A

PROJECT REPORT

ON

BACK OFFICE FUNCTION IN A STOCK EXCHANGE

(PSE Securities Limited (PSESL))

SUBMITTED TO

ST. MIRA VISHWAKARMA INSTITUTE OF MANAGEMENT

A PROJECT REPORT IN PARTIAL FULFILLEMENT FOR THE DEGREE OF

MASTER IN BUSINESS ADMINISTRATION FROM ST. MIRA
VISHWAKARMA INSTITUTE OF MANAGEMENT

BY
NIRMAL CHANDRAN

M.B.A-II
(2005-2006)

ST. MIRA VISHWAKARMA INSTITUTE OF MANAGEMENT.

PUNE- 411048.
 Acknowledgement.

It gives me great pleasure in presenting the Project Report that gives the
details of my project on back office functioning of stock market carried
out in PSE Securities Limited (PSESL) .

I thank the college guide Prof Mahesh Halale for his kind and consistent
guidance and help during the project work.

It is impossible to list all the people who have helped us during my

project. I take this opportunity to express whole hearted thanks to Mr.
Manish Rangare Director of Pune Stock Exchange, Mrs.Medha Rane
(A.G.M) who gave me the opportunity to undertake the project work.

I would like to thank Mr. Mandar Bhalerao (D.G.M.) who guided me at

every step in the execution of the project & their experience and valuable
guidance were very helpful.

I would like to express our deep sense of gratitude towards all Managers,
Staff and workers and to all those who directly or indirectly helped us in
successful completion of project.

Nirmal Chandran.
 CERTIFICATE

This is to certify that the Project Report titled, Back office functioning

in a Share Broking Firm is a bonafied work carried out by Nirmal

Chandran, a student of M.B.A-II of St. Mira Vishwakarma Institute of

Management, in partial fulfillment of Degree of M.B.A from St. Mira

Vishwakarma Institute of Management. She has worked under our

guidance and direction.

_________________ ______________
Signature of Director Signature of Guide

Date: Date:

Place: Place:
 CONTENTS

SR.NO. TOPIC PAGE NO.

1. Executive summary . 1
2. Introduction ... .. 2
3. Company Profile . 13
4. Objectives 14
5. Methodology Adopted . 15
6. Information and Analysis . 16
7. Back Office Functioning .. 23
8. Observation and Findings . 28
9. Recommendations and Suggestions ..29
10. Conclusion .30
11. Chronological Order ..31

12. Bibliography ..32

 Executive Summary
____________________________________________________________

This project underlines the need and importance of the back office function
in a share broking firm with special reference to its deployment in Pune
Stock Exchange.
Back office is the back bone of any broking business. The main and
important function of the back office is to ensure that the rules and
regulations are strictly adhered to and the control is maintained on the
operations of the firm. The success of the back office largely depends on the
efficient functioning of the back office. It can be well understood by each
and every broking firm that in order to gain a competitive edge and sustain
the challenges of a dynamic environment today it must have a very efficient
back office.
This project tries to tell us that the why back office functioning is essential
for every firm in this kind of business, so as to increase its profitability,
efficiency and sustain the pressures posed by competition. This project also
tries to bring out the role of the personnel working in the back office, and
how their efficiency and devotion plays an important role in the success of
any broking firm.
The project contents are followed by the objectives which will be followed
by the introduction to the topic. Methodology adopted will help us to know
how the project has been carried out. Observations and Findings will be
followed by the suggestions to improve the efficiency of the back office
function in Pune Stock Exchange.
 Introduction
____________________________________________________________

In world of commerce, apart from money equally revolutionary concept was

the concept of limited liability. Before the industrial revolution economy
was self sufficient village economy. The artisans produced goods and
services on demand. It was industrial revolution which paved the way for
production in anticipation of demand, and along with it came the economies
of large scale production and to support this was needed huge finance.
Innovative forms of business establishment, incorporating the principle of
limited liability emerged. Form the highly imaginative world of business, a
novel form of business organization viz. Joint Stock Companies, with the
features like limited liability and the separation of ownership and
management was born. Risk is an important and inherent part of any
business. Risk cannot be avoided. You can only try to manage it. This was
the best example of risk management by spreading it in small proportions
amongst large number of shareholders. This was achieved by a concept
called shares or stock and the need for trading in these stocks was felt.

Capital Formation and Economic Development

Multiplicity of wants and scarcity of means to satisfy these unlimited wants

has continued to be the fundamental of economic problem. Money resources
are required to move physical resources. Mobilization of resources for
economic development was and continues to be the major problem with all
developing and developed nations.
In a capitalist economy the key decisions like what to produce? When
to produce? And how much to produce is driven by market forces, the where
withal for all this provided by money, by capital. The capital might be from
within the country or outside the country. But one of the greatest challenges
of nations today is creating conditions conducive for capital formation as
also for attracting capital from various countries. A growing economy with
vibrant capital and money market with rules and regulations in place is a
prerequisite for attracting capital. Stock market plays a key role in the entire
gamut of financial system.
Having broadly discussed the developments and the basic issues
involved, we will now try to review the Indian Financial System.
India has come a long way during the last decade of the 20th Century. With
the path-breaking budget of 91-92 presented by Dr. Manmohan Sign an era
of globalization, liberalization, decontrol and de-regulation was adhered in.
Since then a lot of water has flown from under the bridge and lot of
development has taken place. The focus all along has been to faster
economic development.
Indian Financial System

The financial system comprises a variety of intermediaries, markets, and

instruments. It provides the principal means by which savings are
transformed into investments. Given its role in the allocation of resources,
the efficient functioning of the financial system is critical to a modern
economy.

A conceptual Framework of how the financial system works:-

The Financial System

The financial system performs the following interrelated functions that are
essential to a modern economy:
It provides a payment system for the exchange of goods and services.
It enables the pooling of funds for undertaking large-scale enterprises.
It provides a mechanism for managing uncertainty and controlling risk.
It generates information that helps in coordinating decentralized decision
making.
It helps in dealing with the incentive problem when one party has an
information advantages.

Need for Regulatory Framework:-

There were major policy changes like the opening up of the economy and
greater role of the private sector, when the Sixth five-year Plan was
launched in 1985. The need to set up a regulatory agency for the stock and
capital markets was recognized at that time. The malpractices prevailing in
these markets reduced the confidence of investors. This in turn created
obstacles in mobilizing the funds. The entire edifice of capital market is
based on the trust in the financial system of the country. The scams in the
resent past are a testimony to the importance of a sound financial system.
Loss of trust and confidence of the investor in the working of the system and
the ability of regulatory framework to vouch safe the same from the
predators can bring the untold misery and the whole edifice can fall like a
castle of cards.

Regulatory Framework in place:-

As the maker and enforcer of laws in a society, the government has the
responsibility for regulating the financial system. The two major regulatory
arms of the Government of India are the Reserve Bank of India and the
Securities Exchange Board of India.

Securities Exchange Board of India:-

The Securities Exchange Board of India (SEBI) which was established on
April 12, 1988 through an Extraordinary Notification of the Government of
India in the Gazette of India was given statutory recognition with the
promulgation of the Securities and Exchange Board of India Ordinance on
January 30, 1992 and the Board was statutorily set up on February 21, 1992.
The SEBI Act from April 4, 1992 replaced the Ordinance. The Board
consists of a Chairman and five other members, one each from the Ministry
of Finance and the Ministry of Law, Justice and Company Affairs, one from
the Reserve Bank of India and two others to be appointe3d by the Central
Government. The basic aim of the SEBI is to regulate the capital market to
protect the interests of investors.
Organization of SEBI:-
After it became a statutory body, SEBI restructured its organization and
rationalized it in line with its activities into five operational departments,
each headed by an Executive Director, Apart from these, there are two other
departments viz. Legal and Investigations Department.
Following are the five operational departments:-
Primary Market Development.
The Issue Management Department.
The Institutional Investment Department.
The Investigation Department.
SEBI also has two advisory committees, one each for the primary and
secondary markets, to provide advisory inputs in framing the policies and
regulations. These are constituted firm among the market players recognized
investors associations and eminent persons associated with the capital
market. The committees are however non-statutory in nature and SEBI is
not bound by their advisory committees.
The SEBI of India has been entrusted with the responsibilities of dealing
with various matters relating to the capital 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
developments of, and to regulate, the securities market and for matters
connected therewith and incidental there to.

SEBI s principal tasks are to:-

Regulate the business in stock exchange and any other securities
markets.
Register and regulate the capital market intermediaries (brokers,
portfolio managers etc.
Register and regulate the working of mutual funds.
Promote and regulate self-regulatory organizations.
Prohibit fraudulent and unfair practices in securities markets.
Promote investors education and training of securities markets.
Prohibit insider trading in securities.
 Regulate substantial acquisition of share and takeovers of companies.
Perform such other functions as may be prescribed.

Formation of Self Regulatory Organizations:-

The Legislative scene depicted above notwithstanding, SEBI has been
advocating a self-regulatory set up for regulation of capital markets, and in
this connection, the stock exchanges have designated to play the role of self-
regulatory organizations for brokers/sub brokers etc. There are at percent 23
stock exchanges in India, in addition to OTC Exchange.
Similarly, the Association of Merchant Bankers of India, (AMBI) a
representative organization of merchant bankers is being established as a
self-regulatory organization, where after SEBI will consider grant of
recognition to it.

Role of Stock Exchanges :-

The Stock Market is an open auction market, where the buyer and sellers
meet to deal in securities. Stock exchange provides a regular and continuous
market for buying and selling of securities. The usual procedure is that when
an enterprise is in need of funds, it approaches the investing public, both
individuals and institutions, to subscribe to its issue of funds; it approaches
the investing public, both individuals and institutions, to subscribe to its
issue of capital. The securities thus floated are subsequently purchased and
sold among the individual and institutional investors.
There are, in other words, two stages involved in the purchase and sale
of securities. In first stage, the securities are acquired from the issuing
companies them selves and these are, in the second stage, purchased and
sold continuously among the investors without any involvement of the
companies whose securities constitute the stock-in-trade except in the
strictly limited sense of registering the transfer of ownership of the
securities.
The importance of stock exchanges can be well deciphered from the
fact that it imparts liquidity to the scrips held. It provides price continuity to
the shares traded on the stock exchange, the market price of shares reflects
the intrinsic value of the security and the trading is conducting under the
supervision of the stock exchange authorities, thereby providing reasonable
degree of safety and fair dealings to the investors.
The stock exchanges have exhibited a perceptible change in the level
of activities during the 1980 s and particularly during the second half of the
decade. The growth is evident from the dramatic increase in the amounts of
funds raised from the markets annually and from the volume of turnover in
the secondary markets. The developments in the markets also include
establishment of new financial institutions to meet requirements of the
growing economy, and use of innovative financial instruments to sub serve
the needs of investors at whom these instruments are aimed.
With all the above developments, Capital Market has now developed
to cater to the needs of growing corporate sector. The secondary market in
India has also shown maturity by registering enormous growth in the recent
years in terms of the number of listed companies, market capitalization,
market value of listed companies to gross national product, number of
shareholders, and so on. There are 23 recognized stock exchanges in the
country. The organization of the exchange varies: 14 are public limited
companies, 6 are companies limited by guarantee and 3 are companies
limited by guarantee and 3 are voluntary non-profit organizations. The
Government of India/SEBI ensures broad uniformity in the structures while
granting recognition; only 9 stock exchanges have got permanent
recognition, other have to renew it every year until permanent recognition is
granted. All Stock Exchanges are managed by a governing body which
consists of elected broker-directors, public representatives and Government
/SEBI nominees. The number of stock broker-directors members has now
been reduced to about 40%. For regulation and control of transactions, each
stock exchange has bye-laws and regulations which are more or less uniform
in all stock exchanges.

The most active of the stock exchanges are located at Bombay,

Calcutta, Madras, Delhi and Ahemdabad. The number of listed companies
increased from 3118 in 1983 to over 9800 during 1999-2000. The total
market capitalization of all companies listed on the Stock Exchange
Mumbai was 5853 indicating a rise of 20.78%.
The Government too, with a view to encourage the corporate to
approach the capital markets to meet their requirements for funds, has
initiated policy measures to open up the capital markets. These policy
measures include steps to streamline the procedures and to impart
transparency to operations at the stock exchanges. Although by international
standards, the Indian capital markets are still immature, they have certainly
developed to cater to the needs of the growing corporate sector. The
developments in the stock markets are reflected through:
Heightened state of activity reflected through sharp rise in both
resources mobilized through corporate securities and investments
and investments schemes of mutual funds.
Increased trading activity at the secondary markets.
Emergence of mega issues
Progressive role of institutional investors at the capital markets.
Indian Securities Market has undergone a complete transformation.
In recent years with a broadening of the money market and capital markets
significant institutional developments has been noticed in the Indian
markets. Following are the details of the institutions and their functions:-
Discount and Finance House of India:-
The RBI jointly with the public sector banks and financial institutions on the
recommendations of the working group on money market, set up an apex
body named Discount and Finance House of India . The main objective of
DFHI is of imparting liquidity to such instruments like treasury bills etc.
Credit rating and information Services of India Ltd. (CRISIL):-
It is first credit rating agency in the country to evaluate debt obligations of
the companies, depending on their ability to service these obligations and
assigns rating to them expressed as numeric and alphabetical symbols. The
ratings convey the credit agency s opinion on the risk associated with a
particular debt obligation. The credit rating is however not the
recommendation of the credit rating agency to the investor to buy or sell the
securities.
Investment Information and Credit Rating Agency Of India
Ltd.(ICRA):-
The ICRA has been set up with the primary objective of providing guidance
to the investors/ creditor in determining the credit risk associated with a debt
instrument/ credit obligation.
Credit Analysis and Research LTD. (CARE):-
Its main objective is of rating of all types of debt for the benefit to the
investors. It is the third Credit Rated Agency in India.

Stock Market:-
The stock Market is broadly divided into two parts primary market and a
secondary market. New securities are issued in the primary market and
outstanding securities are traded in the secondary market.
The secondary market in India comprises about 23 stock exchanges
recognized by the government under Securities Contract Regulation Act.
The principal exchanges are the National Stock Exchange and Bombay
Stock Exchange, accounting for the bulk of the trading on the Indian Stock
Exchange.
National Stock Exchange (NSE):-
Inaugurated in 1994, the National Stock Exchange seeks for:-
1. Establish a notion-wide trading facility for equities, debt, and hybrids.
2. Facilitate equals access to investors across the country.

3. Impact fairness, efficiency, and transparency to securities.

4. Shorten settlement cycle.
5. Meet international securities market standards.
The NSE, besides operating the traditional market for equities, convertible
debentures, non-convertible debentures etc., also operate a wholesale debt
market, is a separate segment of the NSE as distinct from the capital market
segment.
The NSE has adopted fully automated screen based trading system, which
allows trading members to trade from their offices through a communication
network. Besides there is flexibility with regards to price, time and volume
conditions.

Features of National Stock Exchange:-

Nation-wide Access
The NSE provides nation-wide trading facilities and equal access to
investors all over the country. High quality services to members are
maintained through efficient, transparent and fair trading systems and
procedures.
Automation-Screen Based Trading
The NSE market is a fully automated screen based trading environment.
There is no trading floor as is prevalent in the traditional stock
exchanges, nor do the dealers use the telephone to arrange money
market deals as was the practice. Rather the market will operate with all
market participants stationed at their offices and making use of computer
terminals, to enter orders, to receive the current market status, the traders
executed and other market related information.
Anonymity of the Trading Member s Identity
The identity of the trading member placing the order is not disclosed in
the NSE computer trading system. By enabling the trading members and
participants to hide their identity, it allows placing large orders into the
system by the big players, without fear of large orders influencing the
price of the market.
Complete Transparency
The system provides complete transparency of trading operations.
Investors can know whether their orders have been placed into the
system, the rate at which their deal has taken place the counter party and
the time at which the trade was executed. The trading system also
provides complete market information online through various inquiry
facilities. The system at any point of times gives the member complete
information on the total order depth for a security, the best buys and
sells available in the market the quantity traded in that security etc. All
these information are updated online, enabling the member to make
better decisions. All the key information is updated on a real time basis.
The response time is very quick. As a result it is possible for the
investors to know the actual position of the market before placing the
orders. Investors can also know the fate of the orders almost as soon as
they are placed with trading members.
The trading system is top on the line and user friendly. Some of its new
features include a corporate hierarchy which gives the trading members
an opportunity to set up a network of branches and exercise control on
their orders.
Flexibility in trading
The trading system provides enormous flexibility to trading members.
When entering an order, a trading member can place various conditions
in terms of price, time or size.
Order Matching Principle
Orders are matched automatically by the exchange computer system. All
orders received are stacked in price-time priority i.e. the computer sorts
order as when they are received they are received in terms of the price of
each security and the time at which orders are entered. Subject to the
conditions placed on an order by the trading member the computer
system will automatically search for the best match. As soon as it finds a
suitable match, the deal is stuck. If it does not find the match
immediately as may happen in the case of less liquid securities, the order
is kept pending in the computer unless specified otherwise by the trading
member.
Counter party Exposure Limits
The system has built-in flexibility to allow whole sale debt market
participants to set the exposure limits specified by their management so
that all transcations on behalf of such members are subject to pre-set
exposure limits of the respective counter party, even if all other
parameters such as price and volume can match. These limits are not
accessible to or transparent to other members. As before, if the order is
 kept pending in the system for a counter offer unless specified otherwise
by the trading member.
Efficient and Fair
The automated trade matching system is a highly efficient trading
member can put in a large number of transactions and complete a high
volume of business efficiently. It also ensures that participants secure the
best price available at any point of time.

Benefits from NSE:-

To Investors
The investor is assured of the best price in the market.
Price and brokerage are separately shown on contract notes.
Date and time of trade are indicated.
The system will be better monitored and regulated ensuring a fair deal to
investors.
Safety of securities is enhanced in a depository and there is no problem
of bad delivery, loss, theft or forgery.

To Trading Members
They can provide efficient service to their clients.
Their back office load is reduced considerably as the system generates
details of trade undertaken.
They can benefit from high growth in trading volumes which typically
takes place when on automated trading system is introduced.
They can trade from their respective offices and can make use of full
back office support for trading.
There is no need to occupy office premises near a stock exchange unlike
what was previously required this can lead to reduced establishment costs.
They can install a computer network of their own to receive their own
client orders, which they can interface with the exchange, leading to a large
increase in business.
Large growth opportunities also emerge on the NSE, as Foreign
Financial institutions prefer the automated and regulated market.
Benefits to the Issuer
By a single listing they can provide nationwide access to their investors.
As a result their listing costs are reduced considerably.
Issuers have high visibility.
Bombay Stock Exchange (BSE):-
Established in 1875, the Bombay Stock Exchange (BSE) is one of the
oldest organized exchanges in the world with a long, colourful, and
checkered history. Its distinctive features are as follows:-
The BSE switched from the open outcry system to the screen based
system in 1995. It accelerated its computerization programme in response to
the thereat from NSE.
Jobbers play an important role on the BSE. A jobber is a broker who
trades on his own account and hence offers a two-way quote. The bid price
reflects the price at which the jobber is willing to sell.
Investors have to transact via a broker. The broker feeds his buy/sell
quotes in his terminal, which is linked, to the main server at the BSE,
because of this NSE has adopted a quote driven system and an order
driven system.
Shares listed on the BSE are classified into two groups, viz. Specified and
cash, also referred to as A and B groups. The A group comprises equity
shares of such companies, which have a large volume of business in the
secondary market. Presently, about 150 shares have been classified as A
group shares the rest belong to B group.
 Company Profile
____________________________________________________________

Pune Stock Exchange Ltd. is a company limited by guarantee. The

Exchange was established on 2nd Sept. 1982 to cater to the needs of the
growing investor community in the city.

Starting small, with 35 members and a few lac rupees business initially,
the exchange has grown tremendously to over 185 members and about 15-
20 cores of business daily. Much of the work is computerized with a
smooth settlement system. Over 310 companies are listed with the Stock
Exchange.

The Exchange, while providing an efficient market also upholds investor s

interests and ensures redressal of their grievances. It also strives to educate
and enlighten investors by making available necessary information inputs.

Pune Stock Exchange opted for the on-line screen based trading in 1995.
The Exchange has been successfully using a screen based Trading System,
based on VECTOR (Versatile Engine for Centralized Trading and On-line
Reporting) and developed and implemented by CMC Ltd, for more than
three years now. The present operations cover 183 broker members and 9
workstations for administration, Market Operations and Surveillance
activities of PSE, and it is ranked 7th in the country.

Pune Stock Exchange has been looking into the possibilities of widening
its activities to different parts of Pune city and to other cities like Satara,
Sangli, Solapur, Kolhapur, Ahemdabad, Aurangabad, Nashik and
Mumbai.
 Objectives

In order to retain investor confidence there are regulatory authorities like

SEBI to regulate and control activities of capital market, But in order to
achieve this precautions should be taken at the grass- root level that is at
each broker s place.
For obtaining this it becomes essential to have qualified personnel at the
back office of each broker so that the back office function is carried out
smoothly and In order to understand the process of back office function my
objectives while undergoing project were
o To understand and know Back office function
o Importance of back office function
o Various ways and means by which efficiency in back offices can be
improved.
 Methodology Adopted.

Information to prepare this project report on back office function in a share

broking firm was gathered through
o Discussion with the company project guide and college project
guide.
o Information published in various publications, books, journals, web
sites etc.
o Extensive discussions with senior level management personnel,
some of them forming the part back office function.
 Information and Analysis

Capital Market
Capital Market is a market for long-term debt and equity shares. It
is a source for long term capital raised for the development of companies. In
this market, the capital funds comprising of both equity and debt are issued
and traded. This also includes private placements sources of debt and equity
as well as organized market like stock market, which is a part of it and helps
investors to trade in their shares and thus maintain the liquidity of their
investment.
Primary Market
It is a market for new issues of shares, bonds and debentures,
where investors apply directly to the issuers for the allotment and pay
application money to the issuer s account. It is different from the secondary
market where the investors trade in shares on the stock exchange through
brokers. So in a nutshell the market in which securities are first issued to
investors is a primary market.
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. It comprises of equity market and the debt market.
Stock Exchange
A market place where shares are traded. It is usually a building where
members of the exchange, acting as brokers of client or dealing on their
own, buy or sell shares. It facilitates entry and exit of the investment of the
clients.
Share Market
It is a place where buying and selling of shares and securities take
place of different companies. It is of great importance because it is a
barometer of the country s economy i.e. if economy is sound; market
normally goes up visa a versa. Performance of the company is reflected by
the value of share price without that raising of the funds is difficult for the
economy.
 Broker
A broker is a member of a recognized stock exchange, who is
permitted to do trades on the floor/screen-based trading system of different
stock exchanges. He is enrolled as a member with the concerned exchange
and is registered with SEBI. They come under the SEBI Guide line.
Sub Broker
A sub broker is a person who is registered with SEBI as such and is
affiliated to a member of a recognized stock exchange. They also come
under SEBI guideline, but they are nominated by main broker to carry out
transaction in the market.
Their various repost prepared by them some of them are as follows-
Valan Trial balance
Valan trial balance is a summary of debit and credits given to each and
every client and then the grand total of all the debits and credits. It also
gives the client wise brokerage receivable. Every client is allotted a client
code and the description of the transactions is given client code wise.
Valan trial balance is one of the daily reports that are prepared and from
that the required figures posted wherever required.
Valan number means the settlement number given by NSE, and the
valan trial balance gives for that settlement that client s balance, which is
then sent to accounts department for the recovery, which is deposited in
NSE s account after which NSE gives Broker s account debit.
Following are the contents of the valan trial balance. -

A/c code Account Head Debit Credit

4506 Ravi Inv. 6367.54 8378.43

7014 Ram Inv. 194909.89

. .

* Client Total 593127.38 102744.73

*Net balance 490382.65
76446 Valan Control A/c Group E 645.76

.. Service Tax Payable ..

Clientwise Delivery Statement
It maintains the Clientwise report in the books of brokers a/c, i.e. this
statement gives the details of all the clients one by one, deliveries taken
from a client and deliveries given to the client.

Brought Client Scrip name Book Record Sold

Quantity code Closure date Qty
Date
320 103 Reliance . . 100

250 215 Satyam 320

comp.
. . .. .

Scripwise Delivery Statement

This differentiates from the Clientwise delivery statement because it gives
details like in which scrip trade has done by the client.
Scrip Name: Satyam Comp

Brought Client Client Book Record Sold

Qty. code name closure date date qty

200 2049 Anand . 25/06 275

300 2252 Ravi . . .

 Working of the Stock Exchange.

Buyer-A/ Seller-A Depository

Participant

Broker- A

NSDL
NSE

Broker-B

Buyer-B/Seller-B Client Depository

Participant

Settlement of shares Settlement of money

Detailed explanation with example:-

Buyer-B of Broker-B purchases 100 shares Reliance from Broker-A at the
same time Seller-A sells 100 shares of Reliance to Broker B through
Broker-A then following procedure take place
B pays to broker-B the amount due on the shares purchased by him.
Broker-B pays the settlement amount to NSE (Funds Pay in)
NSE pays the amount to the Seller Broker-A
Then Seller Broker-A pays the amount to seller-A (Funds Pay out)
Simultaneously Seller-A delivers 100 Reliance to Broker-A in
his depository account (Shares Pay in)
Broker-A delivers the shares to NSDL through his Depository
Participant.
NSDL then gives the shares to broker-b
Finally Broker-B delivers the shares to Buyer-B (Shares Payout)
 An investor who wants to hold his securities in electronic form he has to
approach a Depository Participant and through him open an account at
NSDL. After getting Client I.D. no. from NSDL then client goes to a
registered broker of NSE/BSE for investing in the shares. The client gives
the order to the operator seating on the NEAT software (National Exchange
for Automated Trading) for particular scrip at a specific price when the bid
matches on the screen the confirmation tag blinks with the scrip ISIN
no.(International Securities Identification Number) for which he has to take
the delivery and make the payment on T+2 basis, if he doesn t make the
payment it goes to Auction and he has to pay the penalty and the auction
price for the shares traded.
Existing Depositories in India
Presently there are two depositories in the country, namely National
Securities Depositories Limited (NSDL) and Central Depositories Services
Limited (CDSL).
NSDL was set up as the first depository company in the country; it
has been sponsored by the Unit Trust of India, NSE, State Bank of India,
HDFC Bank and City Bank. Its performs the following functions through
depository participants enables the surrender and withdrawal of securities
to, and from, the depository; it maintains investors holdings in the electronic
form; effects settlement of securities traded on the exchanges; it carries out
settlement of trades not done on the stock exchange (off market trades);
transfers of securities; electronic credit in public offerings of companies;
receipt of non-cash corporate benefits like bonus, rights, and so on in
electronic form; Stock lending and borrowing.
The Mumbai Stock Exchange in association with the Bank of
Baroda, State Bank of India and HDFC Bank have promoted CDSL as a
secondary depository in India for dealing in securities, in the electronic
form, by the name of Central Depository Services (India) Limited (CDSL).
The main objectives are as to accelerate the growth of scripless trading; to
make a major trust in the individual investors participation in the
depository, to create a competitive environment which will be responsive to
the user s interests and demands, to enhance liduidity.
Accounting Period Settlement
It is the settlement where the trade pertaining to a period stretching over
more than one day is settled.
Rolling Settlement
The execution made during the day is settlement i.e. by squaring off the
position by either taking delivery or giving the delivery. The trades
pertaining to the rolling settlement are settled on a T+2.
Meaning of T+2 basis
T+2 basis means for e.g. if the transaction has taken place on say Monday
then the pay in and pay out of that settlement will take place on
Wednesday.
Securities Transaction Tax (STT)
STT is a tax being levied on all transactions done on the stock exchange at
the rates prescribed by the Central Government from time to time.
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 of the day is the day when the
exchanges make payment or delivery of securities to the broker.
Settlement cycle is on T+2 rolling settlement bases. The exchanges have
to ensure that the payout of funds and securities to the clients is done by
the broker with in 24 hours of the payout.
The pay in and payout days for funds and securities are prescribed as
per the settlement Cycle. Like a Typical Settlement of Normal Settlement is
as follows-

Activity Day
Trading Rolling Settlement T
Trading
Clearing Custodial T+1working days
Confirmation
Delivery Generation T+1working days
Settlement Securities and Funds T+2working days
Payin
Securities and Funds T+2working days
Payout
Post Valuation Debit T+2working days
Settlement
Auction T+3working days
Bad delivery Reporting T+4working days
Auction T+5working days
Settlement
Close out T+5working days
Rectified bad delivery T+6working days
payin and payout
Re-bad delivery reporting T+8working days
and pick up
Close out of re-bad T+9working days
delivery
Brokerage and other charges
Minimum brokerage is 1 new paisa
Maximum brokerage is 2.5%
Service tax @ 8.5 of the brokerage
Transaction charges as levied by the NSE.
SEBI fees on turn over is 0.01%
Contract Notes
It is the confirmation note of the trade done on a particular day for a client,
which is being issued in the format and manner prescribed by NSE and
has to be acknowledged by the client on getting the duplicate.
Screen Reading
NEAT is the name of the Software used for online trading of NSE so it is
important to be able to read and understand the NSE s screen as it shows
which trades are being carried out, if the operator puts a transaction
purchase then a red strip arises in front of that scrip which is demanded by
the client.
Important Keys Used for various purposes like-
F1 - For placing order for buying the shares.
F2 For placing order for selling the shares.
F3 Outstanding order.
F4 Scrip update.
F6 Market by 1st five buys.
F7 Market by order (active log).
F8 Previous trades.
F9 Snap quote.
F10 Full message display.
F11 Market inquiry.
F12 Supplementary menu.
Alt F6 Net position.
Alt F7 Online Back-up.
Ctl F3 Index.
 Back office functioning

This report is about the study undertaken by me during a period of two

months for my summer project in Pune Stock Exchange. The Back office
function acts as a back bone of any share broking firm as the work which the
personnel in back office has to perform is very crucial and important for the
client as well as the firm. Any mistake from the personnel might become a
liability for the firm, for e.g. if there is short delivery or pay in of clients
share then for those shares auction takes place for which they have to pay
the price for the same. Hence the back office function calls for the full
concentration level of the personnel while doing his or her work.
If the back office section detects any error it should draw the attention
of the higher authority for the corrective action. Basically the back office
function includes responsibilities like transaction processing, settlement and
other administration functions.
So the key result activity in a share broking firm is the back office
function which operates through different department like Crd department,
Delivery department, Accounts Department, Compliance department etc.
Departments
1. Client registration Department (CRD)
In order to trade in the market the client has to fill up the agreement
between the Client-Broker-Sub broker which is know as tripartite
agreement and also know your client forms with necessary requirement
attached to it, has to been send to CRD. In the mean while the client or sub
broker has to feed the all information in masters and has to submit it in s/w
which can viewed by the client broker and sub brokers end. After
receiving the forms the employees in the CRD verifies it and checks with
the master, and everything is matched, it gives instructions for the
activation of the client to the surveillance department. And once it get
activated CRD informs to client by putting the details in the ftp site which
can be viewed at their end and can start trading.
And if the details do not match or any particular attachment is not there
then they inform through ftp site where the client and sub broker can view
the current status. If any changes has to made like change in name or
address or in brokerage they have to inform to CRD and they get it
changed.
2. Delivery and Accounts Department
Basically the employees in the Delivery department have to look
after the pay in and pay out of shares and Accounts department has to look
after the pay in and pay out of funds.
a. Pay in of shares
Now a days pay in of the shares is done automatically which is
known auto delivery out. NSE/BSE has the record of how much
pay in of shares is due from the seller s broker. The bank in which
the broker has his account, which is only for clearing member, the
download of auto delivery out is taken through the NSE s site.
Then the broker gets the print out of the delivery out report which
shows whether nsdl/cdsl has received the pay in correctly or not.
After confirming it from the bank the shares are sent from pse
account to nse/bse and confirm the pay in. Suppose if they are any
short delivery of shares then nse/bse gives debit to the pse account
and similarly brokers debit it to sub brokers/clients account and
then nse/bse can charge penalty for short pay in.

b. Pay out of shares and funds When shares are purchased by

the client then he gives money to sub broker which he delivers
to pse and pse sends to nse/bse as funds pay in against which
nse/bse gives payout of funds and also gives delivery of shares
to pse and in return pse gives the pay out of shares and payout
of funds to the respective sub brokers at present T+2 basis,
which means the day of trade plus two days within which the
 pay in and pay out of shares and funds should take place
simultaneously.
c. Intersettlement transaction Intersettlement transaction are the
necessary adjustments between the broker and the client for
which client has to give request to the broker, for e.g. if the
client has sold 20 share of reliance in settlement number 154,
but if the client request to broker/ sub broker to adjust this pay
in against the payout in settlement number 158 then it is called
as inter settlement transaction.
d. Cash management and transfer of funds Cash/ funds is the
lifeblood of any organization so management of cash and
transfer of funds form a very important aspect of the accounts
department. This includes constant check and reconciliation of
the bank account of the sub broker.
e. Preparation Bank Reconciliation statement Bank
reconciliation state is very important as it helps the accountant
to understand the balance of cash in the respective bank
account and if there is any difference between in balance as per
the sub brokers book and as per our books it has to be rectified
immediately and should be informed immediately. There could
be many reasons because of which there can be indifference in
cash and bank balances and doing bank reconciliation
statement can rectify these difference.
f. Preparing the cash statement This statement gives the details
of the transactions of previous days. It shows all the debits and
credits given to each and every client, margin from the sub
broker, net balances, net stock payment(normal/auction) and
net stock receivable(normal/auction)
g. Checking the Daily Funds Statements Daily funds give the
details of pay in and pay out of funds and also show whether it
was normal or auction. This report has to be checked by the
accountant and find whether there is any short delivery, if yes
then get the short delivery report from the delivery department.
h. Undertake the work of recovery as well The job of recovery
is very is very difficult and this is one of the important
functions of the accounts personnel for this he has to be very
shrud person and see that the job is done.
3. Compliance Department
Compliance has acquired a lot of importance these days as there are
penalties if you fail to comply as per the requirement of nse. For those
purpose of compliance pse has to submit a compliance report to nse s
inspection and investigation department signed by the Managing director
on the behalf of the company under the common seal. They have to inform
to sub broker regarding the inspection or meetings which are duly held
like AGM, has to prepare minutes of the meeting, has to inform any
changes in rules, regulations and laws etc
4. Surveillance Department
As the securities transactions are prone to verity of manipulations, the nse
has instituted a strong surveillance mechanism to protect market integrity.
It includes-
Online monitoring - The National Securities Clearing Corporation Ltd.
has in place an online monitoring and surveillance system whereby
exposure of the member is monitored on a real time basis. A system of
alerts has been built in so that both the member and NSCCL are altered as
per pre-set levels (reaching 70, 85, 95, and 100 percent) when the
members approach their allowable limits. The system enables the NSCCL
to further check the micro details of members positions, if required, and
take proactive action.
The online surveillance mechanism also generates various alerts/ reports
on any price/volume movement of securities not in line with past
trends/patterns. For this purpose, the nse has put in place a system that
generates alerts. Alerts are scrutinized and are taken up for follow up
action. Open positions of securities are also analyzed. Besides this,
rumours in the print media are tracked and, where they are sensitive,
companies are contacted for verification. Replies are informed to the
members and the public.
Investigation and inspection As per regulatory requirements, a minimum
of 10% of the active trading members are to be inspected every year to
verify the level of compliance with various rules, byelaws and regulations
of the nse. Usually, inspection of more members than the regulatory
requirement is under taken every year. The inspection randomly verifies if
investor interests are being compromised in the conduct of business by
members. The investigation is based on various alerts which require
further analysis. If the analysis suggest any possible irregular activity
which deviates from trends/patterns and concentration of trading at the
nse, at the member level, then a more detailed investigation is undertaken.
If the detailed investigation establishes any irregular activity, then
disciplinary action is initiated against the member. If the investigation
suggests possible irregular activity across the exchange and/ or possible
involvement of clients, then the same is informed to the SEBI.
5. Depository participant (DP)
Once the trade is done on the stock exchange, client/sub broker
gets reports of their net obligation. A clearing member (CM) has to open a
clearing and settlement of trades with a DP. On opening of such account
an account, the depositories allots a number identified as CM- Business
partner- Id. The DP opens an account and the CM is allotted a number
(Client ID).
The delivery account consists of three parts pool a/c; delivery
a/c; receipt a/c, to facilitate easy book keeping. The role of the pool
account in clearing of securities is two fold- a.) the selling client of the
CM transfers securities from his client account to the pool a/c of the CM
before pay in and b.) after payout, the CM transfers securities(to the extent
of his obligation to the clearing operation) from the pool a/c to the
delivery a/c , before pay in. On pay in day the depository flushes out the
securities in the delivery a/c and transfers the same to CC automatically.
On pay out day, the CC transfers securities to the pool a/c (to extent of the
net receipt) through the receipt a/c. This account can be used to trace the
details of settlement-wise receipt into the clearing.
On off market trades, these include trades where the seller and buyer
deal directly with each other, without any intervention of the CC. The
seller would give his DP a delivery instruction slip instructing him to debit
his account with the transacted securities and the buyer would give his DP
a receipt instruction slip to credit his account. Both the instructions would
have the same execution date. The transaction would match at the
depository, and credit and debit would be given by the DPs to their
respective Client account.
 Observations and Findings

During the actual two months period of doing this project I was able to
observe some important elements in favor of Pune Stock Exchange and
some against them and in order to put it in a better way I carried out a
swot analysis which is as under
Strength of PSESL Good and Highly qualified and cooperating
Staff
Weakness of PSE Less Manpower.
Opportunities The Company has made an application to NSE for
the F & O membership, for which approval is awaited. The
exchange is planning to commence Investors Service Centers in
Satara, Sangli and Kolhapur to provide services relating to Capital
Market to the investors in these cities and around
Threats to PSESL Threats from competitors like icicidirect.com
 Recommendations and Suggestions.

Findings and suggestions

Findings
At the time of doing my project in PSE I found that there could be
time saving as number of employees working over there were less in
each department so depended was more on these employees and at that
time some of the well set expert employees working over there were
leaving the job due to their future growth or personal reasons, and work
load was huge so it was pretty difficult for employee over their, as they
have stand by longer time, much pressure were on them for the completion
of job and there is always a state were at the end of day some of other
thing used to be pending. And few people who were newly joint in the
PSE at that moment were not that much trained and were not much
confident as they are well qualified but didn t had experience in this field.
So lots of time used to be wasted in order to build confidence by
themselves and grasp the knowledge.
Other things were, in PSE they do not have HR department so that
employees can tell their problems, need and demands to them and if they
had also they used to tell to DGM or to AGM or to the Director and if they
get time they used to solve it or it used to be on priority basis and they
didn t had canteen facilities also.
Suggestions
Instead of employing the no experienced employees or fresher, they
should have employed experienced employees in the departments at that
moment of time, so work load could have been reduced and could not had
been much pending work and tension also.
There are lots of requirement of employees in each department so that
work can be evenly distributed and their will be flow in the work and
doesn t have to depend on anybody.
Their should be a HR department on high priority basis because they can
understand the nature of employees, their need and demands or
requirements, can try to understand their problem or any grievances and
can give immediate solutions to it, and can create working atmosphere for
the employee so that they can work smoothly and happily without any
tension or fear in mind.
 Conclusion

In the present scenario every individual who is searching for the job,
wants to do a front office job, but they don t realize how important the
Back Office Function is.
In a share broking firm like PSE where I did my project, the back office
function is highly important, as many things are dependent on
performance of back office and if it is not performed with full
understanding and concentration, it could lead to blunder mistake and can
put any broker into monetary loss, so after completing the project I could
understand functioning of any broking firm lies in the hands of back office
personnel this shows how important is the back office function.
The whole project is based on the back office function and its importance
implications in the routine of PSE s functioning and after completing the
project I can confidently say that I have got a glimpse of the working in a
share broking firm.
On the basis of the whole project, as a part it suggests a systematic way to
Pune Stock Exchange to increase the efficiency of back office function,
considering the time factor.
 The Chronological Order

This report has been prepared in a chronological sequence explaining the

flow of work logically which is as under
1. The Indian Financial System.
2. Stock Exchange as a part of the whole financial system.
3. Role of Stock Exchange.
4. Need for the regulation and control.
5. Role of SEBI as a regulating and controlling authority.
6. Broker as a part of stock exchange s working.
7. Importance of back office functions in a share broking firm.
 Bibliography

1. Website of RBI, SEBI and NSE.

2. Financial Management Module of ICFAI.
3. C.S. Module (for few definitions)
4. The Economic Times (newspaper)
5. Book Reference
a. Indian Financial System
b. Advance Financial System
6. Discussion with the senior staff of PSE.
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