Limitations of SEBI

· The Central Government has authorized SEBI to frame its rules and regulation for actively monitoring capital markets. These rules and regulations will have to be approved by the government first.This will cause unnecessary delay and interference by the Finance Minister.

· SEBI will have to seek prior approval for filling criminal complaints for violations for the regulations. This will again cause delay at government level.

· SEBI has not been given autonomy. Its Board of Directors is dominated by government nominees. Out of 5 directors only 2 can be from outside and these are to represent the Ministries of Finance, Law and Reserve Bank of India..

SEBI has regulated:-

a) Primary Market

b) Secondary Market

c) Mutual funds

d) Foreign Institutional Investments

Functions of SEBI

Main function of SEBI is to protect the interest of investors in securities and to promote the development and to regulate the securities market by such measures as it thinks fit.

Following are the powers granted to SEBI for fulfilling the above objective:-

· Regulating the business in stock exchanges and any other securities markets

· Registering and regulating the working of stock brokers, sub brokers, share transfer agents, registrars to an issue, merchant bankers and other intermediaries who may be associated with securities market in any manner.

· Registering and regulating the working of collective investment schemes, including Mutual funds.

· Promoting and regulating self regulatory organizations

· Prohibiting Fraudulent and unfair trade practices

· Promoting investors education and teaching of intermediaries

· Regulating substantial acquisition of shares and take over of companies.

· Levying fees or other charges for carrying out the purposes

· Conducting research

Additional Functions of SEBI:_

The following powers of the Central Government under the act have been granted to sebi:-

· Power to approve the bye-laws of stock exchange

· Power to make or amend bye-laws of recognized stock exchanges

· Power to inspect books of accounts and call periodical returns from recognized stock exchange

· Power to grant a license to any person for the business dealing in securities

· Power to compel listing of securities on any recognized stock exchange

· Power to delegate powers exercisable by it.

SEBI POWER’S IN RELATION TO STOCK EXCHANGE:-

· May call periodical returns from Stock exchange

· Has power to approve by laws of stock exchange for regulation and control of contracts

· Can amend by laws of stock exchange

· Provide license to dealer In securities

· Compel a public company to list its shares

· May also call upon exchange or any member to give explanation/ information related to affairs of stock exchange.

SECURITIES AND EXCHANGE BOARD OF INDIA ( SEBI)

The establishment of SEBI was a land mark government measure to monitor and regulate capital market activities and to promote healthy development of the market.

It was constituted in 1988 by a resolution of Government of India and was made a statutory body by Securities and Exchange Board of India Act 1992.

Objectives / Purpose of SEBI Act:-

· To protect the interests of investors in securities

· To promote the development of the securities market

· To regulate the securities market

· For matters connected therewith or incidental too.

Management of the Board ( Sec 4)

It consist of

a) Chairman

b) 2 members from among the officials of the ministries of central govt. dealing with Finance and Law.

c) One member from amongst the officials of RBI

d) Two other members to be appointed by the central government.

Weaknesses of Stock Exchanges In India

· Lack of Professionalism:- Stock Broker in India lacks proper education, business skills etc which inhibit them to provide proper service to clients. They are not able to guide & council their clients in a proper manner.

· Domination of financial institutions:- UTI, LIC, GIC are major players in Indian stock markets. Buying & selling by institutions sets the position in market like market goes bullish if Financial Institutions starts buying shares & vice versa.

· Poor Liquidity:- A Small no. of scrip’s are regularly traded in stock exchange. Out of over 3000 scrip’s less then 500 scrip’s are traded and even out of these 90 % volume of trade confines to between 200-250 scrip’s.

· Dominated by Big Operators:- In BSE, 3-4 operators used to call the shots like Harshad Mehta, he created bullish condition in stock exchange in Ist Quarter of 1992 and Sensex nearly doubled in a very short period. Artificial Increase in price of shares affected the investing public and people suffered huge losses.

· Less Floating Stocks:- Shares and debentures offered for sale are a small portion of total stocks. FI’s and JSC’s having a control over 75% do not offer them for sale.

· Speculative Trading:- Operators try to derive benefit out of short term price fluctuations. At BSE, up to 5% and at other stock exchange up to 10 % are genuine. Investment deals broker try to create a sentiment in the market which will be beneficial to them.

Factors Affecting Price on Stock Exchange

·       Financial Position of a Company:- With the increase in Sales & Profits, Price of securities also increases and vice versa. Rate of dividend also influences the price of shares. Higher dividend rate attract more investors.

·       Demand & Supply Position:-With the increase in more demand , Price also increases & vice versa.

·       Role of Financial Institutions:- Like LIC, UTI, IFCI, ICICI purchase share of good companies in bulk. With the increase in supply, increase in price of shares. If they are selling their holding, due to this decrease in supply there is decrease in prices.

·       Lending rate:-  With the low lending rate, there is increase in money supply leads to increase in prices and vice versa.

·       Trade Cycle:-   With boom, there is increase in process and during depression , leads to decrease in prices.

Operators at Stock Exchange

Broker:- Commission agents and act as an intermediary between buyer & seller of securities. They do not purchase & sell securities on their behalf. They bring together buyers & seller and help them making a deal. They change commission from both parties. They are experts in estimating prices and advise their clients in getting gain. They get orders from public and execute the orders through jobbers.

· Jobbers:- are security merchants dealing in shares, debentures as independent operators. They buy & sell securites on their own behalf and try to earn through price changes. They directly deal with broker who make transactions on the behalf of public. They generally quote two price, one – for purchase and other for sell. Difference between the two is known as jobber’s profit or Jobber’s turn.

· Tarawaniwala’s:- Member’s of BSE has unofficially divided themselves into two categories:-

a) Broker

b) Tarawaniwala’s -Act as both jobbers & broker

A tarawaniwala makes transaction’s on his own behalf like a jobber but he may also act as a broker on behalf of public. They indulge in malpractices to earn profits. They may sell their own securities to their client when prices are higher & vice versa.

Types of Speculators:-

Bull:- A bull or Tejiwala is an operator who expects a rise in prices of securities in the future. In anticipation of price rise, he makes purchases of shares and other securities with the intention to sell at higher prices in future. He has no intention of taking delivery of securities but deals only in difference of prices. They also tries to raise the prices of securities by placing big purchase orders

· Bear:- A bear or Mandi wala speculator expects prices to fall in future and sells securities at present with a view to purchase them at lower prices in future. He does not have securities at present but sells them at prices in anticipation that he will supply them by purchasing at lower prices in future. When bear operator starts selling the securities bearish pressure gradually forces down the prices.

· Stag:- It is a cautious speculator. He applies for shares in new companies and expects to sell them at a premium if he gets an allotment. He select those companies whose shares are more in demand and carry premium. He generally sell the shares before being called to pay the allotment money. He is not interested in allotment of securities. He applies for large no. of shares so that he gets some allotment even if there is heavy over subscription.

· Lame Duck:- Where bear finds it difficult to fulfill his commitment, he is called struggling like a lame duck.

For Example:- A bear contracts to sell securities at a later date. On particular time, he is not able to get securities due to any reason.

Over the Counter Exchange of India ( OTCEI):-

Earlier there were so many problems like absence of liquidity, transparency, undue delay in settlement of transactions etc in trading mechanism. To overcome and for providing efficient services to investor, the country’s first electronic stock exchange which facilitates ringless, scripless trading was set up in 1992 with the name OTCEI. It was sponsored by UTI, ICICI, IDBI, SBI, IFCI, GIC etc subsidiaries and can bank financial services.

Features of OTCEI:-

·       Introduced Screen Based trading for the first time in Indian Stock market

·       Trading takes place through a network of computers of over the counter (OTC) dealers located at several places, linket to central OTC computers.

·       All the activities of OTC trading process was fully computerized.

 

National Stock Exchange of India ( NSE)

NSE was inaugurated in 1994 and seeks to

·       Establish a nation wide trading facility for Equities & Debts

·       Facilitates equal access to investors across the country

·       Impacts fairness, efficiency and transparency to securities

·       Shortens Settlement Cycle

·       Meet International Securities Market Standard.

 

Bombay Stock Exchange:- ( BSE)

Established in 1875 and one of oldest organized exchange in the world with a long colourful history.

Features of BSE:-

·       Switches from Open outcry system to Screen Bases system in 1995

·       Jobbers play an important role in BSE. Jobbers is a broker who trades on his own account and offers a two way quote or bid ask offer. Bid price at which jobber is willing to buy and Ask Price – jobber is willing to sell.

·       Investor have to transact through jobber/ broker

 

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Stock Exchange

Meaning of stock Exchange:

                      Earlier stock exchange was physical market place where the agents of buyer & seller operated through auction process. Now these are being replaced with electronic exchanges where buyer and seller are connected only at computer over a telecommunication network. Auction trading is also known as Screen Based trading, where bid price & offer price (ask price) are displayed on computer screen.

Bid Price:- Price at which an investor is willing to buy the security.

Offer Price:- Price at which investor is willing to sell security.

Bid offer Spread:- Difference between the bid price & offer constitutes the margin of Profit.

Definition of Stock Exchange:-

·       “ A centralized market for buying & selling stock where the price is determined through supply demand mechanism”

·       “ An organization that provides a facility for buyer & seller of listed securities to come together to make trades in these securities”

 

Functions of Stock Exchange:-

                                           It has an important role in economic development of a country. It is essential for smooth functioning of private sector corporate economy. It performs mainly four function:-

1.    Market place for purchase & sale of securities such as shares, bonds, debentures etc.

2.    Provides liquidity to investment in securities because it gives the investor a place to liquidate their holdings

3.    Helps in Valuation of securities by providing the market quotation of the price of securities

4.    Play a role of barometer- an indicator of state of health of nation’s economy as a whole.

 

Meaning of Security Market:

Security market is the market for Equity, debt & derivatives.Debt Market may be divided into 3 parts i.e Government Security Market, Corporate Debt Market, Money Market. Derivative may be divided into 2 parts i.e Option Market & Future Market.

Except derivative Market, each of market has 2 components.

a)                 Primary Market ( where new securities are issued)

b)                Secondary Market  ( Where outstanding securities are traded)

 

Participants in Security Market:-

·        Company Law Board ( CLB) responsible for administration of Company Act, 1956

·        RBI responsible for supervision of Banks, Money Market & Govt. Securities Market

·        SEBI responsible for the regulation of Capital Market

·        DEA (Department of Economic Affairs) arm of Government is concerned with functioning of financial market as a whole.

·        DCA (Department of Company Affairs) arm of Govt. responsible for administration of Corporate bodies. 

Primary Equity Market/ New Issue Market ( NIM)

When a new company is floated, its shares are issued to public in primary market known as Intial Public Offer ( IPO). It does not have a physical structure or form. All the agencies which provides the facilities & participate in process of selling new issue to investors constitute NIM.

FOREIGN EXCHANGE MARKET

. The foreign exchange market is the market which accommodates the currency preferences of the parties involved and helps convert one currency into the other currency.

CLASSIFICATION OF FOREIGN EXCHANGE MARKET

1. The Spot Market:

The spot market or cash market is a commodities or securities market in which goods are sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective.

2. The Forward Market:

The forward market is the over-the-counter financial market in contracts for future delivery, so called forward contracts. Forward contracts are personalized between parties.

SCOPE:

          The foreign exchange market is worldwide in scope and the major world’s trading centers are in Tokyo, Singapore, New York, Frankfurt, Zurich and San Francisco. Many other cities are also major forex market centers.

SPECULATIORS

Some people and businesses are in the business of taking risks to make money for the possibility of a reward. The parties represent another pillar of derivative market and are known as speculators. Speculators are people who take positions in the market and want to assume risks to profit from exchange rate fluctuations. They may take a long position or a short position in a forward contract. Their extent of participation on a deal depends on the prevailing forward rates and their expectation for spot exchange rates in the future. Speculators use derivatives to get extra leverage

Top 10 currency traders

   % of overall volume, May 2009

Rank	Name	Market Share
1	Deutsche Bank	20.96%
2	UBS AG	14.58%
3	Barclays Capital	10.45%
4	Royal Bank of Scotland	8.19%
5	Citi	7.32%
6	JPMorgan	5.43%
7	HSBC	4.09%
8	Goldman Sachs	3.35%
9	Credit Suisse	3.05%
10	BNP Paribas	2.26%