Shares Stocks NSE BSE
Transcript of Shares Stocks NSE BSE
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CHAPTER I SECURITIES MARKET IN INDIA AN OUTLINE
A.INTRODUCTION
fter the securities are issued in the primary market, they are traded in the
secondary market by the investors. The stock exchanges along with a host of
other intermediaries provide the necessary platform for trading in secondary
market and also for clearing and settlement. The securities are traded, cleared and settled
within the regulatory framework prescribed by the Exchanges and the SEBI. Till
recently, it was mandatory for the companies to list their securities on the regional stock
exchange nearest to their registered office, in order to provide an opportunity to
investors to investtrade in the securities of local companies. !owever, following the
withdrawal of this restriction, the companies have an option to choose from any one of
the existing stock exchanges in India to list their securities. "ue to the earlier regulation
re#uiring companies to get listed first at the regional stock exchange, there are in all $%
exchanges operating today in the country.
&
'ith the increased application of information technology, the trading platforms of all the
stock exchanges are accessible from anywhere in the country through their trading
terminals. !owever, the trading platform of (SE is also accessible through internet and
mobile devices. In a geographically widespread country like India, this has significantly
expanded the reach of the exchanges to the homes of ordinary investors and assuaged the
aspirations of people to have exchanges in their vicinity.
&s a result of the reformsinitiatives taken by the )overnment and the *egulators, the
market microstructure has been refined and moderni+ed. The investment choices for the
investors have also broadened. The securities market moved from T% settlement
periods to T$ rolling settlement with effect from &pril -, $%. /urther, straight
through processing has been made mandatory for all institutional trades executed on the
stock exchange. *eal time gross settlement has also been introduced by *BI to settle
inter0bank transactions online at real time mode. These developments in the securities
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market provide the necessary impetus for growth and development, and thereby
strengthen the emerging market economy in India.
B.PRODUCTS AND PARTICIPANTS
obili+ation of savings from surplus savers to deficit savers is most
efficiently carried out by the securities market through a range of complex
products called 1securities2. The definition of securities as per the S3*&,
-456 includes shares, bonds, scrips, stocks or other marketable securities of like nature
in or of any incorporate company or body corporate, government securities, derivatives
of securities, units of collective investment scheme, interest and rights in securities,
security receipt or any other instruments so declared by the central government. The
securities market has essentially three categories of participants, viz., the issuer of
securities, investors in securities and the intermediaries. The issuers are the borrowers or
deficit savers, who issue securities to raise funds. The investors, who are surplus savers,
deploy their savings by subscribing to these securities. The intermediaries are the agents
who match the needs of users and suppliers of funds for a commission. These
intermediaries pack and unpack securities to help both the issuers and investors to
achieve their respective goals. There are a large variety and number of intermediaries
providing various services in the Indian securities market 7Table -0-8. This process of
mobili+ation of resources is carried out under the supervision and overview of the
regulators. The regulators develop fair market practices and regulate the conduct of
issuers of securities and the intermediaries. They are also in charge of protecting the
interests of the investors. The regulator ensures a high service standard from the
intermediaries and supply of #uality securities and non0manipulated demand for them in
the market.
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C.MARKET SEGMENTS
he securities market has two interdependent segments: the primary and the
secondary market. The primary market is the channel for creation of new
securities. These securities are issued by public limited companies or by
government agencies. In the primary market the resources are mobili+ed either through
the public issue or through private placement route. It is a public issue if anybody and
everybody can subscribe for it, whereas if the issue is made available to a selected group
of persons it is termed as private placement. There are two ma;or types of issuers of
securities, the corporate entities who issue mainly debt and e#uity instruments and the
government 7central as well as state8 who issue debt securities. These new securities
issued in the primary market are traded in the secondary market. The secondary market
enables participants who hold securities to ad;ust their holdings in response to changes in
their assessment of risks and returns. The secondary market operates through two
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mediums, namely, the over0the0counter 7
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ratio defined as the value of listed stocks divided by )"? is used as a measure of stock
market si+e. It is of economic significance since market is positively correlated with the
ability to mobili+e capital and diversify risk. It increased sharply to 5$.%> in $%0C
against $.5> in the previous year. The trading volumes on exchanges have been
witnessing phenomenal growth over the past decade. The trading volume, which peaked
at *s. $,4,4 million in $0-, fell substantially to *s. 4,64,4% million in $$0
%. !owever, the year $%0C saw a turnaround in the total trading volumes on the
exchanges. It registered a volume of *s. -6,$C,4AA million. The turnover ratio, which
reflects the volume of trading in relation to the si+e of the market, has been increasing by
leaps and bounds after the advent of screen based trading system by the (SE. The
turnover ratio for the year $%0C accounted at -$$.4>. The relative importance of
various stock exchanges in the market has undergone dramatic change during this
decade. The increase in turnover took place mostly at the big exchanges. The (SE yet
again registered as the market leader with more 5> of total turnover 7volumes on all
segments8 in $%0C. Top 5 stock exchanges accounted for 44.> of turnover, while
the rest - exchange for less than .-$> during $%0C 7Table -0--8. &bout ten
exchanges reported nil trading volume during the year.
The movement of the SD? 3( (ifty, the most widely used indicator of the market, is
presented in 3hart -0-. The index movement has been responding to changes in the
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governmentFs economic policies, the increase in /IIs inflows, etc. !owever, the year
$%0C witnessed a favorable movement in the (ifty, wherein it registered its all time
high in Ganuary $C of $-C.65. The point0to0point return of (ifty was .-C> for
$%0C.
o#er$%e$t Securte!0 The trading in government securities exceeded the
combined trading in e#uity segments of all the exchanges in the country
during $%0C. The aggregate trading in central and state government
dated securities, including treasury bills, increased by manifold over a period of time.
"uring $%0C it reached a level of *s. $6,A4$,4 million. The share of '"9
segment of (SE in total turnover for government securities decreased marginally from
5$> in $$0% to CA.6> in $%0C. !owever, the share of '"9 segment of (SE in
the total of (on0repo government securities increased marginally from AC.-> in $$0
% to AC.4> in $%0C 7Table -0-8.
G
END O& CHAPTER I
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CHAPTER II0 REGULATORY &RAME'ORK
The four main legislations governing the securities market are
7a8 T(e SEBI Act) *++,7b8 T(e Co%pa$e! Act) *+-7c8 T(e Securte! Co$tract!
/Re0u1ato$2 Act) *+-, and 7d8 T(e Depo!tore! Act) *++
& brief about these legislations are as given below:
EBI Act) *++,3 The SEBI &ct, -44$ was enacted to empower SEBI with
statutory powers for /a2protecting the interests of investors in securities, /42
promoting the development of the securities market, and /c2 regulating the
securities market. Its regulatory ;urisdiction extends over corporates in the issuing
capital and all intermediaries and persons associated with securities market. It can
conduct en#uiries, audits and inspection of all concerned participants and ad;udicate
offences under this &ct. It has powers to register and regulate all the market
intermediaries. /urther it can also penali+e them in case of violations of the provisions of
the &ct, *ules and *egulations made there under. SEBI has full autonomy and authority
to regulate and develop an orderly securities market.
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ecurte! Co$tract! /Re0u1ato$2 Act) *+-3It provides for direct and indirect
control of virtually all aspects of the securities trading including the running of
stock exchanges with an aim to prevent undesirable transactions in securities. It
gives the 3entral )overnment regulatory ;urisdiction over /a2stock exchanges through a
process of recognition and continued supervision, /42 contracts in securities, and /c2
listing of securities on stock exchanges. &s a condition of recognition, a stock exchange
complies with the re#uirements prescribed by the 3entral )overnment. The stock
exchanges frame their own listing regulations in consonance with the minimum listing
criteria set out in the *ules.
S
epo!tore! Act) *++3 The "epositories &ct, -446 provides for the
establishment of depositories for securities to ensure transferability of
securities with speed, accuracy and security. /or this, these provisions have
been made: /a2making securities of public limited companies freely transferable sub;ect
to certain exceptionsH /42demateriali+ing the securities in the depository modeH and /c2
providing for maintenance of ownership records in a book entry form. In order to
streamline the settlement process, the &ct envisages transfer of ownership of securities
electronically by book entry without moving the securities from persons to persons. The
&ct has made the securities of all public limited companies freely transferable,restricting the companyFs right to use discretion in effecting the transfer of securities,
and the transfer deed and other procedural re#uirements under the 3ompanies &ct have
been dispensed with.
D
o%pa$e! Act) *+-3It deals with issue, allotment and transfer of securities
and various aspects relating to company management. It provides for
standards of disclosure in the public issues, particularly in the fields of
company management and pro;ects, information about other listed companies under the
same management, and management perception of risk factors. It also regulates
underwriting, the use of premium and discounts on issues, rights and bonus issues,
payment of interest and dividends, supply of annual report and other information.
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A. RULES) REGULATIONS 5 REGULATORS
he )overnment has framed rules under the S3*&, the SEBI &ct and the
"epositories &ct. The SEBI has framed regulations under these acts for
registration and regulation of the market intermediaries and for prevention of
unfair trade practices. nder these &cts, the )overnment and the SEBI issue
notifications, guidelines and circulars, which the market participants comply with. The
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ver the last decade the )overnment and the market regulators have taken
several policy measures to improve the operations of the stock exchanges
and market intermediaries. The measures are aimed at improving the market
infrastructure and upgradation of risk containment, so as to protect the interest of the
investors. The policy developments during &pril $% and Gune $C pertaining to
trading of securities are enumerated below: and for non0delivery transactions at the rate of .-5> for e#uities and .-> on
trades on the derivatives segment.
II. Pe$!o$ S6!te%9I$ter% Pe$!o$ &u$8 Re0u1ator
The )overnment has approved the basic features of the new pension system. & pension
fund regulatory and development authority 7?/*"&8 in the interim is to be set up with
the purpose to regulate and develop the pension market. In this system, there would be
three different choices for investments e.g.
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e#uity.
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7iv8 Guara$tee: Banks, /Is, (B/3s are not permitted to provide guaranteeletter of
comfort.
7v8Proce8ure: &ll E3Bs satisfying the above criteria will be under the auto route up to
SK $ million for E3Bs between %05 years of average maturity and up to SK 5million for E3Bs having average maturity of more than 5 years. &ll cases, which fall
outside the purview of the auto0route in the new liberali+ed E3B policy, should be
sub;ect to the approval by the Empowered 3ommittee of the *BI. of the total paid0up capital and free reserves of the company.
*edemptions are to be sub;ect to /E9& and other laws and cannot be made within one
year of their issue. In case of redemption, the underlying e#uity shares may be released
to the I"* holder or may be sold directly by him.
I$tat#e! 7ro% SEBI
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I. SEBI /L!t$0 Aut(ort62 Re0u1ato$!) ,
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SEBI advised the Stock Exchanges to initiate action against the listed companies, who
have not complied with the various re#uirements of the listing agreements. It has been
clarified that Section $%7$8 of the S37*8&, -456 prescribes punishment for violation and
non compliance of the provisions of listing agreement. /urther, in order to ensure that
listed companies do not in anyway violate or override or circumscribe the provisions of
securities laws or the stock exchange re#uirements, SEBI amended the clause $C of the
listing agreement. The amended clauses are as given below:
7a8 The company should file with the stock exchange for approval any schemepetition
proposed to be filed before any court or tribunal at least a month before it is presented to
the 3ourttribunal.
7b8 The company should ensure that any scheme of
arrangementamalgamationmergerreconstructionreduction of capital, etc., to be
presented to any 3ourt or Tribunal does not in any way violate, override or circumscribe
the provisions of securities laws or the stock exchange re#uirements. Securities law here
means the S3*& -456, the SEBI &ct, -44$, the "epositories &ct -446 and the
provisions of 3ompanies &ct -456 and the other rules, regulations, guidelines etc. made
under these &cts, and the Jisting &greement.
III. Mar0$ Tra8$0'ith a view to improve li#uidity in the e#uity market, SEBI initiated steps to introduce
margin trading w.e.f. &pril -, $C. The securities, eligible for margin trading, should
have an average impact cost of less than or e#ual to - and should be traded on at least
> 705>8 of the days for the previous eighteen months. and C>, respectively. 'hile providing the margin trading facility, the
broker should be prudent and ensure that there is no concentration on any single client.
The
arbitration mechanism of the exchange is not available for grievances arising out of this
facility.
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I;. E1041t6 o7 a Su4"4ro?er to Tra8e t(rou0( t(e Su4!8ar6 Co%pa$6
The Stock Exchanges had been allowed to set up subsidiary company to ac#uire
membership rights of other stock exchanges sub;ect to certain conditions prescribed by
SEBI. &s per the conditions stated in the SEBI directive, the subsidiary company could
register only the members of the parent stock exchange as sub0brokers of the subsidiary
company. !owever, it was noticed that the necessary changes have not been made in the
rules, bye0laws and the regulations of all the stock exchanges which have set up
subsidiaries and 9emorandum&rticles of &ssociation of the subsidiary company.
Therefore, all the stock exchanges, which have set up subsidiaries were directed to make
the necessary provisions in their rules, regulations and the bye0laws as well as in the
9emoranda&rticles of &ssociations to this effect.
;. L!t$0 &ee!
It has been decided by SEBI, that the stock exchanges should have the freedom to charge
listing fees without seeking prior approval from the SEBI. &ccordingly, the exchanges
have been directed to make necessary amendments to the bye0laws, rules and
regulationslisting agreement.
;I. Mar?"up $ re!pect o7 8e4e$ture! a$8 4o$8! tra8e8 o$ t(e Stoc? E@c(a$0e
Through a circular issued by SEBI on "ecember 4, -446, it has been stipulated that the
mark0up for the close out should be $> above the official closing price for e#uities as
well as debentures and bonds. !owever, based on the recommendations of the &dvisory
3ommittee on "erivatives and 9arket *isk 9anagement it has now been decided that in
case of debentures and bonds with a credit rating &&& and above, close out mark0up of
5> should be applied. In cases where the credit rating is below &&&, then the existing
close out mark0up of $> should be applicable.
;II. &ar Practce! a$8 Co8e o7 Co$8uct
& code of conduct for public representativesSEBI nominee directors has been notified
to ensure that the affairs of the stock exchanges are conducted on the healthy lines with
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the highest standards of professional conduct, business ethics and morality. &lso the
guidelines enumerating fair practices have been notified. The public
representativesSEBI nominee directors should:
endeavor to attend all the board meetings. They should be liable to vacate their
office if they remain absent for three consecutive meetings of the Board of
"irectors or do not attend A5> of the total meetings of the Board in a calendar
year.
not participate in the discussion on sub;ects, which may involve any conflict of
interest or give rise to. If in case it happens then the same should be disclosed
and recorded in the minutes of the meetingH however, during the meeting the
agenda papers should not be circulated, unless circumstances re#uires.
meet at least once in 6 months separately, if necessary, to exchange views on
critical issues.
offer their comments on the draft minutes and ensure that the same are
incorporated in the final minutes. It should be ensured that the minutes of the
previous meeting are placed for approval in the subse#uent meeting.
endeavor to have the date of next meeting fixed at each Board 9eeting itself in
consultation with other members of the )overning Board. In case, all the items of
the agenda of a meeting are not covered, then next meeting is to be held within
-5 days.
participate in the formulation and execution of various strategies by being pro0
active in decision making in the Board meetings, so that the exchanges benefits
from their experience and expertise.
endeavor to ensure that the Exchange abides by all the provisions of the SEBI
&ct, Securities 3ontracts 7*egulation8 &ct, *ules, *egulations framed there
under and the circulars, directions issued by the )overnmentSEBI.
endeavour to make the regulatory system foolproof by ensuring compliance at all
levels of hierarchy in the Exchange. They should also ensure that the Exchange
honors the time limit prescribed by SEBI for corrective actions.
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not support any decision of the Board, which may adversely affect the interest of
investors. They should report forthwith any such decision to SEBI.
make sure that the arbitral award is given within the period stipulated in the Bye0
Jaws, *ules or *egulations of the Exchange and in any case, the award is to bedelivered within -5 days after the final meeting.
priorities redressing of investor grievances by encouraging fair trade practice.
They should also make use of every opportunity to enhance and improve their
level of knowledge, so that they are able to resolve various issues arising in the
operations of the exchange with professional competence, fairness, impartiality,
efficiency and effectiveness.
submit the necessary disclosuresstatement of holdingsdealings in securities as
re#uired by the Exchange as per their *ules or &rticles of &ssociation.
maintain confidentiality about any information obtained in the discharge of their
duty unless otherwise re#uired by law. /urther, they should not use the
confidential information for their personal gains.
avoid any interest or activity which is in conflict with the conduct of their official
duties.
not engage in any act involving moral turpitude, dishonesty, fraud, deceit, or
misrepresentation or any other act pre;udicial to the administration of the
exchange.
;III. Corporate Go#er$a$ce $ L!te8 Co%pa$e!
3lause C4 of the listing agreement has been amended to include the recommendations as
prescribed by the committee on corporate governance set up under the chairmanship of
Shri (. *. (arayana 9urthy:
Co%po!to$ o7 Boar8:The board of directors of a company should have an optimum
combination of executive and non0executive directors. !owever, the non0executive
directors should not be less than 5> of the directors. The number of independent
directors should be determined on the basis of the post held by the 3hairmanH in case of
a non0executive chairman, at least -%rd of board should comprise of independent
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directors and if he is an executive chairman, then at least half of Board should comprise
of independent directors.
No$"E@ecut#e Drector! Co%pe$!ato$ a$8 D!c1o!ure!3&ll the compensation paid
to non0executive directors should be fixed by the Board and should be approved by
shareholders in general meeting. & limit should be placed for the maximum number of
stock options that can be granted to them in any financial year and in aggregate. In its
annual report, the company should publish its compensation philosophy, statement of
entitled compensation in respect of non0executive directors and the details of shares held
by non0executive directors.
I$8epe$8e$t Drector3Independent "irector should periodically review the companyFs
legal compliance reports as well as the steps taken by the company. In the event of any
legal proceedings against an independent director in connection with the affairs of the
company, the defence would not be permitted on the ground that he was unaware of his
responsibility.
Boar8 Proce8ure3The Board should meet at least four times a year, with a maximum
time gap of four months between any two meetings. & director should not be a member
in more than - committees or act as 3hairman of more than five
committees across all companies in which he is a director. /urthermore, it should be
mandatory for all the directors to inform the company about the positions they occupy inother companies every year and also notify changes as and when they take place.
Co8e o7 Co$8uct3It is obligatory for the Board to lay down the code of conduct for all
its members and the senior management of the company, which should be posted on the
companyFs website.
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members should be independent directors. It is re#uired that all the members of audit
committee should be financially literate and at least one of them should have accounting
or related financial management expertise. The 3hairman should be present at &nnual
)eneral 9eeting to answer the #ueries of the shareholders. The audit committee should
invite executives, as it considers appropriate 7and particularly the head of the finance
function8 to be present at the meetings, but on occasions it may also meet without the
presence of any executives.
Au8t Co%%ttee3The audit committee should meet at least thrice a year, but once
every six monthsH at least one meeting should be held before finali+ation of annual
accounts. The #uorum for the meeting should be either two members or one third of the
total membersH whichever is higher and minimum of two independent directors. The
committee is empowered to 7i8 investigate any activity within its terms of reference 7ii8
seek information from any employee 7iii8 obtain outside legal or other professional
advice 7iv8 secure attendance of outsiders with relevant expertise, if it considers
necessary.
Ro1e o7 Au8t Co%%ttee3The role of the audit committee should be to 7a8 oversees
the companyFs financial reporting process and the disclosure made in the financial
statement and ascertains its accuracy, sufficiency and credibility
7b8 recommend the appointment and removal of external auditor, fixation of audit feeand also approve payment for any other services 7c8 review the ade#uacy of internal
audit function, including the structure of the internal audit department, its staff, officials
heading the department, reporting structure coverage and fre#uency of internal audit.
/urther, the committee should discuss with internal auditors any significant findings and
follow them up 7d8 review the findings of any internal investigations into matters of a
suspected fraud or irregularity or a failure of internal control systems of a material nature
and reporting the matter to the board. &lso, the committee should discuss with external
auditors before the audit commences about nature and scope of audit. ?ost0audit the
committee should ascertain any area of concern regarding companyFs financial and risk
management policies. The &udit 3ommittee should also compulsorily review
information related to 7i8 financial statements and draft audit report, including
#uarterlyhalf0yearly financial informationH 7ii8 management discussion and analysis of
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financial condition and results of operationsH 7iii8 reports relating to compliance with
laws and to risk managementH and 7iv8 management lettersletters of internal control
weaknesses issued by statutoryinternal auditors.
I. L!t$0 o7 &urt(er I!!ue o7 Capta1
/ollowing the withdrawal of compulsory listing of companies on regional stock
exchange, it has been decided by the SEBI that a company should be listed on any of the
stock exchanges, which have a nationwide trading terminals. If the company is not listed
on any stock exchange having nationwide trading terminals, then it should continue to
obtain Min0principleF approval from all the exchanges where it is listed. The listing
agreement states: 1The 3ompany agrees to obtain Min0principleF approval for listing from
the exchanges having nationwide trading terminals where it is listed, before issuing
further shares or securities. 'here the company is not listed on any exchange having
nationwide trading terminals, it agrees to obtain such Min0principleF approval from all the
exchanges in which it is listed before issuing further shares or securities.2
. A%e$8%e$t to SEBI /Depo!tore! a$8 Partcpa$t!2 /Seco$8 A%e$8%e$t2Re0u1ato$! ,
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basis, starting from September %, $% to the concerned stock exchanges audited by a
#ualified 3hartered &ccountant or a practicing 3ompany Secretary.
I. A%e$8%e$t to SEBI /&II2 /Seco$8 A%e$8%e$t2 Re0u1ato$! ,
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II. SEBI /Ce$tra1 Data4a!e o7 Mar?et Partcpa$t!2 Re0u1ato$! ,
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chooses to do so at a later date, he is re#uired to disclose this to his clients before
carrying out any proprietary trading.
I;. Tra8$0 46 Me%4er!9Su4"4ro?er!
Since certain memberssub0brokers deal through a large number of other stock
brokerssub0brokers on the same exchangeother exchanges for their proprietary trades
as well as trades on behalf of their clients, SEBI has prohibited these transactions, except
with the prior permission of the exchange. &fter the stock exchange considers the reason
stated by the broker0sub0broker for such transactions and carry out due diligence, it
should permit such deals with only one brokersub0broker registered with it. The stock
brokersub0broker of an exchange can deal with only one brokersub0broker of another
exchange for proprietary trading after intimating the names of such stock brokersub0
broker to his parent stock exchange
;. D!c1o!ure o7 Tra8e Deta1! o7 Bu1? Dea1!
SEBI has decided to bring about greater disclosure in the nature of the bulk deals.
&ll transactions in scrip where total #uantity of shares boughtsold is more than .5> of
the outstanding e#uity shares of that company are considered to be bulk deals. The
brokers should disclose to the stock exchange the name of the scrip, name of the client,#uantity of shares boughtsold and the traded price. Immediately after executing the
trade, the brokers should intimate the exchange and the stock exchange, in turn, should
disseminate the aforesaid information on the same day after the market hours to the
general public.
;I. C(a$0e! $ t(e Na%e o7 t(e L!te8 Co%pa$e!
&ll listed companies, which decide to change their names, are re#uired to comply with
certain provisions: 7i8 They have to maintain a time period of at least one year before the
last name change 7ii8 &t least 5> of its total revenue in the preceding one year period
should have been accounted for by the new activity suggested by the new name 7iii8 The
new name along with the old name should be disclosed through web sites of the
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respective stock exchanges where the company is listed and also through E"I/&* web
site for a continuous period of one year from the date of last name change.
;II. Re8ucto$ $ Notce Pero8 7or &@$0 t(e Boo? C1o!ure9Recor8 Date
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clearing corporationclearing house or else through clearing member custodians 7e8 at the
time of trade, securities should be available with the /Is either in their S)J account with
*BI or in demat account with depositories 7f8 the purchase transactions by the /Is should
be sub;ect to availability of clear funds in their settlement accounts at the time of pay0in,
7g8 all pay0out of funds should invariably be out of clear funds, i.e. the pay out must not
be contingent upon the outcome of any clearing to be conducted on that day.
C. &ny settlement failure on account of non0delivery of securitiesnon0availability of
clear funds should be treated as S)J bouncing and the penalties in respect of S)J
bouncing should be applicable.
5. &ll the details of transaction in )overnment securities, on aggregate basis, undertaken
on the stock exchanges and particulars of any 1closed out2 should be reported to the
audit committee of the Board.
In the mid0term review of the monetary and credit policy, *BI has permitted sale of
)overnment security already contracted for purchase sub;ect to two conditions: 7a8 the
purchase contract is confined prior to the sale, is guaranteed by 33IJ or the security is
contracted for purchase from the *BIH 7b8 the sale transaction settles either in the same
settlement cycle as the preceding purchase contract so that the delivery obligation under
the sale contract is met by the securities ac#uired under the purchase contract.
II. De"reco0$to$ o7 O#er!ea! Corporate Bo8e! a! a$ I$#e!tor C1a!!
*BI in consultation with the )overnment have de0recogni+ed
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person resident outside India including
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capital market operations. The existing advancesguarantees issued may continue at the
earlier margins until they come up for renewal.
END O& CHAPTER III
CHAPTER IV - STOCK MARKET DESIGN &ACTS AND &IGURES
t the end of 9arch $C, there were $% operative stock exchanges with 4,%6
registered brokers and -$,-5 registered sub0broker trading on them
7&nnexure C0-8. The stock exchanges need to be recogni+ed under the&
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Securities 3ontracts 7*egulation8 &ct, -456.
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funds. The #uoted companies with wide public interest have en;oyed some benefits and
asset valuation has become easier for tax and other purposes.
In line with the growth in the new issues market during the eighties, the secondary
market also expanded fast during this period. The number of stock exchanges has
increased from in -4 to a total $C in -446. The membership of the stock exchanges
has also increased substantially over the years. The number of listed companies has also
increased and the market capitali+ation has also shown a substantial increase. The
volume of daily turnover of trade and the number of dealings per day have gone up
sharply.
B. Me%4er!(p
he trading platform of a stock exchange is accessible only to brokers. They
play a significant role in the secondary market by bringing together the buyers
and sellers. The brokers input buysell orders either on his own account or on
behalf of clients. The clients may place their orders either with them directly or through
a sub0broker indirectly. Thus, as these buy and sell order matches, the trades are
executed. The exchange can admit a broker as its member only on the basis of the termsspecified in the Securities 3ontracts 7*egulation8 &ct, -456, the SEBI &ct -44$, the
rules, circulars, notifications, guidelines, and the byelaws, rules and regulations of the
concerned exchange. (o stock broker or sub0broker is allowed to buy, sell or deal in
securities, unless he or she holds a certificate of registration from the SEBI. The stock
exchanges, however, are free to stipulate stricter re#uirements than those stipulated by
the SEBI. The minimum standards stipulated by (SE are in excess of those laid down by
the SEBI. The (SE admits members based on factors, such as, corporate structure,
capital ade#uacy, track record, education, and experience 7Table C0$8. This reflects a
conscious decision of (SE to ensure #uality broking services. The authorities have been
encouraging corporatisation of the broking industry. &s a result, a number of brokers0
proprietor firms and partnership firms have converted themselves into corporates. &s at
end09arch $C, there were brokers 4,%6 7including multiple registrations8 registered
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with SEBI as compared to 4,5-4 brokers as at end09arch $%. &s of end09arch $C,
%,AA brokers, accounting for nearly C> of total have become corporate entities.
&mongst those registered with (SE around .4A> of them were corporatised, followed
by corporate brokers. &s at end09arch $C, there were -$,-5
sub0brokers registered with SEBI, as compared with -%,$4- sub0brokers as at end of
previous year. There were a total of -C- additions of members during the year $%0C,
whereas $4$ were membership cases of reconciliation cancellationsurrender. (SE and
BSE together constituted .$4> of the total sub0brokers.
C. L!t$0 o7 Securte!
isting means formal admission of a security to the trading platform of a stock
exchange. Jisting of securities on the domestic stock exchanges is governed
by the provisions in the 3ompanies &ct, -456, the Securities 3ontracts
7*egulation8 &ct, -456 7S37*8&8, the Securities 3ontracts 7*egulation8 *ules 7S37*8*8,
-45A, the circularsguidelines issued by 3entral )overnment and SEBI. In addition, they
are also governed by the rules, bye0laws and regulations of the concerned stock
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exchange and by the listing agreement entered into by the issuer and the stock exchange.
Some of the key provisions are enumerated below:
-. The 3ompanies &ct, -456 re#uires a company intending to issue securities to the
public should seek a permission from one or more recogni+ed stock exchanges for its
listing. If the permission is not granted by all the stock exchanges before the expiry of -
weeks from the closure of the issue, then the allotment of securities would be void. &lso,
a company may prefer to appeal against refusal of a stock exchange to list its securities
to the Securities &ppellate Tribunal 7S&T8. The prospectus should state the names of the
stock exchanges, where the securities are proposed to be listed.
$. The bye0laws of the exchanges stipulate norms for the listing of securities. &ll listed
companies are under obligation to comply with the conditions of listing agreement with
the stock exchange where their securities are listed. If they fail to comply with them,
then they are punishable with a fine up to *s. -,.
%. The S37*8* prescribe re#uirements with respect to the listing of securities on a
recogni+ed stock exchange and empowers SEBI to waive or relax the strict enforcement
of any or all of them.
C. The listing agreement states that the issuer should agree to adhere to the agreement of
listing, except for a written permission from the SEBI. &s a precondition for the security
to remain listed, an issuer should comply with the conditions as may be prescribed bythe Exchange. /urther, the securities are listed on the Exchange at its discretion, as the
Exchange has the right to suspend or remove from the list the said securities at any time
and for any reason, which it considers appropriate.
5. & SEBI circular asserts that the basic norms of listing on the stock exchanges should
be uniform across the exchanges. !owever, the stock exchanges can prescribe additional
norms over and above the minimum, which should be part of their bye0laws. SEBI has
been issuing guidelinescirculars prescribing certain norms to be included in the listing
agreement and to be complied by the companies.
6. The stock exchanges levy listing fees on the companies, whose securities are listed
with them. The listing fee has two components0initial fee and annual fee. 'hile, initial
fee is a fixed amount, the annual fee varies depending upon the si+e of the company.
(SE charges *s. A,5 as initial fees. /or companies with a paid0up share andor
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debenture capital of less than or e#ual to *s. - crore annual listing fees is *s. C,$. /or
companies with a paid0up share andor debenture capital of more than *s. 5 crore, the
annual listing fees is *s. A, plus *s. -,C for every additional *s. 5 crore or part
thereof. & number of re#uirements, under the S37*8*, the bye0laws, the listingagreement have to be continuously complied with by the issuers to ensure continuous
listing of its securities. The listing agreement also stipulates the disclosures that have to
be made by the companies. In addition, the corporate governance practices enumerated
in the agreement have to be followed. The Exchange is re#uired to monitor the
compliance with re#uirements. In case a company fails to comply with the re#uirements,
then trading of its security would be suspended for a specified period, or
withdrawaldelisting, in addition to penalty as prescribed in the S37*8&.
D. Tra8$0 Mec(a$!%
SE was the first stock exchange in the country to provide nation0wide,
anonymous, order driven, screen0based trading system, known as the
(ational Exchange for &utomated Trading 7(E&T8 system. The member
inputs, in the (E&T system, the details of his order such as the #uantities and prices of
securities at which he desires to transact. The transaction is executed as soon as it finds a
matching sale or buys order from a counter party. &ll the orders are electronically
matched on a pricetime priority basis. This has resulted in a considerable reduction in
time spent, cost and risk of error, as well as frauds, resulting in improved operational
efficiency. It allows for faster incorporation of price sensitive information into prevailing
prices, as the market participants can see the full market on real time basis. This
increases informational efficiency and makes the market more transparent. /urther, the
system allows a large number of participants, irrespective of their geographical
locations, to trade with one another simultaneously, improving the depth and li#uidity of
the market. & single consolidated order book for each stock displays, on a real time
basis, buy and sell orders originating from all over the country. The book stores only
limit orders, which are orders to buy or sell shares at a stated #uantity and stated price,
are executed only if the price #uantity conditions match. Thus, the (E&T system
(
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provides an
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world to use satellite communication technology for trading and also has the largest
@S&T0based trading network in the world and largest @S&T network for any purpose in
the &sia ?acific region. It uses satellite communication technology to energi+e
participation from more than $, @S&Ts from approximately %65 cities spread all
over the country. It has been continuously undertaking capacity enhancement measures
so as to effectively meet the re#uirements of increased users and associated trading
loads. (SEFs trading system called the (ational Exchange for &utomated Trading
7(E&T8, is a state of0the0art client server based application. &t the serverFs end all the
trading information is stored in an in0memory database to achieve a minimum response
time and maximum systems availability for users. It has uptime records of 44.A>. The
system also ensures data integrity with past record of single error in - million bits. /or
all trades entered into the (E&T system, there is uniform response time of less than -.5
seconds. (SE has also put in place (IBIS 7(SEFs internet Based Information System8
for on0line real0time dissemination of trading information through its website. &s part of
its business continuity plan, (SE has established a disaster back0up site at 3hennai along
with its entire infrastructure, including the satellite earth station. This site at 3hennai is a
mirror replica of the complete production environment at 9umbai. The link between the
two is through a high0speed optical fiber and the transaction data is backed up on near
real time basis from the main site to the disaster back0up site to keep both the sitessynchroni+ed with each other all the time.
&. Tra8$0 Ru1e!
$!8er Tra8$03 Insider trading is considered an offence and is hence prohibited.
The SEBI 7?rohibition of Insider Trading8 *egulations, -44$ prohibits an insider
from dealing 7on his own behalf or on behalf of others8 in listed securities on the
basis of Munpublished price sensitive informationF. It also prohibits communicating,
counseling or procuring such information from any other person to deal in securities of
any company on the basis of such information. ?rice sensitive information for a security
is any information, which if published, is likely to affect its price. It includes information
regarding the financial results of the company, intended declaration ofdividends, issue
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of securities or buy back of securities, amalgamation, mergers, takeovers, and any ma;or
policy changes. SEBI, on the basis of any complaint or otherwise, is empowered to
investigateinspect these allegation of insider trading. If a person is found prima facie
guilty of insider trading, then SEBI may prosecute persons in an appropriate court orpass such orders as it may deem fit. In order to strengthen insider trading regulations,
SEBI has mandated a code of conduct for listed companies, its employees, analysts,
market intermediaries and professional firms. The insider trading regulations re#uire
initial and continuous disclosure of shareholding by directors, officers and ma;or
shareholders 7holding more than 5> sharesvoting rights8. The companies are also
mandated to adopt a code of disclosure with regards to price sensitive information,
market rumors, reporting of shareholdingownership, etc.
$7ar Tra8e Practce!3 The SEBI 7?rohibition of /raudulent and nfairTrade ?ractices in relation to the Securities 9arket8 *egulations, -445
empowers SEBI to investigate into cases of market manipulation, fraudulent
and unfair trade practices. The regulations define frauds as acts committed by a party of
the contract or by his agent, with intent to deceive another party or his agent or to induce
him to enter into the contract. The regulations specifically prohibit market manipulation,
misleading statements to induce sale or purchase of securities, and unfair trade practices
relating to securities. nder these regulations, SEBI can investigate into violations
committed by any person, including an investor, issuer or an intermediary, suo moto or
upon information received by it. Based on the report of the investigating officer, SEBI
can initiate action for suspension or cancellation of registration of an intermediary.
U
a?eo#er!3 The restructuring of companies through takeover is governed by
the SEBI 7Substantial&c#uisition of Shares and Takeovers8 *egulations,
-44A. The *egulations were formulated so that the process of ac#uisitions
and takeovers is carried out in a well0defined and orderly manner following the
principles of fairness and transparency. &s per the regulations, the mandatory public
offer is triggered on:
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crossing the threshold limit of -5>,
crossing the creeping ac#uisition limit of -5> or more but less than A5> of
shares or voting rights of a target company,
&ttempts by persons having A5> or more to ac#uire more shares.The regulations give enough scope for existing shareholders to consolidate and also
cover the scenario of indirect ac#uisition of control. The applications for takeovers are
scrutini+ed by the Takeover ?anel constituted by the SEBI.
u6 Bac?3 Buy back is done by the company with the purpose to improveli#uidity in its shares and enhance the shareholdersF wealth. nder the SEBI
7Buy Back of Securities8 *egulations, -44, a company is permitted to buy
back its shares from:
B7a8 existing shareholders on a proportionate basis through the offer documentH7b8 open market through stock exchanges using book building processH and7c8 shareholders holding odd lot shares.
The company has to disclose the pre and post0buy back holdings of the promoters. To
ensure completion of the buy back process speedily, the regulations have stipulated
time limit for each step. /or example, in the cases of purchases through stock exchanges,
an offer for buy back should not remain open for more than % days. The verification of
shares received in buy back has to be completed within -5 days of the closure of the
offer. The payments for accepted securities has to be made within A days of the
completion of verification and bought back shares have to be extinguished and
physically destroyed within A days of the date of the payment. /urther, the company
making an offer for buy back will have to open an escrow account on the same lines as
provided in takeover regulations.
rcut Brea?er!3@olatility in stock prices is a cause of concern for both thepolicy makers and the investors. To curb excessive volatility, SEBI has
prescribed a system of circuit breakers. The circuit breakers bring about a
nation0wide coordinated halt in trading on all the e#uity and e#uity derivatives markets.
&n index based market0wide circuit breaker system applies at three stages of the index
C
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movement either way at ->, -5> and $>. The breakers are triggered by movement of
either SD? 3( (ifty or Sensex, whichever is breached earlier. /urther, the (SE views
entries of non0genuine orders with utmost seriousness as this has market0wide
repercussion. It may suo0moto cancel the orders in the absence of any immediate
confirmation from the members that these orders are genuine or for any other reason as it
may deem fit. &s an additional measure of safety, individual scrip0wise price bands have
been fixed as below:
"aily price bands of $> 7either way8 on a set of specified securities,
"aily price bands of 5> 7either way8 on a set of specified securities,
"aily price bands of -> 7either way8 on another set of specified securities,
?rice bands of $> 7either way8 on all remaining securities 7including
debentures, warrants, preference shares etc. which are traded on 39 segment of
(SE8,
(o price bands are applicable on scrips on which derivative products are
available or on scrips included in indices on which derivatives products are
available.
/or auction market the price bands of $> are applicable. In order to prevent members
from entering orders at non0genuine prices in these securities, the Exchange has fixed
operating range of $> for such securities.
e%at Tra8$03 & depository holds securities in dematerialised form. It
maintains ownership records of securities in a book entry form, and also
effects transfer of ownership through book entry. Though, the investors have
a right to hold securities in either physical or demat form, SEBI has made it compulsory
that trading in securities should be only in dematerialised form. This was initially
introduced for institutional investors and was later extended to all investors. The
companies, which fail to establish connectivity with both the depositories on the
scheduled date as announced by SEBI, their securities are traded on the Mtrade for tradeF
settlement window of the exchanges. &t the end of 9arch $C, the number of
companies connected to (S"J and 3"SJ were 5,$-$ and C,A$, respectively. The
D
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number of dematerialised securities have increased from A6.4 billion at the end of 9arch
$% to 4A.A billion at the end of 9arch $C. "uring the same period the value of
dematerialised securities has increased from *s. 5,A5 billion to *s. -,A- billion.
Since the introduction of the depository system, demateriali+ation has progressed at a
fast pace and has gained acceptance amongst the market participants. &ll actively traded
scrips are held, traded and settled in demat form.
G. C(ar0e! 7or Ser#ce!
s per SEBI *egulations, every stockbroker, on the basis of his total turnover,
is re#uired to pay annual turnover charges, which are to be collected by the
stock exchanges. In order to share the benefits of efficiency, (SE has been
reducing the transaction charges over a period of time. &t present a trading member is
re#uired to pay the exchange transaction charges R.C> 7*s. C per *s.- lakh8 of the
turnover.&The maximum brokerage chargeable by a broker is fixed at $.5> of the contract price,
exclusive of statutory levies like, SEBI turnover fee, service tax, and stamp duty. This is
inclusive of the brokerage charged by the sub0broker, which should not exceed -.5> of
contract price. !owever, the brokerage charged varies from clients to clients. There areinstances wherein brokerage as low as .-5> has been charged.
Stamp duties are payable as per the rates prescribed by the relevant states. In
9aharashtra, it is charged R *e. - for every *s. -, or part thereof 7i.e. .->8 of
the value of security at the time of its purchasesale as the case may be. !owever, if the
securities are not delivered, it is levied R $ paise for every *s. -, or part there of
7.$>8. The depositories provide depository services to investors through depository
participants 7"?s8. They do not charge the investors directly, but charge their "?s who
are free to have their own free structure for their clients. The depositories, however, have
been reducing their charges from "?s over a period of time. The charges levied on "?s
by (S"J and 3"SJ are presented in Table C0Cb.
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H. I$!ttuto$a1 Tra8e!
rades by 9utual /unds and /oreign Institutional Investors are termed as
Institutional trades, Transactions by 9/s in the secondary market are
governed by SEBI 79utual /unds8 *egulations, -446. & 9/ under all its
schemes is not allowed to own more than -> of any companyFs paid0up capital. They
are allowed to do only Mdelivery0basedF transactions. & 9/ cannot invest more than ->
of the (&@ of a particular scheme in the e#uity shares or e#uity related instruments of a
single company. The investments by /IIs are governed by the rules and regulations of
the *BI and the SEBI. &s per the *BI guidelines, each /II can invest up to -> of the
paid0up capital of a companyH however, the total /II investment should not exceed $C>.
This can, however, be increased up to the sectoral capstatutory ceiling, as applicable,
provided the Indian companyFs board of directors and also its general body approve it.
&s per the SEBI guidelines, all /II transactions are to be routed through a registered
member of a recogni+ed stock exchange in India. /IIs have to necessarily give and take
delivery of securities sold and bought.
T
I. I$8e@ Ser#ce!
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stock index consists of a set of stocks that are representative of either the
whole market, or a specified sector. It helps to measure the change in overall
behaviour of the markets or sector over a period of time. (SE and 3*ISIJ,
in technical partnership with Standard D ?oorFs, have ;ointly promoted the India Index
Services D ?roducts Jimited 7IISJ8. The IISJ provides stock index services by
developing and maintaining an array of indices for stock prices. IISJ is the only
speciali+ed organi+ation of this type in the country. IISJ maintains a number of e#uity
indices comprising broad0based benchmark indices, sectoral indices and customi+ed
indices. The most popular index is the SD? 3( (ifty, followed by the 3( (ifty
Gunior, SD? 3( "efty, SD? 3( 5, 3( 9idcap $, SD? 3( Industry indices
7for A% industries8 and 3( IT Index. These indices are monitored and updated
dynamically and are reviewed regularly. These are maintained professionally to ensure
that it continues to be a consistent benchmark of the e#uity markets, which involves
inclusion and exclusion of stocks in the index, day0to0day tracking and giving effect to
corporate actions on individual stocks. SD? 3( (ifty is a well diversified 5 stock
index accounting for $C sectors of the economy. It accounted for 56.4A> of total market
capitali+ation of 39 segment of (SE as at end09arch $C. The total traded value of all
(ifty stocks is approximately AA> of the traded value of all the stocks on the (SE. 3(
(ifty Gunior accounts for --.6> of the market capitali+ation in (SE. &fter carrying out anumber of iterations, it was felt that Indian stock market had comfortable li#uidity at
around 5 stocks. Beyond 5, the li#uidity levels became increasingly lower. !ence the
index set si+e of 5 stocks was chosen. The stocks included in the (ifty index are
selected on the basis of their impact cost, li#uidity and market capitali+ation. The
composition of (ifty is reviewed at every #uarter. The index is calculated afresh every
time a trade takes place in any of the index stock. It is calculated on0line and
disseminated over trading terminals across the country. &nnexure C0$ to C05 present the
market capitali+ation, weightage, beta and monthly returns of the SD? 3( (ifty stocks
for the period &pril $%09arch $C. SD? 3( (ifty was introduced considering the
fact that it would not only be used for reflecting the stock market behavior accurately,
but also for modern applications such as index funds and index derivatives. It has
become the most popular and widely used stock market indicator in the country. Index
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futures and options have been launched based on SD? 3( (ifty index and on 3( IT
Index. /utures contracts based on SD? 3( (ifty have also been launched at the
derivative exchange at Singapore. It is the only Indian index0based derivative product
traded on a foreign exchange.
. Mar?et Outco%e
ur$o#er GroFt( a$8 D!tr4uto$3 Trading volumes in the e#uity
segments of the stock exchanges have witnessed phenomenal growth over the
last few years. 'hile it has increased from *s. -,$%%,$ million in -44044
to *s. $,4,4 million in $0-, it witnessed a slump during $-0$ registering
volumes of only *s. ,45,- million. The traits of recovery in the market are visibly
seen for the last two years. The volumes have risen to *s. 4,64,4% million in $$0%
and further to *s. -6,$C,4AA million in $%0C. In percentage terms there has been a
growth of 6A.$4> in $%0C over the previous
T
yearFs volume 7Table C058. The monthly trading value of the 39 segment on (SE
increased from *s. C4,A-% million in &pril $% to *s. -,C,A65 million in 9arch
$C 7Table C068. The daily turnover on (SE averaged around *s. C%,$4 million in this
year. 9ost of the exchanges saw large scale declines in their trading volumes in the year
$%0C with nine exchanges vi+., 3alcutta, ttar ?radesh, &hmedabad, "elhi, ?une,
I3SE, !yderabad, @adodara and 9agadh observing the highest decline. /ive exchanges
viz., (SE, BSE, Bangalore, 9adras and of the total turnover. Since its inception in -44C, (SE has
emerged as the favored exchange among trading members. The consistent increase in
popularity of (SE is clearly evident from &nnexure C06, which presents business growthof 39 segment of (SE. (SE now reports higher turnover
from its trading terminals in most of the cities than their corresponding regional
exchanges. The comparative picture of turnover of regional stock exchanges and
turnover of (SE terminals at different cities is presented in Table C0A. (ot only in the
national arena, but also in the international markets, (SE has been successful in creating
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a niche for itself. &ccording to reports of /IB@, in the calendar year $%, in terms of
trading intensity (SE ranked %rd next only to (&S"& and (NSE.
ATTN3 TABLE ON NET PAGE
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STOCK MARKET TRENDS IN INDIA 43
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The sectoral distribution of turnover has undergone significant change over last few
years. Table C0 presents the share of top M5F companies at (SE, classified according to
different sectors, in turnover and market capitali+ation. The share of manufacturing
companies in trading volume of top M5F companies, which was nearly more than $%> in
-44044, witnessed a sharp decline to $.%> $$ 0%. /urther, in $% 0C, their share
has risen sharply to %A.66>. The share of information technology 7IT8 companies in
trading volume has fallen from AC.A-> in $$ 0 % to only %-.C> in $% 0 C.
ATTN3 TABLE ON NET PAGE
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STOCK MARKET TRENDS IN INDIA
The share of top M5F securities in turnover has been on a declining trend since the
past few years from 5$.$> in $0- to %-.C> in $%0C 7Table C048. Trading in top
M-F securities also has witnessed a decline from 4A.5> to 4-.%> over the same
period. 9ember0wise distribution of turnover indicates increasing diffusion of trades
among a larger number of trading members over the years. "uring $%0C, top M5F
members accounted for only --.6> of turnover, while top M-F members accounted for
6-.C> of total turnover. Turnover in India seems to be more concentrated in comparison
to that in other comparable markets 7international8 as may be seen from Table C 0-. Ten
most active index securities accounted for CC.$> of turnover in India and top ten index
securities in terms of e#uity base accounted for %6.5> of market capitali+ation at the endof "ecember $%.
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&t the end of 9arch $C, (SE has permitted A members on its 39 segment
the web based access to its trading system. These members in turn have registered
C-%,C5C clients for web based access. &bout $%5 lakh trades for *s. %A4,C5- million
constituting %.C5> of the total trading volume were routed and executed through the
internet. (E&TiXS a product of the (SE.IT helps brokerage firms to conduct internet
trading, which can be accessed easily using standard browsers. It provides real time
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on0line market information including stock #uotes and order screens, allowing investors
to place orders from their personal computers. The success of internet trading in India,
however, will depend on expansion of internet bandwidth, which is necessary for faster
execution of trades.
K. Mar?et Capta1ato$
he market capitali+ation for securities available for trading on the e#uity
segment of (SE and BSE witnessed enormous growth over the previous years
7Table C068. The market capitali+ation of (SE and BSE as at end 9arch $C
amounted to *s. --,$4,A6 million and *s. -$,-$,6 million respectively. & sharp
change in the shares of different sectors in market capitali+ation is observed over the
years 7Table C08. Sectors like manufacturing, which used to dominate in terms of
market capitali+ation with more than %5> in the year -44044, have shown declines in
$-0$ and $$0%. !owever, they witnessed a turnaround in $%0C having
registered %-.-%> share in market capitali+ation of the top 5 companies.
T
L. Prce!
he year $%0C proved to be good for all the ma;or indices in the world. The
SD? 3( (ifty index, which remained subdued for the early part of $%,
rose sharply from &ugust $% onwards to reach a peak of $-C.65 in Ganuary
$C. The index rose by -.-C> in $%0C as compared to its previous years close
7Table C0--8. Similarly BSE also gave returns to the tune of %.%> in the said period.
T
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K. Retur$! $ I$8a$ Mar?et
he performance of SD? 3( (ifty and various other indices over different
periods of last one month to -$ months is presented in Table C0-C. It reveals
that the indices have performed with varying degrees over varying periods. &
common phenomenon observed was that some of the indices provided substantial gains
in the longer period of 6 months and one year, but did not give encouraging returns for
the shorter periods of - month, % months. The investments made in SD? 3( (ifty
securities in /ebruary $C did not yield having positive returns, however the
T
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investments in the same a year back 79arch $%8 gave out positive returns of -.-C>.
3( 9idcap $ and 3( IT index proved to follow the same trend as of (ifty. The
comparative performance of five ma;or sectoral indices, viz. SD? 3( ?etrochemicals
Index, SD? 3( /inance Index, 3( /93) Index, SD? 3( ?harma Index, and3( IT Index, with that of SD? 3( (ifty Index for the year $%0C is presented in
3hart C0%. It is observed that during the entire period, 3( /inance Index, SD? 3(
?etrochemicals Index and the SD? 3( ?harma Index out0performed the (ifty. The
3( IT Index, was the worst performer during the whole year. 3( /93) Index
though mirrored the movement of (ifty during the first half of the year. !owever, it
under performed the benchmark index M(iftyF during the later half. The monthly closing
prices of these sectoral indices are presented in Table C 0-%.
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L. E@c(a$0e Tra8e8 &u$8!
he first ET/ in India, the 1(ifty BeES 7(ifty Benchmark Exchange Traded
Scheme8 is based on SD? 3( (ifty. It was launched in "ecember $- by
Benchmark 9utual /und. It is bought and sold like any other stock on (SE
and has all characteristics of an index fund. &s on 9arch end $%, there were five ET/s
launched on (ifty, Gunior (ifty, 3( Bank Index namely, the (ifty BeES, Gunior (ifty
BeES, Bank BeES, Ji#uid BeES and S("E* 7SD? 3( (ifty TI (otional
"epository *eceipts Scheme8. ?rudential I3I3I launched an ET/ based on BSE Sensex,
namely S?I3E 7Sensex ?rudential I3I3I Exchange Traded /und8. "uring the month of
9arch $C, 6%A trades involving .-% million (ifty BeES were transacted. The trading
value was *s. $$.C$ million.
T
M. Lu8t6
any listed securities on stock exchanges are not traded actively. The
percentage of companies traded on BSE was #uite low at %5.4%> as
compared with 4A.A-> on (SE in 9arch $C 7Table C0-58. of companies traded on BSE were traded for more than - days during $%0
C, while that on (SE, it has been 4$.-6> 7Table C0-68. Trading took place for less than9
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- days in case of $C.4> of companies traded at BSE during the year, and for less than
- days in case of 5.6> of companies traded.
N. I$!ttuto$a1 Tra$!acto$!
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hough the volume of trades done by /IIs is not very high as compared to other
market participants, they are the driving force in determination of market
sentiments and price trends. This is so because, they do only delivery0based
trades and they are perceived to be infallible in their assessment of the market. "uring
$%0C, the investments made by /IIs were a total turnaround compared to its
performances in the earlier years. The strong risk ad;usted returns of the Indian market
have led /IIs to make more allocations to India. The /IIs registered a net investment of
*s. C5A,6C5 million. The /IIs net investment was highest during the month of
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O. ADR9GDR Prce!
comparison of the price of &"*)"* of a company with the domestic price
of its share gives an idea about the extent to which domestic price of the
security is at premiumdiscount to the international price. The extent of
divergence between the prices of &"*s)"*s and the domestic prices of the companies
constituting the Instanex Skindia index is presented in Table C0-4. *BI permitted two0
way fungibility for &"*s)"*s, which meant that the investors 7foreign institutional or
domestic8 in any company that has issued &"*s)"*s could freely convert the
&"*s)"*s into underlying domestic shares. They could also reconvert the domestic
shares into &"*s)"*s, depending on the direction of price change in the stock
&
P. Ta?eo#er!
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n $%0C, there were 65 takeovers under open category involving *s. -5,4C
million as against *s. 6%,4- million during the preceding year 7Table C0$8.
!owever, there were -A- takeovers under exempted category involving *s. -C,%5A
million as against *s. $C,$C million in the previous year.
I
. Per7or%a$ce o7 Bro?er!
s mentioned earlier, there were 4,%6 trading members at the end of 9arch
$C, however, the details of their performance are not readily available. &
brief detail with respect to A44 members of (SE is presented in Table C0$-.It is observed that about 5A> of the members had deployed a capital of less than *s. $
million at the end of 9arch $%, while 5> have deployed more than *s. - million.
Similarly about 5$> of members had a turnover of less than *s. -, million during
$%0C, while about 6> had turnover of more than *s. -, crore.
&
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END OF CHAPTER IV
CHAPTER ; TECHNICAL ANAYSIS IN THE STOCK MARKET
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echnical analysis is simply the study of prices as reflected on price charts.
Technical analysis assumes that current prices should represent all known
information about the markets. ?rices not only reflect intrinsic facts, they also
represent human emotion and the pervasive mass psychology and mood of the moment.
?rices are, in the end, a function of supply and demand. !owever, on a moment to
moment basis, human emotionsfear, greed, panic, hysteria, elation, etc. also
dramatically effect prices. 9arkets may move based upon peopleFs expectations, not
necessarily facts. & market UtechnicianU attempts to disregard the emotional component
of trading by making his decisions based upon chart formations, assuming that prices
reflect both facts and emotion.
T
A. STOCK CHARTS
Stock charts gained popularity in the late -4th 3entury from the writings of 3harles !.
"ow in the 'all Street Gournal. !is comments, later known as U"ow TheoryU, alleged
that markets move in all kinds of measurable trends and that these trends could be
deciphered and predicted in the price movement seen on all charts.
/("&9E(T&J &(&JNSIS seeks to determine future stock price by understanding
and measuring the ob;ective UvalueU of an e#uity. The study of stock charts, known as
TE3!(I3&J &(&JNSIS, believes that the past action of the market itself will
determine the future course of prices.
& stock chart is a simple two0axis 7x0y8 plotted graph of price and time. Each individual
e#uity, market and index listed on a public exchange has a chart that illustrates this
movement of price over time. Individual data plots for charts can be made using the
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Stock charts can be created in many different time frames. 9utual fund holders use
monthly charts in which each individual data plot consists of a single month of activity.
"ay traders use - minute and 5 minute stock charts to make #uick buy and sell decisions.
The most common type of stock chart is the daily plot, showing a single complete
market session for each unit.
Stock charts can be drawn in two different ways. &n &*IT!9ETI3 chart has e#ual
vertical distances between each unit of price. & J move. & move from $
to C is also a -> move. /or this reason, the vertical distance from - to $ and the
vertical distance from $ to C will be identical on a logarithmic chart.
Stock chart analysis can be applied e#ually to individual stocks and ma;or indices.
&nalysts use their technical research on index charts to decide whether the current
market is a BJJ 9&*LET or a BE&* 9&*LET.
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se the stock chart to identify the current trend. & trend reflects the average rate of
change in a stockVs price over time. Trends exist in all time frames and all markets. "ay
traders can establish the trend of their stocks to within minutes. Jong term investors
watch trends that persist for many years.
Trends can be classified in three ways: ?, "
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change in value or conditions occurs. 3hart readers try to locate T
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under "IST*IBTI
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!ow can you organi+e the endless stream of stock chart data into a logical format that
doesnVt re#uire rocket science to interpretW 3harts allow investors and traders to look at
past and present price action in order to make reasonable predictions and wise choices. It
is a highly visual medium. This one fact separates it from the colder world of value0
based analysis.
The stock chart activates both left0brain and right0brain functions of logic and creativity.
So itVs no surprise that over the last century two forms of analysis have developed that
focus along these lines of critical examination.
The oldest form of interpreting charts is ?&TTE*( &(&JNSIS. This method gained
popularity through both the writings of 3harles "ow and Technical &nalysis of Stock
Trends, a classic book written on the sub;ect ;ust after 'orld 'ar II. The newer form of
interpretation is I("I3&T
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B
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The most popular technical indicator for studying stock charts is the 9
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multiple moving averages that reflect these characteristics assist important decision
making. 3ommon moving average settings for daily stock charts are: $ days for short0
term, 5 days for intermediate and $ days for long0term.
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The concept of S??
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The ideas of 3harles "ow, the first editor of the 'all Street Gournal, form the basis of
technical analysis today. "ow created the Industrial &verage, of top blue chip stocks,
and a second average of top railroad stocks 7now the Transport &verage8. !e believed
that the behavior of the averages reflected the hopes and fears of the entire market. The
behavior patterns that he observed apply to markets throughout the world.
G. DoF T(eor6
I. T(ree Mo#e%e$t!
9arkets fluctuate in more than one time frame at the same time:
(othing is more certain than that the market has three well defined movements which fit
into each other.
The first is the daily variation due to local causes and the balance of buying and
selling at that particular time 7*ipple8.
The secondary movement covers a period ranging from days to weeks, averaging
probably between six to eight weeks 7'ave8.
The third move is the great swing covering anything from months to years,
averaging between 6 to C months. 7Tide8.
Bull markets are broad upward movements of the market that may last several
years, interrupted by secondary reactions. Bear markets are long declines
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interrupted by secondary rallies. These movements are referred to as the primary
trend.
Secondary movements normally retrace from one third to two thirds of the
primary trend since the previous secondary movement.
"aily fluctuations are important for short0term trading, but are unimportant in
analysis of broad market movements.
H. DoF T(eor6
I. Pr%ar6 Mo#e%e$t! (a#e T(ree P(a!e!
Jook out for these general conditions in the market.
Bu11 %ar?et!
Bull markets commence with reviving confidence as business conditions
improve.
?rices rise as the market responds to improved earnings
*ampant speculation dominates the market and price advances are based on
hopes and expectations rather than actual results.
Bear %ar?et!
Bear markets start with abandonment of the hopes and expectations that
sustained inflated prices.
?rices decline in response to disappointing earnings.
"istress selling follows as speculators attempt to close out their positions and
securities are sold without regard to their true value.
Ra$0$0 Mar?et!
& secondary reaction may take the form of a MlineF which may endure for several
weeks.
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?rice fluctuates within a narrow range of about five per cent.
Brea?out! 7ro% a ra$0e ca$ occur $ et(er 8recto$.
&dvances above the upper limit of the line signal accumulation and higher
pricesH
"eclines below the lower limit indicate distribution and lower pricesH
@olume is used to confirm price breakouts.
I. DoF T(eor6
I. Tre$8!
Bu11 Tre$80 & bull trend is identified by a series of rallies where each rally exceeds the
highest point of the previous rally. The decline, between rallies, ends above the lowest
point of the previous decline
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Successive higher highs and higher lows.
The start of an up trend is signaled when price makes a higher low 7trough8, followed by
a rally above the previous high 7peak8:
Start (0(er LoF 4rea? a4o#e pre#ou! H0(.
The end is signaled by a lower high 7peak8, followed by a decline below the previous
low 7trough8:
E$8 1oFer H0( 4rea? 4e1oF pre#ou! LoF.
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'hat if the series of higher !ighs and higher Jows is first broken by a lower JowW
There are two possible interpretations 0 see Jarge 3orrections.
Bear Tre$8! " Each successive rally fails to penetrate the high point of the previous
rally. Each decline terminates at a lower point than the preceding decline.
Succe!!#e 1oFer (0(! a$8 1oFer 1oF!.
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& bear trend starts at the end of a bull trend: when a rally ends with a lower peak and
then retreats below the previous low. The end of a bear trend is identical to the start of a
bull trend. 'hat if the series of lower !ighs and lower Jows is first broken by a higher
!ighW This is a gray area 0 see Jarge 3orrections.
. DoF T(eor6
I. Lar0e Correcto$!
& large correction occurs when price falls below the previous low 7during a bull trend
where price rises above the previous high 7in a bear trend8.
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Some purists argue that a trend ends if the se#uence of higher highs and higher lows is
broken.
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Ca$81e!tc? C(art! E@p1a$e8
Nou may be asking yourself, UIf I can already use bar charts to view prices, then why doI need another type of chartWU
The answer to this #uestion may not seem obvious, but after going through the following
candlestick chart explanations and examples, you will surely see value in the different
perspective candlesticks bring to the table. In my opinion, they are much more visually
appealing, and convey the price information in a #uicker, easier manner.
H!tor6 o7 Ca$81e!tc? C(art!
3andlestick charts are on record as being the oldest type of charts used for price
prediction. They date back to the -AVs, when they were used for predicting rice prices.
In fact, during this era in Gapan, 9unehisa !omma become a legendary rice trader and
gained a huge fortune using candlestick analysis. !e is said to have executed over -
consecutive winning tradesX
The candlesticks themselves and the formations they shape were give colorful names bythe Gapanese traders. "ue in part to the military environment of the Gapanese feudal
system during this era, candlestick formations developed names such as Ucounter attack
linesU and the Uadvancing three soldiersU. Gust as skill, strategy, and psychology are
important in battle, so too are they important elements when in the midst of trading
battle.
3andlestick charts are much more visually appealing than a standard two0dimensional
bar chart. &s in a standard bar chart, there are four elements necessary to construct a
candlestick chart, the
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The body of the candlestick is called the real body, and represents the
range between the open and closing prices.
& black or filled0in body represents that the close during that time period
was lower than the open, 7normally considered bearish8 and when the
body is open or white, that means the close was higher than the open
7normally bullish8.
The thin vertical line above andor below the real body is called the
upper/lowershadow,representing the highlow price extremes for the
period.
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Bar Co%pare8 to Ca$81e!tc? C(art!
Below is an example of the same price data conveyed in a standard bar chart and acandlestick chartW (otice how the candlestick chart appears %0dimensional, as price data
almost ;umps out at you.
7 %a 8
7%b8
The long, dark, filled0in real bodiesrepresent a weak 7bearish8 close 7 %a 8, while a
long open, light0colored real body represents a strong 7bullish8 close 7 %b 8. It is
important to note that Gapanese candlestick analysts traditionally view the open and
closing prices as the most critical of the day. &t a glance, notice how much easier it is
w