PROCEDURE AND BENEFITS OF ONLINE TRADING

A report submitted to Ishan Institute of Management & Technology,

Greater Noida as a partly fulfilment to full time
Post Graduate Diploma in Management

Submitted
Submitted By:
Dr. D.K. Garg
Chairman,
IIMT, Gr. Noida

To:
Shubham Khare
ENR No: 15031
Batch- 15th (BM)

ISHAN INSTITUTE OF MANAGEMENT &TECHNOLOGY

2, Knowledge Park-1, Greater Noida, Dist- G.B. Nagar (U.P.)
Website: www.ishanfamily.com
E-Mail: student@ishanfamily.com

PREFACE
The project which is being studied here is related to the online trading and the benefits
of the online trading. The main objective of this project is to discuss about the concept
of the online trading in, its evolution in India and the current scenario of the online
trading in India. As online trading also involves various benefits so through this
project there is a deep discussion on the online trading benefits and how the
technology has affected the Indian trading system in the stock market. Indian trading
system was previously quite different one from the current one means that the trading
system previously was the manual trading system or the offline trading system in
which there was no electronic mode of trading involved but since ten years there has
been a drastic change in the Indian share market. Now NSE and BSE are among the
largest exchanges in the country handling very large daily trading volumes, support
large amounts of data traffic, and have a very large nationwide network. Through this
project there is a complete analysis of the technology being used in the trading and the
process of online trading in India. In this process there are various software being
used for the interface between the client and the broker has also been described. In
this project the various tools being used by the brokers and the various other tools
available for the traders are also being described. There has been a description of the
various charts available and how to analyse the data through the graphs and charts for
stock investment. The project deals with the study of the various parties involved in
the trading process and what is their role in the trading process. Also there is another
process which is being carried out after the trading process is the clearing and
settlement process. In this project there has been the analysis of the various steps
being involved in the clearing and settlement process and also to study the various
parties involved in the clearing and settlement. When there is the discussion and
detailed study about the online trading then it is necessary to clear the basics involved
in the online trading and to make clear the background of the online trading. In this
process the objective of preparing this project was to give a complete study about the
capital market and the types of the capital market which are the primary market and
the secondary market. Also there has been a detailed study of the money market and
the instruments involved in the money market. Actually the basic study of the market
starts from this end. Through this project there has been a complete study on the
various types of market. Also without knowing the various regulations involved in the
trading process it is very difficult to involve in the online trading. There has been a
detailed study of he various regulations involved in the online trading and the study of
the regulatory framework of the capital market so as to give you an overview of the
rules and regulation being made by SEBI and their proper implementation. Also there
has been the detailed study of the Stock broker including the evolution of the stock
broker and their role and the functions of the stock broker. Also there has been the
study of some of the most popular brokerage firms in India. For an investor it is very
much necessary to have some knowledge about the stock exchanges what is their role
and the various networks of stock exchange so as to understand the capital market of
the India in a proper way. In this project there has been a detailed and elaborative
study of the trend of SENSEX and Nifty for the last two years, and the factors
involving for the fluctuation of the SENSEX and Nifty. In this project the various
factors are studied which help an investor come to know about the reasons of the
volatility in the market and thus enabling an investor to analyse the market in a better
way. Also in this project there has been the discussion about the various problems of

the new issue market and the problems related to the secondary market. In all this
project guides and enable an investor for trade.

ACKNOWLEDGEMENT
With immense pleasure, I would like to present this project report for the topic
PROCEDURE AND BENEFITS OF ONLINE WORKING. As a student of
ISHAN INSTITUTE OF MANAGEMENT AND TECHNOLOGY, I owe my
gratitude to all the people who have made this dissertation possible. First and
foremost, I would like to thank my guide Mr. Manoj Kumar Kushwaha (Regional
manager) for giving me an invaluable opportunity to work on challenging and
extremely interesting projects during my summer training. He always made himself
available for help and advice. It has been a pleasure to work with and learn from such
extraordinary person. In addition, I am very thankful for the enormous support of Mr.
Amit Kumar Sharma (Manager) that have provided by him to make my project
successfully completed. Also I would like to give special thanks to Mr. Ankur
Srivastava who is manager in IDBI for providing me some interesting information and
giving me knowledge about the stock trading. I am thankful to our college for
organizing such training programme, especially Chairman Sir Dr. D.K. Garg who
gave me an opportunity to gain experience of working in an organisation and to know
the working culture of the corporate and to analyse about the working procedure of
the trading system of equity market. I would like to express my sincere thanks to my
Professors & other faculty members of management department of IIMT, Greater
Noida, for developing their guidance & help. I would like to thanks my seniors for
their support and guidance which made my project fruitful. Without their guidance
and support this project was incomplete. I also convey my love & regard to staffs &
workers, who made my stay at Bonanza Portfolio ltd, a memorable part of my life. I
owe my deepest thanks to my family - my mother and father who have always stood
with me & guided me through my career, and have supported me with every
endeavour I take on. They guided me in proper and right way and encouraged me to
make this project in a proper way. Words cannot express the gratitude I owe them.
Lastly I would like to thank God to give me enough strength to prepare this project
with sincerity and honesty and with proper dedication so as to make it successful.

DECLARATION
The summer training project on PROCEDURE AND BENEFITS OF ONLINE
TRADING under the guidance of Mr. Manoj Kumar Kushwaha (name of the
guide) is the original work done by me. This is the property of the Institute & use of
this report without prior permission of the Institute will be illegal & actionable.

Date:
21/7/2010
Khare)

Signature:
(Shubham
ENR NO.: 15031

TABLE OF CONTENTS
Page Number
Chapter 1
Executive Summary
Literature Review

7-8
9-10

Chapter2
Introduction of security market
Classification of security market
Classification of capital market
Instruments & players of capital market

11- 27
27-36
36- 55
55-62

Chapter3
Introduction to trading
Trading Procedure
Clearing and settlement procedures
Benefits of the online trading

63-65
65-84
84-116
116-123

Chapter 4
Company Profile (Bonanza Portfolio Ltd)

124-135

Chapter 5
Legal framework of capital market

136-174

Chapter6
Role of Stock broker in online trading

175-205

Chapter 7
Network of stock exchange in India

206-219

Chapter 8
Trend of capital market in India

220-245

Chapter-9
Recommendations & problem of capital market
1. Problems of new issue market
2. Problem of secondary market
3. Learning and Findings
4. Suggestions and Recommendations
5. Bibliography
6. Annexure

246-250
246-250
250-256
256-265
266-267
268-275

Word of Thanks

276

CHAPTER 1
EXECUTIVE SUMMARY
The project here undertaken is related to the topic The procedure and the benefits of
the online trading, and under this project the discussion has been related to the online
trading, its evolution, its benefits and the response of the Indian investors towards the
online trading. In this era when internet has become a very important thing in the day
to day life and its being use as a reliable medium of internet, in that stage using
internet for the trading of stock is making the technological advancement of the
trading of shares in the Indian Capital Market. Previously the trading on stock
exchanges in India used to take place through open outcry without use of information
technology for immediate matching or recording of trades. This was time consuming
and inefficient. This imposed limits on trading volumes and efficiency. In order to
provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line
fully automated screen based trading system (SBTS) where a member can punch into
the computer quantities of securities and the prices at which he likes to transact and
the transaction is executed as soon as it finds a matching sale or buy order from a
counter party. NSE became the leading stock exchange in the country, impacting the
fortunes of other exchanges and forcing them to adopt SBTS also. Several factors like
location constraint, improper communication, etc paves the way towards introduction
of online stock trading in India. Online trading is known as internet-based stock
trading facility in which investors get privilege to trade shares through website
without seeking any manual help. In India, online stock trading can be performed with
the help of numerous companies that allow the individual to indulge in trading
activities by company's web portal. Due to technological advances, a large number of
people are enjoying the benefits provided by internet trading. Some of them are:
Trading can be done without visiting the broker's office i.e. stock trading can be
performed by sitting at the home or workplace also, through email or SMS, investors
can get information about various recent happening in the stock market or by availing
assistance of online tools like historical data, recommendations, market watch, graphs,
etc. However, this kind of trading does not act like a boon for those investors who are
not familiar with terminologies like computer, internet, etc. Moreover, factors like
high brokerage charges and unfavourable internet connectivity act as detrimental
factors for online stock trading in India. Needles to say, online stock trading is
considered as best form of trading whilst watchful attitude is required to follow while
getting indulged in it. One can easily start online stock trading in India by opening an
account with reputed company or organization. So, if you are interested in
experiencing the thrill and excitement of online trading, then browse through web as
numerous portals like Moneycontrol.com, etc. are providing information about how to
trade effectively through online, what factors need to be considered while making
stock trading, etc. Online Stock trading in India was never before recognized as
indispensable activity for investors, but due to sudden increase in popularity of the
stock market, more and more people are attracting towards it. The online trading
system has become flexible and provides better order management, through which
you can make an order or modify the order or cancel your order as per your choice.
Online trading provides the modern tools and technique which will help an investor to
take decision in a better way. It provides you an ability to trade the multiple markets
through online as an investor you will have access to multiple markets. Through
7

online trading a trader can trade through multiple ids. Through online trading you can
trade on multiple ids and can place different order through same computer on different
ids on different or same stock. Thus you can trade at the same time in Equity market
and can also trade in debt market or commodity market. An obvious advantage of
online trading is that your transactions would be virtually paperless. Your trading
account would be linked to your demat and bank accounts, ensuring a smooth
transaction process. This is especially helpful in the extant T+2 settlement system,
where you have just two days to settle your transaction. Also the chance of error
through online trading is very less. As your order is always confirmed before it is
executed. You can also make better decisions as you have a clear record of all your
previous transactions. When you trade offline, a statement is normally sent to you
only on a quarterly basis. Keeping track of your portfolio can be a hassle in such a
case. Through online trading you can keep yourself updated with your account
balance on daily basis and can know your position so as to take decision related to
trading on that basis. Indians eager to invest extra income are signing up in droves at
Internet trading sites, data from the nation's largest stock exchange shows. The
number of investors registered for online trading has grown by at least 150 percent
over 2006-07 figures, with 2.9 million in the cash segment and 5.5 million for both
cash and F&O, according to records at the National Stock Exchange (NSE). For many
investors online trading has helped them to manage their portfolio better as there is
more transparency and value-added services such as research reports. Traditionally,
equities trading in India has been done through brokers, in person or over the phone,
but with the convergence of mobile and Internet, shopping for shares has become as
easy as making a few clicks from one's PC or mobile phone. One gets access to
various value-added features like live market rates, intra-day charts, live news, market
statistics, technical analysis tools and research reports. According to NSE data, retail
investors accounted for about 21 percent of trading volume for 2008-09, up from 18.3
percent in the previous year. As per an estimate, the pure retail turnover percentage of
the total exchange turnover is less than 50 percent, and online trading is substantially
contributed by retail investor base. Online trading in India, Asia's third largest
economy, is still at a nascent stage. Though the country is witnessing a 30 percent
growth year-on-year in internet and mobile user base, not all investors are convinced
that trading the cyber way is safe. Issues that need to be addressed are education on
cyber crime and the security solutions around it. To work around this issue, most
brokerages now offer the services of a relationship manager who assists with
information on share prices and places orders online using the investor's login details.
Some internet trading sites have also launched low-bandwidth platforms to facilitate
trading through mobile phones and low-bandwidth connections. With more than 400
million mobile users, India is the world's second-largest market after China for such
services and operators have been adding more than 10 million users a month -making it the fastest-growing market in the world. It's a matter of time when we will
see exponential growth in the online trading segment, not just through the computer
but also through our mobile phones. As the growth of the online trading was expected
it has not been so. It has been 10 years since the introduction of online trading in the
country. While market players term it a decent success, the actual growth of internet
trading in India has been painfully slow. The online trading in equity forms just about
12% of the overall trading volume in the domestic market. Pouring cold water on tall
claims made by proponents of internet trading, the share of e-trades to overall
market volume was just over 9% in 07-08 and 10.5% in 08-09. There may be several
reasons for the slow growth of the internet segment. For one, internet penetration is a
major problem in rural India. Bandwidth availability is also a problem in tier-III and
8

tier-IV cities. But even though there are the problems these problems can be managed
and the online trading facility can be improved and also the internet facility can be
improved to provide the better online trading facility to the Indian trader.

LITERATURE REVIEW
This project mainly deals with the procedure and the benefits of the online trading.
Online trading was initiated by NSE in India and soon after the other exchanges also
followed it. Today online trading contributes are about 8-10%. It is continuously
growing and has a huge market potential. So this was undertaken not only to analyse
the online trading but also to know and understand the response of the Indian
investors towards online trading and to know the actual growth of the online trading.
The emergence of online exchanges has facilitated faster transaction by providing
online trading portals and brokerage house ease and flexibility. The Internet has
indeed opened up new opportunities for conducting the business. The worldwide
stock exchanges has made a major shift from the traditional method of trading and
now conduct a bulk of its business online through its brokers and partners. In the
developed countries majorly all the exchange transaction are conducted online. The
trend took off slowly in India and the National Stock Exchange (NSE) and the
Bombay Stock Exchange (BSE) two of the largest exchanges in India have been
conducting online trades successfully for some time. The Indian exchanges and
brokering houses have been very slow in moving their transactions online and the
major reason has been the lot government regulations. The initial delay was to laying
down the specification for creating Closed User Groups (CUGs). This issue was
resolved between the Department of Telecommunications (DoT) and the Finance
Ministry around 1998 and after the soon came the online trading portals like
ICICIDirect.com,
motilaloswal.com,
sharekhan.com
and
smartjones.com.
Connectivity related issue was perhaps the most important technological factor.
Through online trading everyday large volumes of data is being transacted. There was
a major boom in yr. 2000 when lots of online trading companies came with a bang but
only few were survived because of lack of computer knowledge and low internet
penetration. The NSE and BSE are among the largest exchanges in the country
handling very large daily trading volumes, support large amount of data traffic, and
have a very large nationwide network. The trading volumes in year 2000 was huge
with the average daily turnover in the capital markets segment at NSE is around Rs
2300 crore and in the derivative segment, around Rs 1300 crore. At BSE the daily
turnover in 2004-05 (April- March) was Rs 1244.10 crore and the number of average
daily traders was Rs 5.17 lakh. It has been 10 years since the introduction of online
trading in the country. While market players term it a decent success, the actual
growth of internet trading in India has been painfully slow. The online trading in
equities forms just about 12% of the overall trading volume in the domestic market.
At the end of last fiscal, 349 members were allowed to provide web-based access to
NSEs trading system. The exchange had registered over 56 lakh clients (or users) for
web-based access as on March 31, 09. During the year, shares worth Rs 5, 82,070
crore were traded through internet. If one takes real-long numbers, the capital
market has witnessed a growth in trading volumes from Rs 1,805 crore in 94-95 to
Rs 27, 52,023 crore in 08-09. Average (overall market) daily trading volume
increased from Rs 17 crore during 94-95 to Rs 11,325 crore during 08-09. There is
also a security factor which makes traders hesitant to go for the online trading some
traders feel that the online trading is secured and reliable but some feel that there is
security threat while going for online trading. The reasons for the slow growth of the
internet segment may be internet penetration is a major problem in rural India.
9

Bandwidth availability is also a problem in tier-III and tier-IV cities. But having so
many flaws many analyst feel that these problems are manageable and trading through
online portals reduces transaction costs by a good measure. Besides, there is no
waiting time to place transaction orders. High-speed execution, greater flexibility and
control are the main advantages of the online share trading. The structure of the Indian
market is such that it will take a lot of time for internet trading to catch up, say
experts. First, retail participation has not gone up much over the past few years.
Growth in the number of new demat accounts opened has just been around 12-15%
annually. The structure of the Indian market is such that 25% forms individual retail,
another 25% wholesale retail, 35% proprietary trading and 15% institutional
investors. The whole internet trading play pivots around 25% individual retail
investors. Administered interest rates to investment products like post office savings,
EPFO and such other products take away the need for equity investments for retail
investors. Even though the retail pie is small, internet trading is nowhere near its full
potential. The segment will pick up as the market expands with newer products and
increasing awareness. One of the major fears during the initial days of internet trading
was that e-trading will ruin small-shop brokers with very few clients. Ten years later,
small broking firms operate as profitably as an ICICI-Director Geojit Securties. As
per an analyst, initially, many of his clients walked out to join brokers offering
internet trading. But as a result of the hard margin rules and low-quality advice (by
online trading providers) several of his clients returned and restarted phone-trading
with him. A section of the market believes, internet trading, in real sense, only comes
handy for active, high-volume traders. Investors, who buy smaller number of shares,
can still do well with tele-call options. Active investors, who are always hooked on to
markets, need online mediums. Any online exchange should always be-on, safe,
secure, redundant and should have adequate backup & recovery processes. Today
NSE has the countrys largest VSAT network with over 4000 VSATs and expects to
grow to more than 4500 VSATs very soon According to an article by Krishnamoorthy
B in 2005 after inception of online trading in India in the year 2000 online trading is
gained momentum with trading volumes growing by 150 percent per annum in the
years 2003-2005. The volume of all trades executed through the Internet on the
National Stock Exchange had grown from less than Rs 100 crore (Rs 1 billion) in
June 2003 to over Rs 700 crore (Rs 7 billion) in July 2005 which was a handsome
growth. But later on the growth rate of online trading start declining which was due to
the poor facilities of internet in India. Still in India the bandwidth which is provided
for the internet is very low and in such scenario the online trading is very difficult and
thus hampering the growth of the online trading in India. So steps are required from
the SEBI and the related authority to make the online facilities better in the country
with the help of the government, so as to make the online trading system of the
country effective and technologically advance. Even though still the rate of growth of
the Indian traders for the online trading is very less but there will be a time when
Indian share trading will lot depend on the internet facility and the online trading will
become an important part of the Indian capital market system. As the benefits being
provided by the online trading system is much more and the disadvantages are very
less which includes the flexibility of the online trading of the stocks providing proper
order management and making sure that client can as per his choice can cancel or
modify his order. The SEBI has also played an important role in the issue of the
guidelines regarding online trading so that the chances of fraud and misrepresentation
are minimized. The stock brokers which are being registered with Securities
Exchange Board of India (SEBI) will have to apply to stock exchanges for a formal
permission. So in the last it can be said that in all the online trading is better option for
10

the Indian investors and will provide them not only the convenience of trading but
will provide them additional tools and technique which will help them to analyze their
stock in a better way.

CHAPTER 2
INTRODUCTION TO SECURITIES MARKET
CLASSIFICATION OF CAPITAL MARKET
INSTRUMENTS AND PLAYERS OF CAPITAL
MARKET
OVERVIEW OF SECURITY MARKET
Securities Market plays a crucial role in economic growth and financial stability. The
primary purpose of securities markets is to serve as a mechanism for the
transformation of the savings into financing for the real sector, thus constituting an
alternative to financing. Security market also provides a best mechanism for asset
pricing. Security markets also facilitate in transferring risk and to diversify risk
exposure thus allowing the firms to unlock capital for new investments. Thus risk
transfer and pricing mechanism in the market allow financial institutions such as
banks and insurance companies to manage the risk more efficiently and markets may
therefore work as a buffer for disruption of banking system and therefore contribute to
financial stability. The more efficient markets are the better these outcomes are
achieved and the greater contribution to the economy. A securities market or securities
market is a mechanism that allows people to easily buy and sell (trade) financial
securities (such as stocks and bonds), commodities (such as precious metals or
agricultural goods), and other tangible items of value at low transaction costs and at
prices that reflect the efficient market hypothesis. Thus we can say, securities markets
provide a channel for allocation of savings to those who have a productive need for
them. As a result, the savers and investors are not constrained by their individual
abilities, but by the economys abilities to invest and save respectively, which
inevitably enhances savings and investment in the economy. In securities market both
equity and commodity are traded. Here equity is concerned with the equity shares of
various companies which are traded and commodities refers to various commodities
like gold, copper nickel crude etc. all these commodities are traded. We also call the
commodity market the derivative market. Both general markets (where many
commodities are traded) and specialized markets (where only one commodity is
traded) exist. Markets work by placing many interested buyers and sellers in one
"place", thus making it easier for them to find each other. An economy which relies
primarily on interactions between buyers and sellers to allocate resources is known as
a market economy in contrast either to a command economy or to a non-market
economy such as a gift economy. Security markets have evolved significantly over
several hundred years and are undergoing constant innovation to improve liquidity.
While the role of securities markets is more meaningful in the developed economies
but there is evidence of the growing importance of securities markets in the emerging
markets and developed countries. In many emerging markets and developing
countries securities markets are beginning to gain a place as a source of financing for
the corporate sector although in most markets this is initially restricted to the larger
corporate players. Along with private and public pension fund, collective investment
schemes have become important players in many developing and emerging market
countries and their demand for suitable investments is driving development.
11

Definition of the securities market

Securities markets could mean:
1. Organizations that facilitate the trade in financial products i.e. Stock exchanges
, facilitates the trade in stocks, bonds and warrants.
2. The coming together of buyers and sellers to trade financial products i.e. stocks and
shares are traded between buyers and sellers in a number of ways including: the use of
stock exchanges; directly between buyers and sellers etc.
3. In academia, students of finance will use both meanings but students of economics
will only use the second meaning. Securities markets can be domestic or they can be
international. In Finance, Securities markets facilitate-

The raising of capital (in the capital markets);

The transfer of risk (in the derivatives markets);
International trade (in the currency markets)

STRUCTURE OF SECURITIES MARKETS

The securities markets can be divided into different subtypes:

Capital markets which consist of:

o Stock markets, which provide financing through the issuance of shares
or common stock, and enable the subsequent trading thereof.
o Bond markets, which provide financing through the issuance of Bonds,
and enable the subsequent trading thereof.
Commodity markets, which facilitate the trading of commodities.
Money markets, which provide short term debt financing and investment.
Derivatives markets, which provide instruments for the management of
financial risk.
o Futures markets, which provide standardized forward contracts for
trading products at some future date; see also forward market.
Insurance markets, which facilitate the redistribution of various risks.
Foreign exchange markets, which facilitate the trading of foreign exchange.

Further we classify the capital markets into two

1. Primary markets - : In primary market newly formed (issued) securities are
bought or sold. Stocks available for the first time are offered through new
issue market. The issuer may be a new company.

12

2.

Secondary markets. -: Secondary markets allow investors to sell securities

that they hold or buy existing securities. In this investors trade in the existing
securities in the stock market thus providing liquidity for the issued securities.

Sources of raising capital

To understand financial markets, let us look at what they are used for, i.e. what is their
purpose? Without financial markets, borrowers would have difficulty finding lenders
themselves. Intermediaries such as banks help in this process. Banks take deposits
from those who have money to save. They can then lend money from this pool of
deposited money to those who seek to borrow. Banks popularly lend money in the
form of loans and mortgages. More complex transactions than a simple bank deposit
require markets where lenders and their agents can meet borrowers and their agents,
and where existing borrowing or lending commitments can be sold on to other parties.
A good example of a financial market is a stock exchange. A company can raise
money by selling shares to investors and its existing shares can be bought or sold.
There are various sources through which a company can raise funds and can utilize
that money for the development of the company. The various sources of raising fund
include through bank or through shares which include equity share or preference
shares or debentures which are the loan for the company or can take loan from the
bank. The following table illustrates where financial markets fit in the relationship
between lenders and borrowers:

Table Number 1

(Source NCFM book Capital Market)

Relationship between lenders and borrowers

Lenders

Financial
Intermediaries

Individuals
Companies

Interbank
Banks
Stock Exchange
Insurance Companies
Money Market
Pension Funds
Bond Market
Mutual Funds
Foreign Exchange

Financial Markets

Borrowers
Individuals
Companies Central
Government
Municipalities
Public Corporations

Lenders
Many individuals are not aware that they are lenders, but almost everybody does lend
money in many ways. A person lends money when he or she:

13

puts money in a savings account at a bank;

contributes to a pension plan;
pays premiums to an insurance company;
invests in government bonds; or

Invests in company shares.

Companies tend to be borrowers of capital. When companies have surplus cash that is
not needed for a short period of time, they may seek to make money from their cash
surplus by lending it via short term markets called money markets. There are a few
companies that have very strong cash flows. These companies tend to be lenders
rather than borrowers. Such companies may decide to return cash to lenders (e.g. via a
share buyback.) Alternatively, they may seek to make more money on their cash by
lending it (e.g. investing in bonds and stocks.)
Borrowers
Individuals borrow money via bankers' loans for short term needs or longer term
mortgages to help finance a house purchase. Companies borrow money to aid short
term or long term cash flows. They also borrow to fund modernization or future
business expansion. Governments often find their spending requirements exceed their
tax revenues. To make up this difference, they need to borrow. Governments also
borrow on behalf of nationalized industries, municipalities, local authorities and other
public sector bodies. In the UK, the total borrowing requirement is often referred to as
the public sector borrowing requirement (PSBR).Governments borrow by issuing
bonds. In the UK, the government also borrows from individuals by offering bank
accounts and Premium Bonds. Government debt seems to be permanent. Indeed the
debt seemingly expands rather than being paid off. One strategy used by governments
to reduce the value of the debt is to influence inflation. Municipalities and local
authorities may borrow in their own name as well as receiving funding from national
governments. In the UK, this would cover an authority like Hampshire County
Council. Public Corporations typically include nationalized industries. These may
include the postal services, railway companies and utility companies. Many borrowers
have difficulty raising money locally. They need to borrow internationally with the aid
of Foreign exchange markets.
Derivative products
During the 1980s and 1990s, a major growth sector in financial markets is the trade in
so called derivative products, or derivatives for short. In the financial markets, stock
prices, bond prices, currency rates, interest rates and dividends go up and down,
creating risk. Derivative products are financial products which are used to control risk
or paradoxically exploit risk. It is also called financial economics.
Currency markets
Seemingly, the most obvious buyers and sellers of foreign exchange are
importers/exporters. While this may have been true in the distant past, whereby
importers/exporters created the initial demand for currency markets, importers and

14

exporters now represent only 1/32 of foreign exchange dealing, according to the
picture of foreign currency transactions today shows:

Banks and Institutions

Speculators
Government spending (for example, military bases abroad)
Importers/Exporters
Tourists

PRESENT FACE OF INDIAN CAPITAL MARKETS

Market capitalizations and turnover
The market capitalization of the Indian stock market as on March 31, 2010, was
around Rs 16 trillion ($ 350 billion) which represents 61% of GDP. The annual
trading volume in all the exchanges put together amounted to Rs 20 trillion
(approximately twice the market capitalization). The average daily trading volume is
about $2 billion and there are days on which the turnover is twice this level.
Sideshows 'Stock exchange-wise turnover' and 'Stock market indicators', provide
more details about turnover and market capitalization. India has 9,871 listed
companies; this number is second only to that of the United States. However, most of
the trading volume is concentrated in a few hundred stocks, and even within this, the
top hundred stocks account for a disproportionate share of the trading volume. The
Indian capital market is well-diversified in terms of ownership pattern and industry
structure. Most of the top 50 companies are domestic private sector companies with
no single family or business group accounting for a disproportionate share. There is
no foreign owned corporation, public sector organization or newly privatized
company in the top five stocks by market capitalization. Companies with a market
capitalization of $1 billion or more are present in industries as diverse as software,
petrochemicals, oil refining, consumer goods, telecom, banking, pharmaceuticals, and
entertainment. In the last few years, however, new economy stocks have shown rapid
increase in their market capitalization and turnover. In the BSE 500 index covering
the top 500 listed companies, new economy stocks account for about 49per cent of
market capitalization and 50per cent of the average daily turnover.
Stock exchanges
Stock Exchange is a market like any other centralized market where both buyers and
sellers come and conduct their business of purchase and sale of shares & securities. In
other words, it is a market place for shares and securities where trading takes place in
a controlled and protected environment. A stock exchange, share market or bourse is a
corporation or mutual organization which provides "trading" facilities for stock
brokers and traders, to trade stocks and other securities. Stock exchanges also provide
facilities for the issue and redemption of securities as well as other financial
instruments and capital events including the payment of income and dividends. The
15

securities traded on a stock exchange include: shares issued by companies, unit trusts
and other pooled investment products and bonds. To be able to trade a security on a
certain stock exchange, it has to be listed there. Usually there is a central location at
least for recordkeeping, but trade is less and less linked to such a physical place, as
modern markets are electronic networks, which gives them advantages of speed and
cost of transactions. Trade on an exchange is by members only. The initial offering of
stocks and bonds to investors is by definition done in the primary market and
subsequent trading is done in the secondary market. A stock exchange is often the
most important component of a stock market. Supply and demand in stock markets is
driven by various factors which, as in all free markets, affect the price of stocks.
There is usually no compulsion to issue stock via the stock exchange itself, nor must
stock be subsequently traded on the exchange. Such trading is said to be off exchange
or over-the-counter. This is the usual way that bonds are traded. Increasingly, stock
exchanges are part of a global market for securities. India boasts of the oldest stock
exchange in Asia -- the Bombay Stock Exchange is 125 years old. There are 23
recognized exchanges spread across the country, but a process of consolidation is now
under way. Many of the regional stock exchanges have started aligning themselves
with one or both of the two large exchanges (the Bombay Stock Exchange and the
National Stock Exchange) both of which have VSAT networks that give them a
nationwide reach. The National Stock Exchange is an unlisted for-profit company set
up by some of the leading financial institutions of India. Most of the remaining stock
exchanges are broker-owned (mutual) organizations, but the Bombay Stock Exchange
is actively considering demutualization. The Securities and Exchange Board of India
(SEBI), the apex regulator of the capital market has regulations that mandate a
minimum number of outside directors on the governing board and provide greater
autonomy to the professional executives in the day-to-day running of the exchange.
Stock exchange is a very broad place which provide suitable and easy sell and buy
faciling and provide a comfortable place for company where they can easily listed our
company share and invite the investor to take his share.
Trading and settlement
Indias stock exchanges are fully computerized order driven or order-cum-quote
driven systems. The country has made rapid strides towards a dematerialized trading
environment on the basis of a competing depositorys model. Investors have the
choice of holding their stocks in physical or dematerialized form, but trading in the
exchanges is in mandatory dematerialized mode in most important stocks. As of
October 2000, about 98per cent of the trading in the stock exchanges is in
dematerialized mode. India has put in place a regulatory regime for internet trading of
stocks. A large number of online brokers have started operations. More brokers are
expected to follow when the exchanges put in place an ASP (Application Service
Provider) model for online trading software. However, currently, the level of
penetration of online trading is extremely small. The stock exchanges currently run
two parallel settlement systems. Practically all the trading takes place in the account
16

period settlement system in which all trades during a weekly account period are netted
off and the net obligations are settled five business 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 T+5 basis. SEBI is currently working on mandatory shifting all stocks in a
phased manner to the rolling settlement system. Further improvements in the
settlement system to T+3 or beyond would have to wait for improvements in the
payment system. However, account period settlement does not give rise to significant
systemic risks in India because of stringent end of day and intra-day margining
systems. Put simply, the weekly settlement is regarded as akin to a one-week futures
contract, and the systemic risk is taken care of by using futures style margining. The
exchange imposes daily mark to market and initial margins on the brokers to
eliminate settlement risk. Exchanges also have clearing houses to guarantee
settlements on the exchange. As a result, there have been no settlement failures in the
principal stock exchanges during the last five years.
Primary market
India enjoyed a major boom of IPOs in the mid 1990s. This hot IPO period came to an
, end in 1995-96 with a fall in the stock market and a downturn in the economy.
Investors who subscribed at the height of the boom suffered significant losses, and the
primary market has yet to recover from this debacle. In the late 1990s, moreover, the
Indian corporate sector was in the midst of a structural transformation with the old
economy companies stocks doing badly in the face of global competition while
software companies delivered outstanding financial results. The stock market also
rewarded the new economy stocks with high valuations. In this environment, it was
difficult for most old economy companies to come to the market with a credible
business plan. Software companies in India have used a stock market listing primarily
to establish a valuation and create an acquisition currency as their large positive cash
flows leave them with little need for additional funding. At the same time, SEBI has
been concerned about public capital rising by companies with no track record. Newly
set up software companies, entertainment companies and internet companies with no
tangible assets pose particular problems of valuation. In this situation, SEBI has
moved half-way towards a QIB (Qualified Institutional Buyers) market for some of
these stocks. In the year 2010 the total amount raised through the public offering was
Rs. 46,778 crore. The amount of the public offering of this year is the second highest
amount ever and is almost the double of each of the preceding year.
Disclosure and corporate governance
India moved from a merit based regulation to a disclosure based regulation of the
primary market with the establishment of the Securities and Exchange Board of India
(SEBI) in 1992. The level of disclosure has increased progressively in recent years as
SEBI has attempted to bring disclosure requirements up to international levels. This is
an ongoing exercise. In the field of continuing disclosure, listed companies are now
17

required to disclose unedited financial results on a quarterly basis, and there is now a
subject these results to limited auditor review. The Accounting Standards Board set up
by the accounting profession is engaged in a major exercise to bring Indian
accounting standards on par with those of the IASC (International Accounting
Standards Committee). SEBI is now in the process of implementing the Corporate
Governance Code framed by the Birla Committee through the listing agreement.
Under this code, companies are required to have a minimum number of independent
directors, and to have an audit committee.
Globalization
India operates a rigorous system of exchange controls on the capital account.
However, a window has been created for foreign portfolio investment. As on March
31, 2010, there were 1705 Foreign Institutional Investors (FIIs) registered with SEBI.
These FIIs had in the aggregate invested $11.23 billion in the Indian stock market;
this represents about 5 per cent of the market capitalization. Sideshow, 'FII
Investment', provides trends regarding FII investments in the last few years. Indian
companies have also been allowed to issue shares outside the country in the form of
GDRs (Global Depository Receipts) and ADRs (American Depository Receipts).
From 1992-93 to 1998-99, Indian companies raised Rs 274 billion in this form as
compared to the $3.15 billion in the year 2009. This figure was fallen in the year 2008
amounting to $0.10 billion. But now these issues are again in the picture.
Mutual funds
As on March 31, 2010, there were 42 mutual funds registered with SEBI. This is in
addition to the countrys largest and oldest mutual fund, the Unit Trust of India, which
is not yet under SEBIs regulatory purview. These mutual funds had floated a total of
330 different mutual fund schemes, which together controlled assets of Rs 1.1 trillion
($ 25 billion) representing about 11per cent of the market capitalization. Details
regarding annual resource mobilization by mutual funds are available in Sideshow,
'Mutual fund resource mobilization'.
Investor population and profile
According to the investor survey carried out by the National Council of Applied
Economic Research (NCAER) together with SEBI, about 8per cent of all households
hold equity shares or debentures. This constitutes an investor base of 19 million
individuals. Investors in mutual funds numbered about 23 million thanks mainly to
the long established Unit Trust of India. Allowing for common ownership of shares
and mutual funds, there are probably about 30 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 3 per cent (see Sideshow, Instrument-wise flow
of household financial savings'). This share had reached a level of 23 per cent in early

18

1990s towards the end of a long boom in the capital markets and has been steadily
declining since then.
Derivatives market
Indias fledgling index futures market is less than six months old and the trading
volume is far below even one per cent of the cash market volumes. Global experience
suggests that the market may still be in the initial stage of low awareness and low
acceptance, and that the market could pick up in coming months. There are also plans
to introduce new derivative products.
Market product and their market
(A) Mutual Funds & their Market
A mutual fund is a professionally-managed firm of collective investments that pools
money from many investors and invests it in stocks, bonds, short-term money market
instruments, and/or other securities. In a mutual fund, the fund manager, who is also
known as the portfolio manager, trades the fund's underlying securities, realizing
capital gains or losses, and collects the dividend or interest income. The investment
proceeds are then passed along to the individual investors. The value of a share of the
mutual fund, known as the net asset value per share (NAV), is calculated daily based
on the total value of the fund divided by the number of shares currently issued and
outstanding. In simple words it can be said that mutual funds are the funds of the
investor which is being provided to the fund manager who analyses and comes to the
conclusion that which are the sectors going in profit and invest the investors money
in those sectors so that to earn the profit from those sectors. A Mutual Fund is an
investment tool that allows small investors access to a well-diversified portfolio of
equities, bonds and other securities. Each shareholder participates in the gain or loss
of the fund. Units are issued and can be redeemed as needed. The fund's Net Asset
Value (NAV) is determined each day. Mutual Funds are financial intermediaries. They
are companies set up to receive your money, and then having received it, make
investments with the money Via an AMC. It is an ideal tool for people who want to
invest but don't want to be bothered with deciphering the numbers and deciding
whether the stock is a good buy or not. A mutual fund manager proceeds to buy a
number of stocks from various markets and industries. Depending on the amount you
invest, you own part of the overall fund. The beauty of mutual funds is that anyone
with an investible surplus of a few hundred rupees can invest and reap returns as high
as those provided by the equity markets or have a steady and comparatively secure
investment as offered by debt instruments. A Mutual Fund is not an alternative
investment option to stocks and bond; rather it pools the money of several investors
and invests this in stocks, bonds, money market instruments and other types of
securities. A Mutual Fund is a trust that pools the savings of a number of investors
who share a common financial goal. The money thus collected is then invested in
capital market instruments such as shares, debentures and other securities. The income
earned through these investments and the capital appreciation realised are shared by
its unit holders in proportion to the number of units owned by them. Thus a Mutual
Fund is the most suitable investment for the common man as it offers an opportunity
to invest in a diversified, professionally managed basket of securities at a relatively
low cost. Legally known as an "open-end company" under the Investment Company
19

Act of 1940 (the primary regulatory statute governing investment companies), a

mutual fund is one of three basic types of investment companies available in the
United States.[2] Outside of the United States (with the exception of Canada, which
follows the U.S. model), mutual fund may be used as a generic term for various types
of collective investment vehicle. In the United Kingdom and western Europe
(including offshore jurisdictions), other forms of collective investment vehicle are
prevalent, including unit trusts, open-ended investment companies (OEICs), SICAVs
and unitized insurance funds. In Australia and New Zealand the term "mutual fund" is
generally not used; the name "managed fund" is used instead.
The flow chart below describes broadly the working of a mutual fund:
Concept
Mutual Fund Operation Flow Chart Figure Number 1
(Source: www.icicidirect.com)

Regulatory Body for Mutual Funds

Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual
funds. All the mutual funds must get registered with SEBI.
Benefits of investing in Mutual Funds There are several benefits from investing in a
Mutual
Fund:
Mutual funds help you to reap the benefit of returns by a portfolio spread across a
wide spectrum of companies with small investments.
1) Professional Fund Management: Professionals having considerable expertise,
experience and resources manage the pool of money collected by a mutual fund. They
thoroughly analyze the markets and economy to pick good investment opportunities.
2) Liquidity: Closed ended funds have their units listed at the stock exchange, thus
they can be bought and sold at their market value. Over and above this the units can
be directly redeemed to the Mutual Fund as and when they announce the repurchase.
3) Spreading Risk: An investor with limited funds might be able to invest in only
one or two stocks/bonds, thus increasing his or her risk. However, a mutual fund will
spread its risk by investing a number of sound stocks or bonds. A fund normally
invests in companies across a wide range of industries, so the risk is diversified.
4) Transparency: Mutual Funds regularly provide investors with information on the
value of their investments. Mutual Funds also provide complete portfolio disclosure
of the investments made by various schemes and also the proportion invested in
each asset type.
5) Choice: The large amount of Mutual Funds offers the investor a wide variety to
choose from. An investor can pick up a scheme depending upon his risk/ return
profile.
5) Regulations: All the mutual funds are registered with SEBI and they function
within the provisions of strict regulation designed to protect the interests of the
investor.
20

6) Small investments: Mutual funds help you to reap the benefit of returns by a
portfolio spread across a wide spectrum of companies with small investments. Such a
spread would not have been possible without their assistance. In mutual fund you
invest in different portfolios which will generate return for you. A single portfolio
consists of different companies under it and through mutual fund your investment is
distributed to the different companies as per the earnings they generate, ultimately
generating the return for the investor.
Net assets value
NAV or Net Asset Value of the fund is the cumulative market value of the assets of
the fund net of its liabilities. NAV per unit is simply the net value of assets divided by
the number of units outstanding. Buying and selling into funds is done on the basis
of NAV-related prices. The NAV of a mutual fund are required to be published in
newspapers. The NAV of an open end scheme should be disclosed on a daily basis and
the NAV of a close end scheme should be disclosed at least on a weekly basis
Net Asset Value (NAV) is the actual value of one unit of a given scheme on any given
business day. The NAV reflects the liquidation value of the fund's investments on that
particular day after accounting for all expenses. NAV (Net Asset Value) represents a
fund's per share market value. This is the price at which investors buy ("bid
price") fund shares from a fund company and sell them ("redemption price") to a fund
company. It is derived by dividing the total value of all the cash and securities in a
fund's portfolio, less any liabilities, by the number of shares outstanding. An
NAV computation is undertaken once at the end of each trading day based on the
closing market prices of the portfolio's securities. For example, if a fund has assets of
$50 million and liabilities of $10 million, it would have a NAV of $40 million. This
number is important to investors, because it is from NAV that the price per unit of a
fund is calculated. By dividing the NAV of a fund by the number of outstanding units,
you are left with the price per unit. In our example, if the fund had 4 million shares
outstanding, the price-per-share value would be $40 million divided by 4 million,
which equals $10. This pricing system for the trading of shares in a mutual fund
differs significantly from that of common stock issued by a company listed on a stock
exchange. In this instance, a company issues a finite number of shares through an
initial public offering (IPO), and possibly subsequent additional offerings, which then
trade in the secondary market. In this market, stock prices are set by market forces of
supply and demand. The pricing system for stocks is based solely on market
sentiment. Because mutual funds distribute virtually all their income and realized
capital gains to fund shareholders, a mutual fund's NAV is relatively unimportant in
gauging a fund's performance, which is best judged by its total return. In the context
of mutual funds, NAV per share is computed once a day based on the closing market
prices of the securities in the fund's portfolio. All mutual funds' buy and sell orders are
processed at the NAV of the trade date. However, investors must wait until the
following day to get the trade price. Mutual funds pay out virtually all of their income
and capital gains. As a result, changes in NAV are not the best gauge of mutual fund
performance, which is best measured by annual total return. Because ETFs and
closed-end funds trade like stocks, their shares trade at market value, which can be a
dollar value above (trading at a premium) or below (trading at a discount) NAV. It is
calculated by deducting all liabilities (except unit capital) of the fund from the
realisable value of all assets and dividing it by number of units outstanding.

21

Besides Net Asset Value the following parameters should be considered while
comparing the funds:
Average Returns
An investor should look at the returns given by the fund over a period of time. Care
should be taken to see whether all dividends and bonuses have been accounted for.
The higher and more consistent the returns the better is the fund.
Volatility
In addition to the returns one should also look at the volatility of the returns given by
the fund. Volatility is essentially the fluctuation of the returns about the mean return
over a period of time. A fund giving consistent returns is better than a fund whose
returns fluctuate a lot. It is the relative rate at which the price of a security moves up
and down. Volatility is found by calculating the annualized standard deviation of daily
change in price. If the price of a stock moves up and down rapidly over short time
periods, it has high volatility. If the price almost never changes, it has low volatility.
Thus it's the variation from the average value over a measurement period. If a price
varies a great deal from day to day, the volatility will be high, and conversely if the
day to day variation is low, the value of volatility will be low as well.
Corpus Size:
A Large corpus is generally considered good because large funds have lower costs, as
expenses are spread over large assets but at the same time a large corpus has some
inefficiency too. A large corpus may become unwieldy and thus difficult to manage.
Performance Vis A Vis Benchmark Other Schemes:
An investor should not only look at the returns given by the scheme he has invested in
but also compare it with benchmarks like BSE SENSEX, S & P Nifty, T-bill index etc
depending on the asset class he has invested in. For a true picture it is advised that the
returns should also be compared with the returns given by the other funds in the same
category. Thus it is prudent to consider all the above-mentioned factors while
comparing funds and not rely on any one of them in isolation. This is important
because as of today there is no standard method for evaluation of un-traded securities.
Entry Exit Load
A Load is a charge, which the mutual fund may collect on entry and/or exit from a
fund. A load is levied to cover the up-front cost incurred by the mutual fund for
selling the fund. It also covers one time processing costs. Some funds do not charge
any entry or exit load. Investors have to bear expenses for availing of the services
(professional management) of the mutual fund. The first expense that an investor has
to incur is by way of Entry Load. This is charged to meet the selling and distribution
expenses of the scheme. A major portion of the Entry Load is used for paying
commissions to the distributor. The distributor (also called a mutual fund advisor)
could be an Independent Financial Advisor, a bank or a large national distributor or a
regional distributor etc. They are the intermediaries who help an investor with
choosing the right scheme, financial planning and investing in scheme s from time to
time to meet ones requirements. As there are Entry Loads, there exist Exit Loads as
well. As Entry Loads increase the cost of buying, similarly Exit Loads reduce the
amount received by the investor. Not all schemes have an Exit Load, and not all
schemes have similar exit loads as well. Some schemes have Contingent Deferred
Sales Charge (CDSC). This is nothing but a modified form of Exit Load, wherein the
investor has to pay different Exit Loads depending upon his investment period. If the
investor exits early, he will have to bear more Exit Load and if he remains invested
for a longer period of time, his Exit Load will reduce. Thus the longer the investor
remains invested, lesser is the Exit Load. After some time the Exit Load reduces to
nil; i.e. if the investor exits after a specified time period, he will not have to bear any
22

Exit Load. These funds are referred to as No Load Fund. Funds usually charge an
entry load ranging between 1.00% and 2.00%. Exit loads vary between 0.25% and
2.00%. For e.g. Let us assume an investor invests Rs. 10,000/- and the current NAV is
Rs.13/-. If the entry load levied is 1.00%, the price at which the investor invests is
Rs.13.13 per unit. The investor receives 10000/13.13 = 761.6146 units. (Note that
units are allotted to an investor based on the amount invested and not on the basis of
no. of units purchased). Let us now assume that the same investor decides to redeem
his 761.6146 units. Let us also assume that the NAV is Rs 15/- and the exit load is
0.50%. Therefore the redemption price per unit works out to Rs. 14.925. The investor
therefore receives 761.6146 x 14.925 = Rs.11367.10.
Are there any risks involved in investing in Mutual Funds
Mutual Funds do not provide assured returns. Their returns are linked to their
performance. They invest in shares, debentures, bonds etc. All these investments
involve an element of risk. The unit value may vary depending upon the performance
of the company and if a company defaults in payment of interest/principal on their
debentures/bonds the performance of the fund may get affected. Besides in case there
is a sudden downturn in an industry or the government comes up with new a
regulation which affects a particular industry or company the fund can again be
adversely affected. All these factors influence the performance of Mutual Funds.
Some of the Risk to which Mutual Funds are exposed to is given below:
Market risk
If the overall stock or bond markets fall on account of overall economic factors, the
value of stock or bond holdings in the fund's portfolio can drop, thereby impacting the
fund performance.
Non-market risk
Bad news about an individual company can pull down its stock price, which can
negatively affect fund holdings. This risk can be reduced by having a diversified
portfolio that consists of a wide variety of stocks drawn from different industries.
Interest rate risk
Bond prices and interest rates move in opposite directions. When interest rates rise,
bond prices fall and this decline in underlying securities affects the fund negatively.
Credit risk
Bonds are debt obligations. So when the funds invest in corporate bonds, they run the
risk of the corporate defaulting on their interest and principal payment obligations and
when that risk crystallizes, it leads to a fall in the value of the bond causing the NAV
of the fund to take a beating.
Tax Saving Funds
These funds offer tax benefits to investors under the Income Tax Act. Opportunities
provided under this scheme are in the form of tax rebates under the Income Tax act.
Debt/Income Funds
These funds invest predominantly in high-rated fixed-income -bearing instruments
, like bonds, debentures, government securities, commercial paper and other money
market instruments. They are best suited for the medium to long-term investors who
are averse to risk and seek capital preservation. They provide a regular income to the
investor.
Liquid Funds/Money Market Funds
These funds invest in highly liquid money market instruments. The period of
investment could be as short as a day. They provide easy liquidity. They have emerged
as an alternative for savings and short- term fixed deposit accounts with
comparatively higher returns. These funds are ideal for corporate, institutional
investors and business houses that invest their funds for very short periods.
23

Gilt Funds
These funds invest in Central and State Government securities. Since they are
Government backed bonds they give a secured return and also ensure safety of the
principal amount. They are best suited for the medium to long-term investors who
are averse to risk.
Balanced Funds
These funds invest both in equity shares and fixed-income -bearing instruments (debt)
in some proportion. They provide a steady return and reduce the volatility of the fund
while providing some upside for capital appreciation. They are ideal for medium to
long-term investors who are willing to take moderate risks.
b) On the basis of Flexibility
Open-ended Funds
These funds do not have a fixed date of redemption. Generally they are open for
subscription and redemption throughout the year. Their prices are linked to the daily
net asset value (NAV). From the investors' perspective, they are much more liquid
than closed-ended funds.
Close-ended Funds
These funds are open initially for entry during the Initial Public Offering (IPO) and
thereafter closed for entry as well as exit. These funds have a fixed date of
redemption. One of the characteristics of the close-ended schemes is that they are
generally traded at a discount to NAV; but the discount narrows as maturity nears.
These funds are open for subscription only once and can be redeemed only on the
fixed date of redemption. The units of these funds are listed on stock exchanges (with
certain exceptions), are tradable and the subscribers to the fund would be able to exit
from the fund at any time through the secondary market.
What are the different investment plans that Mutual Funds offer
The term investment plans generally refers to the services that the funds provide to
investors offering different ways to invest or reinvest. It refers to the number of ways
through which the investor can invest their money in the mutual fund market. The
different investment plans are an important consideration in the investment decision,
because they determine the flexibility available to the investor. Some of the
investment plans offered by mutual funds in India are:
1) Growth Plan
A growth plan is a plan under a scheme wherein the returns from investments are
reinvested and very few, income distributions, if any, are made. The investor thus only
realizes capital appreciation on the investment. In the growth plan whatever returns
are received is reinvested in the company so that you can earn huge capital gain. In
this the amount of shares you invested initially will remain the same but the value of
that fund will increase.
2) Dividend Plan
Under the dividend plan, income is distributed from time to time. This plan is ideal to
, those investors requiring regular income. The funda behind Dividend is that the fund
gives you "cash" regularly. And this plan is opted when you want consistent income
on a regular basis in the form of dividends.
3) Dividend Reinvestment Plan
Dividend plans of schemes carry an additional option for reinvestment of income
distribution. This is referred to as the dividend reinvestment plan. Under this plan,
dividends declared by a fund are reinvested in the scheme on behalf of the investor,
thus increasing the number of units held by the investors. In this plan whatever money
24

is being invested by the investor and the return he receive from the investment it is
being reinvested in the mutual fund so as to receive capital gain. In this
What are the rights that are available to a Mutual Fund holder in India
As per SEBI Regulations on Mutual Funds, an investor is entitled to:
1 .Receive Unit certificates or statements of accounts confirming your title within 6
weeks from the date your request for a unit certificate is received by the Mutual Fund.
2. Receive information about the investment policies, investment objectives, financial
position and general affairs of the scheme.
3. Receive dividend within 42 days of their declaration and receive the redemption or
repurchase proceeds within 10 days from the date of redemption or repurchase.
4. The trustees shall be bound to make such disclosures to the unit holders as are
essential in order to keep them informed about any information, which may have an
adverse bearing on their investments.
5. 75% of the unit holders with the prior approval of SEBI can terminate the AMC of
the fund.
6. 75% of the unit holders can pass a resolution to wind-up the scheme.
7. An investor can send complaints to SEBI, who will take up the matter with the
concerned Mutual Funds and follow up with them till they are resolved.
Fund Offer document
A Fund Offer document is a document that offers you all the information you could
possibly need about a particular scheme and the fund launching that scheme. That
way, before you put in your money, you're well aware of the risks etc involved. This
has to be designed in accordance with the guidelines stipulated by SEBI and the
prospectus must disclose details about:
Investment objectives
Risk factors and special considerations
Summary of expenses
Constitution of the fund
Guidelines on how to invest
Organization and capital structure
Tax provisions related to transactions
Financial information
Active Fund Management
When investment decisions of the fund are at the discretion of a fund manager(s) and
he or she decides which company, instrument or class of assets the fund should invest
in based on research, analysis, market news etc. such a fund is called as an actively
managed fund. The fund buys and sells securities actively based on changed
perceptions of investment from time to time. Based on the classifications of shares
with different characteristics, active investment managers construct different
portfolio. Two basic investment styles prevalent among the mutual funds are Growth
Investing and Value Investing:
Growth Investing Style
The primary objective of equity investment is to obtain capital appreciation. A growth
manager looks for, companies that are expected to give above average earnings
growth, where the manager feels that the earning prospects and therefore the
stock prices in future will be even higher. Identifying such growth sectors is the
challenge before the growth investment manager.
Value investment Style
A Value Manager looks to buy companies that they believe are currently undervalued
in the market, but whose worth they estimate will be recognized in the market
valuations eventually.
25

Passive Fund Management

When an investor invests in an actively managed mutual fund, he or she leaves the
decision of investing to the fund manager. The fund manager is the decision- maker
as to which company or instrument to invest in. Sometimes such decisions may
be right, rewarding the investor handsomely. However, chances are that the decisions
might go wrong or may not be right all the time which can lead to substantial losses
for the investor. There are mutual funds that offer Index funds whose objective is
to equal the return given by a select market index. Such funds follow a passive
investment style. They do not analyze companies, markets, economic factors and
then narrow down on stocks to invest in. Instead they prefer to invest in a portfolio of
stocks that reflect a market index, such as the Nifty index. The returns generated by
the index are the returns given by the fund. No attempt is made to try and beat the
index. Research has shown that most fund managers are unable to constantly beat the
market index year after year. Also it is not possible to identify which fund will beat
the market index. Therefore, there is an element of going wrong in selecting a fund to
invest in. This has lead to a huge interest in passively managed funds such as Index
Funds where the choice of investments is not left to the discretion of the fund
manager. Index Funds hold a diversified basket of securities which represents the
index while at the same time since there is not much active turnover of the portfolio
the cost of managing the fund also remains low. This gives a dual advantage to the
investor of having a diversified portfolio while at the same time having low expenses
in fund. There are various passively managed funds in India today some of them are:
1. Principal Index Fund, an index fund scheme on S&P CNX Nifty Launched by
Principal Mutual Fund in July 1999.
2. UTI Nifty Fund launched by Unit Trust of India in March 2000.
3. Franklin India Index Fund launched by Franklin Templeton Mutual Fund in June
2000.
4. Franklin India Index Tax Fund launched by Franklin Templeton Mutual Fund in
February 2001.
5. Magnum Index Fund launched by SBI Mutual Fund in December 2001.
6. IL&FS Index Fund launched by IL&FS Mutual Fund in February 2002.
7. Prudential ICICI Index Fund launched by Prudential ICICI Mutual Fund in
February 2002.
8. HDFC Index Fund-Nifty Plan launched by HDFC Mutual Fund in July 2002.
9. Birla Index Fund launched by Birla Sun Life Mutual Fund in September 2002.
10. LIC Index Fund-Nifty Plan launched by LIC Mutual Fund in November 2002.
11. Tata Index Fund launched by Tata TD Waterhouse Mutual Fund in February 2003.
12. ING vysya Nifty plus Fund launched by ING Vysya Mutual Fund in January 2004.
13. An index Fund launched by Canbank Mutual Fund in September 2004.
Exchange traded fund
Think of an exchange-traded fund as a mutual fund that trades like a stock. Just like
an index fund, an ETF represents a basket of stocks that reflect an index such as the
Nifty. An ETF, however, isn't a mutual fund; it trades just like any other company on a
stock exchange. Unlike a mutual fund that has its net-asset value (NAV) calculated at
the end of each trading day, an ETF's price changes throughout the day, fluctuating
with supply and demand. It is important to remember that while ETFs attempt to
replicate the return on indexes, there is no guarantee that they will do so exactly. By
owning an ETF, you get the diversification of an index fund plus the flexibility of a
stock. Because, ETFs trade like stocks, you can short sell them, buy them on margin
and purchase as little as one share. Another advantage is that the expense ratios of
26

most ETFs are lower than that of the average mutual fund. When buying and selling
ETFs, you pay your broker the same commission that you'd pay on any regular trade.
There are various ETFs available in India, such as:
Nifty Bees: An Exchange Traded Fund launched by Benchmark Mutual Fund in
January 200
Junior Bees: An Exchange Traded Fund on CNX Nifty Junior, launched by
Benchmark Mutual Fund in February 2003.
Sunder: An Exchange Traded Fund launched by UTI in July 2003.
Liquid Bees: An Exchange Traded Fund launched by Benchmark Mutual Fund in
July 2003.
Bank Bees: An Exchange Traded Fund (ETF) launched by Benchmark Mutual Fund
in May 2004
(B) Bond and Bond Market
The bond market (also known as the debt, credit, or fixed income market) is a
financial market where participants buy and sell debt securities, usually in the form of
bonds. As of 2006, the size of the international bond market is an estimated $45
trillion, of which the size of the outstanding U.S. bond market debt was $25.2 trillion.
Nearly all of the $923 billion average daily trading volume (as of early 2007) in the
U.S. Bond Market[2] takes place between broker-dealers and large institutions in a
decentralized, over-the-counter (OTC) market. However, a small number of bonds,
primarily corporate, are listed on exchanges. References to the "bond market" usually
refer to the government bond market, because of its size, liquidity, lack of credit risk
and, therefore, sensitivity to interest rates. Because of the inverse relationship between
bond valuation and interest rates, the bond market is often used to indicate changes in
interest rates or the shape of the yield curve.
Market structure
Bond markets in most countries remain decentralized and lack common exchanges
like stock, future and commodity markets. This has occurred, in part, because no two
bond issues are exactly alike, and the number of different securities outstanding is far
larger. However, the New York Stock Exchange (NYSE) is the largest centralized
bond market, representing mostly corporate bonds. The NYSE migrated from the
Automated Bond System (ABS) to the NYSE Bonds trading system in April 2007 and
expects the number of traded issues to increase from 1000 to 6000.
Types of bond markets
The Securities Industry and Financial Markets Association classify the broader bond
market into five specific bond markets.

27

Corporate
Government & Agency
Municipal

Mortgage Backed, Asset Backed, and Collateralized Debt Obligation

Funding

Bond market participants

Bond market participants are similar to participants in most financial
markets and are, essentially either buyers (debt issuer) of funds or
sellers (institution) of funds or often both. Participants include:

Institutional investors;
Governments;
Traders; and
Individuals

Because of the specificity of individual bond issues, and the lack of liquidity in many
smaller issues, the majority of outstanding bonds are held by institutions like pension
funds, banks and mutual funds. In the United States, approximately 10% of the market
is currently held by private individuals.
Bond market volatility
For market participants who own a bond, collect the coupon and hold it to maturity,
market volatility is irrelevant; principal and interest are received according to a predetermined schedule. But participants who buy and sell bonds before maturity are
exposed to many risks, most importantly changes in interest rates. When interest rates
increase, the value of existing bonds falls, since new issues pay a higher yield. In the
same way, when interest rates decrease, the value of existing bonds rise, since new
issues pay a lower yield. This is the fundamental concept of bond market volatility:
changes in bond prices are opposite to changes in interest rates. Fluctuating interest
rates are part of a country's monetary policy and bond market volatility is a response
to expected monetary policy and economic changes. Economists' views of economic
indicators versus actual released data contribute to market volatility. A tight consensus
is generally reflected in bond prices and there is little price movement in the market
after the release of "in-line" data. If the economic release differs from the consensus
view the market usually undergoes rapid price movement as participants interpret the
data. Uncertainty (as measured by a wide consensus) generally brings more volatility
before and after an economic release. Economic releases vary in importance and
impact depending on where the economy is in the business cycle.
Bond investments
Investment companies allow individual investors the ability to participate in the bond
markets through bond funds, closed-end funds and unit-investment trusts. In 2006
total bond fund net inflows increased 97% from $30.8 billion in 2005 to $60.8 billion
in 2006.[4] Exchange-traded funds (ETFs) are another alternative to trading or
28

investing directly in a bond issue. These securities allow individual investors the
ability to overcome large initial and incremental trading sizes.
Bond indices
A number of bond indices exist for the purposes of managing portfolios and
measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The
most common American benchmarks are the Lehman Aggregate, Citigroup BIG and
Merrill Lynch Domestic Master. Most indices are parts of families of broader indices
that can be used to measure global bond portfolios, or may be further subdivided by
maturity and/or sector for managing specialized portfolios.
(C)Derivatives
Types of Derivatives
(1) Forwards: A forward contract is a customized contract between two entities,
where settlement takes place on a specific date in the future at todays pre-agreed
price.
(2) Futures: A futures contract is an agreement between two parties to buy or sell an
asset at a certain time in the future at a certain price. Futures contracts are special
types of forward contracts in the sense that the former are standardized exchangetraded contracts, such as futures of the Nifty index.
(3) Options: An Option is a contract which gives the right, but not an obligation, to
buy or sell the underlying at a stated date and at a stated price. While a buyer of an
option pays the premium and buys the right to exercise his option, the writer of an
option is the one who receives the option premium and therefore obliged to sell/buy
the asset if the buyer exercises it on him. Options are of two types - Calls and Puts
options: Calls give the buyer the right but not the obligation to buy a given quantity
of the underlying asset, at a given price on or before a given future date. Puts give
the buyer the right, but not the obligation to sell a given quantity of underlying asset
at a given price on or before a given future date. Presently, at NSE futures and options
are traded on the Nifty, CNX IT, BANK Nifty and 116 single stocks.
(4) Warrants: Options generally have lives of up to one year. The majority of options
traded on exchanges have maximum maturity of nine months. Longer dated options
are called Warrants and are generally traded over-the- counter.
Option Premium: At the time of buying an option contract, the buyer has to pay
premium. The premium is the price for acquiring the right to buy or sell. It is price
paid by the option buyer to the option seller for acquiring the right to buy or sell.
Option premiums are always paid up front.
Commodity Exchange: A Commodity Exchange is an association, or a company of
any other body corporate organizing futures trading in commodities. In a wider sense,
it is taken to include any organized market place where trade is routed through one
29

mechanism, allowing effective competition among buyers and among sellers this
would include auction-type exchanges, but not wholesale markets, where trade is
localized, but effectively takes place through many non-related individual transactions
between different permutations of buyers and sellers.
Commodity: FCRA Forward Contracts (Regulation) Act, 1952 defines goods as
every kind of movable property other than actionable claims, money
and securities. Futures trading is organized in such goods or commodities as are
permitted by the Central Government. At present, all goods and products of
agricultural (including plantation), mineral and fossil origin are allowed for futures
trading under the auspices of the commodity exchanges recognized under the FCRA.
Commodity derivatives market
Commodity derivatives market trade contracts for which the underlying asset is
commodity. It can be an agricultural commodity like wheat, soybeans, rapeseed,
cotton, etc or precious metals like gold, silver, etc.
What is the difference between Commodity and Financial derivatives?
The basic concept of a derivative contract remains the same whether the underlying
happens to be a commodity or a financial asset. However there are some features
which are very peculiar to commodity derivative markets.

CLASSIFICATION OF SECURITY MARKET

CAPITAL MARKET
MONEY MARKET
1. Capital Market
Capital markets are like any other markets, but differ in terms of the products traded
and their organization. Capital markets deal with the trading of securities. The capital
market is the market for securities, where companies and the government can raise
long term funds. The capital market includes the stock market and the bond market.
Capital market thus plays a vital role in channelizing the savings of individuals for
Investment in the economic development of the country. As a result the investors are
not constrained by their individual abilities, but by the abilities of the companies,
which in turn enhance the savings and investments in the country, liquidity of capital
the market is an important factor affecting growth. Since projects require long term
finance, but on the other hand, the investor may not like to relinquish control over
their savings for a long time. A liquid stock market ensures a quick exit without
incurring heavy losses or costs. Thus development of efficient market system is
necessary for creating conductive climate for investment and economic growth.
Financial regulators ensure that investors are protected against fraud. The capital
markets consist of the primary market, where new issues are distributed to investors,
30

and the secondary market, where existing securities are trade. Capital markets provide
avenue where companies can raise funds to expand on their businesses or establish
new ones by issuing securities owned by the companies. Like businesses in the private
sector, Government issue its securities to raise funds in capital markets to build
electricity dam, construct new roads, bridges by issues. So we can say capital market
as a market in which individuals and institutions trade in financial securities.
Organizations/ institutions in the public and private sectors also often sell securities
on the capital markets in order to raise funds. Thus, this type of market is composed
of both the primary and secondary markets. Both the stock and bond markets are parts
of the capital markets. For example, when a company conducts an IPO, it is tapping
the investing public for capital and is therefore using the capital markets. This is also
true when a country's government issues treasury bonds in the bond market to fund its
spending initiatives. The market for long-term securities like bonds, equity stocks and
preferred stocks is divided into primary market and secondary market. The primary
market deals with the new issues of securities. Outstanding securities are traded in the
secondary market, which is commonly known as stock market or stock exchange. In
the secondary market, the investors can sell and buy securities. Stock markets
predominantly deal in the equity shares. Debt instruments like bonds and debentures
are also traded in the stock market. Well-regulated and active stock market promotes
capital formation. Growth of the primary market depends on the secondary market.
The health of the economy is reflected by the growth of the stock market. Companies
raise funds to finance their projects through various methods. The promoters can
bring their own money or borrow from the financial institutions or mobilize capital by
issuing securities. The funds may be raised through issue of fresh shares at par or
premium, preference shares, debentures or global depository receipts. The main
objectives of a capital issue are given below:
To promote a new company
To expand an existing company
To diversify the production
To meet the regular working capital requirements
To capitalize the reverses
Securities markets provide a channel for allocation of savings to those who have a
productive need for them. As a result, the savers and investors are not constrained by
their individual abilities, but by the economys abilities to invest and save
respectively, which inevitably enhances savings and investment in the economy.
Market Segments
The securities market has two interdependent and inseparable segments: the primary
and the secondary market. The primary market provides the channel for creation of
new securities through issuance of financial instruments by public companies as well
as Governments and Government agencies and bodies whereas the secondary market
helps the holders of these financial instruments to sale for exiting from the
investment. The price signals, which subsume all information about the issuer and his
business including associated risk, generated in the secondary market, help the
primary market in allocation of funds. The primary market issuance is done either
through public issues or private placement. A public issue does not limit any entity in
31

investing while in private placement, the issuance is done to select people. In terms of
the Companies Act, 1956, an issue becomes public if it results in allotment to more
than 50 persons. This means an issue resulting in allotment to less than 50 persons is
private placement. There are two major types of issuers who issue securities. The
corporate entities issue mainly debt and equity instruments (shares, debentures, etc.),
while the governments (central and state governments) issue debt securities (dated
securities, treasury bills). The secondary market enables participants who hold
securities to adjust their holdings in response to changes in their assessment of risk
and return. They also sell securities for cash to meet their liquidity needs. The
exchanges do not provide facility for spot trades in a strict sense. Closest to spot
market is the cash market in exchanges where settlement takes place after some time.
Trades taking place over a trading cycle (one day under rolling settlement) are settled
together after a certain time. All the 23 stock exchanges in the country provide
facilities for trading of corporate securities. Trades executed on NSE only are cleared
and settled by a clearing corporation which provides novation and settlement
guarantee. Nearly 100% of the trades in capital market segment are settled through
demat delivery. NSE also provides a formal trading platform for trading of a wide
range of debt securities including government securities in both retail and wholesale
mode. NSE also provides trading in derivatives of equities, interest rate as well
indices. In derivatives market (F&O market segment of NSE), standardized contracts
are traded for future settlement. These futures can be on a basket of securities like an
index or an individual security. In case of options, securities are traded for conditional
future delivery. There are two types of options a put option permits the owner to sell
a security to the writer of options at a predetermined price while a call option permits
the owner to purchase a security from the writer of the option at a predetermined
price. These options can also be on individual stocks or basket of stocks like index.
Two exchanges, namely NSE and the Stock Exchange, Mumbai (BSE) provide
trading of derivatives of securities. Today the market participants have the flexibility
of choosing from a basket of products like:
Equities
Bonds issued by both Government and Companies
Futures on benchmark indices as well as stocks
Options on benchmark indices as well as stocks
Futures on interest rate products like Notional 91-day T-Bills, 10 year notional zero
coupon bond and 6% notional 10 year bond. The past decade in many ways has
been remarkable for securities market in India. It has grown exponentially as
measured in terms of amount raised from the market, number of stock exchanges
and other intermediaries, the number of listed stocks, market capitalization, trading
volumes and turnover on stock exchanges, and investor population. Along with this
growth, the profiles of the investors, issuers and intermediaries have changed
significantly. The market has witnessed several institutional changes resulting in
drastic reduction in transaction costs and significant improvements in efficiency,
transparency, liquidity and safety. In a short span of time, Indian derivatives market
has got a place in list of top global exchanges. Reforms in the securities market,
particularly the establishment and empowerment of SEBI, market determined
allocation of resources, screen based nation-wide trading, dematerialization and
electronic transfer of securities, rolling settlement and ban on deferral products,
sophisticated risk management and derivatives trading, have greatly improved the
regulatory framework and efficiency of trading and settlement. Indian market is
now comparable to many developed markets in terms of a number of qualitative
parameters.
32

Products and Participants

Financial markets facilitate the reallocation of savings from savers to entrepreneurs.
Savings are linked to investments by a variety of intermediaries through a range of
complex financial products called securities which is defined in the Securities
Contracts (Regulation) Act, 1956 to include shares, bonds, scrips, stocks or other
marketable securities of like nature in or of any incorporate company or body
corporate, government securities, derivatives of securities, units of collective
investment scheme, interest and rights in securities, security receipt or any other
instruments so declared by the central government. Financial markets help in pooling
out the savings and the hard earned money of the people from their pockets to the
various securities which will help in the investment of their hard earned money in the
various portfolios and to also help in the tax saving purposes. To become a strong
economy for any country it is important to pool out the saving of the public and to
make them realize that their savings will be utilized and be reinvested in the different
portfolios for growth purposes.
Market Participants in Securities Market Table Number 2
Particulars
Number of participants
Securities Appellate Tribunal
1
Regulator
4
Depositories
2
Stock Exchange with equity trading
23
Listed Securities
9413
Brokers
9519
Sub-brokers
13291
FIIs
1705
Portfolio managers
54
Custodians
11
Share transfer agents
143
Merchant Bankers
124
Bankers to an Issue
67
Debenture Trustees
35
Underwriters
43
Venture Capital Funds
43
Mutual Funds
38
Source (Data collected from DCA, DEA, and RBI & SEBI)
It is not that the users and suppliers of funds meet each other and exchange funds for
securities. It is difficult to accomplish such double coincidence of wants. The amount
of funds supplied by the supplier may not be the amount needed by the user.
Similarly, the risk, liquidity and maturity characteristics of the securities issued by the
issuer may not match preference of the supplier. In such cases, they incur substantial
search costs to find each other. Search costs are minimised by the intermediaries who
match and bring the suppliers and users of funds together. These intermediaries may
act as agents to match the needs of users and suppliers of funds for a commission,
help suppliers and users in creation and sale of securities for a fee or buy the securities
issued by users and in turn, sell their own securities to suppliers to book profit. It is,
thus, a misnomer that securities market dis intermediates by establishing a direct
relationship between the savers and the users of funds. The market does not work in a
vacuum; it requires services of a large variety of intermediaries. The disintermediation
in the securities market is in fact an intermediation with a difference; it is a risk-less
intermediation, where the ultimate risks are borne by the savers and not the
33

intermediaries. A large variety and number of intermediaries provide intermediation

services in the Indian securities market. The securities market has essentially three
categories of participants, namely the issuers of securities, investors in securities and
the intermediaries and products include equities, bonds and derivatives. The issuers
and investors are the consumers of services rendered by the intermediaries while the
investors are consumers (they subscribe for and trade in securities) of securities issued
by issuers. In pursuit of providing a product to meet the needs of each investor and
issuer, the intermediaries churn out more and more complicated products. They
educate and guide them in their dealings and bring them together. Those who receive
funds in exchange for securities and those who receive securities in exchange for
funds often need the reassurance that it is safe to do so. This reassurance is provided
by the law and by custom, often enforced by the regulator. The regulator develops fair
market practices and regulates the conduct of issuers of securities and the
intermediaries so as to protect the interests of suppliers of funds. The regulator
ensures a high standard of service from intermediaries and supply of quality securities
and non-manipulated demand for them in the market. The past decade in many ways
has been remarkable for securities market in India. It has grown exponentially as
measured in terms of amount raised from the market, number of stock exchanges and
other intermediaries, the number of listed stocks, market capitalization, trading
volumes and turnover on stock exchanges, and investor population. Along with this
growth, the profiles of the investors, issuers and intermediaries have changed
significantly. The market has witnessed fundamental institutional changes resulting in
drastic reduction in transaction costs and significant improvements in efficiency,
transparency and safety.
2. Money market
Money market is the global financial market for short-term borrowing and lending. It
provides short-term liquid funding for the global financial system. The money market
is where short-term obligations such as Treasury bills, commercial paper and bankers'
acceptances are bought and sold. The money market consists of financial institutions
and dealers in money or credit who wish to either borrow or lend. Participants borrow
and lend for short periods of time, typically up to thirteen months. Money market
trades in short term financial instruments commonly called "paper". This contrasts
with the capital market for longer-term funding, which is supplied by bonds and
equity. Whenever a bear market comes along, investors realize that the stock market is
a risky place for their savings. It's a fact we tend to forget while enjoying the returns
of a bull market. Unfortunately, this is part of the risk-return trade off. To get higher
returns, you have to take on a higher level of risk. For many investors, a volatile
market is too much to stomach-the money market offers an alternative to these higherrisk investments. The money market is better known as a place for large institutions
and government to manage their short-term cash needs. However, individual investors
have access to the market through a variety of different securities. In this tutorial,
we'll cover various types of money market securities and how they can work in your
portfolio. The money market is a subsection of the fixed income market. We generally
think of the term fixed income as being synonymous to bonds. In reality, a bond is just
one type of fixed income security. The difference between the money market and the
bond market is that the money market specializes in very short-term debt securities
34

(debt that matures in less than one year). Money market investments are also called
cash investments because of their short maturities. Money market securities are
essentially IOUs issued by governments, financial institutions and large corporations.
These instruments are very liquid and considered extraordinarily safe. Because they
are extremely conservative, money market securities offer significantly lower returns
than most other securities. One of the main differences between the money market
and the stock market is that most money market securities trade in very high
denominations. This limits access for the individual investor. Furthermore, the money
market is a dealer market, which means that firms buy and sell securities in their own
accounts, at their own risk. Compare this to the stock market where a broker receives
commission to acts as an agent, while the investor takes the risk of holding the stock.
Another characteristic of a dealer market is the lack of a central trading floor or
exchange. Deals are transacted over the phone or through electronic system. The
easiest way for us to gain access to the money market is with money market mutual
funds, or sometimes through a money market bank account. These accounts and funds
pool together the assets of thousands of investors in order to buy the money market
securities on their behalf. However, some money market instruments, like Treasury
bills, may be purchased directly. Failing that, they can be acquired through other large
financial institutions with direct access to these marks. Post reforms period in India
has witnessed tremendous growth of the Indian money markets. Banks and other
financial institutions have been able to meet the high expectations of short term
funding of important sectors like the industry, services and agriculture. Functioning
under the regulation and control of the Reserve Bank of India (RBI), the Indian
money markets have also exhibited the required maturity and resilience over the past
about two decades. Decision of the government to allow the private sector banks to
operate has provided much needed healthy competition in the money markets,
resulting in fair amount of improvement in their functioning. The money market
operations help the banks tide over the temporary mismatch of funds with them. In
case a particular bank needs funds for a few days, it can borrow from another bank by
paying the determined interest rate. The lending bank also gains, as it is able to earn
interest on the funds lying idle with it. In other words, money market provides
avenues to the players in the market to strike equilibrium between the surplus funds
with the lenders and the requirement of funds for the borrowers. An important
function of the money market is to provide a focal point for interventions of the RBI
to influence the liquidity in the financial system and implement other monetary policy
measures. Quantum of liquidity in the banking system is of paramount importance, as
it is an important determinant of the inflation rate as well as the creation of credit by
the banks in the economy. Market forces generally indicate the need for borrowing or
liquidity and the money market adjusts itself to such calls. RBI facilitates such
adjustments with monetary policy tools available with it. Heavy call for funds
overnight indicates that the banks are in need of short term funds and in case of
liquidity crunch, the interest rates would go up. Depending on the economic situation
and available market trends, the RBI intervenes in the money market through a host of
interventions. In case of liquidity crunch, the RBI has the option of either reducing the
35

Cash Reserve Ratio (CRR) or pumping in more money supply into the system.
Recently, to overcome the liquidity crunch in the Indian money market, the RBI has
released more than Rs 75,000 crore with two back-to-back reductions in the CRR. In
addition to the lending by the banks and the financial institutions, various companies
in the corporate sector also issue fixed deposits to the public for shorter duration and
to that extent become part of the money market mechanism selectively. The maturity
of the various instruments being issued by the money market as a whole ranges from
one day to one year. The money market is also closely linked with the Foreign
Exchange Market, through the process of covered interest arbitrage in which the
forward premium acts as a bridge between the domestic and foreign interest rates.
Determination of appropriate interest for deposits or loans by the banks or the other
financial institutions is a complex mechanism in itself. There are several issues that
need to be resolved before the optimum rates are determined. While the term structure
of the interest rate is a very important determinant, the difference between the existing
domestic and international interest rates also emerges as an important factor. Further,
there are several credit instruments which involve similar maturity but diversely
different risk factors. Such distortions are available only in developing and diverse
economies like the Indian economy and need extra care while handling the issues at
the policy levels. There are several different instruments in the money market,
offering different returns and different risks. In the following sections, we'll take a
look at the major money market instruments. The India money market is a monetary
system that involves the lending and borrowing of short-term funds. India money
market has seen exponential growth just after the globalization initiative in 1992. It
has been observed that financial institutions do employ money market instruments for
financing short-term monetary requirements of various sectors such as agriculture,
finance and manufacturing. The performance of the India money market has been
outstanding in the past 20 years. Central bank of the country - the Reserve Bank of
India (RBI) has always been playing the major role in regulating and controlling the
India money market. The intervention of RBI is varied - curbing crisis situations by
reducing the cash reserve ratio (CRR) or infusing more money in the economy.
Participants in money market
The core of the money market consists of banks borrowing and lending to each other,
using commercial paper, repurchase agreements and similar instruments. These
instruments are often benchmarked to LIBOR. Finance companies such as GMAC
typically fund themselves by issuing large amounts of asset-backed commercial paper
(ABCP) which is secured by the pledge of eligible assets into an ABCP conduit.
Examples of eligible assets include auto loans, credit card receivables,
residential/commercial mortgage loans, mortgage backed securities and similar
financial assets. Certain large corporations with strong credit ratings, such as General
Electric, issue commercial paper on their own credit. Other large corporations arrange
for banks to issue commercial paper on their behalf via commercial paper lines. In the
United States, federal, state and local governments all issue paper to meet funding
36

needs. States and local governments issue municipal paper, while the US Treasury
issues Treasury bills to fund the US public debt.

Trading companies often purchase bankers' acceptances to be tendered for

payment to overseas suppliers.
Retail and Institutional Money Market Funds
Banks
Central Banks
Cash management programs
Arbitrage ABCP conduits, which seek to buy higher yielding paper, while
themselves selling cheaper paper. Trading takes place between banks in the
"money centers" (London, New York, and Tokyo).

The Players

37

Reserve Bank of India

SBI DFHI Ltd (Amalgamation of Discount & Finance House in India and SBI
Gilts in 2004)
Commercial Banks, Co-operative Banks and Primary Dealers are allowed to
borrow and lend.
Specified All-India Financial Institutions, Mutual Funds, and certain specified
entities are allowed to access to Call/Notice money market only as lenders

38

Individuals, firms, companies, corporate bodies, trusts and institutions can

purchase
the
treasury
bills,
CPs
and
CDs.

39

40

41

42

43

44

45

46

47

48

49

50

51

52

Common money market instruments

Money market instruments take care of the borrowers' short-term needs and render the
required liquidity to the lenders. The varied types of India money market instruments
are treasury bills, repurchase agreements, commercial papers, certificate of deposit,
and banker acceptance.
Treasury Bills (T-Bills) - Treasury bills were first issued by the Indian
government in 1917. Treasury bills are short-term financial instruments that
are issued by the Central Bank of the country. It is one of the safest money
market instruments as it is void of market risks, though the return on
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investments is not that huge. Treasury bills are circulated by the primary as
well as the secondary markets. The maturity periods for treasury bills are
respectively 3-month, 6-month and 1-year. The price with which treasury bills
are issued comes separate from that of the face value, and the face value is
achieved upon maturity. On maturity, one gets the interest on the buy value as
well. To be specific, the buy value is determined by a bidding process, that too
in auctions.
Repurchase Agreements - Repurchase agreements are also called repos.
Repos are short-term loans that buyers and sellers agree upon for selling and
repurchasing. Repo transactions are allowed only among RBI-approved
securities like state and central government securities, T-bills, PSU bonds, FI
bonds and corporate bonds. Repurchase agreements, on the other hand, are
sold off by sellers, held back with a promise to purchase them back at a certain
price and that too would happen on a specific date. The same is the procedure
with that of the buyer, who purchases the securities and other instruments and
promises to sell them back to the seller at the same time.
Commercial Papers - Commercial papers are usually known as promissory
notes which are unsecured and are generally issued by companies and
financial institutions, at a discounted rate from their face value. The fixed
maturity for commercial papers is 1 to 270 days. The purposes with which
they are issued are - for financing of inventories, accounts receivables, and
settling short-term liabilities or loans. The return on commercial papers is
always higher than that of T-bills. Companies which have a strong credit
rating, usually issue CPs as they are not backed by collateral securities.
Corporations issue CPs for raising working capital and they participate in
active trade in the secondary market. It was in 1990 that Commercial papers
were first issued in the Indian money market. The eligibility to issue
Commercial Paper are:
the tangible net worth of the company, as per the latest audited balance
sheet, is not less than Rs. 4 crore;
the working capital (fund-based) limit of the company from the banking
system is not less than Rs.4 crore
the borrowal account of the company is classified as a Standard Asset by
, Financing bank.
Certificate of Deposit - A certificate of deposit is a borrowing note for the short-term
just similar to that of a promissory note. The bearer of a certificate of deposit receives
interest. The maturity date, fixed rate of interest and a fixed value - are the three
components of a certificate of deposit. Certificate of deposit has a maturity period of
not less than 15 days up to a maximum of one year. CD is subject to payment of
Stamp Duty under Indian Stamp Act, 1899 (Central Act). They are like bank term
deposits accounts. Unlike traditional time deposits these are freely negotiable
instruments and are often referred to as Negotiable Certificate of Deposits. The funds
cannot be withdrawn instantaneously on demand, but has the facility of being
liquidated, if a certain amount of penalty is paid. The risk associated with certificate
of deposit is higher and so is the return (compared to T-bills). It was in 1989 that the
certificate of deposit was first brought into the Indian money market.
Bankers Acceptance - A banker's acceptance is also a short-term investment
plan that comes from a company or a firm backed by a guarantee from the
bank. This guarantee states that the buyer will pay the seller at a future date.
One who draws the bill should have a sound credit rating. 90 days is the usual
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term for these instruments. The term for these instruments can also vary
between 30 and 180 days. It is used as time draft to finance imports, exports.
Call Money - The call money market is an integral part of the Indian Money
Market, where the day-to-day surplus funds (mostly of banks) are traded. The
loans are of short-term duration varying from 1 to 14 days. The money that is
lent for one day in this market is known as "Call Money", and if it exceeds one
day (but less than 15 days) it is referred to as "Notice Money".
Banks borrow in this market for the following purpose
1. To fill the gaps or temporary mismatches in funds
2. To meet the CRR & SLR mandatory requirements as stipulated by the
, Central bank.
3. To meet sudden demand for funds arising out of large outflows.
Repurchase Agreement- Repo is a form of overnight borrowing and is used
by those who deal in government securities. They are usually very short term
repurchases agreement from overnight to 50 days of more. The short term
maturity and government backing usually mean that Repos provide lenders
with extremely low risk. Repos are safe collateral for loans.
Diverse Functions of Money market
Money markets are one of the most important mechanisms of any developing
economy. Instead of just ensuring that the money market in India regulates the flow of
credit and credit rates, this mechanism has emerged as one of the important policy
tools with the government and the RBI to control the monetary policy, money supply,
credit creation and control, inflation rate and overall economic policy of the State.
Hence, the first and the foremost function of the money market mechanism are
regulatory in nature. While determining the total volume of credit plan for the six
monthly periods, the credit policy also aims at directing the flow of credit as per the
priorities fixed by the government according to the needs of the economy. Credit
policy as an instrument is important to ensure the availability of the credit in adequate
volumes; it also caters to the credit needs of various sectors of the economy. The RBI
assists the government to implement its policies related to the credit plans through its
statutory control over the banking system of the country. Monetary policy, on the
other hand, has longer term perspective and aims at correcting the imbalances in the
economy. Credit policy and the monetary policy, both complement each other to
achieve the long term goals determined by the government. It not only maintains
complete control over the credit creation by the banks, but also keeps a close watch
over it. The instruments of monetary policy, including the repo rate, cash reserve ratio
and bank rate are used by the Central Bank of the country to give the required
direction to the monetary policy. Inflation is one of the serious economic problems
that all the developing economies have to face every now and then. Cyclical
fluctuations do affect the price level differently, depending upon the demand and
supply scenario at the given point of time. Money market rates play a major role in
controlling the price line. Higher rates in the money markets reduce the liquidity in
the economy and have the effect of reducing the economic activity in the system.
Reduced rates, on the other hand, increase the liquidity in the market and bring down
the cost of capital substantially, thereby increasing the investment. This function also
assists the RBI to control the overall money supply in the economy. Such operations
supplement the efforts of direct infusion of newly printed notes by the RBI.
Future of Money Markets
Financial openness is said to be a situation under which the residents of one country
are in a position to trade their assets with residents of another country. A slightly mild
55

definition of openness may be referred to as financial integration of two or more

economies. In recent years, the process of globalization has made the money market
operations and the monetary policy tools quite important. The idea is not only to
regulate the economy and its money markets for the overall economic development,
but also to attract more and more foreign capital into the country. Foreign investment
results in increased economic activity, income and employment generation in the
economy. Free and unrestricted flow of foreign capital and growing integration of the
global markets is the hallmark of openness of economies. Indian experience with open
markets has been a mixed one. On the positive side, the growth rate of the country has
soared to new levels and the foreign trade had been growing at around 20 per cent
during the past few years. Foreign exchange reserves have burgeoned to significantly
higher levels and the country has achieved new heights in the overall socio-economic
development. The money market mechanism has played a significant role in rapid
development of the country during the post-reforms era. On the flip side, the postreforms period has witnessed relatively lesser growth of the social sector. Money
market mechanism has kept the markets upbeat, yet the social sector needs more
focused attention. With the base of the economy now strengthened, the money market
mechanism must also focus on ensuring that proper direction is provided to the credit
flows so that the poorest sections of the society also gain.

CLASSIFICATION OF CAPITAL MARKET

Primary Markets
The primary market is that part of the capital markets that deals with the issue of
new securities. Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond 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 issue, this sale is an initial public offering
(IPO). Dealers earn a commission that is built into the price of the security offering,
though it can be found in the prospectus. Primary markets create long term
instruments through which corporate entities borrow from capital market. The
primary markets are where investors can get first crack at a new security issuance.
The issuing company or group receives cash proceeds from the sale, which is then
used to fund operations or expand the business. Exchanges have varying levels of
requirements which must be met before a security can be sold. The primary market
provides the channel for sale of new securities. Primary market provides opportunity
to issuers of securities; Government as well as corporate, to raise resources to meet
their requirements of investment and/or discharge some obligation. They may issue
the securities at face value, or at a discount/premium and these securities may take a
variety of forms such as equity, debt etc. They may issue the securities in domestic
market and/or international market. The primary market issuance is done either
through public issues or private placement. A public issue does not limit any entity in
investing while in private placement, the issuance is done to select people. In terms of
the Companies Act, 1956, an issue becomes public if it results in allotment to more
than 50 persons. This means an issue resulting in allotment to less than 50 persons is
private placement. There are two major types of issuers who issue securities. The
corporate entities issue mainly debt and equity instruments (shares, debentures, etc.),
while the governments (central and state governments) issue debt securities (dated
securities, treasury bills). Once the initial sale is complete, further trading is said to
conduct on the secondary market, which is where the bulk of exchange trading occurs
each day. Primary markets can see increased volatility over secondary markets
because it is difficult to accurately gauge investor demand for a new security until
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several days of trading have occurred. The primary market in India is unique by world
standards in many ways. It has been shaped by an unusual history of regulation. The
sheer size and scope of the primary market is enormous and the large scale direct
participation in the primary market by millions of retail investors is unlike that in any
other country in the world.
Features of primary markets are:

This is the market for new long term equity capital. The primary market is the
market where the securities are sold for the first time. Therefore it is also
called the new issue market (NIM).
In a primary issue, the securities are issued by the company directly to
investors.
The company receives the money and issues new security certificates to the
investors.
Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.
The primary market performs the crucial function of facilitating capital
formation in the economy.
The new issue market does not include certain other sources of new long term
external finance, such as loans from financial institutions. Borrowers in the
new issue market may be raising capital for converting private capital into
public capital; this is known as "going public."
The financial assets sold can only be redeemed by the original holder.

Primarily, issues can be classified as a Public, Rights or Preferential issues (also

known as private placements). While public and rights issues involve a detailed
procedure, private placements or preferential issues are relatively simpler. The
classification of issues is illustrated below or methods of issuing securities in the
primary market are:

Initial public offering;

Rights issue (for existing companies)
Preferential issue.

Initial Public Offering: An initial public offering (IPO) referred to simply as an

"offering" or "flotation," is when a company (called the issuer) issues common stock
or shares to the public for the first time. They are often issued by smaller, younger
companies seeking capital to expand, but can also be done by large privately-owned
companies looking to become publicly traded. It can be said that an Initial Public
Offer (IPO) is the selling of securities to the public in the primary market. It is when
an unlisted company makes either a fresh issue of securities or an offer for sale of its
existing securities or both for the first time to the public. This paves way for listing
and trading of the issuers securities. The sale of securities can be either through book
building or through normal public issue. A follow on public offering (Further Issue) is
when an already listed company makes either a fresh issue of securities to the public
or an offer for sale to the public, through an offer document. In an IPO the issuer may
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obtain the assistance of an underwriting firm, which helps it determine what type of
security to issue (common or preferred), best offering price and time to bring it to
market. An IPO can be a risky investment. For the individual investor, it is tough to
predict what the stock or shares will do on its initial day of trading and in the near
future since there is often little historical data with which to analyze the company.
Also, most IPOs are of companies going through a transitory growth period, and they
are therefore subject to additional uncertainty regarding their future value.
Reasons for listing
When a company lists its shares on a public exchange, it will almost invariably look
to issue additional new shares in order at the same time. The money paid by investors
for the newly-issued shares goes directly to the company (in contrast to a later trade of
shares on the exchange, where the money passes between investors). An IPO,
therefore, allows a company to tap a wide pool of stock market investors to provide it
with large volumes of capital for future growth. The company is never required to
repay the capital, but instead the new shareholders have a right to future profits
distributed by the company and the right to a capital distribution in case of
dissolution. The existing shareholders will see their shareholdings diluted as a
proportion of the company's shares. However, they hope that the capital investment
will make their shareholdings more valuable in absolute terms. In addition, once a
company is listed, it will be able to issue further shares via a rights issue, thereby
again providing itself with capital for expansion without incurring any debt. This
regular ability to raise large amounts of capital from the general market, rather than
having to seek and negotiate with individual investors, is a key incentive for many
companies seeking to list.
Benefits of being a public company Bolster and diversify equity base
Enable cheaper access to capital
Exposure and prestige
Attract and retain the best management and employees
Facilitate acquisitions
Create multiple financing opportunities: equity, convertible debt, cheaper bank
loans, etc.
Procedure of listing an IPO

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IPOs generally involve one or more investment banks as "underwriters." The

company offering its shares, called the "issuer," enters a contract with a lead
underwriter to sell its shares to the public. The underwriter then approaches investors
with offers to sell these shares. The sale (allocation and pricing) of shares in an IPO
may take several forms. Common methods include:

Best efforts contract

Firm commitment contract
All-or-none contract
Bought deal
Dutch auction
Self distribution of stock

A large IPO is usually underwritten by a "syndicate" of investment banks led by one

or more major investment banks (lead underwriter). Upon selling the shares, the
underwriters keep a commission based on a percentage of the value of the shares sold
(called the gross spread). Usually, the lead underwriters, i.e. the underwriters selling
the largest proportions of the IPO, take the highest commissionsup to 8% in some
cases. Multinational IPOs may have as many as three syndicates to deal with differing
legal requirements in both the issuer's domestic market and other regions. For
example, an issuer based in the E.U. may be represented by the main selling syndicate
in its domestic market, Europe, in addition to separate syndicates or selling groups for
US/Canada and for Asia. Usually, the lead underwriter in the main selling group is
also the lead bank in the other selling groups. Because of the wide array of legal
requirements, IPOs typically involve one or more law firms with major practices in
securities law, such as the Magic Circle firms of London and the white shoe firms of
New York City. Usually, the offering will include the issuance of new shares, intended
to raise new capital, as well the secondary sale of existing shares. However, certain
regulatory restrictions and restrictions imposed by the lead underwriter are often
placed on the sale of existing shares. Public offerings are primarily sold to
institutional investors, but some shares are also allocated to the underwriters' retail
investors. A broker selling shares of a public offering to his clients is paid through a
sales credit instead of a commission. The client pays no commission to purchase the
shares of a public offering; the purchase price simply includes the built-in sales credit.
The issuer usually allows the underwriters an option to increase the size of the
offering by up to 15% under certain circumstance known as the greenshoe or
overallotment option.
Auction:
A venture capitalist named Bill Hambrecht has attempted to devise a method that can
reduce the inefficient process. He devised a way to issue shares through a Dutch
auction as an attempt to minimize the extreme under pricing that underwriters were
nurturing. Underwriters, however, have not taken to this strategy very well. Though
not the first company to use Dutch auction, Google is one established company that
went public through the use of auction. Google's share price rose 17% in its first day
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of trading despite the auction method. Perception of IPOs can be controversial. For
those who view a successful IPO to be one that raises as much money as possible, the
IPO was a total failure. For those who view a successful IPO from the kind of
investors that eventually gained from the under pricing, the IPO was a complete
success. It's important to note that different sets of investors bid in auctions versus the
open marketmore institutions bid, fewer private individuals bid. Google may be a
special case; however, as many individual investors bought the stock based on longterm valuation shortly after it launched its IPO, driving it beyond institutional
valuation.
Pricing
The under pricing of initial public offerings (IPO) has been well documented in
different markets (Ibbotson, 1975; Ritter 1984; Levis, 1990; McGuinness, 1992).
While Issuers always try to maximize their issue proceeds, the under pricing of IPOs
has constituted a serious anomaly in the literature of financial economics. Many
financial economists have developed different models to explain the under pricing of
IPOs. Some of the models explained it as a consequence of deliberate under pricing
by issuers or their agents. In general, smaller issues are observed to be underpriced
more than large issues (Ritter, 1984, Ritter, 1991, Levis, 1990) Historically, IPOs both
globally and in the United States have been underpriced. The effect of "initial under
pricing" an IPO is to generate additional interest in the stock when it first becomes
publicly traded. Through flipping, this can lead to significant gains for investors who
have been allocated shares of the IPO at the offering price. However, under pricing an
IPO results in "money left on the table"lost capital that could have been raised for
the company had the stock been offered at a higher price. One great example of all
these factors at play was seen with theglobe.com IPO which helped fuel the IPO
mania of the late 90's internet era. Underwritten by Bear Stearns on November 13,
1998 the stock had been priced at $9 per share, and famously jumped 1000% at the
opening of trading all the way up to $97, before deflating and closing at $63 after
large sell offs from institutions flipping the stock . Although the company did raise
about $30 million from the offering it is estimated that with the level of demand for
the offering and the volume of trading that took place the company might have left
upwards of $200 million on the table. The danger of overpricing is also an important
consideration. If a stock is offered to the public at a higher price than the market will
pay, the underwriters may have trouble meeting their commitments to sell shares.
Even if they sell all of the issued shares, if the stock falls in value on the first day of
trading, it may lose its marketability and hence even more of its value. Investment
banks, therefore, take many factors into consideration when pricing an IPO, and
attempt to reach an offering price that is low enough to stimulate interest in the stock,
but high enough to raise an adequate amount of capital for the company. The process
of determining an optimal price usually involves the underwriters ("syndicate")
arranging share purchase commitments from leading institutional investors.
Issue price of an IPO

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A company that is planning an IPO appoints lead managers to help it decide on an

appropriate price at which the shares should be issued. There are two ways in which
the price of an IPO can be determined: either the company, with the help of its lead
managers, fixes a price or the price is arrived at through the process of book building.
Not all IPOs are eligible for delivery settlement through the DTC system, which
would then either require the physical delivery of the stock certificates to the clearing
agent bank's custodian, or a delivery versus payment (DVP) arrangement with the
selling group brokerage firm
Future of IPO
A harmonic convergence of near double-digit economic growth, a roaring bull market,
and expansion-minded executives has set the stage for another year of high-volume
initial public offering activity in India. And this year could be a record-buster,
according to market watchers. One reason is the Bombay Stock Exchange's
benchmark SENSEX Index, which delivered a nearly 50% return last year and is up
about 2.2% so far in 2007. In all, some 150 companies will list this year and raise an
estimated $10 billion, according to Delhi-based Prime database encouraged by the
general investor enthusiasm for new issuesnot to mention an economy expected to
hit a growth rate of almost 9% in 2007more than 30 companies have already filed
or received approval from the Securities and Exchange Board of India to raise $6.3
billion. Last year's IPO activity, even with a market crash in the SENSEX in late
spring, was extremely robust despite worries by some that the Indian stock rally had
run its course. Yet when stock prices resumed their march upward later in the year,
investors began to view the pessimists with scepticism and again started snapping up
shares of newly listed companies.
Rights Issue
Rights Issue is when a listed company which proposes to issue fresh securities to its
existing shareholders as on a record date. The rights are normally offered in a
particular ratio to the number of securities held prior to the issue. This route is best
suited for companies who would like to raise capital without diluting stake of its
existing shareholders. Under a secondary market offering or seasoned equity offering
of shares to raise money, a company can opt for a rights issue to raise capital. The
rights issue is a special form of shelf offering or shelf registration. With the issued
rights, existing shareholders have the privilege to buy a specified number of new
shares from the firm at a specified price within a specified time. A rights issue is in
contrast to an initial public offering (primary market offering), where shares are
issued to the general public through market exchanges. Companies usually opt for a
rights issue either when having problems raising capital through traditional means or
to avoid interest charges on loans
How it works
A rights issue is directly offered to all shareholders of record or through broker
dealers of record and may be exercised in full or partially. Subscription rights may
either be transferable, allowing the subscription-right-holder to sell them privately, on
the open market or not at all. A right issuance to shareholders is generally issued as a
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tax-free dividend on a ratio basis (e.g. a dividend of one subscription right for one
share of Common stock issued and outstanding). Because the company receives
shareholders' money in exchange for shares, a rights issue is a source of capital.
Issue rights the financial manager has to consider:

Engaging a Dealer-Manager or Broker Dealer to manage the Offering

processes
Selling Group and broker dealer participation
Subscription price per new share
Number of new shares to be sold
The value of rights vs. trading price of the subscription rights
The effect of rights on the value of the current share
The effect of rights to shareholders of record and new shareholders and rightholders
Underwriting
Rights issues may be underwritten. The role of the underwriter is to guarantee that the
funds sought by the company will be raised. The agreement between the underwriter
and the company is set out in a formal underwriting agreement. Typical terms of an
underwriting require the underwriter to subscribe for any shares offered but not taken
up by shareholders. The underwriting agreement will normally enable the underwriter
to terminate its obligations in defined circumstances. A sub-underwriter in turn subunderwrites some or all of the obligations of the main underwriter; the underwriter
passes its risk to the sub-underwriter by requiring the sub-underwriter to subscribe for
or purchase a portion of the shares for which the underwriter is obliged to subscribe in
the event of a shortfall. Underwriters and sub-underwriters may be financial
institutions, stock-brokers, major shareholders of the company or other related or
unrelated parties. The Panels guidance covers both non-underwritten and
underwritten rights issues.
Basic example of right issue
An investor: Mr. A had 100 shares of company X at a total investment of $40,000,
assuming that he purchased the shares at $400 per share and that the stock price did
not change between the purchase date and the date at which the rights were issued.
Assuming a 1:1 subscription rights issue at an offer price of $200, Mr. A will be
notified by a broker dealer that he has the option to subscribe for an additional 100
shares of common stock of the company at the offer price. Now, if he exercises his
option, he would have to pay an additional $20,000 in order to acquire the shares, thus
effectively bringing his average cost of acquisition for the 200 shares to $300 per
share ((40,000+20,000)/200=300). Although the price on the stock markets should
reflect a new price of $300 (see below), the investor is actually not making any profit
nor any loss. In many cases, the stock purchase right (which acts as an option) can be
traded at an exchange. In this example, the price of the right would adjust itself to
$100 (ideally).

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The company: Company X has 100 million outstanding shares. The share price
currently quoted on the stock exchanges is $400 thus the market capitalization of the
stock would be $40 billion (outstanding shares times share price). If all the
shareholders of the company choose to exercise their stock option, the company's
outstanding shares would increase to 200 million. The market capitalization of the
stock would increase to $60 billion (previous market capitalization + cash received
from owners of rights converting their rights to shares), implying a share price of
$300 ($60 billion / 200 million shares). If the company were to do nothing with the
raised money, its Earnings per share (EPS) would be reduced by half. However, if the
equity raised by the company is reinvested (e.g. to acquire another company), the EPS
may be impacted depending upon the outcome of the reinvestment.
Why companies come out with Right Issues?
The basic premise of carrying out rights offers is to raise additional capital. The
company raises money from its existing shareholders, who have seemingly posed
their faith in the company by virtue of being its shareholders, to invest in expanding
capacities or to explore other investment opportunities. This in turn provides the
company better leveraging opportunities. A higher equity capital base would assist the
company to raise higher debt. This is because a company's debt-to-equity ratio would
stand reduced, putting the company in a comfortable position to raise further debt
from the market. While some may argue here that the company's return on equity
(ROE) would get adversely affected and it would be wise to raise debt from the
markets at competitive costs without leveraging on additional equity raised from
shareholders, the former argument (debt-equity) cannot be discarded. Troubled
companies typically use rights issues to pay down debt, especially when they are
unable to borrow more money. But not all companies that pursue rights offerings are
shaky. Some with clean balance sheets use them to fund acquisitions and growth
strategies. For reassurance that it will raise the finances, a company will usually, but
not always, have its rights issue underwritten by an investment bank. So in crux, the
main advantages of a rights issue are that it leads to increased liquidity and
affordability of the stock owing to reduced stock price and higher equity base.
What option investors have in response to a Right Issue?
The rights are normally a tradable security themselves (a type of short dated warrant).
This allows shareholders who do not wish to purchase new shares to sell the rights to
someone who does. Whoever holds a right can choose to buy a new share (exercise
the right) by a certain date at a set price. Shareholders essentially have three options
when considering what to do in response to the rights issue.
Subscribe to the rights issue in full: - Some shareholders may choose to buy all the
rights they are offered in the rights issue. This maintains their proportionate
ownership in the expanded company, so that an x% stake before the rights issue
remains an x% stake after it. To take advantage of the rights issue in full, an investor
need to spend some extra money for every share that are entitled to the investor under
the right issue. The discount on the newly issued shares provides a benefit of bringing
down their average spending on that particular stock. The value of each share will be
diluted as a result of the increased number of shares issued.
Ignore your rights: - Others may choose to sell their rights, diluting their stake and
reducing the value of their holding. If rights are not taken up the company may (and
in practice does) sell them on behalf of the rights holder. In such case, investors need

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not to pay any extra money and let their rights expire. But this not normally
recommended.
Sell the rights to someone else: - Rights that can be traded are called "renounceable
rights", and after they have been traded, the rights are known as "nil-paid rights". To
determine how much you may gain by selling the rights, you need to estimate a value
on the nil-paid rights ahead of time. It is possible to sell some rights and exercise the
remainder. One possibility is selling enough rights to cover the cost of exercising
those that are not sold. This allows a shareholder to maintain the value of a holding
without further expense (apart from dealing costs).It depends on the share holder
which option he opts. Either he wants to go for the selling of some of the rights and
exercising those that are not sold. Thus enabling a share holder maintaining the value
of a holding without any more expense.
SEBIs action regarding Right issue
Reduced Time Frame
Capital market regulator SEBI is working on a proposal to keep the rights issue
process short and simple. The SEBI move is primarily aimed at making the process
attractive enough for corporate and to discourage them from taking the easy route of
private placements. Recently, SEBI announced that the timeline for a rights issue was
being reduced from 109 days to 43 days. The concept of a small declaration instead of
a prospectus with detailed disclosures, which will outline what an issuer plans to do
with the funds raised through a rights issue, could be considered. The rationale for the
move is that since the offer only has to be made to the existing shareholders, the
company does not need to provide details which it would have given in its prospectus
at the time of initial public offer and later in the form of annual reports.
Streamlining the trading through Electronic Process
After amending its guidelines to reduce the time line for rights issues, capital markets
regulator SEBI has now proposed electronic trading of rights entitlements (RE)
through stock exchanges. In the proposed process, the Res will be credited into the
individual shareholders demat account. Currently, the process involves physical
renunciation of REs. The electronic process is intended to minimise manual
intervention in the rights issue process, and to improve its efficiency. The electronic
rights issue process shall apply to shareholders who have an active demat account and
hold shares in demat form as on the record date of the rights issue.
Preferential Issue
A Preferential issue is an issue of shares or of convertible securities by listed
companies to a select group of persons under Section 81 of the Companies Act, 1956
which is neither a rights issue nor a public issue. This is a faster way for a company to
raise equity capital. The issuer company has to comply with the Companies Act and
the requirements contained in the Chapter pertaining to preferential allotment in SEBI
guidelines which inter-alia include pricing, disclosures in notice. Preferential issue is a
way of infusing fresh capital into the business expeditiously and cost effectively and
sometimes with no lock-in period. Although mostly perceived as an easy route for
promoters to increase their stake at less than the market price, in the recent times, a
spate of companies have adopted preferential issue to injecting capital into their
business to finance the various activities and invite strategic investors. From the
investors point of view, the fact that promoters wish to increase their stake is a signal
that the company has potential to grow. Preferential issues backed by adequate
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disclosures have gained impetus in recent times in view of the benefits derived there
from. Among the many ways by which companies can raise capital is preferential
issue -- an issue of fresh shares or convertible debentures allotted to a select set of
people, whether promoters, their relatives, or institutional investors. One could call it
a wholesale equity market since the retail investors or shareholders are not invited to
participate. The issue is currently governed by section 81(1A) of the Companies Act
and is similar to the issues made by companies in the US under Rule 144A of the US
Securities Act. Promoters have used preferential allotments as a means for raising
their stake in their companies -- whether through shares or equity warrants, which can
be converted at a later date. Unfortunately, however, allegations abound that the
system has been misused by unscrupulous promoters, who initially sell their existing
holdings at a higher price in the secondary market, and then build up their stakes
through such issues at a lower price. In some instances, promoters are believed to
have colluded with investors. Essentially, a group of people has enriched themselves
in an unfair manner, to the detriment of the company and smaller shareholders. This is
why the regulators are now attempting to tighten the guidelines. Until now, preference
shares of promoters or promoter groups have been subject to a lock-in for three years.
But this applies only to a maximum of 20 per cent of the paid-up capital and includes
capital brought in by way of a preferential issue. This means that if there are
preferential shares in excess of 20 per cent, the promoter is free to sell them at any
time. What is now being suggested is that the entire lot of shares allotted to promoters
should not be transferable for a period of three years. Thus, the 20 per cent rule, which
was creating anomalous situations, will not apply and all shares issued will be subject
to a lock-in for three years. In addition, a promoter or a promoter group cannot sell
any portion of their existing shareholding for six months before the preferential issue.
That would ensure that promoters do not sell shares at a higher price and then issue
fresh shares to themselves at a lower price. And furthermore, they cannot also sell
existing shares for one year post-allotment. Since the promoter needs to demonstrate
commitment, making the lock-in guidelines more stringent is a step in the right
direction. That should ensure that only promoters serious about their businesses are
allowed to access the markets. For investors, the lock-in period is one year and it is
being suggested the lock-in should remain. The ostensible reason for institutional
investors being subject to a lock-in is that they are privileged, having received a block
of shares and, therefore, must pay a price for it. It is true that institutional investors do
benefit by getting a big lot -- if they had to pick up the same number of shares in the
market, the cost would be higher, especially in an illiquid counter. Investors, however,
are reluctant to lock in their shares claiming that in the event of any adverse news
flow, they become sitting ducks. That is not without justification. Even if there is no
negative news relating to the company per se, the market as a whole could fall, for
extraneous reasons, and investors would not be able to sell. This is one reason for
investors, including some private equity investors, staying away from preferential
issues and preferring instead to pick up a lot from the market as and when it is
available. That, however, defeats the purpose of capital raising since the funds merely
move from one investor to another and do not flow into the company. Neither does the
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free float go up; so if it is a small company, the liquidity does not improve. On the
face of it, there appears to be no reason why a lock-in should be enforced for
investors, especially since the minority shareholders approve the issue at a
shareholder's meeting. Moreover, issued are priced in line with a formula stipulated
by the regulators. If the share price moves up, retail investors also stand to gain. In
fact, stocks often get re-rated when reputed institutions pick up big holdings, which
again is to the benefit of the small shareholder. However, the concern is that being a
big investor, a fund might get hold of sensitive information before other investors, and
sell ahead of the rest. So, while there is little to worry about when things are going
right and the share price is moving up, a situation should not arise where big investors
are privy to sensitive information and dump shares in the market. Of course, this
could happen even with institutional investors who have not bought shares in a
preferential issue but in the secondary market. Managements tipping off fund
managers ahead of formal announcements are not unheard of. On the whole,
therefore, it would be a pity if investors are kept away from companies that genuinely
need capital because not all companies can afford to mop up money through American
depository receipts or foreign currency convertible bonds, which need to be of a
minimum size to justify the expenses. Larger companies will always manage to raise
resources but mid-sized firms need access to capital. One advantage of raising money
via a preferential issue is that it helps save costs and time involved in a public issue.
More important, if the concerned company is not doing too well at that point in time
but requires capital, then retail investors may not want to participate in an issue. At
the same time, there could be some institutions that view the company's troubles as
being temporary and feel that some injection of capital could help it out of the trough.
In fact, promoters need such investors in times when the market sentiment is weak
and a public issue could fail. But such investors, who are willing to take a call on the
management's abilities to turn around the company, nonetheless need an exit if things
don't work out. With not too many preferential allotments having taken place, the
capital market has also lost out since there is less liquidity in the concerned stock and,
consequently, less depth in the market. Though firms prefer an overseas issue even if
they are already listed abroad, because shares fetch a better premium, an overseas
issue is costlier and calls for greater compliance. Thus, if they felt they could price
shares at a reasonably good premium in the domestic market and were confident of a
good response, they might as well issue preferential shares. And investors for their
part should not mind buying through a preferential issue if there is no lock-in because
the premium would be lower and liquidity in the domestic market is better than that in
the ADR or global depository receipts markets. The other issue relating to preferential
issues currently being debated is how these issues should be priced. Currently, the
price for a preferential issue is the higher of the average of the weekly high and low of
the closing prices in past six months, or the average for two weeks. This formula, it is
being suggested, should be changed slightly and the average of the daily weighted
average of 130 trading sessions or the last 10 trading sessions, whichever is higher,
should be the issue price. The new formula is better simply because it takes into
account a daily weighted average and not closing prices that can, to some extent, be
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manipulated in infrequently traded counters. To sum up, preferential issues are good
for the capital market and provide companies with an avenue to raise resources.
Investors should, therefore, be encouraged to invest in these placements. If proper
checks and balances are put in place there can be no incentive to misuse the system.
Preferential Issue Procedure to Be Done By Listed Companies Conditions to be
satisfied.
10% of the PRICE shall be payable at the time of allotment of warrants. This
amt will be forfeited if the option to acquire shares is not exercised.
Option to convert Warrants and other financial Instruments should be
exercised within 18 months of date of issue of security.
Instruments allotted on preferential basis to promoter / promoter group shall
be subject to lock in of 3Yrs. However only 20% of the total capital of the
company including capital brought in by way of preferential issue shall be
locked in for 3 Yrs and remaining shall be locked into a period of 1 year.
Instrument should be allotted within 15 days of EGM Resolution .in case not
allotted within 15 days then fresh EGM should be called and resolution should
be passed.
In case any allottee holds any shares in the company prior to Preferential Issue
then that holding should be Demat form
Entire pre preferential holding if any of the allottee shall be locked in for a
period of 6 months.
Securities allotted on preferential basis to persons other than promoter shall be
locked in for a period of one year from the date of issue of security.
Preferential Issue Procedure to Be Done by Listed Companies before Board
Meeting to consider Preferential Issue
Intimate to all the stock exchanges at least 7 days in advance of the board
meeting to consider Preferential Issue CRD dept
Apply to the stock exchange for Pricing Certificate for last six months and last
two weeks prior to relevant date
Get the Application letter and consent letter prepared and obtain the same from
the proposed allottees before the board meeting to consider the preferential
issue i.e. on / before.
After obtaining the consent from the proposed allotees, write a letter to CDSL
and NSDL requesting to issue confirmation letter for Locking in Entire Pre
Preferential Holding of the proposed allottees if any.
In case proposed allottees holds any shares in the company prior to
preferential issue the same should be held by them in Demat form so in case of
any physical holders get the shares dematerialized
NSDL and CDSL will write a letter to the company asking us to submit the
corporate Action form for Lock In of shares, within 2-3 days of receipt of the
letter prepare Corporate Action form for lock in of shares along with necessary
annexure and send the same to NSDL, CDSL and a copy of it to In time.
Company can write a letter to NSDL and CDSL before Board Meeting i.e.
(25th August, 2007) saying that company is proposing the preferential Issue
and asking for the formalities for Lock in of Entire Pre Preferential Holding.
Dispatch notices and agenda to all the directors in writing.

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Hold the Board meeting and the get the Bonus Issue and increase in authorised
capital if required approved by the Board.
Face Value of a share/debenture
The nominal or stated amount (in Rs.) assigned to a security by the issuer. For shares,
it is the original cost of the stock shown on the certificate; for bonds, it is the amount
paid to the holder at maturity. Its known as par value or simply par. For an equity
share, the face value is usually a very small amount (Rs. 5, Rs. 10) and does not have
much bearing on the price of the share, which may quote higher in the market, at Rs.
100 or Rs. 1000G or any other price. For a debt security, face value is the amount
repaid to the investor when the bond matures
Term Premium and Discount in a Security Market
Securities are generally issued in denominations of 5, 10 or 100. This is known as the
Face Value or Par Value of the security as discussed earlier. When a security is sold
above its face value, it is said to be issued at a Premium and if it is sold at less than
its face value, then it is said to be issued at a Discount.
Why do companies need to issue shares to the public?
Most companies are usually started privately by their promoter(s). However, the
promoters capital and the borrowings from banks and financial institutions may not
be sufficient for setting up or running the business over a long term. So
companies invite the public to contribute towards the equity and issue shares to
individual investors. The way to invite share capital from the public is through a
Public Issue. Simply stated, a public issue is an offer to the public to subscribe to the
share capital of a company. Once this is done, the company allots shares to the
applicants as per the prescribed regulations laid down by SEBI.
Issue price
The price at which a company's shares are offered initially in the primary market is
called as the Issue price. When they begin to be traded, the market price may be above
or below the issue price.
Market Capitalization
The market value of a quoted company, which is calculated by multiplying its current
share price (market price) by the number of shares in issue, is called as market
capitalization. E.g. Company A has 120 million shares in issue. The current market
price is Rs. 100. The market capitalization of a company is Rs. 12000 million.
Difference between public issue and private placement
When an issue is not made to only a select set of people but is open to the general
public and any other investor at large, it is a public issue. But if the issue is made to a
select set of people, it is called private placement. As per Companies Act, 1956,
an issue becomes public if it results in allotment to 50 persons or more. This means an
issue can be privately placed where an allotment is made to less than 50 persons.
Decides the price of an issue
Indian primary market ushered in an era of free pricing in 1992. Following this, the
guidelines have provided that the issuer in consultation with Merchant Banker shall
decide the price. There is no price formula stipulated by SEBI. SEBI does not play
any role in price fixation. The company and merchant banker are however required to
give full disclosures of the parameters which they had considered while deciding the
issue price. There are two types of issues, one where company and Lead Merchant
Banker fix a price (called fixed price) and other, where the company and the Lead
Manager (LM) stipulate a floor price or a price band and leave it to market forces to
determine the final price (price discovery through book building process).
Price discovery through Book Building Process
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Book Building is basically a process used in IPOs for efficient price discovery. It is a
mechanism where, during the period for which the IPO is open, bids are collected
from investors at various prices, which are above or equal to the floor price. The
offer price is determined after the bid closing date. Main difference between offer of
shares through book building and offer of shares through normal public issue
Price
This is the price at which securities will be allotted is not known in case of offer of
shares through Book Building while in case of offer of shares through normal public
issue, price is known in advance to investor. Under Book Building, investors bid for
shares at the floor price or above and after the closure of the book building process the
price is determined for allotment of shares. In case of Book Building, the demand can
be known everyday as the book is being built. But in case of the public issue the
demand is known at the close of the issue.
Cut-Off Price
In a Book building issue, the issuer is required to indicate either the price band or a
floor price in the prospectus. The actual discovered issue price can be any price in the
price band or any price above the floor price. This issue price is called CutOff Price. The issuer and lead manager decides this after considering the book and
the investors appetite for the stock.
Floor price in case of book building
Floor price is the minimum price at which bids can be made.
Price Band in a book built IPO
The prospectus may contain either the floor price for the securities or a price band
within which the investors can bid. The spread between the floor and the cap of the
price band shall not be more than 20%. In other words, it means that the cap should
not be more than 120% of the floor price. The price band can have a revision and such
a revision in the price band shall be widely disseminated by informing the stock
exchanges, by issuing a press release and also indicating the change on the relevant
website and the terminals of the trading members participating in the book building
process. In case the price band is revised, the bidding period shall be extended for a
further period of three days, subject to the total bidding period not exceeding ten days.
Who decides the Price Band?
It may be understood that the regulatory mechanism does not play a role in setting the
price for issues. It is up to the company to decide on the price or the price band, in
consultation with Merchant Bankers.
Minimum number of days for which a bid should remain open during book
The Book should remain open for a minimum of 3 days. Open outcry system be used
for book building No. As per SEBI, only electronically linked transparent facility is
allowed to be used in case of book building. As per SEBI guidelines, the Basis of
Allotment should be completed with 15 days from the issue close date. As soon as the
basis of allotment is completed, within 2 working days the details of credit to demat
account / allotment advice and despatch of refund order needs to be completed. So an
investor should know in about 15 days time from the closure of issue, whether shares
are allotted to him or not. How does one know if shares are allotted in an IPO/offer
for sale, what is the timeframe for getting refund if shares not allotted?
The period of listed the shares after issue
It would take around 3 weeks after the closure of the book built issue.
Role of a Registrar to an issue
The Registrar finalizes the list of eligible allotted after deleting the invalid
applications and ensures that the corporate action for crediting of shares to the demat
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accounts of the applicants is done and the dispatch of refund orders to those
applicable are sent. The Lead Manager coordinates with the Registrar to ensure follow
up so that that the flow of applications from collecting bank branches, processing of
the applications and other matters till the basis of allotment is finalized, dispatch
security certificates and refund orders completed and securities listed.
NSE facility for IPO
Yes. NSEs electronic trading network spans across the country providing access to
investors in remote areas. NSE decided to offer this infrastructure for conducting
online IPOs through the Book Building process. NSE operates a fully automated
screen based bidding system called NEAT IPO that enables trading members to enter
bids directly from their offices through a sophisticated telecommunication network.
Book Building through the NSE system offers several advantages: The NSE system
offers a nationwide bidding facility in securities. It provide a fair, efficient &
transparent method for collecting bids using the latest electronic trading systems
Costs involved in the issue are far less than those in a normal IPO The system reduces
the time taken for completion of the issue process The IPO market timings are from
10.00 a.m. to 3.00 p.m. On the last day of the IPO, the session timings can be further
extended on specific request by the Book
Prospectus
A large number of new companies float public issues. While a large number of these
companies are genuine, quite a few may want to exploit the investors. Therefore, it is
very important that an investor before applying for any issue identifies future potential
of a company. A part of the guidelines issued by SEBI (Securities and Exchange
Board of India) is the disclosure of information to the public. This disclosure includes
information like the reason for raising the money, the way money is proposed to be
spent, the return expected on the money etc. This information is in the form of
Prospectus which also includes information regarding the size of the issue, the
current status of the company, its equity capital, its current and past performance, the
promoters, the project, cost of the project, means of financing, product and capacity
etc. It also contains lot of mandatory information regarding underwriting and statutory
compliances. This helps investors to evaluate short term and long term prospects of
the company.
Draft Offer document
Offer document means Prospectus in case of a public issue or offer for sale and
Letter of Offering case of a rights issue which is filed with the Registrar of
Companies (ROC) and Stock Exchanges (SEs). An offer document covers all the
relevant information to help an investor to make his/her investment decision. Draft
Offer document means the offer document in draft stage. The draft offer documents
are filed with SEBI, atleast 21 days prior to the filing of the Offer Document with
ROC/SEs. SEBI may specify changes, if any, in the draft Offer Document and
the issuer or the lead merchant banker shall carry out such changes in the draft offer
document before filing the Offer Document with ROC/SEs. The Draft Offer
Document is available on the SEBI website for public comments for a period of 21
days from the filing of the Draft Offer Document with SEBI.
Abridged Prospectus
Abridged Prospectus is a shorter version of the Prospectus and contains all the
salient features of a Prospectus. It accompanies the application form of public issues.
Preparation of Prospectus /Offer Documents
Generally, the public issues of companies are handled by Merchant Bankers who are
responsible for getting the project appraised, finalizing the cost of the project,
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profitability estimates and for preparing of Prospectus. The Prospectus is submitted

to SEBI for its approval.
Mean by Lock-in
Lock-in indicates a freeze on the sale of shares for a certain period of time. SEBI
guidelines have stipulated lock-in requirements on shares of promoters mainly to
ensure that the promoters or main persons, who are controlling the company, shall
continue to hold some minimum percentage in the company after the public issue.
Listing of Securities
Listing means admission of securities of an issuer to trading privileges (dealings) on a
stock exchange through a formal agreement. The prime objective of admission to
dealings on the exchange is to provide liquidity and marketability to securities, as also
to provide a mechanism for effective control and supervision of trading.
Listing Agreement
At the time of listing securities of a company on a stock exchange, the company is
required to enter into a listing agreement with the exchange. The listing agreement
specifies the terms and conditions of listing and the disclosures that shall be made
by a company on a continuous basis to the exchange.
Delisting of securities
The term Delisting of securities refers to the permanent removal of securities of a
listed company from a stock exchange. As a consequence of delisting, the securities of
that company would no longer be traded at that stock exchange.
SEBIs Role in an Issue
Any company making a public issue or a listed company making a rights issue of
value of more than Rs 50 lakh is required to file a draft offer document with SEBI for
its observations. The company can proceed further on the issue only after
getting observations from SEBI.
SEBI recommends an issue?
SEBI does not recommend any issue nor does take any responsibility either for the
financial soundness of any scheme or the project for which the issue is proposed to be
made or for the correctness of the statements made or opinions expressed in the offer
document. SEBI mainly scrutinizes the issue for seeing that adequate disclosures are
made by the issuing company in the prospectus or offer document. SEBI main work is
to see whether the investors interest is being protected or not and whether the
company is disclosing all its details related to the share issue to the investor or not.
SEBI tag makes ones money safe
The investors should make an informed decision purely by themselves based on the
contents disclosed in the offer documents. SEBI does not associate itself with any
issue/issuer and should in no way be construed as a guarantee for the funds that
the investor proposes to invest through the issue. However, the investors are generally
advised to study all the material facts pertaining to the issue including the risk factors
before considering any investment. They are strongly warned against relying on any
tips or news through unofficial means.
Companies in India raise foreign currency resources
Yes. Indian companies are permitted to raise foreign currency resources through two
main sources: a) issue of foreign currency convertible bonds more commonly known
as Euro issues and b) issue of ordinary shares through depository receipts namely
Global Depository Receipts (GDRs)/American Depository Receipts (ADRs) to
foreign investors i.e. to the institutional investors or individual investors.
American Depository Receipt
An American Depositary Receipt ("ADR") is a physical certificate evidencing
ownership of American Depositary Shares ("ADSs"). The term is often used to refer
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to the ADSs themselves. An American Depositary Share ("ADS") is a U.S. dollar

denominated form of equity ownership in a non-U.S. company. It represents the
foreign shares of the company held on deposit by a custodian bank in the company's
home country and carries the corporate and economic rights of the foreign shares,
subject to the terms specified on the ADR certificate. One or several ADSs can be
represented by a physical ADR certificate. The terms ADR and ADS are often used
interchangeably. ADSs provide U.S. investors with a convenient way to invest in
overseas securities and to trade non-U.S. securities in the U.S. ADSs are issued by a
depository bank, such as JPMorgan Chase Bank. They are traded in the same manner
as shares in U.S. Companies, on the New York Stock Exchange (NYSE) and the
American Stock Exchange (AMEX) or quoted on NASDAQ and the over-the-counter
(OTC) market. Although ADSs are U.S. dollar denominated securities and pay
dividends in U.S. dollars, they do not eliminate the currency risk associated with an
investment in a non-U.S. company.
Secondary Market
Secondary market refers to a market where securities are traded after being initially
offered to the public in the primary market and/or listed on the stock exchange.
Majority of the trading is done on the secondary market. .Secondary market comprises
of equity and debt market. The number of shareholders in India is estimated at 25
million. However, only an estimated two lakh persons actively trade in stocks. There
has been a dramatic improvement in the country's stock market trading infrastructure
during the last few years. Expectations are that India will be an attractive emerging
market with tremendous potential. Unfortunately, during recent times the stock
markets have been constrained by some unsavoury developments, which have led to
retail investors deserting the stock markets. The secondary market is also known as
the aftermarket, is the financial market where previously issued securities and
financial instruments such as stock, bonds, options, and futures are bought and sold.
The term "secondary market" is also used to refer to the market for any used goods or
assets, or an alternative use for an existing product or asset where the customer base is
the second market (for example, corn has been traditionally used primarily for food
production and feedstock, but a "second" or "third" market has developed for use in
ethanol production). Another commonly referred to usage of secondary market term is
to refer to loans which are sold by a mortgage bank to investors. With primary
issuances of securities or financial instruments, or the primary market, investors
purchase these securities directly from issuers such as corporations issuing shares in
an IPO or private placement, or directly from the federal government in the case of
treasuries. After the initial issuance, investors can purchase from other investors in the
secondary market. In the secondary market shares are maneuvered from one investor
to other, that is, one investor buys an asset from another investor instead of an issuing
corporation. So, the secondary market should be liquid. Example of Secondary
market: In the New York Stock Exchange, in the United States of America, all the
securities belong to the secondary market. The secondary market has an important
role to play behind the developments of an efficient capital market. Secondary market
connects investors' favouritism for liquidity with the capital users' wish of using their
capital for a longer period. For example, in a traditional partnership, a partner cannot
access the other partner's investment but only his or her investment in that
partnership, even on an emergency basis. Then if he or she may breaks the ownership
of equity into parts and sell his or her respective proportion to another investor. This
kind of trading is facilitated only by the secondary market. Secondary Market refers to
a market where securities are traded after being initially offered to the public in the
primary market and/or listed on the Stock Exchange. Majority of the trading is done
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in the secondary market. Secondary market comprises of equity markets and the debt
markets. For the general investor, the secondary market provides an efficient platform
for trading of his securities. For the management of the company, Secondary equity
markets serve as a monitoring and control conduitby facilitating value-enhancing
control activities, enabling implementation of incentive-based management contracts,
and aggregating information (via price discovery) that guides management
decisions.The secondary market for a variety of assets can vary from loans to stocks,
from fragmented to centralized, and from illiquid to very liquid. The major stock
exchanges are the most visible example of liquid secondary markets - in this case, for
stocks of publicly traded companies. Exchanges such as the New York Stock
Exchange, NASDAQ and the American Stock Exchange provide a centralized, liquid
secondary market for the investors who own stocks that trade on those exchanges.
Most bonds and structured products trade over the counter, or by phoning the bond
desk of ones broker-dealer. Loans sometimes trade online using a Loan Exchange.
Secondary market includes those securities which are traded after being initially
offered to the public in the primary market and/or listed on the Stock Exchange.
Majority of the trading is done in the secondary market. Secondary market comprises
of equity markets and the debt markets. The secondary market enables participants
who hold securities to adjust their holdings in response to changes in their assessment
of risk and return. They also sell securities for cash to meet their liquidity needs. Once
the new securities are issued in the primary market they are traded in the stock
(secondary) market. The secondary market is operated through two mediums, namely,
the Over-the-Counter (OTC) market and the Exchange- Traded market. OTC markets
are informal markets where trades are negotiated. Most of the trades in the
government securities are in the OTC market. All the spot trades where securities are
traded for immediate delivery and payment take place in the OTC market. The
exchanges do not provide facility for spot trades in a strict sense. Closest to spot
market is the cash market in exchanges where settlement takes place after some time.
There are 19 exchanges (at the end of March 2008) in India and all of them follow a
systematic settlement period. All the trades taking place over a trading cycle (day=T)
are settled together after a certain time (T+2 day). Trades executed on NSE only are
cleared and settled by a clearing corporation which provides novation and settlement
guarantee. Nearly 100% of the trades in capital market segment are settled through
demat delivery. NSE also provides a formal trading platform for trading of a wide
range of debt securities including government securities in both retail and wholesale
mode. NSE also provides trading in derivatives of equities, interest rate as well
indices. In derivatives market (F&O market segment of NSE), standardised contracts
are traded for future settlement. These futures can be on a basket of securities like an
index or an individual security. In case of options, securities are traded for conditional
future delivery. There are two types of options a put option permits the owner to sell
a security to the writer of options at a predetermined price while a call option permits
the owner to purchase a security from the writer of the option at a predetermined
price. These options can also be on individual stocks or basket of stocks like index.
Two exchanges, namely NSE and the Stock Exchange, Mumbai (BSE) provide
trading of derivatives of securities. Today the market participants have the flexibility
of choosing from a basket of products like:
Equities
Bonds issued by both Government and companies.
Futures on benchmark indices as well as stocks
Options on benchmark indices as well as stocks
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Futures on interest rate products like Notional 91-day T-Bills, 10 year notional
zero coupon bond and 6% notional 10 year bond.
The past decade in many ways has been remarkable for securities market in India. It
has grown exponentially as measured in terms of amount raised from the market,
number of stock exchanges and other intermediaries, the number of listed stocks,
market capitalization, trading volumes and turnover on stock exchanges, and investor
population. Along with this growth, the profiles of the investors, issuers and
intermediaries have changed significantly. The market has witnessed several
institutional changes resulting in drastic reduction in transaction costs and significant
improvements in efficiency, transparency, liquidity and safety. In a short span of time,
Indian derivatives market has got a place in list of top global exchanges. The market
capitalization has grown over the period indicating more companies using the trading
platform of the stock exchange. As of March 2008, the market capitalization of NSE
was Rs. 48,581,217 million. The market capitalization ratio is defined as market
capitalization of stocks divided by GDP. It is used as a measure of stock market size.
It is of economic significance since market is positively correlated with the ability to
mobilize capital and diversify risk. The trading volumes on exchanges have been
witnessing phenomenal growth over the past few years. During 2007-08, the capital
market segment of NSE reported a trading volume of Rs. 35,510,382 million. The
turnover ratio, which reflects the volume of trading in relation to the size of the
market, stood at 73.09% in the year 2007-08. The turnover ratio is defined as the total
value of shares traded on a countrys stock exchange divided by market capitalization.
It is used as a measure of trading activity or liquidity in the stock markets. The top 2
stock exchanges accounted for nearly 99% of turnover, while the rest of the
exchanges had negligible volumes during 2007-08. The movement of the NIFTY50,
the most widely used indicator of the market, has been responding to changes in the
governments economic policies, the increase in FIIs inflows, etc. Reforms in the
securities market, particularly the establishment and empowerment of SEBI, market
determined allocation of resources, screen based nation-wide trading,
dematerialisation and electronic transfer of securities, rolling settlement and ban on
deferral products, sophisticated risk management and derivatives trading, have greatly
improved the regulatory framework and efficiency of trading and settlement. Indian
market is now comparable to many developed markets in terms of a number of
qualitative parameters.
Function of Secondary Markets
Secondary marketing is vital to an efficient and modern capital market. In the
secondary market, securities are sold by and transferred from one investor or
speculator to another. It is therefore important that the secondary market be highly
liquid (originally, the only way to create this liquidity was for investors and
speculators to meet at a fixed place regularly; this is how stock exchanges originated,
see History of the Stock Exchange). There is a general rule, that the greater the
number of investors that participate in a given marketplace, and the greater the
centralization of that marketplace, the more liquid the market. Fundamentally,
secondary markets mesh the investor's preference for liquidity (i.e., the investor's
desire not to tie up his or her money for a long period of time, in case the investor
needs it to deal with unforeseen circumstances) with the capital user's preference to be
able to use the capital for an extended period of time. Accurate share price allocates
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scarce capital more efficiently when new projects are financed through a new primary
market offering, but accuracy may also matter in the secondary market because: 1)
price accuracy can reduce the agency costs of management, and make hostile takeover
a less risky proposition and thus move capital into the hands of better managers, and
2) accurate share price aids the efficient allocation of debt finance whether debt
offerings or institutional borrowing.
Private Secondary Markets
Partially due to increased compliance and reporting obligations enacted in the
Sarbanes-Oxley Act of 2002, private secondary markets began to emerge. These
markets are generally only available to institutional or accredited investors and allow
trading of unregistered and private company securities. In private equity, the
secondary market (also often called private equity secondaries or secondaries) refers
to the buying and selling of pre-existing investor commitments to private equity
funds. Sellers of private equity investments sell not only the investments in the fund
but also their remaining unfunded commitments to the funds.
Secondary Market Investors
Secondary market investors such as institutions, individual investors and mutual
funds can gain from buying and selling of bonds and stocks in the secondary market.
There are many investors who buy new issues of bonds and shares and Initial Public
Offerings (IPO). But these people are primary market investors. In the secondary
market, investors buy already existent securities from other investors. The secondary
share and bond market is quite healthy and there are flexible options for timing and
pricing trades. Investors investing in stocks in the secondary market are either growth
investors or value investors. Growth investors are those that are investing in those
companies that have a revenue growth rate faster than the industry growth rate. The
investment style of value investors, on the other hand, involves the favouring of "good
companies at great prices". The companies in whose stocks the growth investors
invest do not pay much as dividends. The risk tolerance level of the investors
determines the type of investors in the secondary market they would be. The investors
with high risk tolerance levels are usually more interested in investing in growth
stocks while investors with low risk tolerance levels invest in value stocks. The stock
market investors are either buy-to-hold investors or they could be preferring the short
term over the long term. The value investors tend to be more of the buy-to-hold type.
Haste and imprudence should be avoided while investing in the secondary market.
The stock market is a highly volatile place. Price can fluctuate drastically. Investors
do always have the chance of losing their hard earned money in a jiffy. Therefore,
investments should be done intelligently. The services of an efficient and experienced
broker must be availed of. Bond market investors are also a type of secondary market
investors when they trade in the secondary market. A thorough study of the secondary
bond market must be done before investing. Investing in municipal securities can be a
very lucrative option. Bonds can be broken before they mature. Secondary market
investors have their share of advantages and disadvantages. The investors must use
their prudence and experience.
SEBI and its Role in the Secondary Market

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The SEBI is the regulatory authority established under Section 3 of SEBI Act 1992 to
protect the interests of the investors in securities and to promote the development of,
and to regulate, the securities market and for matters connected therewith and
incidental thereto. The following departments of SEBI take care of the activities in the
secondary market. (Table Number 3) (Source: NCFM Book capital market)

Sr.No.
1.

2.
3.

Name of the Department

Market
Intermediaries
Registration
and
Supervision
department
(MIRSD)
Market
Regulation
Department (MRD)
Derivatives
Products
(DNPD)

Major Activities
Registration,
supervision,
compliance
monitoring and inspections of all market
intermediaries viz. equity, equity derivatives,
debt and debt related derivatives.
Formulating new policies and supervising the
functioning and operations (except relating to
derivatives) of securities exchanges.
and
New Supervising trading at derivatives segments of
Departments stock exchanges,

Importance of Secondary Markets

Secondary market is an important part of the economy of a country. Stock market is
also known as the secondary market. The stock market plays a play a pivotal role in
the growth of the industry and commerce of the country that eventually affects the
economy of the country to a great extent. That is reason that the government, industry
and even the central banks of the country keep a close watch on the happenings of the
stock market. The stock market is important from both the industrys point of view as
well as the investors point of view. Whenever a company wants to raise funds for
further expansion or settling up a new business venture, they have to either take a loan
from a financial organization or they have to issue shares through the stock market. In
fact the stock market is the primary source for any company to raise funds for
business expansions. If a company wants to raise some capital for the business it can
issue shares of the company that is basically part ownership of the company. To issue
shares for the investors to invest in the stocks a company needs to get listed to a
stocks exchange and through the primary market of the stock exchange they can issue
the shares and get the funds for business requirements. There are certain rules and
regulations for getting listed at a stock exchange and they need to fulfill some criteria
to issue stocks and go public. The stock market is primarily the place where these
companies get listed to issue the shares and raise the fund. In case of an already listed
public company, they issue more shares to the market for collecting more funds for
business expansion. For the companies which are going public for the first time, they
need to start with the Initial Public Offering or the IPO. In both the cases these
companies have to go through the stock market. This is the primary function of the
stock exchange and thus they play the most important role of supporting the growth of
the industry and commerce in the country. That is the reason that a rising stock market
is the sign of a developing industrial sector and a growing economy of the country. Of
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course this is just the primary function of the stock market and just an half of the role
that the stock market plays. The secondary function of the stock market is that the
market plays the role of a common platform for the buyers and sellers of these stocks
that are listed at the stock market. It is the secondary market of the stock exchange
where retail investors and institutional investors buy and sell the stocks. In fact it is
these stock market traders who raise the fund for the businesses by investing in the
stocks. For investing in the stocks or to trade in the stock the investors have to go
through the brokers of the stock market. Brokers actually execute the buy and sell
orders of the investors and settle the deals to keep the stock trading alive. The brokers
basically act as a middle man between the buyers and sellers. Once the buyer places a
buy order in the stock market the brokers finds a seller of the stock and thus the deal
is closed. All these take place at the stock market and it is the demand and supply of
the stock of a company that determines the price of the stock of that particular
company. So the stock market is not only providing the much required funds for
boosting the business, but also providing a common place for stock trading. It is the
stock market that makes the stocks a liquid asset unlike the real estate investment. It is
the stock market that makes it possible to sell the stocks at any point of time and get
back the investment along with the profit. This makes the stocks much more liquid in
nature and thereby attracting investors to invest in the stock market.

NEW ISSUE MARKET INSTRUMENTS

The term initial public offering (IPO) slipped into everyday speech during the tech
bull market of the late 1990s. Back then, it seemed you couldn't go a day without
hearing about a dozen new dotcom millionaires in Silicon Valley who were cashing in
on their latest IPO. The phenomenon spawned the term siliconaire, which described
the dotcom entrepreneurs in their early 20s and 30s who suddenly found themselves
living large on the proceeds from their internet companies' IPOs.

STOCK MARKET INSTRUMENT

An initial public offering, or IPO, is the first sale of stock by a company to the public.
A company can raise money by issuing either debt or equity. If the company has never
issued equity to the public, it's known as an IPO. Companies fall into two broad
categories: private and public that is:
A privately held company has fewer shareholders and its owners don't have to
disclose much information about the company. Anybody can go out and incorporate a
company: just put in some money, file the right legal documents and follow the
reporting rules of your jurisdiction. Most small businesses are privately held. But
large companies can be private too. Did you know that IKEA, Domino's Pizza and
Hallmark Cards are all privately held? It usually isn't possible to buy shares in a
private company. You can approach the owners about investing, but they're not
obligated to sell you anything. Public companies, on the other hand, have sold at least
a portion of themselves to the public and trade on a stock exchange. This is why doing
an IPO is also referred to as "going public." Public companies have thousands of
shareholders and are subject to strict rules and regulations. They must have a board of
directors and they must report financial information every quarter. In the United
States, public companies report to the Securities and Exchange Commission (SEC). In
other countries, public companies are overseen by governing bodies similar to the
SEC. From an investor's standpoint, the most exciting thing about a public company is
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that the stock is traded in the open market, like any other commodity. If you have the
cash, you can invest. The CEO could hate your guts, but there's nothing he or she
could do to stop you from buying stock. While going public raises cash, and usually a
lot of it. Being publicly traded also opens many financial doors:
Because of the increased scrutiny, public companies can usually get better
rates when they issue debt.
As long as there is market demand, a public company can always issue more
stock. Thus, mergers and acquisitions are easier to do because stock can be
issued as part of the deal.
Trading in the open markets means liquidity. This makes it possible to
implement things like employee stock ownership plans, which help to attract
top talent. Private companies with strong fundamentals could qualify for an
IPO and it wasn't easy to get listed.
The internet boom changed all this. Firms no longer needed strong financials and a
solid history to go public. Instead, IPOs were done by smaller start-ups seeking to
expand their businesses. There's nothing wrong with wanting to expand, but most of
these firms had never made a profit and didn't plan on being profitable any time soon.
Founded on venture capital funding, they spent like Texans trying to generate enough
excitement to make it to the market Being on a major stock exchange carries a
considerable amount of prestige. In the past, there were only before burning through
all their cash. In cases like this, companies might be suspected of doing an IPO just to
make the founders rich. This is known as an implying that there's no desire to stick
around and create value for shareholders. The IPO then becomes the end of the road
rather than the beginning.
The Underwriting Process
Getting a piece of a hot IPO is very difficult, if not impossible. To understand why, we
need to know how an IPO is done, a process known as underwriting. When a
company wants to go public, the first thing it does is hire an investment bank. A
company could theoretically sell its shares on its own, but realistically, an investment
bank is required - it's just the way Wall Street works. Underwriting is the process of
raising money by either debt or equity (in this case we are referring to equity). and the
investing public. The biggest underwriters are Goldman Sachs, Merrill Lynch, Credit
Suisse First Boston, Lehman Brothers and Morgan Stanley The company and the
investment bank will first meet to negotiate the deal. Items usually discussed include
the amount of money a company will raise, the type of securities to be issued and all
the details in the underwriting agreement. The deal can be structured in a variety of
ways. For example, in a firm commitment, the underwriter guarantees that a certain
amount will be raised by buying the entire offer and then reselling to the public. In a
best efforts agreement, however, the underwriter sells securities for the company but
doesn't guarantee the amount rose. Also, investment banks are hesitant to shoulder all
the risk of an offering. Instead, they form a syndicate of underwriters. One
underwriter leads the syndicate and the others sell a part of the issue. Once all sides
agree to a deal, the investment bank puts together a registration statement to be filed
with the SEC. This document contains information about the offering as well as
company info such as financial statements, management background, any legal
problems, where the money is to be used and insider holdings. The SEC then requires
a cooling off period, in which they investigate and make sure all material information
has been disclosed. Once the SEC approves the offering, a date (the effective date) is
set when the stock will be offered to the public. This is an initial prospectus
containing all the information about the company except for the offer price and the
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effective date, which aren't known at that time. With the red herring in hand, the
underwriter and company attempt to hype and build up interest for the issue. They go
on a road show - also known as the "dog and pony show" - where the big institutional
investors are courted. As the effective date approaches, the underwriter and company
sit down and decide on the price. This isn't an easy decision: it depends on the
company, the success of the road show and, most importantly, current market
conditions. Of course, it's in both parties' interest to get as much as possible. Finally,
the securities are sold on the stock market and the money is collected from investors.
An initial public offering (IPO) is the first sale of stock by a company to the
public.
Broadly speaking, companies are either private or public. Going public means
a company is switching from private ownership to public ownership.
Going public raises cash and provides many benefits for a company.
The dotcom boom lowered the bar for companies to do an IPO. Many start ups
went public without any profits and little more than a business plan.
Getting in on a hot IPO is very difficult, if not impossible.
The process of underwriting involves raising money from investors by issuing
new securities.
Companies hire investment banks to underwrite an IPO.
The road to an IPO consists mainly of putting together the formal documents
for the Securities and Exchange Commission (SEC) and selling the issue to
institutional clients.
The only way for you to get shares in an IPO is to have a frequently traded
account with one of the investment banks in the underwriting syndicate.
Lock-up 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.
Flipping may get you blacklisted from future offerings.
Road shows and red herrings are marketing events meant to get as much
attention as possible. Don't get sucked in by the hype.
A tracking stock is created when a company spins off one of its divisions into
a separate entity through an IPO.
Don't consider tracking stocks to be the same as a normal IPO, as you are
essentially a second-class shareholder.

FINANCIAL MARKET PRODUCT AND THEIR MARKET

Following are the main financial products/instruments dealt in the secondary market:
Equity: The ownership interest in a company of holders of its common and preferred
stock. The various kinds of equity shares are as follows
Equity Shares: An equity share, commonly referred to as ordinary share also
represents the form of fractional ownership in which a shareholder, as a fractional
owner, undertakes the maximum entrepreneurial risk associated with a business
venture. The holders of such shares are members of the company and have voting
rights. A company may issue such shares with differential rights as to voting, payment
of dividend, etc.
Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a
ratio to those already held.
Bonus Shares: Shares issued by the companies to their shareholders free of cost by
capitalization of accumulated reserves from the profits earned in the earlier years.
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Preferred Stock/ Preference shares: Owners of these kinds of shares are entitled to a
fixed dividend or dividend calculated at a fixed rate to be paid regularly before
dividend can be paid in respect of equity share. They also enjoy priority over the
equity shareholders in payment of surplus. But in the event of liquidation, their claims
rank below the claims of the companys creditors, bondholders / debenture holders.
Cumulative Preference Shares. A type of preference shares on which dividend
accumulates if remains unpaid. All arrears of preference dividend have to be paid out
before paying dividend on equity shares.
Cumulative Convertible Preference Shares: A type of preference shares where the
dividend payable on the same accumulates, if not paid. After a specified date, these
shares will be converted into equity capital of the company. In cumulative convertible
preference shares the dividend of the shareholder is cumulated in the same way as in
cumulative preference shares but after these dividend which gets cumulated is
converted into the equity shares of the company making converted those preference
shares the equity shares and converting the preference share holder to the equity share
holder.
Participating Preference Share: The right of certain preference shareholders to
participate in profits after
a specified fixed dividend contracted for is paid. Participation right is linked with the
quantum of dividend paid on the equity shares over and above a particular specified
level.
Security Receipts: Security receipt means a receipt or other security, issued by a
securitization company or reconstruction company to any qualified institutional buyer
pursuant to a scheme,
Evidencing the purchase or acquisition by the holder thereof, of an undivided right,
title or interest in the financial asset involved in securitization.
Government securities (G-Secs): These are sovereign (credit risk-free) coupon
bearing instruments which are issued by the Reserve Bank of India on behalf of
Government of India, in lieu of the Central Government's market borrowing
programme. These securities have a fixed coupon that is paid on specific dates on
half-yearly basis. These securities are available in wide range of maturity dates, from
short dated (less than one year) to long date (upto twenty years).
Debentures: Bonds issued by a company bearing a fixed rate of interest usually
payable half yearly on specific dates and principal amount repayable on particular
date on redemption of the debentures. Debentures are normally secured/ charged
against the asset of the company in favours of debenture holder.
Bond: A negotiable certificate evidencing indebtedness. It is normally unsecured.
A debt security is generally issued by a company, municipality or government agency.
A bond investor lends money to the issuer and in exchange, the issuer promises to
repay the loan amount on a specified maturity date. The issuer usually pays the bond
holder periodic interest payments over the life of the loan. The various types of Bonds
are as follows Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No
periodic interest is paid. The difference between the issue price and redemption price
represents the return to the holder. The buyer of these bonds receives only one
payment, at the maturity of the bond
Convertible Bond: A bond giving the investor the option to convert the bond into
equity at a fixed conversion price.
Commercial Paper: A short term promise to repay a fixed amount that is placed
on the market either directly or through a specialized intermediary. It is usually
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issued by companies with a high credit standing in the form of a promissory note
redeemable at par to the holder on maturity.
Treasury Bills: Short-term (up to 91 days) bearer discount security issued by the
Government as a means of financing its cash requirements.

PLAYERS IN THE CAPITAL MARKET

Players of the capital market include various traders who are either the buyer or the
purchaser of the securities and the various underwriting companies, SEBI and the
primary market and secondary market also which comes under the capital market of
India. It includes SEBI, SAT (Securities Appellate Tribunal), Brokers and sub-brokers
etc .Other various types if instruments issued in the capital market are:
Debt Instruments
To meet the long term and short term needs of finance, firms issue various kinds of
Securities to the public. Securities represent claims on a stream of income and /or
particular assets. Debentures are debt securities, and there is a wide range of them.
Market loans are raised by the government and public sector institutions through debt
securities. Equity shares issued by cooperates are ownership securities. Preference
shares are a hybrid security. It is a mixture of an ownership security and debt security.
Debentures
A debenture is a document which either creates a debt or acknowledges it. Debenture
issued by a company is in the form of a certificate acknowledging indebtedness. The
debentures are issued under the Company's Common Seal. Debentures are one of a
series issued to a number of lenders.
The date of repayment is specified in the debentures. Debentures are issued against a
charge on the assets of the Company. Debentures holders have no right to vote at the
meetings of the companies.
Kinds of Debentures
(a)Bearer Debentures:
They are registered and are payable to the bearer. They are negotiable instruments and
are transferable by delivery. Bearer Debentures are transferable per bearer without
endorsement and they are just like bearer cheques or government currency notes.
They are treated as negotiable instrument and transferable by mere delivery. It is not
necessary that transfer of such debentures should be registered with the company. The
interest is paid to the holder irrespective of identity.
(b) Registered Debentures:
They are payable to the registered holder whose name appears both on the debentures
and in the Register of debenture Holders maintained by the company. Registered
Debentures can be transferred but have to be registered again. Registered Debentures
are not negotiable instruments. A registered debenture 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 subject to the conditions endorsed therein.
(c) Secured Debentures:
Debentures which create a change on the assets of the company which may be fixed
or floating are known as secured Debentures. The term "bonds" and
"debentures"(secured) are used interchangeably in common parlance. In USA, BOND
is a long term contract which is secured, whereas a debenture is an unsecured one.
(d) Unsecured or Naked Debentures:
Debentures which are issued without any charge on assets are unsecured or naked
debentures. The holders are like unsecured creditors and may see the company for the
recovery of debt.
(e) Redeemable Debentures:
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Normally debentures are issued on the condition that they shall be redeemed after a
certain period. They can however, be reissued after redemption.
(f) Perpetual Debentures:
When debentures are irredeemable they are called perpetual. Perpetual Debentures
, cannot be issued in India at present.
(g) Convertible Debentures:
If an option is given to convert debentures into equity shares at the stated rate of
exchange after a specified period, they are called convertible debentures. Convertible
Debentures have become very popular in India. On conversion the holders cease to be
lenders and become owners. Debentures are usually issued in a series with a pari
passu (at the same rate) clause which entitles them to be discharged rateably though
issued at different times. New series of debentures cannot rank pari passu with the old
series unless the old series provides so. New debt instruments issued by public limited
companies are participating debentures, convertible debentures with options, third
party convertible debentures convertible debentures redeemable at premiums, debt
equity swaps and zero coupon convertible notes. These are discussed below:
(h) Participating Debentures:
They are unsecured corporate debt securities which participate in the profits of the
company. They might find investors if issued by existing dividend paying companies.
(i) Convertible Debentures with options:
They are a derivative of convertible debentures with an embedded option, providing
flexibility to the issuer as well as the investor to exit from the terms of the issue. The
coupon rate is specified at the time of issue.
(j) Third Party Convertible Debentures:
They are debt with a warrant allowing the investor to subscribe to the equity of third
firm at a preferential price visa Vis the market price. Interest rate on third party
convertible debentures is lower than pure debt on account of the conversion option.
(k) Convertible-Debentures Redeemable at a Premium: Convertible Debentures
are issued at face value with 'a put option entitling investors to sell the bond to the
issuer at a premium. They are basically similar to convertible debentures but embody
less risk.
(l) Debt-Equity Swaps:
Debt-Equity Swaps are an offer from an issuer of debt to swap it for equity. The
instrument is quite risky for the investor because the anticipated capital appreciation
may not materialize.
(m) Deep discount Bonds:
They are designed to meet the long term funds requirements of the issuer and
investors who are not looking for immediate return and can be sold with a long
maturity of 25-30 years at a deep discount on the face value of debentures. IDBI deep
discount bonds for Rs 1 lakh repayable after 25 years were sold at a discount price of
Rs. 2,700.
(n) Zero-Coupon Convertible Note:
A zero-coupon convertible note can be converted into shares. If choice is exercised
investors forego all accrued and unpaid interest. The zero-coupon convertible notes
are quite sensitive to changes in interest rates.
(o) Secured Premium Notes (SPN) with Detachable Warrants:
SPN which is issued along with a detachable warrant, is redeemable after a notice
period, say four to seven years. The warrants attached to it ensure the holder the right
to apply and get allotted equity shares; provided the SPN is fully paid. There is a
lock-in period for SPN during which no interest will be paid for an invested amount.
The SPN holder has an option to sell back the SPN to the company at par value after
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the lock in period. If the holder exercises this option, no interest/ premium will be
paid on redemption. In case the SPN holder holds its further, the holder will be repaid
the principal amount along with the additional amount of interest/ premium on
redemption in instalments as decided by the company. The conversion of detachable
warrants into equity shares will have to be done within the time limit notified by the
company.
(p) Floating Rate Bonds:
The rate on the floating Rate Bond is linked to a benchmark interest rate like the
prime rate in USA or LIBOR in euro currency market. The State Bank of India's
floating rate bond was linked to maximum interest on term deposits which was 10
percent. Floating rate is quoted in terms of a margin above or below the bench mark
rate. The-floor rate in the State Bank of India case was 12 per cent. Interest rates
linked to the bench mark ensure that neither the borrower nor the lender suffer from
the changes in interest rates. When rates are fixed, they are likely to be inequitable to
the borrower when interest rates fall subsequently, and the same bonds are likely to be
inequitable to the lender when interest rates rise subsequently.
Warrants
A warrant is a security issued by a company granting the holder of the warrant the
right to purchase a specified number of, shares at a specified price any time prior to an
expirable date. Warrants may be issued with debentures or equity shares. The specific
rights are set out in the warrant. The main features-of a warrant are number of shares
entitled, expiry date and state price exercise price. Expiry date of warrants, generally
in USA, is 5 to 10 years from the original issue date. The exercise price is 10 to 30
percent above the prevailing market price. The Warrants have a secondary market.
The minimum value of a warrant represents the exchange value between the current
price of the share and the shares purchased at the exercise price. Warrants have no
flotation costs and when they are exercised the firm receives additional funds at a
price lower than the current market, yet about those prevailing at issue time. New or
growing firms and venture capitalists issue warrants. They are also issued in mergers
and acquisitions. Warrants are called sweeteners and have been issued in the recent
past by several companies in India. Debentures issued with warrants, like convertible
debentures, carry lower coupon rates. Non-Convertible Debentures (NCDS) With
Detachable Equity Warrants. The holder of NCDs with detachable equity warrants is
given an option to buy a specific number of shares from the company at a
predetermined price within a definite time-frame. The warrants attached to NCDs will
be issued subject to full payment of NCD is a value. There is a specific lock-in period
after which there detachable option to apply for equities. If the option to apply for
equities is not exercised, the unapplied portion of shares would be disposed off by the
company at its liberty.
Zero-Interest Fully Convertible Debentures (FCDS)
The investors in zero-interest fully convertible debentures will not be paid any
interest. However, there is a notified period after which fully paid FCDs will be
automatically and compulsorily converted into shares. There is a lock-in period upto
which no interest will be paid. Conversion is allowed only for fully paid FCDs. In the
event of the company going for rights issue prior to the allotment of equity resulting
from the conversion of equity shares into FCDs, FCD holders shall be offered
securities as may be determined by the company. Secured Zero-Interest Partly
Convertible Debentures (PCDS) With Detachable and Separately Tradable Warrants:
This instrument has two parts; part A and part B. Part A is convertible into equity
shares at a fixed amount on the date of allotment. Part B is non-convertible, to be
redeemed at par at the end of a specific period from the date of allotment. Part B will
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carry a detachable and separately tradable warrant which will provide an option to the
warrant holder to receive equity shares for every warrant held at a price as worked out
by the company.
Fully Convertible Debentures (FCDS) With Interest (Optional)
This instrument does not yield interest in the initial period of say, 6 months. After this
, period option is given to the holder of FCDs to apply for equity at a "premium" for
which no additional amorist needs to be paid. The option has to be indicated in the
application form itself. However, interest on FCDs is payable at a determined rate
from the date of first conversion to the second / final conversion and in lieu of it,
equity shares are issued.
Other Debt Securities in Vogue Abroad
Income Bonds:
Here interest is paid only when cash flows are adequate. Income Bonds are like
cumulative preference shares on which the fixed dividend is not paid if there is no
profit in a year, but is carried forward and paid in the following year. On Income
Bonds, there is no default if interest is not paid. Unlike dividend on cumulative
preference shares, interest on income bond is tax deductible. Income Bonds are issued
abroad by companies in reorganisation or by firms whose financial situation does not
make it feasible to issue bonds with a fixed interest payment
Asset-Backed Securities:
Assets-backed securities are a category of marketable securities that are collateralized
by financial assets such as instalment loan contracts. Asset-backed financing involves
a process called securitization. Securitization is a disintermediation process in which
credit from financial intermediaries is replaced by marketable debentures that can be
issued at lower cost. Financial assets are pooled so that debentures can be sold to third
parties to finance the pool. Repos are the oldest asset-backed security in our country.
In USA, securitisation has been undertaken for insured mortgages (Ginnie Mae,
1970), mortgage backed loans, student loans (Sallie Mae 1973), trade credit
receivable backed bonds (1982), equipment leasing backed bonds (1984), certificates
of automobile receivable securities (1985) and small business administration loans.
More recently, credit card receivables have been securitized. The decade of the
eighties witnessed large expansion of asset backed security financing.
Junk Bonds:
Junk Bond is a high risk, high yield bond to finance either a leveraged buyout (LBO),
a merger of a company in financial distress. It is a high-risk, non-investment-grade
bond with a low credit rating, usually BB or lower; as a consequence, it usually has a
high yield. Junk bonds are speculative bonds and these bonds involve a lot of risk so
before investing in these types of bonds proper care must be taken by the investors
and after the proper satisfaction of the terms and conditions of the bonds should for
the investment in the Junk bonds. These bonds are not very much good from the point
of safety and reliability. Junk bonds are corporate bonds that are least safe. They have
been rated as not investment grade by Standard & Poors or Moodys because the
company is not fiscally sound. Therefore, they tend to have the highest return for
bonds to compensate for the additional risk. And that is why it is also known as high
yield or speculative bond. Junk bonds typically offer interest rates three to four
percentage points higher than safer government issues. Coupon rates range from 16 to
25 per cent. Old line established companies which were inefficient and. financed
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conservatively were objects of take over and restructuring. To finance such take-over,
high yield bonds were sold. Attractive deals were put together establishing their
feasibility in terms of adequacy of cash flows to meet interest payments. Michael
Milken of Drexel Buraham Lambert was the real developer of the market.

CHAPTER 3
INTRODUCTION TO TRADING
TRADING PROCEDURE
CLEARING AND SETTLEMENT
BENEFITS OF ONLINE TRADING
INTRODUCTION TO TRADING
In general terms trading refer to the buying and selling of goods and services or we
can say it as a commercial exchange of goods and services. In financial terms trading
refers to the buying and selling of financial instruments such as stocks, bonds,
commodities, derivatives etc. Previously the trading on stock exchanges in India used
to take place through open outcry without use of information technology for
immediate matching or recording of trades. This was time consuming and inefficient.
This imposed limits on trading volumes and efficiency. In order to provide efficiency,
liquidity and transparency, NSE introduced a nation-wide on-line fully automated
SBTS (Screen Based Trading System) where a member can punch into the
computer quantities of securities and the prices at which he likes to transact and the
transaction is executed as soon as it finds a matching sale or buy order from a counter
party. SBTS (Screen Based Trading System) electronically matches orders on a
strict price/time priority and hence cuts down on time, cost and risk of error, as well
as on fraud resulting in improved operational efficiency. This is also called as the
online trading of the stock market in which an order is placed by an investor and is
being transferred though online to the NSE portal and executes the order in the
manner the investor wants. Online trading in India is the internet based investment
activity that involves no direct involvement of the broker. There are many leading
online trading portals in India along with the online trading platforms of the biggest
stock houses like the National stock exchange and the Bombay stock exchange. The
total portion of online share trading India has been found to have grown from just 3
per cent of the total turnover in 2003-04 to 16 per cent in 2006-07. The investor has to
register with an online trading portal and get into an agreement with the firm to trade
in different securities following the terms and conditions listed down on the
agreement. The order processing is done in correct timings as the servers of the online
trading portal are connected to the stock exchanges and designated banks all round the
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clock. They can also get updates on the trading and check the current status of their
orders either through e-mail or through the interface. Brokerage also provides
research content on their websites, such that the clients can take their own decisions
on stocks before investing. The major financial products and services of the Online
trading in India are like equities, mutual funds, life insurance, general insurance,
loans, share trading, commodities trading, portfolio management and financial
planning. In spite of many private stock houses at present involved in online trading
in India, the NSE and BSE are among the largest exchanges. They handle huge daily
trading volumes, supporting large amounts of data traffic, and possessing a
countrywide network. The automated online systems used for trading by the national
stock exchange and the Bombay stock exchange are the NIBIS or NSE's Internet
Based Information System and NEAT for the national stock exchange and the BSE
Online Trading system or BOLT for the Bombay stock exchange. It allows faster
incorporation of price sensitive information into prevailing prices, thus increasing the
informational efficiency of markets. It enables market participants, irrespective of
their geographical locations, to trade with one another simultaneously, improving the
depth and liquidity of the market. It provides full anonymity by accepting orders, big
or small, from members without revealing their identity, thus providing equal access
to everybody. It also provides a perfect audit trail, which helps to resolve disputes by
logging in the trade execution process in entirety. This sucked liquidity from other
exchanges and in the very first year of its operation, NSE became the leading stock
exchange in the country, impacting the fortunes of other exchanges and forcing them
to adopt SBTS also. Today India can boast that almost 100% trading take place
through electronic order matching. Technology was used to carry the trading platform
from the trading hall of stock exchanges to the premises of brokers. NSE carried the
trading platform further to the PCs at the residence of investors through the Internet
and to handheld devices through WAP for convenience of mobile investors. This
made a huge difference in terms of equal access to investors in a geographically vast
country like India. The trading network is depicted in Figure 1.1. NSE has main
computer which is connected through Very Small Aperture Terminal (VSAT) installed
at its office. The main computer runs on a fault tolerant STRATUS mainframe
computer at the Exchange. Brokers have terminals (identified as the PCs in the Figure
1.1) installed at their premises which are connected through VSATs/leased
lines/modems.
Figure 2: Trading Network (source: www.invetopedia.com)

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An investor informs a broker to place an order on his behalf. The broker enters the
order through his PC, which runs under Windows NT and sends signal to the Satellite
via VSAT/leased line/modem. The signal is directed to mainframe computer at NSE
via VSAT at NSE's office. A message relating to the order activity is broadcast to the
respective member. The order confirmation message is immediately displayed on the
PC of the broker. This order matches with the existing passive order(s), otherwise it
waits for the active orders to enter the system. On order matching, a message is
broadcast to the respective member. The trading system operates on a strict price time
priority. All orders received on the system are sorted with the best priced order getting
the first priority for matching i.e., the best buy orders match with the best sell order.
Similar priced orders are sorted on time priority basis, i.e. the one that came in early
gets priority over the later one. Orders are matched automatically by the computer
keeping the system transparent, objective and fair. Where an order does not find a
match, it remains in the system and is displayed to the whole market, till a fresh order
comes in or the earlier order is cancelled or modified. The trading system provides
tremendous flexibility to the users in terms of kinds of orders that can be placed on
the system. Several time - related (immediate or cancel), price-related (buy/sell limit
and stop loss orders) or volume related (Disclosed Quantity) conditions can be easily
built into an order. The trading system also provides complete market information online. The market screens at any point of time provide complete information on total
order depth in a security, the five best buys and sells available in the market, the
quantity traded during the day in that security, the high and the low, the last traded
price, etc. Investors can also know the fate of the orders almost as soon as they are
placed with the trading members. Thus the NEAT system provides an Open Electronic
Consolidated Limit Order Book (OECLOB). Limit orders are orders to buy or sell
shares at a stated quantity and stated price. If the price quantity conditions do not
match, the limit order will not be executed. Limit orders are made for a minimum sell
price or a maximum buy price. They allow one to control the price of the trade, but
the order may be executed only partially. The term limit order book refers to the fact
that only limit orders are stored in the book and all market orders are crossed against
the limit orders sitting in the book. The specialist has the responsibility to guarantee
that the top priority order is executed before other orders in the book, and before other
orders at an equal or worse price held or submitted by other traders on the floor (floor
brokers, market makers, etc). Since the order book is visible to all market participants,
it is termed as an Open Book. Thus it is an order to a broker to buy a specified
quantity of a security at or below a specified price, or to sell it at or above a specified
price (called the limit price). This ensures that a person will never pay more for the
stock than whatever price is set as his/her limit. This is one of the two most common
types of orders, the other being a market order. It is opposite of no limit order.

ELECTRONIC SHARE TRADING

Traditionally, settlement system on Indian stock exchanges gave rise to settlement risk
due to the time that elapsed before trades were settled by physical movement of
certificates. There were two aspects: First relating to settlement of trade in stock
exchanges by delivery of shares by the seller and payment by the buyer. The stock
exchange 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 broker to Clearing Corporation to the buyers broker
and finally to the buyer took time with the risk of delay somewhere along the chain.
The second aspect related to transfer of shares in favour of the purchaser by the issuer.
This system of transfer of ownership was grossly inefficient as every transfer involved
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the physical movement of paper securities to the issuer for registration, with the
change of ownership being evidenced by an endorsement on the security certificate.
In many cases the process of transfer took much longer than the two months as
stipulated in the Companies Act, and a significant proportion of transactions wound
up as bad delivery due to faulty compliance of paper work. Theft, mutilation of
certificates and other irregularities were rampant, and in addition the issuer had the
right to refuse the transfer of a security. Thus the buyer did not get good title of the
securities after parting with good money. All this added to the costs and delays in
settlement, restricted liquidity and made investor grievance redressal time-consuming
and at times intractable. To obviate these problems, the Depositories Act, 1996 was
passed to provide for the establishment of depositories in securities with the objective
of ensuring free transferability of securities with speed, accuracy and security by
(a) Making securities of public limited companies freely transferable subject to certain
exceptions;
(b) Dematerializing the securities in the depository mode; and
(c) Providing for maintenance of ownership records in a book entry form.
In order to streamline both the stages of settlement process, the Depositories Act
envisages transfer of ownership of securities electronically by book entry without
making the securities move from person to person. The Act has made the securities of
all public limited companies freely transferable by restricting the companys right of
use discretion in effecting the transfer of securities, and dispensing with the transfer
deed and other procedural requirements under the Companies Act. A depository holds
securities in dematerialized form. It maintains ownership records of securities and
effects transfer of ownership through book entry. By fiction of law, it is the registered
owner of the securities held with it with the limited purpose of effecting transfer of
ownership at the behest 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 beneficial owner. The beneficial owner has
all the rights and liabilities associated with the securities. The owner of securities
intending to avail of depository services opens an account with a depository through a
depository participant (DP). The Securities are transferred from one account to
another through book entry only on the instructions of the beneficial owner. In order
to promote dematerialization of securities, NSE joined hands with leading financial
institutions to establish the National Securities Depository Ltd. (NSDL), the first
depository in the country, with the objective of enhancing the efficiency in settlement
systems as also to reduce the menace of fake/forged and stolen securities. This has
ushered in an era of dematerialized trading and settlement. SEBI has made
dematerialized settlement mandatory in an ever-increasing number of securities in a
phased manner, thus bringing about an increase in the proportion of shares delivered
in dematerialized form. There is an increasing preference to settle trades, particularly
in high value securities, in demat form. Such high level of demat settlement reassures
success of rolling settlement. CDSL was set up in February, 1999 to provide
depository services. All leading stock exchanges like the National Stock Exchange,
Calcutta Stock Exchange, Delhi Stock Exchange, The Stock Exchange, Ahmedabad,
etc have established Connectivity with CDSL.

PROCESS OF SHARE TRADING

Neat System
The NEAT system supports an order driven market, wherein orders match on the basis
of time and price priority. All quantity fields are in units and prices are quoted in
Indian Rupees. The regular lot size and tick size for various securities traded is
88

notified by the Exchange from time to time. NSE is the first exchange in the world to
use satellite communication technology for trading. It uses a modern, fully
computerised trading system designed to offer investors across the length and breadth
of the country a safe and easy way to invest. Its trading system, called National
Exchange for Automated Trading (NEAT), is a state of-the-art client server based
application. At the server end all trading information is stored in an in memory
database to achieve minimum response time and maximum system availability for
users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is
uniform response time of less than one second. The NSE trading system called
'National Exchange for Automated Trading' (NEAT) is a fully automated screen based
trading system, which adopts the principle of an order driven market. Through NEAT
system per trader there are 225 terminals (users) and on an average 2849 VSATs
connect the 6100 users to NSE.

PARTIES INVOLVED IN SHARE TRADING

There are various parties involved in share trading but the main parties involved in the
share trading are seller and buyer and broker who acts as the middle men. Both seller
and buyer are the traders and the broker is the middle men who facilitate the share
trading. There are various markets in which the parties do their trading.
Market Types
The Capital Market system has four types of market.
A) Normal Market
Normal market consists of various book types wherein orders are segregated as
Regular Lot Orders, Special Term Orders, Negotiated Trade Orders and Stop Loss
Orders depending on their order attributes A normal market is termed .as the market
of equity where normal orders can be placed for delivery or for margin. It is a system
used to categorize what normal transactions sizes are for a particular security and
require market makers to stay within the bounds of these sizes.
B) Odd Lot Market
The odd lot market facility is used for the Limited Physical Market. In odd lot market
trading, we generally call traders as an odd lotter. Basically odd lotters are the one
who usually purchase small amount of shares. Stocks are typically traded in
increments of 100 shares and odd lotters usually trade in less than 100 shares. So we
can say it as less than 100 shares of a stock; or less than 10 shares of a very thinly
traded stock. Thus odd lot market is a market where an investor buys or sells less than
100 shares, he or she is said to be trading an odd lot. Traditionally, odd lots involve
higher proportional transaction costs than round lots. Some brokerages charge higher
commissions for such transactions (often 1/8 of a point per share, called the
differential). It is also called as broken lot or uneven lot.
C) Retdebt Market
The Retdebt market facility on the NEAT system of capital market segment is used or
transactions in Retail Debt Market session. Trading in Retail Detail Market takes
place in the same manner as in equities (capital market) segment.
An Overview
History
In most of the countries, the debt market is more popular than the equity market. This
is due to the sophisticated bond instruments that have return-reaping assets as their
underlying. In the US, for instance, the corporate bonds (like mortgage bonds)
became popular in the 1980s. However, in India, equity markets are more popular
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than the debt markets due to the dominance of the government securities in the debt
markets. Moreover, the government is borrowing at a pre-announced coupon rate
targeting a captive group of investors, such as banks. This, coupled with the automatic
monetization of fiscal deficit, prevented the emergence of a deep and vibrant
government securities market. The bond markets exhibit a much lower volatility than
equities, and all bonds are priced based on the same macroeconomic information. The
bond market liquidity is normally much higher than the stock market liquidity in most
of the countries. The performance of the market for debt is directly related to the
interest rate movement as it is reflected in the yields of government bonds, corporate
debentures, MIBOR-related commercial papers, and non-convertible debentures.
There are various debt securities being launched in India and consist of debenture,
warrants and various other securities. Debt is an instrument which is a loan for any
company.
Concept of debt market
The debt market is a market where fixed income securities issued by the Central and
state governments, municipal corporations, government bodies, and commercial
entities like financial institutions, banks, public sector units, and public limited
companies. Therefore, it is also called fixed income market. Debt market refers to the
financial market where investors buy and sell debt securities, mostly in the form of
bonds. These markets are important source of funds, especially in a developing
economy like India. India debt market is one of the largest in Asia. Like all other
countries, debt market in India is also considered a useful substitute to banking
channels for finance. For a developing economy like India, debt markets are crucial
sources of capital funds. The debt market in India is amongst the largest in Asia. It
includes government securities, public sector undertakings, other government bodies,
financial institutions, banks, and companies.
Risks associated with debt securities
The debt market instrument is not entirely risk free. Specifically, two main types of
risks are involved, i.e., default risk and the interest rate risk.

Default Risk/Credit Risk arises when an issuer of a bond defaults on the

interest or principal obligation.
Interest Rate Risk can be defined as the risk emerging from an adverse change
in the interest rate prevalent in the market, which would affect the yield on the
existing instruments. For instance, an upswing in the prevailing interest rate
may lead to a situation where the investors' money is locked at lower rates. If
they had waited and invested in the changed interest rate scenario, they would
have earned more.

Other risks associated with trading in debt securities are more generic in nature, like:

90

Counter Party Risk refers to the failure or inability of the opposite party in the
contract to deliver either the promised security or the sale value at the time of
settlement.
Price Risk refers to the possibility of not being able to receive the expected
price on any order due to an adverse movement in the prices.

Indian Debt Market

The Indian debt market is composed of government bonds and corporate bonds,
debentures and other securities at which the interest has to be given. The debt lenders
are given the propriety over the equity share holders for the payment of their money.
They receive a fixed amount of interest on the debt the debt lenders have given.
However, the Central government bonds are predominant and they form most liquid
component of the bond market. In 2003, the National Stock Exchange (NSE)
introduced Interest Rate Derivatives. MCX Stock Exchange (MCX-SX) is also
planning to launch the same in 2009. The biggest advantage of investing in Indian
debt market is its assured returns. The returns that the market offer is almost risk-free
(though there is always certain amount of risks, however the trend says that return is
almost assured). Safer are the government securities. On the other hand, there are
certain amounts of risks in the corporate, FI and PSU debt instruments. However,
investors can take help from the credit rating agencies which rate those debt
instruments. The interest in the instruments may vary depending upon the ratings.
Another advantage of investing in India debt market is its high liquidity. Banks offer
easy loans to the investors against government securities. As there are several
advantages of investing in India debt market, there are certain disadvantages as well.
As the returns here are risk free, those are not as high as the equities market at the
same time. So, at one hand you are getting assured returns, but on the other hand, you
are getting less return at the same time. Retail participation is also very less here,
though increased recently. There are also some issues of liquidity and price discovery
as the retail debt market is not yet quite well developed. The trading platforms for
government securities are the Negotiated Dealing System and the Wholesale Debt
Market (WDM) segment of NSE and BSE. In the negotiated market, the trades are
normally decided by the seller and the buyer, and reported to the exchange through
the broker, whereas the WDM trading system, known as NEAT (National Exchange
for Automated Trading), is a fully automated screen-based trading system, which
enables members across the country to trade simultaneously with enormous ease and
efficiency. The instruments traded can be classified into the following segments based
on the characteristics of the identity of the issuer of these securities:
Table Number 4 (Source: www.nseIndia.com)

Market Segment

Issuer

Instruments

Government Securities

Central Government

Zero Coupon Bonds, Coupon

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Bearing Bonds,
Bills, STRIPS
State Government
Public Sector Bonds

Private Sector Bonds

Government Agencies
Statutory Bodies

Treasury

Coupon Bearing Bonds

/ Govt. Guaranteed
Debentures

Bonds,

Public Sector Units

PSU Bonds, Debentures,

Commercial Paper

Corporates

Debentures,
Bonds,
Commercial Paper, Floating
Rate Bonds, Zero Coupon
Bonds,
Inter-Corporate
Deposits

Banks

Certificates of Deposits,
Debentures, Bonds

Financial Institutions

Certificates
Bonds

of

Deposits,

Price determination in the debt markets

The price of a bond in the markets is determined by the forces of demand and supply,
as is the case in any market. The price of a bond also depends on the changes in:

Economic conditions
General money market conditions, including the state of money supply in the
economy
Interest rates prevalent in the market and the rates of new issues
Future Interest Rate Expectations
Credit quality of the issuer

Note: There is, however, a theoretical underpinning to the determination of the price
of the bond based on the measure of the yield of the security.
Debt Instruments are categorized as:

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Government of India dated Securities (G Securities) are 100-rupee facevalue units/ debt paper issued by the Government of India in lieu of their
borrowing from the market. They are referred to as SLR securities in the
Indian markets as they are eligible securities for the maintenance of the SLR
ratio by the banks.

Corporate debt market: The corporate debt market basically contains PSU
bonds and private sector bonds. The Indian primary Corporate Debt market is
basically a private placement market with most of the corporate bonds being
privately placed among the wholesale investors, which include banks,
financial Institutions, mutual funds, large corporates & other large investors.

The following debt instruments are available in the corporate debt market:

Non-Convertible Debentures
Partly-Convertible Debentures/Fully-Convertible Debentures (convertible into
Equity Shares)
Secured Premium Notes
Debentures with Warrants
Deep Discount Bonds
PSU Bonds/Tax-Free Bonds

Main participants in the retail debt market include mutual funds, provident funds,
pension funds, private trusts, and state-level and district-level co-operative banks,
housing finance companies, NBFCs and RNBCs, corporate treasuries, Hindu
Undivided Families (HUFs), and individual investors.
Interest Rate Derivatives
An interest rate futures contract is "an agreement to buy or sell a package of debt
instruments at a specified future date at a price that is fixed today." The price of debt
securities and, therefore, interest rate futures, is inversely proportional to the
prevailing interest rate. When the interest rate goes up, the price of debt securities and
interest rate futures goes down, and vice versa. Some of the assets underlying interest
rate futures include US Treasuries, Euro-Dollars, LIBOR Swap, and Euro-Yen
futures.
Tenure
Interest rate futures contracts can have short-term (less than one year) and long-term
(more than one year) interest bearing instruments as the underlying asset. In the US,
short-term interest rate futures like 90-day T-Bill and 3-month Euro-Dollar time
deposits are more popular. Long-term interest rate futures include the 10-year
Treasury note futures contract, and the Treasury bond futures contract.
Hedging with Interest rate futures
Interest rate futures can be used to protect against an increase in interest rates as well
as a decline in interest rates. By selling interest rate futures, also known as short
hedging, an investor can protect himself against an increase in interest rates; and by
buying interest rate futures, also known as long hedging, an investor can protect
himself against a decline in interest rates. Thus, short, medium, and long-term interest
rate risks can be managed with products based on Euro-Dollars, US Treasuries, and
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Swaps in Europe and the US. In India, interest rate derivatives would be used for
hedging in the near future.
Regulatory Authority
The regulators of the Indian debt market are:
RBI: The Reserve Bank of India is the main regulator for the money market. It
controls and regulates the G-Securities market. Apart from its role as a regulator, it
has to simultaneously fulfill several other important objectives, such as managing the
borrowing programme for the Government of India, controlling inflation, ensuring
adequate credit at reasonable costs to various sectors of the economy, managing the
foreign exchange reserves of the country and ensuring a stable currency environment.
The RBI controls the issuance of new banking licenses to banks. It controls the
manner in which various scheduled banks raise money from depositors. Further, it
controls the deployment of money through its policies on CRR, SLR, priority sector
lending, export refinancing, guidelines on investment assets, etc. The RBI also
administers the interest rate policy. Earlier, it used to strictly control interest rates
through a directed system of interest rates. Each type of lending activity was supposed
to be carried out at a pre-specified interest rate. Over the years, the RBI has moved
slowly towards a regime of market-determined controls.
SEBI: The regulator for the Indian corporate debt market is the Securities and
Exchange Board of India (SEBI). SEBI controls bond market in cases where entities
esp. corporate raise money from public through public issues. It regulates the manner
in which money is raised and to ensure a fair play for the retail investor. It forces the
issuer to make the retail investor aware of the risks inherent in the investment and its
disclosure norms. SEBI is also a regulator for the mutual funds and regulates the entry
of new mutual funds in the industry. It also regulates the instruments in which these
mutual funds can invest. SEBI also regulates the investments of FIIs.
D) Auction Market
In the Auction market, auctions are initiated by the Exchange on behalf of trading
members for settlement related reasons. It is a market in which buyers enter
competitive bids and sellers enter competitive offers at the same time. The price a
stock is traded represents the highest price that a buyer is willing to pay and the
lowest price that a seller is willing to sell at. Matching bids and offers are then paired
together and the orders are executed. Auction markets differ from over the counter
where trades are negotiated. For example, 4 buyers want to buy a share of XYZ and
make the following bids: $10.00, 10.02, 10.03 and $10.06. Conversely, there are 4
sellers that desire to sell XYZ and they submitted offers to sell their shares at the
following prices: $10.06, 10.09, 10.12 and $10.13. In this scenario, the individuals
that made bids/offers for XYZ at $10.06 will have their orders executed. All
remaining orders will not immediately be executed and the current price of XYZ will
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then be $10.06. An auction market is an example of buying and selling of financial

instruments that takes place on the floor of an exchange, such as the New York Stock
Exchange. Sometimes referred to as open outcry trading, the auction market provides
a means for buyers and sellers to compete in a real time environment, with the stocks
and bonds usually going to the highest bidder. The attraction of auction markets is that
the process allows for quick and swift trading. Competitive bids for available stocks
and bonds can be accepted and approved immediately, since everyone on the floor of
the stock exchange has to meet strict criteria in order to participate in the bidding
process. As with any type of auction, these qualified participants are free to make as
many bids as possible, creating a lively atmosphere. For many, this form of bidding is
much more exciting than any type of online or indirect negotiations through a third
party, such as in the case of over the counter markets. While most auctions employ
the use of one auctioneer, an auction market is an eclectic mix of both buyers and
sellers. Sellers vie for the attention of the buyers, while buyers are also actively
engaged in attracting the notice of persons who wish to purchase stocks. While this
approach may appear to be unstructured to the novice, the fact is that most people
who choose to participate in an open market have honed their skills to the point that
they are often able to obtain the desired results. Sellers often leave with a price that is
acceptable, while buyers obtain shares at a unit price that is considered to be
competitive and fair. An auction market approach to buying and selling shares of
stocks also has the distinction of being a time-honoured tradition. Long before the
advent of any type of electronic technology to support trading, the open auction
market was considered the most efficient means of building a solid stock portfolio.
Even as modern telephony made it possible to obtain real time information, the
concept of an auction market continued to be highly desirable. Persons who were
unable to travel to an auction floor were still able to provide agents with authorization
to buy and sell within certain limitations, and see the results in a very short period of
time. While online trading has gained a great deal of attention over the last two
decades, there is no doubt that the auction market will continue to be the preferred
means of trading for many investors. Auctions are initiated by the Exchange on
behalf of trading members for settlement related reasons. The main reasons are
Shortages, Bad Deliveries and Objections. There are three types of participants in the
auction market.
(a) Initiator: The party who initiates the auction process is called an initiator.
(b)Competitor: The party who enters on the same side as of the initiator is called a
competitor.
(c) Solicitor: The party who enters on the opposite side as of the initiator is called a
solicitor.
The trading members can participate in the Exchange initiated auctions by entering
orders as a solicitor. E.g. If the Exchange conducts a Buy-In auction, the trading
members entering sell orders are called solicitors. When the auction starts, 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 initiators order i.e. if the initiators order is a buy order, then all the
buy orders for that auction other than the initiators order are competitor orders. And
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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 ends, 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 buy order, then all the sell orders for
that auction are solicitor orders and if the initiator order is a sell order, then all the buy
orders for that auction are solicitor orders. After the solicitor period, order matching
takes place. The system calculates trading price for the auction and all possible trades
for the auction are generated at the calculated trading price. After this the auction is
said to be complete. Competitor period and solicitor period for any auction are set by
the Exchange.
Order Management
Order Management consists of entering orders, order modification, order cancellation
and order matching. It refers to managing an order and identifying whether to enter an
order or to modify it or to cancel that order or to match that order. Actually all this
order management is performed by the software which is being used for trading. This
software depends on brokerage company to company. When an order is made by a
client for purchase or sale of the shares it is being entered in order book and when the
order is being matched with the order being made by the client then it is automatically
triggered. Order management is all about handling the entering of order, modification
of order, and cancellation of order and also includes matching the order placed by a
client at one side with the other order. And all these things are managed by software
through which these activities are handled.
Entering Orders
The trading member can enter orders in the normal market, odd lot, RETDEBT and
auction market. A user
can place orders in any of the above mentioned markets by invoking the respective
order entry screens. After doing so, the system automatically picks up information
from the last invoked screen (e.g. Market Watch/MBP/OO/SQ and Security List).
When the user invokes the order entry screen, the fields that are taken as default are
Symbol, Series and Book
In case of other fields, the system takes the following defaults:
Qty: Regular lot quantity available at best price on counter side
Price: Price of best counter order
Pro: Trading member ID of the user
Order Duration: Day
Disclosed quantity: Fully Disclosed
Participant ID: Trading member ID of the user
Active & Passive Order
When any order enters the trading system, it is an active order. It tries to find a match
on the other side of the books. If it finds a match, a trade is generated. If it does not
find a match, the order becomes a passive order and goes and sits in the order book.
Order Books
As and when valid orders are entered or received by the trading system, they are first
numbered, time stamped and then scanned for a potential match. This means that each
order has a distinctive order number and a unique time stamp on it. If a match is not
found, then the orders are stored in the books as per the price/time priority. Price
priority means that if two orders are entered into the system, the order having the best
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price gets the higher priority. Time priority means if two orders having the same price
is entered, the order that is entered first gets the higher priority. Best price for a sell
order is the lowest price and for a buy order, it is the highest price.
The different order books in the NEAT system are as detailed below:
(a) Regular Lot Book: An order that has no special condition associated with it is a
Regular Lot order. When a dealer places this order, the system looks for a
corresponding Regular Lot order existing in that market (Passive orders). If it does not
find a match at the time it enters the system, the order is stacked in the Regular Lot
book as a passive order. By default, the Regular Lot book appears in the order entry
screen in the normal market. Buyback orders can be placed through the Regular Lot
(RL) book in the Normal Market. The member can place a buyback order by
specifying BUYBACKORD in the Client Account field in the order entry screen.
Such company buyback orders will be identified in MBP screen by an * (asterisk)
indicator against such orders.
(b) Special Terms Book: Orders which have a special term attribute attached to it are
known as special terms orders. When a special term order enters the system, it scans
the orders existing in the Regular Lot book as well as Special Terms Book. Currently
this facility is not available in the trading system.
(c) Stop Loss Book: Stop Loss orders are released into the market when the last
traded price for that security in the normal market reaches or surpasses the trigger
price. Before triggering, the order does not participate in matching and the order
cannot get traded. Untriggered stop loss orders are stacked in the stop loss book. An
order placed with a broker to sell a security when it reaches a certain price. A stoploss order is designed to limit an investor's loss on a security position. It is also known
as a "stop order" or "stop-market order". Setting a stop-loss order for 10% below the
price you paid for the stock will limit your loss to 10%. This strategy allows investors
to determine their loss limit in advance, preventing emotional decision-making. It's
also a great idea to use a stop order before you leave for holidays or enter a
situation in which you will be unable to watch your stocks for an extended period of
time. Thus a stop loss is an order to buy (or sell) a security once the price of the
security climbed above (or dropped below) a specified stop price. When the specified
stop price is reached, the stop order is entered as a market order (no limit) or a limit
order (fixed or pre-determined price). With a stop order, the trader does not have to
actively monitor how a stock is performing. However because the order is triggered
automatically when the stop price is reached, the stop price could be activated by a
short-term fluctuation in a security's price. Once the stop price is reached, the stop
order becomes a market order or a limit order. The stop loss orders can be either a
market order or a limit price order. For buy Stop Loss orders, the trigger price has to
be less than or equal to the limit price. Similarly, for sell Stop Loss orders, the trigger
price has to be greater than or equal to the limit price. In a fast-moving volatile
market, the price at which the trade is executed may be much different from the stop
price in the case of a market order. Alternatively in the case of a limit order the trade
may or may not get executed at all. This happens when there are no buyers or sellers
available at the limit price.
Types of Stop Loss order
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1) Stop Loss Limit Order

A stop loss limit order is an order to buy a security at no more (or sell at no less) than
a specified limit price. This gives the trader some control over the price at which the
trade is executed, but may prevent the order from being executed. A stop loss buy
limit order can only be executed by the exchange at the limit price or lower. For
example, if an trader is short and wants to protect his short position but doesn't want
to pay more than Rs.100 for the stock, the investor can place a stop loss buy limit
order to buy the stock at any price up to Rs.100. By entering a limit order rather than a
market order, the investor will not be caught buying the stock at Rs.110 if the price
rises sharply. Alternatively a stop loss sell limit order can only be executed at the
limit price or higher.
Advantages and disadvantages of the stop loss limit order
The main advantage of a stop loss limit order is that the trader has total control over
the price at which the order is executed. The main disadvantage of the stop loss limit
order is that in a fast moving volatile market your stop loss order may not get
executed if there are no buyers/sellers at the limit price.
2) Stop Loss Market Order
A stop loss market order is an order to buy (or sell) a security once the price of the
security climbed above (or dropped below) a specified stop price. When the specified
stop price is reached, the stop order is entered as a market order (no limit). In other
words a stop loss market order is an order to buy or sell a security at the current
market price prevailing at the time the stop order is triggered. This type of stop loss
order gives the trader no control over the price at which the trade will be executed. A
sell stop market order is a order to sell at the best available price after the price goes
below the stop price. A sell stop price is always below the current market price. For
example, if a trader holds a stock currently valued at Rs.100 and is worried that the
value may drop, he/she can place a sell stop order at Rs.90. If the share price drops to
Rs.90, the exchange will sell the order at the next available price. This can limit the
traders losses (if the stop price is at or below the purchase price) or lock in some of
the profits.
A buy stop market order is typically used to limit a loss (or to protect an existing
profit) on a short sale. A buy stop price is always above the current market price. For
example, if an trader sells a stock short hoping the stock price goes down in order to
book profits at a lower price, the trader may use a buy stop order to protect himself
against losses if the price goes too high.
Advantages and disadvantages of the stop loss market order

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The main advantage of a stop loss market order is that the stop loss order will always
get executed. The main disadvantage of the stop loss market is that the trader has no
control over the price at which the transaction is executed.
Conclusion
Stop loss orders are great insurance policies that cost you nothing and can save you a
fortune. Unless you plan to hold a stock forever, you should consider using them to
protect yourself.
(d) Negotiated Trade Book: Two trading members can negotiate a trade outside the
Exchange. To regularize the trade each trading member has to enter the respective
order in the system. To enter Negotiated Trade order details, select book type as NT. It
is mandatory for the trading member to enter the counterparty trading member id.
When both parties to a trade enter orders, then the request goes to the Exchange for
approval. The Exchange can either approve the request or reject it. Further, the
Exchange has the discretion to send either of the two orders or both the orders to the
Regular Lot book so that the orders are available to the entire market. Currently this
facility is not available in the trading system.
(e) Odd Lot Book: The Odd Lot book can be selected in the order entry screen in
order to trade in the Odd Lot market. Order matching in this market takes place
between two orders on the basis of quantity and price. To enter orders in the odd lot
market, select the book type as OL.
(f) Retdebt Order Book: RETDEBT market orders can be entered into the system by
selecting the RETDEBT Order book. These orders scan only the RETDEBT Order
book for potential matches. If no suitable match can be found, the order is stored in
the book as a passive order. To enter orders in the RETDEBT market, select the book
type as 'D'.
(g) Auction Order Book: Auction order book stores orders entered by the trading
members to participate in the Exchange initiated auctions. Auction orders can be
initiator orders, competitor orders and solicitor orders. For further details kindly refer
to section on 'Auction'.
Symbol & Series
Securities can be taken as default values from the order entry screen from any of the
inquiry screens such as MBP, OO, PT, AL, MI and SQ. In case the security is not set
up in the Market Watch screen, the Security List can also be used to take the codes as
default values. Order entry in a security is not possible if that security is suspended
from trading. E.g. If a security is suspended in the normal market a message Security
is suspended in the normal market is displayed on the order entry screen. The label
Suspended is also displayed in the market watch screen for the setup security. Order
entry is also not possible in case the security is not eligible to trade in a particular
market. E.g. If a security is not eligible to trade in the normal market a message
Security is not allowed to trade in normal market is displayed on the order entry
screen. In case the user types the symbol series incorrectly a message Invalid symbol
series is displayed on the screen.
Quantity
When the buy/sell order entry screen is invoked, the regular lot size available at the
best price on the counter side gets defaulted in the order entry screen. In case of
negotiated trade or auction book is selected for display, the quantity has to be
specifically mentioned by the user. Quantity mentioned should be in multiples of
regular lot size for that security.
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Quantity Freeze
All orders with very large quantities are sent for Exchange approval. If the quantity
for the order is greater than x% of the issue size of the security or is greater than Rs. x
value of the order (x is as specified by the Exchange) whichever is less, then the
order is sent as a quantity freeze to the Exchange for approval. The Exchange may
either approve or reject the quantity freeze request.
Price
Along with the regular lot quantity, the best price on the counter side 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
price, it should be in multiples of the tick size for that particular security and within
the days minimum/maximum price range, otherwise the order is not accepted by the
system and an order rejection message/confirmation slip is generated. If a price
outside the Operational Range is entered, the order results in a price freeze and is not
accepted as a valid order till the time the Exchange approves it. All auction orders
require the user to mention a price. In case the user enters an order with a Market
price the order takes the last traded price in the respective market as the market price,
provided no passive order exists on the same side or the counter side in that security
and in that market. However, if suitable orders exist on the counter side, then the
order takes the price of the counter order and a trade is generated. If an order exists on
the same side but no orders exists on the counter side, then the order takes the price of
the best order on that side and is stacked immediately below it. If the security has
never been traded, then the market order takes the value of the base price and sits in
the books as a passive order. In case of stop loss orders, a user has the flexibility of
specifying a limit price along with the trigger price. This limit price can be selected as
equal to the trigger price in the price field so as to leave it with the word Price.
Alternatively, a user can specify a limit price as Market price.
Circuit Breakers
Circuit breaker refers to any of a number of procedures implemented by a major
stock or commodity exchange when a certain index falls a predetermined amount in a
session, to prevent further losses. It is sometimes referred as collar. The concept of
circuit breaker was laid back to 1987 crash of US markets. This crash left the
surveillance system of US exchanges to introduce the concept of circuit breakers. In
India, both NSE and BSE introduced the concept of circuit breaker. NSE has
introduced it post 2000. Circuit breaker system applies to both stocks and market as a
whole. Circuit breakers are strategies or measures that are employed by a stock
exchange when there is a need to avert a sense that something catastrophic is about to
happen. It is a system to curb excessive speculation in the stock market, applied by
the stock exchange authorities, when the index spurts or plunges by more than 5%.
Trading is then suspended for some time to let the market cool down. Examples
include trading halts and restrictions on program trading. For example, if the Dow
Jones Industrial Average falls by 10%, the NYSE might halt market trading for one
hour. There are other circuit breakers for 20% and 30% falls. Essentially, the circuit
breaker helps to form a stopgap that keeps a stock exchange on a more even keel until
a more reasonable mindset prevails among the traders. The most common
configuration for a circuit breaker is to initiate a carefully crafted series of trading
halts with a sprinkling of price limits. Generally, the price limits are focused on
derivative markets and equities. By creating this temporary status of slowing down,
there is a better chance for the commodity exchange process to continue within
healthy levels, and not run out of control. As a strategy to correct a temporary
situation within a securities market, the circuit breaker is a relatively new approach.
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The Exchange has implemented index-based market-wide circuit breakers in

compulsory rolling settlement with effect from July 02, 2001. In addition to the circuit
breakers, price bands are also applicable on individual securities. A circuit breaker is
intended to allow investors to determine whether a situation is really as bad as it
looks. It is sometimes called a collar. Although introduced in November 1992, it was
used for the first time in the Bombay Stock Exchange on Tuesday, 9 March 1993
when the SENSEX declined by more than 5% from the opening level, i.e. from
2451.20 to 2318.26.Circuit breaker limit changes every day and stock keeps moving
from one circuit breaker category to another, based on previous days closing price.
The intention of introducing the circuit-breaker was to reduce excessive speculation
by stopping order flow and help improve market liquidity.
Why do we need a circuit breaker?
Indian stock market is full of sentimental actions and shockingly defies the law of
supply-demand. In general, when a price of a good increases its demand decreases
simultaneously to keep the supply-demand in balance. But, in stock market, when
price of a stock starts increasing, its demand also starts increasing, as more and more
traders and investors trying to get a portion of this bullish scrip. Similarly, when the
price of a share starts falling, its demand also goes down simultaneously as more and
more shareholders start selling to get out of the counter. These actions of players are
triggered by greed and fear. This in turn leads to euphoria or panic, as the case may be
which in turn leads to a sudden massive fall or rise in the markets. Both these extreme
reactions are irrational. To control the resulting damage due to these frenzied
behaviours and to protect the market and individual investors from the manipulations,
market regulators use circuit breakers. When the buying and selling of shares gets too
frenzied, a circuit breaker is triggered. It's almost like the fuse in electrical meter. If an
index has fallen below a certain percentage, the exchange might activate trading halts
or restrictions on trading. For example, if the SENSEX falls by 10%, the BSE might
halt market trading for one hour or more.
There are two types of Circuit Breakers.
1) Index based Circuit Breaker
2) Stock based Circuit Breaker
Index based Circuit Breaker: The market circuit breakers are triggered by certain
movements in market indices (like SENSEX and Nifty). These circuit breakers bring
all buying and selling of shares in the country to a halt. Recently, it was activated;
when the market rallied after the formation of the new government. The index-based
market-wide circuit breaker system applies at 3 stages of the index movement, either
way viz. at 10%, 15% and 20%. These circuit breakers when triggered bring about a
coordinated trading halt in all equity and equity derivative markets nationwide. The
market-wide circuit breakers are triggered by movement of either the BSE SENSEX
or the NSE S&P CNX Nifty, whichever is breached earlier. In case of a 10%
movement of either of these indices, there would be a one-hour market halt if the
movement takes place before 1:00 p.m. In case the movement takes place at or after
1:00 p.m. but before 2:30 p.m. there would be trading halt for hour. In case
movement takes place at or after 2:30 p.m. there will be no trading halt at the 10%
level and market shall continue trading. In case of a 15% movement of either index,
there shall be a two-hour halt if the movement takes place before 1 p.m. If the 15%
trigger is reached on or after 1:00 p.m., but before 2:00 p.m., there shall be a one-hour
halt. If the 15% trigger is reached on or after 2:00 p.m. the trading shall halt for
remainder of the day. In case of a 20% movement of the index, trading shall be halted
for the remainder of the day. These percentages are translated into absolute points of
index variations on a quarterly basis. At the end of each quarter, these absolute points
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of index variations are revised for the applicability for the next quarter. The absolute
points are calculated based on closing level of index on the last day of the trading in a
quarter and rounded off to the nearest 10 points in case of S&P CNX Nifty.
Stock wise circuit limits
These are also known as price filters or price bands. It specifies the band within which
the price of a particular stock is allowed to move freely. Once the price breaches the
mentioned levels, it enters into a circuit - Lower circuit on breaching the lower price
level, and Upper circuit on breaching upper price level. Before knowing more about
the Upper circuit and lower circuit it is important to know what exactly a circuit is.
Actually when any index or a stock makes a move in any direction from more than the
specified percentage (%), then it is said to have entered into a circuit or breaking a
circuit. This specific percentage has been mentioned by the regulator (SEBI) and is
calculated above the previous close. Generally, the reason behind such a move is
heavy speculation either about the economy or about a particular stock. So as there
are two directions of movement (up and down), therefore there are two types of
circuit possible upper circuit and lower circuit. When a stock is on upper circuit limit
then there will be only buyers in the market and no seller exists and hence the price is
up. On the other hand lower circuit limit is when there are only sellers in the market
for that stock and hence the stock price is down. Both NSE and BSE have
implemented the circuit limit system on the stocks. They have applied the stock wise
circuit limit system at four levels i.e. 2%, 5%, 10% and 20%. Circuit limits like any
other concept have both pros and cons. On the positive side, with the presence of
circuit filters, the traders/investors fear of erosion of wealth is not rapid when
compared to not having circuit limits. However, it may not be true with in all the
cases. Many times, the stock might see a rise due to announcement of any corporate
action. In that case, the rise of stock beyond a limit might be genuine but still, due to
application of this limit the trading in stock is held. The need for circuit-filters can be
questioned on several grounds. For instance, empirical evidence on the effectiveness
of price limits, circuit-breakers and trading halts is ambiguous. But in the case of
specific situations where it is clear that the equilibrium value of the asset will change,
then it makes no sense to have circuit breakers.
Price Bands
Daily price bands are applicable on securities as below:
Daily price bands of 2% (either way) on securities as specified by the Exchange.
Daily price bands of 5% (either way) on securities as specified by the Exchange.
Daily price bands of 10% (either way) on securities as specified by the Exchange.
No price bands are applicable on: scrips on which derivative products are available
or scrips included in indices on which derivative products are available. In order to
prevent members from entering orders at non-genuine prices in such securities, the
exchange has fixed operating range of 20% for such securities.
Price bands of 20% (either way) on all remaining scrips (including debentures,
warrants, preference shares etc). The price bands for the securities in the Limited
Physical Market are the same as those applicable for the securities in the Normal
Market. For auction market the price bands of 20% are applicable.
Order Types and Conditions
The system allows the trading members to enter orders with various conditions
attached to them as per their requirements. These conditions are broadly divided into
Time Conditions, Quantity Conditions, Price Conditions and Other Conditions.
Several combinations of the above are allowed thereby providing enormous flexibility
to the users. The order types and conditions are summarized below:
a) Time Conditions.
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Day: A DAY order, as the name suggests is an order that is valid for the day on which
it is entered. If the order is not executed during the day, the system cancels the order
automatically at the end of the day. By default, the system assumes that all orders
entered are Day orders.
IOC: An Immediate or Cancel (IOC) order allows the user to buy or sell a security as
soon as the order is released into the system, failing which the order is cancelled from
the system. Partial match is possible for the order, and the unmatched portion of the
order is cancelled immediately.
b) Quantity Conditions
DQ: An order with a Disclosed Quantity (DQ) allows the user to disclose only a
portion of the order quantity to the market. For e.g. if the order quantity is 10,000 and
the disclosed quantity is 2,000, then only 2,000 is released to the market. After this
quantity is fully matched, a subsequent quantity of 2,000 is disclosed. Thus, totally
five disclosures with the same order number are shown one after the other in the
market.
c) Price Conditions
Market: Market orders are orders for which price is specified as 'MKT' at the time
the order is entered. For such orders, the system determines the price.
Stop-Loss: This facility allows the user to release an order into the system, after the
market price of the security reaches or crosses a threshold price called trigger price.
Example: If for stop loss buy order, the trigger is Rs.93.00, the limit price is Rs.95.00
and the market (last traded) price is Rs.90.00, then this order is released into the
system once the market price reaches or exceeds Rs.93.00. This order is added to the
regular lot book with time of triggering as the time stamp, as a limit order of Rs.95.00.
All stop loss orders are kept in a separate book (stop loss book) in the system until
they are triggered.
Trigger Price: Price at which an order gets triggered from the stop loss book.
Limit Price: Price of the orders after triggering from stop loss book.
d) Other Conditions
Pro/Cli/Whs: A user can enter orders on his own account or on behalf of clients or
warehouse order on behalf of institutional clients. By default, the system assumes that
the user is entering orders on the trading members own account. The client account
field is an alphanumeric field. It is mandatory to enter the client account number in
the field provided in case the user enters orders on behalf of clients or warehouse
order on behalf of institutional clients. The system will assign a code Cli to such an
order. The user cannot specify the trading member code in the client account field.
Warehouse orders may be entered only in NM for book type RL. In case a member
tries to enter a warehouse order in other segments, an error message Invalid series
for warehouse order is displayed. To enter a warehouse order with client account,
select WHS 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 member
code. In such a case an error message Broker code not allowed as A/C Number for
WHS orders is displayed.
Counterparty ID: In case a negotiated trade order is entered, the system requests the
user to enter the counterparty trading member id which is to be obtained by the user
from the counter party itself. Currently this facility is not available in the trading
system.
Participant Code: By default, the system displays the trading member id of the user
in the participant field. Thus, all trades resulting from an order are to be settled by that
trading member. NCIT orders can be marked by the user at the order entry level itself.
Only a valid participant code can be entered. In case the participant is suspended a
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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 field, O has to be typed, for Open orders and C has to be typed for
Close orders. Warehousing is permitted where registered custodian is involved for
delivery/receipt of securities. The user has to therefore enter a valid participant code
other than O, C, NCIT and broker code in the participant code field. In case of
incorrect participant code a message This participant code is not valid for warehouse
orders is displayed. All pending warehousing orders get purged at the end of the day
processing. The participant field will contain INST code as part of the drop down list
to mark the Institutional orders.
Remarks: The remarks field is a description field within the order entry screen
provided to incorporate any remarks to be specified by the user at the time of order
entry. It consists of the remarks related to the order entry which is given by the user.
Order Modification
All orders can be modified in the system till the time they do not get fully traded and
only during market hours. Once an order is modified, the branch order value limit for
the branch gets adjusted automatically. Following is the corporate hierarchy for
performing order modification functionality:
A dealer can modify only the orders entered by him.
A branch manager can modify his own orders or orders of any dealer under his
branch.
A corporate manager can modify his own orders or orders of all dealers and branch
managers of the trading member firm.
However, the corporate manager/branch manager cannot modify order details such
that it exceeds the branch order value limit set for the day. Order modification cannot
be performed by/for a trading member. A buyback having BUYBACKORD in the
client account field cannot be modified to any other client account. Any order
modifications resulting in price or quantity freeze shall not be allowed. The user will
receive a message "CFO Request Rejected' for such modification requests.
Order Cancellation
Order cancellation functionality can be performed only for orders which have not
been fully or partially traded (for the untraded part of partially traded orders only) and
only during market hours.
Single Order Cancellation
Single order cancellation can be done during trading hours either by selecting the
order from the outstanding order screen or from the function key provided. Order
cancellation functionality is available for all book types. But the user is not allowed to
cancel auction initiation and competitor orders in auction market. Order cancellation
is also not allowed for those negotiated trade orders that have not resulted as an alert.
Quick Order Cancellation
Quick Order Cancellation (Cancel All) is an extension of Single Order Cancellation
enabling a user to cancel multiple outstanding orders in various trading books subject
to the corporate hierarchy. The different filters available for canceling orders by using
quick order cancellation facility are symbol, series, book type, branch, user,
PRO/CLI/WHS, client account number and buy/sell. Quick order cancellation can be
performed by invoking the function key provided and cannot be done from the
outstanding orders screen. If the criteria are not found to be correct by a trading
member then an error message is displayed and the focus is set on the incorrect field
to enable the user to correct it. If the selection criteria are correct then a message
appears on the quick order cancellation screen stating the number of buy and sell
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orders to be cancelled. Quick order cancellation can be done only during market
hours.
Order Cancellation for Disabled Member
The Exchange disables a member from trading due to various reasons. In case a
member is disabled from trading by the Exchange, all pending orders in all books
except for Negotiated Trade orders of the member are immediately cancelled by the
system. Order Number .......... cancelled due to suspension is displayed at the
message window screen at the trader workstation. Inquiry screens such as MBP,
Market Watch and trader specific screens such as Outstanding Orders, Activity Log
etc. get updated accordingly.
Order Matching
The buy and sell orders are matched on Book Type, Symbol, Series, Quantity and
Price.
Matching Priority
The best sell order is the order with the lowest price and a best buy order is the order
with the highest price. The unmatched orders are queued in the system by following
priority:
(a) By Price: A buy order with a higher price gets a higher priority and similarly, a sell
order with a lower price gets a higher priority. For example, consider the following
buy orders:
1) 100 shares @ Rs. 35 at time 9:30 a.m.
2) 500 shares @ Rs. 35.05 at time 9:43 a.m.
The second order price is greater than the first order price and therefore is the best buy
order.
(b) By Time: If there is more than one order at the same price, the order entered
earlier gets a higher priority. E.g. consider the following sell orders:
1) 200 shares @ Rs. 72.75 at time 9:30 a.m.
2) 300 shares @ Rs. 72.75 at time 9:35 a.m.
Both orders have the same price but they were entered in the system at different time.
The first order was entered before the second order and therefore is the best sell order.
As and when valid orders are entered or received by the system, they are first
numbered, time stamped and then scanned for a potential match. This means that each
order has a distinctive order number and a unique time stamp on it. If a match is not
found, then the orders are stored in the books as per the price/time priority. An active
buy order matches with the best passive sell order if the price of the passive sell order
is less than or equal to the price of the active buy order. Similarly, an active sell order
matches with the best passive buy order if the price of the passive buy order is greater
than or equal to the price of the active sell order.
Regular Lot Matching
If the combined quantity of one or more matching orders on the opposite side of the
regular lot book is equal to or more than the quantity of active order, the active order
is completely traded. If the combined quantity of one or more matching orders on the
opposite side of the regular lot book is equal to or less than the quantity of active
order, the active order is partially traded. If after trading any quantity is left untraded,
the order is added to the regular lot book in the price/time priority. The orders with the
IOC attribute try to match maximum possible quantity after they are entered. Any
remaining quantity is cancelled. The orders with DQ attribute disclose only a part of
the total order quantity to the market. An active order with disclosed condition tries to
maximize the quantity as possible regardless of the disclosed quantity i.e. a single
trade takes place for a quantity more than the disclosed quantity. If an active order
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with the disclosed quantity cannot trade its total quantity, it is added to the regular lot
book in the price/time priority. The disclosed order
Quantity is determined as follows:
a) If the remaining order quantity is less than or equal to the original disclosed
quantity, the disclosed order quantity is set as equal to remaining order quantity.
b) If the remaining order quantity is more than the original disclosed quantity, the
disclosed order quantity is set to the original disclosed quantity. Once an order with
the disclosed quantity has become a passive order, it trades only in units of disclosed
quantity or less. However, if there is no other competing order with the same price, a
single trade of as much quantity as possible takes place between the two orders. When
the entire disclosed order quantity is fully traded the disclosed quantity gets
replenished and this continues till the entire order quantity is fully traded. Each time
the disclosed quantity is replenished; the order is stamped with the current trading
time and added to the regular order book as fresh order.
Stop Loss Matching
All stop loss orders entered into the system are stored in the stop loss book. These
orders can contain two prices.
Trigger Price. It is the price at which the order gets triggered from the stop loss book.
Limit Price: It is the price for orders after the orders get triggered from the stop loss
book. If the limit price is not specified, the trigger price is taken as the limit price for
the order. The stop loss orders are prioritised in the stop loss book 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 book. The stop loss condition is met under the following
circumstances:
Sell Order - A sell order in the stop loss book gets triggered when the last traded
price in the normal market reaches or falls below the trigger price of the order.
Buy Order - A buy order in the stop loss book gets triggered when the last traded
price in the normal market reaches or exceeds the trigger price of the order. When a
stop loss order with IOC condition enters the system, the order is released in the
market after it is triggered. Once triggered, the order scans the counter order book for
a suitable match to result in a trade or else is cancelled by the system.
Retdebt Order Matching
The rules for matching the Retdebt orders are similar to the Regular Lot book except
that Retdebt order matching takes place only for orders in the Retdebt order book. In
this book matching of orders related to the Retdebt order takes place.
Odd Lot Order Matching
Odd Lot matching takes place only for orders in Odd Lot book. There are no partial
trades for an Odd Lot order i.e. each match is an exact match where the quantity of
the passive order is equal to that of the active order.
Auction Matching
All auction orders are entered into the auction order book. The rules for matching of
auctions are similar to that of the regular lot book except for the following points:a) Auction order matching takes place at the end of the solicitor period for the auction.
b) Auction matching takes place only across orders belonging to the same auction.
c) All auction trades take place at the auction price.
Validation Checks
While matching orders, the system performs following validation checks:
a) If the turnover limit of any trading member has already exceeded, a trade does not
take place.
b) If the participant of any of the orders is 'Suspended', the trade does not go through.
Trade Management
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A trade is an activity in which a buy and a sell order match with each other. Matching
of two orders is done automatically by the system. Whenever a trade takes place, 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
unique trade number. The system also broadcasts a message to the entire market
through the ticker window displaying the details of the trade. This section describes
trade-related activities like viewing the trades, trade modification/cancellation, etc.
Before the trade is affected, the system performs checks with respect to the following
parameters: a) The security in which the trade is to be affected is not suspended from operations.
b) Trading members involved in the potential trade are not suspended from
operations.
c) Turnover limits for the trading members involved are not exceeded.
Once the trade for an order entered is confirmed by the system, 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.
Trade Modification
The user can use trade modification facility to request for modifying trades done
during the day. The user can request the Exchange to modify only the trade quantity
field. Moreover, the new quantity requested must be lower than the original trade
quantity. If the user is a Corporate Manager of a trading member firm, he can request
for trade modification for the trades of any dealer of the trading members firm and if
he is a Branch Manager of a branch, then he can request for trade modification for any
dealer of the branch of the trading member firm. The user can request for trade
modification either from the previous trades screen or by using the function key
provided in the workstation. Trade Modification Request is sent to the Exchange 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 request for the same modified quantity on the same trading day. Once
both the parties to trade send their respective trade modification requests, the
Exchange either approves or rejects it. The message to that effect is displayed in the
message window. In case a request for trade modification is approved by the
Exchange, 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 Exchange rejects the trade modification request, the trade
modification rejection slip will be printed at their respective trader workstations.
Trade Cancellation
The user can use trade cancellation screen for cancelling trades done during the day. If
the user is a corporate manager of a trading member firm, he can request for trade
cancellation for the trades of any dealer of the trading members firm and if he is a
branch manager of a branch, then he can request for trade cancellation for the trades
for any dealer of the branch of the trading member firm.
The user can request for trade cancellation either from the previous trades screen or
by using the function key provided in the workstation. The trade cancellation request
is sent to the Exchange for approval and message to that effect is displayed in the
message window. The counterparty then has to make similar request on the same
trading day. Once both the parties to trade send the trade cancellation request, the
Exchange either approves or rejects it. The message to that effect is displayed in the
message window. When a request for the trade cancellation is approved by the
Exchange, the parties to trade receive a system message confirming the trade
cancellation and the trade cancellation slip is printed at their respective trader
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workstations. If the Exchange rejects the trade cancellation request, the trade
cancellation rejection slip is printed at their respective trader workstations.
Internet Broking
SEBI Committee has approved the use of Internet as an Order Routing System (ORS)
for communicating clients' orders to the exchanges through brokers. ORS enables
investors to place orders with his broker and have control over the information and
quotes and to hit the quote on an on-line basis. Once the brokers system receives the
order, it checks the authenticity of the client electronically and then routes the order to
the appropriate exchange for execution. On execution of the order, it is confirmed on
real time basis. Investor receives reports on margin requirement, payments and
delivery obligations through the system. His ledger and portfolio account get updated
online. NSE launched internet trading in early February 2000. It is the first stock
exchange in the country to provide web-based access to investors to trade directly on
the exchange. The orders originating from the PCs of the investors are routed through
the Internet to the trading terminals of the designated brokers with whom they are
connected and further to the exchange for trade execution. Soon after these orders get
matched and result into trades, the investors get confirmation about them on their PCs
through the same internet route.
Wireless Application Protocol (WAP)
SEBI has also approved trading through wireless medium on WAP Platform. NSE.IT
launched the Wireless Application Protocol (WAP) in November 2000. This provides
access to its order book through the hand held devices, which use WAP technology.
This serves primarily retail investors who are mobile and want to trade from any place
when the market prices for stocks at their choice are attractive. Only SEBI registered
members who have been granted permission by the Exchange for providing Internet
based trading services can introduce the service after obtaining permission from the
Exchange

PROCESS OF CLEARING AND SETTLEMENT

Clearing and Settlement
After a trade has been matched by a trading system, it needs to be cleared and settled
so that the seller gets paid and the buyer gets ownership of the security traded. The
clearing and settlement mechanism in Indian securities market has witnessed
significant changes and several innovations during the last decade. These include use
of the state-of-art information technology, emergence of clearing corporations to
assume counterparty risk, shorter settlement cycle, dematerialisation and electronic
transfer of securities, fine-tuned risk management system. Clearing and settlement is
a post trade activity. Settlement is the actual exchange of money and securities
between the parties of a trade on the settlement date after agreeing earlier on the
trade. Most settlement of securities trading nowadays is done electronically. Clearing
is the actual process of updating the accounts of the trading parties. Most security
trades are settled in 3 business days (T+3), while government bonds and options are
settled the next business day (T+1). Clearing is all steps of the post-trade processes
apart from the final settlement i.e. apart from the final payment and change in
ownership. Clearing is closely associated with the control of counter-party risk.
Clearing Agencies ensure trading members meet their fund/security obligations. It
acts as a legal counter party to all trades and guarantees settlement for all members.
The original trade between the two parties is cancelled and clearing corporation acts
as counter party to both the parties, thus manages risk and guarantees settlement to
both the parties. This process is called novation. It determines fund/security
obligations and arranges for pay-in of the same. It collects and maintains margins,
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processes for shortages in funds and securities. It takes help of clearing members,
clearing banks, custodians and depositories to settle the trades. The settlement cycle in
India is T+2 days i.e. Trade + 2 days. T+2 means the transactions done on the Trade
day, will be settled by exchange of money and securities on the second business day
(excluding Saturday, Sundays, Bank and Exchange Trading Holidays). Pay-in and
Pay-out for securities settlement is done on a T+2 basis. Till recently, the stock
exchanges in India were following a system of account period settlement for cash
market transactions. T+2 rolling settlement have now been introduced for all
securities. The members receive the funds/securities in accordance with the payin/pay-out schedules notified by the respective exchanges. Given the growing volume
of trades and market volatility, the time gap between trading and settlement gives rise
to settlement risk. In recognition of this, the exchanges and their clearing corporations
employ risk management practices to ensure timely settlement of trades. The
regulators have also prescribed elaborate margining and capital adequacy standards to
secure market integrity and protect the interests of investors. The trades are settled
irrespective of default by a member and the exchange follows up with the defaulting
member subsequently for recovery of his dues to the exchange. Due to setting up of
the Clearing Corporation, the market has full confidence that settlements will take
place on time and will be completed irrespective of possible default by isolated
trading members. Movement of securities has become almost instantaneous in the
dematerialised environment. Two depositories viz., National Securities Depositories
Ltd. (NSDL) and Central Depositories Services Ltd. (CDSL) provide electronic
transfer of securities and more than 99% of turnover is settled in dematerialised form.
All actively traded scrips are held, traded and settled in demat form. The obligations
of members are downloaded to members/custodians by the clearing agency. The
members/custodians make available the required securities in their pool accounts with
depository participants (DPs) by the prescribed pay-in time for securities. The
depository transfers the securities from the pool accounts of members/custodians to
the settlement account of the clearing agency. As per the schedule determined by the
clearing agency, the securities are transferred on the pay-out day by the depository
from the settlement account of the clearing agency to the pool accounts of
members/custodians. The pay-in and pay-out of securities is affected on the same day
for all settlements. Select banks have been empanelled by clearing agency for
electronic transfer of funds. The members are required to maintain accounts with any
of these banks. The members are informed electronically of their pay-in obligations of
funds. The members make available required funds in their accounts with clearing
banks by the prescribed pay-in day. The clearing agency forwards funds obligations
file to clearing banks which, in turn, debit the accounts of members and credit the
account of the clearing agency. In some cases, the clearing agency runs an electronic
file to debit members accounts with clearing banks and credit its own account. On
pay-out day, the funds are transferred by the clearing banks from the account of the
clearing agency to the accounts of members as per the members obligations. In the
T+2 rolling settlement, the pay-in and pay-out of funds as well as securities settlement
takes place 2 working days after the trade date.
Transaction Cycle
Transaction cycle refers to the continuous flow of activities from one end to another
in a form of cycle. It can be said as a systematic process in which various activities in
trading process are executed. A transaction cycle depicts the steps followed by a client
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in order to execute a trade wherein a buy order matches with a sell order. The
following are the steps followed in the completion of the transaction cycle:
Step 1: The above cycle is initiated by a client who wants to either buy or sell
securities. In that case, he has to make a decision regarding the same. A decision is
taken by the client after considering the liquidity conditions and requirements or
reshuffles his holdings in response to changes in the market conditions or perceptions.
In this step the client decides either to buy the share or sell the share as per his
strategy and after analysing his financial position he goes for the decision.
Step 2: He then selects a broker and instructs him to place buy/sell order on an
exchange. In this step the trader selects a broker who can fulfil the requirement of the
trader and can fulfil the requirement of the trader. The selection of the broker depends
on the various factors which consist of the factors ranging from the brokerage rate to
the facilities being provided by the broker to the trader.
Step 3: The order is converted to a trade as soon as it finds a matching sell/buy order.
Step 4: The trades are netted to determine the obligations of the trading members to
deliver securities/funds as per settlement schedule.
Step 5: Buyer/seller delivers funds/securities and receives securities/funds and
acquires ownership of securities. In this step if a person is a buyer then he gives the
money for the purchase of securities and if he is a seller then he give the securities
and receive the money from them.
Decision to trade

Funds/
securities

Placing order
Transaction cycle

Settlement of trades

Trade execution

Clearing of trades

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Figure 3: Diagram related to the trading cycle (source: www.cbse.inc.com)

The following is the trading and settlement process in India.

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Investors place orders from their trading terminals.

Broker houses validate the orders and routes them to the exchange (BSE or
NSE depending on the
Clients choice)
Order matching at the exchange.
Trade confirmation to the investors through the brokers.
Trade details are sent to Clearing Corporation from the Exchange.
Clearing Corporation notifies the trade details to clearing
Members/Custodians who confirm back. Based on the confirmation, Clearing
Corporation determines obligations.
Download of obligation and pay-in advice of funds/securities by Clearing
Corporation.
Clearing Corporation gives instructions to clearing banks to make funds
available by pay-in time.
Clearing Corporation gives instructions to depositories to make securities
available by pay-in-time.
Pay-in of securities: Clearing Corporation advises depository to debit pool
account
of
custodians/
Clearing
members
and
credit
its
(Clearing Corporations) account and depository does the same.
Pay-in of funds: Clearing Corporation advises Clearing Banks to debit account
of custodians or clearing members and credit its account and clearing bank
does the same.
Payout of securities: Clearing Corporation advises depository to credit pool
accounts of Custodians /Clearing members and debit its account
and depository does the same.
Payout of funds: Clearing Corporation advises Clearing Banks to credit
account of custodians/clearing members and debits its account and clearing
bank does the same. Note: Clearing members for buy order and sell order are
different and Clearing Corporation acts as a link here.
Depository informs custodians/Clearing members through Depository
Participants about pay-in and pay-out of securities.

Clearing Banks inform custodians/Clearing members about pay-in and pay-out

of funds.
In case of buy order by normal investors clearing members instruct his DP to
credit the clients account and debit its account. The money will be debited
(Total settled amount - margins paid at the time of trade) from the clients
account.
In case of sell order by normal investors Clearing members instruct his DP to
debit the clients account and credit its account. The money will be credited to
the clients account.
Settlement Process
Settlement is the last step in the post-trade process. Settlement may be:
net: obligations between participants are set-off against each other, or,
gross: each transaction is settled individually, and may be:
real-time: transactions are settled as and when trades are agreed with no delay,
Occur at regular intervals, usually on a rolling schedule at the end of a day.
If settlement is not real-time then it is usual to settle at the end of the days trading.
This usually takes place a set number of days after trading that is the standard for a
particular market or type of security. The standard terminology is to express this as T
+ number of days to settlement: so a T + 3 transactions will be settling at the end of
the third day after the trade takes place. Gross settlement is usually real-time, as there
is no reason not to set off it batch end of day processing is used. Conversely real-time
settlement is usually gross as there are no other transactions made in the same instant
to set-off. While NSE provides a platform for trading to its trading members, the
National Securities Clearing Corporation Ltd. (NSCCL) determines the
funds/securities obligations of the trading members and ensures that trading members
meet their obligations. NSCCL becomes the legal counterparty to the net settlement
obligations of every member. This principle is called novation'' and NSCCL is
obligated to meet all settlement obligations, regardless of member defaults, without
any discretion. Once a member fails on any obligations, NSCCL immediately cuts off
trading and initiates recovery. The clearing banks and depositories provide the
necessary interface between the custodians/clearing members (who clear for the
trading members or their own transactions) for settlement of funds/securities
obligations of trading members. The core processes involved in the settlement process
are:
(a) Determination of Obligation: NSCCL determines what counter-parties owe, and
what counter-parties are due to receive on the settlement date. The NSCCL interposes
itself as a central counterparty between the counterparties to trades and nets the
positions so that a member has security wise net obligation to receive or deliver a
security and has to either pay or receive funds.
(b) Pay-in of Funds and Securities: The members bring in their funds/securities to
the NSCCL. They make available required securities in designated accounts with the
depositories by the prescribed pay-in time. The depositories move the securities
available in the accounts of members to the account of the NSCCL. Likewise
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members with funds obligations make available required funds in the designated
accounts with clearing banks by the prescribed pay-in time. The NSCCL sends
electronic instructions to the clearing banks to debit members accounts to the extent
of payment obligations. The banks process these instructions, debit accounts of
members and credit accounts of the NSCCL.
(c) Pay-out of Funds and Securities: After processing for shortages of funds and
securities and arranging for movement of funds from surplus banks to deficit banks
through RBI clearing, the NSCCL sends electronic instructions to the
depositories/clearing banks to release pay-out of securities/funds. The depositories
and clearing banks debit accounts of NSCCL and credit settlement accounts of
members. Settlement is complete upon release of pay-out of funds and securities to
custodians/members. The settlement process for transactions in securities in the CM
segment of NSE is presented in the Figure.
(d) Risk Management: A sound risk management system is integral to an efficient
settlement system. NSCCL has put in place a comprehensive risk management
system, which is constantly monitored and upgraded to pre-empt market failures. It
monitors the track record and performance of members and their net worth;
undertakes on-line monitoring of members positions and exposure in the market,
collects margins from members and automatically disables members if the limits are
breached. Since there is a time lag between execution of trade and its settlement, there
are chances of default. To minimize the risk of defaults, NSCCL has framed a
comprehensive risk management and surveillance system. Under this, the organization
keeps a check through various systems (on-line and off-line monitoring) and in case
of default panellizes the respective trader for the same
Settlement Agencies
The NSCCL, with the help of clearing members, custodians, clearing banks and
depositories settles the trades executed on exchanges. The roles of each of these
entities are explained below:
(a) NSCCL: The National Securities Clearing Corporation Ltd. (NSCCL), a wholly
owned subsidiary of NSE, was incorporated in August 1995. It was set up to bring and
sustain confidence in clearing and settlement of securities; to promote and maintain,
short and consistent settlement cycles; to provide counter-party risk guarantee, and to
operate a tight risk containment system. NSCCL commenced clearing operations in
April 1996. NSCCL carries out the clearing and settlement of the trades executed in
the Equities and Derivatives segments and operates Subsidiary General Ledger (SGL)
for settlement of trades in government securities. It assumes the counter-party risk of
each member and guarantees financial settlement. It also undertakes settlement of
transactions on other stock exchanges like, the Over the Counter Exchange of India.
NSCCL has successfully brought about an up-gradation of the clearing and settlement
procedures and has brought Indian financial markets in line with international
markets. The NSCCL is responsible for post-trade activities of a stock exchange.
Clearing and settlement of trades and risk management are its central functions. It
clears all trades, determines obligations of members, arranges for pay-in of
funds/securities, receives funds/securities, processes for shortages in funds/securities,
arranges for pay-out of funds/securities to members, guarantees settlement, and
collects and maintains margins/collateral/base capital/other funds.
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(b) Clearing Members: They are responsible for settling their obligations as
determined by the NSCCL. They have to make available funds and/or securities in the
designated accounts with clearing bank/depository participant, as the case may be, to
meet their obligations on the settlement day. In the capital market segment, all trading
members of the Exchange are required to become the Clearing Member of the
Clearing Corporation.
The various categories of Clearing Members are
Trading members
Custodians
Subsidiary Companies formed by the regional stock exchanges to facilitate
their members to trade on BSE/NSE.
While beneficial owners may have their demat accounts on any of both the
depositories it is mandatory on the part of CM to have a demat CM account with both
the depositories in terms of SEBI press release ref. no. PR 153/99 dated July9, 1999.
CM's main activity is to facilitate pay-in/pay-out of securities to/from Stock
Exchanges/Clearing House/Clearing Corporations either on their own behalf or on
behalf of their clients. The securities which are due for delivery can be delivered
directly from client's account (depending on whether exchange provides this facility)
or through CMs to the Stock Exchanges/Clearing House/Clearing Corporations
Account. Similarly, pay-out of securities can be delivered directly to client's account
on the basis of information given to Clearing House by the CMs or to CMs A/c.
(c) Custodians: A custodian is a person who holds for safekeeping the documentary
evidence of the title to property belonging like share certificates, etc. It is a financial
institution that has the legal responsibility for a customer's securities. This implies
management as well as safekeeping. A custodian is a bank or other institution that
holds securities on behalf of investors. The tasks performed by a custodian include:
Safekeeping of securities
Delivering or accepting traded securities
Collecting principal, interest, or dividend payments on held securities
Collectively, these services are called custody. They are the one who are responsible
for safeguarding the documents of evidence related to the title which consists of the
various properties shares, government bond and government securities and other
securities. As the term custody suggests that they are responsible for keeping all the
documents in their safe custody on behalf of the holders of those securities. A
custodian is not any specific organisation but it can be any organisation either bank or
other one. By separating duties, use of custodians reduces the risk of fraud. The
custodian independently ensures that the investor has unencumbered ownership of the
securities other agents represent to have purchased on their behalf. The title to the
custodians property remains vested with the original holder, or in their nominee(s), or
custodian trustee, as the case may be. In NSCCL, custodian is a clearing member but
114

not a trading member. He settles trades assigned to him by trading members. He is

required to confirm whether he is going to settle a particular trade or not. If it is
confirmed, the NSCCL assigns that obligation to that custodian and the custodian is
required to settle it on the settlement day. If the custodian rejects the trade, the
obligation is assigned back to the trading /clearing member.
Figure4: Settlement Process in CM segment of NSE (Source: NCFM book
capital)
NSE
1

8
6

9
7
2

4
10

11

Depositories

NSCCL

Clearing Banks

Custodians/CM

Explanations:
(1) Trade details from Exchange to NSCCL (real-time and end of day trade file).
(2) NSCCL notifies the consummated trade details to CMs/custodians who affirm
back. Based on the affirmation, NSCCL applies multilateral netting and determines
obligations.
(3) Download of obligation and pay-in advice of funds/securities.
(4) Instructions to clearing banks to make funds available by pay-in time.
(5) Instructions to depositories to make securities available by pay-in-time.
(6) Pay-in of securities (NSCCL advises depository to debit pool account of
custodians/CMs and credit its account and depository does it).
(7) Pay-in of funds (NSCCL advises Clearing Banks to debit account of
custodians/CMs and credit its account and clearing bank does it).
(8) Pay-out of securities (NSCCL advises depository to credit pool account of
custodians/CMs and debit its account and depository does it).
(9) Pay-out of funds (NSCCL advises Clearing Banks to credit account of
custodians/CMs and debit its account and clearing bank does it).
(10) Depository informs custodians/CMs through DPs.
(11) Clearing Banks inform custodians/CMs.
(d) Clearing Banks: Clearing banks are a key link between the clearing members
and NSCCL for funds settlement. Clearing Bank acts as an important intermediary
between clearing member and clearing corporation. Every clearing member needs to
maintain an account with clearing bank. Its the clearing members function to make
sure that the funds are available in his account with clearing bank on the day of pay-in

115

to meet the obligations. In case of a pay-out clearing member receives the amount on
pay-out day. The following banks are providing clearing bank services at BSE
Bank of India
HDFC Bank Ltd.
Oriental Bank of Commerce
Standard Chartered Bank
Centurion Bank Ltd
Axis Bank Ltd
ICICI Bank Ltd
Indusind Bank Ltd
Union Bank of India and
Hongkong & Shanghai Banking Corporation Ltd
The following banks are offering clearing bank services at NSE
Axis Bank Ltd
Canara Bank
HDFC Bank
IndusInd Bank
ICICI Bank
Bank of India
IDBI Bank
Hongkong & Shanghai Banking Corporation Ltd.
Kotak Mahindra Bank
Standard Chartered Bank
Union Bank of India
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State Bank of India and

Citibank
Multiple clearing banks facilitate introduction of new products and clearing members
will have a choice to open an account with a bank which offers more facilities. Every
clearing member is required to open a dedicated settlement account with one of the
clearing banks. Based on his obligation as determined through clearing, the clearing
member makes funds available in the clearing account for the pay-in and receives
funds in case of a pay-out. Multiple clearing banks provide advantages of competitive
forces, facilitate introduction of new products viz. working capital funding, anywhere
banking facilities, the option to members to settle funds through a bank, which
provides the maximum services suitable to the member. The clearing banks are
required to provide the following services as a single window to all clearing members
of National Securities Clearing Corporation Ltd. as also to the Clearing Corporation:
Branch network in cities that cover bulk of the trading cum clearing members
High level automation including electronic funds transfer (EFT) facilities
Facilities like (a) dedicated branch facilities (b) software to interface with the
Clearing Corporation (c) access to accounts information on a real time basis
Value-added services to members such as free-of-cost funds transfer across centers
Providing working capital funds
Stock lending facilities
Services as Professional Clearing Members
Services as Depository Participants
Other Capital Market related facilities
All other banking facilities like issuing bank guarantees / credit facilities etc.
(e) Depositories: 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 beneficiary owner. In
case of a joint account, the account holders will be beneficiary holders of that joint
account. Depositories help in the settlement of the dematerialised securities. Each
custodian/clearing member is required to maintain a clearing pool account with the
depositories. He is required to make available the required securities in the designated
account on settlement day. The depository runs an electronic file to transfer the
securities from accounts of the custodians/clearing member to that of NSCCL. As per
the schedule of allocation of securities determined by the NSCCL, the depositories
transfer the securities on the pay-out day from the account of the NSCCL to those of
members/custodians.
(f) Professional Clearing Member: NSCCL admits special category of members
namely, professional clearing members. Professional Clearing Member (PCM) may
clear and settle trades executed for their clients (individuals, institutions etc.). In such
an event, the functions and responsibilities of the PCM would be similar to
Custodians. PCMs may also undertake clearing and settlement responsibility for
trading members. In such a case, the PCM would settle the trades carried out by the
trading members connected to them. The onus for settling the trade would be thus on
the PCM and not the trading member. A PCM has no trading rights but has only
clearing rights, i.e. he just clears the trades of his associate trading members and
institutional clients.
Risks in Settlement
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A sound risk management system is integral to an efficient clearing and settlement

system. NSE introduced for the first time in India, risk containment measures that
were common internationally but were absent from the Indian securities markets.
Counter-party risk and System risk are two kinds of risks that are intrinsic in a
settlement system. Settlement risk is the risk that a counterparty does not deliver a
security or its value in cash per agreement when the security was traded after the other
counterparty or counterparties have already delivered security or cash value per the
trade agreement. It is the risk that one party will fail to deliver the terms of
contract with another party at the time of settlement. Settlement risk can be the risk
associated with default at settlement and any timing differences in settlement between
the two parties. This type of risk can lead to principal risk. In settlement risk there is
the possibility that your counter party will never pay you. Generally, this happens
because one party defaults on its clearing obligations to one or more counterparties.
As such, settlement risk comprises both credit and liquidity risks. The former arises
when a counterparty cannot meet an obligation for full value on due date and
thereafter because it is insolvent. Liquidity risk refers to the risk that a counterparty
will not settle for full value at due date but could do so at some unspecified time
thereafter; causing the party which did not receive its expected payment to finance the
shortfall at short notice. Sometimes a counterparty may withhold payment even if it is
not insolvent (causing the original party to scramble around for funds), so liquidity
risk can be present without being accompanied by credit risk. Settlement risk was a
problem in the forex market up until the creation of continuously linked settlement
(CLS), which is facilitated by CLS Bank International, which eliminates time
differences in settlement, providing a safer forex market. Settlement risk is sometimes
called "Herstatt risk", named after the well-known failure of the German bank
Herstatt. On Jun 26, 1974, the bank had taken in its foreign-currency receipts in
Europe, but had not made any of its U.S. dollar payments when German banking
regulators closed the bank down, leaving counter parties with the substantial losses.
The following two kinds of risks are inherent in a settlement system:
(1) Counterparty Risk: This arises if parties do not discharge their obligations fully
when due or at any time thereafter. This has two components, 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. While the non-defaulting party tries to replace the original transaction at
current prices, he loses the profit that has accrued on the transaction between the date
of original transaction and date of replacement transaction. The seller/buyer of the
security loses this unrealised profit if the current price is below/above the transaction
price. Both parties encounter this risk as prices are uncertain. It has been reduced by
reducing time gap between transaction and settlement and by legally binding netting
systems. A type of risk resulting from a situation in which a party to a trade knows
that the counter party will be unable to meet the obligations of the trade, and thus a
new replacement trade will have to be entered into. Hence it is known as
"replacement-cost risk", which refers to the cost associated with replacing the original
trade. Of course, there is a good chance that the above task will not be done at the
same price, since the market has probably moved since the trade was first done. For
example, Ram sold 100 shares of Reliance at 10:00 am @ Rs.2600 without having
them, in anticipation that the price of Reliance will fall during the day and he will
cover his position intraday by buying those 100 shares at a lower price. His
observations went wrong and instead of Reliance price falling it raised throughout the
day and at 3:00 pm the price of a Reliance share was at Rs.3000. Resulting in a loss of
Rs.400 per share * 100 shares = Rs.40000. He decides to inform his broker about his
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non-fulfilling of his commitment and delivering short his obligation of giving

100shares of Reliance. The broker decides to cover this position of Ram on his own
account by buying 100 Reliance to make his net obligation zero. By the time his order
was executed the price of Reliance was at Rs.2900. Hence the replaced transaction
was at a cost of Rs.300 per share. If Ram is unable to pay this cost, it will result as a
replacement cost risk for the broker and in-turn to the system.
(b) The principal risk arises if a party discharges his obligations but the counterparty
defaults. The seller or buyer of the security suffers this risk when he delivers/makes
payment, but does not receive payment/delivery. This risk can be eliminated by
delivery vs. payment mechanism which ensures delivery only against payment. This
has been reduced by having a central counterparty (NSCCL) which becomes the
buyer to every seller and the seller to every buyer. A variant of counterparty risk is
liquidity risk which arises if one of the parties to transaction does not settle on the
settlement date, but later. The seller/buyer who does not receive payment/delivery
when it is due, may have to borrow funds/securities to complete his payment/delivery
obligations. Another variant is the third party risk which arises if the parties to trade
are permitted or required to use the services of a third party which fails to perform.
For example, the failure of a clearing bank which helps in payment can disrupt
settlement. This risk is reduced by allowing parties to have accounts with multiple
banks. Similarly, the users of custodial services face risk if the concerned custodian
becomes insolvent, acts negligently, etc. Principal risk is the risk that arises when the
buyer/seller has not received the shares/funds but has fulfilled his obligation of
making payment/delivery of shares. This has been reduced by having a central
counterparty such as NSCCL which becomes the buyer to every seller and the seller
to every buyer. For example: Ram bought 100 shares of Reliance on Monday @
Rs.2600 and made good his obligation by paying his broker Rs.2600*100 = Rs.2,
60,000. As a result of this Ram is expecting a delivery of his 100 Reliance shares by
T+2 days (Wednesday). If the counterparty (seller) to this transaction defaults in his
commitment of giving delivery of these 100 shares and if the system does not assure
giving back at least this money (principal) paid by the buyer, then this results into a
principal risk. As it is mentioned principal risk is reduced by having a central
counterparty to all trades in the form of NSCCL. What NSCCL assures Ram is that he
will get his 100 shares or his money Rs.2,60,000 will be returned back with some
surplus (the penalty collected from the defaulting sellers broker), but instead on T+2
day (Wednesday) it will be given on T+5 day (Monday). NSCCL will make it possible
by buying 100 shares for the buyer on behalf of the defaulting seller from the auction
market.
(2) System Risk: System risk comprises of operational, legal and systemic risks. The
operational risk arises from possible operational failures such as errors, fraud, outages
etc. Operational risk is defined as the risk of loss resulting from inadequate or failed
internal processes, people and systems, or from external events. Such as, error, fraud,
outages etc. Although the risks apply to any organisation in business it is of particular
relevance to the financial/banking regime where regulators are responsible for
establishing safeguards to protect against systemic failure of the system and in-turn
the economy. The legal risk arises if the laws or regulations do not support
enforcement of settlement obligations or are uncertain. Thus it can be said that Legal
risk is risk from uncertainty due to legal actions or uncertainty in the applicability or
interpretation of contracts, laws or regulations. Systemic risk arises when failure of
one of the parties to discharge his obligations leads to failure by other parties. The
domino effect of successive failures can cause a failure of the settlement system.
These risks have been contained by enforcement of an elaborate margining and capital
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adequacy standards to secure market integrity, settlement guarantee funds to provide

counter-party guarantee, legal backing for settlement activities and business
continuity plan, etc. Thus it can be said that Systemic risk might arise when the
default by one of the parties leads to the default of other parties too. This has a
multiplying effect and can cause a failure in the system. To avoid such problems, the
exchange has strict rules and regulations on margining, capital adequacy standards,
settlement guarantee funds and legal backing for settlement activity.
Settlement Cycle
At the end of each trading day, concluded or locked-in trades are received from NSE
by NSCCL. NSCCL determines the cumulative obligations of each member and
electronically transfers the data to Clearing Members (CMs). All trades concluded
during a particular trading period are settled together. A multilateral netting procedure
is adopted to determine the net settlement obligations (delivery/receipt positions) of
CMs. NSCCL then allocates or assigns delivery of securities inter se the members to
arrive at the delivery and receipt obligation of funds and securities by each member.
On the securities pay-in day, delivering members are required to bring in securities to
NSCCL. On pay out day the securities are delivered to the respective receiving
members. Settlement is deemed to be complete upon declaration and release of payout of funds and securities. Exceptions may arise because of short delivery of
securities by CMs, bad deliveries or company objections on the pay-out day. NSCCL
identifies short deliveries and conducts a buying-in auction on the day after the payout day through the NSE trading system. The delivering CM is debited by an amount
equivalent to the securities not delivered and valued at a valuation price (the closing
price as announced by NSE on the day previous to the day of the valuation). If the
buy-in auction price is more than the valuation price, the CM is required to make
good the difference. All shortages not bought-in are deemed closed out at the highest
price between the first day of the trading period till the day of squaring off or closing
price on the auction day plus 20%, whichever is higher. This amount is credited to the
receiving member's account on the auction pay-out day.
Bad Deliveries (in case of physical settlement)
The delivery of a security that fails to meet all the standards required to transfer title
to the buyer. To describe a stock that cannot be transferred, especially because of
improperly filed paperwork or another fairly innocuous reason. In other words, the
delivery of such a stock is only stopped by legal and/or regulatory rules. Bad
deliveries (deliveries which are prima facie defective) are required to be reported to
the clearing house within two days from the receipt of documents. The delivering
member is required to rectify these within two days. Un-rectified bad deliveries are
assigned to auction on the next day. One of the biggest problems faced by the
investors in the secondary market is that of bad delivery which arises out of rejection
of physical shares sent it to the companies by the buyers for getting them transferred
in their names In order to help the buyers BSE has set up a Bad Delivery Cell (BDC),
based upon the Uniform Norms for Good/Bad Deliveries formulated by SEBI. BDC
follows a weekly cycle for acceptance of Objections and Rectifications. The cycle
commences every Tuesday, on which the Objections are accepted in the Clearing
House.
Company Objections (in case of physical settlement)
Company objections arise when, on lodgement of the securities with the
company/Share Transfer Agent (STA) for transfer, which is returned due to signature
mismatch or for any other reason for which the transfer of security cannot be affected.
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The original selling CM is normally responsible for rectifying/replacing defective

documents to the receiving CM as per pre-notified schedule. The CM on whom
company objection is lodged has an opportunity to withdraw the objection if the
objection is not valid or the documents are incomplete (i.e. not as required under
guideline No.100 or 109 of SEBI Good/Bad delivery guidelines), within 7 days of
lodgement against him. If the CM is unable to rectify/replace defective documents on
or before 21 days, NSCCL conducts a buying-in auction for the non-rectified part of
defective document on the next auction day through the trading system of NSE. All
objections, which are not bought-in, are deemed closed out on the auction day at the
closing price on the auction day plus 20%. This amount is credited to the receiving
member's account on the auction pay-out day. Till June, 2001 trades were settled as
account period settlement. Following Finance Ministers announcement on March 13,
2001 that the rolling settlement would be extended to 200 category A stocks in
MCFS, ALBM and BLESS by July, 2001, SEBI decided that all 263 scrips included
in the ALBM/BLESS or MCFS in any stock exchange or in the BSE-200 list would
be traded only in the compulsory rolling settlement on all the exchanges from July 2,
2001. Further, SEBI mandated rolling settlement for the remaining securities from
December 31, 2001. The settlement cycle would be reduced from T+5 to T+3 from
April 1, 2002. With effect from April 1, 2003 the settlement cycle has been further
reduced from T+3 to T+2.
Normal Market
In a rolling settlement, trade day is T day, T+1 day and T+2 day for NSCCL. The
trades executed each trading day are considered as a trading period and trades
executed during the day are settled based on the net obligations for the day. At NSE,
trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working
day. Typically trades taking place on Monday are settled on Wednesday, Tuesday's
trades settled on Thursday and so on. A tabular representation of the settlement cycle
for rolling settlement is given below:
Table Number 5 (Source: from NSE guidelines book and NCFM Book)
Activity
Day
Trading
Rolling Settlement Trading
T
Clearing
Custodial Conformation
T+1 working days
Delivery Generation
T+1 working days
Settlement
Securities and Funds pay in
T+2 working days
Activity
Day
Securities and Funds pay out
T+2 working days
Valuation of shortages based on closing T+1 closing prices
prices
Post settlement Auction
T+3 working days
Bad delivery reporting
T+4 working days
Auction settlement
T+5 working days
Rectified bad delivery pay in and pay out T+6 working days
Re-bad delivery reporting and pick up
T+8 working days
Close out of re-bad delivery and funds T+9 working days
pay-in & pay out
Limited Physical Market
Settlement for trades is done on a trade-for-trade basis. Salient features of Limited
Physical Market settlement.
Delivery of shares in street name and market delivery (clients holding physical
shares purchased from the secondary market) is treated as bad delivery. The shares
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standing in the name of individuals/HUF only would constitute good delivery. The
selling/delivering member must necessarily be the introducing member.
Any delivery in excess of 500 shares is marked as short and such deliveries are
compulsorily closed-out.
Shortages, if any, are compulsorily closed-out at 20% over the actual traded price.
Unrectified bad delivery and re-bad delivery are compulsorily closed out at 20% over
the actual traded price.
All deliveries are compulsorily being required to be attested by the introducing/
delivering member.
The buyer must compulsorily send the securities for transfer and dematerialisation,
latest within 3 months from the date of pay-out.
Company objections arising out of such trading and settlement in this market are
reported in the same manner as is currently being done for normal market segment.
However securities would be accepted as valid company objection, only if the
securities are lodged for transfer within 3 months from the date of pay-out. The
settlement cycle can be described as follows:
Table Number 6 (Source: From NSE guidelines book and NCFM Book)
Activity
Day
Trading
Rolling Settlement Trading
T
Clearing
Custodial Conformation
T+1 working days
Delivery Generation
T+1 working days
Settlement
Securities and Funds pay in
T+2 working days
Securities and Funds pay out
T+2 working days
Post settlement Assigning of shortages for close out
T+3 working days
Reporting and pick up of bad delivery
T+4 working days
Close out of shortages
T+5 working days
Replacement of bad delivery
T+6 working days
Reporting of re-bad and pick up
T+8 working days
Close out of re-bad delivery
T+9 working days
Institutional Segment
Trading in this market segment is available for 'institutional investors' only, in order to
ensure that the overall FII limits are not violated; selling in this segment is restricted
to FII clients. Buying is restricted to FII and FI clients. Members are required to enter
the custodian participant code at the time of order entry and to ensure that the
selling/buying restrictions are strictly adhered to. A sale order entered by trading
members on behalf of non FII clients or a buy order entered by trading members on
behalf of non FII / non FI clients, shall be deemed to be invalid and any trade arising
from such order shall be compulsorily closed out by the Clearing Corporation at 20 %
over the actual trade price, without any further reference to the parties to the trade.
The member entering the invalid order shall further be liable for disciplinary action,
which may include penalties, penal action, withdrawal of trading facilities, suspension
etc. Members are not allowed the facility of trade warehousing for this segment and
accordingly members are not required to mark the orders for NCIT and warehousing.
If any orders are marked for the Clearing Corporation shall remove NCIT and / or
warehousing the same. Shortages, if any, are compulsorily closed-out at 20% over the
actual trade price. Deals executed in this segment are cleared on a T+2 rolling basis.
Settlement for all trades is done on a trade-for-trade basis and delivery obligation
arises out of each trade. Settlement of all transactions is compulsorily in dematting
mode only. Deals executed in this segment are not covered under the settlement
guarantee extended by the Clearing Corporation.
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Securities Settlement
The securities obligations of members are downloaded to members/custodians by
NSCCL after the end of the trading day. The members/custodians deliver the
securities to the Clearing House on the pay-in day in case of physical settlement and
make available the required securities in the pool accounts with the depository
participants in case of dematerialised securities. Members are required to open
accounts with depository participants of both the depositories, NSDL and CDSL.
Delivering members are required to deliver all documents to the Clearing House (in
case of physical settlement) between 9:30 a.m. and 10:30 a.m. on the settlement day.
Receiving members are required to collect the documents from the Clearing House
between 2:00 p.m. and 2:30 p.m. In case of dematerialised settlement, the members
receive their obligation by 1.30 pm on T + 1 day. The members need to arrange for the
securities as per their obligations and give instructions by 10.30 am on the pay-in day.
In case of NSDL the members need to give instructions to move the securities to the
settlement account of NSCCL, whereas in case of CDSL the members need to ensure
that the necessary quantity of securities are available in their pool account. The
members need to ensure that the settlement number and type are correctly entered to
avoid any defaults. The depository would credit the receiving members' receipt
account within his CM clearing account with the depository on or after 2:30 p.m. on
the pay-out day. Pursuant to SEBI directive (vide its circular SMDRP/Policy/Cir05/2001 dated February 1, 2001) NSCCL has introduced a settlement system for
direct delivery of securities to the investors accounts with effect from April 2, 2001.
Table Number: 7 (Source: SEBI Guidelines Report 2009)
Activity
Day
Trading
Rolling Settlement Trading
T
Clearing
Custodial Conformation
T+1 working days
Delivery Generation
T+1 working days
Settlement
Securities and Funds pay in
T+2 working days
Securities and Funds pay out
T+2 working days
Valuation of shortages based on T+1 working days
closing prices
Post settlement
Close out
T+2 working days
Direct Payout to Investors
SEBI vide its circular no. SMDRP /Policy/Cir-05/2001 dated February 1, 2001 had
directed stock exchanges to introduce a settlement system for direct delivery of
securities to the investors accounts with effect from April 2, 2001. Accordingly,
NSCCL has introduced the facility of direct payout to clients' account on both the
depositories. It ascertains from each clearing member, the beneficiary account details
of their respective clients who are due to receive pay out of securities. NSCCL has
provided its members with a front-end for creating the file through which the
information is provided to NSCCL. Based on the information received from members,
the Clearing Corporation sends payout instructions to the depositories, so that the
client receives the pay out of securities directly to their accounts on the pay-out day.
The client receives payout to the extent of instructions received from the respective
clearing members. To the extent of instruction not received, the securities are credited
to the CM pool account of the member.
Salient features of Direct Payout to Investors are:
Clearing members are required to provide a file to NSCCL for effecting pay out to
investors' accounts for a particular settlement type, settlement number and delivery
type. The file is to be provided as per the structure specified by NSCCL.
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 Clearing members are provided with an application in the clearing front end for the
purpose of capturing the requisite data and generating the file. This front end is a part
of the Clearing Front End Version 4.2, which is available on the extranet in the
'common/clearing' directory.
The time limit for submission of files is up to 9.30.am on the payout day
The files are uploaded by NSCCL in its system and returned with the indication of
the success/rejection of the file and the records. This is purely a validation of the
correctness of the file and record formats.
Clearing members shall provide details of beneficiary account of the clients of the
trading members in any one of the depositories.
Credit to the accounts of various constituents (i.e. client account and CM Pool / CM
Clearing account) would be in the same order as specified by the clearing member in
the file given to NSCCL.
If for any client account record, the quantity requested for direct payout is more than
the balance available for pay out to the clearing member in that depository, the
quantity available in that depository shall only be directly credited to members
settlement account in that depository.
Example: The member is supposed to receive pay out of 1100 shares for particular
script. The member has allocated the pay out as under:
Example Table Number: 8 (Source: SEBI guidelines for 2007 and
www.invetopedia .com)
Client Name
Depository
Quantity
A
CDSL
100
B
CDSL
500
C
CDSL
500
The member receives 1000 shares in CDSL and 100 shares in NSDL. The allocation
of qty will be as under
As per SEBI Regulations
Table Number: 9 Source: (SEBI guidelines for 2007)
Client Name
Depository
Quantity
A
CDSL
100
B
CDSL
500
C
CDSL
0
Members pool CDSL
400
Members pool NSDL
100
If the member receives entire 1100 shares in NSDL the same will be transferred to
members pool account in NSDL.
In the following situations, the payout shall be credited to CM Pool / Clearing
account of the clearing members:
a. Where the clearing members fail to provide the details of the beneficiary account or
where the credit to the beneficiary accounts of the clients fails, or any account
whatsoever
b. The remaining quantity received from other depository as pay out shall be credited
to the CM Pool / Clearing account of the clearing member with the respective
depositories
If the member's client has not paid the dues to the member for the said securities or
for any other reason, the member has valid justification not to release the payout of a
client direct in such a situation the member may not be giving the beneficiary account
details of such client's in the file. In case the investor has paid the dues for delivery of
securities and there is no valid justification for not releasing pay-out directly to the
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client, the member has to provide the details of its clients beneficiary account so that
direct credit can be given to the client.
3.7 Funds Settlement
Currently, NSCCL offers settlement of funds through 10 clearing banks namely
Canara Bank, HDFC Bank, Global Trust Bank, IndusInd Bank, ICICI Bank, UTI
Bank, Centurion Bank, Bank of India and IDBI Bank, Standard Chartered Bank.
Every Clearing Member is required to maintain and operate a clearing account with
any one of the empanelled clearing banks at the designated clearing bank branches.
The clearing account is to be used exclusively for clearing & settlement operations.
Clearing Account:
Every Clearing Member is required to maintain and operate a clearing account with
any one of the empanelled clearing banks at the designated clearing bank branches.
The clearing account is to be used exclusively for clearing operations i.e., for settling
funds and other obligations to the Clearing Corporation including payments of
margins and penal charges. Clearing Members are required to authorise the Clearing
Bank to access their clearing account for debiting and crediting their accounts,
reporting of balances and other information as may be required by NSCCL from time
to time as per the specified format. The Clearing Bank will debit/ credit the clearing
account of clearing members as per instructions received from the Clearing
Corporation. A Clearing member can deposit funds into this account in any form, but
can withdraw funds from this account only in self name.
Change in Clearing Bank:
In case a Clearing Member wishes to shift a clearing account from one designated
Clearing Bank to another, the procedure is as follows:
1. The Clearing Member is required to lodge his request with the Clearing Bank
where he is maintaining a clearing account, seeking permission to shift his clearing
account to another designated clearing bank and send an acknowledged copy of the
same to the Clearing Corporation.
2. The Clearing Member is required to obtain a "No Objection Certificate" (NOC)
from his existing bank.
3. On receipt of the NOC from the existing bank, the Clearing Corporation shall issue
a letter of introduction to the clearing bank the member wishes to shift his clearing
account to.
4. The Clearing Member, is required to submit an acknowledged copy of the letter
sent to the new clearing bank to the Clearing Corporation, on opening the clearing
account with the designated clearing bank.
Funds settlement:
Members are informed of their funds obligation for various settlements through the
daily clearing data download. The daily funds statement gives date-wise details of
each debit/ credit transaction in the members clearing account whereas the summary
statement summarises the same information for a quick reference. The member
account may be debited for various types of transactions on a daily basis. The member
is required to ensure that adequate funds are available in the clearing account towards
all obligations, on the scheduled date and time. The member can refer to his various
obligation statements and provide for funds accordingly. To ensure timely fulfilment
of funds obligations, members may avail of the facility of standing instructions to
transfer the requisite amount from some other account to the clearing account or a
Temporary Overdraft facility from the bank. In case the member has availed such a
facility, the member may furnish details of his obligation to the bank to ensure timely
transfer of funds towards the same to avoid inconvenience. The member with a funds
pay-in obligation is required to have clear funds in his account on or before 11.00 a.m.
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on the scheduled pay-in day. The payout of funds is credited to the clearing account of
the members on or after 1.30 p.m. on the scheduled payout day.
Funds shortages:
In pursuance of chapter IV of the Byelaws of the NSCCL and Regulations framed
there under, all clearing members are requested to note that on account of settlement
funds shortages trading may not be permitted and securities payout withheld as per
the norm in place from time to time-Penal Charges Penalties are charged to members
for the following:
(a) Failure to fulfil their funds obligations
(b) Failure to fulfil their securities deliverable obligations
(c) Gross Exposure & Turnover Violations
(d) Margin Shortages
(e) Security Deposit Shortages
(f) Other violations in respect of client code modifications, non-confirmation of
custodial trades, company objections reported against the members' etc.
Penalty Points
Penalty points are charged to members for: (a) Gross Exposure & Turnover Violations
(b) Other violations in respect of client code modifications, non-confirmation of
custodial trades, company objections reported against the members' etc. Penalty
points are calculated for each settlement and accumulated for all the settlements over
each calendar month. Penalty points are imposed over and above penal interest and
other charges. At the beginning of the first settlement period of each month the
cumulated points will be reset to zero.
Type of Default Penalty points per settlement Table number 10 (source:
www.sebi.gov.in/guide2009)
Gross Exposure or Turnover Violation for
4
Rs.5 lacs or more
Gross Exposure or Turnover Violation for
2
less than Rs.5 lacs
Non Confirmation of Custodial Trades
4
Client code modifications of more than 5 4
instances
The following penalties are imposed for penalty points earned during each calendar
month:
Penalty Points Table number 11(source: www.sebi.gov.in/guide2009)
0 to 20
No action
21 to 30
Reprimand letter
31 to 50
A fine of Rs.2000/- per point over 30 points
51 to 100
A fine of Rs.5000/- per point over 50 points plus RS 40000
Over 100
Allowable exposure to be reduced by 75% for 10
settlements in normal regular market
In addition to the above, a penal interest at the rate of 9 basis points for each day of
default will be levied on the members who fail to pay the penalty imposed on them.

PARTIES INVOLVED IN CLEARING AND SETTLEMENT

Stock Brokers
Introduction
Brokers share the undesirable reputation of lawyers, bankers and accountants. They
earn a living by selectively sharing knowledge that the general public can't easily
access. But, like it or not, they are the individual investor's direct link to Wall Street.
Although technology and the internet have made it easier for individual investors to
126

take control of their portfolios, the basic rule still applies: you need some kind of
broker if you want to trade stocks and bonds. In any profession, you will find people
who take advantage of those who aren't in the know. Whenever you buy something,
there is the possibility of being cheated. Furthermore, with a broker you purchase
advice, which is hard to price. But not all brokers fit the swindler stereotype. In fact,
there are many brokers who do a phenomenal job of guarding their clients' interests.
There are also many discount brokerages that provide remarkable services for a
reasonable price. It's up to you to pick the broker that meets your needs. This tutorial
will go over some important factors to consider when making the choice. A broker is
an intermediary who arranges to buy and sell securities on behalf of clients (the buyer
and the seller). According to Rule 2 (e) of SEBI (Stock Brokers and Sub-Brokers)
Rules, 1992, a stockbroker means a member of a recognized stock exchange. No
stockbroker is allowed to buy, sell or deal in securities, unless he or she holds a
certificate of registration granted by SEBI. A stockbroker applies for registration to
SEBI through a stock exchange or stock exchanges of which he or she is admitted as a
member. SEBI may grant a certificate to a stock-broker [as per SEBI (Stock Brokers
and Sub-Brokers) Rules, 1992] subject to the conditions that:
a) he holds the membership of any stock exchange;
b) he shall abide by the rules, regulations and bye-laws of the stock exchange or stock
exchanges of which he is a member;
c) in case of any change in the status and constitution, he shall obtain prior permission
of SEBI to continue to buy, sell or deal in securities in any stock exchange;
d) he shall pay the amount of fees for registration in the prescribed manner; and
e) he shall take adequate steps for redressal of grievances of the investors within one
month of the date of the receipt of the complaint and keep SEBI informed about the
number, nature and other particulars of the complaints. While considering the
application of an entity for grant of registration as a stock broker, SEBI shall take into
account the following namely, whether the stock broker applicant - a) is eligible to be
admitted as a member of a stock exchange;
b) Has the necessary infrastructure like adequate office space, equipment and man
power to effectively discharge his activities;
c) Has any past experience in the business of buying, selling or dealing in securities;
d) Is being subjected to any disciplinary proceedings under the rules, regulations and
bye-laws of a stock exchange with respect to his business as a stockbroker involving
either himself or any of his partners, directors or employees.
Membership in NSE
There are no entry/exit barriers to the membership in NSE. Anybody can become
member by complying with the prescribed eligibility criteria and exit by surrendering
membership without any hidden/overt cost. The members are admitted to the different
segments of the Exchange subject to the provisions of the Securities Contracts
(Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, the
Rules, circulars, notifications, guidelines, etc., issued there under and the Bye laws,
Rules and Regulations of the Exchange. The standards for admission of members laid
down by the Exchange stress on factors such as, corporate structure, capital adequacy,
track record, education, experience, etc. and reflect a conscious effort on the part of
NSE to ensure quality broking services so as to build and sustain confidence among
investors in the Exchanges operations. Benefits to the trading membership of NSE
include:
1. Access to a nation-wide trading facility for equities, derivatives, debt and hybrid
instruments / products,
2. Ability to provide a fair, efficient and transparent securities market to the investors
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3. Use of state-of-the-art electronic trading systems and technology,

4. Dealing with an organisation which follows strict standards for trading &
settlement at par with those available at the top international bourses,
5. A demutualised Exchange which is managed by independent and experienced
professionals, and
6. Dealing with an organisation which is constantly striving to move towards a global
marketplace in the securities industry.
New Membership
Membership of NSE is open to all persons desirous of becoming trading members,
subject to meeting requirements/criteria as laid down by SEBI and the Exchange. The
different segments currently available on the Exchange for trading are:
I Capital Market (Equities and Retail Debt)
II Wholesale Debt Market
III Derivatives (Futures and Options) Market
Admission to membership of the Exchange to any of the segments is currently open
and available. Persons or Institutions desirous of securing admission as Trading
Members (Stock Brokers) on the Exchange may apply for any one of the following
segment groups:
I. Wholesale Debt Market (WDM) Segment
II. Capital Market (CM) and Wholesale Debt Market (WDM) segments
III. Capital Market (CM) and Futures & Options (F&O) segments
IV. Capital Market (CM), Wholesale Debt Market (WDM) and Futures & Options
(F&O) segment
V. Clearing Membership of National Securities Clearing Corporation Ltd (NSCCL) as
a Professional Clearing Member (PCM).
Eligibility for acquiring membership of NSE is as follows:
1) The following persons are eligible to become trading members:
(a) Individuals
(b) Partnership firms registered under the Indian Partnership Act, 1932
Individual and Partnership firm are not eligible to apply for membership on WDM
segment.
(c) Institutions, including subsidiaries of banks engaged in financial services.
(d) Body Corporate including companies as defined in the Companies Act, 1956.
A company shall be eligible to be admitted as a member if:
i) Such company is formed in compliance with the provisions of Section 12 of the
said Act;
ii) Such company undertakes to comply with such financial requirements and norms
as may be specified by the Securities and Exchange Board of India for the registration
of such company;
iii) the directors of such company are not disqualified for being members of a stock
exchange and have not held the offices of the Directors in any company which had
been a member of the stock exchange and had been declared defaulter or expelled by
the stock exchange; and
(e) Such other persons or entities as may be permitted from time to time by RBI /
SEBI under the Securities Contracts (Regulations) Rules, 1957.
2) No person shall be admitted as a trading member if:
(a) He has been adjudged bankrupt or a receiver order in bankruptcy has been made
against him or he has been proved to be insolvent even though he has obtained his
final discharge;
(b) He has compounded with his creditors for less than full discharge of debts;
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(c) He has been convicted of an offence involving a fraud or dishonesty;

(d) He is engaged as a principal or employee in any business other than that of
Securities, except as a broker or agent not involving any personal financial liability or
for providing merchant banking, underwriting or corporate or investment advisory
services, unless he undertakes to severe its connections with such business on
admission, if admitted;
(e) He has been at any time expelled or declared a defaulter by any other Stock
Exchange or he has been debarred from trading in securities by any regulatory
authorities like SEBI, RBI etc;
(f) He has been previously refused admission to trading membership by NSE unless a
period of one year has elapsed since the date of such rejection;
(g) He incurs such disqualification under the provisions of the Securities Contract
(Regulations) Act, 1956 or Rules made there under so as to disentitle him from
seeking membership of a stock exchange;
(h) incurs such disqualification consequent to which NSE determines it to be not in
public interest to admit him as a member on the Exchange Provided that in case of
registered firms, body corporate and companies, the condition from (a) to (h) above
will apply to all partners in case of partnership firms, and all directors in case of
companies;
(i) It is a body corporate which has committed any act which renders it liable to be
wound up under the provisions of the law;
(j) It is a body corporate or a company in respect of which a provisional liquidator or
receiver or official liquidator has been appointed by a competent court;
Education and Experience: Where an applicant is a corporate, not less than two
directors of the company (in case of a sole proprietorship, individual and in case of a
partnership firm, two partners) should satisfy the following criteria: They should be at
least graduates and each of them should possess at least two years' experience in an
activity related to broker, sub-broker, authorized agent or authorized clerk or
authorized representative or remisier or apprentice to a member of a recognised stock
exchange. Such experience will include working as a dealer, jobber, market maker, or
in any other manner in the dealing in securities or clearing and settlement thereof, as
portfolio manager or merchant bankers or as a researcher with any individual or
organization operating in the securities market.
Shareholding Pattern: Securities markets have the inherent tendency to be volatile
and risky. Therefore, there should be adequate risk containment mechanisms in place
for the Stock Exchanges. One such risk containment tool is the concept of Dominant
Promoter/Shareholder Group which is very unique for applicants acquiring
membership on the NSE. Though membership on NSE is granted to the entity
applying for it, but for all practical purposes the entity is managed by a few
shareholders who have controlling interest in the company. The shareholders holding
the majority of shares have a dominant role in the affairs of the company. In case of
any default by the broking entity, the Exchange should be able to identify and take
action against the persons who are behind the company. The Exchange, therefore,
needs to know the background, financial soundness and integrity of these shareholders
holding such controlling interest. Hence, during the admission process the dominant
shareholders are called for an interview with the Membership Approval Committee.
Salient features on the concept of Dominant Promoter/Shareholder Group:
a) Dominant Promoter / Shareholder Group (DPG) is a group of shareholders of the
Trading member corporate who normally would be individuals, not exceeding 4 in
number, and who would jointly and/or severally hold not less than 51% of shares
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(40% in case of listed companies) in the trading member corporate at the time of
admission as well as subsequently at all relevant points of time.
b) The shareholding/interest of close relatives of the DPG viz. Parents, spouse,
children, brothers and sisters would also be counted for arriving at total dominant
holding / interest of a particular dominant shareholder, if such relative(s) give an
unqualified and irrevocable support in writing to the concerned dominant shareholder
in respect of such holding / interest.
c) Corporate shareholders of the trading member company can also extend their
support to the DPG, provided the shareholding of the Dominant Promoter Group
along with the support of their specified relatives in the corporate shareholder is not
less than 51% or 40%, as the case may be. The indirect shareholding shall be
calculated proportionately by reckoning the direct shareholding of the DPG along
with the support of their specified relatives in the corporate shareholder of the trading
member company.
d) If none of the dominant promoters/shareholders is a Director on the Board of
Directors of the trading member company, then at least two other directors having the
requisite experience and qualification shall hold a minimum of 5% shares (each) in
the paid up equity capital of the trading member company. Once a trading entity
nominates/determines a group of shareholders (1 to 4) as the DPG, no other
shareholder (existing or new) would be allowed to join the DPG. However, one or
more shareholders within the DPG may be allowed to divest their shares and quit the
group. In such an eventuality, it is to be ensured that the remaining dominant
shareholders always maintain among themselves, a minimum of 51% of the shares of
the company (40% in case of listed trading member corporate) at all points of time.
Failure to maintain this required level of shareholding will be treated as a breach of
the continuing membership norms, which would tantamount to a reconstitution of the
trading member corporate as the existing DPG would no longer hold controlling
interest in the trading member corporate or alternatively a new group would have
emerged with controlling stake. NSE would immediately withdraw the trading facility
of such trading members. They could be re-instated upon rectifying the defect or
seeking the approval of the Exchange for identifying the new group of shareholders as
the dominant shareholders, for which the process of going through the Membership
Approval Committee and the Board will need to be followed.
e) The DPG may also be permitted to consist of corporate shareholders, provided:
The trading member is a wholly owned subsidiary of another company
The said holding company is not a subsidiary of any other company
The identifiable individual dominant promoter(s) (not more than 4) hold at least
51% of the share capital of the holding company, or there are two or more listed
corporate shareholders jointly holding at least 51% of the share capital of the holding
company or one or more listed corporate shareholders along with individual
shareholders together, not exceeding four in number, jointly hold at least 51% of the
shares of the holding company, Provided that in none of the above instances the
holding company of the trading member corporate becomes the subsidiary of another
corporate.
The said dominant promoters undertake in writing, not to dilute their shareholding in
the holding company without prior consent of the Exchange.
Such corporate dominant shareholders are widely held listed Finance companies
having net worth of Rs. 20 crores and above and their debt instruments, if any, have
been accorded at least investment grade credit rating by reputed rating agencies.
If such corporate dominant shareholders are non-finance companies listed on NSE
and have a net worth of Rs. 20 crores and their debt instruments, if any, have been
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accorded at least investment grade credit rating by reputed rating agencies, then such
a company shall be permitted to be included in the DPG.
Private Banks, central or state government owned Finance and/or Development
Institutions etc are also allowed to be identified as dominant shareholder(s) even if
they are not listed provided they have a net worth of at least Rs. 20 crores and the debt
instruments, if any, have investment grade credit rating made by one of the reputed
credit rating agencies. The aforesaid norms are also applicable to trading members
who are partnership firms. The term dominant shareholder/promoter may be
substituted as dominant partner.
Continuing Membership
Trading members of the Exchange have to submit the following
documents/information to the Exchange on an annual basis as part of the continuing
membership norms. Non-submission of the required documents/information attracts
disciplinary action by the Exchange including levy of penalty, reduction of gross
exposure, etc.
1. Audited financial statements (Balance Sheet, Profit and Loss Account)
2. Net worth Certificate in the prescribed format duly certified by a Chartered
Accountant. (Every half yearly)
3. Details of directors, shareholders, dominant shareholders, etc. duly certified by a
Chartered Accountant.
4. Proof of renewal of Insurance Cover.
Other related matters in respect of Continuing Membership are as under:
Up gradation of Membership: The Exchange permits the trading members desirous
of upgrading their trading membership from Individual or Partnership firm to a
Corporate. Trading members intending to do so should take note of the following:
a) A request has to be sent by the trading member indicating the scheme of up
gradation and the proposed shareholding pattern of the corporate.
b) In case of an up gradation from individual to Corporate, the individual should hold
at least 51% of the paid up capital of the proposed corporate (40% in case of listed
corporate).
c) In case of an upgradation from partnership firm to Corporate, the original partners
should hold atleast 51% of the paid up capital of the proposed corporate (40% in case
of listed corporate).
d) There should be at least 2 qualified directors who should be graduates with
minimum 2 years experience in stock broking related activities.
e) The proposed corporate should have a minimum paid up capital of Rs. 30 lakh and
meet the net worth requirements of the Exchange from time to time.
f) After the up gradation is approved by the Exchange, the trading member will have
to pay the differential deposits as applicable to corporate trading members.
Merger/Amalgamation of Membership: Trading members desirous of merging
among themselves are required to submit the proposal to the Exchange for approval.
The salient features are as follows:
a) The dominant promoter group of the merged entity shall comprise of only the
dominant members of the merging Trading Member.
b) When two or more Individual Trading Members merge to form either a partnership
firm or a corporate, the dominant group of partners / shareholders in such emerging
Trading Member entity shall comprise of any or all such individual Trading Members.
c) In case of merger between two or more Individual / partnership firms Trading
Members resulting in the formation of a new partnership firm or corporate; the
dominant group of partners / shareholders in such emerging firms or corporate
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Trading Member shall comprise of any or all the dominant partners / shareholders of
such merging Trading Members.
d) In case of merger between two or more corporate trading members, the dominant
group of shareholders in such emerging corporate Trading Member shall comprise of
any or all the dominant shareholders of such merging Trading Members.
e) The merged entity shall at all times consist of at least one or more members of the
dominant promoter group of the merging Trading Members who would hold at least
51% of its total paid up capital (40% in case of listed companies) / profit sharing ratio.
f) The scheme of merger shall provide for the appropriation / transfer of the entire
amount of security deposits of the extinguishing Trading Members with the
Exchange / NSCCL in favour of the merged entity. Such deposits of the extinguishing
Trading Members will be refunded to the merged entity only after the expiry of the
respective lock in period of each of the extinguishing Trading Members. No interest
shall be paid by the Exchange /NSCCL on such deposits. These deposits may however
be considered towards net worth / capital adequacy requirements / exposure limits of
the merged entity, as also for margin purposes.
g) The scheme of merger shall provide that the merged entity shall honour all the
financial commitments / obligations/ liabilities of all the extinguishing Trading
Members that devolved prior to merger or may devolve subsequent to the merger and
shall be treated as if it were the liability of the merged entity.
h) As soon as the application for merger is filed before the High Court, the
extinguishing broking entity should approach SEBI through the Stock Exchange for
obtaining prior permission, to the scheme of merger, giving all necessary details of the
proposal.
i) The emerging entity would be allowed to trade on the registration of the
extinguishing entity for a period of 45 days. However, the emerging entity should
apply to SEBI at the earliest and give an undertaking to be liable for the act of the
extinguishing entity and such applications in any case should be made not later than
30 days of the registration granted by the Registrar of companies to the emerging
entity.
Reconstitution / Transfer of Membership: Reconstitution / Transfer of Membership
takes place when the shareholding/profit sharing ratio of existing Dominant
Promoter/Shareholder/Partner group falls below 51% (40% in case of listed corporate)
which means that effectively they are no more in control of the trading member entity.
Trading members desirous of transferring their trading membership of the Exchange
are requested to refer to the circulars issued by the Exchange from time to time in this
regard and submit the proposal to the Exchange for approval. The salient features are
as follows:
a) The trading member would be required to comply with the prevalent net worth
norms of the Exchange as applicable to corporate Trading Members.
b) A processing fee of Rs.1 lakh would be payable on approval of proposal for
transfer.
c) The trading member would be required to pay the differential between the deposit
paid by them for the membership of the relevant market segments and the deposit
payable for a corporate trading membership as per the prevailing entry norms for
membership of the segment.
d) The transfer proposal would be subject to recommendation by the Membership
Approval Committee (MAC) and approval by the Board of the Exchange, and, for this
purpose, the Exchange's requirements of written test and an interview by MAC, will
apply.
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Multiple Memberships: The Exchange does not permit multiple memberships

among the same set of dominant promoters/shareholders. However, there may be a
need for the existing trading members to take up more than one membership on the
NSE for various reasons like client segregation, market or business segregation, etc.
In such cases, multiple memberships may be permitted by the Exchange only in cases
where the existing trading member corporate forms a subsidiary. The following
requirements need to be complied with by the applicant company and the holding
company for related entities to obtain membership of the Exchange:
1. In the application for new membership, the applicant shall identify the holding
company, which is a member of the Exchange.
2. Board resolution from the existing trading member corporate for applying for new
membership in the name of the subsidiary.
3. The existing trading member should be the dominant promoter/shareholder directly
holding at least 51% of the shareholding of the company.
4. In case of transfer of membership of holding company, both the companies will be
required to comply with the transfer provisions.
5. Majority of the directors should be appointed by the holding company. The same
should be incorporated in the articles of association of the subsidiary company.
6. Undertaking from the existing as well as the applicant subsidiary company that they
may be considered as a single unit for taking any disciplinary action by the Exchange.
7. In case of default or failure to meet the obligations towards NSEIL / NSCCL by
one company, the deposits of other company may be appropriated.
8. In case of investor grievances and arbitration awards, the holding company shall
honour the obligations of the subsidiary company and vice versa.
9. The new applicant company shall be required to take up the combined membership
of Capital Market Segment and Futures & Options Segment as in the case of new
applicants.
10. When any disciplinary action etc., is taken against the holding company (existing
trading member) or the applicant (new trading member), both the entities shall be
considered as one single unit and would attract similar action by the
Exchange/NSCCL.
Suspension & Expulsion of Membership: The Exchange may expel or suspend
and/or fine under censure and/or warn and/or withdraw any of the membership rights
of a trading member if it be guilty of contravention, non-compliance, disobedience,
disregard or evasion of any of the Bye Laws, Rules and Regulations of the Exchange
or of any resolutions, orders, notices, directions or decisions or rulings of the
Exchange or the relevant authority or of any other Committee or officer of the
Exchange authorized on that behalf or of any conduct, proceeding or method of
business which the relevant authority in its absolute discretion deems dishonorable,
disgraceful or unbecoming of a trading member of the Exchange or inconsistent with
just and equitable principles of trade or detrimental to the interests, good name or
welfare of the Exchange or prejudicial or subversive to its objects and purposes.
1. Misconduct: A trading member shall be deemed guilty of misconduct for any of
the following or similar acts or omissions namely:
(a) Fraud: 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 be a trading member;
(b) Violation: If it has violated provisions of any statute governing the activities,
business and operations of the Exchange, trading members and securities business in
general;

133

(c) Improper Conduct: If in the opinion of the relevant authority it is guilty of

dishonorable or disgraceful or disorderly or improper conduct on the Exchange or of
wilfully obstructing the business of the Exchange;
(d) Breach of Rules, Bye Laws and Regulations: If it shields or assists or omits to
report any trading member whom it has known to have committed a breach or evasion
of any Rule, Bye-law and Regulation of the Exchange or of any resolution, order,
notice or direction there under of the relevant authority or of any Committee or officer
or the Exchange authorized in that behalf;
(e) Failure to comply with Resolutions: If it contravenes or refuses or fails to comply
with or abide by any resolution, order, notice, direction, decision or ruling of the
relevant authority or of any Committee or officer of the Exchange or other person
authorized in that behalf under the Bye Laws, Rules and Regulations of the Exchange;
(f) Failure to submit to or abide by Arbitration: If it neglects or fails or refuses to
submit to arbitration or to abide by or carry out any award, decision or order of the
relevant authority or the Arbitration Committee or the arbitrators made in connection
with a reference under the Bye Laws, Rules and Regulations of the Exchange;
(g) Failure to testify or give information: If it neglects or fails or refuses to submit to
the relevant authority or to a Committee or an officer of the Exchange authorized in
that behalf, such books, correspondence, documents and papers or any part thereof as
may be required to be produced or to appeal and testify before or cause any of its
partners, attorneys, agents, authorized representatives or employees to appear and
testify before the relevant authority or such Committee or officer of the Exchange or
other person authorized in that behalf;
(h) Failure to submit Special Returns: If it neglects or fails or refuses to submit to the
relevant authority within the time notified in that behalf special returns in such form
as the relevant authority may from time to time prescribe together with such other
information as the relevant authority may require whenever circumstances arise which
in the opinion of the relevant authority make it desirable that such special returns or
information should be furnished by any or all the trading members;
(i) Failure to submit Audited Accounts: If it neglects or fails or refuses to submit its
audited accounts to the Exchange within such time as may be prescribed by the
relevant authority from time to time,
(j) Failure to compare or submit accounts with Defaulter: If it neglects or fails to
compare its accounts with the Defaulters' Committee or to submit 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 therein;
(k) False or misleading Returns: If it neglects or fails or refuses to submit or makes
any false or misleading statement in its clearing forms or returns required to be
submitted to the Exchange under the Bye Laws, Rules and Regulations;
(l) Vexatious complaints: If it or its agent brings before the relevant authority or a
Committee or an officer of the Exchange or other person authorised in that behalf a
charge, complaint or suit which in the opinion of the relevant authority is frivolous,
vexatious or malicious;
(m) Failure to pay dues and fees: If it fails to pay its subscription, fees, arbitration
charges or any other money which may be due by it or any fine or penalty imposed on
it.
2. Un-businesslike Conduct: A trading member shall be deemed guilty of unbusiness
like conduct for any of the following or similar acts or omissions namely:
(a) Fictitious Names: If it transacts its own business or the business of its constituent
in fictitious names or if he carries on business in more than one trading segment of the
Exchange under fictitious names;
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(b) Fictitious Dealings: If it makes a fictitious transaction or gives an order for the
purchase or sale of securities the execution of this would involve no change of
ownership or executes such an order with knowledge of its character;
(c) Circulation of rumours: If it, in any manner, circulates or causes to be circulated,
any rumours;
(d) Prejudicial Business: 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
equilibrium of the market or bringing about a condition in which prices will not fairly
reflect market values;
(e) Market Manipulation and Rigging: If it, directly or indirectly, alone or with other
persons, 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 by others;
(f) Unwarrantable Business: If it engages in reckless or unwarrantable or unbusiness
like dealings in the market or effects purchases or sales for its constituent's account or
for any account in which it is directly or indirectly interested which purchases or sales
are excessive in view of its constituent's or his own means and financial resources or
in view of the market for such security;
(g) Compromise: If it connives at a private failure of a trading member or accepts less
than a full and bona fide money payment in settlement of a debt due by a trading
member arising out of a transaction in securities;
(h) Dishonoured Cheque: If it issues to any other trading member or to its constituents
a cheque which is dishonoured on presentation for whatever reasons;
(i) Failure to carry out transactions with Constituents: If it fails in the opinion of the
relevant authority to carry out its committed transactions with its constituents;
3. Unprofessional Conduct: A trading member shall be deemed guilty of
unprofessional conduct for any of the following or similar acts or omissions namely:
(a) Business in Securities in which dealings not permitted: If it enters into dealings in
securities in which dealings are not permitted;
(b) Business for Defaulting Constituent: If it deals or transacts business directly or
indirectly or executes 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
member unless such constituent shall have made a satisfactory arrangement with the
trading member who is its creditor;
(c) Business for Insolvent: If without first obtaining the consent of the relevant
authority it directly or indirectly is interested in or associated in business with or
transacts any business with or for any individual who has been bankrupt or insolvent
even though such individual shall have obtained his final discharge from an
Insolvency Court;
(d) Business without permission when under suspension: If without the permission of
the relevant authority it does business on its own account or on account of a principal
with or through a trading member during the period it is required by the relevant
authority to suspend business on the Exchange;
(e) Business for or with suspended, expelled and defaulter trading members: If
without the special permission of the relevant authority it shares brokerage with or
carries on business or makes any deal for or with any trading member who has been
suspended, expelled or declared a defaulter;
(f) Business for Employees of other trading members: If it transacts business directly
or indirectly for or with or executes an order for a authorized representative or
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employee of another trading member without the written consent of such employing
trading member;
(g) Business for Exchange Employees: If it makes a speculative transaction in which
an employee of the Exchange is directly or indirectly interested;
(h) Advertisement: If it advertises for business purposes or issue regularly circular or
other business communications to persons other than its own constituents, trading
members of the Exchange, Banks and Joint Stock Companies or publishes pamphlets,
circular or any other literature or report or information relating to the stock markets
with its name attached;
(i) Evasion of Margin Requirements: If it wilfully evades or attempts to evade or
assists in evading the margin requirements prescribed in these Bye Laws and
Regulations;
(j) Brokerage Charge: If it wilfully deviates from or evades or attempts to evade the
Bye Laws and Regulations relating to charging and sharing of brokerage.
(k) Dealings with entities prohibited to buy or sell or deal in securities market. If it
deals, directly or indirectly, in the course of its business with or transacts any business
with or for any entity, which has been prohibited by SEBI to buy or sell or deal in the
securities market.
4. Trading members responsibility for Partners, Agents and Employees: A
trading member shall be fully responsible for the acts and omissions of its authorized
officials, attorneys, agents, authorized representatives and employees and if any such
act or omission be held by the relevant authority to be one which if committed or
omitted by the trading member would subject it to any of the penalties as provided in
the Bye Laws, Rules and Regulations of the Exchange then such trading member shall
be liable therefore to the same penalty to the same extent as if such act or omission
had been done or omitted by itself.
5. Suspension on failure to provide margin deposit and/or Capital Adequacy
requirements: The Exchange shall require a trading member to suspend its business
when it fails to provide the margin deposit and/or meets capital adequacy norms as
provided in the Bye Laws, Rules and Regulations and the suspension of business shall
continue until it furnishes the necessary margin deposit or meet capital adequacy
requirements. The relevant authority may expel a trading member acting in
contravention of this provision.
6. Suspension of Business: The relevant authority may require a trading member to
suspend its business in part or in whole:
(a) Prejudicial Business: When in the opinion of the relevant authority, the trading
member conducts business in a manner prejudicial to the Exchange by making
purchases or sales of securities or offers to purchase or sell securities for the purpose
of upsetting equilibrium of the market or bringing about a condition of demoralisation
in which prices will not fairly reflect market values, or
(b) Unwarrantable Business: When in the opinion of the relevant authority it
engages in unwarrantable business or effects purchases or sales for its constituent's
account or for any account in which it is directly or indirectly interested which
purchases or sales are excessive in view of its constituent's or its own means and
financial resources or in view of the market for such security, or
(c) Unsatisfactory Financial Condition: When in the opinion of the relevant
authority it is in such financial condition that it cannot be permitted to do business
with safety to its creditors or the Exchange.
7. Removal of Suspension: The suspension of business as above shall continue until
the trading member has been allowed by the relevant authority to resume business on
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its paying such deposit or on its doing such act or providing such thing as the relevant
authority may require.
8. Consequence of Suspension: The suspension of a trading member shall have the
following consequences namely:
(a) Suspension of Membership Rights : The suspended trading member shall during
the terms of its suspension be deprived of and excluded from all the rights and
privileges of membership including the right to attend or vote at any meeting of the
general body of trading members of the relevant segment, but it may be proceeded
against by the relevant authority for any offence committed by it either before or after
its suspension and the relevant authority shall not be debarred from taking cognisance
of and adjudicating on or dealing with any claim made against it by other trading
members;
(b) Rights of creditors unimpaired: The suspension shall not affect the rights of the
trading members who are creditors of the suspended trading member;
(c) Fulfilment of Contracts: The suspended trading member shall be bound to fulfill
contracts outstanding at the time of its suspension;
(d) Further business prohibited : The suspended trading member shall not during the
terms of its suspension make any trade or transact any business with or through a
trading member provided that it may with the permission of the relevant authority
close with or through a trading member the transactions outstanding at the time of its
suspension;
(e) Trading members not to deal: No trading member shall transact business for or
with or share brokerage with a suspended trading member during the terms of its
suspension except with the previous permission of the relevant authority.
9. Consequences of Expulsion: The expulsion of a trading member shall have the
following consequences namely:
(a) Trading membership rights forfeited: The expelled trading member shall forfeit to
the Exchange its right of trading membership and all rights and privileges as a trading
member of the Exchange including any right to the use of or any claim upon or any
interest in any property or funds of the Exchange but any liability of any such trading
member to the Exchange or to any trading member of the Exchange shall continue
and remain unaffected by its expulsion;
(b) Office vacated: The expulsion shall create a vacancy in any office or position held
by the expelled trading member;
(c) Rights of Creditors unimpaired: The expulsion shall not affect the rights of the
trading members who are creditors of the expelled trading member;
(d) Fulfilment of Contracts: The expelled trading member shall be bound to fulfil
transactions outstanding at the time of his expulsion and it may with the permission of
the relevant authority close such outstanding transactions with or through a trading
member;
(e) Trading members not to deal: No trading member shall transact business for or
with or share brokerage with the expelled trading member except with the previous
permission of the relevant authority.
(f) Consequences of declaration of defaulter to follow: The provisions of Chapter XII
and Chapter XII of the Bye Laws pertaining to default and Protection Fund
respectively shall become applicable to the trading member expelled from the
Exchange as if such trading member has been declared a defaulter.
Declaration of Defaulter: A trading member may be declared a defaulter by direction
circular / notification of the relevant authority of the trading segment if:
1. He is unable to fulfill his obligations; or
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2. He admits or discloses his inability to fulfill or discharge his duties, obligations and
liabilities; or
3. He fails or is unable to pay within the specified time the damages and the money
difference due on a closing-out effected against him under these Bye Laws, Rules and
Regulations; or
4. He fails to pay any sum due to the Exchange or to submit or deliver to the
Exchange on the due date, delivery and receive orders, statement of differences and
securities, balance sheet and such other clearing forms and other statements as the
relevant authority may from time to time prescribe; or
5. If he fails to pay or deliver to the Defaulters' Committee all monies, securities and
other assets due to a trading member who has been declared a defaulter within such
time of the declaration of default of such trading member as the relevant authority
may direct; or
6. if he fails to abide by the arbitration proceedings as laid down under the Bye Laws,
Rules and Regulations without prejudice to the foregoing, if a Trading Member is
either expelled or declared a defaulter by any other recognised Stock Exchange on
which he is a member or if the registration certificate is cancelled by SEBI, then the
said Trading Member is expelled from the Exchange.
Failure to fulfill Obligations
The relevant authority may order a trading member to be declared a defaulter if he
fails to meet an obligation to a trading member or constituent arising out of Exchange
transactions.
Insolvent a Defaulter
A trading member who has been adjudicated an insolvent shall be ipso factor declared
a defaulter although he may not be at the same time a defaulter on the Exchange.
Trading member's Duty to Inform
A trading member shall be bound to notify the Exchange immediately if there be a
failure by any trading member to discharge his liabilities in full.
Compromise Forbidden
A trading member guilty of accepting from any trading member anything less than a
full and bona fide money payment in settlement of a debt arising out of a transaction
in securities shall be suspended for such period as the relevant authority may
determine.
Surrender of Trading Membership: TMs can apply for surrender of their trading
membership once admitted on the Exchange. Surrender of trading membership can be
permitted by the Exchange after fulfilling certain conditions by the member such as,
clearing off all the dues to the Exchange and NSCCL, notifying all other TMs of the
approval of surrender, obtaining No dues certificate from SEBI, issuance of a public
notification in leading dailies etc. The deposits of the trading members would be
released by the Exchange/NSCCL after a prescribed lock-in period. However, there is
no lock-in period applicable in case of trading member, who is,
1. Not SEBI registered
2. SEBI registered but not enabled
3. SEBI registered and enabled but not traded at all
Authorized Persons
Trading members of the Exchange may appoint authorized persons who are
individuals, registered partnership firms, bodies corporate or companies as defined
under the Companies Act, 1956 in the Capital Market (CM) segment or Futures &
Options (F&O) segment or in both CM and F&O segments. An authorized person
may introduce clients to the trading member for whom they may receive remuneration
/ commission / compensation from the trading member and not from the clients. The
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clients introduced by the authorized person will have a direct relationship with the
trading member i.e. the member-constituent agreement, know your client forms, risk
disclosure document, etc. shall be executed between the client and the trading member
i.e., the authorized person shall not be allowed to have any trading relationship with
the clients. The trading member shall issue the contract notes and/or bills directly to
the client i.e. the authorized person shall not issue contract notes, confirmation memo
and/or bills in their name. The clients introduced by the authorised person would be
required to deliver securities and make payments directly in the trade name of the
trading member (as appearing on the SEBI registration certificate). Similarly the
trading member shall deliver securities and make payments directly in the name of the
clients. For further details pertaining to authorised person and trading members
desirous of appointing authorised person may refer to circular no. 333
(NSE/MEM/4082) dated April 10, 2003.
Sub-Brokers
A Sub-broker is a person who intermediates between investors and stock brokers. He
acts on behalf of a stock-broker as an agent or otherwise for assisting the investors for
buying, selling or dealing in securities through such stock-broker. No sub-broker is
allowed to buy, sell or deal in securities, unless he or she holds a certificate of
registration granted by SEBI. A sub-broker may take the form of a sole proprietorship,
a partnership firm or a company. Stockbrokers of the recognised stock exchanges are
permitted to transact with sub-brokers. Sub-brokers are required to obtain certificate
of registration from SEBI in accordance with SEBI (Stock Brokers & Sub-brokers)
Rules and Regulations, 1992, without which they are not permitted to buy, sell or deal
in securities. SEBI may grant a certificate to a sub-broker, subject to the conditions
that:
(a) He shall pay the fees in the prescribed manner;
(b) He shall take adequate steps for redressal of grievances of the investors within one
month of the date of the receipt of the complaint and keep SEBI informed about the
number, nature and other particulars of the complaints received;
(c) In case of any change in the status and constitution, the sub- broker shall obtain
prior permission of SEBI to continue to buy, sell or deal in securities in any stock
exchange; and
(d) He is authorised in writing by a stock-broker being a member of a stock exchange
for affiliating himself in buying, selling or dealing in securities.
In case of company, partnership firm and sole proprietorship firm, the directors, the
partners and the individual, shall comply with the following requirements:
(a) The applicant is not less than 21 years of age;
(b) The applicant has not been convicted of any offence involving fraud or dishonesty;
(c) The applicant has at least passed 12th standard equivalent examination from an
institution recognised by the Government.
(d) They should not have been debarred by SEBI.
(e) The corporate entities applying for sub-brokership shall have a minimum paid up
capital of Rs. 5 lakh and it shall identify a dominant shareholder who holds a
minimum of 51% shares either singly or with the unconditional support of his/her
spouse.
The salient features of the circular Ref. No. SMD/POLICY/CIRCULAR/11-97 dated
May 21, 1999 issued by SEBI is as under:
1. The registered sub-broker can transact only through the member broker who had
recommended his application for registration. If the Sub-broker is desirous of doing
business with more than one broker, he will have to obtain separate registration in
each case.
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2. The sub-broker shall disclose the names of all other sub-brokers/brokers where he
is having direct or indirect interest.
3. It shall be the responsibility of the broker to report the default if any of his subbroker to all other brokers with whom sub-broker is affiliated.
4. The agreement can be terminated by giving the notice in writing of not less than 6
months by either party.
5. Sub-brokers are obligated to enter into agreements and maintain the database of
their clients/investors in the specified format. The applicant sub-broker shall submit
the required documents to the stock exchange with the recommendation of a TM.
After verifying the documents, the stock exchange may forward the documents of the
applicant sub-broker to SEBI for registration. A sub-broker can trade in that capacity
after getting himself registered with SEBI. The Exchange may not forward the said
application of the sub-broker to SEBI for registration if the applicant is found to have
introduced or otherwise dealt with fake, forged, stolen, counterfeit etc. shares and
securities in the market. The sub-broker of a TM of the Exchange has to comply with
all the requirements under SEBI (stock brokers and sub-brokers) Regulation, 1992
and the requirements of the Exchange as may be laid down from time to time. The sub
broker is bound by and amenable to the Rules, Byelaws and Regulations of the
Exchange. The sub-broker shall also comply with all terms and conditions of the
agreement entered into by him with the TM. After registration with SEBI, the subbroker can buy, sell or deal in securities on behalf of the investors through the broker
with whom he is affiliated. The TM has to issue contract notes for all trades in respect
of its sub-broker in the name of the sub-broker and the sub-broker shall, in turn issue
purchase/sale notes to his clients as per the format prescribed by the Exchange. The
TM with whom the sub-broker is affiliated is responsible for
1) Ensuring the compliance by a sub-broker of the Rules, Bye-laws and Regulations
of the Exchange
2) Inspecting that the sub-brokers are registered and recognized
3) Ensuring that the sub-brokers function in accordance with the Scheme, Rules,
Byelaws, Regulations etc. of the Exchange/NSCCL and the SEBI Regulations etc.
4) Informing the sub-broker and keeping him apprised about trading/settlement
cycles, delivery/payment schedules and any changes therein from time to time.
5) Reporting any default or delay in carrying out obligations by any of the sub brokers
affiliated to him, to all other stock brokers with whom the said sub broker is affiliated.
Depositories
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 beneficiary owner. It is an
organisation which holds securities (like shares, debentures, bonds, government
securities, mutual fund units etc.) of investors in electronic form at the request of the
investors through a registered Depository Participant. It also provides services related
to transactions in securities. A depository is similar to bank. It can be compared with a
bank, which holds the funds for the depositors. A Bank holds funds in an account.
Similarly depositories hold securities in an account. In the similar way bank transfers
funds between accounts on the instruction of the account holder. Through Depository
securities between accounts on the instruction of BO account holder. Bank facilitates
transfer without having to handle the money. Depositories facilitate transfer of
ownership without having to handle securities. In case of a joint account, the account
holders will be beneficiary holders of that joint account. Depositories help in the
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settlement of the dematerialized securities. Each custodian/clearing member is

required to maintain a clearing pool account with the depositories. He is required to
make available the required securities in the designated account on settlement day. A
"Depository" is a facility for holding securities, which enables securities transactions
to be processed by book entry. To achieve this purpose, the depository may
immobilize the securities or dematerialise them (so that they exist only as electronic
records).India has chosen the dematerialisation route. In India, a depository is an
organization, which holds the beneficial owner's securities in electronic form, through
a registered Depository Participant (DP). A depository functions somewhat similar to
a commercial bank. To avail of the services offered by a depository, the investor has
to open an account with a registered DP .The depository runs an electronic file to
transfer the securities from accounts of the custodians/clearing member to that of
NSCCL (National Securities Clearing Corporation Ltd.). As per the schedule of
allocation of securities determined by the NSCCL, the depositories transfer the
securities on the pay-out day from the account of the NSCCL to those of
members/custodians. At present there are two depositories in India, National
Securities Depository Limited (NSDL) and Central Depository Services (CDS).
NSDL is the first Indian depository; it was inaugurated in August 1996. NSDL was set
up with an initial capital of US$28mn, promoted by Industrial Development Bank of
India (IDBI), Unit Trust of India (UTI) and National Stock Exchange of India Ltd.
(NSE). Later, State Bank of India (SBI) also became a shareholder. NSDL aims at
ensuring the safety and soundness of Indian marketplaces by developing settlement
solutions that increase efficiency, minimize risk and reduce costs. The other
depository is Central Depository Services (CDS). CDSL was promoted by Bombay
Stock Exchange Limited (BSE) jointly with leading banks such as State Bank of
India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union
Bank of India and Centurion Bank. The balances in the investors account recorded
and maintained with CDSL can be obtained through the DP. CDSL offers an efficient
and instantaneous transfer of securities. It is still in the process of linking with the
stock exchanges. It has registered around 20 DPs and has signed up with 40
companies. It had received a certificate of commencement of business from SEBI on
February 8, 1999. These depositories have appointed different Depository Participants
(DP) for them. An investor can open an account with any of the depositories DP. But
transfers arising out of trades on the stock exchanges can take place only amongst
account-holders with NSDLs DPs. This is because only NSDL is linked to the stock
exchanges (nine of them including the main ones-National Stock Exchange and
Bombay Stock Exchange). In order to facilitate transfers between investors having
accounts in the two existing depositories in the country the Securities and Exchange
Board of India has asked all stock exchanges to link up with the depositories. SEBI
has also directed the companies registrar and transfer agents to effect change of
registered ownership in its books within two hours of receiving a transfer request
from the depositories. Once connected to both the depositories the stock exchanges
have also to ensure that inter-depository transfers take place smoothly. It also involves

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the two depositories connecting with each other. The NSDL and CDS have signed an
agreement for inter-depository connectivity.
The benefits of availing Depository Services are as follows:
A safe, convenient way to hold securities;
Instant transfer of securities;
Stamp duty is not required on transfer of securities;
Elimination of risks associated with physical certificates such as bad delivery,
fake securities, delays, thefts etc.;
Reduction in paperwork involved in transfer of securities;
Reduction in the cost of transaction,
No odd lot problem, even one share can be sold;
Facility of nomination;
Change in address recorded with DP gets registered with all companies in
which investor holds securities electronically eliminating the need to
correspond with each of them separately;
Transmission of securities is done by DP eliminating correspondence with
companies;
Credited automatically into demat account of shares, arising out-of bonus or split or
consolidation or merger.
Depositiory Participant
In India, a Depository Participant (DP) is described as an agent of the depository.
They are the intermediaries between the depository and the investors. The relationship
between the DPs and the depository is governed by an agreement made between the
two under the Depositories Act. In a strictly legal sense, a DP is an entity who is
registered as such with SEBI under the provisions of the SEBI Act. As per the
provisions of this Act, a DP can offer depository-related services only after obtaining
a certificate of registration from SEBI. SEBI (D&P) Regulations, 1996 prescribe a
minimum net worth of Rs. 50 lakh for stockbrokers, R&T agents and non-banking
finance companies (NBFC), for granting them a certificate of registration to act as
DPs. If a stockbroker seeks to act as a DP in more than one depository, he should
comply with the specified net worth criterion separately for each such depository. No
minimum net worth criterion has been prescribed for other categories of DPs;
however, depositories can fix a higher net worth criterion for their DPs. NSDL carries
out its activities through various functionaries called business partners who include
Depository Participants (DPs), Issuing corporates and their Registrars and Transfer
Agents, Clearing corporations/ Clearing Houses etc. NSDL is electronically linked to
each of these business partners via a satellite link through Very Small Aperture
Terminals (VSATs). The entire integrated system (including the VSAT linkups and the
software at NSDL and each business partners end) has been named as the NEST
[National Electronic Settlement & Transfer] system. The investor interacts with the
depository through a depository participant of NSDL. A DP can be a bank, financial
institution, a custodian or a broker. Just as one opens a bank account in order to avail
of the services of a bank, an investor opens a depository account with a depository
participant in order to avail of depository facilities.
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TECHNOLOGICAL EFFECTS OF ONLINE TRADING ON

SHARE MARKET
One of the innumerable ways that the internet has changed all of our lives is with
online stock trading in the share market. By being able to trade stocks online, traders
now have a level of access to their investments and to the stock market itself that they
previously had never enjoyed. Talking about the Indian scenario of the online trading
In a nation with a middle class population of 200 million, most of whom dream of a
better, financially comfortable tomorrow, the stock market is obviously seen as the
perfect place to investespecially when you consider that stock markets can make
you considerably rich in a short span of time, provided you play your cards right.
However, Indias scam-scarred bourses havent exactly inspired trust with retail
investors who want to strike it rich, but who arent too well-versed with the rules of
the game. The last few years of the last century and the first year of the 21st century
though have seen a wave of technology enhancements sweeping though the Indian
share markets, wiping out archaic conventions. This has seen issues like badla going
out, while on the other hand we have seen processes like online trading gradually
coming to India. The National Stock Exchange (NSE) has been the most proactive in
bringing about most of these technological innovations, including online trading. It
started way back in February 2000 with the Kochi-based Geojit Securities conducting
the first Net transaction when 100 shares of Reliance was traded by SEBI chairman D
R Mehta for Geojit chairman A P Kurian. Much water has flown under the bridge
since then. From a base of about Rs 3 crore in April 2000, volumes for online trading
have risen to nearly Rs 1,500 crore per month in January 2001. A Nasscom-BCG
study estimates the market will grow to Rs12, 000 crore per month by 2005. In spite
of these optimistic numbers, online trading in India is at a very nascent stage (about 2
percent of total traded volumes) compared to countries like South Korea (60 percent),
US (40 percent) and UK (20 percent). Online trading in the year 2000-2001 accounted
for only Rs 50,170 crore out of total traded volume of Rs 25,08,445 crore. There are
currently close to 50 online brokerages in India with ICICIDirect, Home Trade,
KotakStreet, Sharekhan, Motilal Oswal, IndiaBulls and 5Paisa being some major
players. However, due to limited volumes, no online brokerage is currently making
money and a shakeout is imminent in the near future. The going is expected to get
tougher with the advent of capital account convertibility. Players such as TD
Waterhouse have already entered the Indian market, while others such as Schwab are
expected shortly. On an average, Rs 40 crore per day (Rs 1,000 crore per month) is
likely to be the threshold breakeven for online brokerages. However Hiren Gada,
senior VP, Home Trade is not unduly perturbed. Similarly, the birth of online trading
has produced a new generation of investors that are more well-informed and savvy
than ever before. Online Trading is an internet based investment activity which
eliminates the association of a broker. Anyone who has a computer, enough money to
open an account and reasonable financial history has the ability to invest in the
market. There was a time when there was an open outcry system for trading in the
share market in India but now Online trading, or direct access trading (DAT), of
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financial instruments has became very popular in the last five years or so. Now almost
all financial instruments are available to trade online including stocks, bonds, futures,
options, ETFs, forex currencies and mutual funds. One reason many people are never
seriously interested in share trading apart from the risk is that although they
are curious, they know it is a hassle to go some place to trade and handle all those
paper certificates. Also, many don't have the time for all this. Online trading
eliminates both these hassles. First by making your transaction virtually paperless and
second by enabling you to buy and sell shares anytime anywhere where there is
Internet access. In fact you can even place a sell or buy order by specifying your order
value during non-market hours. Which broker can you talk to place a buy order in the
middle of the night? With online trading, this is easily possible. It can be your home,
office or Internet caf; you are ready to go to your account to buy or sell shares or to
just watch how your portfolio is performing. There is absolutely no paper involved
whatsoever except for the initial application you sign and give for the purpose of
taking a web trade account. Only thing you would need to do is send your money to
the bank account so that you have the money in the account to be able to buy your
favourite stocks. Your share trading system will be linked to your bank account and
once you have the money in the account it can be made immediately available for
purchase of shares. Online trading differs in many things from traditional trading
practices and different strategies are needed for profiting from the market. Nowadays
there are many online trading companies working as portals for the biggest stock
houses like the National stock exchange and the Bombay Stock Exchange. The person
has to get registered with the online trading portal and get into an agreement with the
company to trade in different kinds of securities by accepting the terms and
conditions. The online trading portals are connected to the stock exchanges and the
assigned banks. Such online portals offer the trader an opportunity to check live
online stock prices which they can either check through mail or the interface. Also
ample amount of research data is provided which helps the user make their own
decisions as to whether to invest in a particular stock or not. In traditional trading,
trades are executed through a broker via phone or via any other communicating
method. The broker assist the trader in the whole trading process; and collect and use
information for making better trading decisions. In return of this service they charge
commissions on traders, which is often very high. The whole process is usually very
slow, taking hours to execute a single trade. Long-term investors who do lesser
number of trades are the main beneficiaries. In online trading, trades are executed
through an online trading platform (trading software) provided by the online broker.
The broker, through their platform offers the trader access to market data, news, charts
and alerts. Day traders who want real-time market data are provided level 1.5, level 2
or level 3 market accesses. All trading decisions are made by the trader himself with
regard to the market information he has. Often traders can trade more than one
product, one market and/or one ECN with his single account and software. All trades
are executed in (near) real-time. In return of their services online brokers charge
trading commissions (which is often very low - discount commission schedules) and
software usage fees. Besides these, what are the other differences between online and
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offline stock trading? Is it just being able to buy and sell stocks with the click of a
mouse, or is there more than meets the eye? Convenience is not the only favorable
aspect of trading stocks online. After all, the commissions and fees associated with
making trades have changed drastically since online trading became popular. Rather
than paying sometimes hundreds of dollars in commissions per trade, online traders
can easily make their trades through websites and brokers that charge $10 (or even
less) per trade. This type of competitive pricing for trade fees has not only encouraged
investors to trade online, but it has also changed the way in which people trade. For
instance, investors are now more likely to make quick trades and attempt to profit
from short-term ownership of stock, since they do not give away hundreds of dollars
each time they make a trade. Another of the differences between offline and online
stock trading has to do with the role of the stock broker his or herself. Whereas a
traditional stock broker provided a certain amount of management assistance in terms
of a trader's investments, online brokers are decidedly less hands-on, and online
investors have pretty much total control over what they do and when. Part of this has
to do with not being able to provide the individual attention that comes with the steep
commissions that traditional brokers charge traders, and this is another reason why
online traders have to be very informed and up-to-date. Online stock trading is not
going anywhere, and many investors absolutely love the convenience and value of
managing their own investments from the comfort of their homes. While it is obvious
that online trading was an attractive option for many investors, what was unexpected
is how much online trading has changed the strategies investors use. The online
trading companies allow the users to invest in a number of financial products and
services like equities, mutual funds, life insurance, loans, share trading, commodities
trading, institutional trading, general insurance and financial planning. Due to this
invent, the market has become more accessible, but that doesnt mean that it should be
taken lightly. When you trade online, you use the services of an online broker. You use
actual money, but instead of talking to the broker about which investments to make,
you yourself decide which stock to buy since you have resource to the online stock
prices. Thus online stock company not only acts as a portal, but also as a broker and
offers you to maximize your returns in the most efficient manner. In brief we can say
there are following advantages of the online trading:
Advantages of the online trading
Of course, online trading has many pros. There are several wonderful reasons to
invest online and consider online trading.
1) Money saving opportunities-: The amount of money you save depends
primarily on the online brokerage firm that you choose. No two firms are the
same. There may be different regulations, similar to bank regulations. There
are minimum deposits required that must be maintained. As mentioned above,
this will depend on the online brokerage firm..It provide you the opportunity
to choose the firm where the brokerage charges are very minimal and are
reasonable.
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2) Instant online access-: You can gain instant access to your account, the value
of your portfolio updates immediately before your eyes. You can get regular
update regarding the share price and can on your convenience trade as per
your position. It facilitates you to give quick update of share market so that
when it is necessary you can go for execution of the order. The online sites
also provide live terminals which provide streaming news to give investor the
latest financial information as it occurs. Through online trading every trade is
confirmed immediately and investor receives an on-screen confirmation
following every trade with full details for the investors records which avoids
costly errors that would have been discovered when it is too late. It tells you
the updated information of each and every second so that you can take
decision for the stock as per your situation and can survive in the market.
3) Enter online trades at anytime-: You can enter online trades at anytime and
from anywhere. This is very convenient if you live in a different time zone
than the country you are trading in. Not to mention, it is especially fit for
investors with busy schedules. Whether you are at home or in office you can g
for online trading any time. It does not require any time or place. So it
facilitates you the way you can trade and it will not make you worry when you
are busy in some place.
4) With online trading you are in charge-: You are in control of your
investments. No sales pitches and no hassle. You decide where to invest your
money. More control on your transactions. You can decide exactly what price
and time you wish to buy, down to the fraction of a second, as well as change
your order whenever you feel like. No waiting on the phone or having to go in
person to a branch. When you use a broker in the real world you may find that
your broker will not agree to execute a trade, believing your decision to buy or
sell the stock in question is flawed. When you trade stock online this is no
longer a problem, your broker has no input as to when you buy and sell stock
you do. You can do your trading in your own way as you as an investor
know better about your position and can handle your stocks well. In online
trading there is no interference of the broker and investor has the full freedom
to trade as per his own choice and can invest in the stock he wants.
5) Brokerage charges are Low- Lower brokerage and fees (in almost all cases).
Fees can be even lower if you're a frequent trader. Trades are cheaper. Online
stock brokers can be a lot more efficient because you as an investor can
automatically place your own trades. The commission structure will be lower,
so you will pay less. Keep in mind that you can get hit with some hidden fees,
so that online brokerages are not always as cheap as they look. For example,
you may be able to take advantage of $7.95 trades, but then have to pay an
extra $9.95 to move money from your bank account. Brokerage charges in the
online trading is less as compared to the charges in the offline trading even
though it is true that the service being provided by the broker may be less as
compared to the online trading then also it is very convenient and it is very
good for them who are expert in stock trading.
6) Provides modern tools and techniques- Online trading provides handy tools
to model interest earned, yield, returns etc., as well as financial screeners to
research stocks and bonds. It also provides good research tools and newsfeeds
on each stock, which you can delve deeper into in your own time. A
conventional offline broker may not always be able or willing to offer you all
of these. You can also get many of these for free from sites like sharetrend.com
etc. These days, online brokerage services usually come with a variety of tool
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to help you make wise investment decisions. Some will even have a system
that interviews you with questions about your financial goals, and then
comes up with automated suggestions for your portfolio. They also have
online systems to help you analyze and track stocks, manage your portfolio,
and access reports. With the use of computer software programs, you can use
stock charts, technical indicators and real time stock prices to help you make
the investment decision you want to make, when you want to make it. Through
online trading various charts and graphs are provided and various technical
methods are there to understand the ups and downs of the market and to
technically analyse the market and to know the current position of the market.
7) Provides Flexibility- The online trading provides flexibility in terms of being
able to see what options are available to you to scan and market. It facilitates
you to put order through online facility and if necessary if an investor thinks
that the order placed through online is of no use then he can cancel the order.
Flexibility is the greatest advantage of online trading. Want to cancel your
order or do it in seconds. If you want to modify the order, can do easily.
8) Fully Automated Process- Online trading is a fully automated trading process
which is broker independent, informed decision making and access to
advanced trading tools, traders also has direct control over their trading
portfolio. In this process nothing has to be done on the brokers side but all has
to be done by the investors and in this through various tools and techniques
available the transaction is executed automatically. Through the software of
fully automated process of the online stock trading, it provides an investor the
facility of the Stock filtering which allows him to filter through all NSE and
BSE stocks for those meeting their investment criteria. This software of fully
automated process also provides an investor the strategy wizard that allows
him to specify rules and regulations and conditions for when to enter and exit
a trade .For this lot of indicators for building trading rules are provided. Also
through this fully automated system investors strategies can run on its own
executing robotically.
9) Provides an ability to trade multiple markets- Through online as an
investor you will have access to multiple markets and can trade
simultaneously in both national stock exchange and Bombay stock exchange
and also can deal in commodities market as well. Through online trading a
trader can trade through multiple ids. Through online trading you can trade on
multiple ids and can place different order through same computer on different
ids on different or same stock. Thus you can trade at the same time in Equity
market and can also trade in debt market or commodity market.
10) Also enable fast execution of the trade- Online trading also help in the faster
execution of the trade in comparison of the manual trading which is being
done by phone or other medium. Through online trading as soon as you place
the order the order is get placed to the NSE VSAT where the order placed is
matched with order from the other side and as soon as the order is matched
then the execution of the order takes place. Then the response of the order is
send to the trader. The normal process of issuing a delivery note, in the case of
a sale, or arranging for payment in the case of a purchase of shares, is all taken
care of the minute your order is executed online.
11) Favours active traders- Online trading favours active traders, who want to
make quick and frequent trades, who demand lesser commission rates and who
trade in bulk on leverage. An active trader is someone who buys and sells
stocks with the intention of making money in the short term. Active traders
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typically don't hold individual stocks for many months or years, and generally
do not focus upon long-term economic trends. Active traders arent involved
in trading to earn money from corporate dividends. They also usually do not
purchase preferred stock, which offers benefits that are oriented toward people
who invest for the long-term.
12) Portfolio - In the real world some brokers will not buy certain stock for
example, some penny stocks. This may limit the stock you are able to have as
part of your investment portfolio. However, when you trade online, subject to
availability, you can trade in any stock - on any stock exchange - you want. As
in online trading as an investor you are exposed to the various stocks and you
can invest in different portfolios as per your choice. Through online trading an
investor is provided a list of stocks which belongs to different sectors and as
per the investors choice he can invest in different portfolios.
13) Time-: One of the essential elements about trading stock is the time it takes to
execute the trade, as this can mean the difference between making a profit and
making a loss. In the real world you as an investor have to phone your broker
and ask him to sell/buy the stock. The broker then phones the trader, who
gives the broker the price. The broker then tells you the price and you either
agree to buy/sell or not to. If you agree to buy/sell, the trader then phones the
order through to the trader. Online you push your mouse over a cursor and
press buy/sell. It is a much quicker sell. Thus time is an important factor for
the execution of the trade as it will make difference in the profit or loss you
will make. Online trading will make the execution of the stock very quick.
14) Volume-Assuming you are happy paying the commission; you can trade as
large or small as you want over the Internet. In the real world, most brokers
require a minimum buy/sell that is out of the reach of most individual traders.
15) Paperless and Convenient- An obvious advantage of online trading is that
your transactions would be virtually paperless. Your trading account would be
linked to your demat and bank accounts, ensuring a smooth transaction
process. This is especially helpful in the extant T+2 settlement system, where
you have just two days to settle your transaction. Through online trading a lot
of paper load is being reduced as all transactions is being done through
electronic mode and thus making the execution of the transaction very easy
and convenient without more complexities involved in it.
16) Less error- There is also little room for error, as your order is always
confirmed before it is executed. You can also make better decisions as you
have a clear record of all your previous transactions. When you trade offline, a
statement is normally sent to you only on a quarterly basis. Keeping track of
your portfolio can be a hassle in such a case. Through online trading you can
keep yourself updated with your account balance on daily basis and can know
your position so as to take decision related to trading on that basis.
17) Convenience-Convenience is probably the greatest advantage online trading
offers an investor. If you do not have time to trade during market hours, when
perhaps you are at work, you can log on to the web-trading site and place your
orders offline, during off-market hours. Your order would join the queue and
be executed the next day. You would need to enjoy a good relationship with
your broker, for you to be able to reach him in the late hours. For NonResident Indians (NRI), trading online is perhaps their easiest option to invest
in the Indian stock markets.
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18) Controls Financial Future: The Internet provides a new sense of controlling
our financial future as the amount of investment information available online
is truly outstanding. An investor can-Know the price of any stock he desires at
any point time on the internet. An investor can review the price history of any
stock in chart format online. An investor can follow in-depth the events
happening in the market
19) Ensures the best price for investors- Some companies specialize in the
technique which offers the
best price for the buy and sell orders of the investors and traders providing the
high level of transparency by displaying of information relating to the specific
stocks and company profiles which helps in getting the best quote for the
orders. Actually through online trading an investor can get the best price of its
stock as through online trading the price of the stock will be updated very fast.
20) Online trading offers greater transparency- Online trading offers the
investors with greater transparency by providing with an audit trail. The
process involves a complete electronic chain starting from order placement, to
clearing and settlement and finally ending with a credit into the depository
account of the investor.
21) Online trading reduces the settlement risk-The method of trading reduces
the settlement risk for the investor as and when a short sell order is played the
orders are squared off at the specified cut-off time and are not allowed to be
carried forward.
22) Online help desk -: Some companies provide online help desk an investor can
contact the Tele trading Executives from the Tele Trading team during and
after market hours and can clarify. In this facility if an investor has any
problem regarding the execution of the transaction or is seeking for the
technical assistance then he can contact at online desk through which his
problem can be solved.
23) Keeps Information Secure - As in the online transaction there is lot of
chances of threat of getting the secured information being hacked and for this
threat efforts are being made by the government and the SEBI for protecting
the investors information through password protection and encryption of
their information

DIFFERENCE BETWEEN THE ONLINE TRADING AND

OFFLINE TRADING
In the recent past as an investor everyone is going for online trading and is getting
more popularity than manual trading. Manual trading is being done through phone or
other medium. It can be said that offline trading is outdated and today every trader is
trading in the share market through online trading. Online trading has become an
integral part of the share market as it is very much convenient in comparison to the
manual trading and it is not in the terms of the convenience but also the time taken for
execution of the order and cost incurred in transaction execution is very low as
compared to the cost incurred in the manual trading. Also in online trading there
investor has more control as he can as per his convenience can execute the order
which is not being there in the offline trading. Online trading also provides you quick
updates as compared to the offline trading. Online Trading saves time. Also online
trading is being a transaction without paper,. Through online trading there is more
transparency in the trade and thus is a vital tool for dynamic trading, and eliminates
the guesswork and arithmetic often involved with calculating how your offline
broking account is performing. In online trading online help desk is provided in which
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there is online brokers are readily available for solving the queries of the investors. So
in brief the difference between the online trading and offline trading is as follows
(Table Number: 12)
Basis
Convenience

(Source: www.investopedia.com)
Online Trading
Online trading is convenient as it
allows you to do transaction at your
ease anywhere any time.
Speed
The execution speed of the transaction
is fast as compared to the offline
transaction.
Time
In online stock trading the time taken
for the execution of the stock is very
less as compared to the offline.
Chances of error
In online stock trading the chances of
error is less as compared to offline
stock trading.
Control
The investor is having a lot of control
in the online trading as he can trade in
the manner he wants.
Multiple Market
In the online trading you as an investor
has facility to do the trading in multiple
markets
Tools and techniques In online trading various tools and
techniques are provided for the proper
analysis of the market situation.

CHAPTER 4
150

Offline Trading(Manual trading)

Offline trading does not provid
convenience to the trader of such ty

In the offline transaction the ex

speed of the transaction is sl
compared to the online trading.
In offline stock trading time taken
execution of the stock is more th
online stock trading.
In offline trading the chances of e
more.

In offline stock trading the deg

freedom of the investor is less.

In the offline trading the investor

trader dont have the facility to t
multiple markets.
In the offline trading an investor
provided with various tools
techniques
helping him to analyse the market.

COMPANY PROFILE
BONANZA PORTFOLIO LIMITED
ABOUT BONANZA PORTFOLIO LIMITED
Bonanza Portfolio Ltd. - Leading online stock brokers firm and online commodity
trading firm in India. It was established in 1994 and has been working diligently since
then and can be described in a single word as a power house. With acknowledged
industry leadership in execution and clearing services on Exchange Traded
Derivatives and Cash Market Products, Bonanza has spread its trustworthy tentacles
all over the country with more than 1150 outlets spread across 375 cities. It has an
extensive range of services whether related to equity market, wealth management,
distribution of third party products, also provides online derivatives future and option
trading in India. BonanzaOnline.com is a popular online share trading portal for BSE
& NSE stocks in India. It is an online Internet share trading firm in India. Its head
quarter is in Delhi area, India. Being at par with the modern tech-savvy world,
Bonanza makes an integrated and an innovative use of technology. It also enables its
clients to trade online as well as offline and the strategic tie-ups with the latest
technology partners has earned Bonanza a prestigious place as one of the top
brokerage houses in the country. Client-focused philosophy backed by memberships
of all principal Indian Stock and Commodity Exchanges makes Bonanza stand apart
from competitors as a preferred service provider in the industry for value-based
services. Bonanza Portfolio Ltd has memberships in all the leading stock and
commodities exchange in India. Bonanza has memberships of NSE and BSE and is a
Depository Participant with NSDL and CDSL. Bonanza Commodity Broker (P) Ltd is
a member of NCDEX and MCX. Bonanza Global DMCC is a member of DGCX,
Dubai. Bonanza has a wide reach through its branches/offices spreading across more
than 250 locations with approximate 800 Branches. BONANZA has been ranked 6th
largest brokerage house in terms of Number of Terminal across India with 3019
trading terminals in all, survey conducted by Dun & Bradstreet (An internationally
renowned provider of business to business credit, marketing, purchasing, and decision
support services) D&B India's Leading Brokerage Firms 2008. Bonanza
Portfolio Ltd, a stock broking firm made sub-brokers their partners and rolled out
branches across India at a time when stock market touched an all time low post 9/11
in 2001. As a stock broking house, they brought a new concept called propagation of
partnership, where sub-brokers and associates were treated as partners to Bonanza
Portfolio. They did it to instil trust and faith among our sub-brokers in the business
when other broking houses were shutting shop and investors were withdrawing
money from the capital market. The retail network helped grow their business
eventually and now they reach out to more than 300 cities in the country. They also
practiced the listing of clients with the brokers much before it was made compulsory
by SEBI in 2002-03. Bonanza differs from other broking houses the terms that the
retail broking and strong sub-broker network, which has helped them, develop an
arbitrage and hedge against market ups and downs. In an era, when other broking
firms stick to franchise route with tried and tested partners, we propagated partnership
with sub-brokers and gave them terminals, which saved time in auto-processing.
Apart from this the major differentiators are: pan India network of branches, in- house
research facility, personal attention to all business associates, higher client
satisfaction, prudent fund management, skilled manpower, full time engagement of
highly qualified top management, uninterrupted trading facility. In future they have
various plans which will help them grow their business and will help them to increase
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the customer base are -: to promote recently launched on line broking service, online
mutual fund investment service. In todays scenario the online facility is very much
becoming popular in the Indian investors and it has to be popular because everyone
wants the convenience and comfortable services which will make them trade in a
better way. It has been seen that other financial broking houses are also coming and
providing the online service so they have also planned about to launch trading and
investment facility through mobile phone. See as the business is customer centric and
it depends on the customer service to increase to increase the customer base now they
have come with the plan to provide trading and investment facility through mobile
phone and to provide various tips related to share market and to provide technical
assistance to the investors from time to time so that they can better get good return on
their investment made. Giving tips on mobile phone is a very good facility through an
investor is always in touch with the broker and can get up to date details regarding the
shares and can take their decisions in proper way. To capture a large market share in
distribution of financial products. As every company in financial services is giving
competition to other financial companies and for this purpose they are trying to grab
the market share of the customers and trying to increase the market base of the
customers by providing them better services and by alluring them with new facilities
and making them sure that there investment is safe and they have joined the company
which will help you give the good return and profit. To expand largely in Insurance
distribution segment for which they have already created infrastructure. As there are
other companies who are also providing insurance services like ICICI, Kotak
Mahindra etc and Bonanza has also its insurance segment which is unfortunately not
so popular in the market and for this their target is to create a market segment for the
insurance segment of the company and to provide them better services to the
customers and to increase their market segment in this segment too. Practically where
I have done my training in Uttar Pradesh frankly speaking the previous market base
when we talk 2-3 years back the insurance segment was very poor and was not having
very good infrastructural facilities in the insurance segment but now this year there
insurance segment has grown a lot and they are able to reach to the target customers
and there is yet more to find and discover the new market for this segment. But this is
just the starting and lot more things have to happen in this segment. Lets see where
this insurance segment of Bonanza portfolio goes and till what depth they discover
Indian market for the insurance segment. Truly speaking the insurance sector in India
has been still unexplored and there is not very good customer base in India for the
insurance sector. This is all due to the lack of convincing power of the companies
which make the customers feel insecure when they come to invest in insurance
companies to expand in institutional broking segment. Institutional broking segment
refers to the segment where the large corporate houses invest their money in the
broking house and put their money as an investment part in this broking house. When
it comes to institutional broking segment then Bonanza portfolio is not very much
popular and successful in this segment and has not done a lot more in this field. As a
company they have to grow in this segment and have to prove themselves as being
getting a lot of institutional investment. They are positioning themselves as fullfledged financial services firm, which will provide research based market survey,
institutional broking, services to NRI clients, distribution of financial services, and
market -neutral arbitrage. They are targeting 10% share of capital market by March
2011.With growing competition the company is targeting themselves to increase their
market base and to increase their research and market based survey and to better work
on institutional broking and want to make their position on top in near future. In
future they see themselves as the market leaders in financial services and are very
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much heading towards it and all this will happen when they will go to increase their
customer base and the customer base will increase when the customer service is at its
best and the customer are satisfied with the service being provided to them and are
getting the daily updates related to the market and share tips also which will facilitate
them in taking wise decisions. And if the company is doing all these things in an
accurate manner and providing all these services properly then there is no obstacle for
them to be on top and to grab a large market share in the financial market for the
customer base.

HISTORY OF THE COMPANY

The history of the company starts from when five partners which includes Mr. Shiv
Kumar Goel and S.P. Goel and his other three partners started business together under
the name of the Bonanza Portfolio Ltd. Except one all of them belong to C.A.
background and they all were Delhi based and were having their family business in
stock broking. Shiv Kumar was previously having a broking firm registered with the
Delhi Stock Exchange in which 50-60 sub brokers have been working under it and his
focus was on the retail broking. So, in 1994 they all joined hands together to form
Bonanza Portfolio Ltd. And since 14 years they have been working together and this
journey of Bonanza Portfolio has been successful and quite interesting for them. They
have attained success in a short span of time and before this success comes to them
they have faced a lot of challenges in the market. The market fluctuations caused
problem for them, but they braved the oddities together. In fact, whenever market
crashed, they invested in manpower and resources to expand the business further as
other stock-broking firms downsized their employee strength and market was flooded
with experienced manpower. Even in odd time they have never thought to downsize
their employees and to recruit further quality employees for the services of the
customers.
Markets & Network
Bonanza holds membership of all principal Indian stock and commodity exchanges. It
has been provided the membership of National stock exchange and Bombay stock
exchange. The firm is a member of NSE, BSE, OTCEIL, NCDEX, MCX, NCDEX,
NMCE, MCXSX and also a depository participant with NSDL and CDSL. It is also
registered with DGCX. It has a wide spread & growing network of 1050 outlets,
4,373 terminals and a professionalized team across 350 cities. It also provides trading
through its online portal www.bonanzaonline.com. You can visit the site for the any
queries or for further details.
Group Companies
Bonanza Portfolio Ltd.
Bonanza Commodity Brokers (P) Ltd.
Bonanza Insurance Brokers (P) Ltd.
Bonanza Global DMCC, Dubai
Sunglow Fininvest Pvt. Ltd

VISION AND MISSION OF THE COMPANY

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The vision of the company is to be one of the most trusted and globally reputed
financial distribution companies. As the companys tagline says MAKE MONEY
NOT MISTAKES it means to be effective in providing financial services to the
investors and making full utilization to the money of the investors and to ensure them
that they have not committed any mistake of investing their money in Bonanza
Portfolio. Thus the company is putting their sincere efforts towards making their
financial distribution channel strong and trustworthy which will thus ensure the
customers that they have not committed any mistake but they have done the right
thing of investing their money in BONANZA PORTFOLIO. Investing the money in
the Bonanza portfolio means, getting money out of money and thus, being in the
Indian scenario and the global scenario being recognized as the best financial services
provider and the best financial advisor. The company wants to make themselves stand
in the line of various successful financial and broking houses and to adhere to their
words and trust for long lasting growth.
Values
Customer Centric Approach - At Bonanza, customers come first. And their
satisfaction is not just the companys top priority but also the driving force for them,
every single day. In todays scenario every business is customer centric and want to
satisfy the need and requirements of the customers .Gone are the days when business
was there just to provide the goods and services and customers have no choice but to
purchase those services but in todays scenario there is lot of competition in the
market related to financial services so a company have to be at his best and Bonanza
is no more different. When it comes to customers they are their first priority and they
are entitled to be serving their customers and also it is the driving force of
encouragement for the company if they satisfy the needs of customers as it will help
in increasing the goodwill of the firm and will help the company grow and prosperous
more. And this is being proved by the reviews of the customers of the company which
is being recently taken by the company in a survey about how they feel as being
customer of the Bonanza portfolio and most of the people were satisfied and were
happy with services being provided by the company. With intense competition in the
market company have to maintain their consistency and to keep a watch on the
services being provided by their counter parts and to update themselves in the
customer service so that customers dont feel themselves backward after joining this
company.
Transparency - Honesty is the companys forte. They believe in dealing on
thoroughly ethical grounds, being fair and transparent with their customers. This
means that they believe in ethics and healthy business and to do their business with
sincerity and full commitment to make sure that the customers dont feel that they are
cheated. For any business transparency is very much important and for that the first
thing is that not to disguise information from your customers which will affect them.
One have to very honest with them and to be keeping your image transparent enough
which will help your business survive. They want to share, each and every,
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information with their customers so as to ensure them that they are with them and
they are guiding them in right direction for the investment of their funds. The
company will not cheat the investors for the means of companys benefit and will
truly serve their customers and will satisfy their needs and wants. They will not
encourage any unhealthy competition or any unethical means which will put
themselves guilty in front of their customers. Thus they will be transparent enough in
their working and will provide the true and the right information to the customers and
will make them feel safe in this company. They will be trust worthy to the customers
and will make sure that this trust will be long lasting and will enhance the relationship
with their customers.
Meritocracy- They recognizes and appreciates the efforts put in by their employees.
And, they, as a matter of fact, reward and distinguish each one of them, ceaselessly.
They care for their employees who selflessly put their efforts and hard work for the
growth of the company and they reward those employees who are there to give their
hundred percent and give their best performance which will ultimately enhance the
growth of the company and will thus help company to sustain in the market. They are
here for customers and to satisfy their needs by the best services to their and how can
they provide them best services- it is with the help of their employees who are not
only the part of their business but also are the part of this small family Bonanza
family where each employee want to only work for their company and to fulfill
overall objective of the organization and it cant be fulfilled if employees are not
satisfied with their jobs.
Solidarity The Company believe in sharing a forthright and respectful relationship
with their business partners and employees. They consider them both as their team
associates, who work together. And can succeed together. Actually they treat their
employees not as our employees but as a part of a small family where each employee
works under one roof for the fulfillment of the objective of the company and for this
purpose they make employees feel them that they are the part of the organization and
welcome any suggestion from them which will ultimately help the company to grow
and to increase their business strength. Actually in todays scenario business doesnt
run without the proper coordination and the synchronization with the business
associates and employees of the organization because they are the only one who
enables the business to run successfully with the satisfaction of the needs of the
customers. And for the satisfaction of the needs customers they need to strengthen
their relationship with the employees and the business associates. For any business to
run with the satisfaction of the customers, at the same time a company has to consider
the needs and wants of the employees of the company and has to strive hard to satisfy
the needs of the employees of the organization because if the needs are fulfilled of the
employees so there can be full commitment of the efforts of the employees of the
organization and they can work hard to satisfy the needs of customers.
Strengths
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 Bonanza has over 1150 outlets in more than 375 cities in India. This means that the
network of the company is enhancing and thus the customers of the company is
increasing and thus enabling the growth and development of the company. Since 1994
the business has grown a lot in terms of quantity and also have considered about the
quality of the services to be rendered to the customers. There was a period of 1994
and now it is 2010 they have increased their strength and customers in short span of
time and will be looking forward to maintain this and to increase the business of the
company.
Bonanza has more than 2,34,000 lakh clients comprising of Corporate Financial
Institutions & Investors, Mutual Funds, High Net-worth Individuals and Retail
Investors. Providing a lot of services to the customers and with the increasing services
of the business the customer base of the company is consistently increasing and the
company is happy to announce that in this small period they are able to make a name
in financial services and make people realize the services they are providing are
trustworthy and thus enabling a lot of customers to come and join their company and
making the business of the company grow. In this intense competition when there are
lot of financial companies in the market the company is able to make people believe
them and the investors are able to put their hard earned money with the company and
to provide their investors better financial services and to give them good return on
their investment. Thus the company is increasing their network and making us a
strong contender in financial services and tend to emerge as a big financial provider
for the investors.
Bonanza has a young dynamic team of 1900 professionals. For providing their
customers better services the company need some professionals who will be able to
serve the customers at the fullest and will provide them satisfaction with their
services, not only satisfaction but also the right guidance of where to invest the money
and which portfolio is going good which will give the investor the better return and
providing them proper analysis and technical information and research and findings of
the market so as to make the right investment decision.
Strong infrastructure supporting over 3000 trading terminals supporting more than
350 VSATs to support geographic reach and servicing capabilities. When the
company is here to provide their best then the first thing comes is to strengthen their
infrastructure base and to provide the best facilities to the customers and using best
and advance technology for customer service and when it comes to service as it is
being already mentioned that they are providing 3000 terminals and 350 VSATs
which means that they dont want to make themselves weak and not to make an
excuse to their customers that they are short of their terminals. With large amount of
terminals they want to serve a large amount of customers and to serve them in a better
way so that there is no complaint from customers side for the service which is being
rendered.

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 247 services and support via there federal support system. With this the company
wants to say that they are available for their customers for the whole week and for 24
hours. As every business today is customer centric so they are no more different and
are available to their customers for whole day and night and for full seven days. The
company is always there for them for the advice their customers want to take for
investment purpose and the financial services related to equity and commodity and
derivative market, because if, there is good return to customers our business will also
grow and thus, we will be able to achieve profit with customer satisfaction. As there
has been technological advancement today so through phone and through mobile the
company can provide them messages related to share information and share tips
which will help the investors to take wise decisions related to the share market. Our
company provide them information related to when to invest in the market and what is
the right time for investment and also provide them daily details about their account
and the remaining balance in their account which will help the customers to know
there current position in the market and will help them to tell that where to invest, in
which company to invest for good return.
Achievements
Achievements are very much important for any company which will always
encourage performing well and always encourage you to provide better services to the
customers and will always motivate you. So Bonanza Portfolio is no more exception
and has various milestones which made them a good company in the eyes of
customers in a short span of time.
5th largest in terms of no of offices for 08-09 .In present scenario the number of
offices in the 1300 offices in the country which are running successfully and still
more offices are opening which is very much in a short span of time. This number of
offices is the largest number of offices being opened by any broking company and in
short span expanding the network to such extent is very commendable. The company
is thankful for awarding them for the 5th largest in terms of the offices for 08-09. In
this competitive era when each and every company is increasing their business
Bonanza Portfolio is also tend to increase their business with increasing the number of
offices and in future also they will strive hard to increase the offices of the company
so that they can serve a large number of customer base and can also increase their
customer base.
Top Equity Broking House in terms of branch expansion for 2008. For the year 2008
being provided as top Equity broking house in terms of branch expansion is very
much commendable and there are lot more branches which has to open yet.
3rd in terms of Number of Trading Accounts for 2008.The trading accounts have
been increasing in the faster rate and this award is the prove to it and making investors
believe to the company and enable them to make the companys business grow and
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prosper. So here all credit goes to customers who believe in company and think them
as best financial providers in India.
6th in terms of Trading Terminals in for two consecutive years 2007- 2008. Since
1994 when the company was having just 434 terminals and now there are 4373
terminals indicates the better sign for the company and the infrastructural growth of
the company. In the year 2007 there were only 2313 terminals and in comparison to
the year 2007 there was increase of 345 terminals which added to total 2658 terminals
and now in this year 2010 we have increased our terminals by 1375 thus making the
total up to the 4373 terminals.
9th in terms of Sub Brokers for 2007. Thus it can be said that in 2007 sub brokers of
the company were around 421 and now in the year 2010 the Sub brokers has
increased from 412 to 900 which is very good. This shows that the companys bases
of sub brokers are increasing and they are striving hard to increase this figure which
will thus enable them to serve a large amount of customers. They are also working
hard to convince other people to act as sub brokers for the bonanza and thus increase
the network of the company. Now the time has come that the company has to prove
themselves. The company is thankful for awarding them as 9th in terms of the figure
of the sub-brokers.
Awarded by BSE Major Volume Driver 04-05, 06-07, 07-08.The company was
being the Major volume driver in these years and they are increasing the volume now
also and will tend to increase in future too. When the company was started then they
were very new to this field but with the passage of time they have make themselves
grow as a major volume provider in India and for this BSE awarded them which
proves that they are moving in right direction and they will be able to prove
themselves in future also. Thus with increase in the volume they are also able to
increase their customer base and it shows that the customers believe them and are
coming to their company to invest their money. The company is proud that BSE the
oldest stock exchange in Asia has recognized their hard work and efforts and give
them an award for their efforts. This award will give them encouragement to increase
their customer base and to be consistent in the quality of the services being provided.
Nominated among the Top 3 for the Best Financial Advisor Awards 08 in the
category of
National Distributors - Retail instituted by CNBC-TV18 and OptiMix. The financial
services that are being provided is the companys strength and the advisory work is
being handled very well in the company and they are here to serve the customers and
to provide them best advice which will increase the companys investment and give
them good return. The company is feeling proud after getting the award in this
category and is thankful to CNBC -TV 18 who realized their capability and makes
them deserving for this award. And in future also the company will strive to give
good financial advices to their customers and to strengthen themselves in this
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direction so that it will in future will become their USP and they will be able to create
and different image in front of the investors and differ themselves with the other
financial companies.
Major Offerings
Prime Brokerage Services
Equity & Equity Derivatives: Bonanzas Trading Platform offers online equity &
equity derivative trading facilities for investors having access to resources like
research charts, advice, live quotes, and online assistance to take well-versed
decisions. Bonanza has been felicitated as the leading volume driver by BSE, during
FY 04-05, 06-07, 07-08. This is the prime service of the company, to provide online
assistance and facilitate online trading for the customers. The company uses ODIEN
client software through which they can provide terminal facility to their investors
through which the investors can quote their price and can take decisions regarding
which stock they want to purchase and the company also provide some professionals
who guide the investors from time to time to where to invest in the market and also
provide the details regarding the current market scenario and help the investors to take
the right decisions which will help them to get good return on their investment. The
company not only deal in cash segment in the Equity but they also provide the
services related to the Future and options in the Equity market. Talking about the
future and option market it is very risky market and one should have to make big
investments in this as the margin requirements in this market for any company for
investment goes to thousands and sometimes to lakhs and for this the broking
company have to provide the up to date information regarding the Margin requirement
of the customer and the current account balance so that he can trade in this market.
But still the company have many good professionals who analyse the market and give
accurate details to their customers and help them get good return through this market.
Commodity & Currency Derivatives: The Company offers access to future trading
via multiple exchanges in wide-ranging commodities like agricultural commodities,
base metals, energy and precious metals. It also provides investment opportunities in
gulf commodities futures and currency market. In commodity market the company
deals in various commodities related to gold, silver, nickel and mentha oil which are
traded as per the lots size which are pre-decided and each lot has a value and with the
increase and decrease in one rupee in any commodity the value of the commodity
changes. For example- In case of Gold there is change in price of gold per gram
rupees 100 and when there is an increase of one rupee in the terminal then the
commodity lot size value will increase by 100 rupees.
Online Trading: Bonanzas online trading portal enables hassle free trading across all
exchanges and offers access to all services in a single window. In todays scenario
when there is everything going through computer and every service is online why the
equity and derivative trading should be behind and there should be online trading of
these commodities which will help the investors and will be convenient for the
customers to trade even from their home and they can trade even themselves as the
terminal is in their hand and they know how their current standing and can take
decisions as per your choice and can do transactions from their home. In the initial
stage there are no charges for the account but later on annual maintenance charges for
the terminal have to pay for continuity of services.
Asset Management
Portfolio Management Services (PMS): Bonanza has a dedicated and experienced
team of portfolio managers to design portfolios which suit every customers needs.
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Constantly scrutinizing the developments in market and moving stocks, aiming for
maximum capitalization. Suggesting the most appropriate product to customers, based
on factors like their investment spheres, return expectation and risk tolerance our
experience, expertise and research helps us give our customers investments the best
upshots. The company have best professionals who are there to advice the investors
on the best portfolios which will give them return and will help increase their profit.
Advisory: Bonanza guides and supports its clients to re-structure and streamline their
portfolios based on changing market conditions and client objectives. Advice is the
important part for any broking house because there are different types of customers
who trade. There is someone who is a beginner and need continuous guidance on the
share market and continuously watch the market for getting updated with it and can
take advice and discuss with the professionals in the company that what strategy they
should use to get more return on their investment. So Bonanza Portfolio does the
same and provides the advisory services to the investors and give them details
regarding the position of the market and the current scenario of the market and to tell
them what is the right time of investment. It is not that only beginners need advice
and help the persons who are involved in the trade and are expert in the trade also
require the guidance and support from the professionals of the company. Actually
without proper guidance and support if anyone enters to a market and dont have
much knowledge about share trading then it is advisable to go for the services of the
professionals. In Bonanza Portfolio also the experts are there who hive messages and
SMS to the customers regarding the financial advice. These experts analyse the
market and do a proper research and through various tools and the charts etc they
come to know about the market conditions and the investment scenario.
Custody Services
Depository Services: Bonanza is a depository participant with NSDL and CDSL. It
provides an array of depository services including demat operations. Bonanza as a
depository participant of consists of various operations like opening of a Demat
account and all the trading has to be done through this Demat account. Actually there
are two types of account in the trading one is the pool account and another is the
demat account. In the pool account also known as trading account the money an
investor has invested is transferred and being traded from there and when an investor
wants to remit that amount from the pool account then he has to first transfer the
amount from the trading account to demat account and then a cheque is issued to the
customer for the amount he received from the trading. So through depository services
the company wants to safeguard the hard earned money of the investors and to ensure
them that their money is under safe custody. Through the depository services no one
can misutilize their money and can do transactions on their money without their
permission.
Distribution
Mutual Funds: Bonanza is one of the largest distributors of mutual funds in India. It
has an in-depth research across categories covering 20 parameters guiding their
clients to take appropriate investment decisions. Keeping in mind customers budget,
needs and securities the AMFI certified investment advisors offer the best deals.
Mutual Fund is another service which Bonanza provides to its customers and to this to
inform you that the current business of the mutual fund is growing very much and
Bonanza is now heading towards to be on top in terms of investment in mutual fund.
Mutual fund has to be explored more as the customer segment for the mutual segment
is increasing and it depends on the market research team of the Bonanza how they
find out the target segment of the mutual fund. Actually in the initial stage the mutual
funds were not so popular in Indian investors but with increasing depth in financial
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services offered by the different financial companys mutual fund are becoming
popular among the Indian investors and they are taking a lot of interest in the mutual
fund. If there is practically analysis of the situation the mutual fund market is very
balanced and less risky than that of Share market as, there is lot of fluctuations in the
share market which, we dont see in the Mutual Fund market. In mutual Fund what is
required is to give the money an investor wants to invest to the fund manager and he
will analyse the portfolio which is best for the investors and will invest the money in
those sectors which will give a good return to the investors. So in terms of the mutual
fund market the company is growing at very fast pace.
Insurance: Bonanza offers insurance products in Life and General Insurance. Their
IRDA certified advisors offer prudent advice on policy selection and assists through
the claim redressal process. Their advisory team matches the insurance products to
financial profiles of customers to offer the best solution options, maintaining
transparency and professionalism. They are also entering in health insurance segment
and will offer various services in the health insurance to the people. Even though they
are having best infrastructure in insurance sector which matches the insurance
facilities and services provided by the other established players in the insurance sector
then also they are not able to give other players in this segment a good competition
may be because they are still new and there are other players also in this segment
which are doing well. So there is a lot of work Bonanza Portfolio has to do in this
sector. Insurance has always been a challenging yet explorable and profitable segment
for any company. In this segment first the company has to find out the target segment
and after that they have to provide insurance facility to that segment as per need and
requirements of that segment. As, it has been seen in the recent past that still the
company is lagging behind other companies even though the company is still growing
in this sector. In the year 2009 the total revenue generated from the insurance sector in
the company was the 2% of the total revenue of the company in comparison to current
year which has increased to 5% of the total revenue of the company. Even though the
company is not on top in this segment but in future they are heading towards it and
will definitely make it happen. So they need some time on their side and on
customers side so that they both can realise that there is a need of understanding of
what requirements and facilities a customer expect from us and what the company
have to offer the customers so that in insurance segment too we can grow and
perspire.
Initial Public Offer (IPO): Company offers online investment access for public
offerings. They also offer In-depth research advice for the forthcoming IPOs. There
are various IPOs coming now a days and with the flood of all these IPOs there is a
lot of confusion from investors perspective regarding which public offer to choose
and which is the best one for them which will give them minimum investment and
maximum return. So for this the experts are there in the company which not only tell
that what public offers are flourishing in the market but also tell them that which offer
suits them as per there investment strategy. There are various offers in the market and
these offers belong to various sectors like power, telecom and when a company bring
these public offer in the market then they come with a big plan or project for which
they need money from the public. So seeing the feasibility of the project the
investment experts tell them about where to invest their money and which is the best
offer for them. Like there was recently seen an IPO of Tarapur company which is a
company of power sector and this company is here with the public offer to finance
their project related to power generation in the hilly regions. So investment expert will
see the feasibility of the project and see the financial performance of the company and
then he will suggest for the investment in this company.
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Research
Bonanza Research desk has a dedicated team of research analysts and experts that
have an in-depth knowledge of the market place. They offer value perspectives, focus
on opportunities for investment and growth and endeavour to reduce risk potential. Its
premium advisory services are based on technical and fundamental views and
strategies. Bonanza provides a host of research reports from Daily reports, Monthly
bulletins, Investment ideas, Newsletters and much more. It covers more than 120
companies and eight sectors. Any broking company depends a lot on its Research
work and the study of the market, which will help them to gain deep knowledge about
the investment scenario and will provide valuable suggestions to the customers on the
basis of the research done. So research process should be very much strong and thus
enabling them to provide right and accurate information to the customers. For this
purpose company provides various magazines, Newsletters to the investors so that
they can study them and can take an idea of the happenings in the current market and
can make an idea of the future happenings in the market. These bulletins are the
research work of the various experts in this field who give their suggestions and tell
which sector is going on the positive note and which one is not giving good return and
besides all this it provides you the latest business news, all about mergers and
acquisitions and recent happenings in the corporate world and in the international and
the Indian economy and how it will affect the share market. All these things are
provided in the bulletins and the monthly magazines.
Future Objectives:
Bonanza aims at attaining 10% market share in equity, commodity and currency
segment. This target they can achieve through better research work, better services
and ensuring the customers that they are on the safe hands and their investment will
be safe and will make money from money. Every company is competing with each
other and alluring the customers of each other to come and join their company .So it is
very much necessary to make your USP which will differentiate you from others.
Now days each company is coming with new offers so now customer on one hand has
get confused and want some service from the companys point of view so that they are
not dubious situation in the market.
Aims at becoming a leading Insurance Broker in India-As it is being already
discussed that the insurance segment of the company is not very strong and need a
support and have to discover them in a new way and to ensure the people of this
segment that the insurance services that they are providing are very good and will
help increase the overall business of the company.
Aspires to enhance our institutional client base.-As there are various broking houses
in which big institutions and companies invest their money with the expectation to
earn more profit and to utilise that money for further investment in various projects.
In this area client base of the company is very less and should strive enough to
increase the institutional base. For institutional client base the company should know
the objective of the institutions for investing money in the broking house.
The company is consistently working towards becoming one of the largest online
broking internet offering. Actually in the current scenario the pace the company is
going they will become the leader of the financial market future and will have a large
customer base and will provide the online broking internet offering. As they have also
advanced them in the trading perspective and are offering online services to the
customers. The online trading will help an investor enhance their knowledge and will
also help them to do their trade in their own way and they can do their trade anywhere
in office or in home anywhere and they are accessible to the various companies and
can quote their price as they want. So for becoming best online service providers they
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should have better trading facility with simplicity and not more complexity. And
Bonanza Portfolio is always there to provide the service simply without more
complexities keeping customers comfort and their requirements on top and giving
them advice as per their objectives of investment in the company.

FOUNDERS AND PROMOTERS OF THE COMPANY

Management of the Company
The management of the company consists of the following persons who are the
Directors and also the Founder and promoters of the company who are leading and
running the company successfully. It consists of -:
1.) Mr. S.P. Goel
2.) Mr. Shiv Kumar Goel
3.) Mr. S.K. Goel
4.) Mr. Vishnu Kumar Aggarwal
5) Mr. Anand Prakash Goel
All these persons are expert in their field. Among these Mr. S.P. Goel, ShivKumar
Goel, Mr.S.K. Goel and Anand Prakash Goel has been the experienced person in the
field of C.A.(Chatered Accountants) and Mr. Vishnu Kumar Aggarwal who has been
taking charge of the Administration, Real Estate Investments and Initiatives for all the
group companies of Bonanza. All these persons are having experience of over 30
years and have been running the broking business very successfully since its
establishment in the year 1994.Since then they have been writing the success story of
this company and thus they are able to do so with their expertise and skills which they
have gained by experience.

ONLINE WORKING PROCEDURE OF THE COMPANY

The company mainly deals in the trading of the equity shares and commodity and
various other securities. As the working process starts from the filling up the form for
the opening up of the Demat account and trading account for which the charges are
Rs. 1050 which is the onetime fee which is to be paid for the opening up of an
account. With the form various other documents has to be attached which includes
PAN card or Voter ID for the identification purpose. One document is being attached
for the address proof of the client which may be electricity bill or phone bill. And one
cancelled cheque leaf for bank account proof is also attached. Cancelled cheque is
attached as to the form because all the dealings of the client related to the deposit and
remittance of the money will be done through the account of this bank. As per SEBI
guidelines a saving account should be there for the opening of the Demat account. If a
person is going for the opening of a commodity account then he has to attach his six
months bank statement along with the form. This is the guideline being issued by the
SEBI. Now after all these formalities the next thing is the documents verification
which is being done at the branch level and then all the documents are send to the
regional office for the verification and then the documents are send to the head office
for the final verification and then the head office send these details to the depositories
organisation of the country namely NSDL (National Securities Depositories Ltd) and
CDSL (Central Depositories Services Ltd). After the detail has been approved by the
NSDL and CDSL then the company opens up the account for that client. In Bonanza
the account id is there of each client who is being determined with the initial of YY or
Y, for example id will be YY 234. After the account has been created and Id has been
given to the client then the Id is mapped with the branch in which the account has
been opened means all the dealing of that account of the client will be done through
that particular branch in which account has been opened. And after the opening of the
opening of the account then the client can go for trading and after the trading if client
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has to sold the shares and want to withdraw the money then he has to first of all he
has to fill the Delivery section Slip which will help to release clients shares from his
account to his saving account. In this process Depository gives the instruction to
release the shares of the client and to transfer the amount to clients saving account. So
this comes all under the process if working of the company

CHAPTER 5
LEGAL FRAMEWORK OF CAPITAL MARKET
ROLE OF RBI AND SEBI
Role of RBI
Modern day central banking extends far beyond the domain of traditional functions
such as currency management, banker to Government and promoting financial
soundness. These re-orientations have been the natural corollary of pursuing monetary
policy measures that are focused on definitive, well-defined and quantifiable
objectives. Central banks in emerging economies differ from their counterparts of
developed countries in several ways. In some developed countries, central banks are
vested only with the conduct of monetary policy. In most emerging countries, central
banks, besides monetary policy, also shoulder the responsibilities of debt
management, and regulation/supervision of banks and financial institutions. Even in
regard to the conduct of monetary policy, central banks in emerging economies have
to contend with several objectives, and distinct trade-offs as compared with some
developed countries which pursue a single objective of price stability. While pursuing
multiple objectives, and managing complex trade-offs, central banks in emerging
countries assume the responsibility of looking after the interests of several agents
including depositors, intermediaries, government, business, and external trade. In
regard to choice of instruments, given the level of market development, and multiple
objectives, emerging countries cannot entirely rely on single instrument such as
interest rates. Rather, central banks in emerging countries prefer a judicious mix of
interest rates, cash reserves, and other instruments. The most striking feature of
central banking in emerging countries pertains to their critical role in development of
financial markets and active involvement in the institution building process. In India
Reserve Bank of India plays the role of the central bank and helps in ensuring the
financial soundness of the country. In the Indian context, the Reserve Bank of India
(RBI), in consultation with the Government, has played a major role in institution
building since independence. Efforts in this direction encompass RBIs contribution to
development of commercial banking, development finance institutions in the areas of
agriculture and industry, and specialised institutions for development of financial
markets. After initiation of the economic reforms of the early 1990s, the role of RBI
in the area of developing financial markets particularly the government securities,
money markets and payment and settlement systems has come to the fore. Moreover,
in a global environment, with increasing integration of the international economy, the
RBIs role as the regulator and supervisor of commercial banks and financial
institutions has assumed a central place in promoting transparency and credibility of
institutions and monetary and financial policies. RBI being the Regulator of the major
components of the Indian financial system, viz., banks, development financial
institutions and NBFCs has a special role to ensure that the financial intermediaries
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prudently engage themselves in securitisation activities. This is more so because

despite the fact that clear benefits accrue to the organisations that engage in
securitisation, these activities have the potential to increase the overall risk profile if
they are not carried out prudently. For the most part, the types of risks that financial
institutions encounter in the securitisation process are identical to those that they face
in traditional lending transactions including credit risk, concentration risk, interest rate
risk, operational risk, liquidity risk, rural recourse risk and funding risk. However,
since the securitisation process separates the traditional lending function into several
limited roles such as originator, servicer, credit enhancer, trustee, investor, the type of
risks that our institutions will encounter will differ depending on the roles they
assume. There is, therefore, a need for the RBI to design an appropriate regulatory
framework / prudential guidelines to ensure that these institutions participate in the
process of securitisation more prudently and derive the benefits it offers more
objectively.
Monetary Policy
Most central bankers presently enjoy independence in choosing their policy
instrument and have used it to rely on setting short-term interest rates. As a logical
offshoot, many central banks in emerging markets are giving more exposures to
pursuing price stability as one of the main objectives of monetary policy. In the RBI,
there is a Financial Markets Committee (FMC), which meets daily before the opening
of the markets and at times more frequently, when the situation warrants. The FMC
reviews the liquidity and interest rate situation in financial markets and advises top
management on the course of action that would be required by RBI during the day.
This institutionalized framework helps the RBI to take an integrated view on allimportant decisions having an impact on financial markets. Economists have long
debated as to what should be the objective(s) of monetary policy. In most developed
countries, monetary stability, defined as the price stability, constitutes the dominant
objective of monetary policy. In emerging economies, central banks have to contend
with several concerns: price stability, sustained growth, financial systems stability,
stable exchange rate, and operating objectives of liquidity management. The animated
discussion on central bank objectives ranges broadly between single objective and
multiple objectives. Such discussion entails a generic analysis of advantages and
disadvantages of single or multiple objectives, and the nature, and scope of central
banking organization, which differs across the country groups of developed and
emerging countries due to significant difference in socio-economic-technologicalinstitutional environment. Adoption of a single objective of monetary policy by
central banks is based on the arguments that (i) monetary policy should concentrate its
instruments on one objective, free from any policy trade-off, thereby strengthening
the implementation of monetary policy; (ii) a single objective promotes transparency,
accountability and independence of monetary policy; (iii) a single objective is more
realistic in a deregulated and globalised economic and financial system; and (iv) it is
easier to observe the channels of transmission, and therefore, easier to determine the
right instruments. Since a central banks monetary policy actions could involve
several implications for the economy as a whole, the counterarguments against a
single objective derive from the fact that (i) economic objectives should be achieved
simultaneously (in harmony), and a single objective may disrupt that harmony; (ii)
monetary policy by itself may not be able to bring down inflation further and other
wings of policy have to be deployed. The case for multiple objectives for central
banks entails co-ordination of a range of policies and thus, a spectrum of objectives.
The principal reason as to why central banks in emerging economies have to contend
with multiple objectives or at least dual objectives of price stability and economic
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growth derives from the concerns of socio-economic-political systems. James Tobin, a

Nobel laureate economist, argued that since central banks form an integral part of
government, they cannot dissociate from the major objectives of the society, which
includes sustained economic growth and price stability. William Poole, a revered
central banker viewed that economic growth is a citizens objective and central
bankers too are citizens. Currency management is one of the most important
traditional functions of central banks in most countries. Central banks serve as a
service provider to issue and distribute currency notes and coins. In most developed
countries, high degree of homogeneity in the society as reflected in the culture,
language, tastes and preferences of the public and the efficient distribution of income
could induce a homogenous pattern of currency demand and thus, facilitate to achieve
better currency management as compared with that of developing countries. In
developing countries, significant diversity in socio-economic development across
regions induce completely different currency preference of the public across regions,
and across demographic segments, thus, entailing dynamic and complex currency
management tasks for central bankers. What is noteworthy is the way in which
technology has been harnessed to bring about improvement in currency management.
The RBI performs the role of currency management with the objectives of ensuring
adequate availability of coins and notes and maintaining the quality of notes in
circulation. This is done through its 18 Regional issue offices/sub offices and a wide
network of currency chests, repositories and small coin depots spread across the
country. In pursuance of the Clean Note Policy, efforts are being made to improve the
quality of notes in circulation. In most emerging markets including India, central
banks manage Government debts. Quite apart from the need to decide on issues such
as the kind of auctioning, the types of securities to be auctioned and the maturity
profile of the securities, there remains the issue of the extent of support that the
central bank and commercial banks should extend to the Government borrowing
programme. This is important from not only the point of view of deepening the
Government securities markets, but also in terms of the flow and cost of credit to the
commercial sector. As adviser to Government, central bankers need to interact
intimately with the Government on fiscal policy matters and provide a unified and
coherent signal to the market on the macro policy stance. In recent years, central
banks have become pro-active in the area of structural reforms. The Indian case
provides an excellent testimony towards this point. The strategy of financial reforms
was worked out in close coordination with the Government, and undertaken in
appropriate sequential steps and synchronized with real sector reforms. This was all
the more relevant in the Indian scenario where the Government has a significant stake
in the banking system and consequently, any disruption in the financial structure
could have significant budgetary implications. The RBI has undertaken wide-ranging
reforms to deepen and widen the financial markets money market, Government
securities market and foreign exchange market. These markets have become vibrant
and competitive. Central bankers, in the present era, rely on a combination of policy
measures in their day-to-day operations. They undertake combinations of actions
primarily to provide signals about their policy stance to market participants. Reforms
of the tools of monetary policy have, therefore, gained prominence. Such reforms
have been made possible by the growing emphasis on indirect instruments of
monetary control and the de-emphasis on direct instruments of policy. Open market
operations, in such a milieu, have grown in importance. Interest rate flexibility is
another tool. A major instrument of statutory pre-emption, such as the Cash Reserve
Ratio has been progressively de-emphasised and instead, short-term instruments, such
as the Repo Rate and in the medium-term, instruments such as Bank Rate have
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become important. Likewise, in several instances, the Statutory Liquidity Ratio

(SLR), an erstwhile important prudential measure, has increasingly been scaled down.
The idea inherent in these transformations in the approach to monetary policy is to
provide banks with maximum freedom in their portfolio choice, without losing sight
of the risks in asset accretion, and to provide opportunity to ensure that their resource
allocation is optimal. Given the concerns of an emerging economy, certain portion of
banks resources are often prescribed to be allotted under the priority sector norms;
but in this case as well, the range of activities covered under priority sector has been
expanded to provide greater choice to banks. And let us not forget the central banks
authority and power of moral suasion which can act as a supervisory and regulatory
force, even when no explicit oversight of the financial system is in place. Liquidity
determination is the key to the efficiency of the actions of the monetary authorities. As
the economy increasingly opens up, the interactions between domestic and external
markets are expected to impinge on liquidity as much as the growth impulses from
within the economy. Liquidity, however, is not static, in view of the speed of
transactions and settlements and the sharp increase in financial innovations. Since
liquidity is a function of both domestic monetary policies as much as external sector
policies and debt management strategy, modern day central bankers are confronted
with the enviable task of balancing a tightrope walk to ensure that the economy
remains on track. As bankers to banks, central bankers tend to exercise considerable
discretion and rarely go by straightjacket rule-based methods. While the lender-ofthe-last resort function of the central banks continues to be important, in addition, the
central bank provides access to refinance facilities and a whole host of services, as in
the matter of payments and settlement, funds transfer, settling of government
securities through the Negotiated dealing System (NDS) and the like. Another area
where central bankers of emerging countries have assumed new responsibilities
pertains to managing the economy in response to external developments in the context
of globalisation. Deputy Governor Dr. Rakesh Mohan has rightly pointed out that
globalisation has offered several benefits as well as a host of challenges. In an
increasingly global environment, countries have to adapt to greater
internationalisation of economic policies. In this regard, central bankers in emerging
countries have to be alert to international developments and acquire skills in the areas
of international banking, international finance and economics, international
regulations and international relations in order to function effectively while managing
the monetary and financial conditions of the economy. In the area of banking
soundness, central banks in emerging markets have become major initiators of
activity. Financial supervision, whether on-site or off-site, has assumed prominence in
the face of market imperfections and ensuring depositor protection. It is widely
recognised that the Asian crisis was, to a large extent, the outcome of lax supervisory
standards pursued in these crisis-ridden economies. The soundness of banks and other
non-bank entities depends not only on the operation of these entities, but also the
efficacy of the supervisory process. In this context, the Core Principles, enunciated by
the BIS in 1997, have quickly become a benchmark and we in the RBI are, by now,
compliant with most of these Principles. In view of the growing risks that banking
entails and the scarcity of supervisory resources, many central banks are increasingly
moving towards a risk-based approach to supervision in order to ensure optimum
utilisation of supervisory resources. Following recent advancements, central banks
have developed macro-prudential indicators in order to monitor the health of financial
entities within the overall economic environment in which they operate. High quality
regulation and supervision, which contribute directly to improvements in operating
efficiency, are beneficial for emerging countries since efficiency in the allocation of
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resources to most productive sectors cannot be achieved and sustained without

achieving operating efficiency. Regulation and supervision of institutions is, however,
not a simple task especially in the Indian context as it involves a large network of
banks and other financial institutions and their large number of branches spread over
the entire country. Banks and their branches too involve a wide network of interaction with different market segments owing to diversified portfolios in a deregulated
environment. In this context, central bankers have to be highly skilled, vibrant and
most dynamic in order to be effective in regulation and supervision. In several
countries, central banks assume a pivotal place in the payments and settlements
system. As financial transactions become increasingly complex, there arises the need
to harness financial markets to fully exploit the advances in information technology
and communications networking. Some important research studies show that a
relatively large involvement of the central bank in the financial system contributes to
financial development. For emerging countries, the central bank involvement in the
payment system enhances financial development. There is a considered view that an
efficient payment and settlement system contributes to operating and allocation
efficiencies of the financial system and thus, overall economic growth. Payments and
settlement systems in emerging countries involve several features, which are distinct
from that of developed countries. One of the guiding principles followed by RBI in
the reforms in the payment and settlement systems has been the need to provide for
safe, secure, and efficient systems. RBI has identified the Systemically Important
Financial Intermediaries (SIFI), which have the propensity for systemic risks. The
introduction of screen based trading in Government securities following the delivery
versus payment model in the form of Negotiated Dealing System (NDS) was a
milestone in this regard. The commencement of foreign exchange clearing by the
Clearing Corporation of India Ltd. aimed at net settlement of the foreign exchange
transactions is a major step forward, which has brought about more efficiency and
safety. The RBI has also embarked upon the introduction of a Real Time Gross
Settlement (RTGS) System for settlement of inter-bank and customer related funds
transfers on a real time mode. Going beyond technological up gradation, the issue also
remains of formulating an appropriate legal framework, in which transactions could
take place in a safe, sound and secured manner ,the growth of e-transactions and
digital signatures is a case in point. As you would be aware, the challenges to central
bankers in the present day are manifold and I venture to list out a few for this
discerning audience. First is the challenge of financial sector liberalisation. While
competitive financial markets no doubt aid in efficient allocation of resources, failure
or even disruptions in one segment of the financial sector can have serious contagion
effects throughout the rest of the economy. Thus, central bankers need to be vigilant
and alert to domestic and external 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 one-stop-banking and
conglomerates as well as off-shore financial activities operating in multiple segments
of the financial markets, leading to blurring of distinction among the various segments
themselves. Repeated financial crises across the world have provided graphic
evidence of the fact that financial disruptions can engender serious output costs. In
this context, the need for effective supervision can hardly be underscored. In
conclusion, central banking is passing through challenging yet exciting times. While
developments within the country charter its transformation, the experience of other
countries provides invaluable lessons in the approach to promote growth, whilst
maintaining price stability. All in all, the life of a central banker is one of anonymity,
staid and boring. It is only in moments when the going is tough that central bankers
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emerge from isolation and lean against the wind to battle splenetic insurmountable
odds. Central bankers choose their profession because they are driven by a
commitment to public service, which they hold dearer to themselves irrespective of
financial remuneration. The conduct of central banking inherently involves the
ultimate good of the society. An inappropriate choice of instruments or targets can
lead to large losses of macroeconomic well-being. Ultimately, all citizens are stake
holders in the central bank. Former Governor, Dr. Bimal Jalan rightly referred to
central banks as the publics own institutions. Every central banker is conscious of
operating at the apex of the financial system and at the centre of the macro-economic
management, continuously balancing risks against every policy action. In this sense, a
central banker has to possess certain unique qualities integrity and professionalism
of the highest order, finely honed analytical skills, the capability to take decisions
under difficult circumstances, a thorough knowledge of the manner in which the
economy functions, adaptability and a dynamism with which to respond to a life of
continuous change and challenge. What is more they have to avoid partisanship and
command public support. Together, these attributes distinguish a central banker as a
leader and manager of people, situations and money, always dedicated to service to
the nation. No wonder that central bankers are called priests at the temple of money.
Role of SEBI
Capital Market Regulation
In keeping with the broad thrust of the ongoing programmes of economic reform, the
mechanism of administrative controls over capital issues has been dismantled and
pricing of capital issues is now essentially market determined. In India the evolution
of the capital market regulation was due to the following two reasons, one is
concerned with the liberal financial markets which consist of the removal of the
measures of financial repression including direct control on interest rates and second
is concerned with the need of more strengthened regulation which rise due to the
unsystematic information system of the contributing towards market failure. In short it
can be said that unregulated market involves higher risk. Before the establishment of
SEBI the capital market of India was not having proper guidance and way to regulate
the Indian capital market. There was no proper regulatory framework defined before
1992 for the capital market. And this was reason which led to the establishment of
SEBI which came under SEBI act 1992 so as to protect the investors interest and
their rights. Regulation of the capital markets and protection of investor's interest is
now primarily the responsibility of the Securities and Exchange Board of India
(SEBI), which is located in Bombay.
Accordingly, SEBI's functions include:
* Regulating the business in stock exchange and any other securities markets
* Registering and regulating the working of collective investment schemes,
including mutual funds.
* Prohibiting fraudulent and unfair trade practices relating to securities markets.
* Promoting investor's education and training of intermediaries of securities
markets.
* Prohibiting insider trading in securities, with the imposition of monetary penalty
on erring market intermediaries.
*Regulating substantial acquisition of shares and takeover of companies.
*Calling for information from, carrying out inspection, conducting inquiries and
audits of the stock exchanges and intermediaries and self regulatory organisations
in the securities market. Keeping this in view, SEBI has issued a new set of
comprehensive guidelines governing issue of shares and other financial
instruments, and has laid down detailed norms for stock-brokers and sub-brokers
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merchant bankers, portfolio managers and mutual funds. On the

recommendations of the Patel Committee report, SEBI on 27th July 1995,
permitted carry forward deals. Some of the major features of the revised carryforward transactions as directed by SEBI are:
*Carry forward deals permitted only on stock exchanges which have screen based
trading system.
* Transactions carried forward cannot exceed 25% of a broker's total transactions
on any one day.
* 90-day limit for carry forward and squaring off allowed only till the 75th day
(or the end of the fifth settlement).
*Daily margins to rise progressively from 20% in the first settlement to 50% in
the fifth. On 26th January, 1995, the government promulgated an ordinance
amending the SEBI Act, 1992, and the Securities Contracts (Regulation) Act,
1956. In accordance with the amendment adjudicating mechanism will be created
within SEBI and any appeal against this adjudicating authority will have to be
made to the Securities Appellate Tribunal, which is to be separately constituted.
These appeals will be heard only at the High Courts.
The SEBI is the regulatory authority established under Section 3 of SEBI Act 1992 to
protect the interests of the investors in securities and to promote the development of,
and to regulate, the securities market and for matters connected therewith and
incidental thereto. The following departments of SEBI take care of the activities in the
secondary market.
Table Number 13 (Source: www.Sebi.gov.in)
Sr.
Name of the Department
Major Activities
No.
1.
Market
Intermediaries Registration, supervision, compliance
Registration and Supervision monitoring and inspections of all market
department (MIRSD)
intermediaries in respect of all segments
of the markets viz. equity, equity
derivatives, debt and debt related
derivatives.
2.
Market Regulation Department Formulating new policies and supervising
(MRD)
the functioning and operations (except
relating to derivatives) of securities
exchanges, their subsidiaries, and market
institutions such as Clearing and
settlement
organizations
and
Depositories.
3.
Derivatives and New Products Supervising trading at derivatives
Departments (DNPD)
segments of stock exchanges, introducing
new products to be traded, and
consequent policy changes
The issue of debt securities having maturity period of more than 365 days by listed
companies (i.e. which have any of their securities, either equity or debt, offered
through an offer document, and listed on a recognized stock exchange and also
includes Public Sector Undertakings whose securities are listed on a recognized stock
exchange) on private placement basis must comply with the conditions prescribed by
SEBI from time to time for getting them listed on the stock exchanges. Further,
unlisted companies/statutory corporations/other entities, if they so desire, may get

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their privately placed debt securities listed on the stock exchanges, by complying with
the relevant conditions. Briefly, these conditions are:

Compliance with disclosure requirements under Chapter VI of the SEBI

(Disclosure and Investor Protection) Guidelines, 2000, Listing Agreement with
the exchanges and provisions of the Companies Act.

Such disclosures may be made through the web site of the stock exchanges
where the debt securities are sought to be listed if the privately placed debt
securities are issued in the standard denomination of Rs. 10 lakhs.

The company shall sign a separate listing agreement with the exchange in
respect of debt securities.

The debt securities shall carry a credit rating from a Credit Rating Agency
, registered with SEBI.

The company shall appoint a debenture trustee registered with SEBI in respect
of the issue of the debt securities.

The debts securities shall be issued and traded in demat form.

All trades with the exception of spot transactions, in a listed debt security,
shall be executed only on the trading platform of a stock exchange.
Guidelines on Advertisements
An issue advertisement shall be truthful, 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 an offer document shall
reproduce such information in full and disclose all relevant facts and not be restricted
to select extracts relating to that item. An issue advertisement shall be considered to
be misleading, if it contains -:
a) Statements made about the performance or activities of the company in the absence
of necessary explanatory or qualifying statements, which may give an exaggerated
picture of the performance or activities, than what it really is.
c) An inaccurate portrayal of past performance or its portrayal in a manner which
implies that past gains or income will be repeated in the future.
d) An advertisement shall be set forth in a clear, concise and understandable language.
e) Extensive use of technical, legal terminology or complex language and the
inclusion of excessive details which may distract the investor shall be 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 models, celebrities, fictional characters,
landmarks or caricatures or the likes shall be displayed on or form part of the offer
documents or issue advertisements. Issue advertisements shall not appear in the form
of crawlers (the advertisements which run simultaneously with the programme in a
narrow strip at the bottom of the television screen) on television.
In case of issue advertisement on television screen:
(a) The risk factors shall not be scrolled on the screen; 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 brand names for the issue
except the normal commercial name of the company or commercial brand
names of its products already in use.

No slogans, expletives or non-factual and unsubstantiated titles shall appear in

the issue advertisements or offer documents.

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If any advertisement carries any financial data, it shall also contain data for the past
three years and shall include particulars relating to sales, gross profit, net profit, share
capital, reserves, earnings per share, dividends and the book values.
(a) All issue advertisements in newspapers, Magazines, brochures, pamphlets
containing highlights relating to any issue shall also contain risk factors given equal
importance in all respects including the print size.
(b) The print size of highlights and risk factors in issue advertisements shall not be
less than point 162(7) size.
(c) 163(Subject to section 66 of the Companies Act, 1956, any advertisement made by
an issuer namely Pre Issue advertisement, advertisement for opening or closure of
the issue, shall be in the format and contain the minimum disclosures as given in the
relevant part of Schedule XX A.

REGULATORY AUTHORITY OF CAPITAL MARKET

Legislations
The four main legislations governing the securities market are:
The Securities Contracts (Regulation) Act, 1956, Preventing undesirable
transactions in securities by regulating the business of dealing in securities;
The Companies Act, 1956, which is a uniform law relating to companies
throughout India;
The SEBI Act, 1992 for the protection of interests of Investors and for
promoting development of and Regulating the securities market;
The Depositories Act, 1996 which provides for Electronic Maintenance and
transfer of ownership of dematerialized Securities.
Rules and Regulations
This chapter deals with legislative and regulatory provisions relevant for Securities
Market in India. The Government has framed rules under the SC(R) A, SEBI Act and
the Depositories Act. SEBI has framed regulations under the SEBI Act and the
Depositories Act for registration and regulation of all market intermediaries, for
prevention of unfair trade practices, insider trading, etc. Under these Acts,
Government and SEBI issue notifications, guidelines, and circulars, which need to be
complied with by market participants. The self-regulatory organizations (SROs) like
stock exchanges have also laid down their rules.
Regulators
The regulators ensure that the market participants behave in a desired manner so that
the securities market continues to be a major source of finance for corporate and
government and the interest of investors are protected. The responsibility for
regulating the securities market is shared by Department of Economic Affairs (DEA),
Department of Company Affairs (DCA), Reserve Bank of India (RBI), Securities and
Exchange Board of India(SEBI) and Securities Appellate Tribunal (SAT).

SECURITIES CONTRACTS (REGULATION) ACT, 1956

The Securities Contracts (Regulation) Act, 1956 [SC(R)A] provides for direct and
indirect control of virtually all aspects of securities trading and the running of stock
exchanges and aims to prevent undesirable transactions in securities. Thus the
Securities Contracts (Regulation) Act, 1956 [SC(R)A] was enacted to prevent
undesirable transactions in securities by regulating the business of dealing therein and
by providing for certain other matters connected therewith It gives Central
Government regulatory jurisdiction over
(a) Stock exchanges through a process of recognition and continued supervision,
(b) Contracts in securities, and
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(c) Listing of securities on stock exchanges.

All the three are discussed subsequently in this section. The SC(R) A, 1956 was
enacted to prevent undesirable transactions in securities by regulating the Business of
dealing therein and by providing for certain other matters connected therewith. This is
the principal Act, which governs the trading of securities in India. As a condition of
recognition, a stock exchange complies with conditions prescribed by Central
Government. Organized trading activity in securities takes place on a recognized
stock exchange. The stock exchange determines their own listing regulations which
have to be confirmed to the minimum listing criteria set out in the rules.
Key definitions:
1. Recognized Stock Exchange: - Recognized stock exchange means a stock
exchange which is for the time being recognized by the Central Government under
Section 4 of the SC(R)A. A recognised stock exchange means, in relation to any
provision of the Companies Act, a stock exchange in or outside India, which is
notified by the Central Government in the Official Gazette as a recognised stock
exchange for the purposes of the provisions of the Companies Act.
2. Stock Exchange: Stock Exchange means anybody of individuals, whether
incorporated or not, constituted before corporatisation and demutualisation under
sections 4A and 4B or it can be said a body corporate incorporated under the
companies Act 1956 whether under a scheme of corporatisation and demutualization
or otherwise for the purpose of assisting, regulating or controlling the business of
buying, selling or dealing in securities. A stock exchange is an entity which provides
"trading" facilities for stock brokers and traders, to trade stocks and other securities.
Stock exchanges also provide facilities for the issue and redemption of securities as
well as other financial instruments and capital events including the payment of
income and dividends. The securities traded on a stock exchange include shares issued
by companies, unit trusts, derivatives, pooled investment products and bonds. To be
able to trade a security on a certain stock exchange, it has to be listed there. Usually
there is a central location at least for recordkeeping, but trade is less and less linked to
such a physical place, as modern markets are electronic networks, which gives them
advantages of speed and cost of transactions. Trade on an exchange is by members
only.
3. Securities: As per Section 2(h), the term 'securities' include:
(i) Shares, scripts, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body
corporate,
(ii) Derivative,
(iii) Units or any other instrument issued by any collective investment scheme to the
investors in such schemes,
(iv) Government Securities, (v) such other instruments as may be declared by the
Central Government to be securities, (vi) rights or interests in securities.
(vii) Security receipts as defined in clause (zg) of section 2 of the Securitisation and
Reconstitution of financial Assets and Enforcement of Security Interest Act
2002(SARFAESI)
(viii) units or any other such instrument issued to the investors under any
mutual fund scheme,
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(ix) any certificate or instrument issued to an investor by any issuer being a special
purpose distinct entity which possesses any debt or receivable, including mortgage
debt, assigned to such entity, and acknowledging beneficial interest of such investor in
such debt or receivable, including mortgage debt, as the case maybe.
(x) Rights or interests in securities.
4. Derivatives: As per section 2 (AA), Derivative includes:
A. a security derived from a debt instrument, share, loan whether secured or
unsecured, risk instrument or contract for differences or any other form of
security;
B. It is a contract which derives its value from the prices, or index of prices, of
underlying securities.
Further, Section 18A provides that notwithstanding anything contained in any other
law for the time being in force, contracts in derivative shall be legal and valid if such
contracts are
(i) Traded on a recognized stock exchange; and
(ii) Settled on the clearing house of the recognized stock exchange, in accordance
with the rules and bye-laws of such stock exchange. In accordance with the rules and
, bye-laws of such stock exchange, Spot delivery contract has been defined in
Section 2(i) to mean a contract which provides for(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 next day, the actual period taken for the
despatch of the securities or the remittance of money therefore through the post being
excluded from the computation of the period aforesaid if the parties to the contract do
not reside in the same town or locality;
(b) Transfer of the securities by the depository from the account of a beneficial owner
to the account of another beneficial owner when such securities are dealt with by a
depository.
The SC(R) A deals with1. Stock exchanges, through a process of recognition and continued supervision,
2. Contracts & options in securities, and
3. Listing of securities on stock exchanges.
Recognition of stock exchanges
By virtue of the provisions of the Act, the business of dealing in securities cannot be
carried out without a registration from SEBI. Any Stock Exchange which is desirous
of being recognized has to make an application under Section 3 of the Act to SEBI,
which is empowered to grant recognition and prescribe conditions. This recognition
can be withdrawn in the interest of the trade or public. Section 4A of the Act was
added in the year 2004 for the purpose of corporatisation and demutualisation of stock
exchange. Under section 4A of the Act, SEBI by notification in the official gazette
may specify an appointed date on and from which date all recognised stock exchanges
have to corporatize and demutualise their stock exchanges. Each of the Recognised
stock exchanges which have not already being corporatized and demutualised by the
appointed date are required to submit a scheme for corporatisation and
demutualization for SEBIs approval. After receiving the scheme SEBI may conduct
such enquiry and obtain such information as be may be required by it and after
satisfying that the scheme is in the interest of the trade and also in the public interest,
SEBI may approve the scheme. SEBI is authorized to call for periodical returns from
the recognized Stock Exchanges and make enquiries in relation to their affairs. Every
Stock Exchange is obliged to furnish annual reports to SEBI. Recognized Stock
Exchanges are allowed to make bylaws for the regulation and control of contracts but
subject to the previous approval of SEBI and SEBI has the power to amend the said
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bylaws. The Central Government and SEBI have the power to supersede the
governing body of any recognized stock exchange to meet any emergency as and
when it arises, by notifying in the official gazette.
Contracts and Options in Securities
Organised trading activity in securities takes place on a recognised stock exchange. If
the Central Government is satisfied, having regard to the nature or the volume of
transactions in securities in any State or States or area, that it is necessary so to do, it
may, by notification in the Official Gazette, declare provisions of section 13 to apply
to such State or States or area, and thereupon every contract in such State or States or
area which is entered into after date of the notification otherwise than between
members of a recognized stock exchange or recognised in stock exchanges in such
State or States or area or through or with such member shall be illegal. The effect of
this provision clearly is that if a transaction in securities has to be validly entered into,
such a transaction has to be either between the members of a recognized stock
exchange or through a member of a Stock Exchange
Listing of Securities
Where securities are listed on the application of any person in any recognized stock
, exchange, such person should comply with the conditions of the listing agreement
with that stock exchange (Section 21). Where recognized stock exchange acting in
pursuance of any power given to it by its bye-laws, refuses to list the securities of any
company, the company shall be entitled to be furnished with reasons for such refusal
and the company may appeal to Securities Appellate Tribunal (SAT) against such
refusal.
Delisting of Securities
A recognised stock exchange may delist the securities of any listed companies on such
grounds as are prescribed under the Act. Before delisting any company from its
exchange, the recognised stock exchange has to give the concerned company a
reasonable opportunity of being heard and has to record the reasons for delisting that
concerned company. The concerned company or any aggrieved investor may appeal to
SAT against such delisting.
The Securities Contracts (Regulation) Amendment Act, 2007
This was An Act further to amend the Securities Contracts (Regulation) Act, 1956 be
it enacted by Parliament in the Fifty-eighth Year of the Republic of India as follows
Short title
1. This Act may be called the Securities Contracts (Regulation) Amendment Act,
2007.
Amendment of section 2
2. In section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)
(hereinafter referred to as the principal Act), in clause (h), after sub-clause (id), the
following sub-clause shall be inserted, namely:- any certificate or instrument (by
whatever name called), issued to an investor by any issuer being a special purpose
distinct entity which possesses any debt or receivable, including mortgage debt,
assigned to such entity, and acknowledging beneficial interest of such investor in such
debt or receivable, including mortgage debt, as the case maybe;".
Insertion of new section 17A
3. After section 17 of the principal Act, the following section shall be inserted,
namely:
Public issue and listing of securities referred to in sub-clause of clause (h) of
section 2.
17 A. (1) Without prejudice to the provisions contained in this Act or any other law
for the time being in force, no securities of the nature referred to in sub-clause of
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clause (h) of section 2 shall be offered to the public or listed on any recognised
stock .exchange unless the issuer fulfils such eligibility criteria and complies with
such other requirements as may be specified by regulations made by the Securities
and Exchange Board of India.
(2) Every issuer referred to in sub-clause of clause (h) of section 2 intending to offer
the certificates or instruments referred therein to the public shall make an application,
before issuing the offer document to the public, to one or more recognised stock
exchanges for permission for such certificates or instruments to be listed on the stock
exchange or each such stock exchange.
(3) Where the permission applied for under sub-section (2) for listing has not been
granted or refused by the recognised stock exchanges or any of them, the issuer shall
forthwith repay all moneys, if any, received from applicants in pursuance of the offer
document, and if any such money is not repaid within eight days after the issuer
becomes liable to repay it, the issuer and every director or trustee thereof, as the case
may be, who is in default shall, on and from the expiry of the eighth day, be jointly
and severally liable to repay that money with interest at the rate of fifteen per cent. per
annum. Explanation.- In reckoning the eighth day after another day, any intervening
day which is a public holiday under the Negotiable Instruments Act, 1881, (26 of
1881) shall be disregarded, and if the eighth day (as so reckoned) is itself such a
public holiday, there shall for the said purposes be substituted the first day thereafter
which is not a holiday.
(4) All the provisions of this Act relating to listing of securities of a public company
on a recognised stock exchange shall, mutatis mutandis, apply to the listing of the
securities of the nature referred to in sub-clause of clause (h) of section 2 by the
issuer, being a special purpose distinct entity.
Amendment of section 23
4. In section 23 of the principal Act, in sub-section (1), in clause (c), for the word and
figures "section 17", the words, figures and letter "section 17 or section 17A" shall be
substituted.
Amendment of section 31
5. In section 31 of the principal Act, for sub-section (2), the following sub-section
shall be substituted, namely:- "(2) In particular, and without prejudice to the
generality of the foregoing power, such regulations may provide for all or any of the
following matters, namely:(a) The manner, in which at least fifty-one per cent. of equity share capital of a
recognised stock exchange is held within twelve months from the date of publication
of the order under sub-section (7) of section 4B by the public other than the
shareholders having trading rights under subsection (8) of that section
(b) the eligibility criteria and the other requirements under section 17 A
Securities Contracts (Regulation) Rules, 1957
The Central Government has made Securities Contracts (Regulation) Rules, 1957, as
required by sub-section (3) of the Section 30 of the Securities Contracts (Regulation)
Act, 1956 for carrying out the purposes of that Act. The powers under the SC(R),
1957 are exercisable by SEBI.
Contracts between members of recognized stock exchange
All contracts between the members of a recognized stock exchange should be
confirmed in writing and should be enforced in accordance with the rules and byelaws of the stock exchange of which they are members (Rule 9).
Maintenance/Preservation of Books of account and other documents by every
member of recognized stock exchange are as under:
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1. Every member of a recognized stock exchange should maintain and Preserve the
following books of account and documents for a period of five years:
(a) Register of transactions (Sauda book).
(b) Clients' ledger.
(c) General ledger.
(d) Journals.
(e) Cash book.
(f) Bank pass-book.
(g) Documents register showing full particulars of shares and securities received and
delivered.
2. Every member of a recognised stock exchange should maintain and preserve the
following documents for a period of two years:
(a) Members' contract books showing details of all contracts entered into by him with
other members of the same exchange or counter-foils or duplicates of memos of
confirmation issued to such other members.
(b) Counter-foils or duplicates of contract notes issued to clients.
(c) Written consent of clients in respect of contracts entered into as principals.

SEBI GUIDELINES
Securities and Exchange Board of India Act, 1992
About Security and exchange board of India
Securities and Exchange Board of India (SEBI) is a board (autonomous body) created
by the Government of India in 1988 and given statutory form in 1992 with the SEBI
Act 1992 with its head office at Mumbai it has offices in Chennai, Kolkata and Delhi.
It is the regulator of Securities markets in India. Major part of the liberalisation
process was the repeal of the Capital Issues (Control) Act, 1947, in May 1992. With
this, Governments control over issues of capital, pricing of the issues, fixing of
premia and rates of interest on debentures etc. ceased, and the office which
administered the Act was abolished: the market was allowed to allocate resources to
competing uses. However, to ensure effective regulation of the market, SEBI Act,
1992 was enacted to establish SEBI with statutory powers for:
(a) Protecting the interests of investors in securities,
(b) Promoting the development of the securities market, and
(c) Regulating the securities market.
Its regulatory jurisdiction extends over companies listed on Stock Exchanges and
companies intending to get their securities listed on any recognized stock exchange in
the issuance of securities and transfer of securities, in addition to all intermediaries
and persons associated with securities market. SEBI can specify the matters to be
disclosed and the standards of disclosure required for the protection of investors in
respect of issues; can issue directions to all intermediaries and other persons
associated with the securities market in the interest of investors or of orderly
development of the securities market; and can conduct enquiries, audits and
inspection of all concerned and adjudicate offences under the Act. In short, it has been
given necessary autonomy and authority to regulate and develop an orderly securities
market. All the intermediaries and persons associated with securities market, viz.,
brokers and sub-brokers, underwriters, merchant bankers, bankers to the issue, share
transfer agents and registrars to the issue, depositories, Participants, portfolio
managers, debentures trustees, foreign institutional investors, custodians, venture
capital funds, mutual funds, collective investments schemes, credit rating agencies,
etc., shall be registered with SEBI and shall be governed by the SEBI Regulations
pertaining to respective market intermediary. It is chaired by Mr. C.B. Bhave a
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respected turnaround civil servant who has been appointed for a three-year term, was
Chairman and Managing Director of the National Securities Depository Ltd (NSDL).
The Board comprises whole time members and outside members (representing the
finance ministry, RBI and experts). The present whole time members are Mr. G
Anantharaman, Dr. TC Nair and Mr. VK Chopra. Below the Board, the staff/officers
of the organization are led by other members include Mr K.P. Krishnan, Joint
Secretary (Capital Markets), Dept of Economics, Ministry of Finance; Mr V.
Leeladhar, Deputy Governor, RBI; Mr Venu Srinivasan, Chairman & MD, TVS
Motor; Mr Anurag Goel, Secretary, Ministry of Corporate Affairs. The organizational
structure of SEBI can be found under the SEBI website by clicking on the RTI Act
2005 at the top (no direct link).
SEBI and its role
The Securities and Exchange Board of India (SEBI) is the regulatory authority in
India established under Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for
establishment of Securities and Exchange Board of India (SEBI) with statutory
powers for (a) protecting the interests of investors in securities (b) promoting the
development of the securities market and (c) regulating the securities market. Its
regulatory jurisdiction extends over corporate in the issuance of capital and transfer
of securities, in addition to all intermediaries and persons associated with securities
market. SEBI has been obligated to perform the aforesaid functions by such measures
as it thinks fit. In particular, it has powers for:
*
Regulating the business in stock exchanges and any other securities markets
*
Registering and regulating the working of stock Brokers, subbrokers etc.
*
Promoting and regulating self-regulatory Organizations
*
Prohibiting fraudulent and unfair trade practices
*
Calling for information from, undertaking Inspection, Conducting inquiries and
audits of the Stock exchanges, Intermediaries, self regulatory Organizations,
mutual funds and other persons associated with the securities market.
SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and
quasi-executive. It drafts rules in its legislative capacity, it conducts enquiries and
enforcement action in its executive function and it passes rulings and orders in its
judicial capacity. Though this makes it very powerful, there is an appeals process to
create accountability. There is a Securities Appellate Tribunal which is a three
member tribunal and is presently headed by a former Chief Justice of a High court Mr. Justice NK Sodhi. A second appeal lies directly to the Supreme Court (where
important questions of law arise.
Constitution of SEBI
The Central Government has constituted a Board by the name of SEBI under Section
3 of SEBI Act. The head office of SEBI is in Mumbai. SEBI may establish offices at
other places in India. SEBI consists of the following members, namely:
(a) A Chairman
(b) Two members from amongst the officials of the Ministry of the Central
Government dealing with Finance and administration of the Companies Act, 1956
(c) One member from amongst the officials of the Reserve Bank
(d) Five other members of whom at least three should be the whole-time members.
The general superintendence, direction and management of the affairs of SEBI vests
on the hand of Board of Members, which exercises all powers and do all acts and
things which may be exercised or done by SEBI. The Chairman and the other
members are from amongst the persons of ability, integrity and standing who have
shown capacity in dealing with problems relating to securities market or have special
knowledge or experience of law, finance, economics, accountancy, administration or
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in any other discipline which, in the opinion of the Central Government, shall be
useful to SEBI.
Functions of SEBI
According to Section 11 of SEBI Act, 1992, SEBI has been obligated to protect the
interests of the investors in securities and to promote the development of and to
regulate the securities market by such measures as it thinks fit. The measures may
provide for:
(a) Regulating the business in stock exchanges and any other securities Markets;
(b) Registering and regulating the working of stock brokers, Sub-brokers Share
transfer agents, bankers to an issue, Trustees of trust deeds, Registrars to an issue,
merchant Bankers, underwriters, portfolio Managers, Investment Advisers and
such other intermediaries who may be Associated with securities markets in any
manner;
(c)Registering and regulating the working of the Depositories, Participants,
Custodians of securities, foreign institutional Investors, credit rating Agencies and
such other intermediaries as SEBI may, by notification, specify in this behalf;
(d)Registering and regulating the working of venture capital funds and Collective
investment schemes including mutual funds;
(e)Promoting and regulating self-regulatory organizations;
(f)Prohibiting fraudulent and unfair trade practices relating to Securities Markets;
(g)Promoting investors' education and training of Intermediaries of Securities market
(h)Prohibiting insider trading in securities;
(i) Regulating substantial acquisition of shares and take- over of Companies;
(j)Calling for information from, undertaking inspection, conducting inquiries and
audits of the stock exchanges, mutual funds, other persons associated with the
securities market, intermediaries and self regulator Organizations in the securities
market;
(k)Performing such functions and exercising such powers Under the Provisions of
Securities Contracts (Regulation) Act, 1956, as May be delegated to it by the
Central Government;
(l)Calling for information and record from any bank or any other Authority or board
or corporation established or constituted by or under any Central, State or
Provincial Act in respect of any transaction in securities which is under
investigation or inquiry by the Board;
(m)Levying fees or other charges for carrying out the purpose of this Section;
(n)Conducting research for the above purposes;
(o)Calling from or furnishing to any such agencies, as may be specified by SEBI,
, such information as may be considered necessary by it for the efficient discharge
, of its functions;
(p)Performing such other functions as may be prescribed according to Section 11A of
SEBI Act, 1992, SEBI may, for the protection of investor, specify, by regulations,
(q)The matters relating to issue of capital, transfer of Securities and Other matters
, incidental thereto; and the manner in which such matters, shall be disclosed by,
, the companies by general or special orders,
(r)Prohibit any company from issuing of prospectus, any Offer Document or
, advertisement soliciting money from the public for the issue of securities
(s) Specify the conditions subject to which the prospectus, such offer Document or
, advertisement, if not prohibited may be issued (Section 11A).
Registration of Intermediaries

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The intermediaries associated with securities market should buy, sell or deal in
securities after obtaining a certificate of registration from SEBI, as required by
Section 12:
1) Stock-broker,
2) Sub-broker,
3) Share transfer agent,
4) Banker to an issue,
5) Trustee of trust deed,
6) Registrar to an issue,
7) Merchant banker,
8) Underwriter,
9) Portfolio manager,
10) Investment adviser
11) Depository,
12) Depository participant
13) Custodian of securities,
14) Foreign institutional investor,
15) Credit rating agency,
16) Collective investment schemes,
17) Venture capital funds,
18) Mutual funds, and
19) Any other intermediary associated with the securities market.
Objective of SEBI establishment
The basic objectives of the Board were identified as:
to protect the interests of investors in securities;
to promote the development of Securities Market;
to regulate the securities market and
For matters connected therewith or incidental thereto.
Since its inception SEBI has been working targeting the securities and is attending to
the fulfilment of its objectives with commendable zeal and dexterity. The
improvements in the securities markets like capitalization requirements, margining,
establishment of clearing corporations etc. reduced the risk of credit and also reduced
the market. SEBI has introduced the comprehensive regulatory measures, prescribed
registration norms, the eligibility criteria, the code of obligations and the code of
conduct for different intermediaries like, bankers to issue, merchant bankers, brokers
and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters
and others. It has framed bye-laws, risk identification and risk management systems
for Clearing houses of stock exchanges, surveillance system etc. which has made
dealing in securities both safe and transparent to the end investor. Another significant
event is the approval of trading in stock indices (like S&P CNX Nifty & SENSEX) in
2000. A market Index is a convenient and effective product because of the following
reasons:
It acts as a barometer for market behaviour;
It is used to benchmark portfolio performance;
It is used in derivative instruments like index futures and index options;
It can be used for passive fund management as in case of Index Funds.
Two broad approaches of SEBI is to integrate the securities market at the national
level, and also to diversify the trading products, so that there is an increase in number
of traders including banks, financial institutions, insurance companies, mutual funds,
primary dealers etc. to transact through the Exchanges. In this context the introduction
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of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD

is a real landmark.
SEBI appointed the L. C. Gupta Committee in 1998 to recommend the regulatory
framework for derivatives trading and suggest bye-laws for Regulation and Control of
Trading and Settlement of Derivatives Contracts. The Board of SEBI in its meeting
held on May 11, 1998 accepted the recommendations of the committee and approved
the phased introduction of derivatives trading in India beginning with Stock Index
Futures. The Board also approved the "Suggestive Bye-laws" as recommended by the
Dr LC Gupta Committee for Regulation and Control of Trading and Settlement of
Derivatives Contracts.
SEBI then appointed the J. R. Verma Committee to recommend Risk Containment
Measures (RCM) in the Indian Stock Index Futures Market. The report was submitted
in November 1998. However the Securities Contracts (Regulation) Act, 1956 (SCRA)
required amendment to include "derivatives" in the definition of securities to enable
SEBI to introduce trading in derivatives. The necessary amendment was then carried
out by the Government in 1999. The Securities Laws (Amendment) Bill, 1999 was
introduced. In December 1999 the new framework was approved. Derivatives have
been accorded the status of `Securities'. The ban imposed on trading in derivatives in
1969 under a notification issued by the Central Government was revoked. Thereafter
SEBI formulated the necessary regulations/bye-laws and intimated the Stock
Exchanges in the year 2000. The derivative trading started in India at NSE in 2000
and BSE started trading in the year 2001SEBI has had a mixed history in terms of its
success as a regulator. Though it has pushed systemic reforms aggressively and
successively (e.g. the quick movement towards making the markets electronic and
paperless), it lacked the legal expertise, till recently, needed to sustain
prosecutions/enforcement actions. It has recently been announced that it is going to
the top law campuses to recruit talent and has found reasonable success there.
SECURITIES & EXCHANG BOARD OF INDIA IT formed under SEBI act 1992. to
protect interest of investor to promote development of security market. However it
has power to stop any type of irregularity regarding securities. But after confirmation
it can prevent. Sometimes it take times, that's why it unable to prevent it.
Constitutionally it is most efficient body.
Capital Issues (Control) Act, 1947
The Act had its origin during the war in 1943 when the objective was to channel
resources to support the war effort. It was retained with some modifications as a
means of controlling the raising of capital by companies and to ensure that national
resources were channelled into proper lines, for desirable purposes to serve goals and
priorities of the government, and to protect the interests of investors. Under the Act,
any firm wishing to issue securities had to obtain approval from the Central
Government, which also determined the amount, type and price of the issue. As a part
of the liberalization process, the Act was repealed in May 1992 paving way for market
determined allocation of resources. With this, Governments control over issues of
capital, pricing of the issues, fixing of premia and rates of interest on debentures etc.
ceased, and the office which administered the Act was abolished: the market was
allowed to allocate resources to competing uses. However, to ensure effective
regulation of the market, SEBI Act, 1992 was enacted to establish SEBI with statutory
powers for
(a) Protecting the interests of investors in securities,
(b) Promoting the development of the securities market, and
(c) Regulating the securities market.
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It can conduct enquiries, audits and inspection of all concerned and adjudicate
offences under the Act. It has powers to register and regulate all market intermediaries
and also to penalize them in case of violations of the provisions of the Act, Rules and
Regulations made there under. SEBI has full autonomy and authority to regulate and
develop an orderly securities market. Its regulatory jurisdiction extends over
companies listed on Stock Exchanges and companies intending to get their securities
listed on any recognised stock exchange in the issuance of securities and transfer of
securities, in addition to all intermediaries and persons associated with securities
market. SEBI can 60 specify the matters to be disclosed and the standards of
disclosure required for the protection of investors in respect of issues; can issue
directions to all intermediaries and other persons associated with the securities market
in the interest of investors or of orderly development of the securities market; and can
conduct enquiries, audits and inspection of all concerned and adjudicate offences
under the Act. In short, it has been given necessary autonomy and authority to
regulate and develop an orderly securities market. All the intermediaries and persons
associated with securities market, viz., and stock brokers and sub-brokers,
underwriters, merchant bankers, bankers to the issue, share transfer agents and
registrars to the issue, depositories, depository participants, portfolio managers,
debentures trustees, foreign institutional investors, custodians, venture capital funds,
mutual funds, collective investments schemes, credit rating agencies, etc., shall be
registered with SEBI and shall be governed by the SEBI Regulations pertaining to
respective market intermediary.
Power to adjudicate
(1) For the purpose of adjudging, the Board appoints any of its officers not below the
rank of a Division Chief to be an adjudicating officer for holding an inquiry in the
prescribed manner after giving any person concerned a reasonable opportunity of
being heard for the purpose of imposing any penalty.
(2) While holding an inquiry the adjudicating officer has the power to summon and
enforce the attendance of any person acquainted with the facts and circumstances of
the case to give evidence or to produce any document which in the opinion of the
adjudicating officer, may be useful for or relevant to the subject matter of the inquiry
and if, on such inquiry, he is satisfied that the person has failed to comply with the
provisions, he may impose penalty as he thinks fit in accordance with the provisions.
4) SEBI (Stock Brokers & Sub-Brokers) Rules, 1992
In exercise of the powers conferred by section 29 of SEBI Act, 1992, Central
Government has made SEBI (Stock-brokers and Sub-brokers) Rules, 1992. In terms
of Rule 2(e), Stock-broker means a member of a stock exchange. He is an agent
who for a commission handles the public's orders to buy and sell securities. In terms
of Rule 2(f), Sub-broker means any person not being a member of a stock exchange
who acts on behalf of a stock-broker as an agent or otherwise for assisting the
investors in buying, selling or dealing in securities through such stock brokers. A
stock-broker or sub-broker shall not buy, sell, and deal in securities, unless he holds a
certificate granted by SEBI.
Capital Adequacy Norms for Brokers
Each stockbroker is subject to capital adequacy requirements consisting of two
components:
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(1) Base minimum capital, and

(2) Additional or optional capital related to volume of business. The amount of base
minimum capital varies from exchange to exchange. The form in which the base
minimum capital has to be maintained is also stipulated by SEBI. The minimum
capital to be kept as a base capital is being determined by the SEBI.
Conditions for grant of certificate to stock-broker (Rule 4)
SEBI grants certificate e to a stock-broker subject to the following conditions,
namely:
(a) He holds membership of any stock exchange,
(b) He abides by the rules, regulations and bye-laws of the stock exchange or stock
exchanges of which he is member;
(c) In case of any change in the status and constitution, the Stock broker obtains prior
permission of SEBI to continue to buy, sell or deal in securities in any stock
exchange;
(d) He pays the amount of fees for registration in the Manner provided in the
regulations; and
(e) He takes adequate steps for redressed of grievances of the investors within one
month of the date of the receipt of the complaint and keep SEBI informed about the
Number, nature and other particulars of the complaints received from such investors.
Conditions of grant of certificate to sub-broker (Rule 5)
SEBI grants certificate to a sub-broker subject to the following conditions, namely:
(a), He takes adequate steps for redressed of grievances of the investors within one
month of the date of the receipt of the complaint and keep SEBI informed about the
number, nature and other particulars of the Complaints received
(b) He pays the fees in the manner provided in the regulations
(c) In case of any change in the status and constitution, the sub- broker obtains prior
permission of SEBI to continue to buy, sell or deal in Securities in any stock
exchange,
(d) He is authorized in writing by a stock-broker being a member of a stock exchange
for affiliating himself in buying, selling or dealing in securities; provided such stock
broker is entitled to buy, sell or deal in securities. In terms of regulation 2 (g), small
investor means any investor buying or selling securities on a cash transaction for a
market value not exceeding rupees fifty thousand in aggregate on any day as shown in
a contract note issued by the stock-brokers.
Registration of Stock Broker
A stock broker applies in the prescribed format for grant of a certificate through the
stock exchange or stock exchanges, as the case may be, of which he is admitted as a
member. The stock exchange forwards the application form to SEBI as early as
possible as but not later than thirty days from the date of its receipt. SEBI takes into
account for considering the grant of a certificate all matters relating to buying, selling,
or dealing in securities and in particular the following, namely, whether the stock
broker:
(a) is eligible to be admitted as a member of a stock exchange,
(b) Has the necessary infrastructure like adequate office space, equipment and
manpower to effectively discharge his activities
(c) Has any past experience in the business of buying, selling or dealing in securities,
(d) is subjected to disciplinary proceedings under the rules, regulations and bye-laws
of a stock exchange with respect to his business as a stock-broker involving either
himself or any of his partners, directors or employees, and
(e) Is a fit and proper person.
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SEBI on being satisfied that the stock-broker is eligible, grants a certificate to the
stock-broker and sends intimation to that effect to the stock exchange or stock
exchanges, as the case may be. Where an application for grant of a certificate does not
fulfill the requirements, SEBI may reject the application after giving a reasonable
opportunity of being heard.
Fees by stock brokers
Every applicant eligible for grant of a certificate should pay fees and in such manner
as specified in Schedule III; provided that SEBI may on sufficient because being
shown, permit the stock-broker to pay such fees at any time before the expiry of six
months from the date on which such fees become due. Where a stock-broker fails to
pay the fees, SEBI suspends the registration certificate, whereupon the stock- broker
ceases to buy, sell or deal in securities as a stock- broker.
Appointment of Compliance Officer
Every stock broker should appoint a Compliance Officer who will be responsible for
monitoring the compliance of the Act, rules and regulations, notifications, guidelines,
instructions, etc., issued by SEBI or the Central Government and for redressed of
investors grievances. The compliance officer should immediately and independently
report to SEBI any non-compliance observed by him (Regulation 18A).
Code of conduct
The stock-broker holding a certificate at all times abides by the Code of Conduct. He
has to follow the following code of conduct which is as given hereunder:
I. General
a) Integrity: A stock-broker, should maintain high standards of integrity, promptitude
and fairness in the conduct of all his business.
b) Exercise of Due Skill and Care: A stock-broker, should act with due skill, care
and diligence in the conduct of all his business.
c) Manipulation: A stock-broker shall not indulge in manipulative, fraudulent or
deceptive transactions or schemes or spread rumours with a view to distorting market
equilibrium or making personal gains.
d) Malpractices: A stock-broker shall not create false market either singly or in
concert with others or indulge in any act detrimental to the investors' interest or which
leads to interference with the fair and in the smooth functioning of the market. A
stock-broker shall not involve him in excessive speculative business market beyond
reasonable levels not commensurate with his financial soundness.
e) Compliance with Statutory Requirements: A stock-broker shall abide by all the
provisions of the Act and the rules, regulations issued by the Government, SEBI and
the stock exchange from time to time as may be applicable to him.
II. Duty to the investor
a) Execution of Orders: A stock-broker, in his dealings with the clients and the
general investing public, should faithfully execute the orders for buying and selling of
securities at the best available market price and not refuse to deal with a small
investor merely on the ground of the volume of business involved. A stock-broker
should promptly inform his client about the execution or non-execution of an order,
and make prompt payment in respect of securities sold and arrange for prompt
delivery of securities purchased by clients.
b) Issue of Contract Note:
A stock-broker should issue without delay to his client or client of sub-broker a
contract note for all transactions in the form specified by the stock exchange.
c) Breach of Trust:

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A stock-broker should 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 business relationship.
d) Business and Commission:
(i) A stock-broker should not encourage sales or purchases of securities with the
sole object of generating brokerage or commission.
(ii) A stock-broker should not furnish false or misleading Quotations or give any
other false or misleading advice or information to the clients with a view of
inducing him to do business in particular securities and enabling himself to earn
brokerage or commission thereby.
e) Business of Defaulting Clients:
A stock-broker should not deal or transact business knowingly, directly or indirectly
or execute an order for a client who has failed to carry out his commitments in
relation to securities with another stock-broker.
(f) Fairness to Clients: A stock-broker, when dealing with a client, should disclose
whether he is acting as a principal or as an agent and should ensure at the same time
that no conflict of interest arises between him and the client. In the event of a conflict
of interest, he should inform the client accordingly and should not seek to gain a
direct or indirect personal advantage from the situation and should not consider
clients' interest inferior to his own.
g) Investment Advice: A stock-broker should not make a recommendation to any
client who might be expected to Rely thereon to acquire, dispose of, and retain any
securities unless he has reasonable grounds for believing that the Recommendation is
suitable for such a client upon the basis of the facts, if disclosed by such a client as to
his own security holdings, financial situation and objectives of such investment. The
stock-broker should seek such Information from clients, wherever he feels it is
appropriate to do so.
h) Investment Advice in publicly accessible media:
(i) A stock broker or any of his employees should not render directly or indirectly,
any investment advice about any security in the publicly accessible media, whether
real-time or non real-time, unless a disclosure of his interest including the interest
of his dependent family members and the employer including their long or short
position in the said security has been made, while rendering such advice.
(ii) In case, an employee of the stock broker is rendering such advice, he should also
disclose the interest of his dependent family members and the employer including
their long or short position in the said security, while rendering such advice.
(i) Competence of Stock Broker: A stock-broker should have adequately trained
staff and arrangements to render fair, prompt and competent services to his clients.
III. Stock-brokers vis-a-vis other stock-brokers
(a) Conduct of Dealings: A stock-broker should co-operate with the other contracting
party in comparing unmatched transactions. A stockbroker should not knowingly and
wilfully deliver documents which constitute delivery and should co-operate with other
contracting party for prompt replacement of documents which are declared as bad
delivery.
(b) Protection of Clients Interests:
A stock-broker should extend fullest cooperation to other stock-brokers in protecting
the interests of his clients regarding their rights to dividends, bonus shares, right
shares and any other rights related to such securities.
(c) Transactions with Stock-Brokers:
A stock-broker should carry out his transactions with other stock-brokers and should
comply with his obligations in completing the settlement of transactions with them.
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(d) Advertisement and Publicity:

A stock-broker should not advertise his business publicly unless permitted by the
stock exchange.
(e) Inducement of Clients:
A stock-broker should not resort to unfair means of inducing clients from other stockbrokers.
(f) False or Misleading Returns:
A stock-broker should not neglect or fail or refuse to submit the required returns and
not make any false or misleading statement on any returns required to be submitted to
the Board and the stock exchange.
IV. 1. A stock broker shall enter into an agreement as specified by the Board with his
client.
2. A stock broker shall also enter into an agreement as specified by the Board with the
client of the sub-broker
Registration of Sub-Broker
An application by a sub-broker for the grant of a certificate is made in the prescribed
format accompanied by a recommendation letter from a stockbroker of a recognized
stock exchange with who he is to be affiliated along with two references including
one from his banker. The application form is submitted to the stock exchange of
which the stock- broker with whom he is to be affiliated is a member. The eligibility
criteria for registration as a sub-broker are as follows:
(i) In the case of an individual:
(a) The applicant is not less than 21 years of age,
(b) The applicant has not been convicted of any offence involving fraud
(c) The applicant has at least passed 12th standard equivalent examination from an
Institution recognized by the Government, provided that SEBI may relax the
educational qualifications on merits having regard to the applicant's
experience.
(d) the applicant is a fit and proper person.
(ii) In the case of partnership firm or a body corporate the partners or directors, as the
case may be, should comply with the following requirements:
(a) The applicant is not less than 21 years of age,
(b) The applicant has not been convicted of any offence involving fraud or
dishonesty,
(c) The applicant has at least passed 12th standard Equivalent examination from
an institution recognized by the Government. Provided that SEBI may relax the
Educational qualifications on merits having regard to the applicants experience.
The stock exchange on receipt of an application, verifies the information
contained therein and certifies that the Applicant is eligible for registration. The
stock exchange forwards the application form of such applicants who comply
with all the requirements specified in the Regulations to SEBI as early as
possible, as but not later than thirty days from the date of its receipt. SEBI on
being satisfied that the sub-broker is eligible, grants a certificate to the sub-broker
and sends intimation to that effect to the stock exchange. Stock Exchanges as the
case may be. SEBI grants a certificate of registration to the appellant subject to
the terms and conditions as stated in Rule 5 of SEBI (Stock Brokers and Subbrokers) Rules, 1992, where an application does not fulfill the requirements,
SEBI may reject the application after giving a reasonable opportunity of being
heard. The sub-broker shall:
(a) Pay the fees as specified in Schedule III;
(b) Abide by the code of conduct specified in Schedule II;
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(c) Enter into an agreement with the stock-broker for specifying the scope of his
authority and responsibilities.
(d) Comply with the rules, regulations and bye-laws of the stock exchange
(e) Not be affiliated to more than one stock broker of one stock exchange
III. Sub-Brokers vis--vis Stock Brokers
(a)
Conduct of Dealings: A sub-broker should co- operate with his broker in
comparing unmatched transactions. A sub-broker should not knowingly
and wilfully deliver documents, which constitute bad delivery. A subbroker should co-operate with other contracting party for prompt
replacement of documents, which are declared as bad delivery.
(b)
Protection of Clients Interests: A sub-broker should extend fullest cooperation to his stock-broker in protecting the interests of their clients
regarding their rights to dividends, right or bonus shares or any other rights
relatable to such securities.
(c)
Transactions with Brokers: A sub-broker should not fail to carry out his
stock broking transactions with his broker nor should he fail to meet his
business liabilities or show negligence in completing the settlement of
transactions with them.
(d)
Agreement between sub-broker, client of the sub- broker and main
broker: A sub-broker should enter into a tripartite agreement with his
client and with the main stock broker specifying the scope of rights and
obligations of the stock broker, sub-broker and such client of the subbroker
(e)
Advertisement and Publicity: A sub-broker should not advertise his
business publicly unless permitted by the stock exchange.
(f)
Inducement of Clients: A sub-broker should not resort to unfair means of
inducing clients from other stock brokers. They should use the ethical
means of the inclusion of the client and should not go against the rules and
the bye-laws which is being defined by SEBI.
IV. Sub-brokers vis-a-vis Regulatory Authorities
1. General Conduct: A sub-broker shall not indulge in dishonourable, disgraceful or
disorderly or improper conduct on the stock exchange nor shall he wilfully obstruct
the business of the stock exchange. He shall comply with the rules, bye-laws and
regulations of the stock exchange.
2. Failure to give Information: A sub-broker shall not neglect or fail or refuse to
submit to SEBI or the stock exchange with which he is registered, such books, special
returns, correspondence, documents, and papers or any part thereof as may be
required.
3. False or Misleading Returns: A sub-broker shall not neglect or fail or refuse to
submit the required returns and not make any false or misleading statement on any
returns required to be submitted to SEBI or the stock exchanges.
4. Manipulation: A sub-broker shall not indulge in manipulative, fraudulent or
deceptive transactions or schemes or spread rumours with a view to distorting market
equilibrium or making personal gains.
5. Malpractices: A sub-broker shall not create false market either singly or in concert
with others or indulge in any act detrimental to the public interest or which leads to
interference with the fair and smooth functions of the market mechanism of the stock
exchanges. A sub-broker shall not involve himself in excessive speculative business in
the market beyond reasonable levels not commensurate with his financial soundness.
SEBI (Prohibition of Insider Trading) Regulations, 1992
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Insider trading is prohibited and is considered an offence vide SEBI (Insider Trading)
Regulations, 1992. The definitions of some of the important terms are given below:
Dealing in securities means an act of subscribing, buying, selling or agreeing to
subscribe, buy, sell or deal in any securities by any person either as principal or agent.
Insider means any person who, is or was connected with the company or is deemed
to have been connected with the company, and who is reasonably expected to have
access to unpublished price sensitive information in respect of securities of a
company, or who has received or has had access to such unpublished price sensitive
information.
A connected person means any person who(i) is a director, as defined in clause (13) of section 2 of the Companies Act, 1956 of a
company, or is deemed to be a director of that company by virtue of sub-clause (10)
of section 307 of that Act, or
(ii) Occupies the position as an officer or an employee of the company or holds a
position involving a professional or business relationship between himself and the
company whether temporary or permanent and who may reasonably be expected to
have an access to unpublished price sensitive information in relation to that company.
A person is deemed to be a connected person if such person(i) is a company under the same management or group or any subsidiary company
thereof within the meaning of section (1B) of section 370, or sub-section (11) of
section 372, of the Companies Act, 1956 or sub clause (g) of section 2 of the
Monopolies and Restrictive Trade Practices Act, 1969 as the case may be;
(ii) is an intermediary as specified in section 12 of SEBI Act, 1992, Investment
company, Trustee Company, Asset Management Company or an employee or director
thereof or an official of a stock exchange or of clearing house or corporation;
(iii) is a merchant banker, share transfer agent, registrar to an issue, debenture trustee,
broker, portfolio manager, Investment Advisor, sub-broker, Investment Company or
an employee thereof, or, is a member of the Board of Trustees of a mutual fund or a
member of the Board of Directors of the Asset Management Company of a mutual
fund or is an employee thereof who have a fiduciary relationship with the company;
(iv) is a member of the Board of Directors, or an employee, of a public financial
institution as defined in Section 4A of the Companies Act, 1956;
(v) Is an official or an employee of a self regulatory organisation recognised or
authorised by the Board of a regulatory body;
(vi) Is a relative of any of the aforementioned persons;
(vii) Is a banker of the company;
(viii) Relatives of the connected person; or
(ix) is a concern, firm, trust, Hindu Undivided Family, company or association of
persons wherein any of the connected persons mentioned in sub-clause (i) of clause
(c) of this regulation or any of the persons mentioned in sub-clauses (vi), (vii) or (viii)
of this clause have more than 10% of the holding or interest
Price sensitive information" means any information which relates directly or
indirectly to a company and which if published is likely to materially affect the price
of securities of that company. The following shall be deemed to be price sensitive
information: (i) Periodical financial results of the company;
(ii) Intended declaration of dividends (both interim and final);
(iii) Issue of securities or buy-back of securities;
(iv) Any major expansion plans or execution of new projects;
(v) Amalgamation, mergers or takeovers;
(vi) Disposal of the whole or substantial part of the undertaking;
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(vii) Any significant changes in policies, plans or operations of the company.

Unpublished means information which is not published by the company or its agents
and is not specific in nature. Speculative reports in print or electronic media shall not
be considered as published information.
Prohibition on dealing, communicating or counselling (Regulation 3)
No insider shall
either on his own behalf or on behalf of any other person, deal in securities of
a company listed on any stock exchange when in possession of any
unpublished price sensitive information;
Communicate, counsel or procure, directly or indirectly, any unpublished
price sensitive information to any person who while in possession of such
unpublished price sensitive information shall not deal in securities; Provided
that nothing contained above shall be applicable to any communication
required in the ordinary course of business or profession or employment or
under any law.
Regulation 3A
No company shall deal in the securities of another company or associate of that other
company while in possession of any unpublished price sensitive information.
Violation of provisions relating to insider trading
Any insider, who deals in securities in contravention of the provisions of regulation 3
or 3A shall be guilty of insider trading (regulation 4). If SEBI suspects any person of
having violated the provisions of insider regulation, it may make inquiries with such
person or with the stock exchanges, mutual funds, other persons associated with the
securities market, intermediaries and self-regulatory organisation in the securities
market to form a prima facie opinion as to whether there is any violation of insider
regulations. Where SEBI forms a prima facie opinion that it is necessary to investigate
and inspect the books of accounts, either documents and records of an insider or the
stock exchanges, mutual funds, other persons associated with the securities market,
intermediaries and self-regulatory organisation in the securities market, it may appoint
an investigating authority for the following purpose
i) to investigate into the complaints received from investors, intermediaries or any
other person on any matter having a bearing on the allegations of insider trading; and
ii) to investigate sou moto upon its own knowledge or information in its possession to
protect the interest of investors in securities against breach of insider trading
regulations. A reasonable notice has to be given to the insider before undertaking any
investigation. Such notice is not required to be given if SEBI is satisfied that it is in
the public interest or in the interest of the investors. During such investigation and
inspection of the books of accounts, the insider or the stock exchanges, mutual funds,
other persons associated with the securities market, intermediaries and self-regulatory
organisation in the securities market shall be bound to discharge their obligations as
provided in the regulations. The investigating authority has to submit his report to
SEBI within reasonable time. SEBI after considering the report shall communicate its
findings to the suspected person and seek a reply from such person. Such suspected
person shall reply to the findings within 21 days to SEBI. After receipt of such reply,
SEBI may take such measures to safeguard and protect the interest of investors,
securities market and for due compliance with the insider trading regulations. SEBI
also has powers to appoint an auditor to investigate into the books of accounts or the
affairs of the insider or the stock exchanges, mutual funds, other persons associated
with the securities market, intermediaries and self regulatory organisation in the
securities market. To protect the interest of investor and securities market and for due
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compliance of the insider trading regulations, SEBI may issue order as per Regulation
11 in accordance with SEBI(Prohibition of Insider Trading) Regulations, 1992 , or
initiate criminal prosecution under Section 24 or any action under Chapter VIA of the
Securities and Exchange Board of India Act 1992.
Policy on disclosures and internal procedure for prevention of insider trading:
Chapter IV of the Regulations deals with policy on disclosures and internal procedure
for prevention of insider trading. Accordingly, all listed companies and organisations
associated with securities markets including:
(a) The intermediaries as mentioned in section 12 of the Act, asset Management
Company and trustees of mutual funds;
(b) The self regulatory organisations recognised or authorised by the Board;
(c) The recognised stock exchanges and clearing house or corporations;
(d) The public financial institutions as defined in Section 4A of the Companies Act,
1956;
(e) The professional firms such as auditors, accountancy firms, law firms, analysts,
consultants, etc., assisting or advising listed companies, shall frame a code of internal
procedures and conduct as near there to The Model Code specified in Schedule I of
these Regulations.
Disclosures
Disclosure of interest or holding by directors and officers and substantial shareholders
in listed companies
Initial Disclosure:
(1) Any person who holds more than 5% shares or voting rights in any listed company
shall disclose to the company in Form A, the number of shares or voting rights held
by such person, on becoming such holder, within 4 working days of:(a) The receipt of intimation of allotment of shares; or
(b) The acquisition of shares or voting rights, as the case may be.
(2) Any person who is a director or officer of a listed Company shall disclose to the
company in Form B, the number of shares or voting rights held by such person, within
4 working days of becoming a director or officer of the company.
Continual Disclosure
(3) Any person who holds more than 5% shares or voting rights in any listed company
shall disclose to the company in Form C the number of shares or voting rights held
and change in shareholding or voting rights, even if such change results in
shareholding falling below 5%, if there has been change in such holdings from the last
disclosure made under sub-regulation (1) or under this sub-regulation; and such
change exceeds 2% of total shareholding or voting rights in the company.
(4) Any person who is a director or officer of a listed company, shall disclose to the
company in Form D, the total number of shares or voting rights held and change in
shareholding or voting rights, if there has been a change in such holdings from the last
disclosure made under sub-regulation (2) or under this sub-regulation, and the change
exceeds Rupees 5 lakh in value or 25000 shares or 1% of total shareholding or voting
rights, whichever is lower.
(5) The disclosure mentioned in sub-regulations (3) and (4) shall be made within 4
working days of:
(a) The receipt of intimation of allotment of shares, or
(b) The acquisition or sale of shares or voting rights, as the case may be.
Disclosure by company to stock exchanges
(6) Every listed company, within five days of receipt, shall disclose to all stock
exchanges on which the company is listed, the information received under subregulations (1), (2), (3) and (4) of Regulation 13.
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Code of Ethics
SEBI has advised stock exchanges to adopt the Code of Ethics for their directories
and functionaries with effect from 31s t May 2001. This is aimed at improving the
professional and ethical standards in the functioning of exchanges thereby creating
better investors confidence in the integrity of the market.
SEBI (Prohibition of fraudulent And Unfair Trade Practices Relating To
Securities Markets)
Regulations, 2003
The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the
Securities Market) Regulations, 2003 enable SEBI to investigate into cases of market
manipulation and fraudulent and unfair trade practices. The regulations specifically
prohibit market manipulation, misleading statements to induce sale or purchase of
securities, unfair trade practices relating to securities. SEBI can conduct investigation,
suo moto or upon information received by it, by an investigating officer in respect of
conduct and affairs of any person dealing, buying/selling/dealing in securities. Based
on the report of the investigating officer, SEBI can initiate action for suspension or
cancellation of registration of an intermediary. The term fraud has been defined by
Regulation 2(1)(c). Fraud includes any act, expression, omission or concealment
committed whether in a deceitful manner or not by a person or by any other person or
his agent while dealing in securities in order to induce another person with his
connivance or his agent to deal in securities, whether or not there is any wrongful gain
or avoidance of any loss, and shall also include 1. A knowing misrepresentation of the truth or concealment of material fact in order
that another person may act to his detriment;
2. The suggestion as to a fact which is not true by one who does not believe it to be
true;
3. An active concealment of a fact by one having knowledge or belief of the fact;
4. A promise made without any intention of performing it;
5. A representation made in a reckless and careless manner whether it be true or false;
6. Any such act or omission as any other law specifically declares to be fraudulent;
7. Deceptive behaviour by a person depriving another of informed consent or full
participation;
8. A false statement made without reasonable ground for believing to be true;
9. The act of an issuer of securities giving out misinformation that affects the market
price of the security, resulting in investors being effectively misled even though they
did not rely on the statement itself or anything derived from it other than the market
price. And fraudulent shall be construed accordingly:
Nothing contained in this clause shall apply to any general comments made in good
faith in regard to
(a) The economic policy of the Government;
(b) The economic situation of the country;
(c) Trends in the securities market;
(d) Any other matter of a like nature;
Whether such comments are made in public or in private, the regulation prohibits:
(1) Dealings in securities in a fraudulent manner,
(2) Market manipulation,
(3) Misleading statements to induce sale or purchase of securities, and
(4) Unfair trade practice relating to securities
Prohibition of certain dealings in securities
No person shall directly or indirectly
(a) Buy, sell or otherwise deal in securities in a fraudulent manner
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(b) Use or employ, in connection with issue, purchase or sale of any security listed or
proposed to be listed in a recognised stock exchange, any manipulative or deceptive
device or contrivance in contravention of the provisions of the Act or the rules or the
regulations made there under.
(c) Employ any device, scheme or artifice to degraud in connection with dealing in or
issue of securities which are listed or proposed to be listed on a recognised stock
exchange;
(d) Engage in any act, practice, and course of business which operates or would
operate as fraud or deceit upon any person in connection with any dealing in or issue
of securities which are listed or proposed to be listed on a recognised stock exchange
in contravention of the act, rules and regulations (Regulation 3).
Prohibition against Manipulative, fraudulent and unfair trade practices
Regulation 4 provides that no person shall indulge in a fraudulent or an unfair trade
practice in securities. Further any dealing in securities shall be deemed to be
fraudulent or an unfair trade practice if it involves fraud and may include all or any of
the following:(i) Indulging in an act which creates false or misleading appearance of trading in the
securities market.
(ii) Dealing in a security not intended to effect transfer of beneficial ownership but
intended to operate only as a device to inflate, depress or cause fluctuations in the
price of such security for wrongful gain or avoidance of loss.
(iii) Advancing or agreeing to advance any money to any person thereby inducing any
other person to offer to buy any security in any issue only with the intention of
securing the minimum subscription to such issue.
(iv) paying, offering or agreeing to pay or offer, directly or indirectly, to any person
any money or moneys worth for inducing such person for dealing in any security
with the object of inflating, depressing, maintaining or causing fluctuation in the
price of such security.
(v) Any act or omission amounting to manipulation of the price of a security.
(vi) Publishing or causing to publish or reporting or causing to report by a person
dealing in securities any information which is not true or which he does not believe to
be true prior to or in the course of dealing in securities.
(vii) Entering into a transaction in securities without intention of performing it or
without intention of change in ownership of such security.
(viii) Selling, dealing or pledging of stolen or counterfeit security whether in physical
or dematerialized form.
(ix) An intermediary promising a certain price in respect of buying or selling of a
security to a client and waiting till a discrepancy arises in the price of such security
and retaining the difference in prices as profit for himself.
(x) An intermediary providing his clients with such information relating to a security
as cannot be verified by the clients before their dealing in such security.
(xi) An advertisement that is misleading or that contains information in a distorted
manner and which may influence the decision of the investors.
(xii) An intermediary reporting trading transactions to his clients entered into on their
behalf in an inflated manner in order to increase his commission and brokerage.
(xiii) An intermediary not disclosing to his client transactions entered into on his
behalf including taking an option position.
(xiv) Circular transactions in respect of a security entered into between intermediaries
in order to increase commission to provide a false appearance of trading in such
security or to inflate, depress or cause fluctuations in the price of such security.
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(xv) Encouraging the clients by an intermediary to deal in securities solely with the
object of enhancing his brokerage or commission.
(xvi) An intermediary predating or otherwise falsifying records such as contract notes.
(xvii) An intermediary buying or selling securities in advance of a substantial client
order or whereby a futures or option position is taken about an impending transaction
in the same or related futures or options contract.
(xviii) Planting false or misleading news which may induce sale or purchase of
securities.
The Depositories Act, 1996
The Depositories Act, 1996 was enacted to provide for regulation of depositories in
securities and for matters connected therewith or incidental thereto. It came into force
from 20th September, 1995. The Depositories Act, 1996 provides for the
establishment of depositories in securities with the objective of ensuring free
transferability of securities with speed, accuracy and security by (a) making securities
of public limited companies freely transferable subject to certain exceptions; (b)
dematerialising the securities in the depository mode; and (c) providing for
maintenance of ownership records in a book entry form. In order to streamline the
settlement process, the Act envisages transfer of ownership of securities electronically
by book entry without making the securities move from person to person. The Act has
made the securities of all public limited companies freely transferable, restricting the
companys right to use discretion in effecting the transfer of securities, and the
transfer deed and other procedural requirements under the Companies Act have been
dispensed with. Through this act dematerialisation of accounts of the investors come
under process and thus enabling electronic transfer of securities.
The Depositories Act, 1996 Regulations.
(a): With effect from 20th September 1995 an Act, to provide regulation of
Depositories in securities and for matters connected therewith and/or incidental
thereto has been enacted in India which is titled as "The Depositories Act, 1996". It
extends to the whole of India. As per the definition provided in Section 2(e) of the
said Act, a "Depository" means a company formed and registered under the
Companies Act, 1956 and which has been granted certificate of registration under
sub-Section (1A) of Section 12 of the Securities & Exchange Board of India Act,
1992.
(b): The Securities & Exchange Board of India has in exercise of the powers
conferred upon it made Regulations which are called "The Securities & Exchange
Board of India (Depositories & Participants) Regulations, 1996".
(c): Regulation 3 of the said Regulations provides as follows:
3. (1) An application for the grant of a certificate of registration as a Depository shall
be made to the Board by the sponsor in Form A, shall be accompanied by the fee
specified in Part A of the Second Schedule and be paid in the manner specified in Part
B thereof.

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(2) The application shall be accompanied by draft bye-laws of the Depository that is
proposed to be set up.
(d): Regulation 6 provides that the Board shall not consider an application under
Regulation 3 for grant of a certificate for registration as a Depository unless the
sponsor belongs to one of the categories mentioned in Regulation 6. Regulation 7
provides that after considering the application under Section 3 with regard to the
clarification specified in Regulation 6 if the Board is satisfied with the company
established by the sponsor being eligible to act as Depository, it may grant a
certificate of registration subject to the conditions mentioned in Regulation 7. A
Depository which has been granted a certificate of registration under Regulation 7 is
obliged to make an application to the Board within one year from the date of issue of
the certificate of registration for commencement of business in a prescribed form.
Regulation 12 empowers the Board to ask the Depository to furnish further
information and/or clarification regarding the matters relevant for the grant of
certificate of commencement of business and Regulation 13 lays down the matters
which are relevant for considering grant of certificate for commencement of business.
(e): The rights and obligations of Depository are provided in Chapter V of the said
Regulations. They inter alia provide for securities eligible for dematerialization,
Agreement between Depository and Issuer, internal and external monitoring, review
and evaluation of systems and controls, insurance against risks, manner of keeping
records, records to be maintained, prohibition of assignment, agreement by
participant, opening of separate accounts, transfer or withdrawal by beneficial owner,
reconciliation, manner of surrender of certificate of security, manner of creating
pledge or hypothecation, etc.
Depositories (Appeal to Securities Appellate Tribunal) Rules, 2000
Pursuant to S 15K of the Act, SEBI established the Securities Appellate Tribunal,
formerly SEBI Appellate Tribunal and the word `SEBI was substituted by the word
`Securities in 1995. Since 1995, all cases concerning securities laws which were to
be appealed against came to be dealt by SAT only. In exercise of the powers conferred
by section 24 read with section 23A, of the Depositories Act, 1996 (22 of 1996), the
Central Government hereby makes the following rules, namely:
Short title and commencement
1. (1) These rules may be called the Depositories (Appeal to Securities Appellate
Tribunal) Rules, 2000.
(2) They shall come into force on the date of their publication in the Official Gazette.
Definitions
2. (1) In these rules, unless the context otherwise requires,
(a) Act means the Depositories Act, 1996 (22 of 1996);
(b) Appeal means an appeal preferred under section 23A of the Act;
(c) Appellate Tribunal means the Securities Appellate Tribunal established under
section 15K of the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(d) Form means the form appended to these rules;
(e) Party means a person who prefers an appeal before the Appellate Tribunal and
includes respondent;
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(f) Presiding Officer means the Presiding Officer of the Securities Appellate
Tribunal appointed under section 15L of the Securities and Exchange Board of India
Act,1992(15 of 1992);
(g) Rules means the rules made under the Act; Registrar means the Registrar of
the Appellate Tribunal and includes an officer of such Appellate tribunal, who is
authorised by the Presiding Officer to function as Registrar,
(h) Registry means the registry of the Appellate Tribunal.
(2) Words and expressions used and not defined in these rules but defined in the
Depositories Act, 1996 shall have the meanings respectively assigned to them in that
Act.
Limitation for filing an appeal
3. An appeal may be preferred by the aggrieved person within a period of forty-five
days from the date on which a copy of the order, made by the Board under the Act or
the regulations made there under, is received by the person: Provided that the
Securities Appellate Tribunal may entertain an appeal after the expiry of the said
period of forty-five days if it is satisfied that there was sufficient cause for not filing it
within that period.
Form and procedure of appeal
4. (1) A memorandum of appeal shall be presented in the Form by any aggrieved
person in the registry of the Appellate Tribunal within whose jurisdiction his case falls
or shall be sent by registered post addressed to the Registrar.
(2) A memorandum of appeal sent by post shall be deemed to have been presented in
the registry on the day it was received in the registry.
Sittings of Appellate Tribunal
5.1[1] The Appellate Tribunal shall hold its sitting either at a place where its office is
situated or at such other place falling within its jurisdiction, as it may deem fit by the
Appellate Tribunal.
2[(2) In the temporary absence of the Presiding Officer, Government may authorise
one of the two other members to preside over the sitting of the Tribunal either at a
place where its office is situated or at such other place falling within its jurisdiction as
it may deem fit by the Appellate Tribunal.]
Language of Appellate Tribunal
6. (1) The proceedings of the Appellate Tribunal shall be conducted in English or
Hindi.
(2) No appeal, application, representation, document or other matters contained in
any language other than English or Hindi shall be accepted by Appellate Tribunal,
unless the same is accompanied by a true copy of translation thereof in English or
Hindi.
Appeal to be in writing
7. (1) Every appeal, application, reply, representation or any document filed before the
Appellate Tribunal shall be typewritten, cyclostyled or printed neatly and legibly on
one side of the good quality paper of foolscap size in double space and separate sheets
shall be stitched together and every page shall be consecutively numbered and filed in
the manner provided in sub-rule (2).
(2) The appeal under sub-rule (1) shall be presented in 3[five] sets in a paper book
along with an empty file size envelope bearing full address of the respondent and in
case the respondents are more than one, then sufficient number of extra paper books
together with empty file size envelope bearing full addresses of each respondent shall
be furnished by the appellant.
Presentation and scrutiny of memorandum of appeal
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8. (1) The Registrar shall endorse on every appeal the date on which it is presented
under rule 4 or deemed to have been presented under that rule and shall sign
endorsement.
(2) If, on scrutiny, the appeal is found to be in order, it shall be duly registered and
given a serial number.
Form and procedure of appeal
4. (1) A memorandum of appeal shall be presented in the Form by any aggrieved
person in the registry of the Appellate Tribunal within whose jurisdiction his case falls
or shall be sent by registered post addressed to the Registrar.
(2) A memorandum of appeal sent by post shall be deemed to have been presented in
the registry on the day it was received in the registry.
Sittings of Appellate Tribunal
5. 1[1] The Appellate Tribunal shall hold its sitting either at a place where its office is
situated or at such other place falling within its jurisdiction, as it may deem fit by the
Appellate Tribunal.
2[(2) In the temporary absence of the Presiding Officer, Government may authorise
one of the two other members to preside over the sitting of the Tribunal either at a
place where its office is situated or at such other place falling within its jurisdiction as
it may deem fit by the Appellate Tribunal.]
Language of Appellate Tribunal
6. (1) The proceedings of the Appellate Tribunal shall be conducted in English or
Hindi.
(2) No appeal, application, representation, document or other matters contained in any
language other than English or Hindi shall be accepted by Appellate Tribunal, unless
the same is accompanied by a true copy of translation thereof in English or Hindi.
Appeal to be in writing
7. (1) Every appeal, application, reply, representation or any document filed before the
Appellate Tribunal shall be typewritten, cyclostyled or printed neatly and legibly on
one side of the good quality paper of foolscap size in double space and separate sheets
shall be stitched together and every page shall be consecutively numbered and filed in
the manner provided in sub-rule (2).
(2) The appeal under sub-rule (1) shall be presented in 3[five] sets in a paper book
along with an empty file size envelope bearing full address of the respondent and in
case the respondents are more than one, then sufficient number of extra paper books
together with empty file size envelope bearing full addresses of each respondent shall
be furnished by the appellant.
Presentation and scrutiny of memorandum of appeal
8. (1) The Registrar shall endorse on every appeal the date on which it is presented
under rule 4 or deemed to have been presented under that rule and shall sign
endorsement.
(2) If, on scrutiny, the appeal is found to be in order, it shall be duly registered and
given a serial number.
Payment of fees
9. 2[(1) every memorandum of appeal shall be accompanied with a fee as provided in
sub-rule (2) and such fee may be remitted in the form of crossed demand draft drawn
on any nationalized bank in favour of The Registrar, Securities Appellate Tribunal
payable at the station where the registry is located
Contents of memorandum of appeal
10. (1) Every memorandum of appeal filed under rule 4 shall set forth concisely under
distinct heads, the grounds of such appeal without any argument or narrative, and
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such ground shall be numbered consecutively and shall be in the manner provided in
sub-rule (1) of rule 7.
(2) It shall not be necessary to present separate memorandum of appeal to seek
interim order or direction if in the memorandum of appeal, the same is prayed for.
Documents to accompany memorandum of appeal
11. 1[(1) every memorandum of appeal shall be in five copies and shall be
accompanied with copies of the order, at least one of which shall be a certified copy,
against which the appeal is filed.]
(2) Where a party is represented by authorised representative, a copy of the
authorisation to act as the authorised representative and the written consent thereto by
such authorised representative shall be appended to the appeal.
Plural remedies
12. A memorandum of appeal shall not seek relief or reliefs therein against more than
one order unless the reliefs prayed for are consequential.
Notice of appeal to the respondent
13. Copy of the memorandum of appeal and paper book shall be served by the
Registrar on the respondent as soon as they are registered in the registry, by hand
delivery, or by Registered Post or Speed Post.
Filing of reply to the appeal and other documents by the respondent
14. (1) The respondent may file 2[five] complete sets containing the reply to the
appeal along with documents in a paper book form with the registry within one month
of the service of the notice on him of the filing of the memorandum of appeal.
(2) Every reply, application or written representation filed before the Appellate
Tribunal shall be verified in the manner provided for, in the Form.
(3) A copy of every application, reply, document or written material filed by the
respondent before the Appellate Tribunal shall be forthwith served on the appellant by
the respondent.
(4) The Appellate Tribunal may, in its discretion, on application by the respondent
allow the filing of reply referred to in sub-rule (1) after the expiry of the period
referred to therein.
Date of hearing to be notified
15. The Appellate Tribunal shall notify the parties the date of hearing of the appeal in
such manner as the Presiding Officer may by general or special order direct.
The Securities Contracts (Regulation) (Appeal to Securities Appellate Tribunal)
Rules, 2000.
The rules were framed to deal with appeals arising out of decisions taken by SEs
particularly when a SE acting as per the power given to it by its bye-laws, refuses to
list securities, the aggrieved company is entitled to file an appeal before SAT stating
the reasons for such refusal and may:
(a) Within 15 days from the date on which the reasons for such refusal are furnished
to it, or
(b) where the SE omitted or failed to dispose of, within the time specified in SSC
(1A) of section (1A) of S 73 of the Companies Act,1956 the application for
permission for the shares or debentures to be dealt with on the SE, within 15 days
from the date of expiry of the specified time or within such further period not
exceeding 1 month as SAT may on sufficient cause being shown, allow appeal to SAT
having jurisdiction in the matter against such refusal, omission or failure as the case
may be. Appeal can be filed within 45 days from the date of the order in respect of
any security/units or other instruments of a `collective instrument scheme defined
under the SEBI Act.
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SEBI Guidelines on Disclosure and Investor Protection (DIP)

The primary functions of the Securities and Exchange Board of India (SEBI) are to
protect the interests of investors in the security markets in India and to regulate the
securities market to ensure its orderly operation. With this objective, SEBI issued the
SEBI (Disclosure and Investor Protection) Guidelines, 2000. SEBI uses these
guidelines as a yardstick to ensure that investor interests are protected. The Disclosure
and Investor Protection guidelines apply to the primary market, i.e., public issues
made by listed and unlisted companies, rights issues, and offers for sale by listed
companies in certain cases. Major part of the liberalisation process was the repeal of
the Capital Issues (Control) Act, 1947 in May 1992. With this, Governments control
over issue of capital, pricing of the issues, fixing of premium and rates of interest on
debentures etc. ceased and the market was allowed to allocate resources to competing
uses. In the interest of investors, SEBI issued Disclosure and Investor Protection
(DIP) guidelines in year 2000. The guidelines contain a substantial body of
requirements for issuers/intermediaries, the broad intention being to ensure that all
concerned observe high standards of integrity and fair dealing, comply with all the
requirements with due skill, diligence and care, and disclose the truth, whole truth and
nothing but truth. The guidelines aim to secure fuller disclosure of relevant
information about the issuer and the nature of the securities to be issued so that
investors can take informed decisions. For example, issuers are required to disclose
any material risk factors and give justification for pricing in their prospectus. The
guidelines cast a responsibility on the lead managers to issue a due diligence
certificate, stating that they have examined the prospectus, they find it in order and
that it brings out all the facts and does not contain anything wrong or misleading.
Issuers are now required to comply with the guidelines and then access the market.
The companies can access the market only if they fulfill minimum eligibility norms
such as track record of distributable profits and net worth. In case they do not do so,
they can access the market only through book building with minimum offer of 50% to
qualified institutional buyers. The norms for continued disclosure by listed
companies also improved availability of information. The information technology
helped in easy dissemination of information about listed companies and market
intermediaries. Equity research and analysis and credit rating improved the quality of
information about issues. SEBI has been issuing clarifications to these guidelines
from time to time aiming at streamlining the public issue process. In order to provide
a comprehensive coverage of all DIP guidelines, SEBI issued a compendium series in
January 2000, known as SEBI (DIP) Guidelines, 2000. The guidelines provide norms
relating to eligibility for companies issuing securities, pricing of issues, listing
requirements, disclosure norms, lock-in period for promoters contribution, contents
of offer documents, pre-and post-issue obligations, etc. These Guidelines are
applicable to all public issues by listed and unlisted companies, all offers for sale and
rights issues by listed companies whose equity share capital is listed, except in case of
rights issues where the aggregate value of securities offered does not exceed Rs.50
lakh. In case of the rights issue where the aggregate value of the securities offered is
less 75 than Rs.50 Lakh, the company shall prepare the letter of offer in accordance
with the disclosure requirements specified in these guidelines and file the same with
the Board for its information and for being put on the SEBI website. Unless otherwise
stated, all provisions in these guidelines are applicable to public issues by unlisted
companies and also apply to offers for sale to the public by unlisted companies. There
are some amendments being made in the DIP (Disclosure and Investor protection
Act), these amendments are discussed below as under:
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Recent Guidelines Issued Under Dip (Disclosure and Investor Protection) As On

24th February 2009
The brief of the amendments are as under:
Opening of Public Issue
An issue shall open within 12 months from the date of issuance of the observation
letter by SEBI, if any or within 3 months from the 31st day from the date of filing of
the draft offer document with SEBI, if no observation letter is issued.
Requirement of filing updated offer document
File an updated offer document with SEBI, highlighting all changes made in the
document and in case of 'significant changes' in the offer document, it shall be filed
with SEBI atleast 1 month before filing final prospectus with ROC/SE;
Change in Timelines of Bonus Issue
Shall be completed within 60 days from the Date of Board Resolution, where-in
bonus was announced subject to Shareholders approval or within 15 days from the
Date of Board Resolution authorising such issue. Once resolved, the board shall not
have the option of changing the decision.
Option not to disclose the floor price or price band
Where the issuer has not disclosed floor price or price band in prospectus filed with
ROC/SE, it shall be disclosed at least 2 working days before opening of the bid in
case of IPO and at least 1 working day before the opening of the bid in case of FPO,
by way of an announcement in all the newspapers in which the pre-issue
advertisement was released by the issuer or the merchant banker;
Justification for Price in some cases
Justification for price is required to be given in the Offer Document and further, if
the Issuer has not disclosed floor price or price band in the prospectus and taken an
option to disclose it before 2 working days (for IPO) or 1 working day (for FPO)
before opening of an issue, then, announcement shall contain the relevant financial
ratios, computed for both upper and lower end of the price band and the basis of issue
price or prescribed statements to guide investors in RHP which are,
(a) a statement that the floor price or price band, as the case may be, shall be disclosed
at least two working days (in case of an initial public offer) and at least one working
day (in case of a further public offer) before the opening of the bid);
(b) A statement that the investors may be guided in the meantime by the secondary
market prices (in case of a further public issue);
c) Names and editions of the newspapers where the announcement of the floor price
or price band would be made;
(d) Names of websites (with address), journals or other media in which the said
announcement will be made.
Preferential Allotment of Warrants
For preferential allotment of warrants minimum 25% paid at the time of allotment
upfront and if warrant is not exercised, then such 25% money is forfeited.
Lock-in Requirements under Preferential Issue Table Number: 14
Shares issued to Promoters (UPTO 20% Lock-in for
Post-Issue Capital)
3 years
Total Post-Issue Capital UPTO 20%
Lock-in for
3 years
Shares issued as Preferential allotment to Lock-in for
promoter or promoter group [other than 1 year
above] or to others
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(Source: SEBI guidelines /www.SEBI .gov.in)

Note: Lock-in of convertible instruments (other than Warrants) shall be reduced to the
extent of lock-in of such convertible instruments.
Requirements when listed less than 6 months & lock-in
If the Company is listed for less than 6 months, then for such issue (other than to
QIB's up to 5) consider the highest of IPO price or Value per share as 391 to 394
Scheme or average weekly high & low closing prices of such period or 2 weeks
preceding relevant date and recomputed the price after 6 months, the difference shall
be paid by the allottees to the company, otherwise such securities shall continue lockin till the amount is paid. Shareholder (to whom preferential allotment is made)
should not have sold such shares during last 6 months (unless relaxed u/R 29A of
SEBI Takeover Code).Preferential Allotment should be completed WITHIN fifteen
days from the passing of the resolution (unless relaxed u/R 29A of SEBI Takeover
Code). Copies of Certificate of Statutory Auditor of the Company (Practising CA
certificate is allowed only when relaxation u/R 29A of SEBI Takeover Code)
certifying that such issue is in compliance with the requirements of the SEBI
guidelines, has to be laid @ the General Meeting convened to get the approval for
issue of shares. In case of relaxations granted under Regulation 29A of SEBI
Takeover Code, the requirements regarding pricing, lock-in, disclosures in
explanatory statement and Certification shall not be applicable to preferential
allotment of equity shares, fully convertible debenture and partly convertible
debentures only if an adequate disclosure about the plan is given in the Explanatory
Statement.
Exemption from Rule 19(2) (b)
There is a relaxation of the strict enforcement of requirements of rule 19(2)(b)
[requirement of 25% of offer to public on initial listing] of the SCRR, 1957 where an
unlisted company intends to list its shares issued to the shareholders of a listed
company pursuant to a scheme of arrangement approved by a High Court, without
making an initial public offer OR for proposal for listing of Equity shares with
differential rights as to dividend, voting or otherwise, offered through rights or bonus
issue OR Warrants issued along with Non Convertible Debentures through Qualified
Institutions Placement by a listed issuer.
Investor Protection and role of the Securities appellate Tribunal
1. Introduction
Need for having separate laws meant for the securities market surfaced in the late
eighties which became a reality in early nineties. Orderly development and protection
of investors became the objective of the Government without which the capital market
would not develop. In the later part of 1991, Department of the Controller of Capital
Issues was abolished and in the first quarter of 1992 on 30.01.992 an ordinance
enacting the Securities and Exchange Board of India Act, 1992 was passed. The
Securities and Exchange Board of India (`SEBI) which was already in existence
received statutory powers through the enactment. SEBI Act has since transformed the
securities market into one which can be compared with the advanced countries. To
redress grievances relating to the securities market, SEBI Act framed regulations
and pursuant to S 15K of the Act, SEBI established the Securities Appellate Tribunal,
formerly SEBI Appellate Tribunal and the word `SEBI was substituted by the word
`Securities in 1995. Since 1995, all cases concerning securities laws which were to
be appealed against came to be dealt by SAT only. To-day the securities laws
constitute the Securities Contracts (Regulation) Act, 1956 (`SCRA), the Securities
and Exchange Board of India Act, 1992 (SEBI ACT) and the Depositories Act, 1996
(`DA). SEBI regulates the securities market and SAT acts as a watchdog to ensure
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justice. SEBI was set up in line with the constitution and operation of the Securities
Exchange Commission (SEC) of USA. Pursuant to S 29 and 15K, 15T and 15 U of
the Act, SEBI constituted the Securities Appellate Tribunal (`SAT). The rules were
repealed and the Securities Appellate Tribunal (Procedure) Rules, 2000 (`RULES)
were notified vide GSR No. 142 (E) dated 18.02.2000. To regulate the working of
SAT for dealing with matters with the SEBI Act, the Depositories Act and the
Securities Contract Act, the SEBI Appellate Tribunal (Procedure) Rules, 2000 , the
Depositories (Appeal to Securities Appellate Tribunal) Rules, 2000 and the Securities
Contracts(Regulation)(Appeal to Securities Appellate Tribunal) Rules, 2000 were
announced to come into effect from 18.2.2000.
2. Tribunal, SAT and Civil Procedure Code
Article 227 of the Constitution of India defines tribunal as a person or a body other
than a Court set up by the State for deciding rights of contending parties in
accordance with rules framed for regulation having force of law (Haripada Dutta vs.
Ananta Mandal, AIR 1952 Cal 526,528). According to Websters International
Dictionary it is a Court or forum of justice; a person or body of persons having
authority to hear and decide disputes to bind disputants. Tribunal, distinguished from
a court, exercises judicial power and decides matters judicially or quasi-judicially. It
does not constitute a court in technical sense. (Engineering Mazdoor Sabha v. Hind
Cycles Ltd., AIR 1963 SC 874,878) [Constitution of India Act 136(1)] Expression
civil court includes all courts of civil judicature whose procedure is governed by the
Code of Civil Procedure (CPC) and includes Revenue Courts in the State
(Mokshagundam Narasaiah v Estates Abolition Tribunal, AIR 1957 AP 903,907).
Courts which decide disputed rights between subjects or between a subject and the
State would be matter to be decided by civil courts as opposed to criminal courts
where the state indicates wrongs committed against the public. While special courts
have jurisdiction over a limited class of suits specified in the statute, jurisdiction of
the civil courts is not limited to any class of suits (Kalavagunta Sriramarao vs.
Kalavagunta Suryanarayana Murthi AIR 1954 Md 340,344,345). S 15 Y of the SEBI
Act provides that no civil court shall have jurisdiction to entertain a suit or proceeding
in respect of any matter in which an adjudicating officer (`AO) is appointed under the
Act or SAT is empowered by or under the Act to determine and no injunction shall be
granted by any court or other authority in respect of any action taken or to be taken in
pursuance of any power conferred by or under the Act. S 15Z states that any order of
SAT can be appealed before the Supreme Court within a period of 60 days. However,
as per S 15 T (2) of the SEBI Act provides that after the commencement of the
Securities Laws (Second Amendment) Act, 1999, no appeal shall lie on orders passed
by an adjudicating officer with the consent of the parties. As per S 15 T (3) appeal is
to be filed before SAT within 45 days from the receipt of the copy of the order of
SEBI or AO accompanied by the prescribed fees. 45 days period time limit may be
extended if the Tribunal is satisfied that there was sufficient cause for not filing the
appeal within the time limit. SAT shall send copy of the order to SEBI, parties to the
appeal and concerned Adjudicating Officer. All appeals filed before SAT is to be
disposed of within 6 months of the filing the appeal. S15 U of the Act provides that
SAT shall not be regulated by the procedure of the Code of Civil Procedure, 1908
(CPC). SAT is guided on the principles of natural justice subject to other provisions
of the Act and rules. SAT has the power to frame their own procedure and fix places
of hearing. As regards discharge of functions, SAT has the same powers as vested in a
civil court under the CPC for:
a) summoning and enforcing attendance of any person and examining him on oath;
b) requiring discovery and production of documents; c) receiving evidence on
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affidavits; d) issuing commissions for examination of witnesses or documents; e)

reviewing its decisions; f) dismissing an application for default or deciding it exparte; g) setting aside any order of dismissal of any application for default or any
order passed by it ex-parte; and h) any other matter which may be prescribed. Though
no civil court has any jurisdiction to try any suit pertaining to securities laws, the
procedure in trying any matter which comes up for adjudication will follow the
procedure followed under CPC. Each proceeding shall be deemed to be judicial
proceeding within the meaning of Ss 193 (Cognizance of offences by Courts of
Session) and 228 (Framing of Charge), S 196 (Prosecution for Offences against the
State and for criminal conspiracy to commit such offence) of the IPC and S 195
( Prosecution for contempt of lawful authority of public servants for offence against
public justice and for offences relating to documents given in evidence.) and Chapter
XXVI (Provision as to offences affecting the Administration of Justice) of the Code of
Criminal Procedure,1973. S 26 of the SEBI Act states that Courts shall not take
cognizance of any offence punishable under the Act or rules save on a complaint by
SEBI. No court inferior to that of a Court of Sessions shall try offence punishable
under the Act. Appearance before SAT may be either in person or through authorized
person being a Chartered Accountant, Company Secretary, Cost Accountant or Legal
Practitioner.
3. Limitation
S 15W of the SEBI Act provides that the Limitation Act, 1963 shall apply in respect
of appeals filed before SAT. S 20 states about appeals filed after expiry of 45 days.
Such appeals will be admitted, if the appellant satisfies the Central Government that
there was sufficient cause for not preferring the appeal within the prescribed period.
Appeals shall be in the prescribed form with a copy of the order appealed against
along with prescribed fees. Appellant shall be given reasonable opportunity of being
heard on the appeal filed before an order is passed.
4. Penalties that may be imposed by SEBI for acts and omissions under the
Chapter are:
1. S 15A Penalty for failure to furnish information; return etc; 2 S 15B - Penalty for
failure by any person to enter into agreement with clients; 3 S 15 C - Penalty for
failure to redress investors grievances; 4 S 15 D Penalty for certain defaults in case
of mutual funds; 5. S 15 E Penalty for failure to observe rules and regulations by an
asset management company; 6 S 15 F- Penalty for failure in case of stock brokers; 7
S 15 G Penalty for insider trading; 8 S 15 H Penalty for non-disclosure of share
and takeovers; 9 S 15 HA - Penalty for fraudulent and unfair trade practices; 10 S 15
J Factors to be taken into account by the adjudicating officer; 11 S 15 JA.
Crediting sums realized by way of penalties to Consolidated Fund of India. SEBI shall
appoint an AO (Adjudicating officer) for holding inquiry that shall not be below the
rank of Division Chief. Reasonable opportunity of being heard shall be given before
imposition of penalty.
Measures and impact
Regulations for the securities market under the control of SEBI is in place for the last
18 years. SAT has been established for the last 15 years. The two have done much to
smooth the securities market for investors in the country. SAT order can be appealed
only before the Supreme Court (S 15 Z). Of the several orders passed over the time,
the order in the appeal Mega Resources Ltd., vs. SEBI (Appeal no.49 of 2001) SAT
held that notice served by `under certificate of posting was not good service.
However, u/s 54(2) (a) of the Companies Act,1956 service of documents under
`certificate of posting is considered valid notice. The difference in view has not been
settled as yet.
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9. Conclusion
SEBI and SAT are all working for the emergence of a transparent capital market to
investors. Through investor education, adoption of measures by the Government
investor base is set to increase. Today household savings have increased manifold and
if the savings can be channelized to the capital market, industrial base of the country
will broaden finally signalling industrial progress. For this purpose SEBI and SAT
should work together for the strengthening of the capital market and making the
consistent development of the capital market. Both SEBI and SAT role should be
clearly defined and should work for the benefit of the investor. As SEBI helps in
making various rules and regulation and provide various guidelines which make
investors understand what is right and what is wrong and help them to analyse their
decision keeping in mind the rules and regulation and various guidelines being
provided by the SEBI and SAT should understand those rules and should ensure that
not only the Indian investors but also the SEBI is restricted to those rules and
regulation of the capital market or not. SAT refers to the tribunal which works for the
various investors and help the investors from being exploited. And ensure that all the
proceedings of the capital market in India go under the prescribed guidelines. On the
other hand the SEBIs role is also diversified ranging from making rules and
regulation and bringing various amendments and effective changes to the regulation
from time to time for the benefit of the customer and providing them confidence and
making the investors feel secure. Also with the various rules and regulation being
established by the SEBI, also they have to think about the implementation part of the
various regulations in a proper way in the Indian Capital market and should ensure
that all the investors are abide by these rules and regulation and should make sure that
there is no unfair or illegal activity is being carried out in the Indian capital market
which may influence the sentiments of the Indian investors. So for this purpose both
SAT and SEBI should work together for the smooth functioning of the Indian capital
market and should make sure that the regulation of the capital market should be so
strict so that there is neither any activity involving the insider trading or any
unfraudelent activity which may cause the harm to the image of the Indian capital
market and also the regulation should be defined enough in a proper way for the
investors. As all the preceding of the investors are should be carried out by the SAT in
a fair and unbiased way and should ensure to give justice to any party in a fair and
honest way.

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CHAPTER 6
ROLE OF STOCK BROKER IN ONLINE TRADING

INTRODUCTION
Brokers, who needs them? Well, when an investor wants to invest in stocks, then he
need them. People like you and me cannot make direct investments in stock market,
thus, it becomes inevitable to get in touch with a person who is related to stock
exchange. If as an investor you think that it is very easy to invest in the stock market,
then you need to think twice. Investing in the stock market is not very easy as it
requires a lot of knowledge about the stock market. There are lots of different options
available to invest in the market. As an investor you should have good knowledge of
the different types of stock brokers. Certain criteria need to be satisfied for a person
to survive the strong sweep of stock market conditions. The recent boon of
technological invention i.e. the internet is a great aid to the shareholders who desires
to have a clear idea of the prevailing conditions in the market along with the
necessary details about the conditions of stock. There is a concept known as day
trading which is very popular amongst the investors. But there are some people who
think that there is a lot of risk in this type of trading. But it is not so as it is not so
much risky and is good for people who go for making their investment in the long
term. As an investor you should be aware of the market conditions so that you can
remain yourself updated on the market. So for this purpose an investor needs a person
who can act as an intermediary between investor and stock market. This person is a
stock broker. He is the one who facilitates your transactions and tend you to buy and
sell shares and commodities. Stock brokers handle most of the buying and selling
activities on the stock market. An average investor will hire the services of a broker to
handle his trades. By profession, he serves as an expertise to wave the path in the
risky stock market. He is the one who allows you to trade in stocks from anywhere
and everywhere. As a new stock investor, the stocks world may be overwhelming.
There comes the role of a stock broker who lets you make wise decisions and manage
your finances. In literal terms, a stock broker is a person who works for commission
being received by him on every transaction made in stocks. He is licensed and
regulated by federal government of the country depending on the market he works in.
A stock broker is a qualified and regulated professional who buys and sells (trades)
shares (in other words, stocks) and other securities through market makers or Agency
Only Firms on behalf of investors. We can say that a stock broker is a professional
who buys and sells stocks and other securities in the stock market through the book
makers from the stock investors. A stock broker is a qualified, registered and
regulated professional who buys and sells stocks and derivatives in the secondary
market on behalf of their clients (investors, institutions etc.). All transactions carried
out in the stock exchanges are done through brokers only. A stock broker is a person
or entity, which is a member of a stock exchange. A stock broker acts as a facilitator
to carry out transactions of investors on a stock exchange. To invest in the stock
market, you need to have a DP (depository participant) account and a trading account.
These services are offered by a stock broker. Basically a stock broker is an entity
through which investors buy and sell shares. There are many stock brokers in the
market. Each SB has its own unique offerings of services. Thus if you want to buy say
100 shares of a company XYZ (which is listed on say National Stock Exchange) in
the secondary securities market, he would have to go through a stock broker
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registered in NSE to carry out his transactions on National Stock exchange. Stock
brokers are governed by SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956,
Securities and Exchange Board of India [SEBI (Stock brokers and Sub brokers) Rules
and Regulations, 1992], Rules, Regulations and Bye laws of stock exchange of which
he is a member as well as various directives of SEBI and stock exchange issued from
time to time. They maintain the basic information about their clients like names,
contact information, PAN number, demat and bank account details etc. As your need
and business grows, you might want to trade in multiple markets. As a investor you
should go for a broker that can provide various facilities which will satisfy the
investors requirement and will give them a good return. An investor must also know
the commission rates they charge for the various facilities. A broker may allow a
client to place orders depending upon the funds which are available in the clients
trading account. The brokers issue contract notes when trades are done. They also
send periodical reports about the transaction history to their clients. The online
brokers may also have these details on their web site which can be accessible only by
the client. Brokers are expected to act based on the best interests of their clients. They
may inform the clients promptly about margin calls, additional documentation if
required etc. They are also required to send the contract notes as and when trades are
carried out by/on behalf of the clients. Before start of trading with a stock broker, as a
investor you are required to furnish your details such as name, address, proof of
address, etc. and execute a broker client agreement. You are also entitled to a
document called Risk Disclosure Document, which would give you a fair idea about
the risks associated with securities market.
Why investor need to hire a stock broker
Deal recommendation: stock broker may recommend an investor a particular
deal to invest in. He at times anticipates the moves of the market and
accordingly suggests your moves with his knowledge and experience. He
assists you to invest your capital with a view to earn more and more profits for
you. In case an investor is new to stock market, he acts as a guide to get you
the knowledge for stock market. Their recommendations seem promising due
to their experience in share market. He do a lot of research work and with this
research work they are able to guide the investor that in which stock they
should put their money and what is the market condition and whether the
investor will get good return in a particular market situation.

Calculate risks: each one of us know that trading in stocks in no less than a
gamble but it is actually a calculated risk that a trader bears. As a investor you
have to take risk and gamble in this market. Hence, stockbrokers help
calculating this risk and the probability to earn profit by investing in certain
venture. He is the one who lower down the amount of risk through his
experienced calculations and instincts regarding bulls and bears. He measures
the situation in the market and analyses them and thus always aims at
minimizing the risk of the investor and to play safe in the market. As a stock
broker he always thinks about the benefit of the investor and wants him to
make more and more money and thus try to increase the profit of the investor.

Guider to learn from: he acts as guidebook to wave the path in stock market.
As an investor you can learn a lot from his experience and the way he trade for

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you. He provides you knowledge and educates you to earn more profits for
you. In case you are new, he helps you make the first move in the market and
supports you when you fall. As he is an expert in stock market and he knows
about the different situations in the stock market so he guides the investor
about these situations and makes him aware of the risks available in the
market and with his experience tries to remove that risk fully.
Managing portfolio: a stock broker manages your (investors) portfolio to get
you know your financial status. A stock portfolio includes initial investment,
profits and losses and the record of trade in stocks. This portfolio is important
to maintain, as it is the only way to calculate the amounts of profits and losses.
Hence, managing a portfolio tends to announce your failure or success in the
market and by it stockbroker shows you as an investor the waters you stand in.
Portfolio refers to various sectors in Indian economy at which stock broker
keep a watch and tries to analyze these portfolios and enable to advice the
investors the portfolio through which they will get a good return and will able
to increase their profit.

Trading abroad: In today's competitive world, it is advised to expand the

business as much as it is profitable. Gone those days when there were
conserved markets with conserved traders. Hence, a broker blessed with the
trends of overseas market can direct you to invest in stocks abroad or make
investments that may yield better profits in future. They are knowledgeable
person to understand the difference in currencies who tends your investments
to fit in right place at right time. In todays scenario when there is a lot of
competitive world the stock broker tends to increase the investors for
business and with his knowledge and ability to read the foreign market
encourage the investors to go the investment in foreign stock and to deal with
them and get in return huge profits.

Automated ventures: stockbrokers do not only guide you as an investor in

investments but also make investments on your behalf. All you have to do is to
trust him and leave the rest on him. This facility is called automated
investments, which involves your capital investments for your positive return
done by your stockbroker. Through this you ensure that your stock broker is
having enough capacity to deal the stocks on your behalf but being a good
investor you are not supposed to blindly follow all the things your stock
broker says and must keep a watch on him an should ensure that he is not
misutilising your hard earned money. Well with proper guidance and effective
analysis of the stock it is required that he is generating return from your
investment.

Easy access: not only does stockbroker serve as mediators to

have easy access to stock exchange, but, with the stock
brokers available online, it is easy for any investor to have
access to brokers. No more those hustle to meet a broker in
person and trade for full day. With the facility available, online
you can have access to your broker 24/7 and hence can trade
freely. With this facility the stock brokers are available to the

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investors everywhere and anywhere and it is not only through

internet but on mobile also they provide you latest tips and
updates about the market which will help you in decision
making. They provide you SMSs related to the various stocks
being traded and keeps you updated regarding the current
happenings in the stock market and also tell you the current
price of the stock in the market
Stock Broking as a profession
When the time comes to choose the profession which highly interests you and which
can be professionally, financially and mentally satisfying, many people find
themselves lured with the prospect of becoming a stock broker. But, before finalizing
upon your choice and taking the next step towards pursuing this profession its
imperative to make sure that you are actually intrigued by it and not merely selecting
it because of its popularity in the past years. The stock broker employment is also
dependent on the type of operations they engage themselves into. Some of the brokers
are interested in practicing with individual clients while others like to work for
institutions. Brokers who work for institutional investors are often called securities
traders. Many opt to work as dealer, advisor and security analyst. Security analysts are
those who advise companies on flotation of shares as they are expected to have sound
knowledge of capital markets. Stock Brokers also work in the financial sector with
banks, mutual funds, consultancies, insurance companies, pension funds and financial
institutions and so on. A successful broker has immense knowledge of the rise and fall
of the stock markets, and has studied the market intricately over the years. He work
with complete devotion, keep himself updated about each and every change which
occurs in the market, has a flare for further increasing his knowledge base and the
most important of all keeps his client's interests before his own. He does not pay heed
to the amount of money he can gain if lured the client into making a wrong deal.
Working as a stock broker also requires you to possess sharp memory, analytical
mind, foresight, logical approach to each transaction and dealings and the most vital
of all a calm and well groomed personality. Dealing with the clients requires you to be
patient, not losing your cool easily, possessing good communication skills and dealing
with complex situations with complete ease and understanding. If you possess all the
qualities and are adventurous enough then you can take the next step and contact a
brokerage firm for stockbroker jobs. Working with a brokerage firm will make you
aware about the intricacies of the market and all the procedures which involves in
smart investment. Some of the brokerage firm prefers a stipulated qualification for
this job which includes degree in economics, finance and so on. So, enjoy your
preferred job and get moving to the road to success.
Requirements for becoming a stock broker

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Well today as a profession stock broking is becoming very popular not only in India
but also in abroad also the stock broking as a profession is gaining popularity. And
there are certain requirements to become a stock broker in India or in Abroad. In order
to become a stockbroker in the United States, a candidate must pass the General
Securities Representative Examination (also known as the "Series 7 exam).Should
have a minimum of 2 years experience in an activity related to dealing in securities or
as portfolio manager or as investment consultant or as a merchant banker or in
financial services or treasury, broker, sub broker, dealer, authorised agent or
authorised clerk or authorised representative of a recognised stock exchange
In order to become a stock broker in India you should have following eligibility:

For membership at the National Stock Exchange, a minimum paid up equity

capital of Rs.30 lakhs is required for corporate. Application form for
membership at NSE is available. Instructions for filling are also available at
the web site. It is to be noted here that those who want to become brokers

Should not have defaulted in a stock exchange

Should not have become bankrupt

Should not have been involved in fraud, dishonesty, etc.

The applicant shall also pay an interest free security deposit for cash, futures &
options and wholesale debt market segments separately. For Cash/F & O segment
trading the deposit is Rs.125 lakhs. Once the application is received by the exchange,
the membership is granted after due scrutiny and the process is given below:
1. Interactive session with Membership Recommendation Committee
2. Approval by Membership Approval Committee / Board
3. Offer letter of provisional membership of Exchange
4. Submission of documents for SEBI registration by applicant
5. Receipt of SEBI certificate
6. Enablement on the Exchange
Once the membership is given, the broker must comply with the rules and regulations
of the exchange by providing documents like audited accounts, insurance policies, net
worth certificates, shareholding pattern details etc. The membership could be
transferred to another person or a firm subject to the rules of the exchange. Members
could be suspended/penalized/warned/expelled for misconduct, unprofessionalism,
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failure to pay margin money, etc. The following institutes in India offer educational
programmes on capital markets:

Bombay Stock Exchange Training Institute, Mumbai

National Stock Exchange of India, Mumbai

Institute of Financial and Investment Planning, Mumbai

All India Centre for Capital Market Studies, Nasik

Institute of Chartered Financial Analysts of India, Hyderabad

Institute of Capital Market Development, New Delhi

Institute of Company Secretaries of India, New Delhi

There is an exam conducted by National stock exchange and

Bombay stock exchange named under the NCFM (NSEs Certification
of Financial markets) and BCFM (BSEs certification of financial
markets) which tells you about the financial markets and give you
knowledge about the working of the financial market. To become a
stock broker now, this exam is given due importance as you have
been certified by the NSE or BSE to be a stock broker and to sit in
from of the terminal and do the rest of the dealings.

HISTORY OF STOCK BROKER

The history of stock brokers can be traced back to the origins of the first stock
exchange in 1602 at Amsterdam. Even before that brokers are said to have existed in
France dealing with government securities. The Amsterdam Stock Exchange was
involved in buying and selling of shares for the Dutch East India Company. However,
the first real stock exchange came up in Philadelphia in the United States during the
late 18th century. Philadelphia was the centre of American finance during the first
forty years of the new United States. Later it was the New York stock exchange which
saw a rise in its popularity. Wall Street, as it was called, became the hub of brokerage
activities. Earlier stock brokers were largely unorganized, but later most of them
joined hands to form institutes and organizations. In 1790, the country's first stock
exchange was founded there and Chestnut Street was home to the nation's most
powerful financial institutions. However, in the 1820s a shift to New York City began
and for more than one hundred and fifty years Wall Street has been synonymous with
the stock brokerage business. Till the 1980's stock broking services were used only by
the wealthy class who could afford them. Later with the advent of the Internet, stock
broking became very easy. Thus, the price tag on stock brokers lowered considerably
and their services became available even to the common man. The stock broking
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duties are now mostly taken up by major organizations with the smaller companies
being absorbed by them. In India, too with increasing globalization the major
corporations are penetrating deeper into the society. Some sources suggest that
historical top-level brokers and a number of other firms rose to prominence over that
time, with the top-ranked brokerages in the early 1950s being:[citation needed]
1.
2.
3.
4.
5.

Merrill Lynch
Paine Webber & Company
Morgan Stanley
Goldman Sachs
Bear Stearns

Since the 1980s stock broking firms have also been allowed to be market makers as
long as the appropriate Chinese walls are put in place. With the advent of automated
stock broking systems on the Internet the client often has no personal contact with
his/her stock broking firm. The stockbroker's system performs all the stock broking
functions: it obtains the best price from the market, executes and settles the trade.
Today, most of the once well-known corporate brand names including mid-sized firms
such as Smith Barney have been swallowed up by global financial conglomerates.
Only a few firms remain independent, such as Edward Jones Investments, Stifled
Nicolas, Oppenheimer & Co, JP Turner & Company and Raymond James. Discount
brokers (such as E*TRADE, Scot trade, TD Ameritrade, and Charles Schwab) have
taken a large share of the business by offering highly discounted commissions.
Discount brokers may offer limited advisory services, but their primary focus tends to
be servicing self directed retail accounts.
Services provided by the broker
A transaction on a stock exchange must be made between two members of the
exchange an ordinary person may not walk into the New York Stock Exchange (for
example), and ask to trade stock. Such an exchange must be done through a broker.
There are three types of stock broking service.

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Execution-only, which means that the broker will only carry out the client's
instructions to buy or sell. In this the advisory part of the broker will not be
included and just the broker has to follow the instructions of the client for any
transaction. In this type of service he is not there to assist the client to deal in a
particular stock but he just acts as an intermediary between the terminal and
the investor and act as per the instruction of the investor.
Advisory dealing, where the broker advises the client on which shares to buy
and sell, but leaves the final decision to the investor. Broker in this part of
service provides various suggestions to the investor and tell him where to
invest and what is the market situation in the market. He gives the investor the
total analysis part being done him and leaves the decision making on the
investor. In this type of service he is there to just advice the investor and leave
the decision making on him.

Discretionary dealing, where the stockbroker ascertains the client's

investment objectives and then makes all dealing decisions on the client's
behalf. In this type of service the broker not only advices the investor about
the stock but deals on the behalf of the investor. He guides and makes
investment on the behalf of investor and. This facility is called automated
investments, which involves your capital investments for your positive return
done by your stockbroker. Through this you ensure as an investor that your
stock broker is having enough capacity to deal the stocks on your behalf

In addition to actually trading stocks for their clients, stock brokers may also offer
advice to their clients on which stocks, mutual funds, etc. to buy. These are the basic
services provided by the stock market brokers and it completely depends on you as an
investor which service you will subscribe to. For example, if you are quite apt at stock
market analysis and can regularly watch on the happenings of stock market and the
stocks in which you invest, it is better to have a stockbroker to execute your buying
and selling instructions. It will not only save the service charges but also give you full
confidence in stock market trading. If you are relatively new to stock investment or if
you do not have adequate knowledge of stock analysis or if you do not have the time
or resource to do thorough research on the stock market the advisory service is
effective for you. It will not only execute your trading directions but also provide you
with effective tips and guidance for stock market investment. Though it will be a bit
more expensive but then you can significantly gain from the technical knowledge and
experience of the broker and its research and analysis team. The full service broker is
the preferred solution for those who do not have the time or knowledge to maintain
their portfolio. In this case the broker takes all the decisions for investing in the stock
market. This is the most costly broking service but then it will not require you to
spend any time for your stock market investment. Just like the different types of stock
broking services there are different categories of brokers as well. While choosing your
stock exchange broker, it is wise to select from the reputed stock trading companies as
that will make sure you as an investor, gain from their robust infrastructure from
analysis and experience in stock market. That also applies to selecting your online
trading company who will carry out the online trading on your behalf. A stock broker
must not be confused with stock broking firm. The stock broker is a person suitably
qualified to invest people money on the market on behalf of the stock broking firm.
These professionals provide share investment related services for a fee on behalf of
their firms - to anyone who wants to buy or sell shares on the market. If the potential
investor doesnt know when and which shares to buy, the role of stock brokers is to
give the necessary advice and then buy on behalf of the investor. Stock brokers are
permitted to act as either an agent or principal. The difference between the two is
that agent means that the broker is buying direct from the market, and trading as
principal means that he is buying from his company account. The status in which the
broker is acting must be disclosed to the investor concerned. Investors who know
procedures of the market, and need not brokers advice may request to open what is
called trading mandate account. This type of an account will enable an investor to
participate in the market without an input from a stock broker, thereby also bringing
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charges down. Should the investor wants to assisted with appropriate advise, can
request for such service.
Similar roles
Roles similar to that of a stockbroker include investment advisor, and financial
advisor. A stockbroker may or may not be also an investment advisor, and vice versa
The Certified Financial Planner designation initially offered by the American College
in Pennsylvania is considered by many to be the next educational step a stockbroker
can take in order to be considered a legitimate and ethical financial consultant. A
stock broker provides you as an investor investment advice and also tells you the
portfolios which are giving good returns and thus he can be a good portfolio manager
who advices the investor about the different portfolios and tells the investor about the
working and history of the current portfolios and also tells abot the future of the
various portfolios.
Acting as a principal
Stockbrokers also sometimes or exclusively trade on their own behalf, as a principal,
speculating that a share or other financial instrument will increase or decline in price.
In such cases the term broker makes little sense and the individuals or firms trading in
principal capacity sometimes call themselves dealers, stock traders or simply traders.
[A stock broker is just the main part of being a City Trader. Other types of City
Trading include working in the Foreign Exchange.
Transactions by stock brokers in the US and UK
In the US: When acting as an agent, the stockbroker typically charges the client a flat
fee and/or a percentage-based commission for undertaking the trade, and the price
quoted the client must be the best price available in the market. When acting as a
principal, the trade could be with another market participant or one of the
stockbroker's clients. When trading in a principal capacity with client, the broker
informs the client and charges the client a markup or markdown from the prevailing
market price.
In the UK: Stock brokers act the same in the UK as in the US, except that when
trading in a principal capacity with a client, the broker is obliged to inform the client
and no commission is charged. Other jurisdictions are thought to have similar rules.
In India: A brokerage charge is being made for every transaction of the stock. In this
case the brokerage charge of every company is different and in many companys the
broker charges 0.3% to 0.4% of the transaction being done. Brokers charge the
brokerage fee as per the transaction being done by the investor.
Opening of an Account
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Investors need to open an account. Opening an account at a brokerage firm is as easy

as opening a bank account. The investor is required to provide basic personal
information, such as occupation and social security number, as well as more specific
information about his or her financial circumstances. Brokers are required to become
familiar with their customers in order to be able to use their judgment with regard to
sizable transactions and to whether or not credit should be issued to finance trades.
Every broker sets his own requirements for the maintenance of an account balance.
This is usually, between, $500 to $1000. Before choosing a broker, investors have to
look at the fine print first in order to know more about he involved fees because some
brokers charge annual maintenance fees. There are even some brokers who charge
fees every time the account balance falls below the minimum. As a bank account is
being traded this brokerage account also operates. An investor has to do for opening
an account is to fulfill all the formalities to open an account and operate it in the
similar way a normal account operates. In this account you can transfer the money
and can operate for various transactions. So for further details there are three types of
account.
A) Cash account
B) Margin account.
C) Discretionary account
A) Cash Account- In a cash account, an investor has to pay the full amount of the
stock price that he wants to buy. Using a cash account, the investor is required to pay
the full price of the securities purchased on or before the transaction's settlement date.
The settlement date is usually three business days after the order to buy or sell has
been executed (the trade date). For government securities and options, the settlement
date is generally the next business day after the trade date. The securities must also be
delivered within three days to avoid any additional fees. After the settlement date, the
proceeds of the sale minus commissions are either mailed or deposited into the
seller's account with the brokerage firm (assuming the seller is also using a cash
account).
B) Margin Accounts-In a margin account, however, an investor is given the chance
to buy the stock on margin which means that the brokerage will carry some of the
cost of the stock. The amount of the margin, which varies from broker to broker, has
to be protected by the value of the clients portfolio. Adding more funds or selling
some stocks are the only two options of the investor in case his portfolio falls below
the specified amount. The investors, through the margin accounts, are allowed to buy
more stocks with less cash thereby realizing greater gains and losses. Inexperienced
traders are not recommended to opt for margin accounts since they are a lot riskier
than cash accounts A margin account allows the investor buy securities without
having to pay the full cash price. The balance needed to complete the transaction is
borrowed from the brokerage firm. The maximum amount that can be borrowed
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depends upon the margin requirement set by the Federal Reserve Board. For
example, with a margin requirement of 50 percent, an investor buying shares of stock
worth $10,000 would have to pay at least $5000 in cash and borrow the remaining
$5000 from the brokerage firm. The firm would use the purchased stock as collateral
against the loan. These securities can also be loaned to other clients of the brokerage
firm who may be executing short sales. The brokerage firm charges interest on the
amount borrowed by the margin investor. Risks are greater in margin trading because
using borrowed funds to buy stocks could lead to substantially larger losses if the
stocks were to drop in price. However, if the price of the stock goes up significantly,
the rate of return is substantially greater for the margin investor because his or her
money is leveraged. If stock prices decline in a margin account, the brokerage firm
will give the investor a margin call, which is a notice requesting that additional money
be deposited in order to maintain the account's minimum margin requirement. If the
required funds aren't put into the account, the firm can liquidate the securities, and the
investor would still be liable for any losses incurred by the brokerage firm.
C) Discretionary account-: With a discretionary account, the investor agrees to
allow the brokerage firm to decide which securities to buy and sell on the investor's
behalf as well as the amount and price to be paid for the transactions. Thus
Discretionary accounts give a broker or financial adviser the right to buy and sell
stock without notifying you. For the unethical broker, an arrangement such as this
could be quite lucrative. The prudent investor should therefore closely monitor this
account on a monthly basis in order to determine if any unnecessary or ill-advised
activity has taken place. Unless the broker is known and implicitly trusted by the
investor, discretionary accounts should be used with extreme caution. It is
recommended never to give control on your finances to anyone else it is equal to
blank cheque. There are circumstances when these types of accounts are appropriate;
however, for most of us they are not only inappropriate, but also hazardous to our
financial well-being.
Brokerage terms
Front office:
This is a description of the part of a brokerage firm that is "client facing". The sales
staff, brokers and traders are part of the front office. Functions of the front office
include acquisition and entry of orders, fulfillment of the orders, and all the regulatory
reporting for the orders.
Back office:
The back office is where the clearance processing of the trades is done. Transfer of
securities and money and the tracking of "failure to deliver" is handled. Securities
lending for a brokerage firm, wherein shares of a security that is being sold short are
located to ensure they can be delivered, is usually included in the back office as well.
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Bulls: A bull is a term used in the stock exchange market to refer to a stock market
optimist who believes that share prices are likely to go higher, and who acts according
to his investment operations. A bull market is associated with increasing investor
confidence, and increased investing in anticipation of future price increases (capital
gains). A bullish trend in the stock market often begins before the general economy
shows clear signs of recovery. It is a win-win situation for the investors

FUNCTIONS OF STOCK BROKER

1. Investment management
Investment management is the professional management of various securities (shares,
bonds etc) assets (e.g. real estate), to meet specified investment goals for the benefit
of the investors. It is an act or practice of an investment advisory firm making
investment decisions on behalf of a client. Investment management often opens more
potential investment vehicles to the client. Another advantage is that, theoretically,
investment managers have more knowledge and experience in making appropriate
investment decisions than the client. Investment managers who handle more than a
certain amount in assets must register with the SEC (Securities Exchange
Commission). Investment management is also called money management. Investors
may be institutions (insurance companies, pension funds, corporations etc.) or private
investors (both directly via investment contracts and more commonly via collective
investment schemes e.g. mutual funds) The term asset management is often used to
refer to the investment management of collective investments, whilst the more generic
fund management may refer to all forms of institutional investment as well as
investment management for private investors. Investment managers who specialize in
advisory or discretionary management on behalf of (normally wealthy) private
investors may often refer to their services as wealth management or portfolio
management often within the context of so-called "private banking". The provision of
investment management services includes elements of financial analysis, asset
selection, stock selection, plan implementation and ongoing monitoring of
investments. Investment management is a large and important global industry in its
own right responsible for caretaking of trillions of dollars, euro, pounds and yen.
Coming under the remit of financial services many of the world's largest companies
are at least in part investment managers and employ millions of staff and create
billions in revenue. Fund manager (or investment advisor in the U.S.) refers to both a
firm that provides investment management services and an individual(s) who directs
"fund management" decisions.
Process and people
The 3-P's (Philosophy, Process and People) are often used to describe the reasons why
the manager is able to produce above average results.

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"Philosophy" refers to the over-arching beliefs of the investment organization.

For example: (i) Does the manager buy growth or value shares (and why)? (ii)
Does he believe in market timing (and on what evidence)? (iii) Does he rely
on external research or does he employ a team of researchers? It is helpful if
any and all of such fundamental beliefs are supported by proof-statements.
"Process" refers to the way in which the overall philosophy is implemented.
For example: Which universe of assets is explored before particular assets are
chosen as suitable investments? (ii) How does the manager decide what to buy
and when? (iii) How does the manager decide what to sell and when? (iv)Who
takes the decisions and are they taken by committee? (v) What controls are in
place to ensure that a rogue fund (one very different from others and from
what is intended) cannot arise?
"People" refers to the staff, especially the fund managers. The questions are,
who are they? How are they selected? How old are they? Who reports to
whom? How deep is the team (and do all the members understand the
philosophy and process they are supposed to be using)? And most important of
all, How long has the team been working together? This last question is vital
because whatever performance record was presented at the outset of the
relationship with the client may or may not relate to (have been produced by) a
team that is still in place. If the team has changed greatly (high staff turnover
or changes to the team), then arguably the performance record is completely
unrelated to the existing team (of fund managers).

2. Investment managers and portfolio structures

At the heart of the investment management industry are the managers who invest and
divest client investments. A certified company investment advisor should conduct an
assessment of each client's individual needs and risk profile. The advisor then
recommends appropriate investments.
3. Asset allocation
The different asset classes and the exercise of allocating funds among these assets
(and among individual securities within each asset class) is what investment
management firms are paid for. Asset classes exhibit different market dynamics, and
different interaction effects; thus, the allocation of monies among asset classes will
have a significant effect on the performance of the fund. Some research suggested that
allocation among asset classes have more predictive power than the choice of
individual holdings in determining portfolio return. Arguably, the skill of a successful
investment manager resides in constructing the asset allocation, and separately the
individual holdings, so as to outperform certain benchmarks (e.g., the peer group of
competing funds, bond and stock indices).
4. Long-term returns
It is important to look at the evidence on the long-term returns to different assets, and
to holding period returns (the returns that accrue on average over different lengths of
investment). For example, over very long holding periods (eg. 10+ years) in most
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countries, equities have generated higher returns than bonds, and bonds have
generated higher returns than cash. According to financial theory, this is because
equities are riskier (more volatile) than bonds which are themselves more risky than
cash.
5. Risk Diversification
Against the background of the asset allocation, fund managers consider the degree of
diversification that makes sense for a given client (given its risk preferences) and
construct a list of planned holdings accordingly. The list will indicate what percentage
of the fund should be invested in each particular stock or bond. The theory of
portfolio diversification was originated by Markowitz and effective diversification
requires management of the correlation between the asset returns and the liability
returns, issues internal to the portfolio (individual holdings volatility), and crosscorrelations between the returns.
6. Investment styles
Investment Style selection depends upon risk appetite and return expectation. There
are a range of different styles of fund management that the institution can implement.
For example, growth, value, market neutral, small capitalization, indexed, etc. Each of
these approaches has its distinctive features, adherents and, in any particular financial
environment, distinctive risk characteristics.
For example, there is evidence that growth styles (buying rapidly growing earnings)
are especially effective when the companies able to generate such growth are scarce;
conversely, when such growth is plentiful, then there is evidence that value styles tend
to outperform the indices particularly successfully.
7. Performance measurement
Fund performance is the acid test of fund management, and in the institutional context
accurate measurement is a necessity. For that purpose, institutions measure the
performance of each fund (and usually for internal purposes components of each
fund) under their management, and performance is also measured by external firms
that specialize in performance measurement. The leading performance measurement
firms (e.g. Frank Russell in the USA) compile aggregate industry data, e.g., showing
how funds in general performed against given indices and peer groups over various
time periods. In a typical case (let us say an equity fund), then the calculation would
be made (as far as the client is concerned) every quarter and would show a percentage
change compared with the prior quarter (e.g., +4.3% total return in US dollars). This
figure would be compared with other similar funds managed within the institution (for
purposes of monitoring internal controls), with performance data for peer group
funds, and with relevant indices (where available) or tailor-made performance
benchmarks where appropriate. The specialist performance measurement firms
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calculate quartile and decile data and close attention would be paid to the (percentile)
ranking of any fund. Generally speaking, it is probably appropriate for an investment
firm to persuade its clients to assess performance over longer periods (e.g., 3 to 5
years) to smooth out very short term fluctuations in performance and the influence of
the business cycle. This can be difficult however and, industry wide, there is a serious
preoccupation with short-term numbers and the effect on the relationship with clients
(and resultant business risks for the institutions).
An enduring problem is whether to measure before-tax or after-tax performance.
After-tax measurement represents the benefit to the investor, but investors' tax
positions may vary. Before-tax measurement can be misleading, especially in
regimens that tax realized capital gains (and not unrealized). It is thus possible that
successful active managers (measured before tax) may produce miserable after-tax
results. One possible solution is to report the after-tax position of some standard
taxpayer.
8. Absolute versus relative performance
In the USA and the UK, two of the world's most sophisticated fund management
markets, the tradition is for institutions to manage client money relative to
benchmarks. For example, an institution believes it has done well if it has generated a
return of 5% when the average manager (usually culled from amongst its peer class)
generates a 4% return.
9. Risk-adjusted performance measurement
Performance measurement should not be reduced to the evaluation of fund returns
alone, but must also integrate other fund elements that would be of interest to
investors, such as the measure of risk taken. Several other aspects are also part of
performance measurement: evaluating if managers have succeeded in reaching their
objective, i.e. if their return was sufficiently high to reward the risks taken; how they
compare to their peers; and finally whether the portfolio management results were due
to luck or the managers skill. The need to answer all these questions has led to the
development of more sophisticated performance measures, many of which originate
in modern portfolio theory. Modern portfolio theory established the quantitative link
that exists between portfolio risk and return. The Capital Asset Pricing Model
(CAPM) developed by Sharpe (1964) highlighted the notion of rewarding risk and
produced the first performance indicators, be they risk-adjusted ratios (Sharpe ratio,
information ratio) or differential returns compared to benchmarks (alphas). The
Sharpe ratio is the simplest and best known performance measure. It measures the
return of a portfolio in excess of the risk-free rate, compared to the total risk of the
portfolio. This measure is said to be absolute, as it does not refer to any benchmark,
avoiding drawbacks related to a poor choice of benchmark. Meanwhile, it does not
allow the separation of the performance of the market in which the portfolio is
invested from that of the manager. The information ratio is a more general form of the
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Sharpe ratio in which the risk-free asset is replaced by a benchmark portfolio. This
measure is relative, as it evaluates portfolio performance in reference to a benchmark,
making the result strongly dependent on this benchmark choice. Portfolio alpha is
obtained by measuring the difference between the return of the portfolio and that of a
benchmark portfolio. This measure appears to be the only reliable performance
measure to evaluate active management. In fact, we have to distinguish between
normal returns, provided by the fair reward for portfolio exposure to different risks,
and obtained through passive management, from abnormal performance (or
outperformance) due to the managers skill, whether through market timing or stock
picking. The first component is related to allocation and style investment choices,
which may not be under the sole control of the manager, and depends on the
economic context, while the second component is an evaluation of the success of the
managers decisions. Only the latter, measured by alpha, allows the evaluation of the
managers true performance. Portfolio normal return may be evaluated using factor
models. The first model, proposed by Jensen (1968), relies on the CAPM and explains
portfolio normal returns with the market index as the only factor. It quickly becomes
clear, however, that one factor is not enough to explain the returns and that other
factors have to be considered. Multi-factor models were developed as an alternative
to the CAPM, allowing a better description of portfolio risks and an accurate
evaluation of managers performance. For example, Fame and French (1993) have
highlighted two important factors that characterized a company's risk in addition to
market risk. These factors are the book-to-market ratio and the company's size as
measured by its market capitalization. Fama and French therefore proposed a threefactor model to describe portfolio normal returns. Carhart (1997) proposed to add
momentum as a fourth factor to allow the persistence of the returns to be taken into
account. Also of interest for performance measurement is Sharpes (1992) style
analysis model, in which factors are style indices. This model allows a custom
benchmark for each portfolio to be developed, using the linear combination of style
indices that best replicate portfolio style allocation, and leads to an accurate
evaluation of portfolio alpha.
10) Transactions
When a stockbroker is acting in a transactional capacity for a client, he is an order
taker. In this role, all the stockbroker does is fulfill the client's instructions to buy or
sell stocks, bonds or mutual funds. Because most stockbrokers work on commission,
transaction brokers are becoming less popular since most investors who just need
someone to fulfill buy/sell tickets can accomplish this with discount brokers or online
brokerages for a lot less money. Most stockbrokers don't want to be transactional
brokers either, since it increases the liability to them personally with their name on the
ticket, effectively endorsing it unless explicit waivers have been signed. That isn't to
say that a stockbroker won't do a transaction for a long-term client with whom he has
a solid relationship.
11) Discretionary
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Some stockbrokers are given discretionary authority over a client's account. When this
happens, client places money into her account and the stockbroker has the legal ability
to buy and sell investments within the account as he sees fit without reviewing the
transaction with the client. Clients may do this when they trust the stockbroker to take
advantage of short-term opportunities to get into great deals. Mutual funds are the best
example of discretionary funds: Investors place their money into the mutual fund, and
the mutual fund managers buy and sell according to market trends and opportunities
according to the objectives of the fund. This is an important point. Even though the
stockbroker has discretion, he still needs to use that discretion within the set
parameters of the client's objectives.
12) Recommendations
Stockbrokers are always doing what is called "due diligence" on different investment
opportunities. What this means is that they are constantly reviewing prices, economic
trends and business developments to have the best information on which to make
decisions. Once they have that, they will present the pros and cons to a client for them
to make the final decision about buying or selling. In this relationship, the stockbroker
functions as a researcher, salesman and transaction taker, with the client still
maintaining all control over the decision. This is the traditional relationship between a
stockbroker and a client.
13) Asset Management
Many stockbrokers don't stop with just a Series 7 license. Many move on to get
master's degrees and to take the Series 65 (Investment Advisor Exam) with possible
other credentials in order to manage assets. This is different from discretionary duties
since the stockbroker is getting paid for having assets under management and not per
transaction. Within this type of managed account, th e broker may or may not have
discretionary authority just the same as he would in a commissioned account.
14) Financial Planning
A large responsibility of a stockbroker is to create a financial profile for his clients
that include a list of their assets, debts and objectives with investing. It also reviews
their investment experiences and risk tolerance to make sure that anything and
everything the stockbroker recommends is in accord with these parameters. As a byproduct of sound profiling of a client, many stockbrokers become the first line in
financial planning for their clients. Many brokers obtain insurance licenses as well to
offer annuities and life insurance, since they already see the entire financial picture
and have a solid relationship with their clients. Financial planning can extend to estate
planning with a team that the stockbroker works with comprised of a trust attorney,
CPA and bank trust officer. Financial planning is a very important function of the
stock broker under which he not only prepares the financial profile of the investor but
also prepares the investment profile as per the financial profile. While preparing the
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financial profile of the client a stock broker analysis the source of income of the
client.
Education or Certification
Increasingly, international business schools are incorporating the subject into their
course outlines and some have formulated the title of 'Investment Management'
conferred as specialist bachelors degrees (e.g. Cass Business School, London). Due
to global cross-recognition agreements with the 2 major accrediting agencies AACSB
and ACBSP which accredit over 560 of the best business school programs, the
Certification of MFP Master Financial Planner Professional from the American
Academy of Financial Management is available to AACSB and ACBSP business
school graduates with finance or financial services-related concentrations. For people
with aspirations to become an investment manager, further education may be needed
beyond bachelors in business, finance, or economics. A graduate degree or an
investment qualification such as Chartered Financial Analyst (CFA) is needed to
move up in the ranks of investment management.[citation needed] There is no
evidence that any particular qualification enhances the most desirable characteristic of
an investment manager, that is the ability to select investments that result in an above
average (risk weighted) long-term performance. The industry has a tradition of
seeking out, employing and generously rewarding such people without reference to
any formal qualifications. In India also there are various certifications being cried to
become financial expert it includes NCFM (NSE certification for financial market)
and BCFM (BSE certification for financial market) and various other like AMFI test
which is a certification for the expertise in Mutual fund.
Evaluating your stock broker
Brokers act as interface between an avid investor and the stock exchange. They
facilitate stock transactions and also perform a number of other responsibilities when
it comes to the serious business of stock trading where millions of money is at stake
every moment. Most stock markets require trades to be placed through brokers. The
brokers buy and sell stocks on behalf of the investors. The brokers might also provide
valuable advice to their clients on which shares to buy but generally leave the ultimate
decision on the investors. They also help in creating a robust portfolio for their clients
and conduct all dealing decisions on the client's behalf. Many investors enter into a
relationship with their brokers with little or no knowledge about the brokers'
background, such as time in the business, expertise or ability to manage money.
Investors also are often in the dark when it comes to particulars of the firms they are
dealing with. This is a mistake. Well-informed investors who know the lay of the land
and who ask the right questions will be able to communicate their needs to a broker
more effectively. Success of online trading depends to a large extent on the speed and
reliability of execution of orders. Choose a brokerage house that is fast and reliable. A
momentary delay in order placing might result in substantial losses. Also while opting
for a broker check if they provide the state-of-the-art technologies that might make
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your life as an investor a lot easier. For example, features like automated stop losses
might protect you from suffering huge losses, minimizing your risks. Features like
contingent order might enable you to place certain conditions before an order in
automatically placed. An effective means of choosing the best broker for yourself
would be to go by your friend's recommendations. Some other criteria to check for
would be their past performance history and the years of business they are into. It
would also be a good idea to personally call up each of the few brokerage firms that
you have short-listed, checking out their response time, quality of service and
promptness, eagerness and willing to serve their customers. Perhaps more
importantly, they will also be able to ensure that they aren't being taken advantage of,
particularly when it comes to commission charges. To that end, below is a list of
questions and actions that will help ensure that neither your broker, nor your
brokerage firm, is ripping you off.:
To Do a Search
Go to the SEBI website and conduct a search for your broker and his or her firm by
name. Gather information about the Stock Broker - When the brokerage business
started, background of the owner/promoters, how strong is the brand of the Stock
Broker, was the Stock Broker involved in any controversies. Are there any judgments
or liens against your broker? Has he or she been terminated by a prior employer?
Have any complaints been registered? If so, what are they? The request for
information is free, and often a detailed report will be sent to your email account
within a few minutes of making a request. This information will give you as an
investor a basis for your future relationship with both the broker and the firm. In other
words, it will either give you confidence that both parties are on the up and up, or that
they are charlatans that must be avoided. In short as an investor you have to first
check the profile of the stock broker and to check for the registration of the stock
broker with SEBI. And in the present scenario it is very much necessary for the stock
broker to be registered under SEBI otherwise he is not able to trade and act as a stock
broker.
Ask Questions
Ask your broker or perspective broker why he or she works at the firm. Inquire about
how many years your broker has been in the business, as well as the number of clients
he or she works with. Also ask them what their "money line" is! In other words, how
does the broker make his or her money? Not only will knowing about a broker's
money line let you know about what the broker is making/charging in terms of
commission, but it will also give you a good idea about whether the broker has a
decent number of clients. Through asking questions as an investor you inquire about
the how many years he has worked and what the brokerage charges a stock broker
charges are and how much years he has worked in a firm as stock broker which will
ensure you that he is an experienced and trustworthy stock broker.
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Does the Firm Make Markets?

Most major firms are market makers, meaning that they act as
intermediaries between buyers and sellers when trading NSE stocks.
However, many of those same brokerage firms also use their
market-making status to build an inventory of stocks so that they
are not only making a commission off of you, but also money on the
actual purchase or sale of the stock you buy. Remember, they buy at
the bid and sell at the offer or ask. As an investor, you do just the
opposite. Simply asking whether or not the firm makes markets in
the stocks you are buying will give you a better picture of exactly
how much money is being generated from your account. This will
also give you some leverage when it comes to negotiating your
commission structure.
Negotiate
Commissions are negotiable. Remember, with the abundance
of discount brokers and stock research information available on the
web, your broker needs to be competitive when it comes to
commissions. Suggest tying your commissions to the broker's
performance. Most good brokers will at least be receptive to this
suggestion. Of course, you should remember that you also often get
what you pay for. If you want a full-service broker, access to the
best research and shares in an IPO, you will almost definitely need
to pay more than the pittance being charged by the deep-discount
firms. Regardless of what kind of service you think you need, shop
around and see what other firms are charging, then try to negotiate
a mutually beneficial deal. Do a proper research as there are a lot of
brokerage firms flooding in the market. So try to analyze the
brokerage rate of the other firms and try to negotiate with tem so as
to get a reasonable brokerage rate. It is the fact that a firm which is
giving a better service will charge you high but then also try to
make it reasonable and convince them for this.
Read Up on the Firm
Trade journals and the web are excellent sources for researching
big-name brokers. Look for any high-level departures or problems.
Try to determine whether the company is competitive not only in
terms of the commissions it charges, but also in the array of
products being offered. Try to find out as much as possible through
various sources about the company and its performance in the
recent past and try to analyze that what the firm is saying whether
they are true to their words or not. Try to collect as much
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information as you can from internet and various book journals

regarding the firm and not only compare that firm on the basis of
the brokerage charges but also on the basis of the various offered
by the company to its investors.
Research/Underwriting in House
Firms that peddle their own research, particularly those that
recommend companies with which they have a banking relationship,
probably have an inherent conflict of interest. Simply knowing that
these conflicts exist and letting the broker know you know should
limit the possibility that your broker will take advantage of you.
Benchmark
Remind your broker that you are benchmarking his or her
performance against other major indexes such as the Dow or the
S&P 500. Also make it clear that if your broker isn't out-pacing these
indexes after a period of time, you can always buy a no-load mutual
fund that will track those indexes. This won't fail to get their
attention.
Review Your Monthly Statements and Ask Questions
You must review your monthly/quarterly statement! Account for
every dollar. Look at every trade and confirm that the commission
you agreed upon is being charged. If there are any discrepancies or
you notice that any unauthorized trades that have been made, you
must approach or confront your broker - or better yet, the firm's
sales manager. It is necessary for you as an investor to review
your monthly statement on time and try to analyze your
position in the market and keep a record of your previous
monthly statement and try to find out how much profit or
loss is there in your account and try to find out whether
there any unauthorized trades being done by the stock
broker on your behalf or any of the fraud being done by him
and misusing the money of the investor. For this purpose
through monthly statement an investor can keep watch on
the stock brokers and let yourself know about the activities
of the stock broker.
Talk to the Sales Manager Periodically
Sales managers typically get an override on any commissions
generated on your account. This means that they make money on
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any trades that are conducted in your account for supervising your
broker and making sure the trades being executed are consistent
with your investment objectives. This means that you as an investor
need to speak to this person on a regular basis. The sales manager
is unlikely to be familiar with every detail of your account, but he or
she will be able to tell you more about your broker's - and the firm's
- history. Sales managers also can help you confirm information you
have received from your broker. Through sales manager you can
know
about
the
stock
broker
and
with
regular
communication with him you can get to know about the daily
transactions being done by the stock broker. So it is very
much necessary to daily communicate with sales manager
and to communicate with him in an effective manner. So,
sales manager can be an important medium to talk about
the stock broker and about the company and its
performance currently and in the past.
Communicate in Plain Terms
Tell your broker - in plain English - what your financial goals are. In
other words, don't say that you want to save money for your child's
college tuition. Instead, ask about what the most efficient way is for
you to accumulate funds to meet a future goal. This gives your
broker a sense of not only what you need the money for, but also of
your time horizon. Talk him as an investor straight forward and in
an effective language and let him know your financial goals i.e. why
you want to invest money and what type of profit you expect means
you expect profit on short term basis or long term. Also let your
stock broker know that you want to hold he stock for the short term
period or long term period and make strategy and plans for financial
goals on that basis only.
Stock Broker Charges This is the most important criteria for choosing a Stock
broker as the account opening charges is a onetime expense whereas stock trading
charges and maintenance charges are recurring. It is always advisable to select a
broker whose trading charges are competitive vis--vis the other brokers in the
market. Proper analyses is required for the stock broker charges and try to find out
which firm is charging reasonable stock broking charges. As there are many
companies in the line of stock broking you as an investor must go through the
research and find out which companys stock broking charges will be reasonable for
you. Obviously there is no company for social work so if they are providing you the
full fledged service and providing you full services then they will charge higher
amount. So the thing is that it is up to the investor to know what type of service he
expects from the stock broker and the services he expects from the stock broker and
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then he should analyze on this basis the stock broker charges .A Stock Broker charges
can be broadly divided into two main categories - a) Stock trading charges and b)
Maintenance charges
a) Stock trading charges - There are two types of charges for trading in shares a)
Delivery Charges and b) Intraday Charges. Delivery means if an investor takes
delivery of the shares, it is called as delivery of shares. Intraday means if the investor
buy/sell shares on the same day. Delivery and Intraday charges are different and vary
from broker to broker. Check the delivery and intraday charges with the Stock broker
and also found out how much other Stock broker charge. In delivery there is the long
term holding of your stock means in the delivery holding you can hold your stock up
to the periods you want so the brokerage charges depend on it. And in Intraday the
stock has to be sold out in the same day and the brokerage charges are decided as per
the intraday transaction.
b) Maintenance charges - Every year, the Stock Broker charges maintenance
charges in order to maintain your account. Do check the maintenance charges and
compare with other brokers maintenance charges. Maintenance charges include
charges relating to the maintaining of the demat account of the investors and their
holdings and also include maintenance of the terminal which include lump sum
charges or monthly charges depending on the policy of the company.
Stock broker services
Broadly the Stock broker services can be divided into two categories
- Online and Offline services. You as an investor can buy/sell shares
by calling up your broker (offline) or through online. Online trading
means you can buy/sell shares through the internet. Offline services
refer to the services which is being provided manually which was
followed previously before he introduction of the online trading. In
simple words offline trading is the trading which is carried out
without the usage of internet. Check with your broker if they provide
both the services or not. It is always advisable to choose a broker
which offers both the services. The dawn of a new, Internet
dominated era has brought about landmark changes in the way in
which we trade. Sophisticated trading technologies have led to the
bulk of share trading moving online, allowing a trader in India the
flexibility to buy shares in Mumbai or in Delhi or in any of the foreign
stocks in seconds with nothing more than a few clicks of the mouse.
For offline brokers, this has made it more necessary than ever to
embrace technologies and get online, as a vital component to
surviving the modern trading environment. While offline brokers
aren't rendered completely obsolete by their online counterparts,

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there are nevertheless a number of key advantages to trading

through an account with an online stockbroker.
Investment research and stock information
Brokers also provide updates and information on stocks. Check the past record of the
broker in providing excellent tips and information on stocks. Based on their past
success stories, you as an investor can zero in on the broker.
Also there are some more points to be considered while
choosing a broker Some of the points that you need to keep in
mind while choosing the right and the most suitable broker for
yourself are the-:
1. Real commission rates of your broker. Inquire regarding the actual commission
rates your broker charges and compare that commission rate with the commission
rate of other broking firms and analyze whether they are charging the genuine
amount for the services being rendered by the stock brokers.
2. Consideration and transparency regarding extra charges. There should be given
consideration regarding the extra charges being charged by the stock broker and a
proper record should be maintained for these types of charges. Whatever charges
being charged by the stock broker should be justified by them and should be
known to the investor.
3. Facility of trading multiple markets. It should provide trading in multiple the
markets like NSE (National stock exchange), BSE (Bombay Stock Exchange) or in
commodity market.
4. Interest payment on uninvested cash in your brokerage account, amount needed to
start a deposit
5. Reliability of the brokerage firm. The brokerage firm should be reliable and should
not disguise any information through which investors feel that they are cheated or
there is misuse of their hard earned money. There should be transparency and
honesty of the stock broking firm which should ensure the investors that they have
invested in the right company and can believe on that company.
6. The quality and standard of the automated features they provide. Automated
features refer to the feature in which through online trading a stock broker trades
on behalf of the investor on his account. Well in this feature an investor has to keep
one thing in mind that he has not to believe blindly on the stock broker and to just
taking and implementing his every advise. It is the responsibility of the investor to
be watchful while the stock broker is trading through his account.
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7. Remember to negotiate the rates because most brokerage firms would be willing to
cut down on the advertised rates depending on the volume of business that you are
running through their account. So it depends on the investor whether he has
properly researched and analyzed and compared the different rates of the different
Brokerage firm.
8. Beware of the hidden fees most brokerage houses charge that can push up your cost
per trade resulting in lower profit margins. These hidden fees can be in the form of
charges for transferring funds, insurance, administration charges, late payment
penalties, your inactivity charges, low minimum balance charges and so on.
Brokers may pay you interest on uninvested cash in the brokerage account to the
tune of 3 to 4% that might come in as a nice little bonus for you. But at the same
time you as an investor should be watchful for the hidden charges from the brokers
which might give you a bit tension and for that you should keep a regular check on
your account and keep a watch on the transactions and should check the monthly
statements and should keep a track of previous monthly statements also.
9.

Account Opening Charges - What is the account opening

charges? Check the account opening charges by other brokers
also. There are some charges which an investor has to pay for
opening an account in the stock broking company. These charges
are related to the charges for the maintenance of the account and
charges for various formalities for the opening of the account. So
it is necessary for the investor to inquire the broking company
regarding the brokerage charges the company charges and to
evaluate those charges and compare with the charges of the
other companies and to take a wise decision regarding the
opening of the account in the company where the charges for
opening an account are minimal and very less.

Conclusion
Thus, it can be concluded that an investor must be informed. Letting
your broker or advisor know that you as an investor have done your
homework, that you are expecting them to perform and that you are
ready, willing and able to detail your financial goals in a crisp, clear
manner will make your relationship more productive. It will also put
the advisor on notice that you are a savvy investor who cannot be
taken advantage of. So for an investor it is very necessary to have
full knowledge about the stock broker and the stock broker should
honestly provide all the information to the investor and he should be
well informed about the brokerage company through which an
investor is trading and should be well versed with the rules and
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regulations of the company so that in future there is no problem

from the investors side and the stock brokers side and after the
proper analysis and research work of the best broker and brokerage
company which suits the needs of an investor he should go for it
and should ensure that the relationship between both the investor
and stock broker can be carried out for a long lasting period.
Category of Brokers
There are two categories of brokers:
1. Full service brokers
2. Discount brokers.
1. Full service Brokers
You should know the functioning of the NSE, NASDAQetc so that you can know
their roles and functions in the economy. There are full service brokers who make
their own research. They are the best person who provides you the best information
on the different profitable stocks. But these brokers charge very high commission for
their services. So, you need to ensure that you get a broker who charges low
commission so that you do not pay hefty fees to get their services. You should look at
the experience of the brokers so that you can have a good idea about whether they
would be able to give you good benefits. You would also be able to know whether it
would suit your requirements or not. Full service brokers offer exclusive advise to
their clients but charge a premium for the service provided. These full service brokers
usually maintain a proactive role and manage your portfolio and all transaction related
formalities. They have a team of experienced and qualified researchers acting behind
the scene to aid their customers. Full-service brokers can give advice about which
stocks to buy or which stocks to sell. They often have full research facilities that they
use to analyze market trends and to predict market movements. The services provided
by full-service brokers do not come in cheap since they charge the highest
commission rates in the industry. Hiring a full-service broker is optional and it
depends on the number of trades level of confidence, and the knowledge of stock
markets of the investors.
2. Discount Brokers
Discount brokers on the other hand are available at much cheaper rates but they do
not provide the personalized guidance or landholding, which you would get from a
full service broker. Most of the brokerage houses are faceless organizations placing
trades on your behalf as per investors instructions. So the investors with the hope of
saving on commission fees hire discount brokers instead. Although these types of
brokers ask for much lower commissions, they dont offer advice or analysis like fullservice brokers. Discount brokers are ideal for those investors who like to make their
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own trading decisions. Some investors use both types of brokers for strategic
purposes. Through these stock brokers investors must not hope for the advisory work
to be done as they have been paid less and that is why they are the discount brokers.
3. Direct access brokers
Well these types of brokers are very different from the traditional brokers in terms of
their offerings. The traders get the advantages of direct access to the market and also
for carrying out their transactions. You can make a direct connection with them
through the Internet where you need to download their software. There are also many
other exciting offers that are provided by them. If you are a day trader then this type
of broker can be very helpful for you where you can make big differences to your
online stock trading. In this type of trading through online services stock brokers
provide their services and through online the trading can be carried forward. Just there
is the need of the direct access of the internet through which online broker services
can be provided to you as an investor. Well there are also other types of brokers that
you can take help from them. But before you as an investor for online trading you
need to make sure that you have arrived to the right place where you can provide your
credit card details. There are many fraud websites that take all your account number
and details and at the end you find that you have lost your money by providing your
account details to a wrong website. So you should be well aware of this. When you
think that you need profit from the stock invested by you, then you should try to
analyze the market so that you can be benefited from it. You need not have to pay any
processing fees when you go for trading with the online stock market. But if you are
someone who thinks that forex trading and stock trading to be the same, then you are
wrong as there is a clear line of demarcation between them. You should keep in mind
that getting the best profit is the main aim of your investment in the stock market. So
you have now come to know about the different types of stock brokers. Make sure
that you get a proper knowledge about the stock market from a reliable source so that
you can know the market very well. Some investors, with the hopes of saving on
commission fees, hire discount brokers instead. Although these types of brokers ask
for much lower commissions, they dont offer advice or analysis like full-service
brokers. Discount brokers are ideal for those investors who like to make their own
trading decisions. Some investors use both types of brokers for strategic purposes.
Some brokers offer better rates by operating exclusively online. There are even some
full-service and discount brokers who offer discounts for orders which are placed
online. Online brokerage is considered to be the least expensive way of trading stocks.
Whether investor should go for a discount broker or a full service broker would
depend on what you need from your broker. Choosing a particular broker has to be
based on the specific needs of the investor. If an investor wishes to receive advice
about which stocks to buy or to sell and yet he is uncomfortable with making trades
on the Internet, then he is suggested to hire a full-service broker. On the other hand,
technology savvy investors with enough confidence and knowledge to make their own
trading decisions are better off with discount brokers. After deciding on which type of
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broker to hire, investors are advised to compare a few competitors in order to find out
the significant differences in the costs. When choosing a broker, investors also have to
consider the number of trades to be made, the amount of cash to be deposited, the type
of margin accounts to be used, or the kind of services to be rendered. In case you are
knowledgeable enough and have enough confidence to manage your own portfolio
and take decisions on your stock pick then it is better to go for discount brokers. Most
online discount brokers charge something between $10 and $40 per trade, which can
go up to $100 per trade in case of a full service broker. Some brokerage houses
specify a large minimum deposit to start an account. Generally speaking, full service
brokerages need a larger deposit compared to a discount brokerage. This amount can
be as high as $50,000 for some brokerage firms, which is somewhat high in case you
are a beginner. So choose a brokerage house with reasonable deposit amount. So the
thing is to analyze yourself as an investor and choose the service you require.
Online stock broker
The World Wide Web has changed the rules of the game in the arena of stock
investments and brokering. Nowadays, you can invest and trade in stocks in a matter
of minutes, thanks to online stock brokers that offer their services to individuals with
even just a few hundred dollars to spare. Yes, you need not have plenty of money in
order to join the ranks of the likes of Warren Buffett. A person can easily engage in
international trading at the mere click of the mouse. However, your success in this
fast-paced world partly rests on choosing the best online broker. After all, your stock
broker will carry out your order to buy or sell, thus, you must ensure that he has the
capacity to do so. This applies to all online stock brokers from the execution only to
the advisory and discretionary management types. This requires looking for a premier
Internet stock broker. Finding a reliable broker is important as it is your money which
is on the line. Here are a few things you should check out before picking the broker
you will use. A good one should be experienced in the field and possess the requisite
licenses to operate. Pick a service provider who has an array of financial services and
a huge range of financial products. A worthy stock broker will be focused on fully
ascertaining the needs of his/her customers. The best stock brokers are those who
provide valuable, unbiased advice to their customers on different options available
and execute the transactions in a speedy manner. The ultimate aim of a stock broker
should be to reap wealth for his/her customers and not have some self-serving motive
in mind. Now there are some specific factors customers should keep in mind when
making your decision. One is the brokerage rate being charged by the Internet broker.
This is the fees charged whenever a stock is bought or sold. Of course, the amount of
commission charged will be in inverse proportion to the quantity of stock being
transacted. The second thing that needs careful study is the terms and conditions of
the agreement. Everything should be transparent from the start including the list of
commissions being charged. In addition, go over the minimum initial deposit which is
required to be placed with the broker. Thirdly, the money in the cash account should
be easily accessible by the customer. Lastly, there should be multiple channels of
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communication with the Internet stock broker. On their part, customers should also
have clarity on certain things before taking the plunge with an Internet broker. They
should think about their short and long term goals of investing in the stock market,
their risk-taking capacity, the amount of money they would like to invest and the
payment modalities. It is a prudent thing to discuss all this with your Internet stock
broker at the outset. Keeping all these tips in mind can be useful in choosing a
trustworthy online stock broker. The search for Internet stock broker can begin online.
Customers can even contact the representatives of these brokers to solicit information.
If you are interested in trading some financial securities online, you may need to
obtain the service of a good online-stock-broker. If you are new to online-stock
investment programs and schemes, you will definitely need a lot of guidance if you're
going to get high returns on your investments Even if you are an experienced onlinestock trader, you will still need an online-stock broker to help you with complicated
researches among other things. So what exactly should you look for in a broker to
consider him the best among the rest? First off, the stock brokerage company to which
the stockbroker is affiliated should provide sufficient research materials, educational
tools and analysis techniques. Said services include analyst reports, useful charts,
chains and graphs as well as investment calculators, to name a few. This way, you can
make educated and informed decisions before giving your order to the broker. Also,
you must be provided with adequate customer service support through e-mails, phone
lines and live chats. And it helps to be able to avail of free trading demo accounts just
so you can get the hang of the stock market. The best online stock broker also offers
reasonable membership fees, brokerage rates and other charges. Basically, you want
online brokers that will provide commensurate services for the money you are paying
for them to handle your accounts, in addition to the fees being within your budget.
The truth is online brokers play a vital role in opening online trading accounts, as well
as offering you a wide array of services all geared towards helping you to make higher
returns on your online stock trades. Yet another criterion is the range of services and
investments offered by the online stock broker. You want the basics like stocks,
mutual funds and options, the essentials of retirement and education savings accounts
and the advanced choices of international markets. And of course, you should look at
the ease of use of all the above mentioned services. With our busy lifestyles, it simply
will not do to have another technical glitch on our hands on top of making important
investment decisions. Ease of use also refers to excellent customer service support.
You may also want to read reviews about the best online stock broker as rated by
various market organizations and actual customers. At the very least, you will have an
idea of the ideal broker in relation to your own investment requirements, goals and
strategies. If you are not too certain as to what to look for in a good online stock
broker, there are a few things that we will look at:
A Good Broker Offers Low Brokerage Rates
For every occasion that you buy or sell through your online account, you will be
charged a rate, called a brokerage fee. The key to making money from online trading
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of securities is to lower your costs and maximize on your profits from a trade. With
that said, you may need to compare the brokerage rates of several online brokers,
before you choose an online-stock broker. Remember to carefully read the fine prints
on the contract and make note of the brokerage fees. The lower the brokerage charge
the greater your chances of making higher profits. Well it is necessary as a wise
investor comparing and analyzing of the brokerage charges of the different online
brokers and then going for the broker who charges lower brokerage rate. In this
competitive era there are various stock broking companies in the market and each
company is trying to allure the customer by charging lower brokerage rate but it is up
to you as an investor and your financial profile that what is your requirement and
what type of brokerage company you require But mind you lower brokerage rate
means the services of the broker will be partial and full services will not be provided
to you. So for this purpose it is necessary to analyze yourself also as an investor
which type of service you require. If you think that you are capable enough to handle
your stocks alone without any support then you should go for the company as per the
this brokerage rate
A Good Online Stock Broker Offers Low Account Fees
When you are going to hire an online stock broker do proceed with caution by looking
out for hidden high fees in the terms and the conditions of the account contracts.
Beware of online brokers that offer extra fees to transfer money out of your online
account. Again, you should carefully read your contract and look for these fees which
should be listed when you are opening your online stock account. If you can avoid as
much of these fees as possible, you should be well on your way to making lots of
money with a good affordable online stock broker. As an investor you should read all
the guidelines and the rules and should go through all the charging details of the
company which means that the investor should go through the account charging rates
and ensure himself that there is no any hidden charges or extra charges and an
investor should also go through research and analysis of the companies charging
lower account opening fees and should get to the result on the basis of the research
and findings and it is the duty of the stock broker to provide each and every
information to the investor which is necessary for an investor to know while he is
going to open an account in a particular brokerage firm. A stock broker should not
disguise any information and should disclose all the information to the investor which
is important from the investors point of view and let the investor have the full
knowledge regarding the company.
A Good Broker Has Access to a phone
When you are going to choose your broker, you should bear in mind that a good
broker must have access to a phone. This is because there will be times when the
online services go down for hours. There may also be interruptions to the broadband
connection, computer problems and power outages, which will prevent you from
getting information about the market. In these cases, you will need to use a phone to
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contact your online stock broker. Don't even bother to consider a broker does not offer
to be contacted via telephone. As an investor you should provide your all details to the
stock broker and should let him know your phone number so that in case of
emergency or urgency he can contact you and give you details regarding the stock
market and he can also give you SMS which will enable you to take wise decisions
related to the stock market.
A Good Broker Allows You Access to Your Money
Finally, a good online stock broker will offer you the chance to have instant and
immediate access to your money, even though it is in a cash account that is controlled
by the broker. This immediate access to your cash will give you a sense of feeling
that's more comfortable to know that your money is not tied up over the internet
limiting you quick and easy access to your cash. The online broker will provide you
the access to your money which is being traded so that you may feel that money is
safe and you can get the detail regarding the money being traded every day with
easing the access to your account.
Explanation of a City Trader's Job
Stock broker: A stock broker would deal with shares. Shares and stocks have the
same definition; a share is a section of a company that a stockbroker can buy and sell
if he/she has a suitable amount of money. Specifically, a stock is a piece of money a
share of a company that a few years ago were represented on a document, and
nowadays spreadsheets are often used to keep the record. For example, a share can be
worth 25p, but can be multiplied by 40 to create the total desired value on the
document in this case it would therefore be worth 1000p. The stockbroker possesses
a number of shares; however he or she can choose how many of these he or she
wishes to trade, so that perhaps some can be kept for him or her. Keeping an amount
is understandable, because stock-broking is a risky business. This is because the
prices that shares are worth are constantly increasing and decreasing, depending on
how much money the company you are dealing with, is producing. For example, say a
stockbroker buys a share from a dealer, for $1, and then sells it to a client for x sum of
money. The next day, the price for that same share value, decreases (the company is
not producing as much money), so that its now worth 50p. The stockbroker had spent
$1, however, which was 50p too much: he or she has just lost 50p. Thats how
stockbrokers lose money. They then continue trading at what they think are suitable
times when it is unlikely for the price of a share to alter (to start with he or she could
buy that share back for 50p and sell it again, to another client).
A day in stock broker life
A stockbroker invests in the stock market for individuals or corporations. Only
members of the stock exchange can conduct transactions, so whenever individuals or
corporations want to buy or sell stocks they must go through a brokerage house.
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Stockbrokers often advice and counsel their clients on appropriate investments.

Brokers explain the workings of the stock exchange to their clients and gather
information from them about their needs and financial ability, and then determine the
best investments for them. They try to find out which are those stocks in which
investor is interested and stock broker also give advice on the basis of his experience
and knowledge to the investor for various stocks. And as per the investor instructions
the broker then sends the order out to the floor of the securities exchange by computer
(terminal)or by phone. When the transaction has been made, the broker supplies the
client with the price. The buyer pays for the stock and the broker transfers the title of
the stock to the client and performs clearing and settlement procedures. The beginning
stockbrokers first priority is learning the market. One broker said, First you have to
decide whether you have an interest in the stock market. This will determine how well
youll do. If youre just interested in making money you wont get very far.
Stockbrokers spend their time in a fast-paced office. There day starts from 9:00 A.M.
and the trading is carried out till 3:30 P.M. and then after doing all the transactions
then he has to do the clearing and settlement of the account and after that providing
them confirmation through the phone regarding the transactions the investors did
through the phone. The stock brokers usually working from nine to five, and they are
just doing trading activities or have to meet with clients. The new broker spends many
hours on the phone building up a client base. Sometimes brokers teach financial
education classes to expose themselves to potential investors who may then become
their clients. Actually being a stock broker you must have a good financial knowledge
and knowledge about the market like how it works, how the volatility in the market
comes and how the foreign market plays an important role for the working of the
Indian stock market and how much Indian stock market is affected by the foreign
market. So as a broker you should be crystal clear with these concepts and should
keep an update on the latest technical term as used in the market and how to apply
them in the market. For a stock broker not only they but practical knowledge is also
required.
Foreign Exchange Members:
These city traders deal with currencies. Their clients are usually called "market
makers" (literally makers of markets: shopkeepers are a common example) and are
the people they use to earn money. Currencies are traded, for example: the stock
broker can give his/her client $1, and the client can give him/her 1 in return, as long
as such a deal was discussed and agreed to (as mentioned previously, the person who
makes the final decision as to what the deal is going to be depends on the position of
the stockbroker
In Advisory dealing, for example, the investor makes the concluding decision.) In this
case the city trader gains profit (because he/she gains 1, that is worth more than what
he/she gave [$1]), but indeed often the market maker does too (that's how they earn
their money). For example, it would be perfectly possible for the city trader to hand
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over 1 and let his/her client give back only $1. N.B: You have to bear in mind that
very large sums of money - NOT the example of $1 and 1 above - are exchanged.
Bond-dealers:
A bond-dealer is a city trader who lends a sum of money to a stock (section of a
company). If a company owns 1,000,000, and this was due to a million bondholders
each lending 1 to the stock, than each bondholder lends a bond of 1.
In such ways, city traders trade via market makers, but they are also trading for a
group of people - the investors. These are people of a higher status than city traders,
for example: chartered accountants. An investor has the right to use money from his
brokerage firm if there is a crisis involving him/her losing a sum of money. This
doesn't change the fact that city can at the same time be allowing the usual
currency/stock deals to take place, enabling them to gain money while providing the
investor with money. You have to bear in mind that these city traders do not have
clients at their desk(s) to perform the deal - the Foreign Exchange (for example) keep
aware of the various money-exchanges through softwares on the computer, a
particular and more popular one being known as "CREST". Other methods of dealing
include using the phone. There are other occupations within the title of being a "city
trader", but these are the main three, in order of which is most common, the most
common being the first in the list.
Some terms related to brokerPrime brokerage - Prime brokerage is the generic name for a bundled package of
services offered by investment banks and securities firms to hedge funds and other
professional investors needing the ability to borrow securities and cash to be able to
invest on a netted basis and achieve an absolute return. These services are provided by
the prime broker who acts as settlement agent, provides custody for assets, provides
financing for leverage, and prepares daily account statements for its clients, who are
money managers, hedge funds, market makers, arbitrageurs, specialists and other
professional investors. The business advantage to a hedge fund of using a Prime
Broker is that the Prime Broker provides a centralized securities clearing facility for
the hedge fund, and the hedge fund's collateral requirements are netted across all deals
handled by the Prime Broker. The Prime Broker benefits by earning fees ("spreads")
on financing the client's long and short cash and security positions, and by charging,
in some cases, fees for clearing and/or other services. It also earns money by
hypothecating the portfolios of the hedge funds it services and charging a fee to those
borrowing securities and other investments. Each client of a prime broker will have
certain technological needs related to the management of its portfolio. These can be as
simple as daily statements or as complicated as real-time portfolio reporting, and the
client must work closely with the prime broker to ensure that its needs are met.
Certain prime brokers offer more specialized services to certain clients. For example,
a prime broker may also be in the business of leasing office space to hedge funds, as
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well as including on-site services as part of the arrangement. Risk management and
consulting services may be among these, especially if the hedge fund has just started
operations.
Retail brokerage- A retail broker is a brokerage firm that caters to the average
investor or, in other words, the retail sector of investors - as opposed to the
institutional sector of investors. Both discount and full-service firms are retail brokers.
The majority of brokers who advertise on TV are retail brokers The Retail Brokers
Network has built its reputation and success on the expertise of its members'
knowledge of their local markets. The Retail Brokers Network has over 40
independent commercial retail real estate firms providing their local expertise to
retailers, developers and investors on a national basis. A retail broker can also be a
commercial real estate broker that focuses on retail tenants and retail developments. It
is a brokerage most of whose customers are retail investors rather than institutional
investors.
Low cost broker - A low-cost brokerage can be considered to be a special case of a
discount brokerage which functions in a similar way to a dividend reinvestment plan.
Low-cost brokers are generally less expensive for an investor who invests in small
amounts (say, fixed dollar amounts) and who is not particular that the stock trade must
happen in real time. One way that could lower cost for these brokers is by executing
orders only a few times a day by aggregating orders from a large number of small
investors into one or more block trades which are made at certain specific times
during the day. Such block trades are also sometimes referred to as window trades.
Window trades help lower costs in two ways:

By matching buy and sell orders within the firm's order book the overall
quantity of stock to be traded can be reduced thus reducing commissions.
The broker can split the bid-ask spread with the investor when matching buy
and sell orders - a win-win situation in most cases.
Since investor money is pooled before stocks are bought or sold, it enables investors
to contribute small amounts of cash using which fractional shares of specific stocks
can be purchased. This is usually not possible with a regular stock broker. Low-cost
brokers also provide real-time trades, but these are usually (but not necessarily)
charged a higher commission.
Boutique brokerage- A boutique brokerage is a type of brokerage company, that
acts much the same as a boutique shop. They often do not charge fees, instead taking
a percentage of any profits generated. Commonly, boutique brokers operate with
family and friends and do not have advertising campaigns. They generally are in the
investment field, but can also exist in other fields such as information technology.
Boutique brokerage can also refer to a real estate brokerage firm.

FAMOUS STOCK BROKER COMPANIES IN INDIA

Popular brokers may be known for different reasons. These include range of advice on
investment matters, quality of customer service, manner of handling the portfolio of
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customers, degree of profits made for customers, free reports on specific sectors or
market analysis and trading tools provided. There are a set of features and tools which
come with the online trading account such as streaming charts, data, real-time data
These allow customers to monitor the movement if stocks. There are some who are
even known for offering cheap or sometimes even free stock trades.
Some of the Famous stock broking companies
1)

Religare stock broking

2)

India bulls stock broking

3) Anagram stock broking limited

4)

Kotak Mahindra stock broking limited

5)

ICICI direct stock broking limited

6)

Bonanza Portfolio stock Broking Company

7)

Angel stock broking company

8)

India info line securities limited

9)

Karvy stock broking limited

10) Embay stock broking limited

11) Motilal Oswal share broking limited
12) Share khan share broking limited
13) Almonds share broking limited
14) Fultron share trading limited
15) Anand Rathi trading limited
16) Geogit Broking limited
A Brief Introduction to Some of the Best Broking Firms in India
1. Religare stock Broking-: Religare Securities Limited (RSL), a 100% subsidiary
of Religare Enterprises Limited is a leading equity and securities firm in India.
Religare Enterprises Limited (REL) is a global financial services group with a
presence across Asia, Africa, Middle East, Europe and the Americas. In India, RELs
largest market, the group offers a wide array of products and services ranging from
insurance, asset management, broking and lending solutions to investment banking
and wealth management. The group has also pioneered the concept of investments in
alternative asset classes such as arts and films .With 10,000 plus employees across
multiple geographies, REL serves over a million clients, including corporates and
institutions, high net worth families and individuals, and retail investors. The
company currently handles sizeable volumes traded on NSE and in the realm of
online trading and investments; it currently holds a reasonable share of the market.
The major activities and offerings of the company today are Equity Broking,
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Depository Participant Services, Institutional Broking and Research Services. To

broaden the gamut of services offered to its investors, the company offers an online
investment portal armed with a host of revolutionary features.
2) IndiaBulls Securities- IndiaBulls is one of the leading broking houses having a
large network of branches spread across the country. They are the pioneers in online
stock trading platform in India and have a customer base of more than 7 lac satisfied
customer. Their products are as follows-:
(a) Power IndiaBulls-It is an online trading platform which brings you the power of a
brokers terminal on your desktop.
(b) Equity Trading Through this you can provide the platform to trade in equity and
derivatives.
(c) Currency Derivative- IndiaBulls offer the currency derivatives segment in
National Stock Exchange.
(d) Depository Services- India Bulls is a depository participant with the National
Securities Depository Limited and Central Depository Services (India) Limited.
3) Kotak Securities-Kotak Securities Ltd., a 100 % subsidiary of Kotak Mahindra
Bank, is one of the oldest and largest stock brokers in the Industry. Their offerings
include stock broking services for stock trading through the branch and Internet,
Investments in IPO, Mutual funds and portfolio management services. Their
Achievements Include: (a)UTI MF CNBC TV18 Financial Advisor Awards - Best
Performing Equity Broker (National) for the year 2009 (b) Best Brokerage Firm in
India by Asia0money in 2009, 2008, 2007 & 2006 (c)Finance Asia Award (2009)Best Brokerage Firm In India (d)Best Performing Equity Broker in India CNBC
Financial Advisor Awards 2008 (e)Avaya Customer Responsiveness Awards (2007 &
2006) in Financial Services Sector (f)The Leading Equity House in India in Thomson
Extel Surveys Awards for the year 2007 (g)Euromoney Award (2007 & 2006) (h) Best
Provider of Portfolio Management: Equities Euromoney Award (2005)-Best Equities
House In India (i) Finance Asia Award (2005)-Best Broker In India. They have been
the first in providing many products and services which have now become industry
standards. Some of them are: Facility of Margin Finance to the customers for online
stock trading Investing in IPOs and Mutual Funds on the phone SMS alerts
before execution of depository transactions AutoInvest - A systematic investing
plan in Equities and Mutual funds Provision of margin against securities
automatically against shares in your Demat account .We have a full-fledged research
division involved in Macro Economic studies, Sectoral research and Company
Specific Equity Research which publishes in-depth stock market analysis. This
combined with a strong and well networked sales force which helps deliver current
and up to date market information and news. They are also a depository participant
with National Securities Depository Limited (NSDL) and Central Depository Services
Limited (CDSL), providing dual benefit services wherein the investors can avail our
stock broking services for executing the transactions and the depository services for
settling them. They process more than 400000 trades a day which is much higher even
than some of the renowned international brokers. Kotak Securities Limited has Rs.
2300 crore of Assets Under Management (AUM) as of 31st March, 2010. The
portfolio Management Service provides top class service, catering to the high end of
the market. Portfolio Management from Kotak Securities comes as an answer to those
who would like to grow exponentially on the crest of the stock market, with the
backing of an expert. Their network spans over 400 cities with 1113 outlets.
(4) Motilal Oswal securities- Motilal Oswal securities (MOSL) was founded in 1987
as a small sub-broking unit, with just two people running the show. Focus on
customer-first-attitude, ethical and transparent business practices, respect for
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professionalism, research-based value investing and implementation of cutting-edge

technology has enabled us to blossom into an almost 2000 member team. Today we
are a well diversified financial services firm offering a range of financial products and
services such as Wealth Management , Broking & Distribution , Commodity Broking,
Portfolio Management Services , Institutional Equities, Private Equity , Investment
Banking Services and Principal Strategies. We have a diversified client base that
includes retail customers (including High Net worth Individuals), mutual funds ,
foreign institutional investors, financial institutions and corporate clients. We are
headquartered in Mumbai and as of March 31st, 2010, had a network spread over 584
cities and towns comprising 1,397 Business Locations operated by our Business
Partners and us. As at March 31st, 2010, we had 6, 21,215 registered customers.
(5) Bonanza Portfolio Ltd- Bonanza Portfolio Ltd. - Leading online stock brokers
firm and online commodity trading firm in India. It was established in 1994 and has
been working diligently since then and can be described in a single word as a power
house. With acknowledged industry leadership in execution and clearing services on
Exchange Traded Derivatives and Cash Market Products, Bonanza has spread its
trustworthy tentacles all over the country with more than 1150 outlets spread across
375 cities. It has an extensive range of services whether related to equity market,
wealth management, distribution of third party products, also provides online
derivatives future and option trading in India. BonanzaOnline.com is a popular online
share trading portal for BSE & NSE stocks in India. It is an online Internet share
trading firm in India. Its head quarter is in Delhi area, India. Bonanza has
memberships of NSE and BSE and is a Depository Participant with NSDL and CDSL
and is also a member of OTCEIL, NCDEX, MCX, NCDEX, NMCE, MCXSX and
also a depository participant with NSDL and CDSL. It is also registered with DGCX.
BONANZA has been ranked 6th largest brokerage house in terms of Number of
Terminal across India. The current the CEO of the company is Shiv Kumar Goel who
is also one of the founders of the company. Strong network of the retail broking and
sub broking make them different from the other broking houses in India. t has a wide
spread & growing network of 4373 terminals and in future they want to make a strong
base of customer support. They are targeting to capture 10% share of capital market
by March 2011.
(6) Karvy Securities- KARVY a premier integrated financial services company
which has, over the years, firmly entrenched its name into various segments of the
financial services industry. Backed by a sound state-of-the-art technology and a highly
motivated employee force, Karvy has carved a niche for itself and is ranked among
the top companies in the area of financial services. It has a wide network of 35
Branches and 93 customer service points, which give Karvy a tremendous mileage in
being close to the retail customer. All of Karvy services are also backed by strong
quality aspects, which have helped Karvy to be certified as an ISO 9002 Company by
DNV. Apart from being the largest Registrar in the country, we are also a registered
Depository Participant with NSDL and CDSL, and ranked among the top 5
Depository Participants in the country. We offer these services at about 50 locations
across the country and are one of the most widely networked Depository Participants.
We are Stock Brokers and are Registered Members of the National Stock Exchange
and the Hyderabad Stock Exchange. We have over the last few years, set up Trading
Terminals across the country and today have a network of 100 Terminals located at 30
cities to provide retail stock broking services. Our Stock Broking arm is backed by a
very strong research team comprising of highly charged professionals who conduct
studies on various industry segment and corporate. Karvy is SEBI registered Category
I merchant banker and is today ranked among the top ten in the country. Karvy is
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known in the merchant banking segment as a professional advisor in structuring IPOs,

takeover assignments and buyback exercises. With the economy trends offering
multifarious opportunities in corporate consolidations, mergers and acquisitions, hive
offs and corporate restructuring, Karvy is positioning itself as a corporate consultant
which would offer value added services and act as a professional navigator for long
term growth of its clients. Karvy has the backing of a professional team with
experience in handling financial climates in both Indian and global markets. Backed
by a predominantly service oriented culture and also capitalising on its experience of
handling a variety of customers, we offer a plethora of financial products through our
retail arm KARVY-THE FINAPOLIS. The business of distribution of financial
products includes Public Issue of bonds, equity shares, fixed deposits of corporate,
distribution of units of various Mutual Funds, a basket of liability products
comprising personal loans, car loans, housing loans and loans against shares and as
the sunrise market of Insurance products. All these products reach the ultimate
customer through our wide spread network of branches and retail
outlets.www.karvy.com is an exclusive comprehensive financial portal offering a wide
spectrum of financial services and also supports the Electronic Custody and Mutual
Fund servicing businesses. The site is positioned to be an online personal finance
advisor and counsels investors on their personal financial planning based on
individual earning capacities. It is also a complete resource center for review of
corporate actions like bonus, rights, mergers, book closures and board meetings.
Further, comprehensive investment reviews of IPOs, mutual funds, bonds, fixed
deposits and insurance makes karvy.com a one-stop guide to the average investor.
Other IT initiatives by Karvy are an e-mail call centre and a medical transcription
division. The underlying reason for our steady growth is attributed to our ability to
improve our work ethos and, the quality of our human resources. We focus on
continuos training of our workforce to enhance their skills and have a full fledged
training centre catering to the same. Karvy, therefore offers good opportunities for
various professionals to upgrade their skills and add value to their learning curve.
(7) Sharekhan Securities- Sharekhan Limited offers online security broking and
portfolio services to institutions and large corporate houses as well as individual
investors. Sharekhan Limited was formerly known as SSKI Investor Services Private
Limited. The company is based in Mumbai, India. ShareKhan is online stock trading
company of SSKI group, provider of India-based investment banking and corporate
finance service. ShareKhan is one of the largest stock broking houses in the country.
S.S. Kantilal Ishwarlal Securities Limited (SSKI) has been among Indias leading
broking houses for more than a century. Sharekhan's equity related services include
trade execution on BSE, NSE, Derivatives, commodities, depository services, online
trading and investment advice. Trading is available in BSE and NSE. Along with
Sharekhan.com website, ShareKhan has around 510 offices (share shops) in 170 cities
around the country. Share khan has one of the best state of art web portal providing
fundamental and statistical information across equity, mutual funds and IPOs. You can
surf across 5,500 companies for in-depth information, details about more than 1,500
mutual fund schemes and IPO data. You can also access other market related details
such as board meetings, result announcements, FII transactions, buying/selling by
mutual funds and much more.
Types of account in Share Khan

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Share khan offers two types of account: (a) Share Khan Classic Account- Allow
investor to buy and sell stocks online along with the following features like multiple
watch lists, Integrated Banking, demat and digital contracts, Real-time portfolio
tracking with price alerts and Instant credit & transfer.
(b) ShareKhan Speed Trade account- This accounts for active traders who trade
frequently during the day's trading session. This is Single screen interface for cash and
derivatives. It provides real-time streaming quotes with Instant order Execution &
Confirmation and also provides hot keys similar to a traditional broker terminal also it
provide services related to alerts and reminders. The back-up facility to place trades
on Direct Phone lines is also available in this account.

(8)Geogit BNP Paribas Financial Services

It all started in the year 1987 when Mr. C.J. George and Mr. Ranajit Kanjilal founded
Geojit as a partnership firm. The company was founded in 1987 and is based in
Kochi, India. Geojit Financial Services Limited, together with its subsidiaries,
provides stock and share broking services in India .Its headquarters is in Mumbai. In
1993, Mr.Ranajit Kanjilal retired from the firm and Geojit became the proprietary
concern of Mr. C .J. George. In 1994, it became a Public Limited Company named
Geojit Securities Ltd. The Kerala State Industrial Development Corporation Ltd.
(KSIDC), in 1995, became a co-promoter of Geojit by acquiring a 24 percent stake in
the company, the only instance in India of a government entity participating in the
equity of a stock broking company. The year 1995 also saw Geojit being listed on the
leading regional stock exchanges. Geojit listed at The Stock Exchange, Mumbai
(BSE) in the year 2000. On 31st December 2007, the company closed its
commodities business and surrendered its membership in the various commodity
exchanges held by Geojit Commodities Ltd. Global banking major BNP Paribas took
a stake in the year 2007 to become the single largest shareholder. Consequently,
Geojit Financial Services Limited has been renamed as Geojit BNP Paribas Financial
Services Ltd.. In the year 2000, the company was the first stock broker in the country
to offer Internet Trading. This was followed by integrating the first Bank Payment
Gateway in the country for Internet Trading, and many other industry firsts. Riding on
this experience, and harnessing BNP Paribas Personal Investors expertise as the
leading online broker in Europe, is helping the company to rapidly expand its business
in this segment. Strategic B2B agreements with Axis Bank and Federal Bank enable
the respective banks clients to open integrated 3-in-1 accounts to seamlessly trade via
a sophisticated Online Trading platform. Further, deployment of BNP Paribas stateof-the-art globally accepted systems and processes is already scaling up the sales of
Mutual Funds and Insurance. It has a joint venture with Al Saud Group to offer online
and offline trading services to NRI clients. Certified financial advisors help clients to
arrive at the right financial solution to meet their individual needs. The wide range of
products and services on offer includes Equities, Derivatives, Currency Futures,
Custody Accounts, Mutual Funds, Life Insurance and General Insurance, IPOs,
Portfolio Management Services, Property Services, Margin Funding, Loans against
Shares. It offers trading in equity and derivatives, including index futures and options,
and stock futures and options. The company also provides offline and online trading
services, as well as calls and trade facility. In addition, it offers margin trading
funding facility to offline customers; loans against security of shares; and loans for
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commodities trading. Further, the company provides distribution services for various
financial instruments, such as mutual funds, bonds, life insurance products, and fixed
deposits. Geojits other services include depository services, portfolio management,
and commodity futures trading. Geojit BNP Paribas today is a leading retail financial
services company in India with a growing presence in the Middle East. The company
rides on its rich experience in the capital market to offer its clients a wide portfolio of
savings and investment solutions. The needs of over 495,000 clients are met via
multichannel services - a countrywide network of over 500 offices, phone service,
dedicated Customer Care centre and the Internet. Geojit BNP Paribas has membership
in, and is listed on, the National Stock Exchange (NSE) and the Bombay Stock
Exchange (BSE). It has a presence in almost all the major states of India, the network
of over 500 offices across 300 cities and towns presently covers-: Andhra Pradesh,
Bihar, Chhattisgarh, Goa, Tamil Nadu and Pondicherry, Uttar Pradesh., Madhya
Pradesh ,Maharashtra ,Sikkim etc.

CHAPTER 7
NETWORK OF STOCK EXCHANGE IN INDIA
NATIONAL STOCK EXCHANGE
The National Stock Exchange of India Limited (NSE) has genesis in the report of the
High Powered Study Group on Establishment of New Stock Exchanges, which
recommended promotion of a National Stock Exchange by financial institutions (FIs)
to provide access to investors from all across the country on an equal footing. Based
on the recommendations, NSE was promoted by leading Financial Institutions at the
behest of the Government of India and was incorporated in November 1992 as a taxpaying company unlike other stock exchanges in the country. On its recognition as a
stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993,
NSE commenced operations in the Wholesale Debt Market (WDM) segment in June
1994. The Capital Market (Equities) segment commenced operations in November
1994 and operations in Derivatives segment commenced in June 2000. The National
Stock Exchange (NSE) is a stock exchange located at Mumbai, India. Since its
inception in 1992, National Stock Exchange of India has been at the vanguard of
change in the Indian securities market. This period has seen remarkable changes in
markets, from how capital is raised and traded, to how transactions are cleared and
settled. Today it is the largest stock exchange in India in terms of daily turnover and
number of trades, for both equities and derivative trading. The market has grown in
scope and scale in a way that could not have been imagined at this time. Average daily
trading volumes have jumped from Rs. 17 crore in 1994-95 when NSE started its
Cash Market segment to Rs. 11,325 crore in 2008-09. Similarly the market
capitalization of listed firms went up from Rs. 363,350 at the end of March 1995 to
Rs 47, 01,923 crore (7 August 2009) and is expected to become the biggest stock
exchange in India in terms of market capitalization by 2009 end. Thus it can be said
Indian equity markets are today among the most deep and vibrant markets in the
world. This transformation was the result of a number of initiatives led by the
Government, market regulators and infrastructure providers like exchanges and
depositories. NSEs efforts in this area have included the creation of the first clearing
corporation in the country in the form of the National Securities Clearing Corporation
Limited (NSCCL). NSCCL today provides central counterparty services and manages
settlement risk for multiple products, and is a major factor in the confidence market
participants have in the ability of Indian markets to handle extreme shocks without
causing any defaults. NSCCL is also the first clearing corporation in the country to
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receive. In May 2008, NSE developed a new trading application, NOW, or NEAT on
Web. The NOW platform allows trading members to connect to the exchange
through the internet, and has resulted in a significant reduction in both the access cost
and turnaround time for providing access. Though a number of other exchanges exist,
NSE and the Bombay Stock Exchange are the two most significant stock exchanges in
India and between them are responsible for the vast majority of share transactions.
The NSE's key index is the S&P CNX Nifty, known as the Nifty, an index of fifty
major stocks weighted by market capitalization.NSE is mutually-owned by a set of
leading financial institutions, banks, insurance companies and other financial
intermediaries in India but its ownership and management operate as separate entities.
There are at least 2 foreign investors NYSE Euro next and Goldman Sachs who have
taken a stake in the NSE As of 2006, the NSE VSAT terminals, 2799 in total, cover
more than 1500 cities across India. In October 2007, the equity market capitalization
of the companies listed on the NSE was US$ 1.46 trillion, making it the second
largest stock exchange in South Asia. NSE is the third largest Stock Exchange in the
world in terms of the number of trades in equities. It is the second fastest growing
stock exchange in the world with a recorded growth of 16.6%.
Innovations
NSE has remained in the forefront of modernization of India's capital and financial
markets, and its pioneering efforts include:

Being the first national, anonymous, electronic limit order book (LOB)
exchange to trade securities in India. Since the success of the NSE, existent
market and new market structures have followed the "NSE" model.
Setting up the first clearing corporation "National Securities Clearing
Corporation Ltd." in India. NSCCL was a landmark in providing innovation
on all spot equity market (and later, derivatives market) trades in India.
Co-promoting and setting up of National Securities Depository Limited, first
depository in India.
Setting up of S&P CNX Nifty.
NSE pioneered commencement of Internet Trading in February 2000, which
led to the wide popularization of the NSE in the broker community.
Being the first exchange that, in 1996, proposed exchange traded derivatives,
particularly on an equity index, in India. After four years of policy and
regulatory debate and formulation, the NSE was permitted to start trading
equity derivatives
Being the first and the only exchange to trade GOLD ETFs (exchange traded
funds) in India.
NSE has also launched the NSE-CNBC-TV18 media centre in association
with CNBC-TV18.
NSE.IT Limited, setup in 1999, is a 100% subsidiary of the National Stock
Exchange of India. A Vertical Specialist Enterprise, NSE.IT offers end-to-end
Information Technology (IT) products, solutions and services.

Markets and its products and market segments

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Currently, NSE has the following major segments of the capital market. It provides
trading for all type of securities which includes:
Equity
Corporate Debt
Central and state government securities
T-Bills
Commercial Papers
Certificate of deposits
Futures and Options
Exchange Traded Funds(ETF)
Retail Debt Market
Wholesale Debt Market
Currency futures
Mutual Fund
Stocks Lending & Browing
The Exchange provides trading in 4 different segments viz., Wholesale Debt Market
(WDM) segment, Capital Market (CM) segment, Futures & Options (F&O) segment
and the Currency Derivatives Segment (trading on which commenced on August 29,
2008).August 2008 Currency derivatives were introduced in India with the launch of
Currency Futures in USD INR by NSE. Currently it has also launched currency
futures in EURO, POUND & YEN. Interest Rate Futures was introduced for the first
time in India by NSE on 31st August 2009, exactly after one year of the launch of
Currency Futures.NSE became the first stock exchange to get approval for Interest
rate futures as recommended by SEBI-RBI committee, on 31 August,2009, a futures
contract based on 7% 10 Year GOI bond (NOTIONAL) was launched with quarterly
maturities.
Wholesale Debt market: The Wholesale Debt Market segment provides the trading
platform for trading of a wide range of debt securities which includes State and
Central Government securities, T-Bills, PSU Bonds, Corporate debentures, CPs, CDs
etc. However, along with these financial instruments, NSE also launched various
products e.g. FIMMDA-NSE MIBID/MIBOR owing to the market need.
Capital Market segment- The Capital Market (CM) segment offers a fully
automated screen based trading system, known as the National Exchange for
Automated Trading (NEAT) system. This operates on a price/time priority basis and
enables members from across the country to trade with enormous ease and efficiency.
Various types of securities e.g. equity shares, warrants, debentures etc. are traded on
this system. The average daily turnover in the CM Segment of the Exchange during
2008-09 was Rs. 11,325 crore.
Futures & Options (F&O) segment: Futures & Options (F&O) segment of NSE
provides trading in derivatives instruments like Index Futures, Index Options, Stock
Options, Stock Futures. The futures and options segment of NSE has made a mark for
itself globally. In the Futures and Options segment, trading in S&P CNX Nifty Index,
CNX IT index, Bank Nifty Index, CNX Nifty Junior, CNX 1 00 index, Nifty Midcap
50 index, S&P CNX Defty and single stocks are available. The average daily
turnover in the F&O Segment of the Exchange during 2008-09 was Rs.45,311 crore
(US $ 8,893 million).
Currency Derivatives Segment: Currency Derivatives Segment (CDS) at NSE
commenced operations on August 29, 2008. with the launch of Currency futures
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trading in US Dollar-Indian Rupee (USDINR). On the very first day of operations a

total number of 65,798 contracts valued at Rs.291 crore were traded on the Exchange.
Since then trading activity in this segment has been witnessing a rapid growth. During
August 29, 2008 to March 31, 2009 the segment reported a trading value of Rs.162 ,
272 crore (US $ 31,849 million). A total number of 518 trading members which
includes 22 banks have taken membership in this market segment as at end March
2009.
Hours
NSE's normal trading sessions are conducted from 9:00 am India Time to 3:30 pm
India Time on all days of the week except Saturdays, Sundays and Official Holidays
declared by the Exchange (or by the Government of India) in advance. The exchange,
in association with BSE (Bombay Stock Exchange Ltd.), is thinking of revising its
timings from 9.00 am India Time to 5.00 pm India Time. There were System Testing
going on and opinions, suggestions or feedback on the New Proposed Timings are
being invited from the brokers across India. And finally on Nov 18, 2009 regulator
decided to drop their ambitious goal of longest Asia Trading Hours due to strong
opposition from its members. On Dec 16, 2009, NSE announced that it would prepone the market opening at 9am from Dec 18, 2009. So NSE trading hours will be
from 9:00 am till 3:30 pm India Time. However, on Dec 17, 2009, after strong
protests from brokers, the Exchange decided to postpone the change in trading hours
till Jan 04, 2010.NSE new market timing from Jan 04, 2010 is 9:00 am till 3:30 pm
India Time.
Exchange Traded Funds on NSE
An exchange-traded fund (ETF), also known as an exchange-traded product
(ETP), is an investment fund traded on stock exchanges, much like stocks. An ETF
holds assets such as stocks or bonds and trades at approximately the same price as the
net asset value of its underlying assets over the course of the trading day. Most ETFs
track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as
investments because of their low costs, tax efficiency, and stock-like features. NSE
has a number of exchange traded funds. These are typically index funds and GOLD
ETFs. Some of the popular ETF's on NSE are. (a) NIFTYBEES - ETF based on
NIFTY index Nifty BEES Live quote (b) GoldBees - ETF based on Gold prices. It
tracks the price of Gold. Each unit is equivalent to 1 gm of gold and bears the price of
1gm of gold and c) BankBees - ETF that tracks the CNX Bank Index
NSE Indexes
Equities trading at NSE began in November 1994. By late 1995, NSE became India's
largest equity market and was looking for a market index to utilize this unique
information source. NSE also wanted to have a vehicle for the futures and options
market. NSE approached the economists Dr. Ajay Shah and Dr. Susan Thomas, then
at CMIE (and now at IGIDR), to do research on methods in index construction. This
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work was funded by the USAID FIRE project and led to the S&P CNX Nifty. NSE
also set up as index services firm known as India Index Services & Products Limited
(IISL) and has launched several stock indices, including

S&P CNX Nifty(Standard & Poor's CRISIL NSE Index)

CNX Nifty Junior
CNX 100 (= S&P CNX Nifty + CNX Nifty Junior)
S&P CNX 500 (= CNX 100 + 400 major players across 72 industries)
CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200)

OTCEI (OVER THE COUNTER EXCHANGE OF INDIA)

Over The Counter Exchange of India (OTCEI) was incorporated in 1990 as a
Section25 company under the Companies Act 1956 and is recognized as a stock
exchange under Section 4 of the Securities Contracts Regulation Act, 1956. OTC
Exchange of India also known as Over-the-Country Exchange of India or OTCEI
was set up to access high-technology enterprising promoters in raising finance for
new product development in a cost effective manner and to provide transparent and
efficient trading system to the investors. It is an electronic stock exchange based in
India that is comprised of small- and medium-sized firms looking to gain access to the
capital markets. Like electronic exchanges in the U.S. such as the NASDAQ, there is
no central place of exchange and all trading is done through electronic networks. It
has a pattern along the lines of the NASDAQ market and has introduced several
innovations to the Indian capital markets like: screen-based nationwide trading,
sponsorship of companies, market making, and scrip less trading. Approved by the
Government of India in 1989m, the first electronic OTC stock exchange in India
was established in 1990 to provide investors and companies with an additional way to
trade and issue securities and it came into operation in 1991. It has no particular
marketplace or stock exchange floor. In OTC, buyers and sellers operate on negotiated
prices acceptable to both. Inactive issues, less liquid shares, issues with limited public
holding, and issue listed with the OTC comprise the OTC market. The objective of the
OTC are liquidity, fixed and fair price, simplified process of buying and selling, quick
disposal of orders, and a cheaper method of public sale of new issues It is a ringless
exchange, located in a number of places in a city, and many large towns, interlinked
by a computer network. The investor has to go to one such counter, watch the
quotations on electronic display board, and make a deal at a very reasonable price. He
is not price blind; he knows exactly at what price the transaction has been made.
This was the first exchange in India to introduce market makers, which are firms that
hold shares in companies and facilitate the trading of securities by buying and selling
from other participants. Over-The-Counter Exchange of India is an electronic stock
exchange. It is made up of medium and small business establishments that are trying
to get some access to various capital markets. Over-The-Counter Exchange of India is
similar to NASDAQ, which is a major electronic stock exchange of the United States
in a way that there is no specific place of exchange and the entire process is executed
through online means. Over-The-Counter Exchange of India is among the first
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electronic OTC stock exchanges in India. It was established in the decade of 90s. The
OTCEI allows listing of small and medium sized companies. The first issue listed on
the OTCEI was in July 1992. The minimum issued share capital required of a
company that wants to be listed on OTCEI is Rs.3 million and the maximum Rs.250
million. Listing on OTCEI is advantageous to companies because of the high liquidity
of these securities, which is a result of compulsory market making, improved access
and speed of transactions resulting from the extensive network of electronically
interlinked counters. Companies engaged in investment, leasing, finance, hire
purchase, amusement parks etc., and companies listed on any other recognized stock
exchange in India are not eligible for listing on OTCEI. Also, listing is granted only if
the issue is fully subscribed to by the public and sponsor. The main aim behind
construction of Over-The-Counter Exchange of India was to give companies and
investors an extra way of issuing and trading in securities. Over-The-Counter
Exchange of India introduced, for the first time in India, market makers. Market
makers are companies that have shares in other business establishments. They
normally make trading activities easier by trading securities with other participants in
a stock market. The Exchange was set up to aid enterprising promoters in raising
finance for new projects in a cost effective manner and to provide investors with a
transparent & efficient mode of trading. Modeled along the lines of the NASDAQ
market of USA, OTCEI introduced many novel concepts to the Indian capital markets
such as screen-based nationwide trading, sponsorship of companies, market making
and scripless trading. As a measure of success of these efforts, the Exchange today has
115 listings and has assisted in providing capital for enterprises that have gone on to
build successful brands for themselves like VIP Advanta, Sonora Tiles & Brilliant
mineral water, etc.
OTCEI
is the first screen based nationwide stock exchange in India
is the first exchange to introduce Market Making in India
is the first exchange to introduce Sponsorship of companies in India
is the only exchange to allow listing of companies with paid-up below Rs.3
crores
is the only exchange to allow companies with less than 3 year track record to
tap capital market.
has shifted trading from counter receipts to share certificates
has introduced Weekly Settlement Cycle
allows short selling
allows demat trading through NSDL
has tied-up with NSCCL for Clearing
Need for OTCEI
Studies by NASSCOM, Software Technology Parks of India, the venture capital funds
and the government's IT Task Force, as well as the rising interest in information
technology, pharmaceutical, biotechnology and media shares have repeatedly
emphasized the need for a national stock market for innovative and high growth
companies. Innovative companies are critical to developing economies like India,
which is undergoing a major technological revolution. With their abilities to generate
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employment opportunities and contribute to the economy, it is essential that these

companies not only expand existing operations but also set up new units. The key
issue for these companies is raising timely, cost effective and long term capital to
sustain their operations and enhance growth. Such companies, particularly those that
have been in operation for a short time, are unable to raise funds through the
traditional financing methods, because they have not yet been evaluated by the
financial world. OTC Exchange of India has been co-promoted by the leading
financial institution of the country, they are as follows:

ICICI Bank Limited

Administrator of Specified Undertaking of Unit Trust of India

IDBI Bank Limited.

SBI Capital Markets Limited

IFCI Limited

Life Insurance Corporation of India

Canbank Financial Services Limited

General Insurance Corporation of India

The New India Assurance Company Limited

The Oriental Insurance Company Limited

United India Insurance Company Limited

National Insurance Company Limited

Who would find OTCEI helpful:

high-technology enterprises
companies with high growth potential
companies focussed on new product development .
entrepreneurs seeking finance for specific business projects
The Indian economy is demonstrating signs of recovery and it is essential that these
companies have suitable financing alternatives to fund their growth and maintain
competitiveness. OTCEI, with its entry guidelines and eligibility requirements
tailored for such innovative and growth oriented companies, is ideally positioned as
the preferred route for raising funds through Initial Public Offer (IPOs) or primary
issues, in this country. The Exchange has three types of intermediaries called
Members, Dealers and Sponsors, who contribute to the Exchange's activities by
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trading and enabling listing of companies on the Exchange. Members and Dealers
may carry out the activities of trading, underwriting, market making and participation
in bought out deals, but Dealers cannot sponsor an issue for listing. Sponsors can
perform the function of sponsorship of issues, but are not permitted to participate in
secondary market activities.
Salient Features of OTCEI:
1. Ringless and Screen-based Trading: The OTCEI was the first stock
exchange to introduce automated, screen-based trading in place of
conventional trading ring found in other stock exchanges. The network of online computers provides all relevant information to the market participants on
their computer screens. This allows them the luxury of executing their deals in
the comfort of their own offices.
2. Sponsorship: All the companies seeking listing on OTCE have to approach
one of the members of the OTCEI for acting as the sponsor to the issue. The
sponsor makes a thorough appraisal of the project; as by entering into the
sponsorship agreement, the sponsor is committed to making market in that
scrip (giving a buy sell quote) for a minimum period of 18 months.
Sponsorship ensures quality of the companies and enhance liquidity for the
scrips listed on OTCEI.
3. Transparency of Transactions: The investor can view the quotations on the
computer screen at the dealers office before placing the order. The OTCEI
system ensures that trades are done at the best prevailing quotation in the
market. The confirmation slip/trading document generated by the computers
gives the exact price at which the deals has been done and the brokerage
charged.
4. Liquidity through Market Making: The sponsor-member is required to give
two-way quotes(buy and sell) for the scrip for 18 months from commencement
of trading. Besides the compulsory market maker, there is an additional market
maker giving two way quotes for the scrip. The idea is to create an
environment of competition among market makers to produce efficient pricing
and narrow spreads between buy and sell quotations.
5. Listing of Small and Medium-sized Companies: Many small and mediumsized companies were not able to enter capital market due to the listing
requirement of Securities Contracts (Regulation) Act, 1956 regarding the
minimum issued equity of Rs.10 crores in case of the Mumbai stock Exchange
and Rs.3 crores in case of other stock exchanges. The OTCEI provides an
opportunity to these companies to enter the capital market as companies with
issued capital of Rs.30 lacks onwards can raise finance from the capital market
through OTCEI.
6. Technology: OTCEI uses computers and telecommunications to bring
members/dealers together electronically, enabling them to trade with one
another over the computer rather than on a trading floor in a single location.
7. Nation-wide Listing: OTCEI network is spread all over India through
members, dealers and representative office counters. The company and its
securities get nation-wide exposure and investors all over India can start
trading in that scrip.
8. Bought-out Deals: Through the concept of a bought-out deal, OTCEI allows
companies to place its equity with the sponsor-member at a mutually agreed
price. This ensures swifter availability of funds to companies for timely
completion of projects and a listed status at a later date.
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Benefits of getting OTCEI Listing for Companies.

The OTCEI offers facilities to the companies having a issued equity capital of more
than Rs. 30 lakhs. The benefits of listing at the OTCEI are:

Small and medium closely-held companies can go public.

The OTCEI encourages entrepreneurship.
Companies can get the money before the issue in cases of Bought-out-deals.
It is more cost-effective to come with an issue of OTCEI.
Small companies can get listing benefits.
Easy issue marketing by using the nation-wide OTCEI dealer network.
Nation-wide trading by listing at just one exchange.

Benefits of Trading on OTCEI for Investors:

The OTCEI trading counters are easily accessible by any investors.

The OTCEI provides greater confidence to investors because of complete
transparency in deals.
At the OTCEI, the transactions are fast and are completed quickly.
The OTCEI ensures security, liquidity by offering two-way quotes.
The OTCEI is an investor friendly exchange with Single Window Clearance
for all investor requests.
Key Information
Base Minimum Capital deposited with the Exchange
The Base Minimum Capital is taken as security for due performance and fulfilment by
the member of his operations and obligations towards the Exchange. The minimum
base capital is Rs. 4 lakhs. All members have to comply with the Base Minimum
Capital requirements before their activation. The members may opt for Base
Minimum Capital by way of Cash, FDRs, Bank Guarantee or Securities.
Cash to be deposited with the Exchange- minimum 25 % i.e. Rs. 1 lakh
Deposit of Fixed Deposit Receipts (FDRs)- (25 %) issued by approved
banks
Deposit /lodgement of Securities- (maximum 50 %) with approved
custodian (HDFC Bank Ltd.) with 20% margin. OR
Irrevocable Bank guarantees (in lieu of securities - maximum 50 %) from
approved banks
Members can also deposit additional base capital with the Exchange. The cash
component of the additional base capital to be deposited should be a minimum 30%.
Intra-day Limits:
Turnover Limit: Members are subject to intra-day trading limits. Gross Turnover
(buy and sell) for the day shall not exceed twenty five times (25) the base capital
deposited by the members. Members desirous of increasing their limits will have to
submit additional deposits by way of cash, bank guarantees, fixed deposit receipts and
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securities. Trading Members violating the intra-day gross turnover limit at any time
on any trading day shall not be permitted to trade forthwith.
Gross Exposure Limit: Members are subject to gross exposure limits. Gross
exposure, being the aggregate of the cumulative net outstanding positions (purchase
or sales) in each security shall not exceed eight and half times (8.5) the base capital
deposited by the members. Gross Exposure at any point of time shall also include net
outstanding positions of the previous settlement till the securities pay-in for the
previous settlement. Members desirous of increasing their limits will have to submit
additional deposits by way of cash, bank guarantees, fixed deposit receipts and
securities.
Margins:
All margins imposed by the Exchange are payable on T+1 day.
The Exchange collects the following margins from brokers depending on their
positions/ exposures and market volatility, in line with SEBI requirements:
a) Daily Margin
Daily margin payable by the member consists of value at Risk Margin and Mark to
Mark Margin.
b) Mark to Market Margin
Mark to market margin is computed on the basis of mark to market loss of a member.
Mark to market loss is potential loss, in case the cumulative net outstanding position
of the member in all securities at the end of day is closed out. Mark to Market margin
is calculated by marking each transaction in a scrip to the closing price of the scrip at
the end of trading. MTM Profit/loss across different securities within the same
settlement is set off to determine the MTM loss for a settlement. Such MTM losses
for settlements are computed at client level.
c) Value at Risk Margin
Value at Risk Margin is computed for all securities in the rolling settlement. All
securities are classified into three groups for purpose of var margin

BOMBAY STOCK EXCHANGE

Bombay Stock Exchange Limited is known as the oldest stock exchange in Asia with
a rich heritage. Popularly known as "BSE", it was established as "The Native Share &
Stock Brokers Association" in 1875. It traces its history to the 1850s, when 4 Gujarati
and 1 Parsi stockbroker would gather under banyan trees in front of Mumbai's Town
Hall. The location of these meetings changed many times, as the number of brokers
constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875
became an official organization known as 'The Native Share & Stock Brokers
Association'. It is the first stock exchange in the country to obtain permanent
recognition in 1956 from the Government of India under the Securities Contracts
(Regulation) Act, 1956. The Bombay Stock Exchange developed the BSE SENSEX in
1986, giving the BSE a means to measure overall performance of the exchange. In
2000 the BSE used this index to open its derivatives market, trading SENSEX futures
contracts. The development of SENSEX options along with equity derivatives
followed in 2001 and 2002, expanding the BSE's trading platform. Historically an
open outcry floor trading exchange, the Bombay Stock Exchange switched to an
electronic trading system in 1995. It took the exchange only fifty days to make this
transition. This automated, screen-based trading platform called BSE On-line trading
(BOLT) currently has a capacity of 80 lakh orders per day. The BSE has also
introduced the world's first centralized exchange-based internet trading system,
BSEWEBx.co.in to enable investors anywhere in the world to trade on the BSE
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platform. Bombay stock Exchange is the third largest number of listed companies in
the world, with 4900 listed as of Feb 2010. It is located at Dalal Street, Mumbai,
India. On Feb, 2010, the equity market capitalization of the companies listed on the
BSE was US$1.28 trillion, making it the largest stock exchange in South Asia and the
12th largest in the world. With over 4900 Indian companies listed & over 7700 scrips
on the stock exchange, it has a significant trading volume. The BSE SENSEX
(Sensitive index), also called the "BSE 30", is a widely used market index in India
and Asia. Though many other exchanges exist, BSE and the National Stock Exchange
of India account for most of the trading in shares in India. The Exchange's pivotal and
pre-eminent role in the development of the Indian capital market is widely recognized
and its index, SENSEX, is tracked worldwide. Earlier an Association of Persons
(AOP), the Exchange is now a demutualised and corporatized entity
incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE
(Corporatisation and Demutualisation) Scheme, 2005 notified by the Securities and
Exchange Board of India (SEBI).With demutualisation, the trading rights and
ownership rights have been de-linked effectively addressing concerns regarding
perceived and real conflicts of interest. The Exchange is professionally managed
under the overall direction of the Board of Directors. The Board comprises eminent
professionals, representatives of Trading Members and the Managing Director of the
Exchange. The Board is inclusive and is designed to benefit from the participation of
market intermediaries. In terms of organization structure, the Board formulates
larger policy issues and exercises over-all control. The committees constituted by the
Board are broad-based. The day-to-day operations of the Exchange are managed by
the Managing Director and a management team of professionals. The Exchange has a
nation-wide reach with a presence in 417 cities and towns of India. The systems and
processes of the Exchange are designed to safeguard market integrity and enhance
transparency in operations. During the year 2004-2005, the trading volumes on the
Exchange showed robust growth. The Exchange provides an efficient and transparent
market for trading in equity, debt instruments and derivatives. The BSE's On Line
Trading System (BOLT) is a proprietory system of the Exchange and is BS 7799-22002 certified. The surveillance and clearing & settlement functions of the Exchange
are ISO 9001:2000 certified. For the premier Stock Exchange that pioneered the stock
broking activity in India , 125 years of experience seem to be a proud milestone. A lot
has changed since 1875 when 318 persons became members of what today is called
"Bombay Stock Exchange Limited" by paying a princely amount of Re1.
Since then, the stock market in the country has passed through both good and bad
periods. The journey in the 20th century has not been an easy one. Till the decade of
eighties, there was no measure or scale that could precisely measure the various ups
and downs in the Indian stock market. Bombay Stock Exchange Limited (BSE) in
1986 came out with a Stock Index that subsequently became the barometer of the
Indian Stock Market. SENSEX, first compiled in 1986 was calculated on a "Market
Capitalization-Weighted" methodology of 30 component stocks representing a sample
of large, well-established and financially sound companies. The base year of SENSEX
is 1978-79. The index is widely reported in both domestic and international markets
through print as well as electronic media. SENSEX is not only scientifically designed
but also based on globally accepted construction and review methodology. From
September 2003, the SENSEX is calculated on a free-float market capitalization
methodology. The "free-float Market Capitalization-Weighted" methodology is a
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widely followed index construction methodology on which majority of global equity

benchmarks are based. The growth of equity markets in India has been phenomenal in
the decade gone by. Right from early nineties the stock market witnessed heightened
activity in terms of various bull and bear runs. More recently, the bourses in India
witnessed a similar frenzy in the 'TMT' sectors. The SENSEX captured all these
happenings in the most judicial manner. One can identify the booms and bust of the
Indian equity market through SENSEX. The launch of SENSEX in 1986 was later
followed up in January 1989 by introduction of BSE National Index (Base: 1983-84 =
100). It comprised of 100 stocks listed at five major stock exchanges in India at
Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The BSE National Index was
renamed as BSE-100 Index from October 14, 1996 and since then it is calculated
taking into consideration only the prices of stocks listed at BSE. The Exchange
launched dollar-linked version of BSE-100 index i.e. Dollex-100 on May 22, 2006.
With a view to provide a better representation of the increased number of companies
listed, increased market capitalization and the new industry groups, the Exchange
constructed and launched on 27th May, 1994, two new index series viz., the 'BSE-200'
and the 'DOLLEX-200' indices. Since then, BSE 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 broader, segment-specific and sector-specific
indices, the Exchange has continuously been increasing the range of its indices. The
launch of BSE-200 Index in 1994 was followed by the launch of BSE-500 Index and
5 sectoral indices in 1999. In 2001, BSE launched the BSE-PSU Index, DOLLEX-30
and the country's first free-float based index - the BSE TECk Index. The Exchange
shifted all its indices to a free-float methodology (except BSE PSU index) in a phased
manner. The Exchange also disseminates the Price-Earnings Ratio, the Price to Book
Value Ratio and the Dividend Yield Percentage on day-to-day basis of all its major
indices. The values of all BSE indices are updated every 15 seconds during the market
hours and displayed through the BOLT system, BSE website and news wire agencies.
All BSE-Indices are reviewed periodically by the "Index Committee" of the
Exchange. The Committee frames the broad policy guidelines for the development
and maintenance of all BSE indices. Department of BSE Indices of the Exchange
carries out the day to day maintenance of all indices and conducts research on
development of new indices. BSE Ltd places great deal of emphasis on Information
Technology to strengthen its functioning and performance. 'Operations & Trading
Department' continuously upgrades the hardware, software and networking systems,
thus enabling the Exchange to enhance the quality and standard of service provided to
its members and other market intermediaries. To facilitate smooth transaction, BSE
had replaced its open outcry system with BSE On-line Trading (BOLT) facility in
1995. This totally automated screen based trading in securities was put into practice
nation-wide within a record time of just 50 days. The BOLT platform capacity has
been enhanced to 40 lakh orders per day by upgrading the hardware. BOLT has been
certified by DNV for conforming to BS7799 security standards. With this, BSE is the
second stock exchange in the world to have this certification. Exchange has also
introduced the world's first centralized exchange based Internet trading system,
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BSEWEBx.com. The initiative enables investors anywhere in the world to trade on

the BSE platform. BSE's website http://www.bseindia.com/ provides comprehensive
information on the stock market. It is one of the most popular financial websites in
India and is regularly visited by financial organizations and other stakeholders for
updates. BSE's team of experts and professionals, along with its strategic partners
have put into place several critical systems such as Derivatives Trading & Settlement
System (DTSS), Electronic Contract Notes (ECN), Unique Client Code registration
(UCC), Real time data dissemination - system Data feed, Integrated Back office
System - CDB / IDB, Book Building System (BBS) & Reverse Book Building
System (RBBS) etc. BSE also operates one of the largest private networks in India,
comprising campus LAN; WAN set up within Mumbai and across some major metros
in India and VSAT set up across the country. BSE's Campus LAN covers around 350
member offices across three BSE buildings P.J. Towers, Rotunda and Cama building.
BSE WAN setup connects approximately 2000 member offices within Mumbai and
some major metros to BSE systems. Leased MLLN circuits from MTNL / BSNL are
provided with ISDN / TTML leased circuit backup. Around 300 circuits are of 2Mbps
capacity and rests all are of 64Kbps capacity. In year 2000 BSE set up its own VSAT
Master Earth Station (HUB), this uses full transponder on INSAT 3B satellite to cater
to roughly 2000 locations in over 400 cities across the country. Regional Hubs for
local fan out of leased lines within Metros backed by high availability trunk backbone
to BSE. The regional technology hubs are commissioned in Ahmedabad, Bangalore,
Chandigarh, Chennai, Delhi, Hyderabad, Indore, Jaipur, Kolkatta, Ludhiana, Pune and
Rajkot provide cost-effective reliable services to members. The trading and settlement
activities of the member-brokers are closely monitored through On-line Real Time
System known as BSE Online Surveillance System (BOSS). The system enables the
Exchange to detect market abuses at a nascent stage, improve the risk management
system and strengthen the self-regulatory mechanisms. Currently, BSE is in the
process of evolving an integrated system for online surveillance of Cash and
Derivatives Segment through BSE Online Surveillance System - Integrated (BOSS i). BSE uses higher end fault tolerant systems for its trading and related
functionalities. It uses Integrity Non-stop S88000 systems for its online trading
systems (BOLT). The systems have been designed to deliver the best performance
without compromising on key factors of availability, scalability, ROI and TCO. There
are powerful RISC based Unix servers rp8400 from hp for our Derivatives,
Settlement, Back office, Data feed, BBS, RBBS and other systems related to trading /
non-trading and related functionalities. The systems are facilitated by the use of the
robust and high available storage subsystems from hp. BSE use one of the most
powerful RISC based Alpha GS140 and ES40 servers for our Internet based trading
system (ITS) enabling the end user to carry out the trading activities from any location
facilitated by the internet. BSE also use Intel 8 way and 4 way servers for
bseindia.com web site, one of the best portal on information related to capital markets.
BSE strictly adheres to IS policies and IS Security policies and procedures for its day
to day operational activities on 24 x 7 basis which has enabled us to achieve the

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BS7799 certification. In addition, BSE has also been successful in maintaining

systems and processes uptime of 99.99%.
Hours of operation of the Bombay Stock Exchange
Session

Timing

Beginning of the Day Session

8:00 - 9:00

Trading Session

9:00 - 15:30

Position Transfer Session

15:30 - 15:50

Closing Session

15:50 - 16:05

Option Exercise Session

16:05 - 16:35

Margin Session

16:35 - 16:50

Query Session

16:50 - 17:35

End of Day Session

17:30

The hours of operation for the BSE quoted above are stated in terms of the local time
(i.e. GMT +5:30) in Mumbai (Bombay), India. BSE's normal trading sessions are on
all days of the week except Saturdays, Sundays and holidays declared by the
Exchange in advance
BSE Indices
For the premier stock exchange that pioneered the securities transaction business in
India, over a century of experience is a proud achievement. A lot has changed since
1875 when 318 persons by paying a then princely amount of Re. 1, became members
of what today is called Bombay Stock Exchange Limited (BSE).Over the decades, the
stock market in the country has passed through good and bad periods. The journey in
the 20th century has not been an easy one. Till the decade of eighties, there was no
measure or scale that could precisely measure the various ups and downs in the Indian
stock market. BSE, in 1986, came out with a Stock Index- SENSEX- that subsequently
became the barometer of the Indian stock market. The launch of SENSEX in 1986 was
later followed up in January 1989 by introduction of BSE National Index (Base:
1983-84 = 100). It comprised 100 stocks listed at five major stock exchanges in India
- Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The BSE National Index was
renamed BSE-100 Index from October 14, 1996 and since then, it is being calculated
taking into consideration only the prices of stocks listed at BSE. BSE launched the
dollar-linked version of BSE-100 index on May 22, 2006.With a view to provide a
better representation of the increasing number of listed companies, larger market
capitalization and the new industry sectors, BSE launched on 27th May, 1994 two
new index series viz., the 'BSE-200' and the 'DOLLEX-200'. Since then, BSE has
come a long way in attuning itself to the varied needs of investors and market
participants. In order to fulfill the need for still broader, segment-specific and sectorspecific indices, BSE has continuously been increasing the range of its indices. BSE500 Index and 5 sectoral indices were launched in 1999. In 2001, BSE launched BSEPSU Index, DOLLEX-30 and the country's first free-float based index-: the BSE
TECk Index. Over the years, BSE shifted all its indices to the free-float methodology
(except BSE-PSU index).BSE disseminates information on the Price-Earnings Ratio,
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the Price to Book Value Ratio and the Dividend Yield Percentage on day-to-day basis
of all its major indices. The values of all BSE indices are updated on real time basis
during market hours and displayed through the BOLT system, BSE website and news
wire agencies. All BSE Indices are reviewed periodically by the BSE Index
Committee. This Committee which comprises eminent independent finance
professionals frames the broad policy guidelines for the development and
maintenance of all BSE indices. The BSE Index Cell carries out the day-to-day
maintenance of all indices and conducts research on development of new indices.
Following are the main BSE Indexes
BSE PSU Index
BSE TECK Index
BSE Mid Cap & Small Cap Index
BSE 100 Index
Dollex-100
BSE-100 index
BSE 200 Index
Dollex-200
BSE-500 index

REGIONAL STOCK EXCHANGE

The Regional Stock Exchanges started clustering from the year 1894, when the first
RSE, the Ahmedabad Stock Exchange (ASE) was established. In the year 1908, the
second in the series, Calcutta Stock Exchange (CSE) came into existence. During the
early sixties, there were only few recognized RSEs in India namely Calcutta, Madras,
Ahmedabad, Delhi, Hyderabad and Indore. The number remained unchanged for the
next two decades. 1980s was the turning point and many RSEs were incorporated.
The stock exchange in India witnessed a flourishing phase in 1980s with the
incorporation of many exchanges under it. The latest is Coimbatore Stock Exchange
and Meerut Stock Exchange. There are total 23 stock exchanges in India. Among
them two are national level stock exchanges namely Bombay Stock Exchange (BSE)
and National Stock Exchange of India (NSE). The rest 21 are Regional Stock
Exchanges (RSE). Only Mumbai Stock Exchange and National Stock Exchange, are
really playing the role of a Stock Exchange by having separate live trading platform
and by providing necessary depth to the market. All other SEs, mostly through their
subsidiaries, have become members of either NSE or BSE or both. Now the members
of regional SEs trade only through this route. Of these 24 Stock Exchanges SEBI has
withdrawn the recognition granted to Hyderabad Stock Exchange and Sourashtra
Kutch Stock Exchange, derecognised Mangalore Stock Exchange and refused to
renew the recognition of Magadh Stock Exchange. As regards Coimbatore Stock
Exchange, its members as per SCRA Rules have expressed their lack of desire to
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renew the recognition and did not intentionally apply for renewal as per AGM
resolution. Its recognition, however, expired on 15/9/2006. The balance 19 SEs is
demutualised stock exchange. After the advent of NSE, regional stock exchanges lost
all their business to the members of NSE and BSE. These two Stock Exchanges have
opened their trading terminal in nook and corner thereby taking stock market
operations even to remote villages. Thanks to the accelerated growth of Technology.
The Finance Ministry took several steps to revive regional SEs. A new Stock
Exchange connecting all regional SEs called Interconnected Stock Exchange was
formed which again drew a big flop. An Expert Committee was formed by
the Finance Ministry & SEBI with Honble Justice Kania (former Chief Justice of
India) as its Chairman which consisted of eminent personalities from various
profession and top officials from SEBI. This Committee was asked to look into Stock
Exchange reforms and about regional stock exchanges. After detailed study of all the
regional SEs the Committee submitted its report and suggested certain measures. In
its study the committee observed that regional stock exchanges have lost their
relevance. The Committee, however, did not suggest any exit route to these regional
stock exchanges. Its recommendations of demutualisation of Stock Exchanges were
accepted by the government. SEBI approved the demutualisation Scheme of all the
Stock Exchanges except Coimbatore Stock Exchange. As per the amended Securities
Contract Act it is the duty of SEBI either to approve or reject the demutualisation
scheme. But SEBI had not done either in the case of Coimbatore Stock Exchange.
This violation by SEBI of SCRA has not been noticed or questioned by anybody so
far. A very good precedence for non compliance by none other than the regulator itself
.Another committee was formed under the Chairmanship of Sri G.Anantharaman,
wholetime member of SEBI to study the future of Regional Stock Exchanges - Post
Demutualisation. The Committee submitted its report on May, 8th 2006. Once again
the Committee confirmed that regional SEs have no relevance whatsoever in the
present situation. They added that they no longer play any role in economic
development and they no longer serve any public interest. They further suggested
ways and means to give an exit route to the regional stock exchanges. Even after
nearly two and half years SEBI has not taken any action on the report of this
Committee. These regional stock exchanges have not done any transaction for the past
8 or 9 years. It has been confirmed by two expert committees that the regional stock
exchanges no longer serve any economic purpose or public purpose. Coimbatore
Stock Exchange, has already passed resolution clearly expressing its lack of desire to
renew its recognition by SEBI and did not apply for renewal. As per SCRA no
member of a Recognised Stock Exchange can do any business other than Securities
business. SEBI should understand that mechanical grant of recognition to dormant
Stock Exchanges affects the livelihood of its members in an indirect way. But without
any valid reason SEBI is not allowing any Regional Stock Exchange to go out of its
clutches even after knowing full well that these are dormant stock exchanges. One
could not understand the logic of SEBI granting recognition to these exchanges year
after year. The only benefit to SEBI seems to be the fees that are payable by the
members of these Stock Exchanges whether they have turnover or not. These
Regional Stock Exchanges, which are akin to dead bodies, are being treated (what
for?) in the hospital by name SEBI. It is high time that SEBI as well as Finance
Ministry come to realities and take a practical step towards closure of all unviable and
dormant regional stock exchanges. This will also reduce the regulatory burden on
SEBI which does not find time to look into the voluminous business done at NSE and
BSE.
Present Status of the Stock Exchanges
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Out of the 22 recognised stock exchanges in India (SEBI has refused renewal of
recognition to Mangalore Stock Exchange), NSE and BSE account for almost 100%
of the total turnover. As far as RSEs are concerned, except for the Calcutta Stock
Exchange (CSE) and the Uttar Pradesh Stock Exchange (UPSE), there is no trading
on any other stock exchange and even on the CSE and UPSE, the business is down to
a trickle. The financial condition of the RSEs is by and large also weak. This state of
affairs has been prevailing for the past several years. Three factors have been
primarily responsible for this: a) the advent of automated trading and extension of
nationwide reach of BSE and NSE which offered a large and liquid market to
investors across the country; b) the introduction of uniform rolling settlement from
June 2001 in place of account period settlement with varying settlement cycles and c)
the abolition of the concept of regional listing.

CHAPTER 8
TREND OF CAPITAL MARKET IN INDIA
TREND OF SENSEX AND NIFTY
Traditionally, indexes have been used as information sources. By looking at an index
we know how the market is faring. Through index we can determine that where the
current market position is. This information aspect also figures in myriad applications
of stock market indexes in economic research. This is particularly valuable when an
index reflects highly up-to-date information (a central issue which is discussed in
detail ahead) and the portfolio of an investor contains illiquid securities - in this case,
the index is a lead indicator of how the overall portfolio will fare. In recent years,
indexes have come to the fore owing to direct applications in finance, in the form of
index funds and index derivatives. Index funds are funds which passively `invest in
the index'. An index fund or index tracker is a collective investment scheme (usually a
mutual fund or exchange-traded fund) that aims to replicate the movements of an
index of a specific financial market, or a set of rules of ownership that are held
constant, regardless of market conditions. Tracking can be achieved by trying to hold
all of the securities in the index, in the same proportions as the index. Other methods
include statistically sampling the market and holding "representative" securities.
Many index funds rely on a computer model with little or no human input in the
decision as to which securities are purchased or sold and is therefore a form of
management. Index fund is a type of mutual fund with a portfolio constructed to
match or track the components of a market index, such as the Standard & Poor's 500
Index (S&P 500). An index mutual fund is said to provide broad market exposure, low
operating expenses and low portfolio turnover. Indexing" is a passive form of fund
management that has been successful in outperforming most actively managed mutual
funds. While the most popular index funds track the S&P 500, a number of other
indexes, including the Russell 2000 (small companies), the DJ Wilshire 5000 (total
stock market), the MSCI EAFE (foreign stocks in Europe, Australasia, Far East) and
the Lehman Aggregate Bond Index (total bond market) are widely used for index
funds. Investing in an index fund is a form of passive investing. The primary
advantage to such a strategy is the lower management expense ratio on an index fund.
Also, a majority of mutual funds fail to beat broad indexes, such as the S&P
500.Index derivatives allow people to cheaply alter their risk exposure to an index
(this is called hedging) and to implement forecasts about index movements (this is
called speculation). Hedging using index derivatives has become a central part of risk
management in the modern economy. These applications are now a multi-trillion
dollar industry worldwide, and they are critically linked up to market indexes. Finally,
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indexes serve as a benchmark for measuring the performance of fund managers. An

all-equity fund should obtain returns like the overall stock market index. A 50:50 debt:
equity fund should obtain returns close to those obtained by an investment of 50% in
the index and 50% in fixed income. A well-specified relationship between an investor
and a fund manager should explicitly define the benchmark against which the fund
manager will be compared, and in what fashion. The most important type of market
index is the broad-market index. In most countries, a single major index dominates
benchmarking, index funds, index derivatives and research applications. In addition,
more specialized indexes often find interesting applications. In India, we have seen
situations where a dedicated industry fund uses an industry index as a benchmark. In
India, where clear categories of ownership groups exist, it becomes interesting to
examine the performance of classes of companies sorted by ownership group.
SENSEX- The Barometer of Indian Capital Markets
The BSE SENSEX is not only scientifically designed but also based on globally
accepted construction and review methodology. First compiled in 1986, SENSEX is a
basket of 30 constituent stocks representing a sample of large, liquid and
representative companies. The base year of SENSEX is 1978-79 and the base value is
100. The index is widely reported in both domestic and international markets through
print as well as electronic media. The SENSEX, short form of the BSE-Sensitive
Index, is a "Market Capitalization-Weighted" index of 30 stocks representing a
sample of large, well-established and financially sound companies. It is the oldest
index in India and has acquired a unique place in the collective consciousness of
investors. The index is widely used to measure the performance of the Indian stock
markets. SENSEX is considered to be the pulse of the Indian stock markets as it
represents the underlying universe of listed stocks at The Stock Exchange, Mumbai.
Further, as the oldest index of the Indian Stock market, it provides time series data
over a fairly long period of time (since 1978-79).For the premier Stock Exchange that
pioneered the stock broking activity in India, 128 years of experience seems to be a
proud milestone. A lot has changed since 1875 when 318 persons became members of
what today is called "The Stock Exchange, Mumbai" by paying a princely amount of
Re1. Since then, the country's capital markets have passed through both good and bad
periods. The journey in the 20th century has not been an easy one. Till the decade of
eighties, there was no scale to measure the ups and downs in the Indian stock market.
The SENSEX is an "index". What is an index? An index is basically an indicator. It
gives you a general idea about whether most of the stocks have gone up or most of the
stocks have gone down. The SENSEX is an indicator of all the major companies of
the BSE. The Nifty is an indicator of all the major companies of the NSE. If the
SENSEX goes up, it means that the prices of the stocks of most of the major
companies on the BSE have gone up. If the SENSEX goes down, this tells you that
the stock price of most of the major stocks on the BSE have gone down. SENSEX is
the short form of The Bombay Stock Exchange Sensitive Index. It is a sweet short
name for a long boring name. Its a benchmark it shows the health of the share
market. If it goes down, it means that the market is going down (Bear market) and if it
goes up, the market is going up (Bull market). Therefore going up is a good sign it
means that youll get more prices for the shares you have. It captures the movement of
the share prices. A rising SENSEX means share prices are going up, as told earlier.
Plus it also means that companies are doing well and shareholders will be earning
more from their shares. In overall, it also reflects the condition on the Indian
economy, because if companies do well, it augurs well for the Indian economy too.
'SENSEX' is the glamorous dancing beauty of traditional Indian stock market. In the
recent past this glamorous stock market indicator dances aggressively. This paper is
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aimed at throwing lights on various factors that made our SENSEX baby to dance fast
with lots of forward steps. Does the movement of SENSEX or Nifty really mean
anything to the investors, fund managers, investment advisors, and last but not the
least to the regulators? Do these numbers have any significance? Do they have any
scientific basis? How does a layman understand these numbers? What exactly that
goes into these numbers? In recent years, indexes have come to the forefront owing to
direct applications in finance in the form of index funds and index derivatives. Index
derivatives allow people to cheaply alter their risk exposure to an index (hedging) and
to implement forecasts about index movements (speculation). Hedging using index
derivatives has become a central part of risk management in the modern economy.
Securities market indexes have been constructed to give a quick answer to the
question: What is the-market- doing? The SENSEX is calculated on the basis of 30
biggest shares. These shares make more than 50% of the total market capitalization in
the BSE market. They are the most traded ones, obviously because market cap is high.
They represent in all 13 sectors of the economy all the companies are leaders in
their respective fields. There is a committee the Index Committee who selects these
shares. The committee consists of experts in share markets. They modify the
SENSEX at regular intervals. SENSEX uses free-float market capitalization. Market
capitalization refers to the simply the value of the company calculated by (share
price*number of shares in the market).Free float refers to those shares that are open
for everyone to trade. They are open to the general public. The criteria for selecting
these shares are a bit complex. The shares should have been bought/ sold every day
for the past one year this ensures that the selected shares are the most happening
ones. The shares should be among the top 150 shares in average value (buy/sell). The
shares should be listed in BSE for more than a year. The company should be a trusted
one and be leaders in their own field. This ensures that theres no black sheep among
the 30 selected. To see the listed companies click here. As the companys performance
change the shares go up or down. If the company is doing well or some news come
that it will do well in future, SENSEX will go up. If theres a bad news, SENSEX will
go down. Moreover, if theres some positive news about the country like India
becoming a nuclear power, SENSEX will go up because Indias economy is going up.
So both companies and the country are responsible for the SENSEX movements.
SENSEX is a general index, there are other specific index too. A SENSEX can be
read as the base year of the SENSEX is 1978-79 and base value is 100. Actually it
means calculations start with taking 1978-79 SENSEX as 100 and then if todays
SENSEX is 12009.59 means that the market value has increased to more than 120
times. The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that
subsequently became the barometer of the Indian stock market. SENSEX is not only
scientifically designed but also based on globally accepted construction and review
methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks
representing a sample of large, liquid and representative companies. The base year of
SENSEX is 1978-79 and the base value is 100. The index is widely reported in both
domestic and international markets through print as well as electronic media. The
Index was initially calculated based on the "Full Market Capitalization" methodology
but was shifted to the free-float methodology with effect from September 1, 2003. The
"Free-float Market Capitalization" methodology of index construction is regarded as
an industry best practice globally. All major index providers like MSCI, FTSE,
STOXX, S&P and Dow Jones use the Free-float methodology. Due to is wide
acceptance amongst the Indian investors; SENSEX is regarded to be the pulse of the
Indian stock market. As the oldest index in the country, it provides the time series data
over a fairly long period of time (From 1979 onwards). Small wonder, the SENSEX
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has over the years become one of the most prominent brands in the country. The
growth of equity markets in India has been phenomenal in the decade gone by. Right
from early nineties the stock market witnessed heightened activity in terms of various
bull and bear runs. The SENSEX captured all these events in the most judicial
manner. One can identify the booms and busts of the Indian stock market through
SENSEX.
What-the-Index means?
An index is a number, which measures the change in a set of values over a period of
time. A stock index represents the change in value of a set of stocks, which constitute
the index. More specifically, a stock index number is the current relative value of a
weighted average of the prices of a pre-defined group of equities. It is a relative value
because it is expressed relative to the weighted average of prices at some arbitrarily
chosen starting date or base period. The starting value or base of the index is usually
set to a number such as 100 or 1000.
Characteristics-of-a-good-Index
o A good stock market index is one, which captures the behaviour of the
overall equity market.
o It should represent the market; it should be well diversified and yet
highly liquid.
o Movements of the index should represent the returns obtained by
"typical" portfolios in the country.
A market index is very important for its use
A market index is very important for its use of the following factors:

as a barometer for market behaviour,

as a benchmark portfolio performance,
as an underlying in derivative instruments like index futures, and in passive
fund management by index funds

Every-stock-price-moves-for-two-possible-reasons:
1. News about the company (e.g. a product launch, or the closure of a factory)
2. News about the country (e.g. nuclear bombs, or a budget announcement)
The job of an index is to purely capture the second part, the movements of the stock
market as a whole (i.e. news about the country). This is achieved by averaging. Each
stock contains a mixture of two elements - stock news and index news. When we take
an average of returns on many stocks, the individual stock news tends to cancel out
and the only thing left is news that is common to all stocks.
SENSEX Calculation Methodology

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SENSEX is calculated using the "Free-float Market Capitalization" methodology. As

per this methodology, the level of index at any point of time reflects the Free-float
market value of 30 component stocks relative to a base period. The market
capitalization of a company is determined by multiplying the price of its stock by the
number of shares issued by the company. This market capitalization is further
multiplied by the free-float factor to determine the free-float market capitalization.
The base period of SENSEX is 1978-79 and the base value is 100 index points. This
is often indicated by the notation 1978-79=100. The calculation of SENSEX involves
dividing the Free-float market capitalization of 30 companies in the Index by a
number called the Index Divisor. The Divisor is the only link to the original base
period value of the SENSEX. It keeps the Index comparable over time and is the
adjustment point for all Index adjustments arising out of corporate actions,
replacement of scrips etc. During market hours, prices of the index scrips, at which
latest trades are executed, are used by the trading system to calculate SENSEX every
15 seconds and disseminated in real time.
Dollex-30
BSE also calculates a dollar-linked version of SENSEX and historical values of this
index are available since its inception. DOLLEX-30 is the dollar version of BSE
SENSEX, the benchmark index of equity markets in India. Similar to SENSEX, the
base year for the DOLLEX-30 is fixed as 1978-79 and base value at 100 points. BSE
has computed historical index values of DOLLEX-30 since 1979. The scope for
DOLLEX-30 emerged from the background of Indian equity markets increasingly
getting integrated with global capital markets and the need to assess the market
movements in terms of international benchmarks. While SENSEX reflects growth in
market value of constituent stocks over the base period in rupee terms, the DOLLEX30 would reflect the changes in both the stock prices as well as currency values.
DOLLEX-30 could be found useful by foreign investors to enable them to measure
the equity returns in real terms both in respect of domestic and international
currencies. DOLLEX-30 is the second dollar denominated index designed by the
BSE. In 1994 BSE had launched DOLLEX-200, a dollar version of BSE-200 Index.
Movement of DOLLEX-30
SENSEX and DOLLEX-30 have a common base year and value. Both these indices
were equal to 100 points in 1978-79. Accompanying graph shows the movement of
the SENSEX and the DOLLEX-30 since 1979. The vast difference between the
SENSEX and DOLLEX-30 in respect of points became more evident and wider in the
decade of the 1990s, owing to steep depreciation of the rupee against dollar. The ReUS$ conversion rate which was about Rs.8.21 in 1980 rose to about Rs.47.15 in July
2001 showing a six fold depreciation in the last two decades. This variation also
explains the wide difference in the returns from both these Indices. At the current
level of SENSEX, in rupee terms the index increased around 34 times whereas in the
US $ terms it increased by only 5.8 times. A foreign investor with a investment of
US$1000 in India in 1979 makes US$6033 at the end of June 2001 (at an annualized
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return of 8.5 percent in US$ terms), where as a domestic investor with an investment
of Rs.8210 in 1979 (equivalent to US$1000 in 1979) would have got a return of
Rs.283802 at the end of June 2001 (at an annualized return of 17.5 percent in rupee
terms).A comparative study of returns of major emerging economy indices measured
in terms of domestic currency and US$ reveals that India tops among Asian majors.
The returns are compared on the basis of SENSEX returns in case of India with MSCI
country indices in respect of Asian countries. DOLLEX-30, dollar equivalent of the
SENSEX has a very high correlation of 0.96 with MSCI India Standard Index. Since
January 1988 till June end 2001, returns from SENSEX were to the tune of 668
percent in respect of local currency and 110 percent in US$ terms. Three of the major
Asian countries namely Korea, Thailand and Indonesia in fact yielded negative
returns in US $ terms during this period, where as the positive returns of Malaysia and
the Philippines are much lower than the returns from India. Singapore is a major
exception where the returns in US$ terms were higher than the return in local
currency terms, partly because of the greater alignment of its currency with the
movement of the US dollar. A comparative study of returns of major emerging
economy indices measured in terms of domestic currency and US$ reveals that India
tops among Asian majors. The returns are compared on the basis of SENSEX returns
in case of India with MSCI country indices in respect of Asian countries. DOLLEX30, dollar equivalent of the SENSEX has a very high correlation of 0.96 with MSCI
India Standard Index. Since January 1988 till June end 2001, returns from SENSEX
were to the tune of 668 percent in respect of local currency and 110 percent in US$
terms. Three of the major Asian countries namely Korea, Thailand and Indonesia in
fact yielded negative returns in US $ terms during this period, where as the positive
returns of Malaysia and the Philippines are much lower than the returns from India.
Understanding Free-float Methodology
Concept:
Free-float Methodology refers to an index construction methodology that takes into
consideration only the free-float market capitalization of a company for the purpose of
index calculation and assigning weight to stocks in Index. It is a method by which the
market capitalization of an index's underlying companies is calculated. Free-float
methodology market capitalization is calculated by taking the equity's price and
multiplying it by the number of shares readily available in the market. Instead of
using all of the shares outstanding like the full-market capitalization method, the freefloat method excludes locked-in shares such as those held by promoters
and governments. Free Float is Calculated as: FFM= Share Price x (Shares
outstanding Locked In shares). The free-float method is seen as a better way of
calculating market capitalization because it provides a more accurate reflection of
market movements. When using a free-float methodology, the resulting market
capitalization is smaller than what would result from a full-market capitalization
method. Free-float methodology has been adopted by most of the world's major
indexes, including the Dow Jones Industrial Average and the S&P 500.Free-float
market capitalization is defined as that proportion of total shares issued by the
company that are readily available for trading in the market. It generally excludes
promoters' holding, government holding, strategic holding and other locked-in shares
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that will not come to the market for trading in the normal course. In other words, the
market capitalization of each company in a Free-float index is reduced to the extent of
its readily available shares in the market. In India, BSE pioneered the concept of Freefloat by launching BSE Tack in July 2001 and BANKEX in June 2003. While BSE
Tack Index is a TMT benchmark, BANKEX is positioned as a benchmark for the
banking sector stocks. SENSEX becomes the third index in India to be based on the
globally accepted Free-float Methodology.
Major advantages of Free-float Methodology:
A market index should reflect the market movements. Since the index funds follow a
market index, it should consider only liquid scrips and the active portion of the
outstanding shares so that it reflects the market conditions in a better way. So freefloat market capitalization method of calculating index value is suitable. Passive
investments such as foreign direct investments are easily replicable. It aids in index
flexibility and covers overall market (for market indices) and sectors (for sector
indices). It avoids the undue influence of any closely-held (i.e. more promoter
holding) large-capitalization stock on the index movement. Free-float market
capitalization method is followed by major index providers worldwide. In 2002
MSCI, a leading global index provider started using Free-float methodology for all its
indices. The MSCI India Standard Index, which is followed by Foreign Institutional
Investors (FIIs) to track Indian equities, is also based on the Free-float methodology.
All other famous world market indices like NASDAQ, FTSE, DowJones, S&P,
STOXX are also using the Free-float methodology.
A Free-float index reflects the market trends more rationally as it takes into
consideration only those shares that are available for trading in the market.

Free-float Methodology makes the index more broad-based by reducing the

concentration of top few companies in Index. For example, the concentration
of top five companies in SENSEX has fallen under the free-float scenario
thereby making the SENSEX more diversified and broad-based.

A Free-float index aids both active and passive investing styles. It aids active
managers by enabling them to benchmark their fund returns vis--vis an
investable index. This enables an apple-to-apple comparison thereby
facilitating better evaluation of performance of active managers. Being a
perfectly replicable portfolio of stocks, a Free-float adjusted index is best
suited for the passive managers as it enables them to track the index with the
least tracking error.

Free-float Methodology improves index flexibility in terms of including any

stock from the universe of listed stocks. This improves market coverage and
sector coverage of the index. For example, under a Full-market capitalization
methodology, companies with large market capitalization and low free-float
cannot generally be included in the Index because they tend to distort the

265

index by having an undue influence on the index movement. However, under

the Free-float Methodology, since only the free-float market capitalization of
each company is considered for index calculation, it becomes possible to
include such closely held companies in the index while at the same time
preventing their undue influence on the index movement.

Globally, the Free-float Methodology of index construction is considered to be

an industry best practice and all major index providers like MSCI, FTSE, S&P
and STOXX have adopted the same. MSCI, a leading global index provider,
shifted all its indices to the Free-float Methodology in 2002. The MSCI India
Standard Index, which is followed by Foreign Institutional Investors (FIIs) to
track Indian equities, is also based on the Free-float Methodology. NASDAQ100, the underlying index to the famous Exchange Traded Fund (ETF) - QQQ
is based on the Free-float Methodology.

Definition of Free-float:
Share holdings held by investors that would not, in the normal course come into the
open market for trading are treated as 'Controlling/ Strategic Holdings' and hence not
included in free-float. In specific, the following categories of holding are generally
excluded from the definition of Free-float:

Holdings by founders/directors/ acquirers which has control element

Holdings by persons/ bodies with "Controlling Interest"
Government holding as promoter/acquirer
Holdings through the FDI Route
Strategic stakes by private corporate bodies/ individuals
Equity held by associate/group companies (cross-holdings)
Equity held by Employee Welfare Trusts
Locked-in shares and shares which would not be sold in the open market in
normal course.
Determining Free-float factors of companies:
BSE has designed a Free-float format, which is filled and submitted by all index
companies on a quarterly basis with the Exchange. The Exchange determines the
Free-float factor for each company based on the detailed information submitted by the
companies in the prescribed format. Free-float factor is a multiple with which the total
market capitalization of a company is adjusted to arrive at the Free-float market
capitalization. Once the Free-float of a company is determined, it is rounded-off to the
higher multiple of 5 and each company is categorized into one of the 20 bands given
below. A Free-float factor of say 0.55 means that only 55% of the market
capitalization of the company will be considered for index calculation.
Free-float Bands:

266

Table Number 15 (Source: www.bseindia.com)

% Free-Float

Free-Float Factor % Free-Float

Free-Float Factor

>0 5%

0.05

>50 55%

0.55

>5 10%

0.10

>55 60%

0.60

>10 15%

0.15

>60 65%

0.65

>15 20%

0.20

>65 70%

0.70

>20 25%

0.25

>70 75%

0.75

>25 30%

0.30

>75 80%

0.80

>30 35%

0.35

>80 85%

0.85

>35 40%

0.40

>85 90%

0.90

>40 45%

0.45

>90 95%

0.95

>45 50%

0.50

>95 100%

1.00

Index Closure Algorithm

The closing SENSEX on any trading day is computed taking the weighted average of
all the trades on SENSEX constituents in the last 30 minutes of trading session. If a
SENSEX constituent has not traded in the last 30 minutes, the last traded price is
taken for computation of the Index closure. If a SENSEX constituent has not traded at
all in a day, then its last day's closing price is taken for computation of Index closure.
The use of Index Closure Algorithm prevents any intentional manipulation of the
closing index value. The closing SENSEX is computed taking the weighted average
of all the trades on SENSEX constituents in the last 15 minutes of trading session, If a
SENSEX constituent has not traded in the last 15 minutes the last traded price is taken
for computation of the Index closure. If a SENSEX constituent has not traded at all in
a day , then its last days closing price is taken for computation of index closure. The
267

use of the Index closure Algorithm prevents any international manipulation of the
closing index value. The closing index SENSEX is computed taking the weighted
average of all the trades on SENSEX for computation of Index closure. The use of
Index closure Algorithm prevents any international manipulation of the closing index
value.
Maintenance of SENSEX
One of the important aspects of maintaining continuity with the past is to update the
base year average. The base year value adjustment ensures that replacement of stocks
in Index, additional issue of capital and other corporate announcements like 'rights
issue' etc. do not destroy the historical value of the index. The beauty of maintenance
lies in the fact that adjustments for corporate actions in the Index should not per se
affect the index values. The Index Cell of the exchange does the day-to-day
maintenance of the index within the broad index policy framework set by the Index
Committee. The Index Cell ensures that SENSEX and all the other BSE indices
maintain their benchmark properties by striking a delicate balance between frequent
replacements in index and maintaining its historical continuity. The Index Committee
of the Exchange comprises of experts on capital markets from all major market
segments. They include Academicians, Fund-managers from leading Mutual Funds,
Finance-Journalists, Market Participants, Independent Governing Board members,
and Exchange administration.
On-Line Computation of the Index:
During market hours, prices of the index scripts, at which trades are executed, are
automatically used by the trading computer to calculate the SENSEX every 15
seconds and continuously updated on all trading workstations connected to the BSE
trading computer in real time.
Adjustment for Bonus, Rights and Newly issued Capital:
The arithmetic calculation involved in calculating SENSEX is simple, but problem
arises when one of the component stocks pays a bonus or issues rights shares. If no
adjustments were made, a discontinuity would arise between the current value of the
index and its previous value despite the non-occurrence of any economic activity of
substance. At the Index Cell of the Exchange, the base value is adjusted, which is used
to alter market capitalization of the component stocks to arrive at the SENSEX value.
The Index Cell of the Exchange keeps a close watch on the events that might affect
the index on a regular basis and carries out daily maintenance of all the 14 Indices.

Adjustments for Rights Issues:

268

When a company, included in the compilation of the index, issues right shares, the
free-float market
capitalization of that company is increased by the number of additional shares issued
based on the theoretical (ex-right) price. An offsetting or proportionate adjustment is
then made to the Base Market Capitalization (see 'Base Market Capitalization
Adjustment' below).

Adjustments for Bonus Issue:

When a company, included in the compilation of the index, issues bonus shares, the
market capitalization of that company does not undergo any change. Therefore, there
is no change in the Base Market Capitalization, only the 'number of shares' in the
formula is updated.

Other Issues:
Base Market Capitalization Adjustment is required when new shares are issued by
way of conversion of
debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-back of
shares, corporate
restructuring etc

Base Market Capitalization Adjustment:

The formula for adjusting the Base Market Capitalization is as follows:
New Market Capitalization
New Base Market Old Base Market
=
x --------------------------------------Capitalization
Capitalization
Old Market Capitalization
To illustrate, suppose a company issues right shares which increases the market
capitalization of the shares of that company by say, Rs.100 crores. The existing Base
Market Capitalization (Old Base Market Capitalization), say, is Rs.2450 crores and
the aggregate market capitalization of all the shares included in the index before the
right issue is made is, say Rs.4781 crores. The "New Base Market Capitalization "
will then be:
2450 x (4781+100)
-------------------------4781

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Rs.2501.24 crores

This figure of 2501.24 will be used as the Base Market Capitalization for calculating
the index number from then onwards till the next base change becomes necessary.
SENSEX - Scrip selection criteria:
The general guidelines for selection of constituents in SENSEX are as follows:
1. Listed History:
The scrip should have a listing history of at least 3 months at BSE. Exception may
be considered if full market capitalization of a newly listed company ranks among
top 10 in the list of BSE universe. In case, a company is listed on account of
merger/ demerger/ amalgamation, minimum listing history would not be required.
2. Trading Frequency:
The scrip should have been traded on each and every trading day in the last three
months. Exceptions can be made for extreme reasons like scrip suspension etc.
3. Final Rank:
The scrip should figure in the top 100 companies listed by final rank. The final
rank is arrived at by assigning 75% weight age to the rank on the basis of threemonth average full market capitalization and 25% weight age to the liquidity rank
based on three-month average daily turnover & three-month average impact cost
4. Market Capitalization Weight age: The weight age of each scrip in
SENSEX based on three-month average free-float market capitalization should
be at least 0.5% of the Index.
5. Industry Representation:
Scrip selection would generally take into account a balanced representation of the
listed companies in the universe of BSE.
6. Track Record: In the opinion of the Committee, the company should have an
acceptable track record.
Index Review Frequency:
The Index Committee meets every quarter to discuss index related issues. In case of a
revision in the Index constituents, the announcement of the incoming and outgoing
scrip is made six weeks in advance of the actual implementation of the revision of the
Index. The revision of various indexes in the stock exchanges is made. This revision
is being made six weeks in advance before the actual implementation of the incoming
and outgoing scrip. The announcement of the incoming and outgoing of the stock is
provided six weeks in advance of the actual implementation of the revision of the
Index.
History of replacement of scrips in SENSEX
Table number 16 (Source www.bseindia.com)

270

Date

Outgoing Scrips

Replaced by

Bombay Burmah

Voltas

Asian Cables

Peico

Crompton Greaves

Premier Auto.

Scinda

G.E.Shipping

3.08.1992

Zenith Ltd.

Bharat Forge

19.08.1996

Ballarpur Inds.

Arvind Mills

Bharat Forge

Bajaj Auto

Bombay Dyeing

BHEL

Ceat Tyres

BSES

Century Text.

Colgate

GSFC

Guj. Amb. Cement

Hind. Motors

HPCL

Indian Organic

ICICI

Indian Rayon

IDBI

1.01.1986

271

FACTORS RESPONSIBLE FOR FLUCTUALTION IN THE

SENSEX AND NIFTY
Think of a liquid stock as a good thermometer, one which gives accurate data about
the true price of the stock, because it trades actively with a tight spread. The prices
observed for an illiquid stock are like readings from a low quality thermometer, which
reports noisy data about the phenomenon of interest (the true price of the security).
We try to find the fifty best thermometers in the country and average their values to
make the S&P CNX Nifty. As time passes, better thermometers become available (in
the form of large, liquid stocks that are not in the S&P CNX Nifty). We would like
that S&P CNX Nifty always uses the best thermometers possible. So we remove the
weakest thermometer from inside the S&P CNX Nifty and accept the new stock into
it. The world changes, so the index should change. Yet, the change should not be
sudden - for that would disrupt the character of the index. In 1996, after a decade of
near-silence, the BSE removed 14 out of 30 stocks in their `sensitive' index. This
completely changed the character of the index - older data for this index is not
comparable with new data. Such sudden changes should be avoided. They serve to
illustrate the proverb those who make peaceful change difficult make violent change
inevitable. S&P CNX Nifty believes in steady, peaceful changes. S&P CNX Nifty
uses clear, publicly documented rules for index revision. These rules are applied
regularly, to obtain changes to the index set. IDBI was once not listed; SBI was once
illiquid; Infosys was once an obscure software start up. The world changes, and one
by one, these stocks have come into the S&P CNX Nifty. Each change in the S&P
CNX Nifty is small, so the continuity of the index is maintained. Yet, at all times,
S&P CNX Nifty represents the 50 most important liquid stocks in the country, the best
thermometers to build an index out of. There are mathematical formulas which ensure
that yesterday's value and todays are comparable, even if a change in composition
takes place in-between. Think of an index as a portfolio. The composition of the
portfolio changes, but it is still meaningful to keep measuring the overnight returns on
the portfolio from day to day. These returns, cumulated up, are the index level. There
are no speculators on the internal committee of IISL which manages the index
revisions. Further, there are objective, publicly defined rules which determine when
stocks come in and go out of the index. There isn't much room for personal judgement
here. Every stock price moves for two possible reasons: news about the company (e.g.
a product launch, or the closure of a factory, etc.) or news about the country (e.g.
nuclear bombs, or a budget announcement, etc.). The job of an index is to purely
capture the second part, the movements of the stock market as a whole (i.e. news
about the country). This is achieved by averaging. Each stock contains a mixture of
these two elements - stock news and index news. When we take an average of returns
on many stocks, the individual stock news tends to cancel out. On any one day, there
would be good stock-specific news for a few companies and bad stock-specific news
for others. In a good index, these will cancel out, and the only thing left will be news
that is common to all stocks. That is what the index will capture. They reflect the
changing expectations of the stock market about future dividends of India's corporate
sector. When the index goes up, it is because the stock market thinks that the
prospective dividends in the future will be better than previously thought. When
prospects of dividends in the future become pessimistic, the index drops. The ideal
index gives us instant-to-instant readings about how the stock market perceives the
future of India's corporate sector. As the stock price is determined in the marketplace,
where seller supply meets buyer demand. But unfortunately there is no lean equation

272

that tells us that how a share market will behave and how the index will fluctuate. But
inspite of this thing we can divide the factors of fluctuations in the three categories:
a) Fundamental factors
b) Technical factors
c) Market sentiment
a) Fundamental factors -: In an efficient market, stock prices would be
determined primarily by fundamentals, which, at the basic level, refer to a
combination of two things: 1) An earnings base (earnings per share (EPS), for
example) and 2) a valuation multiple (a P/E ratio, for example). An owner of a
common stock has a claim on earnings, and Earnings per share (EPS), the
owner's return on his or her investment. When you buy a stock, you are
purchasing a proportional share of an entire future stream of earnings. That's
the reason for the valuation multiple: it is the price you are willing to pay for
the future stream of earnings. Part of these earnings may be distributed as
dividends, while the remainder will be retained by the company (on your
behalf) for reinvestment. We can think of the future earnings stream as a
function of both the current level of earnings and the expected growth in this
earnings base. As shown in the diagram, the valuation multiple (P/E), or the
stock price as some multiple of EPS, is a way of representing the discounted
present value of the anticipated future earnings stream.
b) Technical Factors -: Things would be easier if only fundamental factors set
stock prices. Technical factors are the mix of external conditions that alter the
supply of and demand for a company's stock. Some of these indirectly affect
fundamentals. (For example, economic growth indirectly contributes to
earnings growth.) Technical factors include the following:
Inflation - We mentioned inflation as an input into the valuation multiple, but
inflation is a huge driver from a technical perspective as well. Historically, low
inflation has had a strong inverse correlation with valuations (low inflation
drives high multiples and high inflation drives low multiples). Deflation, on
the other hand, is generally bad for stocks because it signifies a loss in pricing
power for companies.
Economic Strength of Market and Peers - Company stocks tend to track
with the market and with their sector or industry peers. Some prominent
investment firms argue that the combination of overall market and sector
movements - as opposed to a company's individual performance - determines a
majority of a stock's movement. (There has been research cited that suggests
the economic/market factors account for 90%) For example, a suddenly
negative outlook for one retail stock often hurts other retail stocks as "guilt by
association" drags down demand for the whole sector.
Substitutes - Companies compete for investment dollars with other asset
classes on a global stage. These include corporate bonds, government bonds,
commodities, real estate and foreign equities. The relation between demand
for U.S. equities and their substitutes is hard to figure, but it plays an
important role.
Incidental Transactions - Incidental transactions are purchases or sales of a
stock that are motivated by something other than belief in the intrinsic value of
the stock. These transactions include executive insider transactions, which are
often prescheduled or driven by portfolio objectives. Another example is an
institution buying or shorting a stock to hedge some other investment.
Although these transactions may not represent official "votes cast" for or
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against the stock, they do impact supply and demand and therefore can move
the price.
Demographics - Some important research has been done about the
demographics of investors. Much of it concerns these two dynamics: 1)
middle-aged investors, who are peak earners that tend to invest in the stock
market, and 2) older investors who tend to pull out of the market in order to
meet the demands of retirement. The hypothesis is that the greater the
proportion of middle-aged investors among the investing population, the
greater the demand for equities and the higher the valuation multiples.
Trends - Often a stock simply moves according to a short-term trend. On the
one hand, a stock that is moving up can gather momentum, as "success breeds
success" and popularity buoys the stock higher. On the other hand, a stock
sometimes behaves the opposite way in a trend and does what is called
reverting to the mean. Unfortunately, because trends cut both ways and are
more obvious in hindsight, knowing that stocks are "trendy" does not help us
predict the future. (Note: trends could also be classified under market
sentiment.)
Liquidity - Liquidity is an important and sometimes under-appreciated factor.
It refers to how much investor interest and attention a specific stock has. WalMart's stock is highly liquid and therefore highly responsive to material news;
the average small-cap company is less so. Trading volume is not only a proxy
for liquidity, but it is also a function of corporate communications (that is, the
degree to which the company is getting attention from the investor
community). Large-cap stocks have high liquidity: they are well followed and
heavily transacted. Many small-cap stocks suffer from an almost permanent
"liquidity discount" because they simply are not on investors' radar screens.
c) Market Sentiment -:Market sentiment refers to the psychology of market
participants, individually and collectively. This is perhaps the most vexing
category because we know it matters critically, but we are only beginning to
understand it. Market sentiment is often subjective, biased and obstinate. For
example, you can make a solid judgment about a stock's future growth
prospects, and the future may even confirm your projections, but in the
meantime the market may myopically dwell on a single piece of news that
keeps the stock artificially high or low. And you can sometimes wait a long
time in the hope that other investors will notice the fundamentals. Market
sentiment is being explored by the relatively new field of behavioral finance.
It starts with the assumption that markets are apparently not efficient much of
the time, and this inefficiency can be explained by psychology and other social
sciences. The idea of applying social science to finance was fully legitimized
when Daniel Kahneman, a psychologist, won the 2002 Nobel Memorial Prize
in Economics. (He was the first psychologist to do so.) Many of the ideas in
behavioral finance confirm observable suspicions: that investors tend to
overemphasize data that come easily to mind; that many investors react with
greater pain to losses than with pleasure to equivalent gains; and that investors
tend to persist in a mistake. Some investors claim to be able to capitalize on
the theory of behavioral finance. For the majority, however, the field is new
enough to serve as the "catch-all" category, where everything we cannot
explain is deposited

274

STUDY OF STOCK INDEXES

Technical analysis of the Indian stock Market
There is a method of evaluating securities by analyzing statistics generated by market
activity, such as past prices and volume. Technical analysts do not attempt to measure
a security's intrinsic value, but instead use charts and other tools to identify patterns
that can suggest future activity. Technical analysts believe that the historical
performance of stocks and markets are indications of future performance. In a
shopping mall, a fundamental analyst would go to each store, study the product that
was being sold, and then decide whether to buy it or not. By contrast, a technical
analyst would sit on a bench in the mall and watch people go into the stores.
Disregarding the intrinsic value of the products in the store, the technical analyst's
decision would be based on the patterns or activity of people going into each store. In
finance, technical analysis is a security analysis discipline for forecasting the future
direction of prices through the study of past market data, primarily price and volume.
Through this we can know how the different indexes fluctuate and can predict the
stock market. Technical analysts seek to identify price patterns and trends in financial
markets and attempt to exploit those patterns. While technicians use various methods
and tools, the study of price charts is primary. Technicians especially search for
archetypal patterns, such as the well-known head and shoulders or double top reversal
patterns, study indicators such as moving averages, and look for forms such as lines of
support, resistance, channels, and more obscure formations such as flags, pennants,
balance days and cup and handle patterns. Technical analysts also extensively use
indicators, which are typically mathematical transformations of price or volume.
These indicators are used to help determine whether an asset is trending, and if it is,
its price direction. Technicians also look for relationships between price, volume and,
in the case of futures, open interest. Examples include the relative strength index, and
MACD. Other avenues of study include correlations between changes in options
(implied volatility) and put/call ratios with price. Other technicians include sentiment
indicators, such as Put/Call ratios and Implied Volatility in their analysis. Technicians
seek to forecast price movements such that large gains from successful trades exceed
more numerous but smaller losing trades, producing positive returns in the long run
through proper risk control and money management. There are several schools of
technical analysis. Adherents of different schools (for example, candlestick charting,
Dow Theory, and Elliott wave theory) may ignore the other approaches, yet many
traders combine elements from more than one school. Some technical analysts use
subjective judgment to decide which pattern a particular instrument reflects at a given
time, and what the interpretation of that pattern should be. Some technical analysts
also employ a strictly mechanical or systematic approach to pattern identification and
interpretation. Technical analysis is frequently contrasted with fundamental analysis,
the study of economic factors that influence prices in financial markets. Technical
analysis holds that prices already reflect all such influences before investors are aware
of them, hence the study of price action alone. Some traders use technical or
fundamental analysis exclusively, while others use both types to make trading
275

decisions. Users of technical analysis are most often called technicians or market
technicians. Some prefer the term technical market analyst or simply market analyst.
An older term, chartist, is sometimes used, but as the discipline has expanded and
modernized the use of the term chartist has become less popular. The aim of technical
analysis is to forecast price trends in future basing on the historical data along with
the one of the volume. Technical analysts are sure that any fundamentals and even
expectations have affection to exchange rates changing being the factors of the
market. Any private investor can have an access to the technical analysis tools in
order to compute his or her trading decisions. Though, we cannot state that these tools
figure out unreliable estimations. Technical analysis has been in use for centuries,
that's why its premises are based on the experience, prolonged observation and can be
considered quite reliable. Japan traders started using the technique of candlestick
which is still popular in the 18th century, so, it is thought as the oldest one. There are
three suppositions laying at the basis of technical analysis:
1. Everything should be considered at the market movement;
2. Price movement has a purpose;
3. History is to repeat its occasions;
Relying on these statements, technical analysis can be described as the mathematical
analyzing of historical data and carrying out price forecasts. Various charts and
graphical methods are used for the technical analysis of the Indian Market.
How Interest rates affect the Stock Market
Interest Rates: Most people pay attention to them, and they can impact the stock
market. But why? There is some indirect links between interest rates and the stock
market and show you as an investor how they might affect your life. Essentially,
interest is nothing more than the cost someone pays for the use of someone else's
money. Homeowners know this scenario quite intimately. They have to use a bank's
money (through a mortgage) to purchase a home, and they have to pay the bank for
the privilege. Credit card users also know this scenario quite well - they borrow
money for the short term in order to buy something right away. But when it comes to
the stock market and the impact of interest rates, the term usually refers to something
other than the above examples - although we will see that they are affected as well.
The interest rate that applies to investors is the U.S. Federal Reserve's federal funds
rate. This is the cost that banks are charged for borrowing money from Federal
Reserve banks. Why is this number so important? It is the way the Federal Reserve
(the "Fed") attempts to control inflation. Inflation is caused by too much money
chasing too few goods (or too much demand for too little supply), which causes prices
to increase. By influencing the amount of money available for purchasing goods, the
Fed can control inflation. Other countries' central banks do the same thing for the
same reason. Basically, by increasing the federal funds rate, the Fed attempts to lower
the supply of money by making it more expensive to obtain.
Effects of an Increase
When the Fed increases the federal funds rate, it does not have an immediate impact
on the stock market. Instead, the increased federal funds rate has a single direct
effect - it becomes more expensive for banks to borrow money from the Fed.
However, increases in the discount rate also cause a ripple effect, and factors that
influence both individuals and businesses are affected. The first indirect effect of an
increased federal funds rate is that banks increase the rates that they charge their
customers to borrow money. Individuals are affected through increases to credit card
276

and mortgage interest rates, especially if they carry a variable interest rate. This has
the effect of decreasing the amount of money consumers can spend. After all, people
still have to pay the bills, and when those bills become more expensive, households
are left with less disposable income. This means that people will spend less
discretionary money, which will affect businesses' top and bottom lines (that is,
revenues and profits). Therefore, businesses are also indirectly affected by an increase
in the federal funds rate as a result of the actions of individual consumers. But
businesses are affected in a more direct way as well. They, too, borrow money from
banks to run and expand their operations. When the banks make borrowing more
expensive, companies might not borrow as much and will pay a higher rate of
interest on their loans. Less business spending can slow down the growth of a
company, resulting in decreases in profit.
Stock Price Effects
Clearly, changes in the federal funds rate affect the behaviour of consumers and
business, but the stock market is also affected. Remember that one method of valuing
a company is to take the sum of all the expected future cash flows from that company
discounted back to the present. To arrive at a stock's price, take the sum of the future
discounted cash flow and divide it by the number of shares available. This price
fluctuates as a result of the different expectations that people have about the company
at different times. Because of those differences, they are willing to buy or sell shares
at different prices. If, a company is seen as cutting back on its growth spending or is
making less profit - either through higher debt expenses or less revenue from
consumers - then the estimated amount of future cash flows will drop. All else being
equal, this will lower the price of the company's stock. If enough companies
experience a decline in their stock prices, the whole market, or the indexes (like
the Dow Jones Industrial Average or the S&P 500) that many people equate with the
market, will go down.
Investment Effects
For many investors, a declining market or stock price is not a desirable outcome.
Investors wish to see their invested money increase in value. Such gains come from
stock price appreciation, the payment of dividends - or both. With a lowered
expectation in the growth and future cash flows of the company, investors will not get
as much growth from stock price appreciation, making stock ownership less desirable.
Furthermore, investing in stocks can be viewed as too risky compared to other
investments. When the Fed raises the federal funds rate, newly offered government
securities, such Treasury bills and bonds, are often viewed as the safest investments
and will usually experience a corresponding increase in interest rates. In other
words, the "risk-free" rate of return goes up, making these investments more
desirable. When people invest in stocks, they need to be compensated for taking on
the additional risk involved in such an investment, or a premium above the risk-free
rate. The desired return for investing in stocks is the sum of the risk-free rate and the
risk premium. Of course, different people have different risk premiums, depending on
their own tolerance for risk and the company they are buying. However, in general, as
the risk-free rate goes up, the total return required for investing in stocks also
increases. Therefore, if the required risk premium decreases while the potential return
remains the same or becomes lower, investors might feel that stocks have become too
risky, and will put their money elsewhere.
Interest Rates Affect but Don't Determine the Stock Market
The interest rate, commonly bandied about by the media, has a wide and varied
impact upon the economy. When it is raised, the general effect is to lessen the amount
of money in circulation, which works to keep inflation low. It also makes borrowing
277

money more expensive, which affects how consumers and businesses spend their
money; this increases expenses for companies, lowering earnings somewhat for those
with debt to pay. Finally, it tends to make the stock market a slightly less attractive
place to investment. Keep in mind, however, that these factors and results are all
interrelated. What we described above are very broad interactions, which can play out
in innumerable ways. Interest rates are not the only determinant of stock prices
and there are many considerations that go into stock prices and the general trend of
the market - an increased interest rate is only one of them. Therefore, one can never
say with confidence that an interest rate hike by the Fed will have an overall negative
effect on stock prices.
Technical Analysis of Indian stock market BSE SENSEX Index
The Index was initially calculated based on the "Full Market Capitalization"
methodology but was shifted to the free-float methodology with effect from
September 1, 2003. The "Free-float Market Capitalization" methodology of index
construction is regarded as an industry best practice globally. All major index
providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float
methodology. Due to its wide acceptance amongst the Indian investors; SENSEX is
regarded to be the pulse of the Indian stock market. As the oldest index in the country,
it provides the time series data over a fairly long period of time (From 1979 onwards).
Small wonder, the SENSEX has over the years become one of the most prominent
brands in the country.
Objectives of SENSEX
The SENSEX is the benchmark index of the Indian Capital Markets with wide
acceptance among individual investors, institutional investors, foreign investors and
fund managers. The objectives of the index are:
To measure market movements
Given its long history and its wide acceptance, no other index matches the SENSEX
in reflecting market movements and sentiments. SENSEX is widely used to describe
the mood in the Indian Stock markets.
Benchmark for funds performance
The inclusion of blue chip companies and the wide and balanced industry
representation in the SENSEX makes it the ideal benchmark for fund managers to
compare the performance of their funds.
For index based derivative products
Institutional investors, money managers and small investors all refer to the SENSEX
for their specific purposes The SENSEX is in effect the proxy for the Indian stock
markets. The country's first derivative product i.e. Index-Futures was launched on
SENSEX.
Criteria for selection and review of scrips for the SENSEX
A. Quantitative Criteria:
1. Market Capitalization:
The scrip should figure in the top 100 companies listed by market capitalization. Also
market capitalization of each scrip should be more than 0.5 % of the total market
capitalization of the Index i.e. the minimum weight should be 0.5 %. Since the
SENSEX is a market capitalization weighted index, this is one of the primary criteria
for scrip selection. (Market Capitalization would be averaged for last six months)
2. Liquidity:
(i) Trading Frequency: The scrip should have been traded on each and every trading
day for the last one year. Exceptions can be made for extreme reasons like scrip
suspension etc. (ii) Number of Trades: Number of Trades: The scrip should be among
the top 150 companies listed by average number of trades per day for the last one
278

year. (iii) Value of Shares Traded: Value of Shares Traded: The scrip should be among
the top 150 companies listed by average value of shares traded per day for the last one
year.
3. Continuity:
Whenever the composition of the index is changed, the continuity of historical series
of index values is re-established by correlating the value of the revised index to the
old index (index before revision). The back calculation over the last one-year period is
carried out and correlation of the revised index to the old index should not be less than
0.98. This ensures that the historical continuity of the index is maintained.
4. Industry Representation:
Scrip selection would take into account a balanced representation of the listed
companies in the universe of BSE. The index companies should be leaders in their
industry group.
5. Listed History:
The scrip should have a listing history of at least one year on BSE.
B. Qualitative Criteria:
Track Record:
In the opinion of the Index Committee, the company should have an acceptable track
record.
Beta of SENSEX scrips
Beta measures the sensitivity of a scrip movement relative to movement in the
benchmark index i.e. SENSEX. A Beta of one means that for every change of 1% in
index, the scrip moves by 1%. Statistically Beta is defined as: Covariance (SENSEX,
Stock )/ Variance(SENSEX)
Note: Covariance and variance are calculated from the Daily Returns data of the
SENSEX and SENSEX scrips.
How is SENSEX Calculated?
SENSEX is calculated using a "Market Capitalization-Weighted" methodology. As per
this methodology, the level of index at any point of time reflects the total market value
of 30 component stocks relative to a base period. (The market capitalization of a
company is determined by multiplying the price of its stock by the number of shares
issued by the company). An index of a set of combined variables (such as price and
number of shares) is commonly referred as a 'Composite Index' by statisticians. A
single indexed number is used to represent the results of this calculation in order to
make the value easier to work with and track over time. It is much easier to graph a
chart based on indexed values than one based on actual values. The base period of
SENSEX is 1978-79. The actual total market value of the stocks in the Index during
the base period has been set equal to an indexed value of 100. This is often indicated
by the notation 1978-79=100. The formula used to calculate the Index is fairly
straightforward. However, the calculation of the adjustments to the Index (commonly
called Index maintenance) is more complex. The calculation of SENSEX involves
dividing the total market capitalization of 30 companies in the Index by a number
called the Index Divisor. The Divisor is the only link to the original base period value
of the SENSEX. It keeps the Index comparable over time and is the adjustment point
for all Index maintenance adjustments. During market hours, prices of the index
scrips, at which latest trades are executed, are used by the trading system to calculate
SENSEX every 15 seconds and disseminated in real time.
Calculation of closing index
The closing SENSEX is computed taking the weighted average of all the trades on
SENSEX constituents in the last 15 minutes of trading session. If a SENSEX
279

constituent has not traded in the last 15 minutes, the last traded price is taken for
computation of the Index closure. If a SENSEX constituent has not traded at all in a
day, then its last day's closing price is taken for computation of Index closure. The use
of Index Closure Algorithm prevents any intentional manipulation of the closing
index value.
Routine maintenance of SENSEX
One of the important aspects of maintaining continuity with the past is to update the
base year average. The base year value adjustment ensures that additional issue of
capital and other corporate announcements like bonus etc. do not destroy the value of
the index. The beauty of maintenance lies in the fact that adjustments for corporate
actions in the Index should not per se affect the index values. The Index Cell of the
Exchange does the day-to-day maintenance of the index within the broad index policy
framework set by the Index Committee. The Index Cell takes special care to ensure
that SENSEX and all the other BSE indices maintain their benchmark properties by
striking a delicate balance between high turnover in Index scrips and its representative
character. The Index Committee of the Exchange has experts from different field of
finance related to the capital markets. They include Academicians, Fund-managers
from leading Mutual Funds, Finance - Journalists, Market Participants, Independent
Governing Board members, and Exchange administration.
How are adjustments for Bonus, Rights and newly issued Capital carried out in
SENSEX?
The arithmetic calculation involved in calculating SENSEX is simple, but problem
arises when one of the component stocks pays a bonus or issues rights shares. If no
adjustments were made, a discontinuity would arise between the current value of the
index and its previous value. The Index Cell of the Exchange periodically adjusts the
base value to take care of such corporate announcements.
Adjustments for Rights Issues:
When a company, included in the compilation of the index, issues right shares, the
market capitalization of that company is increased by the number of additional shares
issued based on the theoretical (ex-right) price. An offsetting or proportionate
adjustment is then made to the Base Market Capitalization (see ' Base Market
Capitalization Adjustment' below).
Adjustments for Bonus Issue:
When a company, included in the compilation of the index, issues bonus shares, the
market capitalization of that company does not undergo any change. Therefore, there
is no change in the Base Market Capitalization, only the 'number of shares' in the
formula is updated.
Other Issues: Base Market Capitalization Adjustment is required when new shares are
issued by way of conversion of debentures, mergers, spin-offs etc. or when equity is
reduced by way of buy-back of shares, corporate restructuring etc.
Base Market Capitalization Adjustment: The formula for adjusting the Base
Market Capitalization is as follows: New Base Market Capitalization = Old Base
Market Capitalization X (New Market Capitalization/Old Market Capitalization).To
illustrate, suppose a company issues right shares which increases the market
capitalization of the shares of that company by say, Rs.100 crores. The existing Base
Market Capitalization (Old Base Market Capitalization), say, is Rs.2450 crores and
the aggregate market capitalization of all the shares included in the index before the
right issue is made is, say Rs.4781 crores. The "New Base Market Capitalization "
will then be: Rs.2501.24 crores = 2450 X (4781+100)/4781 .This figure of 2501.24
will be used as the Base Market Capitalization for calculating the index number from
then onwards till the next base change becomes necessary.
280

With what frequency is SENSEX calculation done?

During market hours, prices of the index scrips, at which trades are executed, are
automatically used by the trading computer to calculate the SENSEX every 15
seconds and continuously updated on all trading workstations connected to the BSE
trading computer in real time

Market capitalisation of indexes

Indices highlights
Table Number 17 (source: www.bseindia.com)
This data was last updated on Friday July, 2,2010

52 Week

Market Capitalization Turnover

INDICES
Close

High

Low

SENSEX

17460.95

18047.86

13219.99 2655047.02

41.85

779.03

17.10

MIDCAP

7,118.43

4518.59

16.58

993.52

21.81

SMLCAP

9103.58

BSE-100
9,329.87
BSE-200
2,223.59
BSE-500
7,023.58
BSE Sectoral Indices
AUTO
8,184.44
BANKEX
10,663.61
CD
4,732.48
CG
14,494.34
FMCG
3,218.62
HC
5,707.92
IT
5,238.49
METAL
14,382.13
OIL&GAS 10,716.52
PSU
9,445.15
TECk
3,231.08
BSE Dollex Indices
DOLLEX-30 3,074.95
281

7207.44
9293.70

5,011.12

(Rs. crores)

%
to
%
to
(Rs.
Total
Total
crores)
Mkt Cap
Turnover

1052155.11
346,527.79

5.46

857.02

18.82

9,571.52
2,267.07
7,140.21

6,893.29 4,340,740.68 68.42

1,606.61 5,221,337.65 82.30
4,983.95 5,897,355.41 92.95

1,812.60 39.79
2,483.90 54.53
3,525.57 77.40

8,334.60
11,241.04
4,796.03
14,842.72
3,254.70
5,816.97
5,584.60
18,736.77
10,899.95
10,287.24
3,451.04

4,375.20
7,156.87
2,577.21
10,848.31
2,244.82
3,486.60
3,111.88
9,607.74
8,335.82
7,250.95
2,463.14

3.75
8.61
0.48
5.51
4.27
3.38
7.51
7.73
14.39
28.76
11.34

102.25
250.00
75.09
166.68
32.88
143.45
108.99
347.29
477.89
740.40
213.94

2.24
5.49
1.65
3.66
0.72
3.15
2.39
7.62
10.49
16.26
4.70

3,338.28

2,202.43 --

--

--

--

238,138.54
545,951.86
30,491.49
349,803.10
270,689.08
214,478.35
476,282.77
490,375.28
912,963.57
1,824,653.53
719,588.05

DOLLEX100
DOLLEX200

2,070.30

2,231.12

1,446.96 --

--

--

--

794.09

850.48

542.78

--

--

--

--

Table Number 18 (source: www.bseindia.com)

Market capitalisation industry wise as on 29 June 2010(Rs. crores)
Index name

Mkt.Cap(in
Weightage
in
Millions
Index (%)
IDBI Bank Ltd 43238.602
1.305
Oriental Bank 43354.5525
1.3085
Of Commerce
Canara BANK
47261.5559
1.4264
Union Bank of CNX
70011.6716
IT - Industry2.1131
wise Market Capitalization
India
As on 29-June-2010 (Rs. crores) Table number 19 (source: www.bseindia.com)
Bank Of India Index
71055.5208
2.1144
name
Mkt.Cap(in
Weightage in
Kotak
11913.8368
3.6021
Millions
Index (%)
Mahindra Bank Tulip Telecom 87582.7485
0.3243
Punjab National Ltd.
138317.0377
4.1747
Bank
CMC Ltd.
10152.2991 0.4342
State Bank of First
592828.5513
17.8927
source 10422.5305
0.4458
India
Solutions
HDFC BANK Moser
697160.672baer 10460.7863
21.047
0.4458
ICICI BANK India
1060743.484
32.0153
AXIS BANK Polaris
313478.8703
9.4614
12960.6503
0.5544
Software
HCL
14357.6128
0.6141
Infosystems
Core Projects
14835.8349
0.6346
Mind Tree
15270.1598
0.6828
RoltaIndia
17680.7235
0.7563
GTL Ltd
20353.5674
0.7900
Educomp
488579.3746
0.4336
Oracle
35200.46538
0.9084

PERFORMANCE OF STOCK INDEXES (For 2 years)

Indices Watch
282

Table Number 20 (source: www.bseindia.com)

This data was last updated on Thursday, June 22, 2010 4:00:07 PM

SENSEX

Current
Value
17,523.47 17,598.94 17,426.78 17,460.95

Previous
Close
17,509.33

MIDCAP

7,126.69 7,183.76 7,106.00 7,118.43

SMLCAP

9090.92

9087.79

BSE-100

9,374.78 9,406.45 9310.58

BSE-200

7048.17

Index

Open

High

9163.04

7081.46

Low

48.38

0.28

7,121.32

2.89

-0.04

9103.98

9081.32

22.66

0.25

9329.87

9356.43

-26.56

-0.28

7.009.03 7023.45

7038.56

15.37

-0.22

10643.43

20.18

0.19

BSE-500
BSE Sectoral Indices
10624.91 10721.70 10624.91 10663.61
AUTO
BANKEX

9459.75

CD
3147.79
CG
14,312.12
FMCG
3242.23
HC
5,663.03
IT
5,255.80
METAL
14,306.74
OIL&GAS 10,498.23
PSU
9,088.42
TECk
3,248.49
BSE Dollex Indices
DOLLEX3,090.49
30
DOLLEX2,080.26
100
DOLLEX797.20
200

Change(Pts) Change(%)

9539.56

9436.54

9445.45

9445.67

-0.27

0.00

3165.65
14,312.17
3,813.76
5,695.64
5262.50
14,417.96
10,511.03
9,081.42
3,236.46

3131.31
14,216.92
3213.13
5,648.77
5,750.92
14,093.61
10,444.51
9,007.26
3,223.27

3139.90
14,271.18
3,788.37
5,659.18
5,879.59
14,122.01
10,472.99
9,023.39
3,231.65

3142.45
14,342.38
3,811.58
5,677.38
5,808.08
14,330.87
10,540.71
9,103.26
3,245.64

-3.234
-79.20
-13.21
-8.20
18.51
-72.86
-67.72
-9.87
-14.01

-0.10
-0.55
-1.28
-0.49
1.49
-0.24
-1.04
-1.31
-0.63

3,083.47

-8.52

-0.28

2076.19

-5.89

-0.28

796.21

-2.21

-0.27

3,099.23 3,069.01 3,074.95

2,087.29
800.64

2066.02

2070.30

792.47

794.09

Other NSE Indexes as on 22 June 2010 Table number 21 (source:

www.bseindia.com)
Index_
Security Issue Cap
Issue Capital
Close Price
Mkt
283

Flag
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY

ABB LTD.
ACC LIMITED
BAJAJ AUTO LTD
BHARTI AIRTEL
BHEL
CIPLA LTD
DABUR INDIA LTD
GAIL (INDIA) LTD
GLAXOSMITHKLINE
PHARMA LT
HCL TECH LTD
HDFC LTD
HDFC BANK LTD
HERO HONDA
HINDALCO
HINDUSTAN LEVER
LTD
HINDUSTAN
PETROLEUM CORP
ICICI BANK LTD.
INFOSYS
ITC LTD
LARSEN & TOUBRO.
RANBAXY LABS
RELIANCE
COMMUN
RELIANCE ENERGY
LTD
RELIANCE
INDUSTRIES LTD
RELIANCE
PETROLEUM LTD.
SATYAM COMPUTER
SERVICES
STATE BANK OF
INDIA
SIEMENS LTD
STERLITE
INDS
(IND) LTD
SUN
PHARMACEUTICAL
S IND.

42381675
187369776
101183510
1895868407
244760000
777291357
862883808
845651600
84703017

3652.9
726.35
2348.1
769
2468.8
232.4
93.85
284.55
1145.15

Capitalization
1. 54816E+11
1. 36096E+11
2. 37589E+11
1. 45792E+12
6 .04263E+11
1. 80643E+11
80 981645381
2. 4063E+11
96 9976599

650907836
253006677
319389608
199687500
1159684962
2206831977

287.6
1539.25
958.35
629.3
140.15
207.85

1 .87201E+11
3 .89441E+11
3. 06087E+11
1. 25663E+11
1. 6253E+11
4. 5869E+11

339330000

247.55

84 0011415

899321705
571209862
3762222780
281871909
372778821
2044614990

849.25
2045.85
156.25
1566.6
336.95
409.95

7. 63749E+11
1. 16861E+12
5. 87847E+11
4. 41581E+11
1. 25608E+11
8. 3819E+11

228530308

504

1.

1393508041

1387.5

1. 93349E+12

4500000000

73.65

3. 31425E+11

662109109

446.1

2. 95367E+11

526298878

968

5.

168580100
558485850

1120.85
498.4

1. 88953E+11
2. 78349E+11

193402120

1091.65

2. 11127E+11

15179E+11

09457E+11

CNX Junior Nifty as on 22 June 2010 Table Number 22 (source:

www.bseindia.com)
Index_
Security Issue Cap
Issue Capital
Close Price
Mkt Capitalization
284

Flag
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY
JR.
NIFTY

285

ANDHRA BANK

485000000

74.5

361 32500000

APOLLO TYRES LTD

46402477

275.85

12 800123280

ASHOK
LEYLAND
LTD
ASIAN
PAINTS
LIMITED
AUROBINDO
PHARMA LTD
AVENTIS PHARMA
LIMITED
BANK OF BARODA

1323870317

37.15

49 181782277

95919779

803.8

771 00318360

53348637

685.05

36 546483777

23030622

1224.85

28 209057357

364265600

219.65

80 010939040

BANK OF INDIA

487400200

172.8

842 22754560

BHARAT
80000000
ELECTRONICS LTD
BHARAT FORGE CO 222652271
LTD
BIOCON LIMITED.
100000000

1644

1.31 52E+11

313.6

698 23752186

489.7

48970000000

BONGAIGAON
REFINERY LTD
CADILA
HEALTHCARE
LIMITED
CANARA BANK

199817900

41.5

8292442850

125613708

343.3

43123185956

410000000

190.6

78146000000

CHENNAI
PETROLEUM CORP
LT
CONTAINER CORP
OF IND LTD
CORPORATION
BANK
CUMMINS INDIA
LTD
I-FLEX SOLUTIONS
LIMITED

148943200

193.6

28835403520

64991397

1967.9

1.27897E+11

143440000

270.5

38800520000

198000000

271.2

53697600000

83174035

2198.35

1.82846E+11

CNX Bank Nifty as on 22

www.bseindia.com)
Index_
Security Issue Cap
Flag
BANK
BANK OF BARODA
Nifty
BANK
BANK OF INDIA
Nifty
BANK
CANARA BANK
Nifty
BANK
CORPORATION
Nifty
BANK
BANK
HDFC BANK LTD
Nifty
BANK
ICICI BANK LTD.
Nifty
BANK
KOTAK MAHINDRA
Nifty
BANK LTD
BANK
ORIENTAL BANK OF
Nifty
COMMERCE
BANK
PUNJAB NATIONAL
Nifty
BANK
BANK
STATE BANK OF
Nifty
INDIA
BANK
UNION BANK OF
Nifty
INDIA
BANK
UTI BANK LTD
Nifty

June 2010 Table number 23 (source:

Issue Capital

Close Price

Mkt Capitalization

364265600

219.65

80010939040

487400200

172.8

84222754560

410000000

190.6

78146000000

143440000

270.5

38800520000

319389608

958.35

3.06087E+11

899321705

849.25

7.63749E+11

326155708

479.45

1.56375E+11

250539700

183.45

459615079

315302500

441.6

1.39238E+11

526298878

968

5.09457E+11

505117900

102.25

51648305275

281630787

463.25

1.30465E+1

CNX IT as on 22 June 2010 Table number 24 (source: www.bseindia.com)

Index_
Security Issue Cap
Issue Capital
Close Price
Mkt Capitalization
Flag
CNX IT CMC LTD
15150000
1182.75
17918662500
CNX IT FINANCIAL TECHNO 44094696
1922.5
84772053060
(I) LTD
CNX IT GTL LTD
97316886
139.95
13619498196
CNX IT HCL INFOSYSTEMS 169046330
128.65
21747810355
LTD
CNX IT HCL
650907836
287.6
1.87201E+11
TECHNOLOGIES
LTD
CNX IT HEXAWARE
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286

CHAPTER 9
RECOMENDATIONS AND PROBLEM OF CAPITAL
MARKET

PROBLEMS OF THE NEW ISSUE MARKET AND SECONDARY

MARKET
It is ten years since the Securities and Exchange Board of India (SEBI) started to put
in place the regulatory framework for the capital market. The regulatory framework
for the capital market has given a new direction to the Indian capital market under
which the Indian capital market has grown and developed a lot. With this effect the
Indian capital market has groomed and Indian investors were provided with the
information through SEBI under SEBI Act 1992 and Disclosure and Investor
protection guidelines provided by the SEBI. And investors have certainly benefited
from the availability of more information and a contemporary secondary market
structure. Before the year 1992 when the SEBI Act was passed the Indian security
market was having the fragmented regulation. It means that there was no proper
regulatory framework and there was no proper regulator available in the Indian
Securities market and the Indian securities market was handled by multiple
administrations. In short it can be said that there was no proper authority who can
handle the Indian securities market. Primary market was not in the main stream of the
financial system before 1992 which means that primary market was not having much
importance and was not taken as an integral part of the Indian financial system.
Primary market being considered as the New Issue Market was not given due
importance. Before the SEBIs Act implication there was no proper maintenance of
the prospectus of the company. In this respect there was no proper guidance being
provided by any regulatory authority. In the prospectus there was no proper
maintenance of the balance sheet in the prospectus and the balance sheet of the
company was not made available to the investors, which was creating a doubtful
situation for the investors to analyze regarding the companys performance and to
know its income generation and future prospects of the company. But the after the
SEBIs act and the Companys Act 1956 each and every company has to provide full
information regarding the working of the company and providing necessary details of
the company and also providing the income statement and the balance sheet of the
company. Thus making it very easy for investors to analyze the performance of the
company and also help the investors to know that what the scope of the company is in
the near future. Also investors face problem regarding the refund and transfer of the
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money they invested. Before 1992 there was no dematerialization of the investors
account and the trading was not online but the manual trading making the possible
delays in the refundment and transfer of the income of the investors. Even though the
Stock exchanges were regulated through the securities Contracts (Regulations) Act
there was no proper inspection of the stock exchanges and due to this effect there was
no proper auditing of the accounts of the stock exchanges and thus giving a chance to
scrupulous persons to manipulate the market or to do some fraud. How can we forget
the biggest scan in the Indian financial history The Harshad Mehta Scam due to
which many investors had to suffer losses and some of them even have to go for
suicide as they have loss there whole money in the market. These scams have given
the rise of the SEBI under SEBI act which made strict rules and regulations and took
the whole market in his control. Stock Exchange was running as brokers club and
there was no proper direction given by any authority regarding the maintenance of the
brokerage firms. And prior to 1992 the management was dominated by the brokers.
There was the complete monopoly of them and as per their choice they run the market
and there was no proper guidance and there was no authority to guide them to run the
market and to look after the activities of the brokers. The merchant bankers and other
intermediaries were also unregulated and there was no proper regulatory framework
for them to see the workings of the merchant bankers and other intermediaries. There
was no concept of capital adequacy which defines the company having this amount of
capital can rise up to a particular limit. This was not defined previously. There was no
particular structure of the Mutual funds market and it was virtually unregulated. There
were potential conflicts in the structure of the mutual fund market. Even to say that
Indian investors were also new to this market and Mutual fund market was not
properly defined in Indian financial market. There was no guidance to for the
regulation of the Mutual fund securities also there was no proper disclosure of the
mutual funds which consist of the details regarding the mutual fund being launched
by the company and also the income and the balance sheet statement of the company
so that the investor can analyze that which mutual fund is better also the NAV(Net
asset value) of the company was not disclosed and there were no reforms related to
the valuation of the NAV of the mutual fund and also the private sector mutual funds
were not permitted prior to the SEBI Act 1992 only the Mutual funds under the
government were , but then came the SEBI who has given the proper structure and
regulated the mutual fund market and give the mutual fund market a new way to grow
and develop. Under the guidance of SEBI the mutual fund market was regulated and
after that each company with mutual fund has to disclose the NAV (Net Asset Value)
of the company and also the valuation norms and rules for the NAV of the company
having mutual fund were established. Also prior to the SEBI Act 1992 takeovers were
regulated only through listing agreement between the stock exchange and the
company. And also before 1992 there was no prohibition on the insider trading or
fraudulent and unfair trade practices. Before 1992 insider trading was not banned.
And due to this effect there was encouragement of the various activities which
involved insider trading and manipulating the market condition Insider trading is that
trading in which some sensitive information is being leaked regarding a particular
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company or some confidential information or some policies of a particular company is

leaked which may affect the market condition and may manipulate the market
condition. As the Indian market works on sentiments so these type of information
severely affect the securities market condition. But after the establishment of SEBI
under the SEBI act insider trading was banned and guidelines were issued for
prohibition of the insider trading and also acts were passed for the insider trading. In
the same case the for the fraudulent and unfair trade practices act were passed under
which it is being defined that what sort of activities are included in the fraudulent and
unfair trade practices and what are the penalization for the unfair trade or fraudulent
trade practices. SEBI began to put in place regulations a decade ago, starting with its
Guidelines for Disclosure and Investor Protection (primary markets) in 1992. A fairly
broad-based regulatory framework is now in place, though, going forward, SEBI has
to make the market a friendlier place for investors by plugging the gaps in its
performance, especially in the following areas:
Enhancing disclosures
Despite a plethora of disclosure requirements, there are still key areas where investors
get precious little information of value. This mainly relates to big-ticket corporate
action, such as mergers, de-mergers, acquisitions, asset sell-offs, takeovers and intercorporate investments. In each of these areas, no doubt, the minimum information
required under the Companies Act is made available. The disclosure level varies from
one instance to another, though a lot of information is made available on the financials
and the synergies of a merger. But the manner in which the swap ratio is fixed 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 doubt,
valuation reports are made available for inspection, but access is not easy for all
investors. As per SEBI Act the information is being disclosed to the investors but as
some more information regarding the developments or some information about the
future activities of the company should also be disclosed to the investors so that it will
make them more suitable to take decision and to think about the performance of the
company and to analyze it in an effective way. A comprehensive and mandated list of
disclosures, like the one that accompanies an IPO or a rights offer, should be made
available to all shareholders. Aspects such as risks from these actions, mode of
deployment of resources, the benefits, reasons for such action and management
perception of the issues involved, can form part of such a disclosure list. SEBI has
much to do to make its existing disclosure requirements work better. This can be done
only by making all disclosures available freely to everyone. Take, for instance, mutual
funds. Trustee and asset management companies are required to file monthly/quarterly
reports with SEBI. These must be available on the Internet. Only public scrutiny and
comment can improve the level of disclosures mandated by SEBI. While this is not a
job that SEBI can do on its own, due partly to resource constraints and also because of
the varying types of expertise needed, it has made a small beginning with its Web site

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http://www.edifar.nic.in/ and must make sure as much information as possible is

pumped in through this Web site.
Quality of decisions
The effectiveness of any regulatory body is judged by the quality of implementation,
in general, and the rate
of convictions achieved in cases where there are violations. What is worrying is the
poor rate of conviction in major cases. Virtually every SEBI decision involving major
cases such as Sterlite, BPL, Videocon, Anand Rathi and Associates and Hindustan
Lever has been overturned by the appeals process (or the Securities Appellate
Tribunal). This hardly sends the right signals about SEBI's penal actions when
regulations are violated. There is clearly something seriously amiss if the SAT can
overturn SEBI orders by pointing to lacunae on almost every possible ground
ranging from the merely technical aspects to substantive issues involving the
regulator's subjective judgment. This is what happened in the Sterlite, BPL and
Videocon cases (they were barred from capital market access for their role in price
manipulation in 1998). Quite clearly, the quality of SEBI's investigative work has to
improve considerably so that penal actions stick. As the regulatory framework of the
Indian security market is not so strong enough. Even though a lot of regulation has
been brought by the SEBI and has been clearly defined by the SEBI but somewhere or
the other its proper implementation is not being done which makes it a serious
concern for the Indian market. If there is any violation of any of the SEBI rules which
any of the company is not following then in the case of violation there is no proper
conviction. So actions must be taken for the strengthening proper investigation
process so that the SEBIs regulations can be strictly implemented.
Take a larger view
There are quite a few instances where shareholders have suffered due to specific
corporate actions. Whenever an issue of this kind has come up, , SEBI has generally
shied away from taking up the cudgels (unless nudged by some extraneous pressure)
on behalf of the investors to ensure that they will get a fair deal. In some of the global
development-triggered `changes in control', SEBI's actions have been mixed. In some
cases, such as Castrol, it has acted with alacrity and ordered open offers. But in quite a
few others, its stance has virtually enabled elaborate structures to be created that
helped avoid open offers or its actions have come rather late in the day Color
Chem-Clariant, for example imposing unfair costs on acquirers and shareholders.
There have been a quite a few decisions on whether open offers are triggered by
global developments or not, both by SEBI and/or by SAT. But no parameters have
been laid down so far and each issue is handled on a case-by-case basis. When it
comes to domestic acquisitions, SEBI's interpretation of `change in control' is
questionable. When Gujarat Ambuja picked up the entire 14.4 per cent of the Tatas in
ACC, it was clear that effective control had passed. But SEBI offered no view and,
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only when directed by the court, took the stance that there was `no change in control'
on technical grounds. In such situations, SEBI has to come out and clearly say why it
thinks there is change in control or not. The absence of a convincing rationale only
creates precedents that can be used by others, as happened with Grasim-L & T. SEBI
should deeply go through the cases being handled and understand issues related to the
mergers and acquisitions in a broader concept. Every time there is a major corporate
action, SEBI should proactively examine if there are issues of a contentious nature. In
most major cases SEBI has tended to take up matters only when there is a referral
from a court or investor forum or the government (like in the UTI's assured return
schemes).
Accounting, audit quality
SEBI can now act proactively on the issue of accounting and auditing quality. In
several recent instances in the US, such as Enron, WorldCom, Global Crossing,
Merck, to name a few, companies put out blatantly false numbers and auditors went
along with this charade.
In India, hundreds of companies came out with IPOs and vanished subsequently, and
in many companies, accounting and audit information has proved to be of poor quality
and unreliable. This is where SEBI can step in and work with the government to have
special audits done of the top 100 or 200 firms that account for more than 90 per cent
of market capitalization and trading. There is no reason to assume that everything is
hunky-dory on the accounting-auditing front in Indian companies. Just look at the
problems in the finance sector the likes of IFCI, IDBI, UTI and Centurion Bank, to
name a few and one cannot help feeling there may be problems elsewhere too. The
plethora of inter-corporate investments, intra-company and intra-group transactions,
guarantees and contingent liabilities are areas where there is room for considerable
concern. A one-time special audit, efforts to ensure that audit assignments are rotated
at three- or five-year intervals and fast-tracking the process of accounting standards
with relevant authorities are actions that SEBI can pursue before a crisis breaks out on
this front. Perhaps the most significant change in the market in the last decade is the
complete transformation of the trading, clearing and settlement infrastructure. From a
market burdened with heavy problems of paper and an opaque trading structure
(where brokers and sub-brokers ruled the roost), there has been a dramatic
transformation to a paperless market and transparent trading system. The last six
months or so, all trades on the National Stock Exchange are settled in demat
(paperless mode). Full marks to SEBI. No doubt, the process of electronic trading was
set off by the NSE, but SEBI too moved rapidly to force other exchanges, especially
the Bombay Stock Exchange, to adopt contemporary trading systems. By also moving
towards rolling settlement (albeit after a considerable and unnecessary delay), cutting
the settlement cycle and now going forward towards a T+1 settlement system, SEBI
has made the markets much safer for investors. But when it comes to addressing price
manipulation, the story is different.
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Price manipulation no dent: One area where SEBI has barely 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 Ketan Parekh favored stocks, such as Himachal
Futuristic, Global Tele-Systems, SSI, Silverline, surged, recording heavy trading
volumes. But one was left completely in the dark on what was behind the sudden
spurt in interest in these stocks and the rise in prices (even if not of the 1999-2000
kind). This was the kind of situation where SEBI should have stepped in proactively
and told investors what was going in. This would do much more for investors than the
mundane investor education programs talked about often. Price manipulation,
informed trading and insider trading with key operators/investors is now routine. This
is an area that is difficult to tackle for any regulator. But over the last ten years, SEBI
has taken action on such price manipulation in just two cases (Bayer ABS and Amara
Raja Batteries). Here, too, the penal action has hardly been stringent.
Act on corporate actions: Perhaps as a matter of routine, SEBI should take up all
cases of corporate action and subject them to scrutiny for share price behavior ahead
of and after the action. Trading action is generally confined to a small list of 150
stocks, on which SEBI can focus its attention. It can also draw up a list of another 150
stocks of companies with reasonable standing but poor liquidity, for tracking. At the
end of the day, SEBI's effectiveness will be enhanced only if it can make a dent in this
crucial area. Else, the larger body of shareholders will be shortchanged by such price
manipulation.

MY LEARNINGS FROM THE PROJECT

It was a great opportunity for me to do my internship from Bonanza Portfolio Ltd. I
got a project which gave me the opportunity to meet the various people in the
corporate world and to know the people involved around the brokerage firm. Through
this project I learnt about the corporate culture and the working environment of the
company. As my summer internship was in Bonanza portfolio which was a brokerage
firm so there was a lot of scope of learning about the stock trading and to know about
the online trading. As my title of the project was related to the online procedure and
benefits of online trading and I learned a lot about the online trading such as what is
process of the online trading which includes the filling of the form for online trading
with other documents attached with it and submitting to the concerned person.
Through this I understand what formalities have to be fulfilled for the opening of the
Demat account and trading account through which trading is possible. I came to know
about the documents to be filled for the opening of the account, how the demat form
is processed from the branch to regional office then to the head office and then finally
acceptance of the form by the depository of the India which is named under the
NSDL(National Securities Depository Limited) and CDSL(Central Depository
Services Limited). And now after the acceptance of the form by the Depository the
details of the client for the demat account are registered there and clients id is being
created in the company under which he can carry out his account. His account is
mapped with the branch from where his account has been opened and can carry on his
trading activities. In this project I learnt about the software working of the company
and understand the various tools and techniques available for the analyzing of the
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market situation and to analyze and predict the future price with the tools available.
These tools include the graphs and charts which help to analyze the market. In this
project apart from the above things I learnt the research part of the share market
which include the deep analysis and taking into the consideration the various factors
which can affect the Indian market. As when we go through the analysis we see not
only the NSE and BSE the Indian markets but we also see the foreign markets CAC
and DAX and the US markets which affect the Indian market in the sense that many
institutional investors had invested their money in the foreign market and if the
foreign market will fall it will affect the investment of the various investors of the
Indian market thus affecting the overall Indian market. For trading in the stock market
as an investor you have to analyze the things in a much better way so as to get fair
return from your investment. I have understand through this project various regulation
being implemented by the SEBI for the protection of the investors rights and their
interest. In this project I have learnt not only the practical aspect but also the
theoretical aspect being involved in the trading and how to do the online trading in a
better way. As far as theoretical knowledge is concerned for the share trading it is
necessary to know the background of this trading and who all are involved in the
trading of the stock. For this through my project I have learnt about the types of
market which deal in various securities and the role of the capital market for the
development of the economy and how it affects the Indian investors. I have learnt that
the market is of two types as concerned with the securities one is the money market
and the other is the capital market. Money market deals with various instruments like
the promissory notes and t-bills and the capital market deal with the further
categorization of it with the primary market and the secondary market. In this project
I have learnt about the working of the primary market and also that here all the
securities are being issued by the company and in this market the investor directly buy
the shares form the company. So basically in this market the company deals with the
various offers being given to the public and directly provide these offers to the public
and through this project I came to know about the various types of offers being
offered by the company to the company includes IPO (Initial Public offer),
FPO(Follow on Public offer) etc. In the secondary market part through this project I
came to know the dealings of the secondary market is being handled by the National
stock exchange and Bombay stock exchange. And also known through this project
that in the secondary market the shares which are traded in the secondary market are
already listed in the stock exchange. In the theoretical part I came to know about the
participants of the capital market and their contribution to the capital market. The
Indian capital market involves a lot of participant who invest their money in the
capital market. Through this project I learnt about how the online trading works,
means what exactly is the process involved in the online trading. In this context I
learnt that there was the outcry system before the online trading but after there was a
revolution being brought by the internet trading. In this trading takes place through
SBTS system means screen based trading system where a member can punch into the
computer quantities of securities and the prices at which he likes to transact and the
transaction is executed as soon as it finds a matching sale or buy order from a counter
party. Thus it is all in the trading. Through this project I came to know that during this
process there is VSAT installed in the NSEs main computer through which the
brokers terminal is connected and trading goes on. Through this project I get the
knowledge regarding the new market instruments available in the market and the
stock market instruments which include the equity, commodity and debenture and
preference shares dealing. In this project I came to know who all are involved in the
trading system and the role of the broker in the trading system. Also this project
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helped me to analyse the relationship of the broker for an investor and what role he
plays in the investment strategy of the investor as broker advices the investor where
he has to invest the money and to guide him in the analysis of the portfolio which will
give the investor the maximum return from his investment. Also there are many
regulations for the broker and sub broker from the SEBIs side which tell them that
what is their responsibility towards the investor and to provide the necessary
information to the investor regarding the market updates and the tips which guide the
investor for making fair return from the investment. SEBIs regulation for the brokers
monitor that whether they are doing their work in a proper way and with honesty or
not and whether there is any fraud being done by the broker or any cheating being
done by the broker all these things are monitored by the SEBI and make sure that all
the brokers are working in the right direction and are working under the legal frame
work of the SEBI. As my topic was related to the online trading then through this
project. Through this project I came to know about the contract notes to be given to
the client at the end of every month. This is as per the guidelines of the SEBI to give
the contract notes to the clients each and every month. Actually this contract note is
the maintenance and the details of the account and consists of the transaction done by
the client for each month. And every brokerage firm has to maintain these details on
the monthly basis and should post these details to the clients. I came to know the
benefits of the online trading and its gaining popularity and this innovation in the
Indian financial market is creating the Indian financial market technologically
advance. Today in this 21st century as the Indian population is working with the
computers and the introduction if the internet trading is adding some more
technological advancement to the Indian securities market. Through this project I
have learnt about the process of the clearing and settlement and the parties who are
involved in the clearing and the settlement process. In this process I came to know not
only the working of the clearing and settlement but also the procedure of clearing and
settlement and the parties and the organisation involved in the clearing and the
settlement process. The another most important thing in the online trading is the rules
and regulation required for controlling the activities in the trading. So in my project
part I have learnt a lot about the rules and regulation of the SEBI and the act under
which the SEBI was formed that is the SEBI act 1992 and what are the part of the
legal framework of the Indian capital market which includes the SEBI act 1992 ,
Securities Contracts (Regulation) Act , 1956 , the Companies Act 1956 and the
Depositories act 1956. Through this project I was able to get a broad view of these
regulations and how these regulations are related to the Indian investors and how they
protect the right and interest of the Indian investors. In this there was also being
discussed about the insider trading which is being very much prevalent in India
affecting the market condition by the sensitive information and was been affecting the
confidence of the Indian investors and the action being taken by the SEBI for the
control of insider trading. In my project I learnt about the role of the SAT (Securities
Appellate Tribunal) which is an organisation which act as a court for the investors and
the SEBI and check the SEBI is not violating the regulation of the Indian Capital
Market. In my project there was the discussion of the Depositories which involves not
only the holding of the securities of the investors but also the dematerialisation of the
securities of the Indian Investors and making sure that there is a complete list of the
investors with their profile being maintained in the Depository in India. In India there
are two depository named under NSDL (National Securities Depository Limited) and
CDSL (Central Depository Services Limited). These two depositories in India hold
the securities off the Indian investors. Also there was various regulation being
included under the Depository named under the Depository Act 1996.Through this
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project I learnt not only about the stock broker and their function but also I came to
know the various brokerage companies in India and which are those famous
brokerage companies in India in terms of service tips and advice given to the Indian
investors. Through this project I came to know that the qualities that are required to
become a good broker. And also I came to know the history and the evolution of the
stock broker. As talking about the famous stock brokerage firms in India I came to
know about the top 10 brokerage companies in India. Also I analysed regarding the
profile of the Bonanza Portfolio in which I was a summer trainee. Through this
project I came to know about the history of the company and when it was established
and the founders of the company and also the services being offered by the company.
Also I made a comparative analysis of the services being offered by Bonanza
Portfolio and other companies, and came to know about the improvement to be made
by the company in the offering of their services. Also I learned a lot of things from my
guide and the other superiors as to how to maintain the corporate culture in the
company, how to be disciplined and to be punctual in your working. I learned to
respect the decision of the superiors and to maintain effective corporate relationship
with them. Through this project I came to know about the various stock exchanges in
our country and also came to know that Bombay Stock Exchange is the Asias oldest
stock exchange, and also that we are having 22 stock exchanges in our country
including National Stock Exchange and Bombay Stock Exchange. Also through this
project I came to know about the history of the stock exchanges and what is the
meaning of the stock exchange and what is their function. Through this project I was
able to know the history regarding the stock exchange and was able to know the
various indices of the stock exchange and their importance. Through this project I was
able to understand the various technicalities and the technical terms of the share
market like Stop loss, stop order book, margin and delivery selling of shares and I
came to know about the concept of the future and option buying and selling and also
came to know about the call option and put option and the difference in them. Also I
came to know about the time when call option is purchased and when the put option is
purchased. Also I learned regarding how to depict whether there is discount in the
market or not. Also I came to know the concept of short selling of shares and
commodities. Under this concept shares are being sold in the open market at the
prevailing rate and then it is being purchased from the market in the lower rate so as
to make profit. All these things come under short selling. Also through this project I
came to know about the odd lot market and the normal market and what is their
importance and also came to know that normal market is also known as the equity
market. Also in this project there was a topic regarding the SENSEX and the
calculation of the SENSEX and also to know the Nifty and the various types of Nifty
involved for the nifty indices like bank nifty through which we can judge the
performance of the banking sector and can analyse the return from the banking sector
and can also predict the future condition of the market in the banking sector. Same is
in SENSEX, we can come to know about the various indexes in the SENSEX like
BSE-100 or BSE-500 which depicts that various firms being involved in this index
and there is a base year for the calculation of these indices and help in analysing the
market position of different sectors of the economy. SENSEX is also known as the
sensitivity index and is the BSE SENSEX which determines the various indexes of
the SENSEX There is a proper method of calculation of the index and this method is
known as the free-float method and through this project I came to know about the
calculation of the various indices through this method. Also I came to know about the
performance of various sectors of the economy in this project through proper
comparison between them. In this project I came to know about the concept of the
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mutual funds and also came to know about there working. Through this project I came
to know that mutual funds are those funds which are invested in various sectors and
portfolios depending upon the return being generated from these sectors. In this
process an investor provide his investment to the fund manager whose main
responsibility is to analyse the which are the different sectors generating a fair return
and having scope of long term investment for future. After considering various factors
the fund manager makes his plan and invest the money in the different sectors and
after a stipulated period he provide the necessary return to the investor. Through this
project I came to know that in the mutual fund there are various plans like Systematic
investment plan and systematic transfer plan and systematic withdrawal plan and
according to the investors strategy he can go for any scheme, which he thinks suits
him better. Also through this project I came to know about the commodity market and
its working, which is quite different from the equity market. As putting the order over
the terminal is same as in the equity market but here there i lot system. In this system
there are lots fixed for the various commodities and each lot has cost as per its market
value which is being determined as per the market condition of that product in Indian
and in the foreign market. For example in gold there is lot fixed for each commodity
which is around 100 per gram which means that if there is one rupee increase or
decrease in the price of the gold then there will be rupees 100 per gram increase or
decrease in the price of the commodity. Sometimes it is also said that there is a lot of
risk in the commodity market than the equity market as there is a huge investment in
various commodities involved. Also through this project I came to know about the
various factors which influence the SENSEX. As there are various factors which
determine the volatility in the NIFTY and SENSEX which ranges from the market
conditions in the local market and the foreign market. As my work profile in the
summer internship was related to the back office work and then the sitting on the
terminal for the confirmation of the price of the stocks to the customers and also
sometimes by observing the experienced persons on the terminal and gaining
knowledge from them later on I also start giving the customers the suggestion
regarding the stocks and the shares in which they can invest their money and can
generate fair return from their investment. During this process when I interacted with
the clients for the first time I was very hesitant but after that I started to analyse all the
things and understand their requirements in a better way. Sometimes there were
customers who talk in a rude way but then also I maintain my calm and composure
and try my best to convey the customers to understand the situation. This summer
internship made me understand that I have to be patient enough and should be
generous to them while talking. Through this project I learned about the concept of
the order management which makes me understand that through electronic medium
the order that are placed can be modified and can also be cancelled. I learned about
the payment and remittances of the money to the customer or from the company.
Actually there are brokerage firms who want their customers to keep a required
balance in their account and also when any customer sell his shares and want his
money then he has to fill a slip which is a form a cheque book in which he has to
mention the require details and to release his money from the trading account and
transfer it to the saving account to the customer. Through this project I learnt about
the software of the company known as ODIEN client and also know about the
working and how to download this software and through this software I came to know
the various tools available for the working of the software and to analyse the market
trough this software and also came to know how to put the scrips or the stocks
through this software and how to order for any transaction through this software. On
the communication part I was able to understand that what type of communication
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mode you have to keep with a subordinate and a superior and how to encourage the
subordinate to work better and to give better performance and to enable the growth of
the company. Not only with the superiors and subordinates but also with the
customers also it depends how you convey your message to the customers. Also this
project helped me a lot to know how to lead a disciplined daily life. Through this
project I came to know about the internet broking and how it is being implemented. In
this process SEBI Committee has approved the use of Internet as an Order Routing
System (ORS) for communicating clients' orders to the exchanges through brokers.
ORS enables investors to place orders with his broker and have control over the
information and quotes and to hit the quote on an on-line basis. Once the brokers
system receives the order, it checks the authenticity of the client electronically and
then routes the order to the appropriate exchange for execution. On execution of the
order, it is confirmed on real time basis. Investor receives reports on margin
requirement, payments and delivery obligations through the system. His ledger and
portfolio account get updated online. My guide also made me understand the various
concepts and give me knowledge regarding the stock market. Today my confidence
level has gone up as I meet various people who belong to his field and interact with
them and can know their views regarding the market. And now I can frankly meet any
big person in any organization. This summer internship has made me learn a lot of
new things in the corporate world even from the staff of the organization I have
learned a lot of new things regarding the corporate world and the practical world of
the brokerage firm. So in all this summer internship was a good practical and
theoretical experience for me and also enables me to talk with the various
knowledgeable persons of this broking industry and gain experience from them.

FINDINGS OF THE PROJECT

In India this trading in stock has not been grown to his fullest. Still there are many
people having good income and are not concerned with the investment in various
securities and the rural market related to our country is also not very strong and has
not been explored much. In India the individual investors are not been encouraged to
the online trading and there number has to be increased for increasing the growth of
the stock market and the broking firm. In India the way the online trading was
accepted, its growth has been slow and there is a slow response from the investors for
the online trading. Specially the rural sector has been unexplored and not has been
done by the SEBI and the government to increase their contribution so as to
strengthen the capital market of the country. On the practical aspect we talk about the
online trading but still it is in initial stage in India as internet facility in India has not
been very good and hamper to deliver a smooth service to the customers. But even
though many brokers feel that the growth rate of the online trading will increase and
the customers will become used to this service and can easily handle operation
through internet. Internet trading since 10 years have been working and need more
time to fully develop in India, but once developed in India then online trading will
provide a lot of benefits to the customers as fast service and fast execution of the
order and also making the order executed in time. Also through internet trading quick
updates can be provided to the customers regarding the market condition and the
stock which will give them good returns for their investment. In all online trading
provide the clients with the flexibility that can trade and also help in the order
management in which they can cancel or even modify their orders as per their choice
thus making an overall package of convenience with comfort and making the investor
of India technologically advance but some time is required on the part of the investors
for understanding their right choice and accepting online trading in stock market and
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the SEBI to make the investors understand the benefits of the online trading. Also on
the part of the SEBI there has been many flaws in the rules and regulation for the
security market and many a times they have been failed to protect the interest if the
customers and thus giving a chance to the scrupulous persons to take advantage of it.
On the regulation part SEBI has not been able to implement various rules very
successful. But if they have been implemented them seriously then the capital market
system of India will be more strong. Talking about the insider trading which is still
prevalent in India and thus making the investors loose the confidence on the SEBI and
the market and thus proving the failure of the SEBI on this ground. So insider trading
should be controlled in India and strict actions should be taken by the SEBI for the
insider trading activities. When it comes to the US market the US market are very
strong as there regulatory system handled by the strict regulation and very strict
impositions of penalty is there for the insider trading. Thus the regulatory framework
of the capital market of the country should be made more strong and strong and
logical amendments should be made in the regulation and strong implementation
should be there of these regulation so as to protect the right and the interest of the
customers. On the part of the working of the Bonanza Portfolio there were many
employees who were very much knowledgeable regarding the stock market and were
providing better services, but when compared to the other broking houses then the
Bonanza Portfolio is still lagging behind. The brokerage charges of the other broking
firms are very competitive in comparison to the Bonanza Portfolio. But then a the
journey of Bonanza Portfolio has been merely 10 years as compared to the other
broking firms which are very much established and are older than the bonanza
portfolio. So as the competition is increasing then the company should also be
innovative in providing the services and should m provide quick updates to the
customers so as to retain them and to make long lasting relationship with them. Also
the participation of the FIIs in the Indian capital market is small and it has to be
increased for strengthening the capital market of the country. Also there are not many
regulation related to the broker and the investors and there should be some serious
investment and role of the broker should be defined in a proper way and there should
be more responsibility for the broker to make the investors understand the market
condition and the analysis of the market and the stock of the various companies in a
proper way. So it can be said that as the Indian market is based on sentiments and
there is a great possibility to play with the sentiments of the investors and thus the
watch dog should monitor the persons influencing the market.

SUGGESTIONS AND RECOMMENDATIONS

For the suggestions and Recommendations part the first thing here is talking about the
condition of the online trading in India. The way it was welcomed, it was being
predicted that the online trading not only will bring innovative change the trading
scenario of the stock but also will bring revolution among the Indian investors and
thus will revolutionalize the Indian Financial market. But unfortunately the online
trading is not being growing among the Indian investors as the way it should have
been. The growth rate of the online traders instead of increasing had decreased a lot
and has been one the reasons that the Indian investment in share market is still not
equal to 25% of the Indian population. It has been 10 years since the introduction of
online trading in the country. While market players term it a decent success, the actual
growth of internet trading in India has been painfully slow. The online trading in
equity forms just about 12% of the overall trading volume in the domestic market.
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Pouring cold water on tall claims made by proponents of internet trading, the share of
e-trades to overall market volume was just over 9% in 07-08 and 10.5% in 08-09.
At the end of last fiscal, 349 members were allowed to provide web-based access to
NSEs trading system. The exchange had registered over 56 lakh clients (or users) for
web-based access as on March 31, 09. During the year, shares worth Rs 5, 82,070
crore were traded through internet. If one takes real-long numbers, the capital
market has witnessed a growth in trading volumes from Rs 1,805 crore in 94-95 to
Rs 27, 52,023 crore in 08-09. Average (overall market) daily trading volume
increased from Rs 17 crore during 94-95 to Rs 11,325 crore during 08-09.The period
between July 2, 01 and February 5, 10 saw about 149 crore of equity trades being
routed through internet. The number of F&O trades through internet touches close to
28 crore. If one takes a 10-year time-frame, over 16% of the overall trades come
through the online route. There are various reasons for the slow growth rate of the
online trading one of the reasons might be the slow growth of the internet segment.
For one, internet penetration is a major problem in rural India. Bandwidth availability
is also a problem in tier-III and tier-IV cities. Now also the rural market of our
country is very much backward and ignorant about the Indian Share market and that is
the main reason of them of being unexplored and unexploited for the share market
trading in India. Even today also more than half of the population of the rural sector is
ignorant about the share trading and dont know how to plan their investment in
various securities available in India. So on this area SEBI has to work hard and to
carry out various campaigns and programs for the rural people so as to give them
knowledge about the online trading in India and should give them knowledge about
the basics of the working of the share market so that the rural population can also
become the part of the share market and thus enabling a lot of revenue generation and
investment generation from this unexplored segment thus contributing to the growth
of the Indian financial market and strengthening the Indian economy. Also there is the
need for penetration of the internet among the rural investors has to be increased and
they should be provided with the knowledge of the online trading and making
possible the internet growth among the rural investors to grow. Today as we see
internet has become a major part not only of our daily life but also for our
professional life and today also the overall growth rate of internet in India has not
been so good to provide the online trading facility to the Indian investors and further
the internet services available are also not good and the charges of internet in India is
also not very reasonable making the internet services provided by online trading in
India not very popular making Indian investors discouraged to participate in the
Internet market. As more than 70% of the population of India belong to the middle
class and for this money investment means to get some fruitful return from that
investment which should not be very expensive but online trading is making it little
expensive for the Indian investors. Going 10 years back when Indian capital market
was not very strong and Indian investors were not having very much faith on the
Indian market but after that there was a sudden change in the share market and share
trading was becoming popular and there were various news channels providing share
market tips and providing guidance to the investors and then came the online trading
which was gaining popularity but at the end there was not so good response from the
Indian investors. So SEBI should give them time to think for the strategies for
convincing the Indian investors for the online trading and building confidence among
them for online trading in stock market specially in the rural market. The work of
SEBI is now tell about the benefits of the online trading to the rural people and to also
introduce various schemes for the online trading. In the previous year there was the
news regarding the encouragement of online trading in the Indian rural investors and
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for this NSE has introduced the scheme to waive off the fees of the online trading for
increasing of the more contribution of the rural investors of India. Here one more
thing has to be talked about in this context is that the bandwidth facility of the internet
has not been so good in tier three and four cities which has to be solved by the SEBI
and stock exchange of the India. A lot of work has to be done by the SEBI for the
security of the online trading so as to ensure that the online trading is not only carried
in a secure way but also is very much smooth and the not involving lot of complexity
which makes difficulty for the Indian Investors to go for online trading. The online
trading is still in India in the initial stage as lot of investors has not accepted it fully so
it depends on the government and SEBI has not only to encourage the Indian investors
for the online trading and to bring their investment for the investment in various
securities thus for this purpose recently the steps has been taken by the SEBI to
waiving off the online trading fees for the growth of online trading among the Indian
investors and giving a new way for the online trading in India and are commendable
on the part of SEBI for the increasing the growth of the online trading in India. But
various analysts feel that these problems are curable and can be rectified by SEBI and
the stock exchange of India and can enable to increase the investment growth of our
country. The analyst from various broking houses feel that these problems are
manageable and feel that even though there are some problems with the online trading
but then also there are many advantages of the online trading which makes it future
bright and covers some negatives of the online trading. Online trading being through
electronic mode is very fast. Its speed is the main criteria which makes give the online
trading a big scope in future. Also its being very economic in time also and being
very much fast is and having high speed execution also not take very much time for
execution of the transaction. According to the supporters of e-trading, trading through
online portals reduces transaction costs by a good measure. Besides, there is no
waiting time to place transaction orders. High-speed execution, greater flexibility and
control are the main advantages of the online share trading. The structure of the Indian
market is such that it will take a lot of time for internet trading to catch up. First,
retail participation has not gone up much over the past few years. Growth in the
number of new demat accounts opened has just been around 12-15% annually.
Various experts feel agree with the point that the structure of the Indian market is very
complex and it is also very conventional means not able to catch up with new
technologies and new innovations. In the era of computers and internet when there is
a lot of demand of internet trading a slow response from the Indian investors has been
very disappointing. As the experts feel there is still time for the Indian investors to
realize about the online trading and to know the working procedure of it. They feel
that the investors in India are very much hesitant towards the investment in stock
market not only because of the risk involved in the trading but also because of the
lack of knowledge of the internet. The experts comment that the Indian investors are
very much ignorant about the demat account and what it deals with. The slow growth
of account opening is being very discouraging for the various brokerage houses and
the experts now feel that the time has come to take steps for the motivation of the
Indian investors to enter in the market and to guide them to invest them and plan their
investment in an effective and proper way. The structure of the Indian market is such
that 25% forms individual retail, another 25% wholesale retail, 35% proprietary
trading and 15% institutional investors. The whole internet trading play pivots around
25% individual retail investors. According to the experts there a various segments of
the stock market in India but the major role of increasing the growth of the online
trading in the stock market will be the individual retail investors who are still very
much behind in investing in the capital market in India. There contribution is very
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small in contribution to the stock market in India and thus making the trading of
stocks not very much popular in India. These retail investors play a major role of
converting this growth to double. As there is lot of funds generation from these
investors and these retail investors belong to the middle class and upper middle class
of the Indian population and most of the people belong to this class which makes
retail investors role very much important as to how they take the Indian capital market
as they not only enable the growth of the Indian market but also led to the increase in
the stability to Indian Economy thus making it more consistent and more competent in
the global economy. Retail investors are the greatest revenue generators and the
investment generators for the country and thus providing more depth to the Indian
capital market. Talking about other segments of the capital market they also contribute
to the Indian capital market but there is no much effect from them if some of the
institutional investors or the wholesale retail investors contribution is less. As there
number is very less. But talking about the individual retail investors in term as of
India as they form a major part of the population there presence in the capital market
will definitely affect their growth and the consistency of the capital market.
Administered interest rates to investment products like post office savings, EPFO and
such other products take away the need for equity investments for retail investors.
Even though the retail pie is small, internet trading is nowhere near its full potential.
The segment will pick up as the market expands with newer products and increasing
awareness. Actually the major part of the individual retail investors investment goes
in the favour of the post office savings, mutual funds and various other type of
securities making the equity part for the investor very less and giving the equity part
not so much priority as the other securities are given importance. Actually the main
thing here is that the main priority the individual retail investors give to the other
securities and when it comes to the equity investment they are not very much sure that
they will get good return or not in the market and it may result them in loss. Also the
main thing is that the equity investment is very risky making the retail investors very
hesitant to participate in the equity market and to contribute toward the stock
investment. Thus for this the confidence must be built among the retail investors that
the equity market is also very feasible for them and they can get good return if they
invest in this market for this SEBI and the NSE (National Stock Exchange) and BSE
(Bombay Stock Exchange) should play a major role and encourage the retail investors
to participate in the equity market. These authorities are required to tell that even
though there are losses in this market, it is very risky but then also through proper
guidance of the broker and the proper knowledge of the working of the market and
analysis of the market will help them to get good return from the market and thus
making their part of profit. One of the major fears during the initial days of internet
trading was that e-trading will ruin small-shop brokers with very few clients. Ten
years later, small broking firms operate as profitably as an ICICI-director Geojit
Securties. Actually the initial success of the online trading when it was introduced in
the market was good. The online trading gained success in the beginning of its
introduction. All the small brokers feared that there brokerage shops will be closed
down very soon but after years also these small broker shops are running very
successfully as the other online trading providing brokerage companies. Initially
many of the clients of the small brokers walked down to join the services being
provided by the online trading brokerage firms. They were very much attracted
towards the technological change being in the stock trading but later on the hard
margin rules and low quality of services being provided by the online trading firms
had made the investors to join again the services of the small broker shops and turn
down the services of the online trading brokerage houses. For the slow growth of
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online services in India the poor quality of service being provided by them and the
high cost for margin also make the investors to move to their previous small brokers
house where they can get good advices for the daily stocks and the daily tips for the
market conditions and the technical guidance for the market analysis and daily
updates and news regarding investment which can help the investors to take wise
decisions for the investment in various stocks. Investors were expecting these very
services from the online trading and were very much disappointed with lack of service
which made the investors very unsatisfied. Actually as an investor you think about to
get good return from the investment whether it is through the online or manual trading
but the thing here is that even though the technological advancement has
revolutionalized the Indian capital market the basic thing remains the same the return
that the investor gets from the investment he made in various stock companies and
this can be provided when the broker will provide them proper guidance and support
for the investment so as to get good return from the investment. But when we talk
about the online trading except the technological part all other were not developed
very much such as the service part for the investors from various brokers. So it is not
the technology but the services which make any business run and flourish which was
lacking a lot in online trading. But now the online trading companies are realizing this
factor and are providing the investors guidance in the online trading and making the
investors know the technicalities involved in the online trading, making them aware
how to do online trading and also guiding them in various stick and giving them tips
on regular basis. So here the main part has to be played by the various brokerage
companies in the market and they have to realize the situation and on their part they
have to bring various schemes which will give various benefits to the investors and
should try some innovative like there are few companies in online trading who have
started the mobile trading also and also give the investors the daily tips and advices to
the investors and the investors also can make use of it and can take decisions for the
investment. So each and every time the trading companies should go for some unique
feature which makes them their USP. SEBI will play their part here but the main role
is of the brokerage companies to make sure the investors are moving towards them for
their services. The SEBIs part is just to provide the guidance to the brokers and the
investors under the legal framework. A section of the market believes, internet
trading, in real sense, only comes handy for active, high-volume traders. Investors,
who buy smaller number of shares, can still do well with tele-call options. Active
investors, who are always hooked on to markets, need online mediums. Actually a
large segment of the people who invest money in stock market still feels that the
online trading is useful for them who are involved in the trading in a big volume. It
means this online trading service is available to those who are high volume traders
and invest a huge amount of money in the share market and has shares of various
companies which will give them ample amount of return. They feel that the online
trading suits the active traders who are actively dedicated to the online trading for
twenty four hours and all the time keep a check on the market position. For the
investors whose money invested in the capital market is less they can go for the small
brokers services as the online broking services and the trading services being provided
is not required for them. For them the telephone service being provided yo them bu
their brokers is very much sufficient for them and they are satisfied with the way they
are handling their stocks. But being an investor you always try to gain more and
invest in such a way so that with less investment an investor can get huge returns and
thus here the services of the online trading is very beneficial as they provide various
tools like charts and graphs and various feature like market watch and other tools
which enable an investor to analysis the market and study it in an effective way. The
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online trading will provide him the convenience of trading any where whether you are
in home or in office and there is no boundation of trading at a particular place and
besides this also the online trading deals with the faster execution and great flexibility
which blends with the time consumption being very less making the online trading
beneficial for the majority of investors who are trading for the stock market. But the
only thing here required is the first step from the side of the investor to realize the
technological changes and the innovations and to accept those changes and to
understand that they have to work as per the changes in the environment of the Indian
capital market and should welcome and accept the online trading and to learn it and
make full use of the online trading which will ensure the investors that they are being
benefitted with this service providing them fair return on their investment. And for the
role of the SEBI and various Brokers their work is to make these investors motivated
for the online trading and provide them guidance from time to time and through
various regulations SEBI should not only guide the Indian investors but also protect
their rights and make them assure that there will be a fair play in this market. Another
part which is being quite a concern for the Indian capital market is the regulation part
which is being played by the SEBI. SEBI (Securities and Exchange Board of India)
was established in 1988 by Government of India. After Harshad Mehta scam of 1991
it was made an autonomous regulatory body on the lines of SEC( Security Exchange
Commission) of America. SEBI was made to bolster investor confidence and keep an
eye on market transactions. With the inception of SEBI it was expected that security
markets will be integrated over a national level. In the current scenario of financial
markets where numerous financial instruments like Insurance, Mutual Funds,
Derivatives (introduced in the year 2000) etc have come into picture; the role of SEBI
has become more important. But majority of times SEBI proved to be a Watch Dog
without teeth. SEBI has failed in implementation of regulations and bringing
convicted participants of market to justice. SEBI is responsible for working of all the
Stock Exchanges and transactions relating to equities. In India the trading has to be
given a new way by strengthening the regulation part of the SEBI and to take steps for
making the implementation part of the SEBI regulations to be stronger. Actually for
the regulation part regarding the stock market in India there are lot of regulation and a
lot of rules for the trading in share market but even then also there is lot of fraud and
unfair trading and also sometimes encouraging insider trading In India and misusing
the Indian Investors hard earned money. So at this part the not only the trading system
of our country but also the rules and regulation part of the online trading of share
market has to be more refined and clear so as to make it more relaxing and satisfying
for the Indian Investors to trade without fear. SEBI has to play a major role with their
parallel authorized organization for the share market specially the SAT (Securities
Appellate Tribunal) so as to work for the interest of the investors and to make the
financial market of the country stronger and reliable. Actually on this part the question
arises that whether the market is safer for the investors to trade freely without the fear.
For giving the answer as an investor you have to think twice. It is quite shocking
when unscrupulous market players manipulate the system and share prices, and go
scot-freewhile regulators watch from the sidelines. Joint Parliamentary Committees
(JPC) are set up, investigations go on for years, voluminous reports are prepared,
which eventually become academic documents. Meanwhile, market scams continue to
rear their ugly head every now and then, and serve grim reminders that SEBI
(Securities and Exchange Board of India), the capital market regulator, has failed
investors. Here it is important to discuss some of the regulation of the SEBI being
failed to be implemented-: In July 2002, SEBI launched a centralized Internet-based
filing system for listed companies. Called EDIFAR (Electronic Data Information
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Filing and Retrieval System), it required companies to post disclosures as per the
listing agreement with the stock exchanges on the EDIFAR website (www.
SEBIedifar.nic.in) at the same time as they submit them to the exchanges. The
mandated disclosures include: quarterly and financial results, annual report,
shareholding pattern, corporate governance report, and statement of action taken, if
any, against the company by any regulatory agency. In the mean time, companies
would also file other price-sensitive information such as takeovers, tie-ups and new
deals, as they currently do with stock exchanges. The objective of EDIFAR was to
provide investors simultaneous, one-point access to key information on all listed
companies. The NSE (National Stock Exchange) and the BSE (Bombay Stock
Exchange) already do so on their sites for the companies listed with them, but its
rather thin. EDIFAR intended to provide comprehensive coverage. To start with, 201
companies were asked to post disclosures on EDIFAR. This number would likely to
cross 700 when companies post their numbers for the quarter ended September 2002;
and by the end of 2003, all listed companies were supposed to comply with this
requirement. So, how good was EDIFAR? Several of the 201 companies in the first
list havent posted their annual reports; some others have posted only an abridged
version. Some of this can be attributed to teething troublesEDIFAR was barely three
months old. But the corporate disclosures continue to be selective and scattered, and
the stock exchanges didnt take any action, which lead to the explanation to this issue
from SEBI. And ultimately the result was the closure of EDIFAR very soon in the
same year. Another case was Ban on incentives on mutual fund sales. This was
another well-intentioned measure whose effective implementation fall short was the
ban on the practice of rebatingcommissions given by fund houses to their distributors
(normally, to the tune of 2 per cent of the value of units sold), who, in turn, pass on
some of this to investors. SEBIs move was a step in the right direction, as rebates
often led to a misallocation of funds by investorsin favour of high-incentive paying
schemes. However, in the new dispensation, the distributor gained at the expense of
the investor. Eventually, this 2 per cent came out of you as an investors schemes
NAV (net asset value). But if the distributor is not paying you part of this 2 per cent,
why should he continue to get the 2 per cent? In other words, a commission paid by
fund houses to distributors must fall from current levels, which SEBI must ensure in
time. There was also the problem of implementation. Such incentives were normally
paid out in cash, for which no records exist. To circumvent this problem, SEBI had
put the onus on mutual funds to ensure that their distributors do not resort to such
unhealthy practices. But mutual funds had expressed their inability to monitor their
distributors, due to their large number and geographical spread. Again, there was the
need for the regulator to find ways to translate its intent into action at the ground
level. Talking about the implementation of the regulation on the part of the SEBI, they
have implied the one more thing that is posting orders on its website. In the beginning
of July, SEBI has been posting all orders passed by its chairman against errant
companies and market intermediaries on its website (www.SEBI.gov.in); earlier, only
select orders were put up. Since June 2002, SEBI has also been posting all orders
passed by the Securities Appellate Tribunal (SAT) on its site. These are verdicts on
appeals made by intermediaries and companies against orders passed by the SEBI
chairman. Its useful information for investors. Before investing in companies or
signing up with relatively unknown brokers, they can run a search on the SEBI site to
see if the parties concerned have ever been pulled up for violations in the past. Its a
good filter, as it helps investors avoid investor-unfriendly intermediaries and
companies. Investors can also track cases relating to companies or brokers where they
have an interest. There was another story of the Indian watch dog (SEBI) where the
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organization failed to implement its regulation in an effective way. It was related to

Expediting pending cases. One of the perennial investor grouse against SEBI is that
it tends to drag its feet in booking offenders. There are signs that the regulator is
showing a greater sense of urgency in resolving pending cases. In August, SEBI filed
a petition in the Bombay High Court asking it to direct the metropolitan court to speed
up a pending criminal complaint case against senior officials of Hindustan Lever on
insider trading charges. Recently, SEBI also speeded up investigations against former
Tata Finance managing director Dilip Pendse for his alleged involvement in insider
trading in the Tata Finance scrip and suspended brokers responsible for the March
2001 payment crisis on the Calcutta Stock Exchange. There have been more such
instances, though obviously less high-profile than the three cases outlined above.
There is another case which depicts the failure of implementation of the SEBIs
regulation. The case was related to the Amendments to takeover regulations.
Several investor-friendly amendments to the takeover code were made in recent
months. Preferential allotments were brought under the ambit of the takeover code in
September. This would stop the practice of promoters making preferential allotments
to avoid making an open offer to other shareholders. Acquirers also had to disclose
their holdings more frequently, which increase transparency. In addition to the
existing levels of 5 per cent and 15 per cent (when an open offer is triggered), they
also have to inform the company and stock exchanges when their holding touches 10
per cent and 14 per cent. Investors can also withdraw the shares tendered by them in
an open offer till three days before the closure of the offer. In the works: faster
settlements of transactions, a central listing authority to standardise the listing process
across exchanges and improve the quality of companies tapping the market, and the
removal of the Rs 2 lakh minimum contract size stipulation for derivatives to allow
for greater retail participation. In these cases some of the regulations of the SEBI were
implemented in an effective manner and in other cases there was nowhere effective
implementation of the SEBI regulation making it a serious concern from safeguarding
the investors right and interest. But here are the problem areas where the SEBI has to
work hard and to re-think about the implementation part of their regulation in the
effective manner to safeguard the interest of the Indian investors. The key problem
areas on SEBIs part are as follows:
Problem Areas
Sure, all these measures promote a market more attuned to the needs and interests of
investors. But what remains top-most on the minds of small investors is whether this
market is still vulnerable to insider trading and price manipulation, which can
precipitate a collapse of the kind seen in 1992 or in 2001 or in 2010. Says A.K.
Narayan, president, Tamil Nadu Investors Association: "SEBI has failed in vigilance
and online surveillance. It has failed to pre-empt market crises." Added by Gurunath
Mudlapur, head of research, Khandwala Securities: "Decision-making in SEBI is still
long-drawn and process-driven, rather than objective-driven. Insider trading is still
prevailing in the Indian stock market even though the strict regulation of the SEBI.
India seems to be in the category where insider trading laws exist, but the prosecution
are too few to be noteworthy. In the recent case in the United states there was an
alleged insider trading criminal case against Galleon Group hedge funds Raj
Rajaratnam and executives of companies, including International Business Machines
Corp., is likely to be the first in many such cases that will be unearthed in the US, a
news report by Bloomberg suggests. The US Securities and Exchange Commission
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(SEC) and law enforcement agencies are aggressively going after insider trading
networks, according to the report, but what about the integrity of the Indian markets?
Hardly any prosecutions come to mind, although the practice of insider trading is
rather rampant. Back in 2003, Julan Du, professor at the Chinese University of Hong
Kong, and Shang-Jin Wei, an adviser in the International Monetary Funds (IMF)
research department, had done a study on insider trading in 50 countries for IMF. One
of the conclusions they reached was that insider trading is relatively high in India,
China, Russia, Venezuela and Mexico. The situation hasnt changed much in the
country since then. Very often, one would observe share prices of firms already
having moved in anticipation of a major corporate announcement. Based on market
gossip, many of these pre-announcement trades are at the behest of the promoters.
While the Securities and Exchange Board of India (SEBI) has investigated a lot of
these trails, it hasnt been as successful in prosecution as much as SEC. To be fair to
SEBI, regulators worldwide have had little success with convictions in insider trading
cases. The trades are normally done through front entities and generally difficult to
prove since the evidence can be circumstantial. (In this context, since SEC is armed
with recorded conversations of the alleged conspirators in the Galleon case, the
likelihood of prosecution seems relatively high.) . Besides, SECs powers far
outweigh those of SEBIs. SEC is also staffed much better and has more resources at
its disposal, including government support in prosecution. There is much needed
investment should be done by the SEBI and to act tougher against insider traders.
There are some expert persons who believe that it doesnt make much sense to expend
the limited resources of a regulator on insider trading cases. The argument is that
since it is difficult to prove such cases, it would amount to a waste of regulatory
resources. And even though the US regulator has made relatively high investments in
tackling the problem of insider trading for many years now, such cases still crop up.
The opposite view, of course, is that it is the regulators role to maintain market
integrity and ensure that theres no information asymmetry in the markets. When the
markets integrity is maintained, its efficiency is enhanced and this eventually leads to
a lowering of the cost of capital for companies. The central finding of the IMF study
was that countries with more prevalent insider trading have more volatile stock
markets. Keeping this in mind, deterring insider trading should lead to desirable
results from a regulatory perspective. According to a paper by Utpal Bhattacharya and
Hazem Daouk of the Kelley School of Business of Indiana University in the US, the
cost of equity in a country does not change after the introduction of insider trading
laws, but decreases significantly after the first prosecution. India seems to be in the
category where insider trading laws exist, but prosecutions are too few to be
noteworthy. The disincentive for offenders, therefore, isnt high enough. While there
are signs of progress on the market surveillance and investigation front since SEBIs
current chairman C.B. Bhave took over, there need to be some significant
prosecutions before incidences of insider trading come down. Hopefully, the Galleon
case will prompt Indian policymakers to add some teeth to its tackling of insider
trading cases. Even though there has been a lot of improvement in the regulation of
the insider trading and it has been controlled very much now a date but still it is being
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encouraged which make the India investors in an unsecure position. So it is the

SEBIs responsibility that to check whether the activities of the various companies
and to monitor whether there is any encouragement given to the insider trading, and if
it founds so then immediately strict action must be taken against that company or
individual promoting insider trading and making the market very speculative.
Slow on the draw. This scathing assessment partly stems from the yawning gap
between what happens in the market and how muchand howthe regulator reacts to.
Its common knowledge that the promoter-broker nexus is deep-rooted and insider
trading does happen, the abnormal price movements in the infamous K-10 stocks in
early-2001 and, more recently, the undiscriminating run-up in small-cap stocks earlier
this year. Yet, hardly any insider cases are opened, and worse, hardly anybody
punished. Thus as part of suggestion the only thing here is to say is that the vigilance
and the investigation area of the SEBI should now be more stronger so as to see those
companies and individuals still encouraging insider trading. SEBIs regulation are
very strong and there implementation will also be strong if SEBI will look after the
various companies and also the EDIFAR should be there again for the interest and
knowledge of the investors, so that investors can know what are happenings in the
company and should make it compulsory to provide the prescribed listed information
for the investors and also make sure that if any company is hiding any information
from the investors and try to conceal it which will affect the sentiments of the
investors and the market then strict action must be taken against those companies
which will make assure the other companies of the outcomes of such activities. The
other thing here to be concerned of is the legacy of employer provided pensions. India
does not have a legacy of employer provided pensions. The OASIS report is right in
making the proposed pension system completely portable and independent of
employers. India does not also have a legacy of social security, and does not have to
contend with the nightmare of politically determined defined-benefit plans. The
OASIS report is right in keeping its proposals for pension funds totally on a definedcontribution basis and providing market determined rates of return. The OASIS 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
basis of a competitive risk-return trade off decided by the fund manager. The broad
framework of the OASIS Committee report therefore has much to be commended.
However, it attempts to create a class of financial intermediaries to manage pensions
which are isolated from other financial institutions. In any economy, there are
institutions like mutual funds and insurance companies that provide services that have
similarities to what the pension funds would offer. By keeping them as distinct
entities, regulated by a new regulator different from either the capital market regulator
(SEBI) or the insurance regulator (IRDA), the OASIS proposals would perhaps
impede the full play of scale and scope economies and restrict the pace of financial
innovation. Investors would probably have more choice if pension products were fully
integrated into the panoply of financial products available in the economy. The
financial sector would also be more efficient and vibrant if that were done. In this
context, this paper argues that pension fund reforms should be placed in the broader
context of capital market development aimed at providing investors with a range of
choices on risk, liquidity and maturity. It must be recognized 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 between these various
investment needs, artificial barriers between different types of financial products and
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services do not serve investor interests. Another important issue for which there
should be some serious steps to be taken by the SEBI is the implementation by the
SEBI is to tighten rules related for rating agencies. Actually this credit rating agencies
issues is related with the usage of credit rating services by different stakeholders in
the present multi-regulatory environment. A meeting has to be held in which
necessary steps will be taken on this issue. There should be enhanced disclosures,
continuation of the issuer-pays model, strengthened process and compliance audit,
reporting of ownership changes, disclosure of default and transition statistics and
strengthening the CRA Regulation in tune with these suggestions. Basically SEBI
enhanced disclosures, continuation of the issuer-pays model, strengthened process and
compliance audit, reporting of ownership changes, disclosure of default and transition
statistics and strengthening the CRA Regulation in tune with these suggestions. It is
good step toward strengthening of the regulation related to the credit rating agencies
and SEBI has to work on the implementation of this regulation.

BIBLIOGRAPHY
Internet
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Article Name: Online trading India-Simplified
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Date of Site Visited: 21/06/2010
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308

http://www.thehindubusinessline.com/iw/2005/07/24/stories/2005072400741300.htm
Article Name: Online trading: Paperless and convenient
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Article name: The scope of Online Trading in India
Author Name: Ajay Santoshi
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Article Name: Online Trading Systems in India and Other Developed
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Date of Site Visited: 3/07/2010
http://www.managementparadise.com/forums/archive/index.php/t-155.html
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Author Name: Vishal Saxena
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Author Name: Dr. Vijay Pithadia
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Author Name: Shakshi Singh

Date of Site Visited: 5/07/2010
Books:
Title: NCFM (NSEs Certification in Financial Market): Capital Market
Author: NSE India
Place of Publication: NSE, Mumbai, Exchange plaza Bandra (East), Mumbai- 400051
Publisher: NSE India
Date of Publication: May 2008
Number of Pages referred from 7 to 28 ,66 to 72 and 168 to 205

ANNEXURE
Press release related to the Bonanza Portfolio Limited
Diversify fund portfolio, avoid betting on sectors': Bonanza
Madhu T, TNN, Jul 2, 2010, 05.26 AM IST
MUMBAI: Defensive sectors like pharma and FMCG are on investors' radar. Many
have noticed that these sectors have been topping the return chart in the mutual fund
industry for some time. No wonder, they are contemplating investing in these sectoral
schemes. However, investment advisors have a word of caution for them: don't start
chasing short-term winners and instead always try to diversify your portfolio so that
you would gain from upside in any sector. It is no wonder that investors have started
noticing these sectors lately. But the trouble is that winners come into notice only
after they have won already, there is no guaranty that these sectors are likely to offer
similar returns in the coming months," says Amit Trivedi, a financial trainer. "The
problem with investors is that they tend to chase winners in the last six months.
Again, they would shift out and invest in another sector which would have started
performing well for a few weeks. In this chase, they will lose out on a good
opportunity to earn more returns," he adds. Experts say it is almost impossible for
anyone to get in and get out of winning sectors all the time. "Investors should
remember that different sectors would perform better at different points in time. For
example, everyone was talking about gold sometime back. Then small and midcap
stocks came and now it is pharma and FMCG. It won't be possible for an average
investor to get in and out of sectors as and when they perform," says a mutual fund
manager, who doesn't want to be quoted. "Look at the returns offered by either gold or
small and midcap funds now. If anyone has gone overboard on these schemes, they
would be regretting it now," he adds. Rakesh Goyal, senior vice-president, Bonanza
Portfolio, believes that this is not the best to time to be defensive.
Subscribe to Technofab Engg IPO for listing gains: Bonanza
1 Jul 2010, 0008 hrs IST, AGENCIES
MUMBAI: Bonanza Portfolio has advised investors with risk appetite to apply for
Technofab Engineerings initial public offering for listing gains. The company entered
the capital market Tuesday with public issue of 29.90 lakh shares in the price band of
Rs 230-240 per share. The 100 per cent book building issue will close Friday.
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Technofab Engineering has been able to increase the average order size over the
years. It had reported good financial performance in the past. However, the PBDIT
margin has risen very sharply since FY08. In the first half of FY10, PBDIT margin is
higher than the industry and so it would be a challenge for the company to sustain
these levels. Investors with risk appetite may apply for listing gains, the report said.
The company is engaged in the business of providing Engineering Procurement and
Construction (EPC) services, executing a wide range of Balance-of-Plant (BoP) and
electromechanical projects on a complete turnkey basis. It plans to use the proceeds to
meet long-term working capital requirements, finance the procurement of construction
equipment, finance setting up of maintenance and storage facility for construction
equipment and for setting up of training centre for employees.
The RIL-RNRL deal improves outlook for RPower greatly:
Avinash Gupta
Source: IRIS (3-JUN-10)
Avinash Gupta, Assistant VP Research Equity, Bonanza Portfolio Ltd discusses the
RIL-RNRL gas agreement on ET Now and what it could mean for the sector.
What are you making out of Reliance and RNRL and the moves right now and
what would you recommend at this point?
Avinash Gupta : The agreement was there the moment after the court order and the
fact remains that whether it is 28 or whatever the figures have been talked about, the
price and timing the duration just been given. This should always be written by the
government and the government policies will keep changing as the energy situation
changes in the country. Therefore, this agreement per se was there and it has come
through that is what the news is. Now, as far as the power project transfers are
concerned, yes that has been a very good move and in fact RPower has got a lot of
money, is also sitting with them which can be quickly utilised to expand the power
projects. So given this improves the outlook for Reliance Power significantly than any
other company.
What you are seeing for the other ADAG stocks right now? RPower in particular
if you could highlight some details on that as well and us to this is going to open
up doors for it in a big way. So going forward, is this a good momentum booster
for RPower and some of the other ADAG stocks as well?
Avinash Gupta : Some of the other ADAG stocks...to the extent that Reliance Infra
would benefit...extent to which money has been transferred to RPower...to that extent
cash flow will come to Reliance Infra. Other companies like RNRL will probably get
business only by way of transporting the gas which is not something very big
compared to the size of the company. Therefore, I find there is an opportunity much
more for Reliance Power than any of other companies.
What could be the possible reason behind how the Reliance Industries stock has
actually started slipping in last 5 minutes because as we understand Reliance
Natural Resources has a conduit company which gets perhaps some sense to
transfer gas, Reliance power gets gas, Reliance's ADAG Group's gas plans move
forward and Reliance will be probably supplying around 28 units of gas over 17
years. What could be the possible reason of the Reliance stock tanking because
Mukesh Ambani has already talked about his own known gas-based power
plants in its AGM. Could you just try and explain the kind of reaction the
Reliance Industry stock is taking in the last 2 to 3 minutes with just close to 1%?
Avinash Gupta: There should be no reason at all for the Reliance Industries stock to
have gone up on this agreement or going down on this agreement. Because as far as
311

Reliance is concerned, to whomsoever they sell their gas, the price is going to be
determined by the government and that does not affect their bottom line in any way
whatsoever. I mean probably it has shed whatever gain it had made earlier.
Indias Stocks Rise; Reliance Communications, ONGC Lead
Advance: Bonanza Portfolio
June 28, 2010, 7:15 AM EDT | By Rajhkumar K Shaaw
Indias stocks advanced for the first time in three days. Reliance Communications Ltd.
led gains amid expectations it will reduce debt after selling a unit. Reliance
Communications, the nations second-largest wireless carrier, jumped to the highest in
eight months after selling its mobile-phone towers to GTL Infrastructure Ltd. Oil &
Natural Gas Corp., the largest state-owned oil explorer, extended its advance from a
record for a second day after the government increased fuel prices. Reliance
Industries Ltd., the most valuable company, gained 2.6 percent after it made its
seventh oil discovery in a block in the Cambay basin in western Indian state of
Gujarat. It is better to buy companies that have strong fundamentals and fairly strong
elbow room in terms of financial resources, said Avinash Gupta, an analyst at
Bonanza Portfolio Ltd., a New Delhi-based brokerage. The fuel price increase may
lead to inflationary pressure in the short term, but it may also bring down the
governments subsidy burden.

Fortis Healthcare, Tata Motors good stocks to hold: Bonanza Portfolio Ltd
27 May 2010, 1632 hrs IST, ET Now
Avinash Gupta, Assistant Vice President Research Equity, Bonanza Portfolio Limited
How big or positive it is 1) for the big board Reliance Industries because that has
not performed and 2) for the ADAG Group stocks as well?
Avinash Gupta: As far as this agreement is concerned as Reliance is concerned
whether its sells gas to ADAG or to somebody else their profits would not be affected
and in any case the government will have the final say on this whatever the agreement
is as far as the goes whether it is RNRL or it is with R Power. At the same point in
time if you look at the Reliance Industries, they have got a very limited trigger. We
don't see any refining margins moving up significantly as I seeing stand today only
possible trigger for them is the expansion in the gas production from KG Basin. As far
as RNRL is concerned this contract will be very relevant but we have no idea actually
what is the nature of the contract and other things and R Power will have got
substantial expansion plans of their own to set up there thermal power plants in and
UMPPs. Definitely, it will be a planned addition to the capacity.
What's the call on Suzlon looking a bit weak in trade down 1% post that rights
issue or personal dilution of 10% and battling those huge debts on its books
what's the call there?
Avinash Gupta: In a company like Suzlon has been incurring cash losses for last 3
quarters and cash losses are significant. In a company like this return to the
profitability and how to come back to profitability is more critical that their raising the
money. Once you have been losing the cash their financial position will be tight and
that is what we are seeing so raising the cash is not that important part. They have yet
to clearly spell out as to how they are intend to turnaround and that's a big issue so
312

stock like this these are really high risk areas and these stocks are best avoided by at
least the small investors and therefore my suggestion is to exit till the time we get a
clearer picture about the company and how they are intend to return to profitability.
What would you do with Fortis Healthcare considering the current
development?
Avinash Gupta: Yes, the current development is interesting possibly this is that Fortis
will exit this or will reach some kind of agreement with Khazana. There some
agreement and the fact that Fortis has bought it at a price at Khazana is coming at a
higher price it is indication that company's selection and buying other stock was
absolutely right and the market was right on it. To me this looks positive though there
is a risk of competitive bidding and things getting little nasty for Fortis that possibility
cannot be ruled out but I feel at this point in time it looks hold, one should hold the
stock.
Unexpected increase of profits of about 20% is what most analyst are looking at.
We are already seeing a spike of about 2.5% on Tata Motors, what's your call?
Avinash Gupta: Tata Motors looks attractive one should hold and for a target of
something like Rs850 is possible.
Market is in a consolidation phase: Bonanza Portfolio
Source: IRIS (09-MAR-10)
Commenting on the market trend Avinash Gupta, AVP, Bonanza Portfolio said, ``
The consolidation process is expected to continue. The market can be expected to
move between 5,000 and 5,200``The market had a choppy session and ended the day
in red. The market was in the red for almost the entire day. The selling pressure
noticed in the later part of the day yesterday continued today as well. The selling was
on a wide front. The number of declines was more than that of advances. A number of
sectors yielded ground today. The sectors to record losses included Real Estate,
Metals, Power, Telecom, Hotels and Sugar, he added.

Budget Expectation 2010: Bonanza Portfolio

Thursday, February 18, 2010
Mr. Avinash Gupta, Assistant Vice President Research Equity, Bonanza Portfolio
Ltd
Bonanza Portfolio Ltd: Budget Expectation: 1).What are your expectations from the
upcoming budget? The government last year had just got in the office and had to
present budget within a very short period. It was believed that Government did not
have time to formulate new policy initiatives. This budget gets significance as it
would provide a view of what the government wants to achieve and how. The market
is thus expecting the Budget to give a clear thrust and direction to reforms. The
current scenario is The Government has projected a growth of 7.75% plus or minus
0.25% for FY10. This growth is being achieved inspite of draught and difficult
external environment. The consolidated fiscal deficit is running above 10% of GDP
which is not sustainable. Inflation is rearing its head and inflation of food is a matter
of serious concern. Exports continue to be sluggish and imports are rising over the last
few months. The liquidity in the domestic market is ample.RBI has initiated steps in
tightening the liquidity by stepping up CRR in January 2010 and SLR in October
313

2009. International credit markets have eased considerably since the last budget and
Indian corporate are able to raise fund abroad. It is hoped that the recent concerns
relating to credit default in Europe do not escalate. Foreign flow of capital has been
good in the recent past. In CY 2009 the FIIs invested more than 17 Bn USD in India.
External environment is improving with major economies of the world on the
recovery path. In view of the above the following is expected v It is expected that
Government will announce new initiatives which have a long gestation period. A
significant push for the reforms is expected. The improvement in the delivery of
subsidy to the targeted segment of population would get special attention. This would
enable government to better manage the subsidies and thus fiscal deficit. The move
to GST would get further push v Norms for minimum floating stock for listed
companies may be stipulated. The disinvestment required to meet the criteria could
generate substantial resources for the Government. v The effort of the Government
would be to contain the subsidy bill to address Fiscal deficit. Government revenues
would be buoyant in view of expected GDP growth of more than 8%. v No new
indirect taxes are expected except for roll back of some of the concessions given as a
part of the stimulus package. Some relief to individual tax payers is likely. v The
direct tax code was circulated for public comments. The final shape of the direct tax
regime would be of significant interest. v We expect an approach towards reforms in
the financial services sector and the regulatory environment in view of developments
in the recent past in the world. v We expect a significant step up in the investment in
agriculture sector in view of the stated policy of the Government to step up the
growth. We expect the thrust on Infrastructure, Healthcare and Education will
continue. Steps are expected to attract investment in these areas. Within the investing
community there is expectation that cost of executing the trade would be reduced. In
many cases taxes are more than the brokerage paid by investors on the transactions.
2). Any specific sector or source you are looking for? We expect that the budget
would give push to reforms. Agriculture, Infrastructure, Healthcare and Education are
the sectors which would be watched closely.
Mr. Avinash Gupta,
Assistant Vice President Research Equity,
Bonanza Portfolio Ltd.
Press Release related to the SEBI
SEBI nod must for ULIPs by insurance companies
10 Apr 2010, 0838 hrs IST, ET Bureau
MUMBAI: Market regulator SEBI has barred 14 private life insurance companies
from selling unit-linked insurance plans without its approval, giving a fresh twist to
the turf war between SEBI and insurance watchdog IRDA. We expect some
companies to move the court said the CEO of a life company. It is unfortunate that
this dispute has been allowed to reach this stage. It is time for the finance ministry to
intervene he added. In an order signed by Prashant Sharn, wholetime director, SEBI,
said, I hereby direct the entities mentioned in this order not to issue any offer
document, advertisement, brochure soliciting money from investors or raise money
from investors by way of new and/or additional subscription for any product
(including Ulips) having an investment component in the nature of mutual funds, till
they obtain the requisite certificate of registration from SEBI. The 14 companies
mentioned in this order include Aegon Religare, Aviva, Bajaj Allianz Life Insurance,
Bharti AXA, Birla Sun Life, HDFC Standard Life, ICICI Prudential, ING Vyasa Life,
Kotak Mahindra Old Mutual Life, Max New York Life, Metlife India, Reliance Life,
SBI Life, TATA AIG Life. A few months back, SEBI had questioned individual life
314

companies why they were selling investment products without its approval.
Companies had responded individually that insurance laws permit them to offer an
investment component within a life insurance policy. They also said that they were
regulated by SEBI who had cleared all these products. The life companies were
supported by the market regulator, who reiterated the stand taken by life companies.
In its final order SEBI said, I find that the entities by their own admission have stated
that there are two components of Ulips - an insurance component where the risk on
the life insurance portion vests with the insurer and the investment component where
the risk lies with the investor. This establishes conclusively that Ulips are a
combination product and the investment component need to be registered with and
regulated by SEBI .SEBIs order has implications not only for the life insurance
companies but also for their promoters who have sunk in over Rs 26,000 crore in the
form paidup capital. According to analyst report suggest that, a significant portion of
the value of various companies including, ICICI Bank, Aditya Birla Nuvo, SBI Life
and Bajaj Finserve. Most of the business written by these companies is through Ulips.
If these companies are barred from selling Ulips, their valuations are likely to be hit.
SEBI eyes neutrals to save investors
Agencies| Posted: Jun 30, 2010 at 1711 hrs IST
Mumbai In order to avoid misselling of investment products , market regulator SEBI's
Chairman C B Bhave highlighted the greater need for neutral agencies to educate
investors. "Neutral agencies like the media, regulators and other self-regulated bodies
add more value...they make an effort to let investors see both the sides," Bhave said
while speaking at a seminar on investor education. Intermediaries having an interest
in the products do educate the people, Bhave said, but they can tend to overlook the
flip side. He cited the example of derivative products where investors were told how
much money they could make if the stock price. rises, but were not told about what
happens when the stock falls and how their losses increase.
Bhave also stressed the
need for matching the risk profile of the investor and the risk coming with the product
while selling, and said, "different classes of investors need different kinds of
education...a retired person's risk profile is different from that of a student". The SEBI
chief also asked the agencies to target one such group of investors at a time when it
comes to education and avoid having generic programmes. "Emphasis must also be
given to educating the investor in the language he understands, and hence, it would be
beneficial if regional languages are also used," he said
Trading online in vogue among Indian investors
9 Jul 2010, 1554 hrs IST, REUTERS
NEW DELHI: Indians eager to invest extra income are signing up in droves at
Internet trading sites, data from the nation's largest stock exchange shows. The
number of investors registered for online trading has grown by at least 150 percent
over 2006-07 figures, with 2.9 million in the cash segment and 5.5 million for both
cash and F&O, according to records at the National Stock Exchange (NSE). "Online
trading helps me manage my portfolio better as there is more transparency and valueadded services such as research reports," says Akif Ahmad, a manager at a call centre
in Gurgaon. Traditionally, equities trading in India has been done through brokers, in
person or over the phone, but with the convergence of mobile and Internet, shopping
for shares has become as easy as making a few clicks from one's PC or mobile phone.
315

"One gets access to various value-added features like live market rates, intra-day
charts, live news, market statistics, technical analysis tools and research reports," says
Divyesh Shah, CEO of Indiabulls Securities. According to NSE data, retail investors
accounted for about 21 percent of trading volume for 2008-09, up from 18.3 percent
in the previous year. "As per an estimate, the pure retail turnover percentage of the
total exchange turnover is less than 50 percent, and online trading is substantially
contributed by retail investor base," says Gurpreet Sidana, Online Business director at
Religare Securities Ltd.
Internet Security
Online trading in India, Asia's third largest economy, is still at a nascent stage. Though
the country is witnessing a 30 percent growth year-on-year in internet and mobile user
base, not all investors are convinced that trading the cyber way is safe. "Issues that
need to be addressed are education on cyber crime and the security solutions around
it," says Vinesh Menon, Deputy CEO & Head for Online Investment & Branch
Channel, Bajaj Capital. To work around this issue, most brokerages now offer the
services of a relationship manager who assists with information on share prices and
places orders online using the investor's login details. Some internet trading sites have
also launched low-bandwidth platforms to facilitate trading through mobile phones
and low-bandwidth connections. With more than 400 million mobile users, India is
the world's second-largest market after China for such services and operators have
been adding more than 10 million users a month -- making it the fastest-growing
market in the world. "It's a matter of time when we will see exponential growth in the
online trading segment, not just through the computer but also through our mobile
phones," adds Menon.
SEBI eases listing norms for SMEs
Fe Bureau | Posted: Wednesday, May 19, 2010 at 2316 hrs IST
Mumbai: The stock market regulator, Securities & Exchange Board of India (SEBI),
on Tuesday issued a model listing agreement for small and medium enterprises
(SMEs) seeking listing on the SME exchange. The agreement relaxes the listing
requirements for SMEs on proposed stock exchanges dedicated for the sector, a move
likely to encourage small companies to get listed. According to a SEBI circular,
companies listed on the SME exchange are required to send only a statement
containing the salient features of all the documents to their shareholders instead of the
entire annual report. Further, SME-listed companies need to submit financial results
only on a half yearly basis (usually, it is on a quarterly basis). These companies will
not be required to publish their financial results. Instead, it should be made available
on their websites. The exchanges like NSE, BSE, MCXSX, Inter-connected Stock
Exchange and Bangalore Stock Exchange have shown keen interest in launching a
separate SME platform after SEBI issued the operational guidelines. The regulator
had earlier relaxed the minimum net worth criteria and track record for companies
seeking listing on SME Exchange as compared to that of the usual exchange. An
issuer with a post issue paid up capital up to Rs 25 crore is eligible for SME platform
and will have to migrate to the main exchange subject to exchange approval if its
capital exceeds beyond the prescribed limit. In a separate circular issued on Tuesday,
the regulator clearly laid down the policy for issue, listing and trading of the securities
issued by SMEs. SEBI said that an issuer listed on a SME exchange and whose post316

issue face value capital pursuant to further issue of capital does not exceed Rs 10
crore shall make further issue of specified securities. SEBI has entrusted the merchant
banker to completely underwrite the issue with at least 15% of the issue to be
underwritten in their own accounts. Merchant bankers have also been mandated to
compulsorily do market making for a period of three years from the date of listing.
They have options to get represented on the board of the company. However, during
the period of market making, promoters are not allowed to offer their holding to
market makers. The regulator in its circular stated that a minimum of 50 investors is
required at the IPO stage and not on a continuous basis. Further a stock broker of...

SEBI seeks views on exchange ownership limits, listing

BS Reporter / Mumbai April 27, 2010, 0:41 IST
A Securities and Exchange Board of India-appointed panel has sought views from
market participants on presence of trading members on boards of exchanges. The
committee, headed by former Reserve Bank of India governor Bimal Jalan and
reviewing the regulatory architecture of stock exchanges, has also sought comments
on issues related to listing of stock exchanges, cross-listing and restrictions on owning
clearing corporations. In a public notice, the committee has asked stock exchanges,
depositories and clearing companies to respond to these concerns. The committee was
formed to consider issues with regard to the emerging market micro-structure and the
evolving role of market infrastructure institutions (stock exchanges, depositories,
clearing corporations). It will also review the ownership and governance structure of
such institutions to ensure they remain relevant and effective. Market participants
have been asked to respond by May 10.On ownership and governance, the committee
has asked the market participants if diversified ownership (as in the case of stock
exchanges) or an anchor/strategic investor approach (as in the case of depositories) is
a better model. The committee has also sought views on classes of entities that can be
permitted to be anchor investors. The questionnaire asks it there should be lock-in
restrictions for such investors. On listing, the committee wants to know if separate
requirements need to be put in place for QIBs (qualified institutional buyers)
participating in primary issues of stock exchanges and also whether they should be
granted positions on boards of exchanges. It is also looking at whether the current
limit for foreign institutional investors in stock exchanges needs to be reviewed.
Market participants have been asked to also give views on whether foreign stock
exchanges should be permitted to hold up to 15 per cent or more equity in Indian
stock exchanges. The issues of cross-listing and dual listing (including listing of
shares of the stock exchange on itself) would also be examined. This assumes
significance as there have been various reports suggesting that some of the present
shareholders of stock exchanges are anxiously waiting for bourses to list. This is
because this will help raise valuations. The committee has also touched upon the issue
of trading members on boards of exchanges. It has asked whether they should have
any representation on the board, as they can potentially have access to confidential
information in respect of trading information pertaining to other members as well as
sensitive information. It wants to know if trading members can be put on a separate
advisory board. SEBI has also asked if safeguards similar to insider trading rules
should be prescribed for trading members on boards of exchanges. Incidentally, the
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Bombay Stock Exchange has three trading member directors on its board. On
ownership of depositories, the committee wants to know if it is desirable to allow
exchanges (who are in a related business) to own more than 50 per cent in
depositories. The National Stock Exchange recently increased its stake in National
Securities Depository Ltd to 36 per cent. BSE is also trying to increase its stake in
Central Depository Services Ltd.

Sebi Green Light To Mobile Trading Likely Soon

Vandana/Mumbai, July 9, 0:34 IST
Wireless trading, or mobile trading as it is popularly known, may soon see the light
of day with market regulator Securities and Exchange Board of India (SEBI) planning
to approve it shortly. Sources said that SEBI is actively considering wireless trading
and might even announce the same in its next board meeting. SEBI had earlier
proposed a draft framework for wireless trading and invited inputs from industry.
Currently, trading through mobiles is not allowed. The industry feedback received by
SEBI has been quite positive as a number of brokers feel it as another step towards
opening the market further. We are very optimistic about it. Currently, our clients can
only get stock news and prices on mobiles, but with this move, they can trade real
time in markets. We are ready with the platform and will launch as soon as SEBI
approves it, said Dinesh Thakkar, managing director, Angel Broking. Brokers have
been working with software vendors in readying the application and putting systems
in place. Once mobile trading guidelines are approved by SEBI, the software will be
vetted by the Bombay Stock Exchange (BSE) and the National Stock Exchange
(NSE). Once the exchanges approved it, trading can take off. NSE currently has a list
of empanelled vendors, including Omnesys and Religare Technova, for online trading.
It is yet to set up empanelled vendors for mobile trading. For mobile trading, a
software vendor will provide the application to a broker. Clients of the broker will
have to install that particular software on their GPRS-enabled mobiles or PDAs. The
software will thus enable them to trade as well as access streaming quotes and stock
information after confirming valid user names and passwords. All these will come
with no extra cost. The broker will not charge clients for trading through mobile; it is
only the service provider who will charge the customer for using it. While security is
one of the major issues to be resolved before allowing trading through mobiles,
software vendors say that there are technologies which address this issue.

WORD OF THANKS
I take the opportunity to pay hearty regards to Dr. D. K. GARG (Chairman) and Mr.
M. K. VERMA (Dean) for lending me their kind support for completion of my
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project. I would like to thank all those who directly or indirectly supported me
morally, financially and through providing knowledge by which I could complete my
project. Also I would like to thank my seniors for their support and cooperation. I am
thankful to the management of Bonanza Portfolio Limited where each and every staff
guided me for this project. I would also like to thank Mr. Amit Sharma who is an
employee in Bonanza Portfolio Limited and he had given me special attention and
guided me from time to time. Also I would like to thank Mr. Ankur Srivastava who is
manager in IDBI and provided me knowledge for the share market. Last but not the
least I would like to thank my guide Mr. Manoj Kumar Kushwaha whose co-operation
and guidance was a milestone in completion of my project.

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