UNIT IV

WORKING OF SECURITY MARKET

1st place Regulated by SEBI
Buyer

2nd place
Buyer

Broker

Exchange NSE/BSE

Broker

Seller

Seller

Definition
An exchange is defined as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities The stock exchange provide an organized market place for the investors to buy and sell securities freely.

In the stock exchange, there is active bidding and a two way auction trading takes place
The effective functioning of the stock exchange creates a climate conductive for a growing primary market for new issues An active secondary market leads in existing securities leads to a better psychology of expectations

Primary Market
The primary market is that part of the capital market that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public issue (IPO). Dealers earn a commission that is built into the price of the security offering. Primary markets creates long term instruments through which corporate entities borrow from capital market.

Secondary Market
Capital market apart from the primary market also include markets were securities which have been issued in the past are traded. These secondary market are called stock market or stock exchange. A market where investors purchase securities or assets from other investors, rather than from issuing companies themselves is called secondary market In any secondary market trade, the cash proceeds go to an investor rather than to the underlying company/entity directly

Functions of Secondary Market

Price discovery process which results from the interactions of buyers and sellers in the market when they trade assets Provision of liquidity by providing a mechanism for an investor to sell financial assets Low cost of transactions and information

Stock market trading

Wholesale debt market segment (WDM)

Capital Market segment

Trading in central central government securities segment

Wholesale debt market segment (WDM): the WDM provides the facility for institutions to enter into high value transactions in instruments such as government securities, T-bills, public sector undertaking bonds, units of Mutual fund so on. The players are 1. Trading members: recognized members of exchange 2. participants: organization directly responsible for the settlement of trade 3. Trading system 4. Market type: trading in debt or other instruments 5. Clearing and settlement

Capital Market segment: this segment provides an efficient and transparent platform for trading of equity and preference shares, debentures, warrants, coupons and exchange traded funds. 1. Trading mechanism: the trading system NEAT( national exchange for automated trading system is used as an online software 2. Online IPOs 3. Transaction charges 4. Clearing and settlement 5. Trading recording 6. Pay-in and pay-out of funds and securities Trading in central central government securities segment: to encourage wider participation of all class of investors, trading in Government Securities has been introduce a nation wide ,order driven, screen based trading system of stock exchange 1. Eligible stock exchanges: presently RBI permitted transaction through NSE, BSE and OTCEI 2. Eligible securities: 3. Members eligible to trade in government securities 4. Clearing and settlement systems 5. Settlement of funds and securities

NATIONAL STOCK EXCHANGE (NSE)

NATIONAL STOCK EXCHANGE (NSE) was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 with an equity capital of Rs 25 cr, as a tax-paying company unlike other stock exchanges in the country. The promoters for NSE were financial institutions, insurance companies, banks and SBI capital market ltd, infrastructure leasing and financial services Ltd(IL&FS) &stock holding corporation The National Stock Exchange (NSE) is India's leading stock exchange covering various cities and towns across the country. fully automated screen-based trading system with national reach NSE is a national market for shares, PSU bonds, debentures and government securities since infrastructure and trading facilities are provided

OBJECTIVE OF NSE Establishing nationwide trading facilities for all types of securities . Ensuring equal access to investors all over the country through an appropriate telecommunication network. Providing fair , efficient & transparent securities market using Electronic trading system. Meeting international benchmark and standards ORDER DRIVEN MARKET NSE has an order driven system and allows members to undertake jobbing in securities of there choice. Several members undertake jobbing because of ease of entry and exit and narrow margin resulting in improvement of liquidity and reduction of transaction cost

MARK TO MARKET NSE is the first exchange in the country to introduce mark to market system of margin which reduces the risk of default by members. NSE calculates the mark to market margin as the cumulative loss in excess of 50% of the initial security deposit kept with the exchange by way of cash deposit, bank guarantee or approved securities PRICE BANDS The price bands are based on the liquidity of companys shares and not on volatility alone as the potential for price manipulations is more in the case of illiquid securities. The criteria for determining the measure of liquidity of a security are: frequency of trading, average daily volume of trading, average daily value of trading and average daily number of trades MIMINUM PAID UP CAPITAL With regard to companies whose shares are already listed on another exchanget here will now be a requirement of a minimum market capitalization of Rs 20 cr for companies with a paid up capital of at least Rs 10 cr TRADING : 1. Whole sale Market 2. Capital Market

ELECTRONIC TRADE MONITORING SYSTEM The stock- watch system is a computer system designed and programmed to monitor market activity and identify aberrations from historical patterns SETTLEMENT The settlement cycle is completed within eight days of the last day of the trading cycle COUNTER GUARANTEES NSEs 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 of payment or delivery takes place for trades done on NSE

OVER THE COUNTER EXCHANGE OF INDIA (OTCEI)

The OTCE was incorporated under section 25 of the company Act. OTCE has been set up to meet a long felt need for a second tier market where companies with small paid paid-up capital and with less onerous condition could have the advantage of listing OTC exchange is promoted by all India financial institutions, merchant banks and established as recognized stock exchange. Companies listed on OTC Exchange enjoys the same status as companies listed on any other stock exchange in the country
OTC Market in USA: OTCEI with ASTOCS is modelled on National Association of Securities Dealers Automated Quotation System (NASDAQ) in the United States of America Objective of OTCEI: OTCEI has been set- up to help small investors who face the problem of access, liquidity, delays in payment and delivery and uncertainty about prices at which shares are bought and sold; and companies who face the problem of issue cost and restricted access to the market

Members: They are financial institutions, banks, mutual funds, venture capital funds and large financial companies having a minimum net worth of Rs 2.5 cr The functions of the members are 1. Appraise and evaluate proposals 2. Value the script 3. Sponsor the script to other market participants 4. Hold the script till project completion 5. Arrange for an additional market Dealers: it would be a corporate body, partnership firms and individual having a net worth of Rs 5 lakhs and 2 independent references from the bank regarding financial standard dealers are expected to have adequate financial strength to be able to carry on the trading and market making function Dealer should possess adequate organizational infrastructure to carry on the functions of investment, trading and market making Dealer should have adequate knowledge of trading, stock valuation, share transfer rules and laws

Members n being appointed by the company act as sponsors to listing of new script which include the following function: 1. 2. 3. Appraise the project of a company Value the script to be listed on OTC Exchange Sponsor the scrip to other members and licensed dealers and place the entire script with them Make market for three years from the date script are offered for public trading Arrange for one more member, licensed dealer to make market for the scrip for at least one year

4. 5.

Listing on the OTC Exchange: Listing on OTCEI may be done by companies with equity capital of less than Rs 10 cr Listing requirements of OTCEI 1. The minimum issued share capital of more than Rs 30 lakhs 2. For companies with an issued shares capital of more than Rs 30 lakhs but less than Rs 300 lakhs, the minimum public offer should be 25% of the issue capital or Rs 20 lakhs of worth of shares whichever is higher 3. Companies with an issued equity capital of more than Rs300 lakhs seeking listing on the OTC will have to comply with the listing requirements and guidelines as are applicable