CHAPTER-1 INTRODUCTION TO INDIAN SECURITIES MARKET AND

TRADING MEMBERSHIP
Primary Market Secondary Market
• The primary market is where • The secondary market, on the other
securities are issued for the first time hand, is where previously issued
by companies to raise capital. This securities are bought and sold
process often takes place through an between investors. This includes
Initial Public Offering (IPO) or a stock exchanges such as the NYSE or
Private Placement. In the primary Nasdaq, where individuals and
market, investors directly purchase institutions trade securities without
shares or bonds from the issuing the involvement of the issuing
company, and the funds raised go to company. The company does not
the company for its growth, raise any new capital in the
expansion, or other financial needs. secondary market; instead,
Once the securities are issued, they ownership of the securities is
are no longer part of the primary transferred from one investor to
market. another, with the price determined
by supply and demand.
• Index: In the Indian stock market, an index is a statistical measure that
represents the overall performance of a group of stocks from specific sectors
or the broader market. The most well-known Indian stock market indices are
the Nifty 50 (which tracks the top 50 stocks on the National Stock Exchange
(NSE)) and the Sensex (which tracks 30 large companies on the Bombay Stock
Exchange (BSE)). These indices give investors an overview of the market's
overall performance and trends.
• Market Capitalization: Market capitalization in the Indian stock
market refers to the total value of a company’s shares in the market.
It’s calculated by multiplying the current share price by the total number of
outstanding shares. For example, if a company’s share
price is ₹100 and it has 1 million shares, its market capitalization is
₹100 million. In India, companies are often categorized based on their
market capitalization into large-cap, mid-cap, and small-cap stocks.
• Market Capitalization Ratio: This ratio helps assess a company’s market value
in relation to another financial metric, like earnings or revenue. In the Indian
market, it can be used to evaluate whether a stock is overvalued or
undervalued compared to its peers. For example, the Price-to-Earnings (P/E)
ratio is often used as a market capitalization ratio to measure a company’s
valuation by comparing its market capitalization to its earnings.
• Turnover: In the context of the Indian stock market, turnover refers to the total
volume or value of shares traded on exchanges like NSE and BSE within a specific
period (e.g., daily, weekly, monthly). Higher turnover indicates greater liquidity
and trading activity. For instance, the daily turnover in the Nifty 50 index reflects
how much of those stocks are actively being traded and can indicate investor
interest and market sentiment.
• Turnover Ratio: This ratio is a measure of how frequently a company’s stock is
bought and sold within a specific period. In the Indian stock market, the
turnover ratio helps gauge the liquidity of a particular stock or sector. A higher
turnover ratio indicates higher trading activity and liquidity, meaning that
investors can easily buy or sell shares without large price fluctuations. It’s often
used to evaluate the liquidity of mutual funds as well, by assessing how often
the fund's assets are traded within a year.
Major Products in the Indian Stock Market

• Equities (Stocks): Shares of listed companies traded on NSE and BSE.

• Bonds: Debt securities issued by companies or the government, offering
regular interest.
• Mutual Funds: Pooled investments in stocks, bonds, or other assets, managed
by professionals.
• Derivatives: Contracts (futures/options) based on underlying assets like stocks
or commodities.
• ETFs: Funds that track indices or assets, traded like stocks.
• Commodities: Trading in physical assets like gold, silver, and
agricultural products.
• Index Funds: Funds that track market indices, offering diversification.
Major Participants in the Indian Stock Market:
• Investors: These are individuals or institutions who buy and sell securities to
achieve financial goals. They include retail investors (individuals) and
institutional investors (mutual funds, insurance companies, foreign investors).
Investors seek returns through capital gains or dividends.
• Issuers: These are companies or governments that issue securities (stocks,
bonds, etc.) to raise capital. Companies issue shares in the primary market
through IPOs (Initial Public Offerings), while governments issue bonds to
fund public projects or manage debt.
• Intermediaries: These include stock brokers, market makers, financial advisors,
and clearing & settlement agencies. They facilitate trading, ensure liquidity,
provide market advice, and handle the settlement of trades. They include
exchanges like NSE and BSE, and regulatory bodies like SEBI.
1. Wholesale Debt Market Segment:
Started in June 1994, this segment involves trading in debt securities like bonds and
debentures, primarily for institutional investors. It allows entities like banks and mutual
funds to buy and sell large quantities of debt instruments.
• Example: Trading in government bonds or corporate bonds by institutions.
2. Capital Market:
Launched in November 1994, the capital market is where long-term securities like stocks and
bonds are bought and sold. It includes both the primary market (for new issues like IPOs)
and the secondary market (for trading existing securities).
• Example: Trading of Reliance shares on the NSE after its IPO.
3. Futures and Options Segment:
Introduced in June 2000, this segment involves trading in derivatives like futures
and options, which are contracts based on underlying assets such as stocks or
indices. These help investors hedge or speculate on price movements.
• Example: Nifty futures contracts on the NSE.
4. Currency Derivatives Segment:
Launched on August 29, 2008, this segment allows trading in currency futures and
options, helping investors manage currency risks or speculate on exchange rates.
• Example: USD/INR futures contracts on the NSE.
Reforms for Indian Stock Market

• SEBI Creation: The Securities and Exchange Board of India (SEBI) was
established in 1992 to protect investor interests, promote market
development, and regulate the market.
• Screen-Based Trading: The introduction of an automated trading system by
NSE in 1994 replaced the inefficient open outcry system, making trading
faster and more transparent.
• Reduction of Trading Cycle: The settlement period for trades has been reduced
from 30 days to T+2 days (2 days after the trade) since 2003.
• Equity Derivatives Trading: Derivatives trading started in 2000 to help manage
risks, including futures and options on stocks and indices.
• Demutualization: Stock exchanges were demutualized, separating ownership,
management, and trading functions to improve governance.
• Dematerialization: The introduction of electronic trading (Demat) eliminated
physical securities, improving efficiency and reducing risks of bad deliveries.
• Clearing Corporation: NSE set up the first clearing corporation (NSCCL) in 1996
to manage counterparty risks and ensure smooth settlement.
• Investor Protection: SEBI and exchanges established investor protection
funds and grievance redress mechanisms to protect investors.
• Globalisation: Indian companies can now raise capital internationally, and
Foreign Institutional Investors (FIIs) can invest in Indian securities with capital
account convertibility.
• India VIX: In 2008, the NSE launched India VIX, a volatility index that measures
expected market fluctuations.
• Direct Market Access: In 2008, SEBI allowed institutional investors to directly
access trading systems through brokers, reducing intervention.
• Securities Lending and Borrowing: Launched in 2008, this mechanism allows
short selling and helps reduce costs for market participants.
• Currency Futures: Trading in currency futures started in 2008, with more
currency pairs available by 2010.
• ASBA (Application Supported by Blocked Amount): Introduced for IPOs and
rights issues, ASBA allows investors to block funds in their accounts instead of
making an upfront payment.
• Interest Rate Futures: In 2009, NSE launched interest rate futures to help
manage interest rate risks.
• ICDR Regulations: In 2009, SEBI replaced the old guidelines with the new Issue
of Capital and Disclosure Requirements (ICDR) regulations for better
transparency in capital issuance.
ASBA (Application Supported by Blocked Amount)
ASBA (Application Supported by Blocked Amount) is a system where investors
apply for shares in an IPO without paying upfront. Instead of transferring the full
amount, the money is "blocked" in the investor's bank account. If the investor
gets shares, the money is deducted; if not, it's released.
• Example: Say you're applying for an IPO with a bid amount of
₹10,000. Under ASBA, ₹10,000 is blocked in your bank account. If you get
allotted 10 shares at ₹1,000 each, ₹10,000 is deducted from your account. If you
don’t get any shares, the ₹10,000 is released back into your account.
 Demutualization is the process of converting a stock exchange from a member-
owned organization to a shareholder-owned corporation.
Before demutualization, stock exchanges were often owned by brokers or
members who also traded on the exchange. After demutualization, the exchange
becomes a publicly traded company, with shares that can be bought and sold by
anyone, not just the members.
• Example:
The Bombay Stock Exchange (BSE) was demutualized in 2005, becoming a
publicly listed company.
Dematerialization is the process of converting physical share certificates into
electronic form.
• Example:
If you owned 100 shares of a company, you would have a physical share
certificate. After dematerialization, these 100 shares are stored electronically in
your Demat account, and you no longer need to worry about paper certificates.
STOCK BROKER

• A stockbroker is an intermediary authorised to buy and sell stocks

for investors. They provide advisory, portfolio management, and
transaction services. Stockbrokers can be full-service or discount,
and are regulated by SEBI.
• Every stockbroker in India needs to be a member of stock
exchanges and also requires to be registered with SEBI.
Stockbrokers display their registration details on their websites
and even on official documents. One can also visit the Sebi
website and find details of registered stockbrokers.
 NSE Membership

NSE (National Stock Exchange) has no barriers for entry or exit when it comes to
membership. Anyone can join by meeting the eligibility criteria and can exit by
surrendering membership with no hidden costs. Members are admitted to
different segments based on the rules of the Securities Contracts Act, SEBI Act,
and NSE's byelaws.
Key Benefits for Members:
• Access to nationwide trading for stocks, derivatives, debt, and hybrid
products.
• Ability to offer a fair, efficient, and transparent market for investors.
• Use of advanced electronic trading systems and technology.
• Trading with an organization that follows strict international standards for
trading and settlement.
Eligibility for New Membership in NSE:
The following entities can become trading members of the Exchange:
1. Individuals
2. Partnership firms registered under the Indian Partnership Act, 1932.
3. Limited Liability Partnerships (LLPs) registered under the LLP Act, 2008.
[Link], including subsidiaries of banks involved in financial services.
5. Banks for the Currency Derivatives Segment.
[Link] corporates, including companies as defined under the Companies Act,
2013.
For companies to be eligible, they must meet these requirements:
• Formed in compliance with the Companies Act, 2013.
• Comply with financial norms set by SEBI.
• The company's directors must not be disqualified from being members of a
stock exchange or have held director positions in companies that were
defaulters or expelled by a stock exchange.
• Additionally, other entities may be allowed by RBI/SEBI under the Securities
Contracts (Regulation) Rules, 1957.
Surrender of Trading Membership:

A trading member can apply to surrender their membership with the Exchange, but
certain conditions must be met. These include clearing all dues to the Exchange
and the clearing corporation (NSCCL), notifying other trading members, and
publishing a public notice. After this, their deposits are released after a lock-in
period, though if the member hasn't traded or is not enabled by SEBI, there's no
lock-in period. To apply for surrender, the member must submit a written
request, ensure they don't have any pending dues, or claims, and comply with all
other formalities. After approval, they can't reapply for membership for at least
one year.
Suspension and Expulsion of Membership:

• A trading member can face suspension or expulsion if they violate Exchange

rules. This can happen for several reasons, such as fraud, misconduct, or failure
to comply with legal requirements like submitting financial reports. Other
reasons include market manipulation, failing to pay required fees, or engaging in
unfair trading practices. A member can also be suspended if they fail to meet
capital requirements or if they don't maintain sufficient margin deposits. The
Exchange holds the member responsible for the actions of their employees,
agents, or partners.
UCC

• A Unique Client Code (UCC) is a distinctive identifier assigned to each

investor or client by a broker or trading member when they register to trade
on a stock exchange. It serves as a means to track and verify each client’s
trading activities, ensuring that all transactions are properly attributed to the
correct individual or entity.
• The UCC helps prevent fraudulent activities and market manipulation, enhances
investor protection, and ensures regulatory compliance by enabling authorities
like SEBI to monitor and verify client activities. When a client opens a trading
account, the broker generates a UCC based on the client's KYC details, which is
then linked to both their trading and Demat accounts. This code is used for
placing buy or sell orders, linking transactions to the client, and enabling
exchanges to report and monitor trades. For example, when an investor named
Mr. A opens an account, they receive a UCC, such as 12345, which is used to
track all of their trades. This system ensures that all market activities are
transparent and attributed to the correct party, thus maintaining the integrity of
the securities market.
• Brokerage refers to the fee charged by a trading member (TM) for executing buy
or sell orders on behalf of a client. In the context of securities traded on the
Capital Market (CM) segment of an exchange, the maximum brokerage a trading
member can charge is 2.5% of the contract price, excluding any statutory levies
such as taxes or other charges. This 2.5% includes sub-brokerage, meaning the
brokerage shared with sub- brokers involved in the transaction. The brokerage
amount must be clearly stated separately from the transaction price in the
contract note provided to the client. Furthermore, a trading member is
prohibited from sharing brokerage with another trading member or an
employee of another trading member, ensuring that the brokerage is only
distributed within the scope of the specific trading member's operation
ISC

• An Investor Service Cell (ISC) is a dedicated support unit established by

exchanges or brokerage firms to assist investors with various issues related to
trading, investments, and the securities market. The primary role of the ISC is to
act as a point of contact for investors to address their queries, complaints, and
concerns, ensuring smooth communication between the exchange, brokers, and
investors. The cell typically helps resolve issues like delayed settlements, errors
in trades, discrepancies in account statements, and any other investor- related
grievances. The ISC also educates investors on the market, provides updates on
regulations, and offers assistance with procedural formalities such as KYC (Know
Your Customer) registration or the dematerialization of shares.
Authorized Persons
• Authorized Persons are individuals or entities appointed by a stockbroker to
act on their behalf, facilitating the buying and selling of securities for clients.
They are authorized to handle trading activities under the supervision of a
registered stockbroker and must comply with SEBI regulations, including
maintaining records and following ethical practices.
• To become an authorized person, an individual or entity must be approved by a
stockbroker who holds membership in a stock exchange and must meet specific
eligibility criteria. They play a key role in executing trades, providing market
information, and managing client accounts, while also being responsible for
addressing any grievances or complaints.
• An authorized person essentially acts as an intermediary between the client
and the stockbroker, ensuring that trading activities are carried out smoothly
and in accordance with regulatory requirements.
Sub Broker

• Sub broker is an important intermediary between stock broker and client in

capital market segment. The trading members of the Exchange may appoint sub-
brokers to act as agents of the concerned trading member for assisting the
investors in buying, selling or dealing in securities. The sub-brokers are affiliated
to the trading members and are required to be registered with SEBI. A sub-
broker is allowed to be associated with only one trading member of the
Exchange.
Sub-Broker Registration Requirements

A sub-broker cannot buy, sell, or deal in securities unless they hold a

certificate of registration granted by SEBI. To obtain this certificate, the sub-
broker must meet the following conditions:
1. Payment of Fees: The sub-broker must pay the required fees as prescribed.
2. Grievance Redressal: They must address investor complaints within one
month and report details to SEBI.
3. Change of Status: Any changes in the sub-broker's status or structure must be
approved by SEBI.
4. Stock-Broker Authorization: The sub-broker must be authorized in writing by a
stock-broker (member of a stock exchange) to affiliate with them for trading in
securities.
IFSD (Investor Protection Fund)

IFSD (Investor Protection Fund) is a fund set up by stock exchanges to safeguard

the interests of investors. It is designed to compensate investors in case a trading
member defaults or is unable to fulfill their obligations, leading to financial loss
for investors. The fund helps cover claims related to securities transactions, such
as instances where investors are unable to recover their money due to the failure
of a member or broker.
• The fund is typically managed by the stock exchange and contributions to the
IFSD are made by trading members. The fund ensures that investors have a
safety net, though the compensation is usually subject to certain conditions
and limits. This mechanism helps increase investor confidence by providing a
level of financial security against member defaults.