Definition of Secondary Market

Role and Importance

Stock exchanges are intricately inter-woven in the fabric of nation’s economic life. Without a stock exchange, the saving of the community - sinews of economic progress and productive efficiency - would remain underutilized. The task of mobilisation and allocation of savings could be attempted in the old days by a much less specialised institution than the stock exchange. 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 investments into cash at a given time. The answer was a ready market for investments and this was how the stock exchange came into being. Stock exchange means anybody 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:

Shares, scrips, stocks, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; Government securities; and Rights or interest in securities.

Nature and Function of Stock Exchange

There is an extraordinary amount of ignorance and of prejudice born out of ignorance with regard to the nature and functions of stock exchange. As economic development proceeds, the scope for acquisition and ownership of capital by private individuals also grows. Alongwith it, the opportunity for stock exchange to render the service of stimulating private savings and channelling such savings into productive investment exists on a vastly great scales. These are services which the stock exchange alone can render efficiently. It is no exaggeration to say that hi a modern industrialist society, which recognises the rights of private ownership of capital, stock exchanges are not simply a convenience, they are essential. In fact, they are the markets which exist to facilitate purchase and sale of securities of companies and the securities or bonds issued b the government in the course of its borrowing operation. As our country moves towards liberalisation, this tendency is certain to be strengthened. The task facing the stock exchanges is to devise the means to reach down to the masses, to draw the savings of the man in the street into productive investment, to create conditions in which many millions of little investors in cities, towns and villages will find it possible to make use of the facilities, which have so far been limited to the privileged few. This calls for far-reaching changes, institutional as well as operational.

The stock exchanges in India, thus, have an important i-ole to play in the building of a real shareholders democracy. Aim of the stock exchange authorities is to make it as nearly perfect in the social and ethical sense as it is in the economic. To protect the interests of the investing public, the authorities of the stock exchanges have been increasingly subjecting not only its members to a high degree of discipline, but also those who use its facilities—joint stock companies and other bodies in whose stocks and shares it deals. There are stringent regulations to ensure that directors of joint stock companies keep their shareholders fully informed of the affairs of the company. In fact, some of the conditions that the stock exchange imposes upon companies before their shares are listed are more rigorous and wholesome than the statutory provision such as those contained in the Companies Act.

Apart from providing a market that mobilises and distributes the nation’s savings, the stock exchange ensures that the flow of savings is utilised for the best purpose from the community’s point of view. Free markets are not simply a matter of many buyers and sellers. If the prices at which stocks and shares change hands are to be ‘fair’ prices, many important conditions must be satisfied. It is the whole vast company of investors, competing with one another as buyers and sellers, that decide what the level of security prices shall be. But the public is prone to sudden swings of hope and fear. If left entirely to itself it would produce needlessly violent and often quite irrational fluctuations. The professional dealers inside the stock exchange and those outside who depend upon them absorb a large part of the stock of these movements. These are valuable activities. So as to ensure that the investors reap the full benefit of them, they (dealers as well as investors) need to be regulated by a recognised code of conduct. Fair prices and free markets require, above all things, clean dealings both by professionals and by the investors—and dealings based upon up to date and reliable information easily accessible to all.

In case the investment markets are not active and free or adequate information were not available promptly and widely, the unscrupulous people would be able to manipulate particular prices for their own ends. In any of these contingencies, the relative values of securities would no longer be ‘true’ values, so that the relative yields obtainable from them would be mutually distorted. The signposts which, in a well regulated market, show the way along which savings ought to move, would point u the wrong directions. Good businesses would get less, and indifferent or bad businesses more finance than they deserved. The savings of the community would be misdirected and wasted. In addition, some investors would incur losses which they might otherwise have avoided, and others might reap profits which not otherwise could have been made.

Free and active market in stock and shares has become a pre requisite for the mobilisation and distribution of the nation’s savings on the scale needed to support modern business, The exchange by a process of prolonged trial and error, which is b no means complete, has been continuously streamlining its structure to meet these wide and. ever growing responsibilities to the pub1ic.

Stock exchanges provide an organised market for transactions in shares and other securities. As of 2003, there are 23 stock exchanges in the country, out of that 20 being regional ones with allocated areas of operation. Of the 9,855 or so public companies that have listed their shares in stock exchanges, around 500 account for 99.6 per cent of the trading turnover, nearly all of which is on the primary exchanges i.e. Bombay Stock Exchange and National Stock Exchange. The pie chart in figure below shows the distribution of trading activity in terms of volume in the exchanges. The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) together account for nearly 72 per cent of all capital market activity in India. The other major exchanges are the Calcutta, Delhi, and Ahmedabad stock exchanges. The remaining ex changes account for only 4 per cent of the Indian capital market activity.

The number of regional stock exchanges in each of the four zones—east, west, north, south—that the country can be divided into is given in Table. The north zone has five stock exchanges. The east zone has three stock exchanges. The west and south zones have six stock exchanges each.

The share of the 20 regional bourses, which accounted for about 45.63 per cent of the total trading volumes in 1995-96, had reduced alarmingly to only about 16 per cent by 2001-The Bombay Stock Exchange, though initially established as a regional stock exchange has assumed a national perspective in recent years with the introduction of networking and online trading mechanisms.

Besides the regional stock exchanges, three national stock exchanges have been set up in India. They are the National Stock Exchange, Over the Counter Exchange of India Limited (OTCEI), and Inter connected Stock Exchange of India Limited (ISE). All these exchanges have their head office at Mumbai

History of Stock Exchanges in India

The origin of the stock exchanges in India can be traced back to the later half of 19th century. After the American Civil War (1860-61) due to the share mania of the public, the number of brokers dealing in shares increased. The brokers organised an informal association in Mumbai named “The Native Stock and Share Brokers Association” in 1875.

Increased activity in trade and commerce during the First World War and Second World War resulted in an increase in the stock trading. Stock exchanges were established in different centres like Chennai, Delhi, Nagpur, Kan Hyderabad and Bangalore. The growth of stock exchanges suffered a setback after the end of World War. Worldwide depression affected them.

Most of the stock exchanges in the early stages had a speculative nature of working without technical strength. Securities and Contract Regulation Act, 1956 gave powers to the central government to regulate the stock exchanges. The stock exchanges in Mumbai, Calcutta, Chennai, Ahmedabad, Delhi, Hyderabad and Indore were recognised by the SCR Act. The Bangalore stock exchange was recognised only in 1963. At present we have 23 stock exchanges and 21 of them had hardware and software compliant to solve Y2k problem.

Till recent past, floor trading took place in all the stock exchanges. In the floor trading system, the trade takes place through open outcry system during the official trading hours. Trading posts are assigned for different securities where buy and sell activities of securities took place. This system needs a face to face contact among the traders and restricts the trading volume. The speed of the new information reflected on the prices was rather slow. The deals were also not transparent and the system favoured the brokers rather than the investors.

The setting up of NSE and OTCEI with the screen based trading facility resulted in more and more exchanges turning towards the computer based trading. Bombay stock exchange introduced the screen based trading system in 1995, which is known as BOLT (Bombay On-line Trading System.

Organisation of Stock Exchange

The Bombay Stock Exchange

The Indian stock market is one of the oldest in Asia. By the 1830s, business in corporate stocks and shares in bank and cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognised by banks and merchants.

In 1860-61, the American Civil War broke out and cotton supply from the United States of America and Europe was stopped. This resulted in the “Share Mania” for cotton trading in India. The number of brokers increased to between 200 and 250. However, at the end of the American Civil War, in 1865, a disastrous slump began - for example, a Bank of Bombay share that had touched ` 2,850 could only be sold at ` 87.

At the same time, brokers found a place in Dalal Street, Bombay, where they could conveniently assemble and transact business. In 1887, they formally established the “Native Share and Stock Brokers’ Association”. In 1895, the association acquired premises in the same street; it was inaugurated in 1899 as the Bombay Stock Exchange.

The Bombay Stock Exchange is governed by a board, chaired by a non-executive chairman. The executive director is in charge of the administration of the exchange and is supported by elected directors, Securities Exchange Board of India (SEBI) nominees, and public representatives.

The objectives of the stock exchange are

To safeguard the interest of investing public having dealings on the exchange.

To establish and promote honourable and just practices in securities transactions.

To promote, develop and maintain well-regulated market for dealing in securities.

To promote industrial development in the country through efficient resource mobilisation by the way of investment in corporate securities.

The National Stock Exchange

The National Stock Exchange of India Limited was set up to provide access to investors from across the country on an equal footing. NSE was promoted by leading financial institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company, unlike other stock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the wholesale debt market (WDM) segment in June 1994. The capital market (equities) segment commenced operations in November 1994, and operations in the derivatives segment commenced in June 2000. The organisational structure of NSE (Figure) is through the link between National Securities Clearing Corporation Ltd. (NSCCL), India Index Services and Products Ltd. (IISL), National Securities Depository Ltd. (NSDL), DotEx International Limited (DotEx) and NSE.IT Ltd. The National Securities Clearing Corporation Ltd., a wholly owned subsidiary of NSE, was incorporated in August 1995. It was set up to bring and sustain confidence in the clearing and settlement of securities, to promote and maintain short and consistent settlement cycles, and to provide counterparty risk guarantee.

Organisational structure of National Stock Exchange

India Index Services and Products Limited, a joint venture between NSE and the Credit Rating Information Services of India Limited (CRISIL), was set up in May 1998 to provide a variety of indices and index- related services and products for the Indian capital market. It has a consulting and licensing agreement with Standard and Poor’s (S&P) for co-branding equity indices.

In order to counteract the problems associated with trading in physical securities, NSE joined hands with the Industrial Development Bank of India (IDBI) and Unit Trust of India (UTI) to promote dematerialisation of securities. Together they set up the National Securities Depository Limited, the first depository in India.

NSDL commenced operations in November 1996. It has since established a national infrastructure of international standard to handle trading and settlement in dematerialised form and thus has completely eliminated the risks associated with fake/bad/stolen paper documents.

NSE.IT, a 100 per cent subsidiary of NSE, provides technical services and solutions in the area of trading, broker front-end and back-office, clearing and settlement, web-based trading, risk management, treasury management, asset liability management, banking, insurance, and so on. The company also plans to provide consultancy and implementation services in the areas of data warehousing, business continuity plans, mainframe facility management, site maintenance and backups, real time market analysis and financial news, and so on. NSE.IT is an export-oriented unit with Straight Through Processing (STP).

NSE.IT and i-flex Solutions Limited, a leader in e-enabling the global financial services industry, promoted DotEx International Limited. DotEx provides customer fulfillment infrastructure for the securities industry. The initial offering of DotEx is the DotEx Plaza where multiple market participants such as brokers, depository participants, and banks can offer web-based services to their customers. As a neutral aggregator and infrastructure provider, DotEx offers choice and convenience to investors.

The National Stock Exchange (NSE) of India became operational in the capital market segment on 3rd, November 1994 in Mumbai. The genesis of the NSE lies in the recommendations of the Pherwani Committee (1991). Apart from NSE, it had recommended for the establishment of National Stock Market System also. Committee pointed out five major defects in the Indian stock market. The defects specified are

Lack of liquidity in most of the markets in terms of depth and breadth.

Lack of ability to develop markets for debt.

Lack of infrastructure facilities and outdated trading system.

Lack of transparency in the operations that affect investors’ confidence.

Outdated settlement systems that are inadequate to cater to the growing volume, leading to delays.

Lack of single market due to the inability of various stock exchanges to function cohesively with legal structure and regulatory frame work. These factors led to the establishment of NSE.

The main objectives of NSE are as follows

To establish a nation wide trading facility for equities, debt instruments and hybrids.

To ensure equal access to investors all over the country through appropriate communication network.

To provide a fair, efficient and transparent securities market to investors using an electronic communication network.

To enable shorter settlement cycle and book entry settlement system.

To meet current international standards of securities market.

Promoters of NSE IDBI, ICICI, IFCI, LIC, GIC, SBI, Bank of Baroda, Canara Bank, Corporation Bank, Indian Bank, Oriental Bank of Commerce, Union Bank of India, Punjab National Bank, Infrastructure Leasing and Financial Services, Stock Holding Corporation of India and SBI Capital Market are the promoters of NSE.

Membership

Membership is based on factors such as capital adequacy, corporate structure, track record, education, experience, etc. Admission is a two stage process with applicants requiring to go through a written examination followed by an interview. Candidates are interviewed by a committee consisting of experienced people from the industry to assess the applicant’s capability to operate as an exchange member. The exchange admits members separately to Wholesale Debt Market (WDM) segment and the Capital Market segment. Only corporate members are admitted on the debt market segment whereas individuals and firms are also eligible on the capital market segment. Eligibility criteria for Trading Membership on the segment of WDM are as follows

The persons eligible to become Trading Members are bodies corporate, companies, institutions including subsidiaries of banks engaged in financial services and such other persons or entities as may be permitted from time to time by RBI/SEBI.

The whole-time directors should possess at least two years’ experience in any activity related to banking or financial services or treasury.

The applicant must possess a minimum networth of ` 2 crores.

The applicant must be engaged solely in the business of securities and must not be engaged in any fund based activities.

The eligibility criteria for the Capital Market segment are

Individuals, registered firms, bodies corporate, companies and such other persons may be permitted under the SCRA, 1957.

The applicant must be engaged solely in the business of securities and must not be engaged in any fund based activities.

The minimum networth requirements prescribed are as follows

Individuals and regi3tered firms—` 75 lakh

Corporate bodies—` 100 lakh

In the case of registered partnership firm, each partner should contribute at least 5 per cent of the minimum networth requirement of the firm.

A corporate trading member should consist only of individuals (maximum 4) who should directly hold atleast 40 per cent of the paid-up capital in case of listed companies and at least 51 per cent in case of other companies.

The minimum prescribed qualification of graduation and two years experience of handling securities as broker, sub-broker, authorised assistant,etc. must be fulfilled by

Minimum two directors in case the applicant is a corporate,

Minimum two partners in case of partnership firms and

The individual in case of individual or sole proprietary concerns.

The two experienced directors in a corporate applicant or trading member should hold minimum 5 per cent of the capital of the company.

Advantages of NSE

Wider Accessibility

The NSE ensures wider accessibility through satellite linked trading facility. Computer terminals and links with VSAT help the traders to contact their counterparts in other parts of the country quickly. The quick trading system ensures better pricing.

Screen Based Trading

Originally, the basic advantage of NSE is computer based trading. The back office loads have been reduced as everything is stored in the computer. At present, BSE and many other stock exchanges have introduced the computer based trading. The ring based trading is vanishing in the recent days.

Non-Disclosure of the Trading Members Identity

While placing the orders there is no need to disclose the identity of the member on the screen. It depends upon the wish of the trading member. So without any fear of influencing the prices, any member can place large size orders.

Transparent Transactions

The major advantage of the NSE trading is the complete transparency. The investor can find out the rate of the deal, the counterparty and the time of execution of the deal. The enquiry facilities offered in the terminals help the investor to find out the price and the depth of the market of the particular security. The investor can have the high and low quotations and the last traded price of the particular security. This information enables him to make a healthy decision regarding his investment.

Matching of Orders

Once the order has been fed into the computer, the computer searches and finds out the suitable matching order subject to the conditions placed by the investor or the trader. The conditions are related to the price, volume and time of the trade. While matching the order, priority is given on the basis of price and time. If the matching order is found, the deal Is struck, otherwise as per the instructions the order would be kept pending or cancelled.

Effective Settlement of Corporate Benefit

All monetary benefits lodged, dividend, interest and redemption amount, claims on company objections, are debited/credited directly in the clearing account of the clearing members. This reduces the problems faced by the members in settlement of corporate benefits.

Trading in dematerialised Form

According to the SEBI directives, trading in the depository segment is carried out only on the rolling (T + S) settlement basis. This rolling settlement basis helps the traders to settle the accounts quickly without waiting for a fixed settlement date. The total number of compulsorily dematerialised stock was 30 in June 1998. The dematerialised trading helps the institutions to effect the transfer of shares immediately after the payment.

SGL Facility in the Debt Market

The SGL (Subsidiary General Ledger) facility provided by the NSE allows the trusts and other retail constituents to hold and settle their trades through electronic book transfer. This speeds up the transfer process. Settlement of trades in Government Securities would become paperless, more prompt and safer. The constituents get their securities registered in

their names immediately after making payments. They would also get the interest on due dates without delay.

Recent Trends in NSE

The NSE has managed to prove itself successful and maintained its position as the country’s premier stock exchange. The exchange has faired well compared to other stock exchanges in terms of expansion of network, market share, volume traded, liquidity and clearance of deals.

Expansion

After establishing its operation in Mumbai, the NSE had expanded its operation to other cities. NSE has installed 2580 VSATS in 317 cities across the country. A break up of VSATs across 317 cities is given below

Quality

Apart from the consolidation of the market at national level, the transaction cost along with the bad deliveries has declined. Dematerialisation of shares has helped in the reduction of the bad deliveries. The effective functioning of National Securities Clearing Corporation Limited is another reason for it.

More Liquidity

With its on-line system and quick trading facilities, the NSE has introduced some liquidity into the capital market. In the last quarter of 1997, the NSE was more liquid for the 835 scrips that accounted for 97 per cent of the total trading volume. In number of trades, an indicator of the presence of the retail investor, the NSE was ahead of the BSE.

Less Brokerage

Transparency in NSE allows the breaking up of the costs into brokerage fees, market impact costs and clearing and settlement. The brokerage fee at the BSE terminals outside Mumbai is 0.5 per cent of the value transacted. On the NSE, it is around 0.1 per cent of the value transacted.

Insurance Against Risk

When an investor deals with a broker or two brokers deal with each other there is a possibility of either of the parties in the transaction, defaulting on the payment. National Securities Clearing Corporation, a wholly owned subsidiary of the NSE offers legal guarantee and protection against such risk. Till 1996, there was no insurance against such risks.

Quick Clearing and Settlement

NSE has introduced a full range of clearing house facilities. A part of the securities is processed at the regional clearing centres (Delhi, Chennai and Calcutta). The inter-region clearing facility provided at present, reduces the risk of the members because of not getting timely delivery of shares or loss of shares in transit. The facility is also expected to boost delivery based trading.

Foreign Institutional Investors Trading

The identity of the broker remains undisclosed till the transactions are executed. Secrecy being important to FIIs, which is unavailable on the BSE, it encouraged FIIS to trade on the NSE. The corporate becoming members of NSE is on the increase. Out of 780 NSE members corporates are 668 in March 2000.

NSE poses a healthy threat for the existing exchanges, especially to the BSE. It is the competitive threat from the NSE which made the BSE to embark on the reforms and the introduction of the Bombay on-line trading mechanism.

Over the Counter Exchange of India

Over the Counter Exchange of India was started in 1992 after the role models of NASDAQ (National Association of Securities Dealers Automated Quotation) and JASDAQ (Japanese Association of Securities Dealers Automated Quotation). The OTCE! was started with the objective of providing a market for the smaller companies that could not afford the listing fees of the large exchanges and did not fulfill the minimum capital requirement for listing. It aimed at creating a fully decentralised and transparent market. Over the counter means trading across the counter in scrips. The counter refers to the location of the member or dealer of the OTCEI where the deal or trade takes place. Every counter is treated as a trading floor for the OTCEI where the investor can buy and sell. The members or dealers of OTCEI counters are linked to the central OTCEI computer. The member should have the computer and telecommunication facility.

The Promoters

OTCEI is incorporated as a company under sec. 25 of the Indian Companies Act 1956. As per the registration norms, OTCEI will be obliged to plough back all its profits and will not be allowed to declare dividends on its share capital. The promoters are as follows

Players in the OTCEI market

The players on the OTCEI exchange are the members and dealers. The activities of the members and dealers are:

Act as brokers, buy and sell securities according to the instructions of the investors.

Market Makers in securities, they quote the prices at which members are willing to buy and sell the specified number of securities.

Members can be the public financial institutions, scheduled banks, mutual funds, SEBI approved merchant bankers, banking subsidiaries, venture capital funds and other non-banking financial companies with mini mum net worth of ` 2.5 crores. Members pay a onetime non-refundable admission fee of ` 10 lakh and ` 5 lakh after one year. The annual subscription fee is ` 1 lakh.

The dealers are: individuals, partnership firms and corporate entities with a minimum net worth of ` 5 lakh. They should have adequate office space and telecommunication facilities. They have to pay onetime non-refundable admission fee of ` 2 lakh and annual subscription fee of ` 5,000. OTCEI may collect additional security deposit if it considers necessary, depending upon the business experience of the applicant.

Scrips to be Traded

Guidelines are issued for the companies whose scrips have to be traded in the OTCEI by the Government. As per the guidelines

The minimum capital requirement for a company to be listed on the OTCEI is ` 3 crores and the maximum is ` 50 crores.

For companies with an issued capital of more than ` 30 lakhs but less than 300 lakhs, the minimum public offer should be 25 per cent of the issued capital or 20 lakhs worth of shares in face value, whichever is higher.

Companies with an issued capital of more than ` 30 Cr seeking to be listed have to comply with listing requirements and guidelines that are applicable to such companies in other stock exchanges.

Revised Listing Norms

To broaden the base of exchange membership the guidelines have been revised. The ministry allowed

Closely held existing corporate houses upto 100 Cr

New companies with a paid up base of upto 50 Cr and

All currently listed companies on various stock exchanges

The procedure adopted for the listing of the scrips

An OTCEI member is appointed as a sponsor for the companys’s issue. The sponsor appraises the project or company on technical, managerial, commercial, economical and financial aspects. The sponsor certifies the OTCEI regarding its appraisal.

The sponsor determines the price of the company shares offered to the public, members and dealers of the OTCEI.

The sponsor gets all statutory consent and compliance with all SEBI guidelines.

The sponsor registers the issue with OTCEI and places the equity.

The listing application has to be made to the DICEI as per its rules and regulations.

After getting the approval, the allotment is made.

Once the allotment is over, the equity is listed and the trading commences. In the primary issue the sponsor carries the activities of issue management and he is the sole underwriter for the issue. He can sub write his liability with the syndicate of members and dealers.

National Securities Depository Limited

To meet the capital requirements companies turn towards the capital market that is more flexible and responsive source of funds. The savers of Indian economy a decade ago held simple pass books of the post office and banks. Today they hold plenty of paper or marketable financial assets or securities. The stock brokers have to move large number of paper certificates to give delivery on behalf of their clients. Each transfer of a deed involves different manual checks. Many of the share transfers are rejected because of some technical defect and investors who sell their shares often, wait a couple of months before they receive their money. Because of this tiring procedure, many of the foreign institutional investors restrict their trading with sensex scrips. To remove these difficulties, National Securities Depository Limited was established.

NSDL is an organisation promoted by the Industrial Development Bank of India, the Unit Trust of India and the National Stock Exchange of India Ltd., to provide electronic depository facilities for securities traded in the equity and the debt market. The depositories’ ordinances promulgated by the Government of India in September 1995 enabled the setting up of multiple depository system. The securities and Exchange Board of India (SEBI) issued the guidelines for depositories in May 1996. The Bill was passed by the parliament in July 1996. NSDL was registered by SEBI on June 7, 1996.

The Functioning

NSDL performs the following functions through its various participants

Enables surrender and withdrawal of securities to and from the depository.

Maintains investors’ holdings in the electronic form.

Effects settlement of securities traded on exchanges.

Carries out settlements of trader that have not been done on the stock exchanges.

NSDL (DP) Depository Participant can be a public financial institution, bank, custodian, registered stock broker or a NBFC subject to approval from the depository company and the SEBI. Brokers and NBFCs are required to have a minimum net worth of 50 lakhs. DP has to pay a security deposit of ` 10 lakhs and an admission fee of ` 25,000 to NSDL. The depository participants are likely to pass on these charges to the investors.

NSDL operates on two tier structures wherein it maintains accounts of its DP and the DP’s maintain the accounts of their clients. With the help of the continuous electronic connectivity, reconciliation of all accounts is done on daily basis to balance the number of stocks issued and dematerialised.

Initially, NSDL makes use of VSAT network of the NSE for communications as it is easier for the depository participants who have leased lines with NSE to join. After ascertaining its requirement on the volume of trade, NSDL would set up its own network. At present NSE only has the clearing corporation, the National Securities Clearing Corporation and it can participate in the functioning of NSDL. The SEBI has now made it mandatory for all stock exchanges to have clearing corporation. The stock exchanges are setting up their own clearing corporation.

Individual Investor and NSDL

The investor has to open an account with the depository participant that is similar to the opening of a bank account. Investors can get a list of depository participant from NSDL. The depository participants may also advertise the services offered by them once they are registered. The investor can choose any depository participant of his choice and fill up an account opening form. Reasonable charges are received by the depositories for the opening of accounts and every transaction in the accounts. The investor receives a passbook or a statement of holdings, just like the bank passbook from the depository agent. The statement of holdings is despatched to the investors periodically. The investor can contact the depository participant for any disparity in the statement of holding. If the discrepancy cannot be resolved at the depository participant level, he could approach NSDL for clarification. There is absolutely no restriction with the number of depository participants the investor can open accounts.

Rights and Bonus Issue

Depository gives all the details about the corporate events to the clients. The registrar calculates the corporate benefits due to all the shareholders. The disbursement of cash benefits such as dividend or interest is done by the registrar whereas the distribution of the securities entitlements is done by the depository, based on the information provided by the registrar. In case of corporate events such as issuing of right issues, the investor can have the option of having it either in the form of physical or electronic mode of holdings. However, corporate entitlements such as bonus are made in the same form of the original holdings.

Advantages to the Investor

Depositing the securities with NSDL would give the freedom from the worry of loss of share certificates through theft, mutilation due to careless handling, fire, etc.

In selling the shares, the paper work required is reduced to a minimum. Investors also prefer to buy shares that are already in the depository mode. The investor would find it easy to sell the shares whenever he wants to do it.

The investor can become the owner of the shares within a day of the settlement being completed, if the shares bought are in the depository mode. There is no need to apply to the company for registering the share in the name of investors. There is no possibility of loss or theft when the share certificates are posted to the company. There is no fear of any fake or stolen shares being delivered to the investor. In the physical transfer of shares, it takes nearly 40-60 days to get the shares registered in his name.

Listing of Securities

Listing refers to the admission of the security of a public limited company on a recognised stock exchange for trading. Listing of securities is undertaken with the primary objective of providing marketability, liquidity and transferability to securities. After the promulgation of Companies (Amendment) Act 1988, listing of securities offered to the public, became compulsory. The section 73, of the Companies Act states that any company intending to offer shares or debentures to the public through the issue of prospectus should make an application to one or more recognised stock exchanges for permission to be traded in the respective stock exchange. After the permission is granted, the company becomes eligible to list its securities in the stock exchanges.

Merits of Listing

Liquidity

Listed shares can be sold at any recognised stock exchange and converted into cash quickly. Finding out buyers would be easy in the security market through brokers and screen based trading.

Best Prices

The price quotations and the volume traded regarding the listed shares appear in the news papers. According to the demand and supply of the shares, prices are determined. This results in best price.

Regular Information

The transactions of the listed shares regularly appear in the news paper, providing adequate information regarding the current worth of the securities. Buying and selling activities can be decided on the basis of the price quotations.

Periodic Reports

Listed companies have to provide periodic report to the public. Half yearly financial reports should be published in the financial news papers or in any other news papers. In 1985, it has been made obligatory for all listed companies to submit unaudited financial results on a half yearly basis within 2 months of the expiry of that half year. At present quarterly reports have to be published.

Transferability

Listing provides free transferability of securities. After the incorporation of Section 22- A in the Securities Contract (Regulation) Act, free transfer of shares has been ensured.

Income Tax Benefit

Income-tax Act treats the listed companies as widely held companies. The advantages available to a widely held company are applicable to the listed company.

Wide Publicity

Since the prices are quoted in the newspaper, the listed companies get wide publicity. This not only does good to the investor but also to the corporate to attract the public for further issues.

Demerits

Listed companies are subjected to various regulatory measures of the stock exchanges and SEBI.

Essential information has to be submitted by the listed companies to the stock exchanges.

Annual General Meeting, Annual reports have to be sent to a large number of shareholders. This creates large amount of unnecessary expenditure.

Public offer itself is an expensive exercise. But, this is a pre-requisite for the company’s shares to be listed.

Qualification For Listing

There are certain minimum requirements for a security to be listed in a stock exchange. They are given below
Minimum Issued Capital

According to the regulation laid down by The Ministry of Finance and Department of Economic affairs the minimum issued capital should be ` 3 crores and the minimum public offer is ` 75 lakhs. In 1995 the Bombay Stock Exchange raised the limit from Rs Cr to Rs. Cr. In 1996, it has been further raised to ` 10 Cr. Some other stock exchanges have also increased the limit to ` 5 Cr.

Payment of Excess Application

Money According to the direction given by the SEBI, the amended listing agreement of Mumbai Stock Exchange (1996) made the allotment of securities to be done within 30 days of the closure of the public issue. The refund orders should be dispatched within the specified period. Beyond the period they shall be liable to pay an interest rate of 15 p.a. Similar amendments are made in the Delhi Stock Exchange agreement too.

Listing on Multiple Exchanges

When the paid up capital of the company is above ` 5 crores, it obligatory for the company to seek listing on more than one stock exchange.

The Number of Shareholders

To ensure wide distribution of shares among the general public and to prevent undue concentration of large holdings with the company, minimum number of shareholders are prescribed. For every ` 1 lakh of fresh issue of capital, there should be atleast 10 shareholders. In the case of sale of existing capital of ` 1 lakh, it should ensure atleast 20 public shareholders. In 1996, Bombay Stock Exchange has reduced the above said numbers to 5 and 10 respectively. If the number of shareholders falls below the prescribed number, then the concerned company’s security would be delisted.

Appointment of Market Maker

A company where the paid up capital is ` 3 cr but not more than ` 5 cr and having a commercial operation for less than two years should appoint a market maker. The market maker should provide two way quotes for the concerned stock for a minimum period of 18 months from the date of trading on stock exchange. The difference between quotations for the sale and purchase bid, ask spread should not exceed 10 per cent. The market maker should have an inventory of 5 per cent of the post issue capital as on the date of allotment.

Articles of Association

The articles of association of the company should be in tune with the sound corporate practice. If veto power has been provided to a director or a class of directors to over rule the majority decision, the security of the company is not qualified for listing.

Cost of Public Issue

To be listed the company should adhere to the ceiling in the expenditure of public issue as prescribed by the SEBI.

Advertisement

The company should not advertise in newspapers that ‘issue over subscribed’ or ‘Thanks to the investing public for their overwhelming response,’ etc during the subscription period. If the company gives such an advertisement, listing will be refused by the stock exchange -after intimation to the stock exchange division of the Ministry of Finance.

Minimum Subscription

A minimum of ` 5,000 (500 shares of Rs each) subscription has been fixed by SEBI. But, due to the slackness in the primary market, it is reduced to Rs of 200 shares of RsJO each. This should be given in the prospectus.

Applying Mode

The prospectus should provide information on how the investor should apply. It should clearly state that the application must be made in the prescribed form stating the number of shares applied for.

It should be applied in single name or joint names of not more than three. Application can be made in the name of limited companies, corporations or institutions and not in the name of a trust firm or partnership. The names should be given in block letters in English. An individual can make only one application.

Public offer size

The size of the public offer and value of the share should be stated in the first page of the prospectus. If the shares are issued at premium, that also should be stated. Preferential allotment to the directors and workers of the company and the reservation for allotment to the non-resident Indians should be indicated clearly on the prospectus.

Listing Procedure

Obtaining the listing permission from stock exchanges involves various steps. The steps are as follows:

Preliminary Discussion

The Company desirous of getting its security listed on the stock exchange should have detailed discussion with the stock exchange authorities. The discussion enables it to understand the various compliances to be complied with for listing its securities.

Article of Association Approval

The articles of association will be approved only if it fulfills certain requirements. They are:

Common form of transfer should be used

Once the shares are fully paid, they should be free from all lien and in the case of partly paid shares the company’s lien is restricted to the call money alone.

The calls carried out in advance are entitled to interest rate but not for dividends or any other declared profits.

The free dealings in company’s shares should not be restricted by any provision.

The company should comply with the section 205-A of Companies Act in the case of dividends.v

If the company is not able to comply with any of the requirements of the Rule 19(2) of the Securities Contract Regulation Act, the company should give an undertaking to make necessary amendments in the articles of association as required in the next annual general meeting of the company. On the basis of the undertaking, the security will be permitted to trade on the stock exchanges. If the article of association provides veto powers to any director/or group of directors, the relevant article should be amended to remove such powers to get the security listed.

Draft Prospectus Approval

Getting approval for the draft prospectus is the essential pre-requisite for the security to be listed. Before finalising the draft prospectus the company authority should hold a discussion with the stock exchange authorities. While seeking approval, the prospectus should contain all the conditions put by the stock exchange. The prospectus should clearly state the following:

The name of regional stock exchange and any other stock exchanges(s) where it intends to enlist its securities,

It should specify the date of commencement of the subscription and the date of closing of the subscription. It is essential to keep the subscription list open for a minimum period of three working days. It may extend up to 10 working days at the discretion of the Board of Directors. The date of closure of subscription list should be notified to the stock exchange where listing is sought.

Listing Application

Any company when it intends to offer shares to the public through prospectus, should make an application to the stock exchange or exchanges where the share is to be listed. A formal application form should be filed before filing the prospectus with the Registrar of Companies. A number of certificates have to be submitted with the application. They are listed below

Three certified copies of memorandum and articles of association and debenture trust deed.

Copies of prospectus, offer for sale made during the last five years and circulars and advertisement regarding the offer made during the last five years.

Copy of every letter, report, balance sheet, valuation, contract, court order or any other document that is given in the prospectus.

Certified copies of underwriting, brokerage, vendors, promoter’s selling agents and sales managers agreement.

Certified copies of the service agreements of secretaries, treasures, managing director, technical directors, general manager and manager.

Particulars regarding the material contract, technical advice and collaboration, concessions and similar other documents.

Copies of agreements with the Industrial Finance Corporation, Industrial Credit and Investment Corporation and such other bodies.

Details regarding the reorganisation, reconstruction, amalgamation and details of the companies’ activities.

Specimen copies of the share certificate, debenture certificate, letters of allotment, letters of acceptance, letters of renunciation, transfer receipts and renewal receipts.

The above mentioned documents are ordinarily required by the listing application.

But sometime additional documents also may b called for.

The stock exchange generally acknowledges the receipt of the application and gives instructions regarding various other formalities to be fulfilled before getting the listing permission. Once the subscription list is closed, the process of allotment should be closed within 30 days of the closure. Originally it was 10 weeks from the closure of the subscription list. The allocation of shares should be intimated to the stock exchange concerned.

Listing Agreement Regarding Projection of Profitability

Generally companies make projections regarding the profitability of the company at the time of issue of capital and give an abridged statement of the balance sheet and profit and loss account. Many times the projections are not met with. To provide protection to the investors, SEBI amended the listing agreement by inserting a new clause 43. Accordingly the company has to submit yearly statement showing the variation between projections given in the prospectus and the actuals achieved. The reasons for the variation in the profitability projections and actuals should be given. If the projections are provided for five years, the company has to furnish explanation for the unattained projected figures for all the five years. This information also should be published in the news paper. The listed company has to give a copy of the complete and full balance sheet, profit and loss account, and the directors’ report to each shareholder.

Listing Agreement and Cash Flow Statement

The representatives of SEBI, the stock exchanges of Mumbai, Calcutta, Delhi, Ahmedabad, National stock exchange and the Institute of Chartered Accountant of India framed the norms for the inclusion cash flow statement in the annual reports. The cash flow statement discloses the actual cash flow operations in the company. This would provide better quality information to the shareholders. To comply with the international standards this has been imposed as a part of listing agreement. The company has to provide the cash flow statement along with the balance sheet profit and loss account. The cash flow statement has to be prepared according to the instructions given by the SEBI.

The cash flow statement helps the shareholders to analyse the pattern of resources deployed and evaluate the changes in net assets of a company. It helps to assess the ability of the company to generate cash and cash equivalents. Briefly, it is useful to the shareholders to assess the liquidity, viability and financial adaptability of the company.

Listing Fee

The stock exchange charges a fee from the company for permitting the company’s scrip to be traded. The listing fee varies from major stock exchanges to regional stock exchanges. The fees charged by the regional stock exchanges are comparatively less than the major stock exchanges. The fee also differs according to the equity base of the company. The following table gives the listing fee charged by the NSE.

Companies that have a paid up capital of more than ` 50 Cr will pay additional listing fees of ` 1400 for every increase of ` 5 Cr or part thereof in the paid up share or debenture capital.

Listing of Right Shares

The formalities that have to be fulfilled in the case of right shares are given below.

The company should notify the stock exchange, the date of meeting of Board of Directors at which the proposal of the right shares or debenture is to be considered.

The company should inform the decision taken regarding the right issue to the stock exchange immediately.

As per section 81 of the Companies Act 1956 the company should obtain the consent of the shareholders by way of a special resolution in general body meeting.

The record date for closure of register of members should be intimated to the stock exchanges.

The letter of offer should give financial information before one month of the date of letter of offer and from the date of company’s last balance sheet. The working results regarding the sales/turnover and other income, estimated gross profit/loss should be provided. The provisions made for depreciation and taxes should be presented. Estimated amount of profit and loss also should be given.

The current market price of the share, highest and lowest price of the equity during the related period and the week end prices for the last four weeks should be provided. The shareholders can renounce the rights in favour of their nominees. The company has power to reject any nominee of whom it does not approve. If the nominee is rejected, the shareholders have the right to take up shares applied by the rejected nominee.

The shareholders are entitled to apply for additional shares. If the shareholders have renounced their shares in whole or in parts in favour of any other person, they cannot apply for additional shares. If the shares are not quoted at premium this condition would be relaxed by the stock exchanges.

The applications are accepted at all centres where recognised stock exchanges are situated. If the company is not able to make such arrangements at all centres, it can have the centres of its own choice subject to the condition that bank commission and collection charges for out station cheques would be borne by the company.

The letter of offer should be made within six weeks after the closure of the transfer books.

The shareholders should be given reasonable time to record their interest or exercise their rights. It should not be not less than four weeks.

The renunciation forms should be made available to the shareholders freely on request.

The company should inform the stock exchange the last date fixed for submission of rights application, split/renunciation application and consolidated coupons.

The company should forward a specimen copy of the letter of offer and application form for the rights issue to the stock exchange.

After despatching the allotment letters or share certificates the company should apply for listing in the prescribed form. The company has to submit the distribution, an analysis form and new issue statement forms.

After receiving the application form along with the required documents, the stock exchange would permit the shares to be listed for official dealing by its members.

The Securities and Exchange Board of India is taking steps to facilitate the speedy disposal of right issues. It has directed all stock exchanges to amend their listing rules. The appraisal of the rights issue is left with the merchant bankers. The provisions relating to the fixing of record dates for the purpose of right issue has been ignored. The companies can apply for record date simultaneously with the filing of the letter of offer with SEBI.

High Powered Committee Recommendation

The High P Committee’s recommendations on Stock Exchanges on listing of industries securities are given below

Once the completed listing application is submitted to the stock exchanges, it should not take more than three working days for the admission of securities for dealings.

Stock exchanges should set up guidance cells to provide required help to the companies seeking enlistment. A uniform check list exhibiting the standard set norms required by the stock exchanges for the admission of the securities for trading should be prepared.

An updated brochure on matters related to listing should be prepared by the stock exchanges. An annual review should be made regarding the compliances of the provisions of listing agreement by the companies. It should also publicise the names of the companies that have not complied with the listing requirement and the Government also has to be informed.

These recommendations have been accepted by the Government.

Delisting

In December 1998, the Mumbai Stock Exchange has threatened to delist shares of over 700 companies for non-payment of listing fee for 1997-98 by December 1998. Over the past years, several companies incurred loss and many of them were unable to pay the listing fee. But many companies purposefully avoided paying the listing fee. Delisting the company’s share prevents the public scrutiny of performance. Many companies made public issue itself a business. Thus delisting may be compulsory or voluntary. Some of the common causes for delisting are given below.

Compulsory

Non-payment of listing fee or violation of listing agreement.

Thin/negligible trading or thin shareholding base.

Non redressal of grievances.

Unfair trade practices at the behest of promoters or managers, and malpractice such as issuing of duplicate fake shares by management.

Voluntary

Unable to pay the listing fee. Listing fee is prohibitive.

Business sick/suspended/closed.

Capital base is small.

Mergers, demergers, amalgamations and takeovers.

Voluntary delisting is at present provided to the companies if three conditions are satisfied.

Company must have incurred losses in the preceding three years, with net worth less than the paid-up capital.

Securities have been infrequently traded.

Securities remain listed at least on the regional stock exchange.

If these conditions are not fulfilled, Central Government approval would be needed. The other ground under which voluntary delisting can be allowed by a stock exchange is for thin public share holding.

Chandratre Committee Report (1997)

The committee studied the problem of delisting and felt that the listing process at present does not have any degree of transparency. The committee felt that disclosures should be made at every stage of the process. Advance public notice should be given by the stock exchange on the proposed delisting.

Intimation to other stock exchanges where the securities are listed.

Public notice of delisting should be given after the process is completed.

The annual report must contain details of delisting on any stock exchange with reasons and justification.

An appeal made against the decision to delist would lie with the Central Government.

Dealing facility should be allowed for some time to provide a liquidity window after delisting.

These detailed procedures must be made applicable even in the case of a voluntary delisting too. As far as the voluntary delisting, the proposal is to give public notice explaining the justification for delisting and requires a special resolution authorising voluntary delisting.

Suggested Framework

The contents of the Listing Agreement (LA) are to be made part of the Conditions for Listing and Continued Listing under the rules of SCRA. The LA is to have two parts: Part A to stipulate the minimum conditions for listing to all stock exchanges (SE) and Part B to prescribe additional conditions by any SE.

Basic minimum listing norms for listing on any recognised SE must be uniform; additional norms may be specified by SEs.

The LA may contain terms and conditions that serve investor interests though the law may allow greater leeway to a company on a particular issue.

Violation of the LA should be a punishable offense, with penalties of ` 10,000 and ` 1,000 per day of continuing default.

SEs have to be empowered to prosecute a company and its directors/officers for violation of LA.

SEs have to strengthen their machinery for strict enforcement of LA and institution of prosecution.

SEBI to be nodal authority for any amendments to the LA with due consultation of SEs to ensure uniformity and avoid confusion.

Pre-listing scrutiny of draft offer documents to be made mandatory for all stock exchanges before any SEs are cited in the final offer document as SEs on which the securities would be listed.

Listing norms should be disclosed and well publicised to ensure desired transparency in the pre-listing scrutiny of offer documents.

Compulsory listing on Regional Stock Exchanges has to be dispensed with. SEs have to operate competitively and companies should have freedom of choice in seeking listing on any SE.

Recovery of listing fee from shareholders in case of default by the company is not a feasible proposition though they may be the beneficiaries of the SE’s services.

There is no need to bring uniformity in listing fee structure across SEs.

SEs should be free to decide the quantum of ‘listing fee’, manner of payment and periodicity of payment.

The listing fee should not be prohibitive and disproportionate to the services offered by the SE.

SEs must improve services to investors-especially redressal of investor grievances and investor education.

Recent Developments

Share of the companies listed on exchanges other than the Bombay Stock Exchange and seeking listing on it, will be required to have a minimum market capitalisation of ` 20 crores as against the previous criterion of ` 10 crores of issued capital.

The BSE board has decided that companies should have necessarily recorded profits for the last three years, traded on at least half the total trading days with a minimum of five trades and 500 shares on any given day and have 20 per cent of the stock held with the public.

The board also decided to institute awards for investor friendly companies. Categorised into three, companies would be awarded for best returns, being proactive in servicing investor needs and corporate governance. Non friendly companies are classified into ‘Z’ category; the exchange has identified 300 such companies.

Trading Mechanism

Mechanics Of Security Trading In Stock Exchanges

An investor must have some knowledge of how the securities markets operate. The marketing old or new securities on the stock markets can be done only through members of the Stock Exchange. These members are either individuals or partnership firms. An individual must use the facilities of these members for trading in securities unless he himself is a registered dealer or member of an organised stock exchange. Trading among the members of a recognised stock exchange is to be done under the statutory regulations of the stock exchange. The members carrying on business are known as ‘brokers’ and can trade only on listed securities. The se members execute customer’s orders to buy and sell on the exchange and their firms receive negotiated commissions on those transactions. About one-fourth of all members of the exchange are ‘specialists’, so called because they specialise in ‘making a market’ for one or more particular kind of stock. In the process of trading in stock exchanges, there is the basic need for a ‘transaction’ between an individual and the broker. A transaction to buy and sell securities is also called ‘trades.’ This is to be done through the selection of a broker.

Finding a Broker

The selection of a broker depends largely on the kind of services rendered by a particular broker as well as upon the kind of transaction that a person wishes to undertake. An individual usually prefers to select a broker who can render the following services:

Provide information: A broker to be selected should be able to give information about the available investments)These may be in the form of capital structure of companies’ earnings, dividend policies and prospects. These could also take the form of advice about taxes, portfolio planning and investment management.

Availability of In vestment Literature: Secondly, a broker should be able to supply financial periodicals, prospectuses and reports. He should also prepare and analyse valuable advisory literature to educate the investor.

Appoint Competent Representatives: Brokers should have registered competent representatives who can assist customers with most of their problems.

Kinds of Brokers – Selection

Commission Broker: All brokers buy and sell securities for earning a commission. From the investor’s point of view, he is the most important member of the exchange because his main function and responsibility is to buy and sell stock for his customers. He acts as an agent for his customer and earns a commission for the service performed. He is an independent dealer in securities. He purchases and sells securities in his own name. He is not allowed to deal with the non-members. He can either deal with a broker or another jobber.

Jobber: A jobber is a professional speculator. He works for a profit called ‘turn.’

Floor Broker: The floor broker buys and sells shares for other brokers on the floor of the exchange He is an individual member owns his own seat and receives commissions on the orders the executes. He helps other brokers when they are busy and as compensation, receives a portion of the brokerage charged by the commission agent to his customer.

Taraniwalla: The Taraniwalla is also called a jobber. He makes an orderly and continuous auction in the market in the stock in which he specialises. He is a localised dealer and often handles transactions on a commission basis for other brokers who are acting for their customers. He trades in the market even for small differences in prices and helps to maintain liquidity in the stock exchange.

Odd Lot Dealer: The standard trading unit for listed stocks is designated as a round lot which is usually a hundred shares. Anything less than the round lot is an odd lot which is traded on the floor of the exchange because odd lots appear in odd quantities — 8 shares, 10 shares or 15, 20, 25, 27, 33 and it is impossible to match buying and selling orders in them. The specialists handle odd lots. They buy odd lots which other members wish to sell for their customers and sell odd lots which others wish to buy. If dealers buy more than they sell or sell more than they buy, they can clear their position by engaging in round lot transactions. The price of the odd lot is determined by the round lot transactions. The odd lot dealer earns his profit on the difference between the price at which he buys and sells the securities. He does not rely on commission.

Budliwalla: The financier in the stock exchange is also called the Budliwalla. For giving credit facilities to the market, he charges a fee called ‘contango’ or ‘backwardation’ charge. The budliwalla gives a fully secured loan for a short period of two to three weeks. This loan is governed according to the prevailing rate of interest in the market. The Budliwalla’s technique of lending is to take up delivery on the due date at the end of the clearing to those who wish to carry over their sales. These transactions help him to make a profit on the prevailing rates of interest, subject to regulations of the stock exchange.

Arbitrageur: An arbitrageur is a specialist in dealing with securities in different stock exchange centres t the same time. He makes a profit by the difference in prices prevailing in different centres of market activity. He maintains an office with a good communication system and telephonic and tele-printer facility. His profit depends on the ability to get the prices from different centres before others trading in the stock exchange.

Security Dealers: The purchase and sale of government securities is carried on the stock exchange by Security Dealers. Each transaction of purchase or sale has to be separately negotiated. The dealer takes risk in ready purchase and sale of securities for current requirements. The dealer has information about several kinds of government securities as well as statutory public bodies, but the presence of large investors like the Life Insurance Corporation (LIC) and commercial banks makes his role rather restricted.

Opening an Account with Broker

After a broker has been selected, the investor has to place an ‘order’ on the broker. The broker will open an account in the name of the investor in his books. He will also ask the investor for a small sum of money called margin-money as advance. In case, the investor wishes to sell his securities, he will have to deposit with the broker share certificates and transfer deeds. He will also have to sign in the transferor’s column on the transfer deed. The physical presence of share certificates is not required anymore in India if shares have been through the ‘demat’ process.

Order

Brokers receive a number of different types of buying and selling orders from their customers.

Choice of Orders

Buy and sell orders are placed with the members of the stock exchanges by the investors. The orders are of &e types.

Limit orders: Orders are limited by a fixed price. ‘Buy Reliance Petroleum at ` 50. Here, the order has clearly indicated the price at which it has to be bought and the investor is not willing to give more than ` 50.

Best rate order Here, the buyer or seller gives the freedom to the broker to execute the order at the best possible rate quoted on that particular date for buying. It may be the lowest rate for buying and the highest rate for selling.

Discretionary order The investor gives the range of price for purchase and sale. The broker can use his discretion to buy within the specified limit. Generally the approximate price is fixed. The order stands as this ‘Buy BRC 100 shares around ` 40’.

Stop loss order The orders are given to limit the loss due to unfavourable price movements in the market. A particular limit is given for waiting. If the price falls below the limit, the broker is authorised to sell the shares to prevent further loss. Ex. Sell BRC Ltd at ` 25, stop loss at ` 22.

Kinds of Trading Activity

Options: An ‘Option’ is a contract which involves the right to buy or sell securities (usually 100 shares) at specified prices within a stated time. There are various types of such contracts, of which ‘puts’ and ‘calls’ are most important. A ‘put’ is a negotiable contract which gives the holder the right to sell a certain number of shares at a specified price within a limited time. A ‘call’ is the right to buy under a negotiable contract.

Sometimes, these option transactions are combined. These are called options and are exercised through the following strategies:

Establishing a Spread: A spread involves the simultaneous purchase and sale of different options of the same security. A vertical spread is the purchase of two options with the same expiry date but different striking prices. In a horizontal spread, the striking price is the same but the expiry date differs.

Buying a Call: Buyers of a Call look for option profits from some probable advance in the price of specified stock with a relatively small investment compared with buying the stock outright. The maximum that can be lost is the cost of the option itself.

Writing Options: A written option may be ‘covered’ or ‘uncovered.’ A covered option is written against an owned stock position. An uncovered or ‘naked’ option is written without owning the security. A covered option is very conservative. The income derived from the sale of a covered option offsets the decline in the value of the specified security.

Wash Sales: A wash sale is a fictitious transaction in which the speculator sells the security and then buys it at a higher price through another broker This gives a misleading and incorrect position about the value of the security in the market The price of the security in the market rises in such a misleading situation and the broker makes a profit by ‘selling or ‘unloading his security to the public This kind of trading is considered undesirable by the stock exchange regulations and a penalty is charged for such sales.

Rigging the Market: This is a technique through which the market value of securities is artificially forced up in the stock exchange. The demands of the buyers force up the price. The brokers holding a large chunk of securities buy and sell to be able to widen and improve the market and gradually unload their securities. This activity interferes with the normal interplay of demand and supply functions in the stock market.

Cornering: Sometimes, brokers create a condition where the entire supply of particular securities is purchased by a small group of individuals In this situation, those who have dealt with ‘short sales’ will be ‘squeezed’ and will not be able to make their deliveries in time The buyers, therefore assume superior position and dictate terms to short sellers This is also an unhealthy technique of trading in stock exchange.

Blank Transfers: A blank transfer is one in which the transferor signs the form but does not fill-in the name of the transferee while transferring shares. Such a transfer facilitates speculation in securities It involves temporary purchases and sales of securities without regulation.

Arbitrage

Arbitrage is a technique of making a profit on stock exchange trading through difference in price of two different markets. If an advantage of price is taken between two markets in the same country, it is called ‘domestic arbitrage.’ Sometimes, arbitrage may also be between one country and another. It is called ‘foreign arbitrage.’ Such an advantage in prices between two countries can be taken when the currencies of both the countries can be easily converted.

Arbitrage usually equalises the price of security in different places. When the security is sold at a high price in a market, more of the supply of the security will tend to bring a fall in the price, thus neutralisirig the price and making it equal to the price in the cheaper market.

On placing an order, the brokers get busy through different kinds of trading activities, which may also include options and other speculations such as wash sales, rigging, cornering, blank transfers or arbitrage. The sp in the stock market are generally represented by ‘bull’, ‘bear’, ‘stag’, and ‘lame duck’.

Bull: A bull is a person on the stock exchange who expects a rise in the price of a certain security. A bull is also called a ‘tejiwala’, because of his expectation of price rise.

Bear: A bear is the opposite of a bull. He expects a fall in prices always. He is popularly known as ‘Mandiwalla.’

Bullish and Bearish: When the price is rising and the ‘bulls’ are active in the market, there “buoyancy and optimism in the share market. The market in this situation is reigning ‘bullish.’ When there is decline in prices, the market is said to go ‘bearish.’ This is followed by pessimism and decline in the share market activity.

Bull Campaign and Bear Raid: The bulls begin to spread rumours in the market about rise ii when there is an over-bought condition in the market, i.e. the purchases made by the speculators exceed sales made by them. This is called a ‘bull campaign.’ Similarly, a ‘bear raid’ is a condition when speculative sales made by bear speculators exceed the purchases made by them and they spread rumours to bring the price down.

Lame Duck: A Bear cannot always keep his commitments because the price does not move the way he wants the shares to move. He is, therefore, said to be struggling like a ‘lame duck.

Stag: A stag is a cautious speculator. He does not buy or sell securities but applies for shares in the new issue market just like a genuine investor on the expectation that the price of the share will soon rise and be sold for a premium. The stag shares the same approach as a bull, always expecting a rise in price. As soon as the stag receives an allotment of his shares, he sells them. He is, therefore, taking advantage in the rise in price of shares and is called ‘premium hunter.’

Hedging: Hedging is a device through which a person protects himself against loss. A ‘bull agreeing to purchase a security for someone may ‘hedge’ or protect himself by buying a ‘put option’ so that any loss that he r suffer in his transaction may be offset. Similarly, a seller can hedge against loss through ‘call’.

Giving Margin Money to Broker

Margin

Margin is the amount of money provided by customers to the brokers who have agreed to trade their securities. It may also be called a provision to absorb any probable loss.

Execution of Order in the Stock Exchange

Making a Deal

When the broker receives the margin money and is clear about the order received by him, he puts the details in the ‘order book.’ The broker in the beginning of his career makes the deals himself. Once his business grows, he employs clerks to transact his orders.

The stock exchange ‘hail’ also called a ‘floor’ is divided into a number of markets according to the security which is being dealt with. The authorised clerk goes to the particular part of the floor called the ‘pit’ and makes his quotation for the purchase or sale according to the order. The dealer to whom the quotation is given quotes his own price, if it does not suit the clerk, he asks for a lower price to be quoted When both the sides are satisfied, the price is settled and the ‘bargain’ is made.

Preparing Contract Note in the Stock Exchange

Contract Note: The clerk takes the details of the day’s transaction to the broker at the end of the working day. The broker scrutinises all transactions of the day and prepares a contract note and signs it on a prescribed form. The contract note gives the details of the contract for the purchase or sale of securities; it records the number of shares, rate and date of purchase or sale. It also gives the ‘brokerage’ entitlement to the broker.

Settlement of Contracts

Settlement

The last step is the settlement of the contract by the broker for his client. The procedure for settlement is to be made (a) for ready delivery contracts and (b) for forward delivery contracts.

Ready Delivery Contracts

A ready delivery contract is to be settled within three days in Kolkata Stock Exchange and 7 days at the Mumbai and Chennai Stock Exchange. A ready delivery contract is also called a ‘spot’ contract. The settlement under this contract can be made on the same day or during the maximum period of 7 days and there can be no extension, or postponement of the time of settlement. Ready delivery contracts can be settled in two ways:

By Actual Delivery: The securities may be purchased or sold and the price is paid or received in full.

By Paying the Difference: The securities are not actually delivered but on the settlement day the transaction is squared by paying the difference.

Carry Over’ or ‘Badla’

Carry Over’ or ‘Badla’ is the facility of postponing a transaction till the next settlement day. This facility is available only in forward delivery contracts. Postponement of a transaction is effected by payment of an amount called ‘Badla Charge.’ Badla is transacted in the following manner:

First, cancel the existing contract by squaring it up. Cancellation is to be made at the price determined by Stock Exchange authorities.
Second, prepare a new transaction through the original transaction for settlement on the next settlement day.

Third, payment of a ‘badla’ charge. When a Bull speculator wishes to defer his transaction, he pays a ‘contango charge’ to the Bear speculator for carrying over of his purchase agreement to the next settlement.

Screen Based Trading System

In March 1995, the Bombay (Mumbai) Stock Exchange has introduced screen based trading called BOLT (BSE on-line Trading). The BOLT is designed to get best bids and offers from jobbers’ book as well as the best buy and sell orders from the order book. Slowly the network is being extended to other cities too. Now the BOLT has a nationwide network. Trading Work Stations are connected with the main computer at Mumbai through Wide Area Network (WAN). The capacity of the Tandem hardware of BOLT is 5,00,000 trades per day (in 6 hours i.e. from 9:30 a.m. to 3:30 p.m. ). After getting specific approval from SEBI, BOLT connections have been installed in Ahmedabad, Rajkot, Pune, Vadodara and Calcutta. The number of scrips on BSE was 4,702 in March 1995 and has increased to 5,853 in March 1998. The following table indicates the trend of trade in the BSE.

Securities Traded

The securities traded in the BSE are classified into three groups namely, specified shares or ‘A’ group and non-specified securities. The latter is sub-divided into ‘B 1’ and ‘B’ groups. ‘A’ group contains the companies with large outstanding shares, good track record and large volume of business in the secondary market. Carry forward transactions for a pe-riod of 90 days are permitted in A group shares. A group contains 150 companies. Relatively liquid securities come under the ‘B 1’ group and it comprises 746 companies. The remaining shares are placed under the ‘B’ group. Settlements of all the shares are carried out through the Clearing House. The settlement period is reduced from 14 days to 7 days for all scrips.

Surveillance System

There is a separate surveillance department in the stock exchange. The surveillance department aims at providing free and fair market, arresting unsystematic risk from entering into the system and managing risks. The surveillance can be classified into price surveillance and pre-monitoring.

Price Surveillance

he surveillance department keeps a close watch over the price movements of scrips and aims at an early detection of market manipulation like price rigging. The price surveillance is effectively carried out mainly through

Circuit filters and Margins.

Circuit Filters

The circuit filters decide the range within which the traded prices of a scrip can vary on a day compared to the previous day’s closing price. The filter percentages are entered into the system. The quote orders outside the prescribed filter band cannot be traded. The filter percentages for various scrips are changed at the end of the day. If there is a need, it may be changed even when the trade is going on. In spite of the price filters if there is a manipulation in the price, the trading of the particular scrip is suspended for a day or more depending upon the situation.

Margins

The trading members deposit part of their trades as a margin to the exchange. The margin amount varies for Type-I members who trade in ‘A’ group shares and Type-I members who have not opted for carry forward trade. Type-I members pay a daily margin of 15% on their trades both on delivery and carry forward. For Type-H members, the margin is computed on the basis of gross exposure or net exposure and the higher of the margin is charged. Mark-to-market margins are collected on all notional losses on a daily basis. Carry over margin is collected when traders’ transactions are carried forwarded in ‘A’ or specified group scrip from one settlement to another settlement.

Special Margin

To curb the unwanted risk in the price and volume special margin has been imposed. The special margin is levied on the net cumulative purchase of the scrip in which the rise in price is abnormally high. It ranges from 25% to 100%.

Concentration Margina

Apart from daily margin if the member’s trade is concentrated on limited number of scrips say one to three scrips, concentration margin is levied. If the sale or purchase position exceeds 50%, 65% and 80% respectively, the member has to pay concentration margin.

Additional Volatility Margin

This margin is imposed on scrips quoting above ` 40. If the price of the scrip changes by 16% or more in one settlement compared to the closing price at the close of the previous settlement, additional volatility margin is imposed on the traders.

Ad-Hoc Margin

The exchange imposes ad-hoc margin above the daily margins. To have an effective risk management, it is levied when there is an excessive purchase or concentrated purchase position in some scrips. It is also imposed if the member’s financial position may not appear to be sound compared to the market exposure.

Check on the Bolt Terminals

The work stations of the members are deactivated generally on two occasions: the member’s failure to pay the fee and violation of the trade restrictions given by the authorities. The decision to deactivate is taken on case- to-case basis.

Position Monitoring

The position monitoring means watching of the member’s trade position and the outstanding exposure. This is carried out to ensure a smooth completion of pay-in and pay-out settlement. Towards this purpose, various Market Monitoring Reports (MMR) are prepared from the trading data. The Information System Department (ISD) of the exchange provides available data on trade.

Outstanding Market Position

The trade exposure beyond a limit is monitored. The trade outstanding market position is R 10 million and above for A + B1 group scrips. It is ` 5 million and above in the case of B group scrip. It is ` 1 million and above for individual scrips. The market exposures of the members are compared with the financial soundness of the members and their normal volume of business. If the margin cover is not adequate against their outstanding position corrective steps are taken. Adhoc margins are imposed and details of members’ dealings are obtained. The member is advised to square up the outstanding position.

Concentrated Purchase or Sales

Sometimes the members concentrate their trading only on certain scrips and it may end in price rigging. The exchange takes appropriate surveillance against it. The judgment of risk is made on the basis of fundamentals of the scrips, daily turnover and market transactions. The market transactions are scrutinised by cross deals, negotiated deals for settlement, transactions for international investors, Indian financial institutions (IFI), Mutual funds (MFs) and corporate clients.

Carry Forward Positions

The exchange limits the carry forward settlement also. The limit given by the exchange is ` 200 million for the members at the end of settlement and ` 300 million at the end of any day within a settlement. Adherence to these limits has been closely monitored by the Surveillance Department. The department also inspects certain dealings and books of accounts of the members. Irregularities are referred to the Disciplinary Action Committee (DAC) of the Exchange and Scrutiny Committee of the Exchange.

Insider Trading

The most profitable technique employed in the stock market is using one’s access to rice sensitive information ahead of others. For example, Hindustan Lever announced the merger of Broke Bond Lipton India with itself on April 16, 1996. But hectic trading took place on the two scrips preceding the announcement. Once the information became public, the trading volume and price declined. Several examples like this can be cited. To prove this SEBI has come out with the SEBI Insider Trading Regulation 1992. The act has defined the insider and the price sensitive information as

Who is or was connected with the company

Who is deemed to have been connected with the company and is reasonably expected to have access by virtue of such connection to unpublished price information or

Who has received or has had access to unpublished price sensitive information.

Connected person is any person:

Who is a director or is deemed to be a director as per the definition in the Companies Act

Who is an officer or employee of the company

Who holds a position involving a professional or business relationship with the company and who may reasonably be expected to have access to unpublished price sensitive information

A subsidiary as per section (370) (IB) on 372 (11)

An official or member of a stock exchange

A dealer in securities or an employee of such dealer member

A merchant banker, share transfer agent, registrar, debenture trustee, broker, portfolio manger, investment advisor, sub-broker, investment company or an employee thereof, a trustee of a mutual fund, or director on the board of an asset management company

a director or employee of a public financial institution

An official or employee of a self-regulatory organization

A relative of any of the above

Banker to the company

Unpublished price sensitive information areas are given below

Financial results of the company

Intended declaration of dividends

Rights or bonus share offers

Major expansion plans or execution of new projects

Amalgamation, mergers and takeovers

Disposal of the whole of the undertaking

Such other information as may affect the earnings of the company

Any changes in policies, plans or operations of the company

Prohibition of Deals

SEBI prohibits an insider from dealings. SEBI is empowered to investigate cases of insider trading. The person being investigated by SEBI is required to produce books, accounts and other documents which the investigating authority may require. SEBI has the authority to restrain the insider from dealing in securities. Any person violating the provision of the insider trading regulation is liable to be punished with fine or imprisonment under the Securities and Exchange Board of India Act, 1992.

Internet Trading

The Net is used as a medium of trading in internet trading. Orders are communicated to the stock exchange through website. Internet trading started in India on 1St April 2000 with 79 members seeking permission for online trading. The SEBI committees on internet based securities trading services has allowed the net to be used as an Order Routing System (ORS) through registered stock brokers on behalf of their clients for execution of transaction.

Under the Order Routing System the client enters his requirements (security, quantity, price, and buy/sell) in broker’s site. They are checked electronically against the clients account and routed electronically to the appropriate exchange for execution by the broker. The client receives a confirmation on execution of the order. The customer’s portfolio and ledger accounts get updated to reflect the transaction.

The user should have the user id and password to enter into the electronic ring. He should also have a demat account and bank account. The system permits only a registered client to log in using user ID and password. Order can be placed using place order window of the website.

The client has to enter stock code and other parameters such as quantity and price of the scrip on the place order window.

The client can review the order placed by clicking the review option. He can also reset to clear the values.

Satisfactory orders are sent by clicking the Send option.

The client receives an order confirmation message with order number and value of the order.

If the order is rejected by the broker or stock exchange for certain reasons such as invalid price limit, a related message appears at the bottom of the screen. The time taken to execute the order is 10 seconds.

When the trade is executed, the broker asks for the transfer of funds by the investor to his account. Stocks are credited/debited according to the buy/sell order in the demat accounts.

Internet trading provides total transparency between a broker and an investor in the secondary market. In the open outcry system, only the broker knew the actually transacted price. Screen based trading provides more transparency. With online trading investors can see themselves the price at which the deal takes place.

The time gap has narrowed in every stage of operation. Confirmation and execution of trade reaches the investor within the least possible time, mostly within 30 seconds. Instant feedback is available about the execution. Some of the websites also offer;

News and research report

BSE and NSE movements

Stock analysis

Freebies

IPO and mutual fund centers and

Movements of international stock exchanges.

Takeovers & Merger

Terms such as merger, amalgamation, take-over, consolidation, etc., are used int to denote the process of corporate re-structuring. There is no common definition and these terms may be used to describe a re-structuring of one type of the other. Generally, these terms are used to denote a particular type of re-structuring as follows:

Merger

The term merger includes consolidation, amalgamation and absorption. It refers to a situation when two or more existing firms combine together and form a new entity. Either a new company may be incorporated for this purpose or one existing company (generally a bigger one) survives and another existing company (which is smaller) is merged into it. If a new company is incorporated, it is known as a case of consolidation/amalgamation. However, if an existing company is merged into another existing company, it is known as absorption.

The merger of Tata Oil Mills Ltd. and Brook Bond Lipton (India) Ltd. into Hindustan Lever Ltd. were cases of absorption. On the other hand, merger of 4 companies into HCL Ltd. was a case of consolidation. In year 2000, Times Bank had been merged with HDFC Bank, in line with the wave of consolidation that is sweeping across the global banking industry. SmithKline Beecham Pharmaceutical Ltd. has been merged into Glaxo Ltd. ICICI Ltd., a financial institution has been merged into ICICI Bank Ltd.

Merger is an arrangement for bringing the assets of two firms under control of one. It signifies the transfer of all assets and liabilities of one or more existing companies to another existing or new company. A basic feature of merger is that one company takes the ownership of another company and combine its operations with that of its own operations. The term merger is used to denote the fusion of two or more companies.

Takeovers

In general takeovers refer to the acquiring of ownership right in the property and assets. It denotes a situation when one company acquires (i) ownership in the assets, and to control of monies of another company. The other company of which the control is so acquired remains a separate company and is not liquidated, but there is a change in control.

A.V. Birla Group has acquired controlling interest in Larsen & Toubro Ltd. Acquisition results when one company purchases the controlling interest in the share capital of another existing company in any of the following ways:

By entering into an agreement with a person or persons holding controlling interest in the other company.

By subscribing new shares being issued by the other company.

By purchasing shares of the other company at a stock exchange.

By making an offer to buy the shares of other company, to the existing shareholders of that company.

The term take-over is used to denote the acquisition, which is hostile in nature and the company which is being taken-over may put resistance and oppose the take-over bid. Two companies, i.e., DCM Ltd. and Escorts Ltd. had successfully resisted the take-over bid on their companies by the Caparo Group of the U.K. Arun Bajoria made an unsuccessful bid to take over the controlling interest in Bombay Dyeing Ltd.

Another form of acquisition may take place in the form of holding-subsidiary relationship between two companies. A company is called a holding company if it controls the composition of the Board of Directors of the other company, or holds more than half in nominal value of the equity share capital of the other company. The other company in such a case is known as the subsidiary company.

Both holding and the subsidiary companies maintain their individual identity in the eyes of law as well as in practice. Generally, the relationship between holding and subsidiary companies takes place at the time of incorporation of the latter. Reliance Petro Chemical Ltd. was incorporated as a subsidiary of Reliance Industries Ltd. and later it was merged into the holding company. Hindustan Lever Chemical Ltd. (erstwhile Stepan Chemical Ltd.) is a subsidiary of Hindustan Lever Ltd. In most of the cases, subsidiary companies are small in size and operate as an investment or financing arm of the holding company.

In accounting, the term merger is taken in a different way. The Accounting Standard, AS- 14, issued by the Institute of Chartered Accountants of India has defined the term amalgamation by classifying

Amalgamation in the nature of merger, and

Amalgamation in the nature of purchase.

Mergers and Take-Overs: Indian Scene

In India, the concept of mergers, acquisitions and take-overs had not been popular and kept a low profile, and the reason for this is quite obvious. The regulatory and prohibitory provisions of MRTP Act, 1969 provided for a cumbersome procedure to get approval for mergers and acquisitions under the Act. However, most of the previsions of the MRTP Act, 1969, have been repealed as a part of economic liberalization drive of the Government of India. In most of the cases, merger in India used to be friendly amalgamation resulting as a consequence of a negotiated deal, untill 1988 when there was the well-known unsuccessful hostile take-over bid by Swaraj Paul (of Caparo Group of the U.K) to get control over DCM Ltd. and Escorts Ltd. Many other Non-resident Indians, such as Chabrias, Hindujas, etc., also attempted to take over many Indian companies by buying shares of these companies at stock exchanges.

During recent years, there has been a spate of merger moves by various industrial groups. Voirho Ltd., a loss-making company, was amalgamated with Voltas Ltd. Hindustan Lever Ltd., first, acquired Tata Oil Mills from the Tata Group and then merged other group ccmpanies, i.e., Brook Bond Lipton (India) Ltd. and Ponds (India Ltd.) with it. The SCICI Ltd., which was initially promoted by ICICI Ltd., has been merged with the latter. Jindal Ferroy Alloys Ltd. has been merged with Jindal Strips Ltd. ITC Classic Ltd. has been merged with ICICI Ltd. British Gas Company has taken over Gujarat Gas Company. Company like Nicholas Piramal has been built only by mergers and acquisitions. India Cement Ltd.’s offer for Raasi Cement Ltd. and the offer of Sterlite Ltd, for taking over Indian Aluminum Company have heralded a new era of hostile take-overs in India.

Regulatory Framework in India

Initially, the regulatory framework for mergers and acquisitions was contained in MRTP Act, 1969. As a measure for reviving the sick enterprises, the Government introduced certain fiscal concessions through the Finance Act, 1976 under Section 72A of the Income Tax Act, 1961.

A profit-making enterprise taking over a sick firm was allowed to carry forward and set off accumulated losses of the later (subject to certain conditions). Presently, the mergers and acquisitions of corporate entities are regulated by provisions contained in (i) Companies Act, 1956; (ii) Security Contracts (Regulations) Act, 1956; (iii) Income-Tax Act, 1961; (iv) Sick Industries Companies (Special Provisions) Act, 1985; (v) Securities and Exchange Board of India Act, 1992, and (vi) Listing Agreement of the Stock Exchanges.

Tax Aspects of Mergers and Takeovers

Income Tax Act, 1961 is vital among all tax laws which affect the merger of firms from the point of view of tax savings/liabilities. However, the benefits under this Act are available only if the following conditions mentioned in Section 2 (1B) of the Act are fulfilled:

All the amalgamating companies should be companies within the meaning of the Section 2 (17) of the Income Tax Act, 1961;

All the properties of the amalgamating company (i.e., the target firm) should be transferred to the amalgamated company (i.e., the acquiring firm);

All the liabilities of the amalgamating company should become the liabilities of the amalgamated company; and

The shareholders of not less than 90% of the share capital of the amalgamating company should become the shareholders of amalgamated company.

In case of mergers and amalgamations, a number of issues may arise with respect to tax implications. Some of the relevant provisions may be summarized as follows:

Depreciation

The amalgamated company continues to claim depreciation on the basis of written down value of fixed assets transferred to it by the amalgamating company. The depreciation charge may be based on the consideration paid and without any re-valuation. However, unabsorbed depreciation, if any, cannot be assigned to the amalgamated company and hence no tax benefit is available in this respect.

Capital Expenditures

If the amalgamating company transfers to the amalgamated company any asset representing capital expenditure on scientific research, then it is deductible in the hands of the amalgamated company under Section 35 of the Income Tax Act, 1961.

Exemption from Capital Gains Tax

The transfer of assets by amalgamating company to the amalgamated company, under the scheme of amalgamation is exempted for capital gains tax subject to conditions, namely (i) that the amalgamated company should be an Indian Company, and (ii) that the shares are issued in consideration of the shares, to any shareholder, in the amalgamated company. The exchange of old shares in the amalgamated company by the new shares in the amalgamating company, is not considered as sale by the shareholders and hence no profit or loss on such exchange is taxable in the hands of the shareholders of the amalgamated company.

Carry Forward Losses of Sick Companies

Section 72A(1) of the Income Tax Act, 1961 deals with the mergers of the sick companies with healthy companies and to take advantage of the carry forward losses of the amalgamating company. But the benefits under this Section with respect to unabsorbed depreciation and carry forward losses are available only if the following conditions are fulfilled:

The amalgamating company is an Indian Company;

The amalgamating company should not be financially viable;

The amalgamation should be in public interest;

The amalgamation should facilitate the revival of the business of the amalgamating company;

The scheme of amalgamation is approved by a specified authority; and

The amalgamated company should continue to carry on the business of the amalgamating company without any modification.

Amalgamation Expense

In case, an expenditure is incurred red towards professional charges of Solicitors for the services rendered in connection with the scheme of amalgamation, then such expenses are deductible in the hands of the amalgamated firm.