AGURCHAND MANMULL JAIN COLLEGE

DEPARTMENT OF COMMERCE [ACCOUNTING & FINANCE]

CAPITAL MARKETS
UNIT-I NOTES

INTRODUCTION
 AGURCHAND MANMULL JAIN COLLEGE and sellers in what is known as a secondary market. Stocks may be
(A Unit of Sri S.S. Jain Educational Society) traded on listed exchanges, such as the New York Stock
Meenambakkam, Chennai – 600061 Exchange (NYSE) or Nasdaq, or else over-the-counter (OTC). Most
CO-EDUCATION
A Jain Minority Institution - Affiliated to University of Madras trading in stocks is done via regulated exchanges, and these play an
Reaccredited by NAAC important role in the economy as both a gauge of the overall health in
Shift-II the economy as well as providing capital gains and dividend income to
__________________________________________________________________________________ investors, including those with retirement accounts such as IRAs and
401(k) plans.
DEPARTMENT OF COMMERCE (Accounting & Finance)
Typical participants in a stock market include (both retail and
NOTES FOR “CAPITAL MARKETS”
institutional) investors and traders, as well as market makers (MMs)
UNIT-I INTRODUCTION and specialists who maintain liquidity and provide two-sided
markets. Brokers are third parties that facilitate trades between buyers
FINANCIAL MARKETS – MEANING and sellers but who do not take an actual position in a stock.

Financial markets refer broadly to any marketplace where the trading 2. Over-the-Counter Markets
of securities occurs, including the stock market, bond market, forex
An over-the-counter (OTC) market is a decentralized market—meaning
market, and derivatives market, among others. Financial markets are
it does not have physical locations, and trading is conducted
vital to the smooth operation of capitalist economies.
electronically—in which market participants trade securities directly
between two parties without a broker. While OTC markets may handle
trading in certain stocks (e.g., smaller or riskier companies that do not
TYPES OF FINANCIAL MARKETS meet the listing criteria of exchanges), most stock trading is done via
exchanges. Certain derivatives markets, however, are exclusively OTC,
1. Stock Markets
and so make up an important segment of the financial markets. Broadly
Perhaps the most ubiquitous of financial markets are stock markets. speaking, OTC markets and the transactions that occur on them are far
These are venues where companies list their shares and they are less regulated, less liquid, and more opaque.
bought and sold by traders and investors. Stock markets, or equities
markets, are used by companies to raise capital via an initial public
offering (IPO), with shares subsequently traded among various buyers

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3. Bond Markets trading stocks directly, a derivatives market trades in futures
and options contracts, and other advanced financial products, that
A bond is a security in which an investor loans money for a defined
derive their value from underlying instruments like bonds,
period at a pre-established interest rate. You may think of a bond as
commodities, currencies, interest rates, market indexes, and stocks.
an agreement between the lender and borrower that contains the
details of the loan and its payments. Bonds are issued by corporations Futures markets are where futures contracts are listed and traded.
as well as by municipalities, states, and sovereign governments to Unlike forwards, which trade OTC, futures markets utilize standardized
finance projects and operations. The bond market sells securities such contract specifications, are well-regulated, and utilize clearinghouses to
as notes and bills issued by the United States Treasury, for example. settle and confirm trades. Options markets, such as the Chicago Board
The bond market also is called the debt, credit, or fixed-income market. Options Exchange (CBOE), similarly list and regulate options contracts.
Both futures and options exchanges may list contracts on various asset
4. Money Markets
classes, such as equities, fixed-income securities, commodities, and so
Typically the money markets trade in products with highly liquid short- on.
term maturities (of less than one year) and are characterized by a high
6. Forex Market
degree of safety and a relatively low return in interest. At the wholesale
level, the money markets involve large-volume trades between The Forex (foreign exchange) market is the market in which
institutions and traders. At the retail level, they include money market participants can buy, sell, hedge, and speculate on the exchange rates
mutual funds bought by individual investors and money market between currency pairs. The forex market is the most liquid market in
accounts opened by bank customers. Individuals may also invest in the the world, as cash is the most liquid of assets. The currency market
money markets by buying short-term certificates of handles more than $5 trillion in daily transactions, which is more than
deposit (CDs), municipal notes, or U.S. Treasury bills, among other the futures and equity markets combined. As with the OTC markets, the
examples. forex market is also decentralized and consists of a global network of
computers and brokers from around the world. The forex market is
5. Derivatives Markets
made up of banks, commercial companies, central banks, investment
A derivative is a contract between two or more parties whose value is management firms, hedge funds, and retail forex brokers and
based on an agreed-upon underlying financial asset (like a security) or investors.
set of assets (like an index). Derivatives are secondary securities whose
value is solely derived from the value of the primary security that they
are linked to. In and of itself a derivative is worthless. Rather than

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7. Commodities Markets 3. Ensures liquidity:

Commodities markets are venues where producers and consumers Assets that buyers and sellers trade in the financial market have high
meet to exchange physical commodities such as agricultural products liquidity. It means that investors can easily sell those assets and
(e.g., corn, livestock, soybeans), energy products (oil, gas, carbon convert them into cash whenever they want. Liquidity is an important
credits), precious metals (gold, silver, platinum), or "soft" reason for investors to participate in trade.
commodities (such as cotton, coffee, and sugar). These are known
as spot commodity markets, where physical goods are exchanged for
4. Saves time and money:
money. The bulk of trading in these commodities, however, takes place
instead on derivatives markets that utilize spot commodities as the Financial markets serve as a platform where buyers and sellers can
underlying assets. Forwards, futures, and options on commodities are easily find each other without making too much efforts or wasting time.
exchanged both OTC and on listed exchanges around the world such as Also, since these markets handle so many transactions it helps them to
the Chicago Mercantile Exchange (CME) and the Intercontinental achieve economies of scale. This results in lower transaction cost and
Exchange (ICE). fees for the investors.

FUNCTIONS OF INDIAN FINANCIAL MARKETS CLASSIFICATIONS OF FINANCIAL MARKETS

1. Price Determination: 1. By Nature of Claim
Demand and supply of an asset in a financial market help to determine o Debt Market: The market where fixed claims or debt
their price. Investors are the supplier of the funds, while the industries instruments, such as debentures or bonds are bought and sold
are in need of the funds. Thus, the interaction between these two between investors.
participants and other market forces helps to determine the price.
o Equity Market: Equity market is a market wherein the
investors deal in equity instruments. It is the market for residual
2. Mobilization of savings: For an economy to be successful it is claims.
crucial that the money does not sit idle. Thus, a financial market helps
in connecting those with money with those who require money.

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2. By Maturity of Claim 4. By Organizational Structure

o Money Market: The market where monetary assets such as o Exchange-Traded Market: A financial market, which has a
commercial paper, certificate of deposits, treasury bills, etc. centralised organisation with the standardised procedure.
which mature within a year, are traded is called money market.
o Over-the-Counter Market: An OTC is characterised by a
It is the market for short-term funds. No such market exist
decentralised organisation, having customised procedures.
physically; the transactions are performed over a virtual
network, i.e. fax, internet or phone.

o Capital Market: The market where medium and long term INDIAN FINANCIAL MARKETS
financial assets are traded in the capital market. It is divided into
two types: What does the India Financial market comprise of? It talks about the
primary market, FDIs, alternative investment options, banking and
o Primary Market: A financial market, wherein the
insurance and the pension sectors, asset management segment as well.
company listed on an exchange, for the first time, issues
With all these elements in the India Financial market, it happens to be
new security or already listed company brings the fresh
one of the oldest across the globe and is definitely the fastest growing
issue.
and best among all the financial markets of the emerging economies.
o Secondary Market: Alternately known as the Stock The history of Indian capital markets spans back 200 years, around the
market, a secondary market is an organised marketplace, end of the 18th century. It was at this time that India was under the
wherein already issued securities are traded between rule of the East India Company. The capital market of India initially
investors, such as individuals, merchant bankers, developed around Mumbai; with around 200 to 250 securities brokers
stockbrokers and mutual funds. participating in active trade during the second half of the 19th century.

3. By Timing of Delivery

o Cash Market: The market where the transaction between SCOPE OF THE INDIA FINANCIAL MARKET
buyers and sellers are settled in real-time.
The financial market in India at present is more advanced than many
o Futures Market: Futures market is one where the delivery or other sectors as it became organized as early as the 19th century with
settlement of commodities takes place at a future specified date. the securities exchanges in Mumbai, Ahmedabad and Kolkata. In the
early 1960s, the number of securities exchanges in India became eight -

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including Mumbai, Ahmedabad and Kolkata. Apart from these three other determinant factor of the prices of the financial products is the
exchanges, there was the Madras, Kanpur, Delhi, Bangalore and Pune market forces of demand and supply. The various other types of Indian
exchanges as well. Today there are 23 regional securities exchanges in markets help in the functioning of the wide India financial sector.
India.

The Indian stock markets till date have remained stagnant due to the
rigid economic controls. It was only in 1991, after the liberalization FEATURES OF THE FINANCIAL MARKET IN INDIA
process that the India securities market witnessed a flurry of IPOs
 India Financial Indices - BSE 30 Index, various sector indexes,
serially. The market saw many new companies spanning across
stock quotes, Sensex charts, bond prices, foreign exchange,
different industry segments and business began to flourish.
Rupee & Dollar Chart

The launch of the NSE (National Stock Exchange) and the OTCEI (Over  Indian Financial market news
the Counter Exchange of India) in the mid 1990s helped in regulating a
smooth and transparent form of securities trading.  Stock News - Bombay Stock Exchange, BSE Sensex 30 index, S&P
CNX-Nifty, company information, issues on market
The regulatory body for the Indian capital markets was the SEBI capitalization, corporate earning statements
(Securities and Exchange Board of India). The capital markets in India  Fixed Income - Corporate Bond Prices, Corporate Debt details,
experienced turbulence after which the SEBI came into prominence. Debt trading activities, Interest Rates, Money Market,
The market loopholes had to be bridged by taking drastic measures. Government Securities, Public Sector Debt, External Debt
Service

 Foreign Investment - Foreign Debt Database composed by BIS,

POTENTIAL OF THE INDIA FINANCIAL MARKET IMF, OECD,& World Bank, Investments in India & Abroad

India Financial Market helps in promoting the savings of the economy -  Global Equity Indexes - Dow Jones Global indexes, Morgan
helping to adopt an effective channel to transmit various financial Stanley Equity Indexes
policies. The Indian financial sector is well-developed, competitive,
efficient and integrated to face all shocks. In the India financial market  Currency Indexes - FX & Gold Chart Plotter, J. P. Morgan
there are various types of financial products whose prices are Currency Indexes
determined by the numerous buyers and sellers in the market. The  National and Global Market Relations
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  Mutual Funds An ideal capital market at tempts to provide adequate capital at
reasonable rate of return for any business, or industrial proposition
 Insurance
which offers a prospective high yield to make borrowing worthwhile.
 Loans
The Indian capital market is divided into gilt-edged market and the
 Forex and Bullion industrial securities market. The gilt-edged market refers to the market
for government and semi-government securities, backed by the RBI.
The securities traded in this market are stable in value and are much
sought after by banks and other institutions.
INDIAN CAPITAL MARKET
The industrial securities market refers to the market for shares and
The Indian capital market is the market for long term loanable funds as debentures of old and new companies. This market is further divided
distinct from money market which deals in short-term funds. into the new issues market and old capital market meaning the stock
It refers to the facilities and institutional arrangements for borrowing exchange.
and lending ‘term funds’, medium term and long term funds. In The new issue market refers to the raising of new capital in the form of
principal capital market loans are used by industries mainly for fixed shares and debentures, whereas the old capital market deals with
investment. It does not deal in capital goods, but is concerned with securities already issued by companies.
raising money capital or purpose of investment.
The capital market is also divided in primary capital market and
CLASSIFICATION secondary capital market. The primary market refers to the new issue
market, which relates to the issue of shares, preference shares, and
The capital market in India includes the following institutions (i.e.,
debentures of non-government public limited companies and also to
supply of funds tor capital markets comes largely from these); (i)
the realising of fresh capital by government companies, and the issue of
Commercial Banks; (ii) Insurance Companies (LIC and GIC); (iii)
public sector bonds.
Specialised financial institutions like IFCI, IDBI, ICICI, SIDCS, SFCS, UTI
etc.; (iv) Provident Fund Societies; (v) Merchant Banking Agencies; (vi) The secondary market on the other hand is the market for old and
Credit Guarantee Corporations. Individuals who invest directly on their already issued securities. The secondary capital market is composed of
own in securities are also suppliers of fund to the capital market. industrial security market or the stock exchange in which industrial
securities are bought and sold and the gilt- edged market in which the
Thus, like all the markets the capital market is also composed of those
government and semi-government securities are traded.
who demand funds (borrowers) and those who supply funds (lenders).
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GROWTH OF INDIAN CAPITAL MARKET CAPITAL MARKET INSTRUMENTS
Indian Capital Market before Independence: Financial instruments mean documents that evidence the claims and
income or asset as “any contract that gives rise to both a financial asset
Indian capital market was hardly existent in the pre-independence
on one enterprise and a financial liability or equity instrument of
times. Agriculture was the mainstay of economy but there was hardly another enterprise”.
any long term lending to agricultural sector. Similarly the growth of
industrial securities market was very much hampered since there were 1. Securities:
very few companies and the number of securities traded in the stock
‘Securities’ is a general term for a stock exchange investment.
exchanges was even smaller.
Securities Contract (Regulation) Act, 1956 defines securities as to
Indian capital market was dominated by gilt-edged market for
include:
government and semi-government securities. Individual investors were
very few in numbers and that too were limited to the affluent classes in 1. Shares, Scripts, Stocks, Bonds, Debentures.
the urban and rural areas. Last but not the least, there were no
specialised intermediaries and agencies to mobilise the savings of the 2. Government Securities.
public and channelise them to investment.
3. Such other instruments as may be declared by the Central
Indian Capital Market after Independence: government to be securities.

Since independence, the Indian capital market has made widespread 4. Rights or interests in securities and,
growth in all the areas as reflected by increased volume of savings and
5. Derivatives
investments. In 1951, the number of joint stock companies (which is a
very important indicator of the growth of capital market) was 28,500 6. Securitized instruments
both public limited and private limited companies with a paid up
capital of Rs. 775 crore, which in 1990 stood at 50,000 companies with Securities are generally classified into ownership securities and
a paid up capital of Rs. 20,000 crore. The rate of growth of investment creditorship securities. Equity shares and preference shares are
has been phenomenal in recent years, in keeping with the accelerated ownership securities. They are also known as capital stock.
tempo of development of the Indian economy under the impetus of the Creditorship securities are bonds, debentures etc. They are referred to
five year plans. as debt capital.

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2. Equity Shares: 3. Base for Further Borrowings:

Equity Shares are the ordinary shares of a limited company. It is an Lenders generally lend on the basis of paid up capital and reserve. This
instrument, a contract, which guarantees a residual interest in the is the net worth of the company. A higher net worth increases financial
assets of an enterprise after deducting all its liabilities- including capability.
dividends on preference shares. Equity shares constitute the ownership
4. Trading on Equity is Possible:
capital of a company. Equity holders are the legal owners of a company.
When borrowing becomes cheaper, company can borrow money and
Equity shares are regarded as the cornerstones of the capital structure
invest. The whole earnings after the interest belongs to the
of a company. They are the source of permanent capital which does not
shareholders.
have a maturity date. As the owners of equity shares, the equity
shareholders participate in the management of the company through 5. Voting Rights:
the elected board of directors, and through the voting rights in
important decisions. They share the profits and assets in proportion to As the owners of capital equity shareholders can express their opinion
their holding in the net assets of the company. on all important matters through their voting right.

Advantages of Equity Shares: 3. Preference Shares:

Following are the advantages of equity shares: The Companies Act (Sec, 85), 1956 describes preference shares as
those which Carry a preferential right to payment of dividend during
1. Permanent Capital: the life time of the company and Carry a preferential right for
repayment of capital in the event of winding up of the company.
It provides permanent capital to the company. The capital need not be
repaid as long as the company is a going concern. Preference shares have the features of equity capital and features of
fixed income like debentures. They are paid a fixed dividend before any
2. No Fixed Charge on Income:
dividend is declared to the equity holders.
Payment of dividend is a management policy. Company is not legally
Features of Preference Shares
bound to declare dividend even if there is sufficient earnings. Dividend
payment can be postponed. This adds flexibility. Following are the features of Preference Shares:

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1. Priority to Dividend: 5. Convertibility:

Preference share dividend is payable on a fixed rate. Usually the Convertible preferences shareholders are allowed to convert their
dividend is a percentage of the par value of the share. It must be paid preferential holdings, fully or partly into equity shares at a specified
before any equity dividend is paid. conversion rate during a given period of time. This right of conversion
is exercised by preference shareholders mostly to participate in the
2. Cumulative Nature:
excess earnings of the company or to gain ownership control.
Cumulative nature means that when dividends are not paid in a
6. Non-Voting:
particular year they will be accumulated in the coming years. No
dividend can be paid on equity shares until all arrears on preference Preference shareholders have no voting right on ordinary matters of
stock are paid up. However, there are non- cumulative preference stock corporate policy.
also. In this case, there is no guarantee that the unpaid dividend will be
Types of Preference Shares
paid in future even if the profitability of the concern improves. Hence,
the cumulative feature is necessary to project the right of preference 1. Redeemable Preference Shares:
shareholders.
These shares are redeemed after a given period.
3. Non-Participatory:
Such shares can be repaid by the company on certain conditions,
This means that the holders of such shares are not entitled for a share viz.;
in the extra profit earned by the company. Their return will remain at
the agreed rate whatever be the profit level of the company. There are, a. The shares must be fully paid up.
however, occasional issues of participating preferences shares also.
b. It must be redeemed either out of profit or out of reserve fund for the
4. Preference as to Assets on Winding Up: purpose.

Preference shares are given preference in liquidation. Where the c. The premium must be paid if any.
company dissolved, the funds from the sale of the assets go first to the
A company may opt for redeemable preference shares to avoid fixed
various classes of creditors according to the seniority of their claims.
liability of payment, increase the earnings of equity shares, to make the
The preference shareholders get the next priority.
capital structure simple or such other reasons.

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2. Irredeemable Preference Shares: 7. Fully Convertible Cumulative Preference Shares:

These shares are not redeemable except on the liquidation of the Part of such shares, are automatically converted into equity shares on
company. the date of allotment. The rest of the shares will be redeemed at par or
converted in to equity after a lock in period at the option of the
3. Convertible Preference Shares: investors.
Such shares can be converted to equity shares at the option of the 4. Debentures:
holder. Hence, these shares are also known as quasi equity shares.
Conversion of preference shares in to bonds or debentures is permitted Debenture is an instrument under seal evidencing debt. The essence of
if company wishes. The conversion feature makes preference shares debenture is admission of indebtedness. It is a debt instrument issued
more acceptable to investors. Even though the market for preference by a company with a promise to pay interest and repay the principal on
shares is not good at a point of time, the convertibility will make it maturity. Debenture holders are creditors of the company. Sec 2 (12) of
attractive. the Companies Act, 1956 states that debenture includes debenture
stock, bonds and other securities of a company. It is customary to
4. Participating Preference Shares:
appoint a trustee, usually an investment bank- to protect the interests
These kinds of shares are entitled to get regular dividend at fixed rate. of the debenture holders. This is necessary as debenture deed would
Moreover, they have a right for surplus of the company beyond a specify the rights of the debenture holders and the obligations of the
certain limit. company.

5. Cumulative Preference Shares: Types of Debentures:

The dividend payable for such shares is fixed at 10%. The dividend not 1. Secured Debentures:
paid in a particular year can be cumulated for the next year in this case. Debentures which create a charge on the property of the company is a
6. Preference Shares with Warrants: secured debenture. The charge may be floating or fixed. The floating
charge is not attached to any particular asset of the company. But when
This instrument has certain number of warrants. The holder of such the company goes into liquidation the charge becomes fixed. Fixed
warrants can apply for equity shares at premium. The application charge debentures are those where specific asset or group of assets is
should be made between the third and fifth year from the date of pledged as security. The details of these charges are to be mentioned in
allotment. the trust deed.

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 if the company can afford to do so. Redemption can also be brought
about by issuing other securities less costly to the company in the place
2. Unsecured Debentures:
of the old ones.
These are not protected through any charge by any property or assets
6. Convertible Debentures:
of the company. They are also known as naked debentures. Well
established and credit worthy companies can issue such shares. When an option is given to convert debentures in to equity shares after
a specific period, they are called as convertible debentures.
3. Bearer Debentures:
7. Non-Convertible Debentures With Detachable Equity Warrants:
Bearer debentures are payable to bearer and are transferable by mere
delivery. Interest coupons are attached to the certificate or bond. As The holders of such debentures can buy a specified number of shares
interest date approaches, the appropriate coupon is ‘clipped off by the from the company at a predetermined price. The option can be
holder of the bond and deposited in his bank for collection. The bank exercised only after a specified period.
may forward it to the fiscal agent of the company and proceeds are
5. Bonds:
collected. Such bonds are negotiable by delivery.
Bonds are debt instruments that are issued by
4. Registered Debentures:
companies/governments to raise funds for financing their capital
In the case of registered debentures the name and address of the holder requirements. By purchasing a bond, an investor lends money for a
and date of registration are entered in a book kept by the company. The fixed period of time at a predetermined interest (coupon) rate. Bonds
holder of such a debenture bond has nothing to do except to wait for have a fixed face value, which is the amount to be returned to the
interest payment which is automatically sent him on every payment investor upon maturity of the bond.
date.
During this period, the investors receive a regular payment of interest,
When such debentures are registered as to principals only, coupons are semi-annually or annually, which is calculated as a certain percentage
attached. The holder must detach the coupons for interest payment and of the face value and known as a ‘coupon payment.’ Bonds can be issued
collect them as in the case of bearer bonds. at par, at discount or at premium. A bond, whether issued by a
government or a corporation, has a specific maturity date, which can
5. Redeemable Debentures:
range from a few days to 20-30 years or even more.
When the debentures are redeemable, the company has the right to call
Both debentures and bonds mean the same. In Indian parlance,
them before maturity. The debentures can be paid off before maturity,
debentures are issued by corporates and bonds by government or
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semi-government bodies. But now, corporates are also issuing bonds
which carry comparatively lower interest rates and preference in
iv. Step-Up Bonds:
repayment at the time of winding up, comparing to debentures.
A bond that pays a lower coupon rate for an initial period which, then
The government, public sector units and corporates are the dominant
increases to a higher coupon rate.
issuers in the bond market. Bonds issued by corporates and the
Government of India can be traded in the secondary market. v. Callable and Non-Callable Bonds:
The different types of bonds are: If a bond can be called (redeemed) prior to maturity, the bond is said to
be callable. If a bond cannot be called prior to maturity, it is said to be
i. Zero Coupon Bonds:
non-callable.
Zero Coupon Bonds are issued at a discount to their face value and at
the time of maturity, the principal/face value is repaid to the holders.
No interest (coupon) is paid to the holders. The difference between TYPES OF GOVERNMENT SECURITIES
issue price (discounted price) and redeemable price (face value) itself
acts as interest to holders. These types of bonds are also known as 1. Promissory Notes:
Deep Discount Bonds.
Promissory Notes are instruments containing the promises of the
ii. Mortgage Bonds: Government to pay interest at a specified rate. Interests are usually
paid half yearly. Interest is payable to the holder only on presentation
This is the common type of bond issued by the corporates. Mortgage
of the promissory notes. They are transferable by endorsement and
bonds are secured by physical assets of the corporation such as their
delivery.
building or equipment.
2. Stock Certificates (Inscribed Stock):
iii. Convertible Bonds:
Stock certificate, also known as Inscribed Stock, is a debt held in the
This type of bond allows the bond holder to convert their bonds into
form of stock. The owner is given a certificate inserting his name after
shares of stock of the issuing corporation. Conversion ratio (number of
registering in the books of PDO of RBI. The execution of transfer deed is
equity shares in lieu of a convertible bond) and the conversion price
necessary for its transfer. Since liquidity is affected, these are not much
(determined at the time of conversion) are pre-specified at the time of
favoured by investors. One will have to wait till maturity to get it
bonds issue.
encashed.
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 This is a stock where payment of principal amount is made in
installments over a given time frame. It meets the needs of investors
3. Bearer Bonds:
with regular flow of funds and the needs of Government when it does
A bearer bond is an instrument issued by government, certifying that not need funds immediately. The first issue of such stock of eight year
the bearer is entitled to a specified amount on the specified date. maturity was made on November 15, 1994 for Rs. 2000 crore. Such
Bearer bonds are transferable by mere delivery. Interest Coupons are stocks have been issued a few more times thereafter.
attached to these bonds. When the periodical interest falls due, the
7. Floating Rate Bonds:
holder clips off the relevant coupon and presents it to the concerned
authority for payment of interest. These are bonds with variable interest rate, which will be reset at
regular intervals (six months). There may be a cap and a floor rate
4. Dated Securities:
attached, thereby fixing a maximum and minimum interest rate payable
They are long term Government securities or bonds with fixed maturity on it. Floating rate bonds of four year maturity were first issued on
and fixed coupon rates paid on the face value. These are called dated September 29, 1995.
securities because these are identified by their date of maturity and the
8. Bonds with Call/Put Option:
coupon, e.g., 12.60% GOI BOND 2018 is a Central Government security
maturing in 2018, which was issued on 23.11.1998 bearing security These are Govt. bonds with the features of options where the Govt.
coupon 400095 with a coupon of 12.06 % payable half yearly. At (issuer) has the option to call (buy) back or the investor can have the
present, there are Central Government dated securities with tenure up option to sell the bond (Put option) to the issuer. First time in the
to 30 years in the market. Dated securities are sold through auctions. history of Government Securities market RBI issued a bond with call
They are issued and redeemed at par. and put option in 2001-02. This bond was due for redemption in 2012
and carried a coupon of 6.72%. However the bond had call and put
5. Zero Coupon Bonds: option after five years i.e. in the year 2007. In other words, it means
These bonds are issued at discount to face value and to be redeemed at that holder of bond could sell back (put option) bond to Government in
par. As the name suggests there is no coupon/interest payments. These 2007 or Government could buy back (call option) bond from holder in
bonds were first issued by the GOI in 1994 and were followed by two 2007.
subsequent issues in 1995 and 1996 respectively.
9. Capital Indexed Bonds:
6. Partly Paid Stock:
These are bonds where interest rate is a fixed percentage over the
wholesale price index. The principal redemption is linked to an index of
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inflation (here wholesale price index). These provide investors with an GLOBAL DEBT INSTRUMENTS
effective hedge against inflation. These bonds were floated on
December, 1997 on an on tap basis. They were of five year maturity Following are some of the debt instruments that are popular in the
with a coupon rate of 6 per cent over the wholesale price index. international financial markets:

10. Fixed Rate Bond: 1. Income Bonds

Normally government securities are issued as fixed rate bonds. In this Interest income on such bonds is paid only where the corporate
type of bonds the coupon rate is fixed at the time of issue and remains command adequate cash flows. They resemble cumulative preference
fixed till redemption. shares in respect of which fixed dividend is paid only if there is profit
earned in a year, but carried forward and paid in the following year.
Gold bonds, National Defence bonds, Special Purpose Securities, Rural There is no default on income bonds if interest is not paid. Unlike the
Development bonds, Relief bonds, Treasury bill etc. are other types of dividend on cumulative preference shares, the interest on income bond
Government securities. is tax deductible. These bonds are issued by Corporates that undergo
financial restructuring.
The major investors in G-Secs are banks, life insurance companies,
general insurance companies, pension funds and EPFO. Other investors 2. Asset Backed Securities
include primary dealer’s mutual funds, foreign institutional investors,
high net-worth individuals and retail individual investors. These are a category of marketable securities that are collateralized by
financial assets such as installment loan contracts. Asset backed
Most of the secondary market trading in government bonds happens on financing involves a disinter- mediating process called ‘securitization’,
OTC (Over the Counter), the Negotiated Dealing System and the whereby credit from financial intermediaries in the form of
wholesale debt-market (WDM) segment of the National Stock debentures are sold to third parties to finance the pool. REPOS are the
Exchange. oldest asset backed security in our country. In USA, securitization has
been undertaken for the following the oldest asset backed security in
our country. In USA, securitization has been undertaken for the
following: 1. Insured mortgages 2. Mortgage backed bonds 3. Student
loans 4. Trade credit receivable backed bonds 5. Equipments leasing
backed bonds 6. Certificates of automobile receivable securities 7.
Small business administration loans 8. Credit and receivable securities.

Page 14 of 16
3. Junk Bonds 5. Zero-Coupon Bonds (ZCBs)/Zero Coupons Convertible
Debentures
Junk bond is a high risk, high yield bond which finances either a
Leveraged Buyout (LBO) or a merger of a company in financial distress Zero Coupon Bonds first came to be introduced in the U.S. securities
Junk bonds are popular in the USA and are used primarily for financing market. Initially, such bonds were issued for high denominations. These
takeovers. The coupon rates range from 16 to 25 percent. Attractive bonds were purchased by large security brokers in large chunks, who
deals were put together establishing their feasibility in terms of resold them to individual investors, at a slightly higher price in
adequacy of cash flows to meet interest payments. Michael Milken (the affordable lots. Such bonds were called ―Treasury Investment Growth
junk bond king) of Drexel Burnham Lambert was the real developer of Receipts’(TIGRs) or ‘Certificate of Accruals on Treasury
the market. Securities’(CATSs) or ZEROs as their coupon rate is Zero. Moreover,
these certificates were sold to investors at a hefty discount and the
4. Indexed Bonds
difference between the face value of the certificate and the acquisition
These are the bonds whose interest payment and redemption value are cost was the gain. The holders are not entitled for any interest except
indexed with movements in prices. Indexed bonds protect the investor the principal sum on maturity.
from the eroding purchasing power of money because of inflation. For
6. Floating Rate Bonds (FRBs)
instance, an inflation-indexed bond implies that the payment of the
coupon and/or the redemption value increases or decreases according Bonds that carry the provision for payment of interest at different
to movements in prices. The bonds are likely to hedge the principal rates for different time periods are known as ‘Floating Rate Bonds’. T in
amount against inflation. Such bonds are designed to provide investors the Indian capital market. The SBI, while issuing such bonds, adopted a
an effective hedge against inflation so as to enhance the credibility of reference rate of highest rate of interest on fixed deposit of the Bank,
the anti-inflationary policies of the Government. The yields of an provided a minimum floor rate payable at 12 percent p.a. and attached
inflation-indexed bond provide vital information on the expected rate a call option to the Bank after 5 years to redeem the bonds earlier than
of inflation. United Kingdom, Australia, and Canada have introduced the maturity period of 10 years at a certain premium. A major highlight
index linked government securities as a segmented internal debt of the bonds was the provision to reduce interest risk and assurance of
management operation with a view to increase the range of assets minimum interest on the investment provided by the Bank.
available in the system, provide an inflation hedge to investors, reduce
interest costs and pick up direct signals, and the expected inflation and
real rate of interest from the market.

Page 15 of 16
7. Euro Convertible Bonds

Bonds that give the holders of euro bonds to have the instruments
converted into a wide variety of options such as the call option for the
issuer and the put option for the investor, which makes redemption
easy are called ‘Euro-convertible bonds’. A euro convertible bond
essentially resembles the Indian convertible debenture but comes with
numerous options attached. Similarly, a euro-convertible bond is an
easier instrument to market than equity. This is because it gives the
investor an option to retain his investments as a pure debt instrument
in the event of the price of the equity share falling below the conversion
price or where the investor is not too sure about the prospects of the
company.

REFERENCE:

 https://www.investopedia.com/terms/f/financial-market.asp
 https://businessjargons.com/financial-
market.html#:~:text=Definition%3A%20Financial%20Market%
20refers%20to,resources%2C%20in%20the%20country's%20
economy.
 https://business.mapsofindia.com/india-market/financial.html
 https://www.yourarticlelibrary.com/economics/market/indian
-capital-market-classification-and-growth-of-indian-capital-
market/23476
 https://www.businessmanagementideas.com/markets/capital-
market/financial-instruments-used-in-a-capital-market-
financial-management/17105
 http://www.brainkart.com/article/Global-Debt-
Instruments_6180/

Page 16 of 16
AGURCHAND MANMULL JAIN COLLEGE
DEPARTMENT OF COMMERCE [ACCOUNTING & FINANCE]

CAPITAL MARKETS
UNIT-II NOTES

REGULATION OF INDIAN CAPITAL MARKET

 AGURCHAND MANMULL JAIN COLLEGE Controller of Capital Issues was the regulating body to regulate the
(A Unit of Sri S.S. Jain Educational Society) market which was controlled by the Capital Issues (Control) Act, 1947.
Meenambakkam, Chennai – 600061
CO-EDUCATION Majorly, SEBI controls the issuers of securities, the investors and the
A Jain Minority Institution - Affiliated to University of Madras market intermediaries. The Board draft regulations and statutes under
Reaccredited by NAAC
Shift-II its legislative authority, also pass rulings and orders under its judicial
__________________________________________________________________________________ capacity and operate investigations in its executive limits. SEBI works
as a barrier to avoid malpractices related to the stock market by
DEPARTMENT OF COMMERCE (Accounting & Finance) establishing a code of conduct and promoting the healthy functioning of
the stock exchange. Initially, SEBI didn’t have the authority to regulate
NOTES FOR “CAPITAL MARKETS”
the stock exchange, but in 1992 the Union Government gave statutory
UNIT-II REGULATION OF INDIAN CAPITAL MARKET powers to SEBI through the SEBI Act, 1992.

REASONS FOR ESTABLISHING SEBI

During the fall of the 1970s and the rise of the 1980s, the people of
SECURITIES AND EXCHANGE BOARD OF INDIA - SEBI India preferred to work in the Capital Market as the market was
INTRODUCTION trending. Without any authority, problems like unofficial private
placements, the rigging of prices, unofficial self-styled merchant
SEBI is also known as the Security and Exchange Board of India was bankers started violating the rules and regulations of the stock
established on 12 April 1992 through the SEBI Act, 1992. It was a non- exchange which caused delays in the delivery of shares.
statutory body established to regulate the securities market. The
headquarters of the board is situated in Bandra Kurla Complex, The Government felt an immediate need to establish a regulatory body
Mumbai. SEBI helps in regulating the Indian Capital Market by to regulate its working and to find solutions for all the problems the
protecting the interest of investors and establishing the rules and market was going through, as the people were losing interest in the
regulations for the development of the capital market. market. This led to the establishment of the Security and Exchange
Board of India.
SEBI or the Security and Exchange Board of India is a regulatory body
controlled by the Government of India to regulate the capital and PURPOSE AND ROLE OF SEBI
security market. Before the Security and Exchange Board of India, the SEBI helps in creating a healthy environment to facilitate an effective
mobilization between the market participants and investors. It helps in
Page 1 of 14
locating the resources with the help of the securities market. SEBI ORGANIZATIONAL STRUCTURE OF SEBI
establish rules and regulations, policy framework and infrastructure to
The members of the Security and Exchange Board of India are:
meet the needs of the market.
 The Chairman who is appointed by the Union Government of
The financial market majorly comprises of three groups:
India.
The Issuer of Securities
 Two members who are selected from the officers of the Union
Issuers are the group that works in the corporate department to easily Finance Ministry.
raise funds from the various sources of the market. So, SEBI helps the
 One member who is appointed from the Reserve Bank of India.
issuers by providing them a healthy and open environment to work
efficiently.  The other five members are appointed by the Union
Government of India, out of five three must be whole-time
Investors
members.
The investors are the soul of the market as they keep the market alive
Dr. S.A. Dave was the first Chairman of SEBI who was appointed on
by providing accurate supplies, correct information, and protection to
10th April 1988. Ajay Tyagi is the present Chairman appointed on 10th
the people on a daily basis. SEBI helps investors by creating a
February 2017 replacing U K Sinha.
malpractice free environment to attract and protect the money of the
people who invested in the market. FUNCTIONS OF SEBI
Financial Intermediaries SEBI basically protects the interest of the investors in the security
The intermediaries are the people who act as middlemen between the market, promotes the development of the security market and
issuers and the investors. SEBI helps in creating a competitive regulates the business. The functions of the Security and Exchange
professional market which gives a better service to the issuers and the Board of India can primarily be categorized into three parts:
investors. They also provide efficient infrastructure and secured A. Protective Function
financial transactions.
Protective functions are used to protect the interest of investors and
other financial participants. These functions are:

 Prevent Insider Trading: When the people working in the

market like director, promoters or employees working in the
Page 2 of 14
 company starts to buy or sell the securities because they have  SEBI designed guidelines and code of conduct for efficient
access to the confidential price which results in affecting the working of financial intermediaries and corporate.
price of the security is known as insider trading. SEBI restricted
 Established rules for taking over a company.
companies to buy their own shares from the secondary market
and SEBI also regulates regular check-ups to prevent insider  Conducts regular inquiries and audits of stock exchanges.
trading and avoid malpractices.
 Regulates the process of mutual funds.
 Checks price rigging: The malpractices which create
unreasonable fluctuations in the price of the securities with the  Registration of brokers, sub-brokers, and merchant bankers is
help of increasing or decreasing the market price of stocks controlled by SEBI.
which results in an immense loss for the investors or traders are
 Levying of fees is regulated by SEBI.
known as price rigging. To prevent price rigging, SEBI keeps
active surveillance on the factors which can promote price  Restrictions on private placement.
rigging.
C. Development Function
 Promotes fair trade practices: SEBI established rules and
regulations and a certain code of conduct in the securities The development functions are the steps taken by SEBI to improve the
market to restrict fraudulent and unfair trade practices. security of the market through technology. The functions are:

 Providing awareness/financial education for investors: SEBI  By providing training sessions to the intermediaries of the
conducts seminars both online and offline to educate the market.
investors about insights into the financial market and money  By promoting fair trading and restrictions on malpractices of
management. any kind.
B. Regulatory Function  By introducing the DEMAT format.
Regulatory functions are generally used to check the functioning of the  By promoting self-regulating organizations.
financial business in the market. They establish rules to regulate the
financial intermediaries and corporates for the efficiency of the market.  By introducing online trading through registered stock brokers.
These functions are:

Page 3 of 14
OBJECTIVES OF SEBI FEATURES OF SEBI

The objectives of SEBI are:

SEBI is an organization that is responsible for maintaining an
environment that is free from malpractices to restore the confidence of
 Protection of investors: The primary objective of SEBI is to
the general public who invest their hard-earned money in the market.
protect the rights and interests of the people in the stock
SEBI controls the bylaws of every stock exchange in the country. SEBI
market by guiding them to a healthy environment and
keeps an eye on all the books of accounts related to the stock exchange
protecting the money involved in the market.
and financial intermediaries to check their irregularities. The features
 Prevention of malpractices: The main objective for the
of the Security and Exchange Board of India are given below:
formation of SEBI was to prevent fraud and malpractices
related to trading and to regulate the activities of the stock  Quasi-Judicial
exchange.
 Promoting fair and proper functioning: SEBI was established SEBI is allowed to conduct hearings and can pass judgments on
to maintain the functioning of the capital market and to unethical cases and fraudulent trade practices. This feature of SEBI
promote functioning of the stock exchange. They are ordered helps to protect transparency, accountability, reliability, and fairness in
to keep eyes on the activities of the financial intermediaries the capital market.
and regulate the securities industry efficiently.
 Quasi-Legislative
 Establishing Balance: SEBI has to maintain a balance between
the statutory regulation and self-regulation of the securities SEBI is allowed to draft legislatures with respect to the capital market.
industry. SEBI drafts rules and regulations to protect the interests of the
 Establishing a code of conduct: SEBI is required to develop investors. For eg: SEBI LODR or Listing Obligation and Disclosure
and regulate a code of conduct to avoid frauds and Requirements. This helps in consolidating and streamlining the
malpractices caused by intermediaries such as brokers, provisions of existing listing agreements for several segments of the
underwriters and other people. financial market like equity shares. This helps in protecting the market

Page 4 of 14
from malpractices and fraudulent trading activities happening at the seven chapters that provide the rules and regulations associated with
bay. the capital market.

 Quasi-Executive  The First Chapter is an introductory or preliminary chapter of

the Act which provides the title, extent, and definitions of the
SEBI covers the implementation of the legislation. They are allowed to terms used in the Act.
file a complaint against any person who violates their rules and  The Second Chapter is the establishment of the Securities and
regulations. They also have the power to inspect all the books and Exchange Board of India. This chapter deals with management,
records to check for wrongdoings. employees, meetings, and the office of the board. This provides
the necessary details of the board established by this Act.
SEBI ACT
 The Third Chapter is the transfer of assets, liabilities, etc. of the
The Parliament established the Securities and Exchange Board of India existing Security and Exchange Board to the Board, which means
Act,1992 or SEBI Act, 1992 to regulate and develop the securities it declares the provisions to be used to transfer the assets in the
market in India. It was further amended to meet the changes in the case of the formation of a new board.
developing requirements of the securities market.  The Fourth Chapter is the powers and functions of the Board.
This chapter helps in mentioning the powers and functions of
FEATURES AND REGULATIONS OF THE ACT the board which are given by the Act. The Board is bound to
follow the instructions given by the act and is not allowed to
Sebi is an organization that is responsible for maintaining an
exploit their powers.
environment that is free from malpractices to restore the confidence of
 The Fifth Chapter is the Registration Certificate. It deals with the
the general public who invest their hard-earned money in the market.
documentation involved in the registration of the stockbrokers,
SEBI controls the bylaws of every stock exchange in the country. SEBI
sub-brokers, and share transfer agents, etc.
keeps an eye on all the books of accounts related to the stock exchange
 The Sixth Chapter is finance, accounts, and audits. This chapter
and financial intermediaries to check their irregularities. SEBI Act
controls all the grants given by the Central Government, funds
defines and gives powers to the body. The SEBI Act is divided into
Page 5 of 14
 and accounts, to ensure the productivity of the board as well as  Regulations on Substantial Acquisition of Shares and Takeovers,
the capital market. 2011
 The Seventh Chapter miscellaneous, which discusses other
topics that are relevant to the board and the market. To help the These regulations of SEBI were established to solve difficulties related

board from avoiding mistakes. to the legal and fair acquisition of shares and takeovers.

The laws and regulations of the Security and Exchange Board of India  Regulations on Prohibition of Insider Training, 2015

are very important and must be followed seriously by the people who
These regulations introduced new provisions for prohibiting the
are entitled or registered with the stock exchange and capital market of
insider training of securities and try to protect the laws for lawful and
India. The SEBI Act, 1992 is the supreme power of the securities market
fair trading in India.
of India and has the authority to make laws and regulations. And these
rules and regulations are applied to all the listed companies, their  The Equity Listing Agreement
board of directors, key managerial personnel of such companies,
investors, and all the other companies who are associated with the These provisions were a reminder of the clauses which mainly dealt
security market sector. with the mandatory compliances to be made between the stock
exchange of India and the listed companies.
The most valuable regulations promoted by SEBI are:
SCOPE OF ACT
 Regulations on the Issue of Capital and Disclosure
Requirements, 2009 The Preamble of the SEBI Act, 1992 provides that SEBI came into force
to cover two objectives:
These regulations helped with the issues related to capital and
disclosure by improving the trading in securities of the listed  To protect the interests of investors in Securities.
companies and investors in India.  To promote the development and regulations of the securities
market.

Page 6 of 14
All the provisions and regulations are made to achieve their goal of trading cost for investors. The board improved the market by allowing
improving the market and to reach their goal. SEBI acts like a mini-state the contributions of the foreign participants through certain
as it works includes executive, judiciary and legislature. Section 11 of background checks before entering the Indian Market.
the SEBI Act allows the board to work on its objective.

SEBI controls: INVESTOR PROTECTION

 The regulations of the stock exchange and capital market. INTRODUCTION

 Prohibition of fraudulent and unfair trade.
 Improving education and training of intermediaries of the Investors are the backbone of the securities market. They not only

securities market. determine the level of activity in the securities market but also the level

 Promoting investors and registering intermediaries. of activity in the economy. The growth in the numbers of investors in

 Regulating substantial acquisition of shares and takeovers of India is encouraging. The trends reveal that in addition to FIIs and

companies. Institutional Investors, small investors were also gradually beginning to

 Calling for information and records. regain the confidence in the capital markets that had been shaken

 Conducting inquiries of audits and stock exchanges. consequent to the stock market scams during the past decade. It is
imperative for the healthy growth of the corporate sector that this
SEBI is India’s capital market regulator and is trying to benefit the confidence is maintained. However, many investors may not possess
investors by: adequate expertise/knowledge to take informed investment decisions.
Some of them may not be aware of the complete risk-return profile of
 Increasing the trading volumes the different investment options. Some investors may not be fully
 Syncing with the Global Markets aware of the precautions they should take while dealing with market
 Hedging intermediaries and dealing in different securities. They may not be
familiar with the market mechanism and the practices as well as their
SEBI helped the market participants by consolidating their settlement
rights and obligations.
functions at a single clearing meeting and by reducing the effective
Page 7 of 14
REGULATORY FRAMEWORK (b) Promoting the development of the securities market, and

At present, the five main Acts governing the securities markets are: (c) Regulating the securities market. Its regulatory jurisdiction
extends over corporate in the issuance of capital and transfer of
(a) The SEBI Act, 1992 securities, in addition to all intermediaries and persons associated with
the securities market.
(b) The Companies Act, 1956, which sets the code of conduct for the
corporate sector in relation to issuance, allotment, and transfer of It can conduct enquiries, audits, and inspection of all concerned, and
securities, and disclosures to be made in public issues. adjudicate offences under the Act. It has the powers to register and
regulate all market intermediaries, as well as to penalize them in case
(c) The Securities Contracts (Regulation) Act, 1956, which provides
of violations of the provisions of the Act, Rules, and Regulations made
for the regulation of transactions in securities through control over
there under. SEBI has full autonomy and the authority to regulate and
stock exchanges.
develop an orderly securities market.
(d) The Depositories Act, 1996 which provides for electronic
Securities Contracts (Regulation) Act, 1956: This Act provides for the
maintenance and transfers of ownership of demat (dematerialized)
direct and indirect control of virtually all aspects of securities trading
shares.
and the running of stock exchanges, and aims to prevent undesirable
(e) The Prevention of Money Laundering Act, 2002. transactions in securities. It gives the Central Government regulatory
jurisdiction over:
LEGISLATIONS
(a) Stock exchanges through a process of recognition and continued
The SEBI Act, 1992: The SEBI Act, 1992 was enacted to empower SEBI supervision,
with statutory powers for:
(b) Contracts in securities, and
(a) Protecting the interests of investors in securities,
(c) The listing of securities on the stock exchanges.
Page 8 of 14
INVESTORS PROTECTION FUND (IPF) BSE is the only Exchange in India, which offers the highest
compensation of Rs.15lacs in respect of the approved claims of any
The Government has established an Investor Education and Protection Investor against the defaulter Trading Members of the Exchange.
Fund (IEPF) under Sec. 205 C of the Companies Act, 1956 under which
unclaimed funds on account of dividends, matured deposits, matured The Trading members at present contribute 1 paisa per 1lakh of gross
debentures, share application money etc. are transferred through the turnover. The Stock Exchange contributes 2.5% of the listing fees
IEPF to the Government by the company on completion of seven years. collected by it. Also the entire interest earned by the Exchange on 1%
The Government is required to utilize this amount through an Investor security deposit kept by with it by the companies making public /
Education and Protection Fund. For this purpose, the proceeds from the rights issues is credited to the Fund.
companies are credited to the Consolidated Fund of India through this
fund. The Fund may then be entrusted with full-fledged responsibility INVESTOR AWARENESS PROGRAM

to carry out activities for education of investors and protection of their

Investor Awareness programs are being regularly conducted by stock
rights.
exchanges to educate the investors and to create awareness among the

BSE is the first Exchange to have set up the 'Stock Exchange Investors Investors regarding the working of the capital market and in particular

Protection Fund (IPF) in the interest of the customers of the defaulter the working of the Stock Exchanges. These programs have been

members of the Exchange. This fund was set up on 10th July, 1986 and conducted in almost all over the country.

has been registered with the Charity Commissioner, Government of

The Investor Awareness program covers extensive topics like
Maharashtra as a Charitable Fund. The maximum amount of Rs.
Instruments of Investment, Portfolio approach, Mutual funds, Tax
10,00,000 payable to an investor from Investor Protection Fund in the
provisions, Trading, Clearing and Settlement, Rolling Settlement,
event of a default by a Trading Member has been revised to Rs.
Investors' Protection Fund, Trade Guarantee Fund, Dematerialization of
15,00,000; which shall be applicable to the clients of the Trading
shares, information on Debt Market, Investors’ Grievance Redressal
Member of the Exchange, who will be declared Defaulter after 5th
system available with SEBI, BSE & Company Law Board, information on
December, 2009. (This has been progressively raised by BSE from
Rs.10,000 in 1988 to the present level).
Page 9 of 14
Sensex and other Indices, workshops and Information on Derivatives, healthy market operation so that investors could exercise their exit
Futures and Options etc. options in a reasonable and equitable environment. However, there
may be situations where such a frame work is distorted through frauds.
Further, for the benefit of the Investors’ the Bombay Stock Exchange There may be provisions for compensation in the event of fraud by
has: companies being established in securing funds from investors. For this
purpose lifting of corporate veil may be enabled by the law.
• BSE Training Institute which organizes Training programs
periodically on various subjects like comprehensive programs on BSE is the only Exchange in India, which offers the highest
Capital Markets, Fundamental Analysis, Technical Analysis, Derivatives, compensation of Rs.15Lacs in respect of the approved claims of any
Index Futures and Options, Debt Market, etc. Further, for the Investor against the defaulter Trading Members of the Exchange
Derivatives market BSE also conducts the compulsory BSE’s
Certification on Derivatives Exchange (BCDE) certification for Trading STEPS TAKEN BY SEBI TO MAKE INVESTORS AWARE OF THEIR
Members and their dealers to impart basic minimum knowledge of the RIGHTS AND OBLIGATIONS
derivatives markets.
The Primary function of Securities and Exchange Board of India under
COMPENSATION TO THE INVESTORS the SEBI Act, 1992 is the protection of the investors’ interest and the
healthy development of Indian financial markets. No doubt, it is very
Capital market includes investment into risk bearing instruments. In difficult and herculean task for the regulators to prevent the scams in
such cases, the investor is required to make his own assessment of risk the markets considering the great difficulty in regulating and
and reward. No compensation could be visualized for such investors monitoring each and every segment of the financial markets and the
whose investments were in risk bearing instruments. Similarly, same is true for the Indian regulator also. But what are the
investment in a fixed return instrument necessitated a careful review of responsibilities of the regulators to set the system right once the scam
the borrowing entity. Such actions would also be subjected to known or has taken place, especially the responsibility of redressing the
declared risks. Besides, the capital market also provides an opportunity grievances of the investors so that their confidence is restored? The
for an investor to exit. The need therefore, is to ensure proper and redressed of investors’ grievances, after the scam, is the most

Page 10 of 14
challenging task before the regulators all over the world and the Indian Workshops- At workshops, the aim is to acclimatize the investors with
regulator is not an exception. One of the weapons in the hand of the the functioning of the securities market, the basic fundamentals of
regulators is the collection and distribution of disgorged money to the investment and risk management and their rights and responsibilities
aggrieved investors. SEBI had issued guidelines for the protection of
the investors through the Securities and Exchange Board of India Till date, more than 2188 workshops have been conducted in around

(Disclosure and Investor Protection) Guidelines, 2000. The Securities 500 cities/towns across the country.

and Exchange Board of India under Section 11 of the Securities and

Advertisement- SEBI has prepared simple “dos and don’ts” for
Exchange Board of India Act, 1992, have issued these Guidelines.
investors relating to various aspects of the securities market. Till date,

SEBI launched a comprehensive education campaign aimed at creating over 700 advertisements relating to various aspects of Securities

awareness among investors about securities market, which has been Market have appeared in 48 different newspapers/magazines, covering

christened – “Securities Market Awareness Campaign” (SMAC). The approximately 111 cities and 9 regional languages, apart from English

motto of the campaign is – ‘An Educated Investor is a Protected and Hindi.

Investor.’
Educative Materials-SEBI has prepared a standardized reading material

The campaign was launched at the national level by the then Prime and presentation material for the workshops.

Minister, Shri Atal Bihari Vajpayee, on January 17, 2003. The national
All India Radio- With regard to educating investors through the
launch was closely followed by launches in 12 states. The structural
medium of radio, SEBI Officials regularly participate in programmes
foundation of the campaign is based on workshops that are being
aired by All India Radio.
conducted all across the country with the continued and active
participation of market participants, market intermediaries, Investors Cautionary Message on television- With a view to use the electronic
Associations etc, to spread SEBI’s message of “Invest with Knowledge”. media to reach out to a larger number of investors, a short cautionary
message, in the form of a 40 seconds film let, has been prepared and the
same is being aired on television

Page 11 of 14
Internet based response system: A simple and effective internet based have been connected with the company and is reasonably expected to
have access, by virtue of such connection, to unpublished price
response to investor complaints has been set up. On filing of your
sensitive information in respect of securities of the company, or who
complaint electronically, an acknowledgement mail would be sent to has received or has had access to such unpublished price sensitive
your specified email address and you will be issued a complaint information.
registration number instantaneously.
The various categories of insiders who indulge in manipulative
practices in stock market operations are as follows:
INSIDER TRADING
Primary Insiders
The set of all unhealthy and manipulative dealings and practices
indulged in by persons. who are in better know of internal affairs of the These insiders include directors of corporates and stock exchanges,
companies is known as 'insider trading'. SEBI takes appropriate and merchant bankers, registrars, brokers of the company, top executives,
necessary steps to curb and to prohibit such unfair and unethical auditors, banks, etc.
practices so as to protect investor interest.
Secondary Insiders
RATIONALE
These include dealers, agents and other employees haying access to
Although insider trading is the bane of modern stock market trends, price sensitive information due to their proximity with the company.
corporates often indulge in them for the following reasons:
INSIDER INFORMATION
I. Benefiting the company through unethical purchase and sale of the
company's shares by withholding price sensitive information
Insider information is a fact about a public company's plans or finances
2. Benefiting the individual indulging in this unethical practice that has not yet been revealed to shareholders and that could give an
unfair advantage to its possessors if acted upon. Buying or selling stock
based on insider information can be a criminal offense.
INSIDERS—CATEGORIES
A limited number of people inside a company inevitably know about an
Insiders are the persons, who have connection with the company in
event that will, once it is revealed, will significantly affect the
such a way as to have access to price sensitive information. It includes
company's stock price. It might be a pending merger, a product recall, a
any person who is or was connected with the company or is deemed to

Page 12 of 14
shortfall in earnings, or the failure of a major project. In extreme cases,  Member
it might be a financial scandal that is about to burst into public view.
Where the said person is an official or a member of a stock exchange or
The people who are in the know are not just sworn to confidentiality. a clearing house of that stock exchange, or a dealer in securities or of
They are forbidden by law to take advantage of that knowledge by such member or dealer of a stock exchange.
buying or selling stock in the company, or by passing along the
information to someone else who takes advantage of it.  Merchant Banker

CONNECTED PERSONS Where the said person is a merchant banker, share transfer agent; to an
issue, debenture trustee, broker, portfolio manager, sub-broker,
Connected persons mean and include the following: investment adviser company or an employee of the company.

I. Director of the company NEED FOR CONTROL

2. Person deemed to be director of the company The need for controlling and reining in the insiders arises on account of
the need for protecting the interest of investors. In addition, curbing
3. Person occupying the position as an officer or an employee of the
this malicious trading practice will help protect and promote the
company 4. Person holding a position involving a professional or
interest and reputation of the company, besides helping maintenance of
business relationship between himself and the company and who may
confidence in stock exchange operations and the financial system as a
reasonably be expected to have an access to unpublished price
whole.
sensitive information relating to that company
PROHIBITION OF INSIDER TRADING
Deemed Connected Persons
SEBI has come out with the following directions regarding the
A person is deemed to be a connected person under the following
prohibition of insider trading:
circumstances:
 No Dealing
 Same Management
No individual may either on his own behalf or on behalf of any other
Where the said person is a company under the same management
Person deal in securities of a company listed on any stock exchange on
group or any subsidiary company thereof.
the basis of any unpublished price sensitive information.

Page 13 of 14
  No Communication TYPE OF EMPLOYEES

No individual can communicate any unpublished price sensitive Corporates shall initiate action to identify the types of employees and
information to any person, with or without his request for such officers of the company, who are likely to have access to such price
information, except as required in the ordinary course of business or sensitive information.
under any law.
TYPE OF CONTROLS
 No Counsel
Corporates shall initiate action to identify the types of controls that are
No individual can counsel or procure any other persons to deal in put in place in order to handle the price sensitive information specified
securities of any company on the basis of unpublished price sensitive above, so as to publish such information wherever possible. This will
information. help eliminate the non-public character of such information.

 Penalty

A penalty upto Rs. 5 lakhs can be imposed on an insider who indulges REFERENCE:
in dealing, communicating or counseling on matters relating to insider
 https://blog.ipleaders.in/features-of-sebi/
trading.
 https://www.investopedia.com/terms/i/insiderinformation.asp
TYPE OF INFORMATION #:~:text=Insider%20information%20is%20a%20fact,can%20b
e%20a%20criminal%20offense.
Corporates shall initiate action to identify the types of information
could be considered to be price sensitive in relation to the business of
company and its subsidiaries, and associate companies. The possible
such price sensitive information may include: earnings forecast or
material changes therein, significant changes in investment plans,
therein, proposals foe M. acquisition or loss of a significant contract:
changes in investment plans, significant disputes with major suppliers,
consumers or sub-contractors significant decision affecting the product
pricing, profitability, etc.

Page 14 of 14
AGURCHAND MANMULL JAIN COLLEGE
DEPARTMENT OF COMMERCE [ACCOUNTING & FINANCE]

CAPITAL MARKETS
UNIT-III NOTES

STOCK EXCHANGE
 AGURCHAND MANMULL JAIN COLLEGE exchanges in India as of September 19, 2019. The Indian Capital
(A Unit of Sri S.S. Jain Educational Society) Markets are regulated and monitored by the Ministry of Finance, The
Meenambakkam, Chennai – 600061 Securities and Exchange Board of India(SEBI) and The Reserve Bank of
CO-EDUCATION
A Jain Minority Institution - Affiliated to University of Madras India(RBI). The SEBI (Securities and Exchange Board of India) is the
Reaccredited by NAAC regulatory authority established under the SEBI Act 1992. SEBI is the
Shift-II principal regulator for Stock Exchanges in India. SEBI’s functions
__________________________________________________________________________________ include protecting investor interests, promoting and regulating the
Indian securities markets. Stock Exchanges in India as an entity
DEPARTMENT OF COMMERCE (Accounting & Finance)
regulated by SEBI undergo regular inspections by them to ensure
NOTES FOR “CAPITAL MARKETS” compliance.

UNIT-III STOCK EXCHANGE FACTS ABOUT INDIAN STOCK EXCHANGES

 Bombay Stock Exchange Limited(BSE) – Established in 1875, the

STOCK EXCHANGE
BSE is Asia’s first stock exchange.
INTRODUCTION
 The BSE is the world’s 10th largest stock exchange.
A stock exchange is a place where securities, shares, bonds and other
 The Bombay stock exchange was founded by Premchand
financial instruments are listed and bought and sold by traders or
Roychand.
brokers. To be able to trade on a stock exchange, securities must be
listed on it. Stock exchanges help companies to raise funds. Therefore  BSE established India International Exchange (India INX) in
the company needs to list themselves in the stock exchange. Shares December 2016.
listed on the stock exchange are known as equity and these
shareholders are known as Equity Shareholders. Here we shall discuss  India INX is the first international exchange of India.
the Stock Exchange in India.  The National Stock Exchange India Limited(NSE) was founded in
A stock exchange is a facility where stocks are traded. The stock 1992 and started trading in 1994.
exchanges do not own the stocks. In order to trade in a stock exchange,  The BSE had more than 5,000 listed firms, whereas the rival NSE
the enterprises must be listed in that particular stock exchange. The had about 1,600.
smaller, riskier and less liquid companies which are not listed on the
stock exchanges are traded over the counter (OTC). There are 05 stock  NSE is the first demutualized electronic exchange in the country.
Page 1 of 12
 NSE was the first exchange in India to provide a modern, fully  The normal trading time for the equity market is between 9:15
automated screen-based electronic trading system. am to 03:30 pm, and for commodity (MCX) market is between
10:00 AM to 11:30 PM, Monday to Friday.
 The NIFTY 50 is the NSE’s index.
 One can buy stocks on exchange working days between 9:15
 Nifty is owned and managed by India Index Services and
AM to 3:30 PM on BSE and NSE.
Products (IISL).
 For trading in Indian stocks, one needs to have both Demat and
 Sensex(BSE 30), is the market index consisting of companies
listed on the Bombay Stock Exchange (BSE). trading account.

 The index is the measurement of the value of a section of the  You cannot walk in the stock exchange to buy/sell your stocks
stock market. The index is computed from the prices of for this you need the service any stock brokers.
selected stocks. An index is an indicator of market movement

 The base year of Sensex is 1978-79 and the base value is 100.
HISTORY OF INDIAN STOCK EXCHANGE

The first organised stock exchange in India was started in 1875 at

 The base year of NIFTY is 1995 and the base value is set to
Bombay and it is stated to be the oldest in Asia. In 1894 the Ahmedabad
1000.
Stock Exchange was started to facilitate dealings in the shares of textile
mills there. The Calcutta stock exchange was started in 1908 to provide
 NSE IFSC is a fully-owned subsidiary company of National a market for shares of plantations and jute mills.
Stock Exchange of India.
Then the madras stock exchange was started in 1920. At present there
are 24 stock exchanges in the country, 21 of them being regional ones
 If the Sensex or Nifty goes up, it means most of the stocks in with allotted areas. Two others set up in the reform era, viz., the
India went up during that given period. National Stock Exchange (NSE) and Over the Counter Exchange of India
(OICEI), have mandate to have nation-wise trading.
 The fall in the Sensex /NIFTY was analogous to the recession. They are located at Ahmedabad, Vadodara, Bangalore, Bhubaneswar,
Fall in Sensex means people were selling their shares and Mumbai, Kolkata, Kochi, Coimbatore, Delhi, Guwahati, Hyderabad,
leading to an economic crisis in the country.
Page 2 of 12
Indore, Jaipur’ Kanpur, Ludhiana, Chennai Mangalore, Meerut, Patna, The BSE was followed by the Ahmedabad Stock Exchange in 1894
Pune, Rajkot. which focused on trading in shares of textile mills. The Calcutta Stock
Exchange began operations in 1908 and began trading shares of
The Stock Exchanges are being administered by their governing boards
plantations and jute mills. The Madras Stock Exchange followed, being
and executive chiefs. Policies relating to their regulation and control
set up in 1920.
are laid down by the Ministry of Finance. Government also Constituted
Securities and Exchange Board of India (SEBI) in April 1988 for orderly MODERN HISTORY
development and regulation of securities industry and stock exchanges.
In the post-independence era, the BSE dominated the volume of
A DEEP HISTORY trading. However, the low level of transparency and undependable
clearing and settlement systems, apart from other macro factors,
Security trading in India goes back to the 18th century when the East
increased the need of a financial market regulator, and the SEBI was
India Company began trading in loan securities. Corporate shares born in 1988 as a non-statutory body. It was made a statutory body in
started being traded in the 1830s in Bombay (now Mumbai) with the
1992.
stock of Bank and Cotton presses. The simple and informal beginnings
of stock exchanges in India take one back to the 1850s when 22 After the Harshad Mehta scam in 1992, there was a pressing need for
stockbrokers began trading opposite the Town Hall of Bombay under a another stock exchange large enough to compete with the BSE and
banyan tree. The tree still stands in the area which is now known as bring transparency to the stock market. This gave birth to the National
Horniman Circle. Stock Exchange (NSE). It was incorporated in 1992, become recognized
as a stock exchange in 1993, and trading began on it in 1994. It was the
The venue then shifted to banyan trees at the Meadows Street junction,
first stock exchange on which trading took place electronically. In
which is now known as Mahatma Gandhi Road, a decade later. The shift response to this competition, BSE also introduced an electronic trading
continued taking place as the number of brokers increased, finally
system known as BSE On-line Trading (BOLT) in 1995.
settling in 1874 at what is known as Dalal Street. This as yet informal
group known as the Native Share and Stockbrokers Association The BSE launched its sensitivity index, the Sensex, now known as the
organized themselves as the Bombay Stock Exchange (BSE) in 1875. S&P BSE Sensex, in 1986 with 1978–79 as the base year. This is an
The BSE is the oldest stock exchange in Asia and was the first to be index of 30 companies and is a benchmark stock index, measuring the
granted permanent recognition under the Securities Contract overall performance of the exchange. The index reached the level of
Regulation Act, 1956. 1,000 in July 1990, 2,000 in January 1992, 4,000 in March 1992, 5,000
in October 1999, and 6,000 in February 2000. The exchange introduced
equity derivatives in 2000. Index options were launched in June 2001,
Page 3 of 12
stock options in July 2001, and stock futures in November 2001. India’s FUNCTIONS OF INDIAN STOCK EXCHANGE
first free-float index, BSE Teck, was launched in July 2001.
1. Economic Barometer:
Its competitor, NSE, launched its benchmark exchange, the CNX Nifty,
now known as Nifty 50, in 1996. It comprises of 50 stocks and functions A stock exchange is a reliable barometer to measure the economic
as the performance measure of the exchange. In terms of electronic condition of a country. Every major change in country and economy is
screen-based trading and derivatives, it beat BSE by launching first of reflected in the prices of shares. The rise or fall in the share prices
its kind products and services. indicates the boom or recession cycle of the economy. Stock exchange is
also known as a pulse of economy or economic mirror which reflects
THE CURRENT STOCK EXCHANGE SCENARIO the economic conditions of a country.

BSE and NSE are not the only stock exchanges in India. After the 2. Pricing of Securities:
country gained independence, 23 stock exchanges were added not
including the BSE. However, at present, there are only seven recognized The stock market helps to value the securities on the basis of demand
stock exchanges. Apart from the BSE and NSE, they are: and supply factors. The securities of profitable and growth oriented
companies are valued higher as there is more demand for such
 Calcutta Stock Exchange Ltd. securities. The valuation of securities is useful for investors,
government and creditors. The investors can know the value of their
 Magadh Stock Exchange Ltd.
investment, the creditors can value the creditworthiness and
 Metropolitan Stock Exchange of India Ltd. government can impose taxes on value of securities.

 India International Exchange (India INX) 3. Safety of Transactions:

 NSE IFSC Ltd. In stock market only the listed securities are traded and stock exchange
authorities include the companies names in the trade list only after
All other exchanges have been granted exit by SEBI. verifying the soundness of company. The companies which are listed
they also have to operate within the strict rules and regulations. This
ensures safety of dealing through stock exchange.

Page 4 of 12
4. Contributes to Economic Growth: of loss making companies. So stock exchange facilitates allocation of
investor’s fund to profitable channels.
In stock exchange securities of various companies are bought and sold.
This process of disinvestment and reinvestment helps to invest in most 9. Promotes the Habits of Savings and Investment:
productive investment proposal and this leads to capital formation and
The stock market offers attractive opportunities of investment in
economic growth.
various securities. These attractive opportunities encourage people to
5. Spreading of Equity Cult: save more and invest in securities of corporate sector rather than
investing in unproductive assets such as gold, silver, etc.
Stock exchange encourages people to invest in ownership securities by
regulating new issues, better trading practices and by educating public
about investment.
STEPS IN STOCK TRADING
6. Providing Scope for Speculation:
1. Selection of a broker:
To ensure liquidity and demand of supply of securities the stock
exchange permits healthy speculation of securities. The buying and selling of securities can only be done through SEBI
registered brokers who are members of the Stock Exchange. The
7. Liquidity: broker can be an individual, partnership firms or corporate bodies. So
The main function of stock market is to provide ready market for sale the first step is to select a broker who will buy/sell securities on behalf
and purchase of securities. The presence of stock exchange market of the investor or speculator.
gives assurance to investors that their investment can be converted 2. Opening Demat Account with Depository:
into cash whenever they want. The investors can invest in long term
investment projects without any hesitation, as because of stock Demat (Dematerialized) account refer to an account which an Indian
exchange they can convert long term investment into short term and citizen must open with the depository participant (banks or stock
medium term. brokers) to trade in listed securities in electronic form. Second step in
trading procedure is to open a Demat account.
8. Better Allocation of Capital:
The securities are held in the electronic form by a depository.
The shares of profit making companies are quoted at higher prices and Depository is an institution or an organization which holds securities
are actively traded so such companies can easily raise fresh capital (e.g. Shares, Debentures, Bonds, Mutual (Funds, etc.) At present in India
from stock market. The general public hesitates to invest in securities there are two depositories: NSDL (National Securities Depository Ltd.)
Page 5 of 12
and CDSL (Central Depository Services Ltd.) There is no direct contact It means settlement is done immediately and on spot settlement
between depository and investor. Depository interacts with investors follows. T + 2 rolling settlement. This means any trade taking place on
through depository participants only. Monday gets settled by Wednesday.

Depository participant will maintain securities account balances of (b) Forward settlement:
investor and intimate investor about the status of their holdings from
It means settlement will take place on some future date. It can be T + 5
time to time.
or T + 7, etc. All trading in stock exchanges takes place between 9.55
3. Placing the Order: am and 3.30 pm. Monday to Friday.

After opening the Demat Account, the investor can place the order. The
order can be placed to the broker either (DP) personally or through
phone, email, etc. LONDON STOCK EXCHANGE

Investor must place the order very clearly specifying the range of price The London Stock Exchange (LSE) is the primary stock exchange in the
at which securities can be bought or sold. e.g. “Buy 100 equity shares of United Kingdom and the largest in Europe. Originated more than 300
Reliance for not more than Rs 500 per share.” years ago, the regional exchanges were merged in 1973 to form the
Stock Exchange of Great Britain and Ireland, later renamed the London
4. Executing the Order: Stock Exchange (LSE). The Financial Times Stock Exchange (FTSE) 100
Share Index, or "Footsie", is the dominant index, containing 100 of the
As per the Instructions of the investor, the broker executes the order
top blue-chip stocks on the LSE.
i.e. he buys or sells the securities. Broker prepares a contract note for
the order executed. The contract note contains the name and the price The stock exchange is physically located in the city of London. In 2007,
of securities, name of parties and brokerage (commission) charged by the London Stock Exchange merged with the Milan Stock Exchange, the
him. Contract note is signed by the broker. Borsa Italiana, to form the London Stock Exchange Group.
5. Settlement: The London Stock Exchange (LSE) is one of the oldest stock exchanges
in the world, the largest in Europe, and the primary stock exchange of
This means actual transfer of securities. This is the last stage in the
the United Kingdom.
trading of securities done by the broker on behalf of their clients. There
can be two types of settlement.

(a) On the spot settlement:

Page 6 of 12
The London Stock Exchange (LSE) rivals the New York Stock Exchange Europe. Linked by partnerships to international exchanges in Asia and
(NYSE) in terms of market capitalization, trade volume, access to Africa, the LSE intends to remove cost and regulatory barriers from
capital, and trade liquidity. capital markets worldwide.

The "Big Bang" refers to the government's deregulation of the London

stock market on Oct. 27, 1986, an event that led to a modernized
The LSE and the Big Bang
electronic trading system and opened up the LSE to capital markets
worldwide. On Oct. 27, 1986, the U.K. government deregulated the London stock
market. Known as the "Big Bang" because of the massive changes that
Understanding the London Stock Exchange (LSE)
immediately ensued, deregulation introduced electronic trading to the
London has long been one of the world's leading financial cities, well- London Stock Exchange, which replaced traditional open outcry
known as a hub for international trade, banking, and insurance. The trading. The new system was efficient and faster, allowing trading
history of the London Stock Exchange (LSE) goes back to 1698 when volumes to increase and enabling the LSE to successfully rival other
broker John Castaing began posting the prices of stocks and global exchanges, such as the New York Stock Exchange (NYSE).
commodities at Jonathan's Coffee House, which was a popular meeting
place for businessmen to conduct trades. Castaing called his price list
"The Course of the Exchange and Other Things." The Big Bang was part of the government's reform program to
eliminate overregulation and encourage free-market competition. It
By 1801 it became clear that a formal system was needed to deter fraud
introduced other significant changes to the structure of the financial
and unscrupulous traders. Brokers agreed to a set of rules and paid a
markets. These include the elimination of minimum fixed commissions
membership fee to belong to the exchange, thus paving the way for the
on trades and the removal of the separation between companies that
first regulated stock exchange in London.
traded stocks and those that advised investors.
Through its primary markets, the London Stock Exchange (LSE)
These changes increased competition among brokerage companies and
provides cost-efficient access to some of the world’s deepest and most
led to a series of mergers and acquisitions. Another Big Bang change
liquid pools of capital. It is home to a wide range of companies and
allowed foreign ownership of U.K. brokers, which opened London's
provides electronic equities trading for listed companies.
market to international banks.
The LSE is the most international of all stock exchanges with thousands
of companies from more than 60 countries, and it is the premier source
of equity-market liquidity, benchmark prices, and market data in
Page 7 of 12
The Main Market Other Segments

The Main Market of the London Stock Exchange is one of the world's The High Growth Segment and the Specialist Fund Segment are
most diverse stock markets with companies making up 40 different designed specifically for high growth, revenue-generating businesses,
sectors. A listing on the LSE's Main Market gives companies access to and highly specialized investment entities that target institutional
real-time pricing; deep pools of capital; benchmarking through the investors or professionally advised investors, respectively. The High
FTSE UK Index Series; and significant levels of media coverage, Growth Segment is for companies that are not eligible for a Premium or
research, and announcements. Standard listing but are seeking funding to grow their companies.

There are a number of different ways for companies to join the Main
Market, including the following:
NEW YORK STOCK EXCHANGE
Premium
The New York Stock Exchange is the world’s largest stock exchange. It
The Premium segment applies only to equity shares issued by provides a marketplace for buying and selling millions of corporate
commercial trading companies. Premium listing issuers are required to stocks and other securities per day. The NYSE lists much of the S&P
meet the UK’s super-equivalent rules, which are higher than the 500, the Dow Jones Industrial Average, and the world's largest
minimum requirements of the European Union (EU). Because of these corporations. It is also a publicly-traded company with over 2,000
higher standards, Premium-listed companies may have access to a employees. Its ticker symbol is NYSE: ICE. In June 2013, the NYSE was
lower cost of capital and to investors who seek out companies that acquired by the Intercontinental Exchange.
adhere to the highest standards. A company with a Premium listing also
has the possibility of being included in one of the FTSE indices. Founded in 1792 on 68 Wall Street, the NYSE is the world’s largest
stock exchange, based on the volume of market capitalization it trades.
Standard
ICE now owns the NYSE, having bought it in 2013.
The Standard segment is open to the issuing of equity shares, Global
Depositary Receipts (GDRs), debt securities, and derivatives that must Trading is now done either electronically or through the floor traders’
comply with EU minimum requirements. The overall compliance traditional open outcry system.
burden is lighter for companies with a Standard listing. A Standard
History of the NYSE
listing helps companies from emerging markets attract investments
from London's large pool of available capital. The NYSE began on May 17, 1792, under a buttonwood tree at 68 Wall
Street. Twenty-four brokers and merchants signed the aptly-named
Page 8 of 12
Buttonwood Agreement to outline the rules for trading securities. The How the NYSE Works
first stock listed on this exchange was the Bank of New York. The
The New York Stock Exchange uses two methods of trading: brokers
founders named their organization the New York Stock & Exchange
and all-electronic. Regardless of the method of exchange, all stock
Board, which they shortened to the New York Stock Exchange in 1863.
transactions are an auction.
There were only 1,366 traders. They were all men until 1967 when
Muriel Siebert became the first woman who was allowed to trade. Brokers actively trade stocks on the floor of the NYSE. Buyers and
sellers auction securities for the highest price. Brokers represent the
The NYSE became a not-for-profit corporation in 1971 and a publicly
entity buying the stock, whether it's for a retail brokerage company or
traded company in April 2006. That was the same time that it moved to
institutional investors such as pension funds. The brokers set the "bid"
an electronic system used by traders and the public alike.
price, which is the price you're willing to pay for the stock.
In 2007, the NYSE merged with Euronext. It now has the capacity to
When your stockbroker executes your order to sell, it is not completed
trade up to 10 billion shares per day. The move combined the NYSE
until one of the dealers on the floor of the New York Stock Exchange
with the five major European exchanges, including the Paris Bourse,
finds another broker to buy it. Before trading, brokers and dealers must
Amsterdam, the London International Financial Futures Exchange,
get approved by the NYSE and hold a trading license.
Brussels, and Lisbon. In 2008, the NYSE acquired the American Stock
Exchange, focusing on small cap companies.2 The dealers match up the brokers with the stock sellers, who submit an
"ask" price. It's usually higher than the bid price. In this way, it's like
The NYSE Euronext also operates three other exchanges:
selling a home. The dealer is like the real estate agent, who puts the
NYSE Arca, an all-electronic stock exchange trading securities, mutual buyer and seller together. Dealers get to pocket the difference between
funds, and options the ask and bid price, minus fees and expenses, for their work.

ICE Futures Europe, formerly NYSE Liffe, trading more than 2,000 Most of the transactions occur electronically. A computer acts as the
electronic options and futures contracts for gold and other dealer, matching up buyers and sellers. Even the brokers and dealers
commodities get their information and trade electronically.

NYSE Bonds, an all-electronic exchange that trades bonds NYSE Hours of Operation

The opening bell of the NYSE rings at 9:30 a.m. Eastern, while the
closing bell rings at 4 p.m. Eastern. This tradition began in 1870 with a

Page 9 of 12
Chinese gong. In 1903, when the NYSE moved to its current location, it The Tokyo Stock Exchange (TSE) is the largest stock exchange in Japan,
switched to brass bells.1 listing over 3,700 companies with a combined market capitalization
greater than $5.6 trillion (as of June 2020).
The NYSE uses the opening and closing bells to celebrate a New York
City or financially-related event. It's considered an honor to be invited From 1991 to 2001, the TSE shrank dramatically as the Japanese
to ring it. For example, if a company has just issued an Initial Public economy contracted after the country's equity and real estate bubbles
Offering with the NYSE, that firm's CEO or President of the Board gets burst.
to ring the NYSE bell.
The TSE lists the largest companies in Japan, including Toyota,
The NYSE is closed for nine American holidays, including New Year's Softbank, Keyence Corporation, Chugai Pharmaceutical, and Sony
Day, Martin Luther King Day, Washington's Birthday, Good Friday, Corporation.
Memorial Day, Independence Day (July 4), Labor Day, Thanksgiving
The TSE is comprised of five sections; the first two sections are called
Day, and Christmas (December 25). In addition, the NYSE closes at 1
the "Main Market" and include large cap and medium cap companies.
p.m. Eastern on Black Friday and Christmas Eve day (December 24).
Two sections are reserved for startup companies and the last section of
the TSE is for professional investors only.
TOKYO STOCK EXCHANGE
Understanding the Tokyo Stock Exchange (TSE)
The Tokyo Stock Exchange (TSE) is the largest stock exchange in Japan,
At the peak of the Japanese asset price bubble in December 1989, the
headquartered in its capital city of Tokyo. The Tokyo Stock Exchange
Nikkei 225 index reached a record high of 38,916. Following this, the
was established on May 15, 1878. As of June 2020, the exchange had
TSE's combined market capitalization shrank dramatically over the
over 3,700 listed companies, with a combined market capitalization of
next two decades, as the Japanese economy struggled with a
greater than $5.6 trillion.1 2 The TSE is run by the Japan Exchange
recessionary environment and the Nikkei plunged in value.
Group and is home to the largest and best-known Japanese giants with
a global presence—including Toyota, Honda, and Mitsubishi. As of June 2020, the board members of the Tokyo Stock Exchange are
President and CEO Kiyota Akira and board directors Kohda Main,
In addition, the TSE offers specific trading information, real-time and
Yokoyama Ryusuke, and Miyahara Koichiro.3
historical index quotes, market statistics, and information about and
from specialists. Notably, the acronym TSE for the Tokyo Stock The five largest stocks by market capitalization listed on the Tokyo
Exchange should not be confused with Canada's Toronto Stock Stock Exchange as of June 30, 2020, were (in millions of Japanese yen):
Exchange, which is known by the acronym TSX.
Page 10 of 12
  Toyota Motor Corporation (¥220.6). Another possible change includes increasing the market cap
requirement to reduce the number of companies listed in the top tier.
 SoftBank Group Corp. (¥113.9).

 Keyence Corporation (¥109.5).

 Chugai Pharmaceutical Co., Ltd. (¥96.8).

 Sony Corporation (¥93.1).

Criticism of the Tokyo Stock Exchange (TSE)

Some market participants have complained that over the years the TSE
has become too large and complicated compared to other global
exchanges. The TSE consists of five sections. The first section lists
Japan's biggest companies and the second section lists medium-sized
companies. Combined, these two sections are called the "main
markets."

Then there are two sections dedicated to startups. These sections are
called the "Mothers" (Market of the High-Growth and Emerging Stocks)
and the Jasdaq (which is separated further into standard and growth
sub-sections). The final section is the Tokyo Pro Market, which is for
professional investors only.

To complicate matters, each of these TSE sections has its own listing
requirements. As of July 15, 2020, the first section alone included 2,171
companies, almost double the level from 1990. A plan to reform the TSE
includes simplifying the criteria separating the sections and reducing
the number of sections to three—Prime, Standard, and Growth.

Page 11 of 12
REFERENCE:

 https://www.toppr.com/guides/general-awareness/capital-
markets/stock-exchange-in-india/
 https://www.yourarticlelibrary.com/stock-exchange/history-
of-stock-exchange-in-india/23488
 https://medium.com/@askteek/the-history-of-stock-
exchanges-in-india-c97f1ec6f1c1
 https://www.yourarticlelibrary.com/economics/market/9-
most-important-functions-of-stock-exchangesecondary-
market/8766
 https://www.yourarticlelibrary.com/stock-exchange/the-
trading-procedure-on-a-stock-exchange-explained/8760
 https://www.investopedia.com/terms/l/lse.asp
 https://www.thebalance.com/what-is-the-new-york-stock-
exchange-3306243
 https://www.investopedia.com/terms/t/tokyo.asp

Page 12 of 12
AGURCHAND MANMULL JAIN COLLEGE
DEPARTMENT OF COMMERCE [ACCOUNTING & FINANCE]

CAPITAL MARKETS
UNIT-IV NOTES

PRIMARY MARKET
 AGURCHAND MANMULL JAIN COLLEGE PRIMARY MARKET Vs SECONDARY MARKET
(A Unit of Sri S.S. Jain Educational Society)
Meenambakkam, Chennai – 600061 BASIS SECONDARY
CO-EDUCATION PRIMARY MARKET
MARKET
A Jain Minority Institution - Affiliated to University of Madras
Reaccredited by NAAC
Also called as New Issue Market After Issue Market
Shift-II
__________________________________________________________________________________ (NIM) (AIM)

DEPARTMENT OF COMMERCE (Accounting & Finance) Role of the market Market where stocks Market where stocks
are issued for the first are traded once
NOTES FOR “CAPITAL MARKETS” time issued

UNIT-IV PRIMARY MARKET Intermediaries Investment banks Brokers

PRIMARY MARKET Sale of securities Directly by companies Sold and purchased

to investors amongst investors
MEANING and traders

A primary market issues new securities on an exchange for companies, Price of shares Fixed at par value Changes depending
governments, and other groups to obtain financing through debt-based on the supply and
or equity-based securities. Primary markets are facilitated demand of shares
by underwriting groups consisting of investment banks that set a
beginning price range for a given security and oversee its sale to
investors.
METHODS OF NEW ISSUE
Once the initial sale is complete, further trading is conducted on
1. Initial issues are floated through:
the secondary market, where the bulk of exchange trading occurs each
day.  Offer through prospectus

 Bought out deals/offer for sale

 Private placement

 Right issue
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  Book building 4. Private placement: The issue is placed with a small number of
financial institutions, corporate bodies and high networth
2. Offer through prospectus: Shares issued to public through individuals. Financial intermediaries are:
prospectus which consists the following details:
 UTI
 General information about the company.
 Mutual fund
 Capital structure of the company.
 Payments of the issue.  Insurance companies
 Particulars of the issue.  Merchant banking subsidiaries
 Company, management and project.
 Particulars regarding the other listed companies under the same
management in last 3 years. 5. Right Issue:

 Details of outstanding litigations pertaining to matters likely to  If a public company wants to increase its subscribed capital by
affect financial position of the company. allotment of further shares to existing share holder.
 Financial information of the company.
 Issue right shares after two years from the date of its formation
3. Bought out deals: or one year from the date of its first allotment, whichever is
 Promoter places his shares with an investment earlier.
banker(dealer/sponsor) who offer to the public at a later date.
 Time given to accept right offer should not be less than 15 days.
 In addition to the sponsor, individuals and other smaller companies
participating in the syndicate.  Share holders have no legal binding to accept the offer and they
have right to renounce the offer in favour of any person
 The sponsors hold on these shares for a period and at an
appropriate date they offer the same to the public.
 The hold on period may be as low as 70days or more than a year.
 Dealer decides the price after analysing promoters background.
6. Book building:
 Wholesaler may be merchant banker or company with surplus cash.

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  In this process, the price determination is based on orders Underwriters are financial institutions who make a firm commitment
placed and investors have an opportunity to place orders at that they will take up the shares up to a certain amount if the public
different prices as practiced in international offerings. does not subscribe to it. This is an agreement with one or more
institutions and a guarantee of the marketability of shares. Under
 Recommendations given by Malegam committee for the
writing is mandatory for the Public Issue. Underwriters are appointed
introduction of book building process.
by the company in consultation with the managers to the issue.
Financial institutions, bankers, members of stock exchanges,
investment companies, trusts etc. can act as under writers.
INTERMEDIERIES IN NEW ISSUE MARKET
3. Brokers to the Issue:
The important intermediaries/players in the new issue market are: 1.
Brokers are persons authorized to market the issues. Companies can
Merchant Bankers (Managers to the Issue) 2. Underwriters 3.
engage any number of brokers to market the new issue. The brokers
Registrars to the Issue 4. Brokers to the Issue 5. Banker to the Issue 6.
may engage sub-brokers and they send their own circulars, publicity
Syndicate Members.
materials and applications to the clients and follow up the work for
1. Merchant Bankers (Managers to the Issue): canvassing the subscription. Brokers to the issue are not compulsory
for public issues, but their expertise and contacts with investors could
SEBI regulations 1992 prescribes that all public issues should be be used for marketing the issue.
managed by at least one merchant banker functioning as Lead manager
or Managers to the Issue. Remuneration to the broker and terms and conditions of brokerage is
fixed by SEBI. There are 10,000 brokers and more than 70,000 sub-
“Merchant banker means any person/institution who is engaged in the brokers registered with SEBI. Geojith BNP Paribas Financial Services
business of issue management either by making arrangements Ltd., JRG Securities Ltd., Karvy Stock Broking Ltd., UTI Securities Ltd.,
regarding selling, buying or subscribing to securities as manager, UAE Exchange & Finance Ltd., Sharekhan Ltd. etc. are names of few well
consultant, advisor or rendering corporate advisory services in relation known brokers.
to such issue management.” [Sec 2(cb) SEBI (Merchant Bankers) (Third
Amendment) Regulations, 2006]

2. Underwriters to the Issue: 4. Registrars to the Issue (Registrar and Share Transfer (R&T)
Agents):

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R&T agent plays a significant role in a public issue along with the lead Syndicate Members appointed by the Issuer Company. They are also
managers. Registrars are persons appointed in consultation with lead known as ‘the Members of the Syndicate’. The Members of the
managers to assist the issue management functions. Their work relates Syndicate circulate copies of the Red Herring Prospectus along with the
to pre-issue management, management during the currency of issue, bid cum application form to potential investors. After receiving the bid
pre- allotment Work, allotment work and post allotment work. for IPO Shares from an investor, Syndicate Member enters bidding
detail into the electronic bidding system and generates a Transaction
It is their duty to collect the application forms from bankers to the Registration Slip (TRS) for each price and demand option and gives the
issue, process them for allotment and issue certificate of allotment.
same to the bidder.
5. Bankers to the Issue:
SEBI GUIDELINES FOR PRIMARY MARKET
Bankers to the issue collect the application forms and the money in
SEBI advises certain guidelines in issue of fresh share capital, first issue
cash, cheque or ASBA. Depending on the size of the issue there may be
by new companies in Primary Market and functioning of secondary
many collection centers and many bankers. They are appointed in
markets in order to maintain quality standards. A few such guidelines
consultation with lead manager. Infrastructure facilities available,
and objectives of the Securities and Exchange Board of India (SEBI) are
manpower, past experience, location of branches, efficiency and cost
discussed here.
effectiveness etc. are parameters for selection of bankers to the issue.
SEBI Guidelines for issue of fresh share capital
The Lead Merchant Banker shall ensure that Bankers to the Issue are
appointed in all the mandatory collection centers. The Lead manager 1. All applications should be submitted to SEBI in the prescribed form.
also ensures follow-up with bankers to the issue to get quick estimates
of collection and advising the issuer about closure of the issue, based on 2. Applications should be accompanied by true copies of industrial
the actual figures. license.

6. Syndicate Members: 3. Cost of the project should be furnished with scheme of finance.

The Book Running Lead Managers to the issue appoint the Syndicate 4. Company should have the shares issued to the public and listed in
Members, who enter the bids of investors in the book building system. one or more recognized stock exchanges.
Syndicate Members are commercial or investment banks registered
5. Where the issue of equity share capital involves offer for subscription
with SEBI who also carry on the activity of underwriting in IPO.
by the public for the first time, the value of equity capital, subscribed
They work as intermediaries for Issuer Company and the buyers of the capital privately held by promoters, and their friends shall be not less
IPO stocks. Investors submit their bids for IPO shares through than 15% of the total issued equity capital.

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6. An equity-preference ratio of 3:1 is allowed. LISTING
7. Capital cost of the projects should be as per the standard set with a In corporate finance, a listing refers to the company's shares being on
reasonable debt-equity ratio. the list (or board) of stock that are officially traded on a stock exchange.
Some stock exchanges allow shares of a foreign company to be listed
8. New company cannot issue shares at a premium. The dividend on
and may allow dual listing, subject to conditions.
preference shares should be within the prescribed list.

9. All the details of the underwriting agreement. LISTING AGREEMENT

10. Allotment of shares to NRIs is not allowed without the approval of A listing agreement is a contract under which a property owner (as
RBI. principal) authorizes a real estate broker (as agent) to find a buyer for
the property on the owner's terms, for which service the owner pays a
11. Details of any firm allotment in favor of any financial institutions. commission.

12. Declaration by secretary or director of the company. How a Listing Agreement Works

A listing agreement authorizes the broker to represent the seller and

their property to third parties. The listing agreement is an employment
SEBI Guidelines for first issue by new companies in Primary
contract rather than a real estate contract: The broker is hired to
Market:
represent the seller, but no property is transferred between the two.
1. A new company which has not completed 12 months of commercial
Under the provisions of real estate license laws, only a broker can act as
operations will not be allowed to issue shares at a premium.
an agent to list, sell, or rent another person's real estate. In most states,
2. If an existing company with a 5-year track record of consistent listing agreements must be written.
profitability, is promoting a new company, then it is allowed to price its
Because the same considerations arise in almost all real estate
issue.
transactions, most listing agreements require similar information,
3. A draft of the prospectus has to be given to the SEBI before public starting with a description of the property. The description typically
issue. includes a list of personal property that will be left with the property
when it's sold, as well as a list of personal property the seller expects to
4. The shares of the new companies have to be listed either remove (for example, appliances and window treatments).
with OTCEI or any other stock exchange.

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The listing agreement also specifies the listing price, broker's duties, ADVANTAGES OF LISTING
seller's duties, broker's compensation, terms for mediation, an
automatic termination date, and any additional terms and conditions. 1. It provides liquidity to investments. Security holders can convert
their securities into cash by selling them as and when they require.
Types of Listing Agreements
2. Shares are traded in an open auction market where buyers and
 Open listing sellers meet. It enables an investor to get the best possible price for his
securities.
With an open listing, a seller retains the right to employ any number of
brokers as agents. It’s a non-exclusive type of listing, and the seller is 3. Ease of entering into either buy or sell transactions.
obligated to pay a commission only to the broker who successfully
finds a ready, willing, and able buyer. The seller retains the right to sell 4. Transactions are conducted in an open and transparent manner
the property independently without any obligation to pay a subject to a well-defined code of conduct. Therefore investors are
commission. assured of fair dealings.

 Exclusive agency listing 5. Listing safeguards investors interests. It is because listed companies
have to provide clear and timely information to the stock exchanges
With an exclusive agency listing, one broker is authorized to act as the regarding dividends, bonus shares, new issues of capital, plans for
exclusive agent for the seller. The seller retains the right to sell the mergers, acquisitions, expansion or diversification of business. This
property, without obligation to the broker. However, the seller is enables investors to take informed decisions.
obligated to pay a commission to the broker if the broker is the
procuring cause of the sale. 6. Listed securities enable investors to apply for loans by providing
them as collateral security.
 Exclusive right-to-sell listing
7. Investors are able to know the price changes through the price
An exclusive right-to-sell listing is the most commonly used contract. quotations provided by the stock exchanges in case of listed securities.
With this type of listing agreement, one broker is appointed as the sole
seller's agent and has exclusive authorization to represent the 8. Listing of shares in stock exchanges provides investors facilities for
property. The broker receives a commission no matter who sells the transfer, registration of rights, fair and equitable allotment.
property while the listing agreement is in effect. 9. Shareholders are provided due notice with regard to book closure
dates, and they can take investment decisions accordingly.

DISADVANTAGES OF LISTING
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1. Listing might enable speculators to drive up or drive down prices at 3. Joint and several liability to every director of the company after the
their will. The violent fluctuations in share prices affect genuine expiry of the aforesaid eighth day to repay the amount with interest at
investors. prescribed rate.

2. In case of excessive speculation, share prices might not reflect its

fundamentals. The stock markets may fail to be the true economic
barometer of an economy’s performance. UNDERWRITING

3. In case of bear markets share prices might be hammered down, and Underwriting is an act of guarantee by an organization for the sale of
the standing of a company might be lowered in the eyes of the certain minimum amount of shares and debentures issued by a Public
investors, shareholders, bankers, creditors, employees etc. Limited company.

4. Listing of securities may induce the management and the top level According to the Companies Act, when a person agrees to take up
employees to indulge in ‘insider trading‘ by getting access to important shares specified in the underwriting agreement when the public or
information. Such actions adversely affect the common security others failed to subscribe for them, it is called underwriting agreement.
holders. For this purpose, the underwriter who guarantees for the sale of
shares, is given a commission.
5. The management might enter into an agreement with brokers to
artificially increase prices before a fresh issue and benefit from that. When the public to whom the shares of issue fails to subscribe, it is the
Common public might be induced to buy shares in such companies, underwriter who has to subscribe up to the limit he has agreed. Later
ultimately the prices would crash and the common investors would be on, when the market improves he may off load the shares by selling
left with worthless stock of securities. them to the public. Thus, the underwriter makes a promise to get the
underwritten issue subscribed either by him or by others.
CONSEQUENCES OF NON-LISTING
Importance of Underwriting
Following consequences are to be faced by companies that have not
The persons responsible for issuing shares in the company, known
had their securities listed on one or more recognized stock exchanges:
as issuers, have the option of deciding for the underwriting of shares. If
1. Any allotment of shares or debentures on an application shall be the issue is not underwritten, there is a possibility of the issue eiting
void. under subscribed and even if 90% of minimum subscription is not
received, the money has to be refunded in full. Hence, there is an urgent
2. Any application money collected is to be refunded without interest,
need on the part of the issuer, to seek the assistance of underwriters for
within eight days after the company becomes liable to repay it.
a successful completion of issue of shares.
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SEBI’s Guidelines for Underwriting Institutional underwriting in India helps companies to raise capital in
their early stages. In fact, many companies which may not come to the
According to SEBI, the number of underwriters should be decided well
notice of the public were promoted due to the support given by
in advance by the issuer and he must obtain prior permission from
institutional underwriters.
SEBI. Permission will be granted by SEBI only after finding out the net
worth of the underwriters and their outstanding commitments. Many institutional underwriters were responsible for the promotion of
infrastructure companies in the area of steel, chemicals, fertilizer, etc.
The Stock Exchange, where the security is going to be listed must also
be informed about the arrangements made with the underwriters. Responsibilities of Underwriters

25% of each class of securities must be offered to the public and in the 1. An underwriter, not only has to underwrite the securities but has to
remaining 75%, the following method of firm allotment could be subscribe within 45 days that part of shares which remain
adopted. unsubscribed by the public.

SEBI has instructed companies to allot to three major categories of 2. His underwriting obligations should not exceed, at any time, 20 times
allotees, namely, of his net worth.

 QIB 3. The underwriter cannot derive any other benefit except the
underwriting commission which is 5% for shares and 2½% for
 HNI
debentures.
 Retailers
Merits of Underwriting
QIB refers to qualified institutional bidders (Mutual Funds, banks, etc.) 1. Underwriting ensures success of the proposed issue of
HNI refers to high net worth individuals, investing more than Rs. 1 lakh shares since it provides an insurance against the risk.
in a single company security.
2. Underwriting enables a company to get the required minimum
Types of Underwriters subscription. Even if the public fail to subscribe, the underwriters will
fulfill their commitments.
There are two types of underwriters. They are
3. The reputation of the underwriter acts as a confidence to
1. Institutional underwriters – IDBI, IFCI, UTI, SBI Capital Market investors. The underwriters who are called the lead managers provide
financial recognition to the company, whose shares are issued to the
2. Non-Institutional underwriters – Any NBFC.

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public. Thus, the reputation of the issuing company also improves 2. The investment bank invites investors, normally large scale
because of the reputation of underwriters. buyers and fund managers, to submit bids on the number of
shares that they are interested in buying and the prices that they
would be willing to pay.
BOOK BUILDING 3. The book is 'built' by listing and evaluating the aggregated
demand for the issue from the submitted bids. The underwriter
Book building is the process by which an underwriter attempts to
analyzes the information and uses a weighted average to arrive
determine the price at which an initial public offering (IPO) will be
at the final price for the security, which is termed the cutoff
offered. An underwriter, normally an investment bank, builds a book by
price.
inviting institutional investors (such as fund managers and others) to
submit bids for the number of shares and the price(s) they would be 4. The underwriter has to, for the sake of transparency, publicize
willing to pay for them. the details of all the bids that were submitted.
Book building has surpassed the 'fixed pricing' method, where the price 5. Shares are allocated to the accepted bidders.
is set prior to investor participation, to become the de facto mechanism
by which companies price their IPOs. The process of price discovery Even if the information collected during the book building process
involves generating and recording investor demand for shares before suggests a particular price point is best, that does not guarantee a large
arriving at an issue price that will satisfy both the company offering the number of actual purchases once the IPO is open to buyers. Further, it
IPO and the market. It is highly recommended by all the major stock is not a requirement that the IPO be offered at that price suggested
exchanges as the most efficient way to price securities. during the analysis.

CHARACTERISTICS OF BOOK BUILDING

 Tendering Process

The book building process comprises these steps: Book building involves inviting subscriptions to a public offer of
securities, essentially through a tendering process. Eligible investors
1. The issuing company hires an investment bank to act as
are required to place their bids for the number of shares to be issued
an underwriter who is tasked with determining the price range
and the price at which they are willing to invest, with the lead manager
the security can be sold for and drafting a prospectus to send
running the book. At the end of the cut off period, the lead manager
out to the institutional investing community.
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determines the response to the issue in terms of the quantum of shares  Allotment
and the highest price at which demand is sufficient to match the size of
the issue. The lead manager, in consultation with the issuer, decides the price at
which the issue will be subscribed and proceeds to allot shares to
 Floor Price investors who have bid at or above the fixed price. All investors are
allotted shares at the same fixed price. For any allottee, therefore the
Floor price is the minimum price set by the lead manager in price would be equal to or less than the price bid.
consultation with the issuer. This is the price at which the issue is open
for subscription. Investors are free to place a bid at any price higher
than the floor price.
 Participants

Generally, all investors, including individuals, eligible to invest in a

particular issue of securities can participate in the book building
process. However, if the issue is restricted to qualified institutional, as
 Price Band
in the case of government securities, then, only those eligible can
The range of price (the highest and the lowest price) at which offer for participate.
the subscription of securities is made is known as ‘price band’.
PROCESS OF BOOK BUILDING
Investors are free to bid any price within in the price band.
The procedures relating to the book building process depend on the
level at which it is to be taken up by a corporate entity. According to the
SEBI, there are two options available to a company either 75 percent or
100 percent book building process. Each of these methods is discussed
 Bid briefly below:
The investor can place a bid with the authorized lead manager 75 percent Book Building:
merchant banker. In the case of equity shares, usually several brokers
in the stock exchange are also authorized by the lead manager. The The 75 percent book building option of securities is offered on a firm
investor fills up a bid-cum-application form, which gives a choice to bid basis where a minimum of 25 percent of the securities is offered to the
for up to three optional prices. The price and demand options public.
submitted by the bidder are treated as optional demands and are not
The following steps are involved in this process:
cumulated.
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1) Eligibility: All corporates eligible for public shares are also eligible underwriters are required to make a payment of the total amount for
for raising capital through the book building process. the subscription of issues.

2) Earmarking securities: Where a decision is taken by a corporate to

issue shares through the book building process, the securities to be
used should be separately earmarked as the placement portion REVERSE BOOK BUILDING
category in the prospectus. The balance securities must be stated as net
offer to the public category. Reverse book building is a process used for efficient price discovery.
Once a company announces a delisting plan, public shareholders can
tender their shares at or above the floor price. Shareholders can do this
3) Draft prospectus: A draft prospectus containing all the information
through an online bidding system on the stock exchanges, which stays
except price of the issue must be filed wit the SEBI. Although no precise
open for five days.
mention is made, a price band indicating the price range within which
securities are being offered for subscription should be indicated. The
prospectus is to be filed with the ROC within two days of the issue price
being finalized. INITIAL PUBLIC OFFERING – IPO
MEANING
4) Appointment of book runner: The issuing company appoints a
An initial public offering (IPO) is the first time a company issues shares
merchant banker as the book runner, which mentioned in the
to the public. This is when a private company decides to go ‘public’.
prospectus. The book runner circulates a copy of the draft prospectus
among the institutional buyers who are eligible for firm allotment and In other words, a company that was privately-owned until then
to the intermediaries who are eligible to act as underwriters, inviting becomes a publicly-traded company.
them to subscribe to the issue of securities. The book runner maintains
a record of the names and number of securities ordered by Before the IPO, a company has very few shareholders. This includes the
intermediary buyers and the price at which they are willing to founders, angel investors and venture capitalists. But during an IPO, the
subscribe the issue under the placement portion. The book runner company opens its shares for sale to the public. As an investor, you can
collects information about the subscriptions received from buy shares directly from the company and become a shareholder.
underwriters and other intermediaries. After a stipulated time period, ALLOCATION OF SHARES IN IPO
the book runner aggregates the subscription so received. The

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There are different investor categories when it comes to IPOs. This Every company needs money to increase its operations, create new
includes: products or pay off existing debts. Going public is a great way to gain
this much-needed capital for a company.
1. Qualified Institutional Buyers (QIBs)

2. Non Institutional Investors (NIIs)

3. Retail Individual Investors (RIIs)

 Allowing owners and early investors to sell their stake to
The allocation of shares differs for all the above groups in an IPO. As an make money
individual investor, you come under the last category.
It is also seen as an exit strategy for initial investors and venture
As an individual investor, you are allowed to invest in small lots worth
capitalists. A company becomes liquid through the sale of stocks in an
Rs 10,000-15,000. You can apply for a maximum of Rs 2 lakh in an IPO. IPO. Venture capitalists sell their stock in the company at this time to
The total demand for shares in the retail category is judged by the
reap returns and exit from the company.
number of applications received. If the demand is less than or equal to
the number of shares in the retail category, you are offered a full  Greater public awareness
allotment of shares.
IPOs are ‘star-marked’ in the stock market calendar. There is a lot of
When the demand is greater than the allocation, it is known as buzz and publicity around these events. This is a great way for a
oversubscription. Many times an IPO can be over-subscribed five times company to publicize its products and services to a new set of
over. This means that the demand for shares exceeds the supply by five customers in the market.
times!
IPO PROCEDURE
In such cases, the shares in retail category are offered to investors on
the basis of a lottery. This is a computerized process that ensures  Selecting an investment bank
impartial allocation of shares to investors. The first step is to select an investment bank as an underwriter. Here,
the role of an investment bank is to help the company establish various
PUBLIC IPO
details such as
 To raise capital for growth and expansion
- How much money the company hopes to raise

- The type of securities that will be offered

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- The initial price per share which needs to be followed for the company to be listed on its
exchange.
For a large IPO, there can be multiple investment banks involved. In
short, investment banks act as facilitators in the IPO process.

 Creating the Red Herring prospectus

The next step of the IPO process is to create the ‘Red Herring For example:
Prospectus’. This is done with the help of underwriters. The prospectus
- The minimum issue size should be Rs 10 crore.
includes various segments such as financial records, future plans for
the company, potential risks in the market and expected share price - The minimum market capitalization of the company should be Rs 25
range. Many times, underwriters go on road shows in order to attract crore.
potential institutional investors after they create the red herring
prospectus. - The minimum post issue paid-up capital of the company should be
Rs 10 crore.
 SEBI approval
Only if the company follows these criteria, it gets an approval from the
The prospectus is presented to the Securities and Exchange Board of BSE.
India (SEBI). If SEBI is satisfied, it green-lights the initial public offering
(IPO) process. In addition, it also gives a date and time for the IPO. But  Subscription of shares
in case SEBI is not satisfied, it asks for changes to be made before the
Once all the formalities are done, the company makes the shares
prospectus can be shared with public investors.
available to investors. This is done on the dates specified in the
 Stock exchange approval prospectus. Investors who wish to apply for shares have to fill out and
submit the IPO application form.
Listing is the process where securities are allowed to deal on a
recognised stock exchange. But for that to happen, the company needs  Listing
to be approved by the exchange. For instance, the Bombay Stock
The shares are allotted to different investors based on the demand and
Exchange (BSE) has a listing department whose purpose is to grant
price quoted in their IPO application forms. Once this is done, investors
approval for securities of companies. The BSE has a list of criteria
get the shares credited to their Demat account. In case of
oversubscription (if the demand for shares is higher than the number
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of shares floated by the company), investors may not get the number of
shares they originally wanted. They may get fewer shares after a lottery
is done. Some investors may not even get any shares. In such cases,
these investors get a refund of their money.

ADVANTAGES OF IPO

 First-mover advantage

This is especially true when reputed companies announce an IPO. You

get a chance to buy the company’s shares at a much lower price. This is
because once the company’s shares reach the secondary market, the
share price may go up sharply.

 High returns

If the company has a potential to grow, buying shares in an IPO can be

benefit you. Strong fundamentals of the company mean that it has a
good chance of growing bigger. This can be advantageous to you as
well. You stand a chance to earn good returns over the long-term.

 Listing gains

When a company gets listed on the stock market, it may be traded at a

price that is either higher or lower than the allotment price. When the
opening price is higher than the allotment price, it is known as listing
gains.

Generally, investors expect an IPO to perform well on listing due to

factors such as market demand and positive bias. However, this does
not always happen. It is possible for a stock price to drop by the end of
the first trading day too.
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 https://www.citeman.com/6345-concepts-and-process-of-
book-building.html
 https://economictimes.indiatimes.com/markets/stocks/news/
vedanta-delisting-key-learnings-for-investors/what-is-reverse-
book-building/slideshow/78586261.cms
 https://www.edelweiss.in/investology/introduction-to-
primary-market-79a025/what-is-an-ipo-initial-public-offering-
6a7c32
Page 15 of 15
AGURCHAND MANMULL JAIN COLLEGE
DEPARTMENT OF COMMERCE [ACCOUNTING & FINANCE]

CAPITAL MARKETS
UNIT-V NOTES

OTCEI
 AGURCHAND MANMULL JAIN COLLEGE 1. Poor liquidity of Scrips on the Indian Bousers:
(A Unit of Sri S.S. Jain Educational Society)
Meenambakkam, Chennai – 600061 There are about 1000 odd companies listed on the Indian stock
CO-EDUCATION exchanges. But day to day transactions are carried out in only 250 of
A Jain Minority Institution - Affiliated to University of Madras them and the remaining companies have no liquidity at all. Brokers and
Reaccredited by NAAC
Shift-II dealers usually have a tendency to pursue a handful of blue chip
__________________________________________________________________________________ securities which are most profitable. Consequently, the investors who
need cash desperately for domestic or other purposes have to plead
DEPARTMENT OF COMMERCE (Accounting & Finance) before brokers and dealers to sell off their holdings. In many number of
occasions they just cannot get their shares en-cashed.
NOTES FOR “CAPITAL MARKETS”
2. Delay in Settlement:
UNIT-V OTCEI
Small and marginal investors have been suffering from delays in
OTCEI – OVER THE COUNTER EXCHANGE OF INDIA settlements and transfers. They are kept blind to the actual price at
which their transactions took place on their behalf. When the investors
The Indian capital market has witnessed sweeping changes over the
buy stock they-get it at the highest price of the day and when they sell
last few years. There were new instruments and new institutions. The
the scrips, they get lowest price of the day. This amounted to loss of
existing stock exchanges were insufficient in infrastructure facilities to
interest in the scrips.
cope up with the new situation. In order to overcome the pitfalls and
loop-holes of the existing system, a new institution called OTCEI came 3. Lack of Transparency:
into existence in 1990 and started functioning in 1992.
The investors could not understand at what prices their shares are sold
or bought since there is no clear-cut display of the quotations.
Unscrupulous brokers often exploit investors out of their ignorance.
REASONS TO START OTCEI
Moreover, small and newly incorporated companies had the problem of
The Pherwani Committee has identified the shortcomings of the raising capital through a public issue at exorbitant costs and delays
existing stock exchange system as follows and recommended involved in realization of proceeds.
establishment of OTCEI which has tried to address the following issues:

Page 1 of 13
OTCEI – CONCEPT Any counter in any of the four hundred cities in India can receive the
scrip prices, which are generated by OTCEI’s central computer in
OTCEI concept is a great innovation in the Indian Stock market. It is a Bombay. Any person or Indian citizen can apply for dealership or
recognized stock exchange under the Securities Contract (Regulations) membership of the OTC provided he adheres to the prescribed
Act, 1965 as well as the Indian Companies Act. OTCEI is a computer conditions.
based screen system exhibiting the quotations of the scrips of the
companies of different industries of the nation. It has a national The aspirants would also have to pass a computer -based written test.
network and there is no geographical barrier for listing. Dealers and Preference would be given to professionals and people having
Investors can take decisions on the spot more quickly than on the experience in the field with sound network. Those having proper
regular stock exchanges. It is a great boom to the small and marginal infrastructural facilities like telephone, computers, telex, fax, office
investors who are greatly neglected till today. space and other networks would also be given due weightage and
preference.
OTCEI was incorporated in October 1990. This company was promoted
by a consortium of premier financial institutions, namely, UTI, ICICI,
IDBI, SBI Capital Markets Ltd., IFCI, QIC and its subsidiaries and
Canbank Financial Services Ltd. OTC Exchange is recognized by the
FEATURES OF OTCEI
Government of India as a “recognized stock exchange” under section 4 1. Ringless Trading:
of the Securities Contract Regulations Act, 1965.
For greater accessibility to the investor, the OTC Exchange has
Companies listed on the OTCEI will enjoy the same listing status as eliminated the trading ring. Trading will take place through a network
available to other companies listed on any other stock exchange in the of computers of OTC dealers located at several places within the same
country except that a company listed on OTCEI cannot be listed /traded city and even across cities. The exchange allows dealers to quote, query
on any other stock exchange in India. The corporate office is situated in and transact through a central OTC computer using telecommunication
Bombay. It started functioning in 1992. links.
OTCEI has been linked to 42 centers all over India through computers. 2. National Reach:
OTCEI operates with the use of INET the country’s first public switched
data network and Telex – the first nationwide information Unlike other stock exchanges, the OTC Exchange has a nationwide
dissemination network and RABMN – Remote Area Business Message reach. This enables widely dispersed trading across cities, resulting in
Network. greater liquidity. Companies thus, have the unique benefit of

Page 2 of 13
nationwide listing and trading of their scrips by listing at just one compulsory market maker, there are additional market maker and
exchange, the OTC exchange. voluntary market maker who give two way quotes for the scrip.

3. Computerized: 8. Efficient Market Pricing:

All the activities of the OTC trading process are computerized. This Competition among market makers produces efficient pricing. This
facilitates a more transparent, quick and disciplined market. The reduces spreads between buy and sell quotations. It also increases the
trading mechanism brings out these features of the system. capacity to absorb larger volumes, to the benefit of investors’ .The
market makers continually analyze companies and provide information
4. Exclusive List of Companies:
about them to their investors, thus helping investors to make an
The OTC Exchange will not list and trade in companies listed on any informed investment decision.
other exchange. It will list an entirely new set of companies, sponsored
9. Transfer of Securities:
by members of the OTC Exchange.
Investors will be required to submit transfer deeds to any of the OTCEI
5. Closeness:
counters for transferring the shares in their names. Shares will be
Initially counters were opened at Bombay and were followed by automatically transferred in the name of the investors, if the
counters at other centers. OTCEI will give public notice as to the consolidated holding of the shares does not exceed 0.5% of the issued
availability of counters where trading take place. Facility for trading capital of the company.
will be available after the offer at the counters of the sponsor and the 10. Investor Registration:
additional Market Maker addresses will be given in the new issue
application attached to offer for sale document (OSD) and with all the For buying and selling shares on the OTCEI and investor needs
dealers of OTCEI. “INVESTOTC Card”. Application for “INVESTOTC Card” can be made at
any of the counters of OTCEI and also at the time of applying for new
6. Authorized Dealers:
issues on the OTCEI. The share application form includes the necessary
All members and dealers are authorized and approved by the OTCEI details to be filled in for obtaining INVESTOTC Card.

7. Liquidity through Market Making:

The sponsor-member requires day quotes (buy and sell) for the 12
months from the date of commencement of trading. Besides

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ADVANTAGES OF OTCEI 2. To Investor:

The Advantages of Over The Counter Exchange of India (OTCEI) to 1. Investment in stocks becomes easier. OTC Exchange’s wide network
Companies, to Investors, and Economy at large are described will bring the stock exchange to the street corner.
below:
2. Provides greater confidence and fidelity of trade. Investor can look
1. To Companies: up the prices displayed at each OTC counter. He knows he is trading
scrips at the right market price.
1. Provides method of raising funds through capital market instruments
which are priced fairly. In OTCEI the company will be able to negotiate 3. Enables transactions to be completed quickly. Investors can settle the
the issue price with the sponsors who will market the issue. deals across the counter and the money or scrip proceeds from the deal
will be settled in a matter of days if not earlier.
2. Saves unnecessary issue expenses on raising funds from capital
markets. The method of sponsors pricing the scrips with members of 4. Provides definite liquidity to investors. The market making system
OTCEI who will in turn, off – load the scrips to public will obviate the will have two way prices which are quoted regularly to provide
need for a public issue as we know them today. Therefore, almost all sufficient opportunity for investors to exit.
associated costs will be eliminated.
5. Investors may get a greater sense of security because researchers
3. Offer documents of companies seeking listing on OTCEI will not be have been researched and members to get their considered opinion.
vetted by SEBI. Such companies shall only file their offer documents
3. To Economy:
with SEBI and SEBI will communicate its comments to the issuer
company and lead manager within 21 days. 1. OTC Exchange will help spread the stock exchange operations
geographically and integrate capital market investment into a forum.
4. Retains greater degree of management stability. The OTC Exchange
will list scrips even with 40% of the capital made available for public 2. Encourages closely held companies to go public,
trading.
3. Encourages venture capital activities to boost entrepreneurs.
5. Provides greater accessibility to large pool of captive investor base.
This enhances fund raising power substantially. OTC Exchange will
create a nationwide network, where investors will be serviced who will
form the captive investor base for companies.

Page 4 of 13
MECHANISM OF OTCEI DIFFERENCE BETWEEN OTCEI Vs OTHER STOCK EXCHANGES

Investor visualizes the price on OTC screen placed in the office of every S. No. BASIS STOCK EXCHANGE OTCEI
dealer. Investor conveys decision of purchases to the dealer. The dealer 1. Trading Trading is done on in OTCEI, the trading is
confirms the deal and blocks the scrip on OTC computer. Investor Activities Floor in done through network
makes a cheque for the amount. Temporary counter Receipt (TCR) is conventional stock or computer system.
exchange
given to investor. After cheque clearance, Permanent Counter Receipt
2. Minimum For listing of But the minimum paid
(PCR) is issued in place of TCR. paid up companies, up capital in case of
capital minimum paid up OTCEI is 2 Crores only.
For sale, investor watches price on OTC screen and conveys the
capital is Rs. 5
decision to sell to the dealer. Sales Confirmation Slip (SCS) is given by crores
the dealer to investor. Investor gives his PCR and Transfer Deed to the 3. Membership Membership is the membership in
dealer. PCR and TD are validated by the Registrar and a cheque is restrictions restricted to region OTCEI is spread
issued to investor in exchange for SCS. or location in a throughout the country.
regular stock
exchange
4. Securities In a conventional But in OTCEI, securities
traded stock exchange of all companies
securities belonging throughout India are
PARTICIPANTS OF OTCEI to that region and traded.
other permitted
1. Companies which list their shares on OTCEI.
securities are
2. Members, dealers who operate OTCEI counters. traded.
5. Need for Need for a market But market maker is a
3. Registrars who transfer and keep share certificates. market maker depends must for securities of
maker upon the exchange each company in OTCEI.
4. Investors. in a regular stock
exchange
5. Settlement bank 6. Settlement Settlement of But in OTCEI,
days Transactions are settlements are done as
6. SEBI and government. done on the basis of per its rules.
T+5 days in regular
stock exchange
Page 5 of 13
7. Primary The primary But Primary objective of eliminate the costs of holding shares in the form of physical
Objective objective of OTCEI is to help small share certificates by choosing a Demat account. You can also get
conventional stock companies to raise to know the exact amount of the transaction beforehand.
exchange is being funds.
the improvement of 2. Less Paperwork: Earlier, shares transactions used to happen
Capital Market. through certificates or physical receipts which used to incur a
lot of paperwork and used to slow down the trading activities.
Nobody used to be able to do any transaction without
DEMAT ACCOUNT
presenting their certificates. A Demat account holds shares and
Demat account is also known as a Dematerialized account. The primary securities in electronic form. Hence making it easy to transact.
use of Demat account is to hold shares and securities in an electronic
3. No-Risk: Trading through physical securities was always risky
format. It helps you in online trading like buying or selling shares, or
with the threat of physical damage, loss, misplacement, or
converting physical shares into electronic form. All the shares, mutual
forgery. Demat accounts in india eliminate all these risks and
funds, bonds, government securities, and other investments are saved
give you peace of mind.
in a dematerialized account. Also, through demat account investors can
perform intraday trades. 4. Instant Transactions: Delivering physical certificates used to
take days even weeks sometimes due to the administrative
DEMATERILIZATION
system that needed to be fulfilled. With the help of Demat
Dematerialization is the term used to define the process of transferring account, you are avoiding the waiting period as it offers instant
physical certificates into electronic ones. Overall, it makes the transactions.
documents available round the clock and accessible at your fingertip.
ADVANTAGES OF DEMAT ACCOUNT
The main motto of dematerialization is to avoid holding physical shares
and help you with seamless tracking and monitoring. A demat  Easy to use, convenient, and secured.
account helps convert physical shares to electronic form.
 Automatic credit of share in the event of a company merger,
FEATURES OF DEMAT ACCOUNT bonus, consolidation, and so on.

1. Lower Costs: Usually, investors need to spend on different  All the Demat account information is accessible online just using
unexpected expenses when transacting with physical share a secure login.
certificates such as handling cost, stamp duty and so on. You can

Page 6 of 13
  You do not need to keep visiting the stock market for 6. If the application is processed, you will get a Demat account
transactions. number along with a client ID which you can use for the account
online.
 Low transaction costs
7. You need to pay some account opening charges such as annual
 No stamp duty maintenance charge and the transaction fee (monthly basis).
 Unlike physical shares, here you can make transactions with odd The fee differs from one to another Depository Participant.
numbers too. Some DPs charge a fat fee for each transaction while some
charge a percentage to the total transaction value. DPs also
 If you have a common Demat account, you do not need to update charge for converting shares from physical forms to electronic
details from time to time. The companies will automatically ones, or vice-versa.
receive your information from the Demat account.
8. There is no limit on the minimum number of securities to keep
 It offers a common banking solution. your account active.

PROCEDURE FOR OPENING DEMAT ACCOUNT

1. Firstly, decide where you want to open the demat account. Then SETTLEMENT PROCEDURE IN INDIAN STOCK MARKET
choose a DP you want to open the Demat account with. You can
find many financial institutions and brokerages offering this In the stock market, there is always a buyer and a seller. So, when a
service. person buys a certain number of shares, there is another trader who
sells the shares. This trade is settled only when the buyer receives the
2. Fill up the account opening form and submit it along with the shares and the seller receives the money.
copies of all the necessary documents and a passport size photo.
There are three phases in a secondary market transaction:
3. Have original documents handy for verification.
1. Trading
4. You will receive a copy of the terms and conditions agreement.
Go through it. 2. Clearing

5. A member of DP will get in touch with you and verify the details 3. Settlement
you have submitted.
 Trading
Page 7 of 13
In the stock market, a large number of trades occur simultaneously. The  Settlement
stock exchanges use an electronic order matching system to match
The next step is to fulfil the financial obligations identified in the
‘buy’ and ‘sell’ orders from different traders. This way, each trade is
clearing step. This involves the transaction settlement for the buyers
executed.
and sellers.
The market depth is created by brokerages who collect orders from
So once the buyer receives the security and the seller receives the
different investors and pass it on to the stock exchanges, most likely to
payment, the transaction is settled.
be the two most popular exchanges in India—the Bombay Stock
Exchange (BSE) and the National Stock Exchange (NSE). In this process, Participants Involved in the Process
brokerages act as the intermediary between the investor and the stock
exchange.  Clearing Corporation

 Clearing Clearing corporation is one of the major participants involved in

clearing and settlement process in stock market. The responsibility for
Once two orders match and a trade is executed, the clearing process clearing and settlement of trade executed at the stock exchange lies on
takes place. Clearing is the identification of what security is owed to the the National Securities Clearing Corporation Limited (NSCCL). It is also
buyer and how much money is owed to the seller. The entire process is in charge of risk management and is obligated for meeting all
managed by ‘clearing houses’. These are independent entities. settlement regardless of the member defaults.
For example, imagine that there are two traders: Ramesh and Suresh.  Clearing Members/Custodians
However, in the real market scenario, traders tend to conduct multiple They are another participant in the clearing and settlement process in
transactions. As a result, the clearing house identifies all the Indian stock market. When trading members place deals in the stock
transactions and the net amount or net securities owed to the trader exchange, the same is moved to NSCCL, which transfers them to the
are calculated. clearing members. The clearing member is in charge of determining the
position of share to suit the trade.

 Clearing banks

Clearing banks are responsible for the settlement of funds. There are 13
clearing banks, and each clearing member needs to open a clearing
account with either one of them. In case of a pay-out, clearing members
Page 8 of 13
receive funds in the clearing account and in case of pay-in they need to The main function of CDSL is to facilitate holding of dematerialised
make funds available. securities enables securities transactions to be processed by book
entry.
 Depositories
CDSL facilitates holding and transacting in securities in the electronic
There are two depositories in India – National Securities Depository form and facilitates settlement of trades on stock exchanges. These
Limited (NSDL) and Central Depository Services Limited (CDSL). These
securities include equities, debentures, bonds, Exchange traded Funds
two depositories hold your Demat account, and clearing members also
(ETFs), units of mutual funds, units of Alternate Investment Funds
need to maintain a clearing pool account with them. (AIFs), Certificates of deposit (CDs), commercial papers (CPs),
Clearing members need to transfer the securities to the clearing pool Government Securities (GSecs) and Treasury Bills (TBills).
account they hold with the depositories on the date of settlement.
CDSL was listed on June 30, 2017 on the National Stock Exchange (NSE)
 Professional Clearing Members through Initial Public Offer (IPO) and thereafter became the first and
the only depository to get listed in Asia-Pacific region and second in the
These are special category members appointed by the NSCCL. However, World
note that they are not allowed to trade, and they can only clear and
settle trades executed for their clients. Professional clearing members The balances in the investors account recorded and maintained with
generally constitute banks, custodians, etc. CDSL can be obtained through the Depository Participant (DP). The DP
is required to provide the investor, at regular intervals, a statement of
account which gives the details of the securities holdings and
transactions. The depository system has effectively eliminated paper-
CENTRAL DEPOSITORY SERVICES Ltd. [CDSL] based certificates which were prone to be fake, forged, counterfeit
Central Depository Services (India) Ltd (CDSL), is the first listed Indian resulting in bad deliveries. CDSL offers an efficient and instantaneous
securities depository based in Mumbai. transfer of securities.

Central Depository Services (India) Limited (CDSL) was initially

promoted by the BSE Ltd. which thereafter divested its stake to leading
banks. CDSL received the certificate of commencement of business
from the Securities and Exchange Board of India (SEBI) in February
1999.

Page 9 of 13
NATIONAL SECURITIES DEPOSITORY Ltd. [CDSL] NSDL is promoted by Industrial Development Bank of India Limited
(IDBI) - the largest development bank of India, Unit Trust of India (now,
National Securities Depository Limited (NSDL) is an Indian central Administrator of the Specified Undertaking of the Unit Trust of India)
securities depository based in Mumbai. It was established in August and National Stock Exchange of India Limited (NSE) - the largest stock
1996 as the first electronic securities depository in India with national exchange in India.[7] Some of the prominent banks in the country have
coverage. It was established based on a suggestion by a national taken a stake in NSDL.
institution responsible for the economic development of India.
 Other Shareholders
Although India had a vibrant capital market which is more than a  Axis Bank
century old, the paper-based settlement of trades caused substantial  Bank of Baroda (erstwhile Dena Bank)
problems such as bad delivery and delayed transfer of title. The
 Canara Bank
enactment of the Depositories Act in August 1996 paved the way for
 Citibank
the establishment of National Securities Depository Limited (NSDL),
 Deutsche Bank
the first depository in India. It went on to establish infrastructure based
 HDFC Bank
on international standards that handles most of the securities held and
 HSBC Bank India
settled in de-materialized form in the Indian capital markets.
 Punjab National Bank (erstwhile Oriental Bank of Commerce)
In the depository system, securities are held in depository accounts,  Standard Chartered Bank
which are similar to holding funds in bank accounts. Transfer of  State Bank of India
ownership of securities is done through simple account transfers. This
method does away with all the risks and hassles normally associated NSDL Group comprises National Securities Depository Limited (NSDL),
with paperwork. Consequently, the cost of transacting in a depository NSDL Database Management Limited (NDML), NSDL e-Governance
environment is considerably lower as compared to transacting in Infrastructure Limited & NSDL Payments Bank Limited respectively.
certificates. In August 2009, number of Demat accounts held with NSDL NSDL e-Gov was originally set up as a Depository in 1995. NSDL also
crossed one crore. has a subsidiary company NSDL Database Management Limited.

RBI issued licence to NSDL to operate as a payment bank in India from

29 October 2018 under section 22(1) of Banking Regulation Act 1949
to carry payment transactions.

Page 10 of 13
SPECULATION
In the world of finance, speculation, or speculative trading, refers to the Speculators can provide market liquidity and narrow the bid-ask
act of conducting a financial transaction that has substantial risk of spread, enabling producers to hedge price risk efficiently. Speculative
losing value but also holds the expectation of a significant gain or other short-selling may also keep rampant bullishness in check and prevent
major value. With speculation, the risk of loss is more than offset by the the formation of asset price bubbles through betting against successful
possibility of a substantial gain or other recompense. outcomes.

An investor who purchases a speculative investment is likely focused Mutual funds and hedge funds often engage in speculation in the
on price fluctuations. While the risk associated with the investment is foreign exchange markets as well as bond and stock markets.
high, the investor is typically more concerned about generating a profit
based on market value changes for that investment than on long-term
investing. When speculative investing involves the purchase of a INDIAN DEBT MARKET
foreign currency, it is known as currency speculation. In this scenario,
an investor buys a currency in an effort to later sell that currency at an The Indian debt market is a market meant for trading (i.e. buying or
appreciated rate, as opposed to an investor who buys a currency in selling) fixed income instruments. Fixed income instruments could be
order to pay for an import or to finance a foreign investment. securities issued by Central and State Governments, Municipal
Corporations, Govt. Bodies or by private entities like financial
Without the prospect of substantial gains, there would be little institutions, banks, corporates, etc. Simply put, a bond/debt can be
motivation to engage in speculation. It may sometimes be difficult to defined as a loan in which an investor is the lender. The issuer of the
distinguish between speculation and simple investment, forcing the bond pays the investor interest (at a predetermined rate and schedule)
market player to consider whether speculation or investment depends in return for the amount invested. The Indian debt market offers a
on factors that measure the nature of the asset, expected duration of variety of debt instruments, offered by the Government and non-
the holding period and/or amount of leverage applied to the exposure. Government entities.
For example, real estate can blur the line between investment and DEBT INSTRUMENTS
speculation when buying property with the intention of renting it out.
While this would qualify as investing, buying multiple condominiums Buying a debt instrument can be considered as lending money to the
with minimal down payments for the purpose of reselling them quickly entity issuing the instrument. A debt fund invests in fixed-interest
at a profit would undoubtedly be regarded as speculation. generating securities such as corporate bonds, government securities,
treasury bills, commercial paper, and other money market instruments.
Page 11 of 13
The fundamental reason for investing in debt funds is to earn a steady  Commercial Paper
interest income and capital appreciation. The issuers of debt
instruments pre-decide the interest rate you will receive as well as the Commercial paper, also called CP, is a short-term debt instrument
maturity period. Hence, they are also known as ‘fixed-income’ issued by companies to raise funds generally for a period up to one
securities. year. It is an unsecured money market instrument.

 Government Securities  Certificate of Deposit

The government is the largest borrower in the Indian debt markets – it The Certificate of Deposit (CD) is an agreement between a depositor
borrows money by issuing securities of various periods. This is done to and an authorized bank or financial institution. Depositors invest a
fund government expenditure on various things such as infrastructure, certain amount for a tenure while banks and financial institutions pay
social spending, health, defence, education, etc. Government securities interest on the invested amount.
are the highest rated bonds in the country since the government is the Depositors, which can be individuals or companies, are issued a
guarantor in this case. The rating is SO (sovereign). They are a major promissory note by the bank.
means of financing Government deficits.
 Non-convertible Debentures
The Central Government issues treasury bills and bonds or dated
securities while State Governments issue only bonds that are called Non-convertible debentures (NCDs) are a financial instrument that is
State Development Loans (SDLs). Government securities or G-Secs, as used by companies to raise long-term capital. This is done through a
they are called, do not carry any credit risk. public issue. NCDs are a debt instrument with a fixed tenure and people
who invest in these receive regular interest at a certain rate.
 Treasury Bills
 Corporate Bonds
Treasury Bills are short term (up to one year) borrowing instruments
of the Government of India which enable investors to park their short Corporate bonds are debt securities issued by private and public
term surplus funds while reducing their market risk. They are corporations. … In exchange, the company promises to return the
auctioned by the Reserve Bank of India at regular intervals and issued money, also known as “principal,” on a specified maturity date. Until
at a discount to face value. that date, the company usually pays you a stated rate of interest,
generally semi-annually.

Page 12 of 13
REFERENCE:

 https://scripbox.com/mf/what-is-demat-account/
 https://www.businessmanagementideas.com/stock-
exchange/otcei/otcei-concept-and-advantages-india-financial-
management/17117
 https://www.edelweiss.in/investology/introduction-to-stock-
markets-51c006/what-is-stock-trade-settlement-process-
2a34b3
 https://en.wikipedia.org/wiki/National_Securities_Depository_
Limited
 https://en.wikipedia.org/wiki/Central_Depository_Services
 https://www.investopedia.com/terms/s/speculation.asp
 https://sreibonds.com/advisors/understanding-indian-debt-
capital-market#:~:text=Debt%20Capital%20Market-
,The%20Indian%20debt%20market%20is%20a%20market%2
0meant%20for%20trading,%2C%20banks%2C%20corporates
%2C%20etc.

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