A STUDY ON THE WORKING OF BOMBAY STOCK EXCHANGE

A RESEARCH REPORT SUBMITTED FOR

PARTIAL FULFILLMENT OF COMPLETION OF GRADUATION

TO
UNIVERSITY OF MUMBAI
FOR AWARD OF THE DEGREE OF
BACHELOR OF MANAGEMENT STUDIES
IN THE FACULTY OF COMMERCE (MANAGEMENT)
(ADMISSION NUMBER 2018PC1740 AND DATE: 06/03/2021)

SUBMITTED BY
KRISHNA VIJAY SHARMA
UNDER THE GUIDANCE OF
ASST. PROF. SHARAVATHI C

PILLAI COLLEGE OF ARTS, COMMERCE AND SCIENCE

(AUTONOMOUS),

NEW PANVEL, SECTOR – 16,

DISTRICT - RAIGAD, MAHARASHTRA

2020-2021

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 CERTIFICATE

This is certified that the report entitled “A STUDY ON THE WORKING OF BOMBAY
STOCK EXCHANGE” submitted by Krishna Vijay Sharma (Admission no. 2018PC1740
and Date: 06/03/2021) for the fulfilment of the requirement for the degree of Bachelor of
Management Studies of the University of Mumbai, is his original research work carried
out under my supervision. To the best of my knowledge, the results presented have not
been submitted in part or full for any other diploma or degree of this or any other
University. 

Asst. Prof. Sharavathi C (Signature of External Teacher)

(Signature of Guiding Teacher) 

Asst. Prof. Nithya Varghese Dr. Gajanan Wader

(BMS Co-Ordinator) (Principal)

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 INDEX

Chapter No. Topic Page No.

1  Introduction

2  Research Methodology

3  Literature Review

4  Data Analysis, Interpretation and

Presentation
5  Findings, Conclusions and Suggestions

6 Bibliography

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 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and the depth is
so enormous. I would like to acknowledge the following as being idealistic channels and
fresh dimensions in the completion of this project. I take this opportunity to thank the
University of Mumbai for giving me the chance to do this project.
I would like to thank my Principal, Dr. Gajanan Wader for providing the necessary
facilities required for completion of this project.
I take this opportunity to thank our BMS Co-ordinator Mrs. Nithya Varghese, for her
moral support and guidance.
I would also like to express my sincere gratitude towards my project guide Mrs.
Sharavathi C whose guidance and care made the project successful.
I would like to thank my College Library, for having provided various reference books
and magazines related to my project.
My genuine thanks are due to the rest of the workforce, staff of the Mahatma Education
Society's Pillai College of Arts, Commerce and Science (Autonomous), New Panvel for
their significant exhortation and direction.
Ultimately, no words can satisfactorily offer my obligation of thanks to my parents for
producing in me a lasting interest in higher investigations.

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 CHAPTER 1: INTRODUCTION

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Capital market in India has gone through various stages of liberalization, bringing about
fundamental and structural changes in the market design and operation resulting in
broader investment choices, drastic reduction transaction costs, efficiency, transparency
and safety as also increased integration with the global markets. Indian Capital market
has witnessed a paradigm shift at par with the advanced markets of the world in the last
10 years or so. Business process, functionality, monitoring / regulating mechanisms,
hardware, software etc., are all revamped to compete with the global leaders.

The current stand of Indian capital market has a long history in its back. The history of
the capital market in India dates back to the eighteenth century when East India Company
securities were traded in the country. The Bombay Stock Exchange developed the BSE
Sensex in 1986, giving the BSE a means to measure overall performance of the exchange.
In March 1995, Bombay Stock Exchange (BSE) shifted from open outcry to a limit order
book market. BSE is a brand that is credited with pioneering the growth and credited with
pioneering the growth and development development of Indian capital markets.

The problem under study is "Bombay Stock Exchange Function and Working". The stock
exchanges are the pillars of our modern financial capitalism. The stock exchange
represents an organized market for trading in securities. Stock Exchange is an
association, organization or body of individuals, whether incorporated or not, of
individuals, whether incorporated or not, established for the purpose of assisting,
regulating and controlling business in buying, sealing and dealing in securities. The
securities dealt in at a stock exchange include the shares and debentures of public
companies already issued by them, Government securities and the bonds and debentures
issued by municipal bodies, public sector undertaking and port trusts.

The Bombay Stock Exchange has a national reach in India, claiming a presence in 296
towns and cities throughout the country. The exchange is operated through a unique and
proprietary computer system known as the "BSE On Line Trading System" or Line
Trading System" or BOLT.

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Key terms and definitions:
1. Stock:
It is referred to as a share of the limited companies in question and it confers the
right of a part of a company. The loss and profit of a company is distributed as
dividend to the shareholder or stockholder.

2. Stock exchange: 
Stock Exchange refers to the place where people or companies or mutual funds
buy and sell shares in a given company. Example: - In Indian context NSE, BSE
are the main stock exchanges. Stock exchanges also provide facilities for issue
and redemption of securities and other financial instruments, and capital events
including the payment of income and dividends. Securities traded on a stock
exchange include shares issued by companies, unit trusts, derivatives, pooled
investment products and bonds.

3. Bombay Stock Exchange:

The Bombay Stock Exchange (BSE), also known as the Stock Exchange Mumbai,
is one of the oldest stock exchanges in all of Asia, dating back to 1875 when it
was known as the Native Share and Stock Brokers Association. The exchange is
home to about 5,000 listed companies, with a total market capitalization of around
71 trillion Rupees, or nearly $1.6 trillion as of November 2010. The vision of the
Bombay Stock Exchange is "Emerge as the premier Indian stock exchange by
establishing global benchmarks." That means the exchange is thinking big in
terms of customer service and trading activity. The market has not only
experienced explosive growth in terms of trading volume, but also in terms of
overall return to investors. After compensating for inflation, the BSE has
averaged a 15.8% annual return when measured by Sensex, the most popular
stock index in India, over the last 20 years. Other important indices originating
from the Bombay exchange include the BSE 100, BSE 500, BSEPSU,
BSEMIDCAP, BSESMLCAP, and BSEBANKEX.

4. Stock Option: 
Stock Option gives the right to buy or sell a stock at a future date at a fixed price.
Stock options are traded on the stock exchanges. The term stock option also refers
to the Employees Stock Option Scheme wherein they are granted an option to buy
the underlying stocks of a company at a fixed price at a given date after they have
worked in the company for certain years.

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 5. Straddle:
When an investor expects violent movements in the market but he is not sure of
the direction of it then he may enter into a straddle strategy that means buying a
Call and a Put together of the same strike price and same expiry. Normally this
happens when some major announcement is due in the market like results of a
company etc.

6. S&P 500:
This Index represents the top 500 US companies traded on New York Stock
Exchange and NASDAQ. In India, S&P 500 Nifty Index is just like S&P 500 of
US.

7. Stock index:
Index of market prices of a particular group of stocks, such as the S&P 500 and
the Nasdaq Composite Index.

8. Sensex:
It is an index that represents the direction of the companies that are traded on the
Bombay Stock Exchange BSE. The word Sensex comes from sensitive index.
Market: A public place where buyers and sellers make transactions, directly or via
intermediaries. Also sometimes means the stock market.

9. Capital Market:
Sources from which long-term capital is raised for the setting up the sustained
growth of companies. The stock exchange is a part of the capital market, not only
because it readily provides money for new or existing ventures, but also because it
helps investors to trade in their shares and maintains the liquidity of investments.
Investment in further public and rights issues, convertible and non-convertible
debentures, therefore, become an attractive proposition and companies are able to
raise the resource they need. The capital market is distinct from money market –
banks and lending institutions – which provides short – term finance.

10. Rally: 
The word suggests the gain made by the Sensex or Nifty during the course of the
day. If such gains are made on a regular basis then market participants like
investors, brokers etc. call it as a market rally.

11. Crash: 

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 As the word suggests, crash refers to a fall in the value of Sensex and Nifty. In the
first three trading days of this week (February 12-14) alone the Sensex had
crashed by more than 700 points.

12. Correction: 
A correction (or a measured fall) in the Sensex and Nifty takes place when these
indices rise for a few days and then retrace or shave off some of these gains.

13. Dividend: 
It is again a way of rewarding a company's shareholders. A dividend is generally
issued as a percentage of the face value of a share. Face value is the nominal price
of a company's share.

14. Book closure date: 

This is the date on which a company closes its books for business after it
announces a bonus or dividend. The company's registrar keeps a track of who
owns how many shares of that particular company.

15. Bonus shares: 

These are the free shares that a listed company gives its shareholders.

16. Nifty: 
It is the Sensex's counterpart on the National Stock Exchange, NSE.

17. Bull:
A particular kind of investor who purchases shares in the expectation that the
market price of that company's share will increase.

18. Bear: 
Bull's counterpart is the bear.

19. Squaring off: 

A process whereby investors/traders buy or sell shares and later reverse their trade
to complete a transaction is called squaring off of a trade.

20. Annual Report: 

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 Report Made by the Directors of a company to its shareholders at the end of each
accounting year, containing (a) Directors‟ report outlining a review of the
company’s operations during the year, a summary, of its financial results, and
future projections, if any, (b) Auditors‟ report, (c) Balance Sheet, (d) Profit and
loss account, and (e) Schedules explaining items on the balance sheet and
 profit and loss account. Company law requires all companies to prepare such a
report and mail it to the shareholders. A recent amendment in the Company Law,
however, permits a company to send an abridged report to shareholders, who
nevertheless have the right to obtain a full report.

Methodology and Sample Design

Indian capital market is truly an emerging market as it is significant in terms of
the degree of development, volumes of trading and in terms of its tremendous
growth potential. Data used in this study is based on the analysis of Market
Intermediaries / Institutions - Securities Market. In which Monthly, Yearly,
Sensex, Return, Volatility, Turnover in Cash Segment Capitalization etc. are
shown. All data in this study based on Mean/SD, Ratios Percentage This study
assumes the Bombay Stock Exchange as the proxies for Indian capital market. All
the
 pertinent data have been gathered from the publications of RBI, NSE India, and
SEBI and from the websites of BSE India.

Limitations of the Study

The study is not without its limitations. The major limitations are given below:
 The study is limited only to the functions and working of Bombay Stock
Exchange.

 Data used in this study is limited from 1991 to 2011 of Bombay Stock Exchange
annual reports.

 Tried to search Primary data, but not able to joint Primary sources.

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History of BSE

While Bombay Stock Exchange Limited is now synonymous with Dalal Street, it was not
always so. In the 1850s, five stock brokers gathered together under Banyan tree in front
of Mumbai Town Hall, where Horniman Circle is now situated. A decade later, the
brokers moved their location to another leafy setting, this time under banyan trees at the
junction of Meadows Street and what was then called Esplanade Road, now Mahatma
Gandhi Road. With a rapid increase in the number of brokers, they had to shift places
repeatedly. At last, in 1874, the brokers found a permanent location, the one that they
could call their own. The brokers group became an official organization known as "The
Native Share & Stock Brokers Association" in 1875.
The Bombay Stock Exchange continued to operate out of a building near the Town
Hall until 1928. The present site near Horniman Circle was acquired by the exchange in
1928, and a building was constructed and occupied in 1930. The street on which the site
is located came to be called Dalal Street in Hindi (meaning "Broker Street") due to the
location of the exchange.
On 31 August 1957, the BSE became the first stock exchange to be recognized by
the Indian Government under the Securities Contracts Regulation Act. Construction of
the present building, the Phiroze Jeejeebhoy Towers at Dalal Street, Fort area, began in
the late 1970s and was completed and occupied by the BSE in 1980. Initially named
the BSE Towers, the name of the building was changed soon after occupation, in memory
of Sir Phiroze Jamshedji Jeejeebhoy, chairman of the BSE since 1966, following his
death.
In 1986, the BSE developed the S&P BSE SENSEX index, giving the BSE a means to
measure the overall performance of the exchange. In 2000, the BSE used this index to
open its derivatives market, trading S&P BSE SENSEX futures contracts. The
development of S&P BSE SENSEX options along with equity derivatives followed in
2001 and 2002, expanding the BSE's trading platform.
Historically an open outcry floor trading exchange, the Bombay Stock Exchange
switched to an electronic trading system developed by CMC Ltd. in 1995. It took the
exchange only 50 days to make this transition. This automated, screen-based
trading platform called BSE On-Line Trading (BOLT) had a capacity of 8 million orders
per day. Now BSE has raised capital by issuing shares and as on 3 May 2017 the BSE
share which is traded in NSE only closed with ₹999.
The BSE is also a Partner Exchange of the United Nations Sustainable Stock Exchange
initiative, joining in September 2012.

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BSE established India INX on 30 December 2016. India INX is the first international
exchange of India.
BSE launches commodity derivatives contract in gold, silver.

Objectives of BSE
Today BSE gives a productive and straightforward market for exchanging value,
monetary forms, obligation instruments, subsidiaries, common assets. BSE SME is
India's biggest SME stage which has recorded more than 250 organizations and keeps on
developing at a consistent movement. BSE StAR MF is India's biggest online common
asset stage which measure more than 27 lakh exchanges for every month and adds just
about 2 lakh new Tastes ever month. BSE Security, the straightforward and proficient
electronic book instrument measure for private arrangement of obligation protections, is
the market chief with more than Rs 2.09 lakh crore of raising support from 530 issuances.
(F.Y. 2017-2018).
Keeping in accordance with the vision of Shri Narendra Modi, Hon’ble Executive of
India, BSE has dispatched India INX, India's first global trade, situated at Blessing CITY
IFSC in Ahmedabad.
Indian Clearing Company Restricted, a completely claimed auxiliary of BSE, goes about
as the focal counterparty to all exchanges executed on the BSE exchanging stage and
gives full novation, ensuring the settlement of all bona-fide exchanges executed.
BSE Foundation Ltd, another completely possessed auxiliary of BSE runs one of the
most regarded capital market instructive organizations in the nation.
BSE has likewise dispatched BSE Sammaan, the CSR trade, is a first of its sort activity
which expects to interface corporate with confirmed NGOs

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BSE's well known value list - the S&P BSE SENSEX - is India's most broadly followed
financial exchange benchmark list. It is exchanged globally on the EUREX just as driving
trades of the BRCS countries (Brazil, Russia, China and South Africa)
BSE capacities as the primary level controller in the protections market, giving checking
and observation systems that can identify inconsistencies and controls in stock costs. The
Trade additionally gives counter-party hazard the executives in all exchanges that occur
on its exchanging stage through its clearing and settlement administrations. Portions of in
excess of 5,000 organizations are exchanged on BSE. Notwithstanding value and
obligation, the Trade takes into consideration exchanging of common asset units and
subordinates.
Bombay Stock Trade was perceived as a trade under the Protections Agreements
(Guideline) Act in 1957. Its benchmark record, the Touchy File (Sensex) was dispatched
in 1986. In 1995, the BSE dispatched its completely computerized exchanging stage
called BSE On-Line Exchanging framework (Jolt) which completely supplanted the open
objection framework.
In 2005, the Trade changed from being basically a relationship of merchants to turned
into a corporate element. The regulatory structure of the Trade is going by a top
managerial staff, underneath which is an administering board and the executives that
directs its everyday working.
Remarkable Highlights of the pre-open meeting of BSE:
All executable requests for a specific stock will coordinate at one market opening cost
Requests are gathered in the request section period and execution happens in the request
coordinating period
Term of Pre-open meeting - a short ways from 9:00am – 9:15am
Cutoff requests will get need throughout market orders at the hour of execution of
exchanges.
All requests will be uncovered in full amount, for example orders where uncovered
amount work is empowered, won't be permitted during the pre-open meeting.
Unexecuted, qualified requests will be moved to the consistent meeting
In case of no exchanges the pre-open meeting, the requests entered in the pre-open
meeting will be moved to the persistent exchanging meeting on time need basis. The cost
of the primary exchange during the constant exchanging meeting will be taken as the
initial cost.
Characteristic opening cost and matchable amount for each stock and demonstrative S&P
BSE SENSEX will be dispersed at ordinary timespans section period.

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Toward the finish of the coordinating time frame, the framework will process and scatter
the initial qualities for all stocks, S&P BSE SENSEX and different files.
Uniform value band of 20% will be pertinent to all qualified stocks during the pre-open
meeting.
Some of the interesting features I know about BSE are -
 BSE has the largest number of companies listed in the world with more than
5000. However, only 3000 are actively traded.
 Trading on BSE was done under Banyan Tree in 1955.
 The Bombay Stock Exchange was established as The Native Share & Stock
Brokers' Association in 1875, which was later changed to BSE. The street housing
the exchange is still called Dalal street.
 The first stock to be traded was Dutch East India Company.
 BSE's popular equity index, the Sensex or the S&P BSE Sensex is India's most
widely tracked stock market benchmark index.
 Originally, the fee for membership of the Association – the right of admission to
the Broker’s Hall – was fixed at Rs 51.
 Deepak Mohoni, a well-known technical analyst, is believed to have coined the
word Sensex in 1989 to name BSE’s benchmark index. The name stands for
sensitive index, which comprises 30 largest and most actively traded stocks on
BSE.
 Initially, BSE used to keep operations shut from Christmas to the New Year’s
Day. However, after NSE’s entry, it scrapped its one-week holiday system so as
not to lose business to its younger rival.
BSE continues to innovate:
 Became the first national exchange to launch its website in Gujarati and Hindi and
now Marathi
 Purchased of Marketplace Technologies in 2009 to enhance the in-house
technology development capabilities of the BSE and allow faster time-to-market
for new products
 Launched a reporting platform for corporate bonds christened the ICDM or Indian
Corporate Debt Market
 Acquired a 15% stake in United Stock Exchange (USE) to drive the development
and growth of the currency and interest rate derivatives markets
 Launched 'BSE StAR MF' Mutual fund trading platform, which enables exchange
members to use its existing infrastructure for transaction in MF schemes.

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  BSE now offers AMFI Certification for Mutual Fund Advisors through BSE
Training Institute (BTI)
 Co-location facilities for Algorithmic trading
 BSE also successfully launched the BSE IPO index and PSU website
 BSE revamped its website with wide range of new features like 'Live streaming
quotes for SENSEX companies', 'Advanced Stock Reach', 'SENSEX View',
'Market Galaxy', and 'Members'
 Launched 'BSE SENSEX MOBILE STREAMER'

With its tradition of serving the community, BSE has been undertaking
Corporate Social Responsibility (CSR) initiatives with a focus on Education,
Health and Environment. BSE has been awarded by the World Council of
Corporate Governance the Golden Peacock Global CSR Award for its
initiatives in Corporate Social Responsibility (CSR).
Other Awards:
· The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and
March 31, 2007 have been awarded the ICAI awards for excellence in financial reporting.
· The Human Resource Management at BSE has won the Asia - Pacific HRM awards for
its efforts in employer branding through talent management at work, health management
at work and excellence in HR through technology Drawing from its rich past and its
equally robust performance in the recent times, BSE will continue to remain an icon in
the Indian capital market.

Vision
"Emerge as the premier Indian stock exchange by establishing global
benchmarks"

Prominent Position
The journey of BSE Limited is as eventful and interesting as the history of India's
securities market. In fact, as India's biggest bourse, in terms of listed companies and
market capitalization, BSE Limited has played a pioneering role in the development of
the Indian securities market. It is surely BSE Limited pride that almost every leading
corporate in India has sourced BSE Limited services in capital raising and is listed with
BSE Limited. Even in terms of an orderly growth, much before the actual legislations

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were enacted, BSE Limited had formulated a comprehensive set of Rules and
Regulations for the securities market. It had also laid down best practices which were
adopted subsequently by 23 stock exchanges which were set up after India gained its
independence. BSE Limited, as a brand, has been and is synonymous with the capital
market in India. Its SENSEX is the benchmark equity index that reflects the health of the
Indian economy.

Several Firsts
At par with the international standards, BSE Limited has in fact been a pioneer in several
areas. It has several firsts to its credit even in an intensely competitive environment.
 First in India to introduce Equity Derivatives.
 First in India to launch a Free Float Index.
 First in India to launch US$ version of BSE Limited.
 First in India to launch Exchange Enabled Internet Trading Platform.
 First in India to obtain ISO certification for a stock exchange.
 'BSE On-Line Trading System' (BOLT) has been awarded the globally recognized
the Information Security Management System standard BS7799-2:2002
 First to have an exclusive facility for financial training.
 First in India in the financial services sector to launch its website in Hindi and
Gujarati.
 Shifted from Open Outcry to Electronic Trading within just 50 days.
 First bell-ringing ceremony in the history of the Indian capital markets (listing
ceremony of Bharti Tele ventures Ltd. on February 18, 2002)

Investor’s Education
An equally important accomplishment of BSE Limited is its nationwide investor
awareness campaign - "Safe Investing in the Stock Market"- under which awareness
campaigns and dissemination of information through print and electronic medium is
undertaken across the country. BSE Limited also actively promotes the securities market
awareness campaign of the Securities and Exchange Board of India.
Hours of operation
Session Timing:
 Beginning of the Day Session 8:30 - 9:00
 pre-open trading session 9:00 - 9:15
 Trading Session 9:15 - 15:30
 Position Transfer Session 15:30 - 15:50
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  Closing Session 15:50 - 16:05
 Option Exercise Session 16:05 - 16:35
 Margin Session 16:35 - 16:50
 Query Session 16:50 - 17:25
 End of Day Session 17:30
The hours of operation for the BSE quoted above are stated in terms the local time (i.e.,
GMT +5:30) in Mumbai, India. BSE's normal trading sessions are on all days of the week
except Saturday, Sundays and holidays declared by the Exchange in advance.
BSE also has a wide range of services to empower investors and facilitate smooth
transactions:

 Investor Services: The Department of Investor Services redresses grievances of

investors. BSE was the first exchange in the country to provide an amount of Rs.1
million towards the investor protection fund; it is an amount higher than that of
any exchange in the country. BSE launched a nationwide investor awareness
program - 'Safe Investing in the Stock Market' under which 264 programs were
held in more than 200 cities.
 The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-
line screen-based trading in securities. BOLT is currently operating in 25,000
Trader Workstations located across over 359 cities in India.
 BSEWEBX.com: In February 2001, BSE introduced the world's first centralized
exchange-based Internet trading system, BSEWEBX.com. This initiative enables
investors anywhere in the world to trade on the BSE platform.
 Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a real-
time basis the price movements, volume positions and members' positions and
real-time measurement of default risk, market reconstruction and generation of
cross market alerts.
 BSE Training Institute: BTI imparts capital market training and certification, in
collaboration with reputed management institutes and universities. It offers over
40 courses on various aspects of the capital market and financial sector. More
than 20,000 people have attended the BTI programs

Major Companies In BSE:

 Bharat Heavy Electricals
 Bharat Petroleum
 Birla Corporation
 HDFC Bank

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  Hindustan Motors
 ICICI Bank
 Infosys Technologies Limited
 State Bank of India
 Tata Motors
 Wipro Technologies
Mumbai is said to be the financial capital of India and BSE is the beating heart of
Mumbai. Needless to say, BSE is a crucial financial organization and plays a very vital
role in the economy of India.

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 CHAPTER 2: RESEARCH METHODOLOGY

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The study focuses mainly on the genesis of the BSE, objectives, the mechanism of
functioning, composition of membership within the BSE and aggregate of India, state-
wise distribution of membership and spread of distribution of members in the BOLT.
Further, comparison with other stock exchanges, especially NSE, has made. The study
hints that there is continues progression in all the variables examined for the purpose with
a few exceptions.
The primary objective of the study is to examine the profile of the BSE in order to
evaluate the recent trend in the stock exchange in terms of changing style of functioning,
membership (brokers) composition within the BSE and aggregate of all India level,
member’s clients’ dispersion and spread of work stations. Further, comparison
with other stock exchanges also intended. To reach out the pre-defined objectives of
the study it was planned to use secondary data. The data was collected from official
website of the BSE, RBI, journals and magazines, published and unpublished sources.
The collected data was processed, tabulated and interpreted with help of
percentages, compound annual growth and wherever it was necessary ‘t’ test has been
used to check the significance of the growth rate.
A. Functions and Objectives of BSE:
The main objectives behind the establishment of the BSE could be summarized as
under:
 to make funds available to entrepreneurs of business class;
 to ensure maximum possible return on investment to investors;
 to provide a platform for savings, investments and reinvestment
activity;
 to provide a market for the purchase and sale of securities;
 to promote and develop a well-regulated market for dealings in
securities;
 to establish and promote honorable and just practices in the securities
market; and
 to encourage investment culture across the country. Finance is the
oxygen for any economy. Stock exchanges are commonly associated

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 with industrial finance. Stock exchanges provide transaction facility
to investors and thus discover the price for securities traded on them.
The stock exchanges are organized markets for buying and selling
existing industrial stocks, shares, debentures, government securities
and hybrid instruments due to their functioning. The main function of
a stock exchange is to create conducive climate for an active primary
market and to ensure fair and efficient trading in securities in the
secondary market. The former Finance Minister of India, Sri C.D
Deshmukh, while placing a bill on securities contracts (regulation)
bill in the Lok Sabha during November 1955, stated that the
economic services which a well constituted and efficiently run
securities market can render under normal incentives and impulse of
private enterprise are considerable. This statement reveals the
importance of stock exchanges in promoting desirable economic
growth. At present, the BSE functions across 380
medium and big cities in the country. The foremost function of the
BSE is to channelize savings from household sector to meet the
investment requirements of productive sectors of the economy. The
functions include to:
 impart liquidity to securities in the market i.e., securities can be readily
converted into cash;
 provide stability of continuity in price;
 provide easy marketability of shares and other securities so that value
of these securities can keep pace with growth;
 provide a well-organized mechanism to create a common platform
for trading in securities;
 safeguard the interest of investors through strict enforcement of
rules and regulations;
 regulate members through registration, inspection and
enforcement of provisions;
 provide speculation in the market to absorb more investor folk into
the market; and
 provide listing and quotation for trading of securities. The BSE also
undertakes support functions such as training and education,
technology solutions, data/information services and index services.

B. Working of the Bombay Stock Exchange

Bombay Stock Exchange is established in 21st century as medium of Industrial
Development, under sectors Transport Equipment, Capital Goods, Telecom, Healthcare,
Housing Related, Finance Metal, Metal Products & Mining, FMCG, Information
Technology, Power, Oil & Gas etc. Figures relating to the growth of primary capital

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market in India present an impressive picture. According to the figures, the resources
raised by the non-government public limited companies increased eight-fold between the
fifth and sixth plan periods (1974-75 to 1978-79 and 1980-81 to 1984-85) from Rs. 551
crores to Rs. 4,690 crores. During the seventh plan period Rs. 26,800 crores of resources
were estimated to have been raised including Rs. 12,000 crores through PSU bonds. This
represents six-fold increase over the resources mobilized through the capital market
during the sixth plan period. The trend seems to suggest that it should not be difficult for
the market to provide over Rs. 50,000 crores to industry during the eighth plan period.
There should be a healthy and strong secondary market mechanism to sustain this growth
of primary market. Because, ultimately it is only the secondary market or stock
exchanges that provide liquidity and price continuity for corporate securities. In other
words, a healthy secondary market is a prerequisite for smooth functioning of the primary
market, which in turn transmits favorable impulses to the secondary market. Again, the
ability of the corporate sector to raise the required resources from the capital market also
depends on smooth and efficient functioning of the stock exchanges. But available
evidence indicates that the performance of the stock exchanges is not in accordance with
the role prescribed for them. According to Shri M.R. Mayya, Executive Director,
Bombay Stock Exchange, one of the important functions to be discharged by the stock
exchanges is providing a market place for purchase and sale of the securities, thus
enabling their free transferability. Another major function supposed to be done by stock
exchanges is the process of continuous price formation. But recent developments in
important Stock Exchanges like Bombay Stock Exchange and Ahmadabad Stock
Exchange indicate the failure of the stock exchanges to perform their role efficiently and
smoothly.

C. Working Managements of Bombay Stock Exchange:

Composition of governing bodies of stock exchanges reveal almost total dominance of
brokers. This is one of the reasons of leniency of governing boards towards erring
brokers. The issues relating to management of stock exchanges need serious attention of
policy planners and the authorities responsible for administration of stock exchanges. It
has been observed that the growth in primary market is not matched by qualitative
improvement in the working and management of stock exchanges. The issues relating to
management of stock exchanges assume greater significance in view of the fact that there
are estimates of raising about Rs. 50,000 crores from capital market through, debentures,
bonds and shares.15 In fact, the responsibilities of stock exchanges are increasing with
the increasing investors’ participation in securities business. But stock exchanges do not
seem to respond to these responsibilities. There is a need to develop stock exchanges on
the basic broad guidelines which are supposed to give direction to our economic
development so that our stock exchanges can play a more meaningful role in our
economy. The broad guidelines include that "the basic criterion for determining lines of
advance must not be private profit, but social gain and the pattern of development and the

Page | 18
structure of socioeconomic relations should be so planned they result not only in
appreciable increase in national income and employment but also in greater equality in
incomes and wealth. Major decisions regarding production, distribution, consumption and
investment -- and in fact all significant socio-economic relationships -- must be made by
agencies informed by social purpose.

D. Bombay Stock Exchange Profile:

A d d re ss
P h iro z e Je e je e b h o y T o w e rs ,
D ala l S tre e t, M u m b a i
400001

T e le p h o n e
9 1 -2 2 -2 2 7 2 1 2 3 3 /4

T ra d in g H o u rs M o n d a y - F rid a y , 9 :5 5 a m -
3 :3 0 p m IS T

Page | 19
 H o lid a y s
B a k ri-Id , R e p u b lic D ay ,
G o o d F rid a y , A m b e d k a r
J a y an ti, In d e p e n d e n c e D a y ,
G a n e sh C h a tu rth i, D a s e ra ,
D iw a li (L a x m i P o o jan ),
D iw a li (B h a u b e e j), R a m z a n
Id , G u ru N a n a k J a y a n ti.

S e c u ritie s S to ck s, b o n d s , d e riv a tiv e s

T ra d in g S y s te m E le c tro n ic

K e y S ta ff
C h a irm a n - Ja g d is h C ap o o r.
C E O - R ajn ik a n t P a te l

E. Organization and Management

Historically trading members used to control and manage the stock exchanges in the
country. This model was designed to serve the exchanges, which were essentially
regional in character. After opening of the economy, the Indian stock market
registered robust development. With the advent of telecommunications during 1990,
a need was felt to recognize the structure of the BSE to cope with the interest
of investors spread over the country. Towards this end, the BSE has initiated several
measures to separate trading rights from ownership and management. The Governing
Board of the BSE comprises 9 directors, one managing/chief executive director,
two public representatives and three representatives from each of the
shareholders and trading members. A President, Vice-President, Treasurer and Secretary
are annually elected from among the elected directors of the governing body. The
members of the stock exchange elect their directors. The representation of trading
members does not exceed one fourth of total strength and the remaining directors are
appointed as per the guidelines given by the Securities and Exchange Board of India
(SEBI) from time to time.

F. Functions of SEBI:
SEBI has been obligated to protect the interests of the investors in securities and to
promote and development of, and to regulate the securities market by such measures, as it
thinks fit. SEBI, in particular, has powers for: -

Page | 20
  Regulating the business in stock exchanges and any other securities
markets;
 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 advisers and such other intermediaries who may
be associated with securities markets in any manner;
 Registering and regulating the working of the depositories,
participants, custodians of securities, foreign institutional investors,
credit rating agencies and such other intermediaries as SEBI may, by
notification, specify in this behalf;
 Registering and regulating the working of venture capital funds and
collective investment schemes including mutual funds;
 Promoting and regulating self-regulatory organizations;
 Prohibiting fraudulent and unfair trade practices relating to securities
markets;
 Promoting investors' education and training of intermediaries of
securities markets;
 Prohibiting insider trading in securities;
 Regulating substantial acquisition of shares and take-over of
companies;
 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;
 Performing such functions and exercising according to Securities
Contracts (Regulation) Act, 1956, as may be delegated to it by the
Central Government;
 Levying fees or other charges for carrying out the purpose of this
section;
 Conducting research for the above purposes;
 Calling from or furnishing to any such agencies, as may be specified
by SEBI, such information as may be considered necessary by it for
the efficient discharge of its functions;
 Performing such other functions as may be prescribed. While
exercising these powers, SEBI has the same powers as are vested in
civil court under the Code of Civil Procedure, 1908 while trying a suit,
in respect of the following matters:
(i) The discovery and production of books of account and other
documents, at such place and such time as may be specified by
SEBI,

Page | 21
 (ii) Summoning and enforcing the attendance of persons and
examining them on oath, and
(iii) Inspection of any books, registers and other documents of
any person referred to in section 12.
G. Characteristics or features of stock exchange are:

1. Market for securities: Stock exchange is a market, where securities of corporate

bodies, government and semi-government bodies are bought and sold.
2. Deals in second hand securities: It deals with shares, debentures bonds and such
securities already issued by the companies. In short it deals with existing or
second hand securities and hence it is called secondary market.
3. Regulates trade in securities: Stock exchange does not buy or sell any securities
on its own account. It merely provides the necessary infrastructure and facilities
for trade in securities to its members and brokers who trade in securities. It
regulates the trade activities so as to ensure free and fair trade
4. Allows dealings only in listed securities: In fact, stock exchanges maintain an
official list of securities that could be purchased and sold on its floor. Securities
which do not figure in the official list of stock exchange are called unlisted
securities. Such unlisted securities cannot be traded in the stock exchange.
5. Transactions effected only through members: All the transactions in securities
at the stock exchange are affected only through its authorized brokers and
members. Outsiders or direct investors are not allowed to enter in the trading
circles of the stock exchange. Investors have to buy or sell the securities at the
stock exchange through the authorized brokers only.
6. Association of persons: A stock exchange is an association of persons or body of
individuals which may be registered or unregistered.
7. Recognition from Central Government: Stock exchange is an organized market. It
requires recognition from the Central Government.
8. Working as per rules: Buying and selling transactions in securities at the stock
exchange are governed by the rules and regulations of stock exchange as well as
SEBI Guidelines. No deviation from the rules and guidelines is allowed in any
case.
9. Specific location: Stock exchange is a particular market place where authorized
brokers come together daily (i.e., on working days) on the floor of market called
trading circles and conduct trading activities. The prices of different securities
traded are shown on electronic boards. After the working hours market is closed.
All the working of stock exchanges is conducted and controlled through
computers and electronic system.
10. Financial Barometers: Stock exchanges are the financial barometers and
development indicators of national economy of the country. Industrial growth and
stability are reflected in the index of stock exchange.

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 H. Demutualization
Traditionally, stock exchanges were organized in the form of clubs, with the
ownership and control vested with the brokers. In case of disputes, often the interests
of brokers alone were protected, leaving the investors at the losing end. Therefore, to
reduce the dominance of trading members in the management of stock exchanges, the
government of India has proposed to corporatize the stock exchanges by which
ownership, management and trading membership segregated from one another. In this
row, during 2005, the erstwhile BSE became the BSE Limited. The ownership has been
diluted. The public shareholders took 51 per cent of brokers’ stake. The public
shareholding includes 5 per cent share of each of its strategic partners i.e., Deutsche
Borse and Singapore Exchange.
I. Membership
In reflection of the need to upgrade the professional standards of market
intermediaries, the admission standards for trading membership have become more
vigilant. The BSE administration has tightened the qualifications/norms such as
capital adequacy, experience etc. Now, the ownership and management of the BSE are
completely separated from the rights of trading member to trade on the BSE. No person is
eligible for admission as a member unless:
a. he/she worked for not less than two years as partner with or an
authorized clerk or remisier or apprentice; or
b. he/she agrees to work for a minimum period of two years, as a representative
member with another member and enters into bargains on the floor of the
exchange not in his own name but in the name of such other member; or
c. he/she succeeds to the established business of a deceased or retiring member
who is his father, uncle, brother or any other person who is in the opinion of the
Governing Board a close relative; or
d. he/she has a minimum net worth, possesses a minimum working capital of cash
and/or marketable securities, and possesses assets belonging to himself/herself
and/or spouse or children, of such nature and value as the Governing Board may
from time to time, in its opinion, determine and consider acceptable; and
e. he/she qualifies in a written test conducted by the exchange and in case of a
corporate member, the directors referred to in sub-clause (v) of Rule 19A(b)
qualify in a written test conducted by the exchange, and in the case of a
Financial Corporation, the Chief Executive Officer and another
Director/Officer both possessing experience as provided in sub-clause (v) of Rule
19A(b) qualify in a written test conducted by the exchange.

The applicant must be engaged solely in the business of securities and must not be
engaged in any fund/asset-based activity. Admission of trading members in the

Page | 23
 BSE is a two-stage process. After meeting the minimum eligibility to become a
member, the applicants are required to go through a written examination followed
by an interview. The candidates are interviewed by a committee consisting
of experienced people from the industry. The committee assesses the
applicants’ capability to operate as a member. Trading members of the BSE are
the individuals, partnership and corporate members. They have the right to trade
in the stocks listed on the BSE. An investor can buy/sell securities through one of
the trading members of the exchange. The members must be registered with the
SEBI. In India, traditionally, brokerage firms were proprietary or partnership
concerns with unlimited liabilities. This restricts the amount of capital that such
firms can raise. The ever-growing volume of transactions made it imperative for
such firms to be well capitalized and professional. The necessary changes were
affected to the existing legal frame work to open up the membership of stock
exchanges to corporate members with limited liability. In recognition of
the fact that the trading members were undercapitalized, the BSE has
encouraged the setting up of corporate trading members with higher
capitalization. The year wise membership in the BSE during 2001-10 is presented
in Table 1. The membership is spread over individuals, partnership firms
and corporate. The individual membership has declined from 178 in 2001 to
147 in 2010 with relative ups and downs. Of the total membership in the BSE, the
individual members constituted 25.83 per cent in 2001

Page | 24
 Notes: IM Individual membership; PM Partnership membership; CM Corporate
membership; Figures in brackets indicate the percentage to total. Source: SEBI,
Hand Book of Statistics on Indian Securities Market-2011, Mumbai,
2012, 17-23 as compared to 14.66 per cent in 2010. The partnership members
were 48 or 6.97 per cent in 2001 vis-à-vis 30 or 2.99 per cent in 2010. In the
meanwhile, there are to and fro changes in it. The corporate members were 463
in 2001 as compared to 826 in 2010. There is a gradual growth in relative as well
as absolute terms throughout the period. The share of corporate members was
67.20 per cent in 2001 as against 82.35 per cent in 2010. As pointed out in the
first chapter, the share of individual and partnership members has
declined while that of corporate members increased. This has prevailed in all
the stock exchanges in the country in the same period. When all the three
categories of members are put together, the aggregate members were 689 in 2001
while they were 1003 in 2010. It may be noted that this trend is contrary to the
one observed in the first chapter. If all the stock exchanges are considered as a
whole, the membership had declined in 2010 as compared to 2001. It may be
concluded that both the individual and partnership members have declined in
2010 in both absolute and relative terms over 2001, whereas the corporate
membership has shot up in 2010 upon 2001. There is nearly a twofold increase in
corporate members. Thus, corporate members account for a lion’s share in the
BSE. Further, on an overall basis, the membership has gone up in the BSE. The
relative share of the BSE in the total membership of all the stock exchanges in
India during 2001-10 is furnished in Table 2. In the case of individual
membership, the

Page | 25
 Note: Figures in brackets indicate the percentage to total
Source: As in Table 1
proportion of the BSE in the aggregate individual membership of all the stock
exchanges was 3.15 per cent in 2001 as compared to 3.43 per cent in 2010. It was
the least at 2.86 per cent in 2002 while the highest at 3.45 per cent in each of 2008
and 2009. In the case of partnership membership, the share of the BSE has
varied between 10.34 per cent and 13.19 per cent during the period. With
regard to corporate membership, the BSE has formed 12.16 per cent in 2001 vis-
à-vis 19.68 per cent in 2010 with relative fluctuations. The years 2002 and 2009,
with a proportion of 11.99 per cent and 19.74 per cent, formed the lowest
and the highest sequentially. When all the three categories of members
are considered as a whole, the proportion of the BSE was in the range of 6.81-
11.39 per cent. It may be summed up that the relative share of the BSE in the total
membership of all the stock exchanges is the least in individual membership
followed by partnership membership and corporate membership. Further, its

Page | 26
 proportion has never crossed 20 per cent in any one of the years of study period.
Furthermore, there is a decline in individual membership and partnership
membership in 2010 over 2001 in the BSE as well as Indian aggregate. A
converse situation prevails in both the cases. The state-wise distribution of
clients of members in the BSE during 2010 is shown in Table 3. During 2010,
there were 206.57 lakh clients to the members of the BSE spread over different
states and union territories in the country. Of them, 49.48 lakhs or 23.96 per cent
are in Maharashtra followed by Gujarat with 32.31 lakhs or 15.64 per cent.
These two states account for 40 per cent in the aggregate of clients. The share of
each of six states such as Delhi, West Bengal, Uttar Pradesh, Tamil Nadu and
Karnataka varied between 6.04 per cent and 6.61 per cent. The proportion of each
of the five states like Rajasthan, Madhya Pradesh, Haryana, Kerala and Punjab
was in the range of 2.18-4.65 per cent. The account of Jharkhand, Bihar
and Orissa was 1.31 per cent, 1.26 per cent and 1.41 per cent respectively. The
share of each of eight states was in the level of 0.11-0.69 per cent. The account of
each of nine states and union territories differed between 0.01 per cent and 0.08
per cent. The share of all these was 0.23 per cent. The proportion of Mizoram
and Lakshadweep is negligible. It may be said that, out of the states and
union territories, there is high uneven distribution of clients to the members of
the BSE. This is on account of many causes such as stage of economic
concerned, spread in the density of population, distribution of income among the
investing public in financial instruments, habit of development of the
region thrift and savings, availability of online facility, perception of risk,
psychology of investors, knowledge of finance etc.

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 J. Trading mechanism
The trading system of the BSE, known as BOLT, is fully automated and screen
based. During 1994, BOLT came into existence as a part of four-phase
computerization program. This was introduced to bring an automated trading
environment in the BSE. The aim is to convert the open outcry system of

Page | 28
 trading into screen-based trading system (STS). The extension of BOLT to
cities outside Mumbai started during 1997. The existing technique can handle a
maximum of 3,500 trades per second. On an average, per second, 222 orders can
be executed with a peaking speed of 6,000 orders. The system comprises 17,000
Trade Work Stations (TWS) network on Ethernet, Very Small Aperture Terminals
(VSAT) and Local Area Network (LAN). The wide area network (WAN) of the
BSE is connected to over 8,000 BOLT TWS spread over 380 cities across the
country. Further, WAN alone connects 2,500 member offices within Mumbai and
29 major metropolitan cities to BOLT. BOLT enables the members to trade
simultaneously with ease and efficiency across the county. In one stroke it
dispensed with need for people to congregate on the floor of an exchange to trade
and took the exchange floor to the investors’ doorstep. BOLT enables the BSE to
render quality and standard service to members, investors and other
market intermediaries. Presently, BOLT has the capacity to execute 80 lakh
orders per day. Further, the BSE has introduced centralized exchange-based
internet trading system viz. BSEWEBx.co.in for the first time in the world.
This initiative enables investors to trade on the BSE platform from anywhere in
the globe. Through its technology, the BSE provides a facility for screen-based
trading with automated order meeting. The trading system of the BSE is an
anonymous order driven system. This technique helps members to place orders,
whether large or small, without disclosing their names. The disadvantage of
disclosure of identity is avoided. The trading system operates on a strict
principle of price-time priority. All orders received on the system are sorted
out with the best priced order getting the first priority of matching. Orders
are automatically matched by computer. The computer keeps the system more
transparent and fair. If an order does not find a suitable match, it remains in the
system and is displayed to the whole market till a fresh order comes in or the
earlier order is cancelled or modified. The trading system provides flexibility
to users to place several kinds of orders: orders with time related,
price related and volume related conditions can be placed/implemented at
the same time without any delay in their execution. It also provides market
information online through many enquiry channels. The market screens, at any
time, provide information on the total offer depth relating to a security i.e. the
high and lows, the last traded price, spread of the security etc. This information is
updated online, which enables a member to make better decisions. The clearing
and settlement system in a stock exchange refers to the mechanism
where the seller delivers the securities and purchaser makes payment thereon. The
clearing and settlement system of the BSE had undergone many changes along
with the changes of security market as a whole. The clearing and settlement
operations of the BSE are managed by the Bank of India (BOI) Shareholding
Limited, which is the Joint Venture of the BSE and the BOI. As per the directions
of the SEBI, all the transactions in all groups in equity segment and fixed
income segment are required to be settled under T+2 basis. In the

Page | 29
 BSE, the settlement cycle starts on Monday and ends on Friday. The
BSE circulates settlement calendar among the market participants. It
shows the dates of settlement and the related issues. Under this system, the
deals struck on a particular day are settled after a given number of business days.
T+2 means that the exchange of securities for money between seller and buyer
will take place after a span of 2 days after the BSE. Member settles trade deals on
his own account or on behalf of individual or corporate or institutional clients.
This is carried out either through member himself or through the SEBI
registered custodian appointed by him/client. The BSE generates delivery
and receives orders for the trading day excluding Saturday, Sunday and any
other public holiday. Table 4 shows the trade settlement cycle time and process of
operations in transactions carried out by members in different group scrips
after sum up

of purchase and sale deals. The delivery/receive order passes information about
the name of the company’s script and the quantity to be delivered /received
by the member through clearing house. The market timings on the trading day
are 9.30 AM to 3.30 PM. During this period, the securities are bought and sold.
Under T+1, all trades are confirmed by 11 AM. Files are processed and
downloaded to brokers/custodians by 1.30 PM. In the case of T+2, pay-in of
securities and funds is by 11 AM and pay-out of securities and funds is by 1.30
PM. Settlement cycle in the BSE is presented in Fig.1.

Page | 30
 Source: The Institute of Charted Accountants of India, Hand Book for
Investing and Investor Protection, Sahitya Bhavan Publications, New
Delhi,2011, p21. Every short delivery has to be first debited/credited directly to
the account of clearing member of the clearing house at the closing price of short-
delivered shares on the previous trading day to the settlement day. Then, it is
auctioned off on the next trading day and settled on a T+2 basis. Finally, short
deliveries that are left unmatched are closed out at the highest price prevailing on
the BSE from the trade day till the day of closing out or 20 per cent above the
official closing price on the auction day, whichever is higher. On the basis of
nature, the securities traded in the BSE are classified into seven groups.
These include ‘A’, ‘B’, ‘S’, ‘T’, ‘TS’, ‘F’, ‘G’ and ‘Z’. ‘A’ group covers
large outstanding shares, good track record and big volume of business in the
secondary market. Carry forward transactions are permitted in it. At present, 216
companies’ securities are under it. Group ‘B’ consists of relatively liquid
securities. Group ‘S’ represents scripts forming part of the ‘BSE-Indonext’
segment. All the trade deals in this segment are through BOLT system. ‘T’ group
consists of scripts that are traded on trade-to-trade basis. The ‘TS’ group includes
those scripts traded in the ‘BSE-Indonext’ segment. These are settled on a trade-
to-trade basis as a surveillance measure. ‘F’ group comprises fixed income
securities whereas ‘G’ group government securities. ‘Z’ group includes
securities of companies which have failed to comply with listing
requirements of the BSE. All the securities are settled through the
clearing house. Till the advent of online trading, an investor who wants to transact
business in any security which was not traded in the nearest stock exchange had to
route orders through a series of correspondent brokers to the appropriated
exchange. This has resulted in a great deal of uncertainty and high
transaction cost. The BSE has made it possible to connect the parts of the nation

Page | 31
 by its online trading system. The success of any organization depends upon the
efficiency and the qualification of members/brokers. The trading platform
of the BSE is accessible to investors only through the trading
members/brokers. The spread of trade work stations of the BSE through BOLT
across the cities is provided in Table 5. The number of trading terminals were
9,705 in 2004 as against to 15,630 in 2010. On an average, per year, the trading
stations were 14,138.71. There are fluctuations in the yearly progress. It varied
between 0.88 per cent and 25.90 per cent. The compound growth rate (CGR) was
7.04 per cent, which is insignificant. The trading was spread over 420 cities in
2004 as compared to 293 in 2010. The decline was in the range of 1.69 – 13.31
per cent. On an average, per year, the BSE has covered 375.86 cities during the
period. The CGR in the spread of cities was -5.01 per cent which is not
significant. The decline in the coverage of cities is due to the emergence of
the NSE as premier stock exchange in the country, establishment of regional stock

Note: NS Not significant.

Source: As in Table 3.1
exchange etc. It may be said that the trading terminals of the BSE have
increased but the number of cities covered declined. Either the increase or
decrease are insignificant during the period.

K. Indices
Over the decades, the BSE has passed through good and bad periods. Till
1980s, there was no index to measure ups and downs in the prices of scrips of
stock market. During 1986, the BSE came out with a stock index, which is
popularly known as ‘Sensex’. The launch of Sensex was followed by the
introduction of National Index during 1989. It comprises 100 stocks listed at
five major stock exchanges such as Bombay, Calcutta, Delhi, Ahmadabad and
Madras. During 1994, the BSE launched two more indices, namely, the BSE

Page | 32
 200 and the Dollex 200 with a view to provide a representation to an
increasing number of listed companies, large market capitalization and new
industry sectors. Since then, the BSE came a long way by adjusting itself to the
varied needs of investors and market participants. In order to fulfil a wide range
of expectations of market players, the BSE has introduced segment specific
and sector specific indices. During market hours, the values of these
indices are updated on real time basis and the same is displayed
through BOLT system. The index committee periodically revises all the
indices of the BSE. Presently, 11 sectoral indices emerged in the BSE.
The details of sectoral indices, which emerged in the BSE during 1999-2007, are
furnished in Table 6. A glance at the Table reveals that five sectoral indices such
as the BSE capital goods, the BSE consumer durables, the BSE fast moving
consumer goods, the BSE health care and the BSE information technology were
launched during 1999. After a gap of 3 years, the BSE bankex was brought during
2003. Three more indices like the BSE auto, the BSE metal and the BSE oil and
gas were launched during 2004.

During 2007, the BSE power and the BSE realty indexes were added. Thus,
several sectoral indices were launched by the BSE at different points of time.

INDEX of SENSEX as of 26th February, 2021

Page | 33
 L. Sensex
The BSE’s sensitivity index is popularly known as the BSE sensex. The sensex came into
existence during 1986. Subsequently, sensex has become the barometer of the
Indian stock market. Sensex is designed with global standards of index
construction and review methodology. It is a basket of 30 constituent stocks
representing a sample of large, liquid and representative companies. The base year of
Sensex is 1978-79 and hence the base value is 100. The index is widely used in
both the domestic and international markets. Due to wider acceptance of Indian
investors, the BSE Sensex is regarded as the pulse of stock market. Initially, the
index was calculated on the basis of full market capitalization methodology. Later
on, as a part of stock market reforms, the BSE adopted free-float methodology, in the
place of full market capitalization methodology since 2003. On any trading
day, closing Sensex is computed by taking the weighted average of all trades of
constituent companies in the last 30 minutes of trading session. The use of
index closure algorithm prevents any intentional manipulation in the value of closing
index. One of the important aspects of maintenance is upgradation of data to the base
year average. The adjustment of base year value ensures the replacement of
stock in index, additional issues of capital and other corporate announcements like
right issues etc. The index cell of the BSE takes care of day-to-day maintenance of index
within the broad framework of index policy. It ensures proper maintenance of index by
updating data at regular intervals. During market hours, prices of index scrips are
automatically updated for every 15 seconds in all the trading work stations which are
connected to the BSE trading computer. The BSE selects scrips on the basis of
criteria to promote transparency in trading. The general guidelines for the selection
of constituents in the Sensex are: (i) listed history; (ii) trading frequency; (iii) final rank;
(iv) market capitalization weights; (v) industry representation; and (vi) track record.

Page | 34
SENSEX Calculation Methodology:
SENSEX is calculated using the "Free-float Market Capitalization" methodology,
wherein, the level of index at any point of time reflects the free-float market value of 30
component stocks relative to a base period. The market capitalization of a company is
determined by multiplying the price of its stock by the number of shares issued by the
company. This market capitalization is further multiplied by the free-float factor to
determine the free-float market capitalization. The base period of SENSEX is 1978-79
and the base value is 100 index points. This is often indicated by the notation 1978-
79=100. The calculation of SENSEX involves dividing the free float market
capitalization of 30 companies in the Index by a number called the Index Divisor. The
Divisor is the only link to the original base period value of the SENSEX. It keeps the
Index comparable over time and is the adjustment point for all Index adjustments arising
out of corporate actions, replacement of scrips etc. During market hours, prices of the
index scrips, at which latest trades are executed, are used by the trading system to
calculate SENSEX on a continuous basis.
SENSEX OBJECTIVES
 Measurement of Indian Market Movement: Due to a long history and wide
acceptance, BSE is considered to be a very good indicator for reflecting Indian
market movements and sentiments of traders, speculators and investors.
 Acts as Benchmark: Due to the complete and balanced representation of all the
sectors, Sensex acts as an appropriate benchmark for fund managers to compare
the growth of their funds.
 Index-Based Derivative Products: Due to the constituent companies of the
Sensex, all kinds of investors refer to S&P BSE SENSEX for their trading and
investment purposes. It is the most liquid contract in the Indian market.

The criteria for selection and review of scrips for the BSE Sensex can be explained in the
following manner:
A. QUANTITATIVE CRITERIA
1. MARKET CAPITALIZATION: The Scrip should figure in the top 100 companies
listed by market capitalization. Also, market capitalization of each of the scrip should be
at least. 0.5 % of the total market capitalization of the Index i.e., the minimum weight
should be 0.5%. Since the BSE Sensex is a market capitalization weighted index, this is
one of the primary criteria for scrip selection. (Market Capitalization would be averaged
for last 6 months).

2. LIQUIDITY:

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a. Trading Frequency: The scrip should have been traded on each and every trading day
for the last six months. Exceptions can be made for extreme reasons like scrip suspension
etc.

b. Number of Trades: The scrip should be among the top 150 companies listed by average
number of trades per day for the last one year.

c. Value of Shares Traded: The scrip should be among the top 150 companies listed by
average value of shares traded per day for the last one year.

d. Trading Activity: The average number of shares traded per day as a percentage of the
total number of outstanding shares of the company should be greater than 0.05 % for the
last year.

3. CONTINUITY: Whenever the composition of the Index is changed, the continuity of

historical series of index values is re-established by correlating the value of the revised
index to the old index (index before revision). The back calculation over the last one-year
period is carried out and correlation of the revised index to the old index should not be
less than 0.98. This ensures that the historical continuity of the index is maintained.

4. INDUSTRY REPRESENTATION: Scrip selection would take into account a balanced

representation of the listed companies in the universe of BSE. The index companies
should be leaders in their industry group.

5. LISTED HISTORY: The scrip should have a listing history of at least 6 months on
BSE. However, the Committee may relax the criteria under exceptional circumstances.

B. QUALITATIVE CRITERIA
1. SCRIP GROUP: The Scrip should preferably be from BSE group.

2. TRACK RECORD: The company should preferably have continuous dividend paying
record or / and promoted by management having proven record.

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S & P CNX NIFTY
The NSE -50 Index was launched by the National Stock Exchange of India Limited,
taking as base the closing prices of November 3, 1995 when one year of its Capital
Market segment was completed. It was subsequently renamed S & P CNX Nifty- with S
& P indicating endorsement of the Index by Standard and CNX standing for CRISIL NSE
Index. The S & P CNX NIFTY, also popularly known as the Nifty 50, is one of the most
scientific indices in India that reflects the price movement of 50 blue- chips, large cap,
liquid and highly traded stocks of 23 sectors. The Nifty is managed by India Index
Services & Products Ltd. (IISL). The total value of all Nifty stocks is approximately 70%
of the traded value of all stocks on the NSE. Nifty stocks represent about 59% of the total
market capitalization.

OBJECTIVES The basic idea of this index is to ascertain the movements of the stock
market as a whole by tapping the news which can affect the stock. The index also
averages out the good stock – specific news for a few companies and bad stock – specific
news for others and left with the news that is common to all stocks. The news that is
common to all stocks is news about India, which is the sole purpose of NSE Nifty.
According to NSE, the Index was introduced with the objectives of:

1. Reflecting market movement more accurately,

2. Providing Fund Managers with a tool for measuring portfolio returns vis-a-vis market
returns, and
3. Providing a basis for introducing Index based derivatives.

This paper discusses Efficient Market Hypothesis (thereby referred to as EMH),

seasonality and its implications in both advanced and emerging securities markets. EMH
suggests that investors cannot expect to out perform the market consistently on a risk
adjusted basis (Mayo, 2003). According to Fama (1965) who developed the Efficient
Market Hypothesis, “an efficient market is a market where there are a large number of
rational profit-maximizers actively competing, with each trying to predict future market
values of individual securities, and where important current information is almost freely
available to all participants. In an efficient market, competition among the many
intelligent participants leads to a situation where at any point in time, actual prices of
individual securities already reflect the effects of information both on events that have
already occurred and on events which, as of now, the market expects to take place in the
future. In other words, in an efficient market at any point in time, the actual price of a
security will be a good estimate of its intrinsic value.” On the other hand, in an inefficient
market, EMH would not hold. This suggests that existence of loop holes which could be

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exploited to make abnormal returns by predicting market price patterns, using past price
information and insider information. These market inefficiencies, also called market
anomalies have received as much research work as EMH.
2. THREE FORMS OF MARKET EFFICIENT HYPOTHESIS
There are three forms of market efficiency in an informationally efficient market, where
prices adjust quickly and accurately to new information (Emery et al, 2007). These forms
show the degree of efficiency of security markets and attempt to answer the question of
how efficient a market is. (Mayo, 2003 and Keane, 1983)

2.1 Weak Form Efficiency

The weak form of EMH asserts that the current price fully reflects information contained
in the past history of prices only. Stock market price information is available via most
means of mass communication. Thus, investors should be unable to make superior profit
from use of public information i.e. daily stock market prices or company results available
to all. Again, many investment bankers and financial analysts devise investment
strategies using technical analysis of past data to outperform the market and their
competitors, in satisfying their clients demand for superior returns. Transaction costs of
trading, investment advice, analysis and commissions when considered, affects the
investors return, especially for investors who continue to use traditional full service
brokers (Mayo,2003)

2.2 Semi Strong Form Efficiency

The semi strong form of EMH, according to Brealey et al (2006), prices reflect not just
past prices but all other published information, such as you might get from reading the
financial press. Similarly, Fama (1969) defined it as publicly available information with
examples of announcements of annual earnings and stock splits. Semi-strong form of
EMH asserts that current prices fully reflects public knowledge about the underlying
companies and that efforts to acquire and analyze this knowledge cannot be expected to
produce superior investment results (Lorie & Hamilton 1973).

2.3 Strong Form Efficiency

The strong form of EMH suggests that share prices fully reflect not only published
information but all relevant information including data not yet publicly available. It also
asserts that not even those with privileged information (insiders) can often make use of it
to secure superior investment results (Lorie & Hamilton 1973).

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These three forms of EMH are not independent of one another. For the market to be
efficient in the semi-strong form, it must also be efficient in the weak form, because if
price movements follow a predictable path which the perceptive observer can exploit
profitably, the implication is that the price has reacted slowly or capriciously to published
information. Likewise, for the market to be efficient in the strong form it must also be
efficient at the other two levels, otherwise, the price would not capture all relevant
information (Keane, 1983). He went on to state that for an inefficiency (seasonality) to be
operationally significant it must be exploitable. Keane (1983) analyses four criteria an
exploitable inefficiency should satisfy, these are: (a) it should be “authentic” –
supportable by properly conducted statistical research. (b) It should be “identifiable”-not
just strategies or people that beat the market but concrete and verifiable evidence. (c) It
should be “material”- inefficiencies are not exploitable unless they are sufficient to
compensate for the costs and risks of pursuing them. (d) It should be “persistent”-the
value of inefficiency is not just a record of its existence in the past but that it will
continue to exist in future.

These criteria are very important in understanding the different types of market
seasonality or anomaly, their existence, prevalence and their implications for the EMH.

3. SEASONALITIES AND ITS IMPLICATIONS FOR THE EMH

Seasonalities, as the name suggests are time regularities, patterns or predictable trends. In
the financial securities market, seasonalities would suggest predictable time patterns in
the behaviour of the stock market-volume of stock trades, stock returns etc. If it does
exist, then investors can exploit the market for superior returns in all financial securities
markets. Seasonalities as defined by Alagidede (2008) are evidences of market efficiency
anomalies. These are also known as seasonal anomalies (calendar effects) which may be
loosely referred to as the tendency for financial returns to display systematic patterns at
certain times of the day, week, month or year. Calendar effects include: January effect,
the month of the year effect, monthly effect, holiday effect, Monday effect / day of the
week effect, weekend effect, turn of the year effect etc. (Guo and Wang, 2007).
Discussing a few of them will be worthwhile.

3.1 The January Effect

The January effect is where returns are much higher during the month of January than
any other month, i.e. “where investors can earn a disproportionately high amount of the
total annual return available from both fixed income assets and equity in January” Clare
et al (1995). Most research conducted in developed economies confirm the presence of
the January effect, although, in more recent times they seem to be disappearing. Keim
(1983) and Reinganum (1983) show that the January effect and the size effect are highly

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interrelated. Blume and Stambaugh (1983) discovered, after controlling for upward biases
in small stock returns, the size effect was only significant in January.

An extensive amount of studies has gone into the month of the year effect. Mills and
Coutts (1995) concluded that stock returns are much higher in the month of January in
the UK using FTSE indices between January 1986 and October 1992(FTSE 100,Mid 250
and 350 indices). Gultekin and Gultekin (1983) using 17 countries also found evidence
that the January return is much higher than other months returns,

Alagidede (2008) tested for month of the year effect in emerging African markets and
concluded that the January effect is positive and significant for Nigeria, Egypt and
Zimbabwe. However Guo and Wang’s (2007) study on the emerging Chinese stock
market shows that there is no significant January effect in Chinese stock market.

Many researchers have sought the cause of the January effect and arrived at a number of
causes which include: tax-loss selling hypothesis, provision of new information at the end
of a fiscal year, firm size had the significant higher risk in the beginning of the year than
the rest of the year and the systematic tendencies for closing prices to be recorded at the
bid in the last traded in December and at the ask in early January (Guo and Wang’s,
2007)

3.2 The Holiday Effect

The definition of a holiday is relative, subjective and would vary for different countries
and their capital markets e.g. Christian, Muslim, public holidays etc. One definition of a
holiday looks at days, other than Saturday or Sunday, upon which the market is closed
(Alagidede, 2008). Ariel (1990) used US data reports to show that the trading day prior to
holidays on average displays high positive returns, this result was supported by Kim and
Park (1994) for US, Japan and UK .However, Cadsby and Ratner (1992) using UK data
concluded that the holiday effect was insignificant This conclusion was challenged by
Mills and Coutts (1995) in their study of calendar effects using London stock FTSE
indices. Coutts et al (2000) showed that the holiday effect is present in their study of the
Athens Stock Exchange (ASE), although, no similar study has been undertaken on the
ASE which would have been used as a basis of comparison. Their results were consistent
with international evidences.

3.3 The Weekend Effect

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One of the most prevalent anomalies appears to be a weekend effect where stocks display
significantly lower returns over the period between Friday’s close and Monday’s close
(Arsad and Coutts, 1995). Jaffe and Westerfield (1985) examined the daily stock market
returns in 4 international stock markets including, the London stock Exchange’s FT30
over the period 1950 – 1982 and found a significant weekend effect. Consistent with
Jaffe and Westerfield (1985) findings, Condoyanni et al (1987) also found the existence
of the weekend effect in the UK when examining the FT30 over the period 1979 – 1994.
Arsad and Coutts (1996, 1997) also found the weekend effect in the FT30 from the period
1935 – 1994, although according to their research the effect was found not to be
persistent. Board and Sutcliffe (1988) examined the weekend effect in the Financial
Times all share index over the period 1962 – 1986 and found clear evidence of a weekend
effect over the sample period, with the significance of the effect diminishing over time.
This is consistent with later research done by Dubois and Louvet (1996) on the same
index for the period 1969 – 1992, in which negative returns was found on Monday, which
are compensated by abnormal positive returns on Wednesday. Agrawal and Tandon
(1994) examined the weekend effect in 18 countries including the UK and found a
negative Monday return when the market rises in the previous week. Furthermore, they
found the effect disappearing in 1980. Mills and Coutts (1995) found evidence of the
existence of the weekend effect in the UK when the FTSE 100, Mid 250, 350 and certain
of the accompanying industry baskets was examined for the period from 1986 to 1992.
Ajayi et al (2004) investigated day of the week stock return anomaly, using major market
stock indices in eleven eastern European emerging markets for the period 1994 – 2002.
The results show negative and positive Monday returns in six and five emerging markets
respectively, of which only two of the six show negative Monday returns and one of the
five show positive Monday returns and were statistically significant. Choudhry (2000)
investigated the day of the week effect in seven emerging Asian stock markets from 1990
– 1995 and found significant weekend effect in some of the markets considered.

3.4 The Day of the Week Effect:

The day of the week effect refers to existence of a pattern on the part of stock returns,
whereby these returns are linked to the particular day of the week (Poshakwale 1996).
The last trading days of the week, particularly Friday, are characterised by substantially
positive returns while Monday, the first trading day of the week, differs from other days,
even producing negative returns (Cross 1973, Lakonishok & Levi (1982), Rogalski
(1984), Keim & Stambaugh( 1984) and Harris (1986). In other words, this effect relates
to the difference in returns across different days of the week with the variance in stock
returns found to be largest on Mondays and lowest on Fridays (Raj & Kumari 2006). It
should be noted that the day of the week effect in emerging capital markets has not been
extensively researched and the presence of such an effect would mean that equity returns
are not independent of the day of the week effect against random walk theory
(Poshakwale 1996). On the other hand, the international evidence of the report has been

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somewhat mixed. Dubois and Louvert (1996) find returns to be lower for the beginning
of the week (but not necessarily Monday) for European countries, Hong Kong and
Canada. However, it was observed that the anomaly disappeared in the USA for the most
recent periods. Agrawal and Tandon (1994), find negative Monday returns in nine
countries and negative Tuesday returns in eight countries (out of a total of nineteen
countries).

Several theories have been put forward regarding specific time periods anomalies in the
capital market. The day of the week effect has been explained by examining various
kinds of measurement errors such as: – settlement period hypothesis; which attributes the
day of the week effect to the settlement dates with prices higher on the pay-in days as
compared to the pay-out days. Calendar time (trading time) hypothesis; implies that since
Monday returns are spread across three days (Saturday, Sunday & Monday), the returns
should be three times as high as other days. The negative Monday returns go against this
reasoning, which lead to the proposed theory that returns should be proportional to
trading time as opposed to calendar time (Raj & Kumari 2006). Information flow
hypothesis postulates that the difference in information flow over the weekend compared
to other days of the week causes the Monday effect (Dyl & Maberly 1988). Often
companies hold back negative information till the weekend, giving the investors two non-
trading days to absorb the information before reacting with trading activity.
Consequently, all sell orders get pushed to Monday, thereby giving negative returns (Raj
& Kumari 2006). Retail investor trading hypothesis, suggests that negative Monday
returns could be the result of individual investor trading activity (Brooks & Kim 1997). It
was found that trading activity is significantly lower on Monday for large size trades,
while small size trades have a higher percentage of sell orders on Monday as compared to
other days of the week.

3.5 Trading Month Effect

The trading month effect also called the ‘turn-of -the-month’ effect which was first
documented by Ariel(1987) using US data shows that returns are only positive around the
beginning and during the first half of trading months, whereas during the second half they
are on average zero. This study was replicated by Jaffe and Westerfield (1989), for the
UK, Japan, Canada and Australia, in their study. However, only Australia shows a
significant monthly effect. A conflicting evidence for the UK in a report from Cadsby
and Ratner (1992) shows a significant trading month effect in the FT 500. Ariel (1988)
offered three explanations for the trading month effect which include: new information
concerning corporate cash flows, changes in risk free rate and changes in the preferences
of market participants leading to variation in demand for securities which cannot be
offset by supply. Mills and Coutts (1996) investigated the this effect using a large sample
of daily returns from the Financial Times Industrial Ordinary Share Index and found that

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a trading month effect is present but exists for a much shorter period than has been
documented by previous studies for both the US and the UK. The information release
hypothesis of French(1980) was accepted as an explanation of the trading month effect,
only if the unexpected release of ‘good’ and ‘bad’ news has a tendency to fall in the final
and first days of trading months, securities would be riskier during these periods , thus
justifying the higher first half returns.

Context of India:
Published studies that have examined calendar effects in the Indian stock market appear
to be limited. Kaur (2004) reports that few studies have examined the day-of-the-week
effect in the Indian stock market, and further notes the absence of studies that examine
monthly seasonality in the Indian stock market. Kaur utilized two Indian stock indexes,
the Bombay Stock Exchange (BSE) 30 index and the National Stock Exchange (NSE)
S&P CNX Nifty stock index, to examine the day-of-the-week effect and the monthly
effect. Kaur did not find a January effect in the Indian stock market, but did find that
March and September generated substantially lower returns, whereas February and
December generated substantial positive returns.

Sarma (2004) adds that very few studies have examined calendar effects during the post
reform era in the Indian stock market. Sarma investigated the BSE 30, the BSE 100, and
the BSE 200 stock indexes to detect the day-of-the-week effect. Utilizing Kruskal-Wallis
test statistics, Sarma concluded that the Indian stock market exhibited some seasonality in
daily returns over the period January 1, 1996 to August 10, 2002. Bodla and Jindal (2006)
examined several seasonal anomalies in the Indian stock market utilizing the S&P CNX
Nifty Index for the period January 1998 to August 2005. For the monthly effect, they did
find some significant differences for their sub-period, January 2002 to August 2005.
However, they were unable to find any significant differences among individual months.
In an earlier study, Ignatius (1998) examined seasonality in a BSE index and in the
Standard and Poor’s 500 stock index for the period 1979-1990. Ignatius found that
December generated the highest mean returns, and that April and June generated high
returns in the Indian stock index.

Some studies examine seasonality in the Indian stock market as part of a broader analysis
of seasonality in several major emerging stock markets. For example, Fountas and
Segredakis (2002) investigated monthly seasonal anomalies in eighteen major emerging
equity markets, including the Indian stock market. They examined the monthly effect for
the period January 1987 to December 1995. For the Indian stock market, they found
August returns were significantly greater than April, May, October and November

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returns. However, they did not find evidence consistent with hypothesized tax-loss selling
in the Indian stock market, as the tax-year in India commences in April.

Yakob, Beal and Delpachitra (2005) examined seasonal effects in ten Asian Pacific stock
markets, including the Indian stock market, for the period January 2000 to March 2005.
They state that this is a period of stability and is therefore ideal for examining seasonality
as it was not influenced by the Asian financial crisis of the late nineties. Yakob, et al.,
concluded that the Indian stock market exhibited a month-of-the-year effect in that
statistically significant negative returns were found in March and April whereas
statistically significant positive returns were found in May, November and December. Of
these five statistically significant monthly returns, November generated the highest
positive returns whereas April generated the lowest negative returns.

Evidence of monthly seasonality in the Indian stock market is somewhat mixed. This may
be, in part, a consequence of the fact that the Indian economy is in transition and is
therefore constantly evolving, supporting the notion that further research into these
calendar effects in the Indian stock market is warranted.

M. Timeline
Following is the timeline on the rise of the SENSEX through Indian stock market
history.
 1830's Business on corporate stocks and shares in Bank and Cotton presses started
in Mumbai.
 1860-1865 Cotton price bubble as a result of the American Civil War.
 1870 - 90's Sharp increase in share prices of jute industries followed by a boom in
tea stocks and coal
 1978-79 Base year of SENSEX, defined to be 100.
 1986 SENSEX first compiled using a market Capitalization-Weighted
methodology for 30 component stocks representing well-established companies
across key sectors.
 30 October 2006 The SENSEX on October 30, 2006 crossed the magical figure of
13,000 and closed at 13,024.26 points, up 117.45 points or 0.9%. It took 135 days
for the SENSEX to move from 12,000 to 13,000 and 123 days to move from
12,500 to 13,000.
 5 December 2006 The SENSEX on December 5, 2006 crossed the 14,000-mark to
touch 14,028 points. It took 36 days for the SENSEX to move from 13,000 to the
14,000 mark.

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  6 July 2007 The SENSEX on July 6, 2007 crossed the magical figure of 15,000 to
touch 15,005 points in afternoon trade. It took seven months for the SENSEX to
move from 14,000 to 15,000 points.
 19 September 2007 The SENSEX scaled yet another milestone during early
morning trade on September 19, 2007. Within minutes after trading began, the
SENSEX crossed 16,000, rising by 450 points from the previous close. The 30-
share Bombay Stock Exchange's sensitive index took 53 days to reach 16,000
from 15,000. Nifty also touched a new high at 4659, up 113 points.
 The SENSEX finally ended with a gain of 654 points at 16,323. The NSE Nifty
gained 186 points to close at 4,732.
 26 September 2007 The SENSEX scaled yet another height during early morning
trade on September 26, 2007. Within minutes after trading began, the SENSEX
crossed the 17,000-mark. Some profit taking towards the end saw the index slip
into red to 16,887 - down 187 points from the day's high. The SENSEX ended
with a gain of 22 points at 16,921.
 9 October 2007 The BSE SENSEX crossed the 18,000-mark on October 9, 2007.
It took just 8 days to cross 18,000 points from the 17,000 mark. The index
zoomed to anew all-time intra-day high of 18,327. It finally gained 789 points to
close at an all-time high of 18,280. The market set several new records including
the biggest single day gain of 789 points at close, as well as the largest intra-day
gains of 993 points in absolute term backed by frenzied buying after the news of
the UPA and Left meeting on October 22 put an end to the worries of an
impending election.
 15 October 2007 The SENSEX crossed the 19,000-mark backed by revival of
funds-based buying in blue chip stocks in metal, capital goods and refinery
sectors. The index gained the last 1,000 points in just four trading days. The index
touched a fresh all-time intra-day high of 19,096, and finally ended with a smart
gain of 640 points at 19,059.The Nifty gained 242 points to close at 5,670.
 29 October 2007 The SENSEX crossed the 20,000 mark on the back of aggressive
buying by funds ahead of the US Federal Reserve meeting. The index took only
10 trading days to gain 1,000 points after the index crossed the 19,000-mark on
October15. The major drivers of today's rally were index heavyweights Larsen
and Toubro, Reliance Industries, ICICI Bank, HDFC Bank and SBI among others.
The 30-share index spurted in the last five minutes of trade to fly-past the crucial
level and scaled a new intra-day peak at 20,024.87 points before ending at its
fresh closing high of 19,977.67, a gain of 734.50 points. The NSE Nifty rose to a
record high 5,922.50 points before ending at 5,905.90, showing a hefty gain of
203.60 points.
 8 January 2008 The SENSEX peaks. It crossed the 21,000 mark in intra-day
trading after 49 trading sessions. This was backed by high market confidence of
increased FII investment and strong corporate results for the third quarter.
However, it later fell back due to profit booking.

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  13 June 2008 The SENSEX closed below 15,200-mark; Indian market suffer with
major downfall from January 21, 2008
 25 June 2008 The SENSEX touched an intra-day low of 13,731 during the early
trades, then pulled back and ended up at 14,220 amidst a negative sentiment
generated on the Reserve Bank of India hiking CRR by 50 bps. FII outflow
continued in this week.2 July 2008 The SENSEX hit an intra-day low of
12,822.70 on July 2, 2008. This is the lowest that it has ever been in the past year.
Six months ago, on January 10, 2008, the market had hit an all-time high of
21206.70. This is a bad time for the Indian markets, although Reliance and
Infosys continue to lead the way with mostly positive results.
 6 October 2008 The SENSEX closed at 11801.70 hitting the lowest in the past 2
years.
 10 October 2008 The SENSEX today closed at 10527, 800.51 points down from
the previous day having seen an intraday fall of as large as 1063 points. Thus, this
week turned out to be the week with largest percentage fall in the SENSEX
 18 May 2009 After the result of 15th Indian general election SENSEX gained
2100.79 points from the previous close of 12173.42, a record one-day gain. In the
opening trade itself the SENSEX evinced a 15% gain over the previous close
which led to a two-hour suspension in trading. After trading resumed, the
SENSEX surged again, leading to a full day suspension of trading.
 19 October 2010 BSE introduced the 15-minute special pre-open trading session,
a mechanism under which investors can bid for stocks before the market opens.
The mechanism, known as 'pre-open session call auction', lasted for 15 minutes
(from 9:00-9:15 am).
 5 November 2010 BSE SENSEX crossed the 21000 mark (exactly 21004.96).
 27 December 2010 BSE SENSEX was at 20,028.93.

N. Management Team

Name Designation

Ashishkumar Chauhan Managing Director & CEO

David Wright Director

Jayshree Vyas Director

Kersi Tavadia Chief Information Officer

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 Nayan Mehta Chief Financial Officer

Neeraj Kulshrestha Chief Business Officer

Nehal Vora Chief Regulatory Officer

Prajakta Powle Co. Secretary & Compl. Officer

Rajeshree Sabnavis Shareholder Director

S S Mundra Director

Sumit Bose Director

Umakant Jayaram Director

Usha Sangwan Shareholder Director

Vikramajit Sen Chairman & Director

O. BSE categories

Bombay Stock Exchange or the BSE is the largest stock exchange in India in
terms of highest number of companies listed with the stock exchange. If you
consider the market capitalization of the companies listed with BSE even then the
stock exchange is the largest in the country. There are thousands of companies
listed at the stock exchange and they are divided into different categories
depending on various factors including market capitalization, parameters set by
the Securities and Exchange Board of India or the SEBI, number of years of
listing at the exchange, equity capital of the company, liquidity of the company
and so many other factors. Market capitalization of the company is a determining
factor for dividing the stocks in different groups. Market capitalization of a
company is calculated by multiplying the number of outstanding stocks of the
company at the market with the current price of the stock at the market. Along
with that the bonds at the debt market of the company are also taken into
consideration. Depending on the market capitalization stocks are divided mainly
into three categories – the large cap stocks, mid cap stocks and the small cap
stocks. Generally, the biggest companies with a market capital of more than $10
Page | 47
 billion are considered to be large cap stocks. The range for determining the mid
cap stocks is between $ 2 billion to $ 10 billion. Companies that have a market
capitalization of the less than $ 2 billion are grouped under the small cap stocks.
Securities and Exchange Board of India is the governing body for all the stock
exchanges in India and they frame the rules and regulations for the stock
exchanges. Starting right from the listing of the companies, issuing of securities,
trading of stocks at the stock market, everything is controlled by the Securities
and Exchange Board of India or SEBI. Based on the guideline and parameters of
trading by the SEBI authorities, the stocks listed at the BSE are divided. That
means there are different trading guidelines and rules for each ofthe categories of
stocks listed at the Bombay Stock Exchange. Other factors like the number of
years of listing of the company are considered for determining the authenticity of
the company and the business potential of the company. The equity capital of the
company and the asset of the companies are also considered for examining the
financial potential of the company. When a company applies for listing at the
Bombay Stock Exchange, they have to fulfill all the set conditions and then the
BSE authority carries out a due diligence to examine the company. After that
depending on the parameters of the categorization the company is listed at the
appropriate group. Often times listed stocks are rearranged by the BSE. That is
the group or the category of the stocks is changed on the basis of the parameters
that are set for determining the category of the stock. Here we are presenting the
existing groups or categories in which the BSE stocks are divided. Primarily there
are five groups in which the listed stocks are divided and they are A, B, T, Z, and
F.
‘A’
Bombay Stock Exchange The ‘A’ group comprises stocks that have fairly good
growth rate. These companies offer dividend to the investors and have good
capital appreciation over the time. The stocks that are listed with ‘A’ category
have the facility to carry forward to the next settlement cycle. This is an
advantage from the margin and derivative trading point of view.
‘B’
The category ‘B’ is basically a subset of all the listed stocks and the stocks listed
in this category have greater market capitalization that the rest of the stocks. The
trading of the stocks that are listed in the ‘T’ category needs to be settled on the
very trading day and the deals cannot be carried forward. This is done by BSE to
restrict any unwanted movement in these scripts.
‘Z’
The stocks in the ‘Z’ group are marked for not complying with the rules and
regulations of the stock exchange and these stocks are often suspended from
trading.
‘F’
The ‘F’ group is reserved for the stocks listed at the debt market.

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 P. Need for Bombay Stock Exchange
BSE is one of the factors Indian Economy depends upon. BSE has played major role in
the development of the country. Through BSE, Foreign Investors have invested in India.
Due to inward flow of foreign currency the, the Indian economy have started showing the
upward trend towards the development of the country’s provides employment for many
people. Trading in BSE is also a business for a few, their family income depends on it,
that is the reason why when scandals occur in the stock market it not only affects the
companies listed but also affects many families. In the few extreme cases, it is observed
that the bread winner of a family tends to suicide due to the losses occurred. In most of
major industrial cities all over the world, where the businesses were evolving and
required investment capital to grow and thrive, stock exchanges acted as the interface
between Suppliers and Consumers of capital. One of the key advantages of the stock
exchanges is that they are efficient medium for raising resources and channeling savings
from the general public by the way of issue of Equity Debt Capital by joint stock
companies which are listed on stock exchanges. Not to forget that the taxes and other
statutory charges paid by BSE are substantial and make a sizeable contribution to the
Government exchequer (Financial resources; funds). For example, transactions on the
stock exchanges are subject to stamp duties, which is paid to the State Government. The
annual revenue from this source ranges from Rs75 – 100 crores with the opening up of
the financial markets to Foreign Investors a number of foreign institutional investors and
brokers have established a sizeable presence in Mumbai. With no doubt we can clearly
state without BSE, the Indian Economy would have been a completely different story.
Various companies wouldn’t have been a strong and successful as they are today and the
brokers and traders would have been elsewhere is an asset to our country and its
existence plays a vital role in many people’s life who depends on it. Indeed, BSE has
made a major contribution to the industrial and economic development of India.

Q. LISTING OF THE COMPANIES ON STOCKEXCHANGE

Public Limited Company. Public Listed Company Public Non-listed Company ‘Listed
Company’ means a public ltd Co which is:1. Listed on any one or more recognized stock
exchanges in India.2. Securities (shares: debentures) of such company are traded on
such stock exchanges. ‘Unlisted company’ therefore means a company whose securities
are not listed on any of recognized stock exchanges in India.
Why Companies get Listed with Stock Exchange?
Companies get listed with Stock Exchange for following reasons:1. Securities are freely
transferable.2. Easy liquidity of securities.3. Easy availability of prices of securities.4.
Reputation, Image, Goodwill.5. Public awareness.6. More transparency.7. Helps in
obtaining loans from Banks/Institutions.8. Helps in marketing its Products. In order to list
securities of a company & get its shares traded on any recognized stock exchanges, the
Public Ltd Company may either come out with a public issue (i.e. to offer further

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securities to public) or make an offer for sale of existing securities to public. This can be
done by issuing of Prospectus & Complying with all The Provinces of Company Act
1956.Each stock exchange has its own criteria for listing securities which should also be
met. E.g.: If company intends to get listed its securities in Bombay Stock Exchange,
Mumbai post issue capital (paid up capital after proposed public issue) of such companies
should be Rs. 10 Crores at least. The Company enters into a listing agreement with
concerned stock exchange & on receipt of permission from concerned Stock Exchange,
company is listed and securities are thereafter traded on such stock exchange.

R. Dematerialization
Dematerialization is the process of converting the physical form of shares into electronic
form. Prior to dematerialization the Indian stock markets have faced several problems
like delay in the transfer of certificates, forgery of certificates etc. Dematerialization helps
to overcome these problems as well as reduces the transaction time as compared to the
physical segment. The article discusses the procedures, advantages and problems of
dematerialization. The Indian Stock markets have seen a major change with the
introduction of depository system and scrip less trading mechanism. There were various
problems like inordinate delays in the transfer of share certificates, delay in receipt of
securities and inadequate infrastructure in banking and postal segments to handle a large
volume of application and storage of share certificates. To overcome these problems
physical dealing in securities should be eliminated. The Indian stock market introduced
the system of dematerialization recognizing the need for scrip less trading. According to
the Depositories Act, 1996, an investor has the option to hold shares either in physical or
electronic form. The process of converting the physical form of shares into electronic
form is called dematerialization or in short demats. The converted electronic data is
stored with the depository from where they can be traded. It is similar to a bank where an
investor opens an account with any of the depository participants. Depository participant
is a representative of the depository. The DP maintains the investors securities account
balances and intimates him about the status of holdings.
Procedure for converting the physical shares into electronic form:
To convert the shares into electronic form the investor should open an account with any
of the depository participants. For opening an account, the investor has to fill up the
account opening form. An account number (client ID) will be allotted after signing the
agreement which defines the rights and duties of the DP and the investor wishing to open
the account. The client ID along with the DP ID gives a unique identification in the
depository system. Any number of depository accounts can be opened. After opening an
account with the DP, the investor should surrender the physical certificates held in his
name to a depository participant. These certificates will be sent to the respective
companies where they will be cancelled after dematerialization and will credit the
investors account with the DP. The securities on dematerialization will appear as balances

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in the depository account. These balances can be transferred like the shares held in
physical form. Dematerialized shares are in the fungible form and do not have any
distinctive or certificate numbers .The securities in the demat can again be converted into
physical form which is called as dematerialization.
S. Safety to the investor
 Securities Exchange Board of India (SEBI) has laid down certain rules and
regulations for getting registered as a depository participant. With the
recommendation of the Depository and SEBI's own independent evaluation a DP
will be registered under SEBI.
 The investors account will be credited/debited by the DP only on the basis of
valid instruction from the client.
 The system driven mandatory reconciliation is done between the DP and NSDL.
 Periodic inspections of both DP and R&T agent are conducted by NSDL
 The data interchange between NSDL and its business partners is protected by
standard protection measures such as encryption.
 No direct communication links exist between two business partners and all
communications are routed through NSDL.
 A statement of account is received periodically by the investors. NSDL sends
statement of account to a random sample of investors a s a counter check.
 The investor has the right to approach NSDL if the grievances of the investors are
not resolved by the concerned DP.
Advantages of dematerialization
 There is no risk due to loss on account of fire, theft or mutilation.
 There is no chance of bad delivery at the time of selling shares as there is no
signature mismatch.
 Transaction costs are usually lower than that in the physical segment.
 The bonus /rights shares allotted to the investor will be immediately credited into
his account.
 Share transactions like sale or purchase and transfer/transmission etc. can be
effected in a much simpler and faster way.

T. Problems of Dematerialization.
Prior to dematerialization there was almost a gap of three months between application
date and listing of shares. Dematerialization has reduced this gap to a great extent. But
quick money brings with itself a host of problems. Current regulations prohibit multiple
bids or applications by a single person. But the investors open multiple demat accounts
and make multiple applications to subscribe to IPO's in the hope of getting allotment. The
recent IPO allotment scam proves that even a highly automated system is not the solution
to prevent malpractices, if there is laxity. The scam of Yes bank and IDFC reveal that the

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investor banker has failed to weed out multiple applications either direct or benami. Not
only the investor banker the DP and the depository failed to detect the large number of
demat accounts opened with the same address but different names. Lack of coordination
between banks, DP's, brokers depositories, registrars and investment bankers and clarity
of their roles has given rise to such problems.
Remedial measures
 To prevent the sprouting of fictitious demat accounts at DP's the allotment of
shares should be checked thoroughly.
 The concerned DP should strictly enforce the Know your client (KYC) norms
rather than relying on bank documents and verification of brokers.
 DP's should be asked to give monthly figure of accounts opened for the public.
 Coordination and Clear definition of roles is important to weed out manipulations.
Though dematerialization has several benefits the recent scam has the potential to
adversely affect the confidence of retail investors in the capital market .To reap the
benefits of dematerialization SEBI, as a regulator has to place a system that is alert and
vigilant against unjust gains.

U. TRADING & SETTLEMENT

Demat Account is a compulsory Account for traders who want to trade in stock market.
This account is mainly used for buying and selling of shares. Trading each Stock
Exchange has listed and permitted securities that are traded on it. There are two ways of
organizing the trading activity.
1. Open Outcry System:
Under the open outcry system traders shout and resort to
signals on the trading floor of the exchange which consists of
several ‘notional’ trading posts for different securities. A
member (or his representative) wishing to buy or sell a certain
security, reaches the trading post where the security is traded.
Here, he comes in contact with others interested in transacting
in that security. Buyers make their bid and sellers make their
offers and bargains are closed at mutually agreed-upon prices.
In stock where jobbing is done, the jobber plays an important
role. He stands ready to buy or sell on his account. He quotes
his bid (buying) and ask (selling) prices. He provides some
stability and continuity to the market.
2. Screen Based System
In the screen-based system the trading ring is replaced by the
computer screen and distant participants can trade with each
other through the computer network. A large screen-based

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 trading system (a) enhances the informational efficiency of the
market as more participants trade at a faster speed; (b) permits
the market participants to get a full view of the market, which
increases their confidence in the market; and (c) establishes
transparent audit trails.
3. Settlement:
The settlement of transactions is done on a settlement period
basis. Earlier, the settlement period on the Indian Stock
Exchanges was 7days, but now it is T+1 settlement. T+1
includes the day of trade and an additional day. During a
settlement period, buying and selling transactions in a
particular security can be squared up. Square off is a same day
settlement cycle. At the end of settlement period, transactions
are settled on net basis. Since the settlement period used to be 7
days and the settlement is for the new position, most of the
transactions are squared within the settlement period. Clearly
these transactions are motivated by a desire to profit from price
variations within the settlement period. Traditionally, trades
have been settled by physical delivery. This means that the
securities have to physically move from the seller to the seller’s
broker, from the seller’s broker to the buyer’s broker (through
the clearing house of the exchange or directly), and from the
buyer’s broker to the buyer. Further the buyer has to lodge the
securities with the transfer agents of the company and the
process of the transfer may take one to three months. This leads
to high paperwork cost and creates bad paper risks. To mitigate
the cost and the risks associated with the physical delivery,
settlement in the developed securities market is mainly through
electronic delivery facilitated by depositories. A ‘depository ‘is
an institution which immobilizes physical certificates (of
securities) and effect transfers of ownership by electronic book
entry. A beginning in the direction of electronic delivery has
been made in India with the establishment of the National
Securities Depository Limited (NSDL), India’s first depository,
in 1996. As NSDL expands its operations and as new
depositories come into being, settlement will progressively be
done more by electronic delivery and less by physical delivery.
4. INVESTMENT
Investment means the use of money for the purpose of making
more money, to gain income or increase capital, or both. Short
Term Investment and Long-Term Investment

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 i) Short Term Investment: It is riskier. A successful short term trading mindset
instead requires iron discipline, intense focus and steely devotion. Short term
trading can be divided in 3 sections
a. Day Trading
Day traders buy and sell stocks throughout the day in the
hope that the price of the stocks will fluctuate in value
during the day, allowing them to earn quick profits. A day
trader will hold a stock anywhere from a few seconds to
few hours, but will always sell all of those stocks close of
the day. The day trader will therefore not own any position
at the close of each day, and there is overnight risk. The
objective of day trading is to quickly get in and out of any
particular stock for profits anywhere from few cents to
several points per share on an intra-day basis. Day trading
can be further sub-divided into number of styles, including.
Scalpers: This style of day trading involves the rapid and
repeated buying and selling of a large volume of stocks
within seconds or minutes. The objective is to earn a small
per share profit on each transaction while minimizing the
risk. Scalpers: This style of day trading involves the rapid
and repeated buying and selling of a large volume of stocks
within seconds or minutes. The objective is to earn a small
per share profit on each transaction while minimizing the
risk. Momentum Traders: This style of day trading involves
identifying and trading stocks that are in a moving pattern
during the day, in an attempt to buy stocks at bottoms and
sell at tops.
b. Swing Trading
The principal difference between day trading and swing
trading is that swing traders will normally have a slightly
longer time horizon than day traders for holding a position
in a stock. As is the case with day traders, swing traders
also attempt to predict the short-term fluctuation in a
stock’s price. However, swing traders are willing to hold
the stocks for more than one day, if necessary, to give to
stock price some time to move or to capture additional
momentum in the stock’s price. Swing traders will
generally hold on to their stock positions anywhere from a
few hours to several days. Swing trading has the capability
of providing higher returns than day trading. However,
unlike day traders who liquidate their positions at the end
of each day, swing traders assume overnight risk. There are
some significant risks in carrying positions overnight. For

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 example, news events and earnings warnings announced
after the closing bell can result in large, unexpected and
possibly adverse changes to a stock’s price
c. Position Trading
Position trading is similar to swing trading, but with a
longer time horizon. Position traders hold stocks for a time
period anywhere from one day to several weeks or months.
These traders seek to identify stocks where the technical
trends suggest a possible large movement in price is likely
to occur, but which may not be fully played out for several
weeks or months.
ii) Long Term Investment:
A successful long term trading mindset requires, above all, patience and
perseverance. These are more difficult attributes to develop in the average
trader. Too often the average short-term trader succumbs to the markets lure
and develops a frantic, get-it-now mindset believing every price blip
represents a trading opportunity. As this attitude is fanned by the media and
brokerage industry, more and more long-term traders have become aggressive
swing traders and swing traders become rabid day traders - more often than
not with disastrous consequences. Long term trading results in less trades with
fewer mistakes and lower commission and slippage costs because overtrading
is one of the biggest sources of losses facing both new and established traders.
Why is this so? Obviously, more trades mean more commissions and more
slippage. Few short-term traders realize, however, that their total commission
and slippage costs in any year often exceed their total losses for the year. In
other words, many losing short-term traders would have actually made money
on an annual basis had they not incurred the exorbitant commission and
slippage costs of trading throughout the year. Fewer trades mean fewer
mistakes. Long term trading unlike short term requires dramatically reduced
time for analysis and trading. If you are trading using weekly data, only onto
two hours each weekend are required to implement a sophisticated long term
trading system for 21 or more commodities. This includes the time to
completely download your quotes and update your data files, verify which are
the correct months to trade for each commodity, figure out if you have any
positions to rollover, generate your trading signals, and write down orders to
your broker. On the contrary a typical successful day trader literally becomes
a slave to their quote machines during market hours.

V. Factors Affecting Bombay Stock Exchange

There are various factors that affects BSE:
1. Scams like the following one: -THE KETAN PAREKH SCAM Ketan Parekh was
a graduate from HR College and CA by profession. Ketan Parekh’s scam was

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 often referred to as the one-man army Penta four Bull. The 176-point Sensex
crash on March 1, 2001 came as a major shock for the Government of India, the
stock markets and the investors alike This sudden crash in the stock markets
prompted the Securities Exchange Board of India (SEBI) to launch immediate
investigations into the volatility of stock markets. The scam shook the investor's
confidence in the overall functioning of the stock markets. By the end of March
2001, at least eight people were reported to have committed suicide and hundreds
of investors were driven to the brink of bankruptcy. The first arrest in the scam
was of the noted bull, Ketan Parekh (KP), on March 30, 2001, by the Central
Bureau of Investigation (CBI). Soon, reports abounded as to how KP had single
handedly caused one of the biggest scams in the history of Indian financial
markets. He was charged with defrauding Bank of India (BoI) of about $30
million among other charges. KP's arrest was followed by yet another panic run
on the bourses and the Sensex fell by 147 points. By this time, the scam had
become the ‘talk of the nation,' with intensive media coverage and unprecedented
public outcry. Bank of India along with Punjab National Bank and SBI were at
the receiving end. Madhavpura Bank and Classic Cooperative Bank are the others
affected. Ketan Parekh owes around Rs1.3bn to the Bank of India KP’s scam was
one of the major scams in India after Harshad Mehta which lost the confidence of
investors in investing in share market. KP’s scam is also regarded as one-man
army scam.
2. FOREIGN INSTITUTIONAL INVESTORS (FII)
Foreign investment refers to investments made by residents of a country in
another country’s financial assets and production processes. After the opening up
of the borders for capital movement, foreign investments in India have grown
enormously. It affects the productivity factor of the beneficiary or the receiver
country and has the potential to create a ripple effect on the balance of payments
of that country. In developing countries like India, foreign capital helps in
increasing the productivity of labor and to build up foreign exchange reserves to
meet the current account deficit. It provides a channel through which these
countries can have access to foreign capital. Foreign investment can be of two
forms: Foreign direct investment (FDI) and Foreign portfolio investment (FPI).
FDI involves direct production activity and has a medium to long term investment
plans. In contrast the FPI has a short-term investment horizon. They mostly
investment in the financial markets which consist of Foreign Institutional
Investors (FIIs). They invest in domestic financial markets like money market,
stock market, foreign exchange market etc. According to Michael Frenkel and
Lukas Menkhoff, “FIIs are beneficial for an economy under specific institutional
conditions. Itis defining characteristic of an emerging market that these conditions
are often not met”. Foreign institutional investors ‘investments are volatile in
nature, and they mostly invest in the emerging markets. They usually keeping
mind the potential of a particular market to grow. FII has led a significant
improvement in India relating to the flow of foreign capital during the period of

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 post economic reforms. The inflow of FII investments has helped the stock
market to raise at a greater height according to financial analysts. Sensex touched
anew height. It crossed 10000-mark in January 2006, which was8073 on
November 2, 2005, and 9323 in December 2005FII participation in the Indian
stock market triggers its upward movement, but, at the same time, increased
liquidity through FII investment inflow increases volatility too.
3. FIIs’ IMPACT ON THE INDIAN ECONOMY.
The Ashok Lahiri Committee Report on encouraging FII Flows (Ministry of
Finance, the Government of India) mentions some reasons for the need of FII
flows. FII flows supplement and augment domestic savings and domestic
investment without increasing the foreign debt of our country. Capital inflows to
the equity market increase stock prices lower the cost of equity capital and
encourage investment by Indian firms. The Indian stock markets are both shallow
and narrow and the movement of stocks depends on limited number of stocks. As
FIIs purchases and sells these stocks there is a high degree of volatility in the
stock markets. If any set of development encourages outflow of capital that will
increase the vulnerability of the situation. The high degree of volatility can be
attributed to the following reasons The increase in investment by FIIs increases
stock indices in turn increases the stock prices and encourages further
investments. In this event when any correction takes place the stock prices
declines and there will be full out by the FIIs in large number as earning per share
declines. The FIIs manipulate the situation of boom in such a manner that they
wait till the index raises up to a certain height and exit at an appropriate time. This
tendency increases the volatility further. So even though the portfolio investment
by FIIs increases the flow of money in the economic system, it may create
problems of inflation
4. TRANSFORMATION OF THE STOCK EXCHANGE MUMBAI TO BSE LTD.
The change in the name of Asia's oldest stock exchange, from the Stock
Exchange, Mumbai to the Bombay Stock Exchange Ltd., (BSE Ltd.) is of more
than cosmetic significance. Along with the change in name comes a new
perspective, one brought about by a comprehensive change in its ownership and
management. Until now, the BSE like most other exchanges in India was owned
and managed by brokers, who also had the sole right to trade in the exchanges.
Conflicts of interest were bound to arise in such situations. Until the advent of the
National Stock Exchange in 1994, the BSE was India's pre-eminent exchange,
accounting for an overwhelmingly large proportion of the share market
transactions of the country. Companies wherever located were advised to seek a
listing of their shares on the BSE so that they could have access to its large
reservoir of capital and investor base. Legally speaking, it was enough if they
listed their shares on any one of the regional stock exchanges, closest to their
registered office. This last rule, like so many others connected with the securities
market, had tube discarded in the wake of the sweeping changes in the financial
markets since the 1990s. Perceptions of both investors and regulators changed

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 dramatically forcing the stock exchanges to overhaul themselves. A series of
securities scams through the 1990s in which brokers were Bombay Stock
Exchange invariably held accountable, the inability of the broker-dominated
exchanges to check malfeasance, and a vastly expanding role for the capital
market in the national economy necessitated a thorough review of the age-old
stock market structure. In the new demutualized incorporated exchanges that
came about as part of a major capital market reform a time-bound program for 10
other exchanges has since been announced — the right to trade is segregated from
the right town and manage the exchange. The transition is not going to be easy as
it involves the imparting of a much greater degree of professionalism. Stock
market professionals from outside the broking community are reportedly in short
supply. By far the biggest unknown factor relates to the future ownership of the
exchange. Brokers will cede control and investors including retail ones will hold a
substantial portion of the exchange’s equity. Apart from this being totally new to
India, it does raise the possibility of other conflicts of interest including the one
connected with the listing of its own shares.

CHAPTER 3: REVIEW OF LITERATURE

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The review of related literature, besides, allowing the researcher to acquaint himself with
current knowledge in the field or area in which he is going to conduct his research. The
review of related studies involves locating studying and evaluating reports of relevant
researches and articles published research abstracts, journals encyclopedia, etc. The
investigator needs to acquire up to data information about what has been thought and
done in a particular area. The researcher draws maximum benefits from the previous
investigations, utilizes the previous findings, takes many hints from designs and
procedures of previous researches and formulates an outline for future research. The
review of related studies provides the insight into the methods, measures etc., employed
by others in the particular area. It provides idea, theories, explanations, hypothesis of
research, valuable in formulating and studying the problem at hand. It also furnishes
indispensable suggestion related to the problem and already employed techniques to the
investigator. Unless it is burnt what others have done and stay remains to be done in the
area, one can't develop a research project that could contribute to furthering knowledge in
the field. In fact, the review of related literature serves multiple purposes and is essential
to a well-designed research study. It is generally the first step in the research process, and
it can contribute valuable information to any part of the research study. In the process of
reviewing the literature, the investigator is alert for finding out research approaches in the
area that have proved to be sterile.
While a number of studies were undertaken to understand the nature of the relationship
between financial development and economic growth, only a few included the role of
Bombay Stock Exchange in the economic development process. The absence of accurate

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stock market development indicators was one of the many reasons why a majority of the
studies used bank measures of financial development and ignored the role of stock
markets in such studies. But, more recently the availability of more appropriate data has
increased the scope for research in this field. In spite of this, debate still exists over the
nature of the relationship between stock market and economic development, with many
studies attributing a healthy stock market to slow economic growth. The following
studies review the impact of financial development, stock market development and its
functions and its possible impact on economic growth.
 L.C. Gupta (1992) concludes that, a) Indian stock market is highly speculative; b)
Indian investors are dissatisfied with the service provided to them by the brokers;
c) margins levied by the stock exchanges are inadequate and d) liquidity in a large
number of stocks in the Indian markets is very low. While evidently a painstaking
work, the conclusions except `c' above seem to be built on wrong or questionable
arguments.
 Cohen, Ness, Okuda, Schwartz and Whitcomb (1976) worked on The
Determinants of Common Stock Returns Volatility: An International
Comparison” They studied the issue of thinness is of interest for a number of
reasons. They found that the most obvious re changes in the fundamental
determinants of share price and of a firms business and financial risk. They
attempted to account for this by distinguishing between random traders included
demand shifts and demand shifts induced by the receipt of new and generally
available information concerning a stock’s value. They also studied the
differences in trading arrangements might explain some of the volatility
differences especially internationally.
 Barua and Srinivasan (1991) worked on the investment decision making process
of individuals has been explored through experiments. They conclude that the risk
perception of individuals is significantly influenced by the skewness of the return
distribution. This implies that while taking investment decisions, investors are
concerned about the possibility of maximum losses in addition to the variability of
returns. Thus, the mean variance framework does not fully explain the investment
decision making process of individuals.

 Gupta (1981) in an extensive study titled `Return on New Equity Issues' states
that the investment performance of new issues of equity shares, especially those
of new companies, deserves separate analysis. The factor significantly influencing
the rate of return on new issues to the original buyers is the `fixed price' at which
they are issued. The return on equities includes dividends and capital
appreciation. This study presents sound estimates of rates of return on equities,
and examines the variability of such returns over time.

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  Jawahar Lal (1992) presents a profile of Indian investors and evaluates their
investment decisions. He made an effort to study their familiarity with, and
comprehension of financial information, and the extent to which this is put to use.
The information that the companies provide generally fails to meet the needs of a
variety of individual investors and there is a general impression that the
company's Annual Report and other statements are not well received by them.
 Gupta (1972) in his book has studied the working of stock exchanges in India and
has given a number of suggestions to improve its working. The study highlights
the' need to regulate the volume of speculation so as to serve the needs of liquidity
and price continuity. It suggests the enlistment of corporate securities in more
than one stock exchange at the same time to improve liquidity. The study also
wishes the cost of issues to be low, in order to protect small investors

 Nabhi Kumar Jain (1992) specified certain tips for buying shares for holding and
also for selling shares. He advised the investors to buy shares of a growing
company of a growing industry. Buy shares by diversifying in a number of growth
companies operating in a different but equally fast-growing sector of the
economy. He suggested selling the shares the moment company has or almost
reached the peak of its growth. Also, sell the shares the moment you realize you
have made a mistake in the initial selection of the shares. The only option to
decide when to buy and sell high priced shares is to identify the individual merit
or demerit of each of the shares in the portfolio and arrive at a decision.

 Pyare Lal Singh (1993) in the study titled, Indian Capital Market - A Functional
Analysis, depicts the primary market as a perennial source of supply of funds. It
mobilizes the savings from the different sectors of the economy like households,
public and private corporate sectors. The number of investors increased from 20
lakhs in 1980 to 150 lakhs in 1990 (7. 5 times). In financing of the project costs of
the companies with different sources of financing, the contribution of the
securities has risen from 35.01% in 1981 to 52.94% in 1989. In the total volume
of the securities issued, the contribution of debentures / bonds in recent years has
increased significantly from 16. 21% to 30.14%.

 R.Venkataramani (l994) disclosed the uses and dangers of derivatives. The

derivative products can lead us to a dangerous position if its full implications are
not clearly understood. Being off balance sheet in nature, more and more
derivative products are traded than the cash market products and they suffer
heavily due to their sensitive nature. He brought to the notice of the investors the
'Over the counter product' (OTC) which are traded across the counters of a bank.
OTC products (e.g., Options and futures) are tailor made for the particular need of

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 a customer and serve as a perfect hedge. He emphasized the use of futures as an
instrument of hedge, for it is of low cost.

 Sunil Damodar (1993) evaluated the 'Derivatives' especially the 'futures' as a tool
for short-term risk control. He opined that derivatives have become an
indispensable tool for finance managers whose prime objective is to manage or
reduce the risk inherent in their portfolios. He disclosed that the over-riding
feature of 'financial futures' in risk management is that these instruments tend to
be most valuable when risk control is needed for a short- term, i.e., for a year or
less. They tend to be cheapest and easily available for protecting against or
benefiting from short term price. Their low execution costs also make them very
suitable for frequent and short-term trading to manage risk, more effectively.

 Amanulla & Kamaiah (1995) conducted a study to examine the Indian stock
market efficiency by using Ravallion co integration and error correction market
integration approaches. The data used are the RBI monthly aggregate share
indices relating five regional stock exchanges in India, viz Bombay, Calcutta,
Madras, Delhi, Ahmedabad during 1980-1983. According to the authors, the co-
integration results exhibited a long-run equilibrium relation between the price
indices of five stock exchanges and error correction models indicated short run
deviation between the five regional stock exchanges. The study found that there is
no evidence in favor of market efficiency of Bombay, Madras, and Calcutta stock
exchanges while contrary evidence is found in case of Delhi and Ahmedabad.

 Pattabhi Ram.V. (1995) emphasized the need for doing fundamental analysis and
doing Equity Research (ER) before selecting shares for investment. He opined
that the investor should look for value with a margin of safety in relation to price.
The margin of safety is the gap between price and value. He revealed that the
Indian stock market is an inefficient market because of the absence of good
communication network, rampant price rigging, and the absence of free and
instantaneous flow of information, professional broking and so on. He concluded
that in such inefficient market, equity research will produce better results as there
will be frequent mismatch between price and value that provides opportunities to
the long-term value-oriented investor. He added that in the Indian stock market
investment returns would improve only through quality equity research.

 Karajazyk (1995) investigated one measure of financial integration between

equity markets. He used a multifactor equilibrium Arbitrage pricing theory to
define risk and to measure deviations from the “Law of one price”. He applied the
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 integration measure to equities traded in 24 countries (four developed and 20
emerging). He found that the measure of market segmentation tends to be much
larger for emerging markets than for developed markets, which flows into or out
of the emerging markets. The measure tends to decrease over time, which is
consistent with growing levels of integration. Large values of adjusted mis-
pricing occur around periods in which capital controls change significantly.
Finally, he found asymmetric integration relationship; stock markets of developed
nations are more integrated than those of emerging nations.

 Redel (1997) concentrated on the capital market integration in developing Asia

during the period 1970 to 1994 taking into variables such as net capital flows,
FDI, portfolio equity flows and bond flows. He observed that capital market
integration in Asian developing countries in the 1990‟s was a consequence of
broad-based economic reforms, especially in the trade and financial sectors,
which is the critical reason for economic crises which followed the increased
capital market integration in the 1970s in many countries will not be repeated in
the 1990s. He concluded that deepening and strengthening the process of
economic liberalization in the Asian developing countries is essential for
minimizing the risks and maximizing the benefits from increased international
capital market integration.

 Madhusudan (1998) found that BSE sensitivity and national indices did not
follow random walk by using correlation analysis on monthly stock returns data
over the period January 1981 to December 1992.

 Avijit Banerjee (1998) reviewed Fundamental Analysis and Technical Analysis to

analyze the worthiness of the individual securities needed to be acquired for
portfolio construction. The Fundamental Analysis aims to compare the Intrinsic
Value (I.V.) with the prevailing market price (M.P) and to take decisions whether
to buy, sell or hold the investments. The fundamentals of the economy, industry
and company determine the value of a security. If the 1.V is greater than the M.P.,
the stock is underpriced and should be purchased. He observed that the
Fundamental Analysis could never forecast the M.P. of a stock at any particular
point of time. Technical Analysis removes this weakness. Technical Analysis
detects the most appropriate time to buy or sell the stock. It aims to avoid the
pitfalls of wrong timing in the investment decisions. He also stated that the
modern portfolio literature suggests 'beta' value p as the most acceptable measure
of risk of scrip. The securities having low P should be selected for constructing a
portfolio in order to minimize the risks.

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  Arun Jethmalani (1999) reviewed the existence and measurement of risk involved
in investing in corporate securities of shares and debentures. He commended that
risk is usually determined, based on the likely variance of returns. It is more
difficult to compare 80 risks within the same class of investments. He is of the
opinion that the investors accept the risk measurement made by the credit rating
agencies, but it was questioned after the Asian crisis. Historically, stocks have
been considered the riskiest of financial instruments. He revealed that the stocks
have always outperformed bonds over the long term. He also commented on the
'diversification theory' concluding that holding a small number of non-correlated
stocks can provide adequate risk reduction. A debt-oriented portfolio may reduce
short term uncertainty, but will definitely reduce long-term returns. He argued
that the 'safe debt related investments' would never make an investor rich. He also
revealed that too many diversifications tend to reduce the chances of big gains,
while doing little to reduce risk. Equity investing is risky, if the money will be
needed a few months down the line. He concluded his article by commenting that
risk is not measurable or quantifiable. But risk is calculated on the basis of
historic volatility. Returns are proportional to the risks, and investments should be
based on the investors' ability to bear the risks, he advised.

 Suresh G Lalwani (1999) emphasized the need for risk management in the
securities market with particular emphasis on the price risk. He commented that
the securities market is a 'vicious animal' and there is more than a fair chance that
far from improving, the situation could deteriorate.

 Bhanu Pant and Dr. T.R.Bishnoy (2001) analyzed the behavior of the daily and
weekly returns of five Indian stock market indices for random walk during April
1996 to June 2001.They found that Indian Stock Market Indices did not follow
random walk.

 Nath and Verma (2003) examine the interdependence of the three major stock
markets in south Asia stock market indices namely India (NSE-Nifty) Taiwan
(Taiex) and Singapore (STI) by employing bivariate and multivariate co
integration analysis to model the linkages among the stock markets, no co -
integration was found for the entire period (daily data from January 1994 to
November 2002). They concluded that there is no long run equilibrium.

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  Debjiban Mukherjee (2007) made a comparative Analysis of Indian stock market
with International markets. His study covers New York Stock Exchange (NYSE),
Hong Kong Stock exchange (HSE), Tokyo Stock exchange (TSE), Russian Stock
exchange (RSE), Korean Stock exchange (KSE) from various socio- politico-
economic backgrounds. Both the Bombay Stock exchange (BSE) and the National
Stock Exchange of Indian Limited (NSE) have been used in the study as a part of
Indian Stock Market. The main objective of this study is to capture the trends,
similarities and patterns in the activities and movements of the Indian Stock
Market in comparison to its international counterparts. The time period has been
divided into various eras to test the correlation between the various exchanges to
prove that the Indian markets have become more integrated with its global
counterparts and its reaction are in tandem with that are seen globally. The
various stock exchanges have been compared on the basis of Market
Capitalization, number of listed securities, listing agreements, circuit filters, and
settlement. It can safely be said that the markets do react to global cues and any
happening in the global scenario be it macroeconomic or country specific (foreign
trade channel) affect the various markets.

 Juhi Ahuja (2012) presents a review of Indian Capital Market & its structure. In
last decade or so, it has been observed that there has been a paradigm shift in
Indian capital market. The application of many reforms & developments in Indian
capital market has made the Indian capital market comparable with the
international capital markets. Now, the market features a developed regulatory
mechanism and a modern market infrastructure with growing market
capitalization, market liquidity, and mobilization of resources. The emergence of
Private Corporate Debt market is also a good innovation replacing the banking
mode of corporate finance. However, the market has witnessed its worst time with
the recent global financial crisis that originated from the US sub-prime mortgage
market and spread over to the entire world as a contagion. The capital market of
India delivered a sluggish performance.

 Khan (1977, 1978) studied the role of new issues in financing the private
corporate sector during the 1960's and early 1970's and concluded that new issues
were declining in importance. He also showed that with underwriting becoming
almost universal, institutions like the LIC and the UTI were becoming major
players.

 Pandey (1981) examines the impact of leverage on equity prices and concludes
that Modigliani-Miller hypothesis is not supported. However, the risk proxy used
in the paper, namely, coefficient of variation of net operating income, is highly
questionable.

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  Zahir and Yakesh (1982) find the dividend per share to be the most important
variable affecting the share price, followed by dividend yield, book value per
share, dividend coverage and the return on investment, in that order.

 Balakrishnan (1984) also finds that the current dividend and book value per share
are more important determinants of market price as compared to earnings per
share and dividend coverage.

 Lee (1992) used postwar US data to identify the relationship among asset return,
interest rates and Inflation using multivariate VAR model.

 SHAHID Ahmed (2003) – The research focused on the effects of macro-

economic variables on SENSEX index price from 1997 to 2007. The variables
considered for the study were foreign exchange rate & FDI. Granger causality test
was used to find the correlation between stock returns and the macro-economic
variables. The research concluded that there existed a correlation between the
variables and stock returns.

 ‘Shivakumar S (2003) has analyzed the net flows of foreign institutional

investment over the years, it also briefly analyses the nature of FII flows based on
research, explores some determinants of FII flows and examines if the overall
experience has been stabilizing or destabilizing for the Indian capital market.

 Lev Blynski and Alex Faseruklxxxi in 2006 studied and forecast option prices
with simple back propagation neural network and to compare the results between
conventional Black Scholes model, the Black- Scholes model with pure implied
volatility and neural network models over a seven-year period.

 Mayank V. Bhatt and Chetan C. Patel (2008) studied the performance comparison
of different mutual funds schemes in India through Sharpe index model and
concluded that mutual funds are the most popular and safe parameter for an
investor to invest.

 Kavita Chavali and Shefali Jain (2009) evaluated the performance of equity
linked savings schemes and concluded that the fund chosen by the investor should
match the risk appetite of the investor.

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  Mayya (1991) made an overview of the Indian capital market. He examined
various aspects of Indian Capital Market. The study emphasized the need for
modernization and computerization for providing liquid and efficient market. His
study reveals that though Indian stock market has attained a remarkable degree of
growth in last one decade, but has still to go a long way.

 Dhillon (1993) in his doctoral dissertation studied the regulatory policies of

Bombay Stock Exchange (BSE) over a four-year period (July 1986 - June 1990).
His findings show that regulatory authorities decide changes in their margin
policy on the basis of market activity. He found that the margins were prompted
by changes in settlement returns, price volatility, trading volume and open
positions. Granger causality results show that there is limited causality in the
reverse direction: margin changes do not affect returns, and have only a limited
impact on price volatility, trading volume and open positions.

 Prabhu (1995) participating in a seminar organized by the Cochin Stock Exchange

on ‘Stock-broking in the changed scenario’, pointed out , “In order to become
successful in share broking business, the changed scenario looks for professional
standards, functional strength backed by corporate right, ethical behavior and a
comprehensive and total approach to business from the part of stock brokers. ”He
recommended that with corporatization of memberships, the members should
provide multiple services to investors. In his opinion, the brokerage charged has
to be responsive to the cost. He concludes his presentation with the remark the
there is tremendous opportunity in the state of Kerala for development of capital
market activities.

 Handa (1995) made a comparison of practices in developed markets and

developing markets. According to him it is in the developed markets of the west
that business trends, trade cycles and a host of other factors are taken care of by
computers and forecasting models. This information was backed by decades of
diligently stored data. He also found that the situation back home was materially
different and the company reports are available six months after the year ends
which lose relevance by the time they are analyzed.

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  Chaplinsky and Hansen (1993) suggest that the indifferent stock market reaction
is partly on account of market expectation of debt issues. They find significant
negative stock price reaction to debt issue announcement after controlling for
market expectations. However, the fall in price in case of debt issue
announcements has been found to be lower than that of fall in the case of stock
issue offerings.

 Menon (1996) a member of the Cochin Stock Exchange spoke about market
making. In his opinion, good market making is essential not only for inactive
securities, but also for moderately active and daily traded securities. Such an
activity will need the support of banking system and also co-operation from listed
companies. He further pointed out that because of varying market sentiments and
changing investor perceptions there will always be mis-match between buying
and selling orders of investors in respect of any security on any given day in the
market terms of timing and quantity. This leads to buying orders remaining
unexecuted on the one hand and poor liquidity for those who wish to disinvest on
the other hand.

 Ahmed (1996) worked on the development of stock exchanges in developing

countries with special reference to the working and performance of Kuwait Stock
Exchange. He found that Kuwait Stock Exchange enjoys an independent judicial
personality. The Stock Exchange within its activity act to direct and rationalize
dealing in stocks and securities, within the scope of its powers in order to develop
and stabilize dealing in securities in a manner securing safe, easy and accurate
transactions so as to avoid any confusion in dealings. The Stock Exchange staff is
developing the systems and the methods of dealing in securities, besides
introducing modern techniques such as those applied in advanced stock markets
for the purpose of achieving a sound financial position for the KSE on both,
regional and international levels.

 McLaughlin, Safieddine and Vasudevan (1996) analyze the operating

performance of seasoned equity offerings of a large sample of 1,296 firms listed
on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX),
and NASDAQ that raised capital through subsequent offerings during the period
1980 -1991. They also analyzed the determinants of subsequent performance and
the factors influencing the decision to issue equity. The study revealed that the
SEO firms had a significant increase in operating performance prior to the issue
and that they register a considerable decline in profitability in post-offering
period. This research is the examination of the long-run operating performance of
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 a large sample of straight-debt-issuing firms, which complements previous large-
sample studies of firms making seasoned equity offerings (SEOs). Moreover, they
compared the information effects for debt and equity issuers after controlling for
other factors associated with changes in issuer operating performance.

 Masih and Masih (1997) examined the dynamic linkage patterns among national
stock exchange prices of four Asian newly industrializing countries - Taiwan,
South Korea, Singapore and Hong Kong. The sample used comprised end-of-the-
month closing share price indices of the four NIC stock markets from January
1982 to June 1994. They concluded that the study of these markets is not mutually
exclusive of each other and significant short run linkages appear to run among
them. The patterns of dynamic linkages are examined among national stock prices
of four Asian Newly Industrializing Countries stock markets - Taiwan, South
Korea, Singapore and Hong Kong - in models incorporating the established
markets of Japan, USA, UK and Germany had been studied.

 Madhusoodanan and M. Thiripalraju (1998) A study on Indian market analyze the

Indian IPO market for the short-term as well as long-term underpricing prior to
1997. This study indicates that, in general, the underpricing in the Indian IPOs in
the short-run was higher than the experiences of other countries. In the long-run
too, Indian offerings have given high returns compared to negative returns
reported from other countries.

 Eckbo, Masulis and Norli (2000) analyze over 7000 firms that issued seasoned
equity and debt issues during the period 1963 to 1995. They document
underperformance of these firms as a reflection of their lower systematic risk as
compared to their non-issuer counterparts. According to them, seasoned equity
issues strengthen the capital base of companies there by reducing the leverage.
The consequence of lower levels of leverage is that the exposure of firms to
unexpected inflation and default decreases, leading to a lower required rate of
return relative to matched firms.

 Krishnamurti (2000) worked on a paper titled “Competition, Liquidity and

Volatility- A Comparative Study of Bombay Stock Exchange and National Stock
Exchange.” He stated that India has to major stock exchanges: BSE and NSE.
There are important differences in ownership structure, geographical reach,
internal control systems and institutionalized risk management facilities between
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 the BSE and NSE. For examining if these significant structural differences
between these stock exchanges contribute to variations in observed measures of
quality of markets. He used a paired comparison approach and document
significant differences in liquidity and price volatility between the two markets.
He found that NSE is superior in his department on many counts. The reputation
of surveillance system in NSE is better too. NSE adopts a completely order driven
system while BSE has a system that is part order driven and part quote driven.
Both exchanges have price stabilization features.

 Poshakwale (2002) examined the random walk hypothesis in the emerging Indian
stock market, by testing for the nonlinear dependence using a large disaggregated
daily data from the Indian stock market. The sample used was 38 actively traded
stocks in the BSE National Index. He found that the daily returns from the Indian
market do not conform to a random walk. Daily returns from most individual
stocks and the equally weighted portfolio exhibit significant non-linear
dependence. This is largely consistent with previous research that has shown
evidence of non-linear dependence in returns from the stock market indexes.

 Javaid (2002) studied on operations of stock exchanges with special reference to

Delhi Stock Exchange. He worked on the operation and functioning a stock
exchange. He analyzed working, management and performance of Delhi stock
exchange. The study covered wide ranging issues concerning the operations of
trading in stock exchanges. It covered both the brokers and the investors of
primary and secondary market in Delhi. His study is confined to 100 investors
from a large family of investors. He found that the problems been faced by all the
investors were similar in nature. The sample of brokers was 25% of total brokers
at Delhi stock exchange. One of his conclusions was that there should be a
specific act for protecting small investors. The act should be codifying, amend
and consolidate laws and practice for the purpose of protecting investor’s interest
in DSE.

 Shah and Thomas (2002) elucidate the critical developments in Indian securities
markets during the 1990s performance between issuers and non-issuers. They also
find evidence that the market correctly analyzes earnings management and reacts
positively to net income and negatively to discretionary accruals. He reviewed the
changes which took place on India’s equity and government bond markets in the
decade of the 1990s. They focused on four interesting questions: (a) Why did
NSE succeed? (b) Why did the equity market lurch from crisis to crisis? (c) Why
did reforms on the GOI bond market falter? (d) How important are crises as a

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 mechanism for obtaining reforms? They tried to address questions of human
capital and organizational design at SEBI and RBI.

 Agrawal and Singh (2002) examined the stock price effects and trading volume
patterns for the possible existence of informed trading prior to merger
announcement. Event study analysis of forty companies suggested the evidence of
insider trading. Event studies are used in tests of EMH to ask whether prices
incorporate information fully on the day that the information is revealed. If EMH
holds, the information about the event should be incorporated into prices before or
on the day of the event itself. There should be no impact on returns after the
event. Typical event studies analyze the impact of a specific event on returns
behavior. Sometimes it is a macro-economic or institutional event at fixed periods
or at a given point in time for which we want to understand the impact on returns
e.g. the start of electronic trading in India, or the depository; the introduction of
derivatives etc. The study and analysis of how financial asset prices adjust to
information have long been a focus of attention in the academic literature.

 Shamsuddin and Kim (2003) researched on Integration and interdependence of

stock and foreign exchange markets: an Australian perspective. They studied the
integration of the Australian stock market with its two leading trading partners,
the US and Japan. In investigating the extent of integration, the study considered
the interdependence between foreign exchange rates and stock prices, since
exchange rates influence international competitiveness of firms, and, via interest
rates, the cost of capital. The results indicated that there was a stable long-run
relationship among the Australian, US and Japanese markets prior to the Asian
crisis but that this relationship disappeared in the post-Asian crisis period.

 Bavaria (2004) compared the profitability of cement industry. According to him

the increase in the proportion of profit is in the same proportion as increase in
average interval profit. So here also there is a direct relation between Net Profit
and Interval Measure. He concluded that the maximum return on net capital
employed is in the Eastern Region, whereas negative result is seen in the Rest of
the Regions. According to him the best way to tide over the liquidity problems of
the undertakings is to improve their profitability. Companies should revise the
ways, besides, managing the working capital effectively, of maximizing overall
return on investment. This is considered essential because, the cash flows of any
concern rest, primarily, on the profitability and the amounts set a part for
depreciation and other non- cash charges.

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  Somaiya (2005) researched on Scientific Management of Small Investors
Protection in the New Millennium with Reference to India; Challenges and
Opportunities (1991-2011). He has done a tremendous work in the field of Indian
stock exchanges. This doctoral thesis is divided into two volumes. He included
the study of history of stock exchanges, fluctuations in stock market, investors’
risk and protection means, investors’ complaints and their solutions, stock market
scams, role of banks, regulatory frame work and much more. Ex-prime minister
of India Atal Bihari Bajpai and Prime Minister Manmohan Singh have
appreciated this work.

 Noor, Yakob, Beal and Sarath (2006) studied the stock market seasonality in
terms of day-of-the-week, month-of-the-year, month and holiday effects in ten
Asian stock markets, namely, Australia, China, Hong Kong, Japan, India,
Indonesia, Malaysia, Singapore, South Korea and Taiwan. He concluded that the
existence of seasonality in stock markets and also suggested that this is a global
phenomenon.

 Krishanamurti (2006) studied on Competition, Liquidity and Volatility – A

comparative study of BSE & NSE. He found that during the time period taken by
him the NSE showed more efficiency than BSE. He also found that before
founding of NSE, BSE had accounted for about 90% of equity trade volume in
India. Market Efficiency Coefficient (MEC) was used to measure liquidity. He
took 26 paired issues from the exchanges as a sample. As per the findings the
trading frequency is higher on NSE as compared to BSE, while the average size
per trade is higher on the BSE. Overall NSE provides a more liquid market than
BSE as evidenced by lower execution costs and higher MEC.

 Sinha and Pan (2006) have studied on The Power (Law) of Indian Markets:
Analyzing NSE and BSE trading statistics. They analyzed the nature of
fluctuations in the Indian financial market. They have looked at the price returns
of individual stocks, with tick-by tick data from the National Stock Exchange
(NSE) and daily closing price data from both NSE and the Bombay Stock
Exchange (BSE), the two largest exchanges in India. They found that the
distributions of trading volume and the number of trades had a different nature
than that seen in the New York Stock Exchange (NYSE). Further, the price
movement of different stocks are highly correlated in Indian markets.

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  Mukherjee (2007) researched on Comparative Analysis of Indian Stock Market
with International Markets. According to his findings the stock market is
witnessing heightened activities and is increasingly gaining importance. In the
current context of globalization and the subsequent integration of the global
markets this paper captures the trends, similarities and patterns in the activities
and movements of the Indian Stock Market in comparison to its international
counterparts. This study covers New York Stock Exchange (NYSE), Hong Kong
Stock exchange (HSE), Tokyo Stock Exchange (TSE), Russian Stock exchange
(RSE), Korean Stock exchange (KSE) from various socio-politico-economic
backgrounds. Both the Bombay Stock exchange (BSE) and the National Stock
Exchange of Indian Limited (NSE) have been used in the study as a part of Indian
Stock Market. The time period has been divided into various eras to test the
correlation between the various exchanges to prove that the Indian markets have
become more integrated with its global counterparts and its reaction are in tandem
with that are seen globally.

 Osami & Abdullah (2007) researched on topic Towards an Islamic Stock Market:
A Review of Classical and Modern Literatures. In their investigation of half-year
seasonality, they found returns from Newfound that ember to April were greater
than returns for the six months May through October. This half-year effect was
somewhat consistent for different sub-samples of their study. They study
reviewed the classical and modern literature on Islamic laws which are related to
transactions to find out Shariah principles and then follows the analytical method
to examine every aspect of stock market based on these principles. They tried to
furnish some concrete suggestions and recommendations towards the
development of a full-fledged Islamic stock market.

 Diebold and Yilmaz (2007) worked on Macroeconomic Volatility and Stock

Market Volatility, World-Wide. They analyzed the resulting 46 pairs of stock
market and fundamental volatilities in two ways. The first follows Schwert and
exploits only time-series variation, estimating a separate VAR model for each
country and testing causality. The results, which are not reported here, mirror
Schwert’s,failing to identify causality in either direction in the vast majority of
countries. In this paper a broader movement focusing on the macro-finance
interface. Much recent work focuses on high-frequency data, and some of that
work focuses on the high frequency relationships among returns, return
volatilities and fundamentals. He focused on international cross sections obtained
by averaging over time. He added that interpretation is not only in general as a

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 “call to action” for more exploration of the fundamental volatility / return
volatility interface, but also in particular as a call for more exploration of
volatility at medium (e.g., business cycle) frequencies.

 Chukwuogor (2007) studied on “Stock Markets Returns and Volatilities: A Global

Comparison”. He examined the general patterns of recent global stock market
returns and the volatility of such returns using 40 global stock indexes of
countries classified into developed and emerging markets as barometers for the
period 1997-2004. This classification was based on the classification suggested by
Standard and Poor’s Credit Ratings Report by Hessel (2006). He investigated the
presence of the day-of-the-week return in these countries and the correlation of
the returns of these global stock indexes to the US market. A set of parametric and
non-parametric test was used to test the significance of the standard deviations
and further determine the correlation of the returns of these global stock indexes
to the US market. There was evidence of negative and low correlation of returns
between the US stock markets and many global stock markets. These findings
presented interesting opportunities and dynamics for enhanced return through
diversification in global portfolio investments.

 Yinxia Guo (2008) studied The Efficiency of the Chinese Stock Market with
Respect to Monetary Policy. According to him due to the bull stock market in
China, the efficiency of the Chinese stock market has been one of the hot topics.
Because monetary policy plays an important role in Chinese economy and there is
a close relationship between stock returns and monetary policy, he tested the
efficient market hypothesis (EMH) for the Chinese stock market with respect to
monetary policy. The vector auto regression (VAR) models are used to estimate
the relations among stock returns and relative macroeconomic variables related to
monetary policy.

 Daan Struyven (2008) studied on the battle between the Bombay Stock Exchange
and the National Stock Exchange. He compared BSE and NSE on various aspects
like, Impact of technology on transaction costs and access, Governance
&Management, Product scope, Geographical reach. He found that NSE surpassed
BSE on the equity segment in only 12 months because of 4 main raisons. First of
all, non-Gujarati traders and/or investors with low needs to be part of the Gujarati
financial community were predominantly attracted by the fee structure and
customer-oriented clearing-, settlement- and dematerialization processes of NSE.
Secondly, traders, investors and public policy makers with an important long-run

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 financial and/or political interest to transform the Indian equity market into a
competitive and attractive market were attracted by this potential to reshape the
market and by the fee structure and the customer-oriented clearing-, settlement-
and dematerialization processes of NSE. Thirdly, traders and/or investors -who
originally used brokers -become member of NSE because of the possibility to
trade electronically outside Bombay. Fourthly, price differences attracted
arbitrage traders who supported liquidity at both exchanges.

 Jayen B. Patel (2008) studied on Calendar Effects in the Indian Stock Market. He
found two distinct calendar effects in returns for the Indian stock market.
Specifically, a November-December effect in which, they documented that mean
returns for November and December were significantly greater than those of the
other ten months. They found that the highest mean returns for each index were
generated during the month of November. December and August also generated
relatively high returns. The month of March generated negative mean returns, the
lowest for each index, and April and May also generated substantially lower
returns for each index. They seek to identify a series of consecutive months
during which the Indian stock market generates extraordinarily high (or low)
returns. Identification of such a pattern may enable the investors to enhance
investment returns. More specifically, an investor should be invested during the
consecutive months when the Indian stock market generates high positive returns,
and, alternately, an investor should invest out of the Indian stock market in
consecutive months when stocks generate substantially negative returns.

 Novak (2008) worked on the Importance of Accounting Information for Stock

Market Efficiency. This thesis contributes to the discussion on the importance of
accounting information for stock market efficiency. As any analysis of market
efficiency depends on the use of adequate risk proxies, the thesis first investigates
the ability of commonly used risk factors to explain the cross-sectional variation
of Swedish stock returns. The relative bid-ask spread is found to be the strongest
of all the analyzed factors; nevertheless, it does not seem to be related to
momentum in the manner predicted in the conceptual argument presented earlier
in the paper. He concluded that, contrary to this proposition, the structure of
accounting does matter for equity valuation and that changes in representation do
impact on stock prices.

 Sah (2010) worked on the topic “Stock Market Seasonality: A Study of the Indian
Stock Market”. In this study, he tried to examine the seasonality of stock market
in India. He considered the S&P CNX Nifty as the representative of stock market

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 in India and tested whether seasonality is present in Nifty and Nifty Junior returns
using daily and monthly data sets. The study found that daily and monthly
seasonality are present in Nifty and Nifty Junior returns. The analysis of stock
market seasonality using daily data, he found Friday Effect in Nifty returns while
Nifty Junior returns were statistically significant on Friday, Monday and
Wednesday. In case of monthly analysis of returns, the study found that Nifty
returns were statistically significant in July, September, December and January. In
case of Nifty Junior, June and December months were statistically significant.
The results established that the Indian stock market is not efficient and investors
can improve their returns by timing their investment.

 Gupta (2011) studied on Comparative Study of Distribution of Indian Stock

Market with Other Asian Markets. She studied whether Indian stock market
returns were correlated to the stock market returns of other selected Asian
Economies or not and compared the distribution of the stock market returns of
India with other selected Asian economies. She included BSE(India), Heng
Seng(Hong Kong), JKS(Indonesia),KLSE(Malaysia), Nikkie(Japan),
KS11(Korea) in her study. She used the descriptive statistics of the six Asian
markets for the period between 2005 and 2009. She found that the mean of the
weekly returns of India and the Indonesian markets were observed to be the
highest around 23%. Japanese markets were flat during the study period.
Volatility as measured by standard deviation and its square, the variance was the
least observed in the Malaysian markets. The other five Asian markets generated
variance in the range of 11%-15%. Indian markets showed maximum variance.
Kurtosis, as referred to as the volatility of the volatility, measures the peakness of
the distribution. The weekly returns of Hong Kong and Malaysian markets were
more near to their respective means, as their kurtosis were nearing 3. Weekly
returns of Indian stock markets indicate a low peak with a fat mid-range on either
side. The kurtosis of India is platykurtic which signifies the normal distribution of
stock returns in Indian stock market; however, the high kurtosis of other markets
exhibits heavier tail than the standard normal distribution implying that returns
are concentrated on one level. The study uses Jarque-Bera test to examine the
normal distribution.

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Page | 77
 CHAPTER 4: Data Analysis, Interpretation and Presentation

Types of Securities Markets:

In the context of equity products, which this publication seeks to cover in depth, the
following markets could be defined:

 Primary Market
 Secondary Market
 Derivative Market

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Primary Markets:

Fresh issues of shares and other securities are affected though the Primary market. It
 provides issuers opportunity to issue securities, to raise resources to meet their
requirements of business. Equity issues can be affected at face value or at
discount/premium. Issues at discounts are rare and almost unheard of. Issuers can issue
the securities in domestic market and/or international market through ADR/GDR/ECB
route. Resources raised from domestic as well as international markets by issuers have
gone up significantly over the years. During 2006-07, a total of Rs. 33,508 crores were
mobilized by the government and corporate sector from the primary market through
public issues. Capital raised from the primary market through public, rights & follow-on
offerings have aggregated Rs. 67,609 crores during FY 2010-11, as compared to Rs.
57,555 crores during the previous fiscal year. The number of issuances from the primary
market in fact reduced from 76 to 91 over the same period because of a larger per issue
size. During 2010-11, the regulator introduced a new product called a "Qualified
Institutional Placement ("QIP"). QIP enables a listed company to offer shares to qualified
institutional buyers through a
 private placement mechanism and is a landmark introduction in the Indian Capital
Markets. The banking/finance, construction, IT & Telecom sectors dominated the
primary market issuances during 2010-11.

Secondary Market:

This is the market wherein the trading of securities is done. Secondary market consists of
both equity as well as debt markets. Securities issued by a company for the first time are
offered too the
public in the primary market. Once the IPO is done and the stock is listed, they are
traded in the
secondary market. The main difference between the two is that in the primary market, an
investor gets securities directly from the company through IPOs, while in the secondary
market, one
purchase securities from other investors willing to sell the same.

Equity shares, bonds, preference shares, treasury bills, debentures, etc. are some of the
key products available in a secondary market. SEBI is the regulator of the same.
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Derivatives Markets:

Derivatives are tradable products that are based upon another market. This other market
is known as the underlying market. Derivatives markets can be based upon almost any
underlying market, including individual stocks (such as Apple Inc.), stock indexes (such
as the S&P 500 stock index) and currency markets (such as the EUR/USD forex.

Derivatives include:

 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, and

 A contract which derives its value from the prices, or index of prices, or
underlying securities. The Act also made it clear that derivatives shall be legal and
valid only if such contracts are traded on a recognized stock exchange. The
government is also rescinded in March 2000 an old notification, which had
banned forward trading in securities in the 1960s.

Comparative analysis
The membership in all the stock exchanges in India during 2010 is furnished in Table 8.
In the case of corporate members, the share of the BSE was 82.35 per cent followed by
Delhi stock exchange. The share of corporate members has increased in all stock
exchanges over the years. The percentage of total corporate members to total members in
all stock exchanges was 38.61 per cent during 2001, which increased to 47.67 per cent
during 2010. The reverse trend can be observed during the same period in the case of
individuals and partnership members. The percentage of individual and partnership
members

Name of stock CM IM PM
exchange
Ahmedabad 171 139 19
(51.98) (42.25) (5.78)

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 Bangalore 129 129 3
(49.43 (49.43) (1.15)
Bombay 826 147 30
(82.35) (14.66) (2.99)
Bhuvaneswar 19 195 -
(8.88) (91.12)
Calcutta 197 667 44
(21.7) (73.46) (4.85)
Cochin 79 350 9
(18.04) (79.91) (2.05)
Coimbatore 48 87 -
(35.56) (64.44)
Delhi 254 169 32
(55.82) (37.14) (7.03)
Gauhati 3 94 1
(3.06) (95.92) (1.02)
Interconnected 345 569 29
(36.59) (60.34) (3.08)
Jaipur 18 460 6
(3.72) (95.04) (1.24)
Ludhiana 89 209 2
(29.67) (69.67) (0.67)
Madhya Pradesh 38 153 1
(19.79) (79.69) (0.52)
Madras 75 104 14
(38.86) (53.89) (7.25)

National 1,175 68 67

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 (89.69) (5.19) (5.11)
Over the counter 538 148 18
(76.42) (21.02) (2.56)
Pune 54 125 7
(29.03) (67.2) (3.76)
Saurashtra
Uttar Pradesh 75 259 5
(22.12) (76.4) (1.47)
Vadodara 64 245 3
(20.51) (78.53) (0.96)
Total 4197 4317 290
(47.67) (49.03) (3.29)

Notes: CM corporate membership; IM individual membership; PM partnership

membership; There are no members registered in Hyderabad, Magadha and Mangalore
stock exchanges during 2010.
Source: Compiled from relevant issues of Hand Book of Statistics on Indian Securities
Market-2011, SEBI, Mumbai, 2012

to total members in all stock exchanges was 49.03 per cent and 3.29 per cent respectively
during 2010 against to 57.28 per cent and 4.11 per cent respectively during 2001.The
share of corporate members in total members in the BSE ranged between 67-82 per cent
which was the second highest among all the stock exchanges. This shows a conscious
effort by the BSE to improve the corporate membership so as to strengthen confidence in
its operations. The members in corporate firm could raise more funds and have better
infrastructure setup. This leads to better liaison between the exchange and clients.

Method of compilation

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In the BSE, most of the indices are calculated by following the free-float market
capitalisation methodology. The free-float methodology is the process of constructing an
index. The free-float market capitalisation is the total shares issued by a company, which
are readily available for trading in the market. It generally excludes promoter’s holdings,
government holdings, strategic holdings and other locked-in shares. This method allows
that the level of index at any point of time reflects the free-float value of component
stocks relative to base period. The market capitalisation is multiplied by the free-float
factor to arrive at the free-float market capitalisation. All the index companies have to
submit the filled in free-float on quarterly basis to the BSE. Then, the BSE, on the basis
of information submitted by each constituent company, determines the free-float factor
for each company. Once the free-float of a company is determined, it is rounded-off to
the higher multiple of 5 and each company is categorised into one of the 20 bands. The
free-float bands of BSE Sensex are given in Table 7.

Band (%) Free-float factor Band (%) Free-float factor

0-5 0.05 51-55 55
6-10 0.10 56-60 60
11-15 0.15 61-65 65
16-20 0.20 66-70 70
21-25 0.25 71-75 75
26-30 0.30 76-80 80
31-35 0.35 81-85 85
36-40 0.40 86-90 90
41-45 0.45 91-95 95
46-50 0.50 96-100 100

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Table 7: Free-Float Bands of BSE Sensex during 2010
If a free- float factor is 0.55, it means only 55 per cent of market capitalisation of the
company will be considered for index calculation.

Top 50 Companies by Market Capitalization

Market Capitalization of BSERs Listed Co. (Cr.) - 2,03,76,462.82

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Page | 85
The pie chart below indicates the weightage of each sector in the BSE Sensex as of 27 th
February, 2021

Page | 86
SENSEX PE CHART
Understanding the Sensex PE chart helps you know the right time to buy and sell your
shares. Giving the exact idea of the valuation of the shares make trading easy and less
risky.
Here is one of the examples cited using the historical PE chart.

The blue bars in the above chart shows the Sensex PE from 1999 to 2010. As per the
data, the SENSEX during the period remains close to 18.
The dotted line in blue shows the real movement of the Sensex.
The red ribbon shows the undervaluation and purples the overvaluation or stretched
valuation.

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BSE SENSEX FORECAST
When it comes to forecasting the SENSEX, it put many challenges in front. Although it is
good if someone can get a positive forecast, the same turns opposite if not.
A similar case happened in the year 2013 Sensex forecast. Many stock market
predictions were made about the Sensex would close at 20,000 value or near giving the
economy its green shoot, but in July, the Indian Economy moved downward when the US
Fed treated to shut the taps of liquidity and the rupee value fell to its lowest value at 68.7
to a dollar.
A similar thing happened in the current year when the SENSEX was forecasted to reach
the value of 40,000 or more in April or May but the sudden attack of the COVID-19
pandemic reversed the prediction marking the biggest ever fall in the Sensex points.
The Sensex usually interpreted graphically, here is how the forecast looks in the graphical
form

Page | 88
The above chart is the indicator of the annual average calculated in respect of the Share
Indices and market capitalization over the period of 20 years.

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Since its establishment, Bombay Stock Exchange has played a vital role in the growth of
capital markets in India. Another great truth about BSE is that it is the world's fifth
largest stock exchange, with a market capitalization of $466 billion. It makes use of BSE
SENSEX, which is an index of 30 big and developed stocks. The index provides an
evaluation of the comprehensive performance of BSE and is very much tracked
throughout the world. 

Page | 90
Trading Statistics of Bombay Stock Exchange

Page | 91
Above is the chart for the number of shares delivered (in lakhs) in BSE

The Bombay stock exchange is home to about 5,067 (FY 2010-11) listed companies, with
a total market capitalization of around 59 trillion Rupees, or nearly $1.3 trillion (USD) as
of September 2011. The BSE is also one of the busiest stock exchanges in the world,
currently ranking around number four in terms of annual transactions. The exchange has
experienced explosive growth, with a four-fold increase in trading volume over the last
15 years.

The following are some of the facts and figures that can help you get a better feel for the
volume of trading that occurs on the Bombay Stock Exchange:
 In 2011, the average volume of business conducted on the BSE was
approximately $15 billion USD each month.
 The number of shares traded each month on the BSE is in the range of 30 to 35
million.

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 Trends in Cash Segment Bombay Stock Exchange Sensex, 100 Index

Year  BSE Sensex BSE-100 Index 

High  Low  Close  High  Low  Close 

1992-93 4547 2185 2281 2049 989 1021

1993- 4299 1980 3779 2073 912 1830

94

1994 - 4643 3229 3261 2193 1570 1606

95

Page | 93
 1995-96 3612 2820 3367 1692 1298 1549

1996- 4131 2713 3361 1865 1203 1464

97

1997- 4605 3165 3893 2007 1382 1697

98

1998- 4322 2741 3740 1909 1227 1651

99

1999-00 6151 3183 5001 3906 1380 2902

2000- 5543 3437 3604 3055 1634 1692

01

2001- 3760 2595 3469 1831 1210 1716

02

2002- 3538 2828 3049 1763 1411 1501

03

2003- 6250 2904 5591 3373 1447 2966

04

2004- 6955 4228 6493 3756 2226 3482

05

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 2005- 11357 6141 11280 5943 3303 5904
06

2006- 14324 8799 13072 7276 4472 6587

07

2007-08 21207 12426 15644 11656 6271 8233

2008-09 17736 7697 9709 9433 3949 4943

2009-10 17793 9546 17528 9447 4871 9300

2010-11 21109 15960 19445 11193 8510 10096

City-wise Distribution of Turnover of Cash Segment at BSE:

City  2001-  2002-  2003-  2004-  2005-  2006-  2007-  2008-  2009-  2010- 

02  03  04  05  06  07  08  09  10  11 

Ahmadabad 1.0 2.3 3.4 3.1 2.9 4.4 4.6 7.3 9.9 9.4

Bangalore 0.3 0.4 0.7 0.7 0.9 0.5 0.4 0.3 0.4 0.4

Page | 95
 Baroda 0.5 0.8 0.0 0.0 0.0 2.1 2.1 2.4 2.1 2.1

Bhubaneswa - 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
r

Chennai 0.2 0.3 0.3 0.4 0.5 0.4 0.4 0.4 0.3 0.4

Cochin 0.3 0.1 0.1 0.1 0.2 0.0 0.0 0.0 0.0 0.0

Coimbatore 0.0 0.0 0.0 0.1 0.1 0.0 0.1 0.1 0.0 0.0

Delhi 1.3 2.1 2.6 3.1 3.8 8.3 10.5 11.4 12.8 12.8

Guwahati - 0.0 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0

Hyderabad 0.1 0.1 0.2 0.2 0.4 0.5 0.5 0.5 0.5 0.5

Indore 0.2 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6

Page | 96
 Jaipur 0.2 0.7 0.8 0.7 0.8 0.9 1.0 1.1 1.1 1.0

Kanpur 0.3 0.4 0.4 0.4 0.3 0.5 0.4 0.4 0.6 0.7

Kolkata 0.8 1.4 1.1 1.0 1.4 2.3 2.1 1.7 1.6 2.0

Ludhiana 0.0 0.2 0.4 0.3 0.3 0.3 0.3 0.2 0.3 0.2

Mumbai 84.0 77.6 74.5 75.3 75.1 49.3 45.2 38.6 36.0 36.3

Patna - 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Pune 0.6 0.4 0.5 0.6 0.7 0.8 0.7 0.6 0.7 0.7

Mangalore - 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0

Rajkot 0.3 1.4 1.7 1.7 1.3 1.5 2.4 4.8 5.1 4.8

Others 9.8 10.9 12.6 11.4 10.7 27.6 28.4 29.7 27.9 28.0

Total  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0 

Page | 97
Almost 36% of the terminals in the sample are based in the Western region where
Mumbai holds maximum representation, followed by Ahmadabad at 9%. In the southern
region Hyderabad 1% of the terminals, whereas in the North, Delhi has maximum share
at 13%, followed by Kolkata at 2% in the eastern region. Other cities such as Baroda,
Jaipur and Pune have 1% shares respectively. Turnover of cash segment in BSE in
different cities has been elaborated in terms of percentage in the above table over the
period of 10 years.

General DO's and DON'Ts for Investors:

More and more investors are investing / trading in the stock markets than ever before. It
is therefore imperative for the investors to follow some DOs and DON’Ts while dealing
in the stock market.

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DOs: - 
 Always deal with the market intermediaries registered with SEBI / stock
exchanges.

 Collect photocopies of all documents executed for registration as a client,

immediately on its execution. Ensure that the documents or forms for registration
as Client are fully filled in.

 Give clear and unambiguous instructions to your broker / agent / depository

participant.

 Always insist on contract notes from your broker. In case of doubt in respect of
the transactions, verify the genuineness of the same on the BSE website.

 Always settle the dues through the normal banking channels with the market
intermediaries.

 Before placing an order with the market intermediaries, please check about the
credentials of the companies, its management, fundamentals and recent
announcements made by them and various other disclosures made under various
regulations. The sources of information are the websites of Exchanges and
companies, databases of data vendor, business magazines etc.

 Adopt trading / investment strategies commensurate with your risk-bearing

capacity as all investments carry some risk, the degree of which varies according
to the investment strategy adopted.

 Carry out due diligence before registering as client with any intermediary.
Carefully read and understand the contents stated in the Risk Disclosure
Document, which forms part of the investor registration requirement for dealing
through brokers.

 Be cautious about stocks which show a sudden spurt in price or trading activity,
especially low-priced stocks.

 Always keep copies of documents you are sending to companies, Trading

Member, Registrar and Transfer Agent, etc.


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  Send important documents by a reliable mode (preferably through registered post)
to ensure delivery.
 Ensure that you have money before you buy.

 Ensure that you are holding securities before you sell.

 Follow up diligently and promptly e.g. If you do not receive the required
documentation within a reasonable time, contact the concerned person; i.e., the
Trading Member, company etc., immediately.

 Mention clearly whether you want to transact in physical mode or in Demat mode.

 There are no guaranteed returns on investment in the stock market.

 Always keep copies of all investment documentation (e.g., application forms,

acknowledgements slip, contract notes).

DONTs:- 

 Don't deal with unregistered brokers / sub - brokers, or other unregistered

intermediaries.

 Don't execute any documents with any intermediary without fully understanding
its terms and conditions.

 Don’t file your arbitration application against trading member, in the Regional
Investor Service Centre having no geographical jurisdiction over the matter.
Please use for the purpose, your address as intimated to your Trading Member by
following due process of law The Exchange redresses investors‟ complaints thru
arbitration and IGRC mechanism, which are quasi-judicial in nature. The period

 Consumed in redressal of complaint thru IGRC will not be considered while

measuring period of „limitation‟ in filing arbitration application provided  the
complaint is filed at the concerned Regional Investor Service Centre.

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  Don’t file your grievance /s against companies listed on BSE, in the Regional
Investor Service Centre having no geographical jurisdiction over the matter, for
its expeditious redressed. Please use your address for deciding the geographical
 jurisdiction.

 Don't deal based on rumors or 'tips'.

 Don't fall prey to promises of guaranteed returns.

 Don't get misled by companies showing approvals / registrations from

Government agencies as the approvals could be for certain other purposes and not
for the securities you are buying.

 Don't leave the custody of your Demat Transaction slip book in the hands of any
intermediary.

 Don't get carried away with advertisements about the financial performance of
companies in print and electronic media.

 Don't blindly follow media reports on corporate developments, as some of these

could be misleading.

 Don't blindly imitate investment decisions of others who may have profited from
their investment decisions.

 Don't forgo obtaining all documents of transactions, in good faith even from
people whom you know.

 Don't forget to take note of the risks involved in an investment.

 Don't get misled by guarantees of repayment of your investments through

postdated cheques.

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  Don't hesitate to approach concerned persons and then the appropriate authorities.

 Don't get swayed by promises of high returns.

 BSE has installed a Toll Free line 1800 22 6663 at which the investors can inform
on any specific lead with regard to any type of undesirable trading practices in
any scrip or any type of market aberration observed by them. Investors are
requested to get their messages recorded in English or Hindi. Identity of the
investor will be kept confidential. 

Page | 102
 Chapter 5: Conclusions and Suggestions

Page | 103
Conclusion
Profitability of select technical rules of the SENSEX of Bombay Stock Exchange for the
period of 15 years from 1997 to 2012 has been tested by applying twenty-two-time based
trading rules, ten filter rules, eight MACD, seven TRBO rules (47 Rules) in both stock
exchanges in India with and without transaction cost. Among time-based trading rules,
yearly holding period give more returns than other periods like weekly, monthly and
daily trades. 5-year Systematic Investment plan give equal return to yearly returns on
both exchanges. Filter rules give excess returns only on proprietary trade with ideal filter
rate between 0.3% to 0.5%. All the modified MACD and TRBO rules reported excess
returns on both exchanges. Among various asset classes, investing in stocks remains in
top slot on profitability and liquidity around the world. This study also shows that, a
simple buy and hold investment in stock gives an average return of 19% p.a. in India. At
any point, this rate is much better than any other assets/investment opportunity in India.
A 20-year period analysis show common stock returns outstrips gold, bank and
commodity futures. It is also the best bet to beat inflation in India. Hence ordinary
investor shall continue to invest in stocks for better returns. One may also satisfy with
returns of simple buy and hold (19 % p.a.) and live-in peace of mind rather worrying
about heuristic filter rules, technical rules, expert’s advice, stock tips and other borrowed
strategies. But the reports of stock markets, some mutual fund schemes and various
stories of successful investors across the world suggest the possibility of earning excess
returns. Hence this study tested the profitability of few trading strategies and found some
of them giving excess returns on BSE. So, the possibility of beating the market proved.
Hence who would like to get some more returns assuming some more risks may go for
technical rule-based trading. The success lies in identifying the point where growth ends
and greed starts. Keeping in mind that greed on any level is bad but in turn one has to
distinguish greed from reaping the just reward for the resources he commits and risk he
assumes. Hence it is suggested to take investment decisions accordingly. In view of the
empirical evidence and outcome of this study, it may be concluded that, by adopting
some simple trading rules, an ordinary investor either he can get excess returns over
simple buy and hold returns or he can avoid trading loss by holding the investments for
an ideal period in India. As the tested technical rules yield more market returns than
returns based on the simple buy-and-hold decisions, findings presented in this study in a
way challenge the orthodox view based on efficient market hypotheses (EMH), which
rules out the possibility of excess returns
Today BSE India has the maximum number of stocks listed in it comparatively to any
other exchange in the world. BSE Index also known as Sensex is the most popular
exchange or stock in India. BSE Index consist of 30 stocks which involves 12 major
sectors. BSE India
 provides a great platform for trading in equity, derivative and debt instruments. BSE
India live has become the major part of Indian Capital Market. BSE index provide BSE
live

Page | 104
 prices of stocks from morning 9.00AM to 3.30 PM. Today with the modernization of
electronic media like television, computers, internet BSE India has reached to a new high.
People find trading in BSE India live is easier and fast with the help of these media.
Through BSE Live tracking an investor can track the current price of the market and can
make strategies accordingly. Through BSE India Live a trader can make certain strategies
on how to invest, when to invest, in which scrip to invest and what is going to be the
future of the market.

 It is the oldest and the largest stock exchange in Asia.

 It is the fifth largest stock market in the world.
 Approximately 6,000 Indian companies are listed with Bombay Stock Exchange. .
 It is the first stock exchange that introduced Equity derivatives in India.

With the increasing Globalization, the Stock Exchanges have tremendously affected the
financial conditions of India. The stock markets of the future will have a redefined
purpose and reinvented architecture due to the advent and widespread use of technology.
Information and stock price quotations are available almost instantaneously, and, more
importantly, investors can act on this data by executing a trade from anywhere at any
time. This Newmarket will bring benefits to investors, the listed companies, and the
economies of the company. Trading will become cheaper, faster and settlement will be
simpler wit reduced risk. Raising capital for companies will become easier, thereby
contributing directly to the Economic Growth.
Already, BSE has shown its proactive response by increasingly using leading edge to
technologies to effectively compete in the global environment. In the not-too-distant
future, once full capital account convertibility is permitted in India, one could well
witness an expansion of trading volumes and its resultant economic benefits to the
thriving and ever young metropolis of Mumbai. In spite of all these positive predictions,
the future of Stock Exchanges is likely to be uncertain and even their survival is a major
question mark.
Evaluation of profile of the BSE demonstrated that the progression of the BSE during
2001-2010 was remarkable in terms of number of brokers registered with
the BSE comparatively other stock exchanges leaving the NSE. The new settlement
cycle has given oxygen to boost up the overall development of stock market. The
number of member (brokers) clients was increased drastically. The usage BOLT
for online trading was significantly increased. Further, the change in method of
compilation of indices assured the investors more accuracy in terms of capitalization.
Furthermore, corporate members were slowly increased while the individual and
partnership membership in the BSE was declined over the time. It shows the paradigm
shift of preference of ownership of membership due to corporate reforms happened
recently in the stock market. It may be concluded that new challenges in the
Page | 105
new millennium posed by market forces were addressed by the BSE
effectively and efficiently.

Summary of Findings
The summary of major findings from the study of market returns and profitability
analysis of select trading rules on SENSEX for the period of 15 years from 1997 to 2012
has been given as below.
Profitability of time-based trading rules:
 The average rate of return of yearly trade in Sensex is 19.40%. The average
annual return from proprietary trade. i.e. Without brokerage cost in Sensex is
20.50%
 The average annual rate of return in case of monthly trade in Sensex is -4.20 % .
The average annualized monthly returns under proprietary trade in Sensex is
7.78%.
 The mean ROI on average investment in case of weekly trade in Sensex is -
66.81%. Under proprietary trade the weekly returns from Sensex is -11.93%.
 The mean rate of annualized return on average investment for daily trade on long
and short mode is -85.98% and in case of short and long daily trade is -32.92%
in Sensex during the period of study.
 The average yearly returns of Sensex on Systematic yearly investment plans from
1 year SIP to 5 year SIP is 18.33%,17.81%,19.17%,19.28% and 19.32%
respectively. The four and five year SIPs reported higher returns than other SIPs.
during 1991-2012.
 The average annual return on monthly SIP investments in case of Sensex
is comparatively lower than yearly returns. Among 12-month systematic
monthly investment plans the 10 month SIP is most profitable in Sensex at
reported average profit of 17.73%.
 Month of the year effect has been studied and it is found that during months of
April, July, September, November and December , the trading reported
better returns than other months in Sensex .Cumulative net profit from
September trade is higher than that of any other months. Hence one shall resort to
trading these months for better profitability.

Profitability of price based technical trading rules:

Profitability of Filter rules

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  The volatility in daily prices of SENSEX is studied to decide up on the range of
filter rates to be tested during the study period 1997-2012. Intraday price changes
are compared with daily open price and percentage of changes over open price i.e.
ups and downs are calculated. The year wise intraday (daily) changes and their
average for 15 years period are calculated. In Sensex the average daily price
increase is 0.90% and decrease is -1.04 %. with total average fluctuation of 1.94%

 As a part of mechanical trading strategy, Alexander’s Filter rules are applied on

SENSEX. The Filter rates are designed considering average daily upward
volatility range of 0.90% -1.05% and transaction costs involved. Thus, 10filters
from 0.2% to 0.9% are selected.
 The results for filter rule in Sensex are not encouraging one. Except for 0.2% and
0.3% filter, all other filters give negative returns. The filter applied on proprietary
trade without brokerage give substantial returns with highest return of 29.67% for
0.3% filter. The next is 0.35% filter which gives 29.5%. It is also observed that
when filter rate is increased the returns also getting increased but after 0.5% filter,
the trend got reversed to negative even in the absence of brokerage. Hence the
ideal rate of filter for proprietary trade is between 0.25% to 0.5% in Sensex.

Suggestions
The profitability/market returns of select technical rules are tested on Bombay Stock
Exchange for maximizing stock returns. Under time-based calendar rules the yearly
investment mode give maximum returns comparing to monthly, weekly and daily trades.
Hence an ordinary investor who is risk adverse nature may go for yearly trade for
maximum profitability and other frequencies of trade may be avoided. Another important
investment strategy is Systematic investment plan (SIP). The 5-year SIP returns are
maximum one and more or less equal to simple buy and hold returns under yearly trade in
Sensex. Hence 5-year SIP may be selected for long term investments. The monthly SIP is
reported lesser returns than simple buy and hold policy on BSE, hence the same may be
avoided. The mechanical trading strategies of filter rules are tested. Filter is not profitable
to ordinary investors in Sensex. But for proprietary trade, the 0.3% and 0.35% filters give
more returns than simple buy and hold policy in Sensex hence the same may use by
dealers. The average daily price fluctuations during the period of study in BSE exchanges
are 1.94% to 2.10%. Hence filter rules and suitable algorithmic trading rules can be
applied for better results considering the volatility range. Among tested standard MACD
rules MACD (50,200) give more returns than other MACD rules in Sensex. Other
standard MACD rules give lesser return than simple buy and hold policy. The modified
SPMACD rules (1, 50), (1,100), (1,150) and (1,200) reports more returns than simple buy
and hold policy in both Sensex and Nifty. SPMACD (1,50) is the best one for ordinary
investors on both exchanges giving returns of 27.81% return in Sensex. Hence those who

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like to get involved in some more frequencies of trade may apply these rules for getting
more returns than simple buy and hold annual investments. For proprietary trade (for
dealers) the all SPMACD rules tested gives positive excess returns and SPMACD (1, 50)
rule is the most profitable on both exchanges hence same may be applied. Among tested
TRBO rules, the modified TRBO rules of TRBO 50-150 and TRBO 50-200 are reported
higher returns than simple buy and hold policy.
The impact of transaction cost on profitability of various technical rules is analyzed.
Among other transaction costs, the intermediary cost can be avoided in proprietary trade.
Hence this aspect being studied. The impact rate is the difference between the return of a
technical rule with brokerage and without brokerage. This helps one to decide whether to
go for proprietary trade or not by comparing cost of own broker firm and opportunity cost
/ profit lost due to brokerage effect (impact of brokerage on returns) If actual cost of
broker firm is less than impact on returns then proprietary trade is suggested and vice
versa.
The Sensex movements and FIIs/dealers’ investment patterns are positively correlated.
Hence proprietary and FII actions can be used as market indicator for better returns in
BSE. It is suggested to ‘Go technical for speculation/short term trading and go
fundamental for long term investments' for successful stock investing. The empirical
evidence shows that the return from equity investment is higher than that of any other
investment avenues in India. Hence, it is suggested to stay invested in equity shares and
continue to invest in stock market. In a country like India the average Indian must invest
in the capital market, if he has to be a part of the growth story which rest of India is
experiencing particularly the corporate India after liberalization of economy. More
investment avenues coming up as many sectors were opened for private funding like
roads, port, oils, energy, water etc., with promising returns.

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 BIBLIOGRAPHY
1. https://www.ukessays.com/essays/finance/study-on-the-objectives-of-the-bse-
sensex-finance-essay.php
2. https://www.bseindia.com/
3. https://www.adigitalblogger.com/share-market/sensex/#:~:text=A%20stock
%20exchange%20is%20a,includes%20about%205000%20listed%20companies.
4. https://economictimes.indiatimes.com/
5. https://en.wikipedia.org/wiki/Bombay_Stock_Exchange
6. https://en.wikipedia.org/wiki/List_of_stock_exchanges#India
7. https://www.investopedia.com/
8. https://www.fincash.com/l/basics/bombay-stock-exchange
9. https://www.academia.edu/

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