Primary Market

Securities Market In India

Securities market

in India

Equity Market Debt Market Derivatives Market

Primary

Equity market

Secondary

Equity Market

Govt. securities

Market

Corporate debt market

Money market

Futures Market

Options Market

PRIMARY MARKET

• Primary market is also known as new issuemarket.

• In Primary market, shares are offered togeneral public by a company or to its existingshareholders.

• Stocks available for the first time are offeredthrough Primary Market.

• The issuer may be a new or an existingcompany

Ways to issue Equity capital in Primary Market

1. Public Issue

Fixed Method

Book-Building Method (Price Band)

2. Rights Issue

3. Preferential Allotment

4. Private Placement

Initial Public Offer

Intermediaries

• Lead Managers

• Bankers to the issue

• Registrars and share transfer agents

• Underwriters

• Stock-brokers and sub-brokers

• Depositaries

Factors to be Considered

DIP Guidelines

DIP Guidelines

• The primary issuances are governed by SEBI in terms of SEBI(Disclosures and Investor protection) guidelines.

• SEBI framed its DIP guidelines in 1992.

• In 2000, SEBI issued “Securities and Exchange Board of India(Disclosure and Investor Protection) Guidelines, 2000” whichis compilation of all circulars organized in chapter forms.

• SEBI (Disclosure and investor protection) guidelines 2000 arein short called DIP guidelines.

• It provides a comprehensive framework for issuances by thecompanies.

Eligibility Norms

• SEBI has laid down eligibility norms for entities accessing theprimary market through public issues.

• There is no eligibility norm for a listed company making arights issue as it is an offer made to the existing shareholderswho are expected to know their company.

• There are no eligibility norms for a listed company making apreferential issue.

• However for Qualified Institutions’ placement (QIP), onlythose companies whose shares are listed in NSE or BSE andthose who are having a minimum public float as required interms of the Listing agreement, are eligible.

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• Entry Norm I (EN I): The company shall meet the followingrequirements:

(a) The company has net tangible assets of at least Rs. 3 crores in each of the preceding 3 full years (of 12 months each), of which not more than 50% is held in monetary assets.

(b) The company has a track record of distributable profits for at least three out of immediately preceding five years;

(c) Net worth of at least Rs. 1 crore in each of the precedingthree full years ,

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(d) If change in name, at least 50% revenue for preceding 1 yearshould be from the new activity.

(e) The aggregate of the proposed issue and all previous issuesmade in the same financial year should not exceed 5 times thepre- issue net worth.

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• To provide sufficient flexibility and also to ensure that genuinecompanies do not suffer on account of rigidity of theparameters, SEBI has provided two other alternative routes tocompany not satisfying any of the above conditions, foraccessing the primary Market, as under:

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• Entry Norm II (EN II):(a) Issue shall be through book building route, with at least 50%of net public offer to be mandatory allotted to the QualifiedInstitutional Buyers (QIBs).

(b) The minimum post-issue face value capital shall be Rs. 10crore or there shall be a compulsory market-making for at least 2years

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OR

• Entry Norm III (EN III):

(a) The “project” is appraised and participated to the extent of15% by Commercial Banks of which at least 10% comes from theappraiser(s).

(b) The minimum post-issue face value capital shall be Rs. 10crore or there shall be a compulsory market-making for at least 2years.

In addition to satisfying the aforesaid eligibility norms, thecompany shall also satisfy the criteria of having at least 1000prospective allotees in its issue.

Exemption from Eligibility Norms

a) Private Sector Banks

(b) Public sector banks

(c) An infrastructure company whose project has been appraisedby a PFI (Public Financial Institution) or IDFC (InfrastructureDevelopment Finance Corporation) or IL&FS (InfrastructureLeasing and Financing Services Ltd.) and or a bank which wasearlier a PFI and not less than 5% of the project cost is financedby any of these institutions.

(d) Rights issue by a listed company

SEBI’s Role in an Issue

• Any company making a public issue or a listed companymaking a rights issue of value of more than Rs 50 lakhs isrequired to file a draft offer document with SEBI for itsobservations.

• The validity period of SEBI’s observation letter is three monthsonly i.e the company has to open its issue within threemonths period.

• There is no requirement of filing any offer document / noticeto SEBI in case of preferential allotment and QIP.

• In QIP, Merchant Banker handling the issue has to file copy ofplacement document with SEBI post allotment for recordpurpose.

Red Herring Prospectus

• A red herring prospectus does not have details of either priceor the no. of shares being offered or the amount of issue.

• This type of prospectus is adopted in the book building route.

• However this prospectus mentions the upper and lower pricebands.

• It should be filed with the registrar of companies at leastthree days before the opening of the offer.

• It should also be filed with SEBI.

• It is called red herring prospectus because it contains apassage in red that states the company is not attempting tosell its shares before the registration is approved by SEBI.

Escrow Account

• An escrow account is a designated account, the funds inwhich can be utilized only for a specified purpose. In otherwords, the bankers to the issue keep the funds in the escrowaccount on behalf of the bidders.

• These funds are not available to the company till the issue iscompleted and allocation is made.

IPO Grading

• SEBI has made IPO grading mandatory from 1st may 2007.

• But, in December, 2013 SEBI has made it optional.

• IPO grading is the grade assigned by a Credit Rating Agency(CRAs) registered with SEBI, to the initial public offering (IPO)of equity shares.

• The grade represents a relative assessment of thefundamentals of that issue in relation to the other listedequity securities in India.

• The IPO grade assigned is the outcome of a detailedevaluation of qualitative and quantitative factors of theconcerned company.

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• Such grading is generally assigned on a five‐point scale with ahigher score indicating stronger fundamentals and vice versaas below.

IPO grade 1 ‐ Poor fundamentals

IPO grade 2 ‐ Below‐Average fundamentals

IPO grade 3 ‐ Average fundamentals

IPO grade 4 ‐ Above‐average fundamentals

IPO grade 5 ‐ Strong fundamentals

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• IPO grading has been introduced as an endeavour to makeadditional information available for the investors in order tofacilitate their assessment of equity issues offered through anIPO.

• Any issuer who decides to offer shares through an IPO, isrequired to obtain a grade for the IPO from at least one CreditRating Agency.

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• IPO grade/s cannot be rejected. Irrespective of whether theissuer finds the grade given by the rating agency acceptable ornot, the grade has to be disclosed as required under the DIPGuidelines.

• However the issuer has the option of opting for anothergrading by a different agency.

• In such an event all grades obtained for the IPO will have tobe disclosed in the offer documents, advertisements etc.

The Grading Process

• The issuer company sends a formal request to the gradingagency.

• The agency seeks information on the company’s existingoperations as well as the proposed projects through aquestionnaire.

• Site visits and discussions with the key operating personnel ofthe company concerned are conducted by the rating agency.

• Apart from the officials of the company, the agency alsomeets its bankers, auditors, merchant bankers and appraisingauthority (if any). If needed, the opinion of independentexpert agencies on critical issues like, the technologyproposed to be used is also obtained.

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• Analysts of the agency present a detailed grading report to the rating committee, which then assigns the grade.

• Usually, the assignment of grade takes three to four weeks after all the necessary information has been provided to ICRA.

• The issuer company is required to disclose the assigned grade and also publish it in the red herring prospectus, which is filed with the SEBI.

Grading Methodology

1.Business Prospects and Competitive Position

• Industry Prospects

• Company Prospects

2.Financial Position

3. Management Quality

4. Corporate Governance Practices

5. Compliance and Litigation History

6. New Projects—Risks and Prospects

IPO Grading (DIP Guidelines)

No unlisted company shall make an IPO of equity shares or anyother security which may be converted into or exchanged withequity shares at a later date, unless the following conditions aresatisfied as on the date of filing of Prospectus (in case of fixedprice issue) or Red Herring Prospectus (in case of book builtissue) with ROC:

(i) the unlisted company has obtained grading for the IPO from atleast one credit rating agency;

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(ii) disclosures of all the grades obtained, along with therationale/ description furnished by the credit rating agency(ies)for each of the grades obtained, have been made in theProspectus (in case of fixed price issue) or Red HerringProspectus (in case of book built issue);and

(iii) the expenses incurred for grading IPO have been borne bythe unlisted company obtaining grading for IPO.

Lock-in

• “Lock-in” indicates a freeze on the shares. SEBI (DIP)Guidelines have stipulated lock-in requirements on shares ofpromoters mainly to ensure that the promoters or mainpersons who are controlling the company, shall continue tohold some minimum percentage in the company after thepublic issue.

• There is lock-in on the shares held before IPO and also onshares acquired through preferential allotment route.

• However there is no lock- in on shares/ securities allottedthrough QIP route.

Promoter’s Contribution

• In case of Public issue by Unlisted company

• In case of offer for sale

• In case of public issues by listed companies

• In case of composite issues by listed companies

• Promoter’ s contribution should be brought in at least one day prior to the issue opening date

Promoter’s Contribution

• Promoters’ Contribution in a Public Issue by UnlistedCompanies: In a public issue by an unlisted company, thepromoters shall contribute not less than 20% of the post issuecapital.

• Promoters’ Shareholding in Case of Offers for Sale: Thepromoters’ shareholding after offer for sale shall not be lessthan 20% of the post issue capital.

• Promoters’ Contribution in Case of Public Issues by ListedCompanies: the promoters shall participate either to theextent of 20% of the proposed issue or to ensure post-issueshare holding to the extent of 20% of the post-issue capital.

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• Promoters’ Contribution in Case of Composite Issues by Listedcompanies: In case of composite issues of a listed company,the promoters’ contribution shall at the option of thepromoter(s) be either 20% of the proposed public issue or20% of the post-issue capital. Rights issue component of thecomposite issue shall be excluded while calculating the post-issue capital.

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• Promoters’ Contribution to be brought in before Public IssueOpens: Promoters shall bring in the full amount of thepromoters’ contribution including premium at least one dayprior to the issue opening date, which shall be kept in anescrow account with a Scheduled Commercial Bank and thesaid contribution/ amount shall be released to the companyalong with the public issue proceeds. However, where thepromoters’ contribution has been brought prior to the publicissue and has already been deployed by the company, thecompany should disclose the use of such funds in the cashflow statement of the offer document.

Exemption from Requirement of Promoters’ Contribution

• The requirement of promoters’ contribution shall not be applicable:

(a) In case of public issue of securities by a company whichhas been listed on a stock exchange for at least 3 years andhas a track record of dividend payment for at least 3immediately preceding years.

(b) in case of companies where no identifiable promoter orpromoter group exists.

(c) in case of rights issues.

Lock-in requirements

• In case of any issue of capital to the public theminimum promoters’ contribution shall belocked in for a period of 3 years.

• If the promoters’ contribution in the proposedissue exceeds the required minimumcontribution, such excess contribution shallalso be locked in for a period of one year.

Lock-in requirements

• In case of any issue of capital to the public the minimumpromoters’ contribution shall be locked in for a period of 3years.

• The lock-in shall start from the date of allotment in theproposed public issue and the last date of the lock-in shall bereckoned as three years from the date of commencement ofcommercial production or the date of allotment in the publicissue whichever is later.

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• The expression "Date of commencement of commercialproduction“ means the last date of the month in whichcommercial production in a manufacturing company isexpected to commence as stated in the offer document.

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• Lock-in of Excess Promoters’ Contribution:

In case of a public issue by unlisted company, if the promoters’contribution in the proposed issue exceeds the requiredminimum contribution, such excess contribution shall also belocked in for a period of one year.

In case of a public issue by a listed company, participation bypromoters in the proposed public issue in excess of the requiredminimum percentage shall also be locked-in for a period of oneyear as per the lock-in provisions as specified in Guidelines onPreferential issue.

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• Lock-in of pre-issue share capital of an unlisted company:

The entire pre-issue capital, other than that locked-in asminimum promoters’ contribution, shall be locked-in for a periodof one year from the date of allotment in the proposed publicissue. Provided that where shares held by promoter(s) are lent tothe SA under clause 8A.7, they shall be exempted from the lockin requirements specified above for the period starting from thedate of such lending and ending on the date on which they arereturned to the same lender(s) under clause 8A.13 or underclause 8A.15, as the case may be.

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• Lock-in of securities issued on firm allotment basis:

Securities issued on firm allotment basis shall be locked-in for aperiod of one year from the date of commencement ofcommercial production or the date of allotment in the publicissue, whichever is later.

OTHER REQUIREMENTS IN RESPECT OF LOCK-IN

• Pledge of Securities Forming Part of Promoters Contribution

• Inter-se Transfer of Securities Amongst Promoters

• Inscription of Non-Transferability

Green shoe option

• Legally called over allotment option.• a provision contained in an underwriting agreement which

gives the underwriter the right to sell investors more sharesthan originally planned by the issuer.

• This would normally be done if the demand for a securityissue proves higher than expected.

• The term comes from the first company, Green shoemanufacturing, to permit underwriters to use this practice inits offering.

• The green shoe option can be a maximum of 15% of thepublic offer.

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(a) An issuer company making a public offer of equity shares canavail of the Green Shoe Option (GSO) for stabilizing the postlisting price of its shares, subject to the provisions of SEBIguidelines.

(b) A company desirous of availing the option granted by SEBI,shall in the resolution of the general meeting authorizing thepublic issue, seek authorization also for the possibility ofallotment of further shares to the ‘stabilizing agent’ (SA) at theend of the stabilization period.

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• The company shall appoint one of the merchant bankers orBook Runners, as the case may be, from amongst the issuemanagement team, as the “stabilizing agent” (SA), who will beresponsible for the price stabilization process, if required.

• The SA shall enter into an agreement with the issuercompany, prior to filing of offer document with SEBI, clearlystating all the terms and conditions relating to this optionincluding fees charged / expenses to be incurred by SA for thispurpose.

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• The SA shall also enter into an agreement with thepromoter(s) or pre issue shareholders who will lend theirshares, specifying the maximum number of shares that maybe borrowed from the promoters or the shareholders, whichshall not be in excess of 15% of the total issue size.

• The details of the agreements shall be disclosed in the draftprospectus, Red Herring prospectus and the final prospectus.

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• Lead merchant banker or the Lead Book Runner, inconsultation with the SA, shall determine the amount ofshares to be over allotted with the public issue within theceiling specified i.e. 15% of the issue size.

• Over-allotment refers to an allocation of shares in excess ofthe size of the public issue made by the SA out of sharesborrowed from promoters in pursuance of a GSO exercised bythe issuing company.

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• The draft prospectus, the Red Herring prospectus and thefinal prospectus shall contain the following additionaldisclosures:

a. Name of the SA

b. The maximum number of shares proposed to be over-allottedby the company.

c. The period, for which the company proposes to avail of thestabilization mechanism,

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d. The maximum amount of funds to be received by thecompany in case of further allotment and the use of theseadditional funds, in final document to be filed with ROCs.

e. Details of the agreement entered in to by SA with thepromoters to borrow shares from the latter which inter-alia shallinclude name of the promoters, their existing shareholding,number & percentage of shares to be lent by them and otherimportant terms and conditions including the rights andobligations of each party.

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f. The final prospectus shall additionally disclose the exactnumber of shares to be allotted pursuant to the public issue,stating separately therein the number of shares to be borrowedfrom the promoters and over allotted by the SA, and thepercentage of such shares in relation to the total issue size.

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• The SA shall borrow shares from the promoters to the extentof the proposed over-allotment.

• They should be in dematerialized form only and theirallocation should be pro rata to all the applicants.

• The stabilization mechanism shall be available for the perioddisclosed by the company in the prospectus, which shall notexceed 30 days from the date when trading permission wasgiven by the exchange(s).

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• The money received from the applicants against theoverallotment in the green shoe option shall be kept in theGSO Bank Account, distinct from the issue account and shallbe used for the purpose of buying shares from the market,during the stabilization period.

• The shares bought from the market by the SA, if any duringthe stabilization period, shall be credited to the GSO DematAccount.

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• The shares bought from the market and lying in the GSODemat Account shall be returned to the promotersimmediately, in any case not later than 2 working days afterthe close of the stabilization period.

• The prime responsibility of the SA shall be to stabilize postlisting price of the shares.

• To this end, the SA shall determine the timing of buying theshares, the quantity to be bought, the price at which theshares are to be bought etc.

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• On expiry of the stabilization period, in case the SA does notbuy shares to the extent of shares over-allotted by thecompany from the market, the issuer company shall allotshares to the extent of the shortfall in dematerialized form tothe GSO Demat Account, within five days of the closure of thestabilization period.

• These shares shall be returned to the promoters by the SA inlieu of the shares borrowed from them and the GSO DematAccount shall be closed thereafter.

• The company shall make a final listing application in respect ofthese shares to all the Exchanges where the shares allotted inthe public issue are listed.

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• The SA shall remit the issue price to the issuer company fromthe GSO Bank Account.

• The amount left in this account, if any, after this remittanceand deduction of expenses incurred by the SA for thestabilization mechanism, shall be transferred to the investorprotection fund(s) of the stock exchange(s) where the sharesof issuer company are listed, in equal parts if the shares arelisted in more than one exchanges.

• The GSO Bank Account shall be closed soon thereafter.

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• The SA shall submit a report to the stock exchange(s) on adaily basis during the stabilization period.

• The SA shall also submit a final report to SEBI in the formatspecified in Schedule XXIX.

• This report shall be signed by the SA and the company andaccompanied with a depository statement for the “GSODemat Account” for the stabilization period, indicating theflow of the shares into and from the account.

• The report shall also be accompanied by an undertaking givenby the SA and countersigned by the depository(ies) regardingconfirmation of lock-in shares returned to the promoters inlieu of the shares borrowed from them for the purpose of thestabilization, as per the requirement specified.

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• The SA shall maintain a register in respect of each issuehaving the green shoe option in which he acts as a SA. Theregister shall contain the following details of:

(a) each transaction effected in the course of the stabilizingaction, the price, date and time

(b) the details of the promoters from whom the shares areborrowed and the number of shares borrowed from each; anddetails of allotments made

• The register must be retained for a period of at least threeyears from the date of the end of the stabilizing period.”

IDR and DIP guidelines

• Covered through Presentation in class

ASBA

• The SEBI has introduced ASBA facility from Sep. 2008 onwards.

• ASBA provides an alternative mode of payment in issues wherebythe application money remains in the investor's account tillfinalization of basis of allotment in the issue.

• Investors can apply with ASBA route through Self certifiedsyndicate banks (SCSBs) only.

• SCSBs are those banks which satisfy the conditions laid by SEBI.

Book Building• Book building is a price discovery method. In this method, a

company does not fix up a particular price for the shares, butinstead gives a price range.

• As per the SEBI guidelines, an issue company can issuesecurities through either 100% of the net offer to the publicthrough the book building route or 75% through book buildingprocess and remaining 25% through the fixed price method.

Pricing Band

• In book building method, the company gives a price band,e.g., 80-110.

• The lowest price is known as the floor price and the highestprice is known as the cap price.

• When bidding for shares, investors have to decide at whichprice they would like to bid for the shares.

• They can bid for shares at any price within this range.

• The price at which the shares are allotted is known as cut-offprice.

The Process

• The issuer appoints a lead merchant banker as a book runnerby the issuer.

• The issuer decides the price band for the issue and the no. ofsecurities to be issued.

• A draft prospectus (Red Herring Prospectus) is submitted tothe SEBI and circulated among all investors.

• Investors place their orders.

• Book-runner builds a record known as the Book.

• A book should remain open for a minimum of three workingdays.

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• An investor can alter his bid, both price and quantity, anytimebefore the close of the issue.

• Syndicate members aggregate and forward all offers to thebook runner.

• After consulting the issuer, the book runner determines theissue price as a weighted average of the offers received.

• Securities are allotted to the successful bidders.

How does Book Building work?

• The applicants bid for the shares quoting the price and thequantity that they would like to bid at.

• Only the retail investors have the option of bidding at ‘cut-off’.

• After the bidding process is complete, the ‘cut-off’ price isarrived at on the lines of Dutch auction. The basis ofAllotment is then finalized and letters allotment/refund isundertaken.

• The final prospectus with all the details including the finalissue price and the issue size is filed with ROC, thuscompleting the issue process.

Settlement and Allotment

• After the closure of the issue, the bids received areaggregated under different categories i.e., firm allotment,Qualified Institutional Buyers (QIBs), Non-Institutional Buyers(NIBs), Retail, etc.

• The oversubscription ratios are then calculated for each of thecategories as against the shares reserved for each of thecategories in the offer document.

• Within each of these categories, the bids are then segregatedinto different buckets based on the number of shares appliedfor.

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• The oversubscription ratio is then applied to the number ofshares applied for and the number of shares to be allotted forapplicants in each of the buckets is determined.

• Then, the number of successful allotees is determined. Thisprocess is followed in case of proportionate allotment.

• In case of allotment for QIBs, it is subject to the discretion ofthe post issue lead manager.

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QIBs : Retail Investors : Non-Institutional Investors

50% : 35% : 15%

Dutch Auction/Option

• Under Dutch Auction method, investor have to bid within theprice band fixed by the issuing company.

• Finally shares would be allotted proportionately at a uniformprice (cut-off rate) to the allotees.

French Auction/Option

• The Govt. has decided to adopt French auction method forpublic offers of PSUs.

• Under this route there will be no upper limit to bid price andthe highest bidder will secure the largest share of allotments.

• Allotment takes place on Price-priority basis and that too ondifferential prices.

• Higher is the bid, higher would be the allocation.

Firm allotment

• A company making an issue to the public can reserve someshares on allotment on firm basis for some categories asspecified in DIP guidelines.

• 5% firm allotment is maximum in 100% Book building.

Listing

• From hand written notes

Reverse Book Building (Delisting of shares)

• The Reverse Book Building is a mechanism provided forcapturing the sell orders on online basis from the shareholders through respective Book Running Lead Managers(BRLMs) which can be used by companies intending todelist its shares through buy back process.

• In the Reverse Book Building scenario, theAcquirer/Company offers to buy back shares from the shareholders. The Reverse Book Building is basically a processused for efficient price discovery.

• It is a mechanism where, during the period for which theReverse Book Building is open, offers are collected from theshare holders at various prices, which are above or equal tothe floor price. The buy back price is determined after theoffer closing date

Secondary Market

• Origin of stock market in India goes back to the end of the 18th

century, when long-term negotiable securities were first issued.• The real beginning occurred in the middle of the 19th century.• In 1875, BSE came into existence.• Later on, in free India, the securities contract regulation act, 1956

was passed. The act gave permanent recognition to BSE in 1957.• In 1992, SEBI was set up to regulate the stock exchanges and stock

trading.• In 1993, badla system was banned.• The most important developments in the Indian stock market was

the establishment of the NSE in 1994.• NSE is ring less, national and computerized exchange.• Due to threat of NSE in 1994, BSE switched from open outcry

system to screen based system in 1995.

• In 1996, NSCCL came into existence.

• In 2000, derivative trading in the form of index futures indexoptions was introduced.

• In 2003, interest rate derivatives were introduced.

How securities are traded?

• Each stock exchange has certain listedsecurities and permitted securities which aretraded on it.

• Members of the exchange alone are entitledto the trading privileges.

• Investors interested in buying or sellingsecurities should place their orders with themembers or brokers of the exchange.

Ways to Organize trading activity:

• Open Outcry System: Under this system tradersshout and resort to signals on the trading floorof the exchange. Which consists of severalnotional trading posts for different securities.

A member or his representative wishing to buy or sell acertain security reaches the trading post where thesecurity is traded.

Here, he comes in contact with others interested intransacting in that security.

Buyers make their bids and sellers make their offersand bargains are closed at mutually agreed uponprices.

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• Screen-based system: In this system, trading ringis replaced by the computer screen and distantparticipants can trade with each other throughthe computer network

• A large no. of participants, geographicallyseparated, can trade simultaneously at highspeeds.

• The kind of screen based trading system adoptedin India is referred to as the open electronic limitorder book (ELOB) market system.

Key Features of ELOB

Buyers and sellers place their orders on the computer. Theseorders may be limit orders or market orders.

The computer constantly tries to match mutually compatibleorders. The matching is done on a price-time priority,implying that price is given preference over time in theprocess of matching.

A buy order at a higher limit price is accorded precedenceover a buy order at a lower limit price. Between two limitorders placed at the same price, the limit order placedearlier is accorded priority over the limit order placed later.

The limit order book, i.e. the list of unmatched limit orders isdisplayed on the screen. Put differently, it is open forinspection to all traders.

Types of orders

• Market order

• Limit order

• Stop-loss market order

• Stop-loss limit order

• Good till cancelled order

• Day order

• Good till date order

• Immediate or cancer order

Types of orders

1. Market Order: buy or sell order to be executedimmediately at the best prevailing market price. Amarket order to sell will be executed at the highestbid price whereas a market order to buy will beexecuted at the lowest ask price.

E.g. An investor calls his broker and ask for the marketprice of Reliance. The broker reports that the best bidprice is Rs.100 and the best ask price is Rs.105, thatmeans if the investor wants to buy the shares thenhe would have to buy for Rs.105 and if he wants tosell then he would have to sell it for Rs. 100.

2. Limit order: A limit order pre-specifies theprice limit, investors specifies the price atwhich they are willing to buy or sell.

E.g. a limit order to buy at a price of Rs. 50means that a trader want to buy at a price notmore than Rs. 50 and a limit order to sell at aprice of Rs.70 means that a trader wants tosell at a price not less than Rs. 70.

• Stop Loss order: stock is sold when its price falls below a limit.

Settlement

• Rolling Settlement

In a rolling settlement, for all trades executedon trading day .i.e. day the obligations aredetermined on the T+1 day and settlement onT+2 basis i.e. on the 2nd working day. Forarriving at the settlement day all interveningholidays, which include bank holidays, NSEholidays, Saturdays and Sundays areexcluded.

Activity Day

Trading Rolling settlement trading T

Clearing Custodial confirmation and

delivery generation

T+1 working days

Settlement Securities and funds pay-in T+2

Securities and funds pay-out T+2

Transaction Costs

• Trading Costs1.) Brokerage cost: is paid to the broker

2.) Market impact cost: difference between the actualtransaction price and the ideal price ( average of the best bidprice and the ask price).

e.g. if the best buy and best sell price for the stock are Rs. 49.50and Rs. 50.50 respectively. The ideal price is Rs. 50. Thus aperson who wants to buy immediately has to pay Rs. 50.50,suffering a buy-side market impact cost of Rs. 0.50.

3.) Securities transaction tax (STT): is paid on securitiestransactions, by buyer and seller both. In intra-day on sellingtransactions only.

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4. Exchange transaction charges

5. Service tax on brokerage and ETC

6. Stamp duty

7. SEBI charges.

Buying and selling shares

• Procedure for buying shares:

1. Locating a broker

2. Placement of order

3. Execution of order

• Procedure for selling shares:

1. Placement of order

2. Execution of order

Essentials of Online share trading

• Online Stock Trading is a recent way of buying and selling

stocks.

• To get started one needs three accounts

• Savings Account

• Demat Account

• Trading Account

Buy Cycle and Account Transactions

Trading Account

DematAccount

Bank Account

Money from bank Account to trading Account

Shares moving from trading account to Demat Account

Capital Market- Participants

• Brokers

• Depositories (NSDL, CDSL)

• Retail Investors

• Institutional Investors

Market Wide circuit breakers

• Written notes

Mobile trading and Algo trading

• Written notes

Margin Requirement

• Types of Margin in Equity Market

1. VaR based margin

2. Extreme Loss Margin

3. Mark-to-mark margin

• Types of Margin in Futures market

1. SPAN

2. Exposure Margin

3. Mark-to mark

Operation of Margins For a long Position in two

Gold Futures contracts

• For example, An investor takes a long position in 2 December

gold futures contracts on June 5

contract size is 100 ounce.

futures price is US$1250

initial margin requirement is US$6,000/contract

(US$12,000 in total)

maintenance margin is US$4,500/contract (US$9,000 in

total)

It is assumed that excess money is not withdrawn

Day Trade

Price ($)

Settlement

Price ($)

Daily

gain

($)

Cumulative

gain ($)

Margin Account

balance ($)

Margin

call ($)

1 1,250 12,000

2 1241 -1800 -1800 10,200

3 1238.30 -540 -2340 9,660

4 1244.60 1260 -1080 10,920

5 1241.30 -660 -1740 10,260

6 1240.10 -240 -1980 10,020

7 1236.20 -780 -2760 9,240

8 1229.90 -1260 -4020 7,980 4,020

9 1230.80 180 -3840 12,180

10 1225.40 -1080 -4920 11,100

11 1228.10 540 -4380 11,640

12 1211 -3420 -7800 8,220 3,780

13 1226.90 3,180 4,620 15,180

Market Indices

• Written notes