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THE INDIAN CAPITAL MARKET
AN OVERVIEW
The Indian capital market is more than a century old. Its history goes back to 1875,
when 22 brokers formed the Bombay Stock Exchange (BSE). Over the period, the
Indian securities market has evolved continuously to become one of the most
dynamic, modern, and efficient securities markets in Asia. Today,
Indian market confirms to best international practices and standards both in terms of
structure and in terms of operating efficiency .Indian securities markets are mainly
governed by a) The Companys Act1956, b) the Securities Contracts (Regulation) Act
1956 (SCRA Act), and c) the Securities and Exchange Board of India (SEBI) Act,
1992. A brief background of these above regulations are given below
a) The Companies Act 1956 deals with issue, allotment and transfer of securities and
various aspects relating to company management. It provides norms for disclosures in
the public issues, regulations for underwriting, and the issues pertaining to use of
premium and discount on various issues.
b) SCRA provides regulations for direct and indirect control of stock exchanges with
an aim to prevent undesirable transactions in securities. It provides regulatory
jurisdiction to Central Government over stock exchanges, contracts in securities and
listing of securities on stock exchanges.
c) The SEBI Act empowers SEBI to protect the interest of investors in the securities
market, to promote the development of securities market and to regulate the security
market.
The Indian securities market consists of primary (new issues) as well as secondary
(stock) market in both equity and debt. The primary market provides the channel for
sale of new securities, while the secondary market deals in trading of securities
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previously issued. The issuers of securities issue (create and sell) new securities in the
primary market to raise funds for investment. They do so either through public issues
or private placement. There are two major types of issuers who issue securities. The
corporate entities issue mainly debt and equity instruments (shares, debentures, etc.),
while the governments (central and state governments) issue debt securities (dated
securities, treasury bills). The secondary market enables participants who hold
securities to adjust their holdings in response to changes in their assessment of risk
and return. A variant of secondary market is the forward market, where securities are
traded for future delivery and payment in the form of futures and options. The futures
and options can be on individual stocks or basket of stocks like index. Two
exchanges, namely National Stock Exchange (NSE) and the Stock Exchange, Mumbai
(BSE) provide trading of derivatives in single stock futures, index futures, single
stock options and index options. Derivatives trading commenced in India in June 2000
Other leading cities in stock market operations
Ahmedabad gained importance next to Bombay with respect to cotton textile industry.
After 1880, many mills originated from Ahmedabad and rapidly forged ahead. As
new mills were floated, the need for a Stock Exchange at Ahmedabad was realized
and in 1894 the brokers formed "The Ahmedabad Share and Stock Brokers'
Association".
What the cotton textile industry was to Bombay and Ahmedabad, the jute industry
was to Calcutta. Also tea and coal industries were the other major industrial groups in
Calcutta. After the Share Mania in 1861-65, in the 1870's there was a sharp boom in
jute shares, which was followed by a boom in tea shares in the 1880's and 1890's; and
a coal boom between 1904 and 1908. On June 1908, some leading brokers formed
"The Calcutta Stock Exchange Association".
In the beginning of the twentieth century, the industrial revolution was on the way in
India with the Swadeshi Movement; and with the inauguration of the Tata Iron and
Steel Company Limited in 1907, an important stage in industrial advancement under
Indian enterprise was reached.
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Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies
generally enjoyed phenomenal prosperity, due to the First World War.
In 1920, the then demure city of Madras had the maiden thrill of a stock exchange
functioning in its midst, under the name and style of "The Madras Stock Exchange"
with 100 members. However, when boom faded, the number of members stood
reduced from 100 to 3, by 1923, and so it went out of existence.
In 1935, the stock market activity improved, especially in South India where there
was a rapid increase in the number of textile mills and many plantation companies
were floated. In 1937, a stock exchange was once again organized in Madras - Madras
Stock Exchange Association (Pvt) Limited. (In 1957 the name was changed to MadrasStock Exchange Limited).
Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with
the Punjab Stock Exchange Limited, which was incorporated in 1936.
Indian Stock Exchanges - An Umbrella Growth
The Second World War broke out in 1939. It gave a sharp boom which was followed
by a slump. But, in 1943, the situation changed radically, when India was fully
mobilized as a supply base.
On account of the restrictive controls on cotton, bullion, seeds and other commodities,
those dealing in them found in the stock market as the only outlet for their activities.
They were anxious to join the trade and their number was swelled by numerous
others. Many new associations were constituted for the purpose and Stock Exchanges
in all parts of the country were floated.
The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited
(1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.
In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited
and the Delhi Stocks and Shares Exchange Limited - were floated and later in June
1947, amalgamated into the Delhi Stock Exchange Association Limited.There are two
major indicators of Indian capital market- SENSEX & NIFTY:
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SENSEX &NIFTY
What are the Sensex & the Nifty?
The Sensex is an "index". What is an index? An index is basically an indicator. It
gives you a general idea about whether most of the stocks have gone up or most of the
stocks have gone down. The Sensex is an indicator of all the major companies of the
BSE. The Nifty is an indicator of all the major companies of the NSE. If the Sensex
goes up, it means that the prices of the stocks of most of the major companies on the
BSE have gone up. If the Sensex goes down, this tells you that the stock price of most
of the major stocks on the BSE have gone down. Just like the Sensex represents the
top stocks of the BSE, the Nifty represents the top stocks of the NSE. Just in case youare confused, the BSE, is the Bombay Stock Exchange and the NSE is the National
Stock Exchange. The BSE is situated at Bombay and the NSE is situated at Delhi.
These are the major stock exchanges in the country. There are other stock exchanges
like the Calcutta Stock Exchange etc. but they are not as popular as the BSE and the
NSE. Most of the stock trading in the country is done though the BSE & the NSE .
Besides Sensex and the Nifty there are many other indexes. There is an index that
gives you an idea about whether the mid-cap stocks go up and down. This is called theBSE Mid-cap Index. There are many other types of index. Unless stock markets
provide professionalized service, small investors and foreign investors will not be
interested in capital market operations. And capital market being one of the major
source of long-term finance for industrial projects, India cannot afford to damage the
capital market path. In this regard NSE gains vital importance in the Indian capital
market but if we see the sensex & nifty graph there is a great variation.
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HISTORICAL PERSPECTIVE
The history of Indian stock market is about 200 years old. Prior to this the hundis and
bills of exchange were in use, specially in the medieval period, which can be
considered as a form of virtual stock trading but it was certainly not an organized
stock trading. The recorded stock trading can be traced only after the arrival of East
India Company. The first organized stock market that was governed by the rules and
regulations came into the existence in the form of The Native Share and StockBrokers' Association in 1875. After gone through numerous changes this association
is today better as Bombay Stock Exchange, which remains the premier stock
exchange since its inception. During this period several other exchanges were
launched and some of which were closed also. Presently, there are 19 recognized
stock exchanges out of which four are national level exchanges and the remaining are
regional exchanges. National Stock Exchange, established in 1992, was the last
exchange. Although the regional level exchanges are in existence the volume of
trading in these exchanges is negligible. National Stock Exchange and Bombay Stock
Exchange are the leaders of Indian Securities Market in terms of listing, trading and
volumes. The last 15 years of the Indian securities market can be considered as the
most important part of the history where the market gone through the post
liberalization era of Indian economy and witnessed the formation of Securities and
Exchange Board of India (SEBI) which brought substantial transparency in share
market practices and thus managed to bring in trust of not only domestic investors but
also the international ones.
The Big Picture of share market
As investors, most of us tend to forget about all of the good years and only focus on
the bad. The broad markets have been heading up for about four years, so the thoughts
of what happened in 1999-2002 are well behind us. But now that the markets are
volatile, there is a lot of talk about the subprime mortgage industry, a weak dollar, and
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everyone begins to completely forget about how well the past four years have been
and only focus on the last few months or weeks complaining how bad it is. Things can
certainly continue to get worse, but you have to look at things in context.
Remember, what goes up, must come down. Not only does the stock market cycle, but
there is a business cycle as well. We will always have various times that are great, and
those that arent as great, but you cant lose sight of the big picture.
Take a look at the following 12 years in a colorized format. Green identifies periods
of strong growth. Yellow indicates a period of volatility or no real direction, and red
shows a period of a downward trend. Based on this, is it any surprise that markets are
becoming volatile and possibly trending downward?
For even more similarities, scroll back up and look at the first chart from 1996-1999.
Now, scroll down and look at the 2005-Present image. Notice how similar they are?
The markets went up for completely different reasons, yet are behaving almost the
same. All you have to do is look at the following few years to see what might be in
store for us over the coming year or two. Will history repeat itself? There is no way to
tell, and anything could happen to make all of this information worthless, but you do
have to at least consider the past trends and understand that there is a chance the
market will behave similarly and well enter a period of significant decline.
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Keep Doing What Youre Doing
Sure, the market may be a bit unstable right now, and we may certainly be headed for
a time where the market falls further, but that shouldnt be of much concern to you if
youre investing for the next 10, 20, 30 or more years. If you want to try and time themarket or predict what the next hot sector is, thats fine, but the best thing most
people can do is to just continuously invest in a diversified portfolio. If you keep
buying even as the market falls, youre just adding more shares at a lower price.
Could you make more money if you only invested at the low points and sold at the
high points compared to dollar cost averaging? Sure, but the likelihood of succeeding
on a regular basis is low. For most people, the best thing to do is to just continue
investing bi-weekly, monthly, or quarterly into the same diversified portfolio
regardless of market conditions. When markets are choppy or headed down, youre
just buying stocks or funds on sale. All you have to do is look back a few years to see
that even though the market might go down, it will eventually come back up again.
KEY MILESTONES
Following is the timeline on the rise and rise of the Sensex through Indian stock
market history.
1830's Business on corporate stocks and shares in Bank and Cotton presses started in
Bombay.
1860-1865 Cotton price bubble as a result of the American Civil War
1870 - 90's Sharp increase in share prices of jute industries followed by a boom in tea
stocks and coal
1900s
1978-79 Base year of Sensex, defined to be 100.
1986 Sensex first compiled. Using a market Capitalization Weighted methodology for
30 component stocks representing well-established companies across key sectors.
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Since 1990
1000, July 25, 1990 On July 25, 1990, the Sensex touched the magical four-digit
figure for the first time and closed at 1,001 in the wake of a good monsoon season and
excellent corporate results.
July 1991 Rupee devalued by 18-19 %
2000, January 15, 1992 On January 15, 1992, the Sensex crossed the 2,000-mark and
closed at 2,020 followed by the liberal economic policy initiatives undertaken by the
then prime minister P.V.Narasimha rao.
3000, February 29, 1992 On February 29, 1992, the Sensex surged past the 3000
mark in the wake of the market-friendly Budget announced by the then Finance
Minister, Dr Manmohan Singh.
4000, March 30, 1992 On March 30, 1992, the Sensex crossed the 4,000-mark and
closed at 4,091 on the expectations of a liberal export-import policy. It was then that
the Harshad Mehta scam hit the markets and Sensex witnessed unabated selling.
5000, October 8, 1999 On October 8, 1999, the Sensex crossed the 5,000-mark as the
BJP-led coalition won the majority in the 13th Lok Sabha election.
6000, February 11, 2000 On February 11, 2000, the infotech boom helped the Sensex
to cross the 6,000-mark and hit and all time high of 6,006.
6151, Feb 14, 2000 Tops. Index declines until Sept 2001 and loses half the value.
Coincides with dot-com bubble burst.
2595, Sept 21, 2001 Bottoms.
7000, June 20, 2005 On June 20, 2005, the news of the settlement between the
Ambani brothers boosted investor sentiments and the scrips of RIL, Reliance Energy,
Reliance Capital, and IPCL made huge gains. This helped the Sensex crossed 7,000
points for the first time.
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8000, September 8, 2005 On September 8, 2005, the Bombay Stock Exchange's
benchmark 30-share index -- the Sensex -- crossed the 8000 level following brisk
buying by foreign and domestic funds in early trading.
9000, November 28, 2005 The Sensex on November 28, 2005 crossed the magical
figure of 9000 to touch 9000.32 points during mid-session at the Bombay Stock
Exchange on the back of frantic buying spree by foreign institutional investors and
well supported by local operators as well as retail investors.
10,000, February 6, 2006 The Sensex on February 6, 2006 touched 10,003 points
during mid-session. The Sensex finally closed above the 10K-mark on February 7,
2006.
11,000, March 21, 2006 The Sensex on March 21, 2006 crossed the magical figure of
11,000 and touched a life-time peak of 11,001 points during mid-session at the
Bombay Stock Exchange for the first time. However, it was on March 27, 2006 that
the Sensex first closed at over 11,000 points.
12,000, April 20, 2006 The Sensex on April 20, 2006 crossed the 12,000-mark and
closed at a peak of 12,040 points for the first time.
13,000, October 30, 2006 The Sensex on October 30, 2006 crossed the magical figure
of 13,000 and closed at 13,024.26 points, up 117.45 points or 0.9%. It took 135 days
for the Sensex to move from 12,000 to 13,000 and 123 days to move from 12,500 to
13,000.
14,000, December 5, 2006 The Sensex on December 5, 2006 crossed the 14,000-
mark to touch 14,028 points. It took 36 days for the Sensex to move from 13,000 to
the 14,000 mark.
15,000, July 6, 2007 The Sensex on July 6, 2007 crossed the magical figure of 15,000
to touch 15,005 points in afternoon trade. It took seven months for the Sensex to move
from 14,000 to 15,000 points.
16,000, September 19, 2007 The Sensex scaled yet another milestone during early
morning trade on September 19, 2007. Within minutes after trading began, the Sensex
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crossed 16,000, rising by 450 points from the previous close. The 30-share Bombay
Stock Exchange's sensitive index took 53 days to reach 16,000 from 15,000. Nifty
also touched a new high at 4659, up 113 points.
The Sensex finally ended with a gain of 654 points at 16,323. The NSE Nifty gained
186 points to close at 4,732.
17,000, September 26, 2007 The Sensex scaled yet another height during early
morning trade on September 26, 2007. Within minutes after trading began, the Sensex
crossed the 17,000-mark. Some profit taking towards the end, saw the index slip into
red to 16,887 - down 187 points from the day's high. The Sensex ended with a gain of
22 points at 16,921.
18,000, October 09, 2007 The BSE Sensex crossed the 18,000-mark on October 09,
2007. It took just 8 days to cross 18,000 points from the 17,000 mark. The index
zoomed to a new all-time intra-day high of 18,327. It finally gained 789 points to
close at an all-time high of 18,280. The market set several new records including the
biggest single day gain of 789 points at close, as well as the largest intra-day gains of
993 points in absolute term backed by frenzied buying after the news of the UPA and
Left meeting on October 22 put an end to the worries of an impending election.
19,000, October 15, 2007 The Sensex crossed the 19,000-mark backed by revival of
funds-based buying in blue chip stocks in metal, capital goods and refinery sectors.
The index gained the last 1,000 points in just four trading days. The index touched a
fresh all-time intra-day high of 19,096, and finally ended with a smart gain of 640
points at 19,059.The Nifty gained 242 points to close at 5,670.
20,000, October 29, 2007 The Sensex crossed the 20,000 mark on the back of
aggressive buying by funds ahead of the US Federal Reserve meeting. The index took
only 10 trading days to gain 1,000 points after the index crossed the 19,000-mark on
October 15. The major drivers of today's rally were index heavyweights Larsen and
Toubro, Reliance Industries, ICICI Bank, HDFC Bank and SBI among others. The
30-share index spurted in the last five minutes of trade to fly-past the crucial level and
scaled a new intra-day peak at 20,024.87 points before ending at its fresh closing high
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of 19,977.67, a gain of 734.50 points. The NSE Nifty rose to a record high 5,922.50
points before ending at 5,905.90, showing a hefty gain of 203.60 points.
21,000, January 8, 2008 The sensex peaks. It crossed the 21,000 mark in intra-day
trading after 49 trading sessions. This was backed by high market confidence of
increased FII investment and strong corporate results for the third quarter. However, it
later fell back due to profit booking.
15,200, June 13, 2008 The sensex closed below 15,200 mark, Indian market suffer
with major downfall from January 21,2008
14,220, June 25, 2008 The sensex touched an intra day low of 13,731 during the early
trades, then pulled back and ended up at 14,220 amidst a negative sentiment generated
on the Reserve Bank of India hiking CRR by 50 bps. FII outflow continued in this
week.
12,822, July 2, 2008 The sensex hit an intra day low of 12,822.70 on July 2nd, 2008.
This is the lowest that it has ever been in the past year. Six months ago, on January
10th, 2008, the market had hit an all time high of 21206.70. This is a bad time for the
Indian markets, although Reliance and Infosys continue to lead the way with mostlypositive results. Bloomberg lists them as the top two gainers for the Sensex, closely
followed by ICICI Bank and ITC Ltd.
11801.70, Oct 6, 2008 The sensex closed at 11801.70 hitting the lowest in the past 2
years.
10527, Oct 10, 2008 The Sensex today closed at 10527,800.51 points down from the
previous day having seen an intraday fall of as large as 1063 points. Thus,this week
turned out to be the week with largest percentage fall in the Sensex.
14284.21, May 18, 2009 After the result of 15th indian general election Sensex
gained 2110.79 points form the previous close of 12173.42 these creates a new histroy
in Indian Market. In the Opening Trade itself sensex gain 15% from the previous day
close this leads to the suspension of 2 hours trade. After 2 hours sensex again surged
this leads to the suspension of full day trading. 1420
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Myths of stock market
1. You can tell if a Stock is cheap or expensive by the Price to Earnings Ratio.
False: PE ratios are easy to calculate, that is why they are listed in newspapers etc.But you cannot compare PEs on companies from different industries, as the variables
those companies and industries have are different. Even comparing within an industry,
PEs dont tell you about many financial fundamentals and nothing about a stocks
value.
2. To make Money in the Stock Market, you must assume High Risks.
False: Tips to Lower your Risk: Do not put more than 10% of your money into any one stock Do not own more than 2-3 stocks in any industry Buy your stocks over time, not all at once Buy stocks with consistent and predictable earnings growth Buy stocks with growth rates greater than the total of inflation and interest
rates
Use stop-loss orders to limit your risk3. Buy Stocks on the Way Down and Sell on the Way Up.
False: People believe that a falling stock is cheap and a rising stock is too expensive.
But on the way down, you have no idea how much further it may fall. If a stock is
rising, especially if it has broken previous highs, there are no unhappy owners who
want to dump it. If the stock is fairly valued, it should continue to rise.
4. You can Hedge Inflation with Stocks.
False: When interest rates rise, people start to pull money out of the market and into
bonds, so that pushes prices down. Plus the cost of business goes up, so corporate
earnings go down, along with the stock prices.
5. Young People can afford to take High Risk.
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False: The only thing true about this is that young people have time on their side if
they lose all their money. But young people have little disposable income to risk
losing. If they follow the tips above, they can make money over many years. Young
people have the time to be patient.
How stock market works
In order to understand what stocks are and how stock markets work, we need to dive
into history--specifically, the history of what has come to be known as the
corporation, or sometimes the limited liability company (LLC). Corporations in one
form or another have been around ever since one guy convinced a few others to pool
their resources for mutual benefit.
The first corporate charters were created in Britain as early as the sixteenth century,
but these were generally what we might think of today as a public corporation owned
by the government, like the postal service.
Privately owned corporations came into being gradually during the early 19th
century in the United States , United Kingdom and western Europe as the
governments of those countries started allowing anyone to create corporations.
In order for a corporation to do business, it needs to get money from somewhere.
Typically, one or more people contribute an initial investment to get the company off
the ground. These entrepreneurs may commit some of their own money, but if they
don't have enough, they will need to persuade other people, such as venture capital
investors or banks, to invest in their business.
They can do this in two ways: by issuing bonds, which are basically a way of selling
debt (or taking out a loan, depending on your perspective), or by issuing stock, that is,
shares in the ownership of the company.
Long ago stock owners realized that it would be convenient if there were a central
place they could go to trade stock with one another, and the public stock exchange
was born. Eventually, today's stock markets grew out of these public places.
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IPOINITIAL PUBLIC OFFERING
Public issues can be classified into Initial Public offerings and further public
offerings. In a public offering, the issuer makes an offer for new investors to enter its
shareholding family. The issuer company makes detailed disclosures as per the DIP
guidelines in its offer document and offers it for subscription. Initial Public Offering
(IPO ) is when an unlisted company makes either a fresh issue of securities or an
offer for sale of its existing securities or both for the first time to the public. This
paves way for listing and trading of the issuers securities.
IPO is New shares Offered to the public in the Primary Market .The first time the
company is traded on the stock exchange. A prospectus is issued to read about its risk
before investing. IPO is a company's first sale of stock to the public. Securities
offered in an IPO are often, but not always, those of young, small companies seeking
outside equity capital and a public market for their stock. Investors purchasing stock
in IPOs generally must be prepared to accept very large risks for the possibility of
large gains. Sometimes, Just before the IPO is launched, Existing share Holders get a
very liberal bonus issues as a reward for their faith in risking money when the project
was new
How to apply to a publ ic issue ?
When a company floats a public issue or IPO, it prints forms for application to be
filled by the investors. Public issues are open for a few days only. As per law, any
public issue should be kept open for a minimum of 3days and a maximum of 21 days.
For issues, which are underwritten by financial institutions, the offer should be kept
open for a minimum of 3 days and a maximum of 21 days. For issues, which are
underwritten by all India financial institutions, the offer should be kept open for a
maximum of 10 days. Generally, issues are kept open for only 3 to 4 days. The duly
complete application from, accompanied by cash, cheque, DD or stock invest should
be deposited before the closing date as per the instruction on the from. IPO's by
investment companies (closed end funds) usually contain underwriting fees which
represent a load to buyers.
http://www.sharemarketbasics.com/IPO-Initial-Public-Offering.htmhttp://www.sharemarketbasics.com/IPO-Initial-Public-Offering.htmhttp://www.sharemarketbasics.com/IPO-Initial-Public-Offering.htmhttp://www.sharemarketbasics.com/IPO-Initial-Public-Offering.htm7/28/2019 New Trend on Stock Market
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Before applying for any IPO , analyse the following factors:
1. Who are the Promoters ? What is their credibility and track record ?
2. What is the company manufacturing or providing services - Product, its potential
3. Does the Company have any Technology tie-up ? if yes , What is the reputation of
the collaborators
4. What has been the past performance of the Company offering the IPO?
5. What is the Project cost, What are the means of financing and profitability
projections?
6. What are the Risk factors involved ?
7. Who has appraised the Project ? In India Projects apprised by IDBI and ICICI have
more credibility than small Merchant Bankers
How to make payments for I POs:
The payment terms of any IPO or Public issue is fixed by the company keeping in
view its fund requirements and the statutory regulations. In general, companies
stipulate that either the entire money should be paid along with the application or 50
percent of the entire amount be paid along with the application and rest on allotment.
However, if the funds requirements is staggered, the company may ask for the money
in calls, that is, the company demands for the money after allotment as and when thecash flow demands. As per the statutory requirements, for public issue large than Rs.
250 crore, the money is to be collected as under:
25 per cent on application 25 per cent on allotment 50 per cent in two or more calls
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The role of SEBI in the process of IPO
SEBI regulates the IPO process and issued detailed Guidelines under section 11 of the
SEBI Act, 1992 in the name of SEBI (Disclosure and Investors Protection)
Guidelines, 2002 generally known as DIP Guidelines. It is also noted that under the
provisions sections 55 of the Companies Act, 1956. the matters pertaining to issue and
transfer of securities and non payment of dividend in case of listed companies, the
companies intend to get listed are being administered by SEBI.
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DEMAT ACCOUNT
Demat refers to a dematerialised account.
Though the company is under obligation to offer the securities in both physical and
demat mode, you have the choice to receive the securities in either mode.
If you wish to have securities in demat mode, you need to indicate the depository and
also of the depository participant with whom you have depository account in your
application.
It is, howeverdesirable that you hold securities in demat form as physical securities
carry the risk of being fake, forged or stolen.
Just as you have to open an account with a bank if you want to save your money,
make cheque payments etc, Nowadays, you need to open a demat account if you
want to buy or sell stocks.
So it is just like a bank account where actual money is replaced by shares. You have
to approach the DPs (remember, they are like bank branches), to open your demat
account. Let's say your portfolio of shares looks like this: 150 of Infosys, 50 of
Wipro, 200 of HLL and 100 of ACC. All these will show in your demat account. So
you don't have to possess any physical certificates showing that you own these shares.
They are all held electronically in your account. As you buy and sell the shares,
they are adjusted in your account. Just like a bank passbook or statement, the DP
will provide you with periodic statements of holdings and transactions.
The most important thing required to trade in share market is Demat account. Demat
or Dematerialized account is to store stocks in electronics form. It is just like opening
a bank account to store your money. Now nobody is interested to keep shares in
physical forms and going for electronic based filing of shares. This has changed the
style of operation in main Indian stock markets like BSE Sensex ( Bombay Stock
Exchange Sensitive Index) and Nifty (National Stock Exchange of India) and its
brokers.
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How to Open a Demat Account
It is like opening a bank account. You have to approach a depository participants to
open an online trading or demat account. Most of the banks are DPs too.
Documents Required
You will have to submit few documents with the application form to open a demat
account. As per latest Govt of India rule PAN (Personal Account Number) card is
must for opening a demat account. These are the documents required to open a demat
account
1. Photo Copy of PAN Card (Mandatory)2. Two Passport size photos3. Address ProofRation Card/Passport/Driving License/Voters ID Card/BSNL
Telephone/LIC Policy
4. Latest Bank Statement and photocopy of Bank Passbook.
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SEBIINTRODUCTION
In 1988 the Securities and Exchange Board of India (SEBI) was established by the
Government of India through an executive resolution, and was subsequently upgraded
as a fully autonomous body (a statutory Board) in the year 1992 with the passing of
the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In
place of Government Control, a statutory and autonomous regulatory board with
defined responsibilities, to cover both development & regulation of the market, and
independent powers have been set up. Paradoxically this is a positive outcome of the
Securities Scam of 1990-91.
The basic objectives of the Board were identified as:
to protect the interests of investors in securities; to promote the development of Securities Market; to regulate the securities market and for matters connected therewith or incidental thereto.
Since its inception SEBI has been working targetting the securities and is attending tothe fulfillment of its objectives with commendable zeal and dexterity. The
improvements in the securities markets like capitalization requirements, margining,
establishment of clearing corporations etc. reduced the risk of credit and also reduced
the market.
SEBI has introduced the comprehensive regulatory measures, prescribed registration
norms, the eligibility criteria, the code of obligations and the code of conduct for
different intermediaries like, bankers to issue, merchant bankers, brokers and sub-
brokers, registrars, portfolio managers, credit rating agencies, underwriters and others.
It has framed bye-laws, risk identification and risk management systems for Clearing
houses of stock exchanges, surveillance system etc. which has made dealing in
securities both safe and transparent to the end investor.
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Another significant event is the approval of trading in stock indices (like S&P CNX
Nifty & Sensex) in 2000. A market Index is a convenient and effective product
because of the following reasons:
It acts as a barometer for market behavior; It is used to benchmark portfolio performance; It is used in derivative instruments like index futures and index options; It can be used for passive fund management as in case of Index Funds.
Two broad approaches of SEBI is to integrate the securities market at the national
level, and also to diversify the trading products, so that there is an increase in number
of traders including banks, financial institutions,insurance companies, mutual funds,
primary dealers etc. to transact through the Exchanges. In this context the introduction
of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD
is a real landmark.
SEBI appointed the L. C. Gupta Committee in 1998 to recommend the regulatory
framework for derivatives trading and suggest bye-laws for Regulation and Control of
Trading and Settlement of Derivatives Contracts. The Board of SEBI in its meeting
held on May 11, 1998 accepted the recommendations of the committee and approved
the phased introduction of derivatives trading in India beginning with Stock Index
Futures. The Board also approved the "Suggestive Bye-laws" as recommended by the
Dr LC Gupta Committee for Regulation and Control of Trading and Settlement of
Derivatives Contracts.
SEBI then appointed the J. R. Verma Committee to recommend Risk Containment
Measures (RCM) in the Indian Stock Index Futures Market. The report was submitted
in November 1998.
However the Securities Contracts (Regulation) Act, 1956 (SCRA) required
amendment to include "derivatives" in the definition of securities to enable SEBI to
introduce trading in derivatives. The necessary amendment was then carried out by
the Government in 1999. The Securities Laws (Amendment) Bill, 1999 was
introduced. In December 1999 the new framework was approved.
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Derivatives have been accorded the status of `Securities'. The ban imposed on trading
in derivatives in 1969 under a notification issued by the Central Government was
revoked. Thereafter SEBI formulated the necessary regulations/bye-laws and
intimated the Stock Exchanges in the year 2000. The derivative trading started in
India at NSE in 2000 and BSE started trading in the year 2001.
SEBI is the Regulator for the Securities Market in India. Originally set up by
the Government of India in 1988, it acquired statutory form in 1992 with SEBI Act
1992 being passed by the Indian Parliament.Chaired by C B Bhave, SEBI is
headquartered in the popular business district of Bandra-Kurla complex in Mumbai,
and has Northern, Eastern, Southern and Western regional offices in New
Delhi, Kolkata, Chennai and Ahmedabad.
Organisation Structure
Chandrasekhar Bhaskar Bhave is the sixth chairman of the Securities Market
Regulator. Prior to taking charge as Chairman SEBI, he had been the chairman of
NSDL (National Securities Depository Limited) ushering in paperless securities. Prior
to his stint at NSDL, he had served SEBI as a Senior Executive Director. He is a
former Indian Administrative Service officer of the 1975 batch.
The Board comprises
Name Designation As per
Mr CB Bhave Chairman SEBI CHAIRMAN (S.4(1)(a) ofthe SEBI Act, 1992)
Mr KP KrishnanJoint Secretary, Ministryof Finance
Member (S.4(1)(b) of theSEBI Act, 1992)
Mr Anurag GoelSecretary, Ministry ofCorporate Affairs
Member (S.4(1)(b) of theSEBI Act, 1992)
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Dr G Mohan GopalDirector, National JudicialAcademy, Bhopal
Member (S.4(1)(d) of theSEBI Act, 1992)
Mr MS Sahoo Whole Time Member,SEBI
Member (S.4(1)(d) of theSEBI Act, 1992)
Dr KM AbrahamWhole Time Member,SEBI
Member (S.4(1)(d) of theSEBI Act, 1992)
Mr Mohandas Pai Director, InfosysMember (S.4(1)(d) of theSEBI Act, 1992)
Functions and Responsibilities
SEBI has to be responsive to the needs of three groups, which constitute the market:
the issuers of securities the investors the market intermediaries.SEBI has three functions rolled into one body quasi-legislative, quasi-judicial and
quasi-executive. It drafts regulations in its legislative capacity, it conducts
investigation and enforcement action in its executive function and it passes rulings
and orders in its judicial capacity. Though this makes it very powerful, there is an
appeals process to create accountability. There is a Securities Appellate Tribunal
which is a three member tribunal and is presently headed by a former Chief Justice of
a High court - Mr. Justice NK Sodhi. A second appeal lies directly to the SupremeCourt.
SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively
and successively (e.g. the quick movement towards making the markets electronic and
paperless rolling settlement on T+2 basis). SEBI has been active in setting up the
regulations as required under law. It is regulating body.
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INTRODUCTIONBOMBAY STOCK EXCHANGE
Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage,now spanning three centuries in its 133 years of existence. What is now popularly
known as BSE was established as "The Native Share & Stock Brokers' Association"
in 1875.
BSE is the first stock exchange in the country which obtained permanent recognition
(in 1956) from the Government of India under the Securities Contracts (Regulation)
Act 1956. BSE's pivotal and pre-eminent role in the development of the Indian capital
market is widely recognized. It migrated from the open outcry system to an online
screen-based order driven trading system in 1995. Earlier an Association Of Persons
(AOP), BSE is now a corporatised and demutualised entity incorporated under the
provisions of the Companies Act, 1956, pursuant to the BSE (Corporatisation and
Demutualisation) Scheme, 2005 notified by the Securities and Exchange Board of
India (SEBI). With demutualisation, BSE has two of world's best exchanges,
Deutsche Brse and Singapore Exchange, as its strategic partners.
Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector
by providing it with an efficient access to resources. There is perhaps no major
corporate in India which has not sourced BSE's services in raising resources from the
capital market.
Today, BSE is the world's number 1 exchange in terms of the number of listed
companies and the world's 5th in transaction numbers. The market capitalization as on
December 31, 2007 stood at USD 1.79 trillion . An investor can choose from more
than 4,700 listed companies, which for easy reference, are classified into A, B, S, T
and Z groups.
The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic
stature , and is tracked worldwide. It is an index of 30 stocks representing 12 major
sectors. The SENSEX is constructed on a 'free-float' methodology, and is sensitive to
market sentiments and market realities. Apart from the SENSEX, BSE offers 21
indices, including 12 sectoral indices. BSE has entered into an index cooperation
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agreement with Deutsche Brse. This agreement has made SENSEX and other BSE
indices available to investors in Europe and America. Moreover, Barclays Global
Investors (BGI), the global leader in ETFs through its iShares brand, has created
the 'iShares BSE SENSEX India Tracker' which tracks the SENSEX. The ETF
enables investors in Hong Kong to take an exposure to the Indian equity market.
The first Exchange Traded Fund (ETF) on SENSEX, called "SPIcE" is listed on BSE.
It brings to the investors a trading tool that can be easily used for the purposes of
investment, trading, hedging and arbitrage. SPIcE allows small investors to take a
long-term view of the market.
BSE provides an efficient and transparent market for trading in equity, debtinstruments and derivatives. It has a nation-wide reach with a presence in more than
359 cities and towns of India. BSE has always been at par with the international
standards. The systems and processes are designed to safeguard market integrity and
enhance transparency in operations. BSE is the first exchange in India and the second
in the world to obtain an ISO 9001:2000 certification. It is also the first exchange in
the country and second in the world to receive Information Security Management
System Standard BS 7799-2-2002 certification for its BSE On-line Trading System(BOLT).
BSE continues to innovate. In recent times, it has become the first national level stock
exchange to launch its website in Gujarati and Hindi to reach out to a larger number
of investors. It has successfully launched a reporting platform for corporate bonds in
India christened the ICDM or Indian Corporate Debt Market and a unique ticker-cum-
screen aptly named 'BSE Broadcast' which enables information dissemination to the
common man on the street.
In 2006, BSE launched the Directors Database and ICERS (Indian Corporate
Electronic Reporting System) to facilitate information flow and increase transparency
in the Indian capital market. While the Directors Database provides a single-point
access to information on the boards of directors of listed companies, the ICERS
facilitates the corporate in sharing with BSE their corporate announcement.
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INTRODUCTIONNATIONAL STOCK EXCHANG
The National Stock Exchange (NSE), located in Bombay, is India's first debt market.It was set up in 1993 to encouragestock exchange reform through system
modernization and competition. It opened for trading in mid-1994. It was recently
accorded recognition as a stock exchange by the Department of Company Affairs. The
instruments traded are, treasury bills, government security and bonds issued by public
sector companies.
The Organisation
The National Stock Exchange of India Limited has genesis in the report of the High
Powered Study Group on Establishment of New Stock Exchanges, which
recommended promotion of a National Stock Exchange by financial institutions (FIs)
to provide access to investors from all across the country on an equal footing. Based
on the recommendations, NSE was promoted by leading Financial Institutions at the
behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts (Regulation)
Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market
(WDM) segment in June 1994. The Capital Market (Equities) segment commenced
operations in November 1994 and operations in Derivatives segment commenced in
June 2000.
Our Group
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NSCCL NCCL NSETECH
IISL NSE NSE.IT
DotExIntl. Ltd.
NSDL
Listing
NSE plays an important role in helping an Indian companies access equity capital, by
providing a liquid and well-regulated market. NSE has about 1319 companies listed
representing the length, breadth and diversity of the Indian economy which includes
from hi-tech to heavy industry, software, refinery, public sector units, infrastructure,
and financial services. Listing on NSE raises a companys profile among investors in
India and abroad. Trade data is distributed worldwide through various news-vending
agencies. More importantly, each and every NSE listed company is required to satisfy
stringent financial, public distribution and management requirements. High listing
standards foster investor confidence and also bring credibility into the markets
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INTRODUCTION OF SENSEX
SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-
Weighted" methodology of 30 component stocks representing large, well-established
and financially sound companies across key sectors. The base year of SENSEX was
taken as 1978-79. SENSEX today is widely reported in both domestic and
international markets through print as well as electronic media. It is scientifically
designed and is based on globally accepted construction and review methodology.
Since September 1, 2003, SENSEX is being calculated on a free-float market
capitalization methodology. The "free-float market capitalization-weighted"
methodology is a widely followed index construction methodology on which majority
of global equity indices are based; all major index providers like MSCI, FTSE,
STOXX, S&P and Dow Jones use the free-float methodology.
The growth of the equity market in India has been phenomenal in the present decade.
Right from early nineties, the stock market witnessed heightened activity in terms of
various bull and bear runs. In the late nineties, the Indian market witnessed a huge
frenzy in the 'TMT' sectors. More recently, real estate caught the fancy of the
investors. SENSEX has captured all these happenings in the most judicious manner.One can identify the booms and busts of the Indian equity market through SENSEX.
As the oldest index in the country, it provides the time series data over a fairly long
period of time (from 1979 onwards). Small wonder, the SENSEX has become one of
the most prominent brands in the country.
SENSEX Calculation Methodology
SENSEX is calculated using the "Free-float Market Capitalization" methodology,wherein, the level of index at any point of time reflects the free-float market value of
30 component stocks relative to a base period. The market capitalization of a
company is determined by multiplying the price of its stock by the number of shares
issued by the company. This market capitalization is further multiplied by the free-
float factor to determine the free-float market capitalization.
The base period of SENSEX is 1978-79 and the base value is 100 index points. This is
often indicated by the notation 1978-79=100. The calculation of SENSEX involves
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dividing the free-float market capitalization of 30 companies in the Index by a number
called the Index Divisor. The Divisor is the only link to the original base period value
of the SENSEX. It keeps the Index comparable over time and is the adjustment point
for all Index adjustments arising out of corporate actions, replacement of scrips etc.
During market hours, prices of the index scrips, at which latest trades are executed,
are used by the trading system to calculate SENSEX every 15 seconds. The value of
SENSEX is disseminated in real time.
Concept of FREE FLOAT
Free-float methodology refers to an index construction methodology that takes into
consideration only the free-float market capitalization of a company for the purpose of
index calculation and assigning weight to stocks in the index. Free-float market
capitalization takes into consideration only those shares issued by the company that
are readily available for trading in the market. It generally excludes promoters'
holding, government holding, strategic holding and other locked-in shares that will
not come to the market for trading in the normal course. In other words, the market
capitalization of each company in a free-float index is reduced to the extent of itsreadily available shares in the market.
Definition of Free-float
Shareholding of investors that would not, in the normal course come into the open
market for trading are treated as 'Controlling/ Strategic Holdings' and hence not
included in free-float. Specifically, the following categories of holding are generally
excluded from the definition of Free-float:
Shares held by founders/directors/ acquirers which has control element Shares held by persons/ bodies with "Controlling Interest" Shares held by Government as promoter/acquirer Holdings through the FDI Route Strategic stakes by private corporate bodies/ individuals
Equity held by associate/group companies (cross-holdings) Equity held by Employee Welfare Trusts
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Locked-in shares and shares which would not be sold in the open market innormal course.
Maintenance of SENSEX
One of the important aspects of maintaining continuity with the past is to update the
base year average. The base year value adjustment ensures that replacement of stocks
in Index, additional issue of capital and other corporate announcements like 'rights
issue' etc. do not destroy the historical value of the index. The beauty of maintenance
lies in the fact that adjustments for corporate actions in the Index should not per se
affect the index values.
TheBSE Index Celldoes the day-to-day maintenance of the index within the broad
index policy framework set by the BSE Index Committee. The BSE Index Cellensures
that SENSEX and all the other BSE indices maintain their benchmark properties by
striking a delicate balance between frequent replacements in index and maintaining its
historical continuity. The BSE Index Committee comprises of capital market expert,
fund managers, market participants and members of the BSE Governing Board.
Function and purpose of stock market
The stock market is one of the most important sources for companies to raise money.
This allows businesses to be publicly traded, or raise additional capital for expansion
by selling shares of ownership of the company in a public market. The liquidity thatan exchange provides affords investors the ability to quickly and easily sell securities.
This is an attractive feature of investing in stocks, compared to other less liquid
investments such as real estate.
History has shown that the price of shares and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of social mood.
An economy where the stock market is on the rise is considered to be an up and
coming economy. In fact, the stock market is often considered the primary indicator
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of a country's economic strength and development. Rising share prices, for instance,
tend to be associated with increased business investment and vice versa. Share prices
also affect the wealth of households and their consumption. Therefore, central banks
tend to keep an eye on the control and behavior of the stock market and, in general, on
the smooth operation of financial system functions. Financial stability is the raison
d'tre of central banks.
Exchanges also act as the clearinghouse for each transaction, meaning that they
collect and deliver the shares, and guarantee payment to the seller of a security. This
eliminates the risk to an individual buyer or seller that the counterparty could default
on the transaction.
The smooth functioning of all these activities facilitates economic growth in that
lower costs and enterprise risks promote the production of goods and services as well
as employment. In this way the financial system contributes to increased prosperity.
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DEPOSITORY
What is a Depository?
A depository holds shares and other securities of investors in electronic form.
Through Depository Participants (DPs), it also provides services related to
transactions in securities. Its structure and functioning are similar to the Bank.
Presently in India, there are two depository viz. National Securities Depository
Limited (NSDL) and Central Depository Services (I) Limited (CDSL). Both of them
are registered with SEBI.
What is a DP?
DP is a member of a Depository who offers its services to hold securities of Investors
(Beneficial Owners) in dematerialized form. DP is like a Bank branch. It is an agent
of the depository. DP works as an interface between Depository and Investors. DPs
are required to be registered with SEBI. If an investor wants to avail the services
offered by Depository, he has to open a Demat account with DP similar to opening of
a bank account with a branch of the bank.
Depository is responsible for keeping stocks of investors in electronics form. Thereare two depositories in India, NSDL (National Securities Depository Ltd) and CDSL
(Central Depository Services Ltd).
CDSL (Central Depository Services Ltd.)
CDSL was promoted by Bombay Stock Exchange Limited (BSE) jointly with leading
banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank,
Standard Chartered Bank, Union Bank of India and Centurion Bank.
CDSL was set up with the objective of providing convenient, dependable and secure
depository services at affordable cost to all market participants. Some of the important
milestones of CDSL system are:
CDSL received the certificate of commencement of business from SEBI in February,
1999.
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Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the operations
of CDSL on July 15, 1999.
Settlement of trades in the demat mode through BOI Shareholding Limited, the
clearing house of BSE, started in July 1999.
All leading stock exchanges like the National Stock Exchange, Calcutta Stock
Exchange, Delhi Stock Exchange, The Stock Exchange, Ahmedabad, etc have
established connectivity with CDSL.
As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities,
bonds, debentures, commercial papers), units of mutual funds, certificate of deposits
etc. into the CDSL system.
About NSDL
Although India had a vibrant capital market which is more than a century old, the
paper-based settlement of trades caused substantial problems like bad delivery and
delayed transfer of title till recently. The enactment of Depositories Act in August
1996 paved the way for establishment of National Securities Depository Limited
(NSDL), the first depository in India. This depository promoted by institutions of
national stature responsible for economic development of the country has since
established a national infrastructure of international standards that handles most of the
securities held and settled in dematerialised form in the Indian capital market.
Using innovative and flexible technology systems, NSDL works to support theinvestors and brokers in the capital market of the country. NSDL aims at ensuring the
safety and soundness of Indian marketplaces by developing settlement solutions that
increase efficiency, minimise risk and reduce costs. At NSDL, we play a quiet but
central role in developing products and services that will continue to nurture the
growing needs of the financial services industry.
In the depository system, securities are held in depository accounts, which is more or
less similar to holding funds in bank accounts. Transfer of ownership of securities is
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done through simple account transfers. This method does away with all the risks and
hassles normally associated with paperwork. Consequently, the cost of transacting in a
depository environment is considerably lower as compared to transacting in
certificates Promoters / Shareholders
NSDL is promoted by Industrial Development Bank of India Limited (IDBI) - the
largest development bank of India, Unit Trust of India (UTI) - the largest mutual fund
in India and National Stock Exchange of India Limited (NSE) - the largest stock
exchange in India. Some of the prominent banks in the country have taken a stake in
NSDL.
NSDL Facts & F igures
As on December 31, 2008
Number of certificates eliminated (Approx.) : 550 Crore Number of companies in which more than 75% shares are dematted : 2282 Average number of accounts opened per day since November 1996 : 3636 Presence of demat account holders in the country : 78% of all pincodes in the
country.
Central Securities Depository (CSD)
A Central Securities Depository (CSD) is an organization holding securities either
in certificated or uncertificated (dematerialized) form, to enable book entry transfer of
securities. In some cases these organizations also carry out centralized comparison,
and transaction processing such as clearing and settlement of securities. The physical
securities may be immobilised by the depository, or securities may be dematerialised
(so that they exist only as electronic records).
International Central Securities Depository (ICSD) is a central securities
depository that settles trades in international securities and in various domestic
securities, usually through direct or indirect (through local agents) links to local
CSDs. ClearStream International (earlier Cedel), Euro clear and SIX SIS are
considered ICSDs. While some view The Depository Trust Company (DTC) as a
national CSD rather than an ICSD, in fact DTC -- the largest depository in the world -
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- holds over $2 trillion in non-US securities and in American Depository Receipts
from over 100 nations.
Functions
Safekeeping Securities may be in dematerialized form, book-entry only form(with one or more "global" certificates), or in physical form immobilized
within the CSD.
Deposit and Withdrawal Supporting deposits and withdrawals involves therelationship between the transfer agent and/or issuers and the CSD. It also
covers the CSD's role within the underwriting process or listing of new issues
in a market. Dividend, interest, and principal processing, as well as corporate actions
including proxy voting Paying and transfer agents, as well as issuers are
involved in these processes, depending on the level of services provided by the
CSD and its relationship with these entities.
Other services CSDs offer additional services aside from those consideredcore services. These services include Securities Lending and Borrowing,
Matching, and Repo Settlement
Pledge - Central depositories provide pledging of share and securities. Everycountry require to provide legal framework to protect the interest of the
pledgor and pledgee.
However, there are risks and responsibilities regarding these services that must be
taken into consideration in analyzing and evaluating each market on a case-by-case
basis.
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FII (Foreign Institutional Investors) in Indian Stock Market
Foreign Institutional Investor (FII) is used to denote an investor - mostly of the
form of an institution or entity, which invests money in the financial markets of a
country different from the one where in the institution or entity was originally
incorporated.
FII investment is frequently referred to as hot money for the reason that it can leave
the country at the same speed at which it comes in.
In countries like India, statutory agencies like SEBI have prescribed norms to register
FIIs and also to regulate such investments flowing in through FIIs. In 2008, FIIs
represented the largest institution investment category, with an estimated US$ 751.14
billion.
Since 1990-91, the Government of India embarked on liberalisation and economic
reforms with a view of bringing about rapid and substantial economic growth and
move towards globalisation of the economy. As a part of the reforms process, the
Government under its New Industrial Policy, revamped its foreign investment policy
recognising the growing importance of foreign direct investment as an instrument of
technology transfer, augmentation of foreign exchange reserves and globalisation of
the Indian economy. Simultaneously, the Government, for the first time, permitted
portfolio investments from abroad by foreign institutional investors in the Indian
capital market. The entry of FIIs seems to be a follow up of the recommendation of
the Narsimhan Committee Report on Financial System. While
recommending their entry, the Committee, however did not elaborate on the
objectives of the suggested policy. The committee only suggested that the capitalmarket should be gradually opened up to foreign portfolio investments.
From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in
all the securities traded on the primary and secondary markets, including shares,
debentures and warrants issued by companies which were listed or were to be listed
on the Stock Exchanges in India.
While presenting the Budget for 1992-93, the then Finance Minister Dr. Manmohan
Singh had announced a proposal to allow reputed foreign investors, such as PensionFunds etc., to invest in Indian capital market. To operationalise this policy
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announcement, it had become necessary to evolve guidelines for such investments by
Foreign Institutional Investors (FIIs). The policy framework for permitting FII
investment was provided under the Government of India guidelines vide Press Note
date September 14, 1992. The guidelines formulated in this regard were as follows:
1. Foreign Institutional Investors (FIIs) including institutions such as PensionFunds, Mutual Funds, Investment Trusts, Asset Management Companies,
Nominee Companies and Incorporated/Institutional Portfolio Managers or
their power of attorney holders (providing discretionary and non-
discretionary portfolio management services) would be welcome to make
investments under these guidelines.
2. FIIs would be welcome to invest in all the securities traded on the Primaryand Secondary markets, including the equity and other securities/instruments
of companies which are listed/to be listed on the Stock Exchanges in India
including the OTC Exchange of India. These would include shares,
debentures, warrants, and the schemes floated by domestic Mutual Funds.
Government would even like to add further categories of securities later from
time to time.
3. FIIs would be required to obtain an initial registration with Securities andExchange Board of India (SEBI), the nodal regulatory agency for securities
markets, before any investment is made by them in the Securities of
companies listed on the Stock Exchanges in India, in accordance with these
guidelines. Nominee companies, affiliates and subsidiary companies of a FII
would be treated as separate FIIs for registration, and may seek separate
registration with SEBI.
4. Since there were foreign exchange controls in force, for various permissionsunder exchange control, along with their application for initial registration,
FIIs were also supposed to file with SEBI another application addressed to
RBI for seeking various permissions under FERA, in a format that would be
specified by RBI for the purpose. RBI's general permission would be
obtained by SEBI before granting initial registration and RBI's FERApermission together by SEBI, under a single window approach.
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5. For granting registration to the FII, SEBI should take into account the trackrecord of the FII, its professional competence, financial soundness,
experience and such other criteria that may be considered by SEBI to be
relevant. Besides, FII seeking initial registration with SEBI were be required
to hold a registration from the Securities Commission, or the regulatory
organisation for the stock market in the country of domicile/incorporation of
the FII.
6. SEBI's initial registration would be valid for five years. RBI's generalpermission under FERA to the FII would also hold good for five years. Both
would be renewable for similar five year periods later on.
7. RBI's general permission under FERA would enable the registered FII to buy,sell and realize capital gains on investments made through initial corpus
remitted to India, subscribe/renounce rights offerings of shares, invest on all
recognized stock exchanges through a designated bank branch, and to appoint
a domestic Custodian for custody of investments held
8. This General Permission from RBI would also enable the FII to: Open foreign currency denominated accounts in a designated bank.
(There could even be more than one account in the same bank branch
each designated in different foreign currencies, if it is so required by FII
for its operational purposes);
Open a special non-resident rupee account to which could be credited allreceipts from the capital inflows, sale proceeds of shares, dividends and
interests;
Transfer sums from the foreign currency accounts to the rupee accountand vice versa, at the market rate of exchange;
Make investments in the securities in India out of the balances in therupee account;
Transfer repatriable (after tax) proceeds from the rupee account to theforeign currency account(s);
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f. Repatriate the capital, capital gains, dividends, incomes received byway of interest, etc. and any compensation received towards
sale/renouncement of rights offerings of shares subject to the designated
branch of a bank/the custodian being authorized to deduct with holding
tax on capital gains and arranging to pay such tax and remitting the net
proceeds at market rates of exchange;
Register FII's holdings without any further clearance under FERA.What Does Foreign Institutional Investor - FII Mean?
An investor or investment fund that is from or registered in a country outside of the
one in which it is currently investing. Institutional investors include hedge funds,
insurance companies, pension funds and mutual funds.
Regulation imposed by SEBI on FII
(a) "Act" means the Securities and Exchange Board of India Act, 1992 (15 of1992);
(b) "certificate" means a certificate of registration granted by the Board under
these regulations;
(c) "designated bank" means any bank in India, which has been authorised by the
Reserve Bank of India to act as a banker to Foreign Institutional Investors;
(d) "domestic custodian" includes any person carrying on the activity of providing
custodial services in respect of securities;
(e) "Enquiry officer" means any officer of the Board, or any other person
appointed by the Board under Chapter V of these regulations;
(f) "Foreign Institutional Investor" means an institution established or
incorporated outside India which proposes to make investment in India in
securities;
(g) "Form" means a form specified in the First Schedule to these regulations;
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(h) "Government of India Guidelines" means the guidelines dated September 14,
1992 issued by the Government of India for Foreign Institutional Investors, as
amended from time to time;
(i) "institution" includes every artificial juridical person;
(j) "schedule" means a schedule to these regulations;
(k) "sub-account" includes those institutions, established or incorporated outside
India and those funds, or portfolios, established outside India, whether
incorporated or not, on whose behalf investments are proposed to be made in India
by a Foreign Institutional Investor.
Participatory notes (P- Notes)
Participatory notes (PNs / P-Notes) are instruments used by investors or hedge
funds that are not registered with the SEBI (Securities & Exchange Board of India) to
invest in Indian securities. Participatory notes are instruments that derive their value
from an underlying financial instrument such as an equity share and, hence, the word,
'derivative instruments'. SEBI permitted FIIs to register and participate in the indian
stock market in 1992.
Indian based brokerages buy Indian-based securities and then issue PNs to foreign
investors.
Any dividends or capital gains collected from the underlying securities go back to theinvestors.
Participatory notes are instruments used for making investments in the stock markets.
However, they are not used within the country. They are used outside India for
making investments in shares listed in that country. That is why they are also called
offshore derivative instruments.
In the Indian context, foreign institutional investors (FIIs) and their sub-accounts
mostly use these instruments for facilitating the participation of their overseas clients,
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who are not interested in participating directly in the Indian stock market. For
example, Indian-based brokerages buy India-based securities and then issue
participatory notes to foreign investors. Any dividends or capital gains collected from
the underlying securities go back to the investors. According to an expert group
constituted by the finance ministry in India, in August 2004, participatory notes
constituted about 46 per cent of the cumulative net investments in equities by FIIs.
Any entity investing in participatory notes is not required to register with SEBI
(Securities and Exchange Board of India), whereas all FIIs have to compulsorily get
registered. Trading through participatory notes is easy because participatory notes are
like contract notes transferable by endorsement and delivery. Secondly, some of the
entities route their investment through participatory notes to take advantage of the taxlaws of certain preferred countries. Thirdly, participatory notes are popular because
they provide a high degree of anonymity, which enables large hedge funds to carry
out their operations without disclosing their identity.
Participatory notes in brief is as follows :
What are participatory notes or PNs? Participatory notes are instruments used by
foreign funds which are not registered to trade in domestic Indian Capital Markets.
PNs are derivative instruments issued against an underlying security permitting
holders to get a share in the income from the security.
How does it work? Investors who buy PNs deposit their funds in US or European
operations of Foreign Institutional Investors (FII) operating in India . The FII uses its
proprietary account to buy stocks.
Why do investors use PNs? Reason for using PNs is to keep investor name
anonymous, some investors have used them to save transaction and overhead costs.
Tax officials fear that PNs are becoming a favourite with a host of Indian money
launderers who use them to first take funds out of country through hawala and then
get it back using PNs.
Participatory Notes Crisis of 2007
On the 16th of October, 2007, SEBI (Securities & Exchange Board of India) proposed
curbs on participatory notes which accounted for roughly 50% of FII investment in
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2007. SEBI was not happy with P-Notes because it is not possible to know who owns
the underlying securities and hedge funds acting through PNs might therefore cause
volatility in the Indian markets.
However the proposals of SEBI were not clear and this led to a knee-jerk crash whenthe markets opened on the following day (October 17, 2007). Within a minute of
opening trade, the Sensex crashed by 1744 points or about 9% of its value - the
biggest intra-day fall in Indian stock-markets in absolute terms. This led to automatic
suspension of trade for 1 hour. Finance Minister P.Chidambaram issued clarifications,
in the meantime, that the government was not against FIIs and was not immediately
banning PNs. After the markets opened at 10:55 am, they staged a remarkable
comeback and ended the day at 18715.82, down just 336.04 from Tuesdays closeafter tumbling to a days low of 17307.90.
This was, however not the end of the volatility. The next day (October 18, 2007), the
Sensex tumbled by 717.43 points 3.83 per centto 17998.39, its second biggest
fall. The slide continued the next day when the Sensex fell 438.41 points to settle at
17559.98 at the end of the week, after touching the lowest level of that week at
17226.18 during the day.
The SEBI chief, M.Damodaran held an hour long conference on the 22nd of October
to clear the air on the proposals to curb PNs where he announced that funds investing
through PNs were most welcome to register as FIIs, whose registration process would
be made faster and more steamlined. The markets welcomed the clarifications with an
879-point gain its biggest single-day surge on October23, thus signalling the
end of the PN crisis. SEBI issued the fresh rules regarding PNs on the 25th of
October, 2007 which said that FIIs cannot issue fresh P-Notes and existing exposures
were to be wound up within 18 months. The Sensex gave a thumbs up the next day -Friday, 26 October by re-crossing the 19,000 barrier with a 428 point surge. The
coming Monday (October 29, 2007) history was created when the Sensex leaped
734.5 points to cross the hallowed 20,000 mark.
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SCAMS OF SHARE MARKET
HARSHAD MEHTA SCAM
Harshad Mehta was an Indian stockbroker and is alleged to have engineered the rise
in the BSE stock exchange in the year 1992. Exploiting several loopholes in the
banking system, Mehta and his associates siphoned off funds from inter-bank
transactions and bought shares heavily at a premium across many segments, triggering
a rise in the Sensex. When the scheme was exposed, the banks started demanding the
money back, causing the collapse. He was later charged with 72 criminal offenses and
more than 600 civil action suits were filed against him. He died in 2002 with manylitigations still pending against him.
Early Li fe
Harshad Shantilal Mehta was born in a Gujarati Jain family of modest means. His
early childhood was spent in Mumbai where his father was a small-time businessman.
Later, the family moved to Raipur in Madhya Pradesh after doctors advised his father
to move to a drier place on account of his indifferent health. But Raipur could nothold back Mehta for long and he was back in the city after completing his schooling,
Mehta gradually rose to become a stock broker on the Bombay Stock Exchange and
lived almost like a movie star in a 15,000 square feet apartment, which had a
swimming pool as well as a golf patch. He also had a taste for flashy cars, which
ultimately led to his downfall. The year was 1990. Years had gone by and the driving
ambitions of a young man in the faceless crowd had been realised. Harshad Mehta
was making waves in the stock market. He had been buying shares heavily since the
beginning of 1990. The shares which attracted attention were those of Associated
Cement Company (ACC),. The price of ACC was bid up to Rs 10,000. For those
who asked, Mehta had the replacement cost theory as an explanation. The theory
basically argues that old companies should be valued on the basis of the amount of
money which would be required to create another such company.
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Through the second half of 1991, Mehta was the darling of the business media and
earned the sobriquet of the Big Bull, who was said to have started the bull run. But,
where was Mehta getting his endless supply of money from? Nobody had a clue.
On April 23, 1992, journalist Sucheta Dalal in a column in The Times of India,
exposed the dubious ways of Harshad Metha. The broker was dipping illegally into
the banking system to finance his buying.
In 1992, when I broke the story about the Rs 600 crore that he had swiped from the
State Bank of India, it was his visits to the banks headquarters in a flashy Toyota
Lexus that was the tip-off. Those days, the Lexus had just been launched in the
international market and importing it cost a neat package, Dalal wrote in one of hercolumns later.
The authors explain: The crucial mechanism through which the scam was effected
was the ready forward (RF) deal. The RF is in essence a secured short-term (typically
15-day) loan from one bank to another. Crudely put, the bank lends against
government securities just as a pawnbroker lends against jewellery. The borrowing
bank actually sells the securities to the lending bank and buys them back at the end of
the period of the loan, typically at a slightly higher price.
It was this ready forward deal that Harshad Mehta and his cronies used with great
success to channel money from the banking system.
A typical ready forward deal involved two banks brought together by a broker in lieu
of a commission. The broker handles neither the cash nor the securities, though that
wasnt the case in the lead-up to the scam.
In this settlement process, deliveries of securities and payments were made through
the broker. That is, the seller handed over the securities to the broker, who passed
them to the buyer, while the buyer gave the cheque to the broker, who then made the
payment to the seller.
In this settlement process, the buyer and the seller might not even know whom they
had traded with, either being know only to the broker.
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This the brokers could manage primarily because by now they had become market
makers and had started trading on their account. To keep up a semblance of legality,
they pretended to be undertaking the transactions on behalf of a bank.
Another instrument used in a big way was the bank receipt (BR). In a ready forward
deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e.
the seller of securities, gave the buyer of the securities a BR.
As the authors write, a BR confirms the sale of securities. It acts as a receipt for the
money received by the selling bank. Hence the name - bank receipt. It promises to
deliver the securities to the buyer. It also states that in the mean time, the seller holds
the securities in trust of the buyer.
Having figured this out, Mehta needed banks, which could issue fake BRs, or BRs not
backed by any government securities. Two small and little known banks - the Bank
of Karad (BOK) and the Metorpolitan Co-operative Bank (MCB) - came in handy for
this purpose. These banks were willing to issue BRs as and when required, for a fee,
the authors point out.
Once these fake BRs were issued, they were passed on to other banks and the banks inturn gave money to Mehta, obviously assuming that they were lending against
government securities when this was not really the case. This mone
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