A

RESEARCH REPORT
ON

“STOCK MARKET BUBBLES IN INDIA”

SUBMITTED IN THE PARTIAL FULFILLMENT OF COURSE FOR THE
AWARD OFTHE DEGREE OF
MASTER OF BUSINESS ADMMINISTRATION

2019-21

Submitted To Submitted By
Mr. Devesh Gupta Swati Agarwal
(Faculty of Management) Roll no-1900850700026
MBA 4th Sem.

S.D. COLLEGE OF MANAGEMENT STUDIES

MUZAFFARNAGAR

1
 PREFACE
Using a new pattern based on proper integration of formal teaching and actual
practice the M.B.A. program of S.D.C.M.S, MUZAFFARNAGAR has it course for six weeks
industrial training, after the second semester, so as the students could begin to have the
feeling of business environment right in the beginning. Practical training constitutes an
integral part of management studies. Training gives an opportunity to the students to expose
themselves to the industrial environment, which is quite different from the classroom
teaching. The practical knowledge is an important suffix to the theoretical knowledge. One
cannot rely merely upon theoretical knowledge. Is has to be coupled with practical for it to be
fruitful. The training also enables the management students to themselves see the working
conditions under which they have to work in the future.
After Liberalization of Indian economy sense is changed because of Multi National
Companies continuously coming with their technical expertise and improved management
concepts. Industrial activity in India has become a thing to watch and I really wanted to be a
part of it and it is essential for me being a finance student.
I consider myself lucky to get my summer training. I underwent six weeks of training.
It really helped me to get a practical insight into the actual business environment and provide
me an opportunity to make my Financial Management concepts more clear. The advantage of
this sort of integration which promotes guided adjustment to corporate culture, functional,
social and other norms with formal teaching are:
 To bridge the gap between theory and practice
 To install feeling of belongingness and acceptance
 To cultivate proper temperament & to generate much morale
 To help students identify their strong & weak points in the following & appreciating
organization activities
 To acquaints students with job performance standards I believe that this
knowledgeable endeavor of mine has prepared me slowly but surely for taking up new
challenging opportunities in future.

2
 ACKNOWLEDGEMENT
No task is single man’s effort. Any job in this world however trivial or tough cannot
be accomplished without the assistance of others. An assignment puts the knowledge and
experience of an individual to litmus test. There is always a sense of gratitude that one likes it
express towards the persons who helped to change an effort in a success. The opportunity to
express my indebtedness to people who have helped me to accomplish this task.
I am thankful to director sir Dr. ALOK KUMAR GUPTA (Principal), for granting
me the permission to undertake the study. I would like to convey thanks to Mr. Devesh
Gupta for ready assistance, keen interest and valuable suggestions.
Last but not least it would be unfair if I don’t extend my indebtedness to my parents
and all my friends for their active cooperation which was of great help during the course of
my training project.

Swati Agarwal

3
 DECLARATION
I, Swati Agarwal of MBA 2 Year, hereby declare that the project title “General Production
Stock Market for Ordinay Investors” is completed and submitted under the guidance of
Mr. Devesh Gupta. This is my original work and not been published or printed for any other
purpose. The imperial finding in this project is based on the data collected by me.

Swati Agarwal

4
 CONTENTS
1. Introduction
2. Objectives of study
3. Research Methodology
4. Scope of the study
5. Limitations
6. Data Analysis
7. Findings
8. Conclusion
9. Recommendation & Suggestion
10. Annexure
Bibliography

5
 History of Stock Market Bubbles:
The deflation of the subprime mortgage bubble in 2006-7 is widely agreed to have been the
immediate cause of the collapse of the financial sector in 2008. Consequently, one might
think that uncovering the origins of subprime lending would make the root causes of the
crisis obvious. That is essentially where public debate about the causes of the crisis began—
and ended—in the month following the bankruptcy of Lehman Brothers and the 502-point
fall in the Dow Jones Industrial Average in mid-September 2008. However, the subprime
housing bubble is just one piece of the puzzle. Asset bubbles inflate and burst frequently, but
severe worldwide recessions are rare. What was different this time?

In What Caused the Financial Crisis leading economists and scholars delve into the major
causes of the worst financial collapse since the Great Depression and, together, present a
comprehensive picture of the factors that led to it. One essay examines the role of
government regulation in expanding home ownership through mortgage subsidies for
impoverished borrowers, encouraging the subprime housing bubble. Another explores how
banks were able to securitize mortgages by manipulating criteria used for bond ratings. How
this led to inaccurate risk assessments that could not be covered by sufficient capital reserves
mandated under the Basel accords is made clear in a third essay. Other essays identify
monetary policy in the United States and Europe, corporate pay structures, credit-default
swaps, banks' leverage, and financial deregulation as possible causes of the crisis.

With contributions from Richard A. Posner, Vernon L. Smith, Joseph E. Stiglitz, and John B.
Taylor, among others, What Caused the Financial Crisis provides a cogent, comprehensive,
and credible explanation of why the crisis happened. It will be an essential resource for
scholars and students of finance, economics, history, law, political science, and sociology, as
well as others interested in the financial crisis and the nature of modern capitalism and
regulation.

Massachusetts Investors Trust was founded on March 21, 1924, and, after one year, had 200
shareholders and $392,000 in assets. The entire industry, which included a few closed-end
funds, represented less than $10 million in 1924.

The stock market crash of 1929 slowed the growth of mutual funds. In response to the stock
market crash, Congress passed the Securities Act of 1933 and the Securities Exchange Act of

6
1934. These laws require that a fund be registered with the Securities and Exchange
Commission (SEC) and provide prospective investors with a prospectus that contains
required disclosures about the fund, the securities themselves, and fund manager. The SEC
helped draft the Investment Company Act of 1940, which sets forth the guidelines with which
all SEC-registered funds today must comply.

With renewed confidence in the stock market, mutual funds began to blossom. By the end of
the 1960s, there were approximately 270 funds with $48 billion in assets. The first retail
index fund, the First Index Investment Trust, was formed in 1976 and headed by John Bogle,
who conceptualized many of the key tenets of the industry in his 1951 senior thesis at
Princeton University. It is now called the Vanguard 500 Index Fund and is one of the largest
mutual funds ever with in excess of $100 billion in assets.

One of the largest contributors of mutual fund growth was individual retirement account
(IRA) provisions added to the Internal Revenue Code in 1975, allowing individuals
(including those already in corporate pension plans) to contribute $2,000 a year. Mutual
funds are now popular in employer-sponsored defined contribution retirement plans
(401(k)s), IRAs and Roth IRAs.

As of April 2006, there are 8,606 mutual funds that belong to the Investment Company
Institute (ICI), the national association of investment companies in the United States, with
combined assets of $9.207 trillion.

Volatility is the degree of variation of a trading price series over the particular period of time, usually
statistical measure of the dispersion of returns for given security or market index. In most cases if the
volatility is higher than the risk of security is also higher. In securities market volatility often
associated with huge swings in any direction. For example, when stock market is rises and falls more
than 1% over the particular period of time, it is called “Volatile” market. Volatility refers to the
amount of uncertainty or risk related to the size of changes in a security's value. A higher volatility
means that a security's value can potentially be spread out over a larger range of values. A lower
volatility means that a security's value does not fluctuate dramatically, and tends to be steadier.
Within the light of this, have endeavoured to spotlight the background of the COVID - 19 also as
understand the possible economic shocks, and measures initiated by the government of India to tackle
the pandemic within the Indian context.

7
COVID Impact

COVID-19, Corona Virus Disease Primary victim was noticed at Wuhan, capital of the Hubei
province, China on November 17, 2019. However, in India the 1st case was reported in Kerala on
30th January 2020, since then as on 30th April 2020, “the total number of coronavirus positive cases
in India have increased to 33610” (Ministry of Health and Family Welfare, 2020) ,and the curve isn't
yet flattened. The spread of coronavirus has resulted in stock-price volatility, decreases in nominal
interest rates, and certain contractions of real economic activities all round the world.

Lockdown in India

A lockdown is an emergency protocol that stops people from leaving a given area. It means an entire
ban on movement apart from essential services. It's believed that only measure to stop community
spread of coronavirus is social distancing through lockdown. China’s Wuhan, was locked down for
quite six weeks. On March 24, PMO India, Narendra Modi, imposed for a 21-days nationwide
lockdown to for the coronavirus pandemic which had claimed around 10 lives in India until then and
infected 509. In containment zone, through lockdown and social distancing, work closures in
industries and repair sector may lessen the economic activities resulting adverse.

Impact on Stock Market

The performance in the stock market across the world is despondency. These affect in the continues
crashes in the stock markets in almost all part of the world. Stock market and Financial markets in
India are happen sharp volatility now days of the falling in worlds markets. That falling in line with
global benchmark indices as can see the domestic market usually follows the global indices. Overseas
investors flying to the safety of dollar backed assets from emerging markets has led to a slowdown in
India’s stock market. Here is the small details of Indian stock market, S&P BSE Sensex 42273 level
on January 20, 2020 which down at the level of 25638 and close at the level of 26674. Markets Small,
Mid and Large caps have corrected sharply from their peaks. In Financial Year 2020 the Midcaps
index fell by 26% while SENSEX fell by 22%.

8
 Stock Market Crash in History

Stock Market Crash is a sudden decline of stock or indices across a major cross-section of
stock market, resulting in a significant loss of paper wealth. Crashes are come from panic
selling in particular stock or indices as much as by underlying economic factors.

Other major stock market crashes include:

• Stock Market Crash of 1973-1974

• Black Monday of 1987

• Harshad Mehta Scam

• Dot-com Bubble of 2000

• Stock Market Crash of 2008

• COVID19 Crash (Recent)

History of Indian Stock Market Crash and Recovery

SENSEX
Year Reason of Crisis
Crash in Year Recovery in Year
1992 Harshad Mehta Scam 52% 1 127% 1.5
1996 Asian Crisis 40% 3 115% 1
2000 Dot-Com Bubble Tech Affected 56% 1 138% 2.5
2008 Worldwide Crisis 61% 1 157% 1.5
2020 COVID 19 Crisis 32% 3 months
(Sources: BSE, Money Control, News Paper, Article, (Note: E & O.E)
Google)

Haishu Qiao and Yaya Su (2020) proposed during periods of extreme stock market volatility,
the media can cater to investor sentiment by chasing trends and market hotspots and thus play a
negative role by exacerbating market volatility. The Paper talks about the coverage of media
are a negative effect on the volatility of Stock Market. Based on coverage of media investors
adopt different investment strategies because of environmental differences, especially in bull
and bear markets, so investor’s behaviour to the market will different than earlier. The paper
shows that in periods of stock

9
market stability, media can provide investors with useful information about listed companies and
plays a role as an information intermediary.

RanajitChakrabarty and AsimaSarkar (2016) talks about volatility in Indian stock market with respect
to some Ecopolitical Factors. They proposed that the Introduction of index futures not only influences
the volatility of the Indian stock market, but also has an impact on the volatility. It is also noticed that
volatility of stock market is not stable at the time of Lok-Sabha elections as well as after that
elections. Introduction of futures has a important role to control the volatility of the Indian stock
market, it is also studied whether the movement of the index futures and the movement of stock index
are correlated.

JOHN J. BINDER, MATTHIAS J. MERGES (2001) talking about volatility of stock market and
economic factors. The factors includes uncertainty about the price level, the riskless rate of interest,
the risk premium on equity and the ratio of expected profits to expected revenues. As the conclusion
stated that test model provides the information related to the Economic factors is Market Volatility
increase in the time of economic contractions and decreasing in the time of Market recoveries.

Mahender, ShaliniAggarwal and H L Verma (2014) proposed the Investors’ perceptions on Trading
Volume and Stock Return Volatility in Indian Stock Market. What an Individual Investor perception
towards market how they invest, How their Income, Education, Profession, Knowledge react/respond
to the Market and to volatile market. As the Conclusion there is cause and effect relationship between
the Market and Investment in the Market. People’s style of to invest money based on their knowledge,
experienced.

Net asset value:

The net asset value, or NAV, is the current market value of a fund's holdings, usually
expressed as a per-share amount. For most funds, the NAV is determined daily, after the
close of trading on some specified financial exchange, but some funds update their NAV
multiple times during the trading day. Open-end funds sell and redeem their shares at the
NAV, and so process orders only after the NAV is determined. Closed-end funds (the shares
of which are traded by investors) may trade at a higher or lower price than their NAV; this is
known as a premium or discount, respectively. If a fund is divided into multiple classes of
shares, each class will typically have its own NAV, reflecting differences in fees and
expenses paid by the different classes.

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Some mutual funds own securities which are not regularly traded on any formal exchange.
These may be shares in very small or bankrupt companies; they may be derivatives; or they
may be private investments in unregistered financial instruments (such as stock in a non-
public company). In the absence of a public market for these securities, it is the responsibility
of the fund manager to form an estimate of their value when computing the NAV. How much
of a fund's assets may be invested in such securities is stated in the fund's prospectus.

11
 INTRODUCTION

1.1 RELIGARE GROUP

Religare, a Ranbaxy promoter group company, is one of India’s largest and fastest growing
integrated financial services institutions. The company offers a large and diverse bouquet of
services ranging from equities, commodities, insurance broking, to wealth advisory, portfolio
management services, personal finance services, Investment banking and institutional
broking services. The services are broadly clubbed across three key business verticals- Retail,
Wealth management and the Institutional spectrum. Religare Enterprises Limited is the
holding company for all its businesses, structured and being operated through various
subsidiaries.

Religare’s retail network spreads across the length and breadth of the country with its
presence through more than 900 locations across more than 300 cities and towns. Having
spread itself fairly well across the country and with the promise of not resting on its laurels, it
has also aggressively started eyeing global geographies. Religare a company promoted,
controlled and managed by the promoters of Ranbaxy was founded with the vision of
providing integrated financial care driven by relationship of trust. To realize its vision, the
company provides both, fund-based and non-fund based financial services to its clients.
These services include Broking (Stocks and Commodities), Depository Participant Services,
and Advisory on Mutual Fund Investments. The clients of the company greatly benefit by its
strong research capability, which encompasses fundamentals as well as technicals.

Religare provides integrated financial solutions to its corporate, retail and wealth
management clients through Religare Securities Limited, Religare Finvest Limited, Religare
Commodities Limited and Religare Insurance Broking Limited. Today, we provide various
financial services which include Investment Banking, Corporate Finance, Portfolio
Management Services, Equity & Commodity Broking, Insurance and Mutual Funds. Plus,
there’s a lot more to come your way.

 Religare in recent past has been constantly innovating in terms of the product and
services, which it offers, and in this respect it has started a premium NRI, FIs, HNIs,
and Corporate Servicing group. This group specifically caters to the growing

12
 investment needs of these premium client categories by taking all their portfolio
investment decisions depending upon their risk / return parameter.

 Religare has a very credible team in its Research & Analysis division, which not only
caters to the needs of our Institutional clients but also gives valuable input to
Investment Dealers / Investors.

 Religare is also giving in house depository services to its clients and it is amongst the
leading Depository service providers in the country managing more than Rs. 6000
crores worth of shares under its electronic custody.

 Religare – Business Partner Concept has resulted in opening our branches all over the
country, thereby pioneering the concept of partnership to reach multiple locations. We
do this in partnership with existing market participants, who can utilize our corporate
backing coupled with our technical and back office support to enhance the business
opportunities available to them from their area.

1.2 ACHIEVEMENTS

 India's No. 1 Registrar & Securities Transfer Agents

 Among the to top 3 Depository Participants

 Largest Network of Branches & Business Associates

 ISO 9002 certified operations by DNV

 Largest Distributor of Financial Products

 Adjudged as one of the top 50 IT uses in India by MIS Asia

 Full Fledged IT driven operations.

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1.3 OBJECTIVES

To achieve and retain leadership, RELIGARE shall aim for complete customer satisfaction,
by combining its human and technological resources, to provide superior quality financial
services. In the process, RELIGARE will strive to exceed Customer's expectations. 

As per the Quality Policy, RELIGARE will: 

 Build in-house processes that will ensure transparent and harmonious relationships
with its clients and investors to provide high quality of services.

 Establish a partner relationship with its investor service agents and vendors that will
help in keeping up its commitments to the customers.

 Provide high quality of work life for all its employees and equip them with adequate
knowledge & skills so as to respond to customer's needs.

 Continue to uphold the values of honesty & integrity and strive to establish
unparalleled standards in business ethics.

 Use state-of-the art information technology in developing new and innovative

financial products and services to meet the changing needs of investors and clients.

 Strive to be a reliable source of value-added financial products and services and

constantly guide the individuals and institutions in making a judicious choice of same.

 Strive to keep all stake-holders(shareholders, clients, investors, employees, suppliers

and regulatory authorities) proud and satisfied. 

14
The Group

P ha rma He a lthcare

Fina ncia l
Dia gnos tics
S e rvice s

15
 GROUP
ENTITIES

Among top 10 generic South & South East One of the second Religare is among
Pharma co. across the Asia’
Asia’s largest largest hospital chain in India’
India’s largest
globe and largest Pathology labs India financial services
Pharma Company in network Currently1600 beds house reaching more
India Global accreditations across than 180 destinations
Manufacturing and Compliance India; target of 5,500
with more than 150
hospital
operations in 7 Comprehensive range own offices and
Beds by 2008
countries of tests 8 hospitals in National more than 300
Products sold in 125 Focus on R&D Capital partner locations
countries 550 Sample Collection Region; 25 hospitals
Sales of US $ 1.17 Centres in 360 cities across India
billion across the globe Engaged in healthcare,
Manufactures & Over 1.5 mn satisfied Telemedicine,
Markets customers every year education & research
Generics and
Branded Generics

Largest in India Largest in Second Largest Among Largest

South East Asia in India in India

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Ge ogra phica l S pre a d
More tha n 150 bra nch offices acros s India
a nd more tha n 300 pa rtner loc a tions
cove ring a pproxima tely more tha n 180
cities & towns .

17
THE RELIGARE TEAM

Qualification
17%
37%

21%

25%

Graduates MBA/PGDBM
Post-Graduates Professional

18
THE RELIGARE TEAM

Av e r a g e Ag e o n Bo a r d

>40 yrs
5%
>35 <40 yrs
10%
<25 yrs
25%

>30 <35 yrs

20%

>25 <30 yrs

40%

<25 yrs >25 <30 yrs >30 <35 yrs >35 <40 yrs >40 yrs

THE RELIGARE TEAM

19
 Industry Expe rie nce
more than 10
Years
Upto 3 years

3 - 10 ye ars
Upto 3 years 3 - 10 ye ars mo re than 10 Years

1.4 RELIGARE STOCKBROKING LIMITED:

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Member - National Stock Exchange (NSE), The Bombay Stock Exchange (BSE).

RELIGARE Stock Broking Limited, flows freely towards attaining diverse goals of the
customer through varied services. Creating a plethora of opportunities for the customer by
opening up investment vistas backed by research-based advisory services. Here, growth
knows no limits and success recognizes no boundaries. Helping the customer create waves in
his portfolio and empowering the investor completely is the ultimate goal.

STOCK BROKING SERVICES

It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success
rate as a wealth management and wealth accumulation option. The difference between
unpredictability and a safety anchor in the market is provided by in-depth knowledge of
market functioning and changing trends, planning with foresight and choosing one & rescue’s
options with care. This is what we provide in our Stock Broking services.

We offer trading on a vast platform; National Stock Exchange and Bombay Stock Exchange.
More importantly, we make trading safe to the maximum possible extent, by accounting for
several risk factors and planning accordingly. We are assisted in this task by our in-depth
research, constant feedback and sound advisory facilities. Our highly skilled research team,
comprising of technical analysts as well as fundamental specialists, secure result-oriented
information on market trends, market analysis and market predictions. This crucial
information is given as a constant feedback to our customers.

Our foray into commodities broking has been path breaking and we are in the process of
converting existing traders in commodities into the more organized mainstream of trading in
commodity futures, both as a trading and risk hedging mechanism.

In the future, our focus will be on the emerging businesses and to meet this objective, we
have enhanced our manpower and revitalized our knowledge base with enhances focus on
Futures and Options as well as the commodities business.

Interest on margin money:

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With the growth of the internet as a medium for buying and selling of shares the brokerage
rates of the brokers in the US have also come down dramatically. When Internet trading
started the brokerage was $19.95 per trade and now it is possible for $9.95 per trade, which
means a fall of 50.12%. Meanwhile the cost of research has been spiraling, as the brokerage
houses have to keep track of everything that is happening in the financial world. So how do
the brokerage houses give facilities at such low costs? The answer lies in putting up the
margin money for their clients and earning interest income. This works in two ways; first
they earn interest incomes and secondly since they are putting up the margin money the
clients have more money with which they can buy shares and are hence increasing the
brokerage margin.

1.5 Overview of Indian Financial System

The capital markets perform an important function in the allocation of resources. The
allocation of resources is dependent on the health of the various sectors of the economy. In a
market driven economy, resources are channelized to those sectors, which are doing well.
The capital markets through organized exchanges ensure liquidity for funds invested in the
corporate sector. Liquidity of the stock market is therefore an important factor affecting
growth. Many profitable projects which have longer gestation periods require long term
finance, however investors may not wish to keep their investments locked for the entire
period of the project. A liquid stock market ensures a quick exit route without incurring
heavy costs. Thus development of a vibrant and efficient market is necessary for creating a
conducive climate for investment and economic growth.
The Indian financial system has several facets. A classification from the point of view of
regulators is:

Regulatory Authorities
RBI SEBI
Commercial Banks Primary Market

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Foreign Exchange Markets Secondary Market
Financial Institutions Derivatives Market
Primary Dealers

Commercial Banks include the Public Sector banks, Private Banks and Foreign Banks. The
Commercial Banks are regulated by the RBI under the Banking Regulation Act and
Negotiable Instruments Act.
Financial Institutions may be of all India level like IDBI, IFCI, ICICI, NABARD or sectoral
financial institutions like EXIM, TFCIL etc. IFCI was the first term lending institution to be
set up. IDBI is the apex development financial institution set up to provide funds for the rapid
industrialization in India.

The participants in the Foreign Exchange markets include banks, financial institutions and are
regulated by the RBI.

Primary Dealers are the registered participants of the wholesale debt market. They bid at
auctions for Government Debt, treasury bills, which are then retailed to banks and financial
institutions who invest in these papers to maintain their Statutory Liquidity Ratio (SLR).

Reserve Bank of India (RBI)

The Reserve Bank of India is the central banking institution in India. It is the sole authority
for issuing bank notes and the supervisory body for banking operations in India. Even though
the Indian currency (rupee) is now floated in the market, the RBI supervises and administers
exchange control and banking regulations, and administers the government's monetary
policy. It is also responsible for granting licenses for new bank branches.

Securities and Exchange Board of India (SEBI)

SEBI was set up as an autonomous regulatory authority by the Government of India in 1988
“to protect the interests of investors in securities and to promote the development of, and to
regulate the securities market and for matters connected therewith or incidental thereto." It is
empowered by two acts namely the SEBI Act, 1992 and the Securities Contract (Regulation)

23
Act, 1956 to perform the function of protecting investors rights and regulating the capital
markets.

1.6 Overview of the Indian Financial Markets

The Indian Financial Markets comprises of Capital Market, the Money Market and the Debt
Market. The Capital Market consists of –
A. Primary Market
B. Secondary Market
A. Primary Market
The Primary Market is the place where the new offerings by Companies are made either as an
Initial Public Offering (IPO) or Rights Issue. IPOs are offerings made by the Company for
the first time while rights are offerings made to the existing shareholders.

B. Secondary Market
Secondary Markets consists of the Stock Exchanges where the buy-orders and sell orders are
matched in an organized manner.
The functions of the stock exchange are as follows:
1) It ensures a measure of safety and fair dealing.
2) It translates short-term and medium term investments into long-term funds for
companies.
3) It directs the flow of capital to the area of maximum returns and ensures ample investment
options for the investors depending on their risk preference.
4) It induces the companies to raise their standards of performance.

C. Derivatives Market
Derivatives Market is the market for financial instruments whose value is derived from an
underlying stock, commodity or currency. There are innumerable derivative instruments;
common amongst them are futures, options, warrants and swaps. Derivatives trading made its
debut in Indian market with the introduction of Sensex and Nifty futures in June 2000.

Derivatives market has the following roles:

1) Derivatives allow hedging of market risk.

24
2) It allows for a separate market to be developed for lending of funds and securities to the
market.
3) It helps in making the underlying cash market more liquid.
4) It helps in innovations and the creation of new financial products.

D. Role of Capital Markets

a)The Capital Market is the indicator of the inherent health of the economy.
b)The Capital Market is the largest sources of funds with long or indefinite maturity for
companies and thereby enhances capital formation in the economy.
c)The Capital Market offers a number of investment avenues to investors.
d)It helps in channelising the savings pool in the economy towards investments, which are
more efficient and give a better rate of return thereby helping in optimum allocation of capital
in the country.

1.7 Self Regulatory Organizations (SROs)

Securities and Exchange Board of India (SEBI) is authorized to promote and regulate Self-
Regulatory Organizations (SROs) in the Capital markets in India. SROs are practical and
effective tools for regulating various kinds of participants in the securities market. They have
byelaws and codes of conduct to bind their members.
Currently, the SROs related to the securities market whose regulatory framework is well
established and which have actually been functioning are the stock exchanges. Other non-
registered SRO is Association of Merchant Bankers of India (AMBI).

1.8 Functioning of Primary Market

Introduction
Primary market is a place where a corporate may raise capital by way of a -
a) Public Issue: Sale of securities to members of the Public.
b) Rights issue: Method of raising further capital from the existing shareholders/ debenture
holders by offering additional shares to them on a pre-emptive basis.
c) Private placement: As its name suggests it involves selling securities privately to a group
of investors.

25
All issues by a new company has to be made at par and for existing companies the issue price
should be justified as per Malegam Committee recommendations by :
1.The earnings per share (EPS) for the last three years and comparison of pre-issue price to
earnings (P/E) ratio to the P/E ratio of the Industry.
2.Latest Net Asset Value,
3.Minimum return on increased net worth to maintain pre-issue EPS. A company may also
raise finance from the international markets by issuing GDR’s and ADR’s.

Principal steps of a Public Issue

A) Vetting of prospectus by SEBI

A draft prospectus is prepared giving out details of the Company, promoters background,
Management, terms of the issue, project details, modes of financing, past financial
performance, projected profitability and others. Additionally a Venture Capital Firm has to
file the details of the terms subject to which funds are to be raised in the proposed issue in a
document called the ‘placement memorandum:

a)Appointment of underwriters: The underwriters are appointed who commit to shoulder

the liability and subscribe to the shortfall in case the issue is under-subscribed. For this
commitment they are entitled to a maximum commission of 2.5 % on the amount
underwritten.

b)Appointment of Bankers: Bankers along with their branch network act as the collecting
agencies and process the funds procured during the public issue. The Banks provide
temporary loans for the period between the issue date and the date the issue proceeds
becomes available after allotment, which is referred to as a ‘bridge loan’.

c)Appointment of Registrars: Registrars process the application forms, tabulate the

amounts collected during the Issue and initiate the allotment procedures.

d)Appointment of the brokers to the issue: Recognized members of the Stock exchanges
are appointed as brokers to the issue for marketing the issue. They are eligible for a
maximum brokerage of 1.5%.

26
e)Filing of prospectus with the Registrar of Companies: The draft prospectus along with
the copies of the agreements entered into with the Lead Manager, Underwriters, Bankers,
registrars and Brokers to the issue is filed with the Registrar of Companies of the state where
the registered office of the company is located.
f)Printing and dispatch of Application forms: The prospectus and application forms are
printed and dispatched to all the merchant bankers, underwriters, brokers to the issue.

g) Filing of the initial listing application: A letter is sent to the Stock exchanges where the
issue is proposed to be listed giving the details and stating the intent of getting the shares
listed on the Exchange.

h)Statutory announcement: An abridged version of the prospectus and the Issue start and
close dates are published in major English dailies and vernacular newspapers.

i)Processing of applications: After the close of the Public Issue all the application forms are
scrutinized, tabulated and then shares are allotted against these applications.

j)Establishing the liability of the underwriter: In case the Issue is not fully subscribed to,
then the liability for the subscription falls on the underwriters who have to subscribe to the
shortfall, incase they have not procured the amount committed by them as per the
Underwriting agreement.
k)Allotment of shares: After the issue is subscribed to the minimum level, the allotment
procedure as prescribed by SEBI is initiated.

L)Listing of the Issue: The shares after having been allotted have to be listed compulsorily
in the regional stock exchange and optionally at the other stock exchanges.
B) Cost of a Public issue
The cost of a public issue works out between 8% to 12% depending on the issue size but the
maximum has been specified by SEBI as under:

For Equity & Convertible debentures For Non Convertible debentures

 When the issue size is upto 5 crores =  When the issue size is upto 5 crores =
Mandatory costs + 5% Mandatory costs +2%

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 When the issue size is greater than 5  When the Issue size is greater than 5
crores : Mandatory costs + 2% crores : Mandatory costs + 1%

**Mandatory costs includes underwriting commission, brokerage, fees of the lead managers
of the issue, expenses on statutory announcements, listing fees and stamp duty.

C) Eligibility for an IPO

An Indian Company is allowed to make an IPO if:
1.The company has a track record of dividend paying capability for 3 out of the immediately
preceding 5 years.
2.A public financial institution or scheduled commercial banks has appraised the project to be
financed through the proposed offer and the appraising agency participates in the financing of
the project to the extent of at least 10% of the Project cost. Typically a new company has to
compulsorily issue shares at par, while for companies with a track record the shares can be
issued at a premium. Before thadvent of SEBI the prices of shares were valued as per the
Controller of Capital Issues (CCI).

Rights Issue
The rights issue involves selling of securities to the existing shareholders in proportion to
their current holding. When a company issues additional equity capital it has to be offered in
the first instance to the existing shareholders on a pro-rata basis as per Section 81 of the
Companies Act, 1956. The shareholders may by a special resolution forfeit this right,
partially or fully by a special resolution to enable the company to issue additional capital to
the public or alternatively by passing a simple resolution and taking the permission of the
Central Government.

Private Placement
A private placement results from the sale of securities by the company to one or few
investors. The distinctive features of private placement is that:
 There is no need for a formal prospectus as well as underwriting arrangement
 The terms of the issue are negotiated between the company and the investors

28
The issuers are normally the listed public limited companies or closely held public or private
limited companies which cannot access the primary market. The securities are placed
normally with the Institutional investors, Mutual funds or other Financial Institutions.

SEBI Guidelines for IPO’s

1. Allotment has to be made within 30 days of the closure of the Public Issue and
42 days in case of a Rights issue.
2. Net Offer to the General Public has to be at least 25% of the Total Issue Size
for listing on a Stock exchange. For listing an IPO on the NSE firstly, Paid up
capital should be Rs.20 Crores, secondly the issuer or the promoting company
should have a track record of profitability and thirdly the project should be
appraised by a financial Institution, banks or Category I merchant bank. For
knowledge based companies like IT the paid up capital should be Rs.5 Crores,
but the market capitalization should be at least Rs.50 Crores. It is mandatory
for a company to get its shares listed at the regional stock exchange where the
registered office of the issuer is located.
3. A Venture Capital Fund shall not be entitled to get its securities listed on any
stock exchange till the expiry of 3 years from the date of issuance of
securities.
4. In an Issue of more than Rs. 100 crores the issuer is allowed to place the
whole issue by book-building
5. Minimum of 50% of the Net offer to the Public has to be reserved for
Investors applying for less than 1000 shares.
6. All the listing formalities for a public Issue has to be completed within 70 days
from the date of closure of the subscription list.
7. There should be at-least 5 investors for every 1 lakh of equity offered.
8. Quoting of permanent Account number or GIR No. in application for
allotment of securities is compulsory where monetary value of Investment is
Rs.50,000/- or above.
9. Firm Allotment to permanent and regular employees of the issuer is subject to
a ceiling of 10% of the issue amount.
10. Indian development financial institutions and Mutual Fund can be allotted
securities upto 75% of the Issue Amount.

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11. Allotment to categories of FII’s and NRI’s/OCB’s is upto a maximum of 24%
which can be further extended to 30% by an application to the RBI - supported
by a resolution passed in the General Meeting.
12. 10% individual ceiling for each category a) Permanent employees b)
Shareholding of the promoting companies
13. Securities issued to the promoter, his group companies by way of firm
allotment and reservation have a lock-in period of 3 years. However shares
allotted to FII’s and certain Indian and multilateral development financial
institutions and Indian Mutual Funds are not subject to Lock-in periods.
14. The minimum period for which a public issue has to be kept open is 3 working
days and the maximum for which it can be kept open is 10 working days. The
minimum period for a rights issue is 15 working days and the maximum is 60
working days.
15. A public issue is effected if the issue is able to procure 90% of the Total issue
size within 60 days from the date of earliest closure of the Public Issue. In case
of over-subscription the company may have the right to retain the excess
application money and allot shares more than the proposed issue which is
referred to as the ‘green-shoe’ option.
16. A rights issue has to procure 90% subscription in 60 days of the opening of the
issue.
17. 20% of the total issued capital , if the company is an unlisted one with a three
year track record of consistent profitability Else in all cases the following slab
rate apply :
Size of Capital issued (Including Premium) Contribution %
Less than Rs.100crores 50%
> 100 crores upto 300 crores 40%
> 300 crores up to 600 crores 30%
> 600 crores 15%
18. Promoter’s contribution is subject to a lock-in period of 3 years.
19. Refund orders have to be dispatched within 30 days of the closure of the
Public Issue.
20. Refunds of excess application money i.e. for un-allotted shares have to be
made within 30 days of the closure of the Public Issue.

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Listing on Stock Exchanges
The Stock Exchange, Mumbai has notified new listing guidelines from 1st December, 2000
for companies listed on other Stock Exchange and seeking listing at BSE, the threshold limit
will be Rs. 3 crores of minimum issued equity capital and the following criteria will be
applicable:
1. Company should have profit making track record for at least three years.
2. Minimum networth of Rs. 20 crores (networth includes Equity capital and free
reserves excluding revaluation reserves).
3. Minimum market capitalization of the listed capital should be Rs.20 crores, based
on average price of last six months.
4. Number of days traded during last six complete months should be minimum 50%
of the total trading days during the same six months on any stock exchange.
5. Minimum Average volume traded per day during the last three complete months
should be 1000 shares and minimum 5 trades per day.
6. Minimum 25% of the company's issued capital should be with public (inclusive of
bodies corporate) and minimum 15 shareholders per Rs.1 lakh of capital in the
public category.
7. The company should be agreeable to sign an agreement with CDSL & NSDL for
demat trading etc.

The Stock Exchange, Mumbai has decided that for new companies whose draft offer
documents are received w.e.f. 1st December, 2000 the threshold limit for listing on The Stock
Exchange will be issued equity capital of Rs.10 crores and post issue net worth (equity capital
+ free reserves excluding revaluation reserve) of Rs.20 crores.
The Exchange has also decided that for new companies in high technology (i.e. information
technology, internet, e-commerce, telecommunication, media including advertisement,
entertainment etc.) whose draft offer documents are received w.e.f. 1st December, 2000, the
following criteria will be applicable:
1. The total income/sales from the main activity, which should be in the field of
information technology, internet, e-commerce, telecommunication, media
including advertisement, entertainment etc. should not be less than 75% of the
total income during the two immediately preceding years as certified by the
Auditors of the company.

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 2. The minimum post-issue paid-up equity capital should be Rs.5 Crores.
3. The minimum market capitalization should be Rs.50 Crores. (The capitalization
will be calculated by multiplying the post issue subscribed number of equity
shares with the Issue price).
4. Post issue networth (equity capital + free reserves excluding revaluation reserve)
of Rs.20 Crores.

GDR And Its Features

“Global Depositary Receipts means any instrument in the form of a depositary
receipt or certificate (by whatever name it is called) created by the Overseas
Depositary Bank outside India and issued to non-resident investors against the issue
of ordinary shares or Foreign Currency Convertible Bonds of issuing company.” A
GDR issued in the USA is an American Depositary Receipt (ADR). Among the
Indian companies Reliance Industries Limited was the first company to raise funds
through a GDR issue.

A) Salient Features of a GDR

1) The holder of a GDR does not have voting rights
2) The proceeds are collected in foreign currency thus enabling the issuer to
utilize the same for meeting the foreign exchange component of project
cost, repayment of foreign currency loans, meeting overseas commitments
and for similar other purposes.
3) It has less exchange risk as compared to foreign currency borrowings or
foreign currency bonds.
4) The GDR’s are usually listed at the Luxembourg Stock Exchange as also
traded at two other places besides the place of listing e.g. on the OTC
market in London and on the private placement market in USA.
5) An investor who wants to cancel his GDR may do so by advising the
depositary to request the custodian to release his underlying shares and
relinquishing his GDRs in lieu of shares held by the Custodian. The GDR
can be canceled only after a cooling-period of 45 days. The depositary will
instruct the custodian about cancellation of the GDR and to release the
corresponding shares, collect the sales proceeds and remit the same

32
 abroad.
6) Marketing of the GDR issue is done by the under-writers by organizing
road shows which are presentations made to potential investors. During
the road shows, an indication of the investor response is obtained by equity
called the “Book Runner”. The issuer fixes the range of the issue price and
finally decides on the issue price after assessing the investor response at
road shows.

1.9 Functioning of Secondary Market

Secondary Market is a market in which securities that have been issued at some previous
point of time are traded through the intermediaries in an organised exchange. These
intermediaries may be Stockbrokers or Sub-brokers.

Stock Exchange
Stock Exchange is a place where the buyers and sellers meet to trade in shares in an
organized manner. There are at present 24 recognized stock exchanges in the country and are
governed by the Securities Contracts (Regulation) Act, 1956.

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Stock Brokers
According to Section 2 (e) of the SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, a
stockbroker means a member of a recognized stock exchange. No stockbroker is allowed to
buy, sell or deal in securities, unless he or she holds a certificate granted by SEBI.
A stockbroker applies for registration to SEBI through a stock exchange or stock exchanges
of which he or she is admitted as a member. A stockbroker may take the form of sole
proprietorship, partnership or corporation.

Sub-Brokers
Sub-broker is a person who intermediates between investors and trading members.
Stockbrokers of Indian stock exchanges are permitted to transact with sub-brokers.

Capital Adequacy Norms For Brokers

Each stockbroker is subject to capital adequacy requirements consisting of two components:
1. Base minimum capital, and
2. Additional or optional capital related to volume of business.
The amount of base minimum capital varies from exchange to exchange. A SEBI regulation
requires stockbrokers of The Stock Exchange, Mumbai to maintain an absolute minimum of
Rs.500,000. The form in which the base minimum capital has to be maintained is also
stipulated by SEBI. Exchange may stipulate higher levels of base minimum capital at their
discretion.

1.10 E-Broking and Online Trading

Introduction
Online trading gives an investor the flexibility of putting in a trade from the comforts of his
own home as also the transparency of being in front of the screen or trading pit himself. As
far as online brokerage activities is concerned diverse studies the world over have concluded
that, above average rates of growth are to be found in the online securities trading sector,
particularly as online trading has already revolutionized the way ordinary citizens view the
stock market. It’s turned a world that was previously as accessible as the Stalinist Kremlin

34
into a 24-hour fast food restaurant - a fact not lost upon online trading business, investors &
bystanders.
While it still can’t claim the major chunk of the trading, online stock trading constitute
around 37% of all retail trades in the US. Along with the low price, it is the ability to make
their own trading decisions and execute their own trades, which is what is drawing online
investors to the Internet. In US, instead of conducting a trade through a full service broker
which can cost as much as $500 investors can turn to online brokers, who offers trades for
$7.95 to $30 a piece, depending on the level of service and research requested.
Trading volumes & assets are burgeoning as investors recognize the advantages of going
online. In US, assets held online at brokerages have hit $1.3 trillion. All the indicators point
that investors are becoming more comfortable conducting their financial transactions online
as the new platform evolves into the mainstream.
The compelling economics of executing a trade & customer desire to conduct trades online
has drawn close to 150 online brokers, including the big muscles in the business who are now
battling it out for investor business. Expectedly, the competition has become distinctly
Darwinian with huge ad expenditures.

Online trading in India

In January 2000, the Securities and Exchange Board of India (SEBI) allowed e-broking, or
the buying and selling of shares on the Internet. This has opened up a plethora of
opportunities for investors to put in trades themselves at rates that are current and a trading
experience that is completely transparent.

In order to transact on the Internet, an investor first needs to open a trading account with any
of the e-broking sites. This is fairly simple as you only need to furnish information about
yourself such as your name, postal address, e-mail address and your status as an investor.
You are then given your username and password and you are ready to put in your first trade.

Requirements for e-trading

All that an investor requires to trade online is a computer, an Internet connection, a bank
account and a demat account.

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How to choose an online broker?
Many of the criteria that an investor uses for choosing an online broker is the same as that for
a traditional broker. After all, when you shift to an online broker, the essential operation of
buying and selling still remains the same, it is only that you are doing it in a more efficient
manner. Of course, there will be certain additional criteria that you would have to consider
like the security of your transaction over the net.
Some of the key issues to be considered when choosing an online broker are enumerated
below:
1)Safety: Is the broker financially stable? It is always better to choose a broker who has a
string balance sheet. Does the broker have good brand equity? It is always better to check out
the broker’s reputation from friends and acquaintances who may be using his services.

2)Security: Online investing is easy, low cost and efficient. But it can be dangerous too.
Unless effective security systems are in place, secure trading may be difficult.

3)Service quality: What is the broker’s working hours? Can you access your account
information at any point of the day? How soon does the customer service representative
respond when you email him/her with a query? Is the staff courteous and helpful? How soon
does the broker confirm your buy/sell order? How soon do you receive cash once a sell order
is executed? Is your broker getting you the best price?

4)Research/Investment advice: Does the broker provide research and investment advice?
The fact is that most of the online brokers provide research and investment advice on their
websites. The question that you need to consider is of course regarding the quality of the
advice. But here again, the issue is that the investment recommendations put out by most of
the online brokers can be accessed whether you trade through them or not. This practice may
of course change once the volume picks up and the brokers may then decide to permit access
only to investors who trade through them. But for the present, it is not necessary to give too
much weightage to this criterion.

5)Cost: Commissions could eat into your returns more than you think. So, it always makes
sense to trade through the broker offering the lowest commissions, provided of course that
other things remain the same. The importance of “cost” as a criterion also depends on the

36
kind of investor you are. If you are one of those who plan to be a day trader, it of course
makes sense to keep your trading cost minimum. If on the other hand, you are one of those
long term buy and hold investors who rarely buy and sell, broking commissions will of
course have a lower weightage in your decision.

6)Distribution/Reach: The importance of a brick and mortar approach to an online business

has more or less become evident, with even Amazon deciding to set up its own brick and
mortar infrastructure. In spite of the fact that online broking does not involve the sale of a
tangible product, a brick and mortar structure is still essential as online brokers have to win
the trust of the investors. This can be done more easily if the investor is able to attribute a
face to the broking firm he is trading through.
Trading on the Internet

Investors access the exchange through the E-broker. The broker makes available a web-site
through which the investor can log-in and trade. The site will have the usual security features
seen in other e-commerce applications. The online broking firms offer a variety of products
and depending on the margin money, your exposure limit will be decided. Some firms offer
trading where you do not need cash margins but allow you trade on the basis of the value of
your shares deposited in the demat account.
After logging on, investor is taken to the trading screen, where he can give buy and sell
orders. He can give a market order, a fill and kill order or a limit order. In most cases, the
order is valid only for the particular day and if it doesn’t get executed on the same day, the
order stands cancelled. The investor can also modify his order but this will have to be done
before the earlier order is executed. Once the order is executed, his bank and demat accounts
are credited/debited with the cash and shares respectively.
Basic Trading Terminology

A. Pre-Opening Session
In this session, one is allowed to enter only limit orders. This is because the system does not
do any matching to generate trades. This session is meant for entry of orders based on which
the opening price of scrips will be calculated by the system.
User may enter orders one by one at the screen or may wish to batch up the orders for quick
entry into the system, using a previously created file.

37
The time period for this session is approximately from 9:30 a.m. to 9:45 a.m.
B. Opening Session
One cannot enter quotes, orders or deals during this session, which lasts for about 5 minutes.
This is because the system computes the opening price for every scrip according to the
algorithm defined in the BRS.
All possible trades at opening price are executed and unmatched orders are returned at end of
session.
At the end of this session, the opening price of the scrips is displayed on the screen in the
Touchline Window.

The time period for this task is approximately 9:45 a.m. to 10:00 a.m.

C. Continuous Trading Session

During this session user will be allowed to enter quotes, orders, and deals (Negotiated non-
computer deals and Crossed deals) into the system and carry on his trading activities. User
will receive confirmations of the trades executed by him and have the facility to view his net
position and break-even position in scrip. He will also receive the latest market information
and news.

The continuous trading session lasts approximately from 10:00 a.m. to 3:30 p.m.
D. Closing Session
As in the opening session, user will not be allowed to enter quotes, orders or deals. This
session lasts for a maximum of 10 minutes.
In this session, the Closing prices of scrips will be computed based on the trades that took
place during the day, including trades at opening price, according to the algorithm defined in
the BRS. At the end of this session, user will receive the closing price for each scrip on his
workstation in the Touchline window.

The closing session is approximately from 3:30 p.m. to 3:45 p.m.

E.Post-Closing Session

38
This session is after the closing session and is meant for matching of orders at closing price
only. User can enter orders, which will be matched at closing price. User can also enter
negotiated and crossed deals. All unmatched orders entered during this session will be killed.
It is only in this session that a member broker can see ALL the trades of all his traders on his
workstation.

This session lasts approximately from 3:45 p.m. to 4:05 p.m.

F. Breakup Opening
Data processing goes on at backend. During this session traders can not logon.

This session lasts approximately from 4:05 p.m. to 4:15 p.m.

G.Broker Query
During this session the broker can logon as trader 1 and download all the trades done via all
his trading work stations.

This session lasts approximately from 4:15 p.m. to 4:45 p.m.

H. Daily Breakup
Type 1 member can redistribute his trades among 6 different clients for carry forward or
delivery. Broker has to logon as trader 1.

This session lasts approximately from 4:45 p.m. to 6:30 p.m.

Order Types And Conditions

There are five types of orders you can enter into the BOLT system. They are :
A. Price Conditions
a)Limit - Orders which specify the rate at which the trader wishes to execute his trade are
called Limit Orders.

39
b)Stop-Loss - Stop Loss orders are released into the market when the last traded price for
that security in the market reaches or surpasses the trigger price. The trigger price is the price
at which an order gets triggered from the Stop Loss Book. Before triggering, the order does
not participate in matching and cannot get traded.

c)Market - Market orders are orders which are to be executed at the prevailing market price.
For such orders, the system determines the price.
B. Quantity conditions
a)Min Fill/Rest Kill – is a facility provided for quick order execution. Let us say, you are
watching the 'Touchline' and suddenly you find something suitable. To make a quick deal,
select the scrip and enter the quantity. Click on the Sell Min/None or Buy Min/None button
as the requirement may be. The order will be matched at touchline price to a quantity greater
than or equal to minimum quantity and less than or equal to total quantity. The unexecuted
quantity of the order will be killed and a suitable message will be flashed in the reply box.
Hence, they are called 'Min Fill or Rest Kill' orders.

b)All/None – is a facility to enable trader to fill in the entire order quantity at one shot or
then no fills at all below the quantity.
c)Revealed Quantity – This refers to the quantity that the trader wishes to reveal to the
market. The revealed quantity should be at least 10% of the total order quantity.
C. Time conditions
a)EOTODY- Is a default time condition meaning that the order will be in force for the day it
is entered. At the end of the day, the order will be automatically cancelled by the system.
b)EOSESS– Is a time condition which specifies that the order will be retained in the system
only till the end of the ongoing session.
c)EOSTLM- Is an order that is retained in the system till the end of the settlement. If the
order remains unexecuted till the end of the settlement, the order will get cancelled.
1.11 Securities & Exchange Board of India Act, 1992
The Securities and Exchange Board of India Act, 1992, has been enacted to provide for the
establishment of a Board to protect the interest of investors in securities and to promote the
development of, and to regulate, the securities market and for matters connected therewith
and incidental thereto.

40
SEBI’s regulatory jurisdiction extends over corporates in the issuance of capital and transfer
of securities, in addition to all the intermediaries and persons associated with the securities
market.
SEBI has been given the necessary autonomy and authority to ensure an orderly securities
market by regulating all the intermediaries such as stock exchanges, brokers, sub-brokers,
underwriters, merchant bankers, bankers to the issue, share transfer agents and registrars.
SEBI has issued regulations and guidelines for monitoring and inspecting the operations of
all the intermediaries to enforce compliance.

A. Functions of the Securities & Exchange Board of India

The measures which SEBI is expected to perform to promote, develop and regulate an
orderly securities market are:
a) Regulating the business in stock exchanges and any other securities markets;
b) Registering and regulating the working of stock brokers, sub-brokers, share transfer
agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant
bankers, underwriters, portfolio managers, investment advisors and such other
intermediaries who may be associated with securities markets in any manner.
c) Registering and regulating the working of the depositories, participants, custodians of
securities, foreign institutional investors, credit rating agencies and such other
intermediaries as the Board may, by notification, specify in this behalf.
d) Registering and regulating the working of venture capital funds and collective
investment schemes including mutual funds;
e) Promoting and regulating self-regulatory organizations
f) Prohibiting fraudulent and unfair trade practices relating to securities markets
g) Promoting investors’ education and training of intermediaries of securities markets
h) Prohibiting insider trading in securities
i) Regulating substantial acquisition of shares and takeover of companies
j) Calling for information from, undertaking inspection, conducting inquiries and audits
of the stock exchanges, mutual funds and other persons associated with the securities
market and intermediaries and self regulatory organizations in the securities market
k) Performing such functions and exercising such powers according to SC(R)A as may
be delegated to it by the Central Government.

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 l) Conducting research for the above purposes. Calling from or furnishing to any such
agencies as may be specified by the Board, such information as may be considered
necessary by it for the efficient discharge of its functions.

B. Registration of intermediaries with SEBI

The following persons in the below mentioned capacity can buy, sell or deal in securities only
after obtaining a certificate of registration from SEBI under section 12.
1) Stock-broker
2) Sub-broker
3) Share transfer Agent
4) Banker to Issue
5) Trustee of trust Deed
6) Registrar to Issue
7) Merchant Banker
8) Underwriter
9) Portfolio manager
10) Investment manager
11) Investment advisor
12) Depository
13) Depository Participant
14) Foreign Institutional Investor
15) Credit Agency
16) Collective Investment schemes
17) Venture capital funds
18) Mutual Funds
19) Any other intermediary associated with the securities market

C. Penalties under the SEBI Act

The SEBI Act, 1992, provides for two types of penalties for violation of the provisions of the
Act. They are:
1.Suspension or cancellation of certificate of registration to be imposed by SEBI. 2.Monetary
penalty to be imposed by an adjudicating officer appointed by SEBI, as per rules framed by
Central Government.

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1.12 Introduction to Depository

The Government of India enacted the Depositories Act in August 1996, paving the way for
setting up of depositories in India. The National Securities Depository Ltd. was inaugurated
as the first depository in India, paving way for a paperless settlement of securities. Soon after,
the second depository, Central Depository Services Ltd. was inaugurated.
Under the depository system, physical certificates are eliminated and replaced by electronic
entries in the books of the depository. The depository functions with the help of Depository
Participants (DP). This is similar to opening an account with any branch of a bank in order to
utilise the services of the bank The depository holds these shares in its name, however the
beneficial ownership of these shares remain with the persons who are clients with the
Depository Participants.

Need for a Depository

Before the advent of the depository system, settlements were characterised by inefficiencies
of handling of share certificates. They exposed investors to higher costs and unwanted risks.
Some of the problems and risks associated with paper based trading and settlement were:
 Unwarranted delay in transfer of shares.
 Possibility of forgery on various documents leading to bad deliveries, legal
disputes etc
 Theft of share certificates leading to defective title in shares purchased and
subsequent litigation

Benefits of a Depository
The benefits to an investor of participating in a depository are:
 No bad deliveries
 Immediate transfer of shares
 No stamp duty on transfer of shares
 Reduction in handling large volumes of paper
 Elimination of risks associated with physical certificates such as loss, theft,
mutilation, forgery etc;
 Reduction in transaction cost.

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Facilities offered by a Depository
The Depository offers certain facilities to investors. These are listed below:
 Dematerialization i.e., converting physical certificates to electronic form
 Dematerialization which is the opposite of dematerialization
 Transfer of securities
 Settlement of trades executed in stock exchanges
 Pledging/hypothecation of dematerialized securities
 Electronic credit in public offerings of companies
Processes

A. Dematerialization (Demat)
Dematerialization is the process by which physical certificates of an investor are converted to
an equivalent number of securities in electronic form and credited in the investor’s DP
account.
In order to dematerialize his certificates; an investor has to open an account with a DP and
then request for dematerialization of his certificates by filling up a dematerialization request
form (DRF) and submitting the same along with the certificates. An investor can
dematerialize those certificates which are registered in his name and are available for demat
with the Depository. The dematerialization process usually takes about 20 days.

B. Trading and Settlement

Buying and selling in demat stocks is similar to buying/selling physical shares. Once the
buying/selling is done on the exchange, the investor has to follow certain transactions.

The transactions relating to purchase of shares are:

 Investor purchases shares in the exchange and arranges to make

payment to broker
 Broker arranges to make payment to the Clearing Corporation
 Broker receives credit in his clearing account with his DP on the
pay-out day.

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  Broker gives instructions to his DP to debit his clearing account
and credit his client’s account
 Investor gives instruction to his DP for receiving credit in his
investor account
 If the instructions match, investor’s account with his DP is
credited.
An investor can give standing instructions for receiving securities in his account.

The transactions relating to sale of shares are:

 Investor sells shares in the stock exchange through a broker
 Investor gives instruction to his DP for debit of his account and
credit of his broker’s clearing member pool account.
 On the pay-in day investor’s broker gives instructions to his DP for
delivery to clearing corporation of the stock exchange
 The broker receives payment from the clearing corporation
 Investor receives payment from the broker for the sale of the
securities.

C. Corporate Benefits
In the event any company declares benefits such as dividends, rights, bonus or stock split, the
Depository will forward the details of the all the clients having electronic holdings in that
security as of the record date to the registrar of the company. The registrar will calculate the
corporate benefits due to all the shareholders. The distribution of all cash benefits will be
done by the registrar, whereas the Depository will do the distribution of securities

45
entitlements. In recent times, NSDL has begun distributing dividends to accounts of
shareholders directly.
1.13 Automated Lending and Borrowing Mechanism (ALBM)

A. Introduction
The Automated Lending and Borrowing Mechanism (ALBM) is a scheme envisaged
specifically for Participants [Trading Members / Clearing Members] to borrow/lend securities
at market determined rates. The scheme is structured to facilitate borrowing of securities to
meet immediate settlement requirements at reasonable cost and low risk.
Under the securities lending scheme, the Approved Intermediary is required to ensure the
return of the equivalent securities back to the lender. Normally this requires the intermediary
to keep adequate collateral to cover price risks. Under this scheme market risk is sought to be
minimized. The borrower first executes a purchase transaction in the manner specified by the
Approved Intermediary, to indicate an intention to borrow securities. Similarly, the lender
first executes in the manner specified by the Approved Intermediary, a sale transaction to
indicate an intention to lend securities. The Approved Intermediary subsequently gives effect
to the lending/borrowing.

B. Procedure
A Participant who wishes to borrow a security or lend funds for a particular security executes
a borrow transaction in the Neat Trading system (ALBM session). Similarly, the Participant
who wishes to lend the security and borrow funds executes a lend transaction. These
transactions entered into in the ALBM session are primarily meant for the purpose of
determining the intention to borrow/lend securities and the lending fees. These are not a part
of the cleared deals on the NSE and shall not constitute a part of the settlement obligations of
the Participant as a Clearing Member.

The net obligation of the Participant for the security for the transactions executed in the
ALBM session will determine the intention of the Participant to lend or borrow the security.
A net purchase position for a security implies a firm and irrevocable intent to borrow the
security whereas a net sale position for a security implies a firm and irrevocable intent to lend
the security. Based on this NSCCL will give effect to lending/borrowing transactions at the

46
securities lending price. The securities lending price shall be announced to the Participants
prior to the commencement of the ALBM session.

The securities lending price will typically be the closing price of the security on the previous
day. For example, if the ALBM session takes place on Wednesday, the closing price as of
Tuesday, if available, shall be the lending price for the security. If the closing price as of
Tuesday is not available, the last available closing price prior to Tuesday shall be used as the
lending price.
The difference in the value at which transactions is executed in the ALBM session and the
transactions valued at the lending price shall determine the notional lending fee.
The Approved Intermediary ensures the return of equivalent securities to the lender by
creating respective obligations for the lender and the borrower. For the purpose of returning
the securities borrowed to the lender concerned, the Participant shall authorize the National
Securities Clearing Corporation Limited to create for that particular security for the relevant
settlement (i) an obligation to return the securities borrowed and the right to receive back the
corresponding funds in respect of the securities borrower and (ii) a right to receive back the
securities lent and an obligation to return the corresponding funds in respect of the securities
lender. Consequentially, the net obligation of the Participant as a Clearing Member will be
adjusted for the obligation and the right of the Participant concerned, created as above, for
completing the return of the lent securities. The return of the lent securities and the
corresponding return of funds will be deemed to have been completed once the securities and
funds pay out for the relevant settlement takes place to the extent of such adjustment.

To the extent that pay-in of securities and/or funds in respect of the unadjusted portion does
not take place, consequential action, same as the process prescribed under the Bye Laws and
Regulations of NSCCL for Non-delivery and Non-payment shall be taken and upon
completion of the same, the obligation to return securities and/or the right to receive funds
shall be deemed to have taken place. To the extent that pay-out of securities and/or funds in
respect of the unadjusted portion does not take place, consequential action, same as the
process prescribed under the Bye Laws and Regulations of NSCCL for Non-delivery and
Non-payment shall be taken and upon completion of the same, the obligation to return
securities and /or the right to receive funds shall be deemed to have taken place.

47
The payment of total lending fee payable/receivable will be effected along with funds pay-
in/pay-out of the relevant settlement. The pay out of lending fees shall take place to the extent
of fees actually collected by the Approved Intermediary.
C. Securities Eligible for the ALBM
All securities which are in the list of compulsory demat securities issued by SEBI which also
is an index stock (S&P CNX Nifty or CNX Nifty Junior Indices) are eligible for inclusion in
ALBM session. However, if these Securities fall in the No-delivery period for the normal
market, they are not eligible for the ALBM session."

In the event of any corporate action announcement in any of the eligible securities, the
approved Intermediary may permit lending/borrowing in such a security only if one of the
following conditions is satisfied:
If both the securities lending and the return of equivalent securities takes place on ‘cum’ basis
If both the securities lending and the return of equivalent securities takes place on ‘ex’ basis.

D. Objectives of The Securities Lending And Borrowing

From the Participants point of view, the following can be broadly listed as the objectives:
 Cover short sales.
 Optimize yield on portfolio.
 Facilitate timely settlement.

OBJECTIVE OF THE STUDY

OBJECTIVES OF THE STUDY

48
 I. To give an idea to the new beginners about the various governing authorities and their
role in stock market like RBI, SEBI, CRISIL etc.
II. To enable the investors to know about the various investments in stocks & in mutual
fund.
III. To explain the investors about the functioning of markets (NSE, BSE)
IV. To knowledge them about the trading system of the stock broking firms.

RESEARCH METHODOLOGY

RESEARCH PROBLEM:

49
An upsurge in the Indian stock market has resulted into the emergence of common man into
the capital market. However entrance without complete knowledge may prove to be risky for
them. With increase in investor inflow and the involvement of technology people are now,
focusing towards the option of online trading. I have undertaken this project so as to provide
a guide that is brief, concise and easily understandable by the lay investor and online trading.

METHODS OF DATA COLLECTION: Secondary Data-

I. Information available in Religare consultant for study through printed and electronic
media including information available on the Internet.
II. In house guidelines printed manuals and related materials etc. were also examined
during the project.
III. Financial newspapers like magazines and relevant journals had also been considered
during the course of study.

LIMITATIONS:

The two-month was a great experience for me as I have been able to learn a lot about working
of broking house and this new concept of online share trading. But still there are some
limitations, like
 Time limitation
 Non response by the customers
 Anti advertising create a problem
As our work is to have consumer awareness so the time period of two month was not
sufficient and in the mean time bad publicity of the company by the media made our job very
hard.
At last the limited knowledge of a customer was also a big problem for us, so it is necessary
to create awareness among them to have a better result.

FINDINGS:

There are many instruments for the investment purpose where the investor can invest, some
of the major investment instruments are as follows:

50
4.1 Investment Instruments

A. Fixed Income
Fixed Income instruments include bank deposits, Government securities, Bonds, Debentures,
Commercial Papers (CPs), and Certificates of Deposit (CDs).
Criteria for Investment in Fixed Income Products:
1) Yield to maturity
2) Credit rating of the Security
3) Risk Preference
For fixed income securities, credit risk and interest yield are major decisive factors. Credit
rating of the security published periodically helps the investor in credit risk assessment.
Types of fixed income instrument are explained below :
a) Government Securities
Government securities include T-Bills (364,182, 91 & 14 Days); Bonds issued by the Central
& State Government, State Financial Institutions, Municipal Bodies, Post Trusts, Electricity
Bodies etc. T-Bills are discounted instruments and these may be traded with a repurchase
clause which are called repos. Repos are allowed in 364,182 & 91 day T-bills and the
minimum repo term is 1 day. These securities are purchased by the Banks, Financial
Institutions and Provident Fund Trusts for their SLR (Statutory Liquidity Ratio) requirements
and are normally referred to as gilt-edged securities.

b) Bonds
Bonds may be of many types - they may be regular income, infrastructure, tax saving or deep
discount bonds. These are investment products with a fixed coupon rate and a definite period
after which these are redeemed. The bonds may be regular income with the coupons being
paid at fixed intervals or cumulative in which the interest is paid on redemption.

51
Infrastructure bonds are bonds issued by companies/institutions for utilisation in
infrastructure projects. Investment in these bonds usually are eligible for favourable tax
treatment under section 88 of Income Tax Act. Deep Discount Bonds are bonds, which are
issued at a discount to the face value, and an investor is paid the face value on redemption.

c) Debentures
Debentures may be of three types - fully convertible debentures (FCDs), Partly convertible
debentures (PCDs) and non-convertible debentures (NCDs).
FCDs are debentures whose face value is converted into a fixed number of Equity shares at a
fixed price. The price of each equity share received by way of converting the face value of
the convertible security i.e. debenture is called the conversion price. The number of equity
shares exchangeable per unit of the convertible security i.e. debentures is called the
conversion ratio.
PCDs are debentures where a portion of the face value is converted into equity shares and the
non-convertible part, called the ‘khoka’ is redeemed on maturity.

d) Public Deposits
Corporates can raise funds from the public in the form of Fixed Deposits. These deposits are
unsecured and are mainly used for the working capital requirements. These unsecured public
deposits are governed by the Companies (Acceptance of Deposits) Amendment Rules 1978.
Under this rule:
i) Public Deposits cannot exceed 25% of the share capital and free reserves
ii) The maximum maturity period is 3 years while the minimum is 6 months.

e) Certificate of Deposits
Certificates of Deposits are short term funding instruments issued by Banks and Financial
Institutions at a discount to the face value. Banks can issue CDs for a duration of less than 1
year while FIs can only issue it for more than 1 year. The issuing bank or financial institution
cannot repurchase these instruments. These are normally used by corporate for meeting their
short-term requirements.

f) Commercial Papers (CPs)

CPs represents short term unsecured promissory notes issued by firms with a high credit
rating. The maturity of these varies from 15 days to a year sold at a discount to the face value

52
and redeemed at the face value. CPs can be issued by companies which have a minimum
networth of Rs.4 Crores and needs a mandatory credit rating of minimum P2 (CRISIL), D2
(Duff & Phelps), PR2 (Credit Analysis & Research), A2 (ICRA). The rating should not be
more than 2 months old. It can be issued for a minimum amount of Rs.25 lakhs and more in
multiples of Rs.5 Lakh.

B. Equity Shares
Equity share denotes a unit of owner’s capital of a corporate. It may further be classified as
either a) Ordinary or b) Preference. Ordinary shares do not carry any fixed rate of return but
carry voting rights. The equity shareholders are paid dividend depending on the profitability
of the firm, which is proposed by the Board and passed in the Annual General Meeting of the
company. Preference Shareholders are entitled to a fixed percentage of dividend per year and
they have preference in the payment of dividend over the ordinary shares. The preference
shares can also be of Convertible or the non- Convertible types. Sometimes shares issued at
the time of the initial offering (IPOs) or Rights Issue may be accompanied by a warrant
which entitles the holder to subscribe to a fixed number of shares after a mentioned period of
time at a fixed price. These warrants are sometimes listed and traded on the exchange as a
security.

4.2 Mutual funds:

A mutual fund is a form of collective investment that pools money from many
investors and invests their money in stocks, bonds, short-term money market
instruments, and/or other securities. In a mutual fund, the fund manager trades the
fund's underlying securities, realizing capital gains or losses, and collects the dividend
or interest income. The investment proceeds are then passed along to the individual
investors. The value of a share of the mutual fund, known as the net asset value per
share (NAV), is calculated daily based on the total value of the fund divided by the
number of shares currently issued and outstanding.

Legally known as an "open-end company" under the Investment Company Act of

1940 (the primary regulatory statute governing investment companies), a mutual fund is
one of three basic types of investment companies available in the United States.
Outside of the United States (with the exception of Canada, which follows the U.S. model),

53
mutual fund is a generic term for various types of collective investment vehicle. In the
United Kingdom and western Europe (including offshore jurisdictions), other forms of
collective investment vehicle are prevalent, Including unit trusts, open-ended investment
companies (OEICs), SICAVs and unitized insurance funds.

In Australia the term "mutual fund" is generally not used; the name "managed fund" is used
instead. However, "managed fund" is somewhat generic as the definition of a managed fund
in Australia is any vehicle in which investors' money is managed by a third party (NB:
usually an investment professional or organization). Most managed funds are open-ended
(i.e., there is no established maximum number of shares that can be issued); however, this
need not be the case. Additionally the Australian government introduced a compulsory
superannuation/pension scheme which, although strictly speaking a managed fund, is rarely
identified by this term and is instead called a "superannuation fund" because of its special tax
concessions and restrictions on when money invested in it can be accessed.

Types of mutual funds:

BY STRUCTURE
Open-ended fund

An open-ended fund is equitably divided into shares (or units) which vary in price in direct
proportion to the variation in value of the funds net asset value. Each time money is invested
new shares or units are created to match the prevailing share price; each time shares are
redeemed the assets sold match the prevailing share price. In this way there is no supply or
demand created for shares and they remain a direct reflection of the underlying assets

Closed-ended fund

A closed-ended fund issues a limited number of shares (or units) in an initial public offering
(or IPO). The shares are then traded on an exchange or directly through the fund manager to
create a secondary market subject to market forces. If demands for the shares are high they
may trade at a premium to net asset value. If demand is low they may trade at a discount to
net asset value. Further share (or unit) offerings may be made by the scheme if demand is
high although this may affect the share price.

BY NATURE OF INVESTMENT

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Equity funds An equity fund, which mainly consists of stock investments, is the most
common type of mutual fund. Equity funds hold 49 percent of total funds invested in mutual
funds in the United States. Oftentimes equity funds focus investments on particular strategies
and certain types of companies.

Bond funds

Bond funds account for 18% of mutual fund assets. Types of bond funds include term funds,
which have a fixed set of time (short, medium, long-term) before they mature. Municipal
bond funds generally have lower returns, but have tax advantages and lower risk. High-yield
bond funds invest in corporate bonds, including high-yield or junk bonds. With the potential
for high yield, these bonds also come with greater risk.

Gilt Funds

Gilt funds are those that invest in several different types of medium and long-term
government securities in addition to top quality corporate debts. Gilts originated in Britain.
Gilt funds differ from bond funds because Bond funds invest in corporate bonds, government
securities and money market instruments. Gilt funds stick to high quality-low risk debt,
mainly government securities.

Money market funds

Money market funds hold 26% of mutual fund assets in the United States. Money market
funds entail the least risk, as well as lower rates of return. Unlike certificate of deposits
(CDs), assets in money market funds are liquid and redeemable at any time.

Sector Funds

Sector funds invest in individual industries such as banks or technology. Of the 912 new
funds created in 2000,most were sector funds mainly representing the Internet sector. When a
sector is very narrow, it is called Fad Funds. Sometimes they start off with a spectacular flash
earning 100%or more.

Hybrid Funds

These are sometimes referred to as “balanced funds”.  They’re mutual funds that invest in a
mix of stocks and bonds (typically 60% stock, 40% bond).  They give investors a single
option for achieving diversification Hybrid funds are great for investors who are looking for a

55
single investment vehicle to create a diversified portfolio.  If you don’t want to mess around
with owning a number of different mutual funds, a hybrid fund will take care of all of this.

BY INVESTMENT OBJECTIVE

Growth Funds

A mutual fund whose aim is to achieve capital appreciation by investing in growth stocks.
They focus on companies that are experiencing significant earnings or revenue growth, rather
than companies that pay out dividends. The hope is that these rapidly growing companies will
continue to increase in value, thereby allowing the fund to reap the benefits of large capital
gains. In general, growth funds are more volatile than other types of funds, rising more than
other funds in bull markets and falling more in bear markets.

Income Funds

Mutual fund designed to produce current income for shareholders. Some examples of income
funds are government, mortgage-backed security, municipal, international, and junk bond
funds. Several kinds of equity-oriented funds also can have income as their primary
investment objective, such as utilities income funds and equity income funds. All
distributions from income funds are taxable in the year received by the shareholder unless the
fund is held in a tax-deferred account such as an IRA or Keogh or the distributions come
from tax-exempt bonds, such as with a municipal bond fund.

Value Funds

Value funds are those mutual funds that tend to focus on safety rather than growth, and often
choose investments providing dividends as well as capital appreciation. They invest in
companies that the market has overlooked, and stocks that have fallen out of favour with
mainstream investors, either due to changing investor preferences, a poor quarterly earnings
report, or hard times in a particular industry.

Balanced Funds

Fund that buys common stock, preferred stock, and bonds in an effort to obtain the highest
return consistent with a low-risk strategy.

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4.3 The Stock Exchange, Mumbai (BSE)
The Stock Exchange, Mumbai which was established in 1875 as "The Native Share and
Stockbrokers Association" (a voluntary non-profit making association), has evolved over the
years into its present status as one of the premier stock exchanges in the country. It may be
noted that the Stock Exchange is the oldest one in Asia, even older than the Tokyo Stock
Exchange, which was founded in 1878. Sensex of BSE comprises of 30 companies.

The Stock Exchange, Mumbai (BSE) is generally referred to as the Gateway to the capital
market in India. As Indian economy is opening up, the Exchange has brought its operations at
par with international standards. However, the objectives and the role of the Stock Exchange,
Mumbai has remained the same as enunciated by the charter. These objectives are:
1. To safeguard the interest of investing public having dealings on the Exchange and
the members.
2. To establish and promote honourable and just practices in securities transactions.
3. To promote, develop and maintain a well regulated market for dealing in
securities.
4. To promote industrial developments in the country through efficient resource
mobilisation by way of investment in corporate securities.

A Governing Board comprising of 9 elected directors (one third of them retire every year by
rotation), an Executive Director, three Government nominees, a Reserve Bank of India
nominee and five public representatives, is the apex body which regulates the Exchange and
decides its policies.
A President, Vice-President and an Honorary Treasurer are annually elected from among the
elected directors by the Governing Board following the election of directors.
The Executive Director as the Chief Executive Officer is responsible for the day-to-day
administration of the Exchange.
Settlement on The Stock Exchange, Mumbai
The trades done by the members during the weekly trading period from Monday to Friday are
settled by payment of money and delivery of securities in the following week. All deliveries
of securities are required to be routed through the Clearing House, except for certain off-
market transactions which, although are required to be reported to the Exchange, may be
settled directly between the members concerned.

57
A. Settlement procedure
The Information Systems Department of the Exchange nets off all deliverable trades
(purchases and sales in each scrip) done by a member during a settlement and generates
delivery/receive orders and money statements which are downloaded by the members in their
back offices. However, in the Odd Lot segment, the generation of delivery/receive orders is
on a trade-for-trade basis and no netting off is permitted.
The delivery orders provide information like scrip, quantity and the name of the receiving
member to whom the securities are to be delivered through the Clearing House.
The Money Statement provides details of payments/receipts for the settlement.
The bank accounts of members maintained with Bank of India, HDFC Bank Ltd., Global
Trust Bank Ltd. Standard Chartered Bank Ltd. and Centurion Bank Ltd., the five clearing
banks, are directly debited/credited through computerized posting on the pay-in/pay-out day
for their settlement/receivable dues.

Day Activity
Monday to Friday Trading Period
Saturday Carry Forward Session (for ‘A’ Group Securities) and
downloading of money statement.
Wednesday Pay-in of physical securities in the Clearing House
without any time slot upto 4:00 p.m. and between 4:00
p.m. and 6:00 p.m. as per time slot.

58
 Thursday Pay-in of demat securities at 3:00 p.m.
Reconciliation of securities delivered and amounts
claimed.
Friday Pay-out of physical and demat securities
Saturday Funds pay-out

The securities, as per delivery orders issued by the Exchange, are to be delivered in the
Clearing House on the day designated for securities pay-in, i.e., on Wednesday without any
time slot upto 4:00 p.m. and as per time slot between 4:00 p.m. and 6:00 p.m. and on
Thursday as per prescribed time slots upto 2:00 p.m. The members can, however, submit
deliveries between 2:30 p.m. and 4:00 p.m. on Thursday on payment of late delivery charges.
The members have to deliver the securities in special closed pouches issued by the Exchange
along with the relevant details (distinctive numbers, scrip code, quantity, and receiving
member) on a floppy. The data submitted by the members on floppies is matched against the
master file data on the Clearing House computer systems. If there are no discrepancies, then a
scroll number is generated and a scroll slip is issued. The members then submit the securities
at the receiving counter.

B. Securities Settlement
The members can effect demat pay-in either through CDSIL or NSDL. In case of NSDL, the
members give instructions to their Depository Participant (DP) specifying settlement no.,
settlement type, effective pay-in date, quantity, etc. The securities are transferred to the Pool
Account. The members are required to give delivery-out instructions so that the securities are
considered for pay-in. The possibility of auto D.O. processing is currently under
consideration and is likely to be implemented shortly.
As regards CDSL, the members give pay-in instructions to their DP. The securities are
transferred to Clearing Member (CM) Principal Account. The members are required to given
confirmation to their DP, so that securities are processed towards pay-in obligations.
Alternatively, members may also effect pay-in from clients' beneficiary account for which
member is required to do break-up on the front end software to generate obligation and
settlement ID.

C. Securities Shortage (Auction)

59
The members download delivery/receive orders based on their netted positions for
transactions entered into by them during the settlement of ‘A’, ‘B1’, ‘B2’ and ‘Z’ groups of
securities and the seller member has to deliver the shares in the Clearing House of the
Exchange as per the delivery orders downloaded. If the seller member is unable to deliver the
shares by the last day of Pay-in, then he submits a document called "shortage memo" which,
inter alia, indicates the undelivered quantity. The member’s bank account is then debited at
the standard rate fixed by the Exchange for the quantity of shares short delivered. The
shortage memo contains details such as name & code of scrip short-delivered/not delivered,
quantity short-delivered/not delivered, the clearing number of receiving member and the
standard rate of scrip not delivered. These details are also required to be submitted by the
members on a floppy.

The Clearing House tallies the shortage memos delivering memberwise and generates the
final shortage report. The seller members are then informed about the shares not delivered or
short delivered by them. The intimation is given to the seller members to rectify any possible
discrepancy/error to prevent any wrong auction against them.

Subsequently, an Auction Tender Notice is issued by the Exchange to the members informing
them about the names of the scrips, quantity slated for auction and the date and time of the
auction session on the BOLT. The auction for the undelivered quantities is conducted on
Monday and auction offers received in batch mode are electronically matched with the
auction quantities so as to award the ‘best price’. Members who participate in the auction
session can download the delivery orders on the same day, if their offers are accepted. The
members are required to deliver the shares in the Clearing House on the auction Pay-In day,
i.e., Tuesday. Pay-Out of auction shares and funds is done on the next day, i.e., Wednesday.
The various auction sessions relating to shortages, objections not rectified and bad deliveries
are now conducted during normal trading hours on BOLT. Thus, it is possible to schedule
upto three auction sessions on a single day.

D. Close –out
There are cases when no offer for a particular scrip is received in an auction or when
members who offer the scrips in auction, fail to deliver the same. In the former case, the
original seller member’s account is debited and the buyer member’s account is credited at the

60
close-out rate. In the latter case, the offeror member’s account is debited and the buyer
member’s account is credited at the close-out rate. The close-out rate is higher of the
following rates :

a) The highest rate of the scrip from the first day (trading
day in case of Rolling demat segment) to the day prior
to the day on which the auction is conducted for the
respective settlement.

b) 20% above the closing rate as on the day prior to the

day of auction of the respective settlement.

4.4 National Stock Exchange

The National Stock Exchange (NSE) has been set up as a public limited company, owned by
the leading institutions of the country. Industrial and Development Bank of India (IDBI) is a
major shareholder of NSE.
The ownership and management of the Exchange is completely separated from the right to a
trading members, to trade on the NSE. The Exchange is managed by a Board of Directors.
Decisions relating to market operations are delegated by the Board to an Executive
Committee, which includes representatives from Trading Members, public and the
management.
The NSE has an automated order driven trading system. Member workstations are spread-out
throughout the country and NSE’s network is one of the largest interactive VSAT based
networks.

Major Indian Indices

A. BSE Sensitive Index (Sensex)
The BSE Sensex comprises of 30 stocks representing a sample of large, well diversified and
financially sound companies. The Sensex represents 14 significant sectors of the Indian
economy. The Sensex scrips on an average account for 52% of trading volumes on a daily
basis. The selection criteria for inclusion in the Sensex are:

1. The security should figure in the top 100 companies listed by market
capitalization and should account for a minimum 0.5% of weightage of the
index.
2. The scrip should have been traded on every day for the last one year.

61
 3. The scrip should be among the top 150 scrips listed by average number of
trades and average volume per trade.

B. S&P CNX Nifty

This index is calculated and maintained by India Index Services & Products Ltd. (IISL). This
company has been promoted by National Stock Exchange and CRISIL with technical
oversight by Standard & Poor Corporation. The constituent stocks in the Nifty index has been
selected based on 2 criteria:

1. Market capitalization of the company should be at least Rs. 5 billion

2. Impact cost for Rs. 5 million portfolio should be less than 1.5% and should
have traded on at least 85% of trading days.

Concept of Impact cost

Impact cost is defined as the cost of executing a transaction in a security in proportion to the
weightage of its market capitalization as against the index market capitalization at any point
of time.
Calculation - This is the percentage mark up suffered while buying/selling the desired
quantity of a security compared to its ideal price, i.e.,
(best buy + best sell)/2

Order Book
Buy(Qty.) Buy(Price) Sell(Qty.) Sell(Price)
1000 98 1000 99
2000 97 1500 100
1000 96 1000 101

To Buy 1500 Shares

IDEAL PRICE = (99 + 98)/2 = 98.5

ACTUAL BUY PRICE = (1000 X 99 + 500 X 100)/1500 = 99.33
(FOR 1500 SHARES) IMPACT COST = (99.33 - 98.5)/98.5 X 100 = 0.84%

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C. S&P CNX 500 Equity Index
The S&P CNX 500 includes most companies which are leaders in or are representative of
their industries, and reflect the market as closely as possible. S&P CNX 500 Equity Index
currently contains 79 industry groups, including one group for diversified companies and one
group for miscellaneous. However, the number of industries in the Index and the number of
companies within each industry have been kept flexible, in order to ensure that the Index
retains its objective of being an efficient market indicator.

The criteria for inclusion of a stock in the index are:

1. S&P CNX 500 Equity Index includes only those companies which have a
minimum listing record of six months and a portion of their outstanding
share capital held with the public. In addition these companies must have
demonstrated trading liquidity, in terms of quantum of shares traded and
the frequency with which they are traded.

2. S&P CNX 500 Equity Index includes companies that have minimum
record of three years with a positive net worth. The objective here is to
screen the companies for sustainability of operations so that the turnover
on the index is minimized.

Trading System of the Stock Exchanges

Trading System of the National Stock Exchange

The NEAT system is the trading system provided by the National Stock Exchange to its
trading members. The term ‘NEAT’ is an acronym for ‘National Exchange for Automated
Trading’. The NEAT CM system supports an order driven market, wherein orders match
automatically. Order matching is essentially on the basis of security, its price, time and
quantity.

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Basic Trading Terminology
A. Market Phases
The system is normally made available for trading on all days except Saturdays, Sundays and
other holidays. A trading day typically consists of number of discrete market phases:
a) Pre-Open Phase
The Pre-Open period is applicable only to normal market. Order matching takes place at the
end of the session, based on which an opening price is computed and assigned to all trades of
pre-open. Simple Regular Lot and Stop Loss orders can be entered in this phase.

b) Opening
In this period, all orders that have been entered during the pre-open phase are matched.
During this phase, the trading member cannot login to the system.
c) Open Phase
The open period indicates the commencement of trading activity. During this phase, orders
are matched on a continuous basis. Several activities such as Order Entry, Order
Modification and Order Cancellation are allowed during this phase.

d) Market Close
When the market closes, trading in all instruments for that market comes to an end. A
message to this effect is sent to all trading members. No further orders are accepted, but the
user is permitted to perform activities like inquiries.

e) Surcon
Surveillance and Control (SURCON) is that period after market close during which, the users
have inquiry access only. After the end of SURCON period, the system processes the data
and prepares the system for the next trading day. When the system starts processing data the
interactive connection with the trading system is lost and a message to that effect is displayed
at the trader workstation.

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4.5 National Securities Clearing Corporation Ltd. (NSCCL)
National Securities Clearing Corporation Ltd. (NSCCL) a wholly-owned subsidiary of
National Stock Exchange Of India Ltd. (NSE), carries out the clearing and settlement activity
for the National Stock Exchange. It was incorporated as a limited company on 31st August,
1995 under the Companies Act, 1956. NSCCL has been promoted to address these issues as
also to meet several other objectives such as:
 To bring and sustain confidence in clearing and settlement of securities
 To promote and maintain short and consistent settlement cycles
 To provide counter party risk guarantee
 To operate a tight risk containment system

In order to guarantee settlement, NSCCL has set up a Settlement Guarantee Fund contributed
by the clearing members of the Corporation. It is the first of its kind in India and represents
an important step in upgrading clearing and settlement of the securities for investors and
bringing Indian financial markets in line with international markets. The settlement
performance of NSCCL has remained efficient and consistently time bound. Unlike the
experience with the market prior to the setting up of the NSE, there have been no instances of
delays or clubbing of settlement or defaults. As a counter-party to settlement obligations,
NSCCL guarantees financial settlement. As a result, though there have been a few defaults by
member firms, the Clearing Corporation has stepped in to complete settlement and avoided
market disruption. It is of importance to note that short deliveries have averaged less than
1.70% of every settlement and bad deliveries unrectified have been less than 0.3% on an
average in contrast to 10% across the market. Short deliveries and unrectified bad deliveries
are automatically auctioned by NSCCL so that settlement is completed within a well defined
time frame. All this has been made possible on account of the comprehensive approach to
risk management taken earlier by NSE and now NSCCL which encompasses the quality of
clearing members, tight monitoring mechanism, strict margining, efficient settlement systems
cushioned by a large settlement guarantee fund. The market is currently in a transitional
phase. From a purely physical securities environment with its concomitant problems of time
required for settlement, administrative issues of custody, bad deliveries, fakes etc, the market
is moving towards a depository environment. The Clearing Corporation, as the key link with
the depository, has made a smooth transition to provide delivery versus payments settlement
in a risk contained environment.

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A. Clearing Members
NSCCL clears and settles deals on behalf of its clearing members. Presently, there are two
categories of clearing members viz., trading members of NSE and custodians. All trading
members of the Exchange are entitled to become clearing members. Custodians may register
as clearing members and will be responsible for settling funds and securities of custodial
participants. Following the introduction of derivatives trading, the NSCCL has permitted
Professional Clearing members. These members are usually banks and corporates which
provide settlement function for a fee.

B. Custodial Participants
Custodial participants are typically banks, financial institutions, mutual funds and large
corporates. Custodial participants use trading members to trade on NSE and services of
custodians to settle their trades. Each custodial participant may be associated with one or
more custodians and vice versa.

C. Clearing House
NSCCL operates its own clearing house. The actual physical handling of securities i.e., the
delivery and receipt of securities for the settlements is carried out at the clearing house. While
trading has extended beyond Mumbai to over 292 towns and cities, clearing and settlement
was limited to Mumbai till recently. Regional clearing centers at New Delhi, Calcutta,
Madras have now commenced operations to facilitate security settlement. However, since the
introduction of the depository, the Clearing House function has lost much of its relevance.

D. Settlement Cycle for Regular Market

Day Particulars Activity
1-7 Wednesday-Tuesday Trading Period
8 Wednesday Custodians report trades which they will not settle. Such
trades will be added to the member obligation.
14 Tuesday Pay-In of securities in dematerialized form by the
delivering members through the depository
Pay-In of funds by members through the Clearing Bank.
Shortage identification at Clearing House
15 Wednesday Pay-Out day for securities and funds.

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 Auction for shortages
17 Friday Auction pay-in day for securities and funds
18 Saturday Auction pay-out

NSCCL operates an account period or a periodic settlement cycle. Trading period on

the NSE starts on Wednesday and ends on Tuesday of the next week. At the end of each
trading day the Clearing Corporation determines the cumulative obligations of each member
and electronically transfers the data to clearing members.

The clearing process i.e. the process of identifying, confirmed obligations of all concerned
entities is automated. Settlement is carried out on a physical basis and electronic form as well
requiring the delivery and receipt of documents and sending instructions to the depository.
NSCCL operates a clearing house for managing the settlement of securities in physical form
and interacts with the depository for settlement of securities received in electronic form. All
trades concluded during a particular trading period are settled during the next week. A
multilateral netting procedure is adopted to determine the net settlement obligations
(delivery/receipt positions) of clearing members. The Clearing Corporation then allocates or
assigns delivery of securities to receipts to arrive at the delivery and receipt obligation of
members.

E. Security Shortage (Auction procedure)

Each clearing member communicates to the clearing house on the pay-in day the securities, it
is delivering and those it is unable to deliver. The clearing house identifies short deliveries on
Tuesday and the Clearing Corporation conducts a buying-in auction on the pay-out day
through the NSE trading system. The clearing member is also debited by an amount
equivalent to the securities not delivered and valued at a valuation price (the closing price as
announced by NSE on the Friday previous to the day of the valuation). If the buy-in auction
price is more than the valuation price, the clearing member is required to make good the
difference. All shortages not bought-in are deemed closed out at the highest price between the
first day of the trading period till the day of squaring off or closing price on the auction day

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plus 20%, whichever is higher. This amount is credited to the receiving member's account on
the auction pay-out day.

F. Rolling Settlement
Each trading day is considered as a trading period and trade taking place in this trading period
are settled on the 5th working day. Typically trades taking place on Monday is settled on the
next Monday, Tuesday's trades settled on the next Tuesday and so on. Custodial confirmation
takes place on/or before T+2 working day. All unconfirmed trades revert back to the TM
clearing members and the settlement obligation and delivery information provided on T+2
day. Both securities and funds are settled on T+5 working day

Day Activity
T Trading Period
T+2 working days Custodial Confirmation
T+5 working days Pay in of funds/securities and Pay Out of funds/securities
T+6 working days Auction of shortages
On the auction day Custodial confirmation for auction offer

G. Securities Clearing Accounts

In order to settle trades carried out in the depository segment, a clearing member needs to
open a clearing account with a depository participant of the depository. Each clearing account
consists of three sub-accounts ;
Pool Account : This is used by the clearing member to interface with his clients. The clients
deliver securities to this account of the clearing member. The clearing member pools all
client deliveries in this account before making a delivery to the clearing corporation.
Delivery Account : This is used by the clearing member to deliver securities to clearing
corporation. The clearing member moves a net deliverable quantity of shares from the pool
account to the delivery account from where it comes to the clearing corporation.
Receipt Account : The clearing corporation gives pay-out to the clearing member in the
receipt account from where it is transferred to the pool account of the clearing member.

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H. Securities Settlement
Before pay-in, selling investors instruct depository participants to transfer security balances
from their accounts to clearing members' pool accounts. On or before the time and day
specified for pay-in by NSCCL, the clearing member instructs his depository participant to
move the required balance from his pool account to his delivery account. On the pay-in day,
the relevant depository moves balances from the CM delivery accounts to a NSCCL
settlement account within the depository system. On receipt of pay-out instructions from
NSCCL, the Depository credits the receipt accounts of the receiving clearing members. These
balances are then moved back to the clearing members' pool accounts by the clearing
member. From the pool account, the clearing member distributes the receipts to the buying
clients by issuing instructions to his participant.

4.6 CATEGERISATION OF INSTRUMENTS:

Introduction to Derivatives

What are Derivatives?

A derivative is a product whose value is derived from the value of underlying asset, index, or
reference rate. The underlying asset can be equity, forex, commodity, or any other asset. For
example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of
a change in prices by that date. Such a transaction would take place through a forward or
futures market. This market is the “derivative market”, and the prices of this market would be

69
driven by the spot market price of wheat which is the “underlying”. The terms of “contracts”
or “products” are often applied to denote the specific traded instruments.

In recent years, derivatives have become increasingly important in the field of finance.
Futures and options are now actively traded on many exchanges. Forward contracts, swaps,
and many other derivative instruments are regularly traded both in the exchanges and in the
over-the-counter markets.

‘Derivative’ includes-
(i) a security derived from a debt instrument, share, loan whether secured or
unsecured, risk instrument or contract for differences or any other form of
security;
(ii) a contract which derives its value from the prices, or index of prices, of
underlying securities;

Some of the provisions of the Securities Contracts (Regulation) Act relating to securities
trading are as follows:
a) All contracts of securities (other than the spot delivery contracts) which are not
entered into through, with or between members of the recognized stock exchanges
shall be illegal and punishable with fine or imprisonment.
b) A contract that violates the byelaws specified in that behalf shall be void.
c) Members of recognized stock exchanges are permitted to act as both brokers and
dealers. No member is allowed to enter into a transaction as a principal with any
other person unless the other person is a member of the recognized stock
exchange.
d) The Central Government can require listing of securities of any public company if
it is deemed necessary in the interest of the trade or in the interest of the public.

‘Spot delivery contract’ has been defined in Section 2(i), which means a contract
which provides for
(a) actual delivery of securities and the payment of a price therefor either on the same
day as the date of the contract or on the next day, the actual period taken for the
despatch of the securities or the remittance of money therefor through the post

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 being excluded from the computation of the period aforesaid if the parties to the
contract do not reside in the same town or locality;
(b) transfer of the securities by the depository from the account of a beneficial owner
to the account of another beneficial owner when such securities are dealt with by a
depository.

The development of Exchange - Traded derivatives

Derivatives have probably been around for as long as people have been trading with one
another. Forward contracting dates back at least to the 12 th century, and may well have been
around before then. Merchants entered into contracts with one another for future delivery of
specified amount of commodities at specified price. A primary motivation for prearranging a
buyer or seller for a stock of commodities in early forward contracts was to lessen the
possibility that large price swings would inhibit marketing the commodity after a harvest.
Although early forward contracts in the US addressed merchants’ concerns about ensuring
that there were buyers and sellers for commodities, “credit risk” remained a serious problem.
To deal with this problem, a group of Chicago businessmen formed the Chicago Board of
Trade (CBOT) in 1848. The primary intention of the CBOT was to provide a centralized
location known in advance for buyers and sellers to negotiate forward contracts. In 1865, the
CBOT went one step further and listed the first “exchange traded” derivatives contracts in the
US, these contracts were called “futures contracts”. In 1919 Chicago Butter and Egg Board, a
spin off of CBOT, was reorganized to allow futures trading. Its name was changed to
Chicago Mercantile Exchange (CME). The CBOT and CME remain the two largest organised
futures exchanges-indeed, the two largest “financial” exchanges of any kind – in the world
today.
The first stock index futures contract was traded in Kansas City Board of Trade. Currently the
most popular futures contract in the world is based on S&P 500 index, traded on Chicago
Mercantile Exchange. During the mid eighties the financial futures became the most active
derivatives instruments generating volumes many times more than the commodity futures.
Index futures, futures on T-Bills and Euro-Dollar futures are the top three most popular
futures contracts traded today. Other popular international exchanges that trade derivatives
are LIFFE in England, DTB in Germany, SIMEX in Singapore, TIFFE in Japan, MATIF in
France, etc.

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Forward Contracts
A forward contract is an agreement to buy or sell an asset on a specified date for a specified
price. One of the parties to the contract assumes a long position and agrees to buy the
underlying asset on a certain specified future date for a certain specified price. The other
party assumes a short position and agrees to sell the asset on the same date for the same price.
Other contract details like delivery date; price and quantity are negotiated bilaterally by the
parties to the contract. The Forwards contracts are normally traded outside the purview of the
exchange. Forward contracts are very useful in hedging and speculation.

The classic hedging application would be that of a wheat farmer forward-selling his harvest at
a known price in order to eliminate price risk. Conversely, a bread factory may want to buy
bread forward in order to assist production planning without the risk of price fluctuations.
Thus forwards provide a useful tool for both the farmer and the bread factory to hedge their
risks

If a speculator has information or analysis, which forecasts an upturn in a price, then he can
go long on the forward market instead of the cash market. The speculator would go long on
the forward, wait for the price to rise, and then take a reversing transaction to book the
profits. The use of forward markets here supplies leverage to the speculator.

Limitations of forward markets

Forward markets world-wide are afflicted by several problems:

1. Lack of centralization of trading,

2. Liquidity, and
3. Counter party risk.

In the first two of these, the basic problem is that of too much flexibility and generality. The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other. This often makes them design terms of the deal, which are very

72
convenient in that specific situation, but makes the contracts non-tradable. Also the “OTC
market” here is unlike the centralization of price discovery that is obtained on an exchange.

Counter party risk in forward markets is a simple idea: when one of the two sides of the
transaction chooses to declare bankruptcy, the other suffers. Therefore larger the time period
of the contract, larger the counter party risk.

Even when forward markets trade standardized contracts, and hence avoid the problem of
liquidity, still the counter party risk remains a very large problem.

Introduction to Futures
Futures markets were designed to solve the problems that exist in forward markets. A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
futures at a certain price. Unlike forward contracts the futures contracts are standardized and
exchange traded contracts. To facilitate liquidity in the futures contracts, the exchange
specifies certain standard features of the contract. Therefore, a futures contract is a legally
binding agreement between two parties to the contract. It is standardized contract, with
standard underlying instrument, a standard quantity and quality of the underlying instrument
that can be delivered, (or which can be used for reference purposes in settlement) and a
standard timing of such settlement. A futures contract may be offset prior to maturity by
entering into an equal and opposite transaction. More than 99% of futures transactions are
offset this way.

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The exchange-traded futures are a significant improvement over the forward contracts as they
eliminate counterparty risk and offer more liquidity.

Index Futures
The index futures are the most popular futures contracts as they can be used in a variety of
ways by various participants in the market. They offer different users different opportunities.
Futures on stock indices came into vogue only in the early 1980s. These contracts are cash
settled. In India 2 index futures contracts are traded, namely on the BSE Sensex and the S&P
CNX Nifty.

Introduction to Options
Options are one of the most popular derivatives. Options derive their value from the
underlying capital market or forex or other form of assets. These are highly leveraged
instruments. They can be used for hedging, speculating and arbitrage purposes.
Types of options Options are of two types. Call and Put option. A call option gives a buyer
/ holder a right but not an obligation to buy the underlying on or before a specified time at a
specified price (usually called strike / exercise price) and quantity. Whereas a put option
gives a holder of that option a right but not an obligation to sell the underlying on or before a
specified time at a specified price and quantity. The buyer / holder of an option pays an
upfront premium to the writer / seller of an option. In other words he pays the price of the
option.

A writer / seller of an option undertakes an obligation to buy / sell the underling on or before
a specified time at specified price and quantity for a premium. This premium is collected
upfront. Thus, the writer of an option has to price his option such a way that it takes all the
possible scenarios into consideration and should be close to the fair price of the option.
Exercise Style of Options Options are classified into two kinds depending on the exercise
styles. They are 1) American option and 2) European option. In the American option the
holder / buyer of an option is allowed to exercise the option any time during the life of the
option. However, in the European option exercise is allowed only at the maturity date of the
option.
Strike price of Options World over options are generally traded on different variety of strike
prices. These strike prices are determined by the exchange. For example if a call option is

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traded at a strike price equal to that of the underlying spot price, then the option is called “At-
The–Money” option, if the strike price is lesser than the underlying spot price, it is called
“In-The-Money” option and if the strike price is higher than the underlying spot price, it is
called as Out-of-Money option. In case of put option if the strike price is higher than the
underlying spot price it is called In-The-Money and when the strike price lower than the
underlying spot price, it is called Out-of-Money option. At the money option is same for
both a call and put on the same underlying and the same strike price.

Option Premium Option premium consists of two parts 1) Intrinsic value and 2) Time value.
The intrinsic value of a call option is the difference between the spot price and the strike
price, whereas the intrinsic value of a put option is the difference between the strike price and
the spot price. In-the-money options have intrinsic value. However, at-the-money and out-
of-money options have no intrinsic value. Time value of an option is the price a holder of an
option has to pay to the seller of an option because of the risk the seller of an option takes.
This is over and above the intrinsic value that an option holder pays. Typically, the premium
charged by the seller of an option is equal to the sum of both intrinsic value and the time
value.

ANALYSIS
How a customer should choose where to invest and how to invest. Analysis plays an
important role for the investors that where to invest, investor must do proper analysis of the
securities before investing. The intrinsic value of equity share depends on a multitude of
factors. The earnings of the company, the growth rate and the risk exposure of the company
have a direct bearing on the price of the share. The Fundamental school of thought appraised
the intrinsic value of shares through:

 Economic Analysis
 Industry Analysis
 Company Analysis

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5 .1 ECONOMIC ANALYSIS:

It palys an important role and has an impact on investment in many ways. If the economy
gorws rapidly, the industry can also be expected to show rapid growth and vice versa. When
the level of economic activity is low,stock prices are low, and when the level of economic
activity is high, stock prices are high. The commonly analysed economic factors are as
follows:

1. Gross domestic product(GDP)

GDP indicates the rate of growth of the economy. GDP represents the aggregate
value of the goods and services produced in the economy. GDP consists of personal
consumption expenditure, gorss private domestic investment and government
expenditure on goods and services and net export of goods and services.

2. Savings and investment

It is obvious that growth requires investment which in turn requires substantial
amount of domestic savings. Stock market is the channel through which savings of
the investments are made available to the corporate bodies. Savings are distributed
over various assets like equity shares, deposits, mutual fund units, real estate and
bullion.

3. Interest rates
The interest rate affects the cost of financing to the firms. A decrease in the interest
rate implies lower cost of finance for firms and more profitability. More money is
available at a lower interest rate for the brokers who are doing business with
borrowed money. Availability of cheap funds, encourages speculation and rise in the
price of shares.

4. The tax structure

Every year in March, the business community eagerly awaits the Government’s
announcement regarding the tax policy. Concessions and incentives given to a
certain industry encourages investment in that particular industry. Tax reliefs given to
savings encourage savings.

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 5. The balance of payment
The balance of payment is the record of country’s money receipts from and payments
abroad. The difference between receipts and payments may be surplus or deficit.
Balance of payment is a mesure of the strength of rupee on external account. The
industries involved in the export and import are considerably affected by the changes
in foreign exchange rate.

6. Infrastructure facilities
Infrastructure facilities are essential for the growth of industrial and agricultural
sector. A wide network of communication system is a must for the growth of the
economy. Regular supply of power without any power cut would boost the
production. Banking and financial sectors also should be sound enough to provide
adequate support to the industry and agriculture. Good infrastructure facilities affect
the stock market favourably.

5 .2 INDUSTRY ANALYSIS:

An industry is a group of firms that have a similar technological structure of production and
produce similar products. For the convenience of the investors, the broad classification of the
industry is given in the financial dailies and magazines. Industry analysis plays a very
important role, the investor must properly analysed all the factors before making the
investment. The commonly analysed industrial factors are as follows:

1. Growth of the industry

The historical performance of the industry in terms of growth and profitability should
be analysed. Industry wise growth is published periodically by the centre for
Monitoring Indian Economy. Even though history may not repeat in the exact

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 manner, looking in to the past growth of the industry, the analyst can predict the
future. The information technology industry has witnessed a tremendous growth in
the past so also the scrip prices of the IT industry.

2. Nature of the product

The products produced by the industries are demanded by the consumers and other
industries. If industrial goods like pig iron, iron sheet and coils are produced, the
demand for them depends on construction industry. Like wise, textile machine tools
industry produces tools for the textile industry and the entire demand depends upon
the health of the textile industry.The investor has to analyse the condition of related
goods producing industry and the end user industry to find out the demand for
industrial goods.

3. Natur of the competition

Nature of competition is an essential factor that determines the demand for the
particular product, its profitability and the price of the concerned company scrips.The
supply may arise from indigenous producers and multinationals.The multinationals
are also entering in to the field with sophisticated product process and better quality
product.The competition would lead to decline in the price of the product. The
investor before investing in to the scrip of a company, should analyse the market
share of the particular company’s product and should compare it with the top five
companies.

4. Government Policy
The government policies affect the very nerve of the industry and the effects differ
from industry to industry. Tax subsidies and tax holidays are provided for export
oriented products. Government regulates the size of the production and the pricing of
certain products.

5. Research and development

For any industry to survive the competition in the national and international markets,
product and production process have to be technically competitive, This depends on
the R&D in the particular company or industry . Economies of scale and new market
can be obtained only through R&D.

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5 .3 COMPANY ANALYSIS:

In the company analysis the investor assimilates the several bits of information related to the
company and evaluates the present and the future value of the stock. The risk and return
associated with the purchase of the stock is analysed to take better investment decisions. The
valuation process depends upon the investors ability to elicit information from the
relationship and inter-relationship among the company related variables. The present and the
future values are affected by a number of factors.

1. The Competitive edge of the company

The competitiveness of the company can be studied with the help of:
 The market share

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  The growth of annual sales
 The stability of annual sales

The market share: The market share of the annual sales helps to determine a
companie’s relative competitive position within the industry. If the market share is high,
the company would be able to meet the competition successfully.

Growth of sales: The company may be a leading company , but if the

Growth in sales is comparitiveli lower than company, it indicated the
possibility of the company losing the leadership. The rapid growth rate
in sales would keep the shareholders in a better position than one with the
stagnant growth rate. The company of large size with inadequate growth
in sales will not be preferred by the investors.
Stability of sales: If the firm has stable revenue, other things being
remaining constant, will have more stable earnings. Wide variation in sales leads to
variations in capacity utilization, financial planning and dividend.
Hence the invester should compare stability of sales with its market share and the
competitors market share before investing in to any company’s scrip.

2. Earnings of the company

Sales alone do not increase the earnings but the costs and expenses of the company
also influence the earnings of the company. Further, earnings do
not always increase with the increase in sales. The company’s sals might have
increased but its earning per share decline due to rise in costs. The rate change in
earnings differ from the rate of change in sales. Hence the invester should not depend
only on the sales, but should analyse the earnings of the company.

3. Management
Good and capable management generates profit to the investors. The management of
the firm should efficiently plan, organize, actuate and control the activities of the
company. The basic objective of the management is to attain the stated objectives of

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 the company for the good of the equity holders, the public and the employees. If the
objectives of the company are achieved, investors will have a profit. A management
that ignores profit does more harm to the investors than over emphasizes it.

4. Financial analysis
The best source of financial information about a company is its own financial
statements.. Financial statement analysis is the study of a company’s financial
statement from various viewpoints. The statement give the historical and current
information about the company’s operations. Historical financial statement helps to
predict the future. The current information helps to analyse the present status of the
company.

5 .4 TOOLS AND TECHNIQUES:

Financial Ratios-

A) Leverage Ratios
a) Debt Equity Ratio
b) Debt Assets Ratio
c) Interest Coverage Ratio

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 B) Turnover Ratios
a) Inventory Turnover Ratio
b) Average Collection Period
c) Receivables Turnover Ratio
d) Fixed Assets Turnover Ratio

C) Profitability Ratios
a) Gross Profit Ratio
b) Net Profit Ratio
c) Net Income to Total Assets Ratio
d) Return on Investment
e) Return on Equity

D) Valuation Ratios
a) Price Earnings Ratio
b) Yield

Types of Financial Ratios

A. Leverage Ratios
Financial leverage refers to the use of debt finance. Debt finance is thought to be a cheaper
source of finance and at the same time a riskier source. Leverage ratios help in assessing the
risk arising from the use of debt finance.

a) Debt Equity Ratio

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Debt Equity Ratio = Debt / Equity

Debt - Long term as well as short term.

Equity Share Capital plus Reserves and Surplus (Networth)
It is generally felt that lower the ratio, the greater the degree of protection enjoyed by the
creditors. Generally, incase of capital intensive industries a higher debt-equity ratio is
observed.

b) Debt Assets Ratio

Debt Assets Ratio = Debt / Assets

Debt – Long term as well as short term

Assets – total of all assets

c) Interest Coverage Ratio

Interest coverage ratio = Earnings before interest & tax / Interest charges
This ratio measures the margin of safety a firm enjoys with respect to its interest burden. The
higher the ratio, the greater the margin of safety.

B. Turnover Ratios

a) Inventory Turnover Ratio

Inventory Turnover Ratio = Cost of goods sold / Average Inventory
Average Inventory = Opening Inventory +Closing Inventory/2 .This ratio reflects the
efficiency of inventory management. The higher the ratio, the more efficient the inventory
management.
b) Average Collection Period
Average Collection Period = Receivables / Average Sales per day

c) Receivables Turnover Ratio

Receivables Turnover Ratio = Net Sales / Receivables

d) Fixed Assets Turnover Ratio

Fixed Assets Turnover Ratio = Net Sales / Fixed Assets

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This ratio is used to measure the efficiency with which fixed assets are employed. A high
ratio indicates an efficient use of fixed assets. Generally this ratio is high when the fixed
assets are old and substantially depreciated.

C) Profitability Ratios

a) Gross Profit Ratio

Gross Profit Ratio = Gross Profit/Net Sales
Gross Profit = Net sales less cost of goods sold.
This ratio shows the margin left after meeting manufacturing costs and measures the
production efficiency.

b) Net Profit Ratio

Net Profit Margin ratio = Net Profit / Net Sales
This ratio shows the profits left for shareholders as a percentage of net sales. It measures the
overall efficiency of production, administration, selling, financing, pricing and tax
management.

c) Net Income to Total Assets Ratio

Net Income to Total Assets ratio = Net income (profit) / Total Assets
This measures how efficiently capital is employed.

d) Return on Investment
Return on Investment = Earnings before Interest and taxes / Total Assets
This measures the performance of the firm without the effect of interest and tax burden.
e) Return on Equity
Return on Equity = Equity earnings / Net Worth
Equity earnings – Profit after tax less preference dividends.
Net Worth – Share capital plus reserves and surplus.

This ratio measures the profitability of equity funds invested in the firm. This reflects the
productivity of the ownership capital employed in the firm.

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D) Valuation Ratios
Valuation ratios indicate how the equity stock of the company is assessed in the capital
market. Market value of equity reflects the influence of risk and return.
a) Price Earnings Ratio
Price Earnings Ratio = Market Price per share / Earnings per share
Market price per share may the price prevailing on a certain day or the average price over a
period of time.
Earning per share is profit after tax divided by the number of outstanding equity shares.
The P/E ratio reflects the growth prospects, corporate image, risks involved and degree of
liquidity of a firm.

b) Yield
Dividend/Initial Price + Price Change/Initial Price
(Dividend Yield) (Capital gains/losses yield)
Companies with low growth prospects offer a high dividend yield and a low capital gains
yield. Companies with high growth prospects offer low dividend yield and high capital
gains yield.

CONCLUSION:
With more and more people becoming tech savvy and due to advancement of technology and
internet, the online share trading market has start to develop at a fast space. It has got a lot of
potential for the growth as very few players offer service of online share trading. Due to the
transparency of funds and the power with the people to manage their funds themselves,
people are getting attracted towards online share trading. Emergence of new players in this
sector is quite easy as few players are currently in the market and there is vast untapped area
(about 87% people deal offline).

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Emergence of new players will lead to healthy competition. So a company providing better
service and features at comparatively lower price would be demanded. As a result companies
have to constantly think and improve their services, features, marketing strategies etc. in
accordance with the changing market scenario.
It is rightly said that ‘customer is the king’ and in the current scenario, as compared to other
online player, Religare is able to attract customers by providing good services and features
like linkage of bank accounts, tips etc. which are really helpful to the customer. In
comparison to off-line services Religare attracts the customers in regard to brokerage, quick
transfer of funds, providing margin up to 20 times (depending on volume), freedom from
paperwork etc.
There is a huge potential for Religare to grow as very few people trade online and those who
trade are not much satisfied by their current service providers. Religare by giving much better
services and facilities to its clients like, providing trade on BSE online, carrying out
marketing activities at a larger scale, providing much better customer care facilities to its
client and quick registration of new accounts etc. can surely become the market leader in not
in much time. Religare has to pull its stock to make a mark in this field because many
companies are taking quick steps in this field, so they have to be more careful.
As compared to other players, Religare have to still devise many better competitive strategies
and carry them out effectively to increase its market share.

BIBLIOGRAPHY

WEBSITES:
 www.mutualfundsindia.com
 www.karvymf.com
 www.nseindia.com
 www.bseindia.com

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NEWSPAPERS AND MAGAZINES
 Business World
 Economic Times
 Mutual Fund articles

BOOKS
 All about mutual funds

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