Perfect Competition – Case Study

on Stock Exchange

By: Amit Sheth

Gagan Pareek
Sainatth Wagh
Samir Daddikar
 Perfect Competition
A perfectly competitive market must meet the
following requirements:
• Both buyers and sellers are price takers.
• The number of firms is large.
• There are no barriers to entry.
• The firms' products are identical.
• There is complete information.
 Examples of Perfect Competition

•Agriculture
•Poultry
•Stock Market
•Fisheries
•Forex
 Stock Market
Stock market: A stock market is a physical place,
sometimes known as a stock exchange, where
brokers gather to buy and sell stocks and other
securities.
The term is also used more broadly to include
electronic trading that takes place over computer
and telephone lines
 Constituents of Stock Market

Stock Market

Participants Investors Intermediaries For e.g.:

For e.g.: BHEL For e.g.: FII ICICI direct

Types of Securities

Security Market

Secondary Market
List of Stock Exchanges India
 Open Out Cry System
 In the open outcry system, only eight representatives of a broker
were allowed to go to the Ring and trade.
 Investors were allowed to watch from the investors’ gallery and they
had to physically visit the broker’s office to place an order. A
representative of the broker would then rush to the Ring and
execute the trade.

Disadvantages of Open Out Cry:

• This was time consuming and inefficient
• Imposed limits on trading volumes and efficiency.
• Share of Mumbai was 80% , whereas rest part was not able to
participate.
Screen-based trading and Dematerialization
 NSE arrived with a fully computerized order book in 1994 called NEAT
(National Exchange for Automated Trading).
 This enabled it to spread across to various towns and cities in India by
setting up terminals connected to the central system through VSAT.
 Trading in 1363 securities through 2856 VSAT terminals (servicing 9000
users) spread across 354 cities
 Bid & Ask Price

The difference in the price of the best bid and ask is called as the Bid-Ask
spread and often is an indicator of liquidity in a stock. The narrower the
difference the more liquid or highly traded is the stock.
Transaction Stages –Micro Level
Pay In and Pay Out Period
 From outcry to screenplay
• 2009 :NSE turnover almost 70% of total stock market
• Trade settlement reduced from three weeks to T+15 and now
T+2.
• Mumbai shares compare with India reduced from 70% to 40%
, thereby giving large players fare chance.

S.No Day Time Description of activity

1 T T rade Day
2 T +1 By 1.00 pm Confirmat ion of all t rades
(inc luding c ust odial t rades).
By 2.30 pm Proc essing and
Downloading of obligat ion
files t o brokers/c ust odians
3 T +2 By 11.00 am Pay- in of sec urit ies and
funds
By 1.30 pm Pay- out of sec urit ies and
funds
 Harshad Mehta Scam
•Harshad Mehta scam was exposed in April 1992
by the journalist Sucheta Dalal.
•The amount involved in the scam was around
4000 cr INR.
•The scam was a result because of the loopholes
in the banking system which were exploited.
Following were the causes:
•Bank Receipt.
•Ready Forward Deal.
 Bank Receipt
Bank Receipt: As the name suggest, BR acts as the receipt
for the money received by the selling bank.
• It promises to deliver the securities to the buyer.
• In the mean time the seller holds the securities in trust
of buyer.
•For this operation, banks such as the bank of Karad (BoK)
and Metropolitan Co-operative Bank (MCB) came handy
which issued Mehta with fake BR or BR without any
backing from government.
•When Mehta gave this fake receipt for the same the bank
would give the money without checking the credentiality
of the document.
READY FORWARD DEAL
 Drawbacks in Banking System
•In this settlement process, deliveries of securities and payments
were made through the broker. That is, the seller handed over the
securities to the broker, who passed them to the buyer, while the
buyer gave the cheque to the broker, who then made the payment
to the seller. This lead to the asymmetric flow of information.
•In this settlement process, the buyer and the seller might not even
know whom they had traded with, either being know only to the
broker.
•Since the market prices were made by the brokers they had
become market makers. There was no concept of price taker and
price maker. Also the concept of ready forward deal was banned
after this scam.
 Regulatory Framework
SEBI Act (1992): SEBI has been obligated to protect the interests of the
investors in securities and to promote and development of, and to regulate
the securities market.
Following are the functions :
 Regulating the business in stock exchanges.
 Registering and regulating the working of stock brokers.
Promoting and regulating self-regulatory organizations.
Prohibiting insider trading in securities.
Regulating substantial acquisition of shares.
Leving fees or other charges for carrying out various activities.
 Conducting research for various activities.
 Depositories Act 1996
Why was depository act established?
•Introduction of screen based trading
•Shortening of trading and settlement cycles
•Dematerialisation
 Features Of Depository Act 1996
• Making securities of public limited companies
freely transferable
• Dematerialising the securities in the depository
mode
• Providing maintenance of ownership records in a
book entry form.
• Facilitating Screen Based Electronic Trading
• Facilitating exchanges to employ risk management
practices to ensure timely settlement of trades.
 Demutualisation

• Historically, brokers owned, controlled and

managed the stock exchanges.
• Regulators focused on reducing the
dominance of trading members in the
management of stock exchanges
• NSE adopted a pure demutualised governance
structure where ownership, management and
trading are with three different sets of people.
 Investor Protection
• Investor Education and Protection Fund (IEPF)
• SEBI and the stock exchanges have set up
investor grievance cells for redressal of
investor grievance.
 Ketan Parekh Scam
•Scam was detected in March 2001
•Sudden crash of 176 points on 1 March 2001
•SEBI ordered for an instant investigation
•KP arrested on 30 March 2001
• KP charged with defrauding BOI with $30
million
 Liquidity Crunch
KP used to routes for to solve Liquidity crunch
First Route
 Liquidity Crunch contd..
Second Route
• KP used around 16 MMCB branch at Mandvi (Mumbai),
accounts, either directly or through other broker firms, to
obtain funds
• KP used his BoI accounts to discount 248 pay orders worth
about Rs 24 billion between January and March 2001
• BoI's losses eventually amounted to Rs 1.2 billion
• The MMCB pay order issue hit several public sector banks
very hard including big names such as the State Bank of
India, Bank of India and the Punjab National Bank.
 Loopholes
• The scam opened up the debate over banks
funding capital market operations and lending
funds against collateral security.
• It also raised questions about the validity of
dual control of co-operative banks.
• Analysts pointed out that RBI was inspecting
the accounts once in two years, which created
ample scope for violation of rules.
 Regulatory Framework
Prevention of Money Laundering Act (2002): which helped in money
lending and provided confiscation of property derived from or involved in
money lending.

Q) Why do you think the name Money Laundering Act?

The term Money Laundering has been defined in Section 3 of the Act as
Whosoever directly or indirectly attempts to indulge or knowingly assists or
knowingly is a party or is actually involved in any process or activity
connected with the proceeds of crime and projecting it as untainted
property shall be guilty of offence of money-laundering.
 Regulatory Framework
As seen above there are some legal implications under the depositionaries act.
Following are the legal actions mentioned below:

 Rigorous imprisonment .
 Term Imprisonment for three to seven years.
 Liable to fine which may extend to five lakh rupees.
 Conclusion
• Both buyers and sellers are price takers. ×
• The number of firms/individuals is large. 
• There are no barriers to entry. ×
• The firms' products are identical. 
• There is complete information. ×
• Thus under normal circumstances a stock
market nearly resembles a perfectly
competitive market structure
Questions??
THANK YOU!!