STOCK MARKET

The BSE and NSE

Most of the trading in the Indian stock market takes place on its two stock exchanges: the
Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been in
existence since 1875. The NSE, on the other hand, was founded in 1992 and started trading
in 1994. However, both exchanges follow the same trading mechanism, trading hours,
settlement process, etc. At the last count, the BSE had about 4,700 listed firms, whereas the
rival NSE had about 1,200. Out of all the listed firms on the BSE, only about 500 firms
constitute more than 90% of its market capitalization; the rest of the crowd consists of
highly illiquid shares.
Almost all the significant firms of India are listed on both the exchanges. NSE enjoys a
dominant share in spot trading, with about 70% of the market share, as of 2009, and almost
a complete monopoly in derivatives trading, with about a 98% share in this market, also as
of 2009. Both exchanges compete for the order flow that leads to reduced costs, market
efficiency and innovation. The presence of arbitrageurs keeps the prices on the two stock
exchanges within a very tight range. (To learn more, see The Birth Of Stock Exchanges.)
Trading Mechanism
Trading at both the exchanges takes place through an open electronic limit order book, in
which order matching is done by the trading computer. There are no market makers or
specialists and the entire process is order-driven, which means that market orders placed by
investors are automatically matched with the best limit orders. As a result, buyers and
sellers remain anonymous. The advantage of an order driven market is that it brings more
transparency, by displaying all buy and sell orders in the trading system. However, in the
absence of market makers, there is no guarantee that orders will be executed.
All orders in the trading system need to be placed through brokers, many of which provide
online trading facility to retail customers. Institutional investors can also take advantage of
the direct market access (DMA) option, in which they use trading terminals provided by
brokers for placing orders directly into the stock market trading system. (For more, read
Brokers And Online Trading: Accounts And Orders.)
Settlement Cycle and Trading Hours
Equity spot markets follow a T+2 rolling settlement. This means that any trade taking place
on Monday, gets settled by Wednesday. All trading on stock exchanges takes place between
9:55 am and 3:30 pm, Indian Standard Time (+ 5.5 hours GMT), Monday through Friday.
Delivery of shares must be made in dematerialized form, and each exchange has its own
clearing house, which assumes all settlement risk, by serving as a central counterparty.
Market Indexes
The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market
index for equities; it includes shares of 30 firms listed on the BSE, which represent about
45% of the index's free-float market capitalization. It was created in 1986 and provides time
series data from April 1979, onward.
Another index is the S&P CNX Nifty; it includes 50 shares listed on the NSE, which represent
about 62% of its free-float market capitalization. It was created in 1996 and provides time
series data from July 1990, onward. (To learn more about Indian stock exchanges please go
to http://www.bseindia.com/ and http://www.nse-india.com/.)
Market Regulation
The overall responsibility of development, regulation and supervision of the stock market
rests with the Securities & Exchange Board of India (SEBI), which was formed in 1992 as an
independent authority. Since then, SEBI has consistently tried to lay down market rules in
line with the best market practices. It enjoys vast powers of imposing penalties on market
participants, in case of a breach. (For more insight, see http://www.sebi.gov.in/. )

Market Indexes in India

Sensex and Nifty are two of the prominent market indexes in India.

The Sensex, also known as S&P BSE Sensex or S&P Bombay Stock Exchange Sensitive Index
or BSE 30, is a free-float market-weighted stock market index of 30 well-established and
financially sound companies listed on Bombay Stock Exchange. Published since January 1,
1986, the Sensex is regarded as the pulse of the domestic stock markets in India. One of
the oldest market indexes for equities,
Sensex represents about 45 per cent of the index's free-float market capitalization.

The S&P CNX Nifty or Nift 50 or simply Nift is NSE's benchmark stock market index for
Indian equity market. It was launched on April 21, 1996. It is owned and managed by India
Index Services and Products (IISL), which is a wholly owned subsidiary of the NSE Strategic
Investment Corporation Limited. Nifty includes 50 shares listed on the NSE, which
represent about 62 per cent of its free-float market capitalization.
Listing of Securities

Listing means the admission of securities of a company to trading on a stock exchange.

Listing is not compulsory under the Companies Act. It becomes necessary when a public
limited company desires to issue shares or debentures to the public. When securities are
listed in a stock exchange, the company has to comply with the requirements of the
exchange.

Objectives of Listing

The major objectives of listing are

1. To provide ready marketability and liquidity of a company’s securities.

 2. To provide free negotiability to stocks.

3. To protect shareholders and investors interests.

4. To provide a mechanism for effective control and supervision of trading.

Listing requirements

A company which desires to list its shares in a stock exchange has to comply with the
following requirements:

1. Permission for listing should have been provided for in the Memorandum of Association
and Articles of Association.

2. The company should have issued for public subscription at least the minimum prescribed
percentage of its share capital (49 percent).

3. The prospectus should contain necessary information with regard to the opening of
subscription list, receipt of share application etc.

4. Allotment of shares should be done in a fair and reasonable manner. In case of over
subscription, the basis of allotment should be decided by the company in consultation with
the recognized stock exchange where the shares are proposed to be listed.

5. The company must enter into a listing agreement with the stock exchange. The listing
agreement contains the terms and conditions of listing. It also contains the disclosures that
have to be made by the company on a continuous basis.

Key Differences Between NSDL and CDSL

The significant differences between NSDL and CDSL are discussed in the points given below:

1. NSDL is the pioneer electronic depository of securities, established in India. On the other
hand, CDSL is the second central depository of securities which facilitates book entry
transfer of securities.
2. When it comes to promotion, NSDL is promoted by India’s apex institutions like IDBI
(Industrial Development Bank of India), UTI (Unit Trust of India) and NSE (National Stock
Exchange) whereas CDSL is promoted by Bombay Stock Exchange in association with Bank of
Baroda, State Bank of India, Housing Development Finance Corporation, Union Bank of
India, Standard Chartered Bank.
3. NSDL operates in the NSE. Conversely, CDSL operates in BSE.
4. The total number of depository participants in NSDL is 272 and in CDSL is 581.
5. Account wise, the active investor accounts in NSDL are comparatively higher than in CDSL.

Dematerialisation is the process of converting physical shares into electronic format. An investor who
wants to dematerialise his shares needs to open a demat account with Depository Participant. Investor
surrenders his physical shares and in turn gets electronic shares in his demat account.

Depository is the body which is responsible for storing and maintaining investor's securities in demat or
electronic format. In India there are two depositories i.e. NSDL and CDSL.

Depository Participant (DP) is the market intermediary through which investors can avail the depository
services. Depository Participant provides financial services and includes organizations like banks, brokers,
custodians and financial institutions.

Advantages of Demat
Dealing in demat format is beneficial for investors, brokers and companies alike. It reduces the risk of
holding shares in physical format from investor’s perspective. It’s beneficial for brokers as it reduces the
risk of delayed settlement and enhances profit because of increased participation.

From share issuing company’s perspective, issuance in demat format reduces the cost of new issue as
papers are not involved. Efficiency and timeliness of the issue is also maintained while companies deal in
demat format.

There are a lot of other benefits, but let’s focus on benefits with respect to common investor and the
same are listed below.

• Demat format reduces the risk of bad deliveries

• Time and money is saved as you are not dealing in paper now. You need not go to the notary, broker
for taking delivery or submitting the share certificate
• Liquidity is very high in case of demat format as whole process in automated.
• All the benefits of corporate action like bonus, stock split, rights etc are managed through the
depository leading to elimination of transit losses
• Interest on loan against demat shares are less as compared to physical shares
• Investors save stamp duty while transferring shares in demat format.
• One needs to pay less brokerage in case of demat shares

Demat Conversion
Most of the trading in shares are done in demat format now a day, but there are few investors who still
hold shares in paper format. You cannot deal in paper shares now, so you need to dematerialise them
first. In order to dematerialise physical/paper shares, investors need to fill Demat Request Form (DRF),
and submit the same along with physical shares. DRF is available with the DP and you simply need to raise
a request for demat conversion with the DP.

Their representative will come and get the DRF form signed. So the complete process of
dematerialisation involves:

1. Investor surrenders the physical certificates for dematerialisation to the DP along with DRF.
2. DP updates the account of the investor and shares are allocated in investor demat holding.