(IGP) GS Paper 1 - Economic & Social Development - "Stock Markets In India"

Subject - Economic and Social Development
Chapter - Stock Markets In India

Stock Markets

A stock exchange is an organization which provides a platform for trading shares- either physical or virtual. The origin of the stock, market dates back to the year 1494, when the Amsterdam Stock Exchange was first set up. In a stock exchange, investors through stock brokers buy and sell shares in a wide range of listed companies. A given company may list in one or more exchanges by meeting and maintaining the listing requirements of the stock exchange

Importance of Stock Exchanges

• For efficient working of the economy and for the smooth functioning of the corporate form of organization, the stock exchange is an essential institution.

• an efficient medium for raising long term resources for business

• Help raise savings from the general public by the way of issue of equity debt capital

• attract foreign currency

• exercise discipline on companies and make them profitable

• investment in backward regions for job generation

• another vehicle for investors savings

Stock Exchanges in India

• The first company that issued shares was the VOC or Dutch East India Company in. the early 17th century (1602). Since then we have come a long way. With over 25m shareholders today, India has the third largest investor base in the world after the USA and Japan. Over 9,000 companies are listed on the stock exchanges, which are serviced by approximately 7,500 stockbrokers. The Indian capital market is significant in terms of the degree of development, volume of trading and its tremendous growth potential.

• Stock exchanges provide an organised market for transactions in securities and other securities. There are 24 stock exchanges in the country, 21 of them being regional ones with allocated areas

BSE

The Bombay Stock Exchange, or BSE) is the oldest stock exehange in Asia located at Dalal Street in Mumbai, India. Established in the year 1875, it is the largest securities exchange in India with more than 6,000 listed Indian companies. BSE is also the fifth largest exchange in the world with market capitalization of US $1.6 trillion (2011). About 5000 companies are listed on the BSE.

Sensex

Sensex or Sensitive Index is a value-weighted index composed of 30 companies with the base 1978- 1979 = 100. It consists of the 30 largest and most actively traded blue chip stocks, representative of various sectors, on the Bombay Stock Exchange.

Demutualization

Demutualization is when management and ownership are separated. Ownership is divested from the brokers and the company becomes a public company. All stock exchanges are to be demutualised according to the Government law made in 2004. Demutualization, thus means that ownership, management and trading rights are separated in a stock exchange.

SEBI

The capital markets in India are regulated by the Securities and Exchange Board of India. (SEBI) It was established in 1988 and given a statutory basis in 1992 on the basis of the Parliamentary Act- SEBI Act 1992 to regulate and develop capital market. SEBI regulates the working of stock exchanges and intermediaries such as stock brokers and merchant bankers, accords approval for mutual funds, and registers Foreign Institutional Investors who wish to trade in Indian scrips.

Capital Market

• It refers to market for funds with a maturity of 1 year and above, referred to as term funds that includes medium and long term funds. The demand for these funds comes from both the government for its investment purposes and also the private sector. Banks, public financial institutions like LIC and CIIC; development financial institutions like ICICI, 1DBI etc; mutual funds like UTI are the main participants in the market.

• SEBI promotes investor’s education and training of intermediaries of securities markets. It prohibits fraudulent and unfair trade practices relating to securities markets, and inter trading in securities, with the imposition of monetary penalties, on erring market intermediaries. It also regulates substantial acquisition of shares and takeover of companies and calling for information from, carrying out inspection, conducting inquiries and audits of the stock exchanges and intermediaries and self regulatory organizations in the securities market

Capital Market Reforms

Since 1991 when the Government launched economic reforms, the following measures were taken.

• SEBI given statutory status- that is Act of Parliament

• Electronic trade

• Rolling settlement to reduce speculation

• FIIs are permitted since 1992

• setting up of clearing houses

• settlement guarantee funds at all stock exchanges

• compulsory dematerialization of share certificates so as to remove problems associated with paper trading; and speed up the transfer

• clause 49 of the listing agreement for corporate governance

• restrictions on PNs

Primary Market

The primary market is that part of the capital markets that deals with the issuance of new securities directly by the company to the investors. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue.

IPO

In the case of a new stock issue, this sale is called an initial public offering (IPO).

Secondary Market

The secondary market is the financial market for trading of securities that have already been issued in an initial public offering. Once a newly issued stock is listed on a stock exchange, investors and speculators can trade on the exchange as there are buyers and sellers

Derivatives

Derivative is a financial instrument. It derives from an underlying asset- securities, debt instruments, commodities etc. The price of the derivative is directly dependent upon the value of the underlying asset in the present and the projected future trends. Futures and options are the two classes of derivates

Buyback of Shares

Buy back of shares is the process of a corporation’s repurchase of stock it has issued. In the case of stocks, this reduces the number of shares outstanding, giving each remaining shareholder a larger percentage ownership of the company. This is usually considered a sign that the company’s management is optimistic about the future and believes that the current share price is undervalued.

Rolling Settlement

Rolling Settlements is a mechanism of settling trades. In Rolling Settlements, trades done on a single day are settled separately from the trades of another day on the basis of Trade day + 2 days (T+2). Such petting of trades is done only for the day. As such, in Rolling Settlement, settlement is carried out on a daily basis. Since trades done on a given day can not be bunched with those of another day. Thus, speculation is drastically reduced

Commodity Exchanges

Commodity exchanges are institutions which provide a platform for trading in ‘commodity futures’ just as how stock markets provide space-for trading in equities and their derivatives. They thus play a critical role in price discovery where several buyers and sellers interact and determine the most efficient price for the product

There are two types of commodity exchanges in the country: national level and regional. There are five national exchanges

• National Commodity & Derivatives Exchange Limited (NCDEX) Multi Commodity Exchange of India Limited (MCX)
• National Multi-Commodity Exchange of India Limited (NMCEIL)
• ACE Derivatives and Commodity Exchange
• Indian Commodity Exchange (ICEX)

FMC (Forward Market Commission)

• Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority, which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952. The Commission consists of 2-4 members.

• It monitors and disciplines the working of the exchanges. It recognizes an exchange or can withdraw such recognition. It collects and whenever the Commission thinks it necessary publishes information regarding the trading conditions in respect of goods.

FIIs

• Foreign institutional investors are organizations which invest huge sums of money in financial assets - debt and shares- of companies and in other countries- a country different from the one where they are incorporated. They include banks, insurance companies retirement or pension funds hedge funds and mutual funds.

• Foreign individuals are not allowed to participate on their own but go through FIIs

Global Depository Receipts (GDR)

Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs) GDRs are designated in dollars euro.

ADRs

• American depository receipts are like shares. They are issued to US retail and institutional investors.
• They are entitled like the shares to bonus, stock split and dividend. They are listed either on Nasdaq or NYSE.

Participatory Notes

Participatory notes are instruments used for making investments in the stock markets. In India, foreign institutional investors (FIIs) use these instruments for facilitating the participation of overseas funds like hedge funds and others who are not registered with the SEBI and thus are not directly eligible for investing in Indian stocks.

Hedge Fund

A hedge fund is an investment fund open to only a limited range of investors. They are mostly unregulated. The term- hedge funds, is used to distinguish them from regulated investment funds such as mutual funds and pension funds, and insurance companies. Hedge funds are not allowed into India as they do not disclose data required by the SEBI.

Clearing House

An organisation which registers, monitors, matches and guarantees the trades of its members and carries out the final settlement of all futures transactions. The National Securities Clearing Corporation is the clearing house for the NSE.

Equity

Common stock and preferred stock that is, shares issued by the company. Also, funds provided to a business by the sale of stock.

Share

Share is a certificate representing ownership of the company that issued it. Shares can yield dividends and entitle the holder to vote at general meetings. The company may be listed on a stock exchange. Shares are also known as stock or equity.

Bond

A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing.

Blue Chip Share

Blue chip shares are the shares of the companies that are the most valuable. Companies that are profit making; usually dividend —paying and are liquid in the market- that is there is almost always in demand on the market.

Midcap Company

Generally, companies with a market capitalization that is very high are called large caps and the next one below is mid cap and the bottom one is small cap companies. Limits are not statutorily laid down and vary from institution to institution.

Short Selling

• The sale of a security made by an investor who does not own the security; The short sale is made in expectation of a decline in the price of a security, which would allow the investor to then purchase the shares at a lower price in order to deliver the securities earlier sold short
• In short sale, shares are borrowed at a -fees/price and returned when the sell-buy operation is completed. Naked short selling, or naked shorting, is the practice of short-selling a financial instrument without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. It is banned.

Insider Trading

Insider trading occurs when any one with information related to strategic and price-influencing information purchases or sells stocks so as to make speculative profits.

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