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Introduction

Of all the modern service institutions, stock exchanges are perhaps the most crucial agents and facilitators of entrepreneurial progress. After the industrial revolution, as the size of business enterprises grew, it was no longer possible for proprietors or partnerships to raise colossal amount of money required for undertaking large entrepreneurial ventures. Such huge requirement of capital could only be met by the participation of a very large number of investors; their numbers running into hundreds, thousands and even millions, depending on the size of business venture.

In general, small time proprietors, or partners of a proprietary or partnership firm, are likely to find it rather difficult to get out of their business should they for some reason wish to do so. This is so because it is not always possible to find buyers for an entire business or a part of business, just when one wishes to sell it. Similarly, it is not easy for someone with savings, especially with a small amount of savings, to readily find an appropriate business opportunity, or a part thereof, for investment. These problems will be even more magnified in large proprietorships and partnerships. Nobody would like to invest in such partnerships in the first place, since once invested, their savings would be very difficult to convert into cash. And most people have lots of reasons, such as better investment opportunity, marriage, education, death, health and so on for wanting to convert their savings into cash. Clearly then, big enterprises will be able to raise capital from the public at large only if there were some mechanism by which the investors could purchase or sell their share of business as ands they wished to do so. This implies that ownership in business has to be “broken up” into a lager number of small units, such that each unit may be independently & easily bought and sold without hampering the business activity as such. Also, such breaking of business ownership would help mobilize small savings in the economy into entrepreneurial ventures.

This end is achieved in a modern business through the mechanism of shares.

What is a share?

A share represents the smallest recognized fraction of ownership in a publicly held business. Each such fraction of ownership is represented in the form of a certificate known as a share certificate. The breaking up of total ownership of a business into small fragments, each fragment represented by a share certificate, enables them to be easily bought and sold.

What is a stock exchange?

The institution where this buying and selling of shares essentially takes place is the Stock Exchange.

In the absence of stock exchanges, ie. Institutions where small chunks of businesses could be traded, there would be no modern business in the form of publicly held companies. Today, owing to the stock exchanges, one can be part owners of one company today and another company tomorrow; one can be part owners in several companies at the same time; one can be part owner in a company hundreds or thousands of miles away; one can be all of these things. Thus by enabling the convertibility of ownership in the product market into financial assets, namely shares, stock exchanges bring together buyers and sellers (or their representatives) of fractional ownerships of companies. And for that very reason, activities relating to stock exchanges are also appropriately enough, known as stock market or security market. Also a stock exchange is distinguished by a specific locality and characteristics of its own, mostly a stock exchange is also distinguished by a physical location and characteristics of its own. In fact, according to H.T.Parekh, the earliest location of the Bombay Stock Exchange, which for a long period was known as “the native share and stock brokers' association”, was probably under a tree around 1870!

The stock exchanges are the exclusive centers for the trading of securities. The regulatory framework encourages this by virtually banning trading of securities outside exchanges. Until recently, the area of operation/ jurisdiction of exchange was specified at the time of its recognition, which in effect precluded competition among the exchanges. These are called regional exchanges. In order to provide an opportunity to investors to invest/ trade in the securities of local companies, it is mandatory foe the companies, wishing to list their securities, to list on the regional stock exchange nearest to their registered office.

Characteristics of Stock Exchanges in India

Q Traditionally, a stock exchange has been an association of individual members called member brokers (or simply members or brokers), formed for the express purpose of regulating and facilitating buying and selling of securities by the public and institution at large.

Q A stock exchange in India operates with due recognition from the government under the Securities and Contracts (Regulations) Act, 1956. the member brokers are essentially the middlemen who carry out the desired transactions in securities on behalf of the public(for a commission) or on their own behalf. New membership to a Stock Exchange is through election by the governing board of that stock exchange.

Q At present, there areTHE BUYING 23 stock exchanges in India, the largest among them being the Bombay Stock Exchange. BSE alone accounts for over 80% of the total volume of transactions in shares.

Q Typically, a stock exchange is governed by a board consisting of directors largely elected by the member brokers, and a few nominated by the government. Government nominee include representatives of the ministry of finance, as well as some public representatives, who are expected to safeguard the public interest in the functioning of the exchanges. A president, who is an elected member, usually nominated by the government from among the elected members, heads the board. The executive director, who is usually appointed by the by the stock exchange with the government approval is the operational chief of the stock exchange. His duty is to ensure that the day to day operations the Stock Exchange are carried out in accordance with the various rules and regulations governing its functioning.

Q The overall development and regulation of the securities market has been entrusted to the Securities and Exchange Board of India (SEBI) by an act of parliament in 1992.

Q All companies wishing to raise capital from the public are required to list their securities on at least one stock exchange. Thus, all ordinary shares, preference shares and debentures of the publicly held companies are listed in the stock exchange.

Exchange management

Made some attempts in this direction, but this did not materially alter the situation. In view of the less than satisfactory quality, of administration of broker-managed exchanges, the finance minister in march 2001 proposed demutualisation of exchanges by which ownership, management and trading membership would be segregated from each other. The regulators are working towards implementing this. Of the 23 stock exchanges in India, two stock exchanges viz., OTCEI and NSE are already demutualised. Board of directors, which do not include trading members, manages these. Theses are purest form of demutualised exchanges, where ownership, management and trading are in the hands of three sets of people. The concept of demutualisation completely eliminates any conflict of interest and helps the exchange to pursue market efficiency and investors interest aggressively.

Role of SEBI

The SEBI, that is, the Securities and the Exchange Board of India, is the national regulatory body for the securities market, set up under the securities and Exchange Board of India act, 1992, to “protect the interest of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith and incidental too.”

SEBI has its head office in Mumbai and it has now set up regional offices in the metropolitan cities of Kolkata, Delhi, and Chennai. The Board of SEBI comprises a Chairman, two members from the central government representing the ministries of finance and law, one member from the Reserve Bank of India and two other members appointed by the central government.

As per the SEBI act, 1992, the power and functions of the Board encompass the regulation of Stock Exchanges and other securities markets; registration and regulation of the working stock brokers, sub-brokers, bankers to an issue (a public offer of capital), trustees of trust deeds, registrars to an issues, merchant bankers, under writers, portfolio managers, investment advisors and such other intermediaries who may be associated with the stock market in any way; registration and regulations of mutual funds; promotion and regulation of self- regulatory organizations; prohibiting Fraudulent and unfair trade practices and insider trading in securities markets; regulating substantial acquisition of shares and takeover of companies; calling for information from,undertking inspection, conducting inquiries and audits of stock exchanges, intermediaries and self- regulatory organizations of the securities market; performing such functions and exercising such powers as contained in the provisions of the Capital Issues (Control) Act,1947 and the Securities Contracts (Regulation) Act, 1956, levying various fees and other charges, conducting necessary research for above purposes and performing such other functions as may be prescribes from time to time.

SEBI as the watchdog of the industry has an important and crucial role in the market in ensuring that the market participants perform their duties in accordance with the regulatory norms. The Stock Exchange as a responsible Self Regulatory Organization (SRO) function to regulate the market and its prices as per the prevalent regulations. SEBI and the Exchange play complimentary roles to enhance the investor protection and the overall quality of the market.

Membership

The trading platform of a stock exchange is accessible only to brokers. The broker enters into trades in exchanges either on his own account or on behalf of clients. The clients may place their order with them directly or a sub-broker indirectly. A broker is admitted to the membership of an exchange in terms of the provisions of the SCRA, the SEBI act 1992, the rules, circulars, notifications, guidelines, etc. prescribed there under and the byelaws, rules and regulations of the concerned exchange. No stockbroker or sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration granted by SEBI. A broker/sub-broker compiles with the code of conduct prescribed by SEBI.

The stock exchanges are free to stipulate stricter requirements for its members than those stipulated by SEBI. The minimum standards stipulated by NSE for membership are in excess of the minimum norms laid down by SEBI. The standards for admission of members laid down by NSE stress on factors, such as, corporate structure, capital adequacy, track record, education, experience, etc. and reflect the conscious endeavors to ensure quality broking services.

Listing

Listing means formal admission of a security to the trading platform of a stock exchange, invariably evidenced by a listing agreement between the issuer of the security and the stock exchange. ; Listing of securities on Indian Stock Exchanges is essentially governed by the provisions in the companies act, 1956, SCRA, SCRR, rules, bye-laws and regulations of the concerned stock exchange, the listing agreement entered into by the issuer and the stock exchange and the circulars/ guidelines issued by central government and SEBI.

Index services

Stock index uses a set of stocks that are representative of the whole market, or a specified sector to measure the change in overall behavior of the markets or sector over a period of time. India Index Services & Products Limited (IISL), promoted by NSE and CRISIL, is the only specialized organization in the country to provide stock index services.

Trading Mechanism

All stock exchanges in India follow screen-based trading system. NSE was the first stock exchange in the country to provide nation-wide order-driven, screen-based trading system. NSE model was gradually emulated by all other stock exchanges in the country. The trading system at NSE known as the National Exchange for Automated Trading (NEAT) system is an anonymous order-driven system and operates on a strict price/time priority. It enables members from across the countries to trade simultaneously with enormous ease and efficiency. NEAT has lent considerable depth in the market by enabling large number of members all over the country to trade simultaneously and consequently narrowed the spreads significantly. A single consolidated order book for each stock displays, on a real time basis, buy and sell orders originating from all over the country. The bookstores only limit orders, which are orders to buy or sell shares at a stated quantity and stated price. The limit order is executed only if the price quantity conditions match. Thus, the NEAT system provides an open electronic consolidated limit order book (OECLOB). The trading system provides tremendous flexibility to the users in terms of kinds of orders that can be placed on the system. Several time-related (Good-Till-Cancelled, Good-Till-Day, Immediate-or-Cancel), price related (buy/sell limit and stop-loss orders) or volume related (All-or-None, Minimum Fill, etc.) conditions van be easily built into an order. Orders are sorted and match automatically by the computer keeping the system transparent, objective and fair. The trading system also provides complete market information on-line, which is updated on real time basis. The trading platform of the CM segment of NSE is accessed not only from the computer terminals from the premises of brokers spread over 420 cities, but also from the personal computers in the homes of investors through the internet and from the hand-held devices through WAP. The trading platform of BSE is also accessible from 400 cities.

Internet trading is available on NSE and BSE, as of now. SEBI has approved the use of Internet as an order routing system, for communicating clients' orders to the exchanges through brokers. SEBI- registered brokers can introduce internet-based trading after obtaining permission from the respective Stock Exchanges. SEBI has stipulated the minimum conditions to be fulfilled by trading members to start internet-based trading and services.

NSE was the first exchange in the country to provide web-based access to investors to trade directly on the exchange. It launched Internet trading in February 2000. It was followed by the launch of Internet trading by BSE in March 2001. The orders originating from the personal computers (PCs) of investors are routed through the Internet tot eh trading terminals of the designated brokers with whom they have relations and further to the exchange of trade execution. Soon after these orders get matched and result into trades, the investors get confirmation about them on their PCs through the same Internet routes.

SEBI approved trading through wireless medium or WAP platform. NSE is the only exchange to provide access to its order book through the hand held devices, which use WAP technology. This serves primarily retail investors who are mobile and want to trade from any place when the market prices for st0ocks of their choice are attractive.

Demat Trading

A depository holds securities in dematerialized form. It maintains ownership records of securities in a book entry form and also effects transfer of ownership through book entry. SEBI has introduced some degree of compulsion in trading and settlement of securities in dematerialized form. While the investors have a right to hold securities in either physical or demat form, SEBI has mandated compulsory trading and settlement of securities in dematerialized form. This was initially introduced for institutional investors and was later extended to all investors. Starting with 12 scrips on January 15, 1998, all investors are required to mandatorily trade in dematerialized form in respect of 2,335 securities as at end-June, 2001.

Since the introduction of the depository system, dematerialization has progressed at a fast pace and has gained acceptance among the participants in the market. All actively traded scrips are held, traded and settled in demat form. The details of progress in dematerialization in two depositories, viz., NSDL and CDSL., are presented as below:

In a SEBI working paper titled ‘Dematerialization: A Silent Revolution in the Indian Capital Market' released in April 2000, it has been observed that India has achieved a very high level of dematerialization in less than three years' time, and currently more than 99%of trades settle in demand form. Competition and regulatory developments facilitated reduction in custodial charges and improvements in qualities of service standards. The paper observes that one imminent and apparent immediate benefit of competition between the two depositories is fall in settlement and other charges. Competition has been driving improvement in service standards. Depository facility has effected changes in stock market microstructure. Breadth and depth of investment culture has further got extended to interior areas of the country faster. Explicit transaction cost has been falling due to dematerialization. Dematerialization substantially contributed to the increased growth in the turnover. Dematerialization growth in India is the quickest among all emerging markets and also among developed markets excepting for the U.K and Hong Kong.

INTRODUCTION

The Stock Exchange, Mumbai, popularly known as "BSE" was established in 1875 as "The Native Share and Stock Brokers Association", as a voluntary non-profit making association. It has evolved over the years into its present status as the premier Stock Exchange in the country. It may be noted that the Stock Exchanges is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was founded in 1878.

The Exchange, while providing an efficient and transparent market for trading in securities, upholds the interests of the investors and ensures redressal of their grievances, whether against the companies or its own member-brokers. It also strives to educate and enlighten the investors by making available necessary informative inputs and conducting investor education programmes.

A Governing Board comprising of 9 elected directors (one third of them retire every year by rotation), two SEBI nominees, a Reserve Bank of India nominee, six public representatives and an Executive Director is the apex body, which decides the policies and regulates the affairs of the Exchange.

The Executive Director as the Chief Executive Officer is responsible for the day-to-day administration of the Exchange.

The average daily turnover of the Exchange during the year 2000-2001 (April-March), was Rs.3984.19 crores and average number of daily trades was 5.69 lakhs. However, the average daily turnover of the Exchange during the year 2001- 2002 has declined to Rs. 1244.10 crores and number of average daily trades during the period to 5.17 lakhs. The ban on all deferral products like BLESS and ALBM in the Indian capital Markets by SEBI w.e.f. July 2, 2001, abolition of account period settlements, introduction of Compulsory Rolling Settlements in all scrips traded on the Exchanges w.e.f. December 31, 2001, etc. have adversely impacted the liquidity and consequently there is a considerable decline in the daily turnover at the Exchange.

Capital Listed and Market Capitalization.

The Stock Exchange, Bombay (BSE) is the premier Stock Exchange in India. The BSE accounted for 46 per cent of listed companies on an all India basis as on 31st March 1994. It ranked first in terms of the number of listed companies and stock issues listed. The capital listed in the BSE as on 31st March 1994 accounted for 50% of the overall capital listed on all the stock exchanges. Its share of the market capitalization was around 74% as on the same date. The paid-up capital of equity, debentures/bonds and preference were 73%, 31%, 44% respectively of the overall capital listed on all the Stock Exchanges as on the same date.

On the BSE, the Steel Authority of India had the largest market capitalization of Rs.19, 908 crores as on the 31st March, 1994 followed by the State Bank of India with the market capitalization of Rs.16, 702 crores and Mahanagar Telephone Nigam Limited with the market capitalization of Rs.11, 700 crores.

BSE SENSEX

The

BSE SENSEX

, short form of Sensitive Index, first compiled in 1986 is a “market Capitalization-Weighted” index of 30 component stocks representing a sample of large, well-established and financially sound companies. The index is widely reported in both, the domestic international, print electronic media and is widely used to measure the used to measure the performance of the Indian stock markets.

The BSE SENSEX is the benchmark index of the Indian capital market and one, which has the

longest social memory.

In fact the

SENSEX

is considered to be the pulse of the Indian stock markets. It is the oldest index in India and has acquired a unique place in collective consciousness of the investors. Further, as the oldest index of the Indian Stock Market, it provides time series data over a fairly long period of time. Small wonder that the

SENSEX

has over the years has become one of the most prominent brands of the Country.

Objectives of SENSEX

The

BSE SENSEX

is the benchmark index with wide acceptance among individual investors, institutional investors, foreign investors, foreign investors and fund managers. The objectives of the index are:

ATo measure market movements

Given its long history and its wide acceptance, no other index matches the

BSE

SENESX

in the reflecting market movements and sentiments.

SENSEX

is widely

used to describe the mood in the Indian stock markets.

A

Benchmark for funds performance

The inclusion of blue chip companies and the wide and balanced industry Representation in the

SENSEX

makes it the ideal benchmark for fund managers to compare the performance of their funds.

AFor index based derivatives products

Institutional investors, money managers and small investors, all refer to the

BSE

SENSEX

for their specific purposes. The

BSE SENSEX

is in effect the proxy for

the Indian stock markets. Since

SENSEX

comprises of the leading companies in

all the significant sectors in the economy, we believe that it will be the most liquid

contract in the Indian market and will garner a predominant market share.

Companies represented in the SENSEX

Company name

(As on 15.06.01)

Sector

Hindustan lever

FMCG

Reliance limited

Chemicals and petrochemicals

Infosys technologies

Information technology

Reliance petroleum

Oil and gas

ITC

FMCG

State bank of India

Finance

MTNL

Telecom

Satyam computers

Information technology

Zee telefilms

Media

Ranbaxy labs

Healthcare

ICICI

Finance

Larsen & toubro

Diversified

Cipla

Healthcare

Hindalco

Metals and mining

HPCL

Metal and mining

TISCO

Metal and mining

Nestle

FMCG

Trading System

Till Now, buyers and sellers used to negotiate face-to-face on the trading floor over a security until agreement was reached and a deal was struck in the open outcry system of trading, that used to take place in the trading ring. The transaction details of the account period (called settlement period) were submitted for settlement by members after each trading session.

The computerized settlement system initiated the netting and clearing process by providing on a daily basis statements for each member, showing matched and unmatched transactions. Settlement processing involves computation of each member's net position in each security, after taking into account all transactions for the member during the settlement period, which is 10 working days for group 'A' securities and 5 working days for group 'B' securities.

Trading is done by members and their authorized assistants from their Trader Work Stations (TWS) in their offices, through the BSE On-Line Trading (BOLT) system. BOLT system has replaced the open outcry system of trading. BOLT system accepts two-way quotations from jobbers, market and limit orders from client-brokers and matches them according to the matching logic specified in the Business Requirement Specifications (BRS) document for this system.

The matching logic for the Carry-Forward System as in the case of the regular trading system is quote driven with the order book functioning as an "auxiliary jobber".

TRADING

TRADING

The Exchange, which had an open outcry trading system, had switched over to a fully automated computerized mode of trading known as BOLT (BSE on Line Trading) System. Through the BOLT system the members now enter orders from Trader Work Stations (TWSs) installed in their offices instead of assembling in the trading ring. This system, which was initially both order and quote driven, was commissioned on March 14, 1995. However, the facility of placing of quotes has been removed w.e.f., August 13, 2001 in view of lack of market interest and to improve system-matching efficiency. The system, which is now only order driven, facilitates more efficient processing, automatic order matching and faster execution of orders in a transparent manner.

Earlier, the members of the Exchange were permitted to open trading terminals only in Mumbai. However, in October 1996, the Exchange obtained permission from SEBI for expansion of its BOLT network to locations outside Mumbai. In terms of the permission granted by SEBI and certain modifications announced later, the members of the Exchange are now free to install their trading terminals at any place in the country. Shri P. Chidambaram inaugurated the expansion of BOLT network the then Finance Minister, Government of India on August 31, 1997.

In order to expand the reach of BOLT network to centers outside Mumbai and support the smaller Regional Stock Exchanges, the Exchange has, as on March 31, 2002, admitted subsidiary companies formed by 13 Regional Stock Exchanges as its members. The members of these Regional Stock Exchanges work as sub-brokers of the member-brokers of the Exchange.

The objectives of granting membership to the subsidiary companies formed by the Regional Stock Exchanges were to reach out to investors in these centers via the members of these Regional Exchanges and provide the investors in these areas access to the trading facilities in all scrips listed on the Exchange.

Trading on the BOLT System is conducted from Monday to Friday between 9:55 a.m. and 3:30 p.m. The scrips traded on the Exchange have been classified into 'A', 'B1', 'B2', 'F' and 'Z' groups. The number of scrips listed on the Exchange under 'A', 'B1 ', 'B2' and 'Z' groups, which represent the equity segment, as on March 31, 2002 was 173, 560,1930 and 3044 respectively. The 'F' group represents the debt market (fixed income securities) segment wherein 748 securities were listed as on March 31, 2002. The 'Z' group was introduced by the Exchange in July 1999 and covers the companies which have failed to comply with listing requirements and/or failed to resolve investor complaints or have not made the required arrangements with both the Depositories, viz., Central Depository Services (I) Ltd. (CDSL) and National Security Depository Ltd. (NSDL) for dematerialization of their securities by the specified date, i.e., September 30, 2001. Companies in "Z" group numbered 3044 as on March 31, 2002. Of these, 1429 companies were in "Z" group for not complying with the provisions of the Listing Agreement and/or pending investor complaints and the balance 1615 companies were on account of not making arrangements for dematerialization of their securities with both the Depositories. 1615 companies have been put in "Z" group as a temporary measure till they make arrangements for dematerialization of their securities. Once they finalize the arrangements for dematerialization of their securities, trading and settlement in their scrips would be shifted to their respective erstwhile groups.

The Exchange has also the facility to trade in "C" group which covers the odd lot securities in 'A', 'B1', 'B2' and 'Z' groups and Rights renunciations in all the groups of scrips in the equity segment. The Exchange, thus, provides a facility to market participants of on-line trading in odd lots of securities and Rights renunciations. The facility of trading in odd lots of securities not only offers an exit route to investors to dispose of their odd lots of securities but also provides them an opportunity to consolidate their securities into market lots.

The 'C' group can also be used by investors for selling upto 500 shares in physical form in respect of scrips of companies where trades are to be compulsorily settled by all investors in demat mode. This scheme of selling physical shares in compulsory demat scrips is called as Exit Route Scheme.

With effect from December 31, 2001, trading in all securities listed in equity segment of the Exchange takes place in one market segment, viz., Compulsory Rolling Settlement Segment.

Permitted Securities

The Exchange has since decided to permit trading in the securities of the companies listed on other Stock Exchanges under " Permitted Securities" category which meet the relevant norms specified by the Exchange. Accordingly, to begin with the Exchange has permitted trading in scrips of five companies listed on other Stock Exchanges w.e.f. April 22, 2002/

Computation of closing price of scrips in the Cash Segment:

The closing prices of scrips are computed on the basis of weighted average price of all trades in the last 15 minutes of the continuous trading session. However, if there is no trade during the last 15 minutes, then the last traded price in the continuous trading session is taken as the official closing price.

A) Compulsory Rolling Segment (CRS):

Compulsory Rolling Settlement (CRS) Segment:

With a view to introduce the best international trading practices and to achieve higher settlement efficiency, as mandated by SEBI, trades in all the equity shares listed on the Exchange in CRS Segment were to be settled on T+5 basis w.e.f. December 31, 2001. SEBI has further directed the Stock Exchanges that trades in all scrips w.e..f. April 1, 2002 should be settled on T+3 basis. Accordingly, all transactions in all groups of securities in the equity segment and fixed income securities listed on the Exchange are settled on T+3 basis w.e.f. April 1, 2002

Under a rolling settlement environment, the trades done on a particular day are settled after a given number of business days rather than settling all trades done during a period at the end of an 'account period'. A T+3 settlement cycle means that the final settlement of transactions done on T or trade day by exchange of monies and securities, occurs on fifth business day after the trade day.

The transactions in securities of companies which have made arrangements for dematerialization of their securities by the stipulated date are settled only in Demat mode on T+3 on net basis, i.e., buy and sale positions in the same scrip are netted and the net quantity is to be settled. However, transactions in securities of companies, which have failed to make arrangements for dematerialization of their securities or /are in "Z" group, are settled only on trade to trade basis on T+3 i.e., the transactions are settled on a gross basis and the facility of netting of buy and sale transactions in a scrip is not available. For example, if one buys and sells 100 shares of a company on the same day which is on trade to trade basis, the two positions will not be netted and he will have to first deliver 100 shares at the time of pay-in of securities and then receive 100 shares at the time of pay-out of securities on the same day. Thus, if one fails to deliver the securities sold at the time of pay-in, it will be treated as a shortage and the position will be auctioned/ closed-out.

In other words, the transactions in scrips of companies which are in compulsory demat are settled in demat mode on T+3 on netting basis and the transactions in scrips of companies, which have not made arrangements for dematerialization of their securities by the stipulated date or are in "Z" group for other reasons, are settled on trade to trade basis on T+3 either in demat mode or in physical mode.

The settlement of transactions in 'F' group securities representing Fixed Income Securities is also on Rolling Settlement Cycle of T+3 basis.

The following tables summarizes the steps in the trading and settlement cycle for scrips under CRS:

DAY ACTIVITY

Trading on BOLT and daily downloading of statements showing details of transactions and margins at the end of each trading day.

6A/7A entry by the member-brokers.

T+1

Confirmation of 6A/7A data by the Custodians. Downloading of securities and funds obligation statement by members.

T+3

Pay-in of funds and securities by 11:00 a.m. and pay-out of funds and securities by 2:00 p.m

T+4

Auction on BOLT.

T+5

Auction pay-in and pay-out.

  • 6A/7A : A mechanism whereby the obligation of settling the transactions done by a member-broker on behalf of a client is passed on to a custodian based on his confirmation.

    Thus, the pay-in and pay-out of funds and securities takes places on the 3rd working day of the execution of the trade.

    The Information Systems Department of the Exchange generates the following statements, which can be downloaded by the members in their back offices on a daily basis.

    Statements giving details of the daily transactions entered into by the members.

    Statements giving details of margins payable by the members in respect of the trades executed by them.

    The settlement of the trades (money and securities) done by a member on his own account or on behalf of his individual, corporate or institutional clients may be either through the member himself or through a SEBI registered Custodian appointed by him or the respective client. In case the delivery/payment is to be given or taken by a registered Custodian, he has to confirm the trade done by a member on the BOLT System through 6A-7A entry. For this purpose, the Custodians have been given connectivity to BOLT System and have also been admitted as members of the Clearing House. In case a transaction is not confirmed by a registered Custodian, the liability for pay-in of funds or securities in respect of the same devolves on the concerned member.

    The introduction of settlement on T+3 basis has resulted in reduction in settlement risk, provided early receipt of securities and monies to buyers and sellers respectively and brought Indian Capital Markets at the international standard of settlements

    Settlement

    Pay-in and Pay-out for 'A', 'B1', 'B2', 'C', "F" & 'Z' group of securities

    As discussed earlier, the trades done by members in all the securities in CRS are now settled by payment of money and delivery of securities on T+3 basis. All deliveries of securities are required to be routed through the Clearing House, except for certain off-market transactions which, although are required to be reported to the Exchange, may be settled directly between the members concerned.

    The Clearing House is an independent company promoted jointly by Bank of India and Stock Exchange, Mumbai for handling the clearing and settlement operations of funds and securities on behalf of the Exchange. For this purpose, the Clearing & Settlement Dept. of the Exchange liaises with the Clearing House on a day to day basis.

    The Information Systems Department (ISD) of the Exchange generates Delivery and Receive Orders for transactions done by the members in A, B1, B2 and F group scrips after netting purchase and sale transactions in each scrip whereas Delivery and Receive Orders for "C" and "Z" group scrips are generated on trade to trade basis, i.e., without netting of purchase and sale transactions in a scrip.

    The Delivery Orders provide information like scrip, quantity and the name of the receiving member to whom the securities are to be delivered through the Clearing House. The Money Statement provides scrip wise/item wise details of payments/receipts for the settlement. The Delivery/Receive Orders and money statements can be downloaded by the members in their back offices

    The bank accounts of members maintained with the eight clearing banks, viz., Bank of India, HDFC Bank Ltd., Global Trust Bank Ltd., Standard Chartered Bank, Centurion Bank Ltd., UTI Bank Ltd., ICICI Bank Ltd., and Indusind Bank Ltd., are directly debited through computerized posting for their settlement and margin obligations and credited with receivables on accounts of pay-out dues and refund of margins.

    The securities, as per the Delivery Orders issued by the Exchange, are required to be delivered by the members in the Clearing House on the day designated for securities pay-in, i.e., on T+3 day. In case of the physical securities, the members have to deliver the securities in special closed pouches (supplied by the Exchange) along with the relevant details (distinctive numbers, scrip code, quantity, and receiving member) on a floppy. The data submitted by the members on floppies is matched against the master file data on the Clearing House computer systems. If there are no discrepancies, then a scroll number is generated by the Clearing House and a scroll slip is issued. The members can then submit the securities at the receiving counter in the Clearing House

    Auto D.O. facility:

    Instead of issuing Delivery Out instructions for their delivery obligations in a settlement /auction, a facility has been made available to the members of automatically generating Delivery-Out (D.O.) instructions on their behalf from their CM Pool A/cs by the Clearing House w.e.f., August 10, 2000. This Auto D.O. facility is available for CRS (Normal & Auction) and for trade-to-trade settlements. This facility is, however, not available for delivery of non-pari passu shares and shares having multiple ISINs. The members wishing to avail of this facility have to submit an authority letter to the Clearing House. This Auto D.O facility is currently available only for Clearing Member (CM) Pool accounts/Principal Accounts maintained by the members with National Securities Depository Ltd. (NSDL) and Central Depositories Services Ltd. (CDSL)

    Demat pay-in:

    The members can effect demat pay-in either through Central Depository Services (I) Ltd. (CDSL) or National Securities Depository Ltd. (NSDL). In case of NSDL, the members are required to give instructions to their Depository Participant (DP) specifying settlement no., settlement type, effective pay-in date, quantity, etc. The securities are transferred to the Pool Account. The members are required to give delivery-out instructions so that the securities are considered for pay-in.

    As regards CDSL, the members give pay-in instructions to their DP. The securities are transferred to Clearing Member (CM) Principal Account. The members are required to give confirmation to their DP, so that securities are processed towards pay-in obligations. Alternatively, members may also effect pay-in from clients' beneficiary accounts for which member are required to do break-up on the front-end software to generate obligation and settlement ID.

    The Clearing House arranges and tallies the securities received against the receiving member wise report generated on the Pay-in day. Once this reconciliation is complete, the bank accounts of members with seven clearing banks having pay-in positions are debited on the scheduled pay-in day. This procedure is called Funds Pay-in. In case of the demat securities, the securities are credited in the Pool Account of the members or the Client Accounts as per the client details submitted by the members. In case of Physical securities, the Receiving Members collect securities from the Clearing House on the payout day and the accounts of the members having payout are credited on Friday. This is referred to as Payout. In case of the Rolling Settlements, pay-in and payout of both funds and securities is on the same day, in case of Weekly settlements, pay-in of funds and securities is on Thursday and payout is on Friday.

    The auction is conducted for those securities which members fail to deliver/short deliver during the Pay-in. In case the securities are not received in an auction, the positions are closed out as per the closeout rate fixed by the Exchange in accordance with the prescribed rules. The close out rate is calculated as the highest rate of the scrip recorded in the settlement in which the trade was executed and in the subsequent settlement upto the day prior to the day of auction, or 20% above the closing price on the day prior to the day of auction, whichever is higher. However, in case of close-out for shares under objection or traded in "C" group, 10% instead of 20% above the closing price on the day prior to the day of auction and the highest price recorded in the settlement in which trade took place upto a day prior to auction is considered.

    The Exchange has strictly adhered to the settlement schedules for various groups of securities and there has been no case of clubbing of settlements or postponement of pay-in and pay-out during the last six years.

    The Exchange is also maintaining a database of fake/forged, stolen, lost and duplicate securities with the Clearing House so that distinctive numbers submitted by members on delivery may be matched against the database to weed out bad paper from circulation at the time of introduction of such securities in the market. This database has also been made available to the members so that delivering and receiving members can check the entry of fake, forged and stolen shares in the market

    SHORTAGES AND OBJECTIONS

    The members download Delivery/Receive Orders based on their netted positions for transactions entered into by them during a settlement in 'A', 'B1', 'B2', and 'F' group scrips and on trade to trade basis, i.e., without netting buy and sell transactions in scrips in "C" & 'Z' groups and scrips in B1 and B2 groups which have been put on trade to trade basis as a surveillance measure.

    The seller members have to deliver the shares in the Clearing House as per the Delivery Orders downloaded. If a seller member is unable to deliver the shares on the Pay-in day for any reason, his bank account is debited at the standard rate (which is equal to the closing price of the scrip on the day of trading) fixed by the Exchange for the quantity of shares short delivered. The Clearing House arrives at the shortages in delivery of various scrips by members on the basis of their delivery obligations and actual delivery.

    The members can download the statement of shortages on T+3 in Rolling Settlements. After downloading the shortage details, the members are expected to verify the same and report discrepancy , if any, to the Clearing House by 1:00 p.m. If no discrepancy is reported within the stipulated time, the Clearing House assumes that the shortage of a member is in order and proceeds to auction the same. However, in 'C' group, i.e., Odd Lot segment the members are themselves required to report the shortages to the Clearing House.

    The Exchange issues an Auction Tender Notice to the members informing them about the names of the scrips, quantity slated for auction and the date and time of the auction session on the BOLT. The auction for the undelivered quantities is conducted on T+4 for all the scrips under compulsory Rolling Settlements. The auction offers received in batch mode are electronically matched with the auction quantities so as to award the 'best price'. The members who participate in the auction session can download the Delivery Orders on the same day, if their offers are accepted. The members are required to deliver the shares in the Clearing House on the auction Pay-in day, i.e, T+5. Pay-Out of auction shares and funds is also done on the same day, i.e., T+5. The various auction sessions relating to shortages, and bad deliveries are now conducted during normal trading hours on BOLT. Thus, it is possible to schedule multiple auction sessions on a single trading day.

    In auction, the highest offer price is allowed upto the close-out rate and the lowest offer price can be 20% below the closing price on a day prior to day of auction. A member who has failed to deliver the securities of a particular company on the pay-in day is not allowed to offer the same in auction. He can, however, participate in auction of other scrips.

    In case no offers are received in auction for a particular scrip, the sale transaction is closed-out at a close-out price, determined by higher of the following:-

    - Highest price recorded in the scrip from the settlement in which the transaction took place upto a day prior to the day of the auction.

    OR

    - 20% above the closing price on a day prior to the day of auction.

    However, in case of the close-out of the shares under objection and shortages in "C" or "Z" group, 10% above the closing prices of the scrips on the pay-out day of the respective settlement are considered instead of 20%.

    Further, if the auction price/close-out price of a scrip is higher than the standard price of the scrip in the settlement in which the transaction was done, the difference is recovered from the seller who failed to deliver the scrip. However, in case, auction/ close-out price is lower than standard price, the difference is not given to the seller but is credited by the Exchange to the Customers Protection Fund. This is to ensure that the seller does not benefit from his failure to meet his delivery obligation. Further, if the offeror member fails to deliver the shares offered in auction, then the transactions is closed-out as per the normal procedure and the original selling member pays the difference below the standard rate and offer rate and the offeror member pays the difference between the offer rate and close-out rate.

    Self Auction

    As has been discussed in the earlier paragraphs, the Delivery and Receive Orders are issued to the members after netting off their purchase and sale transactions in scrips where netting of purchase and sale positions is permitted. It is likely in some circumstances that a selling client of a member has failed to deliver the shares to him. However, this did not result in a member's failure to deliver the shares to the Clearing House as there was a purchase transaction of some other buying client of the member in the same scrip and the same was netted off for the purpose of settlement. However, in such a case, the member would require shares so that he can deliver the same to his buying client, which otherwise would have taken place from the delivery of shares by the seller. To provide shares to the members, so that they are in a position to deliver them to their buying clients in case of internal shortages, the members have been given an option to submit floppies for conducting self-auction (i.e., as if they have defaulted in delivery of shares to the Clearing House). Such floppies are to be given to the Clearing House on the pay-in day. The internal shortages reported by the members are clubbed with the normal shortages in a settlement and the Clearing House for the combined shortages conducts the auction. A member after getting delivery of shares from the Clearing House in self-auction credits the shares to the Beneficiary account of his client or hand over the same to him in case securities received are in physical form and debits his seller client with the amount of difference, if any, between the auction price and original sale price

    B) Objections

    When receiving members collect the physical securities from the Clearing House on the Payout day, the same are required to be checked by them for good delivery as per the norms prescribed by the SEBI in this regard. If the receiving member does not consider the securities good delivery, he has to obtain an arbitration award from the arbitrators and submit the securities in the Clearing House on the following day of the Pay-Out (T+4). The Clearing House returns these securities to the delivering members on the same day, i.e., (T+4). If a delivering members feels that arbitration awards obtained against him is incorrect, he is required to obtain arbitration award for invalid objection from the members of the Arbitration Review Committee. The delivering members are required to rectify/replace the objections and return the shares to the Clearing House on next day (T+5) to have the entry against them removed. The rectified securities are delivered by the Clearing House to the buyer members on the same day (T+5). The buyer members, if they are not satisfied with the rectification, are required to obtain arbitration awards for invalid rectification from the Bad Delivery Cell on T+6 day and submit the shares to the Clearing House on the same day.

    If a member fails to rectify/replace the objections then the same are closed-out. This is known as "Objection Cycle" and the entire process takes 3 days.

    The following table summarizes the activities involved in the Patawat Objection Cycle of CRS.

    DAY ACTIVITY

    T + 3 Pay-out of securities of Rolling Settlement

    T + 4 Patawat Arbitration session :

    Arbitration awards to be obtained from officials of the Bad Delivery Cell.

    Securities under objection to be submitted in the Clearing House

    Arbitration awards for invalid objection to be obtained from members of the Arbitration Review Committee

    T + 5

    Members and institutions to submit rectified securities, confirmation forms and invalid objections in the clearing house

    Rectified securities delivered to the receiving members

    T + 6

    Arbitration Awards for invalid rectification to be obtained from officials of the Bad Delivery Cell

    Securities to be lodged with the clearing house

    The un-rectified and invalid rectification of securities are directly closed-out by the Clearing House instead of first inviting the auction offers for the same.

    The shares in physical form returned under objection to the Clearing House are required to be accompanied by an arbitration award (Chukada) except in certain cases where the receiving members are permitted to submit securities to the Clearing House without "Chukada".

    These cases are as follows:

    Transfer Deed is out of date.

    Cheques for the dividend adjustment for new shares where distinctive numbers are given in the Exchange Notice is not enclosed.

    Stamp of the Registrar of Companies is missing.

    Details like Distinctive Numbers, Transferors' Names, etc. are not filled, in the Transfer Deeds.

    Delivering broker's stamp on the reverse of the Transfer Deed is missing.

    Witness stamp or signature on Transfer Deed is missing.

    Signature of the transferor is missing.

    Death Certificate (in cases where one or more of the transferors are deceased) is missing.

    A penalty at the rate of Rs.100/- per Delivery Order is levied on the delivering member for delivering shares, which are not in order. In the event a receiving member misuses the facility of submitting shares under objection without "Chukada", a penalty of Rs.500/- per case is charged and the penalty of Rs.100/- per Delivery Order levied on the delivering member is refunded to him by debiting the receiving member's account

    Close Out:

    There are cases when no offer for particular scrip is received in an auction or when members who offer the scrips in auction, fail to deliver the same. In the former case, the original seller member's account is debited and the buyer member's account is credited at the closeout rate. In the latter case, the offeror member's account is debited and the buyer member's account is credited at the close-out rate. The closeout rates for closing the positions in different segments are as under:

    For 'A' + 'B1' + 'B2' + 'Z', 'Rolling demat' and 'F' group

    The closeout rate is higher of the following rates:

    Ø The highest rate of the scrip from the first day (trading day in case of Rolling demat segment) to the day prior to the day on which the auction is conducted for the respective settlement.

    Ø 20% above the closing rate as on the day prior to the day of auction of the respective settlement.

    For 'C' group segment

    The close-out rate is higher of the following rates :

    Ø The highest rate of the scrip from the first day to the day prior to the day of auction of 'A', 'B1', 'B2, and 'Z' group segment of the respective settlements; or

    Ø 10% above the closing rate as on the day prior to the day of auction of 'A', 'B1', 'B2, and 'Z' group; or

    Ø Transaction price.

    In the 'C' group, i.e., Odd Lot Segment, no auction session is conducted. The shortages are directly closed out.

    Close Out:

    There are cases when no offer for particular scrip is received in an auction or when members who offer the scrips in auction, fail to deliver the same. In the former case, the original seller member's account is debited and the buyer member's account is credited at the closeout rate. In the latter case, the offeror member's account is debited and the buyer member's account is credited at the close-out rate. The closeout rates for closing the positions in different segments are as under:

    For 'A' + 'B1' + 'B2' + 'Z', 'Rolling demat' and 'F' group

    The closeout rate is higher of the following rates:

    Ø The highest rate of the scrip from the first day (trading day in case of Rolling demat segment) to the day prior to the day on which the auction is conducted for the respective settlement.

    Ø 20% above the closing rate as on the day prior to the day of auction of the respective settlement.

    For 'C' group segment

    The close-out rate is higher of the following rates :

    Ø The highest rate of the scrip from the first day to the day prior to the day of auction of 'A', 'B1', 'B2, and 'Z' group segment of the respective settlements; or

    Ø 10% above the closing rate as on the day prior to the day of auction of 'A', 'B1', 'B2, and 'Z' group; or

    Ø Transaction price.

    In the 'C' group, i.e., Odd Lot Segment, no auction session is conducted. The shortages are directly closed out.

    Basket Trading System

    The Exchange has commenced trading in the Derivatives Segment with effect from June 9, 2000 to, enable the investors to hedge their risks. Initially, the facility of trading in the Derivatives Segment has been confined to Index Futures. Subsequently, the Exchange has since introduced the index options and options & futures in select individual stocks. The investors in cash market had felt a need to limit their risk exposure in the market to movement in Sensex.

    With a view to provide investors with this facility of creating Sensex linked portfolios and also to create a linkage of market prices of the underlying securities of Sensex in the Cash Segment and Futures on Sensex, the Exchange has provided the facility of Basket Trading System on BOLT. In Basket Trading System, the investors are able to buy/ sell all 30 scrips of Sensex in the proportion of their respective weights in the Sensex, in one go. The investors need not calculate the quantity of Sensex scrips to be bought or sold for creating Sensex linked portfolios and this function is performed by the system. The investors are also allowed to create their own baskets by deleting certain scrips from the Sensex basket of 30 scrips.

    Further, the Basket Trading System provides the arbitrageurs an opportunity to take advantage of price differences in the underlying securities of Sensex and Futures on the Sensex by simultaneous buying and selling of baskets covering the Sensex scrips and Sensex Futures. This is expected to have balancing impact on the prices in both cash and futures markets.

    The Basket Trading System would, thus, meet the needs of investors and also boost the volumes and depth in cash and futures markets.

    The Basket Trading System has been implemented by the Exchange w.e.f. Monday, the 14th August 2000. The trades executed under the Basket Trading System are subject to intra-day trading/gross exposure limits and daily margins as are applicable to normal trades.. To participate in this system the member indicates number of Sensex basket(s) to be bought or sold, where the value of one Sensex basket is arrived at by the system by multiplying Rs.50 to prevailing Sensex.

    Settlement System

    Securities traded on BSE are classified into three groups, namely, specified shares or 'A' group and non-specified securities that are sub-divided into 'B1' and 'B2' groups.

    Presently, equity shares of thirty-two companies are classified as specified shares. These companies typically have a large capital base with widespread shareholding, a steady dividend, good growth record and a large volume of business in the secondary market. Contracts in this group are allowed to be carried over to subsequent settlements upto a maximum permissible period of 75 days.

    495 relatively liquid securities are placed in a category called 'B1' group. The remaining securities-about 5800 as on May 31, 1996 are placed in the 'B2' group. All newly listed securities are placed in the 'B2' group.

    Settlement of transactions is done on an 'Account Period' basis. The period is a calendar week in the case of 'A' and 'B1' groups and 14 calendar days in the case of 'B2' group During an account period, buy or sell positions in a particular security can be either squared up by entering into contra transactions or can be further accumulated by entering into more buy or sell transactions.

    Clearing System

    The Clearing House of the Exchange handles the share and the money parts of the settlement process in the case of 'A' and 'B1' groups. The Clearing House handles only the money part of 'B2' group while securities are physically exchanged between the brokers.

    Opportunities available for foreign investors

    1. Direct investment:

    Foreign Companies are now permitted to have a majority stake in their Indian affiliates except in a few restricted industries. In certain specific industries, foreigners can even have holding upto 100 per cent.

    2. Investment through Stock Exchanges:

    Foreign Institutional Investors (FII) upon registration with the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) are allowed to operate in Indian Stock Exchanges subject to the guidelines issued for the purpose by SEBI.

    Important requirements under the guidelines are as under:

    I. Portfolio investment in primary or secondary markets will be subject to a ceiling of 24 per cent of issued share capital for the total holding of all registered FIIs in any one company. The holding of a single FII in any one company is subject to a ceiling of 5 per cent of the total issued capital.

    However, in applying the ceiling of 24 percent the following are excluded:

  • Foreign investment under a financial collaboration (DFI), which is, permitted upto 51 per cent in all priority areas.

  • Investment by FIIs through following alternative routes; Offshore Single/Regional funds, GDR's and Euro convertibles.

    II. Disinvestments will be allowed only through a broker of a Stock Exchange.

    III. A registered FII is required to buy or sell only for delivery. It should not offset a deal. It is also not allowed to sell short.

    3. Investment in Euro Issues/Mutual Funds Floated Overseas:

    Foreign investors can invest in Euro issues of Indian companies and in India-specific funds floated abroad.

    4. Broking Business:

    Foreign brokers upon registration with the SEBI are now allowed to route the business of registered FIIs. Guideline for the purpose have been issued by SEBI. However, foreign brokers at present are not allowed membership in India Stock Exchanges.

    5. Asset Management Companies/Merchant Banking:

    Foreign Participation in Asset Management Companies and Merchant Banking Companies is permitted.

    Transfer of Ownership

    Transfer of ownership of securities in effected through a date stamped transfer-deed, which is signed, by the buyer and the seller. The duly executed transfer-deed along with the share certificate has to be lodged with the company for change in the ownership. A nominal duty becomes payable in the form of stamps to be affixed on the transfer-deeds. Transfer-deeds remain valid for twelve months or the next book closure following the stamped date whichever occurs later.

    Safeguards

    1. Margins are collected from the brokers on buying and selling positions at the end of the day. The total outstanding position is further subject to capital adequacy norms laid down from time to time.
    2. A comprehensive insurance cover for the Exchange and the members is about to be put in place.
    3. Guaranteeing trades is the cornerstone of a mature clearing and settlement process. BSE is in the process of establishing a Clearing Corporation that will guarantee trades.
    4. Companies are required to publish half-yearly unaudited results and other price sensitive information. This imparts greater transparency to the stock market operations.
    5. Insider Trading Regulations have been laid down and a 'Take-Over' code has been created.

    Arbitration Machinery

    There exists three level arbitration machinery. The first two levels, which are adjudicated by member brokers, comprise of a two-member bench and a full bench that is to comprise of at least sixteen members respectively. The highest arbitrator in the Exchange is the Governing Board. Disputes unresolved in the Exchange are taken to the Court of Law.

    Customer Protection Fund

    The objective of this fund is to provide insurance to investors in case of default by a member. The investor is indemnified from default to the extent of Rs.1, 00,000. The corpus of the fund is created by depositing 2.5% of the listing fees and a levy on turnover at the rate or Re.1 for Rs. 1 million of turnover. It is further augmented by 50% of the interest accrued on 1% of the issue amount which is deposited by companies at the time of their public and rights issues for a three month period as a safeguard against non-refund of excess subscription.

    Grievance Redressal

    The Investor's Services Cell redresses investors' grievances against listed companies and stockbrokers. However, the Exchange does not have power to take penal action against listed companies, except delisting for specified periods.

    Disciplinary Action

    The Exchange has an eight member Disciplinary Action Committee (DAC) which decides on punitive action in disciplinary cases referred to it by the Surveillance and inspection departments of the Exchange Administration.

    Indices

    The Exchange compiles four indices, which are based on market capitalization. The first index to be compiled was the BSE Sensitive Index with 1978-79 as the base year. It comprises of equity shares of 30 companies from both specified and non-specified securities groups. The companies have been selected on the basis of market activity. Subsequently, a more broad based index, BSE National Index with 1983-84 as base year, was compiled. This index is made up of 100 scrips, 98 of which are quoted on Bombay. This index also includes prices on the other major stock exchanges of Delhi, Calcutta, Ahmedabad and Madras. If scrip is actively quoted on more than one Exchange the average price of the scrip is used in the compilation of the index.

    It was felt that the sensitive index-the most popular indicator of market movement-had become oversensitive to a handful of scrips. With divestment of Public Sector Unit (PSU) equity by government and a sharp increase in the number of companies listed over the last few years, it was felt that a new index, which is more representative of the recent changes and is more balanced is necessary. The BSE-200, which was introduced in May 1994, consists of equity shares of 200 companies, which have been selected on the basis of market capitalization, volume of turnover and strength of the companies' fundamentals. 1989-90 has been chosen as the base year for BSE-200.

    As the presence of the foreign investors grew, a need was felt to express the index values by taking into account the Rupee-Dollar conversion rate. Consequently, dividing the current Rupee market value by Rupee-Dollar modifies the BSE-200 conversion rate in the base year. This index, which indicates the movement of the market in dollar values, is called the Dollex.

    Disclosure & Listing Norms

    Companies who wish to raise money from capital market follow guidelines relating to disclosure, laid down by the Securities and Exchange Board of India. Some of the disclosure norms are:

    • Details of other income if it constitutes more than ten percent of total income.
    • All adverse event affecting the operations of the company.
    • Any change in key managerial personnel.
    • Risk factors specific to the project and those which are external to the company.
    • The listing requirements with the Exchange call for further disclosure by companies to promote public confidence. Important disclosures are:

    • The company is required to furnish unaudited half-yearly financial results in the prescribed Performa.
    • The company must explain to the Stock Exchange any large variation between audited and unaudited results in respect of any item.
    • When any person or an institution acquires or agrees to acquire any security of a company which would result in his holding five percent or more of the voting capital of the company, including the existing holding the Exchange must be notified within two days of such acquisition by the company or by authorized intermediary or by the acquirer.
    • Any take-over offer made either voluntarily or compulsorily to a company requires a public announcement by both the offeror and the offeree company.

    Computerized Trading

    BSE computerized its trading and settlement activities by following a three-phased approach.

    Phase I:

    The primary objective of this phase was the real time dissemination of price data through the Display Information Driver System (DIDS). DIDS was commissioned in November 1992 to disseminate bids, offers, actual rates of transactions and indices on a real time basis.

    Phase II:

    In 1994, settlement related daily transactions inputs and outputs were uploaded and downloaded from the TWS in the brokers' offices.

    Phase III:

    Commissioned on March 14, 1995. Although, screen based trading started with 818 scrips, by the 70th day of its commissioning, all scrips-exceeding 5000 had been put on the BOLT system. The BOLT system was commissioned with the Himalya K 10,000 central trading computer hardware. Since then the hardware has been upgraded to the Himalya K 20,000 system. The system provides for a response time of two seconds and can handle more than two hundred thousand trades in a day.

    1991-92


    (Apr.Mar)

    1992-93


    (Apr.Mar)

    1993-94


    (Apr.Mar)

    1994-95


    (Apr.Mar)

    1995-96


    (Apr.Mar)

    No. of Listed Companies

    2061

    2861

    3585

    4702

    5603

    Market Capitalization

    (In Rs.Billion)

    3059.87

    1881.46

    3680.71

    4354.81

    5264.76

    (In US $ Billion)

    97.13

    59.72

    116.85

    138.37

    153.27

    Annual Turnover

    (In Rs.Billion)

    717.77

    456.96

    836.29

    677.49

    500.64

    (In US $ Billion)

    22.78

    14.50

    26.55

    21.51

    14.57

    Velocity

    0.23

    0.24

    0.24

    0.16

    0.10

    Average Daily Turnover

    (In Rs.Billion)

    3.32

    2.38

    3.84

    1.78

    2.16

    (In US $ Billion)

    0.10

    0.07

    0.12

    0.06

    0.06

    No. of Shares Traded


    (In Million Nos.)

    6,35,515

    3,50,313

    7,42,792

    1,07,24.8

    7,71,850

    Average Number of Daily Deals

    75,000

    65,535

    63,786

    85,010

    73,855

    BSE Sensitive Index


    (Year End)

    4285.00

    2280.52

    3778.99

    3260.95

    3366.61

    BSE National Index


    (Year End)

    1967.71

    1021.40

    1829.53

    1605.57

    1549.25

    BSE 2000


    (Year End)

    585.19

    234.35

    450.07

    365.97

    345.40

    Dollex (Year End)

    261.25

    124.89

    238.86

    194.67

    168.54

    No. of Registered Flls

    -

    -

    145

    308

    366

    Fll Net investment

    (In Rs. Billion)

    -

    -

    29.85

    21.24

    31.63

    (In US $ Billion)

    -

    -

    0.95

    0.67

    0.92

    No. of Members


    (Year End)

    558

    558

    628

    636

    641

    No. of Corporate Members (Year End)

    4

    4

    4

    26

    63

    Future Developments

    In 1995, the President of India promulgated an Ordinance, which allowed for establishment of depositories.

    BSE in collaboration with Bank of India (BOI) will shortly establish a depository. BSE has applied for permission from SEBI to expand BOLT to other centres. Expansion of BOLT would bring more investors into the ambit of the capital market and consequently add depth to it.

    INTRODUCTION

    The National Stock Exchange (NSE) is India's leading stock exchange covering around 400 cities and towns all over India. NSE introduced for the first time in India, fully automated screen based trading. It provides a modern, fully computerized trading system designed to offer investors across the length and breadth of the country a safe and easy way to invest or liquidate investments in securities.

    Sponsored by the industrial development bank of India, the NSE has been co-sponsored by other development/ public finance institutions, LIC, GIC, banks and other financial institutions such as SBI Capital Market, Stockholding corporation, Infrastructure leasing and finance and so on. India has had a history of stock exchanges limited in their operating jurisdiction to the cities in which they were set up.

    NSE started equity trading 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.7 crores in November 1994 to Rs.6797 crores in February 2001 with an average of 9.6 lakh trades on a daily basis. During the year 2000-2001, NSE reported a turnover of Rs.13, 39,510 crores in the equities segment accounting for 45% of the total market.

    The NSE represented an attempt to overcome the fragmentation of regional markets by providing a screen-based system, which transcends geographical barriers. Having operationalised both the debt and equity markets, the NSE is planning for a derivative market, which will provide futures and options in equity. Its main objectives has been to set up comprehensive facilities for the entire range of securities under a single umbrella, namely,

    Ø To set up a nation wide trading facility for equities, debt instruments and

    hybrids;

    Ø To ensure equal access to investors across the country through an appropriate

    communication network;

    Ø To provide a fair, efficient and transparent securities market to investors using the electronic trading system;

    Ø To ensure shorter settlement cycles and book entry settlement systems; and

    Ø To meet the current international standards prevalent in the securities

    Industry/markets.

    Locations

    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 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 around 400 cities and towns all over India.

    Listing

    The prime objective of admission to dealings on the Exchange is to provide liquidity and marketability to securities as also to provide a mechanism for effective management of trading.

    Securities listed on the Exchange are required to fulfill the listing eligibility criteria. Various types of securities of a company are traded under a unique symbol and different series. This section provides a direct link to the web site of companies traded on the Exchange.

    Constitution

    The NSE has two segments for trading in securities: Wholesale Debt Market (WDM) and Capital Market (CM). Separate membership is required for each segment.

    Trading members

    They are recognized members of NSE. The persons eligible to become TMs are body corporates, subsidiaries of banks and financial institutions. They are selected on the basis of a comprehensive selection criterion. The whole time directors/dealers of thess

    Trading mechanism

    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 for the day.

    In NSE, the trades in rolling settlement are settled on a T+5 basis i.e. on the 5th 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 shall be settled on the next Monday, Tuesday's trades shall be settled on the next Tuesday and so on.

    Limited Physical Market

    Pursuant to SEBI guidelines, NSE introduced a new market called Limited Physical Market to provide a facility to small investors to trade and settle physical shares in those securities where compulsory dematerialized trading and settlement is enforced by SEBI. In this segment quantities not exceeding 500 shares of each security held in the name of the investor can be traded.

    Institutional Segment

    Trading in this market segment is available for institutional investors only. In order to ensure that the overall FII ceiling limits are not violated, trading members are allowed to enter sell orders in this market segment only for their FII clients. However, members can enter buy orders on behalf of FII/FI clients. The settlement of transactions in this segment is in demat mode only.

    Trade for Trade Segment

    Trading in this segment is available only for those securities, 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.

    Trading System

    NSE operates on the 'National Exchange for Automated Trading' (NEAT) system, a fully automated screen based trading system, which adopts the principle of an order driven market. NSE consciously opted in favour of an order driven system as opposed to a quote driven system. This has helped reduce jobbing spreads not only on NSE but in other exchanges as well, thus reducing transaction costs.

    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. 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.

    Market Types

    The NEAT system in NSE has four types of market. They are:

    ANormal Market

    All orders which are of regular lot size or multiples thereof are traded in the Normal Market. For shares, which are traded in the compulsory dematerialised mode the market lot of these shares, is one. Normal market consists of various book types wherein orders are segregated as Regular lot orders, Special Term orders, Negotiated Trade Orders and Stop Loss orders depending on their order attributes.

    AOdd 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.

    ASpot Market

    Spot orders are similar to the normal market orders except that spot orders have different settlement period's vis-à-vis normal market. These orders do not have any special terms attributes attached to them. Currently the Spot Market is being used for the Automated Lending & Borrowing Mechanism (ALBM) session.

    AAuction Market

    In the Auction Market, the Exchange on behalf of trading members for settlement related reasons initiates' auctions.

    There are 3 participants in this market.

    QInitiator

    The party who initiates the auction process is called an initiator.

    QCompetitor

    The party who enters orders on the same side as of the initiator is called a

    Competitor.

    QSolicitor

    The party who enters orders on the opposite side as of the initiator is called a

    Solicitor.

    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:

    A Best Price- Price priority means that if two orders are entered into the system, the order having the best price gets the higher priority.

    A Within Price, by time priority-Time priority means if two orders having the same price are entered, the order that is entered first gets the higher priority.

    The Capital Market segment has following types of books:

    1.Regular Lot Book

    The Regular Lot Book contains all regular lot orders that have none of the following attributes attached to them.

    a) All or None (AON)

    b) Minimum Fill (MF)

    c) Stop Loss (SL)

    2.Special Terms Book

    The Special Terms book contains all orders that have either of the following terms

    attached:

    a) All or None (AON)

    b) Minimum Fill (MF)

    Note: Currently, special term orders i.e AON and MF are not available on the system as per the SEBI directives.

    3.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 counter party code in addition to other order details.

    4.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.

    5.Odd Lot Book

    The Odd lot book contains all odd lot orders (orders with quantity less than

    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 which has a quantity less than or

    equal to 500 (Qty more than the market lot) for trading. This is referred as the

    Limited Physical Market (LPM).

    6.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 being used for conducting the Automated Lending & Borrowing Mechanism (ALBM) session.

    7.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.

    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 counter-orders 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.

    Order Conditions

    A Trading Member can enter various types of orders depending upon his/her requirements. These conditions are broadly classified into three categories: time related conditions, price-related conditions and quantity related conditions. For example

    Time Conditions

    Q 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.

    Q GTC - A Good Till Cancelled (GTC) order is an order that remains in the system until the Trading Member cancels it. It will therefore be able to span trading days if it does not get matched. The Exchange notifies the maximum number of days a GTC order can remain in the system from time to time.

    Q 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 Exchange notifies the maximum number of days a GTD order can remain in the system from time to time.

    Q 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.

    Q 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.

    Price Conditions

    Limit Price/Order

    An order, which 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 which 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.

    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.

    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

    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.

    Trading Workstation

    The trader workstation is the terminal from which the member accesses the trading system. Each trader has a unique identification by way of Trading Member ID and User ID through which he is able to log on to the system for trading or inquiry purposes. A member can have several user IDs allotted to him by which he can have more than one employee using the system concurrently.

    The Exchange may also allow a Trading Member to set up a network of dealers in different cities all of whom are provided a connection to the NSE central computer. A Trading Member can define a hierarchy of users of the system with the Corporate Manager at the top followed by the Branch Manager and Dealers.

    Trader Workstation Screens

    The Trader Workstation screen of the Trading Member is divided into several major windows:

    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.

    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, which 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. Invoking the Security List and selecting the securities from the window can also set up securities. The Symbol field incorporates the Company name and the Series field captures the segment/instrument type. A third field indicates the market type.

    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 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, which 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.

    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 which 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.

    Off Line Order Entry

    A member is able to make an order entry in the batch mode.

    Computer-to-Computer Link (CTCL) Facility

    NSE offers a facility to its trading members by which members can use their own trading front-end software in order to trade on the NSE trading system. This Computer-to-Computer Link (CTCL) facility is available only to trading members of NSE.

    Through CTCL facility Trading Members can use their own software running on any suitable hardware/software platform of their choice. This software would be a replacement of the NEAT front-end software that is currently used by members to trade on the NSE trading system. Members can use software customised to meet their specialized needs like provision of on-line trade analysis, risk management tools, integration of back-office operations etc. The dealers of the member may trade using the software remotely through the member's own private network, subject to approvals from Department of Telecommunication etc. as may be required in this regard.

    National Securities Clearing Corporation Limited

    National Securities Clearing Corporation Ltd. (NSCCL), a wholly owned subsidiary of NSE, was incorporated in August 1995 and commenced clearing operations in April 1996. It has been set up with a philosophy to sustain confidence in clearing and settlement of securities; promoting and maintaining, short and consistent settlement cycles; to provide counter-party risk guarantee, and to operate a tight risk containment system. It assumes the counter-party risk of each member and guarantees financial settlement. It has successfully brought about an up-gradation of the clearing and settlement procedures and has brought Indian financial markets in line with international markets.

    NSCCL carries out the clearing and settlement of the trades executed in the Equities and Derivatives segments and operates Subsidiary General Ledger (SGL) for settlement of trades in government securities. It also undertakes settlement of transactions on other stock exchanges like, the Over the Counter Exchange of India.

    NSCCL assumes the counter-party risk of each member and guarantees settlement through a fine-tuned risk management system and an innovative method of on-line position monitoring. It operates a well-defined settlement cycle and there are no deviations or deferments from this cycle. It aggregates trades over a trading period, nets the positions to determine the liabilities of members and ensures movement of funds and securities to meet respective liabilities. It provides a facility for multiple settlement mechanisms including, account period settlement for dealings in physical securities and dematerialized securities, rolling settlement (T+5 basis) in dematerialized segment etc.

    NSCCL has empanelled 9 clearing banks to provide banking services to trading members and has established connectivity with both the depositories for electronic settlement of securities.

    Badla trading

    Badla is a complex system that contains many a pitfall for the uninitiated and the unwary. Investors need to be aware of the problems, especially when brokers on BSE and other regional stock exchanges are marketing vyaj badla schemes to their clients aggressively.

    Before an investor start believing in the stories of superlative returns (in excess of 20 per cent), coupled with liquidity, safety and flexibility, it is imperative that one takes a hard, rational look at the entire mechanism. This is so because financing badla is a definite no-no for the first-time investor in the stock market and also for those who don't have the time to constantly monitor the status of his/her investments and fluctuations in the market returns

    Vyaj Badla

    In the vyaj badla system, there was a very high chance that an investor may end up with an average annual return of 14-18 per cent or sometimes even higher. But having said that, unfortunately, the returns were not guaranteed. This rosy picture could well be a reality during a bull run, but when the market was under a bear hug, returns could diminish to just around 6-8 per cent a year. Comparing it with a steady 12 per cent annual return offered by a bank fixed deposit or any AAA rated corporate bandit seemed that The high-risk and uncertain return of vyaj badla would start looking like a bad investment option.

    And then the taxman cometh! Vyaj badla transactions began to be treated as purchase and sale of shares, thus getting subjected to capital gains tax of 30 per cent. Thus, an investor's final returns get lopped off to that extent. Although nay Sayers might feel that vyaj badla provides an investor with an opportunity to maximize his earnings in a bull market, the fact remains that it is a good option for the experienced investor. Else, the nerve-wracking tension that accompanies stock market fluctuations may well take its toll.

    How did the Badla function?

    Assume that there had been 12 trades of 100 shares each in "ABC" stock, and there are 12 separate buyers and sellers respectively. Among the buyers, while six wanted to carry forward their positions, six want to take delivery. Of the sellers, eight wished to deliver the shares while four were keen on carrying their positions forward. Now six buyers made the payment for their purchases, while eight sellers effect delivery. Six buyers and six sellers got squared off. Four "buy" carry-forward positions get matched against four "sell" carry-forward positions.

    To ensure payment to the remaining two sellers for their 200 shares, vyaj badla financiers came in. This financier charged interest (badla) for the money paid on behalf of the two buyers for them. The demand and supply of funds and shares determined this rate. Shares delivered by the seller were kept by the exchange in the clearing-house and allocated to the financier's broker in a special account, forming the financier's collateral.

    On the BSE, brokers who were sure of taking or making delivery of shares mark their respective "for delivery" positions. This helped the exchange to arrive at the net outstanding positions on Friday evening (the last day of the settlement on BSE), by deducting them from the broker's weekly out standings. The difference is threw open to the market's badla trading session on Saturday. Prior to the commencement of this session, the base price (hawala rate) is fixed, which was normally the closing price of the scrip on Friday. An outstanding "buy" position in a stock sees a "seedha badla" where the financiers participate. An outstanding "sell" position in the stock sees an "ulta" or "undha badla" where the stock lenders participate. Specified quantities of the stock on offer are bought and sold at the financier's desired interest rate - the badla rate.

    In this case, let's assume the hawala rate to be Rs 69. If the financier wants to pay for 100 shares at 20 per cent per annum and the trade gets matched, the interest rate is converted into a weekly figure. In this case, it would be 0.38 per cent. On the hawala rate of Rs 69, this 0.38 percent works out to 26 paise. The terminals would constantly keep flashing the best badla rate and the best annual yield for each stock on offer for a particular quantity. A constant fluctuation in these values during the two-and-a-half hour session is due to the constant change in demand and supply, and also market perception. The broker would give the financier a badla bill or informal contract note, which would have two entries. One would show a purchase of 100 shares at Rs 69 per share, while the other would show a sale of 100 shares at Rs 69.26 per share. The difference will be the financiers earning for that week. With the next trading cycle ending, the financier can either receive the difference or roll over his/her money to a new badla transaction.

    Who can participate?

    Not all brokers can participate in the badla process. Memberships on BSE are split between type-I and type-II brokers. Only the former can carry out badla trades, for they maintain higher margins with the exchange. Hence, if you are keen on becoming a vyaj badla financier, you should approach the type-I broker.

    Most brokers don't accept anything less than Rs 1 lakh per client for badla financing. And the stock selection too is at their discretion. But it would be prudent for you to know the basis of allocation of stocks to you, as you would be one among a lot of clients whose money has been collectively invested in vyaj badla. Badla rates vary between stocks, depending upon their demand and supply. These rates fluctuate considerably throughout the session.

    Ideally, brokers using the discretionary allocation of stocks to the badla account should pay a weighted average return to each client. This should be reflected in the badla bills. For getting the weighted average return on badla finance, it is advisable to look for brokers who have automated this process.

    As in any other market transaction, one cannot avoid brokerage in a vyaj badla transaction too. Brokerage for such deals could range between 1-2.5 per cent, trimming down your annual yield further. It is advisable to enter into a firm brokerage percentage prior to the commencement of the relationship.

    Are investors safe?

    What is the investor's safeguard in times of default? If the forward buyer defaults, he got the shares held in the exchange's clearinghouse against his broker's name, on which he had a lien through his Badla bill. But his risk erosioned in the value of the share during the days that it takes to release the shares.

    In the recent history of BSE, there have been instances of brokers (having large carry-forward positions in highly speculative stocks) defaulting. Although these shares were enjoying very high badla rates at the time of the default, the prices had dipped sharply by the time the financiers got their shares.

    If the broker defaults, the financier is in a larger mess. Apart from the large institutional brokers, most brokers on BSE have a net worth of Rs 1-2 crore. Badla positions taken by them sometimes go up to 15-20 times their net worth. Even a 10 per cent downward shift in their position would wipe out the broker's entire net worth. And then you could bid goodbye to your money too. The BSE's Trade Guarantee Fund could be of some succour and solace in these situations, but just that.

    Failure to cash in on your interest gain at the end of the trading cycle gives the confidence to your broker to automatically roll over your investment to the next cycle. While opting out, always time your exit. By virtue of the exchange's settlement cycle, your money gets released within a ten-day period. This further reduces your yield.

    As in the case of defaults, the delay in the release of your money can be detrimental. So factor in those extra days while calculating your actual return. Although vyaj badla is considered to be an effective short-term instrument, as is the case with all such instruments, the delay can really eat into your returns. Given the quirks of the vyaj badla transactions and the inherent risks involved, it can be concluded that amateurs should stay away - it is strictly for the pro and the strong hearted.

    Substitutes to Badla

    Financial derivatives

    By far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives...

    These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it -- a process that has undoubtedly improved national productivity growth and standards of living. -- Fed Chairman Alan Greenspan

    Following the introduction of index futures, the Securities and Exchange Board of India (SEBI) permitted the BSE and the NSE to introduce more derivatives, such as options on indices and individual stocks. But an instrument that may be more in line with the domestic market structure -- single-stock futures -- is not under consideration.

    Single-stock futures are a way to reap the benefits of a stock's performance without actually owning the stock. Theoretically, they offer the benefits of ownership, of leveraging the stock or its underlying asset. But a similar opportunity is not available to the speculator-investor to sell options in the underlying scrip. As delivery of futures contracts is on a future date, the investor has to put up only the margin money. Hence, he can leverage on the margins to buy more units of the underlying security.

    One of the advantages enjoyed by single-stock futures is that they are cheaper to trade and easier to use for hedging strategies than options. Cheaper, because margins in futures trading are lower than in options. But the valuation of futures contracts are not as complicated as that of options. Hence, small investors find them relatively easy to understand and use.

    Trading options:

    Trading options are riskier than futures. This is purely from the options-writer's perspective. Market making in options depends to a great extent on institutions willing to write the contracts. Since the buyer of an option contract is not under any obligation to exercise his right, his risk is limited to the premium paid for purchasing the right.

    However, the writer is under an obligation to deliver. This means the risk borne by the option-writer is enormous. Exchanges normally guarantee the writer's position. Hence, to limit default in the market, the margin requirements are quite high. For instance, in international markets, while the margin rate for index futures contracts is around 5 per cent, that for index options works out to the commission received plus around 15 per cent of the contract's notional value.

    Thus, in this situation, there is excessive risk for the options-writer and transactions costs could be high. Currently, the regulations prevent funds from taking speculative positions in the spot market. So, they may not be allowed to write options. A market exists only if there is a writer and a buyer. But given that there are few takers for the futures market, it is difficult to foresee a lot of interest in the options market.

    Conclusion

    EXECUTIVE SUMMARY

    The project is an attempt to working of stock exchanges in detail. It provides thorough knowledge of different aspects of trading in stock exchanges. The focus is basically with Indian context. The report is divided in three parts. The first dealing with the theory, ie, introduction of securities market, concept of stock exchanges, their role in economy, their characteristics, role of SEBI etc.

    The second part is the study made of different methods of trading and In all they offer 9 different avenues for investing, which have been explained in length in the pages to come.

    The third part is the Case, attached with the report, which is also taken from Franklin Templeton India Ltd. The case speaks about 3 facts of investing; first being that growth and value do not move in tandem; second being, value investing has rewarded long term investors; and the third one as, value stocks have provided low relative volatility over time.

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