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EQUIT

Y
MARK
ET
INDIA
- AN
OVER
VIEW
Equity
Marke
ts In
India An Overview
1
INDEX
1. Equity Market- Introu!tion
". De#e$o%&ent' In Equity Market
(. Equity A' An In#e't&ent
). In#e'tin* +rin!i%$e'
,. +ri&ary Market
-. Met.o' O/ Marketin* In +ri&ary Market
0. Inter&eiarie' In +ri&ary Market
1. 2e!onary Market
3. Rea'on' 4or Tran'itin* In 2e!onary Market
15. 4un!tion' O/ T.e 2e!onary Market
11. 6i'tin*
1". De$i'tin*
1(. Train*
1). Inter&eiarie' In 2e!onary Market
1,. 2E7I 82e!uritie' 9 E:!.an*e 7oar O/ Inia;
1-. 4II' 9 Inian Equity Market
10. "550 A Year To Re&e&<er
11. 6e''on' 4ro& Re!ent Me$to=n
13. >on!$u'ion
"5. 7i<$io*ra%.y
Equity Markets In India An Overview
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,
15
11
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2
EQUITY MARKET
In financial markets, stock is the capital raised y a corporation throu!h the
issuance and distriution of shares" A person or or!ani#ation which holds shares of stocks
is called a shareholder" $he a!!re!ate value of a corporation%s issued shares is its market
capitali#ation" &hen one uys a share of a company he ecomes a shareholder in that
company" 'hares are also known as Equities" Equities have the potential to increase in
value over time" It also provides the portfolio with the !rowth necessary to reach the
lon!(term investment !oals" )esearch studies have proved that the equities have out
performed than most other forms of investments in the lon! term" Equities are considered
the most challen!in! and the rewardin!, when compared to other investment options"
)esearch studies have proved that investments in some shares with a lon!er
tenure of investment have yielded far superior returns than any other investment"
*owever, this does not mean all equity investments would !uarantee similar hi!h returns"
Equities are hi!h(risk investments" One needs to study them carefully efore investin!"
'ince 1++, till date, Indian stock market has returned aout 1-. to investors on an
avera!e in terms of increase in share prices or capital appreciation annually" /esides that
on avera!e stocks have paid 1"0 . dividend annually" 1ividend is a percenta!e of the
face value of a share that a company returns to its shareholders from its annual profits"
2ompared to most other forms of investments, investin! in equity shares offers the
hi!hest rate of return, if invested over a lon!er duration"
$he first company to issue shares of stock was the 1utch East India 2ompany, in
13,2" $he innovation of 4oint ownership made a !reat deal of Europe%s economic !rowth
possile followin! the Middle A!es" $he technique of poolin! capital to finance the
uildin! of ships, for e5ample, made the 6etherlands a maritime superpower" /efore
adoption of the 4oint(stock corporation, an e5pensive venture such as the uildin! of a
Equity Markets In India An Overview
7
merchant ship could only e undertaken y !overnments or y very wealthy individuals
or families"
Equity markets, the world over, !rew at a !reat speed in the decade of the nineties" After
the ear markets of the late ei!hties, the world markets saw one of the lar!est ever ull
markets of more than ten years" $he openin! up of Indian economy in the 1++,%s led to a
series of financial sector reforms, prominent ein! the capital market reforms" $hese
reforms have led to the development of the Indian equity markets to t standards of the
ma4or !loal equity markets" All this started with the aolition of 2ontroller of 2apital
Issues and susequent free pricin! of shares"
$he introduction of demateriali#ation of shares, leadin! to faster and cheaper
transactions and introduction of derivative products and compulsory rollin! settlement
has followed susequently" 1espite a series of stock market scams and crises e!innin!
from 1++2 *arshad Mehta%s scam to the 8etan 9arekh%s 2,,1 scam, the Indian equity
markets have transformed themselves from a roker dominated market to a mass market"
$he introduction of online tradin! has !iven a much(needed impetus to the Indian equity
markets" *owever, over the years, reforms in the equity markets have rou!ht the country
on par with many developed markets on several counts" $oday, India oasts of a variety
of products, includin! stock futures, an instrument launched only y select markets"
$he introduction of rollin! settlement is the latest step in the direction of
overhaulin! the stock market" $he equity market of the country will most likely e
comparale with the world%s most advanced secondary markets with re!ard to
international est practices" $he market moved to compulsory rollin! settlement and now
all settlements are e5ecuted on $:2 asis and market is !earin! up for movin! to $:1
settlement in 2,,; while the 'trai!ht $hrou!h 9rocessin! <'$9= is in place from
1ecemer 2,,2"
Equity Markets In India An Overview
;
$he importance of equity market is increasin!" )i!htly, reali#in! the advanta!es of
resource allocation throu!h market, >overnment of India and )eserve /ank of India have
een pushin! reforms in equity markets" 'eries of steps are ein! taken to remove
hurdles, increase market efficiency and to make it attractive for the retail investors to take
part in the equity market" It may not e an e5a!!eration to say that the Indian markets are
resourceful to put themselves on par with the markets of the developed countries" $he
Indian markets have assimilated in a relatively lesser time, many a developments that
took lon! time in the developed markets"
DEVE6O+MENT2 IN EQUITY MARKET
$he >overnment of India has een tryin! to improve market efficiency, enhance
transparency and rin! the Indian Equity Market up to international standards" Many
reform measures have een initiated in the +,s" $he principal ones are the formation of
'ecurities E5chan!e /oard of India <'E/I=, repeal of the 2apital Issues <2ontrol= Act,
1+;-, introduction of screen(ased tradin!, shortenin! of tradin! cycle, demutuali#ation
of stock e5chan!es, estalishment of depositories disappearance of physical share
certificates and etter risk mana!ement systems in stock e5chan!es"
$he formation of 'ei was the first attempt towards inte!rated re!ulation of the
securities market" 'ei re!ulates all market intermediaries and has the powers to impose
monetary penalties for misconduct of any intermediary" One of the ma4or stumlin!
locks in fair pricin! of capital issues has een the 2apital Issues <2ontrol= Act, 1+;-"
$he issuers were denied the opportunity to economically raise money from the capital
market" $his is now a matter of the past thanks to the repeal of the Act itself" 'ei has
also issued 1isclosure and Investor 9rotection <1I9= !uidelines to ensure fair prices for
Equity Markets In India An Overview
0
the investors, thou!h however, many issuers in the +,s could unfairly price their capital
issues at the cost of the poor common investors"
$he introduction of 'creen /ased $radin! 'ystems <'/$'= y 6'E is a ma4or
development in the capital market" $his made the markets more efficient" $he
!eo!raphical arriers to trade were dismantled resultin! in increased tradin! volumes"
$his was possile due to the !reat advancements in the area of information technolo!y"
'/$' electronically matches orders cuttin! down time, cost and errors, and minimi#in!
the chances of fraud" ?ery lon! settlement cycle was another ma4or hindrance in effectin!
deliveries in the equity market" Often the securities were delivered after 7, days or more
due to weekly@fortni!htly settlements and carry forward transactions" 'ei has enforced
the discipline to compulsorily settle trades in $:7 days since April 2,,2" $his is slated to
reduce to $:2 days from April 2,,7" All scrips are now under rollin! settlement since
1ecemer 2,,1"
$he Equity Market is incomplete without products to mana!e risks in portfolio
values" At lon! last, derivatives tradin! appeared on Indian e5chan!es in Aune 2,,,"
&hile the product ran!e in derivatives is still limited <futures and options on stocks and
stock indices=, it is certainly a ma4or step forward in roadenin! the financial markets"
6'E was estalished as a demutuali#ed structure separatin! the roles of ownership,
mana!ement and tradin! to eliminate any conflict of interest amon! the stakeholders to
improve market efficiency and to focus on investor interest" Another notale
development in the Indian equity market has een the introduction of depositories to
demateriali#e the share certificates" $his avoids physical movement of certificates, ad
deliveries and quicker transfer of ownership of shares" 9resently all actively traded shares
are held, traded and settled in demat form" $he settin! up of 6ational 'ecurities 2learin!
2orporation Btd", <6'22B= in April 1++3 has een a ma4or development in mana!in!
counterparty risks in the equity market" $his has helped in increasin! tradin! volumes
Equity Markets In India An Overview
3
since traders are now more
confident aout default(free
settlements" &hile most of the
aove measures have helped in
reinforcin! confidence in the Indian equity market y
providin! more transparent and efficient uyin!, sellin! and transfer of shares"
Internationa$ 2!enario?
>loal inte!ration, the widenin! and intensifyin! of links, etween hi!h(income
and developin! countries, have accelerated over the years" $he correlation of !loal
markets over a period of time is presented in <$ale 1( 2="
Over the past few years, the financial markets have ecome increasin!ly !loal"
$he descriptive statistics of the ma4or markets in terms of daily returns is presented in
<$ale 1(7=, which shows that the markets are increasin!ly !ettin! interlinked"
Equity
Marke
ts In
India
An
Overvi
ew
-
2ross order capital flows have shifted from pulic transfers to primarily private
sector flows" Indian market has !ained from forei!n inflows throu!h investment of
Corei!n Institutional Investors <CIIs= route" 1urin! 2,,3(,-, cumulative net investments
y CIIs amounted to D' E 01,+3- million"
Collowin! the implementation of reforms in the securities industry in the past
years, Indian stock markets have stood out in the world rankin!" As may e seen from
<$ale 1(;=, India posted a turnover ratio of +7"1 ., which was quite comparale to the
other developed markets" As per 'tandard and 9oor%s Cact /ook 2,,-, India ranked 10th
in terms of market capitali#ation <1Fth in 2,,; and 1-th in 2,,0= and 1Fth in terms of
total value traded in stock e5chan!es and 21st in terms of turnover ratio as of 1ecemer
2,,3"
A comparative study of concentration of market indices and inde5 stocks in different
world markets is presented in the <$ale 1(0=" It is seen that the inde5 stocks share of total
market capitali#ation in India is F1"3. whereas D' inde5 accounted for F+"0." $he ten
lar!est inde5 stocks share of total market capitali#ation is 72"2. in India and 17";. in
case of D'"
Equity Markets In India An Overview
F
$he stock markets worldwide have !rown in si#e as well as depth over the years" As can
e oserved from <$ale 1(3=, the turnover of all markets taken to!ether have !rown from
D' E 7+"31 trillion in 2,,; to D' E 3-"+1 trillion in 2,,3" It is si!nificant to note that D'
alone accounted for aout ;F"++ . of worldwide turnover in 2,,3" 1espite havin! a lar!e
numer of companies listed on its e5chan!es, India accounted for a mea!er ,"+;. in total
world turnover in 2,,3" $he market capitali#ation of all listed companies taken to!ether
on all markets stood at D' E 0;"1+ trillion in 2,,3 <D' E ;7"3F trillion in 2,,0=" $he
share of D' in worldwide market capitali#ation decreased from 7F"F0 . as at end(2,,;
to 70"F; . as at end 2,,3, while Indian listed companies accounted for 1"01. of total
market capitali#ation in 2,,3"
Equity Markets In India An Overview
+
Accordin! to the %&orld 1evelopment Indicators 2,,-, &orld /ank% there has een an
increase in market capitali#ation as percenta!e of >ross 1omestic 9roduct <>19= in
some of the ma4or country !roups" $he increase, however, has not een uniform across
countries" $he market capitali#ation as a percenta!e of >19 was the hi!hest at 112"+.
for the hi!h income countries as at end 2,,0 and lowest for middle income countries at
;+"0." Market capitali#ation as percenta!e of >19 in India stood at 3F"3 . as at end
2,,0" $he turnover ratio, which is a measure of liquidity, was 122"2 . for hi!h(income
countries and +3"3 . for low(income countries" $he total numer of listed companies
stood at 2F,-77 for hi!h(income countries, 11,1;1 for middle(income countries and 3,1--
for low(income countries as at end 2,,3"
EQUITY A2 AN INVE2TMENT
Equity i'?
1" 'tock or any other security representin! an ownership interest"
2" On the alance sheet, the amount of the funds contriuted y the owners <the
stockholders= plus the retained earnin!s <or losses=, also referred to as Gshareholder%s
equityG"
7" In the conte5t of mar!in tradin!, the value of securities in a mar!in account minus
what has een orrowed from the rokera!e"
Equity is a term whose meanin! depends very much on the conte5t" In !eneral,
one can think of equity as ownership in any asset after all dets associated with that asset
are paid off" Cor e5ample, a car or house with no outstandin! det is considered the
owner%s equity since he or she can readily sell the items for cash" 'tocks are equity
Equity Markets In India An Overview
1,
ecause they represent ownership of a company, whereas onds are classified as det
ecause they represent an oli!ation to pay and not ownership of assets"
$he aility of equities to deliver over lon!er time frames and even outperform other
investment avenues like !old, property and onds is an often chronicled fact" *owever,
over shorter time frames, equities also hold the potential to e a very risky asset class and
e5pose the portfolio to hi!h levels of volatility" $his is the primary reason why any fund
mana!er worth his salt always recommends a sufficiently lon! <at least 7 years= time
frame for an equity(oriented investment" 'imilarly financial planners advocate prunin! of
the equity holdin!s with advancement in the investorHs a!e, when the investor is typically
closer to retirement <shorter investment hori#on= and has a lower risk appetite as well"
INVE2TIN@ +RIN>I+6E2
1" Invest for )eal )eturns
2" 8eep an Open Mind
7" 6ever Collow the 2rowd
;" Everythin! 2han!es
0" Avoid the 9opular
3" Bearn from your Mistakes
Equity Markets In India An Overview
11
-" /uy 1urin! $imes of 9essimism
F" *unt for ?alue and /ar!ains
+" 'earch &orldwide
1," 6o(one 8nows Everythin!
If you uy the same securities as other people, you will have the same results as
other people" It is impossile to produce a superior performance unless you do somethin!
different from the ma4ority" $o uy when others are despondently sellin! and to sell when
others are !reedily uyin! requires the !reatest fortitude and pays the !reatest reward"
/ear markets have always een temporary" And so have ull markets" 'hare prices
usually turn upward from one to twelve months efore the ottom of the usiness cycle
and vice versa" If a particular industry or type of security ecomes popular with investors,
that popularity will always prove temporary and, when lost, may not return for many
years"
Equity Markets In India An Overview
12
$he investor should ear in mind that while he makes investment decision, he
should have idea of the companyHs reak(even point and companyHs position in the stock
e5chan!e" Cor this EIDI$J )E'EA)2* is done" Equity )esearch does the research of
companyHs income and !rowth" In the process, it uses the various sources of financial
information availale in the country and accordin!ly advises in which company an
investor should invest"
4UNDAMENTA6 ANA6Y2I2
$he investor while uyin! stock has the primary purpose of !ain" If he invests for a short
period of time it is speculative ut when he holds it for a fairly lon! period of time the
Anticipation is that he would receive some return on his investment" Cundamental analysis
is a method of findin! out the future price of a stock, which an investor wishes to uy"
$he method for forecastin! the future ehavior of investments and the rate of return on
them is clearly throu!h an analy#e of the road economic forces in which they operate"
$he kind of industry to which they elon! and the analysis of the company%s internal
workin! throu!h statements like income statement, alance sheet and statement of
chan!es of income"
Equity Markets In India An Overview
17
E>ONOMI> ANA6Y2I2
Investors are concerned with those forces in the economy,
which affect the performance of or!ani#ations in which they wish
to participate, throu!h purchase of stock" A study of the economic
forces would !ive an idea aout future corporate earnin!s and the
payment of dividends and interest to investors" 'ome of the road
forces within which the factors of investment operate areK
1. +O+U6ATION? -
9opulation !ives an idea of the kind of laor force in a country" In some countries
the population !rowth has slowed down whereas in India and some other third world
countries there has een a population e5plosion" 9opulation e5plosion will !ive demand
for more industries like hotels, residences, service industries like health, consumer
demand like refri!erators and cars" Bikewise, investors should prefer to invest in
industries, which have a lar!e amount of laor force ecause in the future such industries
will rin! etter rates of return"
". RE2EAR>A AND TE>ANO6O@I>A6 DEVE6O+MENT2? -
$he economic forces relatin! to investments would e dependin! on the amount
of resources spent y the !overnment on the particular technolo!ical development
affectin! the future" /roadly the investor should invest in those industries which are
!ettin! a lar!e amount of share in the funds of the development of the country" Cor
e5ample, in India in the present conte5t automoile industries and spaces technolo!y are
receivin! a !reater attention" $hese may e areas, which the investor may consider for
investments"
Equity Markets In India An Overview
1;
(. >A+ITA6 4ORMATION? -
Another consideration of the investor should e the kind of investment that a
company makes in capital !oods and the capital it invests in moderni#ation and
replacement of assets" A particular industry or a particular company which an investor
would like to invest can also e viewed at with the help of the economic indicators such
as the place, value and property position of the industry, !roup to which it 11,n!s and the
year(to(year returns throu!h corporate profits"
). NATURA6 RE2OUR>E2 AND RAW MATERIA62? -
$he natural resources are to a lar!e e5tent responsile for a country%s economic
development and overall improvement in the condition of corporate !rowth" In India,
technolo!ical discoveries recyclin! of materials, nuclear and solar ener!y and new
synthetics should !ive the investor an opportunity to invest in untapped or recently
tapped resources which would also produce hi!her investment opportunity"
INDU2TRIA6 ANA6Y2I2
$he industry has een defined as homo!eneous !roups of people doin! a similar
kind of activity or similar work" In India, the road classification of industry is made
accordin! to stock e5chan!e list, which is pulished" $his !ives a distinct classification to
industry to industry in different forms such asK
<A= En!ineerin!,
</= /ankin! and Insurance,
<2= $e5tiles,
<1= 2ement,
<E= 'teel Mills and Alloys,
Equity Markets In India An Overview
10
<C= 2hemicals and 9harmaceuticals,
<>= )etail,
<*= 'u!ar,
<I= Information $echnolo!y,
<A= Automoiles and Ancillary,
<8= $elecommunications,
<B= CM2>,
<M=Miscellaneous"
Industry should also e evaluated or analy#ed throu!h its life cycle" Industry life
cycle may also e studied throu!h the industrial life cycle state" $here are !enerally three
sta!es of an industry" $hese sta!es are pioneerin! sta!e, e5pansion sta!e and sta!nation
sta!e"
Equity Markets In India An Overview
13
1. TAE +IONEERIN@ 2TA@E? -
$he industrial life cycle has a pioneerin! sta!e when the new inventions and
$echnolo!ical developments take place" 1urin! this time the investor will notice !reat
increase in the activity of the firm" 9roduction will rise and in relation to production,
there will e a !reat demand for the product" At this sta!e, the profits are also very hi!h
as the technolo!y is new" $akin! a look at the profit many new firms enter into the same
field and illL market ecomes competitive" $he market competitive pressures keep on
increasin! with the enG of new(firms and the prices keep on declinin! and then ultimately
profits fall" At this sta!e all firms compete with each other and only a few efficient firms
are left to run the usiness and most of the other firms are wiped out in the pioneerin!
sta!e itself"
". TAE EX+AN2ION 2TA@E? -
$he efficient firms, which have een in the market now, find that it is time to
staili#e them" Althou!h competition is there, the, numer of firms have !one down
durin! ill pioneerin! sta!e itself and there are a lar!e numer of firms left to run the
usiness in the industry" $his is the time when each one has to show competitive stren!th
and superiority" $he investor will find that this is the est time to make an investment" At
the pioneerin! sta!e it was difficult to find out which of the firm to invest in, ut havin!
waited for the staility period there has een a dynamic selection process and a few of the
lar!e numer of firms are left in the industry" $his is the period of security and safety
and this is also called period of maturity for the firm" $his sta!e lasts from five years to
fifty years of a firm dependin! on the potential and productivity and policy to meet the
chan!e of competition and rapid chan!e in uyer and customer hait" After this sta!e
develops the sta!e of sta!nation or osolescence"
Equity Markets In India An Overview
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(. TAE 2TA@NATION 2TA@E? -
1urin! the sta!nation sta!e the investor will find that althou!h there is increase in
sales of an or!ani#ation, this is not in relation to the profits earned y the company"
9rofits are also there ut the !rowth in the firm is lower than it was in the e5pansion
sta!e" $he industry finds that it is at a loss of power and cannot e5pand" 1urin! most of
the firms who have reali#ed the competitive nature of the industry and the arrival of the
sta!nation sta!e, e!in to chan!e their course of action and start on a new venture should
make a continuous evaluation of their investments" In firms in which they have received
profits for lar!e numer of years and have reached sta!nation they can plan to their
investments and find etter avenues in those firms where the e5pansion sta!e has set in"
>OM+ANY ANA6Y2I2
2ompany analysis is a study of the variales that influence the future of a firm
oth qualitatively and quantitatively" It is a method of assessin! the competitive position
of a firm earnin! and profitaility, the efficiency with which it operates its financial
position and its ful1l with respect to the earnin! of its shareholders" $he fundamental
nature of this analysis is that each share of a company has an intrinsic value, which is
dependent on the company%s financial performance, quality of mana!ement and record of
its earnin!s and dividend" $hey elieve that the market price of share in a period of time
will move towards its intrinsic value" If the market price of a share is lower than the
intrinsic value, as evaluated y the fundamental analysis, then the share is supposed to e
undervalued and it should e purchased ut if the current market price shows that it is
more than intrinsic value then accordin! to the theory the share should e sold"
$his asic approach is analy#ed throu!h the financial statements of an
or!ani#ation" $he asic financial statements, which are required as tools of the
fundamental analyst, are the income statement, the alance sheet, and the statement of
Equity Markets In India An Overview
1F
chan!es in financial position" $hese statements are useful for investors, creditors as well
as internal mana!ement of a firm and on the asis these statements the future course of
action may e taken y the investors of the firm" &hile evaluatin! a company, its
statement must e carefully 4ud!ed to find out that they areK
<a=
<=
<c=
<d=
2orrect,
2omplete,
2onsistent and
2omparale
TE>ANI>A6 ANA6Y2I2
$echnical analysis is simply the study of prices as reflected on price charts"
$echnical analysis assumes that current prices should represent all known information
aout the markets" 9rices not only reflect intrinsic facts, they also represent human
emotion and the pervasive mass psycholo!y and mood of the moment" 9rices are, in the
end, a function of supply and demand" *owever, on a moment to moment asis, human
emotionsMfear, !reed, panic, hysteria, elation, etc" also dramatically effect prices"
Markets may move ased upon peopleHs e5pectations, not necessarily facts" A market
GtechnicianG attempts to disre!ard the emotional component of tradin! y makin! his
decisions ased upon chart formations, assumin! that prices reflect oth facts and
Equity Markets In India An Overview
1+
emotion" Analysts use their technical research to decide whether the current
market is a
/DBB MA)8E$ or a /EA) MA)8E$"
1. 2TO>K >AART2
A stock chart is a simple two(a5is <N(J= plotted
!raph of price and time" Each individual equity, market
and inde5 listed on a pulic e5chan!e has a chart that
illustrates this movement of price over time" Individual
data plots for charts can e made usin! the 2BO'I6> price for each day" $he plots are
connected to!ether in a sin!le line, creatin! the !raph" Also, a comination of the
O9E6I6>, 2BO'I6>, *I>* and@or BO& prices for that market session can e used for
the data plots" $his second type of data is called a 9)I2E /A)" Individual price ars are
then overlaid onto the !raph, creatin! a dense visual display of stock movement" 'tock
charts can e drawn in two different ways" An A)I$*ME$I2 chart has equal vertical
distances etween each unit of price" A BO>A)I$*MI2 chart is a percenta!e !rowth
chart"
". TREND2
$he stock chart is used to identify the current
trend" A trend reflects the avera!e rate of chan!e in a
stock%s price over time" $rends e5ist in all time frames
and all markets" $rends can e classified in three waysK
D9, 1O&6 or )A6>E/OD61" In an uptrend, a stock
Equity Markets In India An Overview
2,
rallies often with intermediate periods of consolidation or movement a!ainst the trend" In
doin! so, it draws a series of hi!her hi!hs and hi!her lows on the stock chart" In an
uptrend, there will e a 9O'I$I?E rate of price chan!e over time" In a downtrend, a
stock declines often with intermediate periods of consolidation or movement a!ainst the
trend" In doin!
so, it draws a series of lower hi!hs and lower lows on the stock chart" In a downtrend,
there will e a 6E>A$I?E rate of price chan!e over time" )an!e ound price swin!s
ack and forth for lon! periods etween easily seen upper and lower limits" $here is no
apparent direction to the price movement on the stock chart and there will e BI$$BE or
6O rate of price chan!e"
$rends tend to persist over time" A stock in an uptrend will continue to rise until
some chan!e in value or a condition occurs" 1eclinin! stocks will continue to fall until
some chan!e in value or conditions occur" 2hart readers try to locate $O9' and
/O$$OM', which are those points where a rally or a decline ends" $akin! a position
near a top or a ottom can e very profitale" $rends can e measured usin!
$)E61BI6E'" ?ery often a strai!ht line can e drawn D61E) three or more pullacks
from rallies or O?E) pullacks from declines" &hen price ars then return to that trend
line, they tend to find 'D99O)$ or )E'I'$A62E and ounce off the line in the
opposite direction"
(. VO6UME
?olume measures the participation of the
crowd" 'tock charts display volume throu!h
individual *I'$O>)AM' elow the price pane"
Often these will show !reen ars for up days and red
Equity Markets In India An Overview
21
ars for down days" Investors and traders can measure uyin! and sellin! interest y
watchin! how many up or down days in a row occur and how their volume compares
with days in which price moves in the opposite direction"
'tocks that are ou!ht with !reater interest than sold are said to e under
A22DMDBA$IO6" 'tocks that are sold with !reat interest than ou!ht are said to e
under 1I'$)I/D$IO6" Accumulation and distriution often BEA1 price movement" In
other words, stocks under accumulation often will rise some time after the uyin! e!ins"
Alternatively, stocks under distriution will often fall some time after sellin! e!ins"
It takes volume for a stock to rise ut it can fall of its own wei!ht" )allies require
the enthusiastic participation of the crowd" &hen a rally runs out of new participants, a
stock can easily fall" Investors and traders use indicators such as O6 /ABA62E
?OBDME to see whether participation is la!!in! <ehind= or leadin! <ahead= the price
action" 'tocks trade daily with an avera!e volume that determines their BIIDI1I$J"
Biquid stocks are very easy for traders to uy and sell" Biquid stocks require very hi!h
'9)EA1' <transaction costs= to uy or sell and often cannot e eliminated quickly from
a portfolio" 'tock chart analysis does not work well on illiquid stocks"
). +ATTERN2 AND INDI>ATOR2
*ow can one or!ani#e the endless stream of stock
chart data into a lo!ical formatO 2harts allow
investors and traders to look at past and present
price action in order to make reasonale predictions
and wise choices" It is a hi!hly visual medium" $his
one fact separates it from the colder world of value(ased analysis" $he stock chart
Equity Markets In India An Overview
22
activates oth left(rain and ri!ht(rain functions of lo!ic and creativity" 'o it%s no
surprise that over the last century two forms of analysis have developed that focus
alon! these lines of critical e5amination"
$he oldest form of interpretin! charts is 9A$$E)6 A6ABJ'I'" $his method
!ained popularity throu!h oth the writin!s of 2harles 1ow and $echnical Analysis of
'tock $rends, a classic ook written on the su4ect 4ust after &orld &ar II" $he newer
form of interpretation is I61I2A$O) A6ABJ'I', a math(oriented e5amination in
which the asic elements of price and volume are run throu!h a series of calculations in
order to predict where price will !o ne5t"
9attern analysis !ains its power from the tendency of charts to repeat the same ar
formations over and over a!ain" $hese patterns have een cate!ori#ed over the years as
havin! a ullish or earish ias" 'ome well(known ones include *EA1 and
'*ODB1E)', $)IA6>BE', )E2$A6>BE', 1OD/BE $O9', 1OD/BE /O$$OM'
and CBA>'" Also, chart landscape features such as >A9' and $)E61BI6E' are said to
have !reat si!nificance on the future course of price action" Indicator analysis uses math
calculations to measure the relationship of current price to past price action" Almost all
indicators can e cate!ori#ed as $)E61(COBBO&I6> or O'2IBBA$O)'" 9opular
trend(followin! indicators include MO?I6> A?E)A>E', O6 /ABA62E ?OBDME
and MA21" 2ommon oscillators include '$O2*A'$I2', )'I and )A$E OC
2*A6>E" $rend(followin! indicators react much more slowly than oscillators" $hey
look deeply into the rear view mirror to locate the future" Oscillators react very quickly to
short(term chan!es in price, flippin! ack and forth etween O?E)/OD>*$ and
O?E)'OB1 levels"
Equity Markets In India An Overview
27
/oth patterns and indicators measure market psycholo!y" $he core of investors
and traders that make up the market each day tend to act with a herd mentality as price
rises and falls" $his GcrowdG tends to develop known characteristics that repeat
themselves over and over a!ain" 2hart interpretation usin! these two important analysis
tools uncovers !rowin! stress within the crowd that should eventually translate into price
chan!e"
,. MOVIN@ AVERA@E2
$he most popular technical indicator for
studyin! stock charts is the MO?I6> A?E)A>E"
$his versatile tool has many important uses for
investors and traders" $ake the sum of any numer of
previous 2BO'E prices and then divide it y that same
numer" $his creates an avera!e price for that stock in
that period of time" A movin! avera!e can e displayed
y re(computin! this result daily and plottin! it in the same !raphic pane as the price
ars" Movin! avera!es BA> price" In other words, if price starts to move sharply upward
or downward, it will take some time for the movin! avera!e to Gcatch upG"
9lottin! movin! avera!es in stock charts reveals how well current price is
ehavin! as compared to the past" $he power of the movin! avera!e line comes from its
direct interaction with the price ars" 2urrent price will always e aove or elow any
movin! avera!e computation" &hen it is aove, conditions are GullishG" &hen elow,
conditions are GearishG" Additionally, movin! avera!es will slope upward or downward
over time" $his adds another visual dimension to a stock analysis"
Equity Markets In India An Overview
2;
Movin! avera!es define '$O28 $)E61'" $hey can e computed for any period
of time" Investors and traders find them most helpful when they provide input aout the
'*O)$($E)M, I6$E)ME1IA$E and BO6>($E)M trends" Cor this reason, usin!
multiple movin! avera!es that reflect these characteristics assist important decision
makin!" 2ommons movin! avera!e settin!s for daily stock charts are 2, days for short(
term, 0, days for intermediate and 2,, days for lon!(term"
One of the most common uy or sell si!nals in all chart analysis is the MO?I6>
A?E)A>E 2)O''O?E)" $hese occur when two movin! avera!es representin!
different trends" Cor e5ample, when a short(term avera!e crosses /EBO& a lon!(term
one, a 'EBB si!nal is !enerated" 2onversely, when a short(term crosses A/O?E the
lon!(term, a /DJ si!nal is !enerated"
Movin! avera!es can e Gspeeded upG throu!h the application of further math
calculations" 2ommon avera!es are known as 'IM9BE or 'MA" $hese tend to e very
slow" /y !ivin! more wei!ht to the current chan!es in price rather than those many ars
a!o, a faster EN9O6E6$IAB or EMA movin! avera!e can e created" Many technicians
favor the EMA over the 'MA" Cortunately all common stock chart pro!rams, online and
offline do the difficult movin! avera!e calculations ut plot price perfectly"
-. 2U++ORT AND RE2I2TAN>E
$he concept of 'D99O)$ A61 )E'I'$A62E is
essential to understandin! and interpretin! stock charts"
Aust as a all ounces when it hits the floor or drops after
ein! thrown to the ceilin!, support and resistance defines
Equity Markets In India An Overview
20
natural oundaries for risin! and fallin! prices" /uyers and sellers are constantly in attle
mode" 'upport defines that level where uyers are stron! enou!h to keep price from
fallin! further" )esistance defines that level where sellers are too stron! to allow price to
rise further" 'upport and resistance play different roles in uptrends and downtrends" In an
uptrend, support is where a pullack from a rally should end" In a downtrend, resistance
is where a pullack from a decline should end" 'upport and resistance are created ecause
price has memory" $hose prices where si!nificant
uyers or sellers entered the market in the past will tend to !enerate a similar mi5 of
participants when price a!ain returns to that level"
&hen price pushes aove resistance, it ecomes a new support level" &hen price
falls elow support, that level ecomes resistance" &hen a level of support or resistance
is penetrated, price tends to thrust forward sharply as the crowd notices the /)EA8OD$
and 4umps in to uy or sell" &hen a level is penetrated ut does not attract a crowd of
uyers or sellers, it often falls ack elow the old support or resistance" $his failure is
known as a CAB'E /)EA8OD$" 'upport and resistance come in all varieties and
stren!ths" $hey most often manifest as hori#ontal price levels" /ut trend lines at various
an!les represent support and resistance as well" $he len!th of time that a support or
resistance level e5ists determines the stren!th or weakness of that level" $he stren!th or
weakness determines how much uyin! or sellin! interest will e required to reak the
level" Also, the !reater volume traded at any level, the stron!er that level will e"
'upport and resistance e5ist in all time frames and all markets" Bevels in lon!er time
frames are stron!er than those in shorter time frames" $he ideas of 2harles 1ow, the first
editor of the &all 'treet Aournal, form the asis of technical analysis today" $he ehavior
patterns that he oserved apply to markets throu!hout the world"
Equity Markets In India An Overview
23
+RIMARY MARKET
9rimary market is the place where issuers create
and issue equity, det or hyrid instruments for
suscription y the pulicL the secondary market enales
the holders of securities to trade them" 9rimary market is
a market for raisin! fresh capital in the form of shares"
9ulic limited companies that are desirous of raisin! capital funds throu!h the issue of
securities approach this market" $he pulic limited and !overnment companies are the
issuers and individuals, institutions and mutual funds are the investors in this market" $he
primary market allows for the formation of capital in the country and the accelerated
industrial and economic development"
Everywhere in the world capital markets have ori!inated as the new issues
markets" Once industrial companies are set up in a i! numer and with them a
considerale volume of usiness comes into e5istence a market for outstandin! issues
develops" In the asence of secondary market or the stock e5chan!e, the capital market
will e paraly#ed" $his is on account of the reason that the usiness enterprises orrow
money from the capital market for a very lon! period ut the investors or savers whose
savin!s are canali#ed throu!h the capital market !enerally wish to invest only for a short
period" E5istence of the stock e5chan!e provides a medium throu!h which these two ends
can e reconciled" It enales the investors to sell their shares for money whenever they
wish to do so" $hus, the usiness enterprises keep the possession of permanent capitalL
the shares can keep on chan!in! hands"
In order to sell securities, the company has to fulfill various requirements and decide
upon the appropriate timin! and method of issue" It is quite normal to otain the
assistance of underwriters, merchant anks or special a!encies to look after these aspects"
Equity Markets In India An Overview
2-
METAOD2 O4 MARKETIN@ IN +RIMARY
MARKET
1. +U76I> I22UE? -
A pulic limited company can raise the amount of capital y sellin! its shares to
the pulic" $herefore, it is called pulic issue of shares or deentures" Cor this purpose it
has to prepare a %9rospectus%" A prospectus is a document that contains information
relatin! to the company such as name, address, re!istered office and names and addresses
of company promoters, mana!ers, Mana!in! 1irector, directors, company secretary, le!al
advisors, auditors and ankers" It also includes the details aout pro4ect, plant location,
technolo!y, collaoration, products, e5port oli!ations etc" $he company has to appoint
rokers and underwriters to sell the minimum numer of shares and it has to fi5 the date
of openin! and closin! of suscription list"
$he new issue of shares or deentures of a company are offered for e5clusive
suscription of !eneral pulic" $he prospectus should e approved y 'E/I" A minimum
of ;+ per cent of the amount of the issue at a time is to e offered to pulic" $he company
makes a direct offer to the !eneral pulic to suscrie the securities of a stated price" $he
securities may e issued at par, at discount or at a premium" An e5istin! company may
sell the shares at a premium" $here is no practice of sellin! shares at a discount in India"
9ulic issue is a popular method of raisin! capital" It provides wide distriution of
ownership securities" It also promotes confidence of investors throu!h transparency and
non(discriminatory asis of allotment" It satisfies compliance with the le!al requirements"
*owever, the issue of securities throu!h prospects is time consumin! ecause there are
Equity Markets In India An Overview
2F
various formalities to e completed y the company" $he cost of raisin! capital is also
very hi!h due to underwritin!, commission, rokera!e, pulicity, le!al, and other
administrative costs"
". +RIVATE +6A>EMENT? -
A 2ompany makes the offer of sale to individuals and institutions privately
without the issue of a prospectus" $his saves the cost of issue of securities" $he securities
are placed at hi!her prices to individuals and institutions" Institutional investors play a
very important role in the private placement" $his has ecome popular in recent days"
$his method is less e5pensive and time savin!" $he company has to complete a
very few formalities" It is suitale for small companies as well as new companies" $his
method can e used when the stock market is ull" *owever, the private placement helps
to concentrate securities in the few hands" $hey can create artificial scarcity and increase
the prices of shares temporarily and then sell the shares in the stock market and mislead
the common and small investors" $his method also deprives the common investors of an
opportunity to suscrie to the issue of shares"
(. O44ER 4OR 2A6E? -
A 2ompany sells the securities throu!h the intermediaries such as issue houses,
and stockrokers" $his is known as an offer for sale method" Initially, the company
makes an offer for sale of its securities to the intermediaries statin! the price and other
terms and conditions" $he intermediaries can make ne!otiations with the company and
finally accept the offer and uy the shares from the company" $hen these securities or
shares are re(sold to the !eneral investors in the stock market normally at a hi!her price
in order to !et profit" $he intermediaries have to ear the e5penses of this issue" $he
Equity Markets In India An Overview
2+
o4ect of this issue is to save the time, cost and !et rid of complicated procedure involved
in the marketin! of securities" $he issues can also e underwritten in order to ensure full
suscription of the issue" $he !eneral pulics !et the shares at a hi!her price the
middlemen are more enefited in this process"
). 7OU@AT OUT DEA62? -
A 2ompany makes an outri!ht sale of equity shares to a sin!le sponsor or the lead
sponsor and such deals are known as ou!ht out deals" $here are three parties involved in
the ou!ht out deals" $he promoters of the company, sponsors and co(sponsors, sponsors
are merchant ankers and co(sponsors are the investors" $here is an a!reement in which
an outri!ht sale of a chunk of equity shares is made to a sin!le sponsor or the lead
sponsor" $he sale price is finali#ed throu!h ne!otiations etween the issuin! company
and the purchasers" It is influenced y various factors such as pro4ect evaluation,
reputation of the promoters, current market sentiments etc" /ou!ht out deals are in the
nature of fund(ased activity where the funds of the merchant ankers are locked in for at
least for a minimum period" $hese shares are sold at over the 2ounter E5chan!e of India
or at a reco!ni#ed stock e5chan!e" Bistin! takes place when the company !ets profits and
performs well" $he investor(sponsors make profits ecause the shares are listed at hi!her
price"
,. INITIA6 +U76I> O44ER? -
&hen a company makes pulic issue of shares
for the first time, it is called Initial 9ulic Offer" $he
securities are sold throu!h the issue of prospectus to
successful applicants on the asis of their demand" $he
Equity Markets In India An Overview
7,
company has to appoint underwriters in order to !uarantee the minimum suscription" An
underwriter is !enerally an investment ankin! company" $he underwriter a!rees to pay
the company a certain price and uy a minimum numer of shares, if they are not
suscried y the pulic" $he underwriter char!es some commission for this work" *e
can sell these shares in the market afterwards and make profit" $here may e two or more
underwriters in case of lar!e issue"
$he company has to issue a prospectus !ivin! full information aout the company
and the issue" It has to issue share application forms throu!h the rokers and
underwriters" $he rokers collect orders from their clients and place orders with the
company" $he company then makes the allotment of shares with the help of stock
e5chan!e" $he share certificate are delivered to the investors or credited to their demat
accounts throu!h the depository" $his method saves time and avoids complicated
procedure of issue of shares"
&ith more and more companies comin! out with temptin! I9O or additional
offers, there is !reater need to e5ert caution and pick the est I9O investments" Collowin!
four critical factors should e studied in an I9O offer document, efore makin! an I9O
investmentK 9romoter, 9erformance, 9rospects and 9rice"
>.e!k +ro&oter 2tanin*
$his y far is the most important factor in any investment decision" A !ood
promoter or mana!ement team is important for any usiness success, especially over lon!
periods" &hile usinesses may have their ups and downs, a !ood mana!ement will take
all necessary steps to ensure profitale performance" 'econdly, they would e constantly
lookin! at new usiness opportunities, therey ensurin! re!ular !rowth in the company"
Equity Markets In India An Overview
71
$hirdly, we are reasonaly certain that the company money will not e delierately
misused or siphoned off to the detriment of the shareholders"
$herefore, look at the promoterHs ack!round, the e5perience he has in the
industry, the performance of the other companies promoted y him, his track record,
investor complaints etc" )ead the risk factors very carefully especially those pertainin! to
the promoter@mana!ement" 2heck for any serious liti!ation a!ainst the promoter or the
company" 'ee whether the company is a defaulter to the anks@CIs and the reason thereof"
2tuy >o&%any +er/or&an!e
$he share price is the reflection of the operational performance of the company"
9oor numers say the sales, profit, E9' etc" would mean poor performance on the stock
e5chan!e" $herefore, it is important that the company has a track record of !ood
operational performance" Book for any window dressin!" Are the numers in line with
the similar companies in the industryO Is there any sudden improvement in the numers
4ust efore the issue, without any 4ustifiale reasonsO Also look at the performance of the
!roup companies and the inter(company transaction within the !roup" Ensure that there
are no duious transactions" Book at the loans !iven to !roup companies" Are they payin!
reasonale interestO Is the loan likely to e repaidO
Uner'tan 4uture +ro'%e!t'
$he future prospects of the 2ompany and the industry would play an important
role in the performance of the scrip on the stock e5chan!e" 2heck the o4ects" *ow will
they impact the future prospectsO *ow will the funds raised e utili#edO &ill it
additionally enefit the companyO Is the money ein! raised for a new pro4ect, which will
add to the ottom(line of the companyO
Equity Markets In India An Overview
72
If itsH an offer(for(sale, it means the e5istin! shareholders are sellin! a part of
their stake in the 2ompany" $he amounts raised from the issue will not !o to the
2ompany" $herefore, the 2ompany will not enefit from an offer for sale" If the purpose
of the issue is to list the company on the stock e5chan!e and the ; 9s are positive, then
one can consider investin!"
6ook At T.e +ri!e
Cinally of course every product@scrip has a ri!ht price ased on itsH fundamentals
and industry prospects" Even if the aove 7 9s were favorale, a hi!h price is likely to
reduce the prospects of appreciation at the e5chan!e, therey defeatin! your purpose of
investin!"
Book at the avera!e industry 9E and the companiesHs E9' and try to estimate the
fair price" 2ompare this with the issue price to see if it is undervalued or overvalued" /uy
value nor price" Issues which are overvalued such issues tend to quote elow issue price
over a period of time and it may e prudent to enter then, than at the I9O sta!e"
Cor follow(on issues the price is more or less known" $herefore, there may not e
much listin! !ain or loss" A!ain look for fair valued or undervalued scrip" A little time
spent in readin! the offer document and analy#in! the I9O on the aove factors will help
you to make ri!ht investment decisions and prevent you from endin!(up holdin! a dud
stock"
-. RI@AT I22UE? -
&hen an e5istin! company issues shares to its e5istin! shareholders in proportion
to the numer of shares held y them, it is known as )i!hts Issue" )i!hts issue is
oli!atory for a company where increase in suscried capital is necessary after two
years of its formation or after one year of its first issue of shares, whichever is earlier"
Equity Markets In India An Overview
77
'E/I has issued !uidelines for issue of ri!ht shares" Accordin!ly, only a listed company
can make ri!ht issue" )i!hts issue can e made only in respect of fully paid up shares" 6o
reservation is allowed for ri!hts issue of fully or partly convertile deentures" $he
company has to make announcement of ri!hts issue and once the announcement is made
it cannot e withdrawn" $he company has to make the appointment )e!istrar ut
underwritin! is optional" It has also to appoint cate!ory I Merchant /ankers holdin! a
certificate of re!istration issued y 'E/I" Better of offer should contain disclosures as per
'E/I requirements" $he ri!hts issue should e open for minimum period of 7, days, and
ma5imum up to 3, days" $he company has to make an a!reement with the depository for
materiali#ation of securities to e issued in demat form" A minimum suscription of +,
per cent of the issue should e received" A no complaints certificate is to e filed y the
Bead Merchant /anker with the 'E/I after 21 days from the date of issue of offer
document"
0. 7ONU2 I22UE? -
/onus shares are the shares allotted y capitali#ation of the reserves or surplus of
a company" Issue of onus shares results in conversion of the company%s profits or
reserves into share capital" $herefore, it is capitali#ation of company%s reserves" /onus
shares are issued to the equity shareholders in proportion to their holdin!s of the equity
share capital of the company" Issue of onus shares does not affect the total capital
structure of the company" It is simply a capitali#ation of that portion of shareholders
equity which is represented y reserves and surplus" $he issues of onus shares are issued
su4ect to certain rules and re!ulations" Issue of onus shares reduces the market price of
the company%s shares and keeps it within the reach of ordinary investors" $he company
can retain earnin!s and satisfy the desire of the shareholders to receive dividend" Issue of
onus shares is !enerally an indication of hi!her future profits" )eceipt of onus shares as
compared to cash dividend !enerally results in ta5 advanta!e to the shareholder"
Equity Markets In India An Overview
7;
1. 7OOK-7UI6DIN@? -
2ompanies !enerally raise capital throu!h pulic issue" In these cases companies
decide the si#e of the issue and also the price at which the shares are to e offered to the
investors" *owever in this system the issuer is not ale to ascertain the price that the
market may e willin! to pay for the shares, efore launchin! the issue" $his is where
ook uildin! can come to their aid" $his method is also known as the price discovery
method" $his is a mechanism wherey the price is determined on the asis of actual
demand as evident form the offers !iven y the various institutional investors and the
underwriters"
In the actual pulic offer process, investors are not involved in determinin! the
offer price, whereas in ook uildin! pricin! is determined on the asis of investor
feedack which assures investor demand" 'ince the issue price after the issue marketin!
there is fle5iility in the issue si#e and the price of the shares"
$he option of ook uildin! is availale to all ody corporate, which are
otherwise eli!ile to make issue of capital to the pulic" $he initial minimum si#e of issue
throu!h ook(uildin! process was fi5ed at )s" 1,, crores@(" *owever, issue of any si#e
was allowed since 1++3" /ook(/uildin! facility is availale as an alternative to firm
allotment" A 2ompany can opt for ook(uildin! process for the sale of securities to the
e5tent of the percenta!e of the issue" that can e reserved for firm allotment"
/ook(/uildin! method helps in evaluatin! the intrinsic worth of an instrument
and the company%s crediility in the eyes of the investor" $he company also !ets firm
commitments on the asis of which it can decide whether to !o or not to !o for a
particular issue of securities" /ook(/uildin! process also provides reliale allotment
Equity Markets In India An Overview
70
procedure and quick listin! of shares on the stock e5chan!es" $here is no price
manipulation ecause the price is determined on the asis of ids received% from the
investors" $he followin! sta!es are involved in the ook(uildin! processK
<1= Appointment of ook(runners"
<2= 1raftin! of prospectus and !ettin! approval from 'E/I"
<7= 2irculatin! draft prospectus"
<;= Maintainin! offer details"
<0= Intimation of a!!re!ate orders to the ook(runner"
<3= /id analysis"
<-= Mandatory underwritin!"
<F= Cilin! copy of prospectus with re!istrar of companies"
<+= Openin! ank accounts for collection of application money"
<1,= 2ollection of applications"
<11= Allotment of shares"
<12= 9ayment schedule and listin! of shares"
Equity Markets In India An Overview
73
INTERMEDIARIE2 IN +RIMARY MARKET
1. MER>AANT 7ANKER2? -
Merchant ankers carry out the work of underwritin! and portfolio mana!ement,
issue mana!ement etc" $hey are required to !et separate re!istration with 'E/I as
portfolio mana!ers" Dnderwritin! can e done without any additional re!istration" Only
ody corporate with a net worth of )s"0 crores are allowed to work as cate!ory I
merchant ankers" $hey have to carry out the work relatin! to new issue such as
determination of security mi5 to e issued, draftin! of prospectus, application forms,
allotment letters, appointment of re!istrars for handlin! share applications and transfer,
makin! arran!ement for underwritin! placement of shares, appointment of rokers and
Equity Markets In India An Overview
7-
ankers to issue, makin! pulicity of the issue" $hey are also known as lead mana!ers to
an issue"
2ate!ory II merchant ankers can act as consultants, advisers, portfolio mana!ers
and co(mana!ers" 2ate!ory III merchant ankers can act as underwriters, advisors and
consultants and cate!ory I? merchant ankers can act only as advisers or consultants to a
pulic issue" Merchant ankers have to fulfill the prescried minimum capital adequacy
norms in terms of net worth and they should have adequate and necessary infrastructure"
$hey should also employ e5perts havin! professional qualifications"
". UNDERWRITER2? -
$he issuin! company has to appoint underwriters in consultation with the
merchant ankers or lead mana!er" $he underwriters play an important role in the
development of the primary market" $he underwriters are the institutions or a!encies,
which provide a commitment to take up the issue of securities in case the company fails
to !et full suscription from the pulic" $hey !et commission for their services" $he
underwritin! services are provided y the rokers, investment companiesH commercial
anks and term lendin! institutions"
(. 7ANKER2 TO TAE I22UE? -
$he ankers play an important role in the workin! of the primary market" $hey
collect applications for shares and deentures alon! with application money from
investors in respect of issue of securities" $hey also refund the application money to the
applicants to whom securities could not e allotted on ehalf of the issuin! company" A
company is not authori#ed to collect the application money" $he 2ompanies Act, 1+03,
provides that the money on account of issue of shares and deentures should e collected
throu!h the anks" $herefore, an issuin! company has to appoint ankers to collect
money on ehalf of the company"
Equity Markets In India An Overview
7F
). RE@I2TRAR2 AND 2AARE2 TRAN24ER A@ENT2? -
)e!istrar is an intermediary which carries out functions such as keepin! a proper
record of applications and money received from investors, assistin! the companies in
determinin! the asis of allotment of securities as per stock e5chan!e !uidelines and in
consultation with stock e5chan!es assist in the finali#ation of allotment of securities and
processin! and dispatchin! of allotment letters, refund orders, share certificates and other
documents related to the capital issues" 'hare $ransfer A!ents are also intermediaries
who carry out functions of maintainin! records of holders of securities of the company
for and on ehalf of the company and handlin! all matters related to transfer and
redemption of securities of the company" $hey also function as 1epository 9articipants"
)e!istrar and share transfer a!ents are of two cate!ories" 2ate!ory I carry out the
activities of oth re!istrars to an issue and of share transfer a!ents" 2ate!ory II carries out
the activity fielder of a re!istrar to an issue or as a share transfer a!ent"
,. 7ROKER2 TO AN I22UE? -
/rokers are the middlemen who provide a vital connectin! link etween the
prospective investors and the issuin! company" $hey assist in the suscription of issue y
the pulic" *owever, appointment of rokers is not mandatory" /rokers !et their
commission from the issuin! company accordin! to the provisions of the 2ompanies Act
and rules and re!ulations" $here is an a!reement etween the rokers and the issuin!
company" $he ma5imum rokera!e rate is 1"0 per cent of the capital raised in case of
pulic issue and ,"0 per cent in case of private placement" $he rokera!e covers the cost
of mailin!, canvassin! and all other e5penses relatin! to the suscription of the issue"
$he rokers should have an e5pert knowled!e, professional competence and
inte!rity in order to carry out the overall functions of an issue" $hey have to otain
Equity Markets In India An Overview
7+
consent from the stock e5chan!e to act as a roker to the issuin! company" $he names
and addresses of the rokers to the issue are disclosed in the prospects y the company
help the investors to make a choice of the company for makin! their investments"
2E>ONDARY MARKET
A market, which deals in securities that have een
already issued y companies, is called as secondary
market" It is also known as stock market" It is the ase
upon which the primary market is dependin!" Cor the
efficient !rowth of the primary market a sound secondary
market is an essential requirement" $he secondary market
offers an important facility of transfer of securities activities of securities"
'econdary market essentially comprises of stock e5chan!es, which provide
platform for purchase and sale of securities y investors" In India, apart from the
)e!ional 'tock E5chan!es estalished in different centers, there are e5chan!es like the
6ational 'tock E5chan!e <6'E=, who provide nation wide tradin! facilities with
terminals all over the country" $he tradin! platform of stock e5chan!es is accessile only
throu!h rokers and tradin! of securities is confined only to stock e5chan!es"
$he activities of uyin! and sellin! of securities in a market are carried out throu!h the
mechanism of stock e5chan!e" $here are at present 2; 'tock E5chan!es in India,
reco!ni#ed y the !overnment" $he first or!ani#ed stock e5chan!e was estalished in
India at /omay in 1FF-" &hen the 'ecurities 2ontracts <)e!ulation= Act was passed in
1+03, only - stock e5chan!es were reco!ni#ed" $here are three important stock
Equity Markets In India An Overview
;,
e5chan!es in /omay namely the /omay 'tock E5chan!e, 6ational 'tock E5chan!e
and over the 2ounter E5chan!e of India" $here has een a sustantial !rowth of capital
market in India durin! the last 20 years"
>or%orate 2e!uritie' ( $here are 27 e5chan!es in the country, which offer screen ased
tradin! system" $he tradin! system is connected usin! the ?'A$ technolo!y from over
70- cities" $here were +,73F tradin! memers re!istered with 'E/I as at end March 2,,;
<$ale 1(1,="
$he market capitali#ation has !rown over the period indicatin! more companies usin! the
tradin! platform of the stock e5chan!e" $he all India market capitali#ation is estimated at
)s" 17,1F-,+07 million at the end of March 2,,;" $he market capitali#ation ratio defined
as the value of listed stocks divided y >19 is used as a measure of stock market si#e" It
is of economic si!nificance since market is positively correlated with the aility to
moili#e capital and diversify risk" It increased sharply to 02"7. in 2,,7(,; a!ainst
2F"0. in the previous year" $he tradin! volumes on e5chan!es have een witnessin!
phenomenal !rowth over the past decade" $he tradin! volume, which peaked at )s"
2F,F,+,+,, million in 2,,,(,1, fell sustantially to )s" +,3F+,,+7 million in 2,,2(,7"
*owever, the year 2,,7(,; saw a turnaround in the total tradin! volumes on the
e5chan!es" It re!istered a volume of )s" 13,2,;,+-- million" $he turnover ratio, which
reflects the volume of tradin! in relation to the si#e of the market, has een increasin! y
leaps and ounds after the advent of screen ased tradin! system y the 6'E" $he
turnover ratio for the year 2,,7(,; accounted at 122"+." $he relative importance of
various stock e5chan!es in the market has under!one dramatic chan!e durin! this decade"
$he increase in turnover took place mostly at the i! e5chan!es" $he 6'E yet a!ain
re!istered as the market leader with more F0. of total turnover <volumes on all
se!ments= in 2,,7(,;" $op 0 stock e5chan!es accounted for ++"FF. of turnover, while
Equity Markets In India An Overview
;1
the rest 1F e5chan!e for less than ,"12. durin! 2,,7(,; <$ale 1(11=" Aout ten
e5chan!es reported nil tradin! volume durin! the year"
$he movement of the 'P9 26N 6ifty, the most widely used indicator of the market, is
presented in 2hart 1(1" $he inde5 movement has een respondin! to chan!es in the
!overnmentHs economic policies, the increase in CIIs inflows, etc" *owever, the year
2,,7(,; witnessed a favorale movement in the 6ifty, wherein it re!istered its all time
hi!h in Aanuary 2,,; of 2,1;"30" $he point(to(point return of 6ifty was F,"1;. for
2,,7(,;"
Equity Markets In India An Overview
;2
@o#ern&ent 2e!uritie' ( $he tradin! in !overnment securities e5ceeded the comined
tradin! in equity se!ments of all the e5chan!es in the country durin! 2,,7(,;" $he
a!!re!ate tradin! in central and state !overnment dated securities, includin! treasury
ills, increased y manifold over a period of time" 1urin! 2,,7(,; it reached a level of
)s" 23,-+2,,+, million" $he share of &1M se!ment of 6'E in total turnover for
!overnment securities decreased mar!inally from 02. in 2,,2(,7 to ;-"3. in 2,,7(,;"
*owever, the share of &1M se!ment of 6'E in the total of 6on(repo !overnment
securities increased mar!inally from -;",1. in 2,,2(,7 to -;"F+. in 2,,7(,; <$ale 1(
1,="
Equity Markets In India An Overview
;7
REA2ON2 4OR TRAN2ITIN@ IN 2E>ONDARY
MARKET
$here are two main reasons why individuals transact in the secondary marketK
1. IN4ORMATION MOTIVATED REA2ON2? -
Information motivated investors elieve that they have superior information aout a
particular security than other market participants" $his information leads them to elieve
that the security is not ein! correctly priced y the market" If the information is !ood,
this su!!ests that the security is currently under(priced, and investors with access to such
information will want to uy the security" On the other hand, if the information is ad, the
security will e currently overpriced and such investors will want to sell their holdin!s of
the security"
". 6IQUIDITY MOTIVATED REA2ON2? -
Biquidity motivated investors, on the other hand, transact in the secondary market
ecause they are currently in a position of either e5cess or insufficient liquidity" Investors
with surplus cash holdin!s <e"!", as a result of an inheritance= will uy securities, where
as investors with insufficient cash <e"!", to purchase a 2ar= will sell securities"
Equity Markets In India An Overview
;;
4UN>TION O4 TAE 2E>ONDARY MARKET
1" $o facilitate liquidity and marketaility of the outstandin! equity and det
instruments"
2" $o contriute to economic !rowth throu!h allocation of funds to the most efficient
channel throu!h the process of disinvestments to reinvestment"
7" $o provide instant valuation of securities caused y chan!es in the internal
environment <that is, company(wide and industry wide factors=" 'uch valuation
facilitates the measurement of the cost of capital and the rate of return of the
economic entities at the micro level"
;" $o ensure a measure of safety and fair dealin! to protect investorsH interest"
$o induce companies to improve performance since the market price at the stock
e5chan!es reflects the performance and this market price is readily availale to investors"
6I2TIN@
Bistin! is a process involved in listin! somethin!
with some one" It is a permission to quote shares and
deentures officially on the tradin! floor of the stock
e5chan!e" $he listed shares appear on the official list
of securities for the purpose of tradin! security listin!
is a step that is required to re!ister and to place on
record the security of a company with the appropriate authority i"e" the reco!ni#ed stock
e5chan!e" 'ecurities are required to e listed under 'ection + of the 'ecurities 2ontract
Equity Markets In India An Overview
;0
<)e!ulation= Act, 1+03" $hus, listin! simply means the inclusion of any security for the
purpose of tradin! in a reco!ni#ed stock e5chan!e" Only pulic companies are allowed to
list their securities in the stock e5chan!e" 9rivate Bimited companies cannot !et listin!
facility" $hey shall first convert themselves into pulic limited companies and their
Articles of Association shall contain prohiitions as laid down in the listin! a!reement
and as applicale to pulic limited companies"
$he issuer wishin! to have tradin! privile!es for its securities satisfies listin!
requirements prescried in the relevant statutes and in the listin! re!ulations of the
E5chan!e" It also a!rees to pay the listin! fees and comply with listin! requirements on a
continuous asis" All the issuers who list their securities have to satisfy the corporate
!overnance requirement framed y re!ulators" $he prices at which the securities are
traded in the stock e5chan!e are pulished in the newspapers" Investors are ale to know
these price trends from such pulications" 2ompared to listed securities the tradin! of
unlisted securities is difficult" $he price trends in respect of unlisted securities are seldom
known to the investors and the contract etween the seller and uyer takes places mostly
on one to one asis"
6I2TIN@ +RO>EDURE? -
$he listin! procedure involves makin! a simple
application y the company and payment of listin! fees as
prescried y the respective stock e5chan!e" It is to e
completed efore the offer of securities to the pulic and
re!istration of prospectus with the )e!istrar of
2ompanies" $he reco!ni#ed stock e5chan!e has to !ive approval and then make an
a!reement statin! the terms and conditions" )e!istration and recordin! is done for the
Equity Markets In India An Overview
;3
purpose of tradin! y the re!istered memers of the stock e5chan!e and for the official
quotation of the security price for the enefit of the pulic and the investors" $he
company has to continue listin! y payin! renewal fees from time to time" Bistin! is
mandatory for a pulic company, which intends to offer its securities to the pulic y
issue of prospectus and which wishes to provide facilities to the securities ein! offered
to the pulic" Any allotment of securities made in the asence of listin! or refusal of
listin! is held to e void i"e" ille!al" A!ain, any failure to comply with the 'ection 21 of
the 'ecurities 2ontracts <)e!ulation= Act attracts penalty to the parties"
$he authority of the stock e5chan!e may refuse listin! of the securities of a
company" $he authorities should intimate the company within 10 days with the reasons
for refusal" $he company can make an appeal to the 2entral >overnment within a
prescried period" $he 2entral >overnment may either !rant or refuse to !rant the
permission for listin! and the decision of the 2entral >overnment would e informed to
the stock e5chan!e concerned that shall act in conformity with such a decision" $he stock
e5chan!e is empowered to suspend or withdraw an admission to dealin! in securities of
company for reach or non(compliance with the listin! provision on !ivin! an
opportunity of ein! heard in writin!" In an eventuality where any withdrawal or
suspension e5ceeds 7 months, the company may appeal to the 'E/I who may either vary
or set aside the decision of the stock e5chan!e"
>ENTRA6 6I2TIN@ AUTAORITY? -
$he compliance with the listin! requirements was ein! hitherto seen y each
stock e5chan!e on which the securities of the company are proposed to e listed" $hese
requirements defer from e5chan!e to e5chan!e" 'E/I has initiated steps to set up of a
central listin! authority, which would accord approval" $his approval would enale all
the stock e5chan!es, on which the securities of the companies and Mutual Cunds are
Equity Markets In India An Overview
;-
!oin! to e listed, to list the securities at an early date" $he central listin! authority would
ad as a check on the fly y ni!ht operators who float pulic issues, since the listin! norms
would e uniformly applied as a!ainst the current practice where the norms could e
flouted, if listin! is to take place in a very small e5chan!e where the listin!
requirements may e lenient"
6I2TIN@ A@REEMENT? -
All companies seekin! listin! of their securities on the E5chan!e
are required to enter into a listin! a!reement with the E5chan!e" $he
a!reement specifies all the requirements to e continuously complied with
y the issuer for continued listin!" $he E5chan!e monitors such
compliance" Cailure to comply with the requirements invites suspension of
tradin!, or withdrawal@delistin!, in addition to penalty under the 'ecurities
2ontracts <)e!ulation= Act, 1+03" $he a!reement is ein! increasin!ly used as a means
to improve corporate !overnance"
TY+E2 O4 6I2TIN@
Bistin! of securities falls under 0 !roups
1. INITIA6 6I2TIN@? -
If the shares or securities are to e listed for the first time y a company on a
stock e5chan!e is called initial listin!"
Equity Markets In India An Overview
;F
". 6I2TIN@ 4OR +U76I> I22UE? -
&hen a company whose shares are listed on a stock e5chan!e comes out with a
pulic issue of securities, it has to list such issue with the stock e5chan!e"
(. 6I2TIN@ 4OR RI@AT2 I22UE? -
&hen companies whose securities are listed on the stock e5chan!e issue
securities to e5istin! shareholders on ri!hts asis, it has to list such ri!hts issues on the
concerned stock e5chan!e"
). 6I2TIN@ O4 7ONU2 2AARE2? -
'hares issued, as a result of capitali#ation of profit throu!h onus issue shall list
such issues also on the concerned stock e5chan!e"
,. 6I2TIN@ 4OR MER@ER OR AMA6@AMATION? -
&hen an amal!amated company issues new shares to the shareholders of the
amal!amatin! company, such shares are also required to e listed on the concerned stock
e5chan!e"
>AARA>TERI2TI>2 O4 6I2TIN@
$he followin! are the characteristics of listin! of securitiesK
1. A@REEMENT? -
Bistin! a!reement is made etween the respective stock e5chan!e and the
company" $he company offers or issues the securities to the pulic throu!h the issue of
offer document like prospectus or a letter of offer" $he stock e5chan!e is a reco!ni#ed
stock e5chan!e where the securities are listed for tradin!"
Equity Markets In India An Overview
;+
". +UR+O2E? -
$he purpose of listin! is to ensure free transferaility of securities so as to
facilitate clear transparency and open disclosure of information relatin! to the affairs of
the company whose securities are listed" In addition, official quotation and liquidity in the
tradin! of listed securities is also ensured"
(. RE2TRI>TION? -
A company is free to have its securities listed in any numer of stock e5chan!es"
It is important that the securities are listed at least on the re!ional stock e5chan!e"
). INVE2TOR +ROTE>TION? -
Bistin! offers a measure of protection to the investors" It is a arometer of
performance and continued !ood performance of the company"
7ENE4IT2 O4 6I2TIN@
Bistin! of securities is eneficial to company as well as to investorsK
1. TO TAE >OM+ANY? -
1" $he company en4oys concessions under 1irect $a5 Baws as such companies are
known as companies in which pulic are sustantially interested resultin! in low rate
of income ta5 payale y them"
2" $he company !ains national and international importance y share value quoted on
stock e5chan!es"
Equity Markets In India An Overview
0,
7" Cinancial institution and anks e5tend term loan facilities in the form of rupee
currency and forei!n currency loan"
;" It helps the company to moili#e resources from the shareholders throu!h % )i!ht
Issue% for pro!rams of e5pansion and moderni#ation without dependin! on the
financial institutions in line with the !overnment policies"
0" It ensures wide distriution of shareholdin! thus avoidin! fears of easy takeover of
the or!ani#ation y others"
". TO TAE INVE2TOR2? -
1" 'ince the securities are officially traded, liquidity of investment y the investors is
well ensured"
2" )i!hts entitlement in respect of further issues can e disposed of in the market"
7" Bisted securities are well preferred y the ankers for e5tendin! loan facilities"
;" Official quotations of the securities on the stock e5chan!es corroorate the valuation
taken y the investors for the purpose of assessment under Income $a5 Act, &ealth
$a5 Act etc"
0" 'ince securities are quoted, there is no secrecy of the price reali#ation of securities
sold y the investors"
3" $he rules of stock e5chan!e protect the interest of the investors in respect of their
holdin!"
-" Bisted companies are oli!ed to furnish unaudited financial results on quarterly asis"
$he said details enale the investin! pulic to appropriate financial results etween
the financial periods"
F" $akeover offers concernin! the listed companies are to e announced to the pulic"
$his will enale the investin! pulic to e5ercise their discretion on such matters"
Equity Markets In India An Overview
01
OTAER 7ENE4IT2
1" Easy marketaility and liquidity which also ensures easy risin! of capital"
2" Easy evaluation of the real worth of securities"
7" *i!h collateral value for ank loans"
;" 9rovidin! activities of quick transfer re!istration and company information"
0" $here is a safety in dealin! of securities"
3" It safe!uards !eneral pulic interest y ensurin! equitale allotment, easy transfer,
and disclosure of proper information"
-" $a5 incentives are availale to listed securities"
F" *i!her status and reputation for the company y en4oyin! the confidence of the
investin! pulic"
+" 9rovides an assurance of an e5istence of !ood faith or an asence of fraud with re!ard
to the issue of securities"
1," Bistin! is made throu!h analysis of a company%s capital structure, mana!ement
pattern and usiness prospects" *ence, provides assurance of !enuineness of
securities"
DE6I2TIN@
$he securities listed can e de(listed from the E5chan!e as per the 'E/I
<1elistin! of 'ecurities= >uidelines, 2,,7 in the followin! mannerK
1. VO6UNTARY DE-6I2TIN@ O4 >OM+ANIE2? -
Any promoter or acquirer desirous of delistin! securities of the company under
the provisions of these !uidelines shall otainK (
Equity Markets In India An Overview
02
1" $he prior approval of shareholders of the company y a special resolution passed at
its !eneral meetin!,
2" Make a pulic announcement in the manner provided in these !uidelines,
7" Make an application to the delistin! e5chan!e in the form specified y the e5chan!e,
and
;" 2omply with such other additional conditions as may e specified y the concerned
stock e5chan!es from where securities are to e de(listed"
Any promoter of a company which desires to de(list from the stock e5chan!e
shall also determine an e5it price for delistin! of securities in accordance with the ook
uildin! process"
". >OM+U62ORY DE-6I2TIN@ O4 >OM+ANIE2? -
$he stock e5chan!es may de(list companies which have een suspended for a
minimum period of si5 months for non(compliance with the listin! a!reement" $he stock
e5chan!es have to !ive adequate and wide pulic notice throu!h newspapers P also !ive
a show cause notice to a company" $he e5chan!e shall provide a time period of 10 days
within which any person who may e a!!rieved y the proposed delistin! may make
representation to the e5chan!e"
Equity Markets In India An Overview
07
TRADIN@
$he act of uyin! and sellin! of securities on a stock e5chan!e is known as 'tock
E5chan!e $radin!" Aoers and rokers are the two cate!ories of dealers in the stock
e5chan!e" A 4oer is a dealer in securities while a roker is an a!ent or seller of
securities" Every year a memer has to decide and declare in advance whether he
proposes to act as a 4oer or a roker" A 4oer !ives two quotations as a dealer in
securities, lower quotation for uyin! and hi!her one for sellin!" $he difference etween
the two quotations is his remuneration" $his system enales speciali#ation in the dealin!s
and each 4oer speciali#es in a certain !roup of securities" It also ensures smooth and
Equity Markets In India An Overview
0;
prompt e5ecution of transactions" $he doule quotation of a 4oer assures fair(tradin! in
the market" A roker is merely an a!ent to uy or sell on ehalf of his clients" *e is a
!eneralist" /roker has to ne!otiate terms and conditions of sale or purchase and safe!uard
his client%s interest" *e !ets commission from his clientsH, that is fi5ed y the stock
e5chan!e"
DEMAT? -
1emat is Qdemateriali#ationR on shares" 1emateriali#ation is a process y which
the shares, deentures etc in the physical form !et converted into the electronic form and
are stored in the computers y the depository" Earlier there used to e the hectic
procedure of physical delivery of shares" 1emateriali#ation is a unique process of tradin!
the shares in the electronic form rather then the vulneraility of the physical delivery of
the shares"
Equity Markets In India An Overview
00
$he introduction of 6EA$ and /OB$ has increased the reach of capital market
manifolds" $he increase in numer of investors participatin! in the capital market has
increased the proaility of ein! hit y a ad delivery" $he cost and time spent y the
rokers for rectification of these ad deliveries tends to e hi!her" In this technolo!ical
world thin!s are needed to move at a faster pace, and with the introduction of
demateriali#ation process the stock e5chan!e has e5panded its usiness at a tremendous
speed"
ADVANTA@E2 O4 DEMAT? -
1" Easy liquidity
2" $radin! in demat se!ment enefits elimination of ad deliveries and all risks
associated with physical certificate such as loss, theft, mutilation, for!ery, etc
7" Jou can also e5pect a lower interest char!e for loans taken a!ainst demat shares as
compared to the interest for loan a!ainst physical shares" $his could result in a savin!
of aout ,"20. to 1"0."
;" In case of transfer of electronic shares, you save ,"0. in stamp duty"
0" Jou also avoid the cost of courier@ notari#ation@ the need for further follow(up with
your roker for shares returned for company o4ection
KNOW-AOW O4 TAE DEMAT A>>OUNT? -
A person need to have a 1emat Account in anks possessin! demat units
<depository participants services=, so that, if he is uyin! the shares, shares will e
directly transferred into his A@c y the roker after the payment, and if he is sellin! the
shares, the shares will directly e transferred to the rokers A@c and he will !et the
payment after the scripts have reached on the counter side"
Equity Markets In India An Overview
03
Cor this, an investor needs to sumit his 19 Id <depository participantHs Id=, 19
name and 2lient Id to his roker" $his 19 Id is the ankHs Id, 19 name is the ankHs
name, and 2lient Id is the numer !iven y the ank to the person who opens a demat
A@c" A depository transfers securities as per the investor%s instructions without actually
handlin! securities, throu!h the electronic mode" $he 19 will maintain the account
alances of securities ou!ht and sold y the investor from time to time" $he 19 will also
!ive the investor a statement of holdin!s, which is similar to a passook" /asically the
holdin! of a 1emat Account is similar to holdin! a 2urrent Account in the ank"
TRADIN@ +RO>EDURE? -
6'E was the first stock e5chan!e in the country to provide nation(wide,
anonymous, order driven, screen(ased tradin! system, known as the 6ational E5chan!e
for Automated $radin! <6EA$= system" $he memer inputs, in the 6EA$ system, the
details of his order such as the quantities and prices of securities at which he desires to
transact" $he transaction is e5ecuted as soon as it finds a matchin! sale or uys order
from a counter party" All the orders are electronically matched on a price@time priority
asis" $his has resulted in a considerale reduction in time spent, cost and risk of error, as
well as frauds, resultin! in improved operational efficiency" It allows for faster
incorporation of price sensitive information into prevailin! prices, as the market
participants can see the full market on real time asis" $his increases informational
efficiency and makes the market more transparent" Curther, the system allows a lar!e
numer of participants, irrespective of their !eo!raphical locations, to trade with one
another simultaneously, improvin! the depth and liquidity of the market" A sin!le
consolidated order ook for each stock displays, on a real time asis, uy and sell orders
ori!inatin! from all over the country" $he ook stores only limit orders, which are orders
to uy or sell shares at a stated quantity and stated price, are e5ecuted only if the price
quantity conditions match" $hus, the 6EA$ system provides an Open Electronic
Equity Markets In India An Overview
0-
2onsolidated Bimit Order /ook <OE2BO/=, which ensures full anonymity y acceptin!
orders, i! or small, from memers without revealin! their identity" $hus, provides equal
access to all the investors" A perfect audit trail, which helps to resolve disputes y
lo!!in! in the trade e5ecution process in entirety, is also provided" $he tradin! platform
of the 2M se!ment of 6'E is accessed not only from the computer terminals, ut also
from the personal computers of the investors throu!h the Internet and from the hand(held
devices throu!h &A9" 'E/I has allowed the use of internet as an order routin! system
for communicatin! investorsH orders to the e5chan!es throu!h the re!istered rokers"
$hese rokers should otain the permission from their respective stock e5chan!es" In
Ceruary 2,,,, 6'E ecame the first e5chan!e in the country to provide we(ased
access to investors to trade directly on the E5chan!e followed y /'E in March 2,,1"
$he orders ori!inatin! from the 92s of investors are routed throu!h the internet to the
tradin! terminals of the desi!nated rokers with whom they have relations and further to
the e5chan!e" After these orders are matched, the transaction is e5ecuted and the
investors !et the confirmation directly on their 92s" 'E/I has also allowed tradin!
throu!h wireless medium or &ireless Application 9rotocol <&A9= platform" 6'E is the
only e5chan!e to provide access to its order ook throu!h the hand held devices, which
use &A9 technolo!y" $his particularly helps those retail investors, who are moile and
want to trade from any place"
$he followin! are the steps involved in the tradin! of securities at a stock
e5chan!eK
Equity Markets In India An Overview
0F
1. +6A>IN@ ORDER? -
An order is to e placed y an investor with the roker either to uy or sale of
certain numer of securities at a certain specified price" An order can e placed y
tele!ram, telephone, tele5@ fa5, and letter or in person" $here are different types of orders"
&hen in the order the client places a limit on the price of the security it is called limit
order" &here the order is to e e5ecuted y the roker at the est price, such an order is
called %/est )ate Order%" &hen the client does not fi5 any price limit or time limit on the
e5ecution of the order and relies on the 4ud!ement of the roker is called %Open Order%"
". TRADE EXE>UTION? -
$he roker has to e5ecute the order placed y his client durin! the tradin! hours"
$he order is e5ecuted as per requirements of the client" $he roker may ne!otiate with
other parties in order to e5ecute the orders"
(. >ONTRA>T NOTE? -
&hen the order is e5ecuted, the roker prepares a contract note" It is the asis of
the transaction" 9articulars such as price, quantity of securities, date of transaction, names
of the parties, rokera!e etc" are entered in the contract note"
). DE6IVERIE2 AND >6EARIN@? -
1elivery of shares takes place throu!h the instrument known as transfer deed" $he
transfer deed is si!ned y the transferor <seller= and is authenticated y a witness" It
contains the details of the transferee, stamp of the sellin! roker, etc" 1elivery and
payment may e completed after 1; days as specified at the time of ne!otiation" 1elivery
and clearin! of security takes place throu!h a clearance house"
Equity Markets In India An Overview
0+
,. 2ETT6EMENT? -
$he procedure adopted for the settlement of transactions varies dependin! upon
the kind of securities" On the date of settlement cheques@ drafts and securities are
e5chan!ed as per the delivery order" $he clearin!house makes the payment and delivers
the security certificates to the memers on the payout day" Each roker settles the
account with every client y takin! delivery or !ivin! delivery of securities certificates
and receipts or payment of cheques"
ON6INE TRADIN@? -
Online tradin! in shares and securities has already een
started in India" It has een made possile due to introduction of
demat" I2I2I &e $rade, *1C2 'ecurities, 'tock *oldin!
2orporation of India and many other institutions have started the
online tradin! system" $he investors can carry out uyin! and
sellin! of securities while sittin! in the house or office" Internet
connection is required for this purpose" $he investors have to open an account with these
institutions that provide online tradin!" $here are three accounts opened into one place,
1emat Account, /ank Account and Online $radin! Account" A password is !iven to
each investor who is secret" Investors can carry out uyin! and sellin! securities at /'E
and 6'E durin! normal tradin! hours" $he settlement is done automatically with the
pro!ram of the computer" Mar!in $radin!, Options and Cutures $radin! are also possile
in this method"
AOW TO TRADE ON6INE? -
1" Bo! on to the /roker%s wesite"
2" )e!ister yourself as a client"
7" Cill in the client roker a!reement on stamp paper"
Equity Markets In India An Overview
3,
;" Bo! on the roker%s site usin! secure user I1 and password"
0" $he market watch pa!e shows real time data"
3" $rade shares directly y enterin! the symol of securities"
-" $he roker%s server will check the limit on(line and the demat account for the numer
of shares e5ecute the trade"
F" Dsually the order is e5ecutive in aout 2, seconds and you !et the confirmation"
+" $he roker will send one e(mail confirmation and printed contract y mail"
1," On the settlement day the demat and ank accounts will automatically !et deited and
credited"
7ENE4IT2 O4 ON6INE TRADIN@? -
Online tradin! offers the investors the followin! enefitsK
1. REA>A? -
$he reach of online tradin! spans to all areas where internet connectivity is
availale"
". EM+OWERMENT? -
'ince all decision(makin! is with the investor, with sufficient and relevant
information on his stocks, the investor is empowered to take decisions ased on his own
4ud!ment"
(. >ONVENIEN>E? -
$he share rokin! account inte!rates with the investors ankin!, rokin! and the
share depository accounts" $his enales the investor to trade in shares without !oin!
throu!h the hassles of trackin! settlement cycles, writin! cheques and transfer
instructions, and chasin! rokers for refund cheques"
Equity Markets In India An Overview
31
). 2+EED? -
$he speed of e5ecutin! the transaction is more as compared to a phone(ased
trade"
,. >ONTRO6? -
&ith online tradin!, the investor can e assured of the e5ecution of the transaction
placed, therey havin! complete control over the trades"
2ETT6EMENT? -
$he clearin! and settlement mechanism
in Indian securities market has witnessed
si!nificant chan!es and several innovations
durin! the last decade" $hese include use of the
state(of(art information technolo!y, emer!ence
of clearin! corporations to assume counterparty
risk, shorter settlement cycle, demateriali#ation
and electronic transfer of securities, fine(tuned risk mana!ement system, etc", thou!h
many of these are yet to permeate the whole market"
In order to rin! settlement efficiency and reduce settlement risk, in 1+F+, the
!roup of 7, had recommended that all secondary markets across the !loe should adopt a
rollin! settlement cycle on $:7 asis y 1++2, i"e", the trades should e settled y
delivery of securities and payment of monies within three usiness days after the trade
day" /ut in India, due to multiple prolems faced y the secondary market like the open
out cry system, wide !eo!raphical covera!e, settlement of securities in physical form,
inadequate ankin! and depository infrastructure, India could not implement the >7,
Equity Markets In India An Overview
32
recommendations within the stipulated time frame" In 1+++, rollin! settlements were
introduced in select scrips on a $:0 asis, which had !ot an effect from 1ecemer 2,,1"
After successful implementation of rollin! settlement on $:0 asis, 'E/I moved
the settlement to $:7 asis with effect from April 2,,2" $o carry the reforms further in
this area, the Indian equity market has reduced the settlement cycle to $:2 asis w"e"f" 1
s
t
April, 2,,7" $he main advanta!e of this $:1 settlement cycle is that as the trades spread
across all tradin! days, this reduces undue concentration of payment of monies and
delivery of securities on a sin!le day" As the settlement is spread across evenly, it results
in efficiency utili#ation of infrastructure and system capacity" In addition, trades are
!uaranteed y the 6ational 2learin! 2orporation" India Btd" <6'22B=, and /ank of India
'hareholdin! Btd" </OI'B=, 2learin! 2orporation *ouses of 6'E and /'E respectively"
$he main functions of 2learin! 2orporation are to work outK
<a= &hat counterparties owe and
<= &hy counterparties are due to receive on the settlement date"
Curthermore, each e5chan!e has a 'ettlement >uarantee Cund to meet with any
unpredictale situation" $he 2learin! 2orporation of the e5chan!es assumes the
counterparty risk of each memer and !uarantees settlement throu!h a fine(tuned risk
mana!ement system and an innovative method of online position monitorin!" It also
ensures the financial settlement of trades on the appointed day and time irrespective of
default y memers to deliver the required funds and@or securities with the help of a
settlement !uarantee fund"
Equity Markets In India An Overview
37
ADVANTA@E2 O4 RO66IN@ 2ETT6EMENT? -
In rollin! settlement, payments are quicker than in the weekly settlement" $hus,
investorsH enefits from increased liquidity" Cor e5ample, in a rollin! system, investors
would receive the payments on the fifth day after the sale" $he 6ational 'tock E5chan!e
was the first to introduce rollin! settlement in the country" )ollin! settlement could not
e introduced earlier ecause India did not have depositories" )ollin! settlement
necessarily requires electronic transfer of funds and demat facilities in respect of
securities ein! traded" $his is ecause handlin! lar!e volumes of paper on a daily asis
is e5tremely difficult for the clearin!houses of stock e5chan!e" It is only now that India
has adequate facilities for electronic delivery of shares, which facilitates tradin! and
clearin! lar!e volumes on a daily asis" *owever, transfer of funds in India still takes two
to three days"
INTERMEDARIE2 IN 2E>ONDARY MARKET? -
1. 2TO>K 7ROKER? -
A 'tock /roker plays a very important role in the secondary market helpin! oth
the seller and the uyer of the securities to enter in to a transaction" $he uyer and seller
may e either a roker or a client" A roker is an intermediary who arran!es to uy and
sell securities on ehalf of clients <the uyer and the seller=" $hey !et commission on
these transactions" Aout one fourth of the memers of the stock e5chan!e are specialist
known as market makers"
Accordin! to )ule 2 <e= of 'E/I <'tock(/rokers and 'u(/rokers= )ules, 1++2, a
stockroker means a memer of a reco!ni#ed stock e5chan!e" 6o stockroker is allowed
to uy, sell or deal in securities, unless he or she holds a certificate of re!istration !ranted
Equity Markets In India An Overview
3;
y 'E/I" A stockroker shall not uy, sell, and deal in securities, unless he holds a
certificate !ranted y 'E/I"
". 2U7 7ROKER2? -
A su(roker is a person who intermediates etween investors and stockrokers"
*e acts on ehalf of a stockroker as an a!ent or otherwise for assistin! the investors for
uyin!, sellin! or dealin! in securities throu!h such stockroker" 6o su(roker is
allowed to uy, sell, or deal in securities, unless he or she holds a certificate of
re!istration !ranted y 'E/I" A su(roker may take the form of a sole proprietorship, a
partnership firm or a company" 'tockrokers of the reco!ni#ed stock e5chan!es are
permitted to transact with su(rokers" *e is also known as Re&i'ere'.
(. >U2TODIAN? -
2ustodian of 'ecurities means any person who carries on or proposes to carry on
the usiness of providin! custodial services" 2ustodial 'ervices in relation to securities
means safekeepin! of securities of a client and providin! services incidental thereto, and
includes(
1" Maintainin! accounts of securities of a clientL
2" 2ollectin! the enefits or ri!hts accruin! to the client in respect of securitiesL
7" 8eepin! the client informed of the actions taken or to e taken y the issuer of
securities, havin! a earin! on the enefits or ri!hts accruin! to the clientL and
;" Maintainin! and reconcilin! records of the services"
Equity Markets In India An Overview
30
). BO77ER? -
A 4oer is a specialist and independent dealer in securities" A 4oer has to !ive
two quotations as a dealer in securities" *e !ives lower quotation for uyin! and hi!her
quotation for sellin! the securities" Aoer deals only with the rokers and not with the
investors" *is mar!in is fi5ed y competition amon! themselves as dealers" $he mar!in is
narrow when there is keen competition" Every year, a memer of the stock e5chan!e has
to decide and declare in advance whether he proposes to act as a 4oer or a roker" Each
4oer speciali#es in a certain !roup of securities" *e ensures that the transactions are
carried out smoothly and promptly" $he doule quotation of 4oer assures fair(tradin! to
investors"
,. TARANIWA6A? -
A 4oer who makes an orderly and continues auction in the stock market is
called $araniwala" *e is a locali#ed dealer who handles transactions on a commission
asis for other rokers who act on ehalf of their customers" *e trades in the stock
market even for small differences in price and helps to maintain liquidity in the stock
market"
-. ODD 6OT DEA6ER? -
$hese are specialists who handle the odd lots" $he standard tradin! unit for listed
stock is called SlotH" $he shares are normally traded in the lots of 0, 0,, 1,, etc" *owever,
the minimum lot has ecome 1 due to demateriali#ation" /ut all the listed stocks are not
compulsorily in the demat form" Odd lot dealers uy odd lots, which other memers wish
to sell for their customers and sell odd lots which others, want to uy" $he price of odd
lots is determined y the round lot transactions" $he odd lot dealer earns his profit on the
difference etween the purchase and sales price"
Equity Markets In India An Overview
33
0. AR7ITRA@EUR? -
An aritra!eur is a specialist in dealin! with securities in different stock e5chan!e
centers at the same time" *e makes the profit y difference in the prices prevailin! in
different centers of market activity" *e carries out these transactions with a !ood
communication system and telephonic and tele(printer facility" *e should have aility to
!et the prices from different centers efore other memers tradin! in the stock market"
1. 2E>URITY DEA6ER? -
$he memers who purchase and sale !overnment securities on the stock e5chan!e
are known as 'ecurity 1ealers" Each transaction has to e separately ne!otiated" $he
dealers should have information aout the several kinds of !overnment securities" $hey
take risk in ready purchase and sale of securities for current requirements" $heir role is
restricted y the participation of BI2 and 2ommercial /anks"
3. DE+O2ITORIE2? -
A depository is an entity where the securities of an investor are held in electronic
form" $he person who holds a demat account is a eneficiary owner" In case of a 4oint
account, the account holders will e eneficiary holders of that 4oint account"
1epositories help in the settlement of the demateriali#ed securities"
Each custodian@clearin! memer is required to maintain a clearin! pool account
with the depositories" *e is required to make availale the required securities in the
desi!nated account on settlement day"
Equity Markets In India An Overview
3-
15. +ORT4O6IO MANA@ER2? -
A 9ortfolio Mana!er is a professional with e5perience and e5pertise in the field"
*e studies the market and ad4usts the investment mi5 for his client on a continuin! asis
to ensure safety of investment and reasonale returns there from" Any person who
pursuant to a contract or arran!ement with a client, advises or directs or undertakes on
ehalf of the client whether as a discretionary portfolio mana!er or otherwise the
mana!ement or administration of a portfolio of securities or the funds of the client, as the
case may e is a portfolio mana!er"
11. 2TO>K EX>AAN@E2? -
A stock e5chan!e or securities e5chan!e is a marketplace where stocks offered for
sale are listed and e5chan!ed" $ypically, the e5chan!e is made up of a /oard of
>overnors !enerally selected y the memers, which is chosen to represent the interests
of seat holders" $he /oard then employees an e5ecutive officer, to mana!e the
E5chan!e" $he E5chan!e usually assi!ns a numer of seats to rokers"
Equity Markets In India An Overview
3F
2E7I 82E>URITIE2 9 EX>AAN@E 7OARD O4
INDIA;
>overnment of India set up the 'ecurities and E5chan!e /oard of India <'E/I= on April
12, 1+FF on the asis of the recommendations of the hi!h(powered committee on the
stock E5chan!e )eforms headed y >" '" 9atel" It was !iven a le!al status under the
ordinance of 1++2" It was entrusted with a wide ran!e of responsiilities in re!ulatin! the
activities of almost all the players in the capital market" It aimed at creatin! a proper and
conducive environment required for the raisin! money from the capital market throu!h
rules, re!ulation, trade practices, customs and relations amon! institutions, rokers,
investors and companies" It also aimed at endeavorin! to restore and safe!uard the trust
of the investors, particularly the interest of small investors" It has developed a proper
infrastructure for facilitatin! automatic e5pansion and !rowth of usiness of rokers,
4oers, mutual funds and merchant ankers"
>ON2TITUTION O4 2E7I? -
$he 2entral >overnment has constituted a /oard y the name of 'E/I under
'ection 7 of 'E/I Act" $he head office of 'E/I is in Mumai" 'E/I may estalish
offices at other places in India"
Equity Markets In India An Overview
3+
'E/I consists of the followin! memers, namelyK (
1" A 2hairmanL
2" $wo memers from amon!st the officials of the Ministries of the 2entral
7" >overnment dealin! with Cinance and administration of 2ompanies Act, 1+03L
;" One memer from amon!st the officials of the )eserve /ank of IndiaL
0" Cive other memers of whom at least three shall e whole time memers to e
appointed y the 2entral >overnment"
$he !eneral superintendence, direction and mana!ement of the affairs of 'E/I vests in a
/oard of Memers, which e5ercises all powers and do all acts and thin!s which may e
e5ercised or done y 'E/I" $he 2hairman and the other memers are from amon!st the
persons of aility, inte!rity and standin! who have shown capacity in dealin! with
prolems relatin! to securities market or have special knowled!e or e5perience of law,
finance, economics, accountancy, administration or in any other discipline which, in the
opinion of the 2entral >overnment, shall e useful to 'E/I"
4UN>TION2 O4 2E7I? -
'E/I has een oli!ated to protect the interests of the investors in securities and
to promote and development of, and to re!ulate the securities market y such measures,
as it thinks fit" $he measures referred to therein may provide forK (
<a= )e!ulatin! the usiness in stock e5chan!es and any other securities marketsL
<= )e!isterin! and re!ulatin! the workin! of stock rokers, su(rokers, share transfer
a!ents, ankers to an issue, trustees of trust deeds, re!istrars to an issue, merchant
Equity Markets In India An Overview
-,
ankers, underwriters, portfolio mana!ers, investment advisers and such other
intermediaries who may e associated with securities markets in any mannerL
<c= )e!isterin! and re!ulatin! the workin! of the depositories, participants, custodians of
securities, forei!n institutional investors, credit ratin! a!encies and such other
intermediaries as 'E/I may, y notification, specify in this ehalfL
<d= )e!isterin! and re!ulatin! the workin! of venture capital funds and collective
investment schemes includin! mutual fundsL
<e= 9romotin! and re!ulatin! self(re!ulatory or!ani#ationsL
<f= 9rohiitin! fraudulent and unfair trade practices relatin! to securities marketsL
<!= 9romotin! investors% education and trainin! of intermediaries of securities marketsL
<h= 9rohiitin! insider tradin! in securitiesL
<i= )e!ulatin! sustantial acquisition of shares and take(over of companiesL
<4= 2allin! for information from, undertakin! inspection, conductin! inquiries and audits
of the stock e5chan!es, mutual funds, other persons associated with the securities
market, intermediaries and self(re!ulatory or!ani#ations in the securities marketL
<k= 2allin! for information and record from any ank or any other authority or oard or
corporation estalished or constituted y or under any 2entral, 'tate or 9rovincial Act
in respect of any transaction in securities which is under investi!ation or inquiry y
the /oardL
<l= 9erformin! such functions and e5ercisin! accordin! to 'ecurities 2ontracts
<)e!ulation= Act, 1+03, as may e dele!ated to it y the 2entral >overnmentL
Equity Markets In India An Overview
-1
<m= Bevyin! fees or other char!es for carryin! out the purpose of this sectionL
<n= 2onductin! research for the aove purposesL
<o= 2allin! from or furnishin! to any such a!encies, as may e specified y 'E/I, such
information as may e considered necessary y it for the efficient dischar!e of its
functionsL
<p= 9erformin! such other functions as may e prescried"
INVE2TOR2? -
$he investors in the past have suffered at the hands of insufficient stock
e5chan!es and !reedy unprofessional rokers" $his was one of the reasons why 'E/I was
created" $he investor today can look forward to redress of his !rievances throu!h 'E/I"
6ormally investors have complaints of followin! natureK
1" 1elays in refund of application money"
2" 1elay in receipt of dividend and @ or interest warrants"
7" 1elay in receivin! the maturity value of fi5ed deposits or deentures on redemption"
;" 1elay in receipt of share and deenture certificates after allotment"
Ma4or part of the lierali#ation process was the repeal of the 2apital Issues
<2ontrol= Act, 1+;-, in May 1++2" &ith this, >overnmentHs control over issues of capital,
pricin! of the issues, fi5in! of premium and rates of interest on deentures etc" ceased,
and the office which administered the Act was aolished, the market was allowed to
allocate resources to competin! uses" *owever, to ensure effective re!ulation of the
market, 'E/I Act, 1++2 was enacted to estalish 'E/I with statutory powers forK
<a= 9rotectin! the interests of investors in securities,
<= 9romotin! the development of the securities market, and
Equity Markets In India An Overview
-2
<c= )e!ulatin! the securities market"
'E/I receives many such complaints re!ularly and tries to redress all such
!rievances" 'E/I has from time to time pulled up companies a!ainst whom the
complaints are received and has also initiated action a!ainst the defaultin! companies"
'E/I has encoura!ed the re!istration of investors associations in various parts of the
country to or!ani#e investors into an effective force for protection of their own interests"
'ome of the actions taken y 'E/I can e summari#ed as elowK
1" $he introduction of screen ased tradin!"
2" $he an on /adIa"
7" $he demateriali#ation of shares"
;" $he method of postal allots so that small investors views are heard"
0" $he ook uildin! process in uy(ack of shares y the companies"
3" $he capital adequacy norms for rokers"
'E/I may, for the protection of investors,
1" specify, y re!ulations,
a= the matters relatin! to issue of capital, transfer of securities and other matters
incidental theretoL and
= the manner in which such matters, shall e disclosed y the companies and
2" y !eneral or special orders,
a= prohiit any company from issuin! of prospectus, any offer document, or
advertisement solicitin! money from the pulic for the issue of securities,
specify the conditions su4ect to which the prospectus, such offer document or
advertisement, if not prohiited may e issued"
Equity Markets In India An Overview
-7
4II' 9 INDIAN EQUITY MARKET
Investors worldwide tend to stay away from undertakin! international
investments" /ut the fact is, y avoidin! cross country investment, investors are actually
causin! the rise in the risk of their portfolios" 2ross(order investin! develops asset
classes with very low correlation to the domestic holdin!s, in turn, contriutin! to a lesser
volatility for investments" $his premise of investment theory has led to an increasin!
trend of CII investments across the !loe" India ein! an emer!in! economy with a
capital market at its peak, forei!n investments have een a re!ular feature here" 'uch
investments flood in a country with sound macroeconomic and operational procedures in
place" 'teps taken y India in these fronts have een commendale, ut what is the key to
attractin! a sustantial slice of the cake and how can we sustain the paceO
$he era of CIls investments in India ori!inated in 1++7 and the net investment
durin! the year was EF2-"2, million" CIls of different countries, mainly the D', started
operatin! in India" $he numer of CIls in India has !rown over the year to nearly 0,,"
$he i! names include Mor!an 'tanley, $empleton, 2apital International, 212,
&arur!, and ACAM"
As per the definition of )/I, a CIl is an institution estalished or incorporated
outside India, which proposes to make investments in Indian securities" 'uch institutions
have een permitted to invest in Indian securities markets startin! from 'eptemer 1++2
when the then authorities issued suitale !uidelines" $he CIls are su4ect to strin!ent
monitorin!" $hey are required to re!ister with )/I and the 'E/I efore they commence
their operations"
Equity Markets In India An Overview
-;
Corei!n Institutional Investors <CIls= durin! the last one(decade have ecome an
inte!ral part of Indian equity markets" $hey have een an incredile source of money
ever since" $he clout of the CIls is such that the market players anticipate their arrival
with reathless an5iety" $his reputation of the CIls is a well(earned status" $he authority
of these institutions is evident from the very fact that y the mere news of their arrival it
is sufficient for the market to supplement itself with a doule(di!it !rowth"
$ruly, the CIls have emer!ed as a masculine unit in recent times" CIls support the
markets y unlockin! their chests and re4uvenatin! the secondary markets" 9erformance
of the secondary market rin!s cheer to the new issues market thus allowin! companies
to raise fresh capital" As evident, a healthy CII activity helps fund new pro4ects and
e5pansions, creatin! new 4os and tri!!erin! all positive thin!s that come as a surprise
!ift" Crom the 2entral /ank%s point of view, CIls, investments impart confidence to the
economy y providin! cushion in the form of fore5 reserves"
$his trend of Indian equity markets to that of CIIs investment thou!h encoura!in!,
has to e treated cautiously" Althou!h the investments have provided with the much
needed liquidity and depth in the markets, the role played y the fly(y(ni!ht operators in
creatin! panic is some of the Asian economies do Indian markets face a risk" 9ortfolio
flows are notoriously volatile compared to other forms of capital flows, as CIls usually
pull ack portfolio investments at the sli!htest hint of troule in the host country often
leadin! to disastrous consequences to its economy" CIls have een lamed for
e5aceratin! small economic prolems in a country y makin! lar!e and concerted
withdrawals at the first si!n of economic weakness" *owever, )/I and 'E/I has een
prudent enou!h in enforcin! strict !uidelines for CIls enterin! India and controllin! the
repatriation of the investment"
Equity Markets In India An Overview
-0
Ever since they entered India in 1++7, the market has moved nowhere etween 1++7 and
now" 1espite an over urdened economy and infrastructure ottlenecks, companies like
)IB, *BB, *1C2, Infosys, )ana5y, and 1r" )eddy%s have !iven consistently e5cellent
performance over the years and this has encoura!ed CIls to invest in the stocks of these
companies which holds a ma4or wei!hta!e in sense5" Cor !loal fund mana!ers, top
down is the preferred approach as their portfolios consist of securities across many
markets, which make it too cumersome to follow a ottom(up strate!y in each market"
>AA66EN@E2 4A>IN@ 4II' IN INDIA? -
1. >ON>ENTRATION AND 6IQUIDITY?-
$he i!!est concern pla!uin! Indian markets is that of concentration and
liquidity" $here are only a handful of stocks that have the kind of liquidity for forei!n
investors to take si!nificant positions" Indian markets are concentrated in very few stocks
in terms of volumes turnover" $he share of top 1, most active inde5 stocks in turnover is
aout 0-. in India markets, while it is in the ran!e of 11 to 2-. for countries includin!
2hina, $hailand, $aiwan and 8orea" Also, promoters% holdin!s are hi!h which hampers
liquidity"
". MARKET >A+ITA6ICATION TO @D+ RATIO?-
$he second ma4or concern is market(cap to >19 ratio in India, which is quite low
at 72." $his implies that only a small fraction of Indian usiness is captured in stock
markets and some of the ma4or usinesses are not even availale for investin!" &hile in
developed economies this ratio is to the e5tent of 12,., Asian countries like *on! 8on!,
2hina, 8orea and $aiwan have a ratio of more than 0,." $his is ecause of increased
!overnment ownership in various se!ments" Cor e5ample, Indian )ailways, India 9osts,
'tate )oad $ransport 2orporations, with their si#e and usiness credentials can i!nite a
Equity Markets In India An Overview
-3
lot of investor interest" $ATere are ma4or private players, which are closely held and
unless all these come into the stock market fold, opportunities will e limited"
(. >OR+ORATE @OVERNAN>E AND DI2>6O2URE NORM2?-
$here are concerns on the corporate !overnance standards as well" 1espite
accountin! scandals in the D', !loal investors have more faith in the D' re!ulatory
system and corporate !overnance standards" Dnlike domestic fund mana!ers who feel
reasonaly confident ecause of their re!ular interaction with the mana!ement, forei!n
investors do feel quite insecure" Cor a fund mana!er mana!in! funds from his
headquarters in the D', the quantum of investment in Indian companies may not really
4ustify the costs of monitorin! them on a re!ular asis" 'tocks tradin! at 9E multiple of 2
or 7 in spite of their steady financial performance raises suspicion aout the quality of
mana!ement and in this respect !loal investors look at emer!in! markets like 8orea and
$aiwan, much more favoraly"
). MA>RO-E>ONOMI> +ARAMETER2?-
'election of the ri!ht country is the main o4ective for CIls investments rather
than stitchin! to!ether sector themes" CIIs are payin! more attention than ever to country(
specific factors like reform momentum, local political situation and macro(economic
ratios" Macro(economic staility and fiscal staility are asic hy!iene factors to attract
forei!n investors" $he cost of rescuin! !overnment(owned financial institutions such as
D$I and IC2I will effect the fiscal situation" $he !loal ratin! a!ency 'tandard P 9oor
down!raded India%s local currency ratin! to 4unk !rade from investment !rade 1'
definitely worryin! !loal investors, thou!h local fund mana!ers are more othered aout
!round realities such as corporate profitaility and !rowth prospects"
Equity Markets In India An Overview
--
"550 A YEAR TO REMEM7ER
Jear 2,,- started on a stron! note, ut is endin! on a mi5ed note" $he D' su
prime crisis is far from over, and can dra! the D' economy into recession" 2rude prices
have sur!ed, so have many a!ri and other commodity prices at a time when the !loal
economy is none to stron!" $his will definitely have an impact on India, particularly on
its e5port prospects" Cortunately, India is more of an internal(consumption(driven
economy" In the past few years, the cream of !rowth has een investment(driven, too"
$hese factors provide stron! support for sustained acceleration in the domestic economy"
$he D' Cederal )eserve has cut rates thrice" $his has led to a sur!e in fore5 inflows into
emer!in! markets like India and into commodities" 1omestic inflation has moderated and
is elow ;." Also, interest rates have already peaked" If they fall steeper from the current
levels, it could revive the auto sector and oost the profitaility of the ankin! sector,
particularly 9'D anks, throu!h sur!e in investment income"
$he sur!e on the Indian stock markets was powered y forei!n institutional
investors <CIIs=" Inflows from CIIs stood at D'E 1- illion in 2,,-" A ma4ority of this was
received in the later part of the year" $he main reason was the cuttin! of rates y the D'
Cederal )eserve" &ith the D' market headin! for a recession and the !loal economy for
a slowdown, will forei!n portfolio investment decline, remain consistent or sur!eO &ith
lar!e !loal investment ankin! entities reportin! poor results of late, CII inflows are
ound to reduce from such entities for now" India is also witnessin! one of the len!thiest
capital e5penditure cycles, which shows no si!ns of easin!" $his e5perience has helped
the domestic players to stren!then their overseas usinesses as well"
2,,F has e!un with a an!" And howU $he /omay 'tock E5chan!e </'E=
'ensitive Inde5 <'ense5= shaved off 7,222"1 points in si5 consecutive tradin! sessions
etween 1; and 21 Aanuary 2,,F" $hou!h the fall was continuous on each of these days,
21 Aanuary turned to e a typical /lack Monday as the market went down intra(day y
Equity Markets In India An Overview
-F
2,,32"2 points, finally closin! with 1,;,F"70 points off" $he carna!e was not unique to
India ut was spread across the !loe" In the year to 21 Aanuary 2,,F, only three of the 02
!loal equity markets !ave positive returns in dollar terms, accordin! to the /road
Market Inde5 provided y 'tandard P 9oorHs@2iti!roup >loal Equity Indices" $hese
were Morocco, Aordan and 6i!eria" On the other e5treme, si5 markets V Bu5emour!,
6orway, 9oland, /ra#il, Iceland and $urkey V witnessed over 2,. fall" $hirty( seven
markets had a doule(di!it dip, while si5 markets witnessed sin!le(di!it decline" India
lost 13"2. in dollar terms in this period" It is ecomin! increasin!ly clear that the !loal
economy is set to slow down" 'u(prime crisis is 4ust a symptom of the weaknesses in the
D' economy" A D' recession will slow down the !loal economy due to its !loal
linka!es"
'tartin! the 1ecemer 2,,- quarter at a level of 1-,2+1 points, the /'E 'ense5
kept on risin! <with many corrections= throu!hout the quarter and was up over 1-. at the
end of the quarter" &hen the 1ecemer 2,,- quarter results started pourin! in, the inde5
shot up to a historic hi!h of 21,2,- points on 1, Aanuary 2,,F and then crashed like a
pack of card on fears of a D' recession and hu!e write(offs y almost all !loal anks
and financial institutions on account of defaults in the su(prime mort!a!e market" $his
took a heavy toll on the Indian markets also" After closin! at a historical hi!h of
2,,F-7"77 on F Aanuary 2,,F, the /'E 'ense5 tumled y over 2+. to 1;,F,+";+ on 1-
March 2,,F" Cortunately, there was a relief rally, which talked up the 'ense5 past the
13,,,, levels to 13,7-1"2+ on 2F March 2,,F" 'till the market is nearly 22. lower from
its peak"
$here was sustained and heavy sellin! y forei!n institutional investors <CIIs= in
Aanuary 2,,- as well as in Ceruary till date" Crom e5cessive inflows, the markets are
now sufferin! from e5cessive CII sellin!" 6evertheless, the Indian markets have mana!ed
Equity Markets In India An Overview
-+
to fare much etter compared with other markets on !ood inflows from domestic
institutional investors"
6e''on' 4ro& Re!ent Me$to=n
Investors reali#e how lonely they are durin! a market meltdown" Innovations in
dissemination of information ensure that the markets never sleep" 'omewhere a market is
reelin! under the impact of events unfoldin! in another part of the !loe" 1espite the
availaility of sophisticated tradin! instruments to cushion risks, investors are either
propelled on euphoria emanatin! at one end or swept aside on a wave of pessimism
stemmin! from another" Institutional investors, went the conventional wisdom,
collectively determine the course of the markets" 6ot any more" If an a!!ressive investor
such as /ear 'tearns, alle!edly sittin! on a pile of cash 4ust 1,, hours efore its hasty
rescue, could not foresee its fate, how are retail investors to know that the chatterin!
class, propoundin! the theory of Sdecouplin!H of emer!in! markets such as India and
2hina even as 2iti!roup, Merrill Bynch and other lue(chip D' investment anks were
writin! off hu!e amounts of their e5posure to paper acked y su prime mort!a!es,
were as clueless as they wereO Each crisis rin!s to the tale its own lessons" *ere are
someK
Equity Markets In India An Overview
F,
Mooy &arket'? If the D' Cederal )eserve has the power to oost markets
around the world y cuttin! its lendin! rates, why should domestic policies such as the
Beft partiesH threat to torpedo the Indo(D' nuclear deal and increase in short(term capital
!ain ta5 from 1 April 2,,F still stun the marketO If domestic consumption is drivin! the
economies of emer!in! markets, why should the urstin! of the D' housin! ule pull
down IndiaHs stock marketO $he ottom lineK there is no predictin! what could please or
upset the markets"
6iquiity $ia<i$ity? IndiaHs economy is e5pected to clock aout F. !rowth in the
fiscal endin! March 2,,+" $hou!h consideraly less than the avera!e +. recorded in CJ
2,,-, it is an attractive rate and comparale with other emer!in! economies" Jet, forei!n
funds have turned net sellers, preoccupied y the credit crunch ack home" 'lowdown in
capital inflows could hamper the e5pansion plans of Indian companies and in turn slow
the !rowth rate further" $he cru5 is success of reforms hin!e on liquidity"
Money &o#e'? As funds flow from markets with low interest rates to those with
hi!h interest rates, monetary authorities have to calirate their responses keepin! in mind
not only local conditions ut also the international environment" $he /ear 'tearns ailout
and the efforts of the Dnion /ud!et 2,,F(,+ to cap forei!n portfolio investment to lunt
inflation indicate central anks and central !overnments have to increasin!ly coordinate
policies with each other" In the process, money re!ulators are in the dan!er of losin! their
autonomy" $he positive fallout is alanced monetary and fiscal policies"
Va$uation &ira*e? &hen the markets are u##in!, valuation ecomes a relative
term as liquidity chases sound stocks" 'ometimes even a richly priced I9O in a hot
market can re(rate the entire sector comprisin! estalished players with etter track
records" $he picture chan!es when the situation reverses" Even a stock availale at a deep
Equity Markets In India An Overview
F1
discount at the 10,,,, level compared with the 2,,,,, level of the 'ense5 appears
e5pensive in view of the uncertainty"
Ra!e to ri!.e'? More competition means companies have to not only protect and
increase market shares ut reward shareholders with hi!her return" $he recent write(
downs y leadin! !loal investment anks have unearthed their reckless e5posure to
e5otic derivatives to ma5imi#e profit" 'even years after the end of the dot(com era, the
collapse of the D' property market shows that in the race to the top even the sturdiest
companies can throw caution to the wind"
4ata$ attra!tion? $ill recently, holdin!s y overseas investors were taken as a
measure to !au!e the soundness of the stock" $he lo!ic was that forei!n funds would
invest in only those companies with !ood financial track records or with credile
promoters empowered to tap future potential" Many companies raised the cap on forei!n
holdin!s to earn etter valuation" $he flip side is an equally quick slump in prices if
forei!n investors pull out on panic"
Ri'k /a!tor'? As the markets ecome !loal, operations of Indian companies are
turnin! more comple5" )aw materials are sourced from one continent, processed in
another, and the finished product sold in a third" Many of these companies are lamin!
anks for mis(sellin! derivatives products that were suppose to insulate from forei!n
e5chan!e fluctuations ut may result in hu!e lack holes in the alance sheets" 6ew(
!eneration vehicles to hed!e a!ainst volatility, thus, can transform into sources of in
staility"
Equity Markets In India An Overview
F2
>ON>6U2ION
Equity capital is a hi!h risk(hi!h reward, permanent source of lon! term finance
for corporate enterprises and short term earnin! for shareholders" $he investors, who
desire to share the risk, return and control associated with ownership of companies would
invest in equity capital"
$oday, the Indian Equity Market is one of the most technolo!ically developed in
the world and is on par with other developed markets aroad" $he introduction of on(line
tradin! system, demateriali#ation, an of the adla system, and introduction of rollin!
settlement have facilitated quick tradin! and settlements which lead to lar!er volumes"
$he settin! up of the 6ational 'tock E5chan!e of India Bimited has revolutioni#ed the
face of the stock market" 6'E is the only stock e5chan!e which covers ma4ority equity
investments every day"
Also equity capital market encoura!es capital formation in the country" $he
specific factor, which influences equity market, is the investorHs sentiment towards the
stock market as a whole" 'o investor first has to analy#e and invest and not speculate in
shares" $he introduction of online tradin! has !iven a much(needed impetus to the Indian
Equity Markets In India An Overview
F7
equity markets" In this technolo!ical world thin!s are needed to move at a faster pace,
and with the introduction of ME$*O1' OC MA)8E$I6> 'E2D)I$IE' I6 $*E
EIDI$J MA)8E$, the stock e5chan!e has e5panded its usiness at a tremendous
speed"
Accordin! to economic times, the research states the ma4or reason ehind the
irre!ularities of market <up and down in sale and purchase, price of share= is mainly
ecause of CO)E2A'$I6> MI61 'E$ OC EIDI$J I6?E'$O)'" 'o, the stock
e5chan!es must disre!ards the emotional component of tradin! y makin! investors
decisions ased upon chart formations, assumin! that prices reflect oth facts and
emotion" And also y creatin! the awareness of fundamental analysis <Cundamental
analysis is a method of findin! out the future price of a stock, which an investor wishes to
uy= amon! the investors to avoid the irre!ularities while tradin!"
'o to increase the volume of equity investment, the stock e5chan!es should strive
to increase transparency, strictly enforce corporate !overnance norms, provide more
value(added services to investors, and take steps to increase investor confidence" $hese
stock e5chan!es will have to plan strate!ic tie(ups with their forei!n counterparts to !et
an international platform" A developed and virant secondary market can e an en!ine for
the revival and !rowth of the primary market" 'o, to encoura!e Indian investment and
face international competition every Indian stock e5chan!e has to stress on innovation
and sustained investment in technolo!y to remain ahead"
Equity Markets In India An Overview
F;
7ook' Re/erre
7I76IO@RA+AY
1" Investment Mana!ement(9reeti 'in!h
2" Indian Cinancial Market($ ) ?enkatesh
7" Cinancial Market(9 8 /and!ar
;" Merchant /ankin! P Cinancial 'ervices(Anil A!ashe"
Ma*aDine'
1" /usiness $oday
2" India $oday
7" /usiness &orld
We<'ite'
1" www"nseindia"com
2" www"indiainfoline"com
7" www"hdfcsec"com
;" www"equitymaster"com
0" www"seindia"com
3" www"sei"!ov"in
-" www"financiale5press"com
Equity Markets In India An Overview
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