Role of Banking Sector in Secondary Market

ROLE OF BANKING SECTOR IN SECONDARY MARKET
Chapter 1
Indian banking sector
1.1] Introduction
The banking section will navigate through all the aspects of the Banking System
in India. It will discuss upon the matters with the birth of the banking concept in
the country to new players adding their names in the industry in coming few
years. The banker of all banks, Reserve Bank of India (RBI), the Indian Banks
Association (IBA) and top 20 banks like IDBI, HSBC, ICICI, ABN AMRO, etc.
has been well defined under three separate heads with one page dedicated to
each bank. However, in the introduction part of the entire banking cosmos, the
past has been well explained under three different heads namely:
• History of Banking in India

• Nationalisation of Banks in India
• Scheduled Commercial Banks in India
The first deals with the history part since the dawn of banking system in India.
Government took major step in the 1969 to put the banking sector into systems
and it nationalized 14 private banks in the mentioned year. This has been
elaborated in Nationalization Banks in India. The last but not the least explains
about the scheduled and unscheduled banks in India. Improved performance of
the banking industry in India has helped the economy to bounce back to a
positive growth level. According to the Reserve Bank of India (RBI), the
banking sector in India is sound, adequately capitalized and well-regulated.
Indian financial and economic conditions are much better than in many other
countries of the world. Credit, market and liquidity risk studies show that Indian
banks are generally resilient and have withstood the global downturn well.
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According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled

Commercial Banks: March 2009', nationalized banks, as a group, accounted for
49.5 per cent of the aggregate deposits, while State Bank of India and its
Associates accounted for 24.1 per cent. The shares of other scheduled
commercial banks, foreign banks and regional rural banks in aggregate deposits
were 18.2 per cent, 5.2 per cent and 3.0 per cent, respectively. Nationalized
banks held the highest share of 50.5 per cent in the total bank credit followed by
State Bank of India and its associates at 23.1 per cent and other scheduled
commercial banks at 18.2 per cent. Foreign banks and regional rural banks had
slightly lower share in the total bank credit at 5.9 per cent and 2.3 per cent,
respectively.
According to the RBI in March 2009, number of all Scheduled Commercial

Banks (SCBs) was 171 of which, 86 were Regional Rural Banks and the
number of Non-Scheduled Commercial Banks including Local Area Banks
stood at 5. Taking into account all banks in India, there are overall 56,640
branches or offices, 893,356 employees and 27,088 ATMs. Public sector banks
made up a large chunk of the infrastructure, with 87.7 per cent of all offices, 82
per cent of staff and 60.3 per cent of all automated teller machines (ATMs).
Also, growth of aggregate deposits of all Scheduled Commercial Banks (SCBs)

including Regional Rural Banks (RRBs) up to March 27, 2009 stood at 19.8 per
cent while overall nationalized banks was at 24.7 per cent, foreign banks at 7.8
per cent and private sector banks about 8.0 per cent.
According to the RBI, gross bank credit offered by all Scheduled Commercial
Banks (SCBs) including Regional Rural Banks (RRBs) grew by 17.3 per cent
up to March 2009. Public sector banks' credit grew by 20.4 per cent, foreign
banks' credit by 4 per cent and private sector banks about 10.9 per cent.
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Deposits with scheduled commercial banks (SCBs) surged by US$ 13.41 billion
in the fortnight ended July 3, as against an accumulation of US$ 1.29 billion in
the previous fortnight. In the said fortnight, time and demand deposits jumped
by US$ 8.92 billion and US$ 4.49 billion, respectively. Credit offtake from the
SCBs was up by US$ 5.8 billion. Corporates, MSMEs, agriculture, and the
retail sector have been borrowing strongly, according to major bankers in the
country. The government's huge borrowing programme, investments by banks,
predominantly in government securities, were higher at US$ 9 billion in the July
3 ended fortnight as against an investment of US$ 4 billion in the preceding
fortnight.
Non-resident Indians (NRIs) have cumulatively placed US$ 1.167 billion as

deposits with banks in the April-May 2009-10 period as against US$ 452
million in the corresponding period last year. NRIs are finding it remunerative
to park their money with Indian banks, which are offering higher interest rates.
In the April-May 2009 period, NRIs deposited almost US$ 543 million in
Foreign Currency Non-Resident (Banks) deposits. In the corresponding period
last year, they had pulled out US$ 291 million from the FCNR (B) deposits.
The new borrowing level for April-September 2009 has been set at US$ 62.85
billion—nearly 25 per cent more than the March 2009 projection of US$ 50.66
billion—jointly by the Finance Ministry and the Reserve Bank of India (RBI).
During 2008-09, non-food bank credit (year-on-year basis) stood at 17.5 per
cent by March 2009.India's foreign exchange reserves were US$ 252.0 billion
as at end-March 2009 which increased to US$ 253.0 billion by April 10,
2009.The country's largest bank – the State Bank of India's (SBI) branch
network, increased by 470 to over 11,900 branches. Based on March-end 2009
figures, SBI's deposits increased by US$ 6 billion to US$ 152.32 billion and
advances by US$ 4.57 billion to US$ 120 billion.
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Boosted by gains from gilts, corporate debt and equity, Axis Bank and HDFC
Bank have posted healthy net profit growth of 70 per cent and 30 per cent
respectively, for the quarter ended June 30, 2009.
Public sector banks too are now being approached by more customers owing to
low interest rates and better-managed and transparent operations. An analysis
by Crisil Research reveals that the increasing customer preference for public
sector banks is evident by the rise in their market share by more than 10 per cent
over the last one year. The share of the PSBs has in fact risen to 40 per cent of
the total vehicle finance portfolio as against 25-30 per cent earlier. Private
Banks have retained their share at 50 per cent.
ICICI Bank has organised road shows in Asia, Europe and the US, jointly with
the Union Ministry of Road Transport and Highways to attract investments for
highways and roads. To begin with, the bank organised a meeting between
potential investors and the Union Minister of Road Transport and Highways,
Mr. Kamal Nath. HDFC Bank has signed an agreement with Guruvayoor
Devaswom for offering e-collection through HDFC Bank Payment Gateway.
1.2] Banking services in India

With years, banks are also adding services to their customers. The Indian
banking industry is passing through a phase of customers market. The
customers have more choices in choosing their banks. A competition has been
established within the banks operating in India. With stiff competition and
advancement of technology, the service provided by banks has become more
easy and convenient. The past days are witness to an hour wait before
withdrawing cash from accounts or a cheque from north of the country being
cleared in one month in the south. This section of banking deals with the latest
discovery in the banking instruments along with the polished version of their
old systems.
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1.3] Government Initiatives
In its platinum jubilee year, the RBI, the central bank of the country, in a
notification issued on June 25, 2009, said that banks should link more branches
to the National Electronic Clearing Service (NECS). Ideally, all core-banking-
enabled branches should be part of NECS. NECS was introduced in September
2008 for centralized processing of repetitive and bulk payment instructions.
Currently, a little over 26,000 branches of 114 banks are enabled to participate
in NECS.
The reduction in the Reserve Bank's policy rates and easy liquidity conditions in
the market have helped all public sector banks, most private sector banks and
some foreign banks reduce their deposit and lending rates. Term deposit rates
between October 2008-April 18, 2009 have been reduced by a range of 125-250
basis points by public sector banks, 75-200 basis points by private sector banks
and 100-200 basis points by five major foreign banks. The reduction in the
range of BPLRs was 125-225 basis points by public sector banks, followed by
100-125 basis points by private sector banks and 100 basis points by five major
foreign banks.
Since mid-September 2008 till date, the Reserve Bank has cut the repo rate by
400 basis points to 5 per cent and the reverse repo rate by 250 basis points to 3.5
per cent. The CRR was also reduced by 400 basis points of NDTL of banks and
stood at 5 per cent.
Apart from the bank rate cuts announced in the stimulus packages, cash
withdrawals from bank will not attract tax from April 1, 2009 following
abolition of the banking cash transaction tax (BCTT) in the Union Budget 2008-
09. Also, inter-ATM usage transaction became free of charges effective April 1,
2009.
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1.4] STRUCTURE OF THE BANKING SECTOR
According to the RBI definition, commercial banks which conduct the business
of banking in India and which (a) have paid up capital and reserves of an
aggregate real and exchangeable value of not less than Rs 0.5 mn and (b) satisfy
the RBI that their affairs are not being conducted in a manner detrimental to the
interest of their depositors, are eligible for inclusion in the Second Schedule to
the Reserve Bank of India Act, 1934, and when included are known as
‘Scheduled Commercial Banks’. Scheduled Commercial Banks in India are
categorized in five different groups according to their ownership and/or nature
of operation. These bank groups are (i) State Bank of India and its associates,
(ii) Nationalised Banks, (iii) Regional Rural Banks, (iv) Foreign Banks and (v)
Other Indian Scheduled Commercial Banks (in the private sector). All
Scheduled Banks comprise Schedule Commercial and Scheduled Co-operative
Banks. Scheduled Cooperative banks consist of Scheduled State Co-operative
Banks and Scheduled Urban Cooperative Banks.
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1.5] Foreign Banks In India
Foreign Banks in India always brought an explanation about the prompt

services to customers. After the set up foreign banks in India, the banking sector
in India also become competitive and accurative. A new rule announced by the
Reserve Bank of India for the foreign banks in India in this budget has put up
great hopes among foreign banks which allow them to grow unfettered. Now
foreign banks in India are permitted to set up local subsidiaries. The policy
conveys that foreign banks in India may not acquire Indian ones (except for
weak banks identified by the RBI, on its terms) and their Indian subsidiaries
will not be able to open branches freely. Please see the list of Foreign banks in
India till date.
List of Foreign Banks in India
• ABN-AMRO Bank
• Abu Dhabi Commercial Bank
• Bank of Ceylon
• BNP Paribas Bank
• Citi Bank
• China Trust Commercial Bank
• Deutsche Bank
• HSBC
• JPMorgan Chase Bank
• Standard Chartered Bank
• Scotia Bank
• Taib Bank
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By the year 2009, the list of foreign banks in India is going to become more
quantitative as numbers of foreign banks are still waiting with baggage to start
business in India.
 The Scheduled Commercial Banks (SCBs) in India have shown an
impressive growth from FY04 to the mid of FY09. Total deposits,

advances and net profit grew at CAGR of 19.6%, 27.4% and 20.2%
respectively from FY03 to FY08. Banking sector recorded credit growth
of 33.3% in FY05 which was highest in last 2 and half decades and credit
growth in excess of 30% for three consecutive years from FY04 to FY07,
which is best in the banking industry so far. Increase in economic activity
and robust primary and secondary markets during this period have
helped the banks to garner larger increase in their fee
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Chapter 2
Indian capital Market
Primary Market Secondary Market

• New issues by new companies • Trading in existing securities.
and government. • Listing of the new issues for
• Further issues by existing investments and disinvestments
companies and government. by savers/investors.
(Issue are securities like equity • Imparting liquidity or
shares, preference shares, encashability to stocks and
debentures, bonds, govt. shares.
securities, etc.)
INDIAN CAPITAL MARKET
Capital market
Every company needs long-term as well as short-term capital. Long-term capital

is required essentially for investment in fixed assets such as land, building, plant
and machinery, vehicles, etc. It also includes core working capital and certain
kinds of R&D, pre-operating expenses and preliminary expenses incidental to
setting up a business, which are required to be deployed or incurred for the
production or rendering of goods and services. Short-term capital or working
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capital on the other hand, is required essentially for financing the requirements
of the day-to-day operations of the business, such as raw materials, work-in-
progress, finished goods, trade debtors, etc. capital market is thus a broad term,
which includes primary markets, secondary markets, term lending institutions,
long-term bonds and debenture markets, banks, investors, and almost anybody
who is engaged in providing long-term capital(whether equity or debt capital) to
the industrial sector. Year 2008 was the most eventful year for the capital
market. The year that started on the bull note has lost their entire lustrous gain
that they gained in 2007 .This was sparked by the subprime crisis and their
ripple effects, bad economic news started from the USA and spread throughout
the world and the effect was so cascading that they ruined the sentiments in
capital markets globally and indexes of global market secularly crashed more
than 65%. Any positive development, long term growth story, fundamental
storey everything blown by bears that came in hurry.
 SBI CAPITAL MARKETS LIMITED (SBICAPS)
It is India's leading investment bank and project advisor, assisting domestic

companies fund-mobilisation efforts for last many years. Foreseeing the
changing needs of clients in a rapidly opening economy, over the years, we
have evolved an array of advisory services in almost all sectors of the economy.
We are known for professionalism and business ethics and provide a full range
of Investment, Advisory and Financial Services under one umbrella. A pioneer
in privatisation in India, we have established ourselves as a leader in providing
financial and advisory services in the core sector and infrastructure industries.
We began operations in August 1986 as a wholly owned subsidiary of the State
Bank of India, which is the largest commercial bank in India. In January 1997,
fresh equity shares were issued to Asian Development Bank (ADB) and ADB
now holds 13.84% stake in the equity of SBICAPS. The distinguished parentage
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(with a 86.16% stake) together with the long standing association of an

internationally renowned financial institution like the Asian Development Bank
further enhances our image as a truly 'World Class Investment Bank'.
Our Mission - To provide Credible, Professional and Customer Focused world-

class investment banking services.
Our Vision - To be the best India based Investment Bank.
Our Services
We are an edge above others when it comes to understanding the needs of the
client. A comprehensive analysis of the dynamics of the markets and an
extensive knowledge about the regulatory environment gives us a wider view of
all the aspects of this highly competitive market. We tower above others as the
thought leaders in analysing and interpreting industry trends, both at micro and
macro levels.
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 Pension funds turn towards capital market (PFRDA)
The PFRDA is yet to define the options, though as per the reports, the two
prominent options for the investing subscriber are likely to be 100% in gilt-
edged securities (government bonds0 and 15% in the capital market (5% in
equity and 10% in bonds).One of the conspicuous features of the NPS that
seems to have generated a natural debate among economists and investors, is
the provision permitting investment of a part of the pension corpus in the stock
market. The government is also permitting the pension funds to deploy in
capital market at the discretion of the subscriber for adequate return. “The
central government will notify an interim investment pattern for the funds
collected under the NPS, to allow 5% investment of the corpus in stock market
and another 10% in corporate bonds or reliable bonds. Since, the contributory
NPS was introduced for all fresh government recruits in January 2004, about
RS.1, 500cr have accumulated in public accounts at the center and in 17 states,
which have adopted the scheme”. The initiative will allow more funds to flow
into the market and provide an opportunity for better returns to NPS
subscribers. The NPS corpus earns only 8% interest at present. If the fund
managers convince the sub scribers to avail themselves of the option of going
to the stock market for higher returns, the latter need to consider the financial
risk involved.
Capital inflow
Presently, India ranks second in capital market inflows. The total foreign
institutional investment (FII) till date (19 November 2007) in the Indian markets
zoomed to over $17.230 billion. The private equity (PE) investment is also on
the rise. According to Thomson financial, India has replaced Taiwan from the
second spot in the Asia-Pacific private equity rankings in the first half of
calendar 2007. India has attracted the higher private equity (PE) investments at
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$10 billion in 2007 so far. The Indian real estate and infrastructure sector have
been a key contributor to this rising inflows. Out of $10 billion PE fund that
India attracted so far, $5 billion came in these sectors.
2.1] Primary Market
The primary market is that part of the capital markets that deals with the
issuance of new securities. Companies, governments or public sector
institutions can obtain funding through the sale of a new stock or bond issue.
This is typically done through a syndicate of securities dealers. The process of
selling new issues to investors is called underwriting. In the case of a new stock
issue, this sale is an initial public offering (IPO). Dealers earn a commission
that is built into the price of the security offering, though it can be found in the
prospectus.
Features of primary markets are:
• This is the market for new long term equity capital. The primary market
is the market where the securities are sold for the first time. Therefore it
is also called the new issue market (NIM).
• In a primary issue, the securities are issued by the company directly to
investors.
• The company receives the money and issues new security certificates to
the investors.
• Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.
• The primary market performs the crucial function of facilitating capital
formation in the economy.
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• The new issue market does not include certain other sources of new long
term external finance, such as loans from financial institutions. Borrowers
in the new issue market may be raising capital for converting private
capital into public capital; this is known as "going public."
• The financial assets sold can only be redeemed by the original holder.
Methods of issuing securities in the primary market are:
• Initial public offering;

• Rights issue (for existing companies);
• Preferential issue.
Indian IPO market
IPO means initial public offering which is a method to raise money from the
public to meet a company’s expense by issuing shares. These shares are offered
to the public in a price band range, which means that the price of the shares
issued ranges between two amounts. These shares are also offered to the
financial institutions as well. It is the primary market.
The new IOP that come in future
It is estimated that Indian needs about US$475 bn between 2007 and 2012 to
upgrade its roads, expand and modernize its ports, improve its rail services and
boost power generation. In coming years more IOP will be coming from the
infrastructure and sectors.
 Canara Bank plans initial public offering
Bangalore: Canara Bank is planning to come up with an initial public offering

(IPO) of Rs 175 crore to Rs 225 crore in August or September 2002. The work
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towards fixing the issue price and the appointment of merchant bankers will
begin this month.
Currently Canara Bank has an equity capital base of Rs 578 crore, says Canara
Bank chairman R V Shastri.
Declining to detail the possible premium on the forthcoming issue, Shastri says:
“Though there will be a good premium, it will be made affordable to the
public.” The bank also rules out the book-building route to subscribe the issue.
“We will go to the public directly.” Canara Bank has decided to come out with
the IPO irrespective of the prevailing market conditions. The tier-II
capitalisation route is not attractive because securities are treated as
subordinated debts as long as the maturity period does not exceed five years.
IPO – Role of Underwriter
When a company wants to raise funds through initial public offering (IPO) it
appoints an investment bank for underwriting the issue. An Investment bank is
also called as merchant bank. There is no regulatory restriction to use the
services of a merchant bank for IPO. Since in an IPO a company participates for
the first time, it doesn’t have complete understanding of the rules and
documentation, required to be submitted, to get a clearance from the regulator.
Famous merchant bankers world over are Goldman Sachs, Credit Suisse and
Morgan Stanley. Banks like Deutsche, Citi, UBS etc have investment banking
wings. Underwriters assess and analyze firm’s current performance, firm’s
future earnings potential, industry scenario, competition in the same sector,
current local and global market situations etc. to decide the issue price/price
band. They also work on the activities like completion of the mandatory
documentation as required by the regulatory body. Underwriters charge a fee for
this activity, which is generally a percentage of the issue size.
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If the issue size is very large a syndicate of merchant banks takes up the task
of underwriting the issue. However one merchant bank leads the other.
2.2] Secondary market
Meaning
• Secondary market (stock exchange) is one in which an investor purchases

an asset from another investor, rather than an issuing corporation. The
defining characteristic of the secondary market is that investors trade
among themselves on previously issued securities without the
involvement of the issuing companies (except in the case of buy-back).
The investors could be institutions like FIIs, mutual funds, insurance
companies or individuals.
• The secondary market is the financial market for trading of securities that
have already been issued in an initial private or public offering.
Alternatively, secondary market can refer to the market for any kind of
used goods. The market that exists in a new security just after the new
issue, is often referred to as the aftermarket. Once a newly issued stock is
listed on a stock exchange, investors and speculators can easily trade on
the exchange, as market makers provide bids and offers in the new stock.
Definitions
Some of the important definitions are presented below:
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 According to husband and dockery, “securities or stock exchanges are

privately organized markets which are used to facilitate trading in
securities.”
 According to Hastings, “stock exchange or securities market comprises
all the places where buyers and sellers of stocks and bonds or their
representatives undertake transactions involving the sale of securities.”
 According to Derek honeygold, “ stock exchange can be described as the
place where a marriage of convenience is enacted between those who

wish to raise capital, such as companies, governments and local
authorities, and those who to invest largely households through the
medium of institutions acting upon their behalf.”
 According to section 2(3) of the securities contract (regulation) act 1956,
“The stock exchange has been defined as any 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.”
Objectives of secondary market
• To examine the new bench marks in the secondary market in India.

• To study the selected secondary market development indicators in India.
• To analyze the trading intensity in the world stock exchanges.
• To explore opportunities for the growth of RSEs in India.
• To learn the threats for the growth of RSEs in India.
• To suggest the ways to overcome the threats for the growth of RSEs in
India.
• To examine the present disclosure standards for the protection of
investors in the Indian capital market.
• To analyze the powers of SEBI to take punitive or preventive measure for
the protection of investors.
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• To study the Role of SEBI for the Redressal of investor grievances in the
Indian capital market.
• To explain the investor awareness/ assistance/ education programmes
arranged by SEBI.
• To suggest the Recommendations for strengthening investor confidence
in the Indian capital market
Function
In the secondary market, securities are sold by and transferred from one
investor or speculator to another. It is therefore important that the secondary
market be highly liquid and transparent.
 Secondary market role
In a growing market for commercial banks, where can the secondary

market play a role?
Secondary market investors must continue to play a larger strategic role in

furnishing capital. Many banks don’t possess the massive economies of scale
needed for growth and their available capital is limited.
By developing partnerships with secondary market investors, brokers and
bankers increase their profitability potential by seizing new opportunities for
capital. Further, lenders can benefit from the increased array of funding options
offered by secondary market investors permitting lenders to choose the level of
risk most appropriate for their business. In an industry that barely existed a little
over a decade ago, secondary market investors create a huge strategic
competitive advantage for lenders needing additional liquidity. Lenders can
safely clear off their warehouse loan inventory by building relationships with
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secondary market investors, creating new opportunities for additional growth

and profitability. Equally important, banks and mortgage lenders can reduce
their risk-based capital portfolios by tapping into the multiple options offered by
secondary market investors. Because of loan quality requirements, the
secondary. Market also indirectly improves the mortgage industry by forcing
banks and mortgage lenders to run a clean and efficient operation before they
can do business in the secondary market. In the present environment, financial
institutions – whether in the primary or secondary markets – have a tremendous
opportunity for strong and increased growth. The positive opportunities for
lenders to leverage the multiple services offered by secondary market investors
are there for the taking.
 Changing regulations of secondary market

The Indian securities market is in transition. Several important changes were
brought for the smooth and effective functioning of stock exchanges from the
time to time by the SEBI. The revolutionary changes have been taking place
over a period of time. In fact, on almost all the operational and systematic risk
management parameters, settlement system, disclosures, accounting standards,
the Indian securities market is at par with the global standards. Some of those
initiatives taken place in the secondary market are discussed below:
• Overall administration, supervision and control of the stock

exchanges
The central government for the first time in April 1988 constituted an
administrative body viz. securities and exchange board of India and in January
1992, the central government enacted an Act granting a statutory recognition to
the securities and exchange board of India as a regulator of the securities/
markets. The governing board of the council to be consisting of total 10
members, 4 from stock exchanges, 4 from government, corporate finance,
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commerce, accountancy, management and law and 2 from investment and

development finance institutions.
• Membership of the stock exchange
Minimum basic educational qualification is 12th standard or equivalent and
graduation after 5 years. Members to have reasonable background in economics,
corporate finance, taxation, etc. The stock exchanges have to approve members
(trainers) to impart adequate knowledge and training to aspirants for
membership. Financial institutions, commercial banks and companies are
also eligible for membership of stock exchanges. Membership is to be open to
a qualified person at any time. Multiple memberships are allowed to member to
encourage provision of better services to the investing public and to further the
healthy development of capital market
• Public issues
The companies eligible to make a public issue can freely price their equity
shares or any security convertible into equity at a later date in cases of public/
rights issues by listed companies and public issue by unlisted companies. In
addition, eligible infrastructure companies can freely price their equity shares
subject to compliance of disclosure norms of SEBI. The public and private
sector banks can also freely price their shares subject to approval by RBI.
A company may issue shares to applicants in the firm allotment category at
higher price than the price at which securities are offered to public. Further an
eligible company is free to make public/ rights issue in any denomination
determined by it in accordance with sub-section (4) of section 13 of the
companies Act, 1956 and SEBI norms.
• Risk management
In the equipment leasing industry, application of the liquidity and hedging tools
of modern corporate finance has lagged behind other sectors of the financial
services business. The creation of a deep and liquid secondary market for lease
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assumptions will enable liquidity to be made available and provide more

flexibility to both lessees and lessors. For a better appreciation of how this
might come about, this article presents an economic and financial analysis of
the developing secondary market for lease assumption. A continuing
development in corporate finance has been the sophisticated risk management
methodologies involving credit enhancement, hedging through derivative
securities, and techniques and structures such as securitization for improved
liquidity. This paper presents a brief economic and financial analysis of the
developing secondary market for lease assumption, focusing on the incentive
structure and the underlying rationale for a secondary market. The enhanced
optionality and liquidity that this advance in the state of the art permits has the
potential to create value for all market participants and, in particular, significant
risk management benefits for lessors.
• Systems audit
Trading, settlement and risk management system of stock exchanges are almost
completely automated. For this reason, it becomes very important that the
systems do not have deficiencies which can impair their efficacy. It also
becomes important to ensure that the stock exchanges have suited disaster
recovery sites and business continuity plans and that the systems are adequately
secure. Active stock exchanges have been asked to carry out system audit
through external agencies competent to carry system audit exercise. SEBI does
follow-up for rectification of deficiencies pointed out in the systems audit
reports. In 2004-2005 too. Such follow-up was done through offsite analysis of
compliance reports from stock exchanges and meeting with the senior
management of stock exchanges.
• Institutionalization
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Capital market are said to be more efficient when they have more participants,
instruments, processes and other alternatives. Indian capital market was
dominated by individual investors till early part of the 1990’s. Earlier
institutional investors such as life insurance Corporation of India, General
Insurance Corporation of India and its four subsidiaries, Development
financial institutions, banks etc., used to take minor role in the capital
market activity. Unit trust of India, the only mutual fund then, used to play
active role in the primary market and secondary capital market. 1990s saw entry
of many new participants to the capital market. SEBI permitted private sector
and joint sector (Indian as well as foreign), mutual funds. Government of India
and SEBI allowed foreign institutional investors, non-resident Indians and
overseas corporate bodies to trade in securities. Additionally, non-banking
finance companies also have been taking interest in dealing in securities. Thus,
the variety of participants taking interest in the Indian capital market
substantially increased and the current variety is as large as is available in any
other developed market.
DIFFERANCE BETWEEN PRIMARY MARKET AND SECONDARY

MARKET
• A company cannot easily find investors its securities (shares or

debentures) from the public if they cannot subsequently trade these shares
and debentures at will. In other words, a security cannot have a good
primary market unless it has an active secondary market.
• The primary market comprises companies who make the security issues
and the general public who subscribe to them. The primary market is
where a company in search of capital, markets its first contact whit the
general public. Therefore, if one is wondering whether or not to invest in
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the new issues of a company, one is basically contemplating whether or

not to participate in the primary market.
• The secondary market comprises buyers and sellers of shares and
debentures subsequent to the original issue. For example, having
subscribed to the share or debenture of a company, if one then wishes to
sell this, it will be done in the secondary market. Similarly, one can also
buy the share or debenture of a company from the secondary market (if
the company listed in the stock exchange), without having to wait for that
company to come out with a new public issue. Thus, by their very role,
stock exchanges are an important constituent of the capital market.
• The two markets mentioned above are not two physically segregated
institutions. Often the same parties may be involved in both the markets.
Primary market merely alludes to the first purchase of a new share or
debenture by the public directly from the issuing company, whereas
secondary market refers to the subsequent trading in those shares and
debentures. A stock exchange is the single most important institution in
the secondary market for securities.
23
Chapter 3
Secondary Stock Market
Introduction
The term secondary stock market means the place where the actual trading of
stocks takes place. In the secondary stock market an investor buys a stock from
another investor instead of any particular issuing entity. The New York Stock
Exchange is a good example of a secondary stock market.
Secondary Stock Market Details
The companies apply for the membership of the specific stock market. The
companies are permitted to get into that stock markets after the successful
completion of their Initial Public Offerings. Once a company is registered in a
certain stock market, it means the stocks of the same are then available for
transaction. The listing price of the shares of a company in the secondary stock
market is fixed by the market regulator. In the secondary stock markets the
shares of the enlisted companies are traded at steady intervals.
Secondary Stock Market and Globalization
24
The phenomenon called globalization has had some impact on the various
secondary stock markets at present. The secondary stock markets across the
world have grown in keeping with the process known as globalization. The
advent of information technology has changed the way business is being
executed throughout the world. The secondary stock markets are also looking at
incorporating information technology into their business procedure. The
computers have contributed to the rise of more avenues of bringing up capital,
that could be used for a variety of purposes like increasing the size of the
company as well as making new investments. Information technology has also
helped the various secondary stock markets to conduct business with more
clarity and in a more smooth manner.
Role of stock exchanges in the development of the nation
It is no exaggeration to say that in a modern industrialist society, which

recognizes the rights of private ownership of capital, stock exchange is not
simply a convenience, they are essential. In fact, they are the markets which
exist to facilitate purchase and sale on securities of companies and the securities
or bonds issued by the government in the course of its borrowing operation. As
our country moves towards liberalization, this tendency is certain to be
strengthened. The task facing the stock exchange is to devise the means to reach
down to the masses, to draw the savings of the man in the street into productive
investments, to create conditions in which many millions of little investors in
cities, towns and villages will find it possible to make use of the facilities,
which have so far been limited to the privileged few. This calls for far-reaching
changes, institutional as well as operation.
Securities
25
Securities market is the market in which securities are bought and sold.
However, this is not related to a physical location. The term, securities market
loosely stands for the entire system in which financial securities or financial
instruments are traded, including the people and institutions involved in these
transactions, the organizations issuing or intending to issue the securities and
the systems that enable the trading processes. In short, it implies the entire
infrastructure required for transacting in securities, including the set of
regulatory bodies to ensure that the transactions are carried out in a fair and
transparent manner.
LISTING OF SECURITIES
Listing means admission of the securities to dealings on a recognized stock

exchange. The securities may be of any public limited company, Central or
State Government, quasi governmental and other financial
institutions/corporations, municipalities, etc.
The objectives of listing are mainly to:
• provide liquidity to securities;

• mobilize savings for economic development;
• Protect interest of investors by ensuring full disclosures.
The Exchange has a separate Listing Department to grant approval for listing of
securities of companies in accordance with the provisions of the Securities
Contracts (Regulation) Act, 1956, Securities Contracts (Regulation) Rules,
1957, Companies Act 1956, Guidelines issued by SEBI and Rules, Bye-laws
and Regulations of the Exchange. A company intending to have its securities
listed on the Exchange has to comply with the listing requirements.
 Over the Counter Exchange of India (OTCEI)
26
Introduction
The traditional trading mechanism prevailed in the Indian stock markets gave
way to many functional inefficiencies, such as, absence of liquidity, lack of
transparency, unduly long settlement periods and benami transactions, which
affected the small investors to a great extent. To provide improved services to
investors, the country's first ringless,scripless, electronic stock exchange -
OTCEI - was created in 1992 by country's premier financial institutions - Unit
Trust of India, Industrial Credit and Investment Corporation of India, Industrial
Development Bank of India, SBI Capital Markets, Industrial Finance
Corporation of India, General Insurance Corporation and its subsidiaries
and CanBank Financial Services.
Trading at OTCEI is done over the centres spread across the country. Securities
traded on the OTCEI are classified into:
• Listed Securities - The shares and debentures of the companies listed on the
OTC can be bought or sold at any OTC counter all over the country and they
should not be listed anywhere else.
• Permitted Securities - Certain shares and debentures listed on other
exchanges and units of mutual funds are allowed to be traded.
• Initiated debentures - Any equity holding atleast one lakh debentures of
particular scrip can offer them for trading on the OTC.
 OTC has a unique feature of trading compared to other traditional

exchanges. That is, certificates of listed securities and initiated debentures
are not traded at OTC.
 The original certificate will be safely with the custodian. But, a counter
receipt is generated out at the counter which substitutes the share
certificate and is used for all transactions.
27
 In the case of permitted securities, the system is similar to a traditional

stock exchange. The difference is that the delivery and payment
procedure will be completed within 14 days.
Compared to the traditional Exchanges, OTC Exchange network has the

following advantages:
• OTCEI has widely dispersed trading mechanism across the country

which provides greater liquidity and lesser risk of intermediary
charges.
• Greater transparency and accuracy of prices is obtained due to the
screen-based scrip less trading.
• Since the exact price of the transaction is shown on the computer
screen, the investor gets to know the exact price at which s/he is
trading.
• Faster settlement and transfer process compared to other
exchanges.
• In the case of an OTC issue (new issue), the allotment procedure is
completed in a month and trading commences after a month of the
issue closure, whereas it takes a longer period for the same with
respect to other exchanges.
Thus, with the superior trading mechanism coupled with information

transparency investors are gradually becoming aware of the manifold
advantages of the OTCEI.
Stock market index
28
The movements of the prices in a market or section of a market are captured in

price indices called stock market indices, of which there are many, e.g., the
S&P, the FTSE and the Euronext indices. Such indices are usually market
capitalization weighted, with the weights reflecting the contribution of the stock
to the index. The constituents of the index are reviewed frequently to
include/exclude stocks in order to reflect the changing business environment.
Additionally, many choose to invest via the index method. In this method, one
holds a weighted or unweighted portfolio consisting of the entire stock market
or some segment of the stock market (such as the S&P 500 or Wilshire 5000).
The principal aim of this strategy is to maximize diversification, minimize taxes
from too frequent trading, and ride the general trend of the stock market.
DEMAT AND ONLINE TARDING
Origin of Demat in India
The concept of demat was introduced in Indian capital market in 1996 with the
setting up of NSDL. A depository holds securities in dematerialized form. It
maintains ownership records of securities in a book entry form and also effects
transfer of ownership through book entry. SEBI has introduced some degree of
compulsion in trading and settlement of securities in demat form while the
investors have a right to hold securities in either physical or demat form, SEBI
has mandated compulsory trading and settlement of securities in select
securities in dematerialized form. This was initially introduced for institutional
investors and was later extended to all investors. Starting with 12 script on15th
Jan 1998, all investors are required to mandatory trade in dematerialized form in
respect of 2335 securities as at end-June 2001. By Nov, 2001. 3811 companies
were under demit mode and the rest of the companies were brought under
compulsory demat mode by 2nd Jan. 2002. The securities of companies which
fail to establish connectivity with both the depositories on the scheduled date as
29
announced by SEBI are traded on the “trade for trade” settlement window of the
exchanges. However in order to mitigate the difficulties of small investors the
stock exchanges provide additional windows for sales up to 500 shares in the
physical form.
Benefits of demat
• Elimination of bad deliveries

• Elimination of all risks associated with physical certification.
• NO stamp duty.
• Immediate transfer and registration of securities.
• Faster settlement cycle.
• Faster disbursement of rights, bonus etc.
• Reduction in brokerage by many brokers for trading in dematerialized
securities.
• Reduction in handling of huge volumes of paper and postal delays.
Dematerialization
Dematerialization (“Demat” in short form) signifies conversion of a share
certificate from its physical form to electronic form for the same number of
holding which is credited to your demat account which you open with a
Depository Participant (DP)Depository. A Depository (NSDL & CDSL) is
an organization like a Central Bank where the securities of a shareholder
are held in the electronic form at the request of the shareholder through the
medium of a Depository Participant. If an investor wants to utilize the
services offered by a Depository, the investor has to open an account with
the Depository through a Depository Participant. The Depository can legally
transfer beneficial ownership which a custodian cannot. The main objective
30
of a Depository is to minimize the paper work involved with the ownership,

trading and transfer of securities.
Depository Participant
Similar to the brokers who trade on your behalf in and outside the Stock
Exchange; a Depository Participant (DP) is your representative (agent) in the
depository system providing the link between the Company and you through the
Depository. Your Depository Participant will maintain your securities account
balances and intimate to you the status of your holding from time to time.
According to SEBI guidelines, Financial Institutions like banks, custodians,
stockbrokers etc. can become participants in the depository. A DP is one with
whom you need to open an account to deal in electronic form. While the
Depository can be compared to a Bank, DP is like a branch of your bank
with which you can have an account.
How does the Depository System operate?
The Depository System functions very much like the banking system. A bank
holds funds in accounts whereas a Depository holds securities in accounts for its
clients. A Bank transfers funds between accounts whereas a Depository
transfers securities between accounts. In both systems, the transfer of funds
or securities happens without the actual handling of funds or securities. Both
the Banks and the Depository are accountable for the safe keeping of funds
and securities respectively
Safety to the investor
• Securities Exchange Board of India (SEBI) has laid down certain rules
and regulations for getting registered as a depository participant. With the
31
recommendation of the Depository and SEBI's own independent

evaluation a DP will be registered under SEBI.
• The investors account will be credited / debited by the DP only on the
basis of valid instruction from the client.
• The system driven mandatory reconciliation is done between the DP and
NSDL.
• Periodic inspections of both DP and R&T agent are conducted by NSDL.
• The data interchange between NSDL and its business partners is
protected by standard protection measures such as encryption.
• No direct communication links exist between two business partners and
all communications are routed through NSDL.
• A statement of account is received periodically by the investors. NSDL
sends statement of account to a random sample of investors a s a counter
check.
• The investor has the right to approach NSDL if the grievances of the
investors are not resolved by the concerned DP.
Advantages of dematerialization
• There is no risk due to loss on account of fire, theft or mutilation.

• There is no chance of bad delivery at the time of selling shares as there is
no signature mismatch.
• Transaction costs are usually lower than that in the physical segment.
• The bonus /rights shares allotted to the investor will be immediately
credited into his account. Share transactions like sale or purchase and
transfer/transmission etc. can be effected in a much simpler and faster
way.
Problems of Dematerialisation.
32
Prior to dematerialization there was almost a gap of three months between

application date and listing of shares .Dematerialisation has reduced this gap to
a great extent. But quick money brings with itself a host of problems. Current
regulations prohibit multiple bids or applications by a single person. But the
investors open multiple demat accounts and make multiple applications to
subscribe to IPO's in the hope of getting allotment. The recent IPO allotment
scam proves that even a highly automated system is not the solution to prevent
malpractices, if there is laxity. The scam of Yes bank and IDFC reveal that the
investor banker has failed to weed out multiple applications either direct or
benami. Not only the investor banker the DP and the depository failed to detect
the large number of demat accounts opened names. Lack of coordination
between banks, DP's, broker’s depositories, registrars and investment
bankers and clarity of their roles has given rise to such problems.
Remedial measures
• To prevent the sprouting of fictitious demat accounts at DP's the

allotment of shares should be checked thoroughly.
• The concerned DP should strictly enforce the Know your client (KYC)
norms rather than relying on bank documents and verification of
brokers.
• DP's should be asked to give monthly figure of accounts opened for the
public.
• Coordination and Clear definition of roles is important to weed out
manipulations.
Though dematerialization has several benefits the recent scam has the potential
to adversely affect the confidence of retail investors in the capital market .To
reap the benefits of dematerialization SEBI, as a regulator has to place a system
that is alert and vigilant against unjust gains
33
3.1] Stock Prices in Secondary Market
Introduction
The stock price in the secondary market is determined completely by the

fluctuations in demand and supply of the particular stocks. However the stock
prices in secondary market, of different types of shares are separate from each
other. The prices of stocks, that are liquid and are often traded in the secondary
markets, are liable to fluctuate throughout the entire duration of the transactions.
However, the investors can keep track of the changes in the prices through the
various trading screens.
Secondary Market Rate
The term secondary market rate means the price of the securities that are traded
in the secondary markets. There are various secondary markets which have
separate rates of their own. There are basically few predominant secondary
markets like the stock and bond markets.
Stock Market Rates:
The stock market rates are the prices of transaction in the stock markets. There
are primarily three different stock market rates or prices - the opening price, the
closing price and the listing price. The opening price is the one at which trading
starts for the day.
The closing price of a stock is the one at which the trading stops for the
particular day. The closing price also serves as the opening price for the coming
trading day. The listing price of a particular stock is determined by the market
regulator, along with the respective market, where the stock would be traded.
34
Commercial bank debts of developing countries are held by large international

banks and smaller domestic banks. This paper investigates how debt
concentration--the proportion of a country's debt held by large banks relative to
small banks--affects the secondary market price for these loans. We find that
countries with higher concentrations have higher secondary-market prices.
We explain this empirical finding in a bargaining model that endogenizes the
maximum penalty that banks can credibly impose on a recalcitrant debtor. We
show that the banks' bargaining power increases with the degree of debt
concentration, thus increasing repayment and secondary-market prices.
Copyright 1999 by Economics Department of the University of Pennsylvania
and the Osaka University Institute of Social and Economic Research
Association.
3.2] Secondary market for loans

It is commonly argued that banks play a special role in the financial system
because they resolve an important information asymmetry. The recent
development of an active secondary market for loans could however potentially
diminish this special role. This study utilizes a unique dataset of secondary
market loan prices to examine this issue. We find that new loan announcements
are associated with a positive stock price announcement effect even when a
borrower’s loans trade on the secondary market. This result also holds true for
distressed borrowers who are ex ante expected to be most adversely affected by
a potential reduction in bank incentives to monitor as a result of a secondary
market for loans. Moreover, when a borrower’s existing loans trade for the first
time in the secondary loan market, it elicits a positive stock price response.
Overall, our results suggest that banks continue to be special in the presence of
a secondary market for bank loans, and that the bank monitoring function and
the secondary market for bank loans are complementary sources of information
about borrowers.
35
Bank Loan Sales: A New Look at the Motivations for Secondary Market
Activity
Bank lending traditionally involves the extension of credit that is held by the
originating bank until maturity. Loan sales allow banks to deviate from this
pattern by transferring loans in part or in their entirety from their own books to
those of another institution. This paper uses a new methodology to test the
validity of two hypotheses regarding banks' motivations for selling and buying
loans: (1) the comparative advantage hypothesis, that banks with a
comparative advantage in originating loans sell and those with a comparative
advantage in funding loans buy, and (2) the diversification hypothesis, that
banks lacking the ability to diversify internally use loan sales and purchases to
achieve diversification. A third hypothesis--that reputation barriers can limit
access to the secondary market--is considered as well, with particular attention
paid to the importance of affiliate relationships in explaining secondary market
activity. Together, the evidence relating to these three hypotheses helps clarify
the benefits of an active secondary loan market. It also generates predictions
regarding the future of that market in a world of rapid consolidation and
disappearing barriers to geographical expansion.
3.3] BOMBAY STOCK EXCHANGE
INTRODUCTON:
The Bombay Stock Exchange is the oldest Stock Exchange in Asia located in
Dalal Street, Mumbai in India.
Evolution of the Bombay Stock Exchange and its Size
The Bombay Stock Exchange was established in 1875 as the “Native Share and
Stock Brokers Association” in 1875. It earned a formal status under the
36
Securities and Exchange Board of India (SEBI) in 1956. Market Capitalization

of the BSE was about Rs 33.4 trillion as on 2006, October. The Bombay Stock
Exchange uses the Bombay Stock Exchange Sensex as the market index in Asia
and India.
The Bombay Stock Exchange deals with trading in derivatives, equity and other
debt instruments.
BSE Management
Bombay Stock Exchange is managed professionally by Board of Directors. It

comprises of eminent professionals, representatives of Trading Members and
the Managing Director. The Board is an inclusive one and is shaped to benefit
from the market intermediaries participation. The Board exercises complete
control and formulates larger policy issues. The day-to-day operation of BSE is
managed by the Managing Director and its school of professional as a
management team.
BSE Network
The Exchange reaches physically to 417 cities and towns in the country. The
framework of it has been designed to safeguard market integrity and to operate
with transparency. It provides an efficient market for the trading in equity, debt
instruments and derivatives. Its online trading system, poularly known as
BOLT, is a proprietory system and it is BS 7799-2-2002 certified. The BOLT
network was expanded, nationwide, in 1997. The surveillance and clearing &
settlement functions of the Exchange are ISO 9001:2000 certified
Organization structure
In terms of organization structure, the board formulates larger policy issues and
exercises overall control. The committees constituted by the board are broad-
37
based. The day-to-day operations of the exchange are managed by the managing
director and a management team of professionals
Sensex
Sensex is the value-weighted index of the companies listed on the stock
exchange. Bombay Stock Exchange (BSE) in 1986 came out with a stock index
that subsequently became the barometer of the Indian stock market.
BSE DEBT SEGMENT
Introduction
The capital market comprises of equities market and debt market. Debt market
is a market for the issuance, trading and settlement in fixed income securities of
various types. Fixed income securities can be issued by a wide range of
organizations including the Central and State Governments, public bodies,
statutory corporations, banks and institutions and corporate bodies
Transformations in the Market Structure. The Indian Debt Markets are
today poised on the threshold of momentous change and transition to an
efficient, transparent and vibrant market with significant retail participation.
The first half of the twentieth century had witnessed a significant amount of
retail interest and participation in the G-Sec market with more than half the
holdings of G-Secs issued being held by retail investors, a trend which
continued until the early sixties. The administered interest rate regime and the
emergence of other equity and debt instruments led to a gradual diminution in
the investor interest and participation in the G-Sec market. The Indian Debt
Market structure was hitherto that of a wholesale market with participation
largely restricted to the Banks, Institutions and the Primary Dealers. The rapidly
expanding volumes in the Wholesale Debt Market over the past few years bear
the promise of an immense and attractive financial market with a strong
38
potential for retail participation. The Retail Debt Market in India is being
created, thanks to the pioneering efforts of the Exchanges and the market
participants and the strong leadership and guidance by SEBI, RBI and the
Govt. of India.SEBI has subsequently taken several steps towards creation of a
vibrant Corporate Bond market. On July 2, 2007 SEBI permitted BSE to launch
a trade matching platform with essential features of an OTC Market. Several
other initiatives like simplification of the Debt listing agreement, rationalization
of stamp duty and introduction of Repos on Corporate Bonds have been taken
by SEBI.
BSE’s Bond with Investors
Bombay Stock Exchange Limited (BSE), the premier stock exchange in the
country, has heralded the capital market revolution in India and has contributed
immensely towards the achievement of global standards of efficiency and safety
by the Indian capitals market.BSE, with its rich experience of 133 years in the
Indian capital market, offers investors an efficient and transparent nation-wide
platform for trading in Equities, Debt and Derivative products. BSE is now in
the throes of change, having transformed itself into a corporate entity effective
August 19, 2005, and several significant initiatives are in the offing
permitted banks, Primary Dealers and financial institutions in India to
undertake transactions in debt instruments among themselves or with non-bank
clients through the members of Bombay Stock Exchange Limited (BSE). This
notification paved the way for BSE to commence trading in Government
Securities and other fixed income instruments.
3.4] National stock exchange
Introduction
39
The National Stock Exchange of India Limited (NSE), is a Mumbai-based

stock exchange. It is the largest stock exchange in India in terms of daily
turnover and number of trades, for both equities and derivative trading. NSE has
a market capitalization of around Rs 47,01,923 crore (7 August 2009) and is
expected to become the biggest stock exchange in India in terms of market
capitalization by 2009 end. Though a number of other exchanges exist, NSE and
the Bombay Stock Exchange are the two most significant stock exchanges in
India, and between them are responsible for the vast majority of share
transactions. The NSE's key index is the S&P CNX Nifty, known as the Nifty,
an index of fifty major stocks weighted by market capitalisation.
NSE is mutually-owned by a set of leading financial institutions, banks,

insurance companies and other financial intermediaries in India but its
ownership and management operate as separate entities.
NSE was set up with the objectives of:
• Establishing nationwide trading facility for all types of securities

• Ensuring equal access to investors all over the country through an
appropriate telecommunication network
• Providing fair, efficient & transparent securities market using electronic
trading system
• Enabling shorter settlement cycles and book entry settlements
• Meeting International benchmarks and standards
Within a very short span of time, NSE has been able to achieve its objectives for
which it was set up. Indian Capital Markets are a far cry from what they were
12 years back in terms of market practices, infrastructure, technology, risk
management, clearing and settlement and investor service. To ensure continuity
of business, NSE has built a full fledged BCP site operational for last 7 years.
40
NSE has several advantages over the traditional trading exchanges. They are as
follows:
• NSE brings an integrated stock market trading network across the nation.
• Investors can trade at the same price from anywhere in the country since
inter-market operations are streamlined coupled with the countrywide
access to the securities.
• Delays in communication, late payments and the malpractice’s prevailing
in the traditional trading mechanism can be done away with greater
operational efficiency and informational transparency in the stock market
operations, with the support of total computerized network.
The following diagram shows the trend in the no. of listed companies
participating in the Indian Capital Market. Here again we register a sharp rise
after 1980. The number of stocks issued by the listed companies also shows a
similar trend.
In order to lift the Indian stock market trading system on particular with the
international standards. On the basis of the recommendations of high powered
41
Pherwani Committee, the National Stock Exchange was incorporated in 1992

by Industrial Development Bank of India, Industrial Credit and Investment
Corporation of India, Industrial Finance Corporation of India, all
Insurance Corporations, selected commercial banks and others.
Membership
The National Stock Exchange has set up facilities which serve as a model for
the securities industry in terms of trading systems, practices and procedures.
Though the impetus for its establishment came from policy makers in the
country, it has been set up as a public limited company, owned by the leading
institutional investors in the country. NSE is different from most Stock
Exchanges in India where membership on an exchange also meant ownership of
the exchange. The ownership and management of the Exchange is completely
separated from the right to trading members, to trade on the NSE. The
Exchange is managed by a Board of Directors. Decisions relating to market
operations are delegated by the Board to an Executive Committee which
includes representatives from the Trading Members, the public and the
management. Besides, the Exchange operates various committees to advise it on
areas such as good market practices, settlement procedures, risk containment
systems etc. These committees are manned by industry professionals, Trading
Members and Exchange staff. The day to day management of the Exchange is
delegated to the Managing Director who is supported by a team of professional
staff.(i) 1026 trading members on the Capital Market segment, of which around
86% account for corporates and the remaining individuals and firms.(ii) 113
trading members on the Wholesale Debt Market segment, all of which account
42
for corporates. (Out of these 113 trading members, 106 are members of the
Capital Market segment also and are included in the 1026 members).
Business
At NSE three kinds of margins are imposed i.e. daily margins, margins which
depend on market fluctuations which are adjusted against the exposure of the
member. It has three mutually exclusive segments comprising of wholesale debt
market, capital market and futures and options trading. Debt market was
activated in early 1994 and the share trading on 03.11.1994.The NSE eliminated
the physical trading floor by going in for automated fully screen-based trading
system. The trading system has the advantages of ensuring best price to market
participants, lead higher growth in volumes through automation, increased
efficiency and greater flexibility in money management. Effective monitoring
mechanism, quick and efficient settlements with its trading members spread
across the country, the NSE managed to access hitherto removed markets. At
NSE traders are automatically matches i.e. a buy order is matched with a sale
order.
S&P CNX nifty index
The index popularly called the nifty reflects the price movement of 50 stocks
selected on criteria of market capitalization and liquidity, in the national stock
exchange. The index is well diversified with 23 industries finding
representation. The index has been in operation since Nov.05, 1955, the base
period for nifty is the close price on NOV.03.1995, the date on which NSE
capital market segment completed one year of operation. The index is owned
and operated by Indian index services and products Ltd; a company set up by
NSE and CRISIL with technical assistance from standard and Poor’s. The index
touched its peak of 1756 on February 11, 2000.
43
S&P CNX NIFTY 28TH AUG., 2009

COMPANY INDUSTRY LAST CHARGE %CHARGE MARKET WEIGHT
NANE PRICE CAPITAL
AXIS BANK BANKS- 918.85 -3.90 -0.42 33066.72 1.11
PRIVATE
SECTOR
HDFC FINANCE- 2511.15 9.90 0.40 71457.37 2.40
HOUSING
HDFC BANK BANKS- 1457.75 0.75 0.05 62010.37 2.08
PRIVATE
SECTOR
ICICI BANK BANKS 763.60 13.05 1.74 85013.43 2.86
PRIVATE
SECTOR
PNB BANKS- 678.40 16.20 2.45 21390.12 0.72
PULIC
SECTOR
SBI BANK- 1781.75 27.95 1.59 113119.78 3.80
PUBLIC
Difference between BSE and NSE
Bombay Stock Exchange and National Stock Exchange are both major stock
exchange in India. But there is a difference between NSE and BSE. Investors
put their money in the stock market in order to reap huge benefits from their
investment. But nobody can predict the market as we have already discussed.
Also any stock market is decided by its country’s growth. But you should be
aware that it requires a lot of patience. The market tumbles down and this is the
reason why investors fear of investing their money.
44
Chapter 4
4.1] Secondary Market Trading
Introduction
The term secondary market trading signifies the buying and selling of securities,
after they have been brought out through an Initial Public Offering. In order for
secondary market trading to take place a particular security has to be listed in
the relevant exchange. The term secondary market trading could also be denoted
to the dealing of the smaller parts of a larger loan and ownership interest in
business enterprises.
Nature of Secondary Market
In the secondary markets the securities are traded by investors. The secondary
markets need to have higher levels of liquidity so that transaction could be
carried on properly.
Benefits of Secondary Market Trading
There are various benefits of trading in the secondary markets. The biggest
advantage is that the investors can recover their investments to a certain extent,
provided their economic status undergoes a change. This is different from the
conventional lending and partnership agreements. In such cases the investors
may refrain from making long term investments. Even if they invest for a longer
45
period of time, they would charge higher rates of interest for it. In the secondary
markets the investors are provided the luxury of being able to sell their interests
in the respective investments. This is specifically applicable if the particular
investment has been fragmented in comparatively smaller parts. The investors
are provided such luxuries in case of the securitized loans, equity interests like
bonds or stocks that could be traded.
Private equity secondary market
In finance, the private equity secondary market (also often called private equity
secondaries or secondaries) refers to the buying and selling of pre-existing
investor commitments to private equity and other alternative investment funds.
Sellers of private equity investments sell not only the investments in the fund
but also their remaining unfunded commitments to the funds. By its nature, the
private equity asset class is illiquid, intended to be a long-term investment for
buy-and-hold investors. For the vast majority of private equity investments,
there is no listed public market; however there is a robust and maturing
secondary market available for sellers of private equity assets.
46
Driven by strong demand for private equity exposure, a significant amount of

capital has been committed to dedicated secondary market funds from investors
looking to increase and diversify their private equity exposure.
History of private equity and venture capital
Many of the largest financial institutions (e.g., Deutsche Bank, Abbey

National, UBS AG) sold portfolios of direct investments and “pay-to-play”
funds portfolios that were typically used as a means to gain entry to
lucrative leveraged finance and mergers and acquisitions assignments but
had created hundreds of millions of dollars of losses.
 Bank-sponsored PE, VC funds face capital adequacy norms
In a move that could affect private equity (PE) and venture capital (VC) funds
being set up by banks, the Reserve Bank of India (RBI) today said it was
planning to lay down a risk management and capital adequacy framework for
bank-sponsored private pools of capital.
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The move, a part of the new set of prudential norms being discussed by
financial sector regulators across the globe in the wake of the credit crisis, was
being discussed in view of the reputation risk arising from undertaking such
activities, RBI said in its annual report for 2008-09.
Laying emphasis on the macro-prudential dimension of the systemic risk

assessment, the banking regulator said it was also in the process of revising the
guidelines on stress testing and liquidity risk management and would factor in
the new guidance issued by the Basel Committee on Banking Supervision in
March. Indian banks had not shown any strain during the stress test conducted
by RBI.
While banks such as ICICI Bank and Axis Bank are already in the private
equity arena, others such as State Bank of India and Yes Bank are looking to
launch such funds. While RBI had initially expressed certain concerns about
State Bank of India’s entry into the private equity-venture capital space, it asked
the country’s largest banks to initiate certain steps before foraying into the
business. Canara Bank also has a venture capital fund.
If RBI goes ahead with the move, banks would have to factor in the capital they
might have to set aside to cover the risk of VC and PE funds promoted by them.
In recent years, the regulator has laid emphasis on initiatives such as

consolidated supervision of banking groups. And with Indian financial players
venturing outside the country, steps are also being taken to strengthen cross-
border supervision.
RBI said elements of macro-prudential regulation were visible in India even

before the global crisis started. The central bank had started using counter-
cyclical risk weights and provisioning norms, such as those for bank loans to the
real estate sector, to ensure that the risk was contained. In light of the global
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financial turmoil, the global initiative would focus on a multi-pronged approach

that would focus on introduction of automatic stabilisers by adopting counter-
cyclical capital charge. This would help build a cushion during boom years to
deal with asset-quality issues in a downturn.
Further, RBI said that in the coming days, regulators could focus on elements
such as offbalance sheet exposure, risk concentration and valuation of financial
instruments, among others, to strengthen supervision. In addition, they could
promote market discipline through better disclosure and clarity on risks
associated with certain instruments.
RBI said regulators could provide capital requirements for reputational and
other risk-associated securitisation and activities undertaken by sponsored or
connected conduits. Another element that can be used is stipulating capital
treatment for trading book exposures, besides supplementing the regulatory
approach to minimize the incentive for regulatory arbitrage between banking
and trading books.
4.2] Secondary Market Liquidity
Introduction
The term secondary market liquidity is primarily used in the fields of business,
investment or economics. The term secondary market liquidity is used to mean
the quality of a security to be transferred at the least possible loss of value and
least possible price change. The speculators and the market makers are
important in the context of determining the liquidity of a secondary market.
They are responsible for providing the capital that helps to bring about liquidity.
Secondary Market Securities' Liquidity
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The securities that are traded in the secondary markets and have a certain degree
of liquidity possess some characteristics. They may be enumerated as below:
• They can be sold quickly

• They can be sold at anytime within the trading hours
• They can be sold with the minimum loss of value
LIGUIDITY (IN BANKS)
In banking, liquidity is the ability to meet obligations when they come due
without incurring unacceptable losses. Managing liquidity is a daily process
requiring bankers to monitor and project cash flows to ensure adequate liquidity
is maintained. Maintaining a balance between short-term assets and short-term
liabilities is critical. For an individual bank, clients' deposits are its primary
liabilities (in the sense that the bank is meant to give back all client deposits on
demand), whereas reserves and loans are its primary assets (in the sense that
these loans are owed to the bank, not by the bank). The investment portfolio
represents a smaller portion of assets, and serves as the primary source of
liquidity. Investment securities can be liquidated to satisfy deposit withdrawals
and increased loan demand. Banks have several additional options for
generating liquidity, such as selling loans, borrowing from other banks,
borrowing from a central bank, such as the US Federal Reserve bank, and
raising additional capital. In a worst case scenario, depositors may demand their
funds when the bank is unable to generate adequate cash without incurring
substantial financial losses. In severe cases, this may result in a bank run. Most
banks are subject to legally-mandated reserve requirements intended to help
banks avoid a liquidity crisis.
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Banks can generally maintain as much liquidity as desired because bank

deposits are insured by governments in most developed countries. A lack of
liquidity can be remedied by raising deposit rates and effectively marketing
deposit products. However, an important measure of a bank's value and success
is the cost of liquidity. A bank can attract significant liquid funds, but at what
cost? Lower costs generate stronger profits, more stability, and more confidence
among depositors, investors, and regulators.The secondary market was
underdeveloped and lacked liquidity. Several measures have been initiated and
include new money market instruments, strengthening of existing instruments
and setting up of the Discount and Finance House of India (DFHI). The RBI
conducts its sales of dated securities and treasury bills through its open market
operations (OMO) window. Primary dealers bid for these securities and also
trade in them. The DFHI is the principal agency for developing a secondary
market for money market instruments and Government of India treasury bills.
The RBI has introduced a liquidity adjustment facility (LAF) in which liquidity
is injected through reverse repo auctions and liquidity is sucked out through
repo auctions. On account of the substantial issue of government debt, the gilt-
edged market occupies an important position in the financial set- up. The
Securities Trading Corporation of India (STCI), which started operations in
June 1994, has a mandate to develop the secondary market in government
securities.
4.3] Treasury Bills Secondary Market
Introduction
The term treasury bills secondary market refers to the place where the actual
transactions occur. In this particular market, treasury bills are traded based on a
certain percentage yield. This yield is obtained after a treasury bill matures.
51
Treasury Direct
The Treasury Direct enables buyers of these types of securities to purchase

treasury bills through the Internet. They can have the funds taken out and
subsequently deposited directly into the bank accounts of respective buyers.
Treasury Bill Rates
The maturity period for the treasury bills in the United States is not more than a
year. There are other treasury bills available as well. Those treasury bills have
maturity periods of one, three or six months. The minimum worth of a treasury
bill is a thousand US dollars. The maximum price of a treasury bill is five
million
Treasury Bills in USA
In the United States, treasury bills are issued by the Treasury Department
through the Public Department Bureau. The mechanism of these bills is utilized
by the United States government during the time it conducts open market
operations. The maximum maturity period for treasury bills is one year,
however, bills may be issued for a one, three, or six month period. The price of
a bill ranges from one thousand to five million US dollars.
Treasury Bills India:
Treasury Bills are short term (up to one year) borrowing instruments of the
Government of India which enable investors to park their short term surplus
funds while reducing their market risk.
They are auctioned by Reserve Bank of India at regular intervals and issued at
a discount to face value. On maturity the face value is paid to the holder.
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The rate of discount and the corresponding issue prices are determined at each
auction. When liquidity is tight in the economy, returns on Treasury Bills
sometimes become even higher than returns on bank deposits of similar
maturity. Any person in India including Individuals, Firms, Companies,
Corporate bodies, Trusts and Institutions can purchase Treasury Bills. Treasury
Bills are eligible securities for SLR purposes.
Treasury Bills are available for a minimum amount of Rs.25,000 and in

multiples of Rs. 25,000 thereafter. They are available in both Primary and
Secondary market. Treasury Bills are issued in the form of SGL - entries in
the books of Reserve Bank of India to hold the securities on behalf of the
holder. The SGL holdings can be transferred by issuing a SGL transfer
form. Recently Treasury Bills are also being issued frequently under the
Market Stabilization Scheme (MSS).
Type of Treasury Bills:
At present, RBI issues T-Bills for three different maturities: 91 days, 182 days
and 364 days. The 91 day T-Bills are issued on weekly auction basis while 182
day T-Bill auction is held on Wednesday preceding non-reporting Friday and
364 day T-Bill auction on Wednesday preceding the reporting Friday
Advantages of investing in Treasury Bills:
• No Tax Deducted at Source (TDS).

• Zero default risk as these are the liabilities of GOI.
• Liquid money Market Instrument.
• Active secondary market thereby enabling holder to meet immediate fund
requirement.
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SBI DFHI Ltd, is an active player in the both the primary and the secondary
market for Treasury Bills with an impressive turnover of Rs.5428 crores.
Chapter 5
5.1] Secondary Bond Market
Introduction:
The bond market (also known as the debt, credit, or fixed income market) is
a financial market where participants buy and sell debt securities
Bond Market Rates
There are two different types of bonds in the market as per the rates - the fixed
rate bonds and the floating rate bonds. In the fixed rate bonds the interest rate
stays the same. It never changes throughout the entire term period of the bond.
The interest rate of the floating rate bonds are determined by a money market
index. In the floating rate bonds a spread is grouped together with the rates of
the governmental funds. The spread stays the same throughout the term period
of the bonds. The interest on the floating rate bonds are normally paid after
54
every three months. There are certain bonds like the zero coupon bonds, which
do not require the payment of interest.
SBI DFHI Ltd. is an active participant in the Bond Market. Through SBI
DFHI Invest Plus, investors can purchase investment grade Corporate
Bonds for their purposes.
How to Buy or Sell It?
Corporate bonds can be bought through a full service or discount broker, a

commercial bank or other financial intermediaries. The best time to buy a
corporate bond is when interest rates are relatively high.The central bank sells
treasury bills and bonds to meet short-term borrowing needs of the government.
The mature periods for such bill are 28-day, 91-day, 182-day and 364-day. The
treasury bonds are sold to meet budget deficit and long-term government
financing. The mature periods are five years, 10 years, 15 years and 20 years.
The central bank holds auction for treasury bonds every week and anybody can
bid for it through any bank. The auction committee fixes bond interest rate and
it is applicable throughout the bond's life. This means that buyers will get
interest payment at the rates fixed by the committee. Any individual is allowed
to buy government bond, which pays interest or coupon after every six months
and it is of Tk 0.1 million denominations or its multiplier, from the primary or
secondary market through any bank. There is a secondary market for sale and
purchase of bonds. Yet this market has not been functioning properly since its
inception in 2005, depriving the capital market of the gains and benefits
expected from it. Since its inception at the Dhaka bourse, there had been
negligible transactions at the secondary market. IBBL Mudaraba Perpetual
Bond, the only one corporate bond issued by Islamic Bangladesh Bank Limited
(IBBL), however, showed some good performance. No capital market can reach
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maturity without a strong bond market. Once the government bond market
becomes vibrant, only then the private sector bond market grows.
PSU Bonds/Corporate Debentures

• Since these securities are yet to be dematerialized, problems relating to
physical settlement and non-standardized settlement practices persist.
These include problems of directors’ signatures, banker’s attestation of
signatures, separate resolution for selling and buying, insistence on
rubber stamp of issuer company or transfer agents for previous transfers,
etc.
• Banks are allowed to buy these securities only from registered holders
and not if these are in “street names”. Transfer of bonds and debentures is
further constrained due to some sellers insisting on endorsing the
instruments specifically in favour of the buyer.
• Finally, the status on purchase of bonds/debentures by way of Letter of
Allotment by banks is not clear, again hampering transfer.
 Canara Bank raises Rs 600 cr via bonds issue

Mumbai: State-run lender Canara Bank has raised Rs 600 crore by issuing
bonds.
In a filing to the Bombay Stock Exchange, the bank said, "we have collected
total issue amount of Rs 600 crore under the said issue." Last week the bank had
said it would raise Rs 400 crore by issuing non-convertible subordinate
perpetual Tier-I bonds with an additional option to raise another Rs 200 crore, if
the issue is fully subscribed.
The bonds are with a coupon rate of 9.10 per cent per annum for the first 10
years. The issue, which opened on August 18, closed on August 21, 2009.
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Shares of Canara Bank were trading at Rs 265.75, up 1.47 per cent in the late
afternoon trade on the BSE.
5.2] Secondary Debt Market Investors
Introduction
For a developing economy like India, debt markets are a crucial source of funds.
The debt market in India is amongst the largest in Asia. It includes government
securities – the largest component - and bonds issued by public sector
undertakings, other government bodies, financial institutions, banks and
companies. Debt markets are now considered an alternative route to banking
channels for finance.
Debt Instruments are obligations of issuer of such instruments as regards certain

future cash flows representing Interest & Principal, which the issuer would pay
to the legal owner of the Instruments. Generally debt instruments represent
agreements to receive certain cash flows as per the terms contained within the
agreement. They can also be said to be tradable form of loans. Bond market
investors are also a type of secondary debt market investors when they
trade in the secondary market. A through study of the secondary bond
market must be done before investing. Investing in municipal securities can
be a very lucrative option. Bonds can be broken before they mature. Secondary
market investors have their share of advantages and disadvantages. The
investors must use their prudence and experience.
Some of the benefits to the investors in debt instruments are:
 The investors benefit by investing in fixed income securities as they

preserve and increase their invested capital and also ensure the receipt of
regular interest income.
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 The investors can even neutralize the default risk on their investments by
investing in Govt. securities, which are normally referred to as risk-free
investments due to the sovereign guarantee on these instruments.
 The prices of Debt securities display a lower average volatility as
compared to the prices of other financial securities and ensure the greater
safety of accompanying investments.
 Debt securities enable wide-based and efficient portfolio diversification
and thus assist in portfolio risk-mitigation.
Almost all debt instruments have a rating assigned to them by a Rating Agency
which enables the investor to choose his degree of risk and corresponding
returns.
The Impact of the debt market on the economy
The Asian financial crisis in the 1990s stressed the importance of a fully active
debt market; the lack of which aggravated the crisis. For a developing economy
like India, debt markets are crucial sources of capital funds. The debt market
in India is amongst the largest in Asia. It includes government securities,
public sector undertakings, other government bodies, financial institutions,
banks and companies. Reduced role of banks and political intervention in
use of funds, as banks have to follow norms laid down by the central bank
12.4] DEBT IN BANKS.
Governments raise monetary resources by way of public borrowings to bridge

the gap between budgetary receipts and payments, technically known as Gross
Fiscal Deficit (GFD). In fact, GFD of the Central government is met broadly
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from three sources- public borrowings or internal debt, other liabilities and
external borrowings. Reserve Bank of India has the statutory obligation to
manage the internal debt (public debt) of the Central government while its
obligation to manage the internal debt (public debt) of State Governments arises
from bilateral agreements between the Bank and the respective State
Governments.
Management of public debt by the RBI involves various policy considerations,

which include optimisation of cost of borrowing, achieving dispersion of
ownership of government securities down to the retail level and fostering a deep
and vibrant market for government securities. Demand for credit from
productive sectors and other events such as foreign funds flows and monetary
policy actions can impact the liquidity conditions in the market. The Reserve
Bank has specialized knowledge about the market conditions and, therefore, is
in a position to advise the Governments about the appropriate timing of debt
issuance.
The Indian debt market is dominated by government securities both in terms of

outstanding stock as well as turnover. Till recently, the public sector assumed a
pre dominant role in the development process. Large statutory pre-emption and
borrowing from the RBI provided the government the ability to meet its
borrowing requirements to finance large fiscal deficits. While the rates of
interest on government debt were administered, central bank financing was
extended at much below market interest rates. The monetary policy had to be
compensatory in nature and in the main required successive and large increases
in cash reserve and statutory liquidity requirements.
Till 1993-94 the Central Government was by and large financing its deficits
through a process of larger pre-emption from the banking system and other
captive borrowers besides taking recourse to central bank finance through
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automatic monetisation. The voluntary agreement between the Government of

India and the Reserve Bank of India to phase out the automatic monetisation
was a path-breaking move in the reform process. Consequently, the system of
automatic monetisation ended on March 31, 1997. Government of India's
willingness to borrow from the markets at market rates along with the decision
to introduce auction system for sale of government loans paved the way for
developing a sovereign benchmark yield curve and thus helped the price
discovery in the government and non-government debt market.
Government securities market in India has thus passed through different stages
reflecting the developments in the financial sector from time to time. As the
interest rates for banks were being administered by the Reserve Bank of India,
the interest rate on government securities (known as Coupon Rate) were also
administered and did not reflect the consensus of financial market, which in any
case, was not well developed. This had resulted in coupon rates being low as
compared to interest rates on other assets such as loans. The market for
government securities, as a result, did not develop and mature to be in a position
to discover prices of government securities at the primary issue stage or in the
secondary market.
Financial sector reforms initiated in the year 1992 provided an impetus to RBI's
efforts to bring about debt market reforms. To start with, in June 1992 auction
system for issue of government securities was introduced. Thus from being
viewed as an instrument of mobilisation of plan resources for government
during the first four decades of independence, internal debt management was
transformed into a market driven activity requiring development of pricing and
trading skills, institutional and market infrastructure with the necessary legal
and technological back-up.
Problems by Investor
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1] Retail investors can be best understood by first examining their principal

needs viz. safety, liquidity, yield and ease of operation. The one instrument
which meets all these requirements is a bank deposit. The fact that up to
Rs.1,00,000 of a bank deposit is insured with DICGC, imparts it with additional
safety.
• Retail investors have low interest in Government securities due to
settlement related problems as well as the lack of direct or indirect access
to the electronic clearing and settlement system at the RBI. But the most
important reason which keeps retail investors away from the gilts market
is lack of awareness regarding the yields prevailing in Government
securities and the procedures for investment. As a result, while yields on
T-bills for the first half of 1996 were consistently higher than those
offered by bank deposits, they did not elicit any retail interest.
• At most times however, yields on Government securities are lower than
those on other available investment options due to higher liquidity and
statutory demand from banks in the wholesale market. Low liquidity in
the retail secondary market for Government securities keeps retail
investors away from them.
• After the crash of the equity markets, the traditional retail investor has
moved to bonds of PSUs and corporate debentures in a bid to get higher
yields and greater safety. However, he continues to be plagued by the
problems related to settlement, shallow secondary markets, relatively
lower safety than those offered by bank deposits or Government
securities and extremely cumbersome operational procedures. To invest
in debentures, he still needs to find a broker, take delivery, make
payment, affix transfer stamps, lodge for transfer, follow up with Issuer
Company and collect interest payment. In addition, he has to repeat much
of this process at the time of sale.
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• Larger players, particularly banks, have been reluctant to market debt

instruments to retail investors, under the apprehension of creating an
adverse impact on their own deposits.
• Finally, the absence of market makers, and hence liquidity in the
secondary market, further dampens retail interest.
2] Wholesale investors include banks, insurance companies, mutual funds,

financial institutions and FIIs.
• Since the secondary market is dominated by banks, most of the problems
enumerated, relate primarily to banks. Some of these problems are
attitudinal:
• Treasury is considered a compliance centre instead of a profit centre in
most public sector banks.
• The shadow of the securities scam continues to hinder active trading not
only in public sector banks but also in several private sector and foreign
banks. Trading limits are not delegated to the dealer level but continue to
vest with levels as high as general and deputy general managers. These
managers also bear varied other responsibilities, and are in no way
equipped to trade in the secondary market.
• A number of public sector banks do not yet have a policy in place for
secondary market purchases, particularly for non-SLR securities. Other
problems of the wholesale investor category include :
• Evaluation of investment performance continues to be based on profit or
loss on sale, and the concept of holding period returns is still alien.
• The market is highly segmented as certain segments invest only for
statutory requirements.
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• Risk weightage for banks is based on statutory regulations rather than

rating assigned to the issue. As a result, a corporate debenture may sell at
yields higher than a PSU paper, reflecting an anomaly in pricing.
• Money market mutual funds are virtually non-existent, since their efforts
to mobilize funds have not been too successful. Till such time as
minimum lock-in period and the prohibition on provision of checking
facility by these funds continues, their popularity with retail investors will
remain low.
• There are several restrictions on investment of surplus funds by public
sector enterprises viz.: bonds with a maximum tenure of one year, and
government securities with maximum residual maturity of three years.
PSEs therefore, take the easy way out and place their funds out in
Certificates of Deposit of approved banks. As a result, a large corpus of
funds is prevented from entering the debt market.
Chapter 6
6.1] Government securities market
Introduction
Government Securities are securities issued by the Government for raising a

public loan or as notified in the official Gazette. They consist of Government
Promissory Notes, Bearer Bonds, Stocks or Bonds held in Bond Ledger
Account. They may be in the form of Treasury Bills or Dated Government
Securities. Mostly Government Securities are interest bearing dated securities
issued by RBI on behalf of the Government of India. GOI uses these funds to
meet its expenditure commitments. These securities are generally fixed maturity
and fixed coupon securities carrying semi-annual coupon. Since the date of
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maturity is specified in the securities, these are known as dated Government

securities, e.g. 8.24% GOI 2018 is a Central Government security maturing in
2018, which carries a coupon of 8.24% payable half yearly.
Features of Government Securities
• Issued at face value.

• No default risk as the securities carry sovereign guarantee.
• Liquidity as the investor can sell the security in the secondary market.
• Interest payment on a half yearly basis on face value.
• No tax deducted at source
• Can be held in D-mat form.
• Rate of interest and tenor of the security is fixed at the time of issuance
and is not subject to change (unless intrinsic to the security like FRB’s).
• Redeemed at face value on maturity.
• Maturity ranges from of 2-30 years.
• Securities qualify as SLR investments (unless otherwise stated).
The dated Government securities market in India has two segments with
respect to banks:
1] Primary Market: The Primary Market consists of the issuers of the

securities, viz., Central and Sate Government and buyers include
Commercial Banks, Primary Dealers, Financial Institutions, Insurance
Companies & Co-operative Banks. RBI also has a scheme of non-
competitive bidding for small investors (see SBI DFHI Invest on our website
for further details).
2] Secondary Market: The Secondary Market includes Commercial banks,

Financial Institutions, Insurance Companies, Provident Funds, Trusts,
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Mutual Funds, Primary Dealers and Reserve Bank of India. Even Corporates
and Individuals can invest in Government Securities. The eligibility criteria
is specified in the relative Government notification.
Price Based:
In this type of auction, RBI announces the issue size or notified amount and the
tenor of the paper to be auctioned, as well as the coupon rate. The bidders
submit bids in terms of the price. This method of auction is normally used in
case of reissue of existing government securities. Bids at price lower then the
cut off price are rejected and bids higher then the cut off price are accepted.
Price Base deduction leads to a better price discovery then the Yield base
deduction. RBI holds uniform-price auctions.
Underwriting in Auction:
One day prior to the auction, bids are received from the Primary Dealers (PD)
indicating the amount they are willing to underwrite and the fee expected. The
auction committee of RBI then examines the bid on the basis of the market
condition and takes a decision on the amount to be underwritten and the fee to
be paid. In case of devolvement, the bids put in by the PD’s are set off against
the amount underwritten while deciding the amount of devolvement and in case
the auction is fully subscribed, the PD need not subscribe to the issue unless
they have bid for it.
G-Secs, State Development Loans & T-Bills are regularly sold by RBI through
periodic public auctions. SBI DFHI Ltd. is a leading Primary Dealer in
Government Securities. SBI DFHI Ltd gives investors an opportunity to buy
65
G-Sec / SDLs / T-Bills at primary market auctions of RBI through its SBI DFHI
Invest scheme (details available on website itself). Investors may also invest in
high yielding Government Securities through “SBI DFHI Trade” where “buy
and sell price” and a buy and sell facility for select liquid scrips in the
secondary markets is offered.
Reforms in Secondary market in Government Securities.
• A phased reduction in SLR requirements from an effective 37.4 per cent

in March 1992 to a little over 28 per cent in March 1996.It has since been
reduced to the statutory benchmark level of 25%.
• The DFHI was authorized to deal in government securities in 1992-93
• The Securities Trading Corporation of India (STCI) was set up in 1994
by the RBI jointly with public sector banks and all India financial
institutions with the main objective of fostering the development of the
government securities market (It commenced operations in September
1994)
• Market transparency was achieved through regular publication of details
of SGL transactions in Government securities put though Mumbai PDO
since September 1994.
• After its establishment and becoming operational in June 1994, the
National Stock Exchange provided secondary market treading facilities
through its wholesale debt market segment.
• A system of Delivery Versus Payment (DVP) in Government securities
was introduced in Mumbai in June 1995 to ensure that the transactions in
government securities were fully secured.
• The Repo market has been activated by allowing repos/reverse repos
transactions in all government securities besides treasury bills of all
maturities.
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• Non-bank entities which are holders of account with the RBI have been
allowed to enter reverse repo (but not direct) transactions with
banks/PDs
• With a view to encouraging Mutual Funds to set up gilt funds in
government securities either by way of outright purchase or reverse repos
to the extent of 20 per cent of the outstanding investments.
• Guidelines for satellite dealers in government securities market were
announced in December 1996 And in April 1997 and the RBI granted
approval to 17 entities for registration as satellite dealers in government
securities, to promote/activate retailing in Government securities.
RBI IN Securities
• Transactions in securities are governed by the Securities Contracts

(Regulation) Act, 1956 as government securities are "Securities" as
defined in the Act. Hence the provisions of the Act are applicable for the
transactions in Government securities. Under the Act the Reserve Bank
has been delegated powers by the Government of India to regulate
contracts in government securities, money market securities, gold related
securities and derivatives based on these securities, as also ready forward
contracts in all debt instruments. Transactions on the stock exchanges
will be in addition subject to the regulations prescribed by the Securities
& Exchange Board of India (SEBI).
Reserve Bank of India has permitted Repos and Reverse Repos subject to the
terms and conditions and among the participants as specified hereunder:
a. ready forward contracts are undertaken only in Treasury Bills and

transferable dated securities of all maturities issued by the Government of
India and State Governments.
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b. ready forward contracts in the securities specified at (a) above may be

entered into by a banking company, a cooperative bank or any person,
maintaining a Subsidiary Ledger Account and a Current Account with
Reserve Bank of India, Mumbai, only among themselves.
c. such ready forward contracts shall be settled through the Subsidiary
General Ledger Accounts of the participants with Reserve Bank of India
at Mumbai only, and
d. no sale transaction should be put through without actually holding the
securities in the portfolio.
While RBI policy supports the establishment of a deep and liquid repo market,
enlargement of the types of securities and eligible participants for the repo
market will depend upon the establishment of the secure infrastructure for the
securities market including establishment of a Securities Clearing Corporation
to facilitate tri-partite repos .
Short selling in securities is prohibited. Presently, Over-the -Counter outright

transactions in government securities can be freely concluded providing for spot
delivery (payment on the same day of the contract or next day) as per the Act.
In order to develop the securities market on healthy lines and to facilitate price
discovery in the market, RBI daily makes available to the market the prices in
respect of secondary market transactions in government securities, which are
settled through SGL Account. This has helped in the establishment of sovereign
yield curve, promoted market transparency and improved price discovery for
government securities in the Indian Market.
Effective management of public debt by the Reserve Bank is closely linked to

the development of a deep and liquid secondary market and RBI has been
taking various initiatives in this direction.
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6.2] Securities and exchange board of India (SEBI)
Introduction
SEBI established in 1988 and became a fully autonomous body by the year
1992 with defined responsibilities to cover both development & regulation of
the market.
SEBI and its Role in the Secondary Market
The SEBI is the regulatory authority established under Section 3 of SEBI Act
1992 to protect the interests of the investors in securities and to promote the
development of, and to regulate, the securities market and for matters connected
therewith and incidental there to.
Functions and Responsibilities
• SEBI has to be responsive to the needs of three groups, which constitute

the market:
• The issuers of securities
• The investors
How SEBI came into picture
The World Bank and the International Monetary Fund (IMF) have introduced a
benchmark i.e., Financial Services Assessment Programme (FSAP) to
strengthen the monitoring of financial systems in the context of the IMF’s
bilateral surveillance and the World Bank’s financial sector development work.
The FSAP is designed to help countries enhance their resilience to crisis and
cross-border contagion, and to foster growth by promoting financial system
69
soundness and financial sector diversity. The mission of SEBI is to make India
as one of the best securities market of the world and SEBI as one of the most
respected regulator in the world. SEBI endeavors to achieve the standards of
IOSCO/FSAP. Amendments will be required to be made in the Securities Laws
especially the SEBI Act, which will facilitate India and SEBI to achieve above
objective.
Management
SEBI is managed by its chairman and five member and his departments such as
primary market department; issue management department; secondary market
department and institutional investment department. It has two advisory
committees, one each for primary and secondary market to provide advisory
guidance informing policies and regulations.
SEBI has been able to introduce certain measure such as:

1. Allotment of shares only if minimum 90% subscription is received
from the public.
2. To refund the application money in case of Non- allotment within 90
days.
3. Payments of interest on refund amt after 30 days from date of closure
of issue.
4. Adequate disclosure of all material and specified risk factors
associated with project in the prospectus and the same to be attached
with share application form.
5. Publication of quarterly results.
6. Introduction of stock invests for subscription.
7. Free pricing of equity issues by companies.
70
8. Completion of allotment within 30.
6.3] Bankex
Introduction
Banking sector reforms such as fall in interest rates, and enactment of

Securitization Bill have given a major fillip to Indian banking industry. These
developments have significantly impacted the performance of bank stocks and
bank stocks have emerged as a major segment in the equity markets. Hence,
BSE considered it important to design an index exclusively for bank stocks.
The index, named as Bankex, is based on the free float methodology of index
construction. Bankex tracks the performance of the leading banking sector
stocks listed on the BSE. Twelve stocks, which represent 90 percent of the total
market capitalization of all banking sector stocks listed on BSE, are included in
the index. The base date for Bankex is 1st January 2002 and the base value is
1000 points.Bankex is disseminated on a real-time basis through BSE Online
Trading (BOLT) terminals.
Scrip Selection Criteria for BSE Bankex
• Scrips should at least have a trading frequency of 90% in preceding three

months.
• Scrips classified under the banking sector and which constitute a part of
BSE-500 index are eligible for Bankex.
• Scrips that are a part of Bankex should have a minimum market
capitalization coverage of 90% in banking sector based on free-float final
rank.
Stocks Constituting Bankex
71
 UTI Bank Ltd

 Kotak Mahindra Bank
 UCO Bank
 Indian Overseas Bank
 Jammu & Kashmir Bank
 Vijaya Bank
 Allahabad Bank Ltd
 Centurion Bank Ltd
 Indusind Bank Ltd
 Karnataka Bank Limited
 Federal Bank Ltd
 Yes Bank Ltd
 IDBI Bank Ltd
 Indusind Bank Ltd
Bankex was launched by BSE to track the performance of the leading

banking sectors as bank stocks are emerging as a major segment of the
stock market. The base date for BANKEX is 1st January 2002 and
base value for BANKEX is 1000 points. Bankex Index includes 12
selected major stocks which represent total 90% market capitalization
of all the banking sector stocks listed on the BSE.
Feature
A few important features of the BANKEX are given below:
• BANKEX tracks the performance of the leading banking sector

stocks listed on the BSE.
72
• BANKEX is based on the free-float methodology of index

construction
• The base date for BANKEX is 1st January 2002.
• The base value for BANKEX is 1000 points.
• BSE has calculated the historical index values of BANKEX
since 1st January 2002.
• Stocks which represent 90 percent of the total market
capitalization of all banking sector stocks listed on BSE are
included in the Index.
• The Index is disseminated on a real-time basis through BSE
Online Trading (BOLT) terminals.
• Stocks forming part of the BANKEX along with the particulars
of their free-float adjusted market capitalization are listed
below.
Chapter 7
EXAMPLE OF IN SECONDARY MARKET
1] Indian banks line up Tata-Corus debt in secondary market
Mumbai, Oct 15: Indian banks, after missing out in their direct exposure in the
$6 billion syndicated Tata-Corus deal, have lined up to participate in a big way
in the secondary market for the deal, conducted by Standard Chartered Bank.
The UK-based Standard Chartered, which was one of the banks to have
syndicated the Tata-Corus funding deal, has already offloaded a majority of its
own $2.5 billion exposure in secondary market transactions. A number of
Indian banks, including State Bank of India (SBI), have bought parts of the debt
73
from Standard Chartered. SBI alone has bought over $1 billion of the Tata-
Corus debt from Standard Chartered Bank. StanChart is hardly left with $750
million of the debt in its own book and would like to bring it to zero in future.
The Tata Group is the largest global institutional customer of Standard
Chartered Bank. “By offloading the entire Tata-Corus funding, we will be again
in a position to expand our exposure further for the group,” said Bala Swami
Nathan, managing director, regional head-client relationships, India & South
Asia. For Standard Chartered, the secondary market transactions have been very
profitable as the banks, which bought in the secondary market had to buy at
slightly higher rates than the rate at which the deal was struck with the original
financial institutions. Besides, the US subprime crisis had its impact on the
rates. The secondary market deal has a mechanism called ‘price flex’ by which
the new higher rates are agreed among the original funding agencies,
institutions which take exposure in the secondary market and the company
which had received the original funding. According to Swaminathan, the bank
had already committed over $10 billion to India Inc for overseas buys over a
one-year period. Meanwhile, the bank globally has acquired two small
companies- one aircraft leasing company, Pembroke and one oil and gas
consultancy firm, Harrison Lovegrove, which will have Indian implications.
2] Generically, any market that depends on the existence of the primary market.
The prices in the secondary market are partially dependent on the prices in the
primary market.
A catch-all term for any market whose existence depends on the products
created in the primary market, whether it be cars, farm equipment, mortgages,
BANKER'S ACCEPTANCES, TREASURIES, CERTIFICATES OF
DEPOSIT, PROMISSORY NOTES, etc.
74
This is just one example: a lending bank (primary market) holding

SEASONED individual mortgages on its own customers, i.e. mortgages on
which the payments have a good record for at least one year, can sell a block of
these qualified mortgages to a finance company, let's say ABC Mortgage
(secondary market), a large investor in mortgages.
ABC pays the lending bank the risk-adjusted fair value of those mortgages.
ABC gets the full rights to all remaining interest and principal payments. (In
many instances, the lending bank continues to collect the mortgage payments
for an administration fee, so you may not know that your loan has been sold, but
this in no way affects either the value of your loan or your obligations).
Here is another example: the lending bank owns individually qualified

mortgages for a nanosecond and sells them by established contract to ABC
Mortgage. The lending bank profits by the points it collected from the
borrower, and by the administration fee it is paid by ABC for collecting the
monthly payments from the borrower.In each case, the value of each individual
mortgage is judged by the terms of the loan, the quality of the lender, and
various calculations based on risk-adjusted fair value calculation standards for
the current market.
The Scam: Swindlers involved in HIGH-YIELD INVESTMENT PROGRAM

scams often refer to the Secondary Market as pension funds, brokerage houses,
Trusts, and insurance companies that purchase FRESH CUT SECURITIES
created in bulk* once they have been seasoned for as short a period as
overnight. The swindler tells a potential investor that enormous profits can be
made by purchasing these fresh cut securities and selling them the next day in
the Secondary Market.
75
The con artist tells you that "seasoned" means that the Secondary Market cannot
purchase securities directly from the issuer. The con artist must use your money
to create the securities or purchase the securities, known in ScamSpeak™ as a
FUNDS FIRST deal. Once this has been accomplished, the securities are
considered a safe investment by the Secondary Market.
The scammer would have you believe that securities are created in bulk, run off
the printing press in batches, as it were - unattached to individual specific
transactions.
This is complete hogwash and bears absolutely no resemblance to actual

issuance and trade of securities, BANK GUARANTEES, or LETTERS OF
CREDIT.
However, the banks could report lower provisioning during the quarter due to a
change in secondary market conditions, it added.” Due to improvement in the
secondary market conditions, depreciation on investments was written back
during the quarter, helping banks to lower total provisioning cost,"
The year-on-year credit growth of top banks fell to 15.1 per cent for the month
ended June 2009, the lowest level since March, 2004, the report said.
Also, the top 12 lenders restructured loans worth Rs 32,530 crore in FY10,
taking the total restructured assets to nearly Rs 73,000 crore, with public-sector
banks taking lead in the process, the report said.
However, the proportion of total restructured advances to total loans remained

within a comfortable level of 4 per cent, the report said.
The top 12 lenders – State Bank of India, Bank of Baroda, Bank of India,
Canara Bank, Axis Bank, HDFC Bank, ICICI Bank, IDBI Bank, Central
76
Bank of India, Punjab National Bank, Union Bank of India and Syndicate
Bank – covers 61 per cent of the credits in India.
 ICICI Bank
ICICI Bank started as a wholly owned subsidiary of ICICI Limited, an Indian

financial institution, in 1994. Four years later, when the company offered ICICI
Bank's shares to the public, ICICI's shareholding was reduced to 46%. In the
year 2000, ICICI Bank offered made an equity offering in the form of ADRs on
the New York Stock Exchange (NYSE), thereby becoming the first Indian
company and the first bank or financial institution from non-Japan Asia to be
listed on the NYSE. In the next year, it acquired the Bank of Madura Limited in
an all-stock amalgamation. Later in the year and the next fiscal year, the bank
made secondary market sales to institutional investors.
With a change in the corporate structure and the budding competition in the
Indian Banking industry, the management of both ICICI and ICICI Bank were
of the opinion that a merger between the two entities would prove to be an
essential step. It was in 2001 that the Boards of Directors of ICICI and ICICI
Bank sanctioned the amalgamation of ICICI and two of its wholly-owned retail
finance subsidiaries, ICICI Personal Financial Services Limited and ICICI
Capital Services Limited, with ICICI Bank. In the following year, the merger
was approved by its shareholders, the High Court of Gujarat at Ahmedabad as
well as the High Court of Judicature at Mumbai and the Reserve Bank of India.
Present Scenario
• ICICI Bank has its equity shares listed in India on Bombay Stock
Exchange and the National Stock Exchange of India Limited. Overseas, its
American Depositary Receipts (ADRs) are listed on the New York Stock
Exchange (NYSE). As of December 31, 2008, ICICI is India's second-largest
77
bank, boasting an asset value of Rs. 3,744.10 billion and profit after tax Rs.
30.14 billion, for the nine months, that ended on December 31, 2008.
 PUNJAB NATIONAL BANK
PNB Gilts, a wholly owned subsidiary of Punjab National Bank (PNB),

acquired licence to operate as primary dealer in government securities market in
1996. Punjab National Bank holds 74% of the total capital of PNB Gilts with
other institution such as IDBI, UTI, Punjab & Sindh Bank, Industrial
Investment Bank of India holding sizeable stake. The company was initiated
with the view of enforcing the view of Narsiman committee and RBI’s norm of
regulating the debt market.
PNB Gilts is the intermediary whose role is to participate in primary auctions

and open market operation of G-Secs conducted by RBI and participates in
secondary market operations of treasury bills, G-Secs and rated bonds. PNB
Gilts currently trades in mainly in soverign or highly rated paper with portfolio
size of Rs.1171 crores. The sheer quality of paper provides better liquidity and
low default risk.
Description Rs. in crores % of total
Government securities 786.80 67%
State loan 17.50 2%
Treasury Bills 34.75 3%
Bonds 332.04 28%
1171.08
78
CONCLUSION
It is very evident from the performance of the Bankex that banks are stealing the
thunder of other market heavy weights. The banking sector is playing a major
role in the secondary markets. The banks are making maximum profit out of
the boon in the economy and are providing a platform for mobilizing more
funds in the market.
79
The private sector is ate the help of the growth in the banks. The role of Banks
in the secondary market has become very significant since the liberalization of
the economy; the future of the banking sector is very bright and will enjoy more
success with healthy competition, steady growth, and greater stability.
RECOMMENDATIONS
There is no doubt that banks are playing a vital role in the secondary markets.
Still there are many banks that haven’t gone public yet. This project has helped
me understand that banks play an important role in the growth of the secondary
market and the secondary market plays an important role in the banks
development. Keeping the growth and development of several banks in mind I
have a few recommendations on the project prepared as follows:
• More banks should become public and issue IPO’s which would in turn
help both banks and the depositors in more than one ways.
• The banks will get more funds to not only carry out their regular
operations but also carry out various other financial services.
80
• It will also give the banks to restructure themselves and integrate more
technology in to the services provided to the customers. It will also make
the functioning of the bank more transparent for the depositors and the
shareholders.
BIBLIOGRAPHY
Books:
• Changing pattern of capital markets in India: an analytical study
- Gaddam Naresh Reddy
- Publisher: Cyber tech publications 2007.
• Capital market reforms and individual investors
- Rajarajen vanjeko
- Publisher : Dominant publishers and Distributors, 2008
• Stock Market in India
- D. R. Veena
- Publisher: Ashish, 1988
• Indian Capital Markets: Recent Trends and Reforms
- Arindam Banerjee
- Publisher: Icfai university
MAGAZINE:
• Survey of Indian Industry, 2008
81
Websites:
www.altavista.com
www.sec.gov.com
www.icicibank.com
www.rbi.com
www.sbi.co.in
www.lycos.com
www.banknet.com
82

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ROLE OF BANKING SECTOR IN SECONDARY MARKET

Indian banking sector

• History of Banking in India

According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled

According to the RBI in March 2009, number of all Scheduled Commercial

Also, growth of aggregate deposits of all Scheduled Commercial Banks (SCBs)

Non-resident Indians (NRIs) have cumulatively placed US$ 1.167 billion as

1.2] Banking services in India

1.3] Government Initiatives

1.4] STRUCTURE OF THE BANKING SECTOR

1.5] Foreign Banks In India

Foreign Banks in India always brought an explanation about the prompt

List of Foreign Banks in India

 The Scheduled Commercial Banks (SCBs) in India have shown an

impressive growth from FY04 to the mid of FY09. Total deposits,

Primary Market Secondary Market

INDIAN CAPITAL MARKET

Every company needs long-term as well as short-term capital. Long-term capital

 SBI CAPITAL MARKETS LIMITED (SBICAPS)

It is India's leading investment bank and project advisor, assisting domestic

(with a 86.16% stake) together with the long standing association of an

Our Mission - To provide Credible, Professional and Customer Focused world-

Our Vision - To be the best India based Investment Bank.

 Pension funds turn towards capital market (PFRDA)

2.1] Primary Market

Features of primary markets are:

Methods of issuing securities in the primary market are:

• Initial public offering;

Indian IPO market

The new IOP that come in future

 Canara Bank plans initial public offering

Bangalore: Canara Bank is planning to come up with an initial public offering

IPO – Role of Underwriter

2.2] Secondary market

• Secondary market (stock exchange) is one in which an investor purchases

Some of the important definitions are presented below:

 According to husband and dockery, “securities or stock exchanges are

place where a marriage of convenience is enacted between those who

Objectives of secondary market

• To examine the new bench marks in the secondary market in India.

 Secondary market role

In a growing market for commercial banks, where can the secondary

Secondary market investors must continue to play a larger strategic role in

secondary market investors, creating new opportunities for additional growth

 Changing regulations of secondary market

• Overall administration, supervision and control of the stock

commerce, accountancy, management and law and 2 from investment and

assumptions will enable liquidity to be made available and provide more

DIFFERANCE BETWEEN PRIMARY MARKET AND SECONDARY

• A company cannot easily find investors its securities (shares or

the new issues of a company, one is basically contemplating whether or

Secondary Stock Market

Secondary Stock Market Details

Secondary Stock Market and Globalization

Role of stock exchanges in the development of the nation

It is no exaggeration to say that in a modern industrialist society, which

Listing means admission of the securities to dealings on a recognized stock

The objectives of listing are mainly to:

• provide liquidity to securities;

 Over the Counter Exchange of India (OTCEI)

 OTC has a unique feature of trading compared to other traditional

 In the case of permitted securities, the system is similar to a traditional