Professional Documents
Culture Documents
PROJECT REPORT ON
FOR
HDFC SECURITIES
BY
MBA-II
2006-2008
SUBMITTED TO
UNIVERSITY OF PUNE
ADMINISTRATION (MBA)
Certificate
This is to certify that the project entitled “Risk Management regarding
working of a broking firm, and its investors” is a bonafide work of Mr.
Subrat kumar Mishra, a student of Kushagra Institute of Information and
Management Science (KIIMS), Cuttack, under Utkal university bearing
roll no. 13771u082053, and has successfully conducted at KARVY
STOCK BROKING LIMITED, BHUBANESWAR from 4th may to 29th
june09,under my guidance for the partial fulfillment of the course Master
of Finance & Control (MFC) at KIIMS, Cuttack.
2
Certificate
Date:
Principal
Place:
KIIMS, Cuttack
3
Certificate
This is to certify that the project entitled “ACHIEVING CUSTOMERS’
DELIGHT THROUGH WEALTH MANAGEMENT” by Mr. Subrat
kumar Mishra, bearing enrolment no. 13771U082053 is a student of
Kushagra Institute of Information and Management
Science(KIIMS),Cuttack, towards the partial fulfilment of Degree of
master of finance and control (MFC) is a bonafide record of research
work carried out by his under the supervision of his guide Mr. Parth
Sarathi Swain. The content of the record is full or in part has not been
submitted by any other institution for any other institution, for award of
any Degree or Diploma.
ACKNOWLEDGMENT
It’s a great privilege that I have done my project in such a well-organized and
diversified organization. I am great full to all those who helped and supported me in
completing the project.
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First of all I would sincerely like to thank Mr. Rohit Rakibe (Branch Manager,
Nasik), for his valuable guidance and kind co-operation during the project. I am
highly grateful to Mr. Dhirendra Kapadi (Associates of HDFC SEC) for the help
provided by them in various forms.
I am also thankful to our H.O.D., Mrs. K. Rosalin and my project guide Mr. Ashis
kumar Rout for helping me in completing the project.
Last but not least, I am also thankful to all college staff and my friends for helping me
directly or indirectly in my project.
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CONTENTS
Data Presentation
Introduction to capital
5 7-55
Working of a Broking Firm
Risks in a Broking Firm
10 Limitation 78-78
11 Bibliography 79-79
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A Capital Market deals in financial assets, excluding coins and currency. The
financial assets comprise of banking accounts, pension funds, provident fund, mutual
fund, insurance policy, shares, debentures, and other securities. The secondary market
is the market where scrips are traded. It is a market place, which provides liquidity to
All investments are risky, whether in stock, capital market, banking, financial sector,
real estate, bullion, gold etc. The degree of risk however varies on the basis of the
features of the assets, investments instrument, the mode of investment, time frame or
“The chance of something happening that will have an impact upon objectives. It is
poses maximum risk in the financial market, managing it was felt most essential by
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Company’s Mission
Business Objectives
The primary objective of HDFC is to enhance residential housing stock in the country
through the provision of housing finance in a systematic and professional manner, and
the housing sector by integrating the housing finance sector with the overall domestic
financial markets..
Organizational Goals
HDFC’s main goals are to a) develop close relationships with individuals, b) maintain
its position as the premier housing finance institution in the country, c) transform
ideas into viable and creative solutions, d) provide consistently high returns to
client base.
HDFC was incorporated in 1977 with the primary objective of meeting a social need –
their housing needs. HDFC was promoted with an initial share capital of Rs. 100
million.
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HDFC Securities, a trusted financial service provider promoted by HDFC Bank and
JP Morgan Partners and their associates, is a leading stock broking company in the
BSE , and derivatives in NSE. Our website will support you with the highest
Our research team tracks the economy, industries and companies to provide you the
latest information and analysis. Our content offers financial information, analysis,
investment guidance, news & views, and is designed to meet the requirements of
you get:
Speed :
Our state-of-the art technology enables to instantly trade on the BSE and NSE.
Convenience :
You can trade with us online or on the phone from the convenience of your home or
office. Use the 3-in-1 Advantage account to seamlessly move funds and securities
across your bank, demat and trading account. This way, you do not have to issue
Transparency :
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With our trusted pedigree, you can be assured that you get the best services in a
transparent manner. By broking with us, you are in total control of your funds and
stocks.
Expertise :
Empowered with the latest news, developments and research, you will be able to take
informed decisions.
Your Interest :
For us, your interest comes first. We endeavour to provide high quality investment
services, in a simple, direct and cost-effective way to help you achieve your financial
goals.
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CHAPTER 3 – OBJECTIVE OF THE PROJECT
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CHAPTER 4– RESEARCH METHODLOGY
During my project, I collected data through various sources primary & secondary.
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CHAPTER 5- DATA PRESENTATION
Financial System
1 Financial Institutions
2 Financial Companies
3 Financial Markets
4 Financial Instruments
5 Financial Services
6 Financial regulations
The financial market in India comprised of capital market and money market whereas
the financial system of the country comprised of institutions, which operate the
financial markets and the financial instruments with which the financial system is put
into operation.
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Capital Market Scenario
The stock market in India dates back to the 18 th century when the East India
Company was ruling the roost in the country and was perhaps the most dominant and
powerful institution and its securities were traded. The securities trading were done in
The decade of 90’s has witnessed several changes in reformation of capital market.
investors protection, new rules and regulations, etc. are some of the activities which
only reflect the growth of Indian capital market. By any reckoning Indian corporate
sector has grown very significantly in the last couple of decades whether to look at it
in terms of public and private limited companies, their share capitalization, their sales
turnover or their contribution to capital formation with this came the legislation of
A Capital Market deals in financial assets, excluding coins and currency. The
financial assets comprise of banking accounts, pension funds, provident fund, mutual
fund, insurance policy, shares, debentures, and other securities. If the stock exchanges
are well regulated and function smoothly, then it is an indication of healthy capital
market. Stock exchange provide a good leverage of the capital market and their
stock exchanges functioning across the country. In our country, capital markets are
generally also known as security/stock market. The Indian capital market currently
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The Indian Capital Markets can be broadly classified into three types of markets.
1 Money market
2 Primary market
3 Secondary market
Money market
The money market is part of overall financial system and securities or capital market.
It deals in short term financial assets whish can be readily converted into cash. Money
market is a place for trading in money and short tern financial assets that are as liquid
as money. It provides a platform for short term surplus funds of lenders or investors
and short term requirements of borrowers, the instruments can be traded at low cost
Primary market
Primary market is generally referred to the market of issues or market for new
mobilization of resources by the companies and the government undertakings, for new
gradation. Primary market operations include new issues of shares by new and
existing companies, further and right issues to existing share holders, public offers,
and issue of debt instruments such as debentures, bonds, etc. Raising money from
capital market is cheap for the company and involves a low servicing cost. The
investors’ benefit by way of dividend and or capital appreciation. The following are
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3 Underwriter/broker to the issue
6 Depository
7 Depository participant
8 Bunching of issues.
10 Lack of transparency
Secondary Market
The secondary market is the market where scrips are traded. It is a market place,
which provides liquidity to the scrips issued in the primary market. Thus, the growth
companies entering the primary market, the greater is the volume at the secondary
market. Trading activities in the secondary market are done through recognized stock
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exchanges, which are 24 in number including Over the Counter Exchange of India,
Secondary market operations involves buying and selling of securities on the stock
exchange through its members. The following intermediaries are involved in the
secondary marker.
2 Portfolio manager
3 Investment advisor
5 Depository
6 Depository participant
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WORKING OF A BROKING FIRM
Stock Broker
intermediary who arranges to buy and sell securities on behalf of clients i.e. the buyer
and the seller. A broker can deal in securities only after getting registered with
COMPLIANCE DEPARTMENT
COMPLIANCE DEPARTMENT
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Registration of Client
Documentation required for individual client as per SEBIs guidelines are as follows
Individual
respective state.
- Copy of Passport
- Letter from bank certifying account number and period from which the
same is in operation
Non-Individual
Limited Company
HDFC SEC and appointing persons authorized to operate upon said account
on behalf of company.
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6 Letter from the bank certifying account number and period from which the
same is in operation.
Partnership Firm
1 Application Form
3 Partnership Deed
4 Partnership letter signed by all the partners authorizing the firm to open
account with HDFC SEC and appoint one or more partners to operate the said
5 Identity Proof
Proprietorship Concern
3 Identity Proof
REGISTRATION OF SUB-BROKER
made in Form B
banker
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- The application form shall be submitted to the stock exchange of
information contained and then shall also certify that the applicant
fraud or dishonesty
DEALING DEPARTMENT
out most important activities of Buying and Selling of securities. The people
doing dealing are called as Dealers. He is the person dealing on behalf of the
investor, therefore when the investor wants to trade in some scrip’s he must
inform the dealer first and then the dealer deals in the market. The following are
DEALING DEPARTMENT
Buying Selling
Securities Securities
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Entering Order
The trading member can enter orders in the normal market and auction market. When
an order enters the trading system it is an active order, it tries to find out on the other
side of the books if it finds the match, trade is generated. If it does not find a match,
the order becomes a passive order and goes and sits in the order book.
Order Modification
All orders can be modified in the system till the time they do not get fully traded and
only during market hours. Once an order is modified, the branch order values limit for
Order Cancellation
Order cancellation functionality can be performed only for orders which have not
been fully or partially traded (for the untraded part of partially traded orders only) and
Order Matching
The buy and sell orders are matched on book type, symbol, series, quantity and price.
The best sell order is the order with lowest price and best buy order is the order with
highest price. The unmatched orders are queued in the system by the following
priority.
1 By Price- the buy order with the higher price gets a higher priority and
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The second order price is greater than the first order price and therefore it is the best
buy order.
1 By Time- If there are one or more order at the same price the order entered
Both orders have same price but they were entered in the system at different
times, the first order was entered before the second order and therefore it is the
TRADE
Trade is the basic activity of dealing of which a buy and sell order match with
each other. This matching of two orders is done automatically in the system.
Whenever the trade takes place the system sends a confirmation message to each
Trade Modification
The user can use trade modification facility to request for modifying trade to be
done during the day. The user can request the exchange to modify price and
quantity. Since trading is done on line the dealer makes the necessary changes on
Trade Cancellation
The user can use canceling facility for canceling the trades requested. When the
request for the trade cancellation is approved by the exchange, the party to trade
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receives a system message confirming the trade cancellation at the workstation of
the dealer.
SETTLEMENT DEPARTMENT
This department performs the back office function ie settling of trades that takes
place every day. This settling is done under “T+2” rolling settlement system.
NSE/BSE provides a platform for trading to its trading members; the National
obligation of the trading members and ensures that trading members meet their
obligations. The clearing banks and depositories provide the necessary interface
between the custodians and clearing members (who clear for the trading members
Placing Order
Settlement of trades
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SETTLEMENT DEPARTMENT
The members bring in their funds/securities to the NSCCL; they make available
showing a debit balance his shares are kept on hold until he clears them.
Under Rolling settlement all the trades executed on a trading day are settled X
days later this is called “T+X”rolling settlement where “T” is the trade date and
“X” is the number of business days after trade date in which settlement takes
place. The rolling settlement has started in T+5 basis in India, now it is T+2.
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Advantages
succeeding day are treated differently. All of them wait for “X” days from the
2 The gap between the trade date and the settlement is less under rolling
3 The account period settlement combines the features of cash as well as futures
settlement segregates cash and futures market and thereby removes excessive
4 There is a scope for both inter-day and intra-day speculation under account
period settlement, which allow large outstanding positions and hence poses
greater settlement risks In contrast, since all open positions under rolling
settlement at the end of a date “T” are closed on the same day and necessarily
settled “X” working days later it limits the outstanding positions and reduces
settlement risks.
5 Till recently it was possible to shift position from one exchange to another
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CENTRAL DEPOSITORY SERVICES LTD (CDSL) DEPARTMENT: -
CDSL
Just as in a bank, opening an account is the first step that an investor has to do, here
depository system. The Investor can open an account with any DP of NSDL, CDSL.
An investor can open an account with several DP’s or he may open several accounts
a) SEBI has made it compulsory for trades in almost all listed scrip’s to be settled
physical form.
deceased name etc. can be effected across companies by one single instruction
to the DP.
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f) Each share is a market lots for the purpose of transactions so no odd lot
problem.
g) Any number of securities can be transferred and delivered with one delivery
away with.
h) It facilitates taking advances against securities on low margin and low interest.
1 Account Opening
Types of Accounts: -
The purpose fro which a depository account is opened determines the nature of
3 Intermediary account
form with a depository and to settle the transactions of sale and purchase of such
securities in book entry form through the depository system. An account holder is
legally entitled for all rights and liabilities attached to the securities (i.e. Equity
shares, debentures, government securities etc) held in that account. Therefore the
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Clearing members account
The entities that are authorized to pay in and receive the pay out from a clearing
are known as clearing members (CMs). All pay in and pay out transactions are
members.
member.
Procedure
The clearing member has to first register itself with the depository and obtain a
The steps undertaken to open the account are same as those of individuals
difference lays in the type of form the details to be filled in and documents to be
submitted.
1 Ensure that all compulsory fields in the account opening form have been
entered (except PAN/GIR no and nomination, all other details are compulsory)
2 Ensure that a copy of the board resolution for authorized signatories has been
3 Ensure that required letter from NSCCL giving CC-ID is enclosed. In case of
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4 Ensure CM is informed of standing instruction facility for receipts.
6 If the forms are received at the branch of a DP, ensure that the account
opening form along with required references is dispatched to head office in the
Intermediary account
intermediary can lend and borrow stocks from clients. These intermediaries
borrow from lenders and lends to borrowers. Intermediaries registered with SEBI
choice for executing stock lending and borrowing transactions made through
them. The intermediary account may be opened only after obtaining registration
from SEBI under an approved stock lending scheme and getting the approval of
Transmission
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Transmission is brought about by operation of law. The word “Transmission”
inheritance, bankruptcy, and marriage etc. the persons on whom the shares
seek transmission. If the securities are held in the depository system, documents
have to be submitted to the DP. If the securities are held in physical form, the
certificate.
4 Verify Signature
Nomination
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The Companies (Amendment) Act 1999 has introduced provisions for nomination in
respect of shares, Debentures, Fixed Deposits etc. Under the provision, a Shareholder,
the shares, debentures, bonds or deposits would vest, in the event of original investors
death.
Individuals applying for holding shares/debt securities on their own behalf singly or
jointly with one or two persons can make nomination. If the shares are held jointly, all
the joint holders are required to sign the nomination form. A holder can even
Dematerialization
It is the process in which the physical form of holding securities is replaced with
are fungible. They do not bear any distinguishable features like distinctive number,
certificate number. Once the shares are dematerialized they lose their identification
feature in terms of share certificate distinctive number and folio numbers. Each
Identification number) this is a convenient method for preventing all the problems that
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2 The request should be made in the prescribed dematerialization request
form
eligible. In other words only those securities whose ISIN has been
Depository like NSDL, CDSL, Stock Holding Corporation ltd, only after
INVESTOR DP
1 Client Investor submits the DRF (Demat request form) and physical
certificates to the DP. DP checks whether the securities are available for
Demat.
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3 Depository records the details of the electronic request in the system and
4 R&T agent, on receiving the physical documents and the electronic request
the Depository.
Rematerialization
securities in place of the securities held electronically in book entry form with a
debited for the securities sought to be rematerialized and physical certificates for
Procedure of rematerialization
2 The client should complete RRF in all respects and submit it to the DP.
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3 The DP should check RRF for validity, completeness and correctness. In
- The name of the client on the RRF is exactly the same as that in the
client account
- Details like security type, face value, issuers name and lock in status
- If the RRF is not found in order the DP should return the RRF to the
Settlement of trades
account holder.
Transfer of securities from one account to another may be done for any of
market” trade).
TRANSACTION
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Off-Market On-Market Inter Depository Intra Depository
Off-Market Transaction
Any trade that is clear and settled without the participation of a clearing
DEPOSITORY
DP 1 DP 2
Seller Buyer
On-Market Transaction
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d. Buying broker gives instructions and securities move to the buyers
account.
DEPOSITORY
DP DP
CC
Broker Broker
transfers
2 Inter Depository Transfer can be done only for securities that are available
account.
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RISK MANAGEMENT DEPARTMENT
The concept of Risk Department on a broking firm is a new concept in India. The
trading and non-trading risks. It seeks to ensure that all risks, which threaten the
minimum and not just the risks that are capable of being insured. There have been
experiments with different risk containment measures in the recent past, following
are some of the measures which are taken by the broking firms.
RISK DEPARTMENT
are higher. Out of total capital provided by a member, Base Minimum Capital
Capital (ABC) is utilized towards margin payment if not used up for taking
exposure/turnover.
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2 On-Line and Off-Line Exposure Monitoring
to be inspected every year to verify the level of compliance with various rules,
3 Margin Requirement
(MTM) and Value at Risk based Margin (VaR). Margins are computed at
client level. A member entering an order needs to enter the client code. Based
An index based market wide circuit breakers system applies at three stages of
the index movement either way at 10%, 15%, and 20%. These circuit breakers
nationwide.
RISK
Whether it is driving, or just walking down the street, everyone exposes himself to
risk. It is equally true in the case of investments. Your personality and lifestyle play a
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big role on how much risk you are comfortably able to take if you invest in stocks and
have no trouble sleeping at nights because of your investments you are probably
taking too much of risk. All investments are risky, whether in stock, capital market,
banking, financial sector, real estate, bullion, gold etc. The degree of risk however
varies on the basis of the features of the assets, investments instrument, the mode of
“The chance of something happening that will have an impact upon objectives. It is
Investopedia has defined risk as “The chance that an investment’s actual return will
be different than expected” this includes the possibility of losing some or all of the
original investments.
When considering any security, the investor is always concerned with the return
expected on the investments and the risks of the investments, i.e. how likely it is that
the return expected will be achieved. There are two types of risks
1 Systematic Risks
2 Unsystematic Risks
Systematic Risks
The risks arising out of external and uncontrollable factors, arising out of the
market, nature of industry, the state of the economy and a host of other factors.
yourself against this type of risk. Example, Market Risk, Interest rate risk,
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Unsystematic Risk
The risk emerging out of known and controllable factors, internal to the issuer of
the securities or companies. This risk affects a very small number of assets.
RISK CATEGORIES
Risk and uncertainty go together. Risks suggests that the decision maker knows
involves a situation, where the outcome is not known to the decision maker. But
basically, whether the outcome is known or not, the investments involve both risk
and uncertainty. For our decision, the word “Risk” is comprises of all elements of
The investors and some issuers of securities can control some risks by
planning. Others cannot control and they have to bear the consequence
compulsorily.
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These risks are caused by the following factors
3 Nature of investments.
9 Amount of investment.
Dealing Risks
1 Avoid it
Investor should take those risks, which are bearable. Unnecessary and
2 Retain it
Every Investment posses some inherent risks which are unavoidable; in order
3 Reduce it
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Investor can reduce the risk by taking advice from a knowledgeable persons,
4 Transfer it
5 Share it
While investing an investor can approach his friends, relatives etc to invest
with him and the risk gets shared among different people.
Every investor invests money to receive returns. The risk/return tradeoff could
easily be called the iron stomach test. Deciding what amount of risk you can take
on while allowing you to get rest at night is an investor’s most important decision.
The risk/return tradeoff is the balance, an investor must decide on between the
desires for the lowest possible risk for the highest possible returns. Remember to
keep in mind that low levels of uncertainty (low risks) are associated with low
potential return and high levels of uncertainty (high risks) are associated with high
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R Low Risk Higher Risk
follows
R * Equity
E * Mutual Funds
W * Debentures
A * Fixed Deposits
D * Bank Deposits
S * Insurance Schemes
INVESTORS RISKS
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Smart investors know how much risk is appropriate for them, and they don't exceed
that level. They realize that risks come in many forms, and there is no way to totally
If you can recognize risks, you can manage them with relatively simple solutions. But
too many investors underestimate the importance of doing this and it's one of the most
Inflation risk.
This is the risk that money you save or earn will lose some of its purchasing power.
Even if your five-year certificate of deposit is guaranteed, the dollars you get back
may not buy as much in five years as they bought when you took them to the bank.
It may make you feel giddy to receive double-digit interest on your money market
fund, as some investors did in the early 1980s. But if inflation is also in double digits,
as it was back then, you're more likely to fall behind economically than get ahead
From 1970 through 1999, the cost of living in the United States rose at a compound
rate of 5.1 percent a year. Many people believed they would be secured if they could
retire on a fixed income of $50,000 a year, which in many cases is adequate today.
But at the rate of 5.1 percent inflation, after 25 years you will need $173,400 to buy
what you can get today for $50,000. Even if inflation is much more modest, say 3
percent, a person who retires on $50,000 today at age 55 will require $104,700 at age
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Stated another way, with inflation of 3 percent over 25 years, your $50,000 will be
worth only about $23,300 in today's dollars. At inflation of 5.1 percent, it will be
You may think these numbers are far-fetched and have a hard time relating to them.
But it was amazing to learn that in King County, Washington, per-capita income rose
To illustrate how money has lost its purchasing power during last 10 to 15 years, in
India a two wheeler which costed Rs 5000 few years back is available today in the
range of Rs 35000 to 60000.Our most popular car Maruti which was priced Rs 50000
initially when it was introduced in the market today costs Rs 2.5 lacs.
The way to protect yourself against this risk is to own at least some equity assets. For
most investors, that means stock funds. Over the past 75 years, the annual inflation-
adjusted return of the Standard & Poor's 500 Index was 8 percent, for small-cap
stocks it was 9 percent, while it was only 0.7 percent for Treasury bills and 1.5
Most investors ought to have at least 10 percent of their portfolios in assets that can
increase in value, such as stock funds. Studies show that even a 10 percent equity
stake can noticeably increase the returns while at the same time it actually reduces the
Business risk.
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This is the risk that you buy stock in a company that fails or has a major unexpected
deterioration in its business. The cure for this risk is basic and simple: diversification.
If you own stock in one or a handful of companies, an unexpected disaster hitting one
of them can do serious damage to your portfolio. But if you own 100 companies, a
Credit risk.
This is the variation of business risk that affects bond investors. You can buy a bond
issued by a company that can't pay the interest or the principal. It's called a default.
More commonly, the company that issued your bond has an unexpected deterioration
in its business, and its bonds are downgraded by rating services. When this happens,
The cure for credit risk is mostly diversification. If you own a single bond and it
winds up being insolvent, you may be in a heap of trouble. But if you own 20 bonds,
as is typical of some bond funds, one or two duds won't spoil your party.
Manager risk
Once you determine the proper amount of your portfolio that should be in stocks, you
typically hire a manager to pick them for you. Or you buy a mutual fund, which
amounts to the same thing. You’ll probably pick a manager with a winning
There’s just one problem: Very, very few people have been able to successfully pick
market-beating stocks over long periods of time, and even the best track records don't
last forever. By now you might be able to guess the recommended way to overcome
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this risk: by practicing the most fundamental investing technique of all,
diversification.
Invest in index funds that in turn invest in hundreds or even thousands of stocks. If
you prefer actively managed funds, split your investments among multiple managers.
If you're investing in an actively managed large-cap value fund, choose two of them,
run by different managers. Some mutual funds give you a way to do this in a single
package. Birla Mutual Fund for example, has several funds, which invest in different
sectors of industry and are managed by carefully chosen managers of proven record.
It's a way to get the benefit of several fund managers and diversification.
Market risk.
This is the chance that the entire market, either bonds or stocks, goes way up when
you want to buy-or way down when you want to sell. The market is the product of
nearly countless influences and forces, both economic and psychological, both
rational and irrational. In the very long term, it's a relatively safe bet that the market
will continue its upward climb. But nobody can consistently and accurately predict
Over the past century, the U.S. stock market measured by the Dow ]ones Industrial
Average has experienced 19 bear markets in which the index declined more than 20
percent. These figures, by the way, represent bear markets for the highest quality
companies. If you think this is all in the past, remember that the NASDAQ 100 Index
suffered a decline of more than 50 percent last year. And Warren Buffet's Berkshire
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If you're an equity investor, you have two ways to protect yourself from bear markets.
First, you can use mechanical market timing, to attempt to get out of stocks before
they experience major losses and to attempt to get back in before they experience
major gains., this can be a frustrating and imperfect process. But at times it is very
successful. Second, you can have enough fixed-income assets in your portfolio to
dampen the volatility of equities, so your temporary losses won't exceed your risk
tolerance. Most investors should have at least 10 percent of their portfolios in variable
assets like equity funds, most should have at least 10 percent of their assets in fixed-
income investments like bond funds to dampen the volatility of their portfolios.
Bond investors, including those who invest through bond funds, can protect
themselves by the use of market timing and by investing in short-term bonds, which
One form of market risk is paying too much for assets when you invest in them. By
using dollar cost averaging, the practice of routinely investing a fixed amount in an
asset every month or every quarter or every year, you automatically buy more units
when prices are down and fewer when prices are up. Over time, this technique will
make your average price per share of a mutual fund lower than the average of all the
prices at which you bought. This is the technique many investors use when they invest
Tax risk.
This is the risk, usually a certainty, that your investment gains will be diminished by
income taxes. Later this year, all mutual fund prospectuses will have to disclose more
fully the theoretical impact of taxes on their returns. This will make returns look
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smaller, because the Securities & Exchange Board of India has ordered that
There are plenty of ways to protect you against tax risk, but some of them come at the
expense of good investing principles. Many people bought limited partnerships in the
early 1980s, having been promised substantial tax write-offs from big expected losses.
subsequently. The investment losses came as expected, but the tax write-offs
disappeared, as the changed law did not allow this. Without tax breaks, many limited
partnerships didn't have well enough fundamentals to attract any new buyers hence
Here are a few of the ways you can save taxes on your investments. Each of them
works, but each has drawbacks that you should understand in advance.
• Buy and hold. If you don't sell, you won't be hit with a capital gain.
• Invest in mutual funds with tax benefits. There are many funds available in the
market, which allow this. The dividend earned on these investments is also
tax-free.
• if you're in a high tax bracket, invest in RBI tax-free bonds instead of taxable
• if you have exhausted all other avenues and still need to reduce taxes, consider
variable annuities.
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Expense risk.
This is the risk that your investment returns will be eroded by paying needlessly high
expenses. Expenses are like anchors being dragged behind a sailboat. They may be
invisible, but they inevitably reduce the speed of the boat. High expenses take many
forms, including sales commissions (called loads in mutual funds) and ongoing
expense ratios.
Every investment manager expects and deserves to be paid. But some investment
companies and products charge investors too much. Than you should have a very
good reason.
The best way to control this risk is to inquire about expenses before you invest. Every
investment product involves expenses; don't invest in one until you understand this
• When you buy mutual funds, buy no-load funds. This will save you from one
• If you're a buy-and-hold investor, invest in index funds for their ultra low
expenses.
charges a reasonable brokerage. SEBI has these days made it mandatory for
brokers to issue split Contract Notes, which separately give the rate at which
the broker has bought the stock for you and brokerage he has charged you.
Event risk
This is the -risk that some unexpected event will topple the market, or part of it. This
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crisis that causes investors to suddenly question the future. This risk also can be very
personal, affecting only you and your family: a death, illness, layoff or a house fire.
Unless you keep all your money in government-guaranteed bank accounts, there is no
absolute protection against sudden events. Your best protection may be the right
attitude, that life is uncertain and the uncertainty is part of what makes it worth living,
backed up by an emergency fund that would let you continue living if your income
Liquidity risk
This is the risk that you won't be able to get your money quickly when you need it
without taking a significant investment hit. If you own a small business, selling it for
anything close to what you think it's worth is usually difficult and time consuming. If
your wealth is tied up in raw land and you need to turn it into cash, you may have to
wait months or years to get the price you think you deserve. If you invest in limited
partnerships and need to sell before they expire, you may have to sell at a substantial
loss.
You protect yourself against this risk in two ways: First, by making sure that most of
your investments are in liquid assets that can be sold quickly and inexpensively;
stocks, bonds and mutual funds, gold all qualify. Second, by having an emergency
fund that will let you quickly get your hands on money when you need it, without
Fraud risk.
This is the risk that you'll simply be defrauded in your investments. This is different
from making a dumb mistake. Fraud deliberately creates victims. To keep yourself
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from becoming one of them, deal with reputable investment professionals. Don't make
impulsive decisions about unfamiliar investments; instead, take the time to have
opportunity, there is only one right answer: "I'll pass." If you are offered something
promising an unusually high return, remember that risks and returns always go
together. If you can't identify the risks you are taking in order to seek a high return,
Finally, follow one of the most basic of all investment rules: Don't invest in
Emotional risk.
This is the risk that your emotions will get out of hand and start dictating your
decisions. Greed and fear are the two biggest forces driving our Stock Markets, and
thinking you know more than you really do and becoming overconfident in your
We sometimes see emotional risk most clearly when investors who are on the
sidelines see others making big gains, and eventually they get so anxious to get some
of those gains for themselves that they just jump into whatever is "hot" in the market.
We call this the "I can't stand it any more" market timing system, and very often it
leads people to buy at close to the peak of a market cycle. We see the converse of this
when investors get increasingly frustrated and exasperated- at-continuing losses, and
finally they "Can't stand it any more" and sell, often at close-of -the bottom of a
market cycle.
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If investors could follow the old Stock Market saying, "Buy low and sell high," they
would make money. But in both instances, the "I can't stand it anymore" timing
To protect yourself from the risk of grandiosity, be brutally honest about the results of
the investments you have made. Keep a list, if necessary, of the decisions you made
that went wrong. Next time you are sure that you know better than the rest of the
The best protection against emotional risk is a disciplined plan for buying and selling.
Make sure your assets are balanced so you can sleep at night no matter what the
market is doing. If you use market timing, follow a strict discipline, preferably having
somebody else implement it for you - somebody without any emotional charge on
each trade. If you are a buy-and-hold investor, make sure you have enough fixed
income in the portfolio to moderate the volatility of equities; and make sure you have
some equities in the portfolio so you won't feel totally left out during bull markets.
Finally, the biggest risk of all: You could run out of money before you run out of
life.
This is the biggest fear of many retirees, that their resources won't last long enough to
There are several good ways to protect you against this risk, but none is foolproof.
You must protect yourself against inflation, which we already discussed briefly. You
must keep your living costs within reasonable bounds. You must start with enough
assets before you stop working. Every year "early" that you retire can impact you
financially in two ways: It gives you one less year of savings and one more year of
future life. Finally, you must invest your assets in a sensible way so your risks are
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RISKS INVOLVED IN A BROKING FIRM i.e. FOR BROKER
The Exchange has been exposed to a large number of risks, which have been
inherently borne by the member brokers for all the times. These risks are as follows
BROKER
Operational Risks
Operational risks are very common risks, which are found in every organization.
Operational risks can be defined as “Risk of loss arising due to procedure errors,
the risks that their activities and processes may be disrupted unexpectedly or fail to
meet expected performance level. Strong risk management is an essential part of good
corporate governance and something that helps to protect the shareholders value.
There is also growing recognition of the need to ensure that an effective framework of
attention that is being placed on risk management by regulators and testing authorities
operational risks within the context of an enterprise-wide view of risks. Therefore the
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1 Direct financial losses, which arise from failing to meet an obligation (ex
Legal Litigations
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The operational risks found in a broking firm at various departments are as
follows
OPERATIONAL RISKS
6 Absence of undertaking from sub broker that he/she has not been involved
EFFECTS
If the compliance department doesn’t complete all the required documentation the
results could devastating. First of all in the absence of compliance the broker can
be suspended and penalized. This would result in bad publicity, loss of business
broker. Secondly when compliance is done the broker is insulated from a probable
risk, fraud, and cheating and financial loss at the entry level itself. Proper
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introduction, reference from a chartered accountant, bank statement ensures that
the investor is genuine and has no malafide intentions. It wouldn’t be out of place
that many brokers were cheated by some investors by giving false information and
third party cheques. Since the compliance department had not done their work
perfectly the brokers were on a very weak wicket when they sought legal redressal
of their problems. Similarly the information about the sub broker that he is not
involved in any criminal offence and no trial is pending against him saves the
1 Placing of wrong order i.e. instead of buy order sell order is given.
3 Trading done from wrong account i.e. buying and selling for wrong clients
account.
infosys.
EFFECTS
In all the above-mentioned points the broker suffers financial loss. When instead
of buying the sell order is punched the broker is unable to give delivery of shares
resulting in Auction of the shares and loss to him. It is also observed that in some
compensate him. If this is repeated quite often the investor loses confidence and
prefers changing the broker. Thus long-term relationships are lost leading to
financial losses.
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SETTLEMENT DEPARTMENT RISKS
EFFECTS
can be said that the work of settlement department is of utmost responsibility. All
failure in preparing bills in time, failure in preparing pay in and pay out of slips
can not only create chaos in a broking firm, it can result in huge financial losses to
the broker. It is on the record that frauds by the employees have been responsible
RISK DEPARTMENT
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EFFECTS
Like settlement department the role of risk department is very important. This
concept is quite new in India and its needs were felt when during last two three
years broking houses suffered huge losses. However the risk department, which is
supposed to be managing risk, is managed by human beings and itself faces many
risks. If it does not give enough limits where it is due and is required it can result
in loss to investor or a sub broker leading to dispute and financial loss. On the
contrary giving wrong limits have the same effect. Failure in collecting margins
attracts two types of risks regulatory and financial. If the margins are not collected
2 Punching error
OTHER RISKS
Market Risk
The risk of loss arising from adverse market rate movements e.g. foreign
equity prices are termed as market risk. Generally this risk occurs due to volatility
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Credit risk
It is the risk that the counter party of financial transaction will fail to perform
according to the terms and conditions of the contract, thus causing the other party
Liquidity Risk
Market liquidity is the risk that a financial instrument cannot be sold quickly at a
price, which equates to their market value. Liquidity changes over time and rapid
new, and the liquidity of the market have yet to be fully tested. It must be
recognized that many derivatives are OTC based and liquidity of these products
Financial Risk
Financial risk means fear of loss of money, which is the biggest risk faced by a
broking firm. Financial risk in respect of broking firm can be of two types firstly
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CHAPTER 6- DATA ANALYSIS & INTERPRETATION
RISK MANAGEMENT
This risk in itself is not bad, risk is essential to progress, and failure is often key part
of learning, but we must learn to balance the possible negative consequences of risk
against the potential benefits of its associated opportunities. This is risk management.
1 Global Perspective
potential outcomes
uncertainties
3 Open Communication
4 Integrated management
management
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- Adapting risk management methods and tools to a projects
5 Continuous process
projects lifecycle
- Focusing on results
7 Teamwork
problems
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vi. Communicate - Provide information and feedback internal and
emerging risks.
poses maximum risk in the financial market, managing it was felt most essential by
the regulatory bodies and exchanges. Therefore NSE introduced for the first time in
India, risk containment measures that were common internationally but were absent
from the Indian Securities Market. NSCCL has put in place a comprehensive risk
measures were taken to reduce the brokers’ risks. Whereas SEBI has given some
Margins
NSE has specified Different margins for different instruments like stocks futures and
options etc. Margins depend upon the volatility and market conditions, It vary from
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Daily margin, comprising of the sum of VaR margin and mark to market margin is
payable.
VaR margin is applicable for all securities in rolling settlement. All securities are
The VaR based margin would be rounded off to the next higher integer (For E.g.: if
the VaR based Margin rate is 10. 0 1, 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
are arrived at and thereafter, it is grossed across all the clients for a member to
For example, in case of a member, if 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
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Mark-to-Market Margin
Mark to market margin is computed on the basis of mark to market loss of a member.
Mark to market loss is the notional loss which the member would incur in case the
cumulative net outstanding position of the member in all securities, at the end of the
relevant day were closed out at the closing price of the securities as announced at the
end of the day by the NSE. Mark to market margin is calculated by marking each
transaction in scrip to the closing price of the scrip at the end of trading. In case the
security has not been traded on a particular day, the latest available closing price at
In the event of the net outstanding position of a member in any security being nil, the
difference between the buy and sell values would be considered as notional loss for
MTM profit/loss across different securities within the same settlement is set off to
determine the MTM loss for a settlement. Such MTM losses for settlements are
Members are required to ensure collection of upfront margin from their clients at rates
mentioned below and deposit the same in a separate clients account, in respect of
trades in normal market in which would result in a margin of Rs 50,000 more, after
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Failure to pay margins
Non-payment of either the whole or part of the margin amount due will be treated as a
violation of the Bye Laws of the Clearing Corporation and will attract penal charges
@ 0.09% per day of the amount not paid throughout the period of non-payment.
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 exposure multiple of the member will be
reduced to one level lower at the time of re-activation of their trading terminals as
giver. Under
Slab Multiple
If there is no margin shortage for the next I week of Rs. 10 lacs or more, the exposure
In addition, NSCCL may, within such time as it may deem fit, advise the Exchange to
withdraw any or all of the membership rights of the member including the withdrawal
member may be closed out, to the extent possible, forthwith or any time thereafter by
NSCCL, at its discretion by placing at the Exchange, counter orders in respect of the
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outstanding position of the member, without any notice to the member, and such
Members are subject to intra-day trading limits. Gross turnover (buy +sell) intra-day
of the member should not exceed thirty three and one-third (33 1/3) times the base
capital (cash deposit and other deposits in the form of securities or bank guarantees
Members violating the intra-day gross turnover limit at any time on any trading day
Member’s trading facility is restored from the next trading day with a reduced
intraday turnover limit of 20 times the base capital till deposits in the form of
Members are given a maximum of 15 days time from the date of the violation to bring
in the additional capital. Upon members failing to deposit the 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 times and then from 10 times to 5 times the base capital. Members are
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not permitted to trade if any subsequent violation occurs till the required Additional
Members are also subject to gross exposure limits. Gross exposure for a member,
across all securities in rolling settlements, is computed as absolute (buy value - sell
value), i.e. ignoring +ve and -ve signs, across all open settlements. Open settlements
would be all those settlements for which trading has commenced and for which
Settlement payin is not yet completed. The total gross exposure for a member on any
given day would be the sum total of the gross exposure computed across all the
> Rs. 1 crore - 8.5 crores + 10 times the total base capital in excess of Rs 1 crore
The total base capital being the base minimum capital (cash deposit and security
deposit) and additional deposits, not used towards margins, in the nature of securities,
In case of securities that are traded in the Rolling settlement (Type 'N' and security
Group I I time
Group 11 2 times
Group111 5 times
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All new securities to be traded on the Exchange shall be subject to exposure multiple
of 2 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 as of that particular trading day until the securities pay-in day
Members exceeding the gross exposure limit are not permitted to trade with
immediate effect and are not permitted to do so until the cumulative gross exposure is
reduced to below the gross exposure limits (as defined above or any such lower limits
as applicable to the members) or they increase their limit by providing additional base
capital.
Members who desire to reduce their gross exposure may submit their order entry
requirements as per the prescribed format if members desire to increase their limits,
additional deposits by way of , bank guarantee or Fixed Deposit Receipt CEDR) have
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 utilised 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
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clearing account of the member. Non-payment of penalty in time will attract penal
In respect of violation of stipulated limits on more than one occasion on the same day,
penalty.
NSCCL, over and above their minimum deposit requirements (base capital), towards
Members may submit such deposits in any one form or combination of the following
forms:
I. Cash
All Additional Base Capital (ABC) given in the form of cash / FDR (hereinafter
referred to as 'Cash Component) should be at least 30% of the total ABC and Cash
Margins in respect of every trading member. Incase where non - cash component is
more than 70 % of the total additional base capital, the excess non-cash component is
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ignored for the purpose of exposure limits requirements and / or margins
requirements.
While computing margins, institutional deals are excluded. Deals executed on behalf
1. Financial Institutions
3. Banks
Deals are identified by the use of the participant code in the trades reported on the
NSE.
Deals entered into on behalf of custodial participants i.e. carrying custodial participant
code are considered as institutional deals unless not confirmed by the respective
Non-Custodial 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 Custodial Institutional deals, which are not
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All TM clearing members are required to provide details of the contract notes for all
If members deliver securities prior to the securities pay-in day, then the margin
payable by the member will be recomputed after considering 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 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 a 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 is in place.
The value of the advance 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 that early pay-in of securities only up to the working day prior to
the scheduled settlement pay-in day shall be considered for the purpose of early pay-
in benefits. In case any member makes early pay-in on the scheduled day of pay-in for
the settlement, no benefit will accrue 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
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Pay-in of funds 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 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
The value of such prior pay-in of funds and securities will not be reduced from the
cumulative net position of the member for the purpose of gross exposure reduction.
There will be no margin exemption available for such pay-in of funds and securities.
Some Risk management are also taken by BSE they are as follows
Under the procedure the member brokers of the exchange are compulsory
authorities whenever called for. In case the member brokers fails to furnish the
The exchange has outlined the process i.e. in case the transaction in a
script with one particular client in a settlement exceeds Rs 10 lacs then the
member are to send the photocopies of the transfer deeds and the share
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certificates to the company/ registrar for verification of the material
3 Inspection
4 Insurance
The exchange presently has in place insurance policies to protect itself in the
comprehensive policy that covers risks faced by the exchange, its member brokers
The risks covered under the basic cover of the policy are detailed as below.
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Measures taken by SEBI for Investors protection are as follows
Government of India and SEBI have been stressing upon the need for regulating the
exchanges
The steps taken by SEBI to regulate and control the business of stock exchanges and
1 Regulation on insider trading with the object to curb it completely and punish
the guilty
2 Uniform Trading hours at all the stock exchanges in the country to check
arbitrage.
transactions this is now almost complete and all stock exchanges have been
computerized.
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10 Transfers to be affected within two months as per companies act and within
11 Brokers should notify all transaction to the stock exchanges including off the
floor trades.
bankers, etc.
27 Stock lending.
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Recent Development steps taken by SEBI for Investor protection
The committee set up by SEBI to review the sources and utilization of investor
- Funds should be on trust structure and set upon under Indian Trust Act,
exchanges
- Fund to be utilized only for investor claims and not broker claims.
SEBI has directed all stock exchanges to constitute service centers for investors to
enable the investors to have a form for recording and counseling of their
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4 Compliance Officer
verify rumors and information floating in the market about the company to the
stock exchange. This will reduce motivated rumors about companies, which aids
in price manipulation.
5 Corporate Governance
SEBI has prescribed prudent corporate governance norms for all listed companies
6 Investor Education
SEBI has taken steps to educate investors through various awareness programmes
and publications
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CHAPTER 10- CONCLUSION OF THE STUDY
1 The researcher found that the working of a broking firm is a very risky job
operation wise. The activities have reached through lengths and breadth of
voluminous increase in investors has also increased the risk involved in it.
6 Staff in a broking firm is continuous busy and due to which they are
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CHAPTER 11- RECOMMENDATIONS & SUGGESTIONS
- Products Traded
- Limit Structure
- Frequency of review
independent of its trading staff i.e. personnel responsible for the risk
framework.
6 Highly qualified staff not only in front office positions such as trading
desk, relationship officer and sales but also all back office functions
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7 An organization should have an integrated management system that
integrity.
11 For avoiding market risk the organization should ensure that they
adequately measure, monitor and control the market risk in their trading
activities. the various methods like mark to mark and value at risk
approach can be used for trading operations. Some more measures which
12 Every Organization should have “Know Your Customer” policy and this
13 Every organization should check cash flow statement and balance sheet of
14 Taping of trader and dealer telephone lines will facilitate to resolve the
and examiners.
Practices annually.
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SCOPE FOR DEVELOPMENT (HDFC SEC)
HDFC SEC have set themselves very stringent and high standards of Risk
Management. However I would like to make a few points, which would help the
1 Recording of trader and dealer telephone calls, which will facilitate to resolve
2 Fast and frequent interaction between the risk managers, the sub brokers and
3 Periodical visits to the sub brokers and franchisee by the HDFC SEC
personnel for interaction and inspection will help in minimizing the risk to
great extent.
4 Regarding dealers risks, well-trained and less stressed dealers will help in
reducing the mistakes. It has been observed that most of the mistakes are done
when they are under stress. HRD must help in this matter.
5 In settlement department the persons have be appointed with utmost care and
6 Before starting business with any client his financial capability should be
7 Along with large client base, quality of clientele will help in balanced growth
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LIMITATIONS OF STUDY
Moreover, very few investor and agents have a detail knowledge of the study.
The study was conducted in Nasik only, which restricted the scope of the
study
The data provided by the investor and the agents can’t be held true as 100%
correct.
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CHAPTER 12 - BIBLIOGRAPHY
www.hdfcsec.com
www.bseindia.com
www.nseindia.com
www.google.co.in
Dalal Street
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