Stock Exchange Development and Trading Operations in...
Transcript of Stock Exchange Development and Trading Operations in...
Stock Exchange Development and Trading Operations in India
Introduction
Economic development is largely characterized by the industrial development of
the nation. Industrialization, however, depends upon a host of factors like
entrepreneurship, compatible infrastructure, technological development, existence of
trade promoting institutions which include banks, insurance companies, transport
facilities, warehousing etc. In modern scenario of industrial development, States establish
specialized facilities for rapid and accelerated growth of industry and trade. These include
building industrial estates, setting up Special Economic Zones (SEZs), Export Oriented
Zones, etc.
Of all these pre-requisites for industrial development the most important factor is
the 'investment.' Industrial development is, in fact, hugely dependent and influenced by
'Investment.' Investment, in run, depends upon the flow of adequate funds from such
economic units which have a surplus (savers) those to economic units which have a
deficit of funds (investors). But the savers and investors are widely scattered and
separated physically and knowledgeably from each other. This necessitates the
establishment of a meeting ground as well as provision of adequate information about
those who demand funds to those who supply the funds. This void is bridged through the
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media of Stock Exchange. Every nation sets up stock exchanges to ensure regular and
uninterrupted flow of finance for industrial development. It enables the entrepreneurs and
investors to make decision about setting up new business units and / or undertaking
expansion in the capacities of existing manufacturing units. India is no exception. It also
established stock exchanges and over the course of years these exchanges not only
developed into an advance sophisticated and strong financially viable industry but also
multiplied in number expanded in activities and volume of business.
The present chapter is split into two sections. The first section presents an
overview of the Stock Exchanges followed by development and growth of Capital market
in India. The second section discusses the stock market operations in India.
Section – I
Development and Growth of Stock Market in India
The stock exchange emergence and development in India has a chequered history.
The concept initiated from the speculative activity undertaken by some businessmen in
Bombay during the period 1816-1865. The American Civil War during this period
doubled the demand for cotton exported from Bombay. The cotton price bounced and
during 1861-65 the price was five to nine times higher than the price charged earlier.
Moreover, a large amount of cotton exports was paid for in the form of bullion that
poured into Bombay in the shape of silver and gold. Huge wealth generated in Bombay
during cotton boom. Available facts indicate that speculation in securities and
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establishment of new companies were two of them. Speculation can be termed as the
purchase (or temporary sale) of securities for later resale (re-purchase) in the hope of
profiting from the intervening changes.
From 1861 to the beginning of 1865 speculation was the key activity in Bombay's
securities trading places. Around 25 new banks, 69 financial associations, 7 land
reclamation companies and 30 miscellaneous companies were floated during this period.
But soon the boom was followed by disasters as soon as the American Civil was ended in
early 1865. As a result, the sources of huge earnings dried up. The speculative activity
was interrupted by non-fulfillment of transactions.
Stock Exchange Era in India
The disaster that followed the boom brought the speculators / brokers together in
July 1875, they decided to form an association, that is today called the Bombay Stock
Exchange, the Institution was the first of its kind in India.
The Bombay experience was later followed in Ahmedabad and Calcutta. Security
dealers in these two places also shared the cotton boom. On the pattern of Bombay, the
speculators/brokers at these two centers and at other cities also formed associations with
stock exchanges being set up at Ahmedabad in 1894, at Calcutta in 1908, at Indore in
1930 at Madras in 1937, at Hyderabad in 1943 and at Delhi in 1947. Since
beginning Bombay Stock Exchange is considered as the leader among Indian Stock
Exchanges. Therefore, trends and developments that have taken place at the Bombay
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Stock Exchange or that are taking place can be treated as broad indicators of performance
of Stock Exchanges in the country.
Post-Independence Period:
The national government (post-independence) placed focus on expansion of stock
exchanges which were essential for development of financial markets to channelize and
maintain adequate funds flows for industry and trade. The Government enacted the
Securities Contract (Regulation) Act in 1956 to accord recognition to Stock Exchanges
registered under the Act. Only Bombay, Calcutta, Madras, Ahmedabad, Delhi,
Hyderabad, and Indore Stock Exchange, which were well established, were recognized
under the Act, Bangalore Stock Exchange was registered in 1957 but recognized in 1963.
Thus, during early sixties there were eight recognized Stock Exchanges in India.
The number virtually remained unchanged for nearly two decades.
The decade of eighties witnessed emergence of Stock market as a major source of
finance for trade and industry. During eighties, therefore, many Stock exchanges were
established. The addition of new stock exchanges resulted in the widening of Indian stock
market. Consequently, the number of companies listed in the stock exchanges also shot
up and the volume of market capitalization through these stock exchanges also expanded
tremendously. The following table 2.1 shows the growth of stock market in India during
the last six decades.
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Table 2.1: Stock Exchange Development in India
Description 1961 1971 1981 1991 2001 2010
No. of stock exchanges 7 8 9 22 23 20
No. of listed companies 1203 1599 2265 6229 9871 10297
Market Capitalization
(Rs. In. billion)
12 27 68 1103 11926 12570
Source: BSE & NSE
Statistics of table reflects that the strength of stock exchanges almost tripled from
7 to 20 over the course of 1961 through 2010. The number of listed companies on these
stock exchanges grew more than nine-fold from 1203 to 10297 during the corresponding
period. The amount of market capitalization raised through the stock market soared from
12 billion rupees in 1961 to 12570 billion rupees in 2010 registering an increase of more
than one thousand times during the period.
Post-Liberalization Development of Stock Market:
India embarked upon the economic liberalization and reforms policy in the
beginning of the 90's and switched over from the protected market to open market
economic environment. In the wake of it, reforms, both structural and legal, had to be
carried out in different sectors of economy. Financial sector was no exception.
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The liberalization encompassed wide ranging measures compatible to open
market requirements. Some of the important ones were de- licensing of a number of
industries; through opening up, a number of industries of the public sector to the private
sector, the lowering of personal and corporate tax rate, raising of the interest rate in
convertible debentures of companies, raising the asset limit for applicability of
Monopolies and Restrictive Trade Practice with regard to foreign collaborations;
allowing scope for dominant undertaking to go in for diversification projects. Significant
changes were made in various policies relating to industrial development as well as
overall economic development. The liberalization also included special incentives for
private enterprise by way of reduction of direct taxes and tax free high-yielding
instruments without any financial limit on individual subscription.
One of the results of the liberalization is an increase in the demand for funds on
the part of private corporate sector. As a result investment in shares and debentures
became middle class phenomenon. Financial liberalization in fact help in deepening the
activities of stock market. The countries that succeeded in developing a compatible equity
market in the post-liberalization era were also successful in attracting domestic and
international funds for the growth of economy. In India the process of reforms started in
1991 which included, inter alia, reforms of investments, exchange rate, and trade regimes
has ended the four decades of national planning and set in motion a quiet industrial
revolution.
In fact, Stock Exchanges play an important role in the development and growth of
capital markets which determine economic health of the industry and economy by
providing long term funds to those who need for productive purposes Even Governments
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(Central & States) raise funds from the capital market by issuing government securities.
Capital markets help to raise medium and long term funds through various instruments
such as shares (Equity & preference) debentures and bonds etc. Thus there are two
important operations on the capital markets viz Raising of fresh capital (funds) and
trading in securities already issued by government & companies. The important
constituents of capital markets are stock Exchanges, Banks, Investment trust and
companies Specialized, financial institutions / development banks, Mutual Funds, Non-
banking financial institutions (NBFI) Foreign Institutional Investors (FIIs). Besides these,
Individuals, corporate Governments, Provident Funds & Insurance companies act as fund
providers by utilizing their savings / surplus funds. In India the establishment of
Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) has proved a
turning point in the development of capital markets.
INDIAN CAPITAL MARKET IN ITS HISTORICAL RETROSPECT
The history of the capital market in India dates back to the eighteenth century
when East India Company securities were traded in the country. Until the end of the
nineteenth century' securities trading was unorganized and the main trading centers were
Bombay (now Mumbai) and Calcutta (now Kolkata). Of the two, Bombay was the main
trading center wherein bank shares were the major trading stock. During the American
Civil War (1860-61), Bombay was an important source of supply for cotton. Hence,
trading activities flourished during the period, resulting in a boom in share prices. This
boom, the first in the history of the Indian capital market, lasted for a half a decade. The
bubble burst on July 1, 1865, when there was tremendous slump in share prices.
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Trading was at that time limited to a dozen brokers: their trading place was under
a banyan tree in front of the Town Hall in Bombay. These stockbrokers organized an
informal association in 1865- Native Shares and Stock Brokers Association, Bombay.
The stock exchanges in Calcutta and Ahmedabad, also industrial and trading centers,
came up later. The Bombay Stock Exchange was recognized in May 1927 under the
Bombay Securities Contracts Control Act, 1925.
The capital market was not well organized and developed during the British rule
because the British government was not interested in the economic growth of the country.
As a result, many foreign companies depended on the London capital market for funds
rather than on the Indian capital market. In the post-independence period also, the size of
the capital market remained small. During the first and second five-year plans, the
government's emphasis was on the development of the agricultural sector and public
sector undertakings. The public sector undertakings were healthier than the private
undertakings in terms of paid-up capital but their shares were not listed on the stock
exchanges. Moreover, the Controller of Capital Issues (CCI) closely supervised and
controlled the timing, composition, interest rate, pricing, allotment, and floatation costs of
new issue. These strict regulations demotivated many companies from going public for
almost four and a half decades.
In the 1950s, Century Textiles, Tata Steel, Bombay Dyeing, National Rayon, and
Kohinoor Mills were the favorite scrips of speculators. As speculation became rampant,
the stock market came to be known as 'Satta Bazaar’. Despite this speculation, non-
Payment or defaults were not very frequent. The government enacted the Securities
Contracts (Regulation) Act in 1956s. This year was also characterized by the
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establishment of a network for the development of financial institutions and state
financial corporations.
The 1960s was characterized by wars and draughts in the country which led to
bearish trends. These trends were aggravated by the ban in 1969 on forward trading and
“badla”, technically called “contracts for clearing”. Badla provided a mechanism for
carrying forward positions as well as borrowing funds. Financial institutions such as L I
C and GIC helped to revive the sentiment by emerging as the most important group of
investors. The first mutual fund of India, the Unit Trust of India (UTI) came into
existence in 1964.
In the 1970s, badla trading was resumed under the disguised form of “hand-
delivery contracts-A group”. This revived the market. However, the capital market
received another severe setback on July 6, 1974 when the government promulgated the
Dividend Restriction Ordinance, restricting the payment of dividend by companies to 12
per cent of the face value or one-third of the profits of the companies that can be
distributed, as computed under section 369 of the Companies Act, whichever was lower.
This led to a slump in market. Later came a buoyancy in the stock markets when the
multinational companies (MNCs) were forced to dilute their majority stocks in their
Indian ventures in favour of the Indian public under FERA, 1973. Several MNCs opted
out of India. One hundred and twenty-three MNCs offered shares which were lower than
their intrinsic worth. Hence, for the first time, the FERA dilution created an equity cult in
India. It was the spate of FERA issues that gave a real fillip to the Indian stock markets.
For the first time, many investors got an opportunity to invest in the stocks of such MNCs
as Colgate and Hindustan Liver Limited. Then, in 1977, a little-known entrepreneur,
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Dhirubhai Ambani, tapped the capital market, its scrip, Reliance textiles, has become a
hot favourite and dominates trading at all exchanges.
The 1980s witnessed an explosive growth of the securities market in India, with
millions of investors suddenly discovering lucrative opportunities. Many investors
jumped into the stock markets for the first time. The government's liberalization process
initiated during the mid-1980s, spurred this growth. Participation by small investors,
speculation, defaults, ban on badla, and resumption of badla continued. Convertible
debentures emerged as a popular instrument of resource mobilization in the primary
market. The introduction of public sector bonds and the successful mega issue of
Reliance Petrochemicals and Larson and Toubro gave a new lease of life to the primary
market. This, in turn, enlarged volumes in the secondary market. The decade of the 1980s
was characterized by an increase in the capitalization.
Figure 2.1: Indian Capital Market
Corporates Brokers Equity Primary
Stock Exch SEBL Investment Bankers Debt Secondary
Brokers MCA Stock Exchanges Hybrid
Underwriters RBI Underwriters (Derivatives)
Individual
FIIs
CRA
The 1990s will go down as the most important decade in the history of the capital
market of India. Liberalisation and globalization were the new terms coined and marketed
Markets Instruments Intermediaries Regulators Players
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during this decade. The Capital Issue (Control) Act, 1947 was repealed in May 1992. The
decade was characterized by a new industrial policy, emergence of SEBI as a regulator of
capital market, advent of foreign institutional investors, euro-issue, free pricing, new
trading practices, new stock exchanges, entry of new players such as private sector
mutual funds and private banks, and primary market boom and bust. Major capital market
scams took place in the 1990s. These shook the capital market and drove away small
investors from the market. The securities scam of March 1992 involving brokers as well
as bankers was one of the biggest scams in the history of the Capital market. In the
subsequent years owing to free pricing, many unscrupulous promoters, who raised money
from the capital market, proved to be fly-by-night operators. This led to an erosion in the
investors' confidence. The M S shoes case, a scam which took place in March 1995, put a
break on new issue activity.
The 1991-92 securities scam revealed the inadequacies of and inefficiencies in the
financial system. It was the scam, which prompted a reform of the equity market. The
Indian stock market witnessed a sea change in terms of technology and market prices.
Technology brought radical changes in the trading mechanism. The Bombay Stock
Exchange was subject to nationwide competition by two new stock exchanges-the
National Stock Exchange, set up in 1994, and Over the Counter Exchange of India, set up
in 1992. The National Securities Clearing Corporation (NSCC) and National Securities
Depository Limited (NSDL) were set up in April 1995 and November 1996 respectively
for improved clearing and settlement and dematerialized trading. The Securities Contracts
(Regulation) Act, 1956 was amended in 1995-96 for introduction of options trading.
Moreover, rolling settlement was introduced in January 1998 for the dematerialized
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segment of all companies. With automation and geographical spread, stock market
participation increased.
In the late 1990s, the Information Technology (IT) scrips were dominant on the
Indian bourse. These scrips included Infosys, Wipro, and Satyam. They were a part of the
favorite scrips of the period, also known as 'New Economy' scrips, along with
telecommunications and media scrips. The new economy companies are knowledge
intensive unlike the old economy companies that were asset intensive.
The Indian capital market entered the twenty-first century with the Ketan parekh
scam. As a result of this scam, badla was discontinued from July 2001 and rolling
settlement was introduced in all scrips. Trading of futures commenced from June 2000
and internet trading was permitted in February 2000. On July 2, 2001, the Unit Trust of
India announced suspension of the sale and repurchase of its flagship US-64 scheme due
to heavy redemption leading to panic on the bourses. The government's decision to
privatize oil PSUs in 2003 fuelled stock prices. One big divestment of international
telephony major VSNL took place in early February 2002. Foreign institutional investors
have emerged as major players on the Indian bourses. NSE has an upper hand over its
rival BSE in terms of volumes not only in the equity markets but also in the derivatives
market.
Having examined the development and growth of stock market it its historical
retrospect, now we will have a look at the facts and figures during pre and post
liberalization period.
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Comparison of trends of Indian capital market during pre and post
liberalization period
The most popular method of raising the capital in the New Issue Market is issue
through prospectus and through rights. In table 2.2 an attempt has been made to analyze
the trends in the new capital issue of non-government companies since 1970 to 2008.
In 1970-80, the average capitalization was Rs. 95.18 crore was increased to
2335.90 with 2354 percent growth rate (table 2.2). During 2000-08, the average
capitalization was 18322.87 crore that was 684 percent more from period 1981-91 (table
2.2). The number of issues through prospectus and rights were highest during the period
1992-2000 after introduction of liberalization. From the analyzes we may conclude that
there was a huge jump in the New Capital Issues by Non-Government Public Limited
Companies in the post liberalization period, in terms of total number of capital issues
through of prospectus and through rights and in terms of the respective amount.
Table 2.2: New Capital Issues by Non-Government Public Limited
Companies
(Rs. in crore)
Year
OF TOTAL CAPITAL ISSUES
Total
Amount
Yearly
Average
Growth
Rate
(%age
Change)
Prospectus Rights
No. of
Issues Amount
No. of
Issues Amount
1970-1980 1305 790 465 257 1047 95.18
1981-1991 3842 11398 1230 11961 23359 2335.9 2354
Post-Liberaization Period (1992-2008)
1992-2000 5087 66536 2008 44919 111455 12383.88 430
2000-2008 445 117116 179 29467 146583 18322.87 48
Source: RBI, report on currency and finance. Various issues and SBEI annual report 2008.
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The trend of capital market in India in terms of the number of stock exchanges,
Number of listed companies and market capitalization in the pre and post liberalization
period is analyzed in Table 2.3. Table 2.3 depicts that Indian Stock Market now comprise
of 21 Stock Exchanges with 9500 listed companies. The market capitalization
RS.110,279 Crore in the year of liberalization (ie.1991) which increased to Rs. 8,130,816
Crore in 2008. There is change in market capitalization after introduction of
liberalization. The number of Stock Exchanges increased from eight in 1971 to 20 in
1991 and to 21 in 2008. India now has the largest number of organized and recognized
SEs in the World.
Table 2.3: Capital Market Development in India during Pre and Post
Liberalization Period
Yea
Number of
Exchanges
Stock
Number of
listed companies
Market
Capitalization
(Rs. in Crore)
Market value of
capital per listed
companies
(Rs. in lakhs)
1 2 3 4 2=1(4
Pre-Liberalization Period (1971-1991)
1971 8 1599 2675 167
1981 9 2265 6750 298
1985 14 4344 25302 582
1990 19 5968 70521 1182
1991 20 6229 110279 1770
Post-Liberalization Period (1992-2008
1992 22 6480 354106 5465
1997 23 9332 488270 5232
1999 23 9877 1023381 10361
2000 23 9871 2067030 20940
2008 21 9500 8130816 85588
Estimated Source: RBI report on currency and finance, various issues and SEBI annual repoty 2008
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Table2.4: Annual Average of Share Price Indices and Market Capitalization
of BSE during Pre and Post Liberalization Period
Source: SEBI, and RBI reports, various issues, BSE, NSE.
The Table 2.4 shows that annual average of share price index of BSE which was
711.79 during period 1987-91, increased to 7699.94 by 2001-08, which was mere 172.65
in the period 1979-83. There was 319.20 percent growth in respect of average share price
index after the introduction of liberalization. During period of 1987-91, the average
market capitalization of BSE, which was Rs.64030.25 crore, increased to Rs. 1823873.14
crore during 2001-08, which was mere Rs.3797.50 crore in 1979-83.
Indian capital market has accomplished a long journey, it is well organised, fairly
integrated, mature and modernized with global exposure. It is now being considered as
one of the best in the world in terms of technology. The explosion of knowledge in the
world of information technology has rendered boundaries meaningless. Internet trading
has become a global phenomenon. The Indian stock markets are now getting integrated
with global markets.
***
Year
BSE Sensex
Base
1978
79>100
Yearly
Average
Growth
Rate
(%age
change
Marker
Capitalization
(Rs. in crote)
Yearly
Average
Growth
Rate
(%age
change
Per-Liberalization Period (1979-1991)
1979-83 690.61 172.65 15190 3797.5
1983-87 1564.14 391.04 126.49 78170 195542.5 414.61
1987-91 2847.14 711.79 82.02 256121 64030.25 227.65
Post-Liberalization Period (1992-2008)
1991.96 14937.46 2987.94 319.2 1841537 368307.4 475.21
1996-2001 19505.2 3901.04 30.58 3053996 610799.2 65.83
2001-2008 53895.83 7699.94 97.37 12767112 1823873.14 198.6
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Section – II
STOCK MARKETS OPERATIONS
Stock exchange promotes different types of markets depending upon the type of
financial asset / claims. The claim traded in a financial market may be either for a fixed
rupee amount or a residual amount. The former financial instrument referred to as debt
instrument and the financial market in which such instruments are traded is referred to as
the debt market. The latter financial assets are called equity instruments and the financial
market where such instruments are traded is referred to as the equity market or,
alternatively, it is referred to as stock market. Some instruments traded in the market are
of short duration and some others of longer duration. Financial market for short term
financial assets is referred to as Money Market and the one for longer maturity period is
termed as capital market. In the capital market, the financial assets may be either newly
issued or the already issued assets may be bought and sold. The market for this newly
issued financial asset is referred to as the primary market. Where the issued instruments
are further exchanged and traded, the place is referred to as the secondary market.
Moreover, the stock exchanges have developed financial markets based on their
functional and organizational structure. Based on it, the markets are referred to as auction
markets, over the counter markets, and intermediate markets.
TRADING IN THE STOCK EXCHANGE
The Stock Exchange, as an entity, provides “trading” facility for stock brokers
and traders. They trade stock, bonds and other securities. Stock Exchange also provides
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facilities for the issue and redemption of securities as well as other financial instruments.
The players in the stock market include the entities that issue financial assets and those
entities that invest in assets. A simple classification of these entities is: (1) Central
government (2) agencies of central government (3) State government and their agencies
(4) Local self-governments like municipalities, (5) manufactory business comprising
corporate sector (6) financial enterprises comprising financial institutions, and (7)
households. Other players in the financial markets are the regulators. Financial markets
play a prominent role in any economy, government deems it necessary to regulate certain
aspects of these markets. The Securities and Exchange Board of India (SEBI) is the chief
regulator of trading in the stock markets.
Figure 2.2: Showing Stock Market Trading in India
Stock Market Trading
Cash Trading
Or
Normal Trading Derivative
Trading
Equity (Capital Market)
Segment
Wholesale Debt
Segment
Trading of Government
Securities
Secondary Market for
Corporate Debt Securities
Forward
Futures
Options
Types
Trading
System
Clearings
Settlement
Risk
Management
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MARKET SEGMENTATION:
Stock Exchange has various market segments christened on the basis of nature of
security. Trading in shares of corporations is conducted in the market called ‘Equity
Market’ or ‘Capital Market’. The debt instruments like debentures and bonds are dealt
with in the debt market, the financial derivatives are traded in the Derivative Market; the
working of each market has its own peculiarities. An insight into the trading procedures
and practices in each market is presented below:
(A) THE EQUITY MARKET:
The stock/shares of corporate sector are traded in the Equity Market. The Primary
Market deals in the trading of initial issue of shares while the subsequent trading of these
securities is done in the Secondary Market. Below we will discuss about the trading
system and methodology of the equity market in India.
The Bombay Stock Exchange (BSE) and the National Stock Exchange (NES) are
the leading two entities which form the hub of India financial markets. Both these
organisations have screen based electronic trading system based on the principle of an
order-driven market. Orders are entered into the trading system using computer terminals
provided by the exchanges. Currently all order inputs into the trading system must be
manually released into system. Computer-generated automatic order entry is not
permitted. Nor any systems permitted to interface with both the BSE and NSE order entry
terminals to evaluate and chose the most appropriate market (i.e. best price) to send the
order, which is a valuable tool for dually listed stocks. Instead investors must decide
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which market to send a particular order. As such, some inefficiency exists amongst the
price of deadly tested shares, and therefore arbitrage opportunities appear the two
exchanges.
The transactions take place through the medium of brokers. The trading is
conducted in an anonymous environment. The counterparty to every trade is the exchange
and thus the identity of the broker member representing the other side of the trade is not
revealed.
TRANSACTION ENTRIES:
Trading entries are made on trading terminals provided by the exchanges and
installed in member-broker offices that link directly to the exchanger. Order to buy or
sale securities are entered through these terminals. The trading terminals are unique for
each exchange, BSE & NSE and the member-broker has to install separate terminals for
each exchange. As the entries for trade are manually allowed by each exchange, this rule
influences trading functions in three ways. Firstly, best price advantage is obtained as
such exchange terminal is to be checked before entering and outgressing the order.
Secondly, Arbitrage opportunities are available as securities dually listed on BSE and
NSE often have price discrepancy. However, the exchange and the SEBI do not permit
automated computer-generated arbitrage between the two exchanges. Third, computer-
based trading ensures efficient and instantaneous transaction which will improve the
quality of trading.
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Scrip Classification:
The issues traded on BSE are classified into various categories based on certain
qualitative and quantitative parameters. The following Table 2.5 explains the scrip
classification:
TABLE 2.5: SCRIP CLASSIFICATION
Classification Description
A Equity The 200 strongest, highest market-capitalized, highest-
liquidity companies on the BSE, with strong financials
and high-quality corporate governance.
B1 Also strong companies, but not in the top 200. Many
may compare favorably with A-classification
companies based on the objective and subjective
parameters, but not be in the top 200 and thus receive a
B1 classification. There is no fixed number of B1
companies.
B2 B2 companies represent the lowest tier of listed
equities in terms of market cap, liquidity, financials,
and the subjective measures such as corporate
governance and complaints. Investors should be wary
of B2 companies in terms of management, quality of
earnings, and the financial soundness of the business.
S S shares are also known as “BSE Indonext” shares.
This classification consists of scrip from the B1 and
B2 groups and companies exclusively listed on
regional stock exchanges that have capital of Rs. 3 to
30 crores (US$700,000 to US$7 million).
Z Z shares include companies that either: (1) have failed
to comply with the listing requirements of the
exchange; (2) have failed to resolve investor
complaints; or (3) have not made the required
arrangements with both of the depositories for the
dematerialization of their securities.
T These are shares that settle on a trade-to-trade basis for
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market surveillance reasons.
TS These are a sub-classification of S shares that settle on
a trade-to-trade basis for market- surveillance reasons.
F Debt These are fixed income securities.
G These are government securities for retail investors.
The 200 A-classified holding characteristics as stated in Table 2.5 above are subject to
review semi-annually. Between the semi-annual reviews, the number of A companies
may fluctuate below 200 for reasons of take-over, merger, delisting, etc. or the number
may go slightly above 200 due to possible OPOs of very strong companies deserving A
classification. But at the semi-annual review, however, the number is strictly adhered to
and companies are added to bring their number at specified figure.
NATURE OF SECURITIES TRADED:
Listed securities, as well as permitted securities are qualified for trading in the
stock market. Companies that have signed listing agreements with the BSE & NSE, their
securities acquire the property of “listed securities”. With few exceptions most issues fall
into this category. Permitted securities are issues of companies that are listed and actively
traded on regional Stock Exchanges. However, they are not listed on either BSE or NSE.
These securities are allowed trading on BSE and NSE provided they meet the
requirements specified by the Exchange. They trade on the exchanges as permitted
securities.
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The computation of closing price of a stock is on the basis of all trades executed
during the final 15 minutes of the continuous trading session. If there is no trade recorded
during the last 15 minutes, the last traded price in the continuous trading session is taken
as the official closing price.
TRADING FEATURES OF STOCK EXCHANGES:
Ordering: All orders entered into the exchange trading systems are time-stamped
and assigned a unique identification number to facilitate a verifiable audit trail. The
exchanges adhere to a price-time priority whereby price (higher bids and lower offers)
have first priority, and at the same price orders entered first have priority over those
entered later.
All NSE orders of regular lot size or multiple thereof are traded in the NORMAL
MARKET. The market lot of these shares is one. Orders with size less than the regular lot
size traded in the ODD LOT MARKET at the NSE.
The BSE maintains trading books such as Regular Lot Book, Special Terms
Book, Negotiated Trade Book, Stop Loss Book, Odd Lot Book, Spot Lot Book, and
Auction Book. 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 a buyer. Thus, the best (i.e. highest
priced) buy order is matched with the best (i.e. lowest-priced) sell order.
Type of orders accommodated by exchange system can be classified into four
categories, viz. ‘Time’, ‘price’, ‘Quantity’, and ‘Additional’. Four different time
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conditions attached to an order are accommodated by the NSE and BSE, namely, Day
Order; Good Till cancelled, Good Till Days/Date; and Immediate or Cancel.
Price Attributes of three types accepted by the Exchanges are:(1) Limit price
order, eligible for execution at or better than specified limit price; (2) Market Order, with
no price limit and executed at the best price obtainable at the time of entering the order,
and (3) Stop Loss Price Order, activated only when the market price of relevant security
reaches or crosses a threshold price as specified in the order. Until this trigger price the
order is dormant and not executed. Quantity attributes and condition on orders recognized
for trading by stock exchanges are: No quantity Restrictions; Disclosed Quantity,
Minimum Fill; Hit and Take-order; and All or None; Batch orders are also accepted by
BOLT system at BSE.
PRICE BANDS:
Most securities are subject to price bands that define their maximum permissible
daily price movements. No price bands are applicable to securities which are having
derivative products. All other securities are subject to daily price bands 2 percent; 5
percent, 10 percent, or 20 percent. Securities such as bonds, debentures warrants and
preference shares are mostly subject to 20 percent bands are usually those in which SEBI
or the BSE and NSE acting together, wish to limit or control violability. A list of
securities under lighter band is placed daily or NSE exchange and also displayed on its
website.
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Basket Trading:
Initially created to provide investors with a facility for trading sensex-linked
portfolios and to create a linkage of market prices of the underlying securities of sensex
in the cash segment and futures on sensex, the system has evolved to provide a facility for
investors to create and trade custom baskets. BSE’s trading system BOLT has been
designed to accommodate basket trading and utilizes the batch upload mechanism to do
so.
Investors through member brokers are able to buy and sell 30 sensex stocks with a
single order in the proportion of their respective weights in the sensex. Also investors can
customize baskets specifying the constituent securities and their respective weightings.
Member-brokers need to indicate the number of sensex baskets to be bought or
sold. The value of one sensex basket is arrived at by multiplying Rs 50 to the prevailing
sensex index value. The basket trading system provides index arbitrage opportunities by
simultaneously buying and selling baskets comprising the sensex scrips in the cash
segment and sensex futures.
EXCHANGE SETTLEMENT SYSTEM:
At the end of the day, details of all executed trades and the security obligations of
members are downloaded to members and custodians by the exchange clearing houses.
The clearinghouses then determine the cumulative and net obligation of each member,
and they electronically transfer this data to the clearing members. All of the trades
executed during a particular trading period are settled together. A multilateral netting
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procedure is adopted to determine the net settlement obligations (delivery / receipt
positions) of clearing members. The clearing houses then allocate or assign delivery of
securities to / from the members to arrive at the delivery and receipt obligations of funds
and securities by each member.
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4a
6b 4c 6a 4b
Figure 2.3: The settlement cycle
Broker
Broker enters order
Exchange
confirms
execution
2 1
Exchange
Client enters trade
Broker confirms
trade execution
Client
3
Broker issues
contract note to the
custodian
Client sends
instructions to its
custodian
Exchange issues
custodian list of their
client trades to be settled
Broker issues
contract note to
clearinghouse
Exchange instructs
the clearinghouse
about the
execution
5
Custodian
Custodian instructs
the depository to
receiver/deliver
shares
Depository
Clearinghouse
instructs
receive/deliver the
shares
Clearin
ghou
se
Custodian instructs
the bank to
receive/deliver
funds
Bank
Clearinghouse instructs
the bank to
receive/deliver funds
8 7
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SETTLEMENT CYCLE:
Securities Pay-in and Pay-out:
It is the process of receiving securities from member-brokers against their sale
obligations. On the securities pay-in Day, delivering members are required to deliver
securities to the clearing house. Member brokers can effect pay in of securities to the
clearing house through the depositories.
The process of clearing house passing on to member-brokers the delivery of
securities bought by them is called securities pay-out. It is usually the same day as pay-in
day. Securities are credited by the clearing house into the principal accounts of members.
The exchanges also provide a facility to member brokers so that they can transfer pay-out
securities directly to their clients without routing the securities through their principal
accounts in the depositories. But this is subject to the client providing break-up file which
is uploaded by the members to the clearing house. Based on this break-up the clearing
house instructs depositories to credit the securities to client’s accounts. In case delivery of
securities received from one depository is to be credited to an account in another
depository, the clearing house does an inter-depository transfer.
Compulsory rolling settlement:
CRS refers to the setting of trades a standard fixed period of days after the
execution occurred. Under CRS the settlement is on T+2 basis. This, CRS takes place
from trade day (T) plus 2 more days (T+2). This reduced the time of settlement, powered
settlement risk, ensured early receipt of securities and monies by buyers and sellers and
brought the capital market at par with internationally accepted standards of settlement.
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Depositories:
Almost all equity settlements today take place at the depository. The Depository
system was introduced in India in 1995 to overcome the operational inefficiencies
breeding into the India capital markets due to traditional paper based trading and
settlement system. Depository Act 1996 enacted and the SEBI authorized to frame the
regulations for depositories operation. SEBI mandated the dematerialization of securities
holdings in a phased approach. Moreover, all market participants are required to have
depository accounts.
At present there are two Depositories in India. THE NATIONAL SECURITIES
DEPOSITORY LTD. (NSDL) came into existence in 1996. Three largest organizations
viz. IDBI, UTI and NSE, promoted the NSDL. This Depository is actually a giant
satellite-based integrated computer network that eliminates papers in all share
transactions.
Central Depository Services (India) Ltd. (CDS) is the second depository in India
established in 1999. Next to NSDL, this second depository has been promoted by DSE in
association with BOI, HDFC, and SBI.
Depository Participants:
The Depositories Act 1996 qualifies the following entities being eligible to
become a depository participant:
i. Public Financial Institutions
ii. Banks including foreign banks
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iii. Non-banking financial companies
iv. Clearing houses of stock exchanges
v. Any institution providing financial services such as those provided by the
above mentioned institutions.
vi. State financial corporations
vii. Custodian of securities
viii. Stock Brokers
ix. Registrars & Transfer Agents
DEMAT TRADING:
Compulsory demat delivery by institutions and all investors has been mandated.
Also all the scrips have been mandated for compulsory rolling settlement at T+2 basis
thereby eliminating the weekly settlement cycle on both the exchanger BSE and NSE.
Under the screen-based system now in vogue the players (brokers) strike deals from their
respective locations through their terminals. The computer located at the brokers end is
connected to the central computers located at the exchange through a telephone or a
satellite based system.
(B) DERIVATIVES MARKET:
Derivatives arise from the futures contract. A futures contract is an agreement that
requires a party to the agreement to either buy or sell something at a designated future
date at a pre-determined price. Futures contracts are either commodity futures or financial
futures. Commodity futures involve traditional agricultural commodities, imported
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foodstuffs and industrial commodities. Financial futures are on financial instruments or a
financial index. They can be stock index futures, interest rate futures. The derivatives are
exchanges in other derivative instruments include options and swaps.
‘Options’ contract gives the right for a consideration, to the holder of the contract
to buy or sell the underlying asset at a pre-determined price within or at the end of a
specified period. The underlying asset could include securities or an index of the price of
securities. An, option, to buy a fixed number of shares at the specified price is called a
‘call option’. While an option, to sell a fixed number of shares at a fixed price is called a
‘put option’. Options both ‘Call and Put’ are also classified as American-Style option or
European Style option. The former is exercisable on a before the expiry date whereas the
later only on the expiry date.
The basic economic function of a futures market is to provide an opportunity for
market participants to hedge against the risk of adverse price movements.
The Bombay Stock Exchange (BSE) introduced derivatives trading in India with
the launch of sensex futures contract in June 2000. Later, the BSE and NSE launched the
trading of Futures and Options Contracts for various indexes, specific sectors and
individual stocks. The following table 2.10 shows the derivatives products available for
trading on the BSE and NSE.
BSE Derivative Products and Trading System:
Derivative trading at BSE takes place though Derivative Trading and Settlement
System (DTSS). It is a fully automated screen based trading platform and is designed to
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allow trading on a real-time basis. The derivatives market is order driven. The traders can
place only orders in the system. All orders are time-stamped when accepted by the DTSS.
A unique trade ID is generated for each order and complete information is sent to the
concerned member. Market orders are of two types:
(a) Partial Fill Rest Kill: Execute the available quantity and cancel the rest.
(b) Partial Fill Rest Convert: Execute the available quantity and convert the unexecuted
portion into a limit order for execution at or better than the specified limit price. Stop loss
order is dormant and become active when the security reaches or crosses threshold price
(trigger price), such orders are to preserve profits or limit losses.
BSE OPTIONS:
The BSE trades both index and single stock options. Index options are generally
European style and trade with a three-month maximum maturity. Table 2.6 below lists the
underlying indexes for which option are available:
Table 2.6: Underlying Index Option Contracts
Source: The Bombay Stock Exchange, as of November 2006.
BSE 30 Senesx
BSE Teck
BSE Bankex
BSE Oli & Gas
BSE PSU
BSE Metal
BSE FMCG
BSX
TEK
BNK
OGX
PSU
MET
FMC
SENOPT
TECKOPT
BANKXOPT
ONGXOPT
PSUOPT
METLOPT
FMCGOPT
25
125
50
38
50
25
175
BSE 30 Senesx
BSE Teck
BSE Bankex
BSE Oli & Gas
BSE PSU
BSE Metal
BSE FMCG
Underlying Index
Option Product Security Symbol
Option Code Contract Multoplier
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STOCK OPTIONS:
Individual Stock options trade American style with a maximum 3 month maturity,
except for a few weekly options: Stock for which options are available must satisfy
eligibility criteria and are subject to approval by SEBI. These contracts are cash settled.
Weekly options are introduced on Monday of every week and have a maturity of two
weeks, expiring on Friday of expiry week. Their characteristics are the same as monthly
stock options.
BSE FUTURES:
BSE trades both Index and Single Stock Futures. The underlying indexes futures
contracts of BSE are shown in Table 2.7 below.
Table 2.7: Underlying BSE Index Futures Contracts
Source: BSE
Underlying Index
Security Symbol
Product Product Code Contract Multiplier
BSE Sensex
BSE TECK Index
BSE Bankex
BSE Oil & Gas Index
BSE PSU Index
BSE Metal Index
BSE FMCG Index
BSE 30 Sensex Futures
BSE TECK Futures
BSE Bankex Futures
BSE Oil & Gas Futures
BSE PSU Futures
BSE Metal Futures
BSE FMCG Futures
BSX
TEX
BNK
OGX
PSU
MET
FMC
SENOPT
TECKOPT
BANKXOPT
ONGXOPT
PSUOPT
METLOPT
FMCGOPT
25
125
50
38
50
25
175
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NSE DERIVATIVE PRODUCTS:
NSE Derivatives are traded on NEAT screen-based trading system. NEAT is an
order-driven market and operates with a price-time priority for matching orders. NEAT
accept orders with time-related and price-related parameters similar to those accepted in
the cash market.
NSE OPTIONS:
NSE option contracts must satisfy the following requirements:
(a) Price bands: There are no daily minimum or maximum price ranges applicable to
option contracts. However, in order to prevent order entry errors, the operating
range and day minimum and maximum ranges for option contracts are kept at 99
percent of base price. Orders beyond 99 percent of base price are not placed.
(b) Closing Price: The contracts traded any time of the day, their closing price is the
last traded price of the contract. Contracts traded in the last hour, their closing
price is the last half hour weighted price.
INDEX OPTIONS:
The number of contracts provided in options on the NIFTY is related to the Index
Range in which the previous day’s closing value of NIFTY falls. Table 2.8 below gives
the number of traded contracts associated to given level of index.
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Table 2.8: Nifty Strike Intervals and Number of Options in Series
* In the money, at the money, out-of-the-money.
Source: The National Stock Exchange
INDIVIDUAL STOCK OPTIONS:
NSE options contracts for individual securities are available for 155 securities as
approved by SEBI. For individual stock there are always a minimum of seven strike
prices for every type (call and put) during the trading month, viz. three contracts in the
money (ITM), three contracts out of money (OTM) and one contract at the money
(ATM). The strike price intervals vary depending on the price of underlying security,
widening with increasing price.
NSE FUTURES:
All futures are options traded on NSE have common characteristics. Price bands
have no daily minimum price ranges applicable to all NSE Future Contracts. However,
operating ranges are kept at 10 percent for the three index futures and 20 percent for
155 individual stock futures. Base price for all future contracts on the first day of trading
is the theoretical futures price. The base price of the contracts on subsequent trading days
is the daily settlement price of the futures contracts.
Nifty Index level Strike Interval Strikes to be introduced (ITM-ATM-OTM)*
Up to 1500
> 1500 up to2000
> 2000 Up to 2500
> 2500
10
10
10
10
3-1-3
5-1-5
7-1-7
9-1-9
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Individual Stock Futures:
These future contracts are currently available on 155 individual underlying stocks
trading on the NSE and are subject to approval by SEBI.
NSE Derivative Contract Specification:
Contract specification of NSE index and single stock derivative contracts are as
given below in Table 2.9.
Table 2.9: Contract specifications for NSE Derivatives Contracts*
* Trading cycle: Three-month trading cycle- the near month (one), the next month (two), and the far month
(three).
** Expiry day: Last Thursday of the expiry month. If the last Thursday is a trading holiday, then the expiry day
is the previous trading day.
Source: The National Stock Exchange.
Interest Rate Derivatives:
The NSE makes a market in interest rate future contracts. Interest rate future
contracts are based on the list of underlying fixed income instruments as specified by the
exchange and approved by SEBI. Interest rate futures contracts are available on notional
T-bills, notional 10-year zero coupon bearing bonds securities on which Interest-Rate
Futures contracts are available are show below:
Parameter Index Futures Index Options Futures on Individual Securities
Options on Individual Securities
Underlying 3 indexes 3 indexes 155 securities 155 securities
Instrument Futidx Optidx Futstk Optstk
Option type - CE/PE - CA/PA
Strike price - Strike price - Strike price
Underlying Symbol of underlying
index
Symbol of underlying
index
Symbol of underlying
index
Symbol of underlying
index
Security Descriptor:
Expiry date** dd-mm-yyyy dd-mm-yyyy dd-mm-yyyy dd-mm-yyyy
Stock exchange Development and Operation in India
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Table 2.10: Securities for Interest Rate Contracts
Source: National Stock Exchange (NSE)
TRADING OF INTEREST RATE FUTURES:
The price step for all interest rate futures contracts is Rs. 0.01.Quotation method
is applied in such a way that futures contracts with face values of Rs 100 on notional 10-
year coupon bearing bonds and notional 10-year zero coupon bond are based on price
quotations while futures contracts of face value of Rs. 100 on notional 91-day Treasury
bills are based on the discounted percent from par, or Rs. 100 minus the yield. Base price
for new interest rate futures contracts is the theoretical futures prices based on the
previous day’s closing price of the notional underlying security. The base price of
contracts on subsequent trading days will be the closing price of the futures contracts.
Price ranges of days minimum/maximum are not considered. However, in order to
prevent, order entry errors, the operating ranges for these futures contracts are 2 percent
of the base price. Order conditions available ‘Immediate or cancel’, ’Good until day’,
‘Good until cancelled‘ and ‘Good till date’. Time conditions available are ‘Stop Loss
order’ and ‘Spread order’.
NSETB91D
NSE10Y06
NSE10YZC
Symbol Description
Futures contract on notional 91-day T-bills
Futures contract on notional 10-year coupon- bearing bonds
Futures contract on notional 10-year zero coupon- bonds
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(C) DEBT MARKET:
The debt market plays a vital role in the current and future development of Indian
economy. There is a thriving government securities market, a small but growing
corporate debt market.
The central government is the largest issuer of debt. Debt financing is required for
infrastructure, housing and meeting other economic growth requirements including
meeting the temporary revenue deficits. Most of the corporate bond issue bring privately
placed wholesale investors such as banks, financial institutions, mutual funds, large
corporate and other large investors. The corporate debt market is imperative to support
continued industrial growth and to fund new and large projects both in the infrastructure
space and in manufacturing.
The RBI has the primary regulatory responsibility of the government securities
market, issue by other government institutions and issues by banks. SEBI is the primary
regulatory body of the corporate debt market.
Debt Instruments
Instruments traded in the debt market include instruments issue by government
and corporate sector. These instruments are classified in Table 2.12 below into segments
based on the characteristics of the identity of the issuer.
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Table 2.12: Available Fixed Income Instruments
S. No. Market Segment Issuer Instruments
1. Government Securities
Central Government Zero Coupon bonds, Coupon bearing
bonds, Treasury Bills, STRIRs
State Government Coupon-bearing Bonds
2. Public Sector Bonds
Government
Agencies and
Statutory Bodies
Government guaranteed bonds debentures
Public Sector Units PSU bonds, debentures, commercial
papers
3. Private Sector Bonds
Corporates Debentures, bonds, commercial papers,
floating rate bonds, convertibles, zero-
coupon bonds, inter-corporate deposits
Banks Certificates of deposits, debentures, bonds.
Financial Institutions Certificates of deposits, bonds.
Source: Compiled from information collected from Debt Market.
Wholesale Debt Market Segment:
The RBI permits banks, primary dealers and financial institutions in India to trade
debt instruments among themselves or with non-bank clients through members of stock
exchanges. The most prominent investors in the debt market are commercial banks and
financial institutions. The investors’ base has now widened to include cooperative banks,
investment, cash rich corporate, non-banking financing companies, mutual funds and
high-net worth individuals. FIIs have also been permitted to invest 100 percent of their
funds in debt market. The government also allows FIIs to invest in Treasury Bills.
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Retail Debt Market:
In the retail debt market debt is open to specific participants. The main
investors permitted to participate to participate in the retail debt market include: Mutual
Funds, Provident Funds, Pension Fund, Private Trusts, Housing Finance Companies,
Corporate Treasuries, Hindu Undivided Families, individual investors, cooperative bank,
religious trusts and charitable organizations, Non-banking financial companies and
Residuary Non-banking companies.
DEBT TRADING:
Debt trading is largely conducted through RBI trading system known as
Negotiated Dealing System (NDS). The system has now been upgraded to NDB-OM
system (order matching included). The system is integrated with the clearing corporation
of India Ltd. (CCIL). The RBI also permits trading through the Stock Exchanges viz.
NIES and OTCEI, extensive national network of trading terminals. Each exchange has its
own debt trading module.
AUCTIONS:
In auctions, government securities are bid in two ways:
(1) As yield-based basis where the participants bid for the coupon payable and (2)
a price-based auction basis where participants bid a price for a bond with a
fixed coupon. The auction can be either a multiple price (participants get
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allotments at their quoted price/yields) or a uniform price (all participants get
allotments at the same price).
TRANSACTIONS IN DEBT MARKET:
Transactions are executed over the counter and at the exchanges. Direct
Transactions are traded by banks and other wholesale participants directly between
themselves either on telephone or the NDS system. One-fourth of total transactions are
traded in this manner. Broker-intermediated transactions are traded through the brokers
who need to be members of a recognized stock exchange. The RBI allows banks, primary
dealers and institutions to trade through them.
RISK MANAGEMENT:
Several measures of control are used to maintain the safety and integrity of the
market. These controls include stringent adequacy capital and net worth requirements,
trading and exposure limits, and margins.
At BSE:
Net worth of minimum Rs. 1.5 crores entitles membership in the BSE debt
segment: Clearing members of the NSE wholesale debt market are subject to a minimum
net worth of Rs. 1 crore. An initial contribution to the Settlement Guarantee Fund (SGE)
by way of interest-free security deposit of Rs. 5 lakh is required to be kept with the
NSCCL.
Trading and Exposure limits permit BSE members of the retail debt segment upto
15 times their additional capital deposited with the exchange in gross exposure in
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government securities along with their gross exposure in equity segment. No gross
exposure is permitted for member against their base minimum capital towards the Trade
Guarantee Fund in the Cash segment. Transactions done in this segment and in the equity
segment together would from part of their intraday trading limits and are subject to a limit
of 33.3 times the capital deposited with the exchange.
At NSE:
Value at risk (VaR) system provides effective way of monitoring and managing
market risk and as a basis of setting regulatory minimum capital standards. The VaR
system uses five alternative methods: (1) Variance-Covariance (normal), (2) Historical
simulation method, (3) weighted normal, (4) weighted historical simulation, and (5)
Extreme value method. The five methods provide a range of options for market
participants.
Margin and gross exposure limits of NSE include Mark-to-market margins,
payable on T+1 and are applicable to all open positions in government securities.
Participation in the debt segment of NSE requires an initial contribution to the Settlement
Guarantee Fund of a minimum of Rs. 5 lakh in the form of interest security deposit to the
NSCCL. The gross exposure in government securities cannot exceed 20 times of this
interest free security deposit (IFSD). Greater exposure will need an increase in additional
base capital.
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Summary
The evolution and growth of stock exchanges and capital markets have a
chequered history. There has been a tremendous growth in terms of members of stock
exchanges, resources mobilisation, volume of trade, members of listed companies and
market capitalisation stock exchanges are the barometer of economic growth as they help
to make funds available for various developmental and productive purposes which help
raises general well being of people at large. In fact stock exchanges play a crucial role in
the consolidation of national economy in general and in the development of industrial
sector in particular. It is the most dynamic organised component of capital market,
especially in developing countries like India. Stock exchanges play a cardinal roll
promoting the level of capital formation through effective utilisation of savings and
offering investment opportunities, liquidity, safety of investment, and wide marketability
of securities. With the explosion of knowledge and use of information technology the
trading and settlement mechanism has become smoother and quicker process. The demat
(scripless) trading has further strengthened the capital market segment.
The salient feature of the risk-containment mechanism are stringent capital
adequacy requirement, up front initial margin for all open positions of the clearing
member (CM), marked to market of open position on the contract settlement price, online
position monitoring and creating of separate settlement guarantee fund. However, the
most critical component of the risk-containment mechanism is the margin system and
online position monitoring.
Economic reforms initiated by Government in 1991 have led to a dramatic
transformation of Indian economy which was once socialist centrally planned economy
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into a dynamic capitalist, entrepreneurial competitive economy India's capital market
trading and settlement system is made up of strong competitive institutions that have
developed into time tested efficient operators over the last 20 years. The clearing and
settlement capabilities continue to increase and the quality of the institutions and
processes ensures that these will remain world class.
However, the debt market of India, like others throughout the Asian region
is still a developing market that has demonstrated tremendous growth over the last 15
years but still has a long way to go to meet the needs of the Indian economy. The
foundations of strong market are all in place including good trading and settlement
systems and debt specific risk management processes, providing the significant capital
needs of the economy to improve infrastructure. India will undoubtedly continue to drive
regulatory reforms that enhances the attractiveness and demand for debt, resulting in a
steady growth of investors interest in the Indian debt market.
To sum up the capital market and stock exchange operations in India have
undergone profound change. The financial markets have obtained world class status.
India’s capital market settlement system is made up of strong, competitive institutions
that have developed into time-tested efficient operations. The clearing houses, custodians
and depositories comprise a very smooth system that exhibits few problems in the
processing, clearing and settling of more than 6 million transactions per day. Derivative
plays an important and growing role and their trading volume is continually increasing in
number of scrips underlying both futures and options. Investors find derivatives a method
to play the short term of the market as well as to trade the volatility of the market and in
individual shares. Derivatives will continue to play a greater role in the market as the
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number of foreign investors registered to trade in India employ even more sophisticated
trading strategies. The debt market comprises a thriving government securities market, a
small but growing corporate debt market, and very importantly, a set of foundations and
institution upon which further growth can be achieved. Comparatively, the debt market of
India is still a developing market like others in Asian region. In fact, the debt market
suffers from minimal liquidity and still has a long way to go. Given the significant capital
needs of economy, improved infrastructure, India would undoubtedly continue to drive
regulatory reforms that enhance the attractiveness and demand for debt resulting in steady
growth of the debt market.
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References:
1. Frank J. Fabozzi, Franco Modigliani and Frank J. Jones (2005), “Capital Markets:
institutions and instruments, New Delhi, Prentice-Hall of India.
2. Javid khan Mohammad (2005), “operating of stock exchange in India”, Delhi
(India), Vista International Publishing House.
3. Chance, Don M. (1992), “An Introduction to Options and Futures (The Dryden
Press series in finance)”, 2nd
Edition, published by Thomson Learning, Fort
Worth.
4. Endo Tadashi (1999), “The Indian Securities Market”, New Delhi, Vision Books.
5. Machiraju H.R. (2000), “The working of Stock Exchanges in India”, 2nd
Edition,
New delhi, New Age International.
6. Indian Financial Year Book.
7. Annual Reports of BSE.
8. Annual Reports of NSE.
9. en.wikipedia.org
10. National Stock Exchange of India (NSE), NIFTY Fact Book (2009).
11. Attri Kuldeep and Kumar Rajeev (2011), “comparative analysis of Indian capital
Market in the pre and post liberalisation period”, GGGI Managment Review,
Vol.1, No.1, pp. 66-74.
12. Alan R. kanuk (2007), “Capital Market of India: An Investor’s Guide”, India,
John Wiley & sons, Inc.
13. Economic Survey of India of various years.
Stock exchange Development and Operation in India
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14. Reserve bank of India (RBI) Annual Reports of various years.
15. Hand book of Statistics on Indian Economy, Reserve bank of India (RBI).
16. Published information by NSDL & CDSL
17. www.nseindia.com
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