Project Report

On

National Stock Exchange

A Project report submitted in Partial fulfillment of the requirements for the

Degree of Masters of Business Administration
Of

Sikkim Manipal University, INDIA.

Submitted to:
Sikkim-Manipal University of Health, Medical and Technological Sciences,
Distance Education Wing, Syndicate House, Manipal-576104

Submitted By:
Deepak Kumar
Univ. Roll.No.520762686
MBA 4th SEM (FINANCE)

Student Declaration

I Deepak Kumar hereby declare that the Project Report entitled

NATIONAL

STOCK

EXCHANGE

submitted

in

partial

fulfillment of the requirement for the Degree of Masters of Business

Administration to Sikkim Manipal University, India is my original
work and not submitted for the award of any other degree, diploma,
fellowship

or

any

other

similar

titles

and

Place:

Deepak Kumar

Date:

Roll.No.52076266

prizes.

Guide Certificate

This is to certify that the project report entitled

NATIONAL STOCK EXCHANGE

Is submitted in partial fulfilment of the requirement for the

degree of Masters of Business Administration of Sikkim
Manipal University of Health, Medical and Technological
Sciences
Deepak Kumar has worked under my supervision and
guidance and that no part of this report has been submitted for
the award of any other degree, diploma, fellowship or other
similar titles or prizes and that the work has not been
published in any journal or magazine.

Name:- Miss Seema Saini

Qualification:-M.Com, MBA

Examiner Certificate

The project report of Deepak Kumar entitled

NATIONAL STOCK EXCHANGE
Is approved and is acceptable in quality and form

Internal Examiner

External Examiner

Name:

Name:

Qualification:

Qualification:

Designation:

Designation:

Acknowledgement

Many have contributed to the successful preparation of this text. I would like to
place on record my grateful thanks to each on of them.
I am highly thankful to , who has kept continuous check on the
progress of the project and has always gently reminded me of the manner in
which the progress of the project is to be carried out.

I also extend my thanks to my institute for giving me an identity and an

opportunity to represent the premier institute in professional world.
I am also thankful to my parents, family members, friends and colleagues who
provided me their much needed support and inspiration and when required, and
last but not lest I would like to thank all those people who have been indirectly
contributing to the making of this project.

Preface

The project report developed during the 4th semester of

degree Masters of Business Administration of Sikkim Manipal
University of Health, Medical and technological science is
National Stock Exchange. This project report has various
different uses ands significance that are discussed in detail in
next sections.
An attempt has been made to provide complete information
regarding the National Stock Market

Contents
S. No.

Title

1
2

Objectives
Stock Exchanges An Introduction

Financial Markets India

3.1

Capital Market

3.2 Money Market

Stock Exchanges & Regulatory Bodies
India
4.1 Stock Exchanges in India
4.2

Page No.
7
8

SEBI

National Stock Exchange

5.1

Genesis / History

5.2

Objective

5.3

Products

5.4

Technology

5.5

NSE Family

5.6

Listing & Membership

5.7
5.8

Trading Process
Customer Grievances /
Arbitration
Stock Indices

5.9
6

Conclusion

Bibliography

1. OBJECTIVES:

To study the concept of Stock Exchanges.

To study the genesis of stock exchanges.

To study the genesis of stock exchanges in India.

To study the working of stock exchanges, specifically NSE.

2. Stock Exchanges An Introduction

A stock exchange, (formerly a securities exchange) is a corporation or mutual

organization which provides "trading" facilities for stock brokers and traders, to
trade stocks and other securities. Stock exchanges also provide facilities for the
issue and redemption of securities as well as other financial instruments and
capital events including the payment of income and dividends. The securities
traded on a stock exchange include: shares issued by companies, unit trusts,
derivatives, pooled investment products and bonds. To be able to trade a security
on a certain stock exchange, it has to be listed there. Usually there is a central
location at least for recordkeeping, but trade is less and less linked to such a
physical place, as modern markets are electronic networks, which gives them
advantages of speed and cost of transactions.
Trade on an exchange is by members only. The initial offering of stocks and
bonds to investors is by definition done in the primary market and subsequent
trading is done in the secondary market. A stock exchange is often the most
important component of a stock market. Supply and demand in stock markets is
driven by various factors which, as in all free markets, affect the price of stocks.
There is usually no compulsion to issue stock via the stock exchange itself, nor
must stock be subsequently traded on the exchange. Such trading is said to be off
exchange or over-the-counter. This is the usual way that derivatives and bonds
are traded. Increasingly, stock exchanges are part of a global market for
securities.

2.1

The First Stock Exchanges

In 11th century France the courtiers de change were concerned with managing
and regulating the debts of agricultural communities on behalf of the banks. As
these men also traded in debts, they could be called the first brokers. Some
stories suggest that the origins of the term "bourse" come from the Latin bursa
meaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps
three purses), hung on the front of the house where merchants met.

House Ter Beurze in Bruges, Belgium.

However, it is more likely that in the late 13th century commodity traders in
Bruges gathered inside the house of a man called Van der Burse, and in 1309
they institutionalized this until now informal meeting and became the "Bruges
Bourse". The idea spread quickly around Flanders and neighboring counties and
"Bourses" soon opened in Ghent and Amsterdam.
In the middle of the 13th century, Venetian bankers began to trade in
government securities. In 1351, the Venetian Government outlawed spreading
rumors intended to lower the price of government funds. There were people in
10

Pisa, Verona, Genoa and Florence who also began trading in government
securities during the 14th century. This was only possible because these were
independent city states ruled by a council of influential citizens, not by a duke.
The Dutch later started joint stock companies, which let shareholders invest in
business ventures and get a share of their profitsor losses. In 1602, the Dutch
East India Company issued the first shares on the Amsterdam Stock Exchange. It
was the first company to issue stocks and bonds. In 1688, the trading of stocks
began on a stock exchange in London.
On May 17, 1792, twenty-four supply brokers signed the Buttonwood
Agreement outside 68 Wall Street in New York underneath a buttonwood tree.
On March 8, 1817, properties got renamed to New York Stock & Exchange
Board. In the 19th century, exchanges (generally famous as futures exchanges)
got substantiated to trade futures contracts and then choices contracts. There are
now a large number of stock exchanges in the world.
2.2 The role of stock exchanges
Stock exchanges have multiple roles in the economy, this may include the
following:
2.2.1 Raising capital for businesses
The Stock Exchange provides companies with the facility to raise capital
for expansion through selling shares to the investing public.
2.2.2 Mobilizing savings for investment
When people draw their savings and invest in shares, it leads to a more
rational allocation of resources because funds, which could have been
consumed, or kept in idle deposits with banks, are mobilized and
11

redirected to promote business activity with benefits for several economic

sectors such as agriculture, commerce and industry, resulting in stronger
economic growth and higher productivity levels and firms.
2.2.3 Facilitating company growth
Companies view acquisitions as an opportunity to expand product lines,
increase distribution channels, hedge against volatility, increase its market
share, or acquire other necessary business assets. A takeover bid or a
merger agreement through the stock market is one of the simplest and
most common ways for a company to grow by acquisition or fusion.
2.2.4 Redistribution of wealth
Stock exchanges do not exist to redistribute wealth. However, both casual
and professional stock investors, through dividends and stock price
increases that may result in capital gains, will share in the wealth of
profitable businesses.
2.2.5 Corporate governance
By having a wide and varied scope of owners, companies generally tend
to improve on their management standards and efficiency in order to
satisfy the demands of these shareholders and the more stringent rules for
public corporations imposed by public stock exchanges and the
government. Consequently, it is alleged that public companies (companies
that are owned by shareholders who are members of the general public
and trade shares on public exchanges) tend to have better management
records than privately-held companies (those companies where shares are
not publicly traded, often owned by the company founders and/or their
families and heirs, or otherwise by a small group of investors).

12

However, some well-documented cases are known where it is alleged that

there has been considerable slippage in corporate governance on the part
of some public companies. The dot-com bubble in the early 2000s and the
sub prime mortgage crisis in 2007-08 are classical examples of corporate
mismanagement. Companies like Pets.com (2000), Enron Corporation
(2001), One Tel (2001), Sunbeam (2001), Webvan(2001), Adelphia
(2002), MCI WorldCom (2002), Parmalat (2003), American International
Group (2008), Lehman Brothers (2008), and Satyam Computer Services
(2009) were among the most widely scrutinized by the media.
2.2.6 Creating investment opportunities for small investors
As opposed to other businesses that require huge capital outlay, investing
in shares is open to both the large and small stock investors because a
person buys the number of shares they can afford. Therefore the Stock
Exchange provides the opportunity for small investors to own shares of
the same companies as large investors.
2.2.7 Government capital-raising for development projects
Governments at various levels may decide to borrow money in order to
finance infrastructure projects such as sewage and water treatment works
or housing estates by selling another category of securities known as
bonds. These bonds can be raised through the Stock Exchange whereby
members of the public buy them, thus loaning money to the government.
The issuance of such bonds can obviate the need to directly tax the
citizens in order to finance development, although by securing such bonds
with the full faith and credit of the government instead of with collateral,
the result is that the government must tax the citizens or otherwise raise

13

additional funds to make any regular coupon payments and refund the
principal when the bonds mature.
2.2.8 Barometer of the economy
At the stock exchange, share prices rise and fall depending, largely, on
market forces. Share prices tend to rise or remain stable when companies
and the economy in general show signs of stability and growth.
An economic recession, depression, or financial crisis could eventually
lead to a stock market crash. Therefore the movement of share prices and
in general of the stock indexes can be an indicator of the general trend in
the economy.
2.3 Major stock exchanges
Twenty Major Stock Exchanges In The World: Market Capitalization & Year-todate Turnover at the end of January 2009

Region

Africa

Stock Exchange

Johannesburg Securities
Exchange

Market Value

Total Share

(millions

Turnover (millions

USD)

USD)

432,422.1

17,999.7

2,203,759.6

2,325,238.3

Americas

NASDAQ

Americas

Sao Paulo Stock Exchange

611,695.0

30,748.5

Americas

Toronto Stock Exchange

997,997.4

84,323.0

Americas

New York Stock Exchange

9,363,074.0

1,517,615.7

587,602.7

37,400.1

Asia-Pacific

Australian Securities
Exchange

14

Asia-Pacific Bombay Stock Exchange

613,187.6

14,425.0

1,237,999.5

80,696.8

470,417.3

81,755.0

572,566.8

39,057.1

Asia-Pacific Shanghai Stock Exchange

1,557,161.3

142,144.2

Asia-Pacific Shenzhen Stock Exchange

389,248.3

75,365.5

2,922,616.3

301,781.5

1,862,930.9

146,173.3

937,452.9

264,970.3

1,758,157.7

241,151.1

871,061.4

114,994.0

456,206.7

48,094.8

503,725.8

55,299.9

761,896.1

63,435.6

Asia-Pacific Hong Kong Stock Exchange

Asia-Pacific Korea Exchange
Asia-Pacific

National Stock Exchange of

India

Asia-Pacific Tokyo Stock Exchange

Europe
Europe
Europe

Euronext
Frankfurt Stock Exchange
(Deutsche Borse)
London Stock Exchange
Madrid Stock Exchange

Europe

(Bolsas y Mercados
Espaoles)

Europe

Europe
Europe

Milan Stock Exchange

(Borsa Italiana)
Nordic Stock Exchange
Group OMX1
Swiss Exchange

15

Includes the Copenhagen, Helsinki, Iceland, Stockholm, Tallinn, Riga and

Vilnius Stock Exchanges

The London Stock Exchange in the City of London

New York Stock Exchange, New York City.

16

Sao Paulo Stock Exchange in Sao Paulo

The Tokyo Stock Exchange in Tokyo

17

Australian Securities Exchange's Sydney Exchange Centre in Sydney

The Johannesburg Securities Exchange in the City of Johannesburg.

18

The main stock exchanges:

American Stock Exchange

Australian Securities Exchange

Athens Stock Exchange

Belgrade Stock Exchange

Bermuda Stock Exchange

Bolsa Mexicana de Valores

Bolsa de Valores de Colombia

Bolsa de Valores de Lima

Bombay Stock Exchange

Bucharest Stock Exchange

Budapest Stock Exchange

Cairo & Alexandria Stock Exchange

Casablanca Stock Exchange

Channel Islands Stock Exchange

Euronext Amsterdam

Euronext Brussels

Euronext Lisbon

Euronext Paris

Frankfurt Stock Exchange

Ghana Stock Exchange

Helsinki Stock Exchange

Hong Kong Stock Exchange

Istanbul Stock Exchange

Jakarta Stock Exchange

JASDAQ

JSE Securities Exchange

Karachi Stock Exchange

19

Korea Stock Exchange

Kuwait Stock Exchange

London Stock Exchange

Madrid Stock Exchange

Malaysia Stock Exchange

Milan Stock Exchange

Nagoya Stock Exchange

Nigeria Stock Exchange

National Stock Exchange of India

New York Stock Exchange

Osaka Securities Exchange

Philippine Stock Exchange

Santiago Stock Exchange

Sao Paulo Stock Exchange (BOVESPA)

Shanghai Stock Exchange

Shenzhen Stock Exchange

Singapore Exchange

Stockholm Stock Exchange

Taiwan Stock Exchange

Tehran Stock Exchange

Tel Aviv Stock Exchange

Tokyo Stock Exchange

Toronto Stock Exchange

Warsaw Stock Exchange

Zurich Stock Exchange

20

2.4 Listing requirements

Listing requirements are the set of conditions imposed by a given stock
exchange upon companies that want to be listed on that exchange. Such
conditions sometimes include minimum number of shares outstanding, minimum
market capitalization, and minimum annual income.
2.4.1 Requirements by stock exchange
Companies have to meet the requirements of the exchange in order to have
their stocks and shares listed and traded there, but requirements vary by stock
exchange:

Bombay Stock Exchange: Bombay Stock Exchange (BSE) has

requirements for a minimum market capitalization of Rs.250 Million and
minimum public float equivalent to Rs.100 Million.

London Stock Exchange: The main market of the London Stock

Exchange has requirements for a minimum market capitalization
(700,000), three years of audited financial statements, minimum public
float (25 per cent) and sufficient working capital for at least 12 months
from the date of listing.

NASDAQ Stock Exchange: To be listed on the NASDAQ a company

must have issued at least 1.25 million shares of stock worth at least $70
million and must have earned more than $11 million over the last three
years.

New York Stock Exchange: To be listed on the New York Stock

Exchange (NYSE) a company must have issued at least a million shares of

21

stock worth $100 million and must have earned more than $10 million
over the last three years.

2.5 Ownership
Stock exchanges originated as mutual organizations, owned by its member stock
brokers. There has been a recent trend for stock exchanges to demutualize, where
the members sell their shares in an initial public offering. In this way the mutual
organization becomes a corporation, with shares that are listed on a stock
exchange. Examples are Australian Securities Exchange (1998), Euro next
(merged with New York Stock Exchange), NASDAQ (2002), the New York
Stock Exchange (2005), Bolsas Y Mercados Espanolas, and the Sao Paulo
Stock Exchange (2007). The Shenzhen and Shanghai stock exchanges can been
characterized as quasi-state institutions insofar as they were created by
government bodies in China and their leading personnel are directly appointed
by the China Securities Regulatory Commission.
2.6 Other types of exchanges
In the 19th century, exchanges were opened to trade forward contracts on
commodities. Exchange traded forward contracts are called futures contracts.
These commodity exchanges later started offering future contracts on other
products, such as interest rates and shares, as well as options contracts. They are
now generally known as futures exchanges.
2.7 The future of stock exchanges
The future of stock trading appears to be electronic, as competition is continually
growing between the remaining traditional New York Stock Exchange specialist

22

system against the relatively new, all Electronic Communications Networks, or

ECNs. ECNs point to their speedy execution of large block trades, while
specialist system proponents cite the role of specialists in maintaining orderly
markets, especially under extraordinary conditions or for special types of orders.
The ECNs contend that an array of special interests profit at the expense of
investors in even the most mundane exchange-directed trades. Machine-based
systems, they argue, are much more efficient, because they speed up the
execution mechanism and eliminate the need to deal with an intermediary.
Historically, the 'market' (which, as noted, encompasses the totality of stock
trading on all exchanges) has been slow to respond to technological innovation,
thus allowing growing pure speculation to continue. Conversion to all-electronic
trading could erode/eliminate the trading profits of floor specialists and the
NYSE's "upstairs traders", who, like in September and October 2008, earned
billions of dollars selling shares they did not have, and days later buying the
same amount of shares, but maybe 15 % cheaper, so these shares could be
handed to their buyers, thereby making the market fall deeply
William Lupien, founder of the Instinet trading system and the OptiMark
system, has been quoted as saying "I'd definitely say the ECNs are winning...
Things happen awfully fast once you reach the tipping point. We're now at the
tipping point."
One example of improved efficiency of ECNs is the prevention of front running,
by which manual Wall Street traders use knowledge of a customer's incoming
order to place their own orders so as to benefit from the perceived change to
market direction that the introduction of a large order will cause. By executing
large trades at lightning speed without manual intervention, ECNs make
impossible this illegal practice, for which several NYSE floor brokers were

23

investigated and severely fined in recent years. Under the specialist system,
when the market sees a large trade in a name, other buyers are immediately able
to look to see how big the trader is in the name, and make inferences about why
s/he is selling or buying. All traders who are quick enough are able to use that
information to anticipate price movements.
ECNs have changed ordinary stock transaction processing (like brokerage
services before them) into a commodity-type business. ECNs could regulate the
fairness of initial public offerings (IPOs), oversee Hambrecht's OpenIPO
process, or measure the effectiveness of securities research and use transaction
fees to subsidize small- and mid-cap research efforts. Some, however, believe
the answer will be some combination of the best of technology and "upstairs
trading" in other words, a hybrid model.
Trading 25,000 shares of General Electric stock (recent quote: $7.54; recent
volume: 216,266,000) would be a relatively simple e-commerce transaction;
trading 100 shares of Berkshire Hathaway Class A stock (recent quote:
$72,625.00; recent volume: 877) may never be. The choice of system should be
clear (but always that of the trader), based on the characteristics of the security
to be traded.
Even with ECNs forming an important part of a national market system,
opportunities presumably remain to profit from the spread between the bid and
offer price. That is especially true for investment managers that direct huge
trading volume, and own a stake in an ECN or specialist firm. For example, in
its individual stock-brokerage accounts, "Fidelity Investments runs 29% of its
undesignated orders in NYSE-listed stocks, and 37% of its undesignated market
orders through the Boston Stock Exchange, where an affiliate controls a
specialist post."

24

2.8 Gallery

Frankfurt Stock Exchange

New York Stock Exchange

Milan Stock Exchange

Hong Kong Stock Exchange Madrid Stock Exchange

Montreal Stock Exchange Bombay Stock Exchange

Osaka Securities Exchange

Shanghai Stock Exchange SWX Swiss Exchange

Philippine Stock Exchange

Taiwan Stock Exchange

25

Stock Exchanges:
American Stock Exchanges:

American Stock Exchange (AMEX)

Chicago Mercantile Exchange (CME)

New York Stock Exchange (NYSE)

NASDAQ Stock Exchange

Toronto Stock Exchange (TSX)

European Stock Exchanges:

London Stock Exchange (LSE)

London Metal Exchange (LME)

Irish Stock Exchange (ISE)

Italian Stock Exchange (BIT)

Frankfurt Stock Exchange (FSE)

OMX Stock Exchanges (OMX)

Moscow Stock Exchange (MICEX)

Athens Stock Exchange (ASE)

Middle Eastern Exchanges:

Dubai Stock Exchange (DIFX)

Asian and Pacific Stock Exchanges:

Hong Kong Stock Exchange (HKSE)

Bombay Stock Exchange (BSE)

Hyderabad Stock Exchange (HSE)

Tokyo Stock Exchange (TSE)

26

Singapore Exchange (SGX)

Australian Stock Exchange (ASX)

National Stock Exchange of India (NSE)

Karachi Stock Exchange (KSE)

Philippine Stock Exchange (PSE)

Shanghai Stock Exchange (SSE)

New Zealand Stock Exchange (NZX)

Colombo Stock Exchange (CSE)

3. Financial Markets India:

THERE ARE TWO TYPES OF MARKETS IN INDIA
3.1 MONEY MARKET
Money market is a market for debt securities that pay off in the short term
usually less than one year, for example the market for 90-days treasury bills.
This market encompasses the trading and issuance of short term non equity debt
instruments including treasury bills, commercial papers, bankers acceptance,
certificates of deposits, etc.

In other word we can also say that the Money Market is basically concerned with
the issue and trading of securities with short term maturities or quasi-money
instruments.

27

The Instruments traded in the money-market are Treasury Bills, Certificates of

Deposits (CDs), Commercial Paper (CPs), Bills of Exchange and other such
instruments of short-term maturities (i.e. not exceeding 1 year with regard to the
original maturity)

3.2 CAPITAL MARKET

Capital market is a market for long-term debt and equity shares. In this market,
the capital funds comprising of both equity and debt are issued and traded. This
also includes private placement sources of debt and equity as well as organized
markets like stock exchanges.

Capital market can be divided into Primary and Secondary Markets

3.2.1 PRIMARY MARKET

In the primary market, securities are offered to public for subscription for
the purpose of raising capital or fund. Secondary market is an equity trading
avenue in which already existing/pre-issued securities are traded amongst
investors. Secondary market could be either auction or dealer market. While
stock exchange is the part of an auction market, Over-the-Counter (OTC) is a
part of the dealer market.
In addition to the traditional sources of capital from family and friends,
startup firms are created and nurtured by Venture Capital Funds and Private
Equity Funds. According to the Indian Venture Capital Association Yearbook
(2003), investments of $881 million were injected into 80 companies in 2002,
and investments of $470 million were injected into 56 companies in 2003. The
firms which received these investments were drawn from a wide range of
industries, including finance, consumer goods and health.
28

The growth of the venture capital and private equity mechanisms in India
is critically linked to their track record for successful exits. Investments by these
funds only commenced in recent years, and we are seeing a rapid buildup in a
full range of channels for exit, with a mix of profitable and unprofitable
outcomes. This success with exit suggests that investors will allocate increased
resources to venture funds and private equity funds operating in India, who will
(in turn) be able to fund the creation of new firms.

3.2.2 SECONDARY MARKET

Secondary Market refers to a market where securities are traded after
being initially offered to the public in the primary market and/or listed on the
Stock Exchange.
Majority of the trading is done in the secondary market. Secondary market
comprises of equity markets and the debt markets.
For the general investor, the secondary market provides an efficient
platform for trading of his securities.
For the management of the company, Secondary equity markets serve as a
monitoring and control conduitby facilitating value-enhancing control
activities, enabling implementation of incentive-based management contracts,
and aggregating information (via price discovery) that guides management
decisions.

29

Difference between the primary market and the secondary

market
In the primary market, securities are offered to public for subscription for the
purpose of raising capital or fund. Secondary market is an equity trading avenue
in which already existing/pre- issued securities are traded amongst investors.
Secondary market could be either auction or dealer market. While stock
exchange is the part of an auction market, Over-the-Counter (OTC) is a part of
the dealer market.

Main financial products/instruments dealt in the secondary

market

Equity: The ownership interest in a company of holders of its common and

preferred stock. The various kinds of equity shares are as follows

Equity Shares:
An equity share, commonly referred to as ordinary share also represents the form
of fractional ownership in which a shareholder, as a fractional owner, undertakes
the maximum entrepreneurial risk associated with a business venture. The
holders of such shares are members of the company and have voting rights. A
company may issue such shares with differential rights as to voting, payment of
dividend, etc.

30

 Rights Issue/ Rights Shares: The issue of new securities to existing

shareholders at a ratio to those already held.

Bonus Shares: Shares issued by the companies to their shareholders free of

cost by capitalization of accumulated reserves from the profits earned in the
earlier years.

Preferred Stock/ Preference shares: Owners of these kind of shares are

entitled to a fixed dividend or dividend calculated at a fixed rate to be paid
regularly before dividend can be paid in respect of equity share. They also enjoy
priority over the equity shareholders in payment of surplus. But in the event of
liquidation, their claims rank below the claims of the companys creditors,
bondholders / debenture holders.

Cumulative Preference Shares: A type of preference shares on which

dividend accumulates if remains unpaid. All arrears of preference dividend have
to be paid out before paying dividend on equity shares.

Cumulative Convertible Preference Shares: A type of preference

shares where the dividend payable on the same accumulates, if not paid. After a
specified date, these shares will be converted into equity capital of the company.

Participating Preference Share: The right of certain preference

shareholders to participate in profits after a specified fixed dividend contracted
for is paid. Participation right is linked with the quantum of dividend paid on the
equity shares over and above a particular specified level.

Security Receipts: Security receipt means a receipt or other security, issued

by a securitisation company or reconstruction company to any qualified
institutional buyer pursuant to a scheme, evidencing the purchase or acquisition
by the holder thereof, of an undivided right, title or interest in the financial asset
involved in securitisation.

31

 Government securities (G-Secs): These are sovereign (credit risk-free)

coupon bearing instruments which are issued by the Reserve Bank of India on
behalf of Government of India, in lieu of the Central Government's market
borrowing programme. These securities have a fixed coupon that is paid on
specific dates on half-yearly basis. These securities are available in wide range
of maturity dates, from short dated (less than one year) to long dated (upto
twenty years).

Debentures: Bonds issued by a company bearing a fixed rate of interest

usually payable half yearly on specific dates and principal amount repayable on
particular date on redemption of the debentures. Debentures are normally
secured/ charged against the asset of the company in favour of debenture holder.

Bond: A negotiable certificate evidencing indebtedness. It is normally

unsecured. A debt security is generally issued by a company, municipality or
government agency. A bond investor lends money to the issuer and in exchange,
the issuer promises to repay the loan amount on a specified maturity date. The
issuer usually pays the bond holder periodic interest payments over the life of
the loan.

The various types of Bonds are as follows-

Zero Coupon Bond: Bond issued at a discount and repaid at a face value.
No periodic interest is paid. The difference between the issue price and
redemption price represents the return to the holder. The buyer of these bonds
receives only one payment, at the maturity of the bond.

Convertible Bond: A bond giving the investor the option to convert the
bond into equity at a fixed conversion price.

32

 Commercial Paper: A short term promise to repay a fixed amount that is

placed on the market either directly or through a specialized intermediary. It is
usually issued by companies with a high credit standing in the form of a
promissory note redeemable at par to the holder on maturity and therefore,
doesnt require any guarantee. Commercial paper is a money market instrument
issued normally for a tenure of 90 days.

Treasury Bills: Short-term (up to 91 days) bearer discount security issued

by the Government as a means of financing its cash requirements.

Stock Exchanges & Regulatory Bodies India

BOMBAY STOCK EXCHANGE OF INDIA LIMITED
Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a
rich heritage. Popularly known as "BSE", it was established as "The Native
Share & Stock Brokers Association" in 1875. It is the first stock exchange in the
country to obtain permanent recognition in 1956 from the Government of India
under the Securities Contracts (Regulation) Act, 1956.

The Exchange's pivotal and pre-eminent role in the development of the Indian
capital market is widely recognized and its index, SENSEX, is tracked
worldwide. Earlier an Association of Persons (AOP), the Exchange is now a
demutualised and corporative entity incorporated under the provisions of the
Companies

Act,

1956,

pursuant

to

the

BSE

(Corporatization

and

Demutualization) Scheme, 2005 notified by the Securities and Exchange Board

of India (SEBI).
With demutualization, the trading rights and ownership rights have been delinked effectively addressing concerns regarding perceived and real conflicts of

33

interest. The Exchange is professionally managed under the overall direction of

the Board of Directors. The Board comprises eminent professionals,
representatives of Trading Members and the Managing

Director of the

Exchange. The Board is inclusive and is designed to benefit from the

participation of market intermediaries. In terms of organization structure, the
Board formulates larger policy issues and exercises over-all control. The
committees constituted by the Board are broad-based.
The Exchange has a nation-wide reach with a presence in 417 cities and towns of
India. The systems and processes of the Exchange are designed to safeguard
market integrity and enhance transparency in operations. During the year 20042005, the trading volumes on the Exchange showed robust growth.

The Exchange provides an efficient and transparent market for trading in equity,
debt instruments and derivatives. The BSE's On Line Trading System (BOLT) is
a proprietary system of the Exchange and is BS 7799-2-2002 certified. The
surveillance and clearing & settlement functions of the Exchange are ISO
9001:2000 certified. Bombay Stock Exchange Limited (BSE) which was
founded in 1875 with six brokers has now grown into a giant institution with
over 874 registered Broker-Members spread over 380 cities across the country.
Today, BSE's Wide Area Network (WAN) connecting over 8000 BSE Online
Trading (BOLT) System Trader Work Stations (TWS) is one of the largest of its
kind in the country. With a view to provide efficient and integrated services to
the investing public through the members and their associates in the operations
pertaining to the Exchange, Bombay Stock Exchange Limited (BSE) has set up a
unique Member Services and Development to attend to the problems of the
Broker-Members. Member Services and Development Department is the single
point interface for interacting with the Exchange Administration to address to
Members' issues. The Department takes care of various problems and constraints

34

faced by the Members in various products such as Cash, Derivatives, Internet

Trading, and Processes such as Trading, Technology, Clearing and Settlement,
Surveillance and Inspection, Membership, Training, Corporate Information, etc.

PERSONALIZED SERVICE PROVIDER

Member Services and Development has put in place the concept of 'Relationship
Managers' whereby an Officer is responsible for providing comprehensive
services to a group/ set of Members alloted to him/her. The Relationship
Managers maintain a comprehensive database on the members and their
associates. A distinct feature of the functioning of the Relationship Manager is
attending to the diverse problems of the Members at one stop by co-ordinating
with various departments thus saving valuable time and energy for the Members.
This synergetic effort will benefit both the Exchange and its members in
consolidating the business and exploiting the opportunities.

VISION OF BSE

Emerge as the premier Indian stock exchange by establishing global

benchmarks"

COMMODITY EXCHANGES

There are three categories:

NCDEX
MCX
NMCE

35

A brief description of commodity exchanges is those which trade in particular

commodities, neglecting the trade of securities, stock index futures and options
etc.
In the middle of 19th century in the United States, businessmen began
organizing market forums to make the buying and selling of commodities easier.
These central marketplaces provided a place for buyers and sellers to meet, set
quality and quantity standards, and establish rules of business.

Agricultural commodities were mostly traded but as long as there are buyers and
sellers, any commodity can be traded. In 1872, a group of Manhattan dairy
merchants got together to bring chaotic condition in New-York market to a
system in terms of storage, pricing, and transfer of agricultural products.

In 1933, during the Great Depression, the Commodity Exchange, Inc. was
established in New York through the merger of four small exchanges the
National Metal Exchange, the Rubber Exchange of New York, the National Raw
Silk Exchange, and the New York Hide Exchange. The major commodity
markets are in the United Kingdom and in the USA.

In India there are 25 recognized future exchanges, of which there are three
national level multi-commodity exchanges. After a gap of almost three decades,
Government of India has allowed forward transactions in commodities through
Online Commodity Exchanges, a modification of traditional business known as
Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of
commodities.

36

The three exchanges are:

1. National Commodity & Derivatives Exchange Limited (NCDEX)

2. Multi Commodity Exchange of India Limited (MCX)
3. National Multi-Commodity Exchange of India Limited (NMCEIL)

All the exchanges have been set up under overall control of Forward
Market Commission (FMC) of Government of India.

National Commodity & Derivatives Exchange Limited (NCDEX)

National Commodity & Derivatives Exchange Limited (NCDEX) located in
Mumbai is a public limited company incorporated on April 23, 2003 under the
Companies Act, 1956 and had commenced its operations on December 15,
2003.This is the only commodity exchange in the country promoted by national
level institutions.

It is promoted by ICICI Bank Limited, Life Insurance Corporation of India

(LIC), National Bank for Agriculture and Rural Development (NABARD) and
National Stock Exchange of India Limited (NSE).

It is a professionally managed online multi commodity exchange. NCDEX is

regulated by Forward Market Commission and is subjected to various laws of
the land like the Companies Act, Stamp Act, Contracts Act, Forward
Commission (Regulation) Act and various other legislations.

37

Multi Commodity Exchange of India Limited (MCX)

Headquartered in Mumbai Multi Commodity Exchange of India Limited

(MCX), is an independent and de-mutulised exchange with a permanent
recognition from Government of India.
Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of
India, Union Bank of India, Corporation Bank, Bank of India and Canara Bank.
MCX facilitates online trading, clearing and settlement operations for
commodity futures markets across the country.

MCX started offering trade in November 2003 and has built strategic alliances
with Bombay Bullion Association, Bombay Metal Exchange, Solvent
E x t ra c t o r s A s so c i a ti o n o f In d i a, P u l se s Im p o r te r s A s so c i at io n
and Shetkari Sanghatana.

National Multi-Commodity Exchange of India Limited (NMCEIL)

National Multi Commodity Exchange of India Limited (NMCEIL) is the first demutualzed, Electronic Multi-Commodity Exchange in India. On 25th July, 2001,
it was granted approval by the Government to organize trading in the edible oil
complex. It has operationalised from November 26, 2002. It is being supported
by Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing
Board and Neptune Overseas Limited.

It got its recognition in October 2000.Commodity exchange in India plays an

important role where the prices of any commodity are not fixed, in an organized
way. Earlier only the buyer of produce and its seller in the market judged upon
the prices. Others never had a say.

38

Today, commodity exchanges are purely speculative in nature. Before

discovering the price, they reach to the producers, end-users, and even the retail
investors, at a grassroots level. It brings a price transparency and risk
management in the vital market.

A big difference between a typical auction, where a single auctioneer announces

the bids, and the Exchange is that people are not only competing to buy but also
to sell. By Exchange rules and by law, no one can bid under a higher bid, and no
one can offer to sell higher than someone elses lower offer. That keeps the
market as efficient as possible, and keeps the traders on their toes to make sure
no one gets the purchase or sale before they do.

2. SEBI (SECURITY AND EXCHANGE BOARD OF INDIA)

SEBI AND ITS ROLE IN THE SECONDARY MARKET

The SEBI is the regulatory authority established under Section 3 of SEBI Act
1992 to protect the interests of the investors in securities and to promote the
development of, and to regulate, the securities market and for matters connected
therewith and incidental thereto.

Securities and Exchange Board of India constituted under the Resolution of the
Government of India in the Department of Economic Affairs No.1 (44)SE/86,
dated the 12th day of April, 1988;

39

The Board shall consist of the following members, namely:1. A Chairman

2. Two members from amongst the officials of the Ministry of the Central
Government dealing with Finance (and administration of the
Companies Act, 1956;) 2 of 1934
3. One member from amongst the officials of [the Reserve Bank
4. Five other members of whom at least three shall be the whole-time
members

Departments of SEBI regulating trading in the secondary market

(1) Market Intermediaries Registration and Supervision department

(MIRSD)
Registration, supervision, compliance monitoring and inspections of all market
intermediaries in respect of all segments of the markets viz. equity, equity
derivatives, debt and debt related derivatives.

(2) Market Regulation Department (MRD)

Formulating new policies and supervising the functioning and operations (except
relating to derivatives) of securities exchanges, their subsidiaries, and market
institutions such as Clearing and settlement organizations and Depositories
(Collectively referred to as Market SROs)

(3)Derivatives and New Products Departments (DNPD)

Supervising trading at derivatives segments of stock exchanges, introducing new
products to be traded, and consequent policy changes.

40

POWERS & FUNCTIONS

1. Regulating the business in stock exchanges and any other securities markets.
2. Registering and regulating the working of stock brokers, sub-brokers,
share transfer agents, bankers to an issue, trustees of trust deeds, registrars to
an issue, merchant bankers, underwriters, portfolio managers, investment
advisers and such other intermediaries who may be associated with securities
markets in any manner.
3. Registering and regulating the working of the depositories, participants
custodians of securities, foreign institutional investors, credit rating agencies
and such other intermediaries as the board may, by notification, specify in
this behalf.
4. Registering and regulating the working of (venture capital funds and
collective investment schemes) including mutual funds.
5. Promoting and regulating self-regulatory organizations.
6. Prohibiting fraudulent and unfair trade practices relating to securities markets.
7. Promoting investors' education and training of intermediaries of securities
markets.
8. Prohibiting insider trading in securities.
9. Regulating substantial acquisition of shares and take-over of companies.
10. Calling for information from, undertaking inspection, conducting inquiries
and audits of the stock exchanges, (mutual funds) and other persons
associated with the securities market and intermediaries and self- regulatory
organizations in the securities market.
11. Performing such functions and exercising such powers under the provisions
of securities contracts (regulation) act, 1956, as may be delegated to it by the
central government.
12. Levying fees or other charges for carrying out the purpose of this section.
13. Conducting research for the above purposes.

41

5. National Stock Exchange:

5.1 Genesis:
National Stock Exchange of India (NSE) is India's largest Stock Exchange &
World's third largest Stock Exchange in terms of transactions. Located in
Mumbai, NSE was promoted by leading Financial Institutions at the behest of
the Government of India, and was incorporated in November 1992 as a taxpaying company. In April 1993, NSE was recognized as a Stock exchange under
the Securities Contracts (Regulation) Act-1956. NSE commenced operations in
the Wholesale Debt Market (WDM) segment in June 1994. Capital Market
(Equities) segment of the NSE commenced operations in November 1994, while
operations in the Derivatives segment commenced in June 2000. NSE has played
a catalytic role in reforming Indian securities market in terms of microstructure,
market practices and trading volumes. NSE has set up its trading system as a
nation-wide, fully automated screen based trading system. It has written for itself

42

the mandate to create World-class Stock Exchange and use it as an instrument of

change for the industry as a whole through competitive pressure. NSE is set up
on a demutualised model wherein the ownership, management and trading rights
are in the hands of three different sets of people. This has completely eliminated
any conflict of interest.

History
Capital market reforms in India and the launch of the Securities and Exchange
Board of India (SEBI) accelerated the incorporation of the second Indian stock
exchange called the National Stock Exchange (NSE) in 1992. After a few years
of operations, the NSE has become the largest stock exchange in India.
Three segments of the NSE trading platform were established one after another.
The Wholesale Debt Market (WDM) commenced operations in June 1994 and
the Capital Market (CM) segment was opened at the end of 1994. Finally, the
Futures and Options segment began operating in 2000. Today the NSE takes the
14th position in the top 40 futures exchanges in the world.
In 1996, the National Stock Exchange of India launched S&P CNX Nifty and
CNX Junior Indices that make up 100 most liquid stocks in India. CNX Nifty is
a diversified index of 50 stocks from 25 different economy sectors. The Indices
are owned and managed by India Index Services and Products Ltd (IISL) that
has a consulting and licensing agreement with Standard & Poor's.
In 1998, the National Stock Exchange of India launched its web-site and was the
first exchange in India that started trading stock on the Internet in 2000. The
NSE has also proved its leadership in the Indian financial market by gaining
many awards such as 'Best IT Usage Award' by Computer Society in India (in
1996 and 1997) and CHIP Web Award by CHIP magazine (1999).

43

In the fast growing Indian financial market, there are 23 stock exchanges trading
securities. The National Stock Exchange of India (NSE) situated in Mumbai - is
the largest and most advanced exchange with 1016 companies listed and 726
trading members.
The NSE is owned by the group of leading financial institutions such as Indian
Bank or Life Insurance Corporation of India. However, in the totally demutualised Exchange, the ownership as well as the management does not have a
right to trade on the Exchange. Only qualified traders can be involved in the
securities trading.
The NSE is one of the few exchanges in the world trading all types of securities
on a single platform, which is divided into three segments: Wholesale Debt
Market (WDM), Capital Market (CM), and Futures & Options (F&O) Market.
Each segment has experienced a significant growth throughout a few years of
their launch. While the WDM segment has accumulated the annual growth of
over 36% since its opening in 1994, the CM segment has increased by even 61%
during the same period.
The National Stock Exchange of India has stringent requirements and criteria for
the companies listed on the Exchange. Minimum capital requirements, project
appraisal, and company's track record are just a few of the criteria. In addition,
listed companies pay variable listing fees based on their corporate capital size.
The National Stock Exchange of India Ltd. provides its clients with a single,
fully electronic trading platform that is operated through a VSAT network.
Unlike most world exchanges, the NSE uses the satellite communication system
that connects traders from 345 Indian cities. The advanced technologies enable
up to 6 million trades to be operated daily on the NSE trading platform.

44

5.2 OBJECTIVE:
NSE was set up with the objectives of:

Establishing a nationwide trading facility for all types of securities;

Ensuring equal access to investors all over the country through an

appropriate communication network;

Providing a fair, efficient and transparent securities market using

electronic trading system;

Enabling shorter settlement cycles and book entry settlements; and

Meeting international benchmarks and standards.

NSE has been able to take the stock market to the doorsteps of the
investors.

The technology has been harnessed to deliver the services to the investors across
thecountry at the cheapest possible cost. It provides a nation-wide, screen-based,
automated trading system, with a high degree of transparency and equal access
to investors irrespective of geographical location.

The high level of information dissemination through on-line system has helped
in integrating retail investors on a nation-wide basis. The standards set by the
exchange in terms of market practices, products, technology and service
standards have become industry benchmarks and are being replicated by other
market participants.

Within a very short span of time, NSE has been able to achieve all the objectives
for which it was set up. It has been playing a leading role as a change agent in
transforming the Indian Capital Markets to its present form.
45

The Indian Capital Markets are a far cry from what they used to be a decade ago
in terms of market practices, infrastructure, technology, risk management,
clearing and settlement and investor service.

NSE - A New ideology;

The broad objective for which the exchange was set up has made it to play a
leading role in enlarging the scope of market reforms in securities market in
India. During last one decade it has been playing the role of a catalytic agent in
reforming the markets in terms of market microstructure and in evolving the best
market practices keeping in mind the investors.
The Exchange is set up on a demutualised model wherein the ownership,
management and trading rights are in the hands of three different sets of people
has completely eliminated any conflict of interest. This has helped NSE to
aggressively pursue policies and practices within a public interest framework.

NSE's nationwide, automated trading system has helped in shifting the trading
platform from the trading hall in the premises of the exchange to the computer
terminals at the premises of the trading members located at different
geographical locations in the country and subsequently to the personal
computers in the homes of investors and even to hand held portable devices for
the mobile investors. It has been encouraging corporatization of membership in
securities market.

It has also proved to be instrumental in ushering in scrip less trading and

providing settlement guarantee for all trades executed on the Exchange.
Settlement risks have also been eliminated with NSE's innovative endeavours in
the area of clearing and settlement viz., establishment of the clearing corporation

46

(NSCCL), setting up a settlement guarantee fund (SGF), reduction of settlement

cycle,

implementing

on-line,

real-time

risk

management

systems,

dematerialization and electronic transfer of securities to name few of them.

As a consequence, the market today uses state-of-the-art information technology

to provide an efficient and transparent trading, clearing and settlement
mechanism. In order to take care of investors interest, it has also created an
investors protection fund (IPF), that would help investors who have incurred
financial loss due to default of brokers.

The logo of the NSE symbolises a single

nationwide securities trading facility ensuring equal and fair access to investors,
trading members and issuers all over the country. The initials of the Exchange
viz., N, S and E have been etched on the logo and are distinctly visible. The logo
symbolises use of state of the art information technology and satellite
connectivity to bring about the change within the securities industry. The logo
symbolises vibrancy and unleashing of creative energy to constantly bring about
change through innovation.

47

5.3 Products:
NSE provides an electronic trading platform for of all types of securities for
investors under one roof - Equity, Corporate Debt, Central and State
Government Securities, TBills, Commercial Paper, Certificate of Deposits
(CDs), Warrants, Mutual Funds units, Exchange Traded Funds, Derivatives like
Index Futures, Index Options, Stock Futures, Stock Options, Futures on Interest
Rates etc., which makes it one of the few exchanges in the world providing
trading facility for all types of securities on a single exchange.

NSE's markets
NSE provides a fully automated screen-based trading system with national reach
in the following major market segments:

Equity OR Capital Markets {NSE's market share is over 65%}

Futures & Options OR Derivatives Market {NSE's market share

over 99.5%}

Wholesale Debt Market (WDM)

Mutual Funds (MF)

Initial Public Offerings (IPO)

The Exchange provides trading in 3 different segments viz.

Wholesale debt market (WDM)

Capital market (CM) segment and
The futures & options (F&O) segment.

48

The Wholesale Debt Market segment provides the trading platform for trading
of a wide range of debt securities which includes State and Central Government
securities, T-Bills, PSU Bonds, Corporate Debentures, CPs, CDs etc. However,
along with these financial instruments, NSE has also launched various products
(e.g. FIMMDA-NSE MIBID/MIBOR) owing to the market need. A reference
rate is said to be an accurate measure of the market price. In the fixed income
market, it is the interest rate that the market respects and closely matches. In
response to this, NSE started computing and disseminating the NSE Mumbai
Inter-bank Bid Rate (MIBID) and NSE Mumbai Inter-Bank Offer Rate
(MIBOR). Owing to the robust methodology of computation of these rates and
its extensive use, this product has become very popular among the market
participants.

Keeping in mind the requirements of the banking industry, FIs, MFs, insurance
companies, who have substantial investments in sovereign papers, NSE also
started the dissemination of its yet another product, the Zero Coupon Yield
Curve. This helps in valuation of sovereign securities across all maturities
irrespective of its liquidity in the market.

The increased activity in the government securities market in India and

simultaneous emergence of MFs (Gilt MFs) had given rise to the need for a well
defined bond index to measure the returns in the bond market. NSE constructed
such an index the, NSE Government Securities Index. This index provides a
benchmark for portfolio management by various investment managers and gilt
funds.

The Capital Market segment offers a fully automated screen based trading
system, known as the National Exchange for Automated Trading (NEAT)

49

system. This operates on a price/time priority basis and enables members from
across the country to trade with enormous ease and efficiency. Various types of
securities e.g. equity shares, warrants, debentures etc. are traded on this system.
The average daily turnover in the CM Segment of the Exchange during 2004-05
was nearly Rs. 4,506 crs.

NSE started trading in the equities segment (Capital Market segment) on

November 3, 1994 and within a short span of 1 year became the largest
exchange in India in terms of volumes transacted. Trading volumes in the equity
segment have grown rapidly with average daily turnover increasing from Rs.17
crores during 1994-95 to Rs.6,253 crores during 2005-06.

During the year 2005-06, NSE reported a turnover of Rs.1,569,556 crores in the
equities segment. The Equities section provides you with an insight into the
equities segment of NSE and also provides real-time quotes and statistics of the
equities market. In-depth information regarding listing of securities, trading
systems & processes, clearing and settlement, risk management, trading statistics
etc are available here.

Futures & Options segment of NSE provides trading in derivatives instruments

like Index Futures, Index Options, Stock Options, Stock Futures and Futures on
interest rates. Though only four years into its operations, the futures and options
segment of NSE has made a mark for itself globally. In the Futures and Options
segment, trading in Nifty and CNX IT index and 53 single stocks are available.
W.e.f. May 27 2005, futures and options would be available on 118 single
stocks. The average daily turnover in the F&O Segment of the Exchange during
2004-05 was nearly Rs. 10,067 crs.

50

CAPITAL MARKET (EQUITIES) SEGMENT

1 Settlement Guarantee Fund

31-MAR-2008

Rs.4,767.60 crores

2 Investor Protection Fund

28-FEB-2009

Rs.275.08 crores

3 Number of securities available for trading

28-FEB-2009

1,589

4 Record number of trades

07-JAN-2009

8,959,510

5 Record daily turnover (quantity)

07-JAN-2009

12,599 lakh shares

6 Record daily turnover (value)

01-NOV-2007

Rs.28,476.07 crores

7 Record market capitalization

07-JAN-2008

Rs.67,45,724 crores

8 Record value of S&P CNX Nifty Index

08-JAN-2008

6357.10

9 Record value of CNX Nifty Junior Index

04-JAN-2008

13209.35

CLEARING & SETTLEMENT

1 Record Pay-in/Pay-out (Rolling Settlement):
Funds Pay-in/Pay-out (N2007200)

23-OCT-2007* Rs.4,567.70 crores

Securities Pay-in/Pay-out (Value) (N2007247)

31-DEC-2007* Rs.9,195.56 crores

Securities Pay-in/Pay-out (Quantity) (N2009005)

12-JAN-2009*

3,511.61 lakhs

*Settlement Date

DERIVATIVES (F&O) SEGMENT

1 Settlement Guarantee Fund

31-MAR-2008

Rs.36,972.70 crores

2 Investor Protection Fund

28-FEB-2009

Rs.49.35 crores

3 Record daily turnover (value)

18-OCT-2007

Rs.110,563 crores

4 Record number of trades

07-JAN-2009

1874697

CURRENCY DERIVATIVES SEGMENT

1 Record daily turnover (value)

18-FEB-2009

Rs. 3,238.78 crores

2 Record number of Trades

17-FEB-2009

24,366

3 Record number of Contracts

18-FEB-2009

649,514

51

WHOLESALE DEBT SEGMENT

1 Number of securities available for trading

28-FEB-2009

3,916

2 Record daily turnover (value)

25-AUG-2003

Rs. 13,911.57 crores

5.4 Technology:
Technology has been the backbone of the Exchange. Providing the services to
the investing community and the market participants using technology at the
cheapest possible cost has been its main thrust. NSE chose to harness technology
in creating a new market design.

It believes that technology provides the necessary impetus for the organisation to
retain its competitive edge and ensure timeliness and satisfaction in customer
service. In recognition of the fact that technology will continue to redefine the
shape of the securities industry, NSE stresses on innovation and sustained
investment in technology to remain ahead of competition.

NSE believes that technology shall continue to provide necessary impetus for
any organisation to retain its competitive edge, ensure timeliness & satisfaction
in customer service. Being fully dependant on Information Technology, NSE has
stressed on innovation and sustained investment in technology on a continual
basis to ensure customer satisfaction, improvement in services which
automatically helps in sustaining business and remain ahead of competition.

52

As a policy, NSE looks to improve the quality of Services to its customers.

Projects are not initiated based on a business model to reap profits but from a
strategic perspective of better productivity, Value-adds & features, improving
efficiency, reducing operational costs, compliance, operational transparency etc
for the customers, investors and to the entire Indian Securities Industry.
Some of the projects taken by NSE last year are as follows:1. Trading System Capacity enhancement
2. Re-engineering of Online Position Monitoring (OPMS)
3. Augmentation of Data Warehouse (DWH)
4. STP Central Hub

NSE is the first exchange in the world to use satellite communication technology
for trading. It uses satellite communication technology to energise participation
through about 2,829 VSATs from nearly 345 cities spread all over the country.

The list of towns and cities and the state-wise distribution of VSATs as at end
March2005. Its trading system, called National Exchange for Automated
Trading (NEAT), is a state of the art client server based application. At the
server end all trading information is stored in an in-memory database to achieve
minimum response time and maximum system availability for users.

It has uptime record of 99.7%. For all trades entered into NEAT system, there is
uniform response time of less than 1.5 seconds. NSE has been continuously
undertaking capacity enhancement measures so as to effectively meet the
requirements of increased users and associated trading loads. With recent up
gradation of trading hardware, NSE can handle up to 6 million trades per day.

53

NSE has also put in place NIBIS (NSE's Internet Based Information System) for
on-line real-time dissemination of trading information over the Internet.
As part of its business continuity plan, NSE has established a disaster back-up
site at Chennai along with its entire infrastructure, including the satellite earth
station and the highspeed optical fiber link with its main site at Mumbai. This
site at Chennai is a replica of the production environment at Mumbai. The
transaction data is backed up on near real time basis from the main site to the
disaster back-up site through the 2 mbps high-speed link to keep both the sites
all the time synchronized with each other.

Application Systems:
The various application systems that NSE uses for its trading as well clearing
and settlement and other operations form the backbone of the Exchange. The
application systems used for the day-to-day functioning of the Exchange can be
divided into
(a) Front end applications
(b) Back office applications.

IN THE FRONT END APPLICATION SYSTEM, THERE ARE 6

APPLICATIONS:

NEAT CM system takes care of trading of securities in the Capital Market

segment that includes equities, debentures/ notes as well as retail Gilts. The
NEAT CM application has a split architecture wherein the split is on the
securities and users. The application runs on two Stratus systems with Open
Strata Link (OSL). The application has been benchmarked to support 15000
users and handle more than 6 million trades daily. This application also provides

54

data feed for processing to some other systems like Index, OPMS through
TCP/IP.

This is a direct interface with the trading members of the CM segment of the
Exchange for entering the orders into the main system. There is a two way
communication between the NSE main system and the front end terminal of the
trading member.

NEAT WDM system takes care of trading of securities in the Wholesale

Debt Market (WDM) segment that includes Gilts, Corporate Bonds, CPs, TBills, etc. This is a direct interface with the trading members of the WDM
segment of the Exchange for entering the orders/trades into the main system.
There is a two way communication between the NSE main system and the front
end terminal of the trading member.

NEAT F&O system takes care of trading of securities in the Futures and
Options (F&O) segment that includes Futures on Index as well as individual
stocks and Options on Index as well as individual stocks. This is a direct
interface with the trading members of the F&O segment of the Exchange for
entering the orders into the main system. There is a two way communication
between the NSE main system and the front end terminal of the trading member.

NEAT IPO system is an interface to help the initial public offering of

companies which are issuing the stocks to raise capital from the market. This is a
direct interface with the trading members who are registered for undertaking
order entry on behalf of their clients for IPOs. NSE uses the NEAT IPO system
that allows bidding in several issues concurrently. There is a two way

55

communication between the NSE main system and the front end terminal of the
trading member.
NEAT MF system is an interface with the trading members for order
collection of designated mutual funds units.

Surveillance system offers the users a facility to comprehensively monitor the

trading activity and analyze the trade data online and offline. In the back office,
the following important application systems are operative:

A) NCSS (Nationwide Clearing and Settlement System) is the clearing and

settlement system of the NSCCL for the trades executed in the CM segment of
the Exchange. The system has 3 important interfaces OLTL (Online Trade
loading) that takes each and every trade executed on real time basis and allocates
the same to the clearing members, Depository Interface that connects the
depositories for settlement of securities and Clearing Bank Interface that
connects the 10 clearing banks for settlement of funds.

It also interfaces with the clearing members for all required reports. Through
collateral management system it keeps an account of all available collaterals on
behalf of all trading/clearing members and integrates the same with the position
monitoring of the trading/ clearing members. The system also generates base
capital adequacy reports.

(B) FOCASS is the clearing and settlement system of the NSCCL for the trades
executed in the F&O segment of the Exchange. It interfaces with the clearing
members for all required reports.
Through collateral management system it keeps an account of all available
collaterals on behalf of all trading/ clearing members and integrates the same

56

with the position monitoring of the trading/clearing members. The system also
generates base capital adequacy reports.

(C) OPMS the online position monitoring system that keeps track of all trades
executed for a trading member vis--vis its capital adequacy.

(D) PRISM is the parallel risk management system for F&O trades using
Standard Portfolio Analysis (SPAN). It is a system for comprehensive
monitoring and load balancing of an array of parallel processors that provides
complete fault tolerance.
It provides real time information on initial margin value, mark to market profit
or loss, collateral amounts, contract-wise latest prices, contract-wise open
interest and limits. The system also tracks online real time client level portfolio,
base upfront margining and monitoring.

(E) Data warehousing, that is the central repository of all data in CM as well as
F&O segment of the Exchange.

(F) Listing system, that captures the data of companies which are listed on the
Exchange and integrates the same with the trading system for necessary
broadcasts, information dissemination

(G) Membership system, hat keeps track of all required details of the Trading
Members of the Exchange.

57

5.5 NSE FAMILY:

Our Group

NSCCL

NCCL

NSETECH

IISL

NSE

NSE.IT

DotEx Intl. Ltd.

NSDL

58

NSCCL
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 was the first clearing corporation in the country to
provide notation/settlement guarantee that revolutionized the entire concept of
settlement system in India.

It was set up to bring and 9 sustain confidence in clearing and settlement of

securities; to promote and maintain short and consistent settlement cycles; to
provide counter-party risk guarantee, and to operate a tight risk containment
system. It carries out the clearing and settlement of the trades executed in the
equities and derivatives segments of the NSE.

It operates a well-defined settlement cycle and there are no deviations or

deferments from this cycle. It aggregates trades over a trading period T, nets the
positions to determine the liabilities of members and ensures movement of funds
and securities to meet respective liabilities. It also operates a Subsidiary General
Ledger (SGL) for settling trades in government securities for its constituents.

It has been managing clearing and settlement functions since its inception
without a single failure or clubbing of settlements. It assumes the counter-party
risk of each member and guarantees financial settlement. It has tied up with 10
Clearing Banks viz., Canara Bank, HDFC Bank, IndusInd Bank, ICICI Bank,
UTI Bank, Bank of India, IDBI Bank and Standard Chartered Bank for funds
settlement while it has direct connectivity with depositories for settlement of
securities.

59

It has also initiated a working capital facility in association with the clearing
banks that helps clearing members to meet their working capital requirements.
Any clearing bank interested in utilizing this facility has to enter into an
agreement with NSCCL and with the clearing member. NSCCL has also
introduced the facility of direct payout to clients account on both the
depositories.

It ascertains from each clearing member, the beneficiary account details of their
respective clients who are due to receive pay out of securities.

It has provided its members with a front-end for creating the file through which
the information is provided to NSCCL. Based on the information received from
members, it sends payout instructions to the depositories, so that the client
receives the pay out of securities directly to their accounts on the pay-out day.

NSCCL currently settles trades under T+2 rolling settlement. It has the credit of
continuously upgrading the clearing and settlement procedures and has also
brought Indian financial markets in line with international markets. It has put in
place online real-time monitoring and surveillance system to keep track of the
trading and clearing members outstanding positions and each member is
allowed to trade/operate within the pre-set limits fixed according to the funds
available with the Exchange on behalf of the member.

The online surveillance mechanism also generates various alerts/reports on any

price/volume movements of securities not in line with the normal
trends/patterns.

60

IISL:
India Index Services and Products Limited (IISL), a joint venture of NSE and
Credit Rating Information Services of India Limited (CRISIL), was set up in
May 1998 to provide indices and index services. It has a consulting and licensing
agreement with Standard and Poor's (S&P), the world's leading provider of
invest able equity indices, for co-branding equity indices. IISL pools the index
development efforts of NSE and CRISIL into a coordinated whole. It is India's
first specialized company which focuses upon the index as a core product. It
provides a broad range of products and professional index services.

It maintains over 70 equity indices comprising broad based benchmark indices,

sectoral indices and customized indices. Many investment and risk management
products based on IISL indices have been developed in the recent past. These
include index based derivatives on NSE, a number of index funds and India's
first exchange traded fund.

NSDL;
Prior to trading in a dematerialized environment, settlement of trades required
moving the securities physically from the seller to the ultimate buyer, through
the seller's broker and buyer's broker, which involved lot of time and the risk of
delay somewhere along the chain. Further, the system of transfer of ownership
was grossly inefficient as every transfer involved physical movement of paper to
the issuer for registration, with the change of ownership being evidenced by an
endorsement on the security certificate.

61

In many cases, the process of transfer took much longer than stipulated in the
then regulations. Theft, forgery, mutilation of certificates and other irregularities
were rampant. All these added to the costs and delays in settlement and restricted
liquidity. To obviate these problems and to promote dematerialization of
securities, NSE joined hands with UTI and IDBI to set up the first depository in
India called the "National Securities Depository Limited" (NSDL).

The depository system gained quick acceptance and in a very short span of time
it was able to achieve the objective of eradicating paper from the trading and
settlement of securities, and was also able to get rid of the risks associated with
fake/forged/stolen/bad paper. Dematerialized delivery today constitutes almost
100% of the total delivery based settlement.

NSE.IT:
NSE.IT Limited, a 100% technology subsidiary of NSE, was incorporated in
October 1999 to provide thrust to NSEs technology edge, concomitant with its
overall goal of harnessing latest technology for optimum business use. It
provides the securities industry with technology that ensures transparency and
efficiency in the trading, clearing and risk management systems. Additionally,
NSE.IT provides consultancy services in the areas of data warehousing, internet
and business continuity plans.

Amongst various products launched by NSE.IT are NEAT XS, a Computer-ToComputer Link (CTCL) order routing system, NEAT iXS, an internet trading
system and Promos, professional brokers back office system.

62

NSE.IT also offers an e-learning oral, in varsity (www.finvarsity.com) dedicated

to the finance sector. The site is powered by Enlitor - a learning management
system developed by NSE.IT jointly with an e-learning partner. New initiatives
include payment gateways, products for derivatives segments and Enterprise
Management Services (EMSs).

NCDEX:

NSE joined hand with other financial institutions in India viz., ICICI Bank,
NABARD, LIC, PNB, CRISIL, Canara Bank and IFFCO to promote the
NCDEX which provide a platform for market participants to trade in wide
spectrum of commodity derivatives. Currently NCDEX facilitates trading of 37
agro based commodities,

1) Base metal and

2) Precious metal.

Shareholders of NSEIL
1. Industrial Development Bank of India Limited
2. Industrial Finance Corporation of India Limited
3. Life Insurance Corporation of India
4. State Bank of India
5. ICICI Bank Limited
6. IL & FS Trust Company Limited
7. Stock Holding Corporation of India Limited
8. SBI Capital Markets Limited

63

9. The Administrator of the Specified Undertaking of Unit

Trust of India
10. Bank of Baroda
11. Canara Bank
12. General Insurance Corporation of India
13. National Insurance Company Limited
14. The New India Assurance Company Limited
15. The Oriental Insurance Company Limited
16. United Insurance Company Limited
17. Punjab National Bank
18. Oriental Bank of Commerce
19. Corporation Bank
20. Indian Bank
21. Union Bank of India

5.6 Listing & Membership

LISTING OF SECURITIES
The stocks, bonds and other securities issued by issuers require listing for
providing liquidity to investors. Listing means formal admission of a security to
the trading platform of the Exchange. It provides liquidity to investors without
compromising the need of the issuer for capital and ensures effective monitoring
of conduct of the issuer and trading of the securities in the interest of investors.
The issuer wishing to have trading privileges for its securities satisfies listing
requirements prescribed in the relevant statutes and in the listing regulations of
the Exchange.

64

It also agrees to pay the listing fees and comply with listing requirements on a
continuous basis. All the issuers who list their securities have to satisfy the
corporate governance requirement framed by regulators.

Benefits of Listing on NSE

NSE provides a trading platform that extends across the length and
breadth of the country. Investors from approximately 345 centres can avail
of trading facilities on the NSE trading network. Listing on NSE thus,
enables issuers to reach and service investors across the country.

NSE being the largest stock exchange in terms of trading volumes, the
securities trade at low impact cost and are highly liquidity. This in turn
reduces the cost of trading to the investor.

The trading system of NSE provides unparallel level of trade and posttrade information. The best 5 buy and sell orders are displayed on the
trading system and the total number of securities available for buying and
selling is also displayed. This helps the investor to know the depth of the
market. Further, corporate announcements, results, corporate actions etc
are also available on the trading system, thus reducing scope for price
manipulation or misuse.

The facility of making initial public offers (IPOs), using NSE's network
and software, results in significant reduction in cost and time of issues.

NSE's web-site www.nseindia.com provides a link to the web-sites of the

companies that are listed on NSE, so that visitors interested in any
company can visit that company's web-site from the NSE site.

Listed companies are provided with monthly trade statistics for the
securities of the company listed on the Exchange.

65

The listing fee is nominal.

CM Segment

Two categories, namely 'listed' and 'permitted to trade' categories of securities

(equity shares, preference shares and debentures) are available for trading in the
CM segment. However, the permitted to trade category is being phased out
gradually and no new company is been given the benefit of this category.

At the end of March 2005, 970 'listed' and 1 'permitted to trade' companies were
available for trading. These securities had a market capitalisation of Rs.
1,585,585 crore.

Listing Criteria

The Exchange has laid down criteria for listing of new issues by companies,
companies

listed

on

other

exchanges,

and

companies

formed

by

amalgamation/restructuring, etc. in conformity with the Securities Contracts

(Regulation) Rules, 1957 and directions of the Central Government and the
Securities and Exchange Board of India (SEBI). The criteria include minimum
paid-up capital and market capitalisation, project appraisal, company/promoter's
track record, etc.

The issuers of securities are required to adhere to provisions of the Securities

Contracts (Regulation) Act, 1956, the Companies Act, 1956, the Securities and
Exchange Board of India Act, 1992, and the rules, circulars, notifications,
guidelines, etc. prescribed there under.

66

Listing Agreement

All companies seeking listing of their securities on the Exchange are required to
enter into a listing agreement with the Exchange. The agreement specifies all the
requirements to be continuously complied with by the issuer for continued
listing.

The Exchange monitors such compliance. Failure to comply with the

requirements invites suspension of trading, or withdrawal/delisting, in addition
to penalty under the Securities Contracts (Regulation) Act, 1956. The agreement
is being increasingly used as a means to improve corporate governance.

Shareholding Pattern

In the interest of transparency, the issuers are required to disclose shareholding

pattern on a quarterly basis. On an average, the promoters hold more than
55.63% of total shares. Though non-promoter holding is nearly 44.37%, Indian
public held only 17.03% and the public float (holding by foreign institutional
investors, mutual funds, and Indian Public) is at best 27.27%.

De-listing

The securities listed on NSE can be de-listed from the Exchange as per the SEBI
(Delisting of Securities) Guidelines, 2003 in the following manner:

67

Voluntary De-listing of Companies

Any promoter or acquirer desirous of delisting securities of the company under

the provisions of these guidelines shall obtain the prior approval of shareholders
of the company by a special resolution passed at its general meeting, make a
public announcement in the manner provided in these guidelines, make an
application to the delisting exchange in the form specified by the exchange, and
comply with such other additional conditions as may be specified by the
concerned stock exchanges from where securities are to be de-listed.

Any promoter of a company which desires to de-list from the stock exchange
shall also determine an exit price for delisting of securities in accordance with
the book building process as stated in the guidelines. The stock exchanges shall
provide the infrastructure facility for display of the price at the terminal of the
trading members to enable the investors to access the price on the screen to bring
transparency to the delisting process.

Compulsory De-listing of Companies

The stock exchanges may de-list companies which have been suspended for a
minimum period of six months for non-compliance with the listing agreement.
The stock exchanges have to give adequate and wide public notice through
newspapers and also give a show cause notice to a company.

The exchange shall provide a time period of 15 days within which 30

representations may be made to the exchange by any person who may be
aggrieved by the proposed delisting. Where the securities of the company are delisted by an exchange, the promoter of the company shall be liable to

68

compensate the security holders of the company by paying them the fair value of
the securities held by them and acquiring their securities, subject to their option
to remain security-holders with the company.

WDM Segment

In the WDM segment, all government securities, state development loans and
treasury bills are 'deemed' listed as and when they are issued. The other
categories of securities are traded under the 'listed' category. All eligible
securities whether publicly issued or privately placed can be made available for
trading in the WDM segment. Amongst other requirements, privately placed
debt paper of banks, institutions and corporate require credit rating to be eligible
for listing.

6. MEMBERSHIP ADMINISTRATION

The trading in NSE has a three tier structure-the trading platform provided by
the Exchange, the broking and intermediary services and the investing
community. The trading members have been provided exclusive rights to trade
subject to their continuously fulfilling the obligation under the Rules,
Regulations, Byelaws, Circulars, etc. of the Exchange.

The trading members are subject to its regulatory discipline. Any entity can
become a trading member by complying with the prescribed eligibility criteria
and exit by surrendering trading membership. There are no entry/exit barriers to
trading membership.

69

Eligibility Criteria

The Exchange stresses on factors such as corporate structure, capital adequacy,

track record, education, experience, etc. while granting trading rights to its
members. This reflects a conscious effort by the Exchange to ensure quality
broking services which enables to build and sustain confidence in the Exchange's
operations.

The standards stipulated by the Exchange for trading membership are

substantially in excess of the minimum statutory requirements as also in
comparison to those stipulated by other exchanges in India. The exposure and
volume of transactions that can be undertaken by a trading member are linked to
liquid assets in the form of cash, bank guarantees, etc. deposited by the member
with the Exchange as part of the membership requirements.

The trading members are admitted to the different segments of the Exchange
subject to the provisions of the Securities Contracts (Regulation) Act, 1956, the
Securities and Exchange Board of India Act, 1992, the rules, circulars,
notifications, guidelines, etc., issued there under and the byelaws, Rules and
Regulations of the Exchange. All trading members are registered with SEBI.

5.7 Trading process

A prospective trading member is admitted to any of the following combinations

of market segments:
Wholesale Debt Market (WDM) segment,
Capital Market (CM) and the Futures and Options (F&O) segments,
CM Segment, the WDM and the F&O segment.

70

In order to be admitted as a trading member, at least two directors of the

applicant corporate must be graduates and must possess at least two years'
experience

in

securities

markets.

The

applicant/any

of

its

partners

/shareholders/directors must not have been declared defaulters on any stock

exchange, must not be debarred by SEBI for being associated with capital
market as intermediaries and must not be engaged in any fund-based activity.

For the F&O segment, at least two dealers should also have passed SEBIapproved certification test for derivatives. In case of corporate applicant, the
minimum paid up capital should be Rs. 30 lakh and the dominant
promoter/shareholder group should hold at least 51% (40% in case 2 20 of listed
companies) of paid-up equity capital of such corporate entity.

The net worth required for trading members on CM & F&O Segment is Rs. 100
lakh, however, a net worth of Rs. 300 lakh is required for members clearing for
self as well as for other trading members.

Clearing Membership

The trades executed on the Exchange may be cleared and settled by a clearing
member. The trading members in the CM segment are also clearing members. In
the F&O segment, some members, who are registered with SEBI as self-clearing
members, clear and settle their own trades. Certain others, registered as trading
member-cum-clearing member, clear and settle their own trades as well as trades
of other trading members.

71

Besides this, there is a special category of members, called professional clearing

members (PCMs), who do not trade but only clear trades executed by others.
This means that some members clear and settle their trades through a trading
member-cum-clearing member or a PCM, not themselves. The members clearing
their own trades or trades of others, and the PCMs are required to bring in
additional security deposits in respect of every trading member whose trades
they undertake to clear and settle.

Growth and Distribution of Members

As at end March 2005, the Exchange had 891 members including 519 from nonMumbai centers. A large majority (89%) of them were corporate members, and
the remaining, individuals and firms. There were 881, 75 and 661 members in
the CM, WDM and F&O segments respectively. The distribution of trading
members on the Exchange as at end March 2005 is presented below:

Transaction Charges

In addition to annual fees, members are required to pay transaction charges on

trades undertaken by them. They pay transaction charges at the rate of Rs.4 for
every Rs.1 lakh of turnover in the CM segment, at the rate of Rs.2 for every Rs.1
lakh of turnover in Futures contracts and at the rate of 5 paisa per Rs.1 lakh
gross trade value up to Rs.25,000 crors and at the rate of 2 paisa per Rs.1 lakh
gross traded value above Rs.25,000 crors subject to minimum of Rs.10,000 per
annum in the WDM segment. For the transactions in the Options sub-segment
the transaction charges are levied on the premium value at the rate of 0.05%
(each side).

72

7. INVESTOR GRIEVANCES

Investors are the backbone of the securities market. Protection of their interests
is paramount for NSE. In furtherance of their interests, NSE has put in place
systems to ensure availability of adequate, up-to-date and correct information to
investors to enable them to take informed decisions. It ensures that critical and
price-sensitive information reaching the exchange is made available to all classes
of investor at the same point of time. Such price-sensitive information as bonus
announcements, mergers, new line of business, etc. received from the companies
is disseminated to all the market participants through the network of NSE
terminals all over India.

Action is initiated by the Exchange whenever any kind of price sensitive

information is not provided to the Exchange at the prescribed time by companies
listed on the Exchange. In an attempt to ease the existing system of information
dissemination by the listed companies, NSE launched the electronic interface for
listed companies in August 2004.

Under the new system, all corporate announcements including that of Board
meetings which needs to be disclosed to the market is handled electronically in a
straight through and hands free manner. The Exchange also conducts various
seminars and programs for the investors all over the country with a view of
educating them on their rights and obligations. Investors are also made aware of
the precautions they need to take while dealing in the securities market. The
Exchange makes an audit trail available on request for all transactions executed
on NSE to enable investors to counter-check trade details for the trades executed
on his behalf by the member.

73

The Exchange has also prescribed and makes efforts to ensure the
implementation of various safeguards like time schedules for issuing contract
notes, for receiving funds and securities purchased by investors, segregation of
client funds and securities from those of members, etc. In spite of all the
necessary steps taken by the Exchange to offer quality services to investors, it is
possible that some investors may still have certain complaints, grievances. For
this NSE has put in place a system for redressal of investor grievances for
matters/issues related to/against trading members/listed companies.

The Investor Grievance Cell (IGC) of NSE is manned by a team of professionals

possessing relevant experience in the areas of securities markets, company and
legal affairs and specially trained to identify problems faced by the investor and
to find and effect a solution quickly. It takes up complaints in respect of trades
executed on the NSE through its NEAT terminal and routed through the NSE
trading member or SEBI registered sub-broker of NSE trading member and
trades pertaining to companies traded on NSE.

Investor Protection Fund

Some cushion to the interests of investors is provided by the Investor Protection

Funds (IPFs) set up by the stock exchange. The exchanges maintains an IPF to
take care of investor claims, which may arise out of non settlement of
obligations by the trading member, who has been declared a defaulter, in respect
of trades executed on the Exchange. The maximum amount of claim payable
from the Fund to the investor is Rs. 10 lakh.

Arbitration

74

Arbitration is a speedy and alternative dispute resolution mechanism provided by

the Exchange for resolving disputes between the trading members and between a
trading member and his client, in respect of trades done on the Exchange.

The arbitration mechanism is provided by the Exchange in all its Regional

offices to facilitate the speedy dispute resolution mechanism. The parties to
dispute appoint an arbitrator from the panel of arbitrators maintained by the
Exchange and approved by SEBI. The arbitrator(s) pronounces an award after
going through various documents submitted by the parties and hearing them.

8. DEMATERIALISATION & REMATERIALISATION

DEMATERIALISATION MEANING: Dematerialisation is the process by

which physical certificates of an investor are converted to an equivalent number
of securities in electronic form and credited into the investor's account with
his/her DP.

Dematerialising securities (physical holding into electronic holding)

In order to dematerialise physical securities one has to fill in a DRF (Demat
Request Form) which is available with the DP and submit the same along with
physical certificates one wishes to dematerialise. Separate DRF has to be filled
for each ISIN Number.

Surrender certificates for dematerialisation to your depository participant.

Depository participant intimates Depository of the request through the system.
Depository participant submits the certificates to the registrar of the Issuer

75

Company. Registrar confirms the dematerialisation request from depository.

After dematerialising the certificates, Registrar updates accounts and informs
depository of the completion of dematerialisation. Depository updates its
accounts and informs the depository participant. Depository participant updates
the demat account of the investor.

REMATERIALISATION

The process of rematerialisation is used to convert the electronic holding into

physical holdings. If one wishes to get back his securities in the physical form
one has to fill in the RRF (Remat Request Form) and request his DP for
rematerialisation of the balances in his securities account.

The process of rematerialisation is outlined below:

One makes a request for dematerialisation.

Depository participant intimates depository of the request through the system.
Depository confirms dematerialisation request to the registrar.
Registrar updates accounts and prints certificates.
Depository updates accounts and downloads details to depository participant.
Registrar dispatches certificates to investor.

Procedure for buying & selling dematerialised securities

The procedure for buying and selling dematerialised securities is similar to the
procedure for buying and selling physical securities. The difference lies in the

76

process of delivery (in case of sale) and receipt (in case of purchase) of
securities.

In case of purchase:1. The broker will receive the securities in his account on the payout day
2. The broker will give instruction to its DP to debit his account and credit
investor's account
3. Investor will give Receipt Instruction to DP for receiving credit by filling
appropriate form. However one can give standing instruction for credit into ones
account that will obviate the need of giving Receipt Instruction every time.
In case of sale:The investor will give delivery instruction to DP to debit his account and credit
the brokers account. Such instruction should reach the DPs office at least 24
hours before the pay-in as other wise DP will accept the instruction only at the
investors risk.

9. BROKER & SUB-BROKER

A broker is a member of a recognized stock exchange, who is permitted to do

trades on the screen-based trading system of different stock exchanges. He is
enrolled as a member with the concerned exchange and is registered with SEBI.

A sub broker is a person who is registered with SEBI as such and is affiliated to
a member of a recognized stock exchange.

77

Client Agreement Form

This form is an agreement entered between client and broker in the presence of
witness where the client agrees (is desirous) to trade/invest in the securities listed
on the concerned Exchange through the broker after being satisfied of brokers
capabilities to deal in securities. The member, on the other hand agrees to be
satisfied by the genuineness and financial soundness of the client and making
client aware of his (brokers) liability for the business to be conducted.

Details of Client Registration form

The brokers have to maintain a database of their clients, for which you have to
fill client registration form. In case of individual client registration, you have to
broadly provide following information:
Your name, date of birth, photograph, address, educational qualifications,
occupation, residential status(Resident Indian/ NRI/others)
Unique Identification Number (wherever applicable)
Bank and depository account details
Income tax No. (PAN/GIR) which also serves as unique client code.
If you are registered with any other broker, then the name of broker and
concerned Stock exchange and Client Code Number.
Proof of identity submitted either as MAPIN UID Card/Pan
No./Passport/Voter ID/Driving license/Photo Identity card issued by
Employer registered under MAPIN

78

For proof of address (any one of the following):

1. Passport
2. Voter ID
3. Driving license
4. Bank Passbook
5. Rent Agreement
6. Ration Card
7. Flat Maintenance Bill
8. Telephone Bill
9. Electricity Bill
10. Certificate issued by employer registered under MAPIN
11. Insurance Policy
Each client has to use one registration form. In case of joint names /family
members, a separate form has to be submitted for each person.

In case of Corporate Client, following information has to be provided:

1. Name, address of the Company/Firm

2. Unique Identification Number (wherever applicable)
3. Date of incorporation and date of commencement of business.
4. Registration number(with ROC, SEBI or any government authority)
5. Details of PAN Account Number:
6. Details of Promoters/Partners/Key managerial Personnel of the
Company/Firm in specified format.
7. Bank and Depository Account Details
8. Copies of the balance sheet for the last 2 financial years (copies of annual

79

balance sheet to be submitted every year)

9. Copy of latest share holding pattern including list of all those holding more
than 5% in the share capital of the company, duly certified by the Company
Secretary / Whole time Director/MD. (copy of updated shareholding pattern
to be submitted every year)
10. Copies of the Memorandum and Articles of Association in case of a
company / body incorporate / partnership deed in case of a partnership firm
11. Copy of the Resolution of board of directors' approving participation in
equity / derivatives / debt trading and naming authorized persons for dealing
in securities.
12. Photographs of Partners/Whole time directors, individual promoters holding
5% or more, either directly or indirectly, in the shareholding of the company
and of persons authorized to deal in securities.
13. If registered with any other broker, then the name of broker and concerned
Stock exchange and Client Code Number.

Unique Client Code

In order to facilitate maintaining database of their clients, it is mandatory for all

brokers to use unique client code which will act as an exclusive identification for
the client.

For this purpose, PAN number/passport number/driving License/voters ID

number/ ration card number coupled with the frequently used bank account
number and the depository beneficiary account can be used for identification, in
the given order, based on availability.

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MAPIN

MAPIN is the Market Participants and Investors Integrated Database. The SEBI
(Central Database of Market Participants) Regulations, 2003 were notified on
November 20, 2003.

As per these regulations, all the participants in the Indian Securities Market viz.,
SEBI registered intermediaries, listed companies and their associates and the
investors would need to get registered and obtain a Unique Identification
Number (UIN). The system for allotment of UIN involves the use of biometric
impressions for natural persons. The major objective is creation of a
comprehensive database of market participants.

Once created, the database would not only help the regulator in establishing the
identity of person(s) who have taken large exposures in the market and/or who
are trading through a large number of different brokers but also enable the
regulator to take adequate risk containment measures such as imposition of
margins, trading or exposure limits etc., depending upon the exposures of
various investors.

Hence, in the event of a failure of market integrity, an immediate audit trail

would be possible and the regulator would be able to take early preventive and /
or remedial measures and track down the defaulters and / or manipulators. It has
been decided to suspend all fresh registrations for obtaining UIN and the
requirement to obtain/quote UIN under the MAPIN Regulations/Circulars with
effect from July 01, 2005.

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Maximum brokerage that a broker/sub broker can charge

The maximum brokerage that can be charged by a broker has been specified in
the Stock Exchange Regulations and hence, it may differ from across various
exchanges. As per the BSE & NSE Bye Laws, a broker cannot charge more than
2.5% brokerage from his clients. This maximum brokerage is inclusive of the
brokerage charged by the sub-broker. Further, SEBI (Stock brokers and Sub
brokers) Regulations, 1992 stipulates that sub broker cannot charge from his
clients, a commission which is more than 1.5% of the value mentioned in the
respective purchase or sale note.

Charges that can be levied on the investor by a stock broker/sub broker

The trading member can charge:
1. Brokerage charged by member broker.
2. Penalties arising on specific default on behalf of client (investor)
3. Service tax as stipulated.
4. Securities Transaction Tax (STT) as applicable.

The brokerage, service tax and STT are indicated separately in the contract note.

STT (Securities Transaction Tax)

Securities Transaction Tax (STT) is a tax being levied on all transactions done
on the stock exchanges at rates prescribed by the Central Government from time
to time. Pursuant to the enactment of the Finance (No.2) Act, 2004, the
Government of India notified the Securities Transaction Tax Rules, 2004 and
STT came into effect from
October 1, 2004.

Account Period Settlement

82

An account period settlement is a settlement where the trades pertaining to a

period stretching over more than one day are settled. For example, trades for the
period Monday to Friday are settled together. The obligations for the account
period are settled on a net basis. Account period settlement has been
discontinued since January 1, 2002, pursuant to SEBI directives.

Rolling Settlement
In a Rolling Settlement trades executed during the day are settled based on the
net obligations for the day. Presently the trades pertaining to the rolling
settlement are settled on a T+2 day basis where T stands for the trade day.
Hence, trades executed on a Monday are typically settled on the following
Wednesday (considering 2 working days from the trade day). The funds and
securities pay-in and pay-out are carried out on T+2 day.

10. PAY-IN DAY AND PAY- OUT DAY

Pay in day is the day when the brokers shall make payment or delivery of
securities to the exchange. Pay out day is the day when the exchange makes
payment or delivery of securities to the broker. Settlement cycle is on T+2
rolling settlement basis w.e.f. April 01, 2003. The exchanges have to ensure that
the pay out of funds and securities to the clients is done by the broker within 24
hours of the payout. The Exchanges will have to issue press release immediately
after pay out.

Prescribed pay-in and pay-out days for funds and securities for Normal
Settlement

83

The pay-in and pay-out days for funds and securities are prescribed as per the
Settlement Cycle. A typical Settlement Cycle of Normal Settlement is given
below:

activity any rating online Settlement Trading learning us to dial Confirmation

+1 working days delivery Generation
+1 working day settlement securities and Funds pay in
+2 working days securities and Funds pay out
+2 working days out Settlement valuation Debit
+2 working days auction
+3 working days ad Delivery Reporting
+4 working days auction settlement
+5 working days lose out
+5 working days rectified bad delivery pay-in and ay-out
+6 working days e-bad delivery reporting and pickup
+8 working days lose out of re-bad delivery
+9 working days

(Note: The above is a typical settlement cycle for normal (regular) market
segment. The days prescribed for the above activities may change in case of
factors like holidays, bank closing etc. You may refer to scheduled dates of payin/pay-out notified by the Exchange for each settlement from time-to-time.)

11. AUCTION

The Exchange purchases the requisite quantity in the Auction Market and gives
them to the buying trading member. The shortages are met through auction

84

process and the difference in price indicated in contract note and price received
through auction is paid by member to the Exchange, which is then liable to be
recovered from the client.

What happens if the shares are not bought in the auction?

If the shares could not be bought in the auction i.e. if shares are not offered for
sale in the auction, the transactions are closed out as per SEBI guidelines.

The guidelines stipulate that the close out Price will be the highest price
recorded in that scrip on the exchange in the settlement in which the concerned
contract was entered into and up to the date of auction/close out OR 20% above
the official closing price on the exchange on the day on which auction offers are
called for (and in the event of there being no such closing price on that day, then
the official closing price on the immediately preceding trading day on which
there was an official closing price), whichever is higher.

Since in the rolling settlement the auction and the close out takes place during
trading hours, the reference price in the rolling settlement for close out
procedures would be taken as the previous days closing price.

STOCK MARKET INDEX is a method of measuring a section of the stock

market. Many indices are cited by news or financial services firms and are used
to benchmark the performance of portfolios such as mutual funds

Types of indices
Stock market indices may be classed in many ways. A broad-base index
represents the performance of a whole stock market and by proxy, reflects

85

investor sentiment on the state of the economy. The most regularly quoted
market indices are broad-base indices composed of the stocks of large
companies listed on a nation's largest stock exchanges, such as the British FTSE
100, the French CAC 40, the German DAX, the Japanese Nikkei 225, the
American Dow Jones Industrial Average and S&P 500 Index, the Indian Sensex,
the Australian All Ordinaries and the Hong Kong Hang Seng Index. The concept
may be extended well beyond an exchange. The Dow Jones Total Stock Market
Index, as its name implies, represents the stocks of nearly every publicly traded
company in the United States, including all U.S. stocks traded on the New York
Stock Exchange (but not ADRs) and most traded on the NASDAQ and
American Stock Exchange. Russell Investment Group added to the family of
indices by launching the Russell Global Index.
More specialised indices exist tracking the performance of specific sectors of the
market. The Morgan Stanley Biotech Index, for example, consists of 36
American firms in the biotechnology industry. Other indices may track
companies of a certain size, a certain type of management, or even more
specialized criteria one index published by Linux Weekly News tracks stocks
of companies that sell products and services based on the Linux operating
environment.
Index versions
Some indices, such as the S&P 500 have multiple versions. These versions can
differ based on how the index components are weighted and on how dividends
are accounted for. For example, there are three versions of the S&P 500 index:
price return, which only considers the price of the components, total return,
which accounts for dividend reinvestment, and net total return, which accounts
for dividend reinvestment after the deduction of a withholding tax. As another
example, the Wilshire 4500 and Wilshire 5000 indices have five versions each:
full capitalization total return, full capitalization price, float-adjusted total return,

86

float-adjusted price, and equal weight. The difference between the full
capitalization, float-adjusted, and equal weight versions is in how index
components are weighted.

Weighting
An index may also be classified according to the method used to determine its
price. In a Price-weighted index such as the Dow Jones Industrial Average and
the NYSE ARCA Tech 100 Index, the price of each component stock is the only
consideration when determining the value of the index. Thus, price movement of
even a single security will heavily influence the value of the index even though
the dollar shift is less significant in a relatively highly valued issue, and
moreover ignoring the relative size of the company as a whole. In contrast, a
market-value weighted or capitalization-weighted index such as the Hang Seng
Index factors in the size of the company. Thus, a relatively small shift in the
price of a large company will heavily influence the value of the index. In a
market-share weighted index, price is weighted relative to the number of shares,
rather than their total value.
Traditionally, capitalization- or share-weighted indices all had a full weighting
i.e. all outstanding shares were included. Recently, many of them have changed
to a float-adjusted weighting which helps indexing.
A modified market cap weighted index is a hybrid between equal weighting and
capitalization weighting. It is similar to a general market cap with one main
difference: the largest stocks are capped to a percent of the weight of the total
stock index and the excess weight will be redistributed equally amongst the
stocks under that cap. Moreover, in 2005, Standard & Poor's introduced the S&P
Pure Growth Style Index and S&P Pure Value Style Index which was attribute
weighted. That is, a stock's weight in the index is decided by the score it gets
relative to the value attributes that define the criteria of a specific index, the

87

same measure used to select the stocks in the first place. For these two stocks, a
score is calculated for every stock, be it their growth score or the value score (a
stock cant be both) and accordingly they are weighted for the index.

Criticism of capitalization-weighting
The use of capitalization-weighted indices is often justified by the central
conclusion of modern portfolio theory that the optimal investment strategy for
any investor is to hold the market portfolio, the capitalization-weighted portfolio
of all assets. However, empirical tests conclude that market indices are not
efficient.[citation needed] This can be explained by the fact that these indices do
not include all assets or by the fact that the theory does not hold. The practical
conclusion is that using capitalization-weighted portfolios is not necessarily the
optimal method.

As a consequence, capitalization weighting has been subject to severe criticism

(see e.g. Haugen and Baker 1991, Amenc, Goltz, and Le Sourd 2006, or Hsu
2006), pointing out that the mechanics of capitalization weighting lead to trendfollowing strategies that provide an inefficient risk-return trade-off.
Also, while capitalization weighting is the standard in equity index construction,
different weighting schemes exist. First, while most indices use capitalization
weighting, additional criteria are often taken into account, such as sales/revenue
and net income (see the Guide to the Dow Jones Global Titan 50 Index,
January 2006). Second, as an answer to the critiques of capitalization-weighting,
equity indices with different weighting schemes have emerged, such as
"wealth"-weighted (Morris, 1996), fundamental-weighted (Arnott, Hsu and
Moore 2005), diversity-weighted (Fernholz, Garvy, and Hannon 1998) or
equal-weighted indices.

88

Indices and passive investment management

There has been an accelerating trend in recent decades to create passively
managed mutual funds that are based on market indices, known as index funds.
Advocates claim that index funds routinely beat a large majority of actively
managed mutual funds; one study claimed that over time, the average actively
managed fund has returned 1.8% less than the S&P 500 index - a result nearly
equal to the average expense ratio of mutual funds (fund expenses are a drag on
the funds' return by exactly that ratio). Since index funds attempt to replicate the
holdings of an index, they obviate the need for and thus many costs of the
research entailed in active management, and have a lower "churn" rate (the
turnover of securities which lose fund managers' favor and are sold, with the
attendant cost of commissions and capital gains taxes).
Indices are also a common basis for a related type of investment, the exchangetraded fund or ETF. Unlike an index fund, which is priced daily, an ETF is
priced continuously, is optionable, and can be sold short.

Dr. Emanuele Canegrati of Catholic University of Milan has recently developed

the concept of Market Index Leader. Based on the Granger-causality concept, he
defined a market index leader one which Granger-causes other indices and it is
not Granger-caused by any other index. Since Granger-causality does not deal
with "true" causality, but only with a temporal sequence of events which have a
linkage, he discovered that some indices are first-movers (leaders) and some
others follow them.

Ethical stock market indices

A notable specialised index type is those for ethical investing indices that
include only those companies satisfying ecological or social criteria, e.g. those of

89

The Calvert Group, KLD, FTSE4Good Index, Dow Jones Sustainability Index
and Wilderhill Clean Energy Index.

Another important trend is strict mechanical criteria for inclusion and exclusion
to prevent market manipulation, e.g. in Canada when Nortel was permitted to
rise to over 30% of the TSE 300 index value. Ethical indices have a particular
interest in mechanical criteria, seeking to avoid accusations of ideological bias in
selection, and have pioneered techniques for inclusion and exclusion of stocks
based on complex criteria. Another means of mechanical selection is mark-tofuture methods that exploit scenarios produced by multiple analysts weighted
according to probability, to determine which stocks have become too risky to
hold in the index of concern.

Critics of such initiatives argue that many firms satisfy mechanical "ethical
criteria", e.g. regarding board composition or hiring practices, but fail to perform
ethically with respect to shareholders, e.g. Enron. Indeed, the seeming "seal of
approval" of an ethical index may put investors more at ease, enabling scams.
One response to these criticisms is that trust in the corporate management, index
criteria, fund or index manager, and securities regulator, can never be replaced
by mechanical means, so "market transparency" and "disclosure" are the only
long-term-effective paths to fair markets.

Environmental stock market indices

An environmental stock market index aims to provide a quantitative measure of
the environmental damage caused by the companies in an index. Indices of this
nature face much of the same criticism as Ethical indices do that the 'score'
given is partially subjective.

90

However, whereas 'ethical' issues (for example, does a company use a

sweatshop) are largely subjective and difficult to score, an environmental impact
is often quantifiable through scientific methods. So it is broadly possible to
assign a 'score' to (say) the damage caused by a tonne of mercury dumped into a
local river. It is harder to develop a scoring method that can compare different
types of pollutant for example does one hundred tonnes of carbon dioxide
emitted to the air cause more or less damage (via climate change) than one tonne
of mercury dumped in a river (and poisoning all the fish).

Generally,

most

environmental

economists

attempting

to

create

an

environmental index would attempt to quantify damage in monetary terms. So

one tonne of carbon dioxide might cause $100 worth of damage, whereas one
tonne of mercury might cause $50,000 (as it is highly toxic). Companies can
therefore be given an 'environmental impact' score, based on the cost they
impose on the environment. Quantification of damage in this nature is extremely
difficult, as pollutants tend to be market externalities and so have no easily
measurable cost by definition.

Stock Market Index

Its ironical that something as huge as a stock market which should be stable as
it represents the economy of a nation, is actually extremely volatile since it is
driven more by the sentiments of the people
Stock Market is a place where the stocks of a listed company are traded. A single
figure that sums up the overall performance of the market on a daily basis is the
Stock Index. A good Stock Index captures the movement of the well diversified
and highly liquid stocks.

For a lay man it is the pulse rate of the economy.

91

Index movements reflect the changing expectations of the stock market about
future dividends of the corporate sector.
The index is calculated by finding the weighted average of the prices of the most
actively traded companies in the market, where the weights are generally in
proportion to the market capitalization of the company.

But when and where did it all start?

Stock Exchanges as a centre for trading were established as early as the 16th
century. In Antwerp, a major financial hub in Belgium, traders gathered together
in 1531 to speculate in shares and commodities. This was the world's first Stock
Exchange. London and Paris set up Exchanges sometime near the end of the
17th century. Close to hundred years later, in 1792, the New York Stock
Exchange (NYSE) was established, which is still one of the worlds most
powerful exchanges today. The reason for establishment was primarily the need
for financing businesses and for providing returns for the finances.
In India, the Stock Exchange, Mumbai, was established in 1875 as "The Native
Share and Stockbrokers Association" (a voluntary non-profit making
association) and is now popularly known as the Bombay Stock Exchange (BSE).
The other major exchange is the National Stock Exchange of India Limited
(NSE) and was incorporated in November 1992. Combined the two trading
zones are responsible for 99.9% of the trading done in India.

Types of Indexes available: Broad-Market Index: This consists of all the large, liquid stocks of the
country and becomes the benchmark for the entire capital market of the country.
An example for this is the S&P CNX 500.

92

 Specialized Index: We can either have Industry or Sector specific Index for
any particular sector of the economy which then serves as the benchmark for that
particular industry or we can have an index for the highly liquid stocks.
Taking an example for an industry specific index we have the S&P Banking
Index which is a capitalization-weighted index of 26 domestic equities traded on
the New York Stock Exchange and NASDAQ, The stocks in the Index are highcapitalization stocks representing a sector of the S&P 500. Similarly, The S&P
CNX Nifty is a relevant example for an index composed of highly liquid stocks.

Determinants of a Stock Index

Following parameters should be taken into picture before one constructs a stock
index:
Liquidity Liquidity of stocks as measured by the impact cost criterion
which determines the cost faced when actually trading the index. For example if
the current market price of a stock is Rs.200 and a trader purchases it at Rs.202
(due to involved transaction costs) then the market impact cost is 1% and the
stock is considered highly liquid for lower impact cost.
Diversification Diversification, by putting stocks of various sectors that
reflect the economy, is used to cancel out stock noise which is essentially the
individual stock fluctuations and to reduce investors risks. An index must thus
have a balanced representation of all sectors.
Optimum size - More stocks lead to greater diversification but the limiting
factor is the size of the index. Increasing number of stocks in an index from 10
to say 30 give a sharp reduction in risks but increasing the number beyond a
point does very little in risk reduction. Further it might lead to addition of
illiquid stocks. For example, the optimal size for BSE Sensex is 30.
Market Capitalization: The index should include primarily the stocks of
companies that have significant market capitalization with respect to the index

93

such that any major change in the price of the stock is reflected in the index. For
example in BSE 30 Index, the scrip must have a minimum of 0.5% of the market
capitalization of the Index.
Averaging - Every stock primarily moves for two reasons: The news about the
company and the news about the country. An ideal index is affected only by the
latter, that is the news of the economy and the effect of the former is knocked
out by proper averaging. The various methods of averaging employed are:
o Price Weighted: The weights assigned are proportional to the stock
prices.
o Market Capitalization Weighted: The equity price is weighted by the
market capitalization of the company. Hence each constituent stock in the
index affects the index value in proportion to the market value of all
outstanding shares.
(Current market capitalization)
Index = ---------------------------------------- x Base Value
(Base Market Capitalization)
Where:
CMS = Sum of (current market price * outstanding shares) of all
securities in the index
BMS = Sum of (market price * issue size) of all securities as on base
date.
O Equal Weighted: The weights are equal and assigned irrespective of
both market capitalization or price Index revision is done periodically
taking into consideration the factors mentioned above.
The relevant index body makes clear, researched and publicly documented rules
for this purpose. These rules are applied regularly, to obtain changes to the index
set. However, it is ensured that the value of the index does not change
significantly after the revision of the index set.

94

Sensex (BSE 30)

The index includes 30 companies which figure in top 100 in terms of market
capitalization and are also among the leaders in their industry groups. Presently
the following are the constituent companies: ACC, Infosys, ICICI Bank, Dr.
Reddys Lab, SBI, CIPLA, Zee Telefilms, Nestle India, RPL, RIL, HCL Tech.,
Bajaj Auto, BHEL, Castrol, BSES, Colgate Palmolive, Hindalco, Grasim, Glaxo,
Hero Honda, Gujrat Ambuja Cements, HLL, HPCL, ITC, L&T, MTNL,
Ranbaxy, TISCO, TELCO and Satyam.

Standard and Poors CRISIL NSE Exchange NIFTY

S&P CNX NIFTY is an S&P endorsed Stock Index owned by the India Index
Services Ltd. (IISL). It is a highly diversified index, accurately reflecting the
overall market conditions and is composed of 50 liquid stocks. It is backed by
solid economic research and three extremely respected organizations (NSE,
CRISIL and S&P).

Signals from the Stock Index

The Index finds uses in various fields starting from economic research to helping
investors choose appropriate portfolio for investment. For example the index
funds are funds that passively invest in the market i.e. the portfolio returns of the
index funds is same as that of the Index.
Since the Index is an indicator of the overall mood of the investors in the
secondary market, it helps a company answer questions like is it the right time to
take out an IPO, how to price the issue, etc.

95

It acts as a signal to the government of the feel good factor prevailing in the
economy. As much as the finance ministry may want to ignore it, the
performance of the stock market right after the introduction of the budget gives
an immediate feedback to the Finance Minister about the acceptability of the
budget.
However, the market index is a double edged sword. Because the index is
influenced by expectations of the future performance of the stocks, it leads to a
self fulfilling prophecy. Suppose an investor thinks that the stock of the
company is going to go down and this feeling prevails across the market then
everyone would want to get out of the companys stock. This will automatically
lead to the stock prices crashing.
The Stock Index can often also act as a trigger to herd mentality. Any downturn
in the market would be reinforced by the collective action of the investors to
hedge against any losses and get out of the market. This would further depress
the market. This herd mentality is often used to the advantage of speculators.
The speculator buys long thus creating waves in the market that the stock he is
investing in is hot. Thus everyone would follow suit giving the speculator a
good short term profit margin.
The stock index is often more a representation of investors perceptions (noise
element) rather than real news. In the dot com bubble of 2000, a rush of
investment in anything even remotely connected with information-technology
driving up the stock prices way above what they should have been according to
their P/E ratios.

Thus it can be seen that though the index is a popular investors guide, it is
riddled with imperfections which can often confuse rather than help.

96

The index popularly used in India is the NSE CNX Nifty. There are processes
afoot to reduce the pure noise element and speculative margin of the index. The
basic problem arises due to imperfect information reflected by the inclusion of
illiquid stocks in the calculation of the index. Illiquid stock is one which is not
actively traded in the market or has been lying dormant for a long time.
Inclusion of such stocks leads to problems of stale prices, bid-ask bounce and
ease in manipulation.

Bid-ask bounce: Illiquid stocks have a wide bid-ask spread. Thus even when no
news is breaking, when a stock price is not changing, the `bid-ask bounce' is
about prices bouncing up and down between bid and ask. Such changes are
spurious in nature.

Stale prices: A stock index is supposed to represent the state of the stock market
at the closing time (3:30 pm in NSE) on a particular day. However the last traded
price of an illiquid stock (if included in the index) may be even a week old thus
distorting the index.

Hence to make an index useful, there has to be continuous evaluation of the

stocks listed and any stock which remains inactive for a period of time should be
de-listed or removed from the index. A prudent investor is one who exercises
caution while interpreting the market index, taking into account all its
inconsistencies.

The Standard & Poor's CRISIL NSE Index 50 or S&P CNX Nifty nicknamed
Nifty 50 or simply Nifty is the leading index for large companies on the National
Stock Exchange of India.

97

The Nifty is a well diversified 50 stock index accounting for 22 sectors of the
economy.

It is used for a variety of purposes such as benchmarking fund portfolios, index

based derivatives and index funds.

Nifty components:
The list of constituents of S&P CNX Nifty as on September 27, 2007 along with
the Market capitalization details and weightings is as follows:

Company name
Reliance Industries
Oil and Natural Gas Corporation
of India
Bharti Airtel
NTPC
Reliance Communications
ICICI Bank
Infosys Technologies
Tata Consultancy Services
BHEL
State Bank of India
Steel Authority of India
Larsen & Toubro
ITC
Reliance Petroleum Ltd.
HDFC
Wipro
Sterlite Industries Ltd.
HDFC Bank
Tata Steel

Market Capitalization (Rs.

Crores)
323057

Weightage
11.710

208059

7.50

182208
159921
119109
112542
109435
103977
99874
98981
83042
81216
69786
67928
67878
67183
53884
50619
48413

6.59
5.79
4.31
4.07
3.96
3.76
3.61
3.58
3.01
2.94
2.53
2.46
2.46
2.43
1.95
1.83
1.75

98

Hindustan Unilever
Suzlon Energy
GAIL India
Grasim Industries
Tata Motors
Maruti Udyog
ABB
Power Grid Corporation of India
Reliance Energy
Siemens
ACC
Ambuja Cements
HCL Technologies
Hindalco Industries
National Aluminium Co.
Reliance Capital Ltd.
Sun Pharmaceuticals Ind.
Mahindra & Mahindra
Tata Power
Punjab National Bank
Ranbaxy Labs
Hero Honda Motors
Zee Entertainment
Indian Petrochemicals Corporation
Cipla
Bharat Petroleum Corporation
Videsh Sanchar Nigam Limited
Dr. Reddy's
Mahanagar Telephone Nigam
Limited
GlaxoSmithKline Pharma

48318
41746
32029
31526
28960
28318
27244

1.75
1.51
1.16
1.14
1.05
1.02
0.99

25530
22786
22278
21995
20340
20163
19896
12739
18784
18463
17494
16829
15675
14877
14134
13879
13680
13135
12697
10894

0.92
0.82
0.81
0.80
0.74
0.73
0.72
0.70
0.68
0.67
0.63
0.61
0.57
0.54
0.51
0.50
0.50
0.48
0.46
0.39

10342

0.37

9486

0.34

On January 7 2009, the National Stock Exchange said it removed Satyam from
its benchmark index Nifty and that the IT firm will be replaced by Reliance
Capital with effect from January 12.

99

MARKET CLOSED

Apr 17, 2009 16:01:41 hours IST

S&P CNX NIFTY

3384.40

3369.50

0.44%

CNX NIFTY JUNIOR

5118.00

5012.00

2.11%

CNX IT

2537.30

2492.00

1.82%

BANK NIFTY

5056.90

4915.75

2.87%

CNX 100

3196.80

3175.55

0.67%

S&P CNX DEFTY

2351.75

2347.95

0.16%

S&P CNX 500

2612.60

2593.90

0.72%

CNX MIDCAP

3863.80

3815.55

1.26%

NIFTY MIDCAP 50

1370.25

1359.05

0.82%

NSE Milestones

November 1992 Incorporation

April 1993

Recognition as a stock exchange

May 1993

Formulation of business plan

June 1994

Wholesale Debt Market segment goes live

November 1994 Capital Market (Equities) segment goes live

March 1995

Establishment of Investor Grievance Cell

April 1995

Establishment of NSCCL, the first Clearing Corporation

June 1995

Introduction of centralised insurance cover for all trading

members

100

July 1995

Establishment of Investor Protection Fund

October 1995

Became largest stock exchange in the country

April 1996

Commencement of clearing and settlement by NSCCL

April 1996

Launch of S&P CNX Nifty

June 1996

Establishment of Settlement Guarantee Fund

November 1996

Setting up of National Securities Depository Limited, first

depository in India, co-promoted by NSE

November 1996 Best IT Usage award by Computer Society of India

December 1996

Commencement of trading/settlement in dematerialised

securities

December 1996 Dataquest award for Top IT User

December 1996 Launch of CNX Nifty Junior
February 1997

Regional clearing facility goes live

November 1997 Best IT Usage award by Computer Society of India

May 1998

Promotion of joint venture, India Index Services & Products

Limited (IISL)

May 1998

Launch of NSE's Web-site: www.nse.co.in

July 1998

Launch of NSE's Certification Programme in Financial Market

August 1998

CYBER CORPORATE OF THE YEAR 1998 award

February 1999

Launch of Automated Lending and Borrowing Mechanism

April 1999

CHIP Web Award by CHIP magazine

October 1999

Setting up of NSE.IT

101

January 2000

Launch of NSE Research Initiative

February 2000

Commencement of Internet Trading

June 2000

Commencement of Derivatives Trading (Index Futures)

September 2000 Launch of 'Zero Coupon Yield Curve'

November 2000

Launch of Broker Plaza by Dotex International, a joint venture

between NSE.IT Ltd. and i-flex Solutions Ltd.

December 2000 Commencement of WAP trading

June 2001

Commencement of trading in Index Options

July 2001

Commencement of trading in Options on Individual Securities

November 2001 Commencement of trading in Futures on Individual Securities

December 2001 Launch of NSE VaR for Government Securities
January 2002
May 2002

Launch of Exchange Traded Funds (ETFs)

NSE wins the Wharton-Infosys Business Transformation
Award in the Organization-wide Transformation category

October 2002

Launch of NSE Government Securities Index

January 2003

Commencement of trading in Retail Debt Market

June 2003

Launch of Interest Rate Futures

August 2003

Launch of Futures & options in CNXIT Index

June 2004

Launch of STP Interoperability

August 2004

Launch of NSEs electronic interface for listed companies

March 2005

India Innovation Award by EMPI Business School, New

Delhi

102

June 2005

Launch of Futures & options in BANK Nifty Index

December 2006 'Derivative Exchange of the Year', by Asia Risk magazine

January 2007

Launch of NSE CNBC TV 18 media centre

March 2007

NSE, CRISIL announce launch of IndiaBondWatch.com

June 2007

NSE launches derivatives on Nifty Junior & CNX 100

October 2007

NSE launches derivatives on Nifty Midcap 50

January 2008

March 2008

Introduction of Mini Nifty derivative contracts on 1st January

2008
Introduction of long term option contracts on S&P CNX Nifty
Index

April 2008

Launch of India VIX

April 2008

Launch of Securities Lending & Borrowing Scheme

August 2008

Launch of Currency Derivatives

National Stock Exchange of India Profile:

National Stock Exchange of India Ltd.

Address

Exchange Plaza, Plot no. C/1, G Block, Bandra-Kurla

Complex
Bandra (E), Mumbai - 400 051

Telephone

(022) 26598100 8114

103

Web Site

www.nseindia.com

Trading Hours

9.30 am - 4.30 pm.

Holidays

Bakri Id (11 Jan), Republic Day (26 Jan), Moharram (9

Feb), Holi (15 Mar), Ram Navami (6 Apr), Mahavir Jayanti
(11 Apr), Ambedkar Jayanti (14 Apr), Maharashtra Day (1
May), Independence Day (15 Aug), Gandhi Jayanti (2 Oct),
Laxmi Puja (21 Oct), Bhaubeej (24 Oct), Ramzan Id (25
Oct), Christmas (25 Dec)

Securities

Equities, bonds, CPs, CDs, warrants, mutual funds units,

ETFs, derivatives.

Trading System

Fully automated screen based trading platform NEAT

Key Staff

S.B. Mathur Chairman

Ravi Narain - Managing Director and CEO

Currency

INR

No. of listings

1587

MarketCap

US$ 1.46 trillion (2006)

Indexes

S&P CNX Nifty

CNX Nifty Junior
S&P CNX 500

Innovations
NSE has remained in the forefront of modernization of India's capital and
financial markets, and its pioneering efforts include:

104

Being the first national, anonymous, electronic limit order book (LOB)
exchange to trade securities in India. Since the success of the NSE,
existent market and new market structures have followed the "NSE"
model.

Setting up the first clearing corporation "National Securities Clearing

Corporation Ltd." in India. NSCCL was a landmark in providing
innovation on all spot equity market (and later, derivatives market) trades
in India.

Co-promoting and setting up of National Securities Depository Limited,

first depository in India.

Setting up of S&P CNX Nifty.

NSE pioneered commencement of Internet Trading in February 2000,

which led to the wide popularization of the NSE in the broker community.

Being the first exchange that, in 1996, proposed exchange traded

derivatives, particularly on an equity index, in India. After four years of
policy and regulatory debate and formulation, the NSE was permitted to
start trading equity derivatives

Being the first and the only exchange to trade GOLD ETFs (exchange
traded funds) in India.

NSE has also launched the NSE-CNBC-TV18 media centre in association

with CNBC-TV18,

Markets
Currently, NSE has the following major segments of the capital market:

Equity

Futures and Options

Retail Debt Market

Wholesale Debt Market

105

Currency futures

Hours
NSE's normal trading sessions are from 09:55am to 03:30pm on all days of the
week except Saturdays, Sundays and holidays declared by the Exchange in
advance.
Indices
NSE also set up as index services firm known as India Index Services &
Products Limited (IISL) and has launched several stock indices, including:

S&P CNX Nifty

CNX Nifty Junior

CNX 100 (= S&P CNX Nifty + CNX Nifty Junior)

S&P CNX 500 (= CNX 100 + 400 major players across 72 industries)

CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200)

Certifications
NSE also conducts online examination and awards certification, under its
programmes of NSE's Certification in Financial Markets (NCFM).
Currently, certifications are available in 19 modules, covering different sectors
of financial and capital markets. Branches of the NSE are located throughout
India.

106

6. Conclusion
National Stock Exchange of India Profile:

National Stock Exchange of India Ltd.

Address

Exchange Plaza, Plot no. C/1, G Block, Bandra-Kurla

Complex
Bandra (E), Mumbai - 400 051

Telephone

(022) 26598100 - 8114

Web Site

www.nseindia.com

Trading Hours

9.30 am - 4.30 pm.

Holidays

Bakri Id (11 Jan), Republic Day (26 Jan), Moharram (9

Feb), Holi (15 Mar), Ram Navami (6 Apr), Mahavir Jayanti
(11 Apr), Ambedkar Jayanti (14 Apr), Maharashtra Day (1
May), Independence Day (15 Aug), Gandhi Jayanti (2 Oct),
Laxmi Puja (21 Oct), Bhaubeej (24 Oct), Ramzan Id (25
Oct), Christmas (25 Dec)

Securities

Equities, bonds, CPs, CDs, warrants, mutual funds units,

ETFs, derivatives.

Trading System

Fully automated screen based trading platform NEAT

Key Staff

S.B. Mathur - Chairman

Ravi Narain - Managing Director and CEO

Currency

INR

No. of listings

1587

107

MarketCap

US$ 1.46 trillion (2006)

Indexes

S&P CNX Nifty

CNX Nifty Junior
S&P CNX 500

Innovations
NSE has remained in the forefront of modernization of India's capital and
financial markets, and its pioneering efforts include:

Being the first national, anonymous, electronic limit order book (LOB)
exchange to trade securities in India. Since the success of the NSE,
existent market and new market structures have followed the "NSE"
model.

Setting up the first clearing corporation "National Securities Clearing

Corporation Ltd." in India. NSCCL was a landmark in providing
innovation on all spot equity market (and later, derivatives market) trades
in India.

Co-promoting and setting up of National Securities Depository Limited,

first depository in India.

Setting up of S&P CNX Nifty.

NSE pioneered commencement of Internet Trading in February 2000,

which led to the wide popularization of the NSE in the broker community.

Being the first exchange that, in 1996, proposed exchange traded

derivatives, particularly on an equity index, in India. After four years of
policy and regulatory debate and formulation, the NSE was permitted to
start trading equity derivatives

108

Being the first and the only exchange to trade GOLD ETFs (exchange
traded funds) in India.

NSE has also launched the NSE-CNBC-TV18 media centre in association

with CNBC-TV18,

Markets
Currently, NSE has the following major segments of the capital market:

Equity

Futures and Options

Retail Debt Market

Wholesale Debt Market

Currency futures

Hours
NSE's normal trading sessions are from 09:55am to 03:30pm on all days of the
week except Saturdays, Sundays and holidays declared by the Exchange in
advance.
Indices
NSE also set up as index services firm known as India Index Services &
Products Limited (IISL) and has launched several stock indices, including:

S&P CNX Nifty

CNX Nifty Junior

CNX 100 (= S&P CNX Nifty + CNX Nifty Junior)

S&P CNX 500 (= CNX 100 + 400 major players across 72 industries)

CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200)

109

BIBLIOGRAPHY

1.

WWW.SEBI.GOV.IN

2.

WWW.BSEINDIA.COM

3.

WWW.NSEINDIA.COM

4.

WWW.INDIABUDGET.NIC.IN

5.

WWW.ANGELTRADE.COM

6.

WWW.INDIAINFOLINE.COM

7.

WWW.NSEINDIA.COM

8.

WWW.BSEINDIA.COM

9.

WWW.SPGLOBAL.COM

10.

WWW.E-ANALYTICS.COM

11.

WWW.NNI.NIKKEI.CO.JP

12.

Microstructures Considerations in Index Construction by Ajay Shah

and Susan Thomas

110

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