UNIT:2

CAPITAL MARKET –
SECONDARY MARKET
TOPICS TO BE COVERED
• SECONDARY MARKET
• STOCK EXCHANGE
• INDEX AND ITS CALCULATIONS
• OTCEI
• CORPORATE ACTIONS IN THE MARKET
• SEBI
• GLOBAL MARKET
SECONDARY MARKET:
• Secondary market refers to a market where securities are traded after being
offered to the public in the primary market and/or listed on the Stock
Market. The majority of trading is done in the secondary market
• In other words, securities already passed through the new issue market are
traded in this market. Generally, such securities are quoted on the Stock
Exchange and it provides a continuous and regular market for buying and
selling of securities. This market comprises all stock exchanges recognized by
the Government of India.
• The stock exchanges in India are regulated under the Securities Contracts
(Regulation) Act 1956.
 FUNCTIONS OF THE SECONDARY
MARKET
1. Ensure liquidity of capital
2. Continuous Market for securities
3. Mobilising Surplus Savings
4. Helpful in Raising New Capital
5. Safety in dealings
6. Smoothens the Price Movements
7. Investor Protection
Types of Secondary Market
Stock Exchanges:

•These are centralized platforms where securities are listed and traded. Example: NYSE,
NASDAQ, BSE, NSE.
•Transactions are facilitated by brokers, and there is a strict regulatory framework.

Over-the-counter (OTC) Markets:

•OTC markets are decentralized networks where securities are traded directly between
parties without a central exchange.
•They are often used for smaller, unlisted companies and certain derivatives.
 STOCK EXCHANGE

A stock exchange is defined under Section 2(3) of

the Securities Contract(Regulation) Act,1956, „ as
individuals whether incorporated or not,
constituted to assist, regulate or controlling
the business of buying, selling or dealing in
securities.
The word “ Stock Exchange” is made from two words ‘Stock’ and Exchange. The word
Stock means a part or fraction of the capital of a company, Exchange means a
transferring the ownership
Stock Exchange is an organized market for buying and selling corporate and other
securities. Here, securities are purchased and sold out as per certain well-defined
rules and regulations. It provides a convenient and secured mechanism or platform
for transactions in different securities.
Such securities includes shares and debentures issued by public company which are
duly listed at the stock exchange and bonds and debentures issued by government,
public corporations and municipal and port trust bodies.
FEATURES OF STOCK EXCHANGE
1. Organized Market

2. Formation and Membership

3. Only member can trade

4. Listed securities

5. Operates as per rules

6. Market for securities

7. Second-hand securities

8. Recognition from central government

Functions of Stock Exchange
 Marketability of securities
 Price determination and continuity
 Mobilising surplus savings
 Liquidity
 Safety of transactions
 Barometer of Economy
 STOCK MARKETS IN INDIA
• The first organized stock exchange formed in India was Bombay (now Mumbai) stock exchange started in 1875 and it stated to be the
oldest in Asia.

• Ahmadabad stock exchange in the 1894 to facilitate dealings in the shares of textile mills established there.

• The Calcutta (now Kolkata) stock exchange was started in 1908 to provide the market for shares of Plantations and Jute mills.

• Madras stock exchange (now Chennai) was started in 1937. The Securities Contract (Regulation) Act, 1956.

• 1964 UTI created , first mutual fund

• IPO reliance first IPO

• 1986 BSE Sensex created, 30 share index, face value 100

• 1988 SEBI established 1992 statutory power granted

• 1992 NSE established

• NIFT50 1996

• Till the early 1990, the Indian stock market comprised regional stock exchanges with the BSE heading the list.
POST-REFORMS MARKET SCENARIO
• After the initiations of reforms in 1991, the Indian secondary market now has a
four-tier form.
• Regional Stock Exchanges:There were 15 regional stock exchanges in India. The
Indian market, at present has 6 regional stock exchanges. The National Stock
Exchanges (BSE and NSE): The NSE came into existence in 1992 with the best
global practices
• The Over the Counter Exchange of India (OTCEI): The OTCEI was set up in 1992 as
a stock exchange, providing small and medium sized companies the means to
raise capital.
• The Inter-Connected Stock Exchange of India (ISE): Stock exchange of stock
exchanges, commenced its trading operations in February 26, 1999.
LISTING REQUIREMENTS
• A company who wants its securities to be traded on the floor of a stock
exchange must list its securities on an exchange.
• A company can get its securities listed on more than one stock exchange.
• Earlier it was compulsory for the companies to list on the regional stock
exchange that is nearest to its registered office, but now it is not mandatory.
• A security listed on one exchange is permitted for trading on the other
exchange.
 BOMBAY STOCK EXCHANGE (BSE)
• BSE is the oldest stock exchange of Asia.
• The extensiveness of the indigenous equity broking industry in India led to the
formation of the Native Share Brokers Association in 1875, which later became
Bombay Stock Exchange Limited (BSE).
• In 1995, the trading system transformed from open outcry system to an online
screen based order-driven trading system.
• The exchange opened up for foreign ownership (foreign institutional investment).
• Allowed Indian companies to raise capital from abroad through ADRs and GDRs.
• Expanded the product range (equities/derivatives/debt)
• Introduced the book-building process and brought in transparency in IPO issuance.
• Depositories for share custody (dematerialization of shares).
• Bombay Stock Exchange secured 10th position globally
• The Bombay Stock Exchange is the largest in the world in terms of the number of
listed companies.
• 2010 mutual fund distribution platforms, BSE star
• Listing requirements:
 NATIONAL STOCK EXCHANGE (NSE)
• based on the recommendations of the high-powered Pherwani Committee.
• The National Stock Exchange was incorporated in 1992 by the Industrial Development Bank of India
(IDBI), the Industrial Credit and Investment Corporation of India (ICICI), the Industrial Finance
Corporation of India(IFCI), all insurance Corporations, selected Commercial Banks, and others.
• Trading at NSE takes place through a fully automated screen-based trading mechanism that adopts
the principle of an order-driven market.
• NSE brings an integrated trading network across the nation.
• Investors can trade at the same price from anywhere in the country since inter-market operations are
streamlined coupled with countrywide access to the securities.
• Delays in communication, late payments, and the malpractices prevailing in the traditional trading
mechanism can be done away with greater operational efficiency and informational transparency in
the stock market operations, with the support of a total computerized network.
 SECURITIES AND EXCHANGE BOARD OF INDIA
(SEBI)
• In India trading of securities and the operations of the stock exchanges are governed by
the provisions of the Securities Contracts (Regulation) Act, 1956.
• While the capital market including the market for equity and debt securities is
regulated by SEBI.
• It was established under the Securities and Exchange Board of India Act, 1992 as a
regulatory authority for the capital markets in India.
• SEBI has good full autonomy and authority to regulate and develop the capital market.
 Objectives of SEBI

• Protection of the interest of the investors in securities.

• Development of the securities market
• Regulation of the securities market
• Supervision of securities market
 LEGAL FRAMEWORK OF SEBI

• The Securities Contracts (Regulation) Act 1956

• Securities and Exchange Board of India Act 1992
• The Depositories Act 1996
• The Securities Laws (Amendment) Act 2014
• The Finance Act
MAIN FUNCTIONS OF SEBI
PROTECTIVE FUNCTIONS
The protective function implies the role that SEBI plays in protecting the investor interest and also
that of other financial participants. The protective function includes the following activities.
a. Prohibits insider trading: Insider trading is the act of buying or selling of the securities by the
insiders of a company, which includes the directors, employees and promoters. To prevent such
trading SEBI has barred the companies to purchase their own shares from the secondary market.
b. Check price rigging: Price rigging is the act of causing unnatural fluctuations in the price of
securities by either increasing or decreasing the market price of the stocks that leads to
unexpected losses for the investors. SEBI maintains strict watch in order to prevent such
malpractices.
c. Promoting fair practices: SEBI promotes fair trade practice and works towards prohibiting
fraudulent activities related to trading of securities.
d. Financial education provider: SEBI educates the investors by conducting online and offline
sessions that provide information related to market insights and also on money management.
REGULATORY FUNCTION
Regulatory functions involve establishment of rules and regulations for the financial
intermediaries along with corporates that helps in efficient management of the
market.
The following are some of the regulatory functions.
a. SEBI has defined the rules and regulations and formed guidelines and code of
conduct that should be followed by the corporates as well as the financial
intermediaries.
b. Regulating the process of taking over of a company.
c. Conducting inquiries and audit of stock exchanges.
d. Regulates the working of stock brokers, merchant brokers.
DEVELOPMENTAL FUNCTION
Developmental function refers to the steps taken by SEBI in order to provide the
investors with a knowledge of the trading and market function.
The following are some of the regulatory functions.
a. Training of intermediaries who are a part of the security market.
b. Introduction of trading through electronic means or through the internet by
the help of registered stock brokers.
c. By making the underwriting an optional system in order to reduce the cost of
the issue.
 BUYBACK OF SHARES.
• Buy-Back is a corporate action in which a company
buys back its shares from the existing
shareholders usually at a price higher than market
price. When it buys back, the number of shares
outstanding in the market reduces.
• A buyback allows companies to invest in themselves. By
reducing the number of shares outstanding on the
market, buybacks increase the proportion of shares a
company owns. Buybacks can be carried out in two
ways:
• Shareholders may be presented with a tender offer
whereby they have the option to submit (or tender) a
portion or all of their shares within a certain time
frame and at a premium to the current market price.
This premium compensates investors for tendering
their shares rather than holding on to them.
• Companies buy back shares on the open market over an
extended period of time.
The reasons and advantages for buy-back:

• To improve earnings per share;

• To improve return on capital, return on net worth and to enhance the long-term
shareholder value;

• To provide an additional exit route to shareholders when shares are under valued
or are thinly traded;

• To enhance consolidation of stake in the company;

• To return surplus cash to shareholders;

• To achieve optimum capital structure;

• To support share price during periods of sluggish market conditions;

• To service the equity more efficiently.

Indices
Stock market indices are a trusted weather-wane to identify
changes in the financial markets. The indices serve as performance
indicators, showing how the market either overall or in a particular
market segment is performing. Equities from similar companies or
those that meet a set of criteria are selected to create a stock
market index.
These shares are already traded and listed on the exchanges. A
variety of factors, such as market capitalization, industry, and
segment can be used to construct share market indices.
Every stock market index monitors the performance and price
changes of the individual stocks that make up the index.
https://in.investing.com/indices/
major-indices

• https://in.investing.com/indices/major-indices
What is International Investing?
• By investing in international markets, you can benefit
from the growth of companies in other countries, which
can help diversify your investment portfolio and reduce
risk.
How does Global Exposure Help?
• Volatility Shield: When India faces market turbulence, other nations may
offer stability. By investing in countries with low correlation to India, you can
protect your investments during local market downturns.
• Access to Global Giants: Investing globally lets you participate in the
success of foreign giants like FAANG companies (Facebook, Apple, Amazon,
Netflix, Alphabet known as Google). Just as you contribute to their growth as a
consumer, investing in them through markets like the US can be lucrative.
• Tapping into the Global Economy: India, contributing 3.37% to the global
GDP according to Worldometer, implies that we're currently exposed to only
about 3% of the world's economic opportunities. That is a vast untapped
potential of around 97% awaiting exploration. The US alone makes up roughly
26% of the global GDP, highlighting the substantial economic landscape
beyond our borders.
• Reduced Risk Through Diversification: Including
developed markets such as the US in your portfolio can
help stabilize returns. These markets often operate on
different economic cycles than India, potentially lowering
overall portfolio volatility.
• Currency Benefit: Investing globally in stocks can provide
currency benefits. When the foreign currency strengthens
against your home currency, your investment returns
increase when converted back. Conversely, a weaker
foreign currency reduces returns. This currency impact adds
a layer of diversification to your portfolio.Top of Form
This means your Rs.
5 lakh investment
would’ve been worth
around Rs 28.1
lakhs today,
achieved over 10
years. This strategy
offers significant
growth without the
stress of picking
individual stocks,
requiring only
patience.
What Risks Should You Consider When Investing in
the Global Stock Market?

• currency fluctuations
• Political and economic instability
• market volatility.
• different regulatory environments and accounting
standards,
Ways to Invest in Foreign Stocks
1. American Depository Receipts (ADRs)
2. Global Depository Receipts (GDRs)
3. Foreign Direct Investing
4. Global Mutual Funds
5. Exchange-Traded Funds (ETFs)
6. Multinational Corporations (MNCs)

Refer the values available on the investments made by

countries/in global
 Global Equity Market Tokyo Stock Exchange (TSE)
New York Stock Exchange (NYSE)
Nasdaq

Hong Kong Stock Exchan

Shanghai Stock Exchange
London
(SSE)
Stock Exchange (LSE)

Euronext Stock
Exchange
• The process of Buying or Selling Stocks online has been
made smooth and seamless. The amount is debited
from your account and you receive the shares in your
DEMAT Account. Same way, for sale transactions, shares
are debited from your DEMAT Account while the selling
price is credited to your banking account.
• To ensure smooth operations and minimal risk,
regulators have designed a Trading Cycle, as well as, a
Clearing and Settlement Process.
• F&O equities and remaining stocks in the T+2
Settlement Cycle switched to the T+1 Settlement Cycle
started from January 27, 2023.
• All equities will T+1 Cycle.
Clearing and Settlement Process When You
Buy a Share

• You require a DEMAT Account, where your shares are

held and used for trading, as well as a bank account for
financial transactions, in order to purchase or sell shares.
T-Day
T+1 day
T+2 settlement
T+0 settlement version
How does clearing and settlement works when share bought?
How does clearing and settlement works when share sold?
The bodies participating in clearing and settlement(Depository, clearing
cooperation, clearing members/custodians, clearing banks)
• Trade Day + 1
• https://www.youtube.com/watch?v=V8vDuspTerY

• https://www.youtube.com/watch?v=1-MtK-UPeJ0

• https://unacademy.com/content/upsc/study-material/
commerce/sebi-as-a-regulator/
 Reverse Stock Split
• A reverse stock split is also known as a stock consolidation, stock merge, or share
rollback
• A reverse stock split consolidates the number of existing shares of stock held by
shareholders into fewer shares.
• A reverse stock split does not directly impact a company’s value (only its stock
price).
• It can signal a company in distress since it raises the value of otherwise low-priced
shares.
• Remaining relevant to investors and avoiding share delisting are the most
common reasons corporations pursue this strategy.
1. Tesla (TSLA) – 3-for-1 Reverse Split (August 2022)

• Tesla conducted a 3-for-1 reverse stock split in August 2022. Shareholders received 1 new share

for every 3 shares they held. This split was aimed at making Tesla's stock more accessible to a

broader base of investors.

2. Amazon (AMZN) – 20-for-1 Reverse Split (June 2022)

• Amazon completed a 20-for-1 reverse stock split in June 2022. This move was part of Amazon’s

strategy to make its stock more affordable after its price surged, especially after its previous

split in 1999. The reverse split reduced the number of shares outstanding, which resulted in a

higher price per share.

3. Apple (AAPL) – 4-for-1 Reverse Split (August 2020)

• Apple executed a 4-for-1 reverse stock split in August 2020. This was intended to make Apple’s

stock more affordable to individual investors, despite the company's higher share price.
• The Securities and Exchange Board of India (SEBI) has
laid out several guidelines to regulate the processes
related to dividends, ex-dividend dates, record dates,
and book closure dates.
• These guidelines are designed to ensure transparency
and fairness in the financial markets, and they help
investors and stakeholders understand how dividend-
related processes work.
Dividend Declaration Date
• This is the date on which the board of directors of a
company announces the dividend.
• The dividend amount, the ratio, and other important
details are declared on this date.
Ex-Dividend Date
The ex-dividend date is the first day when the stock
trades without the entitlement to the declared dividend.
This date is crucial because any buyer purchasing the
stock on or after the ex-dividend date will not be entitled
to the dividend.
SEBI Guidelines:
• SEBI has specified that the ex-dividend date should be
set two working days before the record date.
• On the ex-dividend date, the share price usually drops by
the amount of the dividend being declared.
• The ex-dividend date is typically decided by the stock
exchanges based on the declaration date and the record
date.
Record Date
• The record date is the cut-off date set by the company to
determine which shareholders are eligible to receive the
dividend. Only those shareholders who are recorded as
the owners of shares on the record date will be entitled
to the dividend.
SEBI Guidelines:
• Companies must ensure that the record date is not earlier
than the ex-dividend date.
• The record date is typically decided by the company’s board,
and the stock exchanges are notified in advance.
• The company can also decide the record date for other
corporate actions, like stock splits or rights issues.
Book Closure Date
• The book closure date is the period during which the company’s register
of members is closed to update the records. During this time, no
transfers of shares can take place.
SEBI Guidelines:
• The book closure date must coincide with the record date, and the
company must notify the stock exchanges and investors well in advance.
• SEBI mandates that companies notify the book closure dates at least 7
days before the date of closure.
Notice to Stock Exchanges
• SEBI Guidelines: Companies are required to notify the
stock exchanges at least two working days before the
record date or book closure date.
• The notice should include the details of the dividend
declaration, ex-dividend date, record date, and book
closure date.
• XYZ Ltd announces a book closure period from January
20 to January 24, and the record date is January 25.
• During the book closure period (January 20–24), no
shareholder transfers will be processed.
• If you are a shareholder on January 20, you will be
eligible for the dividend on January 25, provided you hold
the shares until the record date
• Company: XYZ Ltd
• Dividend Declared: ₹10 per share
• Ex-Dividend Date: 15th March
• Record Date: 17th March
• Book Closure Period: 12th to 16th March
Scenario 1:
• If you buy the shares on 13th March, you will not receive the
dividend because the ex-dividend date was 15th March. Therefore,
you are not eligible for the dividend.
Scenario 2:
• If you buy the shares on 10th March, you will receive the dividend
because you were a shareholder before the ex-dividend date (15th
March) and the company will recognize you as eligible based on the
record date of 17th March.
Scenario 3:
• If you buy the shares after the ex-dividend date, on 16th March,
you will not be eligible for the dividend.
• SEBI’s guidelines aim to ensure transparency and protect
investors. Key dates such as the ex-dividend date,
record date, and book closure date play a crucial role
in determining who gets the dividend and when.
• By ensuring these dates are communicated properly and
well in advance, SEBI helps shareholders make informed
decisions regarding their investments and eligibility for
dividends