Stock Exchanges i

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Stock ExchangesStock ExchangesOrganization and functions of Stock Organization and functions of Stock

ExchangesExchanges



Stock exchanges provide anStock exchanges provide an organisedorganisedmarketplace for the investors to buy and sellmarketplace for the investors to buy and sellsecurities freely. The market offers perfectlysecurities freely. The market offers perfectlycompetitive conditions where a large number competitive conditions where a large number of sellers and buyers participate.of sellers and buyers participate.M eaningM eaning

A specialized marketplace that facilitates theA specialized marketplace that facilitates theexchange of securities that already exist, isexchange of securities that already exist, isknown as stock exchange or stock market.known as stock exchange or stock market.



I t is also called the Secondary Market for I t is also called the Secondary Market for securities.securities.

D efinitionD efinitionA ccording toA ccording to HastingsHastings , ³Stock exchange or , ³Stock exchange or securities market comprises all the placessecurities market comprises all the placeswhere buyers and sellers of stocks and bondswhere buyers and sellers of stocks and bondsor their representatives undertake transactionsor their representatives undertake transactionsinvolving the sale of securities´.involving the sale of securities´.



A ccording to Section 2(3) of the SecuritiesA ccording to Section 2(3) of the SecuritiesContract Regulations A ct 1956, ³the stock Contract Regulations A ct 1956, ³the stock

exchange has been defined as any body of exchange has been defined as any body of individuals whether incorporated or not,individuals whether incorporated or not,constituted for the purpose of assisting,constituted for the purpose of assisting,regulating or controlling the business of regulating or controlling the business of buying, selling or dealing in securities´.buying, selling or dealing in securities´.



Fu nctions of Stock ExchangesFu nctions of Stock Exchanges1.1. I deal meeting placeI deal meeting place2.2. Mobilizing of savingsMobilizing of savings3.3. Providing safety to investorsProviding safety to investors4.4. Ready market ( broadReady market ( broad- -based market, providingbased market, providing

liquidity, marketability and price uniformity for liquidity, marketability and price uniformity for securities)securities)

5.5.Liquidity (frequency of sale, narrow spreadLiquidity (frequency of sale, narrow spreadbetween bids and offers, prompt execution of between bids and offers, prompt execution of orders, minimum price changes betweenorders, minimum price changes betweentransactions as they occur)transactions as they occur)



6.6. Capital formationCapital formation7.7. Speculative trading (accelerated growth of Speculative trading (accelerated growth of

secondary market)secondary market)8.8. Sound price settingSound price setting9.9. Economic barometer Economic barometer

10.10. Dissemination of market data/informationDissemination of market data/information11.11. I nvestor educationI nvestor education



Listing requirementsListing requirementsListing of securities means that the securities areListing of securities means that the securities areadmitted for trading on a recognized stock exchange.admitted for trading on a recognized stock exchange.I t is the inclusion of the shares of a company on theI t is the inclusion of the shares of a company on theofficial list of the stock exchange for the purpose of official list of the stock exchange for the purpose of facilitating trading in such shares. Listing is veryfacilitating trading in such shares. Listing is verybasis of stock exchange operations.basis of stock exchange operations.Listing is mandatory for a company which wants toListing is mandatory for a company which wants toraise capital by public issue through prospectus.raise capital by public issue through prospectus.



Particulars to be furnishedParticulars to be furnishedA public company desirous of getting its securitiesA public company desirous of getting its securitieslisted on a recognised stock exchange has to apply for listed on a recognised stock exchange has to apply for that purpose to the stock exchange and forward alongthat purpose to the stock exchange and forward alongwith its application the following documents andwith its application the following documents andparticulars.particulars.1. copies of memorandum and articles of association.1. copies of memorandum and articles of association.2. copies of all prospectus or statement in lieu of 2. copies of all prospectus or statement in lieu of prospectus issued by the company at any time.prospectus issued by the company at any time.3. copies of offers for sale and circulars or ads3. copies of offers for sale and circulars or adsoffering any security for sale during the last 5 yearsoffering any security for sale during the last 5 years



4.copies of B/S and audited accounts for the last 5 years.4.copies of B/S and audited accounts for the last 5 years.5.statement showing dividends and cash bonuses, if any paid5.statement showing dividends and cash bonuses, if any paidduring the last 10 years.during the last 10 years.6.certified copies of agreements entered into between company6.certified copies of agreements entered into between companyand all other parties such as underwriters, promoters, brokersand all other parties such as underwriters, promoters, brokersetcetc7.Statement containing all material contracts, agreements7.Statement containing all material contracts, agreementsentered into by the company along with brief descriptionentered into by the company along with brief description

8. statement of brief history of the company including details8. statement of brief history of the company including detailsof reconstruction, amalgamations etcof reconstruction, amalgamations etc9. particulars of shares and debentures issued for consideration9. particulars of shares and debentures issued for considerationother than cash.other than cash.



10.particulars of shares forfeited.10.particulars of shares forfeited.11.list of highest 10 holders of each class of 11.list of highest 10 holders of each class of

securitysecurity12. particulars of shares or debentures for 12. particulars of shares or debentures for which permission to deal is applied for.which permission to deal is applied for.

Listing agreement will be executed with theListing agreement will be executed with thecompany concerned on the satisfactorycompany concerned on the satisfactoryfulfillment of the above requirements.fulfillment of the above requirements.



W eaknesses of Stock ExchangeW eaknesses of Stock ExchangeA lthough there is rapid development in the stock A lthough there is rapid development in the stock markets in I ndia, there are certain lacunas whichmarkets in I ndia, there are certain lacunas which

affect the smooth functioning of the market and putaffect the smooth functioning of the market and putthe small investors under a great disadvantage.the small investors under a great disadvantage.Following are some of the important weaknesses of Following are some of the important weaknesses of I ndian stock exchanges.I ndian stock exchanges.

1. Raging speculation1. Raging speculation2. I nsider trading menace2. I nsider trading menace3. Neglect of small investors3. Neglect of small investors



4. Bad trading practice4. Bad trading practice5. Lack of integration among various stock 5. Lack of integration among various stock

exchangesexchanges6. Lack of interface between primary and6. Lack of interface between primary andsecondary marketsecondary market

7.Inefficient banking system7.

Inefficient banking system

8. I nadequacy of investor services8. I nadequacy of investor services9. I nadequate infrastructure9. I nadequate infrastructure



Regulation of stock exchangesRegulation of stock exchangesA ll stock exchanges were subject to self A ll stock exchanges were subject to self- -

regulation till 1956. Now I ndian stock regulation till 1956. Now I ndian stock exchanges are subject to threeexchanges are subject to three- -tier regulation.tier regulation.1. Central government through its Ministry of 1. Central government through its Ministry of Finance (stock exchange division)Finance (stock exchange division)2. SEB I2. SEB I

3. Self Regulation3. Self Regulation



1.1. T he stock exchange division of Ministry of T he stock exchange division of Ministry of FinanceFinance has its Head Office at Delhi and Branchhas its Head Office at Delhi and BranchOffices at Bombay and Calcutta. The importantOffices at Bombay and Calcutta. The importantfunctions of the Division are as follows.functions of the Division are as follows.a. Providing linkage between government and stock a. Providing linkage between government and stock exchangesexchangesb. Monitoring the operations of the stock b. Monitoring the operations of the stock exchanges.exchanges.

c. Providing advice to overcome the untowardc. Providing advice to overcome the untowarddevelopments and crises.developments and crises.d. Ensuring the compliance of listing provisionsd. Ensuring the compliance of listing provisions



e. Ensuring smooth functioning of the stock e. Ensuring smooth functioning of the stock exchanges.exchanges.

f.Issuing licenses to brokers and dealers inf.

Issuing licenses to brokers and dealers insecurities.securities.



2. SEB I2. SEB I

The Securities and Exchange Board of I ndia (SEB I )The Securities and Exchange Board of I ndia (SEB I )constitutes the second level of authority whichconstitutes the second level of authority whichregulates the stock exchanges in order to protect theregulates the stock exchanges in order to protect theinterest of the investors and to promote theinterest of the investors and to promote thedevelopment of securities market in I ndia. A development of securities market in I ndia. A chairman heads the SEB I along with other topchairman heads the SEB I along with other topmanagement members. The SEB I issues from time tomanagement members. The SEB I issues from time totime various rules, regulations and guidelines. A fewtime various rules, regulations and guidelines. A fewimportant among them are as followsimportant among them are as follows



a. SEB I (Portfolio Managers) Rules and Regulations,a. SEB I (Portfolio Managers) Rules and Regulations,19921992b. SEB I (Stock Brokers and Subb. SEB I (Stock Brokers and Sub- -brokers) Rules andbrokers) Rules andRegulations, 1992Regulations, 1992c. SEB I (I nsider Trading) Regulations, 1992c. SEB I (I nsider Trading) Regulations, 1992d. SEB I (Merchant Bankers) Rules and Regulations,d. SEB I (Merchant Bankers) Rules and Regulations,

19921992e. SEB I (Mutual Fund) Regulations,1993e. SEB I (Mutual Fund) Regulations,1993f. SEB I (Underwriters) Rules and Regulations, 1992f. SEB I (Underwriters) Rules and Regulations, 1992



g. SEB I (Registrars to I ssue and Shareg. SEB I (Registrars to I ssue and ShareTransfer A gents) Rules and Regulations,1993Transfer A gents) Rules and Regulations,1993

h. SEBI

(Debenture Trustee) Rules andh. SEBI

(Debenture Trustee) Rules andRegulations,1993Regulations,1993ii. SEB I (Bankers to an I ssue) Rules and. SEB I (Bankers to an I ssue) Rules andRegulations,1993Regulations,1993A part from the above, SEB I has also issuedA part from the above, SEB I has also issuedguidelines regarding the followingguidelines regarding the following



1. Free pricing of shares1. Free pricing of shares2. Disclosure and I nvestors¶ protection2. Disclosure and I nvestors¶ protection

3. Registration of Foreign I nstitutional3. Registration of Foreign I nstitutionalI nvestorsI nvestors4. A llotment of shares4. A llotment of shares

5. New financial instruments5. New financial instruments6. Credit rating of fixed income bearing6. Credit rating of fixed income bearingsecuritiessecurities



3.The Stock Exchanges3.The Stock ExchangesThe third level of authority constitutes the self The third level of authority constitutes the self- -regulation by the stock exchanges themselves.regulation by the stock exchanges themselves.Stock exchanges will have their own separateStock exchanges will have their own separaterules, byelaws and regulations that arerules, byelaws and regulations that areexercised through their Governing Board. Eachexercised through their Governing Board. Eachstock exchange will have various departmentsstock exchange will have various departmentsto look after the entire working of theto look after the entire working of theexchange.exchange.



Op erations of stock marketsOp erations of stock marketsThe operations of stock market are carried outThe operations of stock market are carried outthrough various departments set up for specificthrough various departments set up for specificfunctions. The major departments of a typical stock functions. The major departments of a typical stock exchange in I ndia are as follows.exchange in I ndia are as follows.

a.a. Listing DepartmentListing Departmentb.b. Operations Department.Operations Department.c.c. Computer and EDP DepartmentComputer and EDP Departmentd.d. I nspection and A udit DepartmentI nspection and A udit Departmente.e. Monitoring DepartmentMonitoring Departmentf.f. I nvestor Service DepartmentI nvestor Service Department



a. Listing Departmenta. Listing DepartmentI ts main function is to list the securities of I ts main function is to list the securities of

companies for trading purposes. I t examinescompanies for trading purposes. I t examinesthe prospectus and other documents submittedthe prospectus and other documents submittedby the company applying for listing.by the company applying for listing.b. Operations Departmentb. Operations Department

The basic objective of this department is toThe basic objective of this department is tokeep watch on the daily trading and other keep watch on the daily trading and other operations of the stock exchange.operations of the stock exchange.



c. Computer and EDP Departmentc. Computer and EDP DepartmentThis Department collects and compiles variousThis Department collects and compiles various

data relating to companies, quotations of scrips anddata relating to companies, quotations of scrips andmember member--wise and scripwise and scrip- -wise turnover. Financialwise turnover. Financialresults of the companies like their net profit, dividendresults of the companies like their net profit, dividenddeclared, bonus shares etc are all recorded in thedeclared, bonus shares etc are all recorded in thecomputer and such information is made available tocomputer and such information is made available tothe members and investors to help in decisionthe members and investors to help in decisionmaking.making.



d. I nspection and A udit Departmentd. I nspection and A udit DepartmentThis department is concerned with carryingThis department is concerned with carrying

out routine audit of the stock exchange for out routine audit of the stock exchange for checking the accuracy and validity of thechecking the accuracy and validity of theaccounting records. The department ensuresaccounting records. The department ensuresthat all the records and registers are maintainedthat all the records and registers are maintainedby the stock exchange as per the guidelines of by the stock exchange as per the guidelines of SEB I and Government.SEB I and Government.



e. Monitoring Departmente. Monitoring DepartmentThis department aims at supervising the activities of theThis department aims at supervising the activities of the

members in the trading ring. I t also watches the pricemembers in the trading ring. I t also watches the pricemovements and the trading volume of the members. The deptmovements and the trading volume of the members. The deptinitiates necessary measures to check excessive trading andinitiates necessary measures to check excessive trading andspeculative transactions by imposing ad hoc margins,speculative transactions by imposing ad hoc margins,suspending trading and enquiring into any specificsuspending trading and enquiring into any specificdevelopments.developments.f. I nvestor service Departmentf. I nvestor service Department

The basic objective of this dept is to safeguard the interestThe basic objective of this dept is to safeguard the interestof the investors by rendering quick services to them nad byof the investors by rendering quick services to them nad byattending to their complaints and grievances.attending to their complaints and grievances.

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