Stock Exchange In India
A physically existing institutionalized set-up where instruments of security stock market (shares, bonds, debentures, securities, etc.) are traded. It serves the following major functions:
(i) Makes a floor available to the buyers and sellers of stocks and liquidity come to the stocks. It is the single most important an institution in the secondary market for securities.
(ii) Makes available the prices of trading as an important piece of information to the investors.
(iii) By following institutionalised rules and procedures, it ensures that the participants in the stock market live up to their commitments.
(iv) Passes updated informations to the enlisted companies about their present stockholders (so that they can pass on dividends etc., to them).
(v) By publishing its ‘Index’, it fulfils the purpose of projecting the moods of the stock market.
World’s first stock exchange was established in Antwerp, Belgium (then part of the Netherlands) in 1631, the London Stock Exchange opened in 1773 and the Philadelphia Stock Exchange (the first in the New World) opened in 1790. The first stock exchange in India, the Bombay Stock Exchange known as The Native Share and Stock Brokers’ Association was set up in 1870 (under a tree!).
Top five largest stock exchanges (on the basis of market capitalization of the world in their decreasing order are—the New York Stock Exchange, the NASDAQ, the Tokyo Stock Exchange, the London Stock Exchange, and the Bombay Stock Exchange.
Trading in the stock exchanges takes place via the mediators are known as the brokers, the jobbers, the market-maker (discussed later in this chapter).
As per the latest information,4 presently, there are a total number of 26 stock exchanges operating in India—7 at the national level and rest 19 at the regional level (one of it, Coimbatore Stock Exchange recently sought for withdrawal of recognition, the matter is sub-judice under SEBI). A brief account of the ‘national level stock exchanges’ is given below.
The National Stock Exchange of India Ltd. (NSE) was set up in 1992 and became
It has a 50 share index and a 500 share index known as S&P CNX-50 (Nifty Fifty) and S&P CNX-500, respectively.otcei
Though the Over the Counter Exchange of India Ltd (OTCEI) was set up in 1989, it could commence trading only in 1992. India’s first fully computerized stock exchange was promoted by the UTI, ICICI, SBI Cap among others, in order to overcome problems such as lack of transparency and delays in settlements prevalent in the older stock exchanges. Another important goal of the exchange was to allow stock market exposure to comparatively smaller companies (companies with paid-up capital from Rs. 30 lakh to Rs. 25 crores are enlisted here). Trading in this exchange takes place via market-makers and commission is fixed.
The Interconnected Stock Exchange of India (ISE) is basically a single floor of India’s 15 regional stock exchanges (RSEs), set up in 1998. The RSEs were provided increased reach through this. It is a web-based exchange.
The Bombay Stock Exchange Ltd. (BSE), earlier a the regional stock exchange, converted into a national one in 2002. The biggest in India, it accounts for almost 75 percent of total stocks traded in India and is the fifth largest in the world (on the basis of market capitalisation).
There are at present four indices connected with the BSE:
(i) Sensex: The sensitive index (i.e., Sensex) is a 30 stocks index of the BSE which was enlarged to include 50 stocks in 2000 but soon was cut down to the original level. This index represents the Indian stock market.
(ii) BSE-200: This is a 200 stock share index of the BSE (including the 30 stocks of the Sensex) which has its Dollar version too—the Dollex.
(iii) BSE-500: In mid-1999, the BSE came up with a 500-stock index representing major industries and many sub-sectors of the economy with information technology getting a significant weight.
(iv) National Index: An index of 100 stocks being quoted nationwide (Bombay, Delhi, Kolkata, etc.) was developed to give the broader/wider representation of the stock market since the Sensex consists of only 30 stocks. The 30 stocks of the Sensex are included in the National Index.
This index is computed by the Statistics Department of the BSE hence it is called the BSE National Index (
New stock exchange to promote liquidity to the stocks of the small enterprises (SMEs) was launched in 2005 jointly and medium the BSE and the FISE (Federation of Indian Stock Exchanges, representing 18 regional stock exchanges).
It is better known as the BSE Indo Next. It was also an effort to rejuvenate the RSEs which were facing falling volumes of trading on their floors.
Due to the absence of trading at the RSEs, the stocks of the SME, have become illiquid.
The BSE will transfer all its B1 and B2 groups to this exchange. The RSEs also transfer their enlisted companies to the new exchange.
Now the RSEs will be able to use the BSE network online—the ‘Webex’.
SME Exchanges: BSESME And Emerge
SME exchange is a stock exchange dedicated for trading the shares of small and medium scale enterprises (SMEs) who, otherwise, find it difficult to get listed in the main exchanges. The concept originated from the difficulties faced by SMEs in gaining visibility or attracting sufficient trading volumes when listed along with other stocks in the main exchanges.
To be listed on the SME exchange, the post issue paid-up capital of the company should not exceed Rs. 25 crores. This means that the SME exchange is not limited to the small and medium scale enterprises (which are defined under the ‘Micro, Small And Medium Enterprises Development Act, 2006’ as enterprises where the investment in plant and machinery does not exceed Rs. 10 crores). As of now, to get listed in the main boards like National Stock Exchange, the minimum paid-up capital required is Rs. 10 cr and that of the BSE is Rs. 3 cr. Hence, those companies with paid-up capital between Rs. 10 cr to Rs. 25 cr have the option of migrating to the Main Board/or to the SME exchange. The companies listed on the SME exchange are allowed to migrate to the Main Board as and when they meet the listing requirements of the Main Board. There shall be compulsory migration of the SMEs from the SME exchange, in case the post-issue paid-up capital is likely to go beyond the Rs 25 crore limit.
World over, trading platforms/exchanges for the shares of SMEs are known by different names such as Alternate Investment Markets or Growth Enterprises Market, SME Board, etc. Some of the known markets for SMEs are AIM (Alternative Investment Market) in the UK, TSX Ventures in Canada, GEM (Growth Enterprise’s Market) in Hong Kong, MOTHERS (Market of the High-Growth and Emerging Stocks) in Japan, Catalyst in Singapore and Chinext, the latest initiative in China [see ‘World Federation of Exchanges’ for latest comparative idea].
Globally, most of these SME exchanges are still at an evolving stage considering the many hurdles they face —
(i) Declining prices of listed stocks and their illiquidity,
(ii) A gradual reduction in new listings and the decline in profits of the exchanges, etc., (for instance, AIM had three predecessors; CATALIST succeeded SESDAQ with new regulations and listing requirements).
(iii) In most jurisdictions, the idea of a separate exchange for SMEs have become unviable and hence tend to be platforms of existing exchanges, perhaps cross-subsidised by the main board/exchange.
In India, similarly, after the two previous attempts—OTCEI (Over the Counter Exchange of India, 1989) and Indonext—the market regulator, SEBI, on May 18, 2010, permitted setting up of a dedicated stock exchange or a trading platform for SMEs. The existing bourses/stock exchanges in India, BSE, and NSE went live on March 13, 2012, with a separate trading platform for small and medium enterprises (SMEs). BSE has named its SME platform as BSESME, while NSE has named it as Emerge.
Unlike in India, many of these SME exchanges in various countries operate at a global level, due to smallness of the market, allowing for listing by both domestic as well as foreign companies. Though the names suggest that they are set up for SMEs, these exchanges hardly follow the definition of SMEs in their respective jurisdictions. Also, many of them follow a ‘Sponsor-supervised’ market model, where sponsors or nominated advisors decide if the listing applicant is suitable to be listed or not, i.e., generally no quantitative entry criteria like track record on profitability or minimum paid-up capital or net worth, etc., are specified to be listed in these exchanges. Instead, they are designed as ‘buyers beware’ markets for informed investors. SEBI has also designed the SME exchanges in a similar format with provisions for ‘market making’ for the specified securities listed on the SME exchange.
As is the case globally, certain relaxations are also provided to the issuers whose securities are listed on the SME exchange in comparison to the listing requirements in the Main Board (such as in BSE and NSE, in the case of India), which include:
(i) Publication of financial results on ‘half-yearly basis’, instead of ‘quarterly basis’, making it available on their websites rather than publishing it.
(ii) The option of sending a statement containing the salient features of all the documents instead of sending a full Annual Report.
(iii) No continuous requirement of a minimum number of shareholders, though at the time of IPO there needs to be a minimum of 50 investors, etc.
(iv) The existing eligibility norms like track record on profits, net worth/net tangible assets conditions, etc., have been fully relaxed for SMEs as is the case globally.
(v) However, no compromise has been made to corporate governance norms.
Common Facts about the National Stock Exchanges
Before the arrival of national level stock exchanges, India was not having any exchange of national status—better say there was no Indian stock market, but stock markets showing only regional pictures. Besides, the national stock exchanges did solve some major problems of the stock market, we may also call their arrivals as part of the stock market reforms in India. The common features of these exchanges are:
(i) all are situated in Mumbai;
(ii) all do screen-based trading (SBT);
(iii) all have their trading terminals in the major cities of the country;
(iv) all are web-enabled;
(v) all are limited liability companies;
(vi) the brokers registered here have no say in either the ownership or the management of the exchanges;
(vii) all are counted among the best and the most technology-equipped stock exchanges in the world.
Players In The Stock Exchanges
Brokers who offer services such as investment advice, clients’ portfolio planning, credit when a client is buying on margin other than their traditional commission job are known as full-service brokers. In India, such brokers are just coming up.
A jobber is a broker’s broker or one who specializes in specific securities catering to the need of other brokers—in India also known as ‘Taravaniwallah’ (in the BSE).7 A jobber is located at a particular trading post on the floor of the stock exchange and does buying and selling for small price differences, called the spread. He has no contact with the investing public.
In the London Stock Exchange, he is called a market-maker while in the New York Stock Exchange he is called a specialist. The Bombay Stock Exchange has made it mandatory for every company with a share capital of over Rs. 3 crores to appoint jobbers or market-makers if it seeks enlistment. Such an arrangement enables investors to buy and sell shares on the stock exchange and thus liquidity increases.
Functions as an intermediary in the market ready to buy and sell securities. He simultaneously quotes two-way rates—like a jobber basically with the only difference that he quotes two-way rates, for buying and selling at the same time.
On the floor of India’s OTCEI, only
Since he quotes the selling price while buying a particular share, he makes the market for that share, hence such a name.
The NASDAQ of the USA is a market maker’s stock exchange where they are connected by the web-enabled trading terminals.
In India, Spot Exchanges refer to electronic trading platforms which facilitate purchase and sale of specified commodities, including agricultural commodities, metals, and bullion by providing spot delivery contracts in these commodities.
This market segment functions like the equity the segment in the main stock exchanges. Alternatively, this can be considered as guaranteed direct marketing by sellers of the commodities. Spot Exchanges leverage the latest technology available in the stock exchange framework for the trading of goods. This is an innovative Indian experiment in the trading of goods and is distinct from what is commonly known as ‘commodity exchanges’ which trade in futures contracts in commodities.
Spot exchange has been defined by the Warehousing Development and Regulatory Authority (Electronic Warehouse Receipts) Regulations, 2011 as “a body corporate incorporated under the Companies Act, 1956 and engaged in assisting, regulating or controlling the business of trading in electronic warehouse receipts.” However, present-day spot exchange deals not just with warehouse receipts—this is an electronic market where a farmer or a trader can discover the prices of commodities on a national level and can buy or sell goods immediately (i.e., on the ‘spot’) to anyone across the country. All contracts on the exchange are compulsory delivery contracts—it means that all outstanding positions at the end of the day are marked for delivery, which implies that seller has to give delivery and buyer has to take the delivery.
The facilities provided by the spot exchange, like a normal stock exchange, include clearing and settlement of trades. Trades are settled on a guaranteed basis (i.e., in case of default by any person exchange arranges for the payment of money/good) and the exchange collects various margin payments, to ensure this. The exchange also offers various other services, such as quality certification, warehousing, warehouse receipt financing, etc.
Spot Exchanges In India
At present, there are four spot exchanges operating in the country:
(i) The National Spot Exchange Ltd. (NSEL), set up in 2008, is a national level commodity spot exchange promoted by the Financial Technologies India Ltd (FTIL) and National Agricultural Cooperative Marketing Federation of India Limited (NAFED). After the FTIL was found involved in irregularities, the FMC (Forward Market Commission), by end-March 2014 asked it to exit the spot exchange.
(ii) NCDEX Spot Exchange Ltd (established in October 2006 by NSE).
(iii) Reliance Spot Exchange Ltd. (R-Next).
(iv) Indian Bullion Spot Exchange Ltd. (an online over the counter spot exchange).
Advantages Of Spot Exchanges
Spot exchange provides various advantages over the traditional way of trading in commodities:
(i) Efficient price determination as price is determined by a wider cross-section of people from across the country, unlike the traditional ‘mandis’ where price discovery for commodities used to happen only through local participation.
(ii) Ensures transparency in price discovery— anonymity ensures convergence of different price perceptions, as the buyer or seller merely expresses their desire to trade without even meeting directly.
(iii) Ensures participation in large numbers by farmers, traders and processors across the country and eliminate the possibility of cartelization and other such unhealthy practices prevalent in the commodity markets.
(iv) It brings in some best practices in commodity trading like the system of grading for quality, creating a network of warehouses with assaying facilities, facilitating trading in relatively smaller quantities, lower transaction cost, etc.
(v) Bank finance available against the goods in the warehouse on easier terms improves holding capacity and can actually, incentivise farm production and hence reduce rural poverty.
(vi) Since the trades are guaranteed (by the exchange), counter party risk is avoided.
Raising Capital In The Primary Market
There are three ways in which a company raises capital in the primary market.
A public offer is open for all Indian citizens, the most broad-based method of raising capital and the most prestigious, too (the Reliance Industries Ltd. is the biggest company of India in this category).
Raising capital from the existing shareholders of a company, it means it is a preferential kind of issue restricted to a certain category of the public only.
Raising capital by selling shares to a select group of investors, usually financial institutions (FIs) but may be to individuals also. This is done through the process of direct negotiations (completely opposite to the public issue). The advantage of this route is the substantial saving a share-issuing company makes on marketing expenses (but the risk of shifting loyalties of the investors in this route is also the highest).
Recent times have seen such capital raising by many companies privately placing their shares to the foreign institutional investors (FIIs) as a route to source foreign exchange in India, and that too quickly.
Important Terms Of Stock Market
A share is given to the existing shareholders without any charge—also known as bonus share.
A share is given to the employees of the company without any charge.
An important reform measure started in the Indian stock market in mid-2001 under which all commitments of sale and purchase result into payment/delivery at the end of the ‘X’ days later (where ‘X’ stands for 5 days. Some shares have X as one, two or three days, too). Today, all shares are covered under this provision.
When the buyers want postponement of the transaction—in the Western world called Contango.
When the sellers want postponement of the transaction—also known as the reverse badla or backwardation.
A trading allowed in shares where a future price is quoted for the shares and the payment and delivery take place on the pre-determined dates.
Started in 1996 under which stocks are converted into ‘paperless form’ (dematerialization of shares are shortly known as the ‘demat’). At present, two public sector depositaries (Mumbai) are functioning in India set up under the Depositories Act, 1996—
(i) NSDL (National Securities Depositories Ltd.)
(ii) CDSL (Central Depositories Services Ltd.)
The difference between the buying and selling prices of a share is called spread. Higher the liquidity of a share lowers its spread and vice versa. Also known as Jobber’s Turn or Margin or Hair cut.
The transactions of stocks which take place outside the stock exchanges—unofficially and take place after the normal trading hours.
The National Securities Clearing Corporation (NSCC), a public sector company set up in 1996 takes the counterparty risk of all transactions done at the NSE just as an intermediary guarantees all trades.
A process started (2002) by SEBI under which ownership, management, and trading membership was to be segregated from each other. No broker was to be on the Board of Directors or an officebearer in a stock exchange.
This has been done in the case of all stock exchanges except for three regional stock exchanges (RSEs) in India.
The limits up to which shares can be issued by a company—also known as the nominal or registered capital. This is fixed in the Memorandum of Association (MoA) and the article of association (AoA) of a company as required by the Companies Act (Law).
The part of the authorized capital of a company that has actually been paid by shareholders. the difference may arise because all shares authorized might not be issued or issued shares are only partly paid-up.
The amount actually paid by the shareholders or have been committed by them for contribution.
The amount which is sought by a company to be raised by issuing shares which cannot exceed the authorized capital of the company.
A provision under which a company issuing shares for the first time is allowed to sell some additional shares to the public—usually, 15 percent, is also known as the over-allotment provision. It gets its name from the first company (Greenshoe The company which was allowed such an option.
The share which remains low-priced at a stock exchange for a comparatively long period.
Speculators may start hoarding them for hefty margins, this was seen in India in mid-2006. And since such stocks get hoarded, ultimately their market prices increase. The speculators earn the profit after offloading (selling) these shares at high prices and others who purchase these shares ultimately might fetch huge losses because price rise of these stocks are unintentional or each intentional manipulation and nothing else.
The Employee Stock Ownership Plan (ESOP) enables a foreign company to offer its shares to employees overseas. It was allowed in India (February 2005) provided that the MNC has a minimum 51 percent holding in its Indian company. Earlier permission from the RBI was required for such an option.
Screen Based Trading (SBT) is trading of stock based on the electronic medium, i.e., with the help of computer monitor, internet, etc. First such trading was introduced in New York in 1972 by the bond broker Cantor Fitzgerald. India introduced it in 1989 at the OTCEI. Now it is carried out at all exchanges.
Debentures are the debt instruments which may be issued by a listed or non-listed firm to raise funds in a security market. They are of many types, viz., Redeemable, Non-redeemable, Partially Convertible and Fully Convertible. In case of ‘fully convertible debentures’ an ‘option’ (that is why the name OFCDs, i.e., Optionally Fully Convertible Debentures) is given to the debenture-holders who may wish to convert their OFCDs into shares (after expiry of the period fixed by the debenture issuing firm—known as ‘lock-in’ period). But the ‘rate’, will be decided by the company (e.g., how many shares against how many debentures).
For debenture-holders, the ‘option’ to convert
(i) The firm is likely to make a high profit (so the shareholder can earn higher dividend), or
(ii) Firm’s share-price is likely to rise in the share market (profit can be made by selling shares).
But suppose the firm has a weak balance sheet (going bankrupt), then it is better to keep the hold on the debenture rather than converting them into shares, because when a company is liquidated (i.e., its assets sold off), the debenture holders get primacy over shareholders in payment. It means OFCD is a bit tricky thing and is the only suitable route to invest in the security market for the investors who have some knowledge and understanding of share prices, company performance, etc.
Recently, the OFCDs issued by Sahara (an NBFC under the regulatory control of the RBI)
(i) Actually, an OFCD issue process has to be completed within 10 working days (Sahara continued for over two years).
(ii) If the OFCD is being issued through the ‘Private Placement’ route only 50 individuals/ institutions can subscribe to it (Sahara issued it to over 23 million people and raised over Rs. 24,000 crores). Such a tricky
(iii) Unlisted companies do not come under the regulatory control of SEBI. In
Companies Act, 2012 which gives SEBI undisputed jurisdiction over any investment scheme involving more than 50 investors whether the company is listed or unlisted.
Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index or reference rate), in a contractual manner.
The underlying asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the ‘underlying’.
In the Indian context the Securities Contracts (Regulation) Act, 1956 [SC(R)A] defines derivative to include :
(i) A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security.
(ii) A contract, which derives its value from the prices, or index of prices, of underlying securities.
Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by the regulatory framework under the SC(R)A and are allowed to be traded on the floors of the stock exchanges
Sale of a share which is not owned. This is done by someone after borrowing shares from stockbrokers promising to replace them at a future date on the hope (speculation) that the price will fall by then. He fetches profit if
Bear And Bull
A person who speculates share prices to fall in the future and so sells his shares and earns a profit is a bear. He earns profit out of a falling market. Basically, here he is short selling the shares.
Opposite to bear, the bull is a person who speculates share prices to go up in future so either stops selling the select group of shares for that time to be reached (he is basically taking the long position on those shares) or starts purchasing that select group of shares.
Thus, a bear increases the number of shares in a stock market activating a general fall in the index—a bearish market. Opposite to it, a bull creates a scarcity of shares in the stock market activating a general rise in the share prices and the index—a bullish market.
Brokers play as a bear for some stocks and as a bull for some other stocks. while a bear broker is a non-entity, a bull is remembered for a long time to come—Harshad Mehta was known as the Great Bull.
A provision allowed by SEBI to all Initial Public offers (IPOs) in which individual investors are reserved and allotted shares by the company. But the issuer has to disclose the price (at which shares have been allotted the size of the issue and the number of shares offered to the public).
Initial Public Offer (IPO) is an event of the share issuing when a company comes up with its share/ securities issued for the first time.
A process of public issue where the company gives a price range (known as price band) and it is left upon the share, applicants to quote their prices on it—the highest bidders getting the shares. This is a variant of share issue at premium but considered a safer choice.
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