Batch -21 Roll No.

18

INSTITUTE FOR TECHNOLOGY

&
MANAGEMENT EDUCATION
CENTRE

BATCH – 21
2007 – 2009

TRADING & SETTELEMENT ON

NATIONAL STOCK EXCHANGE
UNDER FINANCE PROJECT

PROF. S. CLEMENT

SANDESH Y THAKUR
ROLL NO. 18

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INDEX

Particulars Page No.

1. Introduction 4

2. History of NSE 6

3. Objective of NSE 10

4. Membership requirement under NSE 10

5. Rights and Obligations for Investors 11

6. National Stock Exchange Market Segments 12

7. Clearing & Settlement 19

8. Basics Concepts to understand NSE Functions 24

9. NSE Investors Awareness Programs 32

10. IT Initiatives of NSE 33

11. Bibliography 38

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Declaration

This project has been completed under Elective programme in the subject
of Finance . I here by declare that the information provided is to the best of
my knowledge & proper credit has been given to the references made by
me.

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Introduction on NSE :

National Stock Exchange (NSE) is India's largest Stock Exchange &

World's third largest Stock Exchange in terms of transactions. Located in
Mumbai, NSE was promoted by leading Financial Institutions at the behest
of the Government of India

Promoters of NSE

• Industrial Development Bank of India

• Life Insurance Corporation of India
• General Insurance Corporation of India and its subsidiaries
• Industrial Finance Corporation of India Ltd.
• Industrial Credit and Investment Corporation of India Ltd.
• State Bank of India
• Bank of Baroda
• Canara Bank
• Punjab National Bank
• Corporation Bank
• Indian Bank
• Oriental Bank of Commerce
• Union Bank of India
• SBI Capital Markets Ltd.
• Stock Holding Corporation of India Ltd.
• Infrastructure Leasing and Financial Services Ltd.
• Unit Trust of India
• National Insurance Company Limited
• New India Assurance Company Limited
• Oriental Insurance company Limited
• United Insurance Company Limited

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The NSE group consists of:

1. India Index Services & Products Ltd. (IISL)

2. National Securities Clearing Corporation Ltd. (NSCCL)

3. NSE.IT Ltd.

4. National Securities Depository Ltd. (NSDL)

5. DotEx International Limited

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History of NSE :

NSE was incorporated in November 1992 as a tax-paying company. In

April 1993, NSE was recognized as a Stock exchange under the Securities
Contracts (Regulation) Act-1956. NSE commenced operations in the
Wholesale Debt Market (WDM) segment in June 1994. Capital Market
(Equities) segment of the NSE commenced operations in November 1994,
Operations in the Derivatives segment commenced in June 2000.

NSE has played a catalytic role in reforming Indian securities market in

terms of microstructure, market practices and trading volumes. NSE has
set up its trading system as a nation-wide, fully automated screen based
trading system. It has written for itself the mandate to create World-class
Stock Exchange and use it as an instrument of change for the industry as
a whole through competitive pressure. NSE is set up on a demutualised
model wherein the ownership, management and trading rights are in the
hands of three different sets of people. This has completely eliminated any
conflict of interest.

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NSE Mile Stones :

NSE was incorporated on - November 27, 1992

NSE was recognized under SCRA on April 26, 1993
NSE formulation of Business Plan – May,1993.
NSE Wholesale Debt Market segment started its operations - June 30, 1994
NSE Capital Market segment started its operations - November 3, 1994
Establishment of Investor Grievance cell – Mar 1995.
Establishment of NSCCL, the first Clearing Corporation – Apr 1995
Introduction of centralised insurance cover for all trading members – June 1995
Establishment of Investor Protection Fund – June1995
Became largest stock exchange in the country – October 1995
NSE launched NIFTY Junior (Midcap-50 Index) - January 1, 1996
Commencement of clearing and settlement by NSCCL – April 1996
NSE launched NIFTY (NSE-50 Index) - April 22, 1996
Settlement Guarantee Fund set up - June 1996
National Securities Depository Limited set up as a first depository in India -
November 1996
Best IT Usage award by Computer Society of India – November 1996
NSE launched DEFTY Index (Dollar denominated Nifty Index ) - Nov26, 1996
NSE commenced trading in Dematerialised securities- December 26, 1996
Dataquest award for Top IT User – December 1996
Launch of CNX Nifty Junior – December 1996
Regional clearing facility goes live - February 1997
India Index Services & Products Ltd. (IISL) launched as a joint venture between NSE
and the Credit Rating Information Services of India Limited (CRISIL) - May 18, 1998
NSE's web site www.nse.co.in launched - May 21, 1998
Overnight Mumbai Inter Bank Offer Rate and Bid Rate (MIBID/MIBOR) launched -
June 15, 1998

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NSE launched Certification Programme I Financial Market - July 1998

NSE receives the 'CYBER CORPORATE OF THE YEAR 1998' - August 26, 1998
14 Day - MIBID/MIBOR launched - November 10, 1998
One month and three month MIBID/MIBOR launched - November 30, 1998
Launch of Automated Lending and Borrowing Mechanism(ALBM) - Feb10, 1999
Monthly Net Traded Value in Capital Market segment exceeds Rs.1,000 Cr mark -
May 1995
Monthly Net Traded Value in Capital Market segment exceeds Rs.10,000 Cr mark -
February 1996
Daily Turnover in the WDM segment exceeds Rs.1800 Cr - August 12, 1997
Daily Turnover in the WDM segment exceeds Rs.2400 Cr - August 06, 1999
Monthly Net Traded Value in Capital Market segment exceeds Rs.50,000 Cr mark -
March 1999
Monthly Net Traded Value in Capital Market segment exceeds Rs. 70,000 crore mark
- October 1999
Average Daily Turnover in capital market segment crossed Rs.100 Cr mark - August
1995
Average Daily Turnover in capital market segment crossed Rs.1,000 Cr mark - May
1996
Average Daily Turnover in capital market segment crossed Rs.2,000 Cr mark -
October 1997
Average Daily Turnover in capital market segment crossed Rs.3,000 Cr mark -
October 1999
Number of companies available for trading in the capital market segment exceeds 500
- December 28, 1994
Number of listed companies available for trading in the capital market segment
exceeds 500 - October 9, 1996
The Exchange completes 200th settlement - September 22, 1998
The Exchange completes 250th settlement - September 08, 1999
Number of VSATs exceeds 1000 - December 1996

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Number of VSATs exceeds 2000 - March 1999

Number of cities covered exceeds 200 - July 1998
Number of cities covered exceeds 250 - April 1999
The Exchange witnessed the highest value of trades since inception ie. Rs.6212.20
Cr – December 08,1999
The Exchange witnessed the highest number of trades since inception ie. 6,30,386
trades - December 08, 1999
Debt Market operations averages Rs.1305 Cr a day - December – 99
Capital Market operations averages Rs.4481 Cr a day - December – 1999
Market Capitalisation of CM segment - Rs.8,52,985 Cr at the end of Dec 1999
Market Capitalisation of WDM segment - Rs.4,80,023 Cr at the end of Dec 1999
Approximately 1000 trading member.
1211 equity stocks and 1355 debt securities available for trading.
Over 5000 trading terminals using 2485 VSATs spread in 305 locations.
Highest ever value of settlement since inception - Settlement no. N- 2000002(270th
settlement - January 19, 2000)
Total value of the settlement (Securities) - Rs.3052.43 Cr
Total value of the settlement (Funds) - Rs.938.46 Cr.
No. of shares delivered in dematerialised mode - 740.57 lacs
Value of shares delivered in dematerialised mode - Rs.2499.09 Cr
Value of shares delivered in compulsory demat scrips - Rs.2209.19 cr.
Highest ever value of settlement since inception - Settlement no. N- 2000007(275th
settlement - February 23, 2000)
Value of shares - Rs.28840.39 Cr.
Total value of the settlement (Securities) - Rs.3267.41 Cr
Total value of the settlement (Funds) - Rs.973.32 Cr.
Value of shares delivered in dematerialised mode - Rs.2837.24 Cr
Percentage of total demat delivery to total delivery (Value) - 86.83 %
Market Capitalisation of WDM segment - Rs.5,10,350 Cr at the end of April 2000

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The corpus of the Settlement Guarantee Fund as on Apr30,2000 Rs.1358.31 Cr.

Number of VSATs exceeds 2500 - April 2000
Number of cities covered exceeds 320 - April 2000
Market Capitalisation of WDM segment - Rs.5,21,891 Cr at the end of May 2000
The corpus of the Settlement Guarantee Fund as on May 31,2000 Rs.1342 Cr.
Market Capitalisation of WDM segment - Rs.5,26,376 Cr at the end of June 2000
The corpus of the Settlement Guarantee Fund as on Jun30,2000 Rs.1503.31 Cr.

Objective of NSE :

NSE was set up with the objectives of:

• Establishing nationwide trading facility for all types of securities

• Ensuring equal access to investors all over the country through an appropriate
telecommunication network
• Providing fair, efficient & transparent securities market using electronic trading
system
• Enabling shorter settlement cycles and book entry settlements
• Meeting International benchmarks and standards

Within a very short span of time, NSE has been able to achieve its objectives for
which it was set up. Indian Capital Markets are a far cry from what they were 12
years back in terms of market practices, infrastructure, technology, risk
management, clearing and settlement and investor service. To ensure continuity
of business, NSE has built a full fledged BCP site operational for last 7 years.

Membership requirement under NSE :

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In reflection of the need to upgrade professional standards of market

intermediaries, the admission standards laid down by the Exchange stress on
factors such as capital adequacy, corporate structure, track record, education,
experience etc. Admission is a two stage process with applicants requiring to go
through a written examination followed by an interview. Candidates are
interviewed by a committee consisting of experienced people from the industry to
assess the applicant's capability to operate as an Exchange member. The capital
adequacy requirements stipulated by the Exchange are substantially in excess of
the minimum statutory requirements as also in comparison to those stipulated by
other exchanges. This reflects a conscious effort by the Exchange to strengthen
the membership standards so as to build confidence in the Exchange operations.

The Exchange admits members separately to segment such as the Wholesale

Debt Market segment and the Capital Market segment. Only corporate members
are admitted on the debt market segment whereas individuals and firms are also
eligible on the capital market segment. As of now, a prospective trading member
has to seek admission to both WDM and CM segment of the Exchange.

Rights and Obligations for Investors :

Investor Rights Investor Obligations

The right to get The obligation to

• The best price
• Proof of price/brokerage
charged
• Your money/shares on
time
• Shares through auction
where delivery is not
• Sign a proper Member-
Constituent Agreement
• Possess a valid contract or
purchase/sale note
• Deliver securities with valid
documents and proper
signatures

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 Batch -21 Roll No. 18

received
• Square up amount where
delivery not received in
auction

The right for redressal against The obligation to ensure

• Fraudulent price • To make payment on time

• Unfair brokerage • To Deliver shares on time
• Delays in receipt of money • To send securities for transfer
or shares to the company on time

• Investor unfriendly • Forwarding all the papers

companies received from the company
under objections to the broker
on time

Hours

NSE's normal trading sessions are from 09:55am to 03:30pm on all days of the
week except Saturdays, Sundays and holidays declared by the Exchange in
advance

National Stock Exchange Market Segments:

NSE provides a fully automated screen-based trading system with national reach
in the following major market segments:-

A. Wholesale Debt Market (WDM)

B. Equity OR Capital Markets {NSE's market share is over 65%}
C. Futures & Options OR Derivatives Market {NSE's market share over
99.5%}

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D. Retail debt Market

E. Initial Public Offering (IPO)

The salient features relating to the eligibility criteria for the trading segments of
the NSE are :

A. Wholesale Debt Market (WDM)

1. The persons eligible to become Trading Members are corporate

bodies, companies, institutions, including subsidiaries of banks engaged in
financial services and such other persons or entities as may be permitted from
time to time by RBI/SEBI
2. The whole-time directors should possess at least two years'
experience in any activity related to banking or financial services or treasury
3. The applicant must possess a minimum net worth of Rs.2 Cr
4. The applicant must be engaged solely in the business of securities
and must not be engaged in any fund based activities.

Wholesale Debt Market Operations

o The WDM segment commenced operations on June 30, 1994 with

224 securities carrying an outstanding debt value of Rs.1,35,000 Cr. This has
now increased to 1306 securities with a market capitalisation of Rs.4,58,541.35
Cr as on September 30, 1999.
o The highest daily traded value of Rs.2434.00 Cr recorded on August
06, 1999.
o The net monthly traded value in the WDM segment increased from
Rs.1096.25 Cr in July -94 to Rs.26,957.09 Cr in August' 99
o Government securities along with Treasury bills together account for
over 85% of the total market activity.

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Statistics at glance

WHOLESALE DEBT SEGMENT

1 Number of securities available for trading 31-JAN-2009 3,863
2 Record daily turnover (value) 25-AUG-2003 Rs.13,911.57 Cr

B. Equity OR Capital Markets Segment :

• Individuals, registered firms, corporate bodies, companies and such other

persons may be permitted under the SCRA,1957
• The applicant must be engaged solely in the business of securities and must not
be engaged in any fund based activities
• The minimum net worth requirements prescribed are as follows:
a) Individuals and registered firms : Rs.75 lakh
b) Corporate bodies : Rs.100 lakh
• In case of registered partnership firm, each partner should contribute at least 5%
of the minimum net worth requirement of the firm.

• A corporate trading member should consist only of individuals (maximum 4) who

should directly hold at least 40% of the paid-up capital in case of listed companies
and at least 51% in case of other companies.

• The minimum prescribed qualification of graduation and two years experience of

handling securities as broker, sub-broker, authorised assistant etc. must be
fulfilled by:
a) Minimum two directors in case the applicant is a corporate,

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b) Minimum two partners in case of partnership firms and

c) The individual in case of individual or sole proprietary concerns.

The two experienced director in a corporate applicant / trading member should

hold minimum 5% of the paid up capital of the company.

Capital Market Operations

• NSE is working to increase the capacity of the trading system from the present
4,00,000 trades per day to more than 10,00,000 trades per day.
• The average daily numbers of trades have gone up from over 893 trades in
November-94 to over 4,36,387 trades in October '99. On October 13,'99 the
number of trades reached a record high of 5,64,653 which makes NSE one of the
largest stock exchanges in the world
• Average daily traded value has increased from Rs.7 Cr in November-94 to more
than Rs.3439 Cr in Oct '99 with a high of Rs.4851 Cr recorded on October 13, '99
• Number of shares traded has increased from 76.10 lakhs in November-94 to
26,100.43 lakhs in October '99.
• Net traded value has increased from Rs.125 Cr in Nov'94 to 72,216 Cr in Oct'99.
• The market capitalisation of companies has increased from Rs.2,92,637 Cr in
November '94 to Rs.6,70,062 Cr in October '99.
• Delivered value (settlement wise) has increased from Rs.60 Cr in November -94
to Rs.9,333 Cr in October '99.
• Number of shares traded (depository segment) has increased from 200 shares in
December-96 to 110.14 lakh shares in October '99.
• Net traded value (depository segment) has increased from Rs.0.43 lakhs in
December-96 to Rs.39,009.64 lakhs in October '99
• The total turnover in the 3 Day market segment during Oct'99 was Rs.1170.21 Cr.
• Total turnover in the shares traded under compulsory demat shares during Oct'99
was Rs.52,055 Cr

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Statistics at glance

CAPITAL MARKET (EQUITIES) SEGMENT

1 Settlement Guarantee Fund 31-MAR-08 Rs.4,767.60 Cr
2 Investor Protection Fund 31-DEC-08 Rs.271.60 Cr
3 Number of securities available for trading 30-NOV-08 1,621
4 Record number of trades 07-JAN-09 8,959,510
5 Record daily turnover (quantity) 07-JAN-09 12,599 lakh shares
6 Record daily turnover (value) 01-NOV-07 Rs.28,476.07 Cr
7 Record market capitalization 07-JAN-08 Rs.67,45,724 Cr
8 Record value of S&P CNX Nifty Index 08-JAN-08 6357.10
9 Record value of CNX Nifty Junior Index 04-JAN-08 13209.35

• Clearing & Settlement :

o Completed 262 settlements successfully without any delay or postponement as

on December 02, 1999.
o Value of shares handled by the Clearing house per week has increased from
Rs.30 Cr in November 1994 to over Rs.2432 Cr per week in September 1999.
o Inter-Region Clearing : NSCCL has Regional Clearing Centres at Delhi, Calcutta,
Chennai and a Central Clearing Centre at Mumbai. Members have the option of
delivering/receiving the securities at a clearing centre chosen by them.

Statistics at Glance

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Clearing & Settlement

1 Record Pay-in/Pay-out (Rolling Settlement):
23-OCT- Rs.4,567.70
Funds Pay-in/Pay-out (N2007200)
2007* Cr
Securities Pay-in/Pay-out (Value) 31-DEC- Rs.9,195.56
(N2007247) 2007* Cr
Securities Pay-in/Pay-out (Quantity) 01-OCT-
2,788.30 lakhs
(N2007185) 2007*
*Settlement Date

C. Futures & Options Or Derivatives Market Segment :

This segment facilitates trade in index futures and options and stock futures and
options. In the Futures & Options Segment, the applicants have the option of
taking up either only trading membership of NSEIL and have arrangement with a
clearing member for clearing & settlement of their trades or both trading
membership of NSEIL as well as self clearing / clearing membership of NSCCL.

The NSE market is a fully automated screen based trading system, which adopts
the principle of an order driven market as opposed to a quote driven system. This
helps in reducing transaction costs. It is the first exchange to trade Exchange
traded Funds (ETF)

NSEIL has also set up National Securities Clearing Corporation Limited (NSCCL)
as its wholly owned subsidiary for undertaking the clearing and settlement
activities. The applicants for trading membership of Capital Market Segment of
the Exchange, on admission, are compulsorily required to become clearing
members of NSCCL to clear & settle the trades done

Statistics at glance

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DERIVATIVES (F&O) SEGMENT

Settlement Guarantee Fund 31-MAR-2008 Rs.36,972.70 Cr
Investor Protection Fund 31-DEC-2008 Rs.48.86 Cr
Record daily turnover (value) 18-OCT-2007 Rs.110,563 Cr
Record number of trades 07-JAN-2009 1,874,697

D. Retail Debt Market Segment :

Fixed income securities such as debentures are an ideal investment avenue for
risk averse investors. It provides a fixed and regular income with safety of capital.
The deregulation of interest rates has led to borrowings by the Government,
Corporates and Institutions at market determined rates. This has enabled retail
investors to invest in fixed income securities particularly Corporate and
Institutional bonds in favorable terms vis a vis other investment opportunities.
With a view to providing liquidity to these instruments, the Exchange plans to start
a retail debt segment to cater to the growing demands of the investors in the debt
segment. Debentures are presently traded on the Capital Market (CM) and the
Wholesale Debt Market (WDM) segment of the Exchange. However, as WDM
segment continues to be wholesale in nature and CM segment focuses on equity,
there was a need for a separate market for debentures. A separate RDM trading
system would be developed for the same.
The securities traded on the Retail Debt Market segment would comprise of
Corporate Debentures and Institutional Bonds. Members of the Exchange from all
the NSE centres would be eligible to trade on the RDM system.
The National Securities Clearing Corporation Ltd. (NSCCL) would settle the
trades done on the RDM segment on a net basis. The NSCCL would also extend
settlement guarantee for trades done on NSE.

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E. Initial Public Offering Segment :

Initial Public Offerings in India have been typically fixed price offers. A major
problem with such fixed price offerings has been the information asymmetries
between the issuers and the investors. To revive the primary market, NSE is
proposing to provide a facility for conducting primary issues for Initial Public
Offers (IPOs), subsequent issues by companies, private placements as well as
book building through screen based automated trading system. The advantages
of this system will be on-line issue of securities thereby reducing the cost of issue
of securities and an efficient retail distribution network among others.

Clearing & Settlement :

NSCCL (National Securities Clearing Corporation Ltd.) carries out clearing and
settlement functions as per the settlement cycles of different sub-segments in the
Equities segment.

The clearing function of the clearing corporation is designed to work out

a) what counter parties owe and

b) what counter parties are due to receive on the settlement date.

Settlement is a two way process which involves legal transfer of title to funds and
securities or other assets on the settlement date.

NSCCL has also devised mechanism to handle various exceptional situations like
security shortages, bad delivery, company objections, auction settlement etc.

Clearing

Clearing is the process of determination of obligations, after which the obligations

are discharged by settlement.

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NSCCL has two categories of clearing members: trading members and

custodians. The trading members can pass on its obligation to the custodians if
the custodian confirms the same to NSCCL. All the trades whose obligation the
trading member proposes to pass on to the custodian are forwarded to the
custodian by NSCCL for their confirmation. The custodian is required to confirm
these trade on T + 1 days basis.

Once, the above activities are completed, NSCCL starts its function of Clearing. It
uses the concept of multi-lateral netting for determining the obligations of counter
parties. Accordingly, a clearing member would have either pay-in or pay-out
obligations for funds and securities separately.

Thus, members pay-in and pay-out obligations for funds and securities are
determined latest by T + 1 day and are forwarded to them so that they can settle
their obligations on the settlement day (T+2).

Cleared and non-cleared deals

NSCCL carries out the clearing and settlement of trades executed in the following
sub-segments of the Equities segment:

1. All trades executed in the Book entry / Rolling segment.

2. All trades executed in the Limited Physical Market segment.

NSCCL does not undertake clearing and settlement of deals executed in the
Trade for Trade sub-segment of the Equities (Capital Market) segment of the
Exchange. Primary responsibility of settling these deals rests directly with the
members and the Exchange only monitors the settlement. The parties are
required to report settlement of these deals to the Exchange.

Clearing Mechanism

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Trades in rolling segment are cleared and settled on a netted basis. Trading and
settlement periods are specified by the Exchange / Clearing Corporation from
time to time. Deals executed during a particular trading period are netted at the
end of that trading period and settlement obligations for that settlement period are
computed. A multilateral netting procedure is adopted to determine the net
settlement obligations

In a rolling settlement, each trading day is considered as a trading period and

trades executed during the day are netted to obtain the net obligations for the
day.

Trade-for-trade deals and Limited Physical Market deals are settled on a trade for
trade basis and settlement obligations arise out of every deal.

Settlement Cycle

At the end of each trading day, concluded or locked-in trades are received from
NSE by NSCCL. NSCCL determines the cumulative obligations of each member
and electronically transfers the data to Clearing Members (CMs). All trades
concluded during a particular trading period are settled together. A multilateral
netting procedure is adopted to determine the net settlement obligations
(delivery/receipt positions) of CMs. NSCCL then allocates or assigns delivery of
securities inter se the members to arrive at the delivery and receipt obligation of
funds and securities by each member.

Settlement is deemed to be complete upon declaration and release of pay-out of

funds and securities. On the securities pay-in day, delivering members are
required to bring in securities to NSCCL. On pay out day the securities are
delivered to the respective receiving members. Exceptions may arise because of
short delivery of securities by CMs, bad deliveries or company objections on the
pay-out day.

Auctions

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Each CM would communicate to NSCCL on the pay-in day the securities that the
CM would be delivering and those that the CM is unable to deliver. NSCCL
identifies short deliveries and conducts a buying-in auction on the day after the
pay-out day through the NSE trading system. The CM is debited by an amount
equivalent to the securities not delivered and valued at a valuation price (the
closing price as announced by NSE on the day previous to the day of the
valuation). If the buy-in auction price is more than the valuation price, the CM is
required to make good the difference. All shortages not bought-in are deemed
closed out at the highest price between the first day of the trading period till the
day of squaring off or closing price on the auction day plus 20%, whichever is
higher. This amount is credited to the receiving member's account on the auction
pay-out day.

Bad Deliveries (in case of physical settlement) Bad deliveries (deliveries which
are prima facie defective) are required to be reported to the clearing house within
two days from the receipt of documents. The delivering member is required to
rectify these within two days. Un-rectified bad deliveries are assigned to auction
on the next day.

Company Objections (in case of physical settlement Company objections arise

when, on lodgment of the securities with the company / Share Transfer Agent
(STA) for transfer, which are returned due to signature mismatch or for any other
reason for which the transfer of security cannot be effected. The original selling
CM is normally responsible for rectifying / replacing defective documents to the
receiving CM as per pre-notified schedule. The CM on whom company objection
is lodged has an opportunity to withdraw the objection if the objection is not valid
or the documents are incomplete (i.e. not as required under guideline No.100 or
109 of SEBI Good/Bad delivery guidelines), within 7 days of lodgement against
him. If the CM is unable to rectify/replace defective documents on or before 21
days, NSCCL conducts a buying-in auction for the non-rectified part of defective
document on the next auction day through the trading system of NSE. All
objections, which are not bought-in, are deemed closed out on the auction day at

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the closing price on the auction day plus 20%. This amount is credited to the
receiving member's account on the auction pay-out day.

Settlement cycles for the various sub-segments: Rolling Settlement , Limited

Physical Market Segment, Institutional Segment, Securities Settlement

The securities obligations of members are downloaded to members / custodians

by NSCCL after the trading period is over. The members / custodians deliver the
securities to the Clearing House on the pay-in day in case of physical settlement
and make available the required securities in the pool accounts with the
depository participants in case of dematerialised securities. Members are
required to open accounts with depository participants of both the depositors,
NSDL and CDSL.

Delivering members are required to deliver all documents to the Clearing House
(in case of physical settlement) during its regular business hours from 10 a.m. to
5 p.m. but no later than 10:00 a.m on the pay-in day.

Receiving members are allotted specific time slots on pay-out day to collect the
documents from the Clearing House.

In case of dematerialised settlement, the delivering member should have clear

balances of securities in his delivery account within his CM clearing account with
the depository on or before 10:00 a.m. on the pay-in day. The depository would
debit the delivering members account on or after 10:00 a.m. The depository
would credit the receiving members' receipt account within his CM clearing
account with the depository on or after 2:30 p.m. on the pay-out day.

Pursuant to SEBI directive (vide its circular SMDRP/Policy/Cir-05/2001 dated

February 1, 2001) NSCCL has introduced a settlement system for direct delivery
of securities to the investors accounts with effect from April 2, 2001.

Funds Settlement

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NSCCL has empanelled 13 clearing banks namely Axis Bank Ltd., Bank of India,
Canara Bank, Citibank N.A, HDFC Bank, Hongkong & Shanghai Banking
Corporation Ltd., ICICI Bank, IDBI Bank, IndusInd Bank, Kotak Mahindra Bank,
Standard Chartered Bank, State Bank of India and Union Bank of India.

Every Clearing Member is required to maintain and operate a clearing account

with any one of the empanelled clearing banks at the designated clearing bank
branches. The clearing account is to be used exclusively for clearing & settlement
operations.

Basics Concepts to understand NSE Functions :

1. What is Stock Market Index?

A stock market index should capture the behavior of the overall equity market.
Movements of the index should represent the returns obtained by "typical"
portfolios in the country.

2. What do the ups and downs of an index mean?

They reflect the changing expectations of the stock market about future dividends
of India's corporate sector. When the index goes up, it is because the stock
market thinks that the prospective dividends in the future will be better than
previously thought. When prospects of dividends in the future become
pessimistic, the index drops. The ideal index gives us instant-to-instant readings
about how the stock market perceives the future of India's corporate sector.

3. What is the basic idea in an index?

Every stock price moves for two possible reasons: news about the company (e.g.
a product launch, or the closure of a factory, etc.) or news about the country (e.g.
nuclear bombs, or a budget announcement, etc.). The job of an index is to purely

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capture the second part, the movements of the stock market as a whole (i.e.
news about the country).

This is achieved by averaging. Each stock contains a mixture of these two

elements - stock news and index news. When we take an average of returns on
many stocks, the individual stock news tends to cancel out. On any one day,
there would be good stock-specific news for a few companies and bad stock-
specific news for others. In a good index, these will cancel out, and the only thing
left will be news that is common to all stocks. That is what the index will capture.

4. What kind of averaging is done?

For technical reasons, it turns out that the correct method of averaging is to take
a weighted average, and give each stock a weight proportional to its market
capitalisation.

5. What is the portfolio interpretation of index movements?

It is easy to create a portfolio which will reliably get the same returns as the index.
i.e. if the index goes up by 4%, this portfolio will also go up by 4%.

Suppose an index is made of two stocks , one with a market cap of Rs.1000 Cr
and another with a market cap of Rs.3000 Cr. Then the index portfolio will assign
a weight of 25% to the first and 75% weight to the second.

If we form a portfolio of the two stocks, with a weight of 25% on the first and 75%
on the second, then the portfolio returns will equal the index returns. So if you
want to buy Rs.1 lakh of this two-stock index, you would buy Rs.25,000 of the first
and Rs.75,000 of the second; this portfolio would exactly mimic the two-stock
index.

A stock market index is hence just like other prices indexes in showing what is
happening on the overall indexes -- the wholesale price index is a comparable
example. In addition, the stock market index is attainable as a portfolio.

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6. Why are indexes important?

Traditionally, indexes have been used as information sources. By looking at an

index we know how the market is faring. This information aspect also figures in
myriad applications of stock market indexes in economic research. This is
particularly valuable when an index reflects highly uptodate information and the
portfolio of an investor contains illiquid securities - in this case, the index is a lead
indicator of how the overall portfolio will fare.

In recent years, indexes have come to the fore owing to direct applications in
finance, in the form of index funds and index derivatives. Index funds are funds
which passively `invest in the index'. Index derivatives allow people to cheaply
alter their risk exposure to an index (this is called hedging) and to implement
forecasts about index movements (this is called speculation). Hedging using
index derivatives has become a central part of risk management in the modern
economy. These applications are now a multi-trillion dollar industry worldwide,
and they are critically linked up to market indexes.

Finally, indexes serve as a benchmark for measuring the performance of fund

managers. An all-equity fund should obtain returns like the overall stock market
index. A 50:50 debt:equity fund should obtain returns close to those obtained by
an investment of 50% in the index and 50% in fixed income. A well-specified
relationship between an investor and a fund manager should explicitly define the
benchmark against which the fund manager will be compared, and in what
fashion.

7. What kinds of indexes exist?

The most important type of market index is the broad-market index. In most
countries, a single major index dominates benchmarking, index funds, index
derivatives and research applications. In addition, more specialised indexes often
find interesting applications. In India, we have seen situations where a dedicated
industry fund uses an industry index as a benchmark. In India, where clear

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categories of ownership groups exist, it becomes interesting to examine the

performance of classes of companies sorted by ownership group.

8. What is `stale prices'?

Suppose we look at the closing price of an index. It is supposed to reflect the

state of the stock market at 3:50 PM on NSE. Suppose an illiquid stock is in the
index. The last traded price (LTP) of the stock might be an hour, or a day, or a
week old!

The index is supposed to show how the stock market perceives the future of the
corporate sector at 3:50 PM. When an illiquid stock injects these `stale prices' into
the calculation of an index, it makes the index more stale. It reduces the accuracy
with which the index reflects information.

9. What is `bid-ask bounce'?

Suppose a stock trades at bid 1440 ask 1490. Suppose no news appears for ten
minutes. But, over this period, suppose that a buy order first comes in (at
Rs.1490) followed by a sell order (at Rs. 1440). This sequence of events makes it
seem that the stock price has dropped by Rs.50. This is a totally spurious price
movement!

Even when no news is breaking, when a stock price is not changing, the `bid-ask
bounce' is about prices bouncing up and down between bid and ask. These
changes are spurious. This problem is the greatest with illiquid stocks where the
bid-ask spread is wide. When an index component shows such price changes it
contaminates the index.

10. How does the S&P CNX Nifty work?

S&P CNX Nifty is based upon solid economic research. A trillion calculations
were expended to evolve the rules inside the S&P CNX Nifty index. The results of
this work are remarkably simple: (a) the correct size to use is 50, (b) stocks

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considered for the S&P CNX Nifty must be liquid by the `impact cost' criterion, (c)
the largest 50 stocks that meet the criterion go into the index.

S&P CNX Nifty is a contrast to the adhoc methods that have gone into index
construction in the preceding years, where indexes were made out of intuition and
lacked a scientific basis. The research that led up to S&P CNX Nifty is well-
respected internationally as a pioneering effort in better understanding how to
make a stock market index.

11. What do you mean by `an S&P CNX Nifty trade'?

Earlier, we said that the index assigns weightages to index components, and the
weight of a stock is proportional to its market capitalisation. This idea can be
applied to buying the S&P CNX Nifty. If you buy all 50 stocks in the S&P CNX
Nifty, in correct proportions, that would be called "an index trade".

12. Why does the index keep changing from time to time?

Think of a liquid stock as a good thermometer, one which gives accurate data
about the true price of the stock, because it trades actively with a tight spread.
The prices observed for an illiquid stock are like readings from a low quality
thermometer, which reports noisy data about the phenomenon of interest (the
true price of the security).

We try to find the fifty best thermometers in the country and average their values
to make the S&P CNX Nifty. As time passes, better thermometers become
available (in the form of large, liquid stocks that are not in the S&P CNX Nifty).
We would like that S&P CNX Nifty always uses the best thermometers possible.
So we remove the weakest thermometer from inside the S&P CNX Nifty and
accept the new stock into it.

The world changes, so the index should change. Yet, the change should not be
sudden - for that would disrupt the character of the index. In 1996, after a decade
of near-silence, the BSE removed 15 out of 30 stocks in their `sensitive' index.

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This completely changed the character of the index - older data for this index is
not comparable with new data. Such sudden changes should be avoided. They
serve to illustrate the proverb those who make peaceful change difficult make
violent change inevitable. S&P CNX Nifty believes in steady, peaceful changes.

S&P CNX Nifty uses clear, publicly documented rules for index revision. These
rules are applied regularly, to obtain changes to the index set.

IDBI was once not listed; SBI was once illiquid; Infosys was once an obscure
software startup. The world changes, and one by one, these stocks have come
into the S&P CNX Nifty. Each change in the S&P CNX Nifty is small, so the
continuity of the index is maintained. Yet, at all times, S&P CNX Nifty represents
the 50 most important liquid stocks in the country, the best thermometers to build
an index out of.

13. How is the S&P CNX Nifty closing price calculated?

The best closing prices of the country are used for this - the NSE official closing
prices. These, in turn, come from a "call auction" in the last ten minutes. The call
auction yields a single, sharp price out of millions of shares of supply and
demand.

14. What is special about the NSE closing price?

NSE has the best surveillance procedures in India, so the extent of market
manipulation is minimum there. In NSE, the professional staff of the surveillance
department has no positions on the market. This elimination of conflicts of interest
generates a more honest focus upon eliminating market manipulation.

From the date November 18, 1998 onwards, the NSE `official closing price' was
determined by a call auction, a remarkable market procedure where a single,
sharply defined closing price arises out of supply and demand of millions of
shares. Due to the liquidity and order flow from numerous market players
manipulation of the closing price becomes very hard.

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NSE is the most liquid exchange in India. Hence, the prices observed there are
the most reliable. NSE has the highest trading intensity (reducing stale prices)
and their bid-ask spreads are the tightest (reducing bid-ask bounce). This is
assisted by the fact that the NSE tick size is Rs.0.05 for all stocks, which
encourages tight bid-ask spreads.

15. What about dividends?

What is commonly reported as S&P CNX Nifty on TV and in the newspapers is

actually the NSE-50 Price Index. It only reflects changes in prices. IISL also
calculates something called the S&P CNX Nifty Total Returns (TR) index. This
shows the returns on the index portfolio, inclusive of dividends. This is the
appropriate benchmark for mutual funds, which do earn dividends.

Both S&P CNX Nifty and S&P CNX Nifty TR use a base of 3 November 1995 as
1000. On 8 October 1998, i.e. nearly three years later, S&P CNX Nifty was at
847.95 while S&P CNX Nifty TR was at 887.13. The difference in the two levels is
the return obtained on reinvestment of dividends through the intervening period.

16. What's S&P CNX Defty?

S&P CNX Defty is S&P CNX Nifty, measured in dollars. If the S&P CNX Nifty
rises by 2% it means that the Indian stock market rose by 2%, measured in
rupees. If the S&P CNX Defty rises by 2%, it means that the Indian stock market
rose by 2%, measured in dollars.

The S&P CNX Defty is calculated in realtime. Data for the S&P CNX Nifty and the
dollar--rupee is absorbed in realtime, and used to calculate the S&P CNX Defty in
realtime. Realtime currency data is obtained from Knight Ridder. When there is
currency volatility, the S&P CNX Defty is an ideal device for a foreign investor to
know where he stands, even intraday.

17. What's CNX Nifty Junior?

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S&P CNX Nifty is the first rung of the largest, highly liquid stocks in India. CNX
Nifty Junior is an index built out of the next 50 large, liquid stocks in India. It is not
as liquid as the S&P CNX Nifty, which implies that the information in the S&P
CNX Nifty Junior is not as noise-free as that of the S&P CNX Nifty.

It may be useful to think of the S&P CNX Nifty and the CNX Nifty Junior as
making up the 100 most liquid stocks in India. S&P CNX Nifty is the front line
blue-chips, large and highly liquid stocks. The CNX Nifty Junior is the second
rung of growth stocks which are not as established as those in the S&P CNX
Nifty. Stocks like Infosys and NIIT, which recently graduated into the S&P CNX
Nifty, were in the CNX Nifty Junior for a long time prior to this. CNX Nifty Junior
can be viewed as an incubator where young growth stocks are found. As with the
S&P CNX Nifty, stocks in the CNX Nifty Junior are filtered for liquidity, so they are
the most liquid of the stocks excluded from the S&P CNX Nifty. Buying and selling
the entire CNX Nifty Junior as a portfolio is feasible.

The maintenance of the S&P CNX Nifty and the CNX Nifty Junior are
synchronised so that the two indexes will always be disjoint sets; i.e. a stock will
never appear in both indexes at the same time. Hence it is always meaningful to
pool the S&P CNX Nifty and the CNX Nifty Junior into a composite 100 stock
index or portfolio.

NSE Investors Awareness Programs :

The Exchange has conducted a number of Investor Awareness programmes

throughout the country. These programmes involve setting up of stalls,
disseminating information in the form of investo booklets, giving exposure to
investors on the various aspects of trading, settlements and investor rights and
obligations.

NSE has conducted statewide investor programmes in Andhra Pradesh &

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Maharashtra in 1996 & 1997 respectively. These programmes involve audiovisual

presentation and direct interaction with the investors, solving the basic queries on
stock markets, the functioning of the financial markets and the role of NSE in the
development of the Capital Market.

NSE also made a video film clarifying the basic queries of investors that was
shown at the investor meet. At these fairs the Exchange also provides investors
to have hands on experience of its trading screens through its computer based
training (CBT) in the form of a CD-ROM.

IT Initiatives of NSE :

NSE believes that technology shall continue to provide necessary impetus for any
organisation to retain its competitive edge, ensure timeliness & satisfaction in
customer service. Being fully dependant on Information Technology, NSE has
stressed on innovation and sustained investment in technology on a continual
basis to ensure customer satisfaction, improvement in services which
automatically helps in sustaining business and remain ahead of competition. As a
policy, NSE looks to improve the quality of Services to its customers. Projects are
not initiated based on a business model to reap profits but from a strategic
perspective of better productivity, Value-adds & features, improving efficiency,
reducing operational costs, compliance, operational transparency etc for the
customers, investors and to the entire Indian Securities Industry. Some of the
projects taken by NSE in past year are as follows:-

1. Trading System Capacity enhancement

2. Re-engineering of Online Position Monitoring (OPMS)

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3. Augmentation of Data Warehouse (DWH)

4. STP Central Hub

Objectives, business benefits to company & beneficiaries of the IT

Initiatives as under :

1. Implementation of Trading System Capacity enhancement :

Project Benefits

NSE's Capital Market Trading system was operational on two machine split
architecture using Fault Tolerant mainframes and geared to handle 3 million
trades. However, the CM segment had started to experience trades nearing 3
Million trades which form a threshold. Based on the trends & expected volumes,
growth in the medium term is more than thrice the current trading volume, i.e.
about 10 Million transactions per day. However with the then existing 2-machine
split architecture, it was required to improve the trading system transaction
handling capacity. The 3-machine split architecture project was thus taken up to
enhance the load handling capacity of the system by introducing a 3-way split
Hardware, Application optimisation and improving the processes for achieving
market volume of around 6 million transactions per day.

Project was completed as per schedule & is currently operational

Business Benefits

1. System scaled on 3 machines with distribution of users and securities with

complete transparency to market participants.
2. System witnessed 3 million trades with faster response time to members at
significantly lower system resource utilisation level.
3. Scalability to handle higher volumes (3 million to 6 million transactions per
day).

Beneficiaries

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Trading Members have experienced a faster response time. The trading system
is able to handle higher volume of transactions which translates into higher
turnover. It therefore directly translates into more opportunities and growth for the
Entire Indian Securities market.

2. Implementation of Online Position Monitoring (OPMS) :

Project Objective

OPMS is On-line Position Monitoring and Risk Management system for the
Capital Market segment of the National Stock Exchange of India Limited. It tracks
positions of trading members from Turnover and Exposure limits with a view of
identifying and preventing potential settlement related issues. The positions are
monitored on an on-line basis and the system provides for auto disablement of
the violating member on the trading system. Based on the volumes, it is expected
that the current trading levels of about 3 million trades per day may rise to the
new heights of 10 million trades per day in the near future. It was therefore
necessary to initiate was to reengineer OPMS system without imposing any major
cost associated with architectural overhauling. Another key objective was to scale
the violation detection mechanism by a mammoth factor from around 300
violation checks per second to handle more than 4000 violations per second.

Other major objectives and the goals include:

• Real-time position computation and violation detection

• Ability to handle high load of over one million client positions
• Management of information for positions & risk values about each trading
member
• Information structure based on a tree of security, settlement, trading member
• Handle on-line collateral and securities early pay-in
• Total fault tolerance with minimum downtime
• Achieve 4000 violation checks per second

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Business Benefits

1. Effective and efficient Risk Management - Violation turnover reduced from

few seconds to few milliseconds & 99.96% trades processed for Risk
Management within a second of occurrence.
2. Better utilisation of Resources - Peak capacity of trades handling capacity
enhanced to 10 million trades & Average CPU utilisation reduced from
70% to 20%.
3. Linearly scalable

Beneficiaries

Trading Members risk management has significantly improved. Trading members

have benefited due to this initiative.

3. Implementation Augmentation of Data Warehouse (DWH) :

Project Objective

NSE has a matured data warehouse application extensively used for analysis,
reporting and investigative purposes. The project was to enhance and upgrade
existing data warehouse infrastructure in terms of:-

• Migrating to a higher capacity server and storage hardware

• Migrating database from Oracle 8 to Oracle 9i
• Upgrade existing ETL solution consisting of a separate extraction solution
and transformation cum loading solution into a complete and unified ETL
too

Business Benefits

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1. Response time & query performance improved dramatically by about

100%.
2. Extraction and loading time has reduced by almost 8-9 times.
3. Timely, efficient reporting. Reduced lead time in providing data to
Regulator.
4. New features of Oracle 9i like Ranking, enhanced analytic functions have
contributed enormously to efficiency aspect of the data warehouse usage.

Beneficiaries

Benefit accrued to NSE as an organisation due to the extensive usage of DWH.

4. Implementation Straight Through Processing Central Hub:

Project Objective

During a typical day at an institutional fund house, details of trade confirmations

executed in the day are sent out to the Custodian for effecting trade settlements.
The Custodian also receives details of the executed trade from the broker of the
fund house, for cross-verification of the trade data. Upon verification, if it is found
that the trade details do not match the instruction documents sent across by the
fund house and the broker there is a delay in effecting such settlements. This is a
global phenomenon that is a concern for all the major financial institutions.
Studies have shown that around 15% of global trade failures result from
unmatched trade data, which in monetary terms is upwards of Billions of Dollars,
a steep price pay for the lack of an efficient processing framework. Straight
Through Processing (STP) framework seeks to provide seamless data flow both
within the enterprise as well as across the market without any manual intervention
using ISO 15022 messaging standards.

In India, inspite of SEBI making STP mandatory, market participants were not
able to fully adapt the STP framework into their operations as the STP services
provided by various providers were not interoperable. This meant that messages

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destined for market participants registered across the service providers could not
be achieved. One of the options was to ensure that each of the STP provider
"talked" to other STP providers, but this meant a mathematical explosion in terms
of number of interconnects in case of increasing number of service providers.

Recognising that the success of the STP is crucial to make a move towards T+1
settlement cycle, NSE took up the challenge of setting up a Central Hub to
resolve inter-operability amongst various STP Service Providers. After developing
the application software, the STP Central Hub was put for operational testing from
end of March 2004 to route the messages between Service Providers. STP
Central Hub has ensured seamless operations of message processing. After the
initial testing and stabilization period, SEBI has mandated use of STP system for
all institutional trades. SEBI endeavoured to shorten the settlement cycle and has
been successful in reducing the same from T+5 to T+2. It has now set a target for
achieving T+1 settlement in Indian Securities Market. T+1 settlement cycle has
not been achieved anywhere in the world and India is the first country to
successfully implement STP effectively for all the market intermediaries.

NSE through its strength in technology innovations has made it possible for the
integration of all STP service providers using heterogeneous protocols within their
own system so as to provide the necessary impetus to the process

Business Benefits

1. Improved efficiency, reduction of manual activities leading to higher

accuracy of trade execution and settlement.
2. Reduced operational risk by automating the process from execution
through to settlement.
3. Reduction in operational cost by sending data electronically.
4. Transparency & improved customer service with detailed reports about
delivery and failure of messages are available instantaneously, on an on-
line basis.
5. Reduced settlement cycle to facilitate T+1 settlement.

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Beneficiaries

Entire Indian Securities Industry has been the beneficiary of the STP Central Hub
initiative. It is the only STP Central Hub operational since the last few years. This
move has helped for faster clearing and settlement in Indian Securities Industry
and help achieve 'T+1' environment in India. India's profile in International
markets was enhanced which will help in attracting further foreign investments.

Bibliography :
1. www.google.com
2. www.wikipedia.com
3. www.bharatguru.com

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Thank
You!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

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