Stock Markets in India

During the last few years India has emerged as one of the world fastest growing
economies. India stock markets grew not only in size but also in terms of product
offerings. The increasing interest of foreign players in the domestic broking
industry is a testimony to the stock market growth. The stock market in India has
also received a thrust from rise in business transactions over the years, sharp drop
in brokerage fees, and transaction costs, launch of a slew of new products, and a
robust regulatory environment. The broking industry in India seems to be coming
of age as more broking houses are getting listed and stock exchanges are becoming
de-metalized and corporatized. The equity broking firms have also diversified to
other businesses like investment banking and wealth management, which was once
the turf of foreign players of international repute.

Stock market is a trading platform which provides an opportunity to buyers and

sellers of securities to do transactions. As of now there are 23 recognized stock
exchanges in India and 24th is likely to get functional soon. However the majority
of transactions in securities happen only on the National Stock Exchange. The
Bombay stock Exchange is the second largest contributor in the overall pie of
total transactions. However it's contribution is restricted to 5 to 7 percent only.
There are three types of instruments that are traded on National Stock Exchange
namely equities, derivatives and debt instruments. This article attempts to explain
the procedure involved in trading and settlement of equities.

Before understanding the procedure of trading and settlement, it is important to

have an overview of changes that have taken place in Indian securities market in
last ten years. Three most noticeable changes which have taken place are 1)
Dematerialization , 2)Introduction of screen based trading and 3) Shortening of
trading and settlement cycles. The Depositories Act was passed by the parliament
in 1995 and this paved the way for conversion of physical securities into
electronic. With establishment of National Stock Exchange, there was a significant
change in the level of technology used for the operation of stock market. It led to
introduction of Screen Based Trading thereby removing the earlier system of open
outcry where prices of securities were quoted by symbols. Now all the transactions
happen on computer which is spread across country and connected to National
Stock Exchange through VSAT. These two factors combined together helped in
reducing the trading and settlement cycle in Indian securities market which got
reduced from as long as22 days to 2 days currently.

Presently in India, stock exchanges follow T+2 days settlement cycle. Under this
system, trading happens on every business day, excluding Saturday, Sunday and
exchange notified holidays. The trading schedule is between 10:00 a.m. in the
morning to 3:30 p.m. in the evening. During this period , shares of the companies
listed on a particular stock exchange can be bought and sold. The SEBI has made it
mandatory that only brokers and sub-brokers registered with it can buy and
sell shares in the stock exchange. A person desirous of buying or selling shares on
the stock market needs to get himself registered with one of these brokers / sub-
brokers. There is a provision for signing of broker/sub-broker – client agreement
form. Brokers/sub brokers ask their clients to deposit money with them known as
margin based on which brokers provide exposure to the clients in the stock market.

However signing of client-broker agreement is not sufficient. It is also essential for

a person to open a demat account through which securities are delivered and
received. This demat account can be opened with a depository participant which
again is a SEBI registered intermediary. Some of the leading depository in
the country are Stock Holding Corporation of India Ltd., ICICI Bank, HDFC Bank
etc. If an individual buys shares ,it is in the demat account that credit of shares are
received. Similarly when a person sells shares, he has to transfer shares to the
brokers account through his demat account. All the brokers/sub-brokers also
essentially have a demat account.

Shares can be bought and sold through a broker on telephone. Brokers identify
their clients by a unique code assigned to a client. After the transaction is done by
a client broker issues him contract note which provides details of transaction. Apart
from the purchase price of security, a client is also supposed to pay brokerage,
stamp duty and securities transaction ax. In case of sale transaction, these costs are
reduced from the sale proceeds and then

Reform-led growth of Indian stock markets

Over the years several measures — electronic trading system, dematerializing
securities, corporatizing and demutualizing exchanges, settlement through clearing
corporations, trading in derivatives — have been taken to expand the stock
markets. During the last one year, the Securities and Exchange Board of
India(SEBI) introduced some major policy initiatives; for instance, it made grading
of IPOs mandatory; it introduced mini contracts inequity indices and option
contracts with longer life tenure, and recently, it permitted short selling, and
securities lending and borrowing and trading in currency futures. SEBI has invited
proposals from various exchanges for setting up an exchange for small and
medium enterprises (SME). SEBI is the regulatory authority for stock markets in
India. The broking industry is poised for a quantum growth in the medium to long
term because the economy is moderately strong; equity culture is proliferating;
new products are hitting the markets; there is wider integration with global
markets, and more thrust on reforms. The Indian stock markets’ long existence, for
over almost one and- a-half centuries, has enabled the broking industry to not only
absorb and adopt new opportunities but also seamlessly improvise their systems,
which has paved the way for its growth and diversification.

Proliferation in equity culture

Due to the reforms mentioned before, and due to greater regulation in the capital
market, the proportion of shares and debentures in the total financial savings of the
household sector has increased. InFY08, savings in shares and debentures
accounted for almost10.5% of the total financial savings of households
as compared with just 5.1% in FY06. In FY08, the savings in shares and
debentures rose to over 1.6% of the GDP.
The household sector’s savings, which includes both physical and financial assets,
accounted for 23.8% of the GDP; out of this23.8%, financial assets had an 11.3%
share and physical assets had a 12.5% share. The financial assets comprise
currency, deposits, shares and debentures, pension funds, mutual funds, life
insurance funds et.
During FY01 to FY08, the per capita income in India doubled to Rs33,283 from Rs
16,688. The per capital income in real terms at constant prices (1999-00) was
higher by 45.5% at Rs 24,295 as compared with the per capita income of 1999-
00.According to a study by the National Council for Applied Economic Research
(NCAER), the number of households that fall under the medium and high income
bracket is set to go up steadily in the next two years, while the number of
households that fall in the poor income bracket is set to recede. In FY08,
household income levels for Mumbai and Delhi crossed the Rs 400,000-mark,
which is equal to twice the estimates for all-India GDP per capita, and roughly
equivalent to China’s 2007 per capita income levels. Moreover, the income
distribution has changed dramatically in certain cities. In Surat, for instance, the
medium income population more than doubled during 2004-05 and 2007-08 and
in Lucknow, Jaipur, and Nagpur, the growth in number of high income households
was the fastest.

Sensex goes on a free fall in 2008

During CY03-CY07 the Indian equity markets experienced impressive growth and
grew by leaps and bounds. The strong momentum in the equity market was in line
with the robust economic growth witnessed during the last few years. Foreign
inflows into the country swelled to more than Rs 2,301 billion in stock markets
during FY04- FY08, which was equal to almost 80%of the net cumulative FII
investments in India at the end of FY08,as India turned into one of the fastest
growing economies across the world, and India Inc reported robust performance
year after year. The phenomenal surge in FII investments and stock indices
reflected the future value and quick growth opportunities in India.
In FY08, the average market capitalization of companies listed on Bombay Stock
Exchange (BSE) was Rs 53.5 trillion, almost 9%more than the country’s GDP
during the same year. The market capitalization to GDP ratio rose from just 21.9%
in 2002-03 to over109.0% during 2007-08. The surge in activity and participation
at the Indian stock exchange reflects in the total turnover to GDP ratio shown in
the table below. The foreign investment in India grew more than 24 times during
FY03 to FY08. The sharp surge in market capitalization-to-GDP ratio and the
continuous boom in stock market were synchronous with the robust GDP growth
that the Indian economy witnessed. The number of companies listed on the stock
exchanges increased to 1,381 in FY08, up by around 68% as compared with FY03.
 DEMAT ACCOUNT

Demat refers to a dematerialised account.

Though the company is under obligation to offer the securities in both physical and
demat mode, you have the choice to receive the securities in either mode.

If you wish to have securities in demat mode, you need to indicate the depository
and also of the depository participant with whom you have depository account in
your application.

It is, however desirable that you hold securities in demat form as physical securities
carry the risk of being fake, forged or stolen.

Just as you have to open an account with a bank if you want to save your money,
make cheque payments etc, Nowadays, you need to open a demat account if you
want to buy or sell stocks.

So it is just like a bank account where actual money is replaced by shares. You have
to approach the DPs (remember, they are like bank branches), to open your demat
account. Let's say your portfolio of shares looks like this: 150 of Infosys, 50 of
Wipro, 200 of HLL and 100 of ACC. All these will show in your demat account.
So you don't have to possess any physical certificates showing that you own these
shares. They are all held electronically in your account. As you buy and sell the
shares, they are adjusted in your account. Just like a bank passbook or statement,
the DP will provide you with periodic statements of holdings and transactions.
The most important thing required to trade in share market is Demat account. Demat
or Dematerialized account is to store stocks in electronics form. It is just like opening
a bank account to store your money. Now nobody is interested to keep shares in
physical forms and going for electronic based filing of shares. This has changed the
style of operation in main Indian stock markets like BSE Sensex ( Bombay Stock
Exchange Sensitive Index) and Nifty (National Stock Exchange of India) and its
brokers.

How to Open a Demat Account

It is like opening a bank account. You have to approach a depository participants to

open an online trading or demat account. Most of the banks are DPs too.

Documents Required

You will have to submit few documents with the application form to open a demat
account. As per latest Govt of India rule PAN (Personal Account Number) card is
must for opening a demat account. These are the documents required to open a demat
account

1. Photo Copy of PAN Card (Mandatory)

2. Two Passport size photos

3. Address Proof – Ration Card/Passport/Driving License/Voter’s ID

Card/BSNL Telephone/LIC Policy

4. Latest Bank Statement and photocopy of Bank Passbook.

 BSE

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage,
now spanning three centuries in its 133 years of existence. What is now popularly
known as BSE was established as "The Native Share & Stock Brokers' Association"
in 1875.

BSE is the first stock exchange in the country which obtained permanent recognition
(in 1956) from the Government of India under the Securities Contracts (Regulation)
Act 1956. BSE's pivotal and pre-eminent role in the development of the Indian
capital market is widely recognized. It migrated from the open outcry system to an
online screen-based order driven trading system in 1995. Earlier an Association Of
Persons (AOP), BSE is now a corporatised and demutualised entity incorporated
under the provisions of the Companies Act, 1956, pursuant to the BSE
(Corporatisation and Demutualisation) Scheme, 2005 notified by the Securities and
Exchange Board of India (SEBI). With demutualisation, BSE has two of world's best
exchanges, Deutsche Börse and Singapore Exchange, as its strategic partners.

Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector
by providing it with an efficient access to resources. There is perhaps no major
corporate in India which has not sourced BSE's services in raising resources from
the capital market.

Today, BSE is the world's number 1 exchange in terms of the number of listed
companies and the world's 5th in transaction numbers. The market capitalization as
on December 31, 2007 stood at USD 1.79 trillion . An investor can choose from
more than 4,700 listed companies, which for easy reference, are classified into A, B,
S, T and Z groups.
The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic
stature , and is tracked worldwide. It is an index of 30 stocks representing 12 major
sectors. The SENSEX is constructed on a 'free-float' methodology, and is sensitive
to market sentiments and market realities. Apart from the SENSEX, BSE offers 21
indices, including 12 sectoral indices. BSE has entered into an index cooperation
agreement with Deutsche Börse. This agreement has made SENSEX and other BSE
indices available to investors in Europe and America. Moreover, Barclays Global
Investors (BGI), the global leader in ETFs through its iShares® brand, has created
the 'iShares® BSE SENSEX India Tracker' which tracks the SENSEX. The ETF
enables investors in Hong Kong to take an exposure to the Indian equity market.

The first Exchange Traded Fund (ETF) on SENSEX, called "SPIcE" is listed on
BSE. It brings to the investors a trading tool that can be easily used for the purposes
of investment, trading, hedging and arbitrage. SPIcE allows small investors to take
a long-term view of the market.

BSE provides an efficient and transparent market for trading in equity, debt
instruments and derivatives. It has a nation-wide reach with a presence in more than
359 cities and towns of India. BSE has always been at par with the international
standards. The systems and processes are designed to safeguard market integrity and
enhance transparency in operations. BSE is the first exchange in India and the second
in the world to obtain an ISO 9001:2000 certification. It is also the first exchange in
the country and second in the world to receive Information Security Management
System Standard BS 7799-2-2002 certification for its BSE On-line Trading System
(BOLT).
BSE continues to innovate. In recent times, it has become the first national level
stock exchange to launch its website in Gujarati and Hindi to reach out to a larger
number of investors. It has successfully launched a reporting platform for corporate
bonds in India christened the ICDM or Indian Corporate Debt Market and a unique
ticker-cum-screen aptly named 'BSE Broadcast' which enables information
dissemination to the common man on the street.

In 2006, BSE launched the Directors Database and ICERS (Indian Corporate
Electronic Reporting System) to facilitate information flow and increase
transparency in the Indian capital market. While the Directors Database provides a
single-point access to information on the boards of directors of listed companies, the
ICERS facilitates the corporate in sharing with BSE their corporate announcements.
 INTRODUCTION – NATIONAL STOCK EXCHANGE

The National stock Exchange (NSE), located in Bombay, is India’s first debt
market. It was set up in 1993 to encourage stock exchange reform through
system modernization and competition. It opened for trading in 1994. It was
recently accorded recognition as a stock exchange by the Department of
Company Affairs. The instruments traded are treasury bills, government
securities and bonds issued by public sector companies.

The Organization

The National Stock Exchange of India Limited has genesis in the report of the High
Powered Study Group on Establishment of New Stock Exchanges, which
recommended promotion of a National Stock Exchange by financial institutions
(FIs) to provide access to investors from all across the country on an equal footing.
Based on the recommendations, NSE was promoted by leading Financial Institutions
at the behest of the Government of India and was incorporated in November 1992
as a tax-paying company unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts (Regulation)
Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market
(WDM) segment in June 1994. The Capital Market (Equities) segment commenced
operations in November 1994 and operations in Derivatives segment commenced in
June 2000.
Our Group

NSCCL NCCL NSETECH

IISL NSE NSE.IT

DotExIntl. Ltd.
NSDL

Listing

NSE plays an important role in helping an Indian companies access equity capital,
by providing a liquid and well-regulated market. NSE has about 1319 companies
listed representing the length, breadth and diversity of the Indian economy which
includes from hi-tech to heavy industry, software, refinery, public sector units,
infrastructure, and financial services. Listing on NSE raises a company’s profile
among investors in India and abroad. Trade data is distributed worldwide through
various news-vending agencies. More importantly, each and every NSE listed
company is required to satisfy stringent financial, public distribution and
management requirements. High listing standards foster investor confidence and
also bring credibility into the markets.

NSE lists securities in its Capital Market (Equities) segment and its Wholesale Debt
Market segment

Introduction of SENSEX

SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-

Weighted" methodology of 30 component stocks representing large, well-
established and financially sound companies across key sectors. The base year of
SENSEX was taken as 1978-79. SENSEX today is widely reported in both domestic
and international markets through print as well as electronic media. It is scientifically
designed and is based on globally accepted construction and review methodology.
Since September 1, 2003, SENSEX is being calculated on a free-float market
capitalization methodology. The "free-float market capitalization-weighted"
methodology is a widely followed index construction methodology on which
majority of global equity indices are based; all major index providers like MSCI,
FTSE, STOXX, S&P and Dow Jones use the free-float methodology.

The growth of the equity market in India has been phenomenal in the present decade.
Right from early nineties, the stock market witnessed heightened activity in terms of
various bull and bear runs. In the late nineties, the Indian market witnessed a huge
frenzy in the 'TMT' sectors. More recently, real estate caught the fancy of the
investors. SENSEX has captured all these happenings in the most judicious manner.
One can identify the booms and busts of the Indian equity market through SENSEX.
As the oldest index in the country, it provides the time series data over a fairly long
period of time (from 1979 onwards). Small wonder, the SENSEX has become one
of the most prominent brands in the country.

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 every
15 seconds. The value of SENSEX is disseminated in real time.

Concept of FREE FLOAT

Free-float methodology refers to an index construction methodology that takes into

consideration only the free-float market capitalization of a company for the purpose
of index calculation and assigning weight to stocks in the index. Free-float market
capitalization takes into consideration only those shares issued by the company that
are readily available for trading in the market. It generally excludes promoters'
holding, government holding, strategic holding and other locked-in shares that will
not come to the market for trading in the normal course. In other words, the market
capitalization of each company in a free-float index is reduced to the extent of its
readily available shares in the market.

Definition of Free-float

Shareholding of investors that would not, in the normal course come into the open
market for trading are treated as 'Controlling/ Strategic Holdings' and hence not
included in free-float. Specifically, the following categories of holding are generally
excluded from the definition of Free-float:
  Shares held by founders/directors/ acquirers which has control element
 Shares held by persons/ bodies with "Controlling Interest"
 Shares held by Government as promoter/acquirer
 Holdings through the FDI Route
 Strategic stakes by private corporate bodies/ individuals
 Equity held by associate/group companies (cross-holdings)
 Equity held by Employee Welfare Trusts
 Locked-in shares and shares which would not be sold in the open market in
normal course.

Maintenance of SENSEX

One of the important aspects of maintaining continuity with the past is to update the
base year average. The base year value adjustment ensures that replacement of
stocks in Index, additional issue of capital and other corporate announcements like
'rights issue' etc. do not destroy the historical value of the index. The beauty of
maintenance lies in the fact that adjustments for corporate actions in the Index should
not per se affect the index values.

The BSE Index Cell does the day-to-day maintenance of the index within the broad
index policy framework set by the BSE Index Committee. The BSE Index
Cell ensures that SENSEX and all the other BSE indices maintain their benchmark
properties by striking a delicate balance between frequent replacements in index and
maintaining its historical continuity. The BSE Index Committee comprises of capital
market expert, fund managers, market participants and members of the BSE
Governing Board.
Function and purpose of stock market

The stock market is one of the most important sources for companies to raise
money. This allows businesses to be publicly traded, or raise additional capital for
expansion by selling shares of ownership of the company in a public market. The
liquidity that an exchange provides affords investors the ability to quickly and easily
sell securities. This is an attractive feature of investing in stocks, compared to other
less liquid investments such as real estate.

History has shown that the price of shares and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of social mood.
An economy where the stock market is on the rise is considered to be an up and
coming economy. In fact, the stock market is often considered the primary indicator
of a country's economic strength and development. Rising share prices, for instance,
tend to be associated with increased business investment and vice versa. Share prices
also affect the wealth of households and their consumption. Therefore, central banks
tend to keep an eye on the control and behavior of the stock market and, in general,
on the smooth operation of financial system functions. Financial stability is the
raison d'être of central banks.

Exchanges also act as the clearinghouse for each transaction, meaning that they
collect and deliver the shares, and guarantee payment to the seller of a security. This
eliminates the risk to an individual buyer or seller that the counterparty could default
on the transaction.

The smooth functioning of all these activities facilitates economic growth in that
lower costs and enterprise risks promote the production of goods and services as
well as employment. In this way the financial system contributes to increased
prosperity.