ch3.secondary market

8/8/2019 CH3.SECONDARY MARKET

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SECONDARY MARKETSTOCKS OFF TO SCHOOL WHERETHEIR FORTUNES WILL BE MADE


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3.1 SECONDARY MARKET DESIGN

It s the place for sale andpurchase of existingsecurities .The market essentiallycompromises of the stockexchanges which provideplatform for trading of securities and a host of intermediaries who assistin trading of securities,clearing and settlementof trades .


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The secondary market is the market for trading securities thathave been sold or issued in the primary market and already inthe hands of the public . Once securities have been successfullyissued in the primary market, they are subsequently traded in

the secondary market . This is where stock markets, stockexchanges or OTC markets by whichever name the market maybe referred to, provide the facilities for secondary trading .

The stock exchanges in India, under the overall supervision of the regulatory authority, the Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers andsellers can meet to transact in securities . The trading platformprovided by NSE is an electronic one and there is no need forbuyers and sellers to meet at a physical location to trade . Theycan trade through the computerized trading screens availablewith the NSE trading members or the internet based trading

facility provided by the trading members of NSE .

SECONDARY MARKET DESIGN


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Buying client or selling client approaches stockbroker, opens an A/c andpays for an order; either provide funds or give securities to broker andbroker acknowledgesIf buying broker has securities or sell order for securities sought or, requiredat ordered price, broker sells directly to the clientIf buying broker has no selling orders for securities and or price given bysellers, the broker contacts the other brokers seeking securities required . Buying stockbroker and selling stockbroker attends trading sessions at thetrading floor . All stockbrokers attend the session and all report:

traded securities prices, volumes and securities Buying orders outstanding positions price, volumes and securities Selling orders outstanding positions price, volumes and securities

CMAC compiles market report and distribute to the market and Publicthrough the media . On settlement day, CMAC clears the trades for settlement of securitiesagainst funds between stockbrokers .

CMAC sends matched transfers to the Registrar for registration and changeof ownership . Selling stockbroker pays the selling clientRegistrar transfers ownership from the seller to the buyer . The buying stockbroker delivers the new bond or share certificate to

the Buying client .


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At the beginning of every trading session, all members shallbe required to report and display their existing andoutstanding buying and selling positions for all the securitiesthat they have orders for . This will be equivalent topresenting their order books . Trading is conducted by themembers representative calling out their highest bids(buying positions) and their lowest offers (selling positions) .In addition, the members/traders must also call out alltransactions that they had executed in their officesimmediately after the last trading session and immediatelybefore the opening of the current session . Transactions onthe trading boards will be concluded when the first two

counterparty bid price and the offer price are the sameprice .SettlementSettlement is the delivery of funds or payment for securitiesbought and delivery of the securities sold .

SECONDARY MARKET DESIGN


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A SCENE .Most of the Stock Exchanges around the world were set up as associationof the Trading members . The objective to set up association was aimed tocreate a formal institution for mutually regulating the securitiestransactions among the members . Thus, most of the Stock Exchangeswere promoted as non-profit organizations .W hile, the management of the Stock Exchange was generally vested withelected representative(s) of the trading members, executives carried outthe day-to-day functioning of the stock exchange .H owever, during last two decades attempts have been made to changethe profile of the Stock Exchange by demutualising them andreconstituting them as commercial corporate entities .

Demutualization of a Stock Exchange entails that it is no longer remainsentity for mutual benefit of Trading members but beholds the largerobjective of becoming the system with adequate checks for propermobilization of capital & protecting the interest of investors at large .


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Demutualisation refers to the legal structureof an exchange whereby the ownership, themanagement and the trading rights at theexchange are segregated from one another .

Demutualisation refers to the transitionprocess of an exchange from a "mutually-owned" association to a company "owned byshareholders" . In other words, transformingthe legal structure of an exchange from amutual form to a business corporation formis referred to as demutualisation .

3.1.1 SECONDARY MARKET DESIGNCorporatization and demutualization of stock exchange


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Currently are there any demutualised stock exchangesin India?Yes currently there are two stock exchanges inIndiaThe National Stock Exchange (NSE)Over the Counter Exchange of India (OTCEI)

What is meant by corporatisation of stock exchanges?Corporatisation of Stock Exchanges is the process of

converting the organizational structure of the stockexchange from a non-corporate structure to acorporate structure . Traditionally, some of the stockexchanges in India were established as "Associationof persons", like BSE, ASE and MPSE . Corporatisationof these exchanges is the process of converting theminto incorporated Companies .



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What steps have been taken by SEBI to give a head startto the process of demutualisation in India?SEBI had formed a Group on Corporatisation andDemutualisation of Stock Exchanges under theChairmanship of Justice M H Kania, former Chief Justice of India, for advising SEBI on corporatisationand demutualisation of exchanges and to recommendthe steps that need to be taken to implement thesame . The Group submitted its Report to SEBI onAugust 28, 2002 . SEBI has taken up with CentralGovernment to amend the SC( R) A to effect

Corporatisation and Demutualization .



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SEBI required with effect from February 28,200 3 that the small stock exchangesare permitted to promote/ float/ a subsidiary/ company on their own followingthe guidelines below .

1. Company should have a CEO not holding concurrent position elsewhere .

2. Their appointment and termination should be subject to approval from SEBI .

3. The governing board of subsidiary should have following composition CEO OFSUBSIDIARYshould be DIRECTOR OF BOARD OF SUBSIDIARY orShould not be abroker of the parent exchange .

4. 5 0 percent of directors representing on the governing board of subsidiarycompany should not be sub brokers of subsidary company or brokers of thepromoter company or holding exchange and these directors are called asPUBLIC REPRESENTATIVES. These representatives are there for 1 year or tillannual general meeting which ever is first .

5. The subsidiary company to have its own staff not concurrently workingelsewhere .

6. The parent exchange should be responsible for all risk management of thesubsidiary company and should have appropriate mechanism in place forsupervision .

3.1.1 SECONDARY MARKET DESIGNStock Exchanges Subsidiary


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NSE offers multi-asset class productsand services and operates tradingplatforms and the Clearing andSettlement platform is operated byNSCCL, a wholly owned subsidiary of NSE. Participation on the Exchange in

each of the products is through theMember of the Exchange who isregistered for the product .

3.1. 2 SECONDARY MARKET DESIGNMembership In NSE


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Eligibility Criteria

The following are eligible to apply for membership subject to the regulatorynorms and provisions of SEBI and as provided in the Rules, Regulations,

Byelaws and Circulars of the Exchange -

1. Individuals ;2 .

Partnership Firms registered under the Indian Partnership Act, 193 2;3.

Corporations, Companies or Institutions or subsidiaries of suchCorporations, Companies or Institutions set up for providing financialservices;

4 .Banks for Currency Derivative Segments

5. Such other person as may be permitted under the Securities Contracts(Regulation) Rules 1957.

3.1. 2 SECONDARY MARKET DESIGNMembership In NSE


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Individuals (Sole Proprietor)

CRITERIA

Age Minimum age : 21 yearsStatus Indian Citizen

Education At least HSC or equivalentqualification

Experience

Applicant should have anexperience for not less than twoyears as a partner with, or anauthorized assistant or authorizedclerk or remisier or apprentice to,a member.


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Partnership FirmsCRITERIA

Age Minimum age of partner(s) : 21 years

Status Registered Partnership firm under Indian Partnership Act, 1932

Education Partners should be at least HSC or equivalent qualification

Designated

Partners

Identify at least two partners as designated partners who

would be taking care of the day to day management of thepartnership firm

DesignatedPartnersExperience

Should have a minimum of 2 years experience in an activityrelated to dealing in securities or as portfolio manager or asinvestment consultant or as a merchant banker or in financialservices or treasury, broker, sub broker, authorised agent orauthorised clerk or authorised representative or remisier orapprentice to a member of a recognised stock exchange,dealer, jobber, market maker, or in any other manner indealing in securities or clearing and settlement thereof.

DominantPromoterNorms

Identify partners sharing interest as per Exchange DPG norms


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Corporations, Companies orInstitutions

CRITERIA

Age Minimum age of director(s) : 21 years

Status Corporate registered under The Companies Act, 1956 (Indian)

MinimumPaid up

Equity Capital

Rs.30 lakhs

DesignatedDirectors

Identification of at least two directors as designated directorswho would be managing the day to day trading operations

Education Each of the Designated Directors should be at least HSC orequivalent qualification

DesignatedDirectors

Experience

Should have a minimum of 2 years experience in an activityrelated to dealing in securities or as portfolio manager or as

investment consultant or as a merchant banker or in financialservices or treasury, broker, sub broker, authorised agent orauthorised clerk or authorised representative or remisier orapprentice to a member of a recognised stock exchange,dealer, jobber, market maker, or in any other manner in dealingin securities or clearing and settlement thereof.

DominantPromoterNorms

Identify dominant group as per Exchange DPG norms


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3.1. 2 SECONDARY MARKET DESIGNEligibility Criteria for NSE Membership


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3.1.3 Eligibility Criteria forListing

NSE - Equities - Listing Eligibility - IPOs byCompanies

1. Paid up Capital-The paid up equity capital of the applicant shall not be less than Rs . 10 crores* and the capitalisation of the applicant s equity shall not be less than Rs . 25crores**

Explanation 1

For this purpose, the post issue paid up equity capital for which listing issought shall be taken into account .

** Explanation 2

For this purpose, capitalisation will be the product of the issue price and thepost issue number of equity shares . In respect of the requirement of paid-

up capital and market capitalisation, the issuers shall be required to include,in the disclaimer clause of the Exchange required to put in the offer

document, that in the event of the market capitalisation (Product of issueprice and the post issue number of shares) requirement of the Exchange not

being met, the securities would not be listed on the Exchange .

The amount of money that

has beenreceived by

shareholderswho have

completelypaid for their

purchasedshares . This

would notinclude anyshares that

have been bidon, but not yet

purchased .


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2 . Conditions Precedent to Listing:3. Atleast three years track record

For this purpose, the applicant or the promotingcompany shall submit annual reports of three precedingfinancial years to NSE and also provide a certificate to the

Exchange in respect of the following: The company has not been referred to the Board for

Industrial and Financial Reconstruction (BIFR) .

The networth of the company has not been wiped outby the accumulated losses resulting in a negativenetworth

The company has not received any winding up petitionadmitted by a court .


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4 . The applicant desirous of listing its securitiesshould satisfy the exchange on the following:

a) No disciplinary action by other stockexchanges and regulatory authorities in past

three years .b) Redressal Mechanism of Investor grievancec) Distribution of shareholdingd) Details of Litigatione) Track Record of Director(s) of the Company



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EDIFAR

In association with NATIONA L INFORMATICS CENRE(NIC), SEBI setup an Electronic Data informationfiling and retrieval (EDIFAR) systemto facilitate an electronic filing of certain time sensitive corporateinformation by listed companythus accelerating the process for

the benefit of various classes of market participants .

P/LSTATEMENT

BALANCESHEETS

CORPORATEGOVERANCE

REPORTSSHARE

HOLDINGPATTERN

ANY REPORTAGAINSTCOMPANY.

http//sebiedifar . nic . in


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These Regulations provide threedifferent set of provisions fordelisting of equity sharesunder different circumstances .

1. The main delisting provisionpertains to the voluntarydelisting sought by thepromoters of a company .

2. The second delisting provisionrelates to thosecircumstances where a stockexchange is as per its

guidelines forces a companyto delist its equity shares .

3. The third provision pertainsto delisting of smallcompanies .

3.1. 4 DELISTING OF SECURITIESSEBI (DELISTING OF EQUITY SHARES) REGULATIONS, 2009

S ALIENT FEATURE S FORVOLUNTARY DELI S TING1. Approval of shareholders of thecompany is a mandate by a specialresolution passed at its general meeting,making a public announcement.2. Deciding the exit price as determinedthrough book building process.3.Stock exchange should providenecessary infrastructure facility todisplay the price at the trading terminalto enable investor access the price onthe screen to avoid manipulation.4. A company must buyback the sharesso as to either increase its shareholdingto 90% or the level of promoter shareholding post offer is the aggregatepercentage of pre-offer promotersholdingThe stock exchange may delist companies for 6

months for non compliance of listing agreement .


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A premier market placeVisibilityLargest exchangeUnprecedented reachModern infrastructureTransaction speedShort settlement cycleBroadcast facility for corporate announcements

Short settlement cycleTrade statisticsInvestor service centersNominal listing fees .

BENEFITS OFLISTING ON NSE


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CM SEGMENT?

National Stock Exchange of India Limited (NSE) was incorporatedin 199 2 and was given recognition as a stock exchange in April1993. It started operations in June 199 4, with trading on theW holesale Debt Market Segment . Subsequently it launched

the Capital Market Segment in November199

4 as a tradingplatform for equities and the Futures and Options Segment inJune 2000 for various derivative instruments .

Market SegmentsThe Exchange operates three market segments, namelyCapital Market Segment (started in November 199 4),W holesale Debt Market Segment (started in June 199 4) andFutures an Options segment (started in June 2000) .


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Capital Market

NSE commenced trading on the CM segment on November 3 ,199 4 and within a year it established itself as the largeststock exchange in India in terms of trading volumes . TheCM segment provides a trading platform for equities,

preference shares, ETFs, and retail Government securitiesetc . NSE today accounts for nearly 6 8% of the total tradingvalue of all stock exchanges in the India . The trading valueof the CM segment has increased rapidly from Rs . 1 ,80 5 crore during the first year of its operation to Rs . 1 ,1 40,0 7 2crore during 2004-0 5. The average daily trading value have

also increased by leaps and bounds from Rs . 17 crore in199 4-95 to Rs . 4,5 06 crore during 2004-0 5. The total marketcapitalization of securities available for trading on the CMsegment as on March 200 5 was Rs . 1 ,5 85 ,5 85 crore .


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Listing Fees in the CM Segment

Sr. no Listing Fees Amount- Rs

1 Initial Listing Fees 2 5 000

2 Annual Listing Fees (based on paid up share,bond and/ ordebenture and/or debt capital, etc . )

Upto Rs . 1 Crore 1 0000

Above Rs . 1 0 Crore and upto Rs .20 Crores 4 5 000

Above Rs . 45 0 Crore and upto Rs .5 00 Crores 375 000


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Criteria Initial Public Offerings (IPOs) Companies listed on other exchanges

Paid-up EquityCapital (PUEC)/MarketCapitalisation(MC) /Net Worth

PUEC Rs. 10 cr . andMC Rs. 25 cr .

PUEC Rs. 10 cr . andMC Rs. 25 cr . ORPUEC Rs. 25 cr . ORMC Rs. 50 cr . ORThe company shall have a net worth of not less than Rs . 50 crores in each of the

preceding financial years.

Company/Promoter s TrackRecord

Atleast 3 years track record of eithera) the applicant seeking listing ORb) the promoters/promotingcompany incorporated in oroutside India ORc) Partnership firm and subsequentlyconverted into Company notin existence as a Company forthree years) and approachesthe Exchange for listing . TheCompany subsequently formedwould be considered for listingonly on fulfillment of conditionsstipulated by SEBI in this regard .

Atleast three years track record of eithera) the applicant seeking listing; ORb) the promoters/promoting company,incorporated in or outside India .

Dividend Record /Net worth /Distributable Profits

Dividend paid in at least 2 out of thelast 3 financial years immediatelypreceding the year in which theapplication has been made OR Thenetworth of the applicants atleastRs. 50 crores OR The applicant has

distributable profits in at least two outof the last three financial years .

Listing Listed on any other stock exchange forat least last three years OR listed on theexchange having nationwide tradingterminals for at least one year .

Other Requirements No disciplinary action by otherstock exchanges/regulatoryauthority in past 3 yrs .(b) Satisfactory redressal mechanism

for investor grievances,(c) distribution of shareholding(d) details of litigation record in past

(a)No disciplinary action by otherstock exchanges/regulatory authority in past 3 yrs .(b) Satisfactory redressal mechanism forinvestor grievances,

(c ) distribution of shareholding and(d) details of litigation record in past 3 years .(e) Track record of Directors of the Company


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3.1.6 Dematerialization

In finance and financial law ,

dematerializationrefers to the

substitutionof paper-

formsecurities bybook-entry

securities .

S.No.

Basis Of Differentiati

onBank Account Demat Account

1.Form of

Holdings/Deposits

F unds Securities

2. Used for Safekeeping of money Safekeeping of shares

3. FacilitatesTransfer of money(without actuallyhandling money)

Transfer of shares(without actuallyhandling shares)

4. Where toopen A bank of choiceA DP of choice (can be

a bank)

5.Requiremen

t of PANNumber

Not Mandatory Mandatory (effectivefrom April 01, 2006)

6.Interest

accrual onholdings

Interest income issubject to theapplicable rate of

interest

No interest accruals onsecurities held in demat

account

7.Minimumbalance

requirement

AQB* maintainance isspecified for certain

bank accountsNo such requirement

8.Either orSurvivor

facility

Available Not available


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3. 2Understanding Neat System

O ut cry system

NSE introduced a nation-wide on-line fully-automatedSCREEN BASED TRADING SYSTEM (SBTS)

where a member can punch intothe computer quantities of securities andthe prices at which he likes totransact and the transaction is executed assoon as it finds a matching sale orbuy order from a counter party .


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3. 2 .1 Trading Network of NSE

satellite

Brokerspremises

NSE Mainframe


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NSE has main computer which is connected through Very Small ApertureTerminal (VSAT) installed at its office . The main computer runs on a faulttolerant mainframe computer at the Exchange . Brokers have terminals(identified as the PCs in the Figure 1 ) installed at their premises which are

connected through VSATs/leased lines/modems .An investor informs a broker to place an order on his behalf . The broker entersthe order through his PC, which runs under W indows NT and sends signal tothe Satellite via VSAT/leased line/modem . The signal is directed to mainframecomputer at NSE via VSAT at NSE's office . A message relating to the orderactivity is broadcast to the respective member . The order confirmation messageis immediately displayed on the PC of the broker . This order matches with theexisting passive order(s), otherwise it waits for the active orders to enter thesystem . On order matching, a message is broadcast to the respective member .

The trading system operates on a strict price time priority . All orders receivedon the system are sorted, with the best priced order getting the first priority formatching i .e . , the best buy orders match with the best sell oSimilar priced orders are

sorted on time priority basis, i .e . the one that came in earlier getspriority over the later order . Orders are matched automatically by the computerkeeping the system, transparent and fair . W here an order does not find amatch, it remains in the system for the day till a fresh order comes in or theearlier order is cancelled or modified .


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Market Types in NEAT SystemThe NEAT system has four types of market . They are:1. Normal MarketAll orders which are of regular lot size or multiples thereof are traded in theNormal Market . For shares that are traded in the compulsory dematerialisedmode the market lot of these shares is one . Normal market consists of various

book types wherein orders are segregated as Regular lot orders, Special Termorders, Negotiated Trade Orders and Stop Loss orders depending on their orderattributes .

2. Odd Lot MarketAll orders whose order size is less than the regular lot size are traded in theodd-lot market . An order is called an odd lot order if the order size is less thanregular lot size . These orders do not have any special terms attributes attachedto them . In an odd-lot market, both the price and quantity of both the orders(buy and sell) should exactly match for the trade to take place . Currently theodd lot market facility is used for the Limited Physical Market as per the SEBIdirectives .


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Corporate hierarchy

Corporate Manager: - The corporate manager is a term assigned to a user placed at the highest level in a trading firm. Such a user receives at the End of the Day Reports for all branches of the trading member. The facility to setBranch O rder Value Limits and User O rder Value Limits is available to thecorporate manager.

B ranch Manager: - The branch manager is a term assigned to a user who isplaced under the corporate manager. The branch manager receives at End of the Day reports for all the dealers under that branch. The branch manager canset user order value limit for each of his branch.Dealer: - Dealers are users at the lower most level of the hierarchy. A dealer can view and perform order and trade related activities only for himself anddoes not have access to information about other dealers under the samebranch or other branches.


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Market Phases

The system is normally made available for tradingon all days except Saturdays, Sundays and NSEspecified holidays .

A typical trading days has 3 phases1. Open phase:-2 . Market Phase3. Surcon ( Surveillance and control) is the period

after market close during which, the users haveinquiry access only .


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NEATScreen


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Title bar- NEAT TICKERWINDOW

TOOLB AR

MARKETWATCH

ORDER -TRADE

WINDOW

INQU IRYWINDO W

MESS AGE WINDOW


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BASKET TRADINGWhat Does B asket Trade Mean?

A single order to buy or sell a set of 15 or more securities . Basket trading is performedby sophisticated traders, usually institutional traders, who trade in large quantities . Basket trading lets you create a list of up to 5 0 stocks, called a basket, that you cansave, trade, manage and track as one entity . Use the baskets you create to invest inand track stocks grouped by investment style, market sector, life event, or any

classification you choose .When can I place a basket trading order?

Basket trading orders are eligible for execution only during standard market hours ( 9 :3 0a .m . - 4:00 p .m . ET). H owever, you can create and save baskets during non-markethours .

How do I cancel a basket?All orders in a basket are market orders . You can attempt to cancel an individual order

from the Order Details page if an order has not executed, and re-enter a new order inbasket trading . H owever, use caution when entering the new order, as most marketorders receive an execution . Cancel and Replace functionality is not available on baskettrades .


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ch3.secondary market

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