Chapter 07

Stock Exchanges in
India

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 CONCEPT AND MEANING OF STOCK EXCHANGE
• Stock exchange is an organised marketplace, either corporation or mutual
organisation, where members of the organisation gather to trade company
stocks or other securities.
• The members may act either as agents for their customers, or as
principals for their own accounts.
• It is a place where securities are featured by the centralisation of supply
and demand for the transaction of orders by member brokers for
institutional and individual investors.
• It is established to facilitate the buying and selling of stocks.
• Stock exchanges facilitate the issue and redemption of securities and
other financial instruments, including the payment of income and
dividends.
• Trading is linked to such a physical place because modern markets are
computerised.
• Trading on an exchange is only by members and stockbrokers do have a
seat on the exchange.
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 LIST OF STOCK EXCHANGES IN INDIA

􀁺 Bombay Stock Exchange 􀁻 Madhya Pradesh Stock Exchange

􀁺 Regional Stock Exchanges 􀁻 Madras Stock Exchange
􀁺 National Stock Exchange 􀁻 Magadh Stock Exchange
􀁻 Ahmedabad Stock Exchange 􀁻 Mangalore Stock Exchange
􀁻 Bangalore Stock Exchange 􀁻 Meerut Stock Exchange
􀁻 Bhubaneshwar Stock 􀁻 OTC Exchange Of India
Exchange 􀁻 Pune Stock Exchange
􀁻 Calcutta Stock Exchange 􀁻 Saurashtra Kutch Stock Exchange
􀁻 Cochin Stock Exchange 􀁻 Uttar Pradesh Stock Exchange
􀁻 Coimbatore Stock Exchange 􀁻 Vadodara Stock Exchange
􀁻 Delhi Stock Exchange
􀁻 Guwahati Stock Exchange
􀁻 Hyderabad Stock Exchange
􀁻 Jaipur Stock Exchange
􀁻 Ludhiana Stock Exchange

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 TYPES OF FINANCIAL MARKETS

The financial markets can be broadly divided into money market and
capital market:
Money Market
• Money market is a market for debt securities that pay off in the short
term usually less than one year.
• Money market encompasses the trading and issuance of short-term
non-equity debt instruments, including treasury bills, commercial
papers, bankers’ acceptance, certificates of deposits, and so on.
Capital Market
• Capital market is a market for long-term debt and equity shares.
• In Capital market the capital funds comprising of both equity and debt
are issued and traded.
• Capital market can be further divided into primary and secondary
markets.

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Secondary Market
• Secondary market refers to a market where securities are traded after
being initially offered to the public in the primary market, and/or listed on
the stock exchange.
• Secondary market comprises of equity markets and the debt markets.
• Secondary market provides an efficient platform for trading of his
securities.
Difference between Primary Market and Secondary Market
• In the primary market, securities are offered to public for subscription,
for the purpose of raising capital or fund.
• Whereas, the secondary market is an equity-trading avenue in which
the already existing/pre-issued securities are traded among investors.
• The secondary market could be either auction or dealer market. While
stock exchange is the part of an auction market, over-the counter (OTC)
is a part of the dealer market.

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 SEBI AND ITS ROLE IN THE SECONDARY MARKET

Security Exchange Board of India (SEBI)

• The SEBI is the regulatory authority established under Section 3 of

SEBI Act, 1992, to protect the interests of the investors in securities and
to promote the development of, and to regulate, the securities market
and for matters connected, therewith, and incidental, thereto.

• Role of SEBI in Regulating Trading in the Secondary Market

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 The following departments of SEBI take care of the
activities in the secondary market:

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 PRODUCTS AVAILABLE IN THE SECONDARY MARKET

Following are the main financial products/instruments dealt in the

secondary market:
Equity Shares
• An equity share commonly referred to as an ordinary share, also
represents the form of fractional ownership in which a shareholder,
as a fractional owner, undertakes the maximum entrepreneurial risk
associated with a business venture.
• The holders of such shares are members of the company and have
voting rights.
• A company may issue such shares with differential rights as to
voting, payment of dividend, and so on.
• The various kinds of equity shares are as follows:
• Rights Issue/Rights Shares: The issue of new securities to the
existing shareholders at a ratio to those securities already held.
• Bonus Shares: The shares issued by the companies to their
shareholders, free of cost, by capitalisation of accumulated reserves
from the profits earned in the earlier years.
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 Preferred Stock/Preference Shares
The owners of these kinds of shares are entitled to a fixed dividend or
a dividend calculated at a fixed rate to be paid regularly before a
dividend can be paid in respect of an equity share.
Preference shares enjoy priority over the equity shareholders in
payment of a surplus. But in the event of liquidation, their claims
rank below the claims of the company’s creditors, bondholders, or
debenture holders.
• Cumulative Preference Shares: A type of preference shares on
which dividend accumulates, if remains unpaid. All arrears of
preference dividend have to be paid out before paying dividend on
the equity shares.
• Cumulative Convertible Preference Shares: A type of preference
shares where the dividend payable on the same accumulates, if not
paid. Aft er a specified date, these shares will be converted as the
equity capital of the company.
• Participating Preference Share: The right of certain preference
shareholders to participate in profits after a specified fixed dividend
that was contracted for is paid. Participation right is linked with the
quantum of dividend paid on the equity shares, over and above a
particular specified level.

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Security Receipts
• Security receipt means a receipt or other security, issued by a
securitisation or a reconstruction company to any qualified
institutional buyer pursuant to a scheme, evidencing the purchase or
acquisition by the holder thereof, of an undivided right, title, or
interest in the financial asset involved in securitisation.
Government Securities (G-Secs):
• These are sovereign (credit risk-free) coupon-bearing instruments,
which are issued by the Reserve Bank of India (RBI) on behalf of
Government of India, in lieu of the Central government’s market-
borrowing programme.
• These securities have a fixed coupon that is paid on specifi c dates
on half-yearly basis.
• These securities are available in a wide range of maturity dates,
from short dated (less than one year) to long dated (up to 20 years).

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DEBENTURES
Bonds issued by a company, bearing a fixed rate of interest, usually payable
half-yearly on specific dates, and principal amount repayable on a particular
date on redemption of the debentures. Debentures are normally
secured/charged against the asset of the company in favour of a debenture
holder.
Bond:
• A negotiable certificate evidencing indebtedness. It is normally unsecured. A
debt security is generally issued by a company, a municipality, or a
government agency.
• A bond investor lends money to the issuer and, in exchange, the issuer
promises to repay the loan amount on a specified maturity date.
Zero Coupon Bond:
• Bond issued at a discount and repaid at a face value. No periodic interest is
paid.
• The difference between the issue price and redemption price represents the
return to the holder.
• The buyer of these bonds receives only one payment, at the maturity of the
bond.
Convertible Bond:
• A bond giving the investor the option to convert the bond into equity at a
fixed conversion price.

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COMMERCIAL PAPER

A short-term promise to repay a fixed amount that is placed on the

market, either directly or through a specialised intermediary.

• It is usually issued by companies with a high credit, standing in the

form of a promissory note, redeemable at par to the holder on
maturity and, therefore, does not require any guarantee.

• Commercial paper is a money market instrument issued normally for

tenure of 90 days.

Treasury Bills:

• Short-term (up to 91 days) bearer discount security issued by the

government as a means of financing its cash requirements.

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 REGULATORY REQUIREMENTS SPECIFIED BY SEBI
FOR CORPORATE DEBT SECURITIES
• Compliance with the disclosure requirements under Chapter VI of the
SEBI (Disclosure and Investor Protection) Guidelines, 2000, and
listing agreements with the exchanges and provisions of the
Companies Act, 1956.
• Such disclosures may be made through the web site of the stock
exchanges where the debt securities are sought to be listed, if the
privately placed debt securities are issued in the standard
denomination of Rs 10 lakh.
• The company shall sign a separate listing agreement with the
exchange in respect of debt securities.
• The debt securities shall carry a credit rating from a credit rating
agency registered with SEBI.
• The company shall appoint a debenture trustee, who is registered
with SEBI, in respect of the issue of the debt securities.
• The debt securities shall be issued and traded in demat form.
• All trades with the exception of spot transactions, in a listed debt
security, shall be executed only on the trading platform of a stock
exchange.
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 BROKER AND SUB-BROKER IN THE SECONDARY
MARKET

Broker

• A broker is a member of a recognised stock exchange, who is

permitted to do trades on the screen-based trading system of
different stock exchanges. He is enrolled as a member with the
concerned exchange and is registered with SEBI.

Sub-broker

• A sub-broker is a person who is registered with SEBI as such and is

affiliated to a member of a recognised stock exchange. You can
contact a broker or a sub-broker registered with SEBI for carrying
out your transactions pertaining to the capital market.

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 SEBI RISK MANAGEMENT
SYSTEM
1. VAR-based margining system.
2. Specifi cation of mark-to-market margins
3. Specifi cation of intra-day trading limits and gross exposure limits
4. Real-time monitoring of the intra-day trading limits and gross
exposure limits by the stock exchanges
5. Specifi cation of time limits for payment of margins
6. Collection of margins on T+1 basis
7. Index-based market-wide circuit breakers
8. Automatic de-activation of trading terminals, in case of breach of
exposure limits
9. VAR-based margining system has been put in place, based on the
categorisation of stocks, which, in turn, based on the liquidity of
stocks, depending on its impact on cost and volatility. It addresses
99 per cent of the risks in the market.
10. Additional margins have also been specifi ed to address the balance
1 per cent cases.
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INVESTOR PROTECTION FUND (IPF)/CUSTOMER
PROTECTION FUND (CPF) AT STOCK EXCHANGES

• Investor Protection Fund (IPF) is the fund set up by the stock

exchanges, to meet the legitimate investment claims of the clients,
of the defaulting members who are not of speculative nature.

• SEBI has prescribed guidelines for the utilisation of IPF at the stock
exchanges.

• The stock exchanges have been permitted to fix suitable

compensation limits, in consultation with the IPF/CPF Trust.

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Acts Governing Securities Transactions in India

In India, two Acts mainly govern securities transactions at present.

They are as follows:
1. The Securities Contracts (Regulation) Act, 1956 and
2. The Securities & Exchange Board of India Act, 1992.
The other relevant laws, which affect the capital market are:
1. Th e Depositories Act, 1996
2. Th e Foreign Exchange Regulations Act, 1973
3. Arbitration and Conciliation Act, 1996
4. Companies Act, 1956
5. Debt Recovery Act (Bank and Financial Institutions Recovery of
Dues Act, 1993)
6. Banking Regulation Act
7. Benami Prohibition Act
8. Indian Penal Code
9. Indian Evidence Act, 1872, and
10. Indian Telegraph Act, 1885.

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FOREIGN INSTITUTIONAL INVESTORS (FIIS)
Foreign Institutional Investors (FIIs) including institutions such as
pension funds, mutual funds, investment trusts, asset management, or
their power of attorney holders (providing discretionary and non-
discretionary portfolio management services), are invited to invest in all
the securities traded on the primary and secondary markets, including
the equity and other securities/instruments of companies, which are
listed/to be listed on the stock exchanges in India—including the OTC
Exchange of India.
These would include shares, debentures, warrants, and the schemes
floated by domestic mutual funds. To be eligible to do so, the FIIs would
be required to obtain registration with Securities and Exchange Board of
India (SEBI).
FIIs are also required to file with SEBI and another application
addressed to RBI, for seeking various permissions under FERA.

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FUNCTIONS OF SECURITY EXCHANGE BOARD OF
INDIA
• Subject to the provisions of this Act, it shall be the duty of the Board
to protect the interests of the investors in securities and to promote
the development of, and to regulate, the securities market, by such
measures as it thinks fit;
• Regulating the business in stock exchanges and any other
securities markets;
• Registering and regulating the working of stockbrokers, sub-brokers,
share-transfer agents, bankers to an issue, trustees of trust deeds,
registrars to an issue, merchant bankers, underwriters, portfolio
managers, investment advisors, and such other intermediaries who
may be associated with securities markets, in any manner;
• Registering and regulating the working of the depositories,
participants, custodians of securities, FIIs, credit-rating agencies,
and such other intermediaries as the Board may, by notification,
specify in this behalf;

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• Registering and regulating the working of venture capital funds and
collective investment schemes, including mutual funds;
• Promoting and regulating self-regulatory organisations;
• 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 takeover of
companies;
• Can call for any information from, undertaking inspection,
conducting enquiries and audits of the stock exchanges, mutual
funds, other persons associated with the securities market,
intermediaries, and self-regulatory organisations in the securities
market;
• Can call for any information and any record from any bank or any
other authority or board or corporation, established or constituted
by, or under any Central, State, or provincial act, in respect of any
transaction in securities, which is under investigation or enquiry by
the Board;

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POWERS OF SECURITY EXCHANGE
BOARD OF INDIA

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GROWTH OF STOCK MARKET IN INDIA
• The Indian stock market has emerged as one of the worst performers globally in
the first three months this calendar year, with concerns of a possible slowdown in
the US economy and a surge in commodity prices, impacting sentiments of
emerging and developed equity markets, a report says.
• According to a monthly review by global index provider Standard and Poor, or S&P,
the world’s emerging and developed equity markets were hit hard during the first
quarter of 2008, losing 10.56 per cent and 8.95 per cent, respectively, during the
period. “Near-record commodity prices, 10-year US treasury rates approaching
their lowest level, a struggling dollar and the potential global impact of a perceived
US recession all fuelled market volatility and uncertainty during the first quarter.
• Among the emerging world equity markets, 15 of the 26 countries lost ground
during the January–March quarter this year, with India, China, and Turkey
emerging as the worst performers.
• During the first three months in 2008, Indian equity market lost 28.55 per cent,
while China and Turkey witnessed a fall of 24.65 per cent and 36.62 per cent,
respectively.

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