Capital Market

DEFINITIONS OF FINANCIAL MARKET

In economics, a financial market is a mechanism that allows people to easily buy and sell
(trade) financial securities (such as stocks and bonds

Attributive form of financial market, noun

A generic term for the markets in which financial securities are traded – eg. stock exchanges,
futures exchanges, currency markets.

A market for a financial instrument, in which buyers and sellers find each other and create or
exchange financial assets. ..

In economics, a financial market is a mechanism that allows people to easily buy and sell (trade)
financial securities (such as stocks and bonds), commodities (such as precious metals or
agricultural goods), and other fungible items of value at low transaction costs and at prices that
reflect the efficient-market hypothesis.

Financial markets have evolved significantly over several hundred years and are undergoing
constant innovation to improve liquidity.
Both general markets (where many commodities are traded) and specialized markets (where only
one commodity is traded) exist. Markets work by placing many interested buyers and sellers in
one "place", thus making it easier for them to find each other. An economy which relies primarily
on interactions between buyers and sellers to allocate resources is known as a market economy in
contrast either to a command economy or to a non-market economy such as a gift economy.
In finance, financial markets facilitate –

The raising of capital (in the capital markets);

The transfer of risk (in the derivatives markets);

International trade (in the currency markets)
Typically a borrower issues a receipt to the lender promising to pay back the capital. These
receipts are securities which may be freely bought or sold. In return for lending money to the
borrower, the lender will expect some compensation in the form of interest or dividends.
The term "market" is sometimes used for what are more strictly exchanges, organizations that
facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may
be a physical location (like the NYSE) or an electronic system (like NASDAQ). Much trading of
stocks takes place on an exchange; still, corporate actions (merger, spinoff) are outside an
exchange, while any two companies or people, for whatever reason, may agree to sell stock from
the one to the other without using an exchange.
Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a
stock exchange, and people are building electronic systems for these as well, similar to stock
exchanges.
Financial markets can be domestic or they can be international.

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Types of financial markets
The financial markets can be divided into different subtypes:

Capital markets which consist of:
 Stock markets, which provide financing through the issuance of shares or common stock,
and enable the subsequent trading thereof.
 Bond markets, which provide financing through the issuance of bonds, and enable the
subsequent trading thereof.

Commodity markets, which facilitate the trading of commodities.

Money markets, which provide short term debt financing and investment.

Derivatives markets, which provide instruments for the management of financial risk.
 Futures markets, which provide standardized forward contracts for trading products at
some future date; see also forward market.
Insurance markets, which facilitate the redistribution of various risks.
Foreign exchange markets, which facilitate the trading of foreign exchange
The capital markets consist of primary markets and secondary markets. Newly formed (issued)
securities are bought or sold in primary markets. Secondary markets allow investors to sell
securities that they hold or buy existing securities.
Individuals
Many individuals are not aware that they are lenders, but almost everybody does lend money in
many ways. A person lends money when he or she:
 Puts money in a savings account at a bank;
 Contributes to a pension plan;
 Pays premiums to an insurance company;
 Invests in government bonds; or
 Invests in company shares.
Companies
Companies tend to be borrowers of capital. When companies have surplus cash that is not needed
for a short period of time, they may seek to make money from their cash surplus by lending it via
short term markets called money markets.
There are a few companies that have very strong cash flows. These companies tend to be lenders
rather than borrowers. Such companies may decide to return cash to lenders (e.g. via a share
buyback.) Alternatively, they may seek to make more money on their cash by lending it (e.g.
investing in bonds and stocks.)

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Borrowers
Individuals borrow money via bankers' loans for short term needs or longer term mortgages to
help finance a house purchase.
Companies borrow money to aid short term or long term cash flows. They also borrow to fund
modernization or future business expansion.
Governments often find their spending requirements exceed their tax revenues. To make up this
difference, they need to borrow. Governments also borrow on behalf of nationalized industries,
municipalities, local authorities and other public sector bodies. In the UK, the total borrowing
requirement is often referred to as the Public sector net cash requirement (PSNCR).
Governments borrow by issuing bonds. In the UK, the government also borrows from individuals
by offering bank accounts and Premium Bonds. Government debt seems to be permanent. Indeed
the debt seemingly expands rather than being paid off. One strategy used by governments to
reduce the value of the debt is to influence inflation.
Municipalities and local authorities may borrow in their own name as well as receiving funding from
national governments. In the UK, this would cover an authority like Hampshire County Council.
Public Corporations typically include nationalized industries. These may include the postal services,
railway companies and utility companies.
Many borrowers have difficulty raising money locally. They need to borrow internationally with
the aid of Foreign exchange markets

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DEFINITIONS OF CAPITAL MARKET

The capital market is the market for securities, where companies and governments can raise
long-term fund

The market in which corporate equity and longer-term debt securities (those maturing in
more than one year) are issued and traded.

Includes all financial transactions between users of funds and suppliers of funds.

The market for long- and medium-term financing, ie more than a year.

The market from which companies raise capital by selling medium and long-term financial
instruments including bonds, notes, swaps and equities

Debt and equity securities with maturities greater than one year.

A financial market in which long-term debt obligations and equity securities are bought and
sold.

There are two broad types of securities traded in the capital market: debt and equity. Buying
stock allows investors to gain an equity interest in the company and become part owner. ...

Is a market for long-term debt and equity shares? In this market, the capital funds comprising
of both equity and debt are issued and traded. This also includes private placement sources of
debt and equity as well as organized markets like stock exchanges. ...

The supply and demand for resources to invest in real estate and other investments.

The capital market is the market for securities, where companies and governments can raise
long term funds. It is a market in which money is lent for periods longer than a year. The capital
market includes the stock market and the bond market. Financial regulators, such as the U.S.
Securities and Exchange Commission, oversee the capital markets in their designated countries to
ensure that investors are protected against fraud.
The capital markets consist of the primary market and the secondary market. The primary market
is where new stock and bonds issues are sold (underwriting) to investors. The secondary markets
are where existing securities are sold and bought from one investor or speculator to another,
usually on an exchange (e.g.- New York Stock Exchange).

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INDIAN CAPITAL MARKET: AN OVERVIEW
Evolution
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago.
The earliest records of security dealings in India are meagre and obscure. The East India
Company was the dominant institution in those days and business in its loan securities used to be
transacted towards the close of the eighteenth century.
By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in
Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers
recognized by banks and merchants during 1840 and 1850.
The 1850's witnessed a rapid development of commercial enterprise and brokerage business
attracted many men into the field and by 1860 the number of brokers increased into 60.
In 1860-61 the American Civil War broke out and cotton supply from United States of Europe
was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about
200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began
(for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87).
At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a
place in a street (now appropriately called as Dalal Street) where they would conveniently
assemble and transact business. In 1887, they formally established in Bombay, the "Native Share
and Stock Brokers' Association" (which is alternatively known as “The Stock Exchange "). In
1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899.
Thus, the Stock Exchange at Bombay was consolidated.

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TRADING PATTERN OF THE INDIAN STOCK MARKET
Trading in Indian stock exchanges are limited to listed securities of public limited companies.
They are broadly divided into two categories, namely, specified securities (forward list) and non-
specified securities (cash list). Equity shares of dividend paying, growth-oriented companies with
a paid-up capital of atleast Rs.50 million and a market capitalization of atleast Rs.100 million and
having more than 20,000 shareholders are, normally, put in the specified group and the balance in
non-specified group.
Two types of transactions can be carried out on the Indian stock exchanges: (a) spot delivery
transactions "for delivery and payment within the time or on the date stipulated when entering
into the contract which shall not be more than 14 days following the date of the contract" : and (b)
forward transactions "delivery and payment can be extended by further period of 14 days each so
that the overall period does not exceed 90 days from the date of the contract". The latter is
permitted only in the case of specified shares. The brokers who carry over the outstandings pay
carry over charges (cantango or backwardation) which are usually determined by the rates of
interest prevailing.
A member broker in an Indian stock exchange can act as an agent, buy and sell securities for his
clients on a commission basis and also can act as a trader or dealer as a principal, buy and sell
securities on his own account and risk, in contrast with the practice prevailing on New York and
London Stock Exchanges, where a member can act as a jobber or a broker only.
The nature of trading on Indian Stock Exchanges are that of age old conventional style of face-to-
face trading with bids and offers being made by open outcry. However, there is a great amount of
effort to modernize the Indian stock exchanges in the very recent times.

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NEED FOR REGULATORS
The absence of conditions of perfect competition in the securities market makes the role of the
Regulator extremely important. The regulator ensures that the market participants behave in a
desired manner so that securities market continues to be a major source of finance for corporate
and government and the interest of investors are protected.

WHO REGULATES THE SECURITIES MARKET?

The responsibility for regulating the securities market is shared by Department of Economic
Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and
Securities and Exchange Board of India (SEBI).

ROLE OF SEBI
The Securities and Exchange Board of India (SEBI) is the regulatory authority in India
established under Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for establishment of
Securities and Exchange Board of India (SEBI) with statutory powers for (a) protecting the
interests of investors in securities (b) promoting the development of the securities market and (c)
regulating the securities market. Its regulatory jurisdiction extends over corporates in the
issuance of capital and transfer of securities, in addition to all intermediaries and persons
associated with securities market. SEBI has been obligated to perform the aforesaid functions by
such measures as it thinks fit. In particular, it has powers for:

Regulating the business in stock exchanges and any other securities markets.

Registering and regulating the working of stock brokers, sub–brokers etc.

Promoting and regulating self-regulatory organizations

Prohibiting fraudulent and unfair trade practices

Calling for information from, undertaking inspection, conducting inquiries and audits of the
stock exchanges, intermediaries, self–regulatory organizations, mutual funds and other
persons associated with the securities market.

OBJECTIVES
1) Conducive Environment
SEBI aims at creating a proper and conducive environment required for raising money from
the capital market through the rules, regulations, trade practices, customs and relations
among institutions, brokers, Investors and companies. It also aims at endeavoring to restore
and safeguard the trust of investors, especially the interest of the small investors. SEBI works
for creating proper investment climate to enable corporate sector to float industrial securities
easily, efficiently and at affordable minimum cost.
2) Investor Education
SEBI aims at educating investors so as to make them aware of their rights in clear and specific
terms by providing them with information. This way, SEBI aims at maintaining liquidity,
safety and profitability of the securities in the market that are crucial for any investment. A

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high degree of protection of investor rights and interest is made possible by providing
adequate, accurate and authentic information on a continuous basis.
3) Infrastructure
SEBI aims at developing a proper infrastructure for facilitating automatic expansion and
growth of business of middlemen like brokers, jobbers, commercial banks, merchant bankers,
mutual funds, etc.
4) Others
In addition to the above mentioned objectives, SEBI would also make efforts to bring about
necessary enactments for regulating business of intermediaries such as mutual funds, NBFCs
and chit funds, etc. SEBI would also work towards creating a Framework for more open,
orderly and unprejudiced conduct in relation to takeover and mergers in the corporate sector
so as to ensure fair and equal treatment to all the security holders.

FUNCTIONS OF SEBI
1. Prohibition of Fraudulent and Unfair Trade Practices :
SEBI notified regulations on Prohibitions of fraudulent and Unfair Trade Practices which
have imposed prohibition against market manipulators and unfair practices relating to
securities.
2. Penal Margins :
SEBI introduced imposition of penal margin on net undelivered portion at the end of the
settlement, special margin on buyers in case of rise in share prices.
3. Entry Norms :
It issued various guidelines for tightening the entry norms for companies accessing capital
market.
4. Screen-Based Trading :
SEBI decided to allow stock exchanges to expand their online screen based trading terminals
to locations outside their jurisdiction subject to certain conditions and to reduce the minimum
application size for subscribing to a public issue of Rs.2000 from Rs.5000 to encourage small
investors and to boost activity in the capital market.
5. Risk Management :
SEBI Group on risk management for equity market discussed the issues, concerning risk
management in rolling settlement and took following decisions:

For newly added 266 scrips the stock exchange will calculate scrips-wise variance and index
based variance and will apply the higher of the two as the margin percentage.

For 148 scrips already rolling in settlement, the margin is three times the daily index
variance.

The minimum daily index variance has been fixed at 5 percent as in the index futures market.

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6. Investor Protection :
Mitra Committee on investor protection submitted its report to SEBI and its main
recommendations are as follows:

Provisions relating to Investors Education and Protection Fund (IEPF) are removed from the
Companies Act and included in the SEBI Act, 1992; IEPF should be administered by SEBI.

SEBI should be the only regulator of capital market; it should be given powers for
investigation; it must also have powers to attach public funds and all converted assets to
prevent misappropriation; but it cannot have powers to award compensation, which is the job
of the judicial forum.

SEBI Act be amended to provide for statutory standing committees on investor’s protection,
market operation and standard setting.
7. Prevention of Insider Trading :
To prevent price manipulation, SEBI issued Insider Trading Regulations in 1992 prohibiting
insider trading. For ensuring greater market transparency, negotiated and cross deals (where
Both the seller and the buyer operate through the same broker), which are allowed earlier,
have also been banned.
8. Stricter Norms for Share Transfer :
SEBI has appointed Bhagwati Panel on SEBI takeover code to suggest a set of change
including tightening of the norms for transfer of shares among group companies and stiff
action against violation of takeover code. The panel has suggested the following:
i. NRIs and foreigners will have to take prior approval from company board for acquiring more
than 5 percent through creeping acquisition.
ii. Companies may transfer shares between themselves if they can prove that they belong to the
same group.
iii. Under takeover code, it will be made mandatory to inform the company if any one pledges the
company shares. The panel will formulate disclosure rules in the code under which acquires
will have to inform the company and stock exchanges when they reach 5, 10, 14 percent stake
in the company.
9. Online Real – time Information System :
SEBI has been planning to launch an online real –time information system which would
improve the information flow into the market in a more orderly manner. The system would be
similar to Edgar online, US – based provider of information services.
10. Raising Funds from Abroad :
The Indian companies were allowed to raise funds from abroad, through American / Global
Depository Receipts (ADRs/GDRs), Foreign Currency Convertible Bonds (FCCBs) and
external Commercial Borrowings (ECBs). The Reserve Bank allowed two way fungibility of
ADR’s /GDR’s in February 2002. Foreign institutional investors are allowed to participate in
the capital market.

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THE COMPANIES ACT, 1956

PUBLIC COMPANY PRIVATE COMPANY
 Minimum Paid-up Capital : Rs. 5,00,000  Minimum Paid-up Capital: Rs. 1,00,000
 Minimum number of members : 7 members  Minimum number of members 2 members
 Transfer of shares : Easily transferable  Transfer of shares : Restricts the right to
 IPO: It invites public to subscribe shares in transfer its shares
the company.  IPO : prohibits any invitation to the public
 Special privileges: Enjoy no such privileges. to subscribe for any shares in or debentures
of the company
 Restriction on appointment of directors :
 Special privileges: Enjoys some special
Directors must file with the registrar
privileges.
consent to act as directors
 Restriction on appointment of directors:
The directors of private company need not
do so.

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PRIMARY MARKET
The primary market provides the channel for sale of new securities. Primary market provides
opportunity to issuers of securities; Government as well as corporates, to raise resources to meet
their requirements of investment and/or discharge some obligation.
They may issue the securities at face value, or at a discount/premium and these securities may
take a variety of forms such as equity, debt etc. They may issue the securities in domestic market
and/or international market.

FACE VALUE, PREMIUM AND DISCOUNT OF SHARES IN A SECURITY MARKET

Face Value is the nominal or stated amount (in Rs.) assigned to a security by the issuer. For an
equity share, the face value is usually a very small amount (Rs. 5, Rs. 10) and does not have much
bearing on the price of the share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or
any other price. For a debt security, face value is the amount repaid to the investor when the bond
matures (usually, Government securities and corporate bonds have a face value of Rs. 100).
When a security is sold above its face value, it is said to be issued at a Premium and if it is sold at
less than its face value, then it is said to be issued at a Discount.

FEATURES OF PRIMARY MARKET

This is the market for new long term capital. The primary market is the market where the
securities are sold for the first time. Therefore it is also called New Issue Market (NIM).

In a primary issue, the securities are issued by the company directly to investors.

The company receives the money and issues new security certificates to the investors.

Primary issues are used by companies for the purpose of setting up new business or for
expanding or modernizing the existing business.

The primary market performs the crucial function of facilitating capital formation in the
economy.

The new issue market does not include certain other sources of new long term external
finance, such as loans from financial institutions. Borrowers in the new issue market may be
raising capital for converting private capital into public capital; this is known as ‘going public’.

The financial assets sold can only be redeemed by the original holder.

Methods of issuing securities in the primary market

Initial public offering,

Rights issue (for existing companies), and

Preferential issue.

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INITIAL PUBLIC OFFER (IPO)
An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is
when an unlisted company makes either a fresh issue of securities or an offer for sale of its
existing securities or both for the first time to the public. This paves way for listing and trading of
the issuer’s securities.

What is the difference between public issue and private placement?

When an issue is not made to only a select set of people but is open to the general public and any
other investor at large, it is a public issue. But if the issue is made to a select set of people, it is
called private placement. As per Companies Act, 1956, an issue becomes public if it results in
allotment to 50 persons or more. This means an issue can be privately placed where an allotment
is made to less than 50 persons.

Why do companies need to issue shares to the public?

Most companies are usually started privately by their promoter(s). However, the promoters’
capital and the borrowings from banks and financial institutions may not be sufficient for setting
up or running the business over a long term. So companies invite the public to contribute towards
the equity and issue shares to individual investors. The way to invite share capital from the public
is through a ‘Public Issue’. Simply stated, a public issue is an offer to the public to subscribe to the
share capital of a company. Once this is done, the company allots shares to the applicants as per
the prescribed rules and regulations laid down by SEBI.

What are the Benefits of IPOs?

For businesses, stocks and shares are a fast way to raise revenue for business expansion and
growth. They also can take a business to the next level. By becoming a publicly traded company a
business can take advantage of new, larger opportunities and can start working towards
incorporation and even worldwide expansion. IPO gives a company fast access to public capital.
Even though public offering can be costly and time consuming, the tradeoffs are very appealing to
companies. IPOs are also a relatively low risk for businesses and have the potential for huge gains
and for huge opportunities. The more investors wish to invest in a company, the more the
company stands to or from IPOs and other stock offerings.
For the investor, IPOs are attractive mainly because they may be undervalued. Initially, to make
IPOs more attractive, many companies will offer their initial public offering at a low rate. This
helps to encourage investors, and investors will often buy IPOs, thinking that the new company
or the newly public company will be the next big thing with a huge profit margin. As prices grow
and demand for the IPOs grows, early investors stand to make a lot of profit -- and very quickly.

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ROLE OF SEBI IN ISSUE OF SHARES
Any company making a public issue or a listed company making a rights issue of value of more
than Rs 50 lakh is required to file a draft offer document with SEBI for its observations. The
company can proceed further on the issue only after getting observations from SEBI. The validity
period of SEBI’s observation letter is three months only i.e. the company has to open its issue
within three months period.
SEBI does not recommend any issue nor does take any responsibility either for the financial
soundness of any scheme or the project for which the issue is proposed to be made or for the
correctness of the statements made or opinions expressed in the offer document. SEBI mainly
scrutinizes the issue for seeing that adequate disclosures are made by the issuing company in the
prospectus or offer document.
The investors should make an informed decision purely by themselves based on the contents
disclosed in the offer documents. SEBI does not associate itself with any issue/issuer and should
in no way be construed as a guarantee for the funds that the investor proposes to invest through
the issue. However, the investors are generally advised to study all the material facts pertaining
to the issue including the risk factors before considering any investment. They are strongly
warned against relying on any ‘tips’ or news through unofficial means.

Who decides the price of an issue?

Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines
have provided that the issuer in consultation with Merchant Banker shall decide the price. There
is no price formula stipulated by SEBI. SEBI does not play any role in price fixation. The
company and merchant banker are however required to give full disclosures of the parameters
which they had considered while deciding the issue price. There are two types of issues, one where
company and Lead Merchant Banker fix a price (called fixed price) and other, where the company
and the Lead Manager (LM) stipulate a floor price or a price band and leave it to market forces to
determine the final price (price discovery through book building process).

What does ‘price discovery through Book Building Process’ mean?

Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism
where, during the period for which the IPO is open, bids are collected from investors at various
prices, which are above or equal to the floor price. The offer price is determined after the bid
closing date.
Floor price is the minimum price at which bids can be made.

What is a Price Band in a book built IPO?

The prospectus may contain either the floor price for the securities or a price band within which
the investors can bid. The spread between the floor and the cap of the price band shall not be
more than 20%. In other words, it means that the cap should not be more than 120% of the floor
price. The price band can have a revision and such a revision in the price band shall be widely
disseminated by informing the stock exchanges, by issuing a press release and also indicating the

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change on the relevant website and the terminals of the trading members participating in the
book building process. In case the price band is revised, the bidding period shall be extended for a
further period of three days, subject to the total bidding period not exceeding ten days.

Who decides the Price Band?

It may be understood that the regulatory mechanism does not play a role in setting the price for
issues. It is up to the company to decide on the price or the price band, in consultation with
Merchant Bankers.

Prospectus
A large number of new companies float public issues. While a large number of these companies
are genuine, quite a few may want to exploit the investors. Therefore, it is very important that an
investor before applying for any issue identifies future potential of a company. A part of the
guidelines issued by SEBI (Securities and Exchange Board of India) is the disclosure of
information to the public. This disclosure includes information like the reason for raising the
money, the way money is proposed to be spent, the return expected on the money etc. This
information is in the form of ‘Prospectus’ which also includes information regarding the size of
the issue, the current status of the company, its equity capital, its current and past performance,
the promoters, the project, cost of the project, means of financing, product and capacity etc. It also
contains lot of mandatory information regarding underwriting and statutory compliances. This
helps investors to evaluate short term and long term prospects of the company.

What does ‘Draft Offer document’ mean?

‘Offer document’ means Prospectus in case of a public issue or offer for sale and Letter of Offer in
case of a rights issue which is filed with the Registrar of Companies (ROC) and Stock Exchanges
(SEs). An offer document covers all the relevant information to help an investor to make his/her
investment decision.
‘Draft Offer document’ means the offer document in draft stage. The draft offer documents are
filed with SEBI, atleast 21 days prior to the filing of the Offer Document with ROC/SEs. SEBI
may specify changes, if any, in the draft Offer Document and the issuer or the lead merchant
banker shall carry out such changes in the draft offer document before filing the Offer Document
with ROC/SEs. The Draft Offer Document is available on the SEBI website for public comments
for a period of 21 days from the filing of the Draft Offer Document with SEBI.

What is an ‘Abridged Prospectus’?

‘Abridged Prospectus’ is a shorter version of the Prospectus and contains all the salient features of
a Prospectus. It accompanies the application form of public issues.

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Who prepares the ‘Prospectus’/‘Offer Documents’?
Generally, the public issues of companies are handled by ‘Merchant Bankers’ who are responsible
for getting the project appraised, finalizing the cost of the project, profitability estimates and for
preparing of ‘Prospectus’. The ‘Prospectus’ is submitted to SEBI for its approval.
Parties to the issue

Registrar to the issue
Registration with SEBI is mandatory for acting as Registrar & Share Transfer Agent. A
category I Registrar can act as both Registrar to the Issue & as a Share Transfer Agent. A
category II Registrar can act as either as Registrar to the Issue or as a Share Transfer Agent.
Functions:
1) Assist the Lead Manger in selection of Bankers & Collection Centres.
2) Data entry of the contents of all the application forms.
3) Assist the Lead Manager in obtaining stock exchange approval for the basis of allotment.
4) Send stock invests of successful applicants for collection.

Bankers
There are no restrictions on the number of banks that can be associated with an issue. Each
Banker to the issue designated one particular branch as the Controlling Branch. The other
branches which act as collection centres are called as Collecting Branches.
Functions:
1) Open Share Application Money Account of company. All the issue proceeds are transferred
only to this account. The company can’t withdraw the money from this account till the
entire process of allotment & listing is completed.
2) Refund of application money to unsuccessful applicants.
3) Acceptance of money payable on allotment & on calls.

Debenture trustees
Debenture trustees are required to obtain a certificate of Registration from SEBI.
Functions:
1) Take possession of trust property in accordance to the provisions of trust deed.
2) Resolve grievances of debenture holders.
3) Ensure that refund orders & debentures certificates are despatched on time.
4) To ensure continuous listing of debentures.

Underwriters
When an existing shareholder of body corporate/public don’t subscribe to the securities
offered to them, then the underwriter agrees to subscribe a specified number of securities in an
issue. An underwriter should have minimum net worth of Rs. 20 lakhs & total outstanding
underwriting obligation at any point of time can’t exceed 20 times of underwriter’s net worth.
The underwriter exposed to the risk of under subscription & for assuming the risk they are
remunerated by underwriting commission which comprise of the face value + premium of the
issue.

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Brokers
Any member of any recognised stock exchanges can be appointed as Broker to the issue. The
information regarding the brokers to the issue & the rate of brokerage payable is to be
mentioned in the prospectus.
Functions:
1) Offer marketing support for the issue.
2) Disseminate information to the investors about the issue.
3) Extend underwriting support to the issue.

Advertising agencies
The success of many public issues can be attributed to savvy advertising campaign. The role
of advertising agency is of crucial importance in determining the fate of the issue.
Functions:
1) Devising of advertising & publicity strategy.
2) Designing the corporate brochure & publicity material.
3) Arranging press conferences & road shows.
4) Drafting & distribution of press releases.

Printers
The printers are involved in the process of printing & distribution of issue related stationery.
The primary criteria in selection of printers are the cost factor & the quality of service.
Functions:
1) Layout & designing of offer document.
2) Designing of Form 2A (application form).
3) Printing of offer documents, application forms, posters, brochures, etc.

Auditor
The regular auditor of the company acts as the auditor for the purpose of public offer. The
auditor is has to prepare the reports for the company.
Functions:
1) Tax benefits report.
2) Certificate stating the entire amount of reservation.
3) Certificate stating the promoter’s contribution.

Legal Advisor
Legal Advisors are generally appointed to ensure compliance of all legal & regulatory
provisions related to the public offering.
Functions:
1) Scrutinize the offer document to ensure that there is no legally incorrect statement.
2) Provide legal advice to the company on other legal matters related to public offering.
3) Ensure that the offer document is drawn up in accordance with the provisions of the
Companies Act, 1956, SEBI guidelines & the other statutory provisions related to public
offering.

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 Capital Market
PRE – ISSUE ACTIVITIES

Registration of the offer document
10 copies of the draft prospectus have to be filed with SEBI accompanied by the documents
like MOU, Undertaking, Due Diligence & Inter se Allocation of Responsibilities. SEBI
charges registration fees for the same.

Mandatory Collection Centres

The minimum number of collection centres for an issue of capital shall be four metropolitan
cities. At all such places where stock exchange is located & in the region where the registered
office of company is situated. For this purpose, the country has been divided into four regions
i.e. Eastern, Western, Southern, Northern.

POST – ISSUE ACTIVITIES

Post – issue activities commence with the collection of subscription figures & go on till the
securities are listed on the stock exchange.

What is the role of a ‘Registrar’ to an issue?

The Registrar finalizes the list of eligible allottees after deleting the invalid applications and
ensures that the corporate action for crediting of shares to the demat accounts of the applicants is
done and the dispatch of refund orders to those applicable are sent. The Lead Manager
coordinates with the Registrar to ensure follow up so that that the flow of applications from
collecting bank branches, processing of the applications and other matters till the basis of
allotment is finalized, dispatch security certificates and refund orders completed and securities
listed.

How does one know if shares are allotted in an IPO/offer for sale? What is the timeframe for
getting refund if shares not allotted?
As per SEBI guidelines, the Basis of Allotment should be completed with 15 days from the issue
close date. As soon as the basis of allotment is completed, within 2 working days the details of
credit to demat account / allotment advice and dispatch of refund order needs to be completed. So
an investor should know in about 15 day’s time from the closure of issue, whether shares are
allotted to him or not.

How long does it take to get the shares listed after issue?
It would take around 3 weeks after the closure of the book built issue.

What is meant by ‘Listing of Securities’?

Listing means admission of securities of an issuer to trading privileges (dealings) on a stock
exchange through a formal agreement. The prime objective of admission to dealings on the

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exchange is to provide liquidity and marketability to securities, as also to provide a mechanism for
effective control and supervision of trading.

What is a ‘Listing Agreement’?

At the time of listing securities of a company on a stock exchange, the company is required to
enter into a listing agreement with the exchange. The listing agreement specifies the terms and
conditions of listing and the disclosures that shall be made by a company on a continuous basis to
the exchange.
What does ‘Delisting of securities’ mean?
The term ‘Delisting of securities’ means permanent removal of securities of a listed company from
a stock exchange. As a consequence of delisting, the securities of that company would no longer
be traded at that stock exchange.

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 Capital Market
SECONDARY MARKET
DEFINITION OF SECONDARY MARKET
Secondary market refers to a market where securities are traded after being initially offered to the
public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done
in the secondary market. Secondary market comprises of equity markets and the debt markets.

ROLE OF SECONDARY MARKET

For the general investor, the secondary market provides an efficient platform for trading of his
securities. For the management of the company, Secondary equity markets serve as a monitoring
and control conduit—by facilitating value-enhancing control activities, enabling implementation
of incentive-based management contracts, and aggregating information (via price discovery) that
guides management decisions.

DIFFERENCE BETWEEN PRIMARY MARKET & SECONDARY MARKET

In the primary market, securities are offered to public for subscription for the purpose of raising
capital or fund. Secondary market is an equity trading venue in which already existing/pre-issued
securities are traded among investors. Secondary market could be either auction or dealer market.
While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the
dealer market.

EQUITY INVESTMENT
Reason one should invest in equities in particular:
When you buy a share of a company you become a shareholder in that company. Shares are also
known as Equities. Equities have the potential to increase in value over time. It also provides your
portfolio with the growth necessary to reach your long term investment goals. Research studies
have proved that the equities have outperformed most other forms of investments in the long
term. This may be illustrated with the help of following examples:
a) Over a 15 year period between 1990 to 2005, Nifty has given an annualized return of 17%.
b) Mr. Raju invests in Nifty on January 1, 2000 (index value 1592.90).
The Nifty value as of end December 2005 was 2836.55. Holding this investment over this period
Jan 2000 to Dec 2005 he gets a return of 78.07%. Investment in shares of ONGC Ltd for the same
period gave a return of 465.86%, SBI 301.17% and Reliance 281.42%.
Therefore,

Equities are considered the most challenging and the rewarding, when compared to other
investment options.

Research studies have proved that investments in some shares with a longer tenure of
investment have yielded far superior returns than any other investment.

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 Capital Market
However, this does not mean all equity investments would guarantee similar high returns.
Equities are high risk investments. One needs to study them carefully before investing.

AVERAGE RETURN ON EQUITIES IN INDIA

Since 1990 till date, Indian stock market has returned about 17% to investors on an average in
terms of increase in share prices or capital appreciation annually. Besides that on average stocks
have paid 1.5% dividend annually. Dividend is a percentage of the face value of a share that a
company returns to its shareholders from its annual profits. Compared to most other forms of
investments, investing in equity shares offers the highest rate of return, if invested over a longer
duration.

FACTORS INFLUENCING THE PRICE OF STOCK

Broadly there are two factors: (1) stock specific and (2) market specific. The stock-specific factor is
related to people’s expectations about the company, its future earnings capacity, financial health
and management, level of technology and marketing skills. The market specific factor is
influenced by the investor’s sentiment towards the stock market as a whole. This factor depends
on the environment rather than the performance of any particular company. Events favorable to
an economy, political or regulatory environment like high economic growth, friendly budget,
stable government etc. can fuel euphoria in the investors, resulting in a boom in the market. On
the other hand, unfavorable events like war, economic crisis, communal riots, minority
government etc. depress the market irrespective of certain companies performing well. However,
the effect of market-specific factor is generally short-term. Despite ups and downs, price of a stock
in the long run gets stabilized based on the stock specific factors. Therefore, a prudent advice to
all investors is to analyze and invest and not speculate in shares.

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 Capital Market
TERMS
GROWTH STOCK
In the investment world we come across terms such as Growth stocks, Value stocks etc.
Companies, whose potential for growth in sales and earnings are excellent, are growing faster
than other companies in the market or other stocks in the same industry are called the Growth
Stocks. These companies usually pay little or no dividends and instead prefer to reinvest their
profits in their business for further expansions.

VALUE STOCK
The task here is to look for stocks that have been overlooked by other investors and which may
have a ‘hidden value’. These companies may have been beaten down in price because of some bad
event, or may be in an industry that's not fancied by most investors. However, even a company
that has seen its stock price decline still has assets to its name - buildings, real estate, inventories,
subsidiaries, and so on. Many of these assets still have value, yet that value may not be reflected in
the stock's price. Value 38 investors look to buy stocks that are undervalued, and then hold those
stocks until the rest of the market realizes the real value of the company's assets. The value
investors tend to purchase a company's stock usually based on relationships between the current
market price of the company and certain business fundamentals. They like P/E ratio being below
a certain absolute limit; dividend yields above a certain absolute limit; Total sales at a certain level
relative to the company's market capitalization, or market value etc.

ACQUISITION OF EQUITY SHARES

You may subscribe to issues made by corporates in the primary market. In the primary market,
resources are mobilized by the corporates through fresh public issues (IPOs) or through private
placements. Alternately, you may purchase shares from the secondary market. To buy and sell
securities you should approach a SEBI registered trading member (broker) of a recognized stock
exchange.

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 Capital Market
DEBT INSTRUMENT
DEFINITION
Debt instrument represents a contract whereby one party lends money to another on pre-
determined terms with regards to rate and periodicity of interest, repayment of principal amount
by the borrower to the lender. In Indian securities markets, the term ‘bond’ is used for debt
instruments issued by the Central and State governments and public sector organizations and the
term ‘debenture’ is used for instruments issued by private corporate sector.

FEATURES
Each debt instrument has three features: Maturity, coupon and principal.
Maturity: Maturity of a bond refers to the date, on which the bond matures, which is the date on
which the borrower has agreed to repay the principal. Term-to-Maturity refers to the number of
years remaining for the bond to mature. The Term-to-Maturity changes everyday, from date of
issue of the bond until its maturity. The term to maturity of a bond can be calculated on any date,
as the distance between such a date and the date of maturity. It is also called the term or the
tenure of the bond.

Coupon: Coupon refers to the periodic interest payments that are made by the borrower (who is
also the issuer of the bond) to the lender (the subscriber of the bond). Coupon rate is the rate at
which interest is paid, and is usually represented as a percentage of the par value of a bond.

Principal: Principal is the amount that has been borrowed, and is also called the par value or face
value of the bond. The coupon is the product of the principal and the coupon rate. The name of
the bond itself conveys the key features of a bond. For example, a GS CG2008 11.40% bond refers
to a Central Government bond maturing in the year 2008 and paying a coupon of 11.40%. Since
Central Government bonds have a face value of Rs.100 and normally pay coupon semi-annually,
this bond will pay Rs. 5.70 as six- monthly coupon, until maturity.

SEGMENTS IN THE DEBT MARKET IN INDIA

There are three main segments in the debt markets in India, viz., (1) Government Securities,
(2) Public Sector Units (PSU) bonds, and (3) Corporate securities.
The market for Government Securities comprises the Centre, State a State-sponsored securities.
In the recent past, local bodies such as municipalities have also begun to tap the debt markets for
funds. Some of the PSU bonds are tax free, while most bonds including government securities are
not tax-free. Corporate bond markets comprise of commercial paper and bonds. These bonds
typically are structured to suit the requirements of investors and the issuing corporate, and
include a variety of tailor- made features with respect to interest payments and redemption.

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 Capital Market
PARTICIPANTS IN THE DEBT MARKET
Given the large size of the trades, Debt market is predominantly a wholesale market, with
dominant institutional investor participation. The investors in the debt markets are mainly banks,
financial institutions, mutual funds, provident funds, insurance companies and corporates.

ACQUIRING SECURITIES IN THE DEBT MARKET

You may subscribe to issues made by the government/corporates in the primary market.
Alternatively, you may purchase the same from the secondary market through the stock
exchanges.

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 Capital Market
STOCK EXCHANGE
A STOCK EXCHANGE is a marketplace where brokers and dealers meet to buy and sell stocks
of publicly traded companies on behalf of investors. It is an organized market place, either
corporation or mutual organization, where members of the organization gather to trade company
stocks or other securities. Stock Exchange also facilitates for the issue and redemption of
securities and other financial instruments including the payment of income and dividends. The
trade on an exchange is only by members and stock broker who have a seat on the exchange.
STOCK EXCHANGES IN INDIA
There are twenty three stock exchanges in India
 Bombay Stock Exchange (BSE)
 National Stock Exchange (NSE)
 Regional Stock Exchanges
 Ahmedabad Stock Exchange
 Bangalore Stock Exchange
 Bhubaneswar Stock Exchange
 Calcutta Stock Exchange (Kolkata)
 Cochin Stock Exchange
 Coimbatore Stock Exchange
 Delhi Stock Exchange
 Guwahati Stock Exchange
 Hyderabad Stock Exchange
 Jaipur Stock Exchange
 Ludhina Stock Exchange
 Madhya Pradesh Stock Exchange (Indore)
 Madras Stock Exchange
 Magadh Stock Exchange (Patna)
 Mangalore Stock Exchange
 Meerut Stock Exchange
 OTC Exchange of India
 Pune Stock Exchange
 Saurashtra Kutch Stock Exchange
 Uttar Pradesh Stock Exchange (Kanpur)
 Vadodara Stock Exchange (Baroda)

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 Capital Market
BOMBAY STOCK EXCHANGE
Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now spanning
three centuries in its 133 years of existence. What is now popularly known as BSE was
established as "The Native Share & Stock Brokers' Association" in 1875. BSE is the first stock
exchange in the country which obtained permanent recognition (in 1956) from the Government of
India under the Securities Contracts (Regulation) Act 1956. BSE's pivotal and pre-eminent role in
the development of the Indian capital market is widely recognized. It migrated from the open
outcry system to an online screen based order driven trading system in 1995.
Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by
providing it with an efficient access to resources. There is perhaps no major corporate in India
which has not sourced BSE's services in raising resources from the capital market. Today, BSE is
the world's number 1 exchange in terms of the number of listed companies and the world's 5th in
transaction numbers. The market capitalization as on December 31, 2007 stood at USD 1.79
trillion . An investor can choose from more than 4,700 listed companies, which for easy reference,
are classified into A, B, S, T and Z groups.
The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic stature, and is
tracked worldwide. It is an index of 30 stocks representing 12 major sectors. The SENSEX is
constructed on a 'free-float' methodology, and is sensitive to market sentiments and market
realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indices. BSE has
entered into an index cooperation agreement with Deutsche Börse. This agreement has made
SENSEX and other BSE indices available to investors in Europe and America.
BSE provides an efficient and transparent market for trading in equity, debt instruments and
derivatives. It has a nation-wide reach with a presence in more than 450 cities and towns of India.
BSE has always been at par with the international standards. The systems and processes are
designed to safeguard market integrity and enhance transparency in operations. BSE is the first
exchange in India and the second in the world to obtain an ISO 9001:2000 certification. It is also
the first exchange in the country and second in the world to receive Information Security
Management System Standard BS 7799-2-2002 certification for its BSE On-line Trading System
(BOLT).
BSE continues to innovate. In recent times, it has become the first national level stock exchange
to launch its website in Gujarati and Hindi to reach out to a larger number of investors.
In 2006, BSE launched the Directors Database and ICERS (Indian Corporate Electronic
Reporting System) to facilitate information flow and increase transparency in the Indian capital
market. While the Directors Database provides a single-point access to information on the boards
of directors of listed companies, the ICERS facilitates the corporates in sharing with BSE their
corporate announcements.
Awards
 The World Council of Corporate Governance has awarded the Golden Peacock Global CSR
Award for BSE's initiatives in Corporate Social Responsibility (CSR).
 The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and March 31
2007 have been awarded the ICAI awards for excellence in financial reporting.

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 Capital Market
 The Human Resource Management at BSE has won the Asia - Pacific HRM awards for its
efforts in employer branding through talent management at work, health management at
work and excellence in HR through technology
Functions of BSE
The Stock Market is a pivotal institution in the financial system. A well-ordered stock market
performs several economic functions:
 It ensures the measure of safety and fair dealing
 It performs an ‘act of magic’ by translating short-term investments into long-term funds for
companies.
 It directs the flow of capital in the most profitable channels.
 It induces companies to raise their standard of performance.
 It offers guidance to management about the cost of capital.

Listing of the companies on Stock Exchange

‘Listed Company’ means a public ltd Co which is
 Listed on any one or more recognized stock exchanges in India.
 Securities (shares: debentures) of such company are traded on such stock exchanges.

‘Unlisted company’ therefore means a company whose securities are not listed on any of
recognized stock exchanges in India.

Why Companies get listed with Stock Exchange?

Companies get listed with Stock Exchange for following reasons:
 Securities are freely transferable.
 Easy liquidity of securities.
 Easy availability of prices of securities.
 Reputation, Image, Goodwill.
 Public awareness.
 More transparency.
 Helps in obtaining loans from Banks/Institutions.
 Helps in marketing its Products.

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 Capital Market
In order to list securities of a company & get its shares traded on any recognized stock exchanges,
the Public Ltd Company may either come out wit ha public issue (i.e. to offer further securities to
public) or make an offer for sale of existing securities to public. This can be done by issuing of
Prospectus & Complying with all The Provinces of Company Act 1956.
Each stock exchange has its own criteria for listing securities which should also be met.
E.g.: If company intends to get listed its securities in Bombay Stock Exchange, Mumbai post issue
capital (paid up capital after proposed public issue) of such companies should be Rs. 10 Crores
atleast.
The Company enters into a listing agreement with concerned stock exchange & on receipt of
permission from concerned Stock Exchange, company is listed and securities are thereafter traded
on such stock exchange.

Index
 Basically an indicator
 Measures the change in the prices of the underlying asset with respect to the prices in the base
year
 The Sensex is an indicator of all the major companies of the BSE.
 The Nifty is an indicator of all the major companies of the NSE.
 If the Sensex goes up, it means that the prices of the stocks of most of the major companies on
the BSE have gone up. If the Sensex goes down, this tells you that the stock price of most of
the major stocks on the BSE have gone down.

Sensex
 "Sensitive Index" and is generally associated with the stock market indices.
 The oldest stock index in India
 Index of 30 stocks representing 12 major sectors
 During trading hours, value of the Index is calculated and disseminated every 15 seconds.
This is done automatically on the basis of prices at which trades in Index constituents are
executed.
 The base value of the Sensex is 100 on April 1, 1979 and the base year of BSE-SENSEX is
1978-79.
As the oldest index in the country, it provides the time series data over a fairly long period of time
(From 1979 onwards). Small wonder, the Sensex has over the years become one of the most
prominent brands in the country.
The growth of equity markets in India has been phenomenal in the decade gone by. Right from
early nineties the stock market witnessed heightened activity in terms of various bull and bear
runs.

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 Capital Market
The Sensex captured all these events in the most judicial manner. One can identify the booms and
busts of the Indian stock market through Sensex.

Selection of 30 stocks for SENSEX

The index committee selects the list of 30 stocks which should be be included in SENSEX. Index
Committee consists of academicians, mutual fund managers, finance journalists, independent
governing board members and other participants in the financial markets.

Criteria to selects 30 stocks for SENSEX

 To be selected the stock should have been traded on each and every trading day for the past
one year.
 The stock should be among the top 150 companies listed by average number of trades and the
average value of the trades per day over the past one year.
 The stock must have been listed on the BSE (Bombay stock exchange) for at least one year.

SENSEX CALCULATION METHODOLOGY

SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-Weighted"
methodology of 30 component stocks representing large, well-established and financially sound
companies across key sectors. The base year of SENSEX was taken as 1978-79. SENSEX today is
widely reported in both domestic and international markets through print as well as electronic
media. It is scientifically designed and is based on globally accepted construction and review
methodology. Since September 1, 2003, SENSEX is being calculated on a free-float market
capitalization methodology.
SENSEX is calculated using the "Free-float Market Capitalization" methodology, wherein, the
level of index at any point of time reflects the free-float market value of 30 component stocks
relative to a base period. The market capitalization of a company is determined by multiplying the
price of its stock by the number of shares issued by the company. This market capitalization is
further multiplied by the free-float factor to determine the free-float market capitalization.
Free-float methodology refers to an index construction methodology that takes into consideration
only the free-float market capitalization of a company for the purpose of index calculation and
assigning weight to stocks in the index. Free-float market capitalization takes into consideration
only those shares issued by the company that are readily available for trading in the market. It
generally excludes promoters' holding, government holding, strategic holding and other locked-in
shares that will not come to the market for trading in the normal course. In other words, the
market capitalization of each company in a free-float index is reduced to the extent of its readily
available shares in the market.
Subsequently all BSE indices with the exception of BSE-PSU index have adopted the free-float
methodology.

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 Capital Market
OBJECTIVES OF SENSEX
The SENSEX is the benchmark index of the Indian Capital Markets with wide acceptance among
individual investors, institutional investors, foreign investors and fund managers. The objectives
of the index are:
To measure market movements
Given its long history and its wide acceptance, no other index matches the SENSEX in reflecting
market movements and sentiments. SENSEX is widely used to describe the mood in the Indian
Stock markets.
Benchmark for funds performance
The inclusion of blue chip companies and the wide and balanced industry representation in the
SENSEX makes it the ideal benchmark for fund managers to compare the performance of their
funds.

For index based derivative products

Institutional investors, money managers and small investors all refer to the SENSEX for their
specific purposes The SENSEX is in effect the proxy for the Indian stock markets. The country's
first derivative product i.e. Index-Futures was launched on SENSEX.

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 Capital Market
DIFFERENT TYPES OF INDICES

BSE 100
BSE 100 index is called as BSE National Index as it works as broad-based index reflecting the
stock market at national level. Initially Sense was compiled of only 30 most effective stocks of the
market. Due to its limited effect, in 1989 BSE started BSE 100 index, compiled of 100 companies
from "Specified" and the "Non-Specified" list of the five major stock exchanges, viz. Mumbai,
Calcutta, Delhi, Ahmedabad and Madras.
Year 1983-1984 was chosen as the base year due to the market stability that year.

BSE 200
Launched in 1994, BSE 200 index comprises of the 200 selected companies and their equity shares
from the specified and non specified lists of the major exchanges. Companies are short listed on
the basis of their current market capitalization and certain fundamental factors like the market
performance of the company, volumes of the company turnover etc.
Year 1989-90 was chosen as the base year due to its price stability during the year.

BSE 500
Due to the changing pattern of the economy, Bombay Stock Exchange coined a new index as, BSE
500 comprising 500 scrips. The index represents about 93% of the total market capitalizations,
ideally said to represent the total market. Initially calculated on the basis of full market
capitalization methodology, later on free float methodology replaced the full market
capitalization. BSE 500 was launched on August 16 2005.
Year 1999 is selected as the base year because of its proximity to the current period and the base
value is 1000.

BSE MIDCAP
BSE midcap index was introduced by BSE to make sure the unbiased movement of the market.
Midcap index track the performance of the companies with relatively small market capitalization.
As the companies listed in BSE 500 index represents the 93% of total market capitalization.With
Mid- Cap index it was easy to represent the mid cap companies listed on the stock exchange. It
was also based on the free float methodology. Base year chosen is 2002-2003 and the base index
value is 1000 for each indices.

BSE SMALL CAP

BSE Small Cap Index was introduced to track the performance of the small cap companies listed
on the stock exchange. Bse Small indices truly helped the investing community as they capture

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 Capital Market
the movement of the mid and small segments of the market. Base year is 2002-2003 and the base
index value is 1000.
BSE TECK
As Information Technology, Media, & Telecom sectors are emerging as the major dominating
sectors of the economy, BSE introduced the TECk index. It serves as a quality benchmark for the
investment community in these knowledge based sectors. BSE TECk index is composed of 21
quality stocks from the IT, Media and Telecom sectors. The base date chosen is April 2, 2001 and
the base value for BSE TECk Index is 1000 points.

BSE PSU
Launched in June 2001 OR 2004, BSE PSU Index is composed of all Public Sector Undertakings
stocks in BSE 500 Index. The objective behind the launch of this Index was to track the
performance of listed equity of PSU companies. PSU Index is displayed on-line on the BOLT
trading terminals nationwide. Base value has been set at 1000 and the base date is 1st February
1999.

BSE BANKEX
BankEx was launched by BSE to track the performance of the leading banking sectors as bank
stocks are emerging as a major segment of the stock market. The base date for BANKEX is 1st
January 2002 and base value for BANKEX is 1000 points. BankEx Index includes 12 selected
major stocks which represent total 90% market capitalization of all the banking sector stocks
listed on the BSE.

BSE AUTO
In August 2004 BSE launched a new Sector Series (90/FF) indices comprising BSE Auto Index,
BSE BANKEX, BSE Capital Goods Index, BSE Consumer Durables Index, BSE FMCG Index,
BSE Health care Index, BSE IT Index, BSE Metal Index, BSE Oil & Gas Index, BSE Mid Cap
Index, BSE Small Cap Index. BSE Auto Index comprises all the major auto stocks in the BSE 500
Index.

BSE CONSUMER GOODS

Consumer goods index is a part of the BSE sectoral Indices. To track the performance of
companies dealing with the consumer goods it was necessary to list them in a new index named
CG Index. CG Index comprises the companies occupying 90% market capitalization in the field of
consumer goods.

BSE FMCG INDEX

Products that shows a sudden shelf turnover, at comparatively low cost are classified as Fast
Moving Consumer Goods. Eatables, soft drinks, and cleaning materials fall in FMCG category.

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 Capital Market
Examples of FMCG brands are Coca-Cola, Kleenex and Mars. FMCG Index monitors the
performance of the major brands in the FMCG category. Scrips having a minimum of 90%
trading frequency in preceding six months are eligible to be included in the FMCG Index.

BSE HEALTH CARE

Health Care and Pharma sector are emerging as strong effectors on the economy of India. BSE
launched a new Health Care Index, monitoring the health care sector performance individually.
On August 23, 2004 five sectoral Indices viz. BSE IT, BSE FMCG, BSE Capital Goods, BSE
Consumer Durables and BSE Health care were shifted to Free-Float methodology and joined the
Sector Series (90/FF). 90% coverage in health care sector is given from the universe of BSE-500
index constituents. Top stock performers in the health care sector are listed in the BSE Health
Care Index.

BSE METAL INDEX

BSE Metal Index was launched on August 23, 2004. Metal stocks performing well in the economy
are indexed in the BSE metal index.

BSE OIL & GAS INDEX

Oil and Gas sector is gaining its own weight-age in the economy. The stocks from oil and gas
sectors have lot to effect on the stock market movement. Oil and Gas index was launched effective
August 23, 2004 as part of the new series "90/FF". The index covers 90% of the sectoral market
capitalization and is based on the Free-Float methodology

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 Capital Market
NATIONAL STOCK EXCHANGE
The National Stock Exchange (NSE) is India's leading stock exchange covering various cities and
towns across the country. NSE was set up by leading institutions to provide a modern, fully
automated screen-based trading system with national reach. The Exchange has brought about
unparalleled transparency, speed & efficiency, safety and market integrity. It has set up facilities
that serve as a model for the securities industry in terms of systems, practices and procedures.

NSE has played a catalytic role in reforming the Indian securities market in terms of
microstructure, market practices and trading volumes. The market today uses state-of-art
information technology to provide an efficient and transparent trading, clearing and settlement
mechanism, and has witnessed several innovations in products & services viz. demutualization of
stock exchange governance, screen based trading, compression of settlement cycles,
dematerialization and electronic transfer of securities, securities lending and borrowing,
professionalization of trading members, fine-tuned risk management systems, emergence of
clearing corporations to assume counterparty risks, market of debt and derivative instruments
and intensive use of information technology.
CAPITAL MARKET SEGMENT
The Trading on NSE’s capital market segment which commenced on November 04, 1995 has
been witnessing a substantial growth over the years. The trading volumes jumped by 82.55 %
during the fiscal 2007-08 as compared to 2006-07. With the increase in volumes, efficient and
transparent trading platform, a wide range of securities like equity, preference shares, debt
warrants, exchange traded funds as well as retail government securities, NSE upholds its position
as the largest stock exchange in the country.

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 Capital Market

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 Capital Market

NSE FAMILY
NSCCL
National Securities Clearing Corporation Ltd. (NSCCL), a wholly-owned subsidiary of NSE, was
set up in August 1995. It was the first clearing corporation in the country to provide settlement
guarantee that revolutionized the entire concept of settlement system in India. It commenced
clearing operations in April 1996. It has been set up to bring and sustain confidence in clearing
and settlement of securities; to promote and maintain short and consistent settlement cycles; to
provide counter-party risk guarantee, and to operate a tight risk containment system. It carries
out the clearing and settlement of the trades executed in the equities and derivatives segments of
the NSE. NSCCL currently settles trades under T+2 rolling settlement. It has the credit of
continuously upgrading the clearing and settlement procedures and has also brought Indian
financial markets in line with international markets. It has put in place online real-time
monitoring and surveillance system to keep track of the trading and clearing members’
outstanding positions and each member is allowed to trade/operate within the pre-set limits fixed
according to the funds available with the Exchange on behalf of the member. The online
surveillance mechanism also generates various alerts/reports on any price/volume movements of
securities not in line with the trends/patterns.

NSDL
Prior to trading in a dematerialized environment, settlement of trades required moving the
securities physically from the seller to the ultimate buyer, through the seller’s broker and buyer’s
broker, which involved lot of time and the risk of delay somewhere along the chain. Further, the
system of transfer of ownership was grossly inefficient as every transfer involved physical
movement of paper to the issuer for registration, with the change of ownership being evidenced
by an endorsement on the security certificate. In many cases, the process of transfer took much
longer than stipulated in the then regulations. Theft, forgery, mutilation of certificates and other
irregularities were rampant. All these added to the costs and delays in settlement, restricted
liquidity. To obviate these problems, NSE to promote dematerialization of securities joined hands
with UTI and IDBI to set up the first depository in India called the “National Securities
Depository Limited” (NSDL).
The depository system gained quick acceptance and in a very short span of time it was able to
achieve the objective of eradicating the paper from the trading and settlement of securities, and
was also able to get rid of the risks associated with fake/forged/stolen/bad paper. Dematerialized
delivery today constitutes almost 100% of total of the total delivery based settlement.

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 Capital Market
NSE INFOTECH SERVICES LTD
NSE Infotech Services Ltd Information Technology has been the back bone of conceptualization,
formation, running and the success of National Stock Exchange of India Limited (NSE). NSE has
been at the forefront in spearheading technology changes in the securities market. It was
important to give a special thrust and focus on Information Technology to retain the primacy in
the market. Towards this a wholly owned subsidiary M/s. NSE Infotech Services Limited
(NSETECH) was incorporated to cater to the needs of NSE and all it’s group companies
exclusively.
NSE.IT
NSE.IT Limited, a 100% technology subsidiary of NSE, was incorporated in October 1999 to
provide thrust to NSE’s technology edge, concomitant with its overall goal of harnessing latest
technology for optimum business use. It provides the securities industry with technology that
ensures transparency and efficiency in the trading, clearing and risk management systems.
Additionally, NSE.IT provides consultancy services in the areas of data warehousing, internet and
business continuity plans. Amongst various products launched by NSE.IT are NEAT XS, a
Computer-To-Computer Link (CTCL) order routing system, NEAT iXS, an internet trading
system and Probos, professional broker’s back office system.

IISL
India Index Services and Products Limited (IISL), a joint venture of CRISIL and NSE, was set up
in May 1998 to provide indices and index services. It has a licensing and marketing agreement
with Standard and Poor’s (S&P), the world’s leading provider of investible equity indices, for co-
branding equity indices. IISL is India’s first specialized company focusing upon the index as a core
product. It provides a broad range of services, products and professional index services. It
maintains over 96 equity indices comprising broad-based benchmark indices, sectoral indices and
customized indices. Many investment and risk management products based on IISL indices have
developed in the recent past, within India and abroad. These include index based derivatives on
NSE and on Singapore Exchange, India’s first exchange traded fund, a number of index funds, and
Licensing of the Index for various structured products

NCCL
National Commodity Clearing Limited (NCCL) is a company promoted by National Stock
Exchange of India Limited (NSEIL). It was incorporated in the year 2006. One of the objectives of
NCCL is to provide and manage clearing and settlement, risk management and collateral
management services to commodity exchanges. NCCL is having the requisite experience and
exposure in providing clearing and settlement facility, risk and collateral management services in
the commodities market including funds settlement with multiple clearing banks. Currently
NCCL is providing clearing and settlement services to NCDEX.

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 Capital Market
NSE INDICES
S&P CNX NIFTY
S&P CNX Nifty is a well diversified 50 stock index accounting for 22 sectors of the economy. It is
used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and
index funds.

S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which
is a joint venture between NSE and CRISIL. IISL is India's first specialised company focused
upon the index as a core product. IISL has a marketing and licensing agreement with Standard &
Poor's (S&P), who are world leaders in index services.
 The average total traded value for the last six months of all Nifty stocks is approximately
62.45% of the traded value of all stocks on the NSE
 Nifty stocks represent about 63.98% of the total market capitalization as on Jan. 30, 2009.
 Impact cost of the S&P CNX Nifty for a portfolio size of Rs.2 crore is 0.16%
 S&P CNX Nifty is professionally maintained and is ideal for derivatives trading

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 Capital Market
COMPANY NAME

ABB Ltd. National Aluminium Co. Ltd.

ACC Ltd. Oil & Natural Gas Corporation Ltd.
Ambuja Cements Ltd. Power Grid Corporation of India Ltd.
Bharat Heavy Electricals Ltd. Punjab National Bank
Bharat Petroleum Corporation Ltd. Ranbaxy Laboratories Ltd.
Bharti Airtel Ltd. Reliance Capital Ltd.
Cairn India Ltd. Reliance Communications Ltd.
Cipla Ltd. Reliance Industries Ltd.
DLF Ltd.kn Reliance Infrastructure Ltd.
GAIL (India) Ltd. Reliance Petroleum Ltd.
Grasim Industries Ltd. Reliance Power Ltd.
HCL Technologies Ltd. Siemens Ltd.
HDFC Bank Ltd. State Bank of India
Hero Honda Motors Ltd. Steel Authority of India Ltd.
Hindalco Industries Ltd. Sterlite Industries (India) Ltd.
Hindustan Unilever Ltd. Sun Pharmaceutical Industries Ltd.
Housing Development Finance Corporation Ltd. Suzlon Energy Ltd.
I T C Ltd. Tata Communications Ltd.
ICICI Bank Ltd. Tata Consultancy Services Ltd.
Idea Cellular Ltd. Tata Motors Ltd.
Infosys Technologies Ltd. Tata Power Co. Ltd.
Larsen & Toubro Ltd. Tata Steel Ltd.
Mahindra & Mahindra Ltd. Unitech Ltd.
Maruti Suzuki India Ltd. Wipro Ltd.
NTPC Ltd. Zee Entertainment Enterprises Ltd.

CNX NIFTY JUNIOR

The next rung of liquid securities after S&P CNX Nifty is the CNX Nifty Junior. It may be useful
to think of the S&P CNX Nifty and the CNX Nifty Junior as making up the 100 most liquid
stocks in India.

As with the S&P CNX Nifty, stocks in the CNX Nifty Junior are filtered for liquidity, so they are
the most liquid of the stocks excluded from the S&P CNX Nifty. The maintenance of the S&P
CNX Nifty and the CNX Nifty Junior are synchronised so that the two indices will always be
disjoint sets; i.e. a stock will never appear in both indices at the same time. Hence it is always
meaningful to pool the S&P CNX Nifty and the CNX Nifty Junior into a composite 100 stock
index or portfolio.
 CNX Nifty Junior represents about 9.62 % of the total market capitalization as on Jan 30,
2009.
 The average traded value for the last six months of all Junior Nifty stocks is approximately
16.86% of the traded value of all stocks on the NSE
 Impact cost for CNX Nifty Junior for a portfolio size of Rs.50 lakhs is 0.23%

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 Capital Market
CNX IT INDEX
Information Technology (IT) industry has played a major role in the Indian economy during the
last few years. A number of large, profitable Indian companies today belong to the IT sector and a
great deal of investment interest is now focused on the IT sector. In order to have a good
benchmark of the Indian IT sector, IISL has developed the CNX IT sector index. CNX IT
provides investors and market intermediaries with an appropriate benchmark that captures the
performance of the IT segment of the market.

Companies in this index are those that have more than 50% of their turnover from IT related
activities like IT Infrastructure , IT Education and Software Training , Telecommunication
Services and Networking Infrastructure, Software Development, Hardware Manufacturer’s,
Vending, Support and Maintenance.

The average total traded value for the last six months of CNX IT Index stocks is approximately
84.54% of the traded value of the IT sector. CNX IT Index stocks represent about 91.92% of the
total market capitalization of the IT sector as on January 30, 2009.

The average total traded value for the last six months of all CNX IT Index constituents is
approximately 7.90% of the traded value of all stocks on the NSE. CNX IT Index constituents
represent about 6.92% of the total market capitalization as on January 30, 2009.

CNX 100
CNX 100 is a diversified 100 stock index accounting for 35 sector of the economy.

CNX 100 is owned and managed by India Index Services & Products Ltd. (IISL). Which is a joint
venture between CRISIL & NSE. IISL is India’s first specialized company focused upon the index
as a core products. IISL has a licensing & marketing agreement with Standard & Poor’s (S&P),
who are leader’s in index services.
• CNX 100 represents about 73.60% of the total market capitalization as on Jan 30, 2009
• The average traded value for the last six months of all CNX100 stocks is approximately
79.31 % of the traded value of all stocks on the NSE
• Impact cost for CNX 100 for a portfolio size of Rs. 3 crore is 0.18%.

S&P CNX DEFTY

Almost every institutional investor and off-shore fund enterprise with an equity exposure in India
would like to have an instrument for measuring returns on their equity investment in dollar
terms. To facilitate this, a new index the S&P CNX Defty-Dollar Denominated S&P CNX Nifty
has been developed. S&P CNX Defty is S&P CNX Nifty, measured in dollars.

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 Capital Market
SALIENT FEATURES
• Performance indicator to foreign institutional investors, off-shore funds, etc.
• Provides an effective tool for hedging Indian equity exposure.
• Impact cost of the S&P CNX Nifty for a portfolio size of Rs.2 crore is 0.16%
• Provides fund managers an instrument for measuring returns on their equity investment
in dollar terms.

CALCULATION OF S&P CNX DEFTY

Computations are done using the S&P CNX Nifty index calculated on the NEAT trading system
of NSE and INR-USD exchange rate that is based on the real time polled data feed.

S&P CNX Defty = S&P CNX Nifty at time t * Exchange rate as on base date
Exchange rate at time t

CALCULATION OF CLOSING VALUE OF S&P CNX DEFTY

Closing value of S&P CNX Defty is computed by considering average of INR-USD polled data
values (exchange rate) of last 30 minutes of the market.

Closing value of = Closing value of S&P CNX Nifty * Exchange rate as on base date
S&P CNX Defty Average of exchange rate of last 30 minutes of the market

S&P CNX 500

The S&P CNX 500 is India’s first broadbased benchmark of the Indian capital market. The S&P
CNX 500 represents about 93.95% of total market capitalisation and about 93.20% of the total
turnover on the NSE as on January 30,2009.

The S&P CNX 500 companies are disaggregated into 72 industry indices viz. S&P CNX Industry
Indices. Industry weightages in the index reflect the industry weightages in the market. For e.g. if
the banking sector has a 5% weightage in the universe of stocks traded on NSE, banking stocks in
the index would also have an approx. representation of 5% in the index.

NIFTY MIDCAP 50
The medium capitalized segment of the stock market is being increasingly perceived as an
attractive investment segment with high growth potential. The primary objective of the Nifty
Midcap 50 Index is to capture the movement of the midcap segment of the market. It can also be
used for index-based derivatives trading.

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 Capital Market
Method of computation

Nifty Midcap 50 is computed using market capitalisation weighted method, wherein the level of
the index reflects the total market value of all the stocks in the index relative to a particular base
period. The method also takes into account constituent changes in the index and importantly
corporate actions such as stock splits, rights, etc without affecting the index value.

Base Date and Value

The Nifty Midcap 50 Index has a base date of Jan 1, 2004 and a base value of 1000.

Criteria for Selection of Constituent Stocks

The constituents and the criteria for the selection judge the effectiveness of the index. Selection of
the index set is, inter alia, based on the following criteria:
 Stocks with average market capitalization ranging from Rs.1000 Crore to Rs.5000 Crore at
the time of selection.
 Stocks which are not part of the derivatives segment are excluded.
 Stocks which are forming part of the S&P CNX NIFTY index are excluded.

Other statistics:
 Nifty Midcap 50 stocks represent about 3.78 % of the total market capitalization as on January
30, 2009.
 The average traded volume for the last six months of all Nifty Midcap 50 stocks is
approximately 6.27 % of the traded volume of all stocks on the NSE.

CNX MIDCAP
The medium capitalised segment of the stock market is being increasingly perceived as an
attractive investment segment with high growth potential. The primary objective of the CNX
Midcap Index is to capture the movement and be a benchmark of the midcap segment of the
market.

Method of Computation
CNX Midcap is computed using market capitalisation weighted method, wherein the level of the
index reflects the total market value of all the stocks in the index relative to a particular base
period. The method also takes into account constituent changes in the index and importantly
corporate actions such as stock splits, rights, etc without affecting the index value.

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Base Date and Value
The CNX Midcap Index has a base date of Jan 1, 2003 and a base value of 1000

Criteria for Selection of Constituent Stocks

The constituents and the criteria for the selection judge the effectiveness of the index. Selection of
the index set is based on the following criteria :
 All the stocks, which constitute more than 5% market capitalization of the universe (after
sorting the securities in descending order of market capitalization), shall be excluded in order
to reduce the skewness in the weightages of the stocks in the universe.
 After step (a), the weightages of the remaining stocks in the universe is determined again.
 After step (b), the cumulative weightage is calculated.
 After step (c) companies which form part of the cumulative percentage in ascending order
unto first 75 percent (i.e. upto to 74.99 percent) of the revised universe shall be ignored.
 After, step (d), all the constituents of S&P CNX Nifty shall be ignored.
 From the universe of companies remaining after step (e) i.e. 75th percent and above, first 100
companies in terms of highest market capitalization, shall constitute the CNX Midcap Index
subject to fulfillment of the criteria mentioned below.

Trading Interest
All constituents of the CNX Midcap Index must have a minimum listing record of 6 months. In
addition, all candidates for the Index are also evaluated for trading interest, in terms of volumes
and trading frequency.

Financial Performance
All companies in the CNX Midcap Index have a minimum track record of three years of
operations with a positive net worth.

Others
A company which comes out with a IPO will be eligible for inclusion in the index, if it fulfills the
normal eligibility criteria for the index for a 3 month period instead of a 6 month period.

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 Capital Market
CNX BANK INDEX
The Indian banking Industry has been undergoing major changes, reflecting a number of
underlying developments. Advancement in communication and information technology has
facilitated growth in internet-banking, ATM Network, Electronic transfer of funds and quick
dissemination of information. Structural reforms in the banking sector have improved the health
of the banking sector. The reforms recently introduced include the enactment of the
Securitization Act to step up loan recoveries, establishment of asset reconstruction companies,
initiatives on improving recoveries from Non-performing Assets (NPAs) and change in the basis
of income recognition has raised transparency and efficiency in the banking system. Spurt in
treasury income and improvement in loan recoveries has helped Indian Banks to record better
profitability. In order to have a good benchmark of the Indian banking sector, India Index Service
and Product Limited (IISL) has developed the CNX Bank Index.
CNX Bank Index is an index comprised of the most liquid and large capitalised Indian Banking
stocks. It provides investors and market intermediaries with a benchmark that captures the capital
market performance of Indian Banks.The index will have 12 stocks from the banking sector which
trade on the National Stock Exchange.
The average total traded value for the last six months of CNX Bank Index stocks is
approximately 95.85% of the traded value of the banking sector. CNX Bank Index stocks
represent about 86.06% of the total market capitalization of the banking sector as on January 30,
2009.

The average total traded value for the last six months of all the CNX Bank Index constituents is
approximately 14.86% of the traded value of all stocks on the NSE. CNX Bank Index constituents
represent about 8.63% of the total market capitalization as on January 30, 2009.

Methodology
The index is a market capitalization weighted index with base date of January 01, 2000, indexed
to a base value of 1000.

Selection Criteria
Selection of the index set is based on the following criteria:
1. Company's market capitalization rank in the universe should be less than 500
2. Company's turnover rank in the universe should be less than 500
3. Company's trading frequency should be at least 90% in the last six months.
4. Company should have a positive networth.
5. A company which comes out with a IPO will be eligible for inclusion in the index, if it
fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6
month period.

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 Capital Market
ACHIEVEMENTS OF NSE IN LAST YEAR

January 2007 Launch of NSE – CNBC TV 18 media centre

March 2007 NSE, CRISIL announce launch of India Bond Watch.com
March 2007 Launch of Gold BeES- Exchange Traded Fund (ETF)
June 2007 Launch of Futures & Options on CNX 100 and CNX Nifty
Junior contracts.
October 2007 Launch of Futures & Options on Nifty Midcap 50
January 2008 Launch of Mini Nifty derivative contracts
March 2008 Launch of long term option contracts on S&P CNX Nifty
Index.
April 2008 Launch of Securities Lending & Borrowing Scheme
April 2008 Launch of - India VIX - The Volatility Index
June 2008 Setting up of Power Exchange India Ltd.

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 Capital Market
TECHNOLOGY
Technology has been the backbone of the Exchange. Providing the services to the investing
community and the market participants using technology at the cheapest possible cost has been
its main thrust. NSE chose to harness technology in creating a new market design. It believes that
technology provides the necessary impetus for the organization to retain its competitive edge and
ensure timeliness and satisfaction in customer service. In recognition of the fact that technology
will continue to redefine the shape of the securities industry, NSE stresses on innovation and
sustained investment in technology to remain ahead of competition. NSE is the first exchange in
the world to use satellite communication technology for trading. It uses satellite communication
technology to energise participation from about 2,956 VSATs from nearly 245 cities spread all
over the country. Its trading system, called National Exchange for Automated Trading (NEAT),
is a state of-the-art client server based application. At the server end, all trading information is
stored in an in-memory database to achieve minimum response time and maximum system
availability for users. It has uptime record of 99.7%. For all trades entered into NEAT system,
there is uniform response time of less than 1.5 seconds. NSE has been continuously undertaking
capacity enhancement measures so as to effectively meet the requirements of increased users and
associated trading loads. NSE has also put in place NIBIS (NSE’s Internet Based Information
System) for on-line real-time dissemination of trading information over the Internet.
As part of its business continuity plan, NSE has established a disaster back-up site at Chennai
along with its entire infrastructure, including the satellite earth station and the high-speed optical
fibre link with its main site at Mumbai. This site at Chennai is a replica of the production
environment at Mumbai. The transaction data is backed up on near real time basis from the main
site to the disaster back-up site through the 2 mbps high-speed link to keep both the sites all the
time synchronized with each other.

LISTING OF SECURITIES ON NSE

The stocks, bonds and other securities issued by issuers require listing for providing liquidity to
investors. Listing means formal admission of a security to the trading platform of the Exchange.
It provides liquidity to investors without compromising the need of the issuer for capital and
ensures effective monitoring of conduct of the issuer and trading of the securities in the interest of
investors. The issuer wishing to have trading privileges for its securities satisfies listing
requirements prescribed in the relevant statutes and in the listing regulations of the Exchange. It
also agrees to pay the listing fees and comply with listing requirements on a continuous basis. All
the issuers who list their securities have to satisfy the corporate governance requirement framed
by regulators.

The benefits of listing on NSE are as enumerated below:

 NSE provides a trading platform that extends across the length and breadth of the country.
Listing on NSE thus, enables issuers to reach and service investors across the country.
 NSE being the largest stock exchange in terms of trading volumes, the securities trade at low
impact cost and are highly liquid. This in turn reduces the cost of trading to the investor.

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 Capital Market
 The trading system of NSE provides unparallel level of trade and post-trade information. The
best 5 buy and sell orders are displayed on the trading system and the total number of
securities available for buying and selling is also displayed. This helps the investor to know
the depth of the market. Further, corporate announcements, results, corporate actions etc are
also available on the trading system, thus reducing scope for price manipulation or misuse.
 The facility of making initial public offers (IPOs), using NSE’s network and software, results
in significant reduction in cost and time of issues.
 NSE’s web-site www.nseindia.com provides a link to the web-sites of the companies that are
listed on NSE, so that visitors interested in any company can visit that company’s web-site
from the NSE site.
 Listed companies are provided with monthly trade statistics for the securities of the company
listed on the Exchange.
 The listing fee is nominal.

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 Capital Market
INTRODUCTION TO DERIVATIVES

The emergence of the market for derivative products, most notably forwards, futures and options,
can be traced back to the willingness of risk-averse economic agents to guard themselves against
uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets
are marked by a very high degree of volatility. Through the use of derivative products, it is
possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk
management, these generally do not influence the fluctuations in the underlying asset prices.
However, by locking-in asset prices, derivative products minimize the impact of fluctuations in
asset prices on the profitability and cash flow situation of risk-averse investors.

DERIVATIVES DEFINED
“Derivative is a product whose value is derived from the value of one or more basic variables,
called bases (underlying asset, index, or reference rate), in a contractual manner.” The underlying
asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish to
sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a
transaction is an example of a derivative. The price of this derivative is driven by the spot price of
wheat which is the “underlying”.
In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R) A) defines
“derivative” to include -
1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or any other form of security.
2. A contract which derives its value from the prices, or index of prices, of underlying securities.

PRODUCTS, PARTICIPANTS AND FUNCTIONS

Derivative contracts have several variants. The most common variants are forwards, futures,
options and swaps. The following three broad categories of participants - hedgers, speculators,
and arbitrageurs trade in the derivatives market.
• Hedgers face risk associated with the price of an asset. They use futures or options markets to
reduce or eliminate this risk.
• Speculators wish to bet on future movements in the price of an asset. Futures and options
contracts can give them an extra leverage; that is, they can increase both the potential gains
and potential losses in a speculative venture.
• Arbitrageurs are in business to take advantage of a discrepancy between prices in two
different markets. If, for example, they see the futures price of an asset getting out of line with
the cash price, they will take offsetting positions in the two markets to lock in a profit.

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 Capital Market
TYPES OF DERIVATIVES
The most commonly used derivatives contracts are forwards, futures and options which we shall
discuss in detail later. Here we take a brief look at various derivatives contracts that have come to
be used.

• Forwards: A forward contract is a customized contract between two entities, where settlement
takes place on a specific date in the future at today’s pre-agreed price.
• Futures: A futures contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Futures contracts are special types of forward
contracts in the sense that the former are standardized exchange-traded contracts.
• Options: Options are of two types - calls and puts. Calls give the buyer the right but not the
obligation to buy a given quantity of the underlying asset, at a given price on or before a given
future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the
underlying asset at a given price on or before a given date.

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 Capital Market
INTRODUCTION TO FUTURES & OPTIONS

In recent years, derivatives have become increasingly important in the field of finance. While
futures and options are now actively traded on many exchanges, forward contracts are popular on
the OTC market.
FORWARD CONTRACTS
A forward contract is an agreement to buy or sell an asset on a specified date for a specified price.
• One of the parties to the contract assumes a long position and agrees to buy the underlying
asset on a certain specified future date for a certain specified price.
• The other party assumes a short position and agrees to sell the asset on the same date for the
same price. Other contract details like delivery date, price and quantity are negotiated
bilaterally by the parties to the contract.
• The forward contracts are normally traded outside the exchanges.

INTRODUCTION TO FUTURES
Futures markets were designed to solve the problems that exist in forward markets. A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the future
at a certain price. But unlike forward contracts, the futures contracts are standardized and
exchange traded.
To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of
the contract. It is a standardized contract with standard underlying instrument, a standard
quantity and quality of the underlying instrument that can be delivered, (or which can be used for
reference purposes in settlement) and a standard timing of such settlement.
A futures contract may be offset prior to maturity by entering into an equal and opposite
transaction. More than 99% of futures transactions are offset this way.

INTRODUCTION TO OPTIONS
In this section, we look at the next derivative product to be traded on the NSE, namely options.
Options are fundamentally different from forward and futures contracts. An option gives the
holder of the option the right to do something. The holder does not have to exercise this right. In
contrast, in a forward or futures contract, the two parties have committed themselves to doing
something. Whereas it costs nothing (except margin requirements) to enter into a futures
contract, the purchase of an option requires an up-front payment.
• There are two basic types of options, call options and put options.
• Call option: A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price.
• Put option: A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price.

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MUTUAL FUND
A Mutual Fund is a trust that pools the savings of a number of investors who share a common
financial goal. The money thus collected is then invested in capital market instruments such as
shares, debentures and other securities. The income earned through these investments and the
capital appreciation realized are shared by its unit holders in proportion to the number of units
owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it
offers an opportunity to invest in a diversified, professionally managed basket of securities at a
relatively low cost. The flow chart below describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart

ADVANTAGES AND DISADVANTAGES OF MUTUAL FUND

Advantages:
 Portfolio Diversification
 Professional Management
 Reduction / Diversification of Risk
 Liquidity
 Flexibility & Convenience
 Reduction in Transaction cost
 Safety of regulated environment

Disadvantages:
 No Control over Cost
 No Tailor-made Portfolios
 Managing a Portfolio Funds

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STRUCTURE OF A MUTUAL FUND

TYPES OF MUTUAL FUND

 Mutual Funds can be structurally classified as:
 Close ended / Open-ended Funds
 Load Fund / No-Load Funds
 Tax-exempt / Non-Tax exempt Funds

 Mutual Funds can be classified based on asset class as:

 Equity Funds
 Bond Funds
 Money Market Funds
 Balanced Funds

 Mutual Funds can be classified based on investment objective:

 Growth
 Income
 Value

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 Capital Market
MULTI COMMODITY EXCHANGE
Multi Commodity Exchange of India Ltd, (MCX) an independent and de-mutualized multi
commodity exchange, has permanent recognition from the Government of India. It was
established in 2003 and is based in Mumbai.MCX, a state-of-the-art nationwide, digital exchange
facilitates online trading, clearing and settlement operations for a commodities futures
trading.MCX is led by an expert management team with deep domain knowledge of the
commodity futures markets and has successfully established a thriving digital market for trading
in Gold, Silver, Steel, Kapas, Cotton, Rubber, Black Pepper, Oil & Oil Seeds, Ferrous and Non-
Ferrous Metals, Agri Commodities, Pulses and Soft commodities

The turnover of the exchange for the period Apr-Dec 2008 was INR 32 Trillion
MCX has also setup in joint venture the National Spot Exchange a purely agricultural commodity
exchange and National Bulk Handling Corporation (NBHC) which provides bulk storage and
handling of agricultural products.
It is now regulated by forward market commission.
 MCX is India's No. 1 commodity exchange with 84% Market share in 2008($0.84 trillion)
 The exchange's competitor is National Commodity & Derivatives Exchange Ltd
 Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crude oil and gold in futures
trading
 The crude volume touched 23.49 Million barrels on January 3, 2009
 The highest traded item is gold with an average monthly turnover of Rs 1.42 Trillion ($29
Billion)
 MCX has 10 strategic alliances with leading commodity exchange across the globe
 The average daily turnover of MCX is about US$ 2.4 billion
 MCX now reaches out to about 500 cities in India with the help of about 10,000 trading
terminals
 MCX COMDEX is India's first and only composite commodity futures price index

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 Capital Market
AGRICULTURAL (GRAINS, AND FOOD AND FIBER)
Commodity Main Exchange Contract Size Trading Symbol
Corn CBOT 5000 bu C
Oats CBOT 5000 bu O
Rough Rice CBOT 2000 cwt RR
Soybeans CBOT 5000 bu S
Soybean Meal CBOT 100 short tons SM
Soybean Oil CBOT 60,000 lb BO
Wheat CBOT 5000 bu W
Cocoa NYBOT 10 tons CC
Coffee C NYBOT 37,500 lb KC
Cotton No.2 NYBOT 50,000 lb CT
Sugar No.11 NYBOT 112,000 lb SB
Sugar No.14 NYBOT 112,000 lb SE

LIVESTOCK & MEAT

Commodity Contract Size Currency Bourse Ticker
Lean Hogs 40,000 lb (20 tons) USD ($) Chicago Mercantile Exchange LH
Frozen Pork Bellies 40,000 lb (20 tons) USD ($) Chicago Mercantile Exchange PB
Live Cattle 40,000 lb (20 tons) USD ($) Chicago Mercantile Exchange LC
Feeder Cattle 50,000 lb (25 tons) USD ($) Chicago Mercantile Exchange FC

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 Capital Market
ENERGY
Commodity Main Exchanges Contract Size Trading Symbol
1000 bbl CL (NYMEX), WTI
WTI Crude Oil NYMEX, ICE
(42,000 U.S. gal) (ICE)

1000 bbl
Brent Crude ICE IB
(42,000 U.S. gal)
AC (Open Auction)
Ethanol CBOT 29,000 U.S. gal
ZE (Electronic)
Natural Gas NYMEX 10,000 mm BTU NG
1000 bbl
Heating Oil NYMEX HO
(42,000 U.S. gal)
1000 bbl
Gulf Coast Gasoline NYMEX LR
(42,000 U.S. gal)
RBOB Gasoline 1000 bbl
(reformulated gasoline blend NYMEX RB
stock for oxygen blending) (42,000 U.S. gal)

1000 bbl (42,000 U.S.

Propane NYMEX PN
gal)
Uranium NYMEX 250 lbs UX

PRECIOUS METALS
Commodity Unit Currency Price (20th August 2008) Bourse
Gold troy ounce USD ($) $822.00 CBOT
Platinum troy ounce USD ($) $2025.00 NYMEX
Palladium troy ounce USD ($) $443.00 NYMEX
Silver troy ounce USD ($) $13.27 CBOT

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 Capital Market
INDUSTRIAL METALS
Price Price
Commodity Unit Currency Bourse
(2004) (2006)
London Metal Exchange, New
Copper Metric Ton USD ($) $3,200 6,670
York
Lead Metric Ton USD ($) $990 1,515 London Metal Exchange
Zinc Metric Ton USD ($) $1,226 4,110 London Metal Exchange
Tin Metric Ton USD ($) $7,665 9,675 London Metal Exchange
London Metal Exchange, New
Aluminium Metric Ton USD ($) $1,947 2,595
York
Aluminium
Metric Ton USD ($) 2,595 London Metal Exchange
alloy
Nickel Metric Ton USD ($) $15,190 30,050 London Metal Exchange
Aluminium
Metric Ton USD ($) 2,310 London Metal Exchange
alloy
Recycled steel Metric Ton USD ($) Rotterdam

Rare metals
The following metals are not, at present (2008), traded on any exchange, such as the London
Metal Exchange (LME), and, therefore, no spot or futures market, where producers, consumers
and traders can fix an official or settlement price exists for these metals. The only price
information that is available globally is published by, among others, the London Metal Bulletin
and is based on information from producers, consumers and traders. Germanium, Cadmium,
Cobalt, Chromium, Magnesium, Manganese, Molybdenum, Silicon, Rhodium, Selenium,
Titanium, Vanadium, Wolframite, Niobium, Lithium, Indium, Gallium, Tantalum, Tellurium, and
Beryllium.

Other Minerals and Materials

The following minerals and materials are not, at present (2008), traded on any exchange, and,
therefore, no spot or futures market where producers, consumers and traders can fix an official or
settlement price exists for these minerals. Generally the only price information that is available
globally is published privately by, among others, the London Metal Bulletin and is based on
information from producers, consumers and traders.
Asphalt, Aggregate, Arsenic, Borax, Boron, Gypsum, Asbestos, Chlorine, Fluoride, Cement,
Sulfuric Acid, Carbon Dioxide, Fluorspar, Bromine, and Titanium Dioxide.

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 Capital Market
Agricultural Products
The following Agricultural Products are not, at present (2008), traded on any exchange, and,
therefore, no spot or futures market where producers, consumers and traders can fix an official or
settlement price exists for these minerals. Generally the only price information that is available is
based on information from producers, consumers and traders.
Fresh Flowers, Cut Flowers, Melons, Lemons, Tung Oil, Gum Arabic, Pine Oil, Xanthan, Milk,
Tomatoes, Grapes, Eggs, Potatoes, and Figs.

OTHER
Price Price
Commodity Unit Currency Bourse
(2004) (2006)

29,000 US USD
Ethanol CBOT
gallon (110 m³) ($)

EU cents Singapore
Rubber 1 kg Commodity
(¢) Exchange
Malaysian
Palm Oil 1000 kg Ringgit Bursa Malaysia
(RM)
Wool 1 kg AUD (p) ASX
London Metal
Polypropylene 1000 kg USD ($) 1,165
Exchange
Linear Low Density London Metal
1000 kg USD ($) 1,070
Polyethylene (LL) Exchange

In 2007, steel started to be traded as a commodity in the London Metal Exchange

Environmental Commodities
In the last decade, a number of environmental commodities have been created. These include
carbon offsets, Renewable Energy Certificates, and white certificates (energy efficiency credits).

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 Capital Market
Key shareholders
 Financial Technologies (I) Ltd
 State Bank of India and its associates
 National Bank for Agriculture and Rural Development (NABARD)
 National Stock Exchange of India Ltd. (NSE),
 Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International,
 Corporation Bank,
 Union Bank of India,
 Canara Bank,
 Bank of India,
 Bank of Baroda,
 HDFC Bank and SBI Life Insurance Co. Ltd.,
 ICICI ventures, IL&FS, Merrill Lynch

Other Commodity Exchanges & Regulators

 Chicago Board of Trade
 Chicago Mercantile Exchange
 Commodity Futures Trading Commission
 London International Financial Futures and Options Exchange
 National Futures Association
 New York Mercantile Exchange
 Kansas City Board of Trade
 New York Board of Trade

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CORPORATE ACTION
DEFINITION
When a publicly-traded company issues a corporate action, it is initiating a process that will bring
actual change to its stock. By understanding these different types of processes and their effects, an
investor can have a clearer picture of what a corporate action indicates about a company's financial
affairs and how that action will influence the company's share price and performance. This
knowledge, in turn, will aid the investor in determining whether to buy or sell the stock in
question.
The term "corporate action" refers to the distribution of benefits to existing shareholders or
bondholders, or a change in structure to an existing security. Corporate action entails risks for
organizations in the securities industry
Any event that brings material change to a company and affects its stakeholders. This includes
shareholders, both common and preferred, as well as bondholders. These events are generally
approved by the company's board of directors; shareholders are permitted to vote on some events
as well.

RIGHTS ISSUES
A company implementing a rights issue is offering additional and/or new shares but only to
already existing shareholders. The existing shareholders are given the right to purchase or
receive these shares before they are offered to the public. A rights issue regularly takes place in
the form of a stock split, and can indicate that existing shareholders are being offered a chance to
take advantage of a promising new development.
Rights Issue:
An issue of new shares by a Company in the market to raise funds. Current shareholders will be
allotted rights (Nil Paid shares) in accordance with the ratio set by the company. Thus, an 11 for
10 rights issue gives the existing holder the chance to buy eleven new shares for every ten held.
The price of the new shares is set at a price between the Nominal Value and the market value of
the existing shares. It will generally be at a lower price than the existing market price so the issue
is attractive to shareholders. The right to subscribe allows shareholders to retain their percentage
holding in the company.
Stock Splits:
As the name implies, a stock split (also referred to as a bonus share) divides each of the
outstanding shares of a company, thereby lowering the price per share - the market will adjust the
price on the day the action is implemented. A stock split, however, is a non-event, meaning that it
does not affect a company's equity, or its market capitalization. Only the number of shares
outstanding change, so a stock split does not directly change the value or net assets of a company.
A company announcing a 2-for-1 (2:1) stock split, for example, will distribute an additional share
for every one outstanding share, so the total shares outstanding will double. If the company had
50 shares outstanding, it will have 100 after the stock split. At the same time, because the value of
the company and its shares did not change, the price per share will drop by half. So if the pre-split
price was $100 per share, the new price will be $50 per share.

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 Capital Market
So why would a firm issue such an action? a stock split in order to increase the liquidity of the
share on the market.
The result of the 2-for-1 stock split in our example above is two-fold: (1) the drop in share price
will make the stock more attractive to a wider pool of investors, and (2) the increase in available
shares outstanding on the stock exchange will make the stock more available to interested buyers.
So do keep in mind that the value of the company, or its market capitalization (shares outstanding
x market price/share), does not change, but the greater liquidity and higher demand on the share
will typically drive the share price up, thereby increasing the company's market capitalization and
value.
Example of a stock split: Nancy buys 20 shares of ABC Corporation on April 1 for $200 ($10 per
share). On June 1, ABC announces that it's splitting its stock two for one as of July 1. As of July 1,
Nancy will own 40 shares of ABC stock rather than 20 shares. Assuming that the stock is still
trading on the market for $10 per share as of June 30, on July 1 each share will be trading for $5
per share. Therefore, Nancy still owns $200 worth of ABC stock (40 shares x $5 per share =
$200) even though she now owns 40 shares rather than 20 shares.

Bonus Issue
A benefit distribution in which additional shares are issued to qualifying shareholders (at no cost)
in proportion to their existing holdings, as a result of a Re-arrangement of a Company's capital
structure. No new funds are raised for the company. Also known as a Capitalization Issue.

Buy back
What Does Buyback Mean?
The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of
shares on the market. By reducing the number of shares outstanding on the market,
buybacks increase the proportion of shares a company owns.
This is usually considered a sign that the company's management is optimistic about the future
and believes that the current share price is undervalued. Reasons for buybacks include putting
unused cash to use, raising earnings per share, increasing internal control of the company. When
a company's shareholders vote to authorize a buyback, they aren't obliged to actually undertake
the buyback.

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 Capital Market
Why companies buyback?
 Unused Cash: If they have huge cash reserves with not many new profitable projects to invest
in and if the company thinks the market price of its share is undervalued. Eg. Bajaj Auto went
on a massive buy back in 2000 and Reliance's recent buyback.
 Market perception By buying their shares at a price higher than prevailing market price
company signals that its share valuation should be higher. Eg: In October 1987 stock prices in
US started crashing. Expecting further fall many companies like Citigroup, IBM et al have
come out with buyback offers worth billions of dollars at prices higher than the prevailing
rates thus stemming the fall.
 Recently the prices of RIL and REL have not fallen, as expected, despite the spat between the
promoters. This is mainly attributed to the buyback offer made at higher prices.
 Exit option If a company wants to exit a particular country or wants to close the company.

Warrant
A Company may issue Warrants, which entitle the holder to a right to take up Ordinary shares at
a set price within a defined time period. The company does not pay Dividends on Warrants.
Warrants can be traded on the market. Warrants are issued and guaranteed by the company, , the
lifetime of a warrant is often measured in years
Occasionally, companies offer warrants for direct sale or give them to employees as incentive, but
the vast majority of warrants are "attached" to newly issued bonds or preferred stock.
For example, consider the warrants to purchase 100 shares of Company XYZ for $20 per share
anytime in the next five years. If Company XYZ shares rose to $100 during that time, the warrant
holder could purchase the shares for $20 each, and immediately sell them for $100 on the open
market, pocketing a profit of ($100 - $20) x 100 shares = $8,000. Thus, the minimum value of
each warrant is $80.
Warrants are often included in a new debt issue as a "sweetener" to entice investors.

Warrant v/s call options

 Warrants are issued by private parties, typically the corporation on which a warrant is based,
rather than a public options exchange.
 A warrant's lifetime is measured in years (as long as 15 years), while options are typically
measured in months.
Participatory notes (PNs / P-Notes) are instruments used by investors or hedge funds that are
not registered with the SEBI (Securities & Exchange Board of India) to invest in Indian securities.
Participatory notes are instruments that derive their value from an underlying financial
instrument such as an equity share and, hence, the word, 'derivative instruments'. SEBI permitted
FIIs to register and participate in the Indian stock market in 1992.
Indian based brokerages buy Indian-based securities and then issue PNs to foreign investors. Any
dividends or capital gains collected from the underlying securities go back to the investors.

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Participatory notes are instruments used for making investments in the stock markets. However,
they are not used within the country. They are used outside India for making investments in
shares listed in that country. That is why they are also called offshore derivative instruments.
Any entity investing in participatory notes is not required to register with SEBI (Securities and
Exchange Board of India), whereas all FIIs have to compulsorily get registered. Trading through
participatory notes is easy because participatory notes are like contract notes transferable by
endorsement and delivery. Secondly, some of the entities route their investment through
participatory notes to take advantage of the tax laws of certain preferred countries. Thirdly,
participatory notes are popular because they provide a high degree of anonymity, which enables
large hedge funds to carry out their operations without disclosing their identity.
What are participatory notes or PNs?
Participatory notes are instruments used by foreign funds which are not registered to trade in
domestic Indian Capital Markets. PNs are derivative instruments issued against an underlying
security permitting holders to get a share in the income from the security.
How does it work?
Investors who buy PNs deposit their funds in US or European operations of Foreign Institutional
Investors (FII) operating in India. The FII uses its proprietary account to buy stocks.
Why do investors use PNs?
Reason for using PNs is to keep investor name anonymous, some investors have used them to
save transaction and overhead costs.
Tax officials fear that PNs are becoming a favorite with a host of Indian money launderers who
use them to first take funds out of country through hawala and then get it back using PNs.
Participatory Notes Crisis of 2007
On the 16th of October, 2007, SEBI (Securities & Exchange Board of India) proposed curbs on
participatory notes which accounted for roughly 50% of FII investment in 2007. SEBI was not
happy with P-Notes because it is not possible to know who owns the underlying securities and
hedge funds acting through PNs might therefore cause volatility in the Indian markets.
However the proposals of SEBI were not clear and this led to a knee-jerk crash when the markets
opened on the following day (October 17, 2007). Within a minute of opening trade, the Sensex
crashed by 1744 points or about 9% of its value - the biggest intra-day fall in Indian stock-
markets in absolute terms. This led to automatic suspension of trade for 1 hour.
Bonds
Bonds, also known as fixed-income securities, are debt instruments created for the purpose of
raising capital. Essentially loan agreements between an issuer and an investor, the terms of a
bond obligate the issuer to repay the amount of principal at maturity. Most bonds also require
that the issuer pay the investor a specific amount of interest on a semi-annual basis.
What Does Coupon Mean?
The interest rate stated on a bond when it's issued. The coupon is typically paid semiannually.
This is also referred to as the "coupon rate" or "coupon percent rate".
For example: a $1,000 bond with a coupon of 7% will pay $70 a year.

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It is called a "coupon" because some bonds literally have coupons attached to them. Holders
receive interest by stripping off the coupons and redeeming them. This is less common today as
more records are kept electronically.
Corporate Bonds
Corporate bonds are fully taxable debt instruments issued by private corporations rather than
government entities. Corporate bonds usually pay a higher rate of interest than government
bonds, and are most often issued with a par value of $1,000.
Fixed rate bond
A Fixed-rate bond is a security issued by a government or a business corporation that pays a fixed
amount of interest (coupon rate) on the face value (principal/par value) of the bond periodically
(often every six months or annually) to the owner until a date certain, called the maturity date, at
that time the principal amount (and any outstanding interest) of the bond is paid off to the bond
holder and the bond cancelled.
Zero Coupon Bonds
A zero coupon bond is a corporate bond that makes no periodic interest payments, but is sold at a
deep discount from face value. The buyer of the bond receives the rate of return by the gradual
appreciation of the security, which is redeemed at face value on a specified maturity date.
For tax purposes, the IRS maintains that the holder of a zero coupon bond owes income tax on
the interest that has accrued each year, even though the bondholder does not actually receive the
cash until maturity. The IRS calls this “imputed interest”. Because of this interpretation, zero
coupon bonds are often used in retirement accounts where they remain tax-sheltered
Deep-Discount Bond
A bond that is selling at a discount from par value and has a coupon rate significantly less than
the prevailing rates of fixed-income securities with a similar risk profile.
1. Typically, a deep-discount bond will have a market price of 20% or more below its face value.
These bonds are perceived to be riskier than similar bonds and are thus priced accordingly.
2. These low-coupon bonds are typically long term and issued with call provisions. Investors are
attracted to these discounted bonds because of their high return or minimal chance of being
called before maturity.
Floating rate notes (FRNs)
Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market
reference rate, like LIBOR or federal funds rate, plus a spread. The spread is a rate that remains
constant. Almost all FRNs have quarterly coupons, i.e. they pay out interest every three months,
though counter examples do exist. At the beginning of each coupon period, the coupon is
calculated by taking the fixing of the reference rate for that day and adding the spread. A typical
coupon would look like 3 months USD LIBOR +0.20%.
Example
Suppose a new 5 year FRN pays a coupon of 3 months LIBOR +0.20%, and is issued at par
(100.00). If the perception of the credit-worthiness of the issuer goes down, investors will demand
a higher interest rate, say LIBOR +0.25%. Therefore, a dealer would then make a market of 27 /

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25. This means, that he would buy bonds at the equivalent of LIBOR +0.27%, and sell at the
equivalent of LIBOR +0.25%. If a trade is agreed, the price is calculated. In this example, LIBOR
+0.27% would be roughly equivalent to a price of 99.65. This can be calculated as par, minus the
difference between the coupon and the price that was agreed (0.07%), multiplied by the maturity
(5 year).
Bond v/s stock
 Investing in stocks owns a part of the company while investing in bonds owns a part of the
company's debt.
 A stock is a financial asset which a corporation issues in order to raise capital by giving up a
certain percent of ownership over the corporation. A bond is a certificate of debt issued by a
corporation or country which is required, usually, to pay a fixed sum annually until maturity
and a fixed sum to repay the Principal.
 The most notable difference between stock and bond is the risk involved in the investment
and, of course, the expected return. As a stock holder an investor is investing in the
corporation's future worth expecting it to grow. The corporation has not assured the investor
in any way this scenario will take place. It is more then possible the corporation's worth in the
future will be lower. As a result of the risk taken stocks are expected to yield higher returns
on investment. Investing in bond is investing in a company's debt with the assurance of the
company to repay the investor both the interest and the principal. The risk the investor is
taking here is that of bankruptcy on the side of the company, a scenario in which the company
will be unable to pay it's debts. This risk, is of course, lower then that of the stock owner.
FCCB
What Does Foreign Currency Convertible Bond - FCCB Mean?
A type of convertible bond issued in a currency different than the issuer's domestic currency. In
other words, the money being raised by the issuing company is in the form of a foreign currency.
A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making
regular coupon and principal payments, but these bonds also give the bondholder the option to
convert the bond into stock. These types of bonds are attractive to both investors and issuers. The
investors receive the safety of guaranteed payments on the bond and are also able to take
advantage of any large price appreciation in the company's stock. (Bondholders take advantage of
this appreciation by means warrants attached to the bonds, which are activated when the price of
the stock reaches a certain point.) Due to the equity side of the bond, which adds value, the
coupon payments on the bond are lower for the company, thereby reducing its debt-financing
costs.

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ROLE OF BROKER AND SUB-BROKER IN THE SECONDARY MARKET

Whom should I contact for my Stock Market related transactions?

You can contact a broker or a sub broker registered with SEBI for carrying out your transactions
pertaining to the capital market.

Who is a broker?
A broker is a member of a recognized stock exchange, who is permitted to do trades on the
screen-based trading system of different stock exchanges. He is enrolled as a member with the
concerned exchange and is registered with SEBI.

Who is a sub broker?

A sub broker is a person who is registered with SEBI as such and is affiliated to a member of a
recognized stock exchange.

How do I know if the broker or sub broker is registered?

You can confirm it by verifying the registration certificate issued by SEBI. A broker's
registration number begins with the letters "INB" and that of a sub broker with the letters “INS".
For the brokers of derivatives segment, the registration number begins with the letters “INF”.
There is no sub-broker in the derivatives segment.

What is Member –Client Agreement Form?

This form is an agreement entered between client and broker in the presence of witness where the
client agrees (is desirous) to trade/invest in the securities listed on the concerned Exchange
through the broker after being satisfied of brokers capabilities to deal in securities. The member,
on the other hand agrees to be satisfied by the genuineness and financial soundness of the client
and making client aware of his (broker’s) liability for the business to be conducted.

What kind of details do I have to provide in Client Registration form?

The brokers have to maintain a database of their clients, for which you have to fill client
registration form. In case of individual client registration, you have to broadly provide following
information:

Permanent Account Number (PAN), which has been made mandatory for all the investors
participating in the securities market.

Your name, date of birth, photograph, address, educational qualifications, occupation,
residential status(Resident Indian/ NRI/others)

Bank and depository account details

If you are registered with any other broker, then the name of broker and concerned Stock
exchange and Client Code Number.

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For proof of address (any one of the following):

Passport

Voter ID

Driving license

Bank Passbook

Rent Agreement

Ration Card

Flat Maintenance Bill

Telephone Bill

Electricity Bill

Insurance Policy
Each client has to use one registration form. In case of joint names /family members, a separate
form has to be submitted for each person.

In case of Corporate Client, following information has to be provided:

Name, address of the Company/Firm

Date of incorporation and date of commencement of business.

Registration number(with ROC, SEBI or any government authority)

Details of PAN

Details of Promoters/Partners/Key managerial Personnel of the Company/Firm in specified
format.

Bank and Depository Account Details

Copies of the balance sheet for the last 2 financial years (copies of annual balance sheet to be
submitted every year)

Copy of latest share holding pattern including list of all those holding more than 5% in the
share capital of the company, duly certified by the Company Secretary / Whole time
Director/MD. (copy of updated shareholding pattern to be submitted every year)

Copies of the Memorandum and Articles of Association in case of a company / body corporate,
partnership deed in case of a partnership firm

Copy of the Resolution of board of directors' approving participation in equity / derivatives /
debt trading and naming authorized persons for dealing in securities.

Photographs of Partners/Whole time directors, individual promoters holding 5% or more,
either directly or indirectly, in the shareholding of the company and of persons authorized to
deal in securities.

If registered with any other broker, then the name of broker and concerned Stock exchange
and Client Code Number.
How do I place my orders with the broker or sub broker?
You can either go to the broker’s / sub broker’s office or place an order over the phone / internet
or as defined in the Model Agreement given above.

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How do I know whether my order is placed?
The Stock Exchanges assign a Unique Order Code Number to each transaction, which is
intimated by broker to his client and once the order is executed, this order code number is printed
on the contract note. The broker member has also to maintain the record of time when the client
has placed order and reflect the same in the contract note along with the time of execution of the
order.

What documents should be obtained from broker on execution of trade?

You have to ensure receipt of the following documents for any trade executed on the Exchange:
a. Contract note in Form A to be given within stipulated time.
b. In the case of electronic issuance of contract notes by the brokers, the clients shall ensure that
the same is digitally signed and in case of inability to view the same, shall communicate the
same to the broker, upon which the broker shall ensure that the physical contract note reaches
the client within the stipulated time.
It is the contract note that gives rise to contractual rights and obligations of parties of the trade.
Hence, you should insist on contract note from stock broker.

What details are required to be mentioned on the Contract note issued by the Stock Broker?
A broker has to issue a contract note to clients for all transactions in the form specified by the
stock exchange. The contract note inter-alia should have following:

Name, address and SEBI Registration number of the Member broker.

Name of partner /proprietor /Authorised Signatory.

Dealing Office Address/Tel No/Fax no, Code number of the member given by the Exchange.

Unique Identification Number

Contract number, date of issue of contract note, settlement number and time period for
settlement.

Constituent (Client) name/Code Number.

Order number and order time corresponding to the trades.

Trade number and Trade time.

Quantity and Kind of Security brought/sold by the client.

Brokerage and Purchase /Sale rate are given separately.

Service tax rates and any other charges levied by the broker.

Securities Transaction Tax (STT) as applicable.

Appropriate stamps have to be affixed on the original contract note or it is mentioned that the
consolidated stamp duty is paid.

Signature of the Stock broker/Authorized Signatory.
Contract note provides for the recourse to the system of arbitrators for settlement of disputes
arising out of transactions. Only the broker can issue contract notes.

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 Capital Market
What is the maximum brokerage that a broker can charge?
The maximum brokerage that can be charged by a broker has been specified in the Stock
Exchange Regulations and hence, it may differ from across various exchanges. As per the BSE &
NSE Bye Laws, a broker cannot charge more than 2.5% brokerage from his clients.

What are the charges that can be levied on the investor by a stock broker?
The trading member can charge:

Brokerage charged by member broker.

Penalties arising on specific default on behalf of client (investor)

Service tax as stipulated.

Securities Transaction Tax (STT) as applicable.
The brokerage, service tax and STT are indicated separately in the contract note.

What is STT?
Securities Transaction Tax (STT) is a tax being levied on all transactions done on the stock
exchanges at rates prescribed by the Central Government from time to time. Pursuant to the
enactment of the Finance (No.2) Act, 2004, the Government of India notified the Securities
Transaction Tax Rules, 2004 and STT came into effect from October 1, 2004.

What is an Account Period Settlement?

An account period settlement is a settlement where the trades pertaining to a period stretching
over more than one day are settled. For example, trades for the period Monday to Friday are
settled together. The obligations for the account period are settled on a net basis. Account period
settlement has been discontinued since January 1, 2002, pursuant to SEBI directives.

What is a Rolling Settlement?

In a Rolling Settlement, trades executed during the day are settled based on the net obligations
for the day.
Presently the trades pertaining to the rolling settlement are settled on a T+2 day basis where T
stands for the trade day. Hence, trades executed on a Monday are typically settled on the
following Wednesday (considering 2 working days from the trade day).
The funds and securities pay-in and pay-out are carried out on T+2 day.

What is the pay-in day and pay- out day?

Pay in day is the day when the brokers shall make payment or delivery of securities to the
exchange. Pay out day is the day when the exchange makes payment or delivery of securities to
the broker. Settlement cycle is on T+2 rolling settlement basis w.e.f. April 01, 2003. The
exchanges have to ensure that the pay out of funds and securities to the clients is done by the
broker within 24 hours of the payout. The Exchanges will have to issue press release immediately
after pay out.

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What are the prescribed pay-in and pay-out days for funds and securities for Normal
Settlement?
The pay-in and pay-out days for funds and securities are prescribed as per the Settlement Cycle. A
typical Settlement Cycle of Normal Settlement is given below:

Activity Day
Trading Rolling Settlement Trading T
Clearing Custodial Confirmation T+1 working days
Delivery Generation T+1 working days
Settlement Securities and Funds pay in T+2 working days
Securities and Funds pay out T+2 working days
Post Valuation Debit T+2 working days
Settlement
Auction T+3 working days
Bad Delivery Reporting T+4 working days
Auction settlement T+5 working days
Close out T+5 working days
Rectified bad delivery pay-in and pay-out T+6 working days
Re-bad delivery reporting and pickup T+8 working days
Close out of re-bad delivery T+9 working days

Note: The above is a typical settlement cycle for normal (regular) market segment. The days
prescribed for the above activities may change in case of factors like holidays, bank closing etc.
You may refer to scheduled dates of pay-in/pay-out notified by the Exchange for each settlement
from time-to-time.

In case of purchase of shares, when do I make payment to the broker?

The payment for the shares purchased is required to be done prior to the pay in date for the
relevant settlement or as otherwise provided in the Rules and Regulations of the Exchange.

In case of sale of shares, when should the shares be given to the broker?
The delivery of shares has to be done prior to the pay in date for the relevant settlement or as
otherwise provided in the Rules and Regulations of the Exchange and agreed with the broker/sub
broker in writing.

How long it takes to receive my money for a sale transaction and my shares for a buy
transaction?
Brokers were required to make payment or give delivery within two working days of the pay - out
day. However, as settlement cycle has been reduced fromT+3 rolling settlement to T+2 w.e.f.
April 01, 2003, the pay out of funds and securities to the clients by the broker will be within 24
hours of the payout.

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What is an Auction?
The Exchange purchases the requisite quantity in the Auction Market and gives them to the
buying trading member. The shortages are met through auction process and the difference in
price indicated in contract note and price received through auction is paid by member to the
Exchange, which is then liable to be recovered from the client.

What happens if the shares are not bought in the auction?

If the shares could not be bought in the auction i.e. if shares are not offered for sale in the auction,
the transactions are closed out as per SEBI guidelines.
The guidelines stipulate that “the close out Price will be the highest price recorded in that scrip
on the exchange in the settlement in which the concerned contract was entered into and up to the
date of auction/close out OR 20% above the official closing price on the exchange on the day on
which auction offers are called for (and in the event of there being no such closing price on that
day, then the official closing price on the immediately preceding trading day on which there was
an official closing price), whichever is higher.
Since, in the rolling settlement the auction and the close out takes place during trading hours, the
reference price in the rolling settlement for close out procedures would be taken as the previous
day’s closing price.

What is Arbitration?
Arbitration is an alternative dispute resolution mechanism provided by a stock exchange for
resolving disputes between the trading members and their clients in respect of trades done on the
exchange.

What is the process for preferring arbitration?

The byelaws of the exchange provide the procedure for Arbitration. You can procure a form for
filing arbitration from the concerned stock exchange. The arbitral tribunal has to make the
arbitral award within 3 months from the date of entering upon the reference. The time taken to
make an award cannot be extended beyond a maximum period of 6 months from the date of
entering upon the reference.

Who appoints the arbitrators?

Every exchange maintains a panel of arbitrators. Investors may choose the arbitrator of their
choice from the panel. The broker also has an option to choose an arbitrator. The name(s) would
be forwarded to the member for acceptance. In case of disagreement, the exchange shall decide
upon the name of arbitrators.

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DEPOSITORY
A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds,
government securities, units etc.) In electronic form

IS DEPOSITORY SIMILAR TO A BANK?

Bank

Holds funds in an account.

Transfers funds between accounts on the instruction of the account holder.

Facilitates transfers without having to handle money.

Facilitates safekeeping of money.

Depository

Holds securities in an account.

Transfers securities between accounts on the instruction of the account holder.

Facilitates transfers of ownership without having to handle securities.

Facilities safekeeping of share

DEPOSITORIES IN INDIA
There are two depositories in India which provide dematerialization of securities.
1. NATIONAL SECURITIES DEPOSITORY LIMITED (NSDL)
Prior to trading in a dematerialized environment, settlement of trades required moving the
securities physically from the seller to the ultimate buyer, through the seller’s broker and buyer’s
broker, which involved lot of time and the risk of delay somewhere along the chain. Further, the
system of transfer of ownership was grossly inefficient as every transfer involved physical
movement of paper to the issuer for registration, with the change of ownership being evidenced
by an endorsement on the security certificate. In many cases, the process of transfer took much
longer than stipulated in the then regulations. Theft, forgery, mutilation of certificates and other
irregularities were rampant. All these added to the costs and delays in settlement, restricted
liquidity. To obviate these problems, NSE to promote dematerialization of sec utilities joined
hands with UTI and IDBI to set up the first depository in India called the “National Securities
Depository Limited” (NSDL). The depository system gained quick acceptance and in a very short
span of time it was able to achieve the objective of eradicating the paper from the trading and
settlement of securities, and was also able to get rid of the risks associated with
fake/forged/stolen/bad paper. Dematerialized delivery today constitutes almost 100% of total of
the total delivery based settlement.

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2. CENTRAL SECURITIES DEPOSITORY LIMITED (CSDL)

The Depository provides its services to investors through its agents called Depository
Participants (DP). These agents are appointed by the depository with the approval of SEBI.
According to SEBI regulations, amongst others, three categories of entities, i.e. Banks, Financial
Institution and SEBI registered trading members can become DPs.

BENEFITS OF PARTICIPATION IN A DEPOSITORY

Immediate transfer of securities

No stamp duty on transfer of securities

Elimination of risks associated with physical certificates such as bad delivery, fake securities,
etc.

Reduction in paperwork involved in transfer of securities

Reduction in transaction cost

Ease of nomination facility

Change in address recorded with DP gets registered electronically With all companies in
which investor holds securities eliminating the need to correspond with each of them
separately

Transmission of securities is done directly by the DP eliminating Correspondence with
companies

Convenient method of consolidation of folios/accounts

Holding investments in equity, debt instruments and Government securities in a single
account; automatic credit into demat account, of shares, arising out of
split/consolidation/merger etc.

ISIN (International Securities Identification Number) is a unique identification number for a

security.

CUSTODIAN
A Custodian is basically an organization, which helps register and safeguard the securities of its
clients.
Besides safeguarding securities, a custodian also keeps track of corporate actions on behalf of its
clients:

Maintaining a client’s securities account

Collecting the benefits or rights accruing to the client in respect of securities.

Keeping the client informed of the actions taken or to be taken by the issue of securities,
having a bearing on the benefits or rights accruing to the client.

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DEMATERIALIZATION
Dematerialization is the process by which physical certificates of an investor are converted to an
equivalent number of securities in electronic form and credited to the investor’s account with his
Depository Participant (DP).

CONVERT PHYSICAL HOLDING INTO ELECTRONIC HOLDING

In order to dematerialize, physical securities one has to fill in a Demat Request Form (DRF)
which is available with the DP and submit the same along with physical certificates one wishes to
dematerialize. Separate DRF has to be filled for each ISIN number.

CLEARING AND SETTLEMENT

The clearing and settlement mechanism in Indian securities market has witnessed significant
changes and several innovations during the last decade. These include use of the state-of-art
information technology, emergence of clearing corporations to assume counterparty risk, shorter
settlement cycle, dematerialization and electronic transfer of securities, fine-tuned risk
management system, etc., though many of these are yet to permeate the whole market. Till
recently, the stock exchanges in India were following a system of account period settlement for
cash market transactions. T+2 rolling settlement have now been introduced for all securities. The
members receive the funds/securities in accordance with the pay-in/pay-out schedules notified by
the respective exchanges. Given the growing volume of trades and market volatility, the time gap
between trading and settlement gives rise to settlement risk.

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JOURNEY OF SENSEX

BSE SENSEX is the benchmark index for the Indian stock market. It is the most frequently used
indictor while reporting on the state of the market. Sensex is not only scientifically designed but
also based on globally accepted construction and review methodology. First compiled in 1986,
SENSEX is a basket of 30 constituent stocks representing a sample of large, liquid and
representative companies. The base year of SENSEX is 1978-79 and the base value is 100. The
index is widely reported in both domestic and international markets through print as well as
electronic media.

The Index was initially calculated based on the "Full Market Capitalization" methodology but
was shifted to the free-float methodology with effect from September 1, 2003. The "Free-float
Market Capitalization" methodology of index construction is regarded as an industry best
practice globally. All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use
the Free-float methodology.

Due to is wide acceptance amongst the Indian investors; SENSEX is regarded to be the pulse of
the Indian stock market. As the oldest index in the country, it provides the time series data over a
fairly long period of time (From 1979 onwards). Small wonder, the SENSEX has over the years
become one of the most prominent brands in the country.

The growth of equity markets in India has been phenomenal in the decade gone by. Right from
early nineties the stock market witnessed heightened activity in terms of various bull and bear
runs. The SENSEX captured all these events in the most judicial manner. One can identify the
booms and busts of the Indian stock market through SENSEX.

There was a time when India was discussed as the land of snake charmers, black magic and
epidemics but the revolutionary Indian growth story changed everything. Indian economy at its
height compelled the world to change its viewpoint towards India. Out of the several factors
which changed the face of modern India, we are going to discuss the most roaring of them i.e. our
share market. The earlier reform procedures adopted by India gave India the two most sought
after world-class brands i.e. SENSEX and NIFTY. The magical figures displayed by our market
turned all the heads on India. And India became one of the most favoured places for investment

Now we are going to deal with the ups and downs in the share market since last two years i.e.
since year 2007.our share market has went through many phases in there 2 years. We saw the
investors getting overjoyed at 21K and we saw them crying too when it crashed. We saw how the
market rewarded the undervalued shares and how the overvalued shares fell down to demonstrate
the saying “everything which rise more than expected, has to fall.”

So to analyze the saga of Indian share market, we had two indices to follow: BSE sensex and NSE
nifty. Though NSE nifty is a more advanced option and has left BSE sensex far behind, still we
call BSE sensex as the barometer of our economy. That’s why we have followed the BSE sensex.
It was not possible to track each and every day figure of the sensex since last two years. The
performance of the sensex is analyzed with the help of data and graphs collected from various
sources and some of the most talked about movements of sensex starting with the secondary
market summary of each year, firstly year 2007 and then year 2008.

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YEAR 2006 AT A GLANCE:

The benchmark 30-share sensex briefly crossed the psychological 14,000-mark on Tuesday,
December 5, 2006. While foreign institutional investors have been aggressive buying stocks
over the past few months, the response of domestic mutual funds has been guarded. In the
last two months alone, FIIs bought net stocks worth Rs 17,001 crore while local mutual funds
have pumped in a net Rs 638.07 crore.

YEAR 2007 AT A GLANCE

Indian capital market was able to set yet another milestone reflecting the long term growth story
with Sensex crossing the 21,000 mark in early trade on 8th January ’08, it touched the day’s high
at 21,077.53 before closing at 20,873.33 with a P/E of 28.51. It took 49 trading days for the
Sensex to move from 20,000 to 21,000.

The markets reached such heights primarily due expectation of excellent quarterly result, strong
forward momentum and market players reflecting their confidence in Indian economy. There is
increasing recognition of long-term growth prospects in India.

Indices which performed well during the Sensex journey from 20,000 to 21,000 were Reality,
Consumer Durables, Oil & Gas and Metal. Teck and IT sectors were the laggards giving negative
returns.

The US subprime crises has played its part in slowing down the pace of this 1,000 point rally as
Indian stock markets were seen being influenced by the global cues led by US stocks. The
previous 4,000 point rally put together took lesser trading sessions as compared to this 1,000
point rally

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SENSEX JOURNEY (FROM 15,000 TO 21,000)

SENSEX CLOSING VALUES AND PE

The Sensex after crossing 20,000 mark on 29thOctober’07 took 49 trading days in reaching the
21,000 mark. During this journey from 20,000 to 21,000 BSE 100, BSE 200 and BSE 500 reaped
11.21%, 12.877% and 14.65% respectively. The Smallcap and Midcap gave a return of 44.00% and
24.99% respectively while Sensex gave a return of 4.18%.

MOVEMENT OF SENSEX (FROM 20,000-21,000)

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OTHER BSE INDICES RETURNS (FROM 20,000 – 21,000)

BSE SECTORAL INDICES RETURNS (FROM 20,000 – 21,000)

INFLATION AND INTEREST RATES:

The inflation in India is under control and this may create favorable outlook for interest rates
coming down. Interest rates sensitive sector like Auto and Real estate banking may do well going
forward. Only fear to inflationary pressure is fund flow and curb on capital account inflow (ECB,
P notes etc.) which is not going to work as Fed may lower the interest rates further thus creating
robust platform for inflows into India and other emerging markets across Asia and Latin America.

The reason for Inflation coming down is primarily due to high base effect. Low inflation would
persuade RBI to ease liquidity flow but reducing CRR at this juncture was not possible due to
strong fund flow to India and resultant appreciation of rupee vis-à-vis dollar. Exchange rate is
hurting IT stocks & exporters hence lot of job losses which centre can not afford therefore
government will do arrangements for making exports cheaper. The market expects the inflation
to remain largely steady.

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INFLATION DATA

THE FIIS:
US is slowing down and there is fear that this may escalate into full blown recession which can
affect the money flowing into emerging market equity. Subprime mortgages, bad U.S. home loans
that have made their way into the portfolios of financial institutions worldwide, will likely result
in more losses at these firms. With 70% of U.S. growth driven by consumption, economists worry
especially about the drying-up of the easy money that has fueled the economy over the past few
years. At the root of the credit crisis remain U.S. households unable to meet mortgage and
possibly other payments. This will have very bad effect on kind of flow we may see into emerging
markets.

Federal Reserve and other major central banks have intervened through a combination of rate
cuts and money injection into the financial system. The U.S. government has also frozen some
adjustable rate mortgages and announced measures to help distressed homeowners. Adding to the
pressure on consumers are high energy prices, with a barrel of crude oil still flirting with the
USD100 level, and gasoline prices on average 90 cents a gallon higher than a year ago.

In 1000 points rally from 20,000 to 21,000 FIIs infused Rs. 2403 cr in the equity markets in
duration of 49 trading days. The Foreign institutional investors were Net Investors during the
1,000 point rally except for November 2007 where in they were net sellers to the tune of Rs.
5849.90 cr on account of weak global sentiments and crude prices touching new highs. Foreign
institutional investors had pumped Rs. 1929.70 cr into Indian stocks this calendar year till
07thJanurary ’08. According to the Securities and Exchange Board of India FIIs hold total
investments to the tune of Rs. 285398.10 cr in Indian equity market. The number of Registered
FII's as on 07th January’08 was recorded at 1235. We are likely to see more of FII investments in
the days to come.

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FII INFLOWS (FROM 15,000 – 21,000)

FII NET INVESTMENT (FROM 20,000 – 21,000)

MUTUAL FUNDS:

The Mutual Funds in this 1000 point rally have turned to be net investors for a second time to
the extent of Rs. 6264.40 cr in 49 trading sessions after the Sensex breached 20,000 unlike the
previous trends where in the Mutual Funds had been net sellers to the tune of Rs. 965.90 cr after
the Sensex had breached 18,000 mark on 9thOctober’07 continuing the trend of being Net Sellers
from the last 1000 point rally where they sold equity worth Rs. 2102.60 cr.

The MF’s were net investors in the 1,000 point rally where in they invested Rs.2169.50 cr in
November ’07, Rs.3024.40 cr in December ’07 and Rs. 1615.30 cr till 07th January ’08 where as
were net sellers for 30th & 31st October ‘07 to the tune of Rs. 544.80 cr. The calendar year 2008
has seen Mutual Funds as net buyers to the tune of Rs. 1615.30 cr by the time Sensex surged
21,000..

MUTUAL FUND NET INVESTMENT (FROM 15,000 – 21,000)

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Sensex level Date Sensex Drivers

1,000 July 25, 1990 Good monsoon and excellent corporate results.
2,000 Jan 3, 1992 Liberal economic policy initiatives undertaken by the then finance
Minister, Dr Manmohan Singh.
3,000 Feb 29, 1992 Market-friendly Budget by the then Finance Minister, Dr
Manmohan Singh.
4,000 March 30, 1992 Liberal export-import policy.
5,000 Oct 8, 1999 BJP-led coalition won the majority.
6,000 Feb 11, 2000 Infotech boom
7,000 June 20, 2005 News of the settlement between the Ambani brothers boosted
investor sentiments
8,000 Sep 8, 2005 Buying by foreign and domestic funds
9,000 Nov 28, 2005 FIIs on buying Spree.
10,000 Feb6, 2006 Buying from FIIs, Local operators and retail investors
11,000 March 21, 2006 Robust foreign fund inflows and a move by Government towards
greater capital account convertibility.
12,000 April 20, 2006 Massive buying from mutual funds around Rs.3400 cr. in just 19
trading sessions, favorable credit policy. Expectation of robust fourth
quarter earnings by corporate and S&P upgrading India’s sovereign
credit rating from stable to positive
13,000 Oct 30, 2006 Fund infusion from market players, falling oil prices and strong
second quarter results from Technology and Banking companies.
Robust growth in infrastructure sector.
14,000 Dec 5, 2006 Strong FII inflow, healthy corporate earnings and continued strong
economic data coupled with slash in petrol and diesel prices have
fuelled the latest surge on the bourses.
15,000 July 6, 2007 The softening trend in inflation below the five per cent level,
indications of interest rates having peaked, strong FII inflows and
expectations of good quarterly results.
16,000 Sep 19, 2007 US fed rate cut by 50 basis point, strong foreign fund inflows,
softening trend in inflation below the four per cent level and Good
Kharif crop.
17,000 Sep 26, 2007 Robust FII inflows and positive sentiments across the boards.
18,000 Oct 09, 2007 Strong FII Inflows and short covering due to easing of political
tension between LEFT and UPA over the Nuclear Deal.
19,000 Oct 15, 2007 Strong fund flow and expectation of good quarterly result from
companies has fuelled this leg of rally.
20,000 Oct 29, 2007 Strong FII buying coupled with short covering led to sharp up move.
Registering of FII and P notes issue clarification has put momentum
into Sensex.
21,000 January 08, 2008 Expectation of excellent quarterly result and strong forward
momentum has played major role.

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SENSEX DURING YEAR 2008:
After scaling new heights of 20000+, sensex entered year 2008 with rosy pictures. The trade
pundits, brokers and even investors predicted new heights for the year. And they felt their
predictions coming true when sensex touched the 21000 mark on 8th January 2008. It’s
interesting if one sees in terms of flows; the journey from 20,000 to 21,000 is dominated by
domestic institutional investors; FIIs were negative sellers, they sold in the cash market to the
tune of USD 45 billion. So if one has to take out some pointers from this journey from 20,000 to
21,000, it is the longest journey which we have seen in the last 5,000 marks, the midcaps and
smallcaps have been outperformers and in terms of flows, it has been domestic institutional
investors which have been really putting the money.

But the rosy picture soon turned gloomy. The skyrocketing sensex suddenly started heading
south and Sensex saw the biggest absolute fall in history, shedding 2062 points intra-day. It
closed at 17,605.35, down 1408.35 points or 7.4 per cent. It fell to a low of 16,951.50.The fall was
triggered as a result of weakness in global markets, but the impact of the global rout was the
biggest in India. The market tumbled on account of a broad based sell-off that emerged in
global equity markets. Fears over the solvency of major Western banks rattled stocks in
Asia and Europe.

After the worst January in the last 20 years for Indian equities, February turned out to be a flat
month with the BSE sensex down 0.4%. India finished the month as the second worst emerging
market. The underperformance can partly be attributed to the fact that Indian markets
outperformed global markets in the last two months of 2007and hence we were seeing the lagged
impact of that outperformance. In the shorter term, developments in the US economy and US
markets continued to dominate investor sentiments globally and we saw volatility move up
sharply across most markets.

The Bombay Stock Exchange (BSE) Sensex fell 4.44 percent on Monday, 31st march the last day
of the financial quarter, to end the quarter of March down 22.9 percent, its biggest quarterly fall
since the June 1992 quarter, as reports of rising inflation and global economic slowdown
dampened market sentiments. Financial stocks led the
Sensex slide along with IT. According to market analysts, IT stocks fell on worries about the
health of the US economy. Indian IT firms depend on the US clients for a major share of their
revenues.

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REASONS FOR THE PRESENT SLOWDOWN (Q1, FY 08-09)

The first month of the financial year 08-09 proved to be a good one for investors with the month
ending on a positive note. The BSE sensex showed a gain of 10.5% to close at 17287 points. A
combination of firming global markets and technical factors like short covering were the
main reasons for the up move in the markets. Though inflation touched a high of 7.57%
against 6.68% in march 2008 as a result RBI hiked
CRR by 50 bps to take the figure to 8%, still emergence of retail investors was also seen; a fact
reinforced by the strong movement in the mid-cap and small- cap index that rose 16% and 18%
respectively.
So April was the last month to close positive. Then after nobody saw a stable sensex even.
Sometimes it surged by 600+ points, but very next day it plunged by some 800 odd points and
this story is still continuing. Every prediction, every forecasting has failed. The sensex is dancing
on the music of lifetime high inflation rates, historic crude prices, tightening RBI policies,
weak industrial production data, political uncertainties and obviously the sentiments of
domestic as well as FIIs. The only relief came in the form of weakening Indian rupees which
enlightened the IT sector and most recently the UPA gaining vote of confidence. Presently it is
revolving around the figures of 14000 and no one knows what next?
The 30-share BSE Sensex fell 117.89 points or 0.67% at 17,373.01 on Tuesday, 6 May
2008. The key benchmark indices ended lower as investors resorted to profit booking due
to lack of positive triggers in the market. On 30th May an imminent hike in domestic retail
fuel prices due to soaring crude oil prices weighed on the market last week. Foreign institutional
investors sold close to Rs 2204 crore in the first three trading sessions of the week which
accentuated the downfall. However better than expected Q4 gross domestic product figures
provided some relief to the bourses on Friday. IT stocks gained on slipping rupee. BSE Sensex
rose in two out of five trading sessions. In May,

INDIAN INFLATION STOOD AT 8.2%.

The market declined sharply as a hike in fuel pr ces by about 10% announced by the Union
government on Wednesday, 4 June 2008, triggered possibility of a surge in inflation to double
digit level. The BSE Sensex declined 843.39 points or 5.14% to
15,572.18 in the week ended 6 June 2008. The S&P CNX Nifty fell 242.3 points or 4.97% to
4627.80 in the week.

On 6 June 2008, local benchmark indices underperformed their global peers, hit by rumours that
the Reserve Bank of India (RBI) may hike cash reserve ratio (CRR) or interest rate later in
the day to tame runaway inflation. The 30-share BSE Sensex declined 197.54 points or 1.25%
to settle at 15,572.18.

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On 9th June 2008, Bombay’s Sensex index closed 506.08 points down at 15,066.10, having earlier
fallen 4.4% and slipped below 15,000 for the first time since March. Oil prices surged to record
levels, fanning fears that they will keep climbing and hurt world growth.
Central banks across the globe warned that interest rates may have to rise as they look to
keep inflation under control, despite the fact that economic growth is slowing in key nations such
as the US and UK.On the week ending 27th June 2008 Sensex declined 769.07 points or 5.28% to
13,802.22.
The S&P CNX Nifty lost 210.90 points or 4.85% to 4136.65 in the week. Equities extended losses
for the fifth straight day on 24 June 2008 with the barometer index BSE Sensex falling below the
psychologically important 14,000 mark for the first time in 10 months since late August 2007. On
25 June 2008, equities staged a solid rebound after touching fresh calendar 2008 lows in early
trade. The initial jolt was caused by the Reserve Bank of India's move to hike the key
lending rate. A setback to stocks in Asia and US, sharp spurt in crude oil prices and
political uncertainty due to Indo- US nuclear deal rattled bourses on 27 June 2008.
On July 15th 2008, Indian shares fell 4.9 per cent to their lowest close in 15 months, joining a
world equities rout as investors dumped financials on concerns about the fallout from
worsening global credit turmoil. Although Indian banks have no direct exposure to the US
subprime mortgage sector, the global financial sector turmoil impacts sentiment in the local
market and raises worries of more withdrawals by foreign funds.
An 800+ point surge was experienced in the market on the day following UPA gaining vote of
confidence but the very next day market couldn’t maintain the momentum and since then its in a
doldrums’ position.
Presently, we can saw market plunging after the RBI announced further hikes in Repo rate as
well as CRR both increased to 9%. Also, the serial blasts at Ahmadabad and Bangalore
adding to the worries and enhancing the negative sentiments. And above all we can't see any
positive trigger that can dilute the flow of negative news.

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