Secondary Market(Stock Exchanges)

S.R.DeepikaAssistant ProfessorDepartment of BBA

Kristu Jayanti College

Introduction• The financial market where existing securities are traded is

referred to as the Secondary market or stock market

• It provides liquidity to financial instruments which are already

issued in primary market

• For effective functioning of the secondary market, proper control

is exercised through the following three important processes:

– Recognition of stock exchanges

– Listing of securities in stock exchanges

– Registration of brokers

Functions/Services/Features/Role

• Ideal Meeting Place

• Providing safety to investors

• Liquidity

• Speculative trading

• Sound price setting

• Economic barometer

• Dissemination of market data

• Perfect market conditions

Cont..

• Efficient channeling of savings

• Optimal resource allocation

• Platform for public debt

• Motivation for Improved performance by companies

• Availability of business information

• Evaluation of securities

• Investor education

• Industrial financing and Company regulation

• Enable the investors to reduce their risks through diversified portfolio

Definition of Stock Exchange• The securities Contract regulation act of 1956 defined stock exchange

as “an association, organization or an individual whether incorporated

or not , established for the purpose of assisting, regulating and

controlling business in buying, selling and dealing in securities.” Under

the said act following securities can be traded in the stock exchange:

• Shares, debentures, or other marketable securities of like nature of

any incorporated company

• Government securities

• Rights securities

History of Stock Exchanges

• The first organized stock exchange in India is BSE which was

established in 1875 but trading in securities used to take place much

earlier in the 18th century

• Dealings were not regulated by any code of rules, nor any hours of

business or committee to supervise the conduct of members

• The advent of English East India company in the 18th century

dominate business in securities and loan transactions

• Evidence of the existence of the trading in stocks of banks and

certain companies is available in price quotations in newspapers

Cont…

• In 1836 the “Englishman” of Calcutta reported the loans of East

India Company as well as shares of Bank of Bengal

• Shares of banks like the “ Corporation Bank”, the “Chartered

Mercantile Bank”, the “Oriental Bank”, and the old “Bank of

Bombay” were traded

• In 1839 the trading list was broader, where newspapers gave

quotations of “Agra bank”, “union bank”, etc..

• Between 1840 -50, banks recognized about half – a – dozen brokers

and merchants in Bombay

Cont..

• The American civil war of 1860 – 65 had widespread impact on the Indian

share market.

• Supply of cotton to Europe was totally stopped, and there was an

unlimited demand for Indian cotton

• Brokerage business became attractive and in 1860 there were 60 brokers

• Premcahnd Roychand who was called the Napoleon of Finance was the

first broker to read and speak in English

• By the mid 19th century, railways were extended, telegraph were

introduced, and hence communication expended that led to rapid

development of commercial activity.

Indian Stock Exchanges

Origin and Growth

Before World War I – 3 exchanges

• Bombay stock exchange (1875)

• Ahmadabad stock exchange (1894)

• Calcutta stock exchange (1908)

After World War II – 1956 SCRA granted recognition to

establish regional stock exchanges

Mode of Organization

• In India stock exchanges can freely establish themselves in any

form of organization

• Voluntary Associations – BSE, Ahmadabad Stock Exchange and

Indore Stock exchange

• Public Ltd companies – Exchanges in Calcutta, Chennai, Delhi,

Bangalore, Cochin, etc.. However shares not freely transferable

• Companies Ltd by guarantee – Exchanges in Hyderabad, Pune,

Bhubaneswar, etc..

Regulation of stock ExchangesAll stock exchanges were subject to self-regulation till 1956, but now there is a

3-tier regulation

• First level – Central government (Ministry of Finance)

• Second level – SCRA, SEBI

• Third level – Self regulation

– Listing Department

– Operations Department

– Computer and EDP Department

– Inspection and Audit Department

– Monitoring Department

– Investor Service Department

BSE • Year of Establishment – 1875

• Index - S&P BSE SENSEX (30 stock index)

• Trading Time - Monday to Friday (9:15 a.m. - 3:30 p.m. )

• No. of Companies Listed – More than 5500 (world's No. 1

exchange in terms of listed members)

• Settlement Cycle – T+ 2 days

• Automated, screen-based trading platform called BSE On-Line

Trading (BOLT) has a capacity of 8 million orders per day

NSE• Year of Establishment – 1992 ( first exchange in the country to provide a modern,

fully automated screen-based electronic trading system)

• Index – S&P CNX NIFTY (50 stock index)

• No. of Companies Listed – More than 1300

• The world’s 12th-largest stock exchange as of 23 January 2015

• Automated, screen-based trading platform – National Exchange for Automated

Trading (NEAT)

• Instrumental in creating the National Securities Depository Limited (NSDL) which

allows investors to securely hold and transfer their shares and bonds

electronically.

• First to launch equity derivatives trading

MCX - SX• The Multi Commodity Exchange of India Limited (MCX), India’s first listed

exchange, commodity futures exchange that facilitates online trading and

clearing and settlement of commodity futures transactions, thereby providing a

platform for risk management.

• The Exchange, which started operations in November 2003, operates under the

regulatory framework SEBI.

• MCX offers trading in varied commodity futures contracts across segments

including bullion, industrial metals, energy and agricultural commodities.

• Index - MCXCOMDEX, is a real-time composite commodity futures price

index which gives information on market movements in key commodities

• Other indices developed by the exchange include MCXAgri, MCXEnergy,

MCXMetal

OTCEI• OTCEI was incorporated in 1990 and is recognized as a stock

exchange under Section 4 of the Securities Contracts Regulation Act, 1956.

• The Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost effective manner and to provide investors with a transparent & efficient mode of trading.

• Modelled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital markets such as screen-based nationwide trading, sponsorship of companies

and scripless trading. • The Exchange had 115 listings and assisted in providing capital for

enterprises that have gone on to build successful brands for themselves like VIP Advanta, Sonora Tiles, Brilliant mineral water, etc.

Who would find OTCEI helpful?

• High-technology enterprises

• Companies with high growth potential

• Companies focussed on new product development

• Entrepreneurs seeking finance for specific business projects

•Companies with paid-up capital below Rs. 3 crores. • Start-up enterprises that do not have 3-year track record. • Companies that do not have 10% equity / debt

participation by banks / financial institutions

Exit of OTCEI

• On April 2015, The Securities and Exchange Board of India

approved the exit plan of OTC Exchange of India (OTCEI),

making it the 12th bourse to exit under the policy announced

by the capital market regulator in May 2012

• As OTCEI failed to achieve an annual trading turnover of at

least Rs.1,000 crore, it applied to the regulator (SEBI) for

voluntary surrender of recognition and exit.

Stock Market Reformshttp://www.sa-dhan.net/Adls/Legal/Company/Act/PriAct/CapitalIssuesAct1992.htm

• Repealing of the capital issues(control) Act, 1947 and abolition of controller

of capital and control of share pricing

• Blanket permission to companies to approach capital market after clearance

by SEBI for raising the capital needed

• Creation of Market Regulator – SEBI was established in 1992, with the aim

of protecting the interests of investors, promoting and regulating the

securities market.

• Encourage redressal of investors complaints by SEBI

• Permission of FII’s to access Indian Capital Market on registration with SEBI

Cont…http://www.nseindia.com/content/us/ismr2010ch7.pdf

•Liberalization of investment norms for NRIs

•Indian companies permitted to access international capital markets

•NSDL and CDSL set up to provide instantaneous electronic transfer

of securities through Demat settlement

•Commencement of operations of OTCEI and NSE with nation-wide

stock trading

•Screen Based Trading - Open out-cry system replaced by on-line

fully automated screen based trading system (SBTS)

Recent Reforms

• Reduction of Trading Cycle - settlement period was reduced

progressively from T+5 to T+3 days. From April 2003 onwards, T+2

days settlement cycle is being followed.

• Equity Derivatives Trading – To assist market participants in

managing risks better through hedging, speculation and arbitrage,

the market offers index futures, index options, single stock futures

and single stock options.

• Clearing Corporation - National Securities Clearing Corporation Ltd.

(NSCCL), commenced its operations in April 1996.

Recent Reforms• Globalisation - Indian companies have been permitted to raise resources overseas

through issue of ADRs, GDRs and FCCBs.

• Direct Market Access - DMA allows brokers to offer their respective clients, direct

access to the Exchange trading system through the broker’s infrastructure without

manual intervention by the broker

• Market Surveillance Mechanism

• Launch of Securities Lending & Borrowing Scheme - Allows market participants to

take short positions effectively with less cost.

• Launch of Currency Futures

• ASBA: Application Supported by Blocked Amount

• Launch of Interest Rate Futures

• Launch of mobile trading for all investors

Trading and Settlement In Stock Exchange

• The transactions in secondary market pass through 3 distinct phases

– Trading

– Clearing

– Settlement

• Stock Exchange Provides the platform for trading

• The clearing corporation determines the funds and securities obligations

of the trading members and ensures that the trade is settled through

exchange of obligations

• The clearing banks and the depositories provide the necessary interface

between the custodians/clearing members for settlement of funds and

securities obligations of trading members

Steps in Stock Trading

• Client Registration

• Agreement

• Order Placing

• Order Confirmation

• Trade Confirmation

• Contract Note

Settlement

• The process of fulfillment of the obligations of the

trade by the parties to the transactions is known as

‘Settlement’

• Rolling Settlement – Settlement cycle T+2, implies

that the trades executed on the first day (say on

Monday) have to be settled on the 3rd day (on

Wednesday), i.e. after a gap of 2 days

Clearing Corporation

• The clearing corporation is responsible for post-trade activities

such as risk management and clearing and settlement of trades

executed on a stock exchange

• National Securities Clearing Corporation Ltd. (NSCCL), a

wholly owned subsidiary of NSE was set up with the objectives

of bringing and sustaining confidence in clearing and settlement

of securities; promoting and maintaining short and consistent

settlement cycles; providing counter-party risk guarantee

• Clearing Members: Responsible for settling their obligations as

determined by the clearing corporation. They do so by making

available funds and/or securities in the designated accounts with

clearing bank/ depositories on the date of settlement.

• Custodians: Clearing members but not trading members. They

settle trades on behalf of trading members, when a particular

trade is assigned to them for settlement. As on date, there are 13

custodians empanelled with NSCCL. They are Deutsche Bank,

HDFC Bank Ltd., HSBC Ltd., etc.

• Clearing Banks: Clearing banks are a key link between the clearing members and

Clearing Corporation to effect settlement of funds.

• Every clearing member is required to open a dedicated clearing account with one of

the designated clearing banks.

• Based on the clearing member’s obligation as determined through clearing, the

clearing member makes funds available in the clearing account for the pay-in and

receives funds in case of a pay-out. There are 13 clearing banks of NSE, viz., Axis Bank

Ltd, Bank of India Ltd., Canara Bank Ltd., etc.

• Depositories: Depository holds securities in dematerialized form for the investors in

their beneficiary accounts.

• Each clearing member is required to maintain a clearing pool account with the

depositories. He is required to make available the required securities in the

designated account on settlement day.

Players In the Secondary Market• SEBI (As a Regulator)

• Stock Exchange (As a facilitator of trading)

• Stock Brokers/ Trading Members

• Retail Investors

• DII and FII

• Speculators

• Clearing Corporation

• Clearing Members/ Custodians

• Depositories

• Clearing Bank

Weaknesses of Secondary Market

• Raging Speculation

• Insider trading menace

• Neglect of small investors

• Bad trading practice

• Lack of integration

• Inefficient banking system

• Inadequate Infrastructure

• Inadequacy of investor service