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Chapter: Business Science : Merchant Banking and Financial Services : Merchant Banking

Organization of Stock Exchanges

1 Traditional Structure of stock Exchanges 2 Demutualization of Stock Exchanges 3 Corporatization of Stock Exchanges

Organization of Stock Exchanges:

The first organized stock exchange in India was started in Bombay in 1875 with the formation of the ‗Native share and Stock Brokers Association‗. Thus the Bombay Stock Exchange is the oldest one in the country. With the growth of Joint stock companies, the stock exchanges also made a steady growth and at present these are 23 recognized stock exchanges with about 6000 stock brokers.


1 Traditional Structure of stock Exchanges

The stock exchanges in India can be classified into two broad groups on the basis of their legal structure.

They are;

1. Three stock exchanges which are functioning as association of person‗s viz., BSE, ASE and Madhya Pradesh Stock Exchange.

2. Twenty stock exchanges which have been set up as companies, either limited by guarantees or by shares. They are



Ø   Bangalore Stock Exchange


Ø   Bhubaneswar Stock exchange


Ø   Calcutta Stock Exchange


Ø   Cochin Stock Exchange


Ø   Coimbatore Stock Exchange


Ø   Delhi Stock Exchange


Ø   Gauhati Stock Exchange


Ø   Hyderabad Stock Exchange


Ø   Interconnected Stock Exchange


Ø   Jaipur Stock Exchange


Ø   Ludhiana Stock Exchange


Ø   Madras Stock Exchange


Ø   Magadh Stock Exchange


Ø   Mangalore Stock Exchange


Ø   National Stock Exchange


Ø   Pune Stock Exchange







2 Demutualization of Stock Exchanges


• The transition process of an exchange from a ―mutually-owned‖ association to a company ―owned by Shareholders‖ is called demutualization.

Demutualization is transforming the legal structure, of an exchange from a mutual form to a business corporation form. In a mutual exchange, the three functions of ownership, management and trading are intervened into a single group. It means that the broker members of the exchange are owners as well as traders on the exchange and further they themselves manage the exchange. These three functions are segregated from one another after demutualization.


The demutualised stock exchanges in India are;



1. The National Stock Exchange (NSE)


2. Over the Counter Exchange of India (OTCEI)




3 Corporatization of Stock Exchanges


The process of converting the organizational structure of the stock exchange from a non-


corporate structure to a corporate structure is called Corporatization of stock exchanges. As stated earlier, some of the stock exchanges were established   as   ―AssociationinIndia   of like BSE, ASE and MPSE. Corporatization of these exchanges is the process of converting then into incorporated companies.




The recognized stock exchanges are managed boards consist of elected member directors from stock broker members, public representatives and government nominees nominated by the SEBI. The government has also powers to nominate Presidents and Vice-presidents of stock exchanges and to approve the appointment of the chief Executive and public representatives. The major stock exchanges are managed by the Chief Executive Director and the smaller stock exchanges are under the control of a Secretary.




To become a member of a recognized stock exchange, a person must possess the following qualifications:

• He should be a citizen of India,

• He should not be less than 21 years of age,

• He should not have been adjudged bankrupt or insolvent,

• He should not have been convicted for an offence involving fraud or dishonesty,

• He should not be engaged in any other business except dealing in securities,

• He should not have been expelled by any other stock exchange or declared a defaulter by any other stock exchange.

Methods of Trading in a Stock Exchange:


The stock exchange operation at follow level is highly technical in nature. Nonmembers are not permitted to enter into the stock market. Hence, various stages have to be completed in executing a transaction at a stock exchange. The steps involved in the methods of trading have been given below:





1.     Choice of Broker:


The prospective investor who wants to buy shares or the investor who wants to sell his shares cannot enter into the hall of exchange and transact business. They have to act through only member brokers. They can also appoint their bankers for this purpose, since; bankers can become members of the stock exchange as per the present regulations. So, the first task in transacting business on a stock exchange is to choose a broker of repute or a banker. Such persons alone can ensure prompt and quick execution of a transaction at the best possible and profitable price.


2.     Placement of Order:


Placement of order refers to the purchase or sale of securities with the broker. The order is usually placed by telegram, telephone, letter, fax etc., or in person.


3.     Execution of Orders:


The Orders are executed through their authorized clerks. Small one carries out their business personally. Orders are executed in Trading ring of a stock exchange which works from 12 noon to 2 p.m. on all working days from Monday to Friday and a special one hour session on Saturday. Trading outside the trading hours is called kerb dealings.


(1) Preparation of Contract Notes:


A  contract  note  is  a  written  agreement  between  the  broker  and  his  client  for  the transactions executed. It contains the details of the contract made for the purchase/sale of securities, the brokerage chargeable, name of the company, number of shares bought/ sold, net rate, etc., it is prepared in a prescribed from and a copy of it is also sent to the client.


(2) Settlement of Transactions:


The settlement of transactions is made by means of delivering the share certificates along with the transfer deed. The transfer deed is duly signed by the transferor, i.e., the seller. It bears the stamp of the selling broker. The buyer then fills up the particulars in the transfer deed.

At present, the settlement can be made by any one of the following methods;


Spot delivery settlement:


i.e., the delivery of securities and payment for these are affected on the date of the contract itself or on the next day.


Hand Delivery Settlement:


i.e., the delivery of securities and payment are affected within the time stipulated in the agreement or within 14 days from the date of the contract whichever is earlier.


Clearing Settlement:


i.e., the transactions are cleared and settled through the clearing house. Usually those securities which are frequently traded and are usually in demand are cleared through the clearing house. These transactions are also referred to as the transaction for the account.


Special Delivery Settlement:


i.e., the delivery of securities and payment may take place at any time exceeding 14 days following the date of the contract as specified in the contract and permitted by the governing board.

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