CHAPTER

10
LEARNING OBJECTIVES FINANCIAL M ARKETS
After studying this chapter, you
should be able to: IDEA SEEKS TO CAPITALISE ON
M ARKET M OMENTUM
Ø explain the meaning of
Financial Market; With the explosive growth of their
subscriber base, telecom companies
are all looking at capital markets to
Ø explain the meaning of Money raise funds to fuel their expansion
Market and describe its major plan. Idea Cellular, the fifth largest
Instruments; operator in the country and the
flagship telecom venture of AV Birla
Ø explain the nature and types of Group, has decided to enter the capital
Capital Market; market to raise between Rs. 1,700 and
Rs. 2,000 crore.
The company has appointed J.M.
Ø distinguish between Money Morgan Stanley, Merrill Lynch among
Market and Capital Market; other as book-runners for the
proposed Initial Public Offer (IPO),
Ø explain the meaning and which is expected to be ready by
functions of Stock Exchange; January end.
Since, under SEBI norms, the
minimum float size is 10 per cent, the
Ø describe the functioning of NSEI
company will divest between 10
and OTCEI; and and 12 per cent, “The last private
placement made by the promoters is
Ø describe the role of SEBI in at a market capitalisation of
investor protection. Rs. 15,000 crore. The proposed float
is expected to be at 10 to 20 per cent
premium of the private placement
price,” AV Birla Group recently
divested 35 per cent stake in the
company to a clutch of private equity
firms. However, this is a fresh issue of
shares, where the proceeds will be
utilised by Ideal Cellular for capital
expenditure. After the proposed
issues, the promoters stake will come
down to around 58 per cent.
Source: www.hindustantimes.com

2015-16(21/01/2015)
 BUSINESS STUDIES

268

INTRODUCTION sectors – households which save funds

and business firms which invest these
You all know that a business needs funds. A financial market helps to link
finance from the time an entrepreneur the savers and the investors by
makes the decision to start it. It needs mobilizing funds between them. In
finance both for working capital doing so it performs what is known as
requirements such as payments for an allocative function. It allocates or
raw materials and salaries to its directs funds available for investment
employees, and fixed capital into their most productive investment
expenditure such as the purchase of opportunity. When the allocative
machinery or building or to expand its function is performed well, two
production capacity. The above consequences follow:
example gives a fair picture of how
companies need to raise funds from the • The rate of return offered to
capital markets. Idea Cellular decided households would be higher
to enter the Indian capital market for • Scarce resources are allocated to
its needs of expansion. In this chapter those firms which have the highest
you will study concepts like private productivity for the economy.
placement, Initial public Offer (IPO) and There are two major alternative
capital markets which you come across mechanisms through which allocation
in the example of Idea Cellular. of funds can be done: via banks or
Business can raise these funds from via financial markets. Households can
various sources and in different ways deposit their surplus funds with
through financial markets. This banks, who in turn could lend these
chapter provides a brief description of
funds to business firms. Alternately,
the mechanism through which finances
households can buy the shares and
are mobilised by a business organisation debentures offered by a business
for both short term and long term using financial markets. The process
requirements. It also explains the by which allocation of funds is done
institutional structure and the regulatory
is called financial intermediation.
measures for different financial markets.
Banks and financial markets are
CONCEPT OF FINANCIAL M ARKET competing intermediaries in the
financial system, and give households
A business is a part of an economic a choice of where they want to place
system that consists of two main their savings.

HOUSEHOLDS BUSINESS FIRMS

BANKS
FINANCIAL MARKETS
SAVERS INVESTORS

2015-16(21/01/2015)
 FINANCIAL MARKET

269

A financial market is a market for 1 . Mobili s ation of S avings and

the creation and exchange of financial C hanneling them into the most
assets. Financial markets exist P roductive U ses: A financial market

Financial System

wherever a financial transaction facilitates the transfer of savings from

occurs. Financial transactions could savers to investors. It gives savers the
be in the form of creation of financial choice of different investments and thus
assets such as the initial issue of helps to channelise surplus funds into
shares and debentures by a firm or the the most productive use.
purchase and sale of existing financial 2. Facilitat ing Price Discovery: You
assets like equity shares, debentures all know that the forces of demand and
and bonds. supply help to establish a price for a
commodity or service in the market. In
FUNCTIONS OF FINANCIAL M ARKET the financial market, the households are
suppliers of funds and business firms
Financial markets play an important represent the demand. The interaction
role in the allocation of scarce between them helps to establish a price
resources in an economy by performing for the financial asset which is being
the following four important functions. traded in that particular market.

2015-16(21/01/2015)
 BUSINESS STUDIES

270
3. Provid ing Liquidity to Financial
Providing than one year are traded in the money
Assets: Financial markets facilitate easy market. Instruments with longer
purchase and sale of financial assets. maturity are traded in the capital
In doing so they provide liquidity to market.
financial assets, so that they can be
easily converted into cash whenever M ONEY MARKET
required. Holders of assets can readily
The money market is a market for
sell their financial assets through the
short term funds which deals in
mechanism of the financial market.
monetary assets whose period of
4.Reduc ing the Cost of Transactions:
4.Reducing maturity is upto one year. These assets
Financial markets provide valuable are close substitutes for money. It is a
information about securities being market where low risk, unsecured
traded in the market. It helps to save and short term debt instruments that
time, effort and money that both are highly liquid are issued and
buyers and sellers of a financial asset actively traded everyday. It has no
would have to otherwise spend to try physical location, but is an activity
and find each other. The financial conducted over the telephone and
market is thus, a common platform through the internet. It enables the
where buyers and sellers can meet for raising of short-term funds for meeting
fulfillment of their individual needs. the temporary shortages of cash and
Financial markets are classified on obligations and the temporary
the basis of the maturity of financial deployment of excess funds for earning
instruments traded in them. returns. The major participants in the
Instruments with a maturity of less market are the Reserve Bank of India

Classification of Financial Markets

FINANCIAL MARKET

MONEY MARKET CAPITAL MARKET

Primary market Secondary Market

Debt Equity Debt Equity

2015-16(21/01/2015)
 FINANCIAL MARKET

271

(RBI), C ommercial Banks, Non- transferable by endorsement and

Banking Finance Companies, State delivery with a fixed maturity period. It
Governments, Large Corporate Houses is issued by large and creditworthy
and Mutual Funds. companies to raise short-term funds at
lower rates of interest than market rates.
M ONEY M ARKET INSTRUMENTS It usually has a maturity period of 15
days to one year. The issuance of
1 . Treasury Bill: A Treasury bill is commercial paper is an alternative to
basically an instrument of short-term bank borrowing for large companies
borrowing by the Government of India that are generally considered to be
maturing in less than one year. They financially strong. It is sold at a discount
are also known as Zero Coupon Bonds and redeemed at par. The original
issued by the Reserve Bank of India on purpose of commercial paper was to
behalf of the Central Government to provide short-terms funds for seasonal
meet its short-term requirement of and working capital needs. For example
funds. Treasury bills are issued in the companies use this instrument for
form of a promissory note. They are purposes such as bridge financing.
highly liquid and have assured yield Example: Suppose a company needs
and negligible risk of default. They are long-term finance to buy some
issued at a price which is lower than machinery. In order to raise the long
their face value and repaid at par. The term funds in the capital market the
difference between the price at which company will have to incur floatation
the treasury bills are issued and their costs (costs associated with floating of
redemption value is the interest an issue are brokerage, commission,
receivable on them and is called printing of applications and advertising
discount. Treasury bills are available etc.). Funds raised through commercial
for a minimum amount of Rs 25,000 paper are used to meet the floatation
and in multiples thereof. costs. This is known as Bridge Financing.
Example: Suppose an investor 3 . Call Money: Call money is short
purchases a 91 days Treasury bill with term finance repayable on demand, with
a face value of Rs. 1,00,000 for a maturity period of one day to fifteen
Rs. 96,000. By holding the bill until the days, used for inter-bank transactions.
maturity date, the investor receives Commercial banks have to maintain a
Rs. 1,00,000. The difference of minimum cash balance known as cash
Rs. 4,000 between the proceeds reserve ratio. The Reserve Bank of India
received at maturity and the amount changes the cash reserve ratio from time
paid to purchase the bill represents the to time which in turn affects the amount
interest received by him. of funds available to be given as loans
2. Commercial Paper: Commercial by commercial banks. Call money is a
paper is a short-term unsecured method by which banks borrow from
promissory note, negotiable and each other to be able to maintain the

2015-16(21/01/2015)
 BUSINESS STUDIES

272

cash reserve ratio. The interest rate paid credit is high. They help to mobilise a
on call money loans is known as the call large amount of money for short
rate. It is a highly volatile rate that varies periods.
from day-to-day and sometimes even 5 . Commercial Bill: A commercial
from hour-to-hour. There is an inverse bill is a bill of exchange used to finance
relationship between call rates and the working capital requirements of
other short-term money market business firms. It is a short-term,
instruments such as certificates of negotiable, self-liquidating instrument
deposit and commercial paper. A rise in which is used to finance the credit sales
call money rates makes other sources of firms. When goods are sold on credit,
of finance such as commercial paper the buyer becomes liable to make
and certificates of deposit cheaper in payment on a specific date in future.
comparison for banks raise funds from The seller could wait till the specified
these sources. date or make use of a bill of exchange.
4 . Certificate of Deposit: Certificates The seller (drawer) of the goods draws
of deposit (CD) are unsecured, the bill and the buyer (drawee) accepts
negotiable, short-term instruments in it. On being accepted, the bill becomes
bearer form, issued by commercial a marketable instrument and is called
banks and development financial a trade bill. These bills can be
institutions. They can be issued to discounted with a bank if the seller
individuals, corporations and needs funds before the bill matures.
companies during periods of tight When a trade bill is accepted by a
liquidity when the deposit growth of commercial bank it is known as a
banks is slow but the demand for commercial bill.

Sterlite Industries
Sterlite Industries, part of the London listed Vedanta Resources Group, is
scheduled to be listed on the New York Stock Exchange through an initial
public offering (IPO) of about $2 billion. The proceeds will be used to fund its
$1.9 billion, Greenfield power project in Orissa and to expand its aluminium
and copper facilities.
The IPO is a part of an enabling resolution passed by Sterlite to raise upto
12,500 crores through American Depository Shares (ADS). Consequently, the
company has increased its authorised capital from Rs 150 crore to
Rs 185 crore by creating an additional 17.5 crore equity shares of Rs 2 each.
The shares of Sterlite, which will be among the first metal firms from India to
list on NYSE, outpaced Sensex and rose by 1.4% to close at Rs 545.2 on BSE
on the day of the announcement.
Source: The Economic Times

2015-16(21/01/2015)
 FINANCIAL MARKET

273

C APITAL MARKET institutions, banks, corporate

entities, foreign investors and
The term capital market refers to facilities ordinary retail investors from
and institutional arrangements through members of the public. Participation
which long-term funds, both debt and in the money market is by and large
equity are raised and invested. It undertaken by institutional
consists of a series of channels through participants such as the RBI, banks,
which savings of the community are financial institutions and finance
made available for industrial and companies. Individual investors
commercial enterprises and for the although permitted to transact in the
public in general. It directs these savings secondary money market, do not
into their most productive use leading normally do so.
to growth and development of the
(ii) Instruments: The main instruments
economy. The capital market consists
traded in the capital market are –
of development banks, commercial
equity shares, debentures, bonds,
banks and stock exchanges.
preference shares etc. The main
An ideal capital market is one where
instruments traded in the money
finance is available at reasonable cost.
market are short term debt
The process of economic development
instruments such as T-bills, trade
is facilitated by the existence of a well
bills reports, commercial paper and
functioning capital market. In fact,
certificates of deposit.
development of the financial system is
seen as a necessary condition for (iii) Investment Outlay: Investment in the
economic growth. It is essential that capital market i.e. securities does not
financial institutions are sufficiently necessarily require a huge financial
developed and that market operations outlay. The value of units of
are free, fair, competitive and securities is generally low i.e. Rs 10,
transparent. The capital market should Rs 100 and so is the case with
also be efficient in respect of the minimum trading lot of shares which
information that it delivers, minimise is kept small i.e. 5, 50, 100 or so. This
transaction costs and allocate capital helps individuals with small savings
most productively. to subscribe to these securities. In the
The Capital Market can be divided money market, transactions entail
into two parts: a. Primary Market huge sums of money as the
b. Secondary Market instruments are quite expensive.
(iv) Duration: The capital market deals
Distinction between Capital Market
in medium and long term securities
and Money Market
such as equity shares and
The major points of distinction between debentures. Money market
the two markets are as follows: instruments have a maximum
(i) Participants: The participants in the tenure of one year, and may even
capital market are financial be issued for a single day.

2015-16(21/01/2015)
 BUSINESS STUDIES

274

(v) Liquidity: Capital market securities PRIMARY MARKET

are considered liquid investments
because they are marketable on The primary market is also known as
the stock exchanges. However, a the new issues market. It deals with
share may not be actively traded, new securities being issued for the first
i.e. it may not easily find a buyer. time. The essential function of a primary
Money market instruments on the market is to facilitate the transfer of
other hand, enjoy a higher degree investible funds from savers to
of liquidity as there is formal entrepreneurs seeking to establish new
arrangement for this. The Discount enterprises or to expand existing ones
Finance House of India (DFHI) has through the issue of securities for the
been established for the specific first time. The investors in this market
objective of providing a ready are banks, financial institutions,
market for money market insurance companies, mutual funds
instruments. and individuals.
(vi) Safety: Capital market A company can raise capital
instruments are riskier both with through the primary market in the form
respect to returns and principal of equity shares, preference shares,
repayment. Issuing companies debentures, loans and deposits. Funds
may fail to perform as per raised may be for setting up new
projections and promoters may projects, expansion, diversification,
defraud investors. But the money modernisation of existing projects,
market is generally much safer mergers and takeovers etc.
with a minimum risk of default.
This is due to the shorter duration Methods of Floatation
of investing and also to financial
soundness of the issuers, which There are various methods of floating
primarily are the government, new issues in the primary market :
banks and highly rated 1. Offer through Prospectus: Offer
companies. through prospectus is the most
(vii) Expected return: The investment popular method of raising funds by
in capital markets generally yield public companies in the primary
a higher return for investors than market. This involves inviting
the money markets. The possibility subscription from the public through
of earnings is higher if the issue of prospectus. A prospectus
securities are held for a longer makes a direct appeal to investors to
duration. First, there is the scope raise capital, through an advertisement
of earning capital gains in equity in newspapers and magazines. The
share. Second, in the long run, the issues may be underwritten and also
prosperity of a company is shared are required to be listed on at least one
by shareholders by way of high stock exchange. The contents of the
dividends and bonus issues. prospectus have to be in accordance

2015-16(21/01/2015)
 FINANCIAL MARKET

275

with the provisions of the Companies market can be expensive on account of

Act and SEBI disclosure and investor various mandatory and non-
protection guidelines. mandatory expenses. Some companies,
2. Offer for Sale: Under this method therefore, cannot afford a public issue
securities are not issued directly to the and choose to use private placement.
public but are offered for sale through 4. Rights Issue: This is a privilege given
intermediaries like issuing houses or to existing shareholders to subscribe
stock brokers. In this case, a company to a new issue of shares according to
sells securities enbloc at an agreed price the terms and conditions of the
to brokers who, in turn, resell them to company. The shareholders are offered
the investing public. the ‘right’ to buy new shares in
3. Private Placement: Private proportion to the number of shares
placement is the allotment of securities they already possess.
by a company to institutional investors 5. e-IPOs: A company proposing to
and some selected individuals. It helps issue capital to the public through the
to raise capital more quickly than a on-line system of the stock exchange
public issue. Access to the primary has to enter into an agreement with the

PRIMARY AND S ECONDARY MARKETS —A COMPARISON

Primary Market Secondary Market

(New Issue Market) (Stock Exchange)

(i) There is sale of securities by new (i) There is trading of existing shares
companies or further (new issues only.
of securities by existing companies
to investors).
(ii) Securities are sold by the company (ii) Ownership of existing securities is
to the investor directly (or through exchanged between investors. The
an intermediary). company is not involved at all.
(iii) The flow of funds is from savers to (iii) Enhances encashability (liquidity) of
investors, i.e. the primary market shares, i.e. the secondary market
directly promotes capital formation. indirectly promotes capital formation.
(iv) Only buying of securities takes (iv) Both the buying and the selling of
place in the primary market, securities can take place on the
securities cannot be sold there. stock exchange.
(v) Prices are determined and decided (v) Prices are determined by demand
by the management of the company. and supply for the security.
(vi) There is no fixed geographical (vi) Located at specified places.
location.

2015-16(21/01/2015)
 BUSINESS STUDIES

276

stock exchange. This is called an Initial existing securities. It also contributes

Public Offer (IPO). SEBI registered to economic growth by channelising
brokers have to be appointed for the funds towards the most productive
purpose of accepting applications and investments through the process of
placing orders with the company. The disinvestment and reinvestment.
issuer company should also appoint a Securities are traded, cleared and
registrar to the issue having electronic settled within the regulatory framework
connectivity with the exchange. The prescribed by SEBI. Advances in
issuer company can apply for listing of information technology have made
its securities on any exchange other trading through stock exchanges
than the exchange through which it has accessible from anywhere in the
offered its securities. The lead manager country through trading terminals.
coordinates all the activities amongst Along with the growth of the primary
intermediaries connected with the issue. market in the country, the secondary
market has also grown significantly
S ECONDARY MARKET during the last ten years.

The secondary market is also known STOCK E XCHANGE

as the stock market or stock exchange.
It is a market for the purchase and sale A stock exchange is an institution
of existing securities. It helps existing which provides a platform for buying
investors to disinvest and fresh and selling of existing securities. As a
investors to enter the market. It also market, the stock exchange facilitates
provides liquidity and marketability to the exchange of a security (share,

History of the Stock Market in India

The history of the stock market in India goes back to the end of the eighteenth
century when long-term negotiable securities were first issued. In 1850 the
Companies Act was introduced for the first time bringing with it the feature of
limited liability and generating investor interest in corporate securities. The
first stock exchange in India was set-up in 1875 as The Native Share and
Stock Brokers Association in Bombay. Today it is known as the Bombay Stock
Exchange (BSE). This was followed by the development of exchanges in
Ahmedabad (1894), Calcutta(1908) and Madras(1937). It is interesting to note
that stock exchanges were first set up in major centers of trade and commerce.
Until the early 1990s, the Indian secondary market comprised regional
stock exchanges with BSE heading the list. After the reforms of 1991, the
Indian secondary market acquired a three tier form. This consists of:
• Regional Stock Exchanges
• National Stock Exchange (NSE)
• Over the Counter Exchange of India (OTCEI)

2015-16(21/01/2015)
 FINANCIAL MARKET

277
1. Providing Liquidity and Market-
ability to Existing Securities: The
basic function of a stock exchange is the
creation of a continuous market where
securities are bought and sold. It gives
investors the chance to disinvest and
reinvest. This provides both liquidity and
easy marketability to already existing
securities in the market.
2. Pricing of Securities: Share prices
on a stock exchange are determined by
the forces of demand and supply. A
stock exchange is a mechanism of
constant valuation through which the
Bombay Stock Exchange prices of securities are determined.
Such a valuation provides important
debenture etc.) into money and vice
versa. Stock exchanges help instant information to both buyers and
companies raise finance, provide sellers in the market.
liquidity and safety of investment to the 3. Safety of Transaction: T h e
investors and enhance the credit membership of a stock exchange is well-
worthiness of individual companies. regulated and its dealings are well
Meaning of Stock Exchange defined according to the existing legal
framework. This ensures that the
According to Securities Contracts
investing public gets a safe and fair deal
(Regulation) Act 1956, stock exchange
means any body of individuals, whether on the market.
incorporated or not, constituted for the 4. Contributes to Economic Growth:
purpose of assisting, regulating or A stock exchange is a market in which
controlling the business of buying and existing securities are resold or traded.
selling or dealing in securities. Through this process of disinvestment
Functions of a Stock Exchange and reinvestment savings get
channelised into their most productive
The efficient functioning of a stock
investment avenues. This leads to
exchange creates a conducive climate
capital formation and economic growth.
for an active and growing primary
market for new issues. An active and 5. Spreading of Equity Cult: The stock
healthy secondary market in existing exchange can play a vital role in
securities leads to positive environment ensuring wider share ownership by
among investors. The following are regulating new issues, better trading
some of the important functions of a practices and taking effective steps in
stock exchange. educating the public about investments.

2015-16(21/01/2015)
 BUSINESS STUDIES

278

6. Providing Scope for Speculation: electronic and trading is done in the

The stock exchange provides sufficient broker’s office through a computer
scope within the provisions of law for terminal. A stock exchange has its main
speculative activity in a restricted and computer system with many terminals
controlled manner. It is generally spread across the country. Trading in
accepted that a certain degree of healthy securities is done through brokers who
speculation is necessary to ensure are members of the stock exchange.
liquidity and price continuity in the Trading has shifted from the stock
stock market. market floor to the brokers office.
Every broker has to have access to
TRADING AND S ETTLEMENT PROCEDURE a computer terminal that is connected
to the main stock exchange. In this
Trading in securities is now executed screen-based trading, a member logs
through an on-line, screen-based on to the site and any information
electronic trading system. Simply put, about the shares (company, member,
all buying and selling of shares and etc.) he wishes to buy or sell and the
debentures are done through a price is fed into the computer. The
computer terminal. software is so designed that the
There was a time when in the open transaction will be executed when a
outcry system, securities were bought matching order is found from a counter
and sold on the floor of the stock party. The whole transaction is carried
exchange. Under this auction system, on the computer screen with both the
deals were struck among brokers, parties being able to see the prices of
prices were shouted out and the shares all shares going up and down at all
sold to the highest bidder. However, times during the time that business is
now almost all exchanges have gone transacted and during business hours
of the stock exchange. The computer
in the brokers office is constantly
matching the orders at the best bid and
offer price. Those that are not matched
remain on the screen and are open for
future matching during the day.
Electronic trading systems or
screen-based trading has certain
advantages:
1. It ensures transparency as it allows
participants to see the prices of all
securities in the market while
business is being transacted. They
Electronic Trading System

2015-16(21/01/2015)
 FINANCIAL MARKET

279

are able to see the full market and transferring shares can also be
during real time. adopted. This electronic form is called
2. It increases efficiency of information dematerialised form.
being passed on, thus helping in
fixing prices efficiently. The Steps in the Trading and
computer screens display Settlement Procedure
information on prices and also It has been made compulsory to settle
capital market developments that all trades within 2 days of the trade
influence share prices. date, i.e., on a T+2 basis, since 2003.
3. It increases the efficiency of Prior to the reforms, securities were
operations, since there is reduction bought and sold, i.e., traded and all
in time, cost and risk of error. positions in the stock exchange were
4. People from all over the country settled on a weekly/fortnightly
and even abroad who wish to settlement cycle whether it was delivery
participate in the stock market can of securities or payment of cash. This
buy or sell securities through system prevailed for a long time as it
brokers or members without increased the volume of trading on the
knowing each other. That is, they exchange and provided liquidity to the
can sit in the broker’s office, log on system. However, since trades were to
to the computer at the same time be settled on specified dates, this gave
and buy or sell securities. This rise to speculation and price of shares
system has enabled a large number used to rise and fall suddenly due to
of participants to trade with each trading and defaults by brokers. A new
other, thereby improving the system, i.e, rolling settlement, was
liquidity of the market. introduced in 2000, so that whenever
a trade took place it would be settled
5. A single trading platform has been
after some days. Since 2003, all shares
provided as business is transacted
have to be covered under the rolling
at the same time in all the trading
settlement system on a T+2 basis,
centres. Thus, all the trading
meaning thereby that transactions in
centres spread all over the country
securities are settled within 2 days after
have been brought onto one
the trade date. Since rolling settlement
trading platform, i.e., the stock
implies fast movement of shares, it
exchange, on the computer.
requires effective implementation of
Now, screen-based trading or on-line electronic fund transfer and
trading is the only way in which you dematerialisation of shares.
can buy or sell shares. Shares can be The following steps are involved in
held either in physical form or an the screen-based trading for buying
electronic book entry form of holding and selling of securities:

2015-16(21/01/2015)
 BUSINESS STUDIES

280

1. If an investor wishes to buy or sell be given about the number of

any security he has to first shares and the price at which the
approach a registered broker or shares should be bought or sold.
sub-broker and enter into an The broker will then go ahead with
agreement with him. The investor the deal at the above mentioned
has to sign a broker-client price or the best price available. An
agreement and a client registration order confirmation slip is issued to
form before placing an order to buy the investor by the broker.
or sell securities. He has also to 4. The broker then will go on-line and
provide certain other details and connect to the main stock exchange
information. These include: and match the share and best price
• PAN number available.
(This is mandatory)
5. When the shares can be bought or
• Date of birth and address. sold at the price mentioned, it will
• Educational qualification and be communicated to the broker’s
occupation. terminal and the order will be
• Residential status (Indian/NRI). executed electronically. The broker
will issue a trade confirmation slip
• Bank account details.
to the investor.
• Depository account details.
6. After the trade has been executed,
• Name of any other broker with within 24 hours the broker issues
whom registered. a Contract Note. This note contains
• Client code number in the client details of the number of shares
registration form. bought or sold, the price, the date
The broker then opens a trading and time of deal, and the brokerage
account in the name of the investor. charges. This is an important
2. The investor has to open a ‘demat’ document as it is legally enforceable
account or ‘beneficial owner’ (BO) and helps to settle disputes/claims
account with a depository between the investor and the
participant (DP) for holding and broker. A Unique Order Code
transferring securities in the demat number is assigned to each
form. He will also have to open a transaction by the stock exchange
bank account for cash transactions and is printed on the contract note.
in the securities market. 7. Now, the investor has to deliver the
3. The investor then places an order shares sold or pay cash for the
with the broker to buy or sell shares bought. This should be done
shares. Clear instructions have to immediately after receiving the

2015-16(21/01/2015)
 FINANCIAL MARKET

281

contract note or before the day when delays and paperwork associated with
the broker shall make payment or share certificates or debentures held in
delivery of shares to the exchange. physical form.
This is called the pay-in day. This is a process where securities
8. Cash is paid or securities are held by the investor in the physical
delivered on pay-in day, which is form are cancelled and the investor is
before the T+2 day as the deal has given an electronic entry or number so
that she/he can hold it as an electronic
to be settled and finalised on the
balance in an account. This process of
T+2 day. The settlement cycle is on
holding securities in an electronic form
T+2 day on a rolling settlement
is called dematerialisation. For this, the
basis, w.e.f. 1 April 2003.
investor has to open a demat account
9. On the T+2 day, the exchange will with an organisation called a
deliver the share or make payment depository. In fact, now all Initial Public
to the other broker. This is called Offers (IPOs) are issued in
the pay-out day. The broker then dematerialisation form and more than
has to make payment to the 99% of the turnover is settled by
investor within 24 hours of the pay- delivery in the demat form.
out day since he has already The Securities and Exchange Board
received payment from the of India (SEBI) has made it mandatory
exchange. for the settlement procedures to take
10.The broker can make delivery of place in demat form in certain select
shares in demat form directly to the securities. Holding shares in demat
investor’s demat account. The form is very convenient as it is just
investor has to give details of his like a bank account. Physical shares
can be converted into electronic form
demat account and instruct his
or electronic holdings can be
depository participant to take
reconverted into physical certificates
delivery of securities directly in his
(rematerialisation). Dematerialisation
beneficial owner account.
enables shares to be transferred to
some other account just like cash and
Dematerialisation and
ensures settlement of all trades
Depositories
through a single account in shares.
All trading in securities is now done These demat securities can even be
through computer terminals. Since all pledged or hypothecated to get loans.
systems are computerised, buying and There is no danger of loss, theft or
selling of securities are settled through forgery of share certificates. It is the
an electronic book entry form. This is broker’s responsibility to credit the
mainly done to eliminate problems like investor’s account with the correct
theft, fake/forged transfers, transfer number of shares.

2015-16(21/01/2015)
 BUSINESS STUDIES

282

Working of the Demat System in electronic form on behalf of the

investor. In the depository a securities
1. A depository participant (DP),
account can be opened, all shares can
either a bank, broker, or financial
be deposited, they can be withdrawn/
services company, may be
sold at any time and instruction to
identified.
deliver or receive shares on behalf of the
2. An account opening form and investor can be given. It is a technology
documentation (PAN card details, driven electronic storage system. It has
photograph, power of attorney) no paper work relating to share
may be completed. certificates, transfer, forms, etc. All
3. The physical certificate is to be transactions of the investors are settled
given to the DP along with a with greater speed, efficiency and use
dematerialisation request form. as all securities are entered in a book
4. If shares are applied in a public entry mode.
offer, simple details of DP and In India, there are two depositories.
demat account are to be given and National Securities Depositories
the shares on allotment would Limited (NSDL) is the first and largest
automatically be credited to the depository presently operational in
demat account. India. It was promoted as a joint
5. If shares are to be sold through a venture of the IDBI, UTI, and the
broker, the DP is to be instructed National Stock Exchange.
to debit the account with the The Central Depository Services
number of shares. Limited (CDSL) is the second depository
6. The broker then gives instruction to commence operations and was
to his DP for delivery of the shares promoted by the Bombay Stock
to the stock exchange. Exchange and the Bank of India. Both
these national level depositories operate
7. The broker then receives payment
through intermediaries who are
and pay the person for the shares
electronically connected to the
sold.
depository and serve as contact points
8. All these transactions are to be with the investors and are called
completed within 2 days, i.e., depository participants.
delivery of shares and payment The depository participant (DP)
received from the buyer is on a T+2 serves as an intermediary between the
basis, settlement period. investor and the Depository (NSDL or
CSDL) who is authorised to maintain
Depository the accounts of dematerialised shares.
Just like a bank keeps money in safe Financial institutions, banks, clearing
custody for customers, a depository corporations, stock brokers and non-
also is like a bank and keeps securities banking finance corporations are

2015-16(21/01/2015)
 FINANCIAL MARKET

283

permitted to become depository NSE has set up a nationwide fully

participants. If the investor is buying automated screen based trading system.
and selling the securities through the The NSE was set up by leading
broker or the bank or a non-banking financial institutions, banks, insurance
finance corporation, it acts as a DP for companies and other financial
the investor and complete the intermediaries. It is managed by
formalities. professionals, who do not directly or
indirectly trade on the exchange. The
N ATIONAL STOCK EXCHANGE OF INDIA trading rights are with the trading
(NSE) members who offer their services to the
investors. The Board of NSE comprises
The National Stock Exchange is the senior executives from promoter
latest, most modern and technology institutions and eminent professionals,
driven exchange. It was incorporated in without having any representation from
1992 and was recognised as a stock trading members.
exchange in April 1993. It started
operations in 1994, with trading on the OBJECTIVES OF NSE
wholesale debt market segment.
Subsequently, it launched the capital NSE was set up with the following
market segment in November 1994 as a objectives:
trading platform for equities and a. Establishing a nationwide trading
the futures and options segment in June facility for all types of securities.
2000 for various derivative instruments.
b. Ensuring equal access to investors all

Stock Market Index

A stock market index is a barometer of market behaviour. It measures overall
market sentiment through a set of stocks that are representative of the market.
It reflects market direction and indicates day-to-day fluctuations in stock
prices. An ideal index must represent changes in the prices of securities and
reflect price movements of typical shares for better market representation. In
the Indian markets the BSE, SENSEX and NSE, NIFTY are important indices.
Some important global stock market indices are:
• Dow Jones Industrial Average is among the oldest quoted stock market
index in the US.
• NASDAQ Composite Index is the market capitalisation weightages of prices
for stocks listed in the NASDAQ stock market.
• S and P 500 Index is made up of 500 biggest publicly traded companies in
the US. The S and P 500 is often treated as a proxy for the US stock market.
• FTSE 100 consists of the largest 100 companies by full market value listed
on the London Stock Exchange. The FTSE 100 is the benchmark index of
the European market.

2015-16(21/01/2015)
 BUSINESS STUDIES

284

over the country through an (i) Whole Sale Debt Market Segment:
appropriate communication network. This segment provides a trading
c. Providing a fair, efficient and platform for a wide range of fixed
transparent securities market income securities that include
using electronic trading system. central government securities,
d. Enabling shorter settlement cycles treasury bills, state development
and book entry settlements. loans, bonds issued by public
e. Meeting international benchmarks sector undertakings, floating rate
and standards. bonds, zero coupon bonds, index
Within a span of ten years, NSE has bonds, commercial paper, certificate
been able to achieve its objectives for of deposit, corporate debentures
which it was set up. It has been playing and mutual funds.
a leading role as a change agent in (ii) Capital Market Segment: The capital
transforming the Indian capital market. market segment of NSE provides an
NSE has been able to take the stock efficient and transparent platform for
market to the door step of the investors. trading in equity, preference,
It has ensured that technology has been debentures, exchange traded funds as
harnessed to deliver the services to the well as retail Government securities.
investors across the country at the lowest
cost. It has provided a nation wide screen OVER THE COUNTER EXCHANGE OF INDIA
based automated trading system with a (OTCEI)
high degree of transparency and equal The OTCEI is a company incorporated
access to investors irrespective of
under the Companies Act 1956. It was
geographical location.
set-up to provide small and medium
MARKET SEGMENTS OF NSE companies an access to the capital
market for raising finance in a cost
The Exchange provides trading in the effective manner. It was also meant to
following two segments. provide investors with a convenient,
Some Common Stock Market Terms
You would have often come across the following terms in magazines or newspapers
when you read about the stock market.
BOURSES is another word for the stock market
BULLS and BEARS – The term does not refer to animals but to market sentiment of
the investors. A Bullish phase refers to a period of optimism and a Bearish phase to
a period of perssimism on the Bourses.
BADLA – This refers to a carry forward system of settlement, particularly at the BSE.
It is a facility that allows the postponement of the delivery or payment of a transaction
from one settlement period to another.
ODD LOT TRADING – Trading in multiples of 100 stocks or less.
PENNY STOCKS – These are securities that have no value on the stock exchange but
whose trading contributes to speculation.

2015-16(21/01/2015)
 FINANCIAL MARKET

285

transparent and efficient avenue for takes place when a buyer or seller
capital market investment. It is fully walks up to an OTCEI counter, taps on
computerised, transparent, single the computer screen, finds quotes and
window exchange ‘which commenced effects a purchase or sale depending
trading in 1992. This exchange is on whether the prices meet their
established on the lines of NASDAQ targets. There is no particular market
(National Association of Securities place in the geographical sense. The
Dealers Automated Quotations) the objectives of OTCEI are to provide
OTC exchange in USA. It has been quicker liquidity to securities at a
promoted by UTI, ICICI, IDBI, IFCI, LIC, fixed and fair price, liquidity for less
GIC, SBI Capital markets and Can traded securities or that of small
Bank Financial Services. companies, a simplified process of
Over the counter market may be buying and selling and easy and
defined as a place where buyers seek cheaper means of making public sale
sellers and vice-versa and then attempt of new issues. However, the OTCEI has
to arrange terms and conditions for now been withdrawn.
purchase/sale acceptable to both the
Advantages of OTC Market
parties. It is a negotiated market place
that exists any where as opposed to the 1. It provides a trading platform to
auction market place, represented by smaller and less liquid companies
the activity on securities exchanges. as they are not eligible for listing on
Thus, in the OTC exchange, trading a regular exchange.

SENSEX — The Bombay Stock Exchange Sensitive Index

Have you counted the number of times newspaper headlines in the past few
weeks have been discussing the SENSEX? It goes up and down all the time and
seems to be a very important part of business and economic news. Has that
made you wonder what the SENSEX actually is?
The SENSEX is the benchmark index of the BSE. Since the BSE has been the
leading exchange of the Indian secondary market, the SENSEX has been an
important indicator of the Indian stock market. It is the most frequently used
indicator while reporting on the state of the market. An index has just one job: to
capture the price movement. So a stock index will reflect the price movements of
shares while a bond index captures the manner in which bond prices go up or
down. If the SENSEX rises, it indicates the market is doing well. Since stocks are
supposed to reflect what companies expect to earn in the future, a rising index
indicates that investors expect better earnings from companies. It is also a measure
of the state of the Indian economy. If Indian companies are expected to do well,
obviously the economy should do well too.
The SENSEX, launched in 1986 is made up of 30 of the most actively traded
stocks in the market. In fact, they account for half the BSE’s market capitalisation.
They represent 13 sectors of the economy and are leaders in their respective
industries.

2015-16(21/01/2015)
 BUSINESS STUDIES

286

2. It is a cost effective method for discussed earlier, a stock exchange can

corporates as there is a lower cost be set up as a corporate entity with
of new issues and lower expenses different individuals (who are not
of servicing the investors. brokers) as members or shareholders.
3. Family concerns and closely held BSE is one such exchange set up as a
companies can go public through corporate entity with a broad
OTC. shareholder base. It has the following
objectives:
4. Dealers can operate both in new
issues and secondary market at (a) To provide an efficient and
their option. transparent market for trading in
5. It gives greater freedom of choice to equity, debt instruments,
investors to choose stocks by derivatives, and mutual funds.
dealers for market making in both (b) To provide a trading platform for
primary and secondary markets. equities of small and medium
6. It is a transparent system of trading enterprises.
with no problem of bad or short (c) To ensure active trading and
deliveries. safeguard market integrity through
7. Information flows are free and more an electronically-driven exchange.
direct from market makers to (d) To provide other services to capital
customers since there is close market participants, like risk
contact between them. management, clearing, settlement,
market data, and education.
BSE (BOMBAY STOCK EXCHANGE LTD.) (e) To conform to international
standards.
BSE Ltd (formerly known as Bombay
Stock Exchange Ltd) was established Besides having a nation-wide
in 1875 and was Asia’s first Stock presence, BSE has a global reach with
Exchange. It was granted permanent customers around the world. It has
recognition under the Securities stimulated innovation and competition
Contract (Regulation) Act, 1956. It has across all market segments. It has
contributed to the growth of the established a capital market institute,
corporate sector by providing a called the BSE Institute Ltd, which
platform for raising capital. It is known provides education on financial
as BSE Ltd but was established as the markets and vocational training to a
Native Share Stock Brokers Association number of people seeking employment
in 1875. Even before the actual with stock brokers. The exchange has
legislations were enacted, BSE Ltd about 5000 companies listed from all
already had a set of Rules and over the country and outside, and has
Regulations to ensure an orderly the largest market capitalisation in
growth of the securities market. As India.

2015-16(21/01/2015)
 FINANCIAL MARKET

287

S ECURITIES AND EXCHANGE BOARD OF unfair trading practices have eroded

INDIA (SEBI) investor confidence and multiplied
investor grievances. The Government
The Securities and Exchange Board of and the stock exchanges were rather
India was established by the helpless in redressing the investor’s
Government of India on 12 April 1988 problems because of lack of proper
as an interim administrative body to penal provisions in the existing
promote orderly and healthy growth of legislation. In view of the above, the
securities market and for investor Government of India decided to set-up
protection. It was to function under the a separate regulatory body known as
overall administrative control of the Securities and Exchange Board of
Ministry of Finance of the Government India.
of India. The SEBI was given a statutory Purpose and Role of SEBI
status on 30 January 1992 through
The basic purpose of SEBI is to create
an ordinance. The ordinance was later
an environment to facilitate efficient
replaced by an Act of Parliament known
mobilisation and allocation of resources
as the Securities and Exchange Board
through the securities markets. It also
of India Act, 1992.
aims to stimulate competition and
Reasons for the Establishment of encourage innovation. This environment
SEBI includes rules and regulations,
institutions and their interrelationships,
The capital market has witnessed a
instruments, practices, infrastructure
tremendous growth during 1980’s,
and policy framework.
characterised particularly by the
increasing participation of the public. This environment aims at meeting
This ever expanding investors the needs of the three groups which
population and market capitalisation basically constitute the market, viz,
led to a variety of malpractices on the the issuers of securities (Companies),
part of companies, brokers, merchant the investors and the market
bankers, investment consultants and intermediaries.
others involved in the securities market. • To the issuers, it aims to provide a
The glaring examples of these market place in which they can
malpractices include existence of self – confidently look forward to raising
styled merchant bankers unofficial finances they need in an easy, fair
private placements, rigging of prices, and efficient manner.
unofficial premium on new issues, non- • To the investors, it should provide
adherence of provisions of the protection of their rights and
Companies Act, violation of rules and interests through adequate,
regulations of stock exchanges and accurate and authentic information
listing requirements, delay in delivery and disclosure of information on a
of shares etc. These malpractices and continuous basis.

2015-16(21/01/2015)
 BUSINESS STUDIES

288

• To the intermediaries, it should offer brokers and other players in the

a competitive, professionalised and market.
expanding market with adequate 2. Registration of collective investment
and efficient infrastructure so that schemes and Mutual Funds.
they are able to render better service 3. Regulation of stock brokers, portfolio
to the investors and issuers. exchanges, underwriters and
merchant bankers and the business
Objectives of SEBI in stock exchanges and any other
The overall objective of SEBI is to securities market.
protect the interests of investors and to 4. Regulation of takeover bids by
promote the development of, and companies.
regulate the securities market. This 5. Calling for information by under-
may be elaborated as follows: taking inspection, conducting
1. To regulate stock exchanges and enquiries and audits of stock
the securities industry to promote exchanges and intermediaries.
their orderly functioning. 6. Levying fee or other charges for
2. To protect the rights and interests carrying out the purposes of the Act.
of investors, particularly individual 7. Performing and exercising such
investors and to guide and educate power under Securities Contracts
them. (Regulation) Act 1956, as may be
3. To prevent trading malpractices and delegated by the Government of
achieve a balance between self India.
regulation by the securities industry Development Functions
and its statutory regulation.
1. Training of intermediaries of the
4. To regulate and develop a code of securities market.
conduct and fair practices by
2. Conducting research and
intermediaries like brokers,
publishing information useful to all
merchant bankers etc., with a view
to making them competitive and market participants.
3. Undertaking measures to develop
professional.
the capital markets by adapting a
Functions of SEBI flexible approach.
Keeping in mind the emerging nature Protective Functions
of the securities market in India, SEBI
was entrusted with the twin task of 1. Prohibition of fraudulent and unfair
trade practices like making mis-
both regulation and development of the
leading statements, manipulations,
securities market. It also has certain
price rigging etc.
protective functions.
2. Controlling insider trading and
Regulatory Functions imposing penalties for such
1. Registration of brokers and sub- practices.

2015-16(21/01/2015)
 FINANCIAL MARKET

289

3. Undertaking steps for investor intermediaries and stock exchanges in

protection. the concerned region.
4. Promotion of fair practices and code The SEBI also formed two advisory
of conduct in securities market. committees. They are the Primary
Market Advisory Committee and the
The Organisation Structure of SEBI Secondary Market Advisory
As SEBI is a statutory body there has Committee. These committees consist
been a considerable expansion in the of the market players, the investors
range and scope of its activities. Each of associations recognised by the SEBI
the activities of the SEBI now demands and the eminent persons in the capital
more careful, closer, co-ordinated and market. They provide important inputs
intensive attention to enable it to attain to the SEBI’s policies.
its objectives. Accordingly, SEBI has The objectives of the two
been restructured and rationalised in Committees are as follows:
tune with its expanded scope. It has
decided its activities into five operational a. To advise SEBI on matters relating
departments. Each department is to the regulation of intermediaries
headed by an executive director. Apart for ensuring investors protection in
from its head office at Mumbai, SEBI has the primary market.
opened regional offices in Kolkalta, b. To advise SEBI on issues related to
Chennai, and Delhi to attend to investor the development of primary market
complaints and liaise with the issuers, in India.

SEBI Violations
SEBI on Thursday unearthed yet another abuse of IPO norms in the IDFC’s
Initial Public Offering (IPO) where a few investors opened over 14,000
dematerialised accounts to corner large number of shares of the company.
This is the second such incident, after a similar such violations were
detected in the YES Bank’s IPO.
SEBI said in IDFC’s IPO too four investors opened as many as 14,807
dematerialised accounts with Karvy-DP and ‘Strangely’, all these account
holders have their bank accounts with Bharat Overseas Bank Ltd.,
Ahmedabad.
SEBI order said: “Further probe is required for examining the systemic
fault, if any, of the registrar Karvy-RTI, i.e., Karvy Computer Shares P Ltd.,
and the lead managers Kotak Mahindra Capital Company Ltd., DSP Merrill
Lynch Ltd. and SBI Capital Markets Ltd. in identifying and weeding out the
benami applications.”
Reference is being made to the RBI to examine the role of BOB, HDFC Bank,
Indian Overseas Bank, ING Vysya Bank and Vijaya Bank in opening the
bank accounts of these benami entities and apparently funding them.
Source: The Economic Times

2015-16(21/01/2015)
 BUSINESS STUDIES

290

c. To advise SEBI on disclosure in the country.

requirements for companies. The committees are however non-
d. To advise for changes in legal statutory in nature and the SEBI is not
framework to introduce bound by the advise of the committee.
simplification and transparency in These committees are a part of SEBI’s
the primary market. constant endeavor to obtain a feedback
e. To advise the board in matters from the market players on various
relating to the development and issues relating to the regulations and
regulation of the secondary market development of the market.

KEY TERMS
Financial Market Money Market Treasury Bills
Commercial Paper Call Money Certificate of Deposit
Commercial Bill Money Market Mutual Fund Capital
Market Primary Market Secondary Market
Stock Exchange SEBI, NSE OTCEI

SUMMARY
Financial Market is a market for creation and exchange of financial assets. It
helps in mobilisation and channelising the savings into most productive uses.
Financial markets also helps in price discovery and provide liquidity to
financial assets.
Money Market is a market for short-term funds. It deals in monetory assets
whose period of maturity is less than one year. The instruments of money market
includes treasury bills, commercial paper, call money, Certificate of deposit,
commercial bills, participation certificates and money market mutual funds.
Capital Market is a place where long-term funds are mobilised by the corporate
undertakings and Government. Capital Market may be devided into primary
market and secondary market. Primary market deals with new securities which
were not previously tradable to the public. Secondary market is a place where
existing securities are bought and sold.
Stock Exchanges are the organisations which provide a platform for buying
and selling of existing securities. Stock exchanges provide continuous market
for securities, helps in price discovery, widening share ownership and provide
scope for speculation.
The National Stock Exchange of India is the latest, most modern and technology
driven exchange and was incorporated in 1992. OTCEI was incorporated in

2015-16(21/01/2015)
 FINANCIAL MARKET

291

1992 to provide listing facility for small companies with paid up capital of less
than 3 crores.
Securities and Exchange Board of India was established in 1988 and was
given statutory status through an Act in 1992. The SEBI was set-up to protect
the interests of investors, development and regulation of securities market.

EXERCISES
Multiple choice questions
1. Primary and secondary markets:
a. Compete with each other
b. Complement each other
c. Function independently
d. Control each other
2. The total number of Stock Exchanges in India is:
a. 20 b. 21 c. 22 d. 23
3. The settlement cycle in NSE is:
a. T + 5 b. T+3 c. T+2 d. T+1
4. The National Stock Exchange of India was recognized as stock exchange in
the year:
a. 1992 b. 1993 c. 1994 d. 1995
5. NSE commenced futures trading in the year:
a. 1999 b. 2000 c. 2001 d. 2002
6. Clearing and settlement operations of NSE are carried out by:
a. NSDL b. NSCCL c. SBI d. CDSL
7. OTCEI was started on the lines of:
a. NASDAQ b. NYSE c. NASAQ d. NSE
8. To be listed on OTCEI, the minimum capital requirement for a company is:
a. Rs. 5 crores b. Rs. 3 crores c. Rs. 6 crores d. Rs. 1 crore
9. A Treasury Bill is basically:
a. An instrument to borrow short-term funds
b. An instrument to borrow long-term funds
c. An instrument of capital market
d. None of the above

2015-16(21/01/2015)
 BUSINESS STUDIES

292
Short answer questions
1. What are the functions of a financial market?
2. “Money Market is essentially a Market for short term funds.” Discuss.
3. What is a Treasury Bill ?
4. Distinguish between Capital Market and Money Market.
5. What are the functions of a Stock Exchange?
6. What are the objectives of the SEBI?
7. State the objectives of the NSE.
8. What is the OTCEI?
Long
Long-- answer questions
1. Explain the various Money Market Instruments.
2. What are the methods of floatation in Primary Market?
3. Explain the recent Capital Market reforms in India.
4. Explain the objectives and functions of the SEBI
5. Explain the various segments of the NSE.
Projects and Assignments
1. Collect the information about the companies that have recently mobilised
resources through primay market.
2. Collect the information on various measures taken by SEBI to protect the
interests of investors since its inception.
3. Send a group of students to a trading terminal in your city to gain first hand
information on securities trading and prepare a report.
4. Collect data about the movements in SENSEX and NIFTY during the last
one month. Find out whether the two move in same or opposite direction.
5. Collect information about the SEBI action for Investor Protection taken during
last two years.
6. Collect information about e-IPO’s in the Indian Market in the last one year.
TRY AND SOLVE THE CROSSWORD
Clues to the Crossword
Across
1. Commission Agent who transacts in securities on behalf of non members
or members (6).
2. Changes in the price of securities in the stock market. (12)
4. Inclusion of securities in the official trade list of securities in stock market (7)
8. Place of trade I securities (6)
9. Result of selling shares at a price lower than the purchase price. (4)

2015-16(21/01/2015)
 FINANCIAL MARKET

293

13. An independent dealer in securities (6)

15. Includes shares, scripts, bonds, debentures (10)
16. Speculator who expects the prices to go down (4)
17. Buying and selling of securities to manipulate the market (7)
18. Speculator who deals in new securities only (4)
Down
1. Speculator expecting a rise in the prices (4)
3. Means ‘with’ (3)
5. Means a part or fraction of capital (6)
6. Fraction of profit paid to government (3)
7. Illegal, game based on chance (8)
9. Official statement of securities in the stock market (5)
10. Those who buy and sell securities with objective of profit (10)
11. Money invested in business (7)
12. Return on shares out of profits (8)
14. Instrument acknowledging a debt (9)
16. Govt. document acknowledging a debt (5)
19. Profit or yield (4)

2015-16(21/01/2015)
 BUSINESS STUDIES

294
Case Problem I
‘R’ Limited is a real estate company which was formed in 1950. In about 56
years of its existence the company has managed to carve out a niche for itself in
this sector. Lately, this sector is witnessing a boom due to the fact that the Indian
economy is on the rise. The incomes of middle class are rising. More people can
afford to buy homes for themselves due to easy availability of loans and
accompanying tax concessions.
To expand its business in India and abroad the company is weighing various
options to raise money through equity offerings in India. Whether to tap equity or
debt. market whether to raise money from domestic market or international market
or Combination of both? Whe their to raise the necessary financé from money
market or capital market. It is also planning to list itself in New York Stock Exchange
to raise money through ADR’s. To make its offerings attractive it is planning to
offer host of financial plans products to its stakeholders and investors and also
expand it’s listing at NSE after complying with the regulations of SEBI.
(i) What benefits will the company derive from listing at NSE?
(ii) What are the regulations of SEBI that the company must comply with?
(iii) How does the SEBI exercise control over ‘R’ Limited in the interest of
investors?
Case Problem II
NSE Indices World Markets
Index Current Prev. %CHG Index Current Prev. % Change
S&P CNX Nifty 3641.1 3770.55 -3.43% NYSE Composite 8926.88 9120.93 -2.13%
CNX Nifty Junior 6458.55 6634.85 -2.66% NASDAQ Composite 2350.57 2402.29 -2.15%
CNX IT 5100.5 5314.05 -4.02% DOW Jones I. A. 12076 12318.6 -1.97%
Bank Nifty 5039.05 5251.55 -4.05% S&P 500 1377.95 1406.6 -2.04%
CNX 100 3519.35 3640.35 -3.32% Nikkei 225 16676.9 17178.8 -2.92%
More
Source: www.nseindia.com

The above figures are taken from the website of national stock exchange of
India. They illustrate the movement of NSE stock indices as well as world stock
indices on the date indicated.
Questions
1. What do you mean by a stock index? How is it calculated?
2. What conclusions can you draw from the various movements of NSE stock
indices?
3. What factors affect the movement of stock indices? Elaborate on the nature
of these factors.

2015-16(21/01/2015)
 FINANCIAL MARKET

295

4. What relationship do you see between the movement of indices in world

markets and NSE indices?
5. Give details of all the indices mentioned above. You can find information on
the web or business magazines.
(The teacher should help the students in answering these questions. They
can look at the website mentioned above and also website of SEBI, i.e.,
www.sebi.gov.in for educational material. This exercise will help the students
in understanding the stock markets clearly and also create interest therein.)
Project Work
1. Study the wwebsite of Mumbai Stock Exchange, i.e., www.bseindia.com and
compile information which you find useful. Discuss it in your class and find
out how it can help you should you decide to invest in the stock market.
Prepare a report on your findings with the help of your teacher.
2. Prepare a report on the role of SEBI in regulating the Indian stock market.
You can get this information on its website namely www.sebi.gov.in. Do you
think something else should be done to increase the number of investors in
the stock market?

Answers to the Crossword

Across 1. Broker 2. Fluctuations 4. Listing 8. Market 9. Loss
13. Jobber 15. Securities 16. Bear 17. Rigging 18. Stag

Down 1. Bull 3. Cum 5. Stocks 6. Tax 7. Gambling

9. Lists 10. Speculator 11. Capital 12. Dividend 14. Debenture
16. Bonds 19. Gain

2015-16(21/01/2015)