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    THE INDIAN CAPITAL MARKET

    AN OVERVIEW

    The Indian capital market is more than a century old. Its history goes back to 1875,

    when 22 brokers formed the Bombay Stock Exchange (BSE). Over the period, the

    Indian securities market has evolved continuously to become one of the most

    dynamic, modern, and efficient securities markets in Asia. Today,

    Indian market confirms to best international practices and standards both in terms of

    structure and in terms of operating efficiency .Indian securities markets are mainly

    governed by a) The Companys Act1956, b) the Securities Contracts (Regulation) Act

    1956 (SCRA Act), and c) the Securities and Exchange Board of India (SEBI) Act,

    1992. A brief background of these above regulations are given below

    a) The Companies Act 1956 deals with issue, allotment and transfer of securities and

    various aspects relating to company management. It provides norms for disclosures in

    the public issues, regulations for underwriting, and the issues pertaining to use of

    premium and discount on various issues.

    b) SCRA provides regulations for direct and indirect control of stock exchanges with

    an aim to prevent undesirable transactions in securities. It provides regulatory

    jurisdiction to Central Government over stock exchanges, contracts in securities and

    listing of securities on stock exchanges.

    c) The SEBI Act empowers SEBI to protect the interest of investors in the securities

    market, to promote the development of securities market and to regulate the security

    market.

    The Indian securities market consists of primary (new issues) as well as secondary

    (stock) market in both equity and debt. The primary market provides the channel for

    sale of new securities, while the secondary market deals in trading of securities

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    previously issued. The issuers of securities issue (create and sell) new securities in the

    primary market to raise funds for investment. They do so either through public issues

    or private placement. There are two major types of issuers who issue securities. The

    corporate entities issue mainly debt and equity instruments (shares, debentures, etc.),

    while the governments (central and state governments) issue debt securities (dated

    securities, treasury bills). The secondary market enables participants who hold

    securities to adjust their holdings in response to changes in their assessment of risk

    and return. A variant of secondary market is the forward market, where securities are

    traded for future delivery and payment in the form of futures and options. The futures

    and options can be on individual stocks or basket of stocks like index. Two

    exchanges, namely National Stock Exchange (NSE) and the Stock Exchange, Mumbai

    (BSE) provide trading of derivatives in single stock futures, index futures, single

    stock options and index options. Derivatives trading commenced in India in June 2000

    Other leading cities in stock market operations

    Ahmedabad gained importance next to Bombay with respect to cotton textile industry.

    After 1880, many mills originated from Ahmedabad and rapidly forged ahead. As

    new mills were floated, the need for a Stock Exchange at Ahmedabad was realized

    and in 1894 the brokers formed "The Ahmedabad Share and Stock Brokers'

    Association".

    What the cotton textile industry was to Bombay and Ahmedabad, the jute industry

    was to Calcutta. Also tea and coal industries were the other major industrial groups in

    Calcutta. After the Share Mania in 1861-65, in the 1870's there was a sharp boom in

    jute shares, which was followed by a boom in tea shares in the 1880's and 1890's; and

    a coal boom between 1904 and 1908. On June 1908, some leading brokers formed

    "The Calcutta Stock Exchange Association".

    In the beginning of the twentieth century, the industrial revolution was on the way in

    India with the Swadeshi Movement; and with the inauguration of the Tata Iron and

    Steel Company Limited in 1907, an important stage in industrial advancement under

    Indian enterprise was reached.

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    Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies

    generally enjoyed phenomenal prosperity, due to the First World War.

    In 1920, the then demure city of Madras had the maiden thrill of a stock exchange

    functioning in its midst, under the name and style of "The Madras Stock Exchange"

    with 100 members. However, when boom faded, the number of members stood

    reduced from 100 to 3, by 1923, and so it went out of existence.

    In 1935, the stock market activity improved, especially in South India where there

    was a rapid increase in the number of textile mills and many plantation companies

    were floated. In 1937, a stock exchange was once again organized in Madras - Madras

    Stock Exchange Association (Pvt) Limited. (In 1957 the name was changed to MadrasStock Exchange Limited).

    Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with

    the Punjab Stock Exchange Limited, which was incorporated in 1936.

    Indian Stock Exchanges - An Umbrella Growth

    The Second World War broke out in 1939. It gave a sharp boom which was followed

    by a slump. But, in 1943, the situation changed radically, when India was fully

    mobilized as a supply base.

    On account of the restrictive controls on cotton, bullion, seeds and other commodities,

    those dealing in them found in the stock market as the only outlet for their activities.

    They were anxious to join the trade and their number was swelled by numerous

    others. Many new associations were constituted for the purpose and Stock Exchanges

    in all parts of the country were floated.

    The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited

    (1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.

    In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited

    and the Delhi Stocks and Shares Exchange Limited - were floated and later in June

    1947, amalgamated into the Delhi Stock Exchange Association Limited.There are two

    major indicators of Indian capital market- SENSEX & NIFTY:

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    SENSEX &NIFTY

    What are the Sensex & the Nifty?

    The Sensex is an "index". What is an index? An index is basically an indicator. It

    gives you a general idea about whether most of the stocks have gone up or most of the

    stocks have gone down. The Sensex is an indicator of all the major companies of the

    BSE. The Nifty is an indicator of all the major companies of the NSE. If the Sensex

    goes up, it means that the prices of the stocks of most of the major companies on the

    BSE have gone up. If the Sensex goes down, this tells you that the stock price of most

    of the major stocks on the BSE have gone down. Just like the Sensex represents the

    top stocks of the BSE, the Nifty represents the top stocks of the NSE. Just in case youare confused, the BSE, is the Bombay Stock Exchange and the NSE is the National

    Stock Exchange. The BSE is situated at Bombay and the NSE is situated at Delhi.

    These are the major stock exchanges in the country. There are other stock exchanges

    like the Calcutta Stock Exchange etc. but they are not as popular as the BSE and the

    NSE. Most of the stock trading in the country is done though the BSE & the NSE .

    Besides Sensex and the Nifty there are many other indexes. There is an index that

    gives you an idea about whether the mid-cap stocks go up and down. This is called theBSE Mid-cap Index. There are many other types of index. Unless stock markets

    provide professionalized service, small investors and foreign investors will not be

    interested in capital market operations. And capital market being one of the major

    source of long-term finance for industrial projects, India cannot afford to damage the

    capital market path. In this regard NSE gains vital importance in the Indian capital

    market but if we see the sensex & nifty graph there is a great variation.

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    HISTORICAL PERSPECTIVE

    The history of Indian stock market is about 200 years old. Prior to this the hundis and

    bills of exchange were in use, specially in the medieval period, which can be

    considered as a form of virtual stock trading but it was certainly not an organized

    stock trading. The recorded stock trading can be traced only after the arrival of East

    India Company. The first organized stock market that was governed by the rules and

    regulations came into the existence in the form of The Native Share and StockBrokers' Association in 1875. After gone through numerous changes this association

    is today better as Bombay Stock Exchange, which remains the premier stock

    exchange since its inception. During this period several other exchanges were

    launched and some of which were closed also. Presently, there are 19 recognized

    stock exchanges out of which four are national level exchanges and the remaining are

    regional exchanges. National Stock Exchange, established in 1992, was the last

    exchange. Although the regional level exchanges are in existence the volume of

    trading in these exchanges is negligible. National Stock Exchange and Bombay Stock

    Exchange are the leaders of Indian Securities Market in terms of listing, trading and

    volumes. The last 15 years of the Indian securities market can be considered as the

    most important part of the history where the market gone through the post

    liberalization era of Indian economy and witnessed the formation of Securities and

    Exchange Board of India (SEBI) which brought substantial transparency in share

    market practices and thus managed to bring in trust of not only domestic investors but

    also the international ones.

    The Big Picture of share market

    As investors, most of us tend to forget about all of the good years and only focus on

    the bad. The broad markets have been heading up for about four years, so the thoughts

    of what happened in 1999-2002 are well behind us. But now that the markets are

    volatile, there is a lot of talk about the subprime mortgage industry, a weak dollar, and

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    everyone begins to completely forget about how well the past four years have been

    and only focus on the last few months or weeks complaining how bad it is. Things can

    certainly continue to get worse, but you have to look at things in context.

    Remember, what goes up, must come down. Not only does the stock market cycle, but

    there is a business cycle as well. We will always have various times that are great, and

    those that arent as great, but you cant lose sight of the big picture.

    Take a look at the following 12 years in a colorized format. Green identifies periods

    of strong growth. Yellow indicates a period of volatility or no real direction, and red

    shows a period of a downward trend. Based on this, is it any surprise that markets are

    becoming volatile and possibly trending downward?

    For even more similarities, scroll back up and look at the first chart from 1996-1999.

    Now, scroll down and look at the 2005-Present image. Notice how similar they are?

    The markets went up for completely different reasons, yet are behaving almost the

    same. All you have to do is look at the following few years to see what might be in

    store for us over the coming year or two. Will history repeat itself? There is no way to

    tell, and anything could happen to make all of this information worthless, but you do

    have to at least consider the past trends and understand that there is a chance the

    market will behave similarly and well enter a period of significant decline.

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    Keep Doing What Youre Doing

    Sure, the market may be a bit unstable right now, and we may certainly be headed for

    a time where the market falls further, but that shouldnt be of much concern to you if

    youre investing for the next 10, 20, 30 or more years. If you want to try and time themarket or predict what the next hot sector is, thats fine, but the best thing most

    people can do is to just continuously invest in a diversified portfolio. If you keep

    buying even as the market falls, youre just adding more shares at a lower price.

    Could you make more money if you only invested at the low points and sold at the

    high points compared to dollar cost averaging? Sure, but the likelihood of succeeding

    on a regular basis is low. For most people, the best thing to do is to just continue

    investing bi-weekly, monthly, or quarterly into the same diversified portfolio

    regardless of market conditions. When markets are choppy or headed down, youre

    just buying stocks or funds on sale. All you have to do is look back a few years to see

    that even though the market might go down, it will eventually come back up again.

    KEY MILESTONES

    Following is the timeline on the rise and rise of the Sensex through Indian stock

    market history.

    1830's Business on corporate stocks and shares in Bank and Cotton presses started in

    Bombay.

    1860-1865 Cotton price bubble as a result of the American Civil War

    1870 - 90's Sharp increase in share prices of jute industries followed by a boom in tea

    stocks and coal

    1900s

    1978-79 Base year of Sensex, defined to be 100.

    1986 Sensex first compiled. Using a market Capitalization Weighted methodology for

    30 component stocks representing well-established companies across key sectors.

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    Since 1990

    1000, July 25, 1990 On July 25, 1990, the Sensex touched the magical four-digit

    figure for the first time and closed at 1,001 in the wake of a good monsoon season and

    excellent corporate results.

    July 1991 Rupee devalued by 18-19 %

    2000, January 15, 1992 On January 15, 1992, the Sensex crossed the 2,000-mark and

    closed at 2,020 followed by the liberal economic policy initiatives undertaken by the

    then prime minister P.V.Narasimha rao.

    3000, February 29, 1992 On February 29, 1992, the Sensex surged past the 3000

    mark in the wake of the market-friendly Budget announced by the then Finance

    Minister, Dr Manmohan Singh.

    4000, March 30, 1992 On March 30, 1992, the Sensex crossed the 4,000-mark and

    closed at 4,091 on the expectations of a liberal export-import policy. It was then that

    the Harshad Mehta scam hit the markets and Sensex witnessed unabated selling.

    5000, October 8, 1999 On October 8, 1999, the Sensex crossed the 5,000-mark as the

    BJP-led coalition won the majority in the 13th Lok Sabha election.

    6000, February 11, 2000 On February 11, 2000, the infotech boom helped the Sensex

    to cross the 6,000-mark and hit and all time high of 6,006.

    6151, Feb 14, 2000 Tops. Index declines until Sept 2001 and loses half the value.

    Coincides with dot-com bubble burst.

    2595, Sept 21, 2001 Bottoms.

    7000, June 20, 2005 On June 20, 2005, the news of the settlement between the

    Ambani brothers boosted investor sentiments and the scrips of RIL, Reliance Energy,

    Reliance Capital, and IPCL made huge gains. This helped the Sensex crossed 7,000

    points for the first time.

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    8000, September 8, 2005 On September 8, 2005, the Bombay Stock Exchange's

    benchmark 30-share index -- the Sensex -- crossed the 8000 level following brisk

    buying by foreign and domestic funds in early trading.

    9000, November 28, 2005 The Sensex on November 28, 2005 crossed the magical

    figure of 9000 to touch 9000.32 points during mid-session at the Bombay Stock

    Exchange on the back of frantic buying spree by foreign institutional investors and

    well supported by local operators as well as retail investors.

    10,000, February 6, 2006 The Sensex on February 6, 2006 touched 10,003 points

    during mid-session. The Sensex finally closed above the 10K-mark on February 7,

    2006.

    11,000, March 21, 2006 The Sensex on March 21, 2006 crossed the magical figure of

    11,000 and touched a life-time peak of 11,001 points during mid-session at the

    Bombay Stock Exchange for the first time. However, it was on March 27, 2006 that

    the Sensex first closed at over 11,000 points.

    12,000, April 20, 2006 The Sensex on April 20, 2006 crossed the 12,000-mark and

    closed at a peak of 12,040 points for the first time.

    13,000, October 30, 2006 The Sensex on October 30, 2006 crossed the magical figure

    of 13,000 and closed at 13,024.26 points, up 117.45 points or 0.9%. It took 135 days

    for the Sensex to move from 12,000 to 13,000 and 123 days to move from 12,500 to

    13,000.

    14,000, December 5, 2006 The Sensex on December 5, 2006 crossed the 14,000-

    mark to touch 14,028 points. It took 36 days for the Sensex to move from 13,000 to

    the 14,000 mark.

    15,000, July 6, 2007 The Sensex on July 6, 2007 crossed the magical figure of 15,000

    to touch 15,005 points in afternoon trade. It took seven months for the Sensex to move

    from 14,000 to 15,000 points.

    16,000, September 19, 2007 The Sensex scaled yet another milestone during early

    morning trade on September 19, 2007. Within minutes after trading began, the Sensex

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    crossed 16,000, rising by 450 points from the previous close. The 30-share Bombay

    Stock Exchange's sensitive index took 53 days to reach 16,000 from 15,000. Nifty

    also touched a new high at 4659, up 113 points.

    The Sensex finally ended with a gain of 654 points at 16,323. The NSE Nifty gained

    186 points to close at 4,732.

    17,000, September 26, 2007 The Sensex scaled yet another height during early

    morning trade on September 26, 2007. Within minutes after trading began, the Sensex

    crossed the 17,000-mark. Some profit taking towards the end, saw the index slip into

    red to 16,887 - down 187 points from the day's high. The Sensex ended with a gain of

    22 points at 16,921.

    18,000, October 09, 2007 The BSE Sensex crossed the 18,000-mark on October 09,

    2007. It took just 8 days to cross 18,000 points from the 17,000 mark. The index

    zoomed to a new all-time intra-day high of 18,327. It finally gained 789 points to

    close at an all-time high of 18,280. The market set several new records including the

    biggest single day gain of 789 points at close, as well as the largest intra-day gains of

    993 points in absolute term backed by frenzied buying after the news of the UPA and

    Left meeting on October 22 put an end to the worries of an impending election.

    19,000, October 15, 2007 The Sensex crossed the 19,000-mark backed by revival of

    funds-based buying in blue chip stocks in metal, capital goods and refinery sectors.

    The index gained the last 1,000 points in just four trading days. The index touched a

    fresh all-time intra-day high of 19,096, and finally ended with a smart gain of 640

    points at 19,059.The Nifty gained 242 points to close at 5,670.

    20,000, October 29, 2007 The Sensex crossed the 20,000 mark on the back of

    aggressive buying by funds ahead of the US Federal Reserve meeting. The index took

    only 10 trading days to gain 1,000 points after the index crossed the 19,000-mark on

    October 15. The major drivers of today's rally were index heavyweights Larsen and

    Toubro, Reliance Industries, ICICI Bank, HDFC Bank and SBI among others. The

    30-share index spurted in the last five minutes of trade to fly-past the crucial level and

    scaled a new intra-day peak at 20,024.87 points before ending at its fresh closing high

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    of 19,977.67, a gain of 734.50 points. The NSE Nifty rose to a record high 5,922.50

    points before ending at 5,905.90, showing a hefty gain of 203.60 points.

    21,000, January 8, 2008 The sensex peaks. It crossed the 21,000 mark in intra-day

    trading after 49 trading sessions. This was backed by high market confidence of

    increased FII investment and strong corporate results for the third quarter. However, it

    later fell back due to profit booking.

    15,200, June 13, 2008 The sensex closed below 15,200 mark, Indian market suffer

    with major downfall from January 21,2008

    14,220, June 25, 2008 The sensex touched an intra day low of 13,731 during the early

    trades, then pulled back and ended up at 14,220 amidst a negative sentiment generated

    on the Reserve Bank of India hiking CRR by 50 bps. FII outflow continued in this

    week.

    12,822, July 2, 2008 The sensex hit an intra day low of 12,822.70 on July 2nd, 2008.

    This is the lowest that it has ever been in the past year. Six months ago, on January

    10th, 2008, the market had hit an all time high of 21206.70. This is a bad time for the

    Indian markets, although Reliance and Infosys continue to lead the way with mostlypositive results. Bloomberg lists them as the top two gainers for the Sensex, closely

    followed by ICICI Bank and ITC Ltd.

    11801.70, Oct 6, 2008 The sensex closed at 11801.70 hitting the lowest in the past 2

    years.

    10527, Oct 10, 2008 The Sensex today closed at 10527,800.51 points down from the

    previous day having seen an intraday fall of as large as 1063 points. Thus,this week

    turned out to be the week with largest percentage fall in the Sensex.

    14284.21, May 18, 2009 After the result of 15th indian general election Sensex

    gained 2110.79 points form the previous close of 12173.42 these creates a new histroy

    in Indian Market. In the Opening Trade itself sensex gain 15% from the previous day

    close this leads to the suspension of 2 hours trade. After 2 hours sensex again surged

    this leads to the suspension of full day trading. 1420

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    Myths of stock market

    1. You can tell if a Stock is cheap or expensive by the Price to Earnings Ratio.

    False: PE ratios are easy to calculate, that is why they are listed in newspapers etc.But you cannot compare PEs on companies from different industries, as the variables

    those companies and industries have are different. Even comparing within an industry,

    PEs dont tell you about many financial fundamentals and nothing about a stocks

    value.

    2. To make Money in the Stock Market, you must assume High Risks.

    False: Tips to Lower your Risk: Do not put more than 10% of your money into any one stock Do not own more than 2-3 stocks in any industry Buy your stocks over time, not all at once Buy stocks with consistent and predictable earnings growth Buy stocks with growth rates greater than the total of inflation and interest

    rates

    Use stop-loss orders to limit your risk3. Buy Stocks on the Way Down and Sell on the Way Up.

    False: People believe that a falling stock is cheap and a rising stock is too expensive.

    But on the way down, you have no idea how much further it may fall. If a stock is

    rising, especially if it has broken previous highs, there are no unhappy owners who

    want to dump it. If the stock is fairly valued, it should continue to rise.

    4. You can Hedge Inflation with Stocks.

    False: When interest rates rise, people start to pull money out of the market and into

    bonds, so that pushes prices down. Plus the cost of business goes up, so corporate

    earnings go down, along with the stock prices.

    5. Young People can afford to take High Risk.

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    False: The only thing true about this is that young people have time on their side if

    they lose all their money. But young people have little disposable income to risk

    losing. If they follow the tips above, they can make money over many years. Young

    people have the time to be patient.

    How stock market works

    In order to understand what stocks are and how stock markets work, we need to dive

    into history--specifically, the history of what has come to be known as the

    corporation, or sometimes the limited liability company (LLC). Corporations in one

    form or another have been around ever since one guy convinced a few others to pool

    their resources for mutual benefit.

    The first corporate charters were created in Britain as early as the sixteenth century,

    but these were generally what we might think of today as a public corporation owned

    by the government, like the postal service.

    Privately owned corporations came into being gradually during the early 19th

    century in the United States , United Kingdom and western Europe as the

    governments of those countries started allowing anyone to create corporations.

    In order for a corporation to do business, it needs to get money from somewhere.

    Typically, one or more people contribute an initial investment to get the company off

    the ground. These entrepreneurs may commit some of their own money, but if they

    don't have enough, they will need to persuade other people, such as venture capital

    investors or banks, to invest in their business.

    They can do this in two ways: by issuing bonds, which are basically a way of selling

    debt (or taking out a loan, depending on your perspective), or by issuing stock, that is,

    shares in the ownership of the company.

    Long ago stock owners realized that it would be convenient if there were a central

    place they could go to trade stock with one another, and the public stock exchange

    was born. Eventually, today's stock markets grew out of these public places.

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    IPOINITIAL PUBLIC OFFERING

    Public issues can be classified into Initial Public offerings and further public

    offerings. In a public offering, the issuer makes an offer for new investors to enter its

    shareholding family. The issuer company makes detailed disclosures as per the DIP

    guidelines in its offer document and offers it for subscription. Initial Public Offering

    (IPO ) is when an unlisted company makes either a fresh issue of securities or an

    offer for sale of its existing securities or both for the first time to the public. This

    paves way for listing and trading of the issuers securities.

    IPO is New shares Offered to the public in the Primary Market .The first time the

    company is traded on the stock exchange. A prospectus is issued to read about its risk

    before investing. IPO is a company's first sale of stock to the public. Securities

    offered in an IPO are often, but not always, those of young, small companies seeking

    outside equity capital and a public market for their stock. Investors purchasing stock

    in IPOs generally must be prepared to accept very large risks for the possibility of

    large gains. Sometimes, Just before the IPO is launched, Existing share Holders get a

    very liberal bonus issues as a reward for their faith in risking money when the project

    was new

    How to apply to a publ ic issue ?

    When a company floats a public issue or IPO, it prints forms for application to be

    filled by the investors. Public issues are open for a few days only. As per law, any

    public issue should be kept open for a minimum of 3days and a maximum of 21 days.

    For issues, which are underwritten by financial institutions, the offer should be kept

    open for a minimum of 3 days and a maximum of 21 days. For issues, which are

    underwritten by all India financial institutions, the offer should be kept open for a

    maximum of 10 days. Generally, issues are kept open for only 3 to 4 days. The duly

    complete application from, accompanied by cash, cheque, DD or stock invest should

    be deposited before the closing date as per the instruction on the from. IPO's by

    investment companies (closed end funds) usually contain underwriting fees which

    represent a load to buyers.

    http://www.sharemarketbasics.com/IPO-Initial-Public-Offering.htmhttp://www.sharemarketbasics.com/IPO-Initial-Public-Offering.htmhttp://www.sharemarketbasics.com/IPO-Initial-Public-Offering.htmhttp://www.sharemarketbasics.com/IPO-Initial-Public-Offering.htm
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    Before applying for any IPO , analyse the following factors:

    1. Who are the Promoters ? What is their credibility and track record ?

    2. What is the company manufacturing or providing services - Product, its potential

    3. Does the Company have any Technology tie-up ? if yes , What is the reputation of

    the collaborators

    4. What has been the past performance of the Company offering the IPO?

    5. What is the Project cost, What are the means of financing and profitability

    projections?

    6. What are the Risk factors involved ?

    7. Who has appraised the Project ? In India Projects apprised by IDBI and ICICI have

    more credibility than small Merchant Bankers

    How to make payments for I POs:

    The payment terms of any IPO or Public issue is fixed by the company keeping in

    view its fund requirements and the statutory regulations. In general, companies

    stipulate that either the entire money should be paid along with the application or 50

    percent of the entire amount be paid along with the application and rest on allotment.

    However, if the funds requirements is staggered, the company may ask for the money

    in calls, that is, the company demands for the money after allotment as and when thecash flow demands. As per the statutory requirements, for public issue large than Rs.

    250 crore, the money is to be collected as under:

    25 per cent on application 25 per cent on allotment 50 per cent in two or more calls

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    The role of SEBI in the process of IPO

    SEBI regulates the IPO process and issued detailed Guidelines under section 11 of the

    SEBI Act, 1992 in the name of SEBI (Disclosure and Investors Protection)

    Guidelines, 2002 generally known as DIP Guidelines. It is also noted that under the

    provisions sections 55 of the Companies Act, 1956. the matters pertaining to issue and

    transfer of securities and non payment of dividend in case of listed companies, the

    companies intend to get listed are being administered by SEBI.

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    DEMAT ACCOUNT

    Demat refers to a dematerialised account.

    Though the company is under obligation to offer the securities in both physical and

    demat mode, you have the choice to receive the securities in either mode.

    If you wish to have securities in demat mode, you need to indicate the depository and

    also of the depository participant with whom you have depository account in your

    application.

    It is, howeverdesirable that you hold securities in demat form as physical securities

    carry the risk of being fake, forged or stolen.

    Just as you have to open an account with a bank if you want to save your money,

    make cheque payments etc, Nowadays, you need to open a demat account if you

    want to buy or sell stocks.

    So it is just like a bank account where actual money is replaced by shares. You have

    to approach the DPs (remember, they are like bank branches), to open your demat

    account. Let's say your portfolio of shares looks like this: 150 of Infosys, 50 of

    Wipro, 200 of HLL and 100 of ACC. All these will show in your demat account. So

    you don't have to possess any physical certificates showing that you own these shares.

    They are all held electronically in your account. As you buy and sell the shares,

    they are adjusted in your account. Just like a bank passbook or statement, the DP

    will provide you with periodic statements of holdings and transactions.

    The most important thing required to trade in share market is Demat account. Demat

    or Dematerialized account is to store stocks in electronics form. It is just like opening

    a bank account to store your money. Now nobody is interested to keep shares in

    physical forms and going for electronic based filing of shares. This has changed the

    style of operation in main Indian stock markets like BSE Sensex ( Bombay Stock

    Exchange Sensitive Index) and Nifty (National Stock Exchange of India) and its

    brokers.

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    How to Open a Demat Account

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

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

    Documents Required

    You will have to submit few documents with the application form to open a demat

    account. As per latest Govt of India rule PAN (Personal Account Number) card is

    must for opening a demat account. These are the documents required to open a demat

    account

    1. Photo Copy of PAN Card (Mandatory)2. Two Passport size photos3. Address ProofRation Card/Passport/Driving License/Voters ID Card/BSNL

    Telephone/LIC Policy

    4. Latest Bank Statement and photocopy of Bank Passbook.

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    SEBIINTRODUCTION

    In 1988 the Securities and Exchange Board of India (SEBI) was established by the

    Government of India through an executive resolution, and was subsequently upgraded

    as a fully autonomous body (a statutory Board) in the year 1992 with the passing of

    the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In

    place of Government Control, a statutory and autonomous regulatory board with

    defined responsibilities, to cover both development & regulation of the market, and

    independent powers have been set up. Paradoxically this is a positive outcome of the

    Securities Scam of 1990-91.

    The basic objectives of the Board were identified as:

    to protect the interests of investors in securities; to promote the development of Securities Market; to regulate the securities market and for matters connected therewith or incidental thereto.

    Since its inception SEBI has been working targetting the securities and is attending tothe fulfillment of its objectives with commendable zeal and dexterity. The

    improvements in the securities markets like capitalization requirements, margining,

    establishment of clearing corporations etc. reduced the risk of credit and also reduced

    the market.

    SEBI has introduced the comprehensive regulatory measures, prescribed registration

    norms, the eligibility criteria, the code of obligations and the code of conduct for

    different intermediaries like, bankers to issue, merchant bankers, brokers and sub-

    brokers, registrars, portfolio managers, credit rating agencies, underwriters and others.

    It has framed bye-laws, risk identification and risk management systems for Clearing

    houses of stock exchanges, surveillance system etc. which has made dealing in

    securities both safe and transparent to the end investor.

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    Another significant event is the approval of trading in stock indices (like S&P CNX

    Nifty & Sensex) in 2000. A market Index is a convenient and effective product

    because of the following reasons:

    It acts as a barometer for market behavior; It is used to benchmark portfolio performance; It is used in derivative instruments like index futures and index options; It can be used for passive fund management as in case of Index Funds.

    Two broad approaches of SEBI is to integrate the securities market at the national

    level, and also to diversify the trading products, so that there is an increase in number

    of traders including banks, financial institutions,insurance companies, mutual funds,

    primary dealers etc. to transact through the Exchanges. In this context the introduction

    of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD

    is a real landmark.

    SEBI appointed the L. C. Gupta Committee in 1998 to recommend the regulatory

    framework for derivatives trading and suggest bye-laws for Regulation and Control of

    Trading and Settlement of Derivatives Contracts. The Board of SEBI in its meeting

    held on May 11, 1998 accepted the recommendations of the committee and approved

    the phased introduction of derivatives trading in India beginning with Stock Index

    Futures. The Board also approved the "Suggestive Bye-laws" as recommended by the

    Dr LC Gupta Committee for Regulation and Control of Trading and Settlement of

    Derivatives Contracts.

    SEBI then appointed the J. R. Verma Committee to recommend Risk Containment

    Measures (RCM) in the Indian Stock Index Futures Market. The report was submitted

    in November 1998.

    However the Securities Contracts (Regulation) Act, 1956 (SCRA) required

    amendment to include "derivatives" in the definition of securities to enable SEBI to

    introduce trading in derivatives. The necessary amendment was then carried out by

    the Government in 1999. The Securities Laws (Amendment) Bill, 1999 was

    introduced. In December 1999 the new framework was approved.

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    Derivatives have been accorded the status of `Securities'. The ban imposed on trading

    in derivatives in 1969 under a notification issued by the Central Government was

    revoked. Thereafter SEBI formulated the necessary regulations/bye-laws and

    intimated the Stock Exchanges in the year 2000. The derivative trading started in

    India at NSE in 2000 and BSE started trading in the year 2001.

    SEBI is the Regulator for the Securities Market in India. Originally set up by

    the Government of India in 1988, it acquired statutory form in 1992 with SEBI Act

    1992 being passed by the Indian Parliament.Chaired by C B Bhave, SEBI is

    headquartered in the popular business district of Bandra-Kurla complex in Mumbai,

    and has Northern, Eastern, Southern and Western regional offices in New

    Delhi, Kolkata, Chennai and Ahmedabad.

    Organisation Structure

    Chandrasekhar Bhaskar Bhave is the sixth chairman of the Securities Market

    Regulator. Prior to taking charge as Chairman SEBI, he had been the chairman of

    NSDL (National Securities Depository Limited) ushering in paperless securities. Prior

    to his stint at NSDL, he had served SEBI as a Senior Executive Director. He is a

    former Indian Administrative Service officer of the 1975 batch.

    The Board comprises

    Name Designation As per

    Mr CB Bhave Chairman SEBI CHAIRMAN (S.4(1)(a) ofthe SEBI Act, 1992)

    Mr KP KrishnanJoint Secretary, Ministryof Finance

    Member (S.4(1)(b) of theSEBI Act, 1992)

    Mr Anurag GoelSecretary, Ministry ofCorporate Affairs

    Member (S.4(1)(b) of theSEBI Act, 1992)

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    Dr G Mohan GopalDirector, National JudicialAcademy, Bhopal

    Member (S.4(1)(d) of theSEBI Act, 1992)

    Mr MS Sahoo Whole Time Member,SEBI

    Member (S.4(1)(d) of theSEBI Act, 1992)

    Dr KM AbrahamWhole Time Member,SEBI

    Member (S.4(1)(d) of theSEBI Act, 1992)

    Mr Mohandas Pai Director, InfosysMember (S.4(1)(d) of theSEBI Act, 1992)

    Functions and Responsibilities

    SEBI has to be responsive to the needs of three groups, which constitute the market:

    the issuers of securities the investors the market intermediaries.SEBI has three functions rolled into one body quasi-legislative, quasi-judicial and

    quasi-executive. It drafts regulations in its legislative capacity, it conducts

    investigation and enforcement action in its executive function and it passes rulings

    and orders in its judicial capacity. Though this makes it very powerful, there is an

    appeals process to create accountability. There is a Securities Appellate Tribunal

    which is a three member tribunal and is presently headed by a former Chief Justice of

    a High court - Mr. Justice NK Sodhi. A second appeal lies directly to the SupremeCourt.

    SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively

    and successively (e.g. the quick movement towards making the markets electronic and

    paperless rolling settlement on T+2 basis). SEBI has been active in setting up the

    regulations as required under law. It is regulating body.

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    INTRODUCTIONBOMBAY STOCK EXCHANGE

    Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage,now spanning three centuries in its 133 years of existence. What is now popularly

    known as BSE was established as "The Native Share & Stock Brokers' Association"

    in 1875.

    BSE is the first stock exchange in the country which obtained permanent recognition

    (in 1956) from the Government of India under the Securities Contracts (Regulation)

    Act 1956. BSE's pivotal and pre-eminent role in the development of the Indian capital

    market is widely recognized. It migrated from the open outcry system to an online

    screen-based order driven trading system in 1995. Earlier an Association Of Persons

    (AOP), BSE is now a corporatised and demutualised entity incorporated under the

    provisions of the Companies Act, 1956, pursuant to the BSE (Corporatisation and

    Demutualisation) Scheme, 2005 notified by the Securities and Exchange Board of

    India (SEBI). With demutualisation, BSE has two of world's best exchanges,

    Deutsche Brse and Singapore Exchange, as its strategic partners.

    Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector

    by providing it with an efficient access to resources. There is perhaps no major

    corporate in India which has not sourced BSE's services in raising resources from the

    capital market.

    Today, BSE is the world's number 1 exchange in terms of the number of listed

    companies and the world's 5th in transaction numbers. The market capitalization as on

    December 31, 2007 stood at USD 1.79 trillion . An investor can choose from more

    than 4,700 listed companies, which for easy reference, are classified into A, B, S, T

    and Z groups.

    The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic

    stature , and is tracked worldwide. It is an index of 30 stocks representing 12 major

    sectors. The SENSEX is constructed on a 'free-float' methodology, and is sensitive to

    market sentiments and market realities. Apart from the SENSEX, BSE offers 21

    indices, including 12 sectoral indices. BSE has entered into an index cooperation

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    agreement with Deutsche Brse. This agreement has made SENSEX and other BSE

    indices available to investors in Europe and America. Moreover, Barclays Global

    Investors (BGI), the global leader in ETFs through its iShares brand, has created

    the 'iShares BSE SENSEX India Tracker' which tracks the SENSEX. The ETF

    enables investors in Hong Kong to take an exposure to the Indian equity market.

    The first Exchange Traded Fund (ETF) on SENSEX, called "SPIcE" is listed on BSE.

    It brings to the investors a trading tool that can be easily used for the purposes of

    investment, trading, hedging and arbitrage. SPIcE allows small investors to take a

    long-term view of the market.

    BSE provides an efficient and transparent market for trading in equity, debtinstruments and derivatives. It has a nation-wide reach with a presence in more than

    359 cities and towns of India. BSE has always been at par with the international

    standards. The systems and processes are designed to safeguard market integrity and

    enhance transparency in operations. BSE is the first exchange in India and the second

    in the world to obtain an ISO 9001:2000 certification. It is also the first exchange in

    the country and second in the world to receive Information Security Management

    System Standard BS 7799-2-2002 certification for its BSE On-line Trading System(BOLT).

    BSE continues to innovate. In recent times, it has become the first national level stock

    exchange to launch its website in Gujarati and Hindi to reach out to a larger number

    of investors. It has successfully launched a reporting platform for corporate bonds in

    India christened the ICDM or Indian Corporate Debt Market and a unique ticker-cum-

    screen aptly named 'BSE Broadcast' which enables information dissemination to the

    common man on the street.

    In 2006, BSE launched the Directors Database and ICERS (Indian Corporate

    Electronic Reporting System) to facilitate information flow and increase transparency

    in the Indian capital market. While the Directors Database provides a single-point

    access to information on the boards of directors of listed companies, the ICERS

    facilitates the corporate in sharing with BSE their corporate announcement.

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    INTRODUCTIONNATIONAL STOCK EXCHANG

    The National Stock Exchange (NSE), located in Bombay, is India's first debt market.It was set up in 1993 to encouragestock exchange reform through system

    modernization and competition. It opened for trading in mid-1994. It was recently

    accorded recognition as a stock exchange by the Department of Company Affairs. The

    instruments traded are, treasury bills, government security and bonds issued by public

    sector companies.

    The Organisation

    The National Stock Exchange of India Limited has genesis in the report of the High

    Powered Study Group on Establishment of New Stock Exchanges, which

    recommended promotion of a National Stock Exchange by financial institutions (FIs)

    to provide access to investors from all across the country on an equal footing. Based

    on the recommendations, NSE was promoted by leading Financial Institutions at the

    behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.

    On its recognition as a stock exchange under the Securities Contracts (Regulation)

    Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market

    (WDM) segment in June 1994. The Capital Market (Equities) segment commenced

    operations in November 1994 and operations in Derivatives segment commenced in

    June 2000.

    Our Group

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    NSCCL NCCL NSETECH

    IISL NSE NSE.IT

    DotExIntl. Ltd.

    NSDL

    Listing

    NSE plays an important role in helping an Indian companies access equity capital, by

    providing a liquid and well-regulated market. NSE has about 1319 companies listed

    representing the length, breadth and diversity of the Indian economy which includes

    from hi-tech to heavy industry, software, refinery, public sector units, infrastructure,

    and financial services. Listing on NSE raises a companys profile among investors in

    India and abroad. Trade data is distributed worldwide through various news-vending

    agencies. More importantly, each and every NSE listed company is required to satisfy

    stringent financial, public distribution and management requirements. High listing

    standards foster investor confidence and also bring credibility into the markets

    http://www.nseindia.com/content/us/us_nsdl.htmhttp://www.nseindia.com/content/us/us_dotex.htmhttp://www.nseindia.com/content/us/us_nseit.htmhttp://www.nseindia.com/content/us/us_organisation.htmhttp://www.nseindia.com/content/us/us_iisl.htmhttp://www.nseindia.com/content/us/us_nsetech.htmhttp://www.nseindia.com/content/us/us_nccl.htmhttp://www.nseindia.com/content/us/us_nsccl.htmhttp://www.nseindia.com/content/us/us_nsdl.htmhttp://www.nseindia.com/content/us/us_dotex.htmhttp://www.nseindia.com/content/us/us_nseit.htmhttp://www.nseindia.com/content/us/us_organisation.htmhttp://www.nseindia.com/content/us/us_iisl.htmhttp://www.nseindia.com/content/us/us_nsetech.htmhttp://www.nseindia.com/content/us/us_nccl.htmhttp://www.nseindia.com/content/us/us_nsccl.htmhttp://www.nseindia.com/content/us/us_nsdl.htmhttp://www.nseindia.com/content/us/us_dotex.htmhttp://www.nseindia.com/content/us/us_nseit.htmhttp://www.nseindia.com/content/us/us_organisation.htmhttp://www.nseindia.com/content/us/us_iisl.htmhttp://www.nseindia.com/content/us/us_nsetech.htmhttp://www.nseindia.com/content/us/us_nccl.htmhttp://www.nseindia.com/content/us/us_nsccl.htmhttp://www.nseindia.com/content/us/us_nsdl.htmhttp://www.nseindia.com/content/us/us_dotex.htmhttp://www.nseindia.com/content/us/us_nseit.htmhttp://www.nseindia.com/content/us/us_organisation.htmhttp://www.nseindia.com/content/us/us_iisl.htmhttp://www.nseindia.com/content/us/us_nsetech.htmhttp://www.nseindia.com/content/us/us_nccl.htmhttp://www.nseindia.com/content/us/us_nsccl.htmhttp://www.nseindia.com/content/us/us_nsdl.htmhttp://www.nseindia.com/content/us/us_dotex.htmhttp://www.nseindia.com/content/us/us_nseit.htmhttp://www.nseindia.com/content/us/us_organisation.htmhttp://www.nseindia.com/content/us/us_iisl.htmhttp://www.nseindia.com/content/us/us_nsetech.htmhttp://www.nseindia.com/content/us/us_nccl.htmhttp://www.nseindia.com/content/us/us_nsccl.htmhttp://www.nseindia.com/content/us/us_nsdl.htmhttp://www.nseindia.com/content/us/us_dotex.htmhttp://www.nseindia.com/content/us/us_nseit.htmhttp://www.nseindia.com/content/us/us_organisation.htmhttp://www.nseindia.com/content/us/us_iisl.htmhttp://www.nseindia.com/content/us/us_nsetech.htmhttp://www.nseindia.com/content/us/us_nccl.htmhttp://www.nseindia.com/content/us/us_nsccl.htmhttp://www.nseindia.com/content/us/us_nsdl.htmhttp://www.nseindia.com/content/us/us_dotex.htmhttp://www.nseindia.com/content/us/us_nseit.htmhttp://www.nseindia.com/content/us/us_organisation.htmhttp://www.nseindia.com/content/us/us_iisl.htmhttp://www.nseindia.com/content/us/us_nsetech.htmhttp://www.nseindia.com/content/us/us_nccl.htmhttp://www.nseindia.com/content/us/us_nsccl.htmhttp://www.nseindia.com/content/us/us_nsdl.htmhttp://www.nseindia.com/content/us/us_dotex.htmhttp://www.nseindia.com/content/us/us_nseit.htmhttp://www.nseindia.com/content/us/us_organisation.htmhttp://www.nseindia.com/content/us/us_iisl.htmhttp://www.nseindia.com/content/us/us_nsetech.htmhttp://www.nseindia.com/content/us/us_nccl.htmhttp://www.nseindia.com/content/us/us_nsccl.htm
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    INTRODUCTION OF SENSEX

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

    Weighted" methodology of 30 component stocks representing large, well-established

    and financially sound companies across key sectors. The base year of SENSEX was

    taken as 1978-79. SENSEX today is widely reported in both domestic and

    international markets through print as well as electronic media. It is scientifically

    designed and is based on globally accepted construction and review methodology.

    Since September 1, 2003, SENSEX is being calculated on a free-float market

    capitalization methodology. The "free-float market capitalization-weighted"

    methodology is a widely followed index construction methodology on which majority

    of global equity indices are based; all major index providers like MSCI, FTSE,

    STOXX, S&P and Dow Jones use the free-float methodology.

    The growth of the equity market in India has been phenomenal in the present decade.

    Right from early nineties, the stock market witnessed heightened activity in terms of

    various bull and bear runs. In the late nineties, the Indian market witnessed a huge

    frenzy in the 'TMT' sectors. More recently, real estate caught the fancy of the

    investors. SENSEX has captured all these happenings in the most judicious manner.One can identify the booms and busts of the Indian equity market through SENSEX.

    As the oldest index in the country, it provides the time series data over a fairly long

    period of time (from 1979 onwards). Small wonder, the SENSEX has become one of

    the most prominent brands in the country.

    SENSEX Calculation Methodology

    SENSEX is calculated using the "Free-float Market Capitalization" methodology,wherein, the level of index at any point of time reflects the free-float market value of

    30 component stocks relative to a base period. The market capitalization of a

    company is determined by multiplying the price of its stock by the number of shares

    issued by the company. This market capitalization is further multiplied by the free-

    float factor to determine the free-float market capitalization.

    The base period of SENSEX is 1978-79 and the base value is 100 index points. This is

    often indicated by the notation 1978-79=100. The calculation of SENSEX involves

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    dividing the free-float market capitalization of 30 companies in the Index by a number

    called the Index Divisor. The Divisor is the only link to the original base period value

    of the SENSEX. It keeps the Index comparable over time and is the adjustment point

    for all Index adjustments arising out of corporate actions, replacement of scrips etc.

    During market hours, prices of the index scrips, at which latest trades are executed,

    are used by the trading system to calculate SENSEX every 15 seconds. The value of

    SENSEX is disseminated in real time.

    Concept of FREE FLOAT

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

    consideration only the free-float market capitalization of a company for the purpose of

    index calculation and assigning weight to stocks in the index. Free-float market

    capitalization takes into consideration only those shares issued by the company that

    are readily available for trading in the market. It generally excludes promoters'

    holding, government holding, strategic holding and other locked-in shares that will

    not come to the market for trading in the normal course. In other words, the market

    capitalization of each company in a free-float index is reduced to the extent of itsreadily available shares in the market.

    Definition of Free-float

    Shareholding of investors that would not, in the normal course come into the open

    market for trading are treated as 'Controlling/ Strategic Holdings' and hence not

    included in free-float. Specifically, the following categories of holding are generally

    excluded from the definition of Free-float:

    Shares held by founders/directors/ acquirers which has control element Shares held by persons/ bodies with "Controlling Interest" Shares held by Government as promoter/acquirer Holdings through the FDI Route Strategic stakes by private corporate bodies/ individuals

    Equity held by associate/group companies (cross-holdings) Equity held by Employee Welfare Trusts

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    Locked-in shares and shares which would not be sold in the open market innormal course.

    Maintenance of SENSEX

    One of the important aspects of maintaining continuity with the past is to update the

    base year average. The base year value adjustment ensures that replacement of stocks

    in Index, additional issue of capital and other corporate announcements like 'rights

    issue' etc. do not destroy the historical value of the index. The beauty of maintenance

    lies in the fact that adjustments for corporate actions in the Index should not per se

    affect the index values.

    TheBSE Index Celldoes the day-to-day maintenance of the index within the broad

    index policy framework set by the BSE Index Committee. The BSE Index Cellensures

    that SENSEX and all the other BSE indices maintain their benchmark properties by

    striking a delicate balance between frequent replacements in index and maintaining its

    historical continuity. The BSE Index Committee comprises of capital market expert,

    fund managers, market participants and members of the BSE Governing Board.

    Function and purpose of stock market

    The stock market is one of the most important sources for companies to raise money.

    This allows businesses to be publicly traded, or raise additional capital for expansion

    by selling shares of ownership of the company in a public market. The liquidity thatan exchange provides affords investors the ability to quickly and easily sell securities.

    This is an attractive feature of investing in stocks, compared to other less liquid

    investments such as real estate.

    History has shown that the price of shares and other assets is an important part of the

    dynamics of economic activity, and can influence or be an indicator of social mood.

    An economy where the stock market is on the rise is considered to be an up and

    coming economy. In fact, the stock market is often considered the primary indicator

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    of a country's economic strength and development. Rising share prices, for instance,

    tend to be associated with increased business investment and vice versa. Share prices

    also affect the wealth of households and their consumption. Therefore, central banks

    tend to keep an eye on the control and behavior of the stock market and, in general, on

    the smooth operation of financial system functions. Financial stability is the raison

    d'tre of central banks.

    Exchanges also act as the clearinghouse for each transaction, meaning that they

    collect and deliver the shares, and guarantee payment to the seller of a security. This

    eliminates the risk to an individual buyer or seller that the counterparty could default

    on the transaction.

    The smooth functioning of all these activities facilitates economic growth in that

    lower costs and enterprise risks promote the production of goods and services as well

    as employment. In this way the financial system contributes to increased prosperity.

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    DEPOSITORY

    What is a Depository?

    A depository holds shares and other securities of investors in electronic form.

    Through Depository Participants (DPs), it also provides services related to

    transactions in securities. Its structure and functioning are similar to the Bank.

    Presently in India, there are two depository viz. National Securities Depository

    Limited (NSDL) and Central Depository Services (I) Limited (CDSL). Both of them

    are registered with SEBI.

    What is a DP?

    DP is a member of a Depository who offers its services to hold securities of Investors

    (Beneficial Owners) in dematerialized form. DP is like a Bank branch. It is an agent

    of the depository. DP works as an interface between Depository and Investors. DPs

    are required to be registered with SEBI. If an investor wants to avail the services

    offered by Depository, he has to open a Demat account with DP similar to opening of

    a bank account with a branch of the bank.

    Depository is responsible for keeping stocks of investors in electronics form. Thereare two depositories in India, NSDL (National Securities Depository Ltd) and CDSL

    (Central Depository Services Ltd).

    CDSL (Central Depository Services Ltd.)

    CDSL was promoted by Bombay Stock Exchange Limited (BSE) jointly with leading

    banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank,

    Standard Chartered Bank, Union Bank of India and Centurion Bank.

    CDSL was set up with the objective of providing convenient, dependable and secure

    depository services at affordable cost to all market participants. Some of the important

    milestones of CDSL system are:

    CDSL received the certificate of commencement of business from SEBI in February,

    1999.

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    Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the operations

    of CDSL on July 15, 1999.

    Settlement of trades in the demat mode through BOI Shareholding Limited, the

    clearing house of BSE, started in July 1999.

    All leading stock exchanges like the National Stock Exchange, Calcutta Stock

    Exchange, Delhi Stock Exchange, The Stock Exchange, Ahmedabad, etc have

    established connectivity with CDSL.

    As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities,

    bonds, debentures, commercial papers), units of mutual funds, certificate of deposits

    etc. into the CDSL system.

    About NSDL

    Although India had a vibrant capital market which is more than a century old, the

    paper-based settlement of trades caused substantial problems like bad delivery and

    delayed transfer of title till recently. The enactment of Depositories Act in August

    1996 paved the way for establishment of National Securities Depository Limited

    (NSDL), the first depository in India. This depository promoted by institutions of

    national stature responsible for economic development of the country has since

    established a national infrastructure of international standards that handles most of the

    securities held and settled in dematerialised form in the Indian capital market.

    Using innovative and flexible technology systems, NSDL works to support theinvestors and brokers in the capital market of the country. NSDL aims at ensuring the

    safety and soundness of Indian marketplaces by developing settlement solutions that

    increase efficiency, minimise risk and reduce costs. At NSDL, we play a quiet but

    central role in developing products and services that will continue to nurture the

    growing needs of the financial services industry.

    In the depository system, securities are held in depository accounts, which is more or

    less similar to holding funds in bank accounts. Transfer of ownership of securities is

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    done through simple account transfers. This method does away with all the risks and

    hassles normally associated with paperwork. Consequently, the cost of transacting in a

    depository environment is considerably lower as compared to transacting in

    certificates Promoters / Shareholders

    NSDL is promoted by Industrial Development Bank of India Limited (IDBI) - the

    largest development bank of India, Unit Trust of India (UTI) - the largest mutual fund

    in India and National Stock Exchange of India Limited (NSE) - the largest stock

    exchange in India. Some of the prominent banks in the country have taken a stake in

    NSDL.

    NSDL Facts & F igures

    As on December 31, 2008

    Number of certificates eliminated (Approx.) : 550 Crore Number of companies in which more than 75% shares are dematted : 2282 Average number of accounts opened per day since November 1996 : 3636 Presence of demat account holders in the country : 78% of all pincodes in the

    country.

    Central Securities Depository (CSD)

    A Central Securities Depository (CSD) is an organization holding securities either

    in certificated or uncertificated (dematerialized) form, to enable book entry transfer of

    securities. In some cases these organizations also carry out centralized comparison,

    and transaction processing such as clearing and settlement of securities. The physical

    securities may be immobilised by the depository, or securities may be dematerialised

    (so that they exist only as electronic records).

    International Central Securities Depository (ICSD) is a central securities

    depository that settles trades in international securities and in various domestic

    securities, usually through direct or indirect (through local agents) links to local

    CSDs. ClearStream International (earlier Cedel), Euro clear and SIX SIS are

    considered ICSDs. While some view The Depository Trust Company (DTC) as a

    national CSD rather than an ICSD, in fact DTC -- the largest depository in the world -

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    - holds over $2 trillion in non-US securities and in American Depository Receipts

    from over 100 nations.

    Functions

    Safekeeping Securities may be in dematerialized form, book-entry only form(with one or more "global" certificates), or in physical form immobilized

    within the CSD.

    Deposit and Withdrawal Supporting deposits and withdrawals involves therelationship between the transfer agent and/or issuers and the CSD. It also

    covers the CSD's role within the underwriting process or listing of new issues

    in a market. Dividend, interest, and principal processing, as well as corporate actions

    including proxy voting Paying and transfer agents, as well as issuers are

    involved in these processes, depending on the level of services provided by the

    CSD and its relationship with these entities.

    Other services CSDs offer additional services aside from those consideredcore services. These services include Securities Lending and Borrowing,

    Matching, and Repo Settlement

    Pledge - Central depositories provide pledging of share and securities. Everycountry require to provide legal framework to protect the interest of the

    pledgor and pledgee.

    However, there are risks and responsibilities regarding these services that must be

    taken into consideration in analyzing and evaluating each market on a case-by-case

    basis.

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    FII (Foreign Institutional Investors) in Indian Stock Market

    Foreign Institutional Investor (FII) is used to denote an investor - mostly of the

    form of an institution or entity, which invests money in the financial markets of a

    country different from the one where in the institution or entity was originally

    incorporated.

    FII investment is frequently referred to as hot money for the reason that it can leave

    the country at the same speed at which it comes in.

    In countries like India, statutory agencies like SEBI have prescribed norms to register

    FIIs and also to regulate such investments flowing in through FIIs. In 2008, FIIs

    represented the largest institution investment category, with an estimated US$ 751.14

    billion.

    Since 1990-91, the Government of India embarked on liberalisation and economic

    reforms with a view of bringing about rapid and substantial economic growth and

    move towards globalisation of the economy. As a part of the reforms process, the

    Government under its New Industrial Policy, revamped its foreign investment policy

    recognising the growing importance of foreign direct investment as an instrument of

    technology transfer, augmentation of foreign exchange reserves and globalisation of

    the Indian economy. Simultaneously, the Government, for the first time, permitted

    portfolio investments from abroad by foreign institutional investors in the Indian

    capital market. The entry of FIIs seems to be a follow up of the recommendation of

    the Narsimhan Committee Report on Financial System. While

    recommending their entry, the Committee, however did not elaborate on the

    objectives of the suggested policy. The committee only suggested that the capitalmarket should be gradually opened up to foreign portfolio investments.

    From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in

    all the securities traded on the primary and secondary markets, including shares,

    debentures and warrants issued by companies which were listed or were to be listed

    on the Stock Exchanges in India.

    While presenting the Budget for 1992-93, the then Finance Minister Dr. Manmohan

    Singh had announced a proposal to allow reputed foreign investors, such as PensionFunds etc., to invest in Indian capital market. To operationalise this policy

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    announcement, it had become necessary to evolve guidelines for such investments by

    Foreign Institutional Investors (FIIs). The policy framework for permitting FII

    investment was provided under the Government of India guidelines vide Press Note

    date September 14, 1992. The guidelines formulated in this regard were as follows:

    1. Foreign Institutional Investors (FIIs) including institutions such as PensionFunds, Mutual Funds, Investment Trusts, Asset Management Companies,

    Nominee Companies and Incorporated/Institutional Portfolio Managers or

    their power of attorney holders (providing discretionary and non-

    discretionary portfolio management services) would be welcome to make

    investments under these guidelines.

    2. FIIs would be welcome to invest in all the securities traded on the Primaryand Secondary markets, including the equity and other securities/instruments

    of companies which are listed/to be listed on the Stock Exchanges in India

    including the OTC Exchange of India. These would include shares,

    debentures, warrants, and the schemes floated by domestic Mutual Funds.

    Government would even like to add further categories of securities later from

    time to time.

    3. FIIs would be required to obtain an initial registration with Securities andExchange Board of India (SEBI), the nodal regulatory agency for securities

    markets, before any investment is made by them in the Securities of

    companies listed on the Stock Exchanges in India, in accordance with these

    guidelines. Nominee companies, affiliates and subsidiary companies of a FII

    would be treated as separate FIIs for registration, and may seek separate

    registration with SEBI.

    4. Since there were foreign exchange controls in force, for various permissionsunder exchange control, along with their application for initial registration,

    FIIs were also supposed to file with SEBI another application addressed to

    RBI for seeking various permissions under FERA, in a format that would be

    specified by RBI for the purpose. RBI's general permission would be

    obtained by SEBI before granting initial registration and RBI's FERApermission together by SEBI, under a single window approach.

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    5. For granting registration to the FII, SEBI should take into account the trackrecord of the FII, its professional competence, financial soundness,

    experience and such other criteria that may be considered by SEBI to be

    relevant. Besides, FII seeking initial registration with SEBI were be required

    to hold a registration from the Securities Commission, or the regulatory

    organisation for the stock market in the country of domicile/incorporation of

    the FII.

    6. SEBI's initial registration would be valid for five years. RBI's generalpermission under FERA to the FII would also hold good for five years. Both

    would be renewable for similar five year periods later on.

    7. RBI's general permission under FERA would enable the registered FII to buy,sell and realize capital gains on investments made through initial corpus

    remitted to India, subscribe/renounce rights offerings of shares, invest on all

    recognized stock exchanges through a designated bank branch, and to appoint

    a domestic Custodian for custody of investments held

    8. This General Permission from RBI would also enable the FII to: Open foreign currency denominated accounts in a designated bank.

    (There could even be more than one account in the same bank branch

    each designated in different foreign currencies, if it is so required by FII

    for its operational purposes);

    Open a special non-resident rupee account to which could be credited allreceipts from the capital inflows, sale proceeds of shares, dividends and

    interests;

    Transfer sums from the foreign currency accounts to the rupee accountand vice versa, at the market rate of exchange;

    Make investments in the securities in India out of the balances in therupee account;

    Transfer repatriable (after tax) proceeds from the rupee account to theforeign currency account(s);

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    f. Repatriate the capital, capital gains, dividends, incomes received byway of interest, etc. and any compensation received towards

    sale/renouncement of rights offerings of shares subject to the designated

    branch of a bank/the custodian being authorized to deduct with holding

    tax on capital gains and arranging to pay such tax and remitting the net

    proceeds at market rates of exchange;

    Register FII's holdings without any further clearance under FERA.What Does Foreign Institutional Investor - FII Mean?

    An investor or investment fund that is from or registered in a country outside of the

    one in which it is currently investing. Institutional investors include hedge funds,

    insurance companies, pension funds and mutual funds.

    Regulation imposed by SEBI on FII

    (a) "Act" means the Securities and Exchange Board of India Act, 1992 (15 of1992);

    (b) "certificate" means a certificate of registration granted by the Board under

    these regulations;

    (c) "designated bank" means any bank in India, which has been authorised by the

    Reserve Bank of India to act as a banker to Foreign Institutional Investors;

    (d) "domestic custodian" includes any person carrying on the activity of providing

    custodial services in respect of securities;

    (e) "Enquiry officer" means any officer of the Board, or any other person

    appointed by the Board under Chapter V of these regulations;

    (f) "Foreign Institutional Investor" means an institution established or

    incorporated outside India which proposes to make investment in India in

    securities;

    (g) "Form" means a form specified in the First Schedule to these regulations;

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    (h) "Government of India Guidelines" means the guidelines dated September 14,

    1992 issued by the Government of India for Foreign Institutional Investors, as

    amended from time to time;

    (i) "institution" includes every artificial juridical person;

    (j) "schedule" means a schedule to these regulations;

    (k) "sub-account" includes those institutions, established or incorporated outside

    India and those funds, or portfolios, established outside India, whether

    incorporated or not, on whose behalf investments are proposed to be made in India

    by a Foreign Institutional Investor.

    Participatory notes (P- Notes)

    Participatory notes (PNs / P-Notes) are instruments used by investors or hedge

    funds that are not registered with the SEBI (Securities & Exchange Board of India) to

    invest in Indian securities. Participatory notes are instruments that derive their value

    from an underlying financial instrument such as an equity share and, hence, the word,

    'derivative instruments'. SEBI permitted FIIs to register and participate in the indian

    stock market in 1992.

    Indian based brokerages buy Indian-based securities and then issue PNs to foreign

    investors.

    Any dividends or capital gains collected from the underlying securities go back to theinvestors.

    Participatory notes are instruments used for making investments in the stock markets.

    However, they are not used within the country. They are used outside India for

    making investments in shares listed in that country. That is why they are also called

    offshore derivative instruments.

    In the Indian context, foreign institutional investors (FIIs) and their sub-accounts

    mostly use these instruments for facilitating the participation of their overseas clients,

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    who are not interested in participating directly in the Indian stock market. For

    example, Indian-based brokerages buy India-based securities and then issue

    participatory notes to foreign investors. Any dividends or capital gains collected from

    the underlying securities go back to the investors. According to an expert group

    constituted by the finance ministry in India, in August 2004, participatory notes

    constituted about 46 per cent of the cumulative net investments in equities by FIIs.

    Any entity investing in participatory notes is not required to register with SEBI

    (Securities and Exchange Board of India), whereas all FIIs have to compulsorily get

    registered. Trading through participatory notes is easy because participatory notes are

    like contract notes transferable by endorsement and delivery. Secondly, some of the

    entities route their investment through participatory notes to take advantage of the taxlaws of certain preferred countries. Thirdly, participatory notes are popular because

    they provide a high degree of anonymity, which enables large hedge funds to carry

    out their operations without disclosing their identity.

    Participatory notes in brief is as follows :

    What are participatory notes or PNs? Participatory notes are instruments used by

    foreign funds which are not registered to trade in domestic Indian Capital Markets.

    PNs are derivative instruments issued against an underlying security permitting

    holders to get a share in the income from the security.

    How does it work? Investors who buy PNs deposit their funds in US or European

    operations of Foreign Institutional Investors (FII) operating in India . The FII uses its

    proprietary account to buy stocks.

    Why do investors use PNs? Reason for using PNs is to keep investor name

    anonymous, some investors have used them to save transaction and overhead costs.

    Tax officials fear that PNs are becoming a favourite with a host of Indian money

    launderers who use them to first take funds out of country through hawala and then

    get it back using PNs.

    Participatory Notes Crisis of 2007

    On the 16th of October, 2007, SEBI (Securities & Exchange Board of India) proposed

    curbs on participatory notes which accounted for roughly 50% of FII investment in

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    2007. SEBI was not happy with P-Notes because it is not possible to know who owns

    the underlying securities and hedge funds acting through PNs might therefore cause

    volatility in the Indian markets.

    However the proposals of SEBI were not clear and this led to a knee-jerk crash whenthe markets opened on the following day (October 17, 2007). Within a minute of

    opening trade, the Sensex crashed by 1744 points or about 9% of its value - the

    biggest intra-day fall in Indian stock-markets in absolute terms. This led to automatic

    suspension of trade for 1 hour. Finance Minister P.Chidambaram issued clarifications,

    in the meantime, that the government was not against FIIs and was not immediately

    banning PNs. After the markets opened at 10:55 am, they staged a remarkable

    comeback and ended the day at 18715.82, down just 336.04 from Tuesdays closeafter tumbling to a days low of 17307.90.

    This was, however not the end of the volatility. The next day (October 18, 2007), the

    Sensex tumbled by 717.43 points 3.83 per centto 17998.39, its second biggest

    fall. The slide continued the next day when the Sensex fell 438.41 points to settle at

    17559.98 at the end of the week, after touching the lowest level of that week at

    17226.18 during the day.

    The SEBI chief, M.Damodaran held an hour long conference on the 22nd of October

    to clear the air on the proposals to curb PNs where he announced that funds investing

    through PNs were most welcome to register as FIIs, whose registration process would

    be made faster and more steamlined. The markets welcomed the clarifications with an

    879-point gain its biggest single-day surge on October23, thus signalling the

    end of the PN crisis. SEBI issued the fresh rules regarding PNs on the 25th of

    October, 2007 which said that FIIs cannot issue fresh P-Notes and existing exposures

    were to be wound up within 18 months. The Sensex gave a thumbs up the next day -Friday, 26 October by re-crossing the 19,000 barrier with a 428 point surge. The

    coming Monday (October 29, 2007) history was created when the Sensex leaped

    734.5 points to cross the hallowed 20,000 mark.

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    SCAMS OF SHARE MARKET

    HARSHAD MEHTA SCAM

    Harshad Mehta was an Indian stockbroker and is alleged to have engineered the rise

    in the BSE stock exchange in the year 1992. Exploiting several loopholes in the

    banking system, Mehta and his associates siphoned off funds from inter-bank

    transactions and bought shares heavily at a premium across many segments, triggering

    a rise in the Sensex. When the scheme was exposed, the banks started demanding the

    money back, causing the collapse. He was later charged with 72 criminal offenses and

    more than 600 civil action suits were filed against him. He died in 2002 with manylitigations still pending against him.

    Early Li fe

    Harshad Shantilal Mehta was born in a Gujarati Jain family of modest means. His

    early childhood was spent in Mumbai where his father was a small-time businessman.

    Later, the family moved to Raipur in Madhya Pradesh after doctors advised his father

    to move to a drier place on account of his indifferent health. But Raipur could nothold back Mehta for long and he was back in the city after completing his schooling,

    Mehta gradually rose to become a stock broker on the Bombay Stock Exchange and

    lived almost like a movie star in a 15,000 square feet apartment, which had a

    swimming pool as well as a golf patch. He also had a taste for flashy cars, which

    ultimately led to his downfall. The year was 1990. Years had gone by and the driving

    ambitions of a young man in the faceless crowd had been realised. Harshad Mehta

    was making waves in the stock market. He had been buying shares heavily since the

    beginning of 1990. The shares which attracted attention were those of Associated

    Cement Company (ACC),. The price of ACC was bid up to Rs 10,000. For those

    who asked, Mehta had the replacement cost theory as an explanation. The theory

    basically argues that old companies should be valued on the basis of the amount of

    money which would be required to create another such company.

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    Through the second half of 1991, Mehta was the darling of the business media and

    earned the sobriquet of the Big Bull, who was said to have started the bull run. But,

    where was Mehta getting his endless supply of money from? Nobody had a clue.

    On April 23, 1992, journalist Sucheta Dalal in a column in The Times of India,

    exposed the dubious ways of Harshad Metha. The broker was dipping illegally into

    the banking system to finance his buying.

    In 1992, when I broke the story about the Rs 600 crore that he had swiped from the

    State Bank of India, it was his visits to the banks headquarters in a flashy Toyota

    Lexus that was the tip-off. Those days, the Lexus had just been launched in the

    international market and importing it cost a neat package, Dalal wrote in one of hercolumns later.

    The authors explain: The crucial mechanism through which the scam was effected

    was the ready forward (RF) deal. The RF is in essence a secured short-term (typically

    15-day) loan from one bank to another. Crudely put, the bank lends against

    government securities just as a pawnbroker lends against jewellery. The borrowing

    bank actually sells the securities to the lending bank and buys them back at the end of

    the period of the loan, typically at a slightly higher price.

    It was this ready forward deal that Harshad Mehta and his cronies used with great

    success to channel money from the banking system.

    A typical ready forward deal involved two banks brought together by a broker in lieu

    of a commission. The broker handles neither the cash nor the securities, though that

    wasnt the case in the lead-up to the scam.

    In this settlement process, deliveries of securities and payments were made through

    the broker. That is, the seller handed over the securities to the broker, who passed

    them to the buyer, while the buyer gave the cheque to the broker, who then made the

    payment to the seller.

    In this settlement process, the buyer and the seller might not even know whom they

    had traded with, either being know only to the broker.

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    This the brokers could manage primarily because by now they had become market

    makers and had started trading on their account. To keep up a semblance of legality,

    they pretended to be undertaking the transactions on behalf of a bank.

    Another instrument used in a big way was the bank receipt (BR). In a ready forward

    deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e.

    the seller of securities, gave the buyer of the securities a BR.

    As the authors write, a BR confirms the sale of securities. It acts as a receipt for the

    money received by the selling bank. Hence the name - bank receipt. It promises to

    deliver the securities to the buyer. It also states that in the mean time, the seller holds

    the securities in trust of the buyer.

    Having figured this out, Mehta needed banks, which could issue fake BRs, or BRs not

    backed by any government securities. Two small and little known banks - the Bank

    of Karad (BOK) and the Metorpolitan Co-operative Bank (MCB) - came in handy for

    this purpose. These banks were willing to issue BRs as and when required, for a fee,

    the authors point out.

    Once these fake BRs were issued, they were passed on to other banks and the banks inturn gave money to Mehta, obviously assuming that they were lending against

    government securities when this was not really the case. This mone