FOI- Unit :1 –Investment Environment

Chapter -2: Indian Securities Market

Ramesh Kumar
Associate Professor
Department of Commerce
[email protected]
 Contents
Structure of Indian Securities Market
2.1.1 Market Participants
2.1.2 Market segments
2.2 trading Mechanism on stock Exchange
2.2.1 National securities clearing Corporation Limited
2.3 Stock Indices
2.4 Regulation of Securities Market in India (SEBI)
2.4.1 Reform introduced by SEBI
2.5 Latest Development
2.6 Other development in Indian stock Market since 1990
 Contents
2.6.1 Screen based trading and online (internet based)
2.6.2 Depository system, dematerialization and scrip less trading
2.6.3 Book building
2.6.4 Derivatives
2.6.5 Rolling settlement
2.6.6 Securities lending scheme
2.6.7 Regulation regarding prohibition of Insider trading
2.6.8 Regulation of Unpublished price sensitive information
 Structure of Indian securities Market
Market participants
 The issuers of securities
 Investor
 Intermediate
Market Segments
1.Primary market
 Public issue
 Private placement
 Offer for sale
2. Secondary Market
 Over the counter exchange
 Exchange traded market
Structure of Indian securities Market
Stock Exchange
Stock exchange
 Stock Indices
 BSE- Sensex 30 stocks
 NSE- Nifty 50 Stocks
 CNX Nifty 50 STOCK ( 23 sectors of economy)
 S&P BSE GREENEX
Category of Indices
 Board market indices
Companies across number of sector
 Sectoral Indices
Sector based index
 Thematic Indices
Green , ethical and infrastructure etc.
Stock Indices
Stock Indices
Stock Indices
Stock Indices
Stock Indices
Stock Indices
Stock Indices
Stock Indices
 Stock Exchanges in India
 Bombay Stock Exchange Mumbai
 Calcutta Stock Exchange Kolkata
 India International Exchange (India INX) Gandhinagar
 Indian Commodity Exchange Navi Mumbai
 Metropolitan Stock Exchange of India Mumbai
 Multi Commodity Exchange of India Mumbai
 National Commodity & Derivatives Exchange Mumbai
 National Stock Exchange of India Mumbai
 NSE IFSC Gandhinagar
National and Regional Stock Exchange
International Stock Exchange
Derivatives
Book Building
Trading Mechanism
Clearing And Settlement Procedure In The Indian Stock Market

In the stock market, there is always a buyer and a seller. So,

when a person buys a certain number of shares, there is
another trader who sells the shares. This trade is settled only
when the buyer receives the shares and the seller receives
the money.
• There are three phases in a secondary market transaction:
• 1. Trading
• 2. Clearing
• 3. Settlement
 Trading
 In the stock market, a large number of trades occur
simultaneously.
 The stock exchanges use an electronic order
matching system to match ‘buy’ and ‘sell’ orders
from different traders.
 This way, each trade is executed.
For instance, imagine that stock ‘X’ is trading in the
stock market.
The buy and sell orders for this stock are as follows:
 Clearing
 Once two orders match and a trade is executed, the clearing
process takes place.
 Clearing is the identification of what security is owed to the
buyer and how much money is owed to the seller.
 The entire process is managed by ‘clearing houses’.
 These are independent entities.
 Settlement
• The next step is to fulfil the financial obligations identified in
the clearing step.
• This involves the transaction settlement for the buyers and
sellers.
• So once the buyer receives the security and the seller
receives the payment, the transaction is settled.
Types of settlements in the stock market
• There are two types of settlements in equity investment that
you will come across and they are as follows –
Spot settlement
• This type of settlement is carried out immediately following
the rolling settlement principle of T+2.
Forward settlement
• This settlement is applicable when you agree to settle the
trade later at a future date which could be T+5 or T+7.
 Rolling settlement
 A rolling settlement is one in which the trade is settled in the
days following the trade.
 Trades are settled in T+2 days with this sort of settlement,
which indicates that deals are closed after the second
working day. Sunday, Saturday, Bank holidays, and exchange
holidays are not included in this time frame.
 So, if a trade is made on a Tuesday, it will be closed on a
Thursday. Similarly, if you buy a stock on Friday, you must pay
the broker that day, but the shares will be deposited in your
account the following Tuesday.
 You become the shareholder of record on the day that your
trades are settled.
 Rolling settlement rules in BSE
• In the Bombay Stock Exchange (BSE), the shares are
all settled in T+2 days.
• Government securities and fixed income securities
for retail investors are also closed in T+2 days.
• Pay-in and pay-out when you buy or sell securities
are executed on the same day of the trade.
• The securities are deposited by the client within one
working day after the BSE completes the pay-out of
the funds and securities.
 Settlement cycle on the NSE
Activity Working
Days

Rolling Settlement Trading T

Clearing Including Custodial Confirmation and T+1

Delivery Generation

Settlement Through Securities and Funds Pay-In and T+2

Pay-Out

Post Settlement Auction T+2

Auction Settlement T+3

Reporting for Bad Deliveries T+4

Pay-In-Pay-Out of Rectified Bad Deliveries T+6

Re-Reporting of Bad Deliveries T+8

Closing of Re-Bad Deliveries T+9

 Participants Involved in the Process
 Clearing Corporation
 Clearing corporation is one of the major participants
involved in clearing and settlement process in stock
market.
 The responsibility for clearing and settlement of
trade executed at the stock exchange lies on the
National Securities Clearing Corporation Limited
(NSCCL).
 It is also in charge of risk management and is
obligated for meeting all settlement regardless of the
member defaults.
 Participants Involved in the Process
Clearing Members/Custodians
When trading members place deals in the stock exchange, the
same is moved to NSCCL, which transfers them to the clearing
members
Clearing banks
• Clearing banks are responsible for the settlement of funds.
• There are 13 clearing banks, and each clearing member needs
to open a clearing account with either one of them.
• In case of a pay-out, clearing members receive funds in the
clearing account and in case of pay-in they need to make
funds available.
 Participants Involved in the Process
Depositories :
 There are two depositories in India
 National Securities Depository Limited (NSDL)
 Central Depository Services Limited (CDSL).
 These two depositories hold your Demat account, and
clearing members also need to maintain a clearing pool
account with them.
 Clearing members need to transfer the securities to the
clearing pool account they hold with the depositories on the
date of settlement.
 Participants Involved in the Process
Professional Clearing Members
• These are special category members appointed by the NSCCL.
• However, note that they are not allowed to trade, and they
can only clear and settle trades executed for their clients.
• Professional clearing members generally constitute banks,
custodians
 How Trades are Cleared and Settled in the Stock Market?
 The stock exchange transfers the details of every trade to the
clearing corporation on the T day when trade is executed
 The clearing corporation confirms with the clearing members
before they close the trade. Once they receive confirmation,
they determine the obligations of the clearing member
 After the details are confirmed the clearing banks must have
sufficient funds, and depositories should make the shares
available
 The clearing corporations get funds and securities from
clearing banks and depositories for purchase and sale
transactions respectively.
 In the case of the purchase transaction, the clearing member
receives securities and in the case of sale transaction, the
clearing member receives money in the clearing account.
How Trades are Cleared and Settled in the Stock Market?
 Regulation of Securities Market in India -SEBI
 SEBI-1992
 Organization of SEBI
 A Chairman
 Two members - Central Government dealing in
finance
 One member – RBI
 Five members – 3 appointed as whole time members
by central government
 SEBI- Functions
 To protect the interest of investors in securities
 To promote and development of securities market
 To regulate the securities market
 To regulate the business on stock exchange
 To registering and regulating of the working of brokers , sub
brokers bankers, underwriters, portfolio managers
investment advisers
 To registering and regulating the working of the depositories
 To registering and regulating the venture capital funds
 To promoting and regulating self regulatory organization
 Prohibiting fraudulent and unfair trade practices relating to
securities markets
 Promoting investor education and training of intermediate
 Prohibiting insider trading in securities
 SEBI Guidelines for IPO in India
The SEBI guidelines for IPO :
 unlisted companies
 listed companies
SEBI Guidelines for IPO for Unlisted Companies
There are three different routes available to an unlisted company for making its initial
public offer in India:
Profitability Route – Entry Norm 1
• The minimum net worth of the issuer must be more than INR 1 Crore in each
previous three years.
• The minimum net tangible assets of the issuer must be more than INR 3 Crores
each, and not more than 50% of these assets must be held in the form of
monetary assets in the previous three years.
• The minimum average operating profit (before tax) of the company must be more
than INR 15 Crores in at least three out of five previous years.
• The issue size must not be more than five times the pre-issue net worth.
• If the company has changed its name, then a minimum of 50% of the revenue in
the previous year must be received from activities done under the new name.
 SEBI Guidelines for IPO in India
QIB Route – Entry Norm II
• Under this process, 75% of the company’s net offer to the
public must be allotted compulsorily to the Qualified
Institutional Buyers (QIBs). If the company is unable to
achieve the minimum subscription of QIB, it becomes liable to
refund the subscription fee.
Appraisal Route – Entry Norm III
• Under the appraisal route, the project or the public offer is appraised and
participated to the extent of 15% by Financial Institutions or Scheduled
Commercial Bank, of which, a minimum of 10% comes from the appraisers.
• The appraisal route comes with the condition that the minimum post-issue face
value capital must be INR 10 crores or a mandatory market-making must be there
for at least two years.
• All the above-mentioned entry norms also include the requirement of at least
1000 prospective allottees in the issuer company’s public issue.
 SEBI Guidelines for IPO in India
SEBI Guidelines for Public Issue for Listed Companies
• If the company has changed its name during the last one year, at least
50% of its revenue for the previous one year must be from the activities
performed by the company under its new name.
• The size of its issue must not be more than five times the pre-issue net
worth per the company’s audited balance sheet of its last financial year .
Exempted Entities under the SEBI Guidelines for IPO
• SEBI has exempted certain kinds of entities from the above-mentioned
entry norms for making a public issue. These entities include:
• Private and Public Sector Banks
• Infrastructure company which has its project appraised by a Public
Financial Institution or IDFC or IL&FS or a bank which was previously a PFI,
and at least 5% of its project cost is funded by any of these institutions.
No entry norms are provided for a listed company that wants to make a
rights issue.
 Minimum Promoter’s Contribution and Lock-In
 the promoters of the company must contribute at least 20% of the post-
issue capital or
 20% of the total issue size.
 This requirement is in place to make sure that the promoters retain some
part of the company’s stakes once the company makes its public offer.
 General SEBI Guidelines for IPO
• A company that wants to make a public offer must also adhere to the following general SEBI guidelines for IPO in India:
• The directors, promoters or other KMPs must not be associated with any other company in a similar role.
• The directors, promoters or any other key management personnel who have the control of the company must not be debarred from accessing the
primary market.
• The application to list the company’s shares must be filed with a recognised stock exchange in India.
• The company must enter into legal contracts with a depository to dematerialise its specific securities.
• The partly paid-up equity shares must be fully paid-up.
• A listed company must maintain a minimum public shareholding of 25%. In case of failure to do so, the company gets one year to meet the
requirement.
• A company must make financial arrangements from trust and verifiable sources for its financial requirements, excluding the amount put up to issue
new company shares.
• The process of an initial public offer of more than INR 50 lakhs must start with the company filing a draft offer in the form of Draft Red Herring
Prospectus with the SEBI.
• Once the draft is reviewed and received by the company along with the issue of final observation letter, the final offer document or the red herring
prospectus must be filed with the Registrar of Companies (ROC).
• The company may choose the book building process under Entry Norm II. In this case, the company must complete the IPO process within one year
from the date of receiving the final observation letter from SEBI.
• 50% of the Board of Directors of the company must be independent investors.
• The same 50% of the Board of Directors of the company must have no obligations to the promoters or the company.
• No directors or promoters of the company must be guilty of an economic offence.
• The company or any of its promoters or directors must not be a wilful defaulter.
• The issuer company must disclose the number of shares or the number of shares to SEBI between the date of filing its draft red herring prospectus
and issue of specified securities.
• If a company wants to go for a public issue of more than INR 100 crores, it must submit a draft offer document with the regional office of SEBI before
doing so.
SEBI
 Reform in Stock market
 Establishment of Securities and Exchange Board Of India (SEBI)
 Establishment of National Stock Exchange (NSE)
 The Clearing Corporation Of India Limited (CCIL)
 Dematerializations of Shares
 Screen Based Trading
 Investor Protection
 The National Securities Clearing Corporation Limited (NSCL)
 Trading In Central Government Securities
 Credit Rating Agencies
 Buy Back Of Shares
 PAN Made Mandatory
 Accessing Global Funds Market
 Mutual Funds
 INTERNET TRADING
 Rolling Settlement
 Commodity Trading
 Green shoe option
 Latest development
 Derivatives
 Settlement guarantee
 Securities landing and borrowing
 Corporate Governance
 Debt listing agreement
 Social stock exchange started
 Gold exchange traded
 Gold stock exchange started
 Grading of IPO
 Corporate debt market
 Direct market access (DMA)
 Algorithmic trading
 Straight through Processing (STP)
 Depository system
 Compulsory rolling settlement (CRS)
 Securities lending scheme
 Application supported by Blocked amount (ASBA)
 SCORES- Investor Grievances
 Insider Trading
• Insider Trading is the trading of securities of a company by an Insider
using company's non-public, price sensitive information while causing
losses to the company or profit to oneself.
• Insider:
According to the Regulations, "Insider" means any person who is or was
connected to the company or is deemed to have been connected with the
company and who reasonably is expected to have access, connection to
unpublished price sensitive information in relation to that company
Connected Person:
The Regulation defines that a "connected person" means any person who- (i)
is a director, as defined in clause (13) of section 2 of the Companies Act,
1956 of a company, or is deemed to be the director of the company by
virtue of sub-clause (10) of section 307 of the Act. (ii) occupies the
position as an officer or an employee of the company or holds a position
involving a professional or business relationship between himself and the
company, whether temporary or permanent and who may reasonably be
expected to have an access to unpublished, price sensitive information in
relation to that company.
Regulation of unpublished price sensitive information
Price Sensitive Information means any information, which relates directly or
indirectly to a company and which if published, is likely to materially affect
the price of securities of the company.
Price Sensitive Information:
1. Financial results of the company.
2. Intended declaration of Dividends.
3. Issue of shares by way of public rights, bonus, etc.
4. Any major expansion plans or execution of new projects
5. Amalgamation, mergers and takeovers.
6. Disposal of the whole/substantial of the undertaking.
7. Change in key managerial personnel
8. Material events
 Restrictions on communication and Trading by
Corporate Insiders
 Communication or procurement of unpublished price
sensitive information
 Trading when in possession of unpublished price sensitive
information
 Trading plans
Significant Penalties:
 SEBI may impose a penalty of not more than Rs. 25 Crores or
three times the amount of profit made out of Insider Trading;
whichever is higher.
 SEBI may initiate criminal prosecution; or  SEBI may issue
order declaring transactions in Securities based on
unpublished price sensitive information; or
 SEBI may issue orders prohibiting an insider or refraining an
insider from dealing in the securities of the company.
 Prohibition of Insider Trading
SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”),
the Securities and Exchange Board of India (“SEBI”) has continually sought
to fine tune and tweak the regulations through amendments in 2018 and
2019. On July 17, 2020, SEBI notified the Securities and Exchange Board of
India (Prohibition of Insider Trading) (Amendment) Regulations, 2020
(“PIT Amendment”), to introduce further changes to the PIT Regulations.
Introduction
• The PIT Amendment, approved by SEBI at its board meeting held on June
25, 2020, include the following key changes:
• Enhancement of the structured digital database towards seeking and
storing additional details of persons sharing unpublished price sensitive
information (“UPSI”)
• Automation of shareholding disclosures and change in reporting authority
for making disclosures of PIT violations by listed entities, market
intermediaries and fiduciaries.
• Introduction for additional transactional mechanisms as an exception to
trading window restrictions.
 Prohibition of Insider Trading
Changes Introduced to the PIT Regulations
Structured digital database
Maintenance of structured digital database for a period of 8 (eight) years after
completion of the relevant transaction, except in case of any pending enforcement
or investigative proceeding by SEBI
Prohibition on outsourcing maintenance of the internal database:
Reporting of violations of the Code of Conduct
Trading Window Restrictions
 Reference Book

1.Vanita Tripathi, Security Analysis & portfolio

Management
2.Singh ,Y.P. “Fundamentals of investment
3. Rustogi ,R.P. “ Fundamentals of Investment
4. Pandian, P., “ Security Analysis and Portfolio
Management”
5. Donald E. Fisher,Ronald ,J. Jordan, Security Analysis and
Portfolio Management