Secondary Market

What is meant by Secondary Market?

 Secondary Market refers to a market where securities are

traded after being initially offered to the public in the
primary market and/or listed on the Stock Exchange.
 Majority of the trading is done in the secondary market.
 Secondary market comprises of equity markets and the
debt markets.
  For the general investor, the secondary market provides
an efficient platform for trading of his securities.
What are the products dealt in the
secondary markets?

Equity: The ownership interest in a company of holders of its common and

 

preferred stock. The various kinds of equity shares are as follows:-

Equity Shares:

 Rights Issue / Rights Shares: The issue of new securities to existing

shareholders at a ratio to those already held.

 Bonus Shares: Shares issued by the companies to their shareholders free of cost
by capitalization of accumulated reserves from the profits earned in the earlier
years.
 
 Preferred Stock / Preference shares: Owners of these kinds of shares are
entitled to a fixed dividend or dividend calculated at a fixed rate to be paid
regularly before dividend can be paid in respect of equity share. They also enjoy
priority over the equity shareholders in payment of surplus.
 
 Cumulative Preference Shares: A type of preference shares on which dividend
accumulates if remains unpaid. All arrears of preference dividend have to be paid
out before paying dividend on equity shares.
Stock Exchange
 The Securities Contracts (Regulation)
Act, 1956, has defined Stock Exchange
as an "association, organization or body
of individuals, whether incorporated or
not, established for the purpose of
assisting, regulating and controlling
business of buying, selling and dealing in
Securities".
Role of Stock Exchange
 Stock exchange as an organized security market
provides marketability and price continuity for shares
and helps in a fair evaluation of securities in terms of
their intrinsic worth.

 Thus it helps orderly flow and distribution of savings

between different types of investments.

 This institution performs an important part in the

economic life of a country, acting as a free market for
securities where prices are determined by the forces
of supply and demand.
Functions of Stock Exchange

 The stock exchange is really an essential

pillar of the private sector corporate
economy. It discharges three essential
functions:
First, the stock exchange
provides a market place for
purchase and sale of
securities viz. shares, bonds,
debentures etc. It, therefore,
ensures the free
transferability of securities
which is the essential basis
for the joint stock enterprise
Secondly, the stock exchange
provides the linkage between the
savings in the household sector and
the investment in the corporate
economy. It mobilizes savings,
channelises them as securities into
these enterprises which are favoured
by the investors on the basis of such
criteria as future growth prospects,
good returns and appreciation of
capital.
Thirdly, by providing a market
quotation of the prices of shares
and bonds- a sort of collective
judgment simultaneously reached
by many buyers and sellers in the
market- the stock exchange
serves the role of a barometer,
not only of the state of health of
individual companies, but also of
the nation’s economy as a whole.
Stock Exchange in India
 India Stock Exchanges are a structured
marketplace for the proper conduct of trading in
company stocks and other securities. There are 23
recognized stock exchanges in India, including the
Over the Counter Exchange of India for providing
trading access to small and new companies. The
main services of the India Stock Exchanges all
over the country is to provide nation-wide
services to investors and to facilitate the issue
and redemption of securities and other financial
instruments.
Stock Exchange in India (Cont.)

 The two most important exchange houses of the Indian

stock market are the Bombay Stock Exchange and
the National Stock Exchange .

 Many of the regional stock exchanges have

obtained the membership of these two stock
exchanges in India.

 The index of the Bombay Stock Exchange , BSE Sensex

is a value-weighted index composed of 30 companies.
Trading of Securities
 By Various Intermediaries
Clearing & Settlement
 For all trades executed on a given day, it is important to
determine the obligations standing at the end of the day
against parties to trade. This process of ascertaining
obligations is known as clearing, and the process of
meeting or discharging these obligations is known as
settlement.
 Finally, it ensures that the respective liabilities are met
with a regular movement of funds and securities.
 The National Securities Clearing Corporation Limited, a
subsidiary of National Stock Exchange of India Ltd., was
incorporated in August 1995 to carry out the clearing
and settlement of the trades executed in the Equities
and Derivatives segments of NSE
Settlement
 The settlement cycle in India is T+2 days
i.e. Trade + 2 days.  T+2 means the
transactions done on the Trade day, will
be settled by exchange of money and
securities on the second business day
(excluding Saturday, Sundays, Bank and
Exchange Trading Holidays). Pay-in and
Pay-out for securities settlement is done
on a T+2 basis.
Summary of Trading & Settlement Process
in India

 Investors place orders from their trading

terminals.
 Broker houses validate the orders and
routes them to the exchange (BSE or NSE
depending on the client’s choice)
 Order matching at the exchange.
 Trade confirmation to the investors
through the brokers.
  Trade details are sent to Clearing
Corporation from the
Exchange.
Settlement Process in India
(Cont.)
 Clearing Corporation notifies the trade details to
clearing Members/Custodians who confirm back.
Based on the  confirmation, Clearing Corporation
determines obligations.


Clearing Corporation gives instructions to clearing
banks to make funds available by pay-in time.
Demutualization
 What is Demutualisation? 
 Demutualisation refers to the conversion of a “not for-profit” organisation into a “for profit”
company. It refers to the transition from “mutually-owned” association to a company “owned
by shareholders”. Further, the company may choose to be a listed or an unlisted, closely held
public company. The concept of Demutualisation can be applied to any “non-profit
“organisation or association.  
 How is an exchange Demutualised? 
 The exchange values all its assets including the value of seats (membership licence) and
arrives at a total value. This value is divided into shares and offered to the public. Later, the
shares are listed on the stock exchange itself, and the funds got by selling the shares will be
distributed among the members of the exchange as payment for their seats. If the company is
not being listed, the shares may be offered to its members.  
 Why do exchanges demutualise? 
  “Corporate structure” is the goal of Demutualisation and provides management more
flexibility. A company is better equipped to respond to changes when compared to a closely
held mutually owned organisation. Further, a company can spin-off its subsidiaries, get into
mergers and acquisitions, raise funds et al.
 National Stock Exchange (NSE) for example, has spun off its wholly owned subsidiaries like
National Securities Clearing Corp. and more recently NSE.IT into a dedicated info-tech
company. BSE, on the other hand, is a mutually owned association with less transparency,
hence seems to be an ideal candidate for Demutualisation. 
SEBI-Securities Exchange Board of India

 For Regulation of Stock Markets

by a notification issued on 12th
April’1988, Securities and Exchange
Board of India (SEBI) was constituted as
an interim administrative body to
function under the overall administrative
control of the Ministry of Finance of the
Central Government.
Organization Structure of SEBI

 -a Chairman( to be appointed by Central

Govt.)
 - two members from amongst the
officials of the Ministries of the C.Govt.
dealing with Finance and Law.
 - One Member from RBI
 - two members to be appointed by
Central Govt.
Activities of SEBI

1. Rules regarding registration of intermediaries

2. Guidelines and Code of Conduct for Merchant
Bankers
3. Categorization of Merchant Bankers
4. Guidelines for Portfolio Management
Services
5. Circulars on various issues (Periodical)
6. Guidelines for Lead managers
Activities of SEBI (Cont.)

7. Regulation for Registrars and Share-

Transfer agents
8. Guidelines for IPO’s, Debt. Instruments
9. Regulation on Insider trading
10. Guidelines for Mutual funds
11. Regulation on take overs
12. Code for Corporate Governance
Dematerialization
 Dematerialization is a process by which physical certificates of an
investor are converted into electronic form and credited to the account
of the depository participant.

 Dematted securities do not have any certificate numbers or distinctive

numbers and are dealt only in quantity, i.e., the securities are
replaceable.

 Investors can dematerialize only those certificates that are already

registered in their names and are in the list of securities admitted for
dematerialization. These are: shares, scrips, stocks, bonds,
debentures, stock or other marketable securities of a like nature in or
of any incorporated company or other body corporate, units of mutual
funds, rights under collective investment schemes and venture capital
funds, commercial paper, certificate of deposit, securities debt, money
market instruments
Dematerialization of
Securities
1. Investors should have a depository
account.
2. Securities should be from the eligible list
of securities issued by the depository.[3]
3. Securities must be in the name of the
account holders and owned by him.
4. Separate demat requisition form is
required for each issuer company.
5. DRF[4] should be signed by all the holders
so as to match specimen signature.
Advantages of
Dematerialization
 Demat system not only provides smooth and hassle-free way of
dealing in shares, it also does away with all the associated tensions.

 Bad deliveries are minimized

 Postal delays and loss of shares in transit is prevented

Immediate transfer of shares

 No stamp duty on transfer

 Less paper work (reduction in huge volumes).

 Faster settlement cycles and payouts.

 The demat system totally avoids the associated heartburns arising

from theft of shares, mutilation, forgery, counterfeit shares and loss
of shares during a natural calamity.
The Depository System has the following benefits
to different groups:

 Benefit to the Country

The depository system helps the capital
market to be more liquid, attracting more
foreign investors and is in compliance with
international standards, as it creates
efficient and risk-free trading environment.

It minimises the settlement risks and frauds

in carrying out transactions in capital
markets and thus can restore faith
The Depository System has the
following benefits to different groups
(Cont.):
 Benefit to the Investor
The depository system reduces risks involved in
holding physical certificated, e.g., loss, theft,
mutilation, forgery, etc.
It ensures transfer settlements and reduces delay in
registration of shares.
It ensures faster communication to investors.
It helps avoid bad delivery problem due to signature
differences, etc.
It ensures faster payment on sale of shares.
No stamp duty is paid on transfer of shares.
It provides more acceptability and liquidity of
securities.
The Depository System has the
following benefits to different
groups (Cont.):
 Benefit to Brokers
The depository system reduces risk of
delayed settlement.
It ensures greater profit due to increase
in volume of trading.
It eliminates chances of forgery – bad
delivery.
It increases overall of trading and
profitability.
It increases confidence in investors.
Agency in Depositories


India has chosen the concept of multi-

depositories.
 Presently, there are two depositories
registered with SEBI:
National Securities Depository Limited
(NSDL)
Central Depository Service (India)
Limited (CDSL)
Depository Participant


Similar to the brokers who trade on your behalf in and outside

the Stock Exchange; a Depository Participant (DP) is the
representative (agent) in the depository system providing the
link between the Company and the investor through the
Depository.
 Depository Participant maintains investor’s securities account
balances and intimates him 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 bank with whom one can have an
account.
Re-materialization


Rematerialization is a process, by which a client can get his

electronic holdings converted back into the physical holdings, i.e.,
he can get back the physical form of share certificates.
 To get the certificate back, he has to fill up a remat request form
and submit it to its depository with whom he has an account. The
new certificates may not necessarily bear the same folio or
distinctive numbers as previously existed.
 The facility to rematerialise again is offered to all those scrips
which are eligible for demat in the depositories` list of securities
available for dematerialisation.
 The whole process of rematerialisation is completed within 30 days
from the receipt of request. This shows how speedy the electronic
system works – that being the essence of today’s business where
the prices of scrips change many times a day.
Indian Debt Market
 Debt market refers to the financial market where investors buy
and sell debt securities, mostly in the form of bonds. These
markets are important source of funds, especially in a
developing economy like India. India debt market is one of the
largest in Asia. Like all other countries, debt market in India is
also considered a useful substitute to banking channels for
finance.

The most distinguishing feature of the debt instruments of

Indian debt market is that the return is fixed. This means,
returns are almost risk-free. This fixed return on the bond is
often termed as the ‘coupon rate’ or the ‘interest rate’.
Therefore, the buyer (of bond) is giving the seller a loan at a
fixed interest rate, which equals to the coupon rate.
Classification of Indian Debt Market

 Indian debt market can be classified into two

categories:

Government Securities Market (G-Sec Market): It

consists of central and state government securities. It
means that, loans are being taken by the central and state
government. It is also the most dominant category in the
India debt market.

Bond Market: It consists of Financial Institutions bonds,

Corporate bonds and debentures and Public Sector Units
bonds. These bonds are issued to meet financial
requirements at a fixed cost and hence remove uncertainty
in financial costs.
Debt Instruments

 Government Securities

It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of the Government of India.
These securities have a maturity period of 1 to 30 years. G-Secs offer fixed interest rate, where interests are payable
semi-annually. For shorter term, there are Treasury Bills or T-Bills, which are issued by the RBI for 91 days, 182 days
and 364 days.

Corporate Bonds

These bonds come from PSUs and private corporations and are offered for an extensive range of tenures up to 15
years. There are also some perpetual bonds. Comparing to G-Secs, corporate bonds carry higher risks, which depend
upon the corporation, the industry where the corporation is currently operating, the current market conditions, and
the rating of the corporation. However, these bonds also give higher returns than the G-Secs.

Certificate of Deposit

These are negotiable money market instruments. Certificate of Deposits (CDs), which usually offer higher returns
than Bank term deposits, are issued in demat form and also as a Usance Promissory Notes. There are several
institutions that can issue CDs. Banks can offer CDs which have maturity between 7 days and 1 year. CDs from
financial institutions have maturity between 1 and 3 years. There are some agencies like ICRA, FITCH, CARE, CRISIL
etc. that offer ratings of CDs. CDs are available in the denominations of Rs. 1 Lac and in multiple of that.

Commercial Papers

There are short term securities with maturity of 7 to 365 days. CPs are issued by corporate entities at a discount to
face value.