STOCK EXCHANGE AND RETAIL PARTICIPATION OF CLIENTS IN SECURITIES MARKET

INDEX OF CONTENTS 1. 2. Rationale for the Study Objective of the Study Title of the project Objective of the study Scope of the study Profile of the securities market Theoretical Perspective Research Methodology Data Analysis and interpretation using various charts and graphs Findings. Limitation if any Expected contribution from the study

3. 4. 5.
6.

7. 8. 9.

Reforms of the Indian economy during the 1990s have helped to bring the Indian securities market into the main stream of the Indian financial system. As a result, the growth in investment by individual investors has become quite significant. This made it pertinent to have a first hand in depth view of the extent of public participation directly in the securities market or through mutual funds. The terms of reference of the study were to estimate the number of household and the population of individual investors, their economic and demographic profile, portfolio size, investment preferences for equity as well as other
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saving instruments.The study was also designed to elicit information from households on the risk perceptions, experiences in investing in security market, return on investment and the like.Other areas to be covered included awareness of investor rights, experiences with grievance redressal mechanisms; indications of investors future plans of investment and their expectations from the securities market were also obtained. The study also provided estimates of non-investor households and population, their economic and demographic profile, their pattern of investment in various instruments and reasons of noninvestment in the equity market. An important feature of the securities market is the depth and breadth of public participation in the market.Millions of households and individual investors provide a pool of capital and a diversity of decision-making that creates liquidity in the market and makes it dynamic. Thus, the number of households and individual stock holders are the two most commonly cited summary statistics denoting the breadth of stock ownership in the population.These two statistics are useful tools for understanding the changes that take place in the equity market and for policy formulation. It is therefore important to estimate these statistics to assess retail participation in securities market. The securities market in India has grown dramatically in the 1990s;this has led to the expansion of
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direct equity ownership in the country. A large number of households have also indirectly owned equity shares and debentures through their participation in mutual funds. To help guage the impact of the growth of the securities market on the households to conduct a comprehensive survey of Indian Investor households. The markets were transformed in the 1990s The 1990s was the decade of reforms of the Indian economy; it was the period of transformation of the Indian securities market; it was the age of the emergence of the securities market from the backwaters into the mainstream of the Indian financial system. The mutual funds as an investment vehicle helped spread of the equity cult among the households and individual investors. Embracing of new technology redefined the stock exchanges in the country, as elsewhere, and made the geographical location of a stock exchange irrelevant. Automation of trading in the stock exchanges brought in train several changes. It helped improve the level of transparency, reduced spreads, and lowered transaction costs. It also allowed for the expansion of the stock exchanges,through the spread of trading terminals in cities and towns in the country and brought the stock exchanges closer to the investors. These changes were the outcome mainly of the economic reforms, macro-economic changes, and the regulations for the securities market. The flagship of
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governments reforms, SEBI, had an important role to play in inducing the change in the market place.Established in 1992 as the apex, statutory regulatory body for the securities market, with the express mandate of investor protection, development and market regulation, it was able to put in place in a very short period of time, a credible regulatory structure for the securities market for the first time. SEBI thus became the prime catalyst for market development bringing about far reaching changes in market practices, introducing international best practices and procedures and modernizing the market infrastructure taking advantage of technology and enforcing regulations. When the market was in a bearish trend, the interest rates were high, and the confidence of the investors on the securities market had waned considerably, the in vestors opted for fixed income investments, which were providing higher return sowing to the high interest rates prevailing during the period. The study relates to estimating the number of households and the population of individual investors who have invested in the equity market directly or indirectly through mutual funds. Drawing a profile of the households and investors, and describe their demographic, economic, financial and equity ownership characteristics; understand their investment preferences for equity as well as other savings instruments available in the market, their perceptions about market risks, their expectations from the market, the nature of their grievances and difficulties; and estimating the number of
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households which have refrained from investing in the equity market, describe their demographic characteristics, and analyse the reasons for their reluctance to invest in equity. The study also relates to improvement in the service given by brokers/sub-brokers, boosting the investors confidence in the securities market,to enable Non-investors who do not invest in securities market either directly or indirectly to invest in equities and understanding the needs of the investor/non-investor households and preparing tailor-made plans to suit those needs.

Scope of the study

Reforms of the Indian economy during the 1990s have helped to bring the Indian securities market into the main stream of the Indian financial system. As a result,the growth in investment by individual investors has become quite significant.This made it pertinent to have a first hand in depth view of the extent of public participation directly in the securities market or through mutual funds.The Evolution of Stock Exchanges in India Origin of Bombay
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Stock Exchange in 1875 and 23 other Stock Exchanges throughout India.The securities traded were equity, debt, derivatives such as options, futures, index. the securities market has essentially three categories of participants, viz., the issuer of securities, the investors in the securities and the intermediaries. The securities has two interdependent and inseparable segments, the new issues(primary) and the stock (secondary) market. The primary market provides the channel for creation and sale of new securities, while the secondary market deals in securities previously issued. The secondary market operated through two mediums, namely, the over-the-counter (OTC) market and the exchangetraded market. All the trades taking place over a trading cycle (day=T) are settled together after a certain time (T+2 day). The trades executed on the National Stock Exchange (NSE) are cleared and settled by a clearing corporation. The clearing corporation acts as a counter party and guarantees settlement.Exchanges in the country, which offer screen based trading system. The trading system is connected using the VSAT technology from over 281 cities. There are 9,335 trading members registered with SEBI as at end March 2006. Inorder to provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line fully automated screen based trading system (SBTS).Presently only two exchanges viz., NSE and Stock Exchange, Mumbai (BSE) provides trading in the derivatives of securities.Despite having a large number of
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companies listed on its exchanges, India accounted for a meager 0.94% in total world turnover in 2005. Market capitalization as percent for GDP in India stood at 56.1% as at end-2004.There are two depositories in India, viz. NSDL and CDSL.They have been set up to provide instantaneous electronic transfer of securities. The number of dematerialized securities increased to 201.9 billion at the end of March 2006 from 147.7 billion at the end of March, 2005 According to the RBI data, household sector accounted for 85.4% of gross domestic savings during 2004-05. However, this has decreased to 83.9% in 200506. In the last fiscal 2005-06, they have invested 47.4% of financial savings in deposits, 24.2% in insurance/provident funds, 12.3% on small savings, and 7.2% in securities. Thus the fixed income bearing instruments are the most preferred assets of the household sector. It appears that more and more people prefer mutual funds (MFs) as their investment vehicle. This change in investor behaviour is induced by the evolution of a regulatory framework for MFs, tax concessions offered by government and preference of investors for passive investing. Starting with an asset base of Rs.250 million in 1964, the total assets under management at the end of March 2006 has risen to Rs.2,318,620 million. During the last one decade, the resources mobilized by the MFs are increased from Rs.112, 440 million in 1993-94 to Rs.527,800 million in 2005-06.
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The total exchange traded derivatives witnessed a value of Rs.48,242,592 million during 2005-06 as against Rs.25,641,269 million during the preceding year. NSE proved itself as the market leader contributing 99.9% of the total turnover in 2005-06 in India. In the interest of investors, SEBI issued the Disclosure and Investor Protection (DIP) guidelines. These guidelines contain a substantial body of requirements for issuers/intermediaries, with a broad intention to ensure that all the concerned entities observe high standards of integrity and fair dealing.DEA, DCA, the SEBI and the stock exchanges have set up investor grievance cells for redressal of investor grievance. The exchanges maintain investor protection funds to take care of investor claims. Government Securities Market: Non-competitive bids are accepted from retail investors inorder to widen investor base. Further, to facilitate retail investors to invest in government securities, RBI permitted select entities to provide custody (Constituent SGL) accounts.Other measures include abolition of TDS on government securities and stamp duty on transfer of demat debt securities. The terms of reference of the study were to estimate the number of household and the population of individual investors, their economic and demographic profile,portfolio size, investment preferences for equity as well as other saving instruments.The study was also designed to elicit information from households on their risk perceptions, experiences in investing in security market, return on
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investment and the like. Other areas to be covered included awareness of investor rights, experiences with grievance redressal mechanisms; indications of investorsfuture plans of investment and their expectations from the securities market were also obtained. The study also provided estimates of non-investor households and population, their economic and demographic profile, their pattern of investment in various instruments and reasons of noninvestment in the equity market. To help guage the impact of the growth of the securities market on the households to conduct a comprehensive survey of Indian Investor households. The project also covers to study the basic investor/potential investor/non-investment preferences, intentions, attitudes, perception, interests, likes and dislikes towards investment in securities market.It also focuses its attention towards the brokers services, the extent of attracting investors, the opportunities and their ability to face the challenges in the global competitive environment. Lastly, on the basis of the study, to determine the measures to be adopted to improve the level of confidence of investors in the securities market.

PROFILE OF THE SECURITIES MARKET

Evolution of Stock Exchanges in India The origin of the stock market relates back to the year 1494, when the Amsterdam Stock Exchange was set up. In India it dates back to the 18th Century, an era when the East India Company was a dominant institution in India. The Bombay Stock Exchange(BSE) was founded in the year 1875. The Ahmedabad Shares and Stock Association was formed in the year 1894. The Calcutta Stock Exchange Association was formed by about 150 brokers on 15th June 1908. In the year 1920, one stock exchange was established in Northern India and one in Madras called The Madras Stock Exchange.The Madras Stock Exchange Association Pvt.ltd was established in the year 1941. On 29th April, 1959, it was reorganized as a company limited by guarantee under the name and style of Madras Stock Exchange(MSE). The Lahore Stock Exchange was formed in the year 1934. However,in the year 1936 after the Punjab Stock Exchange Ltd. Came into existence, the Lahore Stock Exchange merged with it. In Calcutta, a second Stock Exchange by name The Bengal Share & Stock Exchange Ltd was established in the year 1937 and likewise once again in the year 1938, Bombay also witnessed a rival Stock Exchange formed in the name of Indian Stock Exchange Ltd. The U.P.Stock Exchange was formed in Kanpur and the Nagpur Stock Exchange Ltd. In Nagpur in the year 1940.
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The Hyderabad Stock Exchange Ltd. Was incorporated in the year 1944. Two stock exchanges which came into being in Delhi by the name The Delhi Stock & Share Brokers Association Ltd. And The Delhi Stocks & Shares Exchange Association Ltd. Were amalgamated into The Delhi Stock Exchange Association Ltd. In the year 1947. Subsequently, the Bangalore Stock Exchange was registered in the year 1957 and recognized in the year.The Third Stock Exchange in the state of Gujarat the Vadodara Stock Exchange Ltd.Was incorporated in 1990. The Over the Counter Exchange of India (OTCEI) broadly based on the lines of NASDAQ (National Association of Securities Dealers Automated Quotation) of the USA was promoted and approved on August 1989. The National Stock Exchange of India Ltd. Was incorporated in November, 1992. Today, there are 23 Stock Exchanges in India, including the 3 Stock Exchanges in Mumbai- Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and Over the Counter Exchange of India (OTCEI). The Bombay Stock Exchange is the oldest Stock Exchange in Asia located in Dalal Street, Mumbai in India. The Bombay Stock Exchange was established in 1875 as the Native Share and Stock Brokers Association earned a formal status under the Securities and Exchange Board of India (SEBI) in 1956. Market Capitalisation of BSE

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was about Rs.33.4 trillion as on 2006, October. The Bombay Stock Exchange uses the Bombay Stock Exchange as the market index in Asia and India. The Bombay Stock Exchange deals with trading in derivatives, equity and other debt instruments. Derivatives Market The Bombay Stock Exchange introduces the first Exchange Traded Index Derivative Contract in 2000, the Index Option be traded from 2001 whereas the single stock futures were traded from 2002. The weekly options were introduced. Index Futures: Index futures are basically futures whose underlying asset is the BSE index itself. Index options: The index options like any other option gives the holder, the right but not the obligation to buy or sell the underlying asset at a specified date and price.Then underlying asset in the case of the index option is again the BSE index itself. Stock Futures and Options Stock Futures and the stock options have the normal characteristics as any other stock future or option traded by them where the underlying asset is some stock.Equity Futures and Options: The Bombay Stock Exchange also introduced the Equity Futures and Options.Leaving aside the BSE Sensex there are many other indices that are used by the Bombay Stock Exchange and they are as follows: BSE 500 BSE 100 BSE 200
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BSE PSU BSE MIDCAP BSE SMLCAP BSE BANKEX BSE Tech BSE Auto BSE Pharma

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The securities market has essentially three categories of participants, viz., the issuer of securities, the investors in the securities and the intermediaries. The issuers are the borrowers or deficit savers, who issue securities to raise funds. The investors, who are surplus savers, deploy their saving by subscribing to these securities. The intermediaries are the agents who match the needs of users and suppliers of funds for a commission.These intermediaries perform functions to help both the issuers and investors to achieve their respective goals. This process of mobilizations of resources is carried out under the supervision and overview of the regulators. The regulators develop fair market practices and regulate the conduct issuers of securities and the intermediaries. They are also in charge of protecting the interests of the investors. Market Segments The securities has two interdependent and inseparable segments, the new issues (primary) and the stock (secondary) market. The primary market provides the channel for creation and sale of new securities, while the secondary market deals in securities previously issued. The securities issued in the primary market are issued by public limited

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companies or by government agencies. The resources in this kind of market are mobilized either through the public issue or through private placement route. It is a public issue if anybody and everybody can subscribe for it, whereas if the issue is made available to a selected group of persons it is termed as private placement.There are two major types of issuers of securities, the corporate entities who issue mainly debt and equity instruments and the government (central as well as state) who issue debt securities (dated securities and treasury bills). The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risks and returns. Once the new securities are issued in the primary market they are traded in the stock (secondary)market. The secondary market operated through two mediums, namely, the over-the-counter (OTC) market and the exchange-traded market. OTC markets are informal markets where trades are negotiated. Most of the trades in the government securities are in the OTC market. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC market. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC market. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC market. The other option is to trade using the infrastructure provided by the stock exchanges. There are 23 exchanges in India and all of them follow a systematic settlement period. All the trades taking
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place over a trading cycle (day=T) are settled together after a certain time (T+2 day). The trades executed on the National Stock Exchange (NSE) are cleared and settled by a clearing corporation. The clearing corporation acts as a counterparty and guarantees settlement. Nearly 100% of the trades in capital market segment are settled through demat delivery. NSE also provides a formal trading platform for trading of a wide range of debt securities, including government securities. A variant of the secondary market is the forward market, where securities are traded for future delivery and payment. A variant of the forward market is Futures and Options market. Presently only two exchanges viz., NSE and Stock Exchange, Mumbai(BSE) provides trading in the derivatives of securities. International Scenario Following the implementation of reforms in the securities industry during the last decade,Indian stock markets. As may be seen out in the world ranking as well as in the developed and emerging markets. India has a turnover ratio of 94.2%, which is quite comparable to the other developed market like the US and UK which has turnover ratios of 129.1% and 141.9% respectively. As per Standard and Poors Fact book India ranked 17th in terms of market capitalization (18th in 2004) and 18th in terms of total value traded in stock exchanges and 20th terms of turnover ratio as on December 2005.During the year 2007-08, NSE reported a turnover of Rs.3,551,038 crores in the equities segment. 199 companies
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have used the on-line IPO system of NSE by the end of March 2007. A comparative study of concentration of market indices and indices stocks in different world markets is presented in the table below. It is seen that the index stocksshare of total market capitalization in India is 77.9% whereas US index accounted for 92.7%.The ten largest index stocks of total market capitalization is 33.9% in India and 13.9% in case of US. Market Concentration in the World Index as on End 2005. Market Index Stocks 10 largest Index Share of Stocks Total Market Capitalization 98.5 91.9 95.1 92.3 98.1 Share of total Market Capitalization 18.0 49.3 42.9 46.0 55.0
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Japan Singapore France Germany Italy

United Kingdom 86.8 United States India 92.7 77.9

36.4 13.9 33.9

Source: S&P Emerging Stock Market Factbook, 2006. Data is for the S&P CNX 500 Index. The stock markets worldwide have grown in size as well as depth over the last one decade. As can be observed from Table 1-3, the turnover on all markets taken together though have grown from US $ 29.70 trillion in 2003 to $47.32 trillion in 2005. It is significant to note that US alone accounted for about 45.46% of worldwide turnover in 2005. Despite having a large number of companies listed on its exchanges, India accounted for a meager 0.94% in total world turnover in 2005.The market capitalization of all listed companies taken together on all markets stood at US $ 43.64 trillion in 2005 ($38.90 trillion in 2004). The share of US in worldwide market capitalization decreased from 41.96% as at end-2004 to 38.95% in end-2005, while Indian listed companies accounted for 1.27% of total market capitalization in 2005.There has also been an increase in market capitalization as per cent of GDP in some of the major country groups as is evident from Table 1-4. The increase, however, has not been uniform across countries. The market capitalization as percent of GDP was the highest at 108.9% for the high income countries as at end-2004 and lowest for
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middle income countries at 43.7%. Market capitalization as percent for GDP in India stood at 56.1% as at end-2004. The turnover ratio, which is a measure of liquidity, however was approximately same for both the high-income countries and low-income countries 14% and 107.6% respectively. The total number of listed companies stood at 28,001 for highincome countries, 14,117 for middle income countries as at end-2005.

INVESTMENT DECISIONS
People lose money in stock markets more because of their own mistakes, than any market turmoil and other such things. For instance, it has generally been observed that equity investments are often guided by greed and investors seldom do their homework before putting their hard-earned money in stock markets. Besides, they often resort to speculation and keep 'timing the market', which has not proven to be a great strategy. Lots of investors also presume that the market will only go northwards and the bull run will never end. But that never happens. Not in any market of the world. But that's how it is.Here are 10 such mistakes that equity investors generally make: 1. Guided by greed : Many investors have been losing
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money in stock markets owing to their inability to control greed and fear. The lure of quick wealth is difficult to resist, particularly in a bull market. Greed augments when investors hear stories of fabulous returns being made in the stock market in a short period of time and, thus, lose their hardearned money in many cases. 2. Following herd mentality Following herd mentality is another reason for the investors losses. It has been witnessed that the typical buyers decision is heavily influenced by the actions of his acquaintances, neighbours or relatives. So, if everybody around is investing in a particular stock, the tendency for potential investors is to do the same. But this strategy may backfire in the long run, says Ashish Kapur, CEO, Invest Shoppe India Ltd. 3. Resorting to speculation Investors also face losses because they speculate and buy shares of unknown companies.They should, therefore, avoid relying on random tips and go for long-term gains only. 4. Lack of research Proper research should be undertaken before investing in stocks. But this is rarely done. Investors generally go by the name of a company or the industry they belong to. But this is not the right way of putting ones money into the stock market. Therefore, if one doesnt have time or temperament for studying the markets, one should always take the help of a suitable financial advisor, says Kapur.
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5. Creating leveraged positions Many investors suffer from creating heavy positions in the futures segment without really understanding the risks involved. Instead of creating wealth, however, these investors burn their fingers very badly in case the sentiment in the market reverses. 6. Panic selling In a bear market, investors panic and sell their shares at rock bottom prices. Trading on the bourses was suspended on May 17, 2004, May 18, 2006 and recently on January 22, 2008. Investors who had taken speculative positions lost heavily when blood was on the street. Even investors who had the capacity to hold on to their investments, lost faith in the markets and sold their investments in a hurry, thus incurring heavy losses. 7. Timing the market Many investors try to time the market. But this has not proven to be a great strategy.Historically, in fact, it has been witnessed that even great bull runs have shown bouts of panic moments. The volatility witnessed in the markets has inevitably made investors lose money despite the great bull run. Therefore, only prudent investors who put in money systematically, in the right shares and hold on to their investments patiently, have made outstanding returns. So its not timing the market, but time in the market which creates wealth. Hence, it is prudent to have patience and always keep a long-term broad picture in mind. 8. Putting all eggs in one basket :
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Another mistake which investors generally make is nondiversification of their portfolio.They generally put all their money in limited and favourite stocks which are in momentum. So, investors should diversify their portfolio across industries and size of the companies. Also, it is important to diversify across asset classes equities, real estate,bonds, commodities, cash etc. 9. Avoiding financial planning Investors also do not apply financial planning practices in their investment approach.They should follow an asset allocation model and invest only in long-term funds in the equity markets. They should also keep rebalancing their overall portfolio from time to time to keep their exposure to equity markets at the desired ratio of the total portfolio. 10. No monitoring of portfolio We are living in a global village. Any important event happening in any part of the world has an impact on our financial markets. Hence, we need to constantly monitor our portfolio and keep affecting the desired changes in it. If one cant review ones portfolio due to time-constraint or lack of knowledge, they should take the help of a financial advisor.

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OVERVIEW OF SECURITIES MARKET Share holding pattern In the interest of transparency, the issuers are required to disclose share holding pattern on a quarterly basis. Table 1.5 presents the sector wise shareholding pattern of 1069 companies listed on NSE at end march 06. Though the nonpromoters holding is about 48%, the public held only 15.26% and the institutional holdings by (FIIs, MFs, FIs) accounted for 20.675. There is not much significant difference in the shareholding pattern of companies in different sectors. About 80% of shares in companies in Infrastructure sector are held by Indian Promoters. Households. According to the RBI data, household sector accounted for 85.4% of gross domestic savings during 2004-05. However, this has decreased to 83.9% in 2005-06. In the last fiscal 2005-06, they have invested 47.4% of financial savings in deposits, 24.2% in insurance/provident funds, 12.3% on small savings, and 7.2% in securities (out of which the investment in Gilts has been 2.4%), including government securities and units of mutual funds (Table 1-6). Thus the fixed income bearing instruments are the most preferred assets of the household sector.

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Savings of Household Sector in Financial Assets Financial Assets Currency 8.9 Fixed investments Deposits income 86.9 4.09 81.6 38.8 27.3 15.5 7.5 1.2 7.5 -1.2 85.4 37 28.9 19.5 6.0 0.4 4.9 0.7 83.9 47.4 24.2 12.3 7.2 3.6 2.4 1.2 11.2 8.5 8.8 200203(P) 200304(P) 200405 # 200506 #

Insurance/Provident/ 31.1 Pension Funds 14.9 Small Savings 4.2 Securities Market 1.3 Mutual Funds 2.5 Government Securities 0.4 Other Securities Total 100.0

100.0

100.0

100.0
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Source: RBI Corporate Securities It appears that more and more people prefer mutual funds (MFs) as their investment vehicle. This change in investor behaviour is induced by the evolution of a regulatory framework for MFs, tax concessions offered by government and preference of investors for passive investing. Starting with an asset base of Rs.250 million in 1964, the total assets under management at the end of March 2006 has risen to Rs.2,318,620 million. During the last one decade, the resources mobilized by the MFs are increased from Rs.112, 440 million in 1993-94 to Rs.527,800 million in 2005-06. Table Issues Corporate Securities a)Domestic Issues Non-Govt. Public Cos. PSU Bonds Resoure Mobilisation from the Primary Market 2001-02 2002-03 2003-04 2004-05 2005-06 744032 720612 56920 752411 718147 18777 748500 717520 36750 109297 0 105944 0 134820 1346660 1233080 211540 -

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Govt. Cos. Banks & FIs

3500 10700

29890 669480 34264 181979 0 151126 0 308530 256220 1

1000 40760 639010 30980 198157 0 147636 0 505210 273007 0

26840 57260 840520 33530 145602 0 106501 0 391010 254899 0

3730 54130 963680 113580 1817470 1600180 217290 3164130

Pvt.Placement 649500 b)Euro Issues 23420 Govt. 152508 securities 0 Central Govt. 133801 0 State Govts. 187070 Total 226911 2

Alongwith growth of the market, the investor base has also widened.In addition to banks and insurance companies, corporates and individual investors are also investing in government securities. The weighted average cost of borrowing has increased to 7.34% in 2005-06. The maturity structure of government debt is also changing. About 74% of primary issues were raised through securities with maturities above 5 years and upto 10 years.As a result the weighted average maturity of dated securities increased to 16.9 years in 2005-06.
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Secondary Market Corporate Securities Exchanges in the country, which offer screen based trading system.The trading system is connected using the VSAT technology from over 281 cities.There are 9,335 trading members registered with SEBI as at end March 2006. The relative importance of various stock exchanges in the market has undergone dramatic change during this decade. The increase in turnover took place mostly at the big exchanges. The NSE yet again registered as the market leader with more than 89% of total turnover (volumes on all segment) in 2005-06.Top 2 stock exchanges accounted for 99.9% of turnover, while the rest 21 exchange had negligible volumes during 2005-06. Derivatives Market The number of instruments available in derivatives has been expanded. To begin with, SEBI only approved trading in index future contracts based on S&P CNX Nifty Index and BSE-30 (Sensex) Index. This was followed by approval for trading in options based on these indices and options on individual securities and also futures on interest rates derivative instruments (91 day Notional T-Bills and 10 year Notional 6% coupon bearing as well as zero coupon bonds. Now, there are futures and options based on benchmark index S&P CNX Nifty, CNX IT Index and Bank Nifty Index as well as options and futures on single stocks (122 stocks).
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Futures and options contracts were introduced on CNX Nifty Junior and CNX 100 indices for trading in F&O segment on June 1, 2007. The turnover in the derivatives segment has witnessed considerable growth since inception. In the global market, NSE ranks first (1st) in the world in terms of number of contracts traded in the Single Stock Futures, second (2nd) in Asia in terms of number of contracts traded in equity derivatives instrument. Since inception, NSE established itself as the sole market leader in this segment in the country with more than 98 % market share. As on March 30 2007, 68 members on the F&O segment provided internet based trading facility to the investors. About 167 lakh trades amounting to Rs.922,887.03 crore ( US $211, 719.90 million) constituting about 12.55 % of the total trading volume in this segment were routed and executed through the internet. At NSE, the F&O segment reported a total trading value (notional) of Rs.7,356,271 crore (US $1,687,605 million) during 2006-07 as against Rs. 4,824,250 crore (US $ 1,687,605 million), a rise of more than 52.49 % in the past one year. Regulatory Framework The four main legislations governing the securities market are (a) the SEBI Act, 1992 (b) the Companies Act, 1956 (c) the Securities Contract (Regulation) Act, 1956 and (d) the Depositories Act, 1996. SEBI Act, 1992:The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for (a) protecting the
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interests of investors in securities (b) promoting the development of the securities market, and (c) regulating the securities market.Its regulatory jurisdiction extends over corporates in the issuing capital and all intermediaries and persons associated with securities market.It can conduct enquiries,audits and inspection of all concerned participants and adjudicate offences under this Act.It has powers to register and regulate all the market intermediaries. Further it can also penalize them in case of violations of the provisions of the Act, Rules and Regulations made there under. SEBI has full autonomy and authority to regulate and develop an orderly securities market. Securities Contract (Regulation) Act, 1956: It provides for direct and indirect control of virtually all aspects of the securities trading including the running of stock exchanges with a aims to prevent undesirable transactions in securities. It 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 the requirements prescribed by the Central Government. The stock exchanges frame their own listing regulations in consonance with the minimum listing criteria set out in the Rules.

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Depositories Act, 1996: The Depositories Act, 1996 provides for the establishment of depositories for securities to ensure transferability of securities with speed, accuracy and security. Provisions have been made for (a) dematerializing the securities in the depository mode, and (b) making securities of public limited companies freely transferable subject to certain exceptions (c) providing for maintenance of ownership records in a book entry form. In order to streamline the settlement process, the Act envisages transfer of ownership of securities electronically by book entry without moving the securities from persons to persons. The Act has made the securities of all public limited companies freely transferable, restricting the companys 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. Companies Act,. 1956:It deals with issue, allotment and transfer of securities and various aspects relating to company management. It provides for standards of disclosure in the public issues, 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, payment of interest and dividends, supply of annual report and other information. Rules, Regulations and Regulators:
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The responsibility for regulating the securities market is shared by the Department of Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and SEBI. The orders of SEBI under the securities laws are appealable before the Securities Appellate Tribunal (SAT). The SEBI Act and the Depositories Act are mostly administered by SEBI. SEBI was 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 the SCRA. DIP Guidelines In the interest of investors, SEBI issued the Disclosure and Investor Protection (DIP) guidelines. These guidelines contain a substantial body of requirements for issuers/intermediaries, with a broad intention to ensure that all the concerned entities observe high standards of integrity and fair dealing. The guidelines cast a responsibility on the lead managers to issue a due diligence certificate, stating that the have examined the prospectus and that it brings out all the facts and does not contain anything wrong or misleading. Issuers are now required to comply with the guidelines and then access the market. The companies can access the market only if they fulfill minimum eligibility norms in terms of their track record of distributable profits and net worth.
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Screen Based Trading: Prior to setting up of NSE, the trading on stock exchanges in India used to take place through an open outcry system. This system did not allow immediate trading.Inorder to provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line fully automated screen based trading system (SBTS). In this system a member can punch into the computer, quantities of securities and the prices at which he desires to transact and the transaction is executed as soon as it finds a matching sale or buy order from a counter party. It allows a large number of participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth and liquidity of the market. Given the efficiency and cost effectiveness delivered by the NSEs trading system, it became the leading stock exchange in the country in its very first year of operation. This forced the other stock exchanges to adopt SBTS.As a result, open out-cry system has disappeared from India. Today, India can boast that almost 100% trading takes place through electronic order matching. Technology has been harnessed to carry the trading platform to the premises of brokers. NSE carried the trading platform further to the PCs in the residence of investors through the internet and to hand held devices through (WAP) for convenience of mobile investors. This has made a huge difference in terms of equal access to investors in a geographically vast country like India.
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Trading Cycle: Initially, the trading cycle varied from 14 days for specified securities to 30 days for others and settlement took another fortnight.The exchanges, however,continued to have different weekly trading cycles, which enabled shifting of positions from one exchange to another. Rolling settlement on T+5 basis was introduced in respet of specified scrips reducing the trading cycle to one day. It was made mandatory for all exchanges to follow a uniform weekly trading cycle in respect of scrips not under rolling settlement. All scrips moved to rolling settlement from December, 2001. The settlement period has been reduced progressively from T+5 to T+3 days. Currently, T+2 day settlement cycle is being followed. Derivatives Trading: The market presently offers index futures and index options on S&P CNX Nifty, CNX IT Index, CNX Bank Nifty Index, BSE 30 Index and stock options and stock futures on individual stocks (in NSE 122 as of October, 2006) and futures in interest rate products like notional 91 day T-Bills and notional 10 year bonds. Depositories Act: The Depositories Act, 1996 was passed to provide for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed and accuracy. This act brought in changes by (a) making securities of public limited companies freely transferable subject to certain exceptions (b) dematerializing of securities in the depository mode, in order to promote
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dematerialization, the regulator has been promoting settlement in demat form in a phased manner in an everincreasing number of securities. There are two depositories in India, viz. NSDL and CDSL. They have been set up to provide instantaneous electronic transfer of securities. The number of dematerialized securities increased to 201.9 billion at the end of March 2006 from 147.7 billion at the end of March, 2005. As on the same date, the value of dematerialized securities was Rs.27,.147 billion and the number of investor accounts was 9, 421,587.

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