KGiSL INSTITUTE OF TECHNOLOGY

(Approved by AICTE, New Delhi; Affiliated to Anna University, Chennai)

# 365, KGiSL Campus, Thudiyalur Road, Saravanampatti, Coimbatore – 641035.

UNIT III - SECONDARY MARKET

Financial markets in India comprise the money market Government securities market, capital
market, insurance market, and the foreign exchange market. Recently, the derivatives market has
also emerged. With banks having already been allowed to undertake insurance business, bane
assurance market has also emerged in a big way.
Till the early 1990s most of the financial markets were characterized by controls over the pricing
of financial assets, restrictions on flows or transactions, barrier to entry, low liquidity and high
transaction costs. These characteristics came in the way of development of the markets and
allocate efficiently of resources channelled through them. From 1991 onward, financial market
reforms have emphasized the strengthening of the price discovery process easing restrictions on
transactions, reducing transaction costs and enhancing systemic liquidity.
Private Placement
When a company offers its shares to a select group of persons not exceeding 49, and which is
neither a rights issue nor a public issue, it is called a private placement. Often a combination of
public issue and private placement can be used by the companies for the issue of securities in the
primary market. Privately placed securities are often not publicly tradable and may only be
bought and sold by sophisticated qualified investors. As a result, the secondary market is not
liquid as in the case of a private issue. There are SEBI guidelines, which regulate the private
placement of securities by a company.

Private placement is the fastest way for a company to raise equity capital. Private placement can
of two types viz. preferential allotment and qualified institutional placement.

Issue of shares in the Primary Market

In India, the primary market is governed mainly by the provisions of The Companies Act, 2013,
which deals with issues, listing and allotment of various types of securities. The Securities and
Exchange Board of India (SEBI) protect the interests of investors in securities, promote the
development of securities markets as well as regulate them.

Trading

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An FPI client places order through a Trading Member (broker) on the Exchange. The settlement
is done through a Clearing member/Custodian (DDP). India's Cash Segment follows T+2
Settlement Cycle. Securities are held in a segregated DEMAT form. All settlements are through
Clearing Corporation (ICCL), thereby minimizing settlement risks (Funds/ Securities) to FPIs.

Trading on the BSE is available through multiple online systems and is conducted from Monday
to Friday (except public holidays) between 9:15 a.m. and 3:30 p.m. for Equity Cash / Equity
Derivatives and 9:15 a.m. to 5:00 p.m. for Currency Derivatives.

Settlement

Trades done in the securities in the Equity Cash Segment on BSE are settled through ICCL on a
T+2 basis. A T+2 settlement cycle means that the transactions done on T day (trade day), the
final settlement takes place on second business day (excluding Saturdays, Sundays and other
settlement holidays) after the trade day.

Risk Management

 Core Settlement Guarantee Fund ("Core SGF"): ICCL has created a Core SGF available
to meet settlement obligations.
 Stress Test: ICCL carries out stringent stress tests for assessing the adequacy of liquidity
arrangements and for adequacy of margins.
 Limited Liability: Limited liability for non-defaulting members is subject to a maximum
cap of INR 1 Million (approx. USD 15,000)
 Recovery & Resolution: INR 1 Billion (approx. USD 15 Million) is maintained
separately for covering operational cost for 1 year, legal cost, regulatory cost and other
liabilities.
 The policy on composition and contributions to be made to the Core SGF, investment
policy for Core SGF and the Default Waterfall for each segment along with the quantum
of resources is available in each layer of the default waterfall.

Core Settlement Guarantee Fund

As per present guidelines:

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  ICCL's contribution to Core SGF should be at least 50%.
 The Stock Exchange's contribution to Core SGF should be at least 25%.
 The clearing member's primary contribution to Core SGF should not be more than 25%.

Currently, ICCL has decided to not collect any contribution from clearing members towards
Core SGF. Hence, ICCL's skin in the game is approximately 75%.

Default Waterfall

The default waterfall gives the hierarchy in which funds would be apportioned in case of a
default by clearing members. ICCL maintains a dedicated Default Waterfall for each segment,
effectively ring fencing each segment of ICCL from defaults in other segments.

Features

 Limited Liability: Limited liability for non-defaulting members is subject to a maximum

cap of INR 1 Million.
 Exposure towards CCP: ICCL has decided to currently keep the Clearing Members'
contribution to default fund as "Nil"
 Insurance: ICCL has subscribed to a unique insurance policy of USD 60 Million
applicable across all segments

History of the Stock Market in India

The history of the stock market in India goes back to the end of the eighteenth century when
long-term negotiable securities were first issued. In 1850 the Companies Act was introduced for
the first time bringing with it the feature of limited liability and generating investor interest in

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corporate securities. The first stock exchange in India was set-up in 1875 as The Native Share
and Stock Brokers Association in Bombay. Today it is known as the Bombay Stock Exchange
(BSE). This was followed by the development of exchanges in Ahmedabad (1894),
Calcutta(1908) and Madras(1937). It is interesting to note that stock exchanges were first set up
in major centers of trade and commerce.

Until the early 1990s, the Indian secondary market comprised regional stock exchanges with
BSE heading the list. After the reforms of 1991, the Indian secondary market acquired a three
tier form. This consists of:

• Regional Stock Exchanges

• National Stock Exchange (NSE)

• Over the Counter Exchange of India (OTCEI)

The Role of SEBI:

The Securities and Exchange Board of India (SEBI) regulates the Indian securities market.
SEBI's main objectives are to:

 Protect the interests of investors

 Ensure fair and transparent dealings in securities
 Regulate the stock exchange and securities market to ensure their orderly function
 Prevent trading malpractices like price rigging, insider trading, etc.
 Promote fair dealings in the market
 SEBI regulates various players in the securities market, including: Stockbrokers,
Merchant bankers, Other intermediaries.

SEBI also:

 Monitors and regulates the stock market

 Protects the interests of the investors by enforcing certain rules and regulations
 Aims at developing the capital markets by enforcing various rules and regulations

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  Has the authority to check the account books of stock exchanges
 Audits the books of market intermediaries such as companies, banks, and more
 Requires mutual fund managers to have SEBI approval for their asset management
companies (AMC)
 Requires the trustees of the AMC to make sure that mutual funds are operating in
accordance with the rules

Various Stock Exchanges In India - BSE, NSE and OTCEI

1. Bombay Stock Exchange BSE

BSE is the leading and the oldest stock exchange in India as well as in Asia. It was established in
1887 with the formation of "The Native Share and Stock Brokers' Association". BSE is a very
active stock exchange with highest number of listed securities in India. Nearly 70% to 80% of all
transactions in the India are done alone in BSE. Companies traded on BSE were 3,049 by March,
2006. BSE is now a national stock exchange as the BSE has started allowing its members to set-
up computer terminals outside the city of Mumbai (former Bombay). It is the only stock
exchange in India which is given permanent recognition by the government. At present, (Since
1980) BSE is located in the "Phiroze Jeejeebhoy Towers" (28 storey building) located at Dalal
Street, Fort, Mumbai. Pin code - 400021.

2. National Stock Exchange NSE

Formation of National Stock Exchange of India Limited (NSE) in 1992 is one important
development in the Indian capital market. The need was felt by the industry and investing
community since 1991. The NSE is slowly becoming the leading stock exchange in terms of
technology, systems and practices in due course of time. NSE is the largest and most modern
stock exchange in India. In addition, it is the third largest exchange in the world next to two
exchanges operating in the USA.

3. Over The Counter Exchange of India OTCEI

The OTCEI was incorporated in October, 1990 as a Company under the Companies Act 1956. It
became fully operational in 1992 with opening of a counter at Mumbai. It is recognised by the
Government of India as a recognised stock exchange under the Securities Control and Regulation

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Act 1956. It was promoted jointly by the financial institutions like UTI, ICICI, IDBI, LIC, GIC,
SBI, IFCI, etc.

Introduction to Foreign Institutional Investors (FII)

Foreign Institutional Investors is an institutional, individual or group entity seeking to invest in

the economy of a country other than where the entity is headquartered. FIIs are important to
emerging economies because they bring funds and capital to businesses in developing countries.

Understanding Foreign Institutional Investors

 These investors usually include hedge funds, mutual funds, insurance companies and
investment banks among others. FIIs generally hold equity positions in foreign financial
markets. Due to this, the companies invested in by FIIs generally have improved capital
structures due to healthy inflow of funds. Thus, FIIs facilitate financial innovation and
growth in capital markets.
 The entry of an FII can cause a drastic swing in domestic financial markets. It increases
demand for local currency and directs inflation. Therefore, there are restrictions put by
the managing authority of a country on how much stake FIIs can hold in the domestic
company. This ensures that the FII’s influence on the company is limited, so as to avoid
exploitation.
Factors to Consider

 Foreign Direct Investments (FDI) are a part of the investment made by Foreign
Institutional Investors. However, not every FII will make an FDI in the country it is
investing in.
 FIIs directly impact the stock/securities market of the country, its exchange rate and
inflation.
 FIIs can invest in listed, unlisted, and to-be-listed companies on the stock markets, in
both the primary and secondary markets.
 FDIs are more intentional, while FIIs are more concerned with transfer of funds and
looking for capital gains in a prospective company.
 In India, FIIs tend to invest via Portfolio Investment Scheme (PIS) after registering with
Securities and Exchange Board of India (SEBI).
 Foreign Institutional Investors choose to invest in developing countries because they
provide greater growth potential, due to the emerging economies.
 Sometimes, FIIs invest in the securities for a short period of time. This is helpful for
liquidity in the market, but they also cause instability in flow of money.