PROJECT REPORT ON

Gujarat Stock Exchanges

UNIVERSITY OF MUMBAI

MASTER OF COMMERCE

(Banking & Finance)

SEMESTER III

2016-17

SUBMITTED BY

Name: Samriddhi Rakhecha

Roll No.: 16

PROJECT GUIDE

Mr. Mehul Chhatbar

K.P.B HINDUJA COLLEGE OF COMMERCE

1
 315, NEW CHARNI ROAD, MUMBAI-400 004

M.Com (Banking & Finance)

3rd SEMESTER

Gujarat Stock Exchanges

SUBMITTED BY

Samriddhi Rakhecha

Roll No.: 16

2
 Smt. P.D. Hinduja Trusts

K.P.B. HINDUJA COLLEGE OF COMMERCE

315, New Charni Road, Mumbai 400 004 Tel.: 022- 40989000 Fax: 2385 93 97. Email:

NAAC Re-Accredited A
O 9001:2008THE BEST COLLEGE OF UNIVERSITY OF MUMBAI FOR THE ACADEMIC YEAR 2010
Prin. Dr. Minu Madlani (M. Com., Ph. D.)

CERTIFICATE

This is to certify that Ms. Samriddhi Rakhecha of M.Com (Banking &

Finance) Semester 3rd [2016-2017] has successfully completed the

Project on Gujarat Stock Exchanges under the guidance of DR.

KULDEEP SHARMA.

________________ ________________

Project Guide Co-coordinator

________________ ________________

Internal Examiner External Examiner

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________________ ________________

Principal College Seal

DECLARATION

I Mr. / Ms. Samriddhi Rakhecha, student of M.Com-Banking &

Finance, 3rd semester (2016-2017), hereby declare that I have completed
the project on Gujarat Stock Exchanges

The information submitted is true and original copy to the best of

our knowledge.

(Signature)

Student

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Contents

Chapter Topic Page No.

1.1 Introduction 6
1.2 History of Stock Exchanges in India 8
1.3 Objective of the study 12
1.4 Scope of the Study 12
2.1 Role of Stock Exchanges 13
2.2 Functions of Stock Exchanges 19
3.1 Ahmedabad Stock Exchange 21
3.2 Vision of ASE 23
3.3 Mission Statement of ASE 24
4 Vadodara Stock Exchange 25
5 Saurashtra Kutch Stock Exchange 27
(Erstwhile) Limited
6.1 Decline of Regional Stock Exchanges 28
6.2 Conclusion- Inter connected Stock 31
Exchange of India Ltd
7 Bibliography 39

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Chapter 1.1: Introduction
A stock exchange or bourse is an exchange where stock
brokers and traders can buy and/or sell stocks (also called shares), bonds,
and other securities. Stock exchanges may also provide facilities for issue
and redemption of securities and other financial instruments, and capital
events including the payment of income and dividends. Securities traded
on a stock exchange include stock issued by listed companies, unit
trusts, derivatives, pooled investment products and bonds. Stock
exchanges often function as "continuous auction" markets, with buyers
and sellers consummating transactions at a central location, such as the
floor of the exchange.

To be able to trade a security on a certain stock exchange, it must

be listed there. Usually, there is a central location at least for record
keeping, but trade is increasingly less linked to such a physical place, as
modern markets use electronic networks, which gives them advantages of
increased speed and reduced cost of transactions. Trade on an exchange is
restricted to brokers who are members of the exchange. In recent years,
various other trading venues, such as electronic communication networks,
alternative trading systems and "dark pools" have taken much of the
trading activity away from traditional stock exchanges.

The initial public offering of stocks and bonds to investors is by definition

done in the primary market and subsequent trading is done in
the secondary market. A stock exchange is often the most important
component of a stock market. Supply and demand in stock markets are

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driven by various factors that, as in all free markets, affect the price of
stocks.

There is usually no obligation for stock to be issued via the stock

exchange itself, nor must stock be subsequently traded on the exchange.
Such trading may be off exchange or over-the-counter. This is the usual
way that derivatives and bonds are traded. Increasingly, stock exchanges
are part of a global securities market.

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Chapter 1.2: History of Stock Exchanges in India

The idea of debt dates back to the ancient world, as evidenced for
example by ancient Mesopotamian clay tablets recording interest-bearing
loans. There is little consensus among scholars as to when
corporate stock was first traded. Some see the key event as the Dutch East
India Company's founding in 1602, while others point to earlier
developments. Economist Ulrike Malmendier of the University of
California at Berkeley argues that a share market existed as far back
as ancient Rome.

In the Roman Republic, which existed for centuries before

the Empire was founded, there were societates publicanorum,
organizations of contractors or leaseholders who performed temple-
building and other services for the government. One such service was the
feeding of geese on the Capitoline Hill as a reward to the birds after their
honking warned of a Gallic invasion in 390 B.C. Participants in such
organizations hadpartes or shares, a concept mentioned various times by
the statesman and orator Cicero. In one speech, Cicero mentions "shares
that had a very high price at the time." Such evidence, in Malmendier's

8
view, suggests the instruments were tradable, with fluctuating values
based on an organization's success. The societas declined into obscurity in
the time of the emperors, as most of their services were taken over by
direct agents of the state.

Tradable bonds as a commonly used type of security were a more recent

innovation, spearheaded by the Italian city-states of the late medieval and
early Renaissance periods.

The Dutch East India Company, formed to build up the spice trade,
operated as a colonial ruler in what is now Indonesia and beyond, a
purview that included conducting military operations against wishes of
the exploited natives and competing colonial powers. Control of the
company was held tightly by its directors, with ordinary shareholders not
having much influence on management or even access to the company's
accounting statements.

However, shareholders were rewarded well for their investment. The

company paid an average dividend of over 16 percent per year from 1602
to 1650. Financial innovation in Amsterdam took many forms. In 1609,
investors led by one Isaac Le Maire formed history's first bear syndicate,
but their coordinated trading had only a modest impact in driving down
share prices, which tended to be robust throughout the 17th century. By
the 1620s, the company was expanding its securities issuance with the
first use of corporate bonds.

Joseph de la Vega, also known as Joseph Penso de la Vega and by other

variations of his name, was an Amsterdam trader from a Spanish Jewish
family and a prolific writer as well as a successful businessman in 17th-
century Amsterdam. His 1688 book Confusion of Confusions explained
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the workings of the city's stock market. It was the earliest book
about stock trading, taking the form of a dialogue between a merchant, a
shareholder and a philosopher, the book described a market that was
sophisticated but also prone to excesses, and de la Vega offered advice to
his readers on such topics as the unpredictability of market shifts and the
importance of patience in investment.

William sought to modernize England's finances to pay for its wars, and
thus the kingdom's first government bonds were issued in 1693 and
the Bank of England was set up the following year. Soon thereafter,
English joint-stock companies began going public.

London's first stockbrokers, however, were barred from the old

commercial center known as the Royal Exchange, reportedly because of
their rude manners. Instead, the new trade was conducted from coffee
houses along Exchange Alley. By 1698, a broker named John Castaing,
operating out of Jonathan's Coffee House, was posting regular lists of
stock and commodity prices. Those lists mark the beginning of
the London Stock Exchange.

One of history's greatest financial bubbles occurred in the next few

decades. At the center of it were the South Sea Company, set up in 1711 to
conduct English trade with South America, and the Mississippi Company,
focused on commerce with France's Louisiana colony and touted by
transplanted Scottish financier John Law, who was acting in effect as
France's central banker. Investors snapped up shares in both, and whatever
else was available. In 1720, at the height of the mania, there was even an
offering of "a company for carrying out an undertaking of great
advantage, but nobody to know what it is."

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By the end of that same year, share prices were collapsing, as it became
clear that expectations of imminent wealth from the Americas were
overblown. In London, Parliament passed the Bubble Act, which stated
that only royally chartered companies could issue public shares. In Paris,
Law was stripped of office and fled the country. Stock trading was more
limited and subdued in subsequent decades. Yet the market survived, and
by the 1790s shares were being traded in the young United States.

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Chapter 1.3: Objective of the Study
To understand the role and importance of Stock Exchanges in India.
To achieve an understanding on the stock exchanges in Gujarat,
viz- Ahmedabad Stock Exchange, Vadodara Stock Exchange and
Saurashtra Kutch Stock Exchange Limited.
To study the decline of Regional Stock Exchanges in India.

Chapter 1.4: Scope of the Study

The study covers the following:

Role & Functions of Stock Exchanges in India

Ahmedabad Stock Exchange
Vadodara Stock Exchange
Saurashtra Kutch Stock Exchange (Erstwhile) Limited
Decline of Regional Stock Exchanges in India
Inter connected Stock Exchange of India Ltd

Chapter 2.1: Role of Stock Exchanges

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Stock exchanges have multiple roles in the economy. This may include
the following:

Raising capital for businesses

A stock exchange provides companies with the facility to

raise capital for expansion through selling shares to the investing public.[5]

Common forms of capital raising

Besides the borrowing capacity provided to an individual or firm by

the banking system, in the form of credit or a loan, there are four common
forms of capital raising used by companies and entrepreneurs. Most of
these available options might be achieved, directly or indirectly, through a
stock exchange.

Going public

Capital intensive companies, particularly high tech companies, always

need to raise high volumes of capital in their early stages. For this reason,
the public market provided by the stock exchanges has been one of the
most important funding sources for many capital intensive startups. After
the 1990s and early-2000s hi-tech listed companies' boom and bust in the
world's major stock exchanges, it has been much more demanding for the
high-tech entrepreneur to take his/her company public, unless either the
company already has products in the market and is generating sales and
earnings, or the company has completed advanced promising clinical
trials, earned potentially profitable patents or conducted market research
which demonstrated very positive outcomes. This is quite different from
the situation of the 1990s to early-2000s period, when a number of
companies (particularly Internet boom and biotechnology companies)

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went public in the most prominent stock exchanges around the world, in
the total absence of sales, earnings and any well-documented promising
outcome. Anyway, every year a number of companies, including unknown
highly speculative and financially unpredictable hi-tech startups, are listed
for the first time in all the major stock exchanges there are even
specialized entry markets for these kind of companies or stock
indexes tracking their performance (examples include
the Alternext , CAC Small, SDAX, TecDAX, or most of the third
market good companies).

Limited partnerships

A number of companies have also raised significant amounts of capital

through R&D limited partnerships. Tax law changes that were enacted in
1987 in the United States changed the tax deductibility of investments in
R&D limited partnerships. In order for a partnership to be of interest to
investors today, the cash on cash return must be high enough to entice
investors.

Venture capital

A third usual source of capital for startup companies has been venture
capital. This source remains largely available today, but the maximum
statistical amount that the venture company firms in aggregate will invest
in any one company is not limitless (it was approximately $15 million in
2001 for a biotechnology company).

Corporate partners

A fourth alternative source of cash for a private company is a corporate

partner, usually an established multinational company, which provides

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capital for the smaller company in return for marketing rights, patent
rights, or equity. Corporate partnerships have been used successfully in a
large number of cases.

Mobilizing savings for investment

When people draw their savings and invest in shares (through an IPO or
the issuance of new company shares of an already listed company), it
usually leads to rational allocation of resources because funds, which
could have been consumed, or kept in idle deposits with banks, are
mobilized and redirected to help companies' management boards finance
their organizations. This may promote business activity with benefits for
several economic sectors such as agriculture, commerce and industry,
resulting in stronger economic growth and higher productivity levels of
firms.

Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines,

increase distribution channels, hedge against volatility, increase their
market share, or acquire other necessary business assets. A takeover bid or
a merger agreement through the stock market is one of the simplest and
most common ways for a company to grow by acquisition or fusion.

Profit sharing

Both casual and professional stock investors, as large as institutional

investors or as small as an ordinary middle-class family, through
dividends and stock price increases that may result in capital gains, share
in the wealth of profitable businesses. Unprofitable and troubled
businesses may result in capital losses for shareholders.

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Corporate governance

By having a wide and varied scope of owners, companies generally tend

to improve management standards and efficiency to satisfy the demands
of these shareholders, and the more stringent rules for public corporations
imposed by public stock exchanges and the government. Consequently, it
is alleged that public companies (companies that are owned by
shareholders who are members of the general public and trade shares on
public exchanges) tend to have better management records than privately
held companies (those companies where shares are not publicly traded,
often owned by the company founders and/or their families and heirs, or
otherwise by a small group of investors).

Despite this claim, some well-documented cases are known where it is

alleged that there has been considerable slippage in corporate
governance on the part of some public companies. The dot-com bubble in
the late 1990s, and the subprime mortgage crisis in 200708, are classical
examples of corporate mismanagement. Companies
like Pets.com(2000), Enron (2001), One.Tel (2001), Sunbeam (2001), We
bvan (2001), Adelphia (2002), MCI
WorldCom (2002), Parmalat (2003), American International
Group (2008), Bear Stearns (2008), Lehman Brothers (2008), General
Motors (2009) and Satyam Computer Services (2009) were among the
most widely scrutinized by the media.

To assist in corporate governance many banks and companies worldwide

utilize securities identification numbers (USIN) to identify, uniquely, their
stocks, bonds and other securities. Adding an ISIN code helps to distinctly

16
identify securities and the ISIN system is used worldwide by funds,
companies, and governments.

However, when poor financial, ethical or managerial records are known

by the stock investors, the stock and the company tend to lose value. In
the stock exchanges, shareholders of underperforming firms are often
penalized by significant share price decline, and they tend as well to
dismiss incompetent management teams.

Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing

in shares is open to both the large and small stock investors because a
person buys the number of shares they can afford. Therefore, the Stock
Exchange provides the opportunity for small investors to own shares of
the same companies as large investors.

Government capital-raising for development projects

Governments at various levels may decide to borrow money to finance

infrastructure projects such as sewage and water treatment works or
housing estates by selling another category of securities known as bonds.
These bonds can be raised through the stock exchange whereby members
of the public buy them, thus loaning money to the government. The
issuance of such bonds can obviate, in the short term, direct taxation of
citizens to finance developmentthough by securing such bonds with the
full faith and credit of the government instead of with collateral, the
government must eventually tax citizens or otherwise raise additional
funds to make any regular coupon payments and refund the principal
when the bonds mature.

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Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on
economic forces. Share prices tend to rise or remain stable when
companies and the economy in general show signs of stability and
growth. An economic recession, depression, or financial crisis could
eventually lead to a stock market crash. Therefore, the movement of share
prices and in general of the stock indexes can be an indicator of the
general trend in the economy.

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Chapter 2.2: Functions of Stock Exchanges

1. Economic Barometer: A stock exchange is a reliable barometer to

measure the economic condition of a country. Every major change in country and
economy is reflected in the prices of shares. The rise or fall in the share
prices indicates the boom or recession cycle of the economy. Stock exchange is also
known as a pulse of economy or economic mirror which reflects the economic
conditions of a country.
2. Pricing of Securities: The stock market helps to value the securities on
the basis of demand and supply factors. The securities of profitable and growth
oriented companies are valued higher as there is more demand for
such securities. The valuation of securities is useful for investors, government and
creditors. The investors can know the value of their investment, the creditors can
value the creditworthiness and government can impose taxes on value of
securities.
3. Safety of Transactions: In stock market only the listed securities are traded and
stock exchange authorities include the companies names in the trade list
only after verifying the soundness of company. The companies which are listed
they also have to operate within the strict rules and regulations. This
ensures safety of dealing through stock exchange.
4. Contributes to Economic Growth: In stock exchange securities of various
companies are bought and sold. This process of disinvestment and reinvestment
helps to invest in most productive investment proposal and this leads to
capital formation and economic growth.

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5. Spreading of Equity Cult: Stock exchange encourages people to invest in
ownership securities by regulating new issues, better trading practices and by
educating public about investment.
6. Providing Scope for Speculation: To ensure liquidity and demand of supply of
securities the stock exchange permits healthy speculation of securities.
7. Liquidity: The main function of stock market is to provide ready market for sale
and purchase of securities. The presence of stock exchange market gives
assurance to investors that their investment can be converted into cash whenever they
want. The investors can invest in long term investment projects without
any hesitation, as because of stock exchange they can convert long term
investment into short term and medium term.
8. Better Allocation of Capital: The shares of profit making companies are
quoted at higher prices and are actively traded so such companies can easily
raise fresh capital from stock market. The general public hesitates to
invest in securities of loss
making companies. So stock exchange facilitates allocation of investors
fund to profitable channels.
9. Promotes the Habits of Savings and Investment: The stock market offers
attractive opportunities of investment in various securities. These attractive
opportunities encourage people to save more and invest in securities of
corporate sector rather than investing in unproductive assets such as gold, silver, etc.

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Chapter 3.1: Ahmedabad Stock Exchange
Ahmedabad Stock Exchange Limited is a premier national equities
exchange that plays a key role in the Indian securities markets. Serving
individual and institutional investors from around the world, its primary
business is the trading of approximately 2000 nationally listed equities.
The Exchange also trades over 200 high growth companies that are solely
listed on the ASE or dually listed with another exchange.

The Stock Exchange-Ahmedabad, constituted as a Public Charitable Trust

in 1894, is the second oldest exchange of India. It is recognized by
Securities Contract (Regulations) Act, 1956 as permanent stock exchange.

History of Stock Exchanges in India traces back to the nineteenth century

with the establishment of the Bombay Stock Exchange in 1875 followed
by Ahmedabad Stock Exchange in 1894. In the world map of bourses, the
Stock Exchange - Ahmedabad holds a unique place with its initial
functioning starting under banayan tree and has progressed year after year
there from.

Earlier, all the Stock Exchanges in India functioned under the framework
of Bombay Securities Contracts Act, 1925. The Securities Contract
Regulations Act, 1956 was enacted thereafter and all the Stock Exchanges
in India were required to get recognition from the Ministry Of Finance. At
this juncture, the eventual process of merger took place and Gujarat Share
& Stock Exchange, Indian Share and General Exchange Association and

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Bombay Share and Stock Exchange, Share and Stock Brokers Association
merged with the Ahmedabad Share and Stock Brokers Association. The
membership of the merged entity was 463. In 1982, The Stock Exchange-
Ahmedabad got the permanent recognition from the Government Of
India.

The 80s and 90s saw major focus on building up requisite infrastructure
and bringing about rapid progress in the area of computerization in the
exchanges as whole.Recognizing and appreciating the necessity of
computerization and putting emphasis on screen based trading the Stock
Exchange-Ahmedabad went live on Dec. 12, 1996.

Today, The Stock Exchange-Ahmedabad is one of the oldest bourses

with 333 trading members is serving the investors with its
transparent trading system which among the best in India.

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 Chapter 3.2 : Vision of ASE

Build permanent relationship with the Investors by investing in Total

Quality for Investors delight.

Improving the quality of life in the communities we operate in.

We look at the Finance Sector in a different way. Giving it altogether a

different dimension. Innovations can we say! This in a nutshell best
describes the corporate vision of Ahmedabad Stock Exchange Limited.

Ahmedabad Stock Exchange Limited aims to attain paramount market

position. At Ahmedabad Stock Exchange Limited, we shall continuously
endeavor to seek challenges of meeting the requirements of our investors,
by acquiring and deploying modern technologies, processes and
resources.

We are a conglomerate committed to significantly enhance value for all

our stakeholders by:

Fostering a spirit of continuous learning and innovation.

Having people who practice values and high standards of

behaviour.

Seeking sustained and dynamic growth and securing long-term

success.

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 Taking responsible care of the surrounding environment

Chapter 3.3: Mission Statement of ASE

The mission of Ahmedabad Stock Exchange Limited is setting the agenda

for change in the securities markets in India. The Ahmedabad Stock
Exchange Limited was set-up with the main objectives of:

Ensuring equal access to investors through an appropriate

communication network,

Providing a fair, efficient and transparent securities market to

investors using electronic trading systems,

Enabling settlement cycles and book entry settlements systems

without delays & defaults.

Meeting the current international standards of securities markets.

Ahmedabad Stock Exchange Limited emulates industry benchmarks in

terms of market practices and technology. It is more than a mere market
facilitator. It's that force which is guiding the industry towards new
horizons and greater opportunities.

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Chapter 4: Vadodara Stock Exchange

Vadodara Stock Exchange Limited (VSEL) received

recognition as Stock Exchange from the Government of
India on 5th January 1990 and became Countrys 19th
recognized Stock Exchange. In the beginning it had 150
members and now the strength is 289. In order to revive
the Regional Stock Exchanges, SEBI came out with a
Circular whereby RSEs floated its subsidiary company
which acquired membership rights of BSE/NSE to facilitate
trading terminals to the members of RSE. Accordingly,
Vadodara Stock Exchange Limited floated its 100%
subsidiary named as VSE Stock Services Limited (VSSL).
As on 31-Dec-2009 there are about 98 active sub-brokers
in VSSL and its current average daily turnover is Rs.80
crores in the cash segments of BSE and NSE.
Recognizing and appreciating the necessity of introducing
Screen Based Trading at Vadodara, an accomodacious
premises was acquired in 1995 at Fortune Tower,
admeasuring approximately 1,56,238 Sq. ft. of area. VSEL,
as per Vadodara Stock Exchange Limited (Corporatisation
and Demutualisation) Scheme, 2005 (the Demutualisation

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Scheme), notified by Securities and Exchange Board of
India (SEBI) in the Official Gazette on 15th September,
2005, and in terms of Securities Contract (Regulation)
(Manner of increasing and maintaining Public Shareholding
in Stock Exchanges) Regulations, 2006, is required to
reduce the shareholding of its Trading members up to 49%
of its equity share capital i.e. minimum 51% holding is
required to be owned by non-trading members, subject to
the prior approval of SEBI.

Accordingly the Exchange got demutualised and a

Notification to this effect vide No.
SEBI/MRD/DSA/105441/2007 was published on 9th
October, 2007 in PartIII - Section-4 of the Gazette of India,
notifying that VSEL has ensured compliance with the
requirements of SCRA on 13.09.2007 and that VSEL has
completed corporatisation and demutualization by this
date. For the Depository operations, VSEL has branches in
Surat, Bharuch & Anand and plans to expand its
Depository participant business immediately after
demutualisation in all towns of Gujarat and later on all
over India. It has plans to tie up with banks to provide DP
services from their branch premises, which shall be
beneficial for all the parties.

Trading Members
VSEL currently has 289 Trading Members out of which 54
26
are corporate Trading Members. Since, presently there is
no turnover on the Exchange the Trading Members are
routing their business through the subsidiary of the
Exchange and presently, 100 members are trading through
subsidiary
The services provided by VSSL are as under:

Trading at BSE & NSE Cash Segment

Strong Risk Management Features

Trading at BSE & NSE Cash Segment

Strong Risk Management Features

Electronic Contract Notes

Direct Billing of Clients

Efficient Pay Out of Securities and Funds

Auto Pay In for VSSL clients having Demat

Accounts in VSE CDSL DP

All Demat related Services

Chapter 5: Saurashtra Kutch Stock Exchange

(Erstwhile) Limited

Saurashtra Kutch Stock Exchange Ltd. ( Erstwhile ) was incorporated

in the month of July 1989 and got recognition from the Govt. of India.
The recognition have been renewed from time to time by the Central
Government and SEBI. The Stock Exchange is recognized under

27
Securities Contracts Regulation Act. Earlier the Stock Exchange was
having very good volume. The broker members were doing huge volume
on the floor of the stock exchange. Subsequently after the commencement
of National Stock Exchange and on-line computerized trading, the volume
on the regional Stock Exchanges faced the decreased trend and as a result,
the regional stock exchanges were facing difficulties of reduced liquidity,
volume and dept. Recently, in the month of December 1999, SEBI has
permitted the regional stock exchange to acquire membership of bigger
stock exchanges like BSE and NSE by forming a subsidiary company and
thereby to provide trading platform to the brokers of regional stock
exchanges. Accordingly, many stock exchanges have floated subsidiary
company for acquiring membership of BSE or NSE. Our stock exchange
has also floated a subsidiary company namely SKSE Securities Limited
which was a 100% subsidiary of Saurashtra Kutch Stock Exchange Ltd.
( Erstwhile ). This subsidiary has acquired membership of BSE and NSE
and it has got SEBI registration also and got permission for trading from
the Stock Exchange, Mumbai and National Stock Exchange of India Ltd.,
Mumbai. Our subsidiary is also a Depository Participant of CDSL.

Chapter 6.1: Decline of Regional Stock Exchanges

As in several other fields, technology drives today the stock markets the
world over. India is no exception. Establishment of National Stock
Exchange of India Ltd., (NSE) in 1994 with an all-India spread and
expansion of operations of Bombay Stock Exchange (BSE) throughout
the country, both of which have their trader work stations at over 400

28
centres in the country today, have led to the virtual extinction of all the 19
Regional Stock Exchanges (RSEs) spread across the length and breadth of
the country. The share of 19 RSEs, which was as much as 45.6 per cent of
the total all-India turnover of Rs. 2.39 lakh crore in 1995-96, declined
progressively year after year and in 2001-02, it was just 8.4 per cent of the
total volume of Rs. 8.96 lakh crore. At present, there is virtually no
trading at any of the RSEs. Trading in the cash segment is thus confined
to NSE and BSE only, with the share of the latter, which used to account
for over 70 percent of the all-India volume of trading till 1995, is also
progressively declining. Currently, BSE accounts for about 30 per cent of
the aggregate volume of trading on NSE and BSE in the cash segment. In
the derivatives segment, while NSE clocks in about Rs. 2000 crore daily,
the turnover on BSE has been progressively declining virtually to the zero
level. The RSEs of the country and their members had spent over Rs. 200
crore in automating their trading, clearing and settlement systems, largely
driven by regulatory compulsions, sadly to witness them lying idle at
present.

Causes for the Decline: Abolition of badla with effect from July 2, 2001,
which acted as the backbone of trading at the Calcutta, Delhi, Ahmedabad
and Ludhiana Stock Exchanges and also at a few other exchanges, which
conducted badla trading but in a clandestine manner, dealt a serious blow
to trading at the RSEs. Introduction of uniform trading cycles at all the

29
stock exchange, also effective from July 2, 2001, reduced further the
volume of trading at the RSEs due to diminished opportunities for
arbitrage transactions. Introduction of compulsory rolling settlements,
initially in a few securities and subsequently in all securities effective
from December 31, 2001 on a T+5 basis accelerated the reduction in
turnover at the RSEs. The switch over of the rolling settlement to T+3
effective from April 1, 2002 and to T+2 with effect from April 1, 2003
sealed the fate of the RSEs. Yet another major reason for the absence of
trading at the RSEs is that all the major operators are all these exchanges
acquired memberships of either NSE or BSE or of both, while most others
acquired the sub-brokerships of members of NSE/BSE and all of them
switched over their operations completely to NSE and BSE. In spite of the
fact that trading at the RSEs has ground to a halt, RSEs have managed to
survive so far because of the annual listing fees that are being received
from the listed companies. The circulars issued by the Ministry of Finance
on April 23, 2003 withdrawing its earlier circulars which required all
companies including existing listed companies, to be listed on the stock
exchanges located in the State where the registered office or the main
works/fixed assets of the company are situated, has driven the last nail
into the coffin of RSEs as companies have started lining up one after the
other to get themselves delisted from the RSEs. With the incomes drying
up almost completely, RSEs will soon wear a totally deserted look with no
activity whatever.

30
31
Chapter 6.2: Conclusion -Inter-connected Stock
Exchange of India Ltd
It was the dwindling fortunes of RSEs that brought them together to
establish the Inter-connected Stock Exchange of India Ltd. (ISE). At a
meeting of the Federation of Indian Stock Exchanges held in October
1996, a Steering Committee was formed to evolve an Inter-Connected
Market System. As a result, ISE, which was promoted by 14 regional
stock exchanges of the country (excluding Calcutta, Delhi, Ahmedabad,
Ludhiana and Pune Stock Exchanges, apart from NSE, BSE and OTCEI)
was incorporated on ISE by SEBI under the Securities Contracts
(Regulations) Act, 1956 on November 18, 1998, ISE commenced trading
on February 26, 1999. ISE was launched with the laudable objective of
converting small, fragmented and illiquid markets into a large, efficient
and liquid national-level markets. This was a unique experiment, with a
highly automated trading, clearing and settlement systems backed by
state-of-the-art computers, virtually first of its kind in the world. ISE is
also a professionally managed stock exchange with the Chairman of the
Exchange being also a Public Representative Director right from its
inception. Unfortunately for the RSEs, particularly small brokers, the ISE
experiment did not succeed. The daily turnover, which used to be Rs. 1 to
2 crore in the first six months, gradually declined to virtually zero level.
Failure of ISE is, to a large extent, due to the bigger brokers of the
participating RSEs failing to evince any interest in trading on ISE due to
commercial considerations. As a result, it become virtually impossible for
ISE to create any worthwhile liquidity in its markets in competition with
the breadth and depth of NSE and BSE. Markers continued to be

32
fragmented as the participating RSEs did not close down their regional
segments. The, while the small fragmented and illiquid market failed to
emerge. ISE has also not succeeded in getting companies listed on it
despite the stipulation by SEBI that the State of Maharashtra constituted
the regional area for ISE due to lack of regulatory support for making it
applicable to over 3,000 already listed companies in the State of
Maharashtra. Revival of Small Stock Exchanges With a view to reviving
small stock exchanges, SEBI permitted these exchanges in 1999 to float
subsidiary companies to acquire membership rights of other exchanges to
provide the members of these exchanges access to the wider market for
improving the trading volume. Pursuant to this, almost all the RSEs,
including Delhi Stock Exchange, floated subsidiaries and acquired
membership rights of both NSE and BSE. Although the subsidiaries of
RSEs have been functioning fairly satisfactorily, the volume of turnover
by almost all of them are not upto the expected levels, varying from about
Rs. 10 crore to about Rs. 60 crore a day. These subsidiaries have by and
large not been able to register any significant volume of trading in the
derivative instruments, although the volume of trading in the derivatives
segment of NSE is generally higher than in the cash segment. The
regulatory insistence of maintenance of base minimum capital at the RSEs
despite zero volume of trading amounting to over Rs. 300 crore has
hindered the growth of subsidiaries. As a result, several of these
subsidiaries have not been able to be financially viable. Subsidiaries of
RSEs, strictly speaking, are members of stock exchanges to reconstitute
the governing boards of the subsidiaries to provide for at least 50 percent
of the Directors to be Public Representatives to be appointed with the
approval of SEBI, the Chief Executive Officer of the subsidiary or be a
33
Director on the Board of the subsidiary, etc., almost on the lines of
constitution of a stock exchange. These additional regulatory burdens cast
on the subsidiaries-oriented, privately-run stock-broking house. While
subsidiaries of RSEs have no doubt provided an avenue to the members of
RSEs to survive for the present, there is a lurking fear of even this avenue
grinding to a halt as it is likely that the subsidiaries may not be allowed to
continue to function, if they incur losses, as quite a few of them do.
Moreover, recognition of the RSEs may not be renewed due to absence of
any trading and consequently the subsidiary route presently available for
members of RSEs to trade on NSE and BSE would also automatically
close down. Should these apprehensions result into realities, the country
will soon be faced with the spectre of most of the members of RSEs being
forced to either close down their operations completely or to relegate
themselves to working as sub-brokers of major brokers as they will not be
able to acquire the memberships of NSE/BSE directly. NSE requires the
Dominant Promoter Group of an applicant corporate entity to consist of
not more than four individuals holding at least 51 percent of the paid-up
equity capital of the company. Efforts made by SEBI for revival of small
stock exchanges through the route of subsidiaries will willy nilly grind to
a halt. This is no longer so in respect of small stock exchanges only but
also in respect of bigger stock exchanges like Calcutta Stock Exchanges,
whose turnover in 1995-96 had actually exceeded that of BSE, and Delhi
Stock Exchange. Growing Illiquidity in Listed Stocks The real issue of
concern is not so much as the fate of RSEs and their members but of the
growing illiquidity in listed stocks on the Indian stock exchanges. Top 10
scrips account for over 75 percent of the trading volume while the top 100
scrips account for about 99 percent of the trading volume. Out of about
34
10,000 scrips of about 5,350 companies listed on the BSE, not more than
2,500 scrips were traded in 1999-00, while the number of scrips traded
during 2000-01 and 2001-02 came down further to about 1,800 and 1,600
respectively. In the year 2002, the number of scrips traded for more than
100 days was just 691, while about 1,900 scrips were not traded even on a
single day. Even in respect of the 691 scrips worth Rs. five lakh a day, is
applied, the yearstick of say, five trades a day or trades worth Rs. five
lakh a day, is applied, the number will come down drastically to just about
100. Even at the NSE, which has been permitting trading in big cap and
mid cap companies only, in 2001-02, out of about 1,000 scrips, the
number of scrips listed only on the RSEs and there is virtually no trading
whatever at present in all these scrips. A host of factors like low capital
base of listed companies, (there are about 2,000 listed companies with a
paid-up capital of Rs.3 crore and below), progressive reduction in public
offer from 60 percent of the issued capital to 25/10 percent for eligibility
for listing, switch-over to proportionate allotment of securities, free
pricing of shares, introduction of book-building in respect of IPOs,
introduction of order-driven system and of rolling settlement etc., have all
cumulatively been responsible for the present state of illiquidity in the
Indian stock markets. Indonext Exchanges is the Solution With all the
RSEs having already virtually ground to a halt and with the growing
illiquidity at the NSE-BSE in respect of a vast number of shares, it is
imperative that a solution needs to be evolved in the larger interest of
millions of investors of the country. A feasible solution can be to create
one single trading platform for all the RSEs, shutting down completely
their local trading platforms, on the lines of Euronex of Europe.
Threatened by the growing concentration of business on London Stock
35
Exchange and Deutsche Bourse, the Paris Bourse, Amsterdam Exchange
and Brussels Exchange established in 1999 Euronext by creating a single
Euronext cash market for equities and bonds, a single Euronext
derivatives market and a single Euronext commodity market with a single
set of trading rules. While trading takes place in a multi-jurisdictional
setting, clearing of transactions takes place under a single jurisdiction in
France. It is important to note that while the three Exchange organizations
have merged, there is no merger of their official exchange status. There
are three subsidiary companies of the holding company in the three
member countries, with each of them holding an exchange licence for the
local capital market. This enables companies to choose their entry point
for listing and consequently, their preferred jurisdiction, either France, or
Belgium or the Netherlands. Euronext is a growing organization. Lisbon
Stock Exchange of Portugal has recently joined Euronext. The monthly
turnover on Euronext at present is about $150 billion, much higher than
that of about $90 billion on Deutsche Bourse and about 60 percent of
about $250 billion on the London Stock Exchange. Indonext Exchange
can be ISE or OTCEI or any one of the RSEs that may be chosen by the
Participating Stock Exchanges (PSEs). Indonext Exchange can become a
success if all eligible members of PSEs are freely permitted to become its
trading members with the SEBI stock broker registration on Indonext
Exchange being automatic and membership of PSEs being taken into
account while reckoning payment of turnover fees to SEBI by the trading
members. Besides, base minimum capital varying from Rs. 4 lakh to Rs. 7
lakh lying with the various RSEs to the credit of each of their members
and being totally not put to any use, should be permitted to be transferred
to Indonext Exchange. All the steps mentioned above, necessary as they
36
are, would not be sufficient to make Indonext Exchange a success. NSE
and BSE, having already emerged as giants controlling fully the total
volume of trading in the country, Indonext Exchange can succeed only if
there is exclusivity of trading. This can be done by providing for trading
in respect of all companies with a paid-up capital upto say, Rs. 20 crore,
which currently account for a daily turnover of about Rs. 350 crore, only
on Indonext Exchange, while companies with a paid-up capital upto Rs.
20 crore coming out with IPOs in future may be permitted to be listed
only on Indonext Exchange. Companies with a paid-up capital of Rs. 20
crore already listed on NSE/BSE may be delisted from these stock
exchanges and listed on Indonext Exchange.

Indonext Exchange to Focus on Liquidity Establishment of Indonext

Exchange is only a step towards a solution to the larger issue of lack of
liquidity, the extent of which has been detailed above. Indonext Exchange
has to focus to ensure that lack of liquidity should not be a problem any
longer. A host of issues need to be addressed in this behalf. Broadly, there
are four categories of shares, viz (i) liquid, (ii) thinly traded, (iii)
marginally traded, and (iv) illiquid, while there is no need to do anything
in respect of liquid shares, the question of evolving a suitable exit route to
the illiquid shares mainly by way of transfer of these shares to the recently
set up Asset Reconstruction Company of India Ltd. or some other similar
organizations at a nominal value of say, one paise per share, so as to
enable the holders of these shares to book losses needs to be considered.
With regard to thinly traded and marginally traded shares, trading may be
permitted only through the quote-driven system with market makers, who

37
should mandatorily be required to be appointed by companies on the lines
of the provisions already contained in SEBI guidelines in respect of IPOs,
but rarely implemented. Market makers need to be offered proper
facilities for borrowing of funds at a concessional rate of interest in order
to enable them to hold stock of shares and to finance their working capital
and for supply of stocks from promoters to enalbe the market makers to
fulfil their commitments against sales. Besides, market makers need to be
offered financial incentives by way of waiver of levy on transactions
relating to market-making, stock exchanges to share with market makers
the income earned by way of levy on the transactions in the shares in
which market makers make a market, profits made by market makers on a
short-term basis to be treated as long-term capital gains and taxed
accordingly, as in the United States, etc. In respect of marginally traded
shares, instead of market makers, specialists may be appointed for each
share on the line of the system in vogue in the New York Stock Exchange,
so that all orders for purchase and sale get concentrated at one point In
such cases where market makers and specialist are not appointed, a
separate trade maching engine, called Cal Auction System (which has
been successfully implemented in the recently established Arizona Stock
Exchange in the United State) can be introduced. In this system, matching
of all buy and sell offers takes place at the end of a day or a week, as may
be specified. Liquidity cannot really be generated unless the basic
maladies which have conscripted liquidity referred to earlier are
addressed. Some of the measures that need to be taken immediately
include increasing the capital base of listed companies to at least Rs. 3
crore with a public shareholding of at least 25 percent of the expanded
capital base, enhancing the minimum percentage of public offer to at 40
38
percent of the issued capital of a company for being entitled for listing,
modifying the system of proportionate allotment of shares and grant of
weightage in allotment to those applying upto 10 tradeable lots,
particularly to those applying upto 5 tradeable lots, modifying the free
pricing policy substantially so as to prevent post-listing erosion,
suspending at least for some time he book-building mechanism and re-
introduction of weekly account period settlement in respect of thinly
traded and marginally traded shares, etc. Conclusion Decadence of RSEs
has not affected the brokers of these exchanges to the extent it has hurt the
millions of shareholders of the regionally listed companies who have
awoken to find that there is no market for their holdings. To add to this,
there are other disturbing developments like several of the flourishing
companies going abroad to raise capital, some of the thriving companies,
particularly multinational companies, delisting their shares, etc. Indian
stock markets do not any longer attract the rising levels of savings in the
economy. The shareholding population has virtually investment in stock
market instruments by over 50 percent of the households in the United
States. The various remedies suggested above need serious consideration
by the authorities concerned so that the benefits of fruits of development
have a wider reach.

39
Chapter 7: Bibliography

Sources of data:

Wikipedia.com
Scribd.com
Financial Markets in India Textbook S Parveen
Slideshare.net
Aselindia.co.in
Sksesl.com
Vselindia.com

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