STOCK EXCHANGE

STOCK EXCHANGE is an organized market place, either corporation or mutual

organization, where members of the organization gather to trade company stocks or other
securities.

Stock Exchange also facilitates for the issue and redemption of securities and other
financial instruments including the payment of income and dividends. The trade on an
exchange is only by members and stock broker who have a seat on the exchange.

Some of the Stock Exchanges are

--New York Stock Exchange (NYSE)
--National Stock Exchange (NSE)
--Bombay Stock Exchange (BSE)
--Regional Stock Exchange (RSE)

Stock Exchange being a very vast topic, we are focusing on BOMBAY STOCK
EXCHANGE (BSE).

BOMBAY STOCK EXCHANGE (BSE)

The Bombay Stock Exchange Limited, (formerly, the Stock Exchange, Mumbai; popularly
called as BSE) is the oldest Stock Exchange in Asia with a rich heritage. It is located at
Dalal Street, Mumbai, India.

BSE was established in 1875 as “The Native Share & Stock Brokers”. It was the
first Stock Exchange in the country to obtain permanent recognition in 1956 from The
Government of India under The Securities Contracts (Regulation) Act 1956. There are
around 3500 Indian companies listed with Stock Exchange and has a significant trading
volume.

The Exchange is professionally managed under the over all direction of the Board
Of Directors. The Board comprises eminent professional, representative of Trading
Members and the Managing Directors of the Exchange. The Board is inclusive & is
designed to benefit from the participation of market intermediaries.

As of July ’05, the market Capitalization of BSE was about Rs.20 Trillion (US $466
Billion). As of 2005, it is among the five biggest Stock Exchanges in the world in terms of
transactions volume. Along with NSE, the companies listed on BSE have a combined
market Capitalization of US $125.5 Billion.
 NEED FOR BSE

BSE is one of the factors Indian Economy depends upon. BSE has played a major role in the
development of the country. Through BSE, Foreign Investors have invested in India. Due to
inward flow of foreign currency the, the Indian economy have started showing the upward trend
towards the development of the country.

BSE provides employment for many people. Trading in BSE is also a business for a few, their
family income depends on it, that is the reason why when scandals occur in the stock market it
not only affects the companies listed but also affects many families. In the few extreme cases, it
is observed that the bread winner of a family tends to suicide due to the losses occurred.

In most of major industrial cities all over the world, where the businesses were evolving and
required investment capital to grow and thrive, stock exchanges acted as the interface between
Suppliers and Consumers of capital. One of the key advantages of the stock exchanges is that
they are efficient medium for raising resources and channeling savings from the general public
by the way of issue of Equity / Debt Capital by joint stock companies which are listed on stock
exchanges.

Not to forget that the taxes and other statutory charges paid by BSE are substantial and make a
sizeable contribution to the Government exchequer (Financial resources; funds). For example,
transactions on the stock exchanges are subject to stamp duties, which is paid to the State
Government. The annual revenue from this source ranges from Rs 75 – 100 crores

With the opening up of the financial markets to Foreign Investors a number of foreign
institutional investors and brokers have established a sizeable presence in Mumbai.

With no doubt we can clearly state without BSE, the Indian Economy would have been a
complete different story. Various companies wouldn’t have been a strong and successful as they
are today and the brokers and traders would have been elsewhere.

BSE is an asset to our country and its existence plays a vital role in many people’s life who
depends on it. Indeed, BSE has made a major contribution to the industrial and economic
development of India.

FUNCTIONS OF BSE

The Stock Market is a pivotal institution in the financial system. A well-ordered stock
market performs several economic functions:

• It ensures the measure of safety and fair dealing

• It performs an ‘act of magic’ by translating short-term investments into
long-term funds for companies.
• It directs the flow of capital in the most profitable channels.
• It induces companies to raise their standard of performance.
• It offers guidance to management about the cost of capital.

LISTING OF THE COMPANIES ON STOCK EXCHANGE

Public Limited Company.

• Public Listed Company
• Public Non-listed Company

‘Listed Company’ means a public ltd Co which is

--Listed on any one or more recognized stock exchanges in India.
--Securities (shares: debentures) of such company are traded on such stock exchanges.

‘Unlisted company’ therefore means a company whose securities are not listed on any of
recognized stock exchanges in India.

Why Companies get Listed with Stock Exchange?

Companies get listed with Stock Exchange for following reasons:

--Securities are freely transferable.

--Easy liquidity of securities.
--Easy availability of prices of securities.
--Reputation, Image, Goodwill.
--Public awareness.
--More transparency.
--Helps in obtaining loans from Banks/Institutions.
--Helps in marketing its Products.

In order to list securities of a company & get its shares traded on any recognized stock
exchanges, the Public Ltd Company may either come out wit ha public issue (i.e. to
offer further securities to public) or make an offer for sale of existing securities to
public. This can be done by issuing of Prospectus & Complying with all The Provinces
of Company Act 1956.

Each stock exchange has its own criteria for listing securities which should also be met.
Eg: If company intends to get listed its securities in Bombay Stock Exchange, Mumbai
post issue capital (paid up capital after proposed public issue) of such companies should
be Rs. 10 Crores atleast.

The Company enters into a listing agreement with concerned stock exchange & on
receipt of permission from concerned Stock Exchange, company is listed and securities
are thereafter traded on such stock exchange.
 TRADING & SETTLEMENT

Demat Account is a compulsory Account for traders who want to trade in stock market.
This account is mainly used for buying and selling of shares.

Trading:

Each Stock Exchange has listed and permitted securities that are traded on it. There are two
ways of organizing the trading activity.

Open Outcry System

Under the open outcry system traders shout and resort to signals on the trading floor of the
exchange which consists of several ‘notional’ trading posts for different securities. A
member (or his representative) wishing to buy or sell a certain security, reaches the trading
post where the security is traded. Here, he comes in contact with others interested in
transacting in that security. Buyers make their bid and sellers make their offers and
bargains are closed at mutually agreed-upon prices. In stock where jobbing is done, the
jobber plays an important role. He stands ready to buy or sell on his account. He quotes his
bid (buying) and ask (selling) prices. He provides some stability and continuity to the
market.

Screen Based System

In the screen-based system the trading ring is replaced by the computer screen and distant
participants can trade with each other through the computer network. A large screen based
trading system (a) enhances the informational efficiency of the market as more participants
trade at a faster speed; (b) permits the market participants to get a full view of the market,
which increases their confidence in the market; and (c) establishes transparent audit trails.

Settlement:

The settlement of transactions is done on a settlement period basis. Earlier, the settlement
period on the Indian Stock Exchanges was 7 days, but now it is T+1 settlement. T+1
includes the day of trade and an additional day. During a settlement period, buying and
selling transactions in a particular security can be squared up. Square off is a same day
settlement cycle. At the end of settlement period, transactions are settled on net basis. Since
the settlement period used to be 7 days and the settlement is for the net position, most of
the transactions are squared within the settlement period. Clearly these transactions are
motivated by a desire to profit from price variations within the settlement period.

Traditionally, trades have been settled by physical delivery. This means that the securities
have to physically move from the seller to the seller’s broker, from the seller’s broker to the
buyer’s broker (through the clearing house of the exchange or directly), and from the
buyer’s broker to the buyer. Further the buyer has to lodge the securities with the transfer
agents of the company and the process of the transfer may take one to three months. This
leads to high paperwork cost and creates bad paper risks.

To mitigate the cost and the risks associated with the physical delivery, settlement in the
developed securities market is mainly through electronic delivery facilitated by
depositories. A ‘depository’ is an institution which immobilizes physical certificates (of
securities) and effect transfers of ownership by electronic book entry. A beginning in the
direction of electronic delivery has been made in India with the establishment of the
National Securities Depository Limited (NSDL), India’s first depository, in 1996. As
NSDL expands its operations and as new depositories come into being, settlement will
progressively be done more by electronic delivery and less by physical delivery.

TRANSFORMATION OF THE STOCK EXCHANGE, MUMBAI TO BSE LTD.

The change in the name of Asia's oldest stock exchange, from the Stock
Exchange, Mumbai to the Bombay Stock Exchange Ltd., (BSE Ltd.) is of
more than cosmetic significance. Along with the change in name comes a new perspective, one
brought about by a comprehensive change in its
ownership and management. Until now, the BSE like most other exchanges in India was owned
and managed by brokers, who also had the sole right to trade in the exchanges. Conflicts of
interest were bound to arise in such situations. Until the advent of the National Stock Exchange
in 1994, the BSE was India's pre-eminent exchange, accounting for an overwhelmingly large
proportion of the share market transactions of the country. Companies wherever located were
advised to seek a listing of their shares on the BSE so that they could have access to its large
reservoir of capital and investor base. Legally speaking, it was enough if they listed their shares
on any one of the regional stock exchanges, closest to their registered office. This last rule, like
so many others connected with the securities market, had to be discarded in the wake of the
sweeping changes in the financial markets since the 1990s. Perceptions of both investors and
regulators changed dramatically forcing the stock exchanges to overhaul themselves.

A series of securities scams through the 1990s in which brokers were invariably held
accountable, the inability of the broker-dominated exchanges to check malfeasance, and a vastly
expanding role for the capital market in the national economy necessitated a thorough review of
the age-old stock market structure. In the new demutualised and corporatised exchanges that
came about as part of a major capital market reform a time-bound program for 10 other
exchanges has since been announced — the right to trade is segregated from the right to own and
manage the exchange. The transition is not going to be easy as it involves the imparting of a
much greater degree of professionalism. Stock market professionals from outside the broking
community are reportedly in short supply. By far the biggest unknown factor relates to the future
ownership of the exchange. Brokers will cede control and investors including retail ones will
hold a substantial portion of the exchange's equity. Apart from this being totally new to India, it
does raise the possibility of other conflicts of interest including the one connected with the listing
of its own shares.
CONCLUSION

With the increasing Globalization, the Stock Exchange’s have tremendously affected the
financial conditions of India.

The stock markets of the future will have a redefined pupose and reinvented architecture
due to the advent and widespread use of technology. Information and stock price
quotations are available almost instantaneously, and, more importantly, investors can act on
this data by executing a trade from anywhere at anytime. This new market will bring
benefits to investors, the listed companies, and the economies of the company. Trading will
become cheaper, faster and settlement will be simpler wit reduced risk. Raising capital for
companies will become easier, thereby contributing directly to the Economic Growth.

Already, BSE has shown its proactive response by increasingly using leading edge to
technologies to effectively compete in the global environment. In the not too distant future,
once full capital account convertibility is permitted in India, one could well witness an
expansion of trading volumes and its resultant economic benefits to the thriving and ever
young metropolis of Mumbai.

Inspite of all these positive predictions, the future of Stock Exchanges is likely to be
uncertain and even their survival is a major question mark.
 National Stock Exchange
The National Stock Exchange of India Limited was set upon the basis of the recommendations of
the High Powered Study Group on Establishment of New Stock Exchanges. On its recognition as
a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSF
commenced operations in the Wholesale Debt Market (WDM) seg7ment in June 1994. The
Capital Market (Equities) segment commenced operations in November 1994 and operations in
Derivatives segment commenced in June 2000.
The National Stock Exchange (NSE) was incorporated in November 1992 with an equity capital
of Rs. 25 crores. It was promoted by the International Securities Consultancy (ISC) of I-long
Kong in association with financial institutions, insurance companies, banks, SBI Capital Markets
Ltd., Infrastructure Leasing and Financial Services Ltd., and Stock Holding Corporation Ltd. ISC
has prepared the detailed business plan, including the installation of hardware and software
systems. It aims at promoting professionalism in the capital market and providing better
securities trading facilities to investors nationwide. NSE transcends geographical barriers and
overcomes fragmentation by providing a screen-based trading system instead of the conventional
trading ring. This results in greater depth and liquidity of the market and reduces the transaction
costs.
The NSE is not an exchange in the traditional sense of the term, where brokers own and manage
the exchange. Its two tier administrative set up involves a company board and a governing board
of the exchange.
NSF is a professionally managed national market for shares, PSU bonds., debenture and
government securities with all the necessary infrastructure and trading facilities.
THE MISSION
NSF was set up to realize the following objectives:
I Establishing a nationwide trading facility for equities, debt instruments and hybrids
2. Ensuring equal access to investors all over the country through an appropriate communication
network
3. Providing a fair, efficient and transparent securities market to investors using electronic
trading systems
4. Enabling shorter settlement cycles and book entry settlements systems, and
5. Meeting the current international standards of securities markets
The standards set by NSE in terms of market practices and technology has become industry
benchmarks and is being emulated by other market participants as well. NSE is more than a mere
market facilitator. It guides the industry towards new horizons and greater opportunities.
Trading Mechanism
In order to encourage an institutional market where large volume trades come up for settlement
in jumbo lots, two exclusive additional market segments, the institutional lot segment and trade-
for-trade segment have been setup. NSF has an order driven system, which allows members to
undertake jobbing in securities of their choice. Several members undertake jobbing on account of
the cease of entry and exit, and narrow margins which results in improved liquidity and reduced
transaction costs.
Settlement
The settlement cycle is completed within eight days from the last day of the trading cycle. The
trading period is a week (Wednesday to Tuesday) and the settlement of trades takes place in the
ensuing week.
Counter Guarantee
NSE’s Clearing Corporation stands guarantee to all trades done in the cash market on the
exchange. The counter guarantee of the Clearing Corporation ensures that no default, either in
payment or delivery takes place for trades done on NSF.
Price Bands
The price bands are based on the liquidity of a company’s shares as well as its volatility. The
chances for price manipulation are more in the case of liquid securities. The factors, which
determine the measure of liquidity of a security, are:
1. Frequency of trading
2. Average daily volume of trading
3. Average daily value of trading
4. Average daily number of trades
Listing Requirement
The exchange has also modified two of its listing clauses. The minimum paid-up capital
requirement for initial public offerings has been increased from Rs.10 crores to Rs. 20 crores.
With regard to companies whose shares are already listed on another exchange, there will now be
a requirement of a minimum market capitalization of Rs. 20 crores (for companies with a paid-up
capital of at least Rs. 10 crores) or of Rs. 40 crores (for companies with a paid-up capital of less
than Rs. 10 crores). Companies, which have not paid dividend for at least two of the last three
years, will not be required to have a net worth of at least Rs. 50 crores for seeking listing on the
house.
TRADING
The National Stock Exchange of India started its trading operations in debt market segment from
June 30, 1994. The NSE has adopted a fully automated screen-based trading system, which
allows trading members to trade from their offices through a communications network. Price,
time and volume conditions are quite flexible. Securities like the government bonds, treasury
bills, PSU bonds, CPS, floating rate bonds and Unit 64 of UTI are traded on the exchange. The
capital market segment covers the trading done in convertible/non-convertible debentures and
hybrids, both in equities and retail trade.
Wholesale Debt Market
Two distinctive segments representing Wholesale Debt Market (W’DM) and Capital Market
have started operations in 1994-95, providing secondary market trading facilities. WDM is a
facility for institutions and corporate bodies to enter into high value transactions in instruments
such as government securities, treasury bills, PSU bonds, Unit 64 of UTI, CPS and CDs. Few
large investors and a high average trade volume characterize the segment. The principal
participants are banks, corporates and mutual funds.
There are two types of entities on WDM, Trading Members and Participants. Trading members
are the recognized members of NSE. They can either trade on their own account or on behalf of
their clients, including participants. In the WDM segment of the exchange more than nine
categories of instruments are allowed for trading. The capital market segment of NSE
commenced operations on November 3, 1994 to provide trading facilities for institutions and
retail investors. The exchange has allowed for trading 1,300 securities of medium and large
companies with nationwide investor bases. Because of the nationwide equal access, such
securities can be traded anywhere in country at the same price.
Electronic Trade Monitoring System
The Stock-Watch s is a computer system designed and programmed to monitor market activity
and identify aberrations from historical patterns. The algorithm for the NSF system is similar to
the one prevalent at NASDAQ in the United States. However, the trading systems at NASDAQ
and NSE are totally different. The algorithm 0fNASDAQ has been adapted to NSF trading
conditions. The system enables NSE to electronically monitor the trading patterns, which would
lead to a more effective surveillance. Currently, NSE officials have to manually screen the
trading patterns to ascertain any strange price fluctuations. The electronic track monitoring S
stem will automatically kick off alerts. It will make the task of surveillance easier and more
effective. There is a great need to enhance information flow and this will go hand-in-hand with
better monitoring of trading patterns to reduce eases of price manipulation. SEW will define the
kind of information the stock exchanges need to furnish so as to make their enforcement job
more effective,
CORPORATE STRUCTURE
NSF is one of the first demutualized 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 situational investors in the country.
The ownership, management and trading is in the hands of three different sets of people. NSF is
owned by 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 ruminated any conflict of interest and helped NSE in
aggressively pursuing policies and practices within a public interest framework.
Board
The Board of NSF comprises of senior executives from promoter institutions, eminent
professionals in the fields of law, economics, accountancy, finance, taxation, etc public
representatives, three nominees of SEBI including a senior official of SEBI and one full time
executive of the Exchange.
Executive Committee
While the Board deals with broad policy issues, decisions relating to market operations are
delegated by the Board to an Executive Committee (EC) formed under the Articles of
Association and Rules. The EC includes representatives from trading members, the public and
the management. The EC has four broker-members who are nominated by the Board of NSEI
based on their experience in stock market and represent different regions. The day-to-day
management of the Exchange is delegated to the Managing Director who is supported by a team
of professional staff
Promoters
NSE was promoted by leading financial institutions, banks, insurance companies and other
financial intermediaries such as the following:
1. Industrial Development Bank of India
2. Industrial Finance Corporation of India Limited
3. Life Insurance Corporation of India
4. State Bank of India
5. ICICI Bank Limited
6. Infrastructure Leasing and Financial Services Limited
7. Stock Holding Corporation of India Limited
8. SBI Capital Markets Limited
9. Unit Trust of India
10. Bank of Baroda
11. Canara Bank
12. General Insurance Corporation of India
13. National Insurance Company Limited
14. The New India Assurance Company Limited
15. The Oriental Insurance Company Limited
16. United India Insurance Company Limited
17. Punjab National Bank
18.. Oriental Bank of Commerce
19. Corporation Bank
20. Indian Bank
21. Union Bank of India
Committees
The Exchange has constituted various committees to advise it on areas such as good market
practices, settlement procedures, risk containment systems, etc. Industry professionals. These
committees, are manned by industry trading members, exchange staff as also representatives
from the market regulator.
1. Executive Committee
2. Committee on Settlement Issues (COSI)
3. Dispute Resolution Committee (DRC)
4. Committee On Trade Related Issues (COTI)
5. Advisory Committee—Listing of securities
PRODUCTS
NSE has played a catalystic role in bringing about a favorable transformation in the securities
market in terms of microstructure, market practices and trading volumes. The market has
witnessed several innovations in products and services. NSE offers a wide range of products and
services in the equities, debt and derivative segments of the market as shown below:
I. Indices: Major Indices/Other Indices
2. Derivatives—Futures/Options
3. Computer to Computer Link (CTCL) facility: Equities Derivatives
4. Internet-based Trading: Equities Derivatives
5. Initial Public Offering (IPO)
6. Mutual Funds
7. Mutual Fund Service System (MFSS)
8. Exchange Traded Funds (ETFs)
9. Index Funds
10. Working Capital Funding
11. Direct Payout to Investors
Debt Market
I. References Rates (MIBID/MIBOR)
2. Zero-coupon Yield Curve (ZCYC)
3. Var for Government Securities
4. Constituent SGL Account
Major Indices
The NSE deals with the following major indices:
1. S&P CNX Nifty
2. CNX Nifty Junior
3. S&PCNX500
4. S&P CNX Defty
5. CNX Midcap 200
6. Other IISL Indices
7. CNX IT Sector Index
8. CNX FMCG Index
9. CNX Millennium Index
10. CNX Segment Indices CNX PSE Index/CNX MNC index /CNX IBG Index
I. S & P CNX Industry Indices
12. Customized Indices
Derivatives
The derivatives that are dealt in include:
I. S&P CNX Nifty Futures
2. S&P CNX Nifty
3. Futures on Individual Securities
4. Options on Individual Securities