Stock Market Operations CBCFB5T07

Syllabus topics (RTMNU)

• Meaning, Nature and Functions of the Stock Market
• Primary Market vs Secondary Market
• Stock Exchanges: Meaning, Features and Functions
• Major Stock Exchanges in India: Bombay Stock Exchange, National Stock Exchange
• Market Participants: Issuers, Investors, Traders, Brokers, Sub-brokers, etc.
• Role of Depositories: National Securities Depository Limited, Central Depository Services Limited

Stock Market — Meaning, Nature and Functions

Definition: A stock market (share market) is an organised market where securities such as shares, debentures, bonds, mutual fund units and derivatives are issued and traded, under rules made by a regulator. In India it is regulated mainly by SEBI.

Nature:

1. Organised and regulated market with fixed rules and timings.
2. Market for existing and new securities (secondary and primary).
3. Price set by demand and supply through open bidding.
4. Electronic and screen-based — trading through brokers on computers and mobile apps.
5. Barometer of the economy: index movements reflect economic health.
6. Gives liquidity and safety to investors through clearing corporations and depositories.

Functions: (1) raising long-term capital for companies and government; (2) providing liquidity — investors can sell any time; (3) continuous price discovery and valuation of securities; (4) mobilising household savings into investment; (5) safety of transactions through regulation; (6) wider ownership of companies; (7) helps in mergers and disinvestment; (8) indicates the state of the economy.

Primary Market vs Secondary Market

Stock Exchanges — Meaning, Features and Functions

Definition: Section 2(j) of the Securities Contracts (Regulation) Act, 1956 defines a stock exchange as a body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. A stock exchange must be recognised by the Government/SEBI.

Features: organised market; recognised under SCRA; only listed securities are traded; dealings only through registered brokers (trading members); strict rules and disclosure; electronic trading; transparency of prices.

Functions: provides a ready market and liquidity; continuous price fixation; safety of dealings; listing of securities; helps capital formation; spreads investment culture; publishes prices and indices; protects investors through investor-protection funds.

Major Stock Exchanges in India: BSE and NSE

Other exchanges include the Metropolitan Stock Exchange of India (MSE), and the commodity exchanges MCX and NCDEX (commodities are also under SEBI since 2015).

Market Participants

• Issuers: companies, government and PSUs that issue securities to raise funds.
• Investors: retail investors, high-net-worth individuals (HNIs), institutional investors — mutual funds, insurance companies (LIC), banks, Foreign Portfolio Investors (FPIs).
• Traders and speculators: buy and sell for short-term gain — bulls (expect rise), bears (expect fall), arbitrageurs.
• Stock brokers (trading members): registered with SEBI and members of an exchange; they execute orders for clients for brokerage.
• Sub-brokers / Authorised Persons: agents of brokers who bring clients. SEBI merged the sub-broker category into "Authorised Persons" from 2019 — check latest.
• Clearing corporations: NSE Clearing Ltd, Indian Clearing Corporation Ltd — guarantee settlement.
• Depositories and Depository Participants (DPs).
• Others: merchant bankers, registrars, custodians, credit rating agencies, investment advisers.

Role of Depositories: NSDL and CDSL

Depository — Meaning: A depository is an organisation that holds securities of investors in electronic (dematerialised) form and transfers them by book entry, like a bank holds money. It works under the Depositories Act, 1996 and SEBI regulations, through Depository Participants (DPs) such as banks and brokers who open demat accounts for investors.

Role/functions: dematerialisation (paper to electronic) and rematerialisation; transfer of securities on settlement; pledge and hypothecation of securities; distribution of corporate benefits (dividends, bonus, rights) through the issuer's registrar; e-voting and statements; reducing risks of theft, forgery and bad delivery; safe, quick and low-cost transfers.

Likely exam questions

1. (Long, 8/16 marks) What is a stock exchange? Explain its features and functions. Write a note on BSE and NSE.
2. (Long, 8/16 marks) Distinguish between primary market and secondary market. Explain the role of depositories (NSDL and CDSL) in the stock market.
3. (Short, 4 marks) State the functions of the stock market.
4. (Short, 4 marks) Who are the participants in the stock market?
5. (Short, 4 marks) What is a depository participant?

Syllabus topics (RTMNU)

• Public Issues: IPO, FPO, Rights Issue, Bonus Issue
• Book Building Process
• Private Placement and Preferential Allotment
• Role of Merchant Bankers and Underwriters
• Prospectus: Contents and Legal Requirements
• Listing of Securities: Procedure and Requirements
• Recent Trends in IPO Market (Indian context)

Public Issues: IPO, FPO, Rights Issue, Bonus Issue

Companies raise capital in the primary market mainly under the Companies Act, 2013 and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR).

1. IPO (Initial Public Offer): the first issue of shares by an unlisted company to the public, after which the shares are listed. It may be a fresh issue (money goes to the company) and/or an offer for sale (existing shareholders sell; money goes to them). E.g. LIC IPO (2022), Hyundai Motor India IPO (2024).
2. FPO (Follow-on Public Offer): a further public issue by a company that is already listed, to raise more capital.
3. Rights issue: new shares offered first to existing shareholders in proportion to their holding (e.g. 1 for every 5 held), usually at a discount; rights can be renounced in favour of others (Section 62(1)(a), Companies Act 2013).
4. Bonus issue: free shares given to existing shareholders by capitalising reserves (Section 63). No new money comes in; the number of shares rises and the price per share adjusts.

Book Building Process

Meaning: Book building is a method of price discovery in which the issue price is fixed on the basis of bids received from investors within a price band, instead of a price fixed in advance.

1. The company appoints a lead manager (Book Running Lead Manager) and files the Draft Red Herring Prospectus (DRHP) with SEBI.
2. A price band is announced (floor price and cap price; the cap may not exceed 120% of the floor — check latest).
3. Investors bid for quantity and price within the band during the bid period (usually at least 3 working days) through ASBA/UPI.
4. The "book" of bids is built electronically and shown by category.
5. After closing, the cut-off price (final issue price) is fixed on the basis of demand.
6. Shares are allotted; money is unblocked for unsuccessful bidders; shares are credited to demat accounts and listed.

Reservation (usual for a profitable company): not more than 50% for Qualified Institutional Buyers (QIBs), not less than 15% for Non-Institutional Investors and not less than 35% for retail individual investors — check latest SEBI ICDR rules. Fixed-price issues differ: price is known in advance and demand is known only after closing.

Private Placement and Preferential Allotment

Private placement (Section 42, Companies Act 2013): offer of securities to a select group of persons (not the public) through a private placement offer letter; offer limited to 200 persons in a financial year (excluding QIBs and employees under ESOPs) — check latest rules. Qualified Institutions Placement (QIP) is a type of private placement by listed companies to QIBs only.

Preferential allotment (Section 62(1)(c) and Chapter V of SEBI ICDR): issue of shares by a listed company to selected persons — promoters, strategic investors — at a price as per the SEBI formula, with a lock-in period. It needs a special resolution.

Role of Merchant Bankers and Underwriters

Merchant banker (registered under SEBI (Merchant Bankers) Regulations, 1992; acts as Book Running Lead Manager): advises on size, timing and type of issue; prepares the prospectus and gets SEBI observations; does due diligence; appoints registrars, bankers and advertisers; manages marketing (roadshows) and book building; arranges listing and post-issue work.

Underwriter: a person who guarantees to buy the unsubscribed part of an issue for a commission. It assures the company that the required amount will be raised, adds investor confidence and helps in marketing. (Underwriting commission limits are given in the Companies Act — Section 40(6).)

Prospectus: Contents and Legal Requirements

Definition: Under Section 2(70) of the Companies Act, 2013, a prospectus is any document described or issued as a prospectus, including a red herring prospectus or shelf prospectus, inviting offers from the public for the purchase of securities.

Contents (Section 26 + SEBI ICDR): name and registered office; objects of the issue; details of promoters and directors; capital structure; issue size, price and price band; risk factors; financial statements and auditors' report; management discussion; litigation; lead managers, registrars and bankers; basis of allotment; minimum subscription; dates of opening and closing.

Legal requirements: signed by every director, dated, and filed with the Registrar of Companies before issue; draft filed with SEBI; must be true and complete. Misstatement leads to criminal liability (Section 34) and civil liability to pay compensation (Section 35).

Listing of Securities: Procedure and Requirements

Listing means admission of securities to trading on a recognised stock exchange. A public issue must apply for listing (Section 40, Companies Act 2013).

Procedure: in-principle approval from the exchange before filing the offer document → complete the issue → allotment → apply for final listing and trading approval with documents (memorandum, articles, prospectus, allotment details, listing fee) → sign the listing agreement → trading starts. SEBI has cut the time from issue closing to listing to T+3 working days — check latest.

Requirements: minimum public shareholding of 25% (to be reached within the allowed time); compliance with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 — quarterly results, corporate governance, timely disclosure of price-sensitive information; payment of annual listing fees.

Recent Trends in IPO Market (Indian context)

• Big rise in the number of IPOs and amounts raised in recent years, with record retail participation and many first-time demat accounts.
• Large IPOs such as LIC (2022) and Hyundai Motor India (2024), and new-age tech companies such as Zomato (2021) and Swiggy (2024).
• Boom in SME IPOs on BSE SME and NSE Emerge; SEBI has tightened SME IPO rules because of over-subscription and price concerns.
• UPI-based ASBA for retail bids, and faster listing (T+3).
• More offer-for-sale by private equity investors; anchor investors and grey-market premium attracting attention.
• Growing role of domestic mutual funds as anchor investors.

Likely exam questions

1. (Long, 8/16 marks) Explain the book building process. Distinguish between book building and fixed price issue.
2. (Long, 8/16 marks) What is a prospectus? Explain its contents and legal requirements under the Companies Act, 2013.
3. (Short, 4 marks) Distinguish between IPO and FPO.
4. (Short, 4 marks) Explain the role of a merchant banker.
5. (Short, 4 marks) What is listing of securities?

Syllabus topics (RTMNU)

• Trading Mechanism in Stock Exchanges
• Online Trading System
• Types of Orders: Market Order, Limit Order, Stop Loss Order
• Rolling Settlement System (T+1 System in India)
• Clearing and Settlement Process
• Margin Trading and Short Selling
• Circuit Breakers and Market Volatility
• Stock Market Indices: Meaning, Importance and Value Calculation of SENSEX and NIFTY 50
• Understanding Sectoral and Other Indices

Trading Mechanism in Stock Exchanges and Online Trading System

Earlier, trading in India was by open outcry on the trading floor ("ring"). Today both BSE (BOLT) and NSE (NEAT) use a fully computerised, screen-based, order-driven system that matches buy and sell orders automatically on price-time priority (best price first; for the same price, the earlier order first).

Steps in online trading:

• Open a trading account with a SEBI-registered broker and a demat account with a DP; complete KYC (PAN, Aadhaar, bank details).
• Log in to the broker's app/website and place an order (stock, quantity, price, order type).
• The order goes to the exchange's order book; the system matches it with a counter order.
• A contract note is sent to the investor within 24 hours (electronic).
• Clearing and settlement happen through the clearing corporation; shares/money are credited on T+1.

Merits of online trading: speed, transparency, low cost, trading from anywhere, nationwide access, reduced fraud. Normal equity market hours on NSE/BSE are 9:15 a.m. to 3:30 p.m. (with a pre-open session from 9:00 a.m.).

Types of Orders

Other orders: day order (valid for the day), IOC — immediate or cancel, GTT — good till triggered (offered by brokers).

Rolling Settlement System (T+1 in India)

Rolling settlement means trades of each day are settled separately after a fixed number of working days. In T+1, a trade done on day T is settled on the next working day: the buyer gets shares and the seller gets money on T+1. India moved to T+1 in phases from 2022 and completed it in January 2023, becoming one of the first major markets to do so. SEBI has also introduced an optional same-day (T+0) settlement for selected stocks — check latest.

Benefits: faster access to money and shares, lower settlement risk, lower margin needs, more liquidity.

Clearing and Settlement Process

1. Trade execution on the exchange.
2. Clearing: the clearing corporation (NSE Clearing Ltd / Indian Clearing Corporation Ltd) works out the net obligations of each broker — who must pay how much money and deliver which shares. Through novation it becomes the buyer to every seller and the seller to every buyer, and guarantees settlement.
3. Pay-in: brokers deliver securities (through depositories) and funds (through clearing banks) to the clearing corporation.
4. Pay-out: the clearing corporation passes securities to buying brokers and funds to selling brokers; they credit clients.
5. Risk management: margins, settlement guarantee fund and auction of short deliveries.

Margin Trading and Short Selling

Margin trading: buying shares by paying only a part of the value (the margin) while the broker funds the rest, on interest. In India it is offered as the SEBI-approved Margin Trading Facility (MTF). It increases buying power but also increases loss; if price falls, the broker makes a margin call.

Short selling: selling shares one does not own, expecting the price to fall, and buying them back later at a lower price. Example: sell at ₹800, buy back at ₹720 → profit ₹80 per share (before costs). Naked short selling (without arranging shares to deliver) is not allowed in India; delivery is ensured through the Securities Lending and Borrowing (SLB) mechanism. Short selling helps price discovery and liquidity but can increase volatility — SEBI rules on disclosure apply (check latest).

Circuit Breakers and Market Volatility

Volatility means sharp ups and downs in prices. To control panic, SEBI uses circuit breakers:

• Index-based market-wide circuit breakers: trading in the whole equity and derivatives market halts when SENSEX or NIFTY moves 10%, 15% or 20%; the length of the halt depends on the time of day, and at 20% trading stops for the rest of the day.
• Stock-level price bands: daily limits such as 2%, 5%, 10% or 20% on individual shares (stocks in the derivatives segment have dynamic bands).
• India VIX (volatility index of NSE) measures expected volatility ("fear index").

Stock Market Indices: Meaning, Importance and Calculation of SENSEX and NIFTY 50

Meaning: A stock market index is a number that shows the overall change in prices of a selected group of shares, compared with a base period. Importance: barometer of the economy and market mood; benchmark for mutual funds and portfolios; basis for index funds, ETFs and index derivatives; helps investors compare performance.

Worked example (3-stock index):

If the base market cap is ₹2,400 crore and the base value is 1000: Index = 3,000 ÷ 2,400 × 1000 = 1250. The base cap is adjusted for corporate actions (rights issues, changes in constituents) so that the index measures only price change.

Sectoral and Other Indices

Sectoral indices track one industry: NIFTY Bank, NIFTY IT, NIFTY Pharma, NIFTY FMCG, NIFTY Auto, BSE Bankex, BSE Metal. Size-based indices: NIFTY Next 50, NIFTY Midcap 150, NIFTY Smallcap 250, BSE 500, BSE Midcap/Smallcap. Thematic and strategy indices: NIFTY CPSE, NIFTY ESG indices, Shariah indices, dividend opportunities. They help in sector analysis and are used by ETFs and sector funds.

Likely exam questions

1. (Long, 8/16 marks) Explain the online trading system and the clearing and settlement process under T+1 rolling settlement in India.
2. (Long, 8/16 marks) What is a stock market index? Explain the importance and method of calculation of SENSEX and NIFTY 50.
3. (Short, 4 marks) Explain market order, limit order and stop loss order.
4. (Short, 4 marks) What is short selling?
5. (Short, 4 marks) What are circuit breakers?

Syllabus topics (RTMNU)

• RBI as a regulator of the stock markets
• Securities and Exchange Board of India: Role and Functions of SEBI
• SEBI and Investor Protection
• Grievance Redressal Mechanism (SCORES platform of SEBI)
• Securities Contract Regulation Act
• Ethical Issues in Stock Market Operations

RBI as a Regulator of the Stock Markets

SEBI is the main regulator of the securities market, but the Reserve Bank of India (set up under the RBI Act, 1934) also regulates important parts of the financial market that are linked to it:

1. Government securities market: RBI manages the issue of Central and State Government securities and regulates their trading (NDS-OM platform). Under the SCRA, powers over contracts in government securities, money-market instruments and derivatives on them have been given to RBI.
2. Money market: call money, treasury bills, commercial paper, certificates of deposit, repo.
3. Foreign exchange and FPI limits: under FEMA, 1999, RBI sets limits for foreign investment in Indian companies and debt; it regulates currency and interest-rate derivatives (with SEBI for exchange-traded ones).
4. Banks' exposure to capital markets: limits on bank loans against shares and to brokers, so that bank money does not fuel speculation.
5. Monetary policy: repo rate and liquidity affect interest rates and share prices (check the latest RBI figure; do not quote an old rate).
6. Coordination: RBI works with SEBI, IRDAI and PFRDA through the Financial Stability and Development Council (FSDC).

Securities and Exchange Board of India: Role and Functions

SEBI was set up on 12 April 1988 as a non-statutory body and became a statutory body under the SEBI Act, 1992. Head office: Mumbai. Its preamble states three aims: to protect the interests of investors in securities, to promote the development of the securities market, and to regulate it.

Functions (Section 11 of SEBI Act):

• Protective: prohibit fraudulent and unfair trade practices, insider trading and price manipulation; promote fair practices; educate investors.
• Regulatory: register and regulate stock exchanges, brokers, merchant bankers, mutual funds, depositories, portfolio managers, credit rating agencies, investment advisers; frame rules (ICDR, LODR, takeover code); conduct inspections and audits; levy fees and penalties.
• Developmental: introduce new products (ETFs, REITs, InvITs), promote investor education, training of intermediaries, technology such as T+1 settlement and UPI in IPOs.
• Quasi-judicial and quasi-legislative powers: pass orders, impose penalties, ban entities; appeals go to the Securities Appellate Tribunal (SAT).

SEBI and Investor Protection

• Compulsory disclosure in offer documents (ICDR) and continuous disclosure by listed companies (LODR).
• Regulations against insider trading (SEBI (Prohibition of Insider Trading) Regulations, 2015) and fraudulent/unfair trade practices (PFUTP Regulations, 2003).
• Takeover code to protect minority shareholders during acquisitions.
• Demat system, T+1 settlement, ASBA in IPOs — money stays in investor's account until allotment.
• Investor Protection Fund (IPF) at exchanges and Investor Protection and Education Fund (IPEF) at SEBI.
• Nomination, KYC norms, margin rules, segregation of client funds by brokers.
• Investor education programmes and the SEBI investor website.

Grievance Redressal Mechanism (SCORES)

SCORES (SEBI Complaints Redress System) is SEBI's online platform, launched in 2011, for investors to file complaints against listed companies and SEBI-registered intermediaries (brokers, DPs, mutual funds, RTAs). An upgraded SCORES 2.0 was introduced in 2024 — check latest.

Steps:

1. First complain directly to the company or intermediary.
2. If not resolved, register on SCORES (website or mobile app) and lodge the complaint with documents.
3. The complaint goes to the entity, which must reply within the time SEBI fixes; the designated body (exchange/depository) monitors it.
4. The investor can track the status online and ask for a review if not satisfied.
5. If still not settled, the investor can use the Online Dispute Resolution (ODR) portal for conciliation and arbitration (introduced by SEBI in 2023).

Benefits: centralised, online, 24×7, time-bound, transparent, no need to visit SEBI offices. Other channels: exchange investor service cells, SEBI toll-free helpline.

Securities Contracts (Regulation) Act, 1956

The SCRA, 1956 was passed to prevent undesirable transactions in securities by regulating stock exchanges and dealings in securities. It came into force on 20 February 1957. Main provisions:

• Definitions: "securities", "stock exchange", "derivative" etc. (Section 2).
• Recognition of stock exchanges: only recognised exchanges can operate; recognition can be withdrawn (Sections 3–5).
• Corporatisation and demutualisation of stock exchanges — separation of ownership and trading rights.
• Power to make rules and bye-laws for exchanges, approved by SEBI.
• Clearing corporations to be set up for clearing and settlement.
• Listing: conditions for listing and delisting of securities (Section 21 and 21A).
• Contracts: contracts in notified securities outside recognised exchanges are illegal/void, with exceptions such as spot delivery contracts.
• Penalties for violations; powers of SEBI and the Central Government to inspect and give directions.
• Securities Contracts (Regulation) Rules, 1957 — e.g. minimum public shareholding of 25%.

Ethical Issues in Stock Market Operations

• Insider trading: trading on unpublished price-sensitive information (UPSI) — e.g. buying shares before a merger is announced.
• Price manipulation: "pump and dump", circular trading and rigging to create false prices.
• Front running: a broker or fund manager trades ahead of a big client order to profit from it.
• Misleading advice: unregistered "tips" on social media, finfluencers, Telegram/WhatsApp groups; SEBI has restricted dealings with unregistered finfluencers — check latest.
• Mis-selling and churning of client accounts for brokerage.
• Misuse of client funds and securities by brokers (e.g. the Karvy case).
• Window dressing of accounts and corporate governance failures (e.g. Satyam, 2009).
• Conflict of interest of research analysts, rating agencies and auditors.

Remedies: strict SEBI regulations, surveillance by exchanges (AI-based alerts), heavy penalties, ethical codes for intermediaries, investor awareness, whistle-blower systems and independent directors.

Likely exam questions

1. (Long, 8/16 marks) Explain the role and functions of SEBI. What steps has SEBI taken for investor protection?
2. (Long, 8/16 marks) Explain the main provisions of the Securities Contracts (Regulation) Act, 1956. Discuss the ethical issues in stock market operations.
3. (Short, 4 marks) Explain the role of RBI in regulating the stock market.
4. (Short, 4 marks) What is SCORES?
5. (Short, 4 marks) What is insider trading?