UNIT-3

Stock exchange
Meaning and Definition of Stock exchange

Meaning:
Stock exchange is a specific place ,where trading of the securities, is arranged
in an organized method. In simple words, it is a place where shares, debentures
and bonds (securities) are purchased and sold. The term securities include
equity shares, preference shares, debentures, government bonds, etc.including
mutual funds .
Definition:
According to the Securities Contracts (Regulation) Act 1956, the term 'stock
exchange' is defined as ''An association, organization or body of individuals,
whether incorporated or not, established for the purpose of assisting, regulating
and controlling of business in buying, selling and dealing in securities."
 Functions of Stock exchange
• Ideal meeting place
• Mobilization of savings
• Providing safety to investors
• Distribution of new securities
• Ready market
• Liquidity
• Capital formation
• Speculative trading
• Sound price setting
• Economic barometer
• Dissemination of market data
• Perfect market condition
• Seasoning of securities
 Functions of Stock exchange
• Optimal resource allocation
• Platform for public debt
• Clearing house for business information
• Evaluation of securities
• True market mechanism
• Efficient channelizing of savings
• Investor education
• Fair price determination
• Industrial financing
• Company regulation
 FUNCTIONS OF STOCK EXCHANGE
A stock exchange performs various important functions as discussed below.
          Liquidity : It is the stock exchange that provides liquidity to private investment
in corporate enterprises. It provides marketability along with liquidity to the product
called securities. In other words, the facility of stock exchange provides a two-way
outlet as it transforms money into investment and vice versa, without much delay.
         Promotes capital formation : A stock exchange motivates the investors to
invest their savings in the securities of the reputed companies. Stock exchange is the
market where buying and selling of securities continually goes on. As a result, capital
flows continually into business -field. Thus, formation of capital goes on.,
          Fair evaluation of securities : A .stock exchange like any other market
provides a mechanism for evaluating the prices of securities through the basic law of
demand and supply.
Stock exchange prices help to check the real worth of the securities in the
market. The prices quoted on stock exchange are provided with wide, publicity
through' electronic as well as print media. The working of stock exchanges is on line
which help investors keep in touch with price update and know real worth of their
investment.
Protects investors interest : All the transactions in the stock exchanges are effected and controlled
by the Securities Control (Regulation) Act 1956. The stock exchanges protect the interests of
the investors through the strict enforcement of their rules and regulations.
The malpractices of the brokers are punishable with heavy fine, suspension of their membership
and. even imprisonment.
    Economic Barometer : A stock exchange serves as a reliable barometer of a country's economic
status. Stock exchanges support and promote industrial development. It stimulates investment
in productive sector which accelerates the process of economic development of the country.
                   Motivation to Management : A stock exchange allows the trading of listed securities
only. Listing procedure requires to comply with certain guidelines for protecting the interests
of investors and obviously are under strict supervision of stock exchange. If companies do not
comply with the rules and regulations of the exchange, the shares of a company can be
delisted. To avoid such unfavorable and undesirable consequences every company manages its
affairs more cautiously and effectively.
                 Best utilization of capital : The stock exchange regulates and controls the flow of
investment from unproductive to productive, uneconomic to economic, unprofitable to
profitable enterprises. Thus, savings of the people are channalised into industry yielding good
returns and underutilization of, capital is avoided.. As the stock exchange provides an account
of price variations of the securities listed on it (upward or downward fluctuations) it would be
an opportunity for the investors to switch their investments. This would, keep companies
performing in the best possible way.
 DIFFERENCE BETWEEN STOCK EXCHANGE AND COMMODITY EXCHANGE
No FEATURE STOCK EXCHANGE COMMODITY EXCHANGE

Offering hedging or price insurance services and liquidity to

1 Function Providing easy marketability securities

2 Object Object is facilitating capital formation and Object is facilitating goods flow through rsisk reduction
marketing best use of capital resources
3 Participants Investors and speculators Producers, dealers, traders and a body of speculators
Period of Cash, ready delivery and dealings for account Instant cash dealings and a settlement period of 2 or 3
4
Dealings for a fortnight months for Futures Market dealings.

5 Articles Industrial securities such as stock & bonds and Only durable, graded and goods having large volumes of
Traded Govt securities such as public debt etc trade price uncertainties and uncontrolled supply.

Speculation ensures saleability of securities

6 Speculation affording a broad, ready, liquid and continuous Speculation ensures assumption and absorption of price risk
market of securities

7 Forward Forward dealings are simplified as securities Standard are to be fixed for deliverable grade to facilitate
Contract are fully standardized future contract

As seller has to deliver the agreed securities, cornering is diffucult as the seller has option to deliver
8 Cornering cornering is easy standard or other deliverable goods

Price As regards forward dealings only one

9 quotation quotation is possible For future dealings multiple quotations are possible.
 LISTING AGREEMENT

An agreement entered into between a stock exchange and a company,

whereby security listing is proposed is called a “listing agreement”.

Features
Following are the features of a listing agreement.

SCRA Provisions
The agreement contains provisions in accordance with the rule 19(3) of SCR
Rules (SCRR), 1957; the provisions can be modified, amended or latered from
time to time in consonance with the conditions prevailing in the securities
market and the general economy.

SED direction
The Stock Exchange Division (SED) of the Ministry of Finance periodically
issues issues directions to SEBI, to amend the listing agreement provisions so
as to make the listing agreement more compatible and adaptable to the
changing capital market environment.
 SEBI POWERS
SEBI is authorized to issue guidelines, order and directions to all the recognized stock exchanges, to amend the listing agreement more in particular reference to the recommendations of Malegam & Birla Committee. The purpose is to achieve the cherished objectives of better investor protection and disclosure of more information in the most transparent manner to the public at large, who are directly or inderectly associated with the affairs of the company.

SEBI is empowered under rule 19(7) of SCRR, 1957 to waive or relax the enforcement of all or any of the listing provisions either on its own motion or on recommendation of stock exchanges.

Applicability
The provisions contained in the listing agreement will be applicable to the body corporate constituted by an Act of Parliament or any State Legislature with equal force, besides being applicable to a body corporate under the Companies Act.
Stock Exchange Powers
The stock exchange is empowered under the rule 19(5) of SCRR, 1957, to suspend or
withdraw an admission to dealing in securities of company or body corporate, for
breach or non compliance with the listing provision on giving an opportunity of being
heard in writing. In an eventuality where any such withdrawal or suspension
exceeds 3 months the corporate may appeal to SEBI. The SEBI may either vary or
set aside the decision of the stock exchange. The decision upon being
communicated to the stock exchange shall have to be implemented by the stock
exchange accordingly.
 LISTING – BENEFITS
Listed securities command the following advantages:

1. Easy marketability and liquidity that ensures easy raising of capital

2. High collateral value for bank loans.
3. Easy evaluation of the real worth of securities.
4. Safeguarding general public interest by ensuring equitable allotment,
easy transfer, disclosure of proper information, etc,
5. Availability of tax advantages to listed securities.
6. Provision of selling forum for companies to mop up additional capital in
future.
7. Higher status and reputation for the company by enjoying the confidence
of investing public.
8. Assurance of genuineness of securities
9. Provides an assurance of an existence of good faith.
10. Providing activities of quick transfer registration
 CONSEQUENCES OF NON-LISTING
1. Any allotment of shares or debentures on an
application shall be void
2. Any application money collected is to be refunded
without interest, within 8 days after the company
becomes liable to repay it
3. Joint and several liabilities to every director of the
company after the expiry of the aforesaid 8th day to
repay the amount with interest at prescribed rate
 NEW ENTRY NORMS FOR UNLISTED COMPANIES
With reference to the SEBI’s Disclosure and Investor Protection Guidelines, August 12, 1997 following are
the tightened entry norms for unlisted companies.
1. Dividends should have been paid immediately preceding three years before public issue.

2. Fee pricing of securities possible where the company has shown net profits in the immediately preceding
three years subject to its fulfilling the existing disclosure requirements

3. Compliance with the entry norms only if the post-issue net worth becomes more than five times the pre-
issue net worth.

5. Conversion of partly paid-up shares into fully paid-up or forefeit the same, before making a public right
issue.

6. Only such securities that provide for lock-in facility can be offered for promoters contribution for which a
specific written consent has been obtained from the share holders.

7. Mandatory appointment of a “Registrar to an Issue” for rights issue.

8. A provisions has been made regarding disclosure of the share holding of the promoters whose name figure
in the paragraph on “Promoters and their Background”.