Indian Securities Market

Volume VII 2004

This publication reviews the developments in the securities market in India
Online: www.nseindia.com

National Stock Exchange of India Limited

A Review

Indian Securities Market
A Review

Copyright © 2004 by National Stock Exchange of India Ltd. (NSE) Exchange Plaza, Bandra Kurla Complex Bandra (East), Mumbai 400 051 INDIA All rights reserved. No part of this publication may be produced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise without the written permission of NSE, except as stated below. Single photocopies of single chapters may be made for private study or research. Illustrations and short extracts from the text of individual chapters may be copied provided that the source is acknowledged and NSE is notified. This publication reviews the developments in the Indian Securities Market up to June 2004. The views expressed herein do not necessarily reflect those of NSE. NSE does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. Orders and Enquiries for this issue and the back issues may be sent to: Cor porate Communications Division: National Stock Exchange of India Limited Exchange Plaza, Bandra Kurla Complex Bandra (East), Mumbai 400 051 INDIA

i

Contents

ISMR

Contents
Chapter 1 Securities Market in India – An Overview ....................................... Introduction ............................................................................................. Products and Participants ............................................................ Market Segments ........................................................................... International Scenario .................................................................. Dependence on Securities Market .............................................. Investor Population and Perception .......................................... Primary Market ............................................................................. Corporate Securities ........................................................... Government Securities ....................................................... Secondary Market ......................................................................... Corporate Securities ........................................................... Government Securities ....................................................... Derivatives Market ........................................................................ Regulatory Framework ........................................................................... Rules, Regulations & Regulators .......................................................... Reforms in Indian Securities Markets ................................................. Corporate Securities Market ....................................................... Government Securities Market ................................................... Research in Securities Market ..................................................... Testing and Certification ............................................................. International Initiatives ......................................................................... Principles of Securities Regulation ............................................ Recommendations for Securities Settlement Systems ............ World Federation of Exchanges Trading Survey 2002 ............ Primary Market ................................................................................ Introduction ............................................................................................. Policy Developments .............................................................................. DIP Guidelines .............................................................................. Debentures Trustees Regulations, 2003 ..................................... Unlisted Public Companies Rules, 2003 .................................... Market Design .......................................................................................... DIP Guidelines, 2000 ................................................................... 1 1 1 2 3 5 7 8 8 9 11 11 12 12 13 14 14 14 18 19 19 19 19 23 25 27 27 28 28 32 32 32 33

Chapter 2

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....... Index Funds .............................................................................................................................................................................nseindia.................................................................................... Euro Issues .........................................ISMR Contents ii Credit Rating ........................... Book Building through On-line IPO System ............... Initiatives from SEBI .......... Disclosure of Performance .... Merchant Banking ..................................................................................................................................... Types of Mutual Funds .................................................................... Exchange Traded Funds ....................................................................... Introduction ... Policy Developments ................... Union Budget 2004-05 ............................................................................................................................................................................................................................................................................................................... Collective Investment Schemes ............ Debt Issues .......... Public Issues .. 36 37 37 37 38 38 40 40 41 41 42 44 45 49 49 49 49 50 50 53 53 54 55 55 56 57 57 58 58 60 62 62 63 64 67 67 67 67 69 77 Chapter 4 www......................................................................................................................................................... International Scenario .................................. Regulations of Funds ................................................ Venture Capital Funds ................................................ Assets Under Management .......................... Structure of Mutual Funds ..................... Initiatives from Government................................................................................................... Policy Developments ........................ Mutual Funds ........................................................................................... Private Placement .......................................................................................................................................................................... Secondary Market — Trading .... Investments by MFs............................. Market Outcome .................................................................................. Resource Mobilisation .......................................................... Corporate Debt......................................................................................... Market Design ................... Code of Conduct ..................................................... Guidelines for MFs ............................................................ Market Outcome ...... Initiatives from RBI ......................... Chapter 3 Collective Investment Vehicles ........................................................................................................................................ Advertisement Code by Mutual Funds ... Investment Restrictions ................................................................ Demat issues ...............................................................................................................com ............................................................................................... Performance of IPOs ......................................................................................................... Disinvestment in PSUs in India .

.................................. Clearing and Settlement Processes ...................................................... Institutional Transactions .................................................................... Trading Rules.................................... Electronic Contract Notes ...........................................................................................................................................................................................................nseindia......................................................... Charges for Services................. Risk Management ....................................................... Technology ...................................................................................................................... Performance of Brokers ..................... Exchange Traded Funds .......................................... 115 115 116 117 117 118 118 118 119 120 120 121 123 123 124 125 126 www................................................ Straight Through Processing ................................................. Listing of Securities ............................................ Volatility ......................................................... Settlement Cycle ............................................................... Institutional Trades .................................... Composition of Capital and Margins ............................................................................................................................................................................................... ADR/GDR Prices ............................................................................... Market Outcome .......... Market Capitalisation ........................................................................................ Index Services ............................................... Refund of Base Minimum Capital .................................... Returns in Indian Market ............................... Policy Developments .................................................................................................................................................................iii Contents ISMR 79 79 81 82 84 85 85 87 88 89 89 90 90 95 95 96 98 99 99 101 102 103 104 Market Design ............................................................................................... Settlement of Transactions in case of holidays........... Margin Requirements .....................................com .......... Stock Exchanges ..................................................................................... Prices ....... Liquidity ........................................ Trading Mechanism ................................................................. Membership........................................ Chapter 5 Secondary Market — Clearing and Settlement ................................................................................... Capital Adequacy Requirements ............... Introduction of T+2 rolling Settlement ..................................... Risk Disclosure Document ................................................................................................................................................. Demat Trading .............................................................................. Trading and Exposure Limits .......................................................................... Turnover – Growth and Distribution .................................................... Takeovers ........................................................... Securities Lending and Borrowing........................................... Index Based Market-wide Circuit Breakers ....

.... Interest Rate derivatives ................................................................................... Settlement Efficiency ...................................................................................... NSE-VaR System...................... Debt Derivatives ......................................................................................... Bond Index ............................................... Secondary Market .. Market Design ....... Union Budget 2004-05 ................................................................................... Dematerialisation of Debt Instruments ............ Monetary and Credit Policy 2004-05 ...................................................................nseindia............................................................................................................................................................................................................................................................. Market Participants ........ Policy Developments ................................................ Settlement Statistics.......................... Negotiated Dealing system ............................................................................... STRIPS ..................................................... Treasury Bills ........................................................................................................ 127 127 127 128 129 131 139 139 140 140 140 141 142 147 147 150 150 150 152 152 152 153 153 154 155 155 156 156 157 158 158 158 160 168 169 170 171 172 172 173 174 www............................................................................................ Clearing and Settlement ................................................................................................................................ Chapter 6 Debt Market ........................ Wholesale Debt Market of NSE ....................................................................... CBLO ................................................................ Secondary Market ......................................... Other Measures ...................................................... Primary Market ....................................................................................................................................................................................................... Constituent SGL Accounts......................................................... Primary Issuance Process ....................................... Trading of Securities ...................... Policy Debates....................................................................................... Government Securities ............................... Introduction .......................................................................................................................................................................................................................................com ............................................................................................................. Market Outcome ........................ Issuer of Securities ....................... Zero Coupon Yield Curve ..............................................ISMR Contents iv Settlement Process .................. ISSA Recommendations 2000 ................................................ Settlement Guarantee Fund ........... Clearing Corporation of India Limited ............................................................................................................................................................. Corporate Debt Market ............................................................................................ State Government Securities ...................................................................................... Dematerialised Settlement.... FIMMDA-NSE MIBID/MIBOR .................. Monetary and Credit Policy 2003-04 ..............

.............................................................. 183 Introduction .............................................................. 212 Further Products ...................................................................................................... 206 Trading Volumes ................ 210 Settlement ........................ 197 Clearing Mechanism ............... 184 Exchange-traded vs........... Initiatives in India ...........................................................................................................................................................................................nseindia................ 208 Implied Volatility ................................................................................................... Participants and Functions ........... 211 Policy Debates ............................................................................................. 186 Policy Developments ......................v Contents ISMR Chapter 7 Derivatives Market ............................................................................................................................................................... 210 Volatility Smile .... 195 Trading Mechanism ..................................................................................................................................... NSE’s Certification in Financial Markets .......... 208 Implied Interest Rate ............................................................................................................................. 196 Contract Specifications .............................................................. 191 Introduction of Exchange Traded Interest Rate Derivatives ...... 215 215 216 216 www...................................................................................................... 197 Clearing and Settlement . 185 Global Derivatives Markets ................. 193 Issuance of Offshore Derivative Instruments ........................................................................ 183 Need for a Derivatives Market .................... 201 Market Outcome ............................................................................................................. 195 Membership Criteria ......................................................... 191 Investments by FIIs/NRIs in Exchange Traded Derivative Contracts ......................................................................................................... 192 Interest Rate Future Contracts ...................................................................................................... 194 Minimum Contract size for Exchange Traded Derivative Contracts .. 194 Market Design .............. 197 Basket Trading Facility .... 197 Settlement Mechanism ........................................ 196 Charges .................................... 185 Development of Derivatives Market in India..................................................... 212 Chapter 8 Knowledge Initiatives .........................................com .......................................................................................................... Quality Intermediation .. 206 Open Interest .................................................................................................................................................................................. 183 Products............................................................................................................................... OTC Markets .................................................... 198 Risk Management ...................................................... 212 Cross Margining...............................

........... NSE Research Initiative......................................................... NSENEWS................................................. 218 218 218 218 220 220 221 221 222 223 www.... Investor Protection fund ......................................................................... Data Dissemination......................................................................com ................................................................... Investor Associations....................................nseindia.................... Disclosures ...............................................................................................................................................................................................................ISMR Contents vi Research Initiatives ........................................................................... EDIFAR................................................................................................... Investor Awareness ......... SEBI ..........

nseindia.com . Mumbai Central Board of Direct Taxes Clearing Corporation Certificate of Deposits Clearing House Clearing Corporation of India Limited Central Depository Services (India) Limited Collective Investment Management Company Collective Investment Schemes Collective Investment Vehicles Central Listing Authority Collateralised Lending Facility Clearing Member Capital Market Segment of NSE Centre for Monitoring Indian Economy Committee on Settlement Issues Committee of Trade Issues Custodial Participant Commercial Papers www.vii Abbreviations ISMR Abbreviations ADB ADRs AIFIs ALBM AMC AMFI ASC ATM ATSs B2B BIFR BIS BMC BSE CBDT CC CDs CH CCIL CDSL CIMC CISs CIVs CLA CLF CM CM Segment CMIE COSI COTI CP CPs Asian Development Bank American Depository Receipts All India Financial Institutions Automated Lending and Borrowing Mechanism Asset Management Company Association of Mutual Funds in India Accounting Standards Committee At-The-Money Alternative Trading Systems Business-to-Business Board for Industrial and Financial Reconstruction Bank for International Settlement Base Minimum Capital The Stock Exchange.

ISMR Abbreviations viii CPSS CRAs CRISIL CRR CSD CSE DCA DDBs DEA DFIs DIP DNS DPs DRR DSCE DvP ECBs ECNS EDGAR EDIFAR EFT ELN ELSS EPS ETFs FIA F&O FCCBs FCDs FDI FDRs FDs FEMA FIBV FIIs FIMMDA FIs FMPs FoFs FRAs Committee on Payment and Settlement Issues Credit Rating Agencies The Credit Rating Information Services of India Limited Cash Reserve Ratio Collateral Security Deposit Calcutta Stock Exchange Department of Company Affairs Deep Discount Bonds Department of Economic Affairs Development Financial Institutions Disclosure and Investor Protection Deferred Net Settlement Depository Participants Debenture Redemption Reserve Debt Securities Convertible into Equity Delivery versus Payment External Commercial Bodies Electronic Communication Networks Electronic Data Gathering. Analysis and Retrieval Electronic Data Information Filing and Retrieval Eletronic Fund Transfer Equity Linked Notes Equity Linked Saving Schemes Earning Per Share Exchange Traded Funds Futures Industry Association Futures and Options Foreign Currency Convertible Bonds Fully Convertible Debentures Foreign Direct Investment Foreign Deposit Receipts Fixed Deposits Foreign Exchange Management Act International World Federation of Stock Exchanges Foreign Institutional Investors Fixed Income Money Markets and Derivatives Association Financial Institutions Fixed Maturity Plans Fund of Funds Forward Rate Agreements www.nseindia.com .

ix Abbreviations ISMR FSAP FVCIs GDP GDRs GDRs GNP GOI G-Sec GSO i-BEX ICAI ICICI ICSE IBRD IDBI IDRs IEPF IFC IFSD IIM IISL IMF IOSCO IDFC IPF IPOs IRDA IRS ISIN ISSA IT ITM JPC LAF LIC MFs MFSS MIBID MIBOR MMMF Financial Sector Assesment Program Foreign Venture Capital Investors Gross Domestic Product Global Deposit Receipts Gross Domestic Savings Gross National Product Government of India Government Securities Green Shoe Option ICICI Securities Bond Index Institute of Chartered Accountants of India Industrial Credit and Investment Corporation of India Limited. Inter-Connected Stock Exchange of India Limited International Bank for Reconstruction and Development Industrial Development Bank of India Indian Depository Receipts Investors Education and Protection Fund International Finance Corporation Interest Free Security Deposit Indian Institute of Management India Index Services and Products Limited International Monetary Fund International Organisation of Securities Commission Infrastructure Development Finance Corporation Investor Protection Fund Initial Public Offers Insurance Regulatory and Development Authority Interest Rate Swap International Securities Identification Number International Securities Services Association Information Technology In-The-Money Joint Parliamentary Committee Liquidity Adjustment Facility Life Insurance Corporation of India Limited Mutual Funds Mutual Fund Service System Mumbai Inter-bank Bid Rate Mumbai Inter-bank Offer Rate Money Market Mutual Fund www.com .nseindia.

ISMR Abbreviations x MNCs MOU MoF MTM NASDAQ NA V NBFCs NCAER NCDs NCDS NCFM NDS NEAT NGOs NIBIS NIC NPAs NRIs NSCCL NSDL NSE OCBs OECLOB OLTL OPMS ORS OSL OTC OTCEI OTM P/E PAN PCDs PCM PDAI PDO PDs PFI PFRDA PRI Multi National Companies Memorandum of Understanding Ministry of Finance Mark-To-Market National Association of Securities Dealers Automated Quotation System Net Asset Value Non-Banking Financial Companies National Council for Applied Economic Research Non-Convertible Debentures Non-Convertible Debt Securities NSE’s Certification in Financial Markets Negotiated Dealing System National Exchange for Automated Trading Non-Government Organisations NSE’s Internet-based Information System National Informatics Centre Non-Performing Assets Non-Resident Indians National Securities Clearing Corporation of India Limited National Securities Depository Limited National Stock Exchange of India Limited Overseas Corporate Bodies Open Electronic Consolidated Limit Order Book On-line Trade Loading On-line Position Monitoring System Order Routing System Open Strata Link Over the Counter Over the Counter Exchange of India Limited Out-of the-Money Price Earning Ratio Permanent Account Number Partly Convertible Debentures Professional Clearing Member Primary Dealers Association of India Public Debt Office Primary Dealers Public Finance Institution Pension Fund Regulatory Development Authority Principal Return Index www.nseindia.com .

nseindia. 1957 Scheduled Commercial Banks Satellite Dealers Securities and Exchange Board of India Securities Exchange Commission Settlement Guarantee Fund Subsidiary General Ledger The Singapore Exchange Derivatives Trading Limited Securities Investor Protection Corporation Securities Lending and Borrowing Statutory Liquidity Ratio Standard Portfolio Analysis of Risks State Development Loans Sensex Prudential ICICI Exchange Traded Fund Special Purpose Vehicle Self Regulatory Orgaisations Securities Settlement System Share Transfer Agent Straight Through Processing Separate Trading of Registered Interest and Principal of Securities Special Unit Scheme 99 Treasury Bills Tax Deducted at Source Trading Member Total Return Index Unique Identification Number Unit Trust of India www.com .xi Abbreviations ISMR PRISM PSUs PV QIBs RBI ROCs RTGS SA SBTS SCMRD S&P SAT SC(R)A SC(R)R SCBs SDs SEBI SEC SGF SGL SGX-DT SIPC SLB SLR SPAN SDL SPICE SPV SROs SSS STA STP STRIPS SUS 99 T-Bills TDS TM TRI UIN UTI Parallel Risk Management System Public Sector Undertakings Present Value Qualified Institutional Buyers Reserve Bank of India Registrar of Companies Real Time Gross Settlement Stabilising Agent Screen Based Trading System Society for Capital Market Research and Development Standard and Poor’s Securities Appellate Tribunal Securities Contracts (Regulation) Act. 1956 Securities Contracts (Regulation) Rules.

com .ISMR Abbreviations xii VaR VCFs VCUs VSAT WAN WAP WDM YTM ZCYC Value at Risk Venture Capital Funds Venture Capital Undertakings Very Small Aperture Terminal Wide Area Network Wireless Application Protocol Wholesale Debt Market Segment of NSE Yield to Maturity Zero Coupon Yield Curve www.nseindia.

The regulator ensures a high service standard from the intermediaries and supply of quality securities and non-manipulated demand for them in the market.nseindia. These reforms along with other market developments have been discussed in detail in the following chapters. 2003. The issuers are the borrowers or deficit savers. Further. These intermediaries pack and unpack securities to help both the issuers and investors to achieve their respective goals. government securities. This process of mobilization of resources is carried out under the supervision and overview of the regulators. 1956 includes shares. derivatives of securities.An overview ISMR Securities Market in India – An Overview Introduction This publication reviews the reforms and other market developments in the securities market in India during April 2003 to June 2004.com . and thereby strengthen the emerging market economy in India. who are surplus savers. straight through processing has been made mandatory for all institutional trades executed on the stock exchange. security receipt or any other instruments so declared by the central government. The regulators develop fair market practices and regulate the conduct of issuers of securities and the intermediaries. The investment choices for the investors have also broadened. The securities market has essentially three categories of participants. who issue securities to raise funds. They are also in charge of protecting the interests of the investors. These developments in the securities market provide the necessary impetus for growth and development. stocks or other marketable securities of like nature in or of any incorporate company or body corporate. scrips. investors in securities and the intermediaries. viz. The securities market moved from T+3 settlement period to T+2 rolling settlement with effect from April 1. The intermediaries are the agents who match the needs of users and suppliers of funds for a commission. This chapter. takes a general review of the stock market developments. bonds. units of collective investment scheme. Real time gross settlement has also been introduced by RBI to settle inter-bank transactions online at real time mode. The investors.1 Securities Market in India . however.. the market microstructure has been refined and modernized. There are a large variety and number of intermediaries providing various services in the Indian securities market (Table 1-1). the issuer of securities. deploy their savings by subscribing to these securities. www. As a result of the reforms/initiatives taken by the Government and the Regulators. interest and rights in securities. Products and Participants Mobilization of savings from surplus savers to deficit savers is most efficiently carried out by the securities market through a range of complex products called “securities”. The definition of securities as per the SCRA.

namely.835 13. RBI & SEBI. whereas if the issue is made available to a selected group of persons it is termed as private placement.ISMR Securities Market in India .368 3.291 502 54 11 143 19 124 67 35 43 43 6 38 5 2004 1 4 2 23 1 2 9. DEA.An overview 2 Table 1-1: Market Participants in Securities Market Market Participants Securities Appellate Tribunal Regulators* Depositories Stock Exchanges With Equities Trading With Debt Market Segment With Derivative Trading Brokers Corporate Brokers Sub-brokers FIIs Portfolio Managers Custodians Share Transfer Agents Primar y Dealers Merchant Bankers Bankers to an Issue Debenture Trustees Underwriters Venture Capital Funds Foreign Venture Capital Investors Mutual Funds Collective Investment Schemes * DCA. In the primary market the resources are mobilized either through the public issue or through private placement route. the corporate entities who issue mainly debt and equity instruments and the government (central as well as state) who issue debt securities. There are two major types of issuers of securities. The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risks and returns.746 12.519 3. The secondary market operates through two mediums. The primary market is the channel for creation of new securities.815 540 60 11 78 18 123 55 34 47 45 9 37 — Market Segments The securities market has two interdependent segments: the primary and the secondary market.com . Source: SEBI Bulletin. It is a public issue if anybody and everybody can subscribe for it. These securities are issued by public limited companies or by government agencies. the over-the-counter (OTC) market and the exchange-traded www. Number as on March 31 2003 1 4 2 23 1 2 9. These new securities issued in the primary market are traded in the secondary market.nseindia.

2004 A comparative study of concentration of market indices and indices stocks in different world markets is presented in the table below.151 100.8%. while S&P considers only 5.An overview ISMR market. Nearly 100% of the trades in capital market segment are settled through demat delivery.547 122. These data.041 70.644 companies. India has the number one ranking in terms of listed securities on the Exchanges followed by the USA. India has more than 9000 listed companies at the end of March 2004. There are 23 exchanges in India and all of them follow a systematic settlement period..5% in India and 16.2 477 83. do not reflect the full Indian market. Table 1-2: International Comparison: end December 2003 Particulars No.com .079 57. NSE and Stock Exchange.3 India 5. For example.5 1.4 332 56.nseindia. A variant of the secondary market is the forward market.4% in case of US. Mumbai (BSE) provides trading in the derivatives of securities.147 130.029 715 426. Presently only two exchanges viz. OTC markets are informal markets where trades are negotiated. International Scenario Following the implementation of reforms in the securities industry during the last decade. A variant of the forward market is Futures and Options market.6 3.266 139. Standard and Poor’s (S&P) ranked India 17th in terms of market capitalization (19th in 2002).4 285 138.296 681 55.) Turnover Ratio (%) USA 5.0 475 145 168.4 88 71.3 1. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC market. Indian stock markets have graduated to a better position vis-à-vis the securities market in developed and emerging markets.0 684 1. All the trades taking place over a trading cycle (day=T) are settled together after a certain time (T+2 day).412 159. It is seen that the index stocks’ share of total market capitalisation in India is 75. Most of the trades in the government securities are in the OTC market.7 2. The trades executed on the National Stock Exchange (NSE) are cleared and settled by a clearing corporation.644 279 56.3 2. including government securities.1 1.295 14. At the end of 2003. India has a turnover ratio.311 2. As may be seen from Table 1-2. and also one of the highest in the emerging markets. as S&P (even other international publications) does not cover the whole market.) Market Capitalisation Ratio (%) Turnover ($ Mn. of listed Companies Market Capitalisation ($ Bn. The clearing corporation acts as a counterparty and guarantees settlement. which is comparable to the other developed market. 16th in terms of total value traded in stock exchanges (17 th in 2002) and 6 th in terms of turnover ratio (7th in 2002).3 Securities Market in India .116 3. NSE also provides a formal trading platform for trading of a wide range of debt securities. though quite impressive.273 88.8 15.5 Source: S&P Emerging Stock Market Factbook. If whole market were taken into consideration.8 UK Japan Germany Singapore Hongkong China 2. www. The other option is to trade using the infrastructure provided by the stock exchanges.0% whereas US index accounted for 93. where securities are traded for future delivery and payment. India’s position vis-à-vis other countries would be much better. The ten largest index stocks share of total market capitalisation is 36.

5 The stock markets worldwide have grown in size as well as depth over last one decade.192 20.150.739 2.774 682.703 44.080 131.836 380.ISMR Securities Market in India .021 261.623 3.916 47.371. As can be observed from Table 1-3.269 2.667 1.266 3.5 83.639.952 110.251.5 94.298 9.075 1.659 329.040.040.9 42.098.616 168.6 16.230 1.810.565 379.799.87% of total market capitalisation in 2003.968 49. Despite having a large number of companies listed on its stock exchanges.103 631. 2004 www.957.080.24% as at end-2002 to 44.412. the turnover on all markets taken together have grown from US $ 5.722 681.59 Turnover 2002 36.270 2.272.635 592.134 11.706 50.40 2002 20.126.871.434 14.896.339 69.012 29.499.573.826.676.8 75.931 38.845 2.007 41.24 0.46 0.969 2.376 23.297 52.658 1.118 13.093 54.6 trillion in 2003.721.144 476.290.96 Developed Markets Australia Japan UK USA All Emerging Markets China India Indonesia Korea Malaysia Philippines Taiwan World Total US as % of World India as % of World Source: S&P Emerging Stock Market Factbook.369 197.768 333.802 14.928 249.006 220.474 23.2 89.814 2.523 292.96% in total world turnover in 2003.324 13. It is significant to note that US alone accounted for about 52.68 0.135 2.3 93.665 2.266.4 57.148 544.An overview 4 Market Concentration in the World Index as on End 2003 (In Percent) Market Japan Singapore France Germany Italy United Kingdom United States India Index Stocks Share of Total Market Capitalization 99.6 55.598.620 27.475 3.279 2.042 826.947.73 0.56 2003 28.498 65.66 0. while Indian listed companies accounted for 0.991 249.403 2.656.981 585.404.6 95.87 2001 39.052. Table 1-3: Market Capitalisation and Turnover for Major Markets (US $ million) Country/Region Market Capitalisation (end of period) 2001 25.872 39.0 10 largest Index Stocks’ Share of Total Market Capitalization 20.217.396.204 279.9 43.753 15.639 123.894 29.864.989 374.2 91.080 463.431 2.51 2003 26.01 0. India accounted for a meagre 0. Thereafter.4 36.66% in end-2003.979 523.2 44.nseindia.808 42.989 2.242.556.667 711.018 240.5 trillion in 1990 to $ 38 trillion in 2002 when it reached a peak.621 27.321 448.011 29.439.743.429 2.547.com .813 284.4% of worldwide turnover in 2003.772 3.342 25. The market capitalization of all listed companies taken together on all markets stood at US $ 31 trillion in 2003 ($ 23 trillion in 2002). The share of US in worldwide market capitalisation decreased from 47.153 369.023 31.046 120. it has witnessed a decline and stood at US $ 29.396 23.731 294.

6 Turnover Ratio (%) 1990 59.8 16.644 47.2 2002 138. has not been uniform across countries.011 3.424 2002 26.2 48.4 78.2 7.319 2003 26.2 21.6 20.576 Source: World Development Indicators 2004.734 817 3. World Bank.8 65.842 5.2 2003 137.284 2.nseindia.5 Securities Market in India .3 70.1 57.231 1. however.4 35.4%.5 44. The corporate sector is increasingly depending on external sources (domestic market borrowings and loans) for meeting its funding requirements. It is observed that on an average the promoters hold more than 55% of total shares. The turnover ratio.3 22.6%.8 180.442 17.4 10.0 2001 103. However.3 23.010 1.9 35.307 20. About 56% of shares in companies in www.7 27.7 117. The increase.8 12. respectively.3 23.677 774 110 1.585 6.6 19.307 for middle-income countries and 7.4 26. MFs.947 13.7 47. There is not much significant difference in the shareholding pattern of companies in different sectors.747 4.1 45.322 for low-income countries as at end-2003.629 3.3 23. Dependence on Securities Market Corporate Sector The 1990s witnessed the emergence of the securities market as a major source of finance for trade and industry in India.947 for high-income countries.435 25.132 6.6 21.4 2.6 14.7 19.1 123.0 Listed Domestic Companies 1990 17.7 53.020 7.8 57.7 27.886 2.com .4% for high-income countries as at end-2002 and lowest for low-income countries at 22. the year 2002-03 witnessed the erosion of the corporates to raise money from capital market.9 18.9 44.1 90.322 5.6%.0 — 53.7 103. A growing number of companies have been accessing the securities market rather than depending on loans from financial institutions (FIs)/banks.3 33.9% and 139.8 225.035 9.6 180.381 1. Market capitalization as a per cent of GDP for India stood at 25.8 52.7 139.3 33. FIs) accounted for 16.8 — 54. Though the non-promoter holding is about 44. According to CMIE data (Table 1-5).839 911 7.4 26.039 7. Africa South Asia Sub-Saharan Africa Low Income India World 51.4 58.570 2.7% as at end-2002.8 72.9%.5 54.9 57.3 19.650 43. The total number of listed companies stood at 26. The market capitalization as a per cent of GDP was the highest at 83.1 22. 13.781 1.8 53. which was mainly because of the subdued conditions prevalent in the primary and secondary market Table 1-6 presents sector-wise shareholding pattern of companies listed on NSE.7 74.0 18.7% and the institutional holdings (by FIIs.7 2002 83.8 19.2 9. however it declined to 21% in 2001-02.3 40.2 — 29.An overview ISMR There has also been an increase in market capitalisation as a per cent of GDP in some of the major country groups as is evident from Table 1-4.7 33. the share of capital market based instruments in resources raised externally had been quite significant in the 1990s.446 2. which is a measure of liquidity.0 72. the public held only 17. Table 1-4: Select Stock Market Indicators Markets Market Capitalisation as % of GDP 1990 High Income Middle Income Low & Middle Income East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & N.6 25.231 7.4 22.759 1. however was approximately same for both the high-income countries and low-income countries which stood at 137.

32 3.1 13.96 1.5 4.5 16.2 48.74 4.51 3.5 60.86 4.77 2.99 21. MFs Indian NRIs/ Private Others Indian Foreign Persons Public OCBs CorpoPromo.06 Governments Due to the increase in fiscal deficits of the Governments.06 20.14 3.28 4.97 1.1 7.59 2.58 31.94 5.86 4.16 3.69 5.75 24.42 5.42 5.10 2.6 17.48 1.1 Financial Savings of Households 14.9 67.03 2.9 30.83 19.4 22.9 20.74 4.00 4.17 4.67 22.58 10.ISMR Securities Market in India .7 6.57 0. www.49 4.nseindia.17 33.80 0.62 7.6 14.62 18.80 46.2 14.14 6.92 1.An overview 6 Petrochemicals sector are held by Indian promoters.86 5.72 7.9 17.35 19.75 2.38 53.25 5.22 5.45 6.05 33.86 2.98 3.1 61.58 4.13 1.0 5.41 10.03 3. During the year 1990-91.2 54.98) N .91 7.7 17.2 19.57 8. their dependence on market borrowings to finance fiscal deficits has also increased over the years (Table 1-5).75 24.27 27.75 0.39 20.9 32.93 20.9 13.03 6.07 6.8 15.40 8.3 4.0 36.9 4.5 14.73 11.83 0.36 3.6 64.61 11.27 3.08 17.Acting in rate ters ters Concert Bodies 2.51 5.45 17.Promo.04 1.89 48.27 51.12 1.33 5.18 5.com .86 Finance FMCG Infrastructure IT Manufacturing Media & Entertainment Petrochemicals Pharmaceuticals Services Telecommunication Misc All Companies 7.47 1.96 13.60 (17.8 17.77 56.42 9.7 18.53 2.48 2.62 3.85 0.43 1.55 6.06 2. A.00 3.67 5.3 8.70 5.36 10.57 2.2 7.35 46.0 35.83 45.10 40.42 2.31 28.10 2.9 Fiscal Deficit of State Government 13.56 37.45 26.90 0.62 37.69 2.81 2.9 N .79 13.57 15.45 51.0 12.23 44.4 69. Table 1-5: Dependence on Securities Market Year Share (%) of Securities Market in External Finance of Fiscal Deficit of Corporates Central Government 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Source: CMIE & RBI.16 27.5 16. 17.12 28.67 7.82 42.42 5.04 1.05 0. Table 1-6 : Shareholding Pattern at the end of March 2004 of Companies Listed on NSE (In per cent) Sectors FIs FIIs Non-Pomoters’ Holding Institutional Investors Non-Institutional Investors Promoters’ Holding 19.25 5.34 4.4 77.89 2.47 3.09 20.72 0.43 4.7 9.75 2.56 2.30 0.95 0. A.67 4.28 0. The promoter holding is not strikingly high in respect of companies in the IT sectors.

6% of gross domestic savings during 2002-03.1 3.1 8.5 0.0 4.4 85. Of the total 13.6 25.9 0.0 7.6 4.0 Source: RBI Annual Report P: Provisional Figures.4 88. and 5.2 1.0 5.8 100.2 8.4 8. whereas only 6.4 10.4 1.4 12.6 22.5 100.6 30.0 65.5 29.9% of the fiscal deficit respectively.3 33.6 84. 9.1 100. www. 14. household sector accounted for 85.5 22.0 12.4 100.3 39.4 per cent of all Indian households totaling 21 million individuals directly invested in equity shares or debentures or both during 2000-01.3 1.5 9.3 4.9 42.6 8. The other findings are as listed below: 1.4 -0.4 7.7 100.9% in securities (out of which the investment in Gilts has been 4.5 85.5 100. In percentage terms. Table 1-7: Savings of Household Sector in Financial Assets (In per cent) Financial Assets 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 (P) Currency Fixed Income Investments Deposits Insurance/ Provident/ Pension Funds Small Savings Securities Market Mutual Funds Government Securities Other Securities Total 10.2 12.0 11.9 1.4 6.2 5. Thus the fixed income bearing instruments are the most preferred assets of the household sector.9 28.7 5.1 million or 7.8 100.3%).9 2.nseindia. 29.3 0. The survey estimated that a total of 13.4 37.3% on small savings.0 11 7.5 29.5 1.4 6.081 geographically dispersed rural and urban areas.0 14.An overview ISMR the state governments and the central government financed nearly 14% and 18%.5 27.0 46.6 million households owned bonds or debentures. In 2003-04.9 1.3 1.7 0.3 28.6 0 8.2 73.0 9. Investor Population and Perception SEBI in association with National Council of Applied Economic Research (NCAER) conducted a Survey of Indian Investors in 1998-99 and then followed it up in 2000-01.6 84.9 100.0 7.9 33.1 42. The percentage of households investing in equity or debentures is more in urban areas than in rural areas.0 6.9 0.6 100.7 0.6 42.7 0.6 74.2 33.9 16. dependence of the state governments on market borrowing did not increase much during the decade as it ranged between 13.3 100.0 7. 2.5 82.2 8.2 39.3 8.9 33.0 5.8% in insurance/ provident funds. The survey of 2000-01 was based on a sample of 288.6 1.3 79.9 77.0 1.5 million investor households owned equity shares.com .1 0.1% and 64.3 5. including government securities and units of mutual funds during 2002-03 (Table 1-7).1 million investor households.5% of financial savings in deposits.8 0. of their fiscal deficit by market borrowing. Households According to the RBI data.2 74.0 11.1 100.0 11.2 100.6 100.6 1.2 34.5 48. This divergence is more in case of equities compared to debentures.5 0.4 9.1 8.0 6.8% and 32.0 12.8 4.1 10. They invested 41.1%.9 14.3 4.6 41.7 Securities Market in India . the state and the central government market borrowings financed 32.1 28.1 29.2 14.4 89. The findings of this survey were released in September 2003.4 7.8 13.9 17.0 45.3 4.4 3.4 8. The number of debenture owning households and individual debenture holders far exceeds household and individual equity investors.6 1.5 13. respectively.4 44.

572. only 5. tax concessions offered by Government and preference of investors for passive investing. It was also observed that the investor population and town size are directly proportional. FIIs have invested heavily in Indian market in 2003-04.75 billion as at end of March 2004. 264.676. 3. The largest city with more than 50 lakh population accounted for about 17 per cent of investor households and the next higher segment. Thereafter.980 million through American Depository Receipts (ADRs)/Global Depository Receipts (GDRs).600 million were raised by the government and corporate sector during 2003-04 as against Rs. Since they were permitted access in 1992. there has been a decline due to conditions prevailing in the secondary market. They had net cumulative investments of US$ 25. The capital raised.170 million in 1994-95.ISMR Securities Market in India . Primary Market An aggregate of Rs. when seen as a percentage of GDS. it is 1. 250 million in 1964. 32.6 per cent of all households. 1. 43.20% (Table 1-8).360 million. Private placements accounted for 89% of total resources mobilised through domestic issues by corporate sector during 2003-04. As may be seen from the Table 1-9.201 million during the preceding year.8 million households representing more than 12 million urban individual investors owned equity shares or debentures or both.476. This change in investor behavior is induced by the evolution of a regulatory framework for MFs. It appears that more and more people prefer mutual funds (MFs) as their investment vehicle. Government raised about two third of the total resources.com .nseindia. There were 540 FIIs registered with SEBI as of end March 2004. Whereas.3 million households representing more than 8 million individual investors shows a definite migration of investors from equity market to bond market during the period between the two surveys. 7. Indian market is getting integrated with the global market. 2. 30. Starting with an asset base of Rs. Though there has been a considerable increase in the amount mobilised in 2003-04. of the 125 million rural households. It received a further boost during the first half of 1990s with the capital raised by non-government public companies rising sharply from Rs.100 million. the year 2003-04 took a turnaround in its performance as compared to the previous year by mobilising Rs. though in a limited way through Euro Issues. Corporate Securities The average annual capital mobilisation from the primary market has grown manifold since the last two-three decades. However. which used to be less than 1% of gross domestic saving (GDS) in the 1970s increased to about 13% in 1992-93 but thereafter witnessed declines. Indian companies have raised about Rs. 4.An overview 8 Of the 51 million urban households. The survey results also clearly reveal that number of non-investor households have increased from about 156 million in 1998-99 to nearly 164 million in 2001-02 constituting nearly 92. 2.120 million in 1990-91 to Rs. more than 31 per cent investor households were in towns with population between 10 and 50 lakh. the total assets under www. Data in Table 1-9 shows that there is a high preference for raising resources in the primary market through private placement route. with central government alone raising nearly Rs.

840 million in 2003-04. 505. After meeting repayment liabilities of Rs.51 6. 261.530 130.350 71.370 45.396.840 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 3.20 Government Securities The primary issues of the Central Government have increased manifold during the decade of 1990s from Rs.54 74.924 18.160 million for the year 2003-04.210 million.28 0. million) Year Resources raised by non-government companies 43. As a result the weighted average maturity of dated securities increased to 14. The issues by state governments have also increased over this period from Rs.530 49.100 % of GDS % of disbursements by FIs 33. The net borrowings of State Governments in 2003-04 amounted to Rs.690 million to Rs. 1.08 85.nseindia. corporates and individual investors are also investing in government securities.777 32.800 112. The State Governments collectively raised Rs. 505.430 112.215.160 million.59 24.32 4.640 36.890 million in 1990-91 to Rs.76 9. Table 1-8: Resources Mobilised through Public Issues (Amount in Rs.476.71% in 2003-04.930 million for dated securities.120 61.130 51. and redemption of T-bills of Rs.38 12. In addition to banks and insurance companies. the investor base has also widened.30 –203.300 264.74 1. During the last one decade.27 1. 1.380 50.532 111.08 Mobilisation by mutual funds 750.37 15. 261. About 77% of primary issues were raised through securities with maturities above 5 years and up to 10 years. Due to the soft interest rate policy pursued by the RBI.9 Securities Market in India . The Central Government mobilised Rs. net market borrowing of Central Government amounted to Rs.94 years in 2003-04.70 40.360 million in 2003-04 (Table 1-9).85 8.An overview ISMR management at the end of March 2004 has risen to Rs.66 38.530 million in the preceding year. 308.210 million during 2003-04 as against Rs. The maturity structure of government debt is also changing.030 193.69 41.750 104.170 160.100 31. 326. 112. The weighted average cost of its borrowing have declined to 5.750 –583.930 198.84 1. 888. 1.17 0. 463. the resources mobilized by the MFs are increased from Rs.89 10.34 3. 89.210 112.830 476. 25.40 5.01 1. Along with growth of the market. 476.18 18.000 million through issue of dated securities and Rs.98 10.760 million.360 million through issue of T-bills.11 1.48 5.85 78.110 199.440 million in 1993-94 to Rs.260 million. www. the coupon rates offered on government borrowings have fallen sharply.59 7.490 56.com .

370 939.300 3.7 5.740 264.260 77.095.520 150.915 4.819.660 163.65 1078.333 21.020 176.320 34.920 724.497 13.450 1994-95 480.880 41.470 338.820 20.926.720 10.650 133.411 377 .440 689.612 718.476 8.28 3604. of Listed Companies 6.030 10.360 649.99 3260.204.284.89 3892.97 4285.492.010 1.305.05 1528.915.370 232.212 28.60 — — — 2.032 752.871 9.5 13.090 11.050 1993-94 444.981.660 55.310 2.860 2.75 3739.300 381.Selected Indicators At the End of Financial Year No.269.790 596.660 61.273.00 2280.680 6.380 50.65 660.800 592.270 990.958.857.023 939.760 43.330 503.310 381.4 6.070 308.733.264 673.158 1.970 467.140 137.7 7.782 9.130 51.20 1129.20 1771.511.90 1167.090 62.430 432.900 56.530 2003-04 695.898.6 4.720 104.52 3778.190 17.310 28.093 16.233.368 No.4 2.541.790 20.250 111.860 198.050 2.500 412.3 Turnover Ratio (%) — — — 50.830 1.nseindia.) 1991-92 163.360 1.112 2. (Amount in Rs. mn.890 9.986 720.060 133.440 — 115.867 9. of Brokers Turnover of Derivatives Segment of Exchanges www.800 32.980 545.030 664.060.900 138.640 286.688.6 153.833 9.741.151.830 405.721.954 9.133.490 45.160 9.500 43.850 38.590 678.190 43.1 178.480 6.810 10.530 996.572.860 1.3 122.790 612.180 9.102.476.670.319.740.980 370.423.150 834. Companies Banks & FIs Private Placement Euro Issues Government Securities Central Government State Governments 1990-91 142.96 3366.192 9.100 33.840 419.338.740 67.005 9.720 798.920 18.310 913.433 295.620 4.6 5.920 10.480 36.580 89.430 74.030 1.809.086.953 52.45 1148.940 426.644 9.980 1.480 4.An overview Table 1-10: Secondary Market .3 374.860 8.610 12.6 5.690 10 Note: Turnover figures for the respective year.811 9.700 8.190 33.662.880 361.080 1.152 1.890 25.61 3360.786 2.24 985.201 1992-93 235.080 51.923. Securities On WDM On SGL Segment of NSE — — — — — — — — — — 92.3 154.124.1 11.456 9.480 34.9 Turnover of Non-Repo Govt.510 14.360 505.229 6.45 1261.147 31.287.51 1177.658 10.676.110 1.060 57.500 669.230 1995-96 366.770 45.038.150 30.4 39. mn.360 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 421.069 9.com — Not Available.890 300.) Capital Market Segment of Stock Exchanges S&P CNX Nifty Sensex Turnover Securities Market in India .910 4.875.770 Source: RBI.100 9.630 54.000 34.96 5001.777 29.160 37.190 142.Table 1-9: Resource Mobilisation from the Primary Market (Rs.380 590.525.30 968.210 975.077 9.013.490 121.350 1.037.000 187.000 38.830 1.180 1.000.7 132.977 Market Market Capitalisa.570 47.269.630 741.877 9.820 — — — — — 430 — — — 3.750 22.629.883.350 7.72 5590.955 12.660 78.300 1.711 8.250 601.690 Total 257.9 34.610.700 29.925 7.100 — — 44.930 160.740 1996-97 371.100 — 1.210 2.440 193.870 41.630 — 122.900 8.560 16.38 3469.050 32.840 89.958 5.630 — — 42.413 — 366.068.970 23.940 6.85 1116.520 25.834 12.Capitalisation tion Ratio (%) 1.570 1.7 119.500 — 14.120 56. Source: SEBI & NSE .632 — — — — — — — — — — 40.640 34.461.480 40.4 4.880 4.170 30.956 744. Public Companies PSU Bonds Govt.564.890 361.687 9.930 57.420 34.0 4.190 38.500 783.590 1.300 84.722.520 65.11 990.119.35 3048.6 3.600 ISMR Issues Corporate Securities Domestic Issues Non-Govt. 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 — — — — 6.990 496.300 55.55 978.519 9.5 7.530 48.900 904.689.670 1.3 173.187.422.

779 77.119.250 1.434 13.210 1.447 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 800.310 648 21 — — — — 390 3. 9.056.853 1.385 19. 15. The all India market capitalization is estimated at Rs.889 838.259 38 1 158 23. 21.980 21.720 7.260 2.968 16.528 60.030 23.827 56.970 3. The relative importance of various stock exchanges in the market has undergone dramatic change during this decade.850.790 111.198.230 24.150 59. 2.640 1.590 42. which reflects the volume of trading in relation to the size of the market.700 153. 8.940 10.11 Securities Market in India .016.435 154.073.342 375. 7.793 500.360 3.nseindia.730 621.090 677.730 160.689.331 554 648 1 18.778 413 46 20 — — — 7 5. 4. 6.622.712. while the rest 18 exchange for less than 0. has been increasing by leaps and bounds after the advent of screen based trading system by the NSE.804 3.491 1.360 67.752 — 5.376.) Stock Exchanges 1.146.368 trading members registered with SEBI as at end March 2004 (Table 1-10).156 3. It is of economic significance since market is positively correlated with the ability to mobilize capital and diversify risk.010 17.970 5.An overview ISMR Secondary Market Corporate Securities There are 23 exchanges in the country.030 14.655 3.210 2.640 3.422 35.3% in 2003-04 against 28.468.786 615 5.947 388 — 266 — — 10. 20.310 2.420 6.705 11.704.462. NSE Mumbai Calcutta Delhi Ahmedabad Uttar Pradesh Ludhiana Pune Bangalore Hyderabad ICSE Cochin OCTEI Madras Madhya Pradesh Magadh Vadodara Gauhati Bhubaneshwar Coimbatore Jaipur Mangalore SKSE 1994-95 85.760 17.434 50.290 27.880 36. The trading volumes on exchanges have been witnessing phenomenal growth over the past decade.288.740 83.474 60.367. It registered a volume of Rs.787. The increase in turnover took place mostly at the big exchanges.990 6.365 9.199.470 15.400 517. The trading system is connected using the VSAT technology from over 357 cities. The NSE yet again registered as the market leader with more 85% of total turnover (volumes on all segments) in 2003-04.190 3. which peaked at Rs. which offer screen based trading system.12% during 2003-04 (Table 1-11).980 86.508 78. 18. 16. 17.190 4.204.452 2.275 100.860 205.328 703 — 1 12.490 52.799. Table 1-11: Growth and Distribution of Turnover on Stock Exchanges (Rs.432.242.879 1.717.354 270. two segments viz.593 932. mn.080 112 1 — — — — 5. 28. www.020 770 701 — — — — 25.352 148.240 74.953 million at the end of March 2004.478 247.830 7. CM and F&O are included.165. 13. the year 2003-04 saw a turnaround in the total trading volumes on the exchanges.809. 9.977 million.093.373 147.820 4. all three segments viz.600 12.566 — — 70..330 307.711 58.811.502 1. 22.120 13.550. 19.656 540. The market capitalization has grown over the period indicating more companies using the trading platform of the stock exchange.850 4. F&O and WDM and BSE.680 45.800 18.327 1. 13.150 12.182 7.510 48.634 117.480 528.696 2. There were 9.280 3. 16.864 2. 12.520 11.900 43.840 200 302 — — 1 1 — 2.650 24.730 — 1.180 2.466 33. 14.5% in the previous year.440 11.445 45. However.399 19.696.405 97.883.571.280 111 34 87. The trading volume.830 21. 10.310 678. For NSE.com . CM.593 9 101 25 1 6.282 10. About ten exchanges reported nil trading volume during the year.586 45.792.190 4. 11.730 3.516 5..095 8.445 23.759 12.322 8.650 30.267 240. 23.640 1.093 million in 2002-03.280 1.760 486. 3.840 2.090 3.980 170 — — — — — — Total 1.092 241 — 1.710 297.710 18 — 8.868 61.580 15.710 99.467 252.040 120 10 9 97 24 235 — — 16.550 3.506 23.265.720 90.780 1. The turnover ratio for the year 2003-04 accounted at 122.187.900 186. The market capitalization ratio defined as the value of listed stocks divided by GDP is used as a measure of stock market size.88% of turnover.747 65. 5.830 3. Top 5 stock exchanges accounted for 99. The turnover ratio.133.977 Note: Turnover means total value of transactions of securities in all market segments of an Exchange. It increased sharply to 52.900 million in 2000-01.9%.866 — — — 2.680 17.009 2. fell substantially to Rs.230 — 80 16 — 5 1 12.030 86.

including treasury bills.14% for 2003-04. To begin with.01% in 2002-03 to 74.89% in 2003-04 (Table 1-10). The share of WDM segment of NSE in total turnover for government securities decreased marginally from 52% in 2002-03 to 47. The index movement have been responding to changes in the government’s economic policies.792.nseindia. While NSE accounted for www. 21. 26. is presented in Chart 1-1. the most widely used indicator of the market. During 2003-04 it reached a level of Rs.333 million during the preceding year. The total exchange traded derivatives witnessed a value of Rs.690 million during 2003-04 as against Rs. Derivatives Market The number of instruments available in derivatives has been expanded. Government Securities The trading in government securities exceeded the combined trading in equity segments of all the exchanges in the country during 2003-04. etc. the increase in FIIs inflows. SEBI only approved trading in index futures contracts based on S&P CNX Nifty Index and BSE-30 (Sensex) Index.65.6% in 2003-04. there are futures and options based on benchmark index S&P CNX Nifty and CNX IT Index as well as options and futures on single stocks (51 stocks). However.423.ISMR Securities Market in India . 4. However. The aggregate trading in central and state government dated securities.An overview 12 The movement of the S&P CNX Nifty. the year 2003-04 witnessed a favorable movement in the Nifty. Now. This was followed by approval for trading in options based on these two indices and options on individual securities and also futures on interest rates derivative instruments (91-day Notional T-Bills and 10-year Notional 6% coupon bearing as well as zero coupon bonds).com .090 million. increased by manifold over a period of time. the share of WDM segment of NSE in the total of Non-repo government securities increased marginally from 74.422. The point-to-point return of Nifty was 80. wherein it registered its all time high in January 2004 of 2014.

1956: It provides for direct and indirect control of virtually all aspects of the securities trading including the running of stock exchanges with an aim to prevent undesirable transactions in securities. Companies Act. The stock exchanges frame their own listing regulations in consonance with the minimum listing criteria set out in the Rules.5% of total turnover. these provisions have been made: (a) making securities of public limited companies freely transferable subject to certain exceptions. particularly in the fields of company management and projects. Securities Contracts (Regulation) Act. In order to streamline the settlement process. and (c) regulating the securities market. audits and inspection of all concerned participants and adjudicate offences under this Act. Rules and Regulations made thereunder. (b) dematerialising the securities in the depository mode. As a condition of recognition. (b) promoting the development of the securities market. allotment and transfer of securities and various aspects relating to company management. and (c) listing of securities on stock exchanges. payment of interest and dividends. information about other listed companies under the same management. NSE has created a niche for itself in terms of derivatives trading in the global market. the Act envisages transfer of ownership of securities electronically by book entry without moving the securities from persons to persons. and (c) providing for maintenance of ownership records in a book entry form. It can conduct enquiries. 1992 was enacted to empower SEBI with statutory powers for (a) protecting the interests of investors in securities. It has powers to register and regulate all the market intermediaries. Further it can also penalize them in case of violations of the provisions of the Act. restricting the company’s right to use discretion in effecting the transfer of securities. SEBI has full autonomy and authority to regulate and develop an orderly securities market. (b) contracts in securities. 1992 (b) the Companies Act. supply of annual report and other information. 1992: The SEBI Act. Depositories Act. For this. rights and bonus issues. the use of premium and discounts on issues.nseindia. Its regulatory jurisdiction extends over corporates in the issuing capital and all intermediaries and persons associated with securities market. accuracy and security. It provides for standards of disclosure in the public issues. • • • www. and (d) the Depositories Act. It gives the Central Government regulatory jurisdiction over (a) stock exchanges through a process of recognition and continued supervision. 1996 provides for the establishment of depositories for securities to ensure transferability of securities with speed. 1956. 1956: It deals with issue.com . and the transfer deed and other procedural requirements under the Companies Act have been dispensed with. It also regulates underwriting. a stock exchange complies with the requirements prescribed by the Central Government. BSE accounted for less than 1% in 2003-04. A brief about these legislations are as given below: • SEBI Act.An overview ISMR about 99. and management perception of risk factors. 1996: The Depositories Act. The Act has made the securities of all public limited companies freely transferable. 1996. Regulatory Framework The four main legislations governing the securities market are (a) the SEBI Act.13 Securities Market in India . 1956 (c) the Securities Contracts (Regulation) Act.

Regulations & Regulators The Government has framed rules under the SCRA. Reserve Bank of India (RBI) and SEBI. The SROs ensure compliance of market participants with their own rules as well as with the rules relevant for them under the securities laws. Establishment of SEBI: The Securities and Exchange Board of India (SEBI) was set up as an administrative body in April 1988. regulations are framed by SEBI. The following paragraphs list the principal reform measures undertaken in the last decade. institutional and operational changes in the securities industry. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities. Department of Company Affairs (DCA). in addition to all the intermediaries and persons associated with securities market. The SROs like the stock exchanges have also laid down their rules and regulations. The SEBI has framed regulations under these acts for registration and regulation of the market intermediaries and for prevention of unfair trade practices. the Government and the SEBI issue notifications. gold related securities. guidelines and circulars. The activities of all these agencies are coordinated by a High Level Committee on Capital Markets. structural.ISMR Securities Market in India . www. Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI and some are concurrently by them. While the rules under the securities laws are framed by government. The powers under the Companies Act relating to issue and transfer of securities and non-payment of dividend are administered by SEBI in case of listed public companies and public companies proposing to get their securities listed. The SEBI Act and the Depositories Act are mostly administered by SEBI. The regulation of the contracts for sale and purchase of securities. the regulator has also been given search and seizure powers. preventing unfair trade practices and bringing the Indian market up to international standards. The objective of setting up SEBI is to protect the interest of investors in securities and to promote the development and to regulate the security market.An overview 14 Rules. which the market participants comply with. In a recent amendment to the SEBI Act. there have been substantial regulatory. Reforms in Indian Securities Markets Corporate Securities Market During the last decade. Under these Acts.com . The responsibility for regulating the securities market is shared jointly by Department of Economic Affairs (DEA). It was given statutory status on November 1992 by promulgation of the SEBI Ordinance. The courts have upheld the powers of SEBI to impose monetary penalties and to levy fees from market intermediaries. These have been carried out with the objective of improving market efficiency. The regulator has to ensure that the market participants behave in a desired manner so that securities market continue to be a major source of finance for corporate and government while protecting the interest of investors. the SEBI Act and the Depositories Act. The market participants are also required to appoint a compliance officer who is responsible for monitoring compliance with all the securities laws and for redressal of investor grievances. enhancing transparency. money market securities and securities derived from these securities and ready forward contracts in debt securities are exercised concurrently with the RBI.nseindia.

Currently T+2 day settlement cycle is being followed. For example. Screen Based Trading: Prior to 1990s. It enables market participants to see the full market on real-time. Thereafter. These guidelines contain a slew of requirements for issuers/ intermediaries with a broad intention to ensure that all concerned observe high standards of integrity and fair dealing. ceased. irrespective of their geographical locations. It was made mandatory for all exchanges to follow a uniform weekly trading cycle in respect of scrips not under rolling settlement. Trading Cycle: Initially. However. the trading on stock exchanges in India used to take place through an open outcry system. pricing of the issues. stating that they have examined the prospectus and that it brings out all the facts and does not contain anything wrong or misleading. All scrips moved to rolling settlement from December 2001.nseindia. liquidity and transparency. which enabled shifting of positions from one exchange to another. making the market transparent. to trade with one another simultaneously. Derivatives Trading: To assist market participants to manage risks better through hedging. Rolling settlement on T+5 basis was introduced in respect of specified scrips reducing the trading cycle to one day. speculation and arbitrage. It allows a large number of participants.com . This was time consuming and imposed limits on trading. Issuers are now required to comply with the guidelines and then access the market. Often this cycle was not adhered to and on several occasions led to defaults and risks in settlement.An overview ISMR DIP Guidelines: With the repeal of the Capital Issues (Control) Act. In order to reduce large open positions. 1947 in May 1992. SBTS electronically matches orders on price/time priority and hence it cuts down on time and cost. In the interest of investors. The companies can access the market only if they fulfill minimum eligibility norms in terms of their track record of distributable profits and net worth. the market has been allowed to allocate resources among the competing uses. improving the depth and liquidity of the market. SC(R)A was amended in 1995 to lift the ban on options in securities.15 Securities Market in India . The guidelines also aim to secure fuller disclosure of relevant information about the issuer and the nature of the securities to be issued. As a result. The exchanges. This system did not allow immediate matching or recording of trades. fixing of premia and rates of interest on debentures etc. In this system a member can punch into the computer quantities of securities and the prices at which he desires to transact and the transaction is executed as soon as it finds a matching sale or buy order from a counter party. the trading cycle varied from 14 days for specified securities to 30 days for others and settlement took another fortnight. The settlement period has been reduced progressively from T+5 to T+3 days. NSE introduced a nation-wide on-line fully-automated screen based trading system (SBTS). Given the efficiency and cost effectiveness delivered by the NSE’s trading system. The guidelines cast a responsibility on the lead managers to issue a due diligence certificate. trading in derivatives took off much later after the suitable legal and regulatory www. however. the trading cycle was reduced over a period of time to a week. This forced the other stock exchanges to adopt SBTS. it became the leading stock exchange in the country in its very first year of operation. continued to have different weekly trading cycles. Government’s control over issue of capital. In order to provide efficiency. issuers are required to disclose any material ‘risk factors’ and give justification for pricing in their prospectus. open outcry system has disappeared from India. SEBI issued the Disclosure and Investor Protection (DIP) guidelines. This enables the investors to take informed decisions.

The objective was of ensuring free transferability of securities with speed and accuracy.552. brokers owned. At the end of March 2004. respectively. Demutualisation: Historically. NSE. the Depositories Act. A few exchanges have already initiated demutualisation process. Depositories Act: The earlier settlement system gave rise to settlement risk. however. Demat settlement accounts for over 99% of turnover settled by delivery.com . the Act envisages transfer of ownership of securities electronically by book entry without making the securities move from person to person. However. controlled and managed the stock exchanges. In case of disputes. They have been set up to provide instantaneous electronic transfer of securities. This completely eliminates any conflict of interest and helped NSE to aggressively pursue policies. In order to promote dematerialisation. Therefore regulators focused on reducing the dominance of trading members in the management of stock exchanges.nseindia. the Government proposed to corporatise the stock exchanges by which ownership.701 billion and the number of investor accounts was 5.212 and 4. adopted a pure demutualised governance structure where ownership. viz. To obviate these problems. In face of extreme volatility in the securities market in 2000. This was due to the time taken for settlement and due to the physical movement of paper. NSDL and CDSL. There are two depositories in India. the value of dematerialsied securities was Rs. As on the same date. They advised them to reconstitute their governing councils to provide for at least 50% non-broker representation. It has also been made compulsory for public listed companies making IPO of any security for Rs.9 billion as of end March 2003.7 billion at the end of March 2004 from 76. This has almost eliminated the bad deliveries and associated problems. This act brought in changes by (a) making securities of public limited companies freely transferable subject to certain exceptions. www. The market presently offers index futures and index options on three indices and stock options and stock futures on individual stocks (presently 51 stocks on NSE) and futures in interest rate products like notional 91-day T-Bills and notional 10-year bonds. 10. (b) dematerialising of securities in the depository mode.832. this did not materially alter the situation. In order to streamline both the stages of the settlement process. traded and settled in demat form. The admission to a depository for dematerialisation of securities has been made a prerequisite for making a public or rights issue or an offer for sale. integrity of the exchange suffered. management and trading are with three different sets of people. All actively traded scrips are held. To prevent physical certificates from sneaking into circulation.An overview 16 framework was out in place.ISMR Securities Market in India . Further. the regulator has been promoting settlement in demat form in a phased manner in an ever-increasing number of securities.720. 1996 was passed to provide for the establishment of depositories in securities. the transfer of shares in favour of the purchaser by the company also consumed considerable amount of time. The stamp duty on transfer of demat securities has been waived. management and trading membership would be segregated from one another. it has been mandatory that all new securities issued should be compulsorily traded in dematerialised form. Derivatives trading commenced in June 2000 in the Indian securities market on NSE and BSE only. 10 crore or more only in dematerialised form. and (c) providing for maintenance of ownership records in a book entry form. The number of dematerialised securities increased to 97. the number of companies connected to NSDL and CDSL were 5.

The SGF provides a cushion for any residual risk and operates like a self-insurance mechanism wherein members contribute to the Fund. They also administer an efficient market surveillance system to detect and prevent price manipulations. As a part of the risk management system. This has eliminated counter-party risk of trading on the Exchange. In event of failure of a trading member to meet his obligations. Exchanges have set up trade/settlement guarantee funds for meeting shortages arising out of non-fulfillment/partial fulfillment of funds obligations by the members in a settlement. etc. Investor Protection: The SEBI Act established SEBI with the primary objective of protecting the interests of investors in securities and empowers it to achieve this objective. Globalisation: Indian securities market is getting increasingly integrated with the rest of the world.An overview ISMR Risk Management: With a view to avoid any kind of market failures. The exchanges maintain investor protection funds to take care of investor claims. The clearing corporation has also put in place a system which tracks online real time client level portfolio based upfront margining. SEBI specifies that the critical data should be disclosed in the specified formats regarding all the concerned market participants. Further. which commenced its operations in April 1996. FCCBs and ECBs. indemnity insurance. GDRs. the fund is utilized to the extent required for successful completion of the settlement. adequate margin requirements. DCA. The anonymous electronic order book ushered in by the NSE did not permit members to assess credit risk of the counter-party necessitated some innovation in this area. SEBI launched a nation-wide Securities Market Awareness Campaign that aims at educating investors about the risks associated with the market as well as the rights and obligations of investors. DEA. which is constantly monitored and upgraded. The DCA has also set up an investor education and protection fund for the promotion of investors’ awareness and protection of interest of investors. the regulator/ exchanges have developed a comprehensive risk management system. NSCCL established a Settlement Guarantee Fund (SGF). To address this concern. NRIs and OCBs are allowed to invest in Indian companies. It encompasses capital adequacy of members.nseindia. index based market wide circuit breakers have also been put in place. NSE had set up the first clearing corporation. including government securities. on-line position monitoring and automatic disablement. limits on exposure and turnover.17 Securities Market in India . The NSCCL assured the counterparty risk of each member and guaranteed financial settlement. National Securities Clearing Corporation Ltd. the SEBI and the stock exchanges have set up investor grievance cells for redressal of investor grievance. All these agencies and investor associations are organising investor education and awareness programmes.com . foreign companies are allowed to tap the domestic stock markets. FIIs have been permitted to invest in all types of securities. viz. Indian companies are permitted to list their securities on foreign stock exchanges by sponsoring ADR/GDR issues against block shareholding. The investments by FIIs enjoy full capital account convertibility. In January 2003. They can invest in a company under portfolio investment route upto 24% of the paid-up www. The Central Government has established a fund called Investor Education and Protection Fund (IEPF) in October 2001 for the promotion of awareness amongst investors and protection of the interest of investors. Indian companies have been permitted to raise resources from abroad through issue of ADRs. (NSCCL).

Therefore. This will better align ADR/GDR prices and domestic share prices of companies that have floated ADRs/GDRs. who provide with two way quotes for transactions in securities. also. Further.An overview 18 capital of the company. Subsequently. It. Initially. to facilitate retail investors to invest in Government securities. securities are issued through the auction system at market related rates. Other measures include abolition of TDS on government securities and stamp duty on transfer of demat debt securities. the types of bonds issued have diversified include floating rate bonds. NDS. The trading platform of Indian exchanges is now accessed through the Internet from anywhere in the world. which is used as a benchmark. two new systems/set-up have been made operational the Negotiated Dealing System (NDS) and the Clearing Corporation of India Limited (CCIL). Further. zero coupon bonds. non-competitive bids are accepted from retail investors in order to widen investor base. the CCIL was set up to facilitate settlement using the higher versions of Delivery versus Payment mechanism. This can be increased up to the sectoral cap/statutory ceiling. The major reforms planned include strengthening and modernising legislative framework through a Government Securities Act and switching over to order-driven screen based trading in Government securities on the stock exchanges.ISMR Securities Market in India . online reporting of transactions and dissemination of trade information to the market. there was no central agency to guarantee the trades. setting up of Clearing Corporation of India as the central clearing agency wherein Delivery versus Payment system is used for settlement. RBI permitted select entities to provide custody (Constituent SGL) accounts. which meant that the investors (foreign institutional or domestic) in any company that has issued ADRs/ GDRs can freely convert the ADRs/GDRs into underlying domestic shares.nseindia.com . Commercial Papers and Certificate of Deposits are available for negotiated dealing through NDS among the members. This is expected to bring about an improvement in the liquidity in ADR/GDR market and elimination of arbitrage opportunity. notice/ term money. They are issued across maturities to develop a yield curve from short to long end. acts as a central counterparty for clearing and settlement of government securities transactions done on NDS. Also. depending on the direction of price change in the stock. the settlement of trades was carried out on individually. Government Securities Market The Government securities market has witnessed significant transformation in the 1990s. call money. as applicable. Government Securities (including T-bills). capital index bonds. that is. www. irrespective of couterparties each trade was settled separately. repos in eligible securities. They could also reconvert the domestic shares into ADRs/GDRs. Further. facilitates screen based negotiated dealing for secondary market transactions in government securities and money market instruments. interalia. The Indian Stock Exchanges have been permitted to set up trading terminals abroad. Market Infrastructure: As part of the ongoing ef forts to build debt market infrastructure. The reforms in the secondary market include setting up a system of primary dealers. In the primary market. and negotiated dealing screen for reporting of all the trades. There have been major institutional and operational changes in the government securities market. The two-way fungibility for ADRs/GDRs has been permitted by RBI. both the securities and funds are settled on net basis. It began by settling the securities on gross basis and settlement of funds on net basis.

testing. it would be worthwhile to review the international initiatives in the form of standards/guidelines/ recommendations. there have been substantial changes in the operations of the securities market. the market design has changed drastically. Principles of Securities Regulation In February 2002. the reforms in the securities market are far from complete. but also the career prospectus of the certified professionals is better. As such. Testing and Certification With a view to improve the quality of intermediation. scores reporting and certifying is fully automated. It is an on-line fully automated nation-wide testing and certification system. As a result of these reforms. the confidence of the investors in the market increases. A certificate is awarded to those personnel who qualify the tests. the markets and regulations. the reforms undertaken so far have aimed at improving the operational and informational efficiency in the market by enabling the participants to carry out transactions in a cost effective manner and providing them with full. a system of testing and certification has been used in some of the developed and developing markets. which indicates that they have a proper understanding of the market and skills to service different constituents of the market. Its monthly bulletin carries research articles pertaining to issues in the capital market. This ensures that a person dealing with financial products has a minimum knowledge about them. institutions and the regulatory framework. and a technical document titled “Assessment methodology for Recommendations for Securities Settlement Systems”. It tests practical knowledge and skills. that are required to operate in financial markets. While charting the agenda for future. enhance their confidence and avoid systemic failure of the market.nseindia. These provided advice and a yardstick against which the www. It offers nine securities market related modules. assessing. A number of checks and balances have been set up to protect investors. not only the intermediaries benefit due to the improvement in the quality of their services. IOSCO released a new version of the Objectives and Principles of Securities Regulation. However. Thus. At the same time.com . there is still scope for improving the system as a whole.An overview ISMR Research in Securities Market In order to deepen the understanding and to assist in policy-making. The objective of this initiative is to foster research to better design market microstructure. NSE has evolved a testing and certification mechanism known as the National Stock Exchange’s Certification in Financial Markets (NCFM). The entire process in NCFM from generation of question paper. In order to improve market efficiency further and to set international benchmarks in the securities industry. invigilation. SEBI has been promoting high quality research in the Indian capital market. International Initiatives As a result of the reforms pursued during the past decade. Today the Indian securities market bears a look which is absolutely different from what they were 10 years ago or what they will be 10 years hence. The NSE Research Initiative has so far come out with 32 Working Papers.19 Securities Market in India . relevant and accurate information in time. As a result. NSE administers a scheme called the NSE Research Initiative.

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progress made towards effective regulation would be measured. IOSCO members, including SEBI, have endorsed these principles and within their jurisdiction intend to adhere to these principles. The principles are listed below:

Regulator
1. The responsibilities of the regulator should be clear and objectively stated. This requires a clear definition of responsibilities, preferably set out by law; strong cooperation among responsible authorities through appropriate channels. In addition, there should be adequate legal protection for the regulators and their staff acting in bona fide discharge of their functions and powers. Any division of responsibility should avoid gaps and inequities in regulation. The regulator should be operationally independent and accountable in the exercise of its functions and powers. Independence is enhanced by a stable source of funding for the regulator. The regulator should operate independent of sectoral interests. Nevertheless, a system of public accountability of the regulator and a system permitting the judicial review of decisions of the regulator should be in place. The regulator should have adequate powers, proper resources and the capacity to perform its function and exercise its powers. The regulator should have powers of licensing, supervision, inspection, investigation and enforcement and also access to adequate funding. The regulator should adopt clear and consistent regulatory processes. The regulator should have a process for consultation with the public by openly disclosing its policies. It should observe standards of procedural fairness and have regard to the cost of compliance with the regulations. It should also play an active role in the education of investors and other participants in the capital market. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality. They should be given clear guidance on conduct relating to conflict of interest, appropriate use of information obtained in the course of duty, observance of confidentiality and secrecy provisions, observance of procedural fairness, etc.

2.

3.

4.

5.

Self-Regulation
6. The regulatory regime should make appropriate use of self-regulatory organisations (SROs) that exercise some direct oversight responsibility in their areas of competence. SROs should undertake those regulatory responsibilities to the extent of their size and complexity of the markets. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality while exercising powers and responsibilities. The regulator must ensure that no conflict of interest arises because of SRO’s access to valuable information about market participants. The conflict may be acute when SRO is responsible both for supervision of its members and regulation of the market sector. If the powers of a SRO are inadequate to address a particular misconduct or conflict of interest, then

7.

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the regulator should take over the responsibility. SROs should also follow similar professional standards as expected of the regulator.

Enforcement of Securities Regulation
8. The regulator should have comprehensive inspection, investigation and surveillance powers. It should have the power to seek information, or to carry out inspections of business operations to ensure compliance with relevant standards. The regulator should have comprehensive enforcement powers, including regulatory and investigative powers. It should be able to obtain data/information, to impose administrative sanctions and/or seek orders from court, to initiate or refer matters for criminal prosecution, to suspend trading in securities, to enter into enforceable settlements etc. It is, however, not necessary that all aspects of enforcement of securities law be given to a single body. The regulatory system should ensure that an effective and credible use of inspection, investigation, surveillance and enforcement powers is made. The powers of regulator should be sufficient to ensure its effectiveness in cases of cross border misconduct. The regulator should require market intermediaries to have in place policies and procedures to prevent use of their business as a vehicle for money laundering.

9.

10.

Co-operation in Regulation
11. 12. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts. The regulatory system should allow for assistance to be provided to foreign regulators, who need to make inquiries in the discharge of their functions and exercise of their powers. There should be arrangements, which identifies the circumstances under which such assistance may be sought, identification of the types of information and assistance that can be provided, safeguards of confidentiality of information transmitted, and a description of permitted uses of information.

13.

Issuers
14. There should be full, timely and accurate disclosure of financial results and other information, which may impact the investors’ decisions. Disclosures should be clear, reasonably specific and timely. Holders of securities in a company should be treated in a fair and equitable manner. Accounting and auditing standards should be of a high and internationally acceptable quality.

15. 16.

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Collective Investment Schemes
17. The regulatory system should set standards for the eligibility for those who wish to market or operate a collective investment scheme. The criteria may include honesty and integrity of the operator, competence to carry out the functions and duties of a scheme operator, financial capacity, internal management procedures, etc. The regulatory system should provide for rules governing the legal form, structure of collective investment schemes and protection of client assets. Regulation should require disclosure, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme. Regulation should ensure that there is a proper and disclosed basis for assets valuation, the pricing and the redemption of units in a collective investment scheme.

18. 19.

20.

Market Intermediaries
21. Regulation should provide for minimum entry standards for market intermediaries. It should reduce the risk to investors caused by negligent or illegal behaviour or inadequate capital. The licensing process should require a comprehensive assessment of the applicant and the licensing authority should have the power to withdraw or suspend the license. The regulator should ensure that the public has access to relevant information concerning the licensee. There should be initial and on going capital and prudential requirements for market intermediaries to cover the risks that the intermediaries undertake. The regulations should provide for inspection, investigation, enforcement, discipline and revocation of license. Market intermediaries should be required to comply with the standards. They should conduct their operations with the aim to protect the interest of clients by undertaking proper risk management. There should be a procedure for dealing with the failure of a market intermediary in order to minimise damage and loss to investors and to contain systemic risk.

22.

23.

24.

Secondary Market
25. The establishment of trading systems should be subject to regulatory authorisation and oversight. The relevant factors for authorisation could be operator’s competence, admission of products to trading, admission of participants to trading, provision of trading information, etc. There should be ongoing regulatory supervision of exchanges and trading systems, which should aim to ensure that the integrity is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants. Approval of trading system should be re-examined or withdrawn by the regulator when considered necessary.

26.

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27. 28.

Regulation should promote transparency of trading. Regulation should be designed to detect and deter market manipulation and other unfair trading practices. The regulation should prohibit misleading conduct, insider trading and other fraudulent or deceptive conduct which may distort price discovery system, distort prices and unfairly disadvantage investors. These may be addressed by direct surveillance, inspection, reporting, product design requirements, position limits, market halts, etc. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption. Systems for clearing and settlement of securities should be subject to regulatory oversight. They should be designed in a fair, effective and efficient manner and reduce systemic risk.

29. 30.

A comparison of these principles and the regulations in the Indian Securities Market indicates that India has almost complied with all thirty principles.

Recommendations for Securities Settlement Systems
The 19 recommendations of BIS-IOSCO cover legal risk, pre-settlement risk, settlement risk, operational risk and other issues relating to securities settlement system. India’s readiness vis-à-vis BIS-IOSCO principles have been discussed in detail in Chapter 5. The 19 recommendations are discussed below:

Legal risk
1. Legal framework: Securities settlement systems should have a well-founded, clear and transparent legal basis in the relevant jurisdictions.

Pre-settlement risk
2. Trade confirmation: Confirmation of trades between direct market participants should occur as soon as possible after trade execution, but no later than trade date (T+0). If confirmation of trades by indirect market participants (such as institutional investors) is required, then it should occur as soon as possible after trade execution, preferably on T+0, but no later than T+1. Settlement cycles: Rolling settlement should be adopted in all the securities markets. Final settlement should occur no later than T+3. The benefits and costs of a settlement cycle shorter than T+3 should be evaluated. Central counterparties (CCPs): The benefits and costs of a CCP should be evaluated. Where such a mechanism is introduced, the CCP should rigorously control the risks it assumes. Securities lending: Securities lending and borrowing (or repurchase agreements and other economically equivalent transactions) should be encouraged as a method for expediting the settlement of securities transactions.

3.

4.

5.

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Other issues 13. Protection of customers’ securities: Entities holding securities in custody should employ accounting practices and safekeeping procedures that fully protect customers’ securities.ISMR Securities Market in India . Timing of settlement finality: Final settlement should occur not later than the end of the settlement day. www. 9. Operational reliability: the sources of operational risk in the clearing and settlement process should be identified and minimised through an appropriate systems of controls and procedures. Systems should be reliable and secure. Contingency plans and backup facilities should be established to allow for timely recovery of operations and completion of the settlement process. Operational risk 11. CSD risk control system to address participants’ failures to settle: CSDs that extend intraday credit to participants and that operate net settlement systems. Efforts must be taken to protect CSD members from potential losses and liquidity pressures which may arise due to faulty assets used for that purpose.An overview 24 Settlement risk 6. Access: CSDs and CCPs should have objective and publicly disclosed criteria for participation that permit fair and open access.nseindia. Governance: Governance arrangements for CSDs and CCPs should be designed to fulfill public interest requirements and to promote the objectives of owners and users. Intraday or real-time finality should be provided where necessary to reduce risks. should institute risk controls. Delivery versus payment (DVP): CSDs should eliminate principal risk by linking securities transfers to funds transfers in a way that achieves delivery versus payment. 7. Custody risk 12. 10. Central securities depositories (CSDs): Securities should be immobilised or dematerialised and transferred by book entry in CSDs to the greatest extent possible. The most reliable set of controls is a combination of collateral requirements and limits. Cash settlement assets: Assets used to settle the ultimate payment obligations arising from securities transactions should carry little or no credit or liquidity risk.com . To ensure that timely settlement is made even if the participant with the largest payment obligation is unable to settle. It is essential that customers’ securities be protected against the claims of a custodian’s creditors. 8. 14.

An overview ISMR 15.25 Securities Market in India . Regulation and oversight: Securities settlement systems should be subject to transparent and effective regulation and oversight. Order and Order Routing: The study found that 12% of the Exchanges have the system that gives direct access for order routing and straight through processing is in place (55%). The study found that 49% of exchanges offer automatic execution of small orders and 71% offer opportunities for price improvement. Efficiency: While maintaining safe and secure operations. information.com . orders and order routing mechanism. 16. About 86% of Exchanges have platforms that include stock watch or real time error alerts.nseindia. Central banks and securities regulators should cooperate with each other and with other relevant authorities. 19. execution. Trading Platform: The study found that electronic systems prevail and are typically order driven. Risks in cross-border links: CSDs that establish links to settle cross-border trades should design and operate such links to reduce effectively the risks associated with cross-border settlements. Transparency: CSDs and CCPs should provide market participants with sufficient information for them to identify and evaluate accurately the risks and costs associated with using their services. 18. Execution: The execution quality has generally improved with the electronic system in place in most of the Exchanges. transparency. Communication procedures and standards: Securities settlement systems should use or accommodate the relevant international communication procedures and standards in order to facilitate efficient settlement of cross-border transactions. The study also found a significant growth in Exchange Traded Funds. The time taken to process the order is typically less than a second. World Federation of Exchanges Trading Survey 2002 The World Federation of Exchanges conducted a survey in 2002 on trading practices at major stock exchanges. This survey was conducted by Professor Maureen O’Hara of Cornell University. Trading Products: The study found that 33 exchanges reported negative to flat value growth over the last year but the growth of derivatives has been stronger. 17. About 88% of Exchanges have backup systems in place that are fully redundant. The majority of exchanges disclose substantial market information and www. traded products. securities settlement systems should be cost-effective in meeting the requirements of users. The report was released in March 2003. 14 Exchanges have introduced new trading platform in the past 12 months and 15 are planning to do so in next 12 months. Transparency and Information: The survey indicated that global markets are becoming more and more transparent. The survey covered 42 Exchanges and focussed on 6 operational areas: trading platform. 32 Exchanges have order driven system and only 2 stock exchanges have a floor system.

com . another 26% display depth for specific price levels and 17% allow indicative quotes to be disclosed. 36% through special information system and 7% through satellite. The regulatory functions are handled internally in 40% of exchanges.An overview 26 disseminate them through a variety of ways: 90% through data feed. Other Issues: The survey finds that 76% of the Exchanges reported operating within a self-regulatory framework. www. While Government regulator handles 21%. The depths of all prices is displayed by 57% of exchanges.nseindia. 69% through trading system.ISMR Securities Market in India . 74% through internet. 38% are handled jointly with a regulatory agency. by a separate non-governmental entity for 14%.

147 48.900 32.260 308.676. The securities can be issued at a face value. mn.nseindia. the resources mobilised by non-government entities fell from 88% in 2002-03 to 85% in 2003-04. Public Companies PSU Bonds Govt.360 505. In the private placement market. Companies Banks & FIs Private Placement Euro Issues Government Securities Central Government State Governments Total Source: RBI Annual Report. imposed Table 2-1: Resource Mobilisation by Government and Corporate Sector (Rs. for the first time.790 1. 2002-03 752.com .572. or at a discount/premium. the Government and the corporates issue securities in which the investors deploy their savings.030 664.476. The primary market comprises. This was due to the offers made by quality issuers evoking buoyant investors’ interest (Table 2-1). After a long period of subdued activity. Apart from raising funds in domestic markets.600 stringent disclosure norms in September 2003. there were signs of revival in the public issues in 2003-04. there are only a few select subscribers to the issue.150 30.530 2.777 — — 29. The public issues mobilised www. It is through this market that the borrower’s viz.667 18. In case of private placement.264 1. A public issue consists of a company entering the market to raise funds from all types of investors. they may take a variety of forms such as equity.981.819.27 Primary Market ISMR Primary Market Introduction The primary market plays an important role in the securities market by forming a link between the savings and investments.100 — 1.201 2003-04 695.890 669.800 592. This chapter presents developments in primary market for corporate securities in India.000 38.) Issues Corporate Securities Domestic Issues Public Issues Non-Govt. As a result.411 718.980 1. while the primary market for government securities is discussed separately in Chapter 6. debt or some hybrid instrument. the SEBI. the public issues and the private placement market.210 2.480 34. its debut is known as the initial public offer (IPO).050 71. both equity and debt..570 1. resources are mobilized in international markets through the issuance of American Depository Receipts (ADRs)/Global Depository Receipts (GDRs) and External Commercial Borrowing (ECB) route.511.

10 crore OR (b)(ii) There should be a compulsory market-making for at least 2 years from the date of listing of the shares subject to certain conditions as specified in the guidelines. stringent disclosure and eligibility norms have been issued. if it meets the conditions: (a)(i) The issue is made through the book-building process. net tangible assets etc. In this regard. various measures have been taken by the Government. If the name of the company has been changed in the last one year. the full subscription monies is to be refunded AND (b)(i) The minimum post-issue face value capital of the company has to be Rs. various operational procedures for the issuers have been simplified to facilitate smooth mobilization of resources. 2000 as enumerated below: Eligibility Norms • An unlisted company may make an initial public offering (IPO) of equity shares or any other security. • An unlisted company not complying with any of the above conditions may still make an IPO.com . of which at least 10% comes from the appraiser(s). Provided. In addition. as specified in the guidelines. www.nseindia. unless the following conditions are satisfied: (i) Credit rating of not less than investment grade is obtained from not less than two SEBI registered credit rating agencies. • No company can make a public or rights issue of debt instruments (whether convertible or not). otherwise. But. with at least 50% of the issue size being allotted to the Qualified Institutional Buyers (QIBs). the foreign companies have been allowed to access the Indian capital market through Indian Depository Receipts (IDR) (discussed in detail in chapter 4). subsequently. 71. SEBI has set up various committees. then the revenue accounted for by the activity suggested by the new name should not be less than 50% of its total revenue in the preceding one full-year period. the resources raised by Indian corporates from the international capital market through the issuance of FCCBs.ISMR Primary Market 28 Rs. the aggregate issue size of the proposed issue along with all the previous issues made during the same financial year should not exceed 5 times its pre-issue net worth as per the audited balance sheet of the last financial year. and meets the conditions of net worth. SEBI has amended the SEBI (Disclosure and Investor Protection) Guidelines. GDRs and ADRs have declined marginally during 2003-04. Failing which the full subscription money have to be refunded OR (a)(ii) The “project” has at least 15% participation by Financial Institutions/Scheduled Commercial Banks. With a view to integrate the Indian capital market. DIP Guidelines Given the SEBI’s commitment to protect the investors’ interests and to increase the transparency and efficiency of the primary market. Policy Developments In order to refine the primary market design and boost the waning investors’ confidence. which may be converted into or exchanged with equity shares at a later date. Further. it has a track record of profitability. at least 10% of the issue size is to be allotted to QIBs. • A listed company is eligible to make a public offer of equity shares or any other security which is convertible into equity shares. I. This section throws light on the policy measures initiated during the financial year 2003-04 and till June 2004. Further. which constantly review the guidelines. RBI and SEBI.900 million during this year.

• The lock-in period in respect of the shares issued on preferential basis pursuant to a scheme approved under Corporate Debt Restructuring framework should commence from the date of allotment. Preferential Issues • As in case of equity shares. would not be eligible for allotment of shares on preferential basis. warrants. Partly Convertible Debentures (PCDs). which are locked in may be transferred to any other person holding shares. no listed company is permitted to make preferential issue of equity shares. the company should forthwith refund the entire subscription amount received. FCDs or any other financial instruments convertible into equity shares. Promoters Contribution and Lock-in • Prior to an IPO.com . the entire pre-preferential allotment shareholding should be under lock-in. The lock-in period shall start from the relevant date up to a period of six months from the date of preferential allotment. the shareholders. for a period of more than 6 months. • Unless the entire shareholding is held in dematerialized form. In case of partly paid up shares the lock-in period should commence from the date of allotment and continue for a period of one year from the date when shares become fully paid up. They should not have defaulted payment of interest or repayment of principal. the transfer of the locked in preference shares/instruments is subject to the same norms and comply with SEBI (Substantial Acquisition of Shares and Takeovers) Regulations. www. In such a case. may be transferred to and amongst promoter/promoter group or to a new promoter or persons in control of the company. 1997. the shares held by the persons other than the promoters. which are locked-in. • Shares held by promoter(s). Provided the lock-in of shares in the hands of transferees for the remaining period remains. PCDs. Designated Stock Exchange Following the withdrawal of the concept of a regional stock exchange. who have sold their shares during the six months period prior to the relevant date. companies have to choose one stock exchanges as a designated stock exchange for the purpose of finalization of the basis of allotment. if any. which are issued on preferential basis. a delay beyond 8 days attracts a penal charge of 15% per annum. In addition. if the proposed allottees are less than fifty. This should be subjected to continuation of lock-in in the hands of transferees for the remaining period and compliance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations. 1997. Fully Convertible Debentures (FCDs) or any other financial instruments convertible into or exchanged with equity shares at a later date. They should also comply with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations. The lock-in period should continue for a period of one year. • In case of the shares.29 Primary Market ISMR • (ii) Company should not be in the list of willful defaulters of RBI.nseindia. An issuer company should not allot non-convertible debt instrument pursuant to a public issue. 1997. warrants.

if any. in the book built portion. In case the issue price is below Rs. rounded off to the nearest integer.ISMR Primary Market 30 Book Building Guidelines • The issuer company should enter into an agreement with one or more stock exchange(s). 10 per share. responsibilities and obligations of the company and the stock exchange(s). 500 per share. if the issue price is Rs. Green Shoe Option An issuer company making a public offer of equity shares can avail of the Green Shoe Option (GSO) for stabilising post listing of its shares. The appointed brokers should be financially capable of honouring their commitments arising out of defaults of their clients/ investors. then the following rules apply: (a) not less than 25% of the net offer should be made to retail individual investors. 1 per share.e. It is mandatory that 50% of the issue size is allotted to the QIBs.com . not less than 25% and not more than 50% of the net offer should be available for allocation to non QIBs. (b) the balance 25%. www. This will be subject to a minimum allotment being equal to the minimum application size as fixed and disclosed in the offer document. • The book runner(s)/syndicate members should appoint SEBI registered brokers to accept bids. They will be either those who have not participated or have not received any allocation. 10 per share subject to a lower limit of not less than Re. the face value ought to be Rs. other than retail individual investors and QIBs. • The company should pay the broker/s a commission/fee for the services rendered. Pricing of Issues For an IPO by an unlisted company. • If the offer is through 100% book building process. Post Issue Obligations The allotment of shares should be on a proportionate basis within the specified categories. The brokers’ are not allowed to levy a service fee on his clients/investors for his services.nseindia. duties. then — (a) in the book built portion. which have the requisite system to offer on-line securities. the issuer company has the discretion to fix the face value below Rs. (b) not less than 25% of the net offer to non-institutional investors i. 500 or more. • If 75% of the net offer is through book building process and 25% at the price determined through book building. The face value of shares should be disclosed in the advertisements and offer documents. The agreement should also provide for a dispute resolution mechanism between them. (c) not more than 50% of the net offer for QIBs. applications and placing orders with the company. • The freedom is given to the issuer company to list the securities on any other exchange and not necessarily on the exchange through which the company has offered the securities. should be available only to retail individual investors. The agreement should specify the rights. offered at a price determined through book building. subject to certain provisions in the guidelines such as: • A company desirous of availing the option should seek authorization in the general meeting for allotment of the additional shares to the ‘stabilising agent’ (SA) at the end of the stabilisation period.

The allocation of these shares should be on pro-rata basis to all the applicants.000 and in multiples thereof. The agreement should specify the maximum number of shares that may be borrowed from the promoters or the shareholders which should not be in excess of 15% of the total issue size.nseindia. 5.com . The promoters and pre-issue shareholders. • The minimum application value should be within the range of Rs. 7. NAV per share after issue and comparison thereof with the issue price. www. Prior to filing of offer document with SEBI. holding more than 5% shares should lend the shares for the purpose of GSO. They should also certify that all the disclosures made in the offer document are true and correct. The SA should also enter into an agreement with the promoter(s) or pre-issue shareholders who will lend their shares. minimum return on increased net worth required to maintain pre-issue EPS. average return on net worth in the last 3 years. or (iii) on being satisfied that the violation was caused or may be caused due to factors beyond the control of the applicant. Earnings per share. Guidelines for Issue of Advertisements Every time the issue is advertised on television screen. They will be responsible for the price stabilisation process.000 to Rs. the projected earnings should not be used as a justification for the issue price in the offer document. but the advertisement should advise the viewers to refer to the red herring prospectus or other offer document for details. if required. • Some of the pertinent information have to be disclosed irrespective of the issue prices viz. The stabilisation mechanism should be available for not more than 30 days from the date when trading is permitted on the exchange(s). P/E pre-issue. (ii) of a technical violation or a possible violation. (i) on an application made by any listed company or intermediary connected with the issue. as the SA. the SA should enter into an agreement with the issuer company clearly stating all the terms and conditions relating to this option including fees charged/expenses to be incurred... to subscribe for additional capital will be exercised. Miscellaneous • The Board should provide exemptions regarding any particular provision(s) of these guidelines viz. EPS pre-issue for the last three years.31 Primary Market ISMR • • • • The company should appoint one of the merchant bankers or book runners. Chief Executive Officer and Chief Financial Officer. comparison of all the accounting ratios of the issuer company. the accounting ratios disclosed in the offer documents in support of the issue price should be calculated after giving effect to the consequent increase in capital on account of compulsory conversions outstanding as well as on the assumption that the options outstanding. However. Contents of Offer Document The draft offer document and the final offer document should be approved by the Board of Directors and signed by all the Directors (including the managing director). NAV per share based on last balance sheet. if any. the risk factors should not be scrolled on the screen. of both unlisted and listed company. Further.

nseindia. the statutory auditor has to certify that the issue of securities has been done in accordance to the Rules.com . 2003 SEBI amended the SEBI (Debenture Trustees) Regulations. promoter for accessing the market. Additionally the SEBI (Disclosure and Investor Protection) guidelines issued under the securities law prescribes a series of eligibility and disclosure norms to be complied by the issuer. 1985. for allotment on proportionate basis as in case of allotment in public category. 1 crore. who hold shares worth up to Rs. Debenture Trustees Regulations. this requirement is not applicable in respect of debentures issued prior to the commencement of the Companies (Amendment) Act.ISMR Primary Market 32 • In a public issue by a listed company. (b) The net worth should be monitored by the debenture trustee on a continuous basis and inform SEBI for any shortfall in it. if warrants are issued on preferential basis with an option to apply for and get the shares allotted. which would be convertible or exchanged with equity shares. which came into force w. December 4. (d) No debenture trustee should act as such for any issue of debentures in case it has lent and the loan is not yet fully repaid or is proposing to lend money to the body corporate. or (ii) the body corporate has been referred to BIFR under the Sick Industrial Companies (Special Provisions) Act. they would not be entitled to undertake new assignments until they restore the net worth to the required level within a specified time. 1956. Unlisted Public Companies (Preferential Allotment) Rules. then the issuing company should determine in advance the price of the resultant shares. In such a case. who already is registered. (c) Debenture trustee should not relinquish its assignments unless and until another debenture trustee is appointed in its place. 2003 The Unlisted Public Companies (Preferential Allotment) Rules. It states that no issue of shares on a preferential basis can be made by a company unless authorized by its articles of association and unless a special resolution is passed by the members in a General Meeting.000 on the record date. www. listing and allotment of securities. the reservations can be made for the shareholders. 2000. 2003. In case. The special resolution should be acted upon within a period of 12 months.e. Market Design The primary market is governed by the provisions of the Companies Act. 2003 to include the following: (a) The capital adequacy should not be less than the networth of Rs. 2003. are applicable to all unlisted public companies issuing equity shares. provided that a debenture trustee. which deals with issues. where (i) recovery proceedings in respect of the assets charged against security has been initiated. should fulfill the networth requirements within two years from that date. However. 2003. In case of every issue of shares/warrants or any other financial instrument with a conversion option. prior to commencement of the SEBI (Debenture Trustees) (Amendment) Regulations. in this section we discuss the market design as stipulated in the SEBI (DIP) guidelines. FCDs. However. III. 50. II.f. PCDs or any other financial instruments.

com . an unlisted company can still make an IPO on compliance of the guidelines as specified: (a)(i) issue should be made through the book building process with at least 50% of the issue size being allotted to the QIBs. 2000 Disclosure and Investor Protection (DIP) Guidelines of SEBI. for at least 3 out of the immediately preceding 5 years. 50 lakh. offer for sale. listing requirements. only if it has a track record of profitability and required net worth and net tangible assets. Even if the above mentioned conditions are not satisfied. including premium. SEBI has since then been issuing clarifications/ amendments to these guidelines from time to time. The guidelines provide norms relating to the eligibility for companies issuing securities. pre and post-issue obligations. and rights issues by listed and unlisted companies. at least 50% of the revenue for the preceding one full year is earned by the company from the activity suggested by the new name. The guidelines apply to all public issues. An application for listing of those securities with stock exchange(s) is also to be made. 1 crore in each of the preceding 3 full years. if not. pricing of issues. a comprehensive coverage of all DIP guidelines has been made available through a series of compendium ‘SEBI (DIP) Guidelines. Further. in order to streamline the public issue process. A company cannot make an issue if the company has been prohibited from accessing the capital market under any order or discretion passed by SEBI. governs the issues of capital by Indian companies. 2000’. 3 crore in each of the preceding 3 full years. filing of offer document is mandatory where the aggregate value of securities. disclosure norms. exceeds Rs. Eligibility Norms Any company issuing securities has to satisfy the following conditions at the time of filing the draft offer document and the final offer document with SEBI and Registrar of Companies (ROCs)/Designated Stock Exchange respectively. of which not more than 50% is held in monetary assets. among others. which may be converted into equity shares. (iii) it has a track record of distributable profits in terms of section 205 of the Companies Act. at least 21 days prior to the filing of prospectus with the ROCs. the company must enter into an agreement with the depository for dematerialisation of its securities and should give an option to subscribers/shareholders/ investors to receive the security certificates either in physical or in dematerialised form. (ii) it has a net worth of at least Rs. contents of offer documents. • An unlisted company can make an IPO of equity shares or any other security. This section attempts to highlight some of the important clauses in the guideline in a precise manner. 1956. issued in June 1992. • A company making a public issue of securities has to file a draft prospectus with SEBI. For a rights issue.33 Primary Market ISMR DIP Guidelines.nseindia. through an eligible merchant banker. In January 2000. lock-in period for promoters’ contribution. if any. (iv) the aggregate of the proposed issue and all previous issues made in the same financial year in terms of size (offer through offer document plus firm allotment plus promoters contribution through the offer document) does not exceed five times its pre-issue net worth and (v) in case the company has changed its name within the last one year. then the full subscription monies has to be refunded. OR (a)(ii) the project should have at least 15% participation by FIs/SCBs of which at least 10% should • www. Some of the conditions are specified hereunder: (i) it has net tangible assets of at least Rs.

Contribution of Promoters and lock-in The promoters’ contribution in case of public issues by unlisted companies should not be less than 20% of the post issue capital. OR (b)(ii) there should be compulsory market making for at least 2 years from the date of listing subject to certain conditions as specified in the guidelines.com . A company (listed or unlisted) should issue shares to applicants in the firm allotment category at a different price from the one at which the net offer to the public is made. including the eligible infrastructure companies.ISMR Primary Market 34 come from the appraiser. All the credit ratings obtained during the 3 years preceding the public or rights issue of debt instrument for any listed security of the issuer company should also be disclosed in the offer document. including the rejected ones. In addition. In case of public issues by listed companies. (ILFS) or a bank which was earlier a PFI and not less than 5% of the project cost is financed by any of the institutions referred above. at least 10% of the issue size should be allotted to QIBs. promoters should contribute to the extent of 20% of the proposed issue or should ensure post-issue share holding to the extent of 20% of the post-issue capital. • • Pricing of Issues The companies. In case of the change in name of the issuer company within the last 1 year. The banks. 10 crore. That is. the promoters’ contribution should either be 20% of the proposed public issue or 20% of the www. needs to be disclosed. AND (b)(i) minimum post-issue face value capital of the company should be Rs.nseindia. however. the revenue accounted for by the activity suggested by the new name should not be less than 50% of its total revenue in the preceding one full year period. can price their shares subject to the approval by the RBI. 1956 and norms as specified by SEBI from time to time. No public issue or rights issue of debt instruments (whether convertible or not) can be made unless (a) it has a credit rating of not less than investment grade from not less than two credit rating agencies registered with SEBI. the full subscription monies would be refunded. Further. at a higher price than at which the securities are offered to the public. by way of loan and/or subscription to equity or a combination of both. jointly or individually. A listed company making a composite issue of capital may issue securities at differential prices in its public and rights issue. • For a listed company the aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size should not exceed 5 times its pre-issue net worth. if any for a period more than 6 months. an eligible company is free to make public/rights issue of equity shares in any denomination determined by it in accordance with sub-section (4) of section 13 of the Companies Act. For a composite issue. have the freedom to price their equity shares or any security convertible into equity in public or rights issues as the case may be. otherwise. (b) the company should not feature in the list of willful defaulters of RBI (c) company has not defaulted on payment of interest or repayment of principal of debentures issued to the public. all the credit ratings. Infrastructure companies are exempt from the requirement of eligibility norms if their project has been appraised by a public financial institution (PFI) or Infrastructure Development Finance Corporation (IDFC) or Infrastructure Leasing and Financing Services Ltd.

com .nseindia. is locked for a period of one year from the date of commencement of commercial production or the date of allotment in the public issue. regulations and other directives issued by the Board. Also. www. the promoters should bring in the full amount of the promoters contribution including premium. In a public-issue. liabilities and obligations. However. refund and despatch of certificates are also taken care by the lead merchant banker. the lead merchant banker should ensure that the post-issue monitoring reports are submitted irrespective of the level of subscription. a statement as to whether it is proposed to amend the draft offer document or not. The merchant banker has to appoint a compliance officer who will directly liaise between the Board and the issuer company with regard to compliance of various laws. In case of under-subscription of an issue. veracity and adequacy of disclosures in the offer document. The lock-in period starts from the date of allotment in the proposed public issue and the last date of the lock-in is to be reckoned as three years from the date of commencement of commercial production or the date of allotment in the public issue whichever is later. the Managing Director of the Designated Stock Exchange along with the post issue Lead Merchant Banker and the Registrars to the Issue would be responsible for the finalization of allotment in a fair and proper manner. Twenty-one days after the draft offer document has been made public. The lead manager should also ensure that the issuer company has entered into agreements with all the depositories for dematerialization of securities.35 Primary Market ISMR post-issue capital. Issue Obligations Each company issuing securities has to enter into a Memorandum of Understanding with the lead merchant banker. and (iii) rights issues. rules. Except for (i) public issue of securities which have been listed for at least 3 years and has a track record of dividend payment for at least 3 immediate preceding years. The minimum promoters’ contribution should be locked in for a period of 3 years in case of all types of issues. (ii) companies wherein no identifiable promoter or promoter group exists. allotment. then the excess is locked in for a period of one year. the investors should be given an option to receive securities in dematerialized form through any of the depositories. and highlighting those amendments. Also. All the other formalities like. other than that locked in as promoters contribution. refund and dispatch and also monitor the redressal of investor grievances arising therefrom. whichever is later. Allotment should be on proportionate basis within the specified categories rounded off to the nearest integer subject to the minimum allotment being equal to the minimum application size as fixed and disclosed by the issuer. the lead merchant banker invokes underwriting obligations and ensures that the underwriters pay the amount devolved. The lead merchant banker has to exercise due diligence and satisfies himself about all aspects of offering. Subsequent to the post issue. At least one day prior to the opening of the issue. the entire pre-issue share capital. which specifies their mutual rights. The locked-in securities held by promoters may be pledged only with banks or FIs as collateral security for loans granted by such banks or FIs. In case of pre-issue share capital of unlisted company. if the promoters’ contribution exceeds the required minimum. the lead merchant banker should file a statement with the SEBI giving a list of complaints received. the merchant banker should be associated with allotment. Securities allotted in firm allotment basis are also locked in for a period of one year.

100 crore for the previous five years. bids to remain open for at least 5 days. foreign banks operating in India. if there are www.ISMR Primary Market 36 Book Building Book building is a price discovery mechanism. The balance 25% should be made to the public at the price determined through book building. In this case not more than 50% should be available for allocation to QIBs and not less than 25% to non-QIBs.com . The applicant/ promoters of a CRA should have professional competence. Credit Rating Credit Rating Agencies (CRA) can be promoted by public financial institutions. Besides. (ii) securities issued by any borrower. bidding demand is displayed at the end of every day. In case of under subscription in any category. etc. Further. country ratings and real estates. 5 crore. and by any body corporate having continuous minimum net worth of Rs. A CRA can not rate (i) a security issued by its promoter. the unsubscribed portions can be allocated to the bidders in other categories. e-IPOs A company proposing to issue capital to public through the on-line system of the stock exchanges has to enter into an agreement with the stock exchange(s). an associate promoter of CRA. The issuer company can apply for listing of its securities on any Exchange other than the Exchange through which it has offered its securities. The issuer company should also appoint a Registrar to the Issue having electronic connectivity with the Exchanges. the lead manager analyses the demand generated and determines the issue price in consultation with the issuer. then not less than 25% should be available for allocation to retail individual investors. book building also requires that: issuer should provide indicative floor price and no ceiling price. 75% of the net offer is made through book building process and 25% at the price determined by book building. 1999 cover the rating of the securities listed and not fixed deposits. subsidiary. not less than 25% to non-institutional investors and not more than 50% for QIBs. retail investors have option to bid at cut off price. investors can bid at any price. 75% book building route and 100% book building route.nseindia. scheduled commercial banks. Allotment to retail individual investors and noninstitutional investors are made on the basis of the proportionate allotment system within 15 days of the closure of the issue. viz. SEBI registered brokers should be appointed for the purpose of accepting applications and placing orders with the company.. foreign exchange. they should not be involved in any legal proceedings connected with the securities market. The SEBI (Credit Rating Agencies) Regulations. demand is assessed and then the price of the securities is discovered. The issuer proposing to issue capital through book building has two options. In case of issue of securities through the first route. foreign credit rating agencies having at least five years experience in rating can also operate in the country. failing of which attracts a penal charge of 15% which is paid to the investors. The lead manager coordinates all the activities amongst various intermediaries connected in the issue/system. only electronic bidding is permitted. financial soundness and general reputation of fairness and integrity in business transaction. bids are submitted through syndicate members. The CRAs are required to have a minimum net worth of Rs. Based on the bids received at various prices from the investors. In case a company makes a issue of 100% of the net offer to public through 100% book building process.

1992. Since these securities are allotted to a few sophisticated and experienced investors. with prescribed minimum net worth. Crore) To carry on activity of the issue management. It is arranged through a merchant/ investment banker. press releases etc. consultant. The investors. Merchant Banking The merchant banking activity in India is governed by SEBI (Merchant Bankers) Regulations.com . 1956. requires that every listed public company making IPO of any security for Rs. 100 crore. underwriter. adviser. Directors and Employees between the CRA or its rating committee and these entities (iii) a security issued by its associate or subsidiary if the CRA or its rating committee share a common Chairman. who monitors compliance requirements of the securities laws and is responsible for redressal of investor grievance. MFs and high net worth individuals. For debt securities with issue size greater than or equal to Rs. FIs. The issuer should disclose in the offer documents all the ratings it has got during the previous 3 years for any of its listed securities. to act as adviser. who acts as an agent of the issuer and brings together the issuer and the investor(s). co-manager. to selected subscribers. Demat issues SEBI has mandated that all new IPOs compulsorily should be traded in dematerialised form only. would have the option of either subscribing to securities in physical or dematerialised form.50 0. The applicant has to fulfill the capital adequacy requirements. however. www.20 Nil Only a corporate body other than a non-banking financial company having necessary infrastructure. They are required to appoint a Compliance Officer. manager. debt or equity. the section 68B of the Companies Act. The details about them are presented in the table below: Category of Merchant Banker Category I Category II Category III Category IV Permitted Activity Net worth (Rs. payments of fees and disclosures to SEBI.37 Primary Market ISMR common Chairman. with at least two experienced persons employed can apply for registration as a merchant banker.nseindia. portfolio manager To act as underwriter. CRAs should continuously monitor the securities rated by them and disseminate any changes in its ratings. two ratings from different CRAs are required. Director or Employee. consultant. 10 crore or more should issue the same only in dematerialised form. Private Placement The private placement involves issue of securities.00 0. responsibilities of lead managers. such as banks. all the merchant bankers have to be registered with SEBI. The regulations cover the code of conduct to be followed by merchant bankers. consultant to an issue To act only as adviser or consultant to an issue 5. underwriter. portfolio manager To act as adviser. Consequently. irrespective of whether it has been accepted or not. Further. along with its history through websites.

826 million through 35 issues during 2003-04. 30. During 2003-04. 167. The average size of an issue was Rs.592 A significant spurt can be seen in the total resource mobilisation from the public issues as shown in the Table 2-2.) Issue 2002-03 Number IPOs Issues by Listed Companies Public Issues Rights Issues Total Source: SEBI.327 million in 2003-04 as against Rs. 200.6% of the total resources raised. The share of public issues in the total resources mobilized rose from 89% in 2002-03 to 92% in 2003-04.387 30. accounting for 84% of the resources. As compared with 52 total schemes in 2003-04. diversify or simply to restructure their balance sheets. 1000 million and above) as against 12 such issues in the preceding year.ISMR Primary Market 38 the stringent public disclosure regulations and registration requirements are relaxed. www.004 4. They mobilised around 19. there were 22 mega issues (Rs.4% to the total resources mobilised (Table 2-3). “the turnaround in the fortunes of the rights issues both by numbers and by amount has come about primarily because of the steady conditions in the secondary market and drying up of the ECB market.766 167. The joint sector has not been making any issue of capital for the past few years.826 150.nseindia. and political stability. Of the 52 issuers which tapped the market in 2003-04. states that an offer of securities to more than 50 persons is deemed to be public issue. Most of the issues were made by private sector companies.592 million in 2003-04 from Rs. 6.703 million in 2002-03. The resource mobilisation by way of IPOs and new issues by listed companies leaped to Rs. Companies offer shares on rights basis either to expand. Market Outcome Public Issues The year 2003-04 witnessed an upsurge in the primary market activity induced by a buoyant secondary market. while in 2002-03. According to a press statement of the Prime database (country’s premier database on primary capital market). 40. 6 20 8 12 26 Amount 10. 4. The public sector companies made 18 issues mobilising 80. mn. There were only 2 issues below Rs.com . sharp economic recovery. The Companies Act.312 40. 30 million during 2003-04.094 million in 2002-03. there were 20 issues by listed companies for Rs. 34 issues where by private sector issuers.316 million.087 200. The mobilisation by rights issues also witnessed a manifold increase as compared to the previous year.739 17. there were only 26 in the previous year (Table 2-2).” Table 2-2: Resource Mobilisation from Public Issues (Amount in Rs. The listed companies mobilised Rs.316 26. 1956.703 2003-04 Number 17 35 16 19 52 Amount 32.

The chemical and the Information Technology (IT) industry collectively contributed approximately 10.35 2.24 73. however.34 0.72 5. Table 2-4 Resources Mobilised through Debt and Equity Year 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Source: Prime Annual Report Percentage Share Equity 72.342 — 161. While. debentures have been pre-dominant in the public issues.88 18.00 80.21 83.5% (Table 2-5).53% in 2003-04 (Table 2-4).99 41.00 100.00 2. the year 2003-04 saw a significant fall to only 15.53 The Banks and Financial Institutions (FIs) had assumed a dominant role in fund mobilisation.59 47.00 0.38 0.66 41.79 16.82 0. Percentage Share 2002-03 84.00 19. there has been a reversal in this trend.34 58.com .00 2003-04 15.34 0.00 0.592 For the past few years.61 44.41 52. Their offers in 2001-02 and 2002-03 were 68.00 www.39 Primary Market ISMR Table 2-3: Sector-wise Distribution of Resources Mobilised Sector Private Joint Public Total Source: SEBI.58 0.39 55.16% and 84.58% respectively.48 0. the amount raised through equity issues have been the highest ever in the history so far of the Indian capital market.58 0. However.17 15.00 0. mn) 2003-04 Number 34 0 18 52 Amount 39.2% in the resource mobilisation in 2003-04.973 — 21.75 0. Table 2-5 Industry-wise Resource Mobilisation Industry Banking/FIs Cement & Construction Chemical Entertainment Finance Information Technology Paper & Pulp Plastic Telecom Textile Others Total Source: SEBI.00 0.250 200.65 100.730 40.00 7.47 Debt 27.83 84.01 58.12 82.nseindia. The share of debt in resource mobilisation through public issues decreased from 82% in 2002-03 to mere 19.703 (Amount in Rs. 2002-03 Number 18 0 8 26 Amount 18.00 0. in 2003-04.76 0.00 5.

9-Jul-03 30-Sep-03 9-Oct-03 17-Oct-03 9-Dec-03 26-Dec-03 16-Jan-04 21-Jan-04 25-Feb-04 12-Mar-04 26-Mar-04 125 10 12 10 10 48 95 45 230 25 15 164. need to conform to the existing FDI policy.4 23 14.17 -36.1 19.ISMR Primary Market 40 Euro Issues Indian companies raise resources from international markets through the issue of Foreign Currency Convertible Bonds (FCCBs).nseindia.00 -2.78 -8.05 14. BAG Films Limited. Name of Company No. In India. Media and Entertainment.15 52.00 63. Finance.00 85. 2004 (Rs.00 Maruti Udyog Limited Vardhman Acrylics Limited UCO Bank B. of Trading 2004 (%) (%) 31.96 -12.4 182.75 214.1 119.com . The price of Indraprastha Gas Limited rose by a whopping 148.) Close Price as at endMarch.Depreciation on tion upto first day end-March.45 8. Petronet LNG Limited Source: NSE 1. For few IPOs like Vardhaman Acrylics Limited.11 1. 2004 Sl.9 133. Information Technology.33 297.Appreciation/ tion/ Deprecia. 6.) Close Price on first day of Trading (Rs. Performance of IPOs During 2003-04.74 16. Patni Computers Systems Limited and Petronet LNG Limited.47 -16. the resources mobilised through Euro issues have been lower at Rs.4 15. Pharmaceuticals and Manufacturing. they are reckoned as part of foreign direct investment and hence.264 million raised during 2002-03 (Table 2-1).45 37. 8.980 million as against Rs. During 2003-04.25 234. 2. Date of Listing Issue Price (Rs.50 31.7 As quoted in the RBI annual report 2003-04. followed by TV Today Networks Limited (91.93 4.A.71 40. Table 2-6: Performance of IPOs Listed on NSE During April 01.G. www. Films Limited Jai Balaji Sponge Limited Indraprastha Gas Limited TV Today Network Limited Surya Pharmaceutical Limited 9.44 11. “empirical evidence regarding the variation of IPO share prices for the period 2001-02 to 2003-04 indicates that share prices of about 75% IPOs improved upon listing.11 -6. Stringent entry and disclosure norms introduced by the SEBI have had a significant impact on the quality of issues entering the market as well as their post-listing performance”.75%.00 59.45 26. 2003 to March 31.75 91.74%) and UCO Bank (63. GDRs/ADRs are similar to Indian shares and are traded on overseas stock exchanges.22 6. 5. 7. 34. Surya Pharmaceuticals Limited.20 -2. Patni Computer Systems Limited 10. GDRs and ADRs. 3. eleven IPOs were listed on NSE of different sectors viz. Four Soft Limited 11.00 148.) Price Price Apprecia.50 72.95 82.6 12.33 24.8 22. The variation was measured as the percentage change between the offer price and the market price of the scrip’s after six months. 4.65 497. 30. The market price of almost all the IPOs appreciated quite substantially on the first day of listing/ trading itself against their issue price.45 13. the prices depreciated by end March 2004 (Table 2-6).3 11..33%).

‘privatisation’ is a more comprehensive concept and implies denationalisation including transfer of management and control to private entities. of India (www.843 361 380 902 5.nseindia. The disinvestment process in India has evolved over for more than a decade. Till June 2004. The broad objective of disinvestment has been to reduce the fiscal deficit. it is being also used for IPOs only from 1999. bids are collected from investors at various prices. The union budget of 1991-92 contained the first explicit statement on divestiture – the proposal to divest up to 20% of Government equity in select PSUs.800 5. 36 issuers have used this route for making IPO issues. During the period when the offer is open.000 10. (b) helps in better price discovery. The disinvestment commission was set up in 1996 and it recommended mainly a shift from public offerings to a strategic/trade sale with transfer of management in respect of a number of PSUs.038 1. www.200 Actual receipts 3.500 3.in) Disinvestment through the capital market route is most preferred route these days as it has certain advantages over the strategic sale route e.nic.g.500 4.divest.632 3. It helps to discover price as well as demand for the security to be issued through a process of bidding.000 12.000 7.000 5. The disinvestment from fiscal 1991-92 is given in the table below: (Amount in Rs. which are above or equal to the floor price. Government of India and RBI Annual Report.000 13.in). The offer price is determined after the bid closing date.913 — 4.348 15. NSE has offered an infrastructure for conducting online IPOs through book building. Though the guidelines for book building were issued in 1995. crore) Year No. The advantages are: a) the investor parts with money only after the allotment. b) it eliminates refunds except in case of direct applications and c) it reduces the time taken to process the issue.nic.871 5.000 4.547 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Source: Department of Disinvestment.500 2.com .860 1.000 12.divest. In its endeavor to continuously improve the Indian securities market. Disinvestment in PSUs in India1 The terms ‘disinvestment’ and ‘privatisation’ are usually used interchangeably all over the world. (a) increases public ownership. of Company in which equity sold 47 35 — 13 5 1 1 5 4 4 9 6 9 Target receipt for the year 2. This can be affirmed by the success of the companies which 1 References: Ministry of Disinvestment website (www. Govt. and distribute the shares to a wider investor base. The securities get listed within 15 days from the closure of the issue. In actuality though disinvestment represents sale of government share holding in public sector undertakings (PSUs).371 1.41 Primary Market ISMR Book Building through On-line IPO System Book building is basically a process used in IPO for efficient price discovery.000 10.

279 million through 364 privately placed issues in 2003-04.819. which together mobilised 87% of the total.nseindia.) Issuer Corporate Public Issues Private Placement* Government Total * Only debt placements with a tenor and put/call option of 1 year or more. About 78.981.236 1. Source: Prime Database (for corporate debt) & RBI (for Government debt). The amount raised through the private placement of debt issues have been on an increasing trend over the past few years (Chart 2-1). Gas Authority of India Limited. a total of 140 issuers (institutional and corporates) raised Rs.509. Though.930 484. Indian Petrochemicals Corporation Limited. while the balance by the corporate sector through public issues and private placement (Table 2-7). 2002-03 531. there is no comprehensive data coverage of this. Oil and Natural Gas Corporation.com . mn.97% has been raised by the Government..166 46.279 1. Table 2-7: Resources Raised from Debt Markets (Rs.240 484.509. CMC.ISMR Primary Market 42 went for disinvestment through this route in 2003-04 viz.956 2003-04 527. The two www.790 2. Maruti Udyog Limited.089 million from primary market during 2003-04.519 43.570 2. debt securities were privately placed.350. 188 issues out of 364 were made by the public sector units. 2. ICI and DRDG. Debt Issues Government and corporate sector collectively raised a total of Rs. 484.089 Private Placement of Debt According to Prime Database estimates. Mostly. there were some instances of private placements of equity shares. IBP.

279 % of Issue Amount 2002-03 35.17 100.69 12.5% share (Rs.3% (Rs. can be derived from the equity shares issued by NSE-listed companies on private placement basis. however. however.35 100.656 484. www.2% of total private placement during 2003-04.00 Sectoral distribution shows that the financial sector continued to dominate the private placement market. 65.55 13. raising 67% in 2003-04 followed by power sector.491 43.2 125. Table 2-8: Issuer-wise Distribution of Private Placement of Debt Issuer Issue Amount (Rs. 188 (52%) were from the government/banking sector that together mobilised 87% of the total amount mobilised. The top ‘10’ issuers accounted for 41. RBI estimates the share of equity in total private placements as rather insignificant.894 102. The former data set.642 64. Some idea.06 21.088 42.498 484. RBI data. 253.809 65.43 Primary Market ISMR sources of information regarding private placement market in India are Prime Database and RBI.26 8.236 2003-04 253.088 million). 173.00 2003-04 52. mobilising around Rs. mn.com .642 million) (Table 2-8 and Chart 2-2).084 58.92 9. covers equity private placements also. The All India Financial Institutions (AIFIs) & Banks continued to top the list with 52.536 million during 2003-04 (Annexure 2-1). A total of 20 companies listed on NSE privately placed equities. followed by the State Level Undertakings with 13.) 2002-03 All India Financial Institutions/Banks State Financial Institutions Public Sector Undertakings State Level Undertakings Private Sector Total Source: Prime Database.nseindia. 8.98 25. which is compiled from information gathered from arrangers. which accounted for 17% during the year (Table 2-9).14 13.687 38665. Of the 364 debt private placements.87 7. pertains exclusively to debt issues.

527.450 466.80 89.80 8 45.570 300.34 72.14 83.01 83.729 1995-96 88. it is not mandatory for corporates issuing bonds in the private placement market to obtain and disclose credit rating from an approved credit rating agency.70 88.750 2000-01 24.68 89.910 309. The largest number of placements was for 36 months and 120 months.010 524.990 565.64 91. required for listing.790 2001-02 10.930 43. 484. Of the 364 debt private placement deals during 2003-04.200 484.040 1999-00 29.91 61.23 95.519 million through debt issues. 2002-03 50 16 3 1 30 100 2003-04 67 17 5 1 10 100 The maturity profile of issues in the private placement market ranged between 12 months to 180 months during 2003-04.400 69.50 94.820 1996-97 46.335 462.430 541.390 340.236 484. A total of 65 offers had a put option. mn. while data for earlier years include all privately placed debt issues irrespective of tenor.830 387.550 593.22 91.320 1998-99 5.725 515.166 527.09 92.740 590.) Share (%) of Private Share (%) placement of Debt Total Total in Total Debt Resource Resource (4/5*100) Mobilisation Mobilisation (4/6*100) (5/6*100) 7 77.290 74.610 531.680 329.410 46.480 547.6% of total resources mobilised by the corporate sector from the primary market (Table 2-10). Source: Prime Database.520 526.240 million through public issues.62 9 59.750 253.79 87.ISMR Primary Market 44 Table 2-9: Sectoral Distribution of Resources Mobilised by Private Placement (In per cent) Sector Financial Power Water Resources Telecommunications Others Total Source: Prime Database.67 98.nseindia.770 19.820 2002-03 10.710 1997-98 11.980 41.120 461.210 *Data from 2000-01 onwards include only issues with a tenor and put/call option of 1 year or more.3%.92 95.390 2003-04 178.75 Public Issues 1 2 3 29. however.556 705.95 92. Table 2-10: Resources Raised by Corporate Sector Year Public Equity Issues Debt Issues Private Total Place(3+4) ments* Total Resource Mobilisation (2+5) (Amount in Rs.94 98. Unlike public issues of bonds.580 623.com . the corporates raised a total of Rs. The privately placed debt issues make up a bulk of total debt issuances by accounting www.350 183. 43. The corresponding share of public issues was a meager 25.05 87.42 68. 328 issues (90%) went for rating and 36 did not get rated.279 5 129.80 97.08 74. Private placement accounted for 68.36 84.070 46.519 6 218.240 4 100.45 96.390 53. Rating is.279 million through private placement and Rs. while 69 offers had a call option.16 91. Corporate Debt During 2003-04. of which Rs.

com .45 Primary Market ISMR for 91. Most of the exchanges world-wide have indicated an increase in the capital raised in the year 2003 as compared with the previous year.8% in 2003-04 (Table 2-10).8%. this is expected to rewrite IPO rules in the US. Though. www. its IPO managed to pull through successful. Annexure 2-2 indicates region-wise mobilisation through IPO and capital increased by already listed companies. The share of debt in total collection had been increasing consistently over the years but witnessed a reversal in the trend and stood at 74. International Scenario The much talked about ‘Google IPO’ has made a history in the international primary market by auctioning the securities to the retail investors and keeping investment bankers out of the whole process. Google faced with criticism from all quarters.nseindia. there were few such instances before. Nevertheless. but they were unable to attract the investors community so significantly.

642 433 27. Arvind Mills Ltd.05 148.00 33.00 15.551.000 85.737 1.362. Jindal Vijayanagar Steel Ltd.455 10.264.00 12.000.000 120. The Dhampur Sugar Mills Ltd.600 5. Orchid Chemicals & Pharmaceuticals Ltd. Usha Beltron Ltd.00 142.166 233 1. Arvind Mills Ltd.570 – Source: NSE.20 42. 2004 and listed on the Capital Market segment of the Exchange Sl.) end-March 2004 (Rs.000 3. Name of Company No. Nuchem Ltd.796 7. 7.00 50.373 1.130 146. Khandwala Securities Ltd. Arvind Mills Ltd. Arvind Mills Ltd. 15.65 1.00 15.949 7.00 22.00 10.00 10.400 207 22 10 1.489 1.20 – – 143.000 2. 2.00 220. Strides Arcolab Ltd.00 15. 11.70 – www. 2.000 5.55 45. 2003 to March 31.382.) (Rs.144 9.350. 10. UTI Bank Ltd.144.) 1.00 70.185.067.55 9. Pantaloon Retail (India) Ltd.ISMR Primary Market 46 Annexure 2-1: Details of Private Placement Issues by NSE-listed Companies during the period April 1.764 1. Usha Beltron Ltd.844 16.903 749 9.95 45.000 279.** Shriram Transport Finance Co. 19. Arvind Mills Ltd.727 865.000 2. Padmalaya Telefilms Ltd. Aurobindo Pharma Ltd. 20.776. 5. Note: ** indicates preference shares issued on preferential basis. Strides Arcolab Ltd.714. 14.15 288. 6. lakh) (Rs.08 – 374.55 45.286 8. Number of Funds Raised Face Value Issue Price Close Price as Securities (Rs.55 45. 1. 8.00 100. 9.00 61.50 56.80 37. Glenmark Pharmaceuticals Ltd.356 10 5 5 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 2 – 226.00 15.445 4.103 26 3.55 45.345. 13.00 15. 16. 12.000.000 38.727 5.com .80 24.6 37. 18. Ltd.907 6.034.000 13.243.65 8.834 2.00 33.050. 3. 17.033 63.nseindia.05 – 200. 4.75 10.

113 3.646 Total 23 NA 0 0 42 6.078 2.458 20 NA 0 0 204 4.381 152 5.454 443 39 404 9.162 83 852 510 3.969 16 173 290 414 4.612 11 349 397 732 6.MIDDLE EAST Athens 69 Borsa Italiana 11.182 14.949 16 173 290 210 NA 60.573 0 8.030 N.504 27.439 Capital Total Raised by New Shares 2002 Capital Raised by Existing Shares 1.245 3 800 203 35.047 41 30.com .701 Total Region 2.199 141 1.559 2.178 0 130 5.955 9.501 0 1.377 67 160 0 51.356 Budapest 66 Copenhagen 160 Deutsche Borse 0 Euronext 682 Helsinki 0 Irish 673 Istanbul 12 JSE South Africa 525 Ljubljana 41 London 7.589 11 349 397 691 NA 54.310 1.808 1. 52 5.465 3.244 14.) www.AFRICA .881 3 199 0 32.573 1.475 87 4.549 1.144 9.390 NA 7 543 1.202 152 5.nseindia.913 (Contd.596 EUROPE .271 4 886 17.403 2.021 1 0 0 50.093 405 98 685 16.824 6.New Capital Raised (USD million) Exchange Capital Raised by New Shares AMERICA Amex Bermuda Buenos Aures Lima Mexico Nasdaq NYSE Santiago Sao Paulo TSX Group Total Region 2003 Capital Raised by Existing Shares 3.522 0 22.47 Primary Market ISMR Annexure 2-2: Investment Flows Region-wise .955 443 1.904 115.591 Luxembourg 241 Malta 4 Oslo 834 Spanish Exchanges (BME) 12.196 98 712 21.371 NA NA 675 703 379 1.806 0 26.806 116 34.955 17.736 1.779 128.624 2.510 739 0 116 8.454 114.001 NA 7 38 15 2 1.439 Stockholm NA Swiss Exchange 0 Tehran 242 Tel Aviv 32 Warsaw 0 Wiener Borse 1.364 0 601 203 3.504 87.480 83 179 497 2.809 NA 0 917 735 379 2.365 81.114 8.A.792 NA 27 5.197 0 1.137 119.085 1.184 139 51 1.362 2.365 27.389 NA NA 505 1.216 2.

075 2.837 112 27.420 384 39 3 5.612 1.776 2.316 NA NA 12.269 2.936 665 28 77 6.688 1.437 www.917 7.606 NA 29.247 NA 15.386 4.855 532 0 953 0 5.931 NA 15.479 616 1.040 1.207 434 1.013 11 7.com .110 612 823 2.917 2.048 1.002 4.269 786 7.385 2.242 709 802 307 885 11.246 1.006 Capital Raised by New Shares 2002 Capital Raised by Existing Shares 9.352 4.973 32 6.367 2.934 28 1.PACIFIC Australian Colombo HongKong Jakarta Korea Kuala Lumpur Mumbai National Stock Echange of India New Zealand Osaka Philipine Shanghai Shenzhen Singapore Taiwan Thailand Tokyo Total Region Source: WFE Annual Report & Statistics 2003.298 438 200 5.310 11 14.087 3.777 1.192 1.454 1.319 13.049 3.) (USD million) Exchange Capital Raised by New Shares ASIA .550 83 1.New Capital Raised (Contd.598 1.504 802 1.nseindia.749 71.150 NA 29.752 703 2.880 1 6.169 923 6.749 Total Total 6.665 121 5.054 1.835 2.430 10 7.456 NA NA 22. 2003 Capital Raised by Existing Shares 16.ISMR Primary Market 48 Annexure 2-2: Investment Flows Region-wise .514 1.009 1.824 102 19.642 612 1.286 8.006 89.

particularly. Mutual Funds (MFs) are more popular among investors and are able to mobilize huge amounts of resources. However. these collective investment schemes are known as collective investment vehicles (CIVs). As a result. 1. to deploy their savings. There are schemes that invest only in equities or in debt instruments or in both. exchange traded funds. as investing in MFs is perceived to be less cumbersome than in equities. The MFs are managed aggressively as well as passively. Thus.49 Collective Investment Vehicles ISMR Collective Investment Vehicles The International Organization of Securities Commission (IOSCO) has. liquid funds. in its Report on Investment Management of the Technical Committee. As of end March 2004. index funds. 37 mutual funds are registered with SEBI with an asset base of Rs. Policy Developments The policy and regulatory initiatives taken during the period April 2003-June 2004 are as discussed hereunder: I. Hence.160 million. investors have a variety of options such as income funds. for an investor.nseindia. In India. The developments in the year 2003-04 with respect to the above three different CIVs are discussed in this chapter. namely. the MF schemes have diversified considerably thus expanding the basket of investment opportunities to suit the different needs of the investors. There are three distinct categories of CIVs. among the households. the MF industry has expanded. gilt funds. sectoral funds. They pool the savings of different investors together by issuing ‘units’ and invest them into specific securities (usually stocks or bonds) with a predetermined investment objective. In recent years.396. 2004-05 The Union Budget of 2004-05 proposed that the equity-oriented MFs should continue to be exempt from tax on dividends. Union Budget. Mutual Funds (MFs). as “an open ended collective investment scheme that issues redeemable units and invests primarily in transferable securities or money market instruments”. the number of households owning units of MFs exceeds the number of households owning equities and debentures. The tax rate on corporate unit holders of debt-oriented MFs www. investments in MF imply buying shares (or portions) of the MF and becoming the shareholders of the fund. defined the Collective Investment Schemes. balanced funds. Mutual Funds Of the three categories of CIVs. with MFs investing in growth stocks. The MF industry has become very popular over the years.com . Collective Investment Schemes (CIS) and Venture Capital Funds (VCFs). with the entry of the private sector players. in stocks of a particular sector. The objectives of the MFs have also widened. The Unit Trust of India (UTI) was the first MF in India set up in 1964.

However.ISMR Collective Investment Vehicles 50 have been raised from 12. Gap reporting/Calendar spread analysis of all derivative positions should be reported internally on a weekly basis to a committee.e. the limits on individual scrip/instrument have to be specified.5% for individuals and Hindu Undivided Family (HUF). The MFs can hold different positions involving multiple derivatives positions on the same underlying. if the MF is not been able to deploy funds in securities within the ambit of its investment objectives. each MF has to disclose the maximum net derivatives exposure in terms of the percentage of portfolio value.nseindia.com . In short all derivative positions should be backed by cash or stock (stocks portfolio for index derivatives) as the case may be at the time of exposure. The overall cap for the entire MFs industry to invest in ADRs/ GDRs. Each MF should have a maximum derivative net position of 50% of the portfolio (i. While calculating the industry exposure on monthly basis. Guidelines for MFs SEBI issued the following guidelines in accordance with the provisions of Regulation 77 of the SEBI (Mutual Funds) Regulations. which they should adhere while trading in equity based derivatives. These overseas companies should have a shareholding of at least 10% in an Indian company listed on a recognized stock exchange in India (as on January 31 of the year of investment). With regards to disclosure and accounting norms. Investment by MFs (i) The Government has decided to allow MFs to invest in equities of listed overseas companies. the derivative position should result in actual or potential leverage or short sale/short position on any underlying security. interalia. SEBI issued the following guidelines for MFs. the limits on derivatives exposure per scrip/instrument. However the tax rate remain unchanged at 12. then the MF is permitted to invest in short term deposits of any Scheduled Commercial Banks (SCBs). MFs are allowed to trade in interest rate derivatives listed on the stock exchanges. which should be appointed by the Board of Trustees. The maximum net derivatives exposure in terms of percentage of the portfolio value should be decided in advance by the Board of trustees. foreign equity and debt securities has been set at US$ 1 billion. (ii) (iii) In case of any scheme. 2004. 1996: (i) Participation by MFs in Derivatives Trading: Vide a circular dated February 6. should include comparison with the interest rates offered by other SCBs. The data on actual exposures has to be disclosed in the half yearly portfolio statements. II. Each MF individually is permitted to invest 10% of their net assets as on January 31 of each relevant year in foreign securities with the limit of a minimum of US$ 5 million and a maximum of US$ 50 million. these investments have to be reported to the trustees along with the reasons. III. net assets including cash). www. net assets including cash).e. the total exposure per scrip including derivatives exposure has to be considered.5% to 20%. Within the overall limits of a maximum derivatives net position of 50% of the portfolio (i. The ‘hedging’/‘portfolio balancing’ should be clearly marked while initiating any derivatives position. At no point of time.

Likewise. The half-yearly results should include a comparison of the returns with the benchmarks used. 1996. In addition. In addition the main features of the new consolidated scheme. giving them an option to exit at prevailing NAV without exit load. (c) The AMCs should maintain records of dispatch of the letters to the unit holders giving them an option to exit at prevailing NAVs and also the responses received from them. Further.nseindia. press releases and reprints etc. along with the draft offer document and requisite fees. among others. barring the international funds and transaction in units of MFs undertaken through the stock exchanges. read the offer document carefully before investing” along with advertisement. the MFs. While advertising pay-out dividends. (iii) Advertisements by MFs: To improve the standards of disclosures in advertisements. percentage of total NPAs and percentage of total illiquid assets to net assets of individual schemes as well as consolidated schemes should be disclosed. seminars texts. while advertising schemes having very short investment horizons (in cash/liquid/money market). (c) the types of benchmark indices that can be used in performance advertisements should be disclosed in the offer documents. In case of consolidation the MFs have to comply with the requirements laid down in the SEBI (Mutual Funds) Regulations. should be disseminated. performance reports or summaries. in the audio-visual media like television. (iv) Uniform cut-off timings for applicability of NAV: SEBI has directed the MFs to adopt uniform cut-off timings for applying NAVs both for subscriptions and redemptions.com . SEBI issued guidelines which include: (a) the MFs are mandated to carry only the statement “Mutual Fund investments are subject to market risks. the NAV will fall to the extent of the payout and distribution taxes (if applicable). in a clearly legible font-size covering at least 80% of the total screen space and accompanied by a voice over-reiteration. basis of allocation of new units by way of a numerical illustration and tax impact of the consolidation of schemes among others. should display the simple annualized returns. Further.51 Collective Investment Vehicles ISMR (ii) Consolidation of Schemes: SEBI in its circular dated June 23. (b) Widening the definition of sales literature to include fund fact sheets. 2003 clarified that any consolidation of MF schemes should be viewed as changes in fundamental attributes of the related schemes. in case a new scheme emerges after merger/consolidation. asset allocation. The remaining 20% space can be used for the name of the MF or logo or name of scheme. This is applicable to all schemes/plans whether existing or new. all relevant information such as the investment objective. read the offer document carefully before investing” should be displayed on the screen for at least a period of 2 seconds. the MFs should file the proposals with SEBI. In case the distribution taxes are excluded while calculating the returns. a statement “Mutual Fund investments are subject to market risks. newsletters. telemarketing scripts. The return will be based on 15 days period along with the normal annualized return based on 30 days period. the same needs to be disclosed. given the limited time available to the investors while passing by for reading the advertisements through hoardings/posters. To enable the investors to take well informed decisions. research reports. the MFs are required to take the following steps: (a) the proposal and modalities of the merger/consolidation of schemes should be approved by the Boards of the AMC and Trustees in harmony with the interests of the unit holders of all concerned schemes. www. (b) pursuant to the approval. it should be clearly stated that after the payment. that too. a draft letter has to be sent to all the unit holders.

however. However. Further. In case of non-fulfillment of the aforementioned guidelines for open ended schemes. www.ISMR Collective Investment Vehicles 52 MF Scheme(s)/Plan(s): In case of purchases/redemptions. This disclosure has to be made in the offer document to be filed with SEBI.m.m. In case of existing open ended schemes/ plans. (v) Investment/Trading in Securities by Employees of AMCs and MF Trustee Companies: Any employee/ person of the AMC willing to carry out a transaction of sale/purchase of a security has to take a prior approval from there compliance officer. from the close of IPO is given to balance and to ensure compliance. applications received up to 10 a. the NAV of the closing day is to be applied. he should also make sure that the investments made by the fund managers are in the interest of the unit-holders and are designed to achieve the objectives of the scheme. However. the closing NAV of the day immediately previous to the day on which funds are available for utilization should be applicable. he is responsible for the overall risk management function of the MF. The validity of the approval is to be for a week in tandem with the SEBI (Insider Trading) Regulations.m. for close ended schemes. But. the guidelines are not applicable considering the nature of the schemes/ plans and in the interest of the investors. If the outstation cheques/demand drafts not payable at par at the place where the application is received. Hence. Applications for “switch out” and “switch in” should be treated as redemptions and purchases. in respect of applications received after 1 p.nseindia. (vi) Minimum Number of Investors in Schemes/Plans of MFs: In consultation with Association of Mutual Funds in India (AMFI). If the MF fails to comply.com . respectively. then the scheme is to be wound off. the same days closing NAV should be applicable. In case of applications received after 10 a. (vii) Role of CEO/Fund Managers: The Chief Executive Officer (CEO) of the AMC has to ensure that the mutual fund complies with all the SEBI (MF) Regulations. are not applicable to Exchange Traded Funds (ETFs). guidelines and circulars issued hereto. and if the funds are available for utilization on the same day.m. should refrain from transacting in any security within a period of 30 days from the date of personal transaction. then closing NAV of the day on which cheque/demand draft is credited should be applicable. along with the local cheque or demand draft payable at par at the place where it is received. valid applications received up to 3 p.. 2004. the closing NAV of the day should be applicable. then the closing NAV of the same day should be applied. SEBI issued guidelines stipulating the minimum number of investors in each MF schemes. For Fixed Maturity Plans (FMPs) and Close Ended Schemes no such grace period is given.. In case of redemptions. the same conditions are required to be complied with as soon as possible and not later than December 31. FMPs and ETFs already in existence. MF-Liquid Fund Scheme(s)/Plan(s): With respect to purchases. These guidelines. the closing NAV of the next business day is applicable. hence. a grace period of 3 month or the end of the quarter whichever is earlier. The employees..m. in case of applications received after 3 p. Each scheme/individual plan(s) is required to have a minimum of 20 investors and no single investor should account for more than 25% of the corpus of such scheme/plan(s).

the fact of non-allotment should be mentioned in the application form. the MFs/AMCs have to necessarily engage/employ certified personnel only.com . has developed a self-study and testing/certification programme for the employees and distributors of MFs. in accordance with SEBI Regulations. After the September 2004. However. AMFI in consultation with the SEBI. then the GIR number and the income-tax circle/ward/district should be mentioned. wherever an application is for a total of Rs. They should submit a certificate to their employers by September 2004. Further. Market Design The MF industry is governed by SEBI (MF) Regulations. (x) Quoting of Bank Account Number and PAN by investors: SEBI has made it mandatory for the investors in MF schemes to mention their bank account numbers in their applications/ requests for redemption. Following its registration. 50. should mention his/her Permanent Account Number (PAN) allotted under IT Act. 1882. except to meet the liquidity requirements for the purpose of repurchases or redemptions. The resources raised are pooled under various schemes established by the trust. In order to register with Sebi as a MF. but. All MFs in India are constituted as trusts and are allowed to issue openended and close-ended schemes under a common legal structure. the existing employees above the age of 50 are exempted. The investor subscribes to the units issued by the MFs. each of the applicants. Further. marketing and employees to complete the certification process by September 2004. acting alone or in combination with another corporate body. If the PAN has not been allotted. Additionally. nor in any other assets than the schemes of MFs. who are engaged in sales. the sponsor forms a trust.nseindia. appoints a Board of Trustees and an AMC as a fund manager. only the trustee(s) has an independent legal capacity. 1908. Structure of MFs A typical MF in India has the following constituents: Fund Sponsor: A ‘sponsor’ is a person who. This section throws light on the market design of the MFs in India. a custodian is appointed to carry out the custodial services for the schemes of the fund. These assets are held by the trustee for the benefit of unit holders. Under the Indian Trusts Act. are required to attend a refresher course organized by AMFI. Mutual Fund: A MF is established in the form of a trust under the Indian Trusts Act. www. AMFI in association with the NSE. had made it mandatory to all existing personnel of MFs/AMCs.000 or more. The sponsor should contribute at least 40% of the net worth of the AMC. establishes a MF. However. 1961.53 Collective Investment Vehicles ISMR (viii) Fund of Funds: Fund of Funds (FoFs) is a financial instrument that invests in other MF schemes rather than in securities. the sponsor should have a sound financial track record of over five years and general reputation of fairness and integrity in all his business transaction. which lays the norms for the MF and its AMC. a FoFs scheme is not permitted to invest in any other FoFs scheme. In cases where neither the PAN nor the GIR numbers have been allotted. The instrument of trust is executed by the sponsor in favour of trustees and is registered under the Indian Registration Act. the applicant or in the case of joint applications. 1996. (ix) Certification: To foster professional standards in the operations of MFs.

www. The AMC appoints distributors or brokers to sell units on behalf of the Fund. The trustees. the investors have to wait till maturity to redeem their units. custodians and depositories. which is a body of individuals.g. the MF has some other constituents. Asset Management Company: The AMC. commercial paper. An open-ended fund provides the investors with an easy entry and exit option at NAV. being the primary guardians of the unit holders’ funds and assets. acts like the investment manager of the Trust. but generates moderate income. Trustees and the SEBI. The MF Schemes can be broadly categorized under three headings. transfer agents and distributors. tax saving schemes. in close-ended funds. they are less risky compared to equity schemes. trustees. treasury bills. Income/Debt Oriented Schemes provide regular and steady income to investors by investing in fixed income securities such as bonds. independent individuals are also appointed as ‘agents’ to market the schemes to the investors. While. The listing is to be done within six months of the close of the subscription. or by a Trust Company. which are fully guaranteed either by the sponsor or AMC. which is a corporate body.com . certificates of deposit. Transfer agents are responsible for issue and redemption of the units. The bankers handle the financial dealings of the fund. Types of MFs/Schemes A wide variety of MFs/Schemes cater to different preferences of the investors based on their financial position. risk tolerance and return expectations. appointed by the sponsor or the Trustees and approved by SEBI. The trustees are appointed with the approval of SEBI. A custodian is appointed for safe keeping the securities and participating in the clearing system through approved depository. in accordance with trust deed and SEBI (MF) Regulations. Most of the funds in India are managed by a Board of Trustees. who also serve as investment advisers. AMC floats and manages different investment ‘schemes’ as per the SEBI Regulations and the Investment Management agreement signed with the Trustees. It is managed by the AMC as per the defined objectives. an entry and exit is provided through mandatory listing of units on a stock exchange. Hence. It functions under the supervision of its Board of Directors. is a scheme that assures a specific return to the unit holders irrespective of performance of the scheme. Besides brokers. custodians and AMC. The AMC should have at least a net worth of Rs. Apart from these. money market schemes and lastly other schemes e. government securities and money market instruments. have to be persons of high repute and integrity. banks. Assured return schemes. Two thirds of trustees are independent persons and are not associated with sponsors. Growth/Equity Oriented Schemes provide capital appreciation over medium to longterm by investing a major part of their corpus in equities. corporate debentures. The regulations require non-interfering relationship between the fund sponsors. Funds by investment objective e. do not directly manage the portfolio of MF. Funds by structure e.ISMR Collective Investment Vehicles 54 Trustees: The MF can either be managed by the Board of Trustees. index schemes and sector specific schemes.. viz. Balanced Funds provide both growth and regular income as they invest both in equities and fixed income securities in the specified proportion as indicated in their offer documents. income schemes. open ended and close ended schemes. such as. Money Market or Liquid Funds provide easy liquidity and preserves capital. however. however. In the name of the Trust.nseindia. As they invest exclusively in safer short-term instruments such as. The Trustees. growth schemes. 10 crore.g. balanced schemes.g. which is declared on a daily basis.

In addition.55 Collective Investment Vehicles ISMR inter-bank call money. Many close-ended schemes of the MFs are listed on one or more stock exchanges. MFs. Within the given limit. the MFs can invest only in transferable securities in the money or the capital market or in privately placed debentures or securitized debts. being Public Trusts are governed by the Indian Trust Act. that enforces provisions of the Indian Trusts Act. The exchange traded index funds. the limit may be extended to 20% of the NAV of the scheme with the prior approval of the Board of Trustees and the Board of the AMC. Investment by a MF is subject to following restrictions: i. Index Funds replicate the portfolio of any particular index such as the S&P CNX Nifty by investing in the same securities with the same weightage as in the index. The regulations have laid down a detailed procedure for launching of schemes. which in turn reports to the Charity Commissioner. A MF is not permitted to invest more than 15% of its NAV in debt instruments issued by a single issuer.nseindia. The instruments should be rated not below investment grade by an authorized credit rating agency. www. However. subject to the regulations of the concerned stock exchange(s) through the listing agreement between the fund and the stock exchange. there are funds/schemes that invest in shares of specific sectors or industries such as Pharmaceuticals. Pioneer ITI Internet Opportunities Fund. obligations of Trustees. Software. investments in at least investment grade mortgaged backed securitized debt can be made. RBI also supervises the operations of bank-owned MFs. advertisements. Some of the examples of them are UTI Software Fund. All the MFs have to be registered with SEBI. While SEBI regulates all market related and investor related activities of the bank/FI-owned funds. as the name suggests. Regulation of Funds The MFs are regulated under the SEBI (MF) Regulations. Petroleum stocks. Further. Further. 1956. 1996. the contents of Trust Deed. they have to be in accordance with RBI directives. the directors and the AMC. Investment Restrictions Investment policies of each scheme are dictated by the investment objective stated in the offer document and by the restrictions imposed by SEBI. listing and repurchase of close-ended schemes. any issues concerning the ownership of the AMCs by banks falls under the regulatory ambit of the RBI. As they are sectors or industries specific. MF schemes are not allowed to invest more than 10% of their NAV in unrated debt instruments issued by a single issuer. rights and. the returns on these funds are dependent on the performance of the respective sectors/industries. as the MFs. and government securities. In addition the total investment in such instruments ii. offer period. are accountable to the office of the Public Trustee. In case of investments in money market instruments. they have to comply with the provisions of the Companies Act. the regulations also specify the qualifications. AMCs and corporate trustees are registered as companies under the Companies Act. disclosures in the offer document. eligibility criteria for the sponsor of a fund. Hence.com . Then. among others. etc. therefore. Such schemes are. investments. appointments and restrictions on business activities. transfer of units. Fast Moving Consumer Goods (FMCG). are traded on the stock exchanges. 1882. This limit is not applicable for investments in government securities and money market instruments.

Apart from publishing NAVs in newspapers and the web sites of respective MFs. last six months. MFs are permitted to enter into derivatives transactions on a recognized stock exchange for the purpose of hedging and portfolio balancing. 3 years. The repurchase price should not be lower than 93% of the NAV and sale price should not be higher than 107% of NAV. The difference between repurchase and sale price should not exceed 7% of the sale price.nseindia. 1 year. which should include their returns/yields over a period of time i. this is not applicable for any fund of funds scheme. It should not in any case short sell the securities or carry forward transactions or engage in badla finance. 5 years and at the inception of the schemes. No MF under all its schemes should own more than 10% of any company’s paid up capital. all MFs are required to put their daily NAVs on the website of AMFI. so that the investors can access NAVs of all the MFs at one place. Investments in the unlisted equity shares or equity related instruments are capped at not more than 5% of its NAV in case of open ended scheme and 10% in case of close ended scheme. The repurchase price of a close ended scheme should. v. sale and repurchase prices are also to be disseminated. www. iv.e. iii. The initial issue expenses in any scheme should not exceed six per cent of the funds raised under that scheme. The NAV is to be disseminated on daily basis in case of open ended schemes and on weekly basis in case of close ended schemes. Each buy and sell transactions carried out by MFs should necessarily be delivery based. However the aggregate inter scheme investment made by all schemes under the same AMC or in schemes under the management of any other AMC should not exceed 5% of the NAV of the MF. not be less than 95% of NAV. is not applicable for investments in case of index funds or sector or industry specific schemes.com . This limit. The MFs are required to send annual report or abridged annual report to all the unit holders at the end of the year but not later than six months from the date of closure of the relevant accounts year. vi. MFs should not invest more than 10% of their NAV in the equity shares or equity related instruments of any company. however. The MFs are required to publish their performance in the form of half-yearly results. vii. ix. Disclosure of Performance A MF has to compute net asset value (NAV) for each scheme by dividing the net assets of the scheme by the number of outstanding units as on the valuation date. However. All such investments should be made with the prior approval of the Board of Trustees and the Board of AMC. Along with the NAV.ISMR Collective Investment Vehicles 56 should not exceed 25% of the NAV of the scheme. viii. The NAV reflects the performance of a scheme. A scheme may invest in any other scheme under the same AMC or any other MF without charging any fees. however. Nevertheless. No MF is to make any investments in any unlisted or listed securities of an associate or group company of the sponsor in excess of 25% of the net assets or any security issued by way of private placement.

v. a disclosure of his interest including long or short position in the said security should be made. investment objectives. Trustees and AMCs should also avoid conflicts of interest in managing the affairs of the schemes and the interest of all the unit holders should govern all their activities.57 Collective Investment Vehicles ISMR Code of Conduct The MF regulations include codes of conduct for the MFs and AMCs. annual yield on the purchase price and annual compounded rate of return should be used. vi. However. The AMC should not make any exaggerated statement. ii. vii. They are as follows: i. and not contain any statement/promise/forecast. managed or the portfolio of securities selected. explicit and timely information about the investment policies. which is untrue or misleading. standardized computations such as annual dividend on face value. financial position and general affairs of the scheme is made to all the unit holders. directly or indirectly any investment advice about any security in the publicly accessible media. Excessive concentration of business with few broking firms. It is expected that the Trustees and AMCs should render at all times high standards of services. ensure proper care and exercise independent professional judgment. MF schemes should not be organized. The sales literature should also contain information. the trustees or the AMC or any of their employees should not render. fair and clear. members of Board of trustees or directors of Trustee Company. exercise due diligence. Excessive use of technical/legal jargons or complex language. The investments should be made in accordance with the objectives stated in the offer documents. should be avoided. concise and understandable manner. The sponsor of the MF. viii. directors of AMCs. which is likely to detract the investors. Advertisements Code by MFs As per the MF regulations. Also. Trustees and AMCs must maintain high standards of integrity and fairness in all their dealings and in the conduct of their business. affiliates and also excessive holding of units in a scheme among a few investors should be avoided by the Trustees and AMCs. Trustees and AMCs have to ensure that the dissemination of adequate. accurate. whether on real-time or non real-time basis. inclusion or exclusion of excessive details. in the interest of sponsors.com . www.nseindia. it should be ensured that the advertisement is set forth in a clear. their employees and intermediaries. which is included in the current advertisement. They should not indulge in any unethical means to sell securities or induce any investor to buy their schemes. whether oral or written. iv. associated persons. while rendering such advice. They must keep the interest of all unit holders paramount in all matters. operated. Assuming that the investors are not trained in legal or financial matters. either about their qualifications or capability to render investment management services or their achievements. iii. advertisements should be truthful.

740 -58. who are wary of investing directly in the equities.340 million. which was also supported by the bullish trends in the equities and debt market.760 2.500* Private Sector MFs — — — 15.220 428. as there have been bullish sentiments in equity market and buoyancy in debt market.920 129.090 112. 199. mn.110 -63. However.220 -72. the year 2003-04 witnessed a sharp rise in the net mobilization to Rs. 5. the mobilization fell to a further low of Rs.480 3.040 1.530 86. The popularity of the MFs as an investment avenue is clearly visible from Table 3-1. However.840 million.730 75. This was due to the tax sops announced in the Union Budget 1999-00. The resources mobilized by MFs have remained steady during the period 1992-95 with annual gross mobilisation averaging Rs.370 million.810 million an increase of 80% over Table 3-1: Resource Mobilisation by Mutual Funds (Rs.140 -30.370 2. in the subsequent two financial years.200 14.430 28. As against 53 schemes in the year 2002-03.570 15.350 1.210 112. 2004.030 6.490 25.560 — — — — FI sponsored 6.040 4.nseindia.) Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Public Sector MFs Bank sponsored 23.110 199.520 21.640 36.370 2.901.ISMR Collective Investment Vehicles 58 Market Outcome Resource Mobilisation MFs are quite popular among the investors.190 148. 476. 46 new schemes were launched in 2003-04.840 -94. Owing to the bearish secondary market conditions.340 10.310 1.750 1. as the secondary market turned bearish and the tax rate on income distributed by debt-oriented MFs was increased.850 110.270 7. In 2002-03. During 2003-04.740 18. The year 2000-01 again witnessed a slowdown with net mobilisation falling to Rs.610 — — — — UTI 45. 45. of which 44 were open-ended and 2 close-ended schemes.600 13.370 45. Aggregate sales of all the 403 schemes amounted to Rs. 2003 to March 31.440 112. This took the total number of schemes as at end-March 2004 to 403 against 382 as at end-March 2003.920 92.830 476. the number of registered MF with the SEBI stood at 37.840 Grand Total * Data for 2003-04 relate to UTI Mutual Fund for the period February 01. www.390 5. 71. MFs were able to mobilise modest amounts. with UTI having a net outflow of Rs.360 40.470 121.950 37.480 7.433.530 111. It was only in 1999-00 that the MF witnessed a sharp turnaround. the MFs were adversely affected in 1995-96 and 1996-97. with a record mobilisation of Rs.970 86.330 8.800 million.570 92.520 130.350 71. Source: RBI. 5.650 1. 94. 110.220 1.910 3.900 million registering an increase of 88% over last year and the redemptions during the year were at Rs.000 million during the period.130 60 2.600 2.640 7.400 12.530 million.700 45.com .330 -20.

350 346.210 14.960 21. 100 million (Table 3-3a).830 — 794.830 34.250 100 5. the public sector MFs witnessed an inflow of Rs.900 5.54% in 2003-04 as compared to 99.510 793.970 Management at the end of Net March-03 March-04 239.480 18.250 2003-04 Sale 5.789.030 17.006.580 million accounting for about 11.810 www.240 — 280.196. After adjustment of sale and purchases.900 Purchase 5. had a slight increase from 0.59 Collective Investment Vehicles ISMR the previous year. 17.160 Source: AMFI Updates. Foreign — — — 210.190 ii. 7.020 412.730 Purchase 3.433.874.300 i.4% of gross resources mobilised by MF industry during 2003-04.220 1.190 600 3.673.850 million in 2003-04. mn.610 218.330 1.85% in 2002-03.790 — — 431.804.800 132.340 million and Rs.169. on the other hand.62% of total resource mobilisation by MFs during 2003-04.) Scheme Open-ended Close-ended Assured Return Total Source: AMFI Updates 2002-03 Sale 3.310 36.460 -1.100 1.012. The open ended and close ended schemes together registered a net inflow of Rs.050 Predominately Foreign iv.430 162.901.540 161.850 154. Joint Ventures 715.350 2003-04 Net Sale Purchase 685.810 468. 468.090 million during 2003-04 (Table 3-2).650 Predominately Indian iii. by raising about 88.060 4.396.360 5.500 1. respectively.330 31.480 5.142.640 5.049.800 198.007.870 70.640a 483.460 5.430 298.800 27.com .900 175. The share of open-ended schemes in total funds raised by MFs registered a marginal decline to 99. Institution Sponsored 356.890 192.430. No new assured return schemes were launched in 2003-04.850 65. Public sector MFs (including UTI) made gross mobilisation of Rs.272.780 197. 460.790 55. The private sector MFs accounted for the bulk of the mobilization. Bank Sponsored iii.146.910 59. Table 3-3a: Scheme-wise Resource Mobilisation by Mutual Funds (Rs. The share of close ended schemes.220 1.310 99. 685.250 134.620 110. Note: A Erstwhile UTI has been bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective February 2003 and hence the data pertaining to the Specified Undertaking of the Unit Trust of India under the Assets under management for the period April 2002 to March 2003 are not included in the table presented above. 55.14% during 2002-03 to 0.410 Grand Total (A+B) 3.460 19.160 a 44.590 331.414.010 B Private Sector (i+ii+iii+iv) 2.670 — 3.410 40.920 101. Table 3-2: Accretion of Funds with Mutual Funds (Rs.730 3.331.840 72.420 135.146.405.450 1.480 2.090 555.740 2.100 — 5. Indian 833.790 million during 2003-04 as against Rs.46% during 2003-04. mn.860 2.840 105. On the other hand.140 629.216.012.901.480 44. Unit Trust of India ii.320 4.840 million during the preceding year.nseindia. In net terms.) Category 2002-03 Sale Purchase A Public Sector (i+ii+iii) i.390 339.220 116.580 — 466.433. there was an inflow of funds of Rs.130 683.241.800 1. the assured return schemes registered outflows to the tune of Rs. Joint Ventures 1.

840 — — 11.390 million during 2003-04 (Table 3-3b).8% of total assets under management of MFs as at end-March 2004.930 Assured Returns — — — — — — — Total 625.460 123.900 Purchase 1.440 189.com . the balanced schemes and the ELSS schemes have witnessed outflows to the extent of Rs.080 39.729.690 101.901.146. the share of private sector MFs in total assets managed increased from 69.800 417.345. 245.396. 494.470 52.700 million amounting to an aggregate of Rs. 131 million and Rs. However.810 Assets under Management As on March 31. mn.230 Close Ended 16.230 3.770 million during the year.730 Purchase 1.260 16. respectively (Table 3-4). The growth Table 3-4: Assets under Management as at end March.433.729.020 220 3. 1.) Scheme Income Growth Balanced Liquid/Money Market Gilt ELSS Total Source: AMFI Updates.540 32.040 60.540 221.870 530 5.240 236.890 1.690 1.900. The sale as well as repurchase has been very high in case of these schemes. the liquid/money market schemes have become very popular among investors due to the attractive returns delivered by them. During the year the assets under management of the private sector MFs increased by Rs. 2002-03 Sale 1.004.040 60.550 5.230 46.420 58. The income schemes raised about 29.3% of resources mobilising Rs. The open ended schemes and the close ended schemes as at end-March 2004 accounted for 96. As shown in Table 3-2.510. 1.100 3.35% and 3.094. Table 3-3b: Scheme-wise Resource Mobilisation by Mutual Funds (Rs.580 25.360 3. 1.420 25.601.610 1.nseindia. 2004 (Rs.049.396.661 million.ISMR Collective Investment Vehicles 60 With the decline in interest rates during past few years.65% of total assets under management of MFs.700 14. 2004. respectively during 2003-04. mn. followed by liquid/money market schemes with 29. resulting in a net inflow of Rs. the MFs have managed assets of Rs.950.260 4.9%.180 3.920 2.800 50.012.390 266.190 5.) Scheme Income Growth Balanced Liquid/Money Market Gilt ELSS Total Source: AMFI Updates.560 1.160 million. 4. Open Ended 608.170 7.756.250 2003-04 Sale 1.590 7. The income schemes accounted for 44.8% as at end-March 2003 to 75% as at end-March 2004 (Chart 3-1). They have accounted for almost two-thirds of the total resources mobilized.130 40.960 417.160 www.920 million.

Templeton launched the ‘Franklin India Index Tax Fund’ in February 2001. Magnum Index Fund. Since Index funds are passively managed. Unlike a typical MF. this reduces transaction costs.nseindia. Some of the index funds based on S&P CNX Nifty are UTI Nifty Fund. moderate return arising out of a well-diversified portfolio. There are a total of twelve funds based on S&P Nifty: Franklin India Index Fund.com . index funds do not actively trade stocks throughout the year. particularly. yet providing returns at par with the index. UTI Nifty Fund. Index Funds Index funds attempt to copy the performance of a stock market index such as Nifty or Sensex as closely as possible. the bias of the fund managers in stock selection is reduced. IL&FS Index Fund Nifty Plan. appropriate for conservative long-term investors looking at moderate risk.61 Collective Investment Vehicles ISMR schemes accounted for 16. LIC Index Fund. Franklin India Index Fund and IDBI Principal Index Fund. Prudential ICICI Index Fund Nifty Plan. Franklin India Tax Index Fund. Index funds are considered. The table shows that the index funds closely track their benchmark indices. HDFC Index Fund Nifty Plan. IDBI Principal Index Fund. which has been the first tax saving index fund based on S&P CNX Nifty. ING Vysya Nifty Plus Fund and Tata Index Fund (Table 3-5). They may at times hold their stocks for the full year even if there are changes in the composition of index.9% of assets under management of MFs as at end-March 2004 (Chart 3-1). This is done by investing in all the stocks that comprise the index in proportions equal to the weightage given to those stocks in the index. www. Birla Index Fund.

54 34.04 24.70 47. Further the Benchmark Mutual Fund has launched a money market ETF in India which www. few more ETFs have been introduced.ISMR Collective Investment Vehicles 62 Table 3-5: Performance of Index Funds Index Funds Principal Index Fund Franklin India Index Tax Fund Franklin India Index Fund UTI Nifty Fund UTI Master Index SBI Magnum Index Fund IL&FS Index Fund Prudential ICICI Index Fund HDFC Index Fund Birla Index Fund LIC Index Fund Tata Index Fund ING Vysya Nifty Plus Fund S&P CNX Nifty BSE Sensex Launch Date July 26.88 79.14 23.71 -6.25 Returns* 3 months 6 months 12 months -7. ETFs are also passively managed funds wherein subscription/redemption of units implies exchange with underlying securities.64 — -5.21 23.nseindia. 2004 Exchange Traded Funds An Exchange Traded Fund (ETF) is a type of Investment Company whose investment objective is to achieve similar returns as in case of a particular market index.04 -6. was the Nifty Benchmark Exchange Traded Scheme (Nifty BeES).35 -30. ETFs first came into existence in USA in 1993. An ETF is similar to an index fund.15 -6.50 -19. TRAHK (Tracks) based on the Hang Seng Index and DIAMONDs based on Dow Jones Industrial Average (DJIA). but the ETFs can invest in either all of the securities or a representative sample of securities included in the index.60 84.20 — 81.25 -18. Over the past three years. Bank BeES (Banking Index Benchmark Exchange Traded Scheme) tracking the CNX Bank Index. 2004 November 3. 2002 February 1.04 25.20 -18.29 81. 2003 February 6. 1986 -29.37 -25. These being exchange traded.14 83.com . The first ETF in India.77 24.39 -15.74 -4. It is bought and sold like any other stock on NSE. 2002 July 1. hence. 2001 February 1. based on S&P CNX Nifty. S&P CNX Nifty UTI Depository Receipts Schemes (SUNDER) based on S&P CNX Nifty. The structure of ETFs is such that it protects long-term investors from inflows and outflows of short-term investor.32 -6. cost of distribution is much lower and the reach is wider. 2002 September 17.38 S&P CNX Nifty S&P CNX Nifty S&P CNX Nifty S&P CNX Nifty BSE Sensex S&P CNX Nifty S&P CNX Nifty S&P CNX Nifty S&P CNX Nifty S&P CNX Nifty S&P CNX Nifty S&P CNX Nifty S&P CNX Nifty — — Base Index * Returns are calculated as on March 31. ETFs are highly flexible and can be used as a tool for gaining instant exposure to the equity markets.66 -6. 1999 February 26.78 0.40 -6. Like index funds.75 23. These savings are passed on to the investors in the form of lower costs. the ETFs offer a one-stop exposure to a diversified basket of securities that can be traded in real time like an individual stock.58 24. 2001 August 4.62 9.86 2.68 -24. iSHARES based on MSCI Indices. 2000 June 29. Importantly.21 8. Some of the popular ETFs are: SPDRs (Spiders) based on the S&P 500 Index. 1995 January 2.69 -36.04 83. 2001 March 27.97 24. 1998 December 1.74 -4.47 — 25.71 82. units can be bought and sold directly on the exchange. 2002 November 1. they are: Junior Nifty BeES based on CNX Nifty Junior. This was launched by Benchmark Mutual Fund in December 2001. QQQs (Cubes) based on the Nasdaq-100 Index.89 80. 2002 February 1.

3 crore which should be increased to Rs.63 Collective Investment Vehicles ISMR is incidentally the only money market ETF in the world. 1956 and the memorandum of association should specify management of CIS as one of its objectives. Despite the similarity between the CIS and MF regarding the pooling of savings and issuing of securities. 5 crore within three years from the date of grant of registration). and deploy the same. The offer document should also indicate the maximum and minimum amount expected to be raised. Guidelines under CIS Regulations The SEBI (CIS) Regulations specifically state that. Arbitrage Possible at low cost Collective Investment Schemes A Collective Investment Scheme (CIS) is any scheme or arrangement made or offered by any company. The company at the time of registration as CIMC should have a minimum net worth of Rs. Prudential ICICI Mutual Fund also launched an ETF based on the BSE Sensex. trading for which has started on January 13. It is known as the Liquid BeES (Liquid Benchmark Exchange Traded Scheme). A comparative view of ETFs vis-à-vis other funds are presented in the table below: Parameter Fund Size NAV Liquidity provider Sale Price Availability Portfolio Disclosures Uses Intra-day trading Open-Ended Fund Flexible Daily Fund itself At NAV plus load if any Fund itself Monthly Equitising Cash Not Possible Close-Ended Fund Fixed Daily Stock Market Significant Premium/ Discount to NAV Through Exchange where listed Monthly — Expensive Exchange Traded Fund Flexible Real time Stock Market/Fund itself Very close to actual NAV of scheme Through Exchange where listed/fund itself Daily/Real time Equitising cash.nseindia. 5 crore (provided that at the time of making the application. which pools the contributions. The offer document should disclose adequate information to enable investors to take informed decisions. or payments made by the investors. hedging. iii. SPICE (Sensex Prudential ICICI Exchange Traded Fund). www. No scheme should be kept open for subscription for a period more than 90 days.com . While MF invests exclusively in securities. The other regulations are as follows: i. Any entity proposing to operate as a Collective Investment Management Company (CIMC) has to apply for registration with SEBI. ii. they differ in their investment objective. the applicant should have a minimum net worth of Rs. CIS should be floated as a public company registered under the provisions of the Companies Act. 2003. without obtaining a certificate of registration from SEBI. no entity can sponsor a CIS. CIS confine their investment to plantations and real estate.

The units of every scheme should be listed immediately after the allotment is over. viii. 5 crore. the minimum corpus of the fund before it starts activities should be at least Rs. there was no CIS entity registered with SEBI. As on March 31. The VCF is eligible to participate in the IPO through book building route as Qualified Institutional Buyer. 1996 are as follows: i.ISMR iv. vii. CIMC should obtain adequate insurance policy for protection of the scheme’s property. or manufacture of article. ii. iii. Advertisements for each and every scheme have to conform to the SEBI’s advertisement code. These schemes are prohibited from guaranteeing or assuring returns. Unlike MFs and CIS. raised in the specified manner and invested in Venture Capital Undertakings (VCUs). VCU is a domestic company whose shares is not listed on a stock exchange and is engaged in a business for providing services. The CIMC on behalf of the scheme should before the expiry of one month from the close of each quarter publish its unaudited financial results in one daily newspaper having nation wide circulation and in the regional newspaper of the region where the head office of the CIMC is situated. CIMC should launch only close ended schemes with a minimum duration of three calendar years. www. Venture Capital Funds Venture Capital Fund (VCF) is a fund established in the form of a trust or a company including a body corporate having a dedicated pool of capital. ix. iv. A VCF seeking to avail benefit under the relevant provisions of the Income Tax Act will be required to disinvest its holdings within a period of one year from the listing of the VCU. The minimum investment in a VCF by an investor should not be less than Rs. SEBI had initiated action against 568 CIS entities for their failure to wind up their schemes and make repayments to investors. Automatic exemption is granted from open offer requirements in case of transfer of shares from VCFs in Foreign Venture Capital Investors (FVCIs) to promoters of a venture capital undertaking. Collective Investment Vehicles 64 Each scheme has to obtain a rating from a recognized credit rating agency and the projects to be undertaken should be appraised by an empanelled appraising committee.nseindia. production. A company or body corporate to carry on activities as a VCF has to obtain a certificate from SEBI and comply with the regulations prescribed in the SEBI (Venture Capital Regulations) 1996. there is no retail participations in VCFs. v. which is not later than six weeks from the date of closure of the scheme on the stock exchanges. 2004. 5 lakh.com . Regulations for VCFs The salient features of the SEBI (Venture Capital Regulations). vi.

Not more than 25% of the investible funds may be invested by way of subscription to IPO of a VCU whose shares are proposed to be listed subject to lock-in period of one year and debt or debt instrument of a VCU in which the VCF has already made an investment by way of equity. www. also. According to a survey conducted under the aegis of Indian Venture Capital Association (IVCA) by Thomson Venture Economics (Thomson Financial) and Prime Database. Indian VC funds received US $ 241. As on March 31. ii. The VCF have to disclose the investment strategy at the time of application for registration and should not have invested more than 25% corpus of the fund in any one VCU.65 Collective Investment Vehicles ISMR Investment Restrictions i. At least 75% of the investible funds should be invested in unlisted equity shares or equity linked instruments. 76 Indian companies received investments. 53% of companies that raised venture capital were in the Information Technology sector. cannot invest in associated companies.nseindia.8 million in new commitments in 2002 and have invested $ 590. the average value of each deal is around $ 7.21 million in Indian Companies in the same year. A VCF.com . India ranked second as the most active VC market in Asia Pacific (excluding Japan). All VCFs are now required to provide information pertaining to their venture capital activity for every quarter starting from the quarter ending December 2000.11 million. 2004 the total count of VCFs and FVCIs stood at 45 and 9 respectively.

This will help these enterprises in raising equity and debt from the Capital Market. In a geographically widespread country like India. so as to protect the interest of the investors. the trading platform of NSE is also accessible through internet and mobile devices. the companies have an option to choose from any one of the existing stock exchanges in India to list their securities.nseindia. cleared and settled within the regulatory framework prescribed by the Exchanges and the SEBI. www. However. The policy developments during April 2003 and June 2004 pertaining to trading of securities are enumerated below: Initiatives from Government I. However. Policy Developments Over the last decade the Government and the market regulators have taken several policy measures to improve the operations of the stock exchanges and market intermediaries. Union Budget The Union Budget for 2004-05 proposed the following measures that have a bearing on the functioning of the secondary market: 1. there are in all 23 exchanges operating today in the country. The stock exchanges along with a host of other intermediaries provide the necessary platform for trading in secondary market and also for clearing and settlement. the trading platforms of all the stock exchanges are accessible from anywhere in the country through their trading terminals. The measures are aimed at improving the market infrastructure and upgradation of risk containment. following the withdrawal of this restriction. * This Chapter discusses the trading of equity shares while the trading of debt and derivative instruments is discussed in Chapters 6 and 7 respectively. in order to provide an opportunity to investors to invest/trade in the securities of local companies. With the increased application of information technology. they are traded in the secondary market by the investors.com . An alternate trading platform for Small and Medium Enterprises (SME) have been proposed to be set up. this has significantly expanded the reach of the exchanges to the homes of ordinary investors and assuaged the aspirations of people to have exchanges in their vicinity.67 Secondary Market – Trading ISMR Secondary Market – Trading* Introduction After the securities are issued in the primary market. Till recently. Due to the earlier regulation requiring companies to get listed first at the regional stock exchange. The securities are traded. it was mandatory for the companies to list their securities on the regional stock exchange nearest to their registered office.

capital adequacy.75 billion from US$ 1 billion. B and C. (ii) Eligibility: All corporates. NBFCs and FIs are eligible to borrow through the ECB route. there would be three different choices for investments e. 3. the Securities Contracts (Regulation) Rules. The pension fund managers would be free to make investments in international markets subject to regulatory restrictions. Pension System/Interim Pension Fund Regulator The Government has approved the basic features of the new pension system. Amendment to Securities Contracts (Regulation) Act. Turnover taxes have also been imposed on delivery-based transaction at the rate of 0. except banks. Option B with greater investments in equity and Option C would carry equal investment in fixed income and equity. It states that a member is permitted to conduct business in commodity derivatives only by setting up a separate company.g. Revised ECB Guidelines The Government notified the liberal External Commercial Borrowing (ECB) policy on January 19. 1957 As per the recommendations of a Committee constituted by the SEBI under the chairmanship of Shri K. those banks and FIs. Secondary Market – Trading 68 The procedure for registration and operation of FIIs is to be made simpler and quicker. Ramamoorthy. III.15% and for non-delivery transactions at the rate of 0.01% on trades on the derivatives segment. 2003. The option A would imply predominant investments in fixed income instruments with some investments in equity. The shortterm capital gains tax has been proposed to be at a flat rate of 10 percent. are permitted. over six month LIBOR or the applicable benchmark(s). 4. Long-term capital gains tax on securities transaction has been abolished. In this system. 5.015% for equities and 0. (iii) Interest Rate Spreads: All ECBs are subject to the following revised maximum spreads. www. They are called the Securities Contracts (Regulation) Amendment Rules. margins and exposure norms as maybe specified by the Forward Market Commission. R. The investment ceiling for FIIs in debt funds have been raised to US$ 1. However. who have participated in the Textile or Steel sector restructuring package of the Government/RBI.ISMR 2. A pension fund regulatory and development authority (PFRDA) in the interim is to be set up with the purpose to regulate and develop the pension market. Listed below are the new policies: (i) Removal of end-use restrictions: ECBs are allowed for corporate investments in industrial sector especially infrastructure sector for acquisition of shares under the Governments disinvestment programme of PSU shares up to US$ 500 million having minimum average maturity of 5 years under the automatic route. but only to the extent of their investment in the package. IV. as the case may be (a) Average maturity of 3-5 years -200 basis points and (b) More than 5 years of average maturity 350 basis points.nseindia. The usual restriction on ECB for investment in capital market or in the real estate is to continue. 1957 have been amended. II.com . Option A. 2004. It is required that the company should comply with the regulatory requirements in terms of net worth.

which fall outside the purview of the auto-route in the new liberalised ECB policy. financial experts etc. processing the application made for listing by any body corporate. The IDRs should be denominated in Indian Rupees and not exceed 15% of the total paid-up capital and free reserves of the company.. SEBI (Listing Authority) Regulations. of which at least four members should be representatives of the stock exchanges. In case of redemption. The issuer company can issue Indian Depository Receipts (IDRs) only against its underlying equity shares. and a merchant banker.com . Initiatives from SEBI I. On similar lines. NBFCs are not permitted to provide guarantee/letter of comfort. www. All cases. The rules require that the issuer company’s pre-issue paid up capital and average turnover should be US$ 100 millions and US$ 500 millions. Procedure: All ECBs satisfying the above criteria will be under the auto route up to US$ 20 million for ECBs between 3-5 years of average maturity and up to US$ 500 million for ECBs having average maturity of more than 5 years. domestic depository. academicians. The issuer company has to obtain prior permission from the SEBI and the necessary approvals/exemptions from the country of its incorporation (where required) for making the issue. the underlying equity shares may be released to the IDR holder or may be sold directly by him.69 (iv) (v) Secondary Market – Trading ISMR Guarantee: Banks. Following the approval. V. guidelines for Foreign Currency Convertible Bonds (FCCBs) have been liberalized. Companies (Issue of Indian Depository Rules) 2004 Ministry of Finance (MoF) has notified the Companies (Issue of Indian Depository Rules). reviewing listing norms and any other functions as may be specified by the Board from time to time. respectively. The issuer company should also take in-principle listing approval from one or more stock exchanges having nation wide trading terminals in India. MF or CIS.nseindia. lawyers. 2004. should be subject to the approval by the Empowered Committee of the RBI. The company should also be making profits for at least 5 years preceding the issue and must have declared dividend of at least 10% during the period and has a preissue debt equity ratio of 2:1. The SEBI Board shall appoint the President and the members from amongst persons having integrity and outstanding ability from judiciary. applicable to those companies incorporated outside India desiring to raise resources through Indian securities markets. (ii) The authority should discharge the following functions viz. FIs. issuing the letter of recommendations. SEBI has established the Central Listing Authority (CLA) under the SEBI (Central Listing Authority) Regulations. issuer should appoint a number of intermediaries such as overseas custodian bank. 2003. 2003 To bring about uniformity in scrutinizing listing applications across the stock exchanges and to strengthen the listing agreement. Redemptions are to be subject to FEMA and other laws and cannot be made within one year of their issue. The important features of these regulations are as follows: (i) The Central Listing Authority (CLA) is to be constituted by SEBI and should consist of a President and a maximum of ten other members.

1956.e. the CLA refuses to issue letter of recommendation in accordance with the procedure laid down in the Regulations. Margin Trading With a view to improve liquidity in the equity market. They may use their own or borrowed funds. Only corporate brokers with net worth of at least Rs. to be presented to any Court or Tribunal does not in any way violate. MF or CIS.ISMR Secondary Market – Trading 70 (iii) Prior to applying for listing to any stock exchange. eligible for margin trading. SEBI initiated steps to introduce margin trading w. their total indebtedness should not exceed 5 times their net worth.nseindia. SEBI may direct the CLA to issue a letter of recommendation within 15 days of receipt of such representation. II. which should be constituted basically from the processing fees charged and received by the Authority. (vi) If the exchange refuses listing to the body corporate. and the Listing Agreement. however. (v) In case. the www. While providing the margin trading facility. It has been clarified that Section 23(2) of the SC(R)A. (b) The company should ensure that any scheme of arrangement/amalgamation/merger/ reconstruction/reduction of capital. III. regulations. Securities law here means the SCRA 1956. MF or CIS should obtain a letter of recommendations to list from the CLA. 1992. If the SEBI is not satisfied with the reason. override or circumscribe the provisions of securities laws or the stock exchange requirements.. The initial and maintenance margin is to be paid in cash and have to be a minimum of 50% and 40%. 2004. Amendments to Listing Agreement SEBI advised the Stock Exchanges to initiate action against the listed companies.f. the SEBI Act. a body corporate. etc. respectively. unless it is accompanied by a letter of recommendation issued by the CLA. the aggrieved party may approach SEBI within 10 days of receipt of the refusal. The amended clauses are as given below: (a) The company should file with the stock exchange for approval any scheme/petition proposed to be filed before any court or tribunal at least a month before it is presented to the Court/tribunal. The securities. should have an average impact cost of less than or equal to 1 and should be traded on at least 80% (+/-5%) of the days for the previous eighteen months. Further. (vii) The CLA should also constitute a ‘Fund’ to be called the Central Listing Authority Fund. guidelines etc. SEBI amended the clause 24 of the listing agreement. (iv) Any exchange should not consider any listing application. made under these Acts. 1956 prescribes punishment for violation and non-compliance of the provisions of listing agreement. 3 crore are eligible to offer this facility. the Depositories Act 1996 and the provisions of Companies Act 1956 and the other rules.com . April 1. in order to ensure that listed companies do not in anyway violate or override or circumscribe the provisions of securities laws or the stock exchange requirements. it may appeal to the Securities Appellate Tribunal (SAT) as provided in the Securities Contracts (Regulation) Act. who have not complied with the various requirements of the listing agreements.

! not participate in the discussion on subjects.71 Secondary Market – Trading ISMR broker should be prudent and ensure that there is no concentration on any single client. Listing Fees It has been decided by SEBI.nseindia. The arbitration mechanism of the exchange is not available for grievances arising out of this facility. that the stock exchanges should have the freedom to charge listing fees without seeking prior approval from the SEBI. it has been stipulated that the mark-up for the close out should be 20% above the official closing price for equities as well as debentures and bonds.com . based on the recommendations of the Advisory Committee on Derivatives and Market Risk Management it has now been decided that in case of debentures and bonds with a credit rating AAA and above. Accordingly. VII. regulations and the bye-laws as well as in the Memoranda/Articles of Associations to this effect. V. it was noticed that the necessary changes have not been made in the rules. which may involve any conflict of interest or give rise to. www. during the meeting the agenda papers should not be circulated. all the stock exchanges. They should be liable to vacate their office if they remain absent for three consecutive meetings of the Board of Directors or do not attend 75% of the total meetings of the Board in a calendar year. Eligibility of a Sub-broker to Trade through the Subsidiary Company The Stock Exchanges had been allowed to set up subsidiary company to acquire membership rights of other stock exchanges subject to certain conditions prescribed by SEBI. Fair Practices and Code of Conduct A code of conduct for public representatives/SEBI nominee directors has been notified to ensure that the affairs of the stock exchanges are conducted on the healthy lines with the highest standards of professional conduct. bye-laws and the regulations of all the stock exchanges which have set up subsidiaries and Memorandum/ Articles of Association of the subsidiary company. VI. However. Also the guidelines enumerating fair practices have been notified. close out mark-up of 5% should be applied. As per the conditions stated in the SEBI directive. business ethics and morality. However. unless circumstances requires. In cases where the credit rating is below AAA. 1996. If in case it happens then the same should be disclosed and recorded in the minutes of the meeting. then the existing close out mark-up of 20% should be applicable. Mark-up in respect of debentures and bonds traded on the Stock Exchange Through a circular issued by SEBI on December 09. however. IV. which have set up subsidiaries were directed to make the necessary provisions in their rules. Therefore. the exchanges have been directed to make necessary amendments to the bye-laws. The public representatives/SEBI nominee directors should: ! endeavor to attend all the board meetings. the subsidiary company could register only the members of the parent stock exchange as sub-brokers of the subsidiary company. rules and regulations/listing agreement.

ISMR ! ! Secondary Market – Trading 72 meet at least once in 6 months separately. or misrepresentation or any other act prejudicial to the administration of the exchange. so that they are able to resolve various issues arising in the operations of the exchange with professional competence. However. offer their comments on the draft minutes and ensure that the same are incorporated in the final minutes. ! ! ! ! ! ! ! ! ! ! ! VIII. They should also make use of every opportunity to enhance and improve their level of knowledge. In case. maintain confidentiality about any information obtained in the discharge of their duty unless otherwise required by law. Further. deceit. Rules. fraud. Corporate Governance in Listed Companies Clause 49 of the listing agreement has been amended to include the recommendations as prescribed by the committee on corporate governance set up under the chairmanship of Shri N. the non-executive www. avoid any interest or activity which is in conflict with the conduct of their official duties. they should not use the confidential information for their personal gains.nseindia. dishonesty. They should report forthwith any such decision to SEBI. participate in the formulation and execution of various strategies by being pro-active in decision making in the Board meetings. not engage in any act involving moral turpitude. endeavour to make the regulatory system foolproof by ensuring compliance at all levels of hierarchy in the Exchange. then next meeting is to be held within 15 days. They should also ensure that the Exchange honours the time limit prescribed by SEBI for corrective actions. so that the exchanges benefits from their experience and expertise. Regulations framed thereunder and the circulars. fairness. endeavour to ensure that the Exchange abides by all the provisions of the SEBI Act. efficiency and effectiveness. Rules or Regulations of the Exchange and in any case. not support any decision of the Board. impartiality. R. endeavor to have the date of next meeting fixed at each Board Meeting itself in consultation with other members of the Governing Board. submit the necessary disclosures/statement of holdings/dealings in securities as required by the Exchange as per their Rules or Articles of Association. the award is to be delivered within 15 days after the final meeting. if necessary.com . make sure that the arbitral award is given within the period stipulated in the Bye-Laws. all the items of the agenda of a meeting are not covered. to exchange views on critical issues. priorities redressing of investor grievances by encouraging fair trade practice. It should be ensured that the minutes of the previous meeting are placed for approval in the subsequent meeting. Narayana Murthy: Composition of Board: The board of directors of a company should have an optimum combination of executive and non-executive directors. which may adversely affect the interest of investors. directions issued by the Government/SEBI. Securities Contracts (Regulation) Act.

The number of independent directors should be determined on the basis of the post held by the Chairman. as it considers appropriate (and particularly the head of the finance function) to be present at the meetings.nseindia. Code of Conduct: It is obligatory for the Board to lay down the code of conduct for all its members and the senior management of the company. with a maximum time gap of four months between any two meetings. in case of a non-executive chairman. the company should publish its compensation philosophy. Qualified and Independent Audit Committee: A qualified and independent audit committee with a minimum of three members comprising of a chairman and members shall be set up. Wherein the chairman should be an independent director and majority of members should be independent directors. A limit should be placed for the maximum number of stock options that can be granted to them in any financial year and in aggregate. Furthermore. A director should not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director. at least 1/3rd of board should comprise of independent directors and if he is an executive chairman. In its annual report. but on occasions it may also meet without the presence of any executives. On an annual basis.73 Secondary Market – Trading ISMR directors should not be less than 50% of the directors.com . In addition. The audit committee should invite executives. statement of entitled compensation in respect of non-executive directors and the details of shares held by non-executive directors. It is required that all the members of audit committee should be financially literate and at least one of them should have accounting or related financial management expertise. Term of Office of Non-executive directors: A person would be eligible for the office of non-executive director so long as his term in the office has not exceeded nine years in three terms of three years each. Board Procedure: The Board should meet at least four times a year. all the members of the Board and senior management personnel should affirm compliance with the code. which should be posted on the company’s website. www. Independent Director: Independent Director should periodically review the company’s legal compliance reports as well as the steps taken by the company. Non-Executive Directors’ Compensation and Disclosures: All the compensation paid to nonexecutive directors should be fixed by the Board and should be approved by shareholders in general meeting. it should be mandatory for all the directors to inform the company about the positions they occupy in other companies every year and also notify changes as and when they take place. In the event of any legal proceedings against an independent director in connection with the affairs of the company. The Chairman should be present at Annual General Meeting to answer the queries of the shareholders. then at least half of Board should comprise of independent directors. the annual report should contain a declaration to this effect signed by the CEO and COO. running continuously. the defence would not be permitted on the ground that he was unaware of his responsibility.

nseindia. its staff. (ii) management discussion and analysis of financial condition and results of operations. including quarterly/half-yearly financial information. officials heading the department. The listing agreement states: “The Company agrees to obtain ‘in-principle’ approval for listing from the exchanges having nationwide trading terminals where it is listed. The quorum for the meeting should be either two members or one third of the total members. and (iv) management letters/letters of internal control weaknesses issued by statutory/ internal auditors. The Audit Committee should also compulsorily review information related to (i) financial statements and draft audit report. If the company is not listed on any stock exchange having nationwide trading terminals.” X. but once every six months. (iii) reports relating to compliance with laws and to risk management. if it considers necessary.ISMR Secondary Market – Trading 74 Audit Committee: The audit committee should meet at least thrice a year. fixation of audit fee and also approve payment for any other services (c) review the adequacy of internal audit function. All matters relating to transfer of securities. The committee is empowered to (i) investigate any activity within its terms of reference (ii) seek information from any employee (iii) obtain outside legal or other professional advice (iv) secure attendance of outsiders with relevant expertise. IX. Amendment to SEBI (Depositories and Participants) (Second Amendment) Regulations 2003 SEBI amended the SEBI (Depositories and Participants) Regulations 1996 to include the clauses regarding the manner of handling the share registry work. it agrees to obtain such ‘in-principle’ approval from all the exchanges in which it is listed before issuing further shares or securities. Post-audit the committee should ascertain any area of concern regarding company’s financial and risk management policies. it has been decided by the SEBI that a company should be listed on any of the stock exchanges. Listing of Further Issue of Capital Following the withdrawal of compulsory listing of companies on regional stock exchange. including the structure of the internal audit department. whichever is higher and minimum of two independent directors. Further. which have a nationwide trading terminals. reporting structure coverage and frequency of internal audit. the committee should discuss with internal auditors any significant findings and follow them up (d) review the findings of any internal investigations into matters of a suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board. the committee should discuss with external auditors before the audit commences about nature and scope of audit. before issuing further shares or securities. at least one meeting should be held before finalization of annual accounts. www. Also.com . Role of Audit Committee: The role of the audit committee should be to (a) oversee the company’s financial reporting process and the disclosure made in the financial statement and ascertain its accuracy. then it should continue to obtain ‘in-principle’ approval from all the exchanges where it is listed. Where the company is not listed on any exchange having nationwide trading terminals. redressal of investor grievances and maintenance of audit reports. sufficiency and credibility (b) recommend the appointment and removal of external auditor.

Simultaneously. Every FII should also comply with award of the Ombudsman and decision of the Board under SEBI (Ombudsman) Regulations. XI. handling of physical securities should be handled and maintained at a single point by establishing connectivity with the depositories i. Amendment to SEBI (FII) (Second Amendment) Regulations 2003 The SEBI (Foreign Institutional Investors) Regulations has been amended by the SEBI to include the new clauses as stated herewith. Equity Linked Notes (ELN) or any other such instruments listed or proposed to be listed. 2003 intends to develop an inventory of Market Participants and Investors and also set up standards for client code. should not be a party to or instrumental for creation of false market in securities listed or proposed to be listed in any stock exchange in India. XII. Every issuer or its agent or any person who is registered as an intermediary under this act. fairness and professionalism in all their dealings with intermediaries. The code of conduct has also been specified which states that (a) a FII and its key personnel should observe high standards of integrity.e. regulatory and other government authorities in the Indian securities market. regulations made thereunder and the circulars and guidelines applicable and relevant to them. the depository should also be informed about the number and nature of grievances redressed by it and number of grievances pending before it. They should. It places a mandatory obligation on all entities under the jurisdiction of SEBI and specified investors to obtain unique identification number under MAPIN www. at all times. either in-house by the issuer or by a Share Transfer Agent (STA) registered with the SEBI. 2003 (d) a FII should not make any untrue statement or suppress any material fact in any documents.nseindia. SEBI (Central Database of Market Participants) Regulations 2003 The SEBI (Central Database of Market Participants) Regulations. The issuers should submit the audit report on a quarterly basis. arms length relationship should be maintained between its business of fund management/investment and its other business (c) a FII should maintain an appropriate level of knowledge and competency and abide by the provisions of the Act. render high standards of service. The FIIs should fully disclose information concerning the terms of and parties to off-shore derivative instruments such as Participatory Notes (P-Notes). There should be clear segregation of its own money/securities and sub-accounts’ money/securities.75 Secondary Market – Trading ISMR maintenance of records of holders of securities. 2003 to the concerned stock exchanges audited by a qualified Chartered Accountant or a practicing Company Secretary.com . should redress the grievances of beneficial owners within thirty days of the receipt of the complaint. reports or information furnished to the Board (e) they should ensure that good corporate policies and corporate governance are observed and do not engage in fraudulent and manipulative transactions in the securities listed in any stock exchange in India (f) a FII and/or any of its affiliates should not indulge in any insider trading. They should not be involved in price rigging or manipulation of prices of securities listed or proposed to be listed in any stock exchange in India. exercise due diligence and independent professional judgment (b) a FII should ensure and maintain confidentiality in respect of trades done on its own behalf and/or on behalf of its sub-accounts/clients. starting from September 30.

com . Disclosure of Proprietary Trading by Brokers to Client To increase the transparency in the dealings between the broker and the client. The stock broker/sub-broker of an exchange can deal with only one broker/sub-broker of another exchange for proprietary trading after intimating the names of such stock broker/sub-broker to his parent stock exchange. If the defect is not rectified within the allotted time period. the person will be treated as if no UIN was allotted to him. Disclosure of Trade Details of Bulk Deals SEBI has decided to bring about greater disclosure in the nature of the bulk deals.5% of the outstanding equity shares of that company are considered to be bulk deals. company intending to get its securities listed. SEBI has prohibited these transactions. After the stock exchange considers the reason stated by the broker-sub-broker for such transactions and carry out due diligence. or any other action as may be deemed appropriate by the Board. Once the UIN is revoked. XIII. This should be disclosed to all his existing clients and also to his new clients at the time of entering into the ‘Know Your Client’ agreement. it should permit such deals with only one broker/sub-broker registered with it. it has been decided that every broker should disclose to his client whether he does client based business or proprietary trading as well. listed company. XIV. On receipt of an application. except with the prior permission of the exchange.nseindia. In case a person issues any security or buys. In case of a broker who at present does not trade on proprietary account.ISMR Secondary Market – Trading 76 database. intermediary and other entities should make applications for allotment of unique identification numbers (UINs) for itself and for its related persons (b) the application made by a specified intermediary or any other entity should be in a specified form. revoke the UIN allotted to him or to the related persons. sells or deals in any securities in contravention of these regulations. www. he is required to disclose this to his clients before carrying out any proprietary trading. they would be liable for suspension from trading or may be debarred from dealing in the securities market. the designated service provider should give the applicant an opportunity to rectify it within a period of 15 days from the date of the intimation or within the period approved by the Board. chooses to do so at a later date. In case of any defect. the Board may. after giving him an opportunity of making representations. Trading by Members/Sub-brokers Since certain members/sub-brokers deal through a large number of other stock brokers/ sub-brokers on the same exchange/other exchanges for their proprietary trades as well as trades on behalf of their clients. the designated service provider should allot to the applicant a UIN. The main features of this regulation are as cited: (a) every investor. All transactions in scrip where total quantity of shares bought/sold is more than 0. then the designated service provider should refer the application to the SEBI board (c) if unique identification number was obtained through fraud or misrepresentation or was allotted to a person by mistake. XV.

Initiatives from RBI I. in turn. SEBI decided to reduce the notice period which the listed companies have to give to the stock exchanges before their book-closure/record date. quantity of shares bought/sold and the traded price.com . in addition to their SGL Accounts with RBI. Immediately after executing the trade.e. are required to comply with certain provisions: (i) They have to maintain a time period of at least one year before the last name change (ii) At least 50% of its total revenue in the preceding one year period should have been accounted for by the new activity suggested by the new name (iii) The new name along with the old name should be disclosed through web sites of the respective stock exchange/s where the company is listed and also through EDIFAR web site for a continuous period of one year from the date of last name change.nseindia.77 Secondary Market – Trading ISMR The brokers should disclose to the stock exchange the name of the scrip. the brokers should intimate the exchange and the stock exchange. XVI. Reduction in Notice Period for Fixing the Book Closure/Record Date On receiving representations from various quarters and in view of the major structural changes/developments in the secondary markets. Value free transfer. FIs should open demat accounts with the Depository Participant (DP) of either NSDL/CDSL. XVII. name of the client. the FIs have to follow the procedure mentioned below: 1. www. (i. FIs Trading in GOI Securities With a view to facilitate participation of the financial institutions (FIs) for trading in government securities on the stock exchanges. Changes in the Name of the Listed Companies All listed companies. transfer of the GOI securities from the SGL/CSGL account to the demat account of the same party) of securities between SGL/CSGL and demat accounts should be enabled subject to operational guidelines. 2. securities should be available with the FIs either in their SGL account with RBI or in demat account with depositories (f) the purchase transactions 3. FIs should also ensure: (a) to obtain specific approval from their Board of Directors to enable them to trade in Government securities on the stock exchanges. which decide to change their names. risk management systems and appropriate internal control systems for trading/settlement of Government securities on stock exchanges (c) their transactions through any single broker should be subjected to the extant guidelines on dealings through brokers (d) all their trades should be settled either directly with clearing corporation/clearing house or else through clearing member custodians (e) at the time of trade. (b) they should put in place necessary infrastructure. the said notice period has been reduced to 15 calendar days from 30 days in case of dematerialized scrips and from 42 days to 21 calendar days in case of physical scrips. should disseminate the aforesaid information on the same day after the market hours to the general public. In the first phase.

In the mid-term review of the monetary and credit policy. A person resident in India should also not borrow in foreign currency from OCBs (v) an Indian company should not borrow in rupees on repatriation and non-repatriation basis from OCBs by way of investment in Non-Convertible Debentures (NCDs) (vi) an Indian company. 5. on aggregate basis. following measures have also been initiated (i) an unincorporated entity also should not be allowed to make fresh investments under the Foreign Direct Investment scheme including the automatic route. i. However. a proprietorship concern or a firm in India should not accept deposits from OCBs on non-repatriation basis (vii) OCBs should not open and maintain NonResident (External) Rupee Account (NRE). ADs should arrange to obtain requests for disposal of funds from their OCB clients and seek the specific approval for www. However. (viii) no new NRE/FCNR/NRO Accounts in the name of OCBs should be opened and no renewal of deposits should be made. For investment on non-repatriation basis. the pay out must not be contingent upon the outcome of any clearing to be conducted on that day. authorised dealers (ADs) may allow repatriation as authorised.e. they may continue to hold these securities till they are sold/ matured (iii) a person resident outside India including OCBs should not transfer by way of sale or gift. the shares or convertible debentures held by them to another OCB (iv) OCBs should not purchase equity or preference shares or convertible debentures offered on right basis by an Indian company.nseindia. Any settlement failure on account of non-delivery of securities/non-availability of clear funds should be treated as SGL bouncing and the penalties in respect of SGL bouncing should be applicable. the unincorporated entities and OCBs may continue to hold shares and convertible debentures till they are sold/redeemed (ii) they should also not undertake purchase of Government dated securities or treasury bills or units of domestic MFs or units of Money Market Mutual Funds (MMMFs) in India or National Plan/Savings Certificates both on repatriation and nonrepatriation basis. All the details of transaction in Government securities. II. is guaranteed by CCIL or the security is contracted for purchase from the RBI.ISMR Secondary Market – Trading 78 by the FIs should be subject to availability of clear funds in their settlement accounts at the time of pay-in. undertaken on the stock exchanges and particulars of any “closed out” should be reported to the audit committee of the Board. (b) the sale transaction settles either in the same settlement cycle as the preceding purchase contract so that the delivery obligation under the sale contract is met by the securities acquired under the purchase contract. RBI has permitted sale of Government security already contracted for purchase subject to two conditions: (a) the purchase contract is confined prior to the sale. (g) all pay-out of funds should invariably be out of clear funds. As regards with investment on repatriation basis.com . De-recognition of Overseas Corporate Bodies as an Investor Class RBI in consultation with the Government have de-recognised Overseas Corporate Bodies (OCBs) in India as an eligible ‘class of investor’ under various routes/schemes available under extant Foreign Exchange Management Regulations. Foreign Currency (Non-Resident) Account (Banks) [FCNR(B)] Accounts and Non-Resident Ordinary Rupee (NRO) Deposit Account with Authorised Dealers in India. 4. In addition.

www. A minimum cash margin of 20 per cent (within the margin of 40%) is also to be applied in respect of guarantees issued by the banks. NSE and OTCEI are demutualised and others are in the process of getting demutualised. there were 23 operative stock exchanges with 9. an all-India picture has been presented. all exchanges are not-for-profit making organizations. The NSE model of demutualisation compares well with the international models of demutualised stock exchanges. Kania was set up (i) to review the present structures of stock exchanges (ii) to examine the legal. the overseas entities owned by NRIs remain unaffected of the same. NSE and BSE. * While an attempt has been made to present market design for the entire Indian securities market. H. The existing advances/guarantees issued may continue at the earlier margins until they come up for renewal. Of the 23 recognized stock exchanges. III. and (iii) to advise on the consolidation and merger of the stock exchanges. the trading mechanism and such other exchange-specific elements have been explained based on the model adopted by NSE.815 registered sub-broker trading on them (Annexure 4-1).. The committee recommended a uniform model of demutualisation and corporatisation and advised the stock exchanges to initiate the process of getting demutualised. financial and fiscal issues involved to corporatise and demutualise the stock exchanges. banks were required to apply a uniform margin of 40% on all advances against shares/financing of IPOs/issue of guarantees. a committee under the chairmanship of Chief Justice M. Market Design* At the end of March 2004.nseindia. However. Ahmedabad. Stock Exchanges The stock exchanges need to be recognized under the Securities Contracts (Regulation) Act. only 3 exchanges (Mumbai. Bank Financing of Equities and Investments in Shares As per the RBI directive.79 Secondary Market – Trading ISMR each case from the RBI. It has also been clarified that the de-recognition of OCBs as a separate category of investor meant withdrawal of special facilities made available to them. This has been reviewed and it has been raised to a uniform margin of 50% to all fresh advances/guarantees issued.368 registered brokers and 12. viz. while the rest are organized as limited companies. they are allowed to hold the shares and convertible debentures purchased under PIS till such time these are sold on Stock Exchange in India. mostly for the two largest stock exchanges. Except NSE. The market developments have been explained. and recommend the specific steps that need for demutualisation. 1956. However. Wherever data permits. A minimum cash margin of 25% (within the margin of 50%) should be maintained in respect of guarantees issued by banks for capital market operations. as may be seen from Table 4-1. As on date only two exchanges viz. The ban imposed on OCBs under PIS vide a circular issued earlier shall continue. Madhya Pradesh) are organized in the form of “Association of Persons”. Realizing the problems of a non-demutualised set up.com .

ISMR Secondary Market – Trading 80 Table 4-1: Comparison of the NSE Model and the International Models of Demutualised Stock Exchanges Comparators Legal Structure For Profit/Not for Profit Ownership Structure International Model Company For Profit Company Owned by Shareholders which includes brokers Several stock exchanges are listed on themselves after Initial Public Offer. a demutualised company. Source: Report of the SEBI Group on Corporatisation and Demutualisation of Stock Exchanges. So the question of fiscal benefit prior to demutualisation does not arise. Transfer of assets Assets were transferred from the mutual The question of transfer of assets did entity to the for-profit demutualised not arise because NSE was set up by company and shares were given to the the institutions as a demutualised members in lieu of the ownership in company itself. legal experts etc. it is not necessary to own a share in the company. Not a listed company. members may or may not be shareholders and members who own shares may sell off their trading rights and all shareholders are not necessarily members. No Initial Public Offer made. academics. Of these. To become a member of the demutualised stock exchange. Toronto and Singapore. No ceiling These are segregated. Enactment of legislation to In several countries a separate legislation Not applicable as NSE was set up as give effect to demutualisation was necessary as in the case of Australia.com . Some of the directors are brokers but majority do not have stock broking background. stock exchanges enjoyed fiscal benefits prior to demutualisation. The Governing Board comprises of directors who are elected by shareholders. The broking firms are not shareholders. Since an Initial Public Offer (IPO) was also made in many cases. but when converted into for profit companies these are taxed. trading rights and management Board Structure The Board comprises of representats of shareholders. Thus. Listing Ceilings on shareholding Segregation of ownership. the old entity. www. NSE Model Company For Profit Company Owned by Shareholders which are financial institutions which also have broking firms as subsidiaries. 3 directors are nominated by SEBI and 3 directors are public representatives approved by SEBI. There was no cash consideration paid. chartered accountants. The trading rights and ownership are segregated. Fiscal benefits As mutual entities. Mostly 5% of voting rights for a single shareholder These are segregated. Hong Kong. NSE was set up as a demutualised for profit company and is taxed.nseindia. In several others no legislation was necessary as in the case of UK. the valuation of the shares were done by the market and no separate valuation exercise was required as for example in the case of LSE where a bonus issue was made.

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Secondary Market – Trading

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Membership
The trading platform of a stock exchange is accessible only to brokers. They play a significant role in the secondary market by bringing together the buyers and sellers. The brokers input buy/sell orders either on his own account or on behalf of clients. The clients may place their orders either with them directly or through a sub-broker indirectly. Thus, as these buy and sell order matches, the trades are executed. The exchange can admit a broker as its member only on the basis of the terms specified in the Securities Contracts (Regulation) Act, 1956, the SEBI Act 1992, the rules, circulars, notifications, guidelines, and the byelaws, rules and regulations of the concerned exchange. No stock broker or sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration from the SEBI. The stock exchanges, however, are free to stipulate stricter requirements than those stipulated by the SEBI. The minimum standards stipulated by NSE are in excess of those laid down by the SEBI. The NSE admits members based on factors, such as, corporate structure, capital adequacy, track record, education, and experience (Table 4-2). This reflects a conscious decision of NSE to ensure quality broking services.
Table 4-2: Eligibility Criteria for Trading Membership on CM Segment of NSE (Amount in Rs. lakh) Particulars Constitution Paid-up capital (in case of corporates) Net Worth Interest Free Security Deposit (IFSD) Collateral Security Deposit (CSD) Annual Subscription Education 1 CM and F&O Segment Individuals/Firms/Corporates 30 100 125 25 CM and WDM Segment Corporates 30 200 250 25 2 CM, WDM and F&O Segment Corporates 30 200 275 25 2 At least two directors should be graduates. Dealers should also have passed SEBI approved certification test for Derivatives and Capital Market (Basic or Dealers) Module of NCFM.

Individual trading member/two At least two directors partners/two directors should be should be graduates. graduates. Dealers should also have passed SEBI approved certification test for Derivatives and Capital Market (Basic or Dealers) Module of NCFM.

Experience Track Record

—— Two year’s experience in securities market —— The Applicant/Partners/Directors should not be defaulters on any stock exchange. They must not be debarred by SEBI for being associated with capital market as intermediaries. They must be engaged solely in the business of securities and must not be engaged in any fund-based activity.

Note: Clearing Membership requires higher networth, IFSD and CSD.

The authorities have been encouraging corporatisation of the broking industry. As a result, a number of brokers-proprietor firms and partnership firms have converted themselves into corporates. As at end-March 2004, there were brokers 9,368 (including multiple registrations)

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registered with SEBI as compared to 9,519 brokers as at end-March 2003. As of end-March 2004, 3,787 brokers, accounting for nearly 40% of total have become corporate entities. Amongst those registered with NSE around 88.97% of them were corporatised, followed by OTCEI with 77.85% corporate brokers. As at end-March 2004, there were 12,815 sub-brokers registered with SEBI, as compared with 13,291 sub-brokers as at end of previous year. There were a total of 141 additions of members during the year 2003-04, whereas 292 were membership cases of reconciliation/ cancellation/surrender. NSE and BSE together constituted 88.29% of the total sub-brokers.

Listing of Securities
Listing means formal admission of a security to the trading platform of a stock exchange. Listing of securities on the domestic stock exchanges is governed by the provisions in the Companies Act, 1956, the Securities Contracts (Regulation) Act, 1956 (SC(R)A), the Securities Contracts (Regulation) Rules (SC(R)R), 1957, the circulars/guidelines issued by Central Government and SEBI. In addition, they are also governed by the rules, bye-laws and regulations of the concerned stock exchange and by the listing agreement entered into by the issuer and the stock exchange. Some of the key provisions are enumerated below: 1. The Companies Act, 1956 requires a company intending to issue securities to the public should seek a permission from one or more recognised stock exchanges for its listing. If the permission is not granted by all the stock exchanges before the expiry of 10 weeks from the closure of the issue, then the allotment of securities would be void. Also, a company may prefer to appeal against refusal of a stock exchange to list its securities to the Securities Appellate Tribunal (SAT). The prospectus should state the names of the stock exchanges, where the securities are proposed to be listed. The bye-laws of the exchanges stipulates norms for the listing of securities. All listed companies are under obligation to comply with the conditions of listing agreement with the stock exchange where their securities are listed. If they fail to comply with them, then they are punishable with a fine up to Rs. 1,000. The SC(R)R prescribe requirements with respect to the listing of securities on a recognised stock exchange and empowers SEBI to waive or relax the strict enforcement of any or all of them. The listing agreement states that the issuer should agree to adhere to the agreement of listing, except for a written permission from the SEBI. As a precondition for the security to remain listed, an issuer should comply with the conditions as may be prescribed by the Exchange. Further, the securities are listed on the Exchange at its discretion, as the Exchange has the right to suspend or remove from the list the said securities at any time and for any reason, which it considers appropriate. A SEBI circular asserts that the basic norms of listing on the stock exchanges should be uniform across the exchanges. However, the stock exchanges can prescribe additional norms over and above the minimum, which should be part of their bye-laws. SEBI has been issuing guidelines/circulars prescribing certain norms to be included in the listing agreement and to be complied by the companies. The listing requirements for companies in the CM segment of NSE are presented in Table 4-3.

2.

3.

4.

5.

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Table 4-3: Listing Criteria for Companies on CM Segment of NSE Criteria Paid-up Equity Capital (PUEC)/Market Capitalisation (MC) Company/Promoter’s Track Record Dividend Record or Net worth Project Appraisal/ Listing Initial Public Offerings (IPOs) PUEC > Rs. 10 cr. and MC > Rs. 25 cr. IPOs by Knowledge Based Companies PUEC > Rs. 5 cr. and MC > Rs. 50 cr. Companies listed on other exchanges PUEC > Rs. 10 cr. and MC > Rs. 25 cr. OR PUEC > Rs. 25 cr. OR MC > Rs. 50 cr. 3 years of existence of applicant/ promoting company. Dividend paid for at least 2 out of the last 3 years OR Net worth Rs. 50 cr. Listed on any other stock exchange for at least last three years OR Project appraisal by specified agencies

3 years of existence of applicant/promoting company. —

3 years of existence of applicant/promoting company. —

Project appraisal by specified agencies

Project appraisal by specified agencies

Other Requirements

(a) No disciplinary action (a) by other stock exchanges/regulatory authority in past 3 years. (b) Satisfactory redressal (b) mechanism for investor grievances, distribution of shareholding and litigation record of the promoting company, if any.

No disciplinary action (a) Same as for IPOs. by other stock exchanges/regulatory authority in past 3 years. Satisfactory redressal (b) mechanism for investor grievances, distribution of shareholding and litigation record of the promoting company, if any. No negative net worth, No winding-up petition, and No reference to BIFR.

Note: 1. The criteria for IPOs shall also be applicable to companies which have come out with IPOs, but are not listed on NSE, provided they make an application for listing within 6 months of the date of closure of public issue. 2. Knowledge-based companies are companies in the field of information technology, internet commerce, telecommunications, pharmaceuticals, etc. and the revenue from knowledge-based activity is more than 75% of income for last 2 years. Dividend track record/net worth/project appraisal/listing are not applicable to Government Companies, PSUs, FIs, Nationalised Banks, Statutory Corporations, Banking Companies etc. who are otherwise governed by a regulatory framework.

3.

Explanations: 1. Paid-up Equity Capital means post issue paid-up equity capital. 2. In case of IPOs, market capitalisation is the product of the issue price and the post-issue number of equity shares. In case of listed companies it is the product of post issue number of equity shares and average of the weekly high and low of the closing prices during last 12 months is used to calculate market capitalisation. Net worth means paid-up equity capital + reserves excluding revaluation reserve - miscellaneous expenses not written off - negative balance in profit and loss account to the extent not set off.

3.

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The stock exchanges levy listing fees on the companies, whose securities are listed with them. The listing fee has two components-initial fee and annual fee. While, initial fee is a fixed amount, the annual fee varies depending upon the size of the company. NSE charges Rs. 7,500 as initial fees. For companies with a paid-up share and/or debenture capital of less than or equal to Rs. 1 crore annual listing fees is Rs. 4,200. For companies with a paid-up share and/or debenture capital of more than Rs. 50 crore, the annual listing fees is Rs. 70,000 plus Rs. 1,400 for every additional Rs. 5 crore or part thereof. A number of requirements, under the SC(R)R, the bye-laws, the listing agreement have to be continuously complied with by the issuers to ensure continuous listing of its securities. The listing agreement also stipulates the disclosures that have to be made by the companies. In addition, the corporate governance practices enumerated in the agreement have to be followed. The Exchange is required to monitor the compliance with requirements. In case a company fails to comply with the requirements, then trading of its security would be suspended for a specified period, or withdrawal/delisting, in addition to penalty as prescribed in the SC(R)A.

Trading Mechanism
NSE was the first stock exchange in the country to provide nation-wide, anonymous, orderdriven, screen-based trading system, known as the National Exchange for Automated Trading (NEAT) system. The member inputs, in the NEAT system, the details of his order such as the quantities and prices of securities at which he desires to transact. The transaction is executed as soon as it finds a matching sale or buy order from a counter party. All the orders are electronically matched on a price/time priority basis. This has resulted in a considerable reduction in time spent, cost and risk of error, as well as frauds, resulting in improved operational efficiency. It allows for faster incorporation of price sensitive information into prevailing prices, as the market participants can see the full market on real time basis. This increases informational efficiency and makes the market more transparent. Further, the system allows a large number of participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth and liquidity of the market. A single consolidated order book for each stock displays, on a real time basis, buy and sell orders originating from all over the country. The book stores only limit orders, which are orders to buy or sell shares at a stated quantity and stated price, are executed only if the price quantity conditions match. Thus, the NEAT system provides an Open Electronic Consolidated Limit Order Book (OECLOB), which ensures full anonymity by accepting orders, big or small, from members without revealing their identity. Thus, provides equal access to all the investors. A perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety, is also provided. The trading platform of the CM segment of NSE is accessed not only from the computer terminals, but also from the personal computers of the investors through the Internet and from the hand-held devices through WAP. SEBI has allowed the use of internet as an order routing system for communicating investors’ orders to the exchanges through the registered brokers. These brokers should obtain the permission from their respective stock exchanges. In February 2000, NSE became the first exchange in the country to provide web-based access to investors to trade directly on the Exchange followed by BSE in March 2001. The orders originating from the PCs of investors are routed through the internet to the trading terminals of the designated brokers with whom

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who are mobile and want to trade from any place. The link between the two is through a high-speed optical fiber and the transaction data is backed up on near real time basis from the main site to the disaster back-up site to keep both the sites synchronized with each other all the time.85 Secondary Market – Trading ISMR they have relations and further to the exchange. there is uniform response time of less than 1. Technology With the developments in communication and network technologies. which if published. It also prohibits communicating. NSE has also put in place NIBIS (NSE’s internet Based Information System) for on-line real-time dissemination of trading information through its website. is a state of-the-art client server based application. Price sensitive information for a security is any information. As part of its business continuity plan. there has been a paradigm shifts in the operations of the securities market across the globe. SEBI has also allowed trading through wireless medium or Wireless Application Protocol (WAP) platform. This site at Chennai is a mirror replica of the complete production environment at Mumbai. counseling or procuring such information from any other person to deal in securities of any company on the basis of such information. NSE is the only exchange to provide access to its order book through the hand held devices. NSE has established a disaster back-up site at Chennai along with its entire infrastructure. including the satellite earth station. It has been continuously undertaking capacity enhancement measures so as to effectively meet the requirements of increased users and associated trading loads. bring about innovations in products and services. It uses satellite communication technology to energize participation from more than 2.7%. Technology has enabled organisations to build new sources of competitive advantage. After these orders are matched. For all trades entered into the NEAT system. NSE is the first exchange in the world to use satellite communication technology for trading and also has the largest VSAT-based trading network in the world and largest VSAT network for any purpose in the Asia Pacific region. The SEBI (Prohibition of Insider Trading) Regulations. www.nseindia. which use WAP technology. At the server’s end all the trading information is stored in an in-memory database to achieve a minimum response time and maximum systems availability for users. It has uptime records of 99. The system also ensures data integrity with past record of single error in 10 million bits. Stock exchanges all over the world have realised the potential of IT and have moved over to electronic trading systems. which have wider reach and provide a better mechanism for trade and post trade execution. 1992 prohibits an insider from dealing (on his own behalf or on behalf of others) in listed securities on the basis of ‘unpublished price sensitive information’. Given the importance of technology in shaping the securities industry.com .800 VSATs from approximately 365 cities spread all over the country. NSE has been emphasizing on innovations and sustained investments in technology. is likely to affect its price. the transaction is executed and the investors get the confirmation directly on their PCs. This particularly helps those retail investors.5 seconds. NSE’s trading system called the National Exchange for Automated Trading (NEAT). Trading Rules Insider Trading Insider trading is considered an offence and is hence prohibited. and provide new business opportunities.

If a person is found prima facie guilty of insider trading. SEBI. and any major policy changes. The regulations give enough scope for existing shareholders to consolidate and also cover the scenario of indirect acquisition of control. fraudulent and unfair trade practices.ISMR Secondary Market – Trading 86 It includes information regarding the financial results of the company. 1997. • Attempts by persons having 75% or more to acquire more shares. SEBI can investigate into violations committed by any person. with intent to deceive another party or his agent or to induce him to enter into the contract. including an investor. issuer or an intermediary. The regulations define frauds as acts committed by a party of the contract or by his agent. market intermediaries and professional firms. and unfair trade practices relating to securities. 1995 empowers SEBI to investigate into cases of market manipulation. Based on the report of the investigating officer. suo moto or upon information received by it. takeovers. The regulations specifically prohibit market manipulation. As per the regulations. 1998. officers and major shareholders (holding more than 5% shares/voting rights). the mandatory public offer is triggered on: • crossing the threshold limit of 15%. In order to strengthen insider trading regulations. reporting of shareholding/ownership. Under these regulations. www. is empowered to investigate/inspect these allegation of insider trading. mergers. Unfair Trade Practices The SEBI (Prohibition of Fraudulent and Unfair Trade Practices in relation to the Securities Market) Regulations. then SEBI may prosecute persons in an appropriate court or pass such orders as it may deem fit. a company is permitted to buy back its shares from: (a) existing shareholders on a proportionate basis through the offer document. its employees. The applications for takeovers are scrutinised by the Takeover Panel constituted by the SEBI.com . • crossing the creeping acquisition limit of 15% or more but less than 75% of shares or voting rights of a target company. SEBI has mandated a code of conduct for listed companies. The companies are also mandated to adopt a code of disclosure with regards to price sensitive information. misleading statements to induce sale or purchase of securities. analysts. Buy Back Buy back is done by the company with the purpose to improve liquidity in its shares and enhance the shareholders’ wealth. Under the SEBI (Buy Back of Securities) Regulations. The Regulations were formulated so that the process of acquisitions and takeovers is carried out in a well-defined and orderly manner following the principles of fairness and transparency. SEBI can initiate action for suspension or cancellation of registration of an intermediary. intended declaration of dividends. Takeovers The restructuring of companies through takeover is governed by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations.nseindia. The insider trading regulations require initial and continuous disclosure of shareholding by directors. amalgamation. issue of securities or buy back of securities. on the basis of any complaint or otherwise. etc. market rumours.

which fail to establish connectivity with both the depositories on the scheduled www. To curb excessive volatility. This was initially introduced for institutional investors and was later extended to all investors. The companies. whichever is breached earlier (discussed in details in chapter 5). an offer for buy back should not remain open for more than 30 days. The payments for accepted securities has to be made within 7 days of the completion of verification and bought back shares have to be extinguished and physically destroyed within 7 days of the date of the payment. To ensure completion of the buy back process speedily. which are traded on CM segment of NSE). the Exchange has fixed operating range of 20% for such securities. Though. Further. Further. The company has to disclose the pre and post-buy back holdings of the promoters. SEBI has prescribed a system of circuit breakers. Demat Trading A depository holds securities in dematerialised form. the investors have a right to hold securities in either physical or demat form.87 (b) (c) Secondary Market – Trading ISMR open market through stock exchanges using book building process. • Daily price bands of 5% (either way) on a set of specified securities. individual scrip-wise price bands has been fixed as below: • Daily price bands of 2% (either way) on a set of specified securities. 15% and 20%. the regulations have stipulated time limit for each step. The circuit breakers bring about a nation-wide coordinated halt in trading on all the equity and equity derivatives markets. It may suo-moto cancel the orders in the absence of any immediate confirmation from the members that these orders are genuine or for any other reason as it may deem fit. and shareholders holding odd lot shares. For auction market the price bands of 20% are applicable. For example. The verification of shares received in buy back has to be completed within 15 days of the closure of the offer.com . • Price bands of 20% (either way) on all remaining securities (including debentures. • No price bands are applicable on scrips on which derivative products are available or on scrips included in indices on which derivatives products are available. and also effects transfer of ownership through book entry. The breakers are triggered by movement of either S&P CNX Nifty or Sensex. in the cases of purchases through stock exchanges. As an additional measure of safety. warrants. the NSE views entries of non-genuine orders with utmost seriousness as this has market-wide repercussion.nseindia. Circuit Breakers Volatility in stock prices is a cause of concern for both the policy makers and the investors. • Daily price bands of 10% (either way) on another set of specified securities. It maintains ownership records of securities in a book entry form. An index based market-wide circuit breaker system applies at three stages of the index movement either way at 10%. In order to prevent members from entering orders at non-genuine prices in these securities. the company making an offer for buy back will have to open an escrow account on the same lines as provided in takeover regulations. preference shares etc. SEBI has made it compulsory that trading in securities should be only in dematerialised form.

Since the introduction of the depository system.071 214 1. 0.005 213 1. it is charged @ Re. 10.720. NSDL and CDSL. however. and stamp duty.002%). Table 4-4a: Progress of Dematerialisation: NSDL & CDSL Parameters of Progress Companies — Agreement signed Companies — Available for Demat Market Cap. on the basis of his total turnover. but charge their DPs who are free to have their own free structure for their clients.810 4.628 4.064 211 441 17 629. traded and settled in demat form. are presented in Table 4-4a.803 4. the number of companies connected to NSDL and CDSL were 5.15% has been charged.010 1. of Investor Accounts Demat Quantity (Mn.nseindia.159 14.203. of Companies available (Rs.369 8. However.761 6.212 and 4.5% of the contract price.628 362 189 414 17 247. SEBI turnover fee.000 or part thereof (i.701 billion. which are to be collected by the stock exchanges.) Number of Depository Participants Number of DP Locations Number of Stock Exchanges Connected No. Stamp duties are payable as per the rates prescribed by the relevant states. However. respectively.e.5% of contract price.719 9 5. The number of dematerialised securities have increased from 76. The depositories.039 Charges for Services As per SEBI Regulations. is required to pay annual turnover charges.212 11.795.7 billion at the end of March 2004.720 1.604 68. The depositories provide depository services to investors through depository participants (DPs).1 lakh) of the turnover.9 billion at the end of March 2003 to 97. Bn.) Source: NSDL & CDSL. In order to share the benefits of efficiency. if the securities are not delivered. Bn.01%) of the value of security at the time of its purchase/sale as the case may be. NSDL March-03 4. During the same period the value of dematerialised securities has increased from Rs. At present a trading member is required to pay the exchange transaction charges @0.ISMR Secondary Market – Trading 88 date as announced by SEBI. it is levied @ 20 paise for every Rs. In Maharashtra. their securities are traded on the ‘trade for trade’ settlement window of the exchanges. every stockbroker.) Demat Value (Rs.718 9 3. www. 10.513 March-04 5.757 5. 10.216 5.000 or part there of (0. There are instances wherein brokerage as low as 0.004% (Rs. The charges levied on DPs by NSDL and CDSL are presented in Table 4-4b.393 83. 5. The maximum brokerage chargeable by a broker is fixed at 2. dematerialisation has progressed at a fast pace and has gained acceptance amongst the market participants. The details of progress in dematerialisation in two depositories. have been reducing their charges from DPs over a period of time.662 March-03 4.875 billion to Rs. All actively traded scrips are held. This is inclusive of the brokerage charged by the sub-broker. 1 for every Rs.690 9. service tax. NSE has been reducing the transaction charges over a period of time. 4 per Rs. exclusive of statutory levies like.com . They do not charge the investors directly. which should not exceed 1.210 362 CDSL March-04 4. At the end of March 2004. the brokerage charged varies from clients to clients. viz.

12 per debit instruction Nil for credit instruction Rs. FIIs have to necessarily give and take delivery of securities sold and bought.89 Secondary Market – Trading ISMR Table 4-4b: Service Charges levied by the Depositories (March 2004) Depositories Services Dematerialisation Rematerialisation Custody Settlement NSDL Nil Rs. day-to-day tracking and giving effect to corporate actions on individual stocks. in technical partnership with Standard & Poor’s. NSE and CRISIL. It accounted for 56. These are maintained professionally to ensure that it continues to be a consistent benchmark of the equity markets. S&P CNX 500. S&P CNX Defty. CNX Midcap 200. As per the RBI guidelines. 12 per instruction Rs. all FII transactions are to be routed through a registered member of a recognised stock exchange in India. Index Services A stock index consists of a set of stocks that are representative of either the whole market.97% of total market capitalisation of CM segment of NSE as at www. the total FII investment should not exceed 24%. A MF cannot invest more than 10% of the NAV of a particular scheme in the equity shares or equity related instruments of a single company. which involves inclusion and exclusion of stocks in the index. These indices are monitored and updated dynamically and are reviewed regularly. Institutional Trades Trades by Mutual Funds and Foreign Institutional Investors are termed as Institutional trades. A MF under all its schemes is not allowed to own more than 10% of any company’s paid-up capital. followed by the CNX Nifty Junior.com .nseindia. 10 per certificate Nil 0. 1996. however. It helps to measure the change in overall behaviour of the markets or sector over a period of time. S&P CNX Nifty is a well diversified 50 stock index accounting for 24 sectors of the economy. sectoral indices and customised indices. 8 per debit instruction Nil for credit instruction Rs. The most popular index is the S&P CNX Nifty. 10 per certificate Rs. as applicable. have jointly promoted the India Index Services & Products Limited (IISL). or a specified sector. be increased up to the sectoral cap/statutory ceiling. 12 per instruction Nil Not available Pledge Creation Pledge Closure Pledge Invocation Securities Borrowing Source: NSDL & CDSL. They are allowed to do only ‘delivery-based’ transactions. 6 per ISIN per annum Rs. 5 and a maximum of Rs. IISL is the only specialized organization of this type in the country. S&P CNX Industry indices (for 73 industries) and CNX IT Index. Transactions by MFs in the secondary market are governed by SEBI (Mutual Funds) Regulations. The investments by FIIs are governed by the rules and regulations of the RBI and the SEBI. As per the SEBI guidelines. provided the Indian company’s board of directors and also its general body approve it. 25 per instruction Nil Nil Rs. This can. 25 per instruction CDSL Nil Rs. The IISL provides stock index services by developing and maintaining an array of indices for stock prices. IISL maintains a number of equity indices comprising broad-based benchmark indices. however.01% of the transaction value subject to a minimum of Rs. each FII can invest up to 10% of the paid-up capital of a company.

the liquidity levels became increasingly lower. After carrying out a number of iterations. 43. 8.689. The stocks included in the Nifty index are selected on the basis of their impact cost. While it has increased from Rs. The volumes have risen to Rs.. The traits of recovery in the market are visibly seen for the last two years.809. The consistent increase in popularity of NSE is clearly evident from Annexure 4-6. ICSE..958. 28. Bangalore.093 million in 2002-03 and further to Rs. Hence the index set size of 50 stocks was chosen. weightage. Vadodara and Magadh observing the highest decline. liquidity and market capitalisation. it was felt that Indian stock market had comfortable liquidity at around 50 stocks.048.900 million in 2000-01.977 million in 2003-04. Ahmedabad. S&P CNX Nifty was introduced considering the fact that it would not only be used for reflecting the stock market behavior accurately. Futures contracts based on S&P CNX Nifty have also been launched at the derivative exchange at Singapore.233. NSE has emerged as the favoured exchange among trading members.180 million. which presents business growth of CM segment of NSE.204. Index futures and options have been launched based on S&P CNX Nifty index and on CNX IT Index. The composition of Nifty is reviewed at every quarter. Since its inception in 1994. NSE consolidated its position further as the market leader by contributing about 67. Most of the exchanges saw large scale declines in their trading volumes in the year 2003-04 with nine exchanges viz. Madras and OTCEI were the only ones showing growth trends in this period.713 million in April 2003 to Rs. The daily turnover on NSE averaged around Rs. Market Outcome Turnover – Growth and Distribution Trading volumes in the equity segments of the stock exchanges have witnessed phenomenal growth over the last few years.nseindia. 16.765 million in March 2004 (Table 4-6). It is calculated on-line and disseminated over trading terminals across the country. Five exchanges viz. It is the only Indian index-based derivative product traded on a foreign exchange. Beyond 50. beta and monthly returns of the S&P CNX Nifty stocks for the period April 2003-March 2004. It has become the most popular and widely used stock market indicator in the country. CNX Nifty Junior accounts for 11. Pune. but also for modern applications such as index funds and index derivatives.ISMR Secondary Market – Trading 90 end-March 2004. The total traded value of all Nifty stocks is approximately 77% of the traded value of all the stocks on the NSE. 9. Calcutta. The comparative picture of turnover of regional stock exchanges and turnover of NSE terminals www. The index is calculated afresh every time a trade takes place in any of the index stock. 10. NSE now reports higher turnover from its trading terminals in most of the cities than their corresponding regional exchanges.289 million in this year. In percentage terms there has been a growth of 67.com .820 million in 1998-99 to Rs. Uttar Pradesh.6% of the market capitalization in NSE. it witnessed a slump during 2001-02 registering volumes of only Rs. Annexures 4-2 to 4-5 present the market capitalisation. The monthly trading value of the CM segment on NSE increased from Rs. Hyderabad.8% of the total turnover. NSE. 1.29% in 2003-04 over the previous year’s volume (Table 4-5). 489. Delhi. BSE.

42 0.00 100.500 7.805 9.00 0.873 14.167 20.0 1.0 0.958 9.673 46.411 10.012.140.531 12.00 0.725.00 0.01 0. Source: SEBI Annual Report 2003 .726 1.937 57.0 0.719 11.00 0.91 Secondary Market – Trading ISMR Table 4-5: Turnover on Stock Exchanges in India* Stock Exchanges 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 NSE Mumbai Calcutta Uttar Pradesh Ahmedabad Delhi Pune Ludhiana Bangalore ICSE Hyderabad SKSE Madras Madhya Pradesh Vadodara OTCEI Guwahati Cochin Magadh Bhubaneshwar Coimbatore Jaipur Mangalore Total Turnover (Rs.78 32.109.00 0.00 0.366.760 11.857 788.532 19.033.043 29.795.00 0.635 507.0 0.087.978 530.220 47.343 446.329 329.1 0.086 23.287 11.104 249.543 11.610 12.103.941 10.5 0.510 45.889 7.169 63.04 0.5 19.466 1.654 450.500 11.00 0.1 0 0 0 0 9.215 12.00 0.04 Table 4-6: Stock Market Indicators .339 BSE 208.902 615.00 0.051.179.00 0.975 50.204.00 0.com .816 7.255 6.342.030.670.410 11.00 0.00 0.00 0.00 100.00 0.953 928.012.925 9.048.292 548.120.887 3.7 0 0 0 0 16.191.0 0.330.634.52 1.068 12.0 0.00 0.586 111 18.995.267.977 Share in Turnover (%) 2002 -03 63.505 8.760 BSE 5.85 31. www.713 546.259 46.004.67 1.00 0.532 Average Daily Turnover NSE 24.00 0.0 648 46.nseindia.248 27.00 0.515 24.00 2003 -04 67.0 0.00 0.634 154.449 8.73 0.289 BSE 10.337 18.01 0.995.0 5.343.) 2002 -03 6.00 0.00 0.732 65.785.0 1.275 117.155.12 0.072 22.084 19.303 6.689.0 0.155 656.0 0.687 1.776 853.805 Market Capitalisation (end of period) NSE 5.6 0.00 0.209.181 1.00 0.759.00 0.093 2003 -04 10.9 0. Mn.962.306.) Month Turnover NSE Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 2003-04 489.399 147. Mn.443 50.226 225.030.00 * Excludes turnover in WDM and derivatives segments of Exchanges.068 Source: NSE & Monthly SEBI Bulletins.Monthly Trends on NSE and BSE (Rs.0 0.327 34.858 1.0 25 1.757 363.658.479 9.00 0.304 6.28 0.161.671 43.339 5.4 157.856 5.445 34 0.5 0.765 10.609.00 0.203 514.00 0.544 11.00 0.6 0.068.00 0.486 26.00 0.733.317 23.209.868 10.60 0.295 42.916 31.008.456 1.

423 2.135.472.102 65. in 2003 -04.430 111.865 316.030. but also in the international markets.634 0 18 0 46 0 0 0 5 26 0 0 0 5 0 0 2003 -04 NSE 4. Source: SEBI & NSE.800. The sectoral distribution of turnover has undergone significant change over last few years.140.340 155.259 1.908 1.240 34.302 10.845.357 106.04% in 2003 .423 743.445 117.732 1 648 65.646 141.845. Not only in the national arena.897 Exchange 3.503 47.806 329. their share has risen sharply to 37. classified according to different sectors.387 2.845.586 147.908 4.03 to only 31. which was nearly more than 23% in 1998-99.975 Exchange 5. NSE has been successful in creating a niche for itself.020 54.620 7.720 147. The share of manufacturing companies in trading volume of top ‘50’ companies. Mn. The share of information technology (IT) companies in trading volume has fallen from 74.423 2.472.04.703 52.078 2.71% in 2002 .057 26.399 111 154.792 7.03% 2002 -03.777 54. Table 4-8 presents the share of top ‘50’ companies at NSE.204 77.217 193.510 0 0 1 20 0 1.125 42.505 49.009 0 1 1 0 0 0 0 0 0 Note: The NSE figures relate to its volumes in the CM segment (not WDM and Derivatives segments) only from the concerned city.566 295 11.532 158 1 19. According to reports of FIBV.070 3.446.570 16.472. Table 4-7: Turnover on NSE Terminals vs. in the calendar year 2003.ISMR Secondary Market – Trading 92 at different cities is presented in Table 4-7. in turnover and market capitalisation.167 77.970 265. in terms of trading intensity NSE ranked 3 rd next only to NASDAQ and NYSE.908 4. witnessed a sharp decline to 2.670 1.221 27.com . while all other figures represent all India turnover of the concerned exchange.160 221.440 197. Turnover on other Exchanges in the City (Rs. Further.nseindia.077 82.66%.059 46.275 34 45. www.) Stock Exchange/Exchange City 2002 -03 NSE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Mumbai (BSE) Mumbai (OTCEI) Mumbai (ICSE) Calcutta Delhi Ahmedabad Uttar Pradesh (Kanpur) Ludhiana Pune Bangalore Hyderabad Cochin Chennai (Madras) Madhya Pradesh (Indore) Magadh (Patna) Vadodara Coimbatore Bhubaneshwar Jaipur Guwahati Mangalore Rajkot 2.

100 8.416 3.094 1.00 18.270 2.801 290.00 31.82 66.71 100.580 111.15 11. Fast Moving Consumer Goods I.-Mar) Manufacturing Financial Services F.958.590 324.007 62.T.020 1.065.63 13.72 7.404 343.343 81.79 7.144.62 19.045.450 323.600 229.84 17.630 194.311.03 2.170 275.58 4. Information Technology .08 100.109 175.380 95.775 108.T.56 2.138.551.085 102.53 11.81 13.000.289.091 1.10 9.350 242.426 2.181 1.) 1995-96 (Nov.140 333.00 23.46 0.234 452.338 340.881 12.591 4.294 25.693.56 75.709 882.514 378.814.030 878.326.454 183.M.com 499.421 1.259 45.210 3.070 801.03 10.33 2.73 0.84 100.C.587 1.00 1996-97 1997-98 Turnover % to Total 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 93 www. mn.950 242.476 3.247.66 8.05 11.227.164.711.421.81 74.05 2.00 34.295 482.940 8.458 1.338 907.01 15.930 3.25 2.830 2.41 7.49 17.576 ISMR F.M.758 355.00 54.484 90.00 37.576 13.381.559 2.545.810 2.73 18.63 100.18 11. Pharmaceuticals Others Total 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Market Capitalisation % to Total 2002-03 2003-04 1995-96 (Nov.847.77 0.002.883 0 47.48 15.11 49.53 4.618 3.78 4.39 100.159.397.127.88 35.00 1.71 36.571.357 629.89 9.208 193.152 9.00 37.522.260 49.G.M.95 24.304 210.55 18.76 41.987 84.790 265.85 14.621.00 2.793 1.39 12.80 4.13 6. Pharmaceuticals Others Total 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 1995-96 (Nov.68 100.718 1.13 12.98 100.850 1.387.850 225.710 1.613 591.82 7.29 14.-Mar) 79.857.T.827 298.09 100.623 252.814 1.130 540.237 210.30 22.nseindia.092 795.29 17.090 424.456.62 100.124 7.245.61 2.41 9.039 0 1.762 80.22 31.850 565.22 2.39 2.170 132.220 967.00 8.00 1.63 47.200 1.590 3.230 4.12 100.740 5.04 2. I.930 1.63 5.27 100.180 364.970 561.698.85 1.380 284.39 5.76 7.25 1.) 1995-96 (Nov.830 1.972 2.83 100.00 438.922 256.734.70 100.070 4.71 1.00 0.15 100.76 100.95 10.516.12 0.094 1.187 19.621.003 3.524.279 349.37 6.181 1.61 5.07 0.440.005 942.480 1. mn.92 29.740 598.840 1.248.-Mar) Manufacturing Financial Services F.80 18.06 0.52 26.075 425.375 7.G.G.555 226.608.34 2.600 804.920.241 1.05 1.C.14 3.260 760.271 7.63 6.128.729 362.09 18.395.14 40.00 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Secondary Market – Trading 1.41 10.715 1.00 9.742 4.800 4.082 380.00 20.064.510 4.060.683 328.56 1.05 34.48 2.357 44.01 100.00 457.33 0.43 15.-Mar) 62.040 1.66 13.90 10.00 20.00 6.58 100.28 6.864 3.966 Companies Amount (Rs.182 142.883 1.39 100.25 43.773. I.C.00 12.476 0 41.146.Table 4-8: Distribution of Turnover and Market Capitalisation of Top ‘50’ Companies listed at NSE Companies Amount (Rs.188 811.099.653.57 0.668.

81 20.) 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Source: NSE.60 91.59 45.04 55.03 88.55 72.32 81.63 29.44 91.93 82. Ten most active index securities accounted for 44.92 86.71 82.56 52.32 42.86 7. top ‘5’ members accounted for only 11.com .02 49.15 61.29 16.22 72.03 95.67 18.6% of turnover.ISMR Secondary Market – Trading 94 The share of top ‘5’ securities in turnover has been on a declining trend since the past few years from 52.43 40.nseindia.46 95.66 34.37 28.76 12.98 93.5% of market capitalisation at the end of December 2003.37 48.86 36.24 77.41 33.2% of turnover in India and top ten index securities in terms of equity base accounted for 36.19 10.59 11.9: Percentage Share of Top ‘N’ Securities/Members in Turnover of NSE No.03% over the same period.07 95.56 39.89 95.56 10.19 97.76 92.11 59.73 7.94 6.5% to 91. 18.79 53.95 44. www.) 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Members 1994-95 (Nov.41 44.60 16.99 12.24 47. Table 4.66 97.90 95.58 26. Member-wise distribution of turnover indicates increasing diffusion of trades among a larger number of trading members over the years.31 88.34 61.61 19.98 52.77 82.96 48.65 5.40 59.41 17.96 12.90 62.36 44.-Mar.38 91.69 94.96 85.21 31.4% of total turnover.14 10.70 92.49 44.8 64. while top ‘100’ members accounted for 61.29 7.08 10.-Mar.41 84.14 93.87 68.54 97.56 89.03 10 25 50 100 Turnover in India seems to be more concentrated in comparison to that in other comparable markets (international) as may be seen from Table 4 -10.26 11. During 2003-04.07 30.87 98.57 91.98 90.12 58.71 41.93 30.91 95.17 67.78 23.05 81.92 55.15 44.57 29.00 23.77 22.16 79. Trading in top ‘100’ securities also has witnessed a decline from 97.2% in 2000-01 to 31.98 84.78 7.04% in 2003-04 (Table 4-9). of Securities/Members 5 Securities 1994-95 (Nov.58 31.

which is necessary for faster execution of trades. which used to dominate in terms of market capitalization with more than 35% in the year 1998-99. It provides real time on-line market information including stock quotes and order screens. rose sharply from August 2003 onwards to reach a peak of 2014.5 56.451 million constituting 3.0 43.2 58.8 31. however.0 16.65 in January 2004. The market capitalisation of NSE and BSE as at end March 2004 amounted to Rs. Similarly BSE also gave returns to the tune of 83. which can be accessed easily using standard browsers. which remained subdued for the early part of 2003.9 58.5 Share of 10 Most Active Index Stocks in Turnover 12. have shown declines in 2001-02 and 2002-03. Market Capitalisation The market capitalisation for securities available for trading on the equity segment of NSE and BSE witnessed enormous growth over the previous years (Table 4-6).6 39. The success of internet trading in India. 11.45% of the total trading volume.1 42. will depend on expansion of internet bandwidth.7 24. The index rose by 81.5 67. These members in turn have registered 413.7 74.068 million respectively. NSE has permitted 70 members on its CM segment the web based access to its trading system.0 Turnover 46.2 75. were routed and executed through the internet.14% in 2003-04 as compared to its previous years close (Table 4-11). NEATiXS a product of the NSE.5 84. Sectors like manufacturing.5 20.13% share in market capitalization of the top 50 companies.7 25.5 44.1 72.209.2 36.IT helps brokerage firms to conduct internet trading. 379.3 70.760 million and Rs. The S&P CNX Nifty index.com .2 Source: S&P Emerging Stock Markets Factbook 2004 At the end of March 2004. allowing investors to place orders from their personal computers.95 Secondary Market – Trading ISMR Table 4-10: Market Concentration in Emerging Asian Markets: End December 2003 (In per cent) Market Index Stock’s Share of Market Capitalisation China Thailand Taiwan Korea Malaysia India 60. 12. www. However.454 clients for web based access.38% in the said period. Prices The year 2003-04 proved to be good for all the major indices in the world. A sharp change in the shares of different sectors in market capitalisation is observed over the years (Table 4 -8).nseindia.012. they witnessed a turnaround in 2003-04 having registered 31. About 235 lakh trades for Rs.0 34.2 Share of 10 Largest Index Stock in Market Capitalisation 27.

90 5590.17 7972.2002 31.90 49. Volatility The stock markets witnessed maximum volatility in January 2004 due to the fear of possible ban on the use of Participatory Notes (P-Notes).com .94 1845.94 5271. NASDAQ index has come to symbolise the new economy or technology stocks. BSE & Bloomberg.03. the market participants.40 -12.70 2000.20 3048.18 -27.74 -23.nseindia.55 3469.38 46.80 978. Chart 4-1 plots the daily movement in S&P CNX Nifty. Sensex and NASDAQ index.2003 31.94 22.92 10403.2004 Change during 2002-03 (%) -13.26 S&P CNX Nifty BSE Sensex Hang Seng Dow Jones Nasdaq Nikkei FTSE Source: NSE.12 -21.35 11032.30 1771.87 29.71 3613.03.05% on Nifty www.18% and 2.13 1341.46 Change during 2003-04 (%) 81.50 Of late.17 46.32 -27.45 7992.67 10381.68 -31. analysts and investors have related the developments in domestic equity markets with the NASDAQ.ISMR Secondary Market – Trading 96 Table 4-11: Movement of Select Indices on Indian/Foreign Markets Index 31. During most part of the year.72 8634.60 12681.03.14 83.39 4417.63 11715. the stock prices in India are synchronized with that in Nasdaq.35 11024. wherein it was 2. 1129.

21 0.com .43 17.10 1555.31 0.906.90 S&P CNX Nifty Volatility (%)** 1.05 1.96 5.75 1809.02 1.75 1800.69 1.15 17.04 1.nseindia.65 12.88 13.73 4.55 1417.244.55 16.50 1.84 14.607.14 11.95 15.82 5.590.87 5.453.15 1185.57 * As on the last trading day of the month.75 3.667. Sensex and NASDAQ. in May 2003 lowest volatility was witnessed at 0.60 Sensex Volatility (%)** 1.36 18.55 16.792.81 1. Volatility and P/E Ratio: April 2003 to March 2004 Month/Year Index Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 934.86 18.04 1.80 1134.38 0.74 20.95 12.96 2.81 20. www.23 17.74% and 0.96 19.51 5.72% for S&P CNX Nifty and Sensex respectively.838.695.45 P/E Ratio* 12.18 1.72 1.24 18.61 4.90 1615.70 15.25 1879.94 14. Table 4-12: Stock Market Index.67 5.73 19.79 3.11 15.044.91 2.48 P/E Ratio* 13. Chart 4-2 presents the volatility of S&P CNX Nifty.44 1.97 Secondary Market – Trading ISMR and Sensex. ** Volatility is calculated as standard deviation of the natural log of returns in indices for the respective period.24 4.05 1006.74 0.69 1. However.01 18.70 Index 2.180.959.52 1. respectively (Table 4-12).52 1.85 1356.30 0.13 3.30 1771. Source: SEBI & NSE.94 1.36 1.

24 1.02 1.96 Returns in Indian Market The performance of S&P CNX Nifty and various other indices over different periods of last one month to 12 months is presented in Table 4-14.48 1.35 3 months -5.44 2627.38 1.14 1.94 1.02 11.31 717.30 17315.94 15056. A common phenomenon observed was that some of the indices provided substantial gains in the longer period of 6 months and one year.54 433.26 2016.18 1818.27 21370.06 1.94 1 year 81.85 1.30 1.53 2441.25 1.79 2175.44 134.81 1.45 20599.43 2303.11 11351.58 1. 3 months.15 2619.com .81 95.31 139.20 670.92 1.90 1465.98 6 months 25.71 1.67 -17.14 107.97 1.83 2464.31 1.89 0.00 2785.39 2457.15 5.54 465.90 1615.53 1.38 1.16 2527. however the investments in the same a year back (March 2003) gave out positive returns of 81.13 1.97 2.90 1952.85 1.65 2.01 491.37 1862.39 1.23 2624.30 1771.nseindia.46 1228.16 1.34 1.38%.ISMR Secondary Market – Trading 98 The volatility across different sectoral indices varied widely (Table 4 -13).35 0.75 1800.95 8.65 1.10 1. For the month of April 2003.64 1604.86 1.01 1.53 2323.56 www.88 43.61 2432.44 1.41 2508.20 19372.96 2459.75 1809.25 0.08 1341.26 2234.85 1356.55 1417.85 -2.17 623.70 1.61 1.92 0.96 1.91 336.25 2490.69 1.94 2.61 2.04 28.18 1.25 1879.05 1.23 2508.54 721.28 1.38 1.71 9.27 2863.82 -2. 934.93 1.69 1.51 1.38 0.08 2083.38 2751. CNX Midcap 200 and CNX IT index proved to follow the same trend as of Nifty.40 13002.74 -4. The investments made in S&P CNX Nifty securities in February 2004 did not yield having positive returns.05 1006.94 2202.20 2. Table 4-13: Performance of Sectoral Indices Month/Year S&P CNX Nifty CNX FMGG Monthly Closing Prices CNX IT CNX Finance S&P CNX Petrochemicals S&P CNX Pharmaceutical S&P CNX Nifty CNX FMGG Average Daily Volatility (%) CNX IT CNX Finance S&P CNX Petrochemicals S&P CNX Pharmaceutical Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Source: IISL.33 2165.81 1.53 687. It reveals that the indices have performed with varying degrees over varying periods.29 568. Table 4-14: Performance of Select Indices as at end March 2004 (In per cent) 1 month S&P CNX Nifty S&P CNX 500 S&P CNX Defty CNX Nifty Junior CNX Midcap 200 CNX IT Index CNX Bank Index Source: IISL -1.27 1.98 1719.38 371.98 169.23 1.15 1185.13 10993.24 1386.55 18550.28 2243.84 2.68 1.96 1.99 2.40 2.80 1134.80 1.42 13675.50 1.93 1. but did not give encouraging returns for the shorter periods of 1 month.41 -5.12 38.52 1.47 -0.14%.38 2694.37 1.60 20644.72 29.87 2.76 2.33 1. the volatility of CNX IT Index was 5.10 1555.68 2.55 1.37 2.20%.39 1.40 -10.90 299.13 1477.34 1.99 0.80 23542.13 2417.95 1. while the Nifty volatility was 1.76 1.01 30.06 29.30 0.

The percentage of companies traded on BSE was quite low at 35. Junior Nifty BeES. Details about ETFs are available in Chapter 3. the “Nifty BeES (Nifty Benchmark Exchange Traded Scheme) is based on S&P CNX Nifty. the Nifty BeES. with that of S&P CNX Nifty Index for the year 2003-04 is presented in Chart 4-3.6% of companies traded.10% of companies traded on BSE were traded for more than 100 days during 2003-04. The trading value was Rs. The monthly closing prices of these sectoral indices are presented in Table 4 -13. CNX Bank Index namely. Prudential ICICI launched an ETF based on BSE Sensex.42 million. The CNX IT Index. However. 22. It was launched in December 2001 by Benchmark Mutual Fund. there were five ETFs launched on Nifty. and CNX IT Index.16% (Table 4-16). CNX FMCG Index. As on March end 2003. S&P CNX Petrochemicals Index. Exchange Traded Funds The first ETF in India.13 million Nifty BeES were transacted. Liquidity Many listed securities on stock exchanges are not traded actively. www. CNX FMCG Index though mirrored the movement of Nifty during the first half of the year. was the worst performer during the whole year. Liquid BeES and SUNDER (S&P CNX Nifty UTI Notional Depository Receipts Scheme). Bank BeES. Only 75.9% of companies traded at BSE during the year. S&P CNX Petrochemicals Index and the S&P CNX Pharma Index out-performed the Nifty. 637 trades involving 0. it under performed the benchmark index ‘Nifty’ during the later half. while that on NSE.nseindia. S&P CNX Pharma Index. namely SPICE (Sensex Prudential ICICI Exchange Traded Fund). Trading took place for less than 100 days in case of 24. During the month of March 2004.71% on NSE in March 2004 (Table 4-15). It is bought and sold like any other stock on NSE and has all characteristics of an index fund.com . CNX Finance Index.99 Secondary Market – Trading ISMR The comparative performance of five major sectoral indices. it has been 92. It is observed that during the entire period. Junior Nifty.93% as compared with 97. viz. S&P CNX Finance Index. and for less than 10 days in case of 5.

Table 4-16: Frequency Distribution of Companies Traded at NSE and BSE No.83 97.22 2.00 www.697 2.610 % to Total 75.349 7.54 29.32 93.363 2.79 96.41 5.87 1.25 0.com .00 No.03 98.87 1.63 30.37 1.99 2.55 31.76 2.343 7.15 1.692 1.55 97.ISMR Secondary Market – Trading 100 Table 4-15: Trading Frequency on NSE & BSE Month/Year Companies Available for Trading* Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 771 769 769 774 775 774 776 777 779 786 788 787 NSE Companies Traded 749 743 744 755 752 761 728 738 754 761 763 769 % of Traded to Available for Trading 97.610 % of Traded to Listed Securities 28.99 28.00 0. of Companies Traded at BSE 2003-04 1.30 35.88 1.305 7.07 1.245 2.354 7.25 1.335 7.27 28.118 2.98 96.094 2.00 0.93 Source: SEBI and NSE.37 0.230 2. Includes listed/permitted to trade companies but excludes suspended companies.347 7. 741 7 8 3 2 11 8 2 7 8 7 804 % to Total 92.368 7.312 2.04 23.10 2.338 7.71 Listed Securities 7.62 96.360 7. of Companies Traded at NSE 2003-04 Above 100 days 91-100 days 81-90 days 71-80 days 61-70 days 51-60 days 41-50 days 31-40 days 21-30 days 11-20 days 1-10 days Total Source: SEBI & NSE.81 94.00 0.87 100. * At the end of the month.nseindia.59 100.075 2.173 2.353 7.08 30.05 23.15 96.82 96.264 BSE Traded Securities 2.16 0.960 65 54 49 46 58 61 56 52 63 146 2.332 7.34 2.75 97.357 1.41 32.49 2.16 32. of Days Traded No.

75 billion by endMarch 2004.994 467.861 1.506 499.898 11.253 43.940 48.819 38.552 26.008 658.889 457.506 Net Investment (US$ Mn.237 13.419 534.827 132.746 17.164 411.516 69.935 155.855 78.528 2.240 149. The strong risk adjusted returns of the Indian market have led FIIs to make more allocations to India.167 5.708 21.617 680.443 Cumulative Net Investment (Rs. Table 4-17: Trends in FIIs Investment Period Purchases (Rs.963 117.729 63.com .539 186.506 571.) Sales (Rs.300 85.875 825.) 3.618 192.609 22.063 1.328 955.205 80.284 8.892 722.895 75.343 137.404 850 587 1.735 64.794 127. Mn.802 www.036 2.150 568. The FIIs registered a net investment of Rs.617 21.228 million (Table 4-17). the total number of FIIs registered with SEBI amounted to 540 against 502 in March 2003.242 15.952 84.122 111.475 122.887 127.900 23.650 -386 2.159 1.) 47.749 24.520 159.353 85.448.202 7.754 16. The FIIs net investment was highest during the month of October 2003.019.645 million.432 1.804 25.391 637.372 176. The cumulative net FIIs investment touched US$ 25.161 176.496 22.634 9.601 1.782 73.693 26. 457.786 602.963 69.575 58.384 203.019.710 990. This is so because. 76. As on end March 2004.947 161. 67.336 25.857 348.) 1.) Net Investment (Rs.129 262.466 788 1.449 16.846 562 9.972 561.605 34.) 47.892 66.854 18.845 101. they are the driving force in determination of market sentiments and price trends.635 928.243 28.574 -15.855 43.949 208 645 734 462 480 907 1. Mn. During 2003-04.339 2.077 447. when they made net purchases for a peak of Rs. Mn.645 9.242 20.745 59.335 19.501 88.755 67.342 87. they do only delivery-based trades and they are perceived to be infallible in their assessment of the market.647 789.012 16.703 246.335 641.228 35.418 Cumulative Net Investment (US$ Mn.348 27.925 30.219 99.941 63.555 740. Mn.311 96.396 15.650 443.199 470. the investments made by FIIs were a total turnaround compared to its performances in the earlier years.275 41.nseindia.101 Secondary Market – Trading ISMR Institutional Transactions Though the volume of trades done by FIIs is not very high as compared to other market participants.705 152.816 889.754 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Source: SEBI.420 85.

041 55.) Month/Year Gross Purchase Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 2003-04 Source: SEBI.128 43.743 27.711 Equity Gross Net Sales Purchases/ Sales 15.787 20.303 20.839 240. MFs were net buyers to the tune of Rs.772 762 -1.840 42.379 -5.079 227.901 -1.062 39.798 14.554 -1. 13.nseindia. October 2003 and February 2004 witnessed the MFs in a selling spree in the equity.510 64.474 50.381 36.897 12.485 28.451 31.793 13.268 37.306 17.514 26.712 27.624 20.735 38.378 17. June 2003.157 Gross Purchase 40.676 28.841 62.034 -2.097 30. Mn.173 46.838 22.948 1.521 9.126 33.956 711 4.541 22.283 25.699 Debt Total Net Gross Net Purchases/ Sales Purchases/ Sales Sales 17.322 35.604 31.760 13.190 54.828 26. www.975 26.692 ADR/GDR Prices A comparison of the price of ADR/GDR of a company with the domestic price of its share gives an idea about the extent to which domestic price of the security is at premium/discount to the international price. RBI permitted two-way fungibility for ADRs/GDRs.854 65.623 29. The extent of divergence between the prices of ADRs/GDRs and the domestic prices of the companies constituting the Instanex Skindia index is presented in Table 4-19. whereas in the debt instruments only February 2004 witnessed the MFs in selling mode.182 19.968 48.409 28. In the equity market.905 8. The months of April 2003.458 32.331 -3.287 19. which meant that the investors (foreign institutional or domestic) in any company that has issued ADRs/GDRs could freely convert the ADRs/GDRs into underlying domestic shares. 13.ISMR Secondary Market – Trading 102 During 2003-04.110 21.447 43.106 354.007 15.095 33. They could also reconvert the domestic shares into ADRs/GDRs.328 22.660 23.164 22.954 41. the MFs have invested more funds in the debt instruments than equity instruments (Table 4-18).420 21.337 1.com .759 54.157 million during 2003-04.170 33.386 26. depending on the direction of price change in the stock.415 31.887 631. September 2003.572 27.027 35.983 26.599 58. Table 4-18: Trends in Transactions by Mutual Funds (Rs.808 404.468 38.931 25.399 38.710 -8.950 50.653 31.759 16.878 367.422 31.

890 18.75 33.87 -1.284 14.54 4.398 4.25 2.271 1.948 million as against Rs.479 — — — 35.357 213.284 million in the previous year.75 -4.588 11.63 16.300 425 390 14 10. Mn.357 million as against Rs.430 4. 14.30 -0.14 35. there were 171 takeovers under exempted category involving Rs.21 2.84 48.28 5.79 3.59 5.) Year Objectives Change in Control of Management Number Value Consolidation of Holdings Number Value Substantial Acquisition Number Value Number Value Open Offers Total Automatic Exemption Number Value of Shares Acquired 1994-95 1995-96 1996-97 1997 -98 1998 -99 1999 -00 2000 -01 2001 -02 2002 -03 2003 -04 Total Source: SEBI.nseindia.404 17. August 31.55 5.00 1. 63.774 48.429 997 2.733 1.54 -1.24 Takeovers In 2003-04. 0 4 11 18 29 42 70 54 46 38 312 0 301 118 1.40 10.440 www.599 13.94 7.95 3.562 38.881 46.191 1 0 1 13 12 23 2 1 2 11 66 42 0 23 956 3.784 8.390 24.71 18.49 Premium/Discount to Local 15.163 711 1.63 4.152 25.451 2 8 19 41 65 74 77 81 88 65 520 1.104 63.719 36.022 18.10 16.43 10.96 2.891 million during the preceding year (Table 4-20).732 25. Reddy’s (A) HDFC Bank (A) Hindalco (G) ICICI Bank (A) Infosys Tech (A) ITC (G) L&T (G) MTNL (A) Ranbaxy Labs (G) Reliance (G) Satyam Computers (A) State Bank of India (G) VSNL (A) Wipro (A) Source: The Economic Times. there were 65 takeovers under open category involving Rs.144 3. Table 4-20: Substantial Acquisition of Shares and Takeovers (Value in Rs.952 76.496 1 4 7 10 24 9 5 26 40 16 142 1.19 6.08 -1.com . However. 2004 Weight (%) 100.948 151.55 5.182 556 924 5.103 Secondary Market – Trading ISMR Table 4-19: Divergence between ADR/GDR Prices and Local Prices (In per cent) Company Instanex Skindia Bajaj Auto (G) Dr.140 255 783 3.47 0.42 24. 15.966 58.90 3.138 — — — 93 201 252 248 276 238 171 1.030 16.891 15. 24.

10.000 million during 2003-04.nseindia. www.100 > 100 Total 287 80 26 7 7 6 413 84 33 20 3 1 4 145 25 27 8 4 0 1 65 22 7 9 2 1 3 44 9 10 2 0 0 2 23 18 19 11 5 1 8 62 11 8 11 1 3 13 47 456 184 87 22 13 37 799 <10000 >10000. Similarly about 52% of members had a turnover of less than Rs.>30000. It is observed that about 57% of the members had deployed a capital of less than Rs. Table 4-21: Distribution of Trading Members according to Capital/Turnover Turnover (Rs.>100000 20000 30000 40000 50000 100000 Total Note: Turnover considered for the above computation is Capital Market Turnover only.368 trading members at the end of March 2004.40 > 40 . Mn. however. while about 6% had turnover of more than Rs. Mn.) as on March 31.60 > 60 .000 crore. there were 9. the details of their performance are not readily available.>40000. 10.>50000.) (2003-04) Capital (Rs. while 5% have deployed more than Rs. 2003 < 20 > 20 . A brief detail with respect to 799 members of NSE is presented in Table 4-21.ISMR Secondary Market – Trading 104 Performance of Brokers As mentioned earlier.com .80 > 80 .>20000. 20 million at the end of March 2003. 100 million.

then the knowledge and procedures for trading in securities is directly pertinent to trading in commodity futures. If the commodity futures markets are used for purely financial purposes. Efforts can be speeded up if the institutions of the securities markets are used. (b) Commodity derivatives resemble securities: There are strong commonalities between commodity and securities derivatives.e. merchandising contracts). they have a close resemblance as far as trade practices and operations are concerned. A commodity futures contract is tradable and fungible. was set up to look into the convergence of securities and commodity derivative markets. www. Thus. under the chairmanship of Wajahat Habibullah. Some of the observations made by the committee with regards to the gains from convergence are as given below1. 2003 rescinded all its previous notifications which prohibited futures trading in a large number of commodities in the country.. however there are certain differences with regard to delivery and settlement. whose functions collide with the functions of the commodities derivatives regulator. The Government vide its notification on April 1. As a result. National Multi Commodity Exchange (NMCE).nseindia. Based on the recommendation of the Forward Markets Commission (FMC) three exchanges were granted recognition viz. Even though there are some differences in commodity and financial derivatives markets. (a) Opportunity to speed up the development of the commodity market: If derivatives in commodities resemble securities. An inter-ministerial task force. This was followed by a notification in May 2003 revoking the prohibition on non-transferable specific delivery forward contracts (i.105 Secondary Market – Trading ISMR Box Item 4-1 Commodities Market An important area wherein many new developments have taken place in the year 2003-04 has been the commodities futures market. the modern market institutions would become available to farmers in record time. These developments have set the stage for a prominent role for commodity futures trading which was in hibernation for four decades in the country.com . 1 Report of the inter-ministerial task force on convergence of securities and commodity derivative markets. Multi Commodity Exchange (MCX) and National Commodity and Derivatives Exchange (NCDEX). The task force considered strengthening and restructuring the Forward Markets Commission or to institutionalise some form of coordination or convergence with the Securities Regulator. then the challenge of obtaining sound institutions for trading commodity derivatives can be eased by using the stable and mature institutions that are in existence in the securities markets. which are available off the shelf. This in turn may help accelerate the growth of the agricultural sector. almost all commodity futures contracts are akin to securities.

It is.nseindia. however. Existing SEBI and RBI rules prohibit such integration of the settlement guarantee fund. There have been persistent problems in fully eliminating illegal trading given the limitations of the enforcement mechanism. if a clearing corporation holds a single settlement fund.ISMR Secondary Market – Trading 106 (c) (d) (e) (f) (g) Economies of scale: The securities infrastructure could be obtained for trading in commodity derivatives at a small incremental cost. and once exchanges achieves a certain minimal ‘critical mass’ of liquidity. If shortages or gluts are expected to take place at a future date. Hence. Economies of scope: In the risk management system. """ www. a major problem faced with commodity futures trading is a substantial informal market. as the collateral required in order to obtain a given level of safety will be lower. which would otherwise be required to create the desired institutional structure for the commodities sector. then this is likely to have a considerable impact upon the underlying spot market. Liquidity has a natural monopoly character. This would serve to save capital. low-cost platforms of the legal markets are better places to trade safely and at better prices. This could be used by the Government to devise the policy measures in advance. if commodity markets are also brought alongside equities and debt. anonymous. Impact upon informal market: Presently. As the users would realize that sophisticated. for each market. the viability of the new multi-commodity exchanges would be enhanced if they could trade derivatives on all the underlyings. there are strong incentives for each user of the market to seek the liquidity of exchanges. Conversely. Consequences for Government: Integration of commodity futures markets with the securities markets would not hinder Governments policies for the agriculture. quite possible that convergence would provide economies of scale to some of the leading stock/commodity exchanges. instead they would provide Government with an early warning system. The convergence approach offers the possibility of a market-based mechanism through which informal trading can be curbed. liquid. And a trader operating in different markets have to maintain separate collaterals across the markets.com . order matching environment. particularly. there is different clearing corporation. this would be revealed in the futures price well ahead of time. then it will benefit from diversification. Possibility of strengthening the commodity spot market: If the commodity futures markets has surfeit of liquidity and price discovery in a transparent. and will be extended. However. BSE and NSE. anonymous order matching. which is illegal under Indian law. the basic opportunity to reduce the capital requirements of the clearing corporation in this fashion exists. the incentive to trade in informal market would be reduced. this would thus indirectly assist in strengthening of agricultural spot markets. To the extent that convergence helps speed up the migration of commodity futures markets into screen-based.

Every person who joins this system will be given an Individual Retirement Account (IRA) to which all such contributions would flow. while tier II should be just like a savings account with investment options. If an investor does not specify any investment option. as also between investment plans are able to do so promptly and cost-effectively. and establishing links between the CRA and Government. The CRA needs to ensure that people wanting to switch from one pension fund manager to another. As with SEBI and IRDA. PFRDA has been created by an administrative order. There will be a number of pension fund managers each of whom has to offer three options: safe.nseindia. The PFRDA has to ensure that there is no abuse of this power. the Pension Fund Regulatory and Development Authority (PFRDA) has been created in order to perform regulatory and developmental functions. They are allowed to invest in foreign companies that have certain minimum investment in an Indian subsidiary. fund manager. the ceiling on the funds that a pension fund manager can invest abroad is expected to be determined on the basis of best global practice. A new regulatory agency. 2004. This account will have two tiers: tier I and tier II. the regulator. www. setting up regulatory requirements for fund management. A brief of them is as given herewith: 1. namely. However. PF managers will be guided by investor’s preferences. called points of presence for collecting funds. The new system is based on a defined contribution wherein both employer and employees would make contributions. It is tier I that should serve the real purpose of retirement. balanced and risky. choosing fund managers. safe option will be considered the default option. PFRDA’s activities include contracting for the CRA. reaching out into the unorganized sector. The Central record-keeping agency (CRA) as the name suggests should be responsible for keeping records of all transactions and maintenance of individual retirement accounts. The new system proposes to attract the best global fund managers and adopt the best global regulatory practices. 3. Currently. To give psychological 2. While no withdrawals should be allowed under tier I. no such restrictions would be imposed on the accumulations in tier II. involved in the system. There are four important key actors. central record-keeping agency and the network of agents. MF managers are allowed to invest abroad within certain overall limits.com .107 Secondary Market – Trading ISMR Box Item 4-2 The New Pension System A new pension system has been introduced for the central Government employees (excluding the armed forces) joining service with effect from January 1.

it is also proposed that one of the fund managers should be from the Government. who will be on the same footing as private fund managers. there is a possibility of potentials conflict of interest between the fund manager and the regulater. 4. so as to avoid the cost of building up a new branch network.ISMR Secondary Market – Trading 108 satisfaction to the account holders.com . Economic and Political Weekly. The new system for pensions is also expected to create a new class of large institutional investors who would participate on all the asset markets. including the markets for government bonds. 2004 edition. The pension fund managers would be prominent users of the existing asset markets in the country. PFRDA is expected to play a synergetic role coordinating with SEBI. Points of presence will be the agencies/organisations one can approach to open an account and make deposits. in such a case. However. Reference: The Economic Survey 2003-04. It is expected that existing bank branches (regulated by RBI) and post offices would offer access to these services. RBI and IRDA in effecting a new leap for India’s pension sector. POPs will collect money and speedily transfer the money and the information to the CRA. equity and the currency spot and derivatives. This new pension system envisages harnessing many of the strengths of the India’s financial system. corporate bonds. www. The underlying logic of allowing banks and post offices that already have well-developed network of branches is to minimize the transactions costs so that such costs do not destroy the accumulation mechanism.nseindia. June 12.

291 2004 124 156 17 92 42 24 363 4 199 3 34 38 115 3 1 5 6.com .600 4.890 4.nseindia.368 Registered Sub-Brokers 2003 141 159 17 142 43 26 460 4 201 2 34 34 124 3 3 5 6.703 32 161 0 25 82 13.815 www.109 Secondary Market – Trading ISMR Annexure 4-1: Exchange-wise Brokers and Sub-brokers in India Participants at the end March Exchanges Registered Brokers 2003 Ahmedabad Bangalore Bhubaneshwar Calcutta Cochin Coimbatore Delhi Guwahati Hyderabad ICSEIL Jaipur Ludhiana Madhya Pradesh Madras Magadh Mangalore Mumbai NSEIL OTCEI Pune SKSE Uttar Pradesh Vadodara Total Source: SEBI Annual Report 323 245 233 987 464 182 374 175 306 630 555 302 188 186 199 116 665 1.519 2004 323 242 229 980 468 177 373 172 305 633 532 297 179 182 195 105 673 970 867 197 437 514 318 9.036 883 197 436 518 319 9.717 25 161 0 19 73 12.

359 5.344 — 27.206 16.175 23.716 41.162 56.229 109.878 51.395 253.070 55.488 13.298 43.766 70.680 177.886 — 118.270 — *147.752 115.552 54.960 34.445 135.785 44.243 219.565 110.256 45.401 42.293 44.430 20.156 53.920 173.891 345.963 71.599 12.844 71. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Security ABB ACC BAJAJAUTO BHARTI BHEL BPCL BRITANNIA CIPLA COLGATE DABUR DIGITALEQP DRREDDY GAIL GLAXO GRASIM GUJAMBCEM HCLTECH HDFC HDFCBANK HEROHONDA HINDALCO HINDLEVER HINDPETRO ICICIBANK INDHOTEL INFOSYSTCH IPCL ITC L&T MARUTI M&M MTNL NATIONALUM ORIENTBANK RANBAXY REL RELIANCE SAIL SATYAMCOMP SBIN SCI SUNPHARMA TATACHEM TATAPOWER TATATEA TATAMOTORS TISCO VSNL WIPRO ZEETELE Total Apr-03 13.991 336.700 82.252 — 48.775 16.002 44.067 237.195 46.136 28.660 52.481 17.810 55.437 — *116.721 28.683 — 60.921 138.229 112.798 114.507 96.079 25.836 36.573 17.907 103.649 84.889 57.313 72.450 147.390 38.515 Feb-04 Mar-04 16.677 403.719 171.310 89.111 20.771.915 53.239 80.758 774.231.ISMR Secondary Market – Trading 110 Annexure 4-2: Market Capitalisation of S&P CNX Nifty Securities: April 2003 to March 2004 (end of period) (Rs.493 231.590 92.656 312.236 — 47.770 44.144 32.269 Jun-03 15.994 146.587 62.477 83.036 97.698 102.916 80.059 182.260 326.195 *86.891 26.939 40.500 43.138 60.707 187.689 24.910 47.536 47.086 62.123 34.264 4.316 139.890 77.882 — 62.641 19.905 44.223 17.163 11.867 35.613 92.040 34.880 47.609 25.913 142.540 114.601 21.170 100. mn.589 201.341 368.737 — 100.237 23.869 125.468 258.356 97.527 222.909 60.028 — 619.811 *64.730 184.512 33.070 33.563 31.360 26.152 33.372 450.549 99.217 91.691 131.842 14.344 254.135 101.718 53.502 17.019 12.775 — 24.334 30.764 559.727 69.100 — — 40.165 163.126 78.697 107.939 17.946 124.214 174.131 79.757 — 12.279 216.634 85.821 86.220 — — 680.852 44.953 84.580 57.511 3.642 238.571 751.740 — 16.855 22.712 156.098 20.046 23.089 94.608 90.117 4.880 29.855 26.811 — 132.857 382.148 64.220 13.657 101.250 22.906 339.903 48.722 5.619 May-03 14.661 74.506 75.261 88.748 110.526 46.382 11.028 55.635 45.222 78.273 18.698 11.158 22.674 151.633 61.033 37.981 12.988 — 66.687 11.808 33.247.093 56.202 31.235 13.539 101.922 45.473 36.485 220.861 299.847 38.663 203.140 64.090 80.450 77.474 73.831 35.793 89.898 86.992 72.988 186.571 — 679.976 35.589 69.205 97.463 137.042 44.980 — — 108.977 27.579 383.399 49.622 91.635 72.060 103.479 122.957 189.483 35.385.471 168.552 58.430 328.932 68.825 86.986 112.760 47.787 111.514 41. Source: IISL www.684 49.338 66.441 22.421 58.691 202.597 — — 76.957 61.721 80.654 14.210 72.640 176.035 86.570 55.927 214.188 98.330 189.864 47.568 8.336 21.150 34.967 32.550 97.720 53.858 40.047 11.161 27.988 * Denotes the month in which the particular security was included in S&P CNX Nifty Index.531 15.753 42.256 181.041.494 72.321 172.150 247.487 35.195 103.100 75.305 45.205.150 79.698 49.837 14.890 211.120 13.670 87.036 5.780 71.399 19.605.275 13.230 21.380 248.295 6.745 149.) Sl.402 25.768 75.196 106.649 33.755 142.653 18.528 — *169.812 45.566 78.085 28.993 317.255 2.988 89.434 32.763 19.835 96.190 85.587 50.500 99.775 — 453.356 — 383.496 35.422 408.396 413.903 313.045 143.739 185.088 — — 23.559 53.284 49.434 92.606.766 93.924 Oct-03 22.427 36.651 22.474 72.115 127.302 97.347 114.645 14.035 — 17.010 14.029 58.941 61.328 60.579 50.380 94.057 42.865 98.089 126.270 135.495 157.681 69.060 18.280 98.582 42.268 184.263 6.732 3.849.622 318.494 119.925 18.307 12.005 172.964.com .999 85.720 98.872 154.102 391.621 260.780 53.643 63.959 55.106 799.909 19.914 28.696 139.870 99.600 90.721 49.594 70.756 292.817 171.309 18.970 357.131 53.562 13.334 37.954 75.488 22.091 166.645 10.894 30.297 24.564 19.037 18.173 46.708 158.770 121.096 — 39.773 16.769 56.564 61.237 243.159 27.328 — 782.449 148.615 177.nseindia.990 18.910 106.990 212.774 55.286 77.442 92.967 115.216 — 416.726 18.578 — — 499.614 151.574 181.719 13.747 23.980 43.520 24.945 74.309 28.670 93.350 17.970 — 98.928 25.845 123.627 92.651 133.637 20.851 307.769 37.751 124.782 220.532 41.278 149.917 21.865 3.163 — *288.000 85.248 100.152 71.419.067 50.713 13.064 22.209 36.910 36.710 17.542 80.315 13.712 158.542 68.600 76.650 74.686 185.752 362.591 130.279 107.375 18.100 6.261 19.773 79.292 35.946 182.350 148.923 83.345 39.030 43.125 39.087 — 125.481 28.357 48.640 107.517 46.637 15.454 338.458 31.880 73.239 90.440 153.084 20.297 58.210 392.375 68.611 73.934 33.135 314.517 15.235 185.958 — 52.607 125.930 16.000 133.476 102.553 170.753 83.940 19.066 30.547 38.601 118.038 49.298 16.092 198.080 14.177 272.116 69.040 124.516 169.888 125.666 45.012 26.871 88.745 28.575 Nov-03 Dec-03 Jan-04 28.713 19.243 35.720 19.014.487 20.463 150.510 101.570 38.748 — 58.365 16.356 375.816 145.948 180.481 32.184 346.955 117.692 — 62.981 179.616 56.816 12.823 — *143.375 100.082 404.108 25.640 16.554 74.684 141.079 35.388 11.714 159.020 13.708 184.590 205.257 51.862 — 56.485 19.936 46.269 7.383 Jul-03 Aug-03 Sep-03 20.518 282.773 22.818 — — 64.219 74.810 146.386 316.022 174. No.291 — 15.551 109.488 18.856 61.321 64.720 — 47.045 50.380 27.

93 2.02 0.81 5.99 0.41 0.70 HDFCBANK 2.07 0.20 2.43 0.75 1.88 2.98 5.87 0.15 2.05 GUJAMBCEM 0.18 0.28 2.27 0.41 0.25 1.38 TATAMOTORS — — TISCO 1.76 0.53 0.81 0.79 12.77 3.77 WIPRO 6.98 0.30 0.64 0.03 GAIL — *2.96 1.14 3.88 0.44 0.68 0.01 2.47 0.28 0.97 0.78 0.82 1.67 1.47 2.31 2.00 100.02 0.57 1.36 0.49 DRREDDY 2.97 0.64 2.24 0.13 3.48 3.69 1.75 1.56 3.83 — — 0.03 2.56 0.91 ORIENTBANK 0.57 SBIN 4.30 5.37 0.32 2.78 0.33 3.39 1.95 1.65 1.89 0.34 0.68 1.66 5.70 1.26 0.28 1.80 0.55 0.81 2.25 1.71 1. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Security Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 0.32 0.88 HINDLEVER 10.57 2.86 0.69 0.74 0.41 0.43 2.69 0.54 0.84 1.30 0.98 1.68 1.53 1.32 2.70 1.40 CIPLA 1.63 1.78 RANBAXY 4.47 3.37 5.27 0.45 MTNL 1.75 1.92 4.89 2.91 2.45 0.54 DABUR 0.30 0.45 2.52 SCI 0.34 1.43 0.59 0.93 0.91 1.72 1.39 0.90 0.14 5.77 0.56 5.18 1.20 3.78 0.89 7.42 1.81 0.71 1.36 1.53 0.90 4.13 0.46 2.21 2.21 1.20 1.00 1.99 0.80 1.37 1.78 0.78 3.42 SAIL — — SATYAMCOMP 1.35 0.93 3.39 0.47 1.58 1.02 4.56 0.32 HINDPETRO 3.64 1.59 GLAXO 0.47 2.33 *2.63 1.05 Total 100.93 0.91 1.34 0.77 1.09 1.84 10.20 2.55 0.05 2.95 2.80 1.31 7.38 TATAPOWER 0.29 — — — 0.57 5.30 0.70 1.64 12.82 3.97 3.71 ITC 5.10 7.82 HCLTECH 1.40 2.80 1.com .48 0.58 2.44 1.59 5.35 0.87 1.30 1.27 — — 2.80 GRASIM 1.28 0.74 0.46 1.84 0.46 0.28 2.67 — 2.75 — 12.75 0.65 1.25 1.29 0.85 5.26 0.36 2.00 100.34 1.08 0.95 0.22 1.34 2.36 0.48 — — 12.67 0.13 2.48 1.85 3.36 0.05 2.83 0.52 2.44 *4.96 0.27 HINDALCO 1.52 INDHOTEL 0.89 0.73 1.44 0.58 1.40 0.74 1.nseindia.58 — — — 0.38 DIGITALEQP 0.25 0.11 1.96 0.71 4.61 12.77 TATATEA 0.72 0.40 0.28 2.31 0.09 3.31 1.71 0.14 0.22 COLGATE 0.07 2.27 IPCL 0.65 5.66 0.40 1.64 2.83 1.25 1.88 1.38 0.10 0.00 100.75 NATIONALUM — 1.89 1.07 0.83 5.32 0.88 6.86 2. Source: IISL www.50 1.42 0.29 2.45 1.10 5.82 TATACHEM 0.49 2.98 1. No.78 1.47 2.95 6.64 1.47 2.00 2.80 4.37 1.24 1.25 2.32 2.89 0.36 1.39 0.63 5.73 1.71 5.22 0.82 0.52 0.19 1.45 4.61 0.29 1.59 0.75 2.74 0.61 0.76 1.97 2.96 1.83 1.53 2.98 1.75 0.90 4.67 1.90 1.07 HEROHONDA 1.94 1.05 0.07 2.73 *1.43 0.04 2.48 10.40 0.31 5.78 0.84 0.10 6.86 0.82 0.05 1.59 0.61 1.30 0.81 1.39 BRITANNIA 0.61 1.55 BHARTI — — BHEL 1.10 0.35 5.77 5.60 4.19 0.58 1.27 1.60 1.81 0.48 1.99 12.67 12.29 2.36 0.51 1.76 6.25 2.38 0.35 0.49 1.93 0.76 REL — — RELIANCE 12.27 1.72 0.05 1.111 Secondary Market – Trading ISMR Annexure 4-3: Weightage of S&P CNX Nifty Securities: April 2003 .49 0.83 0.97 0.84 4.44 0.71 1.32 5.68 — 0.84 3.29 1.49 1.83 0.67 0.47 2.29 — 2.71 0.00 ABB 0.43 0.46 1.89 0.09 1.73 0.83 1.35 1.29 1.52 2.53 1.00 100.73 0.27 1.82 — — 2.49 8.58 1.75 0.32 0.85 0.29 1.00 100.79 1.86 0.44 0.25 0.69 2.35 0.69 2.87 0.57 0.68 4.51 0.42 0.74 0.63 1.41 1.74 1.43 2.52 3.36 0.33 0.34 0.87 BPCL 2.32 0.14 2.83 11.61 0.25 5.75 1.42 0.06 — — — 11.12 L&T 1.84 1.94 2.89 3.35 0.15 4.61 — — — 1.65 MARUTI — — M&M 0.28 0.17 2.46 2.99 0.41 1.78 8.75 5.64 1.73 3.47 0.71 1.17 0.46 5.00 100.24 *2.44 0.30 — — — 1.58 2.41 0.28 0.50 — — — 1.06 HDFC 2.March 2004 (In per cent) Sl.94 2.62 1.93 1.55 2.35 0.91 1.49 1.70 3.22 1.66 SUNPHARMA 0.86 4.35 9.13 2.32 0.84 0.95 12.60 2.86 — — — 12.37 0.21 2.07 ICICIBANK 2.87 0.57 1.17 2.58 ZEETELE 1.80 0.78 2.04 0.87 100.35 0.22 1.55 1.84 1.65 1.61 2.58 1.74 BAJAJAUTO 1.27 0.05 2.88 1.73 6.62 2.97 4.63 0.00 100.61 1.00 100.73 VSNL 0.50 0.43 ACC 0.68 0.71 0.00 * Denotes the month in which the particular security was included in S&P CNX Nifty Index.03 5.49 0.70 0.34 1.73 0.58 0.70 0.40 0.33 0.88 0.44 0.71 1.93 1.73 6.82 5.63 0.02 0.18 1.37 0.15 1.95 0.93 5.00 100.00 100.36 0.27 0.24 — — *3.37 1.25 6.73 1.36 0.34 2.71 0.89 2.48 3.19 1.66 0.49 4.66 0.62 0.77 2.75 1.45 0.90 1.26 INFOSYSTCH 6.04 2.

83 0.74 0.60 0.57 1.43 0.45 0.72 0.23 1.64 0.85 0.43 — 0.82 1.26 0.72 1.21 0.86 2.19 1.88 0.64 1.33 0.47 0.39 0.13 0.21 — 2.57 — 1.90 1.58 0.59 0.34 0.17 0.04 0.97 0.23 1.44 0.97 0.97 1.38 1.58 1.85 0.62 — 0.81 1.82 1.08 0.92 0.08 0.40 0.44 1.33 0.97 1.47 0.52 1.63 1.50 0.35 0.80 1.51 1.69 0.05 0.42 0.01 1.81 0.84 0.80 0.25 0.63 0.55 1.28 0.16 0.95 1.67 1.88 0.01 0.23 0.55 1.00 0.25 0.23 1.52 0.58 0.88 1.51 1.14 0.66 1.29 0.29 0.83 0.55 0.61 0.77 0.15 2.45 0.50 0.75 1.45 0.16 0.75 0.52 0.82 1.57 1.06 0.05 0.53 — 0.56 0.73 1.96 0.47 0.33 0.45 1.33 0.56 1.47 0.60 0.86 0.60 *0.90 0.57 0.67 1.32 0.78 0. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 ABB ACC BAJAJAUTO BHARTI BHEL BPCL BRITANNIA CIPLA COLGATE DABUR DIGITALEQP DRREDDY GAIL GLAXO GRASIM GUJAMBCEM HCLTECH HDFC HDFCBANK HEROHONDA HINDALCO HINDLEVER HINDPETRO ICICIBANK INDHOTEL INFOSYSTCH IPCL ITC L&T MARUTI M&M MTNL NATIONALUM ORIENTBANK RANBAXY REL RELIANCE SAIL SATYAMCOMP SBIN SCI SUNPHARMA TATACHEM TATAPOWER TATATEA TATAMOTORS TISCO VSNL WIPRO ZEETELE 0.21 0.06 0.89 1.11 0.94 0.73 1.61 1.35 1.63 *1.69 1.83 1.98 1.19 0.12 0.94 0.82 0.64 0.85 0.21 0.41 0.40 0.77 1.76 0.18 0.88 1.23 1.26 0.37 0.21 0.73 1.81 1.16 — 2.52 0.82 0.98 1.15 0.19 0.36 0.10 0.99 1.01 0.72 — 0.04 1.64 2.38 — 0.24 — 1.17 0.63 0.61 0.49 0.25 0.80 — 1.29 0.56 0.78 0.65 — 1.02 0.61 — 0.61 — 1.77 1.03 0.51 0.90 0.13 1.75 1.59 1.71 1.90 0.82 — 1.79 1.14 0.70 0.27 0.73 0.02 1.17 0. * Denotes the month in which the particular security was included in S&P CNX Nifty Index.92 0.54 0.24 1.01 1.75 0.73 0.95 1.92 0.03 0.35 0.06 *2.24 0.53 1.25 0.23 0.00 1.84 0.77 1.42 1.96 0.09 1.59 0.48 0.51 1.99 1.35 0.84 1.00 0.29 0.69 0.50 1.52 — 0.60 — 1.61 — 0.00 2.84 — 1.31 0.ISMR Secondary Market – Trading 112 Annexure 4-4: Beta of S&P CNX Nifty Securities: April 2003 to March 2004 (In per cent) Sl .84 0.07 0.92 0.95 0.07 0.57 1.44 — 0.79 1.20 0.11 0.92 0.73 1.72 — 1.14 0.56 0.08 0.60 0.87 0.19 — 2.78 *1.00 0.61 0.11 1.66 1.com .65 1.85 0.59 0.23 0.69 1.28 0.91 1.94 0.81 0.45 0.82 0.79 1.93 0.43 0.81 1.84 0.07 1.70 1.49 0.98 1.86 0.25 0.26 0.79 0.26 0.76 1.52 — 1.63 0.81 0.55 0.71 1.nseindia.19 1.28 — 1.01 0.00 0.16 1.85 0.27 0.90 0.42 0.10 1.38 1.78 1.57 0.64 1.91 0.74 0.52 — 1.42 — 1.27 0.80 1.58 — 1.41 0.64 1.70 0.59 1.19 0.00 0.03 0.94 — 1.67 0.85 0.76 1.79 0.26 0.18 0.09 0.22 0.77 1.32 0.99 0.50 0.37 0.15 1.29 0.05 0.55 1.38 0.64 0.90 1.32 0.50 1.78 0.73 1.25 0.68 1. No.93 0.75 0.20 0.40 — 0.22 0.89 0.71 1.26 0.56 1.84 0.75 0.29 0.74 0.75 0.11 0.40 0.31 1.30 — 1.75 0.57 — 1.27 — 1.74 0.66 1.98 1.31 0.23 0. Source: IISL www.09 1.55 — 1.65 1.58 1.48 0.80 0.28 0.41 0.49 0.05 0.12 0.67 0.73 0.73 — 1.74 — 0.92 1.14 0.16 0.87 0.18 0.28 0.76 1.94 1.66 0.67 1.97 0.21 0.65 *0.28 1.45 1.72 — 0.44 0.00 0.00 1.59 — 1.67 0.23 0.46 — 1.22 0.50 1.55 0.08 0.61 1.42 0.61 — 1.19 Security Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 # Beta is calculated for the 12 months ending on the last trading day of the respective month.70 1.95 1.41 0.94 0.16 0.45 0.74 0.16 0.18 0.97 2.12 0.14 0.91 1.60 1.64 0.18 0.28 1.16 0.20 0.25 0.72 — 1.15 0.91 0.24 0.34 0.85 0.51 1.27 0.25 0.49 0.67 0.31 0.42 0.48 0.54 0.51 0.19 1.02 1.42 0.01 1.34 0.82 1.53 0.73 0.80 0.42 0.80 0.40 0.71 0.94 1.52 0.30 0.79 — 1.73 1.28 0.96 0.56 0.89 0.88 0.11 0.85 0.70 1.60 1.44 — 0.45 0.29 0.41 — 0.27 0.24 1.53 2.26 0.10 0.75 1.50 0.51 1.91 2.57 0.94 *1.10 0.11 0.19 0.22 0.17 0.00 0.45 0.13 0.08 0.03 1.40 0.89 0.95 0.91 0.14 0.19 0.68 1.82 — 1.27 1.07 0.35 0.54 0.68 — 1.15 0.66 1.41 0.90 0.46 1.48 1.62 *1.24 0.54 0.48 — 1.97 1.32 0.34 0.93 — 1.76 1.22 — 2.04 1.69 0.39 0.51 0.75 0.32 1.39 0.18 0.91 0.69 2.60 0.66 1.20 1.25 0.09 1.83 0.89 0.55 0.35 0.25 0.72 0.54 0.

96 8.03 — 7.48) 6.09 (0.26 13.73) DRREDDY (4.51 3.64) (4.56) (7.83 8.33 8. No.02 4.17) (1.08 4.25) 4.90) HINDPETRO (5.27 11.59 25.86 (1.98 8.14 (0.07 20.94 13.27 14.08 — 21.81 29.42 6.86) 40.47 48.85) (4.14 11.88 13.55 4.67) — 0.85 11.08) (9.113 Secondary Market – Trading ISMR Annexure 4-5: Monthly Returns of S&P CNX Nifty Securities: April 2003 .48 (3.13 18.13) 20.71 1.15 (10.06 — 10.37 14.09 HCLTECH (10.51 8.44 1.88 MTNL (4.16 12.28 6.41 3.17 (2.58) 5.47 0.18 14.91) (8.70 31.38) COLGATE 6.59 *9.98 — 9.46 11.93) (4.41 (1.61 21.79 17.52 0.11 (2.48 1.37) ITC 8.92 22.02 15.56 25.79 12.26 8.15 15.15) (1.09 0.43) 6.36 19.52) 7.21 7.77) 4.76 28.80 1.54 (4. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Security Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 11.22 25.90 8.95) (4.02 9.12 (5.81 2.97) 3.33 *10.73) ZEETELE 23.53 12.62 6.26) 6.58) 20.41 3.16 — 6.37 27.63 2.38 (3.32) 5.22 14.52) (10.05 33.78 34.80 — 10.23) 9.12 — 16.67) 19.44) 1.33 — 14.21 24.85 (7.12) (9.14) (8.27 8.24 (8.06 5.99 (3.77) 11.71 L&T 8.85 4.73 21.45) (3.38 (4.14) 0.49) 3.83 (3.86 9.16 9.74) 1.13 21.80 (15.75) 3.78) (7.68 — 8.15) 4.20 26.32) (2.79 8.08 6.21 13.33 11.57 3.22 11.08 11.43 MARUTI — M&M 11.81 32.71) (0.50 — 10.27 (0.31 6.25 45.02) 37.23 13.79 DIGITALEQP (12.50) 19.42) 1.83 8.54) — 10.98 30.30 10.09 1.25 — 32.87 (8.53 4.00) (22.13 (2.43 (0.24 11.52) # Returns are calculated for the respective months.15) 12.33 3.81 26.85 (1.73 4.94) 11.49 11.03 (11.01 — 35.72) (0.36 (3.29 — 19.73 (9.52) 8.88 9.29 6.99 3. * Denotes the month in which the particular security was included in S&P CNX Nifty Index.74 9.10 9.21 7.07 12.87 11.79 (1.99 (0.03) 16.16) 4.46 5.82 TATAMOTORS — TISCO (1.89) 3.86 — 0.05) 0.72 (6.96 — (7.21) (6.20 23.69 7.89 11.32 1.61 0.51 SUNPHARMA 2.84 (8.76 (7.68) 14.24) 11.45 16.73 2.66) HDFC 2.87 3.42 — (1.51 14.52 3.02 6.16) 10.76) (1.13 *29.23) (6.25 16.14) (4.92 17.12 (2.04 6.11 (3.27) 5.18 10.13) (8.84 4.53) — — (2.48) 5.93) 19.90 6.71 25.75 28.39 (5.23 3.19) (5.97 5.22 GUJAMBCEM 4.76 (9.78 8.65) (2.19) 2.00 13.70 (6.98) 14.15 (6.80) (2.27 14.18 — — 5.18 15.25) (4.12) 14.80 27.88) (20.54) (4.65 2.61 1.15 — 19.88 (0.42 8.28 18.32 7.76 13.60 7.38 10.69 (2.30) 30.83 5.69) 1.11 (4.01 12.21 8.95 12.17 9.00) 13. Source: IISL www.85 19.87) 12.25) (4.95 (17.35 16.61 GRASIM 9.66 12.73 11.39) 8.65 19.34 57.39 (0.65 2.12 15.40 3.56) BAJAJAUTO 0.18 25.48 (1.03) INFOSYSTCH (31.69 (6.14) 19.08 *(0.06 (0.55) (5.59 4.58 (6.88 (3.55 WIPRO (29.52 — 11.36) — — 1.69 ACC (5.24 6.23 2.61 23.72) 0.48) ICICIBANK (9.55 10.27) (16.65 8.41) 7.62 21.49 (19.07) (1.29) 6.88 15.56 RANBAXY 8.45 (1.27) SBIN 3.70 HDFCBANK 5.08 2.43 13.26 7.nseindia.91) 4.63 14.49 6.65 10.03 12.53) 2.71) — 22.39 — 14.48) (6.10 13.91 (0.09 5.63 0.21 (1.62 0.09 (23.79 1.37 (1.61 15.39) — 3.26) (15.34 (0.63 12.15 (4.42) INDHOTEL (6.87 11.14 11.27 9.40) (2.64 16.56 (3.14 5.82 33.90 10.78 9.32) 3.27 3.27 1.29 13.55 7.82 — 31.26) 8.40 16.90) (1.42 (21.90 1.66 13.13) (7.31 HEROHONDA 8.16) VSNL 3.59) 18.04) (2.34 14.28 HINDLEVER (2.19 9.58 (5.49 19.74) 0.58) 2.74 9.19 17.81 (5.37) 0.59 16.54 6.57 (4.24) IPCL (1.27 9.20 SCI 32.40 19.84 3.56 19.58) ABB 7.18 39.93) 22.70 19.91 12.88 0.04) (12.65 22.10 0.45) 11.51) 16.36 11.06) (14.47 (4.75) — 0.98 2.79 16.12 34.21 10.81 — 15.03 All Securities (4.96 (8.55) 0.45 — 17.29 (8.01 (1.53 CIPLA (11.13 *2.09) (7.12 22.34 3.03) (6.84) (6.97) (4.77 — 4.52) (0.65 (12.24 16.45 17.83 TATATEA 5.62 10.47 (12.22) 2.15 6.85 9.66) 6.96 6.08 HINDALCO 15.73 — 13.42) 0.28 18.58 18.72 13.44) — 7.18 — 11.71) 16.92) 7.64 8.91) 10.49 20.com .18 11.08 (0.70 5.42 4.30 8.89 6.71) 3.64 11.30 (1.25 (2.61 BPCL 4.89) (0.82) (7.94 2.04 10.61 18.13 TATAPOWER 5.82 (0.99 14.30 16.37) 21.83 — 43.16) (11.31 (8.37) 5.54) (6.69 TATACHEM 10.08 (6.11 10.23 (6.99 10.48) NATIONALUM — ORIENTBANK 34.39 REL — RELIANCE (1.84 (0.11 26.99 10.93) (6.37 13.99) 11.02) (4.70) 5.54) 2.79 0.82 (9.30 7.22) (8.03) (11.52) 9.33 7.26 (9.36 7.79 0.01) (4.44 (4.50 1.10 0.76) GAIL — GLAXO 10.12 20.72 14.15 — 17.48 (0.60 BHARTI — BHEL 3.96 *78.94) 10.30 9.56 8.93 14.57 DABUR 3.77 4.12 4.00 25.84 30.88 15.86 5.75 (7.00) (16.95 18.31) SAIL — SATYAMCOMP (14.29) (5.10 BRITANNIA 3.06) (11.36 (8.68 1.82 13.97 15.42 10.50 — 8.98 6.36 (1.10) (5.87 26.47 12.80) (13.45 1.March 2004 (In per cent) Sl.

159 99.30 8.97 6.74 5.815. mn.339 100.092 3.986 100.210 99.363 513.29 7.063 99.270 8.515 100.661 99.580 24.178 544. Source: NSE www.687 4.150 99.600 461.033.00 6.858 100.048.745 21.014.145 489.735 11.84 5.287 7.103.367 18.23 8.772 5.332 3.96 9.00 5.766 2.858 7.910 3.411 3.569 3.415 21.190 615.495.911.19 7.03 9.185 1.455 853.599 100.121 22.924.491 788.314 272. mn.728.172 16.193 426.500 6.697.339 177 2.00 5.400 546.)* Nov 94-Mar 95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 2001-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 2002-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 2003-04 102 246 250 244 251 254 251 19 22 21 22 21 20 21 20 19 23 20 19 247 22 22 20 23 21 20 21 19 21 23 19 20 251 20 21 21 23 20 22 23 20 22 21 19 22 254 — — — — — — 1201 951 954 963 924 931 917 917 920 895 896 840 840 1.892 100.75 4.00 6.330 10.558 464.63 5.371.050 3.99 5.266 99.370 2.043 29.057 84.578.329 442.145 489.342.46 12.530 421.144.316.95 — 8.117.980 353.332 36.181 100.209.180 2.857 100.765 100.51 4.980 353.295 42.20 11.513 33.646 519.39 6.306.410 7.990 22.996.078 356.11 6.32 8.959 23.091.75 8.179.00 6.405 6.97 10.722 12.00 9. of Trading Companies Days Traded No.97 5.740 24.296 20.94 6.190 2.82 10.177 1.515 32.819.733 100.590 — — 0 4.968 20.734 353.500 — — 0 4.102 2.230 2.515 3.177 1.131 100.234 427.00 9.45 8.179.00 6.640 100.59 7.456 7.670.155.303 5.302 619.050 1.nseindia.633.204.048.868 482.648 1.855 495.377 7.) Demat Turnover as a % of Total Turnover Market Capitalisation (Rs.449 8.830 1.00 11.55 7.785.087.98 5.215.634 647.25 9.599 1.190 615.733 3.00 11.529.16 7.00 6.841 5.com .726 7.857 6.634.120.751 15.682 513.662 16.363 513.930 16.175 1.456 100.44 7.) Traded Quantity (mn.479 5.571 483.530 549.868 482.880 3.254 99.371.878 533.634 647.161.304 4.257 30.713 100.953 5.500 4.368.822 21.373 12.954 13.886 3.347 21.022 100.752.086.425 1.816 15.48 9.181 4.430 2.776 24.00 8.358.00 5.260 2.830 2. mn.984 2.85 12.172 1.530 549.267.00 11.390.407 6.492 431.991 672.109.701.98 5.965 1.646 519.511 28.240 99.97 6.00 5.765 71.) Turnover (Rs.94 6.) Average Daily Turnover (Rs.453.289 — — — — — — — 5.073 356.600 461.537.535 421.051 99.855 495.329 442.995.954.128.674 2.366.791 3.ISMR Secondary Market – Trading 114 Annexure 4-6: Business Growth of CM Segment of NSE Month/Year No.558 464.782 23.) Turnover Demat Ratio Securities (%) Traded (mn.027 29.00 6.155.376 14.470 2.342.131 2.160 2.572 483.302 619.259 46.330 10.680 3.320 3.648 1.533 4.687 100.36 — — — 0 3.191.334 1.79 9.776 100.892 2.459 1.087.860 3.080 3.672 928.099.878 24.422 686.713 4.734 353.620 3.185 1.175 1.543 4.742.00 5.00 11.019 843 821 825 820 806 806 770 767 762 763 760 762 899 749 743 744 755 752 761 728 738 754 761 763 769 804 0.220 47.395.880 2.) Demat Turnover (Rs.00 8.986 2.556 2.3 7 26 38 55 98 168 11 14 13 10 11 14 14 15 18 21 18 16 175 20 22 19 21 19 18 20 17 22 24 19 18 240 21 25 27 32 32 35 36 31 38 40 31 32 379 139 18. of Trades (mn.975 50.230 1.00 6.625 27.066 28.760 71.722.760 * At the end of the period.622 100.249 24. mn.459 1.169 63.984 100.953 100.200 2.880 533.278 1.033.131.411 100.00 6.673 46.178 544.326.466 100.455 853.00 6.200 3.209.491 788.599.227 10.032 2.00 6.47 9.791 100.00 6.08 10.030 854 238.776 8.157 25.103.995.94 9.492 431.193.599 36.902 100. of No.00 5.460 2.505 7.670 — — 0 4.91 5.850 2.593 294.870 13.334 1.314 272.180 5.594 294.640 2.715 27.671 43.610 2.610 27.008 17.067.70 8.97 12.510 3.622 2.034 53.99 6.643.937 57.00 7.99 5.438 687.04 — 9.368.845 100.443 50.00 11.236 24.400 546.646 99.99 5.70 6.022 2.805 7.327 34.726 100.672 928.290 2.290 99.030 13.902 5.852 442.21 11.813.852 442.372 94.795.486 26.466 7.21 8.624 100.682 513.667 29.636.621 24.

fine-tuned risk management system. dematerialization. electronic transfer of securities. It is for this reason that the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of IOSCO (International Organization of Securities Commissions) established the Task Force on Securities Settlement Systems in December 1999 to recommend measure aimed at improving safety and efficiency of SSSs. The SSS in the corporate securities market in India have witnessed several innovations during the last one-decade in tune with the global developments.nseindia. This is because they help in reducing the systemic risks. professionalisation of trading members. However.Clearing and Settlement ISMR Secondary Market – Clearing and Settlement “Systems for clearing and settlement of securities transaction should be subject to regulatory oversight and designed to ensure that they are fair. The committee further put a report in November 2002 to develop a clear and comprehensive methodology for assessing whether the recommendations have been implemented.115 Secondary Market . securities lending and borrowing. introduction of straight through processing. effective and efficient and that they reduce systemic risk” is one of the 30 principles of securities regulation enunciated by IOSCO. It continuously reviews the working of clearing and settlement systems as www. Policy Developments SEBI has prescribed elaborate margining and capital adequacy norms to contain and manage risk in the market. the CPSS and the Technical Committee of IOSCO published the Recommendations for Securities Settlement Systems. emergence of clearing corporation (CC) to perform the role of central counter party etc. compression of settlement cycle. The recommendations are designed to cover systems for all types of securities and markets across countries as well as cross-border trades. It also is intended to serve as guidance for Financial Sector Assessment Program (FSAP) assessments and for other forms of technical assistance. These include use of the state-of-art information technology. Safe and stable securities settlement systems (SSSs) are important to preserve the health of the domestic and global financial markets. though many of these are yet to permeate to the entire market. which identifies minimum standards that securities settlement systems should meet to enhance safety and efficiency. In November 2001. National authorities responsible for the regulation and oversight of SSSs are encouraged to assess whether markets in their jurisdiction have implemented the recommendations and to develop action plans wherever necessary. the Clearing Corporation of NSE. in this chapter we restrict our discussion to only the settlement systems adopted by the National Securities Clearing Corporation Limited (NSCCL). possibly including financing of reform efforts by the World Bank.. It sets out and discusses 19 recommendations.com . These recommendations have been included in the Key Standards for Sound Financial Systems highlighted by the Financial Stability Forum. The methodology is intended primarily for use in self-assessments by national authorities or in peer reviews of such self assessments.

30 am Time Description of activity Trade Day Accept pay-in instructions from investors into pool account Submit final pay-in files to the depository and the clearing bank. The major policy developments during the period April 2003 to June 2004 is presented below: I. 2. The year 2003-04 witnessed major improvements in the market practices e. reduction of settlement cycle to T+2 etc. Introduction of T+2 Rolling settlement in Equity Market From April 1.30 pm Time Trade Day Custodians conform the trades.nseindia. (c) The stock exchanges should provide a system for handling shortages of funds and securities in an expeditious manner to adhere to the schedule for pay-out. (b) Stock exchanges should levy an additional charge to discourage late confirmations by the custodians. The stock brokers are required to adhere to the following schedule in T+2 rolling settlement. T+1 3.com . The members should also be encouraged to adopt direct transfer of securities/funds to clients account on pay-out. No. 2. which should be an increasing function of the number of such incidences. there is a facility for late confirmations. 2003. Process and download obligation files to brokers/custodians Pay-in of securities and funds Pay-out of securities and funds Description of Activity On the advice of SEBI.ISMR Secondary Market . S. However. the settlement cycle has been shortened from the T+3 rolling settlement to T+2 by SEBI to facilitate still easier flow of funds and securities. Day T T+2 Until 10.g. www.30 am By 10. (g) Stock exchanges should encourage members to adopt automatic downloading of pay-in files for securities and funds.30 pm By 11.Clearing and Settlement 116 well as the risk management practices being followed by stock exchanges and their clearing corporations. (d) The stock exchanges should also amend their bye laws to mandate the pay-out of funds and securities to the clients by the broker within 24 hours of the payout. The exchange should be put in place a monetary penalty structure that. 1. The activity schedule for which is presented below: Sr. No.00 am By 1. (e) The stock exchanges should design an alternative clearing and settlement system in respect of companies whose shares have not been dematerialized. the time limit for late confirmation should be fixed in a manner that the download of the final obligation files to brokers is not delayed. 1. introduction of Straight Through Processing (STP).00 am By 1. the stock exchanges have put in place the following systems for effecting the settlement on T+2 basis: (a) A facility for late confirmation of trades by the custodians. However. T+2 Day T By 11. (f) The stock exchanges should not normally permit changes in the client ID and should keep a strict vigil on cases of client code modification.

In addition a system wherein pay-out files will be sent to the clearing banks with a request to online credit to the bank accounts of the clients should be set up. margins and the eligibility criteria for securities. In any case the exposure of the TGF/SGF to any single bank should not be more than 15% of the total liquid assets forming part of TGF/SGF of the exchange. the bank guarantees should be considered as cash equivalent only if the guarantees have been provided by the banks whose net worth is more than Rs. 1 SEBI circular no. www. 500 crore. This shall be subjected to a haircut equivalent to the respective VaR of the equity shares. bank guarantees.117 Secondary Market . Units of all MFs would also be eligible security for the purpose of non-cash component of additional capital and margin subject to a haircut plus any exit load charged by the mutual fund. (b) Equity shares classified in Group I at the stock exchange in accordance with the parameters of volatility and liquidity as prescribed by SEBI 1 would be eligible as security for the non-cash component of the additional capital and margin. Composition of Capital and Margins The SEBI. The exposure as mentioned above would include guarantees provided by the bank for itself or for others as well as debt or equity securities of the bank which have been deposited by members for additional capital or margins.com . However. The exchanges having average daily turnover of less than Rs. subject to a standard haircut of 15%. The valuation for these shares should be done at least once a week. The cash component may be in the form of cash or cash equivalents. they have requested to SEBI for refund/withdrawal of the base minimum capital (BMC). (c) The eligible shares for the purpose of the securities portion of the base minimum capital should only be those which are classified as Group I in terms of the parameters of volatility and liquidity as per SEBI circular. Cash equivalents should include FDRs.Clearing and Settlement ISMR With the above schedule of activities. 2003. 1 lakh may be refunded to the member subject to the following conditions: (i) The member has been inactive at the stock exchange for the past 12 months. 1 crore for the past three consecutive months may maintain the BMC at Rs. government securities and units of the schemes of liquid MFs or government securities MFs. online transmitting the client wise pay-in obligation to depository. SMD/POLICY/CIR-9/2003 dated March 11.nseindia. on recommendations of the Advisory Committee on Derivatives and Market Risk Management. Refund of Base Minimum Capital In view of the insignificant volumes at some of the exchanges. (a) The minimum cash component of the additional capital and margins should be increased from the existing level of 30% to 50%. II. a system for capturing details of the client’s depository account and bank account. 1 lakh. the smaller stock exchanges should accept the shares that are in the Group I of the BSE or the NSE for the purpose of base minimum capital. Therefore the SEBI has reviewed its earlier prescription for capital requirement. However. the stock exchanges have to provide facilities such as online confirmation of trades by custodians. III. The excess of the BMC over Rs. decided to revise the compositions of additional capital. The exchanges should lay down exposure limits either in rupee terms or as percentage of the Trade Guarantee Fund (TGF)/Settlement Guarantee Fund (SGF) that can be exposed to a single bank directly or indirectly.

The modification/ amendment should be with respect to signing of the electronic contract note with a digital signature so as to make the modified format a valid legal document. the CC/CH may borrow securities on behalf of their members for the purpose of meeting short falls subject to the following conditions: (a) the CC/CH should borrow the required securities to meet the short fall on the day of settlement for a maximum period of 7 trading days. if any. Risk Disclosure Document NSE in coordination with SEBI designed a Risk Disclosure Document. incurred by the CC/CH in this regard should be recovered from the defaulted selling broker (e) the return of the borrowed securities by the CC/CH should be independent of the normal settlement.e. This will streamline the issuance of electronic contract notes as a legal document like the physical contract note.g.Clearing and Settlement 118 There are no investor complaints pending. risk of lower liquidity. risk-reducing orders. the other stock exchanges were directed to prepare their own Risk Disclosure Document. This includes the risks involved in trading on a stock exchange e. risk of higher volatility. (c) in the event of the defaulted selling broker failing to make the delivery within the aforesaid 3 trading days. VI. www. excluding the day of borrowing. The risk disclosure document should contain important information on trading in the equities segment and should be competent enough for any person to understand the basic risks involved in trading. risk of wider spreads. V. (v) The exchange should ensure that the member has paid the SEBI turnover fees and has obtained a No-Objection Certificate from SEBI in this regard. (iv) The exchange should retain/deduct/debit from the BMC to be refunded. and also the rights and obligations of the investors. The mechanism of record keeping of electronic notes in a soft non-tamperable form should be prescribed in conformity with the IT Act 2000. (b) the defaulter selling broker may make the delivery within 3 trading days from the due date i. the CC/CH should buy the securities from the open market and return the same to the lender within 7 trading days (d) cost. Thereafter. the amount of any complaints/claims of the investors against the member and for dues crystallized and contingent to the exchange/SEBI arising out of pending arbitration cases. administrative expenses. (iii) There are no arbitration cases pending. The exchanges were given the liberty to prescribe any additional clauses as may be considered necessary by them. Securities Lending and Borrowing SEBI has permitted the Clearing Corporation/Clearing House (CC/CH) to get registered as an approved intermediary under the Securities Lending and Borrowing (SLB) scheme.ISMR (ii) Secondary Market . IV. settlement date.nseindia. appealed arbitration awards. risk of new announcements. Based on it. rules and regulations. systemic risk. SEBI turnover fees. Electronic Contract Notes SEBI advised the stock exchanges to prescribe a standard format for the electronic contract note in its bye laws.com . A separate section of investors’ rights and obligations should also be included in the disclosure document. etc. risk of rumours.

nseindia. Currently this STP Centralised Hub has been setup and made operational by NSE.com . SEBI had issued various circulars permitting issue of electronic contract notes with digital signature obtained from a valid Certifying Authority provided under the IT Act. STP was launched in India in November 2002. The exchanges were also directed to amend their bye-laws. July 01. it should (a) verify the signature of the sending STP service provider only (b) send an acknowledgment to the sending STP service provider. there was no inter-operability between them. In view of the aforesaid developments. The recipient STP service provider should forward the message to the recipient STP user. To resolve this issue.119 Secondary Market . The recipient STP user should receive the message and verify the signature of the recipient STP service provider and sending STP user. if the recipient is availing services of the same STP service provider.e. The PKI (Public key www. For this. but was used on a voluntary basis by market participants. STP thus streamlines the process of trade execution and settlement by avoiding manual entry and reentry of the same details by different market intermediaries and participants. In such a case the STP service provider should be required to prepare a message as per the STP centralized hub prescribed message format. NSE has obtained the necessary approvals from Department of Telecommunications (DoT) as an Internet Service Provider (ISP). While several STP Service Providers had been providing STP service to the market participants. which should be as follows: (a) (b) A STP user intending to send an instruction should send the message to his STP service provider after digitally signing the same. On receipt of the message by the STP centralized hub. or the (ii) STP centralized hub if the recipient is not with the same STP service provider.f. (c) (d) (e) (f) To enable inter-operations. that a STP Centralised Hub would be setup. 2000. 2004. The STP centralized hub would then forward the message to the recipient STP service provider after digitally signing on the message. verify if the recipient STP user is associated with itself and send an appropriate acknowledgment with digital signature to the STP centralized hub. enclose the user’s message. The STP centralized hub would in turn forward the acknowledgment (received from the recipient STP service provider) duly signed to the sending STP service provider. SEBI also prescribed the framework for the system flow of the STP. To facilitate this. it was decided in consultation with the stock exchanges and the STP Service Providers. it was decided that all the institutional trades executed on the stock exchanges would mandatorily be processed through the STP System w. the STP centralized hub should provide utility/client software to the STP service provider as a point of interface between them. has to verify the signature of the STP centralized hub. Straight Through Processing The Straight Through Processing (STP) allows electronic capturing and processing of transactions in one pass from the point of order origination to the final settlement.Clearing and Settlement ISMR VII. The recipient STP service provider on receipt of the message from the STP centralized hub. rules and regulations for the equity and the debt segment to streamline the issuance of electronic contract notes as a legal document. digitally sign it and then send it to the STP centralized hub. The STP service provider after verification of the signature should forward it to the (i) recipient user.

Clearing Members: Clearing Members are responsible for settling their obligations as determined by the NSCCL. 2004. The stock exchanges/depositories are also required to follow a strict time schedule. custodians. SEBI has also issued the SEBI (STP centralized hub and STP service providers) Guidelines. ■ ■ www. The clearing process involves determination of what counter-parties owe. While the stock exchanges provide the platform for trading. 2. and which counter-parties are due to receive on the settlement date.e. They settle trades on behalf of trading members. clearing banks. viz. Clearing and Settlement Processes The transactions in secondary market pass through three distinct phases. Settlement of Transactions in Case of Holidays The Advisory Committee on Derivatives and Risk Management. Also. Several entities. when a particular trade is assigned to them for settlement. in-order to meet his pay-in obligations for the subsequent settlement. issued guidelines to facilitate the smooth completion of settlement process in cases where bank holidays are not in conformity with the stock exchanges holidays. They do so by making available funds and/or securities in the designated accounts with clearing bank/depositories on the date of settlement. a code of conduct for them has been included in the guidelines. The clearing banks and the depositories provide the necessary interface between the custodians/clearing members for settlement of funds and securities obligations of trading members. clearing members. Custodians: Custodians are clearing members but not trading members. the clearing corporation determines the funds and securities obligations of the trading members and ensures that the trade is settled through exchange of obligations. The stock exchanges should clear and settle the trades on a sequential basis i. depositories are involved in the process of clearing. the payin and the pay-out of the first settlement should be completed before the commencement of the next pay-in and pay-out. thereafter the obligations are discharged by settlement. The depositories should. obligations and responsibilities of the STP centralized hub and the STP service providers. ensuring that the settlements are completed on the same day. VIII..ISMR Secondary Market . The role of each of these entities is explained below: ■ Clearing Corporation: The clearing corporation is responsible for post-trade activities such as the risk management and the clearing and settlement of trades executed on a stock exchange. like the clearing corporation. The cash/securities pay-out from the first settlement should be made available to the member for meeting his pay-in obligations for the subsequent settlements. To this effect. The clearing and settlement process for transaction in securities on NSE is presented in Chart 5-1. conditions of approval.Clearing and Settlement 120 infrastructure) system for the interface will be implemented at a later stage. which prescribe the eligibility criteria. The guidelines have set certain limits as enumerated herewith: 1. the member may need to move securities from one depository to another. therefore facilitate the inter-depository transfers within one hour and before pay-in for the subsequent settlement begins. clearing and settlement.com . Further.nseindia. trading.

Pay-out of funds (NSCCL advises Clearing Banks to credit account of custodians/CMs and debit its account and clearing bank does it).nseindia. If he confirms to settle that trade.Clearing and Settlement ISMR Chart 5-1: Clearing and Settlement Process at NSE NSE DEPOSITORIES NSCCL CLEARING BANK CUSTODIANS/ CMs 1. 10. NSCCL applies multilateral netting and determines obligations.com . Pay-out of securities (NSCCL advises depository to credit pool account of custodians/CMs and debit its account and depository does it). 5. Download of obligation and pay-in advice of funds/securities. 8. there are 11 custodians empanelled with NSCCL. As on date. 9. Pay-in of securities (NSCCL advises depository to debit pool account of custodians/CMs and credit its account and depository does it). 6. Instructions to depositories to make securities available by pay-in time. Depository informs custodians/CMs through DPs. 11. Based on the affirmation. Clearing Banks inform custodians/CMs. ■ Clearing Banks: Clearing banks are a key link between the clearing members and Clearing Corporation to effect settlement of funds. Pay-in of funds (NSCCL advises Clearing Banks to debit account of custodians/CMs and credit its account and clearing bank does it). 7. Every clearing member is required to open a dedicated clearing account with one of the designated clearing banks.121 Secondary Market . The custodian is required to confirm whether he is going to settle that trade or not. www. Trade details from Exchange to NSCCL (real-time and end of day trade file). 4. NSCCL notifies the consummated trade details to clearing members/custodians who affirm back. the clearing member makes funds available in the clearing account for the pay-in and receives funds in case of a pay-out. 3. 2. then clearing corporation assigns that particular obligation to him. Instructions to clearing banks to make funds available by pay-in time. Based on the clearing member’s obligation as determined through clearing.

Since the beginning of the financial year 2003. Based on it. PCMs also undertake clearing and settlement responsibilities of the trading members. so that they can settle their obligations on T+2. T+2 Rolling Settlement (From April 1. He is required to make available the required securities in the designated account on settlement day. The depository runs an electronic file to transfer the securities from accounts of the custodians/clearing member to that of NSCCL and visa-versa as per the schedule of allocation of securities. (The activity schedule for the T+2 rolling settlement has already been discussed in the policy development section). In such cases. but has clearing rights i. The NSCCL notifies the relevant trade details to clearing members/custodians on the trade day (T).). 2003) T T+1 T+1 T+2 T+2 T+2 T+3 T+4 T+5 T+5 T+6 T+8 T+9 www. Members’ pay-in/ pay-out obligations are determined latest by T+1 and are forwarded to them on the same day. A clearing member has to pay-in/ pay-out funds and/or securities. the functions and responsibilities of the PCM are similar to that of the custodians. he clears the trades of his associate trading members and institutional clients. Each clearing member is required to maintain a clearing pool account with the depositories. The securities/funds are paid-in/paid-out on T+2 day to the members’ clients’ and the settlement is complete in 2 days from the end of the trading day. Other T+ terms have similar meanings. NSCCL nets the positions of counterparties to determine their obligations. Table 5-1: Settlement Cycle in CM Segment Activity Trading Custodial Confirmation Determination of Obligation Securities/Funds Pay-in Securities/Funds Pay-out Valuation Debit Auction Bad Delivery Reporting Auction Pay-in/Pay-out Close Out Rectified Bad Delivery Pay-in/Pay-out Re-bad Delivery Reporting Close Out of Re-bad Delivery T+1 means one working day after the trade day. ■ Settlement Cycle NSCCL clears and settles trades as per the well-defined settlement cycles (Table 5-1). which are affirmed on T+1 to NSCCL.e. institutions etc. Professional Clearing Member : NSCCL admits special category of members known as professional clearing members (PCMs). all securities are being traded and settled under T+2 rolling settlement. PCMs may clear and settle trades executed for their clients (individuals.Clearing and Settlement 122 ■ Depositories: Depository holds securities in dematerialized form for the investors in their beneficiary accounts.com .ISMR Secondary Market . The PCM in this case has no trading rights.nseindia. The obligations are netted for a member across all securities to determine his fund obligations and he has to either pay or receive funds.

1. The clearing corporation ensures that trading members’ obligations are commensurate with their net worth. then automatically the members are disabled. WDM and CM F&O Segment Segment 200 275 25 300 25 25 CM and F&O Segment 300 34 50 100 125 25 200 250 25 A professional clearing member (PCM) is required to bring in IFSD of Rs. The deposits kept with the Exchange as part of the membership requirement are taken as base capital to determine the member’s intra-day trading limit and/or gross exposure limit. This section however discusses the measures prevailing as in June 2004. Table 5-2: Capital Adequacy Norms for Membership on NSE (All values in Rs. Source: NSE. 25 lakh respectively for corporate members) per trading member in the CM segment.com . 9 lakh and Rs. the exchange maintains strict surveillance over market activities in illiquid and volatile securities. 17. It has put in place a comprehensive risk management system. 2004. Lakh) Requirement Members of CM and F&O CM and WDM Segment Segment Net Worth Interest Free Security Deposit (IFSD) Collateral Security Deposit (CSD) Note: Professional Clearing Members of CM. To safeguard the interest of the investors.5 lakh (Rs. 6 lakh and CSD of Rs. NSE administers an effective market surveillance system to detect excessive volatility and prevents price manipulation by setting up price bands.123 Secondary Market . positions and exposure with the market. Capital Adequacy Requirements The capital adequacy requirements stipulated by the NSE are substantially in excess of the minimum statutory requirements as also to those stipulated by other stock exchanges. which is constantly monitored and upgraded to prevent market failures. 1 crore and keep an interest free security deposit of Rs.25 crore with the Exchange/NSCCL. Risk Containment Measures The risk containment measures have been repeatedly reviewed and revised to be up to date with the market realities. collects margins.Clearing and Settlement ISMR Risk Management A sound risk management system is integral to an efficient clearing and settlement system. www. The capital adequacy norms to be followed by members are presented in Table 5-2.25 crore and collateral security deposit of Rs. Additional base capital is required to be deposited by the member for taking additional exposure. A person/entity seeking membership in the CM segment is required to have a net worth of Rs. It monitors the track record and performance of members in terms of their net worth. 0.nseindia. The robustness of the risk management system has been amply proved by the timely and default free settlement even on extreme volatile days like May 14th and 17th . If the prescribed limits on positions and exposures are breached. Further.

nseindia. rumors in the print media are tracked and where they are found to be price sensitive. The on-line surveillance mechanism also generates alerts/reports on any price/volume movement of securities not in line with past trends/patterns. Gross Exposure Limits The gross exposure of a member is computed across all securities and across all open settlements. This is then informed to the members and the public.5 crore plus 10 times of the capital in excess of Rs. A penalty of Rs. Members trading facility is restored from the next trading day with a reduced intra-day turnover limit of 20 times the base capital till deposits in the form of additional base capital is deposited with NSCCL. For this purpose the exchange maintains various databases to generate alerts. after satisfying the applicable conditions. if required and take pro-active action. Besides this. Similarly. www. On-line Monitoring NSCCL has put in place an on-line monitoring and surveillance system.Clearing and Settlement 124 Trading and Exposure Limits NSCCL imposes limits on turnover and exposure in relation to the base capital of a member. Groups I. 1 crore. Gross intra-day turnover of a member should not exceed 25 times of the base capital. It is arrived at by adding up the absolute values of all the securities and the specified adjustment factor in which a member has an open position. his exposure should not exceed Rs. For this purpose. whereby exposure of the members is monitored on a real time basis. Early pay-in of funds/securities If members meet funds/securities obligations prior to the funds pay-in day. 2 and 8.ISMR Secondary Market . 8. 5.5 respectively. Non-payment of penalty on time attracts penal interest of 15 basis points per day till the date of payment. If a member has free capital in excess of Rs. 1 crore. 5. The value of the advance pay-in made is reduced from the cumulative net outstanding position of the member for the purpose of calculating gross exposure. 95% and 100%) as and when the members approach these limits.5 times the total base capital (not utilized towards margin) up to Rs.000 is levied for each violation of gross exposure limit and intra-day turnover limit. scrips have been classified in to three groups on the basis of market capitalisation. impact cost and number of trades. Members exceeding the gross exposure limit are not permitted to trade with immediate effect until their cumulative gross exposure is reduced to below the gross exposure limits (as defined by the guidelines) or they increase their limit by providing additional base capital.25. the penalty in multiples of Rs. then the margin payable by the member is re-computed. These alerts are scrutinized and if necessary taken up for follow up action. Open settlements are all those settlements for which trading has commenced and for which pay-in is yet to be completed. 1 crore. II and III have been assigned adjustment factors of 1. 85%. The system enables NSCCL to further check the micro-details of members’ positions. Members violating the intra-day gross turnover limit at any time on any trading day are automatically and instantaneously disabled by the trading system.000 for each such instance is charged.com . companies are approached to verify the same. Open positions of securities are also analyzed. gross exposure (aggregate of net cumulative outstanding positions in each security) of a member at any point of time should not exceed 8. In case of second and subsequent violation. A system of alerts has been built in so that both the member and the NSCCL are alerted as per pre-set levels (reaching 70%.

1 lakh.5 times the volatility. www. If the investigation suggests suspicions of possible irregular activity across the stock exchanges and/or possible involvement of clients. VaR margin rate for a security constitute the following: 1. the same is informed to SEBI. If it suggests any possible irregularity such as deviations from the past trends/patterns. ■ ■ ■ The daily margin is the sum of Mark to Market Margin (MTM margin) and Value at Riskbased Margin (VaR-based margin). inspection of more members than the regulatory requirement is undertaken every year. then a disciplinary action is initiated against the member. If the detailed investigation establishes any irregular activity. The index VaR would be subject to a minimum of 5%. which have traded at least 80% of the days during the previous 18 months. The categorisation of stocks for imposition of margins is as given below: ■ The stocks. Usually. concentration of trading at NSE at the member level.com . The impact cost is required to be calculated for an order value of Rs. then a more detailed investigation is undertaken. should constitute as the Group I and Group II.Clearing and Settlement ISMR Inspection and Investigation There is a regulatory requirement that a minimum of 10% of the active trading members should be inspected every year to verify their level of compliance with various rules.125 Secondary Market . Margin Requirements NSCCL imposes stringent margin requirements as part of its risk containment measures. For the securities listed in Group II the VaR margin should be higher of scrip VaR (3. should be under Group II. The inspection randomly verifies if the investor interests are being compromised in the conduct of business by the members. On the basis of various alerts further analysis is carried out. VaR margin calculated as shown above. and it should be scaled up by root 3. VaR margin is applicable for all securities in rolling settlement. byelaws and regulations of the Exchange. scrip wise daily volatility is calculated using the exponentially weighted moving average should be 3. the scrip should move from one group to another group from the 1st of the next month. The impact cost should be calculated on the 15th of each month on a rolling basis considering the order book snapshots of the previous six months. The index VaR would be the higher of the daily Index VaR based on S&P CNX NIFTY or BSE SENSEX. the VaR margin would be equal to five times the index VaR and scaled up by square root of 3.5 δ) or three times the index VaR. those having mean impact cost of less than or equal to 1% should be under Group I and the scrips where the impact cost is more than 1. For the securities listed in Group III. For the securities listed in Group I. On the basis of the calculated impact cost. The remaining stocks should be under Group III.nseindia. Out of the scrips identified above. VaR Based Margins All securities are classified into three groups for the purpose of calculating VaR margin.

07% per day of the amount not paid throughout the period of non-payment. Index-based Market-wide Circuit Breakers An index based market-wide circuit breaker system applies at three stages of the index movement either way at 10%.m. In the event of the net outstanding position of a member in any security being nil. there should be a two-hour halt if the movement takes place before 1 p. In case movement takes place at or after 2:30 p. there would be a one-hour market halt if the movement takes place before 1:00 p. there should be a one-hour halt. but before 2:30 p. ● ● www.m. but before 2:00 p.m. Mark to market loss is the notional loss. thereafter it is grossed across all the clients of a member to compute gross exposure for margin calculation for him. In case the security has not been traded on a particular day. Mark-to-Market Margin Mark to market margin is computed on the basis of mark to market loss of a member. The VaR based margin would be rounded off to the next higher integer (For e. whichever is breached earlier.00) and capped at 100%. If the 15% trigger is reached on or after 2:00 p. ● In case of a 10% movement in either of these indices. The breakers are triggered by movements in either S&P CNX Nifty or Sensex. Trades done by trading members on behalf of institutions are.m.m.m. if the VaR based Margin rate is 10. The MTM losses for settlements are computed at client level.g.ISMR 2. MTM profit/loss across different securities within the same settlement is set off to determine the MTM loss for a settlement. trading should be halted for the remainder of the day. which the member would incur in case the cumulative net outstanding position in all securities at the closing price of the securities as announced at the end of the day by the NSE. Secondary Market .. NSCCL may stipulate security specific margins for the securities from time to time. These circuit breakers bring about a coordinated trading halt in trading on all equity and equity derivatives markets across the country. In case of a 20% movement of the index. The net position at a client level for a member are arrived. there will be no trading halt at the 10% level and market would continue trading.m. In case of a 15% movement of either index. Mark to market margin is calculated by marking each transaction in scrip to the closing price of the scrip at the end of trading. 3.. 15% and 20%. it would be rounded off to 11. the difference between the buy and sell values would be considered as notional loss for the purpose of calculating the mark to market margin payable. Non-payment of the margin attracts penal charge @ 0. If the 15% trigger is reached on or after 1:00 p.m.com . however.01.nseindia.Clearing and Settlement 126 Additional VaR Margin of 6% as specified by SEBI. the latest available closing price at the NSE is considered as the closing price. exempt from margin and exposure requirements. In case the movement takes place at or after 1:00 p. the trading should halt for remainder of the day. there would be trading halt for ½ hour. The VaR margin rate computed as mentioned above will be charged on the net outstanding position (buy value minus sell value) of the respective clients on their securities across all open settlements.

The Clearing Corporation provides a major link between the clearing banks and the depositories. Settlement is deemed to be complete upon declaration and release of pay-out of funds and securities. debit accounts of CMs and credit accounts of the Clearing Corporation. Settlement Guarantee The Settlement Guarantee Fund provides a cushion for any residual risk and operates like a self-insurance mechanism wherein members themselves contribute to the Fund. subject to the condition that: (a) in cases where www.com . the first depository in the country. As in case of NSCCL. the Clearing Corporation sends electronic instructions to the depositories/clearing banks to release pay-out of securities/funds. This has ushered in an era of dematerialised trading and settlement. This link ensures actual movement of funds as well as securities on the prescribed pay-in and pay-out day. The settlement process is carried out by the Clearing Corporation with the help of clearing banks and depositories. Dematerialised Settlement NSE along with leading financial institutions established the National Securities Depository Ltd. The share of demats delivery in total delivery at NSE touched almost 99. Likewise CMs with funds obligations make funds available in the designated accounts with clearing banks. (NSDL). The settlement cycle for the CM segment are presented in Table 5-1. SEBI. with the objective to reduce the menace of fake/forged and stolen securities and thereby enhance the efficiency of the settlement systems.nseindia. After processing for shortages of funds/securities and arranging for movement of funds from surplus banks to deficit banks through RBI clearing. other stock exchanges also have been allowed by the SEBI to use trade guarantee funds (TGFs) maintained by them for meeting the shortages arising out of non-fulfillment/partial fulfillment of funds obligations by members in a settlement before declaring the concerned member a defaulter. too. has been progressively promoting dematerialisation by mandating settlement only through dematerialized form for more and more securities. The banks process these instructions. The Clearing Corporation sends electronic instructions to the clearing banks to debit designated CMs’ accounts to the extent of payment obligations. This constitutes pay-in of funds and of securities.127 Secondary Market . The depositories and clearing banks debit accounts of the Clearing Corporation and credit accounts of CMs. In the event of a trading member failing to meet his settlement obligation. then the fund is utilized to the extent required for successful completion of the settlement. This has eliminated counterparty risk of trading on the Exchange.99% in terms of value during 2003-04. This requires members to bring in their funds/securities to the Clearing Corporation. The depositories move the securities available in the pool accounts to the pool account of the Clearing Corporation.Clearing and Settlement ISMR Settlement Process The settlement process begins as soon as members’ obligations are determined through the clearing process. The CMs make the securities available in designated accounts with the two depositories (CM pool account in the case of NSDL and designated settlement accounts in the case of CSDL). This constitutes pay-out of funds and securities.

6% of total delivery in 2003-04.00 28.00 0.19 0. There has been a substantial reduction in short and bad deliveries.00 0.00 0.00 0.79 4. (b) in cases where the shortage exceeded 20% of the BMC and was less than the BMC on six occasions within a period of three months.00 24.00 0.00 0.00 0. the trading facility of the member was withdrawn and the securities pay out due to the member was withheld.00 0.57 1.00 0.com .00 97.00 0.60% of turnover were settled by delivery.18 27. The ratio of bad deliveries to net deliveries progressively declined to almost negligible in 2003-04.00 97. Settlement Statistics The details of settlement of trades on CM segment of NSE are provided in Annexure 5-1.60 * Delivery ratio represents percentage of delivery to turnover of a Stock Exchange Source: SEBI.00 14.04 25. In the preceding year.10 100.00 0.65 – 0.00 0.31 66.02 6.92 0.00 0. 24.00 0.00 34.00 0. 28. the trading facility of the member was withdrawn and the securities pay-out to the member was withheld.00 0.42 2002-03 Value 14.00 0.12 0. During 2003-04.23 16.00 0.53 0.00 0. On recovery of the complete shortages.00 0.00 0.00 0.12 0.nseindia.42% of shares accounting for 21.00 0.67 1.Clearing and Settlement 128 the shortage was in excess of the BMC.62 32.81 0.00 0.00 5.00 0.00 0.00 23.13 0.00 0.19 0.00 210.00 0.35 2003-04 Quantity 24.00 0.00 37.00 0.00 21.00 0.78 0.00 0.98 100.00 0.72% of securities accounting for 21.73 13.00 0. This indicates preference for non-delivery-based trades.00 0.00 0.23 65.00 0.ISMR Secondary Market . the member would be permitted to trade with a reduced exposure.64 1.00 0.47 37.56 0.00 0.13 18. www.89 60.00 0. taking all stock exchanges together.00 0.00 0.88 0.40 1. Short deliveries averaged around 0.33 0.59 2.00 0.60% turnover were settled by delivery and the balance were squared up/netted out (Table 5-3).00 0.13 13.00 4. Table 5-3: Delivery Pattern in Stock Exchanges (In per cent) Exchange Quantity NSEIL Mumbai Calcutta Delhi Ahmedabad Uttar Pradesh Bangalore Ludhiana Pune OTCEI Hyderabad ICSEIL Chennai Vadodara Bhubaneshwar Coimbatore Madhya Pradesh Magadh Jaipur Mangalore Gauhati SKSE Cochin Total 22.00 0.56 1.72 Value 20.

6 16. brokers broker/ dealers and other exchange member) should be accomplished by T+0. Table 5-5: Status of Implementation of G30 Recommendations Recommendations 1a.7 59.Clearing and Settlement ISMR Settlement Efficiency During the past couple of years.30 in 1994 to 93. 1b.3 89.6 2000 59.0 out of 100 in it in 2003 as compared to 28. The Settlement Benchmark provides a means of tracking the evolution of settlement performance over a period of time.3 71. The clients can also browse websites of the exchange to verify their trade details as soon as trades are executed.0 Source: S&P Fact Book 2004 It provides an indication of the aggregate level of post-trade operational efficiency in securities markets.7 47. All comparisons of trades between direct market participants (i.1 43. The Safekeeping Benchmark provides the efficiency of a market in terms of collection of dividends and interest. the clearing and settlement mechanism in India has improved considerably and this has been corroborated in the Standards and Poor’s Factbook.9 78. Table 5-4: Benchmarks of Settlement Efficiency (Score out of 100) Benchmark Settlement Safekeeping Operational Risk 1994 8.6 in 2003.4 2001 75.00 in 1994.8 75.8 86.80 in 1994 to 88.129 Secondary Market .0 0.5 1998 10. Institutional clients are issued electronic contract notes. The benchmarks of settlement efficiency are expressed as a score out of 100 (Table 5-4).3 1999 41.e. and protection of rights in the event of a corporate action. The Settlement Benchmark for India has improved from 8.0 1995 –16.8 23.7 65. reclamation of excess withheld taxes.0 69.7 76.nseindia.com .6 88. Hence trade comparison and confirmation are instantaneous.2 2003 93.1 in 2003.9 51. Corporate Securities Market It is no more relevant as trades are matched on the screen and matched trade details are linked to settlement system of the Clearing Corporation electronically.6 81. The status of Implementation of G30 recommendations on the Corporate Securities market in India are presented in Table 5-5. Matched trade details should be linked to the settlement system. The Operational Risk Benchmark takes into consideration the settlement and safekeeping benchmarks and takes into accounts other operational factors such as the level of compliance with the G30 recommendation.1 66.8 1997 –1. Contd.8 28. www.1 2002 89. The contract notes indicating execution of trades are issued by brokers to clients within 24 hours. India’s score for it has improved from 71.0 1996 –0. India scored 66. and counterparty risk. 2 Indirect market participants (such as institutional investors and other indirect trading counterparties) should achieve positive affirmation of trade details by T+1.2 76. the complexity and effectiveness of the regulatory and legal structure of the market.

The clearing corporation has full control over receipts and payments and does not make pay-out to receiving trading members unless the concerned trading members have fulfilled their respective pay-in obligations. organised and managed to encourage the broadest possible direct and indirect industry participation. that is. The CSA provides counter party guarantee for all trades executed on stock exchanges on the strength of the SGF/ TGF and a comprehensive risk management system. The settlement obligations (both securities and funds) for any settlement constitute about one-third of the funds available in SGF/TGF. Payments associated with the servicing of securities portfolios should be made consistent across all instruments and markets by adopting the “same day” funds convention. 3d. Payments associated with the settlement of securities transactions should be made consistent across all instruments and markets by adopting the “same day” funds convention. The depositories operate under the Depositories Act. irrevocable and immediately available exchange of securities and cash on a continuous basis through out the day. If several CSDs exist in the same market. Immobilisation or dematerialisation of financial instruments should be achieved to the utmost extent possible. a trade netting system that fully meets the “Lamfalussy-recommendations” Corporate Securities Market There are in place two fully developed depositories which maintain and transfer ownership records in electronic form for the entire range of securities. The range of depository eligible instruments should be as wide as possible. 4a. A large variety of instruments including all securities and money market instruments are held in depositories. 3c. This system seeks to settle inter-bank transactions on transaction by transaction basis online at real time mode. The pay-in and pay-outs for both funds and securities take place on the same day. Today about 100% of securities settlement takes place through depositories.ISMR Secondary Market . These are held in dematerialised form. 3b. a member making pay-in is guaranteed of payout by the clearing corporation. DvP means simultaneous. Each country should have in place an effective and fully developed central securities depository. with the aim of reducing settlement risk and enabling efficient use of funds and available cross-collateral. 6b.com . 6a. The members pay-in funds/securities to the CSA which in turn pays-out funds/securities to the receiving members. The systems are in place for smooth inter-depositor y transfer of securities. Contd. 1996 and the systems are in place for smooth interdepository transfer of securities. This is akin to DvP in the sense that there is no principal risk.nseindia. final. they should operate under compatible rules and practices. www. Securities held in depositories are freely transferable and also are preferred collateral in the market. They encourage broadest direct and indirect industry participation.Clearing and Settlement 130 Table 5-5: Status of Implementation of G30 Recommendations – Contd. 5 Delivery based payment (DvP) should be employed as the method of settling all securities transactions. The present capital market settlement system of the clearing coproration relies on multilateral netting the obligations to determine obligations of members who have security-wise net obligations to receive/deliver and a fund obligation to pay or receive. RBI launched the RTGS system in March 2004. Each market is encouraged to reduce settlement risk by introducing either Real Time Gross Settlement or 4b. Recommendations 3a.

Governance: The SSS (Depositories/CC) have a primar y responsibility to their users and other stakeholders. the common messaging standards is ISO 15022. Existing regulatory and taxation barriers that inhibit the practice of lending and borrowing of securities should be removed. 2001 while settlement of funds and securities on T+2 basis have been introduced from April 1. Each country should adopt the standard for securities message developed by the International Organisation of Standardisation (ISO Standard 7775). which have become universal benchmarks. SEBI has framed securities lending and borrowing scheme under which approved intermediaries can lend securities. messaging standards.nseindia. as implemented by the clearing corporation of NSE (NSCCL). A rolling settlement system should be adopted by all markets. Securities lending and borrowing should be encouraged as a method of expediting the settlement of securities transactions. 1961. The depositories and clearing corporations use message structure based on SWIFT standards. or a sector have a large voting position at the board of the SSS? Contd. the SSS may have dominant shareholders or their boards may not be accountable to users directly. and risk management. but to their promoters and the regulators. 9b. countries should adopt the ISIN numbering system for securities issued as defined in the ISO Standard 6166.Clearing and Settlement ISMR Table 5-5: Status of Implementation of G30 Recommendations – Contd. In particular. needs to be replicated for the whole market. However it is important to note that the SSS model. There are dominant shareholders in the depositories/CC. ISIN numbering system is being used by exchanges and depositories for settlement of securities in demat form. Are the boards that gover n the SSS answerable to its users? Does any single organisation. www. 9a. It has been clarified that the lending of securities would not be treated as ‘transfer’ so as to attract the provisions relating to capital gains under the Income Tax Act. if not in letter. These have been removed. They must provide effective low cost processing. The boards are not explicitly answerable to its users. but there are systems in place in the form of Executive Committee or Committee on Settlement Issues to receive input from users. 8a. The key areas where substantial improvements are required to fully comply with ISSA standards are governance of SSS. For Straight through processing. Table 5-6: Indian Securities Settlement System vis-à-vis ISSA Recommendations 2000 I. Final settlement for all trades should occur no later than T+3. ISINs have been issued by SEBI. Services should be priced equitably. 2003. Corporate Securities Market Rolling settlement was introduced for all listed securities from December 31. Recommendations 7a. 7b. 8b. Table 5-6 attempts to assess Indian SSS for corporate securities in terms of ISSA recommendations. For example.131 Secondary Market .com . The Indian SSS seems to have met most of the recommendations in spirit. ISSA Recommendations 2000 The international standards have been instrumental in improving safety and efficiency of the SSS.

exchanges. The depositories and the CC. They should cope with peak capacity without any service degradation. The depositories also have interactive communication with their participants. communiques and newsletters. They do not charge such international clients and domestic clients differently. They generally evolve policies in consultation with the regulator and various committees which comprise of representatives of users and eminent persons. However. custodians. these CC have electronic communication with the brokers. set up under the Companies Act. however. The CC settles the trades in batches. the charges levied by depositories from participants and by participants of the same depository from clients vary widely. What process is in place at the SSS to ensure that it meets the needs of all its stakeholders (e. institutions. They hold annual general meetings and publish annual reports detailing its actions and plans as well as financials. 1956. have the SSS been required to change its published settlement timetable? Do the SSS operate real time or multiple batch processing for settlement? Do the SSS allow inter active communication (on line real time) with its users. a depository is goverened by the Depositories Act. There has been no disruption of settlement schedule drawn by CC. custodians. over the last twelve months. Besides.ISMR Secondary Market . The depositories adhere to the settlement schedules.Clearing and Settlement 132 Contd.g. broker dealers. however.com . They. issuers)? What is the communications strategy of the SSS to its stakeholders and how is this run? II. Though securities are settled in batches. and have sufficient standby capabilities to recover operations in a reasonably short period within each processing day. being companies. While the depositories have electronic communication with DPs. But the depositories process the batches on real time. 1996 and the regulations made there under. They also do real time settlement for spot trades and trades in respect of which both buy and sell orders have been routed through the same broker.g. Is there cross subsidisation of products (e. The depositories do not charge the investors and clearing members directly but charge its participants uniformly. This has never occurred.nseindia. clearing bank and clearing members/custodians. The CC does not levy any fee directly from members. international services subsidised by local ones or transaction costs subsidised by asset servicing charges)? The SSS do not render any international service and hence there is no cross-subsidisation between international service and domestic service. circulars. www. Technology – Core Processing: Securities Systems must allow the option of network access on an interactive basis. the CC. there is online real time interactive communication between the CC and the depositories. clients (BO) and exchanges. How often. retail investors. The SSS. A CC is governed by the rules and regulations made under the SCRA. have international clients. enabling settlement input and amendment? Have the SSS ever failed to recover an outage within a reasonable time and what steps have been taken to prevent a similar event in the future? Contd. 1956 are required to comply with provisions thereof for corporate governance and financial reporting. T hey have electronic interactive communication system with participants. who are free to have their own charge structure for their clients. The SSS maintain websites and disseminate information through press releases. and allow demat account holders to submit delivery instructions directly on the internet. maintain disaster recovery sites. depositories and clearing banks. but shares the transaction fee levied by the exchanges. These charges have reduced drastically over time with increase in volumes.

Any market participants can lend or borrow securities through these approved intermediaries. or closing price on the auction day plus 20%. All shortages not bought in the auction are deemed closed out at the highest price between the trading day and the settlement day. and are these open to all market participants and their settlement agents? Does the settlement system mark fail trades to market and collect margin from the failing counterparty to pr otect the innocent counterpart’s interest? www. Does the market have securities lending and borrowing schemes in place. transfer of economic benefits and shareholder rights. how do these fit into a single global identif ication methodology? IV. however. in turn. The market uses ISINs for all securities as primary identification code. The major exchanges provide nation-wide satellite links. do not have need for borrowing. The regulator has made it mandatory for all brokers to use unique client code for all clients. Contd. However.com . fast settlement by full adherence to the International Securities Numbering process (ISO 6166) and uniform usage of ISO 15022 standards for all securities messages. trades are executed on the basis of scrip identity numbers which are mapped to ISIN. ISO 15022 messaging format has been prescribed for communication between member and custodian. the difference is credited to IPF and not passed on to defaulting broker.Clearing and Settlement ISMR Contd. Failure at delivery stage (short delivery) is less than 0. in such cases. The CC have bilaterally agreed automatic interfaces with one another. member and client and client and custodian for post trading activity. The participants. If the buy-in auction price is more than the valuation price. whichever is higher. The CC identifies the short deliveries and debits the CM on the pay-out day by an amount equivalent to the securities not delivered. There is a securities lending and borrowing scheme in place. Does the market use ISIN as the primary securities identification code? Are the major participants in the market linked electronically? Do the SSS communicate using true (i. not bilaterally agreed on sub-standards) ISO standards for securities messaging? Does the market operate standard identification codes for counterparties or client accounts and. It conducts a buy-in auction on the day following the pay out day. Failure at the stage of confirmation by custodians is insignificant.e. though they may lend. Uniform Market Practices: Each market must have clear rules assuring investor protection by safe guarding participants from the financial risks of failed settlement and ensuring that listed companies are required to follow sound policies on corporate governance.133 Secondary Market . III. who are not permitted to undertake short sales. if so. The industry should seek to introduce a global client and counterpart identification methodology (BICISO 9362) to further facilitate straight through processing. and valued at the closing price on the settlement day. allot client identification numbers. All trades executed on the exchanges are settled by the CC who provide guarantee of financial settlement. Paper instructions are generally not used. custodians and members electronically. Applications and programmes should be structured in such a way as to facilitate open inter-action between all parties. the obligation devolve on the broker and the trades are subjected to usual risk containment measures including margins and exposure limits. Technology – Messaging and Standards: The industry worldwide must satisfy the need for efficient. The depository participants have a unique identification numbers and they.nseindia. The exchanges are also connected to CC which is connected to clearing banks. If the buy-in auction price is less than the valuation price. the CM is liable for the difference. No trade executed on the exchanges fails. depositories. This amount is credited to the receiving members account on the auction pay-out day. The market is yet to adopt universal client identification/ global identification methodology.5% of delivery.

The document appointing a proxy need to be deposited at least 48 hours before the meeting. including registration. Physical securities require registration of transfer in favour of purchaser in order to entitle him to corporate actions. Does the market operate a guarantee fund or have an equivalent procedure to protect against the cost of failed transactions. rights issues. The purchaser gets all the benefits from the date of purchase before no-delivery period. The exchanges can use up to 25% of their guarantee funds to cover failures of payment during the allotment of IPOs for shares offered through them. The listing agreement requires transfers to be affected within thirty days.ISMR Secondary Market . For example. including issuers handling registration and transfer work in-house. the dividend shall be paid to shareholders within 30 days from the date of declaration. However. the dematerialized securities are freely transferable and depositories effect such transfers instantaneously. but cannot participate in the deliberations. tender offers and other voluntary corporate actions? Are all voluntary corporate actions advised through a central mechanism assuring consistent information to all investors? www. the calling of shareholder meetings. etc.com . Are the stock transfer a gents (share registrars) linked electronically to the depository? Is there a legal maximum time period to complete ownership transfers in the books of the issuer? If so. These may differ among exchanges and on the same exchange for physical and dematerialized shares. for certain resolutions. and how are these rules enforced? Is proxy voting permissible in the market and can such proxies be lodged by post or other remote delivery method? Are there binding rules in the market stating the minimum and maximum lapsed time between the announcement and completion of key events. Based on the record date/book closure. These are prescribed in the Companies Act. the exchanges determine ‘nodelivery’ period during which securities are traded ex-benefits and before that cum-benefits. the companies are required to report all corporate actions to exchanges within defined time limits and the exchange in turn disseminates the same to members/investors. The depositories transfer securities electronically. exchanges and depositories. Ex-dates for voluntary corporate actions are announced by the exchanges. It is possible for a member to caste his vote by post also.Clearing and Settlement 134 Contd. Under the listing agreement. The Companies Act. There is a limit on the amount payable per investor claim. A proxy can attend and vote at the meeting of the company. Are investors entitled to all benefits arising on a security from the point of purchase. 1956 requires companies to effect the transfers within 60 days. a share transfer shall be registered within 60 days of presentation. and which sectors of the market does it cover? The exchanges maintain SGF/ TGF and use these funds for meeting shortages arising out of non-fulfillment/partial fulfillment of the funds obligations by the members in a settlement before declaring him a defaulter. Exchanges maintain an Investor Protection Fund to take care of investor claims arising out of non-settlement of obligations by a member. There is no limit on pay-out per incident and all legitimate claims are honoured. Over 99% of securities transactions are currently settled in demat form. at least 21 days’ notice shall be given for general meetings. does market practice adhere to the deadline? Registrars and transfer agents. the payment of dividends or interest. are electronically linked to both the depositories. Contd. 1956 and the listing agreements. T hese are disseminated through the websites of the company. annual general meeting shall be held every year and not more than 15 months shall lapse between two such meetings.nseindia.

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The regulator has put in place an integrated source of company information, which is accessible through a web site on lines similar to that of Electronic Data Gathering, Analysis and Retrieval (EDGAR). All company related information, which is mandatorily required to be filed by the companies with the exchanges under the listing agreement, are be available at one location in electronically interactive form. Is information on corporate actions available electr onically, and is the minimum lapsed time for responding to such actions sufficient to enable all domestic and foreign investors to respond in a timely and considered fashion? V. The exchanges notify members of corporate actions through their websites and circulars. These are also available on the web site of the company and the depositories. Generally, sufficient time is available to all investors to respond to corporate actions.

Reduction of Settlement Risk: The major risks in securities systems should be mitigated by five key measures, namely real delivery versus payment, trade date plus one settlement cycle, the minimisation of funding and liquidity constraints, scrip-less settlement, and mandatory trade matching and settlement performance measures. The market uses a variant of BIS model 3 that settles transfer instructions for both securities and funds on a net basis, with final transfers of both securities and funds occurring at the end of the processing cycle. The CC applies multilateral netting to determine obligations of members who have a security wise net obligation to receive/deliver and a fund obligation to pay/receive. The members pay-in fund/securities to the CC which in turn pays-out funds/securities to them. The CC has full control over receipts and payments and does not make pay-out unless pay-in has been received. This is akin to DvP in the sense that there is no principal risk, that is, a member making pay-in is guaranteed of pay-out. All other securities compulsorily moved to rolling settlement in December 2001 and the settlement cycles have been shortened to T+2 rolling settlement from April 1, 2003. Limited availability of EFT constrains shorter settlement cycle. EFT is available only at 15 centres covering 8500 bank branches and that too, for values not exceeding Rs. 20 million per transfer. The market has moved to T+2 rolling settlement from April 2003 and is expected to switch to T+1 rolling settlement in the near futures. Trades are executed on screen and matched trade details are linked to settlement system electronically. Hence matching of trades for direct participants is instantaneous. The custodians affirm trade details on T+1 basis. The depositories maintain ownership records of dematerialised securities and transfer the ownership electronically in book entry form. The participants accept partial deliveries. The depositories do so for off-market transactions. Since institutions are required to do only delivery based transactions on exchanges and CC processes settlement in batches, same day turnaround is difficult. Contd.

Does the market use DvP settlement procedures in accordance with one of the recognised BIS models?

Does the market have a rolling settlement cycle of T+3 or shorter for all exchange traded instruments? Could the market reduce the current settlement period to T+2 or below, without increasing fails rates? If so, how would this be achieved, and what plans are there to shorten the existing settlement cycle? Is matching of trade details achieved on trade date, at least for direct market participants; and by trade date plus one for indirect participants? Is the depository scrip-less, and, if not, is it working to enable scrip-less settlement? Does the market allow partial settlements? Can the depository accommodate same day turnarounds?

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Contd. VI. Market Linkages: Convergence of Securities Systems, both within countries and across borders, should be encouraged, where this eliminates operational risk, reduces cost and enhances market efficiency. The depositories have secured real time linkages with CC which is connected with trading platform, netting and payment system.

Is the depository linked electronically and in real time with other segments of the core market infrastructure (e.g. trading platfor ms, netting systems, payment systems)? Is there one or more depository or settlement system in the market? If there are several, has a consolidation been considered? If yes, by when?

Each stock exchange has its own clearing agency. There are two depositories which are linked to each other and to most of the exchanges/clearing agencies. The consolidation of trading and settlement system is left to market forces. There are 23 stock exchanges with equal number of clearing agencies and two depositories. The law encourages multiple agencies in the interest of competition. The system does not allow external agencies to participate in the securities system. The system does not allow foreign intermediaries to become direct market participants. They become direct participants through their local subsidiaries or joint ventures with local partners.

Does the securities system allow foreign systems to establish direct links on an equal basis to local members? Does the securities system allow foreign market participants to become direct participants?

VII. Investor Protection: Investor compliance with the laws and regulations in the home countries of their investments should be part of their regulators’ due diligence process. Investors, in turn, should be treated equitably in the home country of their investments especially in respect to their rights to shareholder benefits and concessionary arrangements under double tax agreements. Do domestic regulators monitor the procedures in place at their locally based cross-border custodians to assure compliance with the laws and regulations of the home countries of their investments? What are the areas (e.g. benefits, investor compensation) where foreign investors are not treated in the same way as local investors? Can sales proceeds and income be repatriated without any restrictions? Are double tax agreements simple to apply, and do foreign investors receive promptly their full entitlement to dividends and interest payments? SEBI regulates locally-based cross border custodians and RBI maintains oversight for foreign and local banks licensed to operate in India.

The foreign investors are generally treated at par with domestic investors. However, there are ceilings on investments by NRIs, PIOs, and FIIs. The FIIs can not engage in short selling, turnaround trading and securities borrowing, while they are exempted from exposure and margin requirements. These can be repatriated only after certain tax compliance. The double taxation agreements ar e simple to apply. T he dematerialisation has helped foreign investors to receive their entitlements promptly.

Contd.

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VIII. Legal Infrastructure: Local laws and regulations should ensure that there is segregation of client assets from the principal assets of their custodian; and no possible claim on client assets in the event of custodian bankruptcy or a similar event. Under local rules and regulations, what are the segregation requirements for keeping client assets and custodian assets in the depository? How are clients’ assets protected in the event of insolvency of a custodian or depository? Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security? Does local law clearly define the point of time when a settlement, both for the security and the cash involved, achieves finality and thus cannot be unwound? Does a pledgee have an absolute right to realise their security at all times? Does the depository have loss sharing provisions in its rules, and how would these be applied? The brokers and depository participants are required to segregate their assets from those of their clients and do not commingle the assets of the clients. The securities held with a custodian or depository can not be attached in case of insolvency, as they are not legal owners. The Depositories Act, 1996 explicitly created legal owners and beneficial owners for dematerialized securities. While the depository is the registered owner of the securities, the investors are beneficial owners. The settlement is complete with pay-out of securities/funds to members. In fact once a trade is executed; it is eventually settled and can not be unwound in between. The pledgee generally has such a right. On receipt of a notice from the pledgee, the depository records him as the beneficial owner in respect of pledged securities. The depositories indemnify the beneficial owners of securities for any loss caused to them due to the negligence of the depositories or their participants. The depository can, however, recover the loss from the participant responsible for loss. Besides, the depositories have taken comprehensive insurance for business risk and system risk.

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Annexure 5-1: Settlement Statistics in CM Segment
Month/ Year No. of Traded Quantity % of Trades Quantity of Shares Shares Deliverable Delivered to Total Shares Traded (mn.) (mn.) (mn.) Turnover Value of Shares Deliverable % of Delivery to Value of Shares Traded Securities Pay-in Short Delivery (Auctioned quantity) % of UnShort rectified Delivery Bad to Delivery Delivery (Auctioned quantity) (mn.) % of Funds UnPay-in rectified Bad Delivery to Delivery (Rs. mn.)

(Rs. mn.)

(Rs. mn.)

(Rs. mn.)

(mn.)

Nov 94-Mar 95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 2001-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 2002-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 2003-04

0.3 6

133 3,901

69 726 1,645 2,205 2,799 4,871 5,020 564 643 513 297 302 314 349 487 593 573 660 636 5,930 751 832 1,023 1,035 509 443 460 443 757 815 603 563 8,235 783 1,089 1,403 1,851 2,058 1,681 1,616 1,342 1,898 1,861 981 993

51.74 18.62 12.25 16.31 16.93 20.42 34.57 23.15 22.52 22.59 19.46 18.94 17.62 21.48 20.29 14.95 24.57 24.69 21.59 24.95 24.62 26.14 28.09 18.96 17.55 17.30 19.22 22.43 23.28 21.10 21.32 22.54 24.10 26.88 28.03 27.65 25.31 23.05 22.30 23.90 27.84 25.32 20.78 23.18

17,280 657,420 2,923,140 3,700,100 4,135,730 8,030,497 282,261 518,350 431,360 290,920 285,720 337,180 352,250 374,710 530,976 713,290 488,230 475,962 5,081,208 561,302 534,145 463,339 502,623 454,430 468,940 513,820 501,710 638,722 628,151 487,172 461,341 6,215,694 511,586 517,203 575,238 814,224 827,344 1,012,286 1,167,489 943,760 1,078,981 1,327,514 1,100,700 1,033,307

8,980 117,750 326,400 597,748 662,038 826,070 60,829 73,711 59,601 37,210 39,620 39,330 42,470 56,790 71,844 79,400 79,820 77,034 717,658 89,325 87,320 80,005 84,070 53,115 52,712 57,340 64,515 88,595 91,694 67,367 63,501 879,560 83,281 99,069 125,391 175,812 177,980 206,250 229,572 190,570 258,245 283,449 196,811 187,211

51.98 17.91 11.17 16.15 16.01 10.29 8.41 21.55 14.22 13.82 12.79 13.87 11.66 12.06 15.16 13.53 11.13 16.35 16.18 14.12 15.91 16.35 17.27 16.73 11.69 11.24 11.16 12.86 13.87 14.60 13.83 13.76 14.15 16.28 19.15 21.80 21.59 21.51 20.37 19.66 20.19 23.93 21.35 17.88 18.12

6,112 58,045 137,899 217,125 307,551 797,828 949,621 52,139 37,519 40,579 40,205 35,313 38,074 41,360 54,678 69,244 78,486 79,353 76,577 643,525 88,556 86,758 79,551 83,577 52,748 52,355 57,043 64,110 88,233 91,279 67,092 63,169 874,470 82,749 98,564 124,805 174,886 176,928 205,376 228,598 189,809 256,872 282,202 196,276 186,346

0.6 18 38 33 31 63 34 2 2 1 2 3 2 4 5 5 4 4 4 36 6 5 6 7 3 2 2 2 4 4 2 2 47 9 6 8 12 15 9 8 7 11 10 3 4 101

0.85 2.46 2.32 1.51 1.09 1.30 0.68 0.28 0.24 0.27 0.70 1.03 0.51 1.15 0.95 0.81 0.65 0.59 0.62 — 0.81 0.66 0.62 0.67 0.59 0.56 0.46 0.52 0.46 0.47 0.38 0.44 — 1.11 0.59 0.55 0.62 0.71 0.53 0.49 0.48 0.57 0.53 0.33 0.44 —

0.18 3.22 6.63 7.29 6.97 11 1.16 0.0043 0.0019 0.0010 0.0002 0.0003 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.26 0.44 0.40

3,004 32,583 72,121

26 13,432 38 13,522 55 16,531 96 23,861 161 30,420 9 15 13 10 11 12 15 14 17 23 17 17 21 21 20 21 19 18 20 17 22 23 19 18 21 24 25 33 32 34 37 31 37 40 31 31 1,632 2,776 2,280 1,315 1,551 1,655 1,978 2,265 2,922 3,833 2,687 2,576 3,011 3,379 3,914 3,684 2,682 2,525 2,659 2,307 3,377 3,502 2,859 2,642 3,249 4,050 5,005 6,694 8,130 7,292 7,244 5,615 6,816 7,351 4,722 4,285

0.33 108,272 0.25 121,754 0.23 279,921 0.023 459,367 0.0008 0.0003 0.0002 0.0001 0.0001 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 19,155 19,758 16,260 18,300 18,470 20,680 19,540 23,110 30,347 34,400 30,160 30,301 32,156 31,617 27,277 29,420 21,522 23,364 25,990 26,353 33,914 33,549 26,442 29,316 37,834 35,839 42,917 59,148 54,646 74,122 89,915 71,573 91,706 96,770 84,376 77,036

16.50 12,638,978 1,062,774

172 27,470

0.0001 280,481

240 36,541

0.0000 340,920

376 70,453 17,555

24.92 10,909,632 2,213,640

20.29 2,203,411

0.00 815,882

www.nseindia.com

there was a switch to the delivery versus payment (DvP) III mode in which transaction in government securities could be settled on a net basis..509.214.com . The market for debt derivatives have not yet developed appreciably though a market for OTC and exchange traded derivatives in interest rate products exists.570 527. 27. market capitalisation and trading value. www.557. RBI and NSE. The developments in primar y corporate debt market are presented in Chapter 2 of this publication.790 531. Wherever possible.313 360.622 27.139 Debt Market ISMR Debt Market Introduction The debt market in India comprises mainly of two segments viz.) Turnover in Secondar y Market 2002-03 19.6% during 2003-04.519 2.089 (In Rs.917. During 2003-04.509.166 2.214. Data availability for secondary market for corporate debt securities is limited. Mn.956 2003-04 1. The year 2003-04 was a very eventful year with the operationalisation of real time gross settlement (RTGS) system.706 Government Corporate/Non-Government Total Source: Primedatabase.981.089 million from primary debt market. * This chapter discusses the market design and outcome in the government securities market. which is expected to reduce the settlement risks and cost of financial intermediation significantly. In the Government securities market. the Government and corporate sector collectively mobilised Rs. zero coupon bonds (ZCBs). The main instruments in this market are dated securities that include floating rate bonds (FRBs).nseindia. Government securities (includes central. 6. state and local) form the major part of the market in terms of outstanding issues. The turnover in secondary debt market during 2003-04 aggregated Rs.706 million.792. The year also witnessed unprecedented volumes both in primary market and secondary market.350. It sets benchmark for the rest of the market.819.73% higher than in the preceding year (Table 6-1). Table 6-1: Debt Market: Selected Indicators Issuer/Securities Amount raised from Primary Market 2002-03 1. treasury bills (T-bills) and the state Government bonds. The corporate debt segment on the other hand includes bonds issued by private corporates. the Government securities market and the corporate securities market*.084 422. 36% higher than that in the previous year.387 19. the developments in the secondary market for corporate debt are also covered in this chapter. 2. The share of NSE in total turnover in debt securities remained at about 47. while the balance amount was mobilised by the corporate sector through public and private placement issues. About 79% of these were raised by the government (Central and State Governments). both primary and secondary segment. public sector units (PSUs) and development financial institutions (DFIs).700 2003-04 26.

II. Union Budget 2004-05 The investment ceiling for FIIs in debt funds has been increased from US$ 1 billion to US$ 1. the extent of guarantees offered by the guarantor company. • With the fortnight beginning May 3.e. European swaptions.75 billion in the Union Budget for 2004-05. The bank rate was also cut by 0. 2003. Deals done outside NDS should also be reported within 15 minutes of its execution. floors and collars. it has been proposed that: (a) less complex over-the-counter (OTC) interest rate rupee options should be permitted in the first phase which include vanilla caps. 2003-04 In the annual and mid-term review of Monetary and Credit Policy for 2003-04 the following measures have been taken: Annual monetary credit policy • CRR has been reduced from 4.25% to 6. www. • Indian corporates and resident individuals have also been permitted to invest in rated bonds/fixed income securities of listed eligible companies abroad subject to certain conditions. while corporate may sell options initially without being the net receivers of premium. financial institutions (FIs) and Primary Dealers (PDs) should be allowed to both buy and sell options. the names of the companies to which the guarantor has issued similar guarantees.00% effective from the close of business of April 29. 2003. fortnight starting June 14. (iii) the offer document for CP should properly disclose the net worth of the guarantor company.50% w.com . RBI has mandated for all NDS members to report all their call/notice money market deals on NDS.ISMR Debt Market 140 Policy Developments Various initiatives taken by the RBI and the Government during April 2003 to June 2004 are enumerated in this section. • As per the recommendations of the Working Group on Rupee Derivatives. I. 2003 envisaged the following: • The Indian Banks Association (IBA) has been asked to advise its members regarding the system of benchmarking the prime lending rate (PLR). • A new Government Security Act would replace the Public Debt Act. call and put options and unleveraged structured swaps based on overnight indexed swaps (OIS) and forward rate agreements (FRAs) (b) scheduled commercial banks (SCBs).75% to 4. 2003.f. • RBI also proposed that non-bank entities including corporate may provide unconditional and irrevocable guarantee for credit enhancement for Commercial Paper (CP) issue as long as (i) the issuer fulfils the eligibility criteria prescribed for issuance of CP. The mid-term review of the Monetary and Credit Policy announced on November 3.nseindia. Annual and the Mid-term Monetary & Credit Policy. (ii) the guarantor has at least one notch higher credit rating than the issuer. irrespective of the size of the deal or whether the counter-party is a member of NDS or not. 1944.

2004-05 The Monetary and Credit Policy for 2004-05 notified on May 18.nseindia. The clearing and settlement operations of CCIL are being considered to expand to OTC derivatives contracts and trades in listed as well as unlisted non-SLR debt instruments for NDS members. banks. Monetary & Credit Policy. To deepen the government securities market. RBI proposed to constitute a working group to review the performance of negotiated dealing system (NDS). the purchase contract should be either guaranteed by an approved central counterparty like CCIL or the counterparty thereof should be RBI. • • • • III.f. waiver of service charges on banks for ECS and EFT transaction has been proposed till March 31.com . non-bank financial institutions and credit rating agencies. SEBI and IRDA. It should consist of experts drawn from academia. it has been permitted to contract a sale of a Government security already contracted for purchase. The Committee should examine the issues referred to it by the RBI and advise the RBI on regulations covering banks and non-bank financial institutions and other market participants. The RBI in consultation with the SEBI and the IRDA. 2004. However. it has been proposed to facilitate automated value-free transfer of securities between market participants and the Clearing Corporation of India Limited (CCIL). This limit is applicable on an average basis in a reporting fortnight. the non-bank participants have been allowed to lend in a reporting fortnight on an average 60% of their average daily lending in call/notice money market during 2000-01.141 Debt Market ISMR • To move further towards a pure inter-bank call/notice money market. With a view to encourage further development of the Collateralised Borrowing and Lending Obligation (CBLO) segment. and (iii) the exchange of relevant information among the RBI. on lines of the Board for financial supervision. 2004 the PDs have been allowed to borrow up to 200% of their net owned funds (NOF) as at end-March of the preceding financial year. 2004 proposed the following: • In its endeavor to move towards a pure inter-bank call/money market. The timetable for further phasing out of non-bank participants would be announced separately.e. (ii) the reporting of intra-group transactions. the SEBI and the IRDA. A Standing Technical Advisory Committee on Financial Regulation has been proposed to be set up. In order to develop the repo market. the limit on the lending by non-bank participants have been further reduced by the RBI from 60% to 45% w. With a view to promote electronic fund transfer (EFT) and encourage electronic clearing services (ECS). 2006. proposed to establish a special monitoring system for Systemically Important Financial Intermediaries (SIFIs) that would encompass (i) a reporting system on financial matters of common interest to RBI. financial markets. This will function as a Committee of the Central • • • • • www. June 26. RBI has also set up a Board for Payment and Settlement Systems (BPSS). from February 7.

• A working group. Stock Exchanges. Scheduled Commercial Banks (excluding RRBs & LABs). has been constituted to review electronic funds transfer for capital markets. The norms that will be applicable for transacting IRDs on the F&O segment of the stock exchanges are as follows: (a) Stock Exchange Regulation: SCBs and AIFIs can seek membership of the F&O segment of the stock exchanges for the limited purpose of undertaking proprietary transactions for hedging interest rate risk. banks and FIs are allowed to transact for a limited purpose of hedging the risk. (b) (c) (d) www. Regulated entities participating through approved F&O members should settle proprietary trades as a participant clearing member or through approved professional/custodial clearing members. PDs and Specified Financial Institutions (SFIs) are allowed to deal in Interest Rate Derivatives (IRDs).ISMR Debt Market 142 Board. Those not seeking membership of Stock Exchanges. SCBs and AIFIs should settle their derivative trades directly with the clearing corporation/clearing house. Treasury bills/dated securities issued under the MSS are similar to those issued under the normal borrowing programme. Market Stabilisation Scheme As per the recommendations of the Reserve Bank’s working group on the Instruments of Sterilisation. The hedge will be 2. while PDs are allowed to take trading as well as hedging positions. if and only if.com . Treasury Bills and dated securities of the Central Government are issued as an instrument of sterilisation. (i) the hedge is clearly identified with the underlying Government securities in the AFS and HFT categories. chaired by the Governor. In the initial phase. Eligible underlying securities: For the present. Other Measures The other developments during April 2003-June 2004 include: 1. NSDL and IRDA. 2004 under a Memorandum of Understanding (MoU) between the Government of India and the Reserve Bank. consisting of representatives of SEBI.nseindia. tenure and timing of issuances under the MSS under a calendar of issuances. (ii) the effectiveness of the hedge can be reliably measured (iii) the hedge is assessed on an ongoing basis and is “highly effective” throughout the period. The Reserve Bank notifies the amount. can transact IRDs through approved F&O members of the exchanges. IV. Settlement: As trading members of the F&O segment. The BPSS would lay down the policies for the regulation and supervision of payment and settlement systems. a Market Stabilisation Scheme (MSS) has been introduced on April 1. only the interest rate risk inherent in the Government securities classified under the Available for Sale (AFS) and Held for Trading (HFT) categories is allowed to be hedged. Under the MSS. Guidelines on Exchange Traded Interest Rate Derivatives The RBI issued detailed guidelines for Banks and Institutions allowing them to participate in the exchange traded interest rate derivatives market in India to enable better risk management. Hedge criteria: IRD transactions undertaken on the exchanges should be deemed as hedge transactions.

for evaluating the efficacy of the hedge transaction. (e) Capital adequacy: The net notional principal amount in respect of futures position with same underlying and settlement dates should be multiplied by the conversion factor given below to arrive at the credit equivalent: Original Maturity Less than one year One year and less than two years For each additional year Conversion Factor 0. The auction should be on the basis of the percentage discount to market price offered by banks/financial institutions across securities (c) premium on the securities bought back by the Government should be paid in cash to successful offerers at the buy back auction (d) Government should accept a minimum discount (as a percentage to market price) of 7. a scheme was formulated to buy back high cost and illiquid securities from banks on a voluntary basis.com . at least at monthly intervals. The main features of this scheme are as follows: (a) the scheme should be structured as a switch with the Government of India offering for buy back pre-announced securities. The regulated entities undertaking interest rate derivatives on exchanges should disclose as a part of the notes on accounts to balance sheets details in the specified format. (f) (g) Interest rate futures are treated as a combination of a long and short position in a notional Government security. General Provisions: The existing norm of 5% of total transactions during a year should be observed by SCBs and AIFIs. The actual results should be within a range of 80% to 125%. changes in the marked to market value of the hedged items with reference to the marked to market value at the time of the hedging are “almost fully offset”. Government Buy Back of Securities In the Budget of 2003-04. 3. who participate through approved F&O members of the exchanges.143 Debt Market ISMR deemed to be “highly effective” if. The repurchase of securities should be through an auction process while the reissue of fresh securities in lieu of the auctioned securities should be at a pre-announced fixed price (b) the buy back of securities should be taking place through a multi-security auction. The hedged portion of the AFS/HFT portfolio should be notionally marked to market. at a pre-announced fixed www.5 per cent that must be offered by eligible institutions.5 % 1. If changes in the marked to market values are outside this range. The Government should however retain the right to accept offers with a discount below the cut-off level (and pay a premium larger than the target level) at its discretion (f) successful offerers at the buy back auction should be issued with fresh securities.nseindia. then the hedge would not be deemed as highly effective. The target premium should not be announced before the auction. at inception and throughout the life of the hedge.0 % 1.0 % The credit equivalent thus obtained should be multiplied by the applicable risk weight of 100%. The minimum discount rate should be uniform across securities offered for buy back (e) the cut-off discount at the auction should be arrived at on the basis of the target premium payable set by the Government for the buy back auction.

These guidelines cover www. 2000 and the Listing Agreement with the exchanges. in a listed debt security. The appointment of intermediaries other than debenture trustee for private placement of debt securities is not mandatory. However. 5. in standard denomination of Rs. however they should be accountable for their activities (d) company should sign a separate listing agreement with the exchange in respect of debt securities and thereby comply with its conditions (e) all trades with the exception of spot transactions. Secondary Market for Corporate Debt Securities In order to provide greater transparency and protect the interest of investors. 4. if the privately placed debt securities are in standard denomination of Rs. the provisions as mentioned above should not be applicable for private placement of debt securities having a maturity of less than 365 days. The debt securities should be issued and traded in demat form. SEBI (Disclosure and Investor Protection) Guidelines. However. The issuer companies which make frequent private placements of debt securities should be permitted to file an umbrella offer document on the lines of a “shelf prospectus” as applicable for a public issue (b) debt securities should carry a credit rating of not less than investment grade from a Credit Rating Agency registered with the Board (c) company should appoint a debenture trustee registered with SEBI for the issue of debt securities. There is no prohibition on SEBI registered intermediaries to be associated with the privately placed unlisted debt securities. for equivalent face value (g) accrued interest on securities should be paid in cash by the Government for repurchased securities and by the banks for reissued securities (h) settlement of reissued transactions should be as per the current re-issuance procedure followed by the Reserve Bank (i) buy back auction should be restricted to banks and financial institutions (FIs) connected to the Negotiated Dealing System (NDS) on the Indian Financial Network (INFINET). if all the above requirements are complied with (h) in case the intermediaries registered with SEBI associate themselves with the issuance of private placement of unlisted debt securities. unlisted companies/statutory corporations may also get their privately placed debt securities listed in the stock exchanges by complying with the above mentioned relevant provisions. then the disclosures may be made only through websites of the stock exchange where the debt securities are sought to be listed.com . 1957 will not be applicable to listing of privately placed debt securities on exchanges. 1956. Guidelines for Investments by Primary Dealers in Non-Government Securities RBI in consultation with Primary Dealers Association of India (PDAI) framed guidelines for investments in non-government securities by primary dealers.nseindia.ISMR Debt Market 144 price. SEBI decided that any listed company making issue of debt securities on a private placement basis should be required to comply with certain guidelines as stated herewith (a) company should make full disclosures (initial and continuing) in the manner as prescribed in the Schedule II of the Companies Act. 10 lakh in the order driven system of the stock exchanges in a separate trading segment (g) the requirement of Rule 19(2)(b) of the Securities Contract (Regulation) Rules. they will be held accountable for such issues. should be executed only on the trading platform of a stock exchange (f) the trading in privately placed debts should only take place between Qualified Institutional Investors (QIBs) and High Networth Individuals (HNIs). 10 lakh. Further.

e. other than CP and CDs. • • Regulatory Requirement: PDs should not invest in non-government securities of original maturity of less than one-year. Fixing of Prudential Limits: PDs’ investment in unlisted non-government securities should not exceed 10% of the size of their non-government securities portfolio on an on-going basis. PDs should invest in MF units of the schemes. Role of Boards: PDs should ensure that their investment policies are formulated after taking into account all the relevant issues of the guidelines and are duly approved by their Board of Directors. 2003) till December 31. Listing and Rating Requirement: PDs should not invest in unrated non-government securities and should abide by the requirements stipulated by SEBI in respect of corporate debt securities. Time Schedule of Operationalisation: In view of the time required by issuers to get their unlisted debt issues listed. where the entire corpus is invested in debt securities should be outside the purview of the above guidelines until December 31. 2005. and (v) investments in equity shares. SPVs etc.com . are not applicable to (i) units of equity oriented MF schemes wherein any part of the corpus can be invested in equity (ii) Venture Capital Funds (VCFs) (iii) CP (iv) Corporate Debentures (CDs). They should ensure that investment in privately placed instruments is made in accordance with the systems and procedures prescribed under respective PDs’ investment policy. January 01. They. • • • www.f. the following transition time has been provided (a) Investment in units of MF schemes.145 Debt Market ISMR PDs’ investments in non-government securities issued by corporates. banks. In case of making fresh investments in government debt securities. January 01. W. 2004 (b) w.e.f. 2004 provided that the issuers have applied to the stock exchange(s) for listing and the security(ies) is/are rated minimum investment grade. bonds issued by central or state public sector undertakings with or without government guarantees and bonds issued by banks and financial companies. The ceiling of 10% should be inclusive of investment in Security Receipts issued by Securitisation Companies/Reconstruction Companies and also the investment in Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS). which have an exposure to unlisted securities of less than 10% of the corpus of the fund. This includes capital gains bonds. PDs should put in place proper risk management systems for capturing and analysing the risk in respect of nongovernment securities before making investments. the PDs should ensure that such investment is made only in listed debt securities. The guidelines are applicable to investments in both the primary market and the secondary market. Such investments should be treated on par with listed securities for the purpose of compliance with the prudential limits prescribed in the above guidelines (c) PDs should invest in existing unlisted securities (issued prior to December 31.nseindia. bonds eligible for priority sector status. FIs and State and Central Government sponsored institutions. however. 2005 only those PDs whose investment in unlisted non-government securities are within the prudential limits may make fresh investment in such securities within the prudential limits.

the investments are also allowed in bonds/ debentures/Security Receipts/Pass Through Certificates issued by Securitisation Companies and Reconstruction Companies set up under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. They should undertake usual due diligence in respect of investments in non-SLR securities. banks should ensure that such investment are made only in listed debt securities of companies. They are not applicable to investments in securities issued directly by the Central and State Governments. 2003. securitisation papers issued for infrastructure projects. These guidelines should apply to investments both in the primary market as well as the secondary market. while making fresh investments in non-SLR debt securities. of the previous year. by an additional 10 per cent. 2004. to complying with these SEBI guidelines. then the investments have to be on account of investment in securities issued by SPVs for Mortgage Backed Securities (MBS). The unlisted non-SLR securities in which banks may invest up to the limit. banks. should comply with the disclosure requirements as prescribed by the SEBI for listed companies (b) bank’s investment in unlisted non-SLR securities may exceed the limit of 10 per cent. 7. This should also comply with the requirements of the SEBI circular dated September 30. Guidelines for Investments by Banks in Non-SLR Securities With a view to contain the risks arising out of non-SLR investment portfolio. FIs and State and Central Government sponsored institutions. 6. and investments in equity shares. except to the extent as indicated below. In addition. in particular through private placement. Its details are as follows: (a) Banks should not invest in non-SLR securities of original maturity of less than one-year. This system facilitates settlement of inter-bank transactions online at real-time basis. for making issue of debt securities on a private placement basis. These guidelines came into effect from April 1. investment exclusively in securities specified www.ISMR Debt Market 146 • Trading and Settlement in Debt Securities: As per SEBI guidelines. other than Commercial Paper and Certificates of Deposits. Real-Time Gross settlement As a part of reforms in payment system. which are not reckoned for SLR purpose. RBI had initiated several measures to reduce risks. (a) bank’s investment in unlisted non-SLR securities should not exceed 10 per cent of its total investment in non-SLR securities as on March 31. In other words. all trades except spot transactions. 2004. prudential guidelines have been issued for banks. PDs should also ensure that all spot transactions in listed and unlisted debt securities are reported on the NDS and settled through the CCIL. Most important among these initiatives is the RTGS system. in all listed debt securities should be executed only on the stock exchanges.nseindia. 2002 and registered with RBI.com . Accordingly. In addition. It covers banks’ investments in non-SLR securities issued by corporates. But. The RTGS system has been operationalised on March 26. and Special Purpose Vehicles (SPVs). (b) Banks should not invest in unrated non-SLR securities. SEBI vide its circular have stipulated requirements that listed companies are required to comply with. which are covered under RBI guidelines.

This will enable the banks to regularly (quarterly or half-yearly) track the financial position of the issuer with a view to ensuring continuous monitoring of the rating migration of the issuers/issues. In order to create a central database on private placement of debt. should not make any fresh investment in such securities till they ensure compliance with the above prudential limit. For example. a copy of all the offer documents should be filed with the Credit Information Bureau (India) Ltd. 2003. Banks should put in place proper risk management systems for capturing and analysing the risk. (d) (e) (f) Market Design Market Participants Given the large size of the trades.com . The RBI regulates the Government securities market. a bank issues CDs and also invest in different banks CDs and also in other securities such as PSU bonds or government securities. As per the SEBI guidelines. the investors can also be the issuers of the securities. In this market. (c) Since non-SLR securities are mostly in the form of credit substitutes. except spot transactions.147 Debt Market ISMR in this paragraph could be up to the maximum permitted limit of 20 per cent of non-SLR investment. These policies should be formulated after taking into account all the relevant issues specified in these guidelines on investment in non-SLR securities. they should ensure that all spot transactions in listed and unlisted debt securities are reported on the NDS and settled through the CCIL from a date to be notified by RBI. while the corporate debt instruments traded on exchanges are regulated by the SEBI. Further. and (iii) strengthen their internal rating system. Banks. it still remains rather subdued. any default relating to interest/installment in respect of any privately placed debt should also be reported to CIBIL along with a copy of the offer document. The important market participants in the debt market are: www.. In addition. Banks should ensure that their investment policies are duly approved by the Board of Directors. They should not entirely rely on the ratings of external agencies. which have exposure to investments in unlisted non-SLR securities in excess of the prudential limit prescribed above as on March 31.nseindia. should be executed only on the trading platform of a stock exchange. Boards of banks should review the following aspects of nonSLR investment at least at quarterly intervals viz. (CIBIL) by the investing banks. banks were advised in June 2001 to (i) subject all their investment proposals relating to rated and non-rated non-SLR securities to credit appraisal on par with their credit proposals. (ii) make their own internal credit analysis and rating even in respect of rated issues. all the trades in a listed debt security of banks. the debt market has remained predominantly a wholesale market. Though some efforts have been undertaken to encourage the retail participation. (i) total business (investment and divestment) during the reporting period (ii) compliance with the prudential limits and guidelines (iii) rating migration of the issuers/issues held in the bank’s books and (iv) extent of non-performing investments in this category.

the RBI participates in the market through open-market operations as well as through Liquidity Adjustment facility (LAF) to regulate the money supply. In addition. The brokers are regulated by the stock exchanges and also by the SEBI. PDs collectively offer to underwrite up to 100% of the notified amount in respect of all issues. Investors Banks are the largest investors in the debt markets. the RBI plays a dual role of influencing the interest rates through its monetary policy and also issues government debt securities.nseindia. Banks also issue CDs and bonds in the debt markets. The RBI as the debt manager issues the securities at the cheapest possible rate. There were 18 PDs operating in the market at the end of March 2004. owing to the growing number of debt funds that have mobilised significant amounts from the investors. and trade on their portfolios quite regularly.com . Hence.ISMR Debt Market 148 Regulators The RBI operates both as the monetary authority and the debt manager to the government. They are also the main participants in the call money market/term market and also repo market for their short term funding requirement. Further. Normally. Several facilities have been extended to PDs given their special role in the Government debt market. they arrange CP issues of corporates. Brokers Brokers play an important role in secondary debt market by bringing together counterparties and negotiating terms of the trade. they can raise resources through CPs and also have access to finance from commercial banks as any other corporate borrower. RBI provides liquidity support to the PDs through LAF against collateral of government securities and through repo operations/refinance. PDs underwrite a portion of the issue of government security that is floated for a pre-determined amount. the committed amount of bids and the volume of turnover in securities. www. in the debt market. and as market makers in the secondary market. The secondary market trading is conducted as per the rules set by the SEBI. It also regulates the bank rate and repo rate. particularly in the Government securities market. MFs have emerged as important players in the debt market. PDs are also given favoured access to the RBI’s open market operations. Foreign Institutional Investors (FIIs) also are permitted to invest in treasury and corporate bonds. They participate in the debt markets pre-dominantly as investors. The SEBI regulates the debt instruments listed on the stock exchanges. They act as underwriters in the primary market. its holding strength. The underwriting commitment of each PD is broadly decided on the basis of its size in terms of its net owned funds. the RBI also supervises banks and development financial institutions. It issues guidelines for its issuance and also for their listing on stock exchanges. within certain limits. Most MFs also have specialised debt funds such as gilt funds and liquid funds. and uses these rates as indirect tools for its monetary policy. In its role as a monetary authority. They are permitted to borrow and lend in the money market. Further. It is through them that the trades are entered on the stock exchanges. Primary Dealers Primary dealers (PDs) are important intermediaries in the Government securities markets.

however. Non-Resident Indians Banks.nseindia. Companies. Mutual Funds. instruments in the debt market and their maturities are presented in Table 6-2. FIs. Individuals. Corporates Banks. Select Financial Institutions (under umbrella limit fixed by RBI) Scheduled Commercial Banks Certificates of Deposits 15 days to 1 year. Mutual Funds. Trusts. Provident Funds. Corporations. PDs RBI. trusts and societies are also large investors in the debt markets. Charitable institutions. Corporates. not very active traders in their portfolio. Mutual Funds. The prudential regulations governing the deployment of the funds mobilised by them mandate investments pre-dominantly in treasury and PSU bonds. Corporations. NRIs Corporations.000 and multiples thereof. Banks. Companies . Individuals. FIs. Provident Funds. whereas for FIs it is 1 year to 10 years 1-10 years Bank Bonds PSU Municipal Bonds 0-7 years www. Companies. Individuals. They are. Mutual Funds. This is so because they are not permitted to sell their holdings. Mutual Funds. FIIs. governed by their rules and bye-laws with respect to the kind of bonds they can buy and the manner in which they can trade on their debt portfolios. Corporates. They submit bids for amounts of Rs.com . Funds. subject to the condition that a single bid does not exceed Rs. Insurance Companies. investors. Individuals Banks. Trusts. Insurance Companies. Individuals. Individuals. Individuals. Since January 2002. Funds. Funds. Associations. Table 6-2: Participants and Products in Debt Market Issuer Central Government Instruments Dated Securities Maturity 2-30 years Investors RBI. Associations. however. Financial Institutions. Structured Obligations Debentures 5-13 years 5-10 years Corporates Corporates. Banks. The matrix of issuers. The non-competitive bids upto a maximum of 5% of the notified amount are accepted at the weighted average cut off price/yield. They are. Provident Funds Banks. Associations.149 Debt Market ISMR Provident and pension funds are large investors in the debt markets. 10. Insurance Companies. unless they have a funding requirement that cannot be met through regular accruals and contributions. PDs 1-12 years Commercial Papers 15 days to 1 year Scheduled Commercial Banks. 1 crore. retail investors have been permitted to submit non-competitive bids at primary auction through any bank or PD. FIs. Provident Funds. Trusts. Insurance Companies. Non-Resident Indians Central Government T-Bills 91/364 days State Government PSUs Dated Securities Bonds. PDs Banks. FIIs Banks.

mostly in the form of certificates of deposit (CDs) and commercial papers (CPs). Recently. Development Financial Institutions (DFIs). there is another segment. They include a variety of tailor-made features with respect to interest payments and redemptions. trust. State Government. In addition to above. These bonds are generally treated at surrogates of sovereign paper. international financial institutions such as Asian Development Bank have also tapped the debt market to mobilise funds. The terms and conditions specified in the general notification are listed below: • Any person including firm. The Central Government mobilises funds mainly through issue of dated securities and T-bills. These bonds typically are structured to suit the requirements of investors and the issuing corporate. sometimes due to explicit guarantee and often due to the comfort of public ownership. corporate body. It comprises of the securities issued by the Central Government and State Governments. OCB predominantly owned by NRIs and FII registered with SEBI and approved by RBI can submit offers for purchase of government securities.ISMR Debt Market 150 Issuers of Securities The dominant issuers in debt market consist of Governments. while most bonds are not tax-free. • The Government securities form the oldest and the most dominant part of the debt market. institution. Some of the PSU bonds are tax-free. Bonds are issued by Government sponsored institutions like. public sector units and corporates. The major part of the corporate debt is privately placed with tenors of 1-12 years. which comprises of short-term paper issued by banks. there has been an increase in issuance of corporate bonds with embedded put and call options. company. banks and public sector units. The specific notifications are issued for each security issuance specifying its unique feature. provident fund.com . • The payments can be done through a variety of means such as cash or cheque drawn on RBI or Banker’s pay order or by authority to debit their current account with RBI or by www. there are other issuers who have not been tapping the market frequently such as the local governments and MFs. while State Governments rely solely on state development loans. The corporate bond markets comprise of commercial paper and bonds. Corporate bond market has seen a lot of innovations. local bodies such as municipalities have also tapped the market.nseindia. including securitised products. While CDs are issued by banks and financial institutions. In the recent past. In the recent years. corporate bond strips. CPs are issued by corporates. and a variety of floating rate instruments with floors and caps. international financial institutions have also displayed interest in the domestic market. • • • • Primary Issuance Process Government Securities The issue of government securities is governed by the terms and conditions specified in the general and the specific notification of the Government. NRI. However. Recently.

If the issue is on price basis. In case the total subscription exceeds the aggregate amount offered for sale. Government issues securities through the auction. RBI may make partial allotment to all the applicants. RBI determines the maximum rate of yield or the minimum offer price as the case may be at which offers for purchase of securities would be accepted. categoried by the RBI as ‘retail investors’. These are repaid at Public Debt Offices of RBI or any other institution at which they are registered at the time of repayment. Individuals and specific institutions. Sale of such securities may be extended to more than one day and the sale may be closed at any time on any day. competitive bids offered at the maximum rate of yield or the minimum offer price. competitive bids are tendered with rates up to and including the maximum rate of yield as determined by RBI. These are issued to the investors by credit either in demat form in their SGL account or to a Constituents’ SGL or to their Bond Ledger or in the form of stock certificate. As per the bids received.nseindia. as determined by RBI. If the issue is on yield basis. the coupon is predetermined. 100 of the face value of the security. Bids quoted higher than the maximum rate of yield are rejected. then the coupon of the security is decided in an auction and the security carries the same coupon till maturity. Issue of securities with pre-announced coupon rates: The coupon on securities is announced before the date of floatation and the securities are issued at par. can participate in the auctions on ‘non-competitive’ basis. then the bidders should quote price per Rs. Bids quoted higher than the maximum rate of yield or lower than the minimum price are rejected. Issue of securities through tap sale: No aggregate amount is indicated in the notification in respect of the securities sold on tap. Allocation of the securities to non-competitive bidders are made at the discretion of RBI and at the weighted average price arrived at on the basis of the competitive bids accepted at the auction or any other price announced in the specific notification. RBI determines the maximum rate of yield. The nominal amount of securities that would be allocated to retail investors on non-competitive basis is restricted to a maximum percentage of the aggregate nominal amount of the issue. are accepted. tap sale.151 Debt Market ISMR Electronic Fund Transfer. On the basis of the bids received. For ‘Multiple price’ method.000 (face value) and in multiples of Rs. 10. The auctions are held either on ‘Uniform price’ method or on ‘Multiple price’ method. pre-announced coupon rate etc. 10. Government securities are issued for a minimum amount of Rs.000 thereafter. In ‘Uniform price’ method. Other bids tendered at lower than the maximum rate of yield or higher than the minimum offer price are accepted at the rate of yield or price as quoted in the respective bid.com . A brief about them are as given below: Issue of securities through auction: The securities are issued through auction held either on price or on yield basis. Issue of securities in conversion of maturing treasury bills/dated securities: The holders of treasury bills of certain specified maturities and holders of specified dated securities are provided an option to convert their holding at specified prices into new www.

The most common base rate used is the weighted average of yield of 364 day-treasury bills. They have either 91-days or 364-days maturity. the trade is reported to the concerned exchange. The spread is decided at the auction. Floating Rate Bonds: These securities carry a coupon rate. www. RBI may participate in auctions as a “non-competitor” or subscribe to the government securities in other issues. PDs. These may be issued at a discount. are repaid at the option before the specified redemption date. Such privately placed securities and securities that devolve on RBI are subsequently offloaded through RBI’s open market operations. which consists of a variable base and a spread. Treasury Bills Treasury bills (T-bills) are short-term debt instruments issued by the Central government. If a broker is involved. Most of the States raise resources through tap issuances. but are redeemed at par. FIs. at par or at a premium to the face value. The new securities could be issued on an auction/pre-announced coupon basis. the RBI determines the cut-off price at which tenders would be accepted at the auction. MFs) having SGL accounts with RBI. Trades are also executed on electronic platform of the WDM segment of NSE. Secondary Market Most of the secondary market trades in Government securities are negotiated between participants (Banks. WDM segment of NSE provides trading and reporting facilities for government securities. Allotment of securities to RBI are made at the cut off price/yield emerging in the auction or at any other price/yield decided by the government.nseindia. where a “call option”/“put option” is specified. The following types of securities are issued by the Government: Securities with fixed coupon rates: These securities carry a specific coupon rate remaining fixed during the term of the security and payable periodically. In order to maintain a stable interest rate environment. T-bills are sold through an auction process announced by the RBI at a discount to its face value.com . State Government Securities The states have the choice of raising 5% to 35% of their allocation through auctions. NDS of RBI provides an electronic platform for negotiating trades in government securities. On the basis of the bids tendered.ISMR Debt Market 152 securities offered for sale. RBI accepts private placement of government securities. Zero Coupon Bonds: These are issued at a discount and redeemed at par. These may be negotiated directly between counter parties or negotiated through brokers. Securities with Embedded Options: These securities. RBI issues an indicative calendar of T-bill auctions.

the repo term and the repo rate. the trades are normally decided by the seller and the buyer outside the exchange. and reported to the Exchange through the broker. If orders match. It facilitates online reporting of transactions in the instruments available on the NDS. These trades are required to be reported to the Exchange within 24 hours of the issuance of contract note.) securities are available for trading in the WDM segment of the NSE. Wholesale Debt Market of NSE NSE’s Wholesale Debt Market (WDM) segment offers a fully automated screen based trading platform through the NEAT (National Exchange for Automated Trading) system. In the NEAT-WDM system. deals negotiated or structured outside the exchange are disclosed to the market through NEAT-WDM system. are available for negotiated dealing through NDS. it results into a trade. The WDM segment as the name suggest permits only high value transactions in debt securities. then they are required to report the deal on NDS system within 15 minutes of concluding the deal. it is meant primarily for banks. as buyers and sellers know each other and have agreed to trade. This enables the trading member/ participant to reduce/minimise the counter-party risk associated with the counter-party to trade. the buyer and seller do not know each other and they put their best buy/sell orders. Government Securities (including T-bills). institutions and corporates requires an investment grade credit rating to be eligible for listing. NDS interfaces with CCIL for settlement of government securities transactions for both outright and repo trades. All eligible securities.com . etc. The trades on the WDM segment could be either outright trades or repo transactions with settlement cycle of T+2 and repo periods (1 to 14 days). all participants can set up their counter-party exposure limits against all probable counter-parties. The listing requirements for securities on the WDM segment are presented in Table 6-3. The trades on the WDM segment can be executed through the continuous market and negotiated market. whether publicly issued or privately placed. The Exchange facilitates trading members to report off-market deals in securities in cases where the repo period is more than the permissible days in the trading system (14 days). institutional and corporate participants and intermediaries. For every trade. If the NDS members concludes deals outside the NDS system. In continuous market. T-bills etc. can be made available for trading in the WDM segment. In negotiated market. which are stored in order book with price/time priority. no counter-party exposure limit needs to be invoked. In the negotiated market.) and non-SLR (CPs. call money. All government securities are ‘deemed’ listed as and when they are issued. All types of SLR (Government securities. A trade does not take place if both the buy/sell participants do not invoke the counterparty exposure limit in the trading system.nseindia. repos in eligible securities. CDs etc. who take an exposure to the settlement risk attached to any unknown counter-party. it is necessary to specify the number of settlement days and the trade type (repo or non-repo). Hence.153 Debt Market ISMR Negotiated Dealing System Negotiated Dealing System (NDS) is an electronic platform for facilitating dealing in Government Securities and Money Market Instruments. Thus. www. and in the event of a repo trade. Amongst other requirements. privately placed debt paper of banks. The other debt securities are traded either under the ‘permitted to trade’ or ‘listed’ category. notice/term money. The trades in WDM segment are settled directly between the participants.

The difference between trading of government securities and corporate debt securities is that the latter are traded on the electronic limit order book.000 crore subject to minimum of Rs. b. 50 crore or above – Investment Grade Credit Rating e. which prohibits negotiated deals in respect of www. 10 crore. securitised debt and commercial paper. The rate depends on the type of security and value of transactions. OR Rs.000 per annum. Mutual Funds SEBI registered Mutual Fund/Scheme having an investment objective to invest predominantly in debt instruments. 1 lakh gross traded value above Rs. A trading member is required to pay transaction charges @ 5 paise per Rs. 100 of transaction depending on the order value. Central/State Government Public Sector Undertakings/ Statutory Corporations – Minimum 51% holding by Govt. 1 lakh gross trade value up to Rs. f.nseindia. 25. 10 crore. c. It is 1% of the order value for debentures. 10. The rate for central government securities ranges from 5 paise to 25 paise for every Rs. Charges NSE has specified the maximum rates of brokerage that can be levied by trading members for trades on WDM.com . Source: NSE. 25 crore (Net worth in case of unlisted companies) – Market capitalisation of Rs. these are traded on BSE and on the CM and WDM segments of NSE. OR – Market capitalisation of Rs.ISMR Debt Market 154 Table 6-3: Listing Criteria for Securities on WDM Segment Issuer Public Issue a. it ranges from 5 paise to 50 paise for state government securities and institutional bonds also depending on the order value. – Less than 51% holding by Govt.000 crore and @ 2 paise per Rs. Financial Institutions Scheduled Commercial Banks ----------------------------------------------------. 100 of transactions depending on the order value.Investment Grade Credit Rating -----------------------------– Minimum paid-up capital of – Minimum paid-up capital of Rs. This is in view of SEBI mandate. Corporate Debt Market Corporate debt instruments are traded either as bilateral agreements between two counterparties or on a stock exchange through brokers. Similarly. d.Deemed listed ---------------------------------------------- g. 25 crore (Net worth in case of unlisted companies) – Investment Grade Credit Rating Listing Criteria Private Placement ---------------------------------------------. 50 crore or above – Investment Grade Credit Rating – Net worth of Rs. In the latter category.Eligible -------------------------------------------------------------------------------------. In case of PSU Bonds and FRBs and CP and Debentures the brokerage rate varies between 10 paise and 50 paise for every Rs. Infrastructure Companies Corporates ------------------------------.As applicable to corporates ----------------------------------– Eligible – Net worth of Rs. 25.

In order to promote dematerialisation. SCHIL. which ensures movement of funds and securities simultaneously. an entity can participate in the primary and secondary markets for government securities. These client accounts are referred to as constituent SGL accounts or SGL II accounts. The trades on BSE are settled through the clearing house. www. It also avails of the dematerialised holding and DvP settlement facilities. NSDL and CDSL have admitted debt instruments such as debentures.472. in case of the transfer taking place in the demat mode. 104. as splitting of securities involved considerable amount of time. This facility maintains records of investment in Government securities and T-bills in electronic book entry form. it is possible for the participant to sell securities to corporate clients. All entities regulated by RBI [including FIs. RBI has permitted NSCCL. RRBs. provident funds. FIs.. Holding and trading in dematerialised form provides a number of benefits to the investors. 2. Constituent SGL Accounts Subsidiary General Ledger (SGL) account is a facility provided by RBI to large banks and financial institutions. The outstanding investments in scrip had to be converted into demat by October 2001. RBI has permitted such investors to hold their securities in physical form. Pass through certificates (PTCs) are also being issued in demat form.680 million were available in demat form. PDs and SDs have been permitted to make fresh investments and hold CP only in dematerialised form.155 Debt Market ISMR corporate listed debt securities.com . With these developments. Dematerialisation of Debt Instruments Dematerialised trading was earlier restricted only to the equity shares and units of MFs. Trades on WDM segment of NSE are settled on a trade-by-trade basis on the settlement day. should be executed on the basis of price and order matching mechanism of stock exchanges as in case of equities. 356 issuers have issued 4. As all investors in government securities do not have an access to the SGL accounting system. 568 issuers have issued 12.797 debentures/bonds in demat form. CDSL. Through a constituent SGL account.nseindia. They are also permitted to open a constituent SGL account with any entity authorised by RBI for this purpose. NSDL. The SEBI regulation also prescribes that all such trades. Since June 30. banks and FIs are required to issue CDs only in demat form. RBI specified that repos on PSU bonds would be permitted only in demat form.550 million in demat form. trusts in smaller lots. local area banks. This was not possible in the physical environment. These institutions can settle their trades for securities held in SGL through a DvP mechanism. irrespective of whether these debt instruments are listed. CPs. In the demat form. The trades on CM segment of NSE are settled through National Securities Clearing Corporation. With the passage of Finance Act 2000. As on March 2004. As securities in demat form can be held and transferred in any denomination. stamp duty payable on transfer of debt instruments was waived. bonds. 2001. From June 30.982 commercial papers worth Rs. PDs. it is possible for the participant to STRIP these securities and create a retail market for the same. It may be possible to create a special purpose vehicle and issue cosmetic securities (PTCs) to retail holders. unlisted or privately placed. debentures/bonds worth Rs. 2002. cooperative banks. Banks and PDs to offer constituent SGL account facility. NBFCs] should necessarily hold their investments in government securities in either SGL (with RBI) or CSGL account. CDs etc.

per crore of face value of term repo subject to Minimum of Rs. 1 lakh. The PDO.com .and Maximum of Rs. 5000/. In addition. It facilitates settlement of transactions in government securities on DvP-III basis. 1000/.per trade Rs. 10/. the fees and charges levied for different services on the members are as under: Fees for services of CCIL Sr. Transfer of funds is effected by crediting/debiting the current account of the seller/buyer. transfers securities from one participant to another. 20/. 25/Maximum Rs. 25/Maximum Rs.per crore of face value for over night repo trades subject to Minimum of Rs. daily mark to market margin and maintenance of settlement guarantee fund. Minimum Rs. In the DvP-III the settlement of Securities and Funds are carried out on a net basis. Particulars Charges Transaction Charges – (Payable latest by 10th of the subsequent month as per relative Bill. maintained with the RBI. Minimum Rs. 150 per crore of face value. 1000/for each leg 5 5 basis point per day on the amount of charges www. 20/. Only a Bank/FI/PD/MF or a Statutory Corporation or body corporate that is a member of NDS and has opened an SGL Account and a Current Account with RBI can apply for CCIL’s membership for the Securities segment.ISMR Debt Market 156 Clearing and Settlement All trades in government securities are reported to RBI-SGL for settlement. It provides guaranteed settlement for transactions in government securities including repos through improved risk management practices viz. Central Government securities and T-bills are held as dematerialised entries in the SGL of RBI.per trade Rs. No. 20/. which oversees the settlement of transactions through the SGL. 5000/. The trades are settled on a net basis through the DvP-III system. Clearing Corporation of India Limited CCIL was incorporated in April 2001 to support and facilitate clearing and settlement of trades in government securities (and also trades in forex and money markets). CCIL acts as a central counter-party for clearing and settlement of government securities transactions done on the NDS.. failing which penalty would be payable as per 5 below) 1 Securities Settlement of Outright Trades (Payable by each counter-party) Treasury Bills Settlement of Outright Trades (Payable by each counter-party) Settlement of OVER NIGHT REPO Trades (Difference between first and second leg settlement dates is One Calendar Day) (Payable by each counter-party) Settlement of TERM REPO Trades (Difference between first and second leg settlement dates is more than One Calendar Day) (Payable by each counter-party) Delayed payment of Transaction Charges and System Usage charges Rs.and Maximum of Rs. The members pay a one-time membership fee of Rs. 75 per crore of face value.nseindia.for each leg 2 3 4 Rs.

liquidity arrangements. CCIL assumes certain risks.nseindia.443.761.190 10. of Trades 7. million) Month Outright Transactions No. CCIL in case of unusual volatility in the market may also collect volatility margin.760 25. via INFINET.e.183. Settlement being on DvP basis. In addition.890 No. Both the margins are computed trade-wise and then aggregated member-wise.300 4. The daily average turnover in CBLO increased from Rs. of Trades 524 11. at a specified future date and an authority to the lender to receive money lent. CBLO is an obligation by the borrower to return the money borrowed.330 Repo Transactions No. settlement guarantee fund. 2003. A summary of the trades settled by CCIL are given below: Settlement of Trades in Government Securities (Amount in Rs. The CBLO is a discounted instrument issued in electronic book entr y form for the maturit y period ranging from one day to one year. for settlement. against which CCIL avails of a line of credit from the bank.470 15.512 Total Amount (Face Value) 548.682. 470 million in April 2003 www. measures for risk mitigation (in the form of exposure limit. The margining system in CCIL are so designed that they cover such risks.com . CCIL collects Initial Margin and Mark to Market (MTM) margin from members in respect of their outstanding trades.672 20. This enables CCIL to complete settlement in case a situation of shortage resulting from a member’s default. which may arise due to a default by a member to honour its obligations. continuous position monitoring and loss allocation procedure). the risk from a default is the market risk.843 243.655 203. Initial Margin is collected to cover the likely risk from future adverse movement of prices of the concerned securities.515 264. Mark to Market margin is collected to cover the notional loss (i.751. penalties in case of default.131 191.e. the difference between the current market price and the contract price of the security covered by the trade) already incurred by any member. Each member contributes collaterals to a Settlement Guarantee Fund (SGF).157 Debt Market ISMR After trades have been concluded on the NDS. at a specified future date with an option/privilege to transfer the authorit y to another person for value received and an underlying charge on securities held in custody (with CCIL) for the amount borrowed/lent. i. It encompasses strict admission norms. Activity in this segment has gradually picked up in recent months with increasing supply of funds from MFs and demand for funds by banks and PDs.480 15.220 Source: CCIL Quarterly Newsletter ‘Rakshitra’ Collateralised Borrowing and Lending Obligation Collateralised Borrowing and Lending Obligation (CBLO) was operationalised as a money market instrument through the CCIL on January 20. of Trades 2001-02 2002-03 2003-04 7.290 9.431. During the settlement process. change in price of the concerned security.585 Amount (Face Value) 389.972 Amount (Face Value) 159. CCIL has in place a comprehensive risk management system. details are forwarded to the CCIL system.

ISMR Debt Market 158 to Rs. both in terms of number of contracts and outstanding notional principal amounts. 1. Activity in FRAs/IRS is expected to pick up after the regulatory and prudential norms for over-the-counter (OTC) and exchange traded derivatives are harmonised by the Reserve Bank of India.47% from Rs. The net borrowings of State Governments in 2003-04 amounted to Rs. The state governments collectively raised Rs.760 million. FRAs/IRSs provide means for hedging the interest rate risk arising on account of lendings or borrowings made at fixed/variable interest rates.360 million through issue of T-bills. 5. Their net borrowings also increased by 1. Interest Rate Derivatives A Forward Rate Agreements (FRA) is a financial contract between two parties to exchange interest payments for a ‘notional principal’ amount on settlement date. 903. As at end March 2004.nseindia.363 to 19.210 million during 2003-04 as against Rs. 2003 to March 19.6% of gross fiscal deficit of central government in 2003-04 as against 74. 505.69% from Rs. 369. 50 members were admitted to the CCIL’s CBLO segment.182. The number of contracts rose from 9. the central government and state governments borrowed Rs.508. 2.com . The gross borrowings of the central and state governments taken together increased by 8.215. 1.600 million during the period April 9. 1. After meeting repayment liabilities of Rs.476. 1. 25. 505.710 million and Rs.920 million during 2003-04.060 million in March 2004.260 million.980 million in 2002-03 to Rs.480 million in the same period. for a specified period from start date to maturity date.530 million in the preceding year.000 million through issue of dated securities and Rs. 308.300 million (in the previous year) to Rs.822.160 million for the year 2003-04.867. 420.360 million and Rs. banks’ borrowing through CBLO were exempted from CRR.570 million during 2003-04 (Table 6-4).4% in the preceding year.170 million and Rs. An Interest Rate Swap (IRS) is a financial contract between two parties exchanging or swapping a stream of interest payments for a ‘notional principal’ amount on multiple occasions during a specified period. There was a sharp increase in the volume in FRAs/IRSs market during 2003-04. while those of the state governments are to increase to Rs. 2004. while the outstanding amount rose from Rs. Market Outcome Primary Market Resource Mobilisation During 2003-04. Such contracts generally involve exchange of a ‘fixed to floating’ rate of interest.930 million for dated securities. To encourage activity in this segment.210 million. subject to banks maintaining the minimum CRR of 3 per cent.830 million to Rs.351. 1. 326. net market borrowing of Central Government amounted to Rs. 1.332. The gross and net market borrowings of central government are budgeted to increase further to Rs.981. 1. Net borrowings financed 75. respectively during 2004-05. www. 463. 261.429. The Central Government mobilised Rs.650 million. 261. and redemption of T-bills of Rs. 888. respectively.

215.010 -1.260 41.200 975.94 5.) Items 1.760 — 975.650 905. Table 6-5: Prof ile of Central Government Dated Securities (Amount in Rs.000 1. Central Government (a+b) (a) Dated Securities (b) 364-day T-bills State Government Institutions Sponsored by State Governments Gross 2003-04 2002-03 2004-05* Repayment 2003-04 2002-03 2004-05* Net 2003-04 2002-03 1.710 — 261. This was largely due to comfortable liquidity position and subdued inflationary expectations.260 308.000 5 18 77 100 3.930 261.800 13.nseindia. Net Borrowings Total (B) Maturity Distribution (Per cent) a.041.62% during the preceding year.511.210 — 261.160 1. Above 5 and upto 10 years Above 10 years 2002-03 1. Above 5 and upto 10 years Above 10 years Total www. 2003-04 Yields The year 2003-04 witnessed a persistent decline in interest rates on market borrowings across maturities.000 — 36 64 100 2003-04 1.215.71 65.com .476.520 343.159 Debt Market ISMR Table 6-4: Market Borrowings of Governments (Rs.000 1. 3.170 1.070 90 463.180 888.000 795.260 604.200 195.360 1. Total 1.69% and 6. 6.130 1.83 7.000 930.800 65.080 274.360 369. Gross Borrowing Repayments Weighted Average Maturity (In years) Weighted Average Yield (Per cent) (A) Maturity Distribution (Amount) a.920 1.710 903.360 505.000 326.273.930 888.640 490.248. c.981.360 51.351. c. Upto 5 years b.170 1.250. 5. The yields on primary issues of dated government securities eased during the year with the cut-off yield varying between 4.35% during 2003-04 as against the range of 6.508.880 1.250.890 2.000 1.215.190 2.570 1.880 17.34 — 455.332.000 260.530 3.450 — 470. Source: : RBI Annual Report.05% to 8.822.640 480 1.928.160 261. 4. 2.000 220.250. mn.000 274.070 14.000 420.980 655.750 629.230 — 588.71% in 2003-04 from 7.190 326.680 1.34% in 2002-03 (Table 6-5).300 * Budget Estimates.380 290. Upto 5 years b. The weighted average yield on government dated securities further declined to 5.480 — 888. million) Security 2004-05* 1.

the weighted average maturity of dated securities issued during the year increased marginally to 14.000 Maturity Structure Government has been consciously trying to lengthen maturity profile.09 (FRB. 8 months) Maximum 9.33 (29 years.917.69 (4 years) 6.35 (18 years. mn. as against Rs. Secondary Market Turnover The aggregate secondary market transactions in debt securities (including government and non-government securities) increased by 36. Non-government securities accounted for a meager 1.000 2003-04 740.) Items 7.32 7.6% to Rs. During 2003-04. 3 months) 4. 27.14 5.57 (8 years) Maximum (B) 10 years Minimum Maximum (C) Above 10 years Minimum 6.4% of total turnover in debt securities during 2003-04. 8 months) Maximum 8.62 (9 years) 5.94 years in 2003-04 from 13.72 (9 years. 11 months) 2002-03 560. around 76.62 (24 years. 8. 11 years) 6.com .62 (24 years.05 (12 years.ISMR Debt Market 160 Table 6-5: Profile of Central Government Dated Securities (Contd. 11 months) 4. Price Based Auctions Amount Yield . Yield . NSE accounted for about 48. The maximum maturity of primary issuance has been increased to 30 years. 4 months) 6. 10 months) 8.05 (12 years.214.Maturity Distribution-wise (A) Less than 10 years Minimum 6.700 million during 2002-03 (Table 6-6). FRB is Floating Rate Bonds Source: RBI Annual Report 5. www.6% of total turnover in debt market.76 (8 years.83 years 2002-03.72 8.32 5. As a result. 19.nseindia.) (Amount in Rs.54% of central government borrowings were effected through securities with maturities above 10 years.(Per cent) Minimum 6. 3 months) Note: Figures in brackets indicate residual maturity in years.706 million in 2003-04.

58 22. Except WDM. Securities 59.610.456 million in 2002-03. 13.632 million. 1.947 million in 2003-04.557.049.50 5.328.313 10. The details of non-repo SGL transactions in government securities are presented in Annexure 6-1.834 million in the previous year (Table 6-7).210 1.98 93. www.417.721.119.632 Share in Non-Repo Turnover (%) Central Govt. mn.875.99 35.229.957 million in 2003-04 from Rs. The volume of transactions in state government securities increased to Rs.78 73.456 12.048 360.084 12. BSE and NSE. the volumes are quite insignificant on other segments.700 2003-04 26.188.59 25.06 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Source: RBI.) 295.59 76. Table 6-7: Secondary Market Transactions in Government Securities Year Total SGL Non-Repo Turnover (Rs.300 939.658 13.569 million.82 0. BSE reported a turnover of Rs.564.725 million and Rs. 417.87 10. mn.917.387 683 358. 824. NSE accounted for over 99.220 417.31 88. 2002-03 19.4% of total turnover in non-government securities during the year.803 million. The turnover in non-government securities on WDM of NSE was Rs.013. 171. with a monthly average of Rs.42 10.064 422. and on the BSE (F Category).923.51 0. The aggregate turnover in (central and state government dated securities and T-bills) through non-repo SGL transactions touched a level of Rs. 16. 17.706 The non-government securities are traded on the WDM and CM segments of the NSE.81 91.84 0.94 93.455 27.013. The monthly turnover in non-repo transactions for the year 2003-04 ranged between Rs.63 0.264 9.57 0.44 63.923.161 Debt Market ISMR Table 6-6: Turnover of Debt Securities (Rs.78 88. Securities 1.743.com .755 949 19.947 2.622 2.310 4.56 5.792.) Securities Government Securities WDM Segment of NSE Rest of SGL Non-Government Securities CM Segment of NSE WDM Segment of NSE ‘F’ Category of BSE Total Source: RBI. 2.455 million during 2003-04. recording an increase of 22.020 14.834 17.52 0.68 1.214.51 7. 2.01 T-Bills 38.80 0.93 State Govt.2% over Rs.nseindia.5% higher than that during the preceding year.910 5. 94.900 1.

The turnover in T-bills has increased from 40.) Year Turnover of Non-Repo Govt.969 19.85 40.834 17.990 1.632 92.95 77.300 939.958 9.834 313.915 4.295 2.548 109.741.621 securities were available for www.013.31 Source: RBI & NSE.88 72.890 1.433 381.31 24.750 600.01% in 2002-03 to 74.185. Developments in WDM During 2003-04.190 31.990 555.342 13.836 11.com . 2.305.130 334.564.68 22. 1.71 76.910 5.440 231.160 5.65 41.456 12.010 428.089. Securities On SGL On WDM 180.37 38.610. mn.128 more securities with a total outstanding debt of Rs.57 60. Table 6-8: Share of WDM in Transactions of Government Securities (Amount in Rs.092.31% in 2003-04.120.523 9.10 76. 2.875.507 12.121 170.845 1.14 55.023 975.076 69.21 63.119.94 67.221 Turnover of Non-Repo T-Bills Share of On SGL On WDM Share of WDM (%) WDM (%) 38. Securities On SGL On WDM Share of WDM (%) 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 295.885 271.49 74.170 604.809.310 4.893.121 9.658 13.902 804.58 32.549 million was made available for trading.01 74. The share of WDM in turnover of non-repo dated securities (central and state government securities) witnessed a decline to 49.410 4.915.446.158 2.30 40.nseindia.198.79 44.210 1.19 68.269.ISMR Debt Market 162 The share of WDM segment of NSE in the total turnover of non-repo SGL transaction increased marginally from 74.124.53 48.155.989 15.06 115.89 Turnover of Non-Repo Central & State Govt.863 106.316 767 .923.620 673.475 3.721.446. As at end March 2004.03 78.955 10.900 475.991.01% in 2003-04 from 55.556 22.200.943 798.015.53 37.220 412.497 12.89% in the 2002-03 to 46.76 75.152 904.42% in 2002-03 (Chart 6-1).209 105.89% in 2003-04 (Table 6-8).435 254.900 1.89 46.813.

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trading on the WDM Segment. A total of 1,078 securities were active during 2003-04 as compared to 1,123 in the previous year. The turnover on WDM segment has been growing rapidly over time. The monthly turnover at times far exceeds the turnover in the equity market segment. It has registered an increase of 23.14% from Rs. 10,687,015 million during 2002-03 to Rs. 13,160,962 million during 2003-04. The average daily turnover increased from Rs. 35,983 million to Rs. 44,765 million during the same period, while the average trade size increased from 63.7 million to 69.4 million. The business growth of WDM segment is presented in Table 6-9, Chart 6-2 and Annexure 6-2.
Table 6-9: Business Growth of WDM Segment of NSE
Parameter No. of Active Securities No. of Trades No. of Retail Trades Turnover (Rs. mn.) Average Daily Turnover (Rs. mn.) Retail Turnover (Rs. mn.) Share of Retail Trades (%) Average Trade Size (Rs. mn.) Average Size of Retail Trade (Rs. lakh) 1995-96 304 2,991 1,115 118,677 408 2,072 1.75 39.68 1.86 1996-97 524 7,804 1,061 422,776 1,453 2,005 0.47 54.17 1.89 1997-98 719 16,821 1,390 1,112,633 3,850 2,887 0.26 66.15 2.08 1998-99 1,071 16,092 1,522 1,054,691 3,650 3,078 0.29 65.54 2.02 1999-00 1,057 46,987 936 3,042,162 10,348 2,185 0.07 64.74 2.33 2000-01 1,038 64,470 498 4,285,815 14,830 1,318 0.03 66.48 2.65 2001-02 979 144,851 378 32,775 1,094 0.01 65.39 2.89 2002-03 1,123 167,778 1,252 35,983 2,995 0.03 63.70 2.39 2003-04 1,078 189,518 1,400 44,765 3,317 0.03 69.40 2.37

9,471,912 10,687,015 13,160,962

Source: NSE.

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The market remained highly buoyant throughout the year (2003-04). Specifically the first six months of the fiscal witnessed huge volumes in this segment. The highest turnover of Rs. 139,120 million was witnessed in August 2003. The average daily turnover ranged between Rs. 27,954 million and Rs. 65,095 million.

Retail Trades
The number of retail trades had been increasing till 1998-99 thereafter it witnessed a decline. However, in the past two years there has been a turnaround in the number of retail trades. The number of retail trades increased from 1,252 in the previous year to 1,400 in 2003-04 a rise of by almost 12%. The retail trade market is picking up as a result of the efforts made by policy makers.

Securities Profile
Long-term securities dominated the market during 2003-04 revealing the interest of investors to hold on to long-term of assets. Dated government securities accounted for the bulk of trading with a turnover of Rs. 12,186,448 million. The turnover in government securities increased by 21.8% during 2003-04 as compared to previous year. Its share in total turnover, however, marginally decreased to 92.6% from 93.6% in the previous year (Table 6-10). The share of T-Bills in WDM turnover, which has been declining over a time, witnessed an upward trend registering 4.23% share in the total turnover. The PSU bonds witnessed a turnover of Rs. 158,946 million in 2003-04 as against Rs. 146,508 million in 2002-03 (Annexure 6-3). The share of institutional bonds increased marginally to 0.85% in the current year from 0.50% in the previous year (Chart 6-3).
Table 6-10: Security-wise Distribution of Turnover Securities Turnover (Rs. mn.) 2002-03 Government Securities T-Bills PSU Bonds Institutional Bonds Bank Bonds & CDs Corporate Bonds & CPs Others Total Source: NSE. 10,005,415 322,846 146,508 52,964 29,471 129,637 175 10,687,016 2003-04 12,186,448 556,567 158,946 111,950 43,756 102,945 350 13,160,962 % of Turnover 2002-03 93.62 3.02 1.37 0.50 0.28 1.21 0.00 100.00 2003-04 92.60 4.23 1.21 0.85 0.33 0.78 0.00 100.00

The share of top ‘10’ securities over the past three years has been witnessing a decline and it decreased from 65.15% in 2002-03 to 54.43% in 2003-04 (Table 6-11). Top 50 securities accounted for over 90.66% of turnover.

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Table 6-11: Share of Top ‘N’ Securities/Trading Members/ Participants in Turnover in WDM Segment Year Top 5 Securities 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Trading Members 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 42.84 57.59 32.93 30.65 26.81 37.11 42.20 51.61 43.10 37.06 51.99 44.36 30.02 27.17 29.87 32.38 35.17 35.18 31.77 30.72 Top 10 61.05 69.46 48.02 46.92 41.89 55.57 58.30 68.50 65.15 54.43 73.05 68.58 51.27 47.85 50.45 53.41 54.25 58.68 53.71 53.01 In Percent Top 25 80.46 79.60 65.65 71.25 64.30 82.12 80.73 88.73 86.91 81.58 95.37 96.10 91.57 83.38 86.55 84.46 86.82 88.36 85.49 86.71 Top 50 89.81 86.58 78.32 85.00 78.24 90.73 89.97 94.32 92.74 90.66 100.00 100.00 99.96 99.82 99.98 100.00 100.00 100.00 100.00 100.00 Top 100 97.16 93.24 90.17 92.15 86.66 95.28 95.13 97.19 96.13 95.14 — — 100.00 100.00 100.00 — — — — — (Contd.)

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Table 6-11: Share of Top ‘N’ Securities/Trading Members/ Participants in Turnover in WDM Segment (Contd.) Year Top 5 Participants 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Source: NSE. 18.37 29.66 25.27 23.60 22.47 15.54 17.51 17.49 17.27 16.66 Top 10 27.38 47.15 44.92 38.96 37.39 27.87 28.85 29.25 28.29 25.69 In Percent Top 25 38.40 70.49 67.00 65.59 62.79 52.51 50.64 50.19 49.22 44.25 Top 50 42.20 76.32 76.33 77.96 79.27 74.76 69.72 69.16 68.14 59.87 Top 100 — 76.58 77.10 80.22 84.51 81.32 76.78 76.49 75.20 65.17

Participant Profile
Indian banks, foreign banks and PDs together accounted for over 60% of WDM turnover during 2003-04 (Table 6-12). Though the share of the Indian banks fell from 38.77% to 36.36% in 2003-04, it still continues to be market leader followed by trading members (Annexure 6-3). The share of trading member in the turnover witnessed a huge rise from 24.81% to 34.8% in 2003-04 (Chart 6-4).

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62 22. The total market capitalisation of securities available for trading on WDM segment stood at Rs. 2002-03 38. As at March 31.03 24. MFs & Corporates Total Source: NSE. The growth of market capitalisation of WDM is presented in Annexure 6-4.36 7.81 3. there were 78 members on the WDM segment. registering a growth of 40. which is indicative of the narrow membership structure of WDM segment (Table 6-11).77 100.9% of total market capitalisation at the end of March 2004 (Chart 6-5).com .77 10.00 Top ‘50’ trading members accounted for the total turnover of WDM in 2003-04.03 34.64% over end-March 2003 (Table 6-13). 12.638 million as at end-March 2004.nseindia. Government securities accounted for 78.00 2003-04 36.56 100.80 4. The relative shares of different securities in market capitalisation maintained the trend of 2002-03. www.25 17. Market Capitalisation Market capitalisation of the WDM segment has witnessed a constant increase indicating an increase in activity in the market.167 Debt Market ISMR Table 6-12: Participant-wise Distribution of Turnover Participants Indian Banks Foreign Banks Primary Dealers Trading Members FI. 2004.158.

04 7.69 7.61 5. This product has been developed by using Nelson-Siegel model to estimate the term structure of interest rate at any www.87 5.97 5.64 5.com . 9-10 years and above 10 years are presented in Table 6-14.17 6.017 568.43 5.61 6. financial institutions.61 5.15 6.74 5.02 6.41 6. 5. NSE disseminates a ‘Zero Coupon Yield Curve’ (NSE Zero Curve). 6.580.17 Corporate Securities 5-6 years 9-10 years Above 10 years 6.158. 2003-04 (In per cent) Month/ Year Government Securities 0-1 year Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Source: NSE. 5-6 years.47 5.62 5.25 6.35 6.17 5. This helps in valuation of securities across all maturities irrespective of its liquidity in the market.72 4.75 5.00 Yields The yields (yield-to-maturity) on government and corporate securities of different maturities of 0-1 year.55 5.18 6.43 5.71 5.96 4.94 5.89 4.90 5.12 4.403 326.79 6.89 4.62 5. insurance companies.644.88 6. mutual funds.42 5.25 5.19 6.55 5. Table 6-14: Yields on Government and Corporate Securities.49 5.62 6.07 5.21 100.25 Zero Coupon Yield Curve Keeping in mind the requirements of the banking industry.27 4.05 4.56 0-1 year 5.828 720.81 6.46 4.24 5.67 6.94 6.42 4.66 5.58 4.23 6.593.59 6.99 5.33 5.50 5.04 5.15 4.50 5.03 5.95 6.940 349. mn.14 5.35 5.188 610.42 5-6 years 9-10 years Above 10 years 5.06 100.75 6.638 % to total March-03 76.54 4.66 5.71 6.74 5.) March-03 Government Securities PSU Bonds State Loans T-bills Other Total Source: NSE.50 5.80 6.84 7.02 4.34 4.97 5.25 6.77 4.979 12.76 5.319 793.04 5.09 5.87 5.920 876.12 5.53 2.78 6.017 383. that have substantial investment in sovereign papers.12 7.90 4.67 6.86 5.36 6.34 4.ISMR Debt Market 168 Table 6-13 : Market Capitalisation of WDM Segment Security Market Capitalisation (end of period) (In Rs.41 6.86 6. The yields on government and corporate securities showed a downward trend through out 2003-04 except for February 2004 and August 2003.812 March-04 9.76 4.12 5.86 5.16 5.00 March-04 78.839 8.76 5.65 7.44 8.nseindia.54 5.91 5.

the underlying price of such an instrument is calculated as the net present value of the stream of cash flows. FIMMDA-NSE MIBID/MIBOR A reference rate is an accurate measure of the market price. NSE has been computing and disseminating the NSE Mumbai Inter-bank Bid Rate (MIBID) and NSE Mumbai Inter-bank Offer Rate (MIBOR) for the overnight money market from June 15.com . 1998 and the 1 month and 3 month MIBID/MIBOR from December 1. these have been co-branded with Fixed Income and Money Market Dealers Association (FIMMDA) from March 4. 1998. This has been successfully tested by using daily WDM trades data. This is being disseminated daily. In the fixed income market. Each cash flow. in such a formulation. the 14-day MIBID/MIBOR from November 10. it is an interest rate that the market respects and closely matches. the appropriate rates are read off the estimated ZCYC. In view of the robust methodology of computation of these rates and their extensive use by market participants. These www. It provides daily estimates of the term structure of interest rates using information on secondary market trades in government securities from the WDM segment. Chart 6-6 plots the spot interest rates at different maturities for the year 2003-04. Modeled as a series of cash flows due at different points of time in the future. 2002.169 Debt Market ISMR given point of time. The daily ZCYC captures the changes in term structure. The term structure forms the basis for the valuation of all fixed income instruments. 1998. Once estimated. The ZCYC depicts the relationship between interest rates in the economy and the associated terms to maturity. the interest rate-maturity mapping is used to compute underlying valuations even for securities that do not trade on a given day. is discounted using the interest rate for the associated term to maturity. The estimates of daily ZCYC are available from February 1998. and is used to track the value of portfolios of government securities on a day-to-day basis.nseindia. On these lines.

forward rate agreements.19% and 4. The rates have been particularly stable during the current financial year. Chart 6-7 presents overnight FIMMDANSE MIBID/MIBOR from April 2003 to March 2004. and have been hovering around 4-6%. NSE-VaR System NSE has developed a VaR system for measuring the market risk inherent in Government of India (GOI) securities. reflective of a stable interest rate environment. The overnight rates are disseminated daily to the market at about 0955 (IST) and the 14 day.41%.com . 2003.48%. The rates polled are then processed using the bootstrap method to arrive at an efficient estimate of the reference rates.19% and 6. The stability of the rates in overnight call market may be due to the guidelines issued by RBI moving non-banks from the call market in a phased manner. The FIMMDA-NSE MIBID/MIBOR rates for month ends are presented in Annexure 6-5. 2003 and the low of 4. These are broadcast through NEAT-WDM trading system immediately on release and also disseminated through websites of NSE and FIMMDA and through e-mail.com.nseindia. on November 22. respectively. NSE-VaR system builds on the NSE database of daily yield curves (ZCYC) and provides measures of VaR using 5 alternative methods (variance-covariance. The overnight MIBID/MIBOR rates ruled fairly steady within a narrow range during the year 2003-04. on October 30. The daily FIMMDA-NSE MIBID/MIBOR rates are available at www. The FIMMDA-NSE MIBID/MIBOR is used as a benchmark rate for majority of deals struck for interest rate swaps. quotes are polled and processed daily by the Exchange at 0940 (IST) for overnight rate and at 1130 (IST) for the 14 day.ISMR Debt Market 170 are now known as FIMMDA-NSE MIBID/MIBOR.nseindia. Currently. 1 month and 3 month rates. FIMMDA-NSE MIBID/MIBOR rates are based on quotes polled by NSE from a representative panel of 29 banks/institutions/primary dealers. respectively. floating rate debentures and term deposits. www. 1 month and 3 month rates at about 1145 (IST). These rates touched the peak of 6.

During 2003-04.com. these 5 methods provide a range of options for market participants to choose from.com . primary dealers. Secondly. In contrast. weighted normal. There were also a few additional difficulties in construction and maintenance of debt indices. In a declining interest rate scenario. It is the movement of prices quoted in the market and could be seen as the mirror image of yield movements. These are comparatively easy to construct due to the high liquidity of many equities across several industry categories. market participants need an index to compare their performance with as well as the performance of different classes of assets. can witness significant fluctuations over a short period. while market prices for the constituents of an equity index are normally available on all trading days over a long period of time. the universe of bonds changes frequently (new issues come in while existing issues are redeemed). Together. namely.28% respectively. Therefore. It has two variants. 2002.nseindia. First. the TRI registered gains of 10. While constructing the NSE-Government Securities Index prices are used from NSE ZCYC so that the movements reflect returns to an investor on account of change in interest rates.banks.91% and 2.nseindia. However. NSE’s G-Sec Index and NSE’s T-Bills Index. market prices of constituent bonds in a bond index. the weights being proportionate to the market value of a given security in their portfolio. the interest accrual and reinvestment income is offset by capital losses. As against this. 2004 is presented in Annexure 6-6. the PRI of i-BEX and NSE G-Sec Index increased by 3. insurance companies. irrespective of the selection criteria used. A widely tracked benchmark in this context is the ICICI Securities’ (Isec) bond index (i-BEX). 1-day VaR (99%) measure for GOI Securities traded on NSE-WDM on March 31. financial institutions. in addition.171 Debt Market ISMR historical simulation method. on account of the fixed maturity of bonds vis-à-vis the perpetuity of equity. These have been around for years and are very popular as benchmarks. during rising interest rate periods. The PRI tracks the price movements of bonds or capital gains/losses since the base date. During 2003-04. The VaR for other GOI securities are available at www. mutual funds and foreign institutional investors. designing debt indices posed as a challenge in India as the breadth and depth of the debt market has not been very promising. This is on account of the fact that the liquidity of a security varies over its lifetime and. weighted historical simulation and extreme value method). It captures both interest accruals and capital gains/losses. the TRI typically has a positive slope except during periods when the drop in market prices is higher than the interest accrual.83% and 8. Participants can compute their portfolio risk as weighted average of security-wise VaRs. NSE-VaR system releases daily estimates of security-wise VaR at 1-day and multi-day horizons for securities traded on WDM segment of NSE and all outstanding GOI securities with effect from January 1. provident funds.95% for i-BEX and NSE G-Sec Index respectively. The index provides a benchmark for portfolio management by various investment www. a Principal Return Index (PRI) and Total Return Index (TRI). while losing on reinvestment income. the index gains on account of interest accrual and capital gains. The TRI tracks the total returns available in the bond market. Bond Index Market participants are familiar with the equity indices such as the S&P CNX Nifty and the Sensex. may not be available daily. These have emerged as the benchmark of choice across all classes of market participants .

64 246.04 131.11 1427.88 132.13 NSE G-Sec Index TRI 233.61 240.88 183.10 249.90 184.26 1453.25 3692. being in the nature of OTC.94 246.com .20 1463.34 184.09 1443. There are strong entry barriers to participate in trading of government securities.32 1434. as the deals are required to be reported within 15 minutes of the same being negotiated.74 185.34 182.49 135.24 132.30 3693.88 183.00 3626.95 250. 2003-04 At the end of the month Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 I Sec I-BEX (Base August 1.25 PRI 131.08 249. It is necessary to ban OTC trades and prescribe that all trades in government securities should be subject to discipline of stock exchanges.36 236.74 185. Regulatory fiat is needed to enforce transparency in financial deals.35 3671.03 Source: ICICI Securities and NSE Policy Debates Trading of Securities The trading framework suffers from following deficiencies: 1.42 3689.98 3654.88 185.72 181.12 133.90 184.61 249.48 PRI 1405. The movement of popular fixed income indices at monthly rates are presented in Table 6-15.18 182. 1994=1000) TRI 3386.72 181.nseindia.28 1424.88 185.88 188.48 238.28 186. is difficult.ISMR Debt Market 172 managers and gilt funds.72 1460. Table 6-15: Debt Market Indices.00 1471.49 132. The parties have to search for counterparties and negotiate for the best price.34 182. The enforcement of such trades.66 135.54 3451. Like equity markets.90 132.83 1461. SEBI has taken the initiative in this regard by prohibiting 2.32 1462.98 3481. 3.15 3519.56 134.02 180. any and everybody who complies with the specified criteria should be allowed to participate in the market.88 188.31 134. NSE introduced automated screen based trading in debt securities. NDS is expected to enforce market discipline.10 134.34 184.15 249. It is necessary to mandate that all trades will be executed on the basis of price and order matching mechanism of stock exchanges as in case of equities.28 186. which is an anonymous order matching system.13 PRI 180.02 180.43 254.82 3753.08 3612. However.18 182.15 1455. banks and institutions have shown little interest to use NSE’s trading platform for executing their debt securities transactions. www.25 NSE-T-Bills Index TRI 180. Trades are negotiated bilaterally over phone or NDS.

Of these. futures. clearing corporation for settling these contracts. Further. is very limited. It is viewed in some circles that there is no suitable regulatory framework to govern trading of these derivatives. IRSs and FRAs are the most popular derivative instruments and account for the largest share of turnover in interest rate derivatives all over the world. the parties have to search for counter parties. the parties have to negotiate with counterparties to arrive at an agreeable price. The commonly used interest rate derivatives are forwards. These are not derivatives under the Securities Contracts (Regulation) Act. A buyer from Chennai can not trade in the Mumbai market since securities held in his account with RBI books cannot be easily transferred to Mumbai and vice-versa. As it does not consolidate all orders into an order book.com . However. 1956 as these are not derived from securities. there are strong entry barriers. In situations of rise in interest rates. www. PDs and FIs to hedge interest rate risks. has not developed appreciably for lack of legal clarity.nseindia. swaps and options. the price of the bond declines. by logging in the trade execution process in entirety. capital gains/losses. 4. and a dispute resolution mechanism. However. The market is highly fragmented. it does not obviate the difficulties of an OTC market. there should be complete audit trail to resolve the disputes. 6. Only the parties to trade have information about the trade. and re-investment income. posing the risk of capital loss to an investor who wants to sell off his security prior to maturity. the number of participants who can negotiate on NDS. the quality of price discovery process is very poor. however. It is necessary to provide a facility enabling any body from any corner of the country to trade with ease and convenience. It is desirable to have legislative provisions to provide for such contracts. which is income from the intermediate cash flows that are re-invested. In India. Debt Derivatives There are three sources of income from a fixed income security-coupon or interest payments. It is necessary to allow parties to participate in the market anonymously. the broad parameters of such contracts. The risk arising out of variations in interest rates could be hedged by using interest rate derivatives.173 Debt Market ISMR ‘negotiated deals’ in respect of listed corporate debt securities and prescribing that all such trades would be executed on the basis of price and order matching mechanism of stock exchanges as in case of equities. The market for these derivatives. 5. 7. The knowledge of parties affects the terms of trade and can facilitate formulation of cartels. Since it does not guarantee the best price for all trades. It should cover the entities who can enter into such contracts. NDS is a vastly superior system for negotiation of trades in government securities. if any. T-bills cannot be traded outside Mumbai. An investor faces considerable risk from an adverse movement in interest rates. IRSs/FRAs were introduced in June 1999 with a purpose to enable banks. It is necessary to enable market participants to see the full market and have all trade related information on real time basis. The market is not transparent. Since the order book is geographically fragmented. nor does it provide the liquidity of an order matching market.

100 crore government security carrying a coupon of 12% with 10 year maturity has cash flows of 20 semi-annual payments of Rs. for example. The Government security market in India has the necessary size to make STRIPS a success. Thereby. As one underlying security can be converted to 21 zero coupon securities. Besides. For example. Thus they will earn returns against their investment and also increase the supply of securities to boost the secondary market activity. as these are comparable to other fixed income instruments. without bearing the re-investment risk. Clarifications are required if the issuance and transfer of STRIPS. a 10-year government security. bear the re-investment risk due to the interest receipts every six months. which are their favourites. a few legal clarifications/relaxations are needed for issuance and trading of STRIPS. www. The secondary markets volumes in Government securities were Rs. the provident funds will be able to invest in government securities as required by law and also achieve the desired cash flow. RBI is consolidating outstanding government securities to ensure sufficient volumes and liquidity in any one issue. which can be traded separately. 12 months. Government and RBI have repeatedly expressed their intention to develop markets for STRIPS and are preparing ground for the same. Banks can issue STRIPS against the securities held by them. which would facilitate the emergence of benchmarks and development of STRIPS. 18 months and so on and 1 carrying final redemption amount with maturity of 10 years. Such newly created securities are called STRIPS. like provident funds. interest component of a security cannot be transferred unless the whole security along with other future interest payments are transferred simultaneously. A Rs. 26. Thus. would attract any stamp duty and at what rates.com . it would allow the issuer to issue securities with long-term maturity for any amount and allow stripping of these securities to meet the market appetite for short-term securities in convenient amounts. The Negotiable Instruments Act 1881 does not permit transfer of only a part of the amount appearing due on an instrument. The provident funds can invest in STRIPS. 6 crore each and the repayment of principal of Rs. The introduction of STRIPS in government securities would be good bait for small investors. Further. This results in reduced supply of securities for secondary market activity. RBI is setting up a working group to suggest operational and prudential guidelines. some participants. However.nseindia.ISMR Debt Market 174 STRIPS Separate Trading of Registered Interest and Principal of Securities (STRIPS) involves stripping a conventional security into a number of zero coupon securities. 100 crore after ten years. the breadth of the debt market would expand considerably. STRIPS would provide a solution to both these problems. can be stripped into 21 zero coupon securities-20 carrying half-yearly coupons with maturities of 6 months. CBDT has clarified taxation issues relating to issuance of STRIPS. The participants in the debt market normally purchase the securities and hold till maturity. Each of these 21 cash flows can be treated as a zero coupon instrument which can be traded at varying yields. which will mature on the required specified date. Increased supply of securities across maturities would provide a continuous market and consequently improve liquidity. These 21 instruments are STRIPS of the underlying government security. even though derived from government securities.084 million during 2003-04. a part of a security. STRIPS require the principal and the interest coupons to be uniquely identified as distinctive securities.792.

880.454 996.201 14.357.358 64.210 4.531.290 647.061.788 1.916.734 824.640 115.988 9.922 662.013.418 939.920 9.970 25.992 741.326 13.171 524.609 1.929 1.341.414 12.496 706.576 1.230 1.925 1.066 1.205.131 1.625 1.385.591 476.600 889.220 2.644 504.533 1.216 2.134 5.294 904.554 659.647 11.510 8.243 509.061.335 610 1.705 1.671 1.247.400.185.670 945.654 4.138.658 1.958 452.382 1.036 1.679.373 87.480 967.600 2.665 1.142 1.955 742.) Month/ Year SGL/NDS Non-Repo Transactions Dated State Treasur y Securities Govt.741.630 624.865 36.889 2.207.863 106.497 969.070 295.075. Bills (6+7+8) Securities 5 6 7 8 9 213.093 234 1.920 1.655 3.137.498 85.641.766 111.281 1.000.250 3.158 2.392 39.732 4.575 810.028.828 26.091.598 29.912 1.124.311 856.336 1.944 799.928 629.932 749.227.903 822.542 13.554.747 1.152 904.348 1.289 5.440 28.117 10.211 641.000 56.061 1.044 40.610.796 46.471 68.014 893 2.260 1.556 WDM Non-Repo Transactions in Govt.297.164 9.261 980.071.061.393 793 1.189 46.093 1.372 26.030 61.209 105.315 3.735 975.482 1.047 313.969 56.182.188.253.236 2.551 17.910.154.559 111.050.040 776.956 171.230.825 918.556 789.575 616.479 1.548.566 619.210 1.551 2.189 12.020.497.529 11.248 9.170.900 1.047 763.252.835 41.923.834 1.340 3.915 4.305 8.458 699.757 738.090 556.803 1.246 1.712 11.279.595.108 943.115.959 1.147.845 65.824 42.438 835.052.830 175.476 58.600 24.308 44.273.114 679.119 2.930 9.460 21.789.525 7.312 61.300 939.771 1.658 783.848 46.942 491.785 1.275 4.430.444 5.563 6.237 139.307 673.602 1.696 72.352.389 1.241 1.190 1 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 2001-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 2002-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 2003-04 Source: NSE www.487 1.130 5.480 412.330 42.601 92.083 1.341 5.845 33.456 642.312 1.833 3.482.204 680 999 1.990 50.338 5.052 926.491 7.042 1.785 724.291.794 63.433 381.053 90.191 878.141.797 1.125 572.440 428.915.042 69.176 3.850 5.140 89.664.991 24.878 1.185.600 1.564 26.380 9.211 14.682 908 2.724 106.343 15.755 2.987 64.875.500 1.457 1.806 37.021 6.321 4.320 1.919 1.189.231 1.130 268.766 37.508 62.162 9.526 43.798.553 125.220 13.725 1.358 15.357 1.634 589.506 16.023 975.941 2.030 97.734 81.121 170.614.103 62.943 23.678 4.791 708.478 598.269.310 4.205 555.489 45.704 56.041 945.213 1.317.970 4.711 600.238.721.914 795.035 968.323 1.646 25.515.692 2.638 789.530 599.405 63.892 1.404 15.361 12.337 22.009 37.162 1.628 254.120 528.453 57.957 1.507 59.354 19.200.639 11.413 485.386.272 971.077 614.368 16.856 71.261 9.440 231.939 639.896 28.001.138 10.744 112.569 1.130 14.407 794.741 6.599 1.009.318 13.936 68.834 15.233 913.623 10.760.226.com .603 20.373 1.750 29.881 25.865 848.335 550 1.057.154 903.456 767. Bills Securities 2 3 4 113.839 1.887 73.nseindia.325 1.377 966.445 725.305.530 16.845 5.030 1.628 1.848 15.120 3.024 1.305.540 1.580.428 14.548 109.192 1.543 3.525.593 1.910 8.501 25.001 723.900 36.149.122 787.774 3.241.539 1.008.965.347 892.960 334.631 28.434 811.426 597.152 31.234.156 787.788.698 598.620 4.094.701 29.564.310 475.039 60.335 1.820 12.010 15.119.920 49.910 5.521 86. Securities Total Dated State Treasur y Total (2+3+4) Securities Govt.047 990.084 94.405 102.435 28.802 1.264 537.261.559 938.000.683 5.239 784.570 1.934 828.410 1.972 421.316 10.169 935.618 1.795 15.678 2.175 Debt Market ISMR Annexure 6-1: Secondary Market Transactions in Government Securities (Rs in mn.326.690 1.103 795.632 29.234 1.

03 0.285.078 2.47 61.02 0.390 1.528 65.842 631.858 10.627.523 44.02 0.983 48.44 Retail Trades No.821 16.328 614.776 1.042. mn.407 8.10 66.68 54.029 839.078 No.815 462.17 66.878 9.064 13.593 32.512 18.830 23.256 682.54 64.26 0.371 1.461 544.70 65.851 12.765 67.010.03 0.038 213 220 200 223 215 207 196 216 167 228 254 216 979 254 206 237 230 232 251 265 260 245 253 229 276 1.266.650 10.298 21.753 17.01 0.84 71.577 25.343 32.30 65.280 32.82 61.855 839.03 0.233.692 1.02 0.747 29.975 44.954 39.135 17.180 669.01 0.39 63.03 0.48 70.98 67.01 0.68 62.483 10.02 0.01 0.) (Rs.47 0.07 0.337 532.622 9.285 757.061 1.02 0.99 64.160.737 12.823 823.549 31.03 0.03 0.902 26.446 42.nseindia.807 21.470 6.143 33.526 12.728 8.651 18.07 68.04 0.02 0.58 61.005 2.02 0.804 16.93 66.317 0.675 14.34 63.909 51.017 189.875 14.850 3.996 15.989 988.91 71.02 0.01 0.04 0.99 62.575 11.936 12.606 12.887 3.057 1. mn.162 4.061.81 62.119 23.38 65.932 32.73 68.89 70. of Trades All Trades Average Turnover Average Daily (Rs.778 15.439 16.453 3.633 1.094 73 99 68 158 164 209 406 349 359 322 238 550 2.990 808.050 24.02 0.com .127 9. mn.220 22.059 775.826 1.50 72.650 167.300 10.02 0.774 977.01 0.907 35.014 1.471.457 55.220 11.011 16.195 38.691 3.344 42.987 64.152 20.03 0.112.400 18.013.01 0.216 1.002.434.662 8.01 0.03 0.004 42.322.164 8.092 46.07 68.522 936 498 17 52 28 25 44 28 17 36 21 36 44 30 378 32 30 22 46 56 81 143 172 152 131 115 272 1.49 69. of Turnover Share in Trades (Rs.04 0.10 0.157 144.254 1.310.21 66.74 66.153 59.73 65.669 48.052 18.ISMR Debt Market 176 Annexure 6 -2: Business Growth of WDM Segment Month/Year No. of Active Securities 1994-95 (June-March) 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 2001-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 2002-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 2003-04 Source: NSE 183 304 524 719 1.739 624.529 11.791 36.) Trade Turnover Size (Rs.02 0.072 2.736 549.29 0.135 559.75 0.14 68.43 63. mn.123 282 290 310 271 306 334 275 233 247 280 241 372 1.636 15.054.590 1.522 1.) 304 408 1.318 59 79 49 48 189 43 44 157 57 130 153 86 1.120 51.02 0.01 0.49 61.14 65.117.115 1.15 65.294 846.01 0.02 0.465 11.42 39.812 118.40 63.687.17 64.03 1.995 412 305 290 298 255 251 265 282 142 338 211 268 3.97 67.092 48.021 2.587 21.02 0.01 0.424 1.97 70.45 1.99 70.335 10.185 1.348 14.272 29.251.912 773.49 62.962 66.603 986.02 0.222 21.095 48.173.518 www.268 1.752 35.252 180 148 127 122 127 115 81 89 57 123 79 152 1.071 1.400 306 2.175 32.677 422.400 50.58 65.397.04 0.039 809.57 63.717 1.107 1.775 32.41 65.820 27.) Total Turnover (%) 168 1.987 1.991 7.548 28.361 1.

78 34.68 2.53 4.01 35.32 3.88 20.52 23.38 4.38 2.82 36.22 May-02 90.85 3.05 2.72 0.57 37.16 4.45 11.68 35.35 1.97 5.74 19.81 38.08 19.12 24.93 4.32 36.43 22.91 2.99 Sep-01 94.59 33.05 31.96 10.81 Jul-02 93.15 33.96 4.51 10.80 Jul-03 94.79 3.53 Sep-03 91.09 34.60 24.91 36.42 2.54 0.24 1.94 4.92 16.72 5.86 0.54 36.11 2.19 23.73 16.55 3.88 1.07 2.49 Nov-02 95.21 6.22 14.30 4.52 3.44 22.26 Jan-03 93.78 3.28 33.83 1.33 22.10 4.03 18.15 2.01 May-03 93.71 3.46 4.04 25.32 16.46 6.84 14.49 3.34 15.21 2.43 1.59 10.95 19.47 3.38 6.62 9.72 0.97 1.70 2.34 5.58 2.19 1.90 37.43 7.27 4.95 1.78 22.87 2.98 16.88 3.84 Jun-01 95.19 21.51 21.81 5.53 4.77 3.96 26.03 14.65 0.63 23.56 1.77 16.42 22.92 11.86 33.05 16.34 36.09 15.04 0.11 19.74 24.66 17.40 6.67 39.64 1.03 2.84 19.65 Sep-02 94.61 May-01 94.89 37.52 9.02 31.24 18.42 5.53 10.15 9.87 0.03 1.02 23.98 1.71 Feb-04 90.11 1.02 1.78 1.83 16.07 30.60 3.65 6.33 5.99 3.33 1.83 3.15 3.65 18.09 1.18 3.23 23.97 4.03 0.89 1.58 2.44 1.61 7.65 0.14 1.90 16.75 0.77 Jul-01 94.24 1.29 2003-04 92.95 3.27 15.91 1.10 12.92 20.52 25.48 22.62 5.40 1.177 Debt Market ISMR Annexure 6-3: Security-wise and Participant-wise Distribution of WDM Trades (In per cent) Month/Year Government Securities Security-wise Distribution T-Bills PSU/ Inst.25 www.59 2.40 3.69 6.24 Apr-02 94.38 14.58 Mar-02 94.45 24.72 6.17 Mar-03 88.38 Jun-02 90.78 Dec-02 95.17 3.54 33.96 17.11 Feb-02 95.55 32.31 Jan-04 90.31 12.93 9.59 22.89 Mar-04 89.08 37.16 30.63 1995-96 65.09 37.87 32.22 Apr-01 91.79 1.50 0.83 0.11 57.19 8.16 24.16 5.93 3.91 1.64 22.53 2.nseindia.89 13.49 23.29 40.66 33.73 24.88 1.13 35.99 2000-01 91.35 2.55 19.14 25.13 38.19 1999-00 92.59 2.26 6.18 1.12 3.66 1.09 1.04 3.06 4.68 0.84 3.19 12.06 39.68 2001-02 95.77 0.11 44.49 1.90 12.32 Oct-03 92.64 19.84 1.71 7.78 40.65 22.46 10.65 34.66 39.70 39.06 14.85 32.6 4.67 2.70 1997-98 76.82 19.27 7.11 2.49 24.18 4.4 41.88 1.19 3.79 4.43 25.72 33.89 36.36 0.31 39.14 2.19 19.71 0.02 4. Bonds Others Participant-wise Distribution Trading FIs/MFs/ Members Corporates Primary Dealers Indian Banks Foreign Banks 1994-95 (June-March) 44.17 5.60 Source: NSE 38.17 22.58 5.23 1.95 0.60 5.64 4.48 0.48 18.92 21.70 2.61 4.93 3.21 Nov-01 95.97 2002-03 93.18 3.7 Oct-02 94.48 Aug-03 94.58 4.69 37.25 4.63 Oct-01 96.62 Apr-03 91.31 1.92 5.49 35.65 4.58 34.60 34.20 2.30 17.21 34.17 4.50 22.75 1.78 0.10 4.56 2.82 3.38 17.65 1.83 30.35 1.14 1998-99 80.01 41.76 1.23 12.65 0.7 26.13 22.26 4.75 17.37 39.28 16.84 36.59 Feb-03 92.77 35.07 10.34 0.83 24.18 1.71 2.28 22.01 24.03 17.62 Dec-03 91.12 42.36 Jun-03 95.65 0.17 2.96 1.16 1.60 1.24 3.22 12.33 26.86 Aug-01 95.16 6.56 0.37 28.17 25.26 6.71 25.24 42.83 3.98 25.51 25.81 32.02 Jan-02 95.01 41.53 3.45 33.83 15.67 4.81 4.46 24.33 7.82 23.11 1.72 5.31 41.27 41.37 1.com .67 2.78 36.54 2.67 22.61 6.09 2.48 2.67 0.94 0.13 1996-97 64.42 22.01 3.11 2.02 2.49 8.17 2.55 Aug-02 93.36 21.00 17.61 16.78 19.74 Nov-03 91.80 6.76 Dec-01 96.75 15.78 12.78 2.26 35.98 6.

392 445.972.093.27 3.14 5.42 81.781.15 3.710 579.918 153.410 233.673.ISMR Debt Market 178 Annexure 6-4: Market Capitalisation of WDM Securities Month/Year (end of period) Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 (In Rs.53 7.414.587 9.660 238.38 12.920.726.310 395.71 70.28 8.24 3.099 8.127.94 3.29 8.719 3.476 6.919.812 621.12 8.44 3.99 13.538.599 174.50 75.341 361.946.31 6.542.450 177.839 8.181 664.553.59 12.198.800 8.300 832.19 64.317 711.010 6.970 283.431.35 81.294 84.50 7.87 4.com .031 9.40 3.670 185.20 63.470 328.88 11.188 328.100 9.650 3.808.nseindia.750 613.58 4.75 68.726.560 222.42 71.580.324 322.750 7.770 308.670 6.97 6.950 890.130 894.40 18.140 9.61 71.42 18.07 69.551.610 4.150 365.78 3.904 2.701.58 3.695 715.53 4.39 69.67 State T-bills Others loans 3.936 393.344.426.253.65 13.370 5.24 3.40 7.57 7.170 523.356 461.262 11.79 77.42 6.650 666.40 58.358 793.190 7.94 5.750 300.892 305.760 8.38 6.93 76.205 864.160 403.775 449.42 7.590.698.178.27 3.75 4.923 783.230 415.190 427.980 880.953 9.19 14.200 7.207.240 670.29 8.830 4.650 394.151 720.800 828.638 Source: NSE www.77 2.54 11.81 76.496 8.27 4.31 7.37 12.725.06 81.32 3.51 7.792 610.523 134.06 2.440 444.32 7.740 6.89 8.384 11.570 363.988.017 3.22 5.96 3.973 112.582 8.001.829.158.010 5.83 4.07 4.280 4.043 383.330 7 .789.679.046 790.26 5.860 242.44 4.420 427.05 3.73 12.96 6.11 8.78 7.660 411.372 771.920 602.890 695.170 6.46 7.53 10.861 464.060 640.263 8.940 5.23 14.380 210.95 78. mn.020 478.360 852.48 77.96 7.503 746.432 398.31 78.11 7.27 73.23 7.16 8.100 507.590 396.22 3.456 719.930 8.09 71.567.694.600.543 772.31 3.000 703.150 543.67 6.61 5.36 3.81 78.080 895.828 396.241.730 6.76 11.19 8.02 5.298 1.13 3.905 4.012 9.017 6.01 57.400 10.08 6.531 770.590 9.44 3.71 6.71 5.670 538.00 5.21 233.920 6.15 80.17 8.119 621.224.838.104.34 8.212.797 700.58 6.27 5.713 11.552 9.42 4.82 7.627.61 70.400 473.73 73.91 3.10 4.039 8.50 10.611 420.740 362.070 326.810 5.606 7.415.62 13.979 12.867.720 400.748 1.581.28 5.497 188.12 76.630 8.653 424.562.17 71.20 73.660 240.950 469.235 568.870 7.920 890.790 862.13 6.406.11 11.70 2.10 75.734.490 667.448 444.945 638.45 3.38 3.38 10.622.66 7.914 239.145 421.18 5.430 862.050 635.39 6.46 71.567 652.) Govt.77 6.141.720 230.652 265.549 407.020 5.490 242.42 4.028 365.110 502.810 423.10 2.23 70.290 547.15 16.290 619.810 299.72 71.41 6.18 12.300.69 2.17 8.927.100 6.541.560 680.610 6.382.06 6.75 14.81 6.58 7.330 397.990 363.199 7.00 4.300 399.23 3.11 2.470 236.700 849.39 3.45 6.360 876.69 14.26 7.681.298.907.121 7. Securities 861.254.41 4.83 12.541.86 10.520 235.077.910 746.760 878.56 6.114.297 632.46 7.920 Others Total (In per cent) Govt.17 4.804 321.79 3.608.150 388.60 5.29 3.960 5.77 4.319 State loans 58.74 3.940 722.030 4.291 11.743 763.599.778 6.790 7.291 326.422.790 4.392 322.900 610.450 251.600 418.800 271.79 5.640 8.400 6.697 4.67 78. PSU securities bonds 54.31 3.480 4.849.68 7.180 247.010 277.53 6.980 7.507 876.250 186.29 7.08 4.226 349.940 5.91 4.881 384.030 401.600 10.330 848.747.519 349.071 12.99 7.394.44 3.51 3.014.66 6.350 870.902 6.54 10.969.211 492.111 353.47 7.835 2.15 8.100 7.363.20 3.644.900 4.659 6.86 4.84 11.740 685.940.650 361.796.420 5.58 4.230 626.665 799.403 T-bills 171.86 4.51 7.99 7.679 709.04 3.44 5.090 325.270 399.161 394.010 5.953 702.017 PSU bonds 256.435.925 1.203 402.550 596.40 7.560.540 6.136 718.81 72.89 71.31 5.70 71.58 4.290 652.37 10.890 2.57 20.51 8.90 16.03 6.88 75.674 138.57 11.57 7.440 407 .370 877.53 70.768 651.880 260.514 9.344 1.09 8.160 7.47 12.730 853.57 6.169.068.070.430 432.900 890.557 349.11 3.45 4.850 631.020 394.560 874.962.040 243.22 3.710 5.38 81.613.022.226.510 650.69 3.59 6.01 70.27 8.201.593.240 450.510 6.48 60.770 446.

07 8.87 8.51 9.48 9.11 8.92 9.86 10.06 7.33 14.90 8.95 7.30 a.92 10.04 10.04 – 8.10 7.08 9.87 (Contd.45 9.88 8.95 7.25 8.25 9.12 10.11 8.09 – 8.*** MIBID – – – – – – 9.78 10.75 9.06 9.24 10.76 9.02 9.08 8.81 3.92 – 8.57 8.55 9.18 7.98 9.63 8.* MIBID 29-Jun-98 31-Jul-98 31-Aug-98 30-Sep-98 30-Oct-98 30-Nov-98 31-Dec-98 30-Jan-99 27-Feb-99 31-Mar-99 29-Apr-99 31-May-99 30-Jun-99 31-Jul-99 31-Aug-99 30-Sep-99 30-Oct-99 30-Nov-99 31-Dec-99 31-Jan-00 29-Feb-00 31-Mar-00 29-Apr-00 31-May-00 30-Jun-00 31-Jul-00 31-Aug-00 30-Sep-00 31-Oct-00 30-Nov-00 29-Dec-00 31-Jan-01 28-Feb-01 31-Mar-01 30-Apr-01 31-May-01 29-Jun-01 6.12 8.60 9.com .59 8.25 8.52 7.26 8.63 8.93 9.40 a.28 11.10 6.02 – 8.m.44 8.01 9.68 9.57 8.04 7.37 10.33 11.67 9.31 10.83 9.26 8.45 11.45 9.10 16.11 12.94 10.06 10.30 9.24 9.83 8.05 8.11 14.78 8.14 13.24 9.40 8.81 8.94 10.12 10.25 8.36 9.10 8.87 9.62 9.40 9.89 9.33 8.77 8.86 9.41 3 Month rate at 11.32 9.80 9.20 10.72 10.16 MIBOR – – – – – – 11.44 8.76 9.03 7.nseindia.24 10.38 9.41 8.11 8.78 9.35 9.85 10.30 a.** MIBID – – – – – 8.93 8.09 8.43 10.32 9.46 9.11 9.40 10.98 8.64 11.78 8.86 8.49 9.85 9.93 – 8.61 8.28 8.20 10.79 9.89 7.87 8.22 7.54 10.09 8.98 7.33 9.58 10.15 7.49 13.36 9.48 8.46 10.61 11.01 8.84 9.27 8.179 Debt Market ISMR Annexure 6-5: FIMMDA NSE MIBID/MIBOR Rates Month/Date Overnight at 9.18 8.67 11.*** MIBID – – – – – – 10.85 7.57 9.16 9.80 9.38 9.49 10.85 1 Month rate at 11.79 7.45 9.38 8.57 10.93 9.64 10.20 13.08 10.12 9.68 10.89 9.33 9.63 10.25 6.02 10.82 10.99 14.25 MIBOR – – – – – 9.23 9.57 10.96 10.45 8.06 9.23 9.47 9.73 9.m.) www.46 9.25 10.75 9.00 9.96 9.82 10.44 8.04 7.34 9.06 8.27 12.28 9.31 10.03 8.54 10.m.54 9.69 MIBOR – – – – – – 10.84 12.83 9.76 10.89 9.66 10.11 8.20 10.35 7.82 8.72 9.40 7.19 – 8.96 8.18 9.05 9.96 6.08 11.82 8.64 9.06 – 8.10 7.66 7.80 10.80 9.26 8.80 9.33 8.10 10.13 11.00 – 8.76 9.70 11.62 12.25 9.11 10.12 4.20 MIBOR 7.71 9.97 8.73 10.19 9.31 10.83 8.66 11.34 14 Day at 11.17 9.71 10.39 6.55 7.28 11.68 9.29 8.34 9.53 10.70 10.09 10.08 8.31 10.41 8.30 a.18 8.21 9.m.89 8.

51 6.73 5.60 5.com .53 5.65 5.13 7.29 8.96 4.66 4.77 4. Disseminated since December 1.01 5.91 5.26 5.58 6.29 4.93 4.*** MIBID 7. Disseminated Since December 1.57 4.37 4.89 6.67 4.41 4.82 8.59 4.18 5.15 6.30 MIBOR 7.15 7.56 4.58 7.16 11.76 4.73 MIBOR 8.01 7.59 8.45 5.65 5.44 6.10 6.66 8.04 7.50 5.42 6. 1998.30 5.99 7.*** MIBID 7.81 6.77 7.37 8.32 5.73 5.79 6.50 4.* MIBID 31-Jul-01 31-Aug-01 28-Sep-01 31-Oct-01 29-Nov-01 31-Dec-01 31-Jan-02 28-Feb-02 30-Mar-02 30-Apr-02 31-May-02 28-Jun-02 31-Jul-02 31-Aug-02 28-Sep-02 31-Oct-02 30-Nov-02 31-Dec-02 31-Jan-03 28-Feb-03 31-Mar-03 30-Apr-03 31-May-03 30-Jun-03 31-Jul-03 31-Aug-03 30-Sep-03 31-Oct-03 30-Nov-03 31-Dec-03 31-Jan-04 29-Feb-04 31-Mar-04 Source: NSE Note: * Overnight ** 14 Day *** 1 month *** 3 month 6.88 7.50 6.27 4.37 8.36 5.41 6.61 7.53 7.77 5.62 4.04 6.71 6.52 7.13 4.02 6.39 7.73 4.52 5.98 8.20 6.26 7.42 7.85 5.54 4.80 5.69 4.23 4.21 6.76 5.13 4.17 7.47 4.61 6.83 4.45 4.72 4.40 8.04 7.73 4.57 MIBOR 8.02 6.90 6.73 5.40 a.01 7.11 6.80 6.23 6.23 7.41 8.35 5.59 6.40 7.73 5.64 7.94 7.17 6.45 4.25 4.93 4.30 a.m.01 4. Disseminated since November 10.m.23 8.06 7.83 5.62 5.42 6.21 8.88 7.88 4.03 8.67 5.98 5.50 4.78 8.97 5.94 4.69 4.92 6.48 6. Month/Date Overnight at 9.47 4.01 4.16 6.91 6.32 8.81 6.33 7.50 4.65 5.06 4.60 5.47 4.07 7.29 7.69 5.82 8.07 5.63 4.19 5.59 5.82 4.63 4.51 14 Day at 11.77 5.02 4.49 4.35 6.80 5.00 5.ISMR Debt Market 180 Annexure 6-5: FIMMDA NSE MIBID/MIBOR Rates – Contd.61 4.05 7.77 8.51 5.70 5.04 5.73 7.98 6.14 5. www.48 4.42 4.97 4.28 5.80 8.34 6.34 8.70 4.52 7.30 a.03 4.72 4.45 4.74 7.64 4. 1998.50 5.87 5.99 5.26 7.70 4.96 5.45 6.66 4.73 5.68 1 Month rate at 11.79 7.69 4.30 5.31 4.19 8.37 5.29 6.66 4.80 6.57 8.13 6.37 6.82 5.21 5.75 5.nseindia.62 4.47 6.30 6.50 4.72 4. 1998.32 5.24 7.14 5.99 5.91 5.53 4.72 7.60 5.63 7.39 5.00 4.70 8.16 5. 1998.49 4.96 4.32 8.00 4.35 6.** MIBID 7.91 4.71 5.63 7.29 6.84 7.14 7.67 5.78 4.33 8.39 7.09 6.m.66 5.33 5.53 4.64 6.63 7.84 6.94 5.92 7.30 a.44 MIBOR 7.82 3 Month rate at 11.45 5.m.05 : : : : Disseminated since June 15.82 5.21 4.73 7.56 6.03 7.27 6.66 5.00 5.75 5.39 4.77 6.36 5.

893 130.536 1.092 125.712 0.201 0.593 0.114 1.144 0.21 1.729 105.71% 12.309 139.92 0.96% 11.094 1.68 1.32% 9.726 0.768 1.247 120.22 1.587 0.346 108.40% 7.658 0.53 1.76 0.059 113.65% 6.657 0.892 1.745 0.277 0.542 0.271 1.24 1.07% 10.058 2.758 1.923 0.399 0.275 1.324 0.45% 0.316 138.187 1.788 0.99 1.581 1.091 0.983 1.25% 11.349 0.304 0.854 0.911 0.419 1.337 1.nseindia.096 2.042 1.95% 12.269 104.893 1.797 0.52 0.33 0.895 145.516 0.975 1.153 1.99% 6.727 0.72% 7.30% 12.147 1.31 0.318 0.991 1.524 0.49% 8.889 0.733 0.422 0.847 116.016 1.173 1.55 0.384 0.036 1.30% 7.997 1.234 1.065 1.934 0.437 0.25% 12.181 Debt Market ISMR Annexure 6-6: 1-day VaR (99%) for GoI Securities Traded on NSE-WDM as on March 31.861 107.597 0.159 1.29% 6% 6.758 0.86 149.282 (Contd.609 0.635 0.058 1.427 0.338 0.46% 7.999 0.73 0.746 0.694 133.253 1.128 122.258 151.574 1.27% 9.85% 7.562 0.206 1.126 1.999 132.20% 6.379 0.402 0.67 0.14 1.728 1.556 0.269 0.645 1.091 1.324 0.745 1.936 0.273 159.891 1.com .388 0.436 0.357 0.894 0.72 0.381 0.375 0.378 128.493 1.398 0.463 1.028 0.701 0.711 0.355 0.137 1.) www.287 0.961 0.671 1.401 0.997 115.90% 13.028 1.121 125.384 146.464 0.013 1.549 1.805 1.79 0.667 2.838 112.346 1.076 1.43% 7.825 0.71 0.557 110.125 1.86 0.928 117.381 0.40% 12.357 0.47% 11.806 0.03% 6.001 0.462 123.659 1.964 115.749 0.11 1.55% 10.402 141.399 0.369 1.4 0.747 106.40% 7.569 0.558 0.131 1.83% 6.74 0.86 0.722 1.327 109.684 136.926 0.062 1.449 1.942 1.14 1.62 0.982 1.134 1.455 138.724 2.738 0.392 0.43 1.39% 11.415 114.85% 10.053 1.011 1. 2004 Security Type Security Name Issue Name Normal Weighted Historical Normal Simulation Weighted Historical Simulation EVT Clean Price (off NSEZCYC) GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS CG2007 CG2007 CG2008 CG2008 CG2009 CG2009 CG2009 CG2010 CG2010 CG2010 CG2010 CG2010 CG2010 CG2010 CG2011 CG2011 CG2011 CG2011 A CG2012 CG2012 CG2012 CG2013 CG2013 CG2014 CG2014 CG2014 CG2015 CG2015 CG2015 CG2015 CG2016 CG2016 CG2017 CG2017 CG2017 CG2018 11.81% 11.259 1.316 0.117 1.86 0.38% 9.479 0.084 136.613 0.37% 10.709 0.748 0.543 0.928 0.36 0.336 0.313 0.904 134.353 0.52 0.05% 11.166 1.122 1.50% 11.916 1.058 140.

585 0.489 102.451 104.444 2.029 98.267 0.17% 6.079 1.827 100.198 0.806 0.118 0.836 0.6 1.009 127.415 2.877 0.383 2.454 3.653 2.031 1.973 0.494 0.667 148.01% 6.982 2.25% 8.167 0.472 0.451 2.006 1.479 1.82 0.418 97.612 www.563 99.219 0. 2004 – Contd.173 0.30% 6.769 0.943 0.082 0.008 0.974 96.978 0.268 0.554 0.355 1.092 99.826 0. Security Type Security Name Issue Name Normal Weighted Historical Normal Simulation Weighted Historical Simulation EVT Clean Price (off NSEZCYC) GS GS GS GS GS GS GS GS GS GS GS GS GS TB TB TB TB TB TB TB TB TB TB TB Source: NSE CG2018 CG2018 CG2019 CG2019 CG2019 CG2020 CG2021 CG2022 CG2023 CG2023 CG2028 CG2028 CG2032 364D 364D 364D 364D 364D 364D 364D 364D 364D 364D 364D 5.246 2.669 0.616 2.305 124.081 95.607 0.386 2.03% 5.174 0.083 2.788 2.64% 6.835 2.683 2.417 2.552 1.911 0.558 1.11 1.722 1.006 0.478 1.776 97.42 2.682 0.154 2.34 143.392 0.729 0.137 2.976 2.607 0.781 3.782 3.521 105.713 98.35% 6.581 1.552 3.147 0.85 102.134 0.442 0.nseindia.59 0.162 0.469 0.663 2.117 2.412 0.777 105.634 0.427 2.007 0.919 2.198 2.481 4.79 0.63 0.071 99.013 0.13% 7.306 0.747 0.517 0.342 0.428 96.665 2.726 0.527 0.25% 10.233 2.146 0.605 1.514 0.936 4.971 1.385 1.34 1.35% 10.896 0.404 2.051 0.69% 6.125 99.82 2.633 0.ISMR Debt Market 182 Annexure 6-6: 1-day VaR (99%) for GoI Securities Traded on NSE-WDM as on March 31.736 96.469 1.com .738 0.008 0.827 95.614 0.697 1.568 0.478 0.295 2.553 0.851 1.108 2.049 2.472 2.251 99.556 3.05% 6.048 1.582 0.95% 20404 40205 40305 70105 101204 121104 150504 170904 180305 280504 300404 2.

As per the definition of the International Monetary Fund. 1. In recent years. interest rates. Unlike debt securities. has grown both in terms of variety of instruments available. However. The prices of derivatives normally would converge with the prices of the underlying at the expiration of derivative contract. Need for a Derivatives Market The derivatives market performs a number of economic functions. Derivatives include a wide assortment of financial contracts.com . As instruments of risk management. isolate and manage separately the market risks in financial instruments and commodities for the purpose of hedging. no principal is advanced to be repaid and no investment income accrues. The emergence of the market for derivative products. Through the use of derivative products. The value of a financial derivative derives from the price of an underlying item. speculating. futures and options. www. swaps and options. arbitraging price differences and adjusting portfolio risks. by locking-in asset prices. it is possible to manage volatility and risks of faced by the financial agents. it has been possible to partially or fully transfer price risks by locking-in asset prices. in the past few decades (post 1970s) derivatives have been used extensively in financial markets to respond to the increased volatility in exchange rates. such as an asset or index.183 Derivatives Market ISMR Derivatives Market Introduction By their very nature Financial markets are volatile. and equities. such as: interest rates.” Derivatives allow financial institutions and other participants to identify. Derivatives are financial contracts whose values are derived from the value of an underlying primary financial instrument. The primary motivation for pre-arranging a buyer/seller for a stock of commodities in early forward contracts was to lessen the possibility that large swings would inhibit marketing the commodity after a harvest. Thus derivatives help in discovery of future as well as current prices. derivative products minimise the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. futures. most notably forwards. derivative products generally do not influence the fluctuations in the underlying asset prices. At that time these were used exhaustively in agricultural markets. both OTC as well as exchange traded. Given the different risk bearing capacity of them.nseindia. The prices in an organised derivatives market reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. derivatives are “financial instruments that are linked to a specific financial instrument or indicator or commodity and through which specific financial risks can be traded in financial markets in their own right. including forwards. their complexity and also turnover. Subsequently. commodity or index. the market for financial derivatives. Through the use of derivative products. derivatives emerged essentially to satisfy both of them. exchange rates. commodities. with some of the agents being risk-averse and some risk-lover. can be traced back to the 12th century.

transferring the risk from risk averse people to risk oriented people. The derivatives market helps to transfer risks from those who have them but may not like them to those who have appetite for them i. Whereas put option give the buyer the right. Speculative trades may shift to a more controlled environment of derivatives market. at a given price on or before a given future date. 5. the underlying market may witness higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. speculators trade in the underlying cash markets. Rather than having calls and puts. Call option give the buyer the right but not the obligation to buy a given quantity of the underlying asset. the swaptions market has receiver swaptions and payer swaptions. With the introduction of derivatives. Margining. Swaptions are options to buy/sell a swap that will become operative at the expiry of the option.e. Warrants: All options having maturity above one year are called warrants. Derivatives due to their inherent nature are linked to the underlying cash markets. Transfer of risk enables market participants to expand their volume of activity. with the cash flows in one direction being in a different currency than those in the opposite direction. Thus a swaption is an option on a forward swap. Derivatives markets help increase savings and investment in the long run. In the absence of an organised derivatives market. Products. Option contract are of two types – calls and puts. but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Currency swaps: These entail swapping both principal and interest between the parties. Swaps are private agreements between two parties to exchange cash flows in the future according to a pre-arranged formula. A receiver swaption is an option to receive fixed and pay floating. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts.ISMR Derivatives Market 184 2. Some of them have been described herewith: Forward contract is a customised contract between two entities.com .nseindia. Participants and Functions Derivative contracts have several variants. Futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. monitoring and surveillance of the activities of various participants become extremely difficult in such mixed markets. These are generally traded over-the-counter. www. where settlement takes place on a specific date in the future at today’s pre-agreed price. 4. LEAP the acronym for Long-term Equity Anticipation Securities are options having a maturity of up to three years. whereas a payer swaption is an option to pay fixed and receive floating. 3. The two commonly used swaps are: • • Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency.

OTC Markets The OTC market for derivative contracts has existed in some form or other since many years. liquidity and operational risks as they are outside the regulatory purview. the size and configuration of counter-party exposures may become unsustainably large and provoke a rapid unwinding of positions. banking supervision and market surveillance. (ii) information asymmetries. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture. The features of this market are as below: i. for example. ii. and OTC contracts are generally not regulated by a regulatory authority although they are affected indirectly by national legal systems. including counterparty. This paved the way for introduction of derivatives in the www.nseindia. It is a negotiated and client specific market. (iii) the effects of OTC derivative activities on available aggregate credit. the progress has been limited in implementing reforms in risk management. They are as discussed below: Hedgers use futures or options markets to reduce or eliminate the risk associated with price of an asset. they will take offsetting positions in the two markets to lock in a profit. Thus it poses to be a threat to the stability of the entire international financial system. also alters potential future credit exposures. and (v) the central role of OTC derivatives markets in the global financial system. Indian law considers them illegal except for specific contracts under FRAs/IRS on domestic currency as allowed by RBI. The management of counter-party (credit) risk is decentralised and located within individual institutions. 1995. There are no formal rules or mechanisms for ensuring market stability and integrity. In view of the inherent risks associated with OTC derivatives. iii. and for safeguarding the collective interests of market participants.com . If. There are no formal centralised limits on individual positions. (iv) the high concentration of OTC derivative activities in major institutions. v. Exchange-traded vs. Development of Derivatives Market in India The prohibition on options in securities was withdrawn with the promulgation of the Securities Law (Amendment) Ordinance. iv. If the asset prices change rapidly. There are no formal rules for risk and burden-sharing. they see the futures price of an asset getting out of line with the cash price. Some of the features of OTC derivatives markets can give rise to financial instability affecting not only institutions but also the overall domestic financial markets. Few of them are: (i) the dynamic nature of gross credit exposures. Sharp movements in underlying asset prices and counter-party defaults give rise to instability. which apart from significantly altering the perceptions of current. There has been some progress in addressing these risks and perceptions. However. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. leverage. or margining.185 Derivatives Market ISMR There are three broad categories of participants who trade in the derivatives market. Speculators use futures and options contracts to get extra leverage in betting on future movements in the price of an asset.

940. Initially.62 1. However.63 1.com .65 1.74 Data source is Futures Industry Magazine. Gupta to develop appropriate regulatory framework for derivatives trading in India. Year Wise Trend of Derivatives Trading (in terms of contracts) (in millions) Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1 US Exchanges 550.86 1.217.22 1.347.70 4. March/April 2004. broker net worth. risk instrument or contract for differences or any other form of security.23 2.675.97 1.36 779.84 2.22 Global 938. R.768. but also on CNX IT Index as well as options and futures on single stocks (currently on 51 stocks) and also futures on interest rates. www. or index of prices. NSE introduced futures contracts on S&P CNX Nifty index.142.112.033.83 905.16 1. in the year 2003.587.34 1. 1996.682.930.70 1.313.025. SEBI set up another group in June 1998 to recommend measures for risk containment in derivatives market. and (b) a contract which derives its value from the prices.63 905. L. respectively.844. C.768. Thereafter a regulatory framework was developed for governing the trading in derivatives. The Committee was of the view that derivatives should be declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’ could be extended to govern derivatives. Derivatives trading commenced in India after SEBI granted the final approval to commence trading and settlement in approved derivative contracts on the NSE and BSE. The Act also made it clear that derivatives are legal and valid. but only if such contracts are traded on a recognised stock exchange.87 776. Varma. J.372. or underlying securities.80 2.32 6.65 1.989.52 Non-US Exchanges 387. methodology for charging initial margins. the Securities Contract Regulation Act [SC(R)A] was amended to include derivatives within the ambit of ‘securities’.64 793.5% in 2003.36 807.99 975.38 5.nseindia.98 1. the basket of instruments has widened considerably.175.83 538.ISMR Derivatives Market 186 Indian financial markets. deposit requirement and real-time monitoring requirements. which prohibited forward trading in securities.39 523. 2000. Now trading in futures and options is based on not only on S&P CNX Nifty index.28 8. The Government also rescinded in March 2000 the three-decade old notification.90 2.7% and 32%. Derivatives were formally defined to include: (a) a security derived from a debt instrument. The Report worked out the operational details of margining system.172.405.578. share.45 4. In December 1999. loan whether secured or unsecured.100. NSE started operations in the derivatives segment on June 12. On November 18.81 2.72 1. Global Derivatives Markets1 As per the FIA Annual Volume Survey the global overall futures and options trading volume recorded a rise of 30.20 1. SEBI set up a 24-member Committee under the Chairmanship of Dr. The futures and options volume registered a growth of 27. Under the Chairmanship of Prof.301.07 1.061.

The monthly magazine of the FIA.76 108.74 114.41 50.82 73.37 71. Kospi 200 options of KSE led the table with more than 2.76 23.55 25.19 7.25 15.67 Source: FI Futures Industry.217.18 1.70 199.67 13.49 The details for the top 20 contracts for the year 2003 are presented in Table 7-1.69 81.05 30.49 56.82 191.69 -4.90 53.112.68 95.40 7.791.92 34.31 101.60 115.87 39.44 1.09 39. Volume by Category (in millions) GLOBAL Equity Indices Interest Rate Individual Equities Energy Products Ag Commodities Non-Precious Metals Foreign Currency/Index Precious Metals Other Total Volume 2003 3.15 217.07 50.37 116.44 19.89 63.51 84.79 3.39 209.41 208.64 2002 1. March/April 2004.31 47.nseindia.558.79 105.91 27.65 24. Contract No.24 -10.889. Table 7-1: Top 20 Contracts for the year 2003 (in millions — net of individual equities) Sl.52 261.16 27.57 Volume % Change Change 947.75 73.57 60.80 6.46 0.48 48.837.18 150.91 26.87 1.com .35 105.43 18.08 80.960.881.96 31.478.72 244.75 -17.26 0.48 12.04 100.09 56.34 54.50 30.79 60.26 202. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Kospi 200 Options Euro-Bond Futures 3 Month Eurodollar Futures TIIE 28 Futures E-Mini S&P 500 Index Futures Euro-Bobl Futures 10 Year T-Note Futures 3 Month Euribor Futures Euro-Schatz Futures DJ Euro Stoxx 50 Futures 3-Month Eurodollar Options 5-Year T-Note Futures CAC 40 Index Options E-Mini Nasdaq 100 Futures 30-Year T-Bond Futures Kospi 200 Futures DJ Euro Stoxx 50 Options No.15 6.97 3.08 42.25 9.27 1.38 -4.00 57.30 28.01 -12.93 8.187 Derivatives Market ISMR The trading in equity derivatives has grown by 42% in 2003 as compared to the previous year.59 13.67 67.51 46.39 77.77 162. followed by Interest rates registering growth of 27%.27 45.73 2002 2.48 45.08 161.8 billion contracts in 2003 followed by Euro-Bond Futures of Eurex.75 137. I Soybean Futures 3-Month Euribor Options Interest Rate Futures Exchange KSE Eurex CME MexDer CME Eurex CBOT Euronext Eurex Eurex CME CBOT Euronext CME CBOT KSE Eurex DCE Euronext BM&F 2003 2.26 30. www.51 372.69 117.354.73 57.66 8.44 35.88 53.52 62.58 50.76 86.09 146.56 90.61 29.56 51.28 % Change 41.69 33.81 72.33 22.31 24.20 30.85 64.20 61.

21 95.nseindia.778 90.749.140 84.744.074.572.323.04 26.782.970.097 29.464 468.290.004.936 93.com .899.339 92.223.60 18.025 1.10 60.570.705.822 18.19 14.535 28.895 801. NSEIL ranked second (2nd) next only to RTS Stock Exchange in the single stock future category (Table 7-2).08 6.630 103.853 412.014.74 -3.615.897 177.279 244.882.616. has been making huge strides by moving upwards in the global ranking.190.70 % Change 1.820 640.286 21.252.00 106.200.445 180.186 7.587. 2002 21.083 267.042 2.347 1.261 477.174 25.968.568 7.788 120.70 15.25 2.654 549 310 Table 7-3: Global Futures and Options Volume Rank 2003 1 2 3 4 5 6 7 8 9 10 11 12 13 14 2002 1 2 3 4 5 6 8 7 11 14 9 10 12 15 Korea Stock Exchange Eurex Euronext Chicago Mercantile Exchange Chicago Board of Trade Chicago Board Options Exchange International Securities Exchange American Stock Exchange Bovespa Mexican Derivatives Exchange New York Mercantile Exchange BM&F Philadelphia Stock Exchange Tokyo Commodity Exchange Exchange 2002 Volume 2003 50.219 www.055 47.868 2.602 88.447.399.157.981 558.274.820.496 283.529 454.944 133.ISMR Derivatives Market 188 NSE.247 112. NSE stands at the 14th position (Table 7-4).884.946.495 152.638 202.190 186.175 2.424.224.675.979 173.919 1.312 696.413. NSE has been ranked 20th in the global futures and options volume in 2003 against its rank of 33rd in the previous year (Table 7-3). In the top 40 Futures Exchanges of the World.170 2003 31.937.209. too.585.181 452.890 618.435 137.64 32.785.235 4.320.873 1.955.68 -0.505 12.634 343.225.597 75.730 59.932.439 101.056 13.560 694.039.690 1. Table 7-2: Futures on Individual Equities (Stock Futures) (Number of Contracts) Exchange RTS Stock Exchange National Stock Exchange of India Spanish Exchange (BME) Euronext JSE South Africa Helsinki Stockholm Budapest Athens Derivatives Exchange Borsa Italiana Australian Mumbai Warsaw SFE Corporation Hongkong Singapore Copenhagen Source: WFE 2003 Annual Report and Statistics.434 8.190 87.86 26.749 267.645.492.932.332 12.

88 23.759.842.009.89 -15.02 15.02 8.098.nseindia.93 -35.98 779.262.830 16.538.257 20.634.072.035.56 22.383 2.133.468 17.939.001.750 38.729 1.968.690 N/A 11. March/April 2004.529 1.246.479 35.266 17.670 1.194 1.624.210 2.928.479 18.842.213 12. www.com .69 -10.619.649 48.874.796 627.805 2.330 28.382.38 -25.944.244 33.029.189 Derivatives Market ISMR Table 7-3: Global Futures and Options Volume (Contd.113 12.139 6.852.731 858.24 229.954 3.496 2.441.85 54.682.763 3.401 4.584.917 3.347 44.507.920.956.033 24.705 32.356.89 -11.474 30.341.081.358 1.493 72.776 1.994 17.589 4.254 30.327.37 41.235.395 30.491.283 184.971 14.999 17.817 36.787 2.173.207.308.16 18.109.673.34 360.296 3.65 12.966 4.137.32 18.955.343 1.426.175.340 43.96 -21.326.250 142.471.193.158 21.972 20.287.084 2.152.863 41.404 14.083 41.41 23.298 0.253 Volume 2003 86.460 1.444.583 7.89 -13.) Rank 2003 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 2002 13 18 17 16 21 33 34 19 22 24 23 36 25 20 27 26 28 29 32 30 58 35 31 37 51 39 41 46 38 40 55 42 49 43 47 44 56 48 45 50 57 53 52 54 Pacific Exchange Dalian Commodity Exchange London Metal Exchange OM Sydney Futures Exchange National Stock Exchange of India Shanghai Futures Exchange Tel-Aviv Stock Exchange Singapore Exchange International Petroleum Exchange JSE Securities Exchange South Africa Taiwan Futures Exchange Central Japan Commodity Exchange MEFF Osaka Securities Exchange New York Board of Trade Tokyo Grain Exchange Italian Derivatives Market Bourse de Montreal Tokyo Stock Exchange Australian Stock Exchange Hong Kong Exchanges & Clearing Korea Futures Exchange Osaka Mercantile Exchange Budapest Stock Exchange Tokyo International Finance Futures Exchange Oslo Stock Exchange Budapest Commodity Exchange Kansai Commodities Exchange Kansas City Board of Trade Rosario Futures Exchange Fukuoka Futures Exchange Malaysia Derivatives Exchange Helsinki Exchanges Yokohama Commodity Exchange Winnipeg Commodity Exchange OneChicago Wiener Borse Broker Tec Futures Exchange Minneapolis Grain Exchange NQLX Copenhagen Stock Exchange New Zealand Futures Exchange MidAmerica Commodity Exchange Exchange 2002 85.95 37.978 3.966.644.295 5.77 2.546.739.836 408.33 -70.327 72.648.832.32 -6.973.74 20. The monthly magazine of the FIA.524 13.243.743 31.41 126.61 57.162.637 74.09 -23.039 14.82 595.081 1.42 N/A 31.57 301.731.23 5.652 1.404 58.53 6.728.755.40 6.491.091 536.099.079.823.224 33.011.825 1.050 493.986 1.769 90.968 40.893 4.39 9.934 31.158 1.530 31.629 14.25 -8.81 22.170.419.49 224.407.470 3.771.276.470.120.55 % Change Source: FI Futures Industry.40 18.004 60.814 3.22 853.623.018 483.900 762.17 -23.61 4.392.887.

237.084.652 1.667.670.861 8.ISMR Derivatives Market 190 Table 7-4: Top 40 Futures Exchanges (Volume figures do not include options on futures) Rank 2003 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 2002 1 2 3 4 7 6 5 8 10 9 11 12 22 25 13 14 15 16 17 19 18 21 23 24 20 26 28 29 27 30 45 32 31 42 35 50 36 43 41 39 Eurex Chicago Mercantile Exchange Chicago Board of Trade Euronext Mexican Derivatives Exchange BM&F New York Mercantile Exchange Tokyo Commodity Exchange Dalian Commodity Exchange London Metal Exchange Korea Stock Exchange Sydney Futures Exchange Shanghai Futures Exchange National Stock Exchange of India Singapore Exchange International Petroleum Exchange Central Japan Commodity Exchange OM Tokyo Grain Exchange New York Board of Trade MEFF Tokyo Stock Exchange JSE Securities Exchange South Africa Osaka Securities Exchange Korea Futures Exchange Bourse de Montréal Taiwan Futures Exchange Hong Kong Exchanges & Clearing Italian Derivatives Market Osaka Mercantile Exchange Budapest Stock Exchange Tokyo International Financial Futures Exchange Kansai Commodities Exchange Budapest Commodity Exchange Fukuoka Futures Exchange Rosario Futures Exchange Kansas City Board of Trade Malaysia Derivatives Exchange Yokohama Commodity Exchange Winnipeg Commodity Exchange Exchange 2002 536.808 6.93 15.811.25 254.028 530.009. The monthly magazine of the FIA.07 18.83 -11.973.36 8.231.25 18.com .088 2.38 10.210 2.00 5.669.460 1.38 22.852.623.272.771.939.979 95.470.011.846 3.48 56.158 1.23 21.954.822.154 62.566 4.441.820.565 6.313 2.34 141.199.987.385 31.596. March/April 2004.630.061 111.78 -13.356.233. www.141.25 32.498 6.065 13.143 173.74 19.144 17.831.914 1.190 30.74 -23.276.89 -15.252.658 87.488.407.796 Volume 2003 668.208.383 2.538.164 33.462 84.007 373.06 31.290 267.570.424 2.944 113.404 56.57 6.664 30.17 17.530 22.079.190 48.162.676.947.912.258.739.41 57.nseindia.822.708.048 17.275.27 18.754 14.303.207.174.432 2.97 % Change Source: FI Futures Industry.67 -1.155.986 399.893 4.377.316.013.493 68.507.920 444.302.058.776 33.719 75.071.561 35.219 74.895.745 15.134.783 41.953.175 14.45 35.13 15.13 33.365 3.002 11.111 32.967 12.727 18.08 229.79 45.589 4.787 1.083 10.09 12.579 107.11 23.170.987 276.279 9.26 3.359.61 578.17 12.755.072.537.198 21.868.931 16.989.110.779 42.863 20.616 24.413.338.046 11.862 40.789.634.274.118 8.70 54.314.04 106.88 21.949 1.34 360.965.650.028 5.149 18.287 12.917 3.907 10.75 4.233.228.523 13.652 7.750 36.763 4.04 -4.204.047 221.037 7.173.

The bonds should be quoted on the basis of prices.5σ and in no case the initial margin should be less than 2% of the notional value of the contract. yields or 100-yield. The Exchanges are also permitted to introduce futures contracts on the notional bonds up to a maturity of one year.94 and (ii) σ (sigma) means the standard deviation of daily returns in the interest rate futures contract. Both the futures have to be initially settled in cash.com . the price scan range should be 3. The notional underlying should be a coupon bond or/and a zero coupon bond. There can either be quarterly contracts beyond the first three months. In case of long bond futures. iii. The value of λ is fixed at 0.e. The final settlement price of the futures should be determined using a “zero coupon yield curve (ZCYC)”.1). The minimum contract size of any interest rate derivative contract should not be less than Rs. ii. For T-Bill futures. 2. Risk Containment Measures The parameters for risk containment model include the following: i. iv. The Exchange should initially introduce notional long bond (10-years maturity) and T-bills futures. the price scan range should be 3. based on the volatility estimates.λ)(rt)2 where (i) λ is a parameter which determines how rapidly volatility estimates changes. Initial Margin: The Initial Margin requirements should be based on the worst scenario loss on a portfolio of a client to cover 99% VaR over one day horizon across different possible price changes. and the return (rt) observed in the futures market during day t.2% of the notional value of the contract.1) 2 + (1 . and volatility changes. The (σt) (sigma) should be estimated at the end of day using the previous volatility estimate i. The formula should be (σ t) 2 = λ (σt . initially up to 2 decimal points and after a period of two months since the introduction of the contract up to 4 decimal points. They are given freedom to determine the maturity structures of the contracts. The product specifications and the risk containment measures are as follows: Product Specifications i.000 at the time of the launch.5σ and in no case the initial margin should be less than 0. The exchange should specify the coupon rate and disclose the same to the market prior to introduction of the contracts. Introduction of Exchange Traded Interest Rate Derivatives A scheme for introduction of futures contracts on dated Government Security and Treasury Bills and its risk containment measures have been framed by the SEBI in consultation with the Government and the RBI.191 Derivatives Market ISMR Policy Developments This section discusses the policy developments initiated by the regulators and the Government during April 2003 to June 2004. The ZCYC should be computed from the prices of government securities traded on the Exchange/s or reported on the NDS of RBI or both. as at the end of t-1 day (σt .00.nseindia. and whether the quarters should be fixed or rolling months of the year. www. I.

should be Rs. v.R. Exposure Limits: The notional value of gross open positions at any point in futures contracts on the Notional 10 year bond and T-bill should not exceed 100 times and 1000 times the available liquid net worth of a member. in which the market wide position limit is greater than Rs.com . Margin Collection and Enforcement: The mark to market settlement margin should be collected before start of the next day’s trading. It should be Rs. J. 50 crore. Position Limits: The positions limits for interest rate futures contracts should be specified at the client level and for the near month contracts.nseindia. the clearing corporation/house should collect correspondingly higher initial margin to cover the potential for losses over the time elapsed in the collection of margins. 2003.75% on the far side of the spread with legs up to 1 year apart. vi. 100 crore or 15% of open interest whichever is higher.125% per month of spread on the far month contract subject to minimum margin of 0. Real Time Computation: Initially. The position limits for NRIs should be as follows: • www. The FII position limit.25% and a maximum margin of 0.ISMR Derivatives Market 192 ii. a disclosure is required for any person or persons acting in concert who together owns 15% or more of the open interest of all derivative contracts on a particular underlying index. II. 250 crore. is as follows: • • For stocks. which came into effect from October 31. The FII position limit in stock. in which the market wide position limit is less than or equal to Rs. For index based contracts. the Exchange/yield curve provider should endeavour to compute the ZCYC on a real time basis or at least several times during the course of the day. respectively. In addition. iii. the FII position limit in such stock should be 20% of the market wide limit. Investments by FIIs/NRIs in Exchange Traded Derivative Contracts The Foreign Exchange Management (Transfer or Issue of security by a Person Resident outside India) Regulations 2000 have been amended to include that (i) a registered FII having a valid account under FERA 1973 or under FEMA 1999 may trade in all SEBI approved exchange traded derivative contracts (ii) a Non-Resident Indian (NRI) may also invest in exchange traded derivative contracts out of INR funds held in India on non-repatriable basis. These investments will however not be eligible for repatriation benefits. iv. For interest rate futures contracts a calendar spread margin should be at a flat rate of 0. 250 crore. Varma committee reports on risk containment measures for index futures. the zero coupon yield curve should be computed at the end of the day. If mark to market margins is not collected before start of the next day’s trading. The higher initial margin should be calculated as specified in the Prof. Calendar Spread Charge: The Calendar spread margin is charged in addition to the initial margin. The mark to market margin is to be paid in cash. the investments by FIIs/NRIs should be subject to the position limits as specified by SEBI. However.

nseindia.com . III. With the prior approval of SEBI. it can have quarterly contracts beyond the first three months. The interest rate futures contract on a 10 year coupon bearing notional bond should be priced on the basis of the ‘Yield To Maturity’ (YTM) of a basket comprising bonds with maturity ranging from 9 to 11 years. turnover etc. The features of the notional bond including. The minimum contract size of the IRD contract should not be less than Rs. and should be disclosed to the market. The NRI would be required to notify the Exchange the names of the Clearing Member/s who will clear his derivative trades.. including the day count and other conventions.00. the gross open position across all derivative contracts on a particular underlying stock of a NRI should not exceed the higher of 1% of the free float market capitalization (in terms of number of shares) OR 5% of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts). This position limits would be applicable on the combined position in all derivative contracts on an underlying stock at an exchange.000 at the time of its introduction in the market. 2.193 Derivatives Market ISMR • For stock option and single stock futures contracts. The Exchange should decide the nature of contracts. The composition of the basket of bonds should be disclosed to the market prior to the launch of the futures contract. d. The Exchange should specify the eligibility criteria for selecting the bonds constituting the basket. b. c. The eligibility criteria should be based on volume. g. SEBI has also decided to permit interest rate futures contract on a “10 year coupon bearing notional bond” which would be priced off a basket of bonds. for arriving at the YTM’s of the bonds constituting the basket. www. or the quarters could be fixed months of the year or rolling quarterly horizon from the contract introduction date. The Exchanges have to prescribe the precise formula. The basket should comprise of at least three bonds and the YTM of the basket should be a simple average of each bond’s YTM in the basket. e. the interest rate derivatives (IRD) contract could be traded on the derivative exchange/segment and settled through the Clearing house/ corporation of the Exchange. The price of the futures contract should be quoted and traded as 100 minus the YTM of the basket. The contracts should comply with the relevant requirements as specified by SEBI. The scheme for introduction of such futures contract and the risk containment measures are as follows: Product Specification a. Interest Rate Future Contracts As per the recommendations of the SEBI Advisory Committee on Derivatives and Market Risk Management. f. It should also review the eligibility criteria and the basket at periodic intervals. The interest rate futures contract should be with a maximum maturity of 12 months and be settled through cash. The Exchange should monitor the position limits for both of them. the coupon rate should be disclosed to the market in advance and should form a part of the contract specification. The Exchange would then assign a unique client code to the NRI.

in advance. The methodology of polling should also be disclosed to the market. In the event that bonds comprising the basket become illiquid during the life of the contract the following measures should be adopted: • In case a bond is illiquid for 7 consecutive days excluding the shut period. 2004 whichever is earlier”.nseindia. to a person other than a regulated entity. provided that if any such instrument has already been issued. the Exchange should disclose. the contract size/value of most derivative contracts far exceeded or fell below the stipulated value of www. The precise formulas for arriving at the settlement price. only in favour of those entities which are regulated by any relevant authority in the countries of their incorporation or establishment. Equity Linked Notes (ELN) or any other similar instruments against underlying securities. • Risk Containment Measures The portfolio based margining system presently applicable to the exchange traded equity and interest rate derivative contracts is to be extended to the interest rate futures contracts. The final settlement price of the notional bond should be obtained by discounting the cash flows of the notional bond at the YTM of the basket. The margins should be computed by taking an integrated view comprising positions of a client in all the derivative contracts. V . the day count and other conventions. For this purpose an illiquid bond should be one where. deal in or hold. the YTM of the basket should be determined from the YTMs of the remaining bonds for arriving at the final settlement price and the daily closing price. contract for such transaction should expire on maturity of the instrument or within a period of five years from February 3. SEBI amended the SEBI (FII) Regulations. the volumes and/or turnover in a bond are not sufficient to reflect the fair price of the bond.ISMR Derivatives Market 194 h. including. i. IV. should be fully disclosed to the market. In case reconstitution of the basket is not possible. For the purpose of computing the final settlement price. The Exchange should specify the parameters to determine whether a bond constituting the basket is illiquid.com . in the opinion of the Exchange. reconstitution of the basket should be attempted. j. Minimum Contract Size for Exchange Traded Derivative Contracts It was observed that with the increase/decrease in prices of underlying stock. Polled prices should be used for determining the final settlement price and the daily closing price. Issuance of Offshore Derivative Instruments by Registered FIIs In February 2004. when at least 2 out of the 3 bonds comprising the basket become illiquid. Polling should be carried out by the Exchange in a transparent manner and the prices of bond constituting the basket should be regularly polled and published. prior to February 2004. listed or proposed to be listed on any stock exchange in India. offshore derivative instruments such as Participatory Notes (P-Notes). the methodology for arriving at the YTMs of the bonds. 1995 to include a new regulation which states that “a FII or sub-account may issue. subject to compliance of “Know your client” requirement. comprising the basket.

The increase should be carried out by increasing the lot size/multiplier in multiples of 2. the existing lot size/multiplier should be increased so as to bring the contract size to Rs. the lot size/multiplier should be reduced to one-fourth of the existing lot size/multiplier. For instance. The lot size should be in the multiples of 100 and the fractions. They carry out risk management activities and confirmation/inquiry of trades through the trading system. 2. Therefore. Typically. where the contract size of the derivative contracts is less than Rs. 2 lakh. SEBI vide its circulars had stipulated that the minimum contract size of derivative contracts and its value should not be less than Rs. Trading members: Trading members can trade either on their own account or on behalf of their clients including participants. Professional clearing members: A professional clearing member (PCM) is a clearing member who is not a trading member. anonymous order driven trading system for derivatives on a nationwide basis. 2 lakh. These clients may trade through multiple trading members. the derivative contracts. trading in derivatives segment is essentially similar to that of CM segment. banks and custodians become PCMs and clear and settle for their trading members. Earlier. There are four entities in the trading system: 1. the contract size/value should be determined on the basis of the closing prices of the underlying on the day prior to the beginning of the notice period.com . the lot size/multiplier should be reduced to one-half of the existing lot size/multiplier and for derivative contracts that have a contract size/value of Rs. which have a contract size/ value of Rs.nseindia. 4 lakh and above. 2 lakh. 4. Hence. Similarly. It provides tremendous flexibility by allowing users to place orders with their own time and price related conditions.195 Derivatives Market ISMR Rs. SEBI revoked the stipulation that the lot size/multiplier should be in the multiple of 100. the market design enumerated in this section is the derivative segment of NSE (called Futures and Options (F&O) segment). For the purpose of revising the contract size. Nevertheless. 2 lakh and should be increased for contracts with value less than Rs. SEBI decided that the lot size/multiplier should be reduced for contracts with value exceeding Rs. These clearing members are also trading members and clear trades for themselves and/ or others. Over the years. www. however. To address these concerns. 2 lakh. 8 lakh and above. 2 lakh. if any should be rounded off to the next higher multiple of 100. They are registered as members with NSE and are assigned an exclusive Trading member ID. statistics show that the BSE’s contribution to the total derivatives turnover in the market has been declining. Participants: A participant is a client of trading members like financial institutions. Trading Mechanism The derivatives trading system at NSE is called NEAT-F&O system. Clearing members: Clearing Members are members of NSCCL. 3. Market Design Only the NSE and the BSE offer a platform for trading in derivatives contracts. but settle their trades through a single clearing member only. for the sake of standardization. which provides a fully automated screen-based.

50 lakh Nil Rs. Interest rate future contracts are available on notional 91 day T-bill and 10 year bonds (6% coupon bearing and zero coupon bond). 25 lakh Rs. 25 lakh Rs. 2 lakh and CSD of Rs. While. while stock futures and options are based on individual securities. The eligibility criteria for membership on F&O segment are summarized in Table 7-5(a & b). 100 lakh Rs. Trading and clearing members are admitted separately. Contract Specifications The index futures and index options contracts traded on NSE are based on S&P CNX Nifty Index and the CNX IT Index. WDM and F&O Segment Rs. undertake risk management and perform actual settlement. there were 589 members in the F&O segment.nseindia. two ‘in-the-money’.ISMR Derivatives Market 196 Membership Criteria The members are admitted by NSE for its F&O segment in accordance with the rules and regulations of the Exchange and the norms specified by the SEBI. 300 lakh is required for clearing membership. 8 lakh — Rs. While the index options are European style. 1 lakh Net worth of Rs. 1 lakh CM. 25 lakh Rs. WDM and F&O segment’. Presently stock futures and options are available on 51 securities. 275 lakh Rs. 2. 125 lakh Rs. the clearing member is required to bring in IFSD of Rs. 2 lakh Existing Members Rs. stock options are American style. Table 7-5 B: Requirements for Professional Clearing Membership Particulars Eligibility Net Worth Interest Free Security Deposit (IFSD) Collateral Security Deposit (CSD) Annual Subscription F&O Segment CM and F&O Segment Trading members of NSE/SEBI registered custodians/recognised banks Rs. 2 lakh and CSD of Rs. NSE offers a composite membership of two types for trading in the derivatives segment viz.com . Source: NSE. At the end of March 2004. the trading members (TMs) execute the trades. the clearing members (CM) do the clearing for all his TMs.. 25 lakh is required for clearing membership. 34 lakh Rs. 2. Table 7-5 A: Eligibility Criteria for Membership on F&O Segment of NSE Particulars New Members CM and F&O Segment Net Worth1 Interest Free Security Deposit (IFSD)2 Collateral Security Deposit (CSD) 2 Annual Subscription Note: 1. who have passed a certification programme approved by SEBI. 8 lakh per trading member in the F&O segment. 8 lakh per trading member in the F&O segment. There are a minimum of 5 strike prices. one ‘at-the-money’ and two ‘out-of-the-money’ for every call and put option. 25 lakh Rs.5 lakh Note: The PCM is required to bring in IFSD of Rs. Additional Rs. The strike price is the price at which the buyer has a right to purchase www. Rs. In addition. membership of ‘CM and F&O segment’ or of ‘CM. 100 lakh Rs. 300 lakh Rs. The trading members are required to have qualified users and sales persons. 200 lakh Rs.

nseindia.. Basket Trading Facility To ease the arbitrage between futures and cash markets. In case of index options and stock options. It also acts as legal counterparty to all the trades on the F&O segment and guarantees their settlement. All the derivatives contracts are presently cash settled. The interest rate future contracts are available for a period of one-year maturity with three months continuous contracts and fixed quarterly contracts for the entire year. contracts with 1 month. These contracts expire on the last Thursday of the expiry month. A new contract is introduced on the next trading day following the expiry of the near month contract. Contract specification for derivatives contracts are summarized in Annexure 7-1. The Clearing and Settlement process comprises of three main activities viz. 1 lakh per year. the system automatically works out the quantity of each security to be bought or sold in proportion to their weights in the portfolio. In respect of equity derivatives. it is 2. In case of last Thursday being a holiday. 2 months and 3 months to expiry are available for trading. The brokerages charged are exclusive of statutory levies. New contracts are introduced on the trading day following the expiry of the near month contract. Settlement and Risk Management. at any point of time. Clearing Mechanism The first step in clearing process is working out open positions and obligations of clearing (self-clearing/trading-cum-clearing/professional clearing) members. The open position of a TM is arrived at by www. NSE has provided basket-trading facility. These contracts expire on last Thursday of their respective expiry months. Clearing and Settlement National Securities Clearing Corporation Limited (NSCCL) undertakes clearing and settlement of all trades executed on the futures and options (F&O) segment of the NSE.5% of the contract value in case of index futures and stock futures. The trading members contribute to Investor Protection Fund of F&O segment at the rate of Rs.com .002%) subject to a minimum of Rs. 10 per crore of turnover (0.0001%). Clearing. the contracts expire on the previous trading day. The transaction charges payable by the trading member for the trades executed by him on the F&O segment are fixed at Rs.197 Derivatives Market ISMR or sell the underlying. Charges The maximum brokerage chargeable by a TM for the trades effected in the contracts entered on the F&O segment is fixed at 2. The open positions in the contracts traded of CMs are arrived at by aggregating the open positions of all the TMs and all custodial participants (CPs) clearing through him. 2 per lakh of turnover (0. This enables generation of portfolio offline order files in the derivatives trading system and its execution in the cash segment. Once he determines its size. A trading member can buy or sell a portfolio through a single order.5% of notional value of the contract [(Strike price + Premium) * Quantity)] in case of index options.

The table 7-7 gives the MTM charged on various positions.nseindia. which is passed on to the clearing members who have made a MTM profit. and the final settlement. who clears for two TMs having two clients. Hence on account of the position brought forward. it has been currently mandated that stock options and futures would also be cash settled. These positions become the open positions for the next day. In turn. which is on the last trading day of the futures contracts. therefore. While entering orders on the trading system. The settlement price for the contract for today is assumed to be 105. This is known as the daily mark-tomarket settlement. 100 and today’s settlement price of Rs. across various settlements. The pay-in and pay-out of the mark-to-market settlement are affected on the day following the trade day (T+1). they have to be settled in cash. TMs are responsible to collect/pay losses/profits from/to their clients by the next day. 105. The margin charged on the brought forward contract is the difference between the previous day’s settlement price of Rs.ISMR Derivatives Market 198 summing up his proprietary open position and his clients’ open positions. Table 7-6 : Determination of Open Position of a Clearing Member TMs clearing through CM Buy ABC PQR Total 4000 2000 6000 Proprietary Trades Sell 2000 3000 5000 Net 2000 -1000 2000 -1000 Buy 3000 2000 5000 Trades: Client 1 Sell 1000 1000 2000 Net 2000 1000 3000 Buy 4000 1000 5000 Trades: Client 2 Sell 2000 2000 4000 Net 2000 -1000 2000 -1000 Open Position Long 6000 1000 7000 Short — 2000 2000 Settlement Mechanism The underlying for index futures/options on the index cannot be delivered. However. Settlement of Futures Contracts on Index or Individual Securities Futures contracts have two types of settlements. For the purpose of settlement. the MTM settlement which is done on a daily basis. client open long position and client open short position. TMs identify the orders as either proprietary or client through ‘Pro/Cli’ indicator provided in the order entry screen. • MTM Settlement All futures contracts for each member are mark-to-market (MTM) to the daily settlement price of the relevant futures contracts at the end of each day. The settlement amount for a clearing member is netted across all their TMs/clients. Futures and options on individual securities can be delivered as in the spot market. A TM’s open position is the sum of proprietary open position. Proprietary positions are calculated on net basis for each contract and that of clients’ are arrived at by summing together net positions of each individual client. www.com . Table 7-6 illustrates determination of open position of a CM. Clearing members are responsible to collect and settle the daily MTM profits/losses incurred by the TMs and their clients. The clearing members who have a loss position are required to pay MTM loss amount in cash. After completion of daily settlement computations. all CMs are required to open a separate bank account with NSCCL designated clearing banks for F&O segment. all the open positions are reset to the daily settlement price.

nseindia. 200. The closing price for a futures contracts is currently calculated as the weighted average price of the contract executed in the last half an hour of trading hours. • Daily Premium Settlement Buyer of an option must pay the premium towards the purchase of options to the seller.199 Derivatives Market ISMR the MTM shows a profit of Rs. daily premium settlement. Settlement of Options Contracts on Index or Individual Securities Options contracts have three types of settlements. is margined at the day’s settlement price and the profit of Rs. So the MTM account shows a profit of Rs. 102 during the day. The CMs. 1. The closing price of the underlying Index/security is currently its last half an hour weighted average value in the capital market segment of NSE. which is passed on to the members who have a receivable position. In this example. • Settlement Prices for Futures Daily settlement price is the closing price of the respective futures contracts. Final settlement loss/profit amount is debited/credited to the relevant CM’s clearing bank account on the day following expiry day of the contract. The pay-in www. Finally. NSCCL marks all positions of a CM to the final settlement price and the resulting profit/loss is settled in cash. Final settlement price is the closing price of the relevant underlying index/security in the capital market segment of NSE. Premium settlement is cash settled and settlement style is premium style. 500.200. the seller of an option is entitled to receive the premium for the option sold. The premium payable and receivable are netted to compute the net premium payable or receivable for each client for each option contract. Hence the MTM for the position closed during the day shows a profit of Rs.com . CMs are responsible to collect and settle for the premium amounts from the TMs and their clients. 100 and 100 units sold @Rs. on the last trading day of the contract. This is known as daily premium settlement. the open position of contracts traded during the day. For contracts executed during the day. Similarly. 200 units are bought @Rs. 500 credited to the MTM account. Table 7-7: Computation of MTM at the end of the day Trade details Brought forward from previous day Traded during day Bought Sold Open position (not squared up) Total Quantity bought /sold 100@100 200@100 100@102 100@100 Settlement price 105 MTM 500 102 105 200 500 1200 • Final Settlement of Futures After the close of trading hours on the expiry day. who have a premium payable positions are required to pay the amount to NSCCL. the difference between the buy price and the sell price determines the MTM. interim exercise settlement in case of option contracts on securities and final settlement.

created during the day. in option contracts. In the absence of trading in the last half an hour. And on the last trading day it should be marked to market at Final Settlement Price for settlement. receives the exercise settlement value per unit of the option from the CM. Settlement of Interest Rate Futures Daily and Final Mark to Market settlement of interest rate futures contracts are also cash settled. while stock options using American style. The ZCYC should be computed by the Exchange or by any other approved agency from the prices of securities either traded on the Exchange www. Interim exercise settlement is effected for such options at the close of the trading hours.com . should be marked to market at the Daily Settlement Price. Daily settlement price should be the closing price of the relevant futures contract for the trading day. who has exercised the option. Final settlement loss/profit amount for option contracts on Index is debited/credited to the relevant CMs clearing bank account on T+1 day (T=expiry day). having the same underlying. All positions (brought forward. at the end of trading hours. The CM. closed out during the day) in futures contracts. On the other hand. Theoretically. Final Exercise is Automatic on expiry of the option contracts. Valid exercised option contracts are assigned to short positions in the option contract with the same series (i. Final settlement price should be based on the value of the notional bond determined using the ZCYC computed by the Exchange.ISMR Derivatives Market 200 and pay-out of the premium settlement is on T+1 day. All long positions at in-the-money strike prices are automatically assigned randomly to short positions in option contracts with the same series. Open positions.nseindia. The closing price for the contract is calculated on the basis of the weighted average price of the contracts executed in the last half an hour of trading in these contracts. cease to exist after their expiration day. Exercise settlement value is debited/credited to the relevant CMs clearing bank account on T+2 day (T=exercise date). An investor can exercise his in-the-money options at any time during trading hours. Index options are exercised using European style. same expiry date and same strike price) randomly at the client level. • Final Exercise Settlement Final exercise settlement is effected for option at in-the-money strike prices existing at the close of trading hours on the day of expiry. The premium payable and receivable are directly debited/credited to the CMs clearing bank account. final settlement loss/profit amount for option contracts on Individual Securities is debited/credited to the relevant CMs clearing bank account on T+2 day (T=expiry day). The interim exercise settlement value is the difference between the strike price and the settlement price of the relevant option contract. the daily settlement price for unexpired futures contracts should be the futures prices computed using the (price of the notional bond) spot prices arrived at from the applicable ZCYC Curve. • Interim Exercise Settlement Interim exercise settlement takes place only for option contracts on securities.e. the theoretical price is taken or such other price as may be decided by the relevant authority from time to time. • Daily Settlement Price: Daily settlement price is the closing price of the interest rate futures contracts on the trading day.

but cleared and settled by their own CM. Since the T-bills are priced at 100 minus the relevant annualized yield. Since financial soundness is a key to risk management. security deposits). To avail of this facility. the rate of interest to be used may be the relevant MIBOR rate or such other rate as may be specified from time to time.nseindia.e. Unless CP confirms the trade. • Final Settlement Price: Final settlement price for an interest rate futures contracts on zero coupon notional and coupon bearing bond is based on the price of the bond determined using the zero coupon yield curve. NSCCL has set stringent conditions for membership in terms of capital adequacy (net worth. A FII/a sub-account of the FII. For computation of futures prices.com . The salient features of risk containment mechanism on the F&O segment are: 1. the price should be the present value of the principal payment discounted using discrete discounting for the specified period at the respective zero coupon yield. For this purpose the notional coupon payment date should be half yearly and commencing from the date of expiry of the relevant futures contracts. All trades executed by a CP through any TM are required to have the CP code in the relevant field on the trading system at the time of order entry itself. the settlement value should be arrived at using the relevant multiplier factor. the same is considered as a trade of the TM and the responsibility of settlement of such trade vests with CM of the TM. The settlement price for the notional T-bill should be 100 minus the annualized yield for the specified period using the zero coupon yield curve. A unique CP code is allotted to him by NSCCL.201 Derivatives Market ISMR or reported on the Negotiated Dealing System of RBI or both taking trades of same day settlement (i. In respect of coupon bearing notional bond. t = 0). Only then he is responsible for clearing and settling of deals of such custodial clients. Risk Management NSCCL has developed a comprehensive risk containment mechanism for the F&O segment. • Settlement of Custodial Participant (CP) Deals NSCCL provides a special facility to Institutions/Foreign Institutional Investors (FIIs)/MFs to execute trades through any TM. These trades have to be confirmed by their own CM within the time specified by NSE through the on-line confirmation facility on the same day. FIIs have been permitted to trade in all the exchange traded derivative contracts within the position limits prescribed for them and their sub-accounts. the present value should be obtained as the sum of present value of the principal payment discounted at the relevant zero coupon yield and the present values of the coupons obtained by discounting each notional coupon payment at the relevant zero coupon yield for that maturity. For zero coupon notional bonds. In respect of notional T-bill it should be 100 minus the annualized yield for the specified period computed using the ZCYC. www. are required to obtain a unique Custodial Participant (CP) code from the NSCCL. intending to trade in the F&O segment of the exchange. The FII/sub-account of FII should ensure that all orders placed by them on the Exchange carry the relevant CP code allotted by NSCCL. a CP is required to register with NSCCL through his CM. They are known as Custodial Participants (CPs).

PRISM uses SPAN®2 (Standard Portfolio Analysis of Risk). A member is alerted of his position to enable him to adjust his exposure or bring in additional capital. the initial margins are based on the zero coupon yield curve computed at the end of the day. the initial margin may be computed over a two day time horizon. 2 SPAN® is a registered trademark of the Chicago Mercantile Exchange (CME) used here under licence. Presently. The CM in turn collects the initial margin from the TMs and their respective clients. 7. However. who clear and settle through him. NSCCL monitors the CMs for MTM value violations. NSCCL assists the CM to monitor the intra-day exposure limits set up by a CM and whenever a TM exceed the limits. CMs are provided with a trading terminal for the purpose of monitoring the open positions of all the TMs. it stops that particular TM from further trading. It has also put in place a system which tracks on real time basis the client level portfolio based upfront margining and monitoring. The methodology for computation of VaR percentage should be as per the recommendations of SEBI. Risk Management for Interest Rate Futures Initial margin should be payable on real time basis on all open positions of Clearing Members in accordance with the system adopted by Clearing Corporation. 5. Clearing Corporation has to adopt SPAN (Standard Portfolio Analysis of Risk) system or any other system for the purpose of real time initial margin computation.ISMR Derivatives Market 202 2. Position violations by the CM result in disablement of trading facility for all TMs of a CM. initial margins are to be revised accordingly. The open positions of the members are marked to market based on contract settlement price for each contract. The most critical component of risk containment mechanism for F&O segment is the margining system and on-line position monitoring. before the commencement of trading on the next day. Initial margin requirements should be based on 99% VaR over a one day time horizon. Initial Margin should include SPAN margins and any other additional margins that may be specified by Clearing Corporation. 3. if it may not be possible to collect mark to market settlement value. A CM’s open positions are monitored on a real-time basis using NSCCL’s on-line position monitoring system. while TMs are monitored for contract-wise position limit violations.nseindia.com . www. NSCCL charges an upfront initial margin for all the open positions of a CM on a daily basis. The difference is settled in cash on a T+1 basis. 6. In case of futures contracts. The positions limits for each CM are set on the basis of his capital deposits and whenever a CM reaches the position limit the on-line position monitoring system generates alerts. in case of large deviation between the yields generated using only t=0 trades and all trades. 4. A separate settlement guarantee fund for this segment has been created. A CM may set exposure limits for his TM. The actual position monitoring and margining is carried out on-line through Parallel Risk Management System (PRISM).

100 crore. Underlying market price Strike price www.1% of the gross open positions in notional 91 day T-Bill futures. while at the same time recognizes the unique exposures associated with options portfolios. For futures contracts open interest should be equivalent to the open positions in that futures contracts multiplied by its last available closing price.75% on the far side of the spread with legs upto 1 year apart. Exposure Limit should be 100 times the liquid net worth i.2% of the notional value of the futures contracts.e. 3 trading days prior to expiration of the near month contract. Exposure limit for calendar spreads should be regarded as an open position of one third of the mark to market value of the far month contract.125% per month of spread on the far month contract subject to a minimum margin of 0.nseindia. Trading Member wise/Custodial Participant wise Position Limit: Each Trading Member/ Custodial Participant should ensure that his clients do not exceed the specified position limit. The position limits should be at the client level for near month contracts should be 15% of the open interest or Rs.e.203 Derivatives Market ISMR The Initial margin for a member is to be computed taking into consideration requirements such as : (a) client positions should be netted at the level of individual client and grossed across all clients for the Trading/Clearing Member.com . the price scan range should be 3. SPAN considers uniqueness of option portfolios. 1% of the notional value of the gross open positions in Notional 10 year bond futures (both coupon bearing and zero coupon) and should be 1000 times the liquid net worth i. The following factors affect the value of an option: 1. various parameters should be as specified hereunder: (a) Price Scan Range: In the case of Notional Bond Futures. Calendar Spread Charge: The margin on calendar spread should be calculated at a flat rate of 0.5 sigma (3. The system treats futures and options contracts uniformly. whichever is higher. but in no case the initial margin should be less than 0.25% and a maximum margin of 0. 0. like extremely deep out-of-the-money short positions and inter-month risk.5 σ) and in no case the initial margin should be less than 2% of the notional value of the Futures Contracts. Exposure Limits (2nd line of defense): Clearing Members should be subject to Exposure limits in addition to initial margins. For Notional T-Bill Futures. which should be scaled up by look ahead period. (b) NSE–SPAN® The objective of NSE–SPAN® is to identify overall risk in a portfolio of all futures and options contracts for each member. however. A Calendar spread positions will be treated as non-spread (naked) positions in the far month contract. 2. the price scan range should be same as for notional bond futures. Its overriding objective is to determine the largest loss that a portfolio might reasonably be expected to suffer from one day to the next day based on 99% VaR methodology. As the near month contract approaches expiry. For this purpose. the spread should be treated as a naked position in the far month contract three days prior to the expiry of the near month contract. without any set offs between clients (b) proprietary positions should be netted at Trading/Clearing Member level without any set offs between client and proprietary positions.

members need not execute complex option pricing calculations. Hence. ! ! ! Margin/Position Limit Violations PRISM. NSCCL collects initial margin for all the open positions of a CM as computed by NSE-SPAN. till such obligations are fulfilled.nseindia. is the real-time position monitoring and risk management system for the F&O market segment.com . which are performed by NSCCL. SPAN constructs scenarios of probable changes in underlying prices and volatilities in order to identify the largest loss. for each trade the amount of initial margin is reduced from the effective deposits of the CM held with the clearing corporation. effective deposits are computed by reducing www.g. premium margin is charged at client level. These are required to be paid up-front on gross basis at individual client level for client positions and on net basis for proprietary positions. in turn the TM collects it from his clients. Margins The margining system for F&O segment is explained below: ! Initial Margin: Margin in the F&O segment is computed by NSCCL upto client level for open positions of CMs/TMs. Members can apply the data contained in the risk parameter files. to determine their SPAN margin requirements.e.ISMR Derivatives Market 204 3. The risk of each trading and clearing member is monitored on a real time basis by generating various alerts whenever a CM exceeds any limits set up by NSCCL. It is required to be paid on assigned positions of CMs towards interim and final exercise settlement obligations for option contracts on individual securities. Then it sets the margin requirement to cover this one-day loss. Risk arrays and other data inputs required for margin calculation are provided to members daily in a file called the SPAN risk parameter file. Volatility (variability) of underlying instrument Time to expiration Interest rate As these factors change. Premium Margin: In addition to initial margin. 5. the value of options within the portfolio also changes. which holds in trust client margin monies to the extent reported by the member as having been collected from their respective clients. For this purpose. Thus. These complex calculations (e. 4. The results of these calculations are called risk arrays. These are detailed below: ! Initial Margin Violation: The initial margin is computed on a real time basis i. Additionally members are also required to report details of margins collected from clients to NSCCL. A CM is required to ensure collection of adequate initial margin from his TMs up-front. to their specific portfolios of futures and options contracts. a portfolio might suffer from one day to the next. Assignment Margin for Options on Securities: Assignment margin is levied in addition to initial margin and premium margin. the pricing of options) are executed using SPAN. This margin is required to be paid by a buyer of an option till the premium settlement is complete. the Parallel Risk Management System. Client Margins: NSCCL intimates all members of the margin liability of each of their client. The margin is charged on the net exercise settlement value payable by a CM towards interim and final exercise settlement.

! Member-wise Position Limit Violation: The member-wise position limit on open position of a TM is supervised by PRISM. the trading facility provided to the TM is automatically withdrawn. cannot exceed 15% of the total open interest of the market or Rs. 10% of the free float in terms of the number of shares of a company. Client-wise Position Limit Violation: Whenever the open position of any client exceeds 1% of the free float market capitalization (in terms of no. 50 crore. When the total open interest in an option contract. The open positions in all the futures and option contracts on the same underlying security of any TM. the exposure limits of. As the TM limit is used up to 70%. At 100%. Withdrawal of clearing facility of a CM in case of a violation leads to automatic withdrawal of trading facility for all TMs and/or custodial participants clearing and settling through such CM. across all contracts cannot exceed lower of the following limits: 30 times the average number of shares traded daily in the previous calendar month or 10% of the number of shares held by non-promoters in the relevant underlying security i.nseindia. including during trading hours. For option contracts. as the case may be.5 standard deviation of the notional value of gross open position in futures on individual securities and gross short open positions in options on individual securities in a particular underlying should be collected/adjusted from the liquid networth of a member on a real time basis. open interest is equivalent to the open positions in the futures contracts multiplied by last available traded price or closing price. reaches 80% of the market wide position limit for a contract.e. The open position in all index futures and index option contracts of any TM. including during trading hours. 100 crore.5% of the total open interest of the market or Rs. and 90%. Similarly. which cannot exceed 33. at the beginning of the month. at any time. NSCCL specifies the market-wide position limits once every month. of shares) or 5% of the open ! ! ! www. whichever is higher at any time. whichever is higher. cannot exceed 7. the member receives a warning message on his terminal. 80%. The CM receives warning messages on his terminal when 70%. A member is provided with adequate warnings on the violation before his trading/ clearing facility is withdrawn. For option and futures contracts on individual securities. 80% and 90% of the effective deposits are utilized. For futures contracts. 5% or 1. the initial margins on positions taken by a TM is also computed on a realtime basis and compared with the TM limits set by his CM. The open position across all members.com . which is computed by multiplying the open position in that option contracts multiplied with the last available closing price of the underlying. across all members. which is higher.205 Derivatives Market ISMR the total deposits of the CM by Rs. Market-wide Position Limit Violation: PRISM monitors market wide position limits for futures and option contracts on individual securities. open interest is equivalent to the notional value. At 100% the clearing facility provided to a CM is automatically withdrawn. A CM may appropriately reduce his exposure to contain the violation or alternately bring in additional capital. 50 lakh (referred to as minimum liquid net worth). which is applicable for the subsequent month. the price scan range and volatility scan range (for SPAN margin) are doubled.33 times the liquid net worth for index options and index futures contracts. Exposure Limit Violation: PRISM monitors exposure of members on all futures and option contracts.

Stock Options and Futures on Interest Rates.258 BSE Turnover (Rs. The TM/CM through whom the client trades/clears his deals should be liable for such violation and penalty may be levied on such TM/CM which he may in turn recover from the client. 4.212 17. before initiating exercise processing.620 56. Since more than 99% of volumes came from NSE. 21.580 7.090 8.718 23. data pertains to Index Futures.155 423 4.625 1.869 7.034 Turnover (Rs.634 34.645 1.018 2.098 5.921. TM/CM should immediately ensure that the client does not take fresh positions and reduces the positions of those clients within the permissible limits.605. Stock Futures.035 6.240.690 *: For NSE.717 3.873 4.989.198 TOTAL No. the further detailed analysis is based on NSE data.069 534. mn.196 534.265 1.714 2.333 million during the preceding year.031 5.274 30.219 1.801.233 730.939 5.) 500.408. mn.423.470 2.690 million during 2003-04 as against Rs. of Contracts Traded 2.851.750. of Contracts Traded Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 2003-04 2.) 873 229 92 1. the NSE and the BSE (Table 7-8).205 2.630 2.691 2.715 1. if a CM utilize the collateral of one TM and/or constituent towards the exposure and/or obligations of another TM and/or constituent.) 501. the F&O segment of NSE reported a total turnover for Rs.831.668 31. The number of contracts Table 7-8: Trade Details of Derivatives Market* Month/Year No.574 9. If the contracts are exercised without open positions.210.398.509 2.732 5. In the event of such a violation.com .287 36.425.294 3.548 million during the preceding year. in all the futures and option contracts on the same underlying security.422.006. ! Misutilisation of TM/Constituent’s Collateral and/or Deposit: It is a violation.079. which are exercised by a CM/TM.403.509 8. Index Options .173 1.725.019.545 103.253.306.275 5. Violation of Exercised Positions: NSCCL verifies whether open long positions for CM/TM and/or constituent exist in relation to option contracts. of Contracts Traded 5.nseindia.735.312.728. ! Market Outcome Trading Volumes As mentioned earlier. the derivatives are traded only on two exchanges.573 22.059 57.389.696.205.481.541 7.563 4.750.840 37.499 2. then it is termed as client-wise position limit violation.050 2. During 2003-04.720.099.718.205 4.098.976.813 21. 21.931.753 7. Source: NSE and SEBI Bulletin.769.024.213 6.604.886.303.776 NSE Turnover (Rs.318 21.492 million as against Rs.299 505 116.ISMR Derivatives Market 206 interest (in terms of number of shares) whichever is higher.5% of total turnover.907 3. mn. www.516.495 1.596 5.337 107.337.462 730.280 1.067 3.314. 4.860. then such cases are treated as violations.269.938 5.252.750 2.492 No. The total exchange traded derivatives volume witnessed a sharp rise to Rs.392 2. NSE emerged as a market leader in the Indian Market by accounting for about 99.023 5.306.281 4.439 382.278.526 1.001 2.724.422.

8% of total turnover. 500.89 0.09 7.71 0.57 0.16 0.com .13 0.81 25. contracts on securities are more popular than those on indices.06 1.196 million in April 2003 to Rs.31 15. 22.97 2.34 0. 15.19 0. Location No.813 million in March 2004.20 20. 8. 10.21 0. The contributions from Delhi and Kolkata were 25.010 million in April 2003 to Rs. The segment witnessed a record turnover of Rs. 7. 13.3% respectively (Table 7-9).24 0. 3.213 million on January 28. The business growth of the F&O segment is presented in Annexure 7-2. and call options are more popular than put options. The average daily turnover increased from Rs.51 0. 14.604.44 0.53 0.85 1.32 2.72 0.07 0.00 2. 2. 1.69 100. During the year.nseindia.07 2.13 0. 20. 5.99 0. Mumbai contributed nearly 47.00 www.14 0.61 0. 19.09 1.20 0. It is evident from the statistics as presented in the Annexure 7-2 and the Chart 7-1 that the futures are more popular than options.38 1. 18.45 0.05 100.36 0. 16.49 0. 2.63 1.45 11. 219. 11.12 0. The monthly turnover increased from Rs.00 47.401 million in March 2004.31 0. 9.207 Derivatives Market ISMR traded in 2003-04 amounted to 569 lakh as against 168 lakh in the previous year.11 0. Table 7-9: City-wise Distribution of Turnover of F&O Segment of NSE 2003-04 Sl. 17. 12.16 2.47 0. 118.5% and 11. 2004. 25. 6. Mumbai Delhi/Ghaziabad Calcutta/Howrah Ahmedabad Hyderabad/Secunderabad/Kukatpally Chandigarh/Mohali/Panchkula Chennai Cochin/Ernakulam/Parur/Kalamserry/Alwaye Bangalore Ludhiana Indore Jaipur Baroda Rajkot Pune Agra Coimbatore Lucknow Trivandrum Surat Tenali Others Total Share in Turnover (%) 2002-03 2003-04 41. 4.79 2. 21.

nseindia. The costs involved are storage cost. arbitrage opportunities exist. as by definition it means the total costs required to carry a commodity or any other good forward in time. annualised on the basis of the number of days before the expiry of the contract. the only relevant factor is the cost of financing. Cost of carry is more appropriately used for commodity futures. the carry cost is the cost of financing minus the dividend returns. Carry cost or implied interest rate plays an important role in determining the price differential between the spot and the futures market.com . By comparing the implied interest rate and the existing interest rate level. Implied interest rate is also a measure of profitability of an arbitrage position. www. Assuming zero dividend. 2004. In case of equity futures. insurance cost. Implied interest rate is the percentage difference between the future value of an index and the spot value.ISMR Derivatives Market 208 Open Interest Open interest is the total number of outstanding contracts that are held by market participants at the end of each day. transportation cost and the financing cost. The daily open interest for near month index futures at NSE is presented in Chart 7-2. if the futures price is less than the spot price plus cost of carry or if the futures price is greater than the spot price plus cost of carry. Implied Interest Rate In the futures market. The highest open interest in index futures at NSE was recorded at 50. Increasing open interest means that fresh funds are flowing in the market. Putting it simply. Theoretically. one can determine the relative cost of futures’ market price.663 contracts on March 18. implied interest rate or cost of carry is often used inter-changeably. while declining open interest means that the market is liquidating. open interest is a measure of how much interest is there in a particular option or future.

As the time to expiration approaches.com . the basis reduces. The difference between the future and the spot price is called basis. Daily implied interest rate for Nifty futures from April 2003 to March 2004 is presented in Chart 7-4.nseindia. www. Chart 7-3 presents Nifty futures close prices for the near month contracts. and the spot Nifty close values from April 2003 to March 2004.209 Derivatives Market ISMR The futures prices are available for different contracts at different points of time.

He estimated volatility smiles separately for put and call options and established that the smiles are sharply different for calls and puts.05 1006. Volatility Smile The volatility smile is the relation between the implied volatility and the strike price of the same maturity.52 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Note: (1) The implied interest rate is calculated on the last trading day of the month for Near Month Nifty Futures. Varma in his paper “Mispricing of Volatility in the India Index Options Market”. R.59 -10. It is a measure of the amount and the speed of price change. J. implied volatility was undefined because the option traded below its intrinsic value. especially if they are based upon options that are thinly traded samples.85 1804.March 2004) Month Expiry Date of near month Contract 29-May-2003 26-Jun-2003 31-Jul-2003 31-Jul-2003 25-Sep-2003 30-Oct-2003 27-Nov-2003 24-Dec-2003 29-Jan-2004 26-Feb-2004 25-Mar-2004 29-Apr-2004 Closing Future Price 930.60 1187.35 1358.08 4. It was found that for about 6.75 1809. The implied probability distribution is more highly peaked and has (except for deep-in-the-money calls) thinner tails than the normal distribution www. Implied Volatility Volatility is one of the important factors.71 3.90 1615. Alternatively. For example.30 1814.5% of all puts. To estimate future volatility. IIM. Normally the smiles for equity options have a downward sloping curve and they look alike for both put and call option.25 1879.80 1134.35 1123. which is taken into account while pricing options. then the options premiums are relatively expensive and vice-versa.08 5.99 3. However. R.30 1771.37 -4. If volatility is high. Working Paper 2002-04-01.15 1185. spot price. the Black Scholes model solves for the fair price of the option by using the following parameters-days to expiry.00 NA 2.95 1888. one could work out implied volatility by entering all parameters into an option pricing model and then solving it for volatility. Ahmedabad found V shaped smiles and the smiles markedly different for puts and calls. J. (2) Number of days in a year have been taken as 365. However. Table 7-10: Implied Interest Rate for Near Month Nifty Futures (April 2003 . Ahmedabad) has estimated the option prices and implied volatility from the Black formula.ISMR Derivatives Market 210 The implied interest rate for near month Nifty futures as on last trading of the month is presented in Table 7-10.45 1619.75 1800. IIM.55 1417.10 1555.80 3. a time series analysis of historical volatility may be carried out to know the future movements of the underlying. Source: NSE. Prof.65 999. Working Paper 2002-04-01.80 1418.25 1559. Prof. implied volatility is the estimate of how volatile the underlying will be from the present until the currency of option.24 0.nseindia. April 2002.com . volatility of underlying.55 Closing Spot Price 934.85 1356. strike price.80 1765. This model could be used in reverse to arrive at implied volatility by putting the current price of the option prevailing in the market.90 Implied Interest Rate (%) -4.5% of all calls and about 7. Putting it simply. Varma (“Mispricing of Volatility in the India Index Options Market”.04 -11. interest rate. implied volatility estimate can be biased. April 2002. and dividend.

84 80.897.43 37.07 304.41 1.92 289.88 5.880.06 1.40 1.088.50 143.22 1.30 197.76 98.393.79 1.81 694.20 1.36 5.609 million and Rs.8 million with settlement of futures and of options accounting for Rs.00 236.50 106.109. it was observed that the observed prices are rather close to the average of the intrinsic value of the option and its Black-Scholes value disregarding the smiles.42 1.70 138.959.311.30 2.58 26.09 37.92 16.00 28.60 178.052.74 11.35 196.99 447.00 136.452.40 196.543.065.30 1.50 18.40 1.49 9.143.69 58.93 57.00 337.858.99 128.18 5. Table 7-11: Settlement Statistics in F&O Segment (In Rs.18 407.58 682.120. The detail of the settlement statistics in the F&O segment is presented in Table 7-11.00 1.87 112.00 8.615.48 634.13 10.00 204.344.22 637.58 80.94 336.42 38.682.08 1.13 410.40 383.48 Index/Stock Options Premium Exercise Settlement Settlement — — — 14.39 3.28 50.71 5.50 1. However.95 45. the cash settlement amounted to Rs.878.60 233.50 1.11 459.73 244.80 1.09 238.40 1.608.103.083.38 — — — 2.09 114.589.90 86.22 10.312.10 939.01 10.14 11.22 202.88 1.25 122.184.90 134. Prof.14 177.56 930. 13.35 1.784.59 14.69 122.55 88.81 www.69 283.75 14.23 991.49 9.580.01 2.07 221.41 1.71 244.93 17.19 1. Varma also noticed some overpricing of deep-in-the-money calls and some inconclusive evidence of violation of put-call parity.88 219.83 300.13 0.18 1.021.193.80 14.886. Settlement All derivative contracts are currently cash settled.211 Derivatives Market ISMR or the historical distribution.108.30 338.665.042.35 1.02 2.62 139.00 699.14 304.60 47.054.827.07 141.80 53.378.00 1.70 2.38 141.387.84 1.57 68.22 179.88 66. 109.68 588. The market thus appears to be underestimating the probability of market movements in either direction.91 1.40 2.00 215.28 1.219.25 41. 122.575.75 789.60 2.70 1.484.10 1.60 1.393.50 103.76 48.40 77.968.40 168.38 457.296.70 1.14 82.24 85.33 3.00 170.761.40 353.com .10 446.38 131.56 2.959.60 2.40 17.60 1.074.77 19.49 1. respectively.95 380.09 603.nseindia.125.640.60 166.05 13. 860.05 23.29 0.351 million.) Month/Year Index/Stock Futures MTM Final Settlement Settlement 840.40 1.67 305.20 229.74 13.24 164.16 781.635.696.198.647.31 38.294.958.10 258.058.55 174. mn.39 487.616.202.496.23 108.318.282.58 173.308.366.82 92.40 34.80 38.30 29.036.14 19.922.866.95 426.53 738.31 156.62 21.30 1.03 3.19 Total 2000-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 2001-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 2002-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 2003-04 * Balance at the end of period.389.44 13.13 81.30 1.84 4.46 86.98 12. During 2003-04.240.52 1.487.12 7.630.52 66.44 28.30 464.32 773.61 245.01 7.379.20 445.92 2.25 7.

nseindia. However. such as the Nifty Junior and Defty. CNX IT Index and BSE Sensex. After the market gains some more familiarity with derivative products. After a subdued start. interest rate and gold as the underlying could also be explored. the L. Cross-margining thus results in a far more efficient use of a member’s capital for trading in related products and in more than one market. conceptually. Varma is currently looking into cross margining. C. options and futures on individual stocks are available only on select 51 securities. there is no limit to the range of derivative products as can be seen from the international experience. Cross Margining Cross-margining takes into account a member/client’s combined position across products/market segments.ISMR Derivatives Market 212 Policy Debates Derivatives are being traded in India for about more than three years now. Some of the financial experts and market participants are of the opinion that the full potential of the market is yet to be realized. The index futures/options could be extended to other popular indices. Stock futures/options could be extended to all active securities. as this would optimally use resources. Gupta Committee which had suggested the regulatory framework for derivatives. R. This would imply that a member’s margin with an exchange for one market could be used against the margin requirements of another market. A clearing corporation can easily compute and levy a single net margin amount based upon offsetting positions in different products/markets/exchanges. the trading volumes have picked up substantially thereafter. Index futures and options are available only on S&P CNX Nifty. the logical next step would be to consider expanding the basket of derivative products based on various other instruments available in financial markets. A SEBI constituted advisory committee on derivatives under the chairmanship of Prof. Few policy debates regarding the derivatives market are as discussed below: Further Products Derivatives trading in India have so far been introduced in a fairly limited range of products. The possibility of introducing derivatives based on the exchange rate. had recommended that cross margining (between spot and derivatives market) should eventually be allowed. In fact. J. www.com .

call and put) Between 2.com Style of Option Contract Size Price Steps Expiration Months Trading Cycle NA European American Multiples of 100. 0. the next month (two) and the far month (three).nseindia. where the last Thursday falls on the annual or half yearly closing dates of the bank. 0. If last Thursday is a trading holiday. one ‘at the money’ and two ‘out of the money’) for very option type (i. the contract shall expire on previous trading day NA NA 213 www. as may be 200 or multiples thereof Multiples of 100. 2 lakh) Stock Futures N FUTSTK —— Individual Securities Index Options N OPTIDX S&P CNX Nifty Index/ CNX IT Index Stock Options N OPTSTK —Individual Securities Interest Rate Futures N FUTINT Notional 10 year bond (6% coupon).the near month (one).e. Notional 10 year zero coupon bond and Notional 91 day T-Bill NA Permitted lot size is 2000 Rs.05 3 near months A maximum of three month trading cycle . one ‘at the money’ and two ‘out of the money’) for every option type (i. of Strike Prices Operating range of 10% of the base price NA Operating range of 20% of the base price NA Strike Price Interval (in Rs. 2 lakh) specified by NSE Rs. Further.) Settlement NA In cash on T+1 basis NA In cash on T+1 basis Operating range of 99% of the base price Minimum of 5 (two ‘in the money’. New contract is introduced on the next trading day following the expiry of near month contract Last Trading/Expiration Day Last Thursday of the expiry month or the preceding trading day. the contracts shall expire on previous trading day. call and put) 10 In cash on T+1 basis Daily Settlement Price Final Settlement Price Settlement Day Margins NA: Not applicable Closing price of futures Closing price of futures Premium Value (net) contracts on the trading day contracts on the trading day Closing value underlying index/ Closing value underlying index/ Closing value of such security on the last trading security on the last trading day underlying security (index) day of the futures contract of the futures contract on the last trading day of the options contracts Last trading day Up-front initial margin on daily basis Operating range of 99% of the base price Minimum of 5 (two ‘in the money’.5 and 50 depending on the price of underlying Daily settlement on T+1 basis and final settlement on T+2 basis Premium Value (net) Closing value of such underlying security (index) on the last trading day of the options contracts NA Daily Mark-to-Market settlement and Final Settlement will be on T+1 basis As may be stipulated by NSCCL in this regard from time to time As may be stipulated by NSCCL in this regard from time to time Derivatives Market ISMR . as may be specified by NSE (minimum value of Rs.e. if last Thursday is a trading holiday Price Bands No.01 One year The concern shall be for a period of a maturity of one year with three months continuous contracts for the first three months and fixed quarterly contracts for the entire year Last Thursday of the expiry month.Annexure 1: Contract Specification for F&O Particulars Security Description Underlying Index Futures N FUTIDX S&P CNX Nifty Index/ CNX IT Index NA 200 or multiples thereof (minimum value of Rs.

215 1.957.736 4.768 963 50 0 0 0 0 0 0 0 10.198 55.650 2.933 23.899 63.201 41.453 1.813 490.687 2.282.919 65.907 1.) Traded (Rs.891 78.809 87.658 2.764 109.014 89.897 304.720.206 5.198.027 261.481.922 55.) Contracts Turnover Contracts Turnover Contracts Turnover Contracts Turnover Traded (Rs.888 27.255 1. mn.240.753 20.571 24.797 6.557.310 28.784 439.581 133.934 175.205 2.504 71.876 1.314.540 12.191 4.554.783 212.769 5.589 26.562 552.548 40.768.407 1.197 100.594 5.775 6.469.025 97.379 413.220 1.608 4.000 2.713 88.118.873 55.801 160.135 238.158 96.291 8.598 12.936 751.688 10.191 19. mn.378 21.426 67.282 10.651 159.924 20.825 75.047 178.127 9.057 93.573 322.096 16.849 132.067 36.414 37.773 61.602 216.173 906.299 2.773 69.032 294.819 193 10 0 0 0 0 0 0 0 2.926 5.493 154.553 155.395 139.743 76.529 383.865.853 434.430 2.501 116.877 27.552 27.653 2.567 31.nseindia.134 133.533 8.875 110.) Traded (Rs.396 132.657 2.499 15.892 74.771 131.276 163.060 95.908 1.104.946 23.671 3.324 7.186 1.590 2.555 97.204 25.099 2.225 126.966 26.437 13.104 21.736 16.228 22.404 27.938 132.580 23.524 25.777.866.581 93.158 70.772 6.735 1.413 29. July 2001 and November 2001.714 30.464 233.803 325.157 325.795 34.480 43.303 122.070 10.351 11.025 121.000 970.082 38.630 80.113 2.698 10.370 40.948 3.065 20.620.303 164.551 398.109 182.250 18.128 15.886 2. mn.984 216.006.090 6.950 2.874 87.567 1.588 73.232 8.492 327.460 5.722 19.048 2.237 1.659 104.848 24.781 5.156 255.613 7.874 1.446 113.330 48.939 1.806 175.389.749 7.221 16.499 84.071 14.461 25.794 71.676.429 6.727 11.620 2.317 304.604.126.930 35.448 297.717 25.134 28.066 36.630 355. mn.541 2.851.971 64.321 297.432 3.639 1.614.204 37.098 1.909 4.066.687 1.890 53.155 591.769 30.842 28.513 3.468 998.165 56.499 21.536 48.068 1.869 74.124 12.201 5.696 87.055 37.681.222 13.298 131.047 705.517 465. mn.794 235.498 3.947 133.858 30.877 20.778 726.270 332.059.251 59.361 36.890 515.470 500.962 6.403 258.613 23.681 35.192 1.756 132.628 13.867 123.655 67.694.941 10.804 271.173 51.938 1.051 1.306 2.369 1.895 3.274 2.683 105.160 100.711 11.157 5.606 113.628 187.891 16.484 28.810 8.509.155 150. of Notional No.662 94.221 5.704 230.041 138.147 132.383 22.248.376 26.192 97.697 109.252. of Notional No.638 213.835 125.) Derivatives Market www.843 69.866 2.431 98.316 143.788 269.294 730.755 26.319 23.516 10.466 7.) Turnover Total Average Open Interest Daily at the end of No.181 84.974 11.263 3.285 13.352 1.567 277.011 3.863.920 60.509 7.719 7.138.178 3.038 76.984 5.630 45.989.004 34.763 362.002 41.387 12.600 2.939 1.101 3. mn.596 327.228 616.468 2.669 54.819 1.444 71.997 24.306.957.312 99.027 192.868.431 13.520 766 1.403 1. of Contracts Traded Turnover No.196. 214 .193 1.793 27.828 13.229 1.625 32.432 905.750.334.953 71.610 3. mn.430 2.630 101.633 125.746 12.564 66.115 318.917 66.501 53.088 334.649 2.389 7. of Turnover No.281 68.370 101.224.492 116 154 105 374 967 1.921.973 16. mn.731 1.947 21.188 16.109 34.) (Rs.979 154.625 40.295 63.805 60.846 503.981 2.185 1.405 61.670 179.084 66.305 5.615 110.358 1.961 2.529 805. of Contracts (Rs.254 11.876 71.086 13.776 21.155.602 13.777 3.698 2. respectively.149 2.676.666 17.318 4.508 33.529 111.426 249.398.859 38.261 135.976.306 20. Index Options.902 8.784 7.304.826 1.725 653.635 3.862 2.432 564.666 13.146 912.610 139.360 34.876 268.830 4.929 27.) Traded No.900 272.917 93.601 6.739 172. June 2001.580 1.662 1.910 17.274 10.498 33.305 35.261 26.220 12.994 12.909 1.644 60.572 52.061. of Notional No.563 1.360 4.053 15.984 48. Index Futures.300 66.383 254.808 10.505.098.233 37.839 556.966.883 1.135 31.696.634 696.367 40.708 768.674 54.262 12.114 75.528 3.876 Note: 1.463.395 24.052 269.303.603 495.749 4.578 23.004 493.431 100.089 101.187 12.046 28.) Traded (Rs.706 269.922 1.384 89.943 25.375 144.486 25.442.787 31.332 161.997 16.561 168.601 5.543 13.090 1.448 856.902 13.022 90.776 3.948 39.223 605.856 16.509 44.890 11.038 104.784 4.594 154.159 121.616 2.645 30.998 1. Notional Turnover = (Strike Price + Premium) * Quantity.530 65.033 4.540 1.236 235.785 185.475 1.886.612 1.805 17.051 31.369 71.635 94.637 15.646 151.441 74.113 12.019.650 13.563 494.628 25.724.403.854 1.159 10.291 214.291.917 2.425 44.567 210.761.069 17.708 166.505 147.413 30.380 6.397 35.873 1. of Turnover Turnover Contracts (Rs.544.025.790 2.086 108.780 4.493 62.943 21. 2.616 19.189 5.598 489.334.895 50.326 1. of Notional Traded Contracts (Rs.875.570 15.272 16. mn.897 458. Stock Options and Stock Futures were introduced in June 2000.884 90.805 7.770 47.290 29.704 804.387 269.114 863.024 17.980 439.010 25.217.512 140.507 2.844 112. of Trading Contracts Value (Rs.015 290.368.792 319 471 904 2.138.792 235.320 18.610 4.912 33.810 161.011 212.852 10.668 23.134 254.728.246 43.456.769.501 297.347 28.933 4.316 382.Annexure 7-2: Business Growth of Derivatives Segment ISMR Month/ Year Call Put Call Put Index Futures Stock Futures Interest Rate Futures Index Options Stock Options No.390 2.945 2.998 13.560 93.517 367.151 641.580 13.183 13.048 26.026 161.630 1.493 1.406 38.440 34.951 178.284 2.958 204.467 121.) Traded (Rs.252 5.378.135 140.600 309.020 129. mn.352 1.315 17.955 237.731 143.400 33.149 96.035 2.043.914 10.415 214.611.196 39.239 94.384 56.089 147.235 2.com Jun-00 to Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 2001-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 2002-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 2003-04 9.950.722 4.050 534.344 85.357 700.967 16.122 50.526 401.811 55.329 1.834 85.740 550.040 19.787 14.634 13.487 24.107 30.351 3.663 152.917 10.339.394 72.727 20.640 2.643 834.191.) No.524 101.284 21.472 528.761 70.479 8.274 3.160 55.443 57.600 118.839 65.122.514 122.021 114.791.498 162.988 324.002 990.182 120.771 1.495 42.217 493.133 789.544 179.229 3.205.392 50.894 1.102 17.051 60.933 92.649 69.184 853 1.401 83.393 309.364 688.023 3.342 23.432 887.799 9.209 54.901 33.354.660 405.

In this scenario. how does an investor/ issuer discriminate among them? How does he know that a particular intermediary really understands his needs and can handle his money efficiently? Fortunately. in the securities market. Further.com . the investors are in a dilemma as to which intermediary is to be patronized. there has been no such effort initiated. there is a system to monitor and inspect their operations. In some of the developed and developing markets. SEBI is planning to set up a global securities training centre. In some segments of the financial markets such as the insurance and banking.215 Knowledge Initiatives ISMR Knowledge Initiatives Several initiatives have been taken over the last few years with a view to develop the skills of market intermediaries. For instance. The formal educational or training programme on securities markets is not adequate to cover their areas of operations. This in turn instills confidence in the investors to be associated with the securities market. all the intermediaries in the securities market are now registered and regulated by SEBI. However. who compete among themselves to entice the investors to subscribe to their issues.nseindia. bank officials can take junior associate and certified associate examinations conducted by Indian Institute of Bankers. the professionalization of intermediaries has been left. educate the investors and promote high quality research in the securities market. This dilemma is not restricted to only the investors. All the intermediaries in the market are mandated to have a compliance officer who reports independently to SEBI about any non-compliance observed by him. the employees get an opportunity to improve their career prospects. the ‘National Institute for Securities Training’. there is conscious effort being made to equip the personnel joining these organizations with the required expertise. there is a system of testing and certification for persons joining market intermediaries. The benefits of this system are wide spread. In case of violation of any regulation disciplinary actions are taken against them. Quality Intermediation Given the large number of different intermediaries. Thus. This ensures that these personnel have a minimum required knowledge about the market and the existing regulations. but also to the issuers of securities. Similarly. As a result. to the market forces. While the intermediaries are assured of qualified staff. by and large. The employees of insurance companies upgrade their skills by taking associate and fellow examinations offered by the Insurance Institute of India. no academic course teaches how to www. a reasonably satisfactory arrangement is in place to ensure good conduct of the intermediaries. There are codes of conduct prescribed for each intermediary as well as for their employees. In order to further improve the skills and widen the knowledge base of people involved in the securities market.

Pursuant to this. Also. a need for certification was being increasingly felt by the regulators as well as by the securities industry. The L. In the initial period. a testing and certification mechanism. subsequently specialised tests may be introduced. has become extremely popular and is sought after by the candidates as well as employers due to its unique on-line testing and certification www. Gupta Committee was set up by the SEBI to develop appropriate regulatory framework for derivatives trading in India. SEBI has mandated that trading members must have qualified approved users and sales persons. As a result. 2001. In case of firms/companies. employment or experience. among the existing staff.e. the requirement of certification may be made applicable to the persons engaged in sales and marketing. If the intermediary is unable to employ the minimum number of certified persons. SEBI has supported AMFI by mandating it for all MFs to appoint agents/distributors who have obtained AMFI certification w. the test is to be made mandatory. every person regardless of his educational qualifications has to pass the certification test within a period of 12 months from the date of his employment with the intermediary. but after a period of two years. The Association of Mutual Funds in India (AMFI) has taken a major initiative to build a cadre of trained professional distributors of mutual fund products by starting the AMFI certification for agents and distributors for mutual fund schemes. it has created an awareness of and need for certification among the market participants. It recommended that the brokermembers. C. The Committee designed an exhaustive syllabus with a view to test the understanding a candidate has acquired of the securities market. Initially there may be a single common test for all types of market intermediaries. two persons or 20%.ISMR Knowledge Initiatives 216 maintain depository accounts or to sell mutual fund products. who have passed an approved certification programme. This was reinforced by the Parliamentary Standing Committee on Finance.com . which examined the derivatives bill. the test may be offered on a voluntary basis. have to obtain the certificate within 12 months from the date on which the test becomes mandatory. irrespective of qualifications. issue contract notes or clear and settle trades on a stock exchange. The committee recommended that an examination based certification system was ideal to meet the requirements of the Indian capital markets. The examination can be taken by anyone.nseindia. It also tests his ability to provide sound advice to investors. Though the testing and certification system as recommended by the committee is yet to be operationalised. whichever is higher. Thereafter. SEBI had set up a Committee to prescribe standards of knowledge necessary for different types of specialized functions in the securities industry at operational and supervisory levels. then it would automatically be de-registered from the date of the said violation. sales persons/dealers in the derivatives market must pass a certification programme approved by the SEBI. NSE’s Certification in Financial Markets National Stock Exchange’s Certification in Financial Markets (NCFM). The standing committee recommended that SEBI should in consultation with the stock exchanges endeavour to conduct the certification programme on derivatives trading with a view to educate investors and market players.f November 1. Initiatives in India With a view to improve the quality of intermediation. age.

NCFM offers a comprehensive range of modules covering many different areas in finance. testing. AMFI . dates and timing by providing easy accessibility and convenience to candidates as they can be tested at any time and from any location. Commodities Market Module Through a system of certification. it can be ensured that intermediation is carried out by trained personnel. scores reporting and certifying is fully automated-there is absolutely no human intervention. IRDA.NSE Debt Market (Basic) Module 10. Some of these modules enjoy regulatory and/or industry patronage (Table 8-1). AMFI. Industry/SROs/Regulators have made a modest beginning. Table 8-1: NCFM Modules Sl. IRDA has made it compulsory for all the life insurance agents and general insurance agents.217 Knowledge Initiatives ISMR programme. For the existing intermediaries and employees. Surveillance in Stock Exchanges Module 4. The entire process from generation of question paper. This would induce investors to use their services. FIMMDA and NSE itself. Capital Market (Dealers) Module 7. It allows tremendous flexibility in terms of testing centres.000 candidates have taken test of different modules of NCFM as at end June 2004. it is required that all new employees joining the intermediaries and all intermediaries joining the market. in a very secure and unbiased manner. FIMMDA . No. Derivatives Core Module 2.Mutual Funds (Advisors) Module 5. AMFI . a grace period of five years should be given to qualify for this certification.com . Pre-recruitment Examination for Life Insurance Agents 8. there is still scope to offer such certifications for each category of intermediary/activity. For instance. assessing. The employees should also be required to update their skills and expertise by seeking certification at intervals of five years.nseindia. Hence. should be certified. Securities Market (Basic) Module 11. Though NCFM has been offering a wide range of modules. invigilation. A total of approximately 140. Pre-recruitment Examination for General Insurance Agents 9. Name of Modules Primary Inspiration Regulatory Requirement Industry (NSDL) Initiative Regulatory Persuasion Industry (AMFI) Initiative Industry (AMFI) Initiative SRO’s Requirement Regulatory Requirement Regulatory Requirement Industry (NSE & FIMMDA) Initiative Industry (NSE) Initiative Industry (NSE) Initiative 1. The purpose is to test the practical knowledge and skills that are required to operate in the financial markets. but adequate attention is not given to this dimension of the market.Mutual Funds (Basic) Module 6. NSDL. NSDL . There should be an arrangement to maintain a database of certified professionals and enforce a code of conduct for them so as to enable prospective employers access the database to meet their personnel requirements.Depository Operations Module 3. SEBI should also specify certification as a mandatory requirement for all operational level employees for all types of intermediaries. It offers all the certifications mandated by SEBI. This would enhance the knowledge and skill of the intermediaries www.

and to assist in policy-making. 1.nseindia. 5.com . It has set up an in-house research department. in turn. which brings out working papers on a regular basis (Table 8-2). This acts as a valuable input for formulating strategy. 2. 4.. No. assist regulators to frame regulations. This aims at improving the market efficiency further. several research studies (topics as presented below) have also been conducted viz. Table 8-2: Working Papers of SEBI Sl. IPO Analysis: Shareholding Pattern in the Immediate Post-Listing Phase. Development of Corporate Debt Market in India. Title of Study Stock Market Volatility: An International Comparison Transaction Cost for Equity Shares in India Stock Market Volatility-A Comparative Study of Selected Markets Transaction Cost for Equity Shares in India (Revised) Dematerialisation: A Silient Revolution in the Indian Capital Market Impact of Takeover Regulations on Corporate Sector in India . Assessment of Securities Settlement System in India. Cost Benefit Analysis of T+1. who. The initiative fosters research with a purpose to support and facilitate stock exchanges to design market microstructure. doing research and www. 3. Behavioral Economics: Case of Irrational Behavior of Market Agents. can educate and guide the investors in securities and issuers of securities.A Critical Appraisal Trade Execution Cost of Equity Shares in India Price Discovery and Volatility on NSE Futures Market NSE Research Initiative NSE administers a scheme called the NSE Research Initiative.ISMR Knowledge Initiatives 218 (including regulators and SROs). The initiative has received tremendous response from the academics as well as the market participants from within and outside the country. Research Initiatives The regulators and SROs have been actively promoting academicians and market participants to carry out research about various topics in the various segments of securities market. 7. 6. Disclosures Standards in Indian Stock Market: A Cross Country Comparison. to help participants frame their strategies. Short Selling: Overview. Corporate Governance: A Brief Account of the Major Developments. SEBI has been promoting high quality research in capital market. Data Dissemination NSE compiles. and in general to broaden the knowledge horizon of the securities market. During the year. The initiatives by a few of them are presented below: SEBI In order to improve the understanding and knowledge about Indian capital market. maintains and disseminates high quality data to market participants. Review and Issues. The studies completed/ under progress under the initiative are presented in Table 8-3. 8. researchers and policy-makers.

12. 7. Every development in the market in terms of market design is documented in these circulars. Database of circulars issued during the month. 19.com . Table 8-3: Studies under the NSE Research Initiative Sl. Besides. 16. 5. Nifty Junior and Defty. 20. 2. 4. 17. Snapshots of limit order book of NSE at different points during a day. and number of trades for each trading day. 18. This data is disseminated through monthly CD releases which are priced at a nominal rate.219 Knowledge Initiatives ISMR making policies. Title of Study No. turnover (value and volume). closing price and last traded price. Both intra day and end of day information is available for Nifty. 3. 15. Information and Spot Price Volatility of NSE-50 Index Futures Contract Measuring productive efficiency of stock exchanges using price adjustment coefficients Do Futures and Options trading increase stock market volatility? www. 11. 8. inclusion in country funds and issues of American Depositary Receipts Is the Spread Between E/P Ratio and Interest Rate Informative for Future Movement of Indian Stock Market? Merger Announcements and Insider Trading Activity in India: An Empirical Investigation Achieving an Individual Investor Friendly System using the power of the Internet Improved Techniques for using Monte Carlo in VaR estimation Short selling and its Regulation in India in International Perspective Empirical investigation of multi-factor asset pricing models using Artificial Neural Network Idiosyncratic Factors in Pricing Sovereign Bonds: An Analysis of the Government of India Bond Market The Extreme Value Volatility Estimators and Their Empirical Performance in Indian Capital Markets Equity Market Interlinkages: Transmission of Volatility – A Case Of US and India Institutional Investors and Corporate Governance in India Dividend policy of Indian Corporate Firms : An Analysis of Trends & Determinants Market Microstructure Effects of Transparency of Indian Banks Futures Trading. NSE’s web-site itself is a storehouse of information. 6. low price. 21. NSE has been maintaining the historical database of all the details of every order placed on its trading system and every trade executed. Database of stock market indices computed by IISL. Completed Papers 1. 9. 14. 10. Econometric Estimation of Systematic Risk of S&P CNX Nifty Constituents Stock Market Development and its Impact on the Financing Pattern of the Indian Corporate Sector Efficiency of the Market for Small Stocks Determinants of Financial Performance of Indian Corporate Sector in the Post-Liberalization Era: An Exploratory Study Should pension funds invest in equities? An analysis of risk-return tradeoff and asset allocation decisions Changes in liquidity following exposure to foreign shareholders: The effect of foreign listings.nseindia. The following information is available on CDs: ! ! ! ! Summary information about each security’s high price. 13.

9. Knowledge Initiatives 220 Section switching stock market price effect in the Indian capital market and the policy implications thereof Study of Common Stochastic Trend and Co-integration in the Emerging Markets . 28. Implementation Strategies & Impact Measures for Improving Common Investor Confidence in Indian Primary Market : A Survey Informational Content of Trading Volume And Open Interest – An Empirical Study of Stock Options Market In India An analysis of the Dynamic Relationships Between South Asian and Developed Equity Markets Corporate Governance and Market reactions The Impact of Introducing Stock Futures Trading on the Cash Market in India An analysis of the Dynamic Relationships Between South Asian and Developed Equity Markets Insider Ownership and Corporate Governance Price and Volume Effects of S & P CNX Nifty Index Reorganization Understanding Speculative Bubbles in Stock Markets Seasoned Capital Offerings: Earnings Management and Long-Run Operating Performance of Indian Firms Estimating and Forecasting Volatility of Equity Market Using Asymmetric – GARCH Models Indicators of Shareholder Wealth Maximization: A Comparative study of Indian Industries Volatility Spillovers Management Motivation for Share Buyback: An Empirical Study of Corporate India Improving Index Fund Implementation in India Untangling the web of Indian Pyramids Papers under Progress NSENEWS NSENEWS. 23. 30. 25. it also puts out articles in order to educate the market participants and investors about latest developments in the industry. 31. 3. 24.com . Among other monthly data. 1. 10. 8. An educated and aware investor is not only well acquainted with the functioning of the market. These articles analyse market developments in terms of the working of the market and provide theoretical and empirical inputs for policy initiatives. 29. SEBI had launched a nation-wide intensive investor education exercise aimed at creating awareness among the investors in securities market in January 2003. 5. Singapore and Taiwan Market Discipline in the Indian Banking Sector: An Empirical Exploration Conditional CAPM and Cross sectional returns – A study on Indian Securities Market Evaluating index fund implementation in India Measuring Volumes in the Indian Financial Markets Some Terminological and Conceptual Issues Corporate Social Responsibility Initiatives by NSE NIFTY Companies – Content. Following the national www.ISMR 22. a monthly publication of NSE. self regulatory organisations (SROs). The regulators. so does the width of the market. 32. 4. As the class of educated investors increases. 27. and investor fora/associations need to take steps to educate the investors. 26.A case study India. 12.nseindia. 6. 11. non-government organisations (NGOs). is the most referred publication among professionals in the securities market. 2. 7. but is also aware of his rights and obligations. Investor Awareness Investors are the backbone of the securities market.

A cushion in the form of Investor Protection Funds (IPFs) is set up by the stock exchanges. Kolhapur Investor’ Association. promoting research activities and providing legal assistance to genuine investor litigants through investor grievances forums. the following Investors Associations were registered with SEBI: 1. SEBI has also put in place a comprehensive investor grievances processing mechanism. the campaign has already been extended to 12 states.221 Knowledge Initiatives ISMR launch. Ahmedabad 2. Investors’ Grievances Forum. the investors should approach the RBI. Consumer Education and Research Society. At the end of March 2004. Mumbai 5. Ghatkopar Investors’ Welfare Association. The Department of Company Affairs (DCA) also informs the general public about the agency they should approach for redressal of their grievances.com . non-issue of debenture certificates. In the case of deposits from non-banking non-financial companies. then they should approach the concerned Registrar of Companies. The Companies Act. Jaipur 3. Mumbai 4. For complaints relating to deposits in banking companies and non-banking financial companies. which may arise out of non-settlement of obligations by the trading members. Office of Investor Assistance and Education (OIAE) is a single window interface of SEBI. organising seminars. Jagrut Grahak Mandal. It accepts complaints from aggrieved investor for matters falling within its jurisdiction. Further. These complaints relate to non-registration of transfer of shares. the stock exchanges have been allowed to utilise interest income earned on IPF for investor education. non-receipt of dividends. The fund is utilised for conducting direct education programmes. The IEPF is constituted from grants received from the government and from the unclaimed www. These complaints received are acknowledged and taken up with the concerned entities either directly by OIAE or by the Investor Complaint Cell of the concerned department. awareness and research. non-receipt of duplicate shares. If the orders passed by the Board are not honored. bonus shares. The fund is managed by a committee comprising both government and non-government members. Investors’ Associations SEBI registers and supports investor associations engaged in education of investors and redressal of investor complaints. share certificates on conversion. the depositors should approach the Company Law Board. non-issue of share certificates. The IPF is also used to settle claims of such investors whose trading member has been declared a defaulter. after endorsement etc. 1956 also provides for an Investor Education and Protection Fund (IEPF) to protect the interests of small shareholders. non-refund of share application money. Patan (Gujarat) 6. Kanpur Investor Protection Fund Despite the various efforts taken by the regulators and exchange. All complaints relating to listed companies are dealt by SEBI and for unlisted companies by DCA. some problems do arise.nseindia. Midas Touch Investors’ Association. Consumer Unity & Trust Society. The purpose of the IPF is to take care of investor claims. Kolhapur 7.

The limit for each entity for assistance would be subject to 5% of the budget of IEPF during that financial year and not exceeding 50% of the amount to be spent on the proposed programme/activity. related party transactions and earning per share and their applicability to continuous disclosure requirements. may find it unaffordable to maintain web-sites. The most substantive financial disclosures of companies are found in the annual reports. companies should be promoted to use the information technology for dissemination of information. Further. possible that such information reaches common investors later than it is made available to some others. however. Disclosures The spread of information should be uniform across investors in a timely fashion so as to increase the efficiency of the market. within 15 minutes from the close of Board meeting in which these decisions are taken. It would be better to have a common web-site for providing information on various companies at one place. and the listing agreement. All other important announcements are made through the public media. which are to be sent to all shareholders and lodged with the Registrar of Companies. The Companies Act has laid down detailed guidelines for disclosures to be made by all companies. To impart healthy practices in this regard. up-to-date and correct information is available to the all investors. all companies have to prepare statutorily audited annual accounts. They should be governed by properly established rules. new line of business. These have been supplemented further by the Disclosure and Investor Protection Guidelines of SEBI. regulations and or by-laws prior to its date of application for registration. however. listed companies have to prepare abridged unaudited financial summaries for every quarter and submit a cash flow statement. etc. share application money. It is only very recently that ICAI has issued accounting standards in the areas of consolidation of accounts. matured deposits and unclaimed debentures of the corporates. So that the companies would provide fair disclosures of related party transactions and consolidated accounts of subsidiaries and associate companies.com . In addition. particularly the balance sheet and profit and loss account. Some companies. segment reporting. Under the Companies Act.ISMR Knowledge Initiatives 222 dividends. While the quantity and quality of financial disclosures is an important issue. they should not be a profit making entity. It is. The eligible entities are those registered under the Societies Registration Act or formed as Trusts or incorporated Companies. how these disclosures are made is also important. mergers.nseindia. and financial results of the company. Mostly companies have been making the disclosures through the annual reports and the quarterly reports. which was not earlier. deferred taxes. NSE has put in place a system that ensures proper. received from the companies is disseminated to all the www. In addition. Such price-sensitive information as bonus announcements. IEPF provides financial assistance to any organisation/entity/person with a viable project proposal on investors’ education and protection. One of the major sources of information about a company is the disclosure made by the company itself. such as declaration of dividends and bonus. The listed companies are also required to submit the annual accounts to every stock exchange where they are listed. after being approved by the company Board. the companies are now required to make announcements regarding corporate actions. They should be in existence for a minimum period of 2 years employing a minimum of 20 members.

Gradually the physical filing should be discontinued and both the number of companies as well as disclosure statements should be expanded to cover all the actively traded companies for all the disclosure statements. (iv) statement of action taken against the company by an regulatory agencies and (v) such other statement. This is an automated system for filing. (ii) corporate governance reports. retrieving and disseminating of time sensitive corporate information. As and when the company submits the information in electronic form the same is seamlessly broadcast to the market and also simultaneously displayed on the NSE website. under which all corporate announcements including that of Board meetings that needs to be disclosed to the market is handled in a straight through and hands free manner. SEBI has set up an Electronic Data Information Filing and Retrieval (EDIFAR) System.in. profit and loss account and full version of annual report. The primary objective is to centralize the information and accelerate its dissemination and thereby enhance transparency and efficiency for the benefit of various classes of market participants. In the first phase. information or report as may be specified by SEBI from time to time in this regard. EDIFAR is available at http: //sebiedifar. (iii) shareholding pattern statement.nseindia. which are now being filed physically by the listed companies.223 Knowledge Initiatives ISMR market participants through the network of NSE terminals all over India. NSE conducts various seminars and programs for the investors all over the country with a view to educate them on their rights and obligations and also the precautions they should take while dealing in the securities market. This system facilitates an electronic filing of certain information by listed companies. EDIFAR In association with National Informatics Centre (NIC). NSE has recently launched a new system. the information that is filed online are: (i) financial statements comprising of balance sheets. half yearly financial statements including cash flow statements and quarterly financial statements.nic.544 companies. The system is being introduced in phases and is applicable to 2. These filings are in addition to the filings made by the companies with the stock exchange in compliance with the provisions of the listing agreement. The Exchange initiates action where such price-sensitive information is not provided to the Exchange at the prescribed time.com . www.

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