A Glossary of Terms Related Indian Stock Market
A Broker is a registered member of a stock exchange, who buys or sells shares and securities on his clients’ behalf and charges a commission. Such broker are called Commission Brokers.
There are also brokers who offer services, like investment advise, client’s portfolio planning, credit when a client is buying on margin, and similar services, which are different from their traditional commission based jobs. Such brokers are called Full Service Brokers.
A Jobber is a broker’s broker, or one who specialises in specific securities catering to the needs of other brokers. In India, in the BSE, they are referred to as Taravaniwallah. A jobber is located at a particular trading post, on the floor of the stock exchange, and does buying or selling for small price differences, which is called a spread. A jobber has no contact with the public who invests. In the OTCEI, only jobbers are allowed to transact.
In London Stock Exchange, they are called a ‘Market-maker‘, while in New York Stock Exchange, they are referred to as the ‘Specialists‘.
BSE has made it mandatory for every company, with a share capital of over Rs. 3 crores, to appoint jobbers.
It is a share given to the existing shareholders without any charge. It is also called Bonus share.
It is a share given to the employees of the company without any charge.
This is an important reform introduced in the Indian stock market in December 2001, under which all commitments of sale and purchase result into payment or delivery at the end of ‘T’ days. This helps prevent under volatility and unhealthy speculation in the stock market.
Prior to the introduction of this system, the system practiced in India was called Badla, under which 2 week period was given for settling transactions. However, this often led to brokers taking long positions and indulging in unhealthy speculations, which was detrimental to investors interest.
The introduction of Rolling settlement has added to the integration of Indian stock market, with the global ones.
Badla is term used when the buyer wants to postpone the trasanction. It is also known as Contango in USA.
While, Undha Badla, is a term that means a situation when the seller wants the postponement of the transactions. It is also known as Reverse Badla or Backwardisation.
It is a system started in 1996, under which stocks are converted into paperless form, or dematerialisation of shares (DEMAT). At present, two public sector depositories are functioning in India, which were set up under the Depositories Act, 1996. These two depositories are: National Securities Depositories Limited (NSDL) and the Central Depositories Services Limited (CDSL).
National Securities Clearing Corporation (NSCC):
NSCC is a PSU, established in 1996, to take the counter-party risk of all transactions done at the NSE.
It is a process, started in 2002, by SEBI under which the ownership, management and trading membership was to be segregated from each other. No broker was to be on the Board of Directors or an officer bearer position in the stock exchanges.
It is the limit upto which shares can be issued by a company. It is also called Nominal or Registered capital. This is fixed in a Memorandum of Association (MoA) and the Article of Association (AoA) of a company as required by the Companies Act.
it is that part of the authorised capital, of a company, that has actually been paid by shareholders.
It is that amount which is sought to be raised by issuing shares. This amount cannot exceed the authorised capital.
Financial Institutional Investors (FIIs):
The FIIs were allowed to invest in Indian stock market in 1993, under the policy of Portfolio Investment Scheme (PIS). An FII, having a good track record, may register itself with the SEBI, as a broker, and start playing in the stock market. There is a recent upsurge in FIIs, due to the entry of Japanese and other South-East Asian FIIs in India.
FIIs, in India, can invest upto 24% of their paid-up capital in an Indian company; 49% in private banks; and 74% in telecom sector. In the Public Sector Banks, the FIIs can invest only upto 20%.
it is a provision where a company, issuing shares for the first time, is allowed to sell some additional shares to the public. It is also known as ‘Over-Allotment Provision‘.
ESOP (Employee Stock Ownership Plan):
ESOP enables a foreign company to offer its shares to employees overseas. It was allowed in India, in February 2005, with a condition that the MNC should maintain a minimum of 51% holding in its Indian company.
Derivative is a product whose value is derived from the value of more basic variables, called Bases, in a contractual manner. The underlying asset can be an equity, forex, commodity etc. IT is done with the objective of hedging future risks.
In India, it is governed by the Securities Contract Act, 1956.
Indian Depository Receipts (IDRs):
as per the Companies (Issue of IDR) Rules, 2004, an IDR is an instrument in the form of a Depository receipt created by the Indian depository in India against the underlying equity shares of the issuing company. In an IDR, foreign companies would issue share to an Indian Depository (like NSDL), which would in turn issue depository receipt to investors in India. The actual shares underlying the IDR would be held by the Overseas custodian, which shall authorise the Indian Depository to issue the IDR.
Thus, IDR is a mechanim that allows the investors in India to invest in listed foreign companies, in Indian rupees. IDRs are denominated in Indian rupee. They can be listed on any Indian stock exchange. Anyone who can invest in an IPO (Initial Public Offer) is eligible to invest in IDRs.
IDRs are, similar to what ADRs or GDRs are to foreign investors, with respect to Indian companies.
StanChart is the only issuer of IDRs, in Indian markets, which came out with its IDR issue in May 2010.
FII are allowed by the SEBI to invest in the Indian Stock market via the Participatory Notes. FII need not disclose the details about the foreign nationals whose money is being invested via these notes.
However, this route is considered as volatile, as it may quickly quit the economy, after a simple speculatory newsm, giving birth to severe financial crisis. This is what happened in the South-East Asian crisis.
The Second Committee on Capital Account Convertibility, headed by S. S. Tarapore, has recommended to check and control it.
these funds represent the capital which moves very swiftly towards the more profitable sectors of an economy. Such funds easily move from the stock market of one economy to the another. By nature, these funds are temporary in an economy. There entry and exit might bring boom and crisis for a economy.
Sale of share which is not owned. This is done by someone, after borrowing shares from stock brokers, promising to replace them at a future date, on the hope that the price will fall by then. Recently, short selling has been allowed in India by the SEBI.
It is a provision allowed by the SEBI to all IPOs (Initial Public Offers) in which individual investors are reserved and allotted shares by the company. But the issuer has to disclose the price.
Direct Investment in Equity Market:
Qualified Foreign Investors (QFIs) are now allowed to directly invest in Indian equity market. This was allowed to widen the class of investors, attract foreign funds, reduce market volatility, and deepen the Indian capital market.
QFI shall include individuals, groups or associations, resident in a foreign country, that is complaint with the Financial Action Task Force (FATF) and that is signatory to International Organisation of Securities Commission’s (IOSCO) multilateral MoU.
Earlier, only FIIs and NRIs were allowed to directly invest in the Indian equity market. However, to further liberalise the Portfolio Investment Route, the Budget of 2011-12 permitted SEBI-registered Mutual Funds to accept subscription for equity schemes for foreign investors who meet the KYC requirements.
Foreign Institutional Investment (FIIs) in G-sec and Corporate Bonds:
In November 2011, the government decided to increase the current limit of FIIs investment in government securities to USD 15 billion; and to increase the current limit of FIIs investment in corporate bonds to USD 20 billion. Investment limit in long-term infrastructure corporate bonds has been retained at USD 25 billion.
Financial Action Task Force (FATF):
It is an inter-governmental policy making body that has a ministerial mandate to establish international standards for combating money laundering and terrorist financing. India joined the FATF as its 34th member in 2010. Presently, FATF has 36 member, which comprise of 34 countries and EU and Gulf Cooperation Council (GCC).
The FATF team, that visited India in April 2011, appreciated India for being on course for fulfillment of its medium term commitment plan due in March 2012.
Financial Sector Assessment Programme (FSAP):
The Committee on Financial Sector Assessment (CFSA), which was co-chaired by Deputy Governor of RBI and Secretary, Department of Economic Affairs, completed a self-assessment in 2009.
In May 2010, India requested the IMF and World Bank to conduct a full fledged FSAP, which was later conducted in 2011.
Financial Stability and Development Council (FSDC):
To strengthen and institutionalise the mechanism for maintaining financial stability and enhancing inter-regulatory co-ordination, an apex level FSDC was set up under the chairmanship of the Finance Minister.
A sub-committee of the FSDC has also been set up under the chairmanship of the RBI Governor.
Under the FSDC, 2 empowered Technical Groups- Technical Group on Financial Literacy and Financial Inclusion, and Inter-Regulatory Technical Group, have been formed.
Financial Sector Legislative Reforms Commission (FSLRC):
Government constituted the FSLRC, under the chairmanship of Justice B. N. Srikrishna, in March 2011. These reforms are necessary, as large number of amendments in these Acts have increased the ambiguity and complexity of the system. The Commission would simplify and rewrite financial sector legislations, including subordinate legislations, to bring them in line with the requirements of the sector, to achieve harmony and synergy among them, making them more coherent and dynamic. (download the FSLRC reports)
Securities Transaction Tax (STT):
Rapid growth of the Indian stock market and the wealth of the investors has provided the government an avenue of revenue, by way of imposing the STT, on all transactions in the stock market. The levy is split equally between the buyer and the seller.
Unit Linked Insurance Plan (ULIP)
ULIPs are hybrid intruments where a part of the amount paid by subscribers is invested and a small portion goes towards insurance premium. SEBI passed an order in April 2010 that regulation of ULIP should be it’s responsibility, instead of the IRDA, as the funds were mostly invested in the stock markets. SEBI also imposed a ban on 14 insurance companies for selling ULIPs without its approval. However, later, an ordinance was passed whereby it was clarified that life insurance businesses includes ULIPs, and the IRDA was made the regulator of the ULIPs.
IRDA carried out reforms in the ULIPs by issuing fresh guidelines according to which, ULIPs launched after September 1, 2010 will have low charges, guaranteed returns, longer lock-in period and large insurance cover.
* This is not an all-comprehensive list of the terms related to the Stock Market of India. But it would be helpful to know about these terms.
Team Aspirant Forum