Chapter-1

Gagandeep singh

The Indian Capital Market - An Overview

The function of the financial market is to facilitate the transfer of funds from

surplus sectors (lenders) to deficit sectors (borrowers). Normally,

households have investible funds or savings which they lend to borrowers in

the corporate and public sectors whose requirement of funds far exceeds

their savings. A financial market consists of investors or buyers of securities

borrowers or sellers of securities, intermediaries and regulatory bodies.

Financial market does not refer to a physical location. Formal trading rules,

relationships and communication networks for originating and trading

financial securities link the participants in the market.

Organised money market: Indian financial system consists of money

market and capital

market. The money market has two components - the organised and the

unorganised. The organisedmarket is dominated by commercial banks. The

other major participants are the Reserve Bank of India, Life Insurance

Corporation, General Insurance Corporation, Unit Trust of India, Securities

Trading Corporation of India Ltd., Discount and Finance House of India, other

primary dealers, commercial banks and mutual funds. The core of the money

market is the inter-bank call money market whereby short-term money

borrowing/lending is effected to manage temporary liquidity mismatches.

The Reserve Bank of India occupies a strategic position of managing market

liquidity through open market operations of government securities, access to

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its accommodation, cost (interest rates), availability of credit and other

monetary management tools. Normally, monetary assets of short-term

nature, generally less than one year, are dealt in this market.

Un-organised money market: Despite rapid expansion of the organised

money market through a large network of banking institutions that have

extended their reach even to the rural areas, there is still an active

unorganised market. It consists of indigenous bankers andmoneylenders.

In the unorganised market, there is no clear demarcation between short-

term and long-term finance and even between the purposes of finance. The

unorganised sector continues to provide finance for trade as well as

personal consumption.

The inability of the poor to meet the "creditworthiness" requirements of the

banking sector make them take recourse to the institutions that still remain

outside the regulatory framework of banking. But this market is shrinking.

The Capital market: The capital market consists of primary and secondary

markets. The primary market deals with the issue of new instruments by the

corporate sector such as equity shares, preference shares and debt

instruments. Central and State governments, various public sector industrial

units (PSUs), statutory and other authorities such as state electricity boards

and port trusts also issue bonds/debt instruments.

The primary market in which public issue of securities is made through a

prospectus is a retail market and there is no physical location. Offer for

subscription to securities is made to investing community. The secondary

market or stock exchange is a market for trading and settlement of

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securities that have already been issued. The investors holding securities

sell securities through registered brokers/sub-brokers of the stock exchange.

Investors who are desirous of buying securities purchase securities through

registered broker/sub-broker of the stock exchange. It may have a physical

location like a stock exchange or a trading floor. Since 1995, trading in

securities is screen-based and Internet-based trading has also made an

appearance in India.

The secondary market consists of 22 stock exchanges. The secondary

market provides a trading place for the securities already issued, to be

bought and sold. It also provides liquidity to the initial buyers in the primary

market to re-offer the securities to any interested buyer at any price, if

mutually accepted. An active secondary market actually promotes the

growth of the primary market and capital formation because investors in the

primary market are assured of a continuous market and they can liquidate

their investments.

Capital Market Participants: There are several major players in the

primary market.

These include the merchant bankers, mutual funds, financial institutions,

foreign institutional

investors (FIIs) and individual investors. In the secondary market, there are

the stock exchanges,

stock brokers (who are members of the stock exchanges), the mutual funds,

financial institutions,

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foreign institutional investors (FIIs), and individual investors. Registrars and

Transfer Agents,

Custodians and Depositories are capital market intermediaries that provide

important infrastructure services for both primary and secondary markets.

Market Regulation: It is important to ensure smooth working of capital

market, as it is the arena for the players associated with the economic

growth of the country. Various laws have

been passed from time to time to meet this objective.The financial market in

India was highly segmented until the initiation of reforms in 1992-93 on

account of a variety of regulations and administered prices including

barriers to entry. The reform process was initiated with the establishment of

Securities and Exchange Board of India(SEBI).

The legislative framework before SEBI came into being consisted of three

major Acts governing

the capital markets:

1. The Capital Issues Control Act 1947, which restricted access to the

securities market and controlled the pricing of issues.

2. The Companies Act, 1956, which sets out the code of conduct for the

corporate sector in relation to issue, allotment and transfer of securities and

disclosures to be made in public issues.

3. The Securities Contracts (Regulation) Act, 1956, SC(R)A which regulates

transactions in securities through control over stock exchanges. In addition,

a number of other Acts, e.g.the Public Debt Act, 1942, the Income Tax Act,

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1961, the Banking Regulation Act, 1949, have substantial bearing on the

working of the securities market.

Capital Issues (Control) Act, 1947

The Act had its origin during the Second World War in 1943 when the

objective of the Government was to pre-empt resources to support the War

effort. Companies were required to take the Government's approval for

tapping household savings.

The Act was retained with some modifications as a means of controlling the

raising of capital by companies and to ensure that national resources were

channelled into proper lines, i.e., for desirable purposes to serve goals and

priorities of the government and to protect the interests of investors.

Under the Act, any firm wishing to issue securities had to obtain approval

from the Central Government, which also determined the amount, type and

price of the issue. This Act was repealed and replaced by SEBI Act in 1992.

Companies Act, 1956

Companies Act, 1956 is a comprehensive legislation covering all aspects of

company form of business entity from formation to winding-up. This

legislation (amongst other aspects) deals with issue, allotment and transfer

of securities and various aspects relating to company management. It

provides for standards of disclosure in public issues of capital, particularly

in the fields of company management and projects, information about other

listed companies under the same management and management perception

of risk factors. It also regulates underwriting, the use of premium and

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discounts on issues, rights and bonus issues, substantial acquisitions of

shares, payment of interest and dividends, supply of annual report and other

information.

This legal and regulatory framework contained many weaknesses.

Jurisdiction over the securities market was split among various agencies

and the relevant provisions were scattered in a number of statutes. This

resulted in confusion, not only in the minds of the regulated but also among

regulators. It also created inefficiency in the enforcement of the regulations.

It was the Central Government rather than the market that allocated

resources from the securities market to competing issuers and determined

the terms of allocation. The allocation was not necessarily based on

economic criteria, and as a result the market was not allocating the

resources to the best possible investments, leading to a sub-optimal use of

resources and low allocational efficiency. Informational efficiency was also

low because the provisions of the Companies Act regarding prospectus did

not ensure the supply of necessary, adequate and accurate information,

sufficient to enable investors to make an informed decision.

The many formalities associated with the issue process under various

regulations kept the cost of issue quite high.

Securities Contracts (Regulation) Act, 1956

The previously self-regulated stock exchanges were brought under statutory

regulation through the passage of the SC(R)A, which provides for direct and

indirect control of virtually all aspects of securities trading and the running

of stock exchanges.

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This gives the Central Government regulatory jurisdiction over (a) stock

exchanges, through a process of recognition and continued supervision, (b)

contracts in securities, and (c) listing of securities on stock exchanges. As

a condition of recognition, a stock exchange complies with conditions

prescribed by Central Government. Organised trading activity in securities

in an area takes place on a specified recognised stock exchange. The stock

exchanges determine their own listing regulations which have to conform

with the minimum listing criteria set out in the Rules. The regulatory

jurisdiction on stock exchanges was passed over to SEBI on enactment of

SEBI Act in 1992 from Central Government by amending SC(R)Act.

Securities and Exchange Board of India

With the objectives of improving market efficiency, enhancing transparency,

checking unfair trade practices and bringing the Indian market upto

international standards, a package of reforms consisting of measures to

liberalise, regulate and develop the securities market was introduced during

the 1990s. This has changed corporate securities market beyond

recognition in this decade. The practice of allocation of resources among

different competing entities as well as its terms by a central authority was

discontinued. The secondary market overcame the geographical barriers by

moving to screen-based trading. Trades enjoy counterparty guarantee.

Physical security certificates have almost disappeared. The settlement

period has shortened to two days.

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The following paragraphs discuss the principal reform measures undertaken

since 1992. A major step in the liberalisation process was the repeal of the

Capital Issues (Control) Act, 1947 in May 1992. With this, Government's

control over issue of capital, pricing of the issues, fixing of premia and rates

of interest on debentures, etc., ceased. The office, which administered the

Act, was abolished and the market was allowed to allocate resources to

competing uses and users. Indian companies were allowed access to

international capital market through issue of American Depository Receipts

(ADRs) and Global Depository Receipts (GDRs).

However, to ensure effective regulation of the market, SEBI Act, 1992 was

enacted to empower SEBI with statutory powers for (a) protecting the

interests of investors in securities (b) promoting the development of the

securities market and (c) regulating the securities market. Its regulatory

jurisdiction extends over corporates in the issuance of capital and transfer

of securities, in addition to all intermediaries and persons associated with

securities market. SEBI can specify the matters to be disclosed and the

standards of disclosure required for the protection of investors in respect of

issues. It can issue directions to all intermediaries and other persons

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associated with the securities market in the interest of investors or of

orderly development of the securities market; and can conduct inquiries,

audits and inspection of all concerned and adjudicate offences under the

Act. In short, it has been given necessary autonomy and authority to

regulate and develop an orderly securities market. There were several

statutes regulating different aspects of the securities market and

jurisdiction over the securities market was split among various agencies,

whose roles overlapped and which at times worked at cross-purposes.

As a result, there was no coherent policy direction for market participants to

follow and no single supervisory agency had an overview of the securities

business. Enactment of SEBI Act was the first such attempt towards

integrated regulation of the securities market. SEBI was given full authority

and jurisdiction over the securities market under the Act, and was given

concurrent/delegated powers for various provisions under the Companies Act

and the SC(R)A. The Depositories Act, 1996 is also administered by SEBI. A

high level committee on capital markets has been set up to ensure co-

ordination among the regulatory agencies in financial markets.

National Stock Exchange

The National Stock Exchange commenced its operations in 1994 as a first

step in reforming thesecurities market through improved technology and

introduction of best practices in management. It started with the concept of

an independent governing body without any broker representation thus

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ensuring that the operators' interests were not allowed to dominate the

governance of the exchange. Before the NSE was set up, trading on the

stock exchanges in India used to take place through open outcry without use

of information technology for immediate matching or recording of trades.

This was time consuming and inefficient. The practice of physical trading

imposed limits on trading volumes as well as, the speed with which new

information was incorporated into prices. To obviate this, the NSE introduced

screen-based trading system (SBTS) where a member can punch into the

computer the quantities of shares and the prices at which he wants to

transact. The transaction is executed as soon as the quote punched by a

trading member finds a matching sale or buys quote from counterparty.

SBTS electronically matches the buyer and seller in an order-driven system

or finds the customer the best price available in a quote-driven system, and

hence cuts down on time, cost and risk of error as well as on the chances of

fraud. SBTS enables distant participants to trade with each other, improving

the liquidity of the markets. The high speed with which trades are executed

and the large number of participants who can trade simultaneously allows

faster incorporation of price-sensitive information into prevailing prices.

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Chapter-2

Capital Market Intermediaries

There are several institutions, which facilitate the smooth functioning of the

securities market.They enable the issuers of securities to interact with the

investors in the primary as well as the secondary arena.

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Merchant Bankers

Among the important financial intermediaries are the merchant bankers. The

services of merchant bankers have been identified in India with just issue

management. It is quite common to come across reference to merchant

banking and financial services as though they are distinct categories. The

services provided by merchant banks depend on their inclination and

resources - technical and financial. Merchant bankers (Category I) are

mandated by SEBI to manage public issues (as lead managers) and open

offers in take-overs. These two activities have major implications for the

integrity of the market. They affect investors' interest and, therefore,

transparency has to be ensured. These are also areas where compliance can

be monitored and enforced. Merchant banks are rendering diverse services

and functions. These include organising and extending finance for

investment in projects, assistance in financial management, raising

Eurodollar loans and issue of foreign currency bonds. Different merchant

bankers specialise in different services. However, since they are one of the

major intermediaries between the issuers and the investors, their activities

are regulated by:

(1) SEBI (Merchant Bankers) Regulations, 1992.

(2) Guidelines of SEBI and Ministry of Finance.

(3) Companies Act, 1956.

(4) Securities Contracts (Regulation) Act, 1956.

Merchant banking activities, especially those covering issue and

underwriting of shares and debentures, are regulated by the Merchant

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Bankers Regulations of Securities and Exchange Board of India (SEBI). SEBI

has made the quality of manpower as one of the criteria for renewal of

merchant banking registration. These skills should not be concentrated in

issue management

and underwriting alone. The criteria for authorisation takes into account

several parameters. These include: (a) professional qualification in finance,

law or business management, (b) infrastructure like adequate office space,

equipment and manpower, (c) employment of two persons who have the

experience to conduct the business of merchant bankers, (d) capital

adequacy and (e) past track record, experience, general reputation and

fairness in all their transactions. SEBI authorises merchant bankers

(Category I) for an initial period of three years, ithey have a minimum net

worth of Rs. 5 crore. An initial authorisation fee, an annual fee and renewal

fee is collected by SEBI.

According to SEBI, all issues should be managed by at least one authorised

merchant banker functioning as the sole manager or lead manager. The lead

manager should not agree to manage any issue unless his responsibilities

relating to the issue, mainly disclosures, allotment and refund, are clearly

defined. A statement specifying such responsibilities has to be furnished to

SEBI. SEBI prescribes the process of due diligence that a merchant banker

has to complete before a prospectus is cleared. It also insists on submission

of all the documents disclosing the details of account and the clearances

obtained from the ROC and other government agencies for tapping peoples'

savings. The responsibilities of lead manager, underwriting obligations,

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capital adequacy, due diligence certification, etc., are laid down in detail by

SEBI. The objective is to facilitate the investors to take an informed decision

regarding their investments and not expose them to unknown risks.

Chapter- 3

Credit Rating Agencies

The 1990s saw the emergence of a number of rating agencies in the Indian

market. These agencies appraise the performance of issuers of debt

instruments like bonds or fixed deposits. The rating of an instrument

depends on parameters like business risk, market position, operating

efficiency, adequacy of cash flows, financial risk, financial flexibility, and

management and industry environment. The objective and utility of this

exercise is two-fold. From the point of view of the issuer, by assigning a

particular grade to an instrument, the rating agencies enable the issuer to

get the best price. Since all financial markets are based on the principle of

risk/reward, the less risky the profile of the issuer of a debt security, the

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lower the price at which it can be issued. Thus, forthe issuer, a favourable

rating can reduce the cost of borrowed capital.

From the viewpoint of the investor, the grade assigned by the rating

agencies depends on the capacity of the issuer to service the debt. It is

based on the past performance as well as an analysis of the expected cash

flows of a company, when viewed on the industry parameters and

performance of the company. Hence, the investor can judge for himself

whether he wants to place his savings in a "safe" instrument and get a lower

return or he wants to take a risk and get a higher return.

The 1990s saw an increase in activity in the primary debt market. Under the

SEBI guidelines all issuers of debt have to get the instruments rated. They

also have to prominently display the ratings in all that marketing literature

and advertisements. The rating agencies have thus become an important

part of the institutional framework of the Indian securities market.

R&T Agents - Registrars to Issue

R&T Agents form an important link between the investors and issuers in the

securities market. A

company, whose securities are issued and traded in the market, is known as

the Issuer.The R&T

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Agent is appointed by the Issuer to act on its behalf to service the investors

in respect of all corporate actions like sending out notices and other

communications to the investors as well as despatch ofdividends and other

non-cash benefits. R&T Agents perform an equally important role in the

depository system as well. These are described in detail in the second

section of this Workbook.

Stock Brokers

Stockbrokers are the intermediaries who are allowed to trade in securities

on the exchange of which they are members. They buy and sell on their own

behalf as well as on behalf of their clients. Traditionally in India, partnership

firms with unlimited liabilities and individually owned firms provided

brokerage services. There were, therefore, restrictions on the amount of

funds they could raise by way of debt. With increasing volumes in trading as

well as in the number of small investors, lack of adequate capitalisation of

these firms exposed investors to the risks of these firms going bust and the

investors would have no recourse to recovering their dues. With the legal

changes being effected in the membership rules of stock exchanges as well

as in the capital gains structure for stock-broking firms, a number of

brokerage firms have converted themselves into corporate entities. In fact,

NSE encouraged the setting up of corporate broking members and has today

only 10% of its members who are not corporate entities.

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Custodians

In the earliest phase of capital market reforms, to get over the problems

associated with paperbased securities, large holding by institutions and

banks were sought to be immobilised. Immobilisation of securities is done

by storing or lodging the physical security certificates with an organisation

that acts as a custodian - a securities depository. All subsequent

transactions in such immobilised securities take place through book entries.

The actual owners have the right to withdraw the physical securities from

the custodial agent whenever required by them. In the case of IPO, a jumbo

certificate is issued in the name of the beneficiary owners based on which

the depository gives credit to the account of beneficiary owners. The Stock

Holding Corporation of India Limited was set up to act as a custodian for

securities of a large number of banks and institutions who were mainly in

the public sector. Some of the banks and financial institutions also started

providing "Custodial" services to smaller investors for a fee. With the

introduction of dematerialisation of securities there has been a shift in the

role and business operations of Custodians. But they still remain an

important intermediary providing services to the investors who still hold

securities in physical form.

Mutual Funds

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Mutual funds are financial intermediaries, which collect the savings of small

investors and invest them in a diversified portfolio of securities to minimise

risk and maximise returns for their participants. Mutual funds have given a

major fillip to the capital market - both primary as well as secondary. The

units of mutual funds, in turn, are also tradable securities. Their price is

determined by their net asset value (NAV) which is declared periodically. The

operations of the private mutual funds are regulated by SEBI with regard to

their registration, operations, administration and issue as well as trading.

There are various types of mutual funds, depending on whether they are

open ended or close ended and what their end use of funds is. An open

ended fund provides for easy liquidity and is a perennial fund, as its very

name suggests.

CHAPTER 4

Overview of NSDL

Key features of the depository system in India:

Multi-Depository System: The depository model adopted in India provides

providing depository services.

Dematerialisation as against immobilisation: The model adopted in India

provides only for dematerialisation of securities. This is a significant step in

the direction of achieving a completely paper-free securities market. Many

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of the developed countries have opted either for immobilization (e.g.

Hongkong) or both immobilisation and dematerialisation (e.g. Japan) of

securities.

Immobilisation of securities is done by storing or lodging the physical

security certificates with an organisation that acts as a custodian - a

securities depository. All subsequent transactions in such immobilised

securities take place through book entries. The actual owners have the right

to withdraw the physical securities from the custodial agent whenever

required by them. In the case of IPO, a jumbo certificate is issued in the

name of the beneficiary owners based on which the depository gives credit

to the account of beneficiary owners.

Dematerialisation of securities occurs when securities issued in physical

form are destroyed and an equivalent number of securities are credited into

the beneficiary owner's account. India has adopted dematerialisation route

to depository. In a depository system, the investors stand to gain by way of

efficient settlements, lower costs and lower risks of theft or forgery, etc. But

the implementation of the system has to be secure and well governed.

All the players have to be conversant with the rules and regulations as well

as with the technology for processing. The intermediaries in this system

have to play strictly by the rules.

Depository services through depository participants: The depositories

can provide their services to investors through their agents called

depository participants. These agents are appointed subject to the

19
conditions prescribed under Securities and Exchange Board of India

(Depositories and Participants) Regulations, 1996 and other applicable

conditions.

Fungibility - In the depository system, the securities dematerialised are

not identified by distinctive numbers or certificate numbers as in the

physical environment. Thus all securities in the same class are identical and

interchangeable. For example, all equity shares in the class of fully paid up

shares are interchangeable.

Registered Owner/ Beneficial Owner - In the depository system, the

ownership of securities dematerialised is bifurcated between Registered

Owner and Beneficial Owner. For the securities dematerialised, NSDL is the

Registered Owner in the books of the issuer; but ownership rights and

liabilities rest with Beneficial Owner. All the rights, duties and liabilities

underlying the security are on the beneficial owner of the security.

Free Transferability of shares: Transfer of shares held in dematerialised

form takes place freely through electronic book-entry system.

The Depository System

The Depositories Act, 1996, defines a depository to mean "a company formed

and registered under the Companies Act, 1956 and which has been granted a

certificate of registration under sub-section (IA) of section 12 of the

Securities and Exchange Board of India Act, 1992.

The principal function of a depository is to dematerialise securities and

enable their transactions in book-entry form.

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The securities are transferred by debiting the transferor's depository

account and crediting the transferee's depository account. A depository is

very much like a bank in many of its operations.

Eligibility Criteria for a Depository – Any of the following may promote a

1. A public financial Institution as defined in section 4A of the Companies

Act, 1956;

2. A bank included in the Second Schedule to the Reserve Bank of India Act,

1934;

3. A foreign bank operating in India with the approval of the Reserve Bank of

India;

4. A recognised stock exchange;

5. An institution engaged in providing financial services where not less than

75% of the equity is

held jointly or severally by these institutions;

6. A custodian of securities approved by Government of India, and

7. A foreign financial services institution approved by Government of India.

The promoters of a depository are also known as its sponsors. A depository

company must have a minimum net worth of Rs. 100 crore. The sponsor(s) of

the depository have to hold at least 51% of the equity capital of the

depository company. Participants of that depository, if any, can hold the

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balance of the equity capital. However, no single participant can hold, at any

point of time, more than 5% of the equity capital. No foreign entity,

individually or collectively either as a sponsor or as a DP, or as a sponsor

and DP together, can hold more than 20% of the equity capital of the

depository.

Registration – As per the provisions of the SEBI Act, a depository can deal

in securities only after obtaining a certificate of registration from SEBI. The

sponsors of the proposed depository should apply to SEBI for a certificate of

registration in the prescribed form. On being satisfied with the eligibility

parameters of a company to act as a depository, SEBI may grant a

certificate of registration subject to certain conditions.

Commencement of Business – A depository that has obtained registration

as stated above, can function only if it obtains a certificate of

commencement of business from SEBI.

A depository must apply for and obtain a certificate of commencement of

business from SEBI within one year from the date of receiving the certificate

of registration from SEBI.

SEBI grants a certificate of commencement of business if it is satisfied that

the depository has

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adequate systems and safeguards to prevent manipulation of records and

transactions. SEBI takes into account all matters relevant to the efficient

and orderly functioning of the depository. It particularly examines whether :

1. The depository has a net worth of not less than Rs. 100 crore;

2. The Bye-Laws of the depository have been approved by SEBI;

3. The automatic data processing systems of the depository have been

protected againstunauthorised access, alteration, destruction, disclosure or

dissemination of records and data;

4. The network, through which continuous electronic means of

communication are establishedbetween the depository, participants, issuers

and issuers' agents, is secure against unauthorised entry or access;

5. The depository has established standard transmission and encryption

formats for electronic communication of data between the depository,

participants, issuers and issuers' agents;

6. The physical or electronic access to the premises, facilities, automatic

data processing systems, data storage sites and facilities including back-up

sites, and to the electronic data communication network connecting the

DPs, issuers and issuers' agents is controlled, monitored and recorded;

7. The depository has a detailed operational manual explaining all aspects of

its functioning, including the interface and method of transmission of

information between the depository, issuers, issuers' agents, DPs and

beneficial owners;

8. The depository has established adequate procedures and facilities to

ensure that its records are protected against loss or destruction and

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arrangements have been made for maintaining back-up facilities at a

location different from that of the depository;

9. The depository has made adequate arrangements including insurance for

indemnifying the beneficial owners for any loss that may be caused to such

beneficial owners by the wrongful act, negligence or default of the

depository or its participants or of any employee of the depository or

participant; and

10. The granting of certificate of commencement of business is in the

interest of investors in

securities market.

Agreement between Depository and Issuers – If either the issuer (a

company which has issued securities) or the investor opts to hold his

securities in a demat form, the issuer enters into an agreement with the

depository to enable the investors to dematerialise their securities. No such

agreement is necessary where :

i. Depository, is the issuer of securities, or;

ii. The State or Central Government is the issuer of government securities.

Where the issuer has appointed a registrar to the issue or share transfer, the

depository enters into a tripartite agreement with the Issuer and Registrar &

Transfer (R&T) Agent, as the case may be, for the securities declared eligible

for dematerialisation. At present, NSDL is discharging the responsibility of

R&T Agent for the securities issued by State and Central Governments.

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Rights and Obligations of Depositories – Depositories have the rights and
obligations conferred upon them under the Depositories Act, the regulations

made under the Depositories

Act, Bye-Laws approved by SEBI, and the agreements made with the

participants, issuers and their R&T agents.

Every depository must have adequate mechanisms for reviewing, monitoring

and evaluating the depository's controls, systems, procedures and

safeguards. It should conduct an annual inspection of these procedures and

forward a copy of the inspection report to SEBI. The depository is also

required to ensure that the integrity of the automatic data processing

systems is maintained at all times and take all precautions necessary to

ensure that the records are not lost, destroyed or tampered with. In the

event of loss or destruction, sufficient back up of records should be

available at a different place. Adequate measures should be taken, including

insurance.

Records to be maintained by Depository – Every depository is required to

for a minimum period of five years.

1. Records of securities dematerialised and rematerialised.

2. The names of the transferor, transferee, and the dates of transfer of

securities.

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3. A register and an index of beneficial owners.

4. Details of the holdings of the securities of beneficial owners as at the end

of each day.

5. Records of instructions received from, and sent to, participants, issuers,

issuers' agents and

beneficial owners.

6. Records of approval, notice, entry and cancellation of pledge or

hypothecation.

7. Details of participants.

8. Details of securities declared to be eligible for dematerialisation in the

depository.

9. Such other records as may be specified by SEBI for carrying on the

activities as a depository.

Services of Depository – A depository established under the Depositories

Act can provide any service connected with recording of allotment of

securities or transfer of ownership of securities in the record of a

depository. Any person willing to avail the services of the depository can do

so by entering into an agreement with the depository through any of its

participants.

A depository can provide depository services only through a DP. A

depository cannot directly open accounts and provide services to clients.

Every depository in its Bye-Laws must state which securities are eligible for

demat holding. Generally, the following securities are eligible

for dematerialisation:

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(a) Shares, scrips, stocks, bonds, debentures, debenture stock or other

marketable securities

of a like nature in or of any incorporated company or other body corporate.

(b) Units of mutual funds, rights under collective investment schemes and

venture capital

funds, commercial paper, certificates of deposit, securitised debt, money

market

instruments, government securities, national saving certificates, kisan vikas

patra and

unlisted securities.

(c) Securities admitted to NSDL depository are notified to all DPs through

circulars sent by

email. Investors are informed about these securities through NSDL's Website

- www.nsdl.co.in and NEST Update - a monthly newsletter of NSDL.

Functions of Depository

Dematerialisation: One of the primary functions of depository is to eliminate

or minimise the movement of physical securities in the market. This is

achieved through dematerialisation of securities. Dematerialisation is the

process of converting securities held in physical form into holdings in book

entry form.

Account Transfer: The depository gives effects to all transfers resulting

from the settlement of trades and other transactions between various

beneficial owners by recording entries in the accounts of such beneficial

owners.

27
Transfer and Registration: A transfer is the legal change of ownership of a
security in the records of the issuer. For effecting a transfer, certain legal

steps have to be taken like endorsement, execution of a transfer instrument

and payment of stamp duty.

The depository accelerates the transfer process by registering the

ownership of shares in the name of the depository. Under a depository

system, transfer of security occurs merely by passing book entries in the

records of the depositories, on the instructions of the beneficial owners.

Corporate Actions: A depository may handle corporate actions in two

ways. In the first case, it merely provides information to the issuer about the

persons entitled to receive corporate benefits. In the other case, depository

itself takes the responsibility of distribution of corporate benefits.

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Chapter-5

History of National Securities Depository Limited

National Securities Depository Limited is the first depository to be set-up in

India. It was incorporated on December 12, 1995. The Industrial Development

Bank of India (IDBI) - the largest development bank in India, Unit Trust of

India (UTI) - the largest Indian mutual fund and the National Stock Exchange

(NSE) - the largest stock exchange in India, sponsored the setting up of

NSDL and subscribed to the initial capital. NSDL commenced operations on

November 8, 1996.

Ownership

NSDL is a public limited company incorporated under the Companies Act,

1956. NSDL had a paidup equity capital of Rs. 105 crore. The paid up capital

has been reduced to Rs. 80 crore since NSDL has bought back its shares of

the face value of Rs. 25 crore in the year 2000. However, its net worth is

above the Rs. 100 crore, as required by SEBI regulations.

The following organisations are shareholders of NSDL as on March 31, 2005:1

29
1. Industrial Development Bank of India

2. Administrator of the Specified Undertaking of the Unit Trust of India - DRF

3. National Stock Exchange

4. State Bank of India

5. Oriental Bank of Commerce

6. Citibank N.A.

7. Standard Chartered Bank

8. HDFC Bank Limited

9. The Hongkong and Shanghai Banking Corporation Limited

10. Deutsche Bank A.G.

11. Dena Bank

12. Canara Bank

Management of NSDL

NSDL is a public limited company managed by a professional Board of

Directors. The day-today operations are conducted by the Chairman &

Managing Director (CMD). To assist the CMD in his functions, the Board

appoints an Executive Committee (EC) of not more than 15 members.

The eligibility criteria and period of nomination, etc. are governed by the

Bye-Laws of NSDL in

this regard.

Bye-Laws of NSDL

Bye-Laws of National Securities Depository Limited have been framed under

powers conferred under section 26 of the Depositories Act, 1996 and

30
approved by Securities and Exchange Board of India. The Bye-Laws contain

fourteen chapters and pertain to the areas listed below :

1. Short title and commencement

2. Definitions

3. Board of Directors

4. Executive Committee

5. Business Rules

6. Participants

7. Safeguards to protect interest of clients and participants

8. Securities

9. Accounts/transactions by book entry

10. Reconciliation, accounts and audit

11. Disciplinary action

12. Appeals

13. Conciliation

14. Arbitration

Amendments to NSDL Bye-Laws require the approval of the Board of

Directors of NSDL and SEBI.

Chapter-6

Business Rules of NSDL

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Amendments to NSDL Business Rules require the approval of NSDL

Executive Committee and filing of the same with SEBI at least a day before

the effective date for the amendments.

Functions

NSDL performs the following functions through depository participants :

_ Enables the surrender and withdrawal of securities to and from the

depository

(dematerialisation and rematerialisation).

_ Maintains investor holdings in the electronic form.

_ Effects settlement of securities traded on the exchanges.

_ Carries out settlement of trades not done on the stock exchange (off-

market trades).

_ Transfer of securities.

_ Pledging/hypothecation of dematerialised securities.

_ Electronic credit in public offerings of companies or corporate actions.

_ Receipt of non-cash corporate benefits like bonus rights, etc. in electronic

form.

_ Stock Lending and Borrowing.

Services Offered by NSDL

NSDL offers a host of services to the investors through its network of DPs:

_ Maintenance of beneficiary holdings through DPs

_ Dematerialisation

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_ Off-market Trades

_ Settlement in dematerialised securities

_ Receipt of allotment in the dematerialised form

_ Distribution of corporate benefits

_ Rematerialisation

_ Pledging and hypothecation facilities

_ Freezing/locking of investor's account

_ Stock lending and borrowing facilities

Fee Structure of NSDL

NSDL charges the DPs and not the investors directly. These charges are

fixed. The DPs in turn, are free to charge their clients, i.e., the investors for

their services. Thus, there is a twotier fee structure.

Inspection, Accounting and Internal Audit

NSDL obtains audited financial reports from all its DPs once every year.

NSDL also carries out periodic visits to the offices of its constituents - R&T

agents, DPs and clearing corporations – to review the operating procedures,

systems maintenance and compliance with the Bye-Laws, Business Rules

and SEBI Regulations.

Additionally, DPs are required to submit to NSDL, internal audit reports every

quarter. Internal audit has to be conducted by a chartered accountant or a

33
company secretary in practice. The Board of Directors appoints a

Disciplinary Action Committee (DAC) to deal with any matter relating to DPs

clients, Issuers and R&T agents. The DAC is empowered to suspend or expel

a DP, declare a security as ineligible on the NSDL system, freeze a DP

account and conduct inspection or call for records and issue notices.

If a DP is aggrieved by the action of the DAC, it has the right to appeal to the

EC against the action of the DAC. This has to be done within 30 days of the

action by DAC. The EC has to hear the appeal within two months from the

date of filing the appeal. The EC has the power to stay the operation of the

orders passed by the DAC. The information on all such actions has to be

furnished to SEBI.

Electronic Linkage

_ This figure depicts the electronic connectivity of NSDL with its business

partners - DPs, Issuer companies/ R&T Agents and Stock Exchanges/Clearing

Corporations.

_ Connectivity between NSDL and business partners can be through V-SAT

(Very Small Aperture Terminal) or leased line.

_ No two business partners have direct linkage to each other in the NSDL

system.

_ DP has database (account details) of its investor clients. This helps DP to

service clients effectively. NSDL also has this database. Every transaction is

34
recorded in NSDL database as well as DP database. Both these databases

are reconciled on a daily basis.

Account holders (investors) open account with the DPs. The account details,

entered in a computer system maintained by Depository Participants called

DPM, are electronically conveyed to the central system of NSDL called DM.

Companies who have agreed to offer demat facility to their shareholders use

a computer system called DPM (SHR) to connect to the NSDL central

system. DPM (SHR) may be installed by the company itself or through its

R&T Agent. This system is used to electronically receive demat requests,

confirm such requests or to receive beneficial owner data (Benpos) from the

depository. Stock exchanges receive pay-in (receiving securities against

sales made by brokers) or to payout (giving securities to brokers against

their purchases) using a computer system connected to NSDL called DPM

(CC).

All the computer systems installed by DPs (DPM-DP), companies (DPM-

SHRs), and stock exchanges (DPM-CC) are connected to NSDL central

system (DM) through V-SAT (very small aperture terminal) or leased lines.

These are collectively called Business Partner Systems. Any transaction

conducted by any computer system in the NSDL depository system which is

35
targetted to reach any other computer system first gets recorded in DM and

then will reach the target. No two business partners' systems can

communicate to each other without passing through the DM.

Maintenance of Accounts at the Central System

The NSDL central system known as DM maintains accounts of all account

holders in the depository system. All the transactions entered at any point in

the computer system connected to it are first effected in the central system

and subsequently at these computers. Thus, the central system of NSDL has

the records of all details of every transaction conducted in the depository

system.

Distributed Database

Each of the computer systems connected to NSDL system has its own

database relating to its clients. This helps in giving prompt and accurate

service to the clients. However each of the databases is reconciled with the

data at the central system everyday in order to ensure that the data in the

distributed database tallies with the central database.

Common Software

NSDL develops software required by depository participants, companies,

R&T Agents and clearing corporations for conducting depository operations.

Thus, the computer systems used by all the entities will have common

software given by NSDL.

36
However, depending on the business potential, branch networks and any

other specific features, DPs may develop software mof their own for co-

ordination, communication and control and provide service to their clients.

Such exclusive software is called "back office software". DPM system given

by NSDL gives "export and import" facility to take out the transaction details

to be used by back office software and to feed in transaction details

generated from the back office software.

Connectivity

The computer system used by DPs, companies, R&T Agents and stock

exchanges may be connected to NSDL central system through V-SAT network

or leased line network. NSDL uses NSE's V-SAT network for the connectivity

purposes. Thus, V-SATs used by NSE brokers can connect to NSDL if the

software supplied by NSDL is used. V-SAT uses satellites for communication

purposes. Some business partners may connect using leased lines provided

by

MTNL/ BSNL. V-SAT or leased line connections are called primary

connectivity. If primary connectivity fails for any reason, BPs must have the

ability to connect through other means. Such other means are PSTN lines,

ISDN lines, POP lines(normal telephone lines) through which they can dial

into the NSDL system and conduct their transactions.

37
Chapter-7

Conclusion

India’s improving macroe conomic fundamentals, greater integration with the world

economy, increasing corporate profitability and competitiveness is becoming

apparent through the developments in its capital market.The likely benefits of

investing in a growing economy have inspired the overseas investors to invest in

Indian markets. That is Foreign Institutional Investors (FIIs) i.e pension funds, mutual

funds, investment trusts, asset management companies, nominee companies and

institutional portfolio managers who have been investing heavily in the country’s

capital markets. The country’s capital market registered a net inflow of US$ 7.97

billion from FIIs in 2006 up from US$ 0.7 billion in 2002. The rank of FIIs registered

with the market regulator Securities and Exchange Board of India (“SEBI”) have

burgeoned to 1,000 from 488 two years ago. This along with larger participation of

domestic investors resulted into a sharp upward movement of Sensex, the benchmark

index of Bombay Stock Exchange in India’s commercial capital Mumbai. The 21-year-

38
old Sensex that took 10 years to climb from 1,000 points (in 1990) to touch 6,000

points (in 2000) rallied to the 10,000 mark in February, 2006. Sensex that yield a

spectacular return of 48.06 per cent in 2006 maintained its upward journey in 2007 also

and touched the 15000 mark in the month of July.The capital market in India is

experiencing the next bullish run triggered by the 50 basis point rate cut by the US Fed

in mid September. The rate cut considerably eased the liquidity situation which resulted

in global investors pumping in billions of dollars in growth markets like India.

It was found that how to manage capital inflows remains an important policy issue for

many emerging market economies. The issue has assumed even greater importance in

recent years as the volume of capital flows picked up against the background of

increasing global financial integration. In this environment, even countries without a

fully open capital account can no longer consider themselves immune from the risks of

capital inflows as they liberalize their trade regime and domestic financial system.

Current account convertibility substantially reduces the ability of a control regime to

manage capital flows, while financial liberalization increases substitutability among

different types of capital account transactions. Once a certain threshold of economic

openness and financial market development is reached, a partially open capital account

may not effectively protect an economy from the volatility of international capital

flows. After analyzing the secondary data present on the internet following recent

developments can be found in the field of capital market of India.

1. The Securities Contracts (Regulation) Amendment Bill, 2003, to facilitate the

process of demutualisation and corporatisation of stock exchanges, has been introduced

39
in the Lok Sabha in August, 2003. The Bill has been referred to the Standing

Committee on Finance for examination.

2. Ban of Overseas Corporate Bodies (OCBs): After conducting a review of

investments through the route of OCBs, RBI has, vide its circular dated 16th

September, 2003, has prohibited OCBs as a "class of investor" from making fresh

investments under various schemes/routes available to non-residents under the extant

foreign exchange regulations.

3. Guidelines for Private Placement of debt by listed companies: The Securities and

Exchange Board of India (SEBI) has issued a circular on 30th September, 2003, to

regulate the private placement of debt by listed companies, requiring them to comply

with the following norms for private placement:

1. The company shall make full disclosures (initial and continuing) in the manner

prescribed in Schedule II of the Companies Act, 1956, SEBI (Disclosure and Investor

Protection) Guidelines, 2000 and the Listing Agreement with the exchanges.

However, if the privately placed debt securities are in standard denomination of Rs.10

Lakhs, such disclosures may be made only through web sites of the Stock Exchange/s

where the debt securities are sought to be listed.

2. The debt securities shall carry a credit rating of not less than investment grade from

a Credit Rating Agency registered with the Board.

40
 3. The company shall appoint SEBI registered Debenture Trustees in respect of the

issue of the debt securities

4. The debt securities shall be issued and traded in demat form

5. The company shall sign a separate listing agreement with the exchange in respect of

debt securities and comply with the conditions of listing.

6. All trades, except spot transactions between the two investors directly, in a listed

debt security shall be executed only on the trading platform of an exchange.

7. The trading in privately placed debts will be only between Qualified Institutional

Investors (QIBs) and High Networth Individuals (HNIs), where the standard

denomination is Rs.10 lakhs.

8. SEBI registered intermediaries would be allowed to associate with privately placed

unlisted debt issues and shall be responsible/accountable for such issues. SEBI

registered intermediaries shall be required to furnish periodical reports to SEBI in this

41
regard.

9. The requirement of Rule 19(2)(b) of the Securities Contract (Regulation) Rules,

1957 shall not be applicable to listing of privately placed debt securities on exchanges,

subject to the condition that all the above requirements are complied with.

Subsequently, SEBI has clarified that this circular is applicable to all debt securities

that have been and would be issued on a private placement basis on or after 30th

September, 2003. It would also be applicable to issuer companies whose outstanding

debt securities were issued prior to 30th September, 2003. However, such companies

are required to comply with the provisions of this circular before March 31, 2004.

Further, this circular will not be applicable for private placement of debt securities

having a maturity of less than 365 days.

It is also clarified that is an investor is alloted securities of Rs. 1 lakh or less, such

securities may be issued in physical form at the option of the investor. The trading in

the privately placed debt securities would be permitted in standard denomination of Rs.

10 lakhs in the anonymous, order driven system of the stock exchanges in a separate

trading segment.

42
10. Withdrawal of Central Government Circular dated 20th July, 1994 on listing of

privately placed Debt securities issued by companies and financial institutions: In order

to create a broader and more liquid market for privately placed debt securities issued by

companies and statutory organisations, the Central Government, in exercise of its

powers under Rule 19(7) of the SCRR, 1957, relaxed the requirements of Rule 19(2)(b)

of the SCRR, 1957, in respect of all categories of pure debt securities, subject to the

condition that such securities shall carry a credit rating of not less than investment

grade by any of the domestic credit rating agencies (Circular No. 1/10/SE/94 dated 20th

July, 1994)

This GOI circular was withdrawn on 30th September, 2003 as the new SEBI circular

(as mentioned above) encompassed the requirements of the GOI circular and further

laid down more comprehensive and stringent requirements for private placement of

debt.

11. SEBI (Central Database of Market Participants) regulations, 2003: SEBI has

notified Regulations, in October, 2003, requiring every investor, listed company

intending to get its securities listed, intermediary and other entity shall make

application for allotment of unique identification numbers for itself and for its related

persons in accordance with these regulations.

12. Action Taken Report (ATR) on JPC recommendations: The Joint Parliamentary

Committee on stock market scam 2001, submitted its report to both the Houses of

Parliament on 19th December, 2002. It has been recommended that the Government

43
should present their Action Taken Report on the report with 6 months of the

presentation of the report. Necessary action is being taken. The Action Taken report

was placed before the Parliament on 9th May, 2003. The next ATR has been placed

before the Parliament on 12th December, 2003.

Bibliogr aph y

I hereby submit that this project is truly prepared

by me and which is the crop from the following sources:

1. http://www.uschamber.com/press/speeches/2008/080326_donohue_cap_markets.htm

2.. http://en.wikipedia.org/wiki/Capital_market

3. http://finance.mapsofworld.com/capital-market/instruments.html

4.. http://www.capitalmarket.com/personal/pfdebent.htm

44
5. http://www.capitalmarket.com/Magazine/cm1313/covsto.htm

6. http://www.wisegeek.com/what-is-the-capital-market.htm

7. http://www.superiorinvestor.net/faq/faq/view/180/153/

8. www.adb.org/Documents/Books/Rising_to.../India/india-cap.pdf

9. www.capitalmarket.com/magazine/cm1605/pfinsur.htm

By GaganDeep Singh

45