Tug War Nse and Bse in India

The Tug of War: NSE vs.
BSE
STUFFING OF THE PROJECT
1. Introduction
3-16
2. MONETARY POLICY AND STOCK MARKET 17-34

3. NSE VS. BSE
35-46
4. ROLE OF SEBI IN NSE AND BSE
47-80
5. TABLES
81-92
6. References
93
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The Tug of War: NSE vs. BSE
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1. INTRODUCTION
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INTRODUCTION
WHAT IS STOCK?
A stock, also referred to as a share, is commonly a share of ownership in a joint

stock company. The owners and financial brokers of a company may desire
additional capital to invest in new projects within the company. If they were to sell the
company it would represent a loss of control over the company. Also, Stock is
ownership in a company, with each share of stock representing a tiny piece of
ownership. The more shares you own, the more of the company you own. The more
shares you own, the more dividends you earn when the company makes a profit. In
the financial world, ownership is called equity.
There are two primary classes of stock:
1. Preferred Stock typically pays regular dividends and is favored by investors
who want income foremost from their stocks.
2.
Common Stock represents ownership of a company and may offer more

rights and privileges than preferred stock.
Investors may purchase stock on the primary or secondary market. A company sells
its stock to the public on the primary market through its initial public offering.
Investors may sell their shares through brokers to other investors on the secondary
market. The secondary market can be structured as an auction market, like the other
exchanges, or a dealer market, like the NSE & BSE. Stock prices can be found
(quotes) in newspapers, on television and the Internet.
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WHY DO COMPANIES ISSUE STOCK?
Businesses issue stock to raise money. They use this money to finance expansions,
pay for equipment, and fund projects, etc. Corporations issue stock when they may
need additional capital to operate successfully. The fancy term for issuing stock to
raise money is equity financing. The money received from investors who buy stocks
is called equity capital. In the world of securities, the word "equity" usually refers to
stocks. The other method of raising money is debt financing, which involves selling
bonds. When companies make profits, they may reward their stockholders with
pieces of their profits, known as dividends. Dividends are an incentive for investors
to hold stocks.
WHAT ARE STOCK EXCHANGES?
Exchanges are the physical locations where stocks are bought and sold. They are
the sisters of the over-the-counter (OTC) market. The OTC refers to a market in
which securities transactions are conducted through a telephone and computer
network connecting dealers in stocks and bonds, rather than on the floor of an
exchange. Together, these two markets form the secondary market. The primary and
secondary markets together make up the stock market. Exchanges are located all
over the world, with the most famous one being the Indian Stock Exchange.
Thousands of stocks are listed on this exchange. When you buy a stock, you will
need to learn which exchange list it. Other than locating a quote in the newspaper,
with online trading and the automation of order systems, there is very little reason to
determine where the stock trades from the customer's viewpoint. The Securities and
Exchange Commission (SEC) regulates stock trading and exchanges. Additional
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regulation is administered by The National Association of Securities Dealers (NASD).

The NASD makes and enforces rules for its members and enforces federal securities
acts and the SEC makes rules for its membership. As you read more about
investing, you will become more familiar with these organizations and their protective
regulations.
ABOUT STOCK MARKET BASICS

Companies are started by individuals or maybe a small circle of people. They pool
their money or obtain loans, raising funds to launch the business. A choice is made
to organize the business as a sole proprietorship where one person or a married
couple owns everything, or as a partnership. Later they may choose to "incorporate".
As a corporation, the owners are not personally responsible or liable for any debts of
the company if the company doesn't succeed. Corporations issue official-looking
sheets of paper that represent ownership of the company. These are called stock
certificates, and each certificate represents a set number of shares. The total
number of shares will vary from one company to another, as each makes its own
choice about how many pieces of ownership to divide the corporation into. One
corporation may have only 2,500 shares, while another may issue over a billion
shares such as IBM and Ford Motor Company. Companies sell stock (pieces of
ownership) to raise money and provide funding for the expansion and growth of the
business. The business founders give up part of their ownership in exchange for this
needed cash. The expectation is that even though the owners have surrendered a
portion of the company to the public, their remaining share of stock will become
increasingly valuable as the business grows. Corporations are not allowed to sell
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shares of stock on the open market without the approval of the Securities and
Exchange Commission (SEC).
The Golden Piggy Bank Page 36 This transition from a privately held corporation to a
publicly traded one is called going public, and this first sale of stock to the public is
called an initial public offering, or IPO. Usually an IPO is sponsored by an investment
bank (the underwriter) such as Merrill Lynch, Salomon-Smith Barney, or Goldman
Sachs. Companies can choose to incorporate, by filling the appropriate papers and
paying a fee, in any state that they choose. This becomes their charter state where
they must maintain an office address.
Officers are chosen - president, vice-
president, and secretary-treasurer, and a board of directors may be established. It is

the board of directors' duty to represent the shareholders, who of course at the early
stages of a company's life, are going to be the company founders. Most corporations
stay privately owned although they may elect to sell stock to qualified investors. You
can tell if a company is a corporation by seeing the "Inc." after its name, or other
letters such as LTD or AG if the company is based in a foreign country. According the
U.S. Census Bureau, of the 5,579,177 registered businesses in the United States,
5,562,799 have less than 500 employees. Of the 16,378 big companies with over
500 workers, about half are privately owned.
Common Stock - standard shares issued by a corporation. Most stocks traded are
common stock.
Preferred Stock - special class of stock that is issued without voting rights, but
promises a fixed dividend. If a company is forced to liquidate and close its doors,
preferred shareholders stand in line in front of common stock holders, for any
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proceeds available after secured creditors are paid. Most preferred stock trades on
the NYSE at about $25.00 per share.
HOW TO BUY STOCK?
Buying stocks is not as simple as walking into a stockbroker's office and buying
shares like you would a pair of shoes from a store. You are required to open an
account with the brokerage, like opening an account at a bank. Some brokers will
allow you to open an account with very little money. The firm will then hold this
money in an interest earning cash account, awaiting your orders to buy or sell stock,
or other securities such as bonds or mutual funds. When you buy or sell, you pay a
commission which is deducted from your account. When a stock is purchased, the
ownership of the shares may be listed in one of two ways. "Listed" means how the
corporation tracks the ownership of their stock. If you choose to have the stock listed
in your name, you will receive the actual stock certificates. Most investors choose to
have the ownership listed in the broker's name, called "held in street name", with the
broker keeping track of whose trading account the stock actually belongs to. The
benefits are reduced paperwork, consolidated portfolio statements, no concerns
about storing and processing the paper certificates, and the ability to instantly sell
and transfer the shares. Either way, any dividends are credited to your account.
Stocks held in street name are insured up to $500,000 by the federal government
against fraud or financial failure of the brokerage company.
MARKET CAPITALIZATION
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As you become familiar with stock and mutual fund investing, you will encounter the
term "cap", as in small-cap, mid-cap, and large-cap. Cap is short for capitalization.
As a stock market term, the capitalization of a company is found by multiplying the
total number of shares times the current share price. If a company has 500 million
shares trading at $20 a share, its market cap is $10 billion (500,000,000 x $20). This
is the total value of the company's stock, the value that the world of stock market
investors has placed on the company (at least for today, investors are quick to
change their minds). Today, we define a large-cap company as one whose stock is
valued at over $10 billion, a mid-cap from $1 to $10 billion, a small-cap from $250
million to $1 billion, and a company whose stock value is under $250 million as a
micro-cap. Depending on who you listen to or how old your reference is, these
definitions will vary. A related point - don't think a company is big just because it has
a high stock price, or that it is small just because its stock price is low.
WHAT FUELS DEMAND FOR A STOCK?

Wall Street has said for years that the market is efficient, and the price of a stock
represents everything that is known about a company up to that moment. Wrong,
stock prices over-react to news, both good and bad. You would think that if a stock is
fairly valued, that no one would buy at a higher price or sell at a lower price. But how
can anyone truthfully say what fair value is? Sure, you can measure stocks by
earnings, dividend yields, return on invested capital, the companys growth rate, or
against its industry peers. Some experts say that since safe government bonds sell
at about 20x earnings (at a 5% return), stocks should sell at less than 20x earnings
because of the added risk, and many of course do. The fact is, stocks don't have a
fair value, and they never have. The buying and selling, and so the moments price,
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is driven by psychological forces (fear of lost opportunity, envy over the killing that a
friend made in the market, good news, bad news) and economic forces (productivity,
inflation, deflation, etc.). Its what the crowd thinks about all of this that creates
demand or a lack of demand.
Whether its because of a companys growth or
because its a big company that pays a regular dividend, big demand for a stock
comes down to one thing, and only one thing: investors think that they will make
money by buying the stock. Period.
The Beardstown Ladies Investment Club (of Illinois) sold a lot of their books and
received lots of publicity when they reportedly earned 23.4% for 10 years. Turned out
that they didnt know how to figure percentages, actually earning an annual average
of 9.1% while the S&P 500 averaged 15.3%
WHAT BENEFITS DO INVESTORS GET FROM STOCK OWNERSHIP?
In addition to owning part of a company, you have the potential to receive monetary
benefits when you own stock shares. Owning stock may allows you the opportunity
to earn money on money. Historically, stocks have performed better than most other
investments. This is a testament to the growth of the economy in the United States.
From 1955 to 1994, the average yearly return of a share of stock was approximately
10 percent. This means that if $10,000 were invested in stocks in 1955, and
dividends and capital gains were reinvested instead of kept, this $10,000 would have
been worth about $444,000 by 1994.
Alternatively, by selling shares, they can sell part or all of the company to many partowners. The purchase of one share entitles the owner of that share to literally a
share in the ownership of the company, including the right to a fraction of the
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company, a fraction of the decision-making power, and potentially a fraction of the

profits, which the company may issue as dividends. However, the original owners of
the company often still have control of the company, and can use the money paid for
the shares to grow the company. In the common case, where there are thousands of
shareholders, it is impractical to have all of them making the daily decisions required
in the running of a company. Thus, the shareholders will use their shares as votes in
the election of members of the board of directors of the company. However, the
choices are usually nominated by insiders or the board of the directors themselves,
which over time has led to most of the top executives being on each other's boards.
Each share constitutes one vote (except in a co-operative society where every
member gets one vote regardless of the number of shares they hold). Thus, if one
shareholder owns more than half the shares, they can out-vote everyone else, and
thus have control of the company. Financing a company through the sale of stock in
a company is known as equity financing. Alternatively debt financing can be done to
avoid giving up shares of ownership of the company. Shares of stock are usually
traded on a stock exchange, where people and organizations may buy and sell
shares in a wide range of companies. A given company will usually only trade its
shares in one market, and it is said to be quoted, or listed, on that stock exchange.
However, some large, multinational corporations are listed on more than one
exchange. They are referred to as inter-listed shares. There are several types of
shares, including common stock preferred stock, treasury stock, and dual class
shares. Preferred stock, sometimes called preference shares, have priority over
common stock in the distribution of dividends and assets, and sometime have
enhanced voting rights such as the ability to veto mergers or acquisitions. A dual
class equity structure has several classes of shares (for example Class A, Class B,
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and Class C) each with its own advantages and disadvantages. Treasury stocks are
shares that have been bought back from the public. A stock option is the right or
obligation to buy or sell stock in the future at a fixed price. Stock options are often
part of the package of executive compensation offered to key executives. Some
companies extend stock options to all of their employees. This was especially true
during the dot-com boom of the mid- to late- 1990s, in which the major compensation
of many employees was in the increase in value of the stock options they held,
rather than their wages or salary. This is still the major method of compensation for
CEO. The theory behind granting stock options to executives and employees of a
corporation is that, since their financial fortunes are tied to the stock price of the
company, they will be motivated to increase the value of the stock over time. The first
company that issued shares is considered to be the Dutch East India Company in
1602. In finance a share is a unit of account for various financial instruments
including stocks, mutual funds, limited partnerships, and REIT. In British English, the
usage of the word share alone to refer solely to stocks is so common that it almost
replaces the word stock itself.
HOW DOES THE STOCK MARKET WORK?
For all its apparent complexity, the stock market exists to do two relatively simple
things. One is to allow the sale of pieces of a company (i.e. shares) to investors, and
the second to provide a market place for the ongoing valuation of those shares.
Almost all the action takes place in this second arena, when investors buy and sell
with each other. There are many ways in which an investor can use the stock market
and the huge amount of information that is published by and about companies to try
to make money. The more quickly you intend to make money, the more attention and
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hard work is required. But there are several low-risk, low-maintenance ways of
investing too, so long as you are in for the long haul. These allow you to ignore
almost all that blizzard of news that emerges from the market yet still get superb
long-term returns.
WHY THE STOCK MARKET?
Shares are easily the best way to make your money grow over the very long term.
Those who can manage to regularly put away even small sums year by year in a
broad range of shares and leave it to do its work for a decade or more are likely to
find the performance of their cash has far exceeded the results of other kinds of
savings. This picture would be a lot clearer, of course, if the short-term performance
of the stock market were not so variable. If the value of each and every share rose
every year by 7.5%, which is roughly what it has averaged over the last century or
so, the superiority over savings accounts that pay 2%-4% would be easy to see.
However the fact that some shares double overnight and some halve, and whole
stock markets can rise or fall by 25% in a single year makes us feel seasick, puts
many people off, and obscures the long-term picture. Yet that long-term picture is
astonishingly favorable.
WHY DO PRICES MOVE SO MUCH?
Ultimately the stock market valuation of a company moves in line with the profits and
performance of that enterprise, but rumors, hype, hysteria and gossip play just as big
a role on a day-to-day basis. Stockbrokers say that two factors, greed and fear,
determine the immediate movements of share prices. That is the greed for making a
profit and the fear of making losses. Every share price is a balance between the two.
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For most long-term investors the day-to-day price of a share should not matter too
much so long as the underlying company is performing well. Certainly, many
companies that are well financed and prospering take little notice of day to day
gyrations in their share prices.
BUT WHAT ABOUT RISK?
Shares and risk seem to go hand in hand. Every day there is a story in the papers
about someone who lost an inheritance in the stock markets, or borrowed to buy
shares and now cant repay the loan. We read articles about profit warnings,
unexpected losses, and various other events that can harm companies and destroy
the savings of those who invest in them. There are also the stories of those who
have been investing, carefully and patiently, yet find after many years saving most of
their profits have been eaten up in charges. Still others, entrusting their money to
financial advisers or fund managers, have been sold investments that were either too
risky, performed poorly, or were in some way inappropriate to their needs. There are
ways around all these problems.
RISK AND REWARD
If you put Rs.10 on a 100-1 outsider at Cheltenham, you know you are taking a risk.
There is a very high chance that you will lose your Rs.10, but then there is a tiny
chance that you will win Rs.1000 if the horse comes in. This trade-offs between risk
and rewards are also intrinsic to investing. The difference with buying shares
compared to backing horses is that nobody can put an exact number on your chance
of losing money on a particular share or how much you might gain. Day traders are
quite willing to bet thousands, sometimes much of it borrowed from specialist
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brokers, to bet on short-term movements in indices or shares. They know they are
taking a big risk. However, investors who invest in a broad range of shares and leave
them to grow for a decade or more are taking a very low risk.
MANAGING SPECIFIC RISKS
There are several types of risk.
One is the risk that a company you have shares in will go bankrupt or
permanently lose most of its value. The antidote to this risk is to spread your
investments over a large number of different shares, perhaps through a fund,
so that such an event will have minimal impact on your finances.
A second risk is that your investments will have performed poorly by the time
you want to sell. This could either be in absolute terms or compared with
savings accounts, the return on gilt-edged stocks or some other place where
you may have put the money instead. One answer to this is to put your money
away for as long as possible so the historical superiority of shares has time to
show itself, and the second is to include some of the competing assets, such
as cash or government bonds, in your investment portfolio.
A third risk, rather a subtle one, is that while you have spread your cash
between
different
types
of
assets,
they move
together in
certain
circumstances. For example when inflation is high both savings accounts and
government bonds perform poorly. When interest rates are soaring, shares in
house builders and the value of the home you live in may both fall. The whole
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point of a portfolio is to give you a smoother increase in wealth, and it takes

some planning to make sure that happens.
THINKING ABOUT RISK
We should think about risk whether we want to invest in the stock market or not.
Many of us are running much bigger risks than we think. While many people buy life
insurance in case a family breadwinner dies, few consider how much we may have
at stake from a single event like the collapse of an employer. Bad enough to lose a
job, but what if both breadwinners work for the same firm? What about the company
car and the cheap loan from the employer to help buy an expensive house? Some
people with company share options riding high stop saving altogether. These are an
awful lot of eggs in one basket. Risk, after all, is not confined to the stock market.
HOW TO GET THE BEST FROM STOCK MARKET INVESTING?
There are a few simple rules to make sure that your money works hard for you. We
will come back to them again in more detail in other parts but here they are in brief.
Start investing early in life
Contribute steadily for years, preferably decades
Never forget the importance of dividends, not just their size but their rate of
growth, and make sure you reinvest them
Keep commissions, charges and overheads to a minimum. You want your

money to go into the market, not somebody elses pocket
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Leave the money to do its work, dont raid it for spending
Dont put all your investment eggs in one basket
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2. MONETARY POLICY AND STOCK MARKET
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MONETARY POLICY AND STOCK MARKET

Movements in the stock market can have a significant impact on the macro economy
and are therefore likely to be an important factor in the determination of monetary
policy. However, little is known about the magnitude of the Federal Reserve's
reaction to the stock market. One reason is that it is difficult to estimate the policy
reaction because of the simultaneous response of equity prices to interest rate
changes.
This
paper
uses
an
identification
technique
based
on
the
heteroskedasticity of stock market returns to identify the reaction of monetary policy

to the stock market. The results indicate that monetary policy reacts significantly to
stock market movements, with a 5% rise (fall) in the S&P 500 index increasing the
likelihood of a 25 basis point tightening (easing) by about a half. This reaction is
roughly of the magnitude that would be expected from estimates of the impact of
stock market movements on aggregate demand. Thus, it appears that the Federal
Reserve systematically responds to stock price movements only to the extent
warranted by their impact on the macro economy.
EMPIRICAL RESULTS OF MONETARY POLICY
The ultimate objective of monetary policymakers is to promote the health of the

economy, which we do by pursuing our mandated goals of price stability and
maximum sustainable output and employment. However, the effects of our policy
instruments, such as the short-term interest rate, on these goal variables are indirect
at best. Instead, monetary policy actions have their most direct and immediate
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effects on the broader financial markets, including the stock market, government and
corporate bond markets, mortgage markets, markets for consumer credit, foreign
exchange markets, and many others. If all goes as planned, the changes in financial
asset prices and returns induced by the actions of monetary policymakers lead to the
changes in economic behavior that the policy was trying to achieve. Thus,
understanding how monetary policy affects the broader economy necessarily entails
understanding both how policy actions affect key financial markets, as well as how
changes in asset prices and returns in these markets in turn affect the behavior of
households, firms, and other decision makers. Studying these links is an ongoing
enterprise of monetary economists both within and outside the Federal Reserve
System. The link between monetary policy and the stock market is of particular
interest. Stock prices are among the most closely watched asset prices in the
economy and are viewed as being highly sensitive to economic conditions. Stock
prices have also been known to swing rather widely, leading to concerns about
possible "bubbles" or other deviations of stock prices from fundamental values that
may have adverse implications for the economy. It is of great interest, then, to
understand more precisely how monetary policy and the stock market are related.
EXAMPLE
In my talk today, I will report the results of research that I have been studied on this
topic of the Federal Reserve Bank of New York, as well as the findings of some
related work done both within and outside the Federal Reserve System. The views I
will express today, however, are based on the researchers views on the Federal
Open Market Committee (FOMC) or the Board of Governors of the Federal Reserve
System. In my research, I take two questions.
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1. First, by how much do changes in monetary policy affect equity prices?

As I focus on changes in monetary policy that are unanticipated by market
participants because anticipated changes in policy should already be discounted by
stock market investors and, hence, are unlikely to affect equity prices at the time
they are announced. I find an effect of moderate size: Monetary policy matters for
the stock market but, on the other hand, it is not one of the major influences on
equity prices.
2. Second question, both more interesting and more difficult, is, why do changes
in monetary policy affect stock prices?
I come up with a rather surprising answer, at least one that was surprising to us. I
find that unanticipated changes in monetary policy affect stock prices not so much by
influencing expected dividends or the risk-free real interest rate, but rather by
affecting the perceived riskiness of stocks. A tightening of monetary policy, for
example, leads investors to view stocks as riskier investments and thus to demand a
higher return to hold stocks. For a given path of expected dividends, a higher
expected return can be achieved only by a fall in the current stock price. As I will see,
this finding has interesting implications for several issues, including the role of stock
prices in transmitting the effects of monetary policy actions to the broader economy
and the potential effectiveness of monetary policy in "pricking" putative bubbles in
the stock market.
THE EFFECT OF MONETARY POLICY ACTIONS ON THE STOCK MARKET
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Normally, the FOMC, the monetary policymaking arm of the Federal Reserve,
announces its interest rate decisions at around 2:15 p.m. following each of its eight
regularly scheduled meetings each year. An air of expectation reigns in financial
markets in the few minutes before to the announcement. If you happen to have
access to a monitor that tracks key market indexes, at 2:15 p.m. on an
announcement day you can watch those indexes quiver as if trying to digest the
information in the rate decision and the FOMC's accompanying statement of
explanation. Then the black line representing each market index moves quickly up or
down, and the markets have priced the FOMC action into the aggregate values of
U.S. equities, bonds, and other assets. On occasion, if economic conditions warrant,
the FOMC may decide to make a change in monetary policy on a day that falls
between regularly scheduled meetings, a so-called intermeeting move. Intermeeting
moves, typically agreed upon during a conference call of the Committee, nearly
always take financial markets by surprise, at least in their precise timing, and they
are often followed by dramatic swings in asset prices.
Even the casual observer can have no doubt, then, that FOMC decisions move asset
prices, including equity prices. Estimating the size and duration of these effects,
however, is not so straightforward. Because traders in equity markets, as in most
other financial markets, are generally highly informed and sophisticated, any policy
decision that is largely anticipated will already be factored into stock prices and will
elicit little reaction when announced. To measure the effects of monetary policy
changes on the stock market, then, we need to have a measure of the portion of a
given change in monetary policy that the market had not already anticipated before
the FOMC's formal announcement.
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Fortunately, the financial markets themselves are a source of useful information

about monetary policy expectations. As you may know, the FOMC implements its
decisions about monetary policy by changing its target for a particular short-term
interest rate, the federal funds rate. The federal funds rate is the rate at which
depository institutions borrow and lend reserves to and from each other overnight;
although the Federal Reserve does not control the federal funds rate directly, it can
do so indirectly by varying the supply of reserves available to be traded in this
market. Since October 1988, financial investors have been able to hedge and
speculate on future values of the federal funds rate by trading contracts in a futures
market, overseen by the Chicago Board of Trade. Investors in this market have a
strong financial incentive to try to guess correctly what the federal funds rate will be,
on average, at various points in the future. The existence of a market in federal funds
futures is a boon not only to investors, such as banks, which want to protect
themselves against changes in the cost of reserves, but also to both policymakers
and researchers, because it allows any observer to infer from the sale prices of
futures contracts the values of the federal funds rate that market participants
anticipate at various future dates. Previous research has shown that participants in
this market collectively do a good job of forecasting future values of the funds rate,
efficiently incorporating available information about likely future monetary policy
actions.
By using data from the federal funds futures market, then, it is possible to estimate
the value at which financial market participants expect the FOMC to set its target for
the federal funds rate on any given date. By comparing this expected value to what
the FOMC actually did at each date, we can determine the portion of the Fed's
interest rate decision that came as a surprise to financial markets. In our research, it
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is considered all the dates of scheduled FOMC meetings plus all the dates on which
the FOMC changed the federal funds rate between meetings, or made intermeeting
moves, for the period May 1989 through December 2002, amounting to a total of 131
observations. For each of these dates, we used the expected value of the federal
funds rate as inferred from the futures market to divide the actual change in the
federal funds rate on that day into the part that was anticipated by the markets and
the part that was unanticipated. So, for example, on November 6, 2002, the Federal
Reserve cut the federal funds rate by 50 basis points. (A basis point equals 1/100 of
a percentage point, so a 50-basis-point cut equals a cut of 1/2 percentage point.)
However, this cut in the federal funds rate was not entirely unexpected; indeed,
according to the federal funds futures market, investors were expecting a cut of
about 31 basis points, on average, from the Fed at that meeting. 6 So, of the 50 basis
points that the FOMC lowered its target for the federal funds rate last November 6,
only 19 basis points were a surprise to financial markets and thus should have been
expected to affect asset prices. Note, by the way, that if the Fed had not changed
interest rates at all that day, our method would have treated that action as the
equivalent of a surprise tightening of policy of 31 basis points because the Fed would
have done nothing while the market was expecting an easing of 31 basis points.
To evaluate the effect of monetary policy on the stock market, we looked at how
broad measures of stock prices moved on days on which the Fed made
unanticipated changes to policy. I can illustrate our method by continuing the
example of the Fed's cut in the federal funds rate last November 6. On that day, the
broad stock market index we used in our study (the value-weighted index
constructed by the Center for Research in Securities Prices at the University of
Chicago) rose in value by 0.96 percentage point. Dividing the 96-basis-point gain in
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the stock market by the 19-basis-point downward surprise in the funds rate, we
obtain a value of approximately 5 for the "stock price multiplier" relating policy
changes to stock market changes. If this one day were representative, we would
conclude that each basis point of surprise monetary easing leads to about a 5-basispoint increase in the value of stocks. Or, choosing magnitudes that might be more
helpful to the intuition, we could just as well say that a surprise cut of 25 basis points
in the federal funds rate should lead the stock market to rise, on the same day, about
1.25 percentage points--about 120 points on the Dow Jones index at its current
value. In fact, applying a formal regression analysis to the full sample from 1989 to
2002, we found a number fairly close to this one, namely, a stock price multiplier for
monetary policy of about 4.7. We also found, as expected, that changes in monetary
policy that were anticipated by the market had small and statistically unimportant
effects on stock prices, presumably because these changes had already been priced
into stocks.
Although a stock price multiplier of about five for unanticipated changes in the
federal funds rate is certainly not negligible, we should appreciate that unexpected
changes in monetary policy account for a tiny portion of the overall variability of the
stock market. Unanticipated movements in the federal funds rate of 20 basis points
or more are relatively rare (we observed only thirteen examples in our fourteen-year
sample). Yet the change of one percent or so in the stock market induced by the
typical 20-basis-point "surprise" in the funds rate is swamped by the overall
variability of stock prices. For example, over the past five years, the broad stock
market has moved one percent or more on about 40 percent of all trading days.
Thus, news about monetary policy contributes very little to the day-to-day
fluctuations in stock prices.
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It explored the empirical results with some care. It is noted, for example, that a few of
the monetary policy changes in the sample were followed by what seemed to be
excessive or otherwise unusual stock market responses. A number of these
responses occurred rather recently, during the Fed's series of rate cuts in 2001. The
Fed's surprise intermitting cuts of 50 basis points each on January 3 and April 18 of
that year were both greeted euphorically by the stock market, with one-day increases
in stock values of 5.3 percent and 4.0 percent, respectively. By contrast, the rate cut
of 50 basis points on March 20, 2001, was received less enthusiastically. Even
though the cut was more or less what the futures market had been anticipating, the
financial press reported that many equity market participants were "disappointed"
that the rate cut hadn't been an even larger 75-basis-point action. In any event, the
market lost more than 2 percent that day.
To ensure that results did not depend on a few unusual observations, or "outliers,"
we re-ran our regression, omitting the days with the most extreme or unusual market
moves. This more conservative analysis led to a smaller estimate of the effect of
policy actions on the stock market, a stock price multiplier of about 2.6 rather than
4.7. However, the effect remains quite sharp in statistical terms. It is considered
other variations as well. For example, we investigated whether the magnitude of the
effect on the stock market of a surprise policy tightening (that is, an increase in
interest rates) differs from that of a surprise easing of comparable size. It does not.
Yet another experiment consisted of asking whether an unanticipated policy change
has a larger effect if it is thought by the market to signal a longer-lasting change in
policy. We measured the perceived permanence of policy changes by observing the
effects of unanticipated policy changes on the expected federal funds rate three
months in the future, as measured by the futures market. The stock market multiplier
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associated with unanticipated policy moves that are perceived to be more permanent
is a bit higher, as would be expected; its value is about 6.
In short, the statistical evidence is strong for a stock price multiplier of monetary
policy of something between 3 and 6, the higher values corresponding to policy
changes that investors perceive to be relatively more permanent. That is, according
to our findings, a surprise easing by the Fed of 25 basis points will typically lead
broad stock indexes to rise from between 3/4 percentage point and 1-1/2 percentage
points. Incidentally, similar results obtain for stock values of industry groups: it is find
almost all industry stock portfolios respond significantly to changes in monetary
policy, with telecommunications, high-tech, and durables goods industry stocks being
the most sensitive to monetary policy news, and energy, utilities, and health care
stocks being the least sensitive. These results can be broadly explained by the
tendency of each industry group to move with the broad market, or (to use the
language of the standard capital asset pricing theory), by their industry "betas."
WHY DOES MONETARY POLICY AFFECT STOCK PRICES?
It is interesting, though perhaps not terribly surprising, to know that Federal Reserve
policy actions affect stock prices. An even more interesting question, though, is, why
does this effect occur? Answering this question will give us some insight into how
monetary policy affects the economy, as well as the role that the stock market should
play in policy decisions.
A share of stock is a claim on the current and future dividends (or other cash flows,
such as stock buybacks) to be paid by a company. Suppose, for just a moment, that
financial investors do not care about risk. Then only two types of news ought to affect
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current stock values: news that affects investor forecasts of current or future (aftertax) dividends or news that affects forecasts of current or future short-term interest
rates. News that current or future dividends (which I want to think of here as being
measured in real, or inflation-adjusted, terms) are likely to be higher than previously
expected--say, because the company is expecting to be more profitable--should
raise the current stock price. News that current or future short-term interest rates
(also measured in real, or inflation-adjusted, terms) are likely to be higher than
previously expected should depress the stock price.
There are two essentially equivalent ways of understanding why expectations of
higher short-term real interest rates should lower stock prices.
First, to value future dividends, an investor must discount them back to the
present; as higher interest rates make a given future dividend less valuable in
today's dollars, higher interest rates reduce the value of a share of stock.
Second, higher real interest rates make investments other than stocks, such
as bonds, more attractive, raising the required return on stocks and reducing
what investors are willing to pay for them. Under either interpretation,
expectations of higher real interest rates are bad news for stocks.
So, to reiterate, in a world in which investors do not care about risk, stock prices
should change only with news about current or future dividends or about current or
future real interest rates. However, investors do care about risk, of course. Because
investors care about risk, and because stocks are viewed as relatively risky
investments, investors generally demand a higher average return, relative to other
assets perceived to be safer, to hold stocks. Using long historical averages, one
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finds that, in the United States, a diversified portfolio of stocks has paid 5 to 6
percentage points more per year, on average, than has a portfolio of government
bonds. This extra return, known as the risk premium on stocks, or the equity
premium, presumably reflects, in part, the extra compensation that investors demand
to be willing to hold relatively more risky stocks.
Like news about dividends and real interest rates, news that affects the risk premium
on stocks also affects stock prices. For example, news of an impending recession
could raise the risk premium on stocks in two ways. First, the macroeconomic
environment is more volatile than usual during a recession, so stocks themselves
may become riskier investments. Second, the incomes and wealth of financial
investors tend to fall during a downturn, giving them a smaller cushion to support the
lifestyles to which they are accustomed (that is, to make house payments and meet
other obligations). With less discretionary income and wealth to absorb potential
losses, people may become less willing to bear the risks of more volatile financial
investments. For both reasons, the extra return that investors demand to hold stocks
is likely to rise when bad times loom. With expected dividends and the real interest
rate on alternative assets held constant, the expected yield on stocks can rise only
through a decline in the current stock price. Now there is a list of three key factors
that should affect stock prices. First, news that current or future dividends will be
higher should raise stock prices. Second, news that current or future real short-term
interest rates will be higher should lower stock prices. And third, news that leads
investors to demand a higher risk premium on stocks should lower stock prices.
How does all this relate to the effects of monetary policy on stock prices? According
to our analysis, Fed actions should affect stock prices only to the extent that they
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affect investor expectations about dividends, short-term real interest rates, or the
riskiness of stocks. The trick is to determine quantitatively which of these sets of
investor expectations is likely to be most affected when the Fed unexpectedly
changes the federal funds rate. To make this determination, we used a methodology
first applied by the financial economist John Campbell, of Harvard University, and by
Campbell and John Ammer of the Federal Reserve Board staff. Putting the details
aside, we can describe the basic idea as follows. Imagine that the expectations of
stock market investors can be mimicked by a statistical forecasting model that takes
relevant current data as inputs and projects estimated future values of aggregate
dividends, real interest rates, and equity risk premiums as outputs. In principle,
investors could use such a model to make forecasts of these key variables and
hence to estimate what they are willing to pay for stocks. Besides a number of
standard variables that have been shown to be helpful in making forecasts of such
financial variables, suppose we include in the forecasting model our measure of
unanticipated changes in the federal funds rate. 13 That is, we use the information
contained in these unanticipated changes in making our forecasts of future
dividends, interest rates, and risk premiums.
Suppose we have run our computer model, made our forecasts, and inferred the
appropriate values for stocks. But then we receive news that the Fed has
unexpectedly raised the federal funds rate by 25 basis points. Based on our
forecasting model, by how much would that information change our previous
forecasts of future dividends, interest rates, and risk premiums? The answer to this
question clarifies the channel by which monetary policy affects stock prices. If we
were to find, for example, that the news of an unexpected increase in the funds rate
significantly changed the forecast of future dividends but did not much affect the
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forecasts of interest rates or risk premiums, then we could conclude that monetary
policy affects stock prices primarily by affecting investor expectations of future
dividends. By contrast, if news of the policy action changed the model forecasts for
real interest rates but did not change our forecasts for the other two variables, we
would decide that unanticipated policy actions affect stock prices primarily by
influencing the interest rates expected by stock investors.
What we actually found when conducting this statistical experiment was quite
interesting. It appears that, for example, an unanticipated tightening of monetary
policy leads to only a modest change in forecasts of future dividends and to still less
of a change in forecasts of future real interest rates (beyond a few quarters).
Quantitatively, according to our methodology, the most important effect of a policy
tightening is on the forecasted risk premium. Specifically, an unanticipated tightening
of monetary policy raises expected risk premiums on stocks for a protracted period.
For a given expected stream of dividend payouts and real interest rates, the risk
premium and hence the return to holding stocks can only rise if the current stock
price falls.
In short, our analysis suggests that an unanticipated monetary tightening lowers
stock prices only to a small extent by lowering investor expectations about future
dividend payouts, and by still less by raising expected real interest rates. The most
powerful effect of an unanticipated monetary tightening is to increase the perceived
risk premium on stocks, either by increasing the riskiness of stocks, by reducing
people's willingness to bear risk, or both. Reduced willingness of investors to hold
relatively more risky stocks drives down stock prices.
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Our analysis does not explain precisely how monetary policy affects risk, but we can
make reasonable conjectures. For example, tighter monetary policy may raise the
riskiness of shares themselves by raising the interest costs and weakening the
balance sheets of publicly owned firms. In the macro economy more generally, by
reducing spending and economic activity, tighter money raises the risks of
unemployment or bankruptcy faced by individual households or firms. In each case,
tighter monetary policy increases risk by reducing financial buffers or otherwise
increasing the vulnerability of individuals or firms to future shocks to the economy.
IMPLICATIONS OF THE RESULTS FOR MONETARY POLICY
So far two principal conclusions from the empirical analysis are discussed:
First, the stock price multiplier of monetary policy is between 3 and 6--in other
words, an unexpected change in the federal funds rate of 25 basis points
leads, on average, to a movement of stock prices in the opposite direction of
between 3/4 percentage point and 1-1/2 percentage points.
Second, the main reason that unanticipated changes in monetary policy affect
stock prices is that they affect the risk premium on stocks. In particular, a
surprise tightening of policy raises the risk premium, lowering current stock
prices, and a surprise easing lowers the risk premium, raising current stock
prices.
What implications do these results have for our broader understanding and for the
practice of monetary policy? I will briefly discuss two issues: first, the role of the
stock market in the transmission of monetary policy changes to the economy; and
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second, the efficacy of monetary policy as a tool for controlling stock market
"bubbles." A long-held element of the conventional wisdom is that the stock market is
an important part of the transmission mechanism for monetary policy. The logic goes
as follows: Easier monetary policy, for example, raises stock prices. Higher stock
prices increase the wealth of households, prompting consumers to spend more--a
result known as the wealth effect. Moreover, high stock prices effectively reduce the
cost of capital for firms, stimulating increased capital investment. Increases in both
types of spending--consumer spending and business spending--tend to stimulate the
economy.
This simple story can be elaborated somewhat in light of our results. It is true, as I
have discussed, that an easier monetary policy raises stock prices, whereas a tighter
policy lowers them. However, easier monetary policy not only raises stock prices; as
we have seen, it also lowers risk premiums, presumably reflecting both a reduction in
economic and financial volatility and an increase in the capacity of financial investors
to bear risk. Thus, our results suggest that easier monetary policy not only allows
consumers to enjoy a capital gain in their stock portfolios today, but it also reduces
the effective amount of economic and financial risk they must face. This reduction in
risk may cause consumers to trim their precautionary saving, that is, to reduce the
amount of income that they put aside to protect themselves against unforeseen
contingencies. Reduced precautionary saving in turn implies more spending by
households. Thus, the reduction in risk associated with an easing of monetary policy
and the resulting reduction in precautionary saving may amplify the short-run impact
of policy operating through the traditional channel based on increased asset values.
Likewise, reduced risk and volatility may provide an extra kick to capital expenditure
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in the short run, as firms are more likely to undertake investments in new structures
or equipment in a more stable macroeconomic environment.
A second issue concerns the role of monetary policy in the management of large
swings in stock values, or "bubbles." In an earlier speech (Bernanke, 2002), I gave a
number of reasons why I believe that using monetary policy--as opposed to
microeconomic, prudential policies--is not a good way to address the problem of
asset-market bubbles. These included the difficulty of identifying bubbles in advance;
the questionable wisdom, in the context of a free-market economy, of setting up the
central bank as the arbiter of asset values; the problem that arises when a bubble
occurs in only one asset class rather than in all asset classes; and other reasons. A
major concern that I have about the bubble-popping strategy, however, is that
attempts to bring down stock prices by a significant amount using monetary policy
are likely to have highly deleterious and unwanted side effects on the broader
economy.
The research described today allows me to address this issue more
concretely. Here I will make just two points.
First, this research suggests that relatively small changes in monetary policy
would not do much to curb a major overvaluation in the stock market. As we
have seen, a surprise tightening of 25 basis points should be expected to
lower stock prices by only a little more than 1 percent, which, as already
noted, is a trivial movement relative to the overall variability of the stock
market. It would not be appropriate to extrapolate these results to try to
estimate how much tightening would be needed to correct a substantial
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putative overvaluation in stock prices, but it seems clear that a light tapping of
the brakes will not be sufficient. What we can say is that the necessary policy
move would have to be quite large--many percentage points on the federal
funds rate--and we would be highly uncertain about its magnitude or its
ultimate effects on stock prices and the economy.
Second, we have seen that monetary tightening reduces stock prices primarily
by increasing the risk premium for holding stocks, as opposed to raising the
real interest rate or lowering expected dividends. The risk premium for stocks
will rise only to the extent that broad macroeconomic risk rises, or that people
experience declines in income and wealth that reduce their ability or
willingness to absorb risk. This evidence supports the proposition that
monetary policy can lower stock values only to the extent that it weakens the
broader economy, and in particular that it makes households considerably
worse off. Indeed, according to our analysis, policy would have to weaken the
general economy quite significantly to obtain a large decline in stock prices.
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3. NSE VS. BSE
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The Bombay Stock Exchange Ltd. (BSE) was established in 1875 and is the
oldest exchange in Asia and was the only exchange for investors in India to tradein
stocks(equity shares) till 1995.
In 1995, National Stock Exchange Ltd. (NSE)
promoted by financial institutions was established. Within a short span of time the
NSE with remarkable product innovations, use of technology and professional
management was able to overtake BSE and emerge as a leading stock exchange in
India. NSE introduced avenues for tangible differentiation to set itself apart from
BSE. Major investors shifted their main operations from BSE to NSE to trade and
invest. In 2005, BSE had a market share of 31.11%1 in the cash segment and 0.63%
in the derivatives segment, corresponding to NSEs 68.39% (cash) and 99.37%
(derivatives) respectively.
In 2005, BSE converted into a corporate entity (earlier an association of
brokers) to compete with NSE operations. The ownership and management of the
BSE were separated from the trading rights. The brokers (associated with BSE) were
skeptical about the restructuring exercise and were worried about the future of BSE.
Would BSE be able to gain its lost pride with its new identity?
BSE
Bombay Stock Exchange Limited (popularly known as "BSE") was the oldest
stock exchange in Asia (Table-1). It was established in 1875 when 318 individuals
contributed Re.1 each and became members to form "The Native Share & Stock
Brokers Association". It was the first stock exchange in India to obtain permanent
recognition in 1956 from the Government of India under the Securities Contracts
(Regulation) Act, 1956.
Page 37 of 94
BSE a voluntary non-profit association of broker members emerged as a

premier stock exchange after the 1960s. The increased pace of industrialization
caused by the two world wars, protection to domestic industry and governments
fiscal policies aided the growth of new issues which in turn helped the BSE to
prosper. BSE dominated the Indian capital market with over 60% of the total turnover
of shares traded.
In 1986, the exchange came up with an index called SENSEX, comprising of
30 representative stocks. The stock were selected on the basis of their market
capitalization, number of trades, average value of shares traded per day (as a
percentage of total number of outstanding shares), balanced representation of
industry, leadership position in the industry, continuous dividend paying record and
track record of promoters. This index subsequently proved to be the barometer of the
Indian stock market. Sensex emerged as a prominent brand in the country. Sensex
was scientifically designed and based on globally accepted construction and review
methodology.
The base value of Sensex was 100 taken as on 1978-79.
The carry forward system or badla (Table 2) was a unique selling proposition
of the BSE. Badla provided the facility for carrying forward the transaction from one
settlement to another. It was the postponement of delivery or payment for the
purchase of securities from one settlement period to another. This facility of carry
forward provided liquidity and breadth to the market. By bringing in outside money to
fund the carry forward of long positions, badla acted as a bridge between the money
market and the stock market. But this trading was uncontrolled and unregulated and
enhanced market risk. However, with the securities scam outburst in 1992 Securities
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Exchange Board of India (SEBI) (Table 3) took over the control of the stock market
and banned the badla system in 1993.
Until March 1995, BSE had an open outcry system of trading. With the
entrance of NSE the countrys first modern, computerized and professionally
managed stock exchange in 1994, BSE had to change its system of trading and
operations. In 1995, BSE adapted itself to the BSE online Trading System (BOLT),
an electronic trading system through which brokers traded using computers. The
introduction of BOLT helped BSE significantly reduce the spread between buy and
sell orders, better trading in odd lot shares, fixed income instruments and dealings in
the renunciation of rights shares. The surveillance, clearing and settlement functions
of the exchange were ISO 9001:2000 certified.
Following the ban on badla trading, a steep decline was experienced in
volumes in specified groups of stocks. , the system was later revived and resumed in
1996. However, the BSE had to face a serious scam in 2001 in which Ketan Parekh
was involved. He operated through his three broking outfits and 40 satellite brokers
and invested heavily in Information Technology, Communication and Entertainment
(ICE) industry scrips. He operated with badla payments and used funds of NRIs and
new private sector banks (who accepted shares as collateral).The Sensex rose from
the figures of 3378 to 6100. In 2001, due to the sharp fall in the prices of ICE scrips
across the globe and the recession in the global economy resulted in a significant
erosion of market capitalization of stocks on the NASDAQ and at other leading stock
exchanges around the world, the value of the Sensex fell to 3788. This compelled
brokers and banks to ask for their money. Being unable to meet the demand for
payments Ketan Parekh defaulted and the resultant scams now baled to a large
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amount of Rs 1,500-2,000 crores. The after math of this scam led to SEBI banning
badla once again and possibly forever.
In 1999, BSE set up the Central Depository Services India Ltd. (CDSIL) cosponsored by the State Bank of India, Bank of India, Bank of Baroda and HDFC
Bank. CDSIL improved the overall functioning of the stock settlement process,
eliminated paperwork that impacted service delivery, shortened the book closure
period and effected immediate payment on sale of shares by investors.
By 2005, the network of BSE spread across 417 cities, with over 800
members and 14,426 terminals. It registered about 1.4 million transactions per day,
and an average daily turnover of about Rs. 25 billion.
Restructuring
In 2005, the BSE was demutualized and was registered as a corporate entity
under the provisions of the Companies Act, 1956. Until 2005 the exchange was an
association of brokers. After demutualization the trading rights and ownership rights
were separated.
The Exchange was professionally managed under the overall
direction of the Board of Directors. The Board comprised eminent professionals,

representatives of trading members and the Managing Director of the exchange.
The Board formulated policy issues and exercised overall control. The Managing
Director assisted by a team of professionals who handled the day-to-day operations.
According to experts, BSE was expected to have better commercial
orientation and accountability as a for profit company than before. Moreover,
segregation of ownership and management was expected to encourage greater
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confidence among the regulators and the investors, and flexibility in decision-making
would bring about speedy response to emerging business opportunities.
In 2005, BSE along with Federation of Indian Stock Exchanges launched a
national trading platform called BSE Indonext, for small and medium enterprises.
This platform helped SMEs to raise capital and trade through BSE Online Trading
and its website trading system.
NSE
The National Stock Exchange of India Limited (NSE); promoted by leading
financial institutions (Exhibit IV) was incorporated in 1992 as a tax-paying company
(unlike other stock exchanges in the country). NSE was incorporated as a
demutualised stock exchange where the ownership and management were deprived
of the trading rights. A report from High Powered Study Group on Establishment of
New Stock Exchanges instituted financial institutions to promote NSE and provide
equal access to investors across the country (India).
Though the driving force behind its inception was the policy makers in the
country, it was set up as a public limited company and owned by leading institutional
investors in the country. The Board comprised of senior executives from promoter
institutions, eminent professionals in the field of law, economics, accountancy,
finance, taxation, public representatives and nominees of the SEBI (Securities
Exchange Board of India - the regulating body of the Indian capital market).
In 1993, NSE was recognized as a stock exchange under the Securities
Contracts (Regulation) Act, 1956. The exchange commenced operations in 1994
with the Wholesale Debt Market (WDM) and achieved various milestones (Table -5).
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NSE provided fair and transparent services in the securities market to

investors with the help of screen based electronic trading systems. It allowed a
member to feed into the computer the number of securities and the prices at which
he would like to transact; the transaction was executed as soon as matching order
from a counter party was found. This technology-oriented mechanism ensured
transparency, shortened settlement cycles and book entry settlement systems and
thereby matched the global standards of securities markets. The market practices
and technology standards set by NSE later on emerged as benchmark and were
followed by other participants.
In 1996, the exchange came up with an index called NIFTY, comprising of 50
large, liquid and representative stocks representing 24 sectors of the economy and
77% of traded value of all stocks on the NSE. The stocks were selected on the basis
of low impact cost, high liquidity and market capitalization. The base is defined as
1000 as of November 1995. The index was professionally maintained and reviewed
every quarter.
In 1998, NSE commenced Automated Lending and Borrowing Mechanism for
lending and borrowing of securities (ALBM). ALBM was the answer to BSEs badla.
ALBM facilitated borrowing/lending of securities/funds at market determined rates to
meet immediate settlement requirements or payment obligations at a reasonable
cost and low risk. ALBM was a security lending and borrowing mechanism while
badla a pure financing mechanism.
NSE members were connected to the exchange from their work stations to
the central computer located at the exchange through a satellite using VSATs (Very
Small Aperture Terminals). By 2005, NSE had installed over 2,829 VSATs in over 345
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cities across the country. NSE pioneered commencement of Internet Tradingin

February 2000, which led to the wide popularization of the NSE in the broker
community.
By 2004, NSE was known as the third best exchange across the world
(Exhibit VI). Also, NSE won the Wharton-Infosys Business Transformation Award in
the Organisation-wide Transformation category for the Europe and Asia Pacific
region for harnessing technology to create a world class exchange and bringing a
revolution in the industry as a whole.
In 2004-2005, the NSE had a trading value of Rs.1,140,072 crore from Rs.
1,805 crore in 1994-95. The Futures &Options segment (Box I) had a trading value
of Rs. 2,547,053 crore during 2004-05.
Group Companies
NSDL
In order to solve the problems associated with trading in physical securities,
NSE along with the Industrial Development Bank of India (IDBI) and the Unit Trust of
India (UTI) promoted dematerialisation of securities and set up National Securities
Depository Limited (NSDL)the first depository of India in 1996. NSDL established a
national infrastructure of international standard to handle trading and settlement in
dematerialised form.
NSCCL
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The National Securities Clearing Corporation Ltd. (NSCCL), the first clearing
corporation in India, was incorporated in 1995. NSCCL sustained confidence in
clearing and settlement of securities (equity and derivatives), promoted short and
consistent settlement cycles, provided counter party risk guarantees and operated a
tight risk containment system. It also operated a Subsidiary General Ledger (SGL)for
settling trades in government securities.
These steps brought Indian financial markets at par with international markets.
NSE. IT Ltd.
NSE. IT Ltd. was the 100% subsidiary, information technology arm of NSE.
NSE.IT provided products and services in areas of broker front end and back-ofice,
clearing
and
settlement,
web
based
training,
risk
management,
treasury
management, asset liability management, banking etc.

IISL
In 1998, Indian Index Services and Products Limited (ISL) was set up by the
joint venture of NSE and CRISIL Ltd. (Credit Rating Information Services of India
Limited).ISL provided variety of indices and index related services and products for
the Indian capital markets.
DotEx International Limited
DotExprovided world class Internet trading platforms to members of NSE to
further provide it to their customers. DotEx provided products in two modules: Equity
Trading Module and F&O Trading Module.
Competitive Landscape
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NSE with approximately 860 stocks listed on its exchange provided stiff
competition to BSE (Exhibit VI) which had around 8,500 stocks listed on its
exchange. According to brokers, a large proportion of BSE's cash market turnover
(Table-6) was contributed by arbitrage opportunities between the NSE and BSE and
from small and medium sized stocks that were not listed on NSE.
Around 50% of BSE's cash market turnover came from the stocks other than
those in the 'A' group. On the other hand top 100 stocks on NSE contributed
approximately 80% of its cash segment turnover.
Investors in India traded without any computerization at the BSE for many
years. The quality of this market was widely considered as poor with respect to
transparency, liquidity and market efficiency. After a serious scam in 1992, Finance
Ministry and SEBI sought reforms in the equity markets with the introduction of
screen based trading and promotion of NSE.
BSE Sensex suffered from hedging effectiveness, higher impact cost and
immense political hiccups. NSE within a short period of time overtook BSE due to its
administrative improvements and les systemic costs which attracted a lot of investors
to NSE.
NSE on the other hand with the help of robust IT infrastructure became
strongly associated with derivatives. NSE has a good global perspective.
International investors and NRIs with an interest to hedging India risk knew about
derivatives and started trading in the NSE.
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Earlier the governing board of BSE was an elected body and therefore its
members were worried about broker sentiments; but with the changes that took
place and with competitive pressures from NSE. Broker members (who earlier were
considered to be roadblocks) no longer questioned the regulatory bodies. The
brokers brought about reforms and greater transparency to sustain the competition
from NSE. While NSE was not exposed to such external pressures. Most members
in NSE unanimously accepted the decisions taken by the top authorities and were
happy to be a part of the country's leading stock exchange.
Technically larger trading volumes and superior bid-ask spread son NSE
attracted a large number of traders. More investors at NSE opened different avenues
of investment- for e.g. derivatives. Due to the regulations at BSE, it merely
concentrated in Mumbai, while the NSE spread along the length and breadth of the
country (8,000 terminals across the country)and invited a large number of potential
audiences to the exchange.
Moreover, SEBI allowed exchanges to set up trading terminals abroad with
the help of Internet trading. Internet trading consisted of two types order driven
trading system and quote driven trading system. BSE provided both these systems
while NSE provided only the order driven system.
In global stock markets the size of derivative segments is five times larger
than the size of the cash segment. Rajnikant Patel CEO, BSE said, "We will be relaunching our products to be in the derivatives space".
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The Road Ahead

The restructuring at BSE required the member brokers to of load their
shareholding (i.e.51%) by 2006. The various avenues considered were to offer an
IPO, or enter into strategic relationship or both according to feasibility. Experts
opined that if BSE entered into strategic partnerships with large private sector banks
it would be exposed to a large distribution network and would also be able to
promote new products like derivatives on a large scale.
How and what strategy should BSE adopt to not only preserve its historical
image but also counter the stiff competition from NSE needs to be seen in the future.
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4. ROLE OF SEBI IN NSE AND BSE
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SEBI IN CAPITAL MARKET

Joint Stock Companies: Concept & Evolution
The early history of the accumulation of capital in England is very obscure, especially
as most enterprises were either one-man businesses or simple partnerships, where
all decisions were informal and hardly ever recorded. This was the state of affairs
under the gild system, and the lack of evidence from this quarter increases the
importance of the history of the joint-stock companies, which kept records and
played a large part in the accumulation of capital even before 1720. The concept of
the Corporation was well established in the English Law at about the 14th Century.
The Concept owes its origin to the Earlier Guild system prevalent at theta point of
time. Guilds were built in regard to particular commodity in which they specialized
themselves in order to create monopoly.
The discoveries of the sixteenth and seventeenth centuries had opened new trade
routes all over the world, and the consequent extension of markets offered many
profitable openings for capital to be invested in commercial enterprises. Thus the
way opened for the rapid development of capitalist organization that took place in the
seventeenth and eighteenth centuries.
It was in the 16th and 17th century when the idea of legal unity coupled with the
financial device of joint stock trading bought forth the birth of Business Corporations.
Company form of Business Organization have originated and developed after the
Industrial Revolution. In the year 1844 Joint Stock Companies Act was Enacted
which provided incorporation of companies by way of registration opposed to a
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Special Act or Charter and further differentiating between private partnerships and
joint stock companies. But the concept of limited liability was absent then, it was
brought into existence by Limited liability Act, 1855 but was repealed with Joint stock
Companies Act of 1856. The concept of having limited liability was preserved and
was made compulsory. This was in order to make even small and middle class
investors to contribute to the stock of the Corporation to which they were skeptical in
the absence of limited liability. Thus it can be concluded that Joint Stock Companies
as the name provides are Corporations pooling the fund received from the investor in
a common stock benefits of which is divided between the contributors as in
accordance of their rights so vested.
By the end of Seventeenth Century, share dealings were common and stock broking
was a recognized profession abuse of which legislator sought to regulate as early as
1696.
It is interesting to note that although the invention of preference shares is generally
attributed to Railway boom a century later, certain companys had already
experimented with different classes of shares or of a loan stock, the distinction
between shares and debentures were not appreciated until much later.
Historical Background of Stock Exchange
As According to the Oxford dictionary of the business world, the stock market also
known as the stock exchange is defined as a place in which stock, shares and other
securities are bought and sold, price being controlled by demand and supply. Stock
markets have developed hand in hand with capitalism. Since the 17th century they
are constantly growing in importance and complexity. The stock market has therefore
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been developed with time to open up opportunities to businesses and these

individuals, and could be traced far back in history. During the second half of the
seventeenth century there existed a considerable volume of securities, both
commercial and gilt-edged, and the need to facilitate their transfer was becoming
evident. At first, Government securities were predominantly short-term, such as
Exchequer Tallies and discounting them with bankers affected liquidation. Similarly,
many company stocks were still relatively short term relating to a particular voyage
or adventure. When an investor wished to realize his share before the completion of
the voyage, this was normally achieved by private negotiation with potential buyers.
Towards the end of seventeenth century an organized market existed for the
purchase and sale of stocks and shares. Brokers were licensed by the Lord Mayor of
the City of London, and carried a silver medal as evidence thereof. These brokers
were entitled to trade in any commodity or commodities within the city. After the
financial crisis of 1696 the Government attempted to regulate the market and in 1697
passed an Act to restrain the number and ill practice and stock Jobbers. This
provided that no person was to act as a broker in commodities or stock and shares
unless licensed by the City of London, and that the total number of brokers so
licensed to be limited to one hundred. Both this Act and Barnard Act of 1733, which
made it illegal to buy stock without immediate payment or to sell it without immediate
delivery were largely uninformed, and both the number of practicing Stockbrokers
and the volume of speculative transactions increased. Up to 1698 the stockbrokers
had congregated in the Royal Exchange, which was the center for all commodity
transactions in the city.
It is clear that the Stock Exchange developed in order to meet two demands. First,
the increased issue of securities of a long-term or permanent nature required a
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market for the purchase and sale of these securities, so that their holders could
liquidate their investments in the short-term. Also the expansion of industry during
the nineteenth century necessitated the discovery of new sources of finance. One of
the sources of such was the Stock Exchange, which has continued ever since to be
an important source of capital for industry.
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Role of Regulatory Body

The role of the Regulatory Authority in a Country depends upon the stages of
development in the Securities Market in that Country. In the Indian Context where
the market is emerging in nature, role of the regulatory body is not only limited to
regulation but to create conditions through exercise of function for the development
of the market.
This will ensure the market development and regulatory measures aiming to create
discipline in the market and ensure high degree of fairness and market integrity.
Thus we can say that SEBI as the Capital Market Regulator in India has twin
objectives i.e. of regulating as well as developing the market.
As indicated earlier, a favourably operating capital market requires good rules and
laws guiding a prospective market player which is now the duty of Regulatory
Authority taking charge of fair market entrance and play. Most countries have treated
this as a priority because the development of a countrys financial market and
institution may contribute substantially to its subsequent economic growth. Its been
a decade since the Securities and Exchange Board of India (SEBI) started to put in
place the regulatory framework for the capital market and investors have certainly
benefited from the availability of more information and a contemporary secondary
market structure.
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POWERS AND FUNCTIONS OF THE BOARD

Functions of Board
(1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the
interests of investors in securities and to promote the development of, and to
regulate the securities market, by such measures as it thinks fit.
(2) Without prejudice to the generality of the foregoing provisions, the measures
referred to therein may provide for (a) Regulating the business in stock exchanges and any other securities markets;
(b) registering and regulating the working of stock brokers, sub-brokers, share
transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue,
merchant bankers, underwriters, portfolio managers, investment advisers and such
other intermediaries who may be associated with securities markets in any manner.
(c) Registering and regulating the working of
[15][venture capital funds and
collective investment schemes],including mutual funds;

(d)Promoting and regulating self-regulatory organizations;
(e)Prohibiting fraudulent and unfair trade practices relating to securities markets;
(f) Promoting investors' education and training of intermediaries of securities
markets;
1
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(g) Prohibiting insider trading in securities;

(h) Regulating substantial acquisition of shares and take-over of companies;
(i) Calling for information from, undertaking inspection, conducting inquiries and
audits of the stock exchanges, mutual funds, other persons associated with the
securities market] intermediaries and self- regulatory organizations in the securities
market;
(j) Performing such functions and exercising such powers under the provisions of the
Securities Contracts (Regulation) Act, 1956(42 of 1956), as may be delegated to it by
the Central Government;
(k) Levying fees or other charges for carrying out the purposes of this section;
(l) Conducting research for the above purposes;
(m) Performing such other functions as may be prescribed.
(i) The discovery and production of books of account and other documents, at
such place and such time as may be specified by the Board;
(ii) Summoning and enforcing the attendance of persons and examining them
on oath;
(iii) Inspection of any books, registers and other documents of any person
referred to in section 12, at any place;
(iv) Inspection of any book, or register, or other document or record of the
company referred to in sub-section (2A);
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(v) issuing commissions for the examination of witnesses or documents.

(3) Without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3)
and section 11B, the Board may, by an order, for reasons to be recorded in writing, in
the interests of investors or securities market, take any of the following measures,
either pending investigation or inquiry or on completion of such investigation or
inquiry, namely:(a) Suspend the trading of any security in a recognized stock exchange;
(b) Restrain persons from accessing the securities market and prohibit any person
associated with securities market to buy, sell or deal in securities;
(c) Suspend any office-bearer of any stock exchange or self- regulatory organization
from holding such position;
(d) Impound and retain the proceeds or securities in respect of any transaction which
is under investigation;
(e) attach, after passing of an order on an application made for approval by the
Judicial Magistrate of the first class having jurisdiction, for a period not exceeding
one month, one or more bank account or accounts of any intermediary or any person
associated with the securities market in any manner involved in violation of any of
the provisions of this Act, or the rules or the regulations made there under:
Provided that only the bank account or accounts or any transaction entered therein,
so far as it relates to the proceeds actually involved in violation of any of the
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provisions of this Act, or the rules or the regulations made there under shall be
allowed to be attached;
(f) Direct any intermediary or any person associated with the securities market in any
manner not to dispose of or alienate an asset forming part of any transaction which
is under investigation:
Provided that the Board may, without prejudice to the provisions contained in subsection (2) or sub-section (2A), take any of the measures specified in clause (d) or
clause (e) or clause (f), in respect of any listed public company or a public company
(not being intermediaries referred to in section 12) which intends to get its securities
listed on any recognized stock exchange where the Board has reasonable grounds
to believe that such company has been indulging in insider trading or fraudulent and
unfair trade practices relating to securities market:
Provided further that the Board shall, either before or after passing such orders, give
an opportunity of hearing to such intermediaries or persons concerned.
Board to regulate or prohibit issue of prospectus, offer document or advertisement
soliciting money for issue of securities.
11A (1) without prejudice to the provisions of the Companies Act, 1956(1 of 1956),
the Board may, for the protection of investors, (a) Specify, by regulations
(i) The matters relating to issue of capital, transfer of securities and other matters
incidental thereto; and
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(ii) The manner in which such matters shall be disclosed by the companies;
(b) By general or special orders
(i) Prohibit any company from issuing prospectus, any offer document, or
advertisement soliciting money from the public for the issue of securities;
(ii) Specify the conditions subject to which the prospectus, such offer document
or advertisement, if not prohibited, may be issued.
(2) Without prejudice to the provisions of section 21 of the Securities Contracts
(Regulation) Act, 1956(42 of 1956), the Board may specify the requirements for
listing and transfer of securities and other matters incidental thereto."]
Collective Investment Scheme
(1) Any scheme or arrangement which satisfies the conditions referred to in subsection (2) shall be a collective investment scheme.
(2) Any scheme or arrangement made or offered by any company under which, --(i) the contributions, or payments made by the investors, by whatever name
called, are pooled and utilized solely for the purposes of the scheme or
arrangement;
(ii)The contributions or payments are made to such scheme or arrangement
by the investors with a view to receive profits, income, produce or property,
whether movable or immovable from such scheme or arrangement;
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(iii) The property, contribution or investment forming part of scheme or

arrangement, whether identifiable or not, is managed on behalf of the
investors;
(iv) The investors do not have day to day control over the management and
operation of the scheme or arrangement.
(3) Notwithstanding anything contained in sub-section (2), any scheme or
arrangement
(i) made or offered by a co-operative society registered under the co-operative
societies Act,1912(2 of 1912) or a society being a society registered or
deemed to be registered under any law relating to cooperative societies for
the time being in force in any state;
(ii)under which deposits are accepted by non-banking financial companies as
defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934(2
of 1934);
(iii) Being a contract of insurance to which the Insurance Act,1938(4 of 1938),
applies;
(iv)providing for any scheme, Pension Scheme or the Insurance Scheme
framed under the Employees Provident Fund and Miscellaneous Provisions
Act, 1952(19 of 1952);
(v) Under which deposits are accepted under section 58A of the Companies
Act, 1956(1 of 1956);
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(vi) Under which deposits are accepted by a company declared as a Nidhi or

a mutual benefit society under section 620A of the Companies Act, 1956(1 of
1956);
(vii)falling within the meaning of Chit business as defined in clause (d) of
section 2 of the Chit Fund Act, 1982(40 of 1982);
(viii) Under which contributions made are in the nature of subscription to a
mutual fund;
Power to issue directions.
11B. Save as otherwise provided in section 11, if after making or causing to be made
an enquiry, the Board is satisfied that it is necessary,(i) in the interest of investors, or orderly development of securities market; or
(ii) to prevent the affairs of any intermediary or other persons referred to in
section 12 being conducted in a manner detrimental to the interest of investors or
securities market; or
(iii) to secure the proper management of any such intermediary or person, it
may issue such directions,(a) to any person or class of persons referred to in section 12, or associated
with the securities market; or
(b) to any company in respect of matters specified in section 11A, as may be
appropriate in the interests of investors in securities and the securities market.
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11C. (1) Where the Board has reasonable ground to believe that
(a)the transactions in securities are being dealt with in a manner detrimental
to the investors or the securities market; or
(b)any intermediary or any person associated with the securities market has
violated any of the provisions of this Act or the rules or the regulations made or
directions issued by the Board thereunder,
It may, at any time by order in writing, direct any person (hereafter in this section
referred to as the Investigating Authority) specified in the order to investigate the
affairs of such intermediary or persons associated with the securities market and to
report thereon to the Board.
(2) Without prejudice to the provisions of sections 235 to 241 of the Companies Act,
1956(1 of 1956), it shall be the duty of every manager, managing director, officer and
other employee of the company and every intermediary referred to in section 12 or
every person associated with the securities market to preserve and to produce to the
Investigating Authority or any person authorised by it in this behalf, all the books,
registers, other documents and record of, or relating to, the company or, as the case
may be, of or relating to, the intermediary or such person, which are in their custody
or power.
(3)The Investigating Authority may require any intermediary or any person
associated with securities market in any manner to furnish such information to, or
produce such books, or registers, or other documents, or record before it or any
person authorized by it in this behalf as it may consider necessary if the furnishing of
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such information or the production of such books, or registers, or other documents,

or record is relevant or necessary for the purposes of its investigation.
(4) The Investigating Authority may keep in its custody any books, registers, other
documents and record produced under sub-section (2) or sub-section (3) for six
months and thereafter shall return the same to any intermediary or any person
associated with securities market by whom or on whose behalf the books, registers,
other documents and record are produced:
Provided that the Investigating Authority may call for any book, register, other
document and record if they are needed again:
Provided further that if the person on whose behalf the books, registers, other
documents and record are produced requires certified copies of the books, registers,
other documents and record produced before the Investigating Authority, it shall give
certified copies of such books, registers, other documents and record to such person
or on whose behalf the books, registers, other documents and record were
produced.
(5)Any person, directed to make an investigation under sub-section (1),may examine
on oath, any manager, managing director, officer and other employee of any
intermediary or any person associated with securities market in any manner, in
relation to the affairs of his business and may administer an oath accordingly and for
that purpose may require any of those persons to appear before it personally.
(6)If any person fails without reasonable cause or refuses (a) to produce to the
Investigating Authority or any person authorised by it in this behalf any book, register,
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other document and record which it is his duty under sub-section (2) or sub-section
(3) to produce; or
(b) To furnish any information which is his duty under sub-section (3) to
furnish; or
(c) to appear before the Investigating Authority personally when required to do
so under sub-section (5) or to answer any question which is put to him by the
Investigating Authority in pursuance of that sub-section; or
(d) to sign the notes of any examination referred to in sub-section (7),
he shall be punishable with imprisonment for a term which may extend to one year,
or with fine, which may extend to one crore rupees, or with both, and also with a
further fine which may extend to five lakh rupees for every day after the first during
which the failure or refusal continues.
(7) Notes of any examination under sub-section (5) shall be taken down in
writing and shall be read over to, or by, and signed by, the person examined, and
may thereafter be used in evidence against him.
(8) Where in the course of investigation, the Investigating Authority has
reasonable ground to believe that the books, registers, other documents and record
of, or relating to, any intermediary or any person associated with securities market in
any manner, may be destroyed, mutilated, altered, falsified or secreted, the
Investigating Authority may make an application to the Judicial Magistrate of the first
class having jurisdiction for an order for the seizure of such books, registers, other
documents and record.
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(9) After considering the application and hearing the Investigating Authority, if
necessary, the Magistrate may, by order, authorise the Investigating Authority
(a) To enter, with such assistance, as may be required, the place or places
where such books, registers, other documents and record are kept;
(b) To search that place or those places in the manner specified in the order;
and
(c) To seize books, registers, other documents and record, it considers
necessary for the purposes of the investigation:
Provided that the Magistrate shall not authorize seizure of books, registers,
other documents and record, of any listed public company or a public company (not
being the intermediaries specified under section 12) which intends to get its
securities listed on any recognised stock exchange unless such company indulges in
insider trading or market manipulation.
(10) The Investigating Authority shall keep in its custody the books, registers,
other documents and record seized under this section for such period not later than
the conclusion of the investigation as it considers necessary and thereafter shall
return the same to the company or the other body corporate, or, as the case may be,
to the managing director or the manager or any other person, from whose custody or
power they were seized and inform the Magistrate of such return;
Provided that the Investigating Authority may, before returning such books,
registers, other documents and record as aforesaid, place identification marks on
them or any part thereof.
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(11) Save as otherwise provided in this section, every search or seizure made
under this section shall be carried out in accordance with the provisions of the Code
of Criminal Procedure, 1973(2 of 1974), relating to searches or seizures made under
that Code.
Cease and Desist Proceedings
11D. If the Board finds, after causing an inquiry to be made, that any person has
violated, or is likely to violate, any provisions of this Act, or any rules or regulations
made thereunder, it may pass an order requiring such person to cease and desist
from committing or causing such violation:
Provided that the Board shall not pass such order in respect of any listed public
company or a public company (other than the intermediaries specified under section
12) which intends to get its securities listed on any recognized stock exchange
unless the Board has reasonable grounds to believe that such company has
indulged in insider trading or market manipulation.
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Regulatory Framework & Investor Protection.

Every law relating to Securities has its objective of investor protection. As we have
discussed in the earlier part of the paper that, right form vetting of Prospectus to the
all sorts disclosure requirement of the Companies dealing with the public money has
a nexus with the protection of interest of investor who form the part of the paid up
capital of the Company. Investors make the backbone of the every Corporation by
providing the required Finance to the Corporation. Protection of Investor is
accomplished through effective regulation and Efficient and biting Securities Law.
The Regulatory Framework of Country monitoring the securities dealing in the set
market place aims at fair play and of preserving the market integrity which in turn has
its objective of protection of Interest of Investor who contribute their hard earned
money in the common pool of the Business Corporation. We can take the example
of U.S.A. where the Securities Act of 1933 has two basic objectives:
Require that investors receive financial and other significant information

concerning securities being offered for public sale; and Prohibit deceit,
misrepresentations, and other fraud in the sale of securities.
Further the Preamble of SEBI Act lays down that protection of the interest of investor
is its basic and foremost aim which is to be achieved through its functions of
regulation.
All the Regulatory Measures and actions starting from the vetting of Prospectus till
the trading of shares in the market are designed and modified time to time in the
Interest of Investor.
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The Regulator identifies and prohibits certain types of conduct in the markets and
provides the Commission with disciplinary powers over regulated entities and
persons associated with them.
SEBI and Capital Market
There have been significant reforms in the regulation of the securities market since
1992 in conjunction with overall economic and financial reforms. In 1992, the SEBI
Act was enacted giving statutory status as an apex regulatory body.
Over the last few years, SEBI has announced several far-reaching reforms to
promote the capital Market and protect investor interests. Reforms in the Secondary
market have focused on three main areas: structure and functioning of stock
exchanges, automation of trading and post trade systems, and the introduction of
surveillance and monitoring systems.
Until the early 1990s, the trading and settlement infrastructure of the Indian capital
market was poor. Trading on all stock exchanges was through open outcry,
settlement systems were paper-based, and Market intermediaries were largely
unregulated. The regulatory structure was fragmented and there was neither
comprehensive registration nor an apex body of regulation of the securities market.
Stock exchanges were run as "brokers clubs" as their management was largely
composed of brokers. There was no prohibition on insider trading, or fraudulent and
unfair trade practices since 1992, there has been intensified market reform, resulting
in a big improvement in securities trading, especially in the secondary market for
equity. The Indian Capital Market has experienced a process of structural
Transformation with operations conducted to standards equivalent to those in the
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Capital Market of the developed countries. It was opened for investment for the
Foreign Institutional Investors (FIIs) in 1992 and Indian companies were allowed to
raise resources abroad through Global Depository Receipts (GDRs) and Foreign
Currency convertible Bonds(FCCBs). The Primary and Secondary segment of the
market grew much rapidly, with greater institutionalization and wider participation of
individual investors accompanying this growth. However many problems including
lack of confidence in the stock investment, institutional overlaps and other
governance issues remain as obstacle to the improvement of Indian capital Market
Efficiency.
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SEBI and Primary Market

The fundamental objective of the economic reforms undertaken by the government
since 1991-92 was to bring rapid and sustained improvement in the quality of life of
the people of India. It was with this set of objectives that the government had
undertaken economic reforms since 1991-92. One of the important aspects of this
reform package was to increase the efficiency of the financial system and securities
market so that larger saving could be channeled for productive use reforms in the
public sector. Reforms in the primary market have to be appreciated very well in light
of the regulatory framework in regards to market players involved in the work of
issue. The regulations guidelines and notifications of SEBI have focused right from
vetting of the prospectus to actually reaching the secondary market and have
ensured a fair play ensuring the Protection of the interest of the Investor. Reforms in
the Primary securities market over a decade or so have been of immense help to the
investors. Since the Primary market provides for floating of capital of the Company,
measures regarding market intermediaries, their eligibility criteria and simplification
and streamlining of issue procedure has been the areas of achievement from the
aspect of regulatory framework in India. Disclosure requirement of Company through
its prospectus, market players and all those who play a part in the Primary market
has been appreciated and strengthened with the growing time and need of the Hour.
The focus of these measures was to enhance the level of investor confidence and
inhibit fraud in public offerings. To give effect to these measures, the Guidelines for
Disclosure and Investor Protection were amended.
Further the introduction of Book Building, Regulations of Credit rating agencies, lock
in requirements and Enhancing the Disclosure requirement has been the
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Achievement over a period of more than a decade since SEBI has taken Charge as
a Regulator of the Capital Market in India.
SEBI AND SECONDARY MARKET
A series of re-forms was introduced to improve investor protection, automation of
stock trading, integration of national markets, and efficiency of market operations.
India has seen a tremendous change in the secondary market for equity.
It is ten years since the Securities and Exchange Board of India (SEBI) started to put
in place the regulatory framework for the capital market and investors have certainly
benefited from the availability of more information and a contemporary secondary
market structure. Reforms in the Secondary market include Encouragement to stock
Exchange to act as Self-Regulatory Organisations (SROs) with accountability and
responsibility. Further the Reforms have been in areas of Reconstruction of the
Governing body of the Stock Exchanges, audit of broker book, market makers,
insider trading, code for merger and takeover, grievance redressel by Stock
exchange and function of inspection of and monitoring of Stock Exchange. Market
has been made Infrastructurally sound and modern in terms of transparency and
Efficiency in Light of Investor Protection. In this regard continuous interfaces with
stock Exchanges were kept in regard to various issues as that of Investor Protection,
improvement in intermediary quality and building automodated market Infrastructure.
Introduction of rolling Statements, scrips, maintenance of Accounting standards,
warehousing of shares , market making, setting up of Depositories, stringent
disclosure requirement for the Listed Corporates have added to the achievement and
Reforms in the Secondary Market.
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The present regulatory regime for the securities markets established under the SEBI
Act 1992 has led to improvements in standards of investor protection. At the same
time a number of challenges remain and there is a scope for potential further
improvements and greater efficiency in the regulatory system. Some of the
measures that SEBI proposes to take in this direction are mentioned above. As the
changes and reforms brought in by SEBI get bedded in and markets mature, it is
expected that Indian securities markets will take up their rightful role in the Indian
economy. The Capital market has made tremendous progress in terms of institution
building. In a period of three years, we had the elimination of unlimited leverage in
stock trading; the onset of anonymous, electronic trading; the rise of a clearing
corporation which eliminates counter party risk from the exchanges for which it does
clearing, and the onset of depository settlement. These are profound changes in
market mechanisms. They have transformed the lives of investors and of market
intermediaries. They have given us an unprecedented level of market liquidity and
market efficiency. With the rapid expansion in the primary market, there were
concerns raised about the quality of some of the issuers who were able to raise
funds from the market in the period after the repeal of the Capital Issues (Control)
Act, 1947. In response to these concerns, SEBI had strengthened norms for public
issues, raised the standards of disclosure in public issues to enhance the level of
investor protection without seeking to control the freedom of eligible issuers to enter
the market and freely price their issues. But there still may be some grayer areas in
takeover, merger region etc.
SEBI began to put in place regulations a decade ago, starting with its Guidelines for
Disclosure and Investor Protection (primary markets) in 1992. A fairly broad-based
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regulatory framework is now in place, though, going forward, SEBI has to make the
market a friendlier place for investors by plugging the gaps in its performance.
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CAPITAL MARKET DIVISION -Capital Market Reforms

The Indian regulatory and supervisory framework of securities market has been
adequately strengthened through the legislative and administrative measures in the
recent past. The regulatory framework for securities market is consistent with the
best international benchmarks, such as, standards prescribed by International
Organisation of Securities Commissions (IOSCO).
Capital Market Reforms
Extensive Capital Market Reforms were undertaken during the 1990s

encompassing legislative regulatory and institutional reforms. Statutory
market regulator, which was created in 1992, was suitably empowered to
regulate the collective investment schemes and plantation schemes through
an amendment in 1999. Further, the organization strengthening of SEBI and
suitable empowerment through compliance and enforcement powers including
search and seizure powers were given through an amendment in SEBI Act in
2002. Although dematerialisation started in 1997 after the legal foundations
for electronic book keeping were provided and depositories created the
regulator mandated gradually that trading in most of the stocks take place
only in dematerialised form.
Till 2001 India was the only sophisticated market having account period
settlement alongside the derivatives products. From middle of 2001 uniform
rolling settlement and same settlement cycles were prescribed creating a true
spot market.
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After the legal framework for derivatives trading was provided by the
amendment of SCRA in 1999 derivatives trading started in a gradual manner
with stock index futures in June 2000. Later on options and single stock
futures were introduced in 2000-2001 and now Indias derivatives market
turnover is more than the cash market and India is one of the largest single
stock futures markets in the world.
Indias risk management systems have always been very modern and
effective. The VaR based margining system was introduced in mid 2001 and
the risk management systems have withstood huge volatility experienced in
May 2003 and May 2004. This included real time exposure monitoring,
disablement of broker terminals, VaR based marginingetc.
India is one of the few countries to have started the screen based trading of
government securities in January 2003.
In June 2003 the interest rate futures contracts on the screen based trading
platform were introduced.
India is one of the few countries to have started the Straight Through
Processing (STP), which will completely automate the process of order flow
and clearing and settlement on the stock exchanges.
RBI has introduced the Real Time Gross Settlement system (RTGS) in 2004
on experimental basis. RTGS will allow real delivery v/s. payment which is the
international norm recognized by BIS and IOSCO.
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To improve the governance mechanism of stock exchanges by mandating

demutualisation and corporatisation of stock exchanges and to protect the
interest of investors in securities market the Securities Laws (Amendment)
Ordinance was promulgated on 12th October 2004. The Ordinance has since
been replaced by a Bill.
Page 75 of 94
Sebi, Scams and Reforms

One of the biggest fears that perpetually linger in the minds of Indian investors
remains the possibility of a scam being unearthed, which could end the ongoing
party at its bourses, which has lasted for more than two years now.
The mental wounds inflicted due to the 'Harshad Mehta' and 'Ketan Parikh' scam do
not seem to have healed completely.
Hence,
when
the
recent
imbroglio
surrounding an individual with over 6,000 (!) demat accounts surfaced, several retail
investors kept their fingers crossed hoping that this would not trigger a mass sell-off.
Fortunately for them, it did not, and the party remains well and truly on. The
Securities Exchange Board of India, which is the designated 'watchdog' of the Indian
capital market initiated an enquiry into this matter and came up with a set of fresh
recommendations.
Securities and Exchange Board of India has often been accused, unfairly and
otherwise, of not being proactive enough. In recent times though, under the
stewardship of Damodaran, it seemed to be getting its act together. Its promulgations
on book-building IPO norms were progressive and has substantially minimized the
practice of frivolous bidding with the objective of leading investors.
It has now proposed some further changes in the primary market system, as it exists.
Let us now proceed to scrutinise the proposals:
Public issue refunds through Electronic Clearing Scheme: Presently refunds in public
issues are sent only through post/ registered post, which have time and cost
implications for investors.
Page 76 of 94
Progressive use of technology in banking has enhanced the efficiency in clearing

and transfer of funds, which is evidenced in use of ECS mechanism for corporate
dividend payments and routine corporate transactions. It has now been decided to
extend the facility of electronic transfer of funds, viz, ECS to public issue refunds
also.
Page 77 of 94
The man behind Sebi's makeover - The Capital Markets Crisis

This will ensure faster and hassle free refunds to investors. ECS as a mode of
refunds will initially be available at 15 centers across India where clearing is done by
RBI and may be extended to other centers over a period.
Opinion: Given that the
ECS facility has been in place for quite some time, this pronouncement should have
come a lot earlier. Nevertheless, it is a clear case of 'better late than never'.
Introduction of optional grading of IPOs: SEBI Board has granted in principle
approval for introduction of optional "grading" of public issues by unlisted companies
(viz. IPOs) by credit rating agencies registered with SEBI. IPO grading would not be
mandatory. It would be solely at the option of the issuer company. SEBI will not
certify the assessment made by the grading agency.
The grading is intended to be an independent and unbiased opinion of the
concerned agency. The grading would be a one-time exercise and would only focus
on assisting the investor particularly Retail Individual investors, in taking an informed
investment decision.
The cost of IPO grading can be met by stock exchanges or out of the corpus of
Investor Education and Protection Fund. Necessary procedurals aspects would be
finalized by SEBI in consultation with Stock Exchanges.
Opinion: While the intent cannot be faulted, there has to be serious doubt about its
practicality. Equity, by its inherent nature, signifies risk.
To try and capture that into a grading system should, for all practical purposes, be
extremely difficult. Unless of course, what is planned is merely an academic grading
based on some pre-fixed parameters.
Page 78 of 94
Given that SEBI has washed its hands off being accountable for this grading system,
one wonders whether the grading agency can be held accountable and will need to
indemnify investors relying thereon.
If not, is this then a rap on the knuckles for merchant bankers who do everything
short of grading an issue, even going so far as to justify the price on offer? Or, is this
an attempt to erase the demarcating line between equity and debt. If nothing else,
some comic relief should be on the cards, albeit not for investors who might end
being even more confused than ever.
Rationalising disclosure requirements for further public offers and rights issues:
Presently all companies irrespective of whether they are listed in any stock exchange
or are approaching the markets for the first time with IPOs have to make identical
disclosures in the prospectus/offer document.
In the context of further public offers and Rights Issues, some disclosures in the
document are repetitive, as the same have been periodically disclosed to the
exchanges by the listed companies.
It is now proposed to do away with the repetitive disclosures in case of rights issues
and FPOs by companies, which have a satisfactory track record of filing disclosures
with the stock exchanges, of redressing investors' grievances.
Opinion: Given the amount of irrelevant information that finds its way into every
prospectus, leave alone those of companies making FPO's and rights issues, this is
a welcome pronouncement.
Page 79 of 94
One question though - how many investors read prospectuses? Clearly, the primary
losers here are the printers while the gainers are corporates. As for the retail investor
- who cares?
Unique Identification Number: The Board decided to resume fresh registrations for
obtaining Unique Identification Number under SEBI (Central Database of Market
Participants) Regulations, 2003 (MAPIN), after considering the recommendations of
the Committee set up by SEBI to examine the issues related to MAPIN.
The registration process will be resumed in a phased manner. To begin with, the cut
off limit for obtaining UIN with biometric impressions for natural persons has been
raised from the existing limit of trade order value of Rs 100,000 to Rs 500,000 or
more. The limit will be reduced progressively.
Agencies capable of providing such facilities in a cost effective manner will be
assigned the responsibility of maintaining the databases. For trade order value of
less than Rs 500,000, option will be available to investors to obtain either the
Permanent Account Number of Income Tax Department or UIN obtained under
MAPIN. Investors in mutual funds would be exempted from the requirement of
obtaining UIN.
Opinion: One of the better decisions made by Damodaran after taking over as SEBI
chief was to halt the treatment of retail investors like history-sheeters, through an illconceived UIN regime.
Alas, that now stands reversed. Indian investors must rank among those with the
maximum forms of identification with the likes of a Income Tax PAN Card, ration
card, passport and now the UIN all over again.
Page 80 of 94
One cant' help feeling that whereas those who were prima facie held responsible for
the demat imbroglio have been let off with a light rap on the knuckles, while retail
investors have been left to bear the cross yet again.
To conclude, even as FII money pours in like never before, the old Indian
bureaucratic shuffle of two steps-forward and one-backward, sadly continues.
Page 81 of 94
5. TABLES
Page 82 of 94
Table I
Milestones of BSE
1840-50 About half a dozen brokers converge under a banyan tree near what is now
called Horniman Circle.
1860-65 An the prevailing share mania, the number of brokers rises to about 250 but
in the aftermath of the price crash they are hard pressed to find a place for their
regular meeting.
1874 The broking community find a place in what is now called Dalal Street to
conduct their dealings in securities without hindrance and an informal association of
sorts comes into being.
July 9, 1875 The Native Share and Stock Broker Association with the aim of
protecting the character, status and interests of native share and stock brokers, with
3,128 members who pay an entrance fee of one rupee is set up.
1895-1930 The exchange moves into what is now known as the Stock Exchange Old
Building in 1895. With more members and more trading spaces, after repeated
expansion in 1920, 1928 and 1930, BSE is vastly different from the one that existed
in the last quarter of the nineteenth century.
1921 The establishment of a clearing house for settlement of transactions.
1957 The Government accords permanent recognition under the Securities contracts
(Regulation) Act.
Jan .2, 1986 The BSE launches Sensex, first stock indices (with 1978-79 as base
year), comprising 30 highly liquid stocks from specified and non-specified group
Page 83 of 94
shares listed on the countrys five major stock exchanges Mumbai, Kolkata, Delhi,
Ahmedabad and Chennai.
July 25, 1990 The Sensex touches the four-figure mark for the first time and closes
at 1,000.97 in the wake of good monsoon and corporate results.
Jan 15, 1992 The benchmark index crosses the 2,000 mark and closes at 2,020.18
following the liberal economic policy initiatives undertaken by the then Finance
Minister Dr. Manmohan Singh.
Feb 29 1992 Market friendly Budget by the Finance Minister, Dr. Manmohan Singh,
leads the Sensex to cross the 3,000 mark.
Mar 30 1992 Sensex, in just 30 days rises by 1,000 points and crosses the 4,000
mark (closed at 4,091.43)on expectation of a liberal export import policy.
Apr 28 1992 The 30-stock index falls by record 570.42 points (12.77%) to close at
3,869.90 due to the exposure of securities scam.
1994 Serial bomb blasts in BSE butit begins to operate as usual despite damages to
the premises.
March 1995 BSE introduces the modified cary forward system (the traditional badla
had been banned since March 1993).
July 1995 All scrips are transferred to BOLT.
Aug 19, 1996 Major reconstitution of Sensex with the board of BSE deciding to
replace 15 stocks from the index with a new one in order to have better
representation of the market in the wake of changed economic environment. For the
Page 84 of 94
first time, index includes companies from the finance sector such as ICICI, IDBI and
SBI.
1997 Screen based trading commences.
Nov 16, 1998 BSE replaces four scrips from the Sensex with new ones following
investors fancy for software, pharma and multinational stocks, which include Infosys
Technologies, NIT, Novartis and Castrol.
March 1999 CDSL begins operations.
Oct 8, 1999 Sensex croses 5,000 mark.
Feb 11, 2000 Sensex croses 6,000 mark but closes at 5,933.56.
June 2000 BSE becomes the first exchange in the country to introduce trading in
derivatives in the form of index futures on the Bel Wether Sensex.
Sept 1, 2003 In the line with international trends, the BSE decides to move to freefloat methodology for calculation of Sensex from the full market capitalization
methodology.
June 21,2004 Sensex closes above 7,000 for the first time at 7,076.52.
Sept 8,2005 Sensex croses 8,000 mark close sat 8,052.56.
Page 85 of 94
Table 2
Badla System
Badla was allowed in the specified group of shares of BSE. This specified group was
also known as forward group as one could buy or sell shares in it without physical
delivery. The carry forward session (badla session) was held on every Saturday at
BSE.
A contract for current settlement could be executed in any of the following three
ways:
a) Delivery against a sale contract given and delivery against a purchase contract
received, and payment received/made at the contract rate.
b) Squaring off of transactions wherein a reverse transaction of either buying or
selling of shares squared up with the earlier outstanding position and the difference
in prices settled.
c) A contract in respect of which delivery was given or taken and which was not of
set by an opposite transaction during the settlement period, could be carried forward
to the next settlement period at the making up price, that is, the closing quotation on
the last trading and the difference between the contract rate and the making up price
settled. This postponement of the delivery of or payment for the purchase of
securities from one settlement period to another was referred to as carry forward.
Badla involved four parties: the long buyer a buy position in a stock without the
capacity to take delivery of the same, the short seller a sell position without having
the delivery in hand, the financier, and the stock lender.
Page 86 of 94
If the quantum of delivery sales exceeded the quantum of delivery purchases,

financiers came forward to asist in completing the deal, took delivery in the current
settlement made the delivery in the next settlement to the buyers and, by doing so,
helped in carrying forward the transaction.
The difference between the current settlement rate and the sale rate for the next
settlement which they received was the interest charges.
If the quantum of delivery purchases exceeded the quantum of delivery sales, share
financiers would give delivery in the current settlement to the buyers at the
settlement rate and take the delivery back in the next settlement from the seller at
lower sales rates.
Badla charges were market determined and varied from scrip to scrip and from
settlement to settlement. Badla rates ranged from 15% to 36% on a yearly basis.
SEBI banned badla charges for carry forward sales (short position) if the net carry
forward buy (long) positions exceeded short positions. If the market was overbought
(net long) there would be more demand for funds and the carry forward rates would
be high; the reverse would be true when the market was oversold (net short). An
oversold market would result in high demand for securities and the stock lender
would get returns.
These transactions were completely hedged and stock exchanges guaranteed
settlements and conducted auctions of shares in case of defaults. However, these
guarantees were not available in unofficial or parallel badla markets which existed in
Kolkata and Mumbai.
Page 87 of 94
Badla or carry forward facility was quite popular, accounting for nearly 90% of the
trade at al stock exchanges.
Source: Bharti Pathak,Indian Financial System
Page 88 of 94
Table-3
SEBIs role and regulations
SEBI had the duty to protect the interests of investors in securities and to promote
the development and to regulate the securities market through appropriate
measures. These measures provide for:
i. Regulation the business in stock exchanges and any other securities market.
i. Registering and regulating the working of stock brokers, sub-brokers, share
transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue,
merchant bankers, underwriters, portfolio managers, investment advisors, and such
other intermediaries who may be associated with securities market in any manner.
i. Registering and regulating the working of collective investment schemes, including
mutual funds.
iv. Promoting and regulating self-regulatory organizations.
v. Prohibiting fraudulent and unfair trade practices in securities market.
vi. Promoting investor education and trading of securities insecurities market.
vi. Prohibiting insider trading insecurities.
vi. Regulating substantial acquisition of shares and takeover of companies.
ix. Calling for information from, undertaking inspection, conducting inquiries and
audits of the stock exchanges and intermediaries and self regulatory organizations in
the securities market.
Page 89 of 94
x. Performing such functions and exercising such powers under the provisions of the
Capital Issues (Control) Act, 1947, and the Securities Contracts (Regulations) Act,
1956, as may be delegated to it by the central government.
xi. Levying fees or other charges for carrying out the activities.
xi. Conducting research for the above purpose and
xi. Performing such other functions as maybe prescribed by the government.
Source: Bharti Pathak, Indian Financial System
Page 90 of 94
Table - 4
Promoters of NSE
Industrial Development Bank of India Limited

Industrial Finance Corporation of India Limited
Life Insurance Corporation of India
State Bank of India
ICICI Bank Limited
IL & FS Trust Company Limited
Stock Holding Corporation of India Limited
SBI Capital Markets Limited
The Administrator of the Specified Undertaking of Unit Trust of India
Bank of Baroda
Canara Bank
General Insurance Corporation of India
National Insurance Company Limited
The New India Assurance Company Limited
The Oriental Insurance Company Limited
United India Insurance Company Limited
Punjab National Bank
Oriental Bank of Commerce
Corporation Bank
Indian Bank
Union Bank of India
Table-5
Milestones of NSE
1992 Incorporation
1993 Recognition as a stock exchange
1994 Whole sale Debt Market
1995 Became the largest stock exchange in India
Page 91 of 94
1996 Launch of S&P CNX Nifty & set up National Securities Depository Limited, first
depository in India.
1997 Launch of NSE's website: www.nse.co.in
1999 Launch of Automated Lending and Borrowing Mechanism
2000 Commencement of Derivatives Trading
2001 Commencement of Futures & Options on Individual Securities
2002 Launch of Exchange Traded Funds (ETFs)
2003 Commencement of trading in Retail Debt Market
Comparison of NSE and BSE
BSE
Market capitalization of
NSE
Rs. 4,670,227 crore
Rs. 3,367,350 crore.
20,290
6,097
Name:
Bombay Stock Exchange
National Stock Exchange
What is it?:
Indian Stock exchange
Indian Stock exchange
Location:
Mumbai
Mumbai
Established in:
1875
1993
listed companies:
Index value (As on 11th
December 2007):
Page 92 of 94
Key people:
Rajnikant Patel(CEO)
R.H.Patil (Founder, MD)
Claim to fame:
Oldest stock exchange in
Third largest stock
Asia.
exchange in the world in

terms of volumes.
Owner:
Bombay Stock Exchange
National Stock Exchange of
Limited
India Limited
Main Index:
BSE Sensex
S & P CNX Nifty
Website:
www.bseindia.com
www.nse-india.com
Geographical spread:
Presence in 417 cities
Presence in 1,486 cities
Number of listed
4,867(Oct 2007)
1,288 (March 2007)
Number of members:
951 (Oct 2007)
1,009 as on March 2007
Number of trader
15,151(Oct 2007)
companies:
workstations:
Top trading companies in
Reliance Industries
volumes in main index (Till
Limited, Infosys
March 2007):
Technologies Limited,
Satyam Computer
Services.
Top companies in terms of
Reliance Industries
market capitalization in
Limited, Oil and Natural
each index (Till March
Gas Corporation, Bharti
2007):
Airtel Limited
References
Indian
by Rathore, Shirine Rathore

Investment Performance of Equity
Indian market efficiency

www.sebi.gov.in/
www.sharekhan.com
www.5pasia.com
www.nse-india.com
Capital
Market:
An
Empirical
Shares:
Study
a
test
of
by Hari Om Chaturvedi
Page 93 of 94
www.bseindia.com
Page 94 of 94

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The Tug of War: NSE vs.

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THINKING ABOUT RISK

Start investing early in life

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