Industry Prof Pra
Transcript of Industry Prof Pra
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INDUSTRY PROFILE
NVESTMENT IN INDIAN MARKET
India is believed to be a good investment despite political uncertainty, bureaucratic hassles, and
shortages of power and infrastructure deficiencies. India presents a vast potential for overseas
investment and is actively encouraging the entrance of foreign players into the market. No
company, of any size, aspiring to be a global player can, for long ignores this country, which is
expected to become one of the top three emerging economies.
SUCCESS IN INDIA
Success in India will depend on the correct estimation of the country's potential; underestimation
of its complexity or overestimation of its possibilities can lead to failure. While calculating, due
consideration should be given to the factor of the inherent difficulties and uncertainties of
functioning in the Indian system. Entering India's marketplace requires a well-designed plan
backed by serious thought and careful research. For those who take the time and look to India as
an opportunity for long-term growth, not short-term profit- the trip will be well worth the effort.
MARKET POTENTIAL
India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom,
and Russia) and has the third largest GDP in the entire continent of Asia. It is also the second
largest among emerging nations. (These indicators are based on purchasing power parity). India
is also one of the few markets in the world, which offers high prospects for growth and earning
potential in practically all areas of business. Despite the practically unlimited possibilities in
India for overseas businesses, the world's most populous democracy has, until fairly recently,
failed to get the kind of enthusiastic attention generated by other emerging economies such as
China.
LACK OF ENTHUSIASM AMONG INVESTORS
The reason being, after independence from Britain 50 years ago, India developed a highly protected,
semi-socialist autarkic economy. Structural and bureaucratic impediments were vigorously fostered, along
with a distrust of foreign business. Even as today the climate in India has seen a sea change, smashing
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barriers and actively seeking foreign investment, many companies still see it as a difficult market. India is
rightfully quoted to be an incomparable country and is both frustrating and challenging at the
same time.
Foreign investors should be prepared to take India as it is with all of its difficulties,
contradictions and challenges. Developing a basic understanding or potential of the Indian
market Envisaging and developing a Market Entry Strategy and implementing these strategies
when actually entering the market are three basic steps to make a successful entry into India. The
Indian middle class is large and growing; wages are low; many workers are well educated and
speak English; investors are optimistic and local stocks are up; despite political turmoil, the
country presses on with economic reforms. But there is still cause for worries- Infrastructure
hassles.
The rapid economic growth of the last few years has put heavy stress on India's infrastructure
facilities. The projections of further expansion in key areas could snap the already strained lines
of transportation unless massive programs of expansion and modernization are put in place.
Problems include power demand shortfall, port traffic capacity mismatch, poor road conditions
(only half of the country's roads are surfaced) and low telephone penetration.
INDIAN BUREAUCRACY
Although the Indian government is well aware of the need for reform and is pushing ahead in
this area, business still has to deal with an inefficient and sometimes still slow-moving
bureaucracy.
DIVERSE MARKET
The Indian market is widely diverse. The country has 17 official languages, 6 major religions,
and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ greatly among
sections of consumers. Therefore, it is advisable to develop a good understanding of the Indian
market and overall economy before taking the plunge.
INTERNATIONAL PORTFOLIO FLOWS:
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International portfolio flows, as opposed to foreign direct investment (FDI) flows, refer to capital
flows made by individuals or investors seeking to create an internationally diversified portfolio
rather than to acquire management control over foreign companies. Diversifying internationally
has long been known as a way to reduce the overall portfolio risk and even earn higher returns.
Investors in developed countries can effectively enhance their portfolio performance by adding
foreign stocks particularly those from emerging market countries where stock markets have
relatively low correlations with those in developed countries.
International portfolio flows are largely determined by the performance of the stock markets of
the host countries relative to world markets. With the opening of stock markets in various
emerging economies to foreign investors, investors in industrial countries have increasingly sought to
realize the potential for portfolio diversification that these markets present.
It is likely that for quite a few years to come, FII flows would increase with global integration. The main
question is whether capital flew in to these countries primarily as a result of changes in global (largely
US) factors or in response to events and indicators in the recipient countries like its credit rating and
domestic stock market return. The answer is mixed both global and country-specific factors seem to
matter, with the latter being particularly important in the case of Asian countries and for debt flows rather
than equity flows.
FOREIGN INSTITUTIONAL INVESTMENT IN INDIA:
MILESTONES
India embarked on a programme of economic reforms in the early 1990s to tie over itsbalance of payment crisis and also as a step towards globalization.
An important milestone in the history of Indian economic reforms happened onSeptember 14, 1992, when the FIIs (Foreign Institutional Investors) were allowed toinvest in all the securities traded on the primary and secondary markets, including shares,
debentures and warrants issued by companies which were listed or were to be listed the
stock exchanges in India and in the schemes floated by domestic mutual funds.
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Initially, the holding of a single FII and of all FIIs, NRIs (Non-Resident Indians) andOCBs (Overseas Corporate Bodies) in any company was subject to a limit of 5% and
24% of the company's total issued capital respectively.
( In order to broad base the FII investment and to ensure that such an investment wouldnot become a camouflage for individual investment in the nature of FDI (Foreign Direct
Investment), a condition was laid down that the funds invested by FIIs had to have at
least 50 participants with no one holding more than 5%. Ever since this day, the
regulations on FII investment have gone through enormous changes and have become
more liberal over time.
(From November 1996, FIIs were allowed to make 100% investment in debt securitiessubject to specific approval from SEBI as a separate category of FIIs or sub-accounts as
100% debt funds. Such investments were, of course, subjected to the fund-specific ceilingprescribed by SEBI and had to be within an overall ceiling of US $ 1.5 billion. The
investments were, however, restricted to the debt instruments of companies listed or to be
listed on the stock exchanges.
In 1997, the aggregate limit on investment by all FIIs was allowed to be raised from 24%to 30% by the Board of Directors of individual companies by passing a resolution in their
meeting and by a special resolution to that effect in the company's General Body meeting.
( From the year 1998, the FII investments were also allowed in the dated government securities,treasury bills and money market instruments.
( In 2000, the foreign corporates and high net worth individuals were also allowed to invest assub-accounts of SEBI-registered FIIs. FIIs were also permitted to seek SEBI registration in
respect of sub-accounts. This was made more liberal to include the domestic portfolio managers
or domestic asset management companies.
( 40% became the ceiling on aggregate FII portfolio investment in March 2000. ( Later, on December 27, 2002 the committee was reconstituted and came out with
recommendations in June 2004. The committee had proposed that, 'In general, FII investment
ceilings, if any, may be reckoned over and above prescribed FDI sectoral caps. The 24 per cent
limit on FII investment imposed in 1992 when allowing FII inflows was exclusive of the FDI
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limit. The suggested measure will be in conformity with this original stipulation.' The committee
also has recommended that the special procedure for raising FII investments beyond 24 per cent
up to the FDI limit in a company may be dispensed with by amending the relevant regulations.
ACTS AND RULES
ELIGIBILITY FOR REGISTRATION AS FII: Following entities / funds are eligible to get
registered as FII:
Pension Funds Mutual Funds Insurance Companies Investment Trusts
. Banks University Fund s
The Indian money market is "a market for short-term and Long term funds with maturity ranging
from overnight to one year and includes financial instruments that are deemed to be close
substitutes of money." It is diversified and has evolved through many stages, from the
conventional platform of treasury bills and call money to commercial paper, certificates of
deposit, repos, FRAs and IRS more recently. The Indian money market consists of diverse sub-
markets, each dealing in a particular type of short-term credit. The money market fulfills the
borrowing and investment requirements of providers and users of short-term funds, and balances
the demand for and supply of short-term funds by providing an equilibrium mechanism. It also
serves as a focal point for the Central Bank's intervention in the market.The Indian money
market consists of the unorganized sector: moneylenders, indigenous bankers, chit funds;
organized sector: Reserve Bank of India, private banks, public sector banks, development banks
and other Non Banking Financial Companies(NBFCs) such as Life Insurance Corporation ofIndia (LIC), Unit Trust of India (UTI), the International Finance Corporation, IDBI, and the co-
operative sector.
CALL MONEY MARKET
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The call money market deals in short term finance repayable on demand, with a maturity period
varying from one day to 14 days. S.K. Muranjan commented that call loans in India are provided
to the bill market, rendered between banks, and given for the purpose of dealing in the bullion
market and stock exchanges. Commercial banks, both Indian and foreign, co-operative banks,
Discount and Finance House of India Ltd.(DFHI), Securities trading corporation of India (STCI)
participate as both lenders and borrowers and Life Insurance Corporation of India (LIC), Unit
Trust of India(UTI), National Bank for Agriculture and Rural Development (NABARD)can
participate only as lenders. The interest rate paid on call money loans, known as the call rate, is
highly volatile. It is the most sensitive section of the money market and the changes in the
demand for and supply of call loans are promptly reflected in call rates. There are now two call
rates in India: the Interbank call rate'and the lending rate of DFHI. The ceilings on the call rate
and inter-bank term money rate were dropped, with effect from May 1, 1989. The Indian call
money market has been transformed into a pure inter-bank market during 200607. The major
call money markets are in Mumbai, Kolkata, Delhi, Chennai, and Ahmadabad.
TREASURY BILL MARKET:
Treasury bills are instrument of short-term borrowing by the Government of India, issued as
promissory notes under discount. The interest received on them is the discount which is the
difference between the price at which they are issued and their redemption value. They have
assured yield and negligible risk of default. Under one classification, treasury bills are
categorized as ad hoc, tap and auction bills and under another classification it is classified on the
maturity period like 91-days TBs, 182-days TBs, 364-days TBs and two types of 14-days TBs. In
the recent times (200203, 200304), the Reserve Bank of India has been issuing only 91-day
and 364-day treasury bills. the auction format of 91-day treasury bill has changed from uniform
price to multiple price to encourage more responsible bidding from the market players.[4] the
bills are two kinds- Adhoc and regular. the adhoc bills are issued for investment by the state
governments, semi government departments and foreign central banks for temporary investment.
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they are not sold to banks and general public. The treasury bills sold to the public and banks are
called regular treasury bills. they are freely marketable. Commercial bank buy entire quantity of
such bills issued on tender . they are bought and sold on discount basis.
READY FORWARD CONTRACT (REPOS)
Repo is an abbreviation for Repurchase agreement, which involves a simultaneous "sale and
purchase" agreement. When banks have any shortage of funds, they can borrow it from Reserve
Bank of India or from other banks. The rate at which the RBI lends money to commercial banks
is called repo rate, a short term for repurchase agreement. A reduction in the repo rate will help
banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes
more expensive.
MONEY MARKET MUTUAL FUNDS
Money market mutual funds invest money in specifically, high-quality and very short maturity-
based money market instruments. The RBI has approved the establishment of very few such
funds in India. In 1997, only one MMMF was in operation, and that too with very small amount
of capital.
RESERVE BANK OF INDIA
The influence of the Reserve Bank of India's power over the Indian money market is confined
almost exclusively to the organized banking structure. It is also considered to be the biggest
regulator in the markets. There are certain rates and data which are released at regular intervals
which have a huge impact on all the financial markets in INDIA. The unorganized sector, which
consists mostly of indigenous bankers and non-banking financial companies, although occupying
an important position in the money market have not been properly integrated with the rest of the
money market. The recommendations of the Sukhumi Chakra arty Committee on the Review of
the Working of the Monetary system, and the Narasimham Committee Report on the Working of
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the Financial System in India, 1991, The Reserve Bank of India has initiated a series of money
market reforms basically directed towards the efficient discharge of its objectives. The bank
reduced the ceiling rate on bank advances and on inter-bank call and short-notice money. There
has been a significant lowering of the minimum lending rate of commercial banks and public
sector development financial institutions from 18% in 199091 to 10.5% in 200506.
INVESTMENT OPPORTUNITIES FOR FIIs
THE FOLLOWING FINANCIAL INSTRUMENTS ARE AVAILABLE FOR FII INVESTMENTS
Securities in primary and secondary markets including shares, debentures and warrants ofcompanies, unlisted, listed or to be listed on a recognized stock exchange in India;
Units of mutual funds; Dated Government Securities) Derivatives traded on a recognized stock exchange; Commercial papers. Investment limits on equity investments FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of
an Indian company.
Investment on behalf of each sub-account shall not exceed 10% of total issued capital ofan India company.
For the sub-account registered under Foreign Companies/Individual category, theinvestment limit is fixed at 5% of issued capital.
These limits are within overall limit of 24% / 49 % / or the sectoral caps a prescribed byGovernment of India / Reserve Bank of India.
INVESTMENT LIMITS ON DEBT INVESTMENTS
The FII investments in debt securities are governed by the policy if the Government ofIndia. Currently following limits are in effect:
For corporate debt the investment limit is fixed at US $ 500 million.
TAXATION
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The taxation norms available to a FII are shown in the table below.
Nature of Income Tax Rate
Long-term capital gains 10%
Short-term capital gains 30%
Dividend Income Nil
Interest Income 20%
Long term capital gain: Capital gain on sale of securities held for a period of more than one year.
Short term capital gain: Capital gain on sale of securities held for a period of less than one year.
BRIEF PROFILE OF IMPORTANT INSTITUTIONS:
RESERVE BANK OF INDIA
India's Central Bank - the RBI - was established on 1 April 1935 and was nationalized on 1
January 1949. Some of its main objectives are regulating the issue of bank notes, managing
India's foreign exchange reserves, operating India's currency and credit system with a view to
securing monetary stability and developing India's financial structure in line with national socio-
economic objectives and policies.
The RBI acts as a banker to Central/State governments, commercial banks, state cooperative
banks and some financial institutions. It formulates and administers monetary policy with a view
to promoting stability of prices while encouraging higher production through appropriate
deployment of credit. The RBI plays an important role in maintaining the exchange value of the
Rupee and acts
as an agent of the government in respect of India's membership of IMF. The RBI also performs a
variety of developmental and promotional functions.
The first concern of a central bank is the maintenance of a soundly based commercial banking
structure. While this concern has grown to comprehend the operations of all financial
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institutions, including the several groups of non-bank financial intermediaries, the commercial
banks remain the core of the banking system. A central bank must also cooperate closely with
the national government. Indeed, most governments and central banks have become intimately
associated in the formulation of policy.
They are often responsible for formulating and implementing monetary and credit policies,
usually in cooperation with the government. they have been established specifically to lead or
regulate the banking system.
SECURITUIES AND EXCHANGE BOARD OF INDIA
In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government
of India through an executive resolution, and was subsequently upgraded as a fully autonomous
body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board
of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and
autonomous regulatory board with defined responsibilities, to cover both development &
regulation of the market, and independent powers has been set up.
THE BASIC OBJECTIVES OF THE BOARD WERE IDENTIFIED AS:
To protect the interests of investors in securities; To promote the development of Securities Market; To regulate the securities market and For matters connected therewith or incidental thereto.
Since its inception SEBI has been working targeting the securities and is attending to the
fulfillment of its objectives with commendable zeal and dexterity. The improvements in the
securities markets like capitalization requirements, margining, establishment of clearing
corporations etc. reduced the risk of credit and also reduced the market.
SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility
criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue,
merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies,
underwriters and others. It has framed bye-laws, risk identification and risk management systems for
Clearing houses of stock exchanges, surveillance system etc. which has made dealing in securities both
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safe and transparent to the end investor. Another significant event is the approval of trading in stock
indices (like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product
because of the following reasons:
It acts as a barometer for market behavior; It is used to benchmark portfolio performance; It is used in derivative instruments like index futures and index options; It can be used for passive fund management as in case of Index Funds.
Two broad approaches of SEBI is to integrate the securities market at the national level, and also
to diversify the trading products, so that there is an increase in number of traders including
banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact
through the Exchanges. In this context the introduction of derivatives trading through Indian
Stock Exchanges permitted by SEBI in 2000 AD is a real landmark.
NATIONAL STOCK EXCHANGE OF INDIA
The National Stock Exchange of India Limited has genesis in the report of the High Powered Study
Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock
Exchange by financial institutions (FIs) to provide access to investors from all across the country on an
equal footing. Based on the recommendations, 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 Derivatives segment commenced in June 2000.
S&P CNX Nifty S&P CNX Nifty is a well-diversified 50 stock index accounting for 23 sectors
of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index
based derivatives and index funds.
S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which
is a joint venture between NSE and CRISIL. IISL is India's first specialized company focused
upon the index as a core product. IISL have a consulting and licensing agreement with Standard
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& Poor's (S&P), who are world leaders in index services. The average total traded value for the
last six months of all Nifty stocks is approximately 58% of the traded value of all stocks on the
NSE Nifty stocks represent about 60% of the total market capitalization as on March 31, 2005.
Impact cost of the S&P CNX Nifty for a portfolio size of Rs.5 million is 0.07%
S&P CNX Nifty is professionally maintained and is ideal for derivatives trading.
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BSE SENSEX
THE BSE (CORPORATIZATION AND DEMUTUALIZATION) SCHEME, 2005
Bombay Stock Exchange Limited (the Exchange) is the oldest stock exchange in Asia with a rich
heritage. Popularly known as "BSE", it was established as "The Native Share & Stock Brokers
Association" in 1875. It is the first stock exchange in the country to obtain permanent recognition in 1956
from the Government of India under the Securities Contracts (Regulation) Act, 1956.The Exchange's
pivotal and pre-eminent role in the development of the Indian capital market is widely recognized and its
index, SENSEX, is tracked worldwide. Earlier an Association of Persons (AOP), the Exchange is now a
demutualised and corporative entity incorporated under the provisions of the Companies Act, 1956,
pursuant to the BSE (Corporatization and Demutualization) Scheme, 2005 notified by the Securities andExchange Board of India (SEBI).Bombay Stock Exchange Limited received its Certificate of
Incorporation on 8th August, 2005 and Certificate of Commencement of Business on 12th August, 2005.
The 'Due Date' for taking over the business and operations of the BSE, by the Exchange was fixed for
19th August, 2005, under the Scheme. The Exchange has succeeded the business and operations of BSE
on going concern basis and its recognition as an Exchange has been continued by SEBI.
With demutualization, the trading rights and ownership rights have been de-linked effectively addressing
concerns regarding perceived and real conflicts of interest. The Exchange is professionally managed
under the overall direction of the Board of Directors.The Board comprises eminent professionals,
representatives of Trading Members and the Managing Director of the Exchange. The Board is inclusive
and is designed to benefit from the participation of market intermediaries.
In terms of organisation structure, the Board formulates larger policy issues and exercises over-all control.
The committees constituted by the Board are broad-based.The day-to-dayoperations of the Exchange are
managed by the Managing Director & CEO and a management team of professionals.
The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The systems and
processes of the Exchange are designed to safeguard market integrity and enhance transparency in
operations. During the year 2004-2005, the trading volumes on the Exchange showed robust growth.
The Exchange provides an efficient and transparent market for trading in equity, debt instruments and
derivatives. The BSE's On Line Trading System (BOLT) is a proprietory system of the Exchange and is
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BS 7799-2-2002 certified. The surveillance and clearing & settlement functions of the Exchange are ISO
9001:2000 certified.
The Stock Exchange, Mumbai, is now Bombay Stock Exchange Limited. The Exchange has a new name,
and an entirely new perspective. A perspective born out of corporatization and demutualization.
Bombay Stock Exchange Limited is Asias oldest stock exchange. It carries within itself the depth of
knowledge of capital markets acquired since its inception in 1875. Located in Mumbai, the financial
capital of India, it has been the backbone of the countrys capital markets.As a corporate entity, our new
identity reflects our new perspective. Smoother, seamless, and efficient. Whichever way you look at it.
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NEW YORK STOCK EXCHANGE
HISTORY
The New York Stock Exchange traces its origins to 1792, when 24 New York City stockbrokers and
merchants signed the Buttonwood Agreement. This agreement set in motion the NYSEs unwavering
commitment to investors and issuers.
The historic combination of NYSE Group and Euro next in 2007 marked a milestone for global financial
markets. It brought together major marketplaces across Europe and the United States whose histories
stretch back more than four centuries. The combination was by far the largest of its kind and the first to
create a truly global marketplace group.
DISCOVER HOW NYSE EURO NEXT GREW TO BECOME THE
GLOBAL MARKETPLACE OF TODAY.
The New York Stock Exchange (NYSE), nicknamed the "Big Board," is a New York City-based
stock exchange. It is the largest stock exchange in the world by dollar volume and the second
largest by number of companies listed. Its share volume was exceeded by that of NASDAQ
during the 1990s. The New York Stock Exchange has a global capitalization of $23.0 trillion as
of September 30, 2006.
The NYSE is operated by NYSE Euro next, which was formed by its merger with the fully
electronic stock exchange Archipelago Holdings and Euro next. The New York Stock Exchange
trading floor is located at 11 Wall Street, and is composed of five rooms used for the facilitation
of trading. The main building is listed on the National Register of Historic Places and is located
at 18 Broad Street, between the corners of Wall Street and Exchange Place.NYSE Group merged
with Euro next, and many of its operations (particularly IT and the trading platform) will be
combined with that of the New York Stock Exchange and NYSE Arcs. 20th century dawned; the
NYSE was firmly established as one of Americas preeminent financial institutions. It was also
experiencing a sustained rise in trading volume. Trading in listed stocks had tripled between
1896 and 1899. It would nearly double again by 1901.
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Air conditioning: The Stock Exchange building is one of the first structures in the worldto employ it
The new building is also notable for its many amenities, including separate dining rooms for smokers and
non-smokers, an emergency hospital with a physician in constant attendance and the much-remarked
upon annunciation boards (with over 24 miles of wiring) that are used to page members.
INTEGRITY ABOVE ALL
Entitled Integrity Protecting the Works of Man, the classical design depicts the 22 foot figure of
Integrity in the center, with Agriculture and Mining to her left and Science, Industry and Invention on her
right, representing the sources of American prosperity. The waves on either extreme of the pediment
symbolize the ocean-to-ocean influence of the Exchange.
In 1936, due to the combined effects of the statuarys weight 90 tons together with the ravages of
pollution and flaws in the marble, the Exchange had to replace the marble figures with lead-coated
replicas weighing only 10 tons.
CONSTANT GROWTH AND CHANGE
Much has changed since 1903, yet the NYSE has always kept pace with member and investor need for
increased space and the latest technology.
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ABOUT NASDAQ:
The NASDAQ, an acronym for National Association of Securities Dealers Automated
Quotations, is an electronic stock exchange with 3,300 company listings. It currently has a
greater trading volume than any other U.S. exchange, making approximately 1.8 billion trades
per day. The NYSE is still considered the biggest exchange because its market capitalization far
exceeds that of the NASDAQ. The NASDAQ trades shares in a variety of companies, but is well
known for being a high-tech exchange, trading many new, high growth, and volatile stocks. This
is partially due to the fact that the listing fees on the NASDAQ are significantly lower than those
for the NYSE, with the maximum price only $150,000. The NASDAQ is a publicly owned
company, trading its shares on its own exchange under the ticker symbol NDAQ.
The NASDAQ, as an electronic exchange, has no physical trading floor, but makes all its trades
through a computer and telecommunications system. The exchange is a dealers' market, meaning
brokers buy and sell stocks through a market maker rather than from each other. A market maker
deals in a particular stock and holds a certain number of stocks on his own books so that when a
broker wants to purchase shares, he can purchase them directly from the market maker.
Since there is no trading floor where the NASDAQ operates, the stock exchange built the
NASDAQ Market Site in New York's Times Square to create a physical presence. The tower hasa large outdoor electronic display, giving current financial information 24 hours a day.
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U.S. SECURITIES AND EXCHANGE COMMISSION
"Securities and Exchange Commission" redirects here. For other uses, see Securities and
Exchange Commission (disambiguation).The U.S. Securities and Exchange Commission
(frequently abbreviated SEC) is a federal agency which holds primary responsibility for
enforcing the federal securities laws and regulating the securities industry, the nation's stock and
options exchanges, and other electronic securities markets in the United States. In addition to the
Securities Exchange Act of 1934 that created it, the SEC enforces the Securities Act of 1933, the
Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act
of 1940, the SarbanesOxley Act of 2002 and other statutes. The SEC was created by Section 4
of the Securities Exchange Act of 1934 (now codified as 15 U.S.C. 78d and commonly referred
to as the 1934 Act).
OVERVIEW
The SEC was established by United States President Franklin D. Roosevelt in 1934 as an
independent, quasi-judicial regulatory agency during the Great Depression that followed the
Crash of 1929. The main reason for the creation of the SEC was to regulate the stock market and
prevent corporate abuses relating to the offering and sale of securities and corporate reporting.
The SEC was given the power to license and regulate stock exchanges, the companies whosesecurities traded on them and the brokers and dealers who conducted the trading. Currently, the
SEC is responsible for administering seven major laws that govern the securities industry. They
are: the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of
1939, the Investment Company Act of 1940, the Investment Advisers Act of 1930, the Sarbanes
Oxley Act of 2002 and most recently the Credit Rating Agency Reform Act of 2006.
The enforcement authority given by Congress allows the SEC to bring civil enforcement actions
against individuals or companies alleged to have committed accounting fraud, provided false
information, or engaged in insider trading or other violations of the securities law. The SEC also
works with criminal law enforcement agencies to prosecute individuals and companies alike for
offenses which include a criminal violation.To achieve its mandate, the SEC enforces the
statutory requirement that public companies submit quarterly and annual reports, as well as other
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periodic reports. In addition to annual financial reports, company executives must provide a
narrative account, called the "management discussion and analysis" (MD&A) that outlines the
previous year of operations and explains how the company fared in that time period.
Management will usually also touch on the upcoming year, outlining future goals and approaches
to new projects. In an attempt to level the playing field for all investors, the SEC maintains an
online database called EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system)
online from which investors can access this and other information filed with the agency.
Quarterly and bi-annual reports from public companies are crucial for investors to make sound
decisions when investing in the capital markets. Unlike banking, investment in the capital
markets is not guaranteed by the federal government. The potential for big gains needs to be
weighed against equally likely losses. Mandatory disclosure of financial and other information
about the issuer and the security itself gives private individuals as well as large institutions the
same basic facts about the public companies they invest in, thereby increasing public scrutiny
while reducing insider trading and fraud.
The SEC makes reports available to the public via the EDGAR system. SEC also offers
publications on investment-related topics for public education. The same online system also
takes tips and complaints from investors to help the SEC track down violators of the securities
laws. The SEC adheres to a strict policy that it never comments on the existence or status of an
ongoing investigation.
HISTORY
Prior to the enactment of the federal securities laws and the creation of the SEC, there existed so-
called Blue Sky laws that were enacted and enforced at the state level and regulated the offering
and sale of securities to protect the public from fraud. Though the specific provisions of these
laws varied among states, they all required the registration of all securities offerings and sales, as
well as of every U.S. stockbroker and brokerage firm.However, these Blue Sky laws were
generally found to be ineffective. For example, the Investment Bankers Association told its
members as early as 1915 that they could "ignore" Blue Sky laws by making securities offerings
across state lines through the mail.After holding hearings on abuses on interstate frauds
(commonly known as the Pecora Commission), Congress passed the Securities Act of 1933 (15
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U.S.C. 77a) which regulates interstate sales of securities (original issues) at the federal level.
The subsequent Securities Exchange Act of 1934 (15 U.S.C. 78d) regulates sales of securities
in the secondary market. Section 4 of the 1934 Act created the U.S. Securities and Exchange
Commission to enforce the federal securities laws. Both laws are considered part of Franklin D.
Roosevelt's "New Deal" raft of legislation.The Securities Act of 1933 is also known as the
"Truth in Securities Act" or the "Federal Securities Act or just the "1933 Act." Its goal is to
increase public trust in the capital markets by requiring uniform disclosure of information about
public securities offerings. The primary drafters of 1933 Act were Huston Thompson, a former
Federal Trade Commission (FTC) chairman, and Walter Miller and Ollie Butler, two attorneys in
the Commerce Department's Foreign Service Division, with input from Supreme Court Justice
Louis Brandeis. For the first year of the law's enactment, the enforcement of the statute rested
with the Federal Trade Commission, but this power was transferred to the SEC following its
creation in 1934. (Interestingly, the first, rejected draft of the Securities Act written by Samuel
Untermeyer vested these powers in the U.S. Post Office, because Untermeyer believed that only
by vesting enforcement powers with the postal service could the constitutionality of the act be
assured. The law requires that issuing companies register distributions of securities with the SEC
prior to interstate sales of these securities, so that investors may have access to basic financial
information about issuing companies and risks involved in investing in the securities in question.
Since 1994, most registration statements (and associated materials) filed with the SEC can be
accessed via the SECs online system, EDGAR.
The Securities Exchange Act of 1934 is also known as "the Exchange Act" or "the 1934 Act".
This act regulates secondary trading between individuals and companies which are often
unrelated to the original issuers of securities. Entities under the SECs authority include
securities exchanges with physical trading floors such as the New York Stock Exchange
(NYSE), self-regulatory organizations (SROs) such as the National Association of Securities
Dealers (NASD), the Municipal Securities Rulemaking Board (MSRB), online trading platformssuch as The NASDAQ Stock Market (NASDAQ) and ATS, and any other persons (e.g.,
securities brokers) engaged in transactions for the accounts of others. President Franklin D.
Roosevelt appointed Joseph P. Kennedy, Sr., father of President John F. Kennedy, to serve as the
first Chairman of the SEC, along with James M. Landis (one of the architects of the 1934 Act
and other New Deal legislation) and Ferdinand Pecora (Chief Counsel to the United States
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Senate Committee on Banking and Currency during its investigation of Wall Street banking and
stock brokerage practices). Other prominent SEC commissioners and chairmen include William
O. Douglas (who went on to be a U.S. Supreme Court justice), Jerome Frank (one of the leaders
of the legal realism movement) and William J. Casey (who would later head the Central
Intelligence Agency under President Ronald Reagan).As part of the continuing investigation in
197475, Watergate scandal prosecutors offered companies that had given illegal campaign
contributions to Richard Nixon's re-election campaign lenient sentences if they came forward.
Many companies complied, including Northrop Grumman, 3M, American Airlines and Braniff
International Airways. By 1976, prosecutors had convicted 18 American corporations of
contributing illegally to Nixon's campaign. The SEC, in a state of flux after its chairman was
forced to resign his post, began to audit all the political activities of publicly traded companies.
The SEC's subsequent investigation found that many American companies were making vast
political contributions abroad
ORGANIZATIONAL STRUCTURE
The SEC consists of five Commissioners appointed by the President of the United States with the
advice and consent of the United States Senate. Their terms last five years and are staggered so
that one Commissioner's term ends on June 5 of each year. To ensure that the SEC remains non-
partisan, no more than three Commissioners may belong to the same political party. The
President also designates one of the Commissioners as Chairman, the SEC's top executive.
However, the President does not possess the power to fire the appointed commissioners, a
provision that was made to ensure the independence of the SEC. This issue arose during the 2008
Presidential Election in connection with the ensuing Financial Crises.In November 2012,
Schapiro announced her intention to step down in December and President Obama said he would
nominate Walter to succeed Schapiro. Though Walter's term expired in June 2012 she has
continued to serve and can continue until the end of 2013. The president was also expected to
nominate a new member.
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DIVISIONS
Within the SEC, there are five divisions. Headquartered in Washington, D.C., the SEC has 11
regional offices throughout the United States.
The SEC's five main divisions are: Corporation Finance Trading and Markets Investment Management Enforcement Risk, Strategy, and Financial Innovation
Corporation Finance is the division that oversees the disclosure made by public companies as
well as the registration of transactions, such as mergers, made by companies. The division is also
responsible for operating EDGAR. The Trading and Markets division oversees self-regulatory
organizations such as FINRA and MSRB and all broker-dealer firms and investment houses.
This division also interprets proposed changes to regulations and monitors operations of the
industry. In practice, the SEC delegates most of its enforcement and rulemaking authority to
FINRA. In fact, all trading firms not regulated by other SROs must register as a member of
FINRA. Individuals trading securities must pass exams administered by FINRA to become
registered representatives. The Investment Management Division oversees investment companies
including mutual funds and investment advisors. This division administers federal securities
laws, in particular the Investment Company Act of 1940 and Investment Advisers Act of 1940.
This Division's responsibilities include: The Enforcement Division works with the other three
divisions, and other Commission offices, to investigate violations of the securities laws and
regulations and to bring actions against alleged violators. The SEC generally conducts
investigations in private. The SEC's staff may seek voluntary production of documents and
testimony, or may seek a formal order of investigation from the SEC, which allows the staff to
compel the production of documents and witness testimony. The SEC can bring a civil action in
a U.S. District Court or an administrative proceeding which is heard by an independent
administrative law judge (ALJ). The SEC does not have criminal authority, but may refer matters
to state and federal prosecutors. The current director of the SEC's Enforcement Division is
Robert Hisami, a former federal prosecutor