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Chapter 2
STOCK EXCHANGES IN INDIA

Meaning and Definition

Stock Exchange is an organised market for the buying and selling of second hand listed securities. The
stock exchanges deal with all types of securities including Government bonds, Municipal bonds, shares,
debentures and units of mutual funds. One can buy or sell outstanding securities at the prevailing prices on the
trading floor, known as rings of the exchange.
Stock exchanges are the most important segment of the secondary market, where securities are traded.
Stock exchanges are organised markets, where a formal mechanism exists to bring buyers and sellers together.
In stock exchanges shares and other securities are traded by the members of the exchanges. Stock exchanges
have a physical location where brokers and dealers meet to execute orders from institutional and individual
investors to buy and sell securities. Only members (brokers and jobbers) are allowed to buy or sell securities
in the stock exchange. The floor of the stock exchange is roughly divided into series of smaller markets for the
government securities, debentures, specified shares, non-specified shares etc.
Securities Contract (Regulation) Act, 1956 defines a stock exchange as “any body of individuals, whether
incorporated or not, constituted for the purposes of assisting, regulating or controlling the business of buying,
selling or dealing in securities”. The Act also lays down that all contracts other than spot delivery contracts
that are not effected through the members of the stock exchange shall be illegal.

Features of Stock Exchange

1. A centralised market place: A stock exchange is a centralised market place for trading securities. However,
the general public is not allowed to enter into the trading floor and has to transact business through
member-broker.
2. Fair open market price: The buyers and sellers assemble to deal in securities in the most convenient and
specialised way. Securities are dealt at the fairest open market price.
3. An Auction Market: A stock exchange is an auction market. Bidders compete with each other to purchase
a particular share at the lowest possible price. But the sellers compete to get the highest price for the
shares they want to sell.
4. Market rules and regulations: The exchange has its own rules for assisting, regulating and controlling
the business.
5. Price fluctuations: The prices of securities moves up and down from moment to moment in the market,
according to the laws of demand and supply.
6. Open to small and big investors: A stock exchange is opened to big and small investors. One can start
with as little as few thousand rupees.
7. Element of risk: There is an element of risk in investment in securities as the prices are influenced by the
performance of the company, prospects of the industry, overall economic condition and preference of
investors.
8. Wide choice of securities: Investment in securities offers a wide variety of choice according to the
investor’s perceptions to investment characteristics.

Functions or Role of Stock Exchanges

A well organised stock exchange is indispensable for the proper functioning of the corporate enterprises.
The major functions of stock exchanges are;
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1. Ready and continuous market for securities: An important function of a stock exchange is to provide a
continuous, ready, open and a broad based market for securities. This way maximum liquidity, marketability
and price uniformity for securities is ensured.
2. Safety of funds: Stock exchanges ensure safety of funds invested because they have to operate under
strict rules and regulations. By clear cut rules the members are prevented from exploiting investors. This
would strengthen the investors confidence and promote larger investment. Thus it enhances safety of
capital and fair dealings.
3. Supply of long term funds: The securities traded in the stock exchange are negotiable and transferable
with minimum of formalities. The company is assured of long term availability of funds, due to this
transferability.
4. Efficient channelling of savings: Stock exchange mobilises savings into most productive and profitable
channels. The investors can invest their savings in the securities of companies with high returns. Companies
can also raise additional funds by new issues very easily. Inefficient companies cannot secure further
funds by fresh issues.
5. Agency for capital formation: The stock exchange plays an active role in the capital formation of a
country. It creates the habit of savings and investment among the public. Industrial investments are
stimulated by ensuring positive returns. This also helps in the industrial development and growth of the
nation.
6. Evaluation of securities: Stock exchange integrates the demand and supply of securities in an effective
manner. So investors can evaluate the worth of their holdings. The evaluation is a continuous process, by
which the true price of securities is reflected in the market. The price prevailing in the stock exchange is
called market quotation. This quotation will help the investor to ascertain the value of his holdings.
7. Barometer of Business progress: Stock exchanges act as a barometer of business conditions and progress
of the business in the country. One can easily find out whether there is a boom or depression in the
economy and it is also possible to easily analyse the causes of these conditions too.
8. Facilities for speculation: Healthy speculation is essential to equalize demand and supply of securities at
different places. It also regulates the prices of securities considerably.
9. Regulation of company management: To get the securities listed in a stock exchange the companies have
to follow certain rules and fulfil certain conditions. Such companies should also furnish all reasonable
information concerning the financial affairs to the stock exchange every year. So stock exchange exercises
control over the management of companies.
10. Marketing of new issues: If the new issues are listed, they are readily acceptable to the public. Public
response to such new issue will be relatively high. Stock exchange is opened to all investors scattered
over the country. The introduction of on-line trading, screen based trading, over the counter trading, etc.
globalised the market.

Services of stock exchanges

The important functions performed by the stock exchanges benefit different groups - the investor, the
industry and the economy.
1. Services to Investors
i. Investors are assured of ready and continuous market for their holdings.
ii. Listed securities can be given to banks as collateral securities for granting advances.
iii. Investors can easily evaluate the value of securities held by them.
iv. The risk in the investment is minimised and liquidity ensured.
v. Investors are assured safety of their funds.
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2. Services to Companies
i. Listing enhances reputation and prestige of the company.
ii. It widens the market for securities and smooth operation of the concern.
iii. Reputed companies can raise additional capital very easily.
iv. Securities of the companies shall enjoy confidence of the investors.
v. Market price of listed securities is generally high, so that companies can bargain in times of merger.
3. Services to Community
i. Increases industrial activities and employment opportunities.
ii. Promotion of new industries by raising sufficient finance.
iii. Act as an agency for capital formation
iv. Develops the habit of saving and investment among the public.
v. Enhances productive use of capital.
vi. Result in overall progress of the economy.

Organisation, Management and Membership

Organisation
The stock exchanges in India are organised in any one of the following forms.
1. Voluntary non-profit making organisation - There are 3 stock exchanges under this category. They are
Bombay Stock Exchange, Ahmedabad Stock Exchange and Indore Stock Exchange.
2. Public Limited Company - There are 14 such exchanges under this category. Example, Delhi Stock
Exchange, Calcutta Stock Exchange, Bangalore Stock Exchanges etc.
3. Company Limited by Guarantee - Six stock exchanges belong to this group. Eg. Hyderabad Stock Exchange,
Madrass Stock Exchange etc.
Initially stock exchanges had different organisational setups but in November 2002, the SEBI approved a
uniform model of Corporatisation and Demutualisation for all stock exchanges. Corporatisation means converting
all exchanges into companies limited by shares and changing their character from a not-for-profit entity into a
for profit company. Moreover, all future profits of the exchange would be taxed.

Management
The recognised stock exchanges are managed by Governing Boards. It consists of elected member directors
from stock brokers, public representatives and Government nominees nominated by SEBI. The Government
may also nominate President, Vice-President and approve the appointment of the Chief executives and public
representatives. Major stock exchanges are managed by Chief Executive Director and the smaller stock exchanges
are under the control of a Secretary.

Powers of Governing Boards

1. Setting up of sub-committees like Listing Committee, Arbitration Committee, Defaulters Committee etc.
2. Admission and expulsion of members.
3. Management of the properties and finances of the exchange.
4. Framing and interpretation of Rules, Bye-laws etc. for the regulation of stock exchange.
5. Adjudication of disputes among members or outsiders.
6. Management of the affairs of the exchange in the best interest of the investors.
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Membership
Transactions in any Stock Exchanges are executed by member brokers who deal with investors. A
member of a stock exchange is an individual or a corporate body who holds the right to trade in the stocks
listed on the exchange. To become a member of the recognised stock exchange a person must possess the
following qualifications:
1. He must be an Indian citizen with 21 years of age.
2. He should not be a bankrupt.
3. He should not have been convicted for any offence or fraud.
4. He should not have engaged in any other business except as agent or broker.
5. He should not be connected with a company or corporation.
6. He should not be a defaulter of any other stock exchange.
Apart from individuals, companies are also eligible to become member provided they satisfy the conditions
imposed by the stock exchanges concerned.
To become member of a stock exchange, an individual should submit an application for membership in
the prescribed form, sponsored by two members of 5 year standing as member. If the stock exchange is in
corporate form, he has to buy at least one share. Also, he has to pay an admission fee of Rs. 5,000 and deposit
of Rs. 20,000 either in cash or in approved securities.

Types of Members
The members of London Stock Exchange are of two types - Jobbers and Brokers.
Jobber: A jobber is a member and not the agent of a non-member. He buys and sells securities in his own
name. The difference in selling price and purchase price of securities is his profit. It is technically called
jobbers turn. A jobber is usually dealing in certain types of securities only. A jobber is a professional dealer
who carefully judges the worth of the securities and makes a good forecast of their future price movements. He
buys securities as an owner, keeps them for a very short period and sells them for a profit. He doesn’t work on
commission basis. In London Stock Exchange every member has to indicate very clearly whether he would
like to act as a jobber or as a broker.
Broker: A broker is a commission agent, who acts on behalf of non-members. A non member can buy or sell
securities only through a broker. A broker doesn’t ordinarily deal for himself. He deals in all types of securities
for a commission called brokerage. He is permitted to deal with non members directly. He doesn’t purchase or
sell securities in his own name. He acts for a large number of his clients.
The members of Indian stock exchanges are officially divided into two. (i) Tarawaniwalas and (ii)
Commission brokers.
1. Tarawaniwalas: A tarawaniwala is an active member of the Bombay Stock Exchange. He is similar to
jobbers of London Stock Exchange. He acts as a dealer in his own name. The tarawaniwalas are also
allowed to act as brokers. They frequently change their roles with a view to make a high profit. Basically
he is a jobber, but he is not prohibited from acting as a broker.
2. Commission brokers: A commission broker is similar to the broker of London Stock Exchange. He buys
and sells securities on behalf of his clients for a commission. He is permitted to deal with non members.
He doesn’t buy or sell in his own name. He gets the orders from his clients and execute them through
dealers (Jobbers or Tarawaniwalas).
Brokers are of - (i) Client brokers and (ii) Floor brokers. Client brokers do simple brokering business by
acting as intermediaries between the buyers and sellers and they earn only brokerage for their services.
Floor brokers refer to authorised clerks or remisiers who enter the trading floor and execute orders for
their clients or for members. They have to physically present in the trading ring and to transact business for
their clients.
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Non Members acting for members: Only members are permitted to enter the floor of a stock exchange.
Some Non-members with limited rights are allowed to enter the stock market and to act on behalf of members.
They are-
1. Remisiers: They are sub-brokers employed by a member to secure business. They obtain business for
their principal. They get a commission for the business secured by them. A remisier is not a member of
the stock exchange. He cannot directly deal in securities. Remisiers are also called ‘Half commission
agents’. Generally, their commission cannot exceed 40% of the commission received on the business
transacted by them.
2. Authorised Clerks: They are employees of the members of the stock exchange. The members are permitted
to appoint a fixed number of authorised clerks. In Bombay Stock Exchange each member can employ a
maximum number of 5 clerks. In Calcutta Stock Exchange it is 8 and it is 3 in Madras Stock Exchange.
Generally, authorised clerks are given power of attorney to act on behalf of brokers and so they can sign
on behalf of members. Brokers have to pay entrance fee, annual subscription etc. for each of their
authorised clerks as per the rules of the stock exchange and can be removed at any time after duly
informing the stock exchange concerned.

Code of conduct for stock brokers

To discharge the duties in the best interest of investors and other stock brokers, a code of conduct has
been prescribed for brokers in accordance with the statutory requirements. They have been briefly summarised
below:
i) A stock broker must honestly and promptly execute all orders for buying and selling of securities at the
best possible market price. He must make prompt payment to his clients in the case of sales and prompt
delivery in the case of purchases.
ii) He should not discriminate small investors against big investors.
iii) He must issue a contract note for all transactions as specified by the stock exchange without any delay.
iv) He must maintain complete secrecy of his client’s personal investments and other information of a
confidential nature.
v) He should not induce or initiate purchases or sales just for the sake of his brokerage or commission.

vi) He should not give any false or misleading information with a view to encouraging purchases or sales and
thereby getting his commission.
vii) He should not entertain those clients who have failed to carry out their commitments in respect of
securities with other stock brokers.
viii) The capacity in which he is acting must be duly informed to his client. In other words, he must disclose
whether he is acting as a principal or as an agent. In all cases, he must give top priority to his client’s
interest.
ix) He is not expected to render any investment advice except under those circumstances which warrant it.
x) He must possess adequate infrastructure facilities and maintain proper staff to render prompt, efficient
and fair services to his clients.
xi) He should not advertise his business publicly except when it is permitted by the stock exchange.
xii) He should not adopt any unfair practices with a view to attracting clients from other brokers.
xiii) He should not knowingly and willfully deliver documents which constitute bad delivery.
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xiv) He should not fail to submit the necessary returns to the SEBI and the stock exchange as and when they
have to be submitted as per the statutory regulations. These returns should not contain any false or
misleading information.
xv) He must exercise reasonable care, diligence and skill in the discharge of his functions as a broker.
xvi) He must maintain high standards of integrity and honesty, promptness and fairness in the conduct of all
his business.
xvii) Above all, he should not indulge in fraudulent or deceptive transactions or spread rumours with a view to
creating a false market and making personal gains.
xviii)He must abide by all the rules and regulations of the regulating authorities including the stock exchange.
xix) He must maintain proper books of account, records and documents as required by the various regulating
authorities.
xx) He must produce the above books and records for inspection, whenever, an inspection is undertaken as
per the provisions of the SEBI Act.

Functions of brokers.
1. Client registration: A trading broker has to enter into an agreement in the specified format with his client
before accepting any orders on his clients behalf. This agreement has to be executed on non judicial
stamp paper duly signed by both the parties on all the pages. In addition to the agreement the broker has
to see the other information about the client relating to his financial profile, risk profile, social profile,
identification details, family, income, age, employment details, investment in other assets, financial
liabilities etc. The broker has to obtain 3 copies of recent passport size photos in the case of individual
clients and all partners in the case of firms. But in the case of corporate customers photos of dominant
promoters are to be obtained.
2. Obtaining Margin Money: The broker has to collect margin money in all cases where margin in respect
of the client in settlement, would work out be more than Rs. 50,000. The margin so collected must be
kept separately in the client’s bank account and it must be utilised for making payment in respect of that
client.
3. Execution of orders: The important function of a broker is to execute the orders of his client carefully.
He has to obtain clear-cut order, instructions from the clients, so that, the necessary orders may be placed
on the system. To execute a trade order, the broker must obtain specific instructions relating to the name
of the company, whose securities are to be sold or bought, number of shares required and the limit or
market price conditions.
4. Supply of necessary slips: On execution of the trade, the broker should inform his client the order
number. He should give copies of trade confirmation slip, modification slip, cancellation slip etc. to
enable the client to take necessary follow-up action.
5. Issue of contract notes: The broker should issue a contract note to his client for all trades, whether for
purchase or sale of securities. This contract note should be issued within 24 hours of the execution of the
contracts. It should be duly signed by the broker or authorised signatory. Every broker is expected to
maintain the duplicate copy of each contract note issued for five years.
6. Payment or delivery of securities: It is the duty of every trading member or broker to make payments to
his clients (in the case of sale) or deliver the securities purchased within 24 hours of pay out, unless the
client has requested otherwise. All brokers have to exercise great caution in accepting deliveries of
securities on behalf of his clients to avoid the introduction of any forged or stolen securities into the
market.
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7. Charging of brokerage and other charges: As per SEBI guidelines every broker is entitled to charge
brokerage not exceeding 2.5%. In addition to brokerage, service tax (5% of brokerage), stamp duty,
SEBI turnover fee, transaction tax etc. are charged by the broker.
8. Maintenance of bank account: It is the function of a broker to maintain separate bank accounts for his
clients fund and also for his own funds. However, funds can be transferred from the clients account to the
clearing account for the purpose of pay in obligations on behalf of the client.
9. Receipt of interest, dividend etc.: In case, securities are bought cum vouchers, cum coupons, cum
dividend, cum rights etc. the client is entitled to receive all vouchers, coupons, dividends, rights etc. in
addition to original securities bought. In such a case, it is the duty of the broker to receive all such
privileges on behalf of his clients.
10. Settlement of disputes: In case any dispute arises between the broker and his client, it is the duty of the
broker himself to take the initiative and resolve the dispute.

Operators in Stock Exchange

1. Badliwalas: They are the financiers operating on the securities market. They usually give fully secured
loan for a short period of two to three weeks. They give finance for carry forward deals in specified
securities. The buyers willing to carry-over the transaction have to pay the badliwala a consideration
called ‘contango’. The badla charge, the seller has to pay to the badliwala for the carry over is called
‘Backwardation’.
2. Arbitragers: The dealers who enter into dealings with securities in different stock exchanges at the same
time are called arbitragers. They make simultaneous or closely related purchase and sale of same or
equivalent securities in an attempt to take advantage of price differences in the same or different markets.
3. Odd lot dealers: At stock exchanges, transactions are done in lots mostly of 100 or 50 shares and
multiples thereof. These conventional trading lots are called market lots. Any lot less than the market lot
is odd lot. The brokers who specialise in handling odd lots are called odd lot dealers.
Investors and Speculators
The buyers and sellers of securities in a stock exchange are:
(1) Investors and (2) Speculators.
1. Investors: The investors buy the securities with a view to invest their savings in a profitable income
earning securities. Investors deal with stock exchange securities for genuine trading. They get return in
the form of interest, dividend or rent. Investors are also called genuine investors. They hold securities for
a long period and expects capital gain.
2. Speculators: The speculators are not genuine investors. They buy securities with the hope to sell them in
future at a profit. They hold the securities only for a short period and the price differential shall be their
income. The risk associated with speculation is also high.

Kinds of speculators
Buyers and sellers of securities in a stock market are genuine investors or speculators. The different kinds
of speculators are the following:
1. Bull: A bull enters into agreements to buy securities with the expectation that price will rise in future. As
he always expects a rise in price, a bull is an optimist. In anticipation of rise in price he makes purchases
with the intention to sell them at higher prices. A ‘bull’ always tends to throw its victim up in the air.
Similarly a bull speculator always expects price rise. A bull is also called Tejiwala. He is not taking
delivery of securities, but deal only in price differences.
Bullish trend: If a stock market is dominated by an expectation of rising prices, the bulls will become
active and place big orders for buying the securities. Such a situation is called ‘Bullish trend’.
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2. Bear: A bear speculator expects prices to fall in future and sells securities. He sells securities with the
expectation that they can be purchased at low price in future. A bear doesn’t have securities at present
but sells them at higher prices in anticipation that he will supply them by purchasing at lower prices in
future. If the price moves down as per the expectations of the bear he will earn profits. Just like a ‘bear’
presses its victim down to the ground, the bear speculator tends to force down the prices of different
securities. If a market is dominated by the bear speculators, it is said to be ‘bearish’ market.
Bear raid: If there is a strong expectation of fall in prices, pessimism prevails in the market. In case the
prices are not falling as expected by the bears they may start speculator rumors to pressurise price down
words. It is known as ‘bear raid’.
3. Stag: A stag is a cautious speculator in the stock exchange . He applies for shares in new companies and
expects to sell them at a premium, if he gets an allotment. He selects those companies whose shares are
in more demand and are likely to carry a premium. He sells the shares before being called to pay the
allotment money. A stag doesn’t indulge in the buying or selling like a bull or bear. He relies only on the
allotment of securities to him.
4. Lame duck: When a bear finds it difficult to fulfil his commitment, he is said to be struggling like a ‘lame
duck’. A bear speculator contracts to sell securities on a future date. On the appointed time he is not able
to get the securities as the holders are not willing to part with them. In such a situation he is like a lame
duck, as he has to pay some more money.

Speculative Transactions
1. Wash sales: Wash sales are pretended sales. The speculators may indulge in fictitious sales. Under this
method the speculator sells his securities and then repurchases the same through a broker at a higher
price. Actually no transaction takes place in wash sales. Such activities are done to create confusion in the
minds of the speculators about the actual movement of the price of a particular security. It creates demand
artificially and leads to rise in price. It is an undesirable practice and the rules of every stock exchange
prohibit this activity and provide for severe penalty for such sales.
2. Arbitrage: It is a highly skilled speculative activity. If the price of a certain security is higher in one
market than in the other, the speculator will buy that security in the cheaper market and sells it at a profit
in another market and thereby reap high profits. The prices are highly sensitive and may get equalised
within very short period. Speculators, therefore, have to act very quickly. It is also called ‘traffic in
securities’. If securities are purchased from one market and selling them in another market within the
same country, it is called domestic arbitrage. If it is done between markets in different countries it is
called foreign arbitrage.
3. Cornering: It is the process of holding the entire supply of a particular security by an individual or group
of individuals. The speculators will enter into purchasing contracts with the bears in certain securities.
Later, by purchasing substantially the whole of the available securities and getting their actual delivery
the speculator will make such securities go out of the market. Then he will insist the bear speculator to
make actual delivery of the securities on the fixed date. The bears will find it difficult to effect actual
delivery. At this stage the speculator will be able to dictate the terms and the bears in the market are said
to be ‘squeezed’. The bear will now become lame duck. This is also illegal as it creates artificial scarcity
of securities.
4. Rigging the Market: It is another abuse of speculation. It refers to the creation of artificial demand for
securities. So market value of a particular security is pushed up due to bull movement. When prices rise
they will sell securities and make the profit.
5. Blank transfers: It is a method of transfer without mentioning the name and signature of the transferee in
the transfer deed. It facilitates speculative activities. The transferor simply signs the transfer form without
specifying the name of the transferee. This method is followed when the buyer is intended to immediately
transfer the securities. Blank transfer is also an undesirable transaction because,
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i. It encourages unhealthy speculation.

ii. It helps in avoiding payment of stamp duty.
iii. It facilitates evasion of income tax.
iv. It helps the transferee to gain control over the management without disclosing his name.
6. Margin Trading: It is a popular method of speculative trading. Under this method, the client opens an
account with his brokers. He makes a deposit of cash or securities in this account. He also agrees to
maintain a margin at a certain level. The broker will debit the client’s account with the amount of
purchases, brokerage commission etc. and credit the account with the cash deposit and sale proceeds.
The price difference is also accounted.
7. Matched Orders: This is taken up when a speculator wants to create an impression in the market that a
stock is active. For this purpose two brokers are employed, one to buy and the other to sell at pre-fixed
prices. The intention is to show market active.
8. Buying in and selling out: These are two departments to enable the aggrieved party to exercise remedies,
when the members become defaulters. When the seller fails to give delivery the buyer buys the security
through the buying-in-departments against the seller. Any loss in this dealing, will have to be made good
by the seller.
When the buyer makes a default in paying the money, the seller can sell through the selling out department.
The defaulting member has to bear the loss, if any, in this transaction.
9. Bucket shops: It is also an illegal speculative transaction. In this method buying and selling of securities
is made outside the stock exchange.
10. Option dealing: The term ‘Option’ means a right. An option is a contract which involves a right to buy
or sell securities at specified prices within a stated time. A speculator is given the right to buy or sell on
the settlement day, or else he would forfeit the option money. But the sum paid for the option is against
his chance of profit. Option dealing are of the following types;
i. Call option: It is the right to buy shares under a negotiable contract. The bull speculators generally
enter into call option dealings. It is also known as ‘Teji souda’.
ii. Put option: It is the right to sell certain securities at a certain price on a future date. It is generally
made by bear speculators. It is also called ‘Mandi souda’.
iii. Double option/Put and call option: It is a combination of put option and call option. It is a right,
given for a specified sum, either to buy or sell securities. It is also called ‘Teji mandi’
Option dealings are important instruments for hedging. Option dealing is declared by SCRA, 1956 as
illegal. However an amendment to the Act has been made to delete the provision which prohibited option
dealings in our country. Hence option dealings are now legally permitted.
11. Hedging: It is a device through which a person protects himself against loss. A ‘bull’ agreeing to purchase
a security for some one may hedge or protect himself by buying a put option so that any loss that he may
suffer in this transaction may be offset. Similarly a seller can hedge against loss through call option.
12. Carry over or Badla transactions: In case of forward delivery contracts, if both the parties agree, the
contract can be settled in the next settlement date (probably in the next month or fortnight). Such
postponement is called ‘carry over’ or ‘badla’. This is usually done if prices move against the expectation
of the speculator.
Stock Exchanges in India
Stock Exchanges provide an organised market for transactions in shares and other securities. There are
23 official stock exchanges in India. Among them 20 are regional stock exchanges with allocated areas of
operation. The three national stock exchanges are the National Stock Exchange (NSE), Over the Counter
Exchange of India Limited (OTCEI) and Interconnected Stock Exchange of India Limited (ISE). All these
national exchanges have their head office at Mumbai.
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Table 2.1 shows the number of regional stock exchanges with their respective zones.
Table 2.1
Regional Stock Exchanges
North Zone South Zone East Zone West Zone
Jaipur Bangalore Bhubaneswar Ahmedabad
Kanpur Chennai Guwahati Indore
Ludhiana Coimbatore Kolkata Mumbai
Meerut Hyderabad Pune
New Delhi Kochi Rajkot
Mangalore Vadodara
Source: NSE Website

Bombay Stock Exchange (BSE)

Bombay Stock Exchange was established as the ‘Native Share and Stock Brokers Association’ through
the Presidency of Bombay with the approval of the Central Government. The management of Bombay Stock
Exchange is vested on a Governing Board comprising of 9 elected directors, an executive, three government
nominees, one RBI nominee and five public nominees. The executive director acts as the Chief Executive
officer and is responsible for the day to day working.
Bombay Stock Exchange is the oldest stock exchange in India. It started trading in shares in the year 1875
and since then it has been the forerunner of the secondary market in India. Bombay Stock Exchange is a
witness to continuous rise and fall in share prices over all these years. It has taken number of steps to develop
and strengthen the secondary capital market. The trading system has gradually shifted from traditional system
to computerised on-line system. At present the trading at Bombay Stock Exchange takesplace on screen based
nationwide network. Members sitting in remote offices or work stations can enter into security transactions.
Bombay Stock Exchange Limited has two segments - Capital Market Segment and Derivative Market Segment.
In the Capital Market Segment shares are traded. But in the Derivative Market Segment, futures and options
are traded.
BSE has mechanism to redress grievances of investors and members. It provides information inputs to the
investing public. Bombay Stock Exchange has introduced in 1986, the first Index Number of share prices in
India called SENSEX. At present thirteen different types of indices are calculated to tell the price behaviour
sector wise or groupwise.
Bombay Stock Exchange was the leading Stock Exchange in India till 1993 and had maximum daily
turnover. After the recognition of National Stock Exchange (NSE) in 1993, the Bombay Stock Exchange has
been relegated to second position in daily turnover.
Bombay Stock Exchange (BSE) is the premier stock exchange in India. Apart from BSE, there are two
other Stock Exchanges that are equally important having certain unique features. They are National Stock
Exchange of India and Over the Counter Exchange of India Ltd..

Objectives of BSE
The major objectives of BSE are the following:
1) to safeguard the interest of the investing public.
2) to establish and promote honest and just practices in security transactions.
3) to promote, develop and maintain a well regulated market for dealing in securities and
4) to promote industrial development in the country through efficient resource mobilisation by way of
investment in corporate securities. It was recognised by the government of India on August 31, 1957
under the Securities Contracts (Regulations) Act, 1956.
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Capital Requirements
The capital requirements for companies which are already listed on other stock exchanges and listing on
BSE are
1) the minimum issued equity capital of Rs.3 crores.
2) profitability record of at least 3 years.
3) the minimum market capitalisation of Rs.20 crores (based on average size) for the last six month.
4) trading for a minimum of 50% of the total trading days during the same 6 months on any exchange and
5) the minimum average volume traded per day during the last three completed months should be 500 shares
and at least five trades per day.
For new companies seeking listing on the exchange and relisted companies seeking relisting on the
exchange, the minimum post-issued equity capital requirement is Rs.10 crores.

Trading System
The Bombay Stock Exchange computerised its trading system by introducing Bombay On Line Trading
(BOLT) on 14th March, 1995. Initially screen based trading was confined to 818 major scrips, while trading
in the remaining was done in the traditional way. Trading in all the 5000 odd scrips has been transferred to
Bombay On Line Trading on July 3, 1995. It serves two purposes.
i) It allows retention and matching of orders against one another where no quotes exist in the system for
particular scrip and
ii) It improves the price competitive character of the market, in case investors are willing to deal at prices
better than the current best quotes. The exchange has signed a memorandum of understanding with
eleven stock exchanges.
At the Bombay Stock Exchange, trading takesplace in groups. The scrips traded on the exchange have
been classified into A, B, B1, B2, C, F, G, T and Z groups.
The categories of securities traded under the groups are:
i) Group A - Specified shares
ii) Group B - Non specified shares. (further classified into B1 and B2 groups)
iii) Group C - Odd lots and permitted shares.
iv) Group F - Debt market (fixed income securities)
v) Group G - Government Securities
vi) Group Z - List of companies which have failed to comply with listing requirements and/or failed to
resolve investor complaints.
Besides, the exchange also has another segment called the “Trade to Trade” category that has been
shifted to “T” group. It was created as a preventive surveillance measure to ensure market safety and integrity.
Group A includes only actively traded shares. The governing body of the BSE includes only those shares
in the group that satisfy certain conditions stated by the exchange. The shares of only few companies get listed
in this group. The rest of the shares are listed under group B.
Group C has odd lots and permitted shares. Odd lots trading is allowed to enable trading in small
quantities (less than market lots) to provide liquidity to such trading. Permitted shares are those that are not
listed on the exchange, but are permitted to be traded since they are listed on other stock exchanges in India.
 12

National Stock Exchange of India (NSEI)

NSEI was set up in November 1992 and became recognised with effect from April 26, 1993. It commenced
its operations in the capital market on 3rd November 1994 in Mumbai. It was incorporated with an equity
capital of Rs. 25 crores and promoted by IDBI, ICICI, LIC, GIC and its subsidiaries, SBI and SBI capital
markets limited. The NSEI started derivative trade operation in June 2000.

Objectives of NSEI
1. To establish nationwide trading facility for equities, hybrids and debts.
2. To facilitate equal access to investors across the country.
3. To provide fairness, efficiency and transparency to the securities trading.
4. To enable shorter settlement cycles.
5. To meet international securities market standards.

Features of NSEI
1. NEAT trading system: The trading system of NSEI is known as National Exchange for Automated
Trading (NEAT). It is a fully automated screen based trading system that enables members from across
the country to trade simultaneously.
2. Three segments: It has three segments
i. The capital market segment: It covers equities, convertible debentures and debt instruments. This
particular segment comprises the securities of medium and large companies with nation wide investor
base. These will also include securities which are being traded in other stock exchanges.
ii. Wholesale debt market segment: It deals with high value transactions in government securities,
public sector bonds, commercial papers and other debt instruments.
iii. Retail trade segment: It deals in debt instruments like non-convertible debentures.
3. No trading floor: There is no trading floor as is prevalent in the traditional stock exchanges. But automated
screen based trading system exists.
4. Various committees: The exchange operates various committees to advice it on areas such as good
market practices, settlement procedures, risk containment system etc. These committees include trading
members, exchange staff and industry professionals.
5. Order driven system: The NSE has opted for an order driven system. The system provides enormous
flexibility to trading members.
6. Confirmation slip: When trade takes place, a trade confirmation slip is printed at the trading member’s
work station. It gives details like price, quantity, code number of the party and so on.
7. Identity of trading member is not revealed: When an order is placed or when his pending orders are
delayed, the identity of trading members are not revealed.
8. Statements of position: On the eighth day of trading, each member gets a statement showing his net
position, amount of cash he has to transfer to the clearing house etc.
9. Pay out day: Members are required to deliver securities and cash by the thirteenth and fourteenth days
respectively. The fifteenth day is the payout day.
10. High volume: The trading member can transact a high volume of business efficiently by automated
trading system.

Membership in NSEI
For admission in a NSE, a written examination and an interview is conducted. The interview is done by
a committee consisting of experienced people from the industry to assess the applicant’s capability to operate
as an exchange member. The exchange admits members separately for the capital market segment and whole
sale debts market segment.
 13

Eligibility requirements for membership

Trading membership on the whole sale debt market segment:
i. Members eligible are corporate bodies, institutions and other entities as may be permitted by RBI or
SEBI.
ii. Minimum networth Rs. 2 crores.
iii. Minimum paid up capital Rs. 30 lakhs in case of corporate bodies.
iv. Minimum qualification and experience - the whole time directors or the dealers should possess at least 2
years experience in any activity, related to banking or financial services.
Trading membership in the capital market segment:
i. Eligibility: Individuals, bodies corporate, institutions and registered persons.
ii. Minimum Networth: Individuals - Rs.75 lakhs, body corporate - Rs.1 crore
iii. Minimum paid-up capital: Rs. 30 lakhs in case of corporate body.
iv. Minimum qualification: Graduation, two years experience of dealing in capital market (a) by two directors
in case of body corporate (b) two partners in case of firms and (b) the individual in case of sole proprietary
concerns.
Operating Mechanism of NSE
NSE has two category of members - Principal Trading Members (PTM) and Dealers. A PTM undertakes
trading activity only on his own behalf and acts as a market maker in securities by providing two way quotations.
The intermediary dealers act for their clients through Principal Trading Members.
The NSE is an over the counter market having no trading floor. The principal trading members are highly
professionalised and have a strong infrastructure. They are individuals or corporations having good facilities
such as the telecommunication, on line processing system, publicity departments etc. Their computer terminals
are connected with that of other members and of the exchange. The orders are processed through the computers
and will be recorded in the members computer and the central system. Each day the next record of trading
activities confirmed will be sent to the computer of the PTM. There are separate segments of trading for debt
and equity markets and the same members cannot operate in both the markets at the same time.
Settlement system
The settlement deals are done based on rolling settlement system of T+7. It means that the settlement is
done after 7 days of the engagement in the deal. The number and volume of trade in the NSE is quite large
because of the instant trading linked by electronic system. The settlement of such transactions is done by
passing debit or credit entries based on the information conveyed electronically.
Clearing of securities
Clearing is done through a Central Depository System (CDS). The Stock Holding Corporation of India
and banks provide facilities by acting as Central Depositories under this system. There is no need for physical
transfer of securities from investor to investor. The transfer is effected through the statement issued by the
Central Depository. This statement is the evidence of ownership of securities, which is valid as share or
debenture certificate.

Over The Counter Exchange of India (OTCEI)

The OTCEI is a company incorporated under the Companies Act, 1956 with the main objective of setting
up and operating ‘over the counter’ exchange in India.
OTCEI is a recognised stock exchange like the other stock exchanges. The OTCEI was incorporated in
1990 as a company. It became fully operational on September 1992 with the opening of a counter at Bombay.
It is promoted by UTI, ICICI, IDBI, IFCI, LIC, SBI Capital Market and Can Bank Financial Services.
 14

‘Over the counter’ implies trading across the counter in shares and securities listed in the stock exchange.
It refers to retail brokerage business in shares and securities, wherein shares can be received in exchange of
confirmed payments. On the OTC, there is no trading floor, each counter acting as a trading floor. Hence, as
against a single trading floor in the regular stock exchange, there would be as many trading floors as the
number of counters on the OTCE.

Features of OTCEI
1. Ringless screen-based trading: The OTCEI was the first stock exchange to introduce automated screen
based trading in place of conventional trading ring found is other stock exchanges. The net work of on-
line computers provide all relevant information to the market participants to their computer screens.
2. Sponsorship: All the companies seeking listing on OTCEI have to approach one of the members of the
OTCEI for acting as the sponsor to the issue. The sponsor makes a thorough appraisal of the project. The
sponsor is committed to making market in that scrip for a minimum period of 18 months.
3. Transparency of transactions: The investor can view the quotations on the computer screen at the dealers
office before placing the order. The OTCEI system ensures that trades are done at the best prevailing
quotations in the market. The confirmation slip / trading document generated by the computers gives the
exact price at which the deals are done and the brokerage charged.
4. Liquidity through market making: The sponsor member is required to make two-way quotes (buy and
sell) for the scrip for 18 months from commencement of trading. Besides, the compulsory market maker,
there is an additional market maker giving two way quotes for the scrip. The idea is to create an environment
of competition among market makers to produce efficient pricing and narrow spreads between buying
and selling.
5. Listing of small and medium sized companies: Many small and medium sized companies were not able
to enter capital market due to the requirements of Securities Contracts (Regulation) Act, 1956 regarding
the minimum issued equity of Rs. 10 crores in case of the BSE and 3 crores in other stock exchanges. The
OTCEI provides an opportunity to these companies to enter the capital market, as companies with issued
capital of Rs. 30 lakhs onwards can raise finance through OTCEI.
6. Technology: OTCEI uses computers and telecommunications to bring members or dealers electronically,
enabling them to trade with one another over the computer. The company and its securities get nationwide
exposure and investors all over India can start trading in that scrip.
7. Nationwide listing: OTCEI network is spread all over India through members, dealers and the representative
office counters.
8. Bought out deals: Through the concept of bought out deal, OTCEI allows companies to place it equity
with the sponsor-member at a mutually agreed price. This ensures speedy availability of funds to companies
for timely completion of projects and a listed status at a later date.

Participants in the OTC exchange

The various players in the OTCEI are
1. Members and dealers appointed by OTCEI: Only high networth entities like financial institutions,
scheduled banks, mutual funds, etc. are admitted to the membership of the OTC exchange. They are
authorised to act as brokers for securities market in agreed scrips, and act as sponsor companies. Market
making is the process of making two way quotes - buy as well as sell quotes for the same scrip by the
sponsor. If a company wants to go public on OTC exchange, it requires one sponsor. The sponsor must
appraise the companies management capability, financial viability and do compulsory market making in
the scrip for at least 3 years. Dealers cannot act as sponsors. Individuals, partnership firms, corporate
entities with minimum specified networth and infrastructure can act as OTC dealer.
 15

2. Settlement Bank: It keeps a record of the signatures of all investors and other documents generated by
counters. Verification on the Counter Receipt, checking genuineness of the CR and clearing the payment
between the counters are the functions of the settlement Banks or settlers or custodians.
3. Registrar: The share certificate of the company is kept in safe custody and is exchanged with CR at the
request of the investor by the Registrar.

Difference between Regular stock exchange and over the counter exchange
Stock Exchange OTCE
1. Membership is given to individual firms and Membership is given to companies, scheduled banks,
companies financial institutions, etc.
2. Floor based method of trading Screen based method of trading.
3. Speculation is also allowed. Market for spot deals only.
4. Normally fortnightly settlement. Daily settlement.
5. Companies with equity capital of 3 crores allowed Companies with equity capital of 30 lakhs are allowed
listing. to be listed.
6. Companies permission required for all transfers. Automatic transfers upto 5% of companies equity.
7. As per SEBI guide lines free pricing of equity of SEBI guidelines permit free pricing of equity of
new company’s are not permitted. company’s without a track record under certain
circumstances.
8. Share certificates act as the transferable Share certificate is not transferable but counter receipts
document. are transferable documents.
9. Members operate from a single location Decentralised working with a national network.
(centralised exchange)
10. Jobbers may or may not offer quotes Compulsorily buy or sell quotes are offered by sponsors

Trading systems in OTCEI

Primary Issue
1. Direct offer: A company can offer the shares directly to the public. The only limitation is that the
company should be able to find a sponsor from the members of the OTCE.
2. Indirect offer: The company will be able to negotiate the issue price with the sponsors of the OTCE, who
will market the issue. It will help the companies to save unnecessary issue expenses on raising funds from
capital markets.

Secondary Market
i) Direct deal: When an investor concludes a deal with the market marker (sponsor) in the scrip for the best
price offered by the counter, that transactions is called a direct deal. No brokerage is chargeable in a
direct deal.
ii) Put-through deal: If the investor is not satisfied by the quote given by the counter he can still conclude
the deal with any other dealer through the computer. If the investor sets a better offer and the deal is
concluded, that transaction is called put-through deal. The counter will charge brokerage on this deal.
iii) Deal at market price: It is a deal, where an order could be executed for the best price available at the
time of execution.

Advantages of OTCEI
Benefits to investors
1. Investors can get a fair price and can be verified in the OTC screen. It makes more confidence to
investors.
 16

2. The process of trading is simplified and so the investment in stocks becomes easy.
3. The settlement and clearance is done very quickly.
4. By the system of market making prevailing in the OTCE the investors get continuous liquidity.
5. The investors get greater freedom in choosing securities.

Benefits to Economy
1. OTCEI encourages promotion of ventre capital companies.
2. It provides closely held companies to go on public.
3. It helps the spread of stock exchange operations geographically.
4. It promotes pricing of equity in a fair manner.

Benefits to Companies
1. It is easy and less costly to raise capital through OTCEI
2. The pricing of issue can be done in a fair manner by negotiating with the member of OTCEI who markets
the issue.
3. Since OTCEI has a nation wide network, the companies can have a captive investor base. The issue can
be made without a fear of losing management and control since listing is permitted even with an offer of
40% the capital to the public.

QUESTIONS
Short Answer Questions (2 marks)
1. Define a Stock Exchange.
2. What is meant by On-line trading?
3. Who is a Jobber?
4. Who are Tarawaniwalas?
5. Who is a Remisier?
6. Who is an Arbitrager?
7. Who are Odd-lot Dealers?
8. Who is a Stag?
9. Who is a Bear?
10. Who is a Bull?
11. What is meant by Wash Sales?
12. What is Cornering?
13. What is meant by Rigging the Market?
14. What is Blank Transfer?
15. What is Margin Trading?
16. Write a note on Buying in and Selling out?
17. What is Hedging?
18. What is meant by Badla Transactions?
19. What do you meant by Clearing of Securities?
20. What is meant by OTCEI?
21. What is Screen Based Trading?
Short Answer Questions (5 marks)
1. What are the features of a stock exchange.
2. Explain the services rendered by stock exchanges.
3. Write a note on the recognition of stock exchange by the Government.
4. What are the powers of the Governing Board of a stock exchange?
 17

5. What are the types of members of a stock exchange?

6. Write a note on the non-members of a stock exchange.
7. Explain the procedure of registration of brokers under SEBI.
8. Explain the different types of speculators.
9. Write a note on Option Dealing.
10. Explain the operating mechanism of National Stock Exchange.
11. What are the features of OTCEI?
12. What are the advantages of OTCEI?
13. Explain the objectives of Interconnected Stock Exchange of India.
14. What are the differences between Stock Exchange and OTCE?
Essay Questions (20 marks)
1. Discuss the functions and services of stock exchanges.
2. Explain the organisation, management and membership of a stock exchange.
3. Write an essay on the registration of stock brokers.
4. What are the functions of stock brokers?
5. Discuss the objectives, capital requirements and trading system of BSE.
6. What are the features of National Stock Exchange of India?
7. What are the features of OTCEI?