CHAPTER-I

INTRODUCTION

INTRODUCTION TO CAPITAL MARKETS

Capital markets in the United States provide the lifeblood of capitalism.
Companies turn to them to raise funds needed to finance the building of factories, office
buildings, airplanes, trains, ships, telephone lines, and other assets; to conduct research
and development; and to support a host of other essential corporate activities. Much of
the money comes from such major institutions as pension funds, insurance companies,
banks , foundations, and colleges and universities. Increasingly, it comes from individuals
as well. As noted in chapter 3, more than 40 percent of U.S. families owned common
stock in the mid-1990s.
Very few investors would be willing to buy shares in a company unless they
knew they could sell them later if they needed the funds for some other purpose. The
stock market and other capital markets allow investors to buy and sell stocks
continuously.
The markets play several other roles in the American economy as well. They are
a source of income for investors. When stocks or other financial assets rise in value,
investors become wealthier; often they spend some of this additional wealth, bolstering
sales and promoting economic growth. Moreover, because investors buy and sell shares
daily on the basis of their expectations for how profitable companies will be in the future,
stock prices provide instant feedback to corporate executives about how investors judge
their performance.
Stock values reflect investor reactions to government policy as we<,/ll. If the government
adopts policies that investors believe will hurt the economy and company profits, the
market declines; if investors believe policies will help the economy, the market rises.
Critics have sometimes suggested that American investors focus too much on short-term
profits; often, these analysts say, companies or policy-makers are discouraged from
taking steps that will prove beneficial in the long run because they may require short-term
adjustments that will depress stock prices. Because the market reflects the sum of
millions of decisions by millions of investors, there is no good way to test this theory.
2

In any event, Americans pride themselves on the efficiency of their stock market
and other capital markets, which enable vast numbers of sellers and buyers to engage in
millions of transactions each day. These markets owe their success in part to computers,
but they also depend on tradition and trust -- the trust of one broker for another and the
trust of both in the good faith of the customers they represent to deliver securities after a
sale or to pay for purchases. Occasionally, this trust is abused. But during the last half
century, the federal government has played an increasingly important role in ensuring
honest and equitable dealing. As a result, markets have thrived as continuing sources of
investment funds that keep the economy growing and as devices for letting many
Americans share in the nation's wealth.
To work effectively, markets require the free flow of information. Without it,
investors cannot keep abreast of developments or gauge, to the best of their ability, the
true value of stocks. Numerous sources of information enable investors to follow the
fortunes of the market daily, hourly, or even minute-by-minute. Companies are required
by law to issue quarterly earnings reports, more elaborate annual reports, and proxy
statements to tell stockholders how they are doing. In addition, investors can read the
market pages of daily newspapers to find out the price at which particular stocks were
traded during the previous trading session. They can review a variety of indexes that
measure the overall pace of market activity; the most notable of these is the Dow Jones
Industrial Average (DJIA), which tracks 30 prominent stocks. Investors also can turn to
magazines and newsletters devoted to analyzing particular stocks and markets. Certain
cable television programs provide a constant flow of news about movements in stock
prices. And now, investors can use the Internet to get up-to-the-minute information about
individual stocks and even to arrange stock transactions.

SCOPE OF THE STUDY

The present study involves an analysis of various Capital Market Instruments that are
available in the market, analysis of Dematerialization and limited lists of securities that
are available for trading in corporate
Investor can assess the company financial strength and factors that effect the company.
Scope of the study is limited. We can say that 70% of the analysis is proved good for the
investor, but the 30% depends upon market sentiment.
The topic is selected to analyses the factors that affect the future EPS of a company based
on fundamentals of the company.

OBJECTIVE OF THE STUDY

This study is done to know about Primary and Secondary capital market (Stock
exchange) activities.
To know why the companies go to new issue market.
To know how the primary market intermediaries communicate companies and
investors.
To know how the primary market activities used by the companies in their new
issue shares.
To know how the companies listed in the stock exchanges.
To know how trading activity is to be done.
To know the complete awareness of secondary market (stock exchanges like NSE,
BSE).

METHODOLOGY
The data collection methods include both the Primary and Secondary Collection
methods.
1. Primary Collection Methods:
This method includes the data collected from the personal discussions with
the authorized clerks and members of the Exchange.
2. Secondary Collection Methods:
The Secondary Collection Methods includes the lectures of the
superintend of the Department of Market Operations, EDP etc, and also the data
collected from the News, Magazines of the NSE and different books issues of this
study.

LIMITATIONS OF THE PROJECT

Time constraint was a major limiting factor. Forty five days were insufficient to
even grasp the theoretical concepts.

Several other strategies that could have been studied were not done.

Lack of knowledge with the brokers.

Difference of theory from practice.

Absence of required knowledge and technology.

CHAPTER-II
INDUSTRY PROFILE
&
COMPANY PROFILE

Stocks that respond to interest rate moves, coupled with select debt schemes, are likely to
be the winners in 2015, with the Reserve Bank of India expected to start easing its
monetary policy.
Fund managers said economic prospects have improved, but the New Year may be
tougher for equity investors to make money as valuations of many stocks are rich after
the broad-based rally in 2014. Concern over interest rate hike in the US and weak global
crude oil prices may also keep investors on.

India is among the top-performing emerging markets in 2014. So far in 2014, the Sensex
has gained 34%. Smaller companies have fared even better, with the BSE Mid Cap index
surging 56% and the BSE Small Cap Index jumping 75%.
Though the falling crude prices have improved the prospects of the Indian economy,
India may not be spared if there is an emerging market sell-off. "On the global front, oil
exporting nations could face problems, and there could be a global risk aversion.

Market participants consider probable interest rate cuts by the Reserve Bank of India
(RBI) as the biggest trigger for the economy and the markets. The extent of monetary
policy easing would determine the strength of rally in shares of the so-called interest ratesensitive sectors such as banks, auto, real estate and bonds.
Fund managers said debt funds could offer good returns in the coming year as a fall in
interest rates could lead to an appreciation in bond prices. With wholesale price inflation
coming at nil for November, expectations of interest rate cuts as early as in the March
quarter are high. "Shortterm rates can fall more than long-term rates. We expect consumer
inflation to be in the range of 5-5.5%, and expect RBI to cut interest rates by 50 basis
points in 2015," said Dhawal Dalal, executive V-P and head (fixed income), DSP
BlackRock Mutual Fund. If interest rates fall by 50 basis points, investors could see a 5%
capital appreciation on their long-term gilt fund portfolio.
7

Measured by BSE Sensex, stock market has generated a positive return of about 9 per
cent for investors in 2013, while gold prices fell by about three per cent and its poorer
cousin silver plummeted close to 24 per cent.
After outperforming stock market for more than a decade, gold has been on back foot for
two consecutive years now vis-a-vis equities, shows an analysis of their price
movements.
"Gold's under-performance was mainly due to prices falling in dollar terms amid
anticipated tapering over last several months combined with FII investment in Indian
stocks.
"This movement has been equally true for global markets as 2013 saw gold losing its
shine and markets coming back with a bang," said Jayant Manglik, President Retail
Distribution, Religare Securities.
"As always, gold and stock prices follow opposite trends and this year was no different
except that both changed direction," he said.
Improvement in the world economy has brought the risk appetite back amongst retail
investors and this has drenched the liquidity from safe havens such as gold leading to its
under-performance, an expert said.
In 2012, the Sensex had gained over 25 per cent, which was nearly double the gain of
about 12.95 per cent in gold. The appreciation in silver was at about 12.84 per last year.
According to Hiren Dhakan, Associate Fund Manager, Bonanza Portfolio, "Markets have
particularly shown great strength post July-August 2013 when RBI took some strong
measures to control the steeply depreciating rupee."
"When the US Fed gave indications that it might taper its stimulus programme given the
economy shows improvement, a knee-jerk correction was seen in most risky assets,
including stocks in Indian markets. However, assurance by the Fed about planned and
staggered tapering in stimulus once again proved to be a catalyst for the markets."
"External factors affecting Indian stocks seem to be negative for the first half of 2014 due
to continued strength of the US dollar and benign in the second half. By that time,
elections too would have taken place. A combination of domestic and international

factors point to a bumper closing of Indian markets in 2014 with double-digit percentage
growth," he said.
Stock market segment mid-cap and small-cap indices have fallen by about 10 per cent
and 16 per cent, respectively, in 2013.
Foreign Institutional Investors have bought shares worth over Rs 1.1 lakh crore (nearly
USD 20 billion) till December 19. In 2012, they had pumped in Rs 1.28 lakh crore (USD
24.37 billion).
Evolution
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200
years ago. The earliest records of security dealings in India are meager and obscure. The
East India Company was the dominant institution in those days and business in its loan
securities used to be transacted towards the close of the eighteenth century.
By 1830's business on corporate stocks and shares in Bank and Cotton presses took place
in Bombay. Though the trading list was broader in 1839, there were only half a dozen
brokers recognized by banks and merchants during 1840 and 1850.
The 1850's witnessed a rapid development of commercial enterprise and brokerage
business attracted many men into the field and by 1860 the number of brokers increased
into 60.
In 1860-61 the American Civil War broke out and cotton supply from United States of
Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers
increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a
disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850
could only be sold at Rs. 87).
At the end of the American Civil War, the brokers who thrived out of Civil War in 1874,
found a place in a street (now appropriately called as Dalal Street) where they would
conveniently assemble and transact business. In 1887, they formally established in
Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively
9

known as " The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in
the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was
consolidated.
Other leading cities in stock market operations
Ahmadabad gained importance next to Bombay with respect to cotton textile industry.
After 1880, many mills originated from Ahmadabad and rapidly forged ahead. As new
mills were floated, the need for a Stock Exchange at Ahmadabad was realized and in
1894 the brokers formed "The Ahmadabad Share and Stock Brokers' Association".
What the cotton textile industry was to Bombay and Ahmadabad, the jute industry was to
Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta.
After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares,
which was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom
between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta
Stock Exchange Association".
In the beginning of the twentieth century, the industrial revolution was on the way in
India with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel
Company Limited in 1907, an important stage in industrial advancement under Indian
enterprise was reached.
Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies
generally enjoyed phenomenal prosperity, due to the First World War.
In 1920, the then demure city of Madras had the maiden thrill of a stock exchange
functioning in its midst, under the name and style of "The Madras Stock Exchange" with
100 members. However, when boom faded, the number of members stood reduced from
100 to 3, by 1923, and so it went out of existence.
In 1935, the stock market activity improved, especially in South India where there was a
rapid increase in the number of textile mills and many plantation companies were floated.
10

In 1937, a stock exchange was once again organized in Madras - Madras Stock Exchange
Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange
Limited).
Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with
the Punjab Stock Exchange Limited, which was incorporated in 1936.
Indian Stock Exchanges - An Umbrella Growth
The Second World War broke out in 1939. It gave a sharp boom which was followed by a
slump. But, in 1943, the situation changed radically, when India was fully mobilized as a
supply base.
On account of the restrictive controls on cotton, bullion, seeds and other commodities,
those dealing in them found in the stock market as the only outlet for their activities.
They were anxious to join the trade and their number was swelled by numerous others.
Many new associations were constituted for the purpose and Stock Exchanges in all parts
of the country were floated.
The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited
(1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.
In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and
the Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947,
amalgamated into the Delhi Stock Exchnage Association Limited.
Post-independence Scenario
Most of the exchanges suffered almost a total eclipse during depression. Lahore
Exchange was closed during partition of the country and later migrated to Delhi and
merged with Delhi Stock Exchange.
Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.

11

Most of the other exchanges languished till 1957 when they applied to the Central
Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only
Bombay, Calcutta, Madras, Ahmadabad, Delhi, Hyderabad and Indore, the well
established exchanges, were recognized under the Act. Some of the members of the other
Associations were required to be admitted by the recognized stock exchanges on a
concessional basis, but acting on the principle of unitary control, all these pseudo stock
exchanges were refused recognition by the Government of India and they thereupon
ceased to function.
Thus, during early sixties there were eight recognized stock exchanges in India
(mentioned above). The number virtually remained unchanged, for nearly two decades.
During eighties, however, many stock exchanges were established: Cochin Stock
Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982),
and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association
Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange
Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986),
Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association
Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara
Stock Exchange Limited (at Baroda, 1990) and recently established exchanges Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock
exchanges in India excluding the Over The Counter Exchange of India Limited (OTCEI)
and the National Stock Exchange of India Limited (NSEIL).
The Table given below portrays the overall growth pattern of Indian stock markets since
independence. It is quite evident from the Table that Indian stock markets have not only
grown just in number of exchanges, but also in number of listed companies and in capital
of listed companies. The remarkable growth after 1985 can be clearly seen from the
Table, and this was due to the favouring government policies towards security market
industry.
Trading Pattern of the Indian Stock Market

12

Trading in Indian stock exchanges are limited to listed securities of public limited
companies. They are broadly divided into two categories, namely, specified securities
(forward list) and non-specified securities (cash list). Equity shares of dividend paying,
growth-oriented companies with a paid-up capital of atleast Rs.50 million and a market
capitalization of atleast Rs.100 million and having more than 20,000 shareholders are,
normally, put in the specified group and the balance in non-specified group.
Two types of transactions can be carried out on the Indian stock exchanges: (a) spot
delivery transactions "for delivery and payment within the time or on the date stipulated
when entering into the contract which shall not be more than 14 days following the date
of the contract" : and (b) forward transactions "delivery and payment can be extended by
further period of 14 days each so that the overall period does not exceed 90 days from the
date of the contract". The latter is permitted only in the case of specified shares. The
brokers who carry over the outstandings pay carry over charges (cantango or
backwardation) which are usually determined by the rates of interest prevailing.
A member broker in an Indian stock exchange can act as an agent, buy and sell securities
for his clients on a commission basis and also can act as a trader or dealer as a principal,
buy and sell securities on his own account and risk, in contrast with the practice
prevailing on New York and London Stock Exchanges, where a member can act as a
jobber or a broker only.
The nature of trading on Indian Stock Exchanges are that of age old conventional style of
face-to-face trading with bids and offers being made by open outcry. However, there is a
great amount of effort to modernize the Indian stock exchanges in the very recent times.
Over The Counter Exchange of India (OTCEI)
The traditional trading mechanism prevailed in the Indian stock markets gave way to
many functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly
long settlement periods and benami transactions, which affected the small investors to a
great extent. To provide improved services to investors, the country's first ringless,
scripless, electronic stock exchange - OTCEI - was created in 1992 by country's premier
13

financial institutions - Unit Trust of India, Industrial Credit and Investment Corporation
of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance
Corporation of India, General Insurance Corporation and its subsidiaries and CanBank
Financial Services.
Trading at OTCEI is done over the centres spread across the country. Securities traded on
the OTCEI are classified into:

Listed Securities - The shares and debentures of the companies listed on the OTC
can be bought or sold at any OTC counter all over the country and they should not
be listed anywhere else

Permitted Securities - Certain shares and debentures listed on other exchanges and
units of mutual funds are allowed to be traded

Initiated debentures - Any equity holding atleast one lakh debentures of a

particular scrip can offer them for trading on the OTC.

OTC has a unique feature of trading compared to other traditional exchanges. That is,
certificates of listed securities and initiated debentures are not traded at OTC. The
original certificate will be safely with the custodian. But, a counter receipt is generated
out at the counter which substitutes the share certificate and is used for all transactions.
In the case of permitted securities, the system is similar to a traditional stock exchange.
The difference is that the delivery and payment procedure will be completed within 14
days.
Compared to the traditional Exchanges, OTC Exchange network has the following
advantages:

OTCEI has widely dispersed trading mechanism across the country which
provides greater liquidity and lesser risk of intermediary charges.

14

Greater transparency and accuracy of prices is obtained due to the screen-based

scripless trading.

Since the exact price of the transaction is shown on the computer screen, the
investor gets to know the exact price at which s/he is trading.

Faster settlement and transfer process compared to other exchanges.

In the case of an OTC issue (new issue), the allotment procedure is completed in a
month and trading commences after a month of the issue closure, whereas it takes
a longer period for the same with respect to other exchanges.

Thus, with the superior trading mechanism coupled with information transparency
investors are gradually becoming aware of the manifold advantages of the OTCEI.
National Stock Exchange (NSE)
With the liberalization of the Indian economy, it was found inevitable to lift the Indian
stock market trading system on par with the international standards. On the basis of the
recommendations of high powered Pherwani Committee, the National Stock Exchange
was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and
Investment Corporation of India, Industrial Finance Corporation of India, all Insurance
Corporations, selected commercial banks and others.
Trading at NSE can be classified under two broad categories:
(a) Wholesale debt market and
(b) Capital market.
Wholesale debt market operations are similar to money market operations - institutions
and corporate bodies enter into high value transactions in financial instruments such as
government securities, treasury bills, public sector unit bonds, commercial paper,
certificate of deposit, etc.
15

There are two kinds of players in NSE:

(a) trading members and
(b) participants.
Recognized members of NSE are called trading members who trade on behalf of
themselves and their clients. Participants include trading members and large players like
banks who take direct settlement responsibility.
Trading at NSE takes place through a fully automated screen-based trading mechanism
which adopts the principle of an order-driven market. Trading members can stay at their
offices and execute the trading, since they are linked through a communication network.
The prices at which the buyer and seller are willing to transact will appear on the screen.
When the prices match the transaction will be completed and a confirmation slip will be
printed at the office of the trading member.
NSE has several advantages over the traditional trading exchanges. They are as follows:

NSE brings an integrated stock market trading network across the nation.

Investors can trade at the same price from anywhere in the country since intermarket operations are streamlined coupled with the countrywide access to the
securities.

Delays in communication, late payments and the malpractices prevailing in the

traditional trading mechanism can be done away with greater operational
efficiency and informational transparency in the stock market operations, with the
support of total computerized network.

Unless stock markets provide professionalized service, small investors and foreign
investors will not be interested in capital market operations. And capital market being one
of the major source of long-term finance for industrial projects, India cannot afford to

16

damage the capital market path. In this regard NSE gains vital importance in the Indian
capital market system.
Preamble
Often, in the economic literature we find the terms development and growth are used
interchangeably. However, there is a difference. Economic growth refers to the sustained
increase in per capita or total income, while the term economic development implies
sustained structural change, including all the complex effects of economic growth. In
other words, growth is associated with free enterprise, where as development requires
some sort of control and regulation of the forces affecting development. Thus, economic
development is a process and growth is a phenomenon.
Economic planning is very critical for a nation, especially a developing country like India
to take the country in the path of economic development to attain economic growth.
Why Economic Planning for India?
One of the major objective of planning in India is to increase the rate of economic
development, implying that increasing the rate of capital formation by raising the levels
of income, saving and investment. However, increasing the rate of capital formation in
India is beset with a number of difficulties. People are poverty ridden. Their capacity to
save is extremely low due to low levels of income and high propensity to consume.
Therefor, the rate of investment is low which leads to capital deficiency and low
productivity. Low productivity means low income and the vicious circle continues. Thus,
to break this vicious economic circle, planning is inevitable for India.
The market mechanism works imperfectly in developing nations due to the ignorance and
unfamiliarity with it. Therefore, to improve and strengthen market mechanism planning is
very vital. In India, a large portion of the economy is non-monitised; the product, factors
of production, money and capital markets is not organized properly. Thus the prevailing
price mechanism fails to bring about adjustments between aggregate demand and supply
of goods and services. Thus, to improve the economy, market imperfections has to be
17

removed; available resources has to be mobilized and utilized efficiently; and structural
rigidities has to be overcome. These can be attained only through planning.
In India, capital is scarce; and unemployment and disguised unemployment is prevalent.
Thus, where capital was being scarce and labour being abundant, providing useful
employment opportunities to an increasing labour force is a difficult exercise. Only a
centralized planning model can solve this macro problem of India.
Further, in a country like India where agricultural dependence is very high, one cannot
ignore this segment in the process of economic development. Therefore, an economic
development model has to consider a balanced approach to link both agriculture and
industry and lead for a paralleled growth. Not to mention, both agriculture and industry
cannot develop without adequate infrastructural facilities which only the state can
provide and this is possible only through a well carved out planning strategy. The
governments role in providing infrastructure is unavoidable due to the fact that the role
of private sector in infrastructural development of India is very minimal since these
infrastructure projects are considered as unprofitable by the private sector.
Further, India is a clear case of income disparity. Thus, it is the duty of the state to reduce
the prevailing income inequalities. This is possible only through planning.
Planning History of India
The development of planning in India began prior to the first Five Year Plan of
independent India, long before independence even. The idea of central directions of
resources to overcome persistent poverty gradually, because one of the main policies
advocated by nationalists early in the century. The Congress Party worked out a program
for economic advancement during the 1920s, and 1930s and by the 1938 they formed a
National Planning Committee under the chairmanship of future Prime Minister Nehru.
The Committee had little time to do anything but prepare programs and reports before the
Second World War which put an end to it. But it was already more than an academic
exercise remote from administration. Provisional government had been elected in 1938,
and the Congress Party leaders held positions of responsibility. After the war, the Interim
18

government of the pre-independence years appointed an Advisory Planning Board. The

Board produced a number of somewhat disconnected Plans itself. But, more important in
the long run, it recommended the appointment of a Planning Commission.
The Planning Commission did not start work properly until 1950. During the first three
years of independent India, the state and economy scarcely had a stable structure at all,
while millions of refugees crossed the newly established borders of India and Pakistan,
and while ex-princely states (over 500 of them) were being merged into India or Pakistan.
The Planning Commission as it now exists, was not set up until the new India had
adopted its Constitution in January 1950.
Objectives of Indian Planning
The Planning Commission was set up the following Directive principles :

To make an assessment of the material, capital and human resources of the

country, including technical personnel, and investigate the possibilities of
augmenting such of these resources as are found to be deficient in relation to the
nations requirement.

To formulate a plan for the most effective and balanced use of the countrys
resources.

Having determined the priorities, to define the stages in which the plan should be
carried out, and propose the allocation of resources for the completion of each
stage.

To indicate the factors which are tending to retard economic development, and
determine the conditions which, in view of the current social and political
situation, should be established for the successful execution of the Plan.

To determine the nature of the machinery this will be necessary for securing the
successful implementation of each stage of Plan in all its aspects.

19

To appraise from time to time the progress achieved in the execution of each stage
of the Plan and recommend the adjustments of policy and measures that such
appraisals may show to be necessary.

To make such interim or auxiliary recommendations as appear to it to be

appropriate either for facilitating the discharge of the duties assigned to it or on a
consideration of the prevailing economic conditions, current policies, measures
and development programs; or on an examination of such specific problems as
may be referred to it for advice by Central or State Governments.

The long-term general objectives of Indian Planning are as follows:

Increasing National Income

Reducing inequalities in the distribution of income and wealth

Elimination of poverty

Providing additional employment; and

Alleviating bottlenecks in the areas of : agricultural production, manufacturing

capacity for producers goods and balance of payments.

Economic growth, as the primary objective has remained in focus in all Five Year Plans.
Approximately, economic growth has been targeted at a rate of five per cent per annum.
High priority to economic growth in Indian Plans looks very much justified in view of
long period of stagnation during the British rule

20

COMPANY PROFILE
ABOUT US
The Bajaj Capital Group is one of Indias premier Investment Advisory and Financial
Planning companies. We are also SEBI-approved Category I Merchant Bankers
We offer personalised Investment Advisory and Financial Planning services to
individual investors, corporate houses, institutional investors, Non-Resident Indians
(NRIs) and High Networth Clients, among others.
As one of Indias largest distributors of financial products, we offer a wide range
of investment products such as mutual funds, life and general insurance, bonds, post
office schemes, etc. offered by reputed public and private and government organizations.
Company Profile
Bajaj Capital is one of Indias leading Financial Services companies offering Free
Advice on Investments, Insurance, Tax Saving, Retirement Planning, Financial Planning,
Childrens Future Planning and other services. We also have a wide range of products and
services for Corporates, High Networth Individuals, and NRIs all under one roof.

At Bajaj Capital, we believe in dreaming big. Dreams inspire us to excel. They ignite
hope and kindle in us the passion to stretch our limits. We also believe that nothing can or
should stop us from realising our dreams and financial constraints should be the last thing
to stop anyone.
Four decades of excellence
For over four decades, we have been helping people realise their aspirations by helping
them make their wealth grow, and plan their financial lives.

21

Today, we are a one of the largest financial planning and investment advisory
companies in India, with a strong presence all over the country. We take pride in serving
our customers both individual and institutional and are known for our strong
professionalism and work ethics.
Wide range of services
We offer a comprehensive range of services including financial planning and investment
advice, and the entire gamut of financial instruments and investment products of almost
all major companies, both public and private. In addition, we also provide investment
assistance by helping you complete all the formalities, and help you keep regular track of
your

investments.

These services and products are delivered through our network of 134 Bajaj Capital
Investment Centres located all over the country.
We are also aSEBI-approved Category I Merchant Banker. We raise resources for over
1,000 top institutions and corporate houses every year, and offer specialised services to
Non-Resident Indian (NRIs) and High Networth Clients.
What you can expect from us
Sound, research-based advice
Unbiased, independent and need-based advice
Prompt, courteous service
Honest, ethical dealings
Accessibility
Our Mission, Aims & Objectives
Bajaj Capital's Mission Statement
The focus of our organization is to be the most useful, reliable and efficient provider of
Financial Services. It is our continuous Endeavour to be a trustworthy advisor to our
clients, helping them achieve their financial goals.

22

Our Vision

Build and retain a growing membership base of financial professionals

Develop a bond within the community as the premier resource for financial
information

Increase awareness on Financial Planning, using the CFP mark as the cornerstone

Nurture and develop the careers of our members through outstanding educational
programs

Make members aware of financial market-related issues and provide a forum to

respond and offer feedback.

Our Aims

To serve our clients with utmost dedication and integrity so that we exceed their
expectations and build enduring relationships.

To offer unparalleled quality of service through complete knowledge of products,

constant innovation in services and use of the latest technology.

To always give honest and unbiased financial advice and earn our clients'
everlasting trust.

To serve the community by educating individuals on the merits of Financial

Planning and in turn help shape a financially strong society.

To create value for all stake holders by ensuring profitable growth.

To build an amicable environment that accords respect to every individual and

permits their personal growth.

To utilise the power of teamwork to function as a family and build a seamless

organization.

Management:

23

Mr. K.K. Bajaj

Chairman
A visionary par excellence, a pioneer and a leader, Mr K.K. Bajaj has been
instrumental in shaping Bajaj Capitals emergence as one of Indias largest
Investment Advisory companies.
He is a highly respected figure in the field of institutional and personal finance
and Company FDs. His emphasis on honesty, ethics and values are the guiding
principles of the organization.
Mr Bajaj is also a prolific writer and has written over 200 articles on diverse
issues such as Personal Finance, Economic Affairs, and Health.
Mr. Rajiv Deep Bajaj
Vice Chairman & Managing Director
A qualified Financial Planner; Mr. Rajiv Deep Bajaj was the first to introduce the
concept of Financial Planning in India. In fact, he is the Founding Chairman of
the Association of Financial Planners (AFP). He is also amongst the first batch of
25 Certified Financial Planners (CFPtm) designation holders in India.
A Post-graduate in Management and holder of an International Certificate for
Financial Advisors from the Chartered Insurance Institute, London, Mr Rajiv
Deep Bajaj has played a pivotal role in expanding Bajaj Capital's reach across the
country. He has recently pursued an Executive MBA in International Wealth
Management under an exchange program between University of Geneva,
Switzerland and Carnegie Mellon University, Pittsburgh, USA.
His youthful energy, dynamic leadership, vision and 16 years strategic
management experience in Banking, Financial Advisory, Insurance Broking and
Financial Planning have strengthened Bajaj Capital.
The Media and Industry honchos have regularly acclaimed Mr Rajiv Deep Bajaj
for his strengths as a powerful orator and writer. His views on various Investment
Strategy and Financial Planning-related issues are regularly flashed in some of the
leading media entities like The Economic Times, Business Today, Star TV, CNBC
and Aaj Tak. His personal life goal is to spread Financial Education amongst
24

the Indian masses in order to increase their knowledge base and shift their
perspective from Saving to Investing.
Mr. Sanjiv Bajaj
Joint Managing Director
Mr. Sanjiv Bajaj started his career in 1995 as managerial trainee, worked on
various projects which included developments at alternate channel of distribution
like Broker's associations...etc. From here, he moved on to Investment Advisory
services, which included understanding the client's needs, and by using various
tools of financial planning to offer them a solution to meet his requirements.
Mr Sanjiv Bajaj is versatile personality with diverse areas of interest. He is a Postgraduate in Business Management with specialisation in Finance, and holds an
International Certificate for Financial Advisors from the Chartered Insurance
Institute,

London.

Thanks to him, Bajaj Capital is today the largest individual agent for LIC. Mr
Sanjiv Bajaj has a keen interest in IT, and has played a major role in
implementing the ERP software and E-commerce activities in the company
Mr. Anil Chopra
CEO & Director
Mr. Anil Chopra is the Chief Executive Officer & Director of Bajaj Capital
Limited, He joined the Company in 1984. Mr. Chopra has been instrumental in
expanding the branch
network of Bajaj Capital Ltd. all over India.
A Chartered Accountant and a Certified Financial Planner, Mr Chopra is credited
with introducing international accounting and HR practices in the organisation.
His most valuable contribution, however, has been in building up a financially
literate society and making Bajaj Capital a strong retail brand. He is considered an
authority, and is widely sought after by the media for quotes on key developments
in the industry.
Why Invest Through Bajaj Capital

Wide range of products and services

25

41 years experience as Investment Advisors and Financial Planners

More than eight lakh satisfied clients all over India

Countrywide network of 134 branches

Over 12,000 NRI clients across the globe

Personalised wealth management advice

24 x 7 online accessibility through www.bajajcapital.com

Strong team of qualified and experienced professionals including CAs, MBAs,

MBEs, CFPs, CSs, Insurance experts, Legal experts and others

SEBI-Approved Category I Merchant Bankers

Group Co BCIBL is an IRDA-licensed Direct Insurance Broker

The Significance of Our Logo

Our logo depicts Lord Ganesha who is the source of all our values and ethics in business.

The large ears of Lord Ganesha remind us to hear more. We listen carefully to our
clients to understand their needs.

The weight of the trunk on the mouth symbolises silence. We work silently,
without blowing our own trumpet.

The long trunk symbolises continuous exploration. We explore all avenues to

provide the best investment opportunities for our clients.

The heavy posture of Ganesha symbolises stability. We help our clients to attain
financial stability through wise investments.

Lord Ganesha is known as the remover of obstacles and bestower of prosperity.

We emulate His example and try our best to help our clients attain prosperity by
proper financial planning.

Our logo has a yellow background. Yellow is the colour of gold, which
symbolises wealth. According to Vedic lore, it is also the colour associated with
26

Brihaspati, the guru and counsellor of the Gods. We offer our clients sage counsel
to make their wealth grow.

The letters are in red. Red is the colour rajas symbolising power and incessant
activity. It symbolises our aggressive quest for your well-being and happiness.

The white streak represents the trunk of Lord Ganesha. White is the colour of
satva guna, and implies our selfless commitment to your life-long happiness.

27

CHAPTER-III
REVIEW OFLITERATURE

Capital market:
A capital market is a market for securities (debt or equity), where business enterprises
(companies) and governments can raise long-term funds. It is defined as a market in
which money is provided for periods longer than a year, as the raising of short-term funds
28

takes place on other markets (e.g., the money market). The capital market includes the
stock market (equity securities) and the bond market (debt). Financial regulators, such as
the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange
Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure
that investors are protected against fraud, among other duties.
Capital markets may be classified as primary markets and secondary markets. In primary
markets, new stock or bond issues are sold to investors via a mechanism known as
underwriting. In the secondary markets, existing securities are sold and bought among
investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.

INDIAN CAPITAL MARKET

The Indian Capital Market is one of the oldest capital markets in Asia which
evolved around
200 years ago.

Chronology of the Indian capital markets :

1830s: Trading of corporate shares and stocks in Bank and cotton Presses in
Bombay.

1850s: Sharp increase in the capital market brokers owing to

development of commercial

the

rapid

enterprise.

1860-61: Outbreak of the American Civil War and ' Share Mania ' in India.
1894: Formation of the Ahmadabad Shares and Stock Brokers Association.
1908: Formation of the Calcutta Stock Exchange Association.
A market is any one of a variety of different systems, institutions, procedures, social
relations and infrastructures whereby persons trade, and goods and services are
exchanged, forming part of the economy. It is an arrangement that allows buyers and
sellers to exchange things. Markets vary in size, range, geographic scale, location, types
and variety of human communities, as well as the types of goods and services traded.
29

Some examples include local farmers markets held in town squares or parking lots,
shopping centers and shopping malls, international currency and commodity markets,
legally created markets such as for pollution permits, and illegal markets such as the
market for illicit drugs.
In mainstream economics, the concept of a market is any structure that allows buyers
and sellers to exchange any type of goods, services and information. The exchange of
goods or services for money is a transaction. Market participants consist of all the buyers
and sellers of a good who influence its price. This influence is a major study of
economics and has given rise to several theories and models concerning the basic market
forces of supply and demand. There are two roles in markets, buyers and sellers. The
market facilitates trade and enables the distribution and allocation of resources in a
society. Markets allow any tradable item to be evaluated and priced. A market emerges
more or less spontaneously or is constructed deliberately by human interaction in order to
enable the exchange of rights (cf. ownership) of services and goods.
Historically, markets originated in physical marketplaces which would often develop into
or from small communities, towns and cities.

Types of markets
Although many markets exist in the traditional sense such as a marketplace there
are various other types of markets and various organizational structures to assist their
functions. The nature of business transactions could define markets.

Financial markets
Financial markets facilitate the exchange of liquid assets. Most investors prefer investing
in two markets, the stock markets and the bond markets. NYSE, AMEX, and the
NASDAQ are the most common stock markets in the US. Futures markets, where
contracts are exchanged regarding the future delivery of goods are often an outgrowth of
general commodity markets.

30

Currency markets are used to trade one currency for another, and are often used for
speculation on currency exchange rates.
The money market is the name for the global market for lending and borrowing.

Prediction markets
Prediction markets are a type of speculative market in which the goods exchanged are
futures on the occurrence of certain events. They apply the market dynamics to facilitate
information aggregation.

Organization of markets
A market can be organized as an auction, as a private electronic market, as a commodity
wholesale market, as a shopping center, as a complex institution such as a stock market,
and as an informal discussion between two individuals.
Markets of varying types can spontaneously arise whenever a party has interest in a good
or service that some other party can provide. Hence there can be a market for cigarettes in
correctional facilities, another for chewing gum in a playground, and yet another for
contracts for the future delivery of a commodity. There can be black markets, where a
good is exchanged illegally and virtual markets, such as eBay, in which buyers and
sellers do not physically interact during negotiation. There can also be markets for goods
under a command economy despite pressure to repress them.

Mechanisms of markets
In economics, a market that runs under laissez-faire policies is a free market. It is "free"
in the sense that the government makes no attempt to intervene through taxes, subsidies,
minimum wages, price ceilings, etc. Market prices may be distorted by a seller or sellers
31

with monopoly power, or a buyer with monophony power. Such price distortions can
have an adverse effect on market participant's welfare and reduce the efficiency of market
outcomes. Also, the level of organization or negotiation power of buyers, markedly
affects the functioning of the market. Markets where price negotiations meet equilibrium
though still do not arrive at desired outcomes for both sides are said to experience market
failure.

Study of markets
The study of actual existing markets made up of persons interacting in space and place in
diverse ways is widely seen as an antidote to abstract and all-encompassing concepts of
the market and has historical precedent in the works of Fernand Braudel and Karl
Polanyi. The latter term is now generally used in two ways. First, to denote the abstract
mechanisms whereby supply and demand confront each other and deals are made. In its
place, reference to markets reflects ordinary experience and the places, processes and
institutions in which exchanges occurs. Second, the market is often used to signify an
integrated, all-encompassing and cohesive capitalist world economy. A widespread trend
in economic history and sociology is skeptical of the idea that it is possible to develop a
theory to capture an essence or unifying thread to markets.. For economic geographers,
reference to regional, local, or commodity specific markets can serve to undermine
assumptions of global integration, and highlight geographic variations in the structures,
institutions, histories, path dependencies, forms of interaction and modes of selfunderstanding of agents in different spheres of market exchange Reference to actual
markets can show capitalism not as a totalizing force or completely encompassing mode
of economic activity, but rather as a set of economic practices scattered over a
landscape, rather than a systemic concentration of power
C. B. Macpherson identifies an underlying model of the market underlying AngloAmerican liberal-democratic political economy and philosophy in the seventeenth and
eighteenth centuries: Persons are cast as self-interested individuals, who enter into
contractual relations with other such individuals, concerning the exchange of goods or
personal capacities cast as commodities, with the motive of maximizing pecuniary
32

interest. The state and its governance systems are cast as outside of this framework.). This
model came to dominant economic thinking in the later nineteenth century, as economists
such as Ricardo, Mill, Jevons, Walras and later neo-classical economics shifted from
reference to geographically located marketplaces to an abstract market. This tradition is
continued in contemporary neoliberalism, where the market is held up as optimal for
wealth creation and human freedom, and the states role imagined as minimal, reduced to
that of upholding and keeping stable property rights, contract, and money supply. This
allowed for boilerplate economic and institutional restructuring under structural
adjustment and post-Communist reconstruction.
Similar formalism occurs in a wide variety of social democratic and Marxist discourses
that situate political action as antagonistic to the market. In particular, commodification
theorists such as Georg Lukcs insist that market relations necessarily lead to undue
exploitation of labour and so need to be opposed in toto. ,). Pierre Bourdieu has suggested
the market model is becoming self-realizing, in virtue of its wide acceptance in national
and international institutions through the 1990s. ). The formalist conception faces a
number of insuperable difficulties, concerning the putatively global scope of the market
to cover the entire Earth, in terms of penetration of particular economies, and in terms of
whether particular claims about the subjects (individuals with pecuniary interest), objects
(commodities), and modes of exchange (transactions) apply to any actually existing
markets.
A central theme of empirical analyses is the variation and proliferation of types of
markets since the rise of capitalism and global scale economies. The Regulation School
stresses the ways in which developed capitalist countries have implemented varying
degrees and types of environmental, economic, and social regulation, taxation and public
spending, fiscal policy and government provisioning of goods, all of which have
transformed markets in uneven and geographical varied ways and created a variety of
mixed economies. Drawing on concepts of institutional variance and path dependency,
varieties of capitalism theorists (such as Hall and Soskice) identify two dominant modes
of economic ordering in the developed capitalist countries, coordinated market
economies such as Germany and Japan, and an Anglo-American liberal market
33

economies. However, such approaches imply that the Anglo-American liberal market
economies in fact operate in a matter close to the abstract notion of the market. While
Anglo-American countries have seen increasing introduction of neo-liberal forms of
economic ordering, this has not lead to simple convergence, but rather a variety of hybrid
institutional orderings.. Rather, a variety of new markets have emerged, such as for
carbon trading or rights to pollute. In some cases, such as emerging markets for water,
different forms of privatization of different aspects of previously state run infrastructure
have created hybrid private-public formations and graded degrees of commodification,
commercialization and privatization
Problematic for market formalism is the relationship between formal capitalist economic
processes and a variety of alternative forms, ranging from semi-feudal and peasant
economies widely operative in many developing economies, to informal markets, barter
systems, worker cooperatives, or illegal trades that occur in most developed countries.
Practices of incorporation of non-Western peoples into global markets in the nineteenth
and twentieth century did not merely result in the quashing of former social economic
institutions. Rather, various modes of articulation arose between transformed and
hybridized local traditions and social practices and the emergence world economy. So
called capitalist markets in fact include and depend on a wide range of geographically
situated economic practices that do not follow the market model. Economies are thus
hybrids of market and non-market elements
Helpful here is J. K. Gibson-Grahams complex topology of the diversity of
contemporary market economies describing different types of transactions, labour, and
economic agents. Transactions can occur in underground markets (such as for marijuana)
or be artificially protected (such as for patents). They can cover the sale of public goods
under privatization schemes to co-operative exchanges and occur under varying degrees
of monopoly power and state regulation. Likewise, there are a wide variety of economic
agents, which engage in different types of transactions on different terms: One cannot
assume the practices of a religious kindergarten, multinational corporation, state
enterprise, or community-based cooperative can be subsumed under the same logic of
calculability (pp. 5378). This emphasis on proliferation can also be contrasted with
34

continuing scholarly attempts to show underlying cohesive and structural similarities to

different markets.
A prominent entry point for challenging the market models applicability concerns
exchange transactions and the homo economicus assumption of self-interest
maximization. There are now a number of streams of economic sociological analysis of
markets focusing on the role of the social in transactions, and the ways transactions
involve social networks and relations of trust, cooperation and other bonds.. Economic
geographers in turn draw attention to the ways in exchange transactions occur against the
backdrop of institutional, social and geographic processes, including class relations,
uneven development, and historically contingent path dependencies. A useful schema is
provided by Michel Callons concept of framing: Each economic act or transaction occurs
against, incorporates and also re-performs a geographically and cultural specific complex
of social histories, institutional arrangements, rules and connections. These network
relations are simultaneously bracketed, so that persons and transactions may be
disentangled from thick social bonds. The character of calculability is imposed upon
agents as they come to work in markets and are formatted as calculative agencies.
Market exchanges contain a history of struggle and contestation that produced actors
predisposed to exchange under certain sets of rules. As such market transactions can
never be disembedded from social and geographic relations and there is no sense to
talking of degrees of embeddedness and disembeddeness.
An emerging theme worthy of further study is the interrelationship, interpenetrability and
variations of concepts of persons, commodities, and modes of exchange under particular
market formations. This is most pronounced in recent movement towards poststructuralist theorizing that draws on Foucault and Actor Network Theory and stress
relational aspects of personhood, and dependence and integration into networks and
practical systems. Commodity network approaches further both deconstruct and show
alternatives to the market models concept of commodities. Here, both researchers and
market actors are understood as reframing commodities in terms of processes and social
and ecological relationships. Rather than a mere objectification of things traded, the
complex network relationships of exchange in different markets calls on agents to
35

alternatively deconstruct or get with the fetish of commodities. Gibson-Graham thus

read a variety of alternative markets, for fair trade and organic foods, or those using Local
Exchange Trading Systems as not only contributing to proliferation, but also forging new
modes of ethical exchange and economic subjectivities.
Most markets are regulated by state wide laws and regulations. While barter markets
exist, most markets use currency or some other form of money.
A security is a fungible, negotiable instrument representing financial value. Securities are
broadly categorized into debt securities (such as banknotes, bonds and debentures) and
equity securities, e.g., common stocks; and derivative contracts, such as forwards,
futures, options and swaps. The company or other entity issuing the security is called the
issuer. A country's regulatory structure determines what qualifies as a security. For
example, private investment pools may have some features of securities, but they may not
be registered or regulated as such if they meet various restrictions.
Securities may be represented by a certificate or, more typically, "non-certificated", that
is in electronic or "book entry" only form. Certificates may be bearer, meaning they
entitle the holder to rights under the security merely by holding the security, or registered,
meaning they entitle the holder to rights only if he or she appears on a security register
maintained by the issuer or an intermediary. They include shares of corporate stock or
mutual funds, bonds issued by corporations or governmental agencies, stock options or
other options, limited partnership units, and various other formal investment instruments
that are negotiable and fungible.

Classification
Securities may be classified according to many categories or classification systems:

Currency of denomination

Ownership right
36

Term to maturity

Degree of liquidity

Income payments

Tax treatment

Credit rating

Industrial sector or "Industry". ("Sector" often refers to a higher level or broader

category, such as Consumer Discretionary, whereas "industry" often refers to a
lower level classification, such as Consumer Appliances. See Industry for a
discussion of some classification systems.)

Region or country (such as country of incorporation, country of principal

sales/market of its products or services, or country in which the principal
securities exchange on which it trades is located)

Market capitalization

State (typically for municipal or "tax-free" bonds in the U.S.)

By type of issuer
Issuers of securities include commercial companies, government agencies, local
authorities and international and supranational organizations (such as the World Bank).
Debt securities issued by a government (called government bonds or sovereign bonds)
generally carry a lower interest rate than corporate debt issued by commercial companies.
Interests in an assetfor example, the flow of royalty payments from intellectual
propertymay also be turned into securities. These repackaged securities resulting from
a securitization are usually issued by a company established for the purpose of the
repackagingcalled a special purpose vehicle (SPV). See "Repackaging" below. SPVs
are also used to issue other kinds of securities. SPVs can also be used to guarantee
securities, such as covered bonds.
37

New capital

Commercial enterprises have traditionally used securities as a means of raising new

capital. Securities may be an attractive option relative to bank loans depending on their
pricing and market demand for particular characteristics. Another disadvantage of bank
loans as a source of financing is that the bank may seek a measure of protection against
default by the borrower via extensive financial covenants. Through securities, capital is
provided by investors who purchase the securities upon their initial issuance. In a similar
way, the governments may raise capital through the issuance of securities (see
government debt).
Repackaging

In recent decades securities have been issued to repackage existing assets. In a traditional
securitization, a financial institution may wish to remove assets from its balance sheet in
order to achieve regulatory capital efficiencies or to accelerate its receipt of cash flow
from the original assets. Alternatively, an intermediary may wish to make a profit by
acquiring financial assets and repackaging them in a way which makes them more
attractive to investors. In other words, a basket of assets is typically contributed or placed
into a separate legal entity such as a trust or SPV, which subsequently issues shares of
equity interest to investors. This allows the sponsor entity to more easily raise capital for
these assets as opposed to finding buyers to purchase directly such assets.
By type of holder
Investors in securities may be retail, i.e. members of the public investing other than by
way of business. The greatest part in terms of volume of investment is wholesale, i.e. by
financial institutions acting on their own account, or on behalf of clients. Important
institutional investors include investment banks, insurance companies, pension funds and
other managed funds.
Investment

The traditional economic function of the purchase of securities is investment, with the
view to receiving income and/or achieving capital gain. Debt securities generally offer a
higher rate of interest than bank deposits, and equities may offer the prospect of capital
38

growth. Equity investment may also offer control of the business of the issuer. Debt
holdings may also offer some measure of control to the investor if the company is a
fledgling start-up or an old giant undergoing 'restructuring'. In these cases, if interest
payments are missed, the creditors may take control of the company and liquidate it to
recover some of their investment.
Collateral

The last decade has seen an enormous growth in the use of securities as collateral.
Purchasing securities with borrowed money secured by other securities or cash itself is
called "buying on margin." Where A is owed a debt or other obligation by B, A may
require B to deliver property rights in securities to A, either at inception (transfer of title)
or only in default (non-transfer-of-title institutional). For institutional loans property
rights are not transferred but nevertheless enable A to satisfy its claims in the event that B
fails to make good on its obligations to A or otherwise becomes insolvent. Collateral
arrangements are divided into two broad categories, namely security interests and
outright collateral transfers. Commonly, commercial banks, investment banks,
government agencies and other institutional investors such as mutual funds are significant
collateral takers as well as providers. In addition, private parties may utilize stocks or
other securities as collateral for portfolio loans in securities lending scenarios.
On the consumer level, loans against securities have grown into three distinct groups over
the last decade: 1) Standard Institutional Loans, generally offering low loan-to-value with
very strict call and coverage regimens; 2) Transfer-of-Title (ToT) Loans, typically
provided by private parties where borrower ownership is completely extinguished save
for the rights provided in the loan contract; and 3) Enhanced Institutional Loan Facilities
- a marriage of public and private entities in the form of fully regulated, institutionally
managed brokerage financing supplemented ("enhanced") by private capital where the
securities remain in the client's title and account unless there is an event of default. Of the
three, transfer-of-title loans typically allow the lender to sell or sell short at least some
portion of the shares (if not all) to fund the transaction, and many operate outside the
regulated financial universe as a private loan program. Institutionally managed loans, on
the other hand, draw loan funds from credit lines or other institutional funding sources
39

and do not involve any loss of borrower ownership or control thereby making them more
transparent.
Debt and equity
Securities are traditionally divided into debt securities and equities
Debt
Debt securities may be called debentures, bonds, deposits, notes or commercial paper
depending on their maturity and certain other characteristics. The holder of a debt
security is typically entitled to the payment of principal and interest, together with other
contractual rights under the terms of the issue, such as the right to receive certain
information. Debt securities are generally issued for a fixed term and redeemable by the
issuer at the end of that term. Debt securities may be protected by collateral or may be
unsecured, and, if they are unsecured, may be contractually "senior" to other unsecured
debt meaning their holders would have a priority in a bankruptcy of the issuer. Debt that
is not senior is "subordinated".
Corporate bonds represent the debt of commercial or industrial entities. Debentures have
a long maturity, typically at least ten years, whereas notes have a shorter maturity.
Commercial paper is a simple form of debt security that essentially represents a postdated check with a maturity of not more than 270 days.
Money market instruments are short term debt instruments that may have
characteristics of deposit accounts, such as certificates of deposit, and certain bills of
exchange. They are highly liquid and are sometimes referred to as "near cash".
Commercial paper is also often highly liquid.
Euro debt securities are securities issued internationally outside their domestic market in
a denomination different from that of the issuer's domicile. They include eurobonds and
euronotes. Eurobonds are characteristically underwritten, and not secured, and interest is
paid gross. A euronote may take the form of euro-commercial paper (ECP) or eurocertificates of deposit.

40

Government bonds are medium or long term debt securities issued by sovereign
governments or their agencies. Typically they carry a lower rate of interest than corporate
bonds, and serve as a source of finance for governments. U.S. federal government bonds
are called treasuries. Because of their liquidity and perceived low risk, treasuries are used
to manage the money supply in the open market operations of non-US central banks.
Sub-sovereign government bonds, known in the U.S. as municipal bonds, represent the
debt of state, provincial, territorial, municipal or other governmental units other than
sovereign governments.
Supranational bonds represent the debt of international organizations such as the World
Bank, the International Monetary Fund, regional multilateral development banks and
others.
Equity
An equity security is a share of equity interest in an entity such as the capital stock of a
company, trust or partnership. The most common form of equity interest is common
stock, although preferred equity is also a form of capital stock. The holder of an equity is
a shareholder, owning a share, or fractional part of the issuer. Unlike debt securities,
which typically require regular payments (interest) to the holder, equity securities are not
entitled to any payment. In bankruptcy, they share only in the residual interest of the
issuer after all obligations have been paid out to creditors. However, equity generally
entitles the holder to a pro rata portion of control of the company, meaning that a holder
of a majority of the equity is usually entitled to control the issuer. Equity also enjoys the
right to profits and capital gain, whereas holders of debt securities receive only interest
and repayment of principal regardless of how well the issuer performs financially.
Furthermore, debt securities do not have voting rights outside of bankruptcy. In other
words, equity holders are entitled to the "upside" of the business and to control the
business.
Hybrid
Hybrid securities combine some of the characteristics of both debt and equity securities.
41

Preference shares form an intermediate class of security between equities and debt. If
the issuer is liquidated, they carry the right to receive interest and/or a return of capital in
priority to ordinary shareholders. However, from a legal perspective, they are capital
stock and therefore may entitle holders to some degree of control depending on whether
they contain voting rights.
Convertibles are bonds or preferred stock which can be converted, at the election of the
holder of the convertibles, into the common stock of the issuing company. The
convertibility, however, may be forced if the convertible is a callable bond, and the issuer
calls the bond. The bondholder has about 1 month to convert it, or the company will call
the bond by giving the holder the call price, which may be less than the value of the
converted stock. This is referred to as a forced conversion.
Equity warrants are options issued by the company that allow the holder of the warrant
to purchase a specific number of shares at a specified price within a specified time. They
are often issued together with bonds or existing equities, and are, sometimes, detachable
from them and separately tradable. When the holder of the warrant exercises it, he pays
the money directly to the company, and the company issues new shares to the holder.
Warrants, like other convertible securities, increases the number of shares outstanding,
and are always accounted for in financial reports as fully diluted earnings per share,
which assumes that all warrants and convertibles will be exercised.
The securities markets
Primary and secondary market
In the U.S., the public securities markets can be divided into primary and secondary
markets. The distinguishing difference between the two markets is that in the primary
market, the money for the securities is received by the issuer of those securities from
investors, typically in an initial public offering transaction, whereas in the secondary
market, the securities are simply assets held by one investor selling them to another
investor (money goes from one investor to the other). An initial public offering is when a
company issues public stock newly to investors, called an "IPO" for short. A company
42

can later issue more new shares, or issue shares that have been previously registered in a
shelf registration. These later new issues are also sold in the primary market, but they are
not considered to be an IPO but are often called a "secondary offering". Issuers usually
retain investment banks to assist them in administering the IPO, obtaining SEC (or other
regulatory body) approval of the offering filing, and selling the new issue. When the
investment bank buys the entire new issue from the issuer at a discount to resell it at a
markup, it is called a firm commitment underwriting. However, if the investment bank
considers the risk too great for an underwriting, it may only assent to a best effort
agreement, where the investment bank will simply do its best to sell the new issue.
In order for the primary market to thrive, there must be a secondary market, or
aftermarket which provides liquidity for the investment security, where holders of
securities can sell them to other investors for cash. Otherwise, few people would
purchase primary issues, and, thus, companies and governments would be restricted in
raising equity capital (money) for their operations. Organized exchanges constitute the
main secondary markets. Many smaller issues and most debt securities trade in the
decentralized, dealer-based over-the-counter markets.
In Europe, the principal trade organization for securities dealers is the International
Capital Market Association. In the U.S., the principal trade organization for securities
dealers is the Securities Industry and Financial Markets Association, which is the result of
the merger of the Securities Industry Association and the Bond Market Association. The
Financial Information Services Division of the Software and Information Industry
Association (FISD/SIIA) represents a round-table of market data industry firms, referring
to them as Consumers, Exchanges, and Vendors.
Public offer and private placement
In the primary markets, securities may be offered to the public in a public offer.
Alternatively, they may be offered privately to a limited number of qualified persons in a
private placement. Sometimes a combination of the two is used. The distinction between
the two is important to securities regulation and company law. Privately placed securities
are not publicly tradable and may only be bought and sold by sophisticated qualified
43

investors. As a result, the secondary market is not nearly as liquid as it is for public
(registered) securities.
Another category, sovereign bonds, is generally sold by auction to a specialized class of
dealers.
Listing and OTC dealing
Securities are often listed in a stock exchange, an organized and officially recognized
market on which securities can be bought and sold. Issuers may seek listings for their
securities in order to attract investors, by ensuring that there is a liquid and regulated
market in which investors will be able to buy and sell securities.
Growth in informal electronic trading systems has challenged the traditional business of
stock exchanges. Large volumes of securities are also bought and sold "over the counter"
(OTC). OTC dealing involves buyers and sellers dealing with each other by telephone or
electronically on the basis of prices that are displayed electronically, usually by
commercial information vendors such as Reuters and Bloomberg.
There are also eurosecurities, which are securities that are issued outside their domestic
market into more than one jurisdiction. They are generally listed on the Luxembourg
Stock Exchange or admitted to listing in London. The reasons for listing eurobonds
include regulatory and tax considerations, as well as the investment restrictions.
Market
London is the centre of the eurosecurities markets. There was a huge rise in the
eurosecurities market in London in the early 1980s. Settlement of trades in eurosecurities
is currently effected through two European computerized clearing/depositories called
Euroclear (in Belgium) and Clearstream (formerly Cedelbank) in Luxembourg.
The main market for Eurobonds is the EuroMTS, owned by Borsa Italiana and Euronext.
There are ramp up market in Emergent countries, but it is growing slowly.
Physical nature of securities
44

Certificated securities
Securities that are represented in paper (physical) form are called certificated securities.
They may be bearer or registered.
Bearer securities

Bearer securities are completely negotiable and entitle the holder to the rights under the
security (e.g. to payment if it is a debt security, and voting if it is an equity security).
They are transferred by delivering the instrument from person to person. In some cases,
transfer is by endorsement, or signing the back of the instrument, and delivery.
Regulatory and fiscal authorities sometimes regard bearer securities negatively, as they
may be used to facilitate the evasion of regulatory restrictions and tax. In the United
Kingdom, for example, the issue of bearer securities was heavily restricted firstly by the
Exchange Control Act 1947 until 1953. Bearer securities are very rare in the United
States because of the negative tax implications they may have to the issuer and holder.
Registered securities

In the case of registered securities, certificates bearing the name of the holder are issued,
but these merely represent the securities. A person does not automatically acquire legal
ownership by having possession of the certificate. Instead, the issuer (or its appointed
agent) maintains a register in which details of the holder of the securities are entered and
updated as appropriate. A transfer of registered securities is effected by amending the
register.
Non-certificated securities and global certificates
Modern practice has developed to eliminate both the need for certificates and
maintenance of a complete security register by the issuer. There are two general ways this
has been accomplished.
Non-certificated securities

In some jurisdictions, such as France, it is possible for issuers of that jurisdiction to

maintain a legal record of their securities electronically.

45

In the United States, the current "official" version of Article 8 of the Uniform
Commercial Code permits non-certificated securities. However, the "official" UCC is a
mere draft that must be enacted individually by each of the U.S. states. Though all 50
states (as well as the District of Columbia and the U.S. Virgin Islands) have enacted some
form of Article 8, many of them still appear to use older versions of Article 8, including
some that did not permit non-certificated securities.
In the U.S. today, most mutual funds issue only non-certificated shares to shareholders,
though some may issue certificates only upon request and may charge a fee. Shareholders
typically don't need certificates except for perhaps pledging such shares as collateral for a
loan.
Global certificates, book entry interests, depositories

In order to facilitate the electronic transfer of interests in securities without dealing with
inconsistent versions of Article 8, a system has developed whereby issuers deposit a
single global certificate representing all the outstanding securities of a class or series with
a universal depository. This depository is called The Depository Trust Company, or DTC.
DTC's parent, Depository Trust & Clearing Corporation (DTCC), is a non-profit
cooperative owned by approximately thirty of the largest Wall Street players that
typically act as brokers or dealers in securities. These thirty banks are called the DTC
participants. DTC, through a legal nominee, owns each of the global securities on behalf
of all the DTC participants.
All securities traded through DTC are in fact held, in electronic form, on the books of
various intermediaries between the ultimate owner, e.g. a retail investor, and the DTC
participants. For example, Mr. Smith may hold 100 shares of Coca Cola, Inc. in his
brokerage account at local broker Jones & Co. brokers. In turn, Jones & Co. may hold
1000 shares of Coca Cola on behalf of Mr. Smith and nine other customers. These 1000
shares are held by Jones & Co. in an account with Goldman Sachs, a DTC participant, or
in an account at another DTC participant. Goldman Sachs in turn may hold millions of
Coca Cola shares on its books on behalf of hundreds of brokers similar to Jones & Co.
Each day, the DTC participants settle their accounts with the other DTC participants and
46

adjust the number of shares held on their books for the benefit of customers like Jones &
Co. Ownership of securities in this fashion is called beneficial ownership. Each
intermediary holds on behalf of someone beneath him in the chain. The ultimate owner is
called the beneficial owner. This is also referred to as owning in "Street name".
Among brokerages and mutual fund companies, a large amount of mutual fund share
transactions take place among intermediaries as opposed to shares being sold and
redeemed directly with the transfer agent of the fund. Most of these intermediaries such
as brokerage firms clear the shares electronically through the National Securities Clearing
Corp. or "NSCC", a subsidiary of DTCC.
Other depositories: Euroclear and Clearstream

Besides DTC, two other large securities depositories exist, both in Europe: Euroclear and
Clearstream.
Divided and undivided security
The terms "divided" and "undivided" relate to the proprietary nature of a security.
Each divided security constitutes a separate asset, which is legally distinct from each
other security in the same issue. Pre-electronic bearer securities were divided. Each
instrument constitutes the separate covenant of the issuer and is a separate debt.
With undivided securities, the entire issue makes up one single asset, with each of the
securities being a fractional part of this undivided whole. Shares in the secondary markets
are always undivided. The issuer owes only one set of obligations to shareholders under
its memorandum, articles of association and company law. A share represents an
undivided fractional part of the issuing company. Registered debt securities also have this
undivided nature.
Fungible and non-fungible security
The terms "fungible" and "non-fungible" relate to the way in which securities are held.

47

If an asset is fungible, this means that if such an asset is lent, or placed with a custodian,
it is customary for the borrower or custodian to be obliged at the end of the loan or
custody arrangement to return assets equivalent to the original asset, rather than the
specific identical asset. In other words, the redelivery of fungibles is equivalent and not in
specie In other words, if an owner of 100 shares of IBM transfers custody of those shares
to another party to hold them for a purpose, at the end of the arrangement, the holder
need simply provide the owner with 100 shares of IBM which are identical to that
received. Cash is also an example of a fungible asset. The exact currency notes received
need not be segregated and returned to the owner.
Undivided securities are always fungible by logical necessity. Divided securities may or
may not be fungible, depending on market practice. The clear trend is towards fungible
arrangements.
The primary market is that part of the capital markets that deals with the issuance of
new securities. Companies, governments or public sector institutions can obtain funding
through the sale of a new stock or bond issue. This is typically done through a syndicate
of securities dealers. The process of selling new issues to investors is called underwriting.
In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a
commission that is built into the price of the security offering, though it can be found in
the prospectus.
Features of primary markets are:

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

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

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

48

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

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

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

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

Methods of issuing securities in the primary market are:

Initial public offering;

Rights issue (for existing companies);

Preferential issue.

The secondary market, also known as the aftermarket, is the financial market where
previously issued securities and financial instruments such as stock, bonds, options, and
futures are bought and sold.. The term "secondary market" is also used to refer to the
market for any used goods or assets, or an alternative use for an existing product or asset
where the customer base is the second market (for example, corn has been traditionally
used primarily for food production and feedstock, but a "second" or "third" market has
developed for use in ethanol production). Another commonly referred to usage of
secondary market term is to refer to loans which are sold by a mortgage bank to investors
such as Fannie Mae and Freddie Mac.
With primary issuances of securities or financial instruments, or the primary market,
investors purchase these securities directly from issuers such as corporations issuing
shares in an IPO or private placement, or directly from the federal government in the case
49

of treasuries. After the initial issuance, investors can purchase from other investors in the
secondary market.
The secondary market for a variety of assets can vary from loans to stocks, from
fragmented to centralized, and from illiquid to very liquid. The major stock exchanges are
the most visible example of liquid secondary markets - in this case, for stocks of publicly
traded companies. Exchanges such as the New York Stock Exchange, Nasdaq and the
American Stock Exchange provide a centralized, liquid secondary market for the
investors who own stocks that trade on those exchanges. Most bonds and structured
products trade over the counter, or by phoning the bond desk of ones broker-dealer.
Loans sometimes trade online using a Loan Exchange.

Function
Secondary marketing is vital to an efficient and modern capital market. In the secondary
market, securities are sold by and transferred from one investor or speculator to another.
It is therefore important that the secondary market be highly liquid (originally, the only
way to create this liquidity was for investors and speculators to meet at a fixed place
regularly; this is how stock exchanges originated, see History of the Stock Exchange). As
a general rule, the greater the number of investors that participate in a given marketplace,
and the greater the centralization of that marketplace, the more liquid the market.
Fundamentally, secondary markets mesh the investor's preference for liquidity (i.e., the
investor's desire not to tie up his or her money for a long period of time, in case the
investor needs it to deal with unforeseen circumstances) with the capital user's preference
to be able to use the capital for an extended period of time.
Accurate share price allocates scarce capital more efficiently when new projects are
financed through a new primary market offering, but accuracy may also matter in the
secondary market because: 1) price accuracy can reduce the agency costs of management,
and make hostile takeover a less risky proposition and thus move capital into the hands of

50

better managers, and 2) accurate share price aids the efficient allocation of debt finance
whether debt offerings or institutional borrowing.

Related usage
The term may refer to markets in things of value other than securities. For example, the
ability to buy and sell intellectual property such as patents, or rights to musical
compositions, is considered a secondary market because it allows the owner to freely
resell property entitlements issued by the government. Similarly, secondary markets can
be said to exist in some real estate contexts as well (e.g. ownership shares of time-share
vacation homes are bought and sold outside of the official exchange set up by the timeshare issuers). These have very similar functions as secondary stock and bond markets in
allowing for speculation, providing liquidity, and financing through securitization.

Private Secondary Markets

Partially due to increased compliance and reporting obligations enacted in the SarbanesOxley Act of 2002, private secondary markets began to emerge. These markets are
generally only available to institutional or accredited investors and allow trading of
unregistered and private company securities.
In private equity, the secondary market (also often called private equity secondarys or
secondarys) refers to the buying and selling of pre-existing investor commitments to
private equity funds. Sellers of private equity investments sell not only the investments in
the fund but also their remaining unfunded commitments to the funds.
51

EQUITY SHARES:
They are also called as common stock. The common stock holders of a company are
its real owners, the own the company and assume the ultimate risk associate with
ownership. Their liability, how ever is restricted to the amount of their investment in
the event of liquidation, these stock holders have a residual claim on the assets of the
company after the claims of all creditors and preferred stock holders,are settled in
full. Common stock like preferred stock, as no maturity date.NSE started trading in
the equities segment (Capital Market segment) on November 3, 1994 and within a
short span of 1 year became the largest exchange in India in terms of volumes
transacted.Trading volumes in the equity segment have grown rapidly with average
daily turnover increasing from Rs.17 crores during 1994-95 to Rs.14,148 corers
52

during FY 2007-08. During the year 2007- o8,NSE reported a turnover of

Rs.3,551,038 crores in the equities segment.The Equities section provides you with
an insight into the equities segment of NSE and also provides real-time quotes and
statistics of the equities market. In-depth information regarding listing of securities,
trading systems & processes,clearing and settlement, risk management, trading
statistics etc are available here.
AUTHORIZED, ISSUED AND OUTSTANDING SHARES:

An authorized shares is the maximum no. of shares that the articles of association
(AOA) of
thecompany permit it to issue in the market. A company can however amend its AOA
to increase the number. The number of shares that the company has actually issued
out these authorized shares is called as issued shares. A company usually likes to have
a number of shares that a authorized but un-issued. These un-issued allow flexibility
in granting stock options, pursuing merger targets andsplitting the stock. Outstanding
shares refer to the number of shares issued and actually held by public. The
corporation can buy back part of its issued stock and hold it as a treasury stock.Par
value , book value and liquidating value :The par value of a share of stock is merely a
recorded figure in the corporate charter and is of little economic significance. A
company should not, however, issue common stock at a price less than par value,
because any discount from par value ( amount by which the issuing price is less than
the par value) is considered a contingent liability of the own wrest to the creditors of
the company. In the event of liquidation, the share holders would be legally liable to
creditors of any discount from par value.
Example: suppose that xyz inc. is ready to start business for the first time and sold
10000 shares rupees 10 each . the share holders equity portion of the balance sheet
would be common stock @ 10 each at par value:10000 shares issued and outstanding
RS100000

Total shares holders equity RS100000.The book value per share of

common stock is the shareholders equity total assets minus liabilities and preferred
53

stocks as listed on the balance sheet- dividing by the number of shares outstanding
.suppose that xyz is now 1 year old has generated RS 500000 after- tax profits, but
pays number dividing. Thus, retained earnings are RS 50000. the share holders equity
is now RS 100000+ RS 50000 =150000

and the book value per share is rs

1500000/10000=RS 25.Although one might expect the book value per share of stock
to correspond to the liquidating value (per share) of the company, most frequently
does not. Often assts are sold for less than their values, particularly when liquidating
costs are involved.

Market value
Market value per share is the current price at which the stock is traded. For actively
traded stocks, market price quotations are readily available. For the many in active
stocks that have thin markets, price are difficult to obtain. Even when obtainable, the
information may reflect only the sale of a few shares of stock of common stock and
not typify the market value of the firm as the whole. The market value of a share of
common stock will usually differs from its book value and its liquidating value.
Market value per share of common stock is a function of the current and expected
future dividends of the company and the perceived risk of the stock on the part of
investors.

Rights of common share holders:

1.Rights of income:
If the company fails to pay contractual interest and principle and
payments to creditors, the creditors are able to take legal action to insure that
principle payments are made of company is liquidated. Common share holders, on the
other hand, have legal recourse to a company for not distributing profits. only if
54

management, the board of directors, or both engaged in fraud may share holders take
their case to court and possibly force the company to pay dividends.
1. voting rights:
The common shares of a company are its owners and they are entitled to
elect a board of directors. In a large corporations shares holders usually exercise only
indirect control through the board of directors they elect. The board, in turn, select
the management, and the management actually controls the

operations of the

company. In a sole proprietorship, partnership, or small corporation, the owners

usually control the operation of the business directly.
2. Proxies and proxy contests:
Common share holders are entitled to one vote for each share of stock that
they own . it is usually difficult, both physically and financially, for the most share
holders to attend a corporations annual meetings. Because of this, many share
holders vote of means of a proxy, a legal document by which share holders assign
their right to vote to another person.
3. Voting procedures:
Depending on the corporate charter, the board of directors is elected
under either
Majority rule voting system or a cumulative voting system. Under the majority rule
system, stock holders have one for each share of stock that they own, and they must
vote for each director position that is open. Under cumulating voting system, a stock
holder is able to accumulate votes and cast them for less than the total number of
directors being elected. The total number of votes of each share holders is equal to the
number of shares the stock holder times the number of directors being elected.
ISSUE MECHNISM:
The success of an issue depends, partly, on the Issue Mechanism.
The methods by, which new issues are made of
55

1. public issue through prospectus.

2. Offer for sale.
3. Placement.
4. Rights issue.
1.

Public Issue Through Prospectus :

Under this method, the issuing companies themselves offer directly to general
public a fixed number of shares at a stated price, which in the case of new companies
is invariably the face value of the securities, and in the case of existing companies, it
may something include a underwritten to ensure arising out of unsatisfactory public
response. Transparency and wide distributions of shares are its important

and

advantages. The foundation of the public issue method is a prospectus, the minimum
contents of which are prescribed by the Companies Act 1956. It also provides both
civil and criminal liabilityfor any misstatement in the prospectus. Additional
disclosure requirements are also mandated by the SEBI.
The content of the prospectus, inter aria, include:

Name and registered office of the issuing company.

Existing and proposed activities.

Board of directors.

Location of the industry.

56

Authorized, subscribed and proposed issued of capital to public.

Dates of opening and closing of subscription list.

Names of broker, underwriter, and other from whom application forms along
with copies

prospectus can be obtained.

Minimum subscription.

Names of underwriter , if any, along with a statement that in the opinion of the
directors,

resources of the underwriter are sufficient to meet the underwriting obligation.

A statement that the company will make an application stock exchange for the
permission to deal in or for a quotation of its and so on.
2. offer for sale:
Broker to their own client of securities which have been previously purchased
or
subscribed. Under this method, securities are acquired by the issue houses, as in
offer for sale method, but instead of being subsequently offered to the public, they are
placed with the client of the issue houses, both individual and institutional investors.
Each issue house has a prepared to subscribe to any securities which are issued in
this manner. Its procedure is the same with the only Difference of ultimate investors.
In this method, no formal underwriting of the issue is required as the placement itself
Amount to underwriting since the houses agree to place the issue with their clients.
57

The main Advantages of placing, as a method issuing new securities, are its relative
cheapness. There is a cost cutting on account of underwriting commission, expense
relating to applications, allotment of shares and the stock exchange requirements
relating to contents of the prospectus and its advertisement. This method is generally
adopted by small companies with

unsatisfactory financial performances. Its

weakness arises from the point of distribution of securities. As the securities are
offered only to a select group of investors, it may lead to the concentration of shares
in to a few hands that may create artificial scarcity of scripts in times of hectic
dealings in such shares in the market.
3.Rights Issue :
Only the existing companies can use this method. In the case of companies
whose shares are already listed and widely-held , shares can be offered to the existing
shareholders. This is called right issue. Under this method, the existing shareholders.
Are offered the right to subscribed to new shares in proportion to the number of
shares they already hold. This is made by circular to existing shareholders only.
In India, section 81 of the companies act 1956 provides that where a
company increases

its

subscribed capital by the issue of new shares, either after

two years of its formation or after one year of first issue of shares whichever is
earlier, these have to be first offered to the existing shareholders with this requirement
by passing a special resolution to the same effect. The chief merit of rights issues is
that it is an inexpensive method.

Sweat equity shares :

Under section 9Aof the companies Act , 1956, a company can issue sweat equity
shares to its employees or directors at discount or for consideration other than cash
for providing know-how making available rights in the nature of intellectual property
rights or value additions etc on the following.
58

Conditions:
1.

The issue of sweat equity share is authorized by a special resolution passed by

the company in the general meeting.
2. The resolution specifies the number of shares, current market, Price, resolution, if
any, and the class or classes of directors Or employees to whom such equity shares
are to be issued.
3. The company is entitled to issue sweat equity shares after completion of one year
from the date of Commencement Of business.
4.

The equity shares of the company must be listed on a recognized stock

exchange.
5.

The issue of sweat equity shares must be listed on a accordance with the

regulations made by the SEBI in the behalf.

6.

An unlisted company can issue sweat equity shares in accordance with the

prescribed
guidelines made for this purpose.
7.

All the limitations, restrictions and provision relating to equity shares shall be

applicable to sweat equity shares.

PREFERENCE SHARES:
Preference shares are a hybrid security because it has both ordinary shares and
bonds. Preference

shareholders have preferential rights in respect of assets and

59

dividends. In the event of winding up the preference share holders have a claim on
available assets before the ordinary shareholders.

In

addition, preference

shareholders get their stated dividend before equity shareholders can

receive any

dividends.

TYPES OF PREFERENCE SHARES:

1. Cumulative and Non-cumulative preference shares:
The cumulative preference gives rights to demand the unpaid dividends of
any year, during the subsequent ears when the profits and ample. All preference
dividends

arrears must be paid before any dividends can be paid to equity

shareholders. The non cumulative preference share carry a right to a fixed dividend
out of the profits to any year. In case profits are not available in a year, the holders get
nothing, nor can they claim unpaid dividends in subsequent years.
2. Cumulative convertible preference shares:
The cumulative convertible preference (CCP) share is an instruments that
embraces features of both equity shares and shares and preference shares, but which
essentially is a preference shares. Since the CCP shares capital would constitute a
class of shares, distinct from purely equity and purely preferences share capital, the
rights of the instrument holders must be stated either in a general body resolution or
in the articles or in the terms of issues in the offer documents viz., prospectus /letter
of offer.
3. Participating and non participating preference shares:
Participating preference shares are those shares which are
entitled to a fixed preferential dividend and. in addition, carry a right to participate in
the surplus profits along with equity shares holders after dividend at a certain rate has
been paid to equity share holders. Again in the event of winding up, if after paying
back both preference and equity share holders, there is still any surplus left, then the
participating preference share holders get additional shares in the surplus assets of
60

the company. Unless expressly provided, preference share holders get only the fixed
preference dividends and return on capital in the event of winding up out of realized
values of assets after meeting all external liabilities and nothing more. The rights to
participate may be given either in the memorandum or articles or by virtue of terms of
issue.
4. Redeemable and Irredeemable preference shares:
Subjects to an authority in the articles of association, a public
limited
company may issue redeemable preference shares to be redeemed either at a fixed
date or after a certain period of time during the life time of the company. The
companies act, 1956 prohibits the issue of any preference share which is irredeemable
or is redeemable after the expiry of a period of twenty years from the date issue.

Power to Issue Redeemable Preference Shares:

Section 80 of the companies act 1956 permits a company
to issue
Redeemable preference shares if:

The company is limited by shares.

Its article of association authoriese

the

issue of redeemable preference

shares.

Those shares are redeemable at the option of the company.

A company is allowed to issue redeemable preference shares in the following
circumstances:

Such preference shares shall be redeemed only out of profits of the company,
which would otherwise be available for dividend.

Such redemption can also be made out of the proceeded of fresh issues of
shares made of the purpose of redemption.

61

Before redemption, such shares must be fully paid up.The premium on

redemption shall be provided out of

profits of the company or out of securities

premium account, before the share are redeemed.

Where shares are redeemed out of profits to a separate account called capital

The redemption of preference shares under this section shall not be taken as
reducing the authorized capital of the company.

The capital redemption reserve account may used for issue of fully paid
bonus shares.Companies are not allowed to issued irredeemable preference shares or
preference shares which are redeemable after the expire of a period of 20 years from
the date of its issue.In case of default, the company and every officer of the company
who is indefault shall be punishable with a fine which may extend to Rs 10000.

Deferred/ Founders shares:

A private company any issue what are known as deferred or
founders shares. Such shares are normally held by promoters and directors of the
company. That is why they are usually called of a smaller denomination, say on
rupee each. How ever they are generally given. equal voting

rights with equity

shares, which may be of higher denomination, say Rs10 each. Thus, by investing
relatively lower amounts, the promoter may gain control over the management of the
company. As regards the payment of dividends have been declared on the preference
and equity shares. It is because of this deferment of the dividend payment that these
shares are also called deferred shares. The promoters, founders and directors tend to
have direct interest in the success of the company they will receive dividends on
these shares only if the profits are high enough to leave a balance of after paying
dividends to preference an equity shareholders. Besides greater the profits of the
company , the higher will be dividends paid on these shares.
Issued share at a premium:
When a company issues shares at a premium, whether or cash
or consideration other than cash, the premium collected on those shares shall be
62

transferred to a separate account called securities premium account. The provision

of the act relating reduction of shares capital shall also apply to the securities
premium account may be applied by the company in the following ways:
In paying up un issued shares of the company to be issued to members of the
company as fully paid up shares.
1.

In writing off the preliminary expenses of the company.

2.

In writing off the expenses of, or the commission paid or discount allowed on,
any issue of

3.

shares debentures of the company.

In providing for the premium payable on redemption of any preference shares or

debentures.
Issued share at a Discount:
The issue of shares at a discount must be of a class of shares issued by the
Company.
1. The issue of shares at a discount must be authorized by a resolution passed in
the general meeting and sanctioned by the central government.
2. The resolution shall specify the maximum rate of Discount at which the
shares are to be issued.
3. The maximum rate of discount must not exceed 10% unless the central
government is of the Opinion that higher percentage of discount may be allowed in
special circumstances.
4. The shares must be issued within two months from the date of sanction by the
or within such extended time as the central government may allow.
5. The issue of shares at a discount can be done by a company only a year after
the

Commencement of the business by the company.

63

6. In case of revival and rehabilitation of sick industry companies under chapter

VIA, the issue of shares at discount shall be sanctioned by the Tribunal instead of
central government.
7.

Every prospectus relating to issue of shares shall contain the details of

discount allowed on the issue of shares or the unwritten off amount f discount at the
date of issue of prospectus.
8. In case of default, the company and every officer of the company who is in
default shall be punishable with fine which may extend to Rs.500.Shares issued for
consideration other than cash
9.

to the underwriters of shares and promoters by way of payment

remuneration or for
Expenses incurred.
10. To the vendor from whom the running business is purchased, as purchase
price or
Consideration.
11. Issued of bonus shares out of the reserves to the existing shareholders of the
company

DEBENTURES:
Acknowledge of debt , given under the seal of the company and containing a contract
for the
repayment of the principal sum at a specified date and for repayment of the principal
sum at a specified date and for the payment of interest at fixed rate percent until the
principal sum is
repaid,and

it may or may not give the charge on the assets to the company as

security of the
loan.

64

Kind of debentures:
1. Bearer debentures: Bearer debentures are similar to share warrants in
that too are negotiable instruments, transferable by delivery. The interest on bearer
debentures is paid by the means of attached coupons. On maturity, the principal sum
is paid to the bearers.
2. Registered debentures: These are debentures which are payable to the
registered holders i.e.. persons whose names appear in the register of debenture holders.
Such debentures are transferable in the same way as shares.
3. Perpetual or Irredeemable debentures: A debenture which contains
no clause as to payment or which contains a clause that it shall not be paid back is
called a perpetual or : irredeemable debenture. These debentures are redeemable
only on the happening of a contingency on the expiration of a period, however long.
It follows that debentures can be made perpetual, i.e. the loan is repayable only on
winding up or after a long period of time.
4. Redeemable debentures : These debentures are issued for a specified
period of time. On the expiry of the specified time the company has the right to pay
back the debenture holders and have its properties released from the mortgage or
charge. Generally, debentures are redeemable.
5.

Debentures Issued as Collateral Security for a Loan: The term

collateral security or secondary security means, a security which can be realized by

the party holding it in the event of the loan being not paid at the proper time or
according to the agreement of the parties. At times, the lenders of money are given
debentures as a collateral security for loan. The nominal value of such debentures is
always more than the loan. In case the loan is repaid, The debentures issued as
collateral security are automatically redeemed.
1.

Naked debentures: Normally debentures are secured by a

mortgage or a charge on the companys assets. However debentures may be issued

without any charge on the assets of the company. Such debentures are naked or

65

unsecured debentures. They are mere acknowledgment of a debt due from the
company, creating no rights beyond those secured creditors.

2. Secured debentures: when any particular or specified property

of the company is offered as security to the debenture holders and when the company
can deal with it only subject to the prior right of the debenture holders, fixed charge
on the undertaking of the company i.e.. whole of the property of the company, both
present and future, an when it can deal with the property in the ordinary course of
business until the charge crystallized i.e.. when the company goes in to liqudation or
when a receive is appointed, the charge is said to be floating charge. When the
floating charge crystallizes, the debentures holder have right to be paid out of the
assets subjects to the right of the preferential creditor but prior to making any
payment to unsecured creditors.
Methods of redemption of debentures:
A company may issue redeemable as well as irredeemable debentures.
There are two important ways of redeeming the debentures according to the
terms of the issue.

Redemption of debentures on a fixed date:

In this method payment to the debenture holders is made at the expiry

of the stated period. A sinking fund account is created by debiting the profits and
loss appropriation account. The amount so credited in the sinking fund account is
invested in the

gilt edged

securities.

redemption of debentures.

66

The securities are sold at the date of

Redemption of debentures by periodical drawings:

In this method, payment is made year after of a certain portion of the

total debentures by drawing. A such the revenue account is debited with the annual
drawings and the redemption fund account are credited.

Convertible debentures (CDs):

A company may also issue CDs in which case an option is given to the

debenture holders to covert them in to equity or preference shares at stated rates of

exchange, after a certain period. Such debentures once converted in to shares cannot
be reconverted in to debentures. CDs may be fully or partly convertible. In case of
fully convertible debentures, the inter face values converted in to shares at the expiry
of specified period(S). In case of partly convertible

debenture only convertible

portion is redeemed at the end of specified period. Non convertible debenture do not
confer any option on the holder to the debenture in to shares and are redeemed at the
expiry of specified period (s).CDs, whether fully or partly convertible, may be
converted in to shares at the end of specified periods in one or more stages. The
company should get a credit rating of debenture done by credit rating agency. CDs are
listed on stock exchanges. The partly convertible debenture (PCDs) offer more
flexibility to both companies and investors. It has been claimed to be better than
fully convertible debenture as it does not automatically entail large equity base,
particularly in case of new companies. Experience shows that servicing of large base
of capital is not easy in case of new projects, especially if the company runs in to
rough weather due to marketing difficulties. As such, the non-convertible portion
of the debenture keeps the equity of a company within manageable limits.

American Depository Receipts (ADR):

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An American depository receipt (ADR) is a negotiable receipt which represents one

or more
depository shares held by a US custodian bank, which in turn represent underlying
shares of
non- issuer held by a custodian in the home country. ADR is an attractive investment
to US
investors willing to invest in securities of non US issuers for following reasons:

ADR provide a means to US investors to trade the non US company shares in US

dollars ADR
Negotiable receipt (which represents the non US share) issued in US capital market
and is traded in dollars. The trading in ADR effectively means trading in underlying
shares.

ADR facilitates share transfers. ADRs are negotiable and can be easily transferred
among the investors like any other negotiable instrument. The transfer of ADRs
automatically transfers the underlying share.

The transfer of ADRs does not involve any stamp duty and hence the transfer of
underlying share does not require any stamp duty. The dividends are paid to the

holders of
ADRs in US dollars.

ADR OFFERINGS:
A public offering provides access to the broadest US investor base and
most liquid US securities market. The compliance requirements in public offerings
are the strictest and comprise of Registration of underlying security under the Act
(From F1) Registration of ADR under the 1993Act (From F6) Registration under the
1934 Act (if the company is not already Regulation act under the 1934 Act).

68

Global Depository Receipt (GDR):

With the growth in international equity issuance, together with growth in the
underlying
secondary market investment, an increasing need has been felt for better fungibility.
The investors demand stocks that trade freely on an international basis without
restrictions. The depository receipts have be used as a partial solution to this problem.
American depository receiptshave been the favored forms of investments by US
investors in foreign equities. A number of international equity offers, particularly
some

Asian

markets

have

increasingly

used

global

depository

receipts

(GDR),particularly where legal restrictions and closed markets have prevented the
world wide circulation of underlying security on a freely trade basis. The GDRs
continue to have value in liquid or restricted markets and are frequently used by
project companies to raise equity funds.

CHARACTERISTICS OF A GDR:

Depository receipts are negotiable certificates with publicly traded equity of the

issuer as

underlying security.

An issue of depository receipts would involve the issuer, issuing agent to a foreign

depository.

The depository, in turn, issues GDRs evidencing their rights as share holders.

Depository receipts are denominated in foreign currency and are listed of

international exchange such as London or Luxembourg.

GDRs enable investors trade a dollar denominated instrument on an international

stock exchange and yet have rights in foreign shares.

The principle purpose of the GDR is to provide international investors with local

settlement.

The issuer issuing the shares has to pay dividends to the depository in the domestic

currency.
69

The depository has to then convert the domestic currency into dollars for onward

payment to receipt holders. GDRs bear no risk of capital repayment.

DERIVATIVES:
It is a contract whose value depends on or value depends on or derives from the
value of an underlying asset [say a share, forex, commodity or an index]. In its
broadest sense a derivative attempts to hedge against the variability of any economic
variable. Thus exposures or perceived risks to a firm arising from the variation in
interest rates, exchange rates, commodity prices and equity prices can be hedged
through an appropriate derivative structure. Such a derivative structure covers a wide
variety of financial contracts viz. futures, forwards, options, swaps and different
variations thereof. These contracts can be traded on the various exchanges in a
standardized manner or by custom designed for individual requirements. The history
of derivatives can be traced to the middle ages when farmers and traders in grains
and other agricultural products used certain specific types of futures and forwards to
hedge, the risks. Essentially the farmer wants to ensure that he receives a reasonable
price for the grain that he would harvest [say] three to four months later. An over
supply hurt him badly. For the grain merchant, the opposite is true. A fall in the
agricultural

product will push up the prices. It made sense therefore both of them

to fix a price for the future. These was how the future market first developed in
agricultural commodities such as cotton, coffee, petroleum, soya bean, sugar and
then to financial products such at interest rates, foreign exchange and shares. In 1995
the Chicago board of trade commenced trading derivatives. For the derivatives
market to develop three kinds of participants are necessary .They are the hedgers, the
speculators and the arbitrageurs. All three must co-exist.

Participation Hedger:
A hedger is a risk averse. Typically in India he may be a treasurer in a
public sector company who wants to know with certainty his interest costs for the
70

year 2002. therefore based on current information he would enter into a future
contracts and lock up his interest rate four years henceBut in doing so he consciously
ignores what is called the upside potential-here the possibility that the interest rate
may be lower in the year 2002 than what he had contract four years earlier. A hedger
plays it safe. For a hedging transaction to be completed there must be another person
willing to take advantage of the price movements. That is the speculator.

Speculators:
Contrary to the hedger who avoids uncertainties the speculator thrives on
them. The Speculator may lose plenty of money if his forecast goes wrong but stands
to gain enormously if he is proved correct. The risk taking associated with speculation
is an integral part of a derivatives market.

ARBITRAGEUR:
The third category of participant is the arbitrageur, who looks at risk less profit by
simultaneously buying and selling the same or similar financial products in different
markets. Markets are seldom perfect and there is a possibility to take advantage of
time or space differentials that exits. Arbitrage evens out the price variation with the
government of India permitting futures trading in several commodities and with
futures trading have arrived in the stock markets, index based derivative trading has
finally arrived in India. For smooth functioning of derivative trading the government
of India has commenced the process of dematerialization of shares, short sale facility,
electronic fund transfer facility and rolling settlements in stock markets. This will
hopefully bring transparency in the process of price discovery of the derivative and
also attract a board spectrum of the hedgers and speculators from out of
professionally managed corporate that not only must have a good balance sheet but
71

also significant trading and risk management skills. The stock holding corporation of
India has commenced discussions with the premier stock exchanges of India about
setting up a clearing house for derivatives transactions.

Futures:
A futures contract is an exchange traded agreements between two parties
to buy or sell an asset at a specified time in the futures at the agreed price. In the case
of stock index futures contracts the underlying asset is the specified stock index. To
facilitate n the futures contracts, the exchange specifies certain standard features of
the contracts the standards contracts once bought can be sold at any time to square off
the position till the date of expiry of the contract. Similarly, once a futures contract
issold, it can be bought back at any time to square off the position. Thus a futures
contract may be off set prior to maturity by entering into an equal and opposite
transaction. More than 99% of futures transactions are off set this way.

FURTURE TERMINOLOGY:
SPOT PRICE:
The price at which an asset trades in the spot market.
FURTURE PRICE:
The price at which the future contract trades in the futures market.
CONTRACT CYCLE:
The period over which a contract trades. The index futures contracts on the NSE as
well as BSE have one-month and two-months and three-months expiry cycles, which
expire on last Thursday of the month. Thus a July expiration contract would expire on
the last Thursday of July. On the Friday following the last Thursday, a new contract
having a three - months expiry would be introduced for trading. More generally we
can say, on the first trading day after the day of the expiry of the months future
contract a new contract having a three - months expiry would be introduced for
trading.

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EXPIRY DATE:
It is the date specified in the future contract. This is the last day on which the contract
will be
traded. I will cease to exist by the end of that day.
CONTRACT SIZE:
The amount of asset that has to be delivered under one contract. The contract size of
the stock index futures on NSE nifty is 200 and the contract size of the stock index
futures on BSE Sensex is 50.
BASIS:
Basis is usually defined as the spot price minus the futures price. There will be a
different basis for each delivery month for same asset at any point in time. On 19 th
June 2001 nifty closed at 1096.65. August 2001 nifty futures closed at 1098.90.
Therefore the basis for the August nifty futures is -2.25 index points. In a normal
market, basis will be negative. This reflects the fact that the underlying asset is to be
carried at a cost for delivery in the future.
COST OF CARRY:
The relationship between futures prices can be summarized in terms of what is known
as the cost of carry. This measures the Storage cost plus the interest that is paid to
finance the asset less the income earned on the asset. In the case of stocks, dividend
will be the income earned on the asset. The storage cost will be negligible.
INITIAL MARGIN:
The amount that must be deposited in the margin account kept with the broker at the
time a futures contract is first entered into is known as initial margin. Margins are to
be strictly collected in the future and options markets by brokers as per the exchange

73

regulations. Otherwise the exchange cannot guarantee the trades to all participants in
the market.
MARKING TO MARKET
In the futures market, at the end of each trading day, the margin account is a adjusted
to reflect the investors gain or loss depending upon the futures closing price or
settlement price. This is called Marking-to-Market.
MAINTENANCE MARGIN:
If the balance in the margin account falls below the maintenance margin, the investor
receives a margin call and is expected to top up the margin account to the initial
margin level before trading commences on the next day.

BETA:
Beta is a concept to be used futures and options for hedging. Beta measures the
sensitivity of a share or a portfolio to that of the index. Beta of a share is found out by
relating the daily price changes of a share to the daily changes in a stock price index.
If a graph is drawn with daily changes of the share price on y axis and daily changes
in the index on x axis the slope of the straight line fitted will be the value of beta.
mathematically it is found by regression method. If the beta of Tisco is found to
bel.23,it implies if the index increases by 10% in a period, price of Tisco will increase
by 12.3%. Beta of the portfolios is found by weighted average of the betas of the
shares in the portfolios. For example, an investors portfolio has equal value in Tisco
and Infosys. Tisco has a beta of 1.23 and Infosys has a beta 1.37. the portfolio beta is
the average of 1.23 and 1.37 which is 1.3.NSE website is providing values of beta for
a large number of shares.

74

SPECULATORS AND HEDGERS IN FUTURES:

Speculators buy and sell derivatives to make profit, while hedgers buy and sell
derivatives to reduce risk. Speculators are vital to derivatives markets. They facilitate
hedging and provide liquidity. It is highly unlikely that hedger wishing to buy futures
will precisely match hedgers selling futures in terms of contracts to be traded. If
hedgers are net sellers there will be tendency for futures prices to fall. Speculators
will buy such under period futures. Such purchases by speculators allow net sales on
the part of hedgers. In so doing, they tend to maintain price stability since they are
buying into a falling market. Proper speculation thus provides stability to prices in
markets.In a liquid market, hedgers can make their transactions with ease and with
little impact costs. Speculative transactions add to market liquidity. speculators by
definition do a lot of information search and processing to forecast future behavior of
prices. Therefore they make markets more information ally efficient. In the stock
index futures markets speculators have two alternative strategies. If they are bullish
on the index they can go long on index Futures. If the spot prices go up, future prices
follow them along with their carry premiums and the speculators make the profits.If
the speculator is bearish he can go short on the index futures. If the spot Index goes
down, futures price also will go down and speculator makes a profit. The two
speculative strategies can be summarized as:
Bullish market,

long

index

futures

Bearish market,

short

index

futures

ARBITRAGE IN FUTURE AND SPOT MARKET:

Future prices and spot prices are tightly linked by the fair price formula. Also on the
day of the expiry, the final settlement price of the future is made equal to the spot
index price. thus at the end , the spot and futures prices converge. Any deviation
between the fair price and actual price of a future can be utilized for earning risk less
profits by agents who are willing to buy in the spot market and deliver in future at
expiry. Such operations are called as arbitrage operations. Buying in the spot and
75

delivering in the future market is resorted to when actual futures price in the market is
higher than the fair price. if the actual future price is lower than the fair, then futures
are bought and shares are sold in the spot market to carry out the arbitrage operations.

Introduction to options:
Options give the holder or buyer of the option the right to do something. If the option
is called option, the buyer or holder has the right to buy the number of shares
mentioned in the contract at the agreed strike price. if the option is a put option, the
buyer of the option has the right to sell the number of shares mentioned in the
contract at the agreed strike price. the holder or the buyer does not have to exercise
this right. Thus on the expiry of day of the contract the option may or may not be
exercised by the buyer. In the contrast, in a futures contract, the two parties to the
contract have committed themselves to doing something at future date. To have this
privilege of doing the transaction at a future only if it is profitable, the buyer of
options has to a premium to the seller of options.

HISTORY OF OPTIONS:
In 1983 trading on stock index options contracts started. Since 1983, trading on
options of
individual options decreased as most of the trading shifted to index options. One of
the reasons is that volatilities of the individual scripts is high and therefore premiums
on individual scripts is also high. In India stock index options were introduced in june
2001.

OPTION TERMINOLOGY:
INDEX OPTION:
An option having the index as the underlying asset. Like index futures contracts,
index option contract are also called cash settled.

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STOCK OPTIONS:
Stock options are options on individual stocks. A contract gives the holder the right to
buy or sell shares at the specified price.
AMERICAN OPTIONS:
American options are options that can be exercised any time up to the expiration date.
This name is only a classification and does not imply that they are available only in
America.
EUROPEAN OPTIONS:
European options are options that can be exercised only on the expiration date.
European options are easier to analyze than American options, and properties of
American options are frequently deducted from those of its European counterpart.
CALL OPTIONS:
A call option gives the holder the right but not the obligation to buy an asset by a
certain date for a certain price.
PUT OPTIONS:
A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price.
BUYER OF OPTIONS:
The buyer of the option, calls or put, pays the premium and buys the right but not the
obligation to exercise his option on the seller/writer.

77

WRITER OF AN OPTION:
The writer of a call/put option is the one who receives the option premium and is
thereby obliged to sell/buy the asset if the buyer exercises on him. Option writer is the
seller of the option contract.
STRIKE PRICE:
The price specified in the option contract at which buying or selling will take place is
known as the strike price or the exercise price.
OPTIONS PRICE:
Option price is the premium, which the option buyer pays to the option seller or
writer. Black and schools formula is widely used for determining the fair value of
share.
EXPIRATION DATE:
It is the date on which the European option is exercised. It is also called as exercise
date, strike date or maturity date.
INTRINSIC VALUE OF AN OPTION:
The option premium cab be broken down into two components- intrinsic value and
time value.The intrinsic value of an option is the amount, which the holder will get
by exercising his option and immediately selling or buying the acquired shares in the
spot market. For example, if the strike price of a call option on Reliance shares is
Rs.325 and current market price is Rs.350. The holder of the option can buy the
Reliance share at Rs.325 by exercising the option and can make a profit of Rs.25 by
immediately selling them in the market. In this case the intrinsic value of the call
option is Rs.25.

TIME VALUE OF THE OPTIONS:

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The time value of an option is the difference between its premium and its intrinsic
value.
AT-THE-MONEY:
An option is called at-the-money option when the strike price equals, or nearly
equals, the spot price of the share. For example, if the strike price of stock index
option on Nifty index is also at 1080, the option is called at-the-money option.
SPOT PRICE > STRIKE PRICE
IN-THE-MONEY:
A call option is in the money when the underlying asset price is greater than the strike
price. For example, if the strike price in the case of Nifty stock index option is 1050
and Nifty is at 1080, the option is in-the-money option.
SPOT PRICE = STRIKE PRICE
OUT-OF-THE-MONEY:
A call option is out-of-the-money if the strike price is greater than the underlying
asset price. For example, if the strike price in the case of Nifty stock index option is
1100 and Nifty is at 1080, the option is out-of-the-money option.
SPOT PRICE < STRIKE PRICE
USES OF OPTIONS:
Like futures options are also used for hedging and speculations. Arbitrageurs can look
for Mispricing between spot, option and futures markets and do transactions
whenever they find miss pricing.
TRADING OR SPECULATING WITH OPTIONS:
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Options provide multiple opportunities for trading. Options premiums are determined
by volatility of the underlying asset, time to expiration of the option and the risk free
interest rate .Changes in any of these variables changes option premiums even though
the price of the underlying asset remains constant. Thus a speculator who analyses
multiple dimensions has a lot more opportunity in options to strategize and act.
ARBITRAGE WITH OPTIONS:
Arbitrage involves making risk less profits from miss pricing; relatively under priced
options are bought and relatively overpriced are sold. Pure arbitrage requires that
none of the arbitragers own capital is used. He should be able to borrow all the capital
required. If the arbitrager uses his own capital, the process is called quasi-arbitrage.
There will be number of situations providing arbitrage opportunity as three markets,
spot, futures and options are involved
SUMMING UP:
Options are used by hedgers and speculators. Options provide a variety of ways in
which they can be used to attain the hedging and speculative objectives. Thus trading
interest comes from different participants with different motives. Arbitrageurs will
have opportunities whenever option premiums are out of line with the fair prices. A
fully developed option market provides a good market for traders to display their
trading expertise and hedgers an alternative-hedging medium.
FORWARD CONTRACTS:
In order to avoid this risk one way could be that the farmer may sell his crop at an
agreed-upon rate now with a promise to deliver the asset, i.e., crop at a predetermined date in future. This will at least ensure to the farmer the input cost and a
reasonable profit.

Thus, the farmer would sell wheat forward to secure himself

against a possible loss in future. It is true that by this way he is also foreclosing upon
him the possibility of a bumper profit in the event of wheat prices going up steeply.
But the, more important is that the farmer has played safe and insured himself against
any eventuality of closing down his source of livelihood altogether. The transaction

80

which the farmer has entered into is called a forward transaction and the contract
which covers such a transaction is called a forward contract.
QUICK AND LOW COST TRANSACTIONS:
Futures contracts can be created quickly at low cost to facilitate exchange of money
for goods be delivered at future date. Since these low cost instruments lead to a
specified delivery of goods at a specified price on a specified date, it becomes easy
for the finance managers to take optimal decisions in regard to production,
consumption and inventory. The costs involved in entering into future contracts in
significant as compared to the value of commodities being traded underlying these
contracts.
Price discovery function:
The price of futures contracts incorporates a set of information based on which the
producers and the consumers can get a fair idea of the future demand and supply
position of the commodity and consequently the futures spot price. This is known as
the price discovery function of futures.
Advantage of informed individuals:
Individuals, who have superior information in regard to factors like commodity
demand supply, market behavior, technology changes etc., can operate in futures
markets and impart efficiency to the commoditys price determination process. This
in turn leads to a more efficient allocation of resources.
Hedging Advantage:
Adverse price changes, which may lead to losses, can be adequately and efficiently
hedged against through futures contracts. An individual who is exposed to the risk of
an adverse change while holding a position, either long or short a commodity will
need to enter into a transaction which could protect him in the event of such an
adverse change. For example a trader who has imported a consignment of copper and
the shipment is to reach within a fortnight may sell copper futures if he foresees fall
in copper prices. In case copper prices actually fall, the trader will lose on sale of
copper but will recoup through futures. On the contrary if copper prices rise, the
81

trader will honour the delivery of the futures contract through the imported copper
stocks already available with him.

Employee stock option plans:

Employees stock options means the options given to the whole-time directors,
officers or employees of acompany, which gives such directors, officers or employees
the benefit or right to purchase or subscribe at a future date, the securities offered by
the company at a pre-determined price. Stock option is defined as the right to buy a
designated stock at an option of the holder at any time within a specified period at a
determinable price. it can also represents the right to sell designated stock within an
agreed period at a determinable price.
Benefits of ESOPs:
The ESOPs will benefit the organization in the following ways:

It is used as a HRD tool by the management in connection with restriction of

higher turnover of the employees and retaining the best talents with the organization.

The plan is used as a technique of corporate financing modernization, expansion,

spin-off a division, acquisition etc.

Issuing share, alternative to cash, have no immediate effect until they are
converted into cash Affecting new monetary supply into the real company.

Employees stock ownership plans in USA is used to avoid hostile takeover.

Without any financial strains the employees are rewarded by

printing of share certificated only.

82

Studies undertaken in USA on ESOPs suggest that they tend to out perform their
traditionally organized counterparts in variety of ways, better survival rates, higher
productivity, a better employment and sales growth and higher net operating margins.

List of Bond:
1. Zero Interest Bond:
It refers to those bonds which are sold at a discount from their eventually
maturity value and have zero interest rate. These certificates are sold to the investors
for discount the difference between the face value of the certificates and the
acquisition cost is the gain to the investors. The investors are not entitled to any
interest and are entitled to only repayment of principle sum of the maturity period.
The individual prefers ZIB because of lower investment cost and low rate of
conversion to equity if ZIBs are fully or partly convertible bonds. This is also a means
of tax planning because the Bond doesnt carry any interest, which otherwise taxable.
Company also find ZIB quite attractive because there is no immediate commitment.
On maturity the bond can be converted into equity share or convertible debentures
depending on the requirement of capital structure of a company.
2. Deep Discount Bond( DDB):
The IDBI for the first time issued DDB for a deep discount price of Rs 2700/- an
investor gets bond with a face value of Rs 100000/-. The DDB appreciates to its face
value over the maturity period of 25 Years. The unique advantage of DDB is the
elimination of investment risk. It allows an investor to lock in the yield to maturity or
keep on withdrawing from the scheme periodically after 5 years by returning the
certificate.The main advantage of DDB is that the difference between the sell price
and the original cost of acquisition will be treated as Capital gain, if the investor
sends the bonds on stock exchange.The DDB is safe, solid and liquid instrument.
Investors can take advantage of these new instruments in balancing their mix of
securities to minimize the risk and maximize returns.
83

3. Callable Bonds:
A callable bonds is a bond which the issuer has the right to call in and
payoff at a price stipulated in the bond contract. The price the issuer must pay to retire
a callable bond when it is called is termed as call price. The main advantage in
callable bond is the issuers have an incentive to call their existing bonds if the current
interest rate in the market is sufficiently lower than the bonds coupon rate. Usually
the issuer cannot call the bond for a certain period after issue.
4. option tender bonds:
The option tender bonds are bonds with put option which give the
bond holders the right to sell back their bonds to the issuers normally at par. Issuers
with put are aimed both at investors who are pessimistic about the ability of interest
rates to decline over the long term and at those who simply prefer to take cautious
approach to their bond buying.
5. Guaranteed Debentures :
Some businesses are able to raise long term money because
their debts are guaranteed, usually by their parents companies. In some instances the
state governments guaranteed the bonds issued by the state government undertaking
and corporation like electricity supply board, irrigation corporation etc.
6. subordinated debentures:
A subordinated debenture is an unsecured debt, which is junior to
all other debts i.e.. other debt holders must be fully paid before the subordinated
debenture holders receive anything. This type of debt will have a higher interest rate
than more senior debt and will frequently have rights of conversion into ordinary
shares. Subordinated debt is often called mezzanine finance because it ranks between
equity and standard debt.
7. Floating rate bond:
84

The interest paid to the floating Rate bondholders changes periodically

depending on the market rate of Interest payable on thegilt-edged securities these
bonds are called adjustable interest bond or variable rate bonds.

8. Junk bond:
Junk bonds are a high yield security which because a widely used source of finance in
take overs and leveraged buyouts. Firms with low credit ratings willing to pay 3 to 5
% more than the high grade corporate debt to compensate for the greater risk.
9. Indexed bonds:
Fixed income are fixed sum repayments are uneconomic in times of rapid
inflation. Indexed bond is financial instrument which retain the security and fixed
income of the debenture but which also provides some safeguard against inflation.
10. Inflation adjusted bond:
IABs are bonds which promise to repay both the principal and
interest, by
floating both these amounts upwards in line with the movements in the value of the
specific index of commodity prices.

85

CHAPTER-IV
DATA ANALYSES AND INTERPRETATION

86

STOCK MARKET
Company :DR.REDDY'S LABORATORIES LTD. 500124
Period: 02-Dec-2014 to 23-Jan-2015
All Prices in
Date

Open

High

22Jan-15

3330

3369

21Jan-15

3294

3344.8

20Jan-15

3321.5

Low

Close

WAP

3330 3361.45 3354.701

No. of No. of Total

Shares Trades Turnover
12323

2142

41339977

3328 3304.423

12232

2236

40419705

3336.5 3293.35 3304.85 3311.706

10090

1514

33415114

13719

2342

45386437

3252.8

19Jan-15

3267 3324.95

3267

16Jan-15

3242

3299

3242 3280.45 3257.667 303915

15Jan-15

3220

3251.6

3204.4

3314.9

3308.29

3202 990053942

3238.4 3232.738

11014

1972

35605378

14Jan-15 3223.85 3223.85 3195.25 3207.05 3210.695

21574

4666

69267530

87

13Jan-15

3202.1

3237.1 3191.35 3223.85 3221.563

12Jan-15

3160 3216.45

9-Jan15

3076

8-Jan15

3054 3090.05

7-Jan15

3065 3070.35 3013.55

6-Jan15

3137

3137

5-Jan15

3222

3232

1779

24454888

3202.1 3189.487

32539

9643 103782731

3076 3163.85 3137.734

30017

6310

94185362

3045

3065.4 3066.461

11510

2090

35294969

3043.5

3035.5

26398

4306

80131142

3060 3065.45 3082.979

18830

3653

58052487

3146.8 3157.898

42604

3871 134539073

2-Jan15 3223.65

3266 3210.75 3217.35 3227.766

6630

1247

21400088

1-Jan15

3244

3211.6 3218.744

9529

1443

30671411

3260 3169.05 3244.95 3234.509

17677

3561

57176424

3244

31Dec14 3169.05

3172.5

3127.7

7591

3132.6

3203

30Dec14

3135 3184.95

3135 3180.55 3168.576

7762

1647

24594485

29Dec14

3140 3160.25 3133.75 3140.45 3145.545

6304

1399

19829513

3115.1 3129.85 3132.803

11905

2272

37296023

3190.1 3130.75 3139.15 3155.863

20806

3401

65660890

21770

4093

70043639

26Dec14

3137.8

24Dec14

3180

23Dec14

3235 3235.95

3155

3194.7 3205.25 3217.439

88

22Dec14

3199

3252

3174

19Dec14

3178.5

3221

3171 3198.65

18Dec14

3200

17Dec14

3117

16Dec14

42700

3613 137991558

3202.86

22780

4014

3150.5 3185.406

70141

4911 223427538

3212.6

3060 3160.45 3139.307

48245

8396 151455873

3315 3330.25

3122 3142.05 3199.572

59158

9605 189280276

3381.1 3305.75 3354.15 3346.377

8289

1768

27738121

3219 3125.05

3246.4 3231.652

72961158

15Dec14

3381.1

12Dec14

3405

3427.6

3360.9 3373.75 3399.927

15739

2875

53511457

11Dec14

3390.3

3448

3335 3430.05 3401.475

18062

3604

61437434

10Dec14

3369

3419.9

3339.5 3400.95 3386.769

11815

2840

40014670

9Dec14

3329.8

3379.2

3322 3354.85 3349.963

13430

1934

44989999

8Dec14

3394.8

3403.8

3305

3314.8 3334.237

18519

4652

61746744

5Dec14

3485

3485

3381.2 3394.65 3420.024

23253

3366

79525818

89

4Dec14

3510 3523.65 3462.85 3472.25 3484.992

19812

3635

69044662

No. of Trades
4,000
3,500
3,000
2,500

No. of Trades

2,000
1,500
1,000
500
0

INTERPRETATION:
On open value has risen from 3330.51 to 3361.45. Then compare to higher
value of EPS 3266.68. Then coming to lower price from 36000.02 to 3626.38.
Wholly the conclusion is 3266.85 raised.
Then coming to the volume on the same dates or days volumes are
increased. Because totally this session DR.REDDY'S LABORATORIES LTD. EPS
value is increased i.e. percentage of 29.17%.

Company :Heritage Foods Limited 519552

90

Period: 02-Dec-2014 to 23-Jan-2015

91

Date

Ope
n

High

Low

22-Jan-15

398.1

407.6

394.95

21-Jan-15

398.7

402.65

20-Jan-15

403.2

19-Jan-15

Close
396.4

WAP

No. of
Shares

No. of
Trades

Total
Turnover

399.658

7866

882

3143710

390

394.85 394.9988

9898

1113

3909698

405.7

396.55

400.75 400.7749

4567

433

1830339

399

410.75

390

401.7 405.3161

8324

1033

3373851

16-Jan-15

395

402

390.15

398.65 396.7984

4693

444

1862175

15-Jan-15

399.9

403

391.2

394.05 396.3239

9620

772

3812636

14-Jan-15

393

396.85

386.1

390.95 391.9377

4286

384

1679845

13-Jan-15

398

401

390.5

391.15

396.559

7742

666

3070160

12-Jan-15

389

399.4

389

394.8 396.1577

14590

1145

5779941

9-Jan-15 389.65

391

380.25

385.65 385.4796

6928

574

2670603

8-Jan-15 388.75

394.2

383.7

388.5 388.0841

16494

1148

6401059

7-Jan-15

377.3

389.95

369.3

382.45 378.9626

13516

1213

5122058

6-Jan-15

389

389

375.05

376.85 380.7945

14504

1427

5523043

5-Jan-15 386.15

401.25

380.95

392.4 393.9385

26258

2361

10344036

2-Jan-15

380

389.7

380

382.5 385.7167

10833

1017

4178469

1-Jan-15

376

380

376

377.65 378.2054

3973

359

1502610

31-Dec-14 374.35

379.75

370

375.6 375.1631

9402

753

3527283

30-Dec-14

374.6

380.3

370

372.35 374.4985

6594

623

2469443

29-Dec-14

381.7

383.8

373.5

374.8 378.0257

6310

750

2385342

26-Dec-14

380

389.1

375.35

377.95 381.9854

8861

937

3384773

24-Dec-14 391.85

392.8

377

382.3 386.2734

5845

537

2257768

23-Dec-14

394.6

398

380.6

385.95 390.8327

10813

679

4226074

22-Dec-14

389.6

394

389.6

390.65 391.5617

5441

358

2130487

19-Dec-14

390.2

401.75

384

387.25 394.6524

16087

1454

6348773

18-Dec-14

375

395

375

384.5 387.2399

28282

2404

10951919

17-Dec-14 373.55

382.95

358.1

371.3 370.5324

19091

1278

7073835

384

367.85

373 373.2572

10605

1278

3958393

16-Dec-14

384

92

No. of Shares
35000
30000
25000
No. of Shares

20000
15000
10000
5000
0

INTERPRETATION:
On open value has risen from 389.92 to 393.45. Then compare to higher
value of EPS 390.84. Then coming to lower price from 398.12 to396.47. Wholly the
conclusion is 391.55 raised.
Then coming to the volume on the same dates or days volumes are
increased. Because totally this session Heritage Foods Limited. EPS value is
increased i.e. percentage of 11.54%.

93

Company :HERO MOTOCORP LTD. 500182

Period: 02-Dec-2014 to 23-Jan-2015

94

Date

Open

High

22-Jan-15

2920

2920

21-Jan-15

2830 2895.75

20-Jan-15

2859

19-Jan-15
16-Jan-15

Low

Close

WAP

2815.6 2838.15 2855.027

No. of
Shares

No. of
Trades

Total
Turnover

38052

6423

108639495

2830

2876.5 2858.825

35779

6760

102285884

2797.2

2827.7 2824.009

38720

8281

109345644

2900 2920.55

2835 2841.75 2865.565

31963

6139

91592070

2942 2954.75

2892 2896.85

2913.24

32980

6813

96078655

15-Jan-15 2915.05

2965 2915.05 2950.25 2945.426

17524

2576

51615645

14-Jan-15 2882.55

2922 2882.55

2905.2 2898.807

41818

6790

121222325

2925 2957.75 2887.25

2893.7 2913.776

31553

6970

91938365

12-Jan-15 2990.25 2990.25 2925.65

2936.2 2949.549

22901

3979

67547617

13-Jan-15

2860

9-Jan-15

3000

3010 2968.55 2993.15 2991.348

16513

3060

49396123

8-Jan-15

2980 2998.65 2954.05 2984.45 2976.154

28043

4622

83460273

7-Jan-15

3005

3019.8 2967.05

2977.1 2987.556

16164

3841

48290850

6-Jan-15

3100

3100 3001.05

3011.8 3043.407

20237

4573

61589419

5-Jan-15

3100

3149.2 3098.55 3118.65 3127.453

29509

3586

92287997

2-Jan-15

3110

3117.8 3092.55 3097.75 3103.054

9620

1976

29851378

1-Jan-15

3100

3121.9

3081.6

3107.3 3101.609

9228

1550

28621652

31-Dec-14

3079

3118.7

3050.2

3103.4 3088.951

17946

3010

55434313

30-Dec-14 3145.5

3146.1 3072.65 3084.85 3108.162

9771

2002

30369852

29-Dec-14

3097

3157.6

10656

2134

33425085

26-Dec-14 3106.65

3113

3072

3097.3

3091.1

6966

1280

21532601

24-Dec-14

3145

3160

3087

3108.9 3125.573

8657

1802

27058087

23-Dec-14

3115

3155.5

3103.7

3140.1 3138.442

7689

1655

24131483

22-Dec-14 3063.3 3136.05

3061.8

3115.6 3095.366

12337

2078

38187530

19-Dec-14

3090

3041.3

3063.3 3103.372

28496

3662

88433702

18-Dec-14

3090

3110 3028.25 3067.05 3050.246

51371

4000

156694191

17-Dec-14

3128

3200 3046.15

3083.42

15544

2770

47928678

16-Dec-14

3140 3150.85 3121.15

3134 3135.915

7556

1614

23694975

3147.1

3097 3150.85 3136.738

3061.9
95

No. of Shares
60000
50000
40000
No. of Shares
30000
20000
10000
0

INTERPRETATION:
On open value has risen from 2920.25 to 2838.15. Then compare to higher
value of EPS 3047.06. Then coming to lower price from 3199.95 to 3217.03. Wholly
the conclusion is 3145.65 raised.
Then coming to the volume on the same dates or days volumes are
increased. Because totally this session HERO MOTOCORP LTD. EPS value is
increased i.e. percentage of 16.27 %.

96

Company :ITC LTD. 500875

Period: 02-Dec-2014 to 23-Jan-2015
All Prices in

97

Date
22Jan15
21Jan15
20Jan15
19Jan15
16Jan15
15Jan15
14Jan15
13Jan15
12Jan15
9-Jan15
8-Jan15
7-Jan15
6-Jan15
5-Jan15
2-Jan15
1-Jan15
31Dec-

Ope
n

Clos
e

No.
of
Trades

Total
Turnover

Low

353

359.6

348.9 350.35 356.8064 2440877

17006 870920536

372.7

373.6

349.2

352.6

37883 637820149

358.4

372

358.4

371.2 366.9447

553506

361.8 356.05

358.4 359.0509

220147

5480

79043987

358.15 360.15 354.75

359.3 358.0374

205070

4860

73422731

358 355.8332

390820

8653 139066718

349.533

745803

17160 260682742

357 360.25 359.9008

210490

5335

75755509

358.45

361.5 356.25 357.95 358.2032

244177

8511

87464985

363.85

365.8 353.15

356.7 357.2258

424725

10050 151722728

356

363.3 355.25 362.45 359.0688

287774

8645 103330656

360.6

364 352.95 353.55 356.0336

416574

9035 148314333

370 359.15

360.6

363.914

708040

9536 257665680

369

372

369.8

369.801

292017

7042 107988179

368

370.2

367.5 368.25 368.5461

188501

4376

69471301

368

369

366.1 367.05 367.1251

127759

2702

46903531

360.5

354

359.9 350.95

359

359

358

361.4

369.75

346.1

368

WAP

No. of
Shares

High

357.97 1781770

348.4

98

11126 203106085

No. of Shares
3000000
2500000
2000000

No. of Shares

1500000
1000000
500000
0

INTERPRETATION:
On open value has risen from 353.00 to 350.35 than compare to higher value
of EPS 367.51. Then coming to lower price from 373.00 to382.75. Wholly the
conclusion is 371.24 rise.
The comings to the volume on the same dates or days volumes are
increased. Because on this session ITC LTD value is raised i.e. percentage of 4.15%.

99

CHAPTER-V
100

 FINDINGS
SUGGESSIONS
CONCLUSIONS
BIBLIOGRAPHY

FINDINGS

Lower price from 373.00 to382.75. Wholly the conclusion is 371.24 rise. The
comings to the volume on the same dates or days volumes are increased.
Because on this session ITC LTD value is raised i.e. percentage of 4.15%.

Lower price from 36000.02 to 3626.38. Wholly the conclusion is 3266.85

raised. Then coming to the volume on the same dates or days volumes are
increased. Because totally this session DR.REDDY'S LABORATORIES
LTD. EPS value is increased i.e. percentage of 29.17%.

101

Lower price from 398.12 to396.47. Wholly the conclusion is 391.55 raised.
Then coming to the volume on the same dates or days volumes are increased.
Because totally this session Heritage Foods Limited. EPS value is increased
i.e. percentage of 11.54%.

Lower price from 3199.95 to 3217.03. Wholly the conclusion is 3145.65

raised. Then coming to the volume on the same dates or days volumes are
increased. Because totally this session HERO MOTOCORP LTD. EPS
value is increased i.e. percentage of 16.27 %.

CONCLUSION
Capital market is an innovation to cash market. Approximately its daily turnover
reaches to the equal stage of cash market. The average daily turnover of the NSE
derivative segments. In cash market the profit/loss of the investor depend the market
price of the underlying asset. The investor may incur huge profits or he may incur
huge profits or he may incur huge loss. But in derivatives segment the investor the
investor enjoys huge profits with limited downside. In cash market the investor has
to pay the total money, but in derivatives the investor has to pay premiums or
margins, which are some percentage of total money. Derivatives are mostly used for
hedging purpose. In derivative segment the profit/loss of the option writer is purely
depend on the fluctuations of the underlying asset.

102

 The comprehensive study of capital market instrument at Inter Connected

stock exchange has been an enlightening experience stressing on the
positive aspects on Dematerialization.
And settlement of shares, derivative market and capital instrumentshas
done in whole lot of good to the issuer, investor companies and country.
The depository systems has reduced the lag in delivery and settlement of
securities but also supported the cause of providing more liquidity to the
security holder, the need for setting up of a depository paper less trading.
Through online trading system and settlement became inevitable and
unavoidable for the smooth and the efficient functioning of the capital
market.
Now there is a proposal that the settlement will be done within T+1days in
near future which is in it an indication of a boon in the system of demat
and capital market instruments.
It has been fairly long since derivative trading started off on the Indian
Indexes.
Actively has failed to really take off with low figures being transacted in
terms of value and volumes.
The introduction of derivative trading was hailed by the punters in the
capital markets but has not really brought about a wave so as to speak.
There are several factors, which impede the growth of the derivative
markets in India.

103

 Of these factors the absence of clear guidelines on tax-related issues and

the high cost of transactions are the most prominent.

SUGGESTIONS
There must be prohibition on disposal of promoters share holding, and
also restrictions and the expansion without prior approval of the financial
institutions for declaration of higher amount/ rate.
The availability of derivative products in eluding index futures, index
options, individual stock futures and individual stock options re-enforces
the overall attractiveness of this
investors.

104

market to foreign and domestic

 Volume of paper work is small but it is very complicated to maintain data

in system so tries to reduce that by regular audit and updating data.
Most of the DPs do not have the necessary infrastructure to handle the
high work load of transactions leading to may error by DPs, so by giving
full infrastructure information to every DO can avoid this problem.
The pool account doesnt know the true owner of the share and hence
dividends are paid to the broker instead of owners by this the broker can
do any manipulation or any fraud with the owner, for this the owner can
lose his dividend.
If the shares are fake/forged which delivery by the broker the share holder
can lose that shares and have to receive another lot of issued shares from
the broker in 21 days, this system stands abused.
So minimize that waiting days are deliver the issued shares to the share
holder as soon as Possible.

BIBLIOGRAPHY

Web sites Referred:

Bajacapital.com

Sebi.com

Nseindia.com

105

Yahoo.com

Economywatch.com
Referred Text Book:
V.K. Balla Financial Investment
Gordon & Natarajan Financial Markets and Services

106