Secondary Market

1. Secondary Market
(Stock Exchanges)
S.R.Deepika
Assistant Professor
Department of BBA
Kristu Jayanti College

2. Introduction
• The financial market where existing securities are traded is
referred to as the Secondary market or stock market
• It provides liquidity to financial instruments which are already
issued in primary market
• For effective functioning of the secondary market, proper
control is exercised through the following three important
processes:
– Recognition of stock exchanges
– Listing of securities in stock exchanges
– Registration of brokers

3. Functions/Services/Features/Role
• Ideal Meeting Place
• Providing safety to investors
• Liquidity
• Speculative trading
• Sound price setting
• Economic barometer
• Dissemination of market data
• Perfect market conditions

4. Cont..
• Efficient channeling of savings
• Optimal resource allocation
• Platform for public debt
• Motivation for Improved performance by companies
• Availability of business information
• Evaluation of securities
• Investor education
• Industrial financing and Company regulation
• Enable the investors to reduce their risks through diversified portfolio

5. Definition of Stock Exchange
• The securities Contract regulation act of 1956 defined stock exchange
as “an association, organization or an individual whether
incorporated or not , established for the purpose of assisting,
regulating and controlling business in buying, selling and dealing in
securities.” Under the said act following securities can be traded in
the stock exchange:
• Shares, debentures, or other marketable securities of like nature of
any incorporated company
• Government securities
• Rights securities

6. History of Stock Exchanges
• The first organized stock exchange in India is BSE which was
established in 1875 but trading in securities used to take place
much earlier in the 18th century
• Dealings were not regulated by any code of rules, nor any hours of
business or committee to supervise the conduct of members
• The advent of English East India company in the 18th century
dominate business in securities and loan transactions
• Evidence of the existence of the trading in stocks of banks and
certain companies is available in price quotations in newspapers

7. Cont…
• In 1836 the “Englishman” of Calcutta reported the loans of East
India Company as well as shares of Bank of Bengal
• Shares of banks like the “ Corporation Bank”, the “Chartered
Mercantile Bank”, the “Oriental Bank”, and the old “Bank of
Bombay” were traded
• In 1839 the trading list was broader, where newspapers gave
quotations of “Agra bank”, “union bank”, etc..
• Between 1840 -50, banks recognized about half – a – dozen
brokers and merchants in Bombay

8. Cont..
• The American civil war of 1860 – 65 had widespread impact on the Indian
share market.
• Supply of cotton to Europe was totally stopped, and there was an unlimited
demand for Indian cotton
• Brokerage business became attractive and in 1860 there were 60 brokers
• Premcahnd Roychand who was called the Napoleon of Finance was the first
broker to read and speak in English
• By the mid 19th century, railways were extended, telegraph were
introduced, and hence communication expended that led to rapid
development of commercial activity.

9. Indian Stock Exchanges
Origin and Growth
Before World War I – 3 exchanges
• Bombay stock exchange (1875)
• Ahmadabad stock exchange (1894)
• Calcutta stock exchange (1908)
After World War II – 1956 SCRA granted recognition to
establish regional stock exchanges

10. Mode of Organization
• In India stock exchanges can freely establish themselves in
any form of organization
• Voluntary Associations – BSE, Ahmadabad Stock Exchange
and Indore Stock exchange
• Public Ltd companies – Exchanges in Calcutta, Chennai, Delhi,
Bangalore, Cochin, etc.. However shares not freely
transferable
• Companies Ltd by guarantee – Exchanges in Hyderabad, Pune,
Bhubaneswar, etc..

11. Regulation of stock Exchanges
All stock exchanges were subject to self-regulation till 1956, but now
there is a 3-tier regulation
• First level – Central government (Ministry of Finance)
• Second level – SCRA, SEBI
• Third level – Self regulation
– Listing Department
– Operations Department
– Computer and EDP Department
– Inspection and Audit Department
– Monitoring Department
– Investor Service Department

12. BSE
• Year of Establishment – 1875
• Index - S&P BSE SENSEX (30 stock index)
• Trading Time - Monday to Friday (9:15 a.m. - 3:30 p.m. )
• No. of Companies Listed – More than 5500 (world's No. 1
exchange in terms of listed members)
• Settlement Cycle – T+ 2 days
• Automated, screen-based trading platform called BSE On-Line
Trading (BOLT) has a capacity of 8 million orders per day

13. NSE
• Year of Establishment – 1992 ( first exchange in the country to provide a
modern, fully automated screen-based electronic trading system)
• Index – S&P CNX NIFTY (50 stock index)
• No. of Companies Listed – More than 1300
• The world’s 12th-largest stock exchange as of 23 January 2015
• Automated, screen-based trading platform – National Exchange for
Automated Trading (NEAT)
• Instrumental in creating the National Securities Depository Limited (NSDL)
which allows investors to securely hold and transfer their shares and bonds
electronically.
• First to launch equity derivatives trading

14. MCX - SX
• The Multi Commodity Exchange of India Limited (MCX), India’s first listed
exchange, commodity futures exchange that facilitates online trading and
clearing and settlement of commodity futures transactions, thereby providing a
platform for risk management.
• The Exchange, which started operations in November 2003, operates under the
regulatory framework SEBI.
• MCX offers trading in varied commodity futures contracts across segments
including bullion, industrial metals, energy and agricultural commodities.
• Index - MCXCOMDEX, is a real-time composite commodity futures price
index which gives information on market movements in key commodities
• Other indices developed by the exchange include MCXAgri, MCXEnergy,
MCXMetal

15. OTCEI
• OTCEI was incorporated in 1990 and is recognized as a stock exchange under
Section 4 of the Securities Contracts Regulation Act, 1956.
• The Exchange was set up to aid enterprising promoters in raising finance for
new projects in a cost effective manner and to provide investors with a
transparent & efficient mode of trading.
• Modelled along the lines of the NASDAQ market of USA, OTCEI introduced
many novel concepts to the Indian capital markets such as screen-based
nationwide trading, sponsorship of companies and scripless trading.
• The Exchange had 115 listings and assisted in providing capital for enterprises
that have gone on to build successful brands for themselves like VIP Advanta,
Sonora Tiles, Brilliant mineral water, etc.

16. Who would find OTCEI helpful?
• High-technology enterprises
• Companies with high growth potential
• Companies focussed on new product development
• Entrepreneurs seeking finance for specific business projects
• Companies with paid-up capital below Rs. 3 crores.
• Start-up enterprises that do not have 3-year track record.
• Companies that do not have 10% equity / debt participation
by banks / financial institutions

17. Exit of OTCEI
• On April 2015, The Securities and Exchange Board of India
approved the exit plan of OTC Exchange of India (OTCEI),
making it the 12th bourse to exit under the policy announced
by the capital market regulator in May 2012
• As OTCEI failed to achieve an annual trading turnover of at
least Rs.1,000 crore, it applied to the regulator (SEBI) for
voluntary surrender of recognition and exit.

18. Stock Market Reforms
http://www.sa-dhan.net/Adls/Legal/Company/Act/PriAct/CapitalIssuesAct1992.htm
• Repealing of the capital issues(control) Act, 1947 and abolition of
controller of capital and control of share pricing
• Blanket permission to companies to approach capital market after
clearance by SEBI for raising the capital needed
• Creation of Market Regulator – SEBI was established in 1992, with the
aim of protecting the interests of investors, promoting and regulating the
securities market.
• Encourage redressal of investors complaints by SEBI
• Permission of FII’s to access Indian Capital Market on registration with
SEBI

19. Cont…
http://www.nseindia.com/content/us/ismr2010ch7.pdf
• Liberalization of investment norms for NRIs
• Indian companies permitted to access international capital
markets
• NSDL and CDSL set up to provide instantaneous electronic transfer
of securities through Demat settlement
• Commencement of operations of OTCEI and NSE with nation-wide
stock trading
• Screen Based Trading - Open out-cry system replaced by on-line
fully automated screen based trading system (SBTS)

20. Recent Reforms
• Reduction of Trading Cycle - settlement period was reduced
progressively from T+5 to T+3 days. From April 2003 onwards, T+2
days settlement cycle is being followed.
• Equity Derivatives Trading – To assist market participants in
managing risks better through hedging, speculation and arbitrage,
the market offers index futures, index options, single stock futures
and single stock options.
• Clearing Corporation - National Securities Clearing Corporation Ltd.
(NSCCL), commenced its operations in April 1996.

21. Recent Reforms
• Globalisation - Indian companies have been permitted to raise resources
overseas through issue of ADRs, GDRs and FCCBs.
• Direct Market Access - DMA allows brokers to offer their respective clients,
direct access to the Exchange trading system through the broker’s
infrastructure without manual intervention by the broker
• Market Surveillance Mechanism
• Launch of Securities Lending & Borrowing Scheme - Allows market
participants to take short positions effectively with less cost.
• Launch of Currency Futures
• ASBA: Application Supported by Blocked Amount
• Launch of Interest Rate Futures
• Launch of mobile trading for all investors

22. Trading and Settlement In Stock Exchange
• The transactions in secondary market pass through 3 distinct phases
– Trading
– Clearing
– Settlement
• Stock Exchange Provides the platform for trading
• The clearing corporation determines the funds and securities obligations of
the trading members and ensures that the trade is settled through exchange
of obligations
• The clearing banks and the depositories provide the necessary interface
between the custodians/clearing members for settlement of funds and
securities obligations of trading members

23. Steps in Stock Trading
• Client Registration
• Agreement
• Order Placing
• Order Confirmation
• Trade Confirmation
• Contract Note

26. Settlement
• The process of fulfillment of the obligations of the
trade by the parties to the transactions is known as
‘Settlement’
• Rolling Settlement – Settlement cycle T+2,
implies that the trades executed on the first day
(say on Monday) have to be settled on the 3rd day
(on Wednesday), i.e. after a gap of 2 days

29. Clearing Corporation
• The clearing corporation is responsible for post-trade
activities such as risk management and clearing and
settlement of trades executed on a stock exchange
• National Securities Clearing Corporation Ltd. (NSCCL), a
wholly owned subsidiary of NSE was set up with the
objectives of bringing and sustaining confidence in clearing
and settlement of securities; promoting and maintaining
short and consistent settlement cycles; providing counter-
party risk guarantee

30. • Clearing Members: Responsible for settling their obligations
as determined by the clearing corporation. They do so by
making available funds and/or securities in the designated
accounts with clearing bank/ depositories on the date of
settlement.
• Custodians: Clearing members but not trading members.
They settle trades on behalf of trading members, when a
particular trade is assigned to them for settlement. As on date,
there are 13 custodians empanelled with NSCCL. They are
Deutsche Bank, HDFC Bank Ltd., HSBC Ltd., etc.

31. • Clearing Banks: Clearing banks are a key link between the clearing members
and Clearing Corporation to effect settlement of funds.
• Every clearing member is required to open a dedicated clearing account
with one of the designated clearing banks.
• Based on the clearing member’s obligation as determined through clearing,
the clearing member makes funds available in the clearing account for the
pay-in and receives funds in case of a pay-out. There are 13 clearing banks of
NSE, viz., Axis Bank Ltd, Bank of India Ltd., Canara Bank Ltd., etc.
• Depositories: Depository holds securities in dematerialized form for the
investors in their beneficiary accounts.
• Each clearing member is required to maintain a clearing pool account with
the depositories. He is required to make available the required securities in
the designated account on settlement day.

32. Players In the Secondary Market
• SEBI (As a Regulator)
• Stock Exchange (As a facilitator of trading)
• Stock Brokers/ Trading Members
• Retail Investors
• DII and FII
• Speculators
• Clearing Corporation
• Clearing Members/ Custodians
• Depositories
• Clearing Bank

33. Weaknesses of Secondary Market
• Raging Speculation
• Insider trading menace
• Neglect of small investors
• Bad trading practice
• Lack of integration
• Inefficient banking system
• Inadequate Infrastructure
• Inadequacy of investor service