Capital Market

CAPITAL MARKET IN INDIA
CAPITAL MARKETS
MEANING
Capital markets are markets where people, companies, and
governments with more funds than they need (because they save some of
their income) transfer those funds to people, companies, or governments
who have a shortage of funds (because they spend more than their
income). Stock and bond markets are two major capital markets. Capital
markets promote economic efficiency by channeling money from those
who do not have an immediate productive use for it to those who do.
Capital markets carry out the desirable economic function of
directing capital to productive uses. The savers (governments, businesses,
and people who save some portion of their income) invest their money in
capital markets like stocks and bonds. The borrowers (governments,
businesses, and people who spend more than their income) borrow the
savers' investments that have been entrusted to the capital markets.
ABOUT CAPITAL MARKET

Broadly speaking, the capital market can be divided into two
constituents:
The financial institutions
The securities market
These two constituents provide long-term and medium-term loan
facilities. The securities market is a market where securities can be
bought & sold freely. It consists of the new Issues Market (the Primary
Market) & the Stock Exchange (the secondary market).
ROLE AND IMPORTANCE OF CAPITAL MARKETS IN

INDIA
The capital markets encourage capital formation in the country.
The capital markets mobilize savings of the households and of the
industrial concerns. Such savings are then invested for productive
purposes. Capital markets also facilitate the growth of the industrial
sector, as well as the other sectors of the economy. The capital markets
provide funds for the projects in backward areas. Thus, Capital markets
generate employment in the country.
Moreover, the capital markets makes possible to generate foreign
capital. They also facilitate the development of stock markets. Due to
capital markets, the public has alternative sources of investment. The
public can invest not only in bank deposits, but also in shares and
debentures issued by public companies.
The commercial and FIs provide timely financial assistance to
viable sick units to overcome their industrial sickness. The banks and FIs
may also write off a part of loan, or they re-schedule the loan, so as to
offer payment flexibility to the weak units, which in turn helps the weak
units to overcome financial crises. The secondary market makes it
possible for the investors to sell off their holdings in form of shares and
debentures and convert them into liquid cash.
GROWTH OF CAPITAL MARKET IN INDIA

There has been considerable growth in the capital markets in India.
This can be interpreted from the above mentioned statistical figures. The
following are the factors responsible for the growth of capital markets in
India.
Growth of Stock Exchanges in
National Securities Clearing
India
Growth of Financial Institutions
Growth of Mutual Funds
Growth of Merchant Banking in
Corporation
Corporate Governance
Growth of Multinationals
General Awareness
India
Development of Venture Capital
Clearing Corporation of India
Funds
Development of Credit Rating
Limited
Growing Public Confidence
Agencies
Setting up of SEBI
Growth of Entrepreneurs
SECURITIES MARKET
Securities market consists of two segments, viz.,

Primary market and
Secondary market.
Primary market is the place where issuers create and issue equity,
debt or hybrid instruments for subscription by the public, the secondary
market enables the holders of securities to trade them.
Secondary market essentially comprises of stock exchanges which
provide platform for purchase and sale of securities by investors. In India,
apart from the Regional Stock Exchanges established in different centers,
there are exchange like the National Stock Exchange (NSE) and the Over
the Counter Exchange of India (OTCEI), who provide nation wide
trading facilities with terminals all over the country. The trading
platforms of stock exchanges are accessible only through brokers and
trading of securities is confined only to stock exchanges.
Thus, the securities market has two independent, inseparable
segment, the new issues (primary) market and the stock (secondary)
market. The primary market provides channel for sale of new securities
while the secondary market deals in securities previously issued.
The issuer of securities sells the securities to the primary market to
raise funds for investment and/or to discharge some obligations. The
secondary market enables them who hold securities to adjust their
holdings in response to change in their assessment of risk and return.
They also sell securities for cash to meet their liquidity needs.
STOCK EXCHANGES
Secondary
Secondary Market
Market
A stock exchange or securities exchange is a marketplace where
stocks offered for sale are listed and exchanged. Typically, the exchange
is made up of a Board of Governors generally selected by the members,
which is chosen to represent the interests of seat holders.
The Board then employs an executive officer, to manage the
Exchange. The Exchange usually assigns a number of seats to brokers.
Persons eligible to be brokers may purchase seats in the Exchange.
WHY WAS THE EXCHANGE BORN?

- Purpose
of Existence
To safeguard the interest of investors as well as creating a sense of
security in their minds.
To establish and promote honorable and just practices in securities
transactions.
To promote, development and maintain a well-regulated market for
dealing in securities.
To promote industrial development in the country through efficient
resource mobilizations by way of investment in corporate
securities.
Stock Exchange is medium for the corporate sector to highlight its
goodwill and to gain confidence of the general public to propagate
its trade in the country.
To bring liquidity in the transactions and to increase the pace of
buying and selling and shares with discipline.
To create a common recognized platform for the buying and selling
of the securities.
To bring about speedier conclusion of transactions greater
transparency in operations, and greater investor protection.
To enhance the growth of capital market.
To spurt investments in the country.
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HISTORICAL BACKGROUND OF
STOCK EXCHANGES IN INDIA
The stock trading history in India is obscured in the mists of time.

Historical records, as and where they exist, rarely speak about business
and speculative activity except in passing.
However, the origin of stock broking in the country may go back to
a time, when shares, debentures and bonds representing titles to property
were first issued on the condition of transfer from one person to another
and the earliest record of dealings in securities in India is the East India
Company's loan securities, way back in the 18th century.
The first stock exchange in India, Bombay Stock Exchange was
established in 1875 as 'The Native Share and Stockbrokers Association'
and has evolved over the years into its present status as the premier stock
exchange in the country.
It may be noted that BSE is the oldest stock exchange in Asia, even
older than the Tokyo Stock Exchange, which was founded in 1878. The
country's second stock exchange was established in Ahmedabad in 1894,
followed by the Calcutta Stock Exchange (CSE). CSE can also trace its
origin back to 19th century. The CSE was formally established in May
1908.
India's other major stock exchange National Stock Exchange
(NSE), promoted by leading financial institutions, was established in
April 1993. Over the years, several stock exchanges have been
established in the major cities of India.
LIST OF STOCK EXCHANGES OPERATING IN INDIA

SR.
NO.
1
STOCK EXCHANGE
The Stock Exchange, Mumbai
The Stock Exchange, Ahmedabad
Calcutta Stock Exchange Association Ltd., Calcutta
Madras Stock Exchange Association Ltd , Madras
Delhi Stock Exchange Association Ltd, Delhi
Hyderabad Stock Exchange Ltd, Hyderabad
Madhya Pradesh Stock Exchange, Indore
Bangalore Stock Exchange Ltd., Bangalore
Cochin Stock Exchange Ltd., Cochin
10
The Uttar Pradesh Stock Exchange Association Ltd., Kanpur
11
Pune Stock Exchange Ltd., Pune
12
Ludhiana Stock Exchange Association Ltd., Ludhiana
13
Gauhati Stock Exchange Ltd., Gauhati
14
Magadh Stock Exchange Ltd., Gauhati
15
Mangalore Stock Exchange Ltd., Mangalore
16
Jaipur Stock Exchange Ltd., Jaipur
17
Bhubaneshwar Stock Exchange Association Ltd.,
18
Bhubeshwar
Saurashtra Kutch Stock Exchange Ltd., Rajkot
19
Vadordara Stock Exchange Ltd., Vadodara
20
Coimbatore Stock Exchange Ltd., Coimbatore
21
National Stock Exchange of India Ltd., Mumbai
22
Capital Stock Exchange of Kerala Ltd., Thiruvanathapuram
NATIONAL STOCK EXCHANGE
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.
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HISTORICAL BACK GROUND

Before the incorporation of NSE, there has been number of
limitations associated with the trading system in securities market. Some
of the major areas of problem were:
1. Broker Managed Exchanges
2. Geographical Spread and Diversity
3. Lack of Transparency / Liquidity
4. Paper Based System
5. Settlement Delays
6. No Risk Containment Measures
So, the institutional set up was formed to overcome all these
problems. Thus NSE was formed and incorporated in November 1992,
and got recognition as a Stock Exchange in April 1993, went live for debt
markets in June 1994 and commenced Capital Market Operations in
November 1994.
NSE TODAY
Operational in over 360 cities
Over 872 trading members with 18500 users
More than 1000 listed companies and 2200 debt securities
The Companies listed on NSE are selected, based on their paid-up
capital, market capitalization, dividend payment and a good track record.
The criteria is meant to ensure that only companies that meet certain
standards are listed.
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The list is reviewed at periodic intervals. From 26th December

1996, the NSE has started trading in depositary scripts. Its debt market
operations average 270 crores (US$ 75 Million) a day and capital market
operations average more than Rs.1200 crores (US$ 340 Million) a day.
OBJECTIVES OF NSE
1. Nation wide trading facilities
2. Fair, efficient and transparent market
3. Efficient and risk free settlement
4. Benchmark with global standards
5. High governance standards
IMPORTANCE OF NSE IN INDIAN SECONDARY

MARKET
The NSE has been playing a catalytic role and has significantly
contributed to the reforming of the secondary markets in India in terms of
microstructure, market practices, trading volumes and use of state-of-theart technology. The use of satellite communication technology for trading
using Very Small Aperture Terminals (VSATs) enabled NSE to rapidly
expand across the length and breadth of the country. The broad objective
for which the exchange was setup has made it to play a leading role in
enlarging the scope of market reforms in securities market in India.
Moreover, to take care of investors interest, NSE has created an
Investment Protection Fund (IPF) that would help investors who have
incurred financial loss due to the default of brokers.
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CORPORATE STRUCTURE
NSE is one of the first de-mutualised stock exchanges in the
country, where the ownership and management of the Exchange is
completely divorced from the right to trade on it. Though the impetus for
its establishment came from policy makers in the country, it has been set
up as a public limited company, owned by the leading institutional
investors in the country.
From day one, NSE has adopted the form of a demutualised
exchange - the ownership, management and trading is in the hands of
three different sets of people. NSE is owned by a set of leading financial
institutions,
banks,
insurance
companies
and
other
financial
intermediaries and is managed by professionals, who do not directly or

indirectly trade on the Exchange. This has completely eliminated any
conflict of interest and helped NSE in aggressively pursuing policies and
practices within a public interest framework. The NSE model however,
does not preclude, but in fact accommodates involvement, support and
contribution of trading members in a variety of ways. Its Board comprises
of senior executives from promoter institutions, eminent professionals in
the fields of law, economics, accountancy, finance, taxation, etc, public
representatives, nominees of SEBI and one full time executive of the
Exchange. While the Board deals with broad policy issues, decisions
relating to market operations are delegated by the Board to various
committees constituted by it. Such committee includes representatives
from trading members, professionals, the public and the management.
The day-to-day management of the Exchange is delegated to the
Managing Director who is supported by a team of professional staff.
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NSE FAMILY
DoTEx.
Int Ltd.
NSE.IT
NSCCL
NSE
NSDL
IISL
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NSCCL
National Securities Clearing Corporation Limited (NSCCL), a
wholly owned subsidiary of NSE was incorporated in August
1995 and commenced clearing operations in April 1996. the
formation of NSCCL has revolutionized the entire concept of settlement
system in India. It has been the first clearing corporation in the country.
The NSCCL is responsible
for post-trade activities
of a stock
exchange. Clearing and settlement of trades and risk management are its
central functions. It clears all trades, determines obligations of members,
arranges for pay-in of funds/securities, receives funds/securities,
processes for shortages in funds/securities, arranges for pay-out of
funds/securities
and
maintains
to
members, guarantees
settlement,
and
collects
margins/collateral/base capital/other funds. Various
committees have been constituted to advise on areas such as good market

practices, settlement procedures, risk containment systems etc. These
committees are manned by industry professionals, trading members,
Exchange staff as also representatives from the market regulator.
Thus, the main objective of NSCCL has been:
To bring and sustain confidence in clearing and settlement of

securities;
To promote and maintain, short and consistent settlement cycles;
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To provide counter-party risk guarantee, and
To operate a tight risk containment system.
NATIONAL SECURITIES DEPOSITORY LTD. (NSDL)
In order to solve the myriad problems associated with trading in

physical securities, NSE joined hands with the Industrial Development
Bank of India (IDBI) and the Unit Trust of India (UTI) to promote
dematerialisation of securities. Together they set up National Securities
Depository Limited (NSDL), the first depository in India. NSDL
commenced operations in November 1996 and has since established a
national infrastructure of international standard to handle trading and
settlement in demat form and thus completely eliminated the risks to
investors associated with fake/bad/stolen paper.
TECHNOLOGY AT NSE
INFORMATION TECHNOLOGY AND SECURITIES
MARKET
Across the globe, developments in information, communication
and network technologies have created paradigm shifts in the securities
market operations. Technology has enabled organizations to build new
sources of competitive advantage, bring about innovations in products
and services, and to provide for new business opportunities. Stock
exchanges all over the world have realised the potential of IT and have
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moved over to electronic trading systems, which are cheaper, have wider
reach and provide a better mechanism for trade and post trade execution.
NSES PERSPECTIVE ON TECHNOLOGY

NSE believes that technology will continue to provide the
necessary impetus for the organization to retain its competitive edge and
ensure timeliness and satisfaction in customer service. In recognition of
the fact that technology will continue to redefine the shape of the
securities industry, NSE stresses on innovation and sustained investment
in technology to remain ahead of competition.
LARGEST IT SETUP IN INDIA BY NSE

NSE's IT set-up is the largest by any company in India. It uses
satellite communication technology to energise participation from around
400 cities spread all over the country.
In the recent past, capacity enhancement measures were taken up in
regard to the trading systems so as to effectively meet the requirements of
increased users and associated trading loads. With upgradation of trading
hardware, NSE can handle up to 1 million trades per day. NSE has also
put in place NIBIS (NSE's Internet Based Information System) for online real-time dissemination of trading information over the internet. In
order to capitalize on in-house expertise in technology, NSE set up a
separate company, NSE.IT, in October 1999. This is expected to provide a
platform for taking up new IT assignments both within and outside India
and attaining global exposure.
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The telecommunications network uses X.25 protocol and is the

backbone of the automated trading system. Each trading member trades
on the NSE with other members through a PC located in the trading
member's office, anywhere in India.
The trading members on the Wholesale Debt Market segment are
linked to the central computer at the NSE through dedicated 64Kbps
leased lines and VSAT terminals. These leased lines are multiplexed
using dedicated 2 Mbps, optical-fibre links. The WDM participants
connect to the trading system through dial-up links. The Exchange uses
powerful RISC -based UNIX servers, procured from Digital and HP for
the back office processing. The latest software platforms like ORACLE 7
RDBMS, GUPTA - SQL/ORACLE FORMS 4.5 Front - Ends, etc. have
been used for the Exchange applications. The Exchange currently
manages its data centre operations, system and database administration,
design and development of in-house systems and design and
implementation of telecommunication solutions.
VSAT BASED STOCK EXCHANGE

NSE is one of the largest interactive VSAT based stock exchanges
in the world. Today it supports more than 3000 VSATs and is expected to
grow to more than 4000 VSATs in the next year. The NSE- network is the
largest private wide area network in the country and the first extended CBand VSAT network in the world. Currently more than 9000 users are
trading on the real time-online NSE application. There are over 15 large
computer systems which include non-stop fault-tolerant computers and
high end UNIX servers, operational under one roof to support the NSE
applications. This coupled with the nation wide VSAT network makes
NSE the country's largest Information Technology user.
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PRESENT & FUTURE

In an ongoing effort to improve NSE's infrastructure, a corporate
network has been implemented, connecting all the offices at Mumbai,
Delhi, Calcutta and Chennai. This corporate network enables speedy
inter-office communications and data and voice connectivity between
offices. In keeping with the current trend, NSE has gone online on the
Internet. Apart from having a 2mbps link to VSNL and the own domain
for internal browsing and e-mail purposes, NSE has also set up its own
Web site. Currently, NSE is displaying its live stock quotes on the web
site (www.nseindia.com) which are updated online.
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TRADING NETWORK
SATELLITE
NSE MAINFRAME
Brokers Premises
LOCATIONS
Till the advent of NSE, an investor wanting to transact in a security
not traded on the nearest exchange had to route orders through a series of
correspondent brokers to the appropriate exchange.
This resulted in a great deal of uncertainty and high transaction
costs. One of the objectives of NSE was to provide a nationwide trading
facility and to enable investors spread all over the country to have an
equal access to NSE.
NSE has made it possible for an investor to access the same market
and order book, irrespective of location, at the same price and at the same
cost.
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NSE uses sophisticated telecommunication technology through

which members can trade remotely from their offices located in any part
of the country. NSE trading terminals are present in various cities and
towns all over India.
APPLICATION SYSTEMS
NEAT SYSTEM
NEAT (National Exchange for Automated Trading) is a state-ofthe-art client server based application. At the server end, all trading
information is stored in an in-memory database to achieve minimum
response time and maximum system availability for users.
The trading server software runs on a fault tolerant STRATUS
main frame computer while the client software runs under Windows on
PCs. The combination of Front end & Back end applications has made a
success story in the trading system at NSE.
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LISTING AT NSE
The stocks, bonds and other securities issued by issuers require
listing for providing liquidity to investors. Listing means formal
admission of a security to the trading platform of the Exchange. It
provides liquidity to investors without compromising the need of the
issuer for capital and ensures effective monitoring of conduct of the
issuer and trading of the securities in the interest of investors.
The issuer wishing to have trading privileges for its securities
satisfies listing requirements prescribed in the relevant statutes and in the
listing regulations of the Exchange. It also agrees to pay the listing fees
and comply with listing requirements on a continuous basis. All the
issuers who list their securities have to satisfy the corporate governance
requirement framed by regulators.
Only public companies are allowed to list their securities in the
stock exchange. Private Limited companies cannot get listing facility.
They shall first convert themselves into public limited companies and
their Articles of Association shall contain prohibitions as laid down in the
listing agreement and as applicable to public limited companies.
The prices at which the securities are traded in the stock exchange
are published in the News Papers. Investors are able to know these price
trends from such publications. Compared to listed securities the trading of
unlisted securities is difficult. The price trends in respect of unlisted
securities are seldom known to the investors and the contract between the
seller and buyer takes places mostly on one to one basis.
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Section 73 of the Companies Act, 1956 requires companies to

make an application to one or more recognized stock exchanges seeking
permission for dealing with the securities offered to the public before
issue of prospectus. Section 21 of the Securities Contract (Regulation)
Act, 1956 prescribes necessary conditions that are required to be satisfied
by the public limited companies for the purpose of listing of securities in
the stock exchange.
CHARACTERISTICS OF LISTING
The following are the characteristics of listing of securities:
(A)
AGREEMENT:
Listing
agreement
is
made
between
the respective stock
exchange and the company. The company offers or issues the

securities to the public through the issue of offer document like
prospectus or a letter of offer. The stock exchange is a recognized
stock exchange where the securities are listed for trading.
(B)
PURPOSE:
The purpose of listing is to ensure free transferability of
securities
so
as
to
facilitate
clear transparency and open
disclosure of information relating to the affairs of the company

whose securities are listed. In addition, official quotation and
liquidity in the trading of listed securities is also ensured.
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(C)
RESTRICTION:
A company is free to have its securities listed in any number of
stock exchanges. It is important that the securities are listed at least
on the regional stock exchange.
(D)
INVESTOR PROTECTION:
Listing offers a measure of protection to the investors. It is a
barometer of performance and continued good performance of the
company.
LISTING PROCEDURE
The listing procedure involves making a simple application by the
company and payment of listing fees as prescribed by the respective stock
exchange. It is to be completed before the offer of securities to the public
and registration of prospectus with the Registrar of Companies. The
recognized stock exchange has to give approval and then make an
agreement stating the terms and conditions. Registration and recording is
done for the purpose of trading by the registered members of the stock
exchange and for the official quotation of the security price. For the
benefit of the public and the investors.
The company has to continue listing by paying renewal fees from
time to time. Listing is mandatory for a public company, which intends to
offer its securities to the public by issue of prospectus and which wishes
to provide facilities to the securities being offered to the public. Any
allotment of securities made in the absence of listing or refusal of listing
is held to be void i.e. illegal. Again, any failure to comply with the
Section 21 of the Securities Contracts (Regulation) Act attracts penalty to
the parties.
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The authority of the stock exchange may refuse listing of the

securities of a company. The authorities should intimate the company
within 15 days with the reasons for refusal. The company can make an
appeal to the Central Government within a prescribed period. The Central
Government may either grant or refuse to grant the permission for listing
and the decision of the Central Government would be informed to the
stock exchange concerned who shall act in conformity with such a
decision.
The stock exchange is empowered to suspend or withdraw an
admission to dealing in securities of company for breach or noncompliance with the listing provision on giving an opportunity of being
heard in writing. In an eventuality where any withdrawal or suspension
exceeds 3 months, the company may appeal to the SEBI who may either
vary or set aside the decision of the stock exchange.
BENEFITS OF LISTING
The following are the benefits of listing of securities by a company:
Easy marketability and liquidity which also ensures easy raising of
capital.
Easy evaluation of the real worth of securities.
High collateral value for bank loans.
Providing activities of quick transfer registration and company
information.
There is a safety in dealing of securities.
It safeguards general public interest by ensuring equitable
allotment, easy transfer, disclosure of proper information.
Tax incentives are available to listed securities.
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Higher status and reputation for the company by enjoying the

confidence of the investing public.
Provides an assurance of an existence of good faith or an absence
of fraud with regard to the issue of securities.
Listing is made through analysis of a company's capital structure,
management pattern and business prospects. Hence, provides
assurance of genuineness of securities.
TYPES OF LISTING
Listing of securities falls under 5 groups
(1)
INITIAL LISTING:
If the shares or securities are to be listed for the first time by a
company on a stock exchange is called initial listing.
(2)
LISTING FOR PUBLIC ISSUE:

When a company whose shares are listed on a stock exchange
comes out with a public issue of securities, it has to list such issue
with the stock exchange.
(3)
LISTING FOR RIGHTS ISSUE:

When companies whose securities are listed on the stock exchange
issue securities to existing shareholders on rights basis, it has to list
such rights issues on the concerned stock exchange.
(4)
LISTING OF BONUS SHARES:

Shares issued as a result of capitalization of profit through bonus
issue shall list such issues also on the concerned stock exchange.
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(5)
LISTING FOR MERGER OR AMALGAMATION:

When new shares are issued by an amalgamated company to the
shareholders of the amalgamating company, such shares are also
required to be listed on the concerned stock exchange.
BENEFITS OF LISTING AT NSE

The benefits of listing on NSE are as enumerated below:
NSE provides a trading platform that extends across the length and
breadth of the country. Investors from approximately 345 centers can
avail of trading facilities on the NSE trading network. Listing on NSE
thus, enables issuers to reach and service investors across the country.
NSE being the largest stock exchange in terms of trading volumes,
the securities trade at low impact cost and are highly liquidity. This in
turn reduces the cost of trading to the investor. The trading system of
NSE provides unparallel level of trade and post-trade information. The
best 5 buy and sell orders are displayed on the trading system and the
total number of securities available for buying and selling is also
displayed. This helps the investor to know the depth of the market.
The facility of making initial public offers (IPOs), using NSE's
network and software, results in significant reduction in cost and time of
issues. NSE's web-site www.nseindia.com provides a link to the websites of the companies that are listed on NSE, so that visitors interested in
any company can visit that company's web-site from the NSE site. Listed
companies are provided with monthly trade statistics for the securities of
the company listed on the Exchange. The listing fee is nominal.
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LISTING IN CAPITAL MARKET SEGMENT

Two categories, namely 'listed' and 'permitted to trade' categories of
securities (equity shares, preference shares and debentures) are available
for trading in the CM segment. However, the permitted to trade category
is being phased out gradually and no new company is been given the
benefit of this category. At the end of March 2005, 970 'listed' and 1
'permitted to trade' companies were available for trading. These securities
had a market capitalization of Rs. 1,585,585 crore.
1200
1000
800
550
600
612 648
720
785 793 818
909
970
422
400
200 135
19
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
0
95
No. of Companies Listed
Companies Listed for trading on CM Segment
Year(ending period March)
LISTING CRITERIA
The Exchange has laid down criteria for listing of new issues by
companies, companies listed on Other exchanges, and companies formed
by amalgamation/restructuring, etc. in conformity with the Securities
Contracts (Regulation) Rules, 1957 and directions of the Central
Government and the Securities and Exchange Board of India (SEBI).
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EQUITY MARKET
Equity Market is nothing but market where investors buy and sell
securities providing ownership of a company's shares. The purpose of
business is to add wealth. The means of business is to take calculated risk
and then manage it. An economy without adequate risk capital cannot
create business enterprises. Therefore, equity markets are the primary
engines of business finance.
A vibrant equity market can channelise risk capital from the
household to the industry. A complex process of information processing,
risk taking, speculation, arbitrage, and incentives enables the equity
market to balance the interests of a diverse set of participants. Attempts to
make the equity markets efficient, transparent and safe have transformed
the way equity markets function today. It would not be an exaggeration to
say that sea-changes have taken place in the past one decade.
Equity market is often considered as the main engine driving the
economy. Equity markets allow savers to acquire stake in a firm, and sell
it, if they need access to their savings or if they want to alter their
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portfolio. At the same time, it allows firms to raise permanent capital for
asset creation. By incorporating information about future earnings
potential in current stock prices, the equity market also serves as a
barometer to the state of the economy. This makes the equity market an
important constituent of financial markets.
In emerging countries, equity market plays an even more important
role in economic development. In many emerging markets, firms would
need large quantum of fund to expand and be able to pursue the prevalent
high growth rates. Equity market is the only liquid financial market in
many emerging countries and hence its role in economic development can
not be overemphasized.
In addition, world over, financial markets are getting less insular.
The investors in developed countries are seeking investment opportunities
beyond the confines of their domestic economy to enhance return and
diversify risks.
Despite the increasing importance of the equity market in emerging
countries, their growth is stifled by several systemic factors. The equity
markets in many emerging countries exhibit poor liquidity and very high
volatility. The markets are still fettered by several regulatory and policy
constraints.
There is a large amount of information asymmetry in the market.
These markets also suffer from lack of depth as the derivatives trading are
in its embryonic stage.
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CAPITAL MARKET SEGMENT OF NSE
The Equity Market is popularly known as, Capital Market by NSE.

The trading on the NSEs Capital Market Segment (CM segment)
commenced on November 4, 1994 and within a year of its existence NSE
became the largest stock exchange in the country. The CM segment of
NSE provides an efficient and transparent platform for trading of equity,
preference shares, debentures, warrants, exchange traded funds as well as
retail debt in government securities.
TRADING MECHANISM
The trading system, know as the National Exchange for Automated
trading (NEAT) system, is an on-line, anonymous, order-driven, screenbased trading system. In this system, a member can key into the computer
quantities of securities and the prices at which he would transact and the
transaction is executed as soon as it finds a matching sale or buy order
from a counter party. The system electronically matches orders on a
price/time priority and hence cuts down on time and cost. It allows faster
incorporation of price sensitive information into prevailing prices, thus
increasing the informational efficiency of markets. It enables market
participants to see the full market on a real-time basis, making the
markets transparent.
31
It allows a large number of participants, irrespective of their

geographical locations, to trade with one another simultaneously,
improving the depth and liquidity of the market. The system ensures full
anonymity by accepting orders, big or small, from members without
revealing their identity, thus providing equal access to everybody ad
provides a perfect audit trail by logging in the trade execution process in
entirely.
INDICES
India Index Services and products Ltd. (IISL), a joint venture
between NSE and CRISIL has been developing and is maintaining an
array of indices. The popular indices are the S&P CNX Nifty, CNX Nifty
Junior, S&P CNX Defty, S&P CNX 500, CNX Midcap 200, S&P CNX
Industry indices and CNX Segment indices. S&P CNX Nifty, introduced
in November 3, 1995, is based on 50 largest and highly liquid stocks.
CNX nifty Junior, introduced in December 1996, is built out of the next
50 large and liquid stocks. These indices are monitored and updated
dynamically and are reviewed regularly.
32
RISKS IN SETTLEMENT
TYPES OF RISKS
The following two kinds of risks are inherent in a settlement system:
(1)
COUNTERPARTY RISK
This arises if parties do not discharge their obligations fully when
due or at any time thereafter. This has two components, namely
replacement cost risk prior to settlement and principal risk during
settlement.
(a)
The replacement cost risk arises from the failure of one of

the parties to transaction.
(b)
The principal risk arises if a party discharges his obligations

but the counter party defaults.
A variant of counterparty risk is liquidity risk which arises if one of

the parties to transaction does not settle on the settlement date, but
later. Another variant is the third party risk which arises if the
parties to trade are permitted or required to use the services of a
third party which fails to perform.
33
(2)
SYSTEM RISK
This comprises of operational, legal and systemic risks. The
operational risk arises from possible operational failures such as
errors, fraud, outages etc. The legal risk arises if the laws or
regulations do not support enforcement of settlement obligations or
are uncertain. Systemic risk arises when failure of one of the
parties to discharge his obligations leads to failure by other parties.
MARGINS
Categorisation of stocks for imposition of margins
The Stocks which have traded atleast 80% of the days for the
previous 18 months shall constitute the Group I and Group II.
Out of the scrips identified above, the scrips having mean impact
cost of less than or equal to 1% shall be categorized under Group I
and the scrips where the impact cost is more than 1, shall be
categorized under Group II.
The remaining stocks shall be classified into Group III.
The impact cost shall be calculated at 15th of each month on a
rolling basis considering the order book snapshots of the previous
six months. On the basis of the impact cost so calculated, the scrips
shall move from one group to another group from the 1st of the
next month.
Daily margins payable by members consists of the following:
1. Value at Risk Margin (VaR)
2. Mark to Market Margin (MTM)
34
Daily margin, comprising of the sum of VaR margin and mark to

market margin is payable.
A.
MARK TO MARKET MARGIN

Mark to market margin is computed on the basis of mark to market
loss of a member. Mark to market loss is the notional loss which
the member would incur in case the cumulative net outstanding
position of the member in all securities, at the end of the relevant
day were closed out at the closing price of the securities as
announced at the end of the day by the NSE. Mark to market
margin is calculated by marking each transaction in a scrip to the
closing price of the scrip at the end of trading. In case the security
has not been traded on a particular day, the latest available closing
price at the NSE is considered as the closing price.
B.
VALUE AT RISK-BASED MARGIN.

The VaR rate is applied to gross exposure to determine VaR-based
margin. The computation of the VaR rate as well as the gross
exposure on which VaR rate is applied is explained below:
COMPUTATION OF VAR RATE

VaR rate is a single number, which encapsulates whole information
about the risk in a portfolio. It measures potential loss from an unlikely
adverse event in a normal market environment. It involves using
historical data on market prices and rates, the current portfolio positions,
and models (e.g., option models, bond models) for pricing those
positions.
35
These inputs are then combined in different ways, depending on

the method, to derive an estimate of a particular percentile of the loss
distribution, typically the 99th percentile loss.
NO-DELIVERY PERIOD
Whenever a book closure or a record date is announced by a
company, the exchange sets up a 'no-delivery' period for that security.
During this period, trading is permitted in the security. However, these
trades are settled only after the no-delivery period is over. This is done to
ensure that investor's entitlement for the corporate benefits is clearly
determined.
However, there is no no-delivery period on account of book
closures and record dates for corporate actions, such as, issue of dividend
and bonus shares, in respect of the scrips which are traded in the
compulsory dematerialised mode. The time gap between two book
closures/record dates is 30 days.
MARKET SEGMENTS
The Exchange operates the following sub-segments in the Equities
segment:
Rolling Settlement
Limited Physical Market
Institutional Segment
Trade for Trade Segment
36
ROLLING SETTLEMENT
In a rolling settlement, each trading day is considered as a trading
period and trades executed during the day are settled based on the net
obligations for the day. At NSE, trades in rolling settlement are settled on
a T+2 basis i.e. on the 2nd working day. For arriving at the settlement day
all intervening holidays, which include bank holidays, NSE holidays,
Saturdays and Sundays are excluded. Typically trades taking place on
Monday are settled on Wednesday, Tuesday's trades settled on Thursday
and so on.
LIMITED PHYSICAL MARKET

Pursuant to the directive of SEBI to provide an exit route for small
investors holding physical shares in securities mandated for compulsory
dematerialised settlement, the Exchange has provided a facility for such
trading in physical shares not exceeding 500 shares. This market segment
is referred to as 'Limited Physical Market' (small window). The Limited
Physical Market was introduced on June 7, 1999.
INSTITUTIONAL SEGMENT
The Reserve Bank of India had vide a press release on October 21,
1999,
clarified
that
inter-foreign-institutional-investor
(inter-FII)
transactions do not require prior approval or post-facto confirmation of

the Reserve Bank of India, since such transactions do not affect the
percentage of overall FII holdings in Indian companies. (Inter FII
37
transactions are however not permitted in securities where the FII

holdings have already crossed the overall limit due to any reason).
To facilitate execution of such Inter-Institutional deals in
companies where the cut-off limit of FII investment has been reached, the
Exchange introduced a new market segment on December 27, 1999. The
securities where FII investors and FII holding has reached the cut-off
limit as specified by RBI (2% lower than the ceiling specified by RBI)
from time to time would be available for trading in this market type for
exclusive selling by FII clients.
The cut off limits for companies with 24% ceiling is 22%, for
companies with 30% ceiling, is 28% and for companies with 40% ceiling
is 38%. Similarly, the cut off limit for public sector banks (including State
Bank of India) is 18% whose ceiling is 20%. The list of securities eligible
/ become ineligible for trading in this market type would be notified to
members from time to time.
TRADE FOR TRADE SEGMENT

Trading in this segment is available only for the securities
Which have not established connectivity with both the depositories
as per SEBI directive. The list of these securities is notified by
SEBI from time to time.
On account of surveillance action
38
STOCK MARKET: THE OTHER NAME OF RISK

Even the most disciplined long-term investors cannot resist
sneaking a quick look at the ticker while the market is in session. Most
people assume that if their portfolio gains a few notches, its a clear
vindication of their stock-picking skills. Price movements are considered
the ideal indicator of actual demand for a freely-traded stock.
Unfortunately most stocks are not quite as freely traded as the retail
investor imagines. And, markets definitely dont have perfect pricediscovery mechanisms. Thus, there are number of risks involved in the
stock market system
RATIONALE FOR REGULATION

Risk of Higher Volatility
Volatility refers to the dynamic changes in price that securities
undergo when trading activity continues on the Stock Exchange.
Generally, higher the volatility of a security, greater is its price
swings. There may be normally greater volatility in thinly traded
securities than in active securities. As a result of volatility, your
order may only be partially executed or not executed at all, or the
price at which your order got executed may be substantially
different from the last traded price or change substantially
thereafter, resulting in notional or real losses.
RISK OF LOWER LIQUIDITY
Liquidity refers to the ability of market participants to buy and sell
securities expeditiously at a competitive price and with minimal
price difference. Generally, it is assumed that more the numbers of
orders available in a market, greater is the liquidity. Liquidity is
39
important because with greater liquidity, it is easier for investors to

buy or sell securities swiftly and with minimal price difference, and
as a result, investors are more likely to pay or receive a competitive
price for securities purchased or sold. There may be a risk of lower
liquidity in some securities as compared to active securities. As a
result, your order may only be partially executed, or may be
executed with relatively greater price difference or may not be
executed at all.
RISK OF WIDER SPREADS
Spread refers to the difference in best buy price and best sell price.
It represents the differential between the price of buying a security
and immediately selling it or vice versa. Lower liquidity and higher
volatility may result in wider than normal spreads for less liquid or
illiquid securities. This in turn will hamper better price formation.
RISK-REDUCING ORDERS
Most Exchanges have a facility for investors to place "limit orders,
"stop loss orders" etc". The placing of such orders (e.g., "stop loss
orders, or "limit" orders) which are intended to limit losses to
certain amounts may not be effective many a time because rapid
movement in market conditions may make it impossible to execute
such orders.
RISK OF NEWS ANNOUNCEMENTS
Issuers make news announcements that may impact the price of
their securities. These announcements may occur during trading,
and when combined with lower liquidity and higher volatility, may
suddenly cause an unexpected positive or negative movement in
the price of the security.
40
RISK OF RUMOURS
Rumours about companies at times float in the market through
word of mouth, financial newspapers, websites or news agencies,
etc. The investors should be wary of and should desist from acting
on rumours.
Manipulation can prevent realistic price discovery, for instance.
Bull and bear operators possess the capital and the expertise to
either prop up stock prices to unrealistic levels or to hammer prices
down by supplying sizeable quantities of shares.
This can influence any stocks price and trading volumes and
unwary investors often fall into the trap of following a trend that
isnt actually there. If left unregulated, such a market can turn into
a happy hunting ground for the manipulator. Retail investors may
not have the knowledge to diagnose price-fixing activities and this
is why the bourses have to step in and create safeguards.
Stock exchanges are responsible for putting protective mechanisms
in place to lend stability to market movements and, to safeguard
investor interest. At the Indian bourses, two types of such
mechanisms exist.
41
PRICE CIRCUIT FILTER
One key tool of market regulation is the price circuit filter. By

setting a limit on price fluctuations within a given session, the stock
exchanges control manipulation. Circuit breakers are one way of tackling
the problem. The principle on which they operate is simple: when the
buying and selling of shares gets too frenzied, a circuit breaker is
triggered. It's almost like the fuse in your electrical meter.
A circuit breaker halts trading after a particular level (high or low
as the case may be) is reached. It is activated when the stock moves up or
down by a certain percentage (in terms of price).
If the regulator or the stock exchange decides to have a circuit
breaker at 20 percent, it will get triggered if the price of a stock moves up
or down by 20 per cent in one day. Circuit filter is applied to all the
shares to supposedly safeguard the interests of general investors from the
extreme volatilities in markets by preventing any unexpected fall or rise
in a single day beyond a limit. If the limit is crossed by any of the shares
in a single trading day it is frozen for trade.
42
A major characteristic of circuit-breakers is that it halts trading

when the limits are reached. On the contrary a circuit-filter is a ceiling
fixed on price movement. In other words assume a stock is trading at Rs
100. If the circuit ``breaker'' level is around 5 per cent, then trading will
stop if the stock touches either Rs 95 or Rs 105. If the circuit ``filter''
level is around 5 per cent, then it only means that traders cannot bid/ask
quotes below Rs 95 or above Rs 105. Hence, if traders are willing, they
can still trade within the prescribed band.
Once the circuit breaker is triggered, it halts further trading in the
stock either for a number of hours or for a day. This is to allow the
panic/ frenzy to subside and enable investors to take a cooler, more
rational view of the stock. These circuit breakers are based on the
movement of the big indices. At the BSE, the authorities monitor the
Sensex, while the NSE monitors the Nifty. If either of these benchmark
indices crosses the set limits, it triggers the circuit breaker and trading
halts.
There are actually three different circuit breakers calculated on the
basis of the previous trading days closing values. If any of these is
triggered it brings trading to a halt for some time (see table: Triggering
the Markets Fuse). In a sense it forces excited players in a volatile
market to step back and think again about their positions.
The market circuit-breaker is an emergency brakeits unlikely to be
invoked under normal circumstances. Only concerted movements in the
largest, well-known, institutionally-owned stocks can drive the Sensex or
Nifty up or down by large amounts. Thus, massive movements that
trigger circuit breakers are very infrequent.
43
CIRCUIT BREAKERS INTRODUCED

It was 27th September, 1996, when the concept of Circuit Breakers
was put forward by SEBI in their First meeting of Risk Management
System By Stock Exchanges. It was observed that prices of some of the
actively traded stocks at the major Exchanges showed huge variations on
different exchanges. In volatile situations leading to manipulation by
operators.
The members were of the view that fixing uniform filter bands on
daily basis may not be advisable and it should be left to the discretion of
the Exchanges. However, weekly price filter should be fixed at 25% for
all scrips quoting above par. This would keep abnormal variations in
check. For scrips quoting below par, the Exchange can consider relaxing
the bandwidth of 25%.
CIRCUIT BREAKERS AND NSE

The Exchange has implemented index-based market-wide circuit
breakers in compulsory rolling settlement with effect from July 02, 2001.
INDEX-BASED MARKET-WIDE CIRCUIT BREAKERS

The index-based market-wide circuit breaker system applies at 3
stages of the index movement, either way viz. at 10%, 15% and 20%.
These circuit breakers when triggered, bring about a coordinated trading
halt in all equity and equity derivative markets nationwide.
44
The market-wide circuit breakers are triggered by movement of

either the BSE Sensex or the NSE S&P CNX Nifty, whichever is
breached earlier.
In case of a 10% movement of either of these indices, there would
be a one-hour market halt if the movement takes place before 1:00
p.m. In case the movement takes place at or after 1:00 p.m. but
before 2:30 p.m. there would be trading halt for hour. In case
movement takes place at or after 2:30 p.m. there will be no trading
halt at the 10% level and market shall continue trading.
In case of a 15% movement of either index, there shall be a twohour halt if the movement takes place before 1 p.m. If the 15%
trigger is reached on or after 1:00p.m. but before 2:00 p.m., there
shall be a one-hour halt. If the 15% trigger is reached on or after
2:00 p.m. the trading shall halt for remainder of the day.
In case of a 20% movement of the index, trading shall be halted for
the remainder of the day.
These percentages are translated into absolute points of index
variations on a quarterly basis. At the end of each quarter, these absolute
points of index variations are revised for the applicability for the next
quarter.
The absolute points are calculated based on closing level of index
on the last day of the trading in a quarter and rounded off to the nearest
10 points in case of S&P CNX Nifty.
45
OTHER INITIATIVES BY NSE

The National Stock Exchange has been set up to ensure equal
access to the capital market to investors from all over the country. The
Exchange, with more than 9000 trading terminals across the country,
realises that the investor confidence is of primary importance. Given the
legal / regulatory complexities of the capital markets, the Exchange
realises that an enlightened investor is the moving force towards progress
of the markets. To this end, the Exchange has conducted a number of
Investor Awareness Programmes and has issued a number of
advertisements in various newspapers and other publications.
FORMATION OF IGC
The National Stock Exchange strive to continuously upgrade its
service levels and make the system more investor-friendly. Hence, to
redress investor complaints, the Investor Grievance Cell (IGC) have been
formed. The Investor Grievances Cell is manned by a team of
professionals who possess relevant experience in the areas of capital
markets, company and legal affairs; specially trained to identify the
problem faced by the investor, and to find and execute a solution at the
earliest. The IGC attends to various problems faced by investors in
dealing with the two integral parts of the Capital Markets, Trading
Members and Companies whose securities are traded on the Exchange.
The investors can report their complaints/ grievances to the IGC
through e-mails or Complaint forms. All valid complaints are assigned a
unique complaint no. and are entered into a database for easy follow up
46
and necessary action. Most complaints are resolved within a period of 45

days. On exhausting all means, if the matter remains unresolved, it is
referred to Arbitration.
ARBITRATION
Arbitration is an alternative dispute resolution mechanism provided
by the Exchange for resolving disputes between the trading members and
between trading members & constituents (i.e. clients of trading
members), in respect of trades done on the Exchange. This process of
resolving a dispute is comparatively faster than other means of redressal.
The facility of arbitration on the Exchange can be availed by:
1. Investors who have dealt on the Exchange through its trading
members and who possess a valid contract note issued by the
trading member of the Exchange.
2. Investors who have dealt on the Exchange through registered subbrokers of the trading members of NSE and who possess valid
sale/purchase note issued by the registered sub-broker.
3. Trading members who have a claim, dispute or difference with
another trading member or a constituent.
INVESTORS CENTRE
NSE's diverse network ensures that its investors avail of prompt
services whenever they might need them. NSE has a presence in all the
major cities of the country. The following are the locations of NSEs
investors centers:
47
1) NSE Corporate Office, BKC, Mumbai

2) NSE Branch Office, Ahmedabad
3) NSE Branch Office, Chennai
4) NSE Branch Office, Hyderabad
5) NSE Branch Office, Delhi
6) NSE Branch Office, Kolkatta
INVESTOR PROTECTION FUND
Investor Protection Fund (IPF) has been set up as a trust under

Bombay Public Trust Act, 1950 under the name and style of National
Stock Exchange Investor Protection Fund Trust and is administered by
the Trustees. The IPF is maintained by NSE to make good investor
claims, which may arise out of non-settlement of obligations by the
trading member, who has been declared defaulter, in respect of trades
executed on the Exchange. The IPF is utilised to settle claims of such
investors where the trading member through whom the investor has dealt
has been declared a defaulter. Payments out of the IPF may include
claims arising of non payment/non receipt of securities by the investor
from the trading member who has been declared a defaulter.
48
NSE AND SECONDARY MARKET

INTERMEDIARIES
STOCK BROKER
A Stock Broker plays a very important role in the secondary market

helping both the seller and the buyer of the securities to enter in to a
transaction. The buyer and seller may be either a broker or a client. A
broker is an intermediary who arranges to buy and sell securities on
behalf of clients (the buyer and the seller).
According to Rule 2 (e) of SEBI (Stock Brokers and Sub-Brokers)
Rules, 1992, a stockbroker means a member of a recognized stock
exchange. No stockbroker is allowed to buy, sell or deal in securities,
unless he or she holds a certificate of registration granted by SEBI. A
stock-broker shall not buy, sell, and deal in securities, unless he holds a
certificate granted by SEBI.
49
CONDITIONS FOR GRANT OF CERTIFICATE TO

STOCK-BROKER BY SEBI
A stockbroker applies for registration to SEBI through a stock
exchange or stock exchanges of which he or she is admitted as a member.
SEBI may grant a certificate to a stock-broker [as per SEBI (Stock
Brokers and Sub-Brokers) Rules, 1992] subject to the conditions that:
He holds the membership of any stock exchange;
He shall abide by the rules, regulations and bye-laws of the stock

exchange or stock exchanges of which he is a member;
In case of any change in the status and constitution, he shall obtain

prior permission of SEBI to continue to buy, sell or deal in
securities in any stock exchange;
He shall pay the amount of fees for registration in the prescribed

manner; and
He shall take adequate steps for redressal of grievance of the

investors within one month of the date of the date of the receipt of
the complaint and keep SEBI informed about the number, nature
and other particulars of the complaints.
MEMBERSHIP AT NSE
There are no entry/exit barriers to the membership in NSE.
Anybody can become member by complying with the prescribed
eligibility criteria and exit by surrendering membership without any
hidden/overt cost. The members are admitted to the different segments of
the Exchange subject to the provisions of the Securities Contracts
50
(Regulation) Act, 1956, the Securities and Exchange Board of India Act,
1992, the Rules, circulars, notifications, guidelines, etc., issued there
under and the Bye laws, Rules and Regulations of the Exchange.
The standards for admission of members laid down by the
Exchange stress on factors such as, corporate structure, capital adequacy,
track record, education, experience, etc. and reflect a conscious effort on
the part of NSE to ensure quality broking services so as to build and
sustain confidence among investors in the Exchange's operations.
BENEFITS OF MEMBERSHIP
Benefits to the trading membership of NSE include:
Access to a nation-wide trading facility for equities, derivatives,
debt and hybrid instruments / products.
Ability to provide a fair, efficient and transparent securities market
to the investors
Use of state-of-the-art electronic trading systems and technology,
ACQUIRING MEMBERSHIP
Membership of NSE is open to all persons desirous of becoming
trading members, subject to meeting requirements/criteria as laid down
by SEBI and the Exchange.
The different segments currently available on the Exchange for
trading are:
Capital Market (Equities and Retail Debt)
Wholesale Debt Market
51
Derivatives (Futures and Options) Market

Admission to membership of the Exchange to any of the segments
is currently open and available. Persons or Institutions desirous of
securing admission as Trading Members (Stock Brokers) on the
Exchange may apply for any one of the following segment groups:
1. Wholesale Debt Market Segment
2. Capital Market and Wholesale Debt Market segments
3. Capital Market and Futures & Options segments
4. Capital Market , Wholesale Debt Market and Futures & Options
segment
5. Clearing
Membership of (NSCCL) as a Professional Clearing
Member (PCM)
SUB BROKERS
A sub-broker is a person who intermediates between investors and
stockbrokers. He acts on behalf of a stockbroker as an agent or otherwise
for assisting the investors for buying, selling or dealing in securities
through such stockbroker. No sub-broker is allowed to buy, sell, or deal in
securities, unless he or she holds a certificate of registration granted by
SEBI. A sub-broker may take the form of a sole proprietorship, a
partnership firm or a company. Stockbrokers of the recognized stock
exchanges are permitted to transact with sub-brokers. Sub-brokers are
required to obtain certificate of registration form SEBI in accordance with
SEBI (Stockbrokers and sub-brokers) Rules and Regulations, 1992,
withouth which they are not permitted to buy, sell or deal in securites.
52
CONDITIONS FOR GRANT OF CERTIFICATE TO A

SUB BROKER BY SEBI
SEBI may grant a certificate to a sub-broker, subject to the
conditions that:
He shall pay the fees in the prescribed manner;
He shall take adequate steps for redressal of grievances of the
investors within one month of the date of the receipt of the
complaint and keep SEBI informed about the number, nature and
other particulars of the complaints received.
In case of any change in the status and constitution, the sub-broker
shall obtain prior permission of SEBI to continue to buy, sell or
deal in securities in any stock exchange; and
He is authorized in writing by a stockbroker being a member of a
stock exchange for affiliating himself in buying, selling or dealing
in securities.
53
PORTFOLIO MANAGERS
A Portfolio manager is a professional with experience and expertise

in the field. He studies the marketand adjust the investment mix for his
client on a continuing basis to ensure safety of investment and reasonable
returns there from. Any person who pursuant to a contract or arrangement
with a client, advises or directs or undertakes on behalf of the client
(whether as a discretionary portfolio manager or otherwise) the
management or administration of a portfolio of securities or the funds of
the client, as the case may be is a portfolio manager.
SEBI takes into account all matters which it deems relevant to the
activities relating to portfolio management. The applicant has to be a
body corporate and must have necessary infrastructure like adequate
office space, equipments and the manpower to effectively discharge the
activities of a portfolio manager. The principal officer of the applicant
should have the professional qualifications in finance, law, accountancy
or business management from an institution recognised by the
Government.
54
CUSTODIAN
Custodian of Securities means any person who carries on or
proposes to carry on the business of providing custodial services.
Custodial Services in relation to securities means safekeeping of
securities of a client and providing services incidental thereto, and
includes
Maintaining accounts of securities of a client;
Collecting the benefits or rights accruing to the client in respect of

securities;
Keeping the client informed of the actions taken or to be taken by

the issuer of securities, having a bearing on the benefits or rights
accruing to the client; and
Maintaining and reconciling records of the services.
JOBBER
A jobber is a specialist and independent dealer in securities. A
jobber has to give two quotations as a dealer in securities. He gives lower
quotation for buying and higher quotation for selling the securities.
Jobber deals only with the brokers and not with the investors. His margin
is fixed by competition among themselves as dealers. The margin is
narrow when there is keen competition.
TARANIWALA
A jobber who makes an orderly and continous auction in the stock
market is called Taraniwala. He is a localized dealer who handles
transactions on a commission basis for other brokers who act on behalf
of their customers. He trades in the stock market even for small
differences in price and helps to maintain liquidity in the stock market.
55
ODD LOT DEALER

These are specialists who handles the odd lots. The standard
trading unit for listed stock is called lot. The shares are normally traded
in the lots of 5, 50, 100 etc. However, the minimum lot has become 1 due
to dematerialisation. But all the listed stocks are not compulsorily in the
demat form. Odd lot dealers buy odd lots which other members wish to
sell for their customers and sell odd lots which others want to buy. The
price of odd lots is determined by the round lot transactions. The odd lot
dealer earns his profit on the difference between the purchase and sales
price.
ARBITRAGEUR
An arbitrageur is a specialist in dealing with securities in different
stock exchange centers at the same time. He makes the profit by
difference in the prices prevailing in different centers of market activity.
He carries out these transactions with a good communication system and
telephonic and teleprinter facility. He should have ability to get the prices
from different centers before other members trading in the stock market.
SECURITY DEALER
The members who purchase and sale of government securities on
the stock exchange are known as Security Dealers. Each transaction has
to be separately negotiated. The dealers should have information about
the several kinds of government securities. They take risk in ready
purchase and sale of securities for current requirements. Their role is
restricted by the participation of LIC and Commercial Banks.
56
NSE: THE FUTURE PROSPECTS
The decision at NSE to use a demutualised structure was an

important innovation. If NSE had been own by brokerage firms, it would
have had greater incentives to maximise the profit rates of brokerage
firms. Instead, the fact that large institutional investors owned NSE,
helped ensure that the prime goal that NSE worked towards was the
reduction of transactions costs, even if it involved reduced profit rates for
brokerage firms. While NSE has been an extremely successful
organisation, there are two important areas of concern when we visualise
its functioning in the future:
CAPTURE
The governance of NSE suffers from important vulnerabilities that
flow from its being a public sector organisation. Now that NSE is the
most important securities exchange in the country, there is likely to be
significant interest on the part of political actors to capture NSE and
derive rents from it. The constituency which benefits from a well
functioning securities exchange (households engaging in saving across
the country) has too little at stake to engage in political actions which
favour a soundly run NSE.
57
COST MINIMISATION AND INNOVATION

It increasingly appears that NSE faces little competitive pressure
from other securities exchanges in India. Given the public-sector
ownership of NSE, there is a real possibility that NSE may be weak on
cost minimisation and innovation in the years to come.
Policy makers should be conscious of these two vulnerabilities
about NSE in the future. As with SEBI, it is important to undertake
special efforts to bring the diffused beneficiaries of sound securities
markets to have a greater impact upon decision making at NSE.
This can work in two directions:
1.
INDIAN PRODUCTS TRADED OFFSHORE

As of today, Indian firms do list offshore, and index futures on the
NSE-50 index do trade at Singapore. These offshore trading venues
constitute some competition for NSE. For example, the
transactions charges in NSE-50 futures trading at Singapore have
been an important source of pressure for NSE to lower charges for
NSE-50 futures trading in India.
2.
OFFSHORE PRODUCTS TRADED IN INDIA

Conversely, international products traded at NSE would also serve
as competitive situations which could help constrain governance
and cost minimisation at NSE.
The extent to which the international financial system imposes
competitive pressures upon NSE today is quite limited. However it can be

substantially expanded in the future. This can play a valuable role in
giving NSE incentives in favour of innovation and cost-minimisation.
58
BOND MARKETS
WHAT IS A BOND?
Bonds are debt. They are debt because when an investor buys a
bond they are effectively loaning the bonds issuer a sum of money and
that issuer is incurring a debt. So the issuer or seller of the bond - is a
borrower and the investor - or buyer of the bond - is a lender.
The price paid for the bond is the money the investor is loaning the
issuer. And, like most other loans, when you buy a bond the borrower
pays you interest for as long as the loan is outstanding and then at the
end of the agreed period of the loan pays you the loan back.
THE BOND MARKET

The bond market (also known as the debt, credit, or fixed income
market) is a financial market where participants buy and sell debt
securities, usually in the form of bonds. As of 2006, the size of the
international bond market is an estimated $45 trillion, of which the size of
the outstanding U.S. bond market debt was $25.2 trillion.
59
Average daily trading volume in the U.S. bond market takes place
between broker-dealers and large institutions in a decentralized, over-thecounter (OTC) market. However, a small number of bonds, primarily
corporate, are listed on exchanges.
MARKET STRUCTURE
Bond markets in most countries remain decentralized and lack
common exchanges like stock, future and commodity markets. This has
occurred, in part, because no two bond issues are exactly alike, and the
number of different securities outstanding is far larger.
SHORT TERM DEBT INSTRUMENT

1.
BANKERS ACCEPTANCE BA
This instrument is used to finance domestic as well as international
trade. On completing the transaction, the exporter hands over the
shipping documents and letter of credit LC issued by the importers
bank to its own bank. At the same time, the exporter draws a draft
(or bill) on the importers bank and gets paid the discounted value
of the draft. A bankers acceptance (BA) is created when the
exporters bank presents the draft to the importers bank which
accepts it. This BA may be sold (or discounted) as a money market
instrument or the exporter may keep it as an asset with himself. Bas
are highly standardized negotiable instruments and are available in
varying amounts. They permit importers and other users to obtain
credit on better terms than simple borrowing.
60
2.
EURO COMMERCIAL PAPER

Euro commercial paper is a short term Euro note issued by
corporates on a discountto-yield basis. Investor in ECP may be
money market funds, insurances companies, pension funds and
other corporate bodies having short-term cash surpluses. For
investor s, it represents an attractive short-term investment
opportunity, unlike a time deposit with financial institution. For
borrowers, it is a cheap and flexible source of funds, cheaper than
bank loans. As mentioned above, a CP or ECP is a discount
redeemed at face value on maturity. For example, an ECP issued at
$952.4 with a maturity of 180 days will have a face value of
$1,000, if the discount rate is 10 % pa.
3.
EURO CERTIFICATE OF DEPOSIT (ECD)

A certificate of deposit is an evidence of a deposit with a bank. CD
is a negotiable or marketable instrument. Unlike a bank term
deposit, a CD can be sold in the secondary market whenever cash
is needed. Who ever is holding it at the time of maturity receives its
face value in addition to the interest due. Euro CDs are issued by
London banks. The interest on floating rate CDs is indexed to
LIBOR and Treasury Bill rate, etc. These instruments may be
issued in sum like $1, 00,000 or more. For fixed rate CDs, usually
there is a single period maturity when principal and interest are
paid.
61
BOND MARKET PARTICIPANTS

Bond market participants are similar to participants in most
financial markets and are essentially either buyers (debt issuer) of funds
or sellers (institution) of funds and often both.
Participants include:
Institutional investors;
Governments;
Traders; and
Individuals
BOND MARKET VOLATILITY

For market participants who own a bond, collect the coupon and
hold it to maturity, market volatility is irrelevant; principal and interest
are received according to a pre-determined schedule.
But participants who buy and sell bonds before maturity are
exposed to many risks, most importantly changes in interest rates. When
interest rates increase, the value of existing bonds falls, since new issues
pay a higher yield. Likewise when interest rates decrease, the value of
existing bonds rise since new issues pay a lower yield. This is the
fundamental concept of bond market volatility: changes in bond prices
are inverse to changes in interest rates. Fluctuating interest rates are part
of a country's monetary policy and bond market volatility is a response to
expected monetary policy and economic changes.
62
BOND INDICES
A number of bond indices exist for the purposes of managing
portfolios and measuring performance, similar to the S&P 500 or Russell
Indexes for stocks. The most common American benchmarks are the
Lehman Aggregate, Citigroup BIG and Merrill Lynch Domestic
Master. Most indices are parts of families of broader indices that can be
used to measure global bond portfolios, or may be further subdivided by
maturity and/or sector for managing specialized portfolio Issuing bonds
Bonds are issued by public authorities, credit institutions,
companies and supranational institutions in the primary markets. The
most common process of issuing bonds is through underwriting. In
underwriting, one or more securities firms or banks, forming a syndicate,
buy an entire issue of bonds from an issuer and re-sell them to investors.
Government bonds are typically auctioned.
FEATURES OF BONDS
The most important features of a bond are:
1.
NOMINAL, PRINCIPAL OR FACE AMOUNT:

The amount on which the issuer pays interest and which has to be
repaid at the end.
2.
ISSUE PRICE
The price at which investors buy the bonds when they are first
issued, typically $1,000.00. The net proceeds that the issuer
receives are calculated as the issue price, less issuance fees, times
the nominal amount.
63
3.
MATURITY DATE
The date on which the issuer has to repay the nominal amount. As
long as all payments have been made, the issuer has no more
obligations to the bond holders after the maturity date.
4.
TENURE
The length of time until the maturity date is often referred to as the
term or tenure or maturity of a bond. The maturity can be any
length of time, although debt securities with a term of less than one
year are generally designated money market instruments rather
than bonds. Most bonds have a term of up to thirty years. Some
bonds have been issued with maturities of up to one hundred years,
and some even do not mature at all. In early 2005, a market
developed in euros for bonds with a maturity of fifty years. In the
market for U.S. Treasury securities, there are three groups of bond
maturities:
short term (bills): maturities up to one year;
medium term (notes): maturities between one and ten years;
Long term (bonds): maturities greater than ten years.
5.
INDENTURES AND COVENANTS

An indenture is a formal debt agreement that establishes the terms
of a bond issue, while covenants are the clauses of such an
agreement. Covenants specify the rights of bondholders and the
duties of issuers, such as actions that the issuer is obligated to
perform or is prohibited from performing. In the U.S., federal and
state securities and commercial laws apply to the enforcement of
these agreements, which are construed by courts as contracts
between issuers and bondholders.
64
6.
OPTIONALITY:
A bond may contain an embedded option; that is, it grants optionlike features to the holder or the issuer:
7.
CALLABILITY:
Some bonds give the issuer the right to repay the bond before the
maturity date on the call dates; see call option. These bonds are
referred to as callable bonds. Most callable bonds allow the issuer
to repay the bond at par. With some bonds, the issuer has to pay a
premium, the so called call premium. This is mainly the case for
high-yield bonds. These have very strict covenants, restricting the
issuer in its operations. To be free from these covenants, the issuer
can repay the bonds early, but only at a high cost.
8.
PUTTABILITY
Some bonds give the holder the right to force the issuer to repay
the bond before the maturity date on the put dates; ("Puttable"
denotes an embedded put option; "Puttable" denotes that it may be
putted.)
9.
CALL DATES AND PUT DATES

The dates on which callable and Puttable bonds can be redeemed
early. There are four main categories.
A Bermudan callable has several call dates, usually coinciding
with coupon dates.
A European callable has only one call date. This is a special
case of a Bermudan callable.
65
An American callable can be called at any time until the

maturity date.
A death put is an optional redemption feature on a debt
instrument allowing the beneficiary of the estate of the deceased
to put (sell) the bond (back to the issuer) in the event of the
beneficiary's death or legal incapacitation. Also known as a
"survivor's option".
Sinking fund provision of the corporate bond indenture requires
a certain portion of the issue to be retired periodically. The
entire bond issue can be liquidated by the maturity date. If that
is not the case, then the remainder is called balloon maturity.
Issuers may either pay to trustees, which in turn call randomly
selected bonds in the issue, or, alternatively, purchase bonds in
open market, then return them to trustees.
TYPES OF BONDS
1. Fixed rate bonds have a coupon that remains constant throughout
the life of the bond.
2. Floating rate notes (FRN's) have a coupon that is linked to an
Index. Common Indices include: money market indices, such as
LIBOR or Euribor, or CPI (the Consumer Price Index). Coupon
examples: three month USD LIBOR + 0.20%, or twelve month
CPI + 1.50%. FRN coupons reset periodically, typically every one
or three months. In theory, any Index could be used as the basis for
the coupon of an FRN, so long as the issuer and the buyer can
agree to terms.
66
3. High yield bonds are bonds that are rated below investment grade
by the credit rating agencies. As these bonds are more risky than
investment grade bonds, investors expect to earn a higher yield.
These bonds are also called junk bonds.
4. Zero coupon bonds do not pay any interest. They are issued at a
substantial discount from par value. The bond holder receives the
full principal amount on the redemption date.
5. Asset-backed securities are bonds whose interest and principal
payments are backed by underlying cash flows from other assets.
Examples
of
asset-backed
securities
are
mortgage-backed
securities (MBS's), collateralized mortgage obligations (CMOs)

and collateralized debt obligations (CDOs).
6. Perpetual bonds are also often called perpetuities. They have no
maturity date. The most famous of these are the UK Consol, which
are also known as Treasury Annuities or Undated Treasuries. Some
of these were issued back in 1888 and still trade today. Some ultra
long-term bonds (sometimes a bond can last centuries: West Shore
Railroad issued a bond which matures in 2361 (i.e. 24th century))
are sometimes viewed as perpetuities from a financial point of
view, with the current value of principal near zero.
7. Bearer bond is an official certificate issued without a named holder.
In other words, the person who has the paper certificate can claim
the value of the bond. Often they are registered by a number to
prevent counterfeiting, but may be traded like cash. Bearer bonds
are very risky because they can be lost or stolen. Especially after
federal income tax began in the United States, bearer bonds were
seen as an opportunity to conceal income or assets. U.S.
67
corporations stopped issuing bearer bonds in the 1960s, the U.S.

Treasury stopped in 1982, and state and local tax-exempt bearer
bonds were prohibited in 1983.
8. Registered bond is a bond whose ownership (and any subsequent

purchaser) is recorded by the issuer, or by a transfer agent. It is the
alternative to a Bearer bond. Interest payments, and the principal
upon maturity, are sent to the registered owner.
9. Municipal bond is a bond issued by a state, U.S. Territory, city,
local government, or their agencies. Interest income received by
holders of municipal bonds is often exempt from the federal
income tax and from the income tax of the state in which they are
issued, although municipal bonds issued for certain purposes may
not be tax exempt.
10.Book-entry bond is a bond that does not have a paper certificate.
As physically processing paper bonds and interest coupons became
more expensive, issuers (and banks that used to collect coupon
interest for depositors) have tried to discourage their use. Some
book-entry bond issues do not offer the option of a paper
certificate, even to investors who prefer them.
11.Lottery bond is a bond issued by a state, usually a European state.
Interest is paid like a traditional fixed rate bond, but the issuer will
redeem randomly selected individual bonds within the issue
according to a schedule. Some of these redemptions will be for a
higher value than the face value of the bond.
12.War bond is a bond issued by a country to fund a war.
68
13.Convertible bond lets a bondholder exchange a bond to a number

of shares of the issuer's common stock.
CONCLUSION
How to manage capital inflows remains an important policy issue
for many emerging market economies. The issue has assumed even
greater importance in recent years as the volume of capital flows picked
up against the background of increasing global financial integration. In
this environment, even countries without a fully open capital account can
no longer consider themselves immune from the risks of capital inflows
as they liberalize their trade regime and domestic financial system.
Current account convertibility substantially reduces the ability of a
control regime to manage capital flows, while financial liberalization
increases substitutability among different types of capital account
transactions. Once a certain threshold of economic openness and financial
market development is reached, a partially open capital account may not
effectively protect an economy from the volatility of international capital
flows.
The Project provides little practical guidance on capital account
liberalization, except to advocate the need for pursuing sound
macroeconomic policies and establishing an effective framework of
prudential regulation. The difficulty of identifying the precise sequencing
of steps comes from the fact that the risks of capital inflows are specific
to each transaction and are difficult to measure. Countries with a fully
open capital account may resort to the use of temporary capital controls
or prudential regulations, but it requires a high degree of administrative
capacity to implement them effectively. With respect to the use of
69
conventional macroeconomic measures, the existing literature may

provide guidance on good practice, suggesting for example the greater
effectiveness of fiscal tightening relative to other measures.
BIBLIOGRAPHY
1. www.google.com.
2. www.yahoo.com.
3. www.economywatch.com
4. www.indiacapitalmarket. In
5. www.ask.com
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CAPITAL MARKET IN INDIA

CAPITAL MARKET IN INDIA

ABOUT CAPITAL MARKET

ROLE AND IMPORTANCE OF CAPITAL MARKETS IN

CAPITAL MARKET IN INDIA

GROWTH OF CAPITAL MARKET IN INDIA

National Securities Clearing

Clearing Corporation of India

CAPITAL MARKET IN INDIA

Securities market consists of two segments, viz.,

CAPITAL MARKET IN INDIA

CAPITAL MARKET IN INDIA

WHY WAS THE EXCHANGE BORN?

CAPITAL MARKET IN INDIA

The stock trading history in India is obscured in the mists of time.

CAPITAL MARKET IN INDIA

CAPITAL MARKET IN INDIA

LIST OF STOCK EXCHANGES OPERATING IN INDIA

The Stock Exchange, Ahmedabad

Calcutta Stock Exchange Association Ltd., Calcutta

Madras Stock Exchange Association Ltd , Madras

Delhi Stock Exchange Association Ltd, Delhi

Hyderabad Stock Exchange Ltd, Hyderabad

Madhya Pradesh Stock Exchange, Indore

Bangalore Stock Exchange Ltd., Bangalore

Cochin Stock Exchange Ltd., Cochin

The Uttar Pradesh Stock Exchange Association Ltd., Kanpur

Pune Stock Exchange Ltd., Pune

Ludhiana Stock Exchange Association Ltd., Ludhiana

Gauhati Stock Exchange Ltd., Gauhati

Magadh Stock Exchange Ltd., Gauhati

Mangalore Stock Exchange Ltd., Mangalore

Jaipur Stock Exchange Ltd., Jaipur

Bhubaneshwar Stock Exchange Association Ltd.,

Vadordara Stock Exchange Ltd., Vadodara

Coimbatore Stock Exchange Ltd., Coimbatore

National Stock Exchange of India Ltd., Mumbai

Capital Stock Exchange of Kerala Ltd., Thiruvanathapuram

CAPITAL MARKET IN INDIA

NATIONAL STOCK EXCHANGE

The National Stock Exchange of India Limited has genesis in the

CAPITAL MARKET IN INDIA

HISTORICAL BACK GROUND

CAPITAL MARKET IN INDIA

The list is reviewed at periodic intervals. From 26th December

IMPORTANCE OF NSE IN INDIAN SECONDARY

CAPITAL MARKET IN INDIA

intermediaries and is managed by professionals, who do not directly or

CAPITAL MARKET IN INDIA

CAPITAL MARKET IN INDIA

for post-trade activities

margins/collateral/base capital/other funds. Various

committees have been constituted to advise on areas such as good market

To bring and sustain confidence in clearing and settlement of

To promote and maintain, short and consistent settlement cycles;

CAPITAL MARKET IN INDIA

To provide counter-party risk guarantee, and

To operate a tight risk containment system.

NATIONAL SECURITIES DEPOSITORY LTD. (NSDL)