STOCK

EXCHANGE
Group A
Ritika Choubey
Vrinda Agarwal
Devyash Tripathi
Antara Rastogi
CONTENT
 Introduction
 Working of Stock exchange in Cash market
 Working of Stock exchange in Derivative market
 Regulation
 NSE bye-laws
 Objectives and Functions of Stock Exchange
 Case Study- Harshad Mehta Scam
 INTRODUCTION
 Stock exchange is an organized market where various securities i.e. shares,
debentures, futures and options contracts and bonds issued by companies and
government organizations are sold and purchased.

 The main object

 to assist exchange
 to regulate
 to control the buying and selling in securities.

Stock Exchange is a form of exchange which provides services for stock brokers and
traders to trade shares, debentures and other securities.
TRADING IN STOCK
EXCHANGE
THEN
1. The traditional stock exchange was a place to buy and sell company shares, through the services
of a stockbroker and dealers: the traders who did the actual buying, selling and negotiating on the
exchange floor.

2. A typical exchange floor trader works for a brokerage company that accepts clients' orders to buy
and sell stocks. The trader brings the order to a post on the floor of the exchange where a
particular stock is trading, then negotiates the share price and order size with another trader or a
specialist who maintains a book of all open orders in that stock.
NOW
 Most stock trading is done through desktop stations and online brokerages, bypassing the
traditional floor trading procedure completely.

 With computer programs, algorithmic trading has become a dominant mode of buying and
selling on the stock exchange. These programs use instantly available information about recent
trading volume and price direction in a stock to evaluate and execute trades automatically,
without human intervention. Algorithmic trading can be profitable. But without the judgment
and intuition of a trader who is present, it also can lead to very rapid, out-of-control price
spikes -- up or down.

 This can make stock trading extremely risky for meagerly capitalized investors.
TRADING IN CASH MARKET
 The transaction of Buying or Selling of shares is complete only when you have got the shares you
purchased, or received money for the shares you sold. This is called settlement in stock market.

 The stock exchanges have a complex mechanism in place to ensure that every trade is properly
matched, and shares are received or delivered properly. There are basically three tasks that are
performed in the process of buying and selling of securities. They are:
 Trading 
 Clearing 
 Settlement
 TRADING

Trading is placing an order and its execution.

 CLEARING

Clearing deals with the determination of obligations in terms of funds and securities.

 SETTLENMENT

Transaction of Buying or Selling of shares is complete only when you have got the shares you
purchased, or received money for the shares you sold.

Pay in day is the day when the brokers shall make payment or delivery of securities to the
exchange. 
Pay out day is the day when the exchange makes payment or delivery of securities to the
broker.
TRADING PROCESS
Within 24 hrs of the
trade execution, contract Pay-in of funds and
Investor/ Trader decided
note is issued to the securities before T+2
to trade
investor/ trader by days
broker

Places order with broker Trade confirmation slip

Pay- out of funds and
to buy/ sell the required issued to the investor/
securities on T+2 days
quantity of security trader by the broker

Order execution is
Best priced order
electronically
matches based on price-
communicated to the
time -priority
broker’s terminal
BLOCK DEALS AND BULK
DEALS
 A separate window is provided by the Exchange for executing block deals i.e. orders with a minimum quantity of
5,00,000 shares or minimum value of Rs. 5 crore whichever is lower.
 Usually block deal happens when two parties agree to buy or sell securities at an agreed price between themselves
and inform the stock exchange. The orders in a block deal are not shown to the people who trade from normal trade
window. 

Stock exchanges should disclose the information on block deals to the public on the same day after market hours.
This should contain information bits like name of the scrip, name of the client, quantity of shares, traded price and
so on.

 Bulkdeal

Bulk deal is a trade, where total quantity bought or sold is more than 0.5% of the number of equity shares of a listed
company. 
  If the bulk deal happens through a single trade, it should be notified to the exchange immediately upon the
execution of the order. If it happens through multiple trades, it should be notified to the exchange within one hour
from the closure of the trading.
REGULATORY
REQUIREMENT
 Regulatory requirements

According to SEBI, to facilitate block deals, stock exchanges provide a separate trading
window for only 35 minutes in the beginning of the trading hours. 

The transaction price of a share ranges from +1% to -1% of the previous days closing or the
current market price. These transactions take place on delivery basis. 

According to SEBI guidelines, shares transacted under the window of block deal should not be
reversed. Also, the stock exchanges are required to disclose the information on block deals.
DERIVATIVE MARKET
What are derivatives?
 Section 2(ac) of Securities Contract Regulation Act (SCRA) 1956 defines Derivative as:

a) “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;
b) “a contract which derives its value from the prices, or index of prices, of underlying
securities.”

 Derivatives, such as futures or options, are financial contracts which derive their value from a
spot price, which is called the “underlying”.
 For example, wheat farmers may wish to enter into a contract to sell their harvest at a future
date to eliminate the risk of a change in prices by that date. Such a transaction would take
place through a forward or futures market. This market is the “derivatives market”, and the
prices of this market would be driven by the spot market price of wheat which is the
“underlying”.

 In a forward contract, two parties agree to do a trade at some future date, at a stated price and
quantity. No money changes hands at the time the deal is signed.
 There are two types of derivatives instruments traded on NSE; namely Futures and Options.
 Benefits of trading in Derivatives
 Invest
 Price Risk Transfer
 Leverage.
TRADING IN DERIVATIVE
MARKET
 Futures/ Options contracts in both index as well as stocks can be bought and sold through the

trading members of NSE. Some of the trading members also provide the internet facility to
trade in the futures and options market. You are required to open an account with one of the
trading members and complete the related formalities which include signing of member-
constituent agreement, Know Your Client (KYC) form and risk disclosure document. The
trading member will allot to you an unique client identification number. To begin trading, you
must deposit cash and/or other collaterals with your trading member as may be stipulated by
him.
HOW ARE THE CONTRACTS SETTLED?

 All the Futures and Options contracts are settled in cash on a daily basis and at the expiry or
exercise of the respective contracts as the case may be.

Risks associated with trading in Derivatives

 Investors must understand that investment in derivatives has an element of risk and is
generally not an appropriate avenue for someone of limited resources/ limited investment and /
or trading experience and low risk tolerance. An investor should therefore carefully consider
whether such trading is suitable for him or her in the light of his or her financial condition.
 REGULATIONS UNDER SEBI AND
SECURITIES CONTRACT ACT, 1957
 Specifying rules and regulations

SEBI has the authority to specify rules and regulations to control the stock exchange. For
instance, the opening (9.15 am) and closing (3.30 pm) time of the market has been determined
by SEBI, and it has the right to change the timing if deemed necessary.

 Providing licenses to dealers and brokers

No dealer or broker can start distributing securities to investors without getting a prior approval
and license from SEBI. It also has the right to withhold or cancel the license of brokers and
dealers not adhering to the specified guidelines.
 Auditing the performance of various stock exchange

The regulating body is also responsible for auditing the performances of various stock
exchanges and bringing transparency in their functioning.

 Prohibiting unfair trade practices in the market

While SEBI has laid down specific guidelines that promote fair trade practices, many companies
occasionally undertake activities that are not healthy for the market. SEBI has the power to
prohibit such activities and take action against the parties involved in such a trade.
SECURITY MEASURES AND
OPERATIONAL FEATURES OF
STOCK EXCHANGE
1. Automated Trading System: Today our country has an advanced trading system which is a
fully automated screen based trading system. This system adopts the principle of an order driven
market as opposed to a quote driven system.
Best Price, Within Price, by time priority

2. Circuit Breakers: In case of a 10% movement of either index, there would be a 1-hour market
halt if the movement takes place before 1:00 p.m. In case the movement takes place at or after 1
p.m. but before 2:30 p.m. there will be a trading halt for 1/2 hour.

3. Investors grievances against member-brokers or the companies listed in the Exchange

STOCK EXCHANGE BYE-
LAWS
 The relevant authority prescribe bye-laws to regulate the functioning and operations of the
trading members of the Exchange.

1. Trading members-
 The relevant authority is empowered to admit trading members in accordance with the Bye
Laws, Rules and Regulations it may frame from time to time in accordance with the Securities
Contracts (Regulation) Act and Rules and the SEBI Act.
 Trading members may trade in relevant securities either on their own account as principals or
on behalf of their clients unless otherwise specified by the relevant authority and subject to
such conditions which the relevant authority may prescribe from time to time.
 Trading members shall extend full co-operation and furnish such information and explanation
as may be required for the purpose of any inspection or audit authorised by the relevant
authority or other authorised official of the Exchange into or in regard to any trades, dealings,
their settlement, accounting and/or other related matters.

 A trading member shall not deal with sub-brokers who are not registered with SEBI nor allow
operation of its trading terminal at any office other than its registered office, branch offices
and the offices of its registered sub-brokers.

 All dealings in securities on the Exchange shall be deemed made subject to the Bye Laws,
Rules and Regulations of the Exchange and this shall be a part of the terms and conditions of
all such deals and the deals shall be subject to the exercise by the relevant authority of the
powers with respect thereto vested in it by the Bye Laws, Rules and Regulations of the
Exchange.
2. Clearing and Settlement

 Clearing and Settlement of deals shall be effected by the parties concerned by adopting and
using such arrangements, systems, agencies or procedures as may be prescribed or specified
by the relevant authority from time to time. Without prejudice to the generality of the
foregoing, the relevant authority may prescribe or specify, for adoption and use by the trading
members, participants, and other specified constituents, such custodial and depository services
from time to time to facilitate smooth operation of the clearing and settlement arrangement or
system.

 The function of the clearing house may be performed by the Exchange or any agency
identified by the relevant authority for this purpose. The role of the clearing house shall be to
act as a facilitator for processing of deliveries and payments between trading
members/participants for trades effected by them on the Exchange.
3. Brokerage on Dealings 

 Trading members are entitled to charge brokerage upon the execution of all orders in respect
of purchase or sale of securities at rates not exceeding the official scale prescribed by the
relevant authority from time to time.

 Unless otherwise determined and restricted by the relevant authority, a trading member may, in
its discretion, charge such brokerage or commission for underwriting or placing or acting as a
broker or entering into any preliminary arrangement in respect of any floatation or new Issues
or Offer for Sale of any security as it may agree upon with the issuer or offerer or with the
principal underwriters or brokers engaged by such issuer or offerer, subject to limits stipulated
under the relevant statutory provisions as may be applicable from time to time.
 BASIC RULES OF THE STOCK
MARKET
Stock Market Basics Rule #1: Focus on Price

Stock Market Basics Rule #2: Stay Liquid

Stock Market Basics Rule #3: Practice Before You Jump In

Stock Market Basics Rule #4: Don't Try to Out-Think The

Markets
FUNCTIONS OF STOCK
EXCHANGE
 Formulation of By-Laws for regulations and control of contracts
 They provide the timings of Opening and Closing of the market
 Acts as a Clearing house
 Regulates and prohibits blank transfers
 Can alter the date of final settlement
 To determine and declare market rates
 Provide methods and procedures for settlement of claims
OBJECTIVES OF STOCK
MARKET
 To establish a nationwide trading facility
 To ensure an appropriate communication network
 To facilitate Electronic Payment System
 To enable shorter settlement cycles
 To meet the current international standards of the security market
 HARSHAD MEHTA SCAM
(CASE STUDY)
 Economic and Market position before the scam:

 licensing system
 No permission for Liberalization, Privatization, Globalization
 Government intervention in business
 There were no permission for FII’s & FDI’s
 There was not specific act passed for SEBI by the parliament
 Open-Outcry system
 No Circuit Breakers
BACKGROUND
 In the early eighties he quit his job and sought a job with stock
broker P. Ambalal affiliated to Bombay Stock Exchange. He
became a jobber on BSE for stock broker P.D. Shukla after
that.
 In 1981 he became a sub-broker for stock brokers J.L. Shah
and Nandalal Sheth. He took advantages of loopholes in
banking system.
 He triggered SENSEX in 1992 & made the scam by diverting
funds of Rs.4,000 crore.
 On April 23, 1992, journalist Sucheta Dalal exposed Mehta's
scam. She is columnist in Times Of India Sucheta
DalalSucheta Dalal.
INSTRUMENTS IN THIS
SCAM
1. Ready Forward Deal: A secured short-term (typically 15-day) loan from one bank to another. Bank
lends against government securities. A broker usually brings together two banks for which he is paid a
commission. The securities and payments were delivered through the broker in the settlement process.
In such settlement the banks may not know with whom they are dealing. The Process for RF is :

 Settlement Process
 Payment of cheque
 Dispensing of securities.

 2. Bank Receipts:  In a RF deal securities were not moved back and forth in actuality. The borrower, i.e.
the seller of securities, gave the buyer of the securities a Bank Receipt. Bank receipts serve three
functions:

 Confirms the sale of securities

 States that the securities are held by the seller in trust for the buyer
 Acts as a receipt for the received money by the selling bank. In this scam Bank of Karad & Metropolitan Co- operative
Bank had issued fake BR.
 The Modus Operendi
Mr Mehta had colluded with the banks to change the very nature of the government securities
market. Earlier, the role of a broker was only to bring the parties together whereas the banks
would undertake the transaction of securities and lending of money themselves. In the new
market established by Mr. Mehta, the broker was more of a market maker. This meant that both
the banks were dealing with the broker and neither knew who the counterparty was.
 Impact On others
Mehta had by then swindled the banks of a staggering Rs 4,000 crore. Bribery case on P. V.
Narsimha Rao. Stay on Liberalisation. Holding banks of fake BR had to face losses. BR was
removed by RBI. The chairman of the vijaya bank committed suicide over.
He was later charged with 72 criminal offenses, and more than 600 civil action suits were filed
against him. He was arrested and banished from the stock market. Mehta and his brothers were
arrested by the CBI on November 9, 1992 for allegedly misappropriating more than 27 lakh
shares of about 90 companies.
AFTERMATH
 He was put behind the bars in thane prison. He passed away on
31st December 2001 due to heart ailment. It was only after period
on 9 years after his death that the PSB’s and the IT dept. have
regained a remarkable and noteworthy amount of their hold after
the process of liquidating Mehta’s asests from the security scam.

 Finally, the committee found Harshad Mehta directly responsible

for embezzling worth Rs 1439 crores and causing a scam that led
to the loss of wealth to the tune of Rs 3542 crores.

 To this day, the Harshad Mehta scam brings up memories of

unprecedented boom and bust which was never witnessed earlier
by the Bombay Stock Exchange.
THANK YOU