6.1.1 Types of Stock Exchanges and Important Indices In India there are three types of stock exchanges 6.1.1.1.

Regional Stock Exchanges (RSEs) 6.1.1.2. National Stock Exchange (NSE) 6.1.1.3 Over the Counter Stock Exchange of India (OTCEI) 6.1.1.4. Bombay Stock Exchange(BSE) 6.1.1.1 . Regional Stock Exchanges8 There are 23 stock exchanges in India. Among them two are national level stock exchanges namely Bombay Stock Exchang (BSE) and National Stock Exchange of India (NSE). The rest 21 are Regional Stock Exchanges (RSE). The Regional Stock Exchanges started clustering from the year 1894, when the first RSE, the Ahmedabad Stock Exchange (ASE) was established. In the year 1908, the second in the series, Calcutta Stock Exchange (CSE) came into existence. During the early sixties, there were only few recognized RSEs in India namely Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore. The number remained unchanged for the next two decades. 1980s was the turning point and many RSEs were incorporated. The latest is Coimbatore Stock Exchange and Meerut Stock Exchange. The RSEs are at the following cities: Ahmedabad, Bangalore, Bhubaneshwar, Calcutta, Coching, Coimbatore, Delhi, Guwahati, Hyderabad, Jaipur, Ludhiana, Madhya Pradesh (Indore), Madras, Magadh (Patna), Mangalore, Meerut, Pune, Rajkot, Saurashtra Kutch, Uttar Pradesh (Kanpur), Vadodara. 6.1.1.2 National Stock Exchange (NSE) In order to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others. The purpose was to bring about more professionalism in the stock market trading on all India basis. NSE commenced its operations in Wholesale Debt Market (WDM) segment in June 1994.

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The text related to RSE has been partially taken from the website www.surfindia.com/finance/regional-stock-exchanges.htmltaken from the website

The Wholesale Debt Market (WDM) is concened with trading in government securities like T-bills alongwith PSU bonds, CDs, CPs, and corporate debentures. The main participants in this market are banks, financial institutions and large corporates. The operations in the Wholesale Debt Market is similar to money market operations except that debt market operations involve institutional investors and corporate bodies entering into transactions of high value in financial instruments like treasury bills, government securities, commercial papers etc. Currently NSE provides exposure to investors in two types of markets, namely: 1.Wholesale debt market 2.Capital market Objective of NSE a. To establish a nationwide trading facility for equities, debt instruments, and hybrids b. To ensure equal access to investors all over the country through an appropriate communication network c. To provide a fair, efficient and transparent securities market to investors using electronic systems d. To enable shortening settlement cycles e. To meet the current international standard s 6.1.1.3 Over the Counter Exchange of India (OTCEI) Traditionally, trading in Stock Exchanges in India followed a conventional style where people used to gather at the Exchange and bids and offers were made by open outcry. This age-old trading mechanism in the Indian stock markets used to create many functional inefficiencies. Lack of liquidity and transparency, long settlement periods and benami transactions are a few examples that adversely affected investors. In order to overcome these inefficiencies, OTCEI was incorporated in 1990 under the Companies Act 1956. OTCEI, a different type of stock exchange was set up in the year 1992 as a

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section 25 company (As per the Companies Act, 1956). The main objectives of OTCEI was to list the small companies so that they can also access the public funds while keeping the cost of acquisition of funds low. The Securities Contracts Act , 1956 recognizes OTCEI as a stock exchange under its Section 4 guidelines. OTCEI was established by various financial institutions like UTI, ICICI, IDBI, IFCI, GIC, SBI Capital Market Ltd., Canara Bank Financial Services Ltd. OTCEI is ringliess, fully electronic and a national stock exchange. Wide variety of Instruments like equity share capital, preference share capital, debentures, bonds, warrants and exim scrips are traded on OTCEI. The minimum issued capital of companies for getting a listing on OTCEI has been fixed at Rs 30 lakhs. Companies listed on the OTCEI get the same status as any other company that is listed on any other stock exchange in the country except that they cannot be listed or traded on any other stock exchange in India. Advantages of OTCEI a. Greater liquidity and lesser risk of intermediary charges due to widely spread trading mechanism across India b. The screen-based scripless trading ensures transparency and accuracy of prices c. Faster settlement and transfer process as compared to other exchanges d. Shorter allotment procedure (in case of a new issue) than other exchanges 6.1.1.4 Bombay Stock Exchange (BSE)9 Bombay Stock Exchange is the oldest stock exchange in Asia What is now popularly known as the BSE was established as "The Native Share & Stock Brokers' Association" in 1875. Over the past 135 years, BSE has facilitated the growth of the Indian corporate sector by providing it with an efficient capital raising platform. Today, BSE is the world's number 1 exchange in the world in terms of the number of listed companies (over 4900). It is the world's 5th most active in terms of number of transactions handled through its electronic trading system. And it is in the top ten of global exchanges in terms of the market capitalization of its listed companies (as of December 31, 2009). The companies listed on BSE command a total market capitalization of USD Trillion 1.28 as of Feb, 2010. BSE is the first exchange in India and the second in the world to obtain an ISO 9001:2000 certification. It is also the first Exchange in the country and second in the world to receive Information Security Management System Standard BS 7799-2-2002

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certification for its BSE On-Line trading System (BOLT). Presently, we are ISO 27001:2005 certified, which is a ISO version of BS 7799 for Information Security. The BSE Index, SENSEX, is India's first and most popular Stock Market benchmark index. Exchange traded funds (ETF) on SENSEX, are listed on BSE and in Hong Kong. Futures and options on the index are also traded at BSE.
9

Taken from Bombay Stock Exchange www.bseindia.com/about/introbse.asp on October 14, 2010

(BSE)

website

ie.,

BSE continues to innovate: a. The first national exchange to launch its website in Gujarati and Hindi and now Marathi b. Purchased of Marketplace Technologies in 2009 to enhance the in-house technology development capabilities of the BSE and allow faster time-to-market for new products c. Launched a reporting platform for corporate bonds christened the ICDM or Indian Corporate Debt Market d. Acquired a 15% stake in United Stock Exchange (USE) to drive the development and growth of the currency and interest rate derivatives markets e. Launched 'BSE StAR MF' Mutual fund trading platform, which enables exchange members to use its existing infrastructure for transaction in MF schemes. f. BSE offers AMFI Certification for Mutual Fund Advisors through BSE Training Institute (BTI) g. Co-location facilities for Algorithmic trading h. BSE also successfully launched the BSE IPO index and PSU website i. BSE revamped its website with wide range of new features like 'Live streaming quotes for SENSEX companies', 'Advanced Stock Reach', 'SENSEX View', 'Market Galaxy', and 'Members' j. Launched 'BSE SENSEX MOBILE STREAMER' 6.1.2 Important Indices The indices of all the stock exchanges of the world measures the relative change in their values for two periods of time. The indices of stock exchanges are based on the index number concept. First, we will try to understand what is an index number. Index numbers are indicators which reflect the relative changes in the level of a certain phenomenon in any given period called the current period with

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respect to its values in some fixed period, called the base period selected for campariosn. The phenomenon or variable under consideration may be : (a) The price of a particular commodity like steel, gold, leather etc or a group of commodities like consumer goods, cereals, milk and milk products, cosmetics etc. (b) Volume of trade, factory production, industrial or agricultural production, imports , exports, stocks and shares, sales and profits of a business house and so on

(c) The national income of a country, wage structure of worker in various sectors, bank deposits, foreign exchange reserves, cost of living of persons of a particular community, class or profession and so on. In words, an index number measures how much a variable changes over time. We calculate an index number by finding the ratio of the current alue to a base value. 6.1.2.1 Index Number Defined An index number is a ratio or an average of ratios expressed as a percentage. In an index number two or more time periods are involved, one of which is the base time period. The value at the base time period serves as the standard point of comparison. In other words, index numbers measures the relative change in the level of a phenomenon with respect to time, geographical location or other characteristics such as income, profession etc. 6.1.2.2 Stock Market Indices A stock market index is an index number that measures the movement in share prices of stocks under consideration. 6.1.2.3 Types of Stock Market Indices They can be categorized on the basis of the following determinants: a) Based on Size

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Name of the Index BSE Sensex BSE 100 BSE - 500 Nifty Nikkei S & P 500 NASDAQ

Size Composite of 30 scrips (stocks) Composite of 100 scrips (stocks) Composite of 500 scrips (stocks) Composite of 50 scrips (stocks) Composite of 225 scrips (stocks) Composite of 500 scrips (stocks) Composite of 4250 scrips (stocks)

b) Based on Nature
Name of the Index BSE IT sector index BSE Teck index BSE Healthcare index FTSE TMT index NASDAQ 100 index Nature Index of IT sector stocks Index of Technology sector stocks Index of healthcare sector stocks Index of TMT (Technology Media & Telecommunications) Index representing the Technology stocks

c) Based on Calculation Methodology : All the indices of the stock markets are not calculated by same method rather different methodology is used to calculate the value of different indices as given below:
Type Market Value weighted Method Calulation Methodology Each stock is given a weight proportional to its market capitalization

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Price weighted method

Each stock is given a weight proportional to its market price

Equal weighted method

Each stock is equally weighted

Modified market capitalization Market capitalization is considered only to the weighted index method extent of free float.

6.2 Secondary Market Trading The activities related to the buying and selling of shares on a stock exchange is known as secondary market trading. Earlier, the stock exchanges had the Open outcry method of trading in the stock markets. With the advanced of technology, the outcry system got replaced by totally online screen based fully electronic trading platform. Both the Pan India presence stock exchanges namely NSE and OTCEI right from the beginning of their operation have supported electronic system of trading. At present even BSE has shifted to ring less screen based trading and so is the case with almost all the stock exchanges of the country. As a result of the change in trading system, the focus has shifted from outcry market to the offices of the stock brokers. 6.2.1 Trading on the web (Internet Trading) Web based trading was allowed from 2000, April in the country. The trading using the Internet means that the trading is carried out Online using computer terminals which are connected to a central server which acts as an order matching machine. To start trading, the investors has to have an trading account (Demat Account) and has to register with any broker offering share broking facilities. The orders directly reaches to the trading platform within the assigned limits designated by the broker to the clients. Even if the client order exceeds the assigned limits, the orders needs to be confirmed by the broker before the transaction gets completed. The broker has the power to change the information mentioned in the quote. The software used is so designed that it supports the trading on real time basis. The software also displays the real time market information, client information, bank account management, and a transaction history. In 2000, April the stock market was reaching continuously higher and higher levels and a large number of interested parties ventured in the Internet

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trading business. The current Internet Trading market is dominated by ICICI Direct.com with nearly half of the market share, the other players are India Bulls.com with has around quarter of the market share. ICICI has emerged as a market leader because it can provide strong connectivity between the trading account, demat account and bank accounts. Moreover, ICICI's huge off line presence in various financial services segment and penetration helps in gaining more and more interested customers coming to them. The other players in Internet trading business are Sharekhan.com, 5 paisa.com (both these two firms are witnessing a decline). However, Kotak Street.com and HDFC Securities are still there in the race and competing with ICICI and India Bulls. Though Internet trading platforms has helped more and more investors to participate in the stock market however, it do suffers from lot many operations and technical barriers as given below: a. Low Bandwidth and associated Internet connectivity. Simultaneously, the numbers of persons having access to computers is also not very high in the country. b. All the branches of banks wherein the investors are having their bank accounts are not computerized. c. All the branches of the banks do not have demat account maintenance facility. d. The time taken for completion of a transaction ranges between 5 yo 15 minutes and in between high volatility of stock market may lead to fluctuation in prices. e. The high cost of transactions (fee charged by service providers) also acts as a deterrent for lot many prospective investors. f. An Online investor has to pay more margin for trading as compared to an Offline investor and the money also remains locked for more number of days. 6.2.2 A note on Dematerialisation The limitations that are associated with the physical shares are very large like chances of fake certificates, forged transfers, delay in signature verifications, cumbersome paper work etc. With the advent of technology, an electronic book entry form of holding and trading securities has been introduced. Investors have the option to hold securities in either physical (share certificates) or electronic format (dematerilised format). In order to expedite the process of dematerilisation, the SEBI has made it mandatory to settle the transactions only in demat format for in selected scrips. All the securities issued through IPOs are compulsorily to be settled only in demat format. Two depositories viz National Securities Depository Limited (NSDL)

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and the Central Depository Service Limited (CDSL) offer trading facility in demat securities. As of now, demat process of securities have reached almost 100 percent, accordingly, almost all the transactions that are carried out now, the settlement is done in demat format only. 6.2.3 A note on the steps to be followed for Internet trading. a. Getting the registering done with any Online trading portal listed on the website b. Registration to operate as iconnect user c. After having placed the order, click on 'Pay Through' and then select the bank listed the online portal which will direct the investor to the account' d. Once the details of Login ID and password are verified, the investor needs to verify the transaction and confirm the transaction by entering the transaction ID and password. An automated email immediately follows confirming the transaction. e. The account status is updated on real time basis.

6.3 Settlement Mechanism After several reforms were carried out by SEBI related to the stock market, settlement period was reduced to 7 days from a period of a fortnight (14 days). This system continued and trading cycle was stable and payment and delivery used to happen in a week's time. This carry forward system continued for quite long at the stock exchanges and it increased the volume of trading which lead to the sustained liquidity in the system. Simultaneously, the sustained liquidity resulted in speculative practices which in turn ended in increased volatility in the price of scrips traded in the stock market. The speculative practices artificially inflated the scrip prices also defaults in payments started increasing. Ultimately, the price discovery mechanism of the stocks got a big blow. To come out of this problem, a new settlement mechanism was introduced which was called as Rolling Settlement. Rolling settlement was introduced in phased manner. Under this rolling settlement, initially, T + 5 system of settlement of transactions started happening. At the beginning of rolling settlement in 2000, January, was introduced in only 5 scrips which was extended to 153 scrips in 2000, May, which increased to 400 + scrips in 2001, July. Subsequently, all scrip were covered under rolling settlement.

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This was not the end of the rolling settlement system and in 2002, April, the time duration of completion of transactions was reduced from T+ 5 to T +3. In short, all the transactions needs to be settled in 3 working days time measured from the date of acceptance, ie., the amount has to be paid to the seller and shares are to alloted to the buyer. The settlement time under rolling settlement system was further reduced to T + 2 days from 2003, April. Reaching up to T + 2 level from T+14 took a considerable time because effective implementation of the rolling settlement with T+2 days needs considerable level of technology to support the electronic transfer of funds and crediting of shares in dematerilized form. 6.4 Regulatory framework : Functions and Powers of SEBI

Securities and Exchange Board of India (SEBI) The Securities and Exchange Board of India (SEBI) was set up in 1988 for regulating the capital markets of India. However, SEBI started operating from the year 1992, when it was empowered in a big manner and an autonomous status was granted to it. SEBI is vested with powers concerning various aspects of the capital markets right from acting as a regulator of the stock exchanges to promotion of self regulating organizations (SROs). The major functions of SEBI are given below: a. Regulating the business in the stock markets and other securities b. Registering and regulating the working of collective investment schemes including mutual funds c. Prohibiting fraudulent and unfair trade practices relating to securities market d. Regulating substantial acquition of shares and takeover of companies e. Prohibiting insider trading **** in securities. f. Promoting fair practices and code of condut for all SROs g. Calling for information form, undertaking inspection, conducting inquiring and audits of the stock exchanges and intermediaries, and self-regulatory organization in the securities market. h. Levying fees or other charges for carrying out the purposes of this section Powers of SEBI

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The SEBI has the power to call periodical returns from recognized stock exchanges. a. It can direct enquiries to be made in relation to affairs of stock exchanges. b. It can also amend bye-laws of recognized stock exchanges c. The public companies are compelled by SEBI for listing of securities. d. It can grant registration to market intermediaries e. It can penalize the memebers of stock exchanges for violating securities law

****

INSIDER TRADING : When any sensitive information which may influence the

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price of a scrip is procured or used from sources other normal course of information output for unscrupulous inducement of volatility or personal profits, it is called insider trading.

References
Arora, P. N. et el. (2009). Managerial Statistics. New Delhi. S. Chand & Company Ltd. Brigham, Eugene F. & Houston, Joel F. (2004). Fundamentals of Financial Management. New Delhi. Cengage Learnings Bombay Stock Exchange's Study Material. (2006). BSE Basic Programmes on Stock Markets. Gurusamy, S. (2009). Financial Markets and Institutions 3/e. New Delhi. Tata McGraw Hill Publishing Company Limited. Gurusamy, S. (2009). Financial Services 2/e. New Delhi. Tata McGraw Hill Publishing Company Limited. Khan, M. Y. & Jain, P. K. (2009). Financial Management. Tata McGraw Hill Publishing Company Limited. New Delhi. Kishore, Ravi M. (2005). Financial Management. New Delhi. Taxmann Allied Services (P) Ltd Madura, Jeff. (2006). Financial Institutions and Markets, 7e. New Delhi. South-Western. Pathak, Bharti V. (2008). The Indian Financial System. Dorling Kindersley (India) Pvt Ltd. New Delhi. Saunders, Anthony. & Cornett, Marcia M. (2007). Financial Markets and Institutions. New Delhi. Tata McGraw Hill Publishing Company Limited. Tripathy, Nalini P. (2010). Financial Services. New Delhi, PHI Learning Private Limited. Web based references

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www.bseindia.com/about/introbse.asp (October 14, 2010) www.forex.com/intro-forex-market.html (October 08, 2010) www.surfindia.com/finance/regional-stock-exchanges.html (October 14, 2010) www.wisegeek.com/what-is-a-derivative-market.htm (October 08, 2010)

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