A REPORT ON STOCK EXCHANGE

- FINANCIAL MARKETS AND SERVICES

Deeraj Thimmaiah -11SJCCB102 Akshay Shetty Steve Jacob -11SJCCB114 -11SJCCB171

Introduction
Stock exchanges are the important ingredient of the capital market. They are the citadel of capital and fortress of finance. A stock Exchange is also called as a stock market. Stocks and shares fall into two basic categories: shares, or equities, which give the buyer part- ownership of the company in which he or she has invested; and stocks, or bonds which lend money to the government or large company without giving a right of ownership. Both stocks and shares are called as Securities. The market where existing securities are traded is referred to as the stock market or secondary market. In brief, stock exchanges constitute a market where securities issued by the central and state governments, public bodies and joint stock companies are traded.

Definition
As per the Securities Contracts Regulation Act, 1956 a stock exchange has been defined as follows: It is an association, organization or body of individuals whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.

Functions /Services of Stock Exchange

1. Liquidity and Marketability of Securities Stock exchanges provide liquidity to securities since securities can be converted into cash at any time according to the discretion of the investor by selling them at the listed prices. They facilitate buying and selling of securities at listed prices by providing continuous marketability to the investors in respect of securities they hold or intend to hold. Thus, they create a ready outlet for dealing in securities. 2. Safety of funds Stock exchanges ensure safety of funds because they have to function under strict rules and regulations and the bye-laws are meant to ensure safety of investible funds. Overtrading, illegitimate speculation etc are prevented through carefully designed set of rules. This would strengthen the investors confidence and promote larger investment. 3. Flow of Capital to Profitable Ventures The profitability and popularity of companies are reflected in stock prices. The prices quote indicate the relative profitability and performance of companies. Funds tend to be attracted towards securities of profitable companies and this facilitates the flow of capital into profitable channels. 4. Motivation for Improved Performance The performance of a company is reflected on the prices quoted in the stock market. These prices are more visible in the eyes of the public. This public exposure makes a

company conscious of its status in the market and it acts as a motivation to improve its performance further. 5. Promotion of Investment Stock exchanges mobilise the savings of the public and promote investment through capital formation. But for these stock exchanges, surplus funds available with individuals and institutions would not have gone for productive and remunerative ventures. 6. Reflection of Business Cycle The changing business conditions in the economy are immediately reflected on the stock exchanges. Booms and depressions can be identified through the dealings of the stock exchanges and suitable monetary and fiscal policies can be taken by the government.

Organisation of Stock Exchanges in India

The first organised stock exchange in India was started in Bombay in 1875 with the formation of the Native Share and Stock Brokers Association. Thus the Bombay Stock Exchange is the oldest one in the country. With the growth of joint stock companies, the stock exchanges also made a steady growth and at present there are 23 recognized stock exchanges with about 600 stock brokers. Traditional Structure of Stock Exchanges The stock exchanges in India can be classified into two broad groups on the basis of their legal structure. They are: a) Three stock exchanges which are functioning as Association of Persons (AOP) BSE, ASE and Madhya Pradesh Stock Exchange. b) Twenty Stock Exchanges which have been set up as companies, either limited by guarantees or by shares. Some of them are : i. Bangalore Stock Exchange ii. Calcutta Stock Exchange iii. Delhi Stock Exchange iv. Madras Stock Exchange v. National Stock Exchange etc :

Demutualisation of Stock Exchanges

The transition process of an exchange from a mutually owned association to a company owned by shareholders is called demutualisation. In other words, transforming the legal structure, of an exchange from a mutual form to a business corporation form is referred to as demutualisation. In mutual exchange, the three functions of ownership, management and trading are intervened into a single group. It means the members of the exchange are the owners as well as traders on the

exchange and further they themselves manage the exchange. These three functions are segregated from one another after demutualisation. The demutualised stock exchanges in India are: i. ii. The National Stock Exchange (NSE) Over the Counter Exchange of India (OTCEI)

Corporatisation of Stock Exchanges

The process of converting the organizational structure of the stock exchange from a noncorporate structure to a corporate structure is called corporatisation of stock exchanges. As stated earlier, some of the stock exchanges were established as Association of Persons in India like BSE, ASE and MPSE. Corporatisation of these exchanges is the process of converting them into incorporated companies.

Management
The recognized stock exchanges are managed by Governing Boards. The governing boards consist of elected member directors from stock broker members, public representatives and government nominees nominated by the SEBI (Securities and Exchange Board of India).The government has also powers to nominate Presidents and Vice Presidents of stock exchanges and to approve the appointment of the Chief Executive and public representatives. The major stock exchanges are managed by the Chief Executive Director and the smaller stock exchanges are under the control of a Secretary.

Membership
To become a member of a recognized stock exchange, a person must possess the following qualifications: i. ii. iii. iv. v. He should be a citizen of India. He should not be less than 21 years of age. He should not have been adjudged bankrupt or insolvent. He should not have been convicted for an offence involving fraud or dishonesty. He should not be engaged in any other business except dealing in securities.

Apart from individuals, a company is also eligible to become a member provided it satisfies the conditions imposed by the stock exchange concerned.

History of Stock Exchange in India

Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the close of 18th century when the East India Company used to transact loan securities. In the 1830s, trading on corporate stocks and shares in Bank and Cotton presses took place in Bombay. An informal group of 22 stockbrokers began trading under a banyan tree opposite the Town Hall of Bombay from the mid-1850s, each investing a (then) princely amount of Rupee 1. This banyan tree still stands in the Horniman Circle Park, Mumbai. In 1860, the exchange flourished with 60 brokers. Further the brokers increased to 250. The informal group of stockbrokers organized themselves as The Native Share and Stockbrokers Association which, in 1875, was formally organized as the Bombay Stock Exchange (BSE).BSE was shifted to an old building near the Town Hall. In 1928, the plot of land on which the BSE building now stands (at the intersection of Dalal Street, Bombay Samachar Marg and Hammam Street in downtown Mumbai) was acquired, and a building was constructed and occupied in 1930.

Premchand Roychand was a leading stockbroker of that time, and he assisted in setting out traditions, conventions, and procedures for the trading of stocks at Bombay Stock Exchange and they are still being followed.

In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock exchange in the country under the Securities Contracts (Regulation) Act. The most decisive period in the history of the BSE took place after 1992. In the aftermath of a major scandal with market manipulation involving a BSE member named Harshad Mehta, BSE responded to calls for reform. The foot-dragging by the BSE helped radicalise the position of the government, which encouraged the creation of the National Stock Exchange (NSE), which created an electronic marketplace. NSE started trading on 4 November 1994. Within less than a year, NSE turnover exceeded the BSE. BSE rapidly automated, but it never caught up with NSE spot market turnover. Today, NSE has roughly 66% of equity spot turnover and roughly 100% of equity derivatives turnover.

History of Stock exchange in the world

Securities markets took centuries to develop. The idea of debt dates back to the ancient world, as evidenced for example by ancient Mesopotamian clay tablets recording interest-bearing loans. There is little consensus among scholars as to when corporate stock was first traded. Some see the key event as the Dutch East India Company's founding in 1602, while others point to earlier developments.

As with bonds, the concept of stock developed gradually. Some scholars place its origins as far back as ancient Rome. Partnership agreements dividing ownership into shares date back at least to the 13th century, again with Italian city-states in the vanguard. Such arrangements, however, typically extended only to a handful of people and were of limited duration, as with shipping partnerships that applied only to a single sea voyage.

In 1171, the authorities of the Republic of Venice, concerned about their war-depleted treasury, drew a forced loan from the citizenry. Such debt, known asprestiti, paid 5 percent interest per year and had an indefinite maturity date. Initially regarded with suspicion, it came to be seen as a valuable investment that could be bought and sold. The bond market had begun. From 1262 to 1379, Venice never missed an interest payment, solidifying the credibility of the new instruments. A bond issued by the Dutch East India Company, dating from 7 November 1623, for the amount of 2,400 florins. The Dutch East India Company, formed to build up the spice trade, operated as a colonial ruler in what's now Indonesia and beyond, a purview that included conducting military operations against recalcitrant natives and competing colonial powers. Control of the company was held tightly by its directors, with ordinary shareholders not having much influence on management or even access to the company's accounting statements. However, shareholders were rewarded well for their investment. The company paid an average dividend of over 16 percent per year from 1602 to 1650. Joseph de la Vega, also known as Joseph Penso de la Vega and by other variations of his name, was an Amsterdam trader from a Spanish Jewish family and a prolific writer as well as a successful businessman in 17th-century Amsterdam. His 1688 book Confusion of Confusions explained the workings of the city's stock market. It was the earliest book about stock trading, taking the form of a dialogue between a merchant, a shareholder and a philosopher, the book described a market that was sophisticated but also prone to excesses, and de la Vega offered advice to his readers on such topics as the unpredictability of market shifts and the importance of patience in investment.

The year that de la Vega published also brought an event that helped spread financial techniques and talent from Amsterdam to London. This was the "glorious revolution," in which Dutch ruler William of Orange also ascended to England's throne. William sought to modernize England's finances to pay for its wars, and thus the kingdom's first government bonds were issued in 1693 and the Bank of England was set up the following year. Soon thereafter, English joint-stock companies began going public.

Stock trading was more limited and subdued in subsequent decades. Yet the market survived, and by the 1790s shares were being traded in the young United States On 8 February 1971, NASDAQ, the world's first electronic stock exchange, started its operations.

Listing of Securities
Listing of securities means that the securities are admitted for trading on a recognized stock exchange. Transactions in the securities of any company cannot be conducted on stock exchanges unless they are listed by them. Hence, listing is the very basis of stock exchange operations. It is the green signal given to selected securities to get the trading privileges of the stock exchange concerned. Securities become eligible for trading only through listing. Listing is compulsory for those companies which intend to offer shares/debentures to the public for subscription by means of issuing a prospectus. Moreover, the SEBI insists on listing for granting permission to a new issue by a public limited company. Again, financial institutions do insist on listing for underwriting new issues. Thus listing, becomes an unavoidable one today. The companies which have got their shares/debentures listed in one or more recognized stock exchanges must submit themselves to the various regulatory measures of the stock exchange concerned as well as the SEBI. They must maintain necessary books, documents etc and disclose any information which the stock exchange may call for.

Group A, Group B and Group C shares (BSE)

The listed shares are generally divided into two categories namely: i. ii. Group A shares ( Specified shares or cleared Securities ) Group B shares ( Non- specific shares or non- cleared securities) Group A shares represent large and well established companies having a broad investor base. These shares are actively traded. Naturally, these shares attract a lot of speculative multiples. These facilities are not available to Group B shares. However, shares can from Group B into Group A and vice versa depending on the criteria for shifting. Group B shares are again divided into B1 and B2 shares on the Bombay Stock Exchange. B1 shares represent well traded scrips (written document that acknowledges debt) among the B group and they have weekly settlement. Apart from the above, there is another group called Group C shares. Under Group C , only odd lots and permitted securities are included. A number of shares that are less than the market lot are known as odd lots. Market lot refers to the minimum number of shares of a particular security that must be transacted on a stock exchange. Odd lots have settlement once in a fortnight or once on Saturdays. Odd lots cannot be easily transacted on the stock exchange and so they are illiquid in nature. Permitted securities are those that are not listed on a stock exchange but are listed on other stock exchanges in India. So they are permitted to be traded on this stock exchange.

Advantages of Listing
1) Facilitates Buying and Selling Securities Listing paves way for easy buying and selling of securities. Constant marketing facilities are assured for listed securities.

2) Ensures Liquidity The prices of listed securities are quoted daily in the market. Hence, securities can be converted into cash readily at quoted prices and thus listing ensures liquidity. 3) Offers wide Publicity Listed securities give wide publicity to the companies concerned. It is so because the names of listed companies are frequently mentioned in stock market reports, T.V , Newspapers, Radio etc. This has an advertising effect for such companies and this will automatically widen the market for their securities. 4) Assures Finance The very fact that a security is listed in a recognized stock exchange adds to the prestige of that company and it enables the company to raise the necessary finance by the issues of such securities expeditiously. 5) Enables Borrowing Listed securities are preferred as collateral securities by commercial banks and other lending institutions because they are rated high in market quotations and there is a ready market for them also. Thus, borrowings are made easier against the securities of the listed companies. 6) Protects Investors Listing companies have to necessarily submit themselves to the various regulatory measures by disclosing vital information about their assets, capital structure, profit, bonuses etc. Hence, listing aims at protecting the interest of investors to a greater extent.

Drawbacks of Listing
1) Leads to Speculation Listed securities offer wide scope for the speculators to manipulate the values in such a way that is it beneficial to the company. The stock market may not reflect the true picture of a listed security. Again, the managerial personnel may themselves indulge in speculative activities with regard to listed securities by misusing the inside information available to them.

2) Degrades Companys Reputation Sometimes listed securities are subjected to wide fluctuations in their values. They may become a victim of depression. They are immediately reflected on the stock exchange whereas unlisted securities escape from this misery. These wide fluctuations in their values have the effect of degrading the companys reputation and image in the eyes of the public as well as the financial intermediaries. 3) Discloses Vital Information to Competitors For getting the securities listed, a company has to disclose vital information such as dividends and bonus declared, sales, remuneration and so on. It amounts to leaking of secrecy of the companys operations to trade rivals. Even trade unions may demand higher wages and bonus on the basis of this information.

Listing Procedure
A company which requires its securities to be listed must comply certain formalities. The company concerned must apply in the prescribed form along with a certain set of documents and details. Some of the documents are: i. ii. iii. iv. v. Copies of Balance Sheets and audited accounts for the last 5 years. Certified copies of agreements with the managerial personnel. Particulars of dividends and bonuses paid during the last 10 years. Particulars regarding its capital structure. Particulars of shares forfeited etc.

Criteria for listing

A company which desires it s securities to be listed on a recognised stock exchange must satisfy the following conditions: i. At least 60% of each class of securities issued must be offered to the public for subscription and the minimum issued capital should be Rs 3 crores. The company should be of a fair size having broad based capital structure and public interest in its securities.

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A company having more than Rs 5 crore paid up capital must list its securities on more than one stock exchange. Listing on the regional stock exchange is compulsory.

Listing Obligations
A company whose securities have been listed on a stock exchange has to perform certain obligations also. The company has to compulsorily notify the stock exchange: i. ii. The date of bard meeting at which the declaration of dividend will be considered. Any change in the companys directorate or managerial personnel by death, resignation, removal or otherwise.

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Any issue of new shares Any shares in the companys capital structure. Any material change in the general character or nature of the companys business.

Listing Agreement
The stock exchange authorities will scrutinize the application carefully and if they are satisfied with all the particulars/ documents submitted, they will call upon the company to execute a listing agreement.

Requirements by stock exchange

Companies must meet an exchange's requirements to have their stocks and shares listed and traded there, but requirements vary by stock exchange: New York Stock Exchange: To be listed on the New York Stock Exchange (NYSE) a company must have issued at least a million shares of stock worth $100 million and must have earned more than $10 million over the last three years. NASDAQ Stock Exchange: To be listed on the NASDAQ a company must have issued at least 1.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years. London Stock Exchange: The main market of the London Stock Exchange has requirements for a minimum market capitalization (700,000), three years of audited financial statements, minimum public float (25 per cent) and sufficient working capital for at least 12 months from the date of listing. Bombay Stock Exchange: Bombay Stock Exchange (BSE) has requirements for a minimum market capitalization of 25 crore and minimum public float equivalent to 10 crore .

Stock Indices
A stock market index is one which indicates the pattern of movements of the prices of a group of securities which are considered to be the representative sample of the entire stock market. The stock market index is an invaluable guide to study the trend of growth patterns in the economy, to analyze as well as forecast business cycles and also to correlate stock market indices to various economic activities. The stock market index is a convenient and effective product due to the following reasons: i. ii. iii. iv. v. It acts as a barometer for market behaviour. It is used to benchmark portfolio performance. It helps to allocate scarce resources to the best performed companies. It is used as a forecasting tool to predict the future movement of stock indices and also the business cycle. It is used in derivative instruments like index futures and index options.

There are two leading stock exchanges in India which help us trade are: National Stock Exchange: National Stock Exchange incorporated in the year 1992 provides trading in the equity as well as debt market. Maximum volumes take place on NSE and hence enjoy leadership position in the country today. Bombay Stock Exchange: BSE on the other hand was set up in the year 1875 and is the oldest stock exchange in Asia. It has evolved in to its present status as the premier stock exchange. At BSE you will find some scripts listed that are not available on NSE. Also BSE has the largest number of scripts which are listed.

Introduction to BSE:

As we read in the history of Indian stock exchange; the stock exchange, Mumbai, popularly known as BSE". BSE was established in 1875 as The Native Share and Stock Brokers Association". It is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It is a voluntary non-profit making Association of Persons (AOP) and has converted itself into demutualised and corporate entity. It has evolved over the years into its present status as the Premier Stock Exchange in the country. It is the first Stock Exchange in the Country to have obtained permanent recognition in 1956 from the Govt. of India under the Securities Contracts (Regulation) Act, 1956.

The Exchange, while providing an efficient and transparent market for trading in securities, debt and derivatives upholds the interests of the investors and ensures adressal of their grievances whether against the companies or its own member-brokers. It also strives to educate and enlighten

the investors by conducting investor education programmes and making available to them necessary informative inputs. A Governing Board having 20 directors is the apex body, which decides the policies and regulates the affairs of the Exchange.

Introduction to NSE:
The National Stock Exchange (NSE) is India's leading stock exchange covering 364 cities and towns across the country. NSE was set up by leading institutions to provide a modern, fully automated screen-based trading system with national reach. The Exchange has brought about unparalleled transparency, speed & efficiency, safety and market integrity. It has set up facilities that serve as a model for the securities industry in terms of systems, practices and procedures.

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. . The NSE was set-up with the following objectives: o o o o o o o o establishing a nation-wide trading facility for equities, debt Instruments and hybrids. ensuring equal access to investors all over the country through an appropriate communication network providing a fair, efficient and transparent securities market to investors using electronic trading systems. enabling shorter settlement cycles and book entry settlements systems, meeting the current international standards of securities markets.

The standards set by NSE in terms of market practices and technologies have become industry benchmarks and are being emulated by other market participants. NSE is more than a mere market facilitator. It's that force which is guiding the industry towards new horizons and greater opportunities. 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. 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 committees include representatives from trading members, professionals, the public and the management. The day-today management of the Exchange is delegated to the Managing Director who is supported by a team of professional staff.

Stock Indices of BSE and NSE

Indices of BSE
a. Sensex The stock index which is very popular in BSE is Sensex. It is otherwise called BSE Sensitive Index. The base year of this index is April, 1979. It was launched on 2nd January, 1986. The BSE index is a value-weighted index composed of originally 30 companies representing various sectors on the exchange. At present, all scrips are selected from specified groups only. The index is available on line and is updated continuously.

b. BSE National Index The index is made up of 100 scrips with 1982-84 as the base year. The special feature of this index is that it includes prices of scrips in other major stock exchanges of Delhi, Calcutta, Ahmadabad and Madras. In such a case, the average price of the scrip is taken for the compilation of the index.

c. BSE 200 It was introduced in May, 1994 with 1989-90 as the base year. This index consists of equity shares of 200 companies selected on the basis of market capitalisation, volume of turnover and strength of the companys fundamentals. It includes scrips of both and non- specified groups.

d. Dollex It is nothing but BSE-200 expressed in Dollar values so that it may be useful to foreign investors. In Dollex, the BSE-200 is modified by dividing the current rupee market value by rupee- Dollar Conversion Rate. e. BSE-500 It was introduced in 1999 with the base year 1999 itself. It is treated to be a standard index covering all the sections of the economy as well as the major part of capitalisation.

Indices of NSE
The common and popular name of the NSE index is CNX index. All NSE indices are prepared by the India Index Services and Products Ltd. (IISL) which is a joint venture of NSE, CRISIL and Standard and Poor. The CNX stands for the following: C N stands for CRISIL stands for NSE

stands for

Index

Addition of the letters S and P with any index indicates that is supported by the Standard and Poor also.

Major CNX Indices

i. S & P CNX Nifty It is a popular index of NSE. It was introduced in April, 96 with 96 as the base year. It comprises of a well- diversified 50 stock index accounting for 23 sectors of the economy. Of the total traded value of all stocks on NSE, the total value of Nifty Stocks is about 70% and Nifty Stocks represent about 59% of the total market capitalisation. S & P CNX Deity It is nothing but S & P CNX Nifty expressed in dollars and hence, it is basically a dollar dominated index. This is mainly intended for foreign investors. It is computed at online Rupee Dollar Exchange rate.

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CNX Nifty Junior The index was launched in December, 1996 and S & P CNX Nifty and CNX Nifty Junior together account for 100 most liquid stocks in India. The two indices are synchronised so that they will always operate as disjoint sets in the sense that a stock will never appear in both indices at the same time. S & P CNX 500 Equity Index It comprises of 500 stocks covering 79 industries. It is purely a market capitalisation weighted index. It covers 97% of the total turnover in BSE and 73% of the total market capitalisation. CNX Midcap 200 Index As the very name implies, it is the index for the stocks of mid-cap companies, covering industries having market capitalisation between Rs 150 crores and Rs 1000 crores. CNX segment Indices This index reflects the stock market performance of the various segments of the Indian corporate sector like multinationals, PSUs etc. NSE Government Security Index This index is meant for all Government of India Bonds issued after April 1992 but redeemable after 1997. The base date of the index is 1st January, 1997. This index is calculated on daily basis with the help of market capitalisation. New issues are added to the index while the old ones could be removed as soon as they are redeemed.

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