Student Name:

Financial Institutions and Markets NEP

V Sem B.Com - 2023

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Secondary Market

The investors want liquidity for their investments. When they need cash, they should be able
to sell the securities they hold. Similarly there are others who want to invest in new securities.
There should be a place where securities of different companies can be bought and sold.
Secondary market provides such a place.

Meaning of Secondary Market

Secondary market is a market for old issues. It deals with the buying and selling existing
securities i.e. securities already issued. In other words, securities already issued in the primary
market are traded in the secondary market. Secondary market is also known as stock market.
The secondary market operates through „stock exchanges‟.

In the secondary market, the existing owner sells securities to another party. The secondary
markets support the primary markets. The secondary market provides liquidity to the
individuals who acquired these securities. The primary market gets benefits greatly from the
liquidity provided by the secondary market. This is because investors would hesitate to buy the
securities in the primary market if they thought they could not sell them in the secondary
market later.

In India, stock market consists of recognised stock exchanges. In the stock exchanges,
securities issued by the central and state governments, public bodies, and joint stock
companies are traded.

Stock Exchange

In India the first organized stock exchange was Bombay Stock Exchange. It was started in
1877. Later on, the Ahmadabad Stock Exchange and Calcutta Stock Exchange were
started in 1894 and 1908 respectively. At present there are 24 stock exchanges in India. In
Europe, stock exchanges are often called bourses.

Meaning and Definition of Stock Exchange/ Security Exchange

It is an organized market for the purchase and sale of securities of joint stock companies,
government and semi- govt. bodies. It is the centre where shares, debentures and govt.
securities are bought and sold.

According to Pyle, “Security exchanges are market places where securities that have been listed
thereon may be bought and sold for either investment or speculation”.

The Securities Contract (Regulation) Act 1956, defines a stock exchange as “an association,
organisation or body of individuals whether incorporated or not, established for the purpose of
assisting, regulating and controlling of business in buying, selling and dealing in securities”.

According to Hartley Withers, “a stock exchange is something like a vast warehouse where
securities are taken away from the shelves and sold across the countries at a price fixed in a
catalogue which is called the official list”.

In short, stock exchange is a place or market where the listed securities are bought and sold.

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Characteristics of a Stock Exchange

1. It is an organized capital market.

2. It may be incorporated or non-incorporated body (association or body of individuals).
3. It is an open market for the purchase and sale of securities.
4. Only listed securities can be dealt on a stock exchange.
5. It works under established rules and regulations.
6. The securities are bought and sold either for investment or for speculative purpose.

Economic Functions of Stock Exchange

The stock exchange performs the following essential economic functions:

1. Ensures liquidity to capital: The stock exchange provides a place where shares and stocks
are converted into cash. People with surplus cash can invest in securities (by buying securities)
and people with deficit cash can sell their securities to convert them into cash.

2. Continuous market for securities: It provides a continuous and ready market for buying and
selling securities. It provides a ready market for those who wish to buy and sell securities

3. Mobilisation of savings: It helps in mobilizing savings and surplus funds of individuals,

firms and other institutions. It directs the flow of capital in the most profitable channel.

4. Capital formation: The stock exchange publishes the correct prices of various securities.
Thus the people will invest in those securities which yield higher returns. It promotes the habit
of saving and investment among the public. In this way the stock exchange facilitates the
capital formation in the country.

5. Evaluation of securities: The prices at which transactions take place are recorded and made
public in the forms of market quotations. From the price quotations, the investors can evaluate
the worth of their holdings.

6. Economic developments: It promotes industrial growth and economic development of the

country by encouraging industrial investments. New and existing concerns raise their capital
through stock exchanges.

7. Safeguards for investors: Investors‟ interests are very much protected by the stock exchange.
The brokers have to transact their business strictly according to the rules prescribed by the
stock exchange. Hence they cannot overcharge the investors.

8. Barometer of economic conditions: Stock exchange reflects the changes taking place in the
country‟s economy. Just as the weather clock tells us which way the wind is blowing,
in the same way stock exchange serves as an indicator of the phases in business cycle-boom,
depression, recessions and recovery.

9. Platform for public debt: The govt. has to raise huge funds for the development activities.
Stock exchange acts as markets of govt. securities. Thus, stock exchange provides a platform
for raising public debt.

10. Helps to banks: Stock exchange helps the banks to maintain liquidity by increasing the
volume of easily marketable securities.

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Thus, it helps in pricing of securities. Thus stock exchange is of great importance to a country.
It provides necessary mobility to capital. It directs the flow of capital into profitable and
successful enterprises. It is indispensable for the proper functioning of corporate enterprises.
Without stock exchange, even govt. would find it difficult to borrow for its various schemes. It
helps the traders, investors, industrialists and the banker. Hence, it is described as the
business of business.

Benefits of the Stock Exchange

A. Benefits to Investors

1. The stock exchange plays the role of a friend, philosopher and guide to investors by
providing information about the prices of various securities.
2. It offers a ready market for buying and selling securities.
3. It increases the liquidity of the investors.
4. It safeguards the interests of investors through strict rules and regulations.
5. It enables the investors to know the present worth of their securities.
6. It helps investors in making wise investment decisions by providing useful information
about the financial position of the companies.
7. The holder of a listed security can easily raise loan by pledging it as a collateral security.

B. Benefits to Companies

1. A company enjoys greater reputation and credit in the market. Image of the company goes up.
2. A company can raise large amount of capital from different types of securities.
3. It enjoys market for its shares.
4. The market price for shares and debentures will be higher. Due to this the bargaining power
of the company increases in the events of merger or amalgamation.

C. Benefits to Community and Nation

1. Stock exchange encourages people to sell and invest their savings in shares and debentures.
2. Through capital formation, stock exchange enables companies to undertake expansion and
modernization. Stock exchange is an „Alibaba Cave‟ from which business community
draw unlimited money.
3. It helps the government in raising funds through sale of government securities. This
enables the government to undertake projects of national importance and social value.
4. It diverts the savings towards productive channels.
5. It helps in better utilisation of the country‟s financial resources.
6. It is an effective indicator of general economic conditions of a country.

Listing of Securities

A stock exchange does not deal in the securities of all companies. Only those securities that
are listed are dealt with the stock exchange. For the purpose of listing of securities, a
company has to apply to the stock exchange. The stock exchange will decide whether to list
the securities of the company or not. If permission is granted by the stock exchange to deal
with the securities therein, then such a company is included in the official trade list of the
stock exchange. This is technically known as listing of securities. Thus listing of securities
means permission to quote shares and debentures officially on the trading floor of the stock
exchange. Listing of securities refers to the sanction of the right to trade the securities on the
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stock exchange.

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Objectives of Listing

The main objectives of listing are:

1. To ensure proper supervision and control of dealings in securities.

2. To protect the interests of shareholders and the investors.
3. To avoid concentration of economic power.
4. To assure marketing facilities for the securities.
5. To ensure liquidity of securities.
6. To regulate dealings in securities.

Advantages of Listing

A. Advantages to Company:-

1. It provides continuous market for securities (securities include shares, debentures, bonds etc.)
2. It enhances liquidity of securities.
3. It enhances prestige of the company.
4. It ensures wide publicity.
5. Raising of capital becomes easy.
6. It gives some tax advantage to the company.

B. Advantages to Investors:-

1. It provides safety of dealings.

2. It facilitates quick disposal of securities in times of need. This means that listing enhances
the liquidity of securities.
3. It gives some tax advantage to the security holder.
4. Listed securities command higher collateral value for the purpose of bank loans.
5. It provides an indirect check against manipulation by the management.

Disadvantages of Listing

1. It leads to speculation
2. Sometimes listed securities are subjected to wide fluctuations in their value. This may
degrade the company‟s reputation.
3. It discloses vital information such as dividends and bonus declared etc. to competitors.
4. Company has to spend heavily in the process of placing the securities with public

Classification of Listed Securities

The listed shares are generally divided into two categories - Group A shares (cleared
securities) and Group B shares (non-cleared securities). Group A shares represent large and
well established companies having a broad investor base. These shares are actively traded.
Forward trading is allowed in Group A shares. These facilities are not available to Group B
shares. These are not actively traded. Carry forward facility is not available in case of these
securities.

Requirements of Listing (Procedure of Listing)

Any company intending to get its securities listed at an exchange has to fulfil certain
requirements. The application for listing is to be made in the prescribed form. It should be
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supported by the following documents:

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a) Copies of balance sheets, audited accounts, agreements with promoters, underwriters,
brokers etc.

b) Memorandum and

c) Articles.
d)Letters of consent from SEBI.
d) Details of shares and debentures issued and shares forfeited.
e) Details of bonus issues and dividends declared.
f) History of the company in brief.
g) Agreement with managing director etc.
h) An undertaking regarding compliance with the provisions of the Companies Act and
Securities Contracts (Regulation) Act as well as rules made therein.

After the application is made to the stock exchange the listing committee of the stock
exchange will go into the details of the application. It has to ensure that the company fulfils
the conditions or criteria necessary for listing

Procedure for Dealing at Stock Exchange (Trading Mechanism or Method of Trading on a

Stock Exchange)

Outsiders are not allowed to buy or sell securities at a stock exchange. They have to approach
brokers. Dealings can be done only through brokers. They are the members of the stock
exchange. The following procedure is followed for dealing at exchanges:

1. Selection of a broker: An individual cannot buy or sell securities directly at stock

exchange. He can do so only through a broker. So he has to select a broker through whom the
purchase or sale is to be made. The intending investor or seller may appoint his bank for this
purpose. The bank may help to choose the broker.

2. Placing an order: After selecting the broker, the next step is to place an order for purchase or
sale of securities. The broker also guides the client about the type of securities to be purchased
and the proper time for it. If a client is to sell the securities, then the broker shall tell him
about the favourable time for sale.

3. Making the contract: The trading floor of the stock exchange is divided into different parts
known as trading posts. Different posts deal in different types of securities. The authorised
clerk of the broker goes to the concerned post and expresses his intention to buy and sell the
securities. A deal is struck when the other party also agrees. The bargain is noted by both the
parties in their note books. As soon as order is executed a confirmation memo is prepared and
is given to the client.

4. Contract Note: After issue of confirmation memo, a contract note is signed between the
broker and the client. This contract note will state the transaction fees (commission of broker),
number of shares bought or sold, price at which they are bought or sold, etc.

5. Settlement: Settlement involves making payment to sellers of shares and delivery of share
certificate to the buyer of shares after receiving the price. The settlement procedure depends
upon the nature of the transactions. All the transactions on the stock exchange may be classified
into two- ready delivery contracts and forward delivery contracts.

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a. Ready delivery contract: A ready delivery contract involves the actual payment of the
amount by the buyer in cash and the delivery of securities by the seller. A ready delivery
contract is to be settled on the same day or within the time period fixed by the stock exchange
authorities.

b. Forward delivery contracts: These contracts are entered into without any intention of taking
and giving delivery of the securities. The traders in forward delivery securities are interested
in

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profits out of price variations in the future. Such transactions are settled on the settlement days
fixed by the stock exchange authorities. Such contracts can be postponed to the next settlement
day, if both the parties agree between themselves. Such postponement is called „Carry over‟
or
„badla‟. Thus „carry over‟ or „badla‟ means the postponement of transaction from one
settlement period to the next settlement period.

Rolling Settlement

Rolling settlement has been introduced in the place of account period settlement. Rolling
settlement system was introduced by SEBI in January 1998. Under this system of
settlement, the trades executed on a certain day are settled based on the net obligations for that
day. At present, the trades relating to the rolling settlement are settled on T + 2day basis where
T stands for the trade day. It implies that the trades executed on the first day (say on Monday)
have to be settled on the 3rd day (on Wednesday), i.e., after a gap of 2 days.

This cycle would be rolling and hence there would be number of set of transactions for
delivery every day. As each day‟s transaction are settled in full, rolling settlement helps in
increasing the liquidity in the market. With effect from January 2, 2002, all scrips have been
brought under compulsory rolling mode.

Members in a Stock Exchange

Only members of the exchange are allowed to do business of buying and selling of securities
at the floor of the stock exchange. A non-member (client) can buy and sell securities only
through a broker who is a member of the stock exchange. To deal in securities on recognised
stock exchanges, the broker should register his name as a broker with the SEBI. Brokers are
the main players in the secondary market. They may act in different capacities as a principal,
as an agent, as a speculator and so on.

Types of Members in a Stock Exchange The various types of members of a stock exchange
are as follows:-

1. Jobbers :- They are dealers in securities in a stock exchange. They cannot deal on behalf of
public. They purchase and sell securities on their own names. Their main job is to earn
profit due to price variations.

2. Commission brokers :- They are nothing but brokers. They buy and sell securities no
behalf of their clients for a commission. They are permitted to deal with non-members
directly. They do not purchase or sell in their own name.

3. Tarawaniwalas :- They are like jobbers. They handle transactions on a commission basis
for their brokers. They buy and sell securities on their own account and may act as brokers
on behalf of the public.

4. Sub-brokers :- Sub brokers are agents of stock brokers. They are employed by brokers to
obtain business. They cannot carry on business in their own name. They are also known as
remisiers.

5. Arbitrageurs :- They are brokers. They buy security in one market and sell the same in
another market to get opportunistic profit.

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6. Authorised clerks :- Authorised clerks are those who are appointed by stock brokers to
assist them in the business of securities trading.

Speculation

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Speculation is an attempt to make capital gain from the price movement of the scrips in the
security market over a short span of time. Those who engaged in such type of transactions are
called speculators. They buy and sell securities frequently and are not interested in keeping
them for long term. Speculation involves high risks. If the expectation of speculators comes
true he can make profit but if it goes wrong the loss could be detrimental.

Type of Speculators The following on the different kinds of speculators:

1. Bull: A bull or Tejiwala is a speculator who buys shares in expectation of selling them at
higher prices in future. He believes that current prices are lower and will rise in the future.

2. Bear: A bear or Mandiwala is a speculator who sells securities with the intention to buy at
a later date at a lower price. He expects a fall in price in future.

3. Lame duck: A lame duck is a bear speculator. He finds it difficult to meet his
commitments and struggles like a lame duck. This happens because of the non- availability of
securities in the market which he has agreed to sell and at the same time the other party is not
willing to postpone the transaction.

4. Stag: Stag is a member who neither buys nor sells securities. He applies for shares in the
new issue market. He expects that the price of shares will soon increase and the shares can
be sold for a premium.

5. Wolf: Wolf is a broker who is fast speculator. He is very quick to perceive changes in the
market trends and trade fast and make fast profit.

Speculative Transactions Some of the speculative dealings are as follows:

1. Option deals: This is an arrangement or right to buy or sell securities at a predetermined

price on or before a specified date in future.

2. Wash sales: It is a device through which a speculator is able to reap huge profits by
creating a misleading picture in the market. It is a kind of fictitious transaction in which a
speculator sells a security and then buys the same at a higher price through another broker.
Thus he creates a false or misleading opinion in the market about the price of a security.

3. Rigging: If refers to the process of creating an artificial condition in the market whereby
the market value of a particular security is pushed upon. Bulls buy securities, create demand
for the same and sell them at increased prices.

4. Arbitrage: It is the process of buying a security, from a market where price is lower and
selling at in another market where price is higher.

5. Cornering: Sometimes speculators make entire or a major share of supply of a particular

security with a view to create a scarcity against the existing contracts. This is called
cornering.

6. Blank transfer: When the transferor (seller) simply signs the transfer form without specifying
the name of the transferee (buyer), it is called blank transfer. In this case share can further be
transferred by mere delivery of transfer deed together with the share certificate. A new transfer
deed is not required at the time of each transfer. Hence, expenses such as registration fees,
stamp duty, etc can be saved.

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Factors Influencing Prices on Stock Exchange

The prices on stock exchange depend upon the following factors:

1. Financial position of the company

2. Demand and supply position
3. Lending rates
4. Attitudes of the FIIs and the developments in the global financial markets.
5. Govt. Policies (credit policies, monetary policies, taxation policies etc.)
6. Trade cycle
7. Speculation activities

Problems/Defects of Stock Exchanges (or Capital Market) in India

The Indian stock market is suffering from a number of weaknesses. Important weaknesses are
as follows:

1. Speculative activities: Most of the transactions in stock exchange are carry forward
transactions with a speculative motive of deriving benefit from short term price fluctuation.
Genuine transactions are only less. Hence market is not subject to free interplay of demand
and supply for securities.

2. Insider trading: Insider trading has been a routine practice in India. Insiders are those who
have access to unpublished price-sensitive information. By virtue of their position in the
company they use such information for their own benefits.

3. Poor liquidity: The Indian stock exchanges suffer from poor liquidity. Though there are
approximately 8000 listed companies in India, the securities of only a few companies are actively
traded. Only those securities are liquid. This means other stocks have very low liquidity.

4. Less floating securities: There is scarcity of floating securities in the Indian stock
exchanges. Out of the total stocks, only a small portion is being offered for sale. The
financial institutions and joint stock companies control over 75% of the scrips. However, they
do not offer their holdings for sale. The UTI, GIC, LIC etc. indulge more in purchasing than in
selling. This creates scarcity of stocks for trading. Hence, the market becomes highly
volatile. It is subject to easy price manipulations.

5. Lack of transparency: Many brokers are violating the regulations with a view to cheating
the innocent investing community. No information is available to investors regarding the
volume of transactions carried out at the highest and lowest prices. In short, there is no
transparency in dealings in stock exchanges.

6. High volatility: The Indian stock market is subject to high volatility in recent years. The
stock prices fluctuate from hour to hour. High volatility is not conducive for the smooth
functioning of the stock market.

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7. Dominance of financial institutions: The Indian stock market is being dominated by few
financial institutions like UTI, LIC, GIC etc. This means these few institutions can
influence stock market greatly. This actually reduces the level of competition in the stock
market. This is not a healthy trend for the growth of any stock market.

8. Competition of merchant bankers: The increasing number of merchant bankers in the

stock market has led to unhealthy competition in the stock market. The merchant bankers help
the unscrupulous promoters to raise funds for non-existent projects. Investors are the ultimate
sufferers.

9. Lack of professionalism: Some of the brokers are highly competent and professional. At the
same time, majority of the brokers are not so professional. They lack proper education, business
skills, infrastructure facilities etc. Hence they are not able to provide proper service to their
clients.

Difference between Primary and Secondary Market

Primary Market Secondary Market

1. It is a market for new securities. 1. It is a market for existing or second
hand
securities
2. It is directly promotes capital formation. 2. It is directly promotes capital formation.
3. Investors can only buy securities. 3. Both buying and selling of securities
They takes
cannot sell them place
4. There is no fixed geographical location. 4. There is a fixed geographical location
(stock exchanges)
5. Securities need not be listed. 5. Only listed securities can be bought and
sold
6. It enables the borrowers to raise capital 6. It enables the investors to invest money
in securities and sell and encash as they need
money

Major Stock Exchanges in India

At present there are 24 recognised stock exchanges in India. Further OTCEI, NSE also has
started functioning in our country. Brief descriptions of major SEs are given below:

1. Bombay Stock Exchange (BSE)

BSE is the leading and the oldest stock exchange in India as well as in Asia. It was established
in 1887 with the formation of "The Native Share and Stock Brokers' Association". BSE is a
very active stock exchange with highest number of listed securities in India. Nearly 70% to
80% of all transactions in the India are done alone in BSE. Companies traded on BSE were
3,049 by March, 2006. BSE is now a national stock exchange as the BSE has started
allowing its members to set-up computer terminals outside the city of Mumbai (former
Bombay). It is the only stock exchange in India which is given permanent recognition by the
government.

In 2005, BSE was given the status of a fully-fledged public limited company along with a
new name as "Bombay Stock Exchange Limited". The BSE has computerized its trading system
by introducing BOLT (Bombay on Line Trading) since March 1995. BSE is operating BOLT at
275 cities with 5 lakh (0.5 million) traders a day. Average daily turnover of BSE is near Rs.
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200 crores.

Some facts about BSE are:

 BSE exchange was the first in India to launch Equity Derivatives, Free Float Index, USD
adaptation of BSE Sensex and Exchange facilitated Internet buying and selling policy.

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 BSE exchange was the first in India to acquire the ISO authorization for supervision,
clearance & Settlement

 BSE exchange was the first in India to have launched private service for economic training

 Its On-Line Trading System has been felicitated by the internationally renowned standard
of Information Security Management System.

Bombay Online Trading System (BOLT)

BSE online trading was established in 1995 and is the first exchange to be set up in Asia. It
has the largest number of listed companies in the world and currently has 4937 companies
listed on the Exchange with over 7,700 traded instruments.

The only thing that an investor requires for online trading through BSE is an online trading
account. The trading can then be done within the trading hours from any location in the
world. In fact, BSE has replaced the open cry system with automated trading. Open cry system
is a common method of communication between the investors at a stock exchange where they
shout and use hand gestures to communicate and transfer information about buy and sell
orders. It usually takes place on the 'pit' area of the trading floor and involves a lot of face to
face interaction. However, with the use of electronic trading systems trading is easier, faster
and cheaper; and is less prone to manipulation by market makers and brokers/dealers.

The Bolt system has enabled the exchange to meet the following objective:

 Reduce and eliminate operational inefficiencies inherent in manual systems

 Increases trading capacity of the stock exchange
 Improve market transparency, eliminate unmatched trades and delayed reporting
 Promote fairness and speedy matching
 Provide for on-line and off-line monitoring, control and surveillance of the market
 Smooth market operations using technology while retaining the flexibility of conventional
trading practices
 Set up various limits, rules and controls centrally
 Provide brokers with their trade data on electronic media to interface with the Broker's
Back Office system
 Provide a sophisticated, easy to use, graphical user interface (GUI) to all the users of the
system
 Provide public information on scrip prices, indices for all users of the system and allow the
stock exchange to do information vending
 Provide analytical data for use of the Stock Exchange

2. National Stock Exchange (NSE) Formation of National Stock Exchange of India Limited
(NSE) in 1992 is one important development in the Indian capital market. The need was felt by
the industry and investing community since 1991. The NSE is slowly becoming the leading stock
exchange in terms of technology, systems and practices in due course of time. NSE is the
largest and most modern stock exchange in India. In addition, it is the third largest exchange
in the world next to two exchanges operating in the USA.

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The NSE boasts of screen based trading system. In the NSE, the available system provides
complete market transparency of trading operations to both trading members and the
participates and finds a suitable match. The NSE does not have trading floors as in
conventional stock exchanges. The trading is entirely screen based with automated order
machine. The screen provides entire market information at the press of a button. At the same
time, the system provides for concealment of the identity of market operations. The screen
gives all information

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which is dynamically updated. As the market participants sit in their own offices, they have
all the advantages of back office support, and facility to get in touch with their constituents.
The trading segments of NSE are:

 Wholesale debt market segment,

 Capital market segment, and
 Futures & options trading.

NEAT NSE

uses satellite communication expertise to strengthen contribution from around 400 Indian
cities. It is one of the biggest VSAT incorporated stock exchange across the world.

NSE is the first exchange in the world to use satellite communication technology for trading.
Its trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-
art client server based application. At the server end all trading information is stored in an in
memory database to achieve minimum response time and maximum system availability for
users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is
uniform response time of less than one second.

3. Over the Counter Exchange of India (OTCEI)

The OTCEI was incorporated in October, 1990 as a Company under the Companies Act 1956.
It became fully operational in 1992 with opening of a counter at Mumbai. It is recognised by
the Government of India as a recognised stock exchange under the Securities Control and
Regulation Act 1956. It was promoted jointly by the financial institutions like UTI,
ICICI, IDBI, LIC, GIC, SBI, IFCI, etc.

The Features of OTCEI are:-

 OTCEI is a floorless exchange where all the activities are fully computerised.

 Its promoters have been designated as sponsor members and they alone are entitled to
sponsor a company for listing there.

 Trading on the OTCEI takes place through a network of computers or OTC dealers located
at different places within the same city and even across the cities. These computers allow
dealers to quote, query & transact through a central OTC computer using the
telecommunication links.

 A Company which is listed on any other recognised stock exchange in India is not permitted
simultaneously for listing on OTCEI.

 OTCEI deals in equity shares, preference shares, bonds, debentures and warrants.

 OTC Exchange of India designed trading in debt instruments commonly known as PSU
bonds and also in the equity shares of unlisted companies.

Stock Indices (indexes) Indexes are constructed to measure the price movements of shares,
bonds and other types of instruments in market. A stock market index is a measurement which
indicates the nature, direction and the extent of day to day fluctuations in the stock prices. It
is a simple indication of the trends in the market and investors‟ expectations about future price
movements. The stock market index is a barometer of market behaviour. It functions as an
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indicator of the general economic scenario of a country. If stock market indices are growing, it
indicates that the overall general economy of country is stable if however the index goes down
it shows some trouble in economy.

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Construction of Stock Index: A stock index is created by choosing high performing stocks.
Index can be calculated by two ways by considering the price of component stock alone. By
considering the market value or size of the company called market capitalization method. Two
main stock index of India are Sensex and Nifty. Any of the following methods can be used for
calculating index

 Weighted capitalisation method - full market capitalisation and free float market capitalisation.
 Price weighted index method
 Equal weighting method

The important indices in India:

 BSE Sensex
 S&P CNX Nifty
 S&P CNX 500
 BSE 500
 BSE 100
 BSE 200/Dollex
 BSE IT
 BSE CG
 BSE FMCG
 S&P CNX Defty

BSE SENSEX The 'BSE Sensex' or 'Bombay Stock Exchange' is value-weighted index
composed of 30 stocks and was started in January 1, 1986. The Sensex is regarded as the pulse
of the domestic stock markets in India. It consists of the 30 largest and most actively traded
stocks, representative of various sectors, on the Bombay Stock Exchange. These companies
account for around fifty per cent of the market capitalization of the BSE S&P CNX NIFTY
The Standard & Poor's CRISIL NSE Index 50 or

S&P CNX Nifty nicknamed Nifty 50 or simply Nifty (NSE: ^NSEI), is the leading index for
large companies on the National Stock Exchange of India. The Nifty is a well diversified 50
stock index accounting for 23 sectors of the economy. It is used for a variety of purposes such
as benchmarking fund portfolios, index based derivatives and index funds. Nifty is owned and
managed by India Index Services and Products Ltd. (IISL), which is a joint venture between
NSE and CRISIL. IISL is India's first specialized company focused upon the index as a core
product. IISL has a marketing and licensing agreement with Standard & Poor's.

Merchant Banking Merchant banking was first started in India in 1967 by Grindlays
Bank. It has made rapid progress since 1970. Merchant Banking is a combination of Banking
and consultancy services. It provides consultancy, to its clients, for financial, marketing,
managerial and legal matters. Consultancy means to provide advice, guidance and service for a
fee. It helps a businessman to start a business. It helps to raise (collect) finance. It helps to
expand and modernise the business. It helps in restructuring of a business. It helps to revive
sick business units. It also helps companies to register, buy and sell shares at the stock
exchange.

In short, merchant banking provides a wide range of services for starting until running a
business. It acts as Financial Engineer for a business.

The functions of merchant banking are listed as follows:

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1. Raising Finance for Clients: Merchant Banking helps its clients to raise finance through
issue of shares, debentures, bank loans, etc. It helps its clients to raise finance from the
domestic and international market. This finance is used for starting a new business or project
or for modernization or expansion of the business.

2. Broker in Stock Exchange: Merchant bankers act as brokers in the stock exchange.
They buy and sell shares on behalf of their clients. They conduct research on equity shares.
They also advise their clients about which shares to buy, when to buy, how much to buy and
when to sell. Large brokers, Mutual Funds, Venture capital companies and Investment Banks
offer merchant banking services.

3. Project Management: Merchant bankers help their clients in the many ways. For e.g.
advising about location of a project, preparing a project report, conducting feasibility studies,
making a plan for financing the project, finding out sources of finance, advising about
concessions and incentives from the government.

4. Advice on Expansion and Modernization: Merchant bankers give advice for expansion
and modernization of the business units. They give expert advice on mergers and
amalgamations, acquisition and takeovers, diversification of business, foreign collaborations
and joint-ventures, technology up gradation, etc.

5. Managing Public Issue of Companies: Merchant bank advice and manage the public issue
of companies. They provide following services:

a. Advise on the timing of the public issue.

b. Advise on the size and price of the issue.

c. Acting as manager to the issue, and helping in accepting applications and allotment of
securities.

d. Help in appointing underwriters and brokers to the issue.

e. Listing of shares on the stock exchange, etc.

6. Handling Government Consent for Industrial Projects: A businessman has to get government
permission for starting of the project. Similarly, a company requires permission for expansion or
modernization activities. For this, many formalities have to be completed. Merchant banks do
all this work for their clients.

7. Special Assistance to Small Companies and Entrepreneurs: Merchant banks advise small
companies about business opportunities, government policies, incentives and concessions
available. It also helps them to take advantage of these opportunities, concessions, etc.

8. Services to Public Sector Units: Merchant banks offer many services to public sector units
and public utilities. They help in raising long-term capital, marketing of securities, foreign
collaborations and arranging longterm finance from term lending institutions.

9. Revival of Sick Industrial Units: Merchant banks help to revive (cure) sick industrial units.
It negotiates with different agencies like banks, term lending institutions, and BIFR (Board for
Industrial and Financial Reconstruction). It also plans and executes the full revival package.

10. Portfolio Management: A merchant bank manages the portfolios (investments) of its
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clients. This makes investments safe, liquid and profitable for the client. It offers expert
guidance to its clients for taking investment decisions.

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11. Corporate Restructuring: It includes mergers or acquisitions of existing business units,
sale of existing unit or disinvestment. This requires proper negotiations, preparation of
documents and completion of legal formalities. Merchant bankers offer all these services to
their clients.

12. Money Market Operation: Merchant bankers deal with and underwrite short-term money
market instruments, such as:

a. Government Bonds.
b. Certificate of deposit issued by banks and financial institutions.
c. Commercial paper issued by large corporate firms.
d. Treasury bills issued by the Government (Here in India by RBI).

13. Leasing Services: Merchant bankers also help in leasing services. Lease is a contract
between the lessor and lessee, whereby the lessor allows the use of his specific asset such as
equipment by the lessee for a certain period. The lessor charges a fee called rentals.

14. Management of Interest and Dividend: Merchant bankers help their clients in the
management of interest on debentures / loans, and dividend on shares. They also advise their
client about the timing (interim / yearly) and rate of dividend.

Dematerialisation (Demat Shares)

According to SEBI guidelines, all foreign financial institutions, financial institutions‟

mutual funds and banks will have to compulsorily settle their trades only in dematerialised
form. Dematerialisation implies conversion of a share certificate from its physical form to
electronic form. It is a process by which the physical share certificates of an investor are taken
back by the company and an equivalent number of securities are credited in electronic form at
the request of the investor.

Dematerialisation requires an investor to open an account with a depository participant.

Financial institutions, banks, stock brokers etc. can act as depository participants. A depository
participant acts as custodian of the electronic accounts of the clients and takes care of trading
and settlement thereof. In this system an account is opened in a computerized electronic form.
Securities are received and delivered from this account through computerized electronic form.

Advantages of Dematerialisation

Advantages to the company

(a) No need of issuing share certificates

(b) Reduces the chances of fraud
(c) Reduces the cost of handling.
(d) Provides better facilities to communicate with each and every member of the company.

Advantages to investor

(a) Provides liquidity in the matter of settlement of transactions.

(b) Eliminates bad deliveries.
(c) Reduces trading costs.
(d) Provides paperless trading.
Advantages to government
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(a) Helps in quick settlement of transactions.
(b) Avoids unnecessary frauds.

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Rematerialisation

Rematerialisation is the process of converting dematted shares back into physical shares. It
is the process of conversion of electronic holdings of securities into physical certificate form.
In short, the process of withdrawing securities from the Depository is called rematerialisation.

Depository Services A depository is an organization which holds securities in electronic book

entries at the request of the shareholder through the medium of a depository participant. A
depository keeps the scrips on behalf of the investors. It undertakes the custodian role. A
depository participant is an agent of the depository through which it interfaces with the
investor. A depository can be compared to a bank. Investors can avail the services offered by a
depository. To utilize the services offered by a depository, the investor is required to open an
account called
„demat account with the depository. The demat account is opened through a depository
participant. Thus it is very similar to the opening of an account with any of the branches of a
bank in order to utilize the services of that bank. The objective is to allow for the faster,
convenient and easy mode of affecting the transfer of securities. Thus, financial services
relating to holding, maintaining and dealing securities in electronic form by a financial
intermediary known as depository are called depository services.

Constituents of Depository System There are four players in the depository system. They are :

(1) Depository Participant,

(2) Investor (Beneficial owner),
(3) Issuer, and
(4) Depository.

Depository Participant: DP is an agent of the depository. If an investor wants to avail the

services offered by the depository, the investor has to open an account with a DP. It function
as a bridge between the depository and the owners. A DP may be a financial institution, bank,
custodian, a clearing corporation, a stock broker or a “NBFC.

Investor (Beneficial Owner): He is the real owner of the securities who has lodged his securities
with the depository in the form of a book entry.

Issuer: This is the company which issues the security.

Depository: It is a firm which holds the securities of an investor in electronic form in the
same way a bank holds money. It carries out the transaction of securities by means of book
entry, without any physical movement of securities.

National Securities Depository Ltd. (NSDL)

NSDL was registered by SEBI on June 7, 1996 as India‟s first depository to facilitate trading and
settlement of securities in the dematerialized form. It was promoted by IDBI, UTI and NSE
(National Stock Exchange). The objective is to provide electronic depository facilities for
securities traded in the equity and debt markets in the country. NSDL has been set up to cater to
the demanding needs of the Indian capital markets.

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Functions / Services of NSDL The following are the functions or services of NSDL :

1. Maintenance of individual investors‟ beneficial holdings in an electronic form.

2. Trade settlement
3. Automatic delivery of securities to the clearing corporation

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 4. Dematerialisation and rematerialisation of securities.
5. Allotment in the electronic form in case of IPOs.
6. Distribution of dividend
7. Facility for freezing / locking of investor accounts
8. Facility for pledge and hypothecation of securities.
9. Internet based services such as SPEED-c and IDeAS

Central Depository Services (India) Ltd. (CDSL)

The CDSL is the second depository set up by the Bombay Stock Exchange and co-
sponsored by the SBI, Bank of India, Union bank of India, and Centurian Bank. The CDSL
commenced operations on March 22, 1996. The CDSL was set up with the objectives of
providing convenient, dependable and secure depository services at affordable cost to all
market participants. All leading stock exchanges such as Bombay Stock Exchange, National
Stock Exchange, and Kolkata Stock Exchange etc. have established connectivity with
CDSL.

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