CAPITAL MArket - Module 3 - Final

Indias Capital Market
investment options
III Sem IAM
Prepared by RB
Indian Economy and Capital Market at a glance
The India economy, the third largest economy in

the world in terms of purchasing power
Second fastest growing economies after China
with an average annual growth rate of more than
8 per cent in the last three years
As predicted by Goldman Sachs, the Global
Investment Bank, by 2035 India would be the
third largest economy of the world just after US
and China. It will grow to 60% of size of the US
economy
GDP at current market prices is around US $ 2
trillion
Indian Economy and Capital Market at a glance
Second fastest growing economies after

China with an average annual growth rate of
more than 5 per cent in the last three years
Indias growth rate has surpassed some of
the developed economies
GDP at current market prices is over US
$1.84 trillion
The total market capitalization of 58 major
stock markets across the globe reached
$60.68 trillion by end of September
India had first entered the trillion-dollar club in June

2007, but moved out in September 2008, amid the
global slowdown. It again got back into the elite league
in May 2009 and had largely remained there since then,
except for some brief periods including once in 2012
With India out of this league, only 13 stock markets
across the world now enjoy a trillion-dollar status, led by
the US (an estimated $20 trillion). Others in this club
are UK, Japan, China, Canada, Hong Kong, Germany,
France, Switzerland, Australia, South Korea, Nordic
region and Brazil.
GDP of India
$1.84 trillion
Indian Economy and Capital Market

at a glance
Foreign investment can be made in India
with specific prior approval in sectors other
than those prohibited
Foreign investment is now freely allowed in
all sectors, including the services sector
subject to specified sect oral ceilings except
in a few strategically sensitive areas

at a glance
General permission granted to the Indian
companies for issuing rights/bonus shares
to the existing nonresident shareholders
subject to adherence to sectoral cap
Indian companies may issue shares under
Employee Stock Option Scheme to its
employees who are resident outside

at a glance
An Indian company can raise foreign currency
resources overseas through ADRs or GDRs
Foreign Institutional Investors are allowed to invest
in India under the Foreign Institutional Investment
scheme
Portfolio investment limits in individual companies
can be raised by Board resolution keeping the
overall sect oral cap in view

at a glance
Investments can be made through foreign
venture capital funds
Private equity is allowed as an alternative
form of investment
Qualified Institutional investors are allowed
to invest in Indian Depository Receipts
floated by foreign companies. FIIs and NRIs
can also invest in IDRs after obtaining
permission from RBI

at a glance
FIIs can make investments in Corporate and
Government Bond markets within the limits
Household Investment in Shares and
debentures as percentage of financial
savings at 4.9 per cent
2010
2011
2012
SEBI Registered Market
Intermediaries
/ Institutions
Stock Exchanges
(Cash Market)
19
19
19
Stock Exchanges
(Derivatives Market)
Stock Exchanges
(Currency Derivatives)
Brokers
(Cash Segment)*
8804
9,235
9,195
Corporate Brokers
(Cash Segment)
4,197
4,563
4,672
Sub-brokers
(Cash Segment)
75,378
83,952
77,165
Foreign Institutional
Investors
1,713
1,722
1,765
Sub-accounts
5,378
5,686
6,322
Custodians
17
19
19
Depositories
Merchant Bankers
164
192
200
Depository Participants
758
805
854
Mutual Funds
47
51
49

at a Glance
Rise in index during the last eighteen months
over 100 per cent
Year on year return during the last year at 74
per cent
Daily volatility of the market 0.76 per cent to
1.29 per cent
39 mutual funds with over 500 schemes for
investment

at a Glance
Investors by foreign institutional investors at
over $50 billion
At current prices, it is around 15 per cent of
the total market capitalization
Only broad based entities established and
incorporated abroad are eligible to be
registered as Foreign Institutional investors
in India

at a Glance
FIIs can invest on behalf of their clients
through sub-accounts
For normal FIIs, limit for investment in equity
is at least 70 per cent while the rest could
be invested in debt up to a maximum limit of
30 per cent
The derivatives trading on the NSE

commenced with the S&P CNX Nifty Index
Futures on June 12, 2000. The trading in
index options commenced on June 4, 2001
and trading in options on individual
securities commenced on July 2, 2001.
Single stock futures were launched on
November 9, 2001.
The Index futures and options are available
on Indices - S&P CNX Nifty, CNX Nifty
Junior, CNX 100, CNX IT, Bank Nifty and
Nifty Midcap 50

at a Glance
FIIs could also be dedicated debt funds who can
invest up to 100 per cent in debt
FIIs can issue overseas derivative instruments like
Participatory Notes (PNs) to the entities registered
in the country of origin.
There are 86 venture capital funds and 54 foreign
venture capital investors
Most Foreign venture capital funds provide seed
capital to firms with enormous growth potential
Why invest in Indian capital

markets?
Business Week says that of 100 emerging
market firms which are rapidly globalising
21 are Indian firms
Economists project India to become the
third largest economy in the world by 2040
Indian capital market regulator has acquired
international credibility in the least possible
time

markets?
India has a disclosure based regime of
regulation
Disclosure and Investor Protection
guidelines available
Indias accounting standards are closer to
international standards
India has a well laid down legal framework

markets?
India has T+2 rolling settlement as opposed
to T+3 in NYSE.
In India the transactions are totally
electronic on a real time basis.
India has several protective safeguards for
the retail investor such as grading system of
public offering, retail quota at 25 per cent
etc.

markets?
SEBI has made corporate governance
guidelines mandatory for listed companies
Mutual funds are permitted to invest
overseas up to $3 billion
Margin trading is in vogue
Corporatisation and demutualization of
stock exchanges on card - foreign
participation in bourses permitted.

markets?
As an integral part of risk management
trading and exposure limits, var margins
and mark to market margins are in vogue
Clearing houses and corporations with
novation in place
Almost 100 per cent risk free electronic
settlement through depository system
SEBI has a surveillance and enforcement
system in place

markets?
India to become a regional hub for bond
trading once a free financial zone is set up
India to set up a world class National
Institute for Securities Markets with 7
business schools under its fold
Market Capitalization
Market Capitalization (Market Cap) is a
measurement of business value based on share
price and number of shares outstanding. It
generally represents the market's view of a
company's stock value and is a determining
factor in stock valuation.
For example, if a company has 1.5 million shares
outstanding at a share price of $ 25, its market
cap is $37.5 million (1.5 million x $25).
Companies can be categorized based upon the
size of their market capitalization
There are five basic groups:

mega-cap (market cap over $200B)
large-cap ($10B$200B)
mid-cap ($2B$10B)
small-cap ($300M$2B)
micro-cap ($50M-$300M).
Market cap is not always an accurate indication of
value because it does not account for debt and other
factors
Market Capitalization
Date
Range
Nov. 11, 2013
68.42 M
Nov. 8, 2013
68.42M
Nov. 7, 2013
66.94M
Nov. 6, 2013
67.53M
Nov. 5, 2013
68.72M
Nov. 4, 2013
69.02M
Nov. 1, 2013
68.81M
http://ycharts.com/companies/REDF/market_cap
Investment in Indian
Companies by FIIs/NRIs/PIOs
Foreign Institutional Investors (FIIs), NonResident Indians (NRIs), and Persons of
Indian Origin (PIOs) are allowed to invest in
the primary and secondary capital markets in
India through the portfolio investment
scheme (PIS). Under this scheme, FIIs/NRIs
can acquire shares/debentures of Indian
companies through the stock exchanges in
India.
The ceiling for overall investment for FIIs is

24 per cent of the paid up capital of the Indian
company and 10 per cent for NRIs/PIOs.
The ceiling of 24 per cent for FII investment can be
raised up to sectoral cap/statutory ceiling, subject
to the approval of the board and the general body
of the company passing a special resolution to that
effect. And the ceiling of 10 per cent for NRIs/PIOs
can be raised to 24 per cent subject to the
approval of the general body of the company
passing a resolution to that effect
http://www.capitalmarket.com/MarketWatch/market
cap.htm
http://www.rbi.org.in/advt/fiinri.html
OUTLINE
Structure of the Securities Market

Participants in the Securities Market
Primary Equity Market
Public Issue
Secondary Equity Market (Stock Market)
Trading and Settlement
Buying and Selling Shares
Stock Market Indices
SEBIs Regulation
Stock Market Abroad
Should Trading be Regulated
Government Securities Market
Corporate Debt Market
Money Market
Overview of Financial
Markets
Two types of financial markets

Money markets
Capital markets
Primary market
Secondary market
Structure of the Securities

Market
Securities
Market
Equity
Market
Government
Securities
Market
Debt
Market
Corporate
Debt
Market
Derivatives
Market
Money
Market
Options
Market
Futures
Market
The Capital Market (Equities) segment of

NSE facilitates trading in the following
instruments:
Shares
Equity Shares
Preference Shares
Debentures
Partly Convertible Debentures
Fully Convertible Debentures
Non Convertible Debentures
Warrants / Coupons / Secured Premium Notes/
other Hybrids
Bonds
Units of Mutual Funds
Players and Participants in

Financial Markets
The Individuals
The Firms/Corporates
Government
Regulators
Market Intermediaries
Financial Market
Money market
Commercial
banks
Short term
instruments
Credit
unions
Primary
Mkt Inst
Capital
market
Primary
market
Firms raise
capital
Secondary
market
Stock
exchange
debt
equity
Public
ng
i
t
r
po
p
u
S nts
age
Insurance
cos
Private
placement
Investors
trade
securities
issued in
primary
market
Participants In The Securities Market
Regulators
RBI, SEBI,
DEA(Department of Economic Affairs) , DCA
SEC, MCA ( Ministry of Corporate Affairs)
Stock Exchanges
Listed Securities
Depositories
Brokers
FIIs
Merchant Bankers or Investment Bankers
Mutual Funds
Custodians
Registrars
Underwriters
Bankers to an issue
Debenture trustees
Venture capital funds.
Credit rating agencies
Structure
StructureofofIndian
IndianFinancial
FinancialSystem:
Markets
GOI
GOI
Ministry of Finance
SEBI
Stock
Exchanges
Broker
Dealers
Clearing
Corporations
Merchant
Bankers
Dept of Co. Affairs
Registrar of
Companies
RBI
Depositories
Mutual
Funds
Depository
Participants
Registrar &
Transfer
Agents
Banks
Primary
Dealers
Companies
Financial System
Financial Institutions
Commercial Banks
Insurance Companies
Funds
Mutual Funds
Funds
Provident/Pension Funds
Deposits Non-banking Financial Companies
Loans
Shares
Securities
Funds
Suppliers of Funds
Individuals
Businesses
Governments
Funds
Private
Placement
Funds
Demanders of Funds
Individuals
Businesses
Securities
Governments
Funds
Securities
Financial Markets
Money Market
Capital Market
Securities
Primary vs. Secondary Security Sales

1. Primary
New issue Initial Public Offering (IPO)
Key factor: issuer receives the proceeds from
the sale
2. Secondary
Existing owner sells to another party

Issuing firm doesnt receive proceeds and is
not directly involved
50
Market infrastructure
Stock exchange
Clearing and settlement
Education and training
Investors protection
Rating agency
Instruments
Equities
Most popular investing instruments

Stocks and shares
Bonus issues
Rights issues
Bonds
Corporate
Government
PARTICIPANTS IN SECURITIES
MARKET
issuers of securities, investors in securities
and the intermediaries.
The issuers and investors are the
consumers of services rendered by the
intermediaries while the investors are
consumers (they subscribe for and trade in
securities) of securities issued by issuers.
Intermediaries
Brokerage houses
Stock brokers
Advisors
They educate and guide them in their
dealings and bring them together.
Regulatory Framework of Securities Market

Securities Contracts (Regulation) Act 1956: gives
the central government the regulatory jurisdiction over the
functioning of the stock exchanges
Companies Act 1956

SEBI Act, 1992
Depositories Act, 1996
STOCK EXCHANGE
Stock exchange means anybody of individuals,

whether incorporated or not, constituted for the
purpose of regulating or controlling the business of
buying, selling or dealing in securities.
These securities include:
Shares, stocks, bonds, debentures, Govt. securities
According to Securities Contract Act 1956, the stock
exchange can be defined as An association,
organization or body of assisting, regulating and
controlling business in buying , selling, and dealing in
securities.
Objectives
To regulate the business of trading on Stock
market and its practices
To create efficient securities market.
To ensure fair dealing and protection to
investors
To improve the working of stock exchange.
To control the undesirable speculative
practices
Role and Functions of a stock exchange
To bring companies and investors together so that Investors

can put risk capital into companies and companies can use
the capital.
Provide an orderly regulated market for securities.
Facilitate continuous, ready and open market for selling and
buying securities.
Promote saving and investment in the economy by attracting
funds from the investors.
Facilitate takeovers by means of acquiring majority of shares
traded on the stock market.
Act as clearing house of business information.
Extend liquidity to securities.
.
Facilitate marketability and transparency of

securities
Allow companies to float their shares on the
market.
Ensure wider ownership of securities.
Enable investors to evaluate the net worth of
their holding.
Provide capital to profitable sectors.
Ensure safety and fair dealings to all.
Bombay Stock Exchange (BSE)

BSE, stands for Bombay Stock Exchange.
The oldest market not only in the country, but
also in Asia.
In the early days, BSE was known as "The
Native Share & Stock Brokers Association." It
was established in the year 1875 and
became the first stock exchange in the
country to be recognised by the government
This is recognised worldwide and its index,
SENSEX, is also tracked worldwide
Indian Stock Market (Sensex)
Stocks in India had a positive performance during the

last month. India Stock Market (SENSEX), rallied 138
points or 0.67 percent during the last 30 days.
From 1979 until 2013, India Stock Market (SENSEX)
averaged 5888 Index points reaching an all time high of
21197 Index points in November of 2013 and a record
low of 113 Index points in December of 1979.
The SENSEX (BSE30) is a major stock market index
which tracks the performance of 30 major companies
listed on the Bombay Stock Exchange.
The companies are chosen based on the liquidity,
trading volume and industry representation. The
SENSEX, is a free-float market capitalization-weighted
index. The Index has a base value of 100 as of 1978-79
SENSEX is calculated using the Free Float

Market Capitalization method in which the level of
index at any particular point of time reflects the
market value of free floats of 30 shares
During the trading hours the current prices of index
scrips are used by the SENSEX mechanism to
calculate the value of SENSEX every 15 s
The closing value of the SENSEX value for the day
is computed on the basis of weighted average of
all trades in all 30 shares during last 30 minutes of
the trading session
Method Of Computation
CNX Nifty is computed using free float market capitalization

weighted method, wherein the level of the index reflects the total
market value of all the stocks in the index relative to a particular
base period. The method also takes into account constituent
changes in the index and importantly corporate actions such as
stock splits, rights, etc without affecting the index value.
Base Date and Value
The base period selected for CNX Nifty index is the close of prices
on November 3, 1995, which marks the completion of one year of
operations of NSE's Capital Market Segment. The base value of
the index has been set at 1000 and a base capital of Rs.2.06
trillion.
National Stock Exchange (NSE)

Was incorporated in November 1992 by IDBI and
other All India financial Institutions and became
recognised exchange from April 1993
Promoters:
IDBI
Industrial Finance Corporation of India
Industrial Credit and Investment Corporation of India
LIC
General Insurance Corporation of India
SBI Capital Markets Limited
Stock Holding Corporation of India Ltd
Market Segments of NSE
Wholesale debt market segment June 1994

Capital market segment November 1994
Derivatives (F & O) June 2000
Currency Derivatives Market August 2008
Interest Rate Derivative Market August 2009
NSE CNX Nifty

The CNX Nifty is a well diversified 50 stock
index accounting for 22 sectors of the
economy. It is used for a variety of purposes
such as benchmarking fund portfolios, index
based derivatives and index funds.
CNX Nifty is owned and managed by India
Index Services and Products Ltd. (IISL). IISL
is India's first specialised company focused
upon the index as a core product.
http://www.nseindia.com/products/content/equi
ties/indices/cnx_nifty.htm
The CNX Nifty Index represents about 70.28%

of the free float market capitalization of the
stocks listed on NSE as on September 30,
2013.
The total traded value for the last six months
ending September 2013 of all index
constituents is approximately 58.96% of of the
traded value of all stocks on the NSE.
Impact cost of the CNX Nifty for a portfolio size
of Rs.50 lakhs is 0.08% for the month
September 2013.
CNX Nifty is professionally maintained and is
ideal for derivatives trading.
Criteria for Selection of Constituent Stocks

Liquidity (Impact Cost)
For inclusion in the index, the security should have traded
at an average impact cost of 0.50% or less during the last
six months for 90% of the observations for a basket size of
Rs. 2 Crores.
Impact cost is cost of executing a transaction in a security in
proportion to the weightage of its free float market
capitalisation as against the index free float market
capitalisation at any point of time. This is the percentage
mark up suffered while buying / selling the desired quantity
of a security compared to its ideal price (best buy + best
sell) / 2
.
Buy quantity
Buy Price
Sell quantity
Sell Price
100
56
100
58
200
55
150
59
100
54
100
60
For buying 150 share

Ideal price= (best
buy + best sell) / 2
(
= ( 56 + 58) / 2 = 57
Actual buy price = (100 x 58 + 50 x 59)
= 58.33
Impact cost = [(58.33 57)/57] x 100 =
2.33%
Market capitalization: Companies needs to have a six

monthly average market capitalization of Rs 500 cr or
more for the last six months
Floating Stock:
Companies eligible for inclusion in CNX Nifty should have
atleast 10% floating stock. For this purpose, floating stock
shall mean stocks which are not held by the promoters and
associated entities (where identifiable) of such companies
Others:
a) A company which comes out with a IPO will be eligible
for inclusion in the index, if it fulfills the normal eligiblity
criteria for the index like impact cost, market capitalisation
and floating stock, for a 3 month period instead of a 6
month period.
b) Replacement of Stock from the Index
A stock may be replaced from an index for the following

reasons
Compulsory changes like corporate actions,

delisting etc. In such a scenario, the stock having
largest free float market capitalization and satisfying
other requirements related to liquidity, turnover and
free float will be considered for inclusion.
When a better candidate is available in the
replacement pool, which can replace the index stock
i.e. the stock with the highest free float market
capitalization in the replacement pool has at least
twice the free float market capitalization of the index
stock with the lowest free float market capitalization.
Index Re-Balancing
Index is re-balanced on semi annual
basis.
The cut-off date is January 31 and July 31
of each year, i.e. For semi-annual review of
indices, average data for six months ending
the cut-off data is considered.
Six weeks prior notice is given to market
from the date of change
Index Governance
A professional team at IISL manages CNX
Nifty Index.
There is a three-tier governance structure
comprising the
Board of Directors of IISL
The Index Policy Committee
The Index Maintenance Sub-Committee
CNX -Nifty
Sector Representation
Top 10 Companies in CNX -Nifty
Components of secondary market

over-the-counter (OTC) market
the exchange-traded market.
OTC is different from the market place provided by the
Over The Counter Exchange of India Limited. OTC
markets are essentially informal markets where trades
are negotiated.
Most of the trades in government securities are in the
OTC market. All the spot trades where securities are
traded for immediate delivery and payment take place in
the OTC market.
Trading in securities takes place through OTCEIs
network of members and dealers
It is promoted by the consortium of Financial Institutions
Over the Counter Exchange Of India (OTCEI)

The Over the Counter Exchange of India (OTCEI) was
incorporated under Section 25 of the Companies Act
in October 1990 and started functioning from
September 1992
OTCEI has been set up to meet a long felt need for a
second tier market where companies with small paidup capital can be listed
OTC exchange is promoted by all India Financial
Institutions, merchant bankers, and subsidiaries of
public sector banks
OTCEI is modelled on National Association of
Securities Dealers Automated Quotation System
(NASDAQ)
Listing Requirements of OCTEI
Listing on OTCEI may be sought by companies with

equity capital of less than Rs 10 crore
The minimum issued share capital of more than Rs 30
lakhs but less than 300 lakhs, the minimum public
offer should be 25% of the issued capital or Rs 20
lakhs worth of shares
Companies with an issued equity capital of more than
Rs 300 lakhs seeking listing on the OTC
OTCEI/ OTC Composite Index:
It acts as an indicator of the market movement.
Base index was 100 , base date is 23rd july 1993
CR- counter receipt, SCS- sale conformation slip ,
Benefits to a company
Fast way to get money, as the company does
not have to wait for 3-4 months like a regular
public issue
No danger of under-subscription
A new promoter with no track record can get
premium in the market if the sponsor finds the
project promising
Circuit Breakers
The Exchange has implemented index-based
market-wide circuit breakers with effect from July
02, 2001
SEBI vide its Circular no. CIR/MRD/DP/ 25 /
2013 dated September 03, 2013 has partially
modified the earlier circular. The revised
guidelines are as below.
The index-based market-wide circuit breaker
system applies at 3 stages of the index
movement, either way viz. at 10%, 15% and
20%.
Circuit - Breakers
Trigger Limit
Trigger Time
Market halt duration Pre-open call

auction
10%
Before 1.00 pm
At or after 1.00 pm
upto 2.30 pm
At or after 2.30 pm
45 minutes
15 minutes
15 minutes
15 minutes
No halt
NA
Before 1.00 pm
1 hr 45 min
15 minutes
At or after 1.00 pm
before 2.00 pm
45 minutes
15 minutes
15%
At or after 2.30 pm
Remainder of the day NA
20%
Any time during

market hours
Remainder of the day NA
CNX NIFTY Circuit filter as on

Index Circuit Filter Trigger Limit
Equivalent point (+/-) for Nov 18 ,

2013
10%
605.60
15%
908.40
20%
1211.25
Price Bands
Daily price bands are applicable on securities as
below:
Daily price bands of 2% (either way)
No price bands are applicable on:
scrips on which derivative products are available or
scrips included in indices on which derivative
products are available (unless otherwise specified)*
Price bands of 20% (either way) on all remaining
scrips (including debentures, preference shares etc).
Types of Secondary Markets

1. Direct search
2. Brokered
3. Dealer
4. Auction
95
Screen Based Trading
The trading on stock exchanges in India used

to take place through open outcry without use
of information technology for immediate
matching or recording of trades. This was time
consuming and inefficient. This imposed limits
on trading volumes and efficiency. In order to
provide efficiency, liquidity and transparency
NSE introduced a nation-wide on-line fullyautomated screen based trading system
(SBTS)
A member can punch into the computer

quantities of securities and the prices at which
he likes to transact and the transaction is
executed as soon as it finds a matching sale or
buy order from a counter party. SBTS
electronically matches orders on a strict
price/time priority and hence cuts down on time,
cost and risk of error, as well as on fraud
resulting in improved operational efficiency.
It allows faster incorporation of price sensitive
information into prevailing prices, thus increasing
the informational efficiency of markets.
It enables market participants to see the full

market on real-time, making the market
transparent. It allows a large number of
participants, irrespective of their
geographical locations, to trade with one
another simultaneously, improving the depth
and liquidity of the market. It provides full
anonymity by accepting orders, big or small,
from members without revealing their
identity, thus providing equal access to
everybody.
Secondary Market
Overview of :
1.) Trading and Settlement.
2.) Order Management.
Trading System
NSE operates on the 'National Exchange for
Automated Trading' (NEAT) system, a fully
automated screen based trading system, which
adopts the principle of an order driven market.
The NSE is connected through a VSAT ( Very Small
Earth-based Aperture Terminal) or through leased
telephone lines with all members
Satellite links are established using VSATs at the
offices of the trading members. Through the
network all the members receive complete market
information (best order value, best buying price,
best selling price, order value and last traded)
An investor can place the order for buy or sell at a

particular price and particular quantity. The system
arranges all orders in the priority of price and within
price by time
The NSE trading system matches orders in such a
way that the order gets executed at a price which is
either equal to or better than the specified price but
never worse than it
The NSE trading system (NEAT) generates and
maintains and issues a unique order number
If an order is executed then a trade confirmation slip
is generated which displays the trade number trade
time, quantity and price at which the trade took
place and the corresponding order number
Rolling Settlement
Rolling settlement is the trading system of
securities in which the transaction (buying or
selling of securities) can be squared up by a
counter- transaction on the same day only
The Rolling system was introduced in India
on Jan 10, 2000. Initially settlement period
was T + 5 but it has been reduced to T+2 with
effect from April 1 2003
Transaction Cycle
Trading & Settlement

Process
Depository
Clearing
House
Investor
Broker
Exchange
Contd..
Market Participants
Exchange NSE/BSE
Depository NSDL/CDSL
Custodian
Depository Participants
Clearing Corporation NSCCL/BOI share Holding
Stock Broker
A broker is an intermediary who arranges to

buy and sell securities on behalf of clients (the
buyer and the seller) also known as CM
Clearing Member
Sub Broker
Investors
Trading At NSE
The trading on stock exchanges in
India used to take place through
open outcry
NSE introduced a nation-wide online fully-automated screen based
trading system NEAT)
SBTS electronically matches orders
on a strict price/time priority
Order Placement
NSE has main computer which is connected
through Very Small Aperture Terminal (VSAT)
installed at its office.
Brokers have terminals (identified as the PCs in
the Figure 1) installed at their premises which are
connected through VSATs/leased lines/modems.
An investor informs a broker to place an order on
his behalf. The broker enters the order through
his PC, which runs under Windows NT and sends
signal to the Satellite via VSAT/leased
line/modem. The signal is directed to mainframe
Contd ..
The order confirmation message is
immediately displayed on the PC of
the broker.
This order matches with the existing
passive order(s), otherwise it waits for
the active orders to enter the system.
On order matching, a message is
broadcast to the respective member.
Contd .
All orders received on the system are sorted with
the best priced order getting the first priority for
matching i.e., the best buy orders match with the
best sell order. Similar priced
orders are sorted on time priority basis, i.e. the one
that came in early gets priority over the later one.
Orders are matched automatically by the computer
keeping the system transparent, objective and fair.
Where an order does not find a match, it remains
in the system and is displayed to the whole market,
till a fresh order comes in or the earlier order is
cancelled or modified.
Clearing & Settlement

The clearing and settlement mechanism
in Indian securities market has witnessed
significant changes and several
innovations during the last decade.
T+2 rolling settlement has now been
introduced for all securities. The
members receive the funds/securities in
accordance with the pay-in/pay-out
schedules notified by the respective
exchanges.
Contd ..
The obligations of members are
downloaded to members/custodians
by the clearing agency
The members/custodians make
available the required securities in
their pool accounts with depository
participants (DPs) by the prescribed
pay-in time for securities.
Contd
The depository transfers the securities
from the pool accounts of
members/custodians to the settlement
account of the clearing agency.
The securities are transferred on the
pay-out day by the depository from the
settlement account of the clearing
agency to the pool accounts of
members/custodians.
Settlement Process in CM segment

of NSE
Process
(1) Trade details from Exchange to NSCCL (real-time and end of day
trade file).
(2) NSCCL notifies the consummated trade details to CMs/custodians
who affirm back. Based on the affirmation, NSCCL applies
multilateral netting and determines obligations.
(3) Download of obligation and pay-in advice of funds/securities.
(4) Instructions to clearing banks to make funds available by pay-in
time.
(5) Instructions to depositories to make securities available by pay-intime.
(6) Pay-in of securities (NSCCL advises depository to debit pool
account of
custodians/CMs and credit its account and depository does it).
(7) Pay-in of funds (NSCCL advises Clearing Banks to debit account of
custodians/CMs and credit its account and clearing bank does it).
(8) Pay-out of securities (NSCCL advises depository to credit pool
account of
custodians/CMs and debit its account and depository does it).
(9) Pay-out of funds (NSCCL advises Clearing Banks to credit account
of
custodians/CMs and debit its account and clearing bank does it).
(10) Depository informs custodians/CMs through DPs.
(11) Clearing Banks inform custodians/CMs.
Settlement Cycle
Rolling Settlement: In a rolling settlement,
for all trades executed on trading day .i.e.T
day the obligations are determined on the
T+1 day and settlement on T+2 basis i.e. on
the 2nd working day. For arriving at the
settlement day all intervening holidays, which
include bank holidays, NSE holidays,
Saturdays and Sundays are excluded
Activity
Day
Trading
Rolling Settlement Trading
Clearing
Custodial Confirmation
T+1 working days
Delivery Generation
T+1 working days
Securities and Funds pay in
T+2 working days
Securities and Funds pay out
T+2 working days
Valuation Debt
T+2 working days
Auction
T+2 working days
Auction Settlement
T+ 3 working days
Bad Delivery Reporting
T + 4 working days
Rectified bad delivery pay-in

and pay-out
T + 6 working days
Re-bad delivery reporting

and pickup
T+8 working days
Close out of re-bad delivery

and funds pay-in & pay-out
T+ 9 working days
Settlement
Post Settlement
Flow: Trade Processing

Order confirm
Exchange
Broker
Customer
Trade Details
Clearing Corporation
Clearing Banks
Depository
Trading Terminal
Place order
Security
Transfer
Enters order
Funds Availability
Obligation report
Security transfer
To CM pool acct
DP
Security transfer
CC a/c
Security Availability
Carry over or Badla Transactions

Carry over or badla refers to the postponement of the
settlement of a transaction till the next settlement
period. It is nothing but a facility to carry forward the
transaction from one settlement period to one period
It involves payment of some charge known as Badla
charge by the speculator.
Badla charges are fixed on a fortnightly basis
To effect Badla transactions, two bargains have to be
made. The first one is to cancel the original
transaction by squaring it up and secondly he creates
a fresh purchase positions for the next settlement
Badla transactions facilitate short-selling
SHORT SELLING
Short selling is defined as selling a stock which
the seller does not own at the time of trade.
It increases liquidity in the market, and makes
price discovery more efficient. Besides, it curbs
manipulation of stocks as informed investors
are able to go short on stocks they feel are
higher than fair value.
This facility was available to non-institutional
investors. Vide a circular in February 2008,
SEBI permitted all classes of investors, viz.,
retail and institutional investors to short sell.
Selling too heavily without owning securities is

also dangerous if it exceeds a particular limit.
In a falling market, short sellers have to
purchase to cover their sales position and it
automatically arrests a fall in security prices and
vice versa
It, however, does not permit naked short sales
and accordingly, requires participants to
mandatorily honour their obligation of delivering
the securities at the time of settlement.
It does not permit institutional investor to do

day trading i.e., square-off their transactions
intra-day. In other words, all transactions are be
grossed for institutional investors at the
custodians level and the institutions are
required to fulfil their obligations on a gross
basis.
The custodians, however, continue to settle
their deliveries on a net basis with the stock
exchanges.
What is a depository?
A depository can be compared to a bank. A
depository holds securities of investors in electronic
form. Besides holding securities, a depository also
provides services related to transactions in
securities.
A depository interfaces with its investors through its
agents called Depository Participants(DPs).
Depositories are those who are licensed by the
Securities and Exchange Board of India(SEBI) to
undertake depository functions i.e. holding and
handling of securities in electronic form.
There are two depositories in India, namely

National Securities Depository Limited
(NSDL) and
Central Depository Services (India) Limited
(CDSL).
Currently, almost 99 per cent of the trades in
India are settled in demat mode
The National Securities Depository Ltd.

(NSDL) promoted by UTI, IDBI and NSE is
the first depository of India. NSDL started
operations in November 1996
The Stock Exchange, Mumbai has promoted
Central Depository Services (India) Ltd
(CDSL) which has drawn plans to set up the
second depository in the country. It is cosponsored by SBI, Bank of India, Bank of
Baroda and HDFC Bank. It started its
operation from 1999.
Need for Depository System:

The trading in physical segment is full of
inefficiencies due to handling of large volumes
of certificates and also involves various other
problems like delays in transfer, delay in
settlement, loss in transit, forgery
certificates, stolen certificates, mutilation of
certificates, postal losses, court cases,
litigation etc.
To overcome these deficiencies, a new
system of trading, viz. Depository system was
introduced, which facilitates investor to hold
securities in electronic form and to trade in
these securities.
Services offered by NSDL(1996)

The following services are offered by NSDL
to the investors, through its agents viz
Depository Participants.
1. Holding the investors securities in electronic
form.
2. Dematerialisation and Rematerialisation of
securities.
3. Settlement of trades in electronic form.
4. Electronic credit of public offerings and
non-cash corporate actions such as rights,
bonus etc.
How do you open a depository account?
Choose a participant from amongst the

participants offering depository services and
registered with NSDL.
a. Fill up an Account Opening Form available
with the participant.
b. Sign Participant-Client Agreement.
c. Receive your account number which should
be quoted in all your correspondence.
d. Your participant will provide you a statement
of holdings and statement of transactions (like a
bank pass book) every fortnight giving details of
your holdings and transactions in your account.
How is a depository similar to

a bank?
BANK
DEPOSITORY
Holds funds in an account
Hold securities in an account
Transfers funds between

accounts on the instruction of
the account holder
Transfers securities between

accounts on the instruction of the
account holder
Facilitates transfers without

having to handle money
Facilitates transfers of ownership

without having to handle
securities
Facilitates safekeeping of
money
Facilitates safekeeping of shares.
The benefits of participation in a depository are

No bad deliveries
Immediate transfer of shares and registration of securities,
increasing liquidity of
No stamp duty on transfer of shares;
Considerable reduction in the handling of large volumes of
paper
Elimination of risk associated with physical certificates such
as loss, theft, mutilation and forgery
Reduction in transaction cost
Pay-in and pay-out of securities and funds on the same day
for scrip-less trades
Faster settlement cycle
Faster disbursement of corporate benefits like rights and
bonus
Interacting Institutions
Central Depository: The central depository is a

nominee who holds the securities on behalf of the
investors and maintains records related to that in an
electronic mode
Share Registrar and Transfer Agent : The registrar
is an institution that controls the issuance of securities. The
transfer agent is one who retains the names and addresses
of registered securities owners and reregister traded
securities in the names of new owners
Clearing and Settlement Corporation: It is a centre to do
trade matching and settle the funds and exchange securities
DEMATERIALISATION
Dematerialisation (Demat in short form) signifies
conversion of a share certificate from its physical
form to electronic form for the same number of
holding which is credited to your demat account
which you open with a Depository Participant (DP).
A Depository Participant (DP) is your
representative (agent) in the depository system
providing the link between the Company and you
through the Depository.
Dematerialisation Process
a. Fill a Dematerialisation Request Form available with your
participant.
b. Submit your share certificates along with the above form.
(Please write Surrendered for Dematerialisation on the
face of each certificate before you submit it for
dematerialisation).
c. Your account will be credited within 15 days.
d. If you wish to convert your electronic shares back to
physical shares at a later stage, you may do so by
applying for rematerialistion. Dematerialisation of shares is
optional and an investor can still hold shares in physical
form. However, he / she has to demat the shares if he /
she wishes to sell the same through the Stock
Exchanges.
1. Client/ Investor submit the DRF (Demat Request

Form) and physical certificates to DP. DP checks
whether the securities are available for Demat.
Client defaces the certificate by stamping
Surrendered for Dematerialization. DP punches two
holes on the name of the company and draws two
parallel lines across the face of the certificate
2. DP enters the Demat request in his system to be
sent to NSDL. DP dispatches the physical
certificates along with the DRF to the R&T Agent.
3. NSDL records the details of the electronic request
in the system and forwards the request to the R&T
Agent.
4. R&T Agent, on receiving the physical

documents and the electronic request,
verifies and checks them. Once the R&T
Agent is satisfied, dematerialization of the
concerned securities is electronically
confirmed to NSDL.
5. NSDL credits the dematerialized
securities to the beneficiary account of the
investor and intimates the DP electronically.
The DP issues a statement of transaction to
the client
Some type of orders
Limit order
Market order
Day order
Open
All or none
Any part
Good through
Types of Orders
Orders represent instructions to brokers (agents) as to
how to execute transactions
At Best Order It is an order which does not specify
any specific price. It must be executed immediately at
the best possible price. Eg Buy 100 SBI at best
Market ordertransact at the best possible price when
the order reaches the market
Limit orderexecute the order only if a specified price,
or a better price, exists
Stop loss orderinitiate a market order when a
specifies price is reached
Time orderestablish time limits
day orderthe order dies (expires) at the end of the day
good 'til canceled (GTC)the order stays alive until canceled
Types of Order
Immediate or Cancel order: It is an order for the
purchase or sale of securities immediately at the quoted
price. If the order could not be executed at the quoted
prices immediately, it should be treated cancelled
Discretionary order: It is an order to buy or sell

shares at whatever price the broker thinks reasonable
Open Order: It is an order to buy or sell without fixing

any time limit or price limit on the execution of the order
Limited Discretionary order: It is an order to buy

or sell securities within a specified
Figure 3.6 Price-Contingent Orders
143
Stock Brokers- Participants

Client/ Commission Brokerworks for a company with
a seat on the exchange, do simple brokering business
by acting as intermediaries , earn brokerage
Floor Brokerindependent, freelance broker; who
enter the trading floor and execute orders for their
clients, they have to physically trade
Registered (floor) Trader/ broker trades only for his
or her own private account
Jobbers/Tatavaniwallas (Specialist)market maker;
specializes in certain types of stocks (industries)
Badla Financiers/ Badliwallas : are those brokers
whose main function is to give finance for carry forward
deals in specified securities in return for interest
Arbitrageurs: are those brokers who buy securities in one

market and sell them in another market to take advantage
of the price differences prevailing in the market
Bulls/ Tejiwallas: are those brokers of a stock exchange
who are very optimistic of the rise in prices of the
securities
Bears/ Mandiwallas: are those brokers of a stock
exchange who are very pessimistic and expect prices of
the securities to fall
Other speculators:
(i) Stags: are those who neither buy or sell shares in markets.
They apply for new issues and sell at high
(ii)Wolves: are fast speculators
(iii)Lame ducks: are bear brokers who sell short at wrong
moves
Listing
Listing of securities means that the admitted for trading
on a recognized stock exchange
Listing is the very basis of stock exchange operations
The listing company has to enter into an agreement
called the Listing Agreement containing 51 clauses
like disclosure information, payment of listing fee etc,
The listed shares are generally divided into two
categories:
(i) Group A shares (Specified shares or cleared securities)
an equity base of Rs 10 cr, market cap of Rs 25 -30,
a public holding of 35-40%
(ii)Group B shares (Non-specified shares or non-cleared
securities)
Types of Capital
Authorized capital: is the maximum capital that a company is
authorized to raise. It the sum mentioned in the capital clause of
Memorandum of Association (say Rs. 10,00,000/-). It is the
maximum amount, which the company raises by issuing the shares
and on which the registration fee is paid. This limit cannot be
exceeded unless the Memorandum of Association is altered.
Authorized capital are also known as nominal authorized or
registered capital
Issued capital is that part of the authorized capital which is offered
by the company for being subscribed by members of the public or
anybody
Subscribed capital is that part of the issued capital which is
subscribed (accepted) by the public
Called up capital is a part of subscribed capital which

has been called up by the company for payment. For
example, if 10,000 shares of Rs. 10 each have been
subscribed by the public and of which Rs. 5 per share
has been called up. Then the subscribed capital of the
Company works out to Rs. 1,00,000 of which the called
up capital of the Company is Rs. 50,000
Paid Up capital : refers to that part of the called up
capital which has been actually paid by the
shareholders. Some of the shareholders might have
defaulted in paying the called up money. Such defaulted
amount is called as arrears. From the called up capital,
calls in arrears is deducted to obtain the paid up capital.
Listing requirements for New companies

New companies can be listed if their issue &
subscribed equity capital after the public issue is Rs
10 cr. In addition after the issue the Networth (equity
capital + reserves surplus + retained earnings) of
the issuer should be 20 cr
For new companies in high technology ( IT, ecommerce , telecommunication, media)
- The minimum post-issue paid-up equity capital
should be Rs 5 cr
- The minimum market capitalization should be Rs 50
cr
- Post-issue Networth of Rs 20 cr
Listing requirements
At least 60% of each class of securities must be

offered to the public for subscription and the minimum
issued capital should be Rs 3 crore
The minimum public offer for subscription must be
atleast 25% of each issue and it must be offered thro
advertisement in newspaper at least for a period of
two days
A company having more than Rs 5 cr paid-up capital
must list its securities on more than one stock
exchange. Listing on the regional exchange is a must
Listing must comply with Clause 49 of the listing
agreements
Benefits of listing
Facilitaties Buying and selling of securities

Visibility (offers wide publicity)
Market support
Investors confidence
Increased demand for products and services
Overall increase in profitability
Enables borrowing
Ensures liquidity
Drawbacks of Listing
Leads to speculation
Degrades Companies Reputation
Discloses vital information to competitors
Delisting
Stock exchange can delist companies
for a number of reasons including : Merger with another company
Solvency problems
Name change company asked to be
removed
Failure to comply with exchange rules
Desirable Characteristics
of a stock market
Liquidity
Ability to sell an
asset quickly at a
fairly known price
Low transactions
costs
Desirable Characteristics
of a stock market contd
Availability of information
Market efficiency
Prices react quickly to new
information
Small price fluctuations

Narrow price spread
Regulatory improvement
Transparency and Corporate
Governance
Strong
Protection to
minority
Shareholders
Corporate
Governance
Disclosure
industry
regulator
Enhance
market
confidence
OUTLINE
Structure of the Securities Market

Participants in the Securities Market
Primary Equity Market
Public Issue
Secondary Equity Market (Stock Market)
Trading and Settlement
Buying and Selling Shares
Stock Market Indices
SEBIs Regulation
Stock Market Abroad
Should Trading be Regulated
Government Securities Market
Corporate Debt Market
Money Market
Structure of the Securities

Market
Securities
Market
Equity
Market
Government
Securities
Market
Debt
Market
Corporate
Debt
Market
Derivatives
Market
Money
Market
Options
Market
Futures
Market
Participants In The Securities Market
Regulators
CLB, RBI, SEBI,

DEA, DCA
SEC, FRB
Stock Exchanges
Listed Securities
Depositories
Brokers
FIIs
Merchant Bankers or Investment Bankers
Mutual Funds
Custodians
Registrars
Underwriters
Bankers to an issue
Debenture trustees
Venture capital funds.
Credit rating agencies
Primary market provides opportunity to issuers

of securities, Government as well as
corporates, to raise resources to me et their
requirements of investment and/or discharge
some obligation
They may issue the securities at face value, or
at a discount/premium and these securities
may take a variety of forms such as equity,
debt or some hybrid instrument. They may
issue the securities in domestic market and/or
international market through ADR/GDR/ECB
route
DIP Guidelines, 2000

The issues of capital to public by Indian
companies are governed by the Disclosure
and Investor Protection (DIP) Guidelines of
SEBI, 2000.
The guidelines provide norms relating to
eligibility for companies issuing securities,
pricing of issues, listing requirements,
disclosure norms, lock-in period for promoters
contribution, contents of offer documents, preand post-issue obligations, etc.
Features Of Primary Market

1. This is the market for new long term capital. The primary
market is the market where the securities are sold for the first
time. Therefore it is also called New Issue Market (NIM).
2. In a primary issue, the securities are issued by the company
directly to investors.
3. The company receives the money and issue new security
certificates to the investors.
4. Primary issues are used by companies for the purpose of
setting up new business or for expanding or modernizing the
existing business.
5. The primary market performs the crucial function of facilitating
capital formation in the economy.
6. Borrowers in the new issue market may be raising capital for
converting private capital into public capital; this is known as
going public
Primary
Equity Market
PUBLIC ISSUE
RIGHTS ISSUE
PRIVATE PLACEMENT
PREFERENTIAL ALLOTMENT
Public Issue In India

Approval of the board of directors
Approval of shareholders
Appointment of the lead manager
Due diligence by the lead manager
Appointment of other intermediaries like comanagers, advisors, underwriters, bankers, brokers, and
registrars
Preparation of the draft prospectus
Filing of the draft prospectus with SEBI
Application for listing in stock exchanges
Filing of the prospectus (after any modifications

suggested by SEBI) with the Registrar of
Companies
Promotion of the issue
Printing and distribution of applications
Statutory announcement
Collection of applications
Processing of applications
Determination of the liability of underwriters
Finalisation of allotment
Giving of demat credit (or dispatch of share
certificates) and refund orders
Listing of the issue
Initial Public Offering (IPO)

1. What is an IPO?
2. Who are the agents in an IPO?
3. What kind of paperwork is involved in an
IPO?
171
The agents in an IPO
172
PUBLIC ISSUES
Eligibility Norms I: Any company issuing securities through the
document hasmaking
to sat isfy a
thepublic
followingissue
conditions
offer
A company
of securities has to file a
draft prospectus with SEBI, through an eligible merchant
banker, at least 30 days prior to the filing of prospectus
with the Registrar of Companies (RoCs).
The filing of offer document is mandatory for a listed

company issuing security through a rights issue where the
aggregate value of securities, including premium, if any,
exceeds Rs.50 lakh
The issue size does not exceed 5 times the pre- issue net
worth
A company cannot make a public issue unless it has

made an application for listing of those securities with
stock exchange(s). The company must also have entered
into an agreement with the depository for
dematerialisation of its securities and also the company
should have given an option to
subscribers/shareholders/investors to receive the security
certificates or securities in dematerialised form with the
depository.
The company has a track record of distributable profits in
terms of section 205 of the Companies Act, 1956, for at
least three (3) out of immediately preceding five (5) years.
The company has a net worth of atleast Rs.1 crore in
each of the preceding 3 full years (of 12 months each)
An unlisted company can make an Initial

Public Offering (IPO)
The company has net tangible assets of at
least Rs.3 crore in each of the preceding 3
full years (12 months each),of which not
more than 50 % is held in monetary assets,
provided that if more than 50 % of the net
tangible assets are held in monetary assets,
the company has made firm commitments to
deploy such excess monetary assets in its
business/project.
Entry Norm II (EN II)

An unlisted company not complying with any of
the conditions specified above may make an
initial public offering (IPO)
Issue shall be through book building route, with
at least 50% to be mandatory allotted to the
Qualified Institutional Buyers (QIBs).
The minimum post-issue face value capital shall
be Rs. 10 crore or there shall be a compulsory
market-making for at least 2 years
Entry Norm III (EN III)

The "project" is appraised and participated to
the extent of 15% by FIs/Scheduled
Commercial Banks of which at least 10%
comes from the appraiser(s).
The minimum post-issue face value capital
shall be Rs. 10 crore or there shall be a
compulsory market-making for at least 2 years.
Note :- The company should also satisfy the
criteria of having at least 1000 prospective
allotees.
Infrastructure companies are exempt from the

requirement of eligibility norms if their project has
been appraised by a public financial institution or
infrastructure development finance corporation or
infrastructure leasing and financing services and not
less than 5% of the project cost is financed by any of
the institutions, jointly or severally, by way of loan
and/or subscription to equity or a combination of both.
For public and rights issues of debt instruments
irrespective of their maturities or conversion period, it
is mandatory to obtain credit rating from a registered
credit rating agency and to disclose the same in the
offer document
PUBLIC ISSUES
Issue of securities indematerialised form
- agreement with both depositories
- option to subscribes / shareholders / investors
PUBLIC ISSUES
Exemption to eligibility norms
1. Existing banking company
2. New Bank
3. Infrastructure company whose
a. Project is appraised by a public Financial Institute
etc
b. 5% financed by the PFI or equity
c. Rights issue of a listed company
PUBLIC ISSUES
If public issue is of a debt instrument irrespective of
maturity
- Rating from a recognised rating agency
- If above Rs.100 cr 2 agencies rating
PUBLIC ISSUES
Public issued not allowed
- if there are any outstanding financial instrument /
right entitling existing promoters / shareholders
- if any partly paid up shares are yet to be fully paid
or forfeited
PUBLIC ISSUES
Pricing of Securities
-
Free
- Differential pricing allowed in firm allotment

provided that such price is higher than that offered
to public
PUBLIC ISSUES
PROMOTERS CONTRIBUTION AND LOCK-IN
REQUIREMENTS
Promoters Contribution in a Public Issue by Unlisted
Companies shall contribute not less than 20% of the
post issue capital.
Promoters Contribution in Case of Public Issues by
Listed Companies the promoters shall participate
either to the extent of 20% of the proposed issue or
ensure post-issue share holding to the extent of 20%
of the post-issue capital.
PUBLIC ISSUES
Promoters Contribution in Case of Composite Issues
In case of composite issues of a listed company, the
promoters contribution shall at the option of the
promoter(s) be either 20% of the proposed public
issue or 20% of the post-issue capital.
Rights issue component of the composite issue shall be
excluded while calculating the post-issue capital.
PUBLIC ISSUES
Securities Ineligible for Computation of Promoters
Contribution
Where the promoters of any company making an issue
of securities have acquired equity during the
preceding three years, before filing the offer
documents with the Board, such equity shall not be
considered for computation of promoters contribution
if it is;
i. acquired for consideration other than cash and
revaluation of assets or capitalisation of in tangible
assets is involved in such transaction(s); or
ii. resulting from a bonus issue, out of revaluation
reserves or reserves without accrual of cash resources;
PUBLIC ISSUES
In case of public issue by unlisted companies, securities
which have been issued to the promoters during the
preceding one year, at a price lower than the price at
which equity is being offered to public shall not be
eligible for computation of promoters contribution.
Provided that the shares for which the difference
between the offer price and the issue price for these
shares is brought in by the promoters shall be
considered eligible
PUBLIC ISSUES
In respect of companies formed by conversion of partnership
firms, where the partners of the erstwhile partnership firm and
the promoters of the converted company are the same and
there is no change in management, the shares allotted to the
promoters during previous one year out of the funds brought
in during that period shall not be considered eligible for
computation of promoters contribution unless such shares
have been issued at the same price at which the public offer is
made.
Provided that if the partners capital existed in the firm for a
period of more than one year on a continuous basis, the
shares allotted to promoters against such capital shall be
considered eligible.
PUBLIC ISSUES
No securities forming part of promoters contribution
shall consist of any private placement made by
solicitation of subscription from unrelated persons
either directly or through any intermediary.
The securities for which a specific written consent
has not been obtained from the respective
shareholders for inclusion of their subscription in
the minimum promoters contribution subject to
lock-in shall not be eligible for promoters
contribution.
PUBLIC ISSUES
Promoters Participation in Excess of the Required

Minimum Contribution to be Treated as Preferential
Allotment
Promoters Contribution to be brought in one day
before Public Issue Opens
Provided that where the promoters minimum
contribution exceeds Rs.100 crores, the promoters
shall bring in Rs.100 crores before the opening of
the issue and the remaining contribution shall be
brought in by the promoters in advance on pro-rata
before the calls are made on public.
PUBLIC ISSUES
Exemption from Requirement of Promoters Contribution
The requirement of promoters contribution shall not be applicable a. in case of public issue of securities by a company which has
been listed on a stock exchange for at least 3 years and has a
track record of dividend payment for at least 3 immediately
preceding years.
b. in case of companies where no identifiable promoter or
promoter group exists.
c. in case of rights issues.
Provided, in case of (a) and (c) above, the promoters shall disclose
their existing shareholding and the extent to which they are
participating in the proposed issue, in the offer document.
PUBLIC ISSUES
Lock in of Minimum Specified
Contribution in Public Issues
Promoters
In case of any issue of capital to the public the minimum

promoters contribution shall be locked in for a period
of 3 years from the date of commencement of
commercial production or the date of allotment in the
public issue whichever is later.
PUBLIC ISSUES
Lock-in of Shares Ineligible for Promoters
Contribution
security issued to promoters or other shareholders, out of
revaluation of assets or capitalisation of intangible
assets, within a period of 3 preceding years from the
date of filing of offer documents with the Board, shall
be locked-in for a period of 3 years from the date of
allotment of the proposed issue of capital.
Any security to promoters or other shareholders, issued by
way of bonus out of revaluation reserves, within a
period of 3 preceding years, shall be locked-in for a
period of 3 years from the date of allotment of the
proposed issue of capital
PUBLIC ISSUES
PRE- ISSUE OBLIGATIONS
The pre-issue obligations are detailed below:
The lead merchant banker shall exercise due diligence.
The standard of due diligence shall be such that the merchant
banker shall satisfy himself about all the aspects of offering,
veracity and adequacy of disclosure in the offer documents.
The liability of the merchant banker shall continue even after the
completion of issue process.
The lead merchant banker, shall pay requisite fee in accordance
with regulation 24A of Securities and Exchange Board of India
(Merchant Bankers) Rules and Regulations, 1992 along with
draft offer document filed with the Board.
PUBLIC ISSUES
Documents to be Submitted alongwith the Offer
Document by the Lead Manager
1. Memorandum of Understanding (MOU) between a
lead merchant banker and the issuer company
specifying their mutual rights, liabilities and obligations
relating to the issue.
2. Inter-se Allocation of Responsibilities- In case a
public or rights issue is managed by more than one
merchant bankers the rights, obligations and
responsibilities of each merchant banker shall be
demarcated.
3. Agreement responsibility of LMB that LMB well in
case of under subscription at an issue.
PUBLIC ISSUES
Offer Document to be Made Public
The draft offer document filed with the Board shall be
made public for a period of 21 days from the date of
filing the offer document with the Board.
No Complaints Certificate
After a period of 21 days from the date the draft offer
document was made public, the Lead Merchant
Banker shall file a statement with the Board :
1.
giving a list of complaints received by it,
2.
a statement by it whether it is proposed to amend
the draft offer document or not, and;
3.
highlight those amendments.
PUBLIC ISSUES
Mandatory Collection Centres
The minimum number of collection centres for an issue of capital shall

bea.
the four metropolitan centres situated at Mumbai, Delhi,

Calcutta and Chennai
b. all such centres where the stock exchanges are located in the region
in which the registered office of the company is situated.
c. the regional division of collection centres is indicated by SEBI.
The issuer company shall be free to appoint as many collection centres
as it may deem fit in addition to the above minimum
requirement.
PUBLIC ISSUES
Appointment of Compliance Officer
An issuer company shall appoint a compliance officer
who shall directly liaise with the Board with
regard to compliance with various laws, rules,
regulations and other directives issued by the
Board and investors complaints related matter.
The name of the compliance officer so appointed shall
be intimated to the Board.
PUBLIC ISSUES
Rule 19(2) (b) of SC (R) Rules, 1957
In case of a public issue by an unlisted company, the net
offer to public shall be at least 10% or 25% of the
post-issue capital as the case may be.
In case of a public issue by a listed company, the net
offer to public shall be at least 10% or 25% of the
issue size.
An infrastructure company, satisfying the requirements
in Clause 2.4.1 (iii) of Chapter II, inviting
subscription from public may shall not attract the
PUBLIC ISSUES
Only 10% of securities issued by a company can be offered to the
public for subscription two days if :
(i) minimum twenty lacs securities are offered to the public
(excluding reservation, firm allotment and promoter's
contribution); and
(ii) the size of the offer to the public i.e. the offer price multiplied
by the number of securities offered to the public at point (i)
above, is minimum Rs.100 crores.
(iii) the issue was made only through book building method with
allocation of 60% of the issue size to the qualified institutional
buyers as specified by SEBI.
PUBLIC ISSUES
Terms of the Issue
Minimum Number of Share Applications and Application
Money in public issue
i) In case of public issue at par, the minimum number of shares for
which an application is to be made, shall be fixed at 200 shares
of face value of Rs.10/- each.
ii) Where the public issue is at a premium or comprises security,
whether convertible or non-convertible, or the public issue is of
more than one security, the minimum application moneys
payable in respect of each security by each applicant, shall not
be less than Rs 2000/- irrespective of the size of premium
subject to applications being for a multiple of tradeable lots;
PUBLIC ISSUES
iv. The minimum tradeable lot, in case of shares of face
value of Rs.10/- each, shall at the option of the
issuer/offeror, be fixed on the basis of offer price as
given below:
v. The minimum application moneys to be paid by an
applicant along with the application money shall not
be less than 25% of the issue price.
v. The minimum number of instruments for which an
application has to be made shall be not less than the
tradeable lot.
PUBLIC
ISSUES
Securities Issued to be Made Fully Paid Up
a.
If the subscription money is proposed to be

received in calls, the calls shall be structured in
such a manner that the entire subscription money
is called within 12 months from the date of
allotment.
b. If the investor fails to pay call money within 12
months the subscription money already paid may
be forfeited.
c. If the issue size is above Rs.500 crores and is
subject to monitoring requirement as per Clause
8.17.1 of SEBI DIP guidelines, it shall not be
necessary to call the entire subscription money
within 12 months.
PUBLIC ISSUES
Restriction on further Capital Issues
No company shall make any further issue of capital in any form,
till the securities issued earlier have been listed or application
moneys refunded on account of non-listing or under subscription,
etc.
(a) No company shall, pending conversion of Fully Convertible
Debentures (FCDs) or Partly Convertible Debentures (PCDs),
issue any shares by way of bonus or rights unless similar benefit
is extended to the holders of such FCDs or PCDs, through
reservation of shares in proportion to such convertible part of
FCDs/PCDs.
(b) The share so reserved may be issued at the time of
conversion(s) of such debentures on the same terms on which the
bonus or rights issue was made.
PUBLIC ISSUES
Period of Subscription
Public Issues
(a) Subscription list for public issues shall be kept open
for at least 3 working days and not more than 10 working
days.
(b) The public issue made by an infrastructure company,
may be kept open for a maximum period of 21 working
days.
(c) The period of operation of subscription list of public
issue shall be disclosed in the prospectus.
Rights Issues
Rights issues shall be kept open for at least 30 days and
not more than 60 days.
PUBLIC ISSUES
The Lead Merchant Banker shall ensure that the
particulars as per audited statements contained in the
offer document are not more than 6 months old from
issue opening date.
In respect of a Government company making a public
issue, the auditors report in the prospectus shall not be
more than six months old as on the date of filing of the
prospectus with the Registrar of Companies or the Stock
Exchange as the case may be. .
PUBLIC ISSUES
Compliance Officer to be Appointed by Lead
Merchant Banker
The merchant bankers shall appoint a senior officer as Compliance
Officer to ensure that all Rules, Regulations, Guidelines,
Notifications etc. issued by the Board, the Government of India,
and other regulatory organizations are complied with.
The Compliance Officer shall co-ordinate with regulatory
authorities in various matters and provide necessary guidance as
also ensure compliance internally.
The Compliance Officer shall also ensure that observations made/
deficiencies pointed out by the Board do not recur.
PUBLIC ISSUES
Incentives to Prospective Shareholders
The issuer shall not offer any incentives to the prospective
investors by way of medical insurance scheme, lucky draw, prizes,
etc.
Issue of Debentures Bearing Interest Less Than Bank Rate
Whenever FCDs are issued bearing interest at a rate less than the
Bank Rate, the offer document shall contain disclosures about the
price that would work out to the investor, taking into account the
notional interest loss on the investment from the date of allotment
of FCDs to the date(s) of conversions).
PUBLIC ISSUES
Requirement of Monitoring Agency
In case of issues exceeding Rs.500 crores, the issuer shall
make arrangements for the use of proceeds of the issue to
be monitored by one of the financial institutions.
A copy of the monitoring report as per the format
specified at Schedule-XIX, shall be filed with the Board
by the said monitoring agency, on a half yearly basis, till
the completion of project, for the purposes of record.
PUBLIC ISSUES
Safety Net or Buy Back Arrangement
Any safety net scheme or buy-back arrangements of the shares
proposed in any public issue shall be finalised by issuer company
with the lead merchant banker in advance and disclosed in the
prospectus.
Such buy back or safety net arrangements shall be made available
only to all original resident individual allottees.
Such buy back or safety net facility shall be limited upto a
maximum of 1000 shares per allottee and the offer shall be valid at
least for a period of 6 months from the last date of despatch of
securities.
The financial capacity of the person making available buy back or
safety net facility shall be disclosed in the draft prospectus.
PUBLIC ISSUES
Utilisation of funds in case of Rights Issues
The issuer company may utilise funds collected against
rights issues after satisfying regional stock exchange that
minimum 90% subscription has been received.
Background on Common Stock

Common stock = certificate representing partial
ownership in a corporation
Issued by corporations that need long-term
funds
Issued in the primary market
Stock is then traded in the secondary market,
creating liquidity for investors
213
Background on Common Stock

Ownership and voting rights
Owners of common stock vote on:
Election of board of directors
Authorization to issue new shares
Amendments to corporate charter
Other major events
Many investor assign their vote to management

via a proxy
Households own about half of all common stock,
the rest is owned by institutional investors
214
Background on Preferred Stock

Represents equity interest, but usually no
voting rights
Stated fixed annual dividend
Dividend may be omitted
Cumulative provision
215
Public Placement of Stock

Initial public offerings (IPOs)
First-time offering of shares to the public
Firm must provide information to public
Prospectus
Firm is assisted by a securities firm
Performance of IPOs
Price generally rises on first day
Internet firms
Longer-term performance of IPOs is poor
216
Public Issue In India

Approval of the board of directors
Approval of shareholders
Appointment of the lead manager
Due diligence by the lead manager
Appointment of other intermediaries like comanagers,
advisors, underwriters, bankers, brokers, and
registrars
Preparation of the draft prospectus
Filing of the draft prospectus with SEBI
Application for listing in stock exchanges
Filing of the prospectus (after any modifications

suggested by SEBI) with the Registrar of
Companies
Promotion of the issue
Printing and distribution of applications
Statutory announcement
Collection of applications
Processing of applications
Determination of the liability of underwriters
Finalisation of allotment
Giving of demat credit (or dispatch of share
certificates) and refund orders
Listing of the issue
Public Issues in the U.S

In the U.S., public offerings of both stocks and bonds are
typically marketed by investment bankers who perform
the role of underwriters. Generally, the lead investment
banker forms an underwriting syndicate with other
investment bankers to share the responsibility of the
issue.
Pricing of Issues
Free Pricing
SEBI does not play any role in price fixation.
Fixed Price/Book Building
The company and merchant banker are however required
to give full disclosures of the parameters which they had
considered while deciding the issue price.
Book Building
A process undertaken by which a demand for the
securities proposed to be issued by a body
corporate is elicited and built up and the price for
the securities is assessed on the basis of the bids
obtained for the quantum of securities offered for
subscription by the issuer. This method provides
an opportunity to the market to discover price for
securities.
Book Building
Options in Book building

75 % Book Building
100 % book Building
Books remain open for 7 working days ( Fixed price issue 10 days)
Only Electronic Bidding
Bids to be submitted through Syndicate members
Issue completed and trading commenced on T + 16 basis
Floor price disclosed one day prior to bid date
Price band of 20 %
Green Shoe option
An option of allocating shares in excess of the shares included
in the public issue and operating a post-listing price stabilizing
mechanism in accordance with the provisions of Chapter VIII-A
of DIP Guidelines, which is granted to a company to be
exercised through a Stabilising Agent.
Difference between shares offered through book building and

offer of shares through normal public issue
Features
Fixed Price
Process
Book Building
Process
Pricing
Price at which the

securities are
offered/allotted is known
in advance to the investor
Price at which securities

will be offered/allotted is
not known in advance to
the investor. Only an
indicative price range is
known.
Demand
Demand for the securities

offered is known only
after the closure of the
issue
Demand for the securities

offered can be known
everyday as the book is
built.
Payment
Payment if made at the

time of subscription
wherein refund is given
after allocation.
Payment only after

allocation.
Book Building: Book building is a method of offering shares to

investors in which the issue price is not fixed in advance (as is done in a fixed
price offer) but is determined through a bidding process. Book Building is
basically a process used in IPOs for efficient price discovery. It is a mechanism
where, during the period for which the IPO is open, bids are collected from
investors at various prices, which are above or equal to the floor price. The
offer price is determined after the bid closing date
Under Book Building, investors bid for shares at the floor price or above and
after the closure of the book building process the price is determined for
allotment of shares.
In case of Book Building, the demand can be known everyday as the book is
being built. But in case of the public issue the demand is known at the close of
the issue.
Cut-Off Price: In a Book building issue, the issuer is required to indicate either
the price band or a floor price in the prospectus. The actual discovered issue
price can be any price in the price band or any price above the floor price. This
issue price is called Cut-Off Price. The issuer and lead manager decides this
after considering the book and the investors appetite for the stock.
Steps in Book Building
1.The issuer appoints a lead merchant banker as a book runner

2. The book runner then advices the company on the issue and
helps the issuer to decide the number of securities to be issued
and the price band.
3. The issuer with the book runner, also appoints syndicate
members with whom the investors can place the orders.
4. Then the issuers advertises the issue and sends the application
form through the syndicate members to the prospective
members.
5. On opening the issue, the interested investors place their
orders into the orders with the syndicate members who puts
these orders in the electronic book. This process is called
Bidding.
6. The bidding is open for a stipulated time usually for a minimum
of 5 days.
7. The investor can bid at any price within the price band
which is 20% spread and can be modified during the
bidding period. The issuing company is allowed to
disclose the floor price prior to the bid opening date but
should not do in the red herring prospectus[ It is an
interim prospectus, that carries a passage in red
stating that the company is not selling the shares
without the approval of the regulator]
8. On the close of the book building period the book
runner evaluates the bids based on the criteria such as
price aggression, quality of investors,
9. The book builder helps the issuer company in arriving
the final price at which the it is willing to issue the
shares
Book building can be done

by two ways
1.
2.
It can opt for 75% book building process

It can opt for 100% book building process
In case of 75% book building, 75% of the net public offer

has to be made through book building route in which not
more than 60% of the net public offer can be allocated to
the Qualified institutional buyers(QIB) and not less than
15% of the net offer to the public can be allocated to noninstitutional buyers applying for more than 1000 shares.
In case of 100% book building the entire net public offer has
to be made through book building in which not more than
60% of the net offer to public offer can be allocated to the
QIBs, not less than 15% of the net offer to the public can be
allocated to the non-institutional buyers and not less than
25% of the net public offer can be allocated to the retail
individual investors.
Promoter
The promoter has been defined as a person or persons who are in
over-all control of the company
Promoters Contribution should not be less than 20% of post issue of
capital in case of offers for sale and public issues by unlisted
companies.
To bring Full amount of promoter contribution

including premium one day prior to issue opening
date.
Exceptions
Public issue of securities listed on a stock exchange

for at least 3 years with a dividend payment record of
3 immediate preceding years
No identifiable promoter or group exist
Rights Issue
Lock In of Securities
Promoters minimum contribution in any public issue

locked in for 3 years.
The Contribution over and above 20 % (minimum) is
locked in for one year.
The locked in securities can be pledged with banks as
collateral.
Merchant Banker
Governed by SEBI Merchant Bank

Regulations Act 1992
Need to be a Body Corporate other than
NBFC
Required to have a compliance officer
Merchant Banker
Pre-issue process: The due diligence of companys operations/ management/ business
plans/ legal
Drafting and design of Offer documents, Prospectus, statutory
advertisements and memorandum containing salient features of
the Prospectus.
The BRLMs shall ensure compliance with stipulated requirements
and completion of prescribed formalities with the Stock
Exchanges, RoC and SEBI including finalisation of Prospectus and
RoC filing.
Appointment of other intermediaries viz., Registrar(s), Printers,
Advertising Agency and Bankers to the Offer is also included in the
pre-issue processes.
The LM also draws up the various marketing strategies for the
issue.
Post issue: Including management of escrow accounts, coordinate noninstitutional allocation,
intimation of allocation and dispatch of refunds to bidders
Finalization of trading and dealing of instruments and dispatch of
certificates and demat of delivery of shares, with the various
agencies connected with the work such as the Registrar(s) to the
Offer and
Bankers to the Offer and the bank handling refund business .
Credit Rating
Sebi Credit rating regulations ACT 1999
Promoted by PFI, SCB, Foreign Banks operating in
India, Foreign credit rating agencies with 5 yrs of exp.
Body corporate having continuous net worth of 100
crores for previous 5 yrs.
Minimum Net worth of 5 crores.
A CRA cannot rate
A security issued by its promoter
Security issued by an associate , subsidiary ,an
associate promoter of CRA if they have a
common chairman, director and employees.
For all debt issue greater than or equal to 100 crores ,
has to be rated by two different agencies.
ADR/GDR
Method of raising foreign currency resources
Foreign Convertible currency bonds

ADR/GDR
Depository Receipt negotiable instrument in the form of a
certificate denominated in US dollars
Certificates are issued by an overseas depository bank against
underlying shares deposited by the issuing company with the
bank
The DRs are issued by the bank to the investors
It is a non voting equity holding with all other benefits
accrued.
Permits cross border trading and settlement , minimize
transaction costs and broaden the capital base for Institutional
Investors.
Contd
ADR
GDR
Negotiable U S certificate
representing ownership of
shares in a Non U S corp..
Issued to public or private to

markets inside or outside U
S
Quoted and traded in $ in U

S markets
Allows issuer to raise capital

in two or more markets
simultaneously
To facilitate the purchase,

holding and sale of non U S
Securities by U S investors.
Underlying shares
correspond to GDR are fixed
in ratio i.e. 1 GDR = 10
shares
ADRs and GDRs are identical in legal, technical ,operational and

administrative point of view
VA Linux: a dramatic example
IPO price: $30

First day closing price: $239.25
Todays price: $5.28
Replicate this picture using

finance.yahoo.com (LNUX)
234
Figure 3.3 Average Initial Returns for

IPOs in Various Countries
235
Private placements
Private placement: sale to a limited
number of sophisticated investors not
requiring the protection of registration
Allowed under Rule 144A

Dominated by institutions
Very active market for debt securities
Not active for stock offerings
236
Auctions
Initiated by Exchange on behalf of trading members for
settlement related reasons.
On the securities pay-in day, NSCCL identifies short deliveries
and the respective clearing member is debited by an amount
equivalent to the securities not delivered by him and valued
at a valuation price
NSCCL conducts a buying-in auction for security shortages
on the day after the pay-out day through the NSE trading
system. If the buy-in auction price is more than the valuation
price, the member is required to make good the difference.
Close Out all shortages not bought are deemed closed at
highest price of the trading period or closing price on
auction day plus 20%
Order Management
NSE is Order driven market
Order management consists of
Entering orders
Order modification
Order cancellation
Order matching
Entering Order
Active vs. Passive Order (price, time
stamping)
Order Book
Regular lot, Stop loss, special terms, retail
debt order, auction orders
Symbol and Series
Quantity
Price
Principal or Client
Order types/conditions
Order modification
Modify during market hours

Change unexecuted quantity, price
Cannot change client code
Cannot exceed price limits
User value is adjusted
Roadmap
1. Type of markets
Primary markets
Secondary markets
2. Types of Orders
3. Trading mechanisms
4. US securities markets
241
Trading Mechanisms
1. Over the Counter markets
2. Electronic communication networks
(ECNs)
3. Specialists markets
242
Roadmap
1. Type of markets
Primary markets
Secondary markets
2. Types of Orders
3. Trading mechanisms
4. US securities markets
243
U.S. Security Markets
Nasdaq (National Association of Security Dealers

Automated Quotation System)
Levels of subscribers
1. Level 1 inside quotes

2. Level 2 receives all quotes but they cant enter quotes
3. Level 3 dealers making markets
SuperMontage
Organized Exchanges
New York Stock Exchange

American Stock Exchange
Regionals (e.g. Boston Stock Exchange)
244
Market Structures in Other Countries

London - predominately electronic trading
Euronext market formed by combination
of the Paris, Amsterdam and Brussels
exchanges
Tokyo Stock Exchange
245
Investment Banking and

Underwriting
Investment bankerspecialist in issuing
securities
adviceconcerning market conditions
underwritingtake risk of issuing securities
distributionsyndicates (diversification)
Prospectusdocuments the new issue;

indicates the terms of the issue, use of
funds, and so forth
Investment Banking
Arrangements
Types of Arrangements:
Negotiated purchaseissuing firm negotiates
terms with investment banker
Competitive bid purchaseinvestment bankers
bid on the issue
Best Effortsinvestment banker sells on a
contingency basis; gives a best effort to sell
the issue, but there is no firm commitment that
the entire amount will be sold
Public Versus Private

Placements
Public placements (offerings)must register with
the SEC; sold to the public
Initial Public Offerings (IPOs)first time a sells stock to
the investing public
IPOs generally are underpriced
Investment bankers generally are involved in the market after
the initial offering of the stock
Private placementssell to a limited number of

sophisticated investors; not registered
Institutional investors
Market is more active for debt than equity
Stock (Bond) Markets

Organized exchangesphysical locations
NYSE
AMEX
OTC marketelectronic network

NASDAQ
Third markettrading exchange-listed stocks on the OTC

Institutional investors with large blocks
Fourth marketdirect trades of exchange-listed stocks

Institutional investors with large blocks
Electronic Communications Networks (ECNs)
Regulation & Supervision

A few questions
Ever wondered how the capital markets

work
Who sets the rules
What does the stock exchange do
What is the role of the stock broker
How to become a registered broker
Legislations
Capital Issues (Control) Act, 1947

SEBI Act, 1992
Securities Contracts (Regulation) Act, 1956
Depositories Act, 1996
Companies Act, 1956
Prevention of Money Laundering Act, 2002
The Regulator
Foremost authority presiding over the
capital markets
With mission to promote and maintain Fair,
efficient , secure and transparent market
and to facilitate the orderly development of
the stock exchange
Role and Functions of

a stock exchange
Established for the

purpose of assisting,
regulating and controlling
business of buying,
selling and dealing in
securities

a stock exchange contd
Provides a market for the trading of
securities to individuals and
organizations seeking to invest their
saving or excess funds through the
purchase of securities

Provides a physical location
for buying and selling
securities that have been
listed for trading on that
exchange

Establishes rules for fair
trading practices and
regulates the trading
activities of its members
according to those rules

The exchange itself does

not buy or sell the
securities, nor does it set
prices for them
Fair
The exchange assures that
no investor will have an
undue advantage over other
market participants
Efficient market
This means that orders
are executed and
transactions are settled
in the fastest possible
way
Transparency
Investor make informed and
intelligent decision about the
particular stock based on
information
Transparency contd
Listed companies must

disclose information in
timely, complete and
accurate manner to the
Exchange and the public on
a regular basis
Transparency contd
Required information include stock
price, corporate conditions and
developments dividend, mergers
and joint ventures, and
management changes etc
Stock Exchanges
Organized exchanges
Execute secondary market transactions
Examples: NYSE, AMEX, Midwest, Pacific
NYSE is largest, controlling 80 percent of value
of all organized exchanges
Must own a seat on exchange in order to trade
Trading resembles an auction
263
Stock Exchanges
Over-the-counter market
No trading floor
Telecommunications network
Nasdaq
National Association of Securities Dealers Automatic
Quotations
Thousands of small firms, plus high-tech giants
Pink sheets
Tiny firms that do not meet requirements for NASDAQ
264
Financing the exchange

Transaction fees paid by members for each
order executed
Fees paid by firms when their securities are
originally listed
Annual fees by firms
Entrance fees from new members
sale of historic trading and market
information
Major challenges for the Exchanges

Cross border trading
Issuers and investors are expanding
their horizons beyond their home
markets
Investors becoming much more
demanding
Stock Market In India
As of January 2005 there were 23 stock exchanges

recognised by the central government.
The most important development in the Indian stock

market was the establishment of the National Stock
Exchange (NSE) in 1994.
Within a short period it emerged as the largest stock

exchange surging ahead of the Bombay Stock
Exchange (BSE)
National Stock Exchange (NSE)
The NSE is a ringless, national, computerised

exchange.
The NSE has two segments: The Capital Market

Segment and the Wholesale Debt Market Segment.
Trading members in the Capital Market Segment are

through VSATs. The trading members in the Wholesale Debt Market are linked through leased lines.
The NSE has opted for an order-driven system.
All trades on NSE are guaranteed by the National

Securities Clearing Corporation.
NSE
At the end of March 2008, there were 1,381
companies listed at NSE and 1,236
companies were available for trading. The
Capital Market segment of NSE reported a
trading volume of Rs.35,51,038 crore during
2007-08 and at the end of March 2008, the
NSE Market Capitalisation was Rs.48,58,122
crore.
The derivatives trading on the NSE commenced with the

S&P CNX Nifty Index Futures on June 12, 2000. The trading
in index options commenced on June 4, 2001 and trading in
options on individual securities commenced on July 2, 2001.
Single stock futures were launched on November 9, 2001.
Thereafter, a wide range of products have been introduced
in the derivatives segment on the NSE.
The Index futures and options are available on Indices - S&P
CNX Nifty, CNX Nifty Junior, CNX 100, CNX IT, Bank Nifty
and Nifty Midcap 50.
Single stock futures are available on more than 250 stocks.
The mini derivative contracts (futures and options) on S&P
CNX Nifty were introduced for trading on January 1, 2008
while the Long term Options Contracts on S&P CNX Nifty
were launched on March 3, 2008
Bombay Stock Exchange (BSE)
The BSE switched from the open outcry system to

the screen-based system in 1995.
Jobbers play an important role on the BSE. A jobber

is a broker who offers a two-way quote or a bid-ask
quote.
Since both jobbers and brokers feed their orders,

the BSE has adopted a quote-driven system and
an order-driven system.
Stock Market Indices Around The World
Dow Jones
S & P 500
Nikkei 225
FTSE 100
Stock Indexes
Dow Jones Industrial Average
Price-weighted average
30 large U.S. firms
Standard and Poors (S&P) 500

Value-weighted
500 large U.S. firms
New York Stock Exchange Indexes

Other Stock Indexes
Amex, NASDAQ
273
Stock Indexes
Investing in stock indexes
Indexing
Has become very popular
Lower transactions costs
Studies find that actively-managed funds do not outperform
stock indexes
Examples of publicly traded stock indexes

SPDRs
Diamonds
274
i Bex
i SEC BOND INDEX (i BEX) is the most popular
bond market index in India. There are two versions of iBEX.
Total return index This tracks the total returns. It
captures interest payment (accrued and actual) and
capital gains/losses
Principal return index This index reflects

movements of net prices in the market, that is prices
quoted in the market exclusive of accrued interest
Thrust Of SEBIs
Regulation of Equity Market
PRIMARY MARKET
ACCESS
: RESTRICTED
INSTRUMENTS
: MULTIPLIED
PRICING
: RELAXED
DISCLOSURE NORMS
: TIGHTENED
RESPONSIBILITY OF MERCHANT
BANKERS
: ENHANCED
FOCUS INVESTORS
: SHIFTED INSTNAL
METHOD
: BOOK BUILDING
SECONDARY MARKET
TRADING
: COMPUTERISED
TRADING COSTS
: LOWERED
TRANSPARENCY
: ENHANCED
MARKETS
: INTEGRATED
GLOBALISATION
: ENCOURAGED
MANAGEMENT
: STRENGTHENED
SPECULATION
: HEIGHTENED
SETTLEMENT
: SHIFTED TO ELECTRONIC MODE
New York Stock Exchange
Trading through a system of brokers and specialists
Brokers link investors market
Specialists dual role

a. Match buy and sell orders when the prevailing
prices permit them to do so
b. Buy and sell on their own account when they
cannot match customer orders.
Institutional Participation in Stock

Markets
Program trading by institutions
Simultaneously buying and selling of a portfolio of at

least 15 different stocks valued at more than $1 million
Most commonly used by securities firms
Program refers to the use of computers
Impact on stock volatility

Often blamed for rise or fall in stock market
Studies show that program trading does not increase
volatility
278
Tokyo Stock Exchange
The TSE divides stocks into two sections: First Section: 1200 most
actively traded stocks. Second section: 400 less actively traded
stocks.
Trading in the larger stock of the First Section on the floor of the
exchange.
Remaining stocks in the First Section and the Second Section are
traded electronically.
The TSE relies on saitories who match orders but do not trade on
their own.
A saitori maintains a public limit order book, matches market and

limit orders, and slows down price movements when simple
matching of orders would result in price changes greater than
what is prescribed by the exchange.
Investor Monitoring of Firms in

the Stock Market
Shareholder activism
An investor who is dissatisfied with the way
managers are running a firm has 3 choices:
280
Do nothing
Sell the stock
Engage in shareholder activism
Corporate Monitoring of Firms in

the Stock Market
Potential benefits of an acquisition
Market for corporate control
If price declines due to poor management:
subject to possible takeover
Barriers to corporate control

Antitakeover amendments
Poison pills
Golden parachutes
281
Impact of the 1987 Stock Market

Crash on Financial Markets
October 19, 1987
U.S. stock market declined almost 23%
Impact on diversified stock portfolios

Because even diversified portfolios contain
systematic, or market, risk, these portfolios fall
with overall market declines
282
Globalization of Stock Markets

How barriers to international stock trading
have decreased
Reduction in information costs
Reduction in exchange rate risk
283
Foreign stock offerings in the United States

International placement process
Global stock exchange characteristics
Emerging stock markets

Methods used to invest in foreign shares
Direct purchases
American Depository Receipts (ADRs)
International mutual funds
World equity benchmark shares
284

Global diversification and integration among
stock markets
Integration of markets during the 1987 crash
All major stock markets declined, indicating the
underlying cause systematically affected all markets
Integration of markets during mini-crashes

Ex: August 27, 1998 Bloody Thursday
Russian financial crisis
285

CAPITAL MArket - Module 3 - Final

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Indias Capital Market

Indian Economy and Capital Market at a glance

The India economy, the third largest economy in

Indian Economy and Capital Market at a glance

Second fastest growing economies after

India had first entered the trillion-dollar club in June

Indian Economy and Capital Market

Indian Economy and Capital Market

Indian Economy and Capital Market

Indian Economy and Capital Market

Indian Economy and Capital Market

Indian Economy and Capital Market

Indian Economy and Capital Market

Indian Economy and Capital Market

The derivatives trading on the NSE

Indian Economy and Capital Market

Why invest in Indian capital

Why invest in Indian capital

Why invest in Indian capital

Why invest in Indian capital

Why invest in Indian capital

Why invest in Indian capital

There are five basic groups:

Nov. 11, 2013

The ceiling for overall investment for FIIs is

Structure of the Securities Market

Two types of financial markets

Structure of the Securities

The Capital Market (Equities) segment of

Units of Mutual Funds

Players and Participants in

Participants In The Securities Market

Dept of Co. Affairs

Primary vs. Secondary Security Sales

Existing owner sells to another party

Most popular investing instruments

Regulatory Framework of Securities Market

Companies Act 1956

Stock exchange means anybody of individuals,

Role and Functions of a stock exchange

To bring companies and investors together so that Investors

Facilitate marketability and transparency of

Bombay Stock Exchange (BSE)

Indian Stock Market (Sensex)

Stocks in India had a positive performance during the

SENSEX is calculated using the Free Float

CNX Nifty is computed using free float market capitalization

National Stock Exchange (NSE)

Market Segments of NSE

Wholesale debt market segment June 1994

NSE CNX Nifty

The CNX Nifty Index represents about 70.28%

Criteria for Selection of Constituent Stocks

For buying 150 share

Market capitalization: Companies needs to have a six

A stock may be replaced from an index for the following

Compulsory changes like corporate actions,

Top 10 Companies in CNX -Nifty

Components of secondary market

Over the Counter Exchange Of India (OTCEI)

Listing Requirements of OCTEI

Listing on OTCEI may be sought by companies with