Secondary Market

Module 7 – Secondary Market

• Topics– Introduction– Evolution of Country Stock Exchanges– Functions of Country Stock Exchanges– Regulatory Body of the Capital Market of the Country– Recent Guidelines of SEBI

Secondary Market Introduction

Secondary Market- Definition

• Definition – Secondary markets is a market, where existing securities are sold and bought among investors or traders, usually on a securities exchange, over the counter or elsewhere.

• Stock Market represent the security market where existing securities(Shares and Debentures). It is an organised mechanism for purchase and sale of existing securities.

Secondary Market- Functions

• Functions of the Secondary Market– Facilitate liquidity and marketability of the outstanding equity

and debt instrument.– Contribute to economic growth through allocation of funds to

the most efficient channel through the process of disinvestment to reinvestment.

– Provide instant valuation of securities which facilitate the measurement of the cost of capital and the rate of return.

– Induce Companies to improve performance as the market price at the stock exchanges reflects the performance and market price is readily available to investors.

Stock ExchangesEvolution and Functions

Stock Exchange - Definition• Definition – As per Securities Contract

(Regulation) Act, 1956, Stock Exchange is defined as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the busines of buying, selling in securities under cerain rules and regulations.

Stock Exchange- Characteristics

• Characteristics or Salient Features of Stock Exchange– It is a place where securities are purchased or sold– A Stock exchange is an association of persons whether

incorporated or not.– The trading in a stock exchange is strictly regulated and

rules and regulations prescribed for various transactions– Both genuine investors and speculators buy and sell

shares.– The securities of corporation, trusts, governments,

municipal corporations etc. are allowed to be dealt at stock exchange.

Stock Exchange - Functions• The Stock Exchanges play an important role in the

economic development of a country.• Important Functions of a Stock Exchange

– Ensures liquidity of capital – The stock exchanges provide a ready market where buyers and sellers are readily available and shares and stocks are converted into cash easily.

– Continuous market for securities - Provide a regular and ready market for trading in securities. Securities once listed continue to be traded at the exchange irrespective of the fact that owners go on changing.

Stock Exchange - Functions– Mobilising Surplus Funds – The stock is a ready market

for various securities and hence investors do not find any difficulty in investing their surplus funds or savings by purchasin shares and bonds etc. from the exchanges.

– Safety in dealings - Dealins at Stock exchanges are governed by well defined rules and regulations of SCRA, 1956. No scope for manipulating transactions and hence this safety in dealings bring confidence in the minds of all concerned parties.

– Listing of Securities – Only listed securities can be purchased at stock echanges and the listing is allowed only after critical examination of capital structure, management and prospects of the companies.

Stock Exchange - Functions– Platform for Public Debt – The stock exchange provide a

platform for raising public debts. These are organised markets for government securities, however there is no provision for a separate counter to handle these securities.

– Clearing House of Business Information – The companies listed at stocj exchanges have to procide financial statements, annual reports etc. to ensure maximum publicity of corporation operations and working. Hence Stock exchanges provide economic and company specific information to the investors and help companies decide their policies.

– Evaluation of Securities – The investors can evaluate the worth of their holdings from the prices quoted at different exchanges. Hence these are helpful in evaluating any type of security listed there.

Stock Exchange - Evolution

• The evolution/development of stock exchanges divided into 2 parts

– Pre Reform Era– Post Reform Era

Stock Exchange – Pre Reform Era• Pre Reform Era – Marks the advent of the stock

exchanges . Year(1850 to 1991)– Origin dates back to the 18th century – long term

negotiable securities were issued– Real beginning – beginning of the 19th century after

the enactment of the Companies Act in 1850 – which introduced the feature of limited liability, and generated investor interest in corporate securities.

– 1875 – The Native Share and Stock Brokers Association(now Bombay Stock Exchange – BSE) formed in Bombay(now Mumbai).

Stock Exchange – Pre Reform Era– Followed the formation of Association/exchanges in

Ahmedabad(1894), Calcutta(now Kolkata) in 1908 and Madras(now Chennai)

– Till 1990 – Indian Secondary Market comprised Regional Stock Exchanges with BSE heading the list. The Indian market was plagued with many limitations such as• Uncertainty of execution prices.• Uncertainty of delivery and settlement periods• Lack of transparency• High transaction costs.• Absence of risk management• Private off market deals

Stock Exchange – Post Reform Era– These limitations led to the initiation of reforms in

the year 1991.• Post Reform Phase (1991 onwards)

– Indian Secondary market has four tier structure• Regional Stock Exchanges• The National Stock Exchanges(BSE and NSE)• The Over the Counter Exchange of India(OTCEI)• The Inter Conneced Stock Exchange of India(ISE)

– NSE set up in 1994 – 1st modern exchange to bring in new technology, new trading pracices, new institutions and new products.

Stock Exchange – Post Reform Era– The OTCEI was set up in 1992 – as a Stock Exchange

providin for small and medium sized companies the means to generate capital

– The ISE – is the Stock exchange of stock exchanges– The MCX Stock Exchange came up in September 2008– The United Stock Exchange of India Limited(USE)

entered the market in July 2010. – fourth currency futures exchange after BSE, NSE and MCX-SX.

• All the Stock Exchanges operate under the rules and regulations approved by the government and the SEBI.

Major Stock Exchanges in India• Bombay Stock Exchange(BSE)

– Established in 1875 as a voluntary non-profit making association in Mumbai as the “Native Share and Stock Brokers Association”

– Asia’s oldest stock exchange and is a major stock exchange in India

– It has evolved over the years as the premier stock exchange in the country.

– It has evolved over the years as the premier stock exchange in the country.

– First exchange in the country to have obtained permanent recognition in 1956 from the Govt. of India under the Securities Contracts (Regulation) Act, 1956.

Major Stock Exchanges in India– Has the largest number of scripts listed.– Uses BSE Online Trading System (BOLT) as

the electronic screen based trading system nationwide.

– First Index launched by BSE was the BSE Sensitive Index(SENSEX) in 1986.

– It comprises 30 scrips.– Other Indexes were BSE National, a broader

index comprising 100 scrips, the BSE 200, the Dollex, BSE IT Index etc.

Major Stock Exchanges in India• National Stock Exchange(NSE)

– Incorporated in November 1992 with an equity capital of Rs. 25 crores.

– A professionally managed national market for shares, debentures and government securities

– India’s leading Stock Exchange covering 364 citites and towns across the country.

– NSE operates on the National Exchange for Automated Trading(NEAT) system, a fully automated screen based trading system.

– Brought about transparency, speed and efficiency, safety and market integrity

Major Stock Exchanges in India– Played a catalytic role in reforming the Indian

Securities market in terms of microstructure, market practices and trading volumes.

– NSE Fifty was rechristened as S&P CNX Nifty on July 28, 1998 – widely used to reflect the state of market sentiments for 50 highly liquid scrips.

– Other Indices include the CNX Nifty Junior, S&P CNX Defy(Dollar denominated S&P CNX Nifty), other S&P CNX Sectoral Indices such as IT, Bank, Energy, Pharma etc

Important Terms• Some Important concepts associated with

the Stock Exchanges in India-– Listing of Securities– Dematerialisation of Securities– Depository– Stock Market Index

Important Terms• Listing of Securities – It means

permission to quote shares and debenture officially on the trading floor of the stock exchange.– The stock exchanges fix certain standards

which the company must fulfill before getting the securities listed.

Important Terms• Dematerialisation of Securities –

Dematerialisation is the process wherein share certificates or other securities held in physical form are converted into electronic form and credited to demat account of an investor opened with a depository participant.

Important Terms• A Depository is a firm wherein the securities of an

investor are held in elecronic form in the snae way a bank holds money. It carries out the transacion of securities by means of book entry, without any physical movement of securities.

• Depository Organisation– NSDL – National Securities Depository Ltd.

• First depository organisation promoted by IDBI, UTI and NSE

• It was setup to provide electronic depository facilities for securities being traded in Capital Market.

Important Terms– CDSL – Central Depository Services(India) Ltd.

• It commenced its operations during Feb, 1999.• It was promoted by Mumbai Stock Exchange in

association with the leading banks such as the State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India and Centurion Bank.

• It was set up with the objective of providing convenient, dependable and secure depository services at affordable cost to all the market participants.

Important Terms• Stock Market Index –

– It is the most important indices of all as it measures overall market sentiments through a set of stocks that are representative of the market.

– It is a barometer of market behaviour.– It reflects market direction and indicates day to day

fluctuations in stock prices. It relects the expectations about the behaviour of the economy as a whole.

– Major Indices in India – BSE Sensex(comprises 30 shares and its base year is 1978-79) and NSE Nifty(comprises 50 highly liquid shares and its base period is 1995).

Capital Market Regulator - SEBI

Capital Market- Regulator

• SEBI – Securities and Exchange Board of India Ltd.

Rohit Kochhar