Lecture 9

Recap :
What is the eligibility criteria to become
a member of the stock exchange?
What are the different roles and
responsibilities of a broker?
What are the different requirements for
buying and selling of share?
Explain share group classification of
BSE.
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Lecture 8
Content :
Stock Market Indices
Computation of stock market indices
SEBI

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Objective of the Lecture

To discuss about the stock market
indices.

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Stock Market Indices

Stock market indices are the
barometers of the stock market.
They mirror the stock market
behavior.
The indices give a broad outline of
the market movement and represent
the market.

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STOCK MARKET INDICES

A stock market index may either be a price
index or a wealth index.
The unweighted price index is a simple
arithmetical average of share prices with a
base date. This index gives an idea about the
general price movement of the constituents
that reflects the entire market.
In a wealth index the prices are weighted by
market capitalisation. This gives an idea
about the real wealth created for
shareholders over a period of time.

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STOCK MARKET INDICES

Computation of Stock Index
The following example gives the calculation
procedure for the wealth index.
Let us take an example of an index constructed
with three scrips X, Y and Z.
Equity of the company X : 100 (Par value Rs. 10)
Equity of the company Y : 200 (par value Rs. 10)
Equity of the company Z: 250 (par value Rs. 10)
Market price of scrip X : Rs. 20
Market price of scrip Y: Rs. 30
Market price of scrip Z : Rs. 40

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STOCK MARKET INDICES

Computation of Stock Index
Market Capitalisation (MC) = Number of
shares Prices of shares
X = 100 Rs. 20 = Rs. 2,000
Y = 200 Rs. 30 = Rs. 6,000
Z = 250 Rs. 40 = Rs. 10,000
Aggregate Market Capitalisation = Rs.
18,000.
Index at period N = 100
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STOCK MARKET INDICES

Computation of Stock Index
Market Price at N + 1
X Share price = Rs. 25
Y Share price = Rs. 40
Z Share price = Rs. 50
Market capitalisation
X = 100 Rs. 25 = Rs. 2,500
Y = 200 Rs. 40 = Rs. 8,000
Z = 250 Rs. 50 = Rs. 12,500
Aggregate Market Capitaliation = Rs. 23,000
Index at period N + 1 = Rs. 23,000 100/18,000
N + 1 = 127.78
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Usefulness of Indices
1. Indices help to recognise the broad trends in the market.

2. Index can be used as a bench mark for evaluating the

investors portfolio.
3. Impacts of the various economic policies are reflect on
the stock market.
4. The investor can use the indices to allocate funds
rationally among stocks.
5. Index funds and futures are formulated with the help of
the indices.
6. Technical analysts studying the historical performance of
the indices predict the future movement of the stock
market.

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STOCK MARKET INDICES

The BSE Sensitive Index :
The Sensex has the base year as
1978-79 .
The number of scrips in the Sensex
basket is 30.

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STOCK MARKET INDICES

NSE - 50 Index (NIFTY)
This index is built by India Index Services
Product Ltd (IISL) and Credit Rating
Information Services of India Ltd. (CRISIL).
The CRISIL has a strategic alliance with
Standard and Poor rating Services. Hence, the
index is named as S & P CNX Nifty.
NSE - 50 index was introduced on April
22,1996 .
The base period of the S & P.CNX Nifty index
is the November 3, 1995.
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Introduction to
SEBI
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History
TheSecurities and Exchange Board of
India was established by the
government of India on 12 April 1988
as an interim administrative body to
promote orderly and healthy growth of the
securities market and for investor
protection.
It was to function under the overall
administrative control of the Ministry of
Finance of the GOI.
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History
The SEBI was given a statutory
status on 30 Jan 1992 through an
ordinance.
The ordinance was later replaced
by an Act of Parliament known as
the Securities and Exchange
Board of India Act 1992.

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Reasons for the establishment of SEBI

The capital market had witnessed a
tremendous growth during the 1980s
characterized by the increasing
participation of the public.
This ever expanding investor population
and market capitalization led to a variety
of malpractices on the part of
companies, brokers, merchant
bankers, investment consultants and
others involved in the securities market.
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Continued
These malpractices and unfair trade
practices have eroded investor
confidence and multiplied
investor grievances

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Continued
The government and the stock
exchanges were rather helpless in
redressing the investors problems
because of lack of proper penal
provisions in the existing
legislation.
Therefore the GOI decided to set up
SEBI a separate regulatory body
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PURPOSE & ROLE OF SEBI

To the issuers it aims to provide a
market place in which they can
confidently look forward to raising
finances they need in an easy fair and
efficient manner.
To the investors it provides protection
of their rights and interests through
adequate accurate and authentic
information and disclosure of information
on a continuous basis.
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Continued
To the intermediaries it offers a
competitive , professionalized
and expanding market with
adequate and efficient
infrastructure so as to render
better service to investors and
issuers.

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Objectives:
To regulate stock exchanges and the
securities industry and to promote
their orderly functioning.
To guide , educate and protect the
rights and interests of individual
investors.
To prevent trading malpractices and
achieve a balance between self
regulation by the securities industry
and its statutory regulation.
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Continued
To regulate and develop a code of
conduct and fair practices by
brokers , merchant bankers with a
view to make them competitive and
professional.

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Functions of SEBI
REGULATORY FUNCTIONS
Registration of brokers and sub
brokers and other players in the
market
Registration of collective investment
schemes and Mutual Funds
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Regulatory functions
Prohibition of fraudulent and unfair
trade practices
Controlling insider trading and
takeover bids and imposing penalties
for such practices

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Development functions
Investor education
Training of intermediaries
Promotion of fair practices and code of
conduct
Conducting research and publishing
information useful to all market participants
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Organization of SEBI
The different departments of SEBI are:
Primary department: It has the responsibility
of looking after the policy matters related to
the primary market.
Issue management department: It has the
responsibility of looking after the issuing of
new shares.
Secondary market department: It has the
responsibility of looking after the market price
of the shares in the secondary market.
Institutional investment department: It
has the responsibility of looking after the
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mergers,
acquisitions,
etc.

SEBIs Role in
the Primary Market
For protecting the interest of the
investors in the primary market, SEBI
performs various important roles,
which are as follows:
Entry norms: The SEBI tightens the entry
norms for the companies entering the capital
market.
Promoters contribution: The SEBI regulates
the contribution of the promoters by fixing the
minimum limit
for their contribution made to 26
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the capital issue.

SEBIs Role in
the Primary Market (Contd.)

Disclosure: The draft prospectus is made as a

public document in order to promote
transparency.

Book building: The SEBI accepts book building

as one of the modes of public issue and issues
guidelines for book building mode.

Allocation of shares: The SEBI makes

proportionate allotment of shares in order to
protect the interest of small investors to the
primary market.

Market intermediaries: The merchant bankers

are licensed by the SEBI to carry out their
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SEBIs Role in the Secondary

Market

SEBI has initiated a number of reforms in the

secondary market for making it more attractive
to the investors. These reforms are as follows:
Governing board: The SEBI has reconstituted the governing
board of the stock exchanges.
Infrastructure: In order to sophisticate the shares trading,
SEBI has permitted all the stock exchanges to expand their
online screen-based trading terminals.
Settlement: Rolling settlement was introduced.
Debt market segment: The SEBI has permitted the debt
market instruments to be traded in the stock exchanges.
Price stabilization: A separate division has been set up by the
SEBI to look after the price movements of shares in the market.
Delisting: The norms of delisting of shares has been tightened
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by the SEBI.

Mutual Funds and SEBI

To ensure a smooth functioning of mutual funds,
SEBI has laid down following regulations:
Disclosure norms: The companies in their
disclosure forms (prospectus) must include all the
information about the functioning and nature of the
mutual funds.
Investments: The SEBI has tightened the various
norms of investments of mutual funds so that the
investments can get a better rate of return.
Accountability: The SEBI has issued directives that
proper books of accounts must be maintained
related to the investments made by the mutual
funds.
Dividend: The amount of dividend must not be less
than
90% per cent of the profits earned during the year.
Management:
of the
management must29
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have a great deal of experience, professional

SEBI and the Foreign Institutional

Investment
The Foreign Institutional Investor (FII) is an entity that is
established outside India and proposes to make
investments in India.
A large inflow and outflow of FIIs has a significant
bearing on the stock price movement.
The SEBI, in order to regulate the flow of FIIs in the
stock market has issued the following directives:
An individual must hold a certificate granted by the SEBI, if S/he
has to deal in securities as a foreign institutional investor.
The individual under the provisions of Foreign Exchange
Regulation Act (FERA) 1973 has to take permission in order to
make investments in India.
A custodian has to be appointed by the FIIs to deal in the
securities and reporting.
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Power
SEBI has the right to search and
seizure where just cause can be
given.
In matters of security trading, SEBI
has the power to restrict and
allow trading in a given scrip
without any external (i.e. judicial or
executive) intervention.
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 Announcing guidelines for parking

of funds in short-term deposits of
scheduled commercial banks (SCBs) by
mutual funds, the regulator said that
investment cap would also take into
account the deposit schemes of the
bank's subsidiaries.
The SEBI has also defined 'short term'
for funds' investment purposes as a
period not exceeding 91 days.
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Investors Protection in
New Issue Market
The investors must be protected in
order to ensure smooth functioning
of the new issue market.
The following steps should be taken
to protect the interest of the
investors:

1. Project appraisal: The technical and

economic feasibility of the project is
evaluated so as to determine whether or not
the project should be financed.
2. Underwriting: The reputed institutions
underwrite the issue.

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Investors Protection in
New Issue Market (Contd.)
3. Disclosures in the prospectus: All the data
and information contained in the prospectus is
evaluated.
4. Clearance by the stock exchange: After the
evaluation of the prospectus it is cleared by the
stock exchange.
5. Signing by board of directors: The Board of
Directors of the company sign the prospectus
and it is made available to the investors for
inspection.
6. SEBIs role: SEBI scrutinizes the offer
documents carefully. Any type of misleading
information is deleted by the SEBI.
7. Redressal of investors grievances: The
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grievances Ekta
and
complaints
of the investors are

Summary
Intra day price band fixes the price range
for a scrip for a trading session.
Inter week price band controls the weekly
price movement.
Brokers have to deposit daily margin and
concentration margin on the amount of
transaction undertaken in the stock
exchange.
Stock indices reflect the stock market
behavior.
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Summary
The unweighted price index is a simple arithmetical
average
of share prices on base date.
In the wealth index, prices are weighted by market
capitalisation.
BSE sensitive index comprises of 30 scrips on the basis of
industry representation, market capitalisation, liquidity,
the
market depth, and the floating stock depth.
S & P.CNX Nifty, CNX Nifty Junior and S & P.CNX 500 are
some of the indices based on stocks traded on NSE.

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Lecture 8

QUESTIONS ?

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