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A PROJECT REPORT

ON

SHARES MARKET OPERATIONS

SUBMITTED IN PARTIAL FULFILLMENT OF


THE REQUIREMENT OF THE AWARD OF
DEGREE OF
MASTER OF BUSINESS ADMINISTRATION
TO
M.D UNIVERSITY, ROHTAK

UNDER THE GUIDANCE OF SUBMITTED BY


Mr. Vinod Saini Komal Kochar
LECTURER Semester – 4th Sem.
Roll NO. 90408

SESSION : 2007-2009

ZAD INSTITUTE OF I.T & MANAGEMENT STUDIES,


ROHTAK
DECLARATION

I hereby declare that the project report entitled “Share Market


Operations”. Submitted in partial fulfillment of the requirements for the
degree of Master of Business Administration to M.D University,
Rohtak Is my original work and not submitted for the award of any other
degree, diploma, fellowship, or any other similar title or prizes.

Place : Rohtak Submitted by:


Date : Komal Kochar
I - INTRODUCTION

A. EXECUTIVE SUMMARY
Financial system evolution, reforms and management is a process; they are mutually
reinforcing, sustaining and sustained by each other. A broad-based organizational structure of
the Indian Financial System has emerged in response to the requirement of emerging
industrial organization. The present organizational structure of the Indian Financial system
comprises of three independent components—Financial Market (Money and Capital (NIM &
SM) Market), Financial Institutions and Financial Securities.

Stock Market (SM) came into being when needed for permanent finance arose in Indian
Capital Market. The main function of Capital Market is the collection of savings and their
distribution for industrial investment, thereby stimulating the capital formation and to that
extent, accelerating the process of economic growth through the saving-finance-investment
process. Thus, Financial System is of crucial significance to capital formation.

National Stock Exchange (NSE) in India was incorporated in Nov 1992 as a tax-paying
company unlike other SE in the country and was setup in 1993 .To encouraging SE reforms
through system modernization and competition. NSE in India is leading SE covering 370
cities and towns across the country. NSE was setup by leading institutions to provide a
medium, fully automated screen-based trading system with national reach. The exchange has
brought about unparallel transparency, speed and efficiency, safety and market integrity. It
has also setup facilities that serve as a model for the securities industry in terms of systems,
practices and procedures and has witnessed several innovations in product and services viz-
demutualization.

During the last financial years, there was a tremendous increase in the Stock Index in India,
which has induced me to study the Stock Market Operations. Therefore, this study is a step
in that direction. It is with this in mind an attempt was made to study the various possibilities
of looking into this aspect, by studying the detail Working of National Stock Exchange (NSE).

Methodology so adopted to carry on the project was descriptive in nature. It deals with
secondary source of information. It provides insight to different players /promoters/group
related to SE, their listing, trading, clearing and settlement criteria, risk associated with each
security in SE.

B. OBJECTIVE OF THE STUDY

The Global Financial services industry has seen a roller coaster ride since the late 1990’s. The
industry was at height at the turn of the millennium. With the Stock Market reaching new
high, there was a lot of money to be made. Everything was going well, the bubble bust and so
with it came crashing the hope of the financial services industry. Added to this were the
accounting scandals and the companies associated with the stock market were spurred. The
crushing blow came with the Sept 11 terrorist attacks. The financial services industry is
cyclical in nature and its fortunes move in tune with the economy’s ups and downs. This
leads the International Financial Markets during the late 1990’s and early 2000’s, slowed
down the pace of growth of the financial services industry.

Lawmakers and Central Banks of all the economies affected by this bust tried various ways to
bring back the markets and the industry to their heydays. The corrective measures included
lowering of interest rates, massive tax cuts and other such efforts.

As if a response to such efforts, the beginning of 2004 saw the Stock Markets rolling and the
corporate profit began moving northwards. Restructuring and consolidation have become the
recurrent themes among the financial services firms.

But two questions are making everybody curious: a) what the next 10 years holds for the
financial services industry and b) to get back again their golden days. Certain trends taking
shape indicating restructuring and consolidation of the financial services industries are
globalization of market, introduction of investment banking, encouraging cross-border
Mergers and Acquisition; consider High Net Worth Investors (HNWIs).

After following trend taking shape in the market and with the help of FII the Indian Stock,
Mutual Fund Market has increased its Profits, its Index, and its Position in International
Market, its Operations and finally its Reputation in the year 2006-07.
This fluctuation in Stock Index has induced me to carry on the study on the working of Stock
Exchange, for which I have chosen “SHARE MARKET OPERATIONS”.

In this, I have try to cover up Trends in the Indian Financial System, the Secondary Market
Operations, the different contributors to the National Stock Exchange (NSE), the major
groups-working behind National Stock Exchange, the trading and settlement criteria, in
National Stock Exchange.

C. METHODOLOGY
Methodology adopted to attain the above mentioned objective is purely descriptive in nature.
The data used was secondary. The project tries to find out the current trends in the Indian
Financial System, particularly Secondary Capital Market. It provides an insight to different
players involved with Stock Market. The research study includes working of NSE also..
II - INDIAN FINANCIAL SYSTEMS

ORGANISATIONAL STRUCTUTE

The evolution, reform and management of financial system or sector are a process rather
than an event. It cannot be separated from reform in the real sector. They are mutually
reinforcing, sustaining and sustained by each other. A broad-based organizational structure
of the Indian Financial System has emerged in response to the requirements of the
emerging industrial organization. The present organizational structure of the Indian
Financial System comprises of three interdependent components: (i) Financial markets, (ii)
financial institutions or intermediaries and (iii) Financial assets/instruments/securities. A
bird's eye view of their main elements is as follows:

Financial Markets
One significant component of the organization of the financial system in India comprises of
financial markets which perform a crucial function in the savings-investment process as
facilitating organizations. They are not sources of finance but they are a link between the
savers and investors both, individual as well as institutional. Based on the nature of funds
which are the stock-in-trade, the financial markets are classified into (i) Money market and
(ii) Capital/securities market.

Money Market:

Money market is a market for dealing in monetary assets of short-termed nature, generally
less than one year. It refers to that segment of the financial market which enables the raising
up of short-term funds for meeting temporary shortages of cash and obligations and the
temporary deployment of excess funds for earning returns. The major participants in the
money market are the RBI and commercial banks.

The broad objectives of the money market are to provide:


- An equilibrating mechanism for evening out short-term surpluses and deficiencies.
- Focal point of RBI interventions for influencing liquidity in the economy.
- A reasonable access to the users of short-term funds to meet their requirements at
realistic/reasonable price/cost.
The Indian money market was underdeveloped till the eighties. The post-1990 period has
witnessed significant developments. Its present structure comprises of a number of
interrelated sub-markets, that is, call market, treasury bills market, commercial bills market,
commercial papers (CPs) market, certificate of deposits (CDs) market, and money market
mutual funds (MMMFs). The institutional structure of the market has been fortified by the
setting up of Primary Dealers and Satellite Dealers. An articulate money market has emerged
in the country in the context of the deregulated economic environment and there are
indications of its close integration with the forex market.

Capital Market:

It is a market for long-term funds. Its focus is on financing of fixed investments in contrast to
money market which is the institutional source of working capital finance. The main
participants in the capital market are mutual funds, insurance organizations,
development/public financial institutions, foreign institutional investors, corporates and
individuals. It is regulated by the SEB. The capital securities market has two segments: (i)
Primary/New issue market and (ii) Secondary market/stock exchanges/markets.

New Issue Market (NIM)/Primary Market:

The NIM deals in new securities, that is, securities which were not previously available and
are offered to the investors for the first time. Capital formation occurs in the NIM as it
supplies additional funds to the corporates directly. It does not have any organisational setup
in any particular place and is recognized only by the specialist institutional services that it
renders to the lenders/borrowers of capital funds at the time of any particular operation. It
performs triple-service-function, namely:
- Origination, that is, investigation and analysis and processing of new issue proposals,
- Underwriting in terms of guarantee that the issue should be sold irrespective of public
response and
- Distribution of securities to the investors. .

Secondary Market/Stock Market/Exchanges (SE):

The Stock Exchange is a market for old/existing securities, that is, those already issued and
granted SE quotation/listing. It plays only an indirect role in industrial financing by providing
liquidity to investments already made. It has a physical existence and is located in a particular
geographical area. The SE discharges three vital functions in the orderly growth capital
formation (i) Nexus between savings and investments; (ii) Liquidity to investors by offering a
place for transaction in securities and (iii) Continuous price formation.

Financial Institutions/Intermediaries:
The second constituent of the financial system comprises the financial institutions
/intermediaries (FIs}. In contrast to the financial markets, the FIs are institutional sources of
finance to industry. They act as a 1ink between the savers and the investors, which results in
institutionalization of personal savings. Their main functions to convert direct
assets/instruments/securities issued by corporates into indirect securities. The indirect
securities offer to the individual investors better investments alternative than the direct/
primary security by pooling which it is created, for example of mutual funds, bank deposits,
insurance policies and so on. With the growth of a matured and sophisticated financial system
in the country over the last five decades, a diversified structure of FIs has emerged. The
present structure comprises FIs as listed below:
 Commercial Banks (i) public sector, (ii) private sector and (iii) foreign sector.
 Non-Banking Financial Companies (NBFCs): - Leasing companies. Hire purchase
and consumer finance companies, Housing finance companies, venture capital funds,
merchant banking organizations, credit rating agencies, factoring services.
 Development/Public Financial Institutions (DFls/PFls): (i) some national/all-India
institutions-IFCI, ICICI, IDBI, SIDBI, IIBI etc., (ii) regional and state level
institutions-SFC, SIDC, SII, TCO etc.
 Mutual Funds: issued by LIC, GIC, Private and Foreign banks.
 Insurance Organizations
 Foreign Private Capital

Financial Instruments/Assets/ Securities


The third component of the financial systems/sectors is financial assets/ instruments or
securities. They represent claims on a stream of- income and/or particular assets. The
maturity and sophistication of financial system indeed, depends on the prevalence of a variety
of securities to suit the investment requirements of heterogeneous investors. In a way, they
represent a Financial Product Innovation. The financial systems/markets also promote
financial product innovation. The Indian financial system has witnessed, in the nineties, a
tremendous growth in financial innovation in the form of differentiated financial assets /
instruments both by corporate and financial institutions.

The present structure comprise of following financial instruments/assets/securities:


 Equity/ordinary Share
 Debentures
 Preference Shares
 Innovative Instruments
 Redeemable convertible debentures at Premium
 Zero Coupon Convertible notes
 Non-Convertible debenture

III-The Indian Capital Market- An Overview

The function of the financial market is to facilitate the transfer of funds from surplus sectors
(lenders)to the deficit sectors (borrowers). Normally, households have investible funds or
savings, which they lend to borrowers in the corporate and public sectors whose requirement
of funds far exceeds their savings. A financial market consists of investors or buyers of
securities, borrowers or sellers of securities, intermediaries and regulatory bodies. Financial
market does not refer to physical location.

Organised Money Market: -


Indian financial system consists of money market and capital market. The money market has
two components-the organised and unorganised. The organised market is dominated by
commercial banks. The other major participants are the Reserve Bank of India, Life
Insurance Corporation, General Insurance Corporation, Unit Trust of India, Securities
Trading Corporation of India Ltd., Discount and Finance House of India, other primary
dealers, commercial banks and mutual funds. The core of the money market is the inter-bank
call money market whereby short – term money borrowing/lending is effected to manage
temporary liquidity mismatch. Normally, monetary assets of short –term nature, generally
less than one year, are dealt in this market.

Unorganised Money Market: -


Despite rapid expansion of the organised money market through a large network of banking
institutions that have extended their reach even to the rural areas, there is still an active
unorganised market. It consists of indigenous bankers and moneylenders. In the unorganised
market, there is no clear demarcation between short-term and long-term finance and even
between the purposes of finance. The unorganised sector continues to provide finance for
trade as well as personal consumption. The inability of the poor to meet the
“creditworthiness” requirements of the banking sector make them take recourse to the
institutions that still remain outside the regulatory framework of banking. But this market is
shrinking.

The Capital Market: -


The capital market consists of primary and secondary markets. The primary market deals
with the issue of new instruments by the corporate sector such as equity shares, preference
shares and debt instruments. Central and State governments, various public sector industrial
units (PSUs), statutory and other authorities such as state electricity boards and port trusts
also issue bonds/debt instruments. The primary market in which public issue of securities is
made through a prospectus is a retail market and there is no physical location. Offer for
subscription to securities is made to investing community. The secondary market or stock
exchange is a market for trading and settlement of securities that have already been issued.
The investors holding securities sell securities through registered brokers/sub-brokers of the
stock exchange. It may have physical location like a stock exchange or a trading floors. Since
1995, trading in securities is screen-based and internet based trading has also made an
appearance in India. It also provides liquidity to the initial buyers in the primary market to re-
offer the securities to any interested buyer at any price, if mutually accepted. An active
secondary market actually promotes the growth of the primary market and capital formation
because investors in the primary market are assured of a continuous market and they can
liquidate their investments.

Capital Market Participants: -


There are several major players in the primary market. These include the merchant bankers,
mutual funds, financial institutions, foreign institutional investors (FIIs) and individual
investors. In the secondary market, there are the stock exchanges, stockbrokers, the mutual
funds, financial institutions, foreign institutional investors (FIIs), and individual investors.
Registrar and Transfer Agents, Custodians and Depositories are capital market intermediaries
that provide important infrastructure service for both primary and secondary markets.

Market Regulations: -
It is important to ensure smooth working of capital market, as it is the arena for the players
associated with the economic growth of the country. Various laws have been passed from
time to time to meet this objective.

The financial market in India was highly segmented until the initiation of reforms in 1992-93
on account of a variety of regulations and administered prices including barriers to entry. The
reform process was initiated with the establishment of Securities and Exchange Board of
India (SEBI).

The legislative framework before SEBI came into being consisted of three major Acts
governing the capital markets:
1. The Capital Issues Control Act 1947, which restricted access to the securities market
and controlled the pricing of issues.
2. The Companies Act, 1956, which sets out the code of conduct for the corporate sector
in relation to issue, allotment and transfer of securities and disclosures to be made in
public issues.
3. The Securities Contracts (Regulation) Act, 1956, SC(R)A which regulates
transactions in
securities through control over stock exchanges. In addition, number of other Acts,
e.g.
the Public Debt Act, 1942, the Income Tax Act, 1961, the Banking Regulation Act,
1949, have substantial bearing on the working of securities market.

Capital Issues (Control) Act, 1947: -

The act had its origin during the Second World War in 1943 when the objective of the
Government was to pre-empt resources to support the war effort. Companies were required to
take the Government’s approval for tapping household savings. The act was retained with
some modifications as a means of controlling the raising of capital by companies and to
ensure that national resources were channeled into proper lines, i.e. desirable purposes to
serve goals and priorities of the government and to protect the interests of investors. Under
the Act, any firm wishing to issue securities had to obtain approval from the Central
Government, which also determined the amount, type and price of the issue. This Act was
repealed and replaced by SEBI Act in 1992.

Companies Act, 1956: -

Companies Act, 1956 is a comprehensive legislation covering all aspects of company form of
business entity from formation to winding –up. The legislation deals with issue, allotment
and transfer of securities and various aspects relating to company management. It provides
for standards of disclosure in public issues of capital, particularly in the fields of company
management and projects, information about other listed companies under the same
management and management perception of risk factors. It also regulates underwriting, the
use of premium and discounts on issues, rights and bonus issues, substantial acquisitions of
shares, payment of interest and dividends, supply of annual report and other information.
This legal and regulatory framework contained many weaknesses. Jurisdiction over the
securities market was split among various agencies and the relevant provisions were scattered
in a number of statutes. This resulted in confusion, not only in the minds of the regulated but
also among regulators. It also created inefficiency in the enforcement of regulations. It was
the Central Government rather than the market that allocated resources from the securities
market to competing issuers and determined the terms of allocation. The allocation was not
necessarily based on economic criteria, and as a result the market was not allocating the
resources to the best possible investments, leading to a sub-optimal use of resources and low
allocational efficiency. Information efficiency was also low because the provisions of the
Companies Act regarding prospectus did not ensure the supply of necessary, adequate and
accurate information, sufficient to enable investors to make an informed decision. The many
formalities associated with the issue process under various regulations kept the cost of issue
quite high. Under the SC(R)A, the secondary market was fragmented regionally, with each
stock exchange a self-regulating organisation following its own policy of listing, trading and
settlement. The listing agreement did not have the force of law, so issuers could get away
with violations. The interests of the brokers, who were market players and dominated the
governing boards of stock exchanges, took priority over the interest of investors. The market
was narrow and investors did not have an opportunity to have balanced portfolios. The
settlement of trades took a long time, because it required physical movement of securities,
and the transfer of securities was very cumbersome under the Companies Act and SC( R)
Act, thus depriving the investor of liquidity . Law expressly forbade options and futures.
These weaknesses were corrected by passing SEBI Act and giving overall regulatory
jurisdiction on capital market to SEBI. SEBI framed guidelines and regulations to improve
efficiency of the market, enhance transparency, check unfair trade practices and ensure
international standards in market practices necessitated by the large entry of foreign financial
institutions.

Securities Contract (Regulation) Act, 1956: -

The previously self –regulated stock exchanges were brought under statutory regulation
through the passage of the SC(R)A, which provides for direct and indirect control of virtually
all aspects of securities trading and the running of stock exchanges. This gives the Central
Government regulatory jurisdiction over (a) stock exchanges, through a process of
recognition and continued supervision, (b) contracts in securities, and (c) listing of securities
on stock exchanges. As a condition of recognition, a stock exchange complies with condition
prescribed by Central Government. Organised trading activity in securities in an area takes
place on a specified recognised stock exchange. The stock exchanges determine their own
listing regulations which have to conform with the minimum listing criteria set out in the
Rules. The regulatory jurisdiction on stock exchanges was passed over the SEBI on
enactment of SEBI Act in 1992 from Central Government by amending SC(R) Act.
Securities and Exchange Board of India: -

With the objectives of improving the market efficiency, enhancing transparency, checking
unfair trade practices and bringing the Indian market upto the International standards, a
package of reforms consisting of measures to liberalise, regulate and develop the securities
market was introduced during the 1990s.This has changed corporate securities market
beyond recognition in this decade. The practice of allocation of resources among different
competing entities as well as its terms by central authority was discontinued. The secondary
market overcame the geographical barriers by moving to screen-based trading. Trades enjoy
counterparty guarantees. Physical securities certificates have almost disappeared. The
settlement period has shortened to two days.

A major step in the liberalisation process was the repeal of the Capital Issues (Control) Act,
1947 in May 1992. With this, Government’s control over the issue of capital, pricing of the
issues, fixing of premia and rates of interest on debentures, etc., ceased. The office which
administered the Act, was abolished and the market was allowed to allocate resources to
competing uses and users. Indian companies were allowed access to international capital
market through issue of American Depository Receipts (ADRs) and Global Depositor
Receipts (GDRs). However, to ensure effective regulation of the market, SEBI Act, 1992 was
enacted to empower SEBI with statutory powers for (a) protecting the interest of investors in
securities (b) promoting the development of the securities market and (c) regulating the
securities market. In addition to all intermediaries and persons associated with securities
market. SEBI can specify the matters to be disclosed and the standards of the disclosure
required for the protection of investors in respect of issues. It can issue directions to all
intermediaries and other persons associated with the securities market in the interest of
investors or of orderly development of the securities market; and can conduct inquiries, audits
and inspection of all concerned and adjudicate offences under the Act. In short, it has been
given necessary autonomy and authority to regulate and develop an orderly securities market.

SEBI has been given full authority and jurisdiction over the securities market under the Act,
and was given concurrent/delegated powers for various provisions under the Companies Act
and SC(R) A. The Depositories Act, 1996 is also administered by SEBI. A high level
committee on capital markets have been set up to ensure co-ordination among the regulatory
agencies in financial markets.
In the interest of investors, SEBI issued Disclosure and Investor Protection (DIP) Guidelines.
Issuers are now required to comply with these Guidelines before accessing the market. The
guidelines contain a substantial body of requirements for issuers/intermediaries. The main
objective is to ensure that all concerned observe high standards of integrity and fair dealing,
comply with all the requirements with due skill, diligence and care, and disclose the truth, the
whole truth and nothing but truth. The guidelines aim to secure fuller disclosure of relevant
information about the issuer and the nature of securities to be issued so that investor can take
an informed decision. For example, issuers are required to disclose any material ‘risk f actors’
in their prospectus and the justification for the pricing of the securities has to be given. SEBI
has placed a responsibility on the lead managers to give a due diligence certificate, stating
that they have examined the prospectus, that they find it in order and that it brings out all
facts and does not contain anything wrong or misleading. Though the requirement of vetting
has now been dispensed with, SEBI has raised standards of disclosures in public issues to
enhance the level of investor protection.

Improved disclosures by listed companies: -


The norms for continued disclosure by listed companies have also improved the availability
of timely information. The information technology helped in easy dissemination information
about listed companies and market intermediaries. Equity research and analysis and credit
rating has improved the quality of information.

Introduction of Derivatives: -
To assist market participants to manage risks better through hedging, speculation and
arbitrage, SC(R) A was amended in 1995 to lift the ban on options in securities. However,
trading in derivatives did not take off, as there was no suitable legal and regulatory
framework to govern these trades. Besides, it needed a lot of preparatory work- the
underlying cash markets needed to be strengthened with the assistance of automation of
trading and settlement system; the exchanges developed adequate infrastructure and the
information system to implement trading discipline in derivative instruments. The SC(R)A
was amended further in December 1999 to expand the definition of securities to include
derivatives so that the whole regulatory framework governing trading , which had lost its
relevance and was hindering introduction of derivatives trading, was withdrawn. Derivative
trading took off in June 2000 on two exchanges. Now different types of derivative contracts
i.e. index future, index options, single stock futures and single stock options are available in
the market.

The governing body of stock exchanges used to be dominated by brokers, leading inevitably
to conflicts of interest. To discipline brokers and cure typical stock market ills such as price
rigging, it was considered necessary for stock exchanges to have a professionally managed
environment. NSE started with the concept of an independent governing body without any
broker representation. It was specified in 1993 that the governing boards of stock exchanges
must have 50% non-broker members, and that on committees handling matters of discipline,
default, etc., brokers would be in the minority. All stock exchanges were mandated to appoint
a non-broker executive director who would be accountable to SEBI for implementing the
policy directions of the Central Government/SEBI. In course of time, the position of the
executive director in the management of stock exchange has been strengthened.

Indian Security market is getting increasingly integrated with the rest of the world. FIIs have
been permitted to invest in all types of securities, including government securities. Indian
companies have been permitted to raise resources from abroad through issue of ADRs
(American Depository Receipts), GDRs (Global Depository Receipts), Fully convertible
Corporate Bonds (FCCBs), and External Commercial Borrowings (ECBs). Indian stock
exchanges have been permitted to set up trading terminals abroad. The trading platform of
Indian stock exchanges can now be accessed through the Internet from anywhere in the
world. In line with the global phenomenon, Indian capital markets have also moved to rolling
settlement on a T+2 basis where trades are settled on the second day after trading.

Depository System: -
The erstwhile settlement system on Indian stock exchanges was also inefficient and increased
risk, due to the time that elapsed before trades were settled. The transfer was by physical
movement of papers. There had to be a physical delivery of securities. The second aspect of
the settlement related to the transfer of shares in favour of purchaser by the company. The
system of transfer of ownership was grossly inefficient as every transfer involved physical
movement of paper securities to the issuer for registration, with the change of ownership
being evidenced by an endorsement on the security certificate. In many cases the process of
transfer would take much longer than the two months stipulated in the Companies Act, and a
significant proportion of transactions would end up as bad delivery due to faulty compliance
of paper work. Theft, forgery, mutilation of certificates and other irregularities were rampant.
In addition, the issuer had the right to refuse the transfer of a security. All this added to costs
and delays in settlement, restricted liquidity and made investor grievances redressal time
consuming and, at times, intractable.

To obviate these problems, the Depositories Act 1996 was passed. It provides for the
establishment of depositories in securities with the objective of ensuring free transferability
of securities with speed, accuracy and security. It does so by (a) making securities of public
limited companies freely transferable, subject to certain exceptions; (b) dematerialising the
securities in the depository mode; and (c) providing for maintainance of ownership records in
a book entry form. The Act envisages transfer ownership of securities electronically by book
entry without making the securities move from transferable, restricting the company’s right to
use discretion in effecting the transfer of securities, and the transfer deed and other
procedural requirements under the Companies Act have been dispensed with. Two
depositories, viz. NSDL and CDSL, have come up to provide instantaneous electronic
transfer of securities.

Capital Market Intermediaries: -


There are several institutions, which facilitate the smooth functioning of the securities
market. They enable the issuers of securities to interact with the investors in the primary as
well as secondary arena.

Merchant Bankers: -

Among the important financial intermediaries are the merchant bankers. The services of
merchant bankers have been identified in India with just issue management. It is quite
common to come across reference to merchant banking and financial services as though they
are distinct categories. The services provided by merchant bank depend on their inclination
and resources- technical and financial. Merchant bankers are mandated by SEBI to manage
public issues and open offers in take-overs. These two activities have major implications for
the integrity of the market. They affect investor’s interest and therefore, transparency has to
be ensured. These are also areas where compliance can be monitored and enforced.

Merchant bankers are rendering diverse services and functions. These include organising and
extending finance for investment in projects, assistance in financial management, raising
Euro-dollar loans and issue of foreign currency bonds. Different merchant bankers specialise
in different services. However, since they are one of the major intermediaries between the
issuers and the investors, their activities are regulated by: -

1. SEBI (Merchant Bankers) Regulations, 1992.


2. Guidelines of SEBI and Ministry of Finance.
3. Companies Act, 1956.
4. Securities Contracts (Regulation) Act, 1956.

Merchant banking activities, especially those covering issue and underwriting of shares and
debentures, are regulated by the Merchant Bankers Regulations of Securities and Exchange
Board of India (SEBI). SEBI has made the quality of manpower as one of the criteria for
renewal of merchant banking regulation. These skills should not be concentrated in issue
management and underwriting alone. The criteria for authorisation take into account several
parameters. These include: (a) professional qualification in finance, law or business
management, (b) infrastructure like adequate office space, equipment and manpower, (c)
employment of two persons who have the experience to conduct the business of merchant
bankers, (d) capital adequacy and (e) past track record, experience, general reputation and
fairness in all their transactions.

SEBI authorises merchant bankers for an initial period of three years, if they have a minimum
net worth of Rs. 5 crore. An initial authorisation fee, an annual fee and renewal fee is
collected by SEBI.

According to SEBI, all issues should be managed by at least one authorised merchant banker
functioning as the sole manager or lead manager. The lead manager should not agree to
manage any issue unless his responsibilities relating to the issue, mainly disclosures,
allotment and refund, are clearly defined. A statement specifying such responsibilities has to
be furnished to SEBI. SEBI prescribes the process of due diligence that a merchant banker
has to complete before a prospectus is cleared. It also insists on submission of all the
documents disclosing the details of account and the clearances obtained from the ROC and
other government agencies for tapping people’s saving. The responsibilities of lead manager,
underwriting obligations, capital adequacy, due diligence certification, etc., are laid down in
detail by SEBI. The objective is to facilitate the investors to take an informed decision
regarding their investments and not expose them to unknown risks.

Credit Rating Agencies: -

The 1990s saw the emergence of a number of rating agencies in the Indian market. These
agencies appraise the performance of issuers of debt instruments like bonds or fixed deposits.
The rating of an instrument depends on parameters like business risks, market position,
operating efficiency, adequacy of cash flows, financial risks, financial flexibility, and
management and industry environment.

The objective and utility of these exercises is two-fold. From the point of view of the issuer,
by assigning a particular grade to an instrument, the rating agencies enable the issuer to get
the best price. Since all financial market are based on the principal of risks/reward, the less
risky the profile of the issuer of a debt security, the lower the price at which it can be issued.
Thus, for the issuer, a favourable rating can reduce the cost of borrowed capital.

From the view point of investor, the grade assigned by the rating agencies depends on the
capacity of the issuers to service the debt. It is based on the past performance as well as an
analysis of the expected cash flows of a company, when viewed on the industry parameters
and performance of the company. Hence, the investor can judge for himself whether he wants
to place his savings in a “safe” instrument and get a lower return or he wants to take a risk
and get a higher return.

Under SEBI guidelines all issuers of debt have to get the instruments rated. They also have to
prominently display the rating in all that marketing literature and advertisements. The rating
agencies have thus become an important part of the institutional framework of the Indian
securities market.

R &T Agents- Registrars to Issue: -

R &T Agents form an important link between the investors and issuers in the securities
market. A company, whose securities are issued and traded in the market, is known as the
issuer. The R&T Agent is appointed by the Issuer to act on its behalf to service the investors
as well as dispatch of dividends and other non-cash benefits. R&T Agents perform an equally
important role in the depository system as well.

Stock Brokers: -

Stockbrokers are the intermediaries who are allowed to trade in securities on the exchange of
which they are members. They buy and sell on their own behalf as well as on behalf of their
clients. Traditionally in India, partnership firms with unlimited liabilities and individually
owned firms provided brokerage services. There were, therefore, restrictions on the amount
of funds they could raise by way of debt. With increasing volumes in trading as well as in the
number of small investors, lack of adequate capitalisation of these firms exposed investors to
the risks of these firms going bust and the investors would have no recourse to recovering
their dues.

With the legal changes being effected in the membership rules of stock exchanges as well as
in the capital gains structure for stock-broking firms, a number of brokerage firms have
converted themselves into corporate entities. In fact, NSE encouraged the setting up of
corporate broking members and has today only 10% of its members who are not corporate
entities.

According to Rule 2(e) of SEBI, a stockbroker means a member of a recognised stock


exchange. No stockbroker is allowed to buy, sell or deal in securities, unless he or she holds a
certificate of registration granted by SEBI.

A stock broker applies for registration to SEBI through a stock exchange or stock exchanges
of which he or she is admitted as a member. SEBI may grant a certificate to a stock broker
subject to conditions that:

a) He holds the membership of any stock exchange.


b) He shall abide by the rules, regulations and bye-laws of the stock exchange or stock
exchanges of which he is a member.
c) In case of any change in the status and constitution, he shall obtain prior permission of
S
SEBI to continue to buy, sell or deal in securities in any stock exchange.
d) He shall pay the amount of fees for registration in the prescribed manner
e) He shall take adequate steps for redressal of grievances of the investors within one
month of the date of the receipt of the complaint and keep the SEBI informed about
the number, nature and other particulars of the complaints.

While considering the application of an entity for grant of registration as a stock broker, SEBI
shall take into account the following namely, whether the stock broker applicant-

a) is eligible to be admitted as a member of a stock exchange;


b) has the necessary infrastructure like adequate office space, equipment and man power
to effectively discharge his activities;
c) has any past experience in the business of buying, selling or dealing in securities;

Sub- Brokers: -

A sub-broker is a person who intermediates between investors and stock brokers. He acts on
behalf of a stock-broker as an agent or otherwise for assisting the investors for buying, selling
or dealing in securities through such stock-broker. No sub-broker is allowed to buy, sell or
deal in securities, unless he or she holds a certificate of registration granted by SEBI. A sub-
broker may take the form of a sole proprietorship, a partnership firm or a company.
Stockbrokers of the registered stock exchanges are permitted to transact with sub-brokers.

SEBI may grant a certificate to a sub-broker, subject to the conditions that:


a) He shall pay the fees in the prescribed manner;
b) He shall take adequate steps for redressal of grievances of the investors within one
month of the date of receipt of the complaint and keep SEBI informed about the
nature, number and other particulars of the complaints received;
c) In case of any change in the status and constitution, the sub-broker shall obtain prior
permission of SEBI to continue to buy, sell or deal in securities in any stock
exchange;
d) He is authorised in writing by a stock-broker being a member of a stock exchange for
affiliating himself in buying, selling or dealing in securities.

In case of company, partnership firm and sole proprietorship firm, the directors, the partners
and the individual shall comply with the following requirements:
a) The applicant is not less than 21 years of age;
b) The applicant has not convicted of any offence involving fraud or dishonesty;
c) The applicant has atleast passed 12th standard equivalent examination from an
institution recognised by the Government.
d) He should not have been debarred by SEBI.
e) The corporate entities applying for sub-broking shall have a minimum paid up capital
of Rs. 5 Lakh and it shall identify a dominant shareholder who holds a minimum of
51% shares either singly or with the unconditional support of his/ her spouse.

The salient features of the circular Ref. No. SMD/POLICY/CIRCULAR/11-97 dated May 21,
1999 issued by SEBI is as under:
1. The registered sub-broker can transact only through the member broker who had
recommended his application for registration. If the sub-broker is desirous of doing
business with more than one broker, he will have to obtain separate registration in
each case.
2. The sub-broker shall disclose the names of all other sub-brokers/brokers where he is
having direct or indirect interest.
3. It shall be the responsibility of the broker to report the default if any of his sub-broker
to all other brokers with whom sub-broker is affiliated.
4. The agreement can be terminated by giving the notice in writing of not less than 6
months by either party.
5. Sub-brokers are obligated to enter into agreement and maintain the database of their
clients/investors in the specified format.

Custodians: -

In the earliest phase of capital market reforms, to get over the problems associated with
paper-based securities, large holding by institutional and banks were sought to be
immobilised. Immobilisation of securities is done by storing or lodging the physical security
certificates with an organisation that acts as a custodian- a securities depository. All
subsequent transactions in such immobilised securities take place through book entries. The
actual owners have the right to withdraw the physical securities from the custodial agent
whenever required by them. In the case of IPO, a jumbo certificate is issued in the name of
the beneficiary owners. The Stock Holding Corporation of India Limited was set up to act as
a custodian for securities of a large number of banks and institutions who were mainly in the
public sector. Some of the banks and financial institutions also started providing “Custodial”
services to smaller investors for a fee. With the introduction of dematerialisation of securities
there has been a shift in the role and business operations of custodians. But they still remain
an important intermediary providing services to the investors who still hold securities in
physical form.

Mutual Funds: -

Mutual funds are financial Intermediaries, which collect the saving s of small investors and
invest them in a diversified portfolio of securities to minimise risk and maximise returns for
their participants. Mutual funds have given a major fillip to the capital market- both primary
as well as secondary. The units of mutual funds, in turn, are also tradable securities. Their
price is determined by their net asset value (NAV) which is declared periodically.

The operations of the private mutual funds are regulated by SEBI with regard to their
registration, operations, administration and issue as well as trading.

There are various types of mutual funds, depending on whether they are open ended or close
ended and what their end use of funds is .As open-ended fund provides for easy liquidity and
is a perennial fund, as its very name suggests. A closed-ended fund has a stipulated maturity
period, generally five years. A growth fund has a higher percentage of its corpus invested in
equity than in fixed income securities, hence the chances of capital appreciation are higher. In
growth funds, the dividend accrued, if any, is reinvested in the fund for the capital
appreciation of investment made by the investor. An income fund on the other hand invests a
large portion of its corpus in fixed income securities in order to pay out a portion of its
earnings to the investor at regular intervals. A balance fund invests equally infixed income
and equity in order to earn minimum return to the investors. Some mutual funds are limited to
a particular industry; others invests exclusively in certain kinds of short-term instruments like
money market or government securities. These are called money market funds or liquid
funds. To prevent processed like dividend stripping or to ensure that the funds are available to
the managers for a minimum period so that they can be deployed to at least cover
administrative costs of the assets management company, mutual funds prescribe an entry load
or an exit load for the investors. If investors want to withdraw their investments earlier than
the stipulated period, an exit load is chargeable. To prevent profligacy, SEBI has prescribed
the maximum that can be charged to the investors by the fund managers.
Depositories: -

The depositories are important intermediaries in the securities market that is scrip-less or
moving towards such state. In India , the Depositories Act defines a depository to mean “ a
company formed and registered under the Companies Act, 1956 and which has been granted
a certificate of registration under Section 12 (1A) of the Securities and Exchange Board of
India Act, 1992.”The principal function of a depository is to dematerialise securities and
enable their transactions in book-entry form.

Dematerialisation of securities occurs when securities issued in physical form are destroyed
and an equivalent number of securities are credited into the beneficiary owner’s account. In a
depository system, the investors stand to gain by way of lower costs and lower risks of theft
or forgery, etc. They also benefit in terms of efficiency of the process. But the
implementation of the system has to be secure and well governed. All the players have to be
conversant with the rules and regulations as well as with the technology for processing. The
intermediaries in this system have to play strictly by the rules.

A depository established under the Depositories Act can provide any service connected with
recording of allotment of securities or transfer of ownership of securities in the record of a
depository. A depository cannot directly open account and provide service to clients. Any
person willing to avail of the services of the depository can do so by entering into an
agreement with the depository through any of its Depository Participants.

Depository Participants: -

A Depository Participant (DP) is described as an agent of the depository. They are the
intermediaries between the depository and the investors. The relationship between the DPs
and the depository is governed by an agreement made between the two under the
Depositories Act, 1996. In a strictly legal sense, a DP is an entity who is registered as such
with SEBI under the provisions of SEBI Act. As per the provisions of this Act, DP can offer
depository related services only after obtaining a certificate registration from SEBI.

SEBI (D&P) Regulations1996 prescribe a minimum net worth of Rs. 50 Lakh for the
applicants who are stockbrokers or non-banking finance companies (NBFCs), for granting a
certificate of registration to act as a DP. For R&T Agents a minimum net worth of Rs. 10
Crore is prescribed in addition to a grant of certificate of registration by SEBI. If a
stockbroker seeks to act as a DP in more than one depository. If an NBFC seeks to act as a
DP on behalf of any other person, it needs to have a net worth of Rs. 50 Crore in addition to
the net worth specified by any other authority. No minimum net worth criterion has been
prescribed for other categories of DPs. However, depositories can fix a higher net worth
criterion for their DPs. NSDL stipulates a minimum net worth of Rs. 100 Lakh to be eligible
to become a DP as against Rs. 50 Lakh prescribed by SEBI (D&P) Regulations, except for
R&T agents and NBFCs, as mentioned above.

Capital Market Process: -


There are various processes that issuers of securities follow or utilise in order to tap the
savers for raising resources. Some of the commonly used processes and methods are
described below:

Initial Public Offer (IPO): -

Companies, new as well as old, can offer their shares to the investors in the primary market.
This kind of tapping the savings is called an IPO or Initial Public Offering. SEBI regulates
the way in which companies can make this offering. Companies can make an IPO if they
meet SEBI guidelines in this regard. The size of the initial issue, the exchange on which it
can be listed, the merchant banker’s responsibilities, the nature and content of the disclosures
in the prospectus, procedures for all these are laid down by SEBI and have to be strictly
complied with.

Exemption may be granted by SEBI in certain cases for minimum public offer or minimum
subscription in the case of certain industry sectors like infrastructure or banking. Several
changes have also been introduced in recent years in the manner in which the IPOs can be
marketed. For example, they can now take the book building route or they can even be
marketed through the secondary market by brokers or DPs. All these changes have been
made with the objective of making the process more investor friendly by reducing risk,
controlling cost, greater transparency in pricing mechanism and protecting liquidity in the
hands of the investor. Some of the IPOs have been available for subscription online- where
the bids are made in the real time and the information is made available on an instantaneous
basis on the screen. It is possible to subscribe for IPO shares in demat form through DPs.
Private Placement: -

Many companies choose to raise capital for their operations through various intermediaries
by taking what in marketing terms would be known as the wholesale route. This is called in
financial markets as private placement. The retail route of approaching the public is
expensive as well as time consuming. SEBI has prescribed the eligibility criteria for
companies and instruments as well as procedures for private placement. However, liquidity
for the initial investors in private placed securities is ensured as they can be traded in the
secondary market. But such securities have different rules for listing as well as for trading.

Preferential Offer/Right Offer: -

Companies can expand their capital by offering the new shares to their existing shareholders.
Such offers for sale can be made to the existing shareholders by giving them a preferential
treatment in allocation or the offer can be on right basis, i.e. the existing holders can get by
way of their right, allotment of new shares in certain proportion to their earlier holding. All
such offers have also to be approved by SEBI, which has laid out certain criteria for these
routes of tapping the public. These have to be complied with.

Internet Broking: -

With the Internet becoming ubiquitous, many institutions have set up securities trading
agencies that provide online trading facilities to their clients from their homes. This can be
possible since all the players in the securities market, viz., stockbrokers, stock exchanges,
clearing corporations, depositories, DPs, clearing banks, etc., are linked electronically. Thus,
information flows amongst them on a real time basis.

The trading platform, which was converted from the trading hall to the computer terminals at
the broker’s premises, has now shifted to the homes of investors. This has introduced a higher
degree of transparency in transactions. The investor knows exactly when and at what rate his
order was processed. It also creates an end-to-end audit trail that makes market manipulation
difficult. The availability of securities in demat form has given a further fillip to this process.

However, the emergence of what is known as “day-traders” has resulted in the business
environment of brokers which has changed. Investors, who can now trade directly, no longer
require their intermediation. Service charges have therefore been declining-all of which has
been in favour of investors.

Membership in NSE
There are no entry/exit barriers to the membership in NSE. Anybody can become member by
complying with the prescribed eligibility criteria and exit by surrendering membership
without any hidden/overt cost.
The standards for admission of members laid down by the Exchange stress on factors such as,
corporate structure, capital adequacy, track record, education, experience etc. and reflect a
conscious effort on the part of NSE to ensure quality broking services so as to build and
sustain confidence among investors in the Exchange’s operations.

Benefits to the trading membership of NSE include:

1. Access to a nation-wide trading facility for equities, derivatives, debt and hybrid
instruments/products.
2. Ability to provide a fair, efficient and transparent securities market to the investors.
3. Use of state-of-the-art electronic system and technology.
4. Dealing with an organisation which follows strict standards for trading & settlement
at par with those available at the top international bourses.
5. A demutualised Exchange, which is managed by independent and experienced
professionals.
6. Dealing with an organisation which is constantly striving to move towards a global
marketplace in the securities industry.

New Membership

Membership is open to all persons desirous of becoming trading members, subject to meeting
requirements/criteria as laid down by SEBI and Exchange. The different segments currently
available on the Exchange for trading are:
 Capital Market (Equities and Retail Debt)
 Wholesale Debt Market
 Derivatives (Future and Option) Market

Eligibility criteria for acquiring membership of NSE is as follows


The following persons are eligible to become trading members:
a) Individuals
b) Partnership firms registered under the Indian Partnership Act, 1932
Individual and Partnership firm are not eligible to apply for membership on WDM
segment.
c) Institutions, including subsidiaries of banks engaged in financial services.
d) Body Corporate including companies as defined in the Companies Act, 1956
Education and Experience:

Where an applicant is a corporate, not less than two directors of the company( in case of sole
proprietorship, individual and in case of a partnership firm, two partners) should satisfy the
following criteria:
They should be at least graduates and each of them should possess at least two years
experience in an activity related to broker, sub-broker, authorised agent or authorised clerk or
authorised representative or remisier or apprentice to a member of recognised stock
exchange. Such experience will include working as a dealer, jobber, market maker, or in any
other manner in the dealing in securities or clearing and settlement thereof, as portfolio
manager, merchant bankers or as a researcher with any individual or organisation operating in
the securities market.

Shareholding Pattern: -
Securities markets have the inherent tendency to be volatile and risky. Therefore, there
should be adequate risk containment mechanism in place for the Stock Exchanges. One risk
containment tool is the concept of ‘Dominant Promoter/Shareholder Group’ which is very
unique for applicants acquiring membership on the NSE. Though membership on NSE is
granted to the entity applying for it, but for all practical purposes the entity is managed by a
few shareholders who controlling interest in the company. The shareholder holding the
majority of shares have a dominant role in the affairs of the company. In case of any default
by broking entity, the Exchange should be able to identify and take action against the persons
who are behind the company. The Exchange, therefore, needs to know the background,
financial soundness and integrity of these shareholders holding such controlling interest.
Hence, during the admission process the dominant shareholders are called for an interview
with the Membership Approval Committee.
Brokerage: -
The maximum brokerage chargeable by Trading Member in respect of trades effected in the
securities admitted to dealing on the Trading Member segment of Exchange is fixed at 2.5%
of the contract price, exclusive of statutory levies like, SEBI turnover fee, service tax and
duty. This maximum brokerage is inclusive of brokerage charged by sub-broker. The
brokerage shall be charged separately from the clients and shall be indicated separately from
the price, in the contract note.

Contract Note: -
Contract note is a confirmation of trade(s) done on a particular day for and on behalf of a
client. A stock-broker shall issue a contract note to his clients for trades(purchase/sale of
securities) executed with all relevant details as required therein to be filled in. A contract note
shall be issued to a client within 24 hours of the execution of the contract duly signed by the
Trading Member or his Authorised Signatory or Client Attorney.

Buy-back of securities: -
A Company may purchase its own shares or other specified securities out of:
a) free reserves
b) the securities premium account
c) the proceeds of any shares of other specified securities
Conditions to be satisfied for buy-back: -
The following conditions must be satisfied by the company before buying-back its own
shares or other specified securities:
i) The buy-back must be authrorised by its articles;
ii) A special resolution shall be passed in general meeting of the company authorising
buy-back.
iii) The buy-back shall be equal to or less than 25% of the total paid up capital and free
reserves of the company.
iv) The ratio of debt owned by the company is not more than twice the capital and its free
reserves after such buy-back.
v) All the shares of other specified securities for buy-back are fully paid-up.
vi) Every buy-back shall be completed within twelve months from the date of passing the
special resolution or a resolution passed by the Board.

Circuit Breakers: -
The Exchange has implemented index-based market-wide circuit breakers in compulsory
rolling settlement with effect from July 02, 2001. In addition to the circuit breakers, price
bands are also applicable on individual securities.
The index-based market-wide circuit breaker system applies at 3 stages of the index
movement, either way viz. at 10%, 15%, 20%. These circuit breakers when triggered bring
about a coordinated trading at halt in all equity and equity derivative market nationwide. The
market-wide circuit breakers are triggered by movement of either the BSE Sensex or the NSE
S&P CNX Nifty, whichever is breached earlier.
• In case of a 10% movement of either index, there would be a one-hour market halt if the
movement takes place before 1:00 P.M. In case the movement takes place at or after 1:00
P.M. but before 2:30 P.M. there would be trading halt for ½ hour. In case the movement
takes place at or after 2:30 P.M. there will be no trading halt at 10% level and market
shall continue trading.
• In case of a 15% movement of either index, there shall be a two-hour halt if movement
takes place before 1:00 P.M. If the movement take place after 1:00 P.M. but before 2:00
P.M., there shall be a one-hour halt. If 15% movement takes place after 2:00 P.M., the
trading shall be halt for remainder of the day.
• In case of a 20% movement of the index, trading shall be halted for the remainder of the
day.
IV - STOCK EXCHANGE (SE)
The Indian Capital Market has two segments- Primary/New issue market and Secondary mar-
ket/stock exchanges/markets (SE) as we have already mentioned.

SE is intricately interwoven in the fabric of a nation’s economic life. Without a SE, the savings
of the community- the sinews of economic progress and productive efficiency would remain
underutilized. The task of mobilization and allocation of savings cloud be attempted in the old
days by a much less specialized institution than the SE. but as business and industry expanded
and the economy assumed more complex nature, the need for ‘permanent finance’ arose.
Entrepreneurs needed money for long term whereas investors demanded liquidity, the facility to
convert their investments into cash at any given time.

The answer was a ready market for investments and this was how the SE came into being. SE
means anybody of individuals, whether incorporated or not, constituted for the purpose of
regulating or controlling the business of buying, selling or dealing in securities.

These securities include:


i) Shares, scrip’s, stocks, bonds, debentures stock or other marketable securities of a
like nature in or of any incorporated company or other body corporate;
ii) Government securities; and
iii) Rights or interest in securities.

Regulating Framework of SE
The four legislations governing the securities market are:
1. Capital Issues (control) Act, 1947
2. Securities Contract (Regulation) Act, 1956
3. Companies Act, 1956
4. SEBI Act, 1992
5. Depositories Act, 1996
Organizational Structure of SE
The SE is exclusive centers for trading of securities. At present there are 24 operating SE in
India. Most of the SE in the country is incorporated as “Association of Persons” of section 25
companies under the companies Act.

SE’s are organized as ‘mutuals’ and are considered beneficial in terms of tax benefits and
matters of compliance. The trading member, who provide broking services also own, control and
mange the SE. They elect their representative to regulate the functioning of the exchange,
including their own activities.

Until recently, the area of operation of an exchange was specified at the time of its recognition,
which in effect precluded competition among the exchange. These are called Regional
Exchanges. In order to provide an opportunity to investors to trade in the securities, to list on the
regional SE nearest to their registered office. If they so wish, they can seek listing on other
exchange as well.

Structure of the SE

Stock Exchanges 23 With clearing Corporation 1


With Settlement Guarantee
Exchanges 16
Fund
With Screen-based Trading Registered Members
23 11,732
System (brokers)
With Internet Trading 2 Registered Foreign Brokers 38
With Wireless Application Registered Corporate
1 4,126
Protocol (W AP) Facility Members
With Equity Trading 23 Registered Sub-Brokers 9,957
With Debt Market Segment 1 Registered FIls 506
With Derivative Trading 2 Listed Companies. 10,572
Rs.34,59,883
Market Capitalization
crore
Rs. 1,29,64,455
Turnover during 2006-07
crore

Listing of Securities in SE
A security is said to be ‘Listed’’ when its name is added to the list of securities in which trading
on a particular exchange is permitted. The principal objectives of listing:
i) To provide ready marketability, liquidity and free negotiability to stocks and shares;
ii) To ensure proper supervision and control of dealing therein; and
iii) To protect the interests of shareholders and of general investing public.

Regulating Framework for Listing


1. SCRA
2. SEBI
3. Companies Act
4. Bye- Laws and Regulation of concern SE

General Requirements for Listing


Memorandum and Articles of Association
1. Minimum Public Offer
2. Standard Denomination
3. Prospectus
4. Minimum Public Offer and Minimum Number of Shareholders
5. Allotment of Shares
6. Allotment of Further Issue of Capital
7. Right Issue by a Listed Company
8. Listing of Fresh Capital
9. Listing Fees
10. Listing Application
11. Listing Agreement
12. General
V - NATIONAL STOCK EXCHANGE OF INDIA (NSE)

NSE was set up in 1993 to encourage SE reforms through system modernization and
competition. The reach of NSE has been extended to 21 cities of which 6 cities, do not have SE
of their own. By end 1996, NSE planned to extend its network cities across the country. It is an
Electronic Screen Base System where members have equal access and equal opportunity, of
trade irrespective of their location in different parts of the country as they are connected through
a satellite network. The system helps to integrate the national market and provide a modem
system with a complete audit trial of all transactions. Instantaneous matching of trades
effectively prevents circular trading which has been one of the mechanisms of pre-rigging.

A member's office located anywhere in the country is connected to the central computer
through very small aperture terminals (VSAT). Today, all stock exchanges in India follow
screen-based trading system. NSE was the first stock exchange in the country to provide nation-
wide order-driven, screen-based trading system. NSE model was gradually emulated by all
other stock exchanges in the country. The trading system at NSE known as the “National
Exchange for Automated Trading System (NEAT)” is an anonymous order-driven system and
operates on a strict price/ time priority. It enables members from across the country to trade
simultaneously with enormous ease and efficiency. NEAT has lent considerable depth in the
market by enabling large number of members all over the country to trade simultaneously and
consequently narrowed the spreads significantly.

A single consolidated Order Book for each stock displays, on a real time basis, buy and sell
orders to buy or 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. The limit
orders are executed only if the price quantity conditions match. Thus, the NEAT system
provides Open Electronic Consolidated Limit Order Book (OECLOB). The trading system
provides tremendous flexibility to the users in terms of kinds of orders that can be placed on the
system. Several time-related (Good-till-Cancelled, Good-till-Day, Immediate-or-Cancel), price
related (buy/sell limit and stop-loss orders) or volume-related (All-or-None, Minimum Fill, etc.)
conditions can be easily built into an order. Orders are sorted and matched automatically by the
computer keeping the system transparent, objective and fair. The trading system also provides
complete market information on-line, which is updated on real time basis.
DP-1 DP-2
.

Seller
IX-TRADING
Buyer
AND SETTLEMENT
One of the basic service provided by NSDL is to facilitate transfer of securities from one account
to another at the instruction of the account holder. In NSDL depository system both transferor
and transferee have to give instructions to its depository participants (DPs) for delivering
[transferring out] and receiving of securities. However, transferee can give standing instructions
to its DP receiving in securities. If standing instructions is not given, transferee has to give
separate instructions each time securities have to be received.
Transfer of securities from one account to another may be done for any of the following
purposes:
1. Transfer due to transaction done on a person to person basis is called ‘off-market’
transaction.
2. Transfer arising out of a transaction done on a stock exchange.
3. Transfer arising out of transmission and account closure.
A beneficial account can be debited only if the beneficial owner has given ‘Delivery Instruction’
in the prescribed form. Participant may use the old format as well as the new format of Delivery
Instructions by clients. Separate forms have to be used for transferring securities within NSDL
and between depositories. The DI for an off-market trade has to be clearly indicated in the form
by marking appropriately. The form should be complete in all respects. All the holders of the
account have to sign the form. If the debit has to be effected on a particular date in future,
account holder may mention such date in the space provided for ‘ execution date’ in the form.

Settlement of Off- Market Transactions:

Off –Market Trade

1. Seller gives delivery instructions to his DP to move securities from his account to the
buyer'’ account.
2. Buyer automatically receives the credit of the securities into his account on the basis of standing
instruction for credit.
3. Buyer receives credit of securities into his account only if he gives receipt instructions, if
standing instructions have not been given.
4. DP needs to be extra careful in verifying the signature of the client if large quantities of securities
are being debited to the account.
5. Funds move from buyer to seller outside the NSDL system.

Any trade cleared and settled without the participation of a clearing corporation is called off-
market trade, i.e. transfer from one beneficiary account to another due to trade between them.
Large deals between institution, trades among private parties, transfer of securities between a
client and a sub-broker, large trades in debt instruments are normally settled through off-market
route.

The transferor will submit a DI with ‘Off-market trade’ ticked off to initiate an off-market debit.
The account holder is required to specify the date on which instruction should be executed by
mentioning the execution date on the instruction. The debit will be effected on the execution
date. DP will enter the instruction in the DPM if instruction form is complete in all respects and
is found to be in order. DPM will generate an ‘instruction number’ for each instruction entered.
DP will write the instruction number on the instruction slip for future reference. The instruction
will be triggered on the execution date.

Settlement of Market –Transaction:


Market
CC
Settlement-Demat Shares

Broker Broker

SELLER SELLER BUYER BUYER

A Market trade is one that is settled through participation of a Clearing Corporation. In


the depository environment, the securities move through account transfer. Once the trade
is executed by the broker on the stock exchange, the seller gives a delivery instruction to
his DP to the transfer securities to his broker’s account.

The broker has to then complete the pay-in-before the deadline prescribed by the stock
exchange. The broker removes securities from his account to CC/CH of the stock
exchange concerned, before the deadline given by the stock exchange.

The CC/CH gives Pay-out and securities are transferred to the buying broker’s account.
The broker then gives delivery instructions to his DP to transfer securities to the buyer’s
account. The movement of funds takes place outside the NSDL system.
1. Seller gives delivery instructions to his DP to move securities from his account to
his broker’s account.
2. Securities are transferred from broker’s account to CC on the basis of a delivery
out instruction.
3. On pay-out, securities are moved from CC to buying broker’s account.
4. Buying broker gives instructions and securities move to the buyer’s account.

Transfer of securities towards settlement of transactions done on a stock exchange is called


settlement of market transaction. This type of settlement is done by transferring securities from a
beneficiary account to a clearing member account.
Brokers of stock exchanges that offer settlement through depository are required to open a
‘clearing member account’. In addition to the brokers, custodians registered with SEBI and
approved by stock exchanges can open a clearing member account. These accounts are popularly
known as ‘Broker Settlement account’. A client who has sold shares will deliver securities into
the settlement account of the broker through whom securities were sold.

The following are important descriptions of a transaction done a stock exchange.

Settlement Number:

Trading periods of each of the market segments is identified by a settlement number. Every
settlement number has a trade beginning day, trade –ending day, settlement pay-in day and
settlement pay-out day. Stock exchanges divide a period one year [ generally calendar year] into
several settlement periods and allocate settlement number for each settlement period. All these
days collectively are called ‘settlement calendar’. DPM system will give complete details of
settlement calendar for each stock exchange. The DI should contain the settlement number for
which the securities are being transferred to the clearing member.

Clearing Member:

Every Broker in a stock exchange offering settlement in dematerialised securities will have to
open a distinct account called ‘clearing member account’. It is identified with a number called
‘CM-BP-ID’. If a broker deals in more than one stock exchange, he will be allotted one CM-BP-
ID per stock exchange. The DI slip should contain the CM-BP-ID relevant exchange in which
the trade was done.
Delivery Deadline:

Stock exchanges set a deadline time by which clearing member are expected to deliver
securities. Clearing member can deliver securities within the deadline time only if they have
received securities from their client. In order to ensure that clients give securities in time to the
clearing member, SEBI has prescribed deadline time by which clients have to give securities to
clearing members. SEBI has advised DPs to instruct their clients to submit the settlement
instructions on T+1 (in physical form upto 4 p.m. and 6 p.m. in case of electronic instructions)
for pay-in of securities, viz.; instructions to transfer securities from Client account to CM Pool
account, Inter- Settlement Instructions, CM Pool to CM Pool account transfers and Delivery –
Out Instructions, etc. For example, Pay –in for trades executed on ‘Monday’ will be on
Wednesday. Hence, Clients will have to submit instructions to their Participants (upto 4 p.m. in
case of physical and upto 6 p.m. in case of electronic instructions) on Tuesday. The client must
submit the delivery instruction slip to its Depository Participant before the DPs acceptance
deadline.

All CM’s are expected to complete the pay-in before the deadline time prescribed by the stock
exchange. In Depository environment, the following steps have to be completed to execute the
‘pay-in’ successfully:-

- The client of the brokers who have sold securities will move the securities to the broker-
settlement account before the deadline time.
- CM will move securities from his account to CC/CH of the stock exchange concerned ,
before the deadline time given by stock exchange. If the CM is unable to give delivery
within the time, the shortage is purchased by the CC/CH in an open auction and the
difference in price will be collected from the CM.

The process of a CC/CH transferring the securities to the broker’s settlement –account for
quantity of securities purchased by them on behalf of their clients is known as ‘pay-out’. Pay out
time is also pre-determined by the settlement calendar. The following steps are taken to
distribute securities received in payout to buying clients: -

- The CC/CH credits the buying CM account immediately on pay-out.


- The CM/broker will transfer the securities from his CM settlement account to the
accounts of the buyer.
- If the buying client is a sub-broker, such sub-broker will transfer securities to the final
client using the off-market route.

Tracking of Securities received for pay-in:

A CM is required to track the securities, which it has received for pay-in. A CM can obtain such
information from the following sources:

1. Its clients: CM may contact selling clients to inquire whether they have delivered
securities.
2. Its DP: CM may contact its DP to find out the deliveries received into its CM settlement
account.
3. Internet: using SPEED-e website of NSDL.

Details of all settlements for which pay-in had taken place in last 4 days and for which pay-in is
scheduled in next 4 days and current day is available. Date is updated online with a maximum
delay of half an hour.

CM settlement to CM settlement Instructions:-


The CM may give instructions to its participant to debit its settlement account and credit the
settlement account of another CM in a prescribed format. The CM may give receipt instructions
to its participants for crediting its settlement account from settlement account of another CM in
the format laid down. Alternatively, a CM may give standing instruction to its participant to
credit to credit its settlement account. The participant shall ensure that the instruction form is
complete and the signature of the CM is valid. The participant shall execute the instructions of
the CM to debit/credit the settlement account of the CM.

Inter-depository transfer:-
Transfer of securities from an account in one depository to an account in another depository is
termed as an inter-depository transfer. This facility is quite similar to account transfer within
NSDL.

• As per SEBI (Depositories and Participants) Regulations, 1696, both the depositories
must be inter-connected to enable inter-depository transfers.
• It can be done only for securities that are available for dematerialisation on both the
depositories.
• The account in NSDL can be either a clearing account or a beneficiary account.

• For debiting the clearing account or the beneficiary account with NSDL, the form for
“Inter-depository delivery instruction” is required to be submitted by the clearing
member/beneficial owner to its DP.

• For crediting the clearing account or the beneficiary account, the standing instruction
given for automatically crediting the account is applicable. In case the standing
instructions are not given, then the form for “Inter-Depository Receipt Instruction” is
required to be submitted by the clearing member/beneficial owner to its DP.
• Inter Depository Transfer instructions for the day are exchanged online between the two
depositories.

VIII – MARKET SEGMENTS AND ORDERS

Market Timings
Trading on SE takes place on all days of the week (except Saturdays and Sundays and holidays
declared by the Exchange in advance). The market timings of the equities segment are:
• Normal Market Open : 09:55 hours
• Normal Market Close : 15:30 hours
• Limited Physical Market Open : 09:55 hours
• Limited Physical Market Close : 15:30 hours

(The Closing Session is held between 15.50 hours and 16.00 hours)
Note: The Exchange may however close the market on days other than the above schedule
holidays or may open the market on days originally declared as holidays. The Exchange may
also extend, advance or reduce trading hours when its deems fit and necessary.

Locations
Till the advent of NSE, an investor wanting to transact in a security not traded on the nearest
exchange had to route orders through a series of correspondent brokers to the appropriate
exchange. This resulted in a great deal of uncertainty and high transaction costs. One of the
objectives of NSE was to provide a nationwide trading facility and to enable investors spread all
over the country to have an equal access to NSE.

NSE has made it possible for an investor to access the same market and order book, irrespective
of location, at the same price and at the same cost. NSE uses sophisticated telecommunication
technology through which members can trade remotely from their offices located in any part of
the country. NSE trading terminals are present in 370 cities and towns all over India.

• Cities covered by NSE Terminals


• http://www.nseindia.com/content/equities/eq_citywise.htm

http://www.nseindia.com/content/equities/eq_mkttypes.htm
The NEAT system has four types of market. They are:

Normal Market
All orders which are of regular lot size or multiples thereof are traded in the Normal Market. For
shares that are traded in the compulsory dematerialised mode the market lot of these shares is
one. Normal market consists of various book types wherein orders are segregated as Regular lot
orders, Special Term orders, and Negotiated Trade Orders and Stop Loss orders depending on
their order attributes.

Odd Lot Market


All orders whose order size is less than the regular lot size are traded in the odd-lot market. An
order is called an odd lot order if the order size is less than regular lot size. These orders do not
have any special terms attributes attached to them. In an odd-lot market, both the price and
quantity of both the orders (buy and sell) should exactly match for the trade to take place.
Currently the odd lot market facility is used for the Limited Physical Market as per the SEBI
directives.

Auction Market
In the Auction Market, auctions is initiated by the Exchange on behalf of trading members for
settlement related reasons. There are 3 participants in this market.
> Initiator - the party who initiates the auction process is called an initiator
> Competitor - the party who enters orders on the same side as of the initiator
> Solicitor - the party who enters orders on the opposite side as of the initiator

Spot Market
Spot orders are similar to the normal market orders except that spot orders have different
settlement periods vis-à-vis normal market. These orders do not have any special terms attributes
attached to them. Currently the Spot Market is not in use.

http://www.nseindia.com/content/equities/eq_orderbook.htm
The NSE trading system provides complete flexibility to members in the kinds of orders that can
be placed by them. Orders are first numbered and time-stamped on receipt and then immediately
processed for potential match. Every order has a distinctive order number and a unique time
stamp on it. If a match is not found, then the orders are stored in different 'books'. Orders are
stored in price-time priority in various books in the following sequence:
- Best Price
- Within Price, by time priority.
Price priority means that if two orders are entered into the system, the order having the best price
gets the higher priority. Time priority means if two orders having the same price are entered, the
order that is entered first gets the higher priority.
The Equities segment has following types of books:
1. Regular Lot Book
The Regular Lot Book contains all regular lot orders that have none of the following attributes
attached to them.
- All or None (AON)
- Minimum Fill (MF)
- Stop Loss (SL)
2. Special Terms Book
The Special Terms book contains all orders that have either of the following terms attached:
- All or None (AON)
- Minimum Fill (MF)
Note: Currently, special term orders i.e. AON and MF are not available on the system as per
the SEBI directives.
3. Negotiated Trade Book
The Negotiated Trade book contains all negotiated order entries captured by the system before
they have been matched against their counterparty trade entries. These entries are matched with
identical counterparty entries only. It is to be noted that these entries contain a counter party code
in addition to other order details.
4. Stop-Loss Book
Stop Loss orders are stored in this book till the trigger price specified in the order is reached or
surpassed. When the trigger price is reached or surpassed, the order is released in the
Regular lot book.
The stop loss condition is met under the following circumstances:
(i) Sell order - A sell order in the Stop Loss book gets triggered when the last traded price in the
normal market reaches or falls below the trigger price of the order.
(ii) Buy order - A buy order in the Stop Loss book gets triggered when the last traded price in
the normal market reaches or exceeds the trigger price of the order.
5. Odd Lot Book
The Odd lot book contains all odd lot orders (orders with quantity less than marketable lot) in the
system. The system attempts to match an active odd lot order against passive orders in the book.
Currently, pursuant to a SEBI directive, the Odd Lot Market is being used for orders that have
quantity less than or equal to 500 viz. the Limited Physical Market.
6. Spot Book
The Spot lot book contains all spot orders (orders having only the settlement period different) in
the system. The system attempts to match an active spot lot order against the passive orders in
the book. Currently the Spot Market book type is not in use.
7. Auction Book
This book contains orders that are entered for all auctions. The matching process for auction
orders in this book is initiated only at the end of the solicitor period.

http://www.nseindia.com/content/equities/eq_orderrules.htm
The best buy order is matched with the best sell order. An order may match partially with
another order resulting in multiple trades. For order matching, the best buy order is the one with
the highest price and the best sell order is the one with the lowest price. This is because the
system views all buy orders available from the point of view of a seller and all sell orders from
the point of view of the buyers in the market. So, of all buy orders available in the market at any
point of time, a seller would obviously like to sell at the highest possible buy price that is
offered. Hence, the best buy order is the order with the highest price and the best sell order is the
order with the lowest price.

Members can proactively enter orders in the system, which will be displayed in the system till
the full quantity is matched by one or more of counter-orders and result into trade(s) or is
cancelled by the member. Alternatively, members may be reactive and put in orders that match
with existing orders in the system. Orders lying unmatched in the system are 'passive' orders and
orders that come in to match the existing orders are called 'active' orders. Orders are always
matched at the passive order price. This ensures that the earlier orders get priority over the orders
that come in later.

http://www.nseindia.com/content/equities/eq_ordercond.htm
A Trading Member can enter various types of orders depending upon his/her requirements.
These conditions are broadly classified into three categories:
http://www.nseindia.com/content/equities/eq_ordercond.htm - time#time,
http://www.nseindia.com/content/equities/eq_ordercond.htm - price#price and
http://www.nseindia.com/content/equities/eq_ordercond.htm - qtty#qtty.
1. Time Conditions
DAY - A Day order, as the name suggests, is an order which is valid for the day on which it is
entered. If the order is not matched during the day, the order gets cancelled automatically at the
end of the trading day. GTC - A Good Till Cancelled (GTC) order is an order that remains in the
system until it is cancelled by the Trading Member. It will therefore be able to span trading days
if it does not get matched. The maximum number of days a GTC order can remain in the system
is notified by the Exchange from time to time.
GTD - A Good Till Days/Date (GTD) order allows the Trading Member to specify the days/date
up to which the order should stay in the system. At the end of this period the order will get
flushed from the system. Each day/date counted is a calendar day and inclusive of holidays. The
days/date counted is inclusive of the day/date on which the order is placed. The maximum
number of days a GTD order can remain in the system is notified by the Exchange from time
to time.

IOC - An Immediate or Cancel (IOC) order allows a Trading Member to buy or sell a security as
soon as the order is released into the market, failing which the order will be removed from the
market. Partial match is possible for the order, and the unmatched portion of the order is
cancelled immediately.

2. Price Conditions
Limit Price/Order – An order that allows the price to be specified while entering the order into
the system. Market Price/Order – An order to buy or sell securities at the best price obtainable at
the time of entering the order.
Stop Loss (SL) Price/Order – The one that allows the Trading Member to place an order which
gets activated only when the market price of the relevant security reaches or crosses a threshold
price. Until then the order does not enter the market. A sell order in the Stop Loss book gets
triggered when the last traded price in the normal market reaches or falls below the trigger price
of the order. A buy order in the Stop Loss book gets triggered when the last traded price in the
normal market reaches or exceeds the trigger price of the order.

3. Quantity Conditions
Disclosed Quantity (DQ) - An order with a DQ condition allows the Trading Member to disclose
only a part of the order quantity to the market. For example, an order of 1000 with a disclosed
quantity condition of 200 will mean that 200 are displayed to the market at a time. After this is
traded, another 200 is automatically released and so on till the full order is executed. The
Exchange may set a minimum disclosed quantity criteria from time to time.

MF - Minimum Fill (MF) orders allow the Trading Member to specify the minimum quantity by
which an order should be filled. For example, an order of 1000 units with minimum fill 200 will
require that each trade be for at least 200 units. In other words there will be a maximum of 5
trades of 200 each or a single trade of 1000. The Exchange may lay down norms of MF from
time to time. AON - All or None orders allow a Trading Member to impose the condition that
only the full order should be matched against. This may be by way of multiple trades. If the full
order is not matched it will stay in the books till matched or cancelled.

Trader Workstation

The trader workstation is the terminal from which the member accesses the trading system. Each
trader has a unique identification by way of Trading Member ID and User ID through which he
is able to log on to the system for trading or inquiry purposes. A member can have several user
IDs allotted to him by which he can have more than one employee using the system
concurrently.
The Exchange may also allow a Trading Member to set up a network of dealers in different cities
all of whom are provided a connection to the NSE central computer. A Trading Member can
define a hierarchy of users of the system with the Corporate Manager at the top followed by the
Branch Manager and Dealers. The Trader Workstation screen of the Trading Member is divided
into several major windows:
1. Title Bar The title bar displays the current time, Trading system name and date.
2. Tool Bar A window with different icons which provides quick access to various
functions such as Market By Order, Market By Price, Market Movement, Market Inquiry,
Auction Inquiry, Snap Quote, Market Watch, Buy order entry, Sell order entry, Order
Modification, Order Cancellation, Outstanding Orders, Order Status, Activity Log, Previous
Trades, Net Position, Online Backup, Supplementary Menu, Security List and Help. All these
functions are also available on the keyboard.
3. Ticker Window The ticker displays information about a trade as and when it takes place.
The user has the option to set-up the securities which appear in the ticker.
4. Market Watch Window The Market Watch window is the main area of focus for a
Trading Member. The purpose of Market Watch is to view market information of pre-selected
securities that are of interest to the Trading Member. To monitor various securities, the trading
member can set them up by typing the Security Descriptor consisting of a Symbol field and a
Series field. Securities can also be set up by invoking the Security List and selecting the
securities from the window. The Symbol field incorporates the Company name and the Series
field captures the segment/instrument type. A third field indicates the market type.
5. On line Index and Index Inquiry With every trade in a security participating in Index,
the user has the information on the current value of the Nifty. This value is displayed at the
extreme right hand corner of the ticker window. Index Inquiry gives information on Close, Open,
High, Low and current index values at the time of invoking this inquiry screen.
6. Inquiry Window In this window, the inquiries such as Market by Order, Market by Price,
Previous Trades, Outstanding Orders, Activity Log, Order Status and Market Inquiry can be
viewed.
7. Market By Order (MBO) The purpose of Market by Order is to enable the user to view
outstanding orders in the trading books in the order of price/time priority. The information is
displayed for each order. Stop Loss orders, which are not triggered will not be displayed on the
window. Buy orders are displayed on the left side of the window and Sell orders on the right
side. The orders are presented in a price/time priority with the best priced" order at the top.
8. Market by Price (MBP) The purpose of Market by Price is to enable the Trading
Member to view aggregate orders waiting in the book at given prices.
9. Previous Trades (PT) The purpose of this window is to provide information to users for
their own trade.
10. Outstanding Orders (OO)
The purpose of Outstanding Orders is to enable a Trading Member to view his/her own
outstanding buy or sell orders for a security. An outstanding order will be an order that was
entered by the user, but is not yet completely traded or cancelled.
11. Activity Log (AL) The Activity Log shows the activities that have been performed on
any order of the Trading Member such as whether the order has been traded against fully or
partially, it has been modified or has been cancelled. It displays information only of those orders
in which some activity has taken place. It does not display orders, which have entered the books
but have not been matched (fully or partially) or modified or cancelled.
12. Order Status (OS) Order Status enables the user to look into the status of a specific
order. Current status of the order and other order details are displayed. In case the order is traded,
the trade details are also displayed.
13. Market Inquiry (MI) Market Inquiry enables the user to view the market statistics like
Open, High, Low, Previous close, Last traded price change indicator, Last traded quantity, date
and time etc. A user may find inquiry screens like Market Movement, Most Active Securities
and Net Position useful. These are available in the supplementary menu.
14. Market Movement (MM) The Market Movement screen provides information to the
user regarding the movement of a security for the current day. It gives details of the movement of
the scrip for a time interval. The details include total buy and sell order quantity value, Open,
High, Low, Last traded price etc.
15. Most Active Securities This screen gives a list of the securities with the highest traded
value during the day and the quantity traded for each of them.
16. Net Position This functionality enables the user to interactively view his net position
for all securities in which he has traded.
17. Snap Quote The Snap Quote feature allows a Trading Member to get instantaneous
market information on any desired security. This is normally used for securities that are not
already on display in the Market Watch window. The information presented is the same as that
of Market Watch window.
18. Order/Trade Window Order entry mechanisms enable the Trading Member to
place orders in the market. The system will request re-confirmation of an order so that the user is
cautioned before the order is finally released into the market. Orders once placed on the system
can be modified or cancelled till they are matched. Once orders are matched they cannot be
modified or cancelled. There is a facility to generate online order/trade confirmation slips as
soon as an order is placed or a trading is done. The order confirmation slip contains among other
things, order no., security name, price, quantity, order conditions like disclosed or minimum fill
quantity etc. The trade confirmation slip contains the order and trade no., date, trade time, price
and quantity traded, amount etc. Orders and trades are identified and linked by unique numbers
so that the investor can check his order and trade details.
19. Systems Message Window This window is used to view messages from the
Exchange to all specific Trading Members.
20. Supplementary Menu
Some of the supplementary features in the NEAT system are:
20(a) On line back up An on line back up facility is provided which the user can invoke to
take a back up of all order and trade related information. There is an option to copy the file to
any drive of the computer or on a floppy diskette. Trading members find this convenient in their
back office work.
20(b) Off Line Order Entry A member is able to make an order entry in the batch mode.

Internet Based Trading


The Securities & Exchange Board of India (SEBI) approved the report on Internet Trading
brought out by the SEBI Committee on Internet Based Trading and Services In January 2000.
Internet trading can take place through order routing systems, which will route client orders to
exchange trading systems for execution. Thus a client sitting in any part of the country would be
able to trade using the Internet as a medium through brokers' Internet trading systems.

SEBI-registered brokers can introduce Internet based trading after obtaining permission from
respective Stock Exchanges. SEBI has stipulated the minimum conditions to be fulfilled by
trading members to start Internet based trading and services, vide their circular
no.SMDRP/POLICY/CIR-06/2000 dated January 31, 2000.
• http://www.nseindia.com/content/equities/eq_inetatnse.htm
• http://www.nseindia.com/content/equities/eq_inetvendor.htm
• http://www.nseindia.com/content/equities/eq_inetmembers.htm
• http://www.nseindia.com/content/equities/eq_inetstats.htm
• http://www.nseindia.com/content/equities/eq_wap.htm

A. TRADING OF EQUITIES

Market Segments
The Exchange operates the following sub-segments in the Equities segment:

1. Rolling Settlement
In a rolling settlement, each trading day is considered as a trading period and trades executed
during the day are settled based on the net obligations for the day. At NSE, trades in rolling
settlement are settled on a T+2 bases i.e. on the 2nd working day. For arriving at the settlement
day all intervening holidays, which include bank holidays, NSE holidays, Saturdays and Sundays
are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesday's
trades settled on Thursday and so on.

2. Limited Physical Market


Pursuant to the directive of SEBI to provide an exit route for small investors holding physical
shares in securities mandated for compulsory dematerialised settlement, the Exchange has
provided a facility for such trading in physical shares not exceeding 500 shares. This market
segment is referred to as 'Limited Physical Market' (small window). The LimitedPhysical
Market was introduced on June7, 1999.

3. Institutional Segment
The Reserve Bank of India had vide a press release on October 21, 1999, clarified that inter-
foreign-institutional-investor (inter-FII) transactions do not require prior approval or post-facto
confirmation of the Reserve Bank of India, since such transactions do not affect the percentage
of overall FII holdings in Indian companies. (Inter FII transactions are however not permitted in
securities where the FII holdings have already crossed the overall limit due to any reason).

To facilitate execution of such Inter-Institutional deals in companies where the cut-off limit of
FII investment has been reached, the Exchange introduced a new market segment on December
27, 1999.

The securities where FII investors and FII holding has reached the cut-off limit as specified by
RBI (2% lower than the ceiling specified by RBI) from time to time would be available for
trading in this market type for exclusive selling by FII clients.

The cut off limits for companies with 24% ceiling is 22%, for companies with 30% ceiling, is
28% and for companies with 40% ceiling is 38%. Similarly, the cut off limit for public sector
banks (including State Bank of India) is 18% whose ceiling is 20%. The list of securities
eligible / become ineligible for trading in this market type would be notified to members from
time to time.

4. Trade for Trade Segment


Trading in this segment is available only for the securities
• Which have not established connectivity with both the depositories as per SEBI
directive? The list of these securities is notified by SEBI from time to time.
• On account of surveillance action

Price Bands of Equities


Daily price bands are applicable on securities as below:
 Daily price bands of 2% (either way) on specified securities
 Daily price bands of 5% (either way) on specified securities
 Daily price bands of 10% (either way) on specified securities
 No price bands are applicable on: scripts on which derivative products are
available or scripts included in indices on which derivative products are available.
 Price bands of 20% (either way) on all remaining scripts (including debentures,
warrants, preference shares etc).
 For Auction market the price bands of 20% are applicable.

B. TRADING OF DERIVATIVES

Price Bands of Derivatives


There are no day minimum/maximum price ranges applicable in the derivatives segment.
However, in order to prevent erroneous order entry, operating ranges and day
minimum/maximum ranges arekept as below:

1. For S&P CNX Nifty Futures : at 10% of the base price


2. For S&P CNX Nifty Options: at 99% of the base price
3. For Futures on Individual Securities: at 20% of the base price
4. For Options on Individual Securities: at 99% of the base price

In view of this, orders placed at prices which are beyond the operating ranges would reach
the Exchange as a price freeze. In respect of orders which have come under price freeze,
members would be required to confirm to the Exchange that there is no inadvertent error in
the order entry and that the order is genuine. On such confirmation the Exchange may
approve such order.

Trading System of Derivatives

The Futures and Options Trading System provides a fully automated trading environment for
screen-based, floor-less trading on a nationwide basis and an online monitoring and
surveillance mechanism. The system supports an order driven market and provides
complete transparency of trading operations.
Orders, as and when they are received, are first time stamped and then immediately
processed for potential match. If a match is not found, then the orders are stored in different
'books'. Orders are stored in price-time priority in various books in the following sequence
:-->

• Best Price
• Within Price, by time priority.

C. TRADING IN RETAIL DEBT MARKET


Trading in the Retail Debt Market takes place in the same manner in which the trading
takes place in the equities (Capital Market) segment. The RETDEBT Market facility on
the NEAT system of Capital Market Segment is used for entering transactions in RDM
session.

• http://www.nseindia.com/content/rdm/rdm_trading.htm - 1#1---
Trading Members who are registered members of NSE in the Capital Market segment
and Wholesale Debt Market segment are allowed to trade in Retail Debt Market
(RDM) subject to fulfilling the capital adequacy norms. Trading Members with
membership in Wholesale Debt Market segment only, can participate in RDM on
submission of a letter in the prescribed format as per Circular No.
http://www.nseindia.com/content/circulars/cmtr3860.htm dated January 11, 2003.
• http://www.nseindia.com/content/rdm/rdm_trading.htm - 3#3--
Trading in RDM segment takes place on all days of the week, except Saturdays and
Sundays and holidays declared by the Exchange in advance (The holidays on the
RDM segment shall be the same as those on the
http://www.nseindia.com/content/equities/eq_holidays.htm). The market timings of
the RDM segment are the same as the Equities segment.
• http://www.nseindia.com/content/rdm/rdm_trading.htm - 4#4-- The
trading parameters for RDM segment are as below

• Face Value • Rs. 100/-

• Permitted Lot Size • 10

• Tick Size • Rs. 0.01

• Operating Range +/- 5%

• Mkt. Type • D
Indicator (RETDEBT)


• Book Type • RD

http://www.nseindia.com/content/rdm/rdm_trading.htm - 5#5 -- Trading


in RDM takes place on the 'National Exchange for Automated Trading' (NEAT)
system, a fully automated screen based trading system, which adopts the principle of
an order driven market. The RETDEBT Market facility on the NEAT system of
Capital Market Segment is used for entering transactions in RDM session.

• http://www.nseindia.com/content/rdm/rdm_trading.htm - 6#6--
Trading in Retail Debt Market is permitted under Rolling Settlement, where in each
trading day is considered as a trading period and trades executed during the day are
settled based on the net obligations for the day Settlement is on a T+2 basis i.e. on the
2nd working day. For arriving at the settlement day all intervening holidays, which
include bank holidays, NSE holidays, Saturdays and Sundays are excluded. Typically
trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on
Thursday and so on.

X- INDEX CONCEPT IN NSE


Indices
An Index is used to give information about the price movements of products in the financial,
commodities or any other markets. Financial indexes are constructed to measure price
movements of stocks, bonds, T-bills and other forms of investments. Stock market indexes
are meant to capture the overall behavior of equity markets. A stock market index is created
by selecting a group of stocks that are representative of the whole market or a specified
sector or segment of the market. An Index is calculated with reference to a base period and
a base index value.
Stock market indexes are useful for a variety of reasons. Some of them are:
• They provide a historical comparison of returns on money invested in the stock
market against other forms of investments such as gold or debt.
• They can be used as a standard against which to compare the performance of an
equity fund.
• It is a lead indicator of the performance of the overall economy or a sector of the
economy
• Stock indexes reflect highly up to date information
• Modern financial applications such as Index Funds, Index Futures, Index Options
play an important role in financial investments and risk management
IISL - Products & Services
IISL offers a wide range of products and services which are key support tools for the equity
markets. We provide reliable, accurate and valuable data on indices and index related
services to cater to the needs of various segments of users. Our specialty is indices based on
Indian equity markets, which may be used for benchmarking, trading or research. Use of
IISL data or name or indices requires a license or subscription.

IISL Indices
Major
Other Indices
Indices
S&P
CNX http://www.nseindia.com/content/indices/ind_cnxit.htm
Nifty
CNX
Nifty CNX Bank Index
Junior
S&P
CNX CNX FMCG Index
500
CNX
Midcap CNX Millenium Index
200
S&P
CNX CNX PSE Index
Defty
CNX MNC Index
S&P CNX Industry Indices
Customised Indices

MAJOR INDICES

1. S&P CNX Nifty

S&P CNX Nifty is a well diversified


http://www.nseindia.com/content/indices/ind_niftylist.htm stock index accounting for 23
sectors of the economy. It is used for a variety of purposes such as benchmarking fund
portfolios, http://www.nseindia.com/content/indices/ind_niftytrading.htm and
http://www.nseindia.com/content/indices/ind_indexfunds.htm.

S&P CNX Nifty is owned and managed by


http://www.nseindia.com/content/indices/ind_iisl.htm, which is a joint venture between NSE
and CRISIL. IISL is India's first specialized company focused upon the index as a core
product. IISL have a consulting and licensing agreement with Standard & Poor's (S&P), who
are world leaders in index services.
• The total traded value of all Nifty stocks is approximately 70% of the traded value of
all stocks on the NSE
• Nifty stocks represent about 59% of the total market capitalization
• http://www.nseindia.com/content/indices/ind_niftyimpactcost.htm of the S&P CNX
Nifty for a portfolio size of Rs.5 million is 0.10%
• S&P CNX Nifty is
http://www.nseindia.com/content/indices/ind_niftymaintenance.htm and is ideal for
derivatives trading.

2. CNX Nifty Junior

The next rung of liquid securities after


http://www.nseindia.com/content/indices/ind_nifty.htm is the CNX Nifty Junior. 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.

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. The maintenance of the
S&P CNX Nifty and the CNX Nifty Junior are synchronized 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 indexes or portfolio.
• CNX Nifty Junior represents about 6% of the total market capitalization
• Impact cost for CNX Nifty Junior for a portfolio size of Rs.2.50 million is 0.30%
3. S&P CNX 500

The S&P CNX 500 is India’s first broad-based benchmark of the Indian capital market for
comparing portfolio returns vis-à-vis market returns. The S&P CNX 500 represents about
94% of total market capitalization and about 98% of the total turnover on the NSE. The S&P
CNX 500 companies are disaggregated into 74 industry indexes viz. S&P CNX Industry
Indexes. Industry weightages in the index reflect the industry weightages in the market. For
e.g. if the banking sector has a 5% weightage in the universe of stocks traded on NSE,
banking stocks in the index would also have an approx. representation of 5% in the index.

4. CNX Midcap 200

The medium capitalized segment of the stock market is being increasingly perceived as an
attractive investment segment with high growth potential. The primary objective of the CNX
MidCap 200 Index is to capture the movement and be a benchmark of the midcap segment of
the market.
• CNX Midcap 200 represents about 68% of the total market capitalization and about
72% of the total traded value
• Industry weightages in the index dynamically reflect industry weightages in the
market
• Provide investors a broad based benchmark for comparing portfolio returns vis-à-vis
market returns in the midcap segment.

5. S&P CNX Defty

Almost every institutional investor and off-shore fund enterprise with an equity exposure in
India would like to have an instrument for measuring returns on their equity investment in
dollar terms. To facilitate this, a new index the S&P CNX Defty-Dollar Denominated S&P
CNX Nifty has been developed.

S&P CNX Defty is S&P CNX Nifty, measured in dollars. The S&P CNX Defty is calculated
real-time. 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
6. Other Indices

A. CNX IT Sector Index

Information Technology (IT) industry has played a major role in the Indian economy during
the last few years. A number of large, profitable Indian companies today belong to the IT
sector and a great deal of investment interest is now focused on the IT sector. In order to
have a good benchmark of the Indian IT sector, IISL developed the CNX IT sector index.
Companies in this index are those that have more than 50% of their turnover from IT related
activities like software development, hardware manufacture, vending, support and
maintenance. The index is a market capitalization weighted index with its base period being
December 1995 and the base date and base value being January 1, 1996 and 1,000
respectively.

B. CNX Bank Index

The Indian banking Industry has been undergoing major changes, reflecting a number of
underlying developments. Advancement in communication and information technology has
facilitated growth in internet-banking, ATM Network, Electronic transfer of funds and quick
dissemination of information. Structural reforms in the banking sector have improved the
health of the banking sector.

The reforms recently introduced include the enactment of the Securitization Act to step up
loan recoveries, establishment of asset reconstruction companies, initiatives on improving
recoveries from Non-performing Assets (NPAs) and change in the basis of income
recognition has raised transparency and efficiency in the banking system. Spurt in treasury
income and improvement in loan recoveries has helped Indian Banks to record better
profitability. In order to have a good benchmark of the Indian banking sector, India Index
Service and Product Limited (IISL) has developed the CNX Bank Index.

CNX Bank Index is an index comprised of the most liquid and large capitalized Indian
Banking stocks. It provides investors and market intermediaries with a benchmark that
captures the capital market performance of Indian Banks. The index is a market capitalization
weighted index with base date of January 01, 2000, indexed to a base value of 1000. Initially
the index would be calculated at the end of the trading day.

C. CNX FMCG Index

FMCGs (Fast Moving Consumer Goods) are those goods and products, which are non-
durable, mass consumption products, available off the shelf.
Selection Criteria
Selection of the index set is based on the following criteria:
1. Company's market capitalization rank in the universe should be less than 500
2. Company's turnover rank in the universe should be less than 500
3. Company's trading frequency should be at least 90% in the last one year
4. Company should have a minimum track record of 3 years of operations with a
positive net worth.

D. CNX Millenium Index

The Indian economy has undergone tremendous transformation over the last few years. Till
the early 1990s, the services sector contributed just about 20% to the Indian GDP while this
figure now stands at nearly 50% and is likely to grow further in the coming years. Sectors
like Information Technology, Telecommunication, Media & Entertainment and the Internet
are expected to be the drivers of the Indian economy in the coming years. CNX Millennium
Index comprises of companies belonging to the hi-tech, hi-growth sectors like IT, Telecom,
media, internet etc. The broad sectors taken into considerationin the CNX Millennium Index
are:
1. Computer - Software
2. Computer - Hardware
3. Telecommunication - Services
4. Telecommunication - Equipment
5. Telecommunication - Cables
6. Media &Entertainment
7. Listed Internet companies

E. CNX PSE Index


As part of its agenda to reform the Public Sector Enterprises (PSE), the Government has
selectively been disinvesting its holdings in public sector enterprises since 1991. With a view
to provide regulators, investors and market intermediaries with an appropriate benchmark
that captures the performance of this segment of the market, as well as to make available an
appropriate basis for pricing forthcoming issues of PSEs, IISL has developed the CNX PSE
Index, comprising of 20 PSE stocks.

F. CNX MNC Index

The CNX MNC Index comprises 50 listed companies in which the foreign shareholding is
over 50% and / or the management control is vested in the foreign company.

G. CNX Industry Indices

S&P CNX 500 Equity Index is desegregated into 73 Industry sectors which are separately
maintained by IISL. The industry indices are derived out of the S&P CNX 500 and care is
taken to see that the industry representation in the entire universe of securities is reflected in
the S&P CNX 500. e.g., if in the entire universe of securities, banking sector has a 5%
weightage, then the Banking sector (as determined by the Banking stocks in S&P CNX 500)
would have a 5% weight age in the S&P CNX 500. The Banking sector index would be
derived out of the Banking stocks in the S&P CNX 500. The changes to the weight age of
various sectors in the S&P CNX 500 would dynamically reflect the changes in the entire
universe of securities.

H. Customized Indices

IISL undertakes development & maintenance of customized indices for clients as well as
offers consultancy services for developing indices. Customized indices can be used for
tracking the performance of the client’s portfolio of stocks vis-à-vis objectively defined
benchmarks, or for benchmarking NAV performance to customized indices. The customized
indices can be sub-sets of existing indices or a completely new index. Some of the indices
that can be constructed include:
· Sector Indices
· Individual Business Group Indices
· Portfolios
· Industry Indices

INDEX CONCEPTS

1. http://www.nseindia.com/content/indices/ind_impactcost.htm
2. http://www.nseindia.com/content/indices/ind_beta.htm
3. http://www.nseindia.com/content/indices/ind_totalreturnindex.htm

1. http://www.nseindia.com/content/indices/ind_impactcost.htm

Introduction
Liquidity in the context of stock markets means a market where large orders can be executed
without incurring a high transaction cost. The transaction cost referred here is not the fixed
costs typically incurred like brokerage, transaction charges, depository charges etc. but is the
cost attributable to lack of market liquidity as explained subsequently. Liquidity comes from
the buyers and sellers in the market, who are constantly on the look out for buying and
selling opportunities. Lack of liquidity translates into a high cost for buyers and sellers.

The electronic limit order book (ELOB) as available on NSE is an ideal provider of market
liquidity. This style of market dispenses with market makers, and allows anyone in the
market to execute orders against the best available counter orders. The market may thus be
thought of as possessing liquidity in terms of outstanding orders lying on the buy and sell
side of the order book, which represent the intention to buy or sell.

When a buyer or seller approaches the market with an intention to buy a particular stock, he
can execute his buy order in the stock against such sell orders, which are already lying in the
order book, and vice-versa.

Definition
Impact cost represents the cost of executing a transaction in a given stock, for a specific
predefined order size, at any given point of time. Impact cost is a practical and realistic
measure of market liquidity; it is closer to the true cost of execution faced by a trader in
comparison to the bid-ask spread. It should however be emphasized that:
(a) impact cost is separately computed for buy and sell
(b) impact cost may vary for different transaction sizes
(c) impact cost is dynamic and depends on the outstanding orders
(d) where a stock is not sufficiently liquid, a penal impact cost is applied
In mathematical terms it is the percentage mark up observed while buying / selling the
desired quantity of a stock with reference to its ideal price (best buy + best sell) / 2.

2. Beta
Risk is an important consideration in holding any portfolio. The risk in holding securities is
generally associated with the possibility that realized returns will be less than the returns
expected. Risks can be classified as Systematic risks and Unsystematic risks.

1. Unsystematic risks:
These are risks that are unique to a firm or industry. Factors such as management capability,
consumer preferences, labour, etc. contribute to unsystematic risks. Unsystematic risks are
controllable by nature and can be considerably reduced by sufficiently diversifying one's
portfolio.

2. Systematic risks:
These are risks associated with the economic, political, sociological and other macro-level
changes. They affect the entire market as a whole and cannot be controlled or eliminated
merely by diversifying one's portfolio.

What is Beta?
The degree, to which different portfolios are affected by these systematic risks as compared
to the effect on the market as a whole, is different and is measured by Beta. To put it
differently, the systematic risks of various securities differ due to their relationships with the
market. The Beta factor describes the movement in a stock's or a portfolio's returns in
relation to that of the market return. For all practical purposes, the market returns are
measured by the returns on the index (Nifty, Mid-cap etc.), since the index is a good reflector
of the market.
3. Total Return Index
Introduction
Nifty is a price index and hence reflects the returns one would earn if investment is made in
the index portfolio. However, a price index does not consider the returns arising from
dividend receipts. Only capital gains arising due to price movements of constituent stocks are
indicated in a price index. Therefore, to get a true picture of returns, the dividends received
from the constituent stocks also need to be factored in the index values. Such an index, which
includes the dividends received, is called the Total Returns Index. Total Returns Index
reflects the returns on the index arising from:
(a) Constituent stock price movements and
(b) Dividend receipts from constituent index stocks.