Professional Documents
Culture Documents
Phil 2008-09)
CHAPTER 1
1.07 ISSUERS 1.08 INTERMEDIARIES 1.09 REGULATORS 1.10 SECONDARY MARKET 1.11 RECENT INITIATIVES AND DEVELOPMENTS IN INDIAN SECURITIES MARKETS 1.12 INITIATIVE IN THE PIPELINE 1.13 RESEARCH IN SECURITIES MARKET
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
1.01 Introduction:
We are living in exciting times, witnessing a process of ever-increasing globalization and innovation in the financial markets. This is bringing with it sophistication and thus a need to better understand financial risks and develop tools to manage them. The financial markets and institutions have undergone significant changes keeping pace with the changing needs of market participants. Along side the rise of private finance, the financial markets are seeing an enhanced role of National Governments through Sovereign Wealth Funds. Venture capital funds and hedge funds have added new dimension to the market dynamics. India has not remained untouched by these developments worldwide. With its growing and increasingly complex market-oriented economy and increasing integration with global trade and Finance, Indias financial system has also innovated. In the securities markets, organizational innovation has been witnessed with corporatisation and demutualization of all the stock exchanges; institutional innovations in the form of emergence of regulators, Self Regulatory Organizations and clearing corporations and more recently, market innovations through a short selling and Securities Lending and Borrowing Scheme, Direct Market Access, addressing of the legal, regulatory, tax and market design issues in the development of the corporate bond market in the country, provision of a legal framework for trading of securitized debt, quicker procedures for registration and operation by FIIs, making PAN as the sole Identification number for all transactions in securities market and new derivative products such as currency futures.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
treasury bills). The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risks and returns. Once the new securities are issued in the primary market they are traded in the stock (secondary) market. The secondary market operates through two mediums, namely, the over-thecounter (OTC) market and the exchange-traded market. OTC markets are informal markets where trades are negotiated. Most of the trades in the government securities are in the OTC market. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC market. The other option is to trade using the infrastructure provided by the stock exchanges. The exchanges in India follow a systematic settlement period. All the trades taking place over a trading cycle (day=T) are settled together after a certain time (T+2 day). The trades executed on exchanges are cleared and settled by a clearing corporation. The clearing corporation acts as a counterparty and guarantees settlement. A variant of the secondary market is the forward market, where securities are traded for future delivery and payment. A variant of the forward market is Futures and Options market. Presently only two exchanges viz., National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange (BSE) provides trading in the Futures & Options.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
A comparative study of concentration of market indices and index stocks in different world markets is presented in the (Table 1-2). It is seen that the index stocks share of total market capitalization in India is 77.5% whereas US index accounted for 78.1% as on end 2007. The concentration levels in index stocks in 2006 were 81.6% for India and 89.5% for US. Thus, there is a decline in concentration in 2007. The ten largest index stocks share of total market capitalization is 26.8% in India and 12.4% in case of US.
The stock markets worldwide have grown in size as well as depth over the years. As can be observed from (Table 1-3), the turnover of all markets taken together have grown from US $ 47.39 trillion in 2005 to US $ 98.82 trillion in 2007. US alone accounted for about 43.12 % of worldwide turnover in 2007. The share of India in the total world turnover increased from 0.95% in 2006 to 1.12% in 2007.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
The market capitalization of all listed companies taken together on all markets stood at US $ 64.56 trillion in 2007 up from US $ 53.38 trillion in 2006. The share of US in worldwide market capitalization decreased from 36.39 % as at end-2006 to 30.90 % at end 2007, while Indian listed companies accounted for 2.82% of total market capitalization as at end 2007 (an increase from 1.53% at end of 2006). According to the World Development Indicators 2008, World Bank there has been an increase in market capitalization as percentage of Gross Domestic Product (GDP) in some of the major country groups as is evident from (Table 1-4). The increase, however, has not been uniform across countries. The market capitalization as a percentage of GDP was the highest at 126.1% for the high income countries as at end 2006 and lowest for low income countries at 67%. The Middle income countries have shown a remarkable improvement in market capitalization to GDP ratio from 49.5% in 2005 to 74.2% in 2006.
Market capitalisation as percentage of GDP in India stood at 89.8 % as at end 2006. The turnover ratio, which is a measure of liquidity, was 150.2 % for high-income countries and 93.3% for low-income countries in 2007. The total number of listed companies stood at 30,016 for high-income countries, 13,195 for middle-income countries and 6,911 for low-income countries as at end-2007.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
Thus, the four important elements of securities markets are the investors, the issuers, the intermediaries and regulators.
1.06 Investors
An investor is the backbone of the capital markets of any economy as he is the one lending his surplus resources for funding the setting up of or expansion of companies, in return for financial gain. Households investment pattern According to Reserve Bank of India (RBI) data, the household sector accounted for 80.5% of the Gross Domestic Savings in Fixed Income investment instruments during 2007-08, as against 84.5% in 2006-07 (Table 1-5). Mutual funds accounted for the bulk of securities markets investments with an absolute amount of Rs 568,000 million in 2007-08 against Rs. 398,030 million in 2006-07. 2007-08 saw huge investments in mutual funds to take advantage of the booming stock market. Besides, bank deposit rates
1.07 Issuers
Primary Markets An aggregate of Rs. 5,788,150 million (US $ 144,812 million) were raised by the government and corporate sector during 2007-08 as against Rs. 3,944,540 million (US $ 90,492 million) during the preceding year, an increase of 46.74%. Private placement accounted for 71.75% of the domestic resource mobilization by the corporate sector.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
(Table 1-6)
The Indian market is getting integrated with the global market, though in a limited way through Euro Issues, since they were permitted access in 1992. Indian companies have raised about Rs. 265,560 million i.e. US $ 6,644 million during 2007-08 through American Depository Receipts (ADRs)/Global Depository Receipts (GDRs), an increase of 56.17% as compared with Rs.170,050 million ( US $ 3901 million) during 2006-07. Of the total resources mobilized through the primary markets, the share of resources raised by the Government decreased from 51 % in 2006-07 to 42% in 2007-08. While the primary issues of the Central Government increased from Rs. 1,793,730 million in 2006-07 to Rs. 1,882,050 million in 2007-08, the resources raised by State Governments increased by 225% from Rs. 208,250 million in 2006-07 to Rs.677,790 million in 2007-08.
1.08 Intermediaries
The term market intermediary is usually used to refer to those who are in the business of managing individual portfolios, executing orders, dealing in or distributing securities and providing information relevant to the trading of securities. The market mediators play an important role on the stock exchange market; they put together the demands of the buyers with the offers of the security sellers. A large variety and number of intermediaries provide intermediation services in the Indian securities markets.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
Table 1-7 presents an overview of market participants in the Indian securities market.
The market intermediary has a close relationship with the investor with whose protection the Regulator is primarily tasked. As a consequence a large portion of the regulation of a securities industry is directed at the market intermediary. Regulations address entry criteria, capital and prudential requirements, ongoing supervision and discipline of entrants, and the consequences of default and failure. One of the issue concerning brokers is the need to encourage then to corporatize. Presently, 44% of the brokers are corporates. Corporatisation of
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
their business would help them compete with global players in capital markets at home and abroad. Corporatisation brings better standards of governance and better transparency hence increasing the confidence level of customers.
1.09 Regulators
The absence of conditions of perfect competition in the securities market makes the role of regulator extremely important. The regulator ensures that the market participants behave in a desired manner so that securities market continue to be a major source of finance for corporate and government and the interest of investors are protected. The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA), Ministry of Company Affairs (MCA), Reserve Bank of India (RBI) and SEBI. The activities of these agencies are coordinated by a High Level Committee on Capital Markets. The orders of SEBI under the securities laws are appellable before a Securities Appellate Tribunal. Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI. The powers of the DEA under the SCRA are also con-currently exercised by SEBI. The powers in respect of the contracts for sale and purchase of securities, gold related securities, money market securities and securities derived from these securities and ready forward contracts in debt securities are exercised concurrently by RBI. The SEBI Act and the Depositories Act are mostly administered by SEBI. The rules under the securities laws are framed by government and regulations by SEBI. All these are administered by SEBI. The powers under the Companies Act relating to issue and transfer of securities and non-payment of dividend are administered by SEBI in case of listed public companies and public companies proposing to get their securities listed. The SROs ensure compliance with their own rules as well as with the rules relevant for them under the securities laws.
Regulatory framework
At present, the five main Acts governing the securities markets are (a) the SEBI Act, 1992; (b) the Companies Act, 1956,which sets out the code of
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
conduct for the corporate sector in relation to issuance, allotment and transfer of securities, and disclosures to be made in public issues; (c) the Securities Contracts (Regulation) Act, 1956, which provides for regulation of transactions in securities through control over stock exchanges (d) the Depositories Act, 1996 which provides for electronic maintenance and transfer of ownership of demat shares and (e) Prevention of Money Laundering Act, 2002.
Legislations Capital Issues (Control) Act, 1947 The Act had its origin during the war in 1943 when the objective was to channel resources to support the war effort. It was retained with some modifications as a means of controlling the raising of capital by companies and to ensure that national resources were channeled into proper lines, i.e., for desirable purposes to serve goals and priorities of the government, and to protect the interests of investors. Under the Act, any firm wishing to issue securities had to obtain approval from the Central Government, which also determined the amount, type and price of the issue. As a part of the liberalisation process, the Act was repealed in 1992 paving way for market determined allocation of resources. SEBI Act, 1992 The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for (a) protecting the interests of investors in securities, (b) promoting the development of the securities market, and (c) regulating the securities market. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. It can conduct enquiries, audits and inspection of all concerned and adjudicate offences under the Act. It has power to register and regulate all market intermediaries and also to penalise them in case of violations of the provisions of the Act, Rules and Regulations made there under. SEBI has full autonomy and authority to regulate and develop an orderly securities market. Securities Contracts (Regulation) Act, 1956 It provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and aims to prevent undesirable transactions in securities. It gives Central Government regulatory jurisdiction
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
over (a) stock exchanges through a process of recognition and continued supervision, (b) contracts in securities, and (c) listing of securities on stock exchanges. As a condition of recognition, a stock exchange complies with conditions prescribed by Central Government. Organised trading activity in securities takes place on a specified recognised stock exchange. The stock exchanges determine their own listing regulations which have to conform to the minimum listing criteria set out in the Rules.
Depositories Act, 1996 The Depositories Act, 1996 provides for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by (a) making securities of public limited companies freely transferable subject to certain exceptions; (b) dematerializing the securities in the depository mode; and (c) Providing for maintenance of ownership records in a book entry form. In order to streamline the settlement process, the Act envisages transfer of ownership of securities electronically by book entry without making the securities move from person to person. The Act has made the securities of all public limited companies freely transferable, restricting the companys right to use discretion in effecting the transfer of securities, and the transfer deed and other procedural requirements under the Companies Act have been dispensed with. Companies Act, 1956 It deals with issue, allotment and transfer of securities and various aspects relating to company management. It provides for standard of disclosure in public issues of capital, particularly in the fields of company management and projects, information about other listed companies under the same management, and management perception of risk factors. It also regulates underwriting, the use of premium and discounts on issues, rights and bonus issues, payment of interest and dividends, supply of annual report and other information. Prevention of Money Laundering Act, 2002 The primary objective of the Act is to prevent money-laundering and to
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
provide for confi scation of property derived from or involved in moneylaundering. The term money-laundering is defined as whoever acquires, owns, possess or transfers any proceeds of crime; or knowingly enters into any transaction which is related to proceeds of crime either directly or indirectly or conceals or aids in the concealment of the proceeds or gains of crime within India or outside India commits the offence of money-laundering. Besides providing punishment for the offence of money-laundering, the Act also provides other measures for prevention of Money Laundering. The Act also casts an obligation on the intermediaries, banking companies etc to furnish information, of such prescribed transactions to the Financial Intelligence Unit- India, to appoint a principal officer, to maintain certain records etc. Rules and Regulations The Government have framed rules under the SCRA, SEBI Act and the Depositories Act. SEBI has framed regulations under the SEBI Act and the Depositories Act for registration and regulation of all market intermediaries, and for prevention of unfair trade practices, insider trading, etc. Under these Acts, Government and SEBI issue notifications, guidelines, and circulars which need to be complied with by market participants. The SROs like stock exchanges have also laid down their rules and regulations. Having discussed the various elements of securities market above the following section presents an overview ofSecondary Market segment of the Indian Securities Markets.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
ability to mobilize capital and diversify risk. The All- India market capitalisation ratio increased to 109.26 % in 2007-08 from 86.02 % in 2006-07. NSE Market Capitalisation ratio was 103.08 % during 2007-08 while BSE Market Capitalisation ratio was 109.01 %. The trading volumes on stock exchanges have been witnessing phenomenal growth over the past years. The trading volume, which peaked at Rs.28,809,900 million (US $ 617,708 million) in 2000-01, posted a substantial fall of 68.91 % to Rs.8,958,180 million (US $ 183,569 million) in 2001-02. However, from 2002-03 onwards the trading volumes picked up. It stood at Rs.9,689,098 million (US $ 203,981 million) in 2002-03 and further witnessed a year-on-year increase of 67.29 % in 2003-04 standing at Rs.16,209,326 million (US $ 373,573 million). The upsurge continued and in 2006-07, the turnover showed an increase of 21.40 % to Rs.29,014,715 million (US $ 665,628 million) from Rs.23,901,030 million (US $ 535,777 million) in 200506. (Table 1-8)
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
During 2007-08, the trading volumes on the CM segment of Exchanges increased signifi- cantly by 76.83% to Rs.51,308,160 million (US $ 1,283,667 million).
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
The relative importance of various stock exchanges in the market has undergone dramatic changes over a decade. The increase in turnover took place mostly at the big stock exchanges. The NSE yet again registered as the market leader with 90.27 % of total turnover (volumes on all segment) in 2007-08. Top 2 stock exchanges accounted for 99.99 % of turnover, while the rest 19 stock exchanges had negligible volumes during 2007-08 (Table 1-9).
The movement of the Nifty 50, the most widely used indicator of the market, is presented in Chart 1-1. The index movement has been responding to changes in the governments economic policies, the increase in FII in flows, etc.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
However, the year 2007-08 witnessed a favorable movement in the Nifty 50 Index, wherein it registered its all time high of 6357.10 in January 08, 2008. The point-to-point return of Nifty 50 was 23.89 % for 2007-08. Shareholding Pattern In the interest of transparency, the issuers are required to disclose shareholding pattern on a quarterly basis. Table 1-10 presents the sector wise shareholding pattern of the companies listed at NSE at end June 2008. It is observed that on an average the promoters held 57.45% of the total shares while non-promoters holding was 40.72%.
Individual held 12.86% and the institutional holding (FIIs, MFs, VCFs-Indian and Foreign) accounted for 13.19%.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
Government Securities The trading in non-repo government securities has been declining considerably since 2004-05. The aggregate trading volumes in central and state government dated securities on SGL declined from Rs. 3,982,988 million (US $ 91,374 million) in 2006-07 to Rs.5,003,047million (US $ 125,170 million) in 2007-08 (Table 1-8). Derivatives Market The number of instruments available in derivatives has been expanded. To begin with, SEBI only approved trading in index futures contracts based on Nifty 50 Index and BSE-30 (Sensex) Index. This was followed by approval for trading in options based on these indices and options on individual securities and also futures on interest rates derivative instruments (91-day Notional T-bills and 10-year Notional 6% coupon bearing as well as zero coupon bonds). On NSE, there are futures and options based on benchmark index Nifty 50, CNX IT Index, Bank Nifty Index, CNX Nifty Junior,CNX 100, Nifty Midcap 50 and S&P CNX Defty as well as futures and options on 263 single stocks as of December 2008. On BSE, Futures and Options are based on BSE 30 Sensex, BSE Teck, BSE Bankex, BSE Oil & Gas, BSE Metal and BSE FMCG, as well as futures and options on 119 single stocks. The mini derivative (futures and options) contracts on Nifty 50 and Sensex were introduced for trading on January 1, 2008 while the long term Options on Nifty 50 were launched on March 3, 2008. The futures and options on Defty were introduced on December 10, 2008. The total exchange traded derivatives witnessed a value of Rs.133,327,869 million (US $ 3,335,698 million) during 2007-08 as against Rs. 74,152,780 million (US $ 1,701,142 million) during the preceding year. NSE proved itself as the market leader contributing 98.18 % of the total turnover in 2007-08 in India. Not only in Indian scenario, but also in the global market NSE has created a niche for itself in terms of derivatives trading in various instruments.
and
developments
in
Indian
Corporatisation and Demutualization of Stock Exchanges To improve the governance mechanism of stock exchanges and to protect the interest of investors in securities market, corporatisation and demutualization of stock exchanges was mandated through an amendment to the Securities law in 2004. The benefi ts of
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
demutualisation, other than correcting the con icts of interests situation in governance of stock exchanges, include streamlining of business operations consistent with market needs, streamlined decision making by a professional management and capacity to raise capital which can be used to improve technology, seek innovationsor acquisition of other markets.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
demutualised in 2007-08. One stock exchange, i.e. Hyderabad Stock Exchange, failed to demutualise by the due date and has therefore been derecognized. Saurashtra Kutch Stock exchange, Mangalore Stock exchange and Magadh Stock exchange have been de-recognized for various irregularities/non compliances. As regards Coimbatore Stock Exchange which had sought voluntary withdrawal of recognition, the matter is sub-judice. Corporate Bond Markets The Government and regulators have well recognized that a well developed corporate bond market is essential for financial system effi ciency, stability and overall economic growth. A well functioning bond market provides for financial diversification and facilitates necessary financing not only for AAArated corporates but also less well known, sub-investment grade corporates and infrastructure developers. Considering that this market is not well developed in the country, the Government had set up a High-Level Expert Committee on Corporate Bonds and Securitisation (Patil Committee) to look in to legal, regulatory, tax and market design issues in the development of the corporate bond market. The Committee submitted its report to the Government in December, 2005. The Budget of 2006-07 announced that the Government has accepted the recommendations of the Report and that steps would be taken to create a single, unified exchange-traded market for corporate bonds. The measures already taken in respect of implementation of the recommendations of the Patil Committee include: (a) Amendment to the Securities Contracts (Regulation) Act, 1956 to include securitized instruments within the ambit of securities. (b) Amendment to the RBI Act to empower RBI to develop and regulate market for Repos in corporate bonds; (c) Enhancement of limit of FII Investment in corporate debt from US$ 0.5 bn to US$ 1.5 bn and further to US $ 3 bn.;(d) operationalising of trade reporting and trading platforms for corporate bonds at the major exchanges; (e) Waiver of TDS from corporate bonds traded on exchanges. Foreign investment in stock exchanges Foreign Investment upto 49% has been allowed in December 2006 in infrastructure companies in the securities markets, viz. stock exchanges, depositories and clearing corporations, with separate Foreign Direct Investment (FDI) cap of 26%and Foreign Institutional Investment (FII) cap of 23%. National Institute of Securities Markets (NISM) In the Budget of 2005-06, SEBI was authorized to set up NISM for teaching and training intermediaries in the securities markets and promoting research. NISM has since been set up and is functional. It has been set up as a public trust and is located in Mumbai, India.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
The SEBI, by establishing NISM, has envisioned a large and far reaching vision to articulate the desire expressed by the Indian government to promote securities market education and research. This vision presents an all encompassing educational initiative relevant for the securities markets of emerging nations. This is the first unified attempt of such magnitude and comprehension in the securities markets anywhere. It is a unique experiment in development of new branch of knowledge relevant for emerging securities markets. Towards accomplishing the desire of Government of India and vision of SEBI, NISM has launched an effort to deliver financial and securities education at various levels and across various segments in India and abroad. Securities Contracts (Regulation) Amendment Act, 2007 It was recognized that in India, the market for securitised debt remains underdeveloped. Despite two major initiatives, namely, the amendment of the National Housing Bank Act, 1987 (NHB Act) in 2000; and enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the market did not pick up because the facility of trading on stock exchanges was not available. This was, in part due to the fact that securitisation transactions under the NHB Act were not covered under the definition of securities in the SCR Act. As a result, buyers of securitised financial instruments have few exit options. Thus, the Securities Contracts Regulation Act, 1956 was amended in 2007 to include securitized instruments under the definition of securities and provide for disclosure based regulation for issue of the securitized instruments and the procedure thereof. This has been done keeping in view that there is considerable potential in the securities market for the certificates or instruments under securitisation transactions. The development of the securitised debt market is critical for meeting the huge requirements of the infrastructure sector, particularly housing sector, in the country. Replication of the securities markets framework for these instruments would facilitate trading on stock exchanges and in turn help development of the market in terms of depth and liquidity. PAN as the sole identification number The need for a Unique Identification Number (UIN) for market participants in the securities markets was felt in the interest of enforcement action. Presently, a person has variety of identification numbers such as Permanent Account Number (PAN) from CBDT, Depository Account Numbers from respective depositories, Bank Account Numbers from respective banks, MAPIN from SEBI, Unique Client Code from Exchanges, Director Identification Number from MCA, etc. and there is no arrangement to link these numbers.
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It was felt that the PAN issued by the CBDT could be a UIN for market participants. A PAN could identify all participants and the account managers (Depositories, Banks, Exchanges, Insurance Companies, Pension Fund Managers, Post Offices, and Intermediaries etc.) must use these numbers. Following a budget announcement to this effect in the budget of 2007-08, SEBI has declared PAN the sole identification number for all transactions in securities market. It is an investor friendly measure as he does not have to maintain different identification numbers for different kinds of transactions/ different segments in financial markets. In the Budget of 2008-09 it was proposed that the requirement of PAN be extended to all transactions in the financial market subject to suitable threshold exemption limits. IPO grading SEBI has made it compulsory for companies coming out with IPOs of equity shares to get their IPOs graded by at least one credit rating agency registered with SEBI from May 1, 2007. This measure is intended to provide the investor with an informed and objective opinion expressed by a professional rating agency after analyzing factors like business and financial prospects, management quality and corporate governance practices etc. The grading would be disclosed in the prospectus, abridged prospectus and in every advertisement for IPOs. Real Estate Mutual Funds After careful and detailed deliberations and consultation process, SEBI approved the launch of Real Estate Mutual funds (REMFs) and accordingly made necessary amendments to the SEBI (Mutual Fund) Regulations 1996 in April, 2008. This product would allow retail investors to invest in real estate in a much more flexible and convenient manner. A REMF has investment objective to invest directly or indirectly in real estate property. Real estate the largest asset class in the world, may serve as a hedge against other asset classes like debt or equity. By including it in ones portfolio, an investor reduces risk and can achieve stable returns. Unlike other asset classes, real estate rarely earns negative returns, and does not suffer high volatility. Over years, the value of real estate usually increases manifold. This also makes it a good hedge against inflation. Real estate is a good long-term investment. New derivative products
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
The Mini derivative Futures & Options contract was introduced for trading on S&P CNX Nifty on January 1, 2008 while the long term option contracts on S&P CNX Nifty were introduced for trading on March 3, 2008.
Volatility Index With rapid changes in volatility in securities market from time to time, a need was felt for an openly available and quoted measure of market volatility in the form of an index to help market participants. On January 15, 2008, Securities and Exchange Board of India recommended Exchange to construct and disseminate the volatility index. Volatility Index is a measure, of the amount by which an underlying Index is expected to uctuate, in the near term, (calculated as annualised volatility, denoted in percentage e.g. 20%) based on the order book of the underlying index options. On April 08, 2008, NSE launched the Volatility Index, India VIX, based on the Nifty 50 Index Option prices. From the best bid-ask prices of Nifty 50 Options contracts, a volatility fi gure (%) is calculated which indicates the expected market volatility over the next 30 calendar days. The India VIX is a simple but useful tool in determining the overall volatility of the market . Short Selling There were regulatory restrictions in the Indian markets which enabled only retail investors to short sell. Thus, there was no level playing field between various classes of investors. A need was felt to bridge this gap and provide equal leveraging opportunities for all classes of investors. After due consultation process the SEBI laid down the broad framework to permit all classes of investors to short sell, in December, 2007. Certain conditions were imposed on the FIIs while undertaking a short selling transaction. These, inter-alia, include that borrowing of equity shares by FIIs would only be for the purpose of delivery into short sale and that the margin / collateral would be maintained by FIIs only in the form of cash. Simultaneously, the scope of the existing securities lending and borrowing scheme was widened into a full- edged lending and borrowing scheme enabling participation of all classes of investors, including retail investors. This short selling and securities lending and borrowing scheme was operationalised with effect from April 21, 2008. Investment options for Navaratna and Miniratna Public Sector Enterprises The Navaratna and Miniratna Public Sector Enterprises have been allowed to invest in public sector mutual funds subject to the condition that they would
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not invest more than 30% of the available surplus funds in equity mutual funds and the Boards of PSEs would decide the guidelines, procedures and management control systems for such investment in consultation with their administrative Ministries.
Investor Protection and Education Fund (IPEF) SEBI has set up the Investor Protection and Education Fund (IPEF) with the purpose of investor education and related activities. SEBI has contributed a sum of Rs.10 crore toward the initial corpus of the IPEF from the SEBI General Fund. In addition following amounts will also be credited to the IPEF namely: (i) Grants and donations given to IPEF by the Central Government, State Governments or any institution approved by SEBI for the purpose of the IPEF; (ii) Interest or other income received out of the investments made from the IPEF; and (iii) Such other amount that SEBI may specify in the interests of the investors. Direct Market Access During April 2008, Securities & Exchange Board of India (SEBI) allowed the direct market access (DMA) facility to the institutional investors. DMA allows brokers to offer clients direct access to the exchange trading system through the brokers infrastructure without manual intervention by the broker. DMA facility give clients direct control over orders, help in faster execution of orders, reduce the risk of errors from manual order entry and lend greater transparency and liquidity. DMA also leads to lower impact cost for large orders, better audit trails and better use of hedging and arbitrage opportunities through the use of decision support tools/algorithms for trading. Cross Margining Many trading members undertake transactions on both the cash and derivative segments of an Exchange. They keep separate deposits with the exchange for taking positions in two different segments. In order to improve the efficiency of the use of the margin capital by market participants SEBI introduced cross margining for institutional investors in May 2008. In December 2008, SEBI extended the cross margin facility across Cash and F&O segment to all the market participants. The salient features of cross margining are as under : 1. Cross margin is available across Cash and F&O segment and to all categories of
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market participants. 2. The positions of clients in both the Cash and F&O segments to the extent they offset each other shall be considered for the purpose of cross margining as per the following priority. a) Index futures and constituent stock futures in F&O segment. b) Index futures and constituent stock positions in Cash segment. c) Stock futures in F&O segment and stock positions in Cash segment. 3. In order to extend the cross margin benefit as per 2 (a) and (b) above, the basket of constituent stock futures/ stock positions shall be a complete replica of the index futures. 4. The positions in F&O segment for stock futures and index futures shall be in the same expiry month to be eligible for cross margin benefit. 5. Positions in option contracts shall not be considered for cross margining benefit. 6. The Computation of cross margin shall be at client level on an on-line real time basis. 7. For institutional investors the positions in Cash segment shall be considered only after confirmation by the custodian on T+1 basis and on confirmation by the clearing member in F&O segment. 8. The positions in the Cash and F&O segment shall be considered for cross margining only till the time the margins are levied on such positions. 9. The positions which are eligible for offset, shall be subject to spread margins. The spread margins shall be 25% of the applicable upfront margins on the offsetting positions. ASBA To make the existing public issue process more efficient, SEBI introduced a supplementary process of applying in public issues, viz, the Applications
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Supported by Blocked Amount (ASBA) in July 2008. ASBA is an application containing an authorization to block the application money in the bank account, for subscribing to an issue. If an investor is applying through ASBA, his application money is debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized, or the issue is withdrawn/failed .In case of rights issue his application money is debited from the bank account after the receipt of instruction from the registrars. The ASBA process is available in all public issues made through the book building route. In September 2008, the ASBA facility was extended to Rights Issue.
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the markets and regulations. As a result, not only the intermediaries benefit due to the improvement in the quality of their services, but also the career prospectus of the certified professionals is better. Thus, the confidence of the investors in the market increases. NSE has evolved a testing and certification mechanism known as the National Stock Exchanges Certification in Financial Markets (NCFM). It is an on-line fully automated nation-wide testing and certification system where the entire process from generation of question paper, testing, assessing, scores reporting and certifying is fully automated. It tests practical knowledge and skills, that are required to operate in financial markets. A certificate is awarded to those personnel who qualify the tests, which indicates that they have a proper understanding of the market and skills to service different constituents of the market. It offers 17 securities market related modules.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
CHAPTER -2
Introduction
Exchange)
to )
NSE
(National
Stock
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
management. The day-to-day management of the Exchange is delegated to the Managing Director who is supported by a team of professional staff.
establishing a nation-wide trading facility for equities, debt instruments and hybrids, ensuring equal access to investors all over the country through an appropriate communication network, providing a fair, efficient and transparent securities market to investors using electronic trading systems, enabling shorter settlement cycles and book entry settlements systems, and meeting the current international standards of securities markets.
The standards set by NSE in terms of market practices and technology have become industry benchmarks and are being emulated by other market participants. NSE is more than a mere market facilitator. It's that force which is guiding the industry towards new horizons and greater opportunities.
NSCCL
NCCL
NSETECH
IISL
NSE
NSE.IT
NSDL
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
The logo of the NSE symbolises a single nationwide securities trading facility ensuring equal and fair access to investors, trading members and issuers all over the country. The initials of the Exchange viz., N, S and E have been etched on the logo and are distinctly visible. The logo symbolises use of state of the art information technology and satellite connectivity to bring about the change within the securities industry. The logo symbolises vibrancy and unleashing of creative energy to constantly bring about change through innovation.
November 1992 April 1993 May 1993 June 1994 November 1994 March 1995 April 1995 June 1995
Incorporation Recognition as a stock exchange Formulation of business plan Wholesale Debt Market segment goes live Capital Market (Equities) segment goes live Establishment of Investor Grievance Cell Establishment of NSCCL, the first Clearing Corporation Introduction of centralised insurance cover for all trading members
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July 1995 October 1995 April 1996 April 1996 June 1996 November 1996 November 1996 December 1996 December 1996 December 1996
Establishment of Investor Protection Fund Became largest stock exchange in the country Commencement of clearing and settlement by NSCCL Launch of S&P CNX Nifty Establishment of Settlement Guarantee Fund Setting up of National Securities Depository Limited, first depository in India, co-promoted by NSE Best IT Usage award by Computer Society of India Commencement of trading/settlement in dematerialized securities Dataquest award for Top IT User
February 1997 Regional clearing facility goes live November 1997 May 1998 May 1998 July 1998 August 1998 Best IT Usage award by Computer Society of India Promotion of joint venture, India Index Services & Products Limited (IISL) Launch of NSE's Web-site: www.nse.co.in Launch of NSE's Certification Programme in Financial Market CYBER CORPORATE OF THE YEAR 1998 award
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CHIP Web Award by CHIP magazine Setting up of NSE.IT Launch of NSE Research Initiative
February 2000 Commencement of Internet Trading June 2000 September 2000 November 2000 December 2000 June 2001 July 2001 November 2001 December 2001 January 2002 May 2002 October 2002 January 2003 June 2003 Commencement of Derivatives Trading (Index Futures) Launch of 'Zero Coupon Yield Curve' Launch of Broker Plaza by Dotex International, a joint venture between NSE.IT Ltd. and i-flex Solutions Ltd. Commencement of WAP trading Commencement of trading in Index Options Commencement of trading in Options on Individual Securities Commencement of trading in Futures on Individual Securities
Launch of NSE VaR for Government Securities Launch of Exchange Traded Funds (ETFs) NSE wins the Wharton-Infosys Business Transformation Award in the Organization-wide Transformation category Launch of NSE Government Securities Index Commencement of trading in Retail Debt Market Launch of Interest Rate Futures
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August 2003 June 2004 August 2004 March 2005 June 2005 December 2006 January 2007 March 2007 June 2007 October 2007 January 2008
Launch of Futures & options in CNXIT Index Launch of STP Interoperability Launch of NSEs electronic interface for listed companies India Innovation Award by EMPI Business School, New Delhi Launch of Futures & options in BANK Nifty Index 'Derivative Exchange of the Year', by Asia Risk magazine Launch of NSE CNBC TV 18 media centre NSE, CRISIL announce launch of IndiaBondWatch.com NSE launches derivatives on Nifty Junior & CNX 100 NSE launches derivatives on Nifty Midcap 50 Introduction of Mini Nifty derivative contracts on 1st January 2008 Introduction of long term option contracts on S&P CNX Nifty Index Launch of India VIX Launch of Securities Lending & Borrowing Scheme Launch of Currency Derivatives
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nation: its main function is to liquify capital by enabling a person who has invested money in, say a factory or railway, to convert it into cash by disposing off his shares in the enterprise to someone else. Investment in Joint stock companies is attractive to the public, because the value of the shares is announced day after day in the stock exchanges, and shares quoted on the exchanges are capable of almost immediate conversion into money. In modern days a company stands little chance of inducing the public to subscribe to its capital, unless its shares are quoted in an approved stock exchange. All public companies are anxious to obtain permission from reputed exchanges for securing quotations of their shares and the management of a company is anxious to inform the investing public that the shares of the company will be quoted on the stock exchange.
The stock exchange is really an essential pillar of the private sector corporate economy. It discharges three essential functions: First, the stock exchange provides a market place for purchase and sale of securities viz. shares, bonds, debentures etc. It, therefore, ensures the free transferability of securities which is the essential basis for the joint stock enterprise system. Secondly, the stock exchange provides the linkage between the savings in the household sector and the investment in the corporate economy. It mobilizes savings, channelises them as securities into these enterprises which are favoured by the investors on the basis of such criteria as future growth prospects, good returns and appreciation of capital. Thirdly, by providing a market quotation of the prices of shares and bondsa sort of collective judgment simultaneously reached by many buyers and sellers in the marketthe stock exchange serves the role of a barometer, not only of the state of health of individual companies, but also of the nations economy as a whole. National Stock Exchange of India (NSE) was given recognition as a stock exchange in April 1993. NSE was set up with the objectives of
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(a) establishing a nationwide trading facility for all types of securities, (b) ensuring equal access to all investors all over the country through an appropriate communication network, (c) providing a fair, efficient and transparent securities market using electronic trading system, (d) enabling shorter settlement cycles and book entry settlements and (e) meeting the international benchmarks and standards. Within a short span of time, above objectives have been realized and the Exchange has played a leading role as a change agent in transforming the Indian Capital Markets to its present form. NSE has set up infrastructure that serves as a role model for the securities industry in terms of trading systems, clearing and settlement practices and procedures. The standards set by NSE in terms of market practices, products, technology and service standards have become industry benchmarks and are being replicated by other market participants. It provides screen-based automated trading system with a high degree of transparency and equal access to investors irrespective of geographical location. The high level of information dissemination through on-line system has helped in integrating retail investors on a nation-wide basis. The Exchange currently operates four market
segments, namely Capital Market Segment, Wholesale Debt Market Segment, Futures an Options segment and the Currency Derivatives Segment. NSE has been playing the role of a catalytic agent in reforming the market in terms of microstructure and market practices. Right from its inception, the exchange has adopted the purest form of demutualised set up whereby the ownership, management and trading rights are in the hands of three different sets of people. This has completely eliminated any conflict of interest and helped NSE to aggressively pursue policies and practices within a public interest framework. It has helped in shifting the trading platform from the trading hall in the premises of the exchange to the computer terminals at the premises of the trading members located country-wide and subsequently to the personal computers in the homes of investors. Settlement risks have been eliminated with NSEs innovative endeavors in the area of clearing and settlement viz., reduction of settlement cycle, professionalisation of the trading members, fine-tuned risk management system, dematerialisation and electronic transfer of securities and establishment of clearing corporation.
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As a consequence, the market today uses the state-of-art information technology to provide an efficient and transparent trading, clearing and settlement mechanism. NSE provides a trading platform for of all types of securities-equity and debt, corporate government and derivatives. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, it commenced operations in the Wholesale Debt Market (WDM) segment in June 1994, in the Capital Market (CM) segment in November 1994, in Futures & Options (F&O) segment in June 2000 and in Currency Derivative segment (CDS) in August 2008. The Exchange started providing trading in retail debt of Government Securities in January 2003. During the year 2007-08, it accounted for over 90 % of total trading value (debt, derivatives and equity) in the stock exchanges and 69% in equities and more than 98% in derivatives. Wholesale Debt Market segment provides the trading platform for trading of a wide range of debt securities. Its product, which is now disseminated jointly with FIMMDA, the FIMMDA NSE MIBID/MIBOR is used as a benchmark rate for majority of deals struck for Interest Rate Swaps, Forwards Rate Agreements, Floating Rate Debentures and Term Deposits in the country. Its Zero Coupon Yield Curve as well as NSE-VaR for Fixed Income Securities have also become very popular for valuation of sovereign securities across all maturities irrespective of its liquidity and facilitated the pricing of corporate papers and GOI Bond Index.
NSEs Capital Market segment offers a fully automated screen based trading system, known as the National Exchange for Automated Trading (NEAT) system, which operates on a strict price/time priority. It enables members from across the country to trade simultaneously with enormous ease and efficiency. NSEs Futures & Options segment provides trading of a wide range of derivatives like Index Futures, Index Options, Stock Options and Stock Futures. NSEs Currency Derivatives segment provides trading on currency futures contracts on the USD-INR which commenced on August 29, 2008.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
NSE believes that technology will continue to provide the necessary impetus for the organisation to retain its competitive edge and ensure timeliness and satisfaction in customer service. In recognition of the fact that technology will continue to redefine the shape of the securities industry, NSE stresses on innovation and sustained investment in technology to remain ahead of competition. NSE's IT set-up is the largest by any company in India. It uses satellite communication technology to energise participation from around 200 cities spread all over the country. In the recent past, capacity enhancement measures were taken up in regard to the trading systems so as to effectively meet the requirements of increased users and associated trading loads. With upgradation of trading hardware, NSE today can handle up to 15 million trades per day in Capital Market segment. In order to capitalise on in-house expertise in technology, NSE set up a separate company, NSE Technology Services Ltd. which is expected to provide a platform for taking up all IT related assignments of NSE.
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
NEAT is a state-of-the-art client server based application. At the server end, all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. The trading server software runs on a fault tolerant STRATUS main frame computer while the client software runs under Windows on PCs. The telecommunications network which was using X.25 protocol and is the backbone of the automated trading system is being upgraded to use the more popular and modern IP Protocol. This is a major project involving use of X.25 and IP in parallel and ensuring smooth transition to IP. Each trading member trades on the NSE with other members through a PC located in the trading member's office, anywhere in India. The trading members on the various market segments such as CM / F&O, WDM are linked to the central computer at the NSE through dedicated leased lines and VSAT terminals. The Exchange uses powerful RISC -based UNIX servers, procured from HP for the back office processing. The latest software platforms like ORACLE 10g RDBMS, SQL/ORACLE FORMS Front Ends. Technology has been the backbone of the Exchange. Providing the services to the investing community and the market participants using technology at the cheapest possible cost has been its main thrust. NSE chose to harness technology in creating a new market design. It believes that technology provides the necessary impetus for the organisation to retain its competitive edge and ensure timeliness and satisfaction in customer service. In recognition of the fact that technology will continue to redefine the shape of the securities industry, NSE stresses on innovation and sustained investment in technology to remain ahead of competition. NSE is the first exchange in the world to use satellite communication technology for trading. It uses satellite communication technology to energize participation from about 2,956 VSATs from nearly 245 cities spread all over the country. The list of towns and cities and the statewise distribution of VSATs as at end March 2008 is presented in (Table 1-11).
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
Its trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art client server based application. At the server end all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform response time of less than 1.5 seconds. NSE has been continuously undertaking capacity enhancement measures so as to effectively meet the requirements of increased users and associated trading loads. NSE has also put in place NIBIS (NSEs Internet Based Information System) for on-line real-time dissemination of trading information over the Internet. As part of its business continuity plan, NSE has established a disaster back-up site at Chennai along with its entire infrastructure, including the satellite earth station and the high-speed optical fibre link with its main site at Mumbai. This site at Chennai is a replica of the production environment at Mumbai. The transaction data is backed up on near real time basis from the main site to the disaster back-up site through the 2 mbps high-speed link to keep both the sites all the time synchronised with each other. The various application systems that NSE uses for its trading as well clearing and settlement and other operations form the backbone of the Exchange. The application systems used for the day-to-day functioning of the Exchange can be divided into (a) Front end applications and (b) Back office applications. In the front office, there are 6 applications: (i) NEAT CM system takes care of trading of securities in the Capital Market segment that includes equities, debentures/notes as well as retail Gilts. The NEAT CM application has a split architecture wherein the split is on the securities and users. The application runs on two Stratus systems with Open Strata Link (OSL). The application has been benchmarked to support 15,000 users and handle more than 3 million trades daily. This application also provides data feed for processing to some other systems like Index, OPMS through TCP/IP. This is a direct interface with the trading members of the CM segment of the Exchange for entering the orders into the main system. There is a two way communication between the NSE main system and the front end terminal of the trading member. (ii) NEAT WDM system takes care of trading of securities in the Wholesale Debt Market (WDM) segment that includes Gilts, Corporate Bonds, CPs, T-Bills, etc. This is a direct interface with the trading members of the WDM segment of the Exchange for entering the orders/trades into the main system. There is a two way communication between the NSE main system and the front end terminal of the trading member.
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(iii) NEAT F&O system takes care of trading of securities in the Futures and Options (F&O) segment that includes Futures on Index as well as individual stocks and Options on Index as well as individual stocks. This is a direct interface with the trading members of the F&O segment of the Exchange for entering the orders into the main system. There is a two way communication between the NSE main system and the front end terminal of the trading member. (iv) NEAT IPO system is an interface to help the initial public offering of companies which are issuing the stocks to raise capital from the market. This is a direct interface with the trading members of the CM segment who are registered for undertaking order entry on behalf of their clients for IPOs. NSE uses the NEAT IPO system that allows bidding in several issues concurrently. There is a two way communication between the NSE main system and the front end terminal of the trading member. (v) NEAT MF system is an interface with the trading members of the CM segment for order collection of designated Mutual Funds units (vi) NEAT CD System is trading system for currency derivatives. Currently currency futures are trading in the segment. The exchange also provides a facility to its members to use their own front end software through the CTCL (computer to computer link) facility. The member can either develop his own software or use products developed by CTCL vendors. In the back office, the following important application systems are operative: (i) NCSS (Nationwide Clearing and Settlement System) is the clearing and settlement system of the NSCCL for the trades executed in the CM segment of the Exchange. The system has 3 important interfaces OLTL (Online Trade loading) that takes each and every trade executed on real time basis and allocates the same to the clearing members, Depository Interface that connects the depositories for settlement of securities and Clearing Bank Interface that connects the 13 clearing banks for settlement of funds. It also interfaces with the clearing members for all required reports. Through collateral management system it keeps an account of all available collaterals on behalf of all trading/clearing members and integrates the same with the position monitoring of the trading/clearing members.
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The system also generates base capital adequacy reports. (ii) FOCASS is the clearing and settlement system of the NSCCL for the trades executed in the F&O segment of the Exchange. It interfaces with the clearing members for all required reports. Through collateral management system it keeps an account of all available collaterals on behalf of all trading/clearing members and integrates the same with the position monitoring of the trading/clearing members. The system also generates base capital adequacy reports. (iii) CDCSS is the clearing and settlement system for trades executed in the currency derivative segment. Through collateral management system it keep an account of all available collateral on behalf of all trading / clearing members and integrates the same with the position monitoring of the trading / cleaning members. The System also generate base capital adequacy report. (iv) Surveillance system offers the users a facility to comprehensively monitor the trading activity and analyse the trade data online and of ine. (v) OPMS the online position monitoring system that keeps track of all trades executed for a trading member vis--vis its capital adequacy. (vi) PRISM is the parallel risk management system for F&O trades using Standard Portfolio Analysis (SPAN). It is a system for comprehensive monitoring and load balancing of an array of parallel processors that provides complete fault tolerance. It provides real time information on initial margin value, mark to market profit or loss, collateral amounts, contract-wise latest prices, contractwise open interest and limits. The system also tracks online real time client level portfolio base upfront margining and monitoring. (vii) PRISM-CD is the risk management system of the currency derivatives segment. It is similar in features to the PRISM of F&O segment. (viii)Data warehousing that is the central repository of all data in CM as well as F&O segment of the Exchange. (ix) Listing system that captures the data from the companies which are listed in the Exchange
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
for corporate
governance and integrates the same to the trading system for necessary broadcasts for data dissemination process and (x) Membership system that keeps track of all required details of the Trading Members of the Exchange. The exchange operates and manages a nationwide network. This network of over 2000 VSATs and 3000 Leased Lines is being migrated from X.25 to IP from 2008 onwards and is expected to complete by early 2009. In the new IP network, members have an advantage of a more generic and latest IP protocol and an overall better design, in terms of bandwidth and resilience. Currently the network has over 2000 VSATs, 1500 Leased Lines and 9 POPs (Point of Presence) across the country. NOW (Neat on Web) NSE is also offering internet based trading services to NSE members. This facility is branded as NOW 'NEAT on Web'. NOW provides an internet portal for NSE members and their authorized clients to transact orders and trades to the various market of NSE viz. CM, F&O and Currency. The members can also access NOW through their existing VSAT/Leased line, in addition to internet links. The various features provided by NOW are: (a) Comprehensive Administration features (b) Flexible Risk Management System (c) High speed dealer terminals (d) Online trading facility for investors
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CHAPTER 3
Capital )
Market
Segment-
Equities
3.01 Introduction
NSE started trading in the equities segment (Capital Market segment) on November 3, 1994 and within a short span of 1 year became the largest exchange in India in terms of volumes transacted. Trading volumes in the equity segment have grown rapidly with average daily turnover increasing from Rs.17 crores during 1994-95 to Rs.14,148 crores during FY 2007-08. During the year 2007-08, NSE reported a turnover of Rs.3,551,038 crores in the equities segment. The Equities section provides you with an insight into the equities segment of NSE and also provides real-time quotes and statistics of the equities market. In-depth information regarding listing of securities, trading systems
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& processes, clearing and settlement, risk management, trading statistics etc are available here.
Rolling Settlement / Regular Lot Market / Normal Market Limited Physical Market Institutional Segment Trade for Trade Segment
Rolling Settlement In a rolling settlement, each trading day is considered as a trading period and trades executed during the day are settled based on the net obligations _____________________________________________________________________________ _ 48
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for the day. At NSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.
Limited Physical Market Pursuant to the directive of SEBI to provide an exit route for small investors holding physical shares in securities mandated for compulsory dematerialised settlement, the Exchange has provided a facility for such trading in physical shares not exceeding 500 shares. This market segment is referred to as 'Limited Physical Market' (small window). The Limited Physical Market was introduced on June 7, 2001 Institutional Segment The Reserve Bank of India had vide a press release on October 21, 1999, clarified that inter-foreign-institutional-investor (inter-FII) transactions do not require prior approval or post-facto confirmation of the Reserve Bank of India, since such transactions do not affect the percentage of overall FII holdings in Indian companies. (Inter FII transactions are however not permitted in securities where the FII holdings have already crossed the overall limit due to any reason). To facilitate execution of such Inter-Institutional deals in companies where the cut-off limit of FII investment has been reached, the Exchange introduced a new market segment on December 27, 1999. The securities where FII investors and FII holding has reached the cut-off limit as specified by RBI (2% lower than the ceiling specified by RBI) from time to time would be available for trading in this market type for exclusive selling by FII clients. The cut off limits for companies with 24% ceiling is 22%, for companies with 30% ceiling, is 28% and for companies with 40% ceiling is 38%. Similarly, the cut off limit for public sector banks (including State Bank of India) is 18% whose ceiling is 20%. The list of securities eligible / become ineligible for trading in this market type would be notified to members from time to time. Trade for Trade Segment Trading in this segment is available only for the securities
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Contribution of NSE In the Evolution of Indian Securities Market - By Chitra Rani (M.Phil 2008-09)
Which have not established connectivity with both the depositories as per SEBI directive. The list of these securities is notified by SEBI from time to time. On account of surveillance action
In case of a 10% movement of either of these indices, there would be a one-hour market halt if the movement takes place before 1:00 p.m. In case the movement takes place at or after 1:00 p.m. but before 2:30 p.m. there would be trading halt for hour. In case movement takes place at or after 2:30 p.m. there will be no trading halt at the 10% level and market shall continue trading. In case of a 15% movement of either index, there shall be a two-hour halt if the movement takes place before 1 p.m. If the 15% trigger is reached on or after 1:00p.m. but before 2:00 p.m., there shall be a one-hour halt. If the 15% trigger is reached on or after 2:00 p.m. the trading shall halt for remainder of the day. In case of a 20% movement of the index, trading shall be halted for the remainder of the day.
These percentages are translated into absolute points of index variations on a quarterly basis. At the end of each quarter, these absolute points of index variations are revised for the applicability for the next quarter. The absolute points are calculated based on closing level of index on the last day of the trading in a quarter and rounded off to the nearest 10 points in case of S&P CNX Nifty.
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B. Debentures
Partly Convertible Debentures Fully Convertible Debentures Non Convertible Debentures Warrants / Coupons / Secured Premium Notes/ other Hybrids Bonds
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Special Term orders, Negotiated Trade Orders and Stop Loss orders depending on their order attributes. Odd Lot Market All orders whose order size is less than the regular lot size are traded in the odd-lot market. An order is called an odd lot order if the order size is less than regular lot size. These orders do not have any special terms attributes attached to them. In an odd-lot market, both the price and quantity of both the orders (buy and sell) should exactly match for the trade to take place. Currently the odd lot market facility is used for the
Limited Physical Market as per the SEBI directives. Auction Market In the Auction Market, auctions are initiated by the Exchange on behalf of trading members for settlement related reasons. There are 3 participants in this market.
Initiator - the party who initiates the auction process is called an initiator Competitor - the party who enters orders on the same side as of the initiator Solicitor - the party who enters orders on the opposite side as of the initiator
Spot Market Spot orders are similar to the normal market orders except that spot orders have different settlement periods vis--vis normal market. These orders do not have any special terms attributes attached to them. Currently the Spot Market is not in use. 3.07.2 Trading System - Order Books The NSE trading system provides complete flexibility to members in the kinds of orders that can be placed by them. Orders are first numbered and time-stamped on receipt and then immediately processed for potential match. Every order has a distinctive order number and a unique time stamp on it. If a match is not found, then the orders are stored in different 'books'. Orders are stored in price-time priority in various books in the following sequence: -Best Price -Within Price, by time priority.
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Price priority means that if two orders are entered into the system, the order having the best price gets the higher priority. Time priority means if two orders having the same price are entered, the order that is entered first gets the higher priority. The Equities segment has following types of books: Regular Lot Book The Regular Lot Book contains all regular lot orders that have none of the following attributes attached to them. - All or None (AON) - Minimum Fill (MF) - Stop Loss (SL)
Special Terms Book The Special Terms book contains all orders that have either of the following terms attached: - All or None (AON) - Minimum Fill (MF) Note: Currently, special term orders i.e. AON and MF are not available on the system as per the SEBI directives. Negotiated Trade Book The Negotiated Trade book contains all negotiated order entries captured by the system before they have been matched against their counterparty trade entries. These entries are matched with identical counterparty entries only. It is to be noted that these entries contain a counterparty code in addition to other order details. Stop-Loss Book Stop Loss orders are stored in this book till the trigger price specified in the order is reached or surpassed. When the trigger price is reached or surpassed, the order is released in the Regular lot book. The stop loss condition is met under the following circumstances: Sell order - A sell order in the Stop Loss book gets triggered when the last traded price in the normal market reaches or falls below the trigger price of the order. Buy order - A buy order in the Stop Loss book gets triggered when the last traded price in the normal market reaches or exceeds the trigger price of the order. Odd Lot Book The Odd lot book contains all odd lot orders (orders with quantity less than
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marketable lot) in the system. The system attempts to match an active odd lot order against passive orders in the book. Currently, pursuant to a SEBI directive, the Odd Lot Market is being used for orders that have quantity less than or equal to 500 viz. the Limited Physical Market. Spot Book The Spot lot book contains all spot orders (orders having only the settlement period different) in the system. The system attempts to match an active spot lot order against the passive orders in the book. Currently the Spot Market book type is not in use. Auction Book This book contains orders that are entered for all auctions. The matching process for auction orders in this book is initiated only at the end of the solicitor period.
3.07.3.a Trading System - Order Matching Rules The best buy order is matched with the best sell order. An order may match partially with another order resulting in multiple trades. For order matching, the best buy order is the one with the highest price and the best sell order is the one with the lowest price. This is because the system views all buy orders available from the point of view of a seller and all sell orders from the point of view of the buyers in the market. So, of all buy orders available in the market at any point of time, a seller would obviously like to sell at the highest possible buy price that is offered. Hence, the best buy order is the order with the highest price and the best sell order is the order with the lowest price. Members can proactively enter orders in the system, which will be displayed in the system till the full quantity is matched by one or more of counterorders and result into trade(s) or is cancelled by the member. Alternatively, members may be reactive and put in orders that match with existing orders in the system. Orders lying unmatched in the system are 'passive' orders and orders that come in to match the existing orders are called 'active' orders. Orders are always matched at the passive order price. This ensures that the earlier orders get priority over the orders that come in later.
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(I) Time Conditions DAY - A Day order, as the name suggests, is an order which is valid for the day on which it is entered. If the order is not matched during the day, the order gets cancelled automatically at the end of the trading day. GTC - A Good Till Cancelled (GTC) order is an order that remains in the system until it is cancelled by the Trading Member. It will therefore be able to span trading days if it does not get matched. The maximum number of days a GTC order can remain in the system is notified by the Exchange from time to time. GTD - A Good Till Days/Date (GTD) order allows the Trading Member to specify the days/date up to which the order should stay in the system. At the end of this period the order will get flushed from the system. Each day/date counted is a calendar day and inclusive of holidays. The days/date counted are inclusive of the day/date on which the order is placed. The maximum number of days a GTD order can remain in the system is notified by the Exchange from time to time.
IOC - An Immediate or Cancel (IOC) order allows a Trading Member to buy or sell a security as soon as the order is released into the market, failing which the order will be removed from the market. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately. (II) Price Conditions Limit Price/Order An order that allows the price to be specified while entering the order into the system. Market Price/Order An order to buy or sell securities at the best price obtainable at the time of entering the order. Stop Loss (SL) Price/Order The one that allows the Trading Member to place an order which gets activated only when the market price of the relevant security reaches or crosses a threshold price. Until then the order does not enter the market. A sell order in the Stop Loss book gets triggered when the last traded price in the normal market reaches or falls below the trigger price of the order. A buy order in the Stop Loss book gets triggered when the last traded price in the normal market reaches or exceeds the trigger price of the order. E.g. If for stop loss buy order, the trigger is 93.00, the limit price is 95.00 and the market (last traded) price is 90.00, then this order is released into the system once the market price reaches or exceeds 93.00. This order is added
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to the regular lot book with time of triggering as the time stamp, as a limit order of 95.00 (III) Quantity Conditions Disclosed Quantity (DQ)- An order with a DQ condition allows the Trading Member to disclose only a part of the order quantity to the market. For example, an order of 1000 with a disclosed quantity condition of 200 will mean that 200 is displayed to the market at a time. After this is traded, another 200 is automatically released and so on till the full order is executed. The Exchange may set a minimum disclosed quantity criteria from time to time. MF - Minimum Fill (MF) orders allow the Trading Member to specify the minimum quantity by which an order should be filled. For example, an order of 1000 units with minimum fill 200 will require that each trade be for at least 200 units. In other words there will be a maximum of 5 trades of 200 each or a single trade of 1000. The Exchange may lay down norms of MF from time to time.
AON - All or None orders allow a Trading Member to impose the condition that only the full order should be matched against. This may be by way of multiple trades. If the full order is not matched it will stay in the books till matched or cancelled. Note: Currently, AON and MF orders are not available on the system as per SEBI directives.
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The Trader Workstation screen of the Trading Member is divided into several major windows:
Title Bar Tool Bar Ticker Window Market Watch Window On line Index and Index Inquiry Inquiry Window Snap Quote Order/Trade Window Systems Message Window Supplementary Menu
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Title Bar The title bar displays the current time, Trading system name and date. Tool Bar A window with different icons which provides quick access to various functions such as Market By Order, Market By Price, Market Movement, Market Inquiry, Auction Inquiry, Snap Quote, Market Watch, Buy order entry, Sell order entry, Order Modification, Order Cancellation, Outstanding Orders, Order Status, Activity Log, Previous Trades, Net Position, Online Backup, Supplementary Menu, Security List and Help. All these functions are also available on the keyboard. Ticker Window The ticker displays information about a trade as and when it takes place. The user has the option to set-up the securities which appear in the ticker.
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Market Watch Window The Market Watch window is the main area of focus for a Trading Member. The purpose of Market Watch is to view market information of pre-selected securities that are of interest to the Trading Member. To monitor various securities, the trading member can set them up by typing the Security Descriptor consisting of a Symbol field and a Series field. Securities can also be set up by invoking the Security List and selecting the securities from the window. The Symbol field incorporates the Company name and the Series field captures the segment/instrument type. A third field indicates the market type. For example, Company (Symbol) : ACC Instrument type (Series): EQ Market Type: N For each security in the Market Watch window, market information is dynamically updated on a real time basis. The market information displayed is for the current best price orders available in the regular lot book. For each security, the corporate action indicator (e.g., Ex or cum dividend, interest, rights etc.), the total buy order quantity for the best buy price, best sell price, total sell order quantity for the best sell price, the Last Traded Price (LTP), the last traded price change indicator ('+' if last traded price is better than the previous last traded price and '-' if it is worse) and the no delivery indicators are displayed. If the security is suspended, "SUSPENDED" appears in front of the security. On line Index and Index Inquiry With every trade in a security participating in Index, the user has the information on the current value of the Nifty. This value is displayed at the extreme right hand corner of the ticker window. Index Inquiry gives information on Close, Open, High, Low and current index values at the time of invoking this inquiry screen. Inquiry Window In this window, the inquiries such as Market by Order, Market by Price, Previous Trades, Outstanding Orders, Activity Log, Order Status and Market Inquiry can be viewed.
Market By Order (MBO) The purpose of Market by Order is to enable the user to view outstanding orders in the trading books in the order of price/time priority. The information is
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displayed for each order. Stop Loss orders, which are not triggered will not be displayed on the window. Buy orders are displayed on the left side of the window and Sell orders on the right side. The orders are presented in a price/time priority with the "best priced" order at the top.
Market by Price (MBP) The purpose of Market By Price is to enable the Trading Member to view aggregate orders waiting in the book at given prices. Previous Trades (PT) The purpose of this window is to provide information to users for their own trade. Outstanding Orders (OO) The purpose of Outstanding Orders is to enable a Trading Member to view his/her own outstanding buy or sell orders for a security. An outstanding order will be an order that was entered by the user, but is not yet completely traded or cancelled. Activity Log (AL) The Activity Log shows the activities that have been performed on any order of the Trading Member such as whether the order has been traded against fully or partially, it has been modified or has been cancelled. It displays information only of those orders in which some activity has taken place. It does not display orders, which have entered the books but have not been matched (fully or partially) or modified or cancelled. Order Status (OS) Order Status enables the user to look into the status of a specific order. Current status of the order and other order details are displayed. In case the order is traded, the trade details are also displayed. Market Inquiry (MI) Market Inquiry enables the user to view the market statistics like Open, High, Low, Previous close, Last traded price change indicator, Last traded quantity, date and time etc. A user may find inquiry screens like Market Movement, Most Active Securities and Net Position useful. These are available in the supplementary menu. Market Movement (MM) The Market Movement screen provides information to the user regarding the movement of a security for the current day. It gives details of the movement of the scrip for a time interval. The details include total buy and sell order quantity value, Open, High, Low, Last traded price etc.
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Most Active Securities This screen gives a list of the securities with the highest traded value during the day and the quantity traded for each of them. Net Position This functionality enables the user to interactively view his net position for all securities in which he has traded.
Snap Quote The Snap Quote feature allows a Trading Member to get instantaneous market information on any desired security. This is normally used for securities that are not already on display in the Market Watch window. The information presented is the same as that of Market Watch window. Order/Trade Window Order entry mechanisms enable the Trading Member to place orders in the market. The system will request re-confirmation of an order so that the user is cautioned before the order is finally released into the market. Orders once placed on the system can be modified or cancelled till they are matched. Once orders are matched they cannot be modified or cancelled. There is a facility to generate online order/trade confirmation slips as soon as an order is placed or a trading is done. The order confirmation slip contains among other things, order no., security name, price, quantity, order conditions like disclosed or minimum fill quantity etc. The trade confirmation slip contains the order and trade no., date, trade time, price and quantity traded, amount etc. Orders and trades are identified and linked by unique numbers so that the investor can check his order and trade details. Systems Message Window This window is used to view messages from the Exchange to all specific Trading Members. Supplementary Menu Some of the supplementary features in the NEAT system are:
On line back up An on line back up facility is provided which the user can invoke to take a back up of all order and trade related information. There is an option to copy the file to any drive of the computer or on a floppy diskette. Trading members find this convenient in their back office work.
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Off Line Order Entry A member is able to make an order entry in the batch mode.
Locations Till the advent of NSE, an investor wanting to transact in a security not traded on the nearest exchange had to route orders through a series of correspondent brokers to the appropriate exchange. This resulted in a great deal of uncertainty and high transaction costs. One of the objectives of NSE was to provide a nationwide trading facility and to enable investors spread all over the country to have an equal access to NSE. NSE has made it possible for an investor to access the same market and order book, irrespective of location, at the same price and at the same cost. NSE uses sophisticated telecommunication technology through which members can trade remotely from their offices located in any part of the country. NSE trading terminals are present in various cities and towns all over India.
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The Exchange has issued circular no.NSE/CMO/0235/2005 dated Aug 24, 2005 (Download No.NSE/CMTR/6552) regarding detailing requirement and procedures to be complied with by members desirous of using the CTCL facility. Vendors desirous of being empanelled with the Exchange for providing CTCL solutions to the trading members of the Exchange can refer to circular no.NSE/CMO/0029/2000 dated December 19, 2000 (Download No.NSE/CMT/2174), circular no.NSE/CMO/0039/2001 dated December 14, 2001 (Download No.NSE/CMTR/3054) and circular no.NSE/CMO/10 dated January 28, 2003 (Download No.NSE/CMTR/3896) detailing the requirements and procedures to be complied with by vendors for empanelment.
Internet Trading at NSE NSE became the first exchange to grant approval to its members for providing Internet based trading services. In line with SEBI directives, NSE has issued circulars detailing the requirements and procedures to be complied with by members desirous of providing Internet based trading and services. Members may please refer to circular no. NSE/CMO/0014/2000 dated May 12, 2000 (Download No.NSE/CMPT/1642) and
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Members can procure the Internet trading software from software vendors who are empanelled with NSE or they may develop the software through their own in-house development team or may procure the software from other non-empanelled vendors. Members can also avail of services provided by Application Service Providers (which may inter-alia include providing / maintaining software / hardware / other infrastructure etc.) for providing Internet based trading services subject to the Application Service Provider (ASP) being empanelled with the Exchange for providing such services. The Exchange has issued circular no. NSE/CMO/0028/2000 dated December 18, 2000 (Download No.NSE/CMT/2169) detailing the formalities / requirements for members desirous of using ASPs for providing Internet based trading services as well as formalities / requirements for ASPs desirous of being empanelled with the Exchange for providing such services to trading members of NSE. Clearing & Settlement (Equities) NSCCL carries out clearing and settlement functions as per the settlement cycles of different sub-segments in the Equities segment. The clearing function of the clearing corporation is designed to work out a) what counter parties owe and b) what counter parties are due to receive on the settlement date. Settlement is a two way process which involves legal transfer of title to funds and securities or other assets on the settlement date. NSCCL has also devised mechanism to handle various exceptional situations like security shortages, bad delivery, company objections, auction settlement etc.
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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 confirms the same to NSCCL. All the trades whose obligation the trading member proposes to pass on to the custodian are forwarded to the custodian by NSCCL for their confirmation. The custodian is required to confirm these trade on T + 1 days basis. Once, the above activities are completed, NSCCL starts its function of Clearing. It uses the concept of multi-lateral netting for determining the obligations of counter parties. Accordingly, a clearing member would have either pay-in or pay-out obligations for funds and securities separately. Thus, members pay-in and pay-out obligations for funds and securities are determined latest by T + 1 day and are forwarded to them so that they can settle their obligations on the settlement day (T+2). Cleared and non-cleared deals NSCCL carries out the clearing and settlement of trades executed in the following sub-segments of the Equities segment: 1. All trades executed in the Book entry / Rolling segment. 2. All trades executed in the Limited Physical Market segment.
NSCCL does not undertake clearing and settlement of deals executed in the Trade for Trade sub-segment of the Equities (Capital Market) segment of the Exchange. Primary responsibility of settling these deals rests directly with the members and the Exchange only monitors the settlement. The parties are required to report settlement of these deals to the Exchange. Clearing Mechanism Trades in rolling segment are cleared and settled on a netted basis. Trading and settlement periods are specified by the Exchange / Clearing Corporation from time to time. Deals executed during a particular trading period are netted at the end of that trading period and settlement obligations for that settlement period are computed. A multilateral netting procedure is adopted to determine the net settlement obligations In a rolling settlement, each trading day is considered as a trading period and trades executed during the day are netted to obtain the net obligations for the day. Trade-for-trade deals and Limited Physical Market deals are settled on a trade for trade basis and settlement obligations arise out of every deal.
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At the end of each trading day, concluded or locked-in trades are received from NSE by NSCCL. NSCCL determines the cumulative obligations of each member and electronically transfers the data to Clearing Members (CMs). All trades concluded during a particular trading period are settled together. A multilateral netting procedure is adopted to determine the net settlement obligations (delivery/receipt positions) of CMs. NSCCL then allocates or assigns delivery of securities inter se the members to arrive at the delivery and receipt obligation of funds and securities by each member. Settlement is deemed to be complete upon declaration and release of pay-out of funds and securities. On the securities pay-in day, delivering members are required to bring in securities to NSCCL. On pay out day the securities are delivered to the respective receiving members. Exceptions may arise because of short delivery of securities by CMs, bad deliveries or company objections on the pay-out day.
3.11.3 Auctions
Each CM would communicate to NSCCL on the pay-in day the securities that the CM would be delivering and those that the CM is unable to deliver. NSCCL identifies short deliveries and conducts a buying-in auction on the day after the pay-out day through the NSE trading system.
The CM is debited by an amount equivalent to the securities not delivered and valued at a valuation price (the closing price as announced by NSE on the day previous to the day of the valuation). If the buy-in auction price is more than the valuation price, the CM is required to make good the difference. All shortages not bought-in are deemed closed out at the highest price between the first day of the trading period till the day of squaring off or closing price on the auction day plus 20%, whichever is higher. This amount is credited to the receiving member's account on the auction pay-out day. Bad Deliveries (in case of physical settlement) 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 lodgment of the securities with the company / Share Transfer Agent (STA) for transfer, which are returned due to signature mismatch or for any other reason for which the transfer of security
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cannot be effected. The original selling CM is normally responsible for rectifying / replacing defective documents to the receiving CM as per prenotified schedule. The CM on whom company objection is lodged has an opportunity to withdraw the objection if the objection is not valid or the documents are incomplete (i.e. not as required under guideline No.100 or 109 of SEBI Good/Bad delivery guidelines), within 7 days of lodgement against him. If the CM is unable to rectify/replace defective documents on or before 21 days, NSCCL conducts a buying-in auction for the non-rectified part of defective document on the next auction day through the trading system of NSE. All objections, which are not bought-in, are deemed closed out on the auction day at the closing price on the auction day plus 20%. This amount is credited to the receiving member's account on the auction payout day. Settlement cycles for the various sub-segments: Rolling Settlement Limited Physical Market Segment Institutional Segment
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CHAPTER 4
Future )
&
Option
Market-Derivative
4.01 Introduction
The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the launch of index futures on June 12, 2000. The futures contracts are based on the popular benchmark S&P CNX Nifty Index. The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001. NSE also became the first exchange to launch trading in options on individual securities from July 2, 2001. Futures on individual securities were introduced on November 9, 2001. Futures and Options on individual securities are available on 234 securities stipulated by SEBI. The Exchange has also introducted trading in Futures and Options contracts based on CNX-IT, BANK NIFTY, CNX NIFTY JUNIOR, CNX 100, NIFTY MIDCAP 50 and S&P CNX DEFTY indices. This section provides you with an insight into the derivatives segment of NSE. Real-time quotes and information regarding derivative products, trading systems & processes, clearing and settlement, risk management, statistics etc. are available here.
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4.02 Trading
NSE introduced for the first time in India, fully automated screen based trading. It uses a modern, fully computerised trading system designed to offer investors across the length and breadth of the country a safe and easy way to invest. The NSE trading system called 'National Exchange for Automated Trading' (NEAT) is a fully automated screen based trading system, which adopts the principle of an order driven market.
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Stop Loss (SL) Price/Order The one that allows the Trading Member to place an order which gets activated only when the market price of the relevant security reaches or crosses a threshold price. Until then the order does not enter the market. A sell order in the Stop Loss book gets triggered when the last traded price in the normal market reaches or falls below the trigger price of the order. A buy order in the Stop Loss book gets triggered when the last traded price in the normal market reaches or exceeds the trigger price of the order.
E.g. If for stop loss buy order, the trigger is 93.00, the limit price is 95.00 and the market (last traded) price is 90.00, then this order is released into the system once the market price reaches or exceeds 93.00. This order is added to the regular lot book with time of triggering as the time stamp, as a limit order of 95.00
While entering orders on the trading system, TMs are required to identify them as proprietary (if they are own trades) or client (if entered on behalf of clients) through 'Pro / Cli' indicator provided in the order entry screen. The proprietary positions are calculated on net basis (buy - sell) and client positions are calculated on gross of net positions of each client i.e., a buy trade is off-set by a sell trade and a sell trade is off-set by a buy trade. b. Open Position Open position for the proprietary position are calculated separately from client position.
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For example, For a CM - XYZ, with TMs clearing through him - ABC and PQR Proprietary Position TM Security Buy Sell Qty Qty Net Qty Client 1 Buy Sell Qty Qty Client 2 Net Buy Sell Qty Qty Qty Net Qty Net Member
Long 6000
Long (1000 (1000 1000 2000 3000 2000 1000 1000 1000 2000 ) ) Short 2000
XYZs open position for Nifty January contract is : Member ABC PQR Total for XYZ Long Position 6000 1000 7000 Short Position 0 2000 2000
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clearing bank branches. The clearing account is to be used exclusively for clearing & settlement operations. Clearing Banks Contact Details Clearing Bank Address Capital Market Division Jeevan Prakash Building Sir P.M. Road Fort Mumbai - 400 001 Contact Person & Numbers Mr. Sunil Sharma Asst. Vice President Tel: 66107250/51 Mobile: 9869663870 Fax: 66107284/85 Mr. R. S. Nair Dy. General Manager Tel: 22722400, 22721787 Mobile: 9820520744 Fax: 22721782 Mr Dhapodkar Senior Manager Tel: 22722396 Fax: 22721784/22721788 Mr. Partha Sarathy Chief Manager Tel: 22693157, 22675702, 22658291 Fax: 22670033 Mr K.Y Mallya Senior Manager Tel: 22633006 Fax: 22675650 Mr Ganesh Ramanathan Vice President Tel No:40015640 Mr. Rajarshi Chakraborty Asst Vice President
Stock Exchange Branch P.J.Towers Dalal Street Fort Mumbai - 400 001
NSE Branch Varma Chambers, 1st Floor 11 Homji Street Fort Mumbai - 400 001
Citibank N.A.
Citigroup Global Services Infinity Towers 1srt Floor, A Wing Behind Toyota Showroom Malad (W) Mumbai- 400064
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Tel. No.: 40015652 Mobile: 9820753469 Mr. KVP Satish Chandra Asst Vice President Tel. No.: 40015192 Mobile: 9820787010 Mr. Ritesh Jain Vice President Head- PCM- Payment Operations Tel: 67115841 Fax : 66536004 The Hongkong & Shanghai Banking Corporation Ltd. 52/60 M G Road Fort Mumbai - 400 001 Mr. Shaleen Mahar Sr. Relationship Manager Non Bank Financial Institutions Tel: 22681175, 24980000 Mobile: 9820333047 Fax : 22734388 Ms. Hemanshi Shah Mobile: 9833988770 Mr. Devendra N Chandavarkar Chief Manager Tel: 66672085 Fax: 66661430 Mr. Shailesh Sukhthankar Head- Capital & Commodity Market Business Tel: 24988484 Extn 3334 Mobile: 9323651640 Mr. Chetan A. Shah Business Head Capital Market
Capital Market Division Mafatlal Chambers B wing, 3rd Floor N.M. Joshi Marg Lower Parel (East) Mumbai 400 013
2nd Floor, Trade World "A" Wing, Kamala Mills Lower Parel (W) Mumbai- 400013
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Business Tel: 24988484 Extn 3538 Mobile: 9322902935 Mr. Ashish Agarwal Dy Vice PresidentCapital Market Business Tel: 24988484 Extn 3565 Mobile: 9323469162 Fax : 022-40804711 N.R. Viswanadhan Product head- Capital Market Tel: 66552259 Mob: 9833651064 Mr. Ajay Thakur / Sadik Ali Asst Manager Tel: 66977910 Mobile: 9967222102 Mr. Pradeep Bhave VP & Branch Head Tel: 66347722
Sonawalla Building 57, Mumbai Samachar Marg Fort Mr. Yogesh Adke Mumbai - 400 001 Asst. Vice President Tel : 66366589 Fax: 66366590 Unit no.35, 3rd Floor Navsari Building Dr. D.N. Road Fort Mumbai-400 001 Mr. Rajiv Gurnani Sr. Vice President-FIG Tel: 66596375 Board: 66596103 Fax: 22817527 Mr. Prasad Ramaswamy Associate VP Operations Tel: 66153045/66153065
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Fax: 66159050 Sachin Shah Director (Financial institution) Tel: 66372359 Mobile: 9833477800 Mr. Girish Bhatia Associate Director Tel: 66314285 Mobile: 9820622748 Mr. R.S. Majithia Asst. General Manager Tel: 22629303 Fax: 22642742 Mr. Girishchandra Kashyap Sr Manager Tel : 22629335 Ms. Vidya Krishnan Asst. General Manager Mobile : 9821078386 Mumbai Main Branch 1st floor International Banking State Bank Of India Division Mumbai Samachar Marg Mumbai 400 023 Ms. Supriya Kulkarni Manager Tel: 22651363 Mr. P.N. Raut Dy. Manager Tel: 22644411, 22644972 Mobile: 9870498672 Mr. Sathish Babu Dy Manager Mobile: 9870498671
5th floor, Forbes Building Standard Chartered Charanjeet Rai Marg Bank Fort Mumbai 400 001
Capital Market Cell Mumbai Samachar Marg Branch Union Bank of India 66/80, Mumbai Samachar Marg Fort, Mumbai 400 023
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Clearing Account Every Clearing Member is required to maintain and operate a clearing account with any one of the empanelled clearing banks at the designated clearing bank branches. The clearing account is to be used exclusively for clearing operations i.e., for settling funds and other obligations to the Clearing Corporation including payments of margins and penal charges. A Clearing Member in the Futures and Options Segment, who is also Clearing Member in the Capital Market Segment, shall maintain a separate clearing bank account for the Futures and Options Segment distinct from the capital market clearing account. Clearing Members are required to authorise the Clearing Bank to access their clearing account for debiting and crediting their accounts, reporting of balances and other information as may be required by NSCCL from time to time as per the specified format. The Clearing Bank will debit/ credit the clearing account of clearing members as per instructions received from the Clearing Corporation.
A Clearing member can deposit funds into this account in any form, but can withdraw funds from this account only in self-name.
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Individual Securities
Settlement
Payout : T+1 working day at or after 12.00 p.m. (T is trade day) Pay-in : T+1 working day at or after 11.30 a.m.
Payout : T+1 working day at or after 12.00 p.m. (T is expiration day of contract) Pay-in : T+1 working day at or after 11.30 a.m.
Payout : T+1 working day at or after 12.00 p.m. (T is exercise day) Pay-in : T+1 working day at or after 11.30 a.m.
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CHAPTER 5
Debt )
Contents of this chapter:
5.01 Corporate Bonds 5.02 Wholesale Debt Market (WDM) 5.03 Market Timing 5.04 Trading System 5.05 Retail Debt Market 5.06 Trading in RETDEBT Market 5.07 Trading Parameters 5.08 SLBS
Market
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Pre-Open Market Phase The pre-open period commences from 9.00 a.m. This period allows the trading member/Participant to:
set up counter party exposure limits set up Market Watch (the security descriptor) make inquiries Market Open Phase The system allows for inquiries of the following activities when the market is open for trading: 1. Order Entry 2. Order Modification 3. Order Cancellation 4. Negotiated Entry 5. Trade Cancellation 6. Setting up counter party exposure limits
The Exchange provides a facility for screen based trading with order matching facility. The members are connected from their respective offices at dispersed locations to the main system at the NSE premises through a high-speed, efficient satellite tele-communication network. The trading system is an order-driven, automated order matching system, which does not reveal the identity of parties to an order or a trade. This helps orders whether large or small to be placed without the members being disadvantaged by disclosure of their identity. The trading system operates on a price time priority. Orders are matched automatically by the computer keeping the system transparent, objective and fair. Where an order does not _____________________________________________________________________________ _ 85
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find a match it remains in the system and is displayed to the whole market, till a fresh order which matches, comes in or the earlier order is cancelled or modified.
The trading system provides tremendous flexibility to the users in terms of the type of orders that can be placed on the system. Several time-related, price-related or volume-related conditions can easily be placed on an order. The trading system also provides complete on-line market information through various inquiry facilities. Detailed information on the total order depth in a security, the best buys and sells available in the market, the quantity traded in that security, the high, the low and last traded prices are available through the various market screens at all points of time.
Trade details are available for verification on the same day (i.e. T itself) after 19:00 hours IST.
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The investor needs to input minimum details of the trade viz. client code (provided by the trading member), security details (symbol and series), order number, trade number, trade quantity and price (excluding brokerage). All the above details are mandatory.
If an identical match is found for the details provided, a confirmation along with the details of the trade are displayed to the investor. If no match is found, a message is displayed to that effect.
Where no match is found, investors are advised to contact their trading member for clarification. For further assistance, please contact the Investor Grievance Cell of the Exchange. Trade details for the last 5 trading days will be available on the website. That is, trades executed on 'T' day, can be verified till the T+4th day. All trades can be verified
Members eligible for trading in RDM segment Market Timings and Market Holidays Trading Parameters Trading System Trading Cycle
Members eligible for trading in RDM segment Trading Members who are registered members of NSE in the Capital Market segment and Wholesale Debt Market segment are allowed to trade in Retail Debt Market (RDM) subject to fulfilling the capital adequacy norms. Trading Members with membership in Wholesale Debt Market segment only,
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can participate in RDM on submission of a letter in the prescribed format as per Circular No. NSE/CMTR/3860 dated January 11, 2003.
Market Timings and Market Holidays Trading in RDM segment takes place on all days of the week, except Saturdays and Sundays and holidays declared by the Exchange in advance (The holidays on the RDM segment shall be the same as those on the Equities segment). The market timings of the RDM segment are the same as the Equities segment, viz.: Normal Market Open : 09:55 hours Normal Market Close : 15:30 hours Note: The Exchange may however close the market on days other than the above schedule holidays or may open the market on days originally declared as holidays. The Exchange may also extend, advance or reduce trading hours when its deems fit and necessary.
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Parameters The parameters for SLBS are as follows:Series Permitted Lot Size Tick Size Price Band Mkt. Type Indicator Book Type "FL" 1 Rs. 0.01 No Band with operating range of 40% N (Normal Market) RL (Regular Lot)
Trader Workstation The trader workstation is the terminal from which the member accesses the borrow and lending system. Each member has a unique identification by way of Participant ID and User ID through which he is able to log on to the system for order entry purposes. A participant can have multiple user IDs allotted to him by which he can have more than one employee using the system concurrently.
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Participant Eligibility All clearing members of NSCCL including Banks and Custodians, hereinafter referred to as Participant, shall be eligible to participate in SLBS. In order to become eligible to participate in SLBS, clearing members shall have to register as Participants in SLBS. For this purpose, the eligible persons shall be required to follow the registration procedure as specified by NSCCL which shall include entering into an agreement with NSCCL as per the format specified. Participants desirous of lending or borrowing securities can do so either on their own
account or on behalf of their clients. Prior to undertaking lending or borrowing of securities on account of clients, the Participant shall enter into an agreement with each client as per the format specified by NSCCL. The Participant shall apply to NSCCL for allotment of a Unique client ID for each client who desires to participate in SLBS.
Eligible Securities Securities lending and borrowing shall be permitted in dematerialized form only. NSCCL shall announce the list of securities eligible under SLBS from time to time. To start with, securities available for trading in F&O segment of National Stock Exchange of India Ltd. (NSEIL) shall be permitted.
The shut period for all corporate actions in respect of securities shall be intimated by NSCCL from time to time. Clearing: NSCCL shall compute obligations based on the transactions executed on the order matching platform. All obligations shall be on a gross basis i.e there shall be no netting of transactions. Transactions under SLBS segment shall be identified based on different settlement types as intimated by NSCCL for the first leg and reverse leg settlements. Settlement Procedure:
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The pay-in and pay-out of funds and securities shall be through the designated bank accounts and securities settlement account respectively. The transactions shall be settled on a T+1 day basis as per time lines specified by NSCCL. The lender shall be required to deliver the securities by the scheduled time on T+1 day. Failure to deliver securities shall result in financial close-out. The close-out computation formula shall be intimated by way of circular. For a borrow transaction, the obligation shall be the lending fees.
Designated Bank Account The bank account currently used by Participant for settlement of funds in the Capital Market segment shall be the designated bank account for giving effect to funds debits/credits under SLBS. Securities Settlement Account Participants shall be required to maintain accounts with both depositories i.e NSDL & CDSL. The pool account currently used by Participants in NSDL for effecting securities pay-in and pay-out in the Capital Market segment shall be used for settlement under SLBS. In case of CDSL, Participants shall require to open a separate settlement account for effecting securities pay-in and pay-out under SLBS. Period of lending Tenure of lending / borrowing shall be thirty working days. Accordingly the return of securities by borrower shall be scheduled on the T+31 day (where T is the SLBS transaction day). Process of return of securities All Participants shall be required to return the securities borrowed on completion of period of lending. The securities shall be returned to the lender of the securities by NSCCL. In the case of borrower failing to return securities, NSCCL shall conduct an auction for obtaining securities. In the event of exceptional circumstances resulting in non-availability of securities in auction, such transactions would be financially closed-out at appropriate
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A typical settlement cycle for a lending and borrowing transaction shall be as under: Activities T Day SLBS transaction session Custodial confirmation Final obligation to Participant T+1 day Pay-in of securities/funds first leg (Settl Type L) Pay-out of securities/funds first leg T+31 day Pay-in of securities of reverse leg (Settl Type P) 09:30 AM 9:30 AM 11:30 AM 09:55 AM - 03:30 PM 06:00 PM 07:00 PM Timings
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Pay-out of securities/funds of reverse leg Buy-in auction for failure of borrower to return securities Auction obligation to Participant T+32 day Pay-in of securities for auction settlement (Settl Type Q) Pay-out of securities/funds for auction settlement
09:30 AM 11:30 AM
Shortages and Close out In the event of funds shortage by the borrower, the SLBS transactions shall be cancelled, as may be decided by NSCCL and accordingly, securities shall be returned to the lenders along with lending fees. In the event the lender fails to deliver securities, the transaction shall be closed out. The methodology and rate of close out shall be intimated by NSCCL from time to time. In the event the borrower fails to return the securities NSCCL shall conduct a buy-in auction. The buy-in auction shall be carried out in the Capital Market segment of NSEIL. If the security cannot be bought through the buy-in auction, the transaction shall be closed out. The methodology and rate of close out shall be intimated by NSCCL from time to time. In all cases of shortages, NSCCL may initiate various actions including withdrawal of access to the order matching platform, withhold of the securities/funds pay-out due to the Participant or any other action as may be intimated by NSCCL from time to time.
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NSCCL shall prescribe position limits at various levels for transactions in SLBS in consultation with SEBI and the same shall be intimated from time to time. To begin with the limits shall be as under: (a) the marketwide position limits for SLB transactions shall be 10% of the free-float capital of the company in terms of number of shares (b) No Participant shall have open position of more than 10% of the marketwide position limits or Rs. 50 crore (base value), whichever is lower
(c) For a FII/MF, the position limits shall be the same as of the Participant (d) The client level position limits shall be not more than 1% of the marketwide position limits.
Collateral Deposits Participants may deposit collaterals in the form of cash equivalents i.e., cash, bank guarantees and fixed deposit receipts, and any other form of collateral as may be prescribed by the Approved Intermediary (NSCCL) from time to time. The collateral deposited by the participant shall be utilized towards margin requirement of the participant. In case of failure of the participant to meet its obligation, the collaterals provided by the participants may be liquidated by NSCCL to meet the obligation of the participant. Minimum Collateral Every participant is required to continuously maintain minimum collateral of Rs.10 lacs in the form of cash as prescribed by the NSCCL. This deposit should be provided by the participant at the time of registration in Securities Lending and Borrowing Scheme (SLBS). Margins All transactions under SLBS shall be subject to margins. Following margins shall be applicable for transactions under SLBS. First Leg transactions Both lender and borrower shall be levied margins in respect of first leg of transactions under SLBS.
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Borrow transaction The borrower shall be levied only the Lending fee fixed percentage on T day. The fixed percentage shall be 100% or as may be specified by NSCCL from time to time. Lend transaction The following margins shall be levied on the Participants for lend transactions: 1. Mark to Market Margins 2. Fixed percentage of lending price. The fixed percentage shall be 25% or as may be specified by NSCCL from time to time. Reverse Leg transactions The Lender would not be charged any margins for the reverse leg. The borrower shall be levied margins in respect of reverse leg of transactions under
SLBS. The following margins shall be levied on the Participants for a borrow transactions from T+1 to T+31 day. 1. Value at Risk Margins 2. Extreme Loss Margins 3. Mark to Market Margins 4. Fixed percentage of lending price. The fixed percentage shall be 100% of the lending price or as may be specified by NSCCL from time to time. The fixed percentage of lending price which is currently acceptable only in the form of cash shall be now collected in the form of cash or cash equivalents. Value at Risk Margin (VaR Margin)
VaR margin rate as applicable to the security in the capital market segment shall be applicable in the SLBS. The VaR margin shall be collected on an upfront basis by adjusting against the collateral of the Participant at the time of transaction. The VaR margin shall be collected on the gross open position of the Participant. The gross open position for this purpose would mean the
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gross of all positions across all the clients of a Participant including its proprietary position.
VaR margin rate for each security shall be disseminated to the Participants through the Extranet and on the website of the Exchange. The VaR margin so collected shall be released on completion of pay-in of the respective settlement.
Extreme Loss margin rate as applicable to the security in the capital market segment shall be applicable in the SLBS. The Extreme Loss margin shall be collected on an upfront basis by adjusting against the collateral of the Participant at the time of transaction. The Extreme Loss margin shall be collected on the gross open position of the Participant. The gross open position for this purpose would mean the gross of all positions across all the clients of a Participant including its proprietary position.
The Extreme Loss margin so collected shall be released on completion of pay-in of the respective settlement.
Mark to market loss shall be calculated by marking each transaction in security to the closing price of the security at the end of day in the capital market segment. In case the security has not been transacted on a particular day in the capital market segment, the latest available closing price at the NSE shall be considered as the closing price. The mark to market margin (MTM) shall be collected from the Participant before the start of the SLBS session of the next day. The MTM margin shall also be collected /adjusted from/against the collateral deposited by the Participant. The MTM margin shall be collected on the gross open position of the Participant. The gross open position for this purpose would mean the gross of all positions across all the clients of a Participant including its proprietary position. For this purpose, the position of a client would be netted across its various securities and the positions of all the clients of a Participant would be grossed.
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There would be no netting off of the positions and setoff against MTM profits across two settlements However, for computation of MTM profits/losses for the day, netting or setoff against MTM profits would be permitted. The MTM margin so collected shall be released on completion of pay-in of the settlement.
A fixed percentage of lending price shall be levied as margin on the Participants for lend transactions on T day on upfront basis as may be intimated by NSCCL from time to time. To start with the fixed percentage shall be 25%. A fixed percentage of lending price shall be levied as margin on the Participants for borrow transactions from T+1 day till the shares are returned by the borrower as may be intimated by NSCCL from time to time. To start with the fixed percentage shall be 100%. This shall be collected on an upfront basis by adjusting against the collateral of the Participant at the time of transaction.
This shall be collected on the gross open position of the Participant. The gross open position for this purpose would mean the gross of all positions across all the clients of a Participant including its proprietary position. The margin so collected shall be released on completion of pay-in of the respective settlement. The lending price shall be the previous day closing price of the security in the capital market segment.
A fixed percentage of lending fee shall be levied as margin on the Participants for borrow transactions on T day on upfront basis as may be intimated by NSCCL from time to time. To start with the fixed percentage shall be 100%. This shall be collected on an upfront basis by adjusting against the collateral of the Participant at the time of transaction. The margin so collected shall be released on completion of pay-in of the respective settlement.
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Exemption from margins In cases where early pay-in of securities is made prior to the securities payin, such positions for which early pay-in (EPI) of securities is made shall be exempt from margins. The EPI would be allocated to clients having net deliverable position, on a random basis. Custodial transactions In respect of transactions entered by a Participant which is to be settled by a custodian, the margins from the time of transactions till confirmation by the custodian shall be levied on the Participant. On confirmation of the said transactions by the custodian, the custodian shall be levied the margins applicable on such transactions. In case of rejection by the custodian, the margins on the transaction rejected shall continue to be levied on the Participant.
Short fall of margins In case of any shortfall in margin the Participant shall not be permitted to transact in SLBS with immediate effect. The same shall be considered as violation and shall attract penal charges as may be specified by NSCCL from time to time. Margins from the Client Participants should have a prudent system of risk management to protect themselves from client default. Margins are likely to be an important element of such a system. The same shall be well documented and be made accessible to the clients and NSCCL. However, the quantum of these margins and the form and mode of collection are left to the discretion of the Participants.
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CHAPTER 6
Initial )
Public
Offering
(IPO)
A corporate may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is
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the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company.
The concept of Book Building is relatively new in India. However it is a common practice in most developed countries. Difference between Book Building Issue and Fixed Price Issue In Book Building securities are offered at prices above or equal to the floor prices, whereas securities are offered at a fixed price in case of a public issue. In case of Book Building, the demand can be known everyday as the book is built. But in case of the public issue the demand is known at the close of the issue.
Issuers
An Issuer Company can issue capital through book building in following two ways:
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75% Book Building process The option of 75% Book Building is available to all body corporates that are otherwise eligible to make an issue of capital to the public. The securities issued through the book building process are indicated as 'placement portion category' and securities available to public are identified as 'net offer to public'. In this option, underwriting is mandatory to the extent of the net offer to the public. The issue price for the placement portion and offers to public are required to be same. 100% of the net offer to the public through Book Building process In the 100% of the net offer to the public, entire issue is made through Book Building process. However, there can be a reservation or firm allotment to a maximum of 5% of the issue size for the permanent employees, shareholders of the company or group companies, persons who, on the date of filing of the draft offer document with the Board, have business association, as depositors, bondholders and subscribers to services, with the issuer making an initial public offering.
The number of bidding centres, in case of 75% book building process should not be less than the number of mandatory collection centres specified by SEBI. In case of 100% book building process, the bidding centres should be at all the places where the recognised stock exchanges are situated. For additional details, issuers are requested to refer to SEBI guidelines.
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It provides a fair, efficient & transparent method for collecting bids using latest electronic trading systems Costs involved in the issue are far less than those in a normal IPO
The IPO market timings are from 10.00 a.m. to 5.00 p.m. On the last day of the IPO, the session timings can be further extended on specific request by the Book Running Lead Manager. Procedures Issuers Issuers desirous of using NSE's online IPO system are required to comply with the following procedures: 1. Submit a written request as per prescribed format (Letter1, Letter2, BRLM) for usage of electronic facilities and software of NSE 2. Give details regarding Book Running Lead Manager, Co Book Running Lead Managers and Syndicate Members. 3. Pay the requisite charges to NSE. Trading Members The Book Running Lead Manager will give the list of trading members who are eligible to participate in the Book Building process to the Exchange. Members have to submit a one time undertaking to the Exchange. Eligible trading members have to give in the prescribed format details of the user IDs that they would like to use.
Subscribers Subscribers can approach any of the approved trading members for submitting bids in the NEAT IPO system. On line transaction registration slip are generated automatically after entering the bids in to the system which acts as proof of the registration of each Bid option
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by a promoter. In accordance with the guidelines for the first time in India by any Exchange, National Stock Exchange now provides online reverse book building for promoter/acquirer through its trading network which spans various cities and towns across India. NSE operates a fully automated screen based bidding system that enables trading members to enter offers directly from their offices through a sophisticated telecommunication network. What is Reverse Book Building (Delisting of shares)? The Reverse Book Building is a mechanism provided for capturing the sell orders on online basis from the share holders through respective Book Running Lead Managers (BRLMs) which can be used by companies intending to delist its shares through buy back process. In the Reverse Book Building scenario, the Acquirer/Company offers to buy back shares from the share holders. The Reverse Book Building is basically a process used for efficient price discovery. It is a mechanism where, during the period for which the Reverse Book Building is open, offers are collected from the share holders at various prices, which are above or equal to the floor price. The buy back price is determined after the offer closing date Business process for delisting through book building is as follows:
The acquirer shall appoint designated Book Running Lead Manager (BRLM) for accepting offers from the share holders. The company/acquirer intending to delist its shares through Book Building process is identified by way of a symbol assigned to it by BRLM. Orders for the offer shall be placed by the share holders only through the designated trading members, duly approved by the Exchange. The designated trading members shall ensure that the security / share holders deposit the securities offered with the trading members prior to placement of an order.
The offer shall be open for 'n' number of days. The BRLM shall intimate the final acceptance price and provide the valid accepted order file to the National Securities Clearing Corporation Limited (A wholly owned subsidiary of NSE carrying out clearing and responsible for settlement operations.)
SEBI guidelines shall be applicable to delisting of securities of companies and specifically apply to:
Voluntary delisting being sought by the promoters of a company. Any acquisition of shares of the company (either by a promoter or by any other person) or scheme or arrangement, by whatever name
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referred to, consequent to which the public shareholding falls below the minimum limit specified in the listing conditions or listing agreement that may result in delisting of securities.
Promoters of the companies who voluntarily seek to delist their securities from all or some of the stock exchanges. Cases where a person in control of the management is seeking to consolidate his holding in a company, in a manner which would result in the public shareholding or in the listing agreement that may have the effect of company being delisted. Companies which may be compulsorily delisted by the stock exchanges.
NSE Reverse Book Building System NSE uses the reverse book building system; a fully automated screen based bidding system that allows offers to run in several issues concurrently. The system has the facility of defining a hierarchy amongst the users of the system. The Book Running Lead Manager can define who will be the Syndicate member and who will be the other members participating in the issue. The Syndicate Member and other Members also have a facility of defining a hierarchy among the users of the system as Corporate Manager, Branch Manager and Dealer. Trading Members The Book Running Lead Manager will give the list of trading members who are eligible to participate in the Book Building process to the Exchange. Members have to submit a one-time undertaking to the Exchange. Eligible trading members have to give in the prescribed format details of the user IDs that they would like to use.
ICICI Brokerage Services Limited. Karvy Stock Broking Limited. Master Capital Services Limited.
Subscribers Subscribers can approach any of the approved trading members for submitting offers in the NEAT IPO system. On line transaction registration slip
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are generated automatically after entering the offers in to the system, which acts as proof of the registration of each offer. Reverse Book Building through the NSE system offers several advantages:
The NSE system offers a nation wide bidding facility in securities. It provides a fair, efficient & transparent method for collecting offers using latest electronic trading systems.
CHAPTER 7
Indices )
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7.01 Introduction
An Index is used to give information about the price movements of products in the financial, commodities or any other markets. Financial indexes are constructed to measure price movements of stocks, bonds, T-bills and other forms of investments. Stock market indexes are meant to capture the overall behaviour of equity markets. A stock market index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the market. An Index is calculated with reference to a base period and a base index value. Stock market indexes are useful for a variety of reasons. Some of them are :
They provide a historical comparison of returns on money invested in the stock market against other forms of investments such as gold or debt. They can be used as a standard against which to compare the performance of an equity fund. It is a lead indicator of the performance of the overall economy or a sector of the economy Stock indexes reflect highly up to date information Modern financial applications such as Index Funds, Index Futures, Index Options play an important role in financial investments and risk management
7.02 Index
An Index is used to give information about the price movements of products in the financial, commodities or any other markets. Financial indexes are constructed to
measure price movements of stocks, bonds, T-bills and other forms of investments. Stock market indexes are meant to capture the overall behaviour of equity markets. A stock market index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the _____________________________________________________________________________ _ 107
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market. An Index is calculated with reference to a base period and a base index value. Stock market indexes are useful for a variety of reasons. Some of them are :
They provide a historical comparison of returns on money invested in the stock market against other forms of investments such as gold or debt. They can be used as a standard against which to compare the performance of an equity fund. It is a lead indicator of the performance of the overall economy or a sector of the economy Stock indexes reflect highly up to date information Modern financial applications such as Index Funds, Index Futures, Index Options play an important role in financial investments and risk management
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IISL pools the index development efforts of CRISIL and NSE into a coordinated whole - India's first specialised company focused upon the index as a core product. IISL has the following objectives:
To develop, construct and maintain indices on Indian equities and commodities that serve as useful market performance benchmarks and are the underlying indices for derivatives trading To develop related products and services which can be used by investors for managing their exposures in the equity and commodity markets To provide data and information on the trading activity in the Indian stock markets To provide market participants with value added research on the Indian equity and Commodity markets
All the erstwhile indices of NSE and CRISIL, such as Nifty, Nifty Junior, Defty, CRISIL 500, CRISIL Midcap 200 index etc. have been transferred to IISL which now maintains, develops, compiles and disseminates the indices. The indices of IISL are now known under the following names: S.No . 1 2 3 4 5 6 7 Nifty Defty Crisil 500 Equity Index Nifty Junior Crisil Midcap 200 Crisil PSE Crisil MNC Old Name New Name S&P CNX Nifty S&P CNX Defty S&P CNX 500 Equity Index CNX Nifty Junior CNX Midcap 200 Index* CNX PSE Index CNX MNC Index
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PSE indicates Public Sector Enterprises MNC indicates Multinational Corporation * CNX Midcap 200 Discontinued from July 18, 2005
I. Impact Cost
Introduction Liquidity in the context of stock markets means a market where large orders can be executed without incurring a high transaction cost. The transaction cost referred here is not the fixed costs typically incurred like brokerage, transaction charges, depository charges etc. but is the cost attributable to lack of market liquidity as explained subsequently. Liquidity comes from the buyers and sellers in the market, who are constantly on the look out for buying and selling opportunities. Lack of liquidity translates into a high cost for buyers and sellers. The electronic limit order book (ELOB) as available on NSE is an ideal provider of market liquidity. This style of market dispenses with market makers, and allows anyone in the market to execute orders against the best available counter orders. The market may thus be thought of as possessing liquidity in terms of outstanding orders lying on the buy and sell side of the order book, which represent the intention to buy or sell. When a buyer or seller approaches the market with an intention to buy a particular stock, he can execute his buy order in the stock against such sell orders, which are already lying in the order book, and vice versa.
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Buy Sr.No. 1 2 3 4 Quantity 1000 1000 2000 1000 Price 3.50 3.40 3.40 3.30 Quantity 2000 1000 500 100
There are four buy and four sell orders lying in the order book. The difference between the best buy and the best sell orders (in this case, Rs.0.50) is the bid-ask spread. If a person places an order to buy 100 shares, it would be matched against the best available sell order at Rs. 4 i.e. he would buy 100 shares for Rs. 4. If he places a sell order for 100 shares, it would be matched against the best available buy order at Rs. 3.50 i.e. the shares would be sold at Rs.3.5. Hence if a person buys 100 shares and sells them immediately, he is poorer by the bid-ask spread. This spread may be regarded as the transaction cost which the market charges for the privilege of trading (for a transaction size of 100 shares). Progressing further, it may be observed that the bid-ask spread as specified above is valid for an order size of 100 shares upto 1000 shares. However for a larger order size the transaction cost would be quite different from the bidask spread. Suppose a person wants to buy and then sell 3000 shares. The sell order will hit the following buy orders: Sr. 1 2 3 Quantity 1000 1000 1000 Price 3.50 3.40 3.40
while the buy order will hit the following sell orders :
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Sr. 5 6
This implies an increased transaction cost for an order size of 3000 shares in comparison to the impact cost for order for 100 shares. The "bid-ask spread" therefore conveys transaction cost for a small trade. This brings us to the concept of impact cost. We start by defining the ideal price as the average of the best bid and offer price, in the above example it is (3.5+4)/2, i.e. 3.75. In an infinitely liquid market, it would be possible to execute large transactions on both buy and sell at prices which are very close to the ideal price of Rs.3.75. In reality, more than Rs.3.75 per share may be paid while buying and less than Rs.3.75 per share may be received while selling. Such percentage degradation that is experienced vis--vis the ideal price, when shares are bought or sold, is called impact cost. Impact cost varies with transaction size. For example, in the above order book, a sell order for 4000 shares will be executed as follows: Sr. 1 2 3 Quantity 1000 1000 2000 Total value Wt. average price Price 3.50 3.40 3.40 Value 3500 3400 6800 13700 3.43
The sale price for 4000 shares is Rs.3.43, which is 8.53% worse than the ideal price of Rs.3.75. Hence we say "The impact cost faced in buying 4000 shares is 8.53%". Definition Impact cost represents the cost of executing a transaction in a given stock,
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for a specific predefined order size, at any given point of time. Impact cost is a practical and realistic measure of market liquidity; it is closer to the true cost of execution faced by a trader in comparison to the bid-ask spread. It should however be emphasised that : (a) impact cost is separately computed for buy and sell (b) impact cost may vary for different transaction sizes (c) impact cost is dynamic and depends on the outstanding orders (d) where a stock is not sufficiently liquid, a penal impact cost is applied In mathematical terms it is the percentage mark up observed while buying / selling the desired quantity of a stock with reference to its ideal price (best buy + best sell) / 2. Example A : ORDER BOOK SNAPSHOT Buy Quantity 1000 2000 1000 Buy Price 98 97 96 Sell Quantity 1000 1500 1000 Sell Price 99 100 101
II. Beta
Risk is an important consideration in holding any portfolio. The risk in holding securities is generally associated with the possibility that realised returns will _____________________________________________________________________________ _ 113
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be less than the returns expected. Risks can be classified as Systematic risks and Unsystematic risks.
Unsystematic risks: These are risks that are unique to a firm or industry. Factors such as management capability, consumer preferences, labour, etc. contribute to unsystematic risks. Unsystematic risks are controllable by nature and can be considerably reduced by sufficiently diversifying one's portfolio. Systematic risks: These are risks associated with the economic, political, sociological and other macro-level changes. They affect the entire market as a whole and cannot be controlled or eliminated merely by diversifying one's portfolio.
What is Beta? The degree to which different portfolios are affected by these systematic risks as compared to the effect on the market as a whole, is different and is measured by Beta. To put it differently, the systematic risks of various securities differ due to their relationships with the market. The Beta factor describes the movement in a stock's or a portfolio's returns in relation to that of the market returns. For all practical purposes, the market returns are measured by the returns on the index (Nifty, Midcap etc.), since the index is a good reflector of the market.
Methodology / Formula
Beta is calculated as :
where, Y is the returns on your portfolio or stock - DEPENDENT VARIABLE X is the market returns or index - INDEPENDENT VARIABLE Variance is the square of standard deviation. Covariance is a statistic that measures how two variables co-vary, and is given by:
and
In order to calculate the beta of a portfolio, multiply the weightage of each stock in the portfolio with its beta value to arrive at the weighted average beta of the portfolio
Standard Deviation Standard Deviation is a statistical tool, which measures the variability of returns from the expected value, or volatility. It is denoted by sigma(s) . It is calculated using the formula mentioned below:
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Where, is the sample mean, xis are the observations (returns), and N is the total number of observations or the sample size.
Total Return Index Introduction Nifty is a price index and hence reflects the returns one would earn if investment is made in the index portfolio. However, a price index does not consider the returns arising from dividend receipts. Only capital gains arising due to price movements of constituent stocks are indicated in a price index. Therefore, to get a true picture of returns, the dividends received from the constituent stocks also need to be factored in the index values. Such an index, which includes the dividends received, is called the Total Returns Index. Total Returns Index reflects the returns on the index arising from (a) constituent stock price movements and (b) dividend receipts from constituent index stocks. Methodology for Total Returns Index (TR) is as follows: The following information is a prerequisite for calculation of TR Index: 1. Price Index close 2. Price Index returns 3. Dividend payouts in Rupees 4. Index Base capitalisation on ex-dividend date Dividend payouts as they occur are indexed on ex-date.
Indexed dividends are then reinvested in the index to give TR Index. Total Return Index = [Prev. TR Index + (Prev. TR Index * Index returns)] + [Indexed dividends + (Indexed dividends * Index returns)] Base for both the Price index close and TR index close will be the same. An investor in index stocks should benchmark his investments against the Total Returns index instead of the price index to determine the actual returns vis--vis the index.
CHAPTER-8
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markets and instruments, National Stock Exchange introduced in 1998 a facility for testing and certification by launching NSE's Certification in Financial Markets (NCFM).
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This module has been prepared for those who are keen to acquire some basic but key information about the stock markets as an initial step towards becoming a more informed investor. This module will act as a means of satisfying some of the initial queries on the stock markets and has been prepared with the objective of introducing the functioning and role of the financial markets in India to all those interested in this topic. Mutual Funds : A Beginners' Module This module has been prepared with a view to educate and create awareness about the role and function of mutual funds, the different mutual funds products being offered in the markets, risk profile of different products, the advantages of investing in mutual funds. This module would be useful for first time investors in mutual funds, young students and anyone wanting to know about the basics of mutual funds. Securities Market (Basic) Module This module equips the candidates with the knowledge and fundamentals of the securities market as a whole. Capital Market (Dealers) Module This module equips the candidates with the knowledge and skills required for dealers in the capital market operations. Candidates have the option to take the test in English, Gujarati and Hindi languages. The workbook for the module is available in English only. Derivatives Market (Dealers) Module SEBI Committee on `Regulatory Framework for Financial Derivatives in India had recommended that all brokers-members and sales persons/dealers in the derivatives market must pass a certification programme. Based on the Committees recommendations, SEBI issued guidelines for the conduct of the certification examination. The Derivatives Market (Dealers) Module certifies brokers-members and sales persons/dealers in the derivatives market.
FIMMDA-NSE Debt Market (Basic) Module This module equips the candidates with the knowledge and skills required in _____________________________________________________________________________ _ 118
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debt market operations. NSDL - Depository Operations Module This is an initiative of NSDL to accelerate the pace of professionalisation of the depository operations. This module equips the candidates seeking employment with depository participants and thereby helps in fast dematerialisation of securities. Commodities Market Module The module equips the candidates with the knowledge and skills required for dealers in Commodities Market Module AMFI - Mutual Fund (Basic) Module AMFI - Mutual Fund (Advisors) Module These two modules have been developed by Association of Mutual Funds in India to build a cadre of mutual fund advisors and disseminate knowledge about the working of the mutual funds. Surveillance in Stock Exchanges Module This module has been developed pursuant to the desire of the InterExchange Market Surveillance Group of SEBI to have a certified training programme for the surveillance staff of the stock exchanges. The module seeks to equip the surveillance staff with the art and science of surveillance in the stock market transactions. Corporate Governance Module This module has been jointly developed by National Stock Exchange of India Limited (NSEIL) and The Institute of Company Secretaries of India (ICSI) to strengthen knowledge on Corporate Governance. Compliance Officers (Brokers) Module Compliance Officers (Corporates) Module Market intermediaries need to have comprehensive knowledge and a proper understanding of the Acts governing the Securities Markets, Rules and Regulations of the Exchange, Listing Procedures, etc. A proper understanding and knowledge of these rules and regulations would enable an organization to adhere to the required
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compliance standards and not fall short of meeting any existing guidelines. Compliance Officers modules tests the candidates on their knowledge of the relevant rules, regulations and guidelines governing the securities markets and corporates Information Security Auditors Module (Part-1) Information Security Auditors Module (Part-2) Information security is gaining in importance in todays corporate environment where a vast amount of information is being processed by organisations on a day to day basis. A well defined, objective, information security audit should form a part of every organizations policy. Confidentiality, integrity and timely availability of information are critical, for implementing efficient business processes. An information security audit is one of the best ways to determine the security of an organizations information. Information security is not just technology related security but much more than that, covering physical and environmental security, access controls, business continuity planning etc. A timely and comprehensive assesement of information security systems and policies within the organisation, helps in avoiding the cost and other associated damages of a future security incident. Even today, it is possible to find a number of organizations where a written security policy does not exist. When security practices are unwritten or informal, there is a greater risk of them being misinterpreted or ineffectively executed leading to a costly breach or security lapse which could have severe ramifications for an organization. The Information Security Auditors Module has been developed for those involved with or interested to know about information security related issues in the financial markets. The module consists of two parts: Information Security Auditors Module (Part-1) and Information Security Auditors Module (Part-2) of 2 hours duration each. On successfully clearing both the parts, a candidate would be provided with a 'Certified Information Security Auditor for Financial Markets' certification. Modules of Financial Planning Standards Board India (Certified Financial Planner certification) Currently, tests in four modules of FPSB India namely (i) Risk Analysis & Insurance Planning (ii) Retirement Planning & Employee Benefits (iii) Investment Planning and (iv) Tax Planning & Estate Planning are conducted Live i.e. on real time basis. For any query for the said test(s), contact FPSB India at: Tel No 022-66663268 / 66663314 Ext :17 email: info@fpsbindia.org website: http://www.fpsbindia.org
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FEDAI-NSE Currency Futures (Basic) Module This certification would equip the dealers, investors, students, participants etc. with knowledge and information on the Currency Futures markets and products. It would provide them with knowledge on the structure of the Exchange traded Currency Futures Market, product definitions, application of currency futures for hedging, speculation and arbitrage, order and trade management, clearing and settlement systems and risk management. Options Trading Strategies Module Exchange-traded options form an important class of derivatives which have standardized contract features and trade on public exchanges, facilitating trading among investors. They provide settlement guarantee by the Clearing Corporation thereby reducing counterparty risk. Options can be used for hedging, taking a view on the future direction of the market or for arbitrage. Options are also helpful for implementing various trading strategies such as straddle, strangle, butterfly, collar etc. which can help in generating income for investors under various market conditions. This module is being introduced to explain some of the important and basic Options strategies. The module would be of interest to traders, investors, students and anyone interested in the options markets. However, it is advisable to have a very good knowledge about the basics of Options or clear the NCFM Derivatives Markets (Dealers) Module before taking up this module. There are 22 Options strategies covered in this module and the tests are based on these 22 strategies.
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CONCLUSION
NSE has been playing a vital & very crucial role in the development of Indian Securities Market.NSE has not only changed the share trading in India but also has proved itself as role model for many stock Exchanges across the Globe. Its the contribution of NSE only that today India can boast of being the first country in the world to provide almost 100% demateriased trading. Many stock exchanges across the world are now giving the work of computerization to major IT companies like TCS of India to transform their trading & stock market activities & to put them in line of advanced countries in context of share trading. Before set-up of NSE the stock market seemed to be a maze to normal investor due to its non transparency & other hurdles. Its due to NSE only that today the normal investor is participating aggressively in securities market. NSE has also made a wonderful use of the innovations & Developments in IT industry to its benefit & thus making them reaching to the investors & is playing an important role in helping an Indian companies access equity capital, by providing a liquid and well-regulated market. NSE has about 1319 companies listed representing the length, breadth and diversity of the Indian economy which includes from hi-tech to heavy industry, software, refinery, public sector units, infrastructure, and financial services. Listing on NSE raises a companys profile among investors in India and abroad. Trade data is distributed worldwide through various news-vending agencies. More importantly, each and every NSE listed company is required to satisfy stringent financial, public distribution and management requirements. High listing standards foster investor confidence and also bring credibility into the markets.
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Bibliography
Study Materials of :
NCFM Financial Market Beginners Module NCFM Securities Market Basic Module NCFM Capital Market Dealer Module NCFM Derivative Market Dealer Module NCFM Debt Market Module
Online Resources:
www.sebi.gov.in www.nseindia.com www.bseindia.in www.mintlive.com www.economictimes.com www.wsj.com (Wall Street Journal) NSE 2008-09 fact book
Institutions:
SoftDreamz Institute of Financial Markets,Noida.
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