TRAINING PROJECT

REPORT

A STUDY OF

“EQUITY BROKING”
AT

KOTAK SECURITIES

TRAINING REPORT SUBMITTED

TO

KOTAK SECURITIES LIMITED

SUBMITTED BY:
SUPERVISED BY:

ANKUR MALHOTRA
MR.JOBBY JOHN
 ACKNOWLEDGEMENT

I would like to express my sincere gratitude to the

management of the Kotak Securities for providing me an
opportunity to undergo internship in there esteemed
organization.

I am thankful to Mr. Jobby John for his help and his guidance
in completing the internship report. I am also thankful to Mr.
Mayank Kedia for sharing some of his valuable time in
guiding me during the internship.

I wish to express my sincere thank and appreciation to all those

with whom I worked and interacted and whose thought and
insight helped me in enriching my knowledge and
understanding of the topic.

Last but not least I thank to all those who directly or indirectly
helped me in bringing out this unique study on time and made
it possible to complete the report.
 PREFACE

The economic liberalization in India refers to ongoing reforms in India. After Independence in 1947,
India adhered to socialist policies. In the 1980s, Prime Minister Rajiv Gandhi initiated some reforms.
His government was blocked by politics. In 1991, after the International Monetary Fund (IMF) had
bailed out the bankrupt state, the government of P. V. Narasimha Rao and his finance
minister Manmohan Singh started breakthrough reforms. The new policies included opening for
international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-
controlling measures. The overall direction of liberalization has since remained the same, irrespective
of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade
unions and farmers, or contentious issues such as reforming labor laws and reducing agricultural
subsidies.

As of 2009, about 300 million people — equivalent to the entire population of the entire United
States — has escaped extreme poverty. The fruits of liberalization reached their peak in 2007, with
India recording its highest GDP growth rate of 9%. With this, India became the second fastest growing
major economy in the world, next only to China. An Organisation for Economic Co-operation and
Development (OECD) report states that the average growth rate 7.5% will double the average income
in a decade, and more reforms would speed up the pace.

Indian government coalitions have been advised to continue liberalization. India grows at slower pace
than China. McKinsey states that removing main obstacles "would free India’s economy to grow as
fast as China’s, at 10 percent a year".

Pre-liberalisation policies

Indian economic policy after independence was influenced by the colonial experience (which was
seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian socialism
Policy tended towards protectionism with a strong emphasis on import
substitution, industrialization, state intervention in labour and financial markets, a large public sector,
business regulation, and central planning. Five-Year Plans of India resembled central planning in
the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical
plants, among other industries, were effectively nationalized in the mid-1950s. Elaborate licences,
regulations and the accompanying red tape, commonly referred to as Licence Raj, were required to
set up business in India between 1947 and 1990.

Impact

 The low annual growth rate of the economy of India before 1980, which stagnated around
3.5% from 1950s to 1980s, while per capita income averaged 1.3%.At the same
time, Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Korea by 10% and
in Taiwan by 12%.
 Only four or five licences would be given for steel, power and communications. License
owners built up huge powerful empires.
 A huge public sector emerged. State-owned enterprises made large losses.
 Infrastructure investment was poor because of the public sector monopoly.
 License Raj established the "irresponsible, self-perpetruating bureaucracy that still exists
throughout much of the country" and corruption flourished under this system.

Rajiv Gandhi government (1984-1989)

In the 80s, the government led by Rajiv Gandhi started light reforms. The government slightly
reduced Licence Raj and also promoted the growth of the telecommunications and software
industries.

The Vishwanath Pratap Singh government (1989-1990) and Chandra Shekhar government (1990-
1991) did not add any significant reforms.

Narasimha Rao government (1991-1996)

The assassination of prime minister Indira Gandhi in 1984, and later of her son Rajiv Gandhi in 1991,
crushed international investor confidence on the economy that was eventually pushed to the brink by
the early 1990s.

As of 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of
a basket of currencies of major trading partners. India started having balance of payments problems
since 1985, and by the end of 1990, it was in a serious economic crisis. The government was close to
default, its central bank had refused new credit and foreign exchange reserves had reduced to the
point that India could barely finance three weeks’ worth of imports.
Reforms
The Government of India headed by Narasimha Rao decided to usher in several reforms that are
collectively termed as liberalisation in the Indian media. Narasimha Rao appointed Manmohan
Singh as a special economical advisor to implement liberalisation.

The reforms progressed furthest in the areas of opening up to foreign investment, reforming capital
markets, deregulating domestic business, and reforming the trade regime. Liberalization has done
away with the Licence Raj (investment, industrial and import licensing) and ended many public
monopolies, allowing automatic approval of foreign direct investment in many sectors. Rao's
government's goals were reducing the fiscal deficit, privatization of the public sector, and increasing
investment in infrastructure. Trade reforms and changes in the regulation of foreign direct
investment were introduced to open India to foreign trade while stabilizing external loans. Rao's
finance minister, Manmohan Singh, an acclaimed economist, played a central role in implementing
these reforms. New research suggests that the scope and pattern of these reforms in India's foreign
investment and external trade sectors followed the Chinese experience with external economic
reforms.

 In the industrial sector, industrial licensing was cut, leaving only 18 industries subject to
licensing. Industrial regulation was rationalized.

 Abolishing in 1992 the Controller of Capital Issues which decided the prices and number of
shares that firms could issue.

 Introducing the SEBI Act of 1992 and the Security Laws (Amendment) which gave SEBI the
legal authority to register and regulate all security market intermediaries.

 Starting in 1994 of the National Stock Exchange as a computer-based trading system which
served as an instrument to leverage reforms of India's other stock exchanges. The NSE emerged
as India's largest exchange by 1996.

 Reducing tariffs from an average of 85 percent to 25 percent, and rolling back quantitative
controls. (The rupee was made convertible on trade account.)

 Encouraging foreign direct investment by increasing the maximum limit on share of foreign
capital in joint ventures from 40 to 51 percent with 100 percent foreign equity permitted in priority
sectors.

 Streamlining procedures for FDI approvals, and in at least 35 industries, automatically

approving projects within the limits for foreign participation.
  Opening up in 1992 of India's equity markets to investment by foreign institutional investors
and permitting Indian firms to raise capital on international markets by issuing Global Depository
Receipts(GDRs).

 Marginal tax rates were reduced.

 Privatization of large, inefficient and loss-inducing government corporations was initiated.

Other

 Atal Bihari Vajpayee's administration surprised many by continuing reforms, when it was at
the helm of affairs of India for five years.
 The Vajpayee administration continued with privatization, reduction of taxes, a sound fiscal
policy aimed at reducing deficits and debts and increased initiatives for public works.
 The UF government attempted a progressive budget that encouraged reforms, but the
1997 Asian financial crisis and political instability created economic stagnation.
 Strategies like forming Special Economic Zones - tax amenities, good communications
infrastructure, low regulation — to encourage industries has paid off in many parts of the country.
 The Golden Quadrilateral project aimed to link India's corners with a network of modern
highways.
 Right to Information Act (2005)
 Indo-US civilian nuclear agreement (2008)
 Right to Education Bill (2008)

Impact of reforms
The impact of these reforms may be gauged from the fact that total foreign investment (including
foreign direct investment, portfolio investment, and investment raised on international capital markets)
in India grew from a minuscule US $132 million in 1991-92 to $5.3 billion in 1995-96.

Cities like Bangalore, Hyderabad, Pune and Ahmedabad have risen in prominence and economic
importance, became centres of rising industries and destination for foreign investment and firms.
 TABLE OF CONTENTS

Certificate 1

Acknowledgement 2

Preface 3

1 Objective of study

2 Review of literature

3 Company Profile

4 Presentation of Data

5 Analysis and Findings of data

6 Recommendation and suggestions

7 Limitation

8 Bibliography
 OBJECT IVE OF THE STUDY

The basic objective of the study are:-

• To study the existing capital market.

• To study the recent developments in equity brokerage in India.

• To study the determinant factors which impact brokers or sub-brokers.

 REVIEW
LITERATURE
 CAPITAL MARKET

There are 22 stock exchanges in India, the first being the Bombay Stock Exchange (BSE),
which began formal trading in 1875, making it one of the oldest in Asia. Over the last few
years, there has been a rapid change in the Indian securities market, especially in the
secondary market. Advanced technology and online-based transactions have modernized the
stock exchanges. In terms of the number of companies listed and total market capitalization,
the Indian equity market is considered large relative to the country’s stage of economic
development. The number of listed companies increased from 5,968 in March 1990 to about
10,000 by May 1998 and market capitalization has grown almost 11 times during the same
period. The debt market, however, is almost nonexistent in India even though there has been
a large volume of Government bonds traded. Banks and financial institutions have been
holding a substantial part of these bonds as statutory liquidity requirement. The portfolio
restrictions on financial institutions’ statutory liquidity requirement are still in place. A
primary auction market for Government securities has been created and a primary dealer
system was introduced in 1995. There are six authorized primary dealers. Currently, there are
31 mutual funds, out of which 21 are in the private sector. Mutual funds were opened to the
private sector in 1992. Earlier, in 1987, banks were allowed to enter this business, breaking
the monopoly of the Unit Trust of India (UTI), which maintains a dominant position.Before
1992, many factors obstructed the expansion of equity trading. Fresh capital issues were
controlled through the Capital Issues Control Act. Trading practices were not transparent, and
there was a large amount of insider trading. Recognizing the importance of increasing
investor protection, several measures were enacted to improve the fairness of the capital
market. The Securities and Exchange Board of India (SEBI) was established in 1988. Despite
the rules it set, problems continued to exist, including those relating to disclosure criteria,
lack of broker capital adequacy, and poor regulation of merchant bankers and underwriters.
There have been significant reforms in the regulation of the securities market since 1992 in
conjunction with overall economic and financial reforms. In 1992, the SEBI Act was enacted
giving SEBI statutory status as an apex regulatory body. And a series of reforms was
introduced to improve investor protection,automation of stock trading, integration of national
markets, and efficiency of market operations.India has seen a tremendous change in the
secondary market for equity. Its equity market will most likely be comparable with the
world’s most advanced secondary markets within a year or two. The key ingredients that
underlie market quality in India’s equity market are: exchanges based on open electronic
limit order book;

• nationwide integrated market with a large number of informed traders and fluency of short
or long positions; and
• no counterparty risk
.
Among the processes that have already started and are soon to be fully implemented are
electronic settlement trade and exchange-traded derivatives. Before 1995, markets in India
used open outcry, a trading process in which traders shouted and handsignaled from within a
pit. One major policy initiated by SEBI from 1993 involved the shift of all exchanges
to screen-based trading, motivated primarily by the need for greater transparency. The first
exchange to be based on an open electronic limit order book was the National Stock
Exchange (NSE), which started trading debt instruments in June 1994 and equity in
November 1994. In March 1995, BSE shifted from open outcry to a limit order book market.
Currently, 17 of India’s stock exchanges have adopted open electronic limit order.Before
1994, India’s stock markets were dominated by BSE. In other parts of the country, the
fi nancial industry did not have equal access to markets and was unable to participate in
forming prices,compared with market participants in Mumbai(Bombay). As a result, the
prices in markets outside Mumbai were often different from prices in Mumbai.These pricing
errors limited order flow to these markets.Explicit nationwide connectivity and implicit
movement toward one national market has changed this situation (Shah and Thomas, 1997).
NSE has established satellite communications which give all trading members of NSE equal
access to the market.Similarly, BSE and the Delhi Stock Exchange are both expanding the
number of trading terminals located all over the country. The arbitrages are eliminating
pricing discrepancies between markets. Despite these big improvements in microstructure,
the Indian capital market has been in decline during the last three years. The amount of
capital issued has dropped from the level of its peak year,1994/95, and so have equity prices.
In 1994/95, Rs276 billion was raised in the primary equity market. This figure fell to Rs208
billion in 1995/96 and to Rs142 billion in 1996/97. The BSE-30 index or Sensex, the
sensitive index of equity prices, peaked at 4,361 in September 1994 and fell during the
following years. A leading cause was that financial irregularities and overvaluations of equity
prices in the earlier years had eroded public confidence in corporate shares. Also, there was a
reduced inflow of foreign investment after the Mexican and Asian financial crises. In a sense,
the market is now undergoing a period of adjustment. Thus, it is time for regulatory
authorities to make greater efforts to recover investors’ confidence and to further improve the
efficiency and transparency of market operations.
The Indian capital market still faces many challenges if it is to promote more efficient
allocation and mobilization of capital in the economy. First, market infrastructure has to be
improved as it hinders the efficient flow of information and effective corporate governance.
Accounting standards will have to adapt to internationally accepted accounting practices. The
court system and legal mechanism should be enhanced to better protect small shareholders’
rights and their capacity to monitor corporate activities. Second, the trading system has to be
made more transparent. Market information is a crucial public good that should be disclosed
or made available to all participants to achieve market efficiency. SEBI should also monitor
more closely cases of insider trading. Third, India may need further integration of the national
capital market through consolidation of stock exchanges. The trend all over the world is to
consolidate and merge existing stock exchanges. Not all of India’s 22 stock exchanges may
be able to justify their existence. There is a pressing need to develop a uniform settlement
cycle and common clearing system that will bring an end to unnecessary speculation based on
arbitrage opportunities. Fourth, the payment system has to be improved to better link the
banking and securities industries. India’s banking system has yet to come up with good
electronic funds transfer (EFT) solutions. EFT is important for problems such as direct
payments of dividends through bank accounts, eliminating counterparty risk, and facilitating
foreign institutional investment. The capital market cannot thrive alone; it has to be integrated
with the other segments of the financial system. The global trend is for the elimination of the
traditional wall between banks and the securities market. Securities market development has
to be supported by overall macroeconomic and financial sector environments. Further
liberalization of interest rates, reduced fiscal deficits, fully market-based issuance of
Government securities, and a more competitive banking sector will help in the development
of a sounder and a more efficient capital market in India.
Stock Market

PRIMARY MARKET

Since 1991/92, the primary market has grown fast as a result of the removal of investment
restrictions in the overall economy and a repeal of the restrictions imposed by the Capital
Issues Control Act. In 1991/92, Rs62.15 billion was raised in the primary market. This figure
rose to Rs276.21 billion in 1994/95. Since 1995/1996, however, smaller amounts have been
raised due to the overall downtrend in the market and tighter entry barriers introduced by
SEBI for investor protection

ISSUES IN PRIMARY MARKET

PUBLIC RIGHTS TOTAL

YEAR NUMB AMOUN NUMB AMOUNT NUMBE AMOUNT

ER T ER (Rs R (Rs
(Rs billion) billion)
billion)
1994/9 1,342 210.44 350 65.88 1692 276.32
5
1995/9 1,426 142.39 299 65.54 1725 208.03
6
1196/9 753 115.65 131 27.19 884 142.84
7
Dec 59 21.99
1997

Total market capitalization as of 1997/98 was Rs5,898 billion (Table 2), equivalent to about
half of India’s annual gross domestic product (GDP) for the same fiscal year. India compares
favorably with other emerging markets in this respect. The market capitalization-GDP ratio at
end-1995 was 22.4 percent for Brazil; 12.6 percent for Hong Kong, China;40 percent for
Indonesia; 41 percent for Korea; and 37.1 percent for Mexico.1 It was higher however,in
Malaysia (281.9 percent), Philippines (81.3), Singapore (233 percent), and Thailand (152.9
percent).

EQUITY PRICE

For the past 12 years, equity prices have seen two extended periods of declining prices and
two periods of rising prices. Between April 1986 and March 1988, Sensex decreased from
589 to 398, or by 32 percent.Prices also fell between March 1992, when the monthly closing
level of Sensex was 4,258, and April 1993, when the level was 2,122, a decline of 50.5
percent. Prices generally rose for extended periods from March 1988 to March 1992 and from
May 1993 to August 1994. The monthly closing level of Sensex climbed from 398 in March
1988 to 4,285 in March 1992, an increase of more than 10 times. In the second period of
extended rising equity prices, Sensex increased 1.16 times. Since 1995, it has fluctuated
around the 3,000-4,000 mark .In April 1998, it hovered around 3,000. In the period of
declining prices, from August 1994 to March 1998, the price-earnings (P/E) ratio fell
more sharply than prices (Figure 1). In March 1998 the monthly average Sensex P/E ratio was
15.65 while the figure for October 1993 was 38.76.

Risk Management System

SEBI has taken several measures to improve the integrity of the secondary market. Legislative and
regulatory changes have facilitated the corporatization of stockbrokers. Capital adequacy norms have
been prescribed and are being enforced. A mark-to-market margin and intraday trading limit have also
been imposed. Further, the stock exchanges have put in place circuit breakers, which are applied in
times of excessive volatility. The disclosure of short sales and long purchases is now required at the
end of the day to reduce price volatility and further enhance the integrity of the secondary market.

MARK-TO-MARKET MARGIN AND INTRADAY LIMIT

Under the current clearing and settlement system, if an Indian investor buys and subsequently sells the
same number of shares of stock during a settlement period, or sells and subsequently buys, it is not
necessary to take or deliver the shares. The difference between the selling and buying prices can be
paid or received. In other words, the squaring-off of the trading position during the same settlement
period results in non delivery of the shares that the investor traded. A short-term and speculative
investment is thus possible at a relatively low cost. FIIs and domestic institutional investors
are, however, not permitted to trade without delivery, since non delivery transactions are
limited only to individual investors. One of SEBI’s primary concerns is the risk of settlement
chaos that may be caused by an increasing number of non delivery transactions as the stock
market becomes excessively speculative. Accordingly, SEBI has introduced a daily mark-to-
market margin and intraday trading limit. The daily mark-to market margin is a margin on a
broker’s daily position. The intraday trading limit is the limit to a broker’s intraday trading
volume. Every broker is subject to these requirements. Each stock exchange may take any
other measures to ensure the safety of the market. BSE and NSE impose on members a more
stringent daily margin, including one based on concentration of business. A daily mark-to-
market margin is 100 percent of the notional loss of the stockbroker for every stock,
calculated as the difference between buying or selling price and the closing price of that stock
at the end of that day. However, there is a threshold limit of 25 percent of the base minimum
capital plus additional capital kept with the stock exchange or Rs1 million, whichever is
lower. Until the notional loss exceeds the threshold limit, the margin is not payable. This
margin is payable by a stockbroker to the stock exchange in cash or as a bank guarantee from
a scheduled commercial bank, on a net basis. It will be released on the pay-in day for the
settlement period. The margin money is held by the exchange for 6-12 days. This costs the
broker about 0.4-1.2 percent of the notional loss, assuming that the broker’s funding cost is
about 24-36 percent (Endo 1998).Thus, speculative trading without the delivery of shares is
no longer cost-free. Each broker’s trading volume during a day is not allowed to exceed the
intraday trading limit. This limit is 33.3 times the base minimum capital deposited with the
exchange on a gross basis, i.e., purchase plus sale. In the event of brokers wishing to exceed
this limit, they have to deposit additional capital with the exchange and this cannot be
withdrawn for six months.

CIRCUIT BREAKER

SEBI has imposed price limits for stocks whose market prices are above Rs10 up to Rs20, a
daily price change limit and weekly price change limit of 25 percent. BSE imposes price
limits as a circuit breaker system to maintain the orderly trading of shares on the exchange
BSE’s computerized trading system rejects buy or sell orders of a stock at prices outside the
price limits. The daily price limit of a stock is measured from the stock’s closing price in the
previous trading session. The weekly price limit is based on its closing price of the last
trading in the previous week, usually its closing price on the previous Friday.

Stock Lending

A scheme for regulating stock lending was introduced in February 1997, following changes in tax
regulations. Stock lending can take place through an intermediary registered for this purpose with
SEBI, and which has a minimum capital of Rs500 million. Lenders and borrowers of securities have
to enter into agreements with the intermediary. Stock lending facilitates the timely settlement of
transactions on the stock exchanges, especially in an environment where physical delivery of
certificates is required for settlement.

Introduction of Derivatives Trading

At present, there are no exchange traded derivatives or over-the-counter derivative markets in the
country. However, a new law has been passed permitting the trading of derivatives. This followed
recommendations for the establishment of a regulatory framework for derivatives by a committee
chaired by L.C. Gupta. It is expected that derivatives trading will soon form part of the Indian
securities market.

Institutional Investors

MUTUAL FUNDS

Indian investors have been able to invest through mutual funds since 1964, when UTI was
established.
Indian mutual funds have been organized through the Indian Trust Acts, under which they have
enjoyed certain tax benefits. Between 1987 and 1992, public sector banks and insurance companies
set up mutual funds. Since 1993, private sector mutual funds have been allowed, which brought
competition to the mutual fund industry. This has resulted in the introduction of new products and
improvement of services. The notification of the SEBI (Mutual Fund) Regulations of 1993, brought
about a restructuring of the mutual fund industry. An arm’s length relationship is required between the
fund sponsor, trustees, custodian, and asset management company. This is in contrast to the
previous practice where all three functions, namely trusteeship, custodianship, and asset
management, were often performed by one body,usually the fund sponsor or its subsidiary.
The regulations prescribed disclosure and advertisement norms for mutual funds, and, for the
first time, permitted the entry of private sector mutual funds. FIIs registered with SEBI may
invest in domestic mutual funds, whether listed or unlisted. The 1993 Regulations have been
revised on the basis of the recommendations of the Mutual Funds 2000 Report prepared by
SEBI. The revised regulations strongly emphasize the governance of mutual funds and
increase the responsibility of the trustees in overseeing the functions of the asset management
company. Mutual funds are now required to obtain the consent of investors for any change in
the “fundamental attributes” of a scheme, on the basis of which unit holders have invested.
The revised regulations require disclosures in terms of portfolio composition,transactions by
schemes of mutual funds with sponsors or affiliates of sponsors, with the asset management
company and trustees, and also with respect to personal transactions of key personnel of
asset management companies and of trustees.

FOREIGN INSTITUTIONAL INVESTORS

FIIs have been allowed to invest in the Indian securities market since September 1992 when
the Guidelines for Foreign Institutional Investment were issued by the Government. The
SEBI (Foreign Institutional Investors) Regulations were enforced in November 1995, largely
based on these Guidelines. The regulations require FIIs to register with SEBI and to obtain
approval from the Reserve Bank of India (RBI) under the Foreign Exchange Regulation Act
to buy and sell securities, open foreign currency and rupee bank accounts, and to remit and
repatriate funds. Once SEBI registration has been obtained, an FII does not require any
further permission to buy or sell securities or to transfer funds in and out of the country,
subject to payment of applicable tax. Foreign investors, whether registered as FIIs or not,
may also invest in Indian securities outside the FII process. Such investment requires case-by-
case approval from the Foreign Investment Promotion Board (FIPB) in the Ministry of
Industry and RBI, or only from RBI depending on the size of investment and the industry in
which the investment is to be made. Investment in Indian securities is also possible through
the purchase of GDRs. Foreign currency convertible bonds and foreign currency bonds issued
by Indians that are listed, traded, and settled overseas are mainly denominated in dollars.
Foreign financial service institutions have also been allowed to set up joint ventures in stock
broking, asset management companies, merchant banking, and other financial services firms
along with Indian partners. Foreign portfolio investments in Indian companies are limited to
individual foreign ownership at 10 percent of the total issued capital of any one company and
to aggregate foreign ownership at 30 percent of the total issued capital of any one company.
FIIs’ net investment was positive until October 1997 and their cumulative investments
reached $9.1 billion in the same month. But since then, it has turned negative due to the
Asian financial crisis .As of May 1998, 496 FIIs were registered with SEBI, with a
cumulative net investment of $9.2 billion in the Indian securities market. Since 1993/94,
foreign portfolio investment has so far exceeded foreign direct investment, which has also
increased rapidly . Investment through FIIs constituted the bulk of portfolio investment.
Annual inflows have been about $1.5 billion-$2 billion from 1993/94 to 1996/97 through
FIIs, while inflows through GDRs have declined after peaking at $1.8 billion in 1994/95. In
1996/97, India received $5.6 billion in foreign investment of which $1.9 billion was through
FIIs. During 1997/98, FIIs’ investment fell while foreign direct investment rose.
Improvement in inflow of foreign investment raised India’s foreign exchange reserves from
$17 billion at the end of 1994/95 to $29.3 billion at the end of June 1997. Following the
changes to the 1995 SEBI (Foreign Institutional Investors) Regulations, an FII is allowed to
set up an investment fund to invest in Indian bonds if it registers the fund with SEBI as a new
separate FII or its new subaccount. In 1996, SEBI approved nine debt funds with a
cumulative investment exposure of $1.278 billion for investment in securities. FIIs seem to
have a strong impact on equity price movements in India. Trend analysis has shown a
significantly positive relationship between BSE Sensex and the lagged net investment by
FIIs.

Policy Issues

Regulatory Framework

REGULATION OF INTERMEDIARIES

Participants in the Indian capital market are required to register with SEBI to carry out their
businesses.These include:

• stockbrokers, subbrokers, share transfer agents, bankers to an issue, trustees of a trust deed,
registrars to an issue, merchant bankers, underwriters, portfolio managers, investment
advisers, and other such intermediaries who may be associated with the securities market in
any manner;

• depositories, participants, custodians of securities, FIIs, credit rating agencies, and other
Such intermediaries who may be associated with the securities market in any manner; and

• venture capital funds and collective investment schemes, including mutual funds.However,
the registration system is far from complete. For some professional categories such as
subbrokers, the registration system is in place, but limitations to SEBI’s enforcement power
permits hundreds of thousands of unregistered subbrokers to conduct their securities
businesses, while registered subbrokers are not effectively regulated. There is no registration
system at all for investment advisors.The capital adequacy requirements for registered market
participants are surprisingly low. Consequently, entry barriers are also low. This is probably
because the vested interest of existing market participants cannot be totally ignored since the
Indian capital market would stop functioning without them. The majority are thinly
capitalized. As a result, SEBI’s limited resources are spread too thinly to register many small
participants and regulate them.
Stockbrokers

The Indian law defines a stockbroker simply as a member of a recognized stock exchange.
Therefore,a registered stockbroker is a member of at least one of the recognized Indian stock
exchanges. Stockbrokers are not allowed to buy, sell, or deal in securities, unless they hold a
certificate granted by SEBI. At the end of March 1997, they numbered 8,867.Each
stockbroker is subject to capital adequacy requirements consisting of two components: basic
minimum capital and additional or optional capital related to volume of business. The basic
minimum capital requirement varies from one exchange to another. A SEBI regulation
requires stockbrokers of BSE or NSE to maintain a minimum of Rs500,000 (about $14,000),
which is the largest requirement among the stock exchanges. However, BSE and NSE require
their respective members to deposit with them larger amounts. The additional or optional
capital and the basic minimum capital combined have to be maintained at 8 percent or more
of the gross outstanding business in the exchange (the gross outstanding business means the
cumulative amount of sales and purchases by a stockbroker in all securities at any point
during the settlement period). Sales and purchases on behalf of customers may not be netted
but may be included to those of the broker.There is no mandatory qualification test for
stockbrokers and other market participants in India, unlike other countries such as Japan,
United Kingdom, and United States.

Subbrokers

Most stockbrokers in India are still relatively small. They cannot afford to directly cover
every retail investor in a geographically vast country and in such a complex society. Thus,
they are permitted to transact with subbrokers as the latter play an indispensable role in
intermediating between investors and the stock market. An applicant for a subbroker
certificate must be affiliated with a stockbroker of a recognized stock exchange. A subbroker
application may take the form of sole proprietorship, partnership, or corporation. There are
two major issues concerning subbrokers in the Indian capital market:

• majority of subbrokers are not registered with SEBI; and

• the function of the subbroker is not clearly defined.

No subbroker is supposed to buy, sell, or deal insecurities, without a certificate granted by

SEBI.Nevertheless, there were only about 2,593 subbrokers registered with SEBI as of end-
June 1997, while the number of stock subbrokers in India was estimated in the range of
50,000 to 200,000 (Endo, 1998). The Indian law defines a subbroker as any person, not being
a member of a stock exchange, who acts on behalf of a stockbroker as an agent, or otherwise,
to assist the investors in buying, selling, or dealing securities through such a stockbroker.
Based on this definition, the subbroker is either a stockbroker’s agent or an arranger for the
investor. Thus, legally speaking, the stockbroker as a principal will be responsible to the
investor for a subbroker’s conduct if a subbroker acts as his or her agent. However, the
market practice is different from this legally defined relationship. In reality, the stockbroker,
in general, issues a contract note of a transaction even to a registered subbroker, thus treating
the latter as a counterparty. This implicitly denies the stockbroker’s privity with the investor.
NSE does not officially allow its members to transact with end-investors through a subbroker.
This is probably because NSE has liberal membership criteria and its computerized trading
network can easily provide geographically scattered stockbrokers with direct access to
trading on NSE. Nevertheless, many trading members of NSE have been using registered
and unregistered subbrokers. To sort out this confusion, SEBI enforced the following
measures in March 1997:

• initiation of criminal actions on complaints received against unregistered sub-brokers

in suitable cases;

• revival of the institution of “remisier” under rules and bylaws of the stock exchanges;
and

• prohibition of stockbrokers in dealing with unregistered subbrokers or unregistered

remisiers after 1 June 1997 (this deadline was later extended to 1 July 1997).

In spite of these actions, the confusion has remained. There is a need to address the basic
issue of clarifying the role of the subbroker and to operationally define its relationship with
the stockbrokers.
COMPANY PROFILE
 KOTAK MAHINDRA GROUP

Kotak Mahindra is one of India’s leading financial

institutions,offering complete financial solutions that
encompass every sphere of life .From
Commercial banking,to stock broking,to mutual funds,to life
insurance,to investment banking,the group caters to the
financial needs of individuals and corporate.

The group has a net worth of over Rs.1800 crore and employs
over 4,400 employees in its various businesses.With a presence
in 82 cities in India and offices in New York ,London,Dubai
and Mauritius.it services a customer base of over 5,00.000.

Kotak Mahindra has international partnerships with Goldman

Sachs(one of the world’s largest investment banks and
brokerage firms)and Old Mutual (a large insurance,banking and
asset management conglomerate).
THE JOURNEY SO FAR
 KEY GROUP COMPANIES AND THEIR BUSINESSES

Kotak Mahindra Bank

The Kotak Mahindra Group's flagship company, Kotak Mahindra Finance Ltd which
was established in 1985, was converted into a bank- Kotak Mahindra Bank Ltd in
March 2003 becoming the first Indian company to convert into a Bank. Its banking
operations offer a central platform for customer relationships across the group's
various businesses. The bank has presence in Commercial Vehicles, Retail Finance,
Corporate Banking, Treasury and Housing Finance.

Kotak Mahindra Capital Company

Kotak Mahindra Capital Company Limited (KMCC) is India's premier Investment

Bank and a Primary Dealer approved by the RBI ,is a strategic joint venture Kotak
Mahindra Bank Limited and Goldman Sachs Group,LLP . KMCC's core business
areas include Equity Issuances, Mergers & Acquisitions, Structured Finance and
Advisory Services.

Kotak Securities
Kotak Securities Ltd. is one of India's largest brokerage and securities distribution
houses. Over the years, Kotak Securities has been one of the leading investment
broking houses catering to the needs of both institutional and non-institutional
investor categories with presence all over the country through franchisees and
coordinators. Kotak Securities Ltd. offers online (through www.kotaksecurities.com)
and offline services based on well-researched expertise and financial products to
non-institutional investors.

Kotak Mahindra Prime

Kotak Mahindra Prime Limited (KMP) (formerly known as Kotak Mahindra Primus
Limited) has been formed with the objective of financing the retail and wholesale
trade of passenger and multi utility vehicles in India. KMP offers customers retail
finance for both new as well as used cars and wholesale finance to dealers in the
automobile trade. KMP continues to be among the leading car finance companies in
India.

Kotak Mahindra Asset Management Company

Kotak Mahindra Asset Management Company Kotak Mahindra Asset Management

Company (KMAMC), a subsidiary of Kotak Mahindra Bank, is the asset manager for
Kotak Mahindra Mutual Fund (KMMF). KMMF manages funds in excess of Rs
32,000 crore and offers schemes catering to investors with varying risk-return
profiles. It was the first fund house in the country to launch a dedicated gilt scheme
investing only in government securities.

Kotak Mahindra Old Mutual Life Insurance Limited

Kotak Mahindra Old Mutual Life Insurance Limited is a joint venture between Kotak
Mahindra Bank Ltd. and Old Mutual plc. Kotak Life Insurance helps customers to
take important financial decisions at every stage in life by offering them a wide range
of innovative life insurance products, to make them financially independent.

Kotak's International Business

With a presence outside India since 1994, the international subsidiaries of Kotak
Mahindra Bank Ltd. operating through offices in London, New York, Dubai, San
Francisco, Singapore and Mauritius specialize in providing asset management
services to specialist overseas investors seeking to invest into India. The offerings
are differentiated India investment solutions that span all major asset classes
including listed equity, private equity and real estate. The subsidiaries also lead
manage and underwrite international issuances of securities. With its commendable
track record, large presence on the ground and a team of dedicated staff in India,
Kotak’s international arm is suitably positioned for managing assets in the Indian
Capital markets.
 BOARD OF DIRECTORS

1. KOTAK MAHINDRA CAPITAL COMPANY LIMITED

UDAY KOTAK ( C )

FALGUNI NAYAR (MD)

SHANTI EKAMBARAM

DIPAK GUPTA

TIM LEISSNER

NOEL SEPHTON

MICHAEL EVANS

2. KOTAK SECURITIES LIMITED

JAIMIN BHATT

UDAY KOTAK ( C )

C.JAYARAM

NARAYAN S.A.(MD)

FALGUNI NAYAR

VIJAY KARNANI

JENNY FINNEY

NOEL SEPHTON

ALROY LOBO
 KOTAK SECURITIES

Kotak Securities needs no introduction as the Equity House rated best in

India.It is also the leader as far as primary market distribution goes.Kotak
Securities Limited has been formed by a strategic joint venture between
Kotak Mahindra Bank and Goldman Sachs LLC,a leading international
investment banking and,brokerage firm.

A corporate member of both the BSE and the NSE, Kotak Securities
Depository Limited(NSDL) and the central Depository Services Limited
(CDSl)for trading and settlement of dematerialized shares.

Kotak Securities Limited,caters exclusively to your share trading and

investment requirements.It provides you that pedestal,where you as an
investor can take control of your investing needs.
 KOTAK SECURITIES CREDENTIALS

• Kotak securities limited an affiliate of Kotak Mahindra is the stock

broking and distribution arm of the Mahindra group.

• Kotak Securities Limited has a market share of 5-6% of daily

volumes.

• Manages Equity asset pool through the portfolio management route

with INR Rs 2007 crore of assetsunder management as on June

7, 2005.
• Leading distributors of initial Public Offers (IPO)-ranked No.1

in 2003-2004 as Book Running Lead Managers” by PRIME

Database.
 KOTAK SECURITIES HAS FIVE MAIN AREA OF BUSINESS:

INSTITUTIONAL BUSINESS

This division primarily covers secondary market broking.It caters to the needs of foreign and
Indian investors in Indian equities (both local shares and GDRs).The division also
incorporates a comprehensive research cell with sectoral analysts who cover all the major
areas of the Indian economy.

PRIVATE CLIENT SERVICES

Private client services (PCS) is a special investment decision for High net worth individuals
corporate’s and bank with investment product range covering debt and equity ,mutual
funds and specialised structured investment products.

CLIENT MONEY MANAGEMENT

This division provides professional portfolio management services to high net –worth
individuals and corporate’s. Its expertise in research and stock broking gives the company the
right perspective from which to provide its clients with investment advisory services.

RETAIL DISTRIBUTION SERVICES

Kotak Securities has a comprehensive retail distribution network ,comprising approximately

8000 agents ,195 branches and over 725 franchisees across India .This network is used for the
distribution and placement of a range of financial products that includes company fixed
deposits ,mutual funds, Initial public offers ,Secondary debt and equity products.

RESEARCH DIVISION –SNAPSHOT

The company has a full fledged research division involved in Macro Economic Studies ,
Sectoral research and company specific equity research combined with a strong and well
networked sales force which helps deliver current and up to date market information and
news.
 WHAT KOTAK SECURITIES OFFERS TO THERE CUSTOMERS

There has been a marked change in the equity broking business in the recent times and is
bound to change for more in the future. The change that has been seen in the kinds of service
people looking for ,be it in terms of professionalism or assurance from the broker for there
money .Kotak securities have understood these requirements and have designed a model
wherein customers can be served in a better way. The distance between existing franchisee
or KS branch will with a new one will be atleast 1.00km to 2.00km from your
location’s. There is no exclusivity for anyone for any region. The model is a partnership
between Kotak Securities and franchisee. The working of the model is explained further.

The essence of this model is that though they both come together for business but none
of them loose there individual identity.
 THE FRANCHISEE MODEL

1. This agreement will be arrangement between Kotak securities limited and Franchisee.

2. All the trading clients will be registered separately under client registeration
agreement with Kotak securities .Stamp charge’s to be born by the client for account
opening .Kotak securities will be charging RS 750 /-each as account opening charges
to open trading and DP account from client.

3. All pay ins whether cheques or deliveries will be in favour of Kotak Securities and all
payouts will be paid by Kotak Securities to client directly.

4. Clients will be provided Intra Day gross exposure upto a maximum of seven times
the margin available.

5. Franchisee would be paid 50% of net brokerage earned as service charges.

6. Kotak Securities limited and Franchisee would do the necessary marketing activities
from time to time.

7. Kotak Securities provides the necessary back office support and franchisee will be
given the access to backoffice support through Internet.

8. All communication regarding the contract note/bill will be sent by Kotak Securities
directly to the franchisee.

9. Franchisee will be eligible to sell all the products marketed by Kotak securities (i.e)
distribution of various Mutual funds ,tax saving bonds ,Insurance and IPO’s etc.

10. NetInvest is the model through which Franchisee can apply for primary market .

11. Franchisee will give a base minimum security deposit of 3 lacs in cash there will be
no exposure given in this deposit .

12. The ODIN Trading softwareby financial Technologies for cash and f&o the costing
per ID’s RS 16,000(each) and for BSE cash Rs.16,000.
 13. Trading terminal is provided only after the registeration in both exchanges.

14.Franchisee must scale up the brokerage within 3-5 months of the start of business to
2-3 lacs.

14. Franchisee would be provided access to Technical and Fundamental Research by

Kotak Securities to be further distributed to clients.
 Major developments in equity brokerage industry

i) Corporate memberships

There is a growing surge of corporate memberships (92% in NSE and

75% in BSE), and the scope of functioning of the brokerage firms has
transformed from that of being a family run business to that of
professional organised function that lays greater emphasis on observance
of market principles and best practices. With proliferation of new markets
and products, corporate nature of the memberships is enabling broking
firms to expand the realm of their operations into other exchanges as
also other product offerings. Memberships range from cash market to
derivatives to commodities and a few broking firms are making forays
into obtaining memberships in exchanges outside the country subject to
their availability and eligibility.

ii) Wider product offerings

The product offerings of brokerage firms today go much beyond the

traditional trading of equities. A typical brokerage firm today offers
trading in equities and derivatives, most probably commodities futures,
exchange traded funds, distributes mutual funds and insurance and also
offers personal loans for housing, consumptions and other related loans,
offers portfolio management services, and some even go to the extent of
creating niche services such as a brokerage firm offering art advisory
services. In the background of growing opportunities for Investors to
invest in India as also abroad, the range of products and services will
widen further. In the offing will be interesting opportunities that might
arise in the exchange enabled corporate bond trading, soon after its
commencement and futures trading that might be introduced in the near
future in the areas of interest rates and Indian currency.
iii) Greater reliance on research

Client advising in India has graduated from personal insights, market tips
to becoming extensively research oriented and governed by
fundamentals and technical factors. Vast progress has been made in
developing company research and refining methods in technical and
fundamental analysis. The research and advice are made online giving
ready and real time access to market research for investors and clients,
thus making research important brand equity for the brokerage firms.

iv) Accessing equity capital markets

Access to reliable financial resources has been one of the major

constraints faced by the equity brokerage industry in India since long.
Since the banking system is not fully integrated with the securities
markets, brokerage firms face limitations in raising financial resources for
business and expansion. With buoyancy of the stock markets and the
rising prospects of several well organized broking firms, important
opportunity to access capital markets for resource mobilization has
become available. The recent past witnessed several leading brokerage
firms accessing capital markets for financial resources with success.

v) Foreign collaborations and joint ventures

The way the brokerage industry is run and the manner in which several
of them pursued growth and development attracted foreign financial
institutions and investment banks to buy stakes in domestic brokerage
firms, paving the way for stronger brokerage entities and possible scope
for consolidation in the future. Foreign firms picked up stake in some of
the leading brokerage firms, which might lead to creating of greater
interest in investing in brokerage firms by entities in India and abroad.
vi) Specialised services/niche broking

While supermarkets approach are adopted in general by broking firms,

there are some which are creating niche services that attract a particular
client group such as day traders, arbitrage trading, investing in small cap
stocks etc, and providing complete range of research and other support
to back up this function.

vii) Online broking

Several brokers are extending benefits of online trading through creation

of separate windows. Some others have dedicated online broking portals.
Emergence of online broking enabled reduction in transaction costs and
costs of trading. Keen competition has emerged in online broking
services, with some of these offering trading services at the cost of a few
basis points or costs which are fixed in nature irrespective of the volume
of trading conducted. A wide range of incentives are being created and
offered by online brokerage firms to attract larger number of clients.

viii) Compliance oriented

With stringent regulatory norms in operation, broking industry is giving

greater emphasis on regulatory compliance and observance of market
principles and codes of conduct. Many brokerage firms are investing
time, money and resources to create efficient and effective compliance
and reporting systems that will help them in avoiding costly mistakes and
possible market abuses. Brokerage firms now have a compliance officer
who is responsible for all compliance related aspects and for interacting
with clients and other stake holders on aspects of regulation and
compliance.

ix) Focus on training and skill sets

Brokerage firms are giving importance and significance to aspects such

as training on skill sets that could prove to be beneficial in the long run.
With the nature of markets and products becoming more complex, it
becomes imperative for the broking firms to keep their staff continuously
updated with latest development in practices and procedures. Moreover,
it is mandated for certain types of dealers/brokers to seek specific
certification and examinations that will make them eligible to carry
business or trade. Greater emphasis on aspects such as research and
analysis is giving scope for in-depth training and skills sets on topics such
as trading programs, valuations, economic and financial forecasting and
company research.

x) From owners to traders

A fundamental change that has taken place in the equity brokerage

industry, which is a global trend as well, is the transformation of broking
from owners of the stock exchange to traders of the stock market.
Demutualization and corporatisation of stock exchanges bifurcated the
ownership and trading rights with brokers vested only with the later and
ownership being widely distributed. Demutualization is providing
balanced welfare gains to both the stock exchanges and the members
with the former being able to run as corporations and the latter being
able to avoid conflict of interests that sometimes came as a major
deterrent for the long term growth of the industry.
Emerging challenges and outlook for the brokerage industry

Brokerage firms in India made much progress in pursuing growth and

building professionalism in operations. Given the nature of the brokerage
industry being very dynamic, changes could be rapid and so as the
challenges that emerge from time to time. A brief description on some of
the prospects and challenges of the brokerage firms are discussed below.

i) Fragmentation

Indian brokerage industry is highly fragmented. Numerous small firms

operate in this space. Given the growing importance of technology in
operations and increasing emphasis on regulatory compliance, smaller
firms might find it constrained to make right type of investments that will
help in business growth and promotion of investor interests.

ii) Capital Adequacy

Capital adequacy has emerged as an important determinant that governs

the scope of business in the financial sector. Current requirements
stipulation capital adequacy in regard to trading exposure, but in future
more tighter norms of capital adequacy might come into force as a part
of the prudential norms in the financial sector. In this background, it
becomes imperative for the brokerage firms to focus on raising capital
resources that will enable to give continuous thrust and focus on
business growth.

iii) Global Opportunities

Broking in the future will increasingly become international in character

with the stock markets being open for domestic and international
investors including institutions and individuals, as also opportunities for
investing abroad. Keeping abreast with developments in international
markets as also familiarisation with global standards in broking
operations and assimilating major practices and procedures will become
relevant for the domestic brokerage firms.

iv) Opportunities from regional finance

Regional economic integration such as that under the European Union

and the ASEAN have greatly benefited businesses in the individual
countries with cross border opportunities that helped to expand the
scope and significance of the business. Initial measures to promote
South Asian economic integration is being made by governments in the
region first at the political level to be followed up in regard to financial
markets. South Asian economic integration will provide greater
opportunities for broking firms in India to pursue cross border business.
In view of several of common features prevailing in the markets, it would
be easier to make progress in this regard.

v) Product Dynamics

As domestic finance matures and greater flow of cross border flows

continue, new market segments will come into force, which could benefit
the domestic brokerage firms, if they are well prepared. For instance, in
the last three to four years, brokerage firms had newer opportunities in
the form of commodities futures, distribution of insurance products,
wealth management, mutual funds etc, and as the market momentum
continues, broking firms will have an opportunity to introduce a wider
number of products.

vi) Competition from foreign firms

Surging markets and growing opportunities will attract a number of

international firms that will increase the pace of competition. Global firms
with higher levels of capital, expertise and market experience will bring
dramatic changes in the brokerage industry space which the local firms
should be able to absorb and compete. Domestic broking firms should
always give due focus to emerging trends in competition and prepare
accordingly.
vii) Investor Protection

Issues of investor interest and protection will assume centre stage. Firms
found not having suitable infrastructure and processes to ensure investor
safety and protection will encounter constraints from regulation as also
class action suits that investors might bring against erring firms. The
nature of penalties and punitive damages would become more severe. It
is important for brokerage firms to establish strong and streamlined
systems and procedures for ensuring investor safety and protection.
RECOMMENDATION
&
SUGGESTIONS
Main things an investor should be aware of while dealing with a broker/sub-broker?

Good understanding of investment opportunities alone may not help the investor
in the securities market to trade. It is also important that the investor understands
the process of investing, such as finding an appropriate broker, handling buying
and selling of securities and maintaining records.

Before choosing a broker/sub-broker the investor should be aware of the

following things:-

 From where the broker/sub-broker has learnt the business?

 How long has he been serving the securities industry?

 Whether he has eligible qualifications as a broker?

 How many clients does he serve?

 What fees and expenses does he charge?

 MAJOR RIGHTS AND OBLIGATIONS OF AN INVESTOR

a) Before entering into a contract with the broker, ensure that he is registered
with SEBI.

b) Satisfy yourself about the credentials of the broker by asking for

information/documents supporting his claims.

c) Keep a documentary proof of having made deposit of money or securities

with the broker.

d) Before activating your trading account, obtain clear idea from your broker
about all brokerage, commissions, fees and other charges which will be levied
on your trades
.
e) Furnish details in full as are required by the broker as required in “know your
client” (KYC) norms.

f) Ensure that a contract note is issued by the broker which contains complete
records of every transaction within 24hrs of the execution of the contract.

g) In case pay-out of money and / or securities is not received on the next

working day after date of pay-out, follow up with the concerned broker for its
release. If it is not released within five working days, ensure to lodge a
complaint immediately with the Investors’ Grievance Cell of the exchange.

h) Ensure to receive a complete ‘Statement of Accounts’ for both funds and

securities settlement every quarter.
 PROCESS OF TRADING

The normal course of online trading in the Indian market context is placed below:

Step 1. Investor / trader decides to trade

Step 2. Places order with a broker to buy / sell the required quantity of
respective securities

Step 3. Best priced order matches based on price-time priority

Step 4. Order execution is electronically communicated to the broker’s terminal

Step 5. Trade confirmation slip issued to the investor / trader by the broker

Step 6. Within 24 hours of trade execution, contract note is issued to the

investor / trader by the broker

Step 7 Pay-in of funds and securities before T+2 day

Step 8. Pay-out of funds and securities on T+2 day

 LIMITATION OF STUDY

The major factor of this project is the paucity of time factor. The available time
was not enough compared to the topic in hand? The time factor did not permit
to go into the insight of the problem area. It was not easy to come up with inner
hidden facts, as direct involvement was not done. The primary data was
collected in the shortage of time.
 BIBLIOGRAPHY

CAPITAL MARKET –THE INDIAN FINANCIAL SCENE BY

N GOPALSAMY

Panchali, Jinesh N. "Excellence in Corporate Governance" a monograph,

Indian Institute of Capital Markets, 2003

Arumugam, S 'Indian Capital Markets', Proceedings of Capital Market Conference

1999,
Allied Publishers, 2001 (Edited)

Sahadevan K. G. and Thiripalraju, M. 'Mutual Funds - Fact Book 1995', UTI Institute of
Capital
Markets, Mumbai, 1995

Hiremath, C. V, 'Directory of Mutual Funds in India - 1997', AMFI & UTI Institute of
Capital Markets,
Mumbai, 1997 (Compiled)