STOCK EXCHANGE

&
SECURITES EXCHANGE BOARD OF INDIA
 1. STOCK EXCHANGE

A stock exchange is an entity which provides "trading" facilities for stock brokers and traders, to
trade stocks and other securities. Stock exchanges also provide facilities for the issue and
redemption of securities as well as other financial instruments and capital events including the
payment of income and dividends. The securities traded on a stock exchange include shares
issued by companies, unit trusts, derivatives, pooled investment products and bonds.

To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there
is a central location at least for recordkeeping, but trade is less and less linked to such a physical
place, as modern markets are electronic networks, which gives them advantages of increased
speed and reduced cost of transactions. Trade on an exchange is by members only.

The initial offering of stocks and bonds to investors is by definition done in the primary market
and subsequent trading is done in the secondary market. A stock exchange is often the most
important component of a stock market. Supply and demand in stock markets is driven by
various factors which, as in all free markets, affect the price of stocks (see stock valuation).

There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be
subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter.
This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are
part of a global market for securities.
 2. The first stock exchange
In 12th century France the courtiers de change was concerned with managing and regulating the
debts of agricultural communities on behalf of the banks. As these men also traded in debts, they
could be called the first brokers.

Some stories suggest that the origins of the term "bourse" came from the Latin bursa meaning a
bag because, in 13th century Bruges, the sign of a purse (or perhaps three purses), hung on the
front of the house where merchants met.

2.1 Major stock exchanges

Major Stock Exchanges: Year ended 31 December 2009

(Source: World Federation of Exchanges - Statistics/Monthly)

Market Capitalization Trade Value

Economy Stock Exchange
(USD Billions) (USD Billions)
United States New York Stock Exchange 11838 17521
 Japan Tokyo Stock Exchange 3306 3704
 United States NASDAQ 3239 13608
Europe Euro next 2869 1935
United Kingdom London Stock Exchange 2796 1772
China Shanghai Stock Exchange 2705 5056
 Hong Kong Hong Kong Stock Exchange 2305 1416
 Canada Toronto Stock Exchange 1677 1245
 Spain BME Spanish Exchanges 1435 1259
 Brazil BM&F Bovespa 1337 645
 India Bombay Stock Exchange 1307 264
 Germany Deutsche Börse 1292 1517
 Australia Australian Securities Exchange 1225 799
 India National Stock Exchange of India 1225 792
 Switzerland SIX Swiss Exchange 1065 740
 China Shenzhen Stock Exchange 868 2772
 South Korea Korea Exchange 835 1570
Nordic Countries NASDAQ Exchange 817 697
 South Africa JSE Limited 799 271
 Taiwan Taiwan Stock Exchange 658 905
 Italy Borsa Italiana 656 948
2.2 Other types of exchanges

In the 19th century, exchanges were opened to trade forward contracts on commodities.
Exchange traded forward contracts are called futures contracts. These commodity exchanges later
started offering future contracts on other products, such as interest rates and shares, as well as
options contracts. They are now generally known as futures exchanges.

3. Stock exchanges have multiple roles in the economy. This may include the
following:

1. Raising capital for businesses

The Stock Exchange provides companies with the facility to raise capital for expansion through
selling shares to the investing public.

2. Mobilizing savings for investment

When people draw their savings and invest in shares, it leads to a more rational allocation of
resources because funds, which could have been consumed, or kept in idle deposits with banks,
are mobilized and redirected to promote business activity with benefits for several economic
sectors such as agriculture, commerce and industry, resulting in stronger economic growth and
higher productivity levels of firms.

3. Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution

channels, hedge against volatility, increase its market share, or acquire other necessary business
assets. A takeover bid or a merger agreement through the stock market is one of the simplest and
most common ways for a company to grow by acquisition or fusion

4. Profit sharing

Both casual and professional stock investors, through dividends and stock price increases that
may result in capital gains, will share in the wealth of profitable businesses.

5. Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve on their
management standards and efficiency in order to satisfy the demands of these shareholders and
the more stringent rules for public corporations imposed by public stock exchanges and the
government. Consequently, it is alleged that public companies (companies that are owned by
shareholders who are members of the general public and trade shares on public exchanges) tend
to have better management records than privately held companies (those companies where shares
are not publicly traded, often owned by the company founders and/or their families and heirs, or
otherwise by a small group of investors).

Despite this claim, some well-documented cases are known where it is alleged that there has
been considerable slippage in corporate governance on the part of some public companies. The
dot-com bubble in the late 1990's, and the subprime mortgage crisis in 2007-08, are classical
examples of corporate mismanagement. Companies like Pets.com (2000), Enron Corporation
(2001), One.Tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), MCI WorldCom
(2002), Parmalat (2003), American International Group (2008), Bear Stearns (2008), Lehman
Brothers (2008), General Motors (2009) and Satyam Computer Services (2009) were among the
most widely scrutinized by the media.

However, when poor financial, ethical or managerial records are known by the stock investors,
the stock and the company tend to lose value. In the stock exchanges, shareholders of
underperforming firms are often penalized by significant share price decline, and they tend as
well to dismiss incompetent management teams.

6. Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is open to
both the large and small stock investors because a person buys the number of shares they can
afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares
of the same companies as large investors.

7. Government capital-raising for development projects

Governments at various levels may decide to borrow money in order to finance infrastructure
projects such as sewage and water treatment works or housing estates by selling another category
of securities known as bonds. These bonds can be raised through the Stock Exchange whereby
members of the public buy them, thus loaning money to the government. The issuance of such
bonds can obviate the need to directly tax the citizens in order to finance development, although
by securing such bonds with the full faith and cr of the government instead of with collateral, the
result is that the government must tax the citizens or otherwise raise additional funds to make
any regular coupon payments and refund the principal when the bonds mature.
8. Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on market forces. Share
prices tend to rise or remain stable when companies and the economy in general show signs of
stability and growth. An economic recession, depression, or financial crisis could eventually lead
to a stock market crash. Therefore the movement of share prices and in general of the stock
indexes can be an indicator of the general trend in the economy.

4. Listing requirements

Listing requirements are the set of conditions imposed by a given stock exchange upon
companies that want to be listed on that exchange. Such conditions sometimes include minimum
number of shares outstanding, minimum market capitalization, and minimum annual income.

Requirements by stock exchange

Companies have to meet the requirements of the exchange in order to have their stocks and
shares listed and traded there, but requirements vary by stock exchange:

 Bombay Stock Exchange: Bombay Stock Exchange (BSE) has requirements for a
minimum market capitalization of Rs.250 Million and minimum public float equivalent
to Rs.100 Million.
 London Stock Exchange: The main market of the London Stock Exchange has
requirements for a minimum market capitalization (£700,000), three years of audited
financial statements, minimum public float (25 per cent) and sufficient working capital
for at least 12 months from the date of listing.
 NASDAQ Stock Exchange: To be listed on the NASDAQ a company must have issued at
least 1.25 million shares of stock worth at least $70 million and must have earned more
than $11 million over the last three years.
 New York Stock Exchange: To be listed on the New York Stock Exchange (NYSE) a
company must have issued at least a million shares of stock worth $100 million and must
have earned more than $10 million over the last three years.
5. Indian Stock Exchange:

India Stock Exchanges can either be a conglomerate/ firm or mutual group. The affiliates act as
intermediaries to their patrons or as key players for their own accounts.

Stock Exchanges in India also assist the issue and release of securities and other monetary tools
incorporating the fortification of revenues and dividends. The book keeping of the trade is
centralized but the buying and selling is associated to a particular place as advanced
marketplaces are mechanized. The buying and selling on an exchange is only open to its
affiliates and brokers.

5.1Different Stock Exchanges in India

(a) National Stock Exchange (NSE) of India

Integrated in November 1992, the National Stock Exchange of India (NSE) was initially a tariff
forfeiting association. In 1993, the exchange was certified under Securities Contracts
(Regulation) Act, 1956 and in June 1994 it started its business functioning in the Wholesale Debt
Market (WDM). The Equities division of NSE began its operations in 1994 while in 2000 the
corporation incorporated its Derivatives division.

(b) Bombay Stock Exchange (BSE) of India

The oldest stock market in Asia, BSE stands for Bombay Stock Exchange and was initially
known as "The Native Share & Stock Brokers Association." Incorporated in the 1875, BSE
became the first exchange in India to be certified by the administration. It attained a permanent
authorization from the Indian government in 1956 under Securities Contracts (Regulation) Act,
1956.

Over the year, the exchange company has played an essential part in the expansion of Indian
investment market. At present the association is functioning as corporatized body integrated
under the stipulations of the Companies Act, 1956.

(c) Regional Stock Exchanges (RSE) of India

The Regional Stock Exchanges in India started spreading its business operation from 1894. The
first RSE to start its functioning in India was Ahmadabad Stock Exchange (ASE) followed by
Calcutta Stock Exchange (CSE) in 1908.

The stock exchange in India witnessed a flourishing phase in 1980s with the incorporation of
many exchanges under it. In early 60s, it has only few certifies RSEs under it namely Hyderabad
Stock Exchange, Indore Stock Exchange, Madras Stock Exchange, Calcutta Stock Exchange and
Delhi Stock Exchange. The recent to join the list was Meerut Stock Exchange and Coimbatore
Stock Exchange.

5.2 Functions of Stock Exchange

Functions done by the stock exchange market in favor of the investor:

 It permits him the access to the profitable activities of the big companies.
 It offers liquidity to the security investments, through a place in which to sell or buy
securities.
 It permits for the investor to have a political power in the companies in which he invests
its savings due that the acquisition of ordinary shares gives him the right (among other
things) to vote in the general shareholders meetings of the company in question.
 It offers the possibility of diversifying   your portfolio by enlarging the field of strategy of
investments due to alternative options, as could be the derived market, the money market,
etc.

The function done by the stock exchange market in favor of the companies:

 It supplies them with the obtaining of long-term funds that permits the company to make
profitable activities or to do determine projects that otherwise wouldn’t be possible to
develop for lack of financing. Also, this funding signifies a less cost than if obtained at
other channels.
 The securities quoted at the stock exchange market usually have more fiscal purpose
advantages for the companies.
 It offers to the company’s free publicity, which in other way would suppose considerable
expenses. The institution is objecting of attention of the media (television, radio, etc.) in
case any important change in its owners (the share holders).

The Functions of the stock exchange market as an organization are:

 To guarantee the legal and economic security of the agreed contracts.

 To provide official information about the quantities that are negotiated and of the quoted
prices.
 To fix the prices of the securities according to the fundamental law of the offer and the
demand.
6. SECURITIES EXCAHNGE BOARD OF INDIA (SEBI)
SEBI is the regulator for the securities market in India. It was formed officially by the
Government of India in 1992 with SEBI Act 1992 being passed by the Indian Parliament.
Chaired by C B Bhave, SEBI is headquartered in the popular business district of Bandra-Kurla
complex in Mumbai, and has Northern, Eastern, Southern and Western regional offices in New
Delhi, Kolkata, Chennai and Ahmedabad.
6.2 Functions and responsibilities

SEBI has to be responsive to the needs of three groups, which constitute the market:

 The issuers of securities

 The investors
 The market intermediaries.

SEBI has three functions rolled into one body quasi-legislative, quasi-judicial and quasi-
executive. It drafts regulations in its legislative capacity, it conducts investigation and
enforcement action in its executive function and it passes rulings and orders in its judicial
capacity. Though this makes it very powerful, there is an appeals process to create
accountability. There is a Securities Appellate Tribunal which is a three-member tribunal and is
presently headed by a former Chief Justice of a High court - Mr. Justice NK Sodhi. A second
appeal lies directly to the Supreme Court.

SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and
successively (e.g. the quick movement towards making the markets electronic and paperless
rolling settlement on T+2 basis). SEBI has been active in setting up the regulations as required
under law.

SEBI has also been instrumental in taking quick and effective steps in light of the global
meltdown and the Satyam fiasco. It had increased the extent and quantity of disclosures to be
made by Indian corporate promoters. More recently, in light of the global meltdown, it
liberalized the takeover code to facilitate investments by removing regulatory strictures.
CURRENT EXAMPLES OF SEBI