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ROLL NO: 629

(Session 2011 2016)

University School of Business

Punjabi University, Patiala
Talwandi Sabo, Bathinda


I take this opportunity to express my deep sense of gratitude to all our

friends and seniors who helped and guide me to complete this project
successfully. I am highly grateful and indebted to my project guide Mr. Sadhu
Ram (guide & co-coordinator) and for their excellent and expert guidance in
helping us in completion of project report.


The successful completion of this project was a unique experience for me
because by visiting many place and interacting various person, I achieved a
better knowledge about this project. The experience which I gained by doing
this project was essential at this turning point of my carrier this project is
being submitted which content detailed analyst of the research under taken
by me.
The research provides an opportunity to the student to devote her skills
knowledge and competencies required during the technical session.
The research is on the topic capital market


Introduction to Ludhiana stock exchange

Organization of LSE
Management of LSE
Strengths of LSE
Investors related services
Educational initiatives of exchange
Listing of securities of companies at LSE


Introduction and definition

Advantages of capital market
Disadvantages of capital market
Function of capital market
Role of capital market in an economy
The importance of C.M for the economic development of India
Significance of capital market
The importance of C.M in economy
C.M: Components and functions
Capital market instruments
Primary market
Secondary market
Activities in the primary market
How does Primary Market works?
Types of issues
Secondary market
Activities in the secondary market
Major entities involved in the C.M
Secondary market & its operations


History and function of stock exchange

The stock exchanges
Member of the stock exchange
Settlement cycle


SEBI(intermediaries) Regulation,2008
SEBI Regulations, 1992

Welcome to LSE Securities Limited

LSE Securities Ltd., was incorporated in 07TH January, 2000 with a view to
revive the capital market in the region and for taking full advantage of the
emerging opportunities being provided by expansion of bigger stock
exchanges like NSE and BSE. The company since its inception has marched
forward rapidly and has maintained consistent growth record.
LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange has
presence at various locations to effectively service its large base of individual
clients. The clients of the company greatly benefit from strong research
capability, which encompasses fundamentals as well as technicals of LSE
Securities Ltd, besides its wide reach in this part of the country.
LSE SECURITIES LIMITED (LSESL) is a subsidiary of the Ludhiana Stock
Exchange Limited under the policy formulated by the Securities and
Exchange Board of India (SEBI) for Revival of Small Stock Exchanges. The
policy enunciated by the SEBI permits a stock exchange to float a subsidiary,
which can take up membership of larger stock exchanges, such as the
National Stock Exchange of India Ltd. (NSE), and Bombay Stock Exchange
Ltd. (BSE). LSESL has been registered by SEBI as a Trading-cum-Clearing
Member in the Capital Market segment and Futures & Options segment of
NSE and Capital Market segment of BSE and Trading member of MCX-Stock
Exchange Limited. Trading Members of LSE can access NSE and BSE by
registering themselves with SEBI as Sub-brokers of LSESL.

LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange,
which was formed with an objective to enhance business and investment
opportunities for the investors and members of Ludhiana Stock Exchange at
large, through innovative products by encompassing a variety of activities
related to the capital market. The company has a paid-up capital of Rs 5.55
LSE Securities Ltd., was incorporated in January, 2000 with a view to revive
the capital market in the region and for taking full advantage of the
emerging opportunities being provided by expansion of bigger stock
exchanges like NSE and BSE. The company since its inception has marched
forward rapidly and achieved many milestones in a short span of existence.

The Council of the management of the Company comprises of 10 directors
of which 3are broker members and 7non-brokers. Five non broker members
are Independent Directors of eminent status from the field of finance, law
and management and remaining two are Chief Executive Officer of LSE
Securities Limited and Executive Director of the holding company (Ludhiana
Stock Exchange), who are on the Board of the company as ex-officio
Directors. Thus the council of management has representation of subbrokers as well as professionals and subject specialists representing various
fields of business activities. Operations of the company are run in a
professional, transparent and fair manner keeping in view of the interest of
investors as well as other stake-holders.
SEBI, at the initiative of LSE, permitted smaller Stock Exchanges, to trade
on bigger Stock Exchanges through their subsidiary companies. The
Ludhiana Stock Exchange floated its subsidiary company, the LSE Securities
Limited, with the objective of obtaining trading rights on bigger Stock
Exchanges. It has obtained corporate membership of both NSE and BSE in
the first half of year 2000.
The LSE Securities Ltd. commenced trading operations in Capital Market
Segments of BSE and NSE in September, 2000 and December 2000
respectively. The turnover of the Company at NSE and BSE is growing by
leaps and bounds ever since in incorporation. There was encouraging
response from the sub-brokers specially at NSE counters.During the

financial year 2005-06, the Company recorded a turnover of Rs. 7975

crores and Rs.3834 crores in "Capital Market" segments of NSE and BSE
respectively. For the year ended 2005-2006, there were 128 sub-brokers
registered for NSE and 68 for BSE.
The LSE Securities Ltd. commenced trading operations in Future and
Options Segment of NSE in February 2002. The Company became the first
subsidiary of any Regional Stock Exchange which commenced trading in
F&O Segment of NSE. Response to trading facilities in the F&O segment
of NSE has been very encouraging and volumes generated in this segment
soon exceeded those in Capital Market segment.
The LSE Securities Limited has provided facility to its sub-brokers for
trading on NSE and BSE through VSAT counters which are located outside
Stock Exchange Building. During 2005-2006, 27 sub-brokers of the
company have been trading through VSAT on NSE and 13 on BSE.
In order to provide professional services to the investors of LSE Securities
Limited through its sub-brokers, the company motivated its sub-brokers and
its staff to qualify the certification in financial markets conducted by NSE.
All trading terminals for Capital Market Segment and F&O segment are
being operated by the persons after having qualified the said certification
The LSE Securities Ltd. commenced its operations as Depository Participant
of NSDL in August 2000. The DP services provided by the Company have
technology edge over other DPs, as DP of the company is the only On-line
Real-Time DP in the region. As a result of efficient services and competitive
rates, the Company has been able to increase its market share in the DP
business at the cost of other DPs in the region. As on date DP of NSDL and
CDSL of the Company at Ludhiana is servicing over 35000 beneficiary
In order to further strengthen its services to sub-brokers and investors, the
Company applied for the DP of CDSL. It started DP operations of CDSL in
December 2001. With the operationalisation of DP Services of CDSL, the
Company has been able to provide delivery of shares to sub-brokers and
investors on the day of pay-out which in turn helps the sub-brokers to give
timely deliveries to their clients. Introduction of CDSL operations has also
enabled the sub-brokers and investors of the Company to timely meet the
pay-in obligations of securities purchased by the investors on BSE and sold

next day on NSE through the Company and vice-versa.

To increase its presence in the region further, the company plans to open
its branches of Depository Services in the major cities of the region. To start
with, it has already opened its branches at Jalandhar, Amritsar and

The management of the Company comprises of 12 directors of which 5 are
member directors and 5 Public Representatives being persons of eminent
status from the field of finance, law and management, who are nominated
by Ludhiana Stock Exchange after approval of their name from SEBI.
Besides the Chief Executive Officer of company and Executive Director of
the holding company (Ludhiana Stock Exchange) are on the Board of the
company as ex-officio Directors. Operations of the company are run in a
professional, transparent and fair manner keeping in view the interest of
investors as well as other stake-holders.


LSE brand is popular among masses.

We have requisite infrastructure for the capital market activities
which includes a multistoried, centrally air conditioned building
situated in the financial hub of the cities i.e. feroze Gandhi market.

We have well experienced staff handling operations of stock

We have competent board and professional management.
We have much needed networking of sub brokers in the entire
regions, who are having rich experience in stock exchange operations
for the last thirty one years.
We have more than forty six thousands clients spread across Punjab,
Himachal Pradesh, Jammu & Kashmir and adjoining areas of Haryana
and Rajasthan.
The turnover of our subsidiary is the highest amongst all subsidiaries
of regional stock exchanges in India.


The exchange has been providing a variety of services for the benefits of
the investing public. The services include investors service centers,
investors protection fund and investor educational seminar.
1. Investors service centers:
The exchange has setup investors service centers at lse building for
providing information relating to capital market to the general public. The
centers subscribe to leading economic, financial dailies and periodicals.
They also stored the annual reports of the company listed at the stock
exchange. The investors service centers are also equipped with a terminal
foe providing live rates of trading at NSE and BSE.
A large number of investors visit the centers to utilize the services being
provided by the exchange.
The exchange has been organizing investors awareness seminars for the
benefit of the investors of the region comprising state of Punjab, Himachal
Pradesh, Jammu & Kashmir, Chandigarh and adjoining areas of Haryana and
Rajasthan. This massive exercise of organizing investor awareness
seminars has been launched as a part of securities market awareness
campaign launched by SEBI in January, 2003. The exchange apprises the
investors about dos and donts to be observed while dealing in securities
market. During 2011 to 2012, till date, exchange has organized more than
83 workshops in the region mentioned above.
3. WEBSITE OF THE EXCHANGE: the exchange has its on website with the domain name The website provides valuable information about the latest
market commentary, research report about company, daily status of
international market, is separate module for internet trading, information
about listed companies and brokers and sub brokers of the exchange and
its subsidiary. The website also contain many useful links on portfolio
management, investors education, frequently asked questions about
various topics relating to primary and secondary market, information about

mutual funds, financials of the company including quarterly results, share

prices, profit and loss accounts, balance sheet and many more. The
websites also contains daily technical charts of various scrips being traded
in BSE and NSE.
LSE has carved out its unique position among the stock exchanges of the
country for the knowledge management. It has set up an education and
training cell and the same has emerged as a leading facility in various
financial services in India. The exchange has been conducting a unique
certification programme in capital market in a association with center for
industry institute partnership programme Punjab university, Chandigarh for
the last three years. This programme has widened the horizons of
participants vis--vis capital market operations as practical skills based
knowledge is provided by stock brokers, stock exchange officials, professors
of finance and business management and above all professionals working
in different areas of capital market. We have completed
Series of batches of this programme and we now want to scale up this
programme and are planning to launch various other programmes on areas
relating to securities market. We have edge over others as far as
educational training in financial services is concerned due to following

Directly connected with the industry as regional stock exchanges.

Connected with the large base of investors as they use the stock
exchange as a trading platform for their liquidity needs.
Presence in the region of Punjab, Himachal Pradesh, Jammu &
Kashmir and Chandigarh through our branches network and the area
being under the jurisdiction of our exchange.
Already running certificate programmes in capital market
Continuously holding investor programmes for investors and
investors groups through association with brokers, sub brokers,
colleges, universities and consumer groups.


At present, LSE has 324 listed companies, out of which 211 are regional
and 113 are non regional. The total listed capital of aforesaid companies is
rupees, 3063.56 crore approximately. The market capitalization of the said
company is more than rupees 1890.53 crore. The stock exchange is
covering the vast investors base through the listing if above said
companies, which are situated in the region of Punjab, Himachal Pradesh,
Jammu & Kashmir Chandigarh. LSE has facilitated the capital generation for

agro based industries as Punjab is an agriculture led economy. It will

continue to do so, once it gets approval for a tie up with bigger exchanges
for commencing trading operations.

Markets exist to facilitate the purchase and sale of goods and services. The
financial market exists to facilitate sale and purchase of financial
instruments and comprises of two major markets, namely the capital
market and the money market. The distinction between capital market and
money market is that capital market mainly deals in medium and long-term
investments (maturity more than a year) while the money market deals in
short term investments (maturity upto a year).
Capital market can be divided into two segments viz. primary and
secondary. The primary market is mainly used by issuers for raising fresh
capital from the investors by making initial public offers or rights issues or
offers for sale of equity or debt. The secondary market provides liquidity to
these instruments, through trading and settlement on the stock exchanges.
Capital market is, thus, important for raising funds for capital formation and
investments and forms a very vital link for economic development of any
country. The capital market provides a means for issuers to raise capital
from investors (who have surplus money available from saving for
investment). Thus, the savings normally flow from household sector to
business or
Government sector, which normally invest more than they save.
A vibrant and efficient capital market is the most important parameter for
evaluating health of any economy.

Capital markets provide a wide range of products and services that are
related to financial investments. Capital markets include the stock market,
commodities exchanges, the bond market, and just about any physical or
virtual service or intermediary where debt and equity securities can be
bought or sold. Their primary purpose is to raise funds and channel
investors money to areas where there is a deficit or need for investment.
They play a vital role as intermediaries between governments and
companies, which use them to finance a myriad of activities.
The capital markets can be broken down into the primary market, where
new stocks and bonds are issued to investors, and the secondary market,

where existing stocks and bonds are traded.

In the primary market, governments, companies, or public sector
organizations can obtain funding through the sale of a new stock or bonds.
These are normally issued through securities dealers and banks, which
underwrite the offered stocks or bonds. The issuers earn a commission,
which is built into the price of the security offering.
In the secondary market, stocks and shares in publicly traded companies
are bought and sold through one of the major stock exchanges, which serve
as managed auctions for stock. A stock exchange, share market, or bourse
is a company, corporation, or mutual organization that provides facilities for
stockbrokers and traders to trade stocks and other securities. Stock
exchanges also provide facilities for the issue and redemption of securities,
trading in other financial instruments, and the payment of income and

History of Capital Markets

The origin of Capital Markets goes back to the early 17 th century. The Dutch
were the pioneers in capital markets and they successfully leveraged the
power of capital markets to withstand the British and won three wars
against them, despite being a smaller nation in all aspects. Finally, British
collaborated with the Dutch and became an expert in leveraging Capital
Markets that led to the rise of the British Empire. One major reason for the
success of British Empire over the French, despite France having population
three times that of the British, was that they were able to raise capital from
public at low interest rates, whereas its counter parts, such as French
didnt have superior financial markets and their cost of raising the capital
from public was very high.
In the United States of America, the stabilization of securities market begun
with the passing of the Blue Sky Law in 1911 in the Kansas State to
protect investors through anti-fraud provisions, regulation of brokers,
dealers and registration of securities. The technology innovation in United
States made them the biggest economy in the world. Information
Technology led to paradigm shift and revolutionized the structure and
functioning of Capital Markets by reducing information asymmetry and
assisting faster settlements of transactions. The most significant
development in Capital Markets is the way the technology has erased the

geographical boundaries.
The story of Capital Markets in India dates back to the 18 th century when
trading shares of East India commenced. The real story of Indias Capital
Markets started in July 1875 with the formation of Stock Exchange in
Mumbai by the brokers. Indias Capital Market in terms of GDP raised from
75 percent in 1995 to 130 percent of GDP in 2005. But the relative growth
compared to US, Malaysia and South Korea remains low, indicating
immense untapped potential.


Capital markets provide the lubricant between investors and those

needing to raise capital.

Capital markets create price transparency and liquidity. They provide

a safe platform for a wide range of investors including commercial
and investment banks, insurance companies, pension funds, mutual
funds, and retail investorsto hedge and speculate.

Holding different shares or bonds allows an investor to spread

investment risk.

The secondary market gives important pricing information that

permits efficient use of limited capital.


In capital markets, bond prices are influenced by economic data such

as employment, income growth/decline, consumer prices, and
industrial prices. Any information that implies rising inflation will
weaken bond prices, as inflation reduces the income from a bond.

Prices for shares in capital markets can be very volatile. Their value
depends on a number of external factors over which the investor has
no control.

Different shares can have different levels of liquidity, i.e. demand

from buyers and sellers.

Functions of the capital market

The major objectives of capital market are:
To mobilize resources for investments.
To facilitate buying and selling of securities.
To facilitate the process of efficient price discovery.
To facilitate settlement of transactions in accordance
predetermined time Schedules.



What is the role of capital markets in an economy?

Provides an important alternative source of long-term finance for
long-term productive investments. This helps in diffusing stresses on the
banking system by matching long-term investments with long-term capital.
Provides equity capital and infrastructure development capital that has
strong socio-economic benefits - roads, water and sewer systems, housing,
energy, telecommunications, public transport, etc. - ideal for financing
through capital markets via long dated bonds and asset backed securities.
Provides avenues for investment opportunities that encourage a
thrift culture critical in increasing domestic savings and investment ratios

that are essential for rapid industrialization. The Savings and investment
ratios are too low, below 10% of GDP.
Encourages broader ownership of productive assets by small savers
to enable them benefit from Kenyas economic growth and wealth
distribution. Equitable distribution of wealth is a key indicator of poverty
Promotes public-private sector partnerships to encourage
participation of private sector in productive investments. Pursuit of economic
efficiency shifting driving force of economic development from public to
private sector to enhance economic productivity has become inevitable as
resources continue to diminish.
Assists the Government to close resource gap, and complement its effort in
financing essential socio-economic development, through raising long-term
project based capital.
Improves the efficiency of capital allocation through competitive
pricing mechanism for better utilization of scarce resources for increased
Provides a gateway to Kenya for global and foreign portfolio investors, which
is critical in supplementing the low domestic saving ratio.

The Importance of Capital

Development of India





Capital Market is a channel through which the wealth of savers are put into
long-term productive use. Both the Equity and Bond markets are parts of
Capital Markets. Governments and Companies use Capital Markets to raise
money for their long-term investments. The capital is raised through debt
and equity instruments. Capital Markets are of two types: Primary market is a
market for new shares and secondary market is a market for trading existing

Significance of Capital Markets

Allocation of Capital: One of the major economic benefits generated by
development of the Capital Markets is improved allocation of capital. The
prices of Equity and Debt respond immediately to change in market
conditions and quickly embodied in current asset prices. The signal created

by the price change encourages or discourages capital inflow to an

Allocation of Risk: The other major economic benefit generated by
development of the Capital Markets is improved allocation of Risk. Capital
Markets facilitates investors to earn returns based on their risk taking ability.
Investors invest in high-risk instruments either because they are less risk
averse or because the new risk is unaffected or negatively correlated with
other investments in the portfolio.
Mobilization of Savings: Capital Markets is a good channel to move idle
savings to most productive units in the economy. In any economy savings are
moved to borrowers through Capital Markets or through Banking Financial
Corporations/ Non-Banking Financial Corporations. In the first case the
transaction occurs through the exchange of securities. In case of common
stock the transfer results in ownership and in case of debt there is a
contractual obligation to pay interest rate and debt. The advantage of
investing in Capital Markets is the price of the securities fluctuates in
response to change in supply and demand and can be brought and sold to
third parties. As a result, the investor usually has a good idea of what the
securities are worth and can obtain liquid funds by selling the securities. On
the other hand, in the second case the investor doesnt have claim over the
ultimate beneficiary of the funds and the price of the claim doesnt fluctuate
in response to shift in supply and demand.
Policy Making: Capital Markets play an important role in improving policy
framework of a country. This is because when policy makers embark on bad
policies the equity and bond prices tend to fall. Capital markets anticipate
the future prospects of a country thus they reduce politicians incentives to
do things that provide short-term gains, but that brings long-term costs that
will hurt the economy.
The postponement of new GAAR proposal and Retrospective taxation
amendments shows how Capital Markets impact policy making. After
amendment of GAAR and Retrospective taxation amendments in budget last
year (2012) both FDI and FII inflows dropped and stock market fell down that
led to fall in rupee value and credit rating by top rating agencies.
Micro, Small and Medium Enterprises (MSME): Traditionally MSME are
the ones that faced difficulty in obtaining capital at low interest rate, but
MSME sector contributes 8% of the country's GDP, 45% of the manufactured

output and 40% of our exports. It provides employment to about 6 crore

people and are the largest generator of employment in Indian Economy.
Apart from the facts mentioned above, about the significance of Capital
Markets, there is a vast amount of empirical data that supports the
importance of Capital Markets facilitating economic growth. The view that
Capital Markets is associated with superior economic performance can be
verified by looking the correlation between Real GDP VS performance of
Capital Markets in developed economies. Below is the list of superior
economic performance in five major respects in countries with good Capital
Market environment.

Higher productivity growth

Higher real-wage growth

Greater employment opportunities

Greater macroeconomic stability

Greater homeownership

If one looks into history and traces back the reasons for flourishing of
economies such as Dutch and United Kingdom the reasons for the success of
these economies lies in piping the public saving in to long-term investments.
The Dutch were the first to procure funds from public; they raised capital to
trade and maintain battle ships in order to protect their ships from the
pirates. British had replicated the Dutch financial system and became an
Empire and eventually the countries that replicated good Capital Market
practices, like United States, also flourished.
The Capital Markets play a significant role in any economy from allocation of
Capital and Risk to Policy Making. If there is any single factor that makes a
huge impact in improving the GDP of a country, it is the effective allocation

of capital to the Industry and Government. Capital Market is the best channel
to route the savings into long-term productive use. If we look in to the
economy and find the enterprises that were hit by high cost of capital, one
can observe that MSME that provides highest number of employment
opportunities were worst hit by it. If a country develops and adopts best
Capital Market practices they create multiple effects and helps in reviving
the economy. The SME Exchange is a welcome move for the Small and
Medium Scale Enterprises, but it is alone not enough to revive MSME.
Capital market is the heart of any economy through which the savings are
channelized into effective long-term investments. A developed and vibrant
Capital Market will immensely contribute towards speedy economic growth
and development.


It is very difficult today to imagine ourselves the times when there were no
banks, stock markets, money markets, public debts, times when the fortune
of a person was only measured by the surface of land owned, by the number
of animals one possessed as well as by the number of work hands one could
use in the working the field. Economies presented themselves in the form of
gold or silver goblets or jewels, and usury the practice consisting of the
charging of interest on money was prohibited both by law and by the
The capital market today is a reality met in any modern economy. It is a
market thenecessity of which is unchallengeable, an extremely dynamic and
innovative structure, permanently adapting to the economic environment
and at the same time an influential factor of it, generating opportunities and
to the same extent risk for all categories of participants to the economic
activity, being a replica of a national economy to a small scale, but
nevertheless especially representative.
Tributary to the conditions in which it was formed and developed, the capital
market brings together under this syntagma different conceptions. The
continental-European conception attributes to this market a more comprising
structure, containing the monetary market, the mortgage market and the
financial market. In the Anglo-Saxon conception, which the economic
practice has also adopted in our country, the capital market is a component
of the financial market together with the monetary market and the insurance

The specificity of this market derives from numerous aspects, but defining
and at the same time delimitative in relation to other components of the
financial market are the following traits:
It is a market specialized in transactions with medium and long term
financial assets, unlike the monetary market which offers solutions for
refinancing through short and medium term capitals;
It is a public, open and transparent market, in the sense that anyone can
be a participant on this market, without there being notable entry or exit
barriers, the transactions having a public character;
The dissemination of information on this market, through its volume or,
quickness and with the possibility of equal reception by all participants, is
probably the best one from the ones existing in the structures of a market
The capital circulation vehicle is represented by securities, characterized
through negotiability of the price and immediate transferability with very low
transaction costs;
The transaction is made through intermediaries, who have an essential
role in connecting the owners or issuers of securities with the owners of
It entails risks both for the issuer and for the investor, specific for each
financial instrument in question, but at the same time it also offers complex
solutions for minimizing and dispersing it, both the financial and the
operational one;
It is an organized market, in the sense that the transactions are
performed according to certain principles, norms and rules known and
accepted by participants. This does not mean the administration of the
market, but its regulation with the purpose of creating or preserving the
conditions for the unfolding of free competition, so a system for
guaranteeing the free and open character of all transactions.
In a market economy, the role of the capital market is of first rate. The well
functioning of the capital market is vital in the contemporary economy in
order to be able to perform an efficient transfer of money resources from
those who save towards those who need capital and those who succeed to
offer it a higher capitalization; the capital market can significantly influence
the quality of the investment decisions.
Depending on the moment when the transaction is performed, the capital
market is divided into two temporal dependant segments: primary and
The primary market has the role of placing the issuing of securities, to attract
the available financial capitals on medium and long term, both on the
internal capital markets, and on the international one appealing to the public
The secondary market once the securities are set into circulation, through
the issuance on the primary market, they are the object of transactions on
the secondary market. The existence of this type of market offers to the
owners of shares and bonds the possibility to capitalize them before they

bring a profit (dividends or interests). The secondary market represents, at

the same time, the way to concentrate in the same place private or
institutional investors who can sell or buy securities, having the guarantee
that they are valuable and can be reinserted into the circuit at any time.
The secondary market is also the almost perfect expression of the free
adjustment between the offer and demand of securities, being a barometer,
in the first place for the need for capital, but also for the economic, social
and political state of a country. From this point of view, the secondary capital
market can be considered a perfect market, where the law of demand and
offer finds the perfect terrain for its unfenced action. Ensuring the mobility of
capitals, of liquidities on long and medium term, of the negotiability of any
security that passes the primary market, the secondary market attracts, at
the same time, professional investors, but also amateur investors, in the
hope of a maximum profit in record time.
The stock exchange is an important institution of the capital market, specific
to the market economy, which concentrates in the same geographical and
economic space the demand and offer of securities, openly, freely and
permanently negotiated, based on known regulations. The stock exchanges
always represent an extremely sensitive and accurate barometer of the
status quo in the economic, geo-political and foreign currency field. The price
a security is negotiated for accurately reflects the economic-financial state of
the company that issued it, in a positive or negative sense.
Most times, because of the interdependencies in a national economy, but
also at world level, the modification of the rate of a certain security can
attract with it chain modifications, with repercussions on other securities. It is
true that, sometimes, the stock exchange can register false signals
(incidental or directed), disturbing the real situation. The psychological and
emotional factors have always had and will continue to have a notable role.
A question the enterprisers and the smaller or larger companies always ask
themselves is:
Which is the optimum way for financing investments? The answers are not
many and along time they were the same: either using the own fortune,
either requesting a subsidy from the state or from another institution or from
anywhere else, or obtaining a bank loan or turning to the stock market.
The first option is only possible for those who own the necessary capital. The
second option is determined by exceptional situations. In regard to the bank
loan, although it is a more realistic option than the other two, it is maybe not
the most wanted one, first because it is expensive (the interests are, in
general, quite high) and, second, the banks set a series of hard and strict
conditions, often difficult to meet by the applicant.
A possibility, for an enterpriser or for a company, to
obtain money (capital), avoiding the problems raised by the options above, is
represented by the public sale of shares or bonds with the help of the stock
exchange. The stock exchange ensures the shortest and most efficient circuit
between the economies or temporary surplus of capital of those who want to

invest on medium or long term (be it companies, funds, banks, insurance

companies or plain private individuals) and the needs for financing of the
enterprisers or of the commercial companies. The stock exchange becomes
thus a strong competitor for the banks, representing a serious alternative to
the bank loan, often times more expensive and difficult to obtain.
From the above it is clearly noted that the main role of the stock markets is
that of financing the economy (especially the economic agents), by
mobilizing capitals on medium and long term. Also, another important role of
the stock exchange is that it facilitates the circulation of capitals, the
securities being easily transformed into liquidities or exchanged into other
securities, by selling or re-selling them on this market.
The most important function of the stock exchange is that the transactions
with the securities issued and initially placed on the primary capital market
are performed here. After the securities have been issued and placed with
the investors, they can be freely transacted on the stock exchange because
of their negotiable character, thus guaranteeing the investor that he can
recuperate the placed money funds, of course for the value they have on
that date on the market.
Also, the stock exchange is the place and instrument for some important
sector reorganizing and restructurings. On the stock markets a redistributing
of the financings within the economy takes place: the financial funds are
oriented towards more lucrative or perspective fields, because an investor
can very easily sell here the securities he no longer considers to be a very
good placement and invest in a sector he considers more attractive.
Another interesting aspect is that of the acquiring of companies and of
mergers on the stock market, which are increasingly frequent. The stock
exchange facilitates these operations and the main instrument through
which the tender offer is performed. The tender offer is the operation
performed through a intermediation company through which an investor
announces that he is willing to buy partially or all the shares on the market of
a commercial company he is interested on, for a firm price and within a well
defined period of time. This is how most takeovers, transfers and mergers
take place on the stock market.
On the stock exchange the sell-buy price for the quoted
securities is permanently established and displayed. The stock market offers
systematic information concerning the rate of the quoted securities and,
implicitly, information on the listed companies and even on the respective
economy on the whole. In this sense an important indicator is the stock
exchange capitalization of a listed company, which shows the market value
of that company: it is calculated by multiplying the total number of shares of
that company with their market rate. In order to evaluate the dimensions of a
stock market the total stock exchange capitalization can also be calculated
by adding all the stock exchange values (stock exchange capitalizations) of
the companies listed on those markets.

Finally, the stock exchange reflects especially accurately the

overall situation of an economy, as well as its trends and perspectives.
Especially useful for this purpose is the studying of the stock exchange
indexes, calculated as an average of the evolutions and of the volume of
transactions for a representative sample of shares or for their totality, on
each stock exchange in part.
The collection of the temporary available capitals in the economy, the
reallocation of those insufficient of inefficiently capitalized at a certain point
and even the favoring of some sector restructurings, are meant to outline the
place presently occupied by the capital market in the economy of many
countries, not only the most developed ones.
The observation that in the developing countries the same attention must be
granted to the starting and developing of an efficient financial market is wellfounded, just as much as the preoccupations for developing the
infrastructure of telecommunications. This is more important in the transition
countries, considering the necessity to reorient resources from the inefficient
sectors towards to efficient ones, thus ensuring the increase of efficiency in
economy, supporting the economic reform process and even the
privatization actions.

The importance of the financial market is given by the significant role it
plays in the finances (financing) of the enterprises and of the state, by the
percentage the direct financing has among the methods for financing.
Beyond what is apparently important - the high volume of transactions on
the stock market - what really counts is the place the (primary) market holds
in the development first of the stock companies (direct financing), and this is
sometimes forgotten, or appears secondary. The well functioning of the
financial market is a strong fundament for ensuring a lasting growth, on the
long term, of the national economy; the financial market and firstly the
capital market represent in many countries and could also represent in
Romania the engine for economic development.
If to a certain extent they can be
replaced as financing sources, it must not be understood that financing
through the banking system and financing through the capital market are
perfectly replaceable, but rather complementary. In most cases, the issuing
of shares or bonds tend to sooner supplement, than replace the bank loans,
especially when the allocation of some important resources is wanted for
sustaining some large investment plans, when a farther horizon for the
maturity of the loan is sought, or even obtaining non-refundable funds for
the price of dilution of capital and future dividends.

More and more issuers turn to financing instruments which

not until long ago seemed too sophisticated, and the theoretical
advantages of the listing on the stock exchange start to be the put into
practice. The ability of the capital market to mobilize important financial
resources now is no longer doubted and any company listed on the stock
exchange will also consider from now on the issuing of bonds or shares
among its financing options.
The Romanian capital market is ready both for the financing
of companies and for the use of some sophisticated methods for forming the
subscription price, and through the behavior of investors recently, it seems
keen for new securities. This does not mean it can absorb the entire
necessary of financing of the Romanian economy or that it can handle
debt/equity financing ratios such as those from the developed capital
markets, but nor can it be said that it does not offer sufficient liquidity or that
the risk of the volatility of prices in the case of some public offers is
alarming. Moreover, the current moment is an especially favorable one for
the unfolding of this financing process for businesses, process also propelled
by an overall economic conjuncture favorable for investments, through a
stock market found under the sign of the bull, through a penetration in
Romania of important foreign capital funds that seek placements as
profitable as possible.

Capital Market

Instruments some of the capital market

instruments are:
Preference shares
Debenture/ Bonds

Corporate securities
The total capital of a company may be divided into small units called shares.
For example, if the required capital of a company is US $5,00,000 and is
divided into 50,000 units of US $10 each, each unit is called a share of face
value US $10. A share may be of any face value depending upon the capital
required and the number of shares into which it is divided. The holders of the
shares are called share holders. The shares can be purchased or sold only in
integral multiples.
Equity shares signify ownership in a corporation and represent claim over the
financial assets and earnings of the corporation. Shareholders enjoy voting

rights and the right to receive dividends; however in case of liquidation they
will receive residuals, after all the creditors of the company are settled in full.
A company may invite investors to subscribe for the shares by the way of:
Public issue through prospectus
Tender/ book building process
Offer for sale
Placement method
Rights issue

The word stock refers to the old English law tradition where a share in the
capital of the company was not divided into shares of fixed denomination
but was issued as one chunk. This concept is no more prevalent, but the
word stock continues. The word joint stock companies also refers to this

Debt Instruments
A contractual arrangement in which the issuer agrees to pay interest and
repay the borrowed amount after a specified period of time is a debt
instrument. Certain features common to all debt instruments are:
Maturity the number of years over which the issuer agrees to meet the
contractual obligations is the term to maturity. Debt instruments are
classified on the basis of the time remaining to maturity
Par value the face value or principal value of the debt instrument is called
the par value.
Coupon rate agreed rate of interest that is paid periodically to the
investor and is calculated as a percentage of the face value. Some of the
debt instruments may not have an explicit coupon rate, for instance zero
coupon bonds. These bonds are issued on discount and redeemed at par.
Thus the difference between the investors investment and return is the
interest earned. Coupon rates may be fixed for the term or may be variable.
Call option option available to the issuer, specified in the trust indenture,
to call in the bonds and repay them at pre determined price before
maturity. Call feature acts like a ceiling f or payments. The issuer may call
the bonds before the stated maturity as it may recognize that the interest
rates may fall below the coupon rate and redeeming the bonds and replacing
them with securities of lower coupon rates will be economically beneficial. It
is the same as the prepayment option, where the borrower prepays before
scheduled payments or slated maturity
Some bonds are issued with call protection feature, i.e they would
not be called for a specified period of time

Similar to the call option of the issuer there is a put option for the
investor, to sell the securities back to the issuer at a predetermined
price and date.
The investor may do so anticipating rise in the interest rates wherein the
investor would liquidate the funds and alternatively invest in place of higher
Refunding provisions in case where the issuer may not have cash to
redeem the debt instruments the issuer may issue new debt instrument and
use the proceeds to repay the securities or to exercise the call option.
Debt instruments may be of various kinds depending on the repayment:
Bullet payment instruments where the issuer agrees to repay the entire
amount at the maturity date, i.e lumpsum payment is called bullet payment
Sinking fund payment instruments where the issuer agrees to retire a
specified portion of the debt each year is called sinking fund requirement
Amortization instruments where there are scheduled principal
repayments before maturity date are called amortizing instruments

Debentures/ Bonds
The term Debenture is derived from the Latin word debere which means to
owe a debt. A debenture is an acknowledgment of debt, taken either from
the public or a particular source. A debenture may be viewed as a loan,
represented as marketable security. The word bond may be used
interchangeably with debentures.
Debt instruments with maturity more than 5 years are called bonds

Most common method of calculating the yields on debt instrument is the
yield to maturity method, the formula is as under:
YTM = coupon rate + prorated discount / (face value + purchase price)/2

Main differences between shares and debentures

Share money forms a part of the capital of the company. The share holders
are part proprietors of the company, whereas debentures are mere debt, and
debenture holders are just creditors.
Share holders get dividend only out of profits and in case of insufficient or
no profits they get nothing and debenture holders being creditors get
guaranteed interest, as agreed, whether the company makes profit or not.
Share holders are paid after the debenture holders are paid their due first
The dividend on shares depends upon the profit of the company but the
interest on debentures is very well fixed at the time of issue itself.
Shares are not to be paid back by the company whereas debentures have
to be paid back at the end of a fixed period.
In case the company is wound up, the share holders may lose a part or full
of their capital but he debenture holders invariably get back their

Investment in shares is riskier, as it represents residual interest in the

Debenture, being debt, is senior.
Debentures are quite often secured, that is, a security interest is created
on some assets to back up debentures. There is no question of any security
in case of shares.
Share holders have a right to attend and vote at the meetings of the share
holders whereas debenture holders have no such rights.

Quasi debt instruments

Preference shares
Preference shares are different from ordinary equity shares. Preference share
holders have the following preferential rights
(i) The right to get a fixed rate of dividend before the payment of dividend to
the equity holders.
(ii) The right to get back their capital before the equity holders in case of
winding up of the company.

Segments of capital market

The Capital Market consists of
A) Primary Market
B) Secondary Market

Primary Market: A market where the issuers access the prospective

investors directly for funds required by them either for expansion or for
meeting the working capital needs. This process is called disintermediation
where the funds flow directly from investors to issuers. The other alternative
for issuers is to access the financial institutions and banks for funds. This
process is called intermediation where the money flows from investors to
banks/financial institutions and then to issuers.
Securities CDSL BCCDJune 2010 Page 5 of 144Primary market comprises of
a market for new issues of shares and debentures, where investors apply
directly to the issuer for allotment of shares/ debentures and pay application
money to the issuer. Primary market is one where issuers contact directly to
the public at
large in search of capital and is distinguished from the secondary market,
where investors buy/ sell listed shares / debentures on the stock exchange
from / to new existing investors. Primary market helps public limited
companies as well as Government organizations to issue their securities to
the new / existing shareholders by making a public issue / rights issue.
Issuers increase capital by expanding their capital base. This enables them

to finance their growth plans or meet their working capital requirements, etc.
After the public issue, the securities of the issuer are listed on a stock
exchange(s) provided it complies with requirements prescribed by the stock
exchange(s) in this regard. The securities, thereafter, become marketable.
The issuers generally get their securities listed on one or more than one
stock exchange. Listing of securities on more than one stock exchange
enhances liquidity of the securities and results in increased volume of
trading. A formal public offer consists of an invitation to the public for
subscription to the equity shares, preference shares or debentures has to be
made by a company highlighting the details such as future prospects,
financial viability and analyse the risk factors so that an investor can take an
informed decision to make an investment. For this purpose, the company
issues a prospectus in case of public issue and a letter of offer in case of
rights issue, which is essentially made to its existing shareholders. This
document is generally known as Offer document. It has the information
about business of the company, promoters and business collaboration,
management, the board of directors, cost of the project and the means of
finance, status of the project, business prospects and profitability, the size of
the issue, listing, tax benefits if any, and the names of underwriters and
managers to the issue, etc.
The issuers are, thus, required to make adequate disclosures in the offer
documents to enable the investors to decide about the investment.
Making public issue of securities is fraught with risk. There is always a
possibility that the issue may not attract minimum subscription stipulated in
the prospectus. The risk may be high or low depending upon promoters
making the issue, the track record of the company, the size of the issue, the
nature of project for which the issue is being made, the general economic
conditions, etc. Issuers would like to free themselves of this worry and attend
CDSL BCCDJune 2010 Page 6 of 144 their operations wholeheartedly if they
could have someone else to worry on their behalf. For this purpose the
companies approach underwriters who provide this service.
Normally, whenever an existing company comes out with a further issue of
securities, the existing holders have the first right to subscribe to the issue in
proportion to their existing holdings. Such an issue to the existing holders is
called Rights issue. The price of the security before the entitlement of rights
issue is known as the cum-rights price. The price after the entitlement of
rights issue is known as the ex-rights price. The difference between the two
is a measure of the market value of a right entitlement. An existing holder,
besides subscribing to such an issue, can let his rights lapse, or renounce his
rights in favour of another person (free, or for a consideration) by signing the
renunciation form.
The companies declare dividends, interim as well as final, generally from the
profits after the tax. The dividend is declared on the face value or par value
of a share, and not on its market price.

A company may choose to capitalize part of its reserves by issuing bonus

shares to existing shareholders in proportion to their holdings, to convert the
reserves into equity. The management of the company may do this by
transferring some amount from the reserves account to the share capital
account by a mere book entry. Bonus shares are issued free of cost and the
number of shareholders remains the same. Their proportionate holdings do
not change. After an issue of bonus shares, the price of a companys share
drops generally in proportion to the issue.

Activities in the Primary Market

1. Appointment of merchant bankers
2. Pricing of securities being issued
3. Communication/ Marketing of the issue
4. Information on credit risk
5. Making public issues
6. Collection of money
7. Minimum subscription
8. Listing on the stock exchange(s)
9. Allotment of securities in demat / physical mode
10. Record keeping

How does Primary Market work?

Preparation and Filing of Offer Document:
i. A company wanting to raise capital from the public is required to prepare
an offer document giving sufficient information and disclosures, which
enables (potential) investors to make an informed decision. Accordingly, the
offer document is required to contain details about the company, its
promoters, the project, financial details, objects of raising the money, terms
of the issue etc. How to read the offer document is dealt in the section
How to apply in public issue.
ii. The issuer company engages a SEBI registered merchant banker to
prepare the offer document. Besides, due diligence in preparing the offer
document, the merchant banker is also responsible for ensuring legal
compliance. The merchant banker facilitates the issue in reaching the
prospective investors (marketing the issue).
iii. The draft offer document thus prepared is filed with SEBI and is made
( Company is also required to make a
public announcement about the filing English, Hindi and in regional language
newspapers. In case, investors notice any wrong / incomplete / lack of

information in the offer document, they may send their representation /

complaint to the merchant banker and / or to SEBI.
iv. The Indian regulatory framework is based on a disclosure regime. SEBI
reviews the draft offer document and may issue observations on the draft
offer document with a view to ensure that adequate disclosures are made by
the issuer company/merchant bankers in the offer document to enable the
investor to make an informed investment decision in the issue. It must be
clearly understood that
SEBI does not vet and approve the offer document.
v. SEBIs observations on the draft offer document are forwarded to the
merchant banker, who incorporates the necessary changes and files the
final offer document with SEBI, Registrar of Companies (ROC) and stock
This is made available on websites of the merchant banker, stock
exchange(s) and SEBI.
Opening of the Issue:
vi. After completing legal formalities, the issuer company issues
advertisements in
English, Hindi and regional language news papers and the issue is open to
public for subscription.
vii. If the prospective investor is interested in subscribing to the shares of the
issuer company based on what is disclosed in the offer document, he can
apply for its shares (or debentures) before the issue closes, by duly filling up
the application form and making the payment. How to apply invest in
(public) issues, is covered separately.
viii. The entire back office operation of the public issue, including processing
of application forms, despatch of refunds, allotment of securities, is handled
by the Registrar to the Issue (RTI) on behalf of the issuer company.
ix. It is to be noted that only one application per PAN is allowed in any issue.
If investor makes more than one application, all the applications are liable to
be rejected. The RTI matches applicants name in the application form and
verifies it against the PAN, demat account details (DP ID and Demat A/c No)
and also weeds out duplicate applications.
Allotment and Listing:
x. The issue then closes (investor cannot apply beyond the closing date)
and the shares are allotted to the applicants proportionally or on lottery
basis, if there is oversubscription. The merchant banker and RTI finalize the
basis of allotment.
This is approved by the stock exchange officials and the basis of allotment is
made available in the website of the RTI. The issuer company issues
advertisements in English,
xi. Upon allotment, investor will receive demat credit within 12 days. The
dispatch of refund cheques, instructions for unblocking amount in bank
account (for

ASBA) and instructions for electronic credits of refund money, is given by

the RTI within 12 days of the close of the issue. ASBA is dealt in the section
How to apply in public issue.
xii. The shares of the company are then listed on the stock exchange
within 12 working days of the close of the issue. Listing of shares (or
debentures) in stock exchange enables the investor to buy securities from or
sell securities to other investors (secondary market).
xiii. The complete contact details of all the intermediaries involved in an
issue namely merchant banker, RTI, banker to the issue etc. are available in
the offer document. In case the investor needs any clarification they can
contact them.

Different types of issues

i. Public issue: When a company raises funds by selling (issuing) its shares
(or debenture / bonds) to the public through issue of offer document
(prospectus), it is called a public issue.
1) Initial Public Offer: When a (unlisted) company makes a public issue for
the first time and gets its shares listed on stock exchange, the public issue is
called as initial public offer (IPO).
2) Further public offer: When a listed company makes another public issue
to raise capital, it is called further public / follow-on offer (FPO).
ii. Offer for sale: Institutional investors like venture funds, private equity
funds etc., invest in unlisted company when it is very small or at an early
stage. Subsequently, when the company becomes large, these investors sell
their shares to the public, through issue of offer document and the
companys shares are listed in stock exchange. This is called as offer for
sale. The proceeds of this issue go the existing investors and not to the
iii. Issue of Indian Depository Receipts (IDR): A foreign company which
is listed in stock exchange abroad can raise money from Indian investors by
selling (issuing) shares. These shares are held in trust by a foreign custodian
bank against which a domestic custodian bank issues an instrument called
Indian depository receipts
(IDR), denominated in `. IDR can be traded in stock exchange like any other
shares and the holder is entitled to rights of ownership including receiving
iv. Others:
1) Rights issue (RI): When a company raises funds from its existing
shareholders by selling (issuing) those new shares / debentures, it is called
as rights issue. The offer document for a rights issue is called as the Letter
of Offer and the issue is kept open for 30-60 days.
Existing shareholders are entitled to apply for new shares in proportion to the
number of shares already held. Illustratively, in a rights issue of 1:5 ratio, the
investors have the right to subscribe to one (new) share of the company for
every 5 shares held by the investor.

2) In a Bonus Issue, the company issues new shares to its existing

As the new shares are issued out of the companys reserves (accumulated
profits), shareholders need not pay any money to the company for receiving
the new shares.
The net worth (owners money) of a company consist of its equity capital and
its reserves. After a bonus issue, there is an increase in the equity capital of
the company with a corresponding decrease in the reserves, while the net
worth remains constant. In a bonus issue of 5:1 ratio, the investor will
receive five new shares of the company for each share the investor held as
illustrated below.
d. Pricing of (public) issues
On the basis of pricing, issues can be classified into Book Built issues and
Fixed Price issues. We shall focus on the book built issues as most of the
issues nowadays are through this method.
i. In a Book Building issue the issuer company mentions the minimum and
maximum price (price band) at which it will sell (issue) its shares. Thus the
offer document (in this case, called the Red Herring Prospectus) contains
only the price band instead of the price at which its shares are offered to the
Within this price band the investor can choose the price at which the investor
are willing to buy the shares and also the quantity. As this process is similar
to bidding in an auction, the application form for book built issue is also
known as the bid form.
At times the issuer may revise the price band (revision of price band)
which has to be accompanied with news paper advertisement.
Bids by various investors are entered into the stock exchange system
through the brokers (also called syndicate member) terminal. The list of
the bid received from investors at various price bands is known as the
book and can be seen in the website(s) of the stock exchange for each
investor category.
Based on the total demand in the book, the cut off price is then decided
by the issuer and merchant banker. The cut off price is the price at which the
cumulative demand for shares, equals or exceeds the offer size.
2. How to invest in (public) issue?
a. The pre-requisites
(i) The investor need to have Permanent Account Number (PAN) issued by
Income Tax Department and quote the same in the application form.
However, the investors are not required to attach photocopy of PAN along
with the application form.
(ii) Bank account
(iii) Shares or debentures allotted in a public issue will be credited to the
investors account in electronic form. For this the investor need to have a

demat account and the investor need to fill up the correct 16 digit demat
account number in the application form.
1. How to obtain prerequisites
(i) Obtaining PAN: The website of Tax Information Network of Income Tax
Department provides on-line application for PAN.
The investor can submit his application and make payment on line or off line
and forward physically copies of the required documents [proof of identity,
proof of residence, photograph and demand draft (if the payment is off line)]
to the address mentioned therein.
(ii) Opening Demat account: Just as money is kept in bank account, shares
and debentures can be kept in electronic form in a demat account by an
entity called Depository.
For opening a demat account, the investor has to approach a Depository
Participant (DP), an agent of Depository, and fill up an account opening
form. The list of DPs is available in the websites of Along with the account
opening form, the investor must enclose the any one of the following
document for proof of identity and proof of address as under.
No. Documents for proof of identity
Documents for proof of address
1 Passport
2 Voter ID card
3 Driving license
4 Identity card / document with applicants Photo, issued by
a. Central / State Government and its Departments
b. Statutory / Regulatory Authorities
c. Public Sector Undertakings
d. Scheduled Commercial Banks
e. Public Financial Institutions
f. Colleges affiliated to Universities
g. Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to their
Members and;
h. Credit cards / Debit cards issued by banks
5 PAN cards with photograph Bank Passbook
6 - Ration Card
7 - Verified copies of
a) Electricity bills (not more than 2 months old)
b) Residence Telephone bills (not more than 2 months old) and
c) Lease and License agreement /
Agreement for sale
8 - Self-declaration by High Court and
Supreme Court judges, giving the new address in respect of their own
The investor has to produce the original documents, including PAN card, for
verification by the DP at the time of account opening.
The investor will have to enter into an agreement with DP in the standard
format, which gives details of rights and duties of investor and DP. The

investors are entitled to receive a copy of the agreement and schedule of

charges for future reference.
The DP will open then account and give the investor a 16 digit demat
account number (8 digit DP ID and 8 digit Client ID). All purchase /
investment in securities will be added (credited) to this account. Upon sale of
securities, the demat account will be reduced (debited).
b. Getting the offer document
The offer documents of public issues are available on the websites of
merchant banker and stock exchange. It is also available in the website of
SEBI under Offer Documents section The investor can obtain hard copy of
the offer document from SEBI upon payment of ` 100 through Demand Draft
made in favor of Securities & Exchange Board of India or obtain it from the
issuer company at its registered office or from the merchant banker. The
abridged prospectus contains all the salient features of the offer
document and is available along with the issue application form.
d. How to fill the application form
(i) General:
You can make up to 3 bids in the same application form in book built issues.
Alternatively, you can choose to bid at the cut off option, if your investment
amount is less than ` 200,000. Above that amount, you will not be treated as
a retail investor and you will be in the category of non institutional
investor. However, you can submit only one application per issue.
1 Status of applicant: (Individual / HUF)
2 Name of the applicant(s)
3 Age of the bidder (in case of joint holders, age of first applicant)
4 Depository Participant Name
6 Category of Investor: (Retail)
7 Payment details: (Cheque / DD Number, Bank Name)
Bank account number, Bank branch details
Check Refund Option, if covered under 68 centers* prescribed by RBI and
IFSC code of Bank
Signing the undertaking authorizing to mark a lien of funds by the bank
9 PAN Numbers
10 Signature of applicant
11 - Signature of Bank account holder, if different from applicant
* Available in the offer document and RBI web site
Fill the form legibly without any crossing, corrections and over writing. Please
strike off the non applicable fields in the application form. Always mention
the application form number on the reverse of the draft / cheque.
Remember to update your bank account number, postal address etc.
mentioned in your demat account as you will receive refund credits /
cheques as per the details mentioned in your demat account.

(ii) ASBA application form:

You can avail ASBA facility even if you do not hold account with SCSB. For
this your ASBA application has to be signed by the account holder.
(iii) If you have bank account with SCSB, you can apply online if the bank
offers internet banking facility.
Grounds for rejections: (even after filling all the above fields)
Applications made by partnership firms, minors
Payment made by postal order / money order / cash / stock invest
Bids made below minimum lot or not in multiples of lot prescribed in the
offer document
when there is a difference in the Names of the holder(s), DP ID, Client
ID provided in the application and details available with Depository
Multiple applications
Names of the joint holders are not in the same order as details available
with Depository
Inactive demat account
Applications, which do not bear stamp of the syndicate member
(In case of normal application)
Inadequate funds in the bank account
Outstation Cheques / Drafts drawn on the banks not participating in the
clearing process
e. Submitting the application form
The application form and the offer document have the full contact details
of where you can submit the filled up forms.
Ensure that you submit the application well within the closing date and time
(i) Submit the ASBA application forms to the designate branch of the SCSB/
Syndicate member and collect Transaction Registration Slip (TRS) /
(ii) Submit non ASBA application forms to the stock broker (syndicate
member) along with a cheque for the payment and obtain acknowledgement
(date stamping on the counterfoil).
(iii) Retain the acknowledgement till allotment / refund is complete as it is
crucial evidence in case of any complaint.
f. Checking the demand for the book built issue at any point of time
The status of bidding in a book built issue is available on the website(s) of
stock exchange(s) on a consolidated basis. The data is also available investor
category wise.
g. Revision of bids
You can revise both the price and the quantity of your bid(s) within the price
band, till the issue closing date. For this use the revision form available along
with the application form and submit it to the same broker / SCSB.
Remember to collect the revised TRS.
h. Withdrawal of Bids
You can withdraw your bid till the closure of the issue by approaching
syndicate member/ SCSB.

After closure of the issue, you can withdraw your bid till the finalization of the
basis of allotment by making a written application to the RTI.
i. Allotment of shares
Shares will be allotted to you and credited to your demat account within 12
days of the close of the issue.
In the case of bonds/ debentures, the timeline for allotment is 30 days of the
close of the issue.
k. Interest for delay in allotment / refund
You are eligible to receive interest @ 15% p.a. upon delay in allotment /
refund beyond the prescribed period.
l. Any other requirement
Peruse the post issue advertisements issued by the company for the issue
price and the basis of allotment.
m. Listing of the shares
Equity shares are listed on the stock exchange for trading within 12 days of
closure of the issue.
n. Grievance redressal (non receipt of shares, delay in refund etc.)
In case of any grievance in a public issue, you can approach the compliance
officer of the issuer, whose name and contact details are mentioned on the
cover page of the Offer Document.

Secondary Market: In the secondary market the investors buy / sell

securities through stock exchanges. Trading of securities on stock exchange
results in exchange of money and securities between the investors.
Secondary market provides liquidity to the securities on the exchange(s) and
this activity commences subsequent to the original issue. For example,
having subscribed to the securities of a company, if one wishes to sell the
same, it can be done through the secondary market.
Similarly one can also buy the securities of a company from the secondary
A stock exchange is the single most important institution in the secondary
market for providing a platform to the investors for buying and selling of
securities through its members.
In other words, the stock exchange is the place where already issued
securities of companies are bought and sold by investors. Thus, secondary
market activity is different from the primary market in which the issuers
issue securities directly to the investors.
Traditionally, a stock exchange has been an association of its members or
stock brokers, formed for the purpose of facilitating the buying and selling of
securities by the public and institutions at large and regulating its day to day
operations. Of late however, stock exchanges in India now operate with due
recognition from Securities and Exchange Board of India (SEBI) / the
Government of India under the Securities Contracts (Regulation) Act, 1956.
The stock exchanges are either association of persons or are
formed as companies. There are 24 recognized stock exchanges in India out

of which one has not commenced its operations. Out of the 23 remaining
stock exchanges, currently only on four stock exchanges, the trading
volumes are recorded. Most of regional stock exchanges have formed
subsidiary companies and obtained membership of Bombay Stock Exchange,
(BSE) or National Stock Exchange (NSE) or both. Members of these stock
exchanges are now working as sub-brokers of BSE / NSE brokers.

Securities listed on the stock exchange(s) have the

following advantages:

The stock exchange(s) provides a fair market place.

It enhances liquidity.
Their price is determined fairly.
There is continuous reporting of their prices.
Full information is available on the companies.
Rights of investors are protected.

Stockbroker is a member of the stock exchange and is licensed to buy or sell

securities for his own or on behalf of his clients. He charges a commission
(brokerage) to the clients on the gross value of the transactions done by
them. However, some of the stockbrokers, apart from buying and selling of
securities for their clients for a commission, offer facilities such as
safekeeping clients shares and bonds, offering investment advice, planning
clients portfolio of investments, managing clients portfolio.
There are experts who believe that by identifying and processing relevant
information pertaining to financials of the companies "correctly" and quickly
(as compared to the market as whole), they can predict the share price
movement faster than the market and thus outperform the market. Such
experts are known as fundamental analysts. These experts use the
fundamental approach to security valuation, for estimating the fundamental
price (or fundamental price-earnings multiple) of a security.
Fundamental Analysis refers to scientific study of the basic factors, which
determine a shares value. The fundamental analyst studies the industry and
the companys sales, assets, liabilities, debt structure, earnings, products,
market share; evaluates the companys management, compares the
company with its competitors, and then estimates the shares intrinsic worth.
The fundamental analysts tools are financial ratios arrived at by studying a
companys balance sheet and profit and loss account over a number of
years. Fundamental analysis is more effective in fulfilling long-term growth
objectives of shares, rather than their short-term price fluctuations.
Ratios of values obtained from a companys financial statements are used to
study its health and the price of its securities. The most important among
these are current ratio, price earning (P/E) ratio, earnings to equity ratio,
price-book value ratio, profit before tax to sales ratio, and quick ratio.
Accounting figures, which help to arrive at these ratios, include book value,
dividend, current yield, earning per share (EPS), volatility, etc.

Unlike the fundamental analysts, there are other experts who believe that
largely the forces of demand and supply of securities determine the security
prices, though the factors governing the demand and supply may
themselves be both objective and subjective. They also believe that
notwithstanding the day-to-day fluctuations, share prices move in a
discernible pattern, and that these patterns last for long periods to be
identified by them.
Such analysts are called as Technical Analysts.
Technical analysis is a method of prediction of share price movement based
on a study of price graphs or charts on the assumption that share price
trends are repetitive, and that since
CDSL BCCDJune 2010 Page 9 of 144 investor psychology follows certain
pattern, what is seen to have happened before is likely to be repeated. The
technical analyst is not concerned with the fundamental strength or
weakness of a company or an industry; he studies investor and price
A stock market operator who expects share prices to fall in the immediate
future and keeps selling (with the intention to pick up the shares later at a
lower price for actual delivery), causing selling pressure and lowering the
prices further is called a "Bear. The term is derived from the attacking
posture of the bear, pushing downwards.
A stock market operator who expects share prices to rise and keeps buying
(to sell the shares later at higher price), causing buying pressure and
increasing the prices further is called a
Bull. The term is derived from the attacking posture of the bull, pushing
Stag is a person who subscribes to a new issue with the primary objective of
selling at profits no sooner than he gets the allotment.
Contract Note is a document given by the stockbroker to his clients giving
particulars of the securities bought / sold, rate and date of transaction and
the brokers commission. The broker sends the contract note after executing
the clients order as an agreement. The contract note must be carefully
preserved, as it is a primary documentary evidence of clients' transactions
being executed by a member of a stock exchange. In case of any dispute
between them, this can be used for the purpose of arbitration or filing
claims / compensation against the member of the stock exchange who has
executed the transaction. It also serves as evidence to the income tax
authorities in verification of computations of short-term or long-term capital
gains or losses.
Buying or selling of securities of a particular company with an expectation
that the prices will increase or decrease in a span of short duration with an
objective to generate income on account of such fluctuations in price is
called Speculation. This is an activity in which a person assumes high
risks, often without regard for the safety of his invested principal, to achieve
capital gains in a short time. Investing in securities with the intention of
holding them for long term for realizing appreciation in the value of the

securities should be the aim of the investors who wish to derive benefits
from holding investments for long term.
Arbitrage means buying shares on one stock exchange at a lower rate and
selling the same on other stock exchange at a higher rate.

Activities in the Secondary Market


Trading of securities
Risk management
Clearing and settlement of trades
Delivery of securities and funds

Major entities involved in the capital market:



The market for long term securities like bonds, equity stocks and preferred
stocks is divided into primary market and secondary market. The primary
market deals with the new issues of securities. Outstanding securities are
traded in the secondary market, which is commonly known as stock market
predominantly deals in the equity shares. Debt instruments like bonds and
debentures are also traded in the stock market. Well regulated and active
stock market promotes capital formation.
Growth of the primary market depends on the secondary market. The health
of the economy is reflected by the growth of the stock market.

History of Stock Exchanges in India

The origin of the stock exchanges in India can be traced back to the later
half of 19th century. After the American Civil War (1860-61) due to the
share mania of the public, the number of brokers dealings in shares
increased. The brokers organised an informal association in Mumbai named
The Natick Stock and Share Brokers Association in 1875.
Increased activity in trade and commerce during the First World War and
Second War resulted in an increase in the stock trading. Stock exchanges
were established indifferent centre like Chennai, Delhi, Nagpur, Kanpur,
Hyderabad and Bangalore. The growth of stock exchanges suffered a
setback after the end of World War. Worldwide depression affected them.
Most of the stock exchanges in the early stages had a speculative nature of
working without technical strength. Securities and Contract Regulation Act,
1956 gave powers to the central government to regulate the stock
exchanges. The stock exchanges in Mumbai, Calcutta, Chennai,
Ahmadabad, Delhi, Hyderabad and Indore were recognised by the SCR Act.
The Bangalore stock exchange was recognised only in 1963. At present we
have 23 stock exchanges and 21 of them had hardware and software
compliant to solve Y2K problem. Till recent past, floor trading took place in
all the stock exchanges.
In the floor trading system, the trade takes place through open outcry
system during the official trading hours. Trading pests are assigned for
different securities where buy and sell activities of securities took place.
This system needs a face to face contact among the traders and restricts the
trading volume.
The speed of the new information reflected on the prices was rather slow.
The deals were also not transparent and the system favoured the brokers
rather than the investors. The setting up of NSE and OTCEI with the screen
based trading facility resulted in more and more stock exchanges turning
towards the computer based trading. Bombay stock exchange introduced
the screen based trading system in 1995, which is known as BOLT (Bombay
On-line Trading System). Madras stock exchange introduced Automated
Network Trading System (MANTRA) on Oct 7th 1996. Apart from Bombay
stock exchange, Vadodara, Delhi, Pune, Bangalore, Calcutta and
Ahmadabad stock exchanges have introduced screen based trading. Other
exchanges are also planning to shift to the screen based trading. The
turnover and market share of the various stock exchanges are given in

Functions of Stock Exchange

Maintains Active Trading
Shares are traded on the stock exchanges, enabling the investors to buy and
sell securities. The prices may vary from transaction to transaction. A
continuous trading increases the liquidity or marketability of the shares
traded on the stock exchanges.

Fixation of Prices
Price is determined by the transactions that flow from investors demand
and suppliers preferences. Usually the traded prices are made known to
the public. This helps the investors to make better decisions.
Ensures Safe and Fair Dealing
The rules, regulations and by-laws of the stock exchanges provide a
measure of safety to the investors. Transactions are conducted under
competitive conditions enabling the investors to get a fair deal.
Aids in Financing the Industry
A continuous market for shares provides a favorable climate for raising
capital. The negotiability and transferability of the securities helps the
companies to raise long-term funds. When it is easy to trade the securities,
investors are willing to subscribe to the initial public offerings. This
stimulates the capital formation.
Dissemination of Information
Stock exchanges provide information through their various publications.
The publish the share prices traded on daily basis along with the volume
traded. Directory of Corporate information is useful for the investors
assessment regarding the corporate. Handouts, handbooks and pamphlets
provide information regarding the functioning of the stock exchanges.
Performance Inducer
The prices of stock reflect the performance of the traded companies. This
makes the corporate more concerned with its public image and tries to
maintain good performance.
Self-regulating Organization
The stock exchanges monitor the integrity of the members, brokers, listed
companies and clients. Continuous internal audit safeguards the investors
against unfair trade practices. It settles the disputes between member
brokers, investors and brokers.
Regulatory Framework
A comprehensive legal framework was provided by the
Securities Contract Regulation Act, 1956 and the Securities and Exchanges
Board of India Act, 1992. A three tire regulatory structure comprising the
Ministry of Finance, the Securities and
Exchanges Board of India and the Governing Boards of the
Stock Exchanges regulate the functioning of stock exchanges.
Ministry of Finance
The stock Exchanges Division of the Ministry of Finance has powers related
to the application of the provision of the SCR Act and licensing of dealers in
the other area. According to
SEBI Act, the Ministry of Finance has the appellate and supervisory powers
over the SEBI. It has power to grant recognition to the stock Exchanges and
regulation of their operations. Ministry of Finance has the power to approve
the appointments of executive chiefs and nominations of the public

representatives in the Governing Boards of the stock exchanges. It has the

responsibility of preventing undesirable speculation.
The Securities and Exchange Board of India the Securities and Exchange
Board of India even though established in the year 1988, received statutory
powers only on 30th Jan 1992. Under the SEBI Act, a wide variety of powers
is vested in the hands of SEBI. SEBI has the powers to regulate the business
of stock exchanges, other security markets and mutual funds. Registration
and regulation of market intermediaries are also carried out by SEBI. It has
the responsibility to prohibit the fraudulent unfair trade practices and
insider dealings. Take overs also monitored by the SEBI. Stock Exchanges
have to submit periodic and annual returns to SEBI. SEBI has the
multipronged duty to promote the healthy growth of the capital market and
protect the investors.
The Governing Board
The Governing Board of the stock exchange consists of elected member
directors, government nominees and public representatives.
Rules, byelaws and regulations of the stock exchange provide substantial
powers to the Executive Director for maintaining efficient and smooth day
to day functioning of the stock exchange. The governing Board has the
responsibility to maintain and orderly and well regulated market.
The governing body of the stock exchange consists of 13 members of which
(a0 6 members of the stock exchange are elected by the members of the
stock exchange (b) central government nominates not more than three
members. (c) The board nominates three public representatives (d) SEBI
nominates persons not exceeding three and (e) the stock exchange appoints
one Executive Director.
One third of the elected members retire at annual general meeting. The
retired member can offer himself for election if he is not elected for two
consecutive years. If a member serves in the governing body for two years
consecutively, he should refrain from offering himself for another two year.
The members of the governing body elect the President and vice-president.
It needs no approval from the Central Government or the Board. The office
tenure for the President and Vice-President is one year. They can offer
themselves for reelection, if they have not held office for two consecutive
years. In that case they can offer themselves for re-election after a gap of
one-year period.
The Stock Exchanges
The names of the stock exchanges are given below
Ahmadabad Stock Exchange
Bangalore Stock Exchange
Bhubaneswar Stock Exchange
Bombay Stock Exchange
Calcutta Stock Exchange

Cochin Stock Exchange

Coimbatore Stock Exchange
Delhi Stock Exchange
Guwahati Stock Exchange
Hyderabad Stock Exchange
Indore Stock Exchange
Jaipur Stock Exchange
Kanpur Stock Exchange
Ludhiana Stock Exchange
Madras Stock Exchange
Magadh Stock Exchange
Mangalore Stock Exchange
Pune Stock Exchange
Saurashtra Stock Exchange
Vadodhara Stock Exchange
Inter Connected Stock Exchange
Stock exchanges normally function between 10:00 a.m. and 3:45 p.m. on the
working days. Badla sessions are held on Saturdays.

Member of the Stock Exchange

The Securities Contract Regulation Act of 1956 has provided uniform
regulation for the admission of members in the stock exchanges. The
qualifications for becoming a member of a recognised stock exchange are
given below.
The minimum age prescribed for the members is 21 years.
He/she should be an Indian Citizen.
He should be neither a bankrupt nor compounded with the creditors.
He should not be convicted for fraud or dishonesty.
He should not be engaged in any other business connected with a company.
He should not be a defaulter of any other stock exchange.
The minimum required educational qualification is a pass in 12th
The Mumbai and Calcutta stock exchanges have set up training institutes to
enable the members to understand the complexities of the stock trading. In
recent days highly qualified persons such as Company secretaries, charted
accountants and MBAs are becoming members. Corporate membership is
also permitted now. The members transacting business through their
appointed members. The governing board has to approve the partnership
and the appointed membership in other stock exchanges. If he applies
before the completion of five years he has to relinquish the If membership
of the present membership before accepting the other.

The Broker
A member/broker registered with the recognized stock exchange has to
apply to the SEBI for registration. Likewise a sub-broker even though he is
registered with the stock exchange should apply to SEBI for registration.
Usually the agreement between the broker and the sub broker is carried out
on a non judicial stamp paper of Rs 10. The agreement generally specifies
the authority and responsibility of the broker and sub broker.
The broker has to abide by the code of conduct laid down by the SEBI. The
code of conduct prevents the malpractice, manipulation and gives other
statutory requirements. If
A broker is involved in manipulation or price rigging or gives false
information, his registration is likely to be suspended. If the rules and
regulations regarding insiders trading and take over codes are not adhered
to, the registration may even be cancelled.
Broker and the Investor
1. The broker should provide adequate information regarding the stocks.
2. The broker should be capable of giving short term and long term
investment suggestions to the investors.
3. The broker should be able to confirm the purchase and sale of the
securities quickly.
4. He should be able to provide price quotes quickly, which is now possible
with the computer network.
5. The broker should be noted for his integrity. He should have a good name
in the society.
6. The broker should have adequate experience in the market to take
correct decision.
7. The broker should have contact with other stock exchanges to execute
the order profitably.
8. The broker should also offer incidental service like arranging for
financing the clients transaction.

Types of Orders
Buy and sell orders are placed with the members of the stock exchanges by
the investors. The orders are of different types.
Limit Orders
Orders are limited by a fixed price. Buy Reliance Petroleum at Rs 50. Here,
the order has clearly indicated the price at which it has to be bought and
the investor is not willing to give more than Rs 50.
Best Rate Order
Here, the buyer or seller gives the freedom to the broker to execute the
order at the best possible rate quoted on that particular date for buying. It
may be the lowest rate for buying and the highest rate for selling.
Discretionary Order
The investor gives the range of price for purchase and sale. The broker can
use his discretion to buy within the specified limit.

Generally the approximate price is fixed. The order stands as this Buy BRC
100 shares around Rs 40.
Stop Loss Order
The orders are given to limit the loss due to unfavorable price movements in
the market. A particular limit is given for waiting.
If the price falls below the limit, the broker is authorised to sell the shares
to prevent further loss.
Buying and Selling Shares
To buy and sell shares the investor has to locate a registered broker or sub
broker who can render prompt and efficient service to him. Then orders to
buy or sell the specified number of shares of a company of the investors
choice are placed with the broker. The order may be of any of the above
mentioned type. After receiving the order, the broker tries to execute the
order in his computer terminal. Once matching order is found, the order is
executed. The broker delivers the contract note to the investors. It gives
details regarding: the name of the company, number of shares bought,
price, brokerage, and date of delivery of shares. In the physical trading
form, once the broker gets the share certificate through the clearing houses
he delivers the share certificate along with transfer deed to the investor.
The investor has to fill the transfer deed and stamp it.
Stamp duty is one-half percentage of the purchase consideration; the
investor should lodge the share certificate and transfer deed to the registrar
or transfer agent of the company. If it is bought in the demat form, the
broker has to give a matching instruction to his depository participant to
transfer the share bought to the investors account. The investor should be
an account holder in any of the depository participant. In the case of sale of
shares on receiving payment from the purchasing broker, the broker effects
the payment to the investor.

Share Groups
The listed shares are divided into three categories: Group a shares
(specified shares) B1 shares and B shares. The last two groups are referred
to cleared securities or no-specified shares.
The shares that come under specified group can avail the carry forward
transactions. In A group, shares are selected on the basis of equity, market
capitalisation and public holding.
Further it should have a good track record and a dividend paying company.
It should have good growth potential too.
The trading volumes and the investors base are high in A group share. Any
company when it satisfies these criteria would be shifted from B group to
A group.
In the B1 group actively traded shares are included. Carry forward
transactions are not allowed in this group. Settlement takes place through
the clearing house along with the A group shares. The settlement cycle
and the procedure are identical to A group security. The rest of the
company shares listed form the B group.

Settlement Cycle
A settlement cycle consists of five days trading period within which any
transaction buy/sell must be completed. There are two types of settlement:
fixed and rolling. A fixed cycle starts on a particular day and ends after five
days. For example, in the
Mumbai stock exchange the settlement cycle starts on Monday and ends of
Friday. In the NSE it starts on Wednesday of one week and ends on the
Tuesday of the following week. A pay-in day and a pay-out day follow the
settlement cycle. The pay-in day refers to all the buyer brokers depositing
the money for the purchase of shares. The payout day refers to the
exchange handing over the proceeds to the seller brokers.
A settlement cycle is important for the investors and brokers. If, an investor
purchases 1000 shares of Asian Paints on Monday, to square up the position
by the end of the settlement, the sale will have to take place before Friday,
the same week. If the sale has not taken place, he has to paya consideration
for the broker at the end of the settlement period. The broker collects the
payments from the clients and deposits it with the exchange on the pay-in
day. The exchange allows four days, from the end of the settlement cycle to
the pay-in day to enable the brokers to collect the payments from the
clients. After found days, on the pay-out day the exchange hands over the
proceeds to the seller broker. The same trading/settlement cycle and
procedure of the specified group are followed in the B1 non-specified
But no carry forward (Badla) transaction is allowed for B1 group shares.
The pay-in for B1 group securities can be done with A group
simultaneously under one balance sheet.
In the B group shares, clearing house handles the money and part of the
transaction. Physical delivery of securities is done by the members. In the
pay-in day the balance sheet is filed Along with cheques/drafts. Only on the
payout day monetary are made by the clearings house.

The exigencies of the market and the flexibility of the regulators are
maintained through the exercise of delegated legislation to the regulators.
Under this the regulators issue notifications, circulars and guidelines which
are to be complied by the market participants.
Various activities in the securities market in India are regulated in a
coordinated manner by four regulators namely Department of Economic
Affairs (DEA) of the Ministry of Finance, Ministry of Company Affairs,
Securities and Exchange Board of India (SEBI) and the Reserve Bank of India
The regulatory and the supervisory framework of the securities market in
India has been progressively strengthened through various legislative and
administrative measures and is consistent with the best international

benchmarks, such as, standards prescribed by the International Organisation

of Securities Commissions (IOSCO).

Rules and Regulations

The Government has framed rules under the Securities Contract (Regulation)
Act SC(R)A, SEBI Act and the Depositories Act. SEBI has framed regulations
under the SEBI Act and the Depositories Act for registration and regulation of
all market intermediaries, for prevention of unfair trade practices, insider
trading, etc. Under these Acts, Government and SEBI issue notifications,
guidelines, and circulars, which need to be complied by the market
The self-regulatory organizations (SROs) like stock exchanges have also laid
down their rules and regulations for market participants.


The regulators ensure that the market participants behave in a desired

manner so that the securities market continues to be a major source of
finance for corporate and government and the interest of investors are
protected. As noted earlier, the responsibility for regulating the securities
market is shared by DEA, Ministry of Corporate Affairs, SEBI and RBI.
* This chapter only touches upon the broad regulatory framework for the
Indian securities markets, giving the main clauses of various acts, rules and
regulations that have a bearing on the functioning of the markets. For
greater details, it is recommended that original acts, rules and regulations
may be referred to.

SEBI (Intermediaries) Regulations, 2008

One of the main functions of SEBI is to register and regulate the functioning
of various types of intermediaries and persons associated with securities
market in a manner as to ensure smooth functioning of the markets and
protection of interests of the investors. These intermediaries, as detailed in
the SEBI Act are: stock-brokers, sub- broker, share transfer agents, bankers
to an issue, trustees of trust deed, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers, depositories,
participants, custodians of securities, foreign institutional investors, credit
rating agencies, asset management companies, clearing members of a
clearing corporation, trading member of a derivative segment of a stock
exchange, collective investment schemes, venture capital funds, mutual
funds, and any other intermediary associated with the securities market.
SEBI had issued regulations governing the registration and regulatory
framework for each of these intermediaries. However, given the fact that
many requirements and obligations of most intermediaries are common, SEBI
has recently consolidated these requirements and issued the SEBI
(Intermediaries) Regulations, 2008. These regulations were notified on May
26, 2009.

These regulations apply to all the intermediaries mentioned above, except

foreign institutional investors, foreign venture capital investors, mutual
funds, collective investment schemes and venture capital funds.

The salient features of the Regulations are as under:

(a) The SEBI Regulations put in place a comprehensive regulation which is
applicable to all intermediaries. The common requirements such as grant of
registration, general obligations, common code of conduct, common
procedure for action in case of default and miscellaneous provisions are
applicable for all intermediaries.
(b) The registration process has been simplified. An applicant can file
application in the prescribed format along with additional information as
required under the relevant regulations along with the requisite fees. The
existing intermediaries ma y, within the prescribed time, file the disclosure in
the specified form. The disclosures are required to be made public by
uploading the information on the website specified by SEBI. The information
of commercial confidence and private information furnished to SEBI shall be
treated confidential. In the event intermediary wishes to operate in a
capacity as an intermediary in a new category, such person may only file the
additional shortened forms disclosing the specific requirements of the new
category as per the relevant regulations.
(c) The Fit and Proper criteria have been modified to make it principle based.
The common code of conduct has been specified at one place.
(d) The registration granted to intermediaries has been made permanent
unless surrendered by the intermediary or suspended or cancelled in
accordance with these regulations.
(e) Procedure for action in case of default and manner of suspension or
cancellation of certificate has been simplified to shorten the time usually
faced by the parties without compromising with the right of reasonable
opportunity to be heard. Surrender of certificate has been enabled without
going through lengthy procedures.
(f) While common requirements will be governed by the new regulations, the
intermediaries specific requirements will continue to be as per the relevant
regulations applicable to individual intermediaries. The relevant regulations
will be amended to provide for the specific requirements.

SEBI (Prohibition of Insider Trading) Regulations, 1992

The malpractice of insider trading affects the innocent investors. In simple
terms insider trading means selling or buying in securities on the basis of
price sensitive unpublished information of a listed corporate which if
published could lead to a fall or rise in the prices of shares of the corporate.
To tackle the problem of insider trading, SEBI issued the SEBI (Insider
Trading) Regulations 1992. These regulations were further made stringent
through amendments in February 2002 and they were notified as the SEBI
(Insider Trading)

(Amendment) Regulations 2002.

The important definitions used in the regulations are:
(i) Dealing in securities means an act of subscribing, buying, selling or
agreeing to subscribe, buy, sell or deal in any securities by any person either
as principal or agent.
(ii) Insider means any person who, is or was connected with the company
or is deemed to have been connected with the company, and who is
reasonably expected to have access to unpublished price sensitive
information in respect of securities of a company, or who has received or has
had access to such unpublished price sensitive information.
(iii) A connected person means any person who:
(a) Is a director, as defined in clause (13) of section 2 of the Companies Act,
1956 of a company, or is deemed to be a director of that company by virtue
of sub-clause (10) of section 307 of that Act, or
(b) Occupies the position as an officer or an employee of the company or
holds a position involving a professional or business relationship between
himself and the company whether temporary or permanent and who may
reasonably be expected to have an access to unpublished price sensitive
information in relation to that company.
(iv) A person is deemed to be a connected person if such person:
(a) Is a company under the same management or group or any subsidiary
company thereof within the meaning of section (1B) of section 370, or
(11) Of section 372, of the Companies Act, 1956 or sub-clause (g) of section
2 of the Monopolies and Restrictive Trade Practices Act, 1969 as the case
may be; or
(b) Is an intermediary as specified in section 12 of SEBI Act, 1992,
Investment company, Trustee Company, Asset Management Company or an
employee or director thereof or an official of a stock exchange or of clearing
house or corporation;
(c) is a merchant banker, share transfer agent, registrar to an issue,
debenture trustee, broker, portfolio manager, investment advisor, sub
broker, investment company or an employee thereof, or, is a member of the
board of trustees of a mutual fund or a member of the board of directors of
the asset management company of a mutual fund or is an employee thereof
who have a fiduciary relationship with the company;
(d) Is a member of the board of directors, or an employee, of a public
financial institution as defined in Section 4A of the Companies Act, 1956?
(e) Is an official or an employee of a self regulatory organisation recognised
or authorised by the Board of a regulatory body;
(F) is a relative of any of the aforementioned persons;
(g) Is a banker of the company?
(h) Relative of the connected person.
(v) Price sensitive information means any information which is related
directly or indirectly to a company and which if published is likely to
materially affect the price of securities of a company. It includes only such

information which if published is likely to materially affect the price of

securities of a company. The following is deemed to be price sensitive
(a) Periodical financial results of the company;
(b) Intended declaration of dividends (both interim and final);
(c) Issue of securities or buy-back of securities;
(d) Any major expansion plans or execution of new projects;
(e) Amalgamation, mergers or takeovers;
(f) Disposal of the whole or substantial part of the undertaking;
(g) Significant changes in policies, plans or operations of the company.
(vi)Unpublished information means information which is not published by
the company or its agents and is not specific in nature. However, speculative
reports in print or electronic media are not considered as published

Prohibition on Dealing, Communicating or Counseling

Under this regulation, no insider should:
(a) Either on his own behalf or on behalf of any other person, deal in
securities of a company listed on any stock exchange when in possession of
any unpublished price sensitive information;
(b) Communicate, counsel or procure, directly or indirectly, any unpublished
price sensitive information to any person who while in possession of such
unpublished price sensitive information should not deal in securities. This is
however, not applicable to any communication required in the ordinary
course of business or profession or employment or under any law.
The regulations require that no company should deal in the securities of
another company or associate of that other company while in possession of
any unpublished price sensitive information.


If SEBI suspects any person of having violated the provisions of insider

regulation, it may make inquiries with such person or with the stock
exchanges, mutual funds, other persons associated with the securities
market, intermediaries and self regulatory organisation in the securities
market to form a prima facie opinion as to whether there is any violation of
insider regulations.
Where SEBI forms a prima facie opinion that it is necessary to investigate
and inspect the books of accounts, either documents and records of an
insider or the stock exchanges, mutual funds, other persons associated with
the securities market, intermediaries and self-regulatory organisation in the
securities market, it may appoint an investigating authority for the purpose.
The investigating authority has to submit its report to SEBI, after completion
of investigations in accordance with the provisions of the regulations.
After considering the report, SEBI is required to communicate its findings to
the suspected person and seek a reply from such person. Such suspected

person is required to reply to the findings within 21 days to SEBI. After

receipt of the reply,
SEBI may take such measures to safeguard and protect the interest of
investors, securities market and for due compliance with the insider trading
SEBI also has powers to appoint an auditor to investigate into the books of
accounts or the affairs of the insider or the stock exchanges, mutual funds,
other persons associated with the securities market, intermediaries and selfregulatory organization in the securities market.

Disclosures and Internal Procedure for Prevention of

Insider Trading
All listed companies and organisations associated with securities markets
such as intermediaries, asset management company, trustees of mutual
funds, self regulatory organisations recognised by SEBI, recognised stock
exchanges, clearing house or corporations, public financial institutions and
professional firms such as auditors, accountancy firms, law firms, analysts,
consultants, etc., assisting or advising listed companies, are required to
frame a code of internal procedures and conduct as per the prescribed
format provided in SEBI (Prohibition of Insider Trading) Regulations without
diluting it any manner and ensure compliance of the same.
The regulations require certain disclosures to be made by directors, officers
and substantial shareholders in listed companies. These are:
(i) Initial Disclosure:
(a) Any person who holds more than 5% shares or voting rights in any listed
company should disclose to the company in prescribed form, the number of
shares or voting rights held by such person, on becoming such holder, within
2 working days of:
(i) The receipt of intimation of allotment of shares; or
(ii) The acquisition of shares or voting rights, as the case may be.
(b) Any person who is a director or officer of a listed company should disclose
to the company in prescribed form, the number of shares or voting rights
held by such person, within 2 working days of becoming a director or
officer of the company.
(ii) Continual Disclosure
(a) Any person who holds more than 5% shares or voting rights in any listed
company should disclose to the company in prescribed form the number of
shares or voting rights held and change in shareholding or voting rights,
even if such change results in shareholding falling below
5%, if there has been change in such holdings from the last disclosure and
such change exceeds 2% of total shareholding or voting rights in the
(b) Any person who is a director or officer of a listed company, should
disclose to the company in prescribed form, the total number of shares or

voting rights held and change in shareholding or voting rights, if there has
been a change in such holdings from the last disclosure made and the
change exceeds Rs. 5 lakh in value or 25,000 shares or 1% of total
shareholding or voting rights, whichever is lower. The disclosure mentioned
above should be made within 2 working days of:
(i) The receipt of intimation of allotment of shares, or
(ii) The acquisition or sale of shares or voting rights, as the case may be.
(iii) Disclosure by Company to Stock Exchanges
Every listed company, within two days of receipt, should disclose to all stock
exchanges on which the company is listed, the information relating to
continual and initial disclosure given above. The disclosures required under
this regulation may also be made through electronic filing in accordance with
the system devised by the stock exchanges. Further, the SEBI Act, which
inter-alia, prescribes the penalty for insider trading (Section 15G), was
amended in 2002 to increase the penalty for insider trading to Rs 25 crore or
three times the amount of profits made out of insider trading, whichever is

SEBI (Prohibition of fraudulent and Unfair Trade Practices

relating to securities market) Regulations, 2003
The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the
Securities Market) Regulations, 2003 enable SEBI to investigate into cases of
market manipulation and fraudulent and unfair trade practices. The
regulations specifically prohibit market manipulation, misleading statements
to induce sale or purchase of securities, unfair trade practices relating to
securities. The important terms defined under the regulations are:
(i) Fraud includes any act, expression, omission or concealment committed
whether in a deceitful manner or not by a person or by any other person or
his agent while dealing in securities in order to induce another person with
his connivance or his agent to deal in securities, whether or not there is any
wrongful gain or avoidance of any loss, and should also include:
(a) A knowing misrepresentation of the truth or concealment of material fact
in order that another person may act to his detriment;
(b) A suggestion as to a fact which is not true by one who does not believe it
to be true;
(c) An active concealment of a fact by one having knowledge or belief of the
(d) A promise made without any intention of performing it;
(e) A representation made in a reckless and careless manner whether it is
true or false;
(f) Any such act or omission as any other law specifically declares to be
(g) Deceptive behaviour by a person depriving another of informed consent
or full participation;

(h) A false statement made without reasonable ground for believing to be

(i) The act of an issuer of securities giving out misinformation that affects the
market price of the security, resulting in investors being effectively misled
even though they did not rely on the statement itself or anything derived
from it other than the market price.
The term fraudulent should be construed accordingly. Nothing contained in
this clause is applicable to any general comments made in good faith in
regard to the economic policy of the Government; the economic situation of
the country; trends in the securities market; any other matter of a like
(ii) Dealing in Securities is defined to include an act of buying, selling or
subscribing pursuant to any issue of any securities or agreeing to buy, sell or
subscribe to any issue of any securities or otherwise transacting in any way
in any security by any person as principal, agent or intermediary as defined
under the SEBI

Prohibition of Certain Dealings in Securities

The regulation provides that no person should directly or indirectly:

(a) Buy, sell or otherwise deal in securities in a fraudulent manner;
(b) Use or employ, in connection with issue, purchase or sale of any security
listed or proposed to be listed in a recognised stock exchange, any
manipulative or deceptive device or contrivance in contravention of the
provisions of the Act or the rules or the regulations made
There under;
(c) Employ any device, scheme or artifice to defraud in connection with
dealing in or issue of securities which are listed or proposed to be listed on a
recognised stock exchange;
(d) Engage in any act, practice, and course of business which operates or
would operate as fraud or deceit upon any person in connection with any
dealing in or issue of securities which are listed or proposed to be listed on a
recognised stock exchange in contravention of the act, rules and regulations.

Prohibition of Manipulative, Fraudulent and Unfair Trade

The Regulation provides that no person should indulge in a fraudulent or an
unfair trade practice in securities. Any dealing in securities is deemed to be
fraudulent or an unfair trade practice if it involves fraud and may include all
or any of the following:
(a) Indulging in an act which creates false or misleading appearance of
trading in the securities market;
(b) Dealing in a security not intended to effect transfer of beneficial
ownership but intended to operate only as a device to inflate, depress or
cause fluctuations in the price of such security for wrongful gain or
avoidance of loss;

(c) Advancing or agreeing to advance any money to any person thereby

inducing any other person to offer to buy any security in any issue only with
the intention of securing the minimum subscription to such issue;
(d) Paying, offering or agreeing to pay or offer, directly or indirectly, to any
person any money or moneys worth for inducing such person for dealing in
any security with the object of inflating, depressing, maintaining or causing
fluctuation in the price of such security;
(e) Any act or omission amounting to manipulation of the price of a security;
(f) Publishing or causing to publish or reporting or causing to report by a
person dealing in securities any information which is not true or which he
does not believe to be true prior to or in the course of dealing in securities.
(g) Entering into a transaction in securities without intention of performing it
or without intention of change in ownership of such security.
(h) Selling, dealing or pledging of stolen or counterfeit security whether in
physical or dematerialized form.
(i) An intermediary promising a certain price in respect of buying or selling of
a security to a client and waiting till a discrepancy arises in the price of such
security and retaining the difference in prices as profit for himself.
(j) An intermediary providing his clients with such information relating to a
security as cannot be verified by the clients before their dealing in such
(k) An advertisement that is misleading or that contains information in a
distorted manner and which may influence the decision of the investors.
(l) An intermediary reporting trading transactions to his clients entered into
on their behalf in an inflated manner in order to increase his commission and
(m) An intermediary not disclosing to his client transactions entered into on
his behalf including taking an option position.
(n) Circular transactions in respect of a security entered into between
intermediaries in order to increase commission to provide a false appearance
of trading in such security or to inflate, depress or cause fluctuations in the
price of such security.
(o) Encouraging the clients by an intermediary to deal in securities solely
with the object of enhancing his brokerage or commission.
(p) An intermediary predating or otherwise falsifying records such as
contract notes.
(q) An intermediary buying or selling securities in advance of a substantial
client order or whereby a futures or option position is taken about an
impending transaction in the same or related futures or options contract.
(r) Planting false or misleading news which may induce sale or purchase of

The first thing that I have learned is, I have knowledge of capital market. I
also come to know the working of Ludhiana stock exchange i.e. how the
different departments are performing their jobs successfully. It was a
wonderful experience interacting with different people and simultaneously
enhancing my knowledge and skills about stock market operators. Ludhiana
stock exchange also provides practical training under sub brokers. I also
come to know about how on live trading is done, how shares are bought and
sold. I also learned that how to work under the stock exchange. The working
culture of Ludhiana stock exchange is quite good. Under the training
education department, the higher authorities of LSE conduct the Training
Exam and Viva before providing training certificate. It is very good
experience in Ludhiana stock exchange.

Securities market plays an important role. The capital market deals with long
term securities which have a maturity period of above one year. A market in
which individuals and institutions trade financial securities. Organization
/institution in the public and private sectors also often sell securities on
capital markets in order to raise funds. Thus, type of market is composed of
entering a derivative market is called hedgers, and those who increase risks
are called speculators.