Economics - Stock Exchange In India - Notes - Economics, Study notes of Economics

Download Economics - Stock Exchange In India - Notes - Economics and more Study notes Economics in PDF only on Docsity! STOCK EXCHANGE IN INDIA Introduction Stock exchange or the secondary market is that where purchase and sale of shares are affected in a free market conditions. The joint stock companies or corporate houses issue stock and bounds and enables those who have surplus funds to invest them profitably in either of them according to their choice. A Stock exchange is an association of member brokers for self regulating and protection of their interests. The first stock exchange in India was started in Bombay in the year 1875 in the name of Native Share Stock Brokers Association and later it became popular by the name of Bombay Stock Exchange. Objective By reading this lesson the students would be in a position to understand the meaning, objectives, Features and the functioning of the stock exchange in India. Contents Regulation which governs stock exchange- Organization- 1 Role of stock exchanges- 2 Qualification for membership- 3 Process of Transaction- 4 SEBI and Capital Market Reforms. Regulation for Governing Stock Exchange the SC(R) Act 1956 and the securities contracts (regulation) rules 1957 regulate certain matters of trading on stock exchanges subjects like opening and closing of the stock exchanges, timing of trading, banks transfer regulation, bank regulation, badla regulations, settlement, fixation of margin, market prices, regulation of broker trading, brokerage charges, trading rules etc are governed by the bylaws of the exchanges. Organization On the organization front stock exchanges in India are divided into two categories. Non profit making and Profit making exchanges Stock exchanges at Mumbai, Ahemadabad, Indore are voluntary non- profit making associations, while Kolkata, Dehli, Banglore, etc. are joint stock companies limited by shares. There is uniformity in their organization because the Rules of Articles of association which defines the constitutions of the recognized stock exchanges are approved by the Central Government. The decision making body of the stock exchanges is a governing body which has wide governmental and administrative powers. Subject to the approval of the government, it can make, amend and suspend the operation of the rules, bylaws and regulations of the exchanges. The constitution has provided it absolute power of jurisdiction over all members, power of management and control. The constitution also provides it the power to and admits expel members, to warn, censure, fine and suspend, members and their partners etc. It has also the power to determine the mode and conditions of the stock exchange business and to supervise direct and control all matters and activities affecting the stock exchange. The organization of Mumbai exchange is different. The members elect 16 directors for the Governing board. The governing board elects a President, a Vice- President and a treasurer. The governing board recommends the name of Process of Transaction: The investment transaction passes through following four stages- Exchange of the Order: A Clint places his order to a stock broker who is entitled to do business in a stock exchange. Execution of the order:- After placing the order , the broker or his clerk will execute the order and that will appear in the stock exchange daily official list showing the number and price of shares Reporting the tail to the Clint:- The moment the deal is transacted, the broker will send a contract note to the client giving details of the security bought or sold, prices and broker’s commission etc. Settlement of Transaction- In the case of cash transaction, payment has be made immediately on the transfer of the securities, or within a period of one to seven days. But in case of forward delivering contracts, the settlement is made on a fixed day generally a fortnight. The National Stock Exchange India in the recent past has witnessed wide ranging changes in its economy and its organs. Stock market is one of them. Liberalization and Globalization are the mantras of the day. The setting of the National Stock Exchange is an important part of the securities market reform process of the country. Though securities trading is not a new phenomenon in India but it was not keeping pace and standard as per the requirement of the day because securities trading in India was experiencing multiplicity of defects as lack of trading facilities with fairness and accessibility and dated procedures and long and uncertain settlement cycles. 1980’s is a land mark with regards to the growth of capital market in India. It witnessed a manifold increase in the number of companies, investors, brokers, and stock exchanges. Mr. M.J.Pherwani the Chairman of the Expert Group recommended the establishment of the National Stock Exchange .Hence, the National Stock Exchange came into existence in November 1992 with an equity capital of Rs. 25 crores but started its operation in November 1994.Companies with capital of Rs. 10 crores are eligible for listing .The NSE has been established for providing a nation wide stock trading facility and will operate in traditional and non traditional market for equities. The NSE has the following objectives:- 1.To provide a nation wide trading facility for trading in equities, debt and hybrids. 2.It provides equal access to the investors across the country. 3.To ensure fairness, efficiency and transparency in security trading. 4.To ensure shorter settlement cycles. 5.To provide international standard in the trading of securities. Functioning of the NSE National Stock Exchange has a nation wide network for providing trading facilities and equal access to investors across the country. There is no trading floor and each trading member has to have a computer in his office. This computer will be linked to the central computer at the NSE by internet. Thus it provides a high tech trading facility. The trading system provides a high flexibility to trading members. They can easily exercise the various options which are traditionally available to them on trading floor. When entering the order a trading member is empowered to place various conditions on the order. The system provides complete transparency. The identity of the trading members is kept secret and revealed only on confirmation of a trade to the respective counter parties. When securities are sold and delivery made to the clearing system, they are transferred to a depository. Each trading member is provided a pass book showing securities deposited by the trading member. Every client of the trading member has to have a sub account where records of Secondary Market Reforms Under the provision of Securities and Stock Exchange Board Act, 1992, SEBI has started registering the intermediaries like stock brokers and sub-brokers. While registering SEBI will adequacy, infrastructure etc. It has also notified regulation an insider trading. It has amended the organization of the governing body also and by now the governing body must have 5 elect members, not more than government nominated as public representatives. The government has allowed Foreign Institutional Investors (FIIs) to invest in the Indian capital market provide they are registered with the SEBI. Till January 1995, as many as 286 FIIs have been registered with the SEBI. To prevent excessive speculation and volatility in the stock market, SEBI has introduced rolling settlement from July 2002, under which settlements has to be made every day. Reforms in the Insurance Sector After a wide range of reforms in the capital market it was felt necessary to bring reforms in the insurance sector also. Accordingly in the year 1999-2000 the Insurance Regulation and Development Authority Act was passed despite stiff opposition from trade unions and left parties. The IRDA Act brought an end to the monopoly of the government in the insurance sector because it aims to promote private sector including foreign companies, in the insurance sector. It provides priority for the utilization of the policy holder’s funds in infrastructure development. So far the government has given the licenses to a number of private sector companies to participate in this business. Wide ranging powers to SEBI for better functioning of the Capital Market In the due course the government of India felt that SEBI should be strengthened more specially after experiencing Security Scam (Popularly known as Harsad Mehta Scam) in early 90’s.Accordingly in January 1995, the Government of India promulgated an ordinance to amend SEBI Act 1992 so as to empower SEBI with additional powers for ensuring the orderly development of the capital market and to enhance its ability to protect the interests of the investors. Important clauses of this ordinance are: To enable SEBI to respond quickly to market conditions and to reinforce its authority, it can go to the courts without prior approval of the government matters related to any dispute. SEBI is now provided with the regulatory powers over companies in the issuance of capital, the transfer of securities and other related matters. SEBI can now impose monetary fine on capital market intermediaries and other participants for a listed range of violations. SEBI can now summon the attendance of and call for documents from all categories of market intermediaries, including persons from the securities market. Summary Stock exchange or the secondary market is that where sale and purchase of shares are perfected in a free market condition. The joint stock companies and corporate houses issue stock and bonds in this market. The first stock exchange of India was started in Bombay In the year 1875 in the name of Native Share Stock Brokers Association. Stock exchanges of in India are divided into two categories – a) Non profit making and b) Profit making exchanges. To become member of the stock exchange a person has to full fill certain conditions. The process of transaction consists of – exchange of the order, execution of the order, reporting the deal to the client and settlement of the transaction. SEBI has brought the reforms in both the markets – primary market and secondary market.