INTRODUCTION Stock markets refer to a market place where investors can buy and sell stocks. The price at which each buying and selling transaction takes is determined by the market forces (i. e. demand and supply for a particular stock). Let us take an example for a better understanding of how market forces determine stock prices. ABC Co. Ltd. enjoys high investor confidence and there is an anticipation of an upward movement in its stock price. More and more people would want to buy this stock (i. e. high demand) and very few people will want to sell this stock at current market price (i. . less supply). Therefore, buyers will have to bid a higher price for this stock to match the ask price from the seller which will increase the stock price of ABC Co. Ltd. On the contrary, if there are more sellers than buyers (i. e. high supply and low demand) for the stock of ABC Co. Ltd. in the market its price will fall down. In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction but now with the dawn of IT, most of the operations are done electronically and the stock markets have become almost paperless.
Now investor’s don’t have to gather at the Exchanges, and can trade freely from their home or office over the phone or through Internet. The Securities Contract Regulation Act, 1956, under Section-2(j) defines stock exchange. A stock exchange thus, imparting marketability & liquidity to securities, encourages investments in securities & assists corporate growth. Stock exchange is regarded as “an essential concomitant of the capitalistic system of economy. It is indispensable for the proper functioning of corporate enterprise.
It brings together large amount of capital necessary for the economic progress of a country. It is citadel of capital & the pivot of money market. It provides necessary mobility to capital & directs the flow of capital into profitable & successful enterprises. It is the barometer of general economic progress in a country & exerts a powerful & significant influence as a depressant or stimulate of business activity. It may be defined as the place or market where securities of joint stock companies & of government or semi-government bodies are dealt in”.
The London Stock Exchange is the heart of global financial markets & is the home to some of the best companies in the world. It enables co. from around the world to raise the capital they need to grow, by listing securities on our highly-efficient, transparent & well-regulated markets through two primary markets i. e. the Main Market & Alternative Investment Market). It gives co’s to access to one of the world’s deepest & most liquid pools of investment capital. Once co. have been admitted to trading, expertise of the global financial markets help them maximize the value of their listing in London.
It provides the trading platforms used by broking firms around the world to buy & sell securities. More than 300 firms worldwide trade as members of the London Stock Exchange. EDX London is the international equity derivatives exchange & its aim is to become the world’s most efficient & liquid market for equity derivatives. The UK covered warrants market is one of the world’s fastest growing investment markets. It host five blue-chip issuers offering over 800 warrants & certificates on single stocks & indices in the UK & around the world.
The project explores the regulatory framework of the Indian & London Stock Exchange. Whereas, my first chapter deals with the Overview of Indian stock exchange and second chapter deals with the Overview of London stock exchange and third and the last chapter deals with the comparative analysis of regulatory framework of stock exchange of both the countries. CHAPTER-1 STOCK EXCHANGE IN INDIA 1. 1BACKGROUND During the eighteenth and nineteenth centuries, India supplied Britain with raw materials and a market for manufactured products.
Britain became increasingly reliant on India for raw materials such as cotton, especially during the American Civil War. The resultant wealth generation in India created a need for legitimate means of investment rather than rampant unorganised speculation in securities. To this end, a group of brokers created the Native Share and Stockbrokers Association, which later became the Bombay Stock Exchange (BSE) in 1875. The Bombay Stock Exchange Limited is the oldest stock exchange in Asia and was the first stock exchange to be recognized by the Indian government, in 1956.
Today, the BSE is professionally managed under the overall direction of the board of directors, which formulates larger policy issues and exercises overall control. The board comprises eminent professionals, representatives of trading members and the managing director of the BSE. In addition to the BSE, there are two other main exchanged – the National lock Exchange (NSE) and the Over the Counter Exchange of India Limited (OTCEI) – which operate at a national level. The NSE is the world’s third largest stock exchange in terms of transactions and is also located in Mumbai.
The OTCEI, which operates from Mumbai, Kolkata and New Delhi, is a unique stock exchange suited to small and medium-sized firms looking to gain access to the capital markets. It is often the exchange of choice for technology and growth stocks. 1. 2 CLASSIFICATION OF MARKET The stock market comprises of two markets, viz. , the primary market and the secondary market. The evolution and the development of various stock exchanges in India and Abroad were presented briefly. The Stock Exchange is a key institution facilitating the issue and sale of various types of securities.
It is pivot around which every activity of the capital market revolves. In the absence of the stock exchange, the people with savings would hardly invest in corporate securities for which there would be no liquidity (buying & selling facility). Corporate investments from a general public would have been thus lower. The stock exchanges are virtually the nerve centre of the capital market & reflect the health of the country’s economy as a whole. 1. THE PRIMARY MARKET :- The primary market provides the channel for sale of new securities, while the secondary market deals in securities previously issued.
The primary market consists of new issues of capital (equity, debentures, bonds etc. ) by new/existing companies. In this case, the corporate body invites applications to the issue of equity or debentures by filling the prospectus or letter of offer. The application forms can be obtained from the bankers / merchant bankers of the issues, brokers etc. Investors subscribe to issue these by filling in the application forms & remitting the requisite amount to the designated banks (listed on the reverse of the application) within the time period for which the subscription list is open. The subscription list is generally kept open for 3 days.
The company in consultation with its merchant bankers & the Stock Exchange Authorities is expected to finalize the list of successful applications within 10 weeks. The share/debenture certificates are dispatched to the successful application while refund orders are posted to the others. If the amount paid on application is only half the face/nominal value, the company must mention the date by which the successful applicants are required to pay the balance. The company normally gives an allotment advise & after remittance of the first/final call, the fully paid share certificate is sent to the investor.
In case the applicant does not hear from the company regarding allotment/refund, he can approach the merchant banker to the issue & the Securities and the Exchange Board of India, lodging a written complaint giving particulars of the application form no. , the bank at which the application was lodged, etc. the securities are listed by the concerned exchange once the company complies with the listing agreement of the exchange. Once the shares/debentures are listed, market forces decided the price of the same- the investor’s perception of the company, its management, the industry potential, the general economic environment, etc.
The primary market is an intermittent and discrete market where the initially listed shares are traded first time, changing hands from the listed company to the investors. It refers to the process through which the companies, the issuers of stocks, acquire capital by offering their stocks to investors who supply the capital. In other words 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 called 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. The issue of securities by companies can take place in any of the following methods: •Initial public offer (securities issued for the first time to the public by the company); •Further issue of capital; Rights issue to the existing shareholder. (on their renunciation, the shares can be sold by the company to others also); •Offer of securities under reservation/firm allotment basis to : i) foreign partners & collaborators, ii) mutual funds iii) merchant bankers iv) banks and institutions v) non resident Indians and overseas corporate bodies vi) employee •Offer to public •Bonus issue. The primary market (New Issues) is of great significance to the economy of a country. It is through the primary market that funds flow for productive purposes from investors to entrepreneurs.
The latter use of funds for creating new products & rendering services to customers in India & abroad. The strength of the economy of a country is gauged by the activities of the Stock Exchanges. The primary market creates and offers the merchandise for the secondary market. 2. THE SECONDARY MARKET: The secondary market is where listed securities are brought and sold. Shares are normally issued having a face value of Rs. 10 or Rs. 100. The trading is normally done in what are known as market lots. For a share of face value Rs. 10, the market lot is 50 or 100 & for Rs. 00, the market lot is 1 or 5 shares respectively. Secondary Market is the market where, unlike the primary market, an investor can buy a security directly from another investor in lieu of the issuer. It is also referred as “after market”. The securities initially are issued in the primary market, then they enter into the secondary market. In other words, secondary market is a place where any type of used goods are available. In the secondary market shares are maneuvered from one investor to other, that is, one investor buys an asset from another investor instead of an issuing corporation.
So, the secondary market should be liquid. Example of secondary market is New York Stock Exchange, in the United States of America, all the securities belong to the secondary market. The secondary market has an important role to play behind the developments of an efficient capital market. Secondary market connects investors’ favoritism for liquidity with the capital users’ wish of using their capital for a longer period. For example, in a traditional partnership, a partner can not access the other partner’s investment but only his or her investment in that partnership, even on an emergency basis.
Then if he or she may breaks the ownership of equity into parts and sell his or her respective proportion to another investor. This kind of trading is facilitated only by the secondary market. The secondary market is an on-going market, which is equipped and organized with a place, facilities and other resources required for trading securities after their initial offering. It refers to a specific place where securities transaction among many and unspecified persons is carried out through intermediation of the securities firms, i. e. a licensed broker, and the exchanges, a specialized trading organization, in accordance with the rules and regulations established by the exchanges. 1. 3 ORIGIN OF INDIAN STOCK MARKET The origin of the stock market relates back to the year 1494, when the Amsterdam Stock Exchange was set up. In India it dates back to the 18th century, an era when the East India Company was a dominant Institution in India. The real beginning occurred in the middle of the nineteenth century after the enactment of the companies Act in 1850, which introduced the features of limited liability and generated investor interest in corporate securities.
An important early event in the development of the stock market in India was the formation of the native share and stock brokers ‘Association at Bombay in 1875, the precursor of the present day Bombay Stock Exchange. The Ahmadabad Shares and Stock Association” was formed in the year 1894. The Calcutta Stock Exchange Association was formed by about 150 brokers on 15th June 1908. In the year 1920, one stock exchange was established in Northern India and one in Madras called “The Madras Stock Exchange”. “The Madras Stock Exchange Association Pvt. Ltd. ” was established in the year 1941.
On 29th April 1959, it was reorganized as a company limited by guarantee under the name and style of “Madras Stock Exchange” (MSE). The Lahore Stock Exchange was formed in the year 1934. However in the year 1936 after the Punjab Stock Exchange Ltd. came into existence, the Lahore Stock Exchange merged with it. In Calcutta, a second Stock Exchange by name “The Bengal Share & Stock Exchange Ltd. ” was established in the year 1937 and likewise once again in the year 1938, Bombay also witnessed a rival Stock Exchange formed in the name of “Indian Stock Exchange Ltd. ” The U. P.
Stock Exchange was formed in Kanpur and the Nagpur Stock Exchange Ltd. in Nagpur in the year 1940. The Hyderabad Stock Exchange Ltd. was incorporated in the year 1944. Two stock exchanges which came into being in Delhi by the name “The Delhi Stock & Share Brokers Association Ltd. ” and “The Delhi Stocks & Shares Exchange Association Ltd. ” were amalgamated into “The Delhi Stock Exchange Association Ltd. ” in the year 1947. Subsequently the Bangalore Stock Exchange was registered in the year 1957 and recognized in the year 1963. The third stock exchange in the state of Gujarat the “Vadodara Stock Exchange Ltd. was incorporated in 1990. The Over the Counter Exchange of India (OTCEI) broadly based on the lines of NASDAQ (National Association of Securities Dealers Automated Quotation) of the USA was promoted and approved on August 1989. The National Stock Exchange of India Ltd. was incorporated in November 1992. Without a stock exchange, the saving of the community- the sinews of economic progress and productive efficiency- would remain underutilized. The task of mobilization and allocation of savings could be attempted in the old days by a much less specialized institution than the stock exchanges.
But as business and industry expanded and the economy assumed more complex nature, the need for ‘permanent finance’ arose. Entrepreneurs needed money for long term whereas investors demanded liquidity – the facility to convert their investment into cash at any given time. The answer was a ready market for investments and this was how the stock exchange came into being. Stock exchange means any body of individuals, whether incorporated or not, constituted for the purpose of regulating or controlling the business of buying, selling or dealing in securities. These securities include: i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ii) Government securities; and (iii) Rights or interest in securities. The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges. However, the BSE and NSE have established themselves as the two leading exchanges and account for about 80 per cent of the equity volume traded in India. The NSE and BSE are equal in size in terms of daily traded volume.
The average daily turnover at the exchanges has increased from Rs 851 crore in 1997-98 to Rs 1,284 crore in 1998-99 and further to Rs 2,273 crore in 1999-2000 (April – August 1999). NSE has around 1500 shares listed with a total market capitalization of around Rs 9, 21,500 crore. The BSE has over 6000 stocks listed and has a market capitalization of around Rs 9, 68,000 crore. Most key stocks are traded on both the exchanges and hence the investor could buy them on either exchange. Both exchanges have a different settlement cycle, which allows investors to shift their positions on the bourses.
The primary index of BSE is BSE Sensex comprising 30 stocks. NSE has the S NSE 50 Index (Nifty) which consists of fifty stocks. The BSE Sensex is the older and more widely followed index. Today, there are a total of 24 recognised stock exchanges ii India, operating at a national or regional level. 1. Bombay Stock Exchange 2. National Stock Exchange 3. Regional Stock Exchanges •Ahmedabad Stock Exchange •Bangalore Stock Exchange •Bhubaneshwar Stock Exchange •Calcutta Stock Exchange •Cochin Stock Exchange •Coimbatore Stock Exchange •Delhi Stock Exchange Guwahati Stock Exchange •Hyderabad Stock Exchange •Jaipur Stock Exchange •Ludhiana Stock Exchange •Madhya Pradesh Stock Exchange •Madras Stock Exchange •Magadh Stock Exchange •Mangalore Stock Exchange •Meerut Stock Exchange 4. OTC Exchange Of India • Pune Stock Exchange •Saurashtra Kutch Stock Exchange •Uttar Pradesh Stock Exchange •Vadodara Stock Exchange 1. 4 REGULATORY FRAMEWORK 1. 4. 1 LEGISLATIVE FRAMEWORK (a)Companies Act 1956 The Companies Act requires a company to apply to one or more recognised stock exchanges for permission to issue securities to the public.
A company must prepare a prospectus which lists the stock exchanges to which it has applied. Any allotment of securities is void if those stock exchanges do not grant permission within 10 weeks of the closure of the issue. (b)Securities Exchange Board of India Act 1992 The Securities Exchange Board of India Act provides for the establishment of the Securities and Exchange Board of India (SEBI) to protect investors in securities, and to promote the development of and regulate the securities market in India. The act also establishes the Securities Appellate Tribunal to adjudicate matters concerning to refusals to list securities.
Further, the act empowers the central government to issue rules and SEBI to issue regulations to stock exchanges and other intermediaries regarding listing requirements, procedures and related matters. (c)Securities Contracts (Regulation) Act 1956 The Securities Contract (Regulation) Act, 1956 was enacted by Parliament to prevent undesirable transactions in securities by regulating the business of dealing therein, & by providing for certain other matters connected therewith. The Act extends to the whole of India & came into force on 28th Feb, 1957.
The Act defines various terms in relation to securities and provides the detailed procedure for the stock exchanges to get recognition from governemnt/ SEB, procedure for listing of securities of companies & operations of the brokers in relation to purchase & sale of securities on behalf of investors. However, the provisions of this Act shall not apply to- (a) the government, the Reserve Bank of India, any local authority or any corporation set up by the special law or any person who has effected any transaction with or through the agency of any such authority. b) any convertible bond or share warrant or any option or right in ralation thereto, in so far as it entitles the person in whose favor any of the foregoing has been issued to obtain at his option from the company or other body corporate, issuing the same or any from any of its shareholders’ or duly appointed agents, shares of the company or other body corporate, whether by conversion of the bond or warrant or otherwise, on the basis of the price agreed upon when the same was issued.
If the Central Government is satisfied that in the interest of trade & commerce or the economic development of the country, it is necessary or expedient so to do, it may, by notification in the Official Gazette, specify any class of contracts to which this Act or any provision contained therein shall not apply, & also the conditions, limitations or restrictions, if any, subject to which it shall not so apply. The Securities Contracts (Regulation) Act prevents undesirable transactions by regulating the working of stock exchanges as well as the listing and transfer of securities.
For example, the act allows the central government to suspend a stock exchange’s business for up to seven days in emergency situations. The act also makes the listing agreement binding on all listed securities and allows a stock exchange to appeal before the Securities Appellate Tribunal if it refuses to list a public company’s securities. (d)Securities Contracts (Regulation) Rules 1957 Authorized by Section 30 of the Securities Contracts (Regulations) Act, the central government created the Securities Contracts (Regulation) Rules to egulate membership of recognized stock exchanges. For example, non-citizens of India cannot be elected to the board of a recognized stock exchange without the prior approval of SEBI. The rules also regulate the listing of securities on stock exchanges by requiring that applications contain such information as a company’s memorandum and articles of association, and copies of balance sheets and audited accounts for the last five years. e)Securities Exchange Board of India (Disclosure and Investor Protection) Guidelines 2000 The Disclosure and Investor Protection Guidelines were framed by SEBI to govern the public issue of securities by prescribing pre-issue and post-issue obligations of intermediaries and issuer conies. These guidelines also detail the disclosures required in a company’s prospectus or otherwise, and regulate the marketing and advertising process of public issues. SEBI must approve all offer documents (prospectuses) before the actual public issue. f) Securities Exchange Board of India (Central Listing Authority) Regulations 2003 These regulations provide for the establishment of the Central Listing Authority to scrutinize applications for listing on a stock exchange and to advise SEBI on issues concerning the listing of securities. This authority is not currently operational. (g)The Securities Exchange Board of India (Delisting of Securities) Guidelines 2003 The Delisting Regulations outline the circumstances under which securities may be voluntarily or punitively delisted and the consequences thereof.
A company cannot voluntarily delist from a stock exchange unless it has been listed or a minimum of three years and provides an exit opportunity to its investors. The company’s promoters or acquirers must also make a public announcement before applying for delisting. (h)Companies (Issue of Indian Depository Receipts) Rules 2004 The Indian Depository Receipts Rules, framed under the Companies Act, permit foreign companies to raise capital on the Indian markets by issuing Indian depositary receipts (IDRs) These can be listed and traded on Indian stock exchanges and are based on a foreign company’s securities in an overseas depository. . 4. 2 REGULATORY BODIES (a) Securities and Exchange Board of India: SEBI monitors listing requirements, stock exchange regulations and compliance issues, and can initiate action against defaulting companies. Moreover, SEBI can debar a company from undertaking any capital market activity and prohibit it from accessing the capital market. This regulatory power can be exercised even if the company listed on a recognized stock exchange. Under the provisions of Securities Control (Regulation) Act, SEBI has authority regarding the creation & amendment of a stock exchange’s bylaws.
These regulatory powers also relate to a stock exchange’s policies on listing securities & conducting trade. Further, SEBI can ask a stock exchange for periodical returns & make direct inquiries into its workings. (b) Stock Exchanges: Under the provisions of the Securities Contracts (Regulation) Act, recognized stock exchanges have the power to make bylaws to regulate and control such matters as the listing or suspension of securities. Any company seeking to have its securities listed must apply a stock exchange. The exchange may either accept or refuse the application at its discretion.
A stock exchange must ensure that accepting a company’s application for listing would not be detrimental to the interests of the market or investors. Thus, stock exchanges actively protect investors’ interests rather than simply providing the infrastructure for securities trading. 1. 5TRADING PATTERN Indian Stock Exchanges allow trading of securities of only those public limited companies that are listed on the Exchange(s). They are divided into two categories: 1. 6TYPES OF TRANSACTIONS The flowchart below describes the types of transactions that can be carried out on the Indian stock exchanges: . 7 TYPES OF ENTITY ELIGIBLE FOR LISTING The Securities Contracts (Regulation) Act and the Securities Contract (Regulation) Rules envisage only the listing of securities issued by public companies incorporated in India. Thus, foreign companies cannot list on Indian stock exchanges, although they can issue IDRs to the public. (A) DOMESTIC COMPANIES: Only a company incorporated in India may list on an Indian stock exchange. The listing committee of each stock exchange sets the listing criteria for that particular exchange, and therefore the listing requirements are different for each exchange.
However, such listing requirements must fall within the framework established by the Securities Contract (Regulation) Act, which ensures that the basic norms for the listing securities are uniform. However, stock exchanges may prescribe additional norms in their bylaws over and above the minimum norms prescribed by the Securities Contracts (Regulation) Act. In addition, SEBI has issued guidelines and circulars requiring the inclusion of certain norms in a stock exchange’s listing agreements. The listing requirements for the BSE, NSE and OTCEI are outlined below.
The securities of a company listed on an Indian exchange cannot be of differing classes affording different rights. The share capital must be either equity share capital or preference share capital. No further class differentiations are permitted. (a)Bombay Stock Exchange 1) New companies : New companies are subject to the BSE’s minimum capital and minimum public offer requirements. Minimum capital: Issued and subscribed equity capital after the public issue must be at least Rs100 million. In addition, the issuer company should have a post-issue net worth (equity capital and free reserves, excluding revaluation reserve) of Rs 200 million.
For new companies in the high-technology sector (information technology, Internet, e-commerce, telecommunications and media), the following criteria apply regarding the threshold limit: • The total income from the main activity (ie, in the field of information technology, Internet, e-commerce, telecommunications or media) must be 75% or more of the total income in the two immediately preceding years, as certified by the auditors of the company; • The minimum post-issue paid-up equity capital must be Rs50 million; • The minimum market capitalization must be Rs500 million; and •
The post-issue net worth (equity capital and free reserves, excluding revaluation reserve) must be Rs200 million. Minimum public offer: The securities of a company can be listed on the BSE only when at least 25% of each class or kind of securities is offered to the public for subscription.
However, in the case of unlisted companies in the IT and entertainment sectors, securities can be listed only if at least 10% of the securities issued by the company are offered to the public subject to the following conditions: • A minimum of Rs 2 million’s worth of securities are offered to the public (excluding reservation, firm allotment and promoters’ contribution); and • The value of the offer to the public is at least Rs500 million.
For these purposes, the term ‘offered to the public’ means only the portion offered to the public and does not cover shares reserved for firm allotment to Indian mutual funds, foreign institutional investors and so on, or the promoters’ contribution. 2) Companies listed on other stock exchanges
A company already listed on another Indian stock exchange must meet the following requirements to be listed on the BSE: • a minimum issue and paid-up equity capital of Rs30 million; • a minimum net worth of Rs200 million; • a distributable profit track record for at least three of the immediately preceding five years, excluding any revenues/profits of a non-recurring nature; • allocation of at least 25% of the issued capital to non-promoters that do not hold more than 0. % of the paid-up capital, individually or jointly (this restriction does not apply to banks, financial institutions, foreign institutional investors, overseas corporate bodies or non-resident Indians); • a listing record with any regional stock exchange over a two-year period; and • agreements signed with Central Depository Services (India) Limited and National Securities Depository Limited for ‘demat’ trading. (b)National stock exchange 1)Minimum requirements: A company applying for listing on the NSE must adhere to conditions set out in the Securities Contracts (Regulation) Act, the
Companies Act, the SEBI Act, any rules and regulations frames med under these statutes and any circular, clarifications or guidelines issued by SEBI. The company seeking listing, or its promoting company, must submit its track record and annual returns for the last three years, together with certification to the effect that: • it has not been referred to the Board of Industrial and Financial Reconstruction; • its net worth has not been wiped out by accumulated losses leading to negative net worth; and • it has not received a winding-up petition accepted by a court.
The company’s project/activity plan must be evaluated by: • a financial institution under Section 4A of the Companies Act; • a state finance corporation; • a scheduled commercial the paid-up capital exceeding Rs500 million; • a Category I merchant banker, with a net worth of at least Rs100 million; or • a venture capital fund with a net worth of at least Rs500 million. The company may forgo such appraisal of its project/activity plan if it has a working capital arrangement with a bank having a net worth of not less than Rs500 million.
The company must not have defaulted in payment of listing fees to any stock exchange in the last three years. Also, it must not have been delisted, suspended or subjected to proceedings by SEBI or any other regulatory authority. The company must have an investor grievance redressal system and must submit a track record of redressing investor grievances. It must further have a general approach and philosophy to serve and protect its investors.
Any defaults relating to payments of interest and/or principal to debenture, bond or fixed deposit holders shall be considered when the NSE evaluates’ the application for listing. The company will not be listed until it has cleared all pending obligations relating to the payment of interest and/or principal. The applicant’s shareholding pattern as on March 31 of the last three calendar years must be provided under the Disclosure and Investor Protection Guidelines.
The applicant’s litigation record and the nature and status of any litigation during the preceding three-year period must be submitted to the exchange to which the application has been made. The applicant must further disclose the track records of its directors, including all relevant documents regarding the status or nature of any criminal cases involving directors and their effect on the company’s business. Unlike the BSE, the NSE makes no special provisions for companies operating in the high-technology sector. 2) Companies listed on other stock exchanges:
In addition to the foregoing minimum requirements, a company listed on another stock exchange in India must have a paid-up equity capital of at least Rs100 million before and after the proposed issue. Further, the market capitalisation of a company’s equity must beat least Rs250 million in the six months immediately preceding the application date. Market capitalisation is a 12-month moving average of the weekly high and low closing prices of the shares as quoted on the NSE or another recognised stock exchange, after making necessary adjustments for corporate action such as rights/bonus issues.
This market capitalisation requirement does not apply for the listing of securities issued by government companies, public sector undertakings, financial institutions, nationalised banks, statutory corporations and banking companies which are otherwise bound to adhere to all the relevant statutes, guidelines, circulars and clarifications that may be issued by various regulatory authorities from time to time. Nor does it apply if the company’s paid-up equity is at least Rs250 million. In such case the company’s securities should be traded for at least 25% of the trading days in the 12 months before the application is submitted.
Further, a company does not require a Ps100 million paid-up equity if its market capitalisation is at least Rs500 million. The applicant must additionally satisfy one or more of the following conditions: • It has been listed on another recognised Indian stock exchange for at least three immediately preceding years; and • Its project/activity plan has been appraised by: ?a financial institution; ?a state finance corporation; ?a scheduled commercial bank with a paid-up capital exceeding Rs 500 million; ? a merchant banker with a net worth of at least Rs100 million; or ? venture capital fund with a net worth of at least Rs500 million; or ? It has working capital arrangements with a bank with a net worth of at least Rs500 million. The applicant must further satisfy one or more of the following conditions: ? It must have paid dividends in at least two of the three financial years immediately preceding its listing application; ? It has distributable profits in at least two of the last three financial years, with an auditor’s certificate to verify such statement; or ? Its net worth is at least Rs500 million. c) Over The Counter Exchange Of India The OTCEI prescribes certain initial and continuing listing requirements. i)Initial listing requirements If a company wishes to list on the OTCEI: • its net tangible assets must be at least Rs 10 million; • its market capitalisation must be Rs 50 million; or • its net income in the latest fiscal year (or in at least two of the three preceding fiscal years) must be Rs2. 5 million. It must have a minimum total float of Rsl. 1 million and a minimum public float at Rs500,000.
The market value of the public float must be Rs25 million and at least 25% of the total paid-up capital must be offered to the public. The OTCEI prescribes a minimum of two market makers and the duration of market making must be 18 months. Additionally, the company must have either a one-year operating history or a market capitalisation of at least Rs50 million. A member of the exchange must agree to sponsor the company. The sponsor of the issue must arrange for market makers to give buy and sell quotes in the securities for an initial period of 18 months.
Further, certain requirements – such as three-year dividend-paying track record in the last five years, appraisal and funding by financial institutions – which are commonplace on other exchanges are relaxed for listing on the OTCEI All companies listed on the OTCEI must conform to corporate governance requirements. The OTCEI caters primarily for companies in technology or growth sectors, but makes no special concessions for these companies, unlike the BSE. ii)Continuous listing requirements A company listed on the OTCEI must maintain: • net tangible assets of Rs7. 5 million; • a market capitalisation at Rs3. 5 million; or • net income in the latest fiscal year (or in at least two of the three preceding fiscal years) at Rsl. 5 million. The minimum total float must be maintained at Rs825,000 and the minimum public float at Rs375,000. The market value of the public float must be maintained at Rs19 million, with 25% of the paid-up capital in the hands of the public. The OTCEI also specifies corporate governance compliance as a continuous requirement of all companies listed on it. (B) FOREIGN COMPANIES: A company that is not incorporated in India cannot list itself on an Indian stock exchange.
However, a foreign company may raise capital in India by issuing IDRs. The mechanism for the issue of IDRs is similar to that for American depositary receipts and global depositary receipts. A foreign company intending to issue IDRS places the underlying shares with a depository in the home country, which then issues the depositary receipts to the investors. The minimum size of an IDR issue must be Rs50 million. Detailed guidelines are provided under the SEBI Guidelines for the Issue of IDRs. However, IDRS have yet to be notified as the government is reconsidering the SEBI notification.
As a result, no IDR issue has actually occurred to date. Companies listed on a foreign exchange may list on an Indian exchange provided they are incorporated in India. If a company that is listed on a foreign exchange wishes to list on an Indian exchange, it must follow all requirements under the SEBI Guidelines and the Disclosure and Investor Protection Guidelines like any other Indian company. The typical timeframe for a company to gain admission on an exchange is three to six months. CHAPTER-2 LONDON STOCK EXCHANGE 2. 1 BACKGROUND
The London Stock Exchange is the most important exchange in Europe and one of the largest in the world. It lists over 3,000 companies and with 350 of the companies coming from 50 different countries, the LSE is the most international of all exchanges. The London Stock Exchange is comprised of two different stock markets: a)the Main Market and the Alternative Investment Market (AIM). The Main Market is solely for established companies with high performance, and the listing requirements are strict. Approximately 1,800 of the LSE’s company listings trade on the Main Market, and the total market capitalization is over 3,500 billion. )The Alternative Investment Market on the other hand trades small-caps, or new enterprises with high growth potential. Over 1,060 companies list on this market, with a total capitalization of 37 billion. However, the shares of a company can be traded on the AIM market segment of the LSE without it being a listed security. AIM’s success has also attracted negative attention, prompting comments from the leaders of rival exchanges and regulatory authorities that AIM should raise its regulatory requirements. Financial markets are largely defined by regulation and technology.
Regulation includes financial services regulation, company law, and the specific regulations imposed by the markets themselves. Technology relates to the trading systems that allow market participants to interact with each other and to establish prices at which to trade. Comparisons between markets are generally difficult as both technology and regulation differ significantly. The LSE is completely electronic, but different shares are traded on different systems. Highly liquid shares are traded using the SETS automated system on an order driven basis. This means that when a buy and sell price match, an order is automatically executed.
For securities that trade less regularly, the London Stock Exchange implements the SEAQ system, where market makers keep the shares liquid. These market makers are required to hold shares of a specific company and set the bid and ask prices, ensuring that there is always a market for the stock. The LSE also has a new and growing exchange for equity derivatives called EDX London, created in 2003. In 2004, EDX traded an average of 382,599 contracts per day. Its aim is to become the leading derivatives market in the world. 2. 2 HISTORY OF LSE The London Stock Exchange history is proof that from something small, a huge giant can be built.
It can trace its history back more than 300 years. Starting life in the coffee houses of 17th century London, the Exchange quickly grew to become the City’s most important financial institution. In 1698, John Castaing begins to issue ‘at this Office in Jonathan’s Coffee-house’ a list of stock and commodity prices called ‘The Course of the Exchange and other things’. It is the earliest evidence of organised trading in marketable securities in London. In 1698, Stock dealers are expelled from the Royal Exchange for rowdiness and start to operate in the streets and coffee houses nearby, in particular in Jonathan’s Coffee House in Change Alley.
In 1720, The wave of speculative fever known as the South Sea Bubble bursts. Details of this can be found in many investment books – especially those related to investor or crowd psychology. It makes for an instructive and entertaining read!! Without doubt, this has to be one of the most interesting times in London Stock Exchange history. In 1761, A group of 150 stock brokers and jobbers form a club at Jonathan’s to buy and sell shares. In 1773, The brokers erect their own building in Sweeting’s Alley, with a dealing room on the ground floor and a coffee room above. The members soon name it the ‘The Stock Exchange’.
In 1801, On 3 March, the business reopens under a formal membership basis. On this date, the first regulated exchange comes into existence in London, and the modern Stock Exchange is born. Officially, London Stock Exchange history starts here. In 1812, The first codified rule book is created. In 1836, The first regional exchanges open in Manchester and Liverpool. In 1854, The Stock Exchange is rebuilt. In 1876, A new Deed of Settlement for the Stock Exchange comes into force. In 1914, The Great War means the Exchange market is closed from the end of July until the new year.
In 1923, The Exchange receives its own Coat of Arms, with the motto ‘Dictum Meum Pactum’ (My Word is My Bond). For many decades, this phrase summed up the code of those working on or in the exchange. In 1939, the start of World War Two. The Exchange is closed for 6 days and reopens on 7 September. The floor of the House closes for only one more day, in 1945 due to damage from a V2 rocket – trading then continues in the basement. In 1972, Her Majesty the Queen opens the Exchange’s new 26-storey office block. In 1973, First female members admitted to the market.
In 1986, Deregulation of the market, known as ‘Big Bang’: Ownership of member firms by an outside corporation is allowed. All firms become broker/dealers able to operate in a dual capacity. Minimum scales of commission are abolished. Individual members cease to have voting rights. Trading moves from being conducted face-to-face on a market floor to being performed via computer and telephone from separate dealing rooms. The Exchange becomes a private limited company under the Companies Act 1985. 1991 The governing Council of the Exchange is replaced with a Board of Directors drawn from the Exchange’s executive, customer and user base.
The trading name becomes ‘“The London Stock Exchange’. In 1995, AIM is launched. In 1997, SETS (Stock Exchange Electronic Trading Service) is launched to bring greater speed and efficiency to the market. The CREST settlement service is launched. In 2000, Shareholders vote to become a public limited company. In 2001, London Stock Exchange listed their shares in their own Main Market. 2. 3 REGULATORY FRAMEWORK The Main Market and AIM are the most important markets run by the LSE. There is a two-stage admission process for an applicant seeking a listing of its equity securities on the Full List; these two stages run in parallel.
First, the equity securities must be admitted to the Official List of the United Kingdom Listing Authority (UKLA) and second, the equity securities must be admitted to trading by the exchange. Until 2000 the LSE regulated the formal listing requirements for companies, at which point this regulatory function was transferred to the UK Listing Authority (UKLA), itself part of the UK Financial Services Authority (FSA). The Main Market of the LSE is a regulated market as defined by the EU Investment Services Directive whereas AIM is designated as an exchange regulated market.
In practice this means that companies seeking admission to the MM have to obtain prior approval by the UKLA – whose rules have to be consistent with EU legislation7 – as well as satisfy the requirements of the LSE. In contrast, the rules for admission to AIM are entirely determined by the LSE, and the main principle that has been adopted is that companies seeking admission should engage, and obtain the approval of, a nominated advisor (or “Nomad”), who will guide them through the process and certify that they are appropriate companies to be traded on AIM.
Nomads tend to be smaller investment banks or corporate finance advisory boutiques; to date the bulge-bracket investment banks have not entered this market. In order to complete the application process and to obtain and maintain its listing, the applicant will need to comply with: • The Listing Rules, which ontain rules and guidance focusing on eligibility and procedure for listing, and continuing obligations following listing; • The Prospectus Rules (which implement the EU Prospectus Directive), which contain rules, regulations and guidance outlining the circumstances in which a prospectus is required upon an issue of new shares and the information that prospectus must contain; • The Disclosure and Transparency Rules (which implement the EU Market Abuse Directive and the EU Transparency Obligations Directive), which contain rules and guidance in relation to the publication and control of ‘inside information’ and the disclosure of transactions by persons disc arguing managerial responsibilities and their connected persons; • Part VI of the Financial Services and Markets Act 2000; and • The Admission and Disclosure Standards issued by the exchange. 2. 3. 1CLASSIFICATION OF MARKETS The London stock exchange is actually divided into two parts. The first part is the main market, for which companies need at least three years of audited accounts to become members. The second part of the exchange is the Alternative Investment Market, otherwise known as AIM. 1. MAIN MARKET: The London Stock Exchange’s Main Market is the world’s most international market for the listing and trading of equity, debt and other securities.
Its location at the heart of the world’s leading financial centre makes it the ideal home to over 1,600 companies from 60 countries, including many of the world’s largest, most successful and most dynamic companies. Underpinned by London’s balanced and globally-respected standards of regulation and corporate governance, the Main Market represents a badge of quality for every company listed and traded on it and an aspiration for many companies worldwide. It offers the lowest cost of capital to issuers. The Main Market is also one of the world’s most international and diverse stock markets, with companies coming from nearly 60 countries across 42 sectors and vary widely in size, covering a spectrum from fledgling growth companies to global multinationals.
The market now has a combined capitalization of over ? 4. 3 trillion. The Main Market offers a choice of listing options. Equity, debt, depositary receipts (DRs) plus a range of other security types may be listed on the Main Market. The Main Market also offers companies the choice between a primary listing and a secondary listing. A primary listing requires a company to meet the highest standards of regulation and disclosure in Europe; it is not necessarily that company’s first or sole listing. To obtain a secondary listing a company must meet the standards set by the relevant EU directives; such a listing is not inevitably the issuer’s second listing.
A listing on the Exchange’s Main Market enables companies to access public capital to fund growth at the same time as gaining the key benefits of profile and liquidity. The extensive benefits provided by the Main Market are supported by its intelligent and respected framework of regulation and corporate governance. 2. ALTERNATIVE INVESTMENT MARKET: AIM is the London Stock Exchange’s international market for smaller growing companies. A wide range of businesses including early stage, venture capital backed as well as more established companies join AIM seeking access to growth capital. AIM is supported by a wide community of experienced advisers, ranging from Nomads and brokers to accountants, lawyers and public relations and investor relations firms.
AIM offers a market for those shares that either cannot obtain or do not want a full listing on the main market (also known as the Stock Exchange’s Official List). AIM is targeted at smaller companies with fewer costs and formalities in obtaining a listing. This often attracts young and fast companies. The Alternative Investment Market started on the London Stock Exchange in June 1995 and at the end of 1996 it replaced the Unlisted Securities Market. Companies which want to be listed have to meet the Public Offers of Securities Regulations (1995). This requires much less information than the full listing document. There is no minimum capitalisation for an AIM company, nor is there a minimum track record.
But, if the company has a history of less than two years, the directors and employees must undertake not to dispose of their shares for at least 12 months after listing. It is unambiguous that the MM is more highly regulated than AIM. The legal and trading systems are the same. The only complexity arises due to the need to investigate the potential impact of tax-driven strategies for changing market segment, although we find no significant impact arising from taxation. Consequently, although our focus is exclusively on companies trading on the London markets, the analysis has broader relevance to the cross-listing debate, and the general policy concern about the impact of regulation – in its various forms – on the competitiveness of markets. 2. 3. REGULATORY BODIES The Financial Services Authority (FSA) is a governmental body & has been the single regulator for financial services in the United Kingdom since December 2001 when the Financial Services & Market Act came into force. The UKLA is the relevant division of FSA through which it acts & is the competent authority for the regulation of the admission of securities to the Official list. The UKLA makes the rule governing admission to listing on the official list, monitors the continuing obligations of issuers & is responsible for enforcing its rules by various means, including through the use of its power to suspend or cancel a listing.
It deals with all applications for admittance to trading on the exchange. In response to fears of a foreign takeover bid for the exchange, the UK Parliament introduced the Investment Exchanges & Clearing Houses Bill to protect the exchange from the threat of excessive regulation. The Bill received royal assent on December 20, 2006 & grants the FSA the power to disallow excessive regulatory provision. The FSA, the independent financial services regulator, took action on Wednesday 5 April in response to the London Stock Exchanges inability to open its main trading systems until 3. 30pm. The FSA sees the failure of major trading systems to open as a serious matter that requires a prompt and thorough response.
The FSA will work with the LSE, which it supervises as a recognised investment exchange, to ensure that the lessons from the failure to open are learned rapidly and made public, and that any necessary changes to its systems and back-up arrangements are made immediately. The FSA has been working closely with the LSE and market participants to ensure that investor interests are safeguarded as far as possible. The FSA also offered guidance to retail brokers on handling customer orders. Brokers were asked to put messages on their phone systems and websites: •alerting customers to the problem; •telling customers that their orders would be executed as soon as practicable after the market re-opened; •and warning customers that prices could be volatile in the early hours of trading after re-opening.
The FSA found that most brokers were not taking orders from customers because of these problems. The FSA itself alerted investors to the problem on its own website and installed a link to the LSEs website so that investors could see the latest news there as it was posted. An applicant must satisfy the UKLA and the exchange that all the relevant conditions for listing have been met, and in order to do so must submit various documents for approval. The applications are dealt with by the UKLA and the exchange on a case by case basis, & the onus on accuracy & completeness of the documentation falls to the applicant, its directors & advisers. 2. 4 TYPES OF ENTITY ELIGIBLE FOR LISTING 2. 4. 1 FOREIGN COMPANIES:
Non-UK incorporated companies can be listed on the Official List. UK law governs the listing of a foreign incorporated company on the Official List even though the company is incorporated under the law of a foreign country. Foreign incorporated companies already listed on a foreign stock exchange can also list on the Full List. The rules and regulations that apply to foreign incorporated companies which apply for a primary or secondary listing on the Full List differ from those for UK incorporated companies. The application process and eligibility requirements for a secondary listing are similar to those for a primary listing and there is no fast-track procedure.
However, where an offer to the public or admission to trading on a regulated market has taken place in a country within the European Economic (if required), by the home member state and any supplements thereto, as translated into the relevant language, are valid for the public offer or admission to trading in all EEA member states. As a consequence, when an applicant is already listed on another EEA regulated market, the timeframe for gaining admission to the Full List is normally much shorter than would otherwise be the case. The time-framework of gaining admission to the full list can also be curtailed if the applicant has already prepared & issued a prospectus directive-complaint prospectus or a prospectus prepared in accordance with the laws of its country of incorporation & which is acceptable to UKLA under prospectus. This rule provides that the UKLA may approve a prospectus of an applicant that has its egistered office in a country outside the EEA if: •the prospectus has been prepared in accordance with the country’s laws & international standards set by international securities commission organizations, including International Organization of Securities Commissions disclosure standards; & •the information requirements, including information of a financial nature, are equivalent to those in Part VI of the Financial Services & Markets Act, the prospectus directive & the prospectus rules. 2. 4. 2 DOMESTIC COMPANIES: The following minimum eligibility requirements apply to all applicants seeking a listing of their equity securities on the Official List. a) Incorporation: An applicant must be duly incorporated or otherwise validly established in accordance with the laws of its place of incorporation & must operate in accordance with its constitutional documents. ) Validity: The securities being listed must conform with the laws of the applicant’s place of incorporation, be duly authorized according to the requirements of the applicant’s constitution & have any necessary statutory or other consents. c) Admission of Trading: the securities must be admitted to trading on the exchange (or any other recognized investment exchange) d) Transferability: The securities must be freely transferable, fully paid & free from all liens & restrictions on the right of transfer. It is possible to issue some shares partly paid, provided that the shares are freely transferable & investors have sufficient information to enable dealings to take place in the shares on an open and proper basis. ) Whole Class to be Listed: An application or listing of securities must: •if no securities of that class are already listed, related to all securities of that class, issued or proposed to be issued; or •if securities of that class are already listed, relate to all further securities of that class, issued or proposed to be issued. CHAPTER-3 COMPARATIVE ANALYSIS OF INDIA & LONDON STOCK EXCHANGE The aim of this study is to test the applicability of the stock market in a less developed country, namely, India, & to compare this behavior to that of stock markets in advance, industrialized countries, namely United Kingdom. For this purpose, the price behavior of a broadly reflective stock market index of common stocks listed on the Bombay Stock Exchange (BSE), is examined.
Both included randomness and independence. But there are certain different approaches in both the exchanges. In India, there are two codes which govern the stock exchange: a) SEBI Clause 49 Listed companies in India (with paid-up capital of Rs. 3 crore and more) have to comply with the corporate governance related provisions of Clause 49 of the Listing Agreement of Stock Exchanges. Clause 49 has been prepared by the Securities and Exchange Board of India (SEBI) b) CII code on Corporate Governance (1998): The Confederation of Indian Industry (CII) published India’s first comprehensive code on corporate governance (Desirable Corporate Governance: A Code) in 1998.
This Code was well received by Corporate India and many of its recommendations became part of subsequent regulations. In U. K, there are two code which govern the stock exchange: a) Combined Code (1998) The combined Code consolidated the principles and recommendations of the Cadbury, Greenbury and Hampel reports. The Code is divided into two sections. The first section outlines principles of best practice and their supporting provisions for companies. It covers topics such as composition and operations of Board, directors’ remuneration and relationship with shareholders, the supply of information, etc. The second section covers shareholder voting, dialogue with companies and the valuation of governance disclosures. b) Cadbury Report (1992)
The Cadbury Report, formally entitled The Report of the Committee on the Financial Aspects of Corporate Governance was published in December 1992. The establishment of the committee in May 1991 by the Financial Reporting Council, the London Stock Exchange, and the accountancy profession arose in response to the occurrence of financial scandals in the 1980’s involving UK listed Companies, which led to fall in investor confidence in the quality of company’s financial reporting. The committee addressed the financial aspects of corporate governance and produced a code of Best Practice. DIFFERENCE BETWEEN INDIAN AND LONDON STOCK EXCHANGE 1. SHORT-SELLING
In India, the need for introducing regulation of short sales her been felt for many years but no tangible progress has been made in evolving such regulation. A short sale is a sale of securities which the seller does not own at the time of affecting the sale. The U. K represent opposite approaches to the regulation of short sales. The U. K. never had, nor felt the need, for any regulation of short sales till now. Upto early 1994, London had a fortnightly settlement system. India too had a fortnightly system. Many people are mistakenly under the impression that India’s and U. K. ‘s fortnightly settlement systems were similar. It was not so. All trading of LSE was always delivery-based even when it had fortnightly settlements before adopting rolling settlement in 1994.
In contrast, in India, deliveries were only about 10% of the trading volume. Such a huge difference explains why the Indian stock market had recurrent cries throughout, but it was nothing like that in the U. K. Further, while London was able to change to rolling settlement system since 1994 smoothly and without resistance from brokers, the rolling settlement was stiffly opposed by the brokers community in India. In India, the High Powered Committee on Stock Exchange Reforms (1984–85) for the first time expressly stated that India needed short selling regulation on the U. S. pattern because of serious weakness of the governance of stock exchanges.
The Committee found that speculative activity in Indian stock market was excessively high on both bull and bear sides. In late 1996, due to prolonged depression in the stock market, the need for controlling bear-side speculative activity began to attract special attention. The SEBI appointed the B. D. Shah Committee to recommend a suitable system for regulating short selling. The Committee came up with the idea of “differential margins”, i. e. charging a higher margin during market’s declining phase on daily outstanding short sale position than on long purchase position and doing the opposite during a bull phase. 2. REGULATORY MECHANISM TO PREVENT INSIDER TRADING
In India, the Stock Exchange Board of India, the statutory body authorized to prohibit insider trading was established by an Act of Parliament in 1992 “to protect the interest of investors in securities and promote the development of, and to regulate the securities markets and for matters connected therewith or incidental thereto. ” One of its functions is to “prohibit insider trading in securities”. Soon after its formation, it came out with a few of regulations, one such being SEBI (Insider Trading) Regulations, 1992 (1992 Regulations). The 1992 Regulations were short with just 12 clauses, divided into three chapters, “Preliminary”, “Prohibition on Dealing, Communicating or Counseling” and “Investigation”.
These Regulations were amended exhaustively in February 2002 (2002 Amendments) and was renamed “Prohibition of Insider trading Regulations”, bringing these in line with the parent SEBI Act. Two Schedules were added, the first having two parts, Part A, a model code of conduct for prevention of insider trading for listed companies, and Part B, a similar code for other entities; the second, a model code of corporate disclosure practices for prevention of insider trading. In the United Kingdom, Sections 68 to 73 of the Companies Act, 1980 deal with the prevention of the abuse of insider trading by making certain dealings in shares criminal offences.
The above sections prohibit Stock Exchange dealings in shares by insiders and those who obtain information from them, and cover the procuring of such deals, the provision of information to make such deals possible; dealings by persons who have made or withdrawn a take-over offer and dealings by persons who have access to any such information. Indian Law satisfy four characteristics as per the U. K law •It must relate to particular securities or to a particular issuer(s) of securities and not to either securities or issuers in general. Thus, an information becomes insider information, even if it does not relate to a particular issuer but does relate to the industry within the issuer operates, so it may come within or without the issuer. According to many authors the exclusion of general information would appear to exclude unpublished information regarding Government Economic policy or the bank rate, which might be expected to impact on the market in a general way. •Information may be either be specific or precise, e. g. the information disclosing that a takeover bid is to be made is specific information or the information disclosing the price at which the bid is to be made is precise information. The importance lies in the capability of this information in excluding rumors or casual rema
