Stock Exchanges

Organization and functions of Stock

Exchanges
 Stock exchanges provide an organised
marketplace for the investors to buy and sell
securities freely. The market offers perfectly
competitive conditions where a large number
of sellers and buyers participate.
 Meaning
 A specialized marketplace that facilitates the
exchange of securities that already exist, is
known as stock exchange or stock market.
 It is also called the Secondary Market for
securities.
 Definition
 According to Hastings, “Stock exchange or
securities market comprises all the places
where buyers and sellers of stocks and bonds
or their representatives undertake transactions
involving the sale of securities”.
 According to Section 2(3) of the Securities
Contract Regulations Act 1956, “the stock
exchange has been defined as any body of
individuals whether incorporated or not,
constituted for the purpose of assisting,
regulating or controlling the business of
buying, selling or dealing in securities”.
 Functions of Stock Exchanges
1. Ideal meeting place
2. Mobilizing of savings
3. Providing safety to investors
4. Ready market ( broad-based market, providing
liquidity, marketability and price uniformity for
securities)
5. Liquidity (frequency of sale, narrow spread
between bids and offers, prompt execution of
orders, minimum price changes between
transactions as they occur)
6. Capital formation
7. Speculative trading (accelerated growth of
secondary market)
8. Sound price setting
9. Economic barometer
10. Dissemination of market data/information
11. Investor education
 Listing requirements
 Listing of securities means that the securities are
admitted for trading on a recognized stock exchange.
It is the inclusion of the shares of a company on the
official list of the stock exchange for the purpose of
facilitating trading in such shares. Listing is very
basis of stock exchange operations.
 Listing is mandatory for a company which wants to
raise capital by public issue through prospectus.
 Particulars to be furnished
 A public company desirous of getting its securities
listed on a recognised stock exchange has to apply for
that purpose to the stock exchange and forward along
with its application the following documents and
particulars.
 1. copies of memorandum and articles of association.
 2. copies of all prospectus or statement in lieu of
prospectus issued by the company at any time.
 3. copies of offers for sale and circulars or ads
offering any security for sale during the last 5 years
 4.copies of B/S and audited accounts for the last 5 years.
 5.statement showing dividends and cash bonuses, if any paid
during the last 10 years.
 6.certified copies of agreements entered into between
company and all other parties such as underwriters, promoters,
brokers etc
 7.Statement containing all material contracts, agreements
entered into by the company along with brief description
 8. statement of brief history of the company including details
of reconstruction, amalgamations etc
 9. particulars of shares and debentures issued for consideration
other than cash.
 10.particulars of shares forfeited.
 11.list of highest 10 holders of each class of
security
 12. particulars of shares or debentures for
which permission to deal is applied for.
 Listing agreement will be executed with the
company concerned on the satisfactory
fulfillment of the above requirements.
 Weaknesses of Stock Exchange
 Although there is rapid development in the stock
markets in India, there are certain lacunas which
affect the smooth functioning of the market and put
the small investors under a great disadvantage.
 Following are some of the important weaknesses of
Indian stock exchanges.
 1. Raging speculation
 2. Insider trading menace
 3. Neglect of small investors
 4. Bad trading practice
 5. Lack of integration among various stock
exchanges
 6. Lack of interface between primary and
secondary market
 7. Inefficient banking system
 8. Inadequacy of investor services
 9. Inadequate infrastructure
 Regulation of stock exchanges
 All stock exchanges were subject to self-
regulation till 1956. Now Indian stock
exchanges are subject to three-tier regulation.
 1. Central government through its Ministry of
Finance (stock exchange division)
 2. SEBI
 3. Self Regulation
 1. The stock exchange division of Ministry of
Finance has its Head Office at Delhi and Branch
Offices at Bombay and Calcutta. The important
functions of the Division are as follows.
 a. Providing linkage between government and stock
exchanges
 b. Monitoring the operations of the stock
exchanges.
 c. Providing advice to overcome the untoward
developments and crises.
 d. Ensuring the compliance of listing provisions
 e. Ensuring smooth functioning of the stock
exchanges.
 f. Issuing licenses to brokers and dealers in
securities.
 2. SEBI
 The Securities and Exchange Board of India (SEBI)
constitutes the second level of authority which
regulates the stock exchanges in order to protect the
interest of the investors and to promote the
development of securities market in India. A
chairman heads the SEBI along with other top
management members. The SEBI issues from time to
time various rules, regulations and guidelines. A few
important among them are as follows
 a. SEBI (Portfolio Managers) Rules and Regulations,
1992
 b. SEBI (Stock Brokers and Sub-brokers) Rules and
Regulations, 1992
 c. SEBI (Insider Trading) Regulations, 1992
 d. SEBI (Merchant Bankers) Rules and Regulations,
1992
 e. SEBI (Mutual Fund) Regulations,1993
 f. SEBI (Underwriters) Rules and Regulations, 1992
 g. SEBI (Registrars to Issue and Share
Transfer Agents) Rules and Regulations,1993
 h. SEBI (Debenture Trustee) Rules and
Regulations,1993
 i. SEBI (Bankers to an Issue) Rules and
Regulations,1993
 Apart from the above, SEBI has also issued
guidelines regarding the following
 1. Free pricing of shares
 2. Disclosure and Investors’ protection
 3. Registration of Foreign Institutional
Investors
 4. Allotment of shares
 5. New financial instruments
 6. Credit rating of fixed income bearing
securities
 3.The Stock Exchanges
 The third level of authority constitutes the self-
regulation by the stock exchanges themselves.
Stock exchanges will have their own separate
rules, byelaws and regulations that are
exercised through their Governing Board.
Each stock exchange will have various
departments to look after the entire working of
the exchange.
 Operations of stock markets
 The operations of stock market are carried out
through various departments set up for specific
functions. The major departments of a typical stock
exchange in India are as follows.
a. Listing Department
b. Operations Department.
c. Computer and EDP Department
d. Inspection and Audit Department
e. Monitoring Department
f. Investor Service Department
 a. Listing Department
 Its main function is to list the securities of
companies for trading purposes. It examines
the prospectus and other documents submitted
by the company applying for listing.
 b. Operations Department
 The basic objective of this department is to
keep watch on the daily trading and other
operations of the stock exchange.
 c. Computer and EDP Department
 This Department collects and compiles various
data relating to companies, quotations of scrips and
member-wise and scrip-wise turnover. Financial
results of the companies like their net profit, dividend
declared, bonus shares etc are all recorded in the
computer and such information is made available to
the members and investors to help in decision
making.
 d. Inspection and Audit Department
 This department is concerned with carrying
out routine audit of the stock exchange for
checking the accuracy and validity of the
accounting records. The department ensures
that all the records and registers are
maintained by the stock exchange as per the
guidelines of SEBI and Government.
 e. Monitoring Department
 This department aims at supervising the activities of the
members in the trading ring. It also watches the price
movements and the trading volume of the members. The dept
initiates necessary measures to check excessive trading and
speculative transactions by imposing ad hoc margins,
suspending trading and enquiring into any specific
developments.
 f. Investor service Department
 The basic objective of this dept is to safeguard the interest
of the investors by rendering quick services to them nad by
attending to their complaints and grievances.