PROJECT REPORT

ON
STUDY OF CAPITAL MARKET
FOR THE PARTIAL FULFILLMENT OF THE REQUIREMENT
FOR THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION
(Industry Integrated)
AADEMI SESSION (!"#!$!"#%)
UNDER THE GUIDANE OF& SUBMITTED BY:
Pr'(- As)*s) Aggar+a, Ra-ee. )au)an
MBA (SESSION$!"#!$!"#%)
SPET
ACKNOWLEDGEMENT
/*t) ,*0*t,ess )u0*,*ty1 I +'u,d ,*2e t'
3ra*se and t)an2 G'd1 t)e Su3re0e
and t)e 0er4*(u,1 +)' 5,essed 0e +*t)
a,, t)e (a.'ra5,e 4*r4u0stan4es t' g'
t)r'ug) t)*s 3r'-e4t6
I +*s) t' e73ress 0y 3r'('und
grat*tude t' Pr'( As)*s) Aggar+a,1
SPET1 ('r )*s ,earned gu*dan4e1
4'nstant en4'urage0ent and .a,ua5,e
suggest*'ns6
S'0et*0es *t *s n't easy t' e73ress
y'ur e0't*'ns *n +'rdses3e4*a,,y +)en
y'u )a.e t' say t)an2s t' y'ur
3arents ('r t)e*r 4'nstant
unde0and*ng ,'.e1 ded*4at*'n1
sa4r*(*4e1 *ns3*r*ng gu*dan4e1
a((e4t*'nate en4'urage0ent and
ne.er$ end*ng ent)us*as08 +*t)
+)*4) t)*s 3r'-e4t +'u,d n't )a.e
5een 4'03,eted su44ess(u,,y6
I +'u,d ,*2e t' t)an2 0any
't)ers +)' )a.e 5een ass'4*ated
+*t) +'r2 d*re4t,y 'r *nd*re4t,y6
$ Ra-ee.
)au)an
3
//DECLA
RATION//
I )ere5y de4,are t)at t)e Pr'-e4t
Re3'rt ent*t,ed
STUDY OF CAPITAL
MARKET
Su50*tted t' S+a0* Par0anand
',,ege '( Eng*neer*ng and
Te4)n','gy *n 3art*a, (u,(*,,0ent '( t)e
re9u*re0ents ('r t)e degree '( Master
'( Bus*ness Ad0*n*strat*'n *s 0y
'r*g*na, +'r2 and t)e sa0e )as n't
5een su50*tted ('r t)e a+ard '( any
't)er degree:d*3,'0a:(e,,'+s)*3:'r
't)er s*0*,ar t*t,es 'r 3r*;es6 It )as n't
5een su50*tted t' any 't)er un*.ers*ty
'r *nst*tut*'n ('r t)e a+ard '( any
degree 'r d*3,'0a6
P,a4e
Na0e Ra-ee.
)au)an
Date
R',, N'
4
TABLE OF CONTENTS
Title-
1. Introduction
a. An overview of capital market
b. Structure of capital market
c. Present face of capital market
2. Classification of capital market
a. Primary market
b. Secondary market
3. Instruments & players of capital market
New issue market instruments
Stock market instruments
Players in capital market
4. Trading Procedure
Electronic share trading
Process of share trading
Parties involved in trading
5. egal frame work of capital market
!egulatory authority of capital
market SE"I guidelines
Securities Contract and !egulations Act
6. Clearing and settlement procedures
Process of clearing and settlement
Parties involved in clearing and settlement
7. Network of stock e#change in India
$
National stock e#change
"om%ay stock e#change
!egional stock e#change
&ver the counter e#change of India
8. Trend of capital market in India
Trend of Sense# and Nifty 'for last ( years)
*actors responsi%le for the fluctuation of Sense# and Nifty+
9. !ole of !"I &SE"I
SE"I guidelines &
impact !ole of SE"I
10. Study of stock inde#es
,arket capitali-ation of different inde#es
Performance of Stock inde#es' for past ( years)
11. Analysis &findings
.ata analysis &
interpretation *indings
12. !ecommendations &pro%lem of capital market
pro%lem of new issue market
Pro%lem of secondary market
Suggestions and recommendations
13. Conclusion
14. Appendi#
15. "i%liography
/

PREFACE
The pro0ect on Capital market is an attempt to
study an overall primary market and secondary
market of India+ It helped to know and study the
parameters opted %y all the Capital market and
the companies who are operating themselves
under the rules and regulation of Capital ,arket+
The performance of Capital ,arket has registered
a significant upward in recent times+
!ight from the %eginning Capital ,arket
attract every person as it has %ecome
common to see car on road every day and
%eing a student of marketing I learnt a lot
from this pro0ect and it would helped me a lot
in making my career+ I came to know a lot
a%out Indian as well as international Capital
,arket and how they help their economy+
The market for long1term securities like %onds2
e3uity stocks and preferred stocks is divided into
primary market and secondary market+ The
primary market deals with the new issues of
securities+ &utstanding securities are traded in
the secondary market2 which is commonly known
as stock market or stock e#change+ In the
secondary market2 the investors can sell and %uy
securities+ Stock markets predominantly deal in
the e3uity shares+ .e%t instruments like %onds
and de%entures are also traded in the stock
market+ 4ell1regulated and active stock market
promotes capital formation+ 5rowth of the primary
market depends on the secondary market+ The
health of the economy is reflected %y the growth
of the stock market+
Companies raise funds to finance their
pro0ects through various methods+ The
promoters can %ring their own money or
%orrow from the financial institutions or
mo%ili-e capital %y issuing securities+ The
funds may %e raised through issue of fresh
shares at par or premium2 preference shares2
de%entures or glo%al depository receipts+ The
main o%0ectives of a capital issue are given
%elow6
To promote a new company
To e#pand an e#isting company
7
To diversify the production
To
m
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et
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Securities markets provide a channel for
allocation of savings to those who have a
productive need for them+ As a result2 the
savers and investors are not constrained %y
their individual a%ilities2 %ut %y the economy8s
a%ilities to invest and save respectively2
which inevita%ly enhances savings and
investment in the economy+
The National Stock E#change of India imited
'NSE) has genesis in the report of the 9igh
Powered Study 5roup on Esta%lishment of
New Stock E#changes2 which recommended
promotion of a National Stock E#change %y
financial institutions '*Is) to provide access to
investors from all across the country on an
e3ual footing+ "ased on the
recommendations2 NSE was promoted %y
leading *inancial Institutions at the %ehest of
the 5overnment of India and was
incorporated in Novem%er :;;( as a ta#1
paying company unlike other stock
e#changes in the country+
I am really thankful to Dr. D.K. Garg
'Chairman2 Ishan Institute of ,anagement
and Technology)2 who has %een the chief
facilitator of this pro0ect and I could enhance
my knowledge in the field of Capital ,arket+
Ankush Choudhary
Enr No+1 ::<<7
=
UNIT- I
Intro!"tion#
Concept of capital market+
Structure of capital market+
Present face of capital market+
;
CONCEPT OF
CAPITAL
MARKET
"o!$on %on an &' notional () *ear
%on.
T+e $a,t e"ae in -an* .a*, +a, %een
re-ar/a%le 0or ,e"!ritie, -ar/et in Inia.n It +a,
gro.n e1$onentiall* a, -ea,!re in ter-, o0
a-o!nt rai,e 0ro- t+e -ar/et2n!-%er o0 ,to"/
e1"+ange, an ot+er inter-eiarie,2 t+e n!-%er
o0 li,te ,to"/,2-ar/et "a$itali,ation2 traing
3ol!-e, an t!rno3er on ,to"/ e1"+ange,2 an
in3e,tor $o$!lation. Along .it+ t+i, gro.t+2 t+e
$ro0ile, o0 t+e in3e,tor,2 i,,!er, an
inter-eiarie, +a3e "+ange ,igni0i"antl*. T+e
-ar/et +a, .itne,,e ,e3eral in,tit!tional
"+ange, re,!lting in ra,ti" re!"tion in
tran,a"tion "o,t, an ,igni0i"ant i-$ro3e-ent,
in e00i"ien"*2 tran,$aren"*2 li4!iit* an ,a0et*.
In a ,+ort ,$an o0 ti-e2 Inian eri3ati3e,
-ar/et +a, got a $la"e in li,t o0 to$ glo%al
e1"+ange,. In ,ingle ,to"/ 0!t!re, "ategor*2 t+e
F!t!re, In!,tr* A,,o"iation 5FIA6 $la"e NSE
in ,e"on $o,ition in t+e *ear 7))).
Intro!"tion
T+e -ar/et 0or long-ter- ,e"!ritie, li/e
%on,2 e4!it* ,to"/, an $re0erre ,to"/,
i, i3ie into $ri-ar* -ar/et an
,e"onar* -ar/et. T+e $ri-ar* -ar/et
eal, .it+ t+e ne. i,,!e, o0 ,e"!ritie,.
O!t,taning ,e"!ritie, are trae in t+e
,e"onar* -ar/et2 .+i"+ i, "o--onl*
/no.n a, ,to"/ -ar/et or ,to"/ e1"+ange.
In t+e ,e"onar* -ar/et2 t+e in3e,tor, "an
,ell an %!* ,e"!ritie,. Sto"/ -ar/et,
$reo-inantl* eal in t+e e4!it* ,+are,.
De%t in,tr!-ent, li/e %on, an
e%ent!re, are al,o trae in t+e ,to"/
-ar/et. 8ell-reg!late an a"ti3e ,to"/
-ar/et $ro-ote, "a$ital 0or-ation. Gro.t+
o0 t+e $ri-ar* -ar/et e$en, on t+e
,e"onar* -ar/et. T+e +ealt+ o0 t+e
e"ono-* i, re0le"te %* t+e gro.t+ o0 t+e
,to"/ -ar/et.
:<
Co-$anie, rai,e 0!n, to 0inan"e t+eir
$ro9e"t, t+ro!g+ 3ario!, -et+o,. T+e
$ro-oter, "an %ring t+eir o.n -one* or
%orro. 0ro- t+e 0inan"ial in,tit!tion, or
-o%ili:e "a$ital %* i,,!ing ,e"!ritie,. T+e
0!n, -a* %e rai,e t+ro!g+ i,,!e o0
0re,+ ,+are, at $ar or $re-i!-2 $re0eren"e
,+are,2 e%ent!re, or glo%al e$o,itor*
re"ei$t,. T+e -ain o%9e"ti3e, o0 a "a$ital
i,,!e are gi3en %elo.#
To $ro-ote a ne. "o-$an*
T
o

e
1
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a
n

a
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o

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n

To
-eet
t+e
reg!l
ar
.or/i
ng
"a$ita
l
re4!ir
e-en
t, To
"a$ita
li:e
t+e
re3er
,e,
Se"!ritie, -ar/et, $ro3ie a "+annel 0or
allo"ation o0 ,a3ing, to t+o,e .+o +a3e a
$ro!"ti3e nee 0or t+e-. A, a re,!lt2 t+e
,a3er, an in3e,tor, are not "on,traine %*
t+eir ini3i!al a%ilitie,2 %!t %* t+e
e"ono-*;, a%ilitie, to in3e,t an ,a3e
re,$e"ti3el*2 .+i"+ ine3ita%l* en+an"e,
,a3ing, an in3e,t-ent in t+e e"ono-*.
Mar/et Seg-ent,
T+e ,e"!ritie, -ar/et +a, t.o intere$enent
an in,e$ara%le ,eg-ent,# t+e $ri-ar* an t+e
,e"onar* -ar/et. T+e $ri-ar* -ar/et $ro3ie,
t+e "+annel 0or "reation o0 ne. ,e"!ritie,
t+ro!g+ i,,!an"e o0 0inan"ial in,tr!-ent, %*
$!%li" "o-$anie, a, .ell a, Go3ern-ent, an
Go3ern-ent agen"ie, an %oie, .+erea, t+e
,e"onar* -ar/et +el$, t+e +oler, o0 t+e,e
0inan"ial in,tr!-ent, to ,ale 0or e1iting 0ro- t+e
in3e,t-ent. T+e $ri"e ,ignal,2 .+i"+ ,!%,!-e
all in0or-ation a%o!t t+e i,,!er an +i, %!,ine,,
in"l!ing a,,o"iate ri,/2 generate in t+e
,e"onar* -ar/et2 +el$ t+e $ri-ar* -ar/et in
allo"ation o0 0!n,. T+e $ri-ar* -ar/et i,,!an"e
i, one eit+er t+ro!g+ $!%li" i,,!e, or $ri3ate
$la"e-ent. A $!%li" i,,!e oe, not li-it an*
entit* in in3e,ting .+ile in $ri3ate $la"e-ent2 t+e
i,,!an"e i, one to ,ele"t $eo$le. In ter-, o0 t+e
Co-$anie, A"t2 (<=&2 an i,,!e %e"o-e,
::
$!%li" i0 it re,!lt, in allot-ent to -ore
t+an =) $er,on,. T+i, -ean, an i,,!e
re,!lting in allot-ent to le,, t+an =)
$er,on, i, $ri3ate $la"e-ent.
T+ere are t.o -a9or t*$e, o0 i,,!er, .+o i,,!e
,e"!ritie,. T+e "or$orate entitie, i,,!e -ainl*
e%t an e4!it* in,tr!-ent, 5,+are,2
e%ent!re,2 et".62 .+ile t+e go3ern-ent, 5"entral
an ,tate go3ern-ent,6 i,,!e e%t ,e"!ritie,
5ate ,e"!ritie,2 rea,!r* %ill,6. T+e ,e"onar*
-ar/et ena%le, $arti"i$ant, .+o +ol ,e"!ritie,
to a9!,t t+eir +oling, in re,$on,e to "+ange,
in t+eir a,,e,,-ent o0 ri,/ an ret!rn. T+e* al,o
,ell ,e"!ritie, 0or "a,+ to -eet t+eir li4!iit*
nee,. T+e e1"+ange, o not $ro3ie 0a"ilit* 0or
,$ot trae, in a ,tri"t ,en,e. Clo,e,t to ,$ot
-ar/et i, t+e "a,+ -ar/et in e1"+ange, .+ere
,ettle-ent ta/e, $la"e a0ter ,o-e ti-e. Trae,
ta/ing $la"e o3er a traing "*"le 5one a* !ner
rolling ,ettle-ent6 are ,ettle toget+er a0ter a
"ertain ti-e. All t+e 7> ,to"/ e1"+ange, in t+e
"o!ntr* $ro3ie 0a"ilitie, 0or traing o0 "or$orate
,e"!ritie,. Trae, e1e"!te on NSE onl* are
"leare an ,ettle %* a "learing "or$oration
.+i"+ $ro3ie, no3ation an ,ettle-ent
g!arantee. Nearl* ())' o0 t+e trae, in "a$ital
-ar/et ,eg-ent are ,ettle t+ro!g+ e-at
eli3er*. NSE al,o $ro3ie, a 0or-al traing
$lat0or- 0or traing o0 a .ie range o0 e%t
,e"!ritie, in"l!ing go3ern-ent ,e"!ritie, in
%ot+ retail an .+ole,ale -oe. NSE al,o
$ro3ie, traing in eri3ati3e, o0 e4!itie,2
intere,t rate a, .ell ini"e,. In eri3ati3e,
-ar/et 5F?O -ar/et ,eg-ent o0 NSE62
,tanari:e "ontra"t, are trae 0or 0!t!re
,ettle-ent. T+e,e 0!t!re, "an %e on a %a,/et o0
,e"!ritie, li/e an ine1 or an ini3i!al ,e"!rit*.
In "a,e o0 o$tion,2 ,e"!ritie, are trae 0or
"onitional 0!t!re eli3er*. T+ere are t.o t*$e,
o0 o$tion, @ a $!t o$tion $er-it, t+e o.ner to
,ell a ,e"!rit* to t+e .riter o0 o$tion, at a
$reeter-ine $ri"e .+ile a "all o$tion $er-it,
t+e o.ner to $!r"+a,e a ,e"!rit* 0ro- t+e .riter
o0 t+e o$tion at a $reeter-ine $ri"e. T+e,e
o$tion, "an al,o %e on ini3i!al ,to"/, or
%a,/et o0 ,to"/, li/e ine1. T.o e1"+ange,2
na-el* NSE an t+e Sto"/ E1"+ange2 M!-%ai
5BSE6 $ro3ie traing o0 eri3ati3e, o0
,e"!ritie,. Toa* t+e -ar/et $arti"i$ant, +a3e
t+e 0le1i%ilit* o0 "+oo,ing 0ro- a %a,/et o0
$ro!"t, li/e#
E4!itie,
Bon, i,,!e %* %ot+ Go3ern-ent an
Co-$anie,
F!t!re, on %en"+-ar/ ini"e, a, .ell a,
,to"/,
:(
O$tion, on %en"+-ar/ ini"e, a, .ell a,
,to"/,
F!t!re, on intere,t rate $ro!"t, li/e
Notional <(-a* T-Bill,2 () *ear notional
:ero Re0or-, in t+e ,e"!ritie, -ar/et2
$arti"!larl* t+e e,ta%li,+-ent an
e-$o.er-ent o0 SEBI2 -ar/et eter-ine
allo"ation o0 re,o!r"e,2 ,"reen %a,e
nation-.ie traing2 e-ateriali:ation an
ele"troni" tran,0er o0 ,e"!ritie,2 rolling
,ettle-ent an %an on e0erral $ro!"t,2
,o$+i,ti"ate ri,/ -anage-ent an
eri3ati3e, traing2 +a3e greatl* i-$ro3e
t+e reg!lator* 0ra-e.or/ an e00i"ien"* o0
traing an ,ettle-ent. Inian -ar/et i,
no. "o-$ara%le to -an* e3elo$e
-ar/et, in ter-, o0 a n!-%er o0 4!alitati3e
$ara-eter,.
Pro!"t, an Parti"i$ant,
Finan"ial -ar/et, 0a"ilitate t+e reallo"ation
o0 ,a3ing, 0ro- ,a3er, to entre$rene!r,.
Sa3ing, are lin/e to in3e,t-ent, %* a
3ariet* o0 inter-eiarie, t+ro!g+ a range
o0 "o-$le1 0inan"ial $ro!"t, "alle
A,e"!ritie,B .+i"+ i, e0ine in t+e
Se"!ritie, Contra"t, 5Reg!lation6 A"t2 (<=&
to in"l!e ,+are,2 %on,2 ,"ri$,2 ,to"/, or
ot+er -ar/eta%le ,e"!ritie, o0 li/e nat!re
in or o0 an* in"or$orate "o-$an* or %o*
"or$orate2 go3ern-ent ,e"!ritie,2
eri3ati3e, o0 ,e"!ritie,2 !nit, o0 "olle"ti3e
in3e,t-ent ,"+e-e2 intere,t an rig+t, in
,e"!ritie,2 ,e"!rit* re"ei$t or an* ot+er
in,tr!-ent, ,o e"lare %* t+e "entral
go3ern-ent.
Mar/et Parti"i$ant,
in Se"!ritie, Mar/et
Parti"!lar,
N!-%er o0
$arti"i$ant,
Se"!ritie, A$$ellate Tri%!nal
Reg!lator
De$o,itorie,
Sto"/ E1"+ange, .it+ e4!it* traing
Li,te Se"!ritie,
Bro/er,
S!%-%ro/er,
FII,
Port0olio Manager,
C!,toian,
S+are Tran,0er Agent,
Mer"+ant Ban/er,
Ban/er, to an I,,!e
De%ent!re Tr!,tee,
:>
Uner.riter,
Cent!re Ca$ital F!n,
M!t!al F!n,
Colle"ti3e In3e,t-ent S"+e-e,
DData "olle"te 0ro- DCA2 DEA2 RBI ? SEBI
It i, not t+at t+e !,er, an ,!$$lier, o0 0!n,
-eet ea"+ ot+er an e1"+ange 0!n, 0or
,e"!ritie,. It i, i00i"!lt to a""o-$li,+ ,!"+
o!%le "oin"ien"e o0 .ant,. T+e a-o!nt o0
0!n, ,!$$lie %* t+e ,!$$lier -a* not %e t+e
a-o!nt neee %* t+e !,er. Si-ilarl*2 t+e ri,/2
li4!iit* an -at!rit* "+ara"teri,ti", o0 t+e
,e"!ritie, i,,!e %* t+e i,,!er -a* not -at"+
$re0eren"e o0 t+e ,!$$lier. In ,!"+ "a,e,2 t+e*
in"!r ,!%,tantial ,ear"+ "o,t, to 0in ea"+
ot+er. Sear"+ "o,t, are -ini-i,e %* t+e
inter-eiarie, .+o -at"+ an %ring t+e
,!$$lier, an !,er, o0 0!n, toget+er. T+e,e
inter-eiarie, -a* a"t a, agent, to -at"+ t+e
nee, o0 !,er, an ,!$$lier, o0 0!n, 0or a
"o--i,,ion2 +el$ ,!$$lier, an !,er, in
"reation an ,ale o0 ,e"!ritie, 0or a 0ee or %!*
t+e ,e"!ritie, i,,!e %* !,er, an in t!rn2 ,ell
t+eir o.n ,e"!ritie, to ,!$$lier, to %oo/ $ro0it.
It i,2 t+!,2 a -i,no-er t+at ,e"!ritie, -ar/et
i,inter-eiate, %* e,ta%li,+ing a ire"t
relation,+i$ %et.een t+e ,a3er, an t+e !,er,
o0 0!n,. T+e -ar/et oe, not .or/ in a
3a"!!-E it re4!ire, ,er3i"e, o0 a large 3ariet*
o0 inter-eiarie,. T+e i,inter-eiation in t+e
,e"!ritie, -ar/et i, in 0a"t an inter-eiation
.it+ a i00eren"e2 it i, a ri,/-le,,
inter-eiation2 .+ere t+e !lti-ate ri,/, are
%orne %* t+e ,a3er, an not t+e
inter-eiarie,. A large 3ariet* an n!-%er o0
inter-eiarie, $ro3ie inter-eiation ,er3i"e,
in t+e Inian ,e"!ritie, -ar/et. T+e ,e"!ritie,
-ar/et +a, e,,entiall* t+ree "ategorie, o0
$arti"i$ant,2 na-el* t+e i,,!er, o0 ,e"!ritie,2
in3e,tor, in ,e"!ritie, an t+e inter-eiarie,
an $ro!"t, in"l!e e4!itie,2 %on, an
eri3ati3e,. T+e i,,!er, an in3e,tor, are t+e
"on,!-er, o0 ,er3i"e, renere %* t+e
inter-eiarie, .+ile t+e in3e,tor, are
"on,!-er, 5t+e* ,!%,"ri%e 0or an trae in
,e"!ritie,6 o0 ,e"!ritie, i,,!e %* i,,!er,.
In $!r,!it o0 $ro3iing a $ro!"t to -eet t+e
nee, o0 ea"+ in3e,tor an i,,!er2 t+e
inter-eiarie, "+!rn o!t -ore an -ore
"o-$li"ate $ro!"t,. T+e* e!"ate an g!ie
t+e- in t+eir ealing, an %ring t+e- toget+er.
T+o,e .+o re"ei3e 0!n, in e1"+ange 0or
,e"!ritie, an t+o,e .+o re"ei3e ,e"!ritie, in
e1"+ange 0or 0!n, o0ten nee t+e rea,,!ran"e
:?
t+at it i, ,a0e to o ,o. T+i, rea,,!ran"e i,
$ro3ie %* t+e la. an %* "!,to-2 o0ten
en0or"e %* t+e reg!lator. T+e reg!lator
e3elo$, 0air -ar/et $ra"ti"e, an reg!late,
t+e "on!"t o0 i,,!er, o0 ,e"!ritie, an t+e
inter-eiarie, ,o a, to $rote"t t+e intere,t, o0
,!$$lier, o0 0!n,. T+e reg!lator en,!re, a
+ig+ ,tanar o0 ,er3i"e 0ro- inter-eiarie,
an ,!$$l* o0 4!alit* ,e"!ritie, an non-
-ani$!late e-an 0or t+e- in t+e -ar/et.
T+e $a,t e"ae in -an* .a*, +a, %een
re-ar/a%le 0or ,e"!ritie, -ar/et in Inia. It
+a, gro.n e1$onentiall* a, -ea,!re in
ter-, o0 a-o!nt rai,e 0ro- t+e -ar/et2
n!-%er o0 ,to"/ e1"+ange, an ot+er
inter-eiarie,2 t+e n!-%er o0 li,te ,to"/,2
-ar/et "a$itali,ation2 traing 3ol!-e, an
t!rno3er on ,to"/ e1"+ange,2 an in3e,tor
$o$!lation. Along .it+ t+i, gro.t+2 t+e
$ro0ile, o0 t+e in3e,tor,2 i,,!er, an
inter-eiarie, +a3e "+ange ,igni0i"antl*.
T+e -ar/et +a, .itne,,e 0!na-ental
in,tit!tional "+ange, re,!lting in ra,ti"
re!"tion in tran,a"tion "o,t, an
,igni0i"ant i-$ro3e-ent, in e00i"ien"*2
tran,$aren"* an ,a0et*.
.EPEN.ENCECAPI
TA ,A!@ET
Three main sets of entities depend on
securities market+ 4hile the corporates and
governments raise resources from the
securities market to meet their o%ligations2 the
households invest their savings in the
securities+
Corporate Sector
The :;;<s witnessed emergence of the securities
market as a ma0or source of finance for trade and
industry+ A growing num%er of companies are
accessing the securities market rather than
depending on loans from *IsA%anks+ The
corporate sector is increasingly depending on
e#ternal sources for meeting its funding
re3uirements+ There appears to %e growing
preference for direct financing 'e3uity and de%t) to
indirect financing '%ank loan) within the e#ternal
sources+
:$
According to C,IE data2 the share of capital
market %ased instruments in resources raised
e#ternally increased to $>B in :;;>1;?2 %ut
declined thereafter to >>B %y :;;;1<< and further
to (:B in (<<:1<(+ In the sector1wise
shareholding pattern of companies listed on NSE2
it is o%served that on an average the promoters
hold more than $$B of total shares+ Though the
non1promoter holding is a%out ??B2 Indian pu%lic
held only :7B and the pu%lic float 'holding %y *IIs2
,*s2 Indian pu%lic) is at %est ($B+ There is not
much difference in the shareholding pattern of
companies in different sectors+ Strangely2 />B of
shares in companies in media and entertainment
sector are held %y private corporate %odies though
the re3uirement of pu%lic offer was rela#ed to :<B
for them+ The promoter holding is not strikingly
high in respect of companies in the IT and telecom
sectors where similar rela#ation was granted+
Go3ern-ent,
Along with increase in fiscal deficits of the
governments2 the dependence on market
%orrowings to finance fiscal deficits has
increased over the years+ .uring the year
:;;<1;:2 the state governments and the
central government financed nearly :?B and
:=B respectively of their fiscal deficit %y
market %orrowing+ In percentage terms2
dependence of the state governments on
market %orrowing did not increase much
during the decade :;;:1(<<:+ In case of
central government2 it increased to 77+/B %y
(<<(1<>+
Fo!,e+ol,
According to !"I data2 household sector accounted
for =(+?B of gross domestic savings during (<<:1<(+
They invested >=B of financial savings in deposits2
>>B in insuranceAprovident funds2 ::B on small
savings2 and =B in securities2 including government
securities and units of mutual funds during (<<:1 <(+
Thus the fi#ed income %earing instruments are the
most preferred assets of the household sector+ Their
share in total financial savings of the household
sector witnessed an increasing trend in the recent
past and is estimated at =(+?B in (<<:1 <(+ In
contrast2 the share of financial savings of the
household sector in securities 'shares2 de%entures2
pu%lic sector %onds and units of CTI and other
mutual funds and government securities) is
estimated to have gone down from ((+;B in :;;:1
;( to ?+>B in (<<<1<:2 which increased to =B in
(<<:1<(+ Though there was a ma0or shift in the
saving pattern of the household sector from physical
assets to
:/
financial assets and within financial assets2 from %ank deposits to securities2 the trend
got reversed in the recent past due to high real interest rates2 prolonged su%dued
conditions in the secondary market2 lack of confidence %y the issuers in the success of
issue process as well as of investors in the credi%ility of the issuers and the systems
and poor performance of mutual funds+ The portfolio of household sector remains
heavily weighted in favour of physical a,,et, an 0i1e in"o-e %earing in,tr!-ent,.
Investor Population
The Society for Capital ,arket !esearch and .evelopment carries out periodical surveys of
household investors to estimate the num%er of investors+ Their first survey carried out in :;;< placed
the total num%er of share owners at ;<1:<< lakh+ Their second survey estimated the num%er of
share owners at around :?<1:$< lakh as of mid1:;;>+ Their latest survey estimates the num%er of
shareowners at around ( crore at :;;7 end2 after which it remained stagnant up to the end of :;;<s+
The %ulk of increase in num%er of investors took place during :;;:1;? and tapered off thereafter+
?;B of the share owners at the end of (<<< had2 for the first time2 entered the market %efore the end
of :;;<2 ??B entered during :;;:1;?2 /+>B during :;;$1;/ and <+=B since :;;7+ The survey
attri%utes such tapering off to persistent depression in the share market and investors8 %ad
e#perience with many unscrupulous company promoters and managements+
.istri%ution of Investors
The Society for Capital ,arket !esearch & .evelopment estimates that :$B of ur%an
households and only <+$1:+<B of semi1ur%an and rural households own shares+ It is
estimated that ?B of all households own shares+
.istri%ution of "eneficial Accounts with NS.
S+
No+ StatesACnion "eneficial Accounts
Territories Num%er B to total
: Andhra Pradesh
:;?2?
<$ /+<=
( "ihar
(72>?
< <+=$
> Chandigarh 72=;: <+($
:7
? .elhi >(>2/;> :<+:(
$ 5oa ::2>7? <+>/
/ 5u0arat $>/27(< :/+7=
7 9imachal Pradesh >27</ <+:(
= Dammu & @ashmir 72>(< <+(>
; @arnataka :;$2:$; /+:<
:< @erala 7/27;> (+?<
:: ,adhya Pradesh 7:2:$= (+(>
:( ,aharashtra ;::2;;7 (=+$(
:> &rissa :?27<: <+?/
:? Pondicherry (2?=: <+<=
:$ Pun0a% $(2?>? :+/?
:/ !a0asthan 7(2>:/ (+(/
:7 Tamil Nadu (><2?<7 7+(<
:= Cttar Pradesh :==2=>$ $+;<
:; 4est "engal (:?2?>( /+7:
(< &thers $?2=<( :+7:
Total
>2:;72;/
? :<<+<<
An indirect2 %ut very authentic source of information a%out distri%ution of investors is the
data %ase of %eneficial accounts with the depositories+ "y *e%ruary (<<>2 there were >
million %eneficial accounts with the National Securities .epository imited 'NS.)+ The
state1wise distri%ution of %eneficial accounts with NS. e#pected ,aharashtra and
5u0arat account for nearly ?$B of total %eneficial accounts+
CAPITAL MARKET AT A GLANCE
Pri-ar* -ar/et
Sto"/, a3aila%le 0or t+e 0ir,t ti-e are o00ere t+ro!g+ ne. i,,!e -ar/et. T+e i,,!er -a* %e a
ne. "o-$an*. T+e,e i,,!e, -a* %e o0 ne. t*$e or t+e ,e"!rit* !,e in t+e $a,t. In t+e ne.
i,,!e -ar/et t+e i,,!er "an %e "on,iere a, a -an!0a"t!rer. T+e i,,!ing +o!,e,2
:=
in3e,t-ent %an/er, an %ro/er, a"t a, t+e
"+annel o0 i,tri%!tion 0or t+e ne. i,,!e,.
T+e* ta/e t+e re,$on,i%ilit* o0 ,elling t+e
,to"/, to t+e $!%li".
A total o0 R,. 72=7)2(G< -illion .ere rai,e
%* t+e go3ern-ent an "or$orate ,e"tor
!ring 7))7-)> a, again,t R,. 727&<2(()
-illion !ring t+e $re"eing *ear.
Go3ern-ent rai,e a%o!t t.o t+ir o0 t+e
total re,o!r"e,2 .it+ "entral go3ern-ent
alone rai,ing nearl* R,. (2=((27&) -illion.
Cor$orate Se"!ritie,
A3erage ann!al "a$ital -o%ili:ation 0ro- t+e
$ri-ar* -ar/et2 .+i"+ !,e to %e a%o!t R,.G)
"rore in t+e (<&), an a%o!t R,.<) "rore in t+e
(<G),2 in"rea,e -ani0ol !ring t+e (<H),2
.it+ t+e a-o!nt rai,e in (<<)-<( %eing R,.
I2>(7 "rore. It re"ei3e a 0!rt+er %oo,t !ring
t+e (<<), .it+ t+e "a$ital rai,e %* non-
go3ern-ent $!%li" "o-$anie, ri,ing ,+ar$l*
to R,. 7&2I(G "rore in (<<I-<=. T+e "a$ital
rai,e .+i"+ !,e to %e le,, t+an (' o0 gro,,
o-e,ti" ,a3ing 5GDS6 in t+e (<G), in"rea,e
to a%o!t (>' in (<<7-<>. In real ter-,2 t+e
"a$ital rai,e in"rea,e I ti-e, %et.een (<<)-
<( an (<<I-<=. D!ring (<<I-<=2 t+e a-o!nt
rai,e t+ro!g+ ne. i,,!e, o0 ,e"!ritie, 0ro-
t+e ,e"!ritie, -ar/et a""o!nte 0or a%o!t
0o!r-0i0t+ o0 t+e i,%!r,e-ent, %* FI,. I,,!er,
+a3e ,+i0te 0o"!, to ot+er a3en!e, 0or rai,ing
re,o!r"e, li/e $ri3ate $la"e-ent.
T+ere i, a $re0eren"e 0or rai,ing re,o!r"e, in t+e
$ri-ar* -ar/et t+ro!g+ $ri3ate $la"e-ent o0
e%t in,tr!-ent,. Pri3ate $la"e-ent, a""o!nte
0or a%o!t <>' o0 total re,o!r"e, -o%ili:e
t+ro!g+ o-e,ti" i,,!e, %* t+e "or$orate ,e"tor
!ring 7))7-)>. Ra$i i,-antling o0 ,+a"/le,
on in,tit!tional in3e,t-ent, an ereg!lation o0
t+e e"ono-* are ri3ing gro.t+ o0 t+i, ,eg-ent.
T+ere are ,e3eral in+erent a3antage, o0 rel*ing
on $ri3ate $la"e-ent ro!te 0or rai,ing re,o!r"e,.
8+ile it i, "o,t an ti-e e00e"ti3e -et+o o0
rai,ing 0!n, an "an %e ,tr!"t!re to -eet t+e
nee, o0 t+e entre$rene!r,2 it oe, not re4!ire
etaile "o-$lian"e .it+ 0or-alitie, a, re4!ire
in $!%li" or rig+t, i,,!e,. It i, %elie3e in ,o-e
"ir"le, t+at $ri3ate $la"e-ent +a, "ro.e o!t
$!%li" i,,!e,. Fo.e3er2 to $re3ent $!%li" i,,!e,
0ro- %eing $a,,e on a, $ri3ate $la"e-ent2 t+e
Co-$anie, 5A-en-ent6 A"t2 7))( "on,ier,
o00er o0 ,e"!ritie, to -ore t+an =) $er,on, a,
-ae to $!%li".
Inian -ar/et i, getting integrate .it+ t+e
glo%al -ar/et t+o!g+ in a li-ite .a* t+ro!g+
e!ro i,,!e,. Sin"e (<<72 .+en t+e* .ere
$er-itte a""e,,2 Inian "o-$anie, +a3e rai,e
:;
a%o!t R,. >I27&I -illion t+ro!g+
ADR,JGDR,. B* t+e en o0 Mar"+ 7))>2 =)7
FII, .ere regi,tere .it+ SEBI. T+e* +a net
"!-!lati3e in3e,t-ent, o3er o0 US K (=.H
%illion %* t+e en o0 Mar"+ 7))>. T+eir
o$eration, in0l!en"e t+e -ar/et a, t+e* o
eli3er*-%a,e %!,ine,, an t+eir
/no.lege o0 -ar/et i, "on,iere ,!$erior.
T+e -ar/et i, getting in,tit!tionali:e a,
$eo$le $re0er -!t!al 0!n, a, t+eir
in3e,t-ent 3e+i"le2 t+an/, to e3ol!tion o0 a
reg!lator* 0ra-e.or/ 0or -!t!al 0!n,2 ta1
"on"e,,ion, o00ere %* go3ern-ent an
$re0eren"e o0 in3e,tor, 0or $a,,i3e
in3e,ting. T+e net "olle"tion, %* MF, $i"/e
!$ !ring t+i, e"ae an in"rea,e to R,.
(<<2=>) -illion !ring (<<<-)). T+i, e"line
to R,. (((2>=) -illion !ring 7)))-)( .+i"+
-a* %e attri%!te to in"rea,e in rate o0 ta1
on in"o-e i,tri%!te %* e%t oriente
-!t!al 0!n, an la"/l!,ter ,e"onar*
-ar/et.
T+e total "olle"tion o0 -!t!al 0!n, 0or 7))7-)>
+a, %een R,. ()=2>GH -illion. Starting .it+ an
a,,et %a,e o0 R,. 7=) -illion in (<&I2 t+e total
a,,et, !ner -anage-ent at t+e en o0 Mar"+
7))> .a, R,. G<I2&I) -illion. T+e n!-%er o0
+o!,e+ol, o.ning !nit, o0 MF, e1"ee, t+e
n!-%er o0 +o!,e+ol, o.ning e4!it* an
e%ent!re,. At t+e en o0 0inan"ial *ear Mar"+
7))>2 a""oring to a SEBI $re,, relea,e 7>
-illion !nit +oler, +a in3e,te in !nit, o0 MF,2
.+ile (& -illion ini3i!al in3e,tor, in3e,te in
e4!it* an or e%ent!re,.
Go3ern-ent Se"!ritie,
T+e $ri-ar* i,,!e, o0 t+e Central Go3ern-ent
+a3e in"rea,e -an*-0ol !ring t+e e"ae o0
(<<), 0ro- R,. H<2H<) -illion in (<<)-<( to R,.
(2=((27&) -illion in 7))7-)>. T+e i,,!e, %* ,tate
go3ern-ent, in"rea,e %* a%o!t t.el3e ti-e,
0ro- R,. 7=2&<) -illion to R,. >)H2=>) -illion
!ring t+e ,a-e $erio. T+e Central Go3ern-ent
-o%ili,e R,. (27=)2))) -illion t+ro!g+ i,,!e o0
ate ,e"!ritie, an R,. 7&(27&) -illion t+ro!g+
i,,!e o0 T-%ill,. A0ter -eeting re$a*-ent
lia%ilitie, o0 R,. 7GI27)) -illion 0or ate
,e"!ritie,2 an ree-$tion o0 T-%ill, o0 R,.
(<=2HH) -illion2 net -ar/et %orro.ing o0 Central
Go3ern-ent a-o!nte to R,. (2)I(2(H) -illion
0or t+e *ear 7))7-)>. T+e ,tate go3ern-ent,
"olle"ti3el* rai,e R,. >)=2H>) -illion !ring
7))7-)> a, again,t R,. (HG2)G) -illion in t+e
$re"eing *ear. T+e net %orro.ing, o0 State
Go3ern-ent, in 7))7-)> a-o!nte to R,.
7<)2&I) -illion. Along .it+ gro.t+ o0 t+e -ar/et2
t+e in3e,tor %a,e +a, %e"o-e 3er* .ie. In
aition to %an/, an in,!ran"e "o-$anie,2
"or$orate, an ini3i!al in3e,tor, are
(<
in3e,ting in go3ern-ent ,e"!ritie,. 8it+
i,-antling o0 "ontrol regi-e2 an gra!al
lo.ering o0 t+e SLR an CRR2 Go3ern-ent i,
%orro.ing at near@-ar/et rate,. T+e "o!$on,
a"ro,, -at!ritie, .ent o.n re"entl* ,igni0*ing
lo.er intere,t rate,. T+e .eig+te a3erage "o,t
o0 it, %orro.ing at one ,tage in"rea,e to
(>.G=' in (<<=- <&2 .+i"+ e"line to G.>I' in
7))7-)>. T+e -at!rit* ,tr!"t!re o0 go3ern-ent
e%t i, al,o "+anging. In 3ie. o0 %!n"+ing o0
ree-$tion lia%ilitie, in t+e -ei!- ter-2
,e"!ritie, .it+ +ig+er -at!ritie, .ere i,,!e
!ring 7))7-)>. A%o!t &I' o0 $ri-ar* i,,!e,
.ere rai,e t+ro!g+ ,e"!ritie, .it+ -at!ritie,
a%o3e = *ear, an !$ to () *ear,. A, a re,!lt t+e
.eig+te a3erage -at!rit* o0 ate ,e"!ritie,
in"rea,e to (>.H> *ear, 0ro- &.& *ear, in (<<G-
<H.
Relation,+i$ %et.een t+e Pri-ar*
an Se"onar* Mar/et
1. T+e ne. i,,!e, -ar/et "annot 0!n"tion
.it+o!t t+e ,e"onar* -ar/et. T+e
,e"onar* -ar/et or t+e ,to"/ -ar/et
$ro3ie, li4!iit* 0or t+e i,,!e
,e"!ritie,. T+e i,,!e ,e"!ritie, are
trae in t+e ,e"onar* -ar/et o00ering
li4!iit* to t+e ,to"/, at a 0air $ri"e.
2. T+e ,to"/ e1"+ange, t+ro!g+ t+eir li,ting
re4!ire-ent,2 e1er"i,e "ontrol o3er t+e
$ri-ar* -ar/et. T+e "o-$an* ,ee/ing 0or
li,ting on t+e re,$e"ti3e ,to"/ e1"+ange +a,
to "o-$l* .it+ all t+e r!le, an reg!lation,
gi3en %* t+e ,to"/ e1"+ange.
3. T+e $ri-ar* -ar/et $ro3ie, a ire"t
lin/ %et.een t+e $ro,$e"ti3e in3e,tor,
an t+e "o-$an*. B* $ro3iing li4!iit*
an ,a0et*2 t+e ,to"/ -ar/et,
en"o!rage t+e $!%li" to ,!%,"ri%e to
t+e ne. i,,!e,. T+e -ar/eta%ilit* an
t+e "a$ital a$$re"iation $ro3ie in t+e
,to"/ -ar/et are t+e -a9or 0a"tor, t+at
attra"t t+e in3e,ting $!%li" to.ar, t+e
,to"/ -ar/et. T+!,2 it $ro3ie, an
inire"t lin/ %et.een t+e ,a3er, an t+e
"o-$an*.
4. E3en t+o!g+ t+e* are "o-$le-entar* to
ea"+ ot+er2 t+eir 0!n"tion, an t+e
organi:ational ,et !$ are i00erent 0ro-
ea"+ ot+er. T+e +ealt+ o0 t+e $ri-ar*
-ar/et e$en, on t+e ,e"onar*
-ar/et an 3i"e 3er,a.
F!n"tion, o0 Pri-ar* Mar/et
T+e -ain ,er3i"e 0!n"tion, o0 t+e $ri-ar* -ar/et
are organi:ation2 !ner.riting an i,tri%!tion.
Origination eal, .it+ t+e origin o0 t+e ne.
i,,!e. T+e $ro$o,al i, anal*:e in
(:
ter-, o0 t+e nat!re o0 t+e ,e"!rit*2 t+e ,i:e
o0 t+e i,,!e2 an ti-ing o0 t+e i,,!e an
0loatation -et+o o0 t+e i,,!e.
Uner.riting "ontra"t -a/e, t+e ,+are
$rei"ta%le an re-o3e, t+e ele-ent o0
!n"ertaint* in t+e ,!%,"ri$tion.
Di,tri%!tion re0er, to t+e lea -anager,
an %ro/er, to t+e i,,!e.
In t+e ne. i,,!e -ar/et ,to"/, are o00ere 0or
t+e 0ir,t ti-e. T+e 0!n"tion, an t+e organi:ation
o0 t+e ne. i,,!e -ar/et i, i00erent 0ro- t+e
,e"onar* -ar/et. In t+e ne. i,,!e t+e lea
-anger, -anage t+e i,,!e2 t+e !ner.riter,
a,,!re to ta/e !$ t+e !n,!%,"ri%e $ortion
a""oring to +i, "o--it-ent 0or a "o--i,,ion
an t+e %an/er, ta/e !$ t+e re,$on,i%ilit* o0 t+e
"olle"ting t+e a$$li"ation 0or- an t+e -one*.
A3erti,ing agen"ie, $ro-ote t+e ne. i,,!e
t+ro!g+ a3erti,ing. Finan"ial in,tit!tion, an
!ner.riter len ter- loan, to t+e "o-$an*.
Go3ern-ent agen"ie, reg!late t+e i,,!e. T+e
ne. i,,!e, are o00ere t+ro!g+ $ro,$e"t!,. T+e
$ro,$e"t!, i, ra0te a""oring to SEBI
g!ieline, i,"lo,ing t+e neee in0or-ation to
t+e in3e,ting $!%li". In t+e %o!g+t o!t eal
%an/, or a "o-$an* %!*, t+e $ro-oter, ,+are,
an t+e* o00er t+e- to t+e $!%li" at a later ate.
T+i, re!"e, t+e "o,t o0 rai,ing t+e 0!n. Pri3ate
$la"e-ent -ean, $la"ing o0 t+e i,,!e .it+
0inan"ial in,tit!tion,. T+e* ,ell ,+are, to t+e
in3e,tor, at a ,!ita%le $ri"e. Rig+t i,,!e -ean,
t+e allot-ent o0 ,+are, to t+e $re3io!,
,+are+oler, at a $ro-ratio %a,i,. Boo/ %!iling
in3ol3e, 0ir- allot-ent o0 t+e in,tr!-ent to a
,*ni"ate "reate %* t+e lea -anager,. T+e
%oo/ r!nner -anage, t+e i,,!e. Nor-, are
gi3en %* t+e SEBI to $ri"e t+e i,,!e.
Pro$ortionate allot-ent -et+o i, ao$te in t+e
allo"ation o0 ,+are,. Pro9e"t a$$rai,al2
i,"lo,!re in t+e $ro,$e"t!, an "learan"e o0
t+e $ro,$e"t!, %* t+e ,to"/ e1"+ange, $rote"t
t+e in3e,tor, in t+e $ri-ar* -ar/et along .it+
t+e a"ti3e role $la*e %* t+e SEBI
Se"onar* -ar/et
T+e -ar/et 0or long-ter- ,e"!ritie, li/e %on,2
e4!it* ,to"/, an $re0erre ,to"/, i, i3ie
into $ri-ar* -ar/et an ,e"onar* -ar/et.
T+e $ri-ar* -ar/et eal, .it+ t+e ne. i,,!e,
o0 ,e"!ritie,. O!t,taning ,e"!ritie, are
trae in t+e ,e"onar* -ar/et2 .+i"+ i,
"o--onl* /no.n a, ,to"/ -ar/et or ,to"/
e1"+ange. In t+e ,e"onar* -ar/et2 t+e
in3e,tor, "an ,ell an %!* ,e"!ritie,. Sto"/
-ar/et, $reo-inantl* eal in t+e e4!it*
,+are,. De%t in,tr!-ent, li/e %on, an
e%ent!re, are al,o trae in t+e ,to"/
-ar/et. 8ell-reg!late an a"ti3e ,to"/ -ar/et
$ro-ote, "a$ital 0or-ation. Gro.t+ o0 t+e
((
$ri-ar* -ar/et e$en, on t+e ,e"onar*
-ar/et. T+e +ealt+ o0 t+e e"ono-* i,
re0le"te %* t+e gro.t+ o0 t+e ,to"/
-ar/et.
Cor$orate Se"!ritie,
T+e n!-%er o0 ,to"/ e1"+ange, in"rea,e
0ro- (( in (<<) to 7> no.. All t+e e1"+ange,
are 0!ll* "o-$!teri,e an o00er ())' on-line
traing. <2I(> "o-$anie, .ere a3aila%le 0or
traing on ,to"/ e1"+ange, at t+e en o0
Mar"+ 7))>. T+e traing $lat0or- o0 t+e ,to"/
e1"+ange, .a, a""e,,i%le to <2=(< -e-%er,
0ro- o3er >=H "itie, on t+e ,a-e ate.
T+e -ar/et "a$itali,ation gre. ten 0ol
%et.een (<<)-<( an (<<<-)). It in"rea,e
%* 77(' !ring (<<(-<7 an %* ()G' !ring
(<<<-)). All Inia -ar/et "a$itali,ation i,
e,ti-ate at R,. &2>(<27(7 -illion at t+e en
o0 Mar"+ 7))>. T+e -ar/et "a$itali,ation
ratio2 .+i"+ ini"ate, t+e ,i:e o0 t+e -ar/et2
in"rea,e ,+ar$l* to =G.I' in (<<(-<7
0ollo.ing ,$!rt in ,+are $ri"e,. T+e ratio
0!rt+er in"rea,e to H=' %* Mar"+ 7))). It2
+o.e3er2 e"line to ==' at t+e en o0
Mar"+ 7))( an to 7<' %* en Mar"+ 7))>.
T+e traing 3ol!-e, on e1"+ange, +a3e
%een .itne,,ing $+eno-enal gro.t+ !ring
t+e (<<),. T+e a3erage ail* t!rno3er gre.
0ro- a%o!t R,.(=)) -illion in (<<) to R,.
(7)2))) -illion in 7)))2 $ea/ing at o3er R,.
7))2))) -illion. One-,ie t!rno3er on all
,to"/ e1"+ange, e1"eee R,. ()2)))2)))
-illion !ring (<<H-<<2 R,. 7)2)))2)))
-illion !ring (<<<-)) an a$$roa"+e R,.
>)2)))2))) -illion !ring 7)))-)(. Fo.e3er2
t+e traing 3ol!-e ,!%,tantiall* e$lete to
R,.<2&H<2=I( -illion in 7))7-)>. T+e t!rno3er
ratio2 .+i"+ re0le"t, t+e 3ol!-e o0 traing in
relation to t+e ,i:e o0 t+e -ar/et2 +a, %een
in"rea,ing %* lea$, an %o!n, a0ter t+e
a3ent o0 ,"reen %a,e traing ,*,te- %*
t+e NSE. T+e t!rno3er ratio 0or t+e *ear
7))7-)> in"rea,e to >G= %!t 0ell
,!%,tantiall* !e to %a -ar/et "onition,
to ((< !ring 7))(-)7 regaining it, $o,ition
a""o!nte (=>.>' in 7))7-)>.
T+e relati3e i-$ortan"e o0 3ario!, ,to"/
e1"+ange, in t+e -ar/et +a, !nergone
ra-ati" "+ange !ring t+i, e"ae. T+e
in"rea,e in t!rno3er too/ $la"e -o,tl* at t+e
large %ig e1"+ange, an it .a, $artl* at t+e "o,t
o0 ,-all e1"+ange, t+at 0aile to /ee$ $a"e .it+
t+e "+ange,. NSE i, t+e -ar/et leaer .it+ -ore
H=' o0 total t!rno3er 53ol!-e, on all ,eg-ent,6
in 7))7-)>. To$ = ,to"/ e1"+ange, a""o!nte 0or
<<.HH' o0 t!rno3er2 .+ile t+e
(>
re,t (H e1"+ange 0or le,, t+an ).(7'
!ring 7))7-)>. A%o!t ten e1"+ange,
re$orte nil t!rno3er !ring t+e *ear.
Role o0 t+e Se"onar* Mar/et
8+en "o-$an* -anage-ent +a, i00erent
o%9e"ti3e, t+an it, o!t,ie in3e,tor,2 Lagen"*B
an Lin0or-ationL $ro%le-, -a* re,!lt. For
e1a-$le2 -anage-ent -a* e1ert le,, t+an
o$ti-al e00ort2 -a* $!r,!e goal, t+at ,i-$l*
en+an"e it, o.n $o.er an "ontrol2 or -a*
,4!aner or i3ert "o-$an* re,o!r"e,. In
aition2 to t+e e1tent t+at -anage-ent i, %etter
in0or-e t+an o!t,ie in3e,tor, a%o!t t+e
"o-$an*M, 0inan"ial ,it!ation2 t+i, "reate, an
in0or-ational a,*--etr*. T+i,2 in t!rn2 -a*
re,!lt in -anage-ent %eing !na%le to "on3in"e
it, o!t,ie in3e,tor, o0 t+e tr!e 3al!e o0 t+e
"o-$an* a, .ell a, o0 -anage-entM, intention,.
A, a "on,e4!en"e2 -anage-ent al,o -a* 0in
t+at it i, not a%le to rai,e a, -!"+ "a$ital a, it
.ant, or nee, to 0inan"e ne. $ro9e"t,2 or t+at
-anage-ent -a* +a3e to ,!rrener too -!"+ o0
t+e 3al!e o0 t+e 0ir- to rai,e t+e "a$ital it .ant,
or nee,. LGo3ernan"eL re0er, to t+e 3ario!,
-e"+ani,-, t+at e1i,t to -itigate t+e,e agen"*
an in0or-ation $ro%le-,. T+e,e -e"+ani,-,
are n!-ero!,2 ,o-e in3ol3ing "a$ital -ar/et,
5e.g.2 0a"ilitation o0 "or$orate "ontrol 3ia
ta/eo3er6 .+ile ot+er, o not2 at lea,t not
ire"tl* 5e.g.2 t+e role o0 t+e %oar o0 ire"tor, a,
a -onitoring e3i"e6. T+e,e -a9or -e"+ani,-,
.ill %e i,"!,,e. 8e !,e t+e ter- L-ar/et-
%a,e go3ernan"eL to re0er to t+e role o0 "a$ital
-ar/et, in alle3iating t+e agen"* an
in0or-ation $ro%le-,2 %* 0!n"tioning a, an
e00e"ti3e "on!it 0or -onitoring an "ontrolling
-anage-entM, ,!% o$ti-al %e+a3ior. Mar/et-
%a,e go3ernan"e -a* ta/e i00erent 0or-,.
Fo.e3er2 generall* ,$ea/ing2 ,!"+ go3ernan"e
ta/e, t+e 0or- o0 0a"ilitating t+e -onitoring o0
-anage-ent %* o!t,ier,2 an aggregating
in0or-ationNin t+e 0or- o0 e4!ili%ri!- $ri"e, 5or
$ri"e i,"o3er*6Nto +el$ g!ie -anage-ent
e"i,ion, .it+in t+e 0ir-.
A. Monitoring an Control.
A, note2 ,e"onar* e4!it* -ar/et, ,er3e a, a
"on!it 0or -onitoring an "ontrolling
-anage-ent %* o!t,ier,. Fir,t2 -ar/et,
generate in0or-ation t+at +el$, o!t,ie
in3e,tor, E3al!ate t+e 4!alit* o0 $a,t
-anage-ent e"i,ion,. Se"on2 t+e t+reat o0 a
ta/eo3er -a* -itigate -anage-ent
ine00i"ien"ie,. T+ir2 in0or-ation on ,to"/-
-ar/et $ri"e, $ro3ie,
(?
0or e00e"ti3e in"enti3e, 0or -anage-ent. An
0o!rt+2 t+e ri"+ -en! o0 "ontra"t, $ro3ie in
t+e -ar/et allo., $ri3ate .or/o!t, o0 0inan"ial
i,tre,,2 ea,ing t+e tran,0er o0 "ontrol.
For $!r$o,e, o0 o!r anal*,i, %elo.2 .e +a3e
i3ie -onitoring into t.o "ategorie,
Mar/et-%a,e -onitoring
Non -ar/et-%a,e -onitoring
I. Mar/et-Ba,e Monitoring
I. ( A"ti3e S+are+oler,#
T+e ,e"onar* e4!it* -ar/et "an 0a"ilitate
e00e"ti3e -onitoring %* $ro3iing t+e
a%ilit* to %!il $o,ition, ,o a, to in0l!en"e
-anage-ent e"i,ion, in ,it!ation, .+ere
a "+ange in "or$orate $oli"ie, "o!l
in"rea,e a 0ir-M, 3al!e.
I. 7 T+e Mar/et 0or Cor$orate Control#
T+e t+reat o0 a "or$orate ta/eo3er %*
o!t,ie in3e,tor, "o!l ,er3e a, a eterrent
to -i,-anage-ent. Se"onar* e4!it*
-ar/et, $ro3ie t+e -ean, 0or la!n"+ing a
"rei%le ta/eo3er t+reat2 .+i"+ "o!l
in0l!en"e a"tion, %* -anage-ent.
I. > Fa"ilitation o0 In"enti3e-Ba,e
Co-$en,ation#
Manage-ent "o!l %e aligne .it+ it,
o!t,ie ,+are+oler, t+ro!g+ a $ro$er
,tr!"t!ring o0 in"enti3e-%a,e
"o-$en,ation. Manage-entM, e4!it*
o.ner,+i$ an ,to"/ o$tion, $ro3ie
-anage-ent .it+ aitional in"enti3e, to
a"t in t+e intere,t o0 o!t,ie ,+are+oler,.
I. I Certi0i"ation %* In3e,t-ent Ban/,#
8+en i,,!ing ,e"!ritie, to t+e $!%li"2 t+e
!ner.riting in3e,t-ent %an/er, -onitor
-anage-ent. 8+en "erti0*ing a 0ir- t+at
+ire, t+e- to ,ell it, ,e"!ritie,2 t+e,e
in3e,t-ent %an/er, $la"e t+eir o.n
re$!tation, an "a$ital at ,ta/e.
I
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#
A %oar o0 ire"tor, i, t+e $ri-ar* -et+o o0
non -ar/et-%a,e -onitoring. Manage-ent
re$ort, ire"tl* to t+e %oar2 an t+e %oar +a, a
0i!"iar* o%ligation to ,ta* in0or-e o0
-anage-entM, -a9or a"ti3itie,. T+e %oar +a,
t+e $o.er to ter-inate -anage-ent t+at
($
oe, not a"t in t+e %e,t intere,t, o0 t+e
"o-$an*M, ,+are+oler,. T+e /e* to a
%oarM, %eing an e00e"ti3e -onitoring
-e"+ani,- i, it, ine$enen"e. In t+i,
regar2 t+e "o-$o,ition o0 t+e %oar2
e,$e"iall* t+e $re,en"e o0 o!t,ie %oar
-e-%er,2 i, "riti"al to it, e00e"ti3ene,, a,
a -onitor.
II. 7 Finan"ial inter-eiarie, a, elegate
-onitor,#
Ban/, "lo,el* -onitor t+eir %!,ine,,
%orro.er,2 an "olle"t in0or-ation an
,"r!tini:e -a9or in3e,t-ent an 0inan"ing
e"i,ion,. In oing ,o2 t+e* "an t+reaten
to .it++ol 0inan"ing ,+o!l -anage-ent
a"t in a -anner "ontrar* to t+e %an/,M
intere,t,. Monitoring 3ia %!,ine,, gro!$,.
In ,o-e "o!ntrie,2 ,!"+ a, Oa$an an
Korea2 "or$orate a"tion, are "oorinate
.it+in a 0a-il* o0 interrelate 0ir-,2 .it+ a
-ain %an/ at t+e "enter. Fir-, in t+e gro!$
are inter"onne"te t+ro!g+ intri"ate
3erti"al an +ori:ontal %!,ine,,
relation,+i$, an "ro,,-o.ner,+i$.
Me-%er, o0 t+e %!,ine,, gro!$2 .it+ t+e
lea $arti"i$ation o0 t+e -ain %an/2 "lo,el*
-onitor t+e a"tion, o0 a -e-%er 0ir-M,
-anage-ent.
T+e Legal S*,te-#
T+e 0o!r -ain legi,lation, go3erning t+e
,e"!ritie, -ar/et are# 5a6 t+e SEBI A"t2 (<<7
.+i"+ e,ta%li,+e, SEBI to $rote"t in3e,tor, an
e3elo$ an reg!late ,e"!ritie, -ar/etE 5%6 t+e
Co-$anie, A"t2 (<=&2 .+i"+ ,et, o!t t+e "oe o0
"on!"t 0or t+e "or$orate ,e"tor in relation to
i,,!e2 allot-ent an tran,0er o0 ,e"!ritie,2 an
i,"lo,!re, to %e -ae in $!%li" i,,!e,E 5"6 t+e
Se"!ritie, Contra"t, 5Reg!lation6 A"t2 (<=&2
.+i"+ $ro3ie, 0or reg!lation o0 tran,a"tion, in
,e"!ritie, t+ro!g+ "ontrol o3er ,to"/
e1"+ange,E an 56 t+e De$o,itorie, A"t2 (<<&
.+i"+ $ro3ie, 0or ele"troni" -aintenan"e an
tran,0er o0 o.ner,+i$ o0 e-at ,e"!ritie,.
Go3ern-ent +a, 0ra-e r!le, !ner t+e SCRA2
SEBI A"t an t+e De$o,itorie, A"t. SEBI +a,
0ra-e reg!lation, !ner t+e SEBI A"t an t+e
De$o,itorie, A"t 0or regi,tration an reg!lation
o0 all -ar/et inter-eiarie,2 an 0or $re3ention
o0 !n0air trae $ra"ti"e,2 in,ier traing2 et".
Uner t+e,e A"t,2 Go3ern-ent an SEBI i,,!e
noti0i"ation,2 g!ieline,2 an "ir"!lar, .+i"+
nee to %e "o-$lie .it+ %* -ar/et $arti"i$ant,.
T+e SRO, li/e ,to"/ e1"+ange, +a3e al,o lai
o.n t+eir r!le, o0 ga-e.
T+e re,$on,i%ilit* 0or reg!lating t+e ,e"!ritie,
-ar/et i, ,+are %* De$art-ent o0 E"ono-i"
A00air, 5DEA62 De$art-ent o0 Co-$an* A00air,
5DCA62 Re,er3e Ban/ o0 Inia 5RBI6 an SEBI.
T+e a"ti3itie, o0 t+e,e agen"ie, are "o-
orinate %* t+e Fig+ Le3el
(/
Co--ittee on Ca$ital Mar/et,. Mo,t o0 t+e
$o.er, !ner t+e SCRA are e1er"i,a%le %*
DEA .+ile a 0e. ot+er, %* SEBI. T+e $o.er,
o0 t+e DEA !ner t+e SCRA are al,o "on-
"!rrentl* e1er"i,e %* SEBI. T+e $o.er, in
re,$e"t o0 t+e "ontra"t, 0or ,ale an
$!r"+a,e o0 ,e"!ritie,2 gol relate
,e"!ritie,2 -one* -ar/et ,e"!ritie, an
,e"!ritie, eri3e 0ro- t+e,e ,e"!ritie, an
rea* 0or.ar "ontra"t, in e%t ,e"!ritie,
are e1er"i,e "on"!rrentl* %* RBI. T+e SEBI
A"t an t+e De$o,itorie, A"t are -o,tl*
a-ini,tere %* SEBI. T+e r!le, an
reg!lation, !ner t+e ,e"!ritie, la., are
a-ini,tere %* SEBI. T+e $o.er, !ner t+e
Co-$anie, A"t relating to i,,!e an tran,0er
o0 ,e"!ritie, an non-$a*-ent o0 i3ien
are a-ini,tere %* SEBI in "a,e o0 li,te
$!%li" "o-$anie, an $!%li" "o-$anie,
$ro$o,ing to get t+eir ,e"!ritie, li,te. T+e
SRO, en,!re "o-$lian"e .it+ t+eir o.n
r!le, a, .ell a, .it+ t+e r!le,.
T+e legal ,*,te- go3ern, %ot+ t+e rig+t,
o0 -anage-ent an t+e rig+t, o0
in3e,tor,. T+e legal ,*,te- al,o ,$e"i0ie,
t+e re"o!r,e a3aila%le to in3e,tor,. Re"ent
re,ear"+ ini"ate, t+at "o!ntrie, 3ar* in
t+e le3el o0 $rote"tion a00ore to -inorit*
,+are+oler, 5LaPorta et al2 (<<&6.
Generall*2 "o!ntrie, .it+ "o--on-la.
traition, a00or t+e +ig+e,t $rote"tion2
.+ile "i3il-la. "o!ntrie,2 $arti"!larl* t+e
Fren"+ "i3il-la. ,*,te-,2 $ro3ie t+e lea,t
a-o!nt o0 $rote"tion.
For $!r$o,e, o0 t+i, $a$er2 t+e -ain 0o"!,
an e-$+a,i, are on -ar/et-%a,e
go3ernan"e ,er3i"e,.
B. In0or-ation Pro!"tion.
Mar/et, ,er3e to aggregate t+e i3er,e
o$inion, +el %* in3e,tor, regaring t+e
0inan"ial $ro,$e"t, o0 a "o-$an*2 t+ere%*
$ro3iing -anage-ent .it+ an i-$ortant
g!ie .+en it "o-e, to it, in3e,t-ent
e"i,ion,. T+i, $ri"e i,"o3er* role o0
,e"onar* e4!it* -ar/et, i, .ell
re"ogni:e. Pri"e, aggregate t+e i3er,e
o$inion, an "on3e* t+at "olle"ti3e .i,o-
to -anage-ent. T+i, 0lo. o0 in0or-ation
0ro- t+e -ar/et to t+e 0ir- -ig+t %e
e,$e"iall* rele3ant in toa*M, e"ono-*2
,in"e "on,en,!, on t+e o$ti-al
-anage-ent a"tion, i, ,o i00i"!lt to
a"+ie3e !e to ra$i te"+nologi"al "+ange
an "on,tantl* "+anging -ar/et "onition,.
(7
F!n"tion, o0 Sto"/ E1"+ange
Maintain, a"ti3e traing# ,+are, are
trae on t+e ,to"/ e1"+ange,2
ena%ling t+e in3e,tor, to %!* an ,ell
,e"!ritie,. T+e $ri"e, -a* 3ar* 0ro-
tran,a"tion, to tran,a"tion. A
"ontin!o!, traing in"rea,e, t+e
li4!iit* or -ar/eta%ilit* o0 t+e
,+are, trae on t+e ,to"/
e1"+ange,.
Fi1ation o0 $ri"e,# Pri"e i, eter-ine
%* t+e tran,a"tion, t+at 0lo. 0ro-
in3e,tor,; e-an an ,!$$lier,;
$re0eren"e,. U,!all* t+e trae $ri"e,
are -ae /no.n to t+e $!%li". T+i,
+el$, t+e in3e,tor, to -a/e %etter
e"i,ion,.
En,!re, ,a0e an 0air ealing# T+e r!le,2
reg!lation, an %*-la., o0 t+e ,to"/
e1"+ange,; $ro3ie a -ea,!re o0 ,a0et*
to t+e in3e,tor,. Tran,a"tion, are
"on!"te !ner "o-$etiti3e "onition,
ena%ling t+e in3e,tor, to get a 0air eal.
Ai, in 0inan"ing t+e in!,tr*# A
"ontin!o!, -ar/et 0or ,+are,
$ro3ie, a 0a3o!ra%le "li-ate 0or
rai,ing "a$ital. T+e negotia%ilit* an
tran,0era%ilit* o0 t+e ,e"!ritie, +el$,
t+e "o-$anie, to rai,e long-ter-
0!n,. 8+en it i, ea,* to trae t+e
,e"!ritie,2 in3e,tor, are .illing to
,!%,"ri%e to t+e initial $!%li"
o00ering,. T+i, ,ti-!late, t+e "a$ital
0or-ation.
Di,,e-ination o0 in0or-ation# Sto"/
e1"+ange, $ro3ie in0or-ation t+ro!g+
t+eir 3ario!, $!%li"ation,. T+e* $!%li,+
t+e ,+are $ri"e, trae on ail* %a,i,
along .it+ t+e 3ol!-e trae. Dire"tor*
o0 Cor$orate In0or-ation i, !,e0!l 0or t+e
in3e,tor,; a,,e,,-ent regaring t+e
"or$orate. Fano!t,2 +an%oo/, an
$a-$+let, $ro3ie in0or-ation regaring
t+e 0!n"tioning o0 t+e ,to"/ e1"+ange,.
(=
Per0or-an"e in!"er# T+e $ri"e, o0
,to"/, re0le"t t+e $er0or-an"e o0 t+e
trae "o-$anie,. T+i, -a/e, t+e
"or$orate -ore "on"erne .it+ it,
$!%li" i-age an trie, to -aintain
goo $er0or-an"e.
Sel0-reg!lating organi:ation# T+e
,to"/ e1"+ange, -onitor t+e
integrit* o0 t+e -e-%er,2 %ro/er,2
li,te "o-$anie, an "lient,.
Contin!o!, internal a!it ,a0eg!ar,
t+e in3e,tor, again,t !n0air trae
$ra"ti"e,. It ,ettle, t+e i,$!te
%et.een -e-%er %ro/er,2 in3e,tor,
an %ro/er,.
Re,ear"+ in Se"!ritie, Mar/et
In orer to ee$en t+e !ner,taning an
/no.lege a%o!t Inian "a$ital -ar/et2 an to
a,,i,t in $oli"*--a/ing2 SEBI +a, %een
$ro-oting +ig+ 4!alit* re,ear"+ in "a$ital
-ar/et. It +a, ,et !$ an in-+o!,e re,ear"+
e$art-ent2 .+i"+ %ring, o!t .or/ing $a$er,
on a reg!lar %a,i,. In "olla%oration .it+
NCAER2 SEBI %ro!g+t o!t a PS!r3e* o0 Inian
In3e,tor,;2 .+i"+ e,ti-ate, in3e,tor
$o$!lation in Inia an t+eir in3e,t-ent
$re0eren"e,. SEBI +a, al,o tie !$ .it+
re$!te national an international a"ae-i"
an re,ear"+ in,tit!tion, 0or "on!"ting
re,ear"+ ,t!ie,J$ro9e"t, on 3ario!, i,,!e,
relate to t+e "a$ital -ar/et. In orer to
i-$ro3e -ar/et e00i"ien"* 0!rt+er an to ,et
international %en"+-ar/, in t+e ,e"!ritie,
in!,tr*2 NSE a-ini,ter, a ,"+e-e "alle t+e
NSE Re,ear"+ Initiati3e .it+ a 3ie. to e3elo$
an in0or-ation %a,e an a %etter in,ig+t into
t+e .or/ing o0 ,e"!ritie, -ar/et in Inia. T+e
o%9e"ti3e o0 t+i, initiati3e i, to 0o,ter re,ear"+2
.+i"+ "an ,!$$ort an 0a"ilitate 5a6 ,to"/
e1"+ange, to %etter e,ign -ar/et -i"ro-
,tr!"t!re2 5%6 $arti"i$ant, to 0ra-e t+eir
,trategie, in t+e -ar/et $la"e2 5"6 reg!lator, to
0ra-e reg!lation,2 56 $oli"* -a/er, to
0or-!late $oli"ie,2 an 5e6 e1$an t+e +ori:on
o0 /no.lege. T+e Initiati3e +a, re"ei3e
tre-eno!, re,$on,e.
Te,ting an Certi0i"ation
(;
T+e inter-eiarie,2 o0 all ,+a$e, an ,i:e,2
.+o $a"/age an ,ell ,e"!ritie,2 "o-$ete .it+
one anot+er 0or t+e "+an"e to +anle
in3e,tor,Ji,,!er,; -one*. T+e 4!alit* o0 t+eir
,er3i"e, eter-ine, t+e ,+a$e an +ealt+ o0
t+e ,e"!ritie, -ar/et. In e3elo$e -ar/et,
an in ,o-e o0 t+e e3elo$ing -ar/et,2 t+i, i,
en,!re t+ro!g+ a ,*,te- o0 te,ting an
"erti0i"ation o0 $er,on, 9oining -ar/et
inter-eiarie, in t+e ,e"!ritie, -ar/et. A
te,ting an "erti0i"ation -e"+ani,- t+at +a,
%e"o-e e1tre-el* $o$!lar an i, ,o!g+t a0ter
%* t+e "aniate, a, .ell a, e-$lo*er, i, a
!ni4!e on-line te,ting an "erti0i"ation
$rogra--e "alle National Sto"/ E1"+ange;,
Certi0i"ation in Finan"ial Mar/et, 5NCFM6. It i,
an on-line 0!ll* a!to-ate nation-.ie te,ting
an "erti0i"ation ,*,te- .+ere t+e entire
$ro"e,, 0ro- generation o0 4!e,tion $a$er2
in3igilation2 te,ting2 a,,e,,ing2 ,"ore,
re$orting an "erti0*ing i, 0!ll* a!to-ate -
t+ere i, a%,ol!tel* no ,"o$e 0or +!-an
inter3ention. It allo., tre-eno!, 0le1i%ilit* in
ter-, o0 te,ting "entre,2 ate, an ti-ing an
$ro3ie, ea,* a""e,,i%ilit* an "on3enien"e
to "aniate, a, +e "an %e te,te at an* ti-e
an 0ro- an* lo"ation. It te,t, $ra"ti"al
/no.lege an ,/ill,2 t+at are re4!ire to
o$erate in 0inan"ial -ar/et,2 in a 3er* ,e"!re
an !n%ia,e -anner2 an "erti0ie, $er,onnel
.+o +a3e a $ro$er !ner,taning o0 t+e
-ar/et an %!,ine,, an ,/ill, to ,er3i"e
i00erent "on,tit!ent, o0 t+e -ar/et. It o00er, <
0inan"ial -ar/et relate -o!le,.
Mar/et
De,ign
Pri-ar* Mar/et
(. Cor$orate Se"!ritie,# T+e Di,"lo,!re an
In3e,tor Prote"tion 5DIP6 g!ieline, $re,"ri%e a
,!%,tantial %o* o0 re4!ire-ent, 0or
i,,!er,Jinter-eiarie,2 t+e %roa intention %eing
to en,!re t+at all "on"erne o%,er3e +ig+
,tanar, o0 integrit* an 0air ealing2 "o-$l*
.it+ all t+e re4!ire-ent, .it+ !e ,/ill2 iligen"e
an "are2 an i,"lo,e t+e tr!t+2 .+ole tr!t+ an
not+ing %!t tr!t+. T+e g!ieline, ai- to ,e"!re
0!ller i,"lo,!re o0 rele3ant in0or-ation a%o!t
t+e i,,!er an t+e nat!re o0 t+e ,e"!ritie, to %e
i,,!e ,o t+at in3e,tor, "an ta/e in0or-e
e"i,ion,. For e1a-$le2 i,,!er, are re4!ire to
i,"lo,e an* -aterial Pri,/ 0a"tor,; an gi3e
9!,ti0i"ation 0or $ri"ing in t+eir $ro,$e"t!,. An
!nli,te "o-$an* "an a""e,, t+e -ar/et !$ to =
ti-e, it, $re-i,,!e net.ort+ onl* i0 it +a, tra"/
re"or o0 i,tri%!ta%le $ro0it, an net .ort+ o0
R,. ( "rore in > o!t o0 la,t 0i3e *ear,. A li,te
"o-$an* "an a""e,, !$ to = ti-e, o0 it, $re-
i,,!e net.ort+. In "a,e a "o-$an* oe, not
><
+a3e tra"/ re"or or .i,+e, to rai,e %e*on =
ti-e, o0 it, $re-i,,!e net.ort+2 it "an a""e,, t+e
-ar/et onl* t+ro!g+ %oo/ %!iling .it+
-ini-!- o00er o0 &)' to 4!ali0ie in,tit!tional
%!*er,. In0ra,tr!"t!re "o-$anie, are e1e-$t
0ro- t+e re4!ire-ent o0 eligi%ilit* nor-, i0 t+eir
$ro9e"t +a, %een a$$rai,e %* a $!%li" 0inan"ial
in,tit!tion an not le,, t+an =' o0 t+e $ro9e"t
"o,t i, 0inan"e %* an* o0 t+e in,tit!tion,2 9ointl*
or ,e3erall*2 %* .a* o0 loan anJor ,!%,"ri$tion
to e4!it*. T+e e%t in,tr!-ent, o0 -at!ritie,
-ore t+an (H -ont+, re4!ire "reit rating. I0 t+e
i,,!e ,i:e e1"ee, R,. ()) "rore2 t.o rating,
0ro- i00erent agen"ie, are re4!ire. T+!, t+e
4!alit* o0 t+e i,,!e i, e-on,trate %* tra"/
re"orJa$$rai,al %* a$$ro3e 0inan"ial
in,tit!tion,J"reit ratingJ,!%,"ri$tion %* QIB,.
T+e lea -er"+ant %an/er i,"+arge, -o,t o0
t+e $re-i,,!e an $o,t-i,,!e o%ligation,. Fe
,ati,0ie, +i-,el0 a%o!t all a,$e"t, o0 o00ering
an ae4!a"* o0 i,"lo,!re, in t+e o00er
o"!-ent. Fe i,,!e, a !e iligen"e "erti0i"ate
,tating t+at +e +a, e1a-ine t+e $ro,$e"t!,2 +e
0in, it in orer an t+at it %ring, o!t all t+e 0a"t,
an oe, not "ontain an*t+ing .rong or
-i,leaing. Fe al,o ta/e, "are o0 allot-ent2
re0!n
an e,$at"+ o0 "erti0i"ate,. T+e
a-i,,ion to a e$o,itor* 0or
e-ateriali,ation o0 ,e"!ritie, i, a
$rere4!i,ite 0or -a/ing a $!%li" or rig+t,
i,,!e or an o00er 0or ,ale. T+e in3e,tor,2
+o.e3er2 +a3e t+e o$tion o0 ,!%,"ri%ing to
,e"!ritie, in eit+er $+*,i"al 0or- or
e-ateriali,e 0or-. All ne. IPO, are
"o-$!l,oril* trae in e-ateriali,e
0or-. E3er* $!%li" li,te "o-$an* -a/ing
IPO o0 an* ,e"!rit* 0or R,. () "rore or
-ore i, re4!ire to o ,o onl* in
e-ateriali,e 0or-.
7. Go3ern-ent Se"!ritie,# T+e go3ern-ent
,e"!ritie, -ar/et +a, .itne,,e ,igni0i"ant
tran,0or-ation in t+e (<<),. 8it+ gi3ing !$ o0
t+e re,$on,i%ilit* o0 allo"ating re,o!r"e, 0ro-
,e"!ritie, -ar/et2 go3ern-ent ,to$$e
e1$ro$riating ,eigniorage an ,tarte %orro.ing
at near - -ar/et rate,. Go3ern-ent ,e"!ritie, are
no. ,ol at -ar/et relate "o!$on rate, t+ro!g+
a ,*,te- o0 a!"tion, in,tea o0 earlier $ra"ti"e
o0 i,,!e o0 ,e"!ritie, at 3er* lo. rate, 9!,t to
re!"e t+e "o,t o0 %orro.ing o0 t+e go3ern-ent.
Ma9or re0or-, initiate in t+e $ri-ar* -ar/et 0or
go3ern-ent ,e"!ritie, in"l!e a!"tion ,*,te-
5!ni0or- $ri"e an -!lti$le $ri"e -et+o6 0or
$ri-ar* i,,!an"e o0 T-%ill, an "entral
go3ern-ent ate ,e"!ritie,2 a ,*,te- o0
$ri-ar* ealer, an non-"o-$etiti3e %i, to
.ien in3e,tor %a,e an $ro-ote retail
$arti"i$ation2 i,,!an"e o0 ,e"!ritie, a"ro,,
-at!ritie, to e3elo$ a
>:
*iel "!r3e 0ro- ,+ort to long en an $ro3ie
%en"+-ar/, 0or re,t o0 t+e e%t -ar/et2
inno3ati3e in,tr!-ent, li/e2 :ero "o!$on
%on,2 0loating rate %on,2 %on, .it+
e-%ee eri3ati3e,2 a3aila%ilit* o0 0!ll range
5 <(-a* an >H7-a*6 o0 T-%ill,2 et".
Se"onar* Mar/et
(a) Cor$orate Se"!ritie,# T+e ,to"/ e1"+ange,
are t+e e1"l!,i3e "entre, 0or traing o0
,e"!ritie,. T+o!g+ t+e area o0
o$erationJ9!ri,i"tion o0 an e1"+ange i,
,$e"i0ie at t+e ti-e o0 it, re"ognition2 t+e*
+a3e %een allo.e re"entl* to ,et !$ traing
ter-inal, an*.+ere in t+e "o!ntr*. T+e t+ree
ne.l* ,et !$ e1"+ange, 5OTCEI2 NSE an
ICSE6 .ere $er-itte ,in"e t+eir in"e$tion to
+a3e nation .ie traing. T+e traing
$lat0or-, o0 a 0e. e1"+ange, are no.
a""e,,i%le 0ro- -an* lo"ation,. F!rt+er2 .it+
e1ten,i3e !,e o0 in0or-ation te"+nolog*2 t+e
traing $lat0or-, o0 a 0e. e1"+ange, are al,o
a""e,,i%le 0ro- an*.+ere t+ro!g+ t+e Internet
an -o%ile e3i"e,. T+i, -ae a +!ge
i00eren"e in a
geogra$+i"all* 3a,t "o!ntr* li/e Inia.
(b) E1"+ange Manage-ent# Mo,t o0 t+e ,to"/
e1"+ange, in t+e "o!ntr* are organi:e a,
A-!t!al,B .+i"+ .a, "on,iere %ene0i"ial in
ter-, o0 ta1 %ene0it, an -atter, o0 "o-$lian"e.
T+e traing -e-%er,2 .+o $ro3ie %ro/ering
,er3i"e,2 al,o o.n2 "ontrol an -anage t+e
e1"+ange,. T+i, i, not an e00e"ti3e -oel 0or
,el0-reg!lator* organi,ation, a, t+e reg!lator*
an $!%li" intere,t o0 t+e e1"+ange "on0li"t,
.it+ $ri3ate intere,t,. E00ort, are on to
e-!t!ali,e t+e e1"+ange, .+ere%* o.ner,+i$2
-anage-ent an traing -e-%er,+i$ .o!l %e
,egregate 0ro- one anot+er. T.o e1"+ange,
3i:. OTCEI an NSE are e-!t!ali,e 0ro-
in"e$tion2 .+ere o.ner,+i$2 -anage-ent an
traing are in t+e +an, o0 t+ree i00erent ,et, o0
$eo$le. T+i, -oel eli-inate, "on0li"t o0 intere,t
an +el$, t+e e1"+ange to $!r,!e -ar/et
e00i"ien"* an in3e,tor intere,t aggre,,i3el*.
(c) Me-%er,+i$# T+e traing $lat0or- o0 an
e1"+ange i, a""e,,i%le onl* to %ro/er,. T+e
%ro/er enter, into trae, in e1"+ange, eit+er on
+i, o.n a""o!nt or on %e+al0 o0 "lient,. No ,to"/
%ro/er or ,!%-%ro/er i, allo.e to %!*2 ,ell or
eal in ,e"!ritie,2 !nle,, +e or ,+e +ol, a
"erti0i"ate o0 regi,tration grante %* SEBI. A
%ro/erJ,!%-%ro/er "o-$lie, .it+ t+e
"oe o0 "on!"t $re,"ri%e %* SEBI. O3er
ti-e2 a n!-%er o0 %ro/er, - $ro$rietor 0ir-,
an $artner,+i$ 0ir-, @ +a3e "on3erte
t+e-,el3e, into "or$orate,. T+e ,tanar, 0or
>(
a-i,,ion o0 -e-%er, ,tre,, on 0a"tor,2
,!"+ a, "or$orate ,tr!"t!re2 "a$ital
ae4!a"*2 tra"/ re"or2 e!"ation2
e1$erien"e2 et". an re0le"t a "on,"io!,
enea3o!r to en,!re 4!alit* %ro/ing
,er3i"e,.
56 Li,ting# A "o-$an* ,ee/ing li,ting ,ati,0ie,
t+e e1"+ange t+at at lea,t ()' o0 t+e ,e"!ritie,2
,!%9e"t to a -ini-!- o0 7) la/+ ,e"!ritie,2 .ere
o00ere to $!%li" 0or ,!%,"ri$tion2 an t+e ,i:e o0
t+e net o00er to t+e $!%li" 5i.e. t+e o00er $ri"e
-!lti$lie %* t+e n!-%er o0 ,e"!ritie, o00ere to
t+e $!%li"2 e1"l!ing re,er3ation,2 0ir- allot-ent
an $ro-oter,; "ontri%!tion6 .a, not le,, t+an
R,.()) "rore2 an t+e i,,!e i, -ae onl* t+ro!g+
%oo/ %!iling -et+o .it+ allo"ation o0 &)' o0
t+e i,,!e ,i:e to t+e 4!ali0ie in,tit!tional
%!*er,. In t+e alternati3e2 it i, re4!ire to o00er at
lea,t 7=' o0 t+e ,e"!ritie, to $!%li". T+e
"o-$an* i, al,o re4!ire to -aintain t+e
-ini-!- le3el o0 non-$ro-oter +oling on a
"ontin!o!, %a,i,. In orer to $ro3ie an
o$$ort!nit* to in3e,tor, to in3e,tJtrae in t+e
,e"!ritie, o0 lo"al "o-$anie,2 it i, -anator* 0or
t+e "o-$anie,2 .i,+ing to li,t t+eir ,e"!ritie,2 to
li,t on t+e regional ,to"/ e1"+ange neare,t to
t+eir regi,tere o00i"e. I0 t+e* ,o .i,+2 t+e* "an
,ee/ li,ting on ot+er e1"+ange, a, .ell.
Mono$ol* o0 t+e e1"+ange, .it+in t+eir allo"ate
area2 regional a,$iration, o0 t+e $eo$le an
-anator* li,ting on t+e regional ,to"/
e1"+ange re,!lte in -!lti$li"it* o0 e1"+ange,.
T+e %a,i" nor-, 0or li,ting o0 ,e"!ritie, on t+e
,to"/ e1"+ange, are !ni0or- 0or all t+e
e1"+ange,. T+e,e nor-, are ,$e"i0ie in t+e
li,ting agree-ent entere into %et.een t+e
"o-$an* an t+e "on"erne e1"+ange. T+e
li,ting agree-ent $re,"ri%e, a n!-%er o0
re4!ire-ent, to %e "ontin!o!,l* "o-$lie .it+
%* t+e i,,!er, 0or "ontin!e li,ting an ,!"+
"o-$lian"e i, -onitore %* t+e e1"+ange,. It
al,o ,ti$!late, t+e i,"lo,!re, to %e -ae %* t+e
"o-$anie, an t+e "or$orate go3ernan"e
$ra"ti"e, to %e 0ollo.e %* t+e-. SEBI +a, %een
i,,!ing g!ieline,J"ir"!lar, $re,"ri%ing "ertain
nor-, to %e in"l!e in t+e li,ting agree-ent
an to %e "o-$lie .it+ %* t+e "o-$anie,. A
li,te ,e"!rit* i, a3aila%le 0or traing on t+e
e1"+ange. T+e ,to"/ e1"+ange, le3* li,ting 0ee,
- initial 0ee, an ann!al 0ee, - 0ro- t+e li,te
"o-$anie,. It i, a -a9or ,o!r"e o0 in"o-e 0or
-an* e1"+ange,. A ,e"!rit* li,te on ot+er
e1"+ange, i, al,o $er-itte 0or traing. A li,te
"o-$an* "an 3ol!ntar* eli,t it, ,e"!ritie, 0ro-
non-regional ,to"/ e1"+ange, a0ter $ro3iing an
e1it o$$ort!nit* to +oler,
>>
o0 ,e"!ritie, in t+e region .+ere t+e
"on"erne e1"+ange i, lo"ate. An
e1"+ange "an2 +o.e3er2 eli,t t+e ,e"!ritie,
"o-$!l,oril* 0ollo.ing a 3er* ,tringent
$ro"e!re.
(e) Traing Me"+ani,-# T+e e1"+ange,
$ro3ie an on-line 0!ll*-a!to-ate ,"reen
%a,e traing ,*,te- 5SBTS6 .+ere a -e-%er
"an $!n"+ into t+e "o-$!ter 4!antitie, o0
,e"!ritie, an t+e $ri"e, at .+i"+ +e li/e, to
tran,a"t an t+e tran,a"tion i, e1e"!te a,
,oon a, it 0in, a -at"+ing orer 0ro- a
"o!nter $art*. SBTS ele"troni"all* -at"+e,
orer, on a ,tri"t $ri"eJti-e $riorit* an +en"e
"!t, o.n on ti-e2 "o,t an ri,/ o0 error2 a,
.ell a, on 0ra! re,!lting in i-$ro3e
o$erational e00i"ien"*. It allo., 0a,ter
in"or$oration o0 $ri"e ,en,iti3e in0or-ation
into $re3ailing $ri"e,2 t+!, in"rea,ing t+e
in0or-ational e00i"ien"* o0 -ar/et,. It ena%le,
-ar/et $arti"i$ant, to ,ee t+e 0!ll -ar/et on
real-ti-e2 -a/ing t+e -ar/et tran,$arent. It
allo., a large n!-%er o0 $arti"i$ant,2
irre,$e"ti3e o0 t+eir geogra$+i"al lo"ation,2 to
trae .it+ one anot+er ,i-!ltaneo!,l*2
i-$ro3ing t+e e$t+ an li4!iit* o0 t+e
-ar/et. It $ro3ie, 0!ll anon*-it* %* a""e$ting
orer,2 %ig or ,-all2 0ro- -e-%er, .it+o!t
re3ealing t+eir ientit*2 t+!, $ro3iing e4!al
a""e,, to e3er*%o*. It al,o $ro3ie, a $er0e"t
a!it trail2 .+i"+ +el$, to re,ol3e i,$!te, %*
logging in t+e trae e1e"!tion $ro"e,, in
entiret*.
(f) Traing R!le,# Reg!lation, +a3e %een
0ra-e to $re3ent in,ier traing a, .ell
a, !n0air trae $ra"ti"e,. T+e a"4!i,ition,
an ta/eo3er, are $er-itte in a
.elle0ine an orerl* -anner. T+e
"o-$anie, are $er-itte to %!* %a"/ t+eir
,e"!ritie, to i-$ro3e li4!iit* an
en+an"e t+e ,+are+oler,; .ealt+.
(g) Pri"e Ban,# Sto"/ -ar/et 3olatilit* i,
generall* a "a!,e o0 "on"ern 0or %ot+ $oli"*
-a/er, a, .ell a, in3e,tor,. To "!r% e1"e,,i3e
3olatilit*2 SEBI +a, $re,"ri%e a ,*,te- o0
$ri"e %an,. T+e $ri"e %an, or "ir"!it
%rea/er, %ring a%o!t a "oorinate traing
+alt in all e4!it* an e4!it* eri3ati3e,
-ar/et, nation-.ie. An ine1-%a,e -ar/et-
.ie "ir"!it %rea/er ,*,te- at t+ree ,tage, o0
t+e ine1 -o3e-ent eit+er .a* at ()'2 (='
an 7)' +a, %een $re,"ri%e. T+e -o3e-ent
o0 eit+er S?P CNR Ni0t* or Sen,e12 .+i"+e3er
i, %rea"+e earlier2 trigger, t+e %rea/er,. A,
an aitional -ea,!re o0 ,a0et*2 ini3i!al
>?
,"ri$-.i,e $ri"e %an, o0 7)' eit+er .a*
+a3e %een i-$o,e 0or all ,e"!ritie,
e1"e$t t+o,e a3aila%le 0or ,to"/ o$tion,.
(h) De-at Traing# T+e De$o,itorie, A"t2 (<<&
.a, $a,,e to $ro3e 0or t+e e,ta%li,+-ent o0
e$o,itorie, in ,e"!ritie, .it+ t+e o%9e"ti3e o0
en,!ring 0ree tran,0era%ilit* o0 ,e"!ritie, .it+
,$ee2 a""!ra"* an ,e"!rit* %* 5a6 -a/ing
,e"!ritie, o0 $!%li" li-ite "o-$anie, 0reel*
tran,0era%le ,!%9e"t to "ertain e1"e$tion,E 5%6
e-ateriali,ing t+e ,e"!ritie, in t+e e$o,itor*
-oeE an 5"6 $ro3iing 0or -aintenan"e o0
o.ner,+i$ re"or, in a %oo/ entr* 0or-. In orer
to ,trea-line %ot+ t+e ,tage, o0 ,ettle-ent
$ro"e,,2 t+e A"t en3i,age, tran,0er o0 o.ner,+i$
o0 ,e"!ritie, ele"troni"all* %* %oo/ entr* .it+o!t
-a/ing t+e ,e"!ritie, -o3e 0ro- $er,on to
$er,on. T.o e$o,itorie,2 3i:. NSDL an CDSL2
+a3e "o-e !$ to $ro3ie in,tantaneo!,
ele"troni" tran,0er o0 ,e"!ritie,. At t+e en o0
Mar"+ 7))72 I2(G7 an I27HI "o-$anie, .ere
"onne"te to
NSDL an CDSL re,$e"ti3el*. T+e n!-%er o0
e-ateriali,e ,e"!ritie, in"rea,e to =&.=
%illion at t+e en o0 Mar"+ 7))7. A, on t+e
,a-e ate2 t+e 3al!e o0 e-aterial,ie
,e"!ritie, .a, R,. I2&&< %illion an t+e
n!-%er o0 in3e,tor a""o!nt, .a, I2&)=2=HH.
All a"ti3el* trae ,"ri$, are +el2 trae an
,ettle in e-at 0or-. De-at ,ettle-ent
a""o!nt, 0or o3er <<' o0 t!rno3er ,ettle %*
eli3er*. T+i, +a, al-o,t eli-inate t+e %a
eli3erie, an a,,o"iate $ro%le-,. To
$re3ent $+*,i"al "erti0i"ate, 0ro- ,nea/ing
into "ir"!lation2 it +a, %een -anator* 0or all
ne. IPO, to %e "o-$!l,oril* trae in
e-ateriali:e 0or-. T+e a-i,,ion to a
e$o,itor* 0or e-ateriali,ation o0 ,e"!ritie,
+a, %een -ae a $rere4!i,ite 0or -a/ing a
$!%li" or rig+t, i,,!e or an o00er 0or ,ale. It +a,
al,o %een -ae "o-$!l,or* 0or $!%li" li,te
"o-$anie, -a/ing IPO o0 an* ,e"!rit* 0or R,.
() "rore or -ore to o t+e ,a-e onl* in
e-ateriali,e 0or-.
(i) C+arge,# A stock %roker is re3uired to pay a
registration fee of !s+$2<<< every financial year2 if
his annual turnover does not e#ceed !s+ : crore+ If
the turnover e#ceeds !s+ : crore during any financial
year2 he has to pay !s+ $2<<< plus one1hundredth of
:B of the turnover in e#cess of !s+: crore+ After the
e#piry of five years from the date of initial registration
as a %roker2 he has to pay !s+ $2<<< for a %lock of
five financial years+ "esides2 the e#changes collect
transaction charges from its trading mem%ers+ NSE
levies !s+ ? per lakh of turnover+ The ma#imum
>$
%rokerage a trading mem%er can levy in
respect of securities transactions is (+$B of
the contract price2 e#clusive of statutory levies
like SE"I turnover fee2 service ta# and stamp
duty+ 9owever2 %rokerage charges as low as
<+:$B are also o%served in the market+
(j) Traing C*"le# !olling settlement on TE>
%asis gave way to TE( from April (<<>+ The
market has moved close to spotAcash market+
(k) Ri,/ Manage-ent# To pre1empt market
failures and protect investors2 the
regulatorAe#changes have developed a
comprehensive risk management system2
which is constantly monitored and upgraded+
It encompasses capital ade3uacy of
mem%ers2 ade3uate margin re3uirements2
limits on e#posure and turnover2 indemnity
insurance2 on1line position monitoring and
automatic disa%lement2 etc+ They also
administer an efficient market surveillance
system to cur% e#cessive volatility2 detect and
prevent price manipulations+ E#changes have
set up tradeAsettlement guarantee funds for
meeting shortages arising out of
nonfulfillmentApartial fulfillment of funds
o%ligations %y the mem%ers in a settlement+ A
clearing corporation assures the counterparty
risk of each mem%er and guarantees financial
settlement in respect of trades e#ecuted on
NSE+
(l) Go3ern-ent Se"!ritie,# The reforms in the
secondary market include .elivery versus
Payment system for settling scripless S5
transactions to reduce settlement risks2 S5
Account II with !"I to ena%le financial
intermediaries to open custody 'Constituent S5)
accounts and facilitate retail transactions in
scripless mode2 enforcement of a trade1for1trade
regime2 settlement period of TE< or TE: for all
transactions undertaken directly %etween S5
participants and up to TE$ days for transactions
routed through NSE %rokers2 routing transactions
through %rokers of NSE2 &TCEI and "SE2 repos
in all government securities with settlement
through S52 li3uidity support to P.s to ena%le
them to support primary market and undertake
market making2 special fund facility for security
settlement2 etc+ As part of the ongoing efforts to
%uild de%t market infrastructure2 two new systems2
the Negotiated .ealing System 'N.S) and the
Clearing Corporation of India imited 'CCI)
commenced operations on *e%ruary :$2 (<<(+
N.S2 interalia2 facilitates screen %ased negotiated
dealing for secondary
>/
market transactions in government securities
and money market instruments2 online
reporting of transactions in
the instruments availa%le on the N.S and
dissemination of trade information to the
market+ 5overnment Securities 'including T1
%ills)2 call money2 noticeAterm money2 repos in
eligi%le securities2 Commercial Papers and
Certificate of .eposits are availa%le for
negotiated dealing through N.S among the
mem%ers+ The CCI facilitates settlement of
transactions in government securities '%oth
outright and repo) on .elivery versus
Payment '.vP1II) %asis which provides for
settlement of securities on gross %asis and
settlement of funds on net %asis
simultaneously+ It acts as a central
counterparty for clearing and settlement of
government securities transactions done on
N.S+
The relative importance of various stock
e#changes in the market has undergone
dramatic change during this decade+ The
increase in turnover took place mostly at the
large %ig e#changes and it was partly at the
cost of small e#changes that failed to keep
pace with the changes+ NSE is the market
leader with over =<B of total turnover
'volumes on all segments) in (<<:1<(+ Top /
stock e#changes accounted for ;;+==B of
turnover2 while the rest :7 e#change for less
than <+:(B during (<<(1<> 'Ta%le $+?)+ A%out
a do-en e#changes reported nil turnover
during the year+
The movement of the S&P CNF NI*TG2 the most
widely used indicator of the market2 is presented
in Chart $+:+ In the very first year of li%eralisation2
i+e+ :;;:1;(2 it recorded a growth of (/7B2
followed %y sharp decline of ?7B in the ne#t year
as certain irregularities in securities transactions
were noticed+ The market picked up ne#t year
thanks to increased inflow of foreign funds2 and
increased investor interest+ Thereafter the market
remained su%dued+ The inde# recorded a decline
of >+?7B during :;;=1;; under the pressure of
economic sanctions following detonation of
nuclear device2 continuing woes of East Asian
financial markets2 volatility of Indian currency and
worries a%out financial health of CTI8s CS1/?
scheme+ The Cnion "udget of :;;; %rought
cheers to the market+ The market moved on a
roller coaster ride2 %ut a distinct rising trend
emerged due to all1round positive perception
a%out strength of the 5overnment and also its
commitment towards second generation reforms2
improved macro1economic parameters and %etter
corporate results+ The S&P CNF Nifty firmed up
during :;;;1(<<< %y ?(B which was nearly four
times the average return offered on %ank deposits+
The trend got reversed during (<<<1<:2 which
witnessed large sell1offs in new economy stocks in
glo%al markets and
>7
deceleration in the growth of the domestic economy+
This %rought down Nifty from a high of :/>/+;$ in
April (<<< to a low of ::<=+(< in &cto%er (<<<+ The
market looked up in Novem%er1Danuary in
anticipation of a good %udget+ 9owever it did not last
long as the market received shocking news a%out
imminent payment crisis on certain e#changes2 large
scale manipulations in stock prices and revelation of
large scale corruption in the procurement of defence
e3uipments+ The Nifty closed at ::?=+(< at the end
of ,arch (<<: recording a fall of a%out ($B during
(<<<1<:+ The trend precipitated further with
introduction of rolling settlement and withdrawal of
deferral products in Duly (<<(2 suspension of
repurchase facility under CTI8s CS1/? scheme2
terrorist attack on world Trade Centre in Septem%er
(<<(2 etc+ which caused a further decline in S&P
CNF Nifty %y :+/B during (<<:1<(+ The Nifty closed
at ;7=+( at the end of ,arch (<<>+
Go3ern-ent Se"!ritie,
The trading volumes in government securities
e#ceeded the com%ined trading volumes in e3uity
segments of all the e#changes in the country during
(<<(1<>+ The aggregate turnover in central and state
government dated securities2 including treasury %ills2
through S5 transactions increased %y manifold
%etween :;;?1;$ and (<<(1<>+ .uring (<<(1<> it
reached a level of !s+ :;2$$72>:> million2 recording
a%out (?+>B growth over !s+:$27>=2;>< million in
the previous year+ Such growing turnover reflects
further deepening of the market+ The %ulk of
transactions during (<<<1<( were on outright %asis+
The share of outright transactions in government
securities increased from (>+(B in :;;$1;/ to
7:+(B in (<<(1<>+ The share of repo transactions
declined correspondingly from 7/+=B in :;;$1;/ to
(;B in (<<(1<>+ The share of 4., segment of
NSE in total turnover for government securities
decreased marginally from $=+;B in (<<<1<: to $(B
in (<<(1<>+ As compared to the increase in overall
turnover of government securities %y (?B2 the same
on 4., grew %y ::B during (<<(1<>+ Share of
4., in transactions of dated securities decreased
from /:+:B in (<<:1<( to $$+/B in (<<(1<>+ Its
share in transactions of T1%ills decreased from
(7+?B in (<<:1<( to (:+$B in (<<(1<>+ 5overnment
de%t2 which constitutes a%out three1fourth of the total
outstanding de%t2 has the highest level of li3uidity
amongst the fi#ed income instruments in the
secondary market+ The share of dated securities in
total turnover of government securities has %een
increasing over the years+ Two1way 3uotes are
availa%le for the active gilt securities from the
primary dealers+ Though many trades in the gilts
take place through telephone2 a larger chunk of
trades get routed through NSE %rokers+
>=
Deri3ati3e, Mar/et
Trading in derivatives of securities commenced in
Dune (<<< with the enactment of ena%ling
legislation in early (<<<+ .erivatives are formally
defined to include6 'a) a security derived from a
de%t instrument2 share2 loan whether secured or
unsecured2 risk instrument or contract for
differences or any other form of security2 and '%) a
contract which derives its value from the prices2 or
inde# of prices2 or underlying securities+
.erivatives are legal and valid only if such
contracts are traded on a recognised stock
e#change2 thus precluding &TC derivatives+
.erivatives trading commenced in India in Dune
(<<< after SE"I granted the approval to this effect
in ,ay (<<<+ SE"I permitted the derivative
segment of two stock e#changes2 i+e+ NSE and
"SE2 and their clearing houseAcorporation to
commence trading and settlement in approved
derivative contracts+ To %egin with2 SE"I approved
trading in inde# futures contracts %ased on S&P
CNF Nifty Inde# and "SE1>< 'Sense#) Inde#+ This
was followed %y approval for trading in options
%ased on these two indices and options on
individual securities+ The trading in inde# options
commenced in Dune (<<: and trading in options
on individual securities would commence in Duly
(<<: while trading in futures of individual stocks
started from Novem%er (<<:+ In Dune (<<>2
SE"IA!"I approved the trading on interest rate
derivative instruments+
The total e#change traded derivatives
witnessed a volume of !s+?2?(>2>>> million
during (<<(1<> as against !s+ :2<>=2?=<
million during the preceding year+ 4hile NSE
accounted for a%out ;;+$B of total turnover2
"SE accounted for less than :B in (<<(1<>+
The market witnessed higher volumes from
Dune (<<: with introduction of inde# options2
and still higher volumes with the introduction
of stock options in Duly (<<:+ There was a
spurt in volumes in Novem%er (<<: when
stock futures were introduced+ It is %elieved
that India is the largest market in the world for
stock futures+
C!rrent ,tat!, o0 Inian "a$ital
-ar/et,
Mar/et "a$itali,ation an t!rno3er
>;
As on ,arch >:2 (<<<2 the Indian stock market
had a market capitalisation of over !s :< trillion
'H (>< %illion) representing $=per cent of 5.P+
The annual trading volume in all the e#changes
put together amounted to !s (< trillion
'appro#imately twice the market capitalisation)+
The average daily trading volume is a%out H(
%illion and there are days on which the turnover
is twice this level+ Sie,+o.,
MSto"/e1"+ange-.i,e t!rno3erM an MSto"/
-ar/et ini"ator,M2 provide more details a%out
turnover and market capitalisation+
India has ;2=7: listed companiesI this num%er is
second only to that of the Cnited States+ 9owever2
most of the trading volume is concentrated in a
few hundred stocks2 and even within this2 the top
hundred stocks account for a disproportionate
share of the trading volume+
The Indian capital market is well1diversified in
terms of ownership pattern and industry
structure+ ,ost of the top $< companies are
domestic private sector companies with no
single family or %usiness group accounting for
a disproportionate share+ There is no foreign
owned corporation2 pu%lic sector organisation
or newly privatised company in the top five
stocks %y market capitalisation+ Companies
with a market capitalisation of H: %illion or
more are present in industries as diverse as
software2 petrochemicals2 oil refining2
consumer goods2 telecom2 %anking2
pharmaceuticals2 and entertainment+
In the last few years2 however2 new economy
stocks have shown rapid increase in their
market capitalisation and turnover+ In the "SE
$<< inde# covering the top $<< listed
companies2 new economy stocks account for
a%out ?;per cent of market capitalisation and
$<per cent of the average daily turnover+
Sto"/ e1"+ange,
India %oasts of the oldest stock e#change in Asia 11
the "om%ay Stock E#change is :($ years old+ There
are (> recognised e#changes spread across the
country2 %ut a process of consolidation is now under
way+ ,any of the regional stock e#changes have
started aligning themselves with one or %oth of the
two large e#changes 'the "om%ay Stock E#change
and the National Stock E#change) %oth of which
have JSAT networks that give them a nation wide
reach+
?<
The National Stock E#change is an unlisted
for1profit company set up %y some of the
leading financial institutions of India+ ,ost of
the remaining stock e#changes are %roker1
owned 'mutual) organisations2 %ut the
"om%ay Stock E#change is actively
considering demutualisation+ The Securities
and E#change "oard of India 'SE"I)2 the
ape# regulator of the capital market has
regulations that mandate a minimum num%er
of outside directors on the governing %oard
and provide greater autonomy to the
professional e#ecutives in the day1to1day
running of the e#change+
Traing an ,ettle-ent
India8s stock e#changes are fully
computerised order driven or order1cum13uote
driven systems+ The country has made rapid
strides towards a dematerialised trading
environment on the %asis of a competing
depositories model+ Investors have the choice
of holding their stocks in physical or
dematerialised form2 %ut trading in the
e#changes is in mandatory dematerialised
mode in most important stocks+ As of &cto%er
(<<<2 a%out ;=per cent of the trading in the
stock e#changes is in dematerialised mode+
India has put in place a regulatory regime for
internet trading of stocks+ A large num%er of
online %rokers have started operations+ ,ore
%rokers are e#pected to follow when the
e#changes put in place an ASP 'Application
Service Provider) model for online trading
software+ 9owever2 currently2 the level of
penetration of online trading is e#tremely small+
The stock e#changes currently run two parallel
settlement systems+ Practically all the trading
takes place in the account period settlement
system in which all trades during a weekly
account period are netted off and the net
o%ligations are settled five %usiness days after the
end of the period+ The other unpopular system is
that of rolling settlements where trades of each
day are settled on a TE$ %asis+ SE"I is currently
working on mandatorily shifting all stocks in a
phased manner to the rolling settlement system+
*urther improvements in the settlement system to
TE> or %eyond would have to wait for
improvements in the payment system+
9owever2 account period settlement does not
give rise to significant systemic risks in India
%ecause of stringent end of day and intra1day
margining systems+ Put simply2 the weekly
?:
settlement is regarded as akin to a one1week
futures contract2 and the systemic risk is
taken care of %y using futures style margining+
The e#change imposes daily mark to market
and initial margins on the %rokers to eliminate
settlement risk+ E#changes also have clearing
houses to guarantee settlements on the
e#change+ As a result2 there have %een no
settlement failures in the principal stock
e#changes during the last five years+
Pri-ar* -ar/et
India en0oyed a ma0or %oom of IP&s in the mid
:;;<s+ This hot IP& period came to an end in
:;;$1;/ with a fall in the stock market and a
downturn in the economy+ Investors who
su%scri%ed at the height of the %oom suffered
significant losses2 and the primary market has
yet to recover from this de%acle+ In the late
:;;<s2 moreover2 the Indian corporate sector
was in the midst of a structural transformation
with the old economy companies stocks doing
%adly in the face of glo%al competition while
software companies delivered outstanding
financial results+ The stock market also
rewarded the new economy stocks with high
valuations+ In this environment2 it was difficult
for most old economy companies to come to the
market with a credi%le %usiness plan+ Software
companies in India have used a stock market
listing primarily to esta%lish a valuation and
create an ac3uisition currency as their large
positive cash flows leave them with little need
for additional funding+
At the same time2 SE"I has %een concerned
a%out pu%lic capital raising %y companies with
no track record+ Newly set up software
companies2 entertainment companies and
internet companies with no tangi%le assets pose
particular pro%lems of valuation+ In this
situation2 SE"I has moved half1way towards a
KI" 'Kualified Institutional "uyers) market for
some of these stocks+ This mandatory
gatekeeping approach is discussed later in this
paper+ In :;;;1(<<<2 a total of !s 7= %illion was
raised in the Indian capital market2 of which
a%out !s ?$ %illion was in the form of e3uity and
the %alance in the form of de%t+ ,ore details
a%out the Indian primary market are availa%le in
the Sie,+o.,. 'see MCa$ital rai,e 0ro- t+e
$ri-ar* -ar/etM2 MIn!,tr*.i,e "la,,i0i"ationM
an MSi:e.i,e "la,,i0i"ationM6
Di,"lo,!re an "or$orate go3ernan"e
?(
India moved from a merit %ased regulation to a
disclosure %ased regulation of the primary market
with the esta%lishment of the Securities and
E#change "oard of India 'SE"I) in :;;(+ The level
of disclosure has increased progressively in
recent years as SE"I has attempted to %ring
disclosure re3uirements up to international levels+
This is an ongoing e#ercise+
In the field of continuing disclosure2 listed
companies are now re3uired to disclose
unaudited financial results on a 3uarterly
%asis2 and there is now a su%0ect these results
to limited auditor review+ The Accounting
Standards "oard set up %y the accounting
profession is engaged in a ma0or e#ercise to
%ring Indian accounting standards on par with
those of the IASC 'International Accounting
Standards Committee)+
SE"I is now in the process of implementing the
Corporate 5overnance Code framed %y the
"irla Committee through the listing agreement+
Cnder this code2 companies are re3uired to
have a minimum num%er of independent
directors2 and to have an audit committee+
Glo%ali,ation
India operates a rigorous system of e#change
controls on the capital account+ 9owever2 a
window has %een created for foreign portfolio
investment+ As on ,arch >:2 (<<<2 there were
$</ *oreign Institutional Investors '*IIs)
registered with SE"I+ These *IIs had in the
aggregate invested H::+(> %illion in the Indian
stock marketI this represents a%out $ per cent
of the market capitalisation+ Sie,+o.2 MFII
In3e,t-entM2 provides trends regarding *II
investments in the last few years+
Indian companies have also %een allowed to issue
shares outside the country in the form of 5.!s
'5lo%al .epository !eceipts) and A.!s
'American .epository !eceipts)+ *rom :;;(1;> to
:;;=1;;2 Indian companies raised !s (7? %illion
in this form ',ee Sie,+o.2 E!ro i,,!e, %*
Inian "o-$anie,)+ Any holder of A.!s and
5.!s can convert these into the underlying
domestic shares+ 9owever conversion in the
opposite direction is not permitted+
M!t!al 0!n,
?>
As on ,arch >:2 (<<<2 there were >7 mutual
funds registered with SE"I+ This is in addition to
the country8s largest and oldest mutual fund2 the
Cnit Trust of India2 which is not yet under SE"I8s
regulatory purview+ These mutual funds had
floated a total of >>< different mutual fund
schemes2 which together controlled assets of !s
:+: trillion 'H ($ %illion) representing a%out ::per
cent of the market capitalisation+ .etails regarding
annual resource mo%ilisation %y mutual funds are
availa%le in Sie,+o.2 MM!t!al 0!n re,o!r"e
-o%ili,ationM+
In3e,tor $o$!lation an $ro0ile
According to the investor survey carried out %y
the National Council of Applied Economic
!esearch 'NCAE!) together with SE"I2 a%out
=per cent of all households hold e3uity shares
or de%entures+ This constitutes an investor %ase
of :; million individuals+ Investors in mutual
funds num%ered a%out (> million thanks mainly
to the long esta%lished Cnit Trust of India+
Allowing for common ownership of shares and
mutual funds2 there are pro%a%ly a%out ><
million direct and indirect investors in the Indian
capital market+
The share of household financial savings that
goes to the capital market is very small at
around > per cent ',ee Sie,+o.2
MIn,tr!-ent-.i,e 0lo. o0 +o!,e+ol
0inan"ial ,a3ing,M)+ This share had reached
a level of (> per cent in early :;;<s towards
the end of a long %oom in the capital markets
and has %een steadily declining since then+
Deri3ati3e, -ar/et
India8s fledgling inde# futures market is less than si#
months old and the trading volume is far %elow even
one per cent of the cash market volumes+ 5lo%al
e#perience suggests that the market may still %e in
the initial stage of low awareness and low
acceptance2 and that the market could pick up in
coming months+ There are also plans to introduce
new derivative products+
??
Unit
@II
Classification of capital
market
P
r
i
m
a
r
y

m
a
r
k
e
t

S
e
c
o
n
d
a
r
y

m
a
r
k
e
t

PRIMA
RY
MARK
ET
The $ri-ar* is that part of the capital markets
that deals with the issuance of new securities+
Companies2 governments or pu%lic sector
institutions can o%tain funding through the sale of
a new stock or %ond issue+ This is typically done
through a syndicate of securities dealers+ The
process of selling new issues to investors is called
underwriting+ In the case of a new stock issue2 this
sale is an initial pu%lic offering 'IP&)+ .ealers
earn a commission that is %uilt into the price of the
security offering2 though it can %e found in the
prospectus+
?$
The primary market for e3uity2 which consists of
%oth the Linitial pu%lic offering8 'IP&)market and
the Lseasoned e3uity offering8 'SE&) markets2
e#perienced considera%le activity in (<<$ and
(<</ 'Ta%le ?+:)+ In (<</2!s+><2>($ crore of
resources were raised onthis market2 of which
!s+;2;:= crore were made up %y $$ companies
which were listed for the first time 'IP&s)+ The
num%er of IP&s per year has risen steadily from
(<<( onwards+ A level of $$ IP&s in the year
translates to roughly ? IP&s every month+ The
mean IP& si-e2 which was elevated in (<<$2
returned to !s+:=< crore2 which is similar to the
value prevalent in (<<>+ ?+> The primary issuance
of de%t securities2 as per SE"I2 fell to a low of
around !s+ // crore in (<</2 which is one facet of
the far1reaching difficulties of the de%t market+
Cnlike e3uity securities2 de%t securities issued at
previous dates are redeemed %y companies every
year+ 9ence2 a year with a low issuance of fresh
de%t securities is a year in which the stock of
outstanding de%t securities drops+ In addition to
resource mo%ilisation %y the issuance of de%t and
e3uity securities2 one of the most important
mechanisms of financing that has %een used %y
Indian firms is retained earnings2 which are also a
part of e3uity financing+
Ta%le # Pri-ar*
-ar/et
Calenar *ear
7))7
7))>
7))=
.e%t ?2$?; E3uity (2?(< &f which2 IP&s $2(=? (2>=>
:2;=: Num%er of IP&s / (2=;: >>2?7$
:27<= :( :(2?<( (/
,ean IP& si-e >>< :?( ?77
Total /2 ;7< =2:7$
>$2=$
;
Num%er (= ?> /$
So!r"e# SEBI.
SECONDARY MARKET#
&utstanding securities are traded in the
secondary market2 which is commonly known
as stock market or stock e#change+ In the
secondary market2 the investors can sell and
%uy securities+ Stock markets predominantly
deal in the e3uity shares+ .e%t instruments
like %onds and de%entures are also traded in
the stock market+
De-ateriali:ation
?/
Indian investor community has undergone sea
changes in the past few years+ India now has
a very large investor population and ever
increasing volumes of trades+ 9owever2 this
continuous growth in activities has also
increased pro%lems associated with stock
trading+ ,ost of these pro%lems arise due to
the intrinsic nature of paper %ased trading and
settlement2 like theft or loss of share
certificates+ This system re3uires handling of
huge volumes of paper leading to increased
costs and inefficiencies+ !isk e#posure of the
investor also increases due to this trading in
paper+
Some of these risks are 6
.elay in transfer of shares+
Possi%ility of forgery on various documents
leading to %ad deliveries2 legal disputes
etc+
Possi%ility of theft of share certificates+
Prevalence of fake certificates in the
market+
,utilation or loss of share certificates
in transit+
The physical form of holding and
trading in securities also acts as a
%ottleneck for %roking community in
capital market operations+
The introduction of NSE and "&T has increased
the reach of capital market manifolds+ The increase
in num%er of investors participating in the capital
market has increased the possi%ility of %eing hit %y a
%ad delivery+ The cost and time spent %y the %rokers
for rectification of these %ad deliveries tends to %e
higher with the geographical spread of the clients+
The increase in trade volumes lead to e#ponential
rise in the %ack office operations thus limiting the
growth potential of the %roking mem%ers+ The
inconvenience faced %y investors 'in areas that are
far flung and away from the main metros) in
settlement of trade also limits the opportunity for
such investors2 especially in participating in auction
trading+ This has made the investors as well as
%roker wary of Indian capital market+ In this scenario
demateriali-ed trading is certainly a welcome move+
8+at i, De-ateriali:ationS
.emateriali-ation or M.ematM is a process where%y
your securities like shares2 de%entures etc2 are
converted into electronic data and stored in
computers %y a .epository+ Securities registered
?7
in your name are surrendered to depository
participant '.P) and these are sent to the respective
companies who will cancel them after
M.emateriali-ationM and credit your depository
account with the .P+ The securities on
.emateriali-ation appear as %alances in your
depository account+ These %alances are transfera%le
like physical shares+ If at a later date2 you wish to
have these MdematM securities converted %ack into
paper certificates2 the .epository helps you to do
this+
De$o,itor*
.epository functions like a securities %ank2
where the demateriali-ed physical securities
are traded and held in custody+ This facilitates
faster2 risk free and low cost settlement+
.epository is much like a %ank and perform
many activities that are similar to a %ank+
*ollowing ta%le compares the two+
Ban/ De$o,itor*
9olds funds in accounts 9olds securities in account
Transfers funds %etween accounts
Transfers securities %etween
accounts
Transfers without handling money
Transfers without handling
securities
Safekeeping of money Safekeeping of securities
NSDL an CDS
At present there are two depositories in India2
National Securities .epository imited 'NS.)
and Central .epository Services 'C.S)+ NS. is
the first Indian depository2 it was inaugurated in
Novem%er :;;/+ NS. was set up with an initial
capital of CSH(=mn2 promoted %y Industrial
.evelopment "ank of India 'I."I)2 Cnit Trust of
India 'CTI) and National Stock E#change of India
td+ 'NSEI)+ ater2 State "ank of India 'S"I) also
%ecame a shareholder+
The other depository is Central .epository Services
'C.S)+ It is still in the process of linking with the
stock e#changes+ It has registered around (< .Ps
and has signed up with ?< companies+ It had
received a certificate of commencement of %usiness
from Se%i on *e%ruary =2 :;;;+
These depositories have appointed different
.epository Participants '.P) for them+ An investor
can open an account with any of the depositories8
.P+ "ut transfers arising out of trades on the stock
e#changes can take place only amongst account1
holders with NS.Ns .Ps+ This is %ecause
?=
only NS. is linked to the stock e#changes
'nine of them including the main ones1
National Stock E#change and "om%ay Stock
E#change)+
In order to facilitate transfers %etween
investors having accounts in the two e#isting
depositories in the country the Securities and
E#change "oard of India has asked all stock
e#changes to link up with the depositories+
Se%i has also directed the companies8
registrar and transfer agents to effect change
of registered ownership in its %ooks within two
hours of receiving a transfer re3uest from the
depositories+ &nce connected to %oth the
depositories the stock e#changes have also to
ensure that inter1depository transfers take
place smoothly+ It also involves the two
depositories connecting with each other+ The
NS. and C.S have signed an agreement
for inter1depository connectivity+
De$o,itior* Parti"i$ant
NS. carries out its activities through various
functionaries called %usiness partners who
include .epository Participants '.Ps)2 Issuing
corporates and their !egistrars and Transfer
Agents2 Clearing corporationsA Clearing
9ouses etc+ NS. is electronically linked to
each of these %usiness partners via a satellite
link through Jery Small Aperture Terminals
'JSATs)+ The entire integrated system
'including the JSAT linkups and the software
at NS. and each %usiness partnerNs end)
has %een named as the MNESTM ONational
Electronic Settlement & TransferP system+
The investor interacts with the depository
through a depository participant of NS.+ A
.P can %e a %ank2 financial institution2 a
custodian or a %roker
Dust as one opens a %ank account in order to avail
of the services of a %ank2 an investor opens a
depository account with a depository participant in
order to avail of depository facilities+
"enefits of demat
Transacting the depository way has several
advantages over the traditional system of
transacting using share certificates+ Some of
the %enefits are6
?;
Trading in demat segment completely
eliminates the risk of %ad deliveries2
which in turn eliminates all cost and
wastage of time associated with follow
up for rectification+ This reduction in
risk associated with %ad delivery has
lead to reduction in %rokerage to the
e#tent of <+$B %y 3uite a few
%rokerage firms+
In case of transfer of electronic shares2
you save <+$B in stamp duty+
Gou also avoid the cost of courierA
notari-ationA the need for further follow1
up with your %roker for shares returned
for company o%0ection
In case the certificates are lost in
transit or when the share certificates
%ecome mutilated or misplaced2 to
o%tain duplicate certificates2 you may
have to spend at least !s$<< for
indemnity %ond2 newspaper
advertisement etc2 which can %e
completely eliminated in the demat
form+
Gou can also receive your %onuses and
rights into your depository account as a
direct credit2 thus eliminating risk of
loss in transit+
Gou can also e#pect a lower interest
charge for loans taken against demat
shares as compared to the interest for
loan against physical shares+ This could
result in a saving of a%out <+($B to
:+$B+ Some %anks have already
announced this+
!"I has increased the limit of loans
against demateriali-ed securities as
collateral to !s(mn per %orrower as
against !s:mn per %orrower in case of
loans against physical securities+
!"I has also reduced the minimum
margin to ($B for loans against
demateriali-ed securities as against
$<B for loans against physical
securities+
Sa3ing,
Trading in demateriali-ed shares results in
su%stantial savings for the investors+
*ollowing ta%les gives an idea a%out these
savings+
Savings for a person who %uy shares for long
term investment
'&n a purchase of !s:<<<<)
$<
Ite- P+*,i"al
De$o,ito
r*
5e-
at6
5R,6 5RS6
"rokerage 7$1:<< $<17$
QStamp .uty $< 1
Postal Charges :<1>< 1
Company &%0ection
'courier :<1>< 1
etc+)
Settlement charges 1 $1:<
RCustody '$ years) 1 :<1$<
Total
Q Stamp duty of <+$B
R Custody charge of <+<$B1 <+:B
Savings
for an
investor
who
sells
demateri
ali-ed
shares
'*or a
sale of
!s:<<<
<)
Ite- P+*,i"al De$o,itor*
5e-at6
5R,6 5R,6
Q"rokerage 7$1:<< $<17$
Company &%0ection
'courier2 :<1>< 1
etc+)
Settlement charges 1 1'$1:<)
Total
Savings for a trader who %uys and
sell very often+
'*or a trader who turns over his
portfolio of !s:<<<< ten times in a
year+)
Ite-
P+*,i"al
5R,6
De$o,itor* 5e-at6
5R,6
Q"rokerage 7$<1:<<< $<<17$<
Settlement
charges 1 $<1:<<
Custody '$ years) 1 (1:<
Total
$:
Q ,any %rokers offer reduced %rokerage for
sell of demateriali-ed securities since they
would not have fear of %ad delivery
Ban/ A""o!nt,
Fo. to o$en a %an/ a""o!nt .it+ a DP
&pening a depository account is as simple as
opening a %ank account+ Gou can open a
depository account with any .P convenient to
you+
To open an account you have to6
*ill up the account opening form2 which
is availa%le with the .P+
Sign the .P1client agreement2 which
defines the rights and duties of the .P
and the person wishing to open the
account+
!eceive your client account num%er
'client I.)+
This client I. along with your .P I.
gives you a uni3ue identification in the
depository system+
There is no restriction on the num%er of depository
accounts a person can open+ 9owever2 if your
e#isting physical shares are in 0oint names2 you have
to open the account in the same order of names
%efore you su%mit your share certificates for demat+
A sole holder of the share certificates cannot add
more names as 0oint holders at the time of
demateriali-ing his share certificates+
9owever2 if the investor wants to transfer the
ownership from his individual name to a 0oint
name2 he should first open an account as the
sole holder 'account A) and demateriali-e the
share certificates+ 9e should then open
another depository account 'account ") in
which he is the first holder and the other
person is the second holder and make an off
market transfer of the shares from the
account A to account "+ The investor will incur
a charge on this transaction+ Alternatively2 the
certificates can %e transferred to the 0oint
ownership and then sent for
.emateriali-ation+
$(
!ight now2 as per the Companies Act2 there is
no nomination facility for shares 'whether in
the physical or in the electronic form)+ The
nomination facility for shares can %e availed
of only when the relevant provisions in the
Companies Act are amended+ NS. captures
the details of the nominee when the account
is opened so as to offer the facility as soon as
the relevant amendments are effected in the
aw+
A client can choose to open more than one
account with same .P+ In addition to this2 he
has a choice of opening accounts with more
than one .P+ 9owever a %roker can open 0ust
one Clearing ,em%er account per cardA stock
e#change for clearing purpose2 %ut he can still
open multiple %eneficiary accounts
"eneficiary is the personal account wherein
%rokers can keep their personal holdings+
A %roker has only one Clearing ,em%er1pool1
account+ &ne Clearing ,em%er pool account is
opened per cardA stock e#change to settle
trades in the demateriali-ed form+ The Clearing
CorporationA 9ouse 0ust deals with one
designated account for pay1in and payout and
the %rokerNs clients know to which account they
have to deliver and receive securities from+
A clearing mem%er cannot hold his personal
holdings in his clearing mem%er account+ A
%roker may deal in the depository system as a
clearing mem%er only through a special
account2 known as the Clearing ,em%er
account+ This account can %e used only for
clearing purposes and not for holding his own
securities in it+ As this is a transitory account2
the securities held in this account are not
eligi%le for corporate actions+ Therefore2 the
%roker will have to open a separate %eneficiary
owner account to hold his investments+
There is no compulsion for the client to open
his account with the same .P as that of his
%roker+ Even if he has an account with
another .P2 he can carry out normal %usiness
with his %roker+ There is no loss in operational
efficiency+ "ut it is possi%le that opening
account with his %rokerNs .P may work out to
his advantage2 as some .Ps may offer
special charge structure if the %roker and his
clients are dealing through him+
Fo. to "+oo,e a DP
*ollowing are the few aspects
that
you
should
consid
er
%efore
choosi
ng a
.P
$>
"ranch1level service+
,ost .Ps offer depository services from their
main %ranch as well as through other
%ranches and franchisees+ 9igher the num%er
of %ranches your .P has2 'which offer
depository services) greater will %e the
geographical convenience you will have+
!ecently .epartment of Telecommunications
has allowed the .Ps 'only %ank1.Ps at present)
to connect their entire internal network to NS.+
The NS. is making changes in its software for
.Ps to meet the .oT conditions+ After it is done
.Ps will %e a%le to e#ecute your instructions
directly at the %ranch level thus saving time and
improving efficiency+ So check %efore opening
an account whether your .P 'if it is a %ank1.P)
intends to interconnect its %ranch network with
that of NS.+ "efore opening an account with a
.P you should also check whether the .P is
offering all the services through its %ranches+
.Ps mandate a time limit for su%mission of
de%it instructions %efore settlement pay1in
time+ It should %e checked whether the time
limit applies e3ually to all the %ranches 'or
franchisees) of the .P or whether it varies+
"ackup facilities
9aving an ade3uate %ackup system is
e#tremely necessary for a .P+ In case of a
system failure all the data could %e lost if
%ackup facilities are not present+ Although
depositories too have the data with them %ut a
strong system with your .P ensures no risks
and hassles+
So %efore opening an account get details from
your .P a%out its computer systemNs technical
specifications and %ackup facilities+
Safe procedures+
Gour securities account can get de%ited only if you
su%mit to your .P a duly filled and signed Ndelivery
instructionN 'de%it instruction) form 'separate for
market trades and off1market transfers) that
authori-es the .P to de%it your account+ Gou will
e#ecute this form only when you have
$?
sold shares+ "ut you could have worries that some
one else can forge your signature on such a form2
which your .P will not %e a%le to detect2 and your
account will get de%ited +To get rid of these worries
you should check that delivery instruction form %ook
that you get from your .P must %e serial1num%ered
with num%ers uni3ue to your account and recorded
in the .PNs system+
4henever there is a de%it or credit in an
account the .P is supposed to send a
transaction statement and a holding statement
to the investors within a fortnight+ In case there
have %een no transactions they generate 0ust a
holding statement every 3uarter+ So check for
the statements regularly since all .Ps are not
very punctual a%out sending transaction and
holding statements+ These statements will
ensure that your account is proper+
There is an additional safety feature availa%le with
the .Ps+ Gou can free-e your account on the de%it
side if you do not want to sell the shares from your
account2 this will ensure that no de%it is done in
your account+ Gour account will continue to
receive credits arising from fresh purchases %ut
no de%it will %e permitted+ A special form2 that you
can get from the .P2 is e#ecuted that instructs
your .P to free-e your account 'only for the de%it
side or completely)+ 4hen you want to sell your
shares you can e#ecute the same form to unlock
your account+
C!,to-er Ser3i"e
.Ps should have an ade3uate customer
service facilities+ This is one of the most
important aspects while deciding your .P+ At
some time or other you will need some
information on your account+ Gour .P should
%e a%le to provide you 3uick service2 so check
whether your .P has a dedicated customer
service department+
If you are not happy with the service you get
from your .P or you are not sure that your
shares will %e safe you should not think twice
of taking your shares to another .P+
De-ateriali:ation An Re-ateriali:ation
Fo. To De-ateriali:e Yo!r S+are,
$$
To demateriali-e your share certificates you
have to6
*ill up a demateriali-ation re3uest
form2 which is availa%le with your .PI
Su%mit your share certificates along
with the formI 'write Msurrendered for
dematM on the face of the certificate
%efore su%mitting it for demat)
!eceive credit for the demateriali-ed
shares into your account in :$ days+
.emateriali-ed shares do not have any
distinctive or certificate num%ers+ These
shares are fungi%le 1 which means that :<<
shares of a security are the same as any
other :<< shares of that security+
The investor can demateriali-e only those
certificates that are already registered in his name
and %elong to the list of securities admitted for
.emateriali-ation at NS.+ Shares held in street
name 'market deliveries) cannot %e
demateriali-ed+ If the share certificates that
investor wants to demateriali-e do not %elong to
the list of securities eligi%le for .emateriali-ation
specified %y NS.2 he can approach the company
and re3uest them to sign up with NS. to make
their securities availa%le for .emateriali-ation+
&dd lot share certificates can also %e
demateriali-ed+
No transfer deed is re3uired for demateriali-ing
certificates2 the certificates have to %e
accompanied %y a demat re3uest form '.!*)
which can %e o%tained from .Ps+ It is
compulsory to mention the ISIN num%er of the
company while filling up the .emat !e3uest
form+ This2 to a certain e#tent2 ensures that the
security mentioned in the .emat !e3uest *orm
is the same as the one the investor intends to
demateriali-e+ 9owever2 the investor need not
remem%er cryptic num%ers and can take the
help of his .P in filling these forms+
.emateriali-ation is not compulsory+
According to the .epositories Act2 :;;/2 an
investor has the option to hold shares either in
physical or in demateriali-ed form+ An investor
can hold part of his holdings in demat form
and part of his holdings in the form of share
certificates for the same security+
Although the depository would %e a registered owner
of securities in the depository2 a transaction involving
demateriali-ed securities would not %e considered
as %enami transactions2 the "enami
$/
Transactions 'Prohi%ition) Act2 :;== have
%een suita%ly modified to e#clude the
securities held %y a6
.epository as a registered owner
.P as an agent of the depository+
Securities %earing the same distinctive num%ers
as demat securities can still float in the market+ It
is a case of forged certificates and normal
procedures that are %eing followed in the physical
market will %e used to weed them out+ The
concerned stock e#changes where the securities
are listed are informed of the details of securities
demateriali-ed and remateriali-ed+
An investor can demateriali-e shares that are
pledged with a %ank2 which is a .P as well+
Fo. To Re-ateriali:e S+are,.
.uring a remateriali-ation process2 the
re3uest goes from the .P to the !&T agent
via NS.+ The !&T Agent2 after processing
the re3uest2 will print and dispatch the share
certificate directly to you+ No transfer duty will
%e charged to you when you remateriali-e
your shares+ Gou have the option of
remateriali-ing your total holdings or part of it+
In addition to this2 you have the option to get
the certificates in market lot or 0um%o lot+
If your name has %een wrongly spelt on the
certificates given to you after a remat2 you can
send it for rectification to the !&T agent along
with the relevant documents+
Traing
Trading in demateriali-ed securities is 3uite
similar to trading in physical securities+ The
ma0or difference is that at the time of
settlement2 instead of deliveryA receipt of
securities in the physical form2 it is done
through account transfer+
An investor cannot trade in demateriali-ed securities
through his .P+ Trading at the stock e#changes can
%e done only through a registered trading mem%er
'%roker) of the stock e#change irrespective of
whether the securities are held in physical or
demateriali-ed form+ .Ps role will
$7
only %e to facilitate settlement of trade in the
demateriali-ed form2 %y transferring securities
from and to the account of the investor2 for
selling and %uying respectively+
Trading in demateriali-ed securities is
presently availa%le at NSE2 "SE2 CSE2 .SE2
"gSE2 SE2 ,SE2 ISE & &TCEI+ These
e#changes have a segment e#clusive for
trading in demateriali-ed securities and a
segment where trades could %e settled either
in the physical or in the demateriali-ed form
as per the choice of the delivering client+ In
unified 'erstwhile 1 physical) segment
securities can %e delivered either in the
physical form or in the demateriali-ed form at
the choice of the delivering party+
9owever2 securities that have to %e mandatorily
settled in demat form '%oth %y institutional
investors & all category of investors) cannot %e
settled in physical form+ Also for securities that
have to %e mandatorily settled in demat form %y all
categories of investors the concept of market lot is
eliminated ie the trada%le lot is one share from the
date they %ecome compulsory+
Since Danuary ?2 :;;;2 all category of
investors can deliver only in demateriali-ed
form with respect to a select list of securities
'which is e#panded from time to time)+ *or
these scrips2 from the date they %ecome
compulsory2 the concept of market lot is
eliminated ie the trada%le lot for these scrips
is one share+ This will %e applica%le only at
those e#changes that have 0oined the
depository+
Also2 from Danuary :$2 :;;=2 select category of
investors can deliver only in demateriali-ed form
with respect to a select list of securities 'which
is e#panded from time to time)+
Conse3uently there will %e separate price
3uotes availa%le for each scrips in %oth the
segments+ The trades in each of these
segments cannot %e netted off with each
other+
The facility of delivering demateriali-ed
securities in the physical segments of the
stock e#changes is availa%le for all the
companies that are eligi%le for
demateriali-ation+ This also applies to delivery
against auction of securities in the physical
segment+
9owever2 at .SE demateriali-ed securities can
%e presently traded only in the e#clusive demat
segment+ They are not accepted as good
delivery in the physical segment+ At SE2
$=
demateriali-ed securities can %e delivered
only in the unified 'erstwhile 1 physical)
segment+ Presently2 SE does not have an
e#clusive demat segment+
Non pari1passu shares 'like partly paid up
%onusA right shares with pro1rata dividend) are
identified with separate ISIN 'scrip codes) and
can %e traded separately+ These can also %e
delivered against o%ligation in pari1passu
shares along with dividend che3ues+
In the unified 'erstwhile 1 physical) segment2
auction trade o%ligations can %e met & %ad
delivery rectification can %e made %y
delivering demateriali-ed securities+
Trades in each segment have to %e settled
separately and cannot %e netted %etween
segments for settlement+
Any investor who %uys securities from any of
the stock e#changes where demateriali-ed
securities are availa%le2 may receive his
delivery in the demateriali-ed form as
demateriali-ed shares can %e delivered in the
physical segment at the option of the seller+
Therefore those investors who %uy securities
from these e#changes should necessarily
open a depository account to take delivery of
these shares+
S4!aring o00
It is possi%le to s3uare off trades in demateriali-ed
securities+ In the e#clusive demat segment2 the
trades can %e s3uared off within the same day as
this segment follows a rolling settlement cycle+ In
the physical segment the trades can %e s3uared
off within the trading period specified for that stock
e#change+ This is presently five working days2
%etween 4ednesday to Tuesday at NSE2 ,onday
to *riday at "SE and Thursday to 4ednesday at
CSE+ At CSE for some of the shares 'classified as
specified group) the trading period is :? days+
If an investor s3uares off his position within the
trading period2 he does not need to open a
depository account+ .epository account is
re3uired for taking delivery or giving delivery of
demateriali-ed securities in case of %uy or sell
respectively+ In case the investor s3uares off his
$;
trade2 and hence2 does not have to take or
give delivery of demateriali-ed securities2 the
depository account is not used+
As in the physical segment2 an investor can
go long or short in the demat segment also+
9ow to access a scrip
At NSE2 the AE and "E segments can %e
accessed %y selecting the scrip you want to
trade in and typing AE or "E in place of EK+
At the "SE2 all scrips have a scrip code+ *or
going to the .emat segment2 add $<<<<< to
the scrip code+ *or eg If the scrip code of !I
is >($ in the physical segment2 the scrip code
to %e typed for going to .emat segment is
$<<>($+
Traing at NSE
Trading in demateriali-ed securities is 3uite
similar to trading in physical securities and is
done through the same MNEATM terminals of
the trading mem%ers '%rokers)+
E1"l!,i3e De-at ,eg-ent,.
&n NSE2 three separate segmentsI vi- AE
and "E and "T segments are availa%le for
trading only in demateriali-ed securities+ The
difference %etween the segments %eing that2
in "E segment the concept of market lot is
eliminated ie the minimum trada%le 3uantity is
one share+ 9owever2 securities that have to
%e mandatorily settled in demat form %y all
class of investors cannot %e traded in the AE
segment+
Trades in AE & "E segments follow rolling
settlement of TE$ working days cycle and are
cleared & settled through NSCC2 the Clearing
Corporation 'CC) of NSE+ Trades settled in the
/<
AE segment on 4ednesday follow rolling
settlement cycle of TE> working days+ Trades in
"T segment are not settled through NSCC2 %ut
are settled %ilaterally %y the trading mem%ers+
Cnified 'erstwhile 1 physical) segments+
In EK and TT segments securities can %e
delivered either in the physical form or in the
demateriali-ed form at the choice of the
delivering party+ In the EK segment2 auction
trade o%ligations can %e met and %ad delivery
rectification can %e made %y delivering
demateriali-ed securities+
Trades in EK segment follow account period
settlement '4ednesday to Tuesday) cycle and
are cleared &settled through NSCC+ Trades
in TT segment are not settled through
NSCC2 %ut are settled %ilaterally %y the
trading mem%ers+
Traing at BSE
Trading in demateriali-ed securities is 3uite
similar to trading in physical securities and is
done through the same M"&TM terminals of
the trading mem%ers'%rokers)+
Traing at CSE
Trading in demateriali-ed securities is 3uite
similar to trading in physical securities and is
done through the same MC1StarM terminals of
the trading mem%ers '%rokers)+
Traing at DSE
Trading in demateriali-ed securities is 3uite
similar to trading in physical securities and is
done through the same M.&TSM terminals of
the trading mem%ers '%rokers)+ Presently not
all securities are availa%le for trading at .SE+
&nly a select list of demateriali-ed scrips can
%e presently traded at .SE only in the
e#clusive demat segment+
Traing at BSE
/:
Trading in demateriali-ed securities is 3uite
similar to trading in physical securities and is
done through the same M"ESTM terminals of
the trading mem%ers'%rokers)+
"E and "& are segments availa%le for trading
e#clusively in demateriali-ed securities+
Trades in "E and "& segments follow rolling
settlement cycle of TE$ working days and are
cleared & settled through the Clearing 9ouse
'C9) of "gSE+
The only difference %etween "E and "& is
that while trading in "E segment is in normal
market lots2 trading in "& segment is in units
of one security+
Traing at LSE
Trading in demateriali-ed securities is 3uite
similar to trading in physical securities and is
done through the same MJECT&!M terminals
of the trading mem%ers '%rokers)+
Traing at OTCEI
Trading in demateriali-ed securities is 3uite
similar to trading in physical securities and is
done through the same M&ASISM terminals of
the trading mem%ers'%rokers)+
AE and "E are segments availa%le for trading
e#clusively in demateriali-ed securities+
Trades in AE and "E segments follow rolling
settlement cycle of TE$ working days and are
cleared & settled through NSCC2 the
Clearing Corporation 'CC) of NSE which also
acts as the clearing agent of &TCEI+
The only difference %etween AE and "E is that
while trading in AE segment is in normal market
lots2 trading in "E segment is in units of one
security+ 9owever2 securities that have to %e
mandatorily settled in demat form %y all class of
investors cannot %e traded in the AE segment+
Settle-ent
The settlement of trades in the stock e#changes
is undertaken %y the clearing corporation 'CC)A
clearing house'C9) of the corresponding stock
e#changes+ 4hile the settlement of
/(
demateriali-ed securities is effected through
depository2 the funds settlement is effected
through the clearing %anks+ The physical
securities are settled %y the clearing mem%ers
directly with the CCA C9+
E#clusive demat segment follows rolling
settlement 'TE$) cycle and the unified
'erstwhile 1 physical) segment follows account
period settlement cycle+ In case of rolling
settlement cycle2 the account period is
reduced to one day+
In case of settlement of trades done in
e#clusive demat segments2 the pay1in and
pay out of funds and securities are effected
on the same day afternoon and evening
'same day) thus reducing the %lockage of
funds and limiting e#posure to the clearing
corporation+
Settlement of funds is effected through
the clearing %anks and depository
plays no role in this+
Settlement of securities is effected
through NS. depository system+
Clearing and settlement of the regular
market trades is effected through the
clearing mem%ers of the clearing houses
of respective stock e#changes+ All trading
mem%ers of stock e#changes are clearing
mem%ers of clearing houses+ In addition2
for settlement of institutional trades2
custodians are also allowed to act as
clearing mem%ers+
Clearing mem%ers of clearing house2
dealing in demateriali-ed securities are
e#pected to open a clearing account
with any .P for the purpose of settling
trades in demateriali-ed securities+ As2
in the mi#ed 'unified) segment2 there is
a possi%ility for all clearing mem%ers to
receive demateriali-ed securities2 they
are e#pected to open clearing
accounts+
If there is any short delivery at the time of
pay1in of securities2 these short positions
are auctioned in the .emat segment as
done in the Cnified 'erstwhile1physical)
segment+
Rolling ,ettle-ent 5TT=6 "*"le
In this case2 the trading period 'T) is one day+
*or the trading period comprising one day2
settlement of trades on the %asis of netted
o%ligation is on the $th working day from the
trade day ie on TE$ %asis+ At NSE2 for trades
e#ecuted on 4ednesday in the AE segment2
settlement on the %asis of net o%ligation is on
the >rd working day ie on TE> %asis+
/>
The deadline time for pay1in and pay1out of
securities to the Clearing CorporationA Clearing
9ouse 'through NS. depository system) is
effected till ?+<< p+m+ for NSE and :+>< p+m+ for
"SE2 CSE and .SE on settlement day 'ie $th
working day from trade day) varies from
e#change to e#change+ Pay1in and pay1out of
funds to the clearing %ank 'NS. has no role in
this) is also on the same day 1 settlement day
'ie $th working day from trade day)+
As in the physical segment2 cumulative
o%ligation statement for daily trades is
downloaded %y Clearing CorporationA Clearing
9ouse at the end of the day+ The finalA net
o%ligation statement is downloaded %y the
Clearing CorporationA Clearing 9ouse on the
(nd working day from the trade day+ In case of
CSE2 the finalA net o%ligation statement is
downloaded %y the Clearing 9ouse on the ne#t
working day from trade day+
Short deliveries2 if any is auctioned on the /th
working day from the trade day ie one day after
the settlement day+ In case of NSE2 auction trade
is on the 7th working day from the trade day+ The
time for auction trade is announced %y the
e#changes and may vary from one e#change to
another+ Settlement of auction trades is on the (nd
working day from the auction trade day+ The
procedure for settlement of auction trades is
similar to settlement of market trades+
*or trades e#ecuted on 4ednesday 'T. :)6
*inalA Net o%ligation statement
download 1 *riday 'TE(nd working day)
Settlement day 'S. :) ie pay in and
pay out of funds and securities 1 ne#t
4ednesday 'TE$th working day)
Auction trade day 'AT. :) 1 ne#t
Thursday 'TE/th working day)
Auction settlement day 'AS. :) 1
,onday '(nd working day from auction
trade day ie TE=th working day)
Similarly2 for trades e#ecuted on Thursday
'T. ()6
*inalA Net o%ligation statement
download 1 ,onday 'TE(nd working
day)
Settlement day 'S. () 1 ne#t Thursday
'TE$th working day)
Auction trade day 'AT. () 1 ne#t *riday
'TE/th working day)
/?
Auction settlement day 'AS. () 1
Tuesday '(nd working day from auction
trade day ie TE=th working day)
Selling And "uying of Shares
Fo. To Sell De-ateriali:e S+are,
Selling demateriali-ed shares in stock e#changes
is similar to the procedure for selling physical
shares+ Instead of delivering physical shares to
the %roker2 you instruct your .P to de%it your
account with the num%er of shares sold %y you
and credit your %rokerNs clearing account+
*or this2 a delivery instruction has to %e given
to your .P in a standardi-ed format2 which will
%e availa%le with your .P+
In short2 for selling demat sharesI
Gou can sell shares in any of the stock
e#changes linked to a depository
through a %roker of your choice+
5ive an instruction to your .P to de%it
your account and credit your %rokerNs
clearing mem%er pool account+ 'this is
a depository account used e#clusively
for settling transactions %y a %roker)
&n the pay1in day2 your %roker gives
instruction to his .P for delivery of the
shares to clearing corporation of the
relevant stock e#change+
The %roker receives payment from the
clearing corporation
Gou receive payment from your %roker
for the sale in the same manner you
would receive payment for a sale in the
physical mode+
Fo. To B!* De-ateriali:e S+are,.
The procedure for %uying demateriali-ed shares in
stock e#changes is similar to the procedure for
%uying physical shares+ 4hen you want to
purchase shares in electronic form2 you have to
/$
instruct your %roker to purchase the
demateriali-ed shares from the stock
e#changes linked to a depository+
&nce the order is e#ecuted2 you have to
instruct your .P 'vide a simple format which is
availa%le with the .P) to receive securities
from your %rokerNs clearing account+
Alternatively2 you may give a standing
instruction to receive credits into your account
and do away with giving a separate receipt
instruction each time you e#pect a credit+ Gou
have to ensure that your %roker too gives a
matching instruction to his .P to transfer the
shares purchased on your %ehalf into your
depository account+
Gou should also ensure that your %roker
transfers the shares purchased from his
clearing account to your depository account2
%efore the %ook closure+ This is really
important %ecause shares that remain in the
clearing account of the %roker on the %ook
closureA record date will not %e eligi%le for
corporate %enefits+
In %rief2 the transactions relating to purchase
of shares are6
Gou can purchase shares in any of the
stock e#changes connected to a
depository through a %roker of your
choice and make a payment to your
%rokerI
Gour %roker receives credit in his clearing
account with his .P on the pay1out dayI
"roker gives instructions to his .P to de%it
his clearing account and credit your
accountI
Gou instruct your .P for receiving
credit into your depository account
either through a specific receipt
instruction or using the Mstanding
instructionM facility+
In case you are not using the Mstanding
instructionM facility then2 your
depository account is credited only if
the instructions given %y you and your
%roker match+
C+arge,
NSDL C+arge, 0or DP,
NS. does not charge the investor directly
%ut charges its .Ps2 who are free to charge
their clients+
//
NS. charges its .Ps under the following
heads6
Transaction *ees 6
,arket Trade 6
sale 1 nilI purchase 1 $ %asis
points 'ie <+<$B of the value of net receipts to
a clearing mem%ers account)
&ff ,arket Trade 6
sale 1 nilI
purchase 1 :< %asis points 'ie <+:B of value
of securities)
Custody *ees 6
3.5 %asis points p+a+'ie <+<>$B p+a+ of average
value of securities)
!emateriali-ation 6
!s+ :<A1 per certificate
&ne time payment scheme6
NS. has announced a new scheme under
which2 if a company makes a one1time payment
of $ %asis points '<+<$B) of the average market
capitali-ation during the preceding (/ weeks2
then NS. will not charge any custody fees to
the .Ps for shares of that company+ *uture
issues %y such companies would re3uire a
payment of $ %asis points on the new share
capital created+ The valuation for new shares
will %e done at the issue price+ Companies
would not %e re3uired to pay any additional
amount2 if they make a %onus issue+
&ther Services
"esides demat and trading .epositories also
offer other services2 these are6
/7
Pledgi
ngA
hypoth
ecatio
n of
demat
eriali-
ed
securit
ies+
Electro
nic
credit
in
pu%lic
offerin
gs of
compa
nies+
!eceipt of non1cash
corporate %enefits such as
%onus2 rights in electronic
form+ Stock lending and
%orrowing+
Transmission of securities+
Pleging
.emateriali-ed shares could %e pledgedI in
fact2 this is more advantageous as compared
to pledging share certificates+
9ow to pledge your .emat shares
"oth you 'pledgor) as well as the lender
'pledgee) must have depository
accounts+
Gou must initiate the pledge %y
su%mitting the details of the securities
to %e pledged in a standard format
'availa%le with .Ps)+
The pledgee should confirm the
re3uest through his .P+
&nce this is done2 your securities are
pledged
All commercial documentation %etween
the pledgor and the pledgee are
handled outside the depository system+
After you have repaid your loan2 you can
re3uest for a closure of pledge %y instructing
your .P through a standard format+ The
pledgee on receiving the repayment as well
as the re3uest for closure of pledge will
instruct his .P accordingly+
Even the locked1in securities can %e pledged2
however they cannot %e invoked %efore the
lock1in release date+
Even after the securities are pledged2 the
pledgor continues to remain the %eneficiary
holder of those securities and will receive
%enefits of a corporate action2 if any+
/=
Initial P!%li" O00ering,
Credits for pu%lic offers can %e directly received
into demat account+ In the pu%lic issue
application form of depository eligi%le
companies2 there will %e a provision to indicate
the manner in which securities should %e
allotted to the applicant+ All you have to do is to
mention your client account num%er and the
name and identification num%er of your .P+
Any allotment due to you will %e credited into
your account+
If the applicant is allotted securities in
demateriali-ed form2 %ut the details regarding
the %eneficiary account are incompleteA
wrong2 the person will get physical delivery of
allotted securities+
If securities are allotted in the demateriali-ed
form2 these would %e credited to applicants
account any day %etween allotment date and
listing date2 at the discretion of the company+
The issuer companyA their !&T agent will
forward the applicant the allotment advice
giving the num%er of shares allotted in
demateriali-ed form+ Through this you can
come to know that you have %een allotted
shares+
An amendment to the company law re3uiring
all future pu%lic issues a%ove !s:<<mn to
compulsorily offer securities in demateriali-ed
form is awaiting legislative approval+ After this
all the issues a%ove !s:<<mn will re3uire
investors to trade only in demat way+
Partly paid up and fully paid up shares in the
depository2 will %e given separate ISINs
'International Securities Identification
Num%er)+ These are also traded separately at
the stock e#changes+
The company issues call notices to the
%eneficial holders of securities in the
electronic form+ The details of such %eneficial
holders will %e provided to the issuerA their
!&T agent %y NS.+ After the call money
reali-ation2 issuerA their !&T agent will
electronically convert the partly paid up
shares to fully paid up shares+
Re"ei$t O0 Ca,+J Non-Ca,+ Bene0it,
/;
4hen any corporate event such as rights or
%onus or dividend is announced for a particular
security2 depository will give the details of all the
clients having electronic holdings in that security
as of the record date to the registrar+ The
registrar will then calculate the corporate
%enefits due to all the shareholders+ The
dis%ursement of cash %enefits such as dividendA
interest will %e done directly %y the registrar+ In
case of non1cash %enefits2 depository will
directly credit the securities entitlements in the
depository accounts of all those clients who
have opted for electronic allotment %ased on the
information provided %y the registrar+
The %onusA rights issue against holding in
demateriali-ed form can %e either in the
physicalA demateriali-ed form as per the
choice of the investor+ If no choice is given2 %y
default2 the securities will %e issued in the
physical form+
Even if an investor has holdings in physical
form2 he can receive the %onusA rights issue
against this in the demateriali-ed form+
In case of fractional part2 as in the physical
segment2 it would %e paid in cash and the
remaining whole part would %e credited to the
investors account+
The statement of holding and transaction
statement is sent %y the investors .P2 it will
show the %onusA rights credit into investor8s
account+ This report is sent to the investor
every fifteen days+ In addition2 an allotment
advise will %e send %y the issuerA their !&T
agent for %onusA rights entitlement+
Sto"/ Lening An %orro.ing
Through the depository account securities in
the demat form can %e easily lentA %orrowed+
Securities can %e lent or %orrowed in
electronic form through an approved
intermediary2 who has opened a special
NintermediaryN account with a .P+
Lening Se"!ritie,
7<
Gou have to instruct your .P through a
standard format 'which is availa%le with your
.P) to deposit your securities with the
intermediary+
If the intermediary accepts your deposit of
securities2 the securities will %e moved from
your account into the intermediaryNs account+
If you wish to recall the securities lent %y you2
you can make a re3uest vide a standard
format availa%le with your .P+
Fo. To Borro. Se"!ritie,
Gou have to instruct your .P through a
standard format 'which is availa%le with your
.P) to %orrow securities from the
intermediary+
If the intermediary accepts your re3uest2 the
securities will %e moved from the
intermediaryNs account to your account+ If you
wish to return the securities %orrowed %y you2
you can make a re3uest vide a standard
format availa%le with your .P+
Tran,-i,,ion O0 Se"!ritie,
Transmission of securities due to death2
lunacy2 %ankruptcy2 insolvency or %y any other
lawful means other than transfer is also
possi%le in the depository system+ In the case
of transmission2 the claimant will have to fill in
a transmission re3uest form2 'which is
availa%le with the .P) supported %y valid
documents+ The .P2 after ensuring that the
application is genuine2 will transfer securities
to the account of the claimant+ *or this2 the
claimant must have a depository account+ The
ma0or advantage in transmission of
demateriali-ed holdings is that the
transmission formalities for all securities held
with a .P can %e completed in one go2 unlike
in the case of share certificates2 where the
claimant will have to interact with each issuing
company or its !&T Agent+
In case where the deceased was one of the 0oint
holders in the Client account2 the surviving
client's) shall %e the person's) recogni-ed %y
depository as having title to the securities held
in that 0oint Client account+ In case where the
deceased was a sole holder of the Client
account2 his legal heir's) or the legal
representative's) will %e the person's)
recogni-ed %y depository as having title to the
securities held in that sole Client account
7:
Security
National Security and .epository imited
claims to have undertaken sufficient security
measures+ These measures are6
A .P can %e operational only after
registration %y Se%i2 which is %ased on
the recommendation from NS. and
Se%i8s own independent evaluation+
Se%i has
prescri%ed criteria for %ecoming a .P in the
regulations+
.Ps are allowed to effect any de%it and
credit to an account only on the %asis
of valid instruction from the client+
Every day2 there is a system driven
mandatory reconciliation %etween the .P
and NS.+
There are periodic inspections into the
activities of %oth .P and !&T agent %y
NS.+ This also includes records
%ased on which the de%itA credit are
effected+
The data interchange %etween NS.
and its %usiness partners is protected
%y standard protection measures such
as encryption+ This is a SE"I
re3uirement+
There are no direct communication
links %etween two %usiness partners
and all communications %etween two
%usiness partners are routed through
NS.
All investors have a right to receive their
statement of accounts periodically from the
.P+
Every month NS. forwards statement
of accounts to a random sample of
investors as a counter check+
In the depository2 the depository holds
the investor holdings on trust+ Therefore2
if the .P goes %ankrupt the creditors of
the .P will have no access to the
holdings in the name of the clients of the
.P+ These investors can then either
demateriali-e their holdings or transfer
them to a different account held with
another .P+
7(
Investor grievance6 All grievances of
the investors are to %e resolved %y the
concerned .P+ If they fail to do so the
investor has the right to approach
NS.+
Insurance Cover6 NS. has taken a
comprehensive insurance policy to
protect the interest of the investors in
cases of failure of the .P to resolve a
genuine loss+ The details of the policy
is as under6
Cpper limit per claim 6 !s(<<mn
Num%er of claims allowed 6 unlimited
,inimum value of the claim 6
!s:$<2<<<
To cover claims valued less than
!s:$<2<<< NS. has an investor
protection fund in place+
"esides all these safety measures efforts
have %een done to make this electronic
system foolproof+
Co-$!ter An Co--!ni"ation
In0ra,tr!"t!re.
The systems are accepted %y NS. only after
a rigorous testing procedure+
,achine level %ack up6 The I", mainframe
situated at MTrade 4orldM 'NS. office in
,um%ai) in which the data is processed has
ade3uate redundancy %uilt into its
configuration+ There is a stand%y central
processing unit 'CPC) to which processing
can %e switched over to in case of main
system CPC failure+ The disk has !AI.
implementation2 which ensures that a single
point failure will not lead to loss in data+
System has spare disk configuration where
data is automatically copied from the main
disk upon encountering the first failure 'due to
!AI. implementation 1 first failure does not
result in loss of data)+
All network components like router2
communication controllers etc2 have on1line
redundancy and thus a failure does not result
in loss of transaction+
7>
.isaster %ack up site6 In addition2 a disaster
%ack up site e3uipped with a computer identical
to the mainframe computer & computing
resources has %een set up at a remote location
a%out :7$ km away from ,um%ai+ This site has
%een tested for operations from the site+
"ack1up in case of power failure6 Continuity in
power supply to the main systems is assured
%y providing forI dual uninterrupted power
supply 'CPS) for I",1,ainframe and related
components wherein the two CPSs are
connected in tandem+ In case of failure of
primary CPS2 the secondary CPS takes over
instantaneously and thus2 there is no
interruption in operation2 and %ack1up diesel
generator set+
If an investor looses his statement of holdings2
he may inform his .P and o%tain a duplicate
statement of holdings+ The loss of statement of
holding will not effect his actual holdings+
If a .P goes %ankrupt2 there is no need for an
investor to %e unduly concerned as enough
provisions are there for the investor to transfer
his account from the defunct .P to another .P
or get the securities remateriali-ed+ There
cannot %e any lien on the account holders
assets %y creditors %elonging to the .P or
NS. and therefor the account holders assets
are a%solutely safe+ There is no credit risk in
case of a defunct NS. or its .Ps+
.epository account details are confidential+
There are strict systems and procedures
esta%lished to protect the confidentiality of
investor information at the depository to
ensure that these are availa%le to only
authori-ed persons+ Even a .P other than
your own2 cannot have access to your
account+
Ta1 A,$e"t
In case of demateriali-ed holdings cost of ac3uisition
and period of holding for calculation of capital gains
ta# is determined on the %asis of *irst In *irst &ut
'*I*&) method+ This is as per the
7?
amendment to the Income Ta# Act+ The proof
of the cost of ac3uisition will remain to %e the
contract note+
.emat Shares6 Are They :<<B Safe
4hen you %uy physical shares from the stock
market2 you could never %e certain of the
validity of the title of shares+ There were many
reasons1 the sellersN signature did not match2
or the certificates were fake2 forged or stolen2
and so on+
.emat shares are supposed to o%viate these
pro%lems+ "uying shares in the demat form
always guarantees you a good title as soon
as the settlement is over+ The %iggest
attraction of trading in demat shares is that
the shares you %uy come with a clean title
and immediately after the settlement on the
relevant stock e#change+
!ule :<< of market regulator SE"I determines
whether the shares delivered in a settlement2
are good or not+ Cnder rule :<<2 the shares that
have %een transferred any num%er of times can
still %e withdrawn %y the company2 if a transfer
is found to %e invalid for any reason+
Suppose A sells physical shares to " and " gets
them demateriali-ed+ ater " sells the shares in
the stock e#change and C %uys them+ ,eanwhile
A discovers that his share certificates were stolen
and fraudulently sold %y someone else+ 9e gets a
court order restraining the company from further
transferring the shares and attaching them
'currently in possession of C)+ This is known as
Nstop transferN+ So C who has %ought
demateriali-ed shares is now struck with the
shares+ 9e cannot sell these shares since they
would %e fro-en in his account
In demat shares2 pre1demat pro%lems a%out
the validity of a share do not effect the interest
of the %uyers after demateriali-ation+ Shares
go through a verification process at the
registrarsN %efore they are demateriali-ed+
Therefore the responsi%ility lies with the registrar+
The registrar must find a remedy if the original
transfer of shares2 %efore their demateriali-ation
comers under dou%t+ "ut there is a catch+ The
company and its registrars are not responsi%le if
the reasons for original transfer %eing invalid were
not availa%le at the time of demateriali-ation+
,atters have to %e dealt with on a
7$
case to case %asis+ 4hich means that even demat
%uyer may find that his shares have %een fro-en in
his demat account+ This kind of case has to %e
contested in court %y the parties involved+
This issue is not directly addressed in The
.epositories Act2 :;;/+ Se%i8s regulations on
depositories and depository participants also
do not mention the issue+
,atters get more comple# if an investor has
traded further in shares of the same company
in his demat account+ .emat shares are
fungi%le and don8t have distinctive num%ers+ It
is not easy to track the sale or trade of shares
after they are demateriali-ed+
A!"tion
Auctions are initiated %y the E#change on
%ehalf of trading mem%ers for settlement
related reasons+ The main reasons are
Shortages2 "ad .eliveries and &%0ections+
There are three types of participants in the
auction market+
(a) Initiator# The party who initiates the
auction process is called an initiator+
(b) Co-$etitor# The party who enters on the
same side as of the initiator is called a
competitor+
(c) Soli"itor# The party who enters on the
opposite side as of the initiator is called a
solicitor+ The trading mem%ers can participate in
the E#change initiated auctions %y entering
orders as a solicitor+ E+g+ If the E#change
conducts a "uy1In auction2 the trading mem%ers
entering sell orders are called solicitors+ 4hen
the auction starts2 the competitor period for that
auction also starts+ Competitor period is the
period during which competitor order entries are
allowed+ Competitor orders are the orders which
compete with the initiator8s order i+e+ if the
initiator8s order is a %uy order2 then all the %uy
orders for that auction other than the initiator8s
order are competitor orders+ And if the initiator
order is a sell order then all the sell orders for
that auction other than the initiators order are
competitor orders+
After the competitor period ends2 the solicitor
period for that auction starts+ Solicitor period
is the period during which solicitor order
entries are allowed+ Solicitor orders are the
orders which are opposite to the initiator order
i+e+ if the initiator order is a %uy order2 then all
the sell orders for that auction are solicitor
orders and if the initiator order is a sell order2
then all the %uy orders for that auction are
solicitor orders+
7/
After the solicitor period2 order
matching takes place+ The system calculates
trading price for the auction and all possi%le
trades for the auction are generated at the
calculated trading price+ After this the auction
is said to %e complete+ Competitor period and
solicitor period for any auction are set %y the
E#change+
Entering A!"tion Orer,
Auction order entry allows the user to enter orders
into auctions that are currently running+ To view
the information a%out currently running auctions
invoke LAuction In3uiry8 screen+ *urther one can
view oneNs own outstanding orders for any auction
%y invoking L&utstanding &rder In3uiry8 for auction
market+ All auction orders are valid for the trading
day only+ The user can do auction order entry %y
entering LAC8 in the %ook type of the order entry
screen+ Sym%ol and Series that is currently
selected in any of the market information windows
'i+e+ ,4) provides the defaults in the auction
order entry screen+ If Auction && is up for an
auction that is either in a competitor or solicitor
period2 then the auction num%er has to %e
entered+ All fields in the auction order entry screen
e#cept auction num%er and settlement days are
same as normal market order entry screen+ The
screen also displays competitor period and
solicitor period+ The defaults that are provided on
the auction in3uiry screen are sym%ol2 series2
auction num%er2 settlement days and 3uantity
'availa%le for auction)+ The user can edit the
default values if re3uired+ The fields in the auction
order entry screen that has to %e entered are
P!&ACI selection2 account num%er 'not
mandatory)2 participant and remarks+
Solicitor period for an auction starts as
soon as the auction starts+ The duration of the
solicitor period is set %y the E#change+ The
system accepts the solicitor orders in any
currently running auction only if the solicitor
period for that auction is in progress+ Presently
the trading mem%ers cannot initiate auctions in
any security+ They can only participate as
solicitors in auctions initiated %y the E#change+
In E#change initiated auctions2 the competitor
period is set to -ero and therefore only solicitor
period is availa%le+
Entering Solicitor Order: To enter a solicitor order
invoke auction order entry screen and enter the
auction num%er or sym%ol series in ACC No+
'auction num%er) field+ The ACC No+ and sym%ol
series com%ination is validated and if an error is
encountered then an appropriate error message is
displayed in the message window and the focus is
set on the ACC No+ 4hen the order details are found
to %e correct2 the system assigns a uni3ue order
num%er to the order and sends an order confirmation
message to the trader workstation+ If the solicitor
period for that
77
auction is over2 the order is not accepted+
Auction num%er for each security is displayed
in the Auction In3uiry screen+
Validation of Auction Orders: *ollowing
validation checks are performed2 in addition to
the routine order entry validation checks2 to
verify initiator orders+
If the auction market is not open for trading2 the
user is not allowed to enter an auction order+
If a trading mem%er or a participant is
suspended2 then no auctions can %e entered
for the trading mem%er or for the participant+
If the security is not allowed to trade in the
auction market or if the security is suspended2
the orders for that security are not allowed+
If the 3uantity entered e#ceeds 4arning
Kuantity Percentage2 the system asks the
user for confirmation of the order+
Any order with a price outside the .ay
,inA,a# range is not allowed+
Follo.ing 3aliation "+e"/, are $er0or-e
to 3eri0* t+e "o-$etitor an t+e ,oli"itor
orer,# -
If a competitor order is entered2 then a
check is made if the auction in which order
entry is desired is in the competitor period+
If a solicitor order is entered2 then a check is
made if the auction in which order entry is
desired is either in competitor period or
solicitor period+
Auction order entry in auctions which are yet
in a pending state or which are cancelled is
prohi%ited+
A!"tion Orer Moi0i"ation
The user is not allowed to modify any auction
orders+
A!"tion Orer Can"ellation
The user can cancel any solicitor order placed %y
him in any auction provided the solicitor period for
that auction is not over+ The order cancellation
procedure is similar to that of normal market+ The
user can also use 3uick order cancellation key to
cancel his outstanding auction orders+
A!"tion Orer Mat"+ing
4hen the solicitor period for an auction is over2
auction order matching starts for that auction+
.uring this process2 the system calculates the
trading price for the auction %ased on the initiator
7=
order and the orders entered during the
competitor and the solicitor period+ At present for
E#change initiated auctions2 the matching takes
place at the respective solicitor order prices+
Rolling Settle-ent
In a !olling Settlement2 all trades outstanding
at end of the day have to %e settled2 which
means that the %uyer has to make payments
for securities purchased and seller has to
deliver the securities sold+ In India2 we have
adopted the TT= ,ettle-ent "*"le2 which
means that a transaction entered into on .ay
: has to %e settled on the .ay : E $ working
days2 when funds pay in or securities pay out
takes place+
5No. .e +a3e TT7 ,ettle-ent "*"le6
Internationally2 most developed countries
follow rolling settlement system+ *or instance2
CSA and C@ follow a TE> system+
In a weekly settlement cycle2 'currently
operational in India)2 all transactions done
during the week 'which is defined as ,onday
to *riday for the Stock E#change2 ,um%ai
'"SE) and 4ednesday to Tuesday for the
National Stock E#change 'NSE)) can %e
s3uared off on the last day of the cycle+ This
means that a trader has a longer time frame
to speculate+ &nly those transactions which
are outstanding at the end of the last trading
day are re3uired to %e settled %y payments or
deliveries+
A3antage,
As mentioned earlier2 this is the system
practiced in developed countries+ Pay outs are
3uicker than in weekly settlements2 and
investors will %enefit from increased li3uidity+
The other %enefit of the modified system is that
it keeps cash and forward markets separate+ In
the current system2 the trader has five days to
s3uare off his transaction which leads to a high
level of speculation as people even without
funds tend to MplayM the market+ .uring volatile
markets2 especially in a %earish market2 this
often leads to a payment pro%lem which has
dogged the Indian stock e#changes for a long
time+ It provides for a higher degree of safety2
and once mechanisms such as futures and
stock1lending %ecome popular2 it would result in
3uality speculation and genuine investor
interest+
7;
Rolling Settle-ent .ill /ee$ Ca,+ an
F!t!re,J S$e"!lati3e -ar/et, ,e$arate
Currently2 we have M%adlaM2 which is nothing %ut
a carry forward mechanism+ A trader takes a
long position in a stock2 and at settlement end2
he carries forward his open position %y paying
%adla+ This effectively means that cash and
forward markets are over lapping+ In the !olling
Settlement2 a trader has only time within the day
to speculate+ At end of each day2 either he has
to deliver securities or funds+ All forward
positions will %e now limited to Inde# *utures
and individual &ptions on stocks2 thus
separating cash and forward markets+
Mo,t %ro/er, an -eia re$ort, ,a* t+at
3ol!-e, .ill r*2 $o,t intro!"tion o0
Rolling Settle-ent.
5oing %y past track record of what happened
to shares in rolling settlement2 there will %e a
temporary dip in volumes+ Time frame for
speculation will get reduced from $ days to $
hours2 which will also impact volumes+ In the
long term2 the superior trading mechanism will
instill investor confidence and volumes will
rise+
In the past2 given the fact that trades used to happen
in physical format 'paper shares)2 settlements was a
tedious process+ Post demateriali-ation and
introduction of depositories2 rolling settlements has
%ecome feasi%le+ *unds transfer still takes time+ The
other reason attri%uted %y media is the presence of
the M%roker lo%%yM which used to o%0ect to this move
citing reasons that trading volumes will diminish
significantly post rolling settlements2 impacting their
%usiness+
The Securities & E#change "oard of India
'SE"I) had decided to gradually introduce
rolling settlements on Indian stock e#changes+
This is a forward step which makes Indian
markets compara%le to developed markets like
CSA and Europe+ This will give a %oost to
investor confidence and increase foreign
inflows+ At the same time2 SE"I is planning to
introduce futures and options2 which are
instruments of choice in developed countries+
*rom Duly (2 (<<:2 5roup A and Inde# heavy
weight stocks will %e put in compulsory rolling
mode and hence the media hype+ "ut we can
trade in odd lot shares in rolling+
*utures and &ptions will replace %adla+ SE"I had
earlier allowed carry forward positions taken prior
to ,ay :?2 (<<: to %e Mcarried forwardM till
Septem%er >2 %y which time they had to %e
=<
s3uared off+ In a later note2 it said2 all carry
forward outstanding positions from Duly (
shall %e allowed only with the approved
deferral products in the rolling settlement and
not through the weekly %adla product+
5iven the confusion and uncertainty2 we
would advice retail investors to s3uare all
outstanding carry forward positions+
A%o!t ,$e"!lator,
Since settlement is now daily2 there will %e intra
day speculation+ Note only ?:: scrips are getting
into rolling from Duly (2 hence action will shift to
3uality ": and "( stocks which are not under the
rolling purview+ 4e %elieve SE"I to act 3uickly
and %ring all those stocks also under rolling mode+
A %etter degree of speculative interest will re1
emerge in the rolling settlement stocks+ Note that
when %adla was %anned all market players and
o%servers felt that volumes will dry and %usiness
will evaporate+ Nothing of that sort happened and
markets %ounced %ack with a vengeance+ There
will %e a period of ad0ustment and volumes might
see a short term dip+
Ri,ing 3olatilit*
*or small or mid cap stocks2 the rolling
settlement could lead to sharper price swings+
Intra day speculation with lower volumes may
lead to every significant %uy or sell order
having a much greater impact+
Conse3uently2 will retail investors get
marginali-ed leading the field open to
institutional players onlyS
In the short term2 this is a distinct likelihood+
&ne should keep in mind that even in normal
five day settlement cycle2 %ig ticket orders
impacted prices+ This is a small price to pay
as markets evolve+ Intra day speculation
'made famous %y day traders on Nasda3) will
grow leading to more li3uidity+
OTCEI +a ,i-ilar ,ettle-ent "*"le, an
,tringent "onition,2 %!t 0aile to get an*
in3e,tor ,!$$ort. 8ill t+e OTCEI ,tor*
re$eatS
=:
The fundamental difference %etween &TCEI
of the early ;<s and the rolling settlement of
the ((
nd
century is maturity+ Indian markets
have matured and concepts like rolling
settlement2 paperless trading and stringent
market conditions are accepted now+ Stocks
on the &TCEI were companies in an early
stage2 most of which failed to deliver results
and enthuse investors+ Even when screen
%ased trading was started %y NSE2 most
market operators predicted that it will die and
early death citing &TCEI e#ample+ &n
contrary2 NSE flourished and thrived and
completely revolutioni-ed trading in India+
&TCEI faced competition from NSE and "SE
with %etter options+ And given profile of listed
stocks2 it could not grow+ Investor and
speculative investor will %e there2 given most
ma0or stocks are in rolling segment now+
Doe, t+i, -ean t+at $ri"e rigging an
"ir"!lar traing .ill en2 -a/ing -ar/et,
"leaner 0or gen!ine in3e,tor,S
No market and trading system is free from evils
of price rigging and circular trading+ To keep
these anti investor activities in check is the main
task of the regulator+ !olling settlements will go
a long way in making the market safer for
investors+ This would attract more interest in the
market2 as investor confidence in the price
discovery process will %e higher+
T+e S?P CNR Ni0t*
4hat makes a good stock market inde# for
use in an inde# futures and inde# options
marketS Several issues play a role in terms of
the choice of inde#+ 4e will discuss how the
S&P CNFNifty addresses some of these
issues+
Di3er,i0i"ation As mentioned earlier2 a stock
market inde# should %e wellTdiversifi ed2 thus
ensuring thathedgers or speculators are not
vulnera%le to individualTcompany or industry risk+
Mar/et ine1
=(
The S&P CNF Nifty is an inde# %ased upon
solid economic research+ It was designed not
only as a%arometer of market movement %ut
also to %e a foundation of the new world of
financial products %ased on the inde# like
inde# futures2 inde# options and inde# funds+
A trillion calculations were e#pended to evolve
the rules inside the S&P CNF Nifty inde#+ The
results of this work are remarka%ly simple6
'a) the correct si-e to use is $<2 '%) stocks
considered for the S&P CNF Nifty must %e li3uid
%y the8 impact cost8 criterion2 'c) the largest $<
stocks that meet the criterion go into the inde#+
S&P CNF Nifty is a contrast to the adhoc
methods that have gone into inde# construction
in the preceding years2 where inde#es were
made out of intuition and lacked a scientific
%asis+ The research that led up to S&P CNF
Nifty is well1respected internationally as a
pioneering effort in %etter understanding how to
make a stock market inde#+
The Nifty is uni3uely e3uipped as an inde# for
the inde# derivatives market owing to its 'a) low
market impact cost and '%) high hedging
effectiveness+ The good diversifi cation of Nifty
generates low initial margin re3uirement+ *inally2
Nifty is calculated using NSE prices2 the most
li3uid e#change in India2 thus making it easier to
do ar%itrage for inde# derivatives+
Li4!iit* o0 t+e ine1 The inde# should %e
easy to trade on the cash market+ This is
partly related to the choice of stocks in the
inde#+ 9igh li3uidity of inde# components
implies that the information in the inde# is less
noisy+
O$erational i,,!e, The inde# should %e
professionally maintained2 with a steady
evolution of securities in the inde# to keep pace
with changes in the economy+ The calculations
involved in the inde# should %e accurate and
relia%le+ 4hen a stock trades at multiple
venues2 inde# computation should %e done
using prices from the most li3uid market+
I-$a"t "o,t
,arket impact cost is a measure of the li3uidity of
the market+ It reflects the costs faced when
actually trading an inde#+ *or a stock to 3ualify for
possi%le inclusion into the Nifty2 it has to have
market impact cost of %elow :+$B when doing
Nifty trades of half a crore rupees+ The market
impact cost on a trade of !s+> million of the full
Nifty works out to %e a%out <+(B+ This
=>
means that if Nifty is at :<<<2 a %uy order
goes through at :<<(2 i+e+:<<<E':<<<Q<+<<()
and a sell order gets ;;=2 i+e+ :<<<1
':<<<Q<+<<()+
Feging e00e"ti3ene,,
9edging effectiveness is a measure of the
e#tent to which an inde# correlates with a
portfolio2 whatever the portfolio may %e+ Nifty
correlates %etter with all kinds of portfolios in
India as compared to other inde#es+ This
holds good for all kinds of portfolios2 not 0ust
those that contain inde# stocks+ Nifty is
owned2 computed andmaintained %y India
Inde# Services &Products imited 'IIS)2 a
company setup %y NSE and C!ISI with
technical assistance from Standard & Poor8s+
=?
Unit @III
Instruments & players of capital market
New issue market instruments
Stock market instruments
Players in capital market
=$
Pro!"t, a3aila%le in t+e Se"onar*
an Pri-ar* Mar/et
New issue market
instruments
The term initial pu%lic offering 'IP&) slipped
into everyday speech during the tech %ull
market of the late :;;<s+ "ack then2 it
seemed you couldnNt go a day without hearing
a%out a do-en new dotcom millionaires in
Silicon Jalley who were cashing in on their
latest IP&+ The phenomenon spawned the
term siliconaire2 which descri%ed the dotcom
entrepreneurs in their early (<s and ><s who
suddenly found themselves living large on the
proceeds from their internet companiesN IP&s+
Selling Sto"/
An initial pu%lic offering2 or IP&2 is the first
sale of stock %y a company to the pu%lic+ A
company can raise money %y issuing either
de%t or e3uity+ If the company has never
issued e3uity to the pu%lic2 itNs known as an
IP&+
Companies fall into two %road categories6
private and pu%lic+
A privately held company has fewer
shareholders and its owners donNt have to
disclose much information a%out the company+
Any%ody can go out and incorporate a
company6 0ust put in some money2 file the right
legal documents and follow the reporting rules
of your 0urisdiction+ ,ost small %usinesses are
privately held+ "ut large companies can %e
private too+ .id you know that I@EA2 .ominoNs
Pi--a and 9allmark Cards are all privately heldS
It usually isnNt possi%le to %uy shares in a private
company+ Gou can approach the owners a%out
investing2 %ut theyNre not o%ligated to sell you
anything+ Pu%lic companies2 on the other hand2 have
sold at least a portion of themselves to the pu%lic
and trade on a stock e#change+ This is why doing
an IP& is also referred to as Mgoing pu%lic+M Pu%lic
companies have thousands of shareholders and are
su%0ect to strict rules and regulations+ They must
have a %oard of directors and they must report
financial information every 3uarter+ In the Cnited
States2 pu%lic companies report to the Securities
and E#change Commission 'SEC)+ In other
countries2 pu%lic companies are overseen %y
governing %odies similar to the SEC+ *rom an
investorNs standpoint2 the most e#citing thing a%out a
pu%lic company is that the stock is traded in the
open market2 like any
=/
other commodity+ If you have the cash2 you
can invest+ The CE& could hate your guts2 %ut
thereNs nothing he or she could do to stop you
from %uying stock+
5oing pu%lic raises cash2 and usually a lot of
it+ "eing pu%licly traded also opens many
financial doors6
"ecause of the increased scrutiny2
pu%lic companies can usually get
%etter rates when they issue de%t+
As long as there is market demand2 a
pu%lic company can always issue more
stock+ Thus2 mergers and ac3uisitions
are easier to do %ecause stock can %e
issued as part of the deal+
Trading in the open markets means
li3uidity+ This makes it possi%le to
implement things like employee stock
ownership plans2 which help to attract
top talent+
"eing on a ma0or stock e#change carries a
considera%le amount of prestige+ In the past2
only private companies with strong
fundamentals could 3ualify for an IP& and it
wasnNt easy to get listed+
The internet %oom changed all this+ *irms no
longer needed strong financials and a solid
history to go pu%lic+ Instead2 IP&s were done %y
smaller startups seeking to e#pand their
%usinesses+ ThereNs nothing wrong with wanting
to e#pand2 %ut most of these firms had never
made a profit and didnNt plan on %eing profita%le
any time soon+ *ounded on venture capital
funding2 they spent like Te#ans trying to
generate enough e#citement to make it to the
market %efore %urning through all their cash+ In
cases like this2 companies might %e suspected
of doing an IP& 0ust to make the founders rich+
This is known as an e#it strategy2 implying that
thereNs no desire to stick around and create
value for shareholders+ The IP& then %ecomes
the end of the road rather than the %eginning+
T+e Uner.riting Pro"e,,
5etting a piece of a hot IP& is very difficult2 if not
impossi%le+ To understand why2 we need to
know how an IP& is done2 a process known
as underwriting+
=7
4hen a company wants to go pu%lic2 the first thing it
does is hire an investment %ank+ A company could
theoretically sell its shares on its own2 %ut
realistically2 an investment %ank is re3uired 1 itNs 0ust
the way 4all Street works+ Cnderwriting is the
process of raising money %y either de%t or e3uity 'in
this case we are referring to e3uity)+ Gou can think of
underwriters as middlemen %etween companies and
the investing pu%lic+ The %iggest underwriters are
5oldman Sachs2 ,errill ynch2 Credit Suisse *irst
"oston2 ehman "rothers and ,organ Stanley+
The company and the investment %ank will first
meet to negotiate the deal+ Items usually
discussed include the amount of money a
company will raise2 the type of securities to %e
issued and all the details in the underwriting
agreement+ The deal can %e structured in a
variety of ways+ *or e#ample2 in a firm
commitment2 the underwriter guarantees that a
certain amount will %e raised %y %uying the
entire offer and then reselling to the pu%lic+ In a
%est efforts agreement2 however2 the
underwriter sells securities for the company %ut
doesnNt guarantee the amount raised+ Also2
investment %anks are hesitant to shoulder all
the risk of an offering+ Instead2 they form a
syndicate of underwriters+ &ne underwriter
leads the syndicate and the others sell a part of
the issue+
&nce all sides agree to a deal2 the investment
%ank puts together a registration statement to
%e filed with the SEC+ This document contains
information a%out the offering as well as
company info such as financial statements2
management %ackground2 any legal
pro%lems2 where the money is to %e used and
insider holdings+ The SEC then re3uires a
cooling off period2 in which they investigate
and make sure all material information has
%een disclosed+ &nce the SEC approves the
offering2 a date 'the effective date) is set when
the stock will %e offered to the pu%lic+
.uring the cooling off period the underwriter
puts together what is known as the red
herring+ This is an initial prospectus containing
all the information a%out the company e#cept
for the offer price and the effective date2
which arenNt known at that time+ 4ith the red
herring in hand2 the underwriter and company
attempt to hype and %uild up interest for the
issue+ They go on a road show 1 also known
as the Mdog and pony showM 1 where the %ig
institutional investors are courted+
As the effective date approaches2 the underwriter
and company sit down and decide on the price+ This
isnNt an easy decision6 it depends on the company2
the success of the road show and2 most
==
importantly2 current market conditions+ &f
course2 itNs in %oth partiesN interest to get as
much as possi%le+
*inally2 the securities are sold on the stock market
and the money is collected from investors+
An initial pu%lic offering 'IP&) is the first
sale of stock %y a company to the pu%lic+
"roadly speaking2 companies are
either private or pu%lic+ 5oing pu%lic
means a company is switching from
private ownership to pu%lic ownership+
5oing pu%lic raises cash and provides
many %enefits for a company+
The dotcom %oom lowered the %ar for
companies to do an IP&+ ,any
startups went pu%lic without any profits
and little more than a %usiness plan+
5etting in on a hot IP& is very difficult2
if not impossi%le+
The process of underwriting involves
raising money from investors %y
issuing new securities+
Companies hire investment %anks to
underwrite an IP&+
The road to an IP& consists mainly of
putting
together
the Securities and E#change Commission
'SEC) and
selling
clients+
The only way for you to get shares in
an IP& is to have a fre3uently traded
account with one of the investment
%anks in the underwriting syndicate+
An IP& company is difficult to analy-e
%ecause there isnNt a lot of historical
info+
ock1up periods prevent insiders from
selling their shares for a certain period
of time+ The end of the lockup period
can put strong downward pressure on
a stock+
*lipping may get you %lacklisted from
future offerings+
!oad shows and red herrings are
marketing events meant to get as
much attention as possi%le+ .onNt get
sucked in %y the hype+
A tracking stock is created when a
company spins off one of its divisions
into a separate entity through an IP&+
.onNt consider tracking stocks to %e the
same as a normal IP&2 as you are
essentially a second1class shareholder+
=;
Follo.ing are t+e -ain 0inan"ial
$ro!"t,Jin,tr!-ent, ealt in t+e ,e"onar*
-ar/et#
E3uity6 The ownership interest in a company
of holders of its common and preferred stock+
The various kinds of e3uity shares are as
follows T
E3uity Shares6
An e3uity share2 commonly referred to as
ordinary share also represents the form of
fractional ownership in which a shareholder2
as a fractional owner2 undertakes the
ma#imum entrepreneurial risk associated with
a %usiness venture+ The holders of such
shares are mem%ers of the company and
have voting rights+ A company may issue such
shares with differential rights as to voting2
payment of dividend2 etc+
!ights IssueA !ights Shares6 The issue
of new securities to e#isting
shareholders at a ratio to those already
held+
"onus Shares6 Shares issued %y the
companies to their shareholders free of
cost %y capitali-ation of accumulated
reserves from the profits earned in the
earlier years+
Preferred StockA Preference shares6
&wners of these kind of shares are
entitled to a fi#ed dividend or dividend
calculated at a fi#ed rate to %e paid
regularly %efore dividend can %e paid in
respect of e3uity share+ They also en0oy
priority over the e3uity shareholders in
payment of surplus+ "ut in the event of
li3uidation2 their claims rank %elow the
claims of the company8s creditors2
%ondholders A de%enture holders+
Cumulative Preference Shares+ A type
of preference shares on which dividend
accumulates if remains unpaid+ All
arrears of preference dividend have to
%e paid out %efore paying dividend on
e3uity shares+
Cumulative Converti%le Preference
Shares6 A type of preference shares
where the dividend paya%le on the
same accumulates2 if not paid+ After a
specified date2 these shares will %e
converted into e3uity capital of the
company+
;<
Participating Preference Share6 The
right of certain preference shareholders
to participate in profits after a specified
fi#ed dividend contracted for is paid+
Participation right is linked with the
3uantum of dividend paid on the e3uity
shares over and a%ove a particular
specified level+
Security !eceipts6 Security receipt
means a receipt or other security2 issued %y a
securitisation company or reconstruction
company to any 3ualified institutional %uyer
pursuant to a scheme2 evidencing the
purchase or ac3uisition %y the holder thereof2
of an undivided right2 title or interest in the
financial asset involved in securitisation+
5overnment securities '51Secs)6 These
are sovereign 'credit risk1free) coupon %earing
instruments which are issued %y the !eserve
"ank of India on %ehalf of 5overnment of India2 in
lieu of the Central 5overnmentNs market %orrowing
programme+ These securities have a fi#ed coupon
that is paid on specific dates on half1yearly %asis+
These securities are availa%le in wide range of
maturity dates2 from short dated 'less than one
year) to long dated 'upto twenty years)+
.e%entures6 "onds issued %y a
company %earing a fi#ed rate of interest
usually paya%le half yearly on specific dates
and principal amount repaya%le on particular
date on redemption of the de%entures+
.e%entures are normally securedA charged
against the asset of the company in favour of
de%enture holder+
"ond6 A negotia%le certificate evidencing
inde%tedness+ It is normally unsecured+ A de%t
security is generally issued %y a company2
municipality or government agency+ A %ond
investor lends money to the issuer and in
e#change2 the issuer promises to repay the loan
amount on a specified maturity date+ The issuer
usually pays the %ond holder periodic interest
payments over the life of the loan+ The various
types of "onds are as follows1
Uero Coupon "ond6 "ond issued at a
discount and repaid at a face value+ No periodic
interest is paid+ The difference %etween the issue
price and redemption price represents the return to
the holder+ The %uyer of these %onds receives only
one payment2 at the maturity of the %ond+
Converti%le "ond6 A %ond giving the
investor the option to convert the %ond into
e3uity at a fi#ed conversion price+

;:
Commercial Paper6 A short term promise
to repay a fi#ed amount that is placed on the
market either directly or through a speciali-ed
intermediary+ It is usually issued %y companies
with a high credit standing in the form of a
promissory note redeema%le at par to the holder
on maturity and therefore2 doesn8t re3uire any
guarantee+ Commercial paper is a money
market instrument issued normally for a tenure
of ;< days+
Treasury "ills6 Short1term 'up to ;:
days) %earer discount security issued %y the
5overnment as a means of financing its cash
re3uirements+
DEBT INSTRUMENTS
To meet the long term and short term needs
of finance2 firms issue various kinds of
Securities to the pu%lic+ Securities represent
claims on a stream of income and Aor
particular assets+.e%entures are de%t
securities2 and there is a wide range of them+
,arket loans are raised %y the government
and pu%lic sector institutions through de%t
securities+ E3uity shares issued %y
cooperates are ownership securities+
Preference shares are a hy%rid security+ It is a
mi#ture of an ownership security and de%t
security+
DEBENTURES
A de%enture is a document which either
creates a de%t or acknowledges it+ .e%enture
issued %y a company is in the form of a
certificate acknowledging inde%tedness+ The
de%entures are issued under the CompanyNs
Common Seal+ .e%entures are one of a
series issued to a num%er of lenders+ The
date of repayment is specified in the
de%entures+ .e%entures are issued against a
charge on the assets of the Company+
.e%entures holders have no right to vote at
the meetings of the companies+
KINDS OF DEBENTURES
5a6Bearer De%ent!re,#
They are registered and are paya%le to the
%earer+ They are negotia%le instruments and
are transfera%le %y delivery+
;(
5%6 Regi,tere De%ent!re,#
They are paya%le to the registered holder
whose name appears %oth on the de%entures
and in the !egister of .e%enture 9olders
maintained %y the company+ !egistered
.e%entures can %e transferred %ut have to %e
registered again+ !egistered .e%entures are
not negotia%le instruments+ A registered
de%enture contains a commitment to pay the
principal sum and interest+ It also has a
description of the charge and a statement that
it is Issued su%0ect to the conditions endorsed
therein+
5"6 Se"!re De%ent!re,#
.e%entures which create a change on the
assets of the company which may %e fi#ed or
floating are known as secured .e%entures+
The term M%ondsM and Mde%enturesM'secured)
are used interchangea%ly in common
parlance+ In CSA2 "&N. is a long term
contract which is secured2 whereas a
de%entures is an unsecured one+
56 Un,e"!re or Na/e De%ent!re,#
.e%entures which are issued without any charge
on assets are insecured or naked de%entures+ The
holders are like unsecured creditors and may see
the company for the recovery of de%t+
5e6 Reee-a%le De%ent!re,#
Normally de%entures are issued on the
condition that they shall %e redeemed after a
certain period+ They can however2 %e reissued
after redemption+
506 Per$et!al De%ent!re,#
4hen de%entures are irredeema%le they are
called perpetual+ Perpetual .e%entures
cannot %e issued in India at present+
5g6 Con3erti%le De%ent!re,#
;>
If an option is given to convert de%entures into e3uity
shares at the stated rate of e#change after a
specified period2 they are called converti%le
de%entures+ Converti%le .e%entures have %ecome
very popular in India+ &n conversion the holders
cease to %e lenders and %ecome owners+
.e%entures are usually issued in a series with a
pari passu 'at the same rate) clause which
entitles them to %e discharged ratea%ly though
issued at different times+ New series of
de%entures cannot rank pari passu with the old
series unless the old series provides so+
New de%t instruments issued %y pu%lic limited
companies are participating de%entures2
converti%le de%entures with options2 third
party converti%le de%entures converti%le
de%entures redeema%le at premiums2 de%t
e3uity swaps and -ero coupon converti%le
notes+ These are discussed %elow6
5+6 Parti"i$ating De%ent!re,#
They are unsecured corporate de%t securities
which participate in the profits of the company+
They might find investors if issued %y e#isting
dividend paying companies+
5i6 Con3erti%le De%ent!re, .it+ o$tion,#
They are a derivative of converti%le
de%entures with an em%edded option2
providing fle#i%ility to the issuer as well as the
investor to e#it from the terms of the issue+
The coupon rate is specified at the time of
issue+
596 T+ir Part* Con3erti%le De%ent!re,#
They are de%t with a warrant allowing the
investor to su%scri%e to the e3uity of third firm
at a preferential price visa vis the market
price+ Interest rate on third party converti%le
de%entures is lower than pure de%t on
account of the conversion option+
5/6 Con3erti%le-De%ent!re, Reee-a%le at
a Pre-i!-#
;?
Converti%le .e%entures are issued at face
value with Na put option entitling investors to
sell the %ond to the issuer at a premium+ They
are %asically similar to converti%le de%entures
%ut em%ody less risk+
5I6 De%t-E4!it* S.a$,#
.e%t1E3uity Swaps are an offer from an issuer of
de%t to swap it for e3uity+ The instrument is 3uite
risky for the investor %ecause the anticipated
capital appreciation may not materialise+
5-6 Dee$ i,"o!nt Bon,#
They are designed to meet the long term
funds re3uirements of the issuer and
investors who are not looking for immediate
return and can %e sold with a long maturity of
($1>< years at a deep discount on the face
value of de%entures+ I."I deep discount
%onds for !s : lakh repaya%le after ($ years
were sold at a discount price of !s+ (27<<+
5n6 Uero-Co!$on Con3erti%le Note#
A -ero1coupon converti%le note can %e
converted into shares+ If choice is e#ercised
investors forego all accured and unpaid
interest+ The -ero1coupon converti%le notes
are 3uite sensitive to changes in interest
rates+
5o6 Se"!re Pre-i!- Note, 5SPN6 .it+
Deta"+a%le 8arrant,#
SPN which is issued along with a detacha%le
warrant2 is redeema%le after a notice period2
say four to seven years+ The warrants
attached to it ensures the holder the right to
apply and get allotted e3uity sharesI provided
the SPN is fully paid+
There is a lock1in period for SPN during which no
interest will %e paid for an invested amount+ The
SPN holder has an option to sell %ack the SPN to
the company at par value after the lock in period+
If the holder e#ercises this option2 no interestA
premium will %e paid on redemption+ In case the
SPN holder holds its further2 the holder wili %e
repaid the principal amount along with the
additional amount of interestA premium on
redemption in instalments as decided %y the
;$
company+ The conversion of detacha%le
warrants into e3uity shares will have to %e
done within the time limit notified %y the
company+
5$6 Floating Rate Bon,#
The rate on the floating !ate "ond is linked to a
%enchmark interest rate like the prime rate in
CSA or I"&! in eurocurrency market+ The
State "ank of IndiaNs floating rate %ond was
linked to ma#imum interest on term deposits
which was :< percent+ *loating rate is 3uoted in
terms of a margin a%ove or %elow the %ench
mark rate+ The1floor rate in the State "ank of
India case was :( per cent+ Interest rates linked
to the %ench mark ensure that neither the
%orrower nor the lender suffer from the changes
in interest rates+ 4hen rates are fi#ed2 they are
likely to %e ine3uita%le to the %orrower when
interest rates fall su%se3uently2 and the same
%onds are likely to %e ine3uita%le to the lender
when interest rates rise su%se3uently+
8ARRANTS
A warrant is a security issued %y a company granting
the holder of the warrant the right to purchase a
specified num%er of2 shares at a specified price any
time prior to an e#pira%le date+ 4arrants may %e
issued with de%entures or e3uity shares+ The
specific rights are set out in the warrant+ The main
features1of a warrant are num%er of shares entitled2
e#piry date and state price e#ercise price+ E#piry
date of warrants2 generally in CSA2 is $ to :< years
from the original issue date+ The e#ercise price is :<
to >< percent a%ove the prevailing market price+ The
4arrants have a secondary market+ The minimum
value of a warrant represents the e#change value
%etween the current price of the share and the
shares purchased at the e#ercise price+ 4arrants
have no flotation costs and when they are e#ercised
the firm receives additional funds at a price lower
than the current market2 yet a%out those prevailing at
issue time+ New or growing firms and venture
capitalists issue warrants+ They are also issued in
mergers and ac3uisitions+ 4arrants are called
sweeteners and have %een issued in the recent past
%y several companies in India+ .e%entures issued
with warrants2 like converti%le de%entures2 carry
lower coupon rates+
;/
Non-Con3erti%le De%ent!re, 5NCDS6
8it+ Deta"+a%le E4!it* 8arrant,
The holder of NC.s with detacha%le e3uity
warrants is given an option to %uy a specific
num%er of shares from the company at a
predetermined price within a definite time1
frame+
The warrants attached to NC.s will %e issued
su%0ect to full payment of NC. is a value+
There is a specific lock1in period after which
there detacha%le option to apply for e3uities+
If the option to apply for e3uities is not
e#ercised2 the unapplied portion of shares
would %e disposed off %y the company at its
li%erty+
Uero-Intere,t F!ll* Con3erti%le De%ent!re,
5FCDS6
The investors in -ero1interest fully converti%le
de%entures will not %e paid any interest+
9owever2 there is a notified period after which
fully paid *C.s will %e automatically and
compulsorily converted into shares+
There is a lock1in period upto which no
interest will %e paid+ Conversion is allowed
only for fully paid *C.s+ In the event of the
company going for rights issue prior to the
allotment of e3uity resulting from the
conversion of e3uity shares into *C.s2 *C.
holders shall %e offered securities as may %e
determined %y the company+
Se"!re Uero-Intere,t Partl* Con3erti%le
De%ent!re, 5PCDS6 8it+ Deta"+a%le An
Se$aratel* Traa%le 8arrant,#
This instrument has two partsI A and "+ Part A
is converti%le into e3uity shares at a fi#ed
amount on the date of allotment+ Part " is
non1converti%le2 to %e redeemed at par at the
end of a specific period from the date of
allotment+ Part " will carry a detacha%le and
separately trada%le warrant which will provide
an option to the warrant holder to receive
e3uity shares for every warrant held at a price
as worked out %y the company+
F!ll* Con3erti%le De%ent!re, 5FCDS6 8it+
Intere,t 5O$tional6
This instrurnent does not yield interest in the initial
period of say2 / months+ After this period option is
given to the holder of *C.s to apply for e3uity at a
MpremiumM for which no additional
;7
amourit needs to %e paid+ The option has to
%e indicated in the application form itself+
9owever2 interest on *C.s is paya%le at a
determined rate from the date of first
conversion to the second A final conversion
and in lieu of it2 e3uity shares are issued+
OTFER DEBT SECURITIES IN COGUE
ABROAD
In"o-e Bon,#
9ere interest is paid only when cash flows are
ade3uate+ Income "onds are like cumulative
preference shares on which the fi#ed dividend is
not paid if there is no profit in a year2 %ut is carried
forward and paid in the following year+ &n Income
"onds2 there is no default if interest is not paid+
Cnlike dividend on cumulative preference shares2
interest on income %ond is ta# deducti%le+ Income
"onds are issued a%road %y companies in
reorganisation or %y firms whose financial
situation does not make it feasi%le to issue %onds
with a fi#ed interest payment
A,,et-Ba"/e Se"!ritie,#
Assets1%acked securities are a category of
marketa%le securities that are collateralised %y
financial assets such as instalment loan contracts+
Asset1%acked financing involves a process called
securitisation+ Securitisation is a disintermediation
process in which credit from financial
intermediaries is replaced %y marketa%le
de%entures that can %e issued at lower cost+
*inancial assets are pooled so that de%entures
can %e sold to third parties to finance the pool+
!epos are the oldest asset1%acked security in our
country+ In CSA2 securitisation has %een
undertaken for insured mortgages '5innie ,ae2
:;7<)2 mortgage %acked loans2 student loans
'Sallie ,ae :;7>)2 trade credit receiva%le %acked
%onds ':;=()2 e3uipment leasing %acked %onds
':;=?)2 certificates of automo%ile receiva%le
securities ':;=$) and small %usiness
administration loans+ ,ore recently2 credit card
receiva%les have %een securiti-ed+ The decade of
the eighties witnessed large e#pansion of asset
%acked security financing+
O!n/ Bon,#
Dunk "ond is a high risk2 high yield %ond to
finance either a leveraged %uyout '"&)2 a merger
of a company in financial distress+ Coupon rates
range from :/ to ($ per cent+ &ld line
;=
esta%lished companies which were inefficient and+
financed conservatively were o%0ects of take over
and restructuring+ To finance such take1over2 high
yield %onds were sold+ Attractive deals were put
together esta%lishing their feasi%ility in terms of
ade3uacy of cash flows to meet interest
payments+ ,ichael ,ilken 'the DCN@ "&N.
@IN5) of .re#el "uraham am%ert was the real
developer of the market+ The 0unk %ond market
was tarnished %y the fines 'H /$< million) levied in
:;=; on the investment %anking firm .re#el
"urnham am%ert for various Securities aw
violations and thus was forced into %ankruptcy in
:;;< and the indictment of ,ilken in :;;< on
charges of fraud H /<< million fines and penalties+
;;
Unit @IC
Trading Procedure
Electronic share trading
Process of share trading
Parties involved in trading
:<<
De-ateriali:ation an Ele"troni"
Tran,0er o0 Se"!ritie,
Traditionally2 settlement system on Indian stock
e#changes gave rise to settlement risk due to
the time that elapsed %efore trades were settled
%y physical movement of certificates+ There were
two aspects6 *irst relating to settlement of trade
in stock e#changes %y delivery of shares %y the
seller and payment %y the %uyer+ The stock
e#change aggregated trades over a period of
time and carried out net settlement through the
physical delivery of securities+ The process of
physically moving the securities from the seller
to his %roker to Clearing Corporation to the
%uyer8s %roker and finally to the %uyer took time
with the risk of delay somewhere along the
chain+ The second aspect related to transfer of
shares in favour of the purchaser %y the issuer+
This system of transfer of ownership was grossly
inefficient as every transfer involved the physical
movement of paper securities to the issuer for
registration2 with the change of ownership %eing
evidenced %y an endorsement on the security
certificate+ In many cases the process of transfer
took much longer than the two months as
stipulated in the Companies Act2 and a
significant proportion of transactions wound up
as %ad delivery due to faulty compliance of
paper work+ Theft2 mutilation of certificates and
other irregularities were rampant2 and in addition
the issuer had the right to refuse the transfer of a
security+ Thus the %uyer did not get good title of
the securities after parting with good money+ All
this added to the costs and delays in settlement2
restricted li3uidity and made investor grievance
redressal time1consuming and at times
intracta%le+
To o%viate these pro%lems2 the .epositories
Act2 :;;/ was passed to provide for the
esta%lishment of depositories in securities with
the o%0ective of ensuring free transfera%ility of
securities with speed2 accuracy and security
%y
(a) making securities of pu%lic limited
companies freely transfera%le su%0ect to
certain e#ceptionsI
(b) demateriali-ing the securities in the
depository modeI and
(c) providing for maintenance of ownership
records in a %ook entry form+
:<:
In order to streamline %oth the stages of
settlement process2 the .epositories Act
envisages transfer of ownership of securities
electronically %y %ook entry without making the
securities move from person to person+ The
Act has made the securities of all pu%lic limited
companies freely transfera%le %y restricting the
company8s right of use discretion in effecting
the transfer of securities2 and dispensing with
the transfer deed and other procedural
re3uirements under the Companies Act+
A depository holds securities in demateriali-ed
form+ It maintains ownership records of securities
and effects transfer of ownership through %ook
entry+ "y fiction of law2 it is the registered owner of
the securities held with it with the limited purpose
of effecting transfer of ownership at the %ehest of
the owner+ The name of the depository appears in
the records of the issuer as registered owner of
securities+ The name of actual owner appears in
the records of the depository as %eneficial owner+
The %eneficial owner has all the rights and
lia%ilities associated with the securities+ The owner
of securities intending to avail of depository
services opens an account with a depository
through a depository participant '.P)+ The
Securities are transferred from one account to
another through %ook entry only on the instructions
of the %eneficial owner+
In order to promote demateriali-ation of
securities2 NSE 0oined hands with leading
financial institutions to esta%lish the National
Securities .epository td+ 'NS.)2 the first
depository in the country2 with the o%0ective of
enhancing the efficiency in settlement systems
as also to reduce the menace of fakeAforged and
stolen securities+ This has ushered in an era of
demateriali-ed trading and settlement+ SE"I has
made demateriali-ed settlement mandatory in an
ever1increasing num%er of securities in a phased
manner2 thus %ringing a%out an increase in the
proportion of shares delivered in demateriali-ed
form+ There is an increasing preference to settle
trades2 particularly in high value securities2 in
demat form+ Such high level of demat settlement
reassures success of rolling settlement+ C.S
was set up in *e%ruary2 :;;; to provide
depository services+ All leading stock e#changes
like the National Stock E#change2 Calcutta Stock
E#change2 .elhi Stock E#change2 The Stock
E#change2 Ahmeda%ad2 etc have esta%lished
Connectivity with C.S+
TRADING PROCEDURE
Neat S*,te-
:<(
The NEAT system supports an order driven
market2 wherein orders match on the %asis of
time and price priority+ All 3uantity fields are in
units and prices are 3uoted in Indian !upees+
The regular lot si-e and tick si-e for various
securities traded is notified %y the E#change
from time to time+
Mar/et T*$e,
The Capital ,arket system has four types of
market+
Nor-al Mar/et
Normal market consists of various %ook types
wherein orders are segregated as !egular ot
&rders2 Special Term &rders2 Negotiated
Trade &rders and Stop oss &rders
depending on their order attri%utes+
O Lot Mar/et
The odd lot market facility is used for the
imited Physical ,arket+ The main features of
the imited Physical ,arket are detailed in a
separate section ':+:?)+
RETDEBT Mar/et
The !ET.E"T market facility on the NEAT
system of capital market segment is used or
transactions in !etail .e%t ,arket session+
Trading in !etail .etail ,arket takes place in
the same manner as in e3uities 'capital
market) segment+ The main features of this
market are detailed in a separate section
':+:$) on !ET.E"T market+
A!"tion Mar/et
In the Auction market2 auctions are initiated %y
the E#change on %ehalf of trading mem%ers
for settlement related reasons+ The main
features of this market are detailed in a
separate section ':+:>) on auction+
Orer Manage-ent
&rder ,anagement consists of entering
orders2 order modification2 order cancellation
and order matching+
Entering Orer,
The trading mem%er can enter orders in the normal
market2 odd lot2 !ET.E"T and auction market+ A
user can place orders in any of the a%ove
mentioned markets %y invoking the respective
order entry screens+ After doing so2 the system
automatically picks up information from the last
invoked screen 'e+g+ ,arket 4atchA,"PA&&ASK
and Security ist)+ 4hen the user
:<>
invokes the order entry screen2 the fields that
are taken as default are Sym%ol2 Series and
"ook Type+
In "a,e o0 ot+er 0iel,2 t+e ,*,te- ta/e,
t+e 0ollo.ing e0a!lt,#
Kty 6 !egular lot
3uantity
availa%le at %est
price on counter
side Price 6
Price of %est
counter order
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4hen any order enters the trading system2 it is
an active order+ It tries to find a match on the
other side of the %ooks+ If it finds a match2 a
trade is generated+ If it does not find a match2
the order %ecomes a passive order and goes
and sits in the order %ook+
&rder "ooks
As and when valid orders are entered or received %y
the trading system2 they are first num%ered2 time
stamped and then scanned for a potential match+
This means that each order has a distinctive order
num%er and a uni3ue time stamp on it+ If a match is
not found2 then the orders are stored in the %ooks as
per the priceAtime priority+ Price priority means that if
two orders are entered into the system2 the order
having the %est price gets the higher priority+ Time
priority means if two orders having the same price is
entered2 the order that is entered first gets the higher
priority+ "est price for a sell order is the lowest price
and for a %uy order2 it is the highest price+
T+e i00erent orer %oo/, in t+e NEAT
,*,te- are a, etaile %elo.#
'a) !egular ot "ook6 An order that has no
special condition associated with it is a !egular
ot order+ 4hen a dealer places this order2 the
system looks for a corresponding !egular ot
order e#isting in that market 'Passive orders)+ If
it does not find a match at the time it enters the
system2 the order is stacked in the !egular ot
%ook as a passive order+ "y default2 the !egular
ot %ook appears in the order entry screen in the
normal market+ "uy%ack orders can %e placed
through the !egular ot '!) %ook in the Normal
,arket+ The mem%er can place a %uy%ack order
%y specifying L"CG"AC@&!.8 in the Client
Account field in the order entry screen+ Such
company %uy%ack orders will %e identified in
,"P screen %y an LQ8 'asterisk) indicator against
such orders+
:<?
(b) Special Terms "ook# &rders which have a
special term attri%ute attached to it are known
as special terms orders+ 4hen a special term
order enters the system2 it scans the orders
e#isting in the !egular ot %ook as well as
Special Terms "ook+ Currently this facility is
not availa%le in the trading system+
(c) Stop oss "ook# Stop oss orders are
released into the market when the last traded
price for that security in the normal market
reaches or surpasses the trigger price+ "efore
triggering2 the order does not participate in
matching and the order cannot get traded+
Cntriggered stop loss orders are stacked in the
stop loss %ook+ The stop loss orders can %e
either a market order or a limit price order+ *or
%uy S orders2 the trigger price has to %e less
than or e3ual to the limit price+ Similarly2 for
sell S orders2 the trigger price has to %e
greater than or e3ual to the limit price+
(d) Negotiated Trade "ook# Two trading mem%ers
can negotiate a trade outside the E#change+ To
regularise the trade each trading mem%er has to
enter the respective order in the system+ To enter
Negotiated Trade order details2 select %ook type as
NT+ It is mandatory for the trading mem%er to enter
the counterparty trading mem%er id+ 4hen %oth
parties to a trade enter orders2 then the re3uest
goes to the E#change for approval+ The E#change
can either approve the re3uest or re0ect it+ *urther2
the E#change has the discretion to send either of
the two orders or %oth the orders to the !egular
ot %ook so that the orders are availa%le to the
entire market+ Currently this facility is not availa%le
in the trading system+
(e) &dd ot "ook6 The &dd ot %ook can %e
selected in the order entry screen in order to trade
in the &dd ot market+ &rder matching in this
market takes place %etween two orders on the
%asis of 3uantity and price+ To enter orders in the
odd lot market2 select the %ook type as &+
(f) !ET.E"T &rder "ook6 !ET.E"T market
orders can %e entered into the system %y
selecting the !ET.E"T &rder %ook+ These
orders scan only the !ET.E"T &rder %ook for
potential matches+ If no suita%le match can %e
found2 the order is stored in the %ook as a
passive order+ To enter orders in the !ET.E"T
market2 select the %ook type as N.N+
(g) Auction &rder "ook# Auction order %ook
stores orders entered %y the trading mem%ers to
participate in the E#change initiated auctions+
Auction orders can %e initiator orders2 competitor
orders and solicitor orders+ *or further details
kindly refer to section on NAuctionN+
Sym%ol & Series
:<$
Securities can %e taken as default values from
the order entry screen from any of the in3uiry
screens such as ,"P2 &&2 PT2 A2 ,I and SK+
In case the security isnot set up in the ,arket
4atch screen2 the Security ist can also %e used
to take the codes as default values+ &rder entry
in a security is not possi%le if that security is
suspended from trading+ E+g+ If a security is
suspended in the normal market a message
VSecurity is suspended in the normal marketW is
displayed on the order entry screen+ The la%el
LSuspended8 is also displayed in the market
watch screen for the setup security+ &rder entry
is also not possi%le in case the security is not
eligi%le to trade in a particular market+ E+g+ If a
security is not eligi%le to trade in the normal
market a message VSecurity is not allowed to
trade in normal marketW is displayed on the order
entry screen+ In case the user types the sym%ol
series incorrectly a message VInvalid sym%ol
seriesW is displayed on the screen+
Kuantity
4hen the %uyAsell order entry screen is invoked2
the regular lot si-e availa%le at the %est price on
the counter side gets defaulted in the order entry
screen+ In case of negotiated trade or auction
%ook is selected for display2 the 3uantity has to
%e specifically mentioned %y the user+ Kuantity
mentioned should %e in multiples of regular lot
si-e for that security+
Kuantity *ree-e
All orders with very large 3uantities are sent
for E#change approval+ If the 3uantity for the
order is greater than #B of the issue si-e of
the security or is greater than !s+ # value of
the order 'L#8 is as specified %y the E#change)
whichever is less2 then the order is sent as a
3uantity free-e to the E#change for approval+
The E#change may either approve or re0ect
the 3uantity free-e re3uest+
Price
Along with the regular lot 3uantity2 the %est price
on the counterside is also taken as default value
in the order entry screen+ A user has the option
to either enter the order at the default price or
overwrite it with any other desired price+ If a user
mentions a price2 it should %e in multiples of the
tick si-e for that particular security and within the
day8s minimumAma#imum price range2 otherwise
the order is not accepted %y the system and an
order re0ection messageAconfirmation slip is
generated+ If a price outside the &perational
!ange is entered2 the order results in a price
free-e and is not accepted as a valid order till
the time the E#change approves it+ All auction
orders re3uire the user to mention a price+
:</
In case the user enters an order with a L,arket8 price
the order takes the last traded price in the respective
market as the market price2 provided no passive
order e#ists on the same side or the counter side in
that security and in that market+ 9owever2 if suita%le
orders e#ist on the counter side2 then the order takes
the price of the counter order and a trade is
generated+ If an order e#ists on the same side %ut no
orders e#ists on the counter side2 then the order
takes the price of the %est order on that side and is
stacked immediately %elow it+ If the security has
never %een traded2 then the market order takes the
value of the %ase price and sits in the %ooks as a
passive order+
In case of stop loss orders2 a user has the fle#i%ility
of specifying a limit price along with the trigger
price+ This limit price can %e selected as e3ual to
the trigger price in the price field so as to leave it
with the word LPrice8+ Alternatively2 a user can
specify a limit price as L,arket8 price+
Cir"!it Brea/er,
The E#change has implemented inde#1%ased
market1wide circuit %reakers in compulsory
rolling settlement with effect from Duly <(2
(<<:+ In addition to the circuit %reakers2 price
%ands are also applica%le on individual
securities+
Inde#1%ased ,arket1wide Circuit "reakers
The inde#1%ased market1wide circuit %reaker
system applies at > stages of the inde#
movement2 either way vi-+ at :<B2 :$B and
(<B+ These circuit %reakers when triggered
%ring a%out a coordinated trading halt in all
e3uity and e3uity derivative markets
nationwide+ The market1wide circuit %reakers
are triggered %y movement of either the "SE
Sense# or the NSE S&P CNF Nifty2 whichever
is %reached earlier+
In case of a :<B movement of either of these
indices2 there would %e a one1hour market halt
if the movement takes place %efore :6<< p+m+
In case the movement takes place at or after
:6<< p+m+ %ut %efore (6>< p+m+ there would %e
trading halt for X hour+ In case movement
takes place at or after (6>< p+m+ there will %e
no trading halt at the :<B level and market
shall continue trading+
In case of a :$B movement of either inde#2
there shall %e a two1hour halt if the movement
takes place %efore : p+m+ If the :$B trigger is
reached on or after :6<< p+m+2 %ut %efore (6<<
p+m+2 there shall %e a one1hour halt+ If the :$B
trigger is reached on or after (6<< p+m+ the
trading shall halt for remainder of the day+
In case of a (<B movement of the inde#2 trading
shall %e halted for the remainder of the day+
:<7
These percentages are translated into
a%solute points of inde# variations on a
3uarterly %asis+ At the end of each 3uarter2
these a%solute points of inde# variations are
revised for the applica%ility for the ne#t 3uarter+
The a%solute points are calculated %ased on
closing level of inde# on the last day of the
trading in a 3uarter and rounded off to the
nearest :< points in case of S&P CNF Nifty+
Pri"e Ban,
.aily price %ands are applica%le on securities
as %elow6
.aily price %ands of (B 'either way) on
securities as specified %y the E#change+
.aily price %ands of $B 'either way) on
securities as specified %y the E#change+
.aily price %ands of :<B 'either way) on
securities as specified %y the E#change+
No price %ands are applica%le on6 scrips on
which derivative products are availa%le or
scrips included in indices on which derivative
products are availa%le+ In order to prevent
mem%ers from entering orders at non1genuine
prices in such securities2 the E#change has
fi#ed operating range of (<B for such
securities+
Price %ands of (<B 'either way) on all
remaining scrips 'including de%entures2
warrants2 preference shares etc)+ The price
%ands for the securities in the imited Physical
,arket are the same as those applica%le for
the securities in the Normal ,arket+ *or
auction market the price %ands of (<B are
applica%le+
&rder Types and Conditions
The system allows the trading mem%ers to
enter orders with various conditions attached
to them as per their re3uirements+ These
conditions are %roadly divided into Time
Conditions2 Kuantity Conditions2 Price
Conditions and &ther Conditions+ Several
com%inations of the a%ove are allowed there%y
providing enormous fle#i%ility to the users+ The
order types and conditions are summari-ed
%elow6
a) Time Conditions+
.AG# A .AG order2 as the name suggests is an
order that is valid for the day on which it is entered+
If the order is not e#ecuted during the day2 the
system cancels the order automatically at the end
of the day+ "y default2 the system assumes that all
orders entered are .ay orders+
:<=
I&C# An Immediate or Cancel 'I&C) order
allows the user to %uy or sell a security as
soon as the order is released into the system2
failing which the order is cancelled from the
system+ Partial match is possi%le for the order2
and the unmatched portion of the order is
cancelled immediately+ %) Kuantity Conditions
.K# An order with a .isclosed Kuantity '.K)
allows the user to disclose only a portion of the
order 3uantity to the market+ *or e+g+ if the
order 3uantity is :<2<<< and the disclosed
3uantity is (2<<<2 then only (2<<< is released
to the market+ After this 3uantity is fully
matched2 a su%se3uent 3uantity of (2<<< is
disclosed+ Thus2 totally five disclosures with
the same order num%er are shown one after
the other in the market+
c) Price Conditions
,arket# ,arket orders are orders for which
price is specified as N,@TN at the time the
order is entered+ *or such orders2 the system
determines the price+
Stop1oss# This facility allows the user to release
an order into the system2 after the market price
of the security reaches or crosses a threshold
price called trigger price+ E#ample6 If for stop
loss %uy order2 the trigger is !s+;>+<<2 the limit
price is !s+;$+<< and the market 'last traded)
price is !s+;<+<<2 then this order is released into
the system once the market price reaches or
e#ceeds !s+;>+<<+ This order is added to the
regular lot %ook with time of triggering as the
time stamp2 as a limit order of !s+;$+<<+ All stop
loss orders are kept in a separate %ook 'stop
loss %ook) in the system until they are triggered+
Trigger Price# Price at which
an order gets triggered from
the stop loss %ook+ imit Price#
Price of the orders after
triggering from stop loss %ook+
d) &ther Conditions
P!&ACIA49S# A user can enter orders on his own
account or on %ehalf of clients or warehouse order on
%ehalf of institutional clients+ "y default2 the system
assumes that the user is entering orders on the
trading mem%er8s own account+ The client account
field is an alphanumeric field+ It is mandatory to enter
the client account num%er in the field provided in
case the user enters orders on %ehalf of clients or
warehouse order on %ehalf of institutional clients+ The
system will assign a code LCli8 to such an order+ The
user cannot specify the trading mem%er code in the
client account field+ 4arehouse orders may %e
entered only in N, for %ook type !+ In case a
mem%er tries to enter a warehouse order in other
segments2 an error message VInvalid series for
warehouse orderW is displayed+ To enter a warehouse
order with client account2 select 49S and
:<;
enter the client account in the client account field+
The client account field is an alphanumeric field
and does not accept client code same as trading
mem%er code+ In such a case an error message
V"roker code not allowed as AAC Num%er for 49S
ordersW is displayed+
Counterparty I.6 In case a negotiated trade
order is entered2 the system re3uests the user
to enter the counterparty trading mem%er id
which is to %e o%tained %y the user from the
counter party itself+ Currently this facility is not
availa%le in the trading system+
Participant Code6 "y default2 the system
displays the trading mem%er id of the user in the
participant field+ Thus2 all trades resulting from
an order are to %e settled %y that trading
mem%er+ NCIT orders can %e marked %y the
user at the order entry level itself+ &nly a valid
participant code can %e entered+ In case the
participant is suspended a message to this effect
is displayed to the user on the order entry
screen+ The user can also mark his orders at the
order entry screen to disclose his open or close
orders+ In the participant field2 L&8 has to %e
typed2 for L&pen8 orders and LC8 has to %e typed
for LClose8 orders+ 4arehousing is permitted
where registered custodian is involved for
deliveryAreceipt of securities+ The user has to
therefore enter a valid participant code other
than L&82 LC82 LNCIT8 and %roker code in the
participant code field+ In case of incorrect
participant code a message VThis participant
code is not valid for warehouse ordersW is
displayed+
All pending warehousing orders get purged at the
end of the day processing+ The participant field will
contain LINST8 code as part of the drop down list to
mark the Institutional orders+
!emarks6 The remarks field is a description
field within the order entry screen provided to
incorporate any remarks to %e specified %y the
user at the time of order entry+
Orer Moi0i"ation
All orders can %e modified in the system till the
time they do not get fully traded and only
during market hours+ &nce an order is
modified2 the %ranch order value limit for the
%ranch gets ad0usted automatically+
*ollowing is the corporate hierarchy for
performing order modification functionality6
A dealer can modify only the orders entered
%y him+
A %ranch manager can modify his own orders
or orders of any dealer under his %ranch+
A corporate manager can modify his own
orders or orders of all dealers and %ranch
managers of the trading mem%er firm+
::<
9owever2 the corporate managerA%ranch manager
cannot modify order details such that it e#ceeds
the %ranch order value limit set for the day+ &rder
modification cannot %e performed %yAfor a trading
mem%er who is suspended or de1activated %y the
E#change for any reason+
A %uy%ack having L"CG"AC@&!.8 in the
client account field cannot %e modified to any
other client account+
Any order modifications resulting in price or
3uantity free-e shall not %e allowed+ The user
will receive a message MC*& !e3uest
!e0ectedN for such modification re3uests+
Orer Can"ellation
&rder cancellation functionality can %e
performed only for orders which have not %een
fully or partially traded 'for the untraded part of
partially traded orders only) and only during
market hours+
Single &rder Cancellation
Single order cancellation can %e done during
trading hours either %y selecting the order from
the outstanding order screen or from the
function key provided+ &rder cancellation
functionality is availa%le for all %ook types+ "ut
the user is not allowed to cancel auction
initiation and competitor orders in auction
market+ &rder cancellation is also not allowed
for those negotiated trade orders that have not
resulted as an alert+
Kuick &rder Cancellation
Kuick &rder Cancellation 'Cancel All) is an
e#tension of Single &rder Cancellation ena%ling a
user to cancel multiple outstanding orders in
various trading %ooks su%0ect to the corporate
hierarchy+ The different filters availa%le for
canceling orders %y using 3uick order cancellation
facility are sym%ol2 series2 %ook type2 %ranch2 user2
P!&ACIA49S2 client account num%er and
%uyAsell+ Kuick order cancellation can %e
performed %y invoking the function key provided
and cannot %e done from the outstanding orders
screen+ If the criteria are not found to %e correct %y
a trading mem%er then an error message is
displayed and the focus is set on the incorrect field
to ena%le the user to correct it+ If the selection
criteria are correct then a message appears on the
3uick order cancellation screen stating the num%er
of %uy and sell orders to %e cancelled+ Kuick order
cancellation can %e done only during market hours+
&rder Cancellation for .isa%led ,em%er
:::
The E#change disa%les a mem%er from trading
due to various reasons+ In case a mem%er is
disa%led from trading %y the E#change2 all pending
orders in all %ooks e#cept for Negotiated Trade
orders of the mem%er are immediately cancelled
%y the system+ A message6
V&rder Num%er ++++++++++ cancelled due to
suspensionW is displayed at the message window
screen at the trader workstation+ In3uiry screens
such as ,"P2 ,arket 4atch and trader specific
screens such as &utstanding &rders2 Activity
og etc+ get updated accordingly+
Orer Mat"+ing
The %uy and sell orders are matched
on "ook Type2 Sym%ol2 Series2
Kuantity and Price+ ,atching Priority
The %est sell order is the order with the lowest
price and a %est %uy order is the order with the
highest price+ The unmatched orders are 3ueued
in the system %y the following priority6
(a) "y Price6 A %uy order with a higher price
gets a higher priority and similarly2 a sell order
with a lower price gets a higher priority+ E+g+
Consider the following %uy orders6
:
)

:
<
<

s
h
a
r
e
s

Y

!
s
+

>
$

a
t

t
i
m
e

;
6
>
<

a
+
m
+

(
)

$
<
<

s
h
a
r
e
s

Y

!
s
+

>
$
+
<
$

a
t

t
i
m
e

;
6
?
>

a
+
m
+

The second order price is greater than the first
order price and therefore is the %est %uy order+
(b) "y Time6 If there is more than one order at
the same price2 the order entered earlier gets
a higher priority+ E+g+ consider the following
sell orders6
:
)

(
<
<

s
h
a
r
e
s

Y

!
s
+

7
(
+
7
$

a
t

t
i
m
e

;
6
>
<

a
+
m
+

(
)

>
<
<

s
h
a
r
e
s

Y

!
s
+

7
(
+
7
$

a
t

t
i
m
e

;
6
>
$

a
+
m
+

"oth orders have the same price %ut they
were entered in the system at different time+
The first order was entered %efore the second
order and therefore is the %est sell order+
As and when valid orders are entered or received
%y the system2 they are first num%ered2 time
stamped and then scanned for a potential match+
This means that each order has a distinctive order
num%er and a uni3ue time stamp on it+ If a match
is not found2 then the orders are stored in the
%ooks as per the priceAtime priority+ An active %uy
order matches with the %est passive sell order if
the price of the passive sell order is less than or
e3ual to the price of the active %uy order+ Similarly2
an active sell order matches with the %est passive
%uy order if the price of the passive %uy order is
greater than or e3ual to the price of the active sell
order+
!egular ot ,atching
::(
If the com%ined 3uantity of one or more matching
orders on the opposite side of the regular lot %ook
is e3ual to or more than the 3uantity of active
order2 the active order is completely traded+ If the
com%ined 3uantity of one or more matching orders
on the opposite side of the regular lot %ook is e3ual
to or less than the 3uantity of active order2 the
active order is partially traded+
If after trading any 3uantity is left untraded2 the
order is added to the regular lot %ook in the
priceAtime priority+
The orders with the I&C attri%ute try to match
ma#imum possi%le 3uantity after they are
entered+ Any remaining 3uantity is cancelled+
The orders with .K attri%ute disclose only a
part of the total order 3uantity to the market+
An active order with disclosed condition tries to
ma#imi-e the 3uantity as possi%le regardless of
the disclosed 3uantity i+e+ a single trade takes
place for a 3uantity more than the disclosed
3uantity+ If an active order with the disclosed
3uantity cannot trade its total 3uantity2 it is added
to the regular lot %ook in the priceAtime priority+
The disclosed order
3uantity is determined as follows6
a) If the remaining order 3uantity is less than
or e3ual to the original disclosed 3uantity2 the
disclosed order 3uantity is set as e3ual to
remaining order 3uantity+
b) If the remaining order 3uantity is more than the
original disclosed 3uantity2 the disclosed order
3uantity is set to the original disclosed 3uantity+
&nce an order with the disclosed 3uantity has
%ecome a passive order2 it trades only in units of
disclosed 3uantity or less+ 9owever2 if there is no
other competing order with the same price2 a
single trade of as much 3uantity as possi%le takes
place %etween the two orders+ 4hen the entire
disclosed order 3uantity is fully traded the
disclosed 3uantity gets replenished and this
continues till the entire order 3uantity is fully
traded+ Each time the disclosed 3uantity is
replenished2 the order is stamped with the current
trading time and added to the regular order %ook
as fresh order+
Stop oss ,atching
All stop loss orders entered into the system
are stored in the stop loss %ook+ These orders
can contain two prices+
Trigger Price+ It is the price at which the order gets
triggered from the stop loss %ook+ imit Price+ It is
the price for orders after the orders get triggered
from the stop loss %ook+ If the limit price is not
specified2 the trigger price is taken as the limit
price for the order+ The stop loss orders are
prioritised in the stop loss %ook with the most likely
order to trigger first and the least
::>
likely to trigger last+ The priority is same as
that of the regular lot %ook+ The stop loss
condition is met under the following
circumstances6
Sell &rder 1 A sell order in the stop loss %ook
gets triggered when the last traded price in the
normal market reaches or falls %elow the
trigger price of the order+
"uy &rder 1 A %uy order in the stop loss %ook
gets triggered when the last traded price in the
normal market reaches or e#ceeds the trigger
price of the order+ 4hen a stop loss order with
I&C condition enters the system2 the order is
released in the market after it is triggered+
&nce triggered2 the order scans the counter
order %ook for a suita%le match to result in a
trade or else is cancelled %y the system+
!ET.E"T &rder ,atching
The rules for matching the !ET.E"T orders
are similar to the !egular ot %ook e#cept that
!ET.E"T order matching takes place only for
orders in the !ET.E"T order %ook+
&dd ot &rder ,atching
&dd ot matching takes place only for orders
in &dd ot %ook+ There are no partial trades
for an &dd ot order i+e+ each match is an
e#act match where the 3uantity of the passive
order is e3ual to that of the active order+
Auction ,atching
All auction orders are entered into the auction
order %ook+ The rules for matching of auctions
are similar to that of the regular lot %ook
e#cept for the following points61
a) Auction order matching takes place at the
end of the solicitor period for the auction+
b) Auction matching takes place only across
orders %elonging to the same auction+
c) All auction trades take place at the auction
price+
Jalidation Checks
4hile matching orders2 the system performs
following validation checks6
a) If the turnover limit of any trading mem%er has
already e#ceeded2 a trade does not take place+
b) If the participant of any of the orders is
NSuspendedN2 the trade does not go through+
Trae Manage-ent
A trade is an activity in which a %uy and a sell order
match with each other+ ,atching of two orders is
done automatically %y the system+ 4henever a trade
takes place2 the system sends a trade confirmation
message to each of the users involved in the trade+
The trade confirmation slip gets printed at the trader
workstation of the user with a uni3ue trade num%er+
The system also
::?
%roadcasts a message to the entire market
through the ticker window displaying the
details of the trade+ This section descri%es
trade1related activities like viewing the trades2
trade modificationAcancellation2 etc+ "efore the
trade is effected2 the system performs checks
with respect to the following parameters6 1
a) The security in which the trade is to %e
effected is not suspended from operations+
b) Trading mem%ers involved in the potential
trade are not suspended from operations+
c) Turnover limits for the trading mem%ers
involved are not e#ceeded+
&nce the trade for an order entered is
confirmed %y the system2 a message is sent to
the trader workstation+ The system generates
a Trade Confirmation Slip that is printed on the
printer of the trader workstation+
Trae Moi0i"ation
The user can use trade modification facility to
re3uest for modifying trades done during the day+
The user can re3uest the E#change to modify only
the trade 3uantity field+ ,oreover2 the new 3uantity
re3uested must %e lower than the original trade
3uantity+ If the user is a Corporate ,anager of a
trading mem%er firm2 he can re3uest for trade
modification for the trades of any dealer of the
trading mem%ers firm and if he is a "ranch
,anager of a %ranch2 then he can re3uest for trade
modification for any dealer of the %ranch of the
trading mem%er firm+
The user can re3uest for trade modification
either from the previous trades screen or %y
using the function key provided in the
workstation+ Trade ,odification !e3uest is sent
to the E#change for approval and message to
that effect is displayed in the message window+
The counterparty to the trade also receives this
message+ The counterparty then has to make a
similar re3uest for the same modified 3uantity on
the same trading day+ &nce %oth the parties to
trade send their respective trade modification
re3uests2 the E#change either approves or
re0ects it+ The message to that effect is displayed
in the message window+
In case a re3uest for trade modification is approved
%y the E#change2 the parties to trade receive a
system message confirming the trade modification
and the trade modification slip is printed at their
respective trader workstations+ If the E#change
re0ects the trade modification re3uest2 the trade
modification re0ection slip will %e printed at their
respective trader workstations+
Trae Can"ellation
The user can use trade cancellation screen for
cancelling trades done during the day+ If the user is
a corporate manager of a trading mem%er firm2 he
can re3uest for trade cancellation for the
::$
trades of any dealer of the trading mem%ers
firm and if he is a %ranch manager of a
%ranch2 then he can re3uest for trade
cancellation for the trades for any dealer of the
%ranch of the trading mem%er firm+
The user can re3uest for trade cancellation
either from the previous trades screen or %y
using the function key provided in the
workstation+ The trade cancellation re3uest is
sent to the E#change for approval and
message to that effect is displayed in the
message window+ The counterparty to the
trade also receives the message+
The counterparty then has to make similar re3uest
on the same trading day+ &nce %oth the parties to
trade send the trade cancellation re3uest2 the
E#change either approves or re0ects it+ The
message to that effect is displayed in the message
window+ 4hen a re3uest for the trade cancellation
is approved %y the E#change2 the parties to trade
receive a system message confirming the trade
cancellation and the trade cancellation slip is
printed at their respective trader workstations+ If
the E#change re0ects the trade cancellation
re3uest2 the trade cancellation re0ection slip is
printed at their respective trader workstations+
Internet Bro/ing
SE"I Committee has approved the use of Internet
as an &rder !outing System '&!S) for
communicating clientsN orders to the e#changes
through %rokers+ &!S ena%les investors to place
orders with his %roker and have control over the
information and 3uotes and to hit the 3uote on an
on1line %asis+ &nce the %roker8s system receives
the order2 it checks the authenticity of the client
electronically and then routes the order to the
appropriate e#change for e#ecution+ &n e#ecution
of the order2 it is confirmed on real time %asis+
Investor receives reports on margin re3uirement2
payments and delivery o%ligations through the
system+ 9is ledger and portfolio account get
updated online+ NSE launched internet trading in
early *e%ruary (<<<+ It is the first stock e#change
in the country to provide we%1%ased access to
investors to trade directly on the e#change+ The
orders originating from the PCs of the investors are
routed through the Internet to the trading terminals
of the designated %rokers with whom they are
connected and further to the e#change for trade
e#ecution+ Soon after these orders get matched
and result into trades2 the investors get
confirmation a%out them on their PCs through the
same internet route+
7.& 8irele,, A$$li"ation Proto"ol
58AP6
SE"I has also approved trading through wireless
medium on 4AP Platform+ NSE+IT launched
the 4ireless Application Protocol '4AP) in
Novem%er (<<<+ This
provides access to its
order
::/
%ook through the hand held devices2 which
use 4AP technology+ This serves primarily
retail investors who are mo%ile and want to
trade from any place when the market prices
for stocks at their choice are attractive+ &nly
SE"I registered mem%ers who have %een
granted permission %y the E#change for
providing Internet %ased trading services can
introduce the service after o%taining
permission from the E#change+
Unit
@C
egal frame work of capital
market
!egulator
y
authority
of capital
market
SE"I
guideline
s
Securities Contract
and !egulations Act
::7
LEGAL
FRAME8OR
K
This section deals with legislative and
regulatory provisions relevant from the
viewpoint of a trading mem%er+
The four main legislations governing the securities
market are6'a) the Securities Contracts
'!egulation) Act2 :;$/2 which provides for
regulation of transactions in securities through
control over stock e#changesI '%) the Companies
Act2 :;$/2 which sets out the code of conduct for
the corporate sector in relation to issue2 allotment
and transfer of securities2 and disclosures to %e
made in pu%lic issuesI 'c) the SE"I Act2 :;;(
which esta%lishes SE"I to protect investors and
develop and regulate securities marketI and 'd) the
.epositories Act2 :;;/ which provides for
electronic maintenance and transfer of ownership
of demateriali-ed securities+
Legi,lation,
Ca$ital I,,!e, 5Control6 A"t2 (<IG
The Act had its origin during the war in :;?>
when the o%0ective was to channel resources to
support the war effort+ It was retained with some
modifications as a means of controlling the
raising of capital %y companies and to ensure
that national resources were channeled into
proper lines2 i+e+2 for desira%le purposes to serve
goals and priorities of the government2 and to
protect the interests of investors+ Cnder the Act2
any firm wishing to issue securities had to o%tain
approval from the Central 5overnment2 which
also determined the amount2 type and price of
the issue+ As a part of the li%erali-ation process2
the Act was repealed in :;;( paving way for
market determined allocation of resources+
Se"!ritie, Contra"t, 5Reg!lation6 A"t2 (<=&
::=
It provides for direct and indirect control of virtually
all aspects of securities trading and the running of
stock e#changes and aims to prevent undesira%le
transactions in securities+ It gives Central
5overnment regulatory 0urisdiction over 'a) stock
e#changes through a process of recognition and
continued supervision2 '%) contracts in securities2
and 'c) listing of securities on stock e#changes+ As
a condition of recognition2 a stock e#change
complies with conditions prescri%ed %y Central
5overnment+ &rgani-ed trading activity in
securities takes place on a specified recogni-ed
stock e#change+ The stock e#changes determine
their own listing regulations which have to conform
to the minimum listing criteria set out in the !ules+
SEBI A"t2 (<<7
The SE"I Act2 :;;( was enacted to empower
SE"I with statutory powers for 'a) protecting the
interests of investors in securities2 '%) promoting
the development of the securities market2 and
'c) regulating the securities market+ Its
regulatory 0urisdiction e#tends over corporate
in the issuance of capital and transfer of
securities2 in addition to all intermediaries and
persons associated with securities market+ It
can conduct en3uiries2 audits and inspection
of all concerned and ad0udicate offences under
the Act+ It has powers to register and regulate
all market intermediaries and also to penalise
them in case of violations of the provisions of
the Act2 !ules and !egulations made there
under+ SE"I has full autonomy and authority to
regulate and develop an orderly securities
market+
De$o,itorie, A"t2 (<<&
The .epositories Act2 :;;/ provides for the
esta%lishment of depositories in securities with the
o%0ective of ensuring free transfera%ility of
securities with speed2 accuracy and security %y 'a)
making securities of pu%lic limited companies
freely transfera%le su%0ect to certain e#ceptionsI
'%) demateriali-ing the securities in the
depository modeI and 'c) providing for
maintenance of ownership records in a %ook
entry form+ In order to streamline the settlement
process2 the Act envisages transfer of ownership
of securities electronically %y %ook entry without
making the securities move from person to
person+ The Act has made the securities of all
pu%lic limited companies freely transfera%le2
restricting the company8s right to use discretion
in effecting the transfer of securities2 and the
transfer deed and other procedural re3uirements
under the Companies Act have %een dispensed
with+
Co-$anie, A"t2 (<=&
::;
It deals with issue2 allotment and transfer of
securities and various aspects relating to company
management+ It provides for standard of disclosure
in pu%lic issues of capital2 particularly in the fields
of company management and pro0ects2 information
a%out other listed companies under the same
management2 and management perception of risk
factors+ It also regulates underwriting2 the use of
premium and discounts on issues2 rights and
%onus issues2 payment of interest and dividends2
supply of annual report and other information+
R!le, an Reg!lation,
The 5overnment has framed rules under the
SC'!) A2 SE"I Act and the .epositories Act+
SE"I has framed regulations under the SE"I Act
and the .epositories Act for registration and
regulation of all market intermediaries2 for
prevention of unfair trade practices2 insider
trading2 etc+ Cnder these Acts2 5overnment and
SE"I issue notifications2 guidelines2 and
circulars2 which need to %e complied with %y
market participants+ The self1regulatory
organi-ations 'S!&s) like stock e#changes have
also laid down their rules of game+
Reg!lator,
The regulators ensure that the market
participants %ehave in a desired manner so
that the securities market continues to %e a
ma0or source of finance for corporate and
government and the interest of investors are
protected+ The responsi%ility for regulating the
securities market is shared %y .epartment of
Economic Affairs '.EA)2 .epartment of
Company Affairs '.CA)2 !eserve "ank of
India '!"I)2 Securities and E#change "oard of
India 'SE"I) and Securities Appellate Tri%unal
'SAT)+
,ost of the powers under the SC'!)A are
e#ercisa%le %y .epartment of Economic Affairs
'.EA)2 while a few others %y SE"I+ The powers of
the .EA under the SC'!)A are also con1currently
e#ercised %y SE"I+ The powers in respect of the
contracts for sale and purchase of securities2 gold1
related securities2 money market securities and
securities derived from these securities and ready
forward contracts in de%t securities are e#ercised
concurrently %y !"I+ The SE"I Act and the
.epositories Act are mostly administered %y SE"I+
All these are administered %y SE"I+ The powers
under the Companies Act relating to issue and
transfer of securities and non1payment of dividend
are administered %y SE"I in case of listed pu%lic
companies and pu%lic companies proposing to get
their securities listed+ The S!&s ensure
compliance with their own rules relevant for them
under the securities laws+
:(<
=.( Se"!ritie, Contra"t, 5Reg!lation6
A"t2 (<=&
The Securities Contracts '!egulation) Act2 :;$/
OSC'!)AP was enacted to prevent undesira%le
transactions in securities %y regulating the
%usiness of dealing therein and %y providing for
certain other matters connected therewith+ This is
the principal Act2 which governs the trading of
securities in India+ The definitions of some of the
important terms are given %elow6
PRe"ogni,e Sto"/ E1"+ange; means a
stock e#change2 which is for the time %eing
recognised %y the Central 5overnment under
Section ? of the SC'!)A
PSto"/ E1"+ange; means any %ody of
individuals2 whether incorporated or not2
constituted for the purpose of assisting2
regulating or controlling the %usiness of
%uying2 selling or dealing in securities+
As per Section ('h)2 the term M,e"!ritie,M
include1
'I) shares2 scrips2 stocks2 %onds2 de%entures2
de%enture stock or other marketa%le securities
of a like nature in or of any incorporated
company or other %ody corporate2
(ii) .erivative2
(iii) Cnits or any other instrument issued %y
any collective investment scheme to the
investors in such schemes2
(iv) Security receipts
(v) 5overnment securities2
(vi) Such other instruments as may %e declared %y
the Central 5overnment to %e securities2 and
(vii) !ights or interests in securities+
As per section ('aa)2 ADeri3ati3eB includes1
. a security derived from a de%t instrument2
share2 loan whether secured or unsecured2
risk instrument or contract for differences or
any other form of securityI
!. a contract which derives its value from the
prices2 or inde# of prices2 of underlying securitiesI
Section :=A provides that notwithstanding anything
contained in any other law for the time
%eing in force2 contracts in derivative shall %e
legal and valid if such contracts are1
(i) Traded on a recognised stock e#changeI
(ii) Settled on the clearing house of the recognised
stock e#change2 in accordance with the rules
and %ye1laws of such stock e#changes+
:(:
MS$ot eli3er* "ontra"tM has %een defined in
Section ('i) to mean a contract which provides for1
(a) actual delivery of securities and the payment of a
price therefore either on the same day as the date of
the contract or on the ne#t day2 the actual period
taken for the dispatch of the securities or the
remittance of money therefore through the post %eing
e#cluded from the computation of the period
aforesaid if the parties to the contract do not reside in
the same town or localityI
(b) Transfer of the securities %y the depository
from the account of a %eneficial owner to the
account of another %eneficial owner when such
securities are dealt with %y a depository+
The SC'!)A deals with1
:+ Stock e#changes2 through a
process of recognition and
continued supervision2 (+
Contracts in securities2 and
>+ isting of securities on stock e#changes+
Re"ognition o0 ,to"/ e1"+ange,
"y virtue of the provisions of the Act2 the %usiness
of dealing in securities cannot %e carried out
without registration from SE"I+ Any Stock
E#change which is desirous of %eing recognised
has to make an application under Section > of the
Act to SE"I2 which is empowered to grant
recognition and prescri%e conditions+ This
recognition can %e withdrawn in the interest of the
trade or pu%lic+ SE"I is authori-ed to call for
periodical returns from the recognised Stock
E#changes and make en3uiries in relation to their
affairs+ Every Stock E#change is o%liged to furnish
annual reports to SE"I+ !ecognised Stock
E#changes are allowed to make %ylaws for the
regulation and control of contracts %ut su%0ect to
the previous approval of SE"I and SE"I has the
power to amend the said %ylaws+ The Central
5overnment and SE"I have the power to
supersede the governing %ody of any recognised
stock e#change+
Contra"t, in Se"!ritie,
&rgani-ed trading activity in securities takes place on
a recognised stock e#change+ If the Central
5overnment is satisfied2 having regard to the nature
or the volume of transactions in securities in any
State or area2 that it is necessary so to do2 it may2 %y
notification in the &fficial 5a-ette2 declare provisions
of section :> to apply to such State or area2 and
thereupon every contract in such State or area which
is entered into after date of the notification otherwise
than %etween mem%ers of a recognised stock
e#change in such State or area or through or with
such mem%er shall %e illegal+ The effect of this
provision clearly is that if a transaction in securities
has to %e
:((
validly entered into2 such a transaction has to
%e either %etween the mem%ers of a
recognised stock e#change or through a
mem%er of a Stock E#change+
Li,ting o0 Se"!ritie,
4here securities are listed on the application of
any person in any recognised stock e#change2
such person shall comply with the conditions of
the listing agreement with that stock e#change
'Section (:)+ 4here a recognised stock
e#change acting in pursuance of any power
given to it %y its %ye1laws2 refuses to list the
securities of any company2 the company shall %e
entitled to %e furnished with reasons for such
refusal and the company may appeal to
Securities Appellate Tri%unal 'SAT) against such
refusal+
Se"!ritie, Contra"t, 5Reg!lation6
R!le,2 (<=G
The Central 5overnment has made Securities
Contracts '!egulation) !ules2 :;$72 as re3uired %y
su%1section '>) of the Section >< of the Securities
Contracts '!egulation) Act2 :;$/ for carrying out the
purposes of that Act+ The powers under the SC'!)!2
:;$7 are e#ercisa%le %y SE"I+
Contra"t, %et.een -e-%er, o0 re"ogni,e
,to"/ e1"+ange
All contracts %etween the mem%ers of a
recognised stock e#change shall %e confirmed
in writing and shall %e enforced in accordance
with the rules and %yelaws of the stock
e#change of which they are mem%ers '!ule ;)+
"ooks of account and other documents to %e
maintained and preserved %y every mem%er of
a recognised stock e#change6
'i) Every mem%er of a recognised stock
e#change shall maintain and preserve the
following %ooks of account and documents for
a period of five years6
(a) !egister of transactions 'Sauda %ook)+
(b) ClientsN ledger+
(c) 5eneral ledger+
(d) Dournals+
(e) Cash %ook+
(f) "ank pass1%ook+
(g) .ocuments register showing full particulars of
shares and securities received and delivered+
'() Every mem%er of a recognised stock
e#change shall maintain and preserve the
following documents for a period of two years6
:(>
(a) ,em%ersN contract %ooks showing details
of all contracts entered into %y him with other
mem%ers of the same e#change or counter1
foils or duplicates of memos of confirmation
issued to such other mem%ers+
(b) Counter1foils or duplicates of contract notes
issued to clients+
(c) 4ritten consent of clients in respect of
contracts entered into as principals+ '!ule
:$)
Se"!ritie, an E1"+ange Boar o0
Inia A"t2 (<<7
,a0or part of the li%erali-ation process was the
repeal of the Capital Issues 'Control) Act2
:;?72 in ,ay :;;(+ 4ith this2 5overnment8s
control over issues of capital2 pricing of the
issues2 fi#ing of premia and rates of interest on
de%entures etc+ ceased2 and the office which
administered the Act was a%olished6 the
market was allowed to allocate resources to
competing uses+ 9owever2 to ensure effective
regulation of the market2 SE"I Act2 :;;( was
enacted to esta%lish SE"I with statutory
powers for6
(a) Protecting the interests of investors in
securities2
(b) Promoting the development of the
securities market2 and
(c) !egulating the securities market+
Its regulatory 0urisdiction e#tends over companies
listed on Stock E#changes and companies
intending to get their securities listed on any
recogni-ed stock e#change in the issuance of
securities and transfer of securities2 in addition to
all intermediaries and persons associated with
securities market+ SE"I can specify the matters to
%e disclosed and the standards of disclosure
re3uired for the protection of investors in respect of
issuesI 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 marketI and can
conduct en3uiries2 audits and inspection of all
concerned and ad0udicate offences under the Act+
In short2 it has %een given necessary autonomy
and authority to regulate and develop an orderly
securities market+ All the intermediaries and
persons associated with securities market2 vi-+2
%rokers and su%1%rokers2 underwriters2 merchant
%ankers2 %ankers to the issue2 share transfer
agents and registrars to the issue2 depositories2
depository participants2 portfolio managers2
de%entures trustees2 foreign institutional investors2
custodians2 venture capital funds2 mutual funds2
collective investments schemes2 credit rating
agencies2 etc+2 shall %e registered with SE"I and
shall %e governed %y the SE"I !egulations
pertaining to respective market intermediary+
Con,tit!tion o0 SEBI
:(?
The Central 5overnment has constituted a
"oard %y the name of SE"I under Section > of
SE"I Act+ The head office of SE"I is in
,um%ai+ SE"I may esta%lish offices at other
places in India+ SE"I consists of the following
mem%ers2 namely61
(a) A ChairmanI
(b) Two mem%ers from amongst the officials of
the ,inistries of the Central 5overnment
dealing with *inance and administration of
Companies Act2 :;$/I
(c) &ne mem%er from amongst the officials of
the !eserve "ank of IndiaI
(d) five other mem%ers of whom at least three
shall %e whole time mem%ers to %e appointed
%y the Central 5overnment+
The general superintendence2 direction and
management of the affairs of SE"I vests in a
"oard of ,em%ers2 which e#ercises all powers
and do all acts and things which may %e
e#ercised or done %y SE"I+ The Chairman and
the other mem%ers are from amongst the
persons of a%ility2 integrity and standing who
have shown capacity in dealing with pro%lems
relating to securities market or have special
knowledge or e#perience of law2 finance2
economics2 accountancy2 administration or in
any other discipline which2 in the opinion of the
Central 5overnment2 shall %e useful to SE"I+
F!n"tion, o0 SEBI
SE"I has %een o%ligated to protect the
interests of the investors in securities and to
promote and development of2 and to regulate
the securities market %y such measures as it
thinks fit+ The measures referred to therein
may provide for61
(a) !egulating the %usiness in stock
e#changes and any other securities
marketsI
(b) registering and regulating the working of stock
%rokers2 su%1%rokers2 share transfer agents2
%ankers to an issue2 trustees of trust deeds2
registrars to an issue2 merchant %ankers2
underwriters2 portfolio managers2 investment
advisers and such other intermediaries who
may %e associated with securities markets in
any mannerI
(c) registering and regulating the working of
the depositories2 participants2 custodians of
securities2 foreign institutional investors2 credit
rating agencies and such other intermediaries
as SE"I may2 %y notification2 specify in this
%ehalfI
(d) !egistering and regulating the working of
venture capita funds and collective investment
schemes including mutual fundsI
(e) Promoting and regulating self1regulatory
organi-ationsI
:($
(f) Prohi%iting fraudulent and unfair trade
practices relating to securities marketsI
(g) Promoting investorsN education and training
of intermediaries of securities marketsI
(h) Prohi%iting insider trading in securitiesI
(i) !egulating su%stantial ac3uisition of shares
and take1over of companiesI
(j) calling for information from2 undertaking
inspection2 conducting in3uiries and audits of
the stock e#changes2 mutual funds2 other
persons associated with the securities market2
intermediaries and self1 regulatory
organi-ations in the securities marketI
(k) calling for information and record from any
%ank or any other authority or %oard or
corporation esta%lished or constituted %y or
under any Central2 State or Provincial Act in
respect of any transaction in securities which is
under investigation or in3uiry %y the "oardI
(l) Performing such functions and e#ercising
according to Securities Contracts '!egulation)
Act2 :;$/2 as may %e delegated to it %y the
Central 5overnmentI
(") evying fees or other charges for carrying
out the purpose of this sectionI
(#) Conducting research for the a%ove
purposesI
($) Calling from or furnishing to any such
agencies2 as may %e specified %y SE"I2 such
information as may %e considered necessary %y
it for the efficient discharge of its functionsI
(%) Performing such other functions as may %e
prescri%ed+
SE"I may2 for the protection of investors2 'a)
specify2 %y regulations2 'i) the matters relating
to issue of capital2 transfer of securities and
other matters incidental theretoI and 'ii) the
manner in which such matters2 shall %e
disclosed %y the companies and '%) %y general
or special orders2 'i) prohi%it any company
from issuing of prospectus2 any offer
document2 or advertisement soliciting money
from the pu%lic for the issue of securities2 'ii)
specify the conditions su%0ect to which the
prospectus2 such offer document or
advertisement2 if not prohi%ited may %e issued
'Section ::A)+
SE"I may issue directions to any person or
class of persons referred to in section :(2 or
associated with the securities market or to any
company in respect of matters specified in
section ::A+ if it is in the interest of investors2 or
orderly development of securities market to
prevent the affairs of any intermediary or other
persons referred to in section :( %eing
conducted in a manner detrimental to the
interests of investors or securities market to
secure the proper management of any such
intermediary or person 'Section ::")+
Regi,tration o0 Inter-eiarie,
:(/
The intermediaries and persons associated with
securities market shall %uy sell or deal in
securities after o%taining a certificate of
registration from SE"I2 as re3uired %y Section
:(6
1) Stock1%roker2
2) Su%1 %roker2
3) Share transfer agent2
4) "anker to an issue2
5) Trustee of trust deed2
6) !egistrar to an issue2
7) ,erchant %anker2
8) Cnderwriter2
9) Portfolio manager2
10) Investment adviser
11) .epository2
12) .epository Participant
13) Custodian of securities2
14) *oreign institutional investor2
15) Credit rating agency or
16) Collective investment schemes2
17) Jenture capital funds2
18) ,utual fund2 and
19) Any other intermediary associated with the
securities market
SEBI 5Sto"/ Bro/er, ? S!%-Bro/er,6
Reg!lation,2 (<<7
In terms of regulation :'g)2 L,-all in3e,torM means
any investor %uying or selling securities on a cash
transaction for a market value not e#ceeding
rupees fifty thousand in aggregate on any day as
shown in a contract note issued %y the stock%roker
Regi,tration o0 Sto"/ Bro/er
A stock %roker applies in the prescri%ed format
for grant of a certificate through the stock
e#change or stock e#changes2 as the case
may %e2 of which he is admitted as a mem%er
'!egulation >)+ The stock e#change forwards
the application form to SE"I as early as
possi%le as %ut not later than thirty days from
the date of its receipt+
SE"I takes into account for considering the grant
of a certificate all matters relating to %uying2
selling2 or dealing in securities and in particular the
following2 namely2 whether the stock %roker6
:(7
(a) is eligi%le to %e admitted as a mem%er of a
stock e#change2
(b) 9as the necessary infrastructure like
ade3uate office space2 e3uipment and man
power to effectively discharge his activities2
(c) 9as any past e#perience in the %usiness of
%uying2 selling or dealing in securities2
(d) Is su%0ected to disciplinary proceedings
under the rules2 regulations and %yelaws
&f a stock e#change with respect to his
%usiness as a stock1%roker involving either
himself or any of his partners2 directors or
employees2 and
'e) Is a fit and proper person+
SE"I on %eing satisfied that the stock1%roker is
eligi%le2 grants a certificate to the stock1%roker
and sends intimation to that effect to the stock
e#change or stock e#changes2 as the case may
%e+ 4here an application for grant of a certificate
does not fulfill the re3uirements2 SE"I may re0ect
the application after giving a reasona%le
opportunity of %eing heard+
Fee, %* ,to"/ %ro/er,
Every applicant eligi%le for grant of a certificate
shall pay such fees and in such manner as
specified in Schedule III+ Provided that SE"I
may on sufficient cause %eing shown permit
the stock1%roker to pay such fees at any time
%efore the e#piry of si# months from the date
for which such fees %ecome due '!egulation
:<)+
4here a stock1%roker fails to pay the fees2 SE"I
may suspend the registration certificate2
whereupon the stock1 %roker shall cease to %uy2
sell or deal in securities as a stock1 %roker+
A$$oint-ent o0 Co-$lian"e O00i"er
Every stock %roker shall appoint a compliance
officer who shall %e responsi%le for monitoring
the compliance of the Act2 rules and
regulations2 notifications2 guidelines2
instructions etc issued %y SE"I or the Central
5overnment and for redressal of investors8
grievances+ The compliance officer shall
immediately and independently report to SE"I
any non1compliance o%served %y him
'!egulation :=A)+
Coe o0 "on!"t
The stock1%roker holding a certificate at all
times a%ides %y the Code of Conduct as given
hereunder6
I+ 5eneral
:+ Integrity6 A stock1%roker2 shall maintain high
standards of integrity2 promptitude and
fairness in the conduct of all his %usiness+
:(=
2. E#ercise of .ue Skill and Care6 A stock1
%roker2 shall act with due skill2 care and
diligence in the conduct of all his %usiness+
3. ,anipulation6 A stock1%roker shall not
indulge in manipulative2 fraudulent or
deceptive transactions or schemes or spread
rumors with a view to distorting market
e3uili%rium or making personal gains+
4. ,alpractices6 A stock1%roker shall not create
false market either singly or in concert with
others or indulge in any act detrimental to the
investorsN interest or which leads to
interference with the fair and smooth
functioning of the market+ A stock1%roker shall
not involve himself in e#cessive speculative
%usiness in the market %eyond reasona%le
levels not commensurate with his financial
soundness+
5. Compliance with Statutory !e3uirements6 A
stock1%roker shall a%ide %y all the provisions of
the Act and the rules2 regulations issued %y the
5overnment2 SE"I and the stock e#change
from time to time as may %e applica%le to him+
II+ .uty to the investor
1. E#ecution of &rders6 A stock1%roker2 in his
dealings with the clients and the general
investing pu%lic2 shall faithfully e#ecute the
orders for %uying and selling of securities at the
%est availa%le market price and not refuse to
deal with a small investor merely on the ground
of the volume of %usiness involved+ A stock1
%roker shall promptly inform his client a%out the
e#ecution or no e#ecution of an order2 and make
prompt payment in respect of securities sold and
arrange for prompt delivery of securities
purchased %y clients+
2. Issue of Contract Note6 A stock1%roker shall
issue without delay to his client a contract note
for all transactions in the form specified %y the
stock e#change+
3. "reach of Trust6 A stock1%roker shall not
disclose or discuss with any other person or
make improper use of the details of personal
investments and other information of a
confidential nature of the client which he
comes to know in his %usiness relationship+
4. "usiness and Commission6
'a) A stock1%roker shall not encourage sales or
purchases of securities with the sole o%0ect of
generating %rokerage or commission+
'%) A stock1%roker shall not furnish false or
misleading 3uotations or give any other false or
misleading advice or information to the clients
with a view of inducing him to do %usiness in
particular securities and ena%ling himself to earn
%rokerage or commission there%y+
:(;
5. "usiness of .efaulting Clients6 A stock1
%roker shall not deal or transact %usiness
knowingly2 directly or indirectly or e#ecute an
order for a client who has failed to carry out his
commitments in relation to securities with
another stock%roker+
6. *airness to Clients6 A stock1%roker2 when
dealing with a client2 shall disclose whether he is
acting as a principal or as an agent and shall
ensure at the same time that no conflict of
interest arises %etween him and the client+ In the
event of a conflict of interest2 he shall inform the
client accordingly and shall not seek to gain a
direct or indirect personal advantage from the
situation and shall not consider clientsN interest
inferior to his own+
7. Investment Advice6 A stock1%roker shall not
make a recommendation to any client who might
%e e#pected to rely thereon to ac3uire2 dispose
of2 retain any securities unless he has
reasona%le grounds for %elieving that the
recommendation is suita%le for such a client
upon the %asis of the facts2 if disclosed %y such
a client as to his own security holdings2 financial
situation and o%0ectives of such investment+ The
stock1%roker should seek such information from
clients2 wherever he feels it is appropriate to do
so+
8. Investment Advice in pu%licly accessi%le
media6
(a) A stock %roker or any of his employees
shall not render2 directly or indirectly2 any
investment advice a%out any security in the
pu%licly accessi%le media2 whether real 1 time
or non real1time2 unless a disclosure of his
interest including the interest of his dependent
family mem%ers and the employer including
their long or short position in the said security
has %een made2 while rendering such advice+
(b) In case2 an employee of the stock %roker is
rendering such advice2 he shall also disclose
the interest of his dependent family mem%ers
and the employer including their long or short
position in the said security2 while rendering
such advice+
;+ Competence of Stock "roker6 A stock1
%roker should have ade3uately trained staff
and arrangements to render fair2 prompt and
competent services to his clients+
III+ Stock1%rokers vis1Z1vis other stock1%rokers
:+ Conduct of .ealings6 A stock1%roker shall co1
operate with the other contracting party in
comparing unmatched transactions+ A stock1
%roker shall not knowingly and willfully deliver
documents which constitute %ad delivery and
shall co1operate with other contracting parties for
prompt replacement of documents which are
declared as %ad delivery+
:><
2. Protection of Clients Interests6 A stock1
%roker shall e#tend fullest co1operation to
other stock1%rokers in protecting the interests
of his clients regarding their rights to
dividends2 %onus shares2 right shares and any
other rights related to such securities+
3. Transactions with Stock1"rokers6 A stock1
%roker shall carry out his transactions with
other stock1%rokers and shall comply with his
o%ligations in completing the settlement of
transactions with them+
4. Advertisement and Pu%licity6 A stock1%roker
shall not advertise his %usiness pu%licly unless
permitted %y the stock e#change+
5. Inducement of Clients6 A stock1%roker shall
not resort to unfair means of inducing clients
from other stock1 %rokers+
6. *alse or ,isleading !eturns6 A stock1%roker
shall not neglect or fail or refuse to su%mit the
re3uired returns and not make any false or
misleading statement on any returns re3uired
to %e su%mitted to the "oard and the stock
e#change+
Regi,tration o0 S!%-Bro/er
An application %y a su%1%roker for the grant of
a certificate is made in the prescri%ed format
accompanied %y a recommendation letter from
a stock1%roker of a recognised stock e#change
with whom he is to %e affiliated along with two
references including one from his %anker
'!egulation ::)+ The application form is
su%mitted to the stock e#change of which the
stock1%roker with whom he is to %e affiliated is
a mem%er+
The eligi%ility criteria for registration as a su%1
%roker are as follows6
'i) In the case of an individual6
'a) The applicant is not less than (: years of
age2
'%) The applicant has not %een convicted of
any offence involving fraud or dishonesty2
'c) The applicant has at least passed :(th
standard e3uivalent e#amination from an
institution recognised %y the 5overnment2 and
'd) The applicant is a fit and proper person+
Provided that SE"I may rela# the educational
3ualifications on merits having regard to the
applicantNs e#perience+
'ii) In the case of partnership firm or a %ody
corporate the partners or directors2 as the
case may %e2 shall comply with the following
re3uirements6
'a) The applicant is not less than (: years of
age2
:>:
(b) The applicant has not %een convicted of any
offence involving fraud or dishonesty2 and
(c) The applicant has at least passed :(th
standard e3uivalent e#amination from an
institution recognised %y the 5overnment+
The stock e#change on receipt of an
application2 verifies the information contained
therein and certifies that the applicant is
eligi%le for registration+ The stock e#change
forwards the application form of such
applicants who comply with all the
re3uirements specified in the !egulations to
SE"I as early as possi%le2 %ut not later
Than thirty days from the date of its receipt+
SE"I on %eing satisfied that the su%1%roker is
eligi%le2 grants a certificate to the su%1%roker
and sends intimation to that effect to the stock
e#change or stock e#changes as the case
may %e+ SE"I grants a certificate of
registration to the appellant su%0ect to the
terms and conditions as stated in rule $+
4here an application does not fulfill the
re3uirements2 SE"I may re0ect the application
after giving a reasona%le opportunity of %eing
heard+
The su%1%roker shall 1
(a) Pay the fees as specified in Schedule III2
(b) A%ide %y the Code of Conduct specified in
Schedule II2 and
(c) Enter into an agreement with the stock1
%roker for specifying the scope of his authority
and responsi%ilities+
Coe o0 "on!"t
The su%1%roker at all times
a%ides %y the Code of
Conduct as given hereunder6
I+ 5eneral
:+ Integrity6 A su%1%roker shall maintain high
standards of integrity2 promptitude and
fairness in the conduct of all investment
%usiness+
(+ E#ercise of .ue Skill and Care6 A su%1
%roker shall act with due skill2 care and
diligence in the conduct of all investment
%usiness+
II+ .uty to the Investor
:+ E#ecution of &rders6 A su%1%roker2 in his
dealings with the clients and the general investing
pu%lic2 shall faithfully e#ecute the orders for %uying
and selling of securities at the %est availa%le
market price+ A su%1%roker shall promptly inform
his client a%out the e#ecution or non1e#ecution
:>(
of an order and make payment in respect of
securities sold and arrange for prompt delivery
of securities purchased %y clients+
(+ Issue of Purchase or Sale Notes6
a) A su%1%roker shall issue promptly to his
client8s purchase or sale notes for all the
transactions entered into %y him with his
clients+
b) A su%1%roker shall issue promptly to his
clients scrip1wise split purchase or sale notes
and similarly %ills and receipts showing the
%rokerage separately in respect of all
transactions in the specified form+
c) A su%1%roker shall only split the contract
notes client1wise and scrip1wise originally
issued to him %y the affiliated %roker into
different denominations+
d) A su%1%roker shall not match the purchase
and sale orders of his clients and each order
must invaria%ly %e routed through a mem%er1
%roker of the stock e#change with whom he is
affiliated+ >+ "reach of Trust6 A su%1%roker shall
not disclose or discuss with any other person or
make improper use of the details of personal
investments and other information of a
confidential nature of the client which he comes
to know in his %usiness relationship+
?+ "usiness and Commission6
a) A su%1%roker shall not encourage sales or
purchases of securities with the sole o%0ect of
generating %rokerage or commission+
b) A su%1%roker shall not furnish false or
misleading 3uotations or give any other false or
misleading advice or information to the clients
with a view of inducing him to do %usiness in
particular securities and ena%ling himself to earn
%rokerage or commission there%y+
c) A su%1%roker shall not charge from his
clients a commission e#ceeding one and one1
half percent of the value mentioned in the
respective sale or purchase notes+
$+ "usiness of .efaulting Clients6 A su%1%roker
shall not deal or transact %usiness knowingly2
directly or indirectly or e#ecute an order for a
client who has failed to carry out his
commitments in relation to securities and is in
default with another %roker or su%1%roker+
/+ *airness to Clients6 A su%1%roker2 when dealing
with a client2 shall disclose that he is acting as an
agent and shall issue appropriate purchaseAsale
note ensuring at the same time2 that no conflict of
interest arises %etween him and the client+ In the
event of a conflict of interest2 he shall inform the
client accordingly and shall not seek to gain a
direct or indirect personal advantage from the
situation and shall not consider clientsN interest
inferior to his own+
:>>
7. Investment Advice6 A su%1%roker shall not
make a recommendation to any client who
might %e e#pected to rely thereon to ac3uire2
dispose of2 retain any securities unless he has
reasona%le grounds for %elieving that the
recommendation is suita%le for such a client
upon the %asis of the facts2 if disclosed %y
such a client as to his own security holdings2
financial situation and o%0ectives of such
investment+ The su%1%roker should seek such
information from clients2 wherever they feel it
is appropriate to do so+
8. Investment Advice in pu%licly accessi%le
media6
a) A su%1%roker or any of his employees shall
not render2 directly and indirectly any
investment advice a%out any security in the
pu%licly accessi%le media2 whether real1time or
non1real1time2 unless a disclosure of his
interest including his long or short position in
the said security has %een made2 while
rendering such advice+
b) In case2 an employee of the su%1%roker is
rendering such advice2 he shall also disclose
the interest of his dependent family mem%ers
and the employer including their long or short
position in the said security2 while rendering
such advice+
;+ Competence of Su%1%roker6 A su%1%roker
should have ade3uately trained staff and
arrangements to render fair2 prompt and
competent services to his clients and
continuous compliance with the regulatory
system+
III+ Su%1"rokers vis1Z1vis Stock "rokers
:+ Conduct of .ealings6 A su%1%roker shall co1
operate with his %roker in comparing unmatched
transactions+ A su%1%roker shall not knowingly
and willfully deliver documents2 which constitute
%ad delivery+ A su%1%roker shall co1operate with
other contracting party for prompt replacement
of documents2 which are declared as %ad
delivery+
(+ Protection of Clients Interests6 A su%1%roker
shall e#tend fullest co1operation to his stock1
%roker in protecting the interests of their clients
regarding their rights to dividends2 right or
%onus shares or any other rights relata%le to
such securities+
>+ Transaction with "rokers6 A su%1%roker shall
not fail to carry out his stock %roking
transactions with his %roker nor shall he fail to
meet his %usiness lia%ilities or show
negligence in completing the settlement of
transactions with them+
?+ egal Agreement %etween "rokers6 A su%1
%roker shall e#ecute an agreement or contract
with his affiliating %rokers who would clearly
specify the rights and o%ligations of the su%1
%roker and the principal %roker+
:>?
5. Advertisement and Pu%licity6 A su%1%roker
shall not advertise his %usiness pu%licly unless
permitted %y the stock e#change+
6. Inducement of Clients6 A su%1%roker shall
not resort to unfair means of inducing clients
from other %rokers+
IJ+ Su%1%rokers vis1Z1vis !egulatory
Authorities
1. 5eneral Conduct6 A su%1%roker shall not indulge
in dishonora%le2 disgraceful or disorderly or
improper conduct on the stock e#change nor shall
he willfully o%struct the %usiness of the stock
e#change+ 9e shall comply with the rules2 %ye1laws
and regulations of the stock e#change+
2. *ailure to give Information6 A su%1%roker
shall not neglect or fail or refuse to su%mit to
SE"I or the stock e#change with which he is
registered2 such %ooks2 special returns2
correspondence2 documents2 and papers or
any part thereof as may %e re3uired+
3. *alse or ,isleading !eturns6 A su%1%roker
shall not neglect or fail or refuse to su%mit the
re3uired returns and not make any false or
misleading statement on any returns re3uired
to %e su%mitted to SE"I or the stock
e#changes+
4. ,anipulation6 A su%1%roker shall not indulge
in manipulative2 fraudulent or deceptive
transactions or schemes or spread rumours
with a view to distorting market e3uili%rium or
making personal gains+
5. ,alpractices6 A su%1%roker shall not create
false market either singly or in concert with
others or indulge in any act detrimental to the
pu%lic interest or which leads to interference
with the fair and smooth functions of the
market mechanism of the stock e#changes+ A
su%1%roker shall not involve himself in
e#cessive speculative %usiness in the market
%eyond reasona%le levels not commensurate
with his financial soundness+
SEBI 5In,ier Traing6 Reg!lation,2
(<<7
Insider trading is prohi%ited and is considered
an offence vide SE"I 'Insider Trading)
!egulations2 :;;(+
The definitions of some of the important terms
are given %elow6
PDealing in ,e"!ritie,; means an act of
%uying2 selling or agreeing to %uy2 sell or deal
in any securities %y any person either as
principal or agent+
PIn,ier; means any person who2 is or was
connected with the company or is deemed to have
%een connected with the company2 and who is
reasona%ly e#pected to have access2 connection2 to
:>$
unpu%lished price sensitive information in
respect of securities of a company2 or who has
received or has had access to such
unpu%lished price sensitive information+
A A"onne"te $er,onB means any person
who1
(i) is a director2 as defined in clause ':>) of
section ( of the Companies Act2 :;$/ of a
company2 or is deemed to %e a director of that
company %y virtue of su%clause ':<) of section
><7 of that Act2 or
(ii) &ccupies the position as an officer or an
employee of the company or holds a position
involving a professional or %usiness
relationship %etween himself and the company
whether temporary or permanent and who
may reasona%ly %e e#pected to have an
access to unpu%lished price sensitive
information in relation to that company+
A person is Pee-e to %e a "onne"te
$er,on; if such person1
(i) is a company under the same management
or group or any su%sidiary company thereof
within the meaning of section ':") of section
>7<2 or su%section '::) of section >7(2 of the
Companies Act2 :;$/ or su%1clause 'g) of
section ( of the ,onopolies and !estrictive
Trade Practices Act2 :;/; as the case may %eI
or
(ii) is an intermediary as specified in section
:( of SE"I Act2 :;;(2 Investment company2
Trustee Company2 Asset ,anagement
Company or an employee or director thereof
or an official of a stock e#change or of clearing
house or corporationI
(iii) is a merchant %anker2 share transfer
agent2 registrar to an issue2 de%enture trustee2
%roker2 portfolio manager2 Investment Advisor2
su%1%roker2 Investment Company or an
employee thereof2 or2 is a mem%er of the
"oard of Trustees of a mutual fund or a
mem%er of the "oard of .irectors of the Asset
,anagement Company of a mutual fund or is
an employee thereof who have a fiduciary
relationship with the companyI
(iv) is a mem%er of the "oard of .irectors2 or
an employee2 of a pu%lic financial institution as
defined in Section ?A of the Companies Act2
:;$/I or
(v) is an official or an employee of a self
regulatory organi-ation recognised or
authori-ed %y the "oard of a regulatory %odyI
or
(vi) is a relative of any of the aforementioned
personsI
:>/
(vii) Is a %anker of the company+
(viii) !elatives of the connected personI
(i&) is a concern2 firm2 trust2 9indu Cndivided
*amily2 company or association of persons
wherein any of the connected persons
mentioned in su%1clause 'i) of clause 'c) of this
regulation or any of the persons mentioned in
su%clauses 'vi)2 'vii) or 'viii) of this clause have
more than :<B of the holding or interest
APri"e ,en,iti3e in0or-ationL means any
information which relates directly or indirectly
to a company and which if pu%lished is likely to
materially affect the price of securities of that
company+
The following shall %e deemed to %e price
sensitive information6 1
(i) Periodical financial results of the companyI
(ii) Intended declaration of dividends '%oth
interim and final)I
(iii) Issue of securities or %uy1%ack of
securitiesI
(iv) Any ma0or e#pansion plans or e#ecution of
new pro0ectsI
(v) Amalgamation2 mergers or takeoversI
(vi) .isposal of the whole or su%stantial part of
the undertakingI
(vii) Any significant changes in policies2 plans
or operations of the company+
Cnpu%lished means information which is not
pu%lished %y the company or its agents and is
not specific in nature+
Speculative reports in print or electronic media
shall not %e considered as pu%lished information+
Pro+i%ition on ealing2 "o--!ni"ating or
"o!n,eling 5Reg!lation >6
No insider shallT
[ either on his own %ehalf or on %ehalf of any other
person2 deal in securities of a company listed on
any stock e#change when in possession of any
unpu%lished price sensitive informationI
[ communicate2 counsel or procure2 directly or
indirectly2 any unpu%lished price sensitive
information to any person who while in
possession of such unpu%lished price
sensitive information shall not deal in
securitiesI Provided that nothing contained
a%ove shall %e applica%le to any
communication re3uired in the ordinary course
of %usiness or profession or employment or
under any law+
Reg!lation >A
:>7
No company shall deal in the securities of
another company or associate of that other
company while in possession of any
unpu%lished price sensitive information+
Ciolation o0 $ro3i,ion, relating to in,ier
traing
Any insider2 who deals in securities in
contravention of the provisions of regulation >
or >A shall %e guilty of insider trading
'regulation ?)+ The regulations ena%le SE"I2
on the %asis of any complaint or otherwise2 to
take steps to investigate an allegation of
insider trading+ &n the %asis of the report of
the investigating authority2 SE"I is empowered
to prosecute persons found prima facie guilty
of insider trading in an appropriate court+
Poli"* on i,"lo,!re, an internal
$ro"e!re 0or $re3ention o0 in,ier traing#
Chapter IJ of the !egulations deals with policy
on disclosures and internal procedure for
prevention of insider trading+ Accordingly2 all
listed companies and organi-ations associated
with securities markets including6
(a) The intermediaries as mentioned in section
:( of the Act2 asset ,anagement Company
and trustees of mutual fundsI
(b) The self regulatory organi-ations
recognised or authori-ed %y the "oardI
(c) The recognised stock e#changes and
clearing house or corporationsI
(d) The pu%lic financial institutions as defined in
Section ?A of the Companies Act2 :;$/I and
(e) the professional firms such as auditors2
accountancy firms2 law firms2 analysts2
consultants2 etc+2 assisting or advising listed
companies2 shall frame a code of internal
procedures and conduct as near there to the
,odel Code specified in Schedule I of these
!egulations+
Di,"lo,!re,
.isclosure of interest or holding %y directors
and officers and su%stantial shareholders in
listed companies T
Initial Di,"lo,!re#
':) Any person who holds more than $B
shares or voting rights in any listed company
shall disclose to the company2 the num%er of
shares or voting rights held %y such person2 on
%ecoming such holder2 within ? working days
of61
(a) The receipt of intimation of allotment of
sharesI or
(b) The ac3uisition of shares or voting rights2
as the case may %e+
:>=
(2) Any person who is a director or officer of a
listed company shall disclose to the company2
the num%er of shares or voting rights held %y
such person2 within ? working days of
%ecoming a director or officer of the company+
Contin!al Di,"lo,!re
(3) Any person who holds more than $B shares or
voting rights in any listed company shall disclose to
the company the num%er of shares or voting rights
held and change in shareholding or voting rights2
even if such change results in shareholding falling
%elow $B2 if there has %een change in such holdings
from the last disclosure made under su%1regulation
':) or under this su%1regulationI and such change
e#ceeds (B of total shareholding or voting rights in
the company+
(4) Any person who is a director or officer of a
listed company2 shall disclose to the company2 the
total num%er of shares or voting rights held and
change in shareholding or voting rights2 if there
has %een a change in such holdings from the last
disclosure made under su%1regulation '() or under
this su%1regulation2 and the change e#ceeds
!upees $ lacs in value or ?(QO($<<<P shares or
?>QO:BP of total shareholding or voting rights2
whichever is lower+
(5) The disclosure mentioned in su%1regulations
'>) and '?) shall %e made within ? working days
ofI
'a) The receipt of intimation of allotment of
shares2 or
'%) The ac3uisition or sale of shares or voting
rights2 as the case may %e+
Di,"lo,!re %* "o-$an* to ,to"/
e1"+ange,
(6) Every listed company2 within five days of
receipt2 shall disclose to all stock e#changes on
which the company is listed2 the information
received under su% regulations ':)2 '()2 '>) and '?)+
Coe o0 Et+i",
SE"I has advised stock e#changes to adopt
the Code of Ethics for their directories and
functionaries with effect from >:st ,ay (<<:+
This is aimed at improving the professional
and ethical standards in the functioning of
e#changes there%y creating %etter investors
confidence in the integrity of the market+
SEBI 5Pro+i%ition o0 Fra!!lent an
Un0air Trae Pra"ti"e, Relating To
Se"!ritie, Mar/et,6 Reg!lation,2
(<<=
The SE"I 'Prohi%ition of *raudulent and Cnfair
Trade Practices in relation to the Securities
,arket) !egulations2 :;;$ ena%le SE"I to
investigate into cases of market manipulation and
fraudulent and unfair trade practices+ The
regulations specifically
prohi%it market
manipulation2
:>;
misleading statements to induce sale or
purchase of securities2 unfair trade practices
relating to securities+ SE"I can conduct
investigation2 suo moto or upon information
received %y it2 %y an investigating officer in
respect of conduct and affairs of any person
dealing2 %uyingAsellingAdealing in securities+
"ased on the report of the investigating officer2
SE"I can initiate action for suspension or
cancellation of registration of an intermediary+
The term V0ra!W has %een defined %y !egulation
(':)'c)+ *raud includes any of the following acts
committed %y a party to a contract2 or with his
connivance2 or %y his agent2 with intent to deceive
another party thereto or his agent2 or to induce him
to enter into the contract61
1. The suggestion2 as to a fact which is not true2
%y one who does not %elieve it to %e trueI
2. The active concealment of a fact %y one
having knowledge or %elief of the factI
3. A promise made without any intention of
performing itI
4. Any other act fitted to deceiveI and
5. Any such act or omission as the law
specially declares to %e fraudulentI and
Lfraudulent8 shall %e construed accordingly+
The regulation prohi%its6
':) .ealings in securities in a fraudulent
manner2
'() ,arket manipulation2
'>) ,isleading statements to induce sale or
purchase of securities2 and
'?) Cnfair trade practice relating to securities
Pro+i%ition o0 "ertain ealing, in ,e"!ritie,
A person shall not %uy2 sell or otherwise deal in
securities in a fraudulent manner '!egulation >)+
Pro+i%ition again,t Mar/et Mani$!lation
*or prohi%ition against market manipulation2
!egulation ? specifies that no person shall1
(i) Effect2 take part in2 or enter into2 either
directly or indirectly2 transactions in securities2
with the intention of artificially raising or
depressing the prices of securities and there%y
inducing the sale or purchase of securities %y
any person2
(ii) Indulge in any act2 which is calculated to
create a false or misleading appearance of
trading in the securities market2
(iii) Indulge in any act which results in
reflection of prices of securities %ased on
transactions that are not genuine trade
transactions2
:?<
(iv) enter into a purchase or sale of any
securities2 not intended to effect transfer of
%eneficial ownership %ut intended to operate
only as a device to inflate2 depress2 or cause
fluctuations in the market price of securities2
and
(v) Pay2 offer or agree to pay or offer2 directly
or indirectly2 to any person any money or
moneyNs worth for inducing another person to
purchase or sell any security with the sole
o%0ect of inflating2 depressing2 or causing
fluctuations in the market price of securities+
Pro+i%ition o0 -i,leaing ,tate-ent, to
in!"e ,ale or $!r"+a,e o0 ,e"!ritie,
According to !egulation $':)2 no person shall
make any statement2 or disseminate any
information which T
'a) is misleading in a material particularI and
'%) is likely to induce the sale or purchase of
securities %y any other person or is likely to
have the effect of increasing or depressing the
market price of securities2 if when he makes
the statement or disseminates the information1
(i) 9e does not care whether the statement or
information is true or falseI or
(ii) 9e knows2 or ought reasona%ly to have
known that the statement or information is
misleading in any material particular+
According to !egulation $'()2 nothing in this
su%1regulation shall apply to any general
comments made in good faith in regard to T
a
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d) Any other matter of a similar nature+
4hether such comments %e made in pu%lic or
in private+
Pro+i%ition on !n0air trae $ra"ti"e relating to
,e"!ritie, '!egulation /) No person shall6
'a) In the course of his %usiness2 knowingly
engage in any act2 or practice which would
operate as a fraud upon any person in
connection with the purchase or sale of2 or any
other dealing in2 any securitiesI
'%) on his own %ehalf or on %ehalf of any person2
knowingly %uy2 sell or otherwise deal in securities2
pending the e#ecution of any order of his client
relating to the same security for purchase2 sale or
other dealings in respect of securitiesI Nothing
contained in this clause shall
:?:
apply where according to the clients
instructions2 the transaction for the client is to
%e effected only under specified conditions or
in specified circumstancesI
(c) intentionally and in contravention of any law
for the time %eing in force delays the transfer
of securities in the name of the transferee or
the dispatch of securities or connected
documents to any transfereeI
(d) Indulge in falsification of the %ooks2
accounts and recordsI 'whether maintained
,anually or in computer or in any other form)I
'e) 4hen acting as an agent2 e#ecute a transaction
with a client at a price other than the price at which
the transaction was e#ecuted %y him2 whether on a
stock e#change or otherwise2 or at a price other
than the price at which it was offset against the
transaction of another client+
T+e De$o,itorie, A"t2 (<<&
The .epositories Act2 :;;/ was enacted to
provide for regulation of depositories in
securities and for matters connected therewith
or incidental thereto+ It came into force from
(<th Septem%er2 :;;$+
The terms used in the Act are defined as
under6
(1) MBene0i"ial o.nerM means a person whose
name is recorded as such with a depository+
(2) MDe$o,itor*M means a company2 formed
and registered under the Companies Act2 :;$/
and which has %een granted a certificate of
registration under su%section ':A) of section
:( SE"I Act2 :;;(+
(3) MI,,!erM means any person making an
issue of securities+
(4) MParti"i$antM means a person registered
as such under su%1section ':A) of section :(
of SE"I Act2 :;;(+
(5) MRegi,tere o.nerM means a depository
whose name is entered as such in the register
of the issuer+
Agree-ent %et.een e$o,itor* an
$arti"i$ant
A depository shall enter into an agreement in
the specified format with one or more
participants as its agent+
Ser3i"e, o0 e$o,itor*
Any person2 through a participant2 may enter
into an agreement2 in such form as may %e
specified %y the %ye1laws2 with any depository
for availing its services+
S!rrener o0 "erti0i"ate o0 ,e"!rit*
:?(
Any person who has entered into an agreement with
a depository shall surrender the certificate of security2
for which he seeks to avail the services of a
depository2 to the issuer in such manner as may %e
specified %y the regulations+ The issuer2 on receipt of
certificate of security2 shall cancel the certificate of
security and su%stitute in its records the name of the
depository as a registered owner in respect of that
security and inform the depository accordingly+ A
depository shall2 on receipt of information enter the
name of the person in its records2 as the %eneficial
owner+
Regi,tration o0 tran,0er o0 ,e"!ritie, .it+
e$o,itor*
Every depository shall2 on receipt of intimation
from a participant2 register the transfer of
security in the name of the transferee+ If a
%eneficial owner or a transferee of any security
seeks to have custody of such security2 the
depository shall inform the issuer accordingly+
O$tion, to re"ei3e ,e"!rit* "erti0i"ate or
+ol ,e"!ritie, .it+ e$o,itor*
Every person su%scri%ing to securities offered
%y an issuer shall have the option either to
receive the security certificates or hold
securities with a depository+ 4here a person
opts to hold a security with a depository2 the
issuer shall intimate such depository the
details of allotment of the security2 and on
receipt of such information the depository shall
enter in its records the name of the allottee as
the %eneficial owner of that security+
Se"!ritie, in e$o,itorie, to %e in 0!ngi%le
0or-
All securities held %y a depository shall %e
demateriali-ed and shall %e in a fungi%le form+
Rig+t, o0 e$o,itorie, an %ene0i"ial o.ner
A depository shall %e deemed to %e the
registered owner for the purposes of effecting
transfer of ownership of security on %ehalf of a
%eneficial owner+ The depository as a
registered owner shall not have any voting
rights or any other rights in respect of
securities held %y it+ The %eneficial owner shall
%e entitled to all the rights and %enefits and %e
su%0ected to all the lia%ilities in respect of his
securities held %y a depository+
Plege or +*$ot+e"ation o0 ,e"!ritie, +el
in a e$o,itor*
A %eneficial owner may with the previous
approval of the depository create a pledge or
hypothecation in respect of a security owned %y
him through a depository+ Every %eneficial owner
shall give intimation of such pledge or
hypothecation to the depository and such
depository shall thereupon make entries in its
records accordingly+ Any entry in the records of a
depository under Section :( '() shall %e
evidence of a pledge or hypothecation+
F!rni,+ing o0 in0or-ation an re"or, %*
e$o,itor* an i,,!er
:?>
Every depository shall furnish to the issuer
information a%out the transfer of securities in
the name of %eneficial owners at such
intervals and in such manner as may %e
specified %y the %ye1laws+ Every issuer shall
make availa%le to the depository copies of the
relevant records in respect of securities held
%y such depository+
O$tion to o$t o!t in re,$e"t o0 an* ,e"!rit*
If a %eneficial owner seeks to opt out of a
depository in respect of any security he
Shall inform the depository accordingly+ The
depository shall on receipt of intimation make
appropriate entries in its records and shall inform
the issuer+ Every issuer shall2 within thirty days
of the receipt of intimation from the depository
and on fulfillment of such conditions and on
payment of such fees as may %e specified %y the
regulations2 issue the certificate of securities to
the %eneficial owner or the transferee2 as the
case may %e+
De$o,itor* to ine-ni0* lo,, in "ertain
"a,e,
Any loss caused to the %eneficial owner due to
the negligence of the depository or the
participant2 the depository shall indemnify such
%eneficial owner+ 4here the loss due to the
negligence of the participant is indemnified %y
the depository2 the depository shall have the
right to recover the same from such
participant+
Se"!ritie, not lia%le to ,ta-$ !t*
As per Section =1A of Indian Stamp Act2 :=;;I
an issuer2 %y the issue of securities to one or
more depositories shall2 in respect of such
issue2 %e chargea%le with duty on the total
amount of security issued %y it and such
securities need not %e stampedI
1) where an issuer issues certificate of
security under su%1section '>) of Section :? of
the .epositories Act2 :;;/2 on such certificate
duty shall %e paya%le as is paya%le on the
issue of duplicate certificate under the Indian
Stamp Act2 :=;;I
2) Transfer of registered ownership of shares
from a person to a depository or from a
depository to a %eneficial owner shall not %e
lia%le to any stamp dutyI
3) transfer of %eneficial ownership of shares2
such shares %eing shares of a company
formed and registered under the Companies
Act2 :;$/ or a %ody corporate esta%lished %y a
Central Act dealt with %y a depository2 shall not
%e lia%le to duty under Article /( of Schedule I
of the Indian Stamp Act2 :=;;I
:??
4) Transfer of %eneficial ownership of units2
such units %eing units of mutual fund including
units of the Cnit Trust of India2 dealt with %y a
depository shall not %e lia%le to duty under
Article /( of Schedule I of the Indian Stamp
Act2 :=;;I
5) transfer of %eneficial ownership of
de%entures2 such de%entures %eing
de%entures of a company formed and
registered under the Companies Act2 :;$/ or a
%ody corporate esta%lished %y a Central Act2
dealt with a depository2 shall not %e lia%le to
duty under Article (7 of Schedule I of the
Indian Stamp Act2 :=;;I
In"o-e Ta1 A"t2 (<&(
PDo-e,ti" "o-$an*; means an Indian
company2 or any other company which2 in
respect of its income lia%le to ta# under this
Act2 has made the prescri%ed arrangements
for the declaration and payment2 within India2
of the dividends 'including dividends on
preference shares) paya%le out of such
income2 as per Section ('((A)+
Di3ien2 according to Section ('(() includes1
(a) Any distri%ution %y a company of
accumulated profits2 whether capitali-ed or
not2 if such distri%ution entails the release %y
the company to its shareholders of all or any
part of the assets of the companyI
(b) any distri%ution to its shareholders %y a
company of de%entures2 de%enture stock2 or
deposit certificates in any form2 whether with
or without interest2 and any distri%ution to its
preference shareholders of shares %y way of
%onus2 to the e#tent to which the company
possesses accumulated profits2 whether
capitali-ed or notI
(c) Any distri%ution made to the shareholders
of a company on its li3uidation2 to the e#tent to
which the distri%ution is attri%uta%le to the
accumulated profits of the company
immediately %efore its li3uidation2 whether
capitali-ed or notI
(d) any distri%ution to its shareholders %y a
company on the reduction of its capital2 to the
e#tent to which the company possesses
accumulated profits which arose after the end
of the previous year ending ne#t %efore the :st
day of April2 :;>>2 whether such accumulated
profits have %een capitali-ed or notI
(e) any payment %y a company2 not %eing a
company in which the pu%lic are
su%stantially
interested2 of any sum 'whether as representing a
part of the assets of the company or otherwise)
made after the >:st day of ,ay2 :;=72 %y way
of advance or loan to a
shareholder2 %eing a
person
:?$
who is the %eneficial owner of shares 'not
%eing shares entitled to a fi#ed rate of dividend
whether with or without a right to participate in
profits) holding not less than ten percent of the
voting power2 or to any concern in which such
shareholder is a mem%er or a partner and in
which he has a su%stantial interest 'hereafter
in this clause referred to as the said concern)
or any payment %y any such company on
%ehalf2 or for the individual %enefit2 of any such
shareholder2 to the e#tent to which the
company in either case possesses
accumulated profitsI %ut Ldividend8 does not
include1
(a) a distri%ution made in accordance with su%1
clause 'c) or su%1clause 'd) in respect of any
share issued for full cash consideration2 where
the holder of the shares is not entitled in the
event of li3uidation to participate in the surplus
assetsI
(b) a distri%ution made in accordance with
su%1clause 'c) or su%1clause 'd) in so far as
such distri%ution is attri%uta%le to the
capitali-ed profits of the company representing
%onus shares allotted to its e3uity
shareholders after the >:st day of ,arch2 :;/?
'and %efore the :st day of April2 :;/$)I
(c) Any advance or loan made to a
shareholder 'or the said concern) %y a
company in the ordinary course of its
%usiness2 where the lending of money is a
su%stantial part of the %usiness of the
companyI
(d) any dividend paid %y a company which is
set off %y the company against the whole or
any part of any sum previously paid %y it and
treated as a dividend within the meaning of
su%1clause 'e)2 to the e#tent to which it is so
set offI
(e) Any payment made %y a company on
purchase of its own shares from a shareholder
in accordance with the provisions of section
77A of the Companies Act2 :;$/+
(f) Any distri%ution of shares pursuant to a
demerger %y the resulting company to the
shareholders of the demerged company
'whether or not there is a reduction of capital
in the demerged company)+
Di3ien in"o-e 'Section =)6 *or the purposes of
inclusion in the total income of an assessee1
(a) any dividend declared %y a company or
distri%uted or paid %y it within the meaning of
su%1clause 'a) or su%1clause '%) or su%1clause
'c) or su%1clause 'd) or su%1clause 'e) of
clause '(() of Section (2 shall %e deemed to
%e the income of the previous year in which it
is so declared2 distri%uted or paid2 as the case
may %eI
:?/
'%) Any interim dividend shall %e deemed to %e
the income of the previous year2 in which the
amount of such dividend is unconditionally
made availa%le %y the company to the
mem%er who is entitled to it+
Intere,t on ,e"!ritie, 'Clause (=" of Section
() means1
(i) interest on any security of the
Central 5overnment or a State
5overnment2
(ii) Interest on de%entures or other
securities for money issued %y or on
%ehalf of a local authority or a
company or a corporation
esta%lished %y a Central2 state or
provincial Act+
Ca$ital a,,et
(i) ong term capital asset means a capital
asset which is not a short term capital asset2
as per Clause (;A of Section (+
(ii) Short term capital asset means a capital asset
held %y an assessee for not more than thirty1si#
monthsQ immediately preceding the date of its
transfer2 'Clause ?(A of Section ()Q twelve months
in the case of a share held in a company or any
other security listed in a recognised stock
e#change in India or a unit of the Cnit Trust of India
esta%lished under the Cnit Trust of India Act2 :;/>
or a unit of a ,utual *und specified under clause
'(>.) of section :<+
Ca$ital gain, 'Section ?$)
Any profits or gains arising from the transfer of a
capital asset effected in the previous year shall2
save as otherwise provided in sections '$?2 $?"2
$?.2 $?E2 $?EA2 $?E"2 $?*2 $?5 and $?9)2 %e
chargea%le to income1ta# under the head VCapital
gainsW2 and shall %e deemed to %e the income of
the previous year in which the transfer took place+
4here any person has had at any time during
previous year any %eneficial interest in any
securities2 then any profits or gains arising from
transfer made %y the depository or participant of
such %eneficial interest in respect of securities
shall %e chargea%le to income1ta# as the income of
the %eneficial owner of the previous year in which
such transfer took place and shall not %e regarded
as income of the depository who is deemed to %e
registered owner of securities %y virtue of
su%section ':) of section :< of the .epositories
Act2 :;;/2 and for the purposes of section ?= and
proviso to clause ' ?(A) of section (2 the cost of
ac3uisition and the period of holding of any
securities shall %e determined on the %asis of the
first1in first1 out method+
:?7
T*$e, o0 "a$ital gain,
:+ ong term capital gain means capital gain
arising from the transfer of a long term capital
asset2 as per Clause (;" of Section (+ (+ Short
term capital gain means capital gain arising from
the transfer of a short term capital asset2 as per
Clause ?(" of Section (+
De!"tion in re,$e"t o0 intere,t on "ertain
,e"!ritie,2 i3ien,2 et".
According to Section =<2 where the gross
total income of an assessee2 %eing an
individual2 or a 9indu undivided family includes
any income %y way of1
(i) Interest on any security of the Central
5overnment or a State 5overnment
(ii) Interest on National Savings Certificates
'JI Issue) or National Savings Certificates 'JII
Issue) or National Savings Certificates 'JIII
Issue) issued under the 5overnment Savings
Certificates Act2 :;$;+
(iii) Interest on such de%entures2 issued %y
any institution or authority or any pu%lic sector
company2 or any co1operative society
'including a co1operative land mortgage %ank
or a co1operative land development %ank)2 as
the Central 5overnment may2 %y notification in
the &fficial 5a-ette2 specify in this %ehalfI
(iv) Interest on deposits under such National
.eposit Scheme as may %e framed %y the
Central 5overnment and notified %y it in this
%ehalf in the &fficial 5a-etteI
(v) Interest on deposits under any 'other)
scheme framed %y the Central 5overnment
and notified %y it in this %ehalf in the &fficial
5a-etteI
(vi) Interest on deposits under the Post &ffice
',onthly Income Account) !ules2 :;=7+
(vii) Interest on deposits with a %anking
company to which the "anking !egulation Act2
:;?; ':< of :;?;)2 applies 'including any %ank
or %anking institution referred to in section $: of
that Act) or a co1operative society engaged in
carrying on the %usiness of %anking 'including a
co1operative land mortgage %ank or a co1
operative land development %ank)I
(viii) Interest on deposits with any such %ank2 not
%eing a %anking company or a co1operative society
referred to in the clause %ut %eing a %ank
esta%lished %y or under any law made %y
Parliament2 as may %e approved %y the Central
5overnment for the purposes of this clauseI
:?=
(i&) Interest on deposits with a financial
corporation which is engaged in providing long1
term finance for industrial development in India
'and which is eligi%le for deduction under clause
(viii) of su%1section ':) of section >/)
(&) Interest on deposits with any authority
constituted in India %y or under any law enacted
either for the purpose of dealing with and satisfying
the need for housing accommodation or for the
purpose of planning2 development or improvement
of cities2 towns and villages2 or for %othI
(&i) Interest on deposits with a co1operative
society2 not %eing a co1operative society made
%y a mem%er of the societyI
(&ii) .ividends from any co1operative societyI
(&iii) Interest on deposits with any pu%lic company
formed and registered in India with the main o%0ect
of carrying on the %usiness of providing long1term
finance for construction or purchase of houses in
India for residential purposes 'and which is eligi%le
for deduction under clause 'viii) of
su%section ':) of section >/)+ there shall2 in
accordance with and su%0ect to the provisions
of this section2 %e allowed2 in computing the
total income of the assessee2 a deduction as
specified hereunder2 namely61
(i) in a case where the amount of such
income does not e#ceed in the
aggregate 'nine) thousand rupees2 the
whole of such amountI and
(ii) in any other case 'nine) thousand
rupees6
Provided that where any income referred to in
clause 'i) remains unallowed after the
deduction under the foregoing provision of this
section2 there shall %e allowed in computing
the total income of the assessee2 an additional
deduction of an amount e3ual to so much of
such income as has remained unallowedI so2
however2 that the amount of such additional
deduction shall not e#ceed three thousand
rupees+
E#planation 1 *or the purposes of this su%1
section2 the e#pression Lsecurity8 means a
5overnment security as defined in clause '()
of section ( of the Pu%lic .e%t Act2 :;??+
*or the removal of dou%ts2 it is here%y declared
that where the income referred to in su%1section
':) is derived from any asset held %y2 or on
%ehalf of2 a firm2 an association of persons or
a %ody of individuals2 no deduction shall %e
allowed under the said su%1section in respect
of such income in computing the total income
of any partner of the firm or any mem%er of the
association or %ody+
PAN "o-$!l,or* 0or Se"!ritie, tran,a"tion
:?;
The Income1ta# 'Eighth Amendment) !ules2
(<<( made it mandatory for a person to 3uote
permanent account num%ers 'PAN)2 issued %y
the income ta# department2 for securities
transactions of over !s+ : lakh+
Ta1 on long-ter- "a$ital gain, 'Section ::()
4here the total income of an assessee
includes any income2 arising from the transfer
of along1term capital asset2 which is
chargea%le under the head LCapital gains82 the
ta# paya%le %y the assessee on the total
income shall %e the aggregate of21
'a) In the case of an individual or a 9indu
undivided family2 %eing a resident21
i. the amount of income1ta# paya%le on the total
income as reduced %y the amount of such long1
term capital gains2 had the total income as so
reduced %een his total incomeI and
ii. The amount of income1ta# calculated on
such long1term capital gains at the rate of
twenty per cent6
'%) In the case of a domestic company21
i. the amount of income1ta# paya%le on the total
income as reduced %y the amount of such long1
term capital gains2 had the total income as so
reduced %een its total incomeI and
ii. The amount of income1ta# calculated on
such long1term capital gains at the rate of
OtwentyP per cent6
'c) In the case of a non1resident 'not %eing a
company) or a foreign company21
i. the amount of income1ta# paya%le on the total
income as reduced %y the amount of such long1
term capital gains 2 had the total income as so
reduced %een its total incomeI and
ii. The amount of income1ta# calculated on
such long1term capital gains at the rate of
twenty percentI
'd) In any other case of a resident21
i. the amount of income1ta# paya%le on the
total income as reduced %y the amount of
long1term capital gains2 had the total income
as so reduced %een its total incomeI and
ii. the amount of income1ta# calculated on
such long1term capital gains at the rate of
twenty per cent 4here the gross total income
of an assessee includes any income arising
from the transfer of along term capital asset2
the gross total income shall %e reduced %y the
amount of such income and the deduction
under Chapter JI1A shall %e allowed as if the
gross total income as so reduced were the
gross total income of the assessee+ 4here the
total income of an assessee includes any
income arising from the
:$<
Transfer of a long1term capital asset2 the total
income shall %e reduced %y the amount of
such income and the re%ate under section ==
shall %e allowed from the income1Ta# on the
total income as so reduced+
Unit
@CI
Clearing and settlement
procedures
Process of clearing
and settlement
Parties involved in
clearing and
settlement
:$:
CLEARING AND SETTLEMENT
Tran,a"tion C*"le
.ecision to
trade
*undsA
securities
Transaction cycle
Settlement of
trades
Clearing of
trades
Settle-ent Pro"e,,
4hile NSE provides a platform for trading to its
trading mem%ers2 the National Securities Clearing
Corporation td+ 'NSCC) determines the
fundsAsecurities o%ligations of the trading mem%ers
and ensures that trading mem%ers meet their
o%ligations+ NSCC %ecomes the legal
counterparty to the net settlement o%ligations of
every mem%er+ This principle is called \\novationNN
and NSCC is o%ligated to meet all settlement
o%ligations2 regardless of mem%er defaults2 without
any discretion+ &nce a mem%er fails on any
o%ligations2 NSCC immediately cuts off trading
and initiates recovery+ The clearing %anks and
depositories provide the necessary interface
%etween the custodiansAclearing mem%ers 'who
clear for the trading mem%ers or their own
transactions) for settlement of fundsAsecurities
o%ligations of trading mem%ers+ The core
processes involved in the settlement process are6
:$(
(a) .etermination of &%ligation6 NSCC
determines what counter1parties owe2 and
what counter1parties are due to receive on the
settlement date+ The NSCC interposes itself
as a central counterparty %etween the
counterparties to trades and nets the positions
so that a mem%er has security wise net
o%ligation to receive or deliver a security and
has to either pay or receive funds+
(b) Pay1in of *unds and Securities6 The
mem%ers %ring in their fundsAsecurities to the
NSCC+ They make availa%le re3uired securities
in designated accounts with the depositories %y
the prescri%ed pay1in time+ The depositories
move the securities availa%le in the accounts of
mem%ers to the account of the NSCC+ ikewise
mem%ers with funds o%ligations make availa%le
re3uired funds in the designated accounts with
clearing %anks %y the prescri%ed pay1in time+
The NSCC sends electronic instructions to the
clearing %anks to de%it mem%er8s accounts to
the e#tent of payment o%ligations+ The %anks
process these instructions2 de%it accounts of
mem%ers and credit accounts of the NSCC+
(c) Pay1out of *unds and Securities6 After
processing for shortages of fundsAsecurities and
arranging for movement of funds from surplus
%anks to deficit %anks through !"I clearing2 the
NSCC sends electronic instructions to the
depositoriesAclearing %anks to release pay1out of
securitiesAfunds+ The depositories and clearing
%anks de%it accounts of NSCC and credit
settlement accounts of mem%ers+ Settlement is
complete upon release of pay1out of funds and
securities to custodiansAmem%ers+ The
settlement process for transactions in securities
in the C, segment of NSE is presented in the
*igure >+(
(d) !isk ,anagement6 A sound risk
management system is integral to an efficient
settlement system+ NSCC has put in place a
comprehensive risk management system2
which is constantly monitored and upgraded to
pre1empt market failures+ It monitors the track
record and performance of mem%ers and their
net worthI undertakes on1line monitoring of
mem%ers8 positions and e#posure in the
market2 collects margins from mem%ers and
automatically disa%les mem%ers if the limits
are %reached+
>.> Settle-ent Agen"ie,
The NSCC2 with the help of clearing mem%ers2
custodians2 clearing %anks and depositories settles
the trades e#ecuted on e#changes+ The roles of each
of these entities are e#plained %elow6
'a) NSCC6 The NSCC is responsi%le for post1
trade activities of a stock e#change+ Clearing and
settlement of trades and risk management are its
central functions+ It clears all trades2
:$>
determines o%ligations of mem%ers2 arranges
for pay1in of fundsAsecurities2 receives
fundsAsecurities2 processes for shortages in
fundsAsecurities2 arranges for pay1out of
fundsAsecurities to mem%ers2 guarantees
settlement2 and collects and maintains
marginsAcollateralA%ase capitalAother funds+
'%) Clearing ,em%ers6 They are responsi%le for
settling their o%ligations as determined %y the
NSCC+ They have to make availa%le funds andAor
securities in the designated accounts with clearing
%ankAdepository participant2 as the case may %e2 to
meet their o%ligations on the settlement day+ In the
capital market segment2 all trading mem%ers of the
E#change are re3uired to %ecome the Clearing
,em%er of the Clearing Corporation+ 'c)
Custodians6 A custodian is a person who holds for
safekeeping the documentary evidence of the title
to property %elonging like share certificates2 etc+
The title to the custodian8s property remains vested
with the original holder2 or in their nominee's)2 or
custodian trustee2 as the case may %e+ In NSCC2
custodian is a clearing mem%er %ut not a trading
mem%er+ 9e settles trades assigned to him %y
trading mem%ers+ 9e is re3uired to confirm
whether he is going to settle a particular trade or
not+ If it is confirmed2 the NSCC assigns that
o%ligation to that custodian and the custodian is
re3uired to settle it on the settlement day+ If the
custodian re0ects the trade2 the o%ligation is
assigned %ack to the trading Aclearing mem%er+
Fig!re # Settle-ent
Pro"e,, in CM ,eg-ent
o0 NSE
NSE
:
= ;
De$o,itorie,
/
NSCCL
7
( >
$
:<
C!,toian,JCM
;,
:$?
E#planations6
(1) Trade details from E#change to NSCC
'real1time and end of day trade file)+
(2) NSCC notifies the consummated trade
details to C,sAcustodians who affirm %ack+
"ased on the affirmation2 NSCC applies
multilateral netting and determines o%ligations+
(3) .ownload of o%ligation and pay1in advice
of fundsAsecurities+
(4) Instructions to clearing %anks to make
funds availa%le %y pay1in time+
(5) Instructions to depositories to make
securities availa%le %y pay1in1time+
(6) Pay1in of securities 'NSCC advises
depository to de%it pool account of
custodiansAC,s and credit its account and
depository does it)+
(7) Pay1in of funds 'NSCC advises Clearing
"anks to de%it account of custodiansAC,s and
credit its account and clearing %ank does it)+
(8) Pay1out of securities 'NSCC advises
depository to credit pool account of
custodiansAC,s and de%it its account and
depository does it)+
(9) Pay1out of funds 'NSCC advises Clearing
"anks to credit account of custodiansAC,s
and de%it its account and clearing %ank does
it)+
(10) .epository informs custodiansAC,s
through .Ps+
(11) Clearing "anks inform custodiansAC,s+
(d) Clearing "anks6 Clearing %anks are a key link
%etween the clearing mem%ers andNSCC for funds
settlement+ Every clearing mem%er is re3uired to
open a dedicated settlement account with one of the
clearing %anks+ "ased on his o%ligation as
determined through clearing2 the clearing mem%er
makes funds availa%le in the clearing account for the
pay1in and receives funds in case of a pay1out+
,ultiple clearing %anks provide advantages of
competitive forces2 facilitate introduction of new
products vi-+ working capital funding2 anywhere
%anking facilities2 the option to mem%ers to settle
funds through a %ank2 which provides the ma#imum
services suita%le to the mem%er+ The clearing %anks
are re3uired to provide the following services as a
single
:$$
window to all clearing mem%ers of National
Securities Clearing Corporation td+ as also to
the Clearing Corporation6
"ranch network in cities that cover %ulk of the
trading cum clearing mem%ers
9igh level automation including electronic
funds transfer 'E*T) facilities
*acilities like 'a) dedicated %ranch facilities
'%) software to interface with the Clearing
Corporation 'c) access to accounts information
on a real time %asis
Jalue1added services to mem%ers such as
free1of1cost funds transfer across centers etc+
Providing working capital funds
Stock lending facilities
Services as Professional Clearing ,em%ers
Services as .epository Participants
&ther Capital ,arket related facilities
All other %anking facilities like issuing %ank
guarantees A credit facilities etc+
(e) .epositories6 A depository is an entity where
the securities of an investor are held in
electronic form+ The person who holds a demat
account is a %eneficiary owner+ In case of a 0oint
account2 the account holders will %e %eneficiary
holders of that 0oint account+ .epositories help in
the settlement of the dematerialised securities+
Each custodianAclearing mem%er is re3uired to
maintain a clearing pool account with the
depositories+ 9e is re3uired to make availa%le
the re3uired securities in the designated account
on settlement day+ The depository runs an
electronic file to transfer the securities from
accounts of the custodiansAclearing mem%er to
that of NSCC+ As per the schedule of allocation
of securities determined %y the NSCC2 the
depositories transfer the securities on the pay1
out day from the account of the NSCC to those
of mem%ersAcustodians+
(f) Professional Clearing ,em%er6 NSCC admits
special category of mem%ers namely2 professional
clearing mem%ers+ Professional Clearing ,em%er
'PC,) may clear and settle trades e#ecuted for their
clients 'individuals2 institutions etc+)+ In such an
event2 the functions and responsi%ilities of the PC,
would %e similar to Custodians+ PC,s may also
undertake clearing and settlement responsi%ility for
trading mem%ers+ In such a case2 the PC, would
settle the trades carried out %y the trading mem%ers
connected to them+ The onus for settling the trade
would %e thus on the PC, and not the trading
mem%er+ A PC, has no trading rights %ut has
:$/
only clearing rights2 i+e+ he 0ust clears the
trades of his associate trading mem%ers and
institutional clients+
>.I Ri,/, in Settle-ent
The following two kinds of risks are inherent in
a settlement system6
(1) Counterparty !isk# This arises if parties do
not discharge their o%ligations fully when due
or at any time thereafter+ This has two
components2 namely replacement cost risk
prior to settlement and principal risk during
settlement+
'a) The replacement cost risk arises from the
failure of one of the parties to transaction+
4hile the non1defaulting party tries to replace
the original transaction at current prices2 he
loses the profit that has accrued on the
transaction %etween the date of original
transaction and date of replacement
transaction+ The sellerA%uyer of the security
loses this unrealised profit if the current price
is %elowAa%ove the transaction price+ "oth
parties encounter this risk as prices are
uncertain+ It has %een reduced %y reducing
time gap %etween transaction and settlement
and %y legally %inding netting systems+
'%) The principal risk arises if a party discharges
his o%ligations %ut the counterparty defaults+ The
sellerA%uyer of the security suffers this risk when
he deliversAmakes payment2 %ut does not receive
paymentAdelivery+ This risk can %e eliminated %y
delivery vs+ payment mechanism which ensures
delivery only against payment+ This has %een
reduced %y having a central counterparty 'NSCC)
which %ecomes the %uyer to every eller and the
seller to every %uyer+ A variant of counterparty risk
is li3uidity risk which arises if one of the parties to
transaction does not settle on the settlement date2
%ut later+ The sellerA%uyer who does not receive
paymentAdelivery when due2 may have to %orrow
fundsAsecurities to complete his paymentAdelivery
o%ligations+ Another variant is the third party risk
which arises if the parties to trade are permitted or
re3uired to use the services of a third party which
fails to perform+ *or e#ample2 the failure of a
clearing %ank which helps in payment can disrupt
settlement+ This risk is reduced %y allowing parties
to have accounts with multiple %anks+ Similarly2 the
users of custodial services face risk if the
concerned custodian %ecomes insolvent2 acts
negligently2 etc+
(2) System !isk6 This comprises of operational2
legal and systemic risks+ The operational risk
arises from possi%le operational failures such as
errors2 fraud2 outages etc+ The legal risk arises if
the laws or regulations do not support enforcement
of settlement o%ligations or are uncertain+
Systemic risk arises when failure of one of the
parties to discharge his
o%ligations leads to
failure
:$7
%y other parties+ The domino effect of successive
failures can cause a failure of the settlement
system+ These risks have %een contained %y
enforcement of an ela%orate margining and capital
ade3uacy standards to secure market integrity2
settlement guarantee funds to provide counter1
party guarantee2 legal %acking for settlement
activities and %usiness continuity plan2 etc+
>.= Settle-ent C*"le
At the end of each trading day2 concluded or
locked1in trades are received from NSE %y
NSCC+ NSCC determines the cumulative
o%ligations of each mem%er and electronically
transfers the data to Clearing ,em%ers 'C,s)+ All
trades concluded during a particular trading period
are settled together+ A multilateral netting
procedure is adopted to determine the net
settlement o%ligations 'deliveryAreceipt positions)
of C,s+ NSCC then allocates or assigns delivery
of securities inter se the mem%ers to arrive at the
delivery and receipt o%ligation of funds and
securities %y each mem%er+ &n the securities pay1
in day2 delivering mem%ers are re3uired to %ring in
securities to NSCC+&n pay out day the securities
are delivered to the respective receiving mem%ers+
Settlement is deemed to %e complete upon
declaration and release of pay1out of funds and
securities+ E#ceptions may arise %ecause of short
delivery of securities %y C,s2 %ad deliveries or
company o%0ections on the pay1out day+ NSCC
identifies short deliveries and conducts a %uying1in
auction on the day after the pay1out day through
the NSE trading system+ The delivering C, is
de%ited %y an amount e3uivalent to the securities
not delivered and valued at a valuation price 'the
closing price as announced %y NSE on the day
previous to the day of the valuation)+ If the %uy1in
auction price is more than the valuation price2 the
C, is re3uired to make good the difference+ All
shortages not %ought1in are deemed closed out at
the highest price %etween the first day of the
trading period till the day of s3uaring off or closing
price on the auction day plus (<B2 whichever is
higher+ This amount is credited to the receiving
mem%erNs account on the auction pay1out day+
Ba Deli3erie, 5in "a,e o0 $+*,i"al
,ettle-ent6
"ad deliveries 'deliveries which are prima
facie defective) are re3uired to %e reported to
the clearing house within two days from the
receipt of documents+ The delivering mem%er
is re3uired to rectify these within two days+ Cn1
rectified %ad deliveries are assigned to auction
on the ne#t day+
Co-$an* O%9e"tion, 5in "a,e o0 $+*,i"al
,ettle-ent6
:$=
Company o%0ections arise when2 on lodgment of
the securities with the companyAShare Transfer
Agent 'STA) for transfer2 which are returned due to
signature mismatch or for any other reason for
which the transfer of security cannot %e effected+
The original selling C, is normally responsi%le for
rectifyingAreplacing defective documents to the
receiving C, as per pre1notified schedule+ The C,
on whom company o%0ection is lodged has an
opportunity to withdraw the o%0ection if the
o%0ection is not valid or the documents are
incomplete 'i+e+ not as re3uired under guideline
No+:<< or :<; of SE"I 5oodA"ad delivery
guidelines)2 within 7 days of lodgement against
him+ If the C, is una%le to rectifyAreplace defective
documents on or %efore (: days2 NSCC conducts
a %uying1in auction for the non1rectified part of
defective document on the ne#t auction day
through the trading system of NSE+ All o%0ections2
which are not %ought1in2 are deemed closed out on
the auction day at the closing price on the auction
day plus (<B+ This amount is credited to the
receiving mem%erNs account on the auction pay1out
day+
Till Dune2 (<<: trades were settled as account
period settlement+ *ollowing *inance ,inister8s
announcement on ,arch :>2 (<<: that the rolling
settlement would %e e#tended to (<< category LA8
stocks in ,C*S2 A", and "ESS %y Duly2 (<<:2
SE"I decided that all (/> scrips included in the
A",A"ESS or ,C*S in any stock e#change or
in the "SE1(<< list would %e traded only in the
compulsory rolling settlement on all the e#changes
from Duly (2 (<<:+ *urther2 SE"I mandated rolling
settlement for the remaining securities from
.ecem%er >:2 (<<:+ The settlement cycle would
%e reduced from TE$ to TE> from April :2 (<<(+
4ith effect from April :2 (<<> the settlement cycle
has %een further reduced from TE> to TE(+
Nor-al Mar/et
In a rolling settlement2 trade day is T day2 TE: day
and TE( day for NSCC+ The trades e#ecuted
each trading day are considered as a trading
period and trades e#ecuted during the day are
settled %ased on the net o%ligations for the day+ At
NSE2 trades in rolling settlement are settled on a
TE( %asis i+e+ on the (
nd
working day+ Typically
trades taking place on ,onday are settled on
4ednesday2 TuesdayNs trades settled on Thursday
and so on+
A ta%ular representation of the settlement
cycle for rolling settlement is given %elow6
Activity
Trading !olling Settlement Trading
Clearing Custodial Conformation
:$;
day
s
.elivery 5eneration TE:
workin
g
day
s
Settlemen
t Securities and *unds pay in TE( working
day
s
Securities and *unds pay out TE( working
day
s
Jaluation of shortages %ased on closing prices TE: closing
pric
es
Post Auction TE> working
settlement
day
s
"ad delivery reporting TE? working
day
s
Auction settlement TE$ working
day
s
!ectified %ad delivery pay in and pay out TE/ working
day
s
!e1%ad delivery reporting and pick up TE= working
day
s
Close out of re1%ad delivery and funds pay1in &
pay TE; working
out
day
s
Li-ite P+*,i"al Mar/et
Settlement for trades is done on a trade1for1trade %asis and delivery o%ligations arise
out of each trade+
Salient features of imited Physical ,arket settlement+
.elivery of shares in street name and market delivery 'clients holding physical shares
purchased from the secondary market) is treated as %ad delivery+ The shares standing
in the name of individualsA9C* only would constitute good delivery+ The
sellingAdelivering mem%er must necessarily %e the introducing mem%er+
Any delivery in e#cess of $<< shares is marked as short and such deliveries are
compulsorily closed1out+
Shortages2 if any2 are compulsorily closed1out at (<B over the actual traded price+ Cnrectified %ad
delivery and re1%ad delivery are compulsorily closed out at (<B over the actual traded price+
:/<
All deliveries are compulsorily %e re3uired to %e attested %y the introducingA delivering
mem%er+
The %uyer must compulsorily send the securities for transfer and dematerialisation2
latest within > months from the date of pay1out+
Company o%0ections arising out of such trading and settlement in this market are
reported in the same manner as is currently %eing done for normal market segment+
9owever securities would %e accepted as valid company o%0ection2 only if the securities
are lodged for transfer within > months from the date of pay1out+
The settlement cycle for this segment is same as for the rolling settlement vi-6
Activity
.a
y
Trading !olling Settlement Trading T
Clearing Custodial Conformation
TE
:
workin
g
day
s
.elivery 5eneration
TE
:
workin
g
day
s
Settlemen
t Securities and *unds pay in TE( working
day
s
Securities and *unds pay out TE( working
day
s
Post Assigning of shortages for close out TE> working
settlement
day
s
!eporting and pick up of %ad delivery TE? working
day
s
Close out of shortages TE$ working
day
s
!eplacement of %ad delivery TE/ working
day
s
!eporting of re1%ad and pick up TE= working
day
s
Close out of re1%ad delivery TE; working
day
s
In,tit!tional Seg-ent
Trading in this market segment is availa%le for Ninstitutional investorsN only+ In order to ensure
that the overall *II limits are not violated2 selling in this segment is restricted to *II clients+
:/:
"uying is restricted to *II and *I clients+ ,em%ers
are re3uired to enter the custodian participant code
at the time of order entry and to ensure that the
sellingA%uying restrictions are strictly adhered to+ A
sale order entered %y trading mem%ers on %ehalf
of non *II clients or a %uy order entered %y trading
mem%ers on %ehalf of non *II A non *I clients2 shall
%e deemed to %e invalid and any trade arising from
such order shall %e compulsorily closed out %y the
Clearing Corporation at (< B over the actual trade
price2 without any further reference to the parties to
the trade+ The mem%er entering the invalid order
shall further %e lia%le for disciplinary action2 which
may include penalties2 penal action2 withdrawal of
trading facilities2 suspension etc+
,em%ers are not allowed the facility of trade
warehousing for this segment and accordingly
mem%ers are not re3uired to mark the orders for
NCIT and warehousing+ If any orders are marked
for the Clearing Corporation shall remove NCIT
and A or warehousing the same+
Shortages2 if any2 are compulsorily closed1out
at (<B over the actual trade price+ .eals
e#ecuted in this segment are cleared on a TE(
rolling %asis+ Settlement for all trades is done
on a trade1for1trade %asis and delivery
o%ligation arises out of each trade+ Settlement
of all transactions is compulsorily in demat
mode only+
.eals e#ecuted in this segment are not
covered under the settlement guarantee
e#tended %y the Clearing Corporation+
The settlement cycle for this segment is shown %elow6
Activity
Trading !olling Settlement Trading
Clearing Custodial Conformation
.elivery 5eneration
Settlemen
t Securities and *unds pay in
Securities and *unds pay out
Jaluation of shortages %ased on closing prices
Post Close out
settlement
Se"!ritie, Settle-ent
:/(
The securities o%ligations of mem%ers are
downloaded to mem%ersAcustodians %y NSCC
after the end of the trading day+ The
mem%ersAcustodians deliver the securities to the
Clearing 9ouse on the pay1in day in case of
physical settlement and make availa%le the
re3uired securities in the pool accounts with the
depository participants in case of dematerialised
securities+ ,em%ers are re3uired to open
accounts with depository participants of %oth the
depositories2 NS. and C.S+ .elivering
mem%ers are re3uired to deliver all documents
to the Clearing 9ouse 'in case of physical
settlement) %etween ;6>< a+m+ and :<6>< a+m+
on the settlement day+ !eceiving mem%ers are
re3uired to collect the documents from the
Clearing 9ouse %etween (6<< p+m+ and (6><
p+m+
In case of dematerialised settlement2 the mem%ers
receive their o%ligation %y :+>< pm on T E : day+ The
mem%ers need to arrange for the securities as per
their o%ligations and give instructions %y :<+>< am on
the pay1in day+ In case of NS. the mem%ers need
to give instructions to move the securities to the
settlement account of NSCC2 whereas in case of
C.S the mem%ers need to ensure that the
necessary 3uantity of securities are availa%le in their
pool account+ The mem%ers need to ensure that the
settlement num%er and type are correctly entered to
avoid any defaults+ The depository would credit the
receiving mem%ersN receipt account within his C,
clearing account with the depository on or after (6><
p+m+ on the pay1out day+
Pursuant to SE"I directive 'vide its circular
S,.!PAPolicyACir1<$A(<<: dated *e%ruary :2
(<<:) NSCC has introduced a settlement
system for direct delivery of securities to the
investors accounts with effect from April (2
(<<:+
Dire"t Pa*o!t to In3e,tor,
SE"I vide its circular no+S,.!PAPolicyACir1
<$A(<<: dated *e%ruary :2 (<<: had directed
stock e#changes to introduce a settlement system
for direct delivery of securities to the investors
accounts with effect from April (2 (<<:+
Accordingly2 NSCC has introduced the facility of
direct payout to clientsN account on %oth the
depositories+ It ascertains from each clearing
mem%er2 the %eneficiary account details of their
respective clients who are due to receive pay out
of securities+ NSCC has provided its mem%ers
with a front1end for creating the file through which
the information is provided to NSCC+ "ased on
the information received from mem%ers2 the
Clearing Corporation sends payout instructions to
the depositories2 so that the client receives the pay
out of securities directly to their accounts on the
pay1out day+ The client receives payout
:/>
to the e#tent of instructions received from the
respective clearing mem%ers+ To the e#tent of
instruction not received2 the securities are
credited to the C, pool account of the mem%er+
Salient features of .irect Payout to Investors
Clearing mem%ers are re3uired to provide a
file to NSCC for effecting pay out to investorsN
accounts for a particular settlement type2
settlement num%er and delivery type+ The file
is to %e provided as per the structure specified
%y NSCC+
Clearing mem%ers are provided with an
application in the clearing front end for the purpose
of capturing the re3uisite data and generating the
file+ This front end is a part of the Clearing *ront
End Jersion ?+(2 which is availa%le on the e#tranet
in the NcommonAclearingN directory+
The time limit for su%mission of files is up to
;+><+am on the pay out day
The files are uploaded %y NSCC in its
system and returned with the indication of the
successAre0ection of the file and the records+
This is purely a validation of the correctness of
the file and record formats+
Clearing mem%ers shall provide details of
%eneficiary account of the clients of the trading
mem%ers in any one of the depositories+
Credit to the accounts of various constituents
'i+e+ client account and C, Pool A C, Clearing
account) would %e in the same order as
specified %y the clearing mem%er in the file
given to NSCC+
If for any client account record2 the 3uantity
re3uested for direct payout is more than the
%alance availa%le for pay out to the clearing
mem%er in that depository2 the 3uantity availa%le in
that depository shall only %e directly credited to
mem%ers settlement account in that depository+
E#ample6 The mem%er is supposed to receive
pay out of ::<< shares for particular script+
The mem%er has allocated the pay out as
under6
Client
Name .epository
Kuant
ity
A C.S :<<
" C.S $<<
C C.S $<<
:/?
The mem%er receives :<<< shares in C.S and :<< shares in NS.+ The allocation of 3ty will
%e as under
Client Name .epository Kuantity
A C.S :<<
" C.S $<<
C C.S <
,em%ers
pool C.S ?<<
,em%ers
pool NS. :<<
If the mem%er receives entire ::<< shares in NS. the same will %e transferred to
mem%ers pool account in NS.+
In the following situations2 the pay out shall %e credited to C, Pool A Clearing account
of the clearing mem%ers 6
a+ 4here the clearing mem%ers fail to provide the details of the %eneficiary account or
where the credit to the %eneficiary accounts of the clients fail2 or any account whatsoever
%+ The remaining 3uantity received from other depository as pay out shall %e credited to
the C, Pool A Clearing account of the clearing mem%er with the respective depositories
If the mem%erNs client has not paid the dues to the mem%er for the said securities or for any
other reason2 the mem%er has valid 0ustification not to release the payout of a client direct in
such a situation the mem%er may not %e giving the %eneficiary account details of such clientNs in
the file+ In case the investor has paid the dues for delivery of securities and there is no valid
0ustification for not releasing pay1out directly to the client2 the mem%er has to provide the details
of its clients %eneficiary account so that direct credit can %e given to the client+
>.G F!n, Settle-ent
Currently2 NSCC offers settlement of funds through :< clearing %anks namely Canara
"ank2 9.*C "ank2 5lo%al Trust "ank2 IndusInd "ank2 ICICI "ank2 CTI "ank2 Centurion
"ank2 "ank of India and I."I "ank2 Standard Chartered "ank+ Every Clearing ,em%er
is re3uired to maintain and operate a clearing account with any one of the empanelled
clearing %anks at the designated clearing %ank %ranches+ The clearing account is to %e
used e#clusively for clearing & settlement operations+
Clearing Account6
:/$
Every Clearing ,em%er is re3uired to maintain
and operate a clearing account with any one of
the empanelled clearing %anks at the designated
clearing %ank %ranches+ The clearing account is
to %e used e#clusively for clearing operations
i+e+2 for settling funds and other o%ligations to the
Clearing Corporation including payments of
margins and penal charges+ Clearing ,em%ers
are re3uired to authorise the Clearing "ank to
access their clearing account for de%iting and
crediting their accounts2 reporting of %alances
and other information as may %e re3uired %y
NSCC from time to time as per the specified
format+ The Clearing "ank will de%itA credit the
clearing account of clearing mem%ers as per
instructions received from the Clearing
Corporation+ A Clearing mem%er can deposit
funds into this account in any form2 %ut can
withdraw funds from this account only in
selfname+
Change in Clearing "ank6
In case a Clearing ,em%er wishes to shift a
clearing account from one designated Clearing
"ank to another2 the procedure is as follows6
1. The Clearing ,em%er is re3uired to lodge
his re3uest with the Clearing "ank where he is
maintaining a clearing account2 seeking
permission to shift his clearing account to
another designated clearing %ank and send an
acknowledged copy of the same to the
Clearing Corporation+
2. The Clearing ,em%er is re3uired to o%tain
a MNo &%0ection CertificateM 'N&C) from his
e#isting %ank+
3. &n receipt of the N&C from the e#isting %ank2
the Clearing Corporation shall issue a letter of
introduction to the clearing %ank the mem%er
wishes to shift his clearing account to+
4. The Clearing ,em%er2 is re3uired to su%mit
an acknowledged copy of the letter sent to the
new clearing %ank to the Clearing Corporation2
on opening the clearing account with the
designated clearing %ank+
*unds settlement6
,em%ers are informed of their funds o%ligation for
various settlements through the daily clearing data
download+ The daily funds statement gives date1wise
details of each de%itA credit transaction in the
mem%er8s clearing account whereas the summary
statement summarises the same information for a
3uick reference+ The mem%er account may %e
de%ited for various types of transactions on a daily
%asis+ The mem%er is re3uired to ensure that
ade3uate funds are availa%le in the clearing account
towards all o%ligations2 on the scheduled date and
time+ The mem%er can
://
refer to his various o%ligation statements and
provide for funds accordingly+ To ensure timely
fulfillment of funds o%ligations2 mem%ers may
avail of the facility of standing instructions to
transfer the re3uisite amount from some other
account to the clearing account or a
Temporary &verdraft facility from the %ank+ In
case the mem%er has availed such a facility2
the mem%er may furnish details of his
o%ligation to the %ank to ensure timely transfer
of funds towards the same to avoid
inconvenience+ The mem%er with a funds pay1
in o%ligation is re3uired to have clear funds in
his account on or %efore ::+<< a+m+ on the
scheduled pay1in day+ The payout of funds is
credited to the clearing account of the
mem%ers on or after :+>< p+m+ on the
scheduled payout day+
*unds shortages6
In pursuance of chapter IJ of the "yelaws of
the NSCC and !egulations framed there
under2 all clearing mem%ers are re3uested to
note that on account of settlement funds
shortages trading may not %e permitted and
securities payout withheld as as per the norm
in place from time to time1
Penal Charges
Penalties are charged to mem%ers for6
(a) failure to fulfil their funds o%ligations
(b) failure to fulfil their securities delivera%le
o%ligations
(c) 5ross E#posure & Turnover Jiolations
(d) ,argin Shortages
(e) Security .eposit Shortages
(f) &ther violations in respect
of client code modifications2
non1confirmation of custodial
trades2 company o%0ections
reported against the mem%ersN
etc+ Penalty Points
Penalty points are charged to mem%ers for6
(a) 5ross E#posure & Turnover Jiolations
(b) &ther violations in respect of client code
modifications2 non1confirmation of custodial
trades2 company o%0ections reported against
the mem%ersN etc+
Penalty points are calculated for each settlement
and accumulated for all the settlements over each
calendar month+ Penalty points are imposed over
and a%ove penal interest and other
:/7
charges+ At the %eginning of the first settlement period of each month the cumulated
points will %e reset to -ero+
T*$e o0 De0a!lt Penalt* $oint, $er ,ettle-ent
5ross E#posure or Turnover Jiolation for ?
!s+$ lacs or more
5ross E#posure or Turnover Jiolation for (
less than !s+$ lacs
Non Confirmation of Custodial Trades ?
Client code modifications of more than
$ ?
instances
The following penalties are imposed for penalty points earned during each calendar
month6
Penalt* Point, Penalt*
< to (< No action
(: to >< !eprimand letter
>: to $< A fine of !s+(<<<A1 per point over >< points
$: to :<<
A fine of !s+$<<<A1 per point over $< points plus !S
?<<<<
&ver :<<
Allowa%le e#posure to %e reduced %y 7$B for :<
settlements
in normal regular market
In addition to the a%ove2 a penal interest at the rate of ; %asis points for each day of
default will %e levied on the mem%ers who fail to pay the penalty imposed on them+
Partie, in3ol3e in clearing and settlement
Sto"/ Bro/er,
Intro!"tion
:/=
A %roker is an intermediary who arranges to
%uy and sell securities on %ehalf of clients 'the
%uyer and the seller)+ According to !ule ( 'e)
of SE"I 'Stock "rokers and Su%1"rokers)
!ules2 :;;(2 a stock%roker means a mem%er
of a recogni-ed stock e#change+ No
stock%roker is allowed to %uy2 sell or deal in
securities2 unless he or she holds a certificate
of registration granted %y SE"I+
A stock%roker applies for registration to SE"I
through a stock e#change or stock e#changes of
which he or she is admitted as a mem%er+ SE"I
may grant a certificate to a stock1%roker Oas per
SE"I 'Stock "rokers and Su%1"rokers) !ules2
:;;(P su%0ect to the conditions that6
a) he holds the mem%ership of any stock
e#changeI
b) he shall a%ide %y the rules2 regulations and
%ye1laws of the stock e#change or stock
e#changes of which he is a mem%erI
c) in case of any change in the status and
constitution2 he shall o%tain prior permission of
SE"I to continue to %uy2 sell or deal in
securities in any stock e#changeI
d) he shall pay the amount of fees for
registration in the prescri%ed mannerI and
e) he shall take ade3uate steps for redressal
of grievances of the investors within one
month of the date of the receipt of the
complaint and keep SE"I informed a%out the
num%er2 nature and other particulars of the
complaints+
4hile considering the application of an entity
for grant of registration as a stock %roker2 SE"I
shall take into account the following namely2
whether the stock %roker applicant 1 a) is
eligi%le to %e admitted as a mem%er of a stock
e#changeI
b) has the necessary infrastructure like
ade3uate office space2 e3uipment and man
power to effectively discharge his activitiesI
c) has any past e#perience in the %usiness of
%uying2 selling or dealing in securitiesI
d) is %eing su%0ected to any disciplinary
proceedings under the rules2 regulations and
%ye1laws of a stock e#change with respect to
his %usiness as a stock%roker involving either
himself or any of his partners2 directors or
employees+
Me-%er,+i$ in NSE
There are no entryAe#it %arriers to the
mem%ership in NSE+ Any%ody can %ecome
mem%er %y complying with the prescri%ed
eligi%ility criteria and e#it %y surrendering
mem%ership without any hiddenAovert cost+
:/;
The mem%ers are admitted to the different
segments of the E#change su%0ect to the
provisions of the Securities Contracts '!egulation)
Act2 :;$/2 the Securities and E#change "oard of
India Act2 :;;(2 the !ules2 circulars2 notifications2
guidelines2 etc+2 issued there under and the "ye
laws2 !ules and !egulations of the E#change+ The
standards for admission of mem%ers laid down %y
the E#change stress on factors such as2 corporate
structure2 capital ade3uacy2 track record2
education2 e#perience2 etc+ and reflect a conscious
effort on the part of NSE to ensure 3uality %roking
services so as to %uild and sustain confidence
among investors in the E#change8s operations+
"enefits to the trading mem%ership of NSE
include6
1. access to a nation1wide trading facility for
e3uities2 derivatives2 de%t and hy%rid
instruments A products2
2. a%ility to provide a fair2 efficient and
transparent securities market to the
investors
3. use of state1of1the1art electronic trading
systems and technology2
4. dealing with an organisation which follows
strict standards for trading & settlement at par
with those availa%le at the top international
%ourses2
5. a demutualised E#change which is
managed %y independent and e#perienced
professionals2 and
6. dealing with an organisation which is
constantly striving to move towards a glo%al
marketplace in the securities industry+
New ,em%ership
,em%ership of NSE is open to all persons
desirous of %ecoming trading mem%ers2
su%0ect to meeting re3uirementsAcriteria as laid
down %y SE"I and the E#change+ The
different segments currently availa%le on the
E#change for trading are6
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III .erivatives '*utures and &ptions) ,arket
Admission to mem%ership of the E#change to
any of the segments is currently open and
availa%le+
Persons or Institutions desirous of securing
admission as Trading ,em%ers 'Stock
"rokers) on the E#change may apply for any
one of the following segment groups6
I+ 4holesale .e%t ,arket '4.,) Segment
II+ Capital ,arket 'C,)
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:7<
III+ Capital ,arket 'C,) and *utures & &ptions
'*&&) segments
IJ+ Capital ,arket 'C,)2
4holesale .e%t ,arket '4.,)
and *utures & &ptions '*&&)
segment
J+ Clearing ,em%ership of National Securities
Clearing Corporation td+'NSCC) as a
Professional Clearing ,em%er 'PC,)
Eligi%ility for ac3uiring mem%ership of NSE is
as follows6
1) The following persons are eligi%le to
%ecome trading mem%ers6
'a) Individuals
'%) Partnership firms registered under the
Indian Partnership Act2 :;>(
Individual and Partnership firm are not eligi%le to
apply for mem%ership on 4., segment+
'c) Institutions2 including su%sidiaries of %anks
engaged in financial services+
'd) "ody Corporate including
companies as defined in the
Companies Act2 :;$/+ A
company shall %e eligi%le to %e
admitted as a mem%er if6
i) such company is formed in compliance with
the provisions of Section :( of the said ActI
ii) such company undertakes to comply with such
financial re3uirements and norms as may %e
specified %y the Securities and E#change "oard of
India for the registration of such companyI iii) the
directors of such company are not dis3ualified for
%eing mem%ers of a stock e#change and have not
held the offices of the .irectors in any company
which had %een a mem%er of the stock e#change
and had %een declared defaulter or e#pelled %y the
stock e#changeI and
'e) such other persons or entities as may %e
permitted from time to time %y !"I A SE"I
under the Securities Contracts '!egulations)
!ules2 :;$7+
2) No person shall %e admitted as a trading
mem%er if6
(a) he has %een ad0udged %ankrupt or a receiver
order in %ankruptcy has %een made against him or
he has %een proved to %e insolvent even though
he has o%tained his final dischargeI
(b) he has compounded with his creditors for
less than full discharge of de%tsI
(c) he has %een convicted of an offence
involving a fraud or dishonestyI
(d) he is engaged as a principal or employee in
any %usiness other than that of Securities2
e#cept as a %roker or agent not involving any
personal financial lia%ility or for providing
merchant %anking2 underwriting or corporate or
investment advisory services2 unless he
undertakes to severe its connections with such
%usiness on admission2 if admittedI
:7:
(e) he has %een at any time e#pelled or declared a
defaulter %y any other Stock E#change or he has
%een de%arred from trading in securities %y any
!egulatory Authorities like SE"I2 !"I etcI
(f) he has %een previously refused admission
to trading mem%ership %y NSE unless a period
of one year has elapsed since the date of such
re0ectionI
(g) he incurs such dis3ualification under the
provisions of the Securities Contract
'!egulations) Act2 :;$/ or !ules made there
under so as to disentitle him from seeking
mem%ership of a stock e#changeI
(h) incurs such dis3ualification conse3uent to
which NSE determines it to %e not in pu%lic
interest to admit him as a mem%er on the
E#change Provided that in case of registered
firms2 %ody corporate and companies2 the
condition from 'a) to 'h) a%ove will apply to all
partners in case of partnership firms2 and all
directors in case of companiesI
(i) it is a %ody corporate which has committed
any act which renders it lia%le to %e wound up
under the provisions of the lawI
(j) it is a %ody corporate or a company in
respect of which a provisional li3uidator or
receiver or official li3uidator has %een
appointed %y a competent courtI
Education and E#perience+ 4here an
applicant is a corporate2 not less than two
directors of the company 'in case of a sole
proprietorship2 individual and in case of a
partnership firm2 two partners) should satisfy
the following criteria6
They should %e at least graduates and each of them
should possess at least two yearsN e#perience in an
activity related to %roker2 su%1%roker2 authori-ed
agent or authori-ed clerk or authori-ed
representative or remisier or apprentice to a mem%er
of a recognised stock e#change+ Such e#perience
will include working as a dealer2 0o%%er2 market
maker2 or in any other manner in the dealing in
securities or clearing and settlement thereof2 as
portfolio manager or merchant %ankers or as a
researcher with any individual or organi-ation
operating in the securities market+
Shareholding Pattern6 Securities markets have
the inherent tendency to %e volatile and risky+
Therefore2 there should %e ade3uate risk
containment mechanisms in place
for the Stock E#changes+ &ne such risk
containment tool is the concept of L.ominant
PromoterAShareholder 5roup8 which is very uni3ue
for applicants ac3uiring mem%ership on the NSE+
Though mem%ership on NSE is granted to the
entity applying for it2 %ut for all practical purposes
the entity is managed %y a few shareholders who
have controlling interest in the company+ The
shareholders holding the ma0ority of shares have a
dominant role in the affairs of
:7(
the company+ In case of any default %y the %roking
entity2 the E#change should %e a%le to identify and
take action against the persons who are %ehind the
company+ The E#change2 therefore2 needs to know
the %ackground2 financial soundness and integrity
of these shareholders holding such controlling
interest+ 9ence2 during the admission process the
dominant shareholders are called for an interview
with the ,em%ership Approval Committee+
Salient features on the concept of
.ominant PromoterAShareholder 5roup6
a) .ominant Promoter A Shareholder 5roup
'.P5) is a group of shareholders of the
Trading mem%er corporate who normally
would %e individuals2 not e1"eeing I in
n!-%er2 and who would 0ointly andAor
severally hold not less than $:B of shares
'?<B in case of listed companies) in the
trading mem%er corporate at the time of
admission as well as su%se3uently at all
relevant points of time+
b) The shareholdingAinterest of close relatives of
the .P5 vi-+ Parents2 spouse2 children2 %rothers
and sisters would also %e counted for arriving at
total dominant holding A interest of a particular
dominant shareholder2 if such relative's) give an
un3ualified and irrevoca%le support in writing to the
concerned dominant shareholder in respect of
such holding A interest+
c) Corporate shareholders of the trading
mem%er company can also e#tend their
support to the .P52 provided the shareholding
of the .ominant Promoter 5roup along with
the support of their specified relatives in the
corporate shareholder is not less than $:B or
?<B2 as the case may %e+ The indirect
shareholding shall %e calculated
proportionately %y reckoning the direct
shareholding of the .P5 along with the
support of their specified relatives in the
corporate shareholder of the trading mem%er
company+
d) If none of the dominant promotersAshareholders
is a .irector on the "oard of .irectors of the
trading mem%er company2 then at least two other
directors having the re3uisite e#perience and
3ualification shall hold a minimum of $B shares
'each) in the paid up e3uity capital of the trading
mem%er company+ &nce a trading entity
nominatesAdetermines a group of shareholders ':
to ?) as the .P52 no other shareholder 'e#isting or
new) would %e allowed to 0oin the .P5+ 9owever2
one or more shareholders within the .P5 may %e
allowed to divest their shares and 3uit the group+ In
such an eventuality2 it is to %e ensured that the
remaining dominant shareholders always maintain
among themselves2 a minimum of $:B of the
shares of the company '?<B in case of listed
trading mem%er corporate) at all points of time+
*ailure to maintain this re3uired level of
shareholding will %e treated as a %reach of the
continuing
:7>
mem%ership norms2 which would tantamount to a
reconstitution of the trading mem%er corporate as
the e#isting .P5 would no longer hold controlling
interest in the trading mem%er corporate or
alternatively a new group would have emerged
with controlling stake+ NSE would immediately
withdraw the trading facility of such trading
mem%ers+ They could %e re1instated upon
rectifying the defect or seeking the approval of the
E#change for identifying the new group of
shareholders as the dominant shareholders2 for
which the process of going through the
,em%ership Approval Committee and the "oard
will need to %e followed+
e) The .P5 may also %e permitted to consist
of corporate shareholders2 provided6
The trading mem%er is a wholly owned
su%sidiary of another company
The said holding company is not a su%sidiary
of any other company
The identifia%le individual dominant
promoter's) 'not more than ?) hold at least
$:B of the share capital of the holding
company2 or there are two or more listed
corporate shareholders 0ointly holding at least
$:B of the share capital of the holding
company or one or more listed corporate
shareholders along with individual
shareholders together2 not e#ceeding four in
num%er2 0ointly hold at least $:B of the shares
of the holding company2 Provided that in none
of the a%ove instances the holding company of
the trading mem%er corporate %ecomes the
su%sidiary of another corporate+
The said dominant promoters undertake in
writing2 not to dilute their shareholding in the
holding company without prior consent of the
E#change+
Such corporate dominant shareholders are
widely held listed *inance companies having
net worth of !s+ (< crores and a%ove and their
de%t instruments2 if any2 have %een accorded
at least investment grade credit rating %y
reputed rating agencies+
If such corporate dominant shareholders are
non1finance companies listed on NSE and
have a net worth of !s+ (< crores and their
de%t instruments2 if any2 have %een accorded
at least investment grade credit rating %y
reputed rating agencies2 then such a company
shall %e permitted to %e included in the .P5+
Private "anks2 central or state government owned
*inance andAor .evelopment Institutions etc are also
allowed to %e identified as dominant shareholder's)
even if they are not listed provided they have a net
worth of at least !s+ (< crores and the de%t
instruments2 if any2 have investment grade credit
rating made %y one of the reputed credit rating
agencies+ The aforesaid norms are
:7?
also applica%le to trading mem%ers who are
partnership firms+ The term dominant
shareholderApromoter may %e su%stituted as
Ldominant partner8+
Continuing ,em%ership
Trading mem%ers of the E#change have to
su%mit the following documentsAinformation to
the E#change on an annual %asis as part of
the continuing mem%ership norms+ Non1
su%mission of the re3uired
documentsAinformation attracts disciplinary
action %y the E#change including levy of
penalty2 reduction of gross e#posure2 etc+
1. Audited *inancial statements '"alance
Sheet2 Profit and oss Account)
2. Net worth Certificate in the prescri%ed
format duly certified %y a Chartered
Accountant+ 'every half yearly)
3. .etails of directors2 shareholders2 dominant
shareholders2 etc+ duly certified %y a Chartered
Accountant+
4. Proof of renewal of Insurance Cover+
&ther related matters in respect of Continuing
,em%ership are as under6
Cp gradation of ,em%ership6 The E#change
permits the trading mem%ers desirous of
upgrading their trading mem%ership from
Individual or Partnership firm to a Corporate+
Trading mem%ers intending to do so should
take note of the following6
a) A re3uest has to %e sent %y the trading
mem%er indicating the scheme of up gradation
and the proposed shareholding pattern of the
corporate+
b) In case of an up gradation from individual to
Corporate2 the individual should hold at least
$:B of the paid up capital of the proposed
corporate '?<B in case of listed corporate)+
c) In case of an upgradation from partnership firm to
Corporate2 the original partners should hold atleast
$:B of the paid up capital of the proposed corporate
'?<B in case of listed corporate)+
d) There should %e at least ( 3ualified
directors who should %e graduates with
minimum ( years e#perience in stock %roking
related activities+
e) The proposed corporate should have a
minimum paid up capital of !s+ >< lakh and
meet the net worth re3uirements of the
E#change from time to time+
f) After the up gradation is approved %y the
E#change2 the trading mem%er will have to
pay the differential deposits as applica%le to
corporate trading mem%ers+
:7$
,ergerAAmalgamation of ,em%ership6 Trading
mem%ers desirous of merging among
themselves are re3uired to su%mit the
proposal to the E#change for approval+ The
salient features are as follows6
a) The dominant promoter group of the
merged entity shall comprise of only the
dominant mem%ers of the merging Trading
,em%er+
b) 4hen two or more Individual Trading
,em%ers merge to form either a partnership
firm or a corporate2 the dominant group of
partners A shareholders in such emerging
Trading ,em%er entity shall comprise of any
or all such individual Trading ,em%ers+
c) In case of merger %etween two or more
Individual A partnership firms Trading ,em%ers
resulting in the formation of a new partnership
firm or corporateI the dominant group of partners
A shareholders in such emerging firms or
corporate Trading ,em%er shall comprise of any
or all the dominant partners A shareholders of
such merging Trading ,em%ers+
d) In case of merger %etween two or more
corporate trading mem%ers2 the dominant
group of shareholders in such emerging
corporate Trading ,em%er shall comprise of
any or all the dominant shareholders of such
merging Trading ,em%ers+
e) The merged entity shall at all times consist
of at least one or more mem%ers of the
dominant promoter group of the merging
Trading ,em%ers who would hold at least
$:B of its total paid up capital '?<B in case of
listed companies) A profit sharing ratio+
f) The scheme of merger shall provide for the
appropriation A transfer of the entire amount of
security deposits of the e#tinguishing Trading
,em%ers with the E#change A NSCC in
favour of the merged entity+ Such deposits of
the e#tinguishing Trading ,em%ers will %e
refunded to the merged entity only after the
e#piry of the respective lock in period of each
of the e#tinguishing Trading ,em%ers+ No
interest shall %e paid %y the E#change
ANSCC on such deposits+ These deposits
may however %e considered towards net worth
A capital ade3uacy re3uirements A e#posure
limits of the
merged entity2 as also for margin purposes+
g) The scheme of merger shall provide that
the merged entity shall honour all the financial
commitments A o%ligationsA lia%ilities of all the
e#tinguishing Trading ,em%ers that devolved
prior to merger or may devolve su%se3uent to
the merger and shall %e treated as if it were
the lia%ility of the merged entity+
:7/
h) As soon as the application for merger is
filed %efore the 9igh Court2 the e#tinguishing
%roking entity should approach SE"I through
the Stock E#change for o%taining prior
permission2 to the scheme of merger2 giving all
necessary details of the proposal+
i) The emerging entity would %e allowed to
trade on the registration of the e#tinguishing
entity for a period of ?$ days+ 9owever2 the
emerging entity should apply to SE"I at the
earliest and give an undertaking to %e lia%le for
the act of the e#tinguishing entity and such
applications in any case should %e made not
later than >< days of the registration granted
%y the !egistrar of companies to the emerging
entity+
!econstitution A Transfer of ,em%ership6
!econstitution A Transfer of ,em%ership takes
place when the shareholdingAprofit sharing
ratio of e#isting .ominant
PromoterAShareholderAPartner group falls
%elow $:B '?<B in case of listed corporates)
which means that effectively they are no more
in control of the trading mem%er entity+
Trading mem%ers desirous of transferring their
trading mem%ership of the E#change are
re3uested to refer to the circulars issued %y the
E#change from time to time in this regard and
su%mit the proposal to the E#change for
approval+ The salient features are as follows6
a) The trading mem%er would %e re3uired to
comply with the prevalent net worth norms of
the E#change as applica%le to corporate
Trading ,em%ers+
b) A processing fee of !s+: lakh would %e
paya%le on approval of proposal for transfer+
c) The trading mem%er would %e re3uired to pay the
differential %etween the deposit paid %y them for the
mem%ership of the relevant market segments and the
deposit paya%le for a corporate trading mem%ership
as per the prevailing entry norms for mem%ership of
the segment+
d) The transfer proposal would %e su%0ect to
recommendation %y the ,em%ership Approval
Committee ',AC) and approval %y the "oard of
the E#change2 and2 for this purpose2 the
E#changeNs re3uirements of written test and an
interview %y ,AC2 will apply+
,ultiple ,em%erships6 The E#change does not
permit multiple mem%erships among he same set
of dominant promotersAshareholders+ 9owever2
there may %e a need for the e#isting trading
mem%ers to take up more than one mem%ership
on the NSE for various reasons like client
segregation2 market or %usiness segregation2 etc+
In such cases2 multiple mem%erships may %e
permitted %y the E#change only in cases where the
e#isting trading mem%er corporate forms a
su%sidiary+ The following re3uirements need to %e
complied with %y the applicant company and the
holding company for related entities to o%tain
mem%ership of the E#change6
:77
1. In the application for new mem%ership2 the
applicant shall identify the holding company2
which is a mem%er of the E#change+
2. "oard resolution from the e#isting trading
mem%er corporate for applying for new
mem%ership in the name of the su%sidiary+
3. The e#isting trading mem%er should %e the
dominant promoterAshareholder directly
holding at least $:B of the shareholding of the
company+
4. In case of transfer of mem%ership of holding
company2 %oth the companies will %e re3uired
to comply with the transfer provisions+
5. ,a0ority of the directors should %e
appointed %y the holding company+ The same
should %e incorporated in the articles of
association of the su%sidiary company+
6. Cndertaking from the e#isting as well as the
applicant su%sidiary company that they may
%e considered as a single unit for taking any
disciplinary action %y the E#change+
7. In case of default or failure to meet the
o%ligations towards NSEI A NSCC %y one
company2 the deposits of other company may
%e appropriated+
8. In case of investor grievances and
ar%itration awards2 the holding company shall
honour the o%ligations of the su%sidiary
company and vice versa+
9. The new applicant company shall %e re3uired
to take up the com%ined mem%ership of Capital
,arket Segment and *utures & &ptions
Segment as in the case of new applicants+
10. 4hen any disciplinary action etc+2 is taken
against the holding company 'e#isting trading
mem%er) or the applicant 'new trading
mem%er)2 %oth the entities shall %e considered
as one single unit and would attract similar
action %y the E#changeANSCC+
Suspension & E#pulsion of ,em%ership6 The
E#change may e#pel or suspend andAor fine under
censure andAor warn andAor withdraw any of the
mem%ership rights of a trading mem%er if it %e
guilty of contravention2 non1compliance2
diso%edience2 disregard or evasion of any of the
"ye aws2 !ules and !egulations of the E#change
or of any resolutions2 orders2 notices2 directions or
decisions or rulings of the E#change or the
relevant authority or of any other Committee or
officer of the E#change authorised on that %ehalf
or of any conduct2 proceeding or method of
%usiness which the relevant authority in its
a%solute discretion deems dishonora%le2
disgraceful or un%ecoming of a trading mem%er of
the E#change or inconsistent with 0ust and
e3uita%le principles of trade or detrimental to the
interests2 good name or welfare of the E#change
or pre0udicial or su%versive to its o%0ects and
purposes+
:7=
:+ Mi,"on!"t6 A trading mem%er shall %e
deemed guilty of misconduct for any of the
following or similar acts or omissions namely6
(a) *raud6 If it is convicted of a criminal offence
or commits fraud or a fraudulent act which in
the opinion of the relevant authority renders it
unfit to %e a trading mem%erI
(b) Jiolation6 If it has violated provisions of any
statute governing the activities2 %usiness and
operations of the E#change2 trading mem%ers
and securities %usiness in generalI
(c) Improper Conduct6 If in the opinion of the
relevant authority it is guilty of dishonora%le or
disgraceful or disorderly or improper conduct
on the E#change or of willfully o%structing the
%usiness of the E#changeI
(d) "reach of !ules2 "ye aws and !egulations6 If
it shields or assists or omits to report any trading
mem%er whom it has known to have committed a
%reach or evasion of any !ule2 "ye1law and
!egulation of the E#change or of any resolution2
order2 notice or direction thereunder of the relevant
authority or of any Committee or officer or the
E#change authorised in that %ehalfI
(e) *ailure to comply with !esolutions6 If it
contravenes or refuses or fails to comply with
or a%ide %y any resolution2 order2 notice2
direction2 decision or ruling of the relevant
authority or of any Committee or officer of the
E#change or other person authorised in that
%ehalf under the "ye aws2 !ules and
!egulations of the E#changeI
(f) *ailure to su%mit to or a%ide %y Ar%itration6
If it neglects or fails or refuses to su%mit to
ar%itration or to a%ide %y or carry out any
award2 decision or order of the relevant
authority or the Ar%itration Committee or the
ar%itrators made in connection with a
reference under the "ye aws2 !ules and
!egulations of the E#changeI
(g) *ailure to testify or give information6 If it
neglects or fails or refuses to su%mit to the relevant
authority or to a Committee or an officer of the
E#change authorised in that %ehalf2 such %ooks2
correspondence2 documents and papers or any
part thereof as may %e re3uired to %e produced or
to appeal and testify %efore or cause any of its
partners2 attorneys2 agents2 authori-ed
representatives or employees to appear and testify
%efore the relevant authority or such Committee or
officer of the E#change or other person authori-ed
in that %ehalfI
(h) *ailure to su%mit Special !eturns6 If it neglects
or fails or refuses to su%mit to the relevant
authority within the time notified in that %ehalf
special returns in such form as the relevant
authority may from time to time prescri%e together
with such other information as the relevant
authority may re3uire whenever circumstances
arise which in the opinion of the relevant

:7;
authority make it desira%le that such special
returns or information should %e furnished %y
any or all the trading mem%ersI
(i) *ailure to su%mit Audited Accounts6 If it
neglects or fails or refuses to su%mit its
audited accounts to the E#change within such
time as may %e prescri%ed %y the relevant
authority from time to time2
(j) *ailure to compare or su%mit accounts with
.efaulter6 If it neglects or fails to compare its
accounts with the .efaultersN Committee or to
su%mit to it a statement of its accounts with a
defaulter or a certificate that it has no such
account or if it makes a false or misleading
statement thereinI
(k) *alse or misleading !eturns6 If it neglects
or fails or refuses to su%mit or makes any false
or misleading statement in its clearing forms or
returns re3uired to %e su%mitted to the
E#change under the "ye aws2 !ules and
!egulationsI
(l) Je#atious complaints6 If it or its agent %rings
%efore the relevant authority or a Committee or
an officer of the E#change or other person
authorised in that %ehalf a charge2 complaint or
suit which in the opinion of the relevant authority
is frivolous2 ve#atious or maliciousI
(") *ailure to pay dues and fees6 If it fails to pay
its su%scription2 fees2 ar%itration charges or any
other money which may %e due %y it or any fine
or penalty imposed on it+
(+ Un-%!,ine,,li/e Con!"t6 A trading
mem%er shall %e deemed guilty of un%usiness
like conduct for any of the following or similar
acts or omissions namely 6
(a) *ictitious Names6 If it transacts its own
%usiness or the %usiness of its constituent in
fictitious names or if he carries on %usiness in
more than one trading segment of the
E#change under fictitious namesI
(b) *ictitious .ealings6 If it makes a fictitious
transaction or gives an order for the purchase
or sale of securities the e#ecution of which
would involve no change of ownership or
e#ecutes such an order with knowledge of its
characterI
(c) Circulation of rumours6 If it2 in any manner2
circulates or causes to %e circulated2 any
rumoursI
(d) Pre0udicial "usiness6 If it makes or assists in
making or with such knowledge is a party to or
assists in carrying out any plan or scheme for
the making of any purchases or sales or offers of
purchase or sale of securities for the purpose of
upsetting the e3uili%rium of the market or
%ringing a%out a condition in which prices will not
fairly reflect market valuesI

:=<
(e) ,arket ,anipulation and !igging6 If it2
directly or indirectly2 alone or with other
persons2 effects series of transactions in any
security to create actual or apparent active
trading in such security or raising or
depressing the prices of such security for the
purpose of inducing purchase or sale of such
security %y othersI
(f) Cnwarranta%le "usiness6 If it engages in
reckless or unwarranta%le or un%usinesslike
dealings in the market or effects purchases or
sales for its constituentNs account or for any
account in which it is directly or indirectly
interested which purchases or sales are
e#cessive in view of its constituentNs or his
own means and financial resources or in view
of the market for such securityI
(g) Compromise6 If it connives at a private
failure of a trading mem%er or accepts less
than a full and %ona fide money payment in
settlement of a de%t due %y a trading mem%er
arising out of a transaction in securitiesI
(h) .ishonoured Che3ue6 If it issues to any
other trading mem%er or to its constituents a
che3ue which is dishonoured on presentation
for whatever reasonsI
(i) *ailure to carry out transactions with
Constituents6 If it fails in the opinion of the
relevant authority to carry out its committed
transactions with its constituentsI
>+ Un$ro0e,,ional Con!"t6 A trading
mem%er shall %e deemed guilty of
unprofessional conduct for any of the following
or similar acts or omissions namely 6
(a) "usiness in Securities in which
dealings not permitted6 If it enters
into dealings in securities in which
dealings are not permittedI
(b) "usiness for .efaulting Constituent6 If it deals or
transacts %usiness directly or indirectly or e#ecutes
an order for a constituent who has within its
knowledge failed to carry out engagements relating
to securities and is in default to another trading
mem%er unless such constituent shall have made a
satisfactory arrangement with the trading mem%er
who is its creditorI
(c) "usiness for Insolvent6 If without first
o%taining the consent of the relevant authority
it directly or indirectly is interested in or
associated in %usiness with or transacts any
%usiness with or for any individual who has
%een %ankrupt or insolvent even though such
individual shall have o%tained his final
discharge from an Insolvency CourtI
(d) "usiness without permission when under
suspension6 If without the permission of
:=:
the relevant authority it does %usiness on its
own account or on account of a principal with
or through a trading mem%er during the period
it is re3uired %y the relevant authority to
suspend %usiness on the E#changeI
(e) "usiness for or with suspended2 e#pelled
and defaulter trading mem%ers6 If without the
special permission of the relevant authority it
shares %rokerage with or carries on %usiness
or makes any deal for or with any trading
mem%er who has %een suspended2 e#pelled
or declared a defaulterI
(f) "usiness for Employees of other trading
mem%ers6 If it transacts %usiness directly or
indirectly for or with or e#ecutes an order for a
authori-ed representative or employee of
another trading mem%er without the written
consent of such employing trading mem%erI
(g) "usiness for E#change Employees6 If it
makes a speculative transaction in which an
employee of the E#change is directly or
indirectly interestedI
(h) Advertisement6 If it advertises for %usiness
purposes or issue regularly circular or other
%usiness communications to persons other than
its own constituents2 trading mem%ers of the
E#change2 "anks and Doint Stock Companies or
pu%lishes pamphlets2 circular or any other
literature or report or information relating to the
stock markets with its name attachedI
(i) Evasion of ,argin !e3uirements6 If it
willfully evades or attempts to evade or assists
in evading the margin re3uirements prescri%ed
in these "ye aws and !egulationsI
(j) "rokerage Charge6 If it willfully deviates
from or evades or attempts to evade the "ye
aws and !egulations relating to charging and
sharing of %rokerage+
(k) .ealings with entities prohi%ited to %uy or sell
or deal in securities market+ If it deals2 directly or
indirectly2 in the course of its %usiness with or
transacts any %usiness with or for any entity2
which has %een prohi%ited %y SE"I to %uy or sell
or deal in the securities market+
?+ Traing -e-%er;, re,$on,i%ilit* 0or
Partner,2 Agent, an E-$lo*ee,# A trading
mem%er shall %e fully responsi%le for the acts and
omissions of its authori-ed officials2 attorneys2
agents2 authori-ed representatives and employees
and if any such act or omission %e held %y the
relevant authority to %e one which if committed or
omitted %y the trading mem%er would su%0ect it to
any of the penalties as provided in the "ye aws2
!ules and !egulations of the E#change then such
trading mem%er shall %e lia%le therefore to the
same penalty to the same e#tent as if such act or
omission had %een done or omitted %y itself+
:=(
5. S!,$en,ion on 0ail!re to $ro3ie -argin
e$o,it anJor Ca$ital Ae4!a"*
re4!ire-ent,6 The E#change shall re3uire a
trading mem%er to suspend its %usiness when it
fails to provide the margin deposit andAor meets
capital ade3uacy norms as provided in the "ye
aws2 !ules and !egulations and the suspension
of %usiness shall continue until it furnishes the
necessary margin deposit or meet capital
ade3uacy re3uirements+ The relevant authority
may e#pel a trading mem%er acting in
contravention of this provision+
6. S!,$en,ion o0 B!,ine,,6 The relevant
authority may re3uire a trading mem%er to
suspend its %usiness in part or in whole 6
'a) Pre0udicial "usiness6 4hen in the opinion
of the relevant authority2 the trading mem%er
conducts %usiness in a manner pre0udicial to
the E#change %y making purchases or sales of
securities or offers to purchase or sell
securities for the purpose of upsetting
e3uili%rium of the market or %ringing a%out a
condition of demoralisation in which prices will
not fairly reflect market values2 or
'%) Cnwarranta%le "usiness6 4hen in the
opinion of the relevant authority it engages in
unwarranta%le %usiness or effects purchases
or sales for its constituentNs account or for any
account in which it is directly or indirectly
interested which purchases or sales are
e#cessive in view of its constituentNs or its own
means and financial resources or in view of
the market for such security2 or
'c) Cnsatisfactory *inancial Condition6 4hen
in the opinion of the relevant authority it is in
such financial condition that it cannot %e
permitted to do %usiness with safety to its
creditors or the E#change+
7. Re-o3al o0 S!,$en,ion6 The suspension of
%usiness as a%ove shall continue until the trading
mem%er has %een allowed %y the relevant authority
to resume %usiness on its paying such deposit or on
its doing such act or providing such thing as the
relevant authority may re3uire+
8. Con,e4!en"e o0 S!,$en,ion6 The
suspension of a trading mem%er shall have the
following conse3uences namely6
'a) Suspension of ,em%ership !ights 6 The
suspended trading mem%er shall during the terms
of its suspension %e deprived of and e#cluded from
all the rights and privileges of mem%ership
including the right to attend or vote at any meeting
of the general %ody of trading mem%ers of the
relevant segment2 %ut it may %e proceeded against
%y the relevant authority for any offence
committed %y it either %efore or after its
suspension and the
relevant authority shall
not %e
:=>
de%arred from taking cognisance of and
ad0udicating on or dealing with any claim made
against it %y other trading mem%ersI
(b) !ights of creditors unimpaired6 The
suspension shall not affect the rights of the
trading mem%ers who are creditors of the
suspended trading mem%erI
(c) *ulfillment of Contracts6 The suspended
trading mem%er shall %e %ound to fulfill
contracts outstanding at the time of its
suspensionI
(d) *urther %usiness prohi%ited 6 The suspended
trading mem%er shall not during the terms of its
suspension make any trade or transact any
%usiness with or through a trading mem%er
provided that it may with the permission of the
relevant authority close with or through a trading
mem%er the transactions outstanding at the time
of its suspensionI
(e) Trading mem%ers not to deal6 No trading
mem%er shall transact %usiness for or with or
share %rokerage with a suspended trading
mem%er during the terms of its suspension
e#cept with the previous permission of the
relevant authority+
;+ Con,e4!en"e, o0 E1$!l,ion6 The
e#pulsion of a trading mem%er shall have the
following conse3uences namely6
(a) Trading mem%ership rights forfeited6 The
e#pelled trading mem%er shall forfeit to the
E#change its right of trading mem%ership and all
rights and privileges as a trading mem%er of the
E#change including any right to the use of or any
claim upon or any interest in any property or funds
of the E#change %ut any lia%ility of any such
trading mem%er to the E#change orto any trading
mem%er of the E#change shall continue and
remain unaffected %y its e#pulsionI
(b) &ffice vacated 6 The e#pulsion shall create
a vacancy in any office or position held %y the
e#pelled trading mem%erI
(c) !ights of Creditors unimpaired6 The
e#pulsion shall not affect the rights of the
trading mem%ers who are creditors of the
e#pelled trading mem%erI
(d) *ulfillment of Contracts6 The e#pelled trading
mem%er shall %e %ound to fulfil transactions
outstanding at the time of his e#pulsion and it
may with the permission of the relevant authority
close such outstanding transactions with or
through a trading mem%erI
(e) Trading mem%ers not to deal6 No trading
mem%er shall transact %usiness for or with or
share %rokerage with the e#pelled trading
mem%er e#cept with the previous permission
of the relevant authority+
:=?
'f) Conse3uences of declaration of defaulter to
follow6 The provisions of Chapter FII and
Chapter FII of the "ye aws pertaining to
default and Protection *und respectively shall
%ecome applica%le to the trading mem%er
e#pelled from the E#change as if such trading
mem%er has %een declared a defaulter+
.eclaration of .efaulter6 A trading
mem%er may %e declared a defaulter
%y direction circular A notification of
the relevant authority of the trading
segment if6
1. he is una%le to fulfill his o%ligationsI or
2. he admits or discloses his ina%ility to fulfill or
discharge his duties2 o%ligations and lia%ilitiesI
or
3. he fails or is una%le to pay within the specified
time the damages and the money difference due
on a closing1out effected against him under these
"ye aws2 !ules and !egulationsI or
4. he fails to pay any sum due to the E#change
or to su%mit or deliver to the E#change on the
due date2 delivery and receive orders2
statement of differences and securities2
%alance sheet and such other clearing forms
and other statements as the relevant authority
may from time to time prescri%eI or
5. if he fails to pay or deliver to the .efaultersN
Committee all monies2 securities and other
assets due to a trading mem%er who has %een
declared a defaulter within such time of the
declaration of default of such trading mem%er as
the relevant authority may directI or
6. if he fails to a%ide %y the ar%itration
proceedings as laid down under the "ye aws2
!ules and !egulations 4ithout pre0udice to
the foregoing2 if a Trading ,em%er is either
e#pelled or declared a defaulter %y any other
recognised Stock E#change on which he is a
mem%er or if the registration certificate is
cancelled %y SE"I2 then the said Trading
,em%er is e#pelled from the E#change+
*ailure to fulfill &%ligations
The relevant authority may order a trading
mem%er to %e declared a defaulter if he fails to
meet an o%ligation to a trading mem%er or
constituent arising out of E#change transactions+
Insolvent a .efaulter
A trading mem%er who has %een ad0udicated
an insolvent shall %e ipso factor declared a
defaulter although he may not %e at the same
time a defaulter on the E#change+
Trading mem%erNs .uty to Inform
:=$
A trading mem%er shall %e %ound to notify the
E#change immediately if there %e a failure %y
any trading mem%er to discharge his lia%ilities
in full+
Compromise *or%idden
A trading mem%er guilty of accepting from any
trading mem%er anything less than a full and
%ona fide money payment in settlement of a
de%t arising out of a transaction in securities
shall %e suspended for such period as the
relevant authority may determine+
Surrender of Trading ,em%ership+ T,s can apply
for surrender of their trading mem%ership once
admitted on the E#change+ Surrender of trading
mem%ership can %e permitted %y the E#change
after fulfilling certain conditions %y the mem%er
such as2 clearing off all the dues to the E#change
and NSCC2 notifying all other T,s of the approval
of surrender2 o%taining No dues certificate from
SE"I2 issuance of a pu%lic notification in leading
dailies etc+ The deposits of the trading mem%ers
would %e released %y the E#changeANSCC after a
prescri%ed lock1in period+ 9owever2 there is no
lock1in period applica%le in case of trading
mem%er2 who is2
1. Not SE"I registered
2. SE"I registered %ut not ena%led
3. SE"I registered and ena%led %ut not traded
at all
A!t+ori:e Per,on,
Trading mem%ers of the E#change may
appoint authori-ed persons who are
individuals2 registered partnership firms2
%odies corporate or companies as defined
under the Companies Act2 :;$/ in the Capital
,arket 'C,) segment or *utures & &ptions
'*&&) segment or in %oth C, and *&&
segments+
An authori-ed person may introduce clients to the
trading mem%er for whom they may receive
remuneration A commission A compensation from
the trading mem%er and not from the clients+ The
clients introduced %y the authori-ed person will
have a direct relationship with the trading mem%er
i+e+ the mem%er1constituent agreement2 know your
client forms2 risk disclosure document2 etc+ shall %e
e#ecuted %etween the client and the trading
mem%er i+e+2 the authori-ed person shall not %e
allowed to have any trading relationship with the
clients+
The trading mem%er shall issue the contract notes
andAor %ills directly to the client i+e+ the authori-ed
person shall not issue contract notes2 confirmation
memo andAor %ills in their name+ The clients
introduced %y the authorised person would %e
re3uired to deliver securities and make payments
directly in the trade name of the trading mem%er
'as appearing on the SE"I
:=/
registration certificate)+ Similarly the trading
mem%er shall deliver securities and make
payments directly in the name of the clients+
*or further details pertaining to authorised person
and trading mem%ers desirous of appointing
authorised person may refer to circular no+ >>>
'NSEA,E,A?<=() dated April :<2 (<<>+
S!%-Bro/er,
A Su%1%roker is a person who intermediates
%etween investors and stock %rokers+ 9e acts on
%ehalf of a stock1%roker as an agent or otherwise
for assisting the investors for %uying2 selling or
dealing in securities through such stock1%roker+ No
su%1%roker is allowed to %uy2 sell or deal in
securities2 unless he or she holds a certificate of
registration granted %y SE"I+ A su%1%roker may
take the form of a sole proprietorship2 a
partnership firm or a company+ Stock%rokers of the
recognised stock e#changes are permitted to
transact with su%1%rokers+ Su%1%rokers are
re3uired to o%tain certificate of registration from
SE"I in accordance with SE"I 'Stock "rokers &
Su%1%rokers) !ules and !egulations2 :;;(2 without
which they are not permitted to %uy2 sell or deal in
securities+ SE"I may grant a certificate to a su%1
%roker2 su%0ect to the conditions that6
(a) he shall pay the fees in the prescri%ed
mannerI
(b) he shall take ade3uate steps for redressal
of grievances of the investors within one
month of the date of the receipt of the
complaint and keep SE"I informed a%out the
num%er2 nature and other particulars of the
complaints receivedI
(c) in case of any change in the status and
constitution2 the su%1 %roker shall o%tain prior
permission of SE"I to continue to %uy2 sell or
deal in securities in any stock
e#changeI and
(d) he is authorised in writing %y a stock1
%roker %eing a mem%er of a stock e#change
for affiliating himself in %uying2 selling or
dealing in securities+
In case of company2 partnership firm and sole
proprietorship firm2 the directors2 the partners
and the individual2 shall comply with the
following re3uirements6
(a) the applicant is not less than (: years of
ageI
(b) the applicant has not %een convicted of any
offence involving fraud or dishonestyI
(c) the applicant has atleast passed :(th
standard e3uivalent e#amination from an
institution recognised %y the 5overnment+
(d) They should not have %een de%arred %y
SE"I+
:=7
'e) The corporate entities applying for su%1
%rokership shall have a minimum paid up
capital of !s+ $ lakh and it shall identify a
dominant shareholder who holds a minimum of
$:B shares either singly or with the
unconditional support of hisAher spouse+
The salient features of the circular !ef+ No+
S,.AP&ICGACI!CCA!A::1;7 dated ,ay
(:2 :;;; issued %y SE"I is as under6
1. The registered su%1%roker can transact only
through the mem%er %roker who had
recommended his application for registration+ If the
Su%1%roker is desirous of doing %usiness with
more than one %roker2 he will have to o%tain
separate registration in each case+
2. The su%1%roker shall disclose the names of
all other su%1%rokersA%rokers where he is
having direct or indirect interest+
3. It shall %e the responsi%ility of the %roker to
report the default if any of his su%%roker to all
other %rokers with whom su%1%roker is
affiliated+
4. The agreement can %e terminated %y giving
the notice in writing of not less than / months
%y either party+
5. Su%1%rokers are o%ligated to enter into
agreements and maintain the data%ase of their
clientsAinvestors in the specified format+ The
applicant su%1%roker shall su%mit the re3uired
documents to the stock e#change with the
recommendation of a T,+ After verifying the
documents2 the stock e#change may forward the
documents of the applicant su%1%roker to SE"I
for registration+ A su%1%roker can trade in that
capacity after getting himself registered with
SE"I+ The E#change may not forward the said
application of the su%1%roker to SE"I for
registration if the applicant is found to have
introduced or otherwise dealt with fake2 forged2
stolen2 counterfeit etc+ shares and securities in
the market+
The su%1%roker of a T, of the E#change has to
comply with all the re3uirements under SE"I 'stock
%rokers and su%1%rokers) !egulation2 :;;( and the
re3uirements of the E#change as may %e laid down
from time to time+ The su% %roker is %ound %y and
amena%le to the !ules2 "yelaws and !egulations of
the E#change+ The su%1%roker shall also comply with
all terms and conditions of the agreement entered
into %y him with the T,+ After registration with SE"I2
the su%1%roker can %uy2 sell or deal in securities on
%ehalf of the investors through the %roker with whom
he is affiliated+ The T, has to issue contract notes for
all trades in respect of its su%1%roker in the name of
the su%1%roker and the su%1%roker shall2 in turn issue
purchaseAsale notes to his clients as
:==
per the format prescri%ed %y the E#change+
The T, with whom the su%1%roker is affiliated
is responsi%le for T
1) Ensuring the compliance %y a su%1%roker of
the !ules2 "ye1laws and !egulations of the
E#change
2) Inspecting that the su%1%rokers are
registered and recogni-ed
3) Ensuring that the su%1%rokers function in
accordance with the Scheme2 !ules2 "yelaws2
!egulations etc+ of the E#changeANSCC and
the SE"I !egulations etc+
4) Informing the su%1%roker and keeping him
apprised a%out tradingAsettlement cycles2
deliveryApayment schedules and any changes
therein from time to time+
5) !eporting any default or delay in carrying
out o%ligations %y any of the su% %rokers
affiliated to him2 to all other stock %rokers with
whom the said su% %roker is affiliated+
De$o,itorie,
A depository is an entity where the securities of an
investor are held in electronic form+ The person who
holds a demat account is a %eneficiary owner+ In
case of a 0oint account2 the account holders will %e
%eneficiary holders of that 0oint account+ .epositories
help in the settlement of the demateriali-ed
securities+ Each custodianAclearing mem%er is
re3uired to maintain a clearing pool account with the
depositories+ 9e is re3uired to make availa%le the
re3uired securities in the designated account on
settlement day+ The depository runs an electronic file
to transfer the securities from accounts of the
custodiansAclearing mem%er to that of NSCC+ As
per the schedule of allocation of securities
determined %y the NSCC2 the depositories transfer
the securities on the pay1out day from the account of
the NSCC to those of mem%ersAcustodians+
:=;
Unit @CII
Network of stock e#change in India
National stock e#change
"om%ay stock e#change
!egional stock e#change
&ver the counter e#change of India
:;<
National Sto"/ E1"+ange.
The National Stock E#change of India imited
'NSE) has genesis in the report of the 9igh
Powered Study 5roup on Esta%lishment of
New Stock E#changes2 which recommended
promotion of a National Stock E#change %y
financial institutions '*Is) to provide access to
investors from all across the country on an
e3ual footing+ "ased on the recommendations2
NSE was promoted %y leading *inancial
Institutions at the %ehest of the 5overnment of
India and was incorporated in Novem%er :;;(
as a ta#1paying company unlike other stock
e#changes in the country+
&n its recognition as a stock e#change under
the Securities Contracts '!egulation) Act2
:;$/ in April :;;>2 NSE commenced
operations in the 4holesale .e%t ,arket
'4.,) segment in Dune :;;?+ The Capital
,arket 'E3uities) segment commenced
operations in Novem%er :;;? and operations
in .erivatives segment commenced in Dune
(<<<+
T+e
Gro!$
NSCCL
IISL NSE
.IT
NSDL
DotE1 Intl.
Lt.
:;:
AT A GLANCE#
CAPITAL MARKET 5EQUITIES6 SEGMENT
Num%er of JSATs ,ay >:2 (<</ (2=: <
Num%er of cities covered ,ay >:2 (<</ >> ;
Settlement 5uarantee *und ,arch >:2 (<<$ !s+ :2$$<+;< crores
Investor Protection *und 'C, and
*&&) ,ay >:2 (<</ !s+ :??+(< crores
Num%er of securities availa%le for
trading ,ay >:2 (<</ :2>7;
!ecord num%er of trades Danuary <$2 (<</ (=2?;2;=7
!ecord daily turnover '3uantity) Danuary <$2 (<</ /27$7 lakhs
!ecord daily turnover 'value)
*e%ruary (=2
(<<: !s+:<2>//+$( crores
!ecord market capitalisation Dune (?2 (<</
!s+ :72(>2/?=+7<
crores
!ecord value of S&P CNF Nifty Inde# Dune (?2 (<</ (2(<?+?$
!ecord value of CNF Nifty Dunior Inde#
*e%ruary (>2
(<<< $2>/$+;<
!ecord Pay1inAPay1out '!olling
Settlement)6
*unds Pay1inAPay1out
*e%ruary <$2
(<<$Q !s+ /=$+7/ crores
Securities Pay1inAPay1out 'Jalue)
Danuary :>2
(<<$Q !s+ :==?+<; crores
Securities Pay1inAPay1out 'Kuantity) August (:2 (<<>Q :?7<+:? lakhs
QSettlement .ate
DERICATICES 5F?O6 SEGMENT
No+ of cities covered Dune <;2 (<</ >: (
Settlement 5uarantee *und ,arch >:2 (<<$ !s+ ?2>$/+=$ crores
!ecord daily turnover 'value) Danuary (=2 (<<$ !s+ (:2;(:+>? crores
!ecord num%er of trades April (=2 (<</ ?2<(2;=<
8FOLESALE DEBT SEGMENT
Num%er of securities availa%le for
trading ,ay >:2 (<</ >2:<>
!ecord daily turnover 'value) August ($2 (<<> !s+:>2;::+$7 crores
:;(
&ver The Counter E#change of India '&TCEI)
was incorporated in :;;< as a Section ($
company under the Companies Act :;$/ and
is recogni-ed as a stock e#change under
Section ? of the Securities Contracts
!egulation Act2 :;$/+ The E#change was set
up to aid enterprising promoters in raising
finance for new pro0ects in a cost effective
manner and to provide investors with a
transparent & efficient mode of trading+
,odelled along the lines of the NAS.AK
market of CSA2 &TCEI introduced many novel
concepts to the Indian capital markets such as
screen1%ased nationwide trading2 sponsorship of
companies2 market making and scripless
trading+
NSE Ine1e,
E3uities trading at NSE %egan in Novem%er
:;;?+ "y late :;;$2 NSE %ecame IndiaNs
largest e3uity market and was looking for a
market inde# to utilise this uni3ue information
source+ NSE also wanted to have a vehicle for
the futures and options market+ NSE
approached the economists .r+ A0ay Shah and
.r+ Susan Thomas2 then at C,IE 'and now at
I5I.!)2 to do research on methods in inde#
construction+ This work was funded %y the
CSAI. *I!E pro0ect and led to the S&P CNF
Nifty+
Ine1 0!t!re,
NSE has %een gearing up from :;;$ onwards
to start an inde# futures market+ Trading in
S&P CNF Nifty futures will soon commence
here+ 4ith NSENs e#pertise2 this futures market
is e#pected to %ecome relia%le and li3uid+
S&P CNF Nifty is uni3uely e3uipped as an
inde# for the inde# futures market owing to 'a)
low market impact cost and '%) high hedging
effectiveness+ The good diversification of S&P
CNF Nifty will generate low initial margin
re3uirements+
*inally2 S&P CNF Nifty is calculated using
NSE prices2 and NSE is the most li3uid
e#change in India2 thus making it easier to do
ar%itrage for S&P CNF Nifty inde# futures+
:;>
S?P CNR De0t*
S&P CNF .efty is S&P CNF Nifty2 measured in
dollars+ If the S&P CNF Nifty rises %y (B it
means that the Indian stock market rose %y (B2
measured in rupees+ If the S&P CNF .efty rises
%y (B2 it means that the Indian stock market
rose %y (B2 measured in dollars+
The S&P CNF .efty is calculated in realtime+ .ata
for the S&P CNF Nifty and the dollar11 rupee is
a%sor%ed in realtime2 and used to calculate the
S&P CNF .efty in realtime+ !ealtime currency
data is o%tained from @night !idder+ 4hen there is
currency volatility2 the S&P CNF .efty is an ideal
device for a foreign investor to know where he
stands2 even intraday+
S?P CNR Ni0t*
S&P CNF Nifty is the first rung of the largest2
highly li3uid stocks in India+ CNF Nifty Dunior
is an inde# %uilt out of the ne#t $< large2 li3uid
stocks in India+ It is not as li3uid as the S&P
CNF Nifty2 which implies that the information in
the CNF Nifty Dunior is not as noise1free as
that of the S&P CNF Nifty+
It may %e useful to think of the S&P CNF Nifty
and the CNF Nifty Dunior as making up the
:<< most li3uid stocks in India+ S&P CNF Nifty
is the front line %lue1chips2 large and highly
li3uid stocks+ The CNF Nifty Dunior is the
second rung of growth stocks which are not as
esta%lished as those in the S&P CNF Nifty+
Stocks like Infosys and NIIT2 which recently
graduated into the S&P CNF Nifty2 were in the
CNF Nifty Dunior for a long time prior to this+
CNF Nifty Dunior can %e viewed as an
incu%ator where young growth stocks are
found+ As with the S&P CNF Nifty2 stocks in
the CNF Nifty Dunior are filtered for li3uidity2 so
they are the most li3uid of the stocks e#cluded
from the S&P CNF Nifty+ "uying and selling
the entire CNF Nifty Dunior as a portfolio is
feasi%le+
The maintenance of the S&P CNF Nifty and the CNF
Nifty Dunior are synchronised so that the two inde#es
will always %e dis0oint setsI i+e+ a stock will never
appear in %oth inde#es at the same
:;?
time+ 9ence it is always meaningful to pool the
S&P CNF Nifty and the CNF Nifty Dunior into a
composite :<< stock inde# or portfolio+
S&P CNF Nifty is %ased upon solid economic
research+ A trillion calculations were e#pended
to evolve the rules inside the S&P CNF Nifty
inde#+ The results of this work are remarka%ly
simple6 'a) the correct si-e to use is $<2 '%)
stocks considered for the S&P CNF Nifty must
%e li3uid %y the \impact costN criterion2 'c) the
largest $< stocks that meet the criterion go into
the inde#+
S&P CNF Nifty is a contrast to the adhoc
methods that have gone into inde# construction
in the preceding years2 where inde#es were
made out of intuition and lacked a scientific
%asis+ The research that led up to S&P CNF
Nifty is well1respected internationally as a
pioneering effort in %etter understanding how to
make a stock market inde#+
OTCEI OCER TFE
COUNTER ERCFANGE OF
INDIA.
&ver The Counter E#change of India '&TCEI)
was incorporated in :;;< as a Section ($
company under the Companies Act :;$/ and
is recogni-ed as a stock e#change under
Section ? of the Securities Contracts
!egulation Act2 :;$/+ The E#change was set
up to aid enterprising promoters in raising
finance for new pro0ects in a cost effective
manner and to provide investors with a
transparent & efficient mode of trading+
,odelled along the lines of the NAS.AK
market of CSA2 &TCEI introduced many novel
concepts to the Indian capital markets such as
screen1%ased nationwide trading2 sponsorship
of companies2 market making and scripless
trading+ As a measure of success of these
efforts2 the E#change today has ::$ listings
and has assisted in providing capital for
enterprises that have gone on to %uild
successful %rands for themselves like JIP
Advanta2 Sonora Tiles & "rilliant mineral
water2 etc+
OTCEI...
is the first
screen %ased
nationwide
stock
e#change in
India is the
first e#change
to introduce
,arket
,aking in
India
:;$
is the first e#change to introduce
Sponsorship of companies in India
is the only e#change to allow listing of
companies with paid1up %elow !s+> crores
is the only e#change to allow
companies with less than > year track
record to tap capital market+
has shifted
trading from
counter
receipts to
share
certificates
has
introduced
4eekly
Settlement
Cycle
allows short selling
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Nee 0or OTCEI
Studies %y NASSC&,2 Software Technology
Parks of India2 the venture capital funds and the
governmentNs IT Task *orce2 as well as the rising
interest in information technology2
pharmaceutical2 %iotechnology and media
shares have repeatedly emphasi-ed the need
for a national stock market for innovative and
high growth companies+
Innovative companies are critical to developing
economies like India2 which is undergoing a
ma0or technological revolution+ 4ith their
a%ilities to generate employment opportunities
and contri%ute to the economy2 it is essential
that these companies not only e#pand e#isting
operations %ut also set up new units+ The key
issue for these companies is raising timely2
cost effective and long term capital to sustain
their operations and enhance growth+ Such
companies2 particularly those that have %een
in operation for a short time2 are una%le to
raise funds through the traditional financing
methods2 %ecause they have not yet %een
evaluated %y the financial world+
8+o .o!l 0in OTCEI +el$0!l#
high1technology enterprises
companies with high growth potential
companies focussed on new product
development +
entrepreneurs seeking finance for specific
%usiness pro0ects
:;/
The Indian economy is demonstrating signs of
recovery and it is essential that these companies
have suita%le financing alternatives to fund their
growth and maintain competitiveness+
&TCEI2 with its entry guidelines and eligi%ility
re3uirements tailored for such innovative and
growth oriented companies2 is ideally
positioned as the preferred route for raising
funds through Initial Pu%lic &ffer 'IP&s) or
primary issues2 in this country+
The E#change has three types of
intermediaries called ,em%ers2 .ealers and
Sponsors2 who contri%ute to the E#changeNs
activities %y trading and ena%ling listing of
companies on the E#change+ ,em%ers and
.ealers may carry out the activities of trading2
underwriting2 market making and participation
in %ought out deals2 %ut .ealers cannot
sponsor an issue for listing+ Sponsors can
perform the function of sponsorship of issues2
%ut are not permitted to participate in
secondary market activities+
Ke* In0or-ation
Ba,e Mini-!- Ca$ital e$o,ite
.it+ t+e E1"+ange
The "ase ,inimum Capital is taken as
security for due performance and fulfillment %y
the mem%er of his operations and o%ligations
towards the E#change+ The minimum %ase
capital is !s+ ? lakhs+ All mem%ers have to
comply with the "ase ,inimum Capital
re3uirements %efore their activation+ The
mem%ers may opt for "ase ,inimum Capital
%y way of Cash2 *.!s2 "ank 5uarantee or
Securities+
Cash to %e deposited with the E#change1
minimum ($ B i+e+ !s+ : lakh
.eposit of *i#ed .eposit !eceipts
'*.!s)1 '($ B) issued %y approved
%anks
.eposit Alodgement of Securities1
'ma#imum $< B) with approved
custodian '9.*C "ank td+) with
(<B margin+ &!
Irrevoca%le "ank guarantees 'in lieu of
securities 1 ma#imum $< B) from approved
%anks
:;7
,em%ers can also deposit additional %ase
capital with the E#change+ The cash
component of the additional %ase capital to %e
deposited should %e a minimum ><B+
Intra-a* Li-it, #
T!rno3er Li-it 6 ,em%ers are su%0ect to intra1day
trading limits+ 5ross Turnover '%uyEsell) for the day
shall not e#ceed twenty five times '($) the %ase
capital deposited %y the mem%ers+ ,em%ers
desirous of increasing their limits will have to su%mit
additional deposits %y way of cash2 %ank guarantees2
fi#ed deposit receipts and securities+ Trading
,em%ers violating the intra1day gross turnover limit
at any time on any trading day shall not %e permitted
to trade forthwith+
Gro,, E1$o,!re Li-it 6 ,em%ers are su%0ect
to gross e#posure limits+ 5ross e#posure2
%eing the aggregate of the cumulative net
outstanding positions 'purchase or sales) in
each security shall not e#ceed eight and half
times '=+$) the %ase capital deposited %y the
mem%ers+ 5ross E#posure at any point of time
shall also include net outstanding positions of
the previous settlement till the securities pay1in
for the previous settlement+ ,em%ers desirous
of increasing their limits will have to su%mit
additional deposits %y way of cash2 %ank
guarantees2 fi#ed deposit receipts and
securities+
Margin, 6
All margins imposed %y the E#change are
paya%le on TE: day+
The E#change collects the following margins
from %rokers depending on their positionsA
e#posures and market volatility2 in line with
SE"I re3uirements6
a6 Dail* Margin
.aily margin paya%le %y the mem%er consists
of value at !isk ,argin and ,ark to ,ark
,argin+
%6 Mar/ to Mar/et Margin
,ark to market margin is computed on the %asis of
mark to market loss of a mem%er+ ,ark to market
loss is potential loss2 in case the cumulative net
outstanding position of the mem%er in all securities
at the end of day is closed out+ ,ark to ,arket
margin is calculated %y marking each transaction
in a scrip to the closing price of the scrip at the end
of trading+ ,T, ProfitAloss
:;=
across different securities within the same
settlement is set off to determine the ,T, loss
for a settlement+ Such ,T, losses for
settlements are computed at client level+
"6 Cal!e at Ri,/ Margin
Jalue at !isk ,argin is computed for all
securities in the rolling settlement+ All
securities are classified into three groups
for purpose of var margin
Bo-%a* Sto"/ E1"+ange.
"om%ay Stock E#change imited is the oldest stock
e#change in Asia with a rich heritage+ Popularly
known as M"SEM2 it was esta%lished as MThe Native
Share & Stock "rokers AssociationM in :=7$+ It is the
first stock e#change in the country to o%tain
permanent recognition in :;$/ from the 5overnment
of India under the Securities Contracts '!egulation)
Act2 :;$/+The E#changeNs pivotal and pre1eminent
role in the development of the Indian capital market is
widely recogni-ed and its inde#2 SENSEX2 is tracked
worldwide+ Earlier an Association of Persons 'A&P)2
the E#change is now a demutualised and
corporatised entity incorporated under the provisions
of the Companies Act2 :;$/2 pursuant to the
"SE'Corporatisation and .emutualisation) Scheme2
(<<$ notified %y the Securities and E#change "oard
of India 'SE"I)+
4ith demutualisation2 the trading rights and
ownership rights have %een de1linked
effectively addressing concerns regarding
perceived and real conflicts of interest+ The
E#change is professionally managed under
the overall direction of the "oard of
.irectors+The "oard comprises eminent
professionals2 representatives of Trading
,em%ers and the ,anaging .irector of the
E#change+ The "oard is inclusive and is
designed to %enefit from theparticipation of
market intermediaries+
In terms of organisation structure2 the "oard
formulates larger policy issues and e#ercises
over1all control+ The committees constituted %y
the "oard are %road1%ased+The day1to1
dayoperations of the E#change are managed
%y the ,anaging .irector and a management
team of professionals+
:;;
The E#change has a nation1wide reach with a
presence in ?:7 cities and towns of India+ The
systems and processes of the E#change are
designed to safeguard market integrity and
enhance transparency in operations+ .uring
the year (<<?1(<<$2 the trading volumes on
the E#change showed ro%ust growth+
The E#change provides an efficient and
transparent market for trading in e3uity2 de%t
instruments and derivatives+ The "SENs &n
ine Trading System '"&T) is a proprietory
system of the E#change and is "S 77;;1(1
(<<( certified+ The surveillance and clearing &
settlement functions of the E#change are IS&
;<<:6(<<< certified+
*or the premier Stock E#change that
pioneered the stock %roking activity in India 2
:($ years of e#perience seem to %e a proud
milestone+ A lot has changed since :=7$ when
>:= persons %ecame mem%ers of what today
is called M"om%ay Stock E#change imitedM %y
paying a princely amount of !e:+
Since then2 the stock market in the country has
passed through %oth good and %ad periods+ The
0ourney in the (<th century has not %een an easy
one+ Till the decade of eighties2 there was no
measure or scale that could precisely measure
the various ups and downs in the Indian stock
market+ "om%ay Stock E#change imited '"SE)
in :;=/ came out with a Stock Inde# that
su%se3uently %ecame the %arometer of the
Indian Stock ,arket+
SENSEX, first compiled in :;=/ was
calculated on a M,arket Capitali-ation1
4eightedM methodology of >< component
stocks representing a sample of large2 well1
esta%lished and financially sound companies+
The %ase year of SENSEF is :;7=17;+ The
inde# is widely reported in %oth domestic and
international markets through print as well as
electronic media+ SENSEX is not only
scientifically designed %ut also %ased on
glo%ally accepted construction and review
methodology+ *rom Septem%er (<<>2 the
SENSEF is calculated on a free1float marke
capitali-ation methodology+ The "free-float
Market Capitaliation-!eig"ted" methodology
is a widely followed inde# construction
methodology on which ma0ority of glo%al e3uity
%enchmarks are %ased+
(<<
The growth of e3uity markets in India has %een
phenomenal in the decade gone %y+ !ight from
early nineties the stock market witnessed
heightened activity in terms of various %ull and
%ear runs+ ,ore recently2 the %ourses in India
witnessed a similar fren-y in the NT,TN sectors+
The SENSEF captured all these happenings in
the most 0udicial manner+ &ne can identify the
%ooms and %ust of the Indian e3uity market
through SENSEF+
The launch of SENSEF in :;=/ was later
followed up in Danuary :;=; %y introduction of
"SE National Inde# '"ase6 :;=>1=? ] :<<)+ It
comprised of :<< stocks listed at five ma0or
stock e#changes in India at ,um%ai2 Calcutta 2
.elhi 2 Ahmeda%ad and ,adras + The "SE
National Inde# was renamed as "SE1:<< Inde#
from &cto%er :?2 :;;/ and since then it is
calculated taking into consideration only the
prices of stocks listed at "SE+ The E#change
launched dollar1linked version of "SE1:<< inde#
i+e+ .olle#1:<< on ,ay ((2 (<</+
4ith a view to provide a %etter representation of
the increased num%er of companies listed2
increased market capitalisation and the new
industry groups2 the E#change constructed and
launched on (7th ,ay2 :;;?2 two new inde# series
vi-+2 the N"SE1(<<N and the N.&EF1(<<N indices+
Since then2 "SE has come a long way in attuning
itself to the varied needs of investors and market
participants+ In order to fulfill the need of the
market participants for still %roader2 segment1
specific and sector1specific indices2 the E#change
has continuously %een increasing the range of its
indices+ The launch of "SE1(<< Inde# in :;;? was
followed %y the launch of "SE1$<< Inde# and $
sectoral indices in :;;;+ In (<<:2 "SE launched
the "SE1PSC Inde#2 .&EF1>< and the countryNs
first free1float %ased inde# 1 the "SE TECk Inde#+
The E#change shifted all its indices to a free1float
methodology 'e#cept "SE PSC inde#) in a pahsed
manner+
The E#change also disseminates the Price1
Earnings !atio2 the Price to "ook Jalue !atio
and the .ividend Gield Percentage on day1to1
day %asis of all its ma0or indices+
The values of all "SE indices are updated
every :$ seconds during the market hours and
displayed through the "&T system2 "SE
we%site and news wire agencies+
All "SE1Indices are reviewed periodically %y the
MInde# CommitteeM of the E#change+ The
Committee frames the %road policy guidelines for
the development and maintenance of all "SE
(<:
indices+ .epartment of "SE Indices of the
E#change carries out the day to day
maintenance of all indices and conducts
research on development of new indices+
"SE td places great deal of emphasis on
Information Technology to strengthen its
functioning and performance+ N&perations &
Trading .epartmentN continuously upgrades the
hardware2 software and networking systems2
thus ena%ling the E#change to enhance the
3uality and standard of service provided to its
mem%ers and other market intermediaries+
To facilitate smooth transaction2 "SE had
replaced its open outcry system with "SE &n1
line Trading '"&T) facility in :;;$+ This totally
automated screen %ased trading in securities
was put into practice nation1wide within a
record time of 0ust $< days+
The "&T platform capacity has %een enhanced
to ?< lakh orders per day %y upgrading the
hardware+ "&T has %een certified %y .NJ for
conforming to "S77;; security standards+ 4ith
this2 "SE is the second stock e#change in the
world to have this certification+
E#change has also introduced the worldNs first
centrali-ed e#change %ased Internet trading
system2 "SE4E"#+com+ The initiative ena%les
investors anywhere in the world to trade on the
"SE platform+
"SENs we%site
http6AAwww+%seindia+com Aprovides
comprehensive information on the stock
market+ It is one of the most popular financial
we%sites in India and is regularly visited %y
financial organi-ations and other stakeholders
for updates+
"SENs team of e#perts and professionals2
along with its strategic partners have put into
place several critical systems such as
.erivatives Trading & Settlement System
'.TSS)2 Electronic Contract Notes 'ECN)2
Cni3ue Client Code registration 'CCC)2 !eal
time data dissemination 1 system 1 .atafeed2
Integrated "ack office System 1 C." A I."2
"ook "uilding System '""S) & !everse "ook
"uilding System '!""S) etc+
"SE also operates one of the largest private
networks in India2 comprising campus ANI
4AN set up within ,um%ai and across some
ma0or metros in India and JSAT set up across
the country+
(<(
"SENs Campus AN covers around >$<
mem%er offices across three "SE %uildings
P+D+ Towers2 !otunda and Cama %uilding+
"SE 4AN setup connects appro#imately (<<<
mem%er offices within ,um%ai and some
ma0or metros to "SE systems+ eased ,N
circuits from ,TN A "SN are provided with
IS.N A TT, leased circuit %ackup+ Around
><< circuits are of (,%ps capacity and rest all
are of /?@%ps capacity+
In year (<<< "SE set up its own JSAT ,aster
Earth Station '9C")2 which uses full transponder
on INSAT >" satellite to cater to roughly (<<<
locations in over ?<< cities across the country+
!egional 9u%s for local fan out of leased lines
within ,etros %acked %y high availa%ility trunk
%ack%one to "SE+ The regional technology hu%s
are commissioned in Ahmeda%ad2 "angalore2
Chandigarh2 Chennai2 .elhi2 9ydera%ad2 Indore2
Daipur2 @olkatta2 udhiana2 Pune and !a0kot
provide cost1effective relia%le services to
mem%ers+
The trading and settlement activities of the
mem%er1%rokers are closely monitored through
&n1line !eal Time System known as "SE &nline
Surveillance System '"&SS)+ The system
ena%les the E#change to detect market a%uses
at a nascent stage2 improve the risk
management system and strengthen the self1
regulatory mechanisms+ Currently2 "SE is in the
process of evolving an integrated system for
online surveillance of Cash and .erivatives
Segment through "SE &nline Surveillance
System 1 Integrated '"&SS 1 i)+
"SE uses higher end fault tolerant systems for
its trading and related functionalities+ It uses
Integrity Non1stop S==<<< systems for its
online trading systems '"&T)+ The systems
have %een designed to deliver the %est
performance without compromising on key
factors of availa%ility2 scala%ility2 !&I and TC&+
There are powerful !ISC %ased Cni# severs
rp=?<< from hp for our .erivatives2 Settlement2
"ackoffice2 .atafeed2 ""S2 !""S and other
systems related to trading A non1trading and related
(<>
functionalities+ The systems are facilitated %y
the use of the ro%ust and high availa%le
storage su%systems from hp+
"SE use one of the most powerful !ISC
%ased Alpha 5S:?< and ES?< servers for our
Internet %ased trading system 'ITS) ena%ling
the end user to carry out the trading activities
from any location facilitated %y the internet+
"SE also use Intel = way and ? way servers
for %seindia+com we% site2 one of the %est
portal on information related to capital
markets+
"SE strictly adheres to IS policies and IS
Security policies and procedures for its day to
day operational activities on (? # 7 %asis
which has ena%led us to achieve the "S77;;
certification+ In addition2 "SE has also %een
successful in maintaining systems and
processes uptime of ;;+;;B+
Follo.ing are t+e -ain
BSE Ine1e,
"SE PSC Inde#
"SE TEC@ Inde#
"SE ,id Cap & Small Cap Inde#
"SE "AN@F
"SE :<< Inde#
"SE (<< Inde#
"SE $<< Inde#
Fo. o S?P CNR Ni0t* an t+e VBSE
,en,iti3e ine1; "o-$areS
Every technical reason favours the S&P CNF
Nifty+
S&P CNF Nifty is a more diversified inde#2
accurately reflecting overall market conditions+
The "SE inde# is more vulnera%le to
movements of individual stocks+ The reward1to1
risk ratio of S&P CNF Nifty is higher '$+7? as
compared with $+:()2 making it a more attractive
portfolio T %oth indices offer similar returns2 %ut
S&P CNF Nifty costs less risk+
(<?
S&P CNF Nifty is a more li3uid inde#+ Trades
on the S&P CNF Nifty suffer lower market
impact cost+
Several important issues lead %ack to the fact
that the S&P CNF Nifty is calculated using
NSE prices while the \"SE sensitive inde#8 is
calculated using "SE prices+
S&P CNF Nifty is calculated from a more li3uid
market2 which features the safety of novation
at the clearing corporation+ Csers of the "SE
inde# would %e forced to trade on "SE2 a less
li3uid e#change where there is settlement risk
owing to the lack of novation and the lack of a
clearing corporation+
S&P CNF Nifty has fully articulated and
professionally implemented rules governing
inde# revision2 corporate actions2 etc+ These
rules are carefully thought out2 under Indian
conditions2 to dovetail with operational
pro%lems of inde# funds and inde#
ar%itrageurs+ ,any of the "SE procedures are
adhoc and undocumented2 and do not reflect
an awareness of modern applications of an
inde#+
S&P CNF Nifty is calculated using modern
computer systems with great care a%out data
accuracy+
S&P CNF Nifty is more likely to rapidly %enefit
from a li3uid inde# futures market+ 'The "SE
has long campaigned against the introduction
of inde# futures in India+)
The hedging effectiveness for randomly
selected portfolios in India is %etter using the
S&P CNF Nifty+
S&P CNF Nifty is relatively free of manipulation2
for three reasons6 'a) the inde# levels are
calculated from the more li3uid e#change with
%etter surveillance procedures 'it is easier for a
manipulator to move prices at "SE)2 '%) S&P
CNF Nifty has a larger market Capitali-ation so
the conse3uence 'upon the inde#) of a given
move in an individual stock price is smaller and
'c) S&P CNF Nifty calculation intrinsically
re3uires li3uidity in proportion to market
Capitali-ation2 thus avoiding weak links which a
manipulator can attack+
(<$
Csers of the S&P CNF Nifty %enefit from the
research that is possi%le owing to the long time1
series availa%le6 %oth S&P CNF Nifty and S&P
CNF Nifty T! series are o%served from Duly
:;;< onwards+ &wing to the large changes in
the \"SE sensitive inde#8 in :;;/2 the
compara%le series availa%le is only two years
old2 and no T! inde# is availa%le+
S&P CNF Nifty is %acked %y solid economic
research and three most respected
institutions6 NSE2 C!ISI and S&P+
(</
Unit
@CIII
Trend of capital market in
India
Trend of
Sense# and
Nifty 'for last (
years) *actors
responsi%le for
the fluctuation
of
Sense# and Nifty+
Intro!"tion
Traditionally2 inde#es have %een used as
information sources+ "y looking at an inde# we
know how the market is faring+ This
information aspect also figures in myriad
applications of stock market inde#es in
economic research+ This is particularly
valua%le when an inde# reflects highly
uptodate information 'a central issue which is
discussed in detail ahead) and the portfolio of
an investor contains illi3uid securities 1 in this
case2 the inde# is a lead indicator of how the
overall portfolio will fare+
(<7
In recent years2 inde#es have come to the fore
owing to direct applications in finance2 in the
form of inde# funds and inde# derivatives+
Inde# funds are funds which passively \invest
in the inde#N+ Inde# derivatives allow people to
cheaply alter their risk e#posure to an inde#
'this is called hedging) and to implement
forecasts a%out inde# movements 'this is
called speculation)+ 9edging using inde#
derivatives has %ecome a central part of risk
management in the modern economy+ These
applications are now a multi1trillion dollar
industry worldwide2 and they are critically
linked up to market inde#es+
*inally2 inde#es serve as a %enchmark for
measuring the performance of fund managers+
An all1e3uity fund should o%tain returns like
the overall stock market inde#+ A $<6$<
de%t6e3uity fund should o%tain returns close to
those o%tained %y an investment of $<B in the
inde# and $<B in fi#ed income+ A well1
specified relationship %etween an investor and
a fund manager should e#plicitly define the
%enchmark against which the fund manager
will %e compared2 and in what fashion+
The most important type of market inde# is the
%road1market inde#+ In most countries2 a single
ma0or inde# dominates %enchmarking2 inde#
funds2 inde# derivatives and research
applications+ In addition2 more specialised
inde#es often find interesting applications+ In
India2 we have seen situations where a
dedicated industry fund uses an industry inde#
as a %enchmark+ In India2 where clear categories
of ownership groups e#ist2 it %ecomes interesting
to e#amine the performance of classes of
companies sorted %y ownership group+
SENSER - TFE BAROMETER OF INDIAN
CAPITAL MARKETS
*or the premier Stock E#change that
pioneered the stock %roking activity in India2
:(= years of e#perience seems to %e a proud
milestone+ A lot has changed since :=7$ when
>:= persons %ecame mem%ers of what today
is called MThe Stock E#change2 ,um%aiM %y
paying a princely amount of !e:+
Since then2 the countryNs capital markets have
passed through %oth good and %ad periods+ The
0ourney in the (<th century has not %een an easy
one+ Till the decade of eighties2 there was no
(<=
scale to measure the ups and downs in the
Indian stock market+ The Stock E#change2
,um%ai '"SE) in :;=/ came out with a stock
inde# that su%se3uently %ecame the
%arometer of the Indian stock market+
SENSEF is not only scientifically designed %ut
also %ased on glo%ally accepted construction
and review methodology+ *irst compiled in :;=/2
SENSEF is a %asket of >< constituent stocks
representing a sample of large2 li3uid and
representative companies+ The %ase year of
SENSEF is :;7=17; and the %ase value is :<<+
The inde# is widely reported in %oth domestic
and international markets through print as well
as electronic media+
The Inde# was initially calculated %ased on the
M*ull ,arket Capitali-ationM methodology %ut
was shifted to the free1float methodology with
effect from Septem%er :2 (<<>+ The M*ree1float
,arket Capitali-ationM methodology of inde#
construction is regarded as an industry %est
practice glo%ally+ All ma0or inde# providers like
,SCI2 *TSE2 ST&FF2 S&P and .ow Dones
use the *ree1float methodology+
.ue to is wide acceptance amongst the Indian
investorsI SENSEF is regarded to %e the pulse
of the Indian stock market+ As the oldest inde#
in the country2 it provides the time series data
over a fairly long period of time '*rom :;7;
onwards)+ Small wonder2 the SENSEF has
over the years %ecome one of the most
prominent %rands in the country+
The growth of e3uity markets in India has %een
phenomenal in the decade gone %y+ !ight from
early nineties the stock market witnessed
heightened activity in terms of various %ull and
%ear runs+ The SENSEF captured all these
events in the most 0udicial manner+ &ne can
identify the %ooms and %usts of the Indian stock
market through SENSEF+
SENSER Cal"!lation Met+oolog*
SENSEF is calculated using the M*ree1float ,arket
Capitali-ationM methodology+ As per this
methodology2 the level of inde# at any point of time
reflects the *ree1float market value of ><
component stocks relative to a %ase period+ The
market capitali-ation of a company is determined
%y multiplying the price of its stock %y the num%er
of shares issued %y the company+
(<;
This market capitali-ation is further multiplied
%y the free1float factor to determine the free1
float market capitali-ation+
The %ase period of SENSEF is :;7=17; and the
%ase value is :<< inde# points+ This is often
indicated %y the notation :;7=17;]:<<+ The
calculation of SENSEF involves dividing the
*ree1float market capitali-ation of >< companies
in the Inde# %y a num%er called the Inde#
.ivisor+ The .ivisor is the only link to the original
%ase period value of the SENSEF+ It keeps the
Inde# compara%le over time and is the
ad0ustment point for all Inde# ad0ustments
arising out of corporate actions2 replacement of
scrips etc+ .uring market hours2 prices of the
inde# scrips2 at which latest trades are e#ecuted2
are used %y the trading system to calculate
SENSEF every :$ seconds and disseminated in
real time+
Dolle1->)
"SE also calculates a dollar1linked version of
SENSEF and historical values of this inde# are
availa%le since its inception+
Uner,taning Free-0loat
Met+oolog*
Con"e$t#
*ree1float ,ethodology refers to an inde#
construction methodology that takes into
consideration only the free1float market
capitali-ation of a company for the purpose of
inde# calculation and assigning weight to stocks
in Inde#+ *ree1float market capitali-ation is
defined as that proportion of total shares issued
%y the company that are readily availa%le for
trading in the market+ It generally e#cludes
promotersN holding2 government holding2
strategic holding and other locked1in shares that
will not come to the market for trading in the
normal course+ In other words2 the market
capitali-ation of each company in a *ree1float
inde# is reduced to the e#tent of its readily
availa%le shares in the market+
In India2 "SE pioneered the concept of *ree1float
%y launching "SE TECk in Duly (<<: and "AN@EF
in Dune (<<>+ 4hile "SE TECk Inde# is a T,T
%enchmark2 "AN@EF is positioned
(:<
as a %enchmark for the %anking sector stocks+
SENSEF %ecomes the third inde# in India to
%e %ased on the glo%ally accepted *ree1float
,ethodology+
Ma9or a3antage, o0 Free-0loat
Met+oolog*#
A *ree1float inde# reflects the market
trends more rationally as it takes into
consideration only those shares that
are availa%le for trading in the market+
*ree1float ,ethodology makes the
inde# more %road1%ased %y reducing
the concentration of top few companies
in Inde#+ *or e#ample2 the
concentration of top five companies in
SENSEF has fallen under the free1float
scenario there%y making the SENSEF
more diversified and %road1%ased+
A *ree1float inde# aids %oth active and
passive investing styles+ It aids active
managers %y ena%ling them to
%enchmark their fund returns vis1Z1vis
an investa%le inde#+ This ena%les an
apple1to1apple comparison there%y
facilitating %etter evaluation of
performance of active managers+ "eing
a perfectly replica%le portfolio of stocks2
a *ree1float ad0usted inde# is %est
suited for the passive managers as it
ena%les them to track the inde# with the
least tracking error+
*ree1float ,ethodology improves inde#
fle#i%ility in terms of including any stock
from the universe of listed stocks+ This
improves market coverage and sector
coverage of the inde#+ *or e#ample2
under a *ull1market capitali-ation
methodology2 companies with large
market capitali-ation and low free1float
cannot generally %e included in the Inde#
%ecause they tend to distort the inde# %y
having an undue influence on the inde#
movement+ 9owever2 under the *ree1float
,ethodology2 since only the free1float
market capitali-ation of each company is
considered for inde# calculation2 it
%ecomes possi%le to include such closely
held companies in the inde# while at the
same time preventing their undue
influence on the inde# movement+
5lo%ally2 the *ree1float ,ethodology of inde#
construction is considered to %e an industry
%est practice and all ma0or inde# providers
like ,SCI2 *TSE2 S&P and ST&FF have
adopted the same+ ,SCI2 a leading glo%al
inde# provider2 shifted all its indices to the
*ree1float ,ethodology in (<<(+ The ,SCI
India Standard Inde#2 which is followed %y
*oreign Institutional Investors '*IIs) to track
Indian e3uities2 is also %ased on the *ree1
(::
float ,ethodology+ NAS.AK1:<<2 the
underlying inde# to the famous
E#change Traded *und 'ET*) 1 KKK is
%ased on the *ree1float ,ethodology+
De0inition o0 Free-0loat#
Share holdings held %y investors that would
not2 in the normal course come into the open
market for trading are treated as NControllingA
Strategic 9oldingsN and hence not included in
free1float+ In specific2 the following categories
of holding are generally e#cluded from the
definition of *ree1float6
9oldings %y foundersAdirectorsA
ac3uirers which has control element
9oldings %y personsA %odies with
MControlling InterestM
5overnment holding as
promoterAac3uirer
9oldings through the *.I !oute
Strategic stakes %y private corporate
%odiesA individuals
E3uity held %y associateAgroup
companies 'cross1holdings)
E3uity held %y Employee 4elfare Trusts
ocked1in shares and shares which
would not %e sold in the open market in
normal course+
T+e re-aining ,+are+oler, .o!l
0all !ner t+e Free-0loat "ategor*.
Deter-ining Free-0loat 0a"tor, o0
"o-$anie,#
"SE has designed a *ree1float format2 which is
filled and su%mitted %y all inde# companies on a
3uarterly %asis with the E#change+The E#change
determines the *ree1float factor for each company
%ased on the detailed information su%mitted %y the
companies in the prescri%ed format+ *ree1float
factor is a multiple with which the total market
capitali-ation of a company is ad0usted to arrive at
the *ree1float market capitali-ation+ &nce the *ree1
float of a company is determined2 it is rounded1off
to the higher multiple of $ and each company is
categori-ed into one of the (< %ands given %elow+
A *ree1float factor of say <+$$ means that only
$$B of the market capitali-ation of the company
will %e considered for inde# calculation+
(:(
Free-0loat Ban,#
' Free-Float Free-Float Fa"tor ' Free-Float
^< T $B <+<$ ^$< T $$B
^$ T :<B <+:< ^$$ T /<B
^:< T :$B <+:$ ^/< T /$B
^:$ T (<B <+(< ^/$ T 7<B
^(< T ($B <+($ ^7< T 7$B
^($ T ><B <+>< ^7$ T =<B
^>< T >$B <+>$ ^=< T =$B
^>$ T ?<B <+?< ^=$ T ;<B
^?< T ?$B <+?$ ^;< T ;$B
^?$ T $<B <+$< ^;$ T :<<B
Ine1 Clo,!re Algorit+-
The closing SENSEF on any trading day is
computed taking the weighted average of all the
trades on SENSEF constituents in the last ><
minutes of trading session+ If a SENSEF
constituent has not traded in the last >< minutes2
the last traded price is taken for computation of
the Inde# closure+ If a SENSEF constituent has
not traded at all in a day2 then its last dayNs
closing price is taken for computation of Inde#
closure+ The use of Inde# Closure Algorithm
prevents any intentional manipulation of the
closing inde# value+
Maintenan"e o0 SENSER
&ne of the important aspects of maintaining
continuity with the past is to update the %ase
year average+ The %ase year value ad0ustment
ensures that replacement of stocks in Inde#2
additional issue of capital and other corporate
announcements like Nrights issueN etc+ do not
destroy the historical value of the inde#+ The
%eauty of maintenance lies in the fact that
ad0ustments for corporate actions in the Inde#
should not per se affect the inde# values+
The #nde$ Cell of the e#change does the day1to1
day maintenance of the inde# within the %road
inde# policy framework set %y the Inde#
Committee+ The #nde$ Cell ensures that SENSEF
and all the other "SE indices maintain their
%enchmark properties %y striking a delicate
%alance %etween fre3uent replacements in inde#
and maintaining its historical continuity+ The Inde#
Committee of the E#change comprises of e#perts
on capital markets from all ma0or market
segments+ They include Academicians2 *und1
managers from leading ,utual *unds2 *inance1
(:>
Dournalists2 ,arket Participants2 Independent
5overning "oard mem%ers2 and E#change
administration+
On-Line Co-$!tation o0 t+e Ine1#
.uring market hours2 prices of the inde# scrips2 at
which trades are e#ecuted2 are automatically used
%y the trading computer to calculate the SENSEF
every :$ seconds and continuously updated on all
trading workstations connected to the "SE trading
computer in real time+
A9!,t-ent 0or Bon!,2 Rig+t, an Ne.l*
i,,!e Ca$ital#
The arithmetic calculation involved in
calculating SENSER is simple2 %ut pro%lem
arises when one of the component stocks
pays a %onus or issues rights shares+ If no
ad0ustments were made2 a discontinuity would
arise %etween the current value of the inde#
and its previous value despite the non1
occurrence of any economic activity of
su%stance+ At the Inde# Cell of the E#change2
the %ase value is ad0usted2 which is used to
alter market capitali-ation of the component
stocks to arrive at the SENSER value+
The Inde# Cell of the E#change keeps a close
watch on the events that might affect the inde#
on a regular %asis and carries out daily
maintenance of all the :? Indices+
A9!,t-ent, 0or Rig+t, I,,!e,#
4hen a company2 included in the compilation of
the inde#2 issues right shares2 the free1float market
capitalisation of that company is increased %y the
num%er of additional shares issued %ased on the
theoretical 'e#1right) price+ An offsetting or
proportionate ad0ustment is then made to the "ase
,arket Capitalisation 'see N"ase ,arket
Capitalisation Ad0ustmentN %elow)+
A9!,t-ent, 0or Bon!, I,,!e#
4hen a company2 included in the compilation of
the inde#2 issues %onus shares2 the market
capitalisation of that company does not undergo
any change+ Therefore2 there is no change in the
"ase ,arket Capitalisation2 only the Nnum%er of
sharesN in the formula is updated+
Ot+er I,,!e,#
(:?
"ase ,arket Capitalisation Ad0ustment is
re3uired when new shares are issued %y way
of conversion of de%entures2 mergers2 spin1
offs etc+ or when e3uity is reduced %y way of
%uy1%ack of shares2 corporate restructuring
etc+
Ba,e Mar/et Ca$itali:ation
A9!,t-ent#
The formula for ad0usting the "ase ,arket
Capitalisation is as follows6
N
ew ,arket Capitalisation New "ase ,arket
Capitalisation ] &ld "ase ,arket
Capitalisation # 111111111111111111111111111111111111111
&ld ,arket
Capitalisation
To illustrate2 suppose a company issues right
shares which increases the market capitalisation
of the shares of that company %y say2 !s+:<<
crores+ The e#isting "ase ,arket Capitalisation
'&ld "ase ,arket Capitalisation)2 say2 is
!s+(?$< crores and the aggregate market
capitalisation of all the shares included in the
inde# %efore the right issue is made is2 say
!s+?7=: crores+ The MNew "ase ,arket
Capitalisation M will then %e6
(?$< # '?7=:E:<<)
1111111
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1

]

!
s
+
(
$
<
:
+
(
?

c
r
o
r
e
s

?
7
=
:
This figure of ($<:+(? will %e used as the
"ase ,arket Capitali-ation for calculating
the inde# num%er from then onwards till the
ne#t %ase change %ecomes necessary+
SENSER - S"ri$ ,ele"tion "riteria#
The general guidelines for selection of
constituents in SENSEF are as follows6
1. Li,te Fi,tor*#The scrip should have a
listing history of at least > months at "SE+
E#ception may %e considered if full market
capitalisation of a newly listed company
ranks among top :< in the list of "SE
universe+ In case2 a company is listed on
account of mergerA demergerA
amalgamation2 minimum listing history
would not %e re3uired+
2. Traing Fre4!en"*#The scrip should
have %een traded on each and every
trading day in the last three months+
E#ceptions can %e made for e#treme
reasons like scrip suspension etc+
(:$
3. Final Ran/#The scrip should figure in the
top :<< companies listed %y final rank+
The final rank is arrived at %y assigning
7$B weightage to the rank on the %asis
of three1month average full market
capitalisation and ($B weightage to the
li3uidity rank %ased on three1month
average daily turnover & three1month
average impact cost+
4. Mar/et Ca$itali:ation 8eig+tage# The
weightage of each scrip in SENSEF %ased
on three1month average free1float market
capitalisation should %e at least <+$B of the
Inde#+
5. In!,tr* Re$re,entation#Scrip
selection would generally take into
account a %alanced representation of
the listed companies in the universe of
"SE+
6. Tra"/ Re"or# In the opinion of the
Committee2 the company should have
an accepta%le track record+
Ine1 Re3ie. Fre4!en"*#
The Inde# Committee meets every 3uarter to
discuss inde# related issues+ In case of a
revision in the Inde# constituents2 the
announcement of the incoming and outgoing
scrip is made si# weeks in advance of the actual
implementation of the revision of the Inde#+
Fi,tor* o0
re$la"e-ent o0 ,"ri$;,
in SENSER
(:/
Date O!tgoing S"ri$, Re$la"e %*
<:+<:+:;=
/ "om%ay "urmah Joltas
Asian Ca%les Peico
Crompton 5reaves Premier Auto+
Scinda 5+E+Shipping
<>+<=+:;;
( Uenith td+ "harat *orge
:;+<=+:;;
/ "allarpur Inds+ Arvind ,ills
"harat *orge "a0a0 Auto
"om%ay .yeing "9E
Ceat Tyres "SES
Century Te#t+ Colgate
5S*C 5u0+ Am%+ Cement
9ind+ ,otors 9PC
Indian &rganic ICICI
Indian !ayon I."I
@irloskar Cummins IPC
,ukand Iron ,TN
Phlips !an%a#y a%+
Premier Auto State "ank of India
Siemens Steel Authority of India
Joltas Tata Chem
:/+::+:;;
= Arvind ,ills Castrol
5+ E+ Shipping Infosys Technologies
IPC NIIT td+
Steel Authority of India Novartis
:<+<?+(<<
< I+.+"+I .r+ !eddy8s a%oratories
Indian 9otels !eliance Petroleum
Tata Chem Satyam Computers
Tata Power Uee Telefilms
<=+<:+(<<
: Novartis Cipla td+
<7+<:+(<<
( NIIT td+ 9C Technologies
,ahindra & ,ahindra 9ero 9onda ,otors td+
>:+<$+(<<
( ICICI td+ ICICI "ank td+
:<+:<+(<<
( !eliance Petroleum td+ 9.*C td+
:<+::+(<<
> Castrol India td+ "harti1Tele1Jentures td+
Colgate Palomive 'India) td+ 9.*C "ank td+
(:7
5la#o Smithkline Pharma+ td+ &N5C td+
9C Technologies td+ Tata Power Company td+
Nestle 'India) td+ 4ipro td+
:;+<$+(<<? arsen & Tou%ro td+ ,aruti Cdyog td+
(7+<;+(<<? ,ahanagar Telephone Nigam td+ arsen & Tou%ro td+
</+</+(<<$ 9industan Petroleum Corp td+ National Thermal Power Corpn+ td+
Uee Telefilms td+ Tata Consultancy Services td+
:(+</+(<</ Tata Power td+ !eliance Communiation Jentures td+
Tren in "a$ital -ar/et
To$
Gainer, -
All Mar/et
isted %elow are the current top
5ainers with respect to Price change
in B terms+
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with respect to Price change in B
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This data was
last updated on
?A:(A(<<7
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*actors responsi%le
for the fluctuation of
Sense# and Nifty+
Think of a li3uid stock as a good thermometer2 one which
gives accurate data a%out the true price of the stock2
%ecause it trades actively with a tight spread+ The prices
o%served for an illi3uid stock are like readings from a low
3uality thermometer2 which reports noisy data a%out the
phenomenon of interest 'the true price of the security)+
4e try to find the fifty %est thermometers in the country
and average their values to make the S&P CNF Nifty+ As
time passes2 %etter thermometers %ecome availa%le 'in
the form of large2 li3uid stocks that are not in the S&P
CNF Nifty)+ 4e would like that S&P CNF Nifty always
uses the %est thermometers possi%le+ So we remove the
weakest thermometer from inside the S&P CNF Nifty and
accept the new stock into it+
The world changes2 so the inde# should change+ Get2 the
change should not %e sudden 1 for that would disrupt the
character of the inde#+ In :;;/2 after a decade of near1
silence2 the "SE removed :? out of >< stocks in their
\sensitiveN inde#+ This completely changed the character of
the inde# 1 older data for this inde# is not compara%le with
new data+ Such sudden changes should %e avoided+ They
serve to illustrate the prover% t"ose %"o make peaceful
c"ange difficult make &iolent c"ange ine&ita'le+ S&P CNF
Nifty %elieves in steady2 peaceful changes+
((:
S&P CNF Nifty uses clear2 pu%licly documented
rules for inde# revision+ These rules are applied
regularly2 to o%tain changes to the inde# set+
I."I was once not listedI S"I was once illi3uidI Infosys
was once an o%scure software startup+ The world
changes2 and one %y one2 these stocks have come into
the S&P CNF Nifty+ Each change in the S&P CNF Nifty is
small2 so the continuity of the inde# is maintained+ Get2 at
all times2 S&P CNF Nifty represents the $< most
important li3uid stocks in the country2 the %est
thermometers to %uild an inde# out of+
There are mathematical formulas which ensure that
yesterdayNs value and todayNs are compara%le2 even if a
change in composition takes place in1%etween+ Think of
an inde# as a portfolio+ The composition of the portfolio
changes2 %ut it is still meaningful to keep measuring the
overnight returns on the portfolio from day to day+ These
returns2 cumulated up2 are the inde# level+
There are no speculators on the internal committee
of IIS which manages the inde# revisions+ *urther2
there are o%0ective2 pu%licly defined rules which
determine when stocks come in and go out of the
inde#+ There isnNt much room for personal 0udgement
here+
Every stock price moves for two possi%le reasons6 news
a%out the company 'e+g+ a product launch2 or the closure of
a factory2 etc+) or news a%out the country 'e+g+ nuclear
%om%s2 or a %udget announcement2 etc+)+ The 0o% of an
inde# is to purely capture the second part2 the movements of
the stock market as a whole 'i+e+ news a%out the country)+
This is achieved %y averaging+ Each stock contains a
mi#ture of these two elements 1 stock news and inde#
news+ 4hen we take an average of returns on many
stocks2 the individual stock news tends to cancel out+
&n any one day2 there would %e good stock1specific
news for a few companies and %ad stock1specific news
for others+ In a good inde#2 these will cancel out2 and
the only thing left will %e news that is common to all
stocks+ That is what the inde# will capture+
They reflect the changing e#pectations of the stock market
a%out future dividends of IndiaNs corporate sector+ 4hen the
inde# goes up2 it is %ecause the stock market thinks that the
prospective dividends in the future will %e %etter than
previously thought+ 4hen prospects of dividends in the future
%ecome pessimistic2 the inde# drops+ The ideal inde# gives us
instant1to1instant readings a%out how the stock market
perceives the future of IndiaNs corporate sector+
(((
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Role o0 RBI an SEBI
Role o0 RBI.
,odern day central %anking e#tends far
%eyond the domain of traditional functions
such as currency management2 %anker to
5overnment and promoting financial
soundness+ These re1orientations have %een
the natural corollary of pursuing monetary
policy measures that are focused on definitive2
well1defined and 3uantifia%le o%0ectives+
Central %anks in emerging economies differ from
their counterparts of developed countries in
several ways+ In some developed countries2
central %anks are vested only with the conduct of
monetary policy+ In most emerging countries2
central %anks2 %esides monetary policy2 also
((>
shoulder the responsi%ilities of de%t management2
and regulationAsupervision of %anks and financial
institutions+ Even in regard to the conduct of
monetary policy2 central %anks in emerging
economies have to contend with several o%0ectives2
and distinct trade1offs as compared with some
developed countries which pursue a single o%0ective
of price sta%ility+ 4hile pursuing multiple o%0ectives2
and managing comple# trade1offs2 central %anks in
emerging countries assume the responsi%ility of
looking after the interests of several agents including
depositors2 intermediaries2 government2 %usiness2
and e#ternal trade+ In regard to choice of
instruments2 given the level of market development2
and multiple o%0ectives2 emerging countries cannot
entirely rely on single instrument such as interest
rates+ !ather2 central %anks in emerging countries
prefer a 0udicious mi# of interest rates2 cash reserves2
and other instruments+ The most striking feature of
central %anking in emerging countries pertains to
their critical role in development of financial markets
and active involvement in the institution %uilding
process+
In,tit!tion B!iling
In the Indian conte#t2 the !eserve "ank of
India '!"I)2 in consultation with the
5overnment2 has played a ma0or role in
institution %uilding since independence+ Efforts
in this direction encompass !"I8s contri%ution
to development of commercial %anking2
development finance institutions in the areas
of agriculture and industry2 and specialised
institutions for development of financial
markets+ After initiation of the economic
reforms of the early :;;<s2 the role of !"I in
the area of developing financial markets
particularly the government securities2 money
markets and payment and settlement systems
has come to the fore+ ,oreover2 in a glo%al
environment2 with increasing integration of the
international economy2 the !"I8s role as the
regulator and supervisor of commercial %anks
and financial institutions has assumed a
central place in promoting transparency and
credi%ility of institutions and monetary and
financial policies+
Monetar* Poli"*
,ost central %ankers presently en0oy independence
in choosing their policy instrument and have used it
to rely on setting short1term interest rates+ As a
logical offshoot2 many central %anks in
((?
emerging markets are giving more e#posures to
pursuing price sta%ility as one of the main
o%0ectives of monetary policy+ In the !"I2 there is
a *inancial ,arkets Committee '*,C)2 which
meets daily %efore the opening of the markets
and at times more fre3uently2 when the situation
warrants+ The *,C reviews the li3uidity and
interest rate situation in financial markets and
advises top management on the course of action
that would %e re3uired %y !"I during the day+
This institutionalised framework helps the !"I to
take an integrated view on all1important
decisions having an impact on financial markets+
Economists have long de%ated as to what
should %e the o%0ective's) of monetary policy+ In
most developed countries2 monetary sta%ility2
defined as the price sta%ility2 constitutes the
dominant o%0ective of monetary policy+ In
emerging economies2 central %anks have to
contend with several concerns6 price sta%ility2
sustained growth2 financial system8s sta%ility2
sta%le e#change rate2 and operating o%0ectives
of li3uidity management+ The animated
discussion on central %ank o%0ectives ranges
%roadly %etween single o%0ective and multiple
o%0ectives+ Such discussion entails a generic
analysis of advantages and disadvantages of
single or multiple o%0ectives2 and the nature2 and
scope of central %anking organisation2 which
differs across the country groups of developed
and emerging countries due to significant
difference in socio1economic1technological1
institutional environment+
Adoption of a single o%0ective of monetary policy
%y central %anks is %ased on the arguments that 'i)
monetary policy should concentrate its instruments
on one o%0ective2 free from any policy trade1off2
there%y strengthening the implementation of
monetary policyI 'ii) a single o%0ective promotes
transparency2 accounta%ility and independence of
monetary policyI 'iii) a single o%0ective is more
realistic in a deregulated and glo%alised economic
and financial systemI and 'iv) it is easier to
o%serve the channels of transmission2 and
therefore2 easier to determine the Lright8
instruments+ Since a central %ank8s monetary
policy actions could involve several implications for
the economy as a whole2 the counterarguments
against a single o%0ective derive from the fact that
'i) economic o%0ectives should %e achieved
simultaneously 'in harmony)2 and a single
o%0ective may disrupt that harmonyI 'ii) monetary
policy %y itself may not %e a%le to %ring down
inflation further and other wings of policy have to
%e deployed+
(($
The case for multiple o%0ectives for central %anks
entails Vco1ordinationW of a range of policies and
thus2 a spectrum of o%0ectives+ The principal
reason as to why central %anks in emerging
economies have to contend with multiple
o%0ectives2 or at least dual o%0ectives of price
sta%ility and economic growth derives from the
concerns of socio1economic1political systems+
Dames To%in2 a No%el laureate economist2 argued
that since central %anks form an integral part of
government2 they cannot dissociate from the ma0or
o%0ectives of the society2 which includes sustained
economic growth and price sta%ility+ 4illiam Poole2
a revered central %anker viewed that economic
growth is a citi-ens8 o%0ective and central %ankers
too are citi-ens+
Currency management is one of the most
important traditional function of central %anks in
most countries+ Central %anks serve as a service
provider to issue and distri%ute currency notes and
coins+ In most developed countries2 high degree of
homogeneity in the society as reflected in the
culture2 language2 tastes and preferences of the
pu%lic and the efficient distri%ution of income could
induce a homogenous pattern of currency demand
and thus2 facilitate to achieve %etter currency
management as compared with that of developing
countries+ In developing countries2 significant
diversity in socio1economic development across
regions induce completely different currency
preference of the pu%lic across regions2 and
across demographic segments2 thus2 entailing
dynamic and comple# currency management tasks
for central %ankers+ 4hat is noteworthy is the way
in which technology has %een harnessed to %ring
a%out improvement in currency management+ The
!"I performs the role of currency management
with the o%0ectives of ensuring ade3uate
availa%ility of coins and notes and maintaining the
3uality of notes in circulation+ This is done through
its := !egional issue officesAsu% offices and a wide
network of currency chests2 repositories and small
coin depots spread across the country+ In
pursuance of the Clean Note Policy2 efforts are
%eing made to improve the 3uality of notes in
circulation+
In most emerging markets including India2 central
%anks manage 5overnment de%ts+ Kuite apart from
the need to decide on issues such as the kind of
auctioning2 the types of securities to %e auctioned
and the maturity profile of the securities2 there
remains the issue of the e#tent of support that the
central %ank and commercial %anks should e#tend to
the 5overnment %orrowing programme+ This is
important from not only the point of view of
deepening the 5overnment securities markets2 %ut
also in terms of the flow and cost of credit to the
commercial sector+ As
((/
adviser to 5overnment2 central %ankers need to
interact intimately with the 5overnment on fiscal
policy matters and provide a unified and coherent
signal to the market on the macro policy stance+ In
recent years2 central %anks have %ecome pro1
active in the area of structural reforms+
The Indian case provides an e#cellent testimony
towards this point+ The strategy of financial
reforms was worked out in close coordination
with the 5overnment2 and undertaken in
appropriate se3uential steps and synchronised
with real sector reforms+ This was all the more
relevant in the Indian scenario where the
5overnment has a significant stake in the
%anking system and conse3uently2 any
disruption in the financial structure could have
significant %udgetary implications+ The !"I has
undertaken wide1ranging reforms to deepen and
widen the financial markets T money market2
5overnment securities market and foreign
e#change market+ These markets have %ecome
vi%rant and competitive+
Central %ankers2 in the present era2 rely on a
com%ination of policy measures in their day1to1day
operations+ They undertake com%inations of
actions primarily to provide signals a%out their
policy stance to market participants+ !eforms of
the tools of monetary policy have2 therefore2
gained prominence+ Such reforms have %een
made possi%le %y the growing emphasis on
indirect instruments of monetary control and the
de1emphasis on direct instruments of policy+ &pen
market operations2 in such a milieu2 have grown in
importance+ Interest rate fle#i%ility is another tool+ A
ma0or instrument of statutory preemption2 such as
the Cash !eserve !atio has %een progressively
de1emphasised and instead2 short1term
instruments2 such as the !epo !ate and in the
medium1term2 instruments such as "ank !ate
have %ecome important+ ikewise2 in several
instances2 the Statutory i3uidity !atio 'S!)2 an
erstwhile important prudential measure2 has
increasingly %een scaled down+ The idea inherent
in these transformations in the approach to
monetary policy is to provide %anks with ma#imum
freedom in their portfolio choice2 without losing
sight of the risks in asset accretion2 and to provide
opportunity to ensure that their resource allocation
is optimal+ 5iven the concerns of an emerging
economy2 certain portion of %anks resources are
often prescri%ed to %e allotted under the Lpriority
sector norms8I %ut in this case as well2 the range of
activities covered under priority sector has %een
e#panded to provide greater choice to %anks+ And
let us not forget the central %ank8s authority and
power of Vmoral suasionW which can act as a
supervisory and regulatory force2 even when no
e#plicit oversight of the financial system is in place+
((7
i3uidity determination is the key to the
efficiency of the actions of the monetary
authorities+ As the economy increasinglyopens
up2 the interactions %etween domestic and
e#ternal markets are e#pected to impinge on
li3uidity as much as the growth impulses from
within the economy+ i3uidity2 however2 is not
static2 in view of the speed of transactions and
settlements and the sharp increase in financial
innovations+ Since li3uidity is a function of %oth
domestic monetary policies as much as e#ternal
sector policies and de%t management strategy2
modern day central %ankers are confronted with
the envia%le task of %alancing a tightrope walk to
ensure that the economy remains on track+
As %ankers to %anks2 central %ankers tend to
e#ercise considera%le discretion and rarely go %y
straight0acket rule1%ased methods+ 4hile the
Llender1of1the1last8 resort function of the central
%anks continues to %e important2 in addition2 the
central %ank provides access to refinance facilities
and a whole host of services2 as in the matter of
payments and settlement2 funds transfer2 settling of
government securities through the Negotiated
dealing System 'N.S) and the like+ Another area
where central %ankers of emerging countries have
assumed new responsi%ilities pertains to managing
the economy in response to e#ternal developments
in the conte#t of glo%alisation+ .eputy 5overnor .r+
!akesh ,ohan has rightly pointed out that
glo%alisation has offered several %enefits as well
as a host of challenges+ In an increasingly glo%al
environment2 countries have to adapt to greater
internationalisation of economic policies+ In this
regard2 central %ankers in emerging countries have
to %e alert to international developments and
ac3uire skills in the areas of international %anking2
international finance and economics2 international
regulations and international relations in order to
function effectively while managing the monetary
and financial conditions of the economy+
In the area of %anking soundness2 central %anks in
emerging markets have %ecome ma0or initiators of
activity+ *inancial supervision2 whether on1site or off1
site2 has assumed prominence in the face of market
imperfections and ensuring depositor protection+ It is
widely recognised that the Asian crisis was 2 to a
large e#tent2 the outcome of la# supervisory
standards pursued in these crisis1ridden economies+
The soundness of %anks and other non1%ank entities
depends not only on the operation of these entities2
%ut also the efficacy of the supervisory process+ In
this
((=
conte#t2 the Core (rinciples 2 enunciated %y the
"IS in :;;72 have 3uickly %ecome a %enchmark
and we in the !"I are2 %y now2 compliant with most
of these (rinciples+ In view of the growing risks
that %anking entails and the scarcity of supervisory
resources2 many central %anks are increasingly
moving towards a risk1%ased approach to
supervision in order to ensure optimum utilisation
of supervisory resources+ *ollowing recent
advancements2 central %anks have developed
macro1prudential indicators in order to monitor the
health of financial entities within the overall
economic environment in which they operate+
9igh 3uality regulation and supervision2 which
contri%ute directly to improvements in operating
efficiency2 are %eneficial for emerging countries
since efficiency in the allocation of resources to
most productive sectors cannot %e achieved and
sustained without achieving operating efficiency+
!egulation and supervision of institutions is2
however2 not a simple task especially in the Indian
conte#t as it involves a large network of %anks and
other financial institutions and their large num%er
of %ranches spread over the entire country+ "anks
and their %ranches too involve a wide network of
inter1action with different market segments owing
to diversified portfolios in a deregulated
environment+ In this conte#t2 central %ankers have
to %e highly skilled2 vi%rant and most dynamic in
order to %e effective in regulation and supervision+
In several countries2 central %anks assume a
pivotal place in the payments and settlements
system+ As financial transactions %ecome
increasingly comple#2 there arises the need to
harness financial markets to fully e#ploit the
advances in information technology and
communications networking+ Some important
research studies show that a relatively large
involvement of the central %ank in the financial
system contri%utes to financial development+ *or
emerging countries2 the central %ank
involvement in the payment system enhances
financial development+ There is a considered
view that an efficient payment and settlement
system contri%utes to operating and allocation
efficiencies of the financial system and thus2
overall economic growth+ Payments and
settlement systems in emerging countries
involve several features2 which are distinct from
that of developed countries+
&ne of the guiding principles followed %y !"I in the
reforms in the payment and settlement systems has
%een the need to provide for a safe2 secure and
efficient systems+ !"I has identified
((;
the Systemically Important *inancial
Intermediaries 'SI*I)2 which have the propensity
for systemic risks+ The introduction of screen
%ased trading in 5overnment securities following
the delivery versus payment model in the form of
Negotiated .ealing System 'N.S) was a
milestone in this regard+ The commencement of
foreign e#change clearing %y the Clearing
Corporation of India td+ aimed at net settlement
of the foreign e#change transactions is a ma0or
step forward2 which has %rought a%out more
efficiency and safety+ The !"I has also
em%arked upon the introduction of a !eal Time
5ross Settlement '!T5S) System for settlement
of inter1%ank and customer related funds
transfers on a real time mode+ 5oing %eyond
technological upgradation2 the issue also
remains of formulating an appropriate legal
framework2 in which transactions could take
place in a safe2 sound and secured manner+ The
growth of e1transactions and Ldigital signatures8
is a case in point+
As you would %e aware2 the challenges to
central %ankers in the present day are manifold
and I venture to list out a few for this discerning
audience+ *irst2 the challenge of financial sector
li%eralisation+ 4hile competitive financial
markets no dou%t aid in efficient allocation of
resources2 failure or even disruptions in one
segment of the financial sector can have serious
Lcontagion effects8 throughout the rest of the
economy+ Thus 2 central %ankers need to %e
vigilant and alert to domestic and e#ternal
developments+
There also remains the challenge of ensuring
soundness of financial institutions+ The
supervision of the financial system is getting
increasingly complicated with the growth of Lone1
stop1%anking8 and conglomerates as well as off1
shore financial activities operating in multiple
segments of the financial markets2 leading to
%lurring of distinction among the various
segments themselves+ !epeated financial crises
across the world have provided graphic
evidence of the fact that financial disruptions can
engender serious output costs+ In this conte#t2
the need for effective supervision can hardly %e
underscored+
In conclusion2 central %anking is passing
through challenging yet e#citing times+ 4hile
developments within the country charter its
transformation2 the e#perience of other
countries provides invalua%le lessons in the
approach to promote growth2 whilst
maintaining price sta%ility+
(><
All in all2 the life of a central %anker is one of anonymity2 staid and %oring+ It is only in
moments when the going is tough that central %ankers emerge from isolation and lean
against the wind to %attle splenetic insurmounta%le odds+ Central %ankers choose their
profession %ecause they are driven %y a commitment to pu%lic service2 which they hold
dearer to themselves irrespective of financial remuneration+ The conduct of central %anking
inherently involves the ultimate good of the society+ An inappropriate choice of instruments
or targets can lead to large losses of macroeconomic well1%eing+ Cltimately2 all citi-ens are
stake holders in the central %ank+ *ormer 5overnor2 .r+ "imal Dalan rightly referred to
central %anks as the pu%lic8s own institutions+ Every central %anker is conscious of operating
at the ape# of the financial system and at the centre of the macro1economic management2
continuously %alancing risks against every policy action+ In this sense2 a central %anker has
to possess certain uni3ue 3ualities Tintegrity and professionalism of the highest order2 finely
honed analytical skills2 the capa%ility to take decisions under difficult
circumstances2 a thorough knowledge of the manner in which the economy functions2
adapta%ility and a dynamism with which to respond to a life of continuous change and
challenge+ 4hat is more they have to avoid partisanship and command pu%lic support+
Together2 these attri%utes distinguish a central %anker as a leader and manager of
people2 situations and money2 always dedicated to service to the nation+ No wonder that
central %ankers are called priests at the temple of money+
Role o0 SEBI
The SE"I is the regulatory authority esta%lished under Section > of SE"I Act :;;( to protect
the interests of the investors in securities and to promote the development of2 and to
regulate2 the securities market and for matters connected therewith and incidental thereto+
The following departments of SE"I take care of the activities in the secondary market+
Sr+No+ Name of the .epartment
,a0or
Activities
(>:
:+ ,arket Intermediaries
!egistration2 supervision2 compliance
monitoring
!egistrati
on
and
Supervision
and inspections of all market intermediaries
in
department ',I!S.)
respect of all segments of the markets vi-+
e3uity2
e3uity derivatives2 de%t and de%t related
derivatives+
(+ ,arket !egulation
*ormulating new policies and supervising
the
.epartment ',!.)
functioning and operations 'e#cept relating
to
derivatives) of securities e#changes2 their
su%sidiaries2 and market institutions such as
Clearing
and settlement organi-ations and
.epositories
'Collectively referred to as L,arket S!&s8+)
>+
.erivatives and New
Products
Supervising trading at derivatives segments of
stock
.epartments '.NP.)
e#changes2 introducing new products to %e
traded2
and conse3uent policy changes
The issue of de%t securities having maturity period of more than >/$ days %y listed companies
'i+e+ which have any of their securities2 either e3uity or de%t2 offered through an offer document2
and listed on a recogni-ed stock e#change and also includes Pu%lic Sector Cndertakings whose
securities are listed on a recogni-ed stock e#change) on private placement %asis must comply
with the conditions prescri%ed %y SE"I from time to time for getting them listed on the stock
e#changes+ *urther2 unlisted companiesAstatutory corporationsAother entities2 if they so desire2
may get their privately placed de%t securities listed on the stock e#changes2 %y complying with
the relevant conditions+ "riefly2 these conditions are6
Compliance with disclosure re3uirements under Chapter JI of the SE"I
'.isclosure and Investor Protection) 5uidelines2 (<<<2 isting Agreement with the
e#changes and provisions of the Companies Act+
(>(
Such disclosures may %e made through
the we% site of the stock e#changes
where the de%t securities are sought to %e
listed if the privately placed de%t securities
are issued in the standard denomination
of !s+ :< lakhs+
The company shall sign a separate
listing agreement with the e#change in
respect of de%t securities+
The de%t securities shall carry a credit
rating from a Credit !ating Agency
registered with SE"I+
The company shall appoint a de%enture
trustee registered with SE"I in respect of
the issue of the de%t securities+
The de%t securities shall %e issued and traded
in demat form+
All trades with the e#ception of spot
transactions2 in a listed de%t security2 shall
%e e#ecuted only on the trading platform
of a stock e#change+
G!ieline, on A3erti,e-ent,
An issue advertisement shall %e truthful2 fair
and clear and shall not contain any statement
which is untrue or misleading+
Any advertisement reproducing or purporting
to reproduce any information contained in a
offer document shall reproduce such
information in full and disclose all relevant
facts and not %e restricted to select e#tracts
relating to that item+
An issue advertisement shall %e considered to
%e misleading2 if it contains 1
a) Statements made a%out the performance or
activities of the company in the a%sence of
necessary e#planatory or 3ualifying
statements2 which may give an e#aggerated
picture of the performance or activities2 than
what it really is+
b) An inaccurate portrayal of past performance
or its portrayal in a manner which implies that
past gains or income will %e repeated in the
future+
a) An advertisement shall %e set forth in a
clear2 concise and understanda%le
language+
b) E#tensive use of technical2 legal
terminology or comple# language and
the inclusion of e#cessive details which may
distract the investor2 shall %e avoided+
An issue advertisement shall not contain
statements which promise or guarantee rapid
increase in profits+
(>>
An issue advertisement shall not contain any
information that is not contained in the offer
document+
No models2 cele%rities2 fictional characters2
landmarks or caricatures or the likes shall %e
displayed on or form part of the offer
documents or issue advertisements+
Issue advertisements shall not appear in the
form of crawlers 'theadvertisements which run
simultaneously with the programme in a
narrow strip at the %ottom of the television
screen) on television+
A In case of issue advertisement on television
screen6
(a) the risk factors shall not %e scrolled on the
screenI and
(b) the advertisement shall advise the viewers
to refer to the red herring prospectus or other
offer document for details+)
No advertisement shall include any
issue slogans or %rand names for the
issue e#cept the normal commercial
name of the company or commercial
%rand names of its products already in
use+
No slogans2 e#pletives or non1factual
and unsu%stantiated titles shall appear
in the issue advertisements or offer
documents+
If any advertisement carries any financial data2
it shall also contain data for the past three
years and shall include particulars relating to
sales2 gross profit2 net profit2 share capital2
reserves2 earnings per share2 dividends and
the %ook values+
(a) All issue advertisements in newspapers2
,aga-ines2 %rochures2 pamphlets containing
highlights relating to any issue shall also
contain risk factors given e3ual importance in
all respects including the print si-e+
(b) The print si-e of highlights and risk factors
in issue advertisements shall not %e less than
point (&7'7) si-e+
(c) (&>'Su%0ect to section // of the Companies Act2
:;$/2 any advertisement made %y an issuer namely
Pre T Issue advertisement2 advertisement for
opening or closure of the issue2 shall %e in
the format and contain the minimum
disclosures as given in the relevant part of
S"+e!le RR @ A.
(>?
Unit @R
Study of stock inde#es
,arket capitali-ation of different inde#es
Performance of Stock inde#es' for past (
years)
Mar/et "a$itali:ation o0 Ine1e,
Ini"e, Fig+lig+t,
This data was last updated on Thursday2 April :(2 (<<7
INDICES =7 8ee/ Mar/et Ca$itali,ation T!rno3er
(>$
Clo,
e
Fig+
Lo.
5R,.
"rore,6
' to
Total
5R,.
"rore,6 ' to Total
M/t Ca$ T!rno3er
SENSE R
:>2::>+=
: :?27(>+== =27;;+<: =>$2</;+<> (>+(? /=>+?( (<+$$
MIDCA P $2$:(+?< /2((;+?< >2/;(+:$ (($27/>+?/ /+(= $7?+>: :7+(7
SMLCA P /2/=(+$> 72=7(+=< ?2?=<+?$ 7;2=(<+>= (+(( >>?+=/ :<+<7
BSE-() ) /2/(/+<? 72???+(= ?2?7:+$: :2:$$2;=?+=$ >(+:/ :2>(=+</ >;+;?
BSE-7) ) :2$/=+(: :27/<+7< :2<$=+// :2><?2::/+;7 >/+(; :2=<=+?( $?+>=
BSE-=) ) $2<<(+=: $2/:/+/7 >2>/<+=$ :2?7(2(($+:: ?<+;/ (2>$<+77 7<+/;
BSE Se"toral
Ini"e,
AUT O ?2/=<+$$ $2==:+=> >2;$;+// ==2<7?+=: (+?$ //+?7 (+<<
BANKE R /2?7<+>( 72/$>+=? >2;>?+:( :7:2??(+:; ?+77 7$+/( (+(7
C D >27>=+$> ?2</<+(? (2>>;+7= 72?7:+?; <+(: (;+:: <+==
C G ;2(7:+:= :<2:?=+;? $2/7?+(: :<=2(;;+/< >+<: :<(+:? >+<7
FMC G :27==+>7 (2>=>+>/ :2:<;+<> =72/?/+<$ (+?? >/+7> :+:<
F C >2/$;+:= ?2:$?+<= (2=<?+>7 /;2?7<+(= :+;> ;=+(= (+;/
I T ?2=7;+$; $2/::+>> >2<:7+($ :=/2?$=+/; $+:; ((>+$: /+7(
META L ;2:((+<: ::2?<(+?< /2?($+$/ //2>7:+:< :+=$ (=/+:= =+/:
OIL?GA S /2?7(+;; /2=<>+<< ?2(?>+(: :/72$;(+:= ?+// ;7+$( (+;>
PS U /2<(>+>; /2/<;+7/ ?2>(>+>7 7>?2;<(+$; $+:; :;:+=: $+77
TEC / >2$($+/$ >2;7(+>$ (2<>>+:/ (;?2:<;+>< =+:= >?(+=< :<+>:
BSE Dolle1
Ini"e,
DOLLER-> ) (2$:<+=( (27?<+=< :2$7<+(/ 11 11 11 11
DOLLER-() ) :2$;=+$/ :27?/+<= :2<<$+?; 11 11 11 11
DOLLER-7) ) /<=+== //?+/> >=>+:( 11 11 11 11
Note # The market capitalisation of all the indices is free float market capitalisation e#cept for "SEPSC
BANK NIFTY - In!,tr* .i,e Mar/et Ca$itali:ation
A, on 7<-De"-7))& 5R,. "rore,6
Se"!rit* Mar/et Ca$itali:ation
8eig+tage
5'6
"AN@ &* "A!&.A =7?( >+>7
"AN@ &* IN.IA :<:<; >+;
CANA!A "AN@ ::>(? ?+>7
C&!P&!ATI&N "AN@ ?;77 :+;(
9.*C "AN@ T. >>/$/ :(+;;
ICICI "AN@ T.+ 7;7<( ><+77
&!IENTA "AN@ &* C&,,E!CE $7:( (+(:
PCNDA" NATI&NA "AN@ :$;=/ /+:7
(>/
STATE "AN@ &* IN.IA /$$$/
SGN.ICATE "AN@ >;<(
CNI&N "AN@ &* IN.IA /:;=
CTI "AN@ T. :>:;(
Total 7=<)=&
CNR IT - In!,tr*.i,e
Mar/et Ca$itali,ation
A, on 7<-De"-7))& 5R,. "rore,6
Security ,arket Capitalisation
C,C T. :<(7
*INANCIA TEC9N& 'I) T. 7=:=
5T T. :>;=
9C IN*&SGSTE,S T. (7<(
9C TEC9N&&5IES T. (<=(:
9EFA4A!E TEC9N&&5IES T. (/><
9IN.CDA T,T T. ><::
I1*EF S&CTI&NS I,ITE. :$=/;
I5ATE 5&"A S&CTI&NS
T :<=?
IN*&SGS TEC9N&&5IES
T. :(?$;/
,ASTE@ T. :<?=
,&SE!1"AE! 'I) T. >??7
,P9ASIS I,ITE. ?;>(
PATNI C&,PCTE! SGST T. $77(
P&A!IS S&*T4A!E A"
T. :7<<
!&TA IN.IA T. (<>?
SATGA, C&,PCTE! SE!JICES >:7$>
TATA EFSI 'I) T. =:7
TATA C&NSCTANCG SE!J T ::;$=/
4IP!& T. =7:?:
Total I><(HG
(>7
Per0or-an"e o0 Sto"/ Ine1e,.
Ini"e, 8at"+
This data was last updated on Thursday2 April :(2 (<<7 ?6<<6<7 P,
Ine1 O$en Fig+ Lo. C!rrent Cal!e
Pre3io!,
Clo,e
C+ange5Pt
,6
C+ange5'
6
SENSE F
:>2:(7+=
/
:>2:/<+:
$
:>2<><+=
7 :>2::>+=: :>2:=>+(? 1/;+?> 1<+$>
,I.CA P $2$<7+<> $2$??+?$ $2?==+$; $2$:(+?< $2$:7+</ 1?+// 1<+<=
S,CA P /27::+7? /27>=+<< /2/7>+;; /2/=(+$> /27::+$: 1(=+;= 1<+?>
"SE1:< < /2/??+(? /2/$=+7/ /2$=;+(< /2/(/+<? /2//;+</ 1?>+<( 1<+/$
"SE1(< < :2$7(+(7 :2$7/+</ :2$$;+;$ :2$/=+(: :2$77+$7 1;+>/ 1<+$;
"SE1$< < $2<:<+// $2<(7+=( ?2;7/+:; $2<<(+=: $2<(=+;$ 1(/+:? 1<+$(
BSE Se"toral Ini"e,
ACT & ?2/;:+>? ?27:>+>> ?2/$$+;> ?2/=<+$$ ?27<<+>? 1:;+7; 1<+?(
"AN@E F /2$::+:/ /2$($+$; /2?><+>$ /2?7<+>( /2$$(+;( 1=(+/< 1:+(/
C . >27>7+($ >27/=+$7 >27:(+<; >27>=+$> >27?(+/; 1?+:/ 1<+::
C 5 ;2>:(+:( ;2>:(+:7 ;2(:/+;( ;2(7:+:= ;2>?(+>= 17:+(< 1<+7/
*,C 5 :2=:>+7/ :2=:>+7/ :27=(+;7 :27==+>7 :2=::+$= 1(>+(: 1:+(=
9 C >2//>+<> >2/;$+/? >2/?=+77 >2/$;+:= >2/77+>= 1:=+(< 1<+?;
I T ?27/;+=< ?2=;?+$< ?27$<+;( ?2=7;+$; ?2=<=+<= 7:+$: :+?;
,ETA ;2></+7? ;2?:7+;/ ;2<;>+/: ;2:((+<: ;2>><+=7 1(<=+=/ 1(+(?
(>=
&I&5A S
/2?;=+
(> /2$::+<> /2???+$: /2?7(+;; /2$?<+7: 1/7+7( 1:+<?
PS C
/2<==+
?( /2<==+?( /2<<7+(/ /2<(>+>; /2:<>+(/ 17;+=7 1:+>:
TEC k
>2?=?+
?; >2$>/+?/ >2?/(+(7 >2$($+/$ >2$<>+/? ((+<: <+/>
BSE Dolle1
Ini"e,
.&EF1> <
(2$:7+
<? (2$(<+(= (2?;=+?? (2$:<+=( (2$(7+/$ 1:/+=> 1<+/7
.&EF1:< <
:2/<$+
:; :2/</+;( :2$;:+;< :2$;=+$/ :2/::+:; 1:(+/> 1<+7=
.&EF1(< <
/::+>
( /:(+:> /</+$( /<=+== /:>+>= 1?+$< 1<+7>
OTFER NSE INDERES
IN.EF_*52 SECC!ITG+ ISSCE CAP2 C&SE P!IC2 ,@T_CAPITAIUATI&N+
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!ecommendations &pro%lem of capital market
pro%lem of new issue market
Pro%lem of secondary market
Suggestions and recommendations
PROBLEMS OF PRIMARY AND SECONDARY MARKET
($?
IT IS ten years since the Securities and E#change
"oard of India 'SE"I) started to put in place the
regulatory framework for the capital market+ And
investors have certainly %enefited from the
availa%ility of more information and a
contemporary secondary market structure+
SE"I %egan to put in place regulations a decade
ago2 starting with its 5uidelines for .isclosure and
Investor Protection 'primary markets) in :;;(+ A
fairly %road1%ased regulatory framework is now in
place2 though2 going forward2 SE"I has to make
the market a friendlier place for investors %y
plugging the gaps in its performance2 especially in
the following areas6
Enhancing disclosures
.espite a plethora of disclosure re3uirements2
there are still key areas where investors get
precious little information of value+ This mainly
relates to %ig1ticket corporate action2 such as
mergers2 de1mergers2 ac3uisitions2 asset sell1
offs2 takeovers and inter1corporate
investments+ In each of these areas2 no dou%t2
the minimum information re3uiredunder the
Companies Act is made availa%le+
($$
The disclosure level varies from one instance to
another2 though a lot of information is made
availa%le on the financials and the synergies of a
merger+ "ut the manner in which the swap ratio
is fi#ed and what the management thinks of the
same is largely taken for granted+
The valuation of the two companies and the
swap ratio are key aspects in any merger+ No
dou%t2 valuation reports are made availa%le for
inspection2 %ut access is not easy for all
investors+ A comprehensive and mandated list
of disclosures2 like the one that accompanies
an IP& or a rights offer2 should %e made
availa%le to all shareholders+
Aspects such as risks from these actions2
mode of deployment of resources2 the
%enefits2 reasons for such action and
management perception of the issues
involved2 can form part of such a disclosure
list+
SE"I has much to do to make its e#isting
disclosure re3uirements work %etter+ This can
%e done only %y making all disclosures
availa%le freely to every one+ Take2 for
instance2 mutual funds+ Trustee and asset
management companies are re3uired to file
monthlyA3uarterly reports with SE"I+ These
must %e availa%le on the Internet+
&nly pu%lic scrutiny and comment can improve
the level of disclosures mandated %y SE"I+
4hile this is not a 0o% that SE"I can do on its
own2 due partly to resource constraints and
also %ecause of the varying types of e#pertise
needed2 it has made a small %eginning with its
4e% site http6AAwww+edifar+nic+inA and must
make sure as much information as possi%le is
pumped in through this 4e% site+
Kuality of decisions
The effectiveness of any regulatory %ody is
0udged %y the 3uality of implementation2 in
general2 and the rate of convictions achieved
in cases where there are violations+
4hat is worrying is the poor rate of conviction
in ma0or cases+ Jirtually every SE"I decision
involving ma0or cases ` such as Sterlite2 "P2
Jideocon2 Anand !athi and Associates and
9industan ever ` has %een overturned %y
the appeals process 'or the Securities
Appellate Tri%unal)+
($/
This hardly sends the right signals a%out
SE"INs penal actions when regulations are
violated+ There is clearly something seriously
amiss if the SAT can overturn SE"I orders %y
pointing to lacunae on almost every possi%le
ground ` ranging from the merely technical
aspects to su%stantive issues involving the
regulatorNs su%0ective 0udgment+
This is what happened in the Sterlite2 "P and
Jideocon cases 'they were %arred from capital
market access for their role in price manipulation
in :;;=)+ + Kuite clearly2 the 3uality of SE"INs
investigative work has to improve considera%ly
so that penal actions stick+
Take a larger view
There are 3uite a few instances where
shareholders have suffered due to specific
corporate actions+ 4henever an issue of this
kind has come up2 2 SE"I has generally shied
away from taking up the cudgels 'unless
nudged %y some e#traneous pressure) on
%ehalf of the investors to ensure that they get
a fair deal+
In some of the glo%al development1triggered
\changes in controlN2 SE"INs actions have %een
mi#ed + In some cases2 such as Castrol2 it has
acted with alacrity and ordered open offers+ "ut
in 3uite a few others2 its stance has virtually
ena%led ela%orate structures to %e created that
helped avoid open offers or its actions have
come rather late in the day ` Color Chem1
Clariant2 for e#ample ` imposing unfair costs on
ac3uirers and shareholders+
There have %een a 3uite a few decisions on
whether open offers are triggered %y glo%al
developments or not2 %oth %y SE"I andAor %y
SAT+ "ut no parameters have %een laid down
so far and eachissue is handled on a case1%y1
case %asis+
4hen it comes todomestic ac3uisitions2
SE"INs interpretation of \change in controlN is
3uestiona%le+ 4hen 5u0arat Am%u0a picked up
the entire :?+? per cent of the Tatas in ACC2 it
was clear that effective control had passed+
"ut SE"I offered no view and2 only when
directed %y the court2 took the stance that
there was \no change in controlN on technical
grounds+ In such situations2 SE"I has to come
out and clearly say why it thinks there is
change in control or not+ The a%sence of a
convincing rationale only creates precedents
that can %e used %y others2 as happened with
5rasim1 & T+
($7
Every time there is a ma0or corporate action2
SE"I should proactively e#amine if there are
issues of a contentious nature+ In most ma0or
cases SE"I has tended to take up matters
only when there is a referral from a court or
investor forum or the government 'like in the
CTINs assured return schemes)+
Accounting2 audit 3uality
SE"I can now act proactively on the issue of
accounting and auditing 3uality+ In several recent
instances in the CS2 such as Enron2 4orldCom2
5lo%al Crossing2 ,erck2 to name a few2
companies put out %latantly false num%ers and
auditors went along with this charade+
In India2 hundreds of companies came out with
IP&s and vanished su%se3uently2 and in many
companies2 accounting and audit information has
proved to %e of poor 3uality and unrelia%le+ This is
where SE"I can step in and work with the
government to have special audits done of the top
:<< or (<< firms that account for more than ;< per
cent of market capitalisation and trading+
There is no reason to assume that everything
is hunky1dory on the accounting1auditing front
in Indian companies+ Dust look at the pro%lems
in the finance sector ` the likes of I*CI2 I."I2
CTI and Centurion "ank2 to name a few `
and one cannot help feeling there may %e
pro%lems elsewhere too+
The plethora of inter1corporate investments2 intra1
company and intra1group transactions2 guarantees
and contingent lia%ilities are areas where there is
room for considera%le concern+
A one1time special audit2 efforts to ensure that
audit assignments are rotated at three1 or five1
year intervals and fast1tracking the process of
accounting standards with relevant authorities
are actions that SE"I can pursue %efore a
crisis %reaks out on this front+
($=
Perhaps the most significant change in the
market in the last decade is the complete
transformation of the trading2 clearing and
settlement infrastructure+ *rom a market
%urdened with heavy pro%lems of paper and
an opa3ue trading structure 'where %rokers
and su%1%rokers ruled the roost)2 there has
%een a dramatic transformation to a paperless
market and transparent trading system+
The last si# months or so2 all trades on the
National Stock E#change are settled in demat
'paperless mode)+ *ull marks to SE"I+
No dou%t2 the process of electronic trading
was set off %y the NSE2 %ut SE"I too moved
rapidly to force other e#changes2 especially
the "om%ay Stock E#change2 to adopt
contemporary trading systems+
"y also moving towards rolling settlement
'al%eit after a considera%le and unnecessary
delay)2 cutting the settlement cycle and now
going forward towards a TE: settlement
system2 SE"I has made the markets much
safer for investors+ "ut when it comes to
addressing price manipulation2 the story is
different+
Pri"e -ani$!lation N no ent6 &ne area
where SE"I has %arely made any difference is
in the manipulation of stock prices ahead of
key corporate actions and even at other times
when operator driven activity is rampant+ The
most recent instance was the manner in which
all @etan Parekh favoured stocks2 such as
9imachal *uturistic2 5lo%al Tele1Systems2 SSI2
Silverline2 surged2 recording heavy trading
volumes+
"ut one was left completely in the dark on what
was %ehind the sudden spurt in interest in these
stocks and the rise in prices 'even if not of the
:;;;1(<<< kind)+ This was the kind of situation
($;
where SE"I should have stepped in proactively and
told investors what was going in+ This would do much
more for investors than the mundane investor
education programmes talked a%out often+
Price manipulation2 informed trading and
insider trading with key operatorsAinvestors is
now routine+ This is an area that is difficult to
tackle for any regulator+ "ut over the last ten
years2 SE"I has taken action on such price
manipulation in 0ust two cases '"ayer A"S and
Amara !a0a "atteries)+ 9ere2 too2 the penal
action has hardly %een stringent+
A"t on "or$orate a"tion,6 Perhaps as a
matter of routine2 SE"I should take up all
cases of corporate action and su%0ect them to
scrutiny for share price %ehaviour ahead of
and after the action+
Trading action is generally confined to a small
list of :$< stocks2 on which SE"I can focus its
attention+ It can also draw up a list of another
:$< stocks of companies with reasona%le
standing %ut poor li3uidity2 for tracking+ At the
end of the day2 SE"INs effectiveness will %e
enhanced only if it can make a dent in this
crucial area+ Else2 the larger %ody of
shareholders will %e shortchanged %y such
price manipulation+
S!gge,tion, an Re"o--enation,
India does not have a legacy of employer
provided pensions+ The &ASIS report is right
in making the proposed pension system
completely porta%le and independent of
employers+ India does not also have a legacy
of social security2 and does not have to
contend with the nightmare of politically
determined defined1%enefit plans+ The &ASIS
report is right in keeping its proposals for
pension funds totally on a defined1contri%ution
%asis and providing market determined rates
of return+ The &ASIS report is also right in
eschewing any attempt to use the pension
fund assets as a pool of funds for financing
infrastructure or any other socially useful
purpose other than on the %asis of a
competitive risk1return tradeoff decided %y the
fund manager+ The %road framework of the
&ASIS Committee report therefore has much
to %e commended+
9owever2 it attempts to create a class of financial
intermediaries to manage pensions which are
isolated from other financial institutions+ In any
economy2 there are institutions like mutual funds
(/<
and insurance companies that provide services
that have similarities to what the pension funds
would offer+ "y keeping them as distinct entities2
regulated %y a new regulator different from either
the capital market regulator 'SE"I) or the
insurance regulator 'I!.A)2 the &ASIS
proposals would perhaps impede the full play of
scale and scope economies and restrict the
pace of financial innovation+ Investors would
pro%a%ly have more choice if pension products
were fully integrated into the panoply of financial
products availa%le in the economy+ The financial
sector would also %e more efficient and vi%rant if
that were done+
In this conte#t2 this paper argues that pension fund
reforms should %e placed in the %roader conte#t of
capital market development aimed at providing
investors with a range of choices on risk2 li3uidity
and maturity+ It must %e recogni-ed that investors
save for life cycle reasons as well as for shorter
term income smoothing and for hedging human
capital+ Since there are no watertight
compartments %etween these various investment
needs2 artificial %arriers %etween different types of
financial products and services do not serve
investor interests+
(/:
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Boo/, an Maga:ine,# -
Indian Securities ,arket6 A !eview 1
NSEI pu%lication
NSE Newsletters
SC'!)A2 :;$/ & !ules
SE"I Act2 :;;(2 !ules & !egulations
.epository Act2 :;;/ & !ules
!ules2 !egulations and "yelaws of
NSEI & NSCC
8ORD OF
TFANKS
In the end I thank to all those persons who
have directly or indirectly helped me to
complete this pro0ect successfully without
whose cooperation it was not possi%le to
complete the pro0ect due to various
constraints+
>(=
I thank to all those readers
who will study this pro0ect
in the future+ I welcome any
type of suggestions or
comments from the
readers+ Thanking you+
Ankush Choudhary
'Enr No+1::<<7)
>(;