THE WORKING OF STOCK EXCHANGES IN INDIA

Transcription

1 THE WORKING OF STOCK EXCHANGES IN INDIA Third Edition H.R. Machiraju PH.D. (INDIANA, U.S.A.] Financial Economist PUBLISHING FOR ONE WORLD NEW AGE INTERNATIONAL (P) LIMITED, PUBLISHERS New Delhi Bangalore Chennai Cochin Guwahati Hyderabad Jalandhar ldhar Kolkata Lucknow Mumbai Ranchi Visit us at

2 CONTENTS Preface to the Third Edition Preface to the First Edition vii ix CHAPTER-1: STOCK EXCHANGES IN INDIA 1-17 Introduction Primary Market Stock Market Symbiotic Relationship between Primary and Secondary Markets Growth and Organisation of Stock Exchanges Management of Stock Exchange Regulation of Stock Exchanges Definition of Stock Exchange Growth Pattern of Listed Stock ( ) Indian Stock Exchanges Services Corporation (ISESC) Impact of Stock Exchanges on Economic Growth Market Capitalisation and GNP Trends in Savings of Household Sector New Issue Market Equity Cult Secondary Market for Debt. CHAPTER-2: FUNCTIONS OF A STOCK EXCHANGE Introduction Functions of Secondary Markets Continuous Market Frequency of Sales Impact Cost: Liquidity Measure Empirical Measurement of Liquidity Fair Price Determination Aid to Financing Industries Other Functions Efficient Transformation into Real Capital Market Efficiency Perfect Capital Market Working of the Stock Exchanges (Patel Committee) Pherwani Study Group 1991 Analysis of Trading in Shares Thin Trading Results of Empirical Analysis. CHAPTER-3: MAJOR STOCK EXCHANGES IN INDIA Introduction Turnover and Market Share of Stock Exchanges National Stock Exchange Objectives of NSE Order Driven System Mark-to-Market Price-Bands Minimum Paid-up Capital Options and

3 XIV CONTENTS Futures Trading on NSE: Wholesale Debt Market Capital Market Segment Electronic Trade Monitoring System ( ) Counter Guarantees Bombay Stock Exchange - Turnover and Deliveries Listing Requirement: Listing Agreement and Corporate Governance Central Listing Authority (CLA) Demutualization of BSE Over the Counter Exchange of India: Introduction OTC Market in USA Objectives of OTCEI Members and Licensed Dealers 'Members Dealers Fees Listing on the OTC Exchange Listing Requirements of OTCEI Guidelines for Issue of Shares Revised Guidelines for Bought-out-Deals (BODs) ( ). Trading Methods of Offer Listing Procedure: Trading Mechanism Settlement Benefits to Investors Dave Committee Report Financial Performance of Exchanges. CHAPTER-4: REGULATIONS RELATING TO STOCK EXCHANGES Recognition of Stock Exchanges * Control over Stock Exchanges Securities Contracts (Regulation) Rules, 1957 Procedure for Recognition of Stock Exchange Books of Account and Other Documents to be Maintained by Stock Exchanges Submission of Annual Returns Submission of Periodical Returns Inquiry into the Affairs of Stock Exchanges or Members Surveillance at Stock Exchanges Stock Watch System. CHAPTER-5: REGULATIONS RELATING TO STOCK BROKERS Regulation by SEBI of Stock Brokers Powers of SEBI Powers Delegated to SEBI under SC(R) Act Government of India: Stock Brokers and Sub-brokers Rules 1992 Definition of Stock Broker Conditions for Grant of Certificate to Stock Broker Conditions for Grant of Certificate to Sub-broker SEBI: Stock Brokers and Sub-brokers Regulations, 1992 Registration of Stock Broker General Rules Duty to the Investor Towards other Stock Brokers Registration Fees General Obligations and Responsibilities Inspection of Accounts, Records and Documents by SEBI Default Registration of Sub-Brokers Fees Duty to the Investor Towards Stock Brokers. CHAPTER-6: TRADING IN STOCK EXCHANGES Auction Markets Vs. Broker-Dealer Markets Specialist's Role in Auction Markets Market Makers Role in Broker-Dealer Market Specialists on NYSE Broker-Dealer Markets: Market Makers Broker-Dealer Advantages of Broker-dealer Markets (NASDAQ) Hybrid Market: Bombay Stock Exchange Market Makers in Order Driven Markets in India Impact of Advances in Communications Technology Trading of Government Securities Internet Trading Margin Trading Trading Procedures Short Selling:

4 CONTENTS = = ^ = = = ^ = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = XV Nature Definition Short Sales for Speculation Constraints on Short Sale Short Position for Hedging Short Position for Arbitrage Trading in Penny Stocks Rolling Settlement Bargains Screen Based Electronic Trading Straight Through Processing (STP) Listed Securities Permitted Securities Tick Size Computation of Closing Price of Scrips in the Cash Segment Compulsory Rolling Settlement (CRS) Segment Settlement Securities Pay-out Funds Payout. CHAPTER-7: CLEARING AND SETTLEMENT IN STOCK EXCHANGES Introduction Forward Trading and Speculation Expert Study on Trading in Shares (1991) Settlement System in Vogue before December 13, 1993 Transfer of Market Position Stock Lending Short Term Finance Committee on Review of Forward Transactions (1995) Weaknesses of Badla System Ban on Badla Impact of Ban Implementation of the Committee Report (1995) J.R.Varma Committee Report (1997) Modified Carry Forward System (MCFS) Position Limits on Badla Ban on Deferral Products Shortening of Settlement Cycle from T + 5 to T + 3 to T + 2. CHAPTER-8: DEPOSITORIES Share Transfer Recommendations of Technical Group (1993) Nature of Depository Services Provided by Depository Need for Depository Players in the Depository System The Depository Act, 1996 SEBI and Depositories Benefits to Investors Procedure for Dematerialization Central Depository Service Limited Benefits of Scripless Trading Working of Depository System. CHAPTER-9: NATIONAL STOCK MARKET SYSTEM Concept of National Market System (NMS) National Market System Abroad Elements of National Market System Regulatory Arrangement Objectives of NMS in India Pherwani Study Group Report (1991) Review of Operations of Stock Exchanges National Market System According to Pherwani Committee Benefits to Investors National Stock Exchange Evaluation of Study Group Report on Liquidity Debt Instruments Modernization of BSE Principal Features of the NSE. CHAPTER-10: SELECT STOCK EXCHANGES ABROAD Amsterdam Stock Exchange Hokeman System United States of America: New York Stock Exchange Board of Directors Membership Capital Requirements of Members Specialized Functions of Members Specialists Specialist's Book Specialist as Dealer Opening the Market Fair and Efficient Market Regulations under U.S. Securities and Exchange Act Regulations of

5 XVI CONTENTS New York Stock Exchange Registered Representatives Listed Securities Listing and Registration Advantages of Listing Listing Requirements of NYSE Trading Settlement NYSE Circuit Breakers: NASDAQ: Nature Size Listing Requirements Trading Hours Trading American Stock Exchange (AMEX): Objective Listing Criteria Electronic Trading Systems Inter Market Trading System Tokyo Stock Exchange (TSE): Size Zaraba Regular and Saitori Members Theme Driven Market United Kingdom: SEAQ Trading and Settlement Derivatives Germany: Origin Deutsche Borse: Types of Members: Trading Settlement France: Markets in Stock Exchange System in France Trading Settlement and Transfer Hongkong: Origin and Size Nature Clearing and Settlement 'China Play' Factor Foreign Investment Emerging Markets Malaysia Taiwan South Africa Brazil Korea: Nature and Size Foreign Investment Regulations Taxes Mexico: International Comparison of Stock Markets International Comparison by Transactions Turnover Ratio. CHAPTER-11: INSIDER TRADING Nature and Definition of Insider Trading Market Efficiency of Insider Trading Scope of Insider Trading in USA Speed Vs. Transamerica Corp. Other Countries Calculation of Profit or Avoidance of Loss Enforcement Insider Prosecution in U.S.A. Monitoring Empirical Evidence Definition of Insider in Incua Scope of Price Sensitive Information Insider Dealing Corporate Governance Measure Negotiated Deals Legislative Remedies: Civil and Criminal How does Insider Trading Work TISCO Case CIPLA (Pharmaceuticals) Hindustan Lever Limited (HLL) Case Comment SEBI's Order Chronology of Trading Loss or Gain Gain to Unilever Loss to UTI Direction of Appellate Tribunal Appendix. CHAPTER-12: STOCK MARKET INDICATOR SERIES Introduction Uses of Market Indicator Series Definition of an Index Weighing Price Weighed Series: Economic Times Index Value Weighed Series Standard and Poor 500 Series NSE 50/S&P CNX Nifty NSE MIDCAP Index Bombay Stock Exchange: SENSEX, National Index, BSE 200 and DoUex National Index Sensex Shift to Free Float Methodology (September 1, 2003) Free Float Methodology Quantitative Criteria Qualitative Criteria: Track Record Advantages of Free Float: National Index BSE 200 BSE Bankex Features BSE TECk Index Why BSE-TECk Index? BSE-PSU Index Objective Index Specifications Scrip Selection Criteria for BSE PSU Index Qualification Criteria BSE Mid-Cap and BSE Small-Cap Index DoUex BSE 500 and Sectoral Indices Unweighed Price Indicator Series Trends in Share Prices Volatility and Dispersion of Share Prices Risk Free Return.

6 CONTENTS =XVII CHAPTER-13: TRADING IN DERIVATIVES* Derivatives: Nature and Growth of Global Markets Characteristics of Derivatives Users of Derivatives Stock Index Futures: Activity in Futures Market Nature Definition Futures and Options Prerequisites for Futures Trading Aspects of Futures Contract Price Quotes Participants in Futures Market Stock Index Futures and Risk Minimum Variance Hedge Ratio Rolling the Hedge Pricing Stock Index Futures News Paper Quotes of Futures: Trading in Stock Options (May 04, 2004) Convergence of Futures Price into Spot Price Marking to Market Clearing House Trading Program Trading Trading Irregularities Volatility October 1987 Crash Disclosures and Fair Value Accounting Accounting and Tax Report of the Committee on Derivatives (1998) Merits of Index Futures Regulation of the Derivatives Market: Self Regulatory Organization Clearing Corporation Members Survey of Potential Participants Hedgers and Stock Index Futures Representative Index Futures Launch by NSE Futures Launch by BSE Interest Rate Futures Options: Nature and Definition Put and Call Option Straddle, Strip, Spread and Strap Options in U.K. Options in U.S.A. Nature of Options Contract Call Option Put Option Strike Price Expiration Date Option Premium Put and Call Valuation Profit-Loss Position of a Call Option Profit-loss Position of Put Option Market Makers Role of a Clearing House Covered Call Writing Protective Put Strategy Index Options Option Valuation: Factors Affecting Option Values Black Scholes Pricing Model Options Trading in India: Need for Options Effects of Options Effect on Share Trading Benefits to Investors Prerequisites for Introduction of Options Trading: Interchangeability of Options Publication of Prices Scripless Clearing Equity Derivatives in India Trading Framework Clearing and Settlement Risk Containment Turnover in the Equity Derivatives Market. CHAPTER-14: REGULATION OF THE STOCK MARKETS Objective of Regulation Central Listing Authority Self Regulation by Stock Exchanges and Supervision by SEBI Risk Management Protection of Investors Development of Stock Exchange as SROs Inspection of Stock Exchanges Promotion and Regulation of Self-Regulatory Organizations Regulation of Trading Separation of Cash and Derivative Segments Margins Mark-to-Market Margin Limits on Business Prohibition of Further Dealings Floor and Ceiling Prices Short Sales and Long Purchases Trading on Account Circuit Breakers Index Based Circuit Breakers (July 2,2001) Circuit Filter Limits Closure of the Market Effectiveness of the Regulatory Mechanism

7 XVIII CONTENTS Prohibition of Fraudulent and Unfair Trade Practices (October 25, 1995) Rigging up of Prices Stock Broker and Sub-broker Regulations Surveillance I. Market Surveillance Mechanism II. Integrated Surveillance System III. Interim Surveillance Arrangement Debt Market Secondary Market for Corporate Debt Securities ( ) Asset Backed Debentures Securitization of DFI Portfolios Strengthening the Corporate Sector. GLOSSARY INDEX