Stock Exchanges

Dr JAYENDRA KASTURE
VIT School of law - Chennai

CAPITAL MARKETS AND SECURITIES REGULATION

 INTRODUCTION

The securities market has two interdependent

and inseparable segments
• the new issues (primary market) and
• the stock (secondary) market.
 INTRODUCTION

Primary Market
• The primary market provides the channel for sale of
new securities. Primary market provides opportunity to
issuers of securities; government as well as corporates,
to raise resources to meet their requirements of
investment and/or discharge some obligation.
• They may issue the securities at face value, or at a
discount/premium and these securities may take a
variety of forms such as equity, debt, etc
• The primary market issuance is done either through
public issues or private placement.
 INTRODUCTION

Secondary Market
• It refers to a market where securities are traded after being
initially offered to the public in the primary market and/or
listed on the Stock Exchange. Majority of the trading is done
in the secondary market.
• Secondary market comprises of equity markets and the debt
markets.
• The secondary market enables participants who hold securities
to adjust their holdings in response to changes in their
assessment of risk and return. They also sell securities for cash
to meet their liquidity needs.
 INTRODUCTION

Secondary Market ......

• Reforms in the securities market, particularly the
establishment and empowerment of SEBI, market determined
allocation of resources, screen based nation-wide trading,
dematerialisation and electronic transfer of securities, rolling
settlement and ban on deferral products, sophisticated risk
management and derivatives trading, have greatly improved
the regulatory framework and efficiency of trading and
settlement. Indian market is now comparable to many
developed markets in terms of a number of qualitative
parameters.
 INTRODUCTION

• There are 19 stock exchanges at present in India. All of them

are regulated in terms of Securities Contract (Regulation) Act,
1956 and SEBI Act, 1992 and the rules and regulations made
thereunder.
• The stock exchanges are managed by Board of Directors or
Council of Management consisting of elected brokers and
representatives of Government and Public appointed by SEBI.
• The Boards of stock exchanges are empowered to make and
enforce rules, bye-laws and regulations with jurisdiction over
all its members.
 INTRODUCTION

• Membership of stock exchanges is generally given to persons

financially sound and with adequate experience/ training in
stock market
• A member of the stock exchange is called ‘broker’ who can
transact on behalf of his clients as well as on his own behalf.
• A non-member can deal in securities only through members. A
broker can also take the assistance of sub-broker whom he can
appoint under the procedure of registration.
• Their enrolment as member is regulated and controlled by
SEBI to whom they have to pay an annual charge
 INTRODUCTION

• Stock exchange is taken as a barometer of the economy of a

country.
• It serves as a market where financial instruments like stocks,
bonds and commodities are traded.
• Only those companies who are listed in a stock exchange are
allowed to trade in it.
• It facilitates the exchange of a security (share, debenture etc.)
into money and vice versa.
• Stock exchanges help companies raise finance, provide
liquidity and safety of investment to the investors.
 INTRODUCTION

According to Securities Contracts (Regulation)

Act 1956,
• stock exchange - means any body of
individuals, whether incorporated or not,
constituted for the purpose of assisting,
regulating or controlling the business of
buying and selling or dealing in securities.
 INTRODUCTION
Stock Exchange
• any body of individuals, whether incorporated or not,
constituted before corporatisation and
demutualisation under sections 4A and 4B, or
• a body corporate incorporated under the Companies
Act, 1956 (1 of 1956) whether under a scheme of
corporatisation and demutualisation or otherwise,
• for the purpose of assisting, regulating or controlling
the business of buying, selling or dealing in securities
 INTRODUCTION
Corporatisation - means the succession of a
recognised stock exchange, being a body of individuals
or a society registered under the Societies Registration
Act, 1860 (21 of 1860), by another stock exchange,
being a company incorporated for the purpose of
assisting, regulating or controlling the business of
buying, selling or dealing in securities carried on by
such individuals or society
 DEMUTUALIZATION
Demutualisation - means the segregation of ownership
and management from the trading rights of the
members of a recognised stock exchange in
accordance with a scheme approved by the Securities
and Exchange Board of India

The process of demutualization is to convert the

traditional ‘not for-profit’ stock exchanges into a ‘for
profit’ company
The process is to transform the legal structure from a
mutual form to a business corporation form
 DEMUTUALIZATION

The important features of the demutualisation

• The board of a stock exchange should consist
of 75% public interest/ shareholder directors
and only 25% broker directors
• 51% shareholding of the stock exchange
should be divested to public/ investors other
than trading member brokers and only 49% of
shareholding can remain with the trading
member brokers
 PURPOSE OF DEMUTUALISATION

• Stock exchanges owned by members tend to

work towards the interest of members alone,
which could on occasion be detrimental to
rights of other stakeholders.
• Division of ownership between members and
outsiders can lead to a balanced approach,
remove conflicts of interest, create greater
management accountability
 PURPOSE OF DEMUTUALISATION

• Publicly owned stock exchanges can enter into

capital market for expansion of business.
• Publicly owned stock exchange would be more
professionally managed than broker owned.
• Demutualisation enhances the flexibility of
management.
 Functions And Significance Of Stock
Exchanges

Economic Barometer
A stock exchange is a reliable barometer to measure the
economic condition of a country. Every major change in
country and economy is reflected in the prices of shares. The
rise or fall in the share prices indicates the boom or recession
cycle of the economy. Stock exchange is also known as a pulse
of economy or economic mirror which reflects the economic
conditions of a country.
 Functions And Significance Of Stock
Exchanges
Adequate Marketability and Price Continuity
The ability to buy and sell quickly is known as marketability. Price
continuity creates such condition that the securities can be bought
and sold steadily.
Open Market Appraisal of Securities
Provides a mechanism for fixing the prices of securities through the
interplay of demand and supply i.e. in open market.
Price fluctuation in the stock market is a collective judgement of all
the existing and potential investors and speculators. That’s why it is
commented that stock market ‘FORESEES THE FUTURE’ reflects
public opinion and acts like a sensitive barometer of economy.
 Functions And Significance Of Stock
Exchanges
Provide an Orderly Regulated Market for Securities
The purpose of regulating the functioning of stock exchanges
is to protect the interest of investors and others who are
interested in its affairs and provide them healthy market
conditions.
Safety and Fair Dealing in Buying and Selling of Securities
An organised and well-managed stock exchange should
provide safety for dealings in securities, which, by their very
nature are susceptible to fraud and manipulation by speculators
and members.
 Functions And Significance Of Stock
Exchanges
Smooth Flow of Funds
By virtue of an organised market, these funds may be invested
in securities with the assurance that they can be reconverted at
any time into cash at market price.
Providing Healthy Speculation
Speculation plays a dominant role for the working of a stock
exchange. It is a cardinal feature and function of the stock
market and the whole question of reform or the stock
exchanges hang on our attitude to it. Speculation has both bad
as well as good effects.
 Functions And Significance Of Stock
Exchanges
Correct and Continuous Valuation of Securities
The negotiability, liquidity and price continuity, which the
stock exchanges provide, make the continuous assessment of
value to all such securities.
Channelising the Saving of Community for Investment into
Productive Lines
Another important function of a well organised and regulated
securities market is to mobilize, harness capital and to direct
its flow into the most productive channels so as to serve in the
best possible way the interest of investors and ofthe national
economy as a whole.
 Functions And Significance Of Stock
Exchanges
Agency of Capital Formation in Country
Harmonious consonance between the requirements of investors
and borrowers of funds is provided by a wide variety of
securities issued by central, state governments, public
corporations and corporate bodies.
Regulation of Issuers Management
An issuer company, who wants its securities to be quoted and
traded on a stock exchange has to get itself enrolled on the
official trading list of the particular exchange. For this it has to
comply various listing requirements. It is also necessary to
submit and disclose various useful information to the stock
exchange from time to time.
 TYPES OF SECURITIES

Securities traded on a stock exchange

• Listed cleared Securities

• Permitted Securities
 TYPES OF SECURITIES

Listed cleared Securities

• The securities of companies, which have
signed the listing agreement with a stock
exchange, are traded as ‘Listed Securities’ in
that exchange.
• The securities admitted for dealing on stock
exchange after complying with all the listing
requirements and displayed by board on the
list of cleared securities.
 TYPES OF SECURITIES

Permitted Securities
• To facilitate the market participants to trade in
securities of such companies, which are
actively traded at other stock exchanges in
India but are not listed on an exchange, trading
in such securities is facilitated as ‘permitted
securities’ provided they meet the relevant
norms specified by the stock exchange
 TYPES OF DELIVERY

Spot Delivery - Where the delivery of and payment

for securities are to be made on the same day as
the day of contract or on the next day
Hand Delivery - Where the delivery of and
payment are to be made on the delivery date fixed
by the stock exchange authorities
Special Delivery - Where delivery and payment
made after the delivery date fixed by the stock
exchange authorities.
 MARGIN TRADING

• In the stock market, margin trading refers to

the process whereby individual investors buy
more stocks than they can afford to.
• A margin account provides you the resources
to buy more quantities of a stock than you can
afford at any point of time. For this purpose,
the broker would lend the money to buy shares
and keep them as collateral.
 MARGIN TRADING

Margins
• An advance payment of a portion of the value
of a stock transaction. The amount of credit a
broker or lender extends to a customer for
stock purchase.
• Margin trading was introduced by SEBI to
curb speculative dealings in shares leading to
volatility in the prices of securities.
 MARGIN TRADING

• Initial margin - in this context means the minimum

amount, calculated as a percentage of the transaction
value, to be placed by the client, with the broker,
before the actual purchase. The broker may advance
the balance amount to meet full settlement
obligations.
• Maintenance margin - means the minimum amount,
calculated as a percentage of market value of the
securities, calculated with respect to last trading day’s
closing price, to be maintained by client with the
broker.
 MARGIN TRADING

• In order to trade with a margin account, you

are first required to place a request with your
broker to open a margin account.
• This requires you to pay a certain amount of
money upfront to the broker in cash, which is
called the minimum margin (Maintenance
Margin). This would help the broker recover
some money by squaring off, should the trader
lose the bet and fail to recuperate the money.
 MARGIN TRADING

Margin Trading Example:

• You have Rs 20,000/- worth of securities bought
using Rs 10,000/- borrowed and Rs 10,000 in
cash.
• When the value of these securities rises by 25% to
Rs 25,000, and the amount you borrowed from
your broker stays at Rs10,000, your equity
becomes Rs15,000. That means your equity grew
from Rs10,000 to Rs 15,000, which is a 50%
growth rate.