RISK MANAGEMENT TECHNIQUES

AND SURVEILLANCE
AT LUDHIANA STOCK EXCHANGE

A training report submitted in partial fulfilment of the requirement for the degree
of

MASTERS OF BUSINESS ADMINISTRATION

(2008-2010)

Submitted by:

Name of Student: PRITPAL SINGH

MBA – 2 SEC B

Roll No.: 3784

SCHOOL OF MANAGEMENT STUDIES

PUNJABI UNIVERSITY PATIALA

PREFACE

The report is the result of my 6 weeks of summer training at Ludhiana stock exchange.
Summer training is an integral part of MBA (finance) course and efficient utilisation of
material, time and resources are very much important for successful completion of any task.
Apart from this coordination is must, which determines the degree of success. In order to be
competent all the students are required to take a real time project work. This exposure to
project work will help them to know that how academic knowledge is applied in actual
business situation.

Keeping all this in view, this project of “Risk management techniques and surveillance” is
prepared by me. The all rounded encouraging support by many persons towards this report
has created confidence in me regarding the approval of subject matter.

Actually this report is the result of an assignment, to improve myself and gain confidence. In
this, I have done my best to make it a genuine body. But, as well, all know the maxim “To
Err is Human”. Therefore there is a chance for some mistake. Also a critical appraisal by
anyone is heartily welcome.

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 ACKNOWLEDGEMENT

“Accomplishment of a task with desired success calls for dedication towards work and
prompting guidance, cooperation and deliberation from seniors.”

First of all, I would like to thank almighty for his gracious blessing without which I would
not be able to complete my project work.

Those who helped me to attain better all the time deserve my highest attention and deep
sincere regards. I take this opportunity to convey my heartiest gratitude to all those, who
directly or indirectly helped me to complete my project.

I am highly indebted to Ms. Pooja M. kohli, executive director (officiating) and Ms. Pooja
sharma( company project guide), who has provided me with valuable information and her
valuable suggestions and comments on bringing out this report in the best possible way.

My special thanks to Ms. Pooja Sharma, Senior Executive, Training, LSE, who always took
interest in my work and helped me in completion of my summer training.

Six weeks of my summer training at LSE Securities Ltd. was an amazing experience. It gave
me much needed knowledge of the capital markets. I got the chance to understand the
activities performed and the modus operandi of the stock exchange. However, this would not
have been possible without the noble attitude of some persons in exchange.

I would like to thank Mr. S.S. Virdi (coordinator, training and placement cell, SMS, Punjabi
university) for giving me opportunity and showing me the path of learning at LSE.

Last but not the least, i would like to thank all the staff of Ludhiana Stock Exchange who had
directly or indirectly supported me in completion of my project report.

PRITPAL SINGH

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TABLE OF CONTENTS

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 Contents

Preface 2

Abstract 11

Chapter 1 Introduction to stock exchange 12

1.1 Introduction 12

1.2 History of Indian stock exchange- the origin 12

1.3 Pre-independence scenario - establishment of 13

different stock exchanges

1.4 Post independence scenario 13

1.5 Trading pattern of the Indian Stock Exchange 17

1.6 Types of transactions 18

1.7 Over The Counter Exchange of India (OTCEI) 18

1.8 National Stock Exchange 19

1.9 Regulatory framework of stock exchange: 20

2. LUDHIANA STOCK EXCHANGE 23

2.1 Profile of ludhiana stock exchange 25

2.2 Operations of Ludhiana Stock Exchange 28

2.3 trading on bigger stock exchanges through 29

subsidiary route

2.4 investor related services 30

Chapter 3 LSE SECURITIES LIMITED 31

3.2 profile 31

3.2 corporate membership of nse & bse 32

NO. LIST OF FIGURES PAGE NO.

1. TRADING PATTERN OF INDIAN STOCK EXHCHANGE 17

2. TYPES OF TRANSACTIONS 18

3. SECURITIES TRADED ON OTCEI 19

4. STRUCTURE OF LSE SECURITIES LIMITED 34

5. ORGANISATIONAL CHART 35

6. FUND SOURCE FOR YEARS 2005-06 & 2004-05 62-63

NO. LIST OF TABLES PAGE NO.

1. STATUS OF VARIOUS STOCK EXCHANGES, COMPANIES 15

LISTED AT VARIOUS TIME

2. DETAILS OF STOCK EXCHANGES 16-17

3. COMPOSITION OF GOVERNING BOARD 25

4. ANNUAL LISTING FEES 39

5. DEPOSITORY SERVICE CHARGES 52

6. COLLECTION OF BMC 76

7. GROSS EXPOSURE LIMIT 81

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ABSTRACT

I prepare this report on my project of “Risk management techniques and Surveillance”. Like any other
business or company, LSEAL, is also required to face some risk. These risks can be divided in to
three categories as under:

1. Risk faced by LSEAL.

2. Risk faced by member brokers.

3. Risk faced by investors.

My project is about how LSEAL manages these risks and mainly three departments that are involved
in risk management. These are as under:

1. Clearing house

2. Margin section

3. Surveillance and monitoring cell

My project is to study the risk management system at LSEAL. This report, primarily, is about how
LSEAL manages various types of risks.

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INTRODUCTION

A stock exchange is that segment of the capital market where the securities issued by the corporate
are traded, these are organised and regulated markets for various securities issued by corporate sector
and other institutions. Stock exchange is a platform where buyers and sellers of securities issued by
government, financial institutions, corporate houses etc. meet and where trading of these securities
takes place. The securities that are traded in stock exchange are shares and debentures of public
companies, port trust utility undertakings and such other securities. Since buying and selling of
different type of securities take place in stock exchange, the prices of particular securities reflect their
demand and supply. In fact, stock exchange is said to be a barometer of economic and financial
health. The stock exchanges are the nerve centre of the capital market. The stock exchanges help in
raising capital for the corporate sector. It provides place for sale and purchase of securities i.e. shares,
bonds etc. it provides linkage between the savings of household sector and investment in corporate
sector of economy.

It provides market quotation for share, debentures and bonds and serves as a role of barometer, not
only the state of individual companies, but also of the economy as a whole.

Therefore, by providing a market place quotation of the prices of shares and bonds or sort of
collective judgement simultaneously reached by many buyers and sellers in the market, the stock
exchanges serve the role of barometer, not only of the state of health of individual companies, but also
of nations and economy as a whole.

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The stock exchange defined

The supreme court of India has enunciated the role of stock exchanges in these words:

“A stock exchange fulfils a vital function in the economic development of a nation. Its main function
is to liquefy capital by enabling a person who has invested money in, say a factory or railway to
convert it in cash by disposing off his shares in the enterprise to someone else.”

A stock exchange, thus, fulfils a vital function in the economic development of the nation. Its main
function is to liquefy capital by enabling a person who has invested in shares of a company to convert
it into cash by disposing of his shares in the company to someone else. Stock markets and equity
prices are the barometer of the economy.

HISTORY OF INDIAN STOCK EXCHANGE – THE ORIGIN

One of the oldest stock exchanges in Asia, the Indian stock exchanges has a history of 200 years.

18th century East India company was the dominant institution and by the end of the century
business of loan securities gain full momentum

1830’s Business on corporate stocks and shares in bank and cotton presses started in Bombay.
Trading list by the end of 1839 got broader

1840’s Recognition from banks and merchants to about half a dozen brokers

1850’s Rapid development of commercial enterprise saw brokerage business attracting more people
into business

1860’s The number of stocks increased to 60

1862-1863 The number of brokers increased to about 200-250

PRE-INDEPENDENCE SCENARIO - ESTABLISHMENT OF DIFFERENT STOCK

EXCHANGES

1874 with rapidly developing share trading business, brokers used to gather at a street (now well
known as “Dalal Street”) for the purpose of transacting business.

1875 “The Native Share and Stock Brokers’ Association” (also known as “The Bombay Stock
Exchange”) was established in Bombay.

1894 establishment of “The Ahmadabad Share and Stock Brokers’ Association”

1880-90’s sharp increase in the share prices of jute industries in 1870’s followed by a boom in
tea stocks and coal.

1908 “The Calcutta Stock Exchange Association” was formed

1920 madras witnessed a boom and business at “The Madras Stock Exchange” was transacted with
100 brokers.

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1934 establishment of Lahore Stock Exchange

1936 Merger of Lahore Stock Exchange with the Punjab Stock Exchange.

1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was established.

1944 Establishment of “The Hyderabad Stock Exchange Limited”

1947 “Delhi Stock and Share Broker’s Association Limited” and “The Delhi Stocks and Shares
Exchange Limited” were established and later on merged into “The Delhi Stock
Exchange Association Limited”

POST INDEPENDENCE SCENARIO

The depression witnessed after the independence led to closure of a lot of exchanges in the country.
Lahore Stock Exchange was closed down after the partition of India, and later on merged with Delhi
Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and got recognition only
in 1963. Most of other exchanges were in a miserable state till 1957 when they applied for recognition
under securities contracts (Regulations) Act, 1956. The Exchanges that were recognised under the Act
were:

1. Bombay

2. Calcutta

3. Madras

4. Ahmadabad

5. Delhi

6. Hyderabad

7. Bangalore

8. Indore

Many more stock exchanges were established during 1980’s namely:

Cochin Stock Exchange (1980)

Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982)

Pune Stock Exchange Limited (1982)

Ludhiana Stock Exchange Association Limited (1983)

Gauhati Stock Exchange Limited (1984)

Kanara Stock Exchange Limited (at Mangalore, 1985)

Magadh Stock Exchange Association Limited (at Patna, 1986)

Jaipur Stock Exchange Limited (1989)

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Bhubaneswar Stock Exchange Association Limited (1989)

Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989)

Vadodara Stock Exchange Limited (at Baroda, 1990)

Coimbatore Stock Exchange

Meerut Stock Exchange

At present, there are twenty one recognised stock exchanges in india which does not include the Over
The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited
(NSEIL).

Government policies during 1980 have also played a vital role in the development of the Indian Stock
Exchanges. There was a sharp increase in number of Exchanges, listed companies as well as their
capital, which is visible from the following table:

S.No. As on 31st 1946 1961 1971 1975 1980 1985 1991 1995
December
1 No. of 7 7 8 8 9 14 20 22
Stock
Exchanges
2 No. of 1125 1203 1599 1552 2265 4344 6229 8593
Listed Cos.
3 No. of 1506 2111 2838 3230 3697 6174 8967 11784
Stock
Issues of
Listed Cos.
4 Capital of 270 753 1812 2614 3973 9723 32041 59583
Listed Cos.
(Cr. Rs.)
5 Exchange 971 1292 2675 3273 6750 25302 110279 478121
value of
capital of
Listed Cos.
(Cr. Rs.)
6 Capital per 24 63 113 168 175 224 514 693
Listed Cos.

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 (Lakh Rs.)
7 Exchange 86 107 167 211 298 592 1770 5564
value of
Capital per
listed Cos.
(Lakh Rs.)
8 Appreciated 358 170 148 126 170 260 344 803
value of
Capital per
Listed Cos.
(Lakh Rs.)

DETAILS OF STOCK EXCHANGES

Sr. Name of the Exchange Valid Upto
No.
1 Ahmedabad Stock Exchange Ltd. PERMANENT
2 Bangalore Stock Exchange Ltd. PERMANENT
3 Bhubaneswar Stock Exchange Ltd. June 04, 2010
4 Bombay Stock Exchange Ltd. PERMANENT
5 Calcutta Stock Exchange Association Ltd., PERMANENT
6 Cochin Stock Exchange Ltd. November 07, 2009
7 Coimbatore Stock Exchange Ltd. September 17, 2006

Due to pending litigation before the Hon'ble Madras High

Court, Coimbatore Stock Exchange Ltd. (CSX) has not filed
application for renewal of recognition which expired on
17.09.06. However, in terms of order dated 15.09.06 of the
Hon'ble Court, the right of CSX to apply for renewal shall
be subject to further orders of the court and the stock
exchange shall not be entitled to oppose the renewal solely
on the ground of lapse of time.

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 8 Delhi Stock Exchange Ltd.,The PERMANENT
9 Gauhati Stock Exchange Ltd.,The April 30, 2010
10 Hyderabad Stock Exchange Ltd.,The

The Hyderabad Stock Exchange Ltd. (HSE) failed to

dilute atleast 51% of its equity share capital to
public other than shareholders having trading rights on or
before the
stipulated date i.e. August 28, 2007. Consequently, in terms
of section 5(2) of the Securities Contracts (Regulation) Act,
1956,
the recognition granted to HSE stands withdrawn
with effect from August 29, 2007.

11 Interconnected Stock Exchange of India Ltd. November 17, 2009

12 Jaipur Stock Exchange Ltd. January 08, 2010
13 Ludhiana Stock Exchange Ltd.,The April 27, 2010
14 Madhya Pradesh Stock Exchange Ltd PERMANENT
15 Madras Stock Exchange Ltd. PERMANENT
16 Magadh Stock Exchange Ltd.

"SEBI vide order dated September 3, 2007 refused to renew

the recognition granted to Magadh Stock Exchange Ltd."
17 * Mangalore Stock Exchange
As per Securities Appellete Tribunal order dated October 4,
2006, the Mangalore Stock Exchange is a de-recognized
Stock Exchange under Section 4 (4) of SCRA
18 MCX Stock Exchange Ltd September 15, 2009
19 National Stock Exchange of India Ltd. PERMANENT
20 OTC Exchange of India August 22, 2009
21 Pune Stock Exchange Ltd. September 01, 2009
22 Saurashtra Kutch Stock Exchange Ltd.

SEBI vide order dated July 06, 2007 has withdrawn the
recognition granted to Saurashtra Kutch Stock Exchange
Limited.
23 Uttar Pradesh Stock Exchange Association Ltd. June 02, 2009
24 The Vadodara Stock Exchange Ltd. January 03, 2010

Equity share of a company that

are:
TRADING PATTERN OF THE INDIAN STOCK EXCHANGE
• Dividend paying
Indian Stock Exchanges allow trading of securities of only those public limited companies that are
listed on Stock Exchange(s). Theycompanies
• Growth-oriented are divided into two categories:

• Paid up capital of atSecurities

Listed least Rs. of Public
50 million Limited Companies
Equity shares of companies not
• Market capitalisation of at 13
covered in specifies securities
Specified
leastSecurities
Rs. 100 million Non-specified Securities
(Forward List) (Cash List)
TYPES OF TRANSACTIONS

The flowchart below describes the types of transactions that can be carried out on the Indian Stock
Exchanges:

Transactions on Indian Stock

Exchanges

Spot delivery transactions Forward transactions

Includes transactions that require Transactions in which delivery and

delivery and payment within
stipulated time period at the time of
entering into the contract
This period shall not be more than
14 days following the date of the
contract
payment can be extended by further
period of 14 days each
The overall period should not exceed
90 days from the date of contract
Transactions permitted only in case of
specified shares

Indian stock exchange allows a member broker to perform following activities:

 Act as an agent

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  Buy and sell securities for his clients and charge commission for the same

 Act as a trader or dealer as a principal

 Buy and sell securities on his account and risk

OVER THE COUNTER EXCHANGE OF INDIA (OTCEI)

Traditionally, trading in stock exchanges in India followed a conventional style where people used to
gather at the exchange and bid and offers were made by open outcry.

This age old trading mechanism in the Indian stock exchanges used to create much functional
inefficiency. Lack of liquidity and transparency, long settlement periods and benami transactions are a
few examples that adversely affected investors. In order to overcome these inefficiencies, OTCEI was
incorporated in 1990 under the companies Act 1956. OTCEI is the first screen based nationwide stock
exchange in India created by Unit Trust of India, Industrial Credit and Investment Corporation of
India, Industrial Development Bank of India, SBI Capital Exchanges, Industrial Financial Corporation
of India, General Insurance Corporation and its subsidiaries and CanBank Financial Services.

Securities traded on the OTCEI

Listed securities Permitted securities Initiated debentures

Securities of the companies Certain securities (shares An equity holding a

listed on the OTC
Can be bought or sold at any
OTC counter across India
Should not be listed
anywhere else
and debentures) listed on
other stock exchanges
Units of mutual funds can
be traded
minimum of one lakh
debentures of particular
scrip can offer them for
trading on the OTC

ADVANTAGES OF THE OTCEI

• Greater liquidity and lesser risk of intermediary charges due to widely spread
trading mechanism across India

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 • The screen-based scripless trading ensures transparency and accuracy of prices

• Faster settlement and transfer process as compared to other exchanges

• Shorter allotment procedure (in case of a new issue) than other exchanges

NATIONAL STOCK EXCHANGE

In order to lift the Indian Stock Exchange trading system on par with intenational standards.
On the basis of the recommendations of high powered Pherwani Committee, The National
Stock Exchange was incorporated in 1992 by Industrial Development Bank of India,
Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of
India, all insurance Corporations and selected commercial banks and others.

NSE provides exposure to investors in two types of exchanges, namely:

1. Wholesale debt exchange

2. Capital exchange

Wholesale Debt Exchange- similar to money exchange operations, debt exchange operations
involve institutional investors and corporate bodies entering into transactions of high value in
financial instruments like treasury bills, government securities, commercial papers etc.

TRADING AT NSE

• Fully automated screen-based trading mechanism

• Strictly follows the principle of an order driven exchange

• Trading members are linked through a communication network

• This network allows them to execute trade from their offices

• The prices at which the buyer and seller are willing to transact will appear on the
screen

• When the prices match the transaction will be completed

• A confirmation slip will be printed at the office of the trading member

ADVANTAGES OF TRADING AT NSE

• Integrated network for trading in stock exchange of India

• Fully automated screen based system that provides higher degree of transparency

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 • Investors can transact from any part of the country at uniform prices

• Greater functional efficiency supported by totally computerized network

WHO BENEFITS FROM STOCK EXCHANGE?

Investors: it provides the liquidity, marketability, safety etc. of investment. Despite

profitability is also a major benefit to the investors.

Companies: it provides them access to market funds, higher rating and public interest.

Broker: they receive commission in lieu of their services to investors

Economy and country: there is a large flow of savings, better growth, movie industry,
higher income.

General public: it provides all available information relating to different companies to the
general public.

REGULATORY FRAMEWORK OF STOCK EXCHANGE:

The need to regulate stock exchanges was felt in 1921 first when Atlay Committee
recommended Bombay Stock Exchange Securities Contract Control Act passed in 1925.
Later on, Securities Contracts (Regulation) Act was made in 1956 and Securities Contracts
(regulation) rules in 1957. These are primarily the rules made by government to control
capital market, which exchanges have to comply with, these are:

1. Capital issues (control) Act 1947:- the main objectives of this act were:

a) To channelize resources to support war efforts.

b) Controlling and raising capital to ensure proper channelizing of national

resources.

c) To protect the interest of the investors.

1. Securities Contracts (Regulation) Act 1956:- the main objectives to enact this act
were:-

a) To control stock exchanges through recognition and continued supervision.

b) To control stock exchanges through contracts securities.

c) To control stock exchanges through listing of securities.

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 2. The Companies Act, 1956:- it was established on the following grounds:-

a) To control management of companies.

b) To secure allotment and transfer of securities.

c) Provision regarding prospectus and public issue of companies.

d) Policies regarding payment of interest and dividend.

e) To keep/ensure regular supply of annual report and other information to

shareholders and stock exchange.

3. Securities and Exchanges Board of India Act, 1992:- this act was enacted due to
the following reasons:-

a) To protect the interest of the investors.

b) To promote the development of securities market.

c) To regulate the securities market.

d) To exercise control over securities’ market intermediaries.

4. The Depository Act, 1996:- a recent development in capital market was electronic
form of share and securities and vanishing the certificate system and reduces the time
of settling down the deliveries and payments and also the secure delivery of securities
and also easy and fast delivery of securities. For this, two main depository companies
came into existence i.e. NSDL and CDSL, National Security Depository Limited and
Central Depository for Securities Limited. The main objectives of Depository Act
are:-

a)To make the securities freely transferrable.

b) Dematerialisation of securities.

c)To provide ownership in Depository mode.

d)No role of company with regard to transfer of shares.

MAIN FUNCTIONS OF STOCK EXCHANGE

1. The stock exchange provides appropriate conditions where purchase and sale of
securities take place at reasonable and fair prices. The bargained prices of buyers and
sellers are recoded, on the basis of which each investor is able to evaluate the securities
held by him and thus knows the worth of his holdings at a particular time.

2. Stock market provides ready market for conversion of existing securities into cash and
vice versa.

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 3. People having surplus funds invest in securities and these funds are used for
industrialization and economic development of the country that leads to capital
formation.

4. Stock exchange protects the interest of investors through strict enforcement of rules
and regulations with respect to dealings. Punishment (including fine, suspension) may
be there if brokers adopt any malpractice in dealing with investor like charging
excessively high commission etc.

5. The stock exchange acts as the center of providing business information relating to
the enterprise whose securities are traded as the listed companies are to present their
financial and other statements to it.

6. It provides linkages between the savings of household sector and investment in

corporate sector or economy.

7. It provides market quotations for shares, debentures and bonds and serves role of
barometer, not only of the state of health of individual companies, but also the
economy as a whole.

The stock exchange discharges these functions by laying down a number of regulations,
which is to be compiled with while making public issues e.g. offering at least a prescribed
percentage of capital to the public, keeping subscription list open for 3 days making
provisions for receiving application, allotting shares against on a fair and unconditional basis
etc.

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ABOUT LUDHIANA STOCK EXCHANGE

The Ludhiana Stock Exchange Limited was established in 1981, by Sh. S.P. Oswal of
Vardhman Group and Sh. B.M. Munjal of Hero Group, leading industrial luminaries, to
fulfill a vital need of having a Stock Exchange in the region of Punjab, Himachal Pradesh,
Jammu & Kashmir and Union Territory of Chandigarh. Since its inception, the Stock
Exchange has grown phenomenally. The Stock Exchange has played an important role in
channelising savings into capital for the various industrial and commercial units of the State
of Punjab and other parts of the country. The Exchange has facilitated the mobilization of
funds by entrepreneurs from the public and thereby contributed in the overall, economic,
industrial and social development of the States under its jurisdiction.

Ludhiana Stock Exchange is one of the leading Regional Stock Exchange and has been in the
forefront of other Stock Exchange in every spheres, whether it is formation of subsidiary for
providing the platform of trading to investors, for brokers etc. in the era of Screen based
trading introduced by National Stock Exchange and Bombay Stock Exchange, entering into
the field of Commodities trading or imparting education to the Public at large by way of
starting Certification Programmes in Capital Market.

The vision and mission of Stock Exchange is:

"Reaching small investors by providing services relating to Capital Market including

Trading, Depository Operations etc and creating Mass Awareness by way of education
and training in the field of Capital Market.
To create educated investors and fulfilling the gap of skilled work force in the domain in
Capital Market."

Further, the Exchange has 295 members out of which 162 are registered with National Stock
Exchange as Sub-brokers and 121 with Bombay Stock Exchange as sub-brokers through our
subsidiary

BRIEF HISTORY OF LSE

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Ludhiana Stock Exchange is one of the leading Stock Exchange among the Regional Stock
Exchange of the country and has been providing trading platform for the investors situated in
Punjab, Himachal Pradesh and Chandigarh.

DATE OF ESTABLISHMENT

Date of incorporation—Oct17, 1981

Date of Recognition—Apr29, 1983

PROFILE OF LUDHIANA STOCK EXCHANGE

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GOVERNMENT COUNCIL, COMMITTEES AND ADMINISTRATION

LSE has a strong governance and administration, which encompasses a right balance
of Industry Experts with highest level educational background, practicing professionals and
independent experts in various fields of Financial Sector. The administration is presently
headed by Sr. General Manager CUM Company Secretary and team of persons having
indepth knowledge of Secretarial, Legal and Education & Training.
The Governing Board of our Exchange comprises of eleven members, out of which two are
Public Interest Directors, who are eminent persons in the fields of Finance and Accounts,
Education, Law, Capital Markets and other related fields, Six are Shareholder Directors, and
Three are Broker Member Director and the Exchange has four Statutory Committees namely
Disciplinary Committee, Arbitration Committee, Defaults Committee and Investor Services
Committee. In addition, it has advisory and standing committees to assist the administration.
LSE has a Code of Conduct in place that governs the elected Board Members and the Senior
Management Team. The same is monitored through periodic disclosure procedures. The
Exchange has an Ethics Committee, which looks into any issue of conflict of interest and has
in place general code of conduct for the Senior Officials.
The composition of the Governing Board is as under:-

Sr. No. Name of Director Category

1 Sh. Jagmohan Krishan Chairman
2 Sh. Padam Parkash Kansal Vice Chairman
3 Sh. Joginder Kumar Shareholder Director
4 Dr. Ravinder Nath Sethi Shareholder Director
5 Sh. Ashok Kumar Shareholder Director
6 Sh. Varun Chhabra Shareholder Director
7 Sh. Sarbjit Garg Public Interest Director
Registrar of Companies (Public Interest
8 Dr. Raj Singh
Director)
9 Sh. T. S. Thapar Broker Director
10 Sh. Sanjeev Kumar Gupta Broker Director
11 Sh. Sunil Gupta Broker Director
Statutory Committees are represented by brokers and non-brokers in 20:80 ratio.

LSE ALSO HAS:

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 Authorised share capital: The Authorised share capital of LSE is Rs. 10, 00, 000(10
lacs) divided into shares of Rs. 2000/- each.

 Own building: LSE has its own six stores ultra modern building at Feroze Gandhi
market Ludhiana. It started its own operations on 16th August, 1983.

 It has its own bulletin: LSE is continuously publishing LSE bulletin at the interval of
the quarter. It is also publishing LSE Annual report which provides information to the
various investors in the stock exchange.

 Governing body: LSE has is administered through a governing body comprising of

nominated members.

 Online trading through V-SAT: LSE has chalked out an ambitious programme to
expand on line trading through v-sat to cities other than Ludhiana and plans to take
the trading facilities to the door step of investors. The board of directors of LSE has
approved the plan for expansion of on line trading through v-sat with the objective of
broad base business opportunities to the investors and members, the exchange has set
up 30 trading terminals at remote sites and union has set up 30 trading through VSAT
has been smoothly conducted in October, 1999.

 Screen based trading: It was started at LSE November 18, 1996. The requisite
software is developed by CMC Ltd. This screen is based trading is based on vector
(versatile engine for centralized trading and on line reporting) system. This system
displays funds with respect to opening prices of the stock exchange as well as last
traded prices.

 Settlements guarantee fund: It provides guarantee of all the genuine based trading
system of the stock exchange and was implemented a settlement guarantee fund with
effect from 6th April 1998.

 Settlement and clearing: There is T+2 settlement cycle prevailing at LSE since 1st
April 2003. At the end of each settlement members are given scrip wise delivery
notes. The members required to deposit scrip sold them to the clearing house on the
second working day following the day transaction. Purchasing members make
payment against the delivery also on the aforesaid day.

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  Depository system: LSE commence trading in demat shares from November 16,
1998 by becoming a participant of NSDL. The exchange has set up in house DP
services to facilitate trading and settlement in demat securities.

 Investor’s grievance cell: LSE has made special arrangement to handle investor’s
complaints and grievances. So it has set up IGC, which receives complaints from
investors to ensure their satisfactory redressed. LSE has also set up investor protection
fund (IPF) in January, 1990. The fund has a corpus of Rs. 30.33 lacs as on March 31,
2002.

FEATURES OF LSE

 It was first regional stock exchange to start Badla system.

 First regional stock exchange to give proposal of “INDONEXT” model.

 First regional stock exchange to start trading in commodities market.

 First regional stock exchange to give proposal of making subsidiary as broker of NSE
& BSE for survival of stock exchange & second to start operations like broker of NSE
& BSE.

 First regional stock exchange to start courses on Capital market, only BSE is
performing this sort of activities & NSE is also performing courses on capital market
only for members but Ludhiana Stock Exchange will start for outsiders also.

ADMINISTRATION OF LSE

• BOARD OF DIRECTORS:

The LSE is governed by Board of Directors, which has six elected directors, two directors
nominated by SEBI and four public representative directors from academicians and experts
from commerce, accounts, law and business management. The board also includes the
executive director who is full time director and is responsible for the execution of the
exchange. The overall management is vested with these directors.

24
COMPOSITION OF BOARD OF DIRECTORS

The board of directors of the exchange comprises of 13 directors, with the following
representation.

Elected Directors 6

SEBI Nominees 2

Public Representative 4

Executive Director 1

In LSE 6 elected directors are elected for 3 years. Now after one year new directors
will be appointed or reappointed by election.

OPERATIONS OF LUDHIANA STOCK EXCHANGE

TURNOVER

The Ludhiana Stock Exchange is one of the leading Stock Exchanges among the
Regional Stock Exchanges of the country, and has been providing trading platform for the
investors situated in Punjab, J&K, and Himachal Pradesh & Chandigarh. At present, it has
330 listed companies and among them, 214 are listed as regional companies and 116 as non
regional companies. It had been generating significant amount of the business in the
secondary market. It recorded a peak turnover of Rs. 9154 crores during the year 2000-2001.
The structural changes that took place in the recent past in the Capital Market of the country
had a negative impact on the trading volume of the Regional Stock Exchanges. There has
been a significant reduction of turnover during the financial year 2001-2002, but the
reduction in the turnover of the Exchange has been more than adequately compensated by
substantial rise in the turnover of LSE Securities Ltd., a subsidiary of Ludhiana Stock
Exchange.

LISTING

Listing is one of the major functions of a Stock Exchange wherein the securities of the
Companies are enlisted for trading purpose. Any company incorporated under Companies
Act, 1956, coming out with an IPO, has to mandatory list its shares on a Stock Exchange. The

25
Listing Department of Ludhiana Stock Exchange deals with listing of securities, further
listing of issues, like bonus and right issues, post listing compliance of the companies which
are already listed with Ludhiana Stock Exchange. The companies desirous of listing its
securities on the Exchange have to sign a Listing Agreement with the Stock Exchange. After
getting the listed approval, the company has to ensure and report compliance of the post
listing requirements. The listing section of the LSE monitors the post-listing compliance of
all the listed companies and follows up with the companies, which are found deficient in
compliance.

SETTLEMENT GUARANTEE FUND (SGF)

The Stock Exchange established a Settlement Guarantee Fund (SGF) on April 6,

1998. It provides guarantee of all the genuine trades made through the Screen based Trading
System of the Stock Exchange.

END OF AN ERA

The management of the Stock Exchange apprehended that the smaller regional Stock
Exchanges would not be able to meet the challenge imposed by expansion of the bigger Stock
Exchanges like NSE & BSE and might end up losing their entire business to VSAT counter
of the bigger Stock Exchanges. In order to prepare for such an eventuality, Stock Exchange
set up a broking arm in the name of LSE Securities Ltd. (a Subsidiary Company of the Stock
Exchange) in January 2000 and build infrastructure and IT based sophisticated systems to
enable its members and investors to trade in NSE and BSE through a subsidiary route. The
Stock Exchange was thus able to convert the “threat” it faced from expansion of NSE and
BSE into an opportunity for its members and investors. As expected, there was a marked shift
in the trading volumes from the Stock Exchange to the NSE and BSE through a subsidiary
Company. The shift became more prominent when SEBI introduced compulsory Rolling
Settlement and banned the deferral products like Badla, MCFS and ALBM w.e.f. July 2,
2001 causing thereby an end to arbitrage opportunities between the Stock Exchange and
NSE/BSE. Ultimately, there was complete shift of trading from Stock Exchange to the LSE
Securities Ltd. in January 2002.

TRADING ON BIGGER STOCK EXCHANGES THROUGH SUBSIDIARY ROUTE

The Exchange acquired the membership of NSE & BSE through its subsidiary, the
LSE Securities Limited, with the objective of providing an enabling mechanism to its

26
member brokers to trade on NSE and BSE as sub-broker of LSE Securities Limited. Trading
at BSE and NSE was commenced through the subsidiary route from September 2000 and
December 2000, respectively, and trading in F&O segment of NSE commenced in February
2002.

INVESTOR RELATED SERVICES

INVESTOR GRIEVANCES

The Exchange has made special arrangement to handle investor’s complaints and
grievances. It has established an Investor Grievance Cell which receives complaints from
investors and follows up the complaints with companies and member-brokers to ensure their
satisfactory redressal. Recording of complaints and monitoring of their redressa has been
fully computerised. The Committee meets periodically to concile the grievances between
investors and broker members.

INVESTOR PROTECTION FUND

The Exchange has set up an investor Protection Fund in the month of January, 1990
for providing compensation to individual investors in case of default by a member of the
Exchange. In case any member broker defaults to meet his obligation towards investors in
respect of deals that took place through the trading system of the Stock Exchange, then the
concerned investors are compensated from this fund.

INVESTOR SERVICE CENTER

The Exchange has set up an Investor Service Center in its premises for providing information
relating to Capital Market to the general public. The center has a well-equipped library,
which subscribe to leading economic, financial details and periodicals. It also stores the
Annual Reports of the companies listed at the Stock Exchange. The Investor Service Center
is also equipped with a terminal for providing “live rates of trading at NSE and BSE. A large
number of the investors visit the center to utilize the services being provided by the
Exchange.

27
 LSE SECURITIES LIMITED

PROFILE

INTRODUCTION OF THE LSE SECURITIES LIMITED

LSE Securities Ltd. was incorporated in January, 2000 with a view to receive the
capital market in the region and for taking full advantage of the emerging opportunities being
provided by expansion of bigger Stock Exchange like NSE and BSE. The company since its
inception has marched forward rapidly and achieved many milestones in a short span of
existence and has maintained consistent growth record. LSE Securities Ltd. is a subsidiary of
Ludhiana Stock Exchange has presence at various locations to effectively service its large
base of individual clients. The clients of the company greatly benefit from strong research
capability, which encompasses fundamental as well as technical of LSE Securities Ltd.,
besides its wide reach in this part of the country.

OBJECTIVE OF THE COMPANY

LSE Securities Ltd. is a subsidiary of the Ludhiana Stock Exchange, which was
formed with an objective to enhance business and investment opportunities for the investors
and members of Ludhiana Stock Exchange at large, through innovative products by
encompassing a variety of activities related to the capital market. The company has paid up
equity capital of Rs. 5.65 crores, preference capital of Rs. 7.90 lacs and authorized capital of
Rs. 8 crores.

GOVERNING COUNCIL

28
 The council of management of the Company comprises of 12 directors of which 5 are
broker members and 7 non-brokers. Five non-broker members are independent Directors of
eminent status from the field of finance, law and management and remaining two are Chief
Executive Officer of LSE Securities Ltd. and Executive Director of the holding company
(Ludhiana Stock Exchange), who is on the Board of the company as ex-officio Directors.
Thus the council of management has representation of sub-brokers as well as professionals
Name Designation

Sh. Krishan kant puri Chairman

Sh. Manoj saran Vice-chairman

Sh. M.s sarna Member-director

Sh. Lalit kishore Member-director

Sh. Vishal goomber Member-director

Sh. Susheel bhakoo Public representative director

Sh. Vijay bansal Public representative director

Dr. Prem kumar Public representative director

DR. Anil angrish Public representative director

Dr. Pawan garg Public representative director

Mrs. Pooja M kohli LSE representative director

and subject specialists representing various fields of the business activities. Operations of the
company are run in a professional, transparent and fair manner keeping in view of the interest
of investors as well as other stake-holders.

BOARD OF DIRECTORS IN LSE SECURITIES

CORPORATE MEMBERSHIP OF NSE & BSE

SEBI, at the initiative of LSE, permitted smaller Stock Exchanges, to trade on bigger Stock
Exchanges through their subsidiary companies. The Ludhiana Stock Exchange floated its
subsidiary company, the LSE Securities Limited, with the objective of obtaining trading

29
rights on bigger Stock Exchanges. It has obtained corporate membership of both NSE and
BSE in the first half of year 2000.

TRADING AT NSE AND BSE

The LSE Securities Ltd. commenced trading operations in Capital Market Segments
of BSE and NSE in September, 2000 and December 2000 respectively. The turnover of
Company at NSE and BSE is growing by leaps and bounds ever since in incorporation. There
was encouraging response from the sub-broker especially at NSE counters. During the
financial year 2005-06, the Company recorded a turnover of Rs. 8613 crores as against Rs.
7987 crores during the financial year 2004-05 and Rs. 4920 crores as against Rs. 3833 crores
during financial year 2004-05 in “Capital Market” segment of NSE and BSE respectively.
For the year ended 2005-2006, there were 128 sub-brokers registered for NSE and 68 for
BSE.

F&O SEGMENT OF NSE

The LSE Securities Ltd. commenced trading operations in Future and Options
Segment of NSE in February 2002. The Company became the first subsidiary of any
Regional Stock Exchange which commenced trading in “F&O” Segment of NSE. Response
to trading facilities in the “F&O” segment of NSE has been very encouraging and volumes
generated in this segment soon exceeded those in “Capital Market” segment. The total
turnover during the financial year 2005-2006 has been Rs. 27343 crores in capital market
segment of NSE as against Rs. 25707 crores during the financial year 2004-05 in Capital
Market segment of NSE.

TRADING THROUGH V-SATS

The LSE Securities provided facility to its sub-brokers for trading on NSE and BSE
through VSAT counters which are located outside Stock Exchange Building. Presently, 17
sub-brokers of the company have been trading through VSAT on NSE and 10 in BSE.

30
CERTIFICATION IN FINANCIAL MARKET

In order to provide professional service to the investors of LSE Securities Ltd.

through its sub-brokers, the company motivated its staff to qualify the certification in
financial markets conducted by NSE. All trading terminals for Capital Market Segment and
F&O segment are being operated by the persons after having qualified the said certification.

DEPOSITORY PARTICIPANT SERVICES – NATIONAL SECURITIES

DEPOSITORY LIMITED (NSDL)

The LSE Securities Ltd. commenced its operations as Depository Participant off
NSDL in August 2000. The DP services provided by the Company have technology edge
over other DP’s, as DP of the company is the only On-line Real-Time DP in the region. As a
result of efficient services and competitive rates, the Company has been able to increase its
market share in the DP business at the cost of other DPs in the region. As on 03.11.2006 DP
of NSDL of the Company at Ludhiana is servicing over 22540 active beneficiary accounts
through four locations in Punjab as against 1716 accounts on 31.03.2001.

DEPOSITORY PARTICIPANT SERVICES – CENTRAL DEPOSITORY SERVICES

(INDIA) LIMITED (CSDL)

In order to further strengthen its services to sub-brokers and investors, the Company
applied for the DP of CSDL. It started DP operations of CSDL in December 2001. With the
operationalisation of DP Services of CSDL, the Company has been able to provide delivery
of shares to sub-brokers and investors on the day of pay-out which in turn helps the sub-
brokers to give timely deliveries to their clients. Introduction of CSDL operations has also
enabled the sub-brokers and investors of the Company to timely meet the pay-in obligations
of Securities purchased by the investors on BSE and sold next day on NSE through the
Company and vice-versa. As on date DP of CSDL is servicing over 8972 active beneficiary
accounts through four locations in Punjab against 19 accounts on 31.03.2002.

EXPANSION PROJECTS

To increase its presence in the region further, the company plans to open its branches
of Depository Services in the major cities of the region. To start with, it has already opened
its branches at Jalandhar, Amritsar and Chandigarh.

31
STRUCTURE OF LSE SECURITIES LIMITED

LSE SECURITIES LIMITED,

LUDHIANA

LSE SECURITIES LSE SECURITIES LSE SECURITIES

LIMITED, AMRITSAR LIMITED, LIMITED,
CHANDIGARH JALANDHAR

32
 ORGANISATION CHART

BOARD OF
DIRECTORS

CHAIRMAN

CHIEF EXEC.
DIRECTOR

GENERAL MANAGER

Margin Surveillance Accounts Membershi Depository

Deptt. Deptt. Deptt. p Deptt. Participant
Deptt.

Clearing
Personnel Deptt.
Computer Deptt. /
Deptt.
Electronic Data
processing

33
34
DEPARTMENT OF LUDHAINA STOCK EXCHANGE

DEPARTMENTS

The aim of LUDHIANA STOCK EXCHANGE is to ensure the secure channel to the
investment of the investors and to provide the proper services under the prescribed guidelines
of SEBI .To maintain the proper system of working of stock exchange there are so many
departments in which particular functions are performed .The LSE has categorised its
functioning of department in to two types. These are services and operational.

Operational department

1. Legal Department
2. Secretarial Department.
3. Listing Department
4. Membership Department
5. Investors grievance cell
6. Technical & maintenance department
7. Personnel Department
8. Account Department.

Service Departments

1. EDP/Computer section
2. Margin section
3. Clearing section
4. Surveillance section
5. Depository participant section

35
 OPERATIONAL DEPARTMENTS

LISTING DEPARTMENT

Listing means admission of securities of public ltd. Company on a recognized stock

exchange, which provides the forum for the purchase and sale of securities. Any company
incorporated under Companies Act, 1956 coming out with IPO must list their shares on stock
exchange. For doing trading on LSE, the company first has to be listed and the function of
listing of the companies is done by listing department. For getting listed the concerned
company has to pay certain fee and fee depends upon the authorized capital of the company.

REQUIREMENTS

In order to get listed a company should have:

 A minimum capital of Rs. 3 crores

 At least 25% of the eqity should be offered to the public

 The company has to deposit initial listing fee of Rs. 15000

 The company has to deposit an amount equal to 1% of the issued price with the stock
exchange and it will be released after the expiry of six months.

 Quarterly Reports

 Reports of Annual General Meeting

 Reports of profit or loss if any of the company

 List of top 50 shareholders

 Listing fee

 Copy of balance sheet for last five years

36
  Copy of prospectus

 Copy of agreement between the selling agent and the company

 Memorandum of Association

If the above requirements are not fulfilled by the listing company then company can be
delisted by listing department. The below written amount is required for listing company.

ANNUAL LISTING FEES

PAID UP CAPITAL ANNUAL LISTING FEE(RS)

1. Up to 1 Crore 7,000
2. 1 to 5 Crores 10,000
3. 5 to 10 Crores 18,000
4. 10 to 20 Crores 24,000
5. 20 to 50 Crores 28,000
6. Above 50 Crores 90,000

The companies which have a paid up capital of more than Rs. 50 Crores will pay
additional fees of Rs. 2800 for every increase.

• Is Listing Compulsory:-

Yes, in case the shares are offered to the public. Listing is governed under:

 Companies Act 1956.

 Securities Contract (Regulations) Act, 1956.

 SEBI Guidelines.

• Benefits of listing:-

 Stock Exchange provide platform for free market.

 Securities available at competitive market price.

37
  Improve public image of the company and provides visibility to the company.

 Provides liquidity to the securities of the company.

 Easier to get loan for listed company.

• Main documents to be submitted for listing of securities:-

 Memorandum and Article of Association.

 Copy of prospectus.

 Copy of offer of sale and circulars of advertisements offering any securities.

 Copy of Balance Sheet for last Five Years.

 List of top 50 shareholdings.

 A brief history of the company since its incorporation.

 Particulars of shares and debentures.

 Shareholding Pattern.

 Statement of company’s commission and brokerage.

COMPUTER DEPARTMENT

This computer department is nerve centre of the entire stock exchange. It is commonly
known as “Electronic DATA Processing [EDP]”. This section remains active all the times
and is directly and indirectly involved in all the activities of the LSE from beginning of its
settlement period till end. The whole working of stock exchange would be halted if this
section becomes inactive. The growing technicalities and the increasing workload have
enhanced the importance of this department at LSE. Now a day this is the back-bone of LSE.
Various sessions involved are:

 Beginning of the day:-

At beginning of the day at 8.00 am, the servers are booted and the net worth of the
brokers is checked.

38
  Pre-opening:-

At the time of opening, the investors can put their bid and if this bid is traded it
becomes the opening rate of the day. The index is also checked and their rates are displayed.

 Opening:-

At the time of opening, the index is checked and the rates are displayed.

 Trading:-

In the time of trading, the computer section runs smoothly for trading. In case if there
is any problem in the computer section, it can be solved with the help of CMC Ltd. and
smooth flow of trading is ensured. {MIS CMC Ltd. is vendor who supplies MULTEX
software to the exchange}.

 Closing:-

At the time of closing, the computer section checks the volumes traded and evaluation
is done.

 Post closing:-

This is the most important section in which trade, volume, number of share traded are
seen. In case, there is any mismatch between vector and multex are seen. In case, there is any
mismatch between vector and molted that can be elected through NEAT terminal.

 Scrip wise statement for each member for each settlement period:-

On Saturday morning “Scrip wise statement of transaction” for the full settlement is
taken out for each broker and given to them. These reports contain:

 Transaction Date

 Name of broker from whom shares are buy/sale

 Hawala rate

 Quantity and rate of shares buy/sale

39
  Net position

 Scrip status reports for each settlement period:-

This report is for the internal use of stock exchange. It contains total numbers of
transactions, value of transactions, quantity sold, and highest, lowest and weighted average
rate for the settlement.

 Statement of transactions of each settlement period for each brokers:-

It gives scrip wise transactions of brokers. It contains hawala rate difference

receivable/payable statement is prepared. This statement is also prepared for individual
broker. It contains information 011 net amount payable/receivable from individual brokers.

 Receives order detail statement:-

The computer section generates this report for each member. It is given to individual
brokers. This statement tells the brokers about their net position share i.e. which and how
many shares they have to receive each broker.

 Different bill statement:-

After preparing statement of transactions, this statement is prepared for individual

brokers. It contains information on the net amount payable/receivable from other brokers.

 Trial balance:-

From difference bill statement trail balance is prepared for all the brokers. It contains balance
carry forward from difference bill statement of each broker. Net of trail balance is zero.

 Supplementary report:-

After the preparation of trail balance, supplementary reports are prepared. It contains
information for the payment made against the debit note.

 Main statement:-

It gives the information regarding debit and credit of scrip and a copy of this statement is sent
to broker.

40
  Main trial:-

It contains the information regarding the net outgoing position in the favour of or against teh
favour of any broker.

 Bank Entry Statement:-

The bank entry statement is sent to bank. It tells the bank how much amount is to be
transferred from or to the broker account. It is the last statement prepared by the EDP
department. For one settlement period, it contains:

 Serial number

 Broker name

 Account name

 Debit amount

 Credit amount

 Grand total

 Final statement:-

It is prepared for the members. It gives information regarding any dues from them,
late delivery, fines etc.

Some of the above mentioned reports are sent to the brokers so that they verify the
data contained in them and submit corrections, if any. Some reports are kept by the stock
exchange for their own record. These reports are prepared on daily basis.

CLEARING HOUSE & SETTLEMENT DEPARTMENT:-

Clearing department deals as an intermediary to settle the claims of the buyers, sellers and
brokers regarding shares in a fraction if any made by two brokers than they will not directly
exchange their shares with payment but the clearing house is involved. It is the share bank
created by the LSE. The members who are sellers in the net after the conclusion of particular
trading period are requested to deposit the respective scrip in the share bank. It acts as a

41
common agent of members for clearing contracts of the members. Clearing house takes the
case of pay in and pay out of securities and funds as well as bad deliveries of the securities. It
maintains DP for the members and brokers and it is mandatory for the brokers to have
securities sold by them in their clearing member’s business partner’s identification number.
There is a weekly settlement cycle prevailing at LSE which commences on Monday and on
end settlement members are given scrip wise delivery notes.

PAY IN: It is designated day on which the securities or funds are paid in by the members to
the clearing house.

PAY OUT: It is designated day on which the securities or funds are paid out to the members
by the clearing house.

• The settlement cycle:

There is rolling settlement cycle w.e.f. 1st April 2002 which is prevailing at LSE and
commenced on daily basis. At the end of the settlement date, members are given scrip wise
delivery notes and have to deposit it with clearing house as per following:

T=Trading Day (Monday)

T+1= Deposit of margin

T+2= Pay in securities and funds (Wednesday) by 11:00 am

T+2= Pay out of securities and funds (Wednesday) by 1:30 pm

T+3= Auction of shortage in deliveries

T+4= Auction of undelivered scrip (Thursday)

T+5= Auction pay in securities and funds on Saturday

T+5= Auction pay out securities and funds on Saturday

T+6= Pay in & Pay out of undelivered Securities.

T+6= Close out

• Rolling settlement:-

42
There is a rolling settlement cycle prevailing at the LSE on T+3 basis since 01.04.2002.
Currently T+2 systems are prevailing. At the end of each settlement, members are given scrip
wise delivery notes. For example: if a member purchase share on Monday then he has pay on
funds on Wednesday but if the purchase on Saturday and Sunday, the trading in every stock
exchanges of India are closed. The same procedure is applied in case of sales of shares.

• Auctions:-

In the stock exchange the defaulter cannot participate in the auction. As per rolling settlement
pay in pay out compelled, some members may which the clearing house has the
responsibility, the clearing house conducts as auction on Thursday (T+3) of pending
securities may be 15% up/down of closing prices of that day.

• Close out of settlement schedule:-

After auction of securities, if still there is no solicitor (seller) in an auction sessions, in that
cases the script is closed out as monetary benefit (buying) against the default of seller
(defaulter) of securities.

The ultimate authority lies with executive director to whom overall reporting is done.
The manager receives the information from the executive director and executive officer from
senior officer, one assistant report the senior officer (BSE and NSE).

SURVEILLANCE DEPARTMENT

This section is responsible for monitoring the trading activity in the exchange with the
purpose of ensuring fare market at LSE some companies try to mix up with selected brokers
and indulge in unfair trade practices to rig price scrip, resulting in violent price fluctuations.
This section keeps track of trading patterns of members; prevent market manipulations and
monitors trading in individual scrip to control price ragging. This may involve obtaining
retail information about the companies in quotation and information about brokers who
maintain excessive exposure in such companies. It also scrutinizes the prices and volume of
scrip on daily basis. As per the guidelines issued by the SEBI, the exchanges are required to
apply daily circuit filter scrip ensures that the prices cannot move upward or downward
beyond the limit set for a day and a settlement w.e.f. July 3rd 2000 SEBI has decided to relax
the price band to 8+8%, totalling 16% from 12% for 200 top and are those in compulsory

43
rolling settlement mode. The last variations in the prices as well as the volume scrip are
scrutinized and appropriate action is taken.

Detailed investigations are concluded III case where price manipulation is

suspected and disciplinary action is taken against the concerned warranted. Where any scrip
has been suspended more than three days after obtaining necessary permission from SEBI for
further investigation/action if any. Thus the surveillance section performs the following
functions:-

 Application of “Circuit Breakage” depending up to situation.

 Pre-issue monitoring of shares.

 Suspension of trading in shares of a company other than an account of circuit

application subjects to prior approval as bye laws regulation of exchange,

 Shifting scrip of trading on “spot” bases to prevent price manipulations subjects to

the prior approval as required Byelaws regulations of exchange.

 Inter-exchange co-ordination regarding suspension of trading etc. to make the

surveillance and maintaining more effective.

MARGIN DEPARTMENT

Margin section is one out of the operational departments and hence it is considered as
important section. The basic function of this department is to collect different types of
margins from brokers as per the regulations given by SEBI.

Margins: - The margin is security deposit levied by an exchange on its brokers.

These margins prevent them from occurring defaults in the markets and control their adverse
impact if they still take place. Margins ensure that the counter party of the trade has not
denied his right to fulfilment of the trade. For trading the client gives the margin to the broker
& broker gives this margin can be return profit of margin.

The rationale behind the establishment of this department is:

 To prevent the brokers doing the excessive speculative trading.

44
  To keep a track of base minimum capital (BMC) and additional base minimum capital
(ABMC) and set exposure limit for each broker.

A broker before starting trading has to deposit BMC to this department. Presently AMBC is
abolished. Now only BMC is charged from brokers. The conditions for the deposit BMC is
given below:-

In the form of....................BMC

CASH Rs. 50,000/-

FDR Rs. 50,000/-

TOTAL Rs. 1, 00, 000/-

The BMC to be deposited in the form of CASH/ FDR will not exceed 100% to total BMC.

 To keep track of brokers who are likely to default in future and prevent such a
situation from arising by taking timely action.

Margin section allows to type of limits to brokers. These are:-

 Gross Limit:-

It indicates aggregate of sales and purchase and is calculated on daily basis. It is presently 25
times of BMC both for NSE and BSE.

 Net Limit:-

It indicates the difference between sale and purchase which is on weekly basis and presently
it is 8.5 times of BMC is NSE and 6 times of BMC is BSE. The gross trading allowed is,
maximum 25 times.

Functions of margin department

To collect the following securities:

1. From brokers:

 Base Minimum Capital (BMC)

 Additional Base Minimum Capital (ABMC)

45
 2. From surveillance:

 About the member position

 Price ragging

 False market

 Valuation of scrip

3. Collection of margins

4. Release of margins

Types of margins

Earlier, before the SEBI decision to ban any carry forward trade, 6 types of margins
were imposed i.e. mark to market margin, carry over margin, incremental margin, cash trade
margins, volatility, margin and special margin (imposed after the Ketan Parkash scam).
However the brokers are now required to pay the following margins with regard to their
trades under rolling settlement.

 VAR(values at risk) margin:

For the scripts in the compulsory rolling settlement, the 99% VAR based margin
system would be introduced w.e.f 2nd July, 2001. The computation of this margin software is
developed by Chicago Stock Exchange.

 Additional margin:

This margin of 12% would be levied over and above the VAR margin.

 Mark to Market margin:

In addition to VAR margin and additional margin the brokers would also be
required to pay Mark- To- market margin. It is collected on daily basis; broker wise 1005
of national loss of each scrip, calculated as the difference of his buying or selling price

46
 and closing price of that scrip at the end of the days. This margin is payable in cash or
bank guarantee.

 Special margin:-

This margin is charged only in special or abnormal cases. At present this margin is
charged by BSE at very few scrips only.

 Exposure margin:-

This margin is charged from brokers at their net position at the evening time of the
day. The preset rate of this margin is 5%.

 Market to market loss margin:-

This margin is collected from brokers on the difference in the rate of scrips. For
example, if a broker “A” purchases certain scrips for Rs. 100 in morning and rate of that
scrips on evening become of Rs. 80, then this margin is charged from broker “A” in
morning of the next day.

 Collection of margin:-

The margin is collected on T+1 basis.

 Membership in NSE/BSE:-

To become a member of NSE or BSE, the broker has to pay Rs. 2.5 lakh in cash to
the margin section out of which broker can allotted Rs. 1 lakh of shares and Rs. 1.5 lakh
for limit is allotted against which he is able for trading.

DEPOSITORY DEPARTMENT

INTRODCTION TO DEPOSITORY SYSTEM:

The Indian capital market is undergoing transformation. The old manual system of trading
and settlement requires the handling of huge volume of papers resulting in cost escalation and
market inefficiencies but now it is getting supplanted by a fully computerized on line trading
system. A part from this infrastructure up gradation the best international practice of

47
depositories has been introduced. This has been possible with legal changes in the form of
depository’s ordinance in September 1995 which was later replaced by the Depositories Act,
1996.

The advantage of depository mode of trading has new demands on the people and it is being
realized that this system eliminates fake and forged share certificates, bad deliveries and other
harmful side effects of the paper trading.

The first depository in the world was set up back in 1947 in Germany. The growth was slow
in first three decades and at the end of 1990 the total number of depository in the world was
32. Depositories in India are relatively a new concept as it was introduced in 1996 with the
enactment of Depositories Act, 1996. The use of depository in India is voluntary or option.

MEANING OF DEPOSITORY

A depository is an entity that holds shares of investors in the form of electronic accounts in
the same manner as a bank holds money for depositories. A depository is an organization
where the securities of a shareholder are held in the electronic form at the request of the
shareholder through the medium of depository participant. A depository can be compared to a
bank. If an investor wants to utilize the services offered by a depository, the investor has to
open an account with the depository through depository participant. This is very similar to the
opening an account with any of the branches of a bank in order to utilize the services of that
bank. It can be compared with a bank, which holds the funds for depositors. A Bank –
Depository Analogy is given in the following table:

BANK-DEPOSITORY – AN ANALOGY

BANK
 Holds funds in account
 Transfers funds between accounts on
the instruction of the account holder
 Facilitates transfer without having to
handle money
 Facilitates safekeeping of money
DEPOSITORY
 Hold securities in account
 Transfers securities between accounts
on the instruction of the account
holder
 Facilitates transfer of ownership
without having to handle Securities
 Facilitates safekeeping of securities

48
The Depositories Act 1996 defined a depository as “A company formed and registered
under the Companies Act, 1956 and which has been granted a certificate of registration
under sub section 1A of section 12 of the Securities and Exchange Board of India Act
1992”.

The principle function of depository is to dematerialization securities and enable their

transaction in book entry form. The securities are transformed by debiting the transferee’s
depository account and crediting the transferor’s depository account.

At present two depositories are registered with SEBI.

 National Securities Depository Ltd.

 Central Depository Services Ltd.

NATIONAL SECURITIES DEPOSITORY LIMITED

NATIONAL SECURITIES DEPOSITORY LIMITED [NSDL] is a depository promoted

by National Stock Exchange of India Limited, IDBI, UTI, SBI and other financial
institutions. NSDL commenced operation in November 1996.

CENTRAL DEPOSITORY SERVICES (INDIA) LIMITED

CENTRAL DEPOSITORY SERVICES (INDIA) LIMITED [CSDL] is a depository

promoted by The Stock Exchange Mumbai jointly with SBI, Bank of India, HDFC Bank and
other financial institutions. CSDL commenced its operations in July 15th 1999.

• What the minimum net worth is required for a depository?

The minimum net worth stipulated by SEBI for a depository is Rs. 100 crore.

• How many Depository Participants are registered with SEBI?

As on 31.03.2006, total of 538 DP’s are registered with SEBI. A list of DP’s and their
addresses can be downloaded from SEBI website “sebi.gov.in”.

• Is it compulsory for every investor to open a depository account to trade in the capital
market?

49
 As per the available statistics at BSE and NSE, 99.9% settlement takes place in demat
mode only. Therefore, in view of the convenience in the settlement through demat mode,
it is advisable to have a beneficiary owner (BO) account to trade at the exchanges.

• Market of trading:-

 NSE – National Stock Exchange

 BSE – Bombay Stock Exchange

• Trading in NSE & BSE:-

 NSE Origin (1996)

NSE related with off market. Off market is that market where shares are
transferred. Transfer of shares in off market under the NSE as follows:-

Transfer of Shares:-

Transfer means willingly transfer of shares.

1. CSDL to CSDL

NSDL to NSDL

It is called as client to client to market.

2. NSDL to CSDL

CSDL to NSDL

It is called as inter transfer or inter depository.

The trading provides in calendar for 1 January to 31 December under the NSE.

Trading time is Monday to Friday. There is normal trading provided in NSE. All functions
controlled by SEBI which is performed by the NSE.

 BSE origin (1984)

50
BSE provides the rolling system of the trading of shares. Rolling system is related with the on
market. On market is that market in which shares are directly sold by the broker the code
number 5 provided for the trading in the on market under the BSE.

• What are the benefits of availing depository services?

The benefits are enumerated below:-

 A safe and convenient way to hold securities;

 Immediate transfer of securities;

 No stamp duty on transfer of share;

 Elimination of risks associated with physical certificates such as bad delivery,

fake securities, delays, thefts etc.;

 Reduction in paperwork involved in transfer of securities;

 Holding investments in equity and debt instruments in a single account;

 Change in address recorded with DP gets registered with all companies in which
investors holds securities electronically eliminating the need to correspond with
each of them separately;

 Nomination facility;

 Transmission of securities is done by DP eliminating correspondence with the

companies;

 Automatic credit into demat account of shares, arising out of

bonus/split/consolidation/merger etc.

 No odd lot problem, even one share can be sold;

 Reduction in transaction cost.

• DEPOSITORY A/C’s:-

51
DP is like a locker. It is compulsory for trading of broker for opening the account, the form is
filled by the broker for his client. The 10% income of the broker should be shown in the
form.

• Whether investors can freeze or lock their accounts?

Investors can freeze or lock their accounts for any given period of time, if so desired.
Accounts can be frozen for the debits (preventing transfer of securities out of accounts) or for
credits (preventing any movements of hindrances into accounts) or for both.

DEPOSITORY SERVICE
CHARGES

Particulars NSDL Charges CSDL Charges

A.M.C. p.a.
Individual Rs. 500 Rs. 500
Corporate Rs. 750 Rs. 750
Dematerialization Rs. 2 per certificate plus Rs. 2 per certificate plus
courier charges courier charges
Rematerialisation Rs. 20 per certificate Rs. 20 per certificate

• DEMATERIALIZATION (DEMAT)

It is the process where the physical forms of shares are being converted into the electric
mode. We can say that conversion of securities from physical mode into electronic is called
dematerialization. The Dmat a/c is opened by the client.

Securities under Demat:-

 Shares, stock, bonds, debentures.

 Unlisted shares, marketable securities, commercial paper etc.

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 • REMATERIALISATION

 Can electronic holdings be converted back into Physical Certificates?

Yes, the process is called rematerialistion. If one wishes to get back his securities in the
physical form one has to fill the RRF (Remat Request Form) and request his DP for
rematerialisation of the balances in his securities account. The process of rematerialisation is
outlined below:

 One makes request for rematerialisation.

 Depository participant intimates depository of the request through the system.

 Depository confirms rematerialisation request to the registrar.

 Registrar updates accounts and prints certificates.

 Depository updates accounts and downloads details to depository participant.

 Registrar dispatches certificates to investor.

53
 SERVICE DEPARTMENTS

ACCOUNTS DEPARTMENT:-

This department deals with the maintenance of records regarding income and expenditure of
the exchange. It also prepares the annual account of the exchange. It involves the preparation
of trail balances, income and expenditure account and balance sheet with the help of
computers. Some of the accounting policies followed are:

 Accrual system of accounting is followed.

 Fixed asset are stated at the historical cost less depreciation.

 Stock inventories.

 Depreciation is provided on w.d.v method in accordance with schedule 15 th of the

Company Act, 1956.

Main books that accounts section of LSE maintains are:

 Half day book- this book contains information regarding daily records of receipts and
payments.

 Cash book

 Ledger

54
  Bank Book

 Bank reconciliation statement

 Receipt book

 Vouchers

Functions of accounts department:

 To make and receive payment to the outside agencies.

 To disburse personal expenses.

 To keep the records of all the incoming and outgoing money and preparation of final
statement at the end of financial year.

 To get their account audited from third party.

 To cell for listing fees from the listed companies for which they are informed from 1 st
April of each year which is determined on the basis of existing capital of the
company.

SOURCES OF FUNDS:

 Membership fee from broker at the beginning with effect from 1/4/2002 i.e. Rs. 1000.

 Initial listing fee for the companies i.e. Rs. 15000.

 Annual listing fee from the company.

 Fines and penalties from brokers.

 Maintenance charges @ Rs. 1103 per room per month from those members having
room and those not having room are charged @ Rs. 3000 p.a.

 Service charges at the brokers.

55
  Interest earned on fixed deposits.

Broker members served a notice for 60 days. If member fails to comply with notice, then he
can be explained.

APPLICATION OF FUNDS:

 5% listing fee to SEBI each year.

 20% providing services to the investors.

 Personal expenses.

 Administrative expenses.

 Electricity charges.

 Security charges.

 Telephone charges.

 V-Sat charges.

 Printing and other charges.

ADMINSTRATION AND PERSONNEL DEPARTMENT:-

Ludhiana Stock Exchange (LSE) does not have a separate personal department in its
organisational chart. All activities relating to the requirement of personal, whenever and

56
wherever a vacancy arises, and maintenance of attendance register is carried out by it. This
department also deals with the appointment or removal of the floor clerks or authorized
representatives of brokers.

 Leave related rules:-

There are three types of leaves permitted for employees:

a. Medical leave

b. Casual leave

c. Earned leave

In the event of registration by employees, they get gradually provided their duration of
services in the organisation is not less than 5 years.

 Loan related rules:-

There are three types of loans available or allotted to the employees:-

a. Two basic loans:-

This type of loan is allotted to employees at the time of emergency for a short period. This
loan is sanctioned to those employees only who have minimum of six month of services. The
maximum amount of loan is 2 times the salary of employee and no interest is charged on such
loan. For example: Let salary of employee “A” is Rs. 4000 p.m. then maximum loan
sanctioned to “A” is Rs. 8000 i.e. (4000*2).

b. Eight basic loans:-

This loan is an option of loan and allotted to those employees having a minimum service of 3
years. The maximum loan amount allotted is 8 times than the salary of an employee and
interest @ of 6% p.a. is charged from employee. E.g. let salary of employee is Rs. 4000 p.m.,
then maximum loan sanctioned to “A” is not exceed than Rs. 32000 i.e. (4000*8). The
repayment of loan is made with in the 3 year in instalments by employee.

57
 c. Vehicle loans:-

This loan is also an optional loan and allotted to employee having minimum service of 3
years for the purchase of new/old vehicle. The rate of interest varies according to the needs of
the individual or amount of loan. The repayment of loan is made with in the 3 year in
instalments by employees.

 Provident fund related rules:-

It is mandatory for every employee to apply for PF account numbers. Once PF number is
allotted to employee, it contains all the details of PF deducted annually from the salary of
employee @ of 12% on basic and D.A. (Dearness Allowance) and employers contribution to
PF is automatically credited to employees PF account.

 TDS (Tax Deducted at Source) related rules:-

As per the tax rules, the personnel department is also under the obligation to deduct tax at
source while making various receipts and payments like salary paid to employees, audit fees
paid to professionals and CA’s payment made to contractors and while receiving any rent of
building etc. An original copy of TDS form is also shown in annexure.

TECHNICAL DEPARTMENT

This department of LSE is regulating the activities relating to the field of electrical,
mechanical and civil engineering besides having other functions like that of security. Here are
some of the important aspects.

 Air-conditioning plant

 Electrification of building

 Maintenance of lifts

 Maintenance of generators

 Maintenance of telephone exchange

 Maintenance of safety equipments

58
INVESTOR GRIEVENCE CELL

LSE has established IGC which receives complaints and follow up the complaints with the
company and member brokers to ensure satisfactory redressal. The rationale behind
establishing IGC is:

 To safeguard the investors interest.

 To participate as monitoring authority in the public and the right issue of the
company.

 To ensure that a company listed at LSE compiles, their annual financial results and
any subsequent increase in equity base.

Normally complaints received by LSE can be against of two types companies:-

 Complaints against unlisted companies.

 Complaints against listed companies.

 Complaints against unlisted companies:-

As far complaints regarding unlisted companies are concerned, it is not the headache of LSE.
Although, LSE sends those letter to stock exchange of that company and also to the company
itself.

 Complaints against listed companies:-

When LSE receives the complaints against listed companies then it goes a long way from
sending the reminder to suspension of trading of that listed company.

First on the receipt of the investor’s complaint letter, LSE writes two letters:-

 To the company: - Where LSE directs the company respond (satisfy investor) within
15 days.

 To the Investor:- LSE indicates that if you are not satisfied by the company within 30
days then again writes to these stock exchange.

59
 • But if the complaint is not satisfied by the company within the limit aforesaid and
investor to the stock exchange following procedure is followed:-

 First Reminder: - first reminder is sent to the company within the time limit of 15
days to respond to the stock exchange directly.

 Second Reminder: - Even if the company does not respond within about period,
second reminder is sent for further 10 days.

 Third or Final Reminder: - This is the final reminder for around ten days is sent to the
company if the company does not respond within above period. Then telegram of
investor complaint is sent to the company and quick response is demanded.

 Show-cause Notice: - Even if the investor is not satisfied with sending the telegram,
LSE demand reasons for this negligence by sending “Show cause Notice”.

 Investor’s meeting: - Investor’s meet is organised at LSE at every Saturday and

decision is taken regarding that company, who does not respond to investor’s
complaints even after sending show cause notice. The officers of the company can
come in this meet and can give justification for the delay to avoid suspension.

 Suspension for three days: - Then trading of those securities stopped if the company
does not respond even after suspension for three days. After all LSE cannot go
beyond this point. That means LSE suspend the trading of that company for a defined
period.

MEMBERSHIP DEPARTMENT

It is the first and foremost department of the stock exchange. The membership department
deals with the members. It is the base department without which effectiveness and efficiency
in working of stock exchange is impossible. There are two types of members in the stock
exchange.

 This section looks after the activities relating to recruitment of personnel.

 Maintenance of attendance registers.

60
  Appointment and removal of authorised representative of brokers.

 Maintains the register of members.

This department deals with the membership of individual and corporate members. The
trade in market is done through the authorized members who have duly registered with the
recognised stock exchange.

Requirements for Individual member of stock exchange

AGE LIMIT: To be a member of stock exchange there is an age limit.

MINIMUM: 21 MAXIMUM: 60

QUALIFICATION

To be a member of stock exchange an individual must fulfil certain requirements:

 The minimum qualification is metric plus an experience of capital market.

 Three years experience including written tests and interview.

61
  Person should not be declared bankrupt.

 Person should get sanction from SEBI or ministry of finance.

 Net worth of member should 5 lacs.

Requirement for corporate member of stock exchange

 Company must be registered under section 322 of the Company Act.

 Two copies of Memorandum of Association and Article of Association.

 Qualification and proof of age of at least 2 directors, who deal in securities.

 Company should not be declared bankrupt.

 Net worth of company should be 10 lacs.

Requirements of sub-broker: -

 After registration with SEBI then can start work as sub broker provided.

 Maximum qualification is 10+2.

 And three year experience of capital market.

Sale of Membership: -

If the member wants to sell the membership, he will have to take the prior permission
from SEBI by getting “No Objection Certificate”, (NOC) from SEBI.

Procedure:-

Prior approval from SEBI:

 15 days notice is given.

 Information to board of directors.

 Transferor and transferee have to fulfil some documents.

 Transfer fee Rs. 5000.

62
New member’s responsibility: -

It is the responsibility of new member to send all has details to SEBI. The new
member is allowed to start its working only if he registered himself with SEBI.

FEE AMOUNT

Particulars Amount (In Rs.)

Sale auction 5,000

Family transfer 2,000

Annual 5,000

SEBI Regulation fee 5,000

Cash security 1, 25, 000

SOURCE OF FUND FOR THE YEAR 2005-06

OF LSE

63
SOURCES: -

(1) Membership Fee = 0.82%

(2) Listing Fee = 13.27%

(3) Interest on deposits = 29.03%

(4) Profit on sale of fixed assets = 3.23%

(5) Other income = 53.65%

SOURCES OF FUND FOR THE YEAR 2004-05

OF LSE

64
SOURCES:-

1) Turnover Charge BSE = 5.10%

2) Turnover Charge NSE = 47.18%

3) Interest on Bank deposits = 31.90%

4) Depository Income = 8.99%

5) Other income = 6.83%

---------

100%

SECTRETARIAL DEPARTMENT

65
 The functions and duties of secretarial department include maintenance of record of
minutes of meeting like:

 Meeting of Board of Directors

 Meetings of various committees

 Meetings of the members

 Meetings of AGM

 Meetings of EGM

These minutes are statutory requirements and are preserved by secretarial

department.

SOME OTHER FUNCTIONS OF SECRETARIAL DEPARTMENT:

 To send notices with direction of Board of Directors to the respective directors to

attend the Board Meetings.

 To ensure that every meeting held as per the law and every meeting is a “valid
meeting” having the quorum required by law otherwise it would affect towards
unlawfulness.

 It also deals with transfer of shares. In order to be a member of Exchange, a person

has to hold at least one share. If a member wishes to sell his ticket, he has to intimate
the secretarial department in advance. A notice is given, thereafter in newspapers for
objection within 10 days of such notice; the clients can lodge their claims. A 10 days
notice is also displayed in the notice board of the exchange for objections to be raised
by members.

All this make it necessary for the secretarial department to have a proper up dating
data, updating of law and timely flow of latest information so that the objectives of its
functioning are properly accomplished.

66
LEGAL DEPARTMENT

When the brokers or outside clients do not settle the claims in between themselves and move
to the legal courts, the legal department comes into the picture to fight for the cause of
investor and against defaulting members. This department also assist the members, investors
to settle their grievance committee or arbitration committee so that the dispute may be settle
at the earliest without incurring huge expenditure on court fee, advocate fee etc. But in case
of non settlement at grass root level legal courts are moved into the picture. To provide
necessary information to the courts legal department plays an important role.

The main objective of legal department is to streamline and make effective

bye-laws, rules and regulations of the exchange and to see that guidelines, circulars or any
amendments made by SEBI are enforced at the appropriate time so that future complications
may be reduced or avoided. As the name suggests Legal Department will solve every
problems including legal matters.

 Four major constituents of the legal department are: -

 Arbitration committee: Dispute if any between members and investors is settled by

this committee.

 Defaults committee: Any members of LSE commit any default like i.e., do not fulfil
their obligation regarding pay in and pay out then this committee looks into the matter
and can declare the member as defaulter.

 Disciplinary committee: In case any member does not comply with its responsibilities
and regulations then action is taken by committee accordingly.

 Investor’s service committee: This committee was constituted in 1988. Any

complaint, any member or any sub broker is looked into by this committee. The
complaints can be;

 Non receipt of shares in time.

 Non receipt of payment in time.

67
  Non receipt of contract note.

 Non rectification of bad deliveries.

 In case of fake securities/companies.

But major point to be kept in mind is that the complaint id to be registered with the investor’s
services committee within 6 months otherwise complaint will not be entertained.

68
 SWOT ANALYSIS OF LSE

The following are the strengths, weaknesses, opportunities and threats of LSE.

STRENGTHS OF LSE

 It possesses with an ultra modern infrastructure.

 It possesses with dedicated manpower.

 The management is fair at LSE.

 It is one of the premiers Stock Exchange.

 It is highly technology drive exchange.

 It is fully computerized and air-conditioned.

 It has in house depositary participants.

 “LSE” brand is popular among masses. The brand image of LSE can be capitalized.

 It has requisite infrastructure for the Capital Market activities which includes a multi-
storeyed, centrally air conditioned building situated in the financial hub of the city i.e.
Feroze Gandhi Market, ludhiana.

 It has well experienced staff handling operations of Stock Exchange.

 It has competent Board and professional management.

 It has much needed networking of sub brokers in the entire region, who are having
rich experience in Stock Market operations for the last 25 years.

69
  It has more than 40,000 clients spread across Punjab, Himachal Pardesh, Jammu &
Kashmir and adjoining areas of Haryana and Rajasthan.

 The turnover of its subsidiary is the highest amongst all subsidiaries of Regional
Stock Exchanges in India.

WEAKNESSES OF LSE

 It has no different products and services from the other stock exchanges.

 Investors and traders are not interested to trade at LSE because of lack of depth.

 It is not able to compete with NSE and BSE.

OPPORTUNITIES FOR LSE

 LSE can introduce new products and services which can benefit the exchange.

 The manager with another Stock Exchange can improve LSE.

 It can better utilize its asset by leasing.

 The subsidiary of LSE has a bright future.

THREATS FOR LSE

 The NSE and BSE are biggest threats for LSE.

 Ban of Badla System shattered the LSE.

 Competition from other Stock Exchanges.

 SEBI’s rules and regulations.

70
 RISK MANAGEMENT – AN OVERVIEW

RISK MANAGEMENT

The word management is the summation of two words i.e. risk + management, which means
the process of managing the risk.

Stock exchange is a place where investors come to invest their surplus money through broker
but always have a question in their mind whether adequate risk management system is in
place at the exchange to manage the default of the brokers thereby granting the safety of the
money invested by them in the capital market.

The risk management department is principally concerned with the management of non-
trading risk. It seems to ensure all risks, which threaten the business, are recognised,
controlled and reduced to their feasible economic minimum and not just the risks that are
capable of being insured. The department has initiated a number of measures towards
minimization of risks associated with paper based trading.

CREATION OF RMD (RISK MANAGEMENT DEPARTMENT):-

71
The BSE appointed an international risk management consultant, the WBK international
limited in 1995 to conduct a risk management survey of the stock exchange, Mumbai and the
associated Clearing House, The BOI Shareholder Limited.

The WBK committee conducted a limited scope risk management study and suggested
various recommendations with a view to contain the risks of the various departments of the
exchange and also that of the clearing house.

On the basis of recommendations of the WBK committee, the governing board constituted a
Risk Management Committee which was to be responsible for all pro-active and retroactive
risk management in addition to an operations control function and physical security.

Nature of Risk

The exchange has been exposed to a large number of risks. Which has been inherently borne
by the member brokers for all times. Since the introduction of the screen based trading the
nature of risk to which the members of the exchange are exposed to has undergone radical
transformation. At the same time the inherent risk involved with the trading of paper based
securities still remains. Though the process of dematerialisation has already begun, till such
that it is made compulsory in all scrips, the risk of trading in fake/forged shares and instances
of loss of shares etc. will continue to exist. The safe custody of these shares in physical form
in the exchange as well as in member brokers’ offices are of prime importance.

The risks can be classified as under:-

A. Risk associated with paper based trading.

1. Lost/misplaced securities

2. Damage to securities

3. Loss of securities in transit

B. Client Risk

1. Client default

2. Client absconding

3. Fake/forged/stolen securities introduced by the clients

REDUCTION AND CONTROL OF RISK

To pro-actively control risk several measures have been initiated by the exchange to reduce
the risk to which the exchange and the member brokers are exposed. In this regard the
exchange has initiated the following measures:

1. Know Your Client Scheme:

72
Under this procedure the member brokers of the exchange are compulsorily required to
obtain detailed information of clients prior to commencement of any transactions for new
clients. A similar procedure is also to be followed for existing client. This information is to be
made available to the Exchange authorities whenever called for.

2. Database of Lost, Stolen, Misplaced securities:

The Exchange maintains a database of all the shares that have been reported as lost, stolen,
duplicate etc by the registrars/companies. The information available through the database is
time relevant thus the database can be modified on a regular basis and is downloaded by the
members through BOLT on a weekly basis. This database is also provided to the clearing
house. The member brokers can thus reduce the instance of delivery of share that has been
reported by the company as bad delivery by checking all the deliveries in their office with the
database provided. The exchange has designed and developed a software module for the
benefit of the members.

The clearing house also uses the database. At the time of pay-in the members of the
Exchange are required to submit the details of shares being deposited in the pay-in a softcopy
in a prescribed format. These details are checked against the database and a report is
generated in case a mismatch is found. Such shares are then reported as bas delivery in
Exchange. Further follow-up is done with the delivery broker and they are directed to lodge a
public complaint against the client introducing the stolen shares.

3. Client Caution Database:

The Risk management department in conjunction with the bad delivery cell of the exchange
has designed and developed a client database. All member brokers whose clients/sub-brokers
has introduced fake/forged shares are required to lodge a fir/police complaint against the
client and also report the same to the Exchange. The information of such clients is called for
in a prescribed format. As per the scheme the members have to collect detailed information
about clients. These details are incorporated in the database, which is downloaded to the
members, as a precautionary measure. The member brokers at the time of admitting new
clients can refer to the client caution database for further verification.

4. Verification of shares at member office:

The Risk Management Committee has outlined a process of minimizing the risk arising out of
fake/forged/stolen shares introduced by the clients of the member brokers.

As per the procedure outline issued by the exchange, in case of the transaction in a script with
one particular client in a settlement exceeds Rs. 10 lakh then the member brokers are required
to send the photocopies of the transfer-deeds and the share certificates to the

73
company/registrar for verification of the material particulars. The members can select a
random sample for the same from the lot. A similar procedure should also be followed in case
the shares worth more than Rs. 10 lakh are received from the Clearing House during pay-out
in one scrip.

The basic idea behind the introduction of this procedure is to prevent Fake/Forged/Stolen
shares from being introduced in the market. The Exchange issued a notice outlining the
procedure to be followed. The above procedure is an important Risk Management Tool
especially where there exists a large volume of deliveries.

5. Inspection:

The department is carrying out inspection of the member brokers records as regards
compliance of risk management procedures.

Insurance – As Risk Transfer

The Exchange presently has in place insurance policies to protect itself in the event of losses
on account of, damage to computer systems and a comprehensive policy which covers risk
faced by the exchange, its members, brokers and Clearing House.

The Integration Comprehensive Insurance Policy:

It is a unique and the first of risk kind of policy in india. This policy insures the risk
pertaining to all the member brokers, the Exchange and Clearing House. The policy covers
the members of cash segment, derivatives segments and internet trading. The policy has been
operational for the last six years the policy period is from july to june. The current policy for
the year 2009-2010 provides a basic cover of Rs. 50 million for the various risks faced by the
members. An additional cover of Rs. 5 million each has also been taken for the Exchange and
Clearing house as to insure only losses on account of physical damage of securities, theft etc.
along with the proactive risk control measures, this insurance will go a long way in
minimizing losses incurred by the member brokers, clearing house and the Exchange. The
risks covered under the basic cover of policy are detailed as below:

1. Loss of members on account of infidelity of employees.

2. Loss of the member on account of fake/forged/stolen shares being introduced by his

client.

3. Direct financial loss suffered by the member broker on account of physical loss,
destruction, theft or damage to securities and cash.

4. Loss suffered on account of incomplete transaction.

5. Loss sustained as final receiving member on exchange on account of the introducing

members.

6. Loss on account of errors and omissions.

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 7. Director’s and official liability cover.

Trade Guarantee Fund (TGFs)

While approving the proposal of the Exchange for expansion of BOLT terminals to cities
than Mumbai, SEBI had, interalia, stipulated that the exchange should introduce a system
of guarantee settlement of traders or setup a clearing corporation to ensure that market
equilibrium is not disturbed in case of payment default by members.

The exchange has accordingly formulated a scheme to guarantee settlement of bonafide

transaction of members which form part of the settlement system.

The exchange has constituted a trade guarantee fund with the following objectives:

A. To guarantee settlement of bonafide transaction of members of the exchange inter-se

which form part of the stock exchange settlement system, so as to ensure timely
completion of contracts and thereby protect the interest of investors and the members
of the exchange.

B. To inculcate confidence in the minds of secondary market participants generally and

global investor particularly, to attract larger number of domestic and international
players in capital market.

C. To protect the interest of investors and to promote the development of and regulation
of secondary market.

The scheme has come into force with effect from May 12, 1997.

The scheme is managed by the Defaulter’s Committee, which is Standing Committee

constituted by the exchange, the constitution of which is approved by SEBI. The declaration
of a member, who is unable to meet his requirement dues, as a defaulter is pre-condition for
invoking the provision of this scheme. The exchange has contributed an initial sum of Rs. 60
crores to the corpus of the fund. All active members are required to make an initial
contribution of Rs. 10,000/- in Cash to the Fund and also contribute Rs. 0.25 for every Rs. 1
lakh of gross turnover in all groups of scrips by continuous contribution which is debited to
their settlement account in each statement.

The active members are required to maintain a base minimum capital of Rs. 10 lakh each
with the exchange. The contribution has also been transferred to each fund and has been
treated as refundable contribution of members. Each member is also required to provide to
the fund, a bank guarantee of Rs. 10 lakh from a scheduled commercial or co-operative bank
as an additional contribution of the funds.

Thus, the initial contribution to the TGF was about Rs. 170 crores has been contributed by the
exchange as well as the member in manner discussed above.

The total corpus of the fund as on august 31,2001 was Rs. 981 crores.

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The creation of TGF has eliminated counter party risk so that if a member is declared a
defaulter, other members do not suffer as was the case in the past.

Broker’s Contingency Fund (BCF):

The exchange has set-up a broker’s contingency fund with a view:

1. To make temporary refundable advance to the members facing temporary financial

mis-match as a result of which they may not be in a position to meet their financial
obligations to the exchanges in time.

2. To protect the interest of the investor’s dealing through members of the Exchange by
ensuring timely completion of settlement.

3. To inculcate confidence in the minds of investors regarding the safety of bonafide

transactions entered into on the Exchange.

The Scheme came into force with effect from july 21, 1997.

The fund is managed by committee comprising of the President, Executive Director, Vice
President, Honorary Treasurer and three non-elected directors.

The exchange has contributed a sum of Rs. 9.51 crores to the corpus of the fund. All the
active members are required to make initial non-refundable contribution of Rs. 1,000/- to the
fund and also contribute Rs. 0.125 for every one lakh rupees of gross turnover by way of
continuous contribution which is debited to their settlement account in each settlement.

The members are eligible to get advanced from the fund upto a maximum of Rs. 25 lakh.

The corpus of fund as on August 31, 2001 was Rs. 31 crores. Thus, by creation of the BCF, it
has been ensured that the settlement cycles at the Exchange are not effected due to financial
problems faced by the members. Thus it is presumed, that this will help in increasing the
credibility of the stock Exchange settlement system.

Market Wide Circuit Breakers:

It would be noted that earlier circuit filters at individual scrip level used to restrict the
excessive moments of indices as well. In the revised scenario, where there are no circuit filter
on the scrip forming parts of popular indices like SENSEX and NIFTY there is need to
contain such excessive market moments. Therefore, i order to contain large market moments,
SEBI has mandated that the market wide circuit breakers (MWCB) which at 10-15% of the
moments in either BSE SENSEX or NSC NIFTY whichever is reached earlier would be
applicable. This would provide cooling period to the market participants and assimilate the
re-act to market movements. The trading halt on the stock exchange would take place as
under:

1. In case of 10% movement of either stock, there would be a 1 hour market halt if the
movement takes place before 1 pm.

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 2. In case the movement takes place at or after 1.00 pm but before 2.30 pm there will be
trading halt for ½ hour. In case the movement takes place at or after 2.30 pm there
will be no trading halt at the 10% level and the market will continue trading.

3. In case of a 15% movement of either index, there will be 2 hour market halt if the
movement takes place before 1.00 pm but before 2.00 pm there will be 1 hour halt. If
the 15% trigger is reached after 2.00 pm, the trading will halt for the remainder of the
day.

4. In case of a 20% movement of the either index, the trading will halt for the remainder
of the day.

The above percentage would be translated into absolute points of the index variations on
quarterly bases. The above points are revised at the end of each quarter.

The market wide circuit breakers at the national level have been introduced in the Indian
market for the first time. This is on the lines of system prevailing in the US market.

A broker does all these transactions so either the seller or the buyer will the defaulter one. So
let’s see that what type of risks may be involved in stock trading.

1. Buyer broker may fail to submit to deposit money to share bank.

2. Seller broker may fail to submit shares to bank.

Other than these risks some more risks are also involved in stock trading:

1. INSIDER TRADING: this type of trading is done when one or more broker gets
inside news of the company, which is not publicly disclosed. For example,
declaration, of higher dividend. It helps broker to make manipulation in shares.

2. MANIPULATION TO HIKE THE PRICES: sometimes manipulations are done to

hike the prices of shares. For example, a company has paid up capital of one lakh
shares of Rs. 10 each that is Rs. 10 lakh. Now any broker or that company will
purchase a large part of the shares to show publicly that there is some profit. But in
real sense there is nothing of that sort. Public thinks that there is some profit and start
purchasing shares. In this way fiction rise in prices takes place.

So to manage all these risks, stock exchange has such type of working process which helps to
eliminate all the above risks, it ensures:

1. In time payment to seller.

2. In time delivery to buyers.

3. Fair deal among brokers.

RISK MANAGEMENT SYSTEM AT LSE SECURITIES LTD.

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As it is already explained, every stock exchange has its own risk management process. LSE
Securities ltd. has established various risk management departments which ensure the fair
deal among brokers as per the rules prescribed by SEBI.

Main departments to manage risks are:

1. Margin Section

2. Surveillance.

3. Clearing house

MARGIN SECTION

Introduction:

Margin section is the backbone of stock exchange. It is the main department which controls
the activities of the brokers. Margin section is one of the most important sections of the
Ludhiana stock exchange. It is necessary for every stock exchange to maintain margin
section in the exchange. The basic aim of the margin section is to collect different type of
margin from the brokers as per the guidelines given by SEBI. Margins are section deposits
levied by an Exchange on its brokers. These margins prevent the defaults from occurring in
the market and control their adverse impact if they still take place. In case of default by the
broker the client and other members can claim for compensation out of the deposits given as
security by the particular broker. On the other hand his section also keeps track of the total
volume traded by a broker, either by the way of sale or a purchase in the particular settlement
period.

The rationale behind establishing this section is as follows:

1. To prevent the broker from indulging in excessive speculative trading.

2. To keep track of brokers who are likely to default in future and prevent them from
creating such a situation.

FUNCTIONS OF MARGIN SECTION

1. To collect the following from the broker

BMC

ABMC

2. Collection and release of the margin.

COLLECTION OF CAPITAL

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BMC: the main function of margin section is to collect the BMC from the member brokers
upto july 1st. From 1999, the minimum limit of the capital in the stock exchange was Rs. 3.75
lacs in scrips/BG and FD. This limit is to be changed according to the guidelines of the SEBI.
It is mandatory for the stock exchange to follow the guidelines of the SEBI. Because SEBI is
the regulatory authority of the stock exchange.

Upto year 1998 Rs. 4.00 lakh in cash, Rs. 3 lakhs in form of scrips/FD/BG
Upto 1st july,1999 Rs. 3.75 lakh in scrips/BG/FD, Rs. 1 lakh in cash
From 1st july,1999 Rs. .75lakh in Scrips/BG/FD, Rs. 1.25 lakh in cash
Present limit Rs. 50,000 cash & 50,000 FD or scrip

Before 1st july 1999 SEBI was forcing the Ludhiana Stock Exchange to increase the BMC to
Rs. 5.00 lakh because the member brokers of DSE, BSE, NSE are under the obligation to pay
the amount because it is the minimum limit there. But the member brokers in Ludhiana Stock
Exchange are opposing the aforesaid because it will increase the burden on them will also
affect their liquidity position.

Out of the total BMC some part is deposited in form of cash and some in form of FD and
Bank Guarantee. The FD is to be formed in the joint venture on the member broker and the
LSE by the member broker. The validity of the bank guarantee is six months after that
accounts department has to get it renewed in the name of Ludhiana Stock Exchange.

ABMC:

Additional Base Minimum Capital is paid by member broker only when demanded by the
margin section for the increase of the trading limits. The trading limit in the stock exchange
in respect of BMC is:

8.5 times in NET

6 times in GROSS

This limit is applicable only upto 1st july, 1999

The limit from 1st July, 1999 onwards is:

6 times the NET

25 times the GROSS

Present limits

6 times in NET

No limit in GROSS

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In the above quotation the meaning of the NET and GROSS are following:

NET: actual outstanding position at the end of the day.

The member purchased shares of Rs. 5,00,000 and sold the shares of Rs. 5,00,000. His NET
outstanding position is NIL because his account doesn’t bear any balance amount.

GROSS: total amount of trading at the end of the day.

The member broker is not allowed to trade more than the GROSS limit without the payment
of ADDITIONAL CAPITAL. The maximum trading limit of a member broker is 25 times of
his BMC. E.g. if the BMC paid by him is Rs. 5,00,000, then the GROSS limit of his trading
is Rs. 1,25,00,000.

ADDITIONAL CAPITAL:

In the case when member broker wants to increase his trading limit. He has to submit the
additional capital to his account in the margin section. The additional capital can be paid
either in the CASH/FD/GUARANTEE/SCRIP.

Receipt of the margin:

The function for which the margin section is formed is to collect the margin from the member
broker. The margin section is the only section, which is authorized by SEBI to receive the
margins from the member brokers.

There are many types of margins collected by the margin section.

In narrow sense the margins are divided in two categories.

1. Fixed margin

2. Daily margin

FIXED MARGIN

It is type of permanent security, which is compulsory to be deposited in the stock Exchange.

Without this the member broker is not allowed to work in the stock exchange. The amount is
not refundable until unless he resigns from being a member broker.

DAILY MARGIN

Daily margins are imposed on the member brokers regularly on the basis of trading made by
them in day to day business. They are collected by stock exchange daily and the detail about
amount, which to be received is given to the member broker in advance by the margin
section.

IN BROADER SENSE THE MARGINS ARE DIVIDED INTO MANY CATEGORIES

Categorization of stock for imposition of margin

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The stock which have traded at least 80% of the day for the previous 18 months shall
constitute the Group I and Group II

1. Out of scrip identified above, the scrips having mean impact cost of less than or equal
to 1% shall be categorized under Group I and the scrips where the impact cost is more
than 1%, shall be categorized under group II.

2. The remaining stocks shall be classified into group III.

3. The impact cost shall be calculated at 15th of each month on a rolling basis
considering the order book snapshots of the previous six months. On the basis of
impact cost so calculated, the scrips shall move from one group to another group from
the 1st of the next month.

PRESENT MARGIN SYSTEM

At present the following margins are imposed by LSE securities Ltd.

I. VALUE AT RISK MARGIN

II. MARKET TO MARKET MARGIN

III. SPAN MARGIN

1. Value at Risk Margin

This type of margin depends upon the fluctuations of shares or scrips. The more the
movement of the scrip, the more the margin he has to pay and vice-versa. VaR margin is
applicable for all securities in rolling settlement. All securities listed in Group I scrip wise
daily volatility calculated using their exponentially weighted moving average methodology
that is used in the index futures market and the scrip wise daily VaR would be 3.5 times the
volatility so calculated subject to minimum 7.5%. for the securities listed in Group II the VaR
margin shall be higher of scrip VaR (3.5 sigma) or three times the index VaR. And it shall be
scaled up by root 3. For the securities listed in group III, the VaR margin would be equal to
five times the Index VaR and scaled up by root 3.

VaR margin rate for a security constitutes the following:

Value at Risk (VaR) based margin, which is arrived at, based on the methods stated above.
The index VaR, for the purpose, would be the higher of the daily index VaR based on S&P
CNX NIFTY or BSE SENSEX. The index VaR would be subject to a minimum of 5%.

1. Additional VaR margin: 6% as specified by SEBI.

2. Security specific margin: NSCCL may stipulate security specific margins for the
securities from time to time.

81
 The VaR based margin would be recorded off to the next higher integer (For e.g. if
the VaR based Margin rate is 10.01, it would be rounded off to 11.00 and capped at
100%. The VaR margin rate computed as mentioned above will be charged on the net
outstanding position (buy value-sell value) of the respective clients on the respective
securities across all open settlements. The net position at a client level for a member is
arrived at and thereafter, it is grossed across all the clients for a member to compute
gross expose for margin calculation.

For example, in case of a member, it the client A has a buy position of 1000 in a
security and client B has a sell position of 1000 in the same security; the net position
of the member in the security would be taken as 2000. The buy position of client A
and sell position of client B in the same security would not be netted. It would be
summed up to arrive at the member’s exposure for the purpose of margin calculation.

3. In addition to VaR margin and additional margin as mentioned above, the brokers
would also be required to pay market-to-market margin. It is collected on daily basis,
broker wise 100% of notional loss of each member script, calculated as the difference
of his buying or selling price and closing price of that scrip at the end of the day. This
margin is payable in cash or in the form of a bank guarantee.

Special margin:

This margin is charged only in special and abnormal cases at present this margin is charged
by BSE on a very few scrips.

Exposure margin:

This margin is charged from the brokers at their net position at the evening time of the day.
The present rate of this margin is 5%.

Market to Market Loss Margin (MTML):

This margin is collected from the brokers on the difference in the rates of the scrips. For e.g.
if a broker purchases certain scrips for Rs. 100 in the morning and the rate of the scrip
becomes Rs.80 in the evening then this margin is charged from the broker A in the morning
of the next day.

Collection of Margin

1. The margins will be collected on T+1 Basis

2. Membership in NSE/BSE

3. To become a member of NSE or BSE, the broker have to pay Rs. 2.5 lakh in cash to
the margin section out of which broker can allot Rs. 1 lakh and Rs. 1.5 lakh for limit
is allotted against which he is able for trading.

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 IV. SPAN MARGIN

Short for Standardized Portfolio Analysis of Risk (SPAN)

This is leading margin system; it has been adopted by most options and future exchanges
around the world. SPAN is based on a sophisticated set of algorithms that determine margin
according to a global (total portfolio) assessment of the one day risk for a trader’s account.

THE SPAN SYSTEM

For options writers, SPAN (Standardized Portfolio Analysis of Risk) margin requirements for
futures options offer a more logical and advantageous system than ones used by equity option
exchanges. It is, however, important to point out that not all brokerage houses give their
customers, SPAN minimum margins. If you are serious about trading options or futures, you
must seek out a broker who will provide you with SPAN minimum.

Future exchange pre-determines the amount margin required for trading a futures contract,
which is based on daily limit prices set by the exchanges. As given, therefore, the
predetermined amount of margin required allows the exchanges to know that a “worst-case”
one day move might be for any futures position (long or short). Risk analysis is done also for
up and down changes in volatility, and these are built into what are known as risk arrays.
Based on these variables , a risk array is in fact created for each future options strike price
and futures contract. A worst-case risk array for a short call, for example would be futures
limit (extreme move up) and volatility up. Obviously, a short call will suffer from losses from
an extreme (limit) move up of the underlying futures and a rise in volatility SPAN margin
requirements are determined by a calculation of possible losses.( the uniqueness of SPAN is
that, when establishing margin requirements, it takes into account the entire portfolio, not just
the last trade.)

MARGIN PAYMENT AND PAYOUT

Payment of margin

The daily margin for rolling settlement is payable on T+1 day. The margin is collected
together for all settlements for all clients. Members are responsible to compute margin
payable and to make suitable margin payments on the due date. Members are required to
deposit the margin money due in cash, bank guarantee or FDRs, rounded off to the next
higher multiple of Rs. 10,000/-

Payout of margins

The margin deposited in cash on a given day, may, if NSCCL chooses not to exercise its lien
be returned to the member on the subsequent day after the adjustment for margin, additional
base capital and any other dues.

Failure to pay margins

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Non-payment of either the whole of part of the margin amount due will be treated as a
violation of the Bye Laws of the clearing corporation and will attract penal charge @ 0.09%
per day of amount not paid throughout the period of non-payment. But afterwards if he is
able to pay the margin his trading becomes active.

In case a member has a margin shortage of Rs. 10 lacs or above for more than 10 occasions in
the past 4 weeks, the gross multiple of the member will be reduced to one level at time of
reactivation of their trading terminals as given under:

SLAB MULTIPLE
Full exposure 8.50 times

If there is no margin shortage for the next 1 week of Rs. 10 lacs or more, the exposure limits
shall be restored to previous levels. If there is margin shortage for more than Rs. 5 lakh, the
trading facility of the member will be withdrawn immediately. However, in case of a shortage
of less than Rs. 5 lakh, the trading facility of the member will be withdrawn only if the
member has a shortage for 3 times or more in last 6 instances of margin payment. In addition,
NSCCL may, within such time as it may deem fit, advice the exchange to withdraw any or all
membership rights of the member including the withdrawal of trading facilities without any
notice. In the event of withdrawal of trading facilities, the outstanding positions of the
member may be closed out, to the extent possible, forthwith or any time thereafter by
NSCCL, as its discretion by placing at the Exchange, counter order in respect of the
outstanding position of the member, without any notice to the member, and such action shall
be final and binding on the member.

MARGINS BASED ON TURNOVER AND EXPOSURE LIMIT (INITIAL MARGINS)

Members are subject to intra-day trading limits. Gross turnover (but sell) intra-day of the
member is unlimited (cash deposit and other deposits in the form of securities and bank
guarantees with NSCCL and NSE).

Members violating the intra-day gross turnover limit at any time on any trading day are not
being permitted to trade forthwith. Member’s trading facility is restored from the next trading
day with a reduced intra-day turnover limit of 20 times the base capital till deposits in the
form of additional deposits (additional base capital) is deposited with NSCCL. Members are
given a maximum of 15 days from the date of the violation to bring in additional capital
within the stipulated time; the reduced turnover limit of 20 times the base capital would be
applicable for a period of one month from the last date for providing the margin deposits.
Upon the member violating the reduced intra-day turnover limit, the above mentioned
provisions apply and the intra-day turnover limit will be further reduced to 15 times. Upon
subsequent violations, the intra-day turnover limit will be further reduced from 15 times to 10

84
times and then from 10 times to 5 times the base capital. Members are not permitted to trade
if any subsequent violation occurs till the required additional deposit is brought in.

Gross exposure limits

Members are also subject to gross exposure limits. Gross exposure for a member, across all
securities in rolling statements, is computed as absolute (buy value- sell value) i.e. ignoring
+ve and –ve signs, across all open settlement. Open settlement would be all those settlement
for which trading has commence and for which settlement paying is not yet completed. The
total gross exposure computed across all the securities in which a member has an open
position.

Gross exposure limit would be

Total base capital Gross Exposure Limit

Upto Rs. 1 Crore 8.5 times the total base capital
>Rs. 1 Crore 8.5 Crore+ 10 times the total Base capital in
excess of Rs. 1 crore

Or any such lower limits as applicable to the members. The total capital being the base
minimum capital ( cash deposit and security deposit) and additional deposit, not used towards
margin in the nature of securities, bank guarantee, FDR, or cash with NSCCL and NSE.

SECURITY-WISE DIFFERENT EXPOSURE LIMITS:

In case of securities that are traded in the rolling settlement (Type ‘N’ and security series
‘EQ’) the GE multiple for each security are as under:

Groups( Securities Covered) Covered multiple

Group I 1.25 times of Gross Exposure
Group II 2 times
Group III 8.5 times

It is clarified that while computing the gross exposure at any time for a particular trading
day, for the purpose of the above limits, members are required to add the net outstanding
positions of the previous settlement period to the cumulative net outstanding positions as of
that particular trading day until the securities pay for the previous settlement period.

Members who desire to reduce their gross exposure may submit their order entry
requirements as per the prescribed format. If the members desire to increase their limits,
additional deposits by way of cash, bank guarantee for Fixed Deposit Receipt (FDR) have to

85
be submitted to NSCCL. Additional deposit by way of securities in electronic form (de-mat
securities) may be deposited as per procedure. The additional deposits of the member are
used first for adjustment against gross exposure of the member. After such adjustments, the
surplus additional deposits, if any, excluding deposits in the form of securities is utilized for
meeting margin requirements.

Violation charges

A penalty of Rs. 5,000/- is levied for each violation of gross exposure limit and intra day
turnover limits, which shall be paid by next day. The penalty is debited to the clearing
account of the member. Non-payment of penalty in the time will attract penal interest of 15
basis points per day till the date of payment. In the case of second and subsequent violation
during the day the penalty will be in multiples of Rs. 5,000/- for each such instance. (for
example in case of second violation for the day the penalty levied will be Rs. 10,000/-, Rs.
15,000/- for third instance and so on) in respect of violation of stipulated limits on more than
one occasion on the same day, each violation would be treated as a separate instance for
purpose of calculation of penalty. The penalty as indicated above would be charged to the
members irrespective of whether it brings in additional capital subsequently.

Exemption for Institutional deals

While computing margins, institutional deals are excluded. Deals executed on behalf of the
following entities are considered as institutional deals:

1. Financial Institutions

2. SEBI registered FII’s

3. Banks

SEBI registered Mutual Funds deals are identified by the use of the participant code in trades
reported on NSE. Deals entered into on the behalf of custodian participants i.e. carrying
custodial participant code are considered as institutional deals unless not confirmed by the
respective custodians in which case the deals shall attract margins. Non-custodian
Institutional Deals are identified by the use of the participant code NCIT. The NCIT deals
will be exempted for margin purposes (However, VaR based margin which is charged on
institutional trades on the net outstanding sale position, in securities shall be applicable in this
case also) and the settlement obligation will remain with TM clearing member. Non-
custodian institutional deals, which are not marked as NCIT at the time of order entity, will
not be exempted. All TM clearing members are required to provide details of the contract
notes for all the Non-custodial Institutional Traders through a file upload as per the
procedure.

Pay-in of fund/securities prior to scheduled pay-in day

The relevant authority may require members to pay-in funds and securities prior to the
scheduled pay-in day for funds and securities. The relevant authority would determine from

86
time to time, the members who would be required to pay-in funds and securities prior to the
pay-in day. The relevant authority would also determine securities and funds which would be
required to be paid in and the date by which such pay-in shall be made by the respective
member.

The value of such prior pay-in funds and securities will not be reduced from the cumulative
net position of the members for the purpose of gross expenditure reduction. There will be no
margin exemption available for such pay-in of funds and securities.

Exemption upon delivery of securities

If a member delivers securities prior to the securities pay-in day, the margin payable by the
member will be recomputed after the above pay-in of securities. The margin benefit on
account of early pay-in (EPI) of securities shall be given to the extent of the net delivery
position across all clients of the member. The EPI would be allocated to clients having net
deliverable position, on a random basis, till such time that the system is developed to provide
the EPI benefit on the client basis. However, members are required to ensure to pass on
appropriate early pay-in benefit of margin/exposure to the relevant client until the above
system in place.

The value of the advances pay-in made is reduced from the cumulative net outstanding sale
position of the member for the purpose of gross exposure limits.

Members may note the early paying of securities only upto the working day prior to the
scheduled paying day shall be considered for the purpose of early pay-in benefits. In case any
member makes early pay-in from the scheduled day of pay-in for settlement, no benefits will
be given to the member. Such early pay-in shall not be adjusted against the settlement pay-in
obligation and it would be treated as short delivery. Members are therefore alerted to ensure
that no early pay-in is made on the scheduled day of settlement pay-in.

SURVEILLANCE

The surveillance function at the exchange has assumed greater importance. The exchange has
accordingly set upon separate surveillance department to keep a close watch on price
movement of scrips, detect market manipulation like price rigging etc, monitor abnormal
prices and volume which are not consistent with normal trading pattern and monitor the
member brokers’ position to ensure the defaults do not occur, this department which is
headed by a G.M. report directly Executive Director. Because there is no trading and LSE the
functions of surveillance are managed by margin section.

In surveillance, the margin section covers the following functions:

1. Members’ position

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 2. Price rigging

3. False position

MEMBERS’ POSITION

It is the duty of the Margin Section to keep an eye on the member broker position. It checks
that the member broker with the stock exchange is working in the right way or not. He is
likely to default in the future or not. If yes, then to take some corrective steps to stop the
default or to reduce the effects of the loss. The Margin Section has right to close the terminal
of the Member Broker. If he is likely to default in the future.

PRICE RIGGING

The Margin Section also checks and controls the practices of the Price Rigging of the
Member Broker. It is also part of duty of the Margin Section to take preventive measures in
case it feels the existence of such activities.

FALSE MARKET OPERATIONS

The margin section of the Ludhiana Stock Exchange also controls the False Market
Operations. It checks that the member broker is not doing the operations of the false market.
It checks all the details to find the existence of any such activity.

Surveillance section uses the following tools for monitoring

CIRCUIT FILTER/breakers:

As per the guidelines issued by SEBI, the exchanges are required to apply circuit filter of 8%
on all scrips. If scrip touches 8% circuit filter band in either direction, the trading will be
halted for half an hour and then the circuit filter would be relaxed by another 8% in the same
direction. The circuit filter for a scrip would be relaxed only once in each direction in a day.
In case circuit filter is hit in the last half hour of trading, then circuit filter in the scrip would
be relaxed after cooling period of 15 minutes instead oh half an hour. The imposition of
circuit filters ensures that prices of scrips cannot move upward or downward beyond the set
limit.

So the main purpose of the surveillance department is to see any abnormality in trading of
scrips i.e. suddenly high increase in trade of securities. This may happen if some sort of
insider trading is going on, like some brokers get any internal news, which is not known
publicly e.g. declaration of higher dividend by a company etc., then the trading in that
company’s scrips can increase but circuit filters acts as a tool to control the excessive price
movement of many scips.

MARKET WIDE CIRCUIT BREAKERS FOR ROLLING SETTLEMENT

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There would be an index based market wide circuit would be applied at three stages of the
index movement either way at 10%, 15%, 20%. Movement of either BSE Sensex of NSE
S&P CNX NIFTY whichever is breached earlier would trigger the Market Wide Circuit
Breakers.

1. In case of 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 10% movement takes at
or after 1 p.m. but before 2.30 pm there would be a trading halt for half an hour. In
case the 10% movement takes place at or after 2.30 pm there would be no trading halt
at the 10% level and the market would continue trading.

2. In case of a 15% movement of either of these indices, there would be two hour market
halt if the movement takes place before 1.00 pm. In case the 15% movement takes
place at or after 1.00 pm but before 2.00 pm there would be a trading halt for one
hour. In case the 15% movement takes place at or after 2.00 pm there would be
trading halt for the remainder of the day.

3. In case of 20% movement of the either indices, the trading at would be halted for the
remainder of the day.

SCRIPWISE PRICE BANDS

In addition to the Market Wide Index Based Circuit Filters, there would be individual scrip
wise price bands as detailed below:-

1. There would be no circuit breakers for the scrips under Compulsory Rolling
Settlement on which derivatives products would be available viz. BSE 30 and NSE &
PCNX fifty currently.

2. There would be no circuit breakers of 20% either way, for all scrips in the
Compulsory Rolling Settlement except for the scrips covered in para 1.

3. For scrips that are not in CRS, the existing price bands of 8% could continue.

Pre-Issue Monitoring and Reporting

Whenever a listed company is coming out with a further issue viz. Public or right issue, then
the price of such scrip have to be monitored by surveillance section of the exchange. LSE
sends such report to SEBI on weekly basis.

Post Issue Monitoring

Post Issue Monitoring involves the monitoring of activities after a security has been listed in
the exchange. Every listed company has to fulfil formalities like:

a) To issue letters of allotment or letters of regret.

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 b) To intimate LSE about any dividend recommended by Stock Exchange and to give
shareholders a reasonable time to exercise their rights.

c) To make an offer for right shares in a form approved by Stock Exchange and to give
shareholders a reasonable time to exercise their rights.

d) To notify the exchange of any proposed change in the general character or nature of
company’s business.

e) To notify the exchange of change in directors, managing directors or auditors.

f) To forward to exchange.

g) Six copies have statutory and director’s annual report, balance sheets etc.

h) Six copies of all notices, resolutions and circular relating to new issue of capital.

i) Copy of proceeding of AGM and EGM.

j) To forward to exchange and to publish in newspapers in prescribed manner, the

unauthorized/audited financial results on a half yearly basis.

CLEARING HOUSE

This is the third most important department to manage risk in LSE Securities Ltd. its main
function is to settle fair deal between buyer and seller. Clearing House takes care of pay-in
and pay-out of securities and funds as well as of bad delivery of securities. Its functions are
classified as follows:

Settlement cycle:-

There is rolling cycle w.e.f. 1st April, 2002 which is prevailing at LSE and commenced on
daily basis. At the end of settlement date, members are given scrip wise delivery notes and to
deposit it with clearing house as per the following:

T = Trading period say Monday

T+2 = Pay in of securities and funds on Wednesday by 10.30 am

T+2 = Pay out of securities and funds on Wednesday by 4.00pm

T+3 = Auction of undelivered securities.

T+5 = Pay in and Pay out of undelivered securities.

T+5 = Close Out.

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Rolling settlement:

There is a rolling settlement cycle prevailing at the LSE on T+3 bases since 01-04-2002.
Currently T+2 systems are prevailing. At the end of each settlement, members are given
scripwise delivery notes. For example, if a member purchases a share on Monday then he has
to pay in funds on Wednesday but if the purchase is made on Friday then he has to provide
funds on Monday because on Saturday and Sunday, the trading in every stock of india are
closed. The same procedure is applied in case of sale of shares.

Auctions

As per rolling settlement pay-in, pay-out completed, some members make fault for which the
clearing house has the responsibility to settle the pending securities. In order to perform the
responsibility the clearing house conducts an auction on Thursday (T+3) of pending
securities. In trading of auction price of securities may be 20% high/less of the closing price
of the day.

Closing of settlement schedule:

After auction of securities, if still there is no solicitor (seller) on auction session, in that case
the script is closed out as mandatory benefit to the initiator (buyer) against the default of
seller (defaulter) of securities.

Clearing:

Clearing is the process of determination of obligations, after which the obligations are
discharged by settlement.

NSCCL has two categories of clearing members, trading members and custodians. The
trading members can pass on its obligation to the custodians. If the custodian confirm the
same to NSCCL. All the traders whose obligation the trading member proposed to pass on to
the custodian are forwarded to the custodian by NSCCL for their confirmation. The custodian
is required to confirm these trades on T+1 days basis.

Bad Deliveries (in case of physical settlement)

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

Company Objections (in case of physical settlement)

Company objections arise when, on lodgement of the securities with the company/Share
Transfer Agent (STA) for transfer, which are returned due to signature mismatch or for any
other reason which the transferor of security cannot be affected. The original selling CM is

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nominally pre-notified schedule. The CM on whom company objection is lodged has an
opportunity to withdraw the objection, which is not valid or the documents are incomplete
(i.e. not as required under guidance no. 100 of 109 of SEBI good/bad delivery guideline),
within 7 days of lodgement against him. If the CM is unable to rectify/replace defective
documents on or before 21 days, 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 of the auction day price plus 20%. This amount is credited to the receiving members’
account on the auction payout day.

PROJECT CASE

Like any other business or company, LSEAL, is also required to face some risk. These risks
can be divided in to three categories as under:

4. Risk faced by LSEAL.

5. Risk faced by member brokers.

6. Risk faced by investors.

My project is about how LSEAL manages these risks and mainly three departments that are
involved in risk management. These are as under:

4. Clearing house

5. Margin section

6. Surveillance and monitoring cell

My project is to study the risk management system at LSEAL. This report, primarily, is about
how LSEAL manages various types of risks.

RESEARCH

Research in common parlance refers to a search for knowledge. One can also define research
as a scientific and systematic search for pertinent information on a specific topic.

Research in an academic activity, as such the term should be used in a technical sense.
Research methodology is a way to systematically solve the research problem. In it we study
the following steps that are generally adopted by a researcher in studying his research
problem:

1. Defining and redefining problem.

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 2. Formulating hypothesis or suggested solution.

3. Collecting, Organizing and evaluating solution data.

4. Making deductions and reaching conclusions.

5. At last carefully testing the conclusions to determine whether they fit the formulation
hypothesis.

6.

RESEARCH PROCESS

Research process consists of a series of steps or actions necessary to effectively carry out
reach. These steps are to be followed in the same sequence. These steps are as follows:

1. Formulating the Research Problem.

2. Extensive literature survey.

3. Development of working hypotheses.

4. Preparing the research design.

5. Determining sample design

6. Collecting the data.

7. Execution of the project.

8. Analysis of the data.

9. Hypothesis-testing.

10. Generalisations and interpretation

11. Preparation of the report.

12.

RESEARCH METHODOLOGY

SOURCES OF DATA

The sources of data means from where we have got the data. There are mainly two sources of
data. These are:

PRIMARY DATA: the Primary data are those which are collected afresh and for the first
time, and for the particular study/research in hand. We collect primary data by face-to-face
discussion, observation method and interview method through questionnaires.

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SECONDARY DATA: the secondary data are those data which have already been collected
by someone for some other purpose, and which has already passed through the statistical
process. We collected data from LSE’s various journals and annual reports, internet,
newspaper and books.

SAMPLE DESIGN:

The sample design is a definite plan for obtaining a sample from a given population. It
mainly refers to the technique and the procedure. I have used CONVENIENCE SAMPLING
method to select the sample. That means, i have not used any specific technique, i have
approached the brokers according to my convenience.

SIZE OF SAMPLE:

Sample size containing 30 brokers.

UNIVERSE:

It consists of all the brokers in the stock exchange.

LIMITATIONS OF STUDY

Most of the researches conducted by students suffer from the following limitations.
Following are the problems encountered by me in conducting the present research at LSE:

I. The sample size is relatively small i.e. out of 30 brokers only 25 brokers responded.

II. Some brokers do not take the questionnaire seriously because most of the time they
are busy in trading and large number of students call upon them to get
questionnaires filled.

III. There may be biasness in the response given by the brokers.

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CONCLUSION

I had undertaken training for eight weeks at Ludhiana stock exchange Association Ltd.
During this short stay, whatever I have learnt and have tried to present in this report is just
equivalent to touching the tip of the iceberg. I got all assistance to complete my work from
the officers and other staff members. Whatever i observed during my training period, I am
summarizing here.

As there are many risks at stock exchange, to manage these risks a proper system is
necessary. The risk management system at LSE is robust and strong. The various types of

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margins like VaR margin, MTML margin & span margin, various exposures limits like intra-
day & gross exposure limits and additional margin ensures the safety of transactions. There is
possibility of margin delays, but not of margin defaults. If the system will prevail investor’s
confidence will increase otherwise they will be afraid of making investment in Stock Market.
Risk management ensures the investor for:

1. Payment of their funds.

2. Delivery of their shares.

3. It controls volatility in market.

To control the risk, margin, clearance and surveillance act as important departments.

SUGGESTIONS:-

Although, i don’t find myself capable of suggesting something extraordinary to such well
established Ludhiana Stock Exchange Association Ltd. After undergoing training for a period
of just six weeks, i have tried to form opinion about the risk management system. I hope
suggestions will help to reduce the risks.

DEMUTUALISATION OF STOCK EXCHANGE

To reduce the occurrence of insider trading and price rigging demutualisation of stock
exchange should be done. Ownership and management of exchange should be separated.
Stock exchange should be managed by professional managers not by brokers themselves.

STRICT RULES BY SEBI

The Regulatory Authority i.e. SEBI should make strict rules to punish the guilty, only then
the stock exchange can be able to manage the risk of investors properly and can lead to safety
of capital market in india.

REFERENCES

BOOKS & JOURNALS

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 1. Krishan Bal & Narata S.S.(2002), Security Markets in India, Kanishka Publishers, p1-
14

2. Oct- Dec. 1999 issue, Stock Exchange Official Directory, Ch. X, p1-35

3. Manual of SEBI notifications and legislations (2002), Academic foundation

4. Aggarwal Sanjeev (Chartered Accountant) (2004), Guide to Indian Capital market,

Bharat Publishing House, 8th edition.

5. Kothari C.R. (1990), Research Methodology- Methods and Techniques, New Age
International (P) Ltd 2nd Edition

Websites:

http://www.lse.co.in/Static/AbtUs.aspx

http://www.sebi.gov.in/Index.jsp?contentDisp=Section&sec_id=1

http://www.sebi.gov.in/faq/faqdemat.html

http://www.sebi.gov.in/faq/smdfaq.html

http://www.sebi.gov.in/faq/buybackfaq.html

https://nsdl.co.in/

https://nsdl.co.in/services/demat.php

https://nsdl.co.in/faq.php

https://nsdl.co.in/downloadables/pdf/mastercircular.pdf

https://nsdl.co.in/services/remat.php

https://nsdl.co.in/services/trans.php

https://nsdl.co.in/joining/investac.php

www.nseindia.com

http://www.bseindia.com/about/abintrobse/listsec.asp

http://www.bseindia.com/about/Benefits.asp

QUESTIONNAIRE

Name of Respondent

Sex:

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Designation:

Room no.

Phone no.

Q1. How do you rate the behaviour of personnel of margin section?

a) Satisfactory b) Unsatisfactory

Q2. How do you rate the performance of the margin section?

a) Excellent b) Good c) Average d) Poor

Q3. Is trading without margin possible?

a) Yes b) No

Q4. According to you which type of margin imposed on you is unnecessary?

Q5. Does the imposition of margin affect your turnover?

a) Very effective b) Average c) Least effective

Q6. Do you have knowledge about margin calculation?

a) 100% knowledge b)Average c)Zero knowledge

Q7. Have you ever found the difference between the actual margin and the imposed margin
imposed by the margin section, please specify?

a) Always b) sometimes c) Never

Q8. According to you which type of margin should be deleted from the following?

a) VaR b) MTML c) Both of them d) None of them

Q9. What %age of your capital is blocked in margin?

a) Less than 50% b) 50%

b) More than 50% d) 100%

Q10. What %age of margin you charge from your client?

Q11. How much %age of margin imposed on brokers that is recovered from their client?

a) Less than 50% b) 50% c) More than 50%

Q12. Is there any security required other than margin?

a) Yes b)No

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Q13. According to you what changes should be made over the current system?

Q14. What is the frequency of changes of margin?

a) Very high b) High

b) Low d) Very Low

Q15. Do frequent changes affect your working?

a) Yes b) No

Q17. How important is the assessment of client’s net worth considered to be?

a) Very important b) Average

a) Less important

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