Security Market - Economics, UPSC, IAS. | Indian Economy (Prelims) by Shahid Ali PDF Download

Security Market

Security Market

The segment of a financial market of an economy wherefrom long-term capital is raised via instruments such as shares, debentures, mutual funds is known as the security market.

Components

SEBI

Stock Exchanges

Brokers

Jobbers etc

Securities and Exchange Board of India (SEBI)

• SEBI (Securities and Exchange Board of India) was initially constituted on April 12, 1988 as a non statutory body through a resolution of the Government for dealing with all matters relating to development and regulation of securities market and investor protection and to advise the Government on all these matters.
• SEBI was given statutory status and powers through an ordinance promulgated on January 30, 1992.
• The statutory powers and functions of SEBI were strengthened through the promulgation of the Securities Laws (Amendment) ordinance on January 25, 1995 which was subsequently replaced by an act of Parliament.

•   In terms of this act, SEBI has been vested with regulatory powers over corporates in the issuance of capital, the transfer of securities and other related matters. Besides, SEBI has also been em powered to impose monetary penalties on capital market intermediaries and other participants for a range of violations. 

•  SEBI is managed by six members – one chairman (nominated by Central Government), two memb ers (officers of central ministries), one memb er (from RBI) and remaining two memb ers nominated by Central Government. The  office  of  SEBI  is  situated  at  Mumbai    with    its   regional    offices  at Calcutta, Delhi and Che nnai. In 1988, the initial    capital    of    SEBI was    7.5 crore which was provided by it s promoters (IDBI, ICICI, IFCI).

•    This amount was investe d and with its interest amount day – to – day expenses of SEBI is met. 

•    All statutory powers for re gulating Indian capital market are vested with SEBI itself. 

Functions of SEBI in India:

•    To safeguard the interes ts of investors and to regulate capital market with suitable 

measures.

•    To regulate the business of stock exchanges and other securities market. 

•    To regulate the working of Stock Brokers, Sub – brokers, Share Tra nsfer Agents, Trustees, Merchant Bank ers, Underwriters, Portfolio Managers etc. and also to make their registration. 

•    To register and regulate collective investment plans of mutual funds. 

•    To encourage self – regulatory organizations. 

•    To eliminate malpractice s of security markets. 
    To train the person a ssociated with security markets and also to encourage investor’s education.    
    To check insider trading of securities

•    To supervise the working of various organizations trading in security market and also to ensure systematic dealings. 

•    To promote research a nd investigations for ensuring the attainme nt of above objectives

Stock Exchange

An institutional set-up where instruments of security stock market are traded

It serves the following functions:

1. Makes a floor available t o the buyers and sellers of stocks and liquidity comes to the stock.
2. Makes available the pric es of trading as an important piece of infor mation to the investors
3.  Passed updated informa tion to the enlisted companies about their p resent stock holders
4.  By publishing its “index”, it fulfills the purpose of projecting the moods of the stock market

• World’s first stock exchange was established in Antwerp, Belgium in 1631.
• London Stock Exchange was opened in 1773.
• The first Stock Exchange in India, the Bombay Stock Exchange known as The Native and Stock Brokers’ Association was set up in 1870.

Top five largest stock exchanges:

1. New York Stock Exchange
2. NASDAQ
3. Tokyo Stock Exchange
4. London Stock Exchange
5. Shanghai Stock Exchange

Largest stock exchanges in the world by market capitalization in 2011:

1. New York Stock Exchange (NYSE) - Headquartered in New York City.

The largest stock exchange in the world by both market capitalization and trade value. NYSE is the premier listing venue for the world’s leading large- and medium-sized companies. Featuring more than 8000 listed issues it includes 90% of the Dow Jones Industrial Average and 82% of the S&P 500 stock market indexes volume.

2. NASDAQ OMX - Headquartered in New York City.

Second largest stock exchange in the world by market capitalization and trade value. The exchange is owned by NASDAQ OMX Group which also owns and operates 24 markets, 3 clearinghouses and 5 central securities depositories supporting equities, options, fixed invome, derivatives, commodities, futures and structured products.

1. Tokyo Stock Exchange - Headquartered in Tokyo.
2. London Stock Exchange - Headquartered in London.

Located in London City, it is the oldest and fourth-largest stock exchange in the world. The Exchange was founded in 1801.

5. Shanghai Stock Exchange - Headquartered in Shanghai.

Stock Market in India

There are 24 stock exchanges in the country :

1. UP Stock Exchange, Kanpur.
2. Vadodara Stock Exchange, Vadodara.
3. Koyambtour Stock Exchange, Coimbatore.
4. Meerat Stock Exchange, Meerat.
5. Bombay StockExchange, Mumbai.
6. Over the Counter Exchange of India, Mumbai.
7. National Stock Exchange, Mumbai.
8. Ahmedabad Stock Exchange, Ahmedabad.
9. Bangalore Stock Exchange, Bangalore.
10. Bhubhaneshwar Stock Exchange, Bhubhaneshwar.
11. Calcutta Stock Exchange, Kolkata.
12. Cochin Stock Exchange, Cochin.
13. Delhi Stock Exchange, Delhi.
14. Guwahati Stock Exchange, Guwahati.
15. Hyderabad Stock Exchange, Hyderabad.
16. Jaipur Stock Exchange, Jaipur.
17. Canara Stock Exchange, Mangalore.
18. Ludhiana Stock Exchange, Ludhiana.
19. Chennai Stock Exchange, Chennai.
20. MP Stock Exchange, Indore.
21. Magadh Stock Exchange, Patna.
22. Pune Stock Exchange, Pune.
23. Saurashtra Stock Exchange, Rajkot.
24. Capital Stock Exchange Kerala Ltd. Thiruvananthapuram.

A brief of the National stock exchanges is as follow:

Bombay Stock Exchange

Biggest in India; account for almost 75%. Of the total stock traded in India.

There are 4 indices connected with BSE:

1. Sensex: The sensitive Index (sensex) is 9 30 stock index of BSE which was enlarged to 50 stock on 2000 but soon cut down to original level. This index represent the Indian Stock Market.
2. BSE 200: This is a 200 stock share index of the BSE.
3. (iii) BSE 500:
4. National Index: Index of 100 stock being quoted nationwide was developed to give wider representation of the stock market since the Sensex consists of only 30 stocks.

• The index is computed by the statistics department of the BSE hence it is called the BSE National Index.
• The Bombay Stock Exchange is the oldest exchange in Asia.
• It traces its history to the 1850s, when four Gujarati and one Parsi stockbroker would gather under banyan trees in front of Mumbai's Town Hall.
• The group eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as 'The Native Share & Stock Brokers Association'.
• In 1956, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act.
• The Bombay Stock Exchange developed the BSE SENSEX in 1986, giving the BSE a means to measure overall performance of the exchange.
• In 2000 the BSE used this index to open its derivatives market, trading SENSEX futures contracts.
• The development of SENSEX options along with equity derivatives followed in 2001 and 2002, expanding the BSE's trading platform.
• The BSE has also introduced the world's first centralized exchange-based internet trading system, BSEWEBx.co.in to enable investors anywhere in the world to trade on the BSE platform.

National Stock Exchange

• The National Stock Exchange (NSE) located at Mumbai, India.
• It was set up by Government of India on the recommendation of Pherwani Committee in 1991.
• Promoted by leading Financial institutions essentially led by IDBI at the behest of the Government of India, it was incorporated in November 1992 as a tax-paying company.
• It is the 11th largest stock exchanges in the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading.
• 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 NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market capitalization.
• 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.
• There are at least 2 foreign investors NYSE Euronext and Goldman Sachs who have taken a stake in the NSE.

OTCEI (over the counter Exchange of India Ltd.)

• Setup in 1989 but trading could commence in 1992.
• It was promoted by UTI,ICICI.SBIcap among others,in order to overcome problems such as lack of transparency and delay in settlements prevalent in the older stock exchanges.
• Trading in this exchange takes place via market-makers and commission is fixed.

ISE

• Inter Connected stock Exchange of India (ISE) is basically a single floor offending 15 regional Stock Exchanges, setup in 1998.
• It is a web based exchange.

Indo next

• A new stock exchange to promote liquidity to the stocks of the Small Enterprises was launched in 2005 jointly by the BSE and the Federation of Indian Stock Exchanges.
• It is better known as BSE Indo next.

Players in the market

Broker

• A broker is an intermediary who has a license to buy and sell securities on a client's behalf.
• Stockbrokers coordinate contracts between buyers and sellers, usually for a commission.

Jobber

• A jobber is a broker’s broker or one who specializes in specific securities.
• Located at a particular trading post on the floor of the stock exchange and does buying and selling for small price differences, called the Spread.
• He has no contact with the investing public.

Market maker

• A market maker, on the other hand, is an intermediary that is willing and ready to buy and sell securities for a profitable price.
• He simultaneously quotes two-way rates like a jobber with the difference that he quotes two-way rates, for buying and selling at the same time.
• In the money market of India, the Discount and Finance House of India (DFHI) is the chief market maker.

Raising capital in the Primary Market

There are 3 ways:

1. Public issue
2. Rights issue
3. Private Placement

Public issue

• A public offer is open for all citizens, the most broad based method of raising capital.

Rights Offering (Issue)

• Issuing rights to a company's existing shareholders to buy a proportional number of additional securities at a given price (usually at a discount) within a fixed period.

Private Placement

• Raising capital by selling shares to a select group of investors, usually Financial Institutions but may be to individual also.
• It is done through of process of direct negotiations.

Important terms

Authorized Capital

• The limit upto which shares can be issued by a count any.

Paid-up capital

• The part of the authorized capital of a company that has actually been paid by shareholders.

Issued Capital

• The amount which is sought by a company to be raised by issuing shares, which can’t exceed the authorized capital of the company.

Hedge Funds

• Hedge funds are the lot of invertible capital which move very swiftly towards the more profitable sectors of an economy.
• As stock markets fall & rise such funds change market accordingly. By nature they are temporary.

Bear and Bull

• A person who speculate share prices to fall in future and so sell his shares & earns profit is a Bear. He cars profit out of falling market.
• Bull is a person who speculates share prices to go up in future so either stops selling the select group of shares foe that time to be reached or starts purchasing that select group of shares.
• Thus a bear increases the number of shares in a stock market and bull creates a scarcity.

IPO

• Initial Public offer (IPO) is an event of share issuing when a company comes up with its shares for the first time.

Public Finance

It includes all those matters which are connected with public money (government).

Budget

According to article 112 of the Indian constitution it is the “annual financial statement”. Article 113 discusses the procedure to be followed in the formation of budget.

Revenue receipts

Tax Revenue Receipts

It includes all “Direct & Indirect Taxes

Non-Tax Revenue Receipts

It includes:

• Profits, Dividends
• Interest
• Fee / fines
• Grants (external)
• Fiscal service
• General Service like Banking, irrigation etc

Capital Receipts

• Loan recovery

• Borrowings
• Postal deposits

• Revenue Expenditure

• Salaries / pensions
• Interest payments
• Subsidies
• Defence expenditure
• Law & order
• Grants
• On social service

• Capital Expenditure

• Loan disbursal
• Loan repayments
• Plan expenditure
• Capital expenditure on defence (maintenance of forces, modernization)
• Other liabilities

Plan expenditure

Done in the name of planning

These are asset creating or productive expenditures

Non-Plan expenditure

All consumptive and non-productive expenditures

* On the suggestions of the Sukhmoy Chakrawarte Committee “Development & Non-Development expenditures” were replaced by “Plan & Non-Plan expenditures” (in public finance literature)

Data in the Budget

I. Actual data of the last year

II. Provisional data of current year

III. Budgetary estimates for the next year

Revised estimates (RE)

• A current estimates of either the Budgetary estimates or the Provisional estimates
• It is an interim data

Quick estimates (QE)

A kind of revised estimates which shows the latest situation

It is an interim data

Advanced estimates (AE)

A kind of Quick estimates but done sahead (in advance) of the final stage when data should have been collected

It is an interim data

Types of Budgets

I. Balanced Budget

II. Surplus Budget

III. Deficit Budget

IV. Gender Budgeting

1. Outcome and Performance Budget:
   • It is part of result oriented budgeting

• While outcome budget is presented by different departments the performance budget is presented by Finance department
• Both go for quantitative as well as qualitative progress reports of the performance
• Outcome budget is a micro level process while Performance is a macro level process
• Basic objective is to bring transparency

VI. Zero based Budget

• first proposed by peter Phyrr;
• first introduced by Jimmy Carter (1979 Budget) in USA
• it is the allocation of resources to agencies based on periodic revaluation y those agencies of the need for all the programmes for they are responsible, justifying the continuance or the termination of each programme.

Deficits

• Revenue deficit
• Fiscal deficit
• Primary deficit
• Monetized deficit

Revenue Deficit

When Revenue Expenditure exceeds revenue Receipts

Fiscal deficit

When total expenditure (Revenue + Capital) exceeds total receipts (Revenue + Capital).

Primary deficit

Fiscal deficit – interest payments

Monetized deficit

It is a part of fiscal deficit provided by the RBI

Deficit financing

• The act f supporting a deficit budget by a government
• First used in USA in 1930s
• India tried it in 1969

Means of deficit financing

I. External borrowings

II. External aids and grants

III. Internal borrowings

IV. Printing currency

Fiscal Responsibility Budget Management (FRBM) Act 2003

Main Highlights:

1. To reduce Fiscal & Revenue deficit so as to eliminate revenue deficit by 31^st March 2008

II. Annual targets 9 Revenue deficit by 0.5 % per annum and Fiscal deficit by 0.3% p.a

III. Fiscal deficit and revenue deficit may exceed targets only on the grounds of National security, calamity etc

     IV. GoI not to borrow from RBI except by Ways & Means Advances (WMAs) V. RBI not to subscribe to the primary issue of GoI securities from       2006-07 VI. To ensure greater transparency in fiscal operations

VII. Each year GoI to lay 3 statements in the parliament

1. Fiscal policy strategy statement
2. Medium term fiscal policy statement
3. Macroeconomic framework statement
4. Finance Minister to make quarterly review of trends in receipts & expenditure in relation to Budget

In 2006-07, in case of the Central government, proposed reduction in revenue and Fiscal deficit were put at 0.6 % and 0.5% respectively (higher than the FRBMA Rules), though the reduction suffered in 2005-06 due to higher devolution to states by centre on account of the recommendations of 12^th Finance Commission.

Sates also showed considerable improvement. The fiscal deficit of the states declined by 1.6% post FRBMA from 4.5 % in 2003-04 to 2.6% in 2006-07 of their GDP.