LIST OF ABBREVIATIONS .....................................................................................................................................

5
CHAPTER 1: AN OVERVIEW OF THE INDIAN SECURITIES MARKET ............................................8
1.1 MARKET SEGMENTS ......................................................................................................................................... 9
1.1.1 Primary Market...........................................................................................................................................9
1.1.2 Secondary Market.......................................................................................................................................9
1.2 KEY INDICATORS OF SECURITIES MARKET................................................................................................ 9
1.2.1 Index..............................................................................................................................................................9
1.2.2 Market Capitalisation.................................................................................................................................9
1.2.3 Market Capitalisation Ratio....................................................................................................................10
1.2.4 Turnover .....................................................................................................................................................10
1.2.5 Turnover Ratio...........................................................................................................................................10
1.3 PRODUCTS AND PARTICIPANTS ................................................................................................................... 10
1.3.1 Products......................................................................................................................................................10
1.3.2 Participants................................................................................................................................................10
1.4 MARKET SEGMENTS AND THEIR PRODUCTS ............................................................................................ 11
1.5 REFORMS IN INDIAN SECURITIES MARKETS ........................................................................................... 12
CHAPTER 2: TRADING MEMBERSHIP ..........................................................................................................15
2.1 STOCK BROKERS............................................................................................................................................. 15
2.2 NSE MEMBERSHIP ......................................................................................................................................... 15
2.2.1 New Membership.......................................................................................................................................16
2.2.2 Eligibility Criteria for Membership at NSE..........................................................................................17
2.2.3 Admission Procedure for New Membership.........................................................................................24
2.3 SURRENDER OF TRADING MEMBERSHIP.................................................................................................... 25
2.4 SUSPENSION & EXPULSION OF MEMBERSHIP........................................................................................ 27
2.4.1 Basis of Suspension of Membership.......................................................................................................27
2.4.2 Suspension of Business.............................................................................................................................28
2.4.3 Removal of Suspension.............................................................................................................................29
2.4.4 Consequences of Suspension...................................................................................................................29
2.4.5 Consequences of Expulsion.....................................................................................................................29
2.5 DECLARATION OF DEFAULTER ..................................................................................................................... 30
2.6 AUTHORISED PERSONS ................................................................................................................................. 31
2.7 SUB -BROKERS................................................................................................................................................. 31
2.7.1 Eligibility....................................................................................................................................................32
2.7.2 Registration................................................................................................................................................32
2.7.3 Cancellation of Registration...................................................................................................................32
2.8 BROKER-CLIENTS RELATIONS ..................................................................................................................... 33
2.8.1 Client Registration Documents...............................................................................................................33
2.8.2 Unique Client Code (UCC).....................................................................................................................34
2.8.3 Margins from the Clients.........................................................................................................................34
2.8.4 Execution of Orders ..................................................................................................................................34
2.8.5 Contract Note.............................................................................................................................................34
2.8.6 Payments/Delivery of Securities to the Clients....................................................................................35
2.8.7 Brokerage...................................................................................................................................................35
2.8.8 Segregation of Bank Accounts................................................................................................................35
2.8.9 Segregation of Demat (Beneficiary) Accounts.....................................................................................35
2.9 SUB -BROKER-CLIENTS RELATIONS .......................................................................................................... 36
2.9.1 Relationship with clients..........................................................................................................................36
2.9.2 Contract notes............................................................................................................................................36
2.9.3 Securities/ Funds.......................................................................................................................................36
2.10 INVESTOR SERVICE CELL AND ARBITRATION....................................................................................... 37
2.11 CODE OF ADVERTISEMENT ........................................................................................................................ 37
CHAPTER 3: TRADING..........................................................................................................................................40
1

3.1 INTRODUCTION................................................................................................................................................ 40
3.2 NEAT SYSTEM................................................................................................................................................. 42
3.3 MARKET T YPES ................................................................................................................................................ 42
3.4 T RADING SYSTEM USERS HIERARCHY...................................................................................................... 43
3.5 LOCAL DATABASE ........................................................................................................................................... 43
3.6 MARKET PHASES............................................................................................................................................. 44
3.7 LOGGING ON.................................................................................................................................................... 46
3.8 LOG OFF/EXIT FROM THE APPLICATION................................................................................................... 48
3.9 NEAT SCREEN ................................................................................................................................................ 49
3.10 INVOKING AN INQUIRY SCREEN............................................................................................................... 51
3.10.1 Market Watch ..........................................................................................................................................51
3.10.2 Security Descriptor.................................................................................................................................52
3.10.3 Market by Price.......................................................................................................................................53
3.10.4 Previous Trades ......................................................................................................................................54
3.10.5 Outstanding Orders................................................................................................................................55
3.10.6 Activity Log..............................................................................................................................................56
3.10.7 Order Status.............................................................................................................................................57
3.10.8 Snap Quote...............................................................................................................................................58
3.10.9 Market Movement...................................................................................................................................58
3.10.10 Market Inquiry.......................................................................................................................................59
3.10.11 Auction Inquiry......................................................................................................................................60
3.10.12 Security/Portfolio List..........................................................................................................................61
3.10.13 Multiple Index Broadcast and Graph................................................................................................62
3.10.14 Online Backup.......................................................................................................................................63
3.10.15 Basket Trading ......................................................................................................................................63
3.10.16 Buy Back Trades...................................................................................................................................65
3.10.17 Supplementary Functions....................................................................................................................66
3.11 ORDER MANAGEMENT ................................................................................................................................. 81
3.11.1 Entering Orders ......................................................................................................................................81
3.11.2 Order Modification.................................................................................................................................86
3.11.3 Order Cancellation.................................................................................................................................86
3.11.4 Order Matching.......................................................................................................................................87
3.12 T RADE MANAGEMENT.................................................................................................................................. 90
3.12.1 Trade Cancellation.................................................................................................................................90
3.13 AUCTION.................................................................................................................................................... 91
3.13.1 Entering Auction Orders........................................................................................................................92
3.13.2 Auction Order Modification..................................................................................................................93
3.13.3 Auction Order Cancellation..................................................................................................................93
3.13.4 Auction Order Matching........................................................................................................................93
3.14 LIMITED PHYSICAL MARKET ...................................................................................................................... 94
3.14.1 Salient Features of Limited Physical Market.....................................................................................94
3.15 BLOCK T RADING SESSION........................................................................................................................ 94
3.16 RETAIL DEBT MARKET (RDM)................................................................................................................. 95
3.16.1 Members eligible for trading in RDM segment .................................................................................95
3.16.2 Trading Parameters................................................................................................................................95
3.16.3 Market Timings and Market Holidays.................................................................................................95
3.16.4 Trading System........................................................................................................................................95
3.16.5 Trading Cycle..........................................................................................................................................97
3.17 T RADING INFORMATION DOWNLOADED TO MEMBERS ....................................................................... 97
3.18 INTERNET BROKING .................................................................................................................................... 98
3.19 CO-LOCATION........................................................................................................................................... 99
3.20 WIRELESS APPLICATION PROTOCOL (WAP)...........................ERROR! BOOKMARK NOT DEFINED .
CHAPTER 4: CLEARING, SETTLEMENT AND RISK MANAGEMENT.......................................... 100

4.1 INTRODUCTION..............................................................................................................................................100
4.2 KEY TERMINOLOGIES USED IN CLEARING AND SETTLEMENT PROCESS .........................................100
4.3 T RANSACTION CYCLE...................................................................................................................................101
4.4 SETTLEMENT AGENCIES ..............................................................................................................................102
4.5 CLEARING AND SETTLEMENT PROCESS...................................................................................................103
4.5.1 Clearing Process.................................................................................................................................... 103
4.5.2 Settlement Process................................................................................................................................. 104
4.5.3 Settlement Cycle..................................................................................................................................... 106
4.6 SECURITIES AND F UNDS SETTLEMENT....................................................................................................108
4.6.1 Securities Settlement.............................................................................................................................. 108
4.6.2 Funds Settlement.................................................................................................................................... 111
4.7 SHORTAGES HANDLING ..............................................................................................................................112
4.7.1 Valuation Prices..................................................................................................................................... 113
4.7.2 Close-out Procedures........................................................................................................................... 113
4.8 RISKS IN SETTLEMENT ................................................................................................................................116
4.9 RISK MANAGEMENT......................................................................................................................................117
4.9.1 Capital Adequacy Requirements ......................................................................................................... 117
4.9.2 Margins.................................................................................................................................................... 118
4.9.3 On-Line Exposure Monitoring............................................................................................................. 126
4.9.4 Off-line Monitoring................................................................................................................................ 126
4.9.5 Index-based Market-wide Circuit Breakers/ Price Bands for Securities..................................... 127
4.9.6 Settlement Guarantee Mechanism....................................................................................................... 127
4.10 INTERNATIONAL SECURITIES IDENTIFICATION NUMBER.................................................................127
4.11 DATA AND REPORT DOWNLOADS ..........................................................................................................129
4.11.1 Obligation Reports............................................................................................................................... 129
4.11.2 Custodial Trade Reports..................................................................................................................... 129
4.11.3 Deliveries Reports................................................................................................................................ 130
4.11.4 Funds Reports....................................................................................................................................... 130
4.11.5 Auction Reports.................................................................................................................................... 131
4.11.6 Margin Reports .................................................................................................................................... 131
4.11.7 Miscellaneous Reports........................................................................................................................ 131
CHAPTER 5: LEGAL FRAMEWORK ............................................................................................................ 133
5.1 SEBI (INTERMEDIARIES) REGULATIONS, 2008.................................................................................134
5.2 SEBI (PROHIBITION OF INSIDER T RADING ) REGULATIONS , 1992..............................................135
5.2.1 Prohibition on Dealing, Communicating or Counseling (Chapter II).......................................... 136
5.2.2 Investigation (Chapter III).................................................................................................................... 137
5.2.3 Disclosures and Internal Procedure for Prevention of Insider Trading (Chapter IV) ............. 137
5.3 SEBI (PROHIBITION OF FRAUDULENT AND UNFAIR T RADE PRACTICES RELATING TO
SECURITIES MARKET) REGULATIONS , 2003 .................................................................................................138
5.3.1 Prohibition of Certain Dealings in Securities................................................................................... 139
5.3.2 Prohibition of Manipulative, Fraudulent and Unfair Trade Practices ........................................ 140
5.4 T HE DEPOSITORIES ACT, 1996...............................................................................................................141
5.5 INDIAN CONTRACT ACT, 1872 ................................................................................................................143
5.6 INCOME T AX ACT, 1961 ..........................................................................................................................144
CHAPTER 6: FUNDAMENTAL VALUATION CONCEPTS ................................................................... 148
6.1 T IME VALUE OF MONEY...............................................................................................................................148
6.1.1 Future Value of a Single Cash Flow................................................................................................... 148
6.1.2 Future Value of an Annuity.................................................................................................................. 148
6.1.3 Present Value of a Single Cash Flow................................................................................................. 149
6.1.4. Present Value of an Annuity................................................................................................................ 149
6.2 UNDERSTANDING F INANCIAL STATEMENTS...........................................................................................149
6.2.1 Comparative Financial Statements..................................................................................................... 150
6.2.2 Common Size Statements...................................................................................................................... 150
3

6.2.3 Ratio Analysis......................................................................................................................................... 151

Model Test Paper..145

List of Abbreviations
ADs
AT
AI
AL
ASBA
ADRs
AL
AON
BOVL
BSE
BM
CADT
CDS
CD
CB
CLI
CI
CM
CR
CSD
CDSL
CM
Co.
CTCL
DEA
DFDS
DFRS
DMA
DP
DPG
DQ
DvP
ECBs
EPI
FCCBs
FI
FII
FIPB
F&O
FTP
FPO
GDRs
HUF
ICDR
IEPF
IFSD
INST
IOC
IPO
IPF

Authorised Dealers
Algorithmic Trading
Auction Inquiry
Activity Log
Application Supported by Blocked Amount
American Depository Receipts
Activity Log
All or None
Branch Order Value Limit
Bombay Stock Exchange
Branch Manager
Client Allocation Details
Currency Derivatives Segment
Cum- Dividend
Cum- Bonus
Client
Cum-Interest
Clearing Member
Cum- Rights
Collateral Security Deposit
Central Depositories Services Ltd.
Capital Market
Company
Computer to Computer Link
Department of Economic Affairs
Demat Final Delivery Statement
Demat Final Receipt Statement
Direct Market Access
Depository Participant
Dominant Promoter Group
Disclosed Quantity
Delivery versus Payment
External Commercial Borrowings
Early Pay-In
Foreign Currency Convertible Bonds
Financial Institution
Foreign Institutional Investors
Foreign Investment Promotion Board
Futures and Options
File Transfer Protocol
Follow-on Public Offer
Global Depository Receipts
Hindu Undivided Family
Issue of Capital and Disclosure Requirements
Investor Education and Protection Fund
Initial Free Security Deposit
Institutional
Immediate or Cancel
Initial Public Offer
Investor Protection Fund
5

ISC
ISIN
KYC
LTP
MBP
MAC
MF
MI
MM
MCA
MCA
MRC
MTM
MW
NEAT
NCFM
NCIT
ND
NISM
NOC
NSCCL
NSDL
NSE
NT
O
OCXL
OTC
OECLOB
OO
OM
OS
PAN
PCM
PFRDA
PRO
PT
RBI
RDD
RETDEBT
RDM
SAT
SBTS
SC(R)A
SC(R)R
SEBI
SL
SLBS
SGF
SQ
SRO
STT
SURCON
T+2

Investor Service Cell

International Securities Identification Number
Know Your Client
Last Trade Price
Market By Price
Membership Approval Committee
Mutual Funds
Market Inquiry
Market Movement
Member Constituent Agreement
Ministry of Corporate Affairs
Membership Recommendation Committee
Mark To Market
Market Watch
National Exchange for Automated Trading
NSE's Certification in Financial Markets
Non Custodian Institutional Trade
No Delivery
National Institute of Securities Market
No Objection Certificate
National Securities Clearing Corporation Ltd.
National Securities Depository Ltd.
National Stock Exchange
Negotiated Trade
Odd Lot market
Order Cancellation
Over The Counter
Open Electronic Consolidated Limit Order Book
Outstanding Orders
Order Modification
Order Status
Permanent Account Number
Professional Clearing Member
Pension Fund Regulatory and Development Fund
Proprietary
Previous Trades
Reserve Bank of India
Risk Disclosure Document
Retail Debt
Retail Debt Market
Securities Appellate Tribunal
Screen Based Trading System
Securities Contracts (Regulation) Act, 1956
Securities Contracts (Regulation) Rules, 1957
Securities and Exchange Board of India
Stop Loss
Securities Lending and Borrowing Scheme
Settlement Guarantee Fund
Snap Quote
Self Regulatory Organization
Securities Transaction Tax
Surveillance and Control
Second day from the trading day
6

TFT
TFTS
TM
UCC
UDR
UTI
UOVL
VaR
VIX
VSAT
WDM
XB
XD
XI
XR

Trade for Trade

Trade for Trade Surveillance
Trading Member
Unique Client Code
Unique Documentary Requirement
Unit Trust of India
User Order Value Limit
Value at Risk
Volatility Index
Very Small Aperture Terminal
Wholesale Debt Market
Ex- Bonus
EX-Dividend
Ex-Interest
Ex- Rights

References and suggested readings

The readings suggested here are supplementary in nature and would prove to be
helpful for those interested in acquiring advanced knowledge about Capital Markets.
1.
2.
3.
4.
5.
6.
7.

www.nseindia.com
www.sebi.gov.in
www.rbi.org.in
www.finmin.nic.in
Rules, Regulations and Byelaws of NSEIL & NSCCL
Indian Securities Market: A Review - NSEIL publication
NSE Newsletter NSEIL publication

CHAPTER 1: AN OVERVIEW OF THE INDIAN

SECURITIES MARKET
1.1 Market Segments
Securities markets provide a channel for allocation of savings to those who have a
productive need for them. The securities market has two interdependent and
inseparable segments: (i) primary market and (ii) secondary market.
1.1.1 Primary Market
Primary market provides an opportunity to the issuers of securities, both
Government and corporations, to raise resources to meet their requirements of
investment. Securities, in the form of equity or debt, can be issued in
domestic /international markets at face value, discount or premium.
The primary market issuance is done either through public issues or private
placement. Under Companies Act, 1956, an issue is referred as public if it results in
allotment of securities to 50 investors or more. However, when the issuer makes an
issue of securities to a select group of persons not exceeding 49 and which is neither
a rights issue nor a public issue it is called a private placement.
1.1. 2 Secondary Market
Secondary market refers to a market where securities are traded after being offered
to the public in the primary market or listed on the Stock Exchange. Secondary
market comprises of equity, derivatives and the debt markets. The secondary market
is operated through two mediums, namely, the Over-the-Counter (OTC) market and
the Exchange-Traded market. OTC markets are informal markets where trades are
negotiated.

1.2 Key Indicators of Securities Market

1.2.1 Index
An Index is used to give information about the price movements of products in the
financial, commodities or any other markets. Stock market indices are meant to
capture the overall behaviour of the equity markets. The stock market index is
created by selecting a group of stocks that are representative of the whole market or
a specified sector or segment of the market. The bluechip index of NSE is S&P CNX
Nifty.
1.2.2 Market Capitalisation
Market capitalisation is defined as value of all listed shares on the countrys
exchanges. It is computed on a daily basis. Market capitalisation of a particular
company on a particular day can be computed as product of the number of shares
outstanding and the closing price of the share. Here the number of outstanding
shares refers to the issue size of the stock.
Market Capitalisation = Closing price of share * Number of outstanding shares

Similarly, to compute the market capitalization of all companies listed on an

Exchange we aggregate the market capitalization of all the companies traded on the
Exchange.
1.2.3 Market Capitalisation Ratio
The market capitalization ratio is defined as market capitalization of stocks divided
by GDP. It is used as a measure of stock market size.
1.2.4 Turnover
Turnover for a share is computed by multiplying the traded quantity with the price at
which the trade takes place. Similarly, to compute the turnover of the companies
listed at the Exchange we aggregate the traded value of all the companies traded on
the Exchange.
1.2.5 Turnover Ratio
The turnover ratio is defined as the total value of shares traded on a countrys stock
Exchange for a particular period divided by market capitalization at the end of the
period. It is used as a measure of trading activity or liquidity in the stock markets.
Turnover Ratio= Turnover at Exchange / Market Capitalisation at Exchange

1.3 Products and Participants

1.3.1 Products
Financial markets facilitate reallocation of savings from savers to entrepreneurs.
Savings are linked to investments by a variety of intermediaries through a range of
complex financial products called securities. Under the Securities Contracts
(Regulation) Act [SC(R)A], 1956, securities include (i) shares, bonds, scrips, stocks
or other marketable securities of like nature in or of any incorporate company or
body corporate, (ii) government securities, (iii) derivatives of securities, (iv) units of
collective investment scheme, (v) interest and rights in securities, and security
receipt or any other instruments so declared by the central government. Broadly,
securities can be of three types - equities, debt securities and derivatives.
1.3.2 Participants
The securities market has essentially three categories of participants (i) the investors,
(ii) the issuers, (iii) the intermediaries (Figure 1.1). These participants are regulated
by the Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI),
Ministry of Corporate Affairs (MCA) and the Department of Economic Affairs (DEA) of
the Ministry of Finance.
Market Participants

Investors

Issuers

Figure 1.1 Market Participants

10

Intermediaries

Table 1.1 below provides the information on Market participants in India.

Table: 1.1 Market Participants in India
Market Participants
Investors
Individual Investors
Corporate Investors
Foreign Venture Capital Investors
FIIs
Depositories
Stock Exchanges
With Equities Trading
With Debt Market Trading
With Derivative Trading
With Currency Derivatives
Brokers
Corporate Brokers
Sub-brokers
Portfolio Managers
Custodians
Registrars to an issue & Share Transfer Agents
Primary Dealers
Merchant Bankers
Bankers to an Issue
Debenture Trustees
Underwriters
Venture Capital Funds
Mutual Funds
Collective Investment Schemes

1.4 Market Segments and their Products

The Exchange (NSE) provides trading in four different segments - Wholesale Debt
Market, Capital Market, Futures and Options and Currency Derivatives Segment as
depicted in the figure 1.2 below.
Market
Segments
Wholesale
Debt
Market

Capital
Market

Futures and
Options

Currency
Derivatives

Figure 1.2: Market Segments

(i) Wholesale Debt Market (WDM) Segment: This segment at NSE commenced
its operations in June 1994. It provides the trading platform for wide range of debt

11

securities which includes State and Central Government securities, T-Bills, PSU
Bonds, Corporate debentures, Commercial Papers, Certificate of Deposits etc.
(ii) Capital Market (CM) Segment: This segment at NSE commenced its
operations in November 1994. It offers a fully automated screen based trading
system, known as the National Exchange for Automated Trading (NEAT) system.
Various types of securities e.g. equity shares, warrants, debentures etc. are traded
on this system.
(iii) Futures & Options (F&O) Segment:
This segment provides trading in
derivatives instruments like index futures, index options, stock options, and stock
futures, and commenced its operations at NSE in June 2000.
(iv) Currency Derivatives Segment (CDS) Segment: This segment at NSE
commenced its operations on August 29, 2008, with the launch of currency futures
trading in US Do llar-Indian Rupee (USD-INR). Trading in other currency pairs like

Euro-INR, Pound Sterling-INR and Japanese Yen-INR was further made available for
trading in February 2010. Interest rate futures was another product made available
for trading on this segment with effect from August 31, 2009.

1.5 Reforms in Indian Securities Markets

Over a period, the Indian securities market has undergone remarkable changes and
grown exponentially, particularly in terms of resource mobilisation, intermediaries,
the number of listed stocks, market capitalisation, turnover and investor population.
The following paragraphs list the principal reform measures undertaken since 1992.
Creation of Market Regulator: Securities and Exchange Board of India (SEBI), the
securities market regulator in India, was established under SEBI Act 1992, with the
main objective and responsibility for (i) protecting the interests of investors in
securities, (ii) promoting the development of the securities market, and (iii)
regulating the securities market.
Screen Based Trading: Prior to setting up of NSE, the trading on stock exchanges
in India was based on an open outcry system. The system was inefficient and time
consuming because of its inability to provide immediate matching or recording of
trades. In order to provide efficiency, liquidity and transparency, NSE introduced a
nation-wide on-line fully automated screen based trading system (SBTS) on the CM
segment on November 3, 1994.
Reduction of Trading Cycle: Earlier, the trading cycle for stocks, based on type of
securities, used to vary between 14 days to 30 days and the settlement involved
another fortnight. The Exchanges, however, continued to have different weekly
trading cycles, which enabled shifting of positions from one Exchange to another. It
was made mandatory for all Exchanges to follow a uniform weekly trading cycle in
respect of scrips not under rolling settlement. In December 2001, all scrips were
moved to rolling settlement and the settlement period was reduced progressively
fro m T+5 to T+3 days. From April 2003 onwards, T+2 days settlement cycle is being
followed.
Equity Derivatives Trading: In order to assist market participants in managing
risks better through hedging, speculation and arbitrage, SC(R) A was amended in
1995 to lift the ban on options in securities. Trading in derivatives, however, took off
12

in 2000 with index futures after suitable legal and regulatory framework was put in
place. The market presently offers index futures, index options, single stock futures
and single stock options.
Demutualisation: Historically, stock exchanges were owned, controlled and
managed by the brokers. In case of disputes, integrity of the stock exchange
suffered. NSE, however, was set up with a pure demutualised governance structure,
having ownership, management and trading with three different sets of people.
Currently, all the stock exchanges in India have a demutualised set up.
Dematerialisation: As discussed before, the old settlement system was inefficient
due to (i) the time lag for settlement and (ii) the physical movement of paper-based
securities. To obviate these problems, the Depositories Act, 1996 was passed to
provide for the establishment of depositories in securities with the objective of
ensuring free transferability of securities with speed and accuracy. There are two
depositories in India, viz. NSDL and CDSL. They have been set up to provide
instantaneous electronic transfer of securities. Demat (Dematerialised) settlement
has eliminated the bad deliveries and associated problems. To prevent physical
certificates from sneaking into circulation, it has been made mandatory for all newly
issued securities to be compulsorily traded in dematerialised form. Now, the public
listed companies making IPO of any security for Rs.10 crore or more have to make
the IPO only in dematerialised form.
Clearing Corporation: The anonymous electronic order book ushered in by the NSE
did not permit members to assess credit risk of the counter-party and thus
necessitated some innovation in this area. To address this concern, NSE had set up
the first clearing corporation, viz. National Securities Clearing Corporation Ltd.
(NSCCL), which commenced its operations in April 1996.
Investor Protection: In order to protect the interest of the investors and promote
awareness, the Central Government (Ministry of Corporate Affairs 1 ) established the
Investor Education and Protection Fund (IEPF) in October 2001. With the similar
objectives, the Exchanges and SEBI also maintain investor protection funds to take
care of investor claims. SEBI and the stock exchanges have also set up investor
grievance / service cells for redress of investor grievance. All these agencies and
investor associations also organise investor education and awareness programmes.
Globalisation: Indian companies have been permitted to raise resources overseas
through issue of ADRs, GDRs, FCCBs and ECBs. Further, FIIs have been permitted to
invest in all types of securities, including government securities and tap the domestic
market. The investments by FIIs enjoy full capital account convertibility. They can
invest in a company under portfolio investment route upto 24% of the paid up capital
of the company. This can be increased up to the sectoral cap/statutory ceiling, as
applicable to the Indian companies concerned, by passing a resolution of its Board of
Directors followed by a special resolution to that effect by its general body. The
Indian stock exchanges have been permitted to set up trading terminals abroad. The
trading platform of Indian exchanges is now accessible through the Internet from
anywhere in the world. RBI permitted two-way fungibility for ADRs / GDRs, which
means that the investors (foreign institutional or domestic) who hold ADRs / GDRs
can cancel them with the depository and sell the underlying shares in the market.

Earlier known as Department of Company Affairs.

13

Launch of India VIX 2 : Volatility index is a measure of markets expectation of

volatility over the near term. It measures the amount by which an underlying Index
is expected to fluctuate in the near term, based on the order book of the underlying
index options. Indias first volatility index, India VIX (based on the Nifty 50 Index
Option prices) was launched by NSE in April 2008.
Direct Market Access: In April 2008, SEBI allowed the direct market access (DMA)
facility to the institutional investors. DMA allows brokers to offer their respective
clients, direct access to the Exchange trading system through the brokers
infrastructure without manual intervention by the broker.
Launch of Securities Lending & Borrowing Scheme: In April 2008, the
Securities Lending & Borrowing mechanism was allowed. It allows market
participants to take short positions effectively with less cost.
Launch of Currency Futures: On August 29, 2008, NSE launched trading in
currency future contracts in the USD-INR pair for the first time in India. Trading in
other currency pairs like Euro INR, Pound Sterling INR and Japanese Yen was
further made available for trading in March 2010.
ASBA: Application Supported by Blocked Amount (ASBA) is a major primary market
reform. It enables investors to apply for IPOs / FPOs and rights issues without
making a payment. Instead, the amount is blocked in investors own account and
only an amount proportionate to the shares allotted goes out when allotment is
finalized.
Launch of Interest Rate Futures: On August 31, 2009, futures on interest rate
was launched on the National Stock Exchange.
Issue of Capital and Disclosure Requirements (ICDR) Regulations 2009: In
August 2009, the SEBI issued Issue of Capital and Disclosure Requirements (ICDR)
Regulations 2009, replacing the Disclosure and Investor Protection (DIP) Guidelines
2000. ICDR Regulations 2009 would govern all disclosure norms regarding issue of
securities.

VIX is a trademark of Chicago Board Options Exchange, Incorporated ("CBOE") and

Standard & Poors has granted a license to NSE, with permission from CBOE, to use such mark
in the name of the India VIX and for purposes relating to the India VIX.

14

CHAPTER 2: TRADING MEMBERSHIP

2.1 Stock Brokers
A stock broker is an intermediary who arranges to buy and sell securities on the
behalf of clients (the buyer and the seller). According to SEBI (Stock Brokers and
Sub-Brokers) Regulations, 1992, a stockbroker is member of a stock exchange and
requires to hold a certificate of registration from SEBI in order to buy, sell or deal in
securities. SEBI grants a certificate to a stock broker subject to the conditions that
the stock broker:
(a)
(b)
(c)

(d)
(e)

holds the membership of any stock exchange;

should abide by the rules, regulations and bye-laws of the stock
exchange or stock exchanges of which he is a member;
should obtain prior permission of SEBI to continue to buy, sell or deal
in securities in any stock exchange in case of any change in the status
and constitution;
should pay the amount of fees for registration in the prescribed
manner; and
should take adequate steps for redress of grievances of the investors
within one month of the date of the receipt of the complaint and keep
SEBI informed about the number, nature and other particulars of the
complaints.

While considering the application of an entity for the grant of registration as a stock
broker, SEBI checks out if the applicant:
(a)
(b)
(c)
(d)

is eligible to be admitted as a member of a stock exchange;

has the necessary infrastructure like adequate office space, equipment
and manpower to effectively discharge his activities;
has any past experience in the business of buying, selling or dealing in
securities;
is subjected to any disciplinary proceedings under the rules,
regulations and bye-laws of a stock exchange with respect to his
business as a stock-broker involving either himself or any of his
partners, directors or employees.

2.2 NSE Membership

There are no entry/exit barriers to the membership of NSE. Anybody can become a
member by complying with the prescribed eligibility criteria and exit by surrendering
membership without any hidden cost.
The members are admitted to different segments of the Exchange subject to the
provisions of the Securities Contracts (Regulation) Act, 1956, the SEBI Act, 1992,
the rules, circulars, notifications, guidelines, etc. issued hereunder and the byelaws,

15

rules and regulations of the Exchange. The trading members of NSE have certain
benefits, which includes:
(a)
(b)
(c)
(d)

Access to a nation-wide trading facility for equities, derivatives, debt

and hybrid instruments / products;
Ability to provide a fair, efficient and transparent securities market to
the investors;
Use of state-of-the-art electronic trading systems and technology;
Dealing with an organisation which follows strict standards for trading
& settlement at par with those available at the top international
bourses and constantly strives to move towards a global marketplace
in the securities industry.

2.2.1 New Membership

The persons eligible to become trading members of Exchange are:
(a)
(b)
(c)
(d)
(e)

(f)

Individuals;
Partnership firms registered under the Indian Partnership Act, 1932.
Institutions, including subsidiaries of banks engaged in financial
services;
Banks for Currency Derivatives Segment;
Body corporates including companies as defined in the Companies Act,
1956. A company is eligible to be admitted as a member if:
i) It is formed in compliance with provisions of Section 12 of the
Companies Act 1956 which mentions about the mode of forming
incorporated company;
ii) It complies with the financial requirements and norms as may be
specified by SEBI;
iii) The directors of the company shouldnt have been disqualified for
being members of a stock exchange and should not have held the
offices of the directors in any company which had been a member
of the stock exchange and had been declared defaulter or expelled
by the stock exchange; and
Such other persons or entities as may be permitted from time to time
by RBI/SEBI under the Securities Contracts (Regulations) Rules, 1957.

Membership for Different Segments at NSE

Persons or Institutions desirous of securing admission as members (stock brokers)

on the Exchange may apply for membership on any one of the following segment
groups:
(a)
(b)
(c)
(d)
(e)
(f)
(g)

Wholesale Debt Market (WDM) Segment

Capital Market (CM) segment
Capital Market (CM) and Wholesale Debt Market (WDM) segment
Capital Market (CM) and Futures & Options (F&O) segment
Capital Market (CM), Futures & Options (F&O) segment and Wholesale
Debt Market (WDM) segment
Currency Derivatives (CD) segment with or without the above
mentioned segments.
Clearing Membership of National Securities Clearing Corporation Ltd.
(NSCCL) as a Professional Clearing Member (PCM). Professional
Clearing Members do not trade but only clear and settle trades
16

executed by other trading members (TMs). Professional clearing

membership is only applicable for the F&O and Currency Derivatives
segments.
In addition to the trading membership in the F&O segment, the trading member can
also take two types of clearing membership in the F&O Segment i.e. as a clearing
member and self clearing member. The self clearing members clear and settle the
trades executed by them only, either on their account or on account of their clients.
Trading members cum clearing members can clear and settle their own trades as
well as trades of other trading members.
Trading members registered in F&O segment and CD segment are eligible to trade in
interest rate futures market.
2.2.2 Eligibility Criteria for Membership at NSE
The standards for admission of members are laid down by the Exchange in terms of
corporate structure (shareholding pattern), capital adequacy (Paid up capital), net
worth, Interest Free Security Deposit (IFSD), Collateral Security Deposit (CSD), track
record, education, experience etc. This is done to ensure quality broking services so
as to build and sustain confidence among investors in the Exchanges operations.
Corporate Structure (Shareholding Pattern)
Securities markets are inherently volatile and risky, and hence risk containment
mechanisms are put in place by the stock exchange. One such risk containment tool
is the concept of Dominant Promoter/Shareholder Group which is very unique for
applicants acquiring membership on the NSE. The shareholders holding the majority
of shares have a dominant role in the affairs of the company. In case of any default
by the broking entity, the Exchange should be able to identify and take action
against the persons who are behind the company. The Exchange, therefore, needs to
know the background, financial soundness and integrity of the shareholders holding
such controlling interest. Hence, during the admission process (explained in the later
section of the book) the dominant shareholders are called for an interview with the
Membership Recommendation Committee (MRC).
Dominant Promoter norms are applicable to all trading members. The norms relating
to dominant promoters falls in different categories such as unlisted corporate trading
member, listed corporate trading member, corporate shareholders, banks, central or
state government owned finance and development institutions and foreign entitites,
which are given as under:
(i) Unlisted corporate trading member: In case of an unlisted corporate trading
member, there are three conditions under which the corporate trading member will
be eligible to constitute dominant promoter group. These conditions are given below:
If a person holds 51% of shares in the trading member corporate on his own or
together with
(a)

his relatives as defined under Companies Act 1956

17

(b)

(c)

person(s) falling within the definition of control 3 under the SEBI

(Substantial Acquisition of Shares and Takeovers) Regulations,
1997
the support of strategic investors in such corporate trading member.
(Strategic investors mean the corporates or individual investors that
add value to investments they make through industry and personal
ties that can assist companies in raising additional capital including
financial investors, venture capitalists and others who invest primarily
with the aim of generating a large return on their investment).

(ii) Listed corporate trading member: In case of listed corporate trading

members, any person(s) identified as promoter in the offer document or in any
document for offer of securities to the public or existing shareholders or in the
shareholding pattern disclosed by the corporate trading member under the
provisions of the Listing Agreement, whichever is later, would be eligible to
constitute dominant promoter group.
(iii) Corporate shareholders to be identified as dominant shareholders:
Corporate shareholder is allowed to be identified as dominant shareholders
(Dominant Promoter Group - DPG) of a corporate trading member provided that the
corporate shareholder identifies any person or persons as their dominant promoter
group as per the aforesaid norms applicable to the corporate trading member. In
case the dominant promoter group consists of more than one corporate shareholder,
the dominant promoter group should be identified separately for each such corporate
shareholder.
(iv) Banks, central or state government owned finance and/or development
institutions: The following entities are allowed to be identified as dominant
shareholder(s) provided they have a networth of at least Rs.50 crores:
(a)
(b)
(c)
(d)

Scheduled Banks;
Central or State Government owned Finance and/or Development
Institutions;
Any financial institution registered and regulated by any regulatory
authority such as RBI, SEBI, IRDA;
Any other entity that is fit to be identified as dominant shareholder in
the opinion of relevant authority.

(v) Foreign Entities: Foreign entities are allowed to take trading membership of
the Exchange through their Indian subsidiary under the automatic approval route
permitted by the government, subject to compliance with the following guidelines of
the RBI in this regard.
(a)
The promoting foreign entity or its subsidiary should be either a bank or
insurance organisation regulated by the Central Bank or such other appropriate
regulatory authority of that country
Or

Here control means the right to appoint majority of directors or to control the management
or policy decisions by virtue of the shareholding or management rights.

18

The promoting foreign entity or its subsidiary should be broking house/ participant in
the securities market that is registered or regulated by the relevant regulatory
authority of that country and that the relevant authority should be a member of
International Organisation of Securities Commission (IOSCO). The entity should have
a sound track record.
Or
The promoting foreign entity is one whose domestic arm or subsidiary is registered
with SEBI for participation in any domestic venture for custodial or Asset
Management services.
(b)
The promoting foreign entity shall hold, directly or indirectly not less than 51
% of the controlling stake in the applicant company proposing to take the trading
membership of the Exchange.
(c)
The net worth of the entity having controlling stake in the applicant company
or the promoting foreign entity should be at least Rs. 50 Crores.
A foreign entity is allowed to become part of the dominant promoter group of an
existing trading member corporate provided it meets the dominant promoter group
norms as applicable to Indian entities, FIPB (Foreign Investment Promotion Board)
norms / RBI norms and any other requirements of the Exchange / SEBI as may be
applicable from time to time.
Corporate trading members will also be allowed to change their shareholding pattern
so long as such change is within the above norms and the existing Dominant
Promoter Group (DPG) continues to hold controlling interest and prior approval from
the Exchange is obtained. Once a DPG is identified during admission, the same has
to be maintained at all points of time. In case of any change in the DPG, the trading
member is required to seek fresh approval of the Exchange as it is done at the time
of admission of new trading member and rules relating to the same apply. Inter-se
transfer of shareholding among the dominant promoters, however will be exempt
from the formalities as required in case of new trading membership. Any changes in
the shareholding require prior approval from the Exchange, except in case of
shareholding changes related to public shareholding in a listed company.

Failure to maintain the required level of shareholding by DPG is treated as a breach

of the continuing membership norms and tantamounts to reconstitution of the
trading member corporate. This is because the existing DPG would no longer hold
controlling interest in the trading member corporate or alternatively a new group
would have emerged with controlling stake. In such case the Exchange can initiate
disciplinary action including withdrawal of trading facility of such trading members.
Networth and Other Deposit Requirements
The networth of the member is calculated as summation of Capital and free
reserves less non allowable assets. Non allowable assets include fixed assets,
pledged securities, members card, non-allowable securities (unlisted securities), bad
deliveries, doubtful debts and advances, prepaid expenses, intangible assets and
30% marketable securities.
19

Deposit requirements are of two types i.e. Interest Free Security Deposit
(IFSD) and Collateral Security Deposit (CSD). IFSD has to be in liquid cash while
CSD can be in cash or non-cash form. Cash component means cash, bank
guarantees, fixed deposit receipts, units of money market mutual fund and gilt funds
and any other form of collateral as may be prescribed from time to time. Non-cash
component means all other forms of collateral deposits like deposit of approved list
of demat securities and units of the other mutual funds and any other form of
collateral as may be prescribed from time to time.
The eligibility criteria for corporates, individuals and partnership firms for different
segments of the Exchange are explained in Table 2.1 and 2.2 below.

20

Table 2.1: Eligibility Criteria for Membership-Corporates (Amount in Rs. Lakh)

Particulars/ Segments

CM

CM and F&O

WDM

Minimum Paid-up capital

Net Worth

30
100

30
100
(Membership in
CM segment and
Trading/Trading
and self clearing
membership
in F&O
segment)

30
200

CM and
WDM
30
200

300
(Membership in
CM segment and
Trading and
Clearing
membership in
F&O segment)

CM,WDM and
F&O
30
200
(Membership in
WDM segment,
CM segment and
Trading/Trading
and Self Clearing
membership in
F&O segment)

Interest Free Security

Deposit with NSEIL
Interest Free Security
Deposit with NSCCL

85

110

150

235

300
(Membership in
WDM segment,
CM segment
and
Trading and
Clearing
membership in
F&O segment)
260

15

15 *

NIL

15

15 *

Collateral Security
Deposit with NSCCL

25

25**

NIL

25

25**

Annual Subscription

NIL

NIL

NIL

Two
directors
should be
HSC.
Dealers
should
also have
passed
SEBI
approved
certificatio
n test for
Capital
Market
Module of
NCFM.

Two directors
should be HSC.
Dealers should
also have passed
SEBI approved
certification test
for Derivatives
and Capital
Market Module of
NCFM.

Two
directors
should be
HSC.
Dealers
should also
have passed
FIMMDANSE Debt
Market
(Basic
Module) of
NCFM.

Advance Minimum
Transaction Charges for
Futures Segment
Education

Experience

Two
Two directors
directors
should be HSC.
should be
Dealers should
HSC.
also have passed
Dealers
FIMMDA-NSE
should
Debt Market
also have
(Basic Module) of
passed
NCFM,
FIMMDACapital Market
NSE Debt
Module of
Market
NCFM.&
(Basic
SEBI approved
Module) of
certification test
NCFM &
for Derivatives
Capital
Market
Module of
NCFM.
---------------Two year's experience in securities market-----------------------

Track Record

The Directors should not be defaulters on any stock exchange. They must not
be debarred by SEBI for being associated with capital market as
intermediaries. They must be engaged solely in the business of securities and
must not be engaged in any fund-based activity.
Net worth requirement for Professional Clearing members in F&O segment is Rs. 300 lakhs. Further, a
Professional Clearing member needs to bring IFSD of 25 lakhs with NSCCL and Collateral Security Deposit
(CSD) of 25 lakh with NSCCL as deposits.
*Additional IFSD of 25 lakhs with NSCCL is required for Trading and Clearing members (TM-CM) and for
Trading and Self clearing members (TM/SCM).
** Additional Collateral Security Deposit (CSD) of 25 lakhs with NSCCL is required for Trading and
Clearingmembers (TM-CM) and for Trading and Self clearing members (TM/SCM). In addition, a member
clearing for others is required to bring in IFSD of Rs. 2 lakh and CSD of Rs. 8 lakh per trading member he
undertakes to clear in the F&O segment.

21

Table 2.2: Eligibility Criteria for Membership- Individuals/ Partnership Firms

Particulars

CM

CM and F&O

WDM

Net Worth
75 (Membership in CM
segment and Trading
membership in F&O
segment)
100 (Membership in CM
segment and Trading and
Self clearing membership
in the F&O segment)

75

(Amount in Rs. lakh)

CM and
CM,WDM and
WDM
F&O
200
(Membership in
WDM segment,
CM segment and
Trading/Trading
and Self Clearing
membership in
F&O segment)

200

200

300
(Membership in
WDM
segment,CM
segment and
Trading and
clearing
membership on
F&O segment)

300 (Membership in CM
segment and Trading and
Clearing membership in
F&O segment)
Interest Free
Security Deposit
(IFSD) with NSEIL
Interest Free
Security Deposit
(IFSD) with NSCCL
Collateral Security
Deposit (CSD) with
NSCCL
Annual Subscription
Advance Minimum
Transaction Charges
for Futures Segment
Track Record

26.5

51.5

150

176.5

201.5

6*

NIL

6*

17.5

17.5 **

NIL

17.5

17.5 **

0.5

0.5

1.5

1.5

NIL

NIL

NIL

The Partners/Proprietor should not be defaulters on any stock exchange. They

must not be debarred by SEBI for being associated with capital market as
intermediaries. They must be engaged solely in the business of securities and must
not be engaged in any fund-based activity.

*Additional IFSD of 25 lakhs with NSCCL is required for Trading and Clearing Members (TM-CM) and for
Trading and Self clearing members (TM/SCM).
** Additional Collateral Security Deposit (CSD) of 25 lakh with NSCCL is required for Trading and
Clearing members(TM-CM) and for Trading and Self clearing member (TM/SCM).

In addition to certain eligibility criterion, there are certain professional requirements

for clearing me mbership as described in Table 2.3 below:
Table 2.3: Requirements for Professional Clearing Membership
(Amount in Rs. lakh)
Particulars
Eligibility
Net Worth
Interest Free Security
Deposit (IFSD) *

CM Segment

F&O Segment

Trading Member of NSE/SEBI Registered Custodians/Recognised Banks

300

300

25

25

Collateral Security Deposit

(CSD)

25

25

Annual Subscription

2.5

Nil

22

*The Professional Clearing Member (PCM) is required to bring in IFSD of Rs. 2 lakh and CSD of Rs. 8 lakh
per trading member whose trades he undertakes to clear in the F&O segment and IFSD of Rs. 6 lakh and
CSD of Rs. 17.5 lakh (Rs. 9 lakh and Rs. 25 lakh respectively for corporate Members) per trading member
in the CM segment.

The following Table 2.4 provides the eligibility criterion for trading membership and
clearing membership for currency derivatives.
Table 2.4: Currency Derivatives- Corporates, Individuals and Firms
Particulars

Networth
Interest Free
Security
Deposit with
NSEIL
Collateral
Security
Deposit with
NSEIL
Interest Free
Security
Deposit with
NSCCL
Collateral
Security
Deposit with
NSCCL
Education
Experience
Track Record

NSE Members
Trading
Member
ship

Trading
cum
Clearing
Member
ship

100

1000

NCDEX Members
Trading
Member
ship

(Amount in Rs. Lakh)

New Applicants

Trading cum
Clearing
Membership

Trading
Member
ship

Trading cum
Clearing
Membership

Professional
Clearing
Membership

100

1000

100

1000

1000

10.5

13

13

18

25

25

25

25

25

25

25

25

Two directors should be HSC. Dealers should also have passed SEBI approved National
Institute of Securities Markets (NISM) Series I Currency Derivatives Certification
Examination
---------------Two year's experience in securities market----------------------The Directors/Partners/Proprietor should not be defaulters on any stock exchange. They
must not be debarred by SEBI for being associated with capital market as intermediaries.
They must be engaged solely in the business of securities and must not be engaged in any
fund-based activity.

In addition to the individuals, corporates and partnership firms, Banks authorized

by the Reserve Bank of India under section 10 of the Foreign Exchange
Management Act, 1999 as AD Category - I bank are permitted to become
trading and clearing members of the currency derivatives market of the
recognized stock exchanges, on their own account and on behalf of their clients,
subject to minimum prudential requirements of minimum net worth of Rs. 500
crores, minimum CRAR of 10 per cent, net NPA not exceeding 3 per cent and net
profit should have been made for last 3 years.
The AD Category - I banks which fulfill the prudential requirements are required
to lay down detailed guidelines with the approval of their Boards for trading and
clearing of currency derivatives contracts and management of risks. AD Category
- I banks which do not meet the above minimum prudential requirements and AD
Category - I banks which are Urban Co-operative banks or State Co-operative
23

banks can participate in the currency derivatives market only as clients, subject
to approval therefore from the respective regulatory Departments of the Reserve
Bank.
2.2.3 Admission Procedure for New Membership

Figure: 2.1 Admission procedure for new membership at NSE

Admission is a two-stage process with applicants requiring to go through an

examination (a module of NCFM) followed by an interview with the Membership
Recommendation Committee. At any point of time the applicant has to ensure that at
least the sole proprietor/one of the designated partner/one of the designated
director/compliance officer has a valid certificate of Securities Market (Basic) Module
or Compliance Officers (Brokers) Module or the relevant module pertaining to the
segments wherein membership of the Exchange has been sought.i.e.
(a)
Capital Market (Dealers) Module
(b)
Derivatives Market (Dealers) Module
(c)
National Institute of Securities Markets (NISM) Series I Currency
Derivatives Certification Examination
The admission procedure for new membership depicted in figure 2.1 is explained
below:
Applicants are required to submit application form, in the prescribed format along
with other relevant documents to the Exchange.
The application for new membership is then forwarded to Membership
Recommendation Committee. The Membership Recommendation Committee (MRC)
consists of seven persons from various disciplines. The MRC conducts interviews of
the applicants for trading membership. In case of corporates, the dominant
shareholder and designated directors; in case of individuals, the individual himself
and in case of partnership firms two designated partners have to appear for the
24

interview. The purpose of the interview is to acquire information about their

capability & commitment to carry on stock broking activities, financial standing and
integrity.
The MRC recommends the names for admission of trading members to the
Membership Approval Committee (Sub-committee of board of directors)/Board of
directors of the Exchange.
The Board of Directors after taking into consideration the recommendations of the
MRC either approves or rejects the applications.
On getting approval from the Board, an admission on a provisional basis is provided
to the applicant subject to certain conditions like registration with SEBI, submission
of relevant fees/deposits and documents. The documents of the member are then
forwarded to SEBI for registration.
After satisfying itself as to compliance with respect to all the prescribed norms, SEBI
grants a Registration Certificate in the name of the applicant.
The applicant then has to remit the prescribed membership deposits (as required by
the demand advice attached to the provisional offer letter) within the time frame
prescribed in the demand advice attached to the provisional offer letter.
After obtaining SEBI Registration, the trading member has to satisfy the Exchange
and NSCCL regarding all the formalities and requirements such as payment of
fees/deposits and submission of relevant documents, for enablement. The dealers on
CM segment are required to clear the Capital Market (Dealers) Module of NCFM;
dealers on Futures & Options Segment are required to clear the Derivatives Market
(Dealers) Module or equivalent examination of NCFM and dealers on Currency
Derivatives segment are required to clear National Institute of Securities Market
(NISM) Series I- Currency Derivatives Certification Examination. This is a prerequisite without which user-ids are not issued.
After ensuring that all the formalities and requirements with regard to the Exchange
and NSCCL are complied, the Trading Member is enabled to trade on the NEAT
system.

2.3 Surrender of Trading membership

Trading members can apply for surrender of their trading membership once admitted
to the Exchange. Surrender of trading membership can be permitted by the
Exchange after fulfilling certain conditions by the member such as, clearing off all the
dues to the Exchange and NSCCL, notifying all other TMs of the approval of
surrender, obtaining No dues certificate from SEBI, issuance of a public notification
in leading dailies etc. The deposits of the trading members would be released by the
Exchange/NSCCL after a prescribed lock-in period. There is, however, no lock-in
period applicable in case of trading member, who is,
(a)
(b)
(c)

Not SEBI registered

SEBI registered but not enabled
SEBI registered and enabled but not traded at all

25

NSE provides a scheme for enabling the trading member to surrender their
membership to the Exchange. Details of the norms and procedures related to the
surrender of membership to the Exchange are prescribed as below:
(a)

A trading member desirous of surrendering its membership of the

Exchange is required to send its request in writing in the prescribed
format.

(b)

Before submission of an application for surrender of membership, the

trading member is required to comply with all the pre-requisites for
application of surrender in the prescribed format. The following aspects
should be covered in the application for surrender of membership from
a trading member,
(i) who has been suspended/ disciplinary action taken by the
Exchange /SEBI
(ii) in respect of whom any investigation/ action consequent to a
default has been initiated by the Exchange /SEBI,
(iii) who is falling within the category of associates as defined by
SEBI,
(iv) who owes dues to the Exchange/ NSCCL,
(v) against whom claims by investors of value of Rs.10 lakh or
more are pending or any claim for any amount is pending for
a period more than 6 months,
(vi) against whom any other claim /complaint is pending which, in
the opinion of the Exchange/ NSCCL, needs to be resolved by
the concerned trading member,
(vii) whose turnover fees liability to SEBI is still outstanding,
The Exchange has absolute discretion in dealing with such applications
and if it decides to process/accept the surrender application of such
trading member, it may impose additional terms and conditions as it
may deem fit.

(c)

No trading member, who has surrendered its trading membership, their

partners (in case of partnership firm) and/ or dominant shareholders
(in case of corporates) is eligible to be re-admitted to the trading
membership of the Exchange in any form for a period of one year from
the date of cessation of trading membership (i.e. from the date of
approval of surrender).

(d)

The application of surrender of trading membership is subject to

fulfillment of certain conditions, such as submission of original SEBI
registration certificate(s) on all segments on which the trading
member is registered; submission of sub-broker registration
certificate(s) of all the sub-brokers associated with the trading
member for onward transmission to the SEBI for cancellation etc.

(e)

The trading member should request the Exchange through their

surrender application to dismantle and recover all the leased line(s)/
VSAT(s) and other equipments given to them at their dealing offices.

(f)

A notice to public by way of a public notification in newspapers should

be made by the Exchange and certain time (from the date of public
26

notification) is given to investors, public, etc. to lodge claims against

the surrendering trading member.
(g)

A letter is also sent to SEBI seeking pending dues, if any, from

member.

(h)

On the expiry of period for receipt of investor claims and on receipt of

intimation of dues amount, if any, from SEBI, the total amount
payable by the member should be appropriated against trading
members deposits available with the Exchange / NSCCL and the
trading member will be intimated accordingly. In case the amount
payable exceeds the deposits, the trading Member would be intimated
to bring in the requisite amount within 21 days of intimation. Upon the
failure of the member to do so within 21 days of intimation, the case
shall be referred to the relevant authority for further action.

2.4 Suspension & Expulsion of Membership

The Exchange may expel or suspend, fine under censure, warn, withdraw any of the
membership rights of a trading member if it is guilty of contravention, noncompliance, disobedience, disregard or evasion of any of the bye-laws, rules and
regulations of the Exchange or of any resolutions, orders, notices, directions or
decisions or rulings of the Exchange or the relevant authority.
2.4.1 Basis of Suspension of Membership
Following are some grounds on basis of which there can be suspension or expulsion
of membership:
(i) Misconduct: A trading member is deemed guilty of misconduct for any of the
following or similar acts or omissions namely:
(a)
Fraud or fraudulent act or if he is convicted of a criminal offence.
(b)
Violation of the provisions of any statute governing the activities,
business and operations of the Exchange.
(c)
Improper conduct.
(d)
Failure to submit to or abide by arbitration.
(e)
Failure to testify or give information sought by the Exchange or any
committee or any other person authorized on that behalf.
(f)
Failure to submit special returns in such form as the relevant authority
may from time to time prescribe.
(g)
Failure to submit audited accounts.
(h)
Failure to compare or submit accounts with defaulter.
(i)
Failure to submit or make any false or misleading returns.
(j)
Make vexatious, malicious or frivolous complaints.
(k)
Failure to pay subscription fee, arbitration charges etc.
(ii) Un-businesslike conduct: A trading member is deemed guilty of unbusinesslike conduct for any of the following or similar acts or omissions namely:
(a)
Transaction or business dealings in fictitious names.
(b)
Circulation of rumours.
(c)
Any unfair dealing in securities which does not reflect the true market
values.
(d)
Market manipulation and rigging.
27

(e)
(f)

(g)
(h)

Unwarrantable business which effects purchases or sales for its

account or any account related to the trading member.
If a trading member accepts less than a full and bonafide money
payment in settlement of a debt due by another trading member
arising out of a transaction in securities.
Dishonoured cheque.
Failure to carry out transactions with constituents.

(iii) Unprofessional conduct: A trading member is deemed guilty of unprofessional

conduct for any of the following or similar acts or omissions namely:
(a)
Business in securities in which dealings not permitted
(b)
Business for defaulting constituent who failed to carry out
engagements relating to securities and is in default to another trading
member
(c)
Transacts in business with an insolvent without obtaining the consent
of the relevant authority even if the individual has obtained his final
discharge from an insolvency court
(d)
Carrying out his business during his suspension period
(e)
Business with suspended, expelled and defaulter trading members
(f)
Business for employees of other trading members
(g)
Business for Exchange employees if it makes a speculative transaction
in which an employee of the Exchange is directly or indirectly
interested
(h)
If it advertises for business purposes or issue regularly circular or
other business communications to persons other than its own
constituents, trading members of the Exchange, banks and joint stock
companies or publishes pamphlets, circular or any other literature or
report or information relating to the stock markets with its name
attached
(i)
Evasion of margin requirements
(j)
Evasion of brokerage charges
(k)
Dealings with entities prohibited by SEBI to buy or sell or deal in
securities market
(iv) Trading members responsibility for partners, agents and employees: A
trading member is fully responsible for the acts and omissions of its partners,
authorised officials, attorneys, agents, authorised representatives and employees. If
any such act which is against the relevant rules and regulations is committed or
omitted by them then the trading member is liable to the same penalty to the same
extent has that act or omission been done or omitted by itself.
(v) Suspension on failure to provide margin deposit and/or capital adequacy
requirements: The Exchange can suspend the business of a trading member when
it fails to provide the margin deposit and/or meets capital adequacy norms as
provided in the Bye Laws, Rules and Regulations. The trading member shall remain
suspended until he furnishes the necessary margin deposit or meet the capital
adequacy requirements.
2.4.2 Suspension of Business
The relevant authority may require a trading member to suspend its business in part
or in whole under following conditions:
28

(a)

(b)

(c)

Prejudicial business: When the relevant authority finds that the trading
member conducts business in a manner prejudicial to the Exchange by
making purchases or sales of securities or offers to purchase or sell
securities for the purpose of upsetting equilibrium of the market or
bringing about a condition of demoralisation in which prices will not
fairly reflect market values, or
Unwarrantable business: When in the opinion of the relevant authority
the trading member engages in unwarrantable business or effects
purchases or sales for its constituent's account or for any account in
which it is directly or indirectly interested which purchases or sales are
excessive in view of its constituent's or its own means and financial
resources or in view of the market for such security, or
Unsatisfactory financial condition: When the relevant authority finds
that the trading member is in a bad financial condition and it cannot be
permitted to do business with safety to its creditors or the Exchange.

2.4.3 Removal of Suspension

The suspension of business as above shall continue until the trading member has
been allowed by the relevant authority to resume business. It may be done on its
paying such deposit or on its doing such act or providing such thing as the relevant
authority may require.
2.4.4 Consequences of Suspension
The suspension of a trading member has the following consequences:
(a)
Suspension of membership rights: The suspended trading member
shall during the terms of its suspension be deprived of and excluded
from all the rights and privileges of membership. It shall also include
the right to attend or vote at any meeting of the general body of
trading members of the relevant segment.
(b)
Rights of creditors unimpaired: The suspension should not affect the
rights of the trading members who are creditors of the suspended
trading member.
(c)
Fulfillment of contracts: The suspended trading members are bound to
fulfill contracts outstanding at the time of its suspension.
(d)
Further business prohibited: The suspended trading member should
not during the terms of its suspension make any trade or transact any
business with or through a trading member. With the permission of the
relevant authority, however it can close the transactions outstanding
at the time of its suspension.
(e)
Trading members not to deal with suspended trading member: No
trading member is allowed to transact in business with a suspended
trading member during the terms of its suspension except with the
prior permission of the relevant authority.
2.4.5 Consequences of Expulsion
The expulsion of a trading member has the following consequences:
29

(a)

(b)
(c)
(d)

(e)

(f)

Trading membership rights forfeited: The expelled trading member

shall forfeit to the Exchange its right of trading membership and all
rights and privileges as a trading member of the Exchange including
any right to the use of or any claim upon or any interest in any
property or funds of the Exchange but any liability of any such trading
member to the Exchange or to any trading member of the Exchange
shall continue and remain unaffected by its expulsion.
Office vacated: The expulsion would create a vacancy in any office or
position held by the expelled trading member.
Rights of creditors unimpaired: The expulsion does not affect the
rights of the trading members who are creditors of the expelled
trading member.
Fulfillment of contracts: The expelled trading members are bound to
fulfill transactions outstanding at the time of his expulsion and it may
with the permission of the relevant authority close such outstanding
transactions with or through a trading member.
Trading members not to deal with expelled trading member: No
trading member is allowed to transact business for or with or share
brokerage with the expelled trading member except with the previous
permission of the relevant authority.
Consequences of declaration of defaulter to follow: The provisions of
pertaining to default and Protection Fund mentioned in the byelaws
become applicable to the trading member expelled from the Exchange
as if such trading member has been declared a defaulter.

2.5 Declaration of Defaulter

A trading member may be declared a defaulter by direction /circular/notification of
the relevant authority of the trading segment if:
(a)
he is unable to fulfill his obligations; or
(b)
he admits or discloses his inability to fulfill or discharge his duties,
obligations and liabilities; or
(c)
he fails or is unable to pay within the specified time the damages and
the money difference due on a closing-out effected against him under
the bye laws, rules and regulations; or
(d)
he fails to pay any sum due to the Exchange or to submit or deliver to
the Exchange on the due date, delivery and receive orders, statement
of differences and securities, balance sheet and such other clearing
forms and other statements as the relevant authority may from time
to time prescribe; or
(e)
if he fails to pay or deliver to the defaulters' committee all monies,
securities and other assets due to a trading member who has been
declared a defaulter within such time of the declaration of default of
such trading member as the relevant authority may direct; or
(f)
if he fails to abide by the arbitration proceedings as laid down under
the bye laws, rules and regulations.
Without prejudice to the foregoing, if a trading member is either expelled or declared
a defaulter by any other recognised stock exchange on which he is a member or if
the registration certificate is cancelled by SEBI, then the said trading member is
expelled from the Exchange.

30

2.6 Authorised Persons

Trading members of the Exchange can appoint authorised persons in the Capital
Market, Futures & Options and Currency Derivatives Segments. Authorised Person is
"Any person-individual, partnership firm, Limited Liability Partnership (LLP) or body
corporate who is appointed as such by a stock broker (including trading member)
and who provides access to trading platform of a stock exchange as an agent of the
stock broker."
Authorised Person can receive remuneration - fees, charges,
commission, salary, etc. for his services only from the stock broker and shall not
charge any amount from the clients. Accordingly, stock broker can share brokerage
with the Authorised Person but shall not charge any amount directly from the clients
The clients introduced by the authorised person should have a direct relationship
with the trading member i.e. the member-constituent agreement, know your client
forms, risk disclosure document, etc. are executed between the client and the
trading member. This implies that the authorised person is not allowed to have any
trading relationship with the clients. The trading member should issue the contract
notes and bills directly to the client i.e. the authorized person should not issue
contract notes, confirmation memo and/or bills in their name.
The clients introduced by the authorised person are required to deliver securities and
make payments directly in the trade name of the trading member (as appearing on
the SEBI registration certificate). Similarly, the trading member should deliver
securities and make payments directly in the name of the clients.

2.7 Sub-Brokers
Sub broker is an important intermediary between stock bro ker and client in capital
market segment. The trading members of the Exchange may appoint sub-brokers to
act as agents of the concerned trading member for assisting the investors in buying,
selling or dealing in securities. The sub-brokers are affiliated to the trading members
and are required to be registered with SEBI. A sub-broker is allowed to be associated
with only one trading member of the Exchange.
Trading members desirous of appointing sub-brokers are required to submit the
following documents to the Membership Department of the Exchange:
(a)
Copy of sub-broker - broker agreement duly certified by the trading
members
(b)
Application form for registration as a sub-broker with Securities and
Exchange Board of India (Form B)
(c)
Recommendation letter to be given by the trading member with whom
the sub-broker is affiliated (Form C)
The trading member has to ensure the settlement of all deals entered into by a
trading member even if the deals may have originated from its sub-broker.
The sub-broker will be required to adhere to NSEs know your clients requirements.
The important documents relating to dealing through a sub-broker are given below:
(a)
Individual client registration application form
(b)
Non-individual client registration application form
(c)
Sub-broker client agreement
31

2.7.1 Eligibility
A sub-broker may be an individual, a partnership firm or a corporate. In case of
corporate or partnership firm, the directors or partners and in the case of an
individual sub-broker applicant should comply with the following requirements:
(a)
They should not be less than 21 years of age;
(b)
They should not have been convicted of any offence involving fraud or
dishonesty;
(c)
They should have either passed
12th standard equivalent
examination from an institution recognized by the Government or
10th standard with 2 years of work experience in securities market.
(d)
They should not have been debarred by SEBI
2.7.2 Registration
No sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a
certificate of registration granted by SEBI. Sub-brokers are required to obtain
certificate of registration from SEBI in accordance with SEBI (Stock Brokers & Subbrokers) Rules and Regulations, 1992, without which they are not permitted to buy,
sell or deal in securities. SEBI may grant a certificate to a sub-broker, subject to the
conditions that:
(a)
he should pay the fees in the prescribed manner;
(b)
he should take adequate steps for redress of grievances of the
investors within one month of the date of the receipt of the complaint
and keep SEBI informed about the number, nature and other
particulars of the complaints received;
(c)
in case of any change in the status and constitution, the sub-broker
should obtain prior permission of SEBI to continue to buy, sell or deal
in securities in any stock exchange; and
(d)
he should be authorised in writing, by a stock-broker being a member
of a stock exchange for affiliating himself in buying, selling or dealing
in securities.
The applicant sub-broker should submit the required documents to the stock
exchange with the recommendation of a trading member. After verifying the
documents, the stock exchange may forward the documents of the applicant subbroker to SEBI for registration. A sub-broker can trade in that capacity after getting
himself registered with SEBI. The Exchange may not forward the application of the
sub-broker to SEBI for registration if the applicant dealt with fake, forged, stolen,
counterfeit etc. shares and securities in the market.
2.7.3 Cancellation of Registration
In case a trading member / sub-broker intends to cancel the registration as a subbroker, the sub-broker is required to submit the original SEBI Registration certificate
through their affiliated trading member. While applying for cancellation of
registration, the affiliated trading member needs to give a public notification to this
effect.

32

2.8 Broker-Clients Relations

2.8.1 Client Registration Documents
The trading member (TM) is required to enter into an agreement in the specified
format provided by NSE with the client before accepting orders on latters behalf. The
agreement is executed on non-judicial stamp paper of adequate value, duly signed
by both the parties on all the pages. Copy of the agreement has to be kept with the
TM permanently. The agreement should contain all the clauses mentioned in Uniform
Documentary Requirement (UDR). Stock broker may incorporate any additional
clauses in these documents provided these are not in conflict with any of the clauses
in the model document, and also the rules, regulations, articles, byelaws, circulars,
directives and guidelines. There should be segregation of mandatory and voluntary
documents/clauses pertaining to client registration in separate docket (compilation of
documents). In case of internet trading, in addition to clauses mentioned in UDR,
the client has to mention clauses pertaining to internet trading.
Under Know Your Client (KYC) requirements, the TM should seek information such
as: investor risk profile, financial profile, investor identification details, address
details, income, PAN number, employment, age, investments experience, trading
preference. The TM has to obtain recent passport size photograph (photographs of
partners/whole time directors, individual promoters holding 5% or more, either
directly or indirectly, in the shareholding of the company and of persons authorized
to deal in securities, and of each of their clients in case of individual clients).
The TM should also take proof of identification and address of the client. In-person
verification should be done by the trading members staff, name & signature of the
person doing the in-person verification together with the stamp of trading member
should be there on the KYC form.
Under Member Constituent Agreement (MCA), trading members are required to
make the constituent/clients aware of (a) trading segment to which TM is admitted,
(b) particulars of SEBI registration number, (c) the precise nature of the trading
members liability for business to be conducted, (d) basic risks involved in trading on
the Exchange (equity and other instruments) including any limitations on the liability
and the capacity in which the trading member acts.
In order to assess the risk involved in trading, TM is required to issue Risk Disclosure
Document (RDD) 4 in such format, as may be prescribed by the Exchange from time
to time and should obtain the same from his constituents duly signed.

A stock-broker should not deal knowingly, directly or indirectly, with a client who
defaults to another stock-broker. There is no limit on the number of clients for a TM.
Copy of the client registration documents is required to be sent to the clients.
Trading member must ensure periodic review of clients financial information & client
database.

The said documents are to be obtained as per Exchange circular NSE/INSP/5387

dt. 27-Aug-04
4

33

2.8.2 Unique Client Code (UCC)

SEBI has made it mandatory for all trading members/brokers to use unique client
codes for all clients. Brokers are required to collect and maintain the Permanent
Account Number (PAN) allotted by Income Tax Department for all their clients.
Brokers should verify the documents with respect to the unique code and retain a
copy of the document. They are also required to provide the PAN and UCC of their
clients to the stock exchanges/clearing corporations and these details have to be
updated before placing orders for the clients. The stock exchanges are also required
to maintain a database of client details submitted by brokers.
2.8.3 Margins from the Clients
Members should have a prudent system of risk management to protect themselves
from client default. Margins are an important element of such a system. The policy
of risk management addressing the margin requirements should be well documented
and be made accessible to the clients and the stock exchanges. In capital market
segment, however, the quantum of these margins, the form and the mode of
collection are left to the discretion of the members 5 . The margin so collected is kept
separately in the client bank account/client beneficiary account. In case of default,
they are utilized for making payment to the clearing corporation for margin and
settlement with respect to that client.
2.8.4 Execution of Orders
Where the constituent requires an order to be placed or any of his order to be
modified after the order has entered the system but has not been traded, the trading
member may, if it so desires, obtain order placement/modification details in writing
from the constituent. The trading member should accordingly provide the constituent
with the relevant order confirmation/modification slip or copy thereof, forthwith, if so
required by the constituent.
Where the constituent requires any of his orders to be cancelled after the order has
been entered in the system but has not been executed, the trading member may, if
it so desires, obtain the order cancellation details in writing from the constituent. The
trading member should accordingly provide the constituent with the relevant order
cancellation details, forthwith, if so required by the constituent. The trading member
may, if it so desires, obtain in writing, the delivery and payment requirement in any
instructions of an order that it receives from the constituent.
Where a trading member receives a request for order modification or order
cancellation from the constituent, it should duly bring it to their notice that if the
total order results in a trade in the meantime, the requests for modification or
cancellation cannot be executed.
2.8.5 Contract Note
Contract note is a confirmation of trade(s) done on a particular day for and on behalf
of a client. A stock-broker should issue a contract note to his clients for trades
(purchase/sale of securities). The contract note should contain name and address
5

SEBI/MRD/DoP/SE/Cir07/2005 dated February 23, 2005

34

(registered office address as well as dealing office address) of the TM, the SEBI
registration number of the TM, details of trade viz. order number, trade number,
order time, trade time, security name, quantity, trade price, brokerage, settlement
number and details of other levies.
As per Regulation 18 of SEBI (Stock-Brokers & Sub-Brokers) Regulations, 1992, the
TM should preserve the duplicate copy of the contract notes issued for a minimum of
five years. The TM should ensure that:
(a)
Contract note is issued to a client within 24 hours and should be
signed by the trading member or by an authorized signatory trading
member.
(b)
Contract notes are in the prescribed format 6 .
(c)
Stamp duty is paid,
(d)
All statutory levies are shown separately in the contract note
2.8.6 Payments/Delivery of Securities to the Clients
Every TM should make payments to his clients or deliver the securities purchased
within one working day of pay-out unless the client has requested otherwise.
2.8.7 Brokerage
The maximum brokerage chargeable by TM in respect of trades effected in the
securities admitted to dealing on the CM segment of the Exchange is fixed at 2.5% of
the contract price, exclusive of statutory levies. This maximum brokerage is inclusive
of sub-brokerage. The brokerage should be indicated separately from the price, in
the contract note. The TM may not share brokerage with a person who is a TM or in
employment of another TM.
For example: If a client has sold 10000 shares of a scrip @ Rs. 50, what is the
maximum brokerage that the client can be charged?
In this case, the maximum brokerage = brokerage rate*value of the transaction
=2.5 %*( 10000 shares*Rs. 50) = Rs. 12,500
2.8.8 Segregation of Bank Accounts
The TM should maintain separate bank accounts for clients funds and own funds. It
is compulsory for all TMs to keep the money of the clients in a separate account and
their own money in a separate account. Funds should be transferred from the client
account to the clearing account for the purpose of funds pay-in obligations on behalf
of the clients and vice-versa in case of funds pay-out. No payment for transaction in
which the TM is taking position as a principal is allowed to be made from the clients
account.
2.8.9 Segregation of Demat (Beneficiary) Accounts
The trading members should keep the dematerialised securities of constituents in a
separate beneficiary account distinct from the beneficiary account maintained for
holding their own dematerialised securities. No delivery towards the own transactions
6

As per circular NSE/LEGL/7036 dated January 05, 2006 in Cash Market segment
35

of the trading members is allowed to be made from the account meant for
constituents. For this purpose, every trading member is required to open a
beneficiary account in the name of the trading member exclusively for the securities
of the constituents (to be referred to as constituents beneficiary account). A
trading member may keep one consolidated constituents beneficiary account for all
its constituents or different accounts for each of its c onstituents as it ma y deem fit.

2.9 Sub-Broker-Clients Relations

2.9.1 Relationship with clients
A sub-broker is required to enter into a tripartite agreement with its clients and the
stock broker specifying the scope of rights and obligations of the sub-broker, the
stock broker and such client of the sub-broker as per the format prescribed by SEBI
for dealing in securities in cash segment. There should be privacy of contract
between the stock broker and the sub-brokers client. A separate agreement has to
be executed for eac h Exchange.
Sub-broker is required to help the client in redress of grievance in respect of
transactions executed through its associated broker. Sub-broker is also required to
assist and co-operate in ensuring faster settlement of any arbitration proceeding
arising out of the transaction entered through its associated broker and is
jointly/severally liable to implement the arbitration award.
A sub-broker should provide assistance to stock broker and clients to reconcile their
accounts at the end of each quarter with reference to all the settlements where
payouts have been declared during the quarter.
2.9.2 Contract notes
A stock broker should issue contract note as per the format prescribed by the
Exchange to client introduced through a sub-broker. A sub-broker should render
necessary assistance to its client in obtaining the contract note from the stock
broker. Sub-broker should not issue any contract note or confirmation memo to its
client.
2.9.3 Securities/ Funds
Transactions in securities executed on behalf of a client introduced through the subbroker should be settled by delivery/ payment between the stock broker and the
client directly, in accordance of the rules, regulations and byelaws of the Exchange
and such settlements should not take place through sub-broker. Delivery of
securities and payment of funds relating to the transactions of a client introduced by
the sub-broker should be directly between the stock broker and the client of the sub
broker.

36

2.10 Investor Service Cell and Arbitration

Investor complaints received against the trading members / companies in respect of
claims/disputes for transactions executed on the Exchange are handled by the
Investor Service Cell (ISC). The complaints are forwarded to the trading members
for resolution and seeking clarifications. The ISC follows-up with the trading
members and makes efforts to resolve the complaint expeditiously. In certain cases,
on account of conflicting claims made by the investor and the trading member, when
it is not possible to administratively resolve the complaint, investors are advised to
take recourse to the arbitration mechanism prescribed by the Exchange.
Arbitration, which is a quasi judicial process, is an alternate dispute resolution
mechanism prescribed under the Arbitration and Conciliation Act, 1996. The
Exchange bye-laws prescribe the provisions in respect of arbitration and the
procedure therein has been prescribed in the regulations. The reference to
arbitration should be filed within six months from the date when the dispute arose.
The time taken by the ISC is excluded by the arbitrator, while considering the issue
of limitation.

2.11 Code of Advertisement

Trading Members of the Exchange while issuing advertisements in the media have to
comply with the Code of Advertisement prescribed by the Exchange. In pursuance of
that, a copy of an advertisement has to be submitted to the Exchange to get a prior
approval before its issue in publication/media. The trading members may apply for
approval of advertisement as per the application format. Trading Members not complying
with the Code of Advertisement may have to face disciplinary proceedings.
The code of Advertisement is as follows:
1.
The term advertisement as referred in this code means and includes any
document, pamphlets, circulars, brochures, notice or any research reports, material
published, or designed for use in a newspaper, magazine or other periodical, radio,
television, telephone or tape recording, video tape display, signs or bill boards, motion
pictures, telephone directories (other than routine listings) or other public media, whether
in print or audio visual form.
The Trading Member should designate and authorise a person to ensure the
correctness of the information given in any advertisement.
2.

The Trading Member issuing any such advertisement should inform the name of
such authorized person to the Exchange.
3.

The advertisement should be related to the nature of services that the Trading
Member can offer. If the Trading Member is engaged in any other business then any
advertisement if permissible for such business should not indicate the name of the
Trading Member as a member of the Exchange.
4.

37

The advertisement should be written in clear language and should not be such
which may prejudice interest of the investors in general.
5.

The advertisement should not contain any confusing, misleading or offensive

information.
6.

7.

It should be free from inaccuracies.

The advertisement should not contain a recommendation regarding purchase or

sale of any particular share or security of any company. It should not make any promise
including guaranteeing of any return to the investing public.
8.

9.

The material should not contain anything that is otherwise prohibited.

10.

The Advertisement shall contain :-

a. Name and/or his logo, code of National Stock Exchange membership.

b. Registration No. allotted by the Securities and Exchange Board of India.
The Advertisement may be issued individually or jointly with other Trading
Members provided that the Trading Member shall not allow its name to be advertised or
caused to be published in the advertisement of other Trading Members, unless such
advertisement is issued by it.
11.

In the event of suspension of any Trading Member by the Exchange, the Trading
Member so suspended shall not issue any advertisement either singly or jointly with any
other Trading Member, during the period of suspension.
12.

In the event of any proceeding/action initiated against a Trading Member by a

regulatory body other than National Stock Exchange, National Stock Exchange reserves
the right to direct the Trading Member to refrain from issuing any advertisement for such
a period as it may deem fit.
13.

National Stock Exchange reserves the right to call for the advertisement and/or
such other information/explanation as it may require, after the publication of the said
advertisement. National Stock Exchange shall have 'cease and desist' powers in this
behalf.
14.

15.

The copy of such advertisement should be retained for a period of three years.

A copy of the advertisement must be submitted to the Exchange within seven

days before their issue. If the advertisement is found to violate any provisions of the
Rules and Bye- laws of the Exchange or rules framed by the SEBI on this behalf, the
Trading Member shall be subject to disciplinary proceedings by the Exchange.
16.

38

These norms will apply to any other investment/consultancy agencies associated

with the Trading Member concerned.
17.

The above norms shall also apply to an advertisement, T.V or Cable T.V. or any
other such media of audio/visual nature.
18.

The Trading Members should check with the Exchange in case of any doubt for
advice prior to the issue of any such material or advertisement.
19.

The advertisement should not have any adverse reference regarding the reputation
of any other Trading Members and also of the Exchange. While preparing any
advertisement a Trading Member should keep in mind that any information if found to be
incorrect will affect not only the reputation of the particular Trading Member but also the
reputation of the Trading Members of the Exchange in general and also on the Exchange
itself.
20.

In the event of any Trading Member of the Exchange having any grievance
against any other Trading Member, consequent upon the publication of advertisement of
the other Trading Member, the Exchange shall be informed of the same in writing, within
a period of seven days from the date of such publication for necessary remedial measure
from the Exchange.
21.

SEBI has advised the stock exchanges to ensure that their brokers/sub-brokers do not
advertise their business, including in their internet sites, by subsidiaries, group companies
etc., in prohibition of code of conduct7. The code of conduct in the regulations require a
stock broker/sub-broker not to advertise his business publicly unless permitted by the
stock exchange and not to resort to unfair means inducing clients from other stock
brokers.

As specified in the Schedule II of the SEBI (Stock Brokers and Sub-brokers) Regulations,
1992 (SEBI circular Ref. No. SMDRP/Policy/Cir-49/2001 Dated October 22, 2001).

39

CHAPTER 3: TRADING
3.1 Introduction
In the past, the trading on stock exchanges in India was based on open outcry
system. Under the system, brokers assemble at a central location usually the
exchange trading ring, and trade with each other. This was time consuming,
inefficient and imposed limits on trading volumes and trading hours. In order to
provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line,
fully-automated screen based trading system (SBTS). Under this system a trading
member can punch into the computer, the number of securities and the prices at
whic h he would like to transact. The transaction is executed as soon as it finds a
matching sell or buy order from a counter party. See Box no. 3.1 for advantages of
SBTS. This system was readily accepted by market participants and in the very first
year of its operation, NSE became the leading stock exchange in the country.
Technology has been used to carry the trading platform from the trading hall of stock
exchanges to the premises of brokers. NSE carried the trading platform further to
the PCs at the residence of investors through the Internet. This made a huge
difference in terms of equal access to investors in a geographically vast country like
India.
The trading network is depicted in Figure 3.1. NSE has a main computer which is
connected through Very Small Aperture Terminal (VSAT) installed at NSE office. The
main computer runs on a fault tolerant STRATUS mainframe computer at the
Exchange. Brokers have terminals (identified as the PCs in the Figure 3.1) installed
at their premises which are connected through VSATs/leased lines/modems.
Box 3.1: Advantages of the Screen-Based Trading System (SBTS)

It electronically matches orders on a strict price/time priority and hence

cuts down on time, cost and risk of error, as well as on fraud resulting in
improved operational efficiency.
It allows faster incorporation of price sensitive information into prevailing
prices, thus increasing the informational efficiency of markets.
It enables market participants, irrespective of their geographical locations,
to trade with one another simultaneously, improving the depth and
liquidity of the market.
It provides full anonymity by accepting orders, big or small, from
members without revealing their identity, thus providing equal access to
everybody.
It also provides a perfect audit trail, which helps to resolve disputes by
logging in the trade execution process in entirety.

40

Satellite
INSAT - 2B

HUB
ANTENNA

Mainframe
NSE Mainframe

Broker's premises

Figure 3.1: Trading Network

An investor informs a broker to place an order on his behalf. The broker enters the
order through his personal computer, which runs under Windows NT and sends
signal to the Satellite via VSAT/leased line/modem. The signal is directed to a
mainframe computer at NSE via VSAT at NSE's office. A message relating to the
order activity is broadcast to the respective member. The order confirmation
message is immediately displayed on the PC of the broker. This order matches with
the existing passive order(s), otherwise it waits for the active orders to enter the
system. On order matching, a message is broadcast to the respective member.
The trading system operates on a strict price time priority. All orders received on the
system are sorted with the best priced order getting the first priority for matching
i.e., the best buy orders match with the best sell order. Similar priced orders are
sorted on time priority basis, i.e. the one that came in early gets priority over the
later one. Orders are matched automatically by the computer keeping the system
transparent, objective and fair. Where an order does not find a match, it remains in
the system and is displayed to the whole market, till a fresh order comes in or the
earlier order is cancelled or modified. The trading system provides tremendous
flexibility to the users in terms of kinds of orders that can be placed on the system.
Several time-related (immediate or cancel), price-related (buy/sell limit and stop loss
orders) or volume related (disclosed quantity) conditions can be easily built into an
order. The trading system also provides complete market information on-line. The
market screen at any point of time provides complete information on total order
depth in a security, the five best buys and sells available in the market, the quantity
traded during the day in that security, the high and the low, the last traded price,

41

etc. Investors can also know the fate of the orders almost as soon as they are placed
with the trading members. Thus, the National Exchange for Automated Trading
(NEAT) system provides an Open Electronic Consolidated Limit Order Book
(OECLOB).
Limit orders are orders to buy or sell shares at a stated quantity and price. If the
price-quantity conditions do not match, the limit order will not be executed. The term
limit order book refers to the fact that only limit orders are stored in the book and
all market orders are crossed against the limit orders sitting in the book. Since the
order book is visible to all market participants, it is termed as an Open Book.

3.2 NEAT System

NSE is the first exchange in the world to use satellite communication technology for
trading. Its trading system, called National Exchange for Automated Trading (NEAT),
is a state of-the-art client server based application. At the server end all trading
information is stored in an in memory database to achieve minimum response time
and maximum system availability for users. It has uptime record of 99.7%. For all
trades entered into NEAT system, there is uniform response time of less than one
second. The NEAT system supports an order driven market, wherein orders match on
the basis of time and price priority. All quantity fields are in units and prices are
quoted in Indian Rupees. The regular lot size and tick size for various securities
traded is notified by the Exchange from time to time.

3.3 Market Types

The Capital Market system has four types of market:
(i) Normal Market: Normal market consists of various book types in which orders
are segregated as Regular Lot Orders, Special Term Orders, and Stop Loss Orders
depending on the order attributes.
(ii) Auction Market: In the auction market, auctions are initiated by the exchange
on behalf of trading members for settlement related reasons. The main features of
this market are detailed in a separate section (3.13) on auction.
(iii) Odd Lot Market: The odd lot market facility is used for the Limited Physical
Market and for the Block Trades Session. The main features of the Limited Physical
Market are detailed in a separate section (3.14). The main features of the Block
Trades Session are detailed in a separate section (3.15).
(iv) Retail Debt Market: The RETDEBT market facility on the NEAT system of
capital market segment is used for transactions in Retail Debt Market session.
Trading in Retail Debt Market takes place in the same manner as in equities (capital
market) segment. The main features of this market are detailed in a separate section
(3.16) on RETDEBT market.

42

3.4 Trading System Users Hierarchy

The trading member has the facility of defining a hierarchy amongst its users of the
NEAT system. This hierarchy is depicted in Figure 3.2.
Corporate Manager

Branch 1
Dealer 11

Dealer 12

Branch 2
Dealer 21

Dealer 22

Figure 3.2: Trading System users hierarchy

The users of the trading system can logon as either of the user type. The significance
of each type is explained below:
(i) Corporate Manager: The corporate manager is a term assigned to a user placed
at the highest level in a trading firm. Such a user receives the end-of-day reports for
all branches of the trading member. The facility to set branch order value limits and
user order value limits is available to the corporate manager. The corporate manager
also has facility to set symbol wise user order quantity limit. He can view outstanding
orders and trades of all users of the trading member and can also cancel/modify
outstanding orders of all users of the trading member.
(ii) Branch Manager: The branch manager is a term assigned to a user who is
placed under the corporate manager. The branch manager receives end-of-day
reports for all the dealers under that branch. He can set user order value limit for
each of his branch. He can view outstanding orders and trades of all users of his
branch and can also cancel/modify outstanding order of all users of his branch.
(iii) Dealer: Dealers are users at the lowest level of the hierarchy. A dealer can view
and perform order and trade related activities only for himself and do not have
access to information on other dealers under either the same branch or other
branches.

3.5 Local Database

The local database provides a faster response time to the users. All inquiries made
by a user for own orders/trades are serviced through the local database. If however,
a corporate manager or branch manager makes inquiries for orders of any
deale r/branch manager of the trading firm, then the inquiry is serviced by the host.
The data stored in the local database include system messages, security related
information and order/trade related data of the user.

43

3.6 Market Phases

The trading system is normally made available for trading on all days except
Saturdays, Sundays and other holidays. Holidays are declared by the Exchange from
time to time. A trading day typically consists of a number of discrete stages as
below:
(i) Opening: The trading memb er can carry out the following activities after login to
the NEAT system and before the market opens for trading:
(a)
Set up Market Watch (the securities which the user would like to view
on the screen)
(b)
View Inquiry screens
At the point of time when the market is opening for trading, the trading member
cannot login to the system. A message Market status is changing. Cannot logon for
sometime is displayed. If the member is already logged in, he cannot perform
trading activities till market is opened.
(ii) Pre-open: The pre-open session is for a duration of 15 minutes i.e. from 9:00
am to 9:15 am. The pre-open session is comprised of Order collection period and
order matching period.
The order collection period of 8* minutes shall be provided for order entry,
modification and cancellation. (* - System driven random closure between 7th and
8th minute). During this period orders can be entered, modified and cancelled.
The information like Indicative equilibrium / opening price of scrip, total buy and sell
quantity of the scrip is disseminated on the NEAT Terminal to the members on real
time basis.
Indicative NIFTY Index value & % change of indicative equilibrium price to previous
close price are computed based on the orders in order book and are disseminated
during pre-open session.
Order matching period starts immediately after completion of order collection period.
Orders are matched at a single (equilibrium) price which will be open price. The
order matching happens in the following sequence:

Eligible limit orders are matched with eligible limit orders

Residual eligible limit orders are matched with market orders
Market orders are matched with market orders

44

During order matching period order modification, order cancellation, trade

modification and trade cancellation is not allowed. The trade confirmations are
disseminated to respective members on their trading terminals before the start of
normal market. After completion of order matching there is a silent period to
facilitate the transition from pre-open session to the normal market. All outstanding
orders are moved to the normal market retaining the original time stamp. Limit
orders are at limit price and market orders are at the discovered equilibrium price. In
a situation where no equilibrium price is discovered in the pre-open session, all
market orders are moved to normal market at previous days close price or adjusted
close price / base price following price time priority. Accordingly, Normal Market /
Odd lot Market and Retail Debt Market opens for trading after closure of pre-open
session i.e. 9:15 am. Block Trading session is available for the next 35 minutes from
the open of Normal Market.
The opening price is determined based on the principle of demand supply
mechanism. The equilibrium price is the price at which the maximum volume is
executable. In case more than one price meets the said criteria, the equilibrium price
is the price at which there is minimum unmatched order quantity. In case more than
one price has same minimum order unmatched quantity, the equilibrium price is the
price closest to the previous days closing price. In case the previous days closing
price is the mid-value of pair of prices which are closest to it, then the previous days
closing price itself will be taken as the equilibrium price. In case of corporate action,
previous days closing price is adjusted to the closing price or the base price. Both
limit and market orders are reckoned for computation of equilibrium price. The
equilibrium price determined in pre-open session is considered as open price for the
day. In case if only market orders exists both in the buy and sell side, then order is
matched at previous days close price or adjusted close price / base price. Previous
days close or adjusted close pric e / base price is the opening price. In case if no
price is discovered in pre-open session, the price of first trade in the normal market
is the open price.
(iii) Normal Market Open Phase: The open period indicates the commencement of
trading activity. To signify the start of trading, a message is sent to all the trader
workstations. The market open time for different markets is notified by the Exchange
to all the trading members. Order entry is allowed when all the securities have been
opened. During this phase, orders are matched on a continuous basis. Trading in all
45

the instruments is allowed unless they are specifically prohibited by the Exchange.
The activities that are allowed at this stage are Inquiry, Order Entry, Order
Modification, Order Cancellation (including quick order cancellation), Order Matching
and Trade Cancellation.
(iv) Market Close: When the market closes, trading in all instruments for that
market comes to an end. A message to this effect is sent to all trading members. No
further orders are accepted, but the user is permitted to perform activities like
inquiries and trade cancellation.
(v) Post-Close Market: This closing session is available only in Normal Market
Segment. Its timings are from 3.50 PM to 4.00 PM. Only market price orders are
allowed. Special Terms, Stop Loss and Disclosed Quantity Orders, Index Orders are
not allowed. The trades are considered as Normal Market trades. Securities not
traded in the normal market session are not allowed to participate in the Closing
Session.
(vi) Surcon: Surveillance and Control (SURCON) is that period after market close
during which, the users have inquiry access only. After the end of SURCON period,
the system processes the data for making the system available for the next trading
day. When the system starts processing data, the interactive connection with the
NEAT system is lost and the message to that effect is displayed at the trader
workstation.

3.7 Logging On
On starting NEAT application, the logon screen appears with the following detail:
(i)
User ID
(ii)
Trading Member ID
(iii)
Password
In order to sign on to the system, the user must specify a valid User ID, Trading
Member ID and the corresponding password. A valid combination of User ID, Trading
Member ID and the password is needed to access the system. Figure 3.3 shows
screenshot of log on screen of NEAT CM.

46

Figure 3.3: Logon Screen of NEAT CM

Following are the details of the Log-on screen:
(i) User ID: Each trading member can have mo re than one user ID. The number of
users allowed for each trading member is notified by the Exchange from time to
time. Each user of a trading member must be registered with the Exchange and is
assigned a unique user ID.
(ii) Trading Member ID: The Exchange assigns a trading member ID to each
trading member. The trading member ID is unique and functions as a reference for
all orders/trades of different users. This ID is common for all the users of a particular
trading member. The trading member ID and user IDs form a unique and valid
combination.
It is the responsibility of the trading member to maintain adequate control over the
persons having access to user IDs. The trading member should request the Exchange
for changes in names of the users of user ID, especially when there are changes in
the users who are dealing on behalf of the trading member.
(iii) Password: When a user logs in for the first time, he has to enter the default
password 'NEATCM' provided by the exchange. On entering this password, the
system requests the user to enter a new password in the `New Password' field. On
entering the new password, the system requests for confirmation of this new
password. This new password is known to the user only. See box no. 3.2 for features
of User ID and Password.

47

Box 3.2: Features of User ID and Password

Location Specific User ID: Earlier, it was possible for the members having
connectivity at more than one location to use the allotted user IDs
interchangeably from either location. This gave rise to various systems security
related problems. To reduce such potential risks associated with the members
workstation, the exchange assigns user ID to a specific location. So, whenever a
user attempts to log on to the trader workstation, the system checks for a valid
location for that user ID in the database at the host end.
Password:
The password should contain minimum of six characters and maximum of
eight characters in length. A combination of characters and numbers is
allowed in the password.
The password can be changed if the user desires so and a new password
can be entered. The new password must be different from the old
password.
Password appears in the encrypted form and thus complete secrecy is
maintained. The system ensures the change in password for all users
(password expiry period is parameterized by the exchange).
In the event of the user forgetting his password, the trading member is
required to reset the password from his corporate manager user id. In
case the corporate manager id is disabled then he is required to inform the
exchange in writing, requesting to reset the password. The user password
is reset to the default password set by the exchange. The user can login
by entering a new password as per the procedure outlined above.
When a user tries to login with a wrong password a message Invalid Sign
on is displayed. If three attempts are made by a user to log on with an
incorrect password, then that user is automatically disabled. In case of
such an event, the trading member is required to reset the password from
his corporate manager user id. In case the corporate manager id is
disabled then he is required to makes a written request to the exchange
for resetting of password. The user password is reset to the default
password set by the exchange. The user can login by entering a new
password as per the procedure outlined above.

3.8 Log Off/Exit from the Application

One can exit from the application as and when one desires before the surcon period.
On invoking the log off screen, the following options are displayed to the user. Figure
3.4 shows screenshot of log off screen of NEAT CM.
(i) Permanent Sign Off: As the name suggests, a user can log off permanently
from the trading system by selecting this option. The user is logged off and the log
on screen appears.

48

(ii) Temporary Sign Off: Temporary sign off is a useful feature that allows the user
to disallow the use of the trading software without actually logging off. During a
temporary sign-off period, the application continues to receive all market updates in
the background. The user, however, cannot enter orders or make inquiries. This
allows the user to leave the trading system temporarily inactive and prevents
unauthorized access to the system. On selecting the temporary sign off option, a
password entry screen is displayed. The use of the NEAT system is enabled on
entering the correct password. The temporary sign off is automatically activated
when the user is inactive for a period of 5 minutes. The user has to enter the
password to resume activities. If three attempts are made to sign on with an
incorrect password, the user is permanently logged off. In this case the user has to
log on again.
(iii) Exit: On selection of this option, the user comes out of sign off screen.

Figure 3.4 Logoff screen of NEAT CM

3.9 NEAT Screen

The trader workstation screen of the trading member is divided into the following
windows:

49

(i) Title bar: It displays trading system name i.e. NEAT, the trading member name
the user id, user type, the date and the current time.
(ii) Ticker Window: The ticker displays information of all trades in the system as
and when it takes place. The user has the option of selecting the securities that
should appear in the ticker. Securities in ticker can be selected for each market type.
On the extreme right hand of the ticker is the on-line index window that displays the
current index value of NSE indices namely S&P CNX Nifty, S&P CNX Defty, CNX Nifty
Junior, S&P CNX500, CNX Midcap, CNX IT, Bank Nifty, CNX 100 and Nifty Midcap 50,
CNX Realty, CNX MNC, CNX FMCG, CNX Energy, CNX Infra, CNX Pharma, CNX PSU
Bank, CNX PSE and CNX Service and India VIX. The user can scroll within these
indices and view the index values respectively. Index point change with reference to
the previous close is displayed along with the current index value. The difference
between the previous close index value and the current index value becomes zero
when the Nifty closing index is computed for the day.
The ticker window displays securities capital market segments. The ticker selection
facility is confined to the securities of capital market segment only. The first ticker
window, by default, displays all the derivatives contracts traded in the Futures and
Options segment.
(iii) Tool Bar: The toolbar has functional buttons which can be used with the mouse
for quick access to various functions such as Buy Order Entry, Sell Order Entry,
Market By Price (MBP), Previous Trades (PT), Outstanding Order (OO), Activity Log
(AL), Order Status (OS), Market Watch (MW), Snap Quote (SQ), Market Movement
(MM), Market Inquiry (MI), Auction Inquiry (AI), Order Modification (OM), Order
Cancellation (OCXL), Security List, Net Position, Online Backup, Supplementary
Menu, Index Inquiry, Index Broadcast and Help. All these functions are also
accessible through the keyboard.
(iv) Market Watch Window: The Market Watch window is the main area of focus
for a trading member. This screen allows continuous monitoring of the securities that
are of specific interest to the user. It displays trading informatio n for the selected
securities.
(v) Inquiry Window: This screen enables the user to view information such as
Market by Order (MBO), Market By Price (MBP), Previous Trades (PT), Outstanding
Orders (OO), Activity Log (AL), Order Status (OS), Market Movement (MM), Market
Inquiry (MI), Net Position, Online Backup, Index Inquiry, Indices Broadcast, Most
Active Securities and so on. Relevant information for the selected security can be
viewed.
(vi) Snap Quote: The snap quote feature allows a trading member to get
instantaneous market information on any desired security. This is normally used for
securities that are not already set in the Market Watch window. The information
presented is the same as that of the Marker Watch window.
(vii) Order/Trade Window: This window enables the user to enter/modify/cancel
orders and to send request for trade cancellation and modification.
(viii) Message Window: This enables the user to view messages broadcast by the
exchange such as corporate actions, any market news, auctions related information
etc. and other messages like order confirmation, order modification, order
cancellation, orders which have resulted in quantity freezes/price freezes and the
50

exchange action on them, trade confirmation, trade cancellation/modification

requests and exchange action on them, name and time when the user logs in/logs
off from the system, messages specific to the trading member, etc. These messages
appear as and when the event takes place in a chronological order.

3.10 Invoking an Inquiry Screen

All Inquiry screens have a selection where the security viewed can be selected. The
screen shows the details of the security selected for that inquiry. The details for each
inquiry screen are discussed below:
3.10.1 Market Watch
The Market Watch window is the third window from the top of the screen that is
always visible to the user. The Market Watch is the focal area for users. The purpose
of Market Watch is to setup and view trading details of securities that are of interest
to users. For each security in the Market Watch, market information is dynamically
updated. Following are the key features of Market Watch Screen:
(i) Market Information Displayed: The one line market information displayed in
the market watch screen is for current best price orders available in the Regular Lot
book. For each security the following information is displayed:
(a)
the corporate action indicator "Ex/Cum"
(b)
the total buy order quantity available at best buy price
(c)
best buy price
(d)
best sell price
(e)
total sell order quantity available at best sell price
(f)
the last traded price
(g)
the last trade price change indicator and
(h)
the no delivery period indicator "ND"
(i)
the Percentage change from previous days closing price

If the security s
i suspended, 'SUSPENDED appears in front of the security. If a
question mark (?) appears on the extreme right hand corner for a security, it
indicates that the information being displayed is not the latest and the system will
dynamically update it.
(ii) Information Update: In the Market Watch screen, changes in the best price
and quantities are highlighted on a dynamic basis (in all pages of Market Watch). For
example, if the best price changes as a result of a new order in the market, the new
details are immediately displayed. The changed details are highlighted with a change
of colour for a few seconds to signify that a change has occurred. The blue colour
indicates that price/quantities have increased, while the red colour indicates that the
price/quantities have decreased.
If the last traded price is higher than the previous last traded price then the indicator
+ appears or if the last traded price is lower than the previous last traded price then
the indicator - appears. If there is no change in the last traded price, no indicator is
displayed.

51

The list of securities that are available for trading on Capital Market segment is
available in the Security List box. The user has the option to setup securities directly
from the Security List without typing a single character on the market watch screen.
This is a quick facility to setup securities. If the user tries to setup a security which is
already present in the market watch one gets a message that the security is already
setup. The user also has the option to add and delete the security set up in the
market watch screen as many times as one desires. The user can print the contents
of the Market Watch setup by the user. The user can either print the Market Watch
on display or the Full Market Watch.
(iii) Market Watch Download: A user has to set up securities after the first
download of the software. After setting up the market watch, it is suggested that the
user should log out normally. This will help the user to save the freshly set up
market watch securities in a file. If at any given time, when the user has freshly set
up a few securities and encounters an abnormal exit, the newly set up securities are
not saved and the user may have to repeat the process of setting up securities. The
Market Watch setup is carried over to subsequent days, thus averting the need to set
up the Market Watch on daily basis. During the logon stage, the relevant Market
Watch details are downloaded from the trading system. The message displayed is
`Market Watch download is in progress'. The time taken for the Market Watch
download depends on the number of securities set up.
(iv) Setting up Securities: One of the best features of this software is that the
user has the facility to set up 500 securities in the market watch. The user can view
up to 30 securities in one page of the market watch screen.
(v) Easy Navigation: The details of the current position in the Market Watch
defaults in the order entry screen and the inquiry selection screen. It is therefore
possible to do quick order entries and inquiries using this feature. The default details
can also be overwritten.
(vi) Corporate Actions Indication: An indicator for corporate actions for a security
is another feature in market watch. The indicators are as follows:
'XD' - ex-dividend
'XB' - ex-bonus
'XI' - ex-interest
'XR' - ex-rights
'CD' - cum-dividend
'CR' - cum-rights
'CB' - cum-bonus
'CI' - cum-interest
'C*' - in case of more than one of CD, CR, CB, CI
'X*' - in case of more than one of XD, XR, XB, XI
3.10.2 Security Descriptor
Information such as Security Name, Book Closure Start and End Dates, Ex-Date, NoDelivery Start and End Dates, Tick Size, daily price range, Face Value, ISIN and
Remarks is displayed in the Security Descriptor. The label DPR i.e. Daily Price Range
displays the permissible price band for a security for the current trading day. Figure
3.5 shows screenshot of security descriptor window in NEAT CM.

52

Figure 3.5: Security Descriptor in NEAT CM

3.10.3 Market by Price

The purpose of Market by Price (MBP) is to enable the user to view outstanding
orders in the market aggregated at each price and are displayed in order of best
prices. Figure 3.6 shows screenshot of market by price window in NEAT CM.
The fields that are available on the selection screen are Symbol, Series and Book
Type. The options available in the book type field are Regular Lot and RETDEBT.
The detailed MBP screen is split into First Line, Detail Line and Summary Line. The
first line displays Market Type, Symbol, Series, Total Traded Quantity, Highest Trade
Price, Lowest Trade Price, Last Trade Price, % Change in LTP from Previous Day
Close and Average Traded Price. The detail line displays Number of Buy Orders, Total
Buy Order Quantity at that price, Buy Order Price, Sell Order Price, Total Sell Order
Quantity at that price and Number of Sell Orders. The summary line displays Total
Buy Order Quantity and Total Sell Order Quantity. For special term orders, the terms
are not reflected in the MBP screen. Buy orders are displayed on the left side of the
window and sell orders on the right. The orders appear in a price/time priority with
the "best priced" order at the top. When any Regular Lot information, currently
displayed on the window, is changed (for example as the result of a trade), this
information is automatically reflected in the MBP i.e. dynamic updation of MBP screen
is present.

53

All buyback orders are identified by an * in the MBP screen. In case a buyback order
appears in the best five orders in the MBP an * will precede such an order record. In
addition, an * will appear against the Total Buy field in the MBP irrespective of the
order being in best five orders in the MBP or not
Special Features of MBP
(a)

(b)
(c)

Regular lot & special term orders can be viewed in the MBP. The
percentage change for last trade price with respect to previous day's
closing price, open price (in case of pre-open indicative opening price),
high price for a day, low price a day and the average trade price of the
security in the given market are the additional fields in the screen.
No untriggered stop-loss order will be displayed on the MBP screen.
Only order details for the best 5 prices information is displayed.

Figure 3.6: Market by Price window in NEAT CM

3.10.4 Previous Trades

The purpose of the Previous Trades window is to provide security-wise information to
users for own trades. The fields that are available on the selection screen are
Symbol, Series, Market type, Auction Number, Trading Member ID, Branch ID,
Deale r, CLI, Buy/Selland Time. The options available in the Market type field are
Normal Market, RETDEBT, Odd Lot and Auction. If the user selects the option to view
Auction Market trade details, the auction number has to be compulsorily entered.
The Corporate Manager can view all the trades for all branches or for a specific
54

branch. Under the specific branch, the user can view trade details for a specific
dealer or for all dealers. The Branch Manager can view all details under that branch
i.e. all previous trades for all dealers and for all clients or for all dealers or for a
specific dealer. The dealer can view previous trades for own user id only. The user
can select the previous trades up to a particular time period, by entering the relevant
time in the time field.
The detailed Previous Trade screen information is split into First Line, Detail Line and
Summary Line. The first line displays Market Type, Symbol, Series, Last Trade Price,
Last Trade Quantity, Last Trade Time and Total Traded Quantity. The detail line
contains Buy/Sell Indicator, PRO/CLI indicator (where P PRO and C - CLI), Order
Number, Trade Number, Trade Quantity, Trade Price and Trade Time. The summary
line contains Total Number of Buy Trades, Total Buy Quantity Traded, Total Buy
Traded Value, Average Buy Traded Price, Total Number of Sell Trades, Total Sell
Quantity Traded, Total Sell Traded Value and Average Sell Traded Price. Previous
Trade Screen displays the client account number also. Preopen Indicator is displayed

as P for all Preopen Trades.

Trades are displayed in a reverse chronological order. First all buy trades are
displayed and then sell trades are displayed. A facility is provided to users to view

their trades for BUY side or SELL side or ALL by selecting the BUY/SELL/ALL filter in
primary window. By default, the filter is on ALL. Once the query is executed with the
filter, the trades are displayed with time sorting for the chosen filter option. This
functionality only works for self and not for hierarchal inquiry
Special Features of Previous Trades
(a)

(b)

Trade cancellation can be requested from the Previous Trade screen. This
facility is available only for members own trades. The Corporate Manager can
request for trade cancellation for any branch or any dealer. The Branch
Manager can request for trade cancellation for any dealer under that branch.
The dealer can request for trade cancellation only for trades under that user
id.
The user can request the Exchange to modify only the client code field.
Currently trade modification facility is not enabled on trading system.

3.10.5 Outstanding Orders

The purpose of Outstanding Orders is to enable the user to view the outstanding
orders for a security. An outstanding order is an order that has been entered by the
user, but whic h has not yet been completely traded or cancelled. The user is
permitted to see his orders.
The fields which are available on the selection screen are Symbol, Series, Book type,
Auction Number, Branch ID, Dealer, PRO/CLI and Time. The options available in the
Book type field are Pre open, Regular Lot, RETDEBT, Odd Lot, Stop Loss and Auction.
If the user selects the option to view Auction Market trade details, the Auction
Number has to be compulsorily entered. When the user selects Pre open book, in the

detailed screen only pre open outstanding orders will be displayed. In the detailed screen,
pre-open orders will have an Identifier P.
55

The corporate manager can view all the Outstanding Orders for all branches or for a
specific branch. Under the specific branch, the user can view Outstanding Orders
details for a specific dealer or for all dealers. Similarly it is possible to view all
Outstanding Orders for a particular client or for all clients under a dealer. The Branch
Manager can view all Outstanding Orders details under that Branch i.e. all
Outstanding Orders for all dealers and for all clients or for all dealers or for a specific
dealer. The dealer can view Outstanding Orders for own user id only.
The detailed outstanding orders screen is split into First Line and Detail Line. The
first line contains Symbol, Series, Market Type, Security Status, Label, Current Time
and Current Date. The detail line contains Book Type, User ID, Client A/C Number,
Order Number, Order Quantity Pending and Order Price.
The orders are listed on the basis of price/time priority. The orders are displayed in
order of Regular Lot orders and then Stop Loss orders. Outstanding order screen is
not dynamically updated, but the user has option to refresh the Outstanding Orders
screen by reinvoking the inquiry.
Special Features of Outstanding Orders
(a)
(b)
(c)

The user can modify orders from the outstanding orders screen.
The user can cancel orders from the outstanding orders screen.
The user can view status of a particular order from the outstanding
orders screen.

3.10.6 Activity Log

The Activity Log (AL) shows all the activities that have been performed on any order
belonging to that user. These activities include order modification/cancellation,
partial/full trade, and trade modification/cancellation. It displays information of only
those orders in which some activity has taken place. It does not display those orders
on which no activity has taken place.
The fields that are available on the selection screen are Symbol, Series, Market Type,
Branch ID, Dealer, PRO/CLI and Client Account Number. The Symbol, Series and
Market Type fields are compulsory. The options available in the Market Type field are
Pre open, Normal Market, RETDEBT, Odd Lot and Auction. A Pre open Identifier P

will be displayed for Pre open orders in Activity Log screen.

The detailed AL screen is split into first line and detail line. The first line displays
Market Type, Symbol, Series, Current Time and Current Date. The detail line
contains User Id, Order Number, PRO/CLI indicator (where P-PRO, C-CLI), Buy/Sell
Indicator, Order quantity, Order price, Order Terms/Trade Number, Disclosed
Quantity, MF Indicator, MF Quantity, Activity Indicator and Activity Time. One line
appears for each activity that has taken place today. For example, if a buy order is
traded against three separate sell orders, then the activity log for the buy order
shows three separate lines and the original order details.
The following activities are displayed:
B
For buy orders, this indicates a match.
56

S
OC
OM

For sell orders, this indicates a match.

This indicates an order was cancelled.
This indicates an order was modified. The details displayed are the
order after it was modified.
TC
For both buy and sell orders this indicates that a trade involving this
order was cancelled.
TM
For both buy and sell orders this indicates that a trade involving this
order was modified.
Special terms associated with the order are displayed to help identify the order.

Special Features of Activity Log

(a)
(b)

The AL gives details of all activities in chronological orders.

Within the order number, the details appear with the oldest activity
first and the latest last.
The activity consists only of orders entered by the requesting trading
member.
This inquiry option is not available to users in inquiry mode.

(c)
(d)

3.10.7 Order Status

The purpose of the Order Status (OS) is to look into the status of one of dealers own
specific orders. The screen provides the current status of orders and other order
details. The order status screen is not dynamically updated. In case the order is
traded, the trade details are also displayed. In case of multiple trades the display is
scrolled.

To view the status of a particular order, enter the order number for
which the order status is to be viewed in the selection screen of OS.
The first part of the order number (i.e. today's date) is defaulted. The
user has to enter the second part of the order number. If the user
does not know the order number, then the user can position the
highlight bar on the desired order on the Outstanding Order screen
and then invoke the OS screen. The order number is directly defaulted
in the Order Status selection screen. Additionally if it is a pre open
order then t here will be an identifier P with tool tip as Preopen

Identifier indicating that it is a Preopen order.

The detailed OS screen is divided into three parts. The first part covers order related
information, the second part covers the trade related information if the order has
resulted in a trade and the third part gives summary details.
The first part details are in two lines. The first line gives Book Type, Symbol, Series,
Order Number, Type (Buy/Sell), Total Order Quantity, Order Price, PRO/CLI, Client
A/C Number and Participant ID. The second line gives Disclosed Quantity, MF/AON
Indicator, MF Quantity, Trigger Price, Day, Indicator 1 (Order Modified - MOD),
Indicator 2 (Order Cancelled - CXL) and Indicator 3 (Order Traded - TRD). The
second part details are Trade Quantity, Trade Price, Trade Time and Trade Number.

57

The third part details are Quantity Traded Today and Balance Quantity (remaining
quantity).
Special Features of Order Status
(a)

(b)
(c)
(d)
(e)

The OS provides the user the current status of the order i.e. whether
order has been modified, order was cancelled, order was traded, or
order has been partially traded on the previous day.
It shows all the order details. It also shows the trade details for each
trade done against this order.
The data is presented in chronological order. One line appears for each
activity that has taken place today.
The dealer can view order status of orders entered under that Dealer
ID only.
This Inquiry option is not available to Users in Inquiry mode.

3.10.8 Snap Quote

The Snap Quote is a feature available in the system to get instantaneous market
information on a desired security. This is normally used for a security that is not
setup in the Market Watch window. The information displayed for the set up security
is same as that in Market Watch window i.e. Corporate action indicator Ex/Cum, the
total buy order quantity, best buy price, best sell price, total sell order quantity, last
traded price, last trade price change indicator and the no delivery indicator ND. The
Snap Quote is displayed for the time specified by the exchange from time to time.
The display position of Snap Quote is reserved and no other information overlaps it.
A user can therefore simultaneously view a regular inquiry (e.g. MBP) and the Snap
Quote display.
3.10.9 Market Movement
The purpose of the Market Movement screen is to provide information to the user
regarding the movement of a security for the current day. This inquiry gives the snap
shot for a particular security for a time interval as parameterised by the exchange.
The fields that are available on the selection screen are Symbol, Series and Market
type. The user can select the Market Type as Normal Market, RETDEBT and Odd Lot
market. Figure 3.7 shows screenshot of market movement window in NEAT CM.
The detailed output screen is given in two parts. The first part gives information
regarding the security for the entire day namely Symbol, Series, Market Type, Total
Buy Order Quantity, Total Sell Order Quantity, Total Traded Quantity, High Price,
Low Price, Open Price and Last Traded Price. The second part gives information for a
particular time interval namely Time Interval, Buy Order Quantity, Sell Order
Quantity, Traded Quantity, High Price and Low Price.
The user can save the Market Movement screen by specifying the directory and file
name to save the information. This file can be viewed in MSDOS editor.
Special Features of Market Movement

58

(a)

(b)

The Market Movement screen provides information to the user

regarding the movement of a security for the current day on
orders/trades done today.
The information displayed is from the time the market was opened
today and in chronological sequence.

Figure 3.7: Market Movement window in NEAT CM

3.10.10 Market Inquiry
The purpose of the Market Inquiry is to enable the user to view the market statistics,
for a particular market, for a security. It also displays the open price and previous
close price for a security.
The fields that are available on the selection screen are Symbol, Series and Market
type. The user can select market type as Normal, RETDEBT and Odd Lot. The
detailed output screen is given in two parts. The first line displays Symbol, Series,
Security Status, Corporate Actions Indicator 1, Corporate Actions Indicator 2,
Corporate Actions Indicator 3, Total Traded Quantity, 52 Week High and 52 Week
Low. The second line displays Closing Price, Opening Price, High Price, Low Price,
Last Traded Price and Net change from closing price. The third line displays Last
Traded Quantity, Last Traded Time and Last Traded Date. The fourth line displays
Best Buy Order Quantity, Best Buy Order Price, Best Sell Order Price and Best Sell
Order Quantity.
Special Features of Market Inquiry
(a)

This screen is not dynamically updated. It displays the security status

of the security selected. 'S' indicates that the security is suspended, P
59

(b)

(c)

(d)

(e)

indicates that the security is in pre open (only for normal market) and
in absence of the above indicators the security is open for trading.
An indicator for corporate actions for a security is displayed on the
screen. The indicators are as follows:
"CD" = cum-dividend
"XD" = ex-dividend
"CR" = cum-rights
"XR" = ex-rights
"CB" = cum-bonus
"XB" = ex-bonus
"CI = cum-interest
"XI = ex-interest
The net change indicator for last trade price with respect to the
previous day's closing price and the net change percentage for the last
trade price with respect to the previous day's closing price are
displayed.
The base price of a security for the day is equal to the previous day's
closing price of the security in normal circumstances. Thus, in the
market inquiry screen the field indicating the closing price also gives
the base price for the day.
If the base price is manually changed (due to a corporate action) then
the market inquiry will not display the new base price in the closing
price field.

3.10.11 Auction Inquiry

The purpose of Auction Inquiry (AI) is to enable the users to view the auction
activities for the current trading day. This window displays information about
auctions currently going on and auctions that have been completed.
The detailed line in the auction inquiry screen displays: No. - Serial Number, St. Status of the auction security, Type - Buy/Sell auction, Symbol, Series, Best Buy
Qty, Best Buy Price, Best Sell Price, Best Sell Qty, Auction Qty, Auction Price and
Settlement Period.
The following
S
M
F
X
P

are the different status displayed for an auction security:

- Auction is in Solicitor Period
- System is matching the orders
- Auction is over
- Auction is deleted
- Auction is pending and yet to begin.

The user can view the auction details of a security setup in the market watch, by
invoking the auction inquiry screen after highlighting the auction security. To view
the auction details for all the securities, the user should blank out the contents of all
the fields in the auction inquiry selection screen. To view the auctions after a
particular number, the user should blank out the contents in Symbol & Series field
and enter the number in the auction number field on the selection screen. The
auction inquiry screen then displays all auctions from that number onwards. This
window is dynamically updated. Figure 3.8 shows screenshot of auction enquiry
window in NEAT CM.
Change screen

60

Figure 3.8: Auction Inquiry window in NEAT CM

3.10.12 Security/Portfolio List

This is a facility for the user for setting up the securities in the market watch screen.
This screen also has a new facility of allowing the user to setup his own portfolio.
Figure 3.9 shows screenshot of security descriptor window in NEAT CM.
(i) Security List: The user can select securities based on Symbol, Series,
Instrument Type and Market Type. A blank/partial search for Symbol and Series is
also possible. The Symbol, Series, Market Type and Security Name are displayed
based on the selection criteria. The user can also print the selected securities.
(ii) Portfolio List: Once the security is selected, the same can be used for setting
up a portfolio. The user can give a name to the list so selected. The existing portfolio
can be modified and/or removed. The user can also set-up a particular portfolio in
market watch. Portfolio created can be used for basket order entry also. Order files
can be generated based on the portfolio created using basket trading option.

61

Figure 3.9: Security/Portfolio List window in NEAT CM

3.10.13 Multiple Index Broadcast and Graph
This screen displays information of NSE indices namely S&P CNX Nifty, S&P CNX
Defty, CNX Nifty Junior, S&P CNX 500, CNX 100, CNX Midcap CNX IT, Bank Nifty,
Nifty Midcap 50, CNX Realty, CNX Infra, CNX Energy, CNX FMCG, CNX MNC, CNX
Pharma, CNX PSE, CNX PSU Bank and CNX Service. The indices are labeled vertically
and the information is displayed against each index horizontally. The data displayed
for each index is as follows:
(a)
Current Index
(b)
High Index
(c)
Low Index
(d)
Open Index
(e)
Close Index
(f)
% change in Current Index (w.r.t. previous close index)
(g)
52 week High
(h)
52 week low
(i)
Up Moves
(j)
Down Moves
(k)
Market Capitalisation (in Rs. Lakh)
Index Graph displays all the indices on a real time basis to the market.

62

Figure 3.10 shows screenshot of multiple index broadcast window in NEAT CM.

Figure 3.10: Multiple Index Broadcast window in NEAT CM

3.10.14 Online Backup
On Line Backup is a facility that the user can invoke to take a backup of all order and
trade related information for the user. The information available is for the current
day only.
On the selection screen the user can select the various fields on which the output will
be filtered. The fields that can be filtered are CLI, Market Type, Book Type, Symbol,
Series, Instrument Type, Date, Time, Order Indicator, Trade Indicator, Buy/Sell
Indicator, Order Numbers and Trade Numbers.
The user is provided the option to copy the files to any drive of the computer or on a
floppy diskette. This utility generates two ASCII files namely Order.txt and Trade.txt.
The user can specify any filename for Orders and Trades. This utility will help the
user to generate the Contract Notes. The user is requested to take backup first on
the C:\ drive and subsequently copy to A:\ drive to avoid overloading PC capacity
and abnormal log-off.
3.10.15 Basket Trading
The purpose of basket trading is to provide NEAT users with a facility to create offline
order entry file for a selected portfolio. On inputting the value, the orders are created
for the selected portfolio of securities according to the ratios of their market

63

capitalisations. An icon has been provided in the Toolbar which can be selected by
the mouse to invoke the functionality.
In the basket trading functionality, the user first selects a portfolio from combo box.
The portfolio in the combo box is user defined portfolios (which can be created or
edited from the Security List screen which is an existing functionality). All users
defined Portfolios are automatically loaded in to the combo box. The User then
allocates an amount to the portfolio by mentioning the amount in the 'Amount' edit
box. The amount entered is in lakh and must be less than or equal to Rs. 3000 lakh.
If the amount entered is not sufficient to buy/sell a complete basket, a message
"Insufficient amount for creating the basket" is displayed. Then, the User mentions
whether he wants to buy or sell the Portfolio by selecting a choice from BUY/SELL
combo box. The User has to mention the name of offline order file which would be
generated. The Output Offline order file is always generated in the Basket directory
of the current selected login drive. If a file with the given name already exists then it
asks for overwriting the old file. A Reverse File with the same name is also generated
in 'R_Basket' directory of the current login drive. The Reverse File contains reverse
order (if user has selected buy then it contains sell orders and vice-versa). The user
can mention orders duration (IOC or day) by selecting from a check box. The User
can also specify PRO/CLI orders by selecting from the combo box. In case of CLI
orders it is compulsory to mention the account number in the edit box.
The
participant name can be mentioned. If mentioned it is verified whether it is a valid
participant or not.
The amount mentioned in the 'Amount Edit' Box is divided among the securities of
the portfolio, depending on their current market capitalisation, and the amount
allocated per security is used to calculate the number of shares to be bought / sold
for that security which is reflected in the offline order file. The number of shares is
rounded off to the nearest integer. If the basket contains any security whose regular
lot is not one, then the file will need to be corrected by the user to accommodate
shares in tradable lots. If the portfolio contains a security which is suspended/not
eligible in the chosen market then an error message is displayed on the screen.
All the orders generated through the offline order file are priced at the available
market price.
Quantity of shares of a particular security in portfolio is calculated as under:
Number of Shares of a
security in portfolio
where
Current Portfolio
Capitalisation

Amount * Issued Capital for the security

Current Portfolio Capitalisation

Summation [Last Traded Price (Previous

close if not traded) * Number of Issued shares]

In case at the time of generating the basket if any of the constituents are not traded,
the weightage of the security in the basket is determined using the previous close
price. This price may become irrelevant if there has been a corporate action in the
security for the day and the same has not yet been traded before generation of the
file. Similarly, basket facility will not be available for a new listed security till the time
it is traded. Figure 3.11 shows screenshot of basket trading window in NEAT CM.

64

Three portfolio names viz NIFTY, JUNIOR & CNX100 are provided in Security /
Portfolio List to generate offline order entry file using basket trading facility. In this
case the file will be generated based on free float market capitalization for the
user defined securities under these names.
Quantity of shares of a particular security in portfolio is calculated as under:
Number of Shares of a
security in portfolio
where
Current Portfolio
Capitalisation
float factor

Amount * Issued Capital for the security

Current Portfolio Capitalisation

Summation [Last Traded Price (Previous

close if not traded) * Number of Issued shares]* Free

Figure 3.11: Basket Trading screen window in NEAT CM

3.10.16 Buy Back Trades

As per SEBI Notification, dated November 14, 1998, buyback of securities is
permitted in the secondary market. This is termed as Buy-Back from the Open
Market. In the open market, buyback of shares is permitted through Stock

65

Exchanges having electronic trading facility and such buyback orders are required to
be identified upfront in the electronic trading screen as buyback orders.
The purpose of Buy Back Trade functionality is to give information to the market
about the buy back trades executed from the start of the buy back period till current
trading date in the securities whose buyback period is currently on. It provides
information about Symbol, Series, Day's high price, Day's Low Price, Days Weighted
Average Price, Days Volume, Total Volume, Highest/Lowest/Weighted Average Prices
till previous day, Buy Back Start & End date.
The Buyback Trade functionality provides users with the information about the
buyback trades going in various securities. The front screen shows Symbol, Series,
Low price (Today), High price (Today), Weightage, Average price, Volume (Today)
and Previous day Volume.
The user after selecting a particular row from the buyback list box can view further
information viz. Symbol, Series, Start date, End date, Total Traded Qty (Till date),
Previous High price, Previous Low price and Wt avg. Price till date of buyback
scheme. The Buyback broadcast updates the information.
3.10.17 Supplementary Functions
This section discusses certain supplementary functions of NEAT such as Branch Order
Value Limit, Most Active Securities, Colour Selection, Report Selection, Net Position
and Print System Message.
The supplementary menu list box has the following options:
(i)
Report Selection
(ii)
Full Message Display
(iii)
Colour Selection
(iv)
Print System Message ON/OFF
(v)
Print Order/Trade Confirmation Slips On/Off
(vi)
Ticker Selection
(vii)
Market Movement
(viii)
Most Active Securities
(ix)
Reprint Order/Trade Confirmation Slip
(x)
Branch Order Value Limit
(xi)
Net Position and Net Position backup
(xii)
Online Backup
(xiii) One line/Tabular Slips
(xiv) Index Inquiry
(xv)
User Order Value Limit Setup
(xvi) Security wise User Order Quantity Limit & Security wise User Order
Quantity Limit Bulk Upload
(xvii) Offline Order Entry
(xviii) Order Limits
(xix) Market Price protection functionality
(xx)
Order Attributes Selection
(xxi) Client Master Maintenance
(xxii) Index Trading
(xxiii) Reverse Basket on Trading Quantity
(xxiv) Display CM Ticker
(xxv) Display FO Ticker
66

(xxvi) Trade Confirmation Bell

(xxvii) Multiple Trade Cancellation
(xxviii) Debarred Client Maintenance
(xxix) Reset User ID
(xxx) Offline File Conversion
(xxxi) Print Bhavcopy On/Off
(xxxii) Reset Password
(xxxiii) About
(i) Report Selection: Report selection window allows the user (corporate manager
and branch manager) to specify the number of copies to be printed for each report.
The user can update the number of copies for a report. The Report Selection screen
allows the user (Corporate manager and Branch Manager only) to specify the
number of copies to be printed for each report. All the reports are generated at the
end of day. Once the reports are printed, the Report Selection screen shows the date
and the time the reports were printed. The user can request for reprinting any of the
reports. The reports that are available to the trading member are Market Statistics
and Market Indices.
(a)

Market Statistics: The purpose of this report is to show the market

statistics of that trading day. This report gives details related to all the
securities traded on that day for all markets.

(b)

Market Indices: A separate Market Indices Report is also disseminated to

members which contains details regarding the Open, High, Low, Close,
Previous Close and % change over the Previous Close of S&P CNX Nifty,
S&P CNX Defty, CNX Nifty Junior, S&P CNX 500, CNX 100, CNX Midcap
CNX IT, Bank Nifty, Nifty Midcap 50, CNX Realty, CNX Infra, CNX Energy,
CNX FMCG, CNX MNC, CNX Pharma, CNX PSE, CNX PSU Bank and CNX
Service

(ii) Full Message Display: This option enables the display of all the system
messages right from the start of the Opening Phase. It is also possible to filter the
messages depending on the message code, symbol, series, PRO/CLI, Client, date and
time. The system messages can be printed, if needed.
Message area contains user ID for order and trade confirmation\modification\
cancellation and rejection. The trade confirmation\modification\cancellation
messages displayed in the message area will contain the corresponding remarks
entered during the order entry.
The user can filter, print and save messages. In the message filtering screen the
message code by default shows ALL. The user has the option to select the desired
message code on which the messages can be filtered. The messages can also be
filtered on Symbol, Series, Trading member Code, PRO/CLI/ ALL, Client A/C Number,
Date and Time fields.
In case the user desires to filter messages for trading member's own order/trade
related messages, PRO has to be specified with the trading member code defaulting
in the Client Account field. In case the user desires to filter messages for a
particular client, CLI has to be specified with the client account code in the Client
Account field. In case the user desires to view all messages, ALL has to be

67

specified and the Client Account field should be blank. The message filter displays
ALL by default when the user invokes the full message display screen.
Message area will contain the machine number along with the me ssage specifying
from which machine the message have been generated. An extra filter code has been
provided in the message area to filter messages on the machine number parameter.
The messages are filtered as per the selection criteria. The message codes on which
the selection can be made are:
Message Code
ALL
AUC
AUI
LIS
MAR
messages
OTH
SPD
SYS
TRD

Description of Messages Selected

All messages
Auction order/trade messages
Auction initiation messages
All listing related messages
Margin Violation messagesORD

Order Related

Miscellaneous
Security Suspension/De-suspension
System Messages
Trades

The full message display and filtered messages can be printed by invoking the print
command by ensuring that the printer is online. The user can save messages by
invoking the Save option on the Full Message Display screen and by specifying the
directory and file name in the pop up box. Here an option is available to the user to
both specify the directory and file name to save messages, or to choose the default
directory i.e. nsecm\user directory. This file can be viewed in MS- DOS editor.
(iii) Colour Selection: The user can customise the colours for various inquiry and
other trader workstation screens as per choice. The background and the foreground
colours can be selected by invoking the Colour Selection option. The following is
displayed on the colour selection list box:
(a)

List of Screens: Lists all the screens in NEAT system. The user has the
option of changing both the foreground and the background colours of any
screen.

(b)

Display Window: Displays the screen with the changed colours. To change
the colour of a particular screen, the user has to position the highlight bar
on the desired screen and select any one of the sixteen colour buttons. The
change in the colour can be seen in the Display window. The user can reset
the colour to default setting by selecting the Default option. It is to be
noted that the user cannot select the same colour for foreground of an
inquiry screen.

(iv) Print System Messages On/Off: The 'Print System Messages ON/OFF'
enables/disables printing of the system messages as and when they appear in the
messages window. By default the option is set to `OFF'. The user can change the
On/Off position by pressing the space bar. The current mode (On/Off) is displayed
for this option on the Supplementary Menu screen itself.
(v) Print Order/Trade Confirmation Slips On/Off: The 'Print Order/Trade
Confirmation ON/OFF' enables/disables printing of the order/trade slips. By default
68

the option is set to `OFF'. The user can change the On/Off position by pressing the
space bar. The current mode (On/Off) is displayed for this option on the
Supplementary Menu screen itself. Pre open Identifier P is displayed for Pre open

records.
(vi) Ticker Selection: The ticker selection screen allows the user to set up the
securities that should appear in the users ticker window. All the securities available
in the system for a particular market are displayed. If a security is deleted from the
system, it is also removed from the ticker selection display. The selection of
securities can be done for each market separately. The user can select one or all
security type for display.
(vii) Market Movement: The purpose of the Market Movement screen is to
provide information to the User regarding the movement of a security for the current
day. This inquiry gives the snap shot for a particular security for a time interval as
parameterised by the exchange.
(viii) Most Active Securities: This screen displays the details of the most active
securities based on the total traded value during the day. The number `N' is
parameterised by the Exchange. The information provided on this screen is not
dynamically updated. The user, however,
can get the latest information by
refreshing the screen.
(ix) Reprint Order/Trade Confirmation Slips: Although the order and trade slips
for `confirmation', `modification', 'rejection' and `cancellation' slips can be printed
as and when a particular operation is performed. The user, however, can reprint
these slips later during the trading day by using this option.
The user can select the order or trade and the type of slips i.e. confirmation,
modification, cancellation or rejection. There is facility to select one or more
operations for printing the slips.
For example one can select confirmation as well as modification at a time. After
the user specifies the type of slip to be printed, the start and end order/trade
numbers are automatically filled. The user has to specify the range of order or trade
numbers by appropriately selecting the start and the end order/trade numbers.
Initially, the options have such values that all the order related slips can be printed.
The start and the end order numbers contain order numb ers that was entered by the
user on the current day. On selecting Print option all the selected order/trade slips
are printed and on selecting the Cancel option, no slips are printed.
(x) Branch Order Value Limit Setup: The purpose of this screen is to enable
corporate manager to setup a limit on order entry for each branch under the trading
member firm. This option in supplementary menu is available to the user only if the
user is a corporate manager. On selection, the Branch Order Value Limit Setup
screen appears. To view the limit for a particular branch, the user has to select the
Branch ID and the details for the branch i.e. branch name, the limit set and the used
up value are displayed. The values for the branch order limit are displayed in Rs.
lakhs.

69

To change the limit for a branch, the user has to select the Limited option and enter
the new limit in the New Limit Value. The new limits are then updated by the
system.
The corporate manager can also authorize a branch with unlimited order entry by
clicking on Unlimited. The user can also print the details of a branch by selecting
the Print option. Viewing and modification is possible during market hours.
A corporate manager can set the branch order value limit for any/all branches either
before or during trading hours. Also, the corporate manager can view the set limit
and the used limit any time during the trading day. Whenever the corporate manager
modifies the branch order limit of any of his branches, the branch manager receives
a message to that effect at his trader workstation.
(xi) Net Position and Net position Backup: The user can interactively view his
net position across securities. The Net Position screen displays Symbol, Series, Buy
Value (in lacs), Buy Qty, Buy Average Price, Sell Average Price, Sell Qty, Sell Value
(in lacs), Net Qty and Net Value (in lacs).
It also displays the Grand Total of Buy Value (in lacs), Buy Qty, Sell Qty, Sell Value
(in lacs), Net Value (in lacs) and Net Value Mark to Market (in lacs). Net position
screen displays the Net Mark to market value scrip wise as well as total net mark to
market value.
The user has the option for selecting market type as Normal/RETDEBT/Odd Lot/All.
The user can also select Client Type as CLI/PRO/All. The user is provided with an

option to select the client code from the drop down menu to view the net position
of specific client. The user can refresh the screen to update the Net Position and can
also print the details of the Net Position screen at any point of time. Net position
backup is available from the Net position screen. The User can select the fields as
Symbol, Series, PRO/CLI and CLI A/c Number on which the output would be filtered.

By default the output file is generated and stored as 'Netpos.txt'. The user can
overwrite and specify any other file name also. The user has a option of generating
the output file in any directory he wants to or on a floppy diskette.

70

SQUARE OFF:
This special functionality has been added for the user to Square of his position.
This can be done by clicking the new option Square Off provided in the screen.
The user first needs to select one or more records from the list box. To select all the
records, Select All button is provided. To clear all the selected records, Clear All
button is provided.
When user clicks on Square off, an offline file will be generated containing counter
orders which will square off the position of that particular user. The offline file
generated will be stored in the drive from where the exe is re-inflated. The name of
the offline file generated will be SqrOffPosition.txt".
The position can be squared off only for Normal Market. If the RETDEBT or ODDLOT
market is selected, the Square Off button will get disabled.
If ALL is selected from the Market type drop down list, then the positions will be
squared off for open position of NORMAL Market only.
If the user selects PRO or CLI from the Client Type drop down box, then the position
would be squared off only for those corresponding Open positions.
In case of CLI if user selects a particular Account Number, then the position would be
squared off only for those corresponding Open positions only.
The user is given an option to generate either DAY/IOC (IOC is defaulted) order
while generating the offline file.

71

(xii) Online Backup: On Line Backup is a facility which the User can invoke to take
a backup of all order and trade related information for the User. The information
available is for the current day only. Figure 3.12 shows screenshot of online backup
window in NEAT CM.

Figure 3.12 Online Backup window in NEAT CM

(xiii) One line/Tabular Slips: The 'One Line or Tabular slips' is used to select the
format for printing confirmation slips. By default the option is set to 'One Line'. The
user can change the format to 'Tabular slip' by pressing the spacebar. The current
mode is displayed on the Supplementary Menu screen.
(xiv) Index Inquiry: Index Inquiry gives information on Previous Close, Open,
High, Low and Current Index values of S&P CNX Nifty at the time of invoking this
inquiry screen. This screen displays information of S&P CNX Nifty as of the time the
screen was invoked on the current trading day. The data displayed is as follows:
(a) 52 week High
(b) 52 week Low
(c) Closing Index
(d) Opening Index
(e) High Index
(f) Low Index
(g) Current Index
(h) Net Change
(i) % Change

72

At the end of day after market closure the Previous Close field will display current
day's closing index value. The user requires to refresh the details of the screen by
re-invoking the screen.
(xv) User Order Value Limit Setup: User order value limit is the cumulative value
of orders placed by the user during the day across all securities. This enables the
corporate manager to set up different limits among the users depending upon the
permitted user activity in single/multiple scrips. For a new user, the user order value
limit is set as zero by default.
Every order entry will be checked for user order value limit. A user is restricted to
enter orders greater than the order value limit specified by his corporate manager.
In case the user order value limit is exhausted a message Order
number.........request rejected. Used limit cannot exceed the user order value limit.
is displayed on the message window screen.
Following are the main features of user order value limit functionality:
(a)

(b)

(c)

(d)

(e)
(f)

A corporate manager can set up branch order value limit and user
order value limit for all users. A branch manager can also set up the
user order value limit for the users under his branch. The corporate
manager can also query for order limits of any user under the trading
member firm. While the branch manager can view the user order limits
of the users under his branch only.
User order value limits are dependent on branch order value limit. It is
not possible for a corporate manager to set only branch order value
limit and not assign any user order value limit. It is mandatory for the
corporate manager to configure user order value limit. The branch
manager may also set up the user order value limit for users under his
branch.
If a corporate manager sets the branch order value limit as unlimited
then the user order value limit can either be set unlimited or a
specified limit. The cumulative value of user order value limit should
not exceed the corresponding branch order value limit. Also, user
order value limit cannot be set as unlimited if branch order value limit
is set as specific value. In case the corporate manager tries to revise
the branch order value limit to a value less than the user order value
limit a message Cumulative user limit exceeded the branch limit is
displayed on the branch order value limit screen.
When the corporate manager sets up the user order value limit as
specified/unlimited, a message "User order value limit for user number
..... has been set to Rs. ...... lakh/unlimited" is displayed on the
message window screen of the corporate manager, respective Branch
Manager and the concerned user.
The user order value limit can be revised during trading hours.
The corporate manager/branch manager can also print the user order
value limit details.
Example: M/s. Agre Financial Services, a trading member on the NSE,
has a branch order value of Rs. 700 lakh for his Chennai branch and
Rs. 650 lakh for Kolkata branch. Chennai branch has two users 'X' and
'Y' with user order value limits of Rs. 250 lakh and Rs. 300 lakh
respectively. Kolkata branch has one user 'Z' with user order value
limit of Rs. 350 lakh. The member applies for a new user at Chennai.
73

What is the maximum user order value that can be set for the new
user?
The maximum User Order Value limit for Chennai is
= Rs. 700 - (Rs. 250 + Rs. 300) = Rs.150 lakh
(xvi) Security wise User Order Quantity Limit & Security wise User Order
Quantity Limit Bulk Upload: The trading system has a facility for setting up
Branch Order Value Limit (BOVL) and User Order Value Limit (UOVL). The Corporate
Manager can set up BOVL for each branch and UOVL for all the users (dealers and
BMs) under him. The Branch Manager (BM) can set the UOVL of the dealers in his
branch. Sum of the UOVLs of all the users under a particular branch cannot exceed
BOVL, set by the corporate manager. While this enables the corporate manager and
branch manager to restrict the total value of order entered by the users, it is not
possible to restrict buying or selling in specific securities.
An additional facility for setting up Security wise user-wise Order Quantity Limits
(SUOQL) for buy and/or sell has been provided. This function will be available only to
the NEAT users. Salient features of the functionality are given below:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)

(m)
(n)
(o)
(p)
(q)

The corporate member is allowed to set the SUOQL separately for buy
and sell orders for each security for all the branch manager and
Dealers (except inquiry only users) under him including himself.
A view only facility is given to the BM for his own limit and the
dealers under him.
View only facility is given to the dealer for his own limit.
For the newly added user or security the SUOQLs record is not to be
added by default (i.e. No SUOQL will be set for new security or user).
It is possible to modify the SUOQL anytime during trading hours and it
should not be set less than the used limit for that security.
The used limit field is displayed for buy and sell separately for each
security.
Any activity like order modification or cancellation is reflected in used
limit figure for the respective security and respective side.
This limit is applicable for a symbol across all series, across all the
markets.
The set value is not less than zero.
Modification of set limits for a security is possible multiple times.
SUOQL setting option is given in supplementary menu.
A bulk upload facility to set the security wise buy sell limit through a
csv file is provided. In case of failure to upload a particular record/s,
failure message will be written in the input file in the form of an error
code. The file is reusable.
SUOQL bulk upload facility is not available during the market hours.
After the limit is set successfully, the message will be sent to the
respective corporate manager/ branch manager/dealer.
For a symbol both buy and sell quantity can be set to unlimited.
The facility to print the set SUOQL limits is provided.
A facility to limit trading to the securities set up in the SUOQL is
provided. If limit trading option is set for the user, the user is allowed
to place orders only for symbols set in his SUOQL list by the corporate
manager. It is however possible to enable this facility without having
any security in the SUOQL list, which prevents the user from entering
any fresh orders.
74

(r)

(s)
(t)
(u)

(v)

(w)

Corporate Manager is given a facility to allow or disallow a user from

entering Index orders. By default all dealers are allowed to place index
orders. Index orders are not validated for SUOQL limits. The orders
once entered are updated in the used limits.
Set limits can be set equal to or greater than used limits.
If a symbol is added/set in SUOQL list during the market hours,
previously used quantities, till that time would be taken into account.
It is possible that dealer is restricted to enter order in particular
security, but allowed to enter index order and that restricted security
is a part of Nifty.
If the order is modified by corporate manager / branch manager for a
respective dealer then the used limit will be updated accordingly, but
in this case it can exceed the set limit.
SUOQL used limit is not validated and updated for Auction orders.
Bulk upload by corporate manager for setting SUOVL for dealers is
allowed after receiving the message in the trader work station (TWS)
after market close and in morning till cut off time set by the exchange
before the market opens.

The structure of input csv file for bulk upload is as follows:

User-Id
Action-Type
Symbol
Buy Set Limit
Sell Set Limit
Error-Code
(xvii) Offline Order Entry: A facility Offline Order Entry has been incorporated in
the trading software where the user can generate order file in a specific format
outside the trading system and upload the file in the system by invoking this facility.
The user has to specify the exact file location that can be a hard disk drive or a
floppy drive. The status of the orders so uploaded is recorded in last two fields of the
same file. Once the order processing is complete, the user can open the same file in
MS-DOS editor. If the system assigns an order number, the same is written against
the record. In case of any error(s), the corresponding error code is written against
the record. Offline order entry is also available for RETDEBT market. Users can place

bulk orders in pre-open with book type as PO

The user has to specify the relevant order file name in the Offline Order Entry pop-up
box and then initiate the upload process. The user can also interrupt the injection of
the orders. It should be noted that the file has to be in the format as specified by the
Exchange. The offline order entry facility accepts comma separated file structure (file
saved as *.csv where * is the file name).
Advanced Offline Order Entry
A special feature 'Advanced Offline Order Entry' has been incorporated in the trader
workstation for all types of users (Corporate Manager , Branch Manager and
Dealer) except Inquiry users. The user can create an offline order file using this
feature. This file can be used to place orders in bulk. The user has the option of
adding, modifying or deleting a record in the created file. The user can also create

75

the file in a specific format (as mentioned below) outside the trading system and
upload the file in the system by invoking this facility.

(xviii) Order Limits: An Order limit is a facility to enable the user to specify
maximum value per order and maximum quantity per order that can be entered from
the trader workstation. At the time of order entry and order modification this limit is
checked by the system. Order limits are set by individual users and are provided as
safety measure against any inadvertent error during data entry while entering
orders.
For a user logging in for the first time, order limits are specified as unlimited by
default. In case specific value/quantity is to be specified, data has to be entered in
the respective input fields namely Order Value (in lakh) & Order Quantity. In case
unlimited is to be specified, the checkbox allows the user to set Unlimited as his
limit.
The order limits can be modified during market hours. When the user modifies these
limits, a message Max. Value/Qty for one order has been set to Rs.......Lakh/...... is
displayed on the message window screen. When the user sets the limit as unlimited,
a message Max. Value/Qty for one order has been set to unlimited is displayed on
the message window screen. While modifying the values if either of the input fields is
left blank, the dealer gets an error message, either Quantity Limit not Entered or
Value Limit not Entered respectively. In case the user tries to modify without
entering any new values, a message Values not changed is displayed.
Whenever the user places an order, the order values are validated against these
values to confine the checking to the trader workstation. In case the user enters an
order that exceeds the specified quantity limit, a message Order quantity entered
exceeds the order limit quantity is displayed. In case the user enters an order which
exceeds specified order value (order price x order quantity) a message Order value
exceeds order value limit is displayed. The quantity check is always done prior to
order value check. Only if both values are not exceeded, the order is sent to the
system for further processing. In case of a market order if the order quantity
exceeds the order quantity limit, the checking is done at the trader workstation itself
as in the case of priced orders. For order value check, however, the check is
performed by the Host.
(xix) Market Price protection functionality: This functionality gives an option to
a trader to limit the risk of a market order, within a pre-set percentage of the Last
Trade Price (LTP). The pre-set Market price protection percentage is by default set to
5% of the LTP. The users can change the pre-set Market price protection percentage
from the Order Limit Screen which can be invoked from the Supplementary Menu.
The set percentage will be applicable till the Ntreltdr EXE is re-inflated.
At the time of order entry, the user can check the cursor is in the price field. In case
of a buy order, the price value shown is taken as the default price, which is greater
than LTP by a pre-set percentage. In case of a sell order, the default value will be
lesser than the LTP by a pre set percentage. The time condition in both cases will
automatically change to IOC. The user has the option to change any of the fields.
Since the calculations are based on LTP if broadcast for the security is not received,
the default value will be 'MARKET'.

76

(xx) Order Attribute Selection: The order attribute selection enables user to set
default parameters for two fields PRO/CLI and Custodial Participant id fields in the
order entry screens. The selection screen provides a facility whereby users can select
or deselect required options. The PRO/CLI and custodial participant ID options as
selected by the user is available in the order entry screen. In case the user deselects
all options for PRO/CLI the following error message is displayed "Either PRO or CLI
must be selected. If a member sets the default option in the PRO/CLI field as PRO,
then each time the order entry screen is invoked, PRO will be displayed and CLI
will not be available to the user for order entry. If a member selects PRO and CLI,
then each time the order entry screen is invoked, PRO and CLI will be available to
the user for order entry. Similarly, if a member selects NCIT in the custodial
participant field, only NCIT will be displayed on invoking the order entry screen. If a
member selects broker id as default option in the custodial participant field, then
only the broker id will be displayed in the order entry screen.
By default this screen has all the options marked for display in the order entry
screen. Options can be changed during trading hours. However, if a user exits the
NEAT application and logs in again, the required parameters will have to be selected
again for order entry.
The order entry screen is defaulted at Book Type field. The member is provided
with the facility where he can choose the order entry screen default to be Book
Type or Quantity.
By default this screen has Book Type option marked. Options can be changed
during trading hours.
If the member selects Book Type in Book/Quantity field, the default cursor will be
placed at Book Type in order entry screen/order modification screen.
If the member selects Quantity in Book/Quantity field, the default cursor will be
placed at Quantity in the order entry screen, except if the market watch is blank, in
this case the default cursor will be placed at "Book Type" while in the order
modification screen the default cursor will be placed at Quantity.
This parameter selected by member will remain even if the member exits the NEAT
application and until the member reinflates the NEAT exe.
The users have been provided with a facility to set up the last entered Client account
number, Participant & remarks fields in the order entry screens as the default values.
These values will be taken as default till the time the fields in the order entry screens
are not altered or the NEAT front end is not closed. On setting the checkboxes, the
values entered in the previous order will be taken as default in the relevant fields.
These fields will continue to have the default values till any one of the fields is
toggled, or a different order is placed. Each of these three fields can be taken as
default individually or in any desired combination.
An option has also been provided to warn the user if the account number being
entered for the client is not present in the client master file. A checkbox has been
provided in the Order Attribute Selection screen to enable or disable this facility.
Once the user receives a warning, he has the option of entering the client account
number and details in the client master and resumes order entry or skip this. In case
of offline order entry, the warning is for each order in the input file. The user has the

77

option of stopping the offline file by clicking on the Offline order entry screen and
clicking on the Stop button. Figure 3.13 shows screenshot of order attribute window.

Figure 3.13: Order Attribute window in NEAT CM

Change screen

(xxi) Client Master Maintenance: This facility allows the user to maintain list of
client in trader workstation. Along with client code other information like Client
Name, PAN No., Participant Code can be maintain in client master. The user can add,
modify, upload or delete clients. During order entry when the user selects the cli
option and press the down arrow key in the account field, a drop down list of clients
will be enabled. The user can select a particular record, by typing the first character
of account number. On pressing Enter key, the account number of that record will be
defaulted in the Account No. field. Also if participant exists for the selected account
number, the Participant ID gets populated in the participant field of the order entry
screen.
(xxii) Index Trading :

The purpose of Index Trading is to provide users with a

facility of buying and selling of Indexes, in terms of securities that comprises the
78

Index. The users have to specify the amount, and other inputs that are sent to the
host, and the host generates the orders. The Index Trading enables the users for
buying or selling an Index Basket. Putting orders in securities in proportion that
comprises the chosen index, simulates the buying and selling of Index basket.
Formula Used to calculate no of shares of each security is
No of Shares of a security in index

Amount * Issued Capital for the security * Free Float Factor

Current Market Capitalization of the Index

Current Market Capitalization of the Index =

Summation [Last Traded Price (Previous close if not traded) * No of Issued shares]

The no of shares are rounded off to the nearest integer. If the Index basket contains any
security whose regular lot is not one, then the file will need to be corrected by the user to
accommodate shares in tradable lots.
(xxiii) Reverse Basket on Traded Quantity: The purpose of Reverse Basket
Trading is to provide the users with an offline file for reversing the trades that have
taken place for a basket order. This file will contain orders for different securities of
the selected basket file. The Orders will be created according to the volume of trade
that has taken place for that basket. This feature can also be used to monitor the
current status of the basket file as the latest status of the orders are displayed in the
list box. The functionality of creating reverse basket offline order file based on orders
at the time of creating the basket will continue to be available. The new functionality
is another alternative to create the reverse file based on the trades executed till the
point of time.
User can invoke the functionality by selecting it from the supplementary menu. On
selecting the relevant basket file the details of that file are loaded in the list box. The
basket file names in the combo box are user defined file names (which can be
created or edited from Basket Trading Screen which is an existing functionality). All
User defined basket file names are automatically loaded in to the Combo box. The
User can select the basket of his choice. It is advisable to create each basket with a
different name and clean up the directories regularly and not tamper with the
original basket file once it has been loaded as it may give erroneous results.
On pressing the Reverse button the reverse basket file would be generated in the
RTRDBASKET folder in the login drive. The file would have the same name as the
basket file prefixed with a REV_. If a file with the given name already exists then it
asks for overwriting the old file. The User can mention Orders duration (IOC or day)
by selecting from a check box.
(xxiv) Display CM Ticker: The 'Display CM Ticker ' is used to enable or disable CM
ticker.
(xxv) Display FO Ticker: The 'Display F&O Ticker ' is used to enable or disable F&O
ticker.

79

(xxvi) Trade Confirmation Bell: The 'Trade confirmation Bell ' is used to enable or
disable the bell sound at trade confirmation.
(xxvii) Multiple Trade Cancellation: An additional facility Multiple Trade
Cancellation is provided to the user to cancel all the trades done by him, based on
an order number.
(xxviii) Debarred Client Maintenance: This facility allows to ma intain a list of
Debarred Clients. The user is provided option to add, modify, save, upload or delete
debarred clients. During order entry, if a user tries to place an order for any
debarred client added in the Debarred Client Master, then an error message The
account is debarred from trading will be displayed on the order entry screen.
(xxix) Reset User ID: This will facilitate the members to terminate the active
session for users under the trading member. The facility has been provided to all
corporate managers and branch managers. A branch manager can terminate the
active session for all the users of that branch except for self. Active session of the
branch manager can be terminated by the corporate manager. The session of the
corporate manager can be terminated only by the Exchange.
(xxx) Offline File Conversion: The feature Offline File Conversion has been
incorporated in the trading software. The user can use this functionality to convert a
file with a predefined format into an output file of Offline file format. The user can
upload this converted file using Offline Order Entry functionality or Advance Offline
Order Entry functionality.
While using the Offline File Conversion Functionality, User has to give the complete
input file name (e.g. C:\Example.txt); the output file will be generated at the same
location as of input file with the name as <filename>_conv (e.g.
C:\Example_conv.txt).
The Offline File Conversion is available only for Normal Market under RL orders.
The Offline File Conversion facility will accept comma separated file as input.
This Facility is not available for the Inquiry user.
In case of any error(s), the corresponding error code is written against the record in
the output file and Pop-Up Error in File Conversion is displayed when Offline File
Conversion is completed.
(xxxi) Print Bhavcopy On/Off:

Print Bhavcopy On/Off is used to enable or

disable the printing the bhavcopy, interim bhavcopy and index bhavcopy reports.
By default, the option will be set to Enable. To change the [Enable/Disable]
status presses the [Spacebar]. The current status is immediately displayed on
the supplementary menu screen
(xxxii) Reset Password: This screen enables Corporate Manager to reset the
password and to enable the users of their trading member who got disabled
by entering wrong passwords for more than 6 times.

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(xxxiii) About: The 'About' window displays the software related version number
details and copyright information.

3.11 Order Management

Order Management consists of entering orders, order modification, order cancellation
and order matching.
3.11.1 Entering Orders
The trading member can enter orders in the normal market, odd lot, RETDEBT and
auction market. A user can place orders in any of the above mentioned markets by
invoking the respective order entry screens. After doing so, the system automatically
picks up information from the last invoked screen (e.g. Market Watch/MBP/OO/SQ
and Security List). When the user invokes the order entry screen, the fields that are
taken as default are Symbol, Series and Book Type.
In case of other fields, the system takes the following defaults:
Qty
Price
Pro
Order Duration
Disclosed quantity
Participant ID

Regular lot quantity available at best price on counter side

Price of best counter order
Trading member ID of the user
Day
Fully Disclosed
Trading member ID of the user

Active & Passive Order

When any order enters the trading system, it is an active order. It tries to find a
match on the other side of the books. If it finds a match, a trade is generated. If it
does not find a match, the order becomes a passive order and goes and sits in the
order book.
Order Books

As and when valid orders are entered or received by the trading system, they are
first numbered, time stamped and then scanned for a potential match. This means
that each order has a distinctive order number and a unique time stamp on it. If a
match is not found, then the orders are stored in the books as per the price/time
priority. Price priority means that if two orders are entered into the system, the
order having the best price gets the higher priority. Time priority means if two orders
having the same price is entered, the order that is entered first gets the higher
priority. Best price for a sell order is the lowest price and for a buy order, it is the
highest price.
The different order books in the NEAT system are as detailed below:

Pre-open Book: - An order during Preopen session has to be a Preopen (PO) order. All
the Preopen orders are stacked in system till the Preopen phase. At the end of Preopen
phase, the matching of Preopen orders takes place at the Final Opening Price. By default,
the Preopen (PO) book appears in the order entry screen when the Normal Market is in
81

Preopen and the security is eligible for Preopen Session. Order entry in preopen book
type is allowed only during market status is in preopen.

Regular Lot Book: An order that has no special condition associated with it
is a Regular Lot order. When a dealer places this order, the system looks for a
corresponding Regular Lot order existing in that market (Passive orders). If it
does not find a match at the time it enters the system, the order is stacked in
the Regular Lot book as a passive order. By default, the Regular Lot book
appears in the order entry screen in the normal market. Buyback orders can
be placed through the Regular Lot (RL) book in the Normal Market. The
member can place a buyback order by specifying BUYBACKORD in the Client
Account field in the order entry screen. Such company buyback orders will be
identified in MBP screen by an * (asterisk) indicator against such orders.

Special Terms Book: Orders which have a special term attribute attached to
it are known as special terms orders. When a special term order enters the
system, it scans the orders existing in the Regular Lot book as well as Special
Terms Book. Currently this facility is not available in the trading system.

Stop Loss Book: Stop Loss (SL) orders are released into the market when the
last traded price for that security in the normal market reaches or surpasses
the trigger price. Before triggering, the order does not participate in matching
and the order cannot get traded. Untriggered stop loss orders are stacked in
the stop loss book. The stop loss orders can be either a market order or a
limit price order. For buy SL orders, the trigger price has to be less than or
equal to the limit price. Similarly, for sell SL orders, the trigger price has to
be greater than or equal to the limit price.

Odd Lot Book: The Odd Lot book can be selected in the order entry screen in
order to trade in the Odd Lot market. Order matching in this market takes
place between two orders on the basis of quantity and price. To enter orders
in the odd lot market, select the book type as OL.

RETDEBT Order Book: RETDEBT market orders can be entered into the
system by selecting the RETDEBT Order book. These orders scan only the
RETDEBT Order book for potential matches. If no suitable match can be
found, the order is stored in the book as a passive order. To enter orders in
the RETDEBT market, select the book type as 'D'.

Auction Order Book: Auction order book stores orders entered by the
trading members to participate in the Exchange initiated auctions. Auction
orders can be initiator orders, competitor orders and solicitor orders.

Symbol & Series

Securities can be taken as default values from the order entry screen from any of the
inquiry screens such as MBP, OO, PT, AL, MI and SQ. In case the security is not set
up in the Market Watch screen, the Security List can also be used to take the codes
as default values.
Order entry in a security is not possible if that security is suspended from trading.
E.g. If a security is suspended in the normal market a message Security is

82

suspended in the normal market is displayed on the order entry screen. The label
Suspended is also displayed in the market watch screen for the setup security.
Order entry is also not possible in case the security is not eligible to trade in a
particular market. E.g. If a security is not eligible to trade in the normal market a
message Security is not allowed to trade in normal market is displayed on the
order entry screen. In case the user types the symbol series incorrectly a message
Invalid symbol series is displayed on the screen.
Quantity

When the buy/sell order entry screen is invoked, the regular lot size available at the
best price on the counter side gets defaulted in the order entry screen. In case
auction book is selected for display, the quantity has to be specifically mentioned by
the user. Quantity mentioned should be in multiples of regular lot size for that
security.
Quantity Freeze

All orders with very large quantities will receive quantity alert at member terminal.
Currently, if member enters any order exceeding the lowest of the quantity given
below, results in an alert which will read as Order entered exceeds alert quantity
limit. Confirm availability of adequate capital to proceed and only after the member
clicks the button Yes the order will be further processed for execution.
Quantity Freeze parameters:
(a) 0.5% of the issue size of the security or
(b) value of the order is around Rs. 2.5 crores or
(c) a global alert quantity limit of more than 25000 irrespective of the issue size
of the security, whichever is less.
Price

Along with the regular lot quantity, the best price on the counterside is also taken as
default value in the order entry screen. A user has the option to either enter the
order at the default price or overwrite it with any other desired price. If a user
mentions a price, it should be in multiples of the tick size for that particular security
and within the days minimum/maximum price range, otherwise the order is not
accepted by the system and an order rejection message/confirmation slip is
generated. For a No price band scrips(scrip), if a price outside the Operational Range
is entered, the order results in a price freeze and is not accepted as a valid order till
the time the Exchange approves it. All auction orders require the user to mention a
price.
In case the user enters an order with a Market price, the order takes the last traded
price in the respective market as the market price, provided no passive order exists
on the same side or the counter side in that security and in that market. On the
other hand, if suitable orders exist on the counter side, then the order takes the
price of the counter order and a trade is generated. If an order exists on the same
side but no orders exists on the counter side, then the order takes the price of the
best order on that side and is stacked immediately below it. If the security has never
been traded, then the market order takes the value of the base price and sits in the
books as a passive order.

83

Another option provided to Users in the Pre-open phase of the Normal market is
ATO or the At Open Price concept. Market orders entered in the pre-open are
termed as ATO. Based on the opening algorithm, the system computes a potential
opening price. Once the market is open for trading, the ATO orders take these prices.
In case of stop loss orders, a user has the flexibility of specifying a limit price along
with the trigger price. This limit price can be selected as equal to the trigger price in
the price field so as to leave it with the word Price. Alternatively, a user can specify
a limit price as Market price.
Circuit Breakers

The Exchange has implemented index-based market-wide circuit breakers in

compulsory rolling settlement with effect fro m July 02, 2001. In addition to the
circuit breakers, price bands are also applicable on individual securities.
Index-based Market- wide Circuit Breakers: The index-based market-wide circuit
breaker system applies at 3 stages of the index movement, either way viz. at 10%,
15% and 20%. These circuit breakers when triggered bring about a coordinated
trading halt in all equity and equity derivative markets nationwide. The market-wide
circuit breakers are triggered by movement of either the BSE Sensex or the S&P CNX
Nifty, whichever is breached earlier.
(a)

In case of a 10% movement of either of these indices, there would be a

one-hour market halt if the movement takes place before 1:00 p.m. In
case the movement takes place at or after 1:00 p.m. but before 2:30 p.m.
there would be trading halt for hour. In case movement takes place at
or after 2:30 p.m. there will be no trading halt at the 10% level and
market shall continue trading.

(b)

In case of a 15% movement of either index, there would be a two-hour

halt if the movement takes place before 1 p.m. If the 15% trigger is
reached on or after 1:00 p.m., but before 2:00 p.m., there shall be a onehour halt. If the 15% trigger is reached on or after 2:00 p.m. the trading
shall halt for remainder of the day.

(c)

In case of a 20% movement of the index, trading shall be halted for the
remainder of the day.

These percentages are translated into absolute points of index variations on a

quarterly basis. At the end of each quarter, these absolute points of index variations
are revised for the applicability for the next quarter. The absolute points are
calculated based on closing level of index on the last day of the trading in a quarter
and rounded off to the nearest 10 points in case of S&P CNX Nifty.
Price Bands

Daily price bands are applicable on securities as below:

(a)
(b)

Daily price bands of 2% (either way) on securities as specified by the

Exchange.
Daily price bands of 5% (either way) on securities as specified by the
Exchange.
84

(c)
(d)

(e)

Daily price bands of 10% (either way) on securities as specified by the

Exchange.
No price bands are applicable on scrips on which derivative products are
available or scrips included in indices on which derivative products are
available. In order to prevent members from entering orders at nongenuine prices in such securities, the Exchange has fixed operating range
of 20% for such securities.
Price bands of 20% (either way) on all remaining scrips (including
debentures, preference shares etc).

The price bands for the securities in the Limited Physical Market are the same as
those applicable for the securities in the Normal Market. For auction market the
price bands of 20% are applicable.
Order Types and Conditions

The system allows the trading members to enter orders with various conditions
attached to them as per their requirements. These conditions are broadly divided
into Time Conditions, Quantity Conditions, Price Conditions and Other Conditions.
Several combinations of the above are allowed thereby providing enormous flexibility
to the users. The order types and conditions are summarised below:

(i) Time Conditions

(a)
DAY: All orders entered into the system are currently considered as
Day orders only.
(b)
IOC: An Immediate or Cancel (IOC) order allows the user to buy or sell
a security as soon as the order is released into the system, failing
which the order is cancelled from the system. Partial match is possible
for the order, and the unmatched portion of the order is cancelled
immediately.
(ii) Quantity Conditions
DQ: An order with a Disclosed Quantity (DQ) allows the user to disclose
only a portion of the order quantity to the market. For e.g. if the order
quantity is 10,000 and the disclosed quantity is 2,000, then only 2,000
is released to the market. After this quantity is fully matched, a
subsequent quantity of 2,000 is disclosed. Thus, totally five disclosures
with the same order number are shown one after the other in the
market.

(iii) Price Conditions

(a)
Market: Market orders are orders for which price is specified as 'MKT'
at the time the order is entered. For such orders, the system
determines the price.
(b)
Stop-Loss: This facility allows the user to release an order into the
system, after the market price of the security reaches or crosses a
threshold price called trigger price.
Example: If for stop loss buy order, the trigger is Rs.93.00, the limit
price is Rs.95.00 and the market (last traded) price is Rs.90.00, then
this order is released into the system once the market price reaches or

85

(c)
(d)

exceeds Rs.93.00. This order is added to the regular lot book with time
of triggering as the time stamp, as a limit order of Rs.95.00.
All stop loss orders are kept in a separate book (stop loss book) in the
system until they are triggered.
Trigger Price: Price at which an order gets triggered from the stop
loss book.
Limit Price: Price of the orders after triggering from stop loss book.

(v) Other Conditions

(a)

(b)

Proprietary (PRO) / Client (CLI): A user can enter orders on his

own account or on behalf of clients. By default, the system assumes
that the user is entering orders on the trading members own account.
The client account field is an alphanumeric field. It is mandatory to
enter the client account number in the field provided in case the user
enters orders on behalf of clients. The system will assign a code Cli to
such an order. The user cannot specify the trading member code in the
client account field.
Participant Code: In case of Pro order by default, the system
displays the trading member ID of the user in the participant field. In
case of Cli order if Participant ID exist in client master maintenance
the same will appear in participant filed, else trading member ID will be
reflected. Only a valid participant code can be entered. In case the
participant is suspended, a message to this effect is displayed to the
user on the order entry screen.

3.11.2 Order Modification

All orders can be modified in the system till the time they do not get fully traded and
only during market hours. Once an order is modified, the branch order value limit for
the branch gets adjusted automatically. Following is the corporate hierarchy for
performing order modification functionality:
(a)
A dealer can modify only the orders entered by him.
(b)
A branch manager can modify his own orders or orders of any dealer
under his branch.
(c)
A corporate manager can modify his own orders or orders of all dealers
and branch managers of the trading member firm.
The corporate manager/branch manager, however, cannot modify order details such
that it exceeds the branch order value limit set for the day. Order modification
cannot be performed by/for a trading member who is suspended or de-activated by
the Exchange for any reason.
3.11.3 Order Cancellation
Order cancellation functionality can be performed only for orders which have not
been fully or partially traded (for the untraded part of partially traded orders only)
and only during market hours and in pre-open period.

Single Order Cancellation

Single order cancellation can be done during trading hours either by selecting the
order from the outstanding order screen or from the function key provided. Order
86

cancellation functionality is available for all book types. But the user is not
allowed to cancel auction initiation and competitor orders in auction market.

Quick Order Cancellation

Quick Order Cancellation (Cancel All) is an extension of Single Order Cancellation

enabling a user to cancel multiple outstanding orders in various trading books
subject to the corporate hierarchy. The different filters available for cancelling
orders by using quick order cancellation facility are symbol, series, book type,
branch, user, PRO/CLI, client account number and buy/sell. Quick order
cancellation can be performed by invoking the function key provided and cannot
be done from the outstanding orders screen. If the criterion is not found to be
correct by a trading member then an error message is displayed and the focus is
set on the incorrect field to enable the user to correct it. If the selection criterion
is correct then a message appears on the quick order cancellation screen stating
the number of buy and sell orders to be cancelled. Quick order cancellation can
be done only during market hours.

Order Cancellation for Disabled Member

The Exchange suspends a member from trading due to various reasons. In case a
member is suspended from trading by the Exchange, all pending orders in all
books of the member are immediately cancelled by the system. A message:
Order Number .......... cancelled due to suspension is displayed at the message
window screen at the trader workstation. Inquiry screens such as MBP, Market
Watch and trader specific screens such as Outstanding Orders, Activity Log etc.
get updated accordingly.
3.11.4 Order Matching
The buy and sell orders are matched on Book Type, Symbol, Series, Quantity and
Price.
Pre- open Matching Priority

The opening price is determined based on the principle of demand supply

mechanism. The equilibrium price is the price at which the maximum volume is
executable. In case more than one price meets the said criteria, the equilibrium price
is the price at which there is minimum unmatched order quantity. In case more than
one price has same minimum order unmatched quantity, the equilibrium price is the
price closest to the previous days closing price. In case the previous days closing
price is the mid-value of pair of prices which are closest to it, then the previous days
closing price itself will be taken as the equilibrium price. In case of corporate action,
previous days closing price is adjusted to the closing price or the base price. Both
limit and market orders are reckoned for computation of equilibrium price. The
equilibrium price determined in pre-open session is considered as open price for the
day. In case if only market orders exists both in the buy and sell side, then order is
matched at previous days close price or adjusted close price / base price. Previous
days close or adjusted close price / base price is the opening price. In case if no
price is discovered in pre-open session, the price of first trade in the normal market
is the open price.
Matching Priority

87

The best sell order is the order with the lowest price and a best buy order is the
order with the highest price. The unmatched orders are queued in the system by the
following priority:
(a)

By Price: A buy order with a higher price gets a higher priority and
similarly, a sell order with a lower price gets a higher priority. E.g.
Consider the following buy orders:
1) 100 shares @ Rs. 35 at time 9:30 a.m.
2) 500 shares @ Rs. 35.05 at time 9:43 a.m.
The second order price is greater than the first order price and
therefore is the best buy order.

(b)

By Time: If there is more than one order at the same price, the order
entered earlier gets a higher priority. E.g. consider the following sell
orders:
1) 200 shares @ Rs. 72.75 at time 9:30 a.m.
2) 300 shares @ Rs. 72.75 at time 9:35 a.m.
Both orders have the same price but they were entered in the system
at different time. The first order was entered before the second order
and therefore is the best sell order.

As and when valid orders are entered or received by the system, they are first
numbered, time stamped and then scanned for a potential match. This means that
each order has a distinctive order number and a unique time stamp on it. If a match
is not found, then the orders are stored in the books as per the price/time priority.
An active buy order matches with the best passive sell order if the price of the
passive sell order is less than or equal to the price of the active buy order. Similarly,
an active sell order matches with the best passive buy order if the price of the
passive buy order is greater than or equal to the price of the active sell order.

Regular Lot Matching

If the combined quantity of one or more matching orders on the opposite side
of the regular lot book is equal to or more than the quantity of active order,
the active order is completely traded.

If the combined quantity of one or more matching orders on the opposite side
of the regular lot book is equal to or less than the quantity of active order,
the active order is partially traded.

If after trading any quantity is left untraded, the order is added to the regular
lot book in the price/time priority.

The orders with the IOC attribute try to match maximum possible quantity
after they are entered. Any remaining quantity is cancelled.

The orders with DQ attribute disclose only a part of the total order quantity to
the market.

88

An active order with disclosed condition tries to maximise the quantity as

possible regardless of the disclosed quantity i.e. a single trade takes place for
a quantity more than the disclosed quantity.

If an active order with the disclosed quantity cannot trade its total quantity, it is
added to the regular lot book in the price/time priority. The disclosed order quantity
is determined as follows:
a)
b)

If the remaining order quantity is less than or equal to the original

disclosed quantity, the disclosed order quantity is set as equal to
remaining order quantity.
If the remaining order quantity is more than the original disclosed
quantity, the disclosed order quantity is set to the original disclosed
quantity.

Once an order with the disclosed quantity has become a passive order, it trades only
in units of disclosed quantity or less. However, if there is no other competing order
with the same price, a single trade of as much quantity as possible takes place
between the two orders.
When the entire disclosed order quantity is fully traded the disclosed quantity gets
replenished and this continues till the entire order quantity is fully traded. Each time
the disclosed quantity is replenished; the order is stamped with the current trading
time and added to the regular order book as fresh order.
Stop Loss Matching

All stop loss orders entered into the system are stored in the stop loss book. These
orders can contain two prices:
(a)

Trigger Price: It is the price at which the order gets triggered from
the stop loss book.
(b)
Limit Price: It is the price for orders after the orders get triggered
from the stop loss book. If the limit price is not specified, the trigger
price is taken as the limit price for the order. The stop loss orders are
prioritised in the stop loss book with the most likely order to trigger
first and the least likely to trigger last. The priority is same as that of
the regular lot book.
The stop loss condition is met under the following circumstances:
(a)

Sell Order: A sell order in the stop loss book gets triggered when the
last traded price in the normal market reaches or falls below the
trigger price of the order.
(b)
Buy Order: A buy order in the stop loss book gets triggered when the
last traded price in the normal market reaches or exceeds the trigger
price of the order.
When a stop loss order with IOC condition enters the system, the order is released in
the market after it is triggered. Once triggered, the order scans the counter order
book for a suitable match to result in a trade or else is cancelled by the system.
RETDEBT Order Matching

89

The rules for matching the RETDEBT orders are similar to the Regular Lot book
except that RETDEBT order matching takes place only for orders in the RETDEBT
order book.
Odd Lot Order Matching

Odd Lot matching takes place only for orders in Odd Lot book. There are no partial
trades for an Odd Lot order i.e. each match is an exact match where the quantity of
the passive order is equal to that of the active order.
Auction Matching

All auction orders are entered into the auction order book. The rules for matching of
auctions are similar to that of the regular lot book except for the following points:
(a)
Auction order matching takes place at the end of the solicitor period
for the auction.
(b)
Auction matching takes place only across orders belonging to the same
auction.
(c)
All auction trades take place at the auction price.
Validation Check

While matching orders, the system performs the validation check, if the participant
of any of the orders is 'Suspended', the trade does not go through.

3.12 Trade Management

A trade is an activity in which a buy and a sell order match with each other. Matching
of two orders is done automatically by the system. Whenever a trade takes place,
the system sends a trade confirmation message to each of the users involved in the
trade. The trade confirmation slip gets printed at the trader workstation of the user
with a unique trade number. The system also broadcasts a message to the entire
market through the ticker window displaying the details of the trade.
This section describes trade-related activities like viewing the trades, trade
cancellation, etc. Before the trade is effected, the system performs checks with
respect to the following parameters:
(a)
(b)

The security in which the trade is to be effected is not suspended from

operations.
Trading members involved in the potential trade are not suspended
from operations.

Once the trade for an order entered is confirmed by the system, a message is sent to
the trader workstation. The system generates a Trade Confirmation Slip that is
printed on the printer of the trader workstation.
3.12.1 Trade Cancellation
The user can use trade cancellation screen for cancelling trades done during the day.
If the user is a corporate manager of a trading member firm, he can request for
trade cancellation for the trades of any dealer of the trading members firm and if he
90

is a branch manager of a branch, then he can request for trade cancellation for the
trades for any dealer of the branch of the trading member firm.
The user can request for trade cancellation either from the previous trades screen or
by using the function key provided in the workstation. The trade cancellation request
is sent to the Exchange for approval and message to that effect is displayed in the
message window. The counterparty to the trade also receives the message. The
counterparty then has to make similar request on the same trading day. Once both
the parties to trade send the trade cancellation request, the Exchange either
approves or rejects it. The message to that effect is displayed in the message
window.
When a request for the trade cancellation is approved by the Exchange, the parties
to trade receive a system message confirming the trade cancellation and the trade
cancellation slip is printed at their respective trader workstations. If the Exchange
rejects the trade cancellation request, the trade cancellation rejection slip is printed
at their respective trader workstations. If counter party to the trade does not enter a
trade cancellation request the Exchange rejects the trade cancellation request.

3.13 Auction
Auctions are initiated by the Exchange on behalf of trading members for settlement
related reasons. The main reasons are shortages, bad deliveries and objections.
There are three types of participants in the auction market:
(a)
Initiator: The party who initiates the auction process is called an
initiator.
(b)
Competitor: The party who enters on the same side as of the initiator
is called a competitor.
(c)
Solicitor: The party who enters on the opposite side as of the initiator
is called a solicitor.
The trading members can participate in the Exchange initiated auctions by entering
orders as a solicitor. e.g. If the Exchange conducts a buy-in auction, the trading
members entering sell orders are called solicitors.
When the auction starts, the competitor period for that auction also starts.
Competitor period is the period during which competitor order entries are allowed.
Competitor orders are the orders which compete with the initiators order i.e. if the
initiators order is a buy order, then all the buy orders for that auction other than the
initiators order are competitor orders. If the initiator order is a sell order then all the
sell orders for that auction other than the initiators order are competitor orders. After
the competitor period ends, the solicitor period for that auction starts. Solicitor
period is the period during which solicitor order entries are allowed. Solicitor orders
are the orders which are opposite to the initiator order i.e. if the initiator order is a
buy order, then all the sell orders for that auction are solicitor orders and if the
initiator order is a sell order, then all the buy orders for that auction are solicitor
orders.
After the solicitor period, order matching takes place. The system calculates trading
price for the auction and all possible trades for the auction are generated at the
calculated trading price. After this the auction is said to be complete. Competitor
period and solicitor period for any auction are set by the Exchange.
91

3.13.1 Entering Auction Orders

Auction order entry allows the user to enter orders into auctions that are currently
running. To view the information about currently running auctions Auction Inquiry
screen has to be invoked. Further one can view one's own outstanding orders for
any auction by invoking Outstanding Order Inquiry for auction market. All auction
orders are valid for the trading day only.
The user can do auction order entry by entering AU in the book type of the order
entry screen. Symbol and Series that is currently selected in any of the market
information windows (i.e. MW) provides the defaults in the auction order entry
screen. If Auction Outstanding Orders is up for an auction that is either in a
competitor or solicitor period, then the auction number has to be entered. All fields
in the auction order entry screen except auction number and settlement days are
same as normal market order entry screen. The screen also displays competitor
period and solicitor period.
The defaults that are provided on the auction inquiry screen are symbol, series,
auction number, settlement days and quantity (available for auction). The user can
edit the default values if required. The fields in the auction order entry screen that
has to be entered are PRO/CLI selection, account number (not mandatory),
participant and remarks.
Solicitor period for an auction starts as soon as the auction starts. The duration of
the solicitor period is set by the Exchange. The system accepts the solicitor orders in
any currently running auction only if the solicitor period for that auction is in
progress. Currently, the trading members cannot initiate auctions in any security.
They can only participate as solicitors in auctions initiated by the Exchange. In
Exchange initiated auctions, the competitor period is set to zero and therefore only
solicitor period is available.
(i) Entering Solicitor Order: To enter a solicitor order, auction order entry screen
has to be invoked and the auction number or symbol series in AUC No. (auction
number) field has to be entered. The AUC No. and symbol series combination is
validated and if an error is encountered then an appropriate error message is
displayed in the message window and the focus is set on the AUC No. When the
order details are found to be correct, the system assigns a unique order number to
the order and sends an order confirmation message to the trader workstation. If the
solicitor period for that auction is over, the order is not accepted. Auction number for
each security is displayed in the Auction Inquiry screen.
(ii) Validation of Auction Orders: Following validation checks are performed, in
addition to the routine order entry validation checks, to verify initiator orders:
(a)
If the auction market is not open for trading, the user is not allowed to
enter an auction order.
(b)
If a trading member or a participant is suspended, then no auctions
can be entered for the trading member or for the participant.
(c)
If the security is not allowed to trade in the auction market or if the
security is suspended, the orders for that security are not allowed.
(d)
If the quantity entered exceeds Warning Quantity Percentage, the
system asks the user for confirmation of the order.
(e)
Any order with a price outside the Day Min/Max range is not allowed.
92

Following validation checks are performed to verify the competitor and the solicitor
orders:
(a)
If a competitor order is entered, then a check is made if the auction in
which order entry is desired is in the competitor period.
(b)
If a solicitor order is entered, then a check is made if the auction in
which order entry is desired is either in competitor period or solicitor
period.
(c)
The Trading Member cannot enter order for a security in which initiator
order is entered against him.
(d)
Auction order entry in auctions which are yet in a pending state or
which are cancelled is prohibited.

3.13.2 Auction Order Modification

The user is not allowed to modify any auction orders.
3.13.3 Auction Order Cancellation
The user can cancel any solic itor order placed by him in any auction provided the
solicitor period for that auction is not over. The order cancellation procedure is
similar to that of normal market. The user can also use quick order cancellation key
to cancel his outstanding auction orders.
3.13.4 Auction Order Matching
When the solicitor period for an auction is over, auction order matching starts for
that auction. During this process, the system calculates the trading price for the
auction based on the initiator order and the orders entered during the competitor
and the solicitor period. Currently, for Exchange initiated auctions, the matching
takes place at the respective solicitor order prices.
Example:
Auction is held in XYZ for 5,000 shares. The closing price of XYZ on that day was Rs.
155. The last traded price of XYZ on that day was Rs. 150. The price of XYZ last
Friday was Rs. 151. The previous days close price of XYZ was Rs. 160. What is the
maximum allowable price at which the member can put a sell order in the auction for
XYZ? (The price band applicable for auction market is +/ - 20%)
Maximum price applicable in auction=Previous days close price*(100+price band)
= Rs. 160*1.20
= Rs. 192
Minimum price applicable in auction=Previous days close price*(100-price band)

93

3.14 Limited Physical Market

Pursuant to the directive of SEBI to provide an exit route for small investors holding
physical shares in securities mandated for compulsory dematerialised settlement, the
Exchange has provided a facility for such trading in physical shares not exceeding
500 shares. This market segment is referred to as 'Limited Physical Market' (small
window). The Limited Physical Market was introduced on June 7, 1999.
3.14.1 Salient Features of Limited Physical Market
(a)
(b)
(c)

(d)
(e)
(f)

(g)

Trading is conducted in the Odd Lot market (market type O) with

Book Type OL and series BT.
Order quantities should not exceed 500 shares.
The base price and price bands applicable in the Limited Physical
Market are same as those applicable for the corresponding Normal
Market on that day.
Trading hours are the same as that of the normal market.
Settlement for all trades is done on a trade-for-trade basis and
delivery obligations arise out of each trade.
Orders get matched when both the price and the quantity match in the
buy and sell order. Orders with the same price and quantity match on
time priority i.e. orders which have come into the system before will
get matched first.
Trading Members are required to ensure that shares are duly
registered in the name of the investor(s) before entering orders on
their behalf on a trade date.

3.15 Block Trading Session

The Exchange has introduced a separate trading session for the block trades from
November 14, 2005. In this session, trading is conducted in the Odd Lot market
(market type O) with Book Type OL and series BL. It is a 35 minute market; i.e.
the trading window shall normally remain open from 9:15 hours to 9:50 hours. There
is no pre-open and post close in the block trade session. For a block trade, order
should be of a minimum quantity of 5,00,000 shares or minimum value of Rs 5 crore
which ever is lower. Orders get matched when both the price and the quantity match
for the buy and sell order. Orders with the same price and quantity are matched on
time priority i.e. orders which have come into the system before will get matched
first. The securities, base price, alert quantity applicable in the block trade session
are same as those applicable for the corresponding Normal Market on that day. As
per SEBI requirement, member is required to put orders at a price not exceeding
(+/-) 1% from the previous close price/ruling market price, as applicable, of normal
market. Accordingly, every order pric e is validated for (+/ -) 1% on the ruling LTP in
normal market and any order away from this will be rejected by the system.
Currently, market order is not allowed for BL series. Order with special terms such as
'Stop Loss', 'Disclosed Quantity' is not available in this session

94

3.16 Retail Debt Market (RDM)

Trading in the Retail Debt Market takes place in the same manner in which the
trading takes place in the equities (Capital Market) segment. The RETDEBT Market
facility on the NEAT system of Capital Market Segment is used for entering
transactions in RDM session.
3.16.1 Members eligible for trading in RDM segment
Trading members who are registered members of NSE in the Capital Market segment
or Wholesale Debt Market segment are allowed to trade in Retail Debt Market (RDM)
subject to fulfilling the capital adequacy norms.
3.16.2 Trading Parameters
The trading parameters for RDM segment are as below:
Face Value

Rs. 100/-

Permitted Lot Size

10

Tick Size

Rs. 0.01

Operating Range

+/- 5%

Mkt. Type Indicator

D (RETDEBT)

Book Type

RD

3.16.3 Market Timings and Market Holidays

Trading in RDM segment takes place on all days of the week, except Saturdays and
Sundays and holidays declared by the Exchange in advance. The market timings and
the holidays on the RDM segment are the same as those on the Equities segment.
The Exchange however, can close the market on days other than the above schedule
holidays or may open the market on days originally declared as holidays. The
Exchange may also extend, advance or reduce trading hours when it deems fit and
necessary.
3.16.4 Trading System
The RETDEBT Market facility on the NEAT system of Capital Market Segment is used
for entering transactions in RDM session. The trading system features and user
navigation for RETDEBT Market are described below. Further details are available on
the on-line help facility of NEAT system:
(a)

(b)

Setting up Securities in Market Watch: For setting up securities in

the Market Watch screen, the user can enter the required details in
Symbol, Series and Market Type fields.
Order Entry: Buy/ Sell orders can be entered in RETDEBT Market by
selecting RD in the Book Type field.
95

(c)
(d)
(e)
(f)
(g)
(h)

(i)

(j)
(k)

(l)

(m)
(n)
(o)

(p)

(q)
(r)
(s)
(t)
(u)

Quantity: Order quantity should be in multiples of Market Lot.

Quantity conditions such as MF, AON and DQ are not allowed.
Price: Members can enter either market orders or limit price orders.
Order price for limit price orders should be in multiples of tick size.
PRO/CLI: In the PRO/CLI field only PRO and CLI orders are
allowed.
Time Conditions: Members can specify time conditions as Day or
IOC.
Participant Code: A valid Participant Code can be entered in this
field. Other options allowed are O, C, NCIT 'INST' and the trading
members own id. Orders in book type NT and SL are not allowed.
Order Cancellation / Modification: Order cancellation and
modification is allowed for orders entered in the RETDEBT Market.
Both Single and Quick Order Cancellation functions are available. Quick
Cancellation can also be done for all securities in the RETDEBT Market
by selecting the Book Type as RD and other parameters as relevant.
MBP: Member can query order information for the RETDEBT Market in
MBP by selecting RETDEBT as book type in the selection screen.
Orders are stacked according to price in MBP. The high, low, last trade
price, percentage change and average trade price figures are
calculated with respect to trades in RETDEBT Market.
Market Inquiry: Security statistics for RETDEBT market can be
viewed by selecting RETDEBT as market type.
Outstanding Orders/Activity log/ Previous Trade: Outstanding
order/ Activity log/ Previous Trade information in a particular security
can be viewed for RETDEBT Market by selecting the book type
RETDEBT in the respective selection screens.
Order and Trade Confirmation Slips: The order confirmation slip for
orders entered in RETDEBT Market displays RD as Book Type field.
Similarly, trade confirmation slip generated for RETDEBT Market trades
show D in the Market Type field.
Net Posit ion: The Net Position screen displays consolidated statistics
for all markets as well as separately for each market.
Market Movement: Market Movement statistics for a security can be
viewed by selecting market type as RETDEBT.
On-line Backup: In the On-line Backup function a facility is provided
to select order/trades based on market type. Alternately, members
can take a backup for all markets by selecting All in the Market Type
field.
Full Message Display: In Full Message Display, messages can be
filtered on Symbol and Series. The option to filter messages for a
market type is presently not available.
Offline Order Entry: This function is available for RETDEBT Market.
The structure for the input file is given in the online help.
Branch/User Order Value Limit: Branch/User Order Limit is
applicable for a particular Branch/User for orders across all Markets.
Securities Order Quantity Limit: Securities Order Quantity Limit is
applicable for a particular security across all Markets.
Order Limits: Order limits set by a user are applicable for a single
order across all Markets.
Ticker Selection: A facility is provided for filtering securities in the
ticker for RETDEBT market.

96

(v)

(w)

Reports: Trades report generated for members i.e. Trades Done,

Order Log and Open Orders report, displays records in ascending order
of security name. Within a security records are displayed by Market
Type.
Bhav Copy: Security statistics pertaining to RETDEBT Market trades
are shown separately in the Market Statistics report.

3.16.5 Trading Cycle

Trading in Retail Debt Market is permitted under Rolling Settlement, where in each
trading day is considered as a trading period and trades executed during the day are
settled based on the net obligations for the day. Settlement is on a T+2 basis i.e. on
the 2nd working day. For arriving at the settlement day all intervening holidays,
which include bank holidays, NSE holidays, Saturdays and Sundays are excluded.
Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades
settled on Thursday and so on.

3.17 Trading information downloaded to Members

The Exchange downloads certain trading related reports and files to the trading
member on a regular basis. Following is the list of reports and files downloaded to
the members.
(i) On-line Backup: The files are Trade.txt and Order.txt or file with user defined
name. Member can take on-line backup of orders and trades for the current trading
day only. The backup can be taken during market hours and till approximately 1
hour after the market close time.
(ii) Trader messages in Full message display: Full message area contains
member's own order and trade information across all securities. It is available for
current trading day only. An option to save as a text file is also provided. The trading
members are required to keep copy of full message area for a period as per NSE
regulations. Refer to section Full Message Display screen.
(iii) Bhav copy: Bhav copy is downloaded in \nsecmtdr\reports directory on a daily
basis. It is downloaded two times after market close. First bhav copy (Interim bhav
copy) downloaded approximately 20 minutes after the market close time. The second
bhav copy (final bhav copy) downloaded 20 minutes after the post close market. The
interim bhav copy is overwritten by final bhav copy. Users are advised to check for
message to this effect. The files downloaded are ddmmxxxx.ms and ddmmxxxx.md
where xxxx is the user id. The ms extension file is formatted txt file whereas the md
extension file has bhav copy records in csv (comma separated value) format. Only
the last seven bhav copy files are stored in the reports directory. When bhav copy is
broadcast, the system checks for the number of bhav copy files. If it is seven the
system deletes the earliest received file and stores the current days file.
(iv) Security Information: The Exchange downloads on a daily basis the following
files for the members to update their local database for NEAT front end. These files
are required to be unzipped and uploaded in their respective trading software by the
members on a daily basis.

97

Sr
1
2
3

File Name
security.zip
participant.zip
FreeFloat.txt

Content
security.txt
participant.txt
FreeFloat.txt

(v) Circulars: Circulars as and when issued by NSE, are available to members on
the website.
(vi) Order/Trade slips: The order/trade slips are Confirmation/Modification/
Cancellation/Rejection slips. The trade and order slips are generated on-line. The
trade confirmation is generated when a trade is executed and order slip when a
member places an order. The option at the supplementary menu Print Trade and
Order confirmation should be set ON. Members can also take print of confirmation
slips at the end of the day from the reprint option in the supplementary menu. The
trading members are required to keep copy of the trade confirmation slip for a period
as per NSE regulations.
(vii) Reports: Once the market closes, the details of trading activities done by the
user are generated as trade reports. They are downloaded on the workstation of
Corporate/Branch manager. Downloaded reports are stored at the workstation as
well as sent to the printer. This allows the user to reprint any report any time. The
reports that are available to the trading member are Market Statistics and Market
Indices.
(viii) Market Statistics: The purpose of this report is to show the market statistics
of that trading day. This report gives details related to all the securities traded on
that day for all markets.
(ix) Market Indices: A separate Market Indices Report is also disseminated to
members which contains details regarding the Open, High, Low, Close, Previous
Close and % change over the Previous Close of S&P CNX Nifty, S&P CNX Defty, CNX
Nifty Junior, S&P CNX500, CNX Midcap, CNX IT, Bank Nifty, CNX 100 and Nifty
Midcap 50, CNX Realty, CNX MNC, CNX FMCG, CNX Energy, CNX Infra, CNX Pharma,
CNX PSU Bank, CNX PSE and CNX Service and India VIX.
(x) Trade Verification: A facility to verify trades is available on the NSE website.
Using this facility, an investor who has received a contract note from a trading
member of the Exchange, can check whether the trade has been executed on the
Exchange. This facility is available on the NSE website for the Capital Market
segment, F&O (Derivatives) segment and Retail Debt Market segment.

3.18 Internet Broking

SEBI Committee approved the use of Internet as an Order Routing System (ORS) for
communicating clients' orders to the Exchanges through brokers. ORS enables
investors to place orders with his broker and have control over the information and
quotes and to hit the quote on an on-line basis. Once the brokers system receives
the order, it checks the authenticity of the client electronically and then routes the
order to the appropriate Exchange for execution. On execution of the order, it is
confirmed on real time basis. Investor receives reports on margin requirement,
payments and delivery obligations through the system. His ledger and portfolio
account get updated online.

98

NSE was the first stock exchange in India to launch internet trading in early February
2000. It provides web-based access to investors to trade directly on the Exchange.
The orders originating from the PCs of the investors are routed through the Internet
to the trading terminals of the designated brokers with whom they are connected
and further to the Exchange for trade execution. Soon after these orders get
matched and result into trades, the investors get confirmation about them on their
PCs through the same internet route.

3.19 Co-location
The term co-location/proximity hosting services means space, power,
telecommunications, and other ancillary products and services made available to
market participants for the purpose of enabling them to position their computer
systems/servers in close proximity to the transaction execution facility (at the
Exchange). Exchanges internationally are introducing co-location services to support
high frequency trading using Algorithmic Trading (ALGO) and Direct Market Access
(DMA). In keeping with the global trends and maintaining high service excellence,
NSE started co-location facility in Jan 2010. The state-of-the-art co-location facility
at NSE provides one of the most modern datacenter facilities.

3.20 Wireless Application Protocol (WAP)

SEBI has also approved trading through wireless medium on WAP Platform. NSE-IT
launched the Wireless Application Protocol (WAP) in November 2000. This provides
access to its order book through the hand held devices, which use WAP technology.
This serves primarily retail investors who are mobile and want to trade from any
place when the market prices for stocks at their choice are attractive. Only SEBI
registered members who have been granted permission by the Exchange for
providing internet based trading services can introduce the service after obtaining
permission from the Exchange.

99

CHAPTER 4: CLEARING, SETTLEMENT AND RISK

MANAGEMENT
4.1 Introduction
After a trade is executed, it needs to be settled. The clearing and settlement
mechanism in Indian securities market has witnessed significant changes and several
innovations during the last decade. These include use of the state-of-art information
technology, emergence of clearing corporations to assume counterparty risk, shorter
settlement cycle, dematerialization, electronic transfer of securities and fine-tuned
risk management system.
Till January 2002, the stock exchanges in India were following a system of account
period settlement for cash market transactions. An account period settlement is a
settlement where the trades pertaining to a period stretching over more than one
day are settled. For example, trades for the period Monday to Friday are settled
together. The obligations for the account period are settled on a net basis.
Instead of the account period settlement, T+2 rolling settlement was introduced for
all securities. Rolling settlement refers to the settling of trades at a standard fixed
period of days after the execution occurred. In a rolling settlement, each trading day
is considered as a trading period and trades executed during the day are settled
based on the net obligations for the day.

4.2 Key terminologies used in Clearing and Settlement Process

Pay-in day is the day when the trading members/brokers are required to make
payment of funds or delivery of securities to the clearing corporation of the Exchange
for all transactions traded by or through them in the respective settlement period.
(a)
Securities Pay-in: The process of delivering securities to the
clearing corporation to effect settlement of a sale transaction.
(b)
Funds Pay-in: The process of transfer of funds to the clearing
corporation to pay for purchase transactions.
Pay-out day is the day when the clearing corporation of the stock exchange
transfers funds and securities to the broker/trading member who have receivable
obligation.
(a)
Securities Pay-out: The process of receiving securities from the
clearing corporation to complete the securities settlement of a
purchase transaction.
(b)
Funds Pay-out: The process of transfers of funds from the clearing
corporation to complete the funds settlement of a sale transaction.

100

4.3 Transaction Cycle

Decision to
Trade

Placing Order

Settlement
of Trades

Trade
Execution

Funds/
Securities

Transaction Cycle

Clearing of
Trades

Figure 4.1: Transaction cycle

Steps in Transaction Cycle
(a)

(b)
(c)
(d)

(e)

A person holding assets (securities/funds), either to meet his liquidity

needs or to reshuffle his holdings in response to changes in his
perception about risk and return of the assets, decides to buy or sell
the securities.
He selects a broker and instructs him to place buy/sell order on an
exchange.
The order is converted to a trade as soon as it finds a matching
sell/buy order.
At the end of the trade cycle, the trades are netted to determine the
obligations of the trading members to deliver securities/funds as per
settlement schedule.
Buyer (seller) delivers funds (securities) and receives securities
(funds) and acquires ownership of the securities. A securities
transaction cycle is presented in Figure 4.1.

101

4.4 Settlement Agencies

The roles of several entities involved in the process of clearing and settling the
trades executed on Exchanges are explained below:
(i) Clearing Corporation (NSCCL): The NSCCL is responsible for post-trade
activities of a stock exchange. Clearing and settlement of trades and risk
management are its central functions. It clears all trades, determines obligations of
members, arranges for pay-in of funds/securities, receives funds / securities,
processes for shortages in funds/securities, arranges for pay-out of funds/securities
to members, guarantees settlement, and collects and maintains margins / collateral
base capital / other funds.
(ii) Clearing Members: They are responsible for settling their obligations as
determined by the NSCCL. They have to make available funds and/or securities in
the designated accounts with clearing bank/depository participant, as the case may
be, to meet their obligations on the settlement day. In the capital market segment,
all trading members of the Exchange are required to become the Clearing Member of
the Clearing Corporation.
(iii) Custodians: A custodian is an entity who is responsible for safeguarding the
documentary evidence of the title to property like share certificates, etc. The title to
the custodians property remains vested with the original holder, or in their
nominee(s), or custodian trustee, as the case may be. In NSCCL, custodian is a
clearing member but not a trading member. The custodian settles trades assigned by
trading members. The custodian is required to confirm whether it is going to settle a
particular trade or not. If it is confirmed, the NSCCL assigns that obligation to that
custodian and the custodian is required to settle it on the settlement day. If the
custodian rejects the trade, the obligation is assigned back to the trading / clearing
member.
(iv) Clearing Banks: Clearing banks are a key link between the clearing members
and NSCCL for funds settlement. Every clearing member is required to open a
dedicated settlement account with one of the clearing banks. Based on his obligation
as determined through clearing, the clearing member makes funds available in the
clearing account for the pay-in and receives funds in case of a pay-out. Multiple
clearing banks provide advantages of competitive forces, facilitate introduction of
new products viz. working capital funding, anywhere banking facilities, the option to
members to settle funds through a bank, which provides the maximum services
suitable to the member.
Functions of Clearing Banks

The clearing banks are required to provide the following services as a single window
to all clearing members of National Securities Clearing Corporation Ltd. as also to the
clearing corporation:
(a)

Branch network in cities that cover bulk of the trading cum clearing
members

102

(b)
(c)

(d)
(e)
(f)

(g)
(h)
(i)

High level automation including Real time gross settlement (RTGS) 8

and electronic funds transfer (EFT) facilities
Facilities like (i) dedicated branch facilities (ii) software to interface
with the clearing corporation (iii) access to accounts information on a
real time basis
Value-added services to members such as free-of-cost funds transfer
across centers etc.
Providing working capital funds.
Stock lending facilities i.e. lending of a security by the registered
owner, to an authorized third party, for a fixed or open period of time,
for an agreed consideration secured by collateral. The demand to
borrow securities comes mainly from market makers to cover short
positions or take arbitrage opportunities.
Services as Depository Participants (an agent of the depository
through which it interfaces with the investor).
Other Capital Market related facilities
All other banking facilities like issuing bank guarantees / credit
facilities etc.

(v) Depositories: A depository is an entity where the securities of an investor are

held in electronic form. The person who holds a demat account is a beneficiary
owner. In case of a joint account, the account holders are beneficiary holders of that
joint account. Depositories help in the settlement of the dematerialised securities.
Each custodian/clearing member is required to maintain a clearing pool account with
the depositories. He is required to make available the required securities in the
designated account on settlement day. The depository runs an electronic file to
transfer the securities from accounts of the custodians/clearing member to that of
NSCCL. As per the schedule of allocation of securities determined by the NSCCL, the
depositories transfer the securities on the pay-out day from the account of the
NSCCL to those of members/custodians.

4.5 Clearing and Settlement Process

While NSE provides a platform for trading to its trading members, the National
Securities Clearing Corporation Ltd. (NSCCL) determines the funds/securities
obligations of the trading members and ensures that trading members meet their
obligations. NSCCL becomes the legal counterparty to the net settlement obligations
of every member. This principle is called `novation' and NSCCL is obligated to meet
all settlement obligations, regardless of member defaults, without any discretion.
Once a member fails on any obligations, NSCCL immediately cuts off trading and
initiates recovery.
4.5.1 Clearing Process
Determination of Obligation: NSCCL determines what counter-parties owe and
what counter-parties are due to receive on the settlement date. The NSCCL
8

Real Time Gross Settlement (RTGS) is the concept designed to achieve sound risk
management in the settlement of interbank payments. Transactions are settled across
accounts held at the Central Bank on a continuous gross basis where settlement is immediate,
final and irrevocable.

103

interposes itself as a central counterparty between the counterparties to trades

and nets the positions so that a member has security wise net obligation to
receive or deliver a security and has to either pay or receive funds.
At the end of each trading day, concluded or locked-in trades are received from
NSE by NSCCL. NSCCL determines the cumulative obligations of each member
and electronically transfers the data to Clearing Members (CMs). This implies that
all trades concluded during a particular trading period are settled together. A
multilateral netting procedure is adopted to determine the net settlement
obligations (delivery / receipt positions) of CMs. NSCCL then allocates or assigns
delivery of securities inter se the members to arrive at the delivery and receipt
obligation of funds and securities by each member.
4.5.2 Settlement Process
The settlement process begins as soon as members obligations are determined
through the clearing process. The clearing banks and depositories provide the
necessary interface between the custodians/clearing members (who clear for the
trading members or their own transactions) for settlement of funds/securities
obligations of trading members. The clearing corporation provides a major link
between the clearing banks, clearing members and the depositories. This link
ensures actual movement of funds and securities on the prescribed pay-in and payout day. The core processes involved in the settlement process are:
(i) Pay-in of Funds and Securities: The members bring in their funds/securities to
the NSCCL. They make available required securities in designated accounts with the
depositories by the prescribed pay-in time. The depositories move the securities
available in the accounts of members to the account of the NSCCL. Likewise
members with funds obligations make available required funds in the designated
accounts with clearing banks by the prescribed pay-in time. The NSCCL sends
electronic instructions to the clearing banks to debit members accounts to the extent
of payment obligations. The banks process these instructions, debit accounts of
members and credit accounts of the NSCCL.
(ii) Pay-out of Funds and Securities: After processing for shortages of
funds/securities and arranging for movement of funds from surplus banks to deficit
banks through RBI clearing, the NSCCL sends electronic instructions to the
depositories/clearing banks to release pay-out of securities/funds. The depositories
and clearing banks debit accounts of NSCCL and credit settlement accounts of
members. Settlement is complete upon release of pay-out of funds and securities to
custodians/members.
Settlement is deemed to be complete upon declaration and release of pay-out of
funds and securities. Exceptions may arise because of short delivery of securities by
CMs, bad deliveries or company objections on the pay-out day. (The detailed
explanation of securities and funds settlement follows in the later section).
NSCCL identifies short deliveries (discussed later) and conducts a buying-in
auction on the day after the pay-out day through the NSE trading system. The
delivering CM is debited by an amount equivalent to the securities not delivered and
valued at a valuation price (the closing price as announced by NSE on the day
previous to the day of the valuation). If the buy-in auction price is more than the
valuation price, the CM is required to make good the difference. All shortages not
104

bought-in are deemed closed out at the highest price between the first day of the
trading period till the day of squaring off or closing price on the auction day plus
20%, whichever is higher. This amount is credited to the receiving member's account
on the auction pay-out day.
The settlement process for transactions in securities in the CM segment of NSE is
presented in the Figure 4.2.

NSE

1
Depositories

NSCCL

Clearing Banks

6
2
5

Custodians/CMs

10

4
11

Figure 4.2: Settlement Process in CM segment of NSE

Explanation:
(1)
(2)

(3)
(4)
(5)
(6)
(7)
(8)
(9)

Trade details from Exchange to NSCCL (real-time and end of day

trade file).
NSCCL notifies the consummated trade details to CMs/custodians
who affirm back. Based on the affirmation, NSCCL applies
multilateral netting and determines obligations.
Download of obligation and pay-in advice of funds/securities.
Instructions to clearing banks to make funds available by pay-in
time.
Instructions to depositories to make securities available by pay-intime.
Pay-in of securities (NSCCL advises depository to debit pool account
of custodians/CMs and credit its account and depository does it).
Pay-in of funds (NSCCL advises Clearing Banks to debit account of
custodians/CMs and credit its account and clearing bank does it).
Pay-out of securities (NSCCL advises depository to credit pool
account of custodians/CMs and debit its account and depository does
it).
Pay-out of funds (NSCCL advises Clearing Banks to credit account of
custodians/CMs and debit its account and clearing bank does it).

105

(10) Depository informs custodians/CMs through DPs.

(11) Clearing Banks inform custodians/CMs.
4.5.3 Settlement Cycle
Settlement cycles for securities in dematerialised and physical mode is explained
below:
Settlement Cycle For Dematerialised Securities
(i) Normal Market: The trades executed each trading day are considered as a trading

period and trades executed during the day are settled based on the net obligations
for the day. At NSE, trades in rolling settlement are settled on a T+2 basis i.e. on the
2nd working day. Typically trades taking place on Monday are settled on Wednesday,
Tuesday's trades settled on Thursday and so on.
A tabular representation of the settlement cycle for rolling settlement is given below
in Table 4.1:
Table 4.1: Settlement Cycle Normal Market

Activity

Day

Trading

Rolling Settlement Trading

Clearing

Custodial Confirmation

T+1 working days

Delivery Generation

T+1 working days

Securities and Funds pay-in

T+2 working days

Securities and Funds pay-out

T+2 working days

Settlement

Valuation of shortages based on closing prices

T+2 working days
(at T+1 closing prices)
Post
Settlement

Auction

T+2 working days

Auction settlement

T+3 working days

Bad Delivery Reporting

T+4 working days

Rectified bad delivery pay-in and pay-out

T+6 working days

Re-bad delivery reporting and pickup

T+8 working days

Close out of re-bad delivery and funds pay-in

T+9 working days
& pay-out
(ii) Inter Institutional Deals: Trading in this market segment is available for

'institutional investors' only. In order to ensure that the overall FII limits are not
violated, selling in this segment is restricted to FII clients. Buying is restricted to
Institutional clients. Members are required to enter the custodian participant code at
the time of order entry and to ensure that the selling/buying restrictions are strictly
adhered to. A sale order entered by trading members on behalf of non FII clients or
a buy order entered by trading members on behalf of non institutional (FII, FI,
Banks, Mutual Funds & Insurance Companies) clients, is deemed to be invalid. The
member entering the invalid order is further liable for disciplinary action, which may
include penalties, penal action, withdrawal of trading facilities, suspension etc.

106

Deals executed in this segment are cleared on a T+2 rolling basis. Settlement of all
transactions is compulsorily in demat mode only.

The settlement cyc le for this segment is shown below in Table 4.2:
Table 4.2: Settlement Cycle Inter Institutional Deals

Activity

Day

Trading

Rolling Settlement Trading

Clearing

Custodial Confirmation

T+1 working days

Delivery Generation

T+1 working days

Securities and Funds pay-in

T+2 working days

Securities and Funds pay-out

T+2 working days

Settlement

Valuation of
closing prices
Post Settlement

shortages

based

on

Close out

at T+1 closing prices

T+2 working days

Settlement Cycle For Physical Securities

Limited Physical Market: For limited physical markets, settlement for trades is done

on a trade-for-trade basis and delivery obligations arise out of each trade.

Salient features of Limited Physical Market settlement are:
(a)

(b)

(c)
(d)

(e)
(f)
(g)

Delivery of shares in street name and market delivery (clients holding

physical shares purchased from the secondary market) is treated as bad
delivery. The shares standing in the name of individuals/HUF only would
constitute good delivery. The selling/delivering member must necessarily
be the introducing member.
Any delivery of shares which bears the last transfer date on or after the
introduction of the security for trading in the LP market is construed as
bad delivery.
Any delivery in excess of 500 shares is marked as short and such
deliveries are compulsorily closed-out.
Shortages, if any, are compulsorily closed-out at 20% over the actual
traded price. Unrectified bad delivery and re-bad delivery are
compulsorily closed-out at 20% over the actual traded price.
All deliveries are compulsorily required to be attested by the
introducing/ delivering member.
The buyer must compulsorily send the securities for transfer and
dematerialisation, latest within 3 months from the date of pay-out.
Company objections arising out of such trading and settlement in this
market are reported in the same manner as is currently being done for
normal market segment. Securities, however, would be accepted as
valid company objection, only if the securities are lodged for transfer
within 3 months from the date of pay-out.

107

The settlement cycle for this segment is same as for the rolling settlement, as shown
in Table 4.3 below:
Table 4.3: Settlement Cycle Physical Securities

Activity

Day

Trading

Rolling Settlement Trading

Clearing

Custodial Confirmation

T+1 working days

Delivery Generation

T+1 working days

Securities and Funds pay-in

T+2 working days

Securities and Funds pay-out

T+2 working days

Assigning of shortages for close out

T+2 working days

Reporting and pick-up of bad delivery

T+4 working days

Close out of shortages

T+4working days

Replacement of bad delivery

T+6 working days

Reporting of re-bad and pick-up

T+8 working days

Close out of re-bad delivery

T+9 working days

Settlement
Post Settlement

4.6 Securities and Funds Settlement

Settlement is done from two aspect- Securities settlement and Funds settlement
(Figure 4.3). These are discussed below.
Settlement

Securities
Settlement

Funds
Settlement

Figure: 4.3 Types of settlement

4.6.1 Securities Settlement
(a)
(b)

(c)

The
securities
obligations
of
members
are
downloaded
to
members/custodians by NSCCL after the end of the trading day.
The members / custodians deliver the securities to the clearing
corporation on the pay-in day in case of physical settlement and make
available the required securities in the pool accounts with the depository
participants in case of dematerialised securities.
Members are required to open accounts with depository participants of
both the depositories, NSDL and CDSL. Delivering members are required
to deliver all documents to the clearing corporation (in case of physical
settlement) between 9:30 a.m. and 10:30 a.m. on the settlement day.
Receiving members are allotted specific time slots on settlement day to
collect the documents fro m the clearing corporation at Mumbai. In case
of dematerialised settlement, the members receive their obligation by
108

(d)

(e)
(f)

2.30 pm on T + 1 day. The members need to arrange for the securities

as per their obligations and give instructions by 10.30 am on the pay-in
day.
In case of NSDL, the members need to give instructions to move the
securities to the settlement account of NSCCL, whereas in case of CDSL
pay-in is done based on settlement ID through in which members are
required to provide separate balances for each settlement.
The members need to ensure that the settlement number and type are
correctly entered to avoid any defaults.
Pursuant to SEBI directive9 , NSCCL has introduced a settlement system
for direct delivery of securities to the investors accounts with effect from
April 2, 2001. This facility is known as Direct Payout to Investors which
is explained below.

Direct Payout to Investors

NSCCL has introduced the facility of direct payout (i.e. direct delivery of securities)
to clients' account on both the depositories. It ascertains from each clearing
member, the beneficiary account details of their respective clients who are due to
receive pay out of securities. Based on the information received from members, the
clearing corporation sends payout instructions to the depositories, so that the client
receives the pay out of securities directly to their accounts on the pay-out day. The
client receives payout to the extent of instructions received from the respective
clearing members. To the extent of instruction not received, the securities are
credited to the CM pool account of the member. Following are the salient features of
Direct Payout to Investors
(a)

(b)
(c)

(d)
(e)

(f)

(g)

Clearing members are required to provide a file to NSCCL for effecting

pay out to investors' accounts for a particular settlement type,
settlement number and delivery type. The file is to be provided as per
the structure specified by NSCCL.
The time limit for submission of files is up to 9.30.am on the pay out
day
The files are uploaded by NSCCL in its system and returned with the
indication of the success/rejection of the file and the records. This is
purely a validation of the correctness of the file and record formats.
Clearing members should provide details of beneficiary account of the
clients of the trading members in any one of the depositories.
Credit to the accounts of various constituents (i.e. client account and
CM Pool / CM Clearing account) would be in the same order as
specified by the clearing member in the file given to NSCCL.
If for any client account record, the quantity requested for direct
payout is more than the balance available for pay out to the clearing
member in that depository, the quantity available in that depository is
directly credited to members settlement account in that depository. If
the member receives entire shares in NSDL the same will be
transferred to members pool account in NSDL.
In the following situations, the pay out is credited to CM Pool /
Clearing account of the clearing members :

vide its circular SMDRP/Policy/Cir-05/2001 dated February 1, 2001

109

(h)

Where the clearing members fail to provide the details of the

beneficiary account or where the credit to the beneficiary
accounts of the clients fail, or any account whatsoever.

The remaining quantity received from other depository as pay

out is credited to the CM Pool / Clearing account of the clearing
member with the respective depositories
If the member's client has not paid the dues to the member for the
said securities or for any other reason, the member has valid
justification not to release the payout of a client direct in such a
situation the member may not be giving the beneficiary account details
of such client's in the file. In case the investor has paid the dues for
delivery of securities and there is no valid justification for not releasing
pay-out directly to the client, the member has to provide the details of
its clients beneficiary account so that direct credit can be given to the
client.

Problems pertaining to Securities Settlement

Broadly, there exist three types of settlement problems pertaining to securities

settlement:
(i) Short Deliveries: A short delivery/failed delivery takes place when a broker, a
custodian or the clearing corporation delivers fewer securities than what were
contracted for either to another broker, a custodian or the clearing corporation. On
the securities pay-in day, clearing member communicate to the clearing corporation
about the securities that he will be able to deliver and those securities which he will
not be able to deliver. Also informs an amount equivalent to the securities not
delivered by him valued at the valuation price (the closing price on the day previous
to the day of valuation). This is called valuation debit. A valuation debit is also
conducted for bad delivery by clearing members. This problem can arise in case of
both physical and dematerialized settlement. (Valuation debit is explained in the
later section)
(ii) Bad Deliveries: Bad deliveries (deliveries which are prima facie defective) are
required to be reported to the clearing corporation within two days from the receipt
of documents. The delivering member is required to rectify these within two days.
Un-rectified bad deliveries are assigned to auction on the next day. This problem can
arise only in case of physical settlement.
(iii) Company Objections: Company objections arise when documents for
securities transfer are returned due to signature mismatch or for any other reason.
The original selling CM is normally responsible for rectifying/replacing defective
documents to the receiving CM as per pre-notified schedule. The CM on whom
company objection is lodged has an opportunity to withdraw the objection if the
objection is not valid or the documents are incomplete (i.e. not as required under
Guideline No.100 or 109 of SEBI Good/Bad delivery guidelines), within 7 days of
lodging the complaint against him. If the CM is unable to rectify/replace defective
documents on or before 21 days, NSCCL conducts a buying-in auction for the nonrectified part of defective document on the next auction day through the trading
system of NSE. All objections, which are not bought-in, are deemed closed out on
the auction day at the closing price on the auction day plus 20%. This amount is
credited to the receiving member's account on the auction pay-out day.

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4.6.2 Funds Settlement

Currently, NSCCL (the clearing corporation) offers settlement of funds through the
clearing banks appointed by it. Every clearing member is required to maintain and
operate a clearing account with any one of the empanelled clearing banks at the
designated clearing bank branches. The clearing account is to be used exclusively for
clearing & settlement operations.
Clearing Account

Every clearing member is required to maintain and operate a clearing account with
any one of the empanelled clearing banks at the designated clearing bank branches.
The clearing account is to be used exclusively for clearing operations i.e., for settling
funds and other obligations to the clearing corporation including payments of
margins and penal charges. Clearing members are required to authorise the clearing
bank to access their clearing account for debiting and crediting their accounts,
reporting of balances and other information as may be required by NSCCL from time
to time as per the specified format. The clearing bank will debit/ credit the clearing
account of clearing members as per instructions received from the clearing
corporation. A clearing member can deposit funds into this account in any form, but
can withdraw funds from this account only in self-name.
Change in Clearing Bank

In case a clearing member wishes to shift a clearing account from one designated
clearing bank to another, the procedure is as follows:
(a)

(b)
(c)

(d)

The CM clearing member while requesting the clearing corporation for

a change in the clearing bank account should either:
(i) Furnish the no objection certificate (NOC) received by the member
from the existing clearing bank for shifting of account, or
(ii) In case no response was received by the clearing member from the
existing clearing bank in respect of the NOC request even after a
minimum waiting period of a fortnight, a declaration to the above
effect along with an acknowledged copy of the NOC request made
by the member to the existing clearing bank.
The c learing corporation would thereon issue a letter of introduction to
the other designated clearing bank.
On opening the account with the other designated clearing bank, the
clearing member should submit to the clearing corporation, the
account particulars issued by the bank and also the acknowledged
copy of the letter issued by the clearing member to the clearing bank.
The clearing corporation should thereon communicate the date from
which the new clearing account will be operational and also the date
after which the existing clearing account may be closed by the clearing
member.

Settlement of Funds

(a)

Members are informed of their funds obligation for various settlements

through the daily clearing data download. The daily funds statement
111

(b)

(c)

(d)

(e)

gives date-wise details of each debit/ credit transaction in the

members clearing account whereas the summary statement
summarises the same information for a quick reference.
The member account may be debited for various types of transactions
on a daily basis. The member is required to ensure that adequate
funds are available in the clearing account towards all obligations, on
the scheduled date and time. The member can refer to his various
obligation statements and provide for funds accordingly.
To ensure timely fulfillment of funds obligatio ns, members may avail of
the facility of standing instructions to transfer the requisite amount
from some other account to the clearing account or a temporary
overdraft facility from the bank. In case the member has availed such
a facility, the member may furnish details of his obligation to the bank
to ensure timely transfer of funds towards the same to avoid
inconvenience.
The member with a funds pay-in obligation is required to have clear
funds in his account on or before 11.00 a.m. on the scheduled pay-in
day.
The payout of funds is credited to the clearing account of the members
on or after 1.30 p.m. on the scheduled payout day.

Funds shortages

In case there is a funds shortage of a particular specific value, trading is not

permitted and securities payout is withheld as per the norms in place from time to
time.
Penal Charges

Penalties are
(a)
(b)
(c)
(d)
(e)
(f)

charged to members for:

Failure to fulfill their funds obligations
Failure to fulfill their securities deliverable obligations
Gross Exposure & Turnover Violations
Margin Shortages
Security Deposit Shortages
Other violations in respect of client code modifications, nonconfirmation of custodial trades, company objections reported against
the members' etc.

4.7 Shortages Handling

On the securities pay-in day, NSCCL identifies short deliveries and the respective
clearing member is debited by an amount equivalent to the securities not delivered
by him and valued at a valuation price. This is called a valuation debit. A valuation
debit is also conducted for bad delivery by clearing members.
NSCCL conducts a buying-in auction for security shortages on the day after the payout day through the NSE trading system. If the buy-in auction price is more than the
valuation price, the member is required to make good the difference.

112

4.7.1 Valuation Prices

Prices at which valuation debits are conducted called Valuation Prices and are
calculated as below:
(i) Valuation Price for failure to deliver for Regular Market, and Limited
Physical Market Deals: The valuation price for securities which were not delivered
on the settlement day for securities, is the closing price of such securities, on the
immediate trading day preceding the pay-in day for the securities.
(ii) Valuation Price for Bad Delivery for Regular Market and the Limited
Physical Market Deals: The valuation price for securities which constitute bad
deliveries, is the closing price of such securities, on the immediate trading day
preceding the bad delivery rectification day for the securities.

4.7.2 Close-out Procedures

All shortages not bought-in are deemed closed out at the highest price between the
first day of the trading period till the day of squaring off or closing price on the
auction day plus 10%/20% (as the case may be). This amount is credited to the
receiving member's account on the auction pay-out day.
The close out procedure is done in the following manner for different markets and
varies from case to case.
(i) For Regular Market:
(a)

(b)

(c)

In the case of failure to give delivery: At the highest price

prevailing in the NSE from the first day of the relevant trading period
till the day of closing out or 20% above the closing price on the
auction day, whichever is higher. In cases of securities having
corporate actions all cases of short delivery of cum transactions which
cannot be auctioned on cum basis or where the cum basis auction pay
out is after the book closure/record date, would be compulsory closed
out. For compulsory close out, the following formula is applicable:
(i)
Higher of 10% above the closing price of the security in
Normal Market on the auction day
(ii)
The highest traded price from first trading day of the
settlement till the auction day.
In the case of non rectification/replacement for bad delivery:
At the highest price prevailing in the NSE from the first day of the
relevant trading period till the day of the closing out or 20% above the
official closing price on the auction day, whichever is higher.
In the case of non rectification/replacement for objection
cases: At 20% above the official closing price on the auction day.

(ii) For Limited Physical Market Deals:

(a)
(b)

In the case of failure to give delivery: At 20% over the actual

trade price
In the case of non rectification/replacement for bad delivery:
At 10% over the actual trade price

113

(c)

In the case of non rectification/replacement for objection

cases: At 20% above the official closing price in regular market on the
auction day.

(iii) Auction Market:

(a)

(b)

In the case of auction non delivery: When the auction seller fails to
deliver in part or full on auction pay-in day, the deal is squared up at
the highest price prevailing in the NSE from the first day of the
relevant trading period till the day of closing out or 20% over the
official closing price on the close out day whichever is higher and is
charged to the auction seller unless otherwise specified.
In the case of an auction bad delivery: An auction delivery
reported as bad delivery is squared up at the highest price prevailing
in the NSE from the first day of the relevant trading period till the day
of closing out or 10% over the official closing price on the close out
day, whichever is higher and will be charged to the auction seller
unless otherwise specified.

(iv) Rectified/Replaced bad deliveries reported as bad delivery (Rebad

delivery):
(a)

For Regular Market Deals: At the highest price prevailing in the NSE
from the first day of the relevant trading period till the day of the
closing out or 10% above the official closing price on the auction day
whichever is higher.

(b)

For Limited Physical Deals: Rectified / replaced shares reported as

bad delivery (Rebad delivery) is squared up at 10% over the actual
trade price.

(v) Company objection cases reported as bad delivery:

Rectified /replaced company objection reported as bad delivery is squared up at 10%
above the official closing price on the auction day.
(vi) C lose out price for deleted security:
Security for which trading has been discontinued on the Exchange (hereinafter
referred to as deleted security), c lose out shall be the last 26 weeks average trade
price on the exchange with a close out mark up of 20%.
(vii) Deleted security on account of payment of additional call money:
In the case of securities for which trading has been discontinued on the Exchange on
account of payment of additional call money (deleted security), the security where
the respective call money has been paid (new security) will be considered to arrive at
the closing price.
Company objections received in the 'deleted security' will be required to be reported
in the 'new security' symbol / series. In case the 'new security' is not available for
the reason of such security not being introduced for trading on the Exchange/trading
114

being discontinued on the Exchange, company objections will be required to be

reported in the 'deleted security' and closing price for such deleted security will be at
20 % over the official closing price on the last traded day of the 'deleted security' on
the Exchange.
(viii) Deleted security on account of payment of redemption:
In the case of securities for which trading has been discontinued on the Exchange on
account of redemption (deleted security), the security (with the new face value after
redemption) introduced for trading by the Exchange (new security) will be
considered to arrive at the closing price.
Company objections received in the 'deleted security' will be required to be reported
in the new security symbol / series and members will be entitled to claim redemption
amount as corporate benefit.
In case the 'new security' is not available for the reason of such security not being
introduced for trading on the Exchange / trading being discontinued on the Exchange
on account of full redemption, company objections will be required to be reported in
the 'deleted security' and closing price for such deleted security will be at 20% over
the official closing price on the last traded day of the 'deleted security' on the
Exchange.
(ix) Deleted security on account of merger / amalgamation / hive off /
scheme of restructuring:
In the case of securities for which trading has been discontinued on the Exchange on
account of merger / amalgamation/ scheme of restructuring ('deleted security'), the
security with which the deleted security is merged / amalgamated / hived off /
restructured into ('new security') will be considered to arrive at the closing price.
Closing price for such 'deleted security' will be the official closing price of the new
security on the auction day prevalent on the Exchange. In case where the price of
the 'new security' is not available for the reason of such security not being traded on
the Exchange, the closing price for such deleted security will be at 20% over the
official closing price on the last traded day of 'deleted security' on the Exchange. In
case, where more than one security ('additional securities') is being given by the
company in lieu of the 'deleted security', the claim of company objection lodged for
such 'deleted security' shall be settled as follows:
(a)
If such 'additional securities' are traded on the Exchange, in the ratio
in which they have been issued by the company.
(b)
If any one or more of these 'additional securities' are not traded on
any Stock Exchange, no claim shall arise, for such security not traded.
(c)
If any one or more of these 'additional securities' are not traded on the
Exchange but traded on some other Stock Exchanges, the relevant
closing price of such securities shall be the closing price on the
Regional Exchange, to be notified by NSCCL.

(x) Close out price for bonds:

(a)

In case of failure to give delivery, non rectification/replacement of bad

delivery, rectified/replaced bad delivery subsequently reported as re115

(b)

bad, auction non-delivery, and auction delivery reported as bad

delivery, closing out price will be the highest rate prevailing on the
Exchange from the first day of the relevant trading period till the day
of closing out or 5% over the official closing price on the auction day,
whichever is higher.
In case of non rectification / replacement of company objection and
rectified/replaced company objections reported as bad delivery, closing
price will be 5% over the official closing price on the auction day.

4.8 Risks in Settlement

The following two kinds of risks are inherent in a settlement system:
(i) Counterparty Risk: This arises if parties do not discharge their obligations fully
when due or at any time thereafter. This has two components, namely replacement
cost risk prior to settlement and principal risk during settlement.
(a)

The replacement cost risk arises from the failure of one of the
parties to transaction. While the non-defaulting party tries to replace
the original transaction at current prices, he loses the profit that has
accrued on the transaction between the date of original transaction
and date of replacement transaction. The seller/buyer of the security
loses this unrealised profit if the current price is below/above the
transaction price. Both parties encounter this risk as prices are
uncertain. It has been reduced by reducing time gap between
transaction and settlement and by legally binding netting systems.

(b)

The principal risk arises if a party discharges his obligations but the
counterparty defaults. The seller/buyer of the security suffers this risk
when
he
delivers/makes
payment,
but
does
not
receive
payment/delivery. This risk can be eliminated by delivery vs. payment
mechanism which ensures delivery only against payment. This has
been reduced by having a central counterparty (NSCCL) which
becomes the buyer to every seller and the seller to every buyer. A
variant of counterparty risk is liquidity risk which arises if one of the
parties to transaction does not settle on the settlement date, but later.
The seller/buyer who does not receive payment/delivery when due,
may have to borrow funds/securities to complete his payment/delivery
obligations. Another variant is the third party risk which arises if the
parties to trade are permitted or required to use the services of a third
party which fails to perform. For example, the failure of a clearing
bank which helps in payment can disrupt settlement. This risk is
reduced by allowing parties to have accounts with multiple banks.
Similarly, the users of custodial services face risk if the concerned
custodian becomes insolvent, acts negligently, etc.

(ii) System Risk: This comprises of operational, legal and systemic risks. The
operational risk arises from possible operational failures such as errors, fraud,
outages etc. The legal risk arises if the laws or regulations do not support
enforcement of settlement obligations or are uncertain. Systemic risk arises when
failure of one of the parties to discharge his obligations leads to failure by other
116

parties. The domino effect of successive failures can cause a failure of the settlement
system.
These risks have been contained by enforcement of an elaborate margining and
capital adequacy standards to secure market integrity, settlement guarantee funds
to provide counter-party guarantee, legal backing for settlement activities and
business continuity plan, etc.

4.9 Risk Management

A sound risk management system is integral to/pre-requisite for an efficient clearing
and settlement system. The National Securities Clearing Corporation Ltd. (NSCCL), a
wholly owned subsidiary of NSE, was incorporated in August 1995 and commenced
clearing operations in April 1996. NSCCL ensures that trading members obligations
are commensurate with their net worth and has put in place a comprehensive risk
management system which is constantly monitored and upgraded to pre-empt
market failures. The risk containment measures are discussed below:
4.9.1 Capital Adequacy Requirements
The trading members are required to provide liquid assets which adequately cover
various margins & minimum capital requirements. Liquid assets of the member
include their initial membership deposits including the security deposits. Members
may provide additional collateral deposit towards liquid assets, over and above their
minimum membership deposit requirements (see table 4.4).
The acceptable forms of capital towards liquid assets and the applicable haircuts are
listed below:

(i) Cash Equivalents: Cash, bank fixed deposits with approved custodians, bank
guarantees from approved banks and government securities with 10% haircut, units
of liquid mutual funds or government securities mutual funds with 10% haircut.

(ii) Other Liquid assets:

(a)

Liquid (Group I) Equity Shares in demat form, as specified by NSCCL

from time to time deposited with approved custodians. Haircuts
applied are equivalent to the VaR margin for the respective securities.

(b)

Mutual fund units other than those listed under cash equivalents
decided by NSCCL from time to time. Haircut equivalent to the VaR
margin for the units computed using the traded price if available, or
else, using the NAV of the unit treating it as a liquid security.

117

Table 4.4: Capital Adequacy Norms for Membership on NSE

Particulars
Net worth 1
Interest free security deposit (IFSD)
Collateral security deposit (CSD) 3
Annual subscription
1:

(Rs. in lakh)

CM and F&O
segment

CM, WDM and F&O

segment

100
125
25
1

200
275
25
2

No additional networth is required for self clearing members. A networth of Rs. 300
Lakh, however, is required for TM-CM and PCM.

2 & 3: Additional Rs. 25 Lakh is required for clearing memberships (SCM, TM-CM). In
addition, the clearing member is required to bring in IFSD of Rs. 2 Lakh and CSD of
Rs. 8 Lakh per trading member he undertakes to clear and settle.

(iii) Additional Capital: Members may provide additional margin/collateral deposit

(additional capital) to NSCCL, over and above their minimum deposit requirements
towards margins and/ or other obligations. Clearing members can submit such
deposits in any one form or combination of the following forms:
(a)
Cash
(b)
Fixed deposit receipts with approved custodians
(c)
Bank guarantee from approved banks
(d)
Approved securities in demat form deposited with approved
custodians.
4.9.2 Margins
Margins form a key part of the risk management system. In the stock markets there
is always an uncertainty in the movement of share prices. This uncertainty leads to
risk which is addressed by margining system of stock markets. Let us understand the
concept of margins with the help of a following example.
Example: Suppose an investor purchases 1000 shares of xyz company at Rs.100/on January 1, 2008. Investor has to give the purchase amount of Rs.1,00,000/(1000 x 100) to his broker on or before January 2, 2008. Broker, in turn, has to give
this money to stock exchange on January 3, 2008. There is always a small chance
that the investor may not be able to bring the required money by required date. As
an advance for buying the shares, investor is required to pay a portion of the total
amount of Rs.1,00,000/- to the broker at the time of placing the buy order. Stock
exchange in turn collects similar amount from the broker upon execution of the
order. This initial token payment is called margin. It is important to remember that
for every buyer there is a seller and if the buyer does not bring the money, seller
may not get his / her money and vice versa. Therefore, margin is levied on the seller
also to ensure that he/she gives the 100 shares sold to the broker who in turn gives
it to the stock exchange.
In the above example, assume that margin was 15%. That is investor has to give
Rs.15,000/-(15% of Rs.1,00,000/) to the broker before buying. Now suppose that
investor bought the shares at 11 am on January 1, 2008. Assume that by the end of
the day, price of the share falls by Rs.25/-. That is total value of the shares has
come down to Rs.75,000/-. That is buyer has suffered a notional loss of Rs.25,000/-.

118

In our example buyer has paid Rs.15,000/- as margin but the notional loss, because
of fall in price, is Rs.25,000/-. That is notional loss is more than the margin given.
In such a situation, the buyer may not want to pay Rs.1,00,000/- for the shares
whose value has come down to Rs.75,000/-. Similarly, if the price has gone up by
Rs.25/-, the seller may not want to give the shares at Rs.1,00,000/-. To ensure that
both buyers and sellers fulfill their obligations irrespective of price movements,
notional losses are also need to be collected.
Prices of shares keep on moving every day. Margins ensure that buyers bring money
and sellers bring shares to complete their obligations even though the prices have
moved down or up.
Imposition of Margins

For imposition of margins, the stocks are categorized on basis of their trading
frequency and impact cost1 0 (see table 4.5). The criteria for categorization of stocks
for imposition of margins is mentioned below:
(a)

(b)

The securities are classified into three groups based on their liquidity. The
stocks which have traded atleast 80% of the days for the previous six
months constitute Group I (Liquid Securities) and Group II (Less Liquid
Securities). Out of the scrips identified above, the scrips having mean
impact cost of less than or equal to 1% are categorized under Group I and
the scrips where the impact cost is more than 1, are categorized under
Group II. The remaining stocks are classified into Group III (Illiquid
Securities).
The impact cost is calculated on the 15th of each month on a rolling basis
considering the order book snapshots of the previous six months. On the
basis of the impact cost so calculated, the scrips are moved from one
group to another group from the 1st of the next month.

Table 4.5: Imposition of Margins

Trading frequency (over the
previous six months*)

Group
Liquid Securities
(Group I)
Less Liquid Securities
(Group II)
Illiquid Securities
(Group III)

At least 80 % of the days

Impact Cost (over the

previous six months*)
Less than or equal to 1
%

At least 80 % of the days

More than 1 %.

Less than 80 % of the days

N/A

* For securities that have been listed for less than 6 months, the trading frequency and the
impact cost is computed using the history of the scrip.
Categorisation of Newly Listed Securities

(a)

For the first month and till the time of monthly review a newly listed
security is categorised in that group where the market capitalization of the
newly listed security exceeds or equals the market capitalization of 80%

10

Impact cost represents the cost of executing a transaction in a given stock, for a specific predefined
order size, at any given point of time.

119

(b)

of the securities in that particular group. Subsequently, after one month,

whenever the next monthly review is carried out, the actual trading
frequency and impact cost of the security is computed, to determine the
liquidity categorization of the security.
In case any corporate action results in a change in ISIN, then the
securities bearing the new ISIN is treated as newly listed security for
group categorization.

Types of Margins

Daily margins payable by the trading members in the Cash market consists of the
following:
(i)
Value at Risk (VaR) margin
(ii)
Mark to Market Margin
(iii)
Extreme Loss Margin
The margins are computed at client level. A member entering an order, needs to
enter the client code. Based on this information, margin is computed at the client
level, which will be payable by the trading members on upfront basis. Let us see in
details what is meant by these margins.

Value at Risk Margin

VaR is a single number, which encapsulates whole information about the risk in a
portfolio. It measures potential loss from an unlikely adverse event in a normal
market environment. It involves using historical data on market prices and rates, the
current portfolio positions, and models (e.g., option models, bond models) for pricing
those positions. These inputs are then combined in different ways, depending on the
method, to derive an estimate of a particular percentile of the loss distribution,
typically the 99th percentile loss.
Computation of VaR Margin: VaR Margin is a margin intended to cover the largest loss

that can be encountered on 99% of the days (99% Value at Risk). For liquid securities,
the margin covers one-day losses while for illiquid securities; it covers three-day losses
so as to allow the clearing corporation to liquidate the position over three days. This
leads to a scaling factor of square root of three for illiquid securities. For liquid
securities, the VaR margins are based only on the volatility of the security while for
other securities, the volatility of the market index is also used in the computation (see
table 4.6).
Some Definitions: Computation of the VaR margin requires the following definitions:
(a) Security sigma: It means the volatility of the security computed as at the
end of the previous trading day. The computation uses the exponentially
weighted moving average method applied to daily returns in the same manner
as in the derivat ives market.
(b) Security VaR: It means the higher of 7.5% or 3.5 security sigmas.
(c) Index sigma: It means the daily volatility of the market index (S&P CNX
Nifty or BSE Sensex) computed as at the end of the previous trading day. The
computation uses the exponentially weighted moving average method applied to
daily returns in the same manner as in the derivatives market.
120

(d) Index VaR: It means the higher of 5% or 3 index sigmas. The higher of
the Sensex VaR or Nifty VaR would be used for this purpose.
Table 4.6: VaR Margins for Different Groups of Securities
Liquidity Categorization
Liquid Securities (Group I)
Less Liquid Securities
(Group II)

Illiquid Securities
(Group III)

One-Day
VaR
Security VaR

Scaling factor for

illiquidity
1.00

VaR Margin

Higher of
Security VaR
and three
times Index
VaR
Five times
Index VaR

1.73
(square root of 3.00)

Higher of 1.73
times Security
VaR and 5.20
times Index
VaR
8.66 times
Index VaR

1.73
(square root of 3.00)

Security VaR

All securities are classified into three groups for the purpose of VaR margin as
discussed above. For the securities listed in Group I, scrip wise daily volatility
calculated using the exponentially weighted moving average methodology applied to
daily returns. The scrip wise daily VaR would be 3.5 times the volatility so calculated
subject to a minimum of 7.5%. For the securities listed in Group II, the VaR margin
is higher of scrip VaR (3.5 sigma) or three times the index VaR, and it shall be scaled
up by root 3 (v3). For the securities listed in Group III, the VaR margin would be
equal to five times the index VaR and scaled up by v 3.
Upfront margin rates (VaR margin + Extreme Loss Margin) applicable for all
securities in Trade for Trade- Surveillance (TFTS) shall be 100%.
VaR margin rate for a security constitutes the following:
(a) Value at Risk (VaR) based margin, which is arrived at, based on the
methods stated above. The index VaR, for the purpose, would be the
higher of the daily Index VaR based on S&P CNX NIFTY or BSE SENSEX.
The index VaR would be subject to a minimum of 5%.
(b)
Security Specific Margin, NSCCL may stipulate security specific margins
for the securities from time to time.
The VaR margin rate computed, as mentioned above, will be charged on the net
outstanding position (buy value-sell) of the respective clients on the respective
securities across all open settlements. There would be no netting off of positions
across different settlements. The net position at a client level for a member are
arrived at and thereafter, it is grossed across all the clients including proprietary
position to arrive at the gross open position.
For example, in case of a member, if client A has a buy position of 1000 in a security
and client B has a sell position of 1000 in the same security, the net position of the
member in the security would be taken as 2000. The buy position of client A and sell
position of client B in the same security would not be netted. It would be summed up
to arrive at the members open position for the purpose of margin calculation.
Collection of VaR Margin: The VaR margin is collected on an upfront basis by
adjusting against the total liquid assets of the member at the time of trade. The VaR

121

margin is collected on the gross open position of the member. The gross open position
for this purpose would mean the gross of all net positions across all the clients of a
member including its proprietary position. For this purpose, there would be no netting
of positions across different settlements.
Upfront margin rates (VaR margin + Extreme Loss Margin) applicable for all
securities in Trade for Trade- Surveillance (TFTS) shall be 100 %. The Intra-day VAR
files is generated based on the prices at 11.00 a.m., 12.30 p.m., 2.00 p.m., and
3.30 p.m. everyday. Such intra-day VAR files are used for margining of intra-day
member positions. In addition to the above, a VAR file at end of day and begin of
day is provided and the same is applicable on the positions for next trading day.
Mark- to- Market Margin

Mark to market loss is calculated by marking each transaction in security to the

closing price of the security at the end of trading. In case the security has not been
traded on a particular day, the latest available closing price at the NSE is to be
considered as the closing price. In case the net outstanding position in any security
is nil, the difference between the buy and sell values is considered as notional loss
for the purpose of calculating the mark to market margin payable.
The mark to market margin (MTM) is collected from the member before the start of
the trading of the next day. The MTM margin is collected/adjusted from/against the
cash/cash equivalent component of the liquid net worth deposited with the
Exchange.
The MTM margin is collected on the gross open position of the member. The gross
open position means the gross of all net positions across all the clients of a member
including its proprietary position. For this purpose, the position of a client would be
netted across its various securities and the positions of all the clients of a broker
would be grossed.
There would be no netting off of the positions and setoff against MTM profits across
two rolling settlements i.e. T day and T-1 day. However, for computation of MTM
profits/losses for the day, netting or setoff against MTM profits would be permitted.
In case of Trade for Trade Segment (TFT segment) each trade is marked to market
based on the closing price of that security. The MTM margin so collected is released
on completion of pay-in of the settlement.

Example: Let us understand the MTM computation with the help of the following
example:

Client

Security

T-1 day

T day

Client A

Security X
Security Y
Total

800
-500
300

300
-1200
-900

122

Total profit/loss
of Client

-900

MTM
for
broker

Total profit/loss
of Client

Client

Security

T-1 day

T day

Client B

Security Z
Security W
Total

700
-1000
-300

-400
800
400

-300

Security X
Security Z
Total

1000
-1500
-500

500
-800
-300

-800

Security Y
Security R
Total

700
-300
400

-200
800
600

1000

Client C

Client D

Member

MTM
for
broker

-2000

For a Client A, his MTM profit/ loss would be calculated separately for his positions on T1 and T day (two different rolling settlements). For the same day positions of the client,
his losses in some securities can be set off/netted against profits of some other
securities. Thus, we would arrive at the MTM loss/profit figures of the two different days
T and T-1. These two figures cannot be netted. Any loss will have to be collected and
same will not be setoff against profit arising out of positions of the other day.
Thus, as stated above MTM profits / losses would be computed for each of the clients;
Client A, Client B, Client C etc. As regards collection of margin from the broker, the
MTM would be grossed across all the clients i.e. no setoff of loss of one client with the
profit of another client. In other words, only the losses will be added to give the total
MTM loss that the broker has to deposit with the exchange. In this example, the broker
has to deposit MTM Margin of Rs 2000.
Extreme Loss Margin

The Extreme Loss Margin for any security is higher of:

(a)
5%, or
(b)
1.5 times the standard deviation of daily logarithmic returns of the
security price in the last six months. This computation is done at the
end of each month by taking the price data on a rolling basis for the
past six months and the resulting value is applicable for the next
month.
The Extreme Loss Margin is collected/ adjusted against the total liquid assets of the
member on a real time basis.
The Extreme Loss Margin is collected on the gross open position of the member. The
gross open position for this purpose would mean the gross of all net positions across
all the clients of a member including its proprietary position.
There would be no netting off of positions across different settlements. The Extreme
Loss Margin collected is released on completion of pay-in of the settlement.

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Cross Margining
An off-setting position for a client in different segments has lower risk as loss on one
position is off-set by profit in the other positio n. An example for an off-setting
position can be a buy position of 100 in security A in capital market and short
position of 100 in stock futures of security A in derivative segment. As the risk of
the off-setting positions is lower, the margin require ment for the combined positions
has to be lower which is considered as cross margining.
The benefit of cross margining is provided on the following off setting positions:
a. Index futures and constituent stock futures for same expiry in F&O
segment
b. Index futures and constituent stock positions in Cash segment
c. Stock futures in F&O segment and stock positions in Cash segment
The offseting positions in respect of (a) and (b) above are computed considering the
weightage of that security in the index. A file is provided by NSE on its website
www.nseindia.com providing minimum number of units of stock/stock future
required to offset position in index future. The number of units is changed only in
case of change in share capital of the constituent security due to corporate action or
issue of additional share capital or change in the constituents of the index.
The cross margining benefits are computed and provided on an on-line real time
basis in respect of all existing and confirmed positions. The offsetting positions are
margined only to the extent of 25% of all applicable margins (all upfront margins, i.e.
initial margins and Exposure margins).
Margin Shortfall

In case of any shortfall in margin:

(a) The members are not permitted to trade with immediate effect.
(b) Penalty for margin violation
Penalty applicable for margin violation is levied on a monthly basis based on slabs as
mentioned below in Table 4.7:
Table 4.7: Penalty for Margin Shortfall
Instances of Disablement

Penalty to be levied

1st instance

0.07% per day

2nd to 5th instance of

disablement

0.07% per day +Rs.5000/- per instance from 2nd to

5th instance

6th to 10th instance of

disablement

0.07% per day+ Rs. 20000 ( for 2nd to 5th instance)

+Rs.10000/- per instance from 6th to 10th instance

11th instance onwards

0.07% per day +Rs. 70,000/- (for 2nd to 10th

instance) +Rs.10000/- per instance from 11th
instance onwards. Additionally, the member will be
referred to the Disciplinary Action Committee for
suitable action

124

Instances as mentioned above refer to all disablements during market hours in a

calendar month. The penal charge of 0.07% per day is applicable on all disablements
due to margin violation anytime during the day.
Margins for institutional deals

As specified by SEBI1 1 , all institutional transactions should be margined in the capital

market segment from T+1 day subsequent to confirmation of the transactions by the
custodians. For this purpose, institutional investors include:
(a)
Foreign Institutional Investors (FIIs) registered with SEBI.
(b)
Mutual Funds (MFs) registered with SEBI.
(c)
Public Financial Institutions as defined under Section 4A of the
Companies Act, 1956.
(d)
Banks, i.e., a banking company as defined under Section 5(1)(c) of
the Banking Regulations Act, 1949.
(e)
Insurance companies registered with IRDA.
(f)
Pension Funds regulated by Pension Fund Regulatory and
Development Authority (PFRDA).
Levy of margin for institutional deals
(i)
(ii)

(iii)
(iv)
(v)
(vi)

(vii)

Institutional transactions are identified by the use of the participant code

at the time of order entry.
Transactions entered into on behalf of custodial participants i.e. carrying
custodial participant code is considered as institutional deals unless not
confirmed by the respective custodians in which case the transactions
are considered as a normal transactions and all applicable margins are
levied on the members.
Members may also enter INST code in the custodial participant code at
the time of entering orders on behalf of the institutional clients.
Members are required to allocate the INST trades only to the above
categories.
In respect of institutional transactions confirmed by the custodians the
margins are levied on the custodians.
In respect of institutional transactions rejected/not accepted by the
custodians the margins is levied on the members who have executed the
transactions.
The margins are computed and levied at a client (Custodial Participant
code) level in respect of institutional transactions and collected from the
custodians/members.

Retail Professional Clearing Member

In case of transactions which are to be settled by Retail Professional Clearing

Members (PCM), all the trades with PCM code are included in the trading members
positions till it is confirmed by the PCM. Margins are collected from respective trading
members until confirmation of trades by PCM. On confirmation of trades by PCM,
such trades are reduced from the positions of trading member and included in the
positions of PCM. The PCM is then liable to pay margins on the same.

11

SEBI Circular No. MRD/DoP/SE/Cir- 06 /2008, March 19 2008

125

Capping of Margins

In case of a buy transaction, the VaR margins, Extreme loss margins and mark to
market losses together should not exceed the purchase value of the transaction. In
case of a sale transaction, the VaR margins and Extreme loss margins together should
not exceed the sale value of the transaction and mark to market losses should also be
levied.
Exemption upon early Pay-in of Securities

In cases where early pay-in of securities is made prior to the securities pay-in, such
positions for which early pay-in (EPI) of securities is made is exe mpt from margins.
The EPI of securities is allocated to clients having net deliverable position, on a
random basis unless specific client details are provided by the member/ custodian.
Member/Custodians, however should ensure that appropriate early pay-in benefit of
margin is passed on to the relevant clients. Additionally, member/custodian can
specify the clients to whom the early pay-in may be allocated.
Exemption upon early Pay- in of Funds

In cases where early pay-in of funds is made prior to the funds pay-in, such positions
for which early pay-in (EPI) of funds is made are exempt from margins based on the
client details provided by the member/ custodian. Early pay-in of funds specified by
the member/custodians for a specific client and for a settlement is allocated against
the securities in the descending order of the net buy value of outstanding position of
the client.
4.9.3 On-Line Exposure Monitoring
NSCCL has put in place an on-line monitoring and surveillance system whereby
exposure of the members is monitored on a real time basis. A system of alerts has
been built in so that both the member and NSCCL are alerted as per pre-set levels
(reaching 70%, 85%, 90%, 95% and 100%) when the members approach their
allowable limits. The system enables NSSCL to further check the micro-details of
members' positions, if required and take pro-active action.
The on-line 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 exchange maintains various databases to generate alerts. Alerts are
scrutinised and if necessary taken up for follow up action. Open positions of
securities are also analysed. Besides this, rumors in the print media are tracked and
where they are price sensitive, companies are contacted for verification. Replies
received are informed to the members and the public.
4.9.4 Off-line Monitoring
Off-line surveillance activity consists of inspections and investigations. As per
regulatory requirement, trading members are to be inspected in order to verify the
level of compliance with various rules, byelaws and regulations of the Exchange. The
inspection verifies if investor interests are being compromised in the conduct of
business by the members.

126

4.9.5 Index-based Market-wide Circuit Breakers/ Price Bands for Securities

An index based market-wide circuit breaker system applies at three stages of the
index movement either way at 10%, 15% and 20%. These circuit breakers bring
about a coordinated trading halt in trading on all equity and equity derivatives
markets across the country. The breakers are triggered by movements in either Nifty
50 or Sensex, whichever is breached earlier. Details of circuit breakers are given in
Chapter 3.
4.9.6 Settlement Guarantee Mechanism
A large Settlement Guarantee Fund provides the cushion for any residual risk. In the
event of failure of a trading member to meet settlement obligations or committing
default, the Fund is utilized to the extent required for successful completion of the
settlement. This has eliminated counter party risk of trading on the Exchange. The
market has now full confidence that settlements will take place in time and will be
completed irrespective of possible default by isolated trading members.
The Settlement Guarantee Fund is an important element in facilitating the settlement
process. The Fund operates like a self-insurance mechanism and is funded through
the contributions made by trading members, transaction charges, penalty amounts,
fines etc. recovered by NSCCL.
A part of the cash deposit and the entire security deposit of every clearing member
with the Exchange has been converted into an initial contribution towards the
Settlement Guarantee Fund, as indicated in Table 4.8.
Table 4.8: Settlement Guarantee Fund-Equity Segment

Type of Member

Security Deposit in the form of

Bank FDR/ guarantee or securities
17.50

Cash Deposit

Individual/
partnership firms

6.00

Corporates

15.00

(in Rs. Lakh)

25.00

There is a provision that as and when volumes of business increase, members may
be required to make additional contributions allowing the fund to grow alongwith the
market volumes.

4.10 International Securities Identification Number

SEBI being the National Numbering Agency for India has permitted NSDL to allot
International Securities Identification Number (ISIN) for demat shares. While
allotting ISINs, NSDL ensures that:
(a)
The ISINs allotted by NSDL does not at any point of time breach the
uniqueness of ISIN of physical form for the same security.
(b)
ISIN for a security is allotted only when the security is admitted to
NSDL or on receipt of request for ISIN from CDSL.
(c)
The numbering system is simple.

127

(d)

The numbering system of ISIN is in compliance with the structure of

ISIN adopted by SEBI.

Numbering System of ISIN: The numbering structure for securities in NSDL is of

12 digit alpha numeric string. The first two characters represent country code i.e. IN
(in accordance with ISO 3166). The third character represents the Issuer Type as
detailed in Table 4.9.
Table 4.9: Issuers Type
Issuer Type
Central Government
State Government
Municipal Corporation
Union Territories
Company, Statutory Corporation, Banking Company
Mutual Funds including UTI

Code allotted
A
B
C
D
E
F

Note: ISINs for Government Securities (Gsec) i.e. loans raised by Central and State
Government are allotted by Reserve Bank of India (RBI).

The list may be expanded as per need. Maximum issuer types can be 35 (A to Z and
0 to 8. The partly paid up shares are identified by 9). The next 4 characters (fourth
to seventh character) represent company identity of which first 3 characters are
numeric and fourth character is alpha character. The numbering begins with 001A
and continues till 999A and proceeds to 001B. The next two characters (the eight
and ninth characters) represent security type for a given issuer. Both the characters
are numeric. The next two characters (the tenth and eleventh characters) are serially
issued for each security of the issuer entering the system. Last digit is check digit.
The security types are planned which may be expanded as per the need as detailed
in Table 4.10.
Table 4.10: Security Types
Security Type
Equity Shares
Mutual Fund
Convertible Preference Shares
Non Convertible Preference Shares
Secured Debentures

Code
01
01
03
04
07

Unsecured Debentures

08

Regular Return Bonds, Promisory Notes

09

Floating Rate Bond

10

Deep Discount Bond

11

Step Discount Bond

Warrants
Commercial Paper

12
13
14

Pass Through Certificate

Certificate of Deposit
Security Receipt

15
16
18

128

Box 4.1: Investor Protection Fund

Investor Protection Fund (IPF) has been set up as a trust under Bombay Public
Trust Act, 1950 under the name and style of National Stock Exchange Investor
Protection Fund Trust and is administered by the Trustees. The purpose of IPF is
to take care of investor claims which may arise out of non-settlement of
obligations by trading members. The IPF is utilised to settle claims of such
investors whose trading member has been declared a defaulter or expelled by the
Exchange. Further the stock exchanges have been allowed to utilize interest
income earned on IPF for Investor Protection Fund for investor education,
awareness and research. The maximum amount of claim payable from the IPF to
the investor is Rs. 15 lakh.

4.11 Data and Report Downloads

NSCCL downloads various reports in csv format to clearing members with regards to
daily obligation report, custodial trade reports, delivery reports, funds report, margin
reports etc, each of which is discussed in the following section.
4.11. 1 Obligation Reports
(i) Daily Obligation Report: This report contains obligations of a Clearing Member
(computed after segregation of the custodial trades for trading members). This is a
daily report which is downloaded at the end of the trading day to each Clearing
Member. This report provides security-wise information on:
(a)
Daily purchases and sales and their value.
(b)
Cumulative purchases and sales, and their value for the trading period.
(ii) Final Obligation Report : At the end of the trading period, members receive
Settlement Obligation Statement for funds and securities. This report indicates the
net obligation to deliver or receive for each security in which he has had dealings and
net obligation to pay or receive funds.
(iii) Net Daily Obligation Report: This is a daily report which is downloaded at the
end of the trading day to each Clearing Member. This report provides security-wise
information on the cumulative net purchases or net sales and their value for the
trading day.
(iv) Net Final Obligation Report: This is a daily report which provides the net
obligation for securities and funds to be delivered or received and is downloaded on
the T+1 day.
4.11. 2 Custodial Trade Reports
(i) Order Confirmation Report: This report contains information of all Custodial
trades which are not confirmed by the Custodians as of the day of the report.

129

(ii) Custodian Trades Report: This report gives the trade details such as symbol,
cpcode, client code, quantity, value for all trades executed by a member.
(iii) Trades Report : This report gives the statement of all the securities traded by
the trading member for the respective Custodial participants.
4.11. 3 Deliveries Reports
(i) Demat Final Delivery Statement (DFDS): This report provides details of the
electronic shares delivered by a member as securities pay-in for various settlements
for the given settlement date. The report is sorted on Settlement Type/Settlement
Number/Delivery Type/Symbol/Series/ISIN.
(ii) Demat Final Receipt Statement (DFRS): This report provides details of the
electronic shares received by a member as securities pay-out for various settlements
for the given settlement date. The report is sorted on Settlement Type/Settlement
Number/Delivery Type/Symbol/Series/ISIN.
(iii) Client Allocation Details
directly credited to the clients
Beneficiary account where the
which have not been credited to

(CADT): This report provides details of pay out

beneficiary account. It gives details of DP ID and
pay-out is credited and also details of securities,
client account.

(iv) Memberwise With-held Securities Statement: This report gives details for
securities payout withheld for members.
(v) Deliveries Report: After allocation, the NSECM Clearing System generates
Trading Member-wise delivery statement. This delivery statement is security-wise.
The statement provides information on delivering centre, receiving centre, number of
shares to deliver or receive for each security and also the code of the receiving entity
or delivering entity respectively.
(vi) Security Shortage Report: The Security Shortage Statement lists down the
shortage in the delivery of the securities as compared to the Clearing Members
obligation of securities pay-in. The details given in the list contain the delivering
centre, receiving centre, delivery number against which securities are delivered
short, the security, the quantity of shares delivered short, the Valuation price and
the amount to be debited to the delivering members account for the quantity of
shares delivered short, the receipt number and the counter party receiving members
name/code.
4.11. 4 Funds Reports
Two Funds Reports are being downloaded to all trading members on a daily basis
i.e., Daily Funds Summary Statement and Daily Funds Statement.
Daily funds summary statement provides details about the transactions effected in
the trading members clearing account at the Clearing Bank. This statement is similar
to the Bank statement provided by the Clearing Bank. The debit appearing in the
summary statement is equal to the withdrawals as per the bank statement and the
credit is equal to the deposits as per the bank statement.
130

Daily funds statement provides the break-up for each debit and credit appearing in
the daily funds summary statement. Both the reports are downloaded on a daily
basis after the debits/credits have been effected by the clearing bank.
4.11. 5 Auction Reports
(i) Auction Square Up Debit Statement: This report gives details of unauctioned
deliveries that are squared-up by the Exchange.
(ii) Auction Square Up Credit Statement: This report gives details of
unauctioned deliveries that are squared-up by the Exchange. This report is
downloaded at the end of the auction trading day.
(iii) Auction Difference Statement: This report gives details of the auctioned
deliveries for which the valuation price exceeds the auction traded price. This report
is downloaded at the end of the auction trading day.
4.11. 6 Margin Reports
(i) Member- wise Daily Margin Payable Statement: This report contains daily
margin amount payable by the members. This is a daily report which is downloaded
at the end of the trading day to each trading member. This report provides
information on the calculated margin amount, collateral amount, amount paid till
date and calculated value of cash margin payable (+)/receivable (-).
(ii) Memberwise Margin Payment Status Report: This report contains the
margin payment status of the member. This is a daily report which is downloaded at
the end of the trading day to each trading member. This report provides information
on the margin due date, cash margin pay-in (+)/pay-out (-), amount transacted and
amount short.
4.11. 7 Miscellaneous Reports
The following reports are downloaded in the common/clearing folder on the extranet:
(i) Corporate Action Report: This report gives the statement of the corporate
actions which are set by NSCCL (i.e. dividend, AGM, book closure date, record date
etc.).
(ii) Securities Master report: This report will display information regarding
Security Settlement Mode for a particular settlement type and number.
(iii) Settlement Calendar: This report gives the monthly settlement schedule.
Further the following reports are also available on EXTRANET:
(i) Detailed Margin Report (MG02): This report provides client wise, security
wise, and settlement wise amount of margin and exposure for the day.

131

(ii) Consolidated Margin Report (MG01): This report provides amount of margin
payable and amount of exposure and MABC available for the day.
(iii) Member Wise STT file (MWST): This file gives the details of client wise
security wise Securities Transaction Tax calculated for the memb er for a trading
day.

132

CHAPTER 5: LEGAL FRAMEWORK *

The exigencies of the market and the flexibility of the regulators are maintained
through the exercise of delegated legislation to the regulators. Under this the
regulators issue notifications, circulars and guidelines which are to be complied by
the market participants.
Various activities in the securities market in India are regulated in a coordinated
manner by four regulators namely Department of Economic Affairs (DEA) of the
Ministry of Finance, Ministry of Company Affairs, Securities and Exchange Board of
India (SEBI) and the Reserve Bank of India (RBI).
The regulatory and the supervisory framework of the securities market in India has
been progressively strengthened through various legislative and administrative
measures and is consistent with the best international benchmarks, such as,
standards prescribed by the International Organisation of Securities Commissions
(IOSCO).
Rules and Regulations

The Government has framed rules under the Securities Contract (Regulation) Act
SC(R)A, SEBI Act and the Depositories Act. SEBI has framed regulations under the
SEBI Act and the Depositories Act for registration and regulation of all market
intermediaries, for prevention of unfair trade practic es, insider trading, etc. Under
these Acts, Government and SEBI issue notifications, guidelines, and circulars, which
need to be complied by the market participants.
The self-regulatory organizations (SROs) like stock exchanges have also laid down
their rules and regulations for market participants.
Regulators

The regulators ensure that the market participants behave in a desired manner so
that the securities market continues to be a major source of finance for corporates
and government and the interest of investors are protected. As noted earlier, the
responsibility for regulating the securities market is shared by DEA, Ministry of
Corporate Affairs, SEBI and RBI.

This chapter only touches upon the broad regulatory framework for the Indian securities
markets, giving the main clauses of various acts, rules and regulations that have a bearing on
the functioning of the markets. For greater details, it is recommended that original acts, rules
and regulations may be referred to.

133

5.1 SEBI (Intermediaries) Regulations, 2008

One of the main functions of SEBI is to register and regulate the functioning of
various types of intermediaries and persons associated with securities market in a
manner as to ensure smooth functioning of the markets and protection of interests of
the investors. These intermediaries, as detailed in the SEBI Act are: stock-brokers,
sub- broker, share transfer agents, bankers to an issue, trustees of trust deed,
registrars to an issue, merchant bankers, underwriters, portfolio managers,
investment advisers, depositories, participants, custodians of securities, foreign
institutional investors, credit rating agencies, asset management companies, clearing
members of a clearing corporation, trading member of a derivative segment of a
stock exchange, collective investment schemes, venture capital funds, mutual funds,
and any other intermediary associated with the securities market.
SEBI had issued regulations governing the registration and regulatory framework for
each of these intermediaries. However, given the fact that many requirements and
obligations of most intermediaries are common, SEBI has recently consolidated these
requirements and issued the SEBI (Intermediaries) Regulations, 2008. These
regulations were notified on May 26, 2009.
These regulations apply to all the intermediaries mentioned above, except foreign
institutional investors, foreign venture capital investors, mutual funds, collective
investment schemes and venture capital funds.
The salient features of the Regulations are as under:
(a)

The SEBI Regulations put in place a comprehensive regulation which is

applicable to all intermediaries. The common requirements such as grant
of registration, general obligations, common code of conduct, common
procedure for action in case of default and miscellaneous provisions are
applicable for all intermediaries.

(b)

The registration process has been simplified. An applicant can file

application in the prescribed format along with additional information as
required under the relevant regulations along with the requisite fees. The
existing intermediaries ma y, within the prescribed time, file the
disclosure in the specified form. The disclosures are required to be made
public by uploading the information on the website specified by SEBI. The
information of commercial confidence and private information furnished
to SEBI shall be treated confidential. In the event intermediary wishes to
operate in a capacity as an intermediary in a new category, such person
may only file the additional shortened forms disclosing the specific
requirements of the new category as per the relevant regulations.

(c)

The Fit and Proper criteria have been modified to make it principle based.
The common code of conduct has been specified at one place.

(d)

The registration granted to intermediaries has been made permanent

unless surrendered by the intermediary or suspended or cancelled in
accordance with these regulations.

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(e)

Procedure for action in case of default and manner of suspension or

cancellation of certificate has been simplified to shorten the time usually
faced by the parties without compromising with the right of reasonable
opportunity to be heard. Surrender of certificate has been enabled
without going through lengthy procedures.

(f)

While common requirements will be governed by the new regulations, the

intermediaries specific requirements will continue to be as per the
relevant regulations applicable to individual intermediaries. The relevant
regulations will be amended to provide for the specific requirements.

5.2 SEBI (Prohibition of Insider Trading) Regulations, 1992

The malpractice of insider trading affects the innocent investors. In simple terms
insider trading means selling or buying in securities on the basis of price sensitive
unpublished information of a listed corporate which if published could lead to a fall or
rise in the prices of shares of the corporate.
To tackle the problem of insider trading, SEBI issued the SEBI (Insider Trading)
Regulations 1992. These regulations were further made stringent through
amendments in February 2002 and they were notified as the SEBI (Insider Trading)
(Amendment) Regulations 2002.
The important definitions used in the regulations are:
(i) Dealing in securities means an act of subscribing, buying, selling or agreeing to
subscribe, buy, sell or deal in any securities by any person either as principal or
agent.
(ii) Insider means any person who, is or was connected with the company or is
deemed to have been connected with the company, and who is reasonably expected
to have access to unpublished price sensitive information in respect of securities of a
company, or who has received or has had access to such unpublished price sensitive
information.
(iii) A connected person means any person who:
(a) is a director, as defined in clause (13) of section 2 of the Companies Act,
1956 of a company, or is deemed to be a director of that company by
virtue of sub-clause (10) of section 307 of that Act, or
(b)

occupies the position as an officer or an employee of the company or holds

a position involving a professional or business relationship between himself
and the company whether temporary or permanent and who may
reasonably be expected to have an access to unpublished price sensitive
information in relation to that company.

(iv) A person is deemed to be a connected person if such person:

(a)

is a company under the same management or group or any subsidiary

company thereof within the meaning of section (1B) of section 370, or subsection (11) of section 372, of the Companies Act, 1956 or sub-clause (g)

135

(b)

(c)

(d)
(e)
(f)
(g)
(h)

of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 as

the case may be; or
is an intermediary as specified in section 12 of SEBI Act, 1992, Investment
company, Trustee Company, Asset Management Company or an employee
or director thereof or an official of a stock exchange or of clearing house or
corporation;
is a merchant banker, share transfer agent, registrar to an issue,
debenture trustee, broker, portfolio manager, investment advisor, subbroker, investment company or an employee thereof, or, is a member of
the board of trustees of a mutual fund or a member of the board of
directors of the asset management company of a mutual fund or is an
employee thereof who have a fiduciary relationship with the company;
is a member of the board of directors, or an employee, of a public financial
institution as defined in Section 4A of the Companies Act, 1956;
is an official or an employee of a self regulatory organisation recognised or
authorised by the Board of a regulatory body;
is a relative of any of the aforementioned persons;
is a banker of the company.
relative of the connected person.

(v) Price sensitive information means any information which is related directly or
indirectly to a company and which if published is likely to materially affect the price
of securities of a company. It includes only such information which if published is
likely to materially affect the price of securities of a company. The following is
deemed to be price sensitive information:
(a)
(b)
(c)
(d)
(e)
(f)
(g)

periodical financial results of the company;

intended declaration of div idends (both interim and final);
issue of securities or buy-back of securities;
any major expansion plans or execution of new projects;
amalgamation, mergers or takeovers;
disposal of the whole or substantial part of the undertaking;
significant changes in policies, plans or operations of the company.

(vi) Unpublished information means information which is not published by the

company or its agents and is not specific in nature. However, speculative reports in
print or electronic media are not considered as published information.
5.2.1 Prohibition on Dealing, Communicating or Counseling (Chapter II)
Under this regulation, no insider should:
(a)
(b)

either on his own behalf or on behalf of any other person, deal in securities
of a company listed on any stock exchange when in possession of any
unpublished price sensitive information;
communicate, counsel or procure, directly or indirectly, any unpublished
price sensitive information to any person who while in possession of such
unpublished price sensitive information should not deal in securities. This is
however, not applicable to any communication required in the ordinary
course of business or profession or employment or under any law.

136

The regulations require that no company should deal in the securities of another
company or associate of that other company while in possession of any unpublished
price sensitive information.
5.2.2 Investigation (Chapter III)
If SEBI suspects any person of having violated the provisions of insider regulation, it
may make inquiries with such person or with the stock exchanges, mutual funds,
other persons associated with the securities market, intermediaries and selfregulatory organisation in the securities market to form a prima facie opinion as to
whether there is any violation of insider regulations.
Where SEBI forms a prima facie opinion that it is necessary to investigate and
inspect the books of accounts, either documents and records of an insider or the
stock exchanges, mutual funds, other persons associated with the securities market,
intermediaries and self-regulatory organisation in the securities market, it may
appoint an investigating authority for the purpose.
The investigating authority has to submit its report to SEBI, after completion of
investigations in accordance with the provisions of the regulations.
After considering the report, SEBI is required to communicate its findings to the
suspected person and seek a reply from such person. Such suspected person is
required to reply to the findings within 21 days to SEBI. After receipt of the reply,
SEBI may take such measures to safeguard and protect the interest of investors,
securities market and for due compliance with the insider trading regulations.
SEBI also has powers to appoint an auditor to investigate into the books of accounts
or the affairs of the insider or the stock exchanges, mutual funds, other persons
associated with the securities market, intermediaries and self-regulatory organisation
in the securities market.
5.2.3 Disclosures and Internal Procedure for Prevention of Insider Trading
(Chapter IV)
All listed companies and organisations associated with securities markets such as
intermediaries, asset management company, trustees of mutual funds, self
regulatory organisations recognised by SEBI, recognised stock exchanges, clearing
house or corporations, public financial institutions and professional firms such as
auditors, accountancy firms, law firms, analysts, consultants, etc., assisting or
advising listed companies, are required to frame a code of internal procedures and
conduct as per the prescribed format provided in SEBI (Prohibition of Insider
Trading) Regulations without diluting it any manner and ensure compliance of the
same .
The regulations require certain disclosures to be made by directors, officers and
substantial shareholders in listed companies. These are:
(i) Initial Disclosure:
(a)
Any person who holds more than 5% shares or voting rights in any
listed company should disclose to the company in prescribed form, the
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number of shares or voting rights held by such person, on becoming

such holder, within 2 working days of:
(i)
the receipt of intimation of allotment of shares; or
(ii)
the acquisition of shares or voting rights, as the case may be.
(b)

Any person who is a director or officer of a listed company should

disclose to the company in prescribed form, the number of shares or
voting rights held by such person, within 2 working days of
becoming a director or officer of the company.

(ii) Continual Disclosure

(a)

Any person who holds more than 5% shares or voting rights in any
listed company should disclose to the company in prescribed form the
number of shares or voting rights held and change in shareholding or
voting rights, even if such change results in shareholding falling below
5%, if there has been change in such holdings from the last disclosure
and such change exceeds 2% of total shareholding or voting rights in
the company.

(b)

Any person who is a director or officer of a listed company, should

disclose to the company in prescribed form, the total number of shares
or voting rights held and change in shareholding or voting rights, if
there has been a change in such holdings from the last disclosure
made and the change exceeds Rs. 5 lakh in value or 25,000 shares
or 1% of total shareholding or voting rights, whichever is lower. The
disclosure mentioned above should be made within 2 working days of:
(i)
the receipt of intimation of allotment of shares, or
(ii) the acquisition or sale of shares or voting rights, as the case may
be.

(iii) Disclosure by Company to Stock Exchanges

Every listed company, within two days of receipt, should disclose to all stock
exchanges on which the company is listed, the information relating to continual and
initial disclosure given above. The disclosures required under this regulation may
also be made through electronic filing in accordance with the system devised by the
stock exchanges. Further, the SEBI Act, which inter-alia, prescribes the penalty for
insider trading (Section 15G), was amended in 2002 to increase the penalty for
insider trading to Rs 25 crore or three times the amount of profits made out of
insider trading, whichever is higher.

5.3 SEBI (Prohibition of fraudulent and Unfair Trade Practices

relating to securities market) Regulations, 2003
The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the
Securities Market) Regulations, 2003 enable SEBI to investigate into cases of market
manipulation and fraudulent and unfair trade practices. The regulations specifically
prohibit market manipulation, misleading statements to induce sale or purchase of
securities, unfair trade practices relating to securities. The important terms defined
under the regulations are:

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(i) Fraud includes any act, expression, omission or concealment committed whether
in a deceitful manner or not by a person or by any other person or his agent while
dealing in securities in order to induce another person with his connivance or his
agent to deal in securities, whether or not there is any wrongful gain or avoidance of
any loss, and should also include:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)

a knowing misrepresentation of the truth or concealment of material fact in

order that another person may act to his detriment;
a suggestion as to a fact which is not true by one who does not believe it
to be true;
an active concealment of a fact by one having knowledge or belief of the
fact;
a promise made without any intention of performing it;
a representation made in a reckless and careless manner whether it be
true or false;
any such act or omission as any other law specifically declares to be
fraudulent;
deceptive behaviour by a person depriving another of informed consent or
full participation;
a false statement made without reasonable ground for believing to be true;
the act of an issuer of securities giving out misinformation that affects the
market price of the security, resulting in investors being effectively misled
even though they did not rely on the statement itself or anything derived
from it other than the market price.

The term fraudulent should be construed accordingly. Nothing contained in this

clause is applicable to any general comments made in good faith in regard to the
economic policy of the Government; the economic situation of the country; trends in
the securities market; any other matter of a like nature.
(ii) Dealing in Securities is defined to include an act of buying, selling or
subscribing pursuant to any issue of any securities or agreeing to buy, sell or
subscribe to any issue of any securities or otherwise transacting in any way in any
security by any person as principal, agent or intermediary as defined under the SEBI
Act.
5.3.1 Prohibition of C ertain Dealings in Securities
The regulation provides that no person should directly or indirectly:
(a)
buy, sell or otherwise deal in securities in a fraudulent manner;
(b)
use or employ, in connection with issue, purchase or sale of any
security listed or proposed to be listed in a recognised stock exchange,
any manipulative or deceptive device or contrivance in contravention of
the provisions of the Act or the rules or the regulations made
thereunder;
(c)
employ any device, scheme or artifice to defraud in connection with
dealing in or issue of securities which are listed or proposed to be listed
on a recognised stock exchange;
(d)
engage in any act, practice, course of business which operates or would
operate as fraud or deceit upon any person in connection with any
dealing in or issue of securities which are listed or proposed to be listed
on a recognised stock exchange in contravention of the act, rules and
regulations.
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5.3.2 Prohibition of Manipulative, Fraudulent and Unfair Trade Practices

The Regulation provides that no person should indulge in a fraudulent or an unfair

trade practice in securities. Any dealing in securities is deemed to be fraudulent or an
unfair trade practice if it involves fraud and may include all or any of the following:
(a)
(b)

(c)
(d)

(e)
(f)

(g)
(h)
(i)

(j)

(k)
(l)

(m)
(n)

(o)

indulging in an act which creates false or misleading appearance of

trading in the securities market;
dealing in a security not intended to effect transfer of beneficial
ownership but intended to operate only as a device to inflate, depress
or cause fluctuations in the price of such security for wrongful gain or
avoidance of loss;
advancing or agreeing to advance any money to any person thereby
inducing any other person to offer to buy any security in any issue only
with the intention of securing the minimum subscription to such issue;
paying, offering or agreeing to pay or offer, directly or indirectly, to any
person any money or moneys worth for inducing such person for
dealing in any security with the object of inflating, depressing,
maintaining or causing fluctuation in the price of such security;
any act or omission amounting to manipulation of the price of a
security;
publishing or causing to publish or reporting or causing to report by a
person dealing in securities any information which is not true or which
he does not believe to be true prior to or in the course of dealing in
securities.
entering into a transaction in securities without intention of performing
it or without intention of change in ownership of such security.
selling, dealing or pledging of stolen or counterfeit security whether in
physical or dematerialized form.
an intermediary promising a certain price in respect of buying or selling
of a security to a client and waiting till a discrepancy arises in the price
of such security and retaining the difference in prices as profit for
himself.
an intermediary providing his clients with such information relating to a
security as cannot be verified by the clients before their dealing in such
security.
an advertisement that is misleading or that contains information in a
distorted manner and which may influence the decision of the investors.
an intermediary reporting trading transactions to his clients entered
into on their behalf in an inflated manner in order to increase his
commission and brokerage.
an intermediary not disclosing to his client transactions entered into on
his behalf including taking an option position.
circular transactions in respect of a security entered into between
intermediaries in order to increase commission to provide a false
appearance of trading in such security or to inflate, depress or cause
fluctuations in the price of such security.
encouraging the clients by an intermediary to deal in securities solely
with the object of enhancing his brokerage or commission.

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(p)
(q)

(r)

an intermediary predating or otherwise falsifying records such as

contract notes.
an intermediary buying or selling securities in advance of a substantial
client order or whereby a futures or option position is taken about an
impending transaction in the same or related futures or options
contract.
planting false or misleading news which may induce sale or purchase of
securities.

5.4 The Depositories Act, 1996

The paper based ownership and transfer of securities was a major drawback of the
Indian securities markets since it often resulted in delay in settlement and transfer of
securities, leading to bad delivery, theft, forgery etc. The rapid growth in number
and volume of transactions in the securities markets further highlighted the
limitations of handling securities in the physical/paper mode. As a result, in line with
the developments in the securities industry worldwide the paper based settlement
and clearing system was replaced with depository system or a scrip less trading
system. This transition was facilitated by the Depositories Act, 1996.
This Act provides for the establishment of depositories in securities with the objective
of ensuring free transferability of securities with speed, accuracy and security by:
(a)
(b)
(c)

making securities of public limited companies freely transferable subject

to certain exceptions;
dematerialising the securities in the depository mode; and
providing for maintenance of ownership records in a book entry form.
In order to streamline the settlement process, the Act envisages
transfer of ownership of securities electronically by book entry without
making the securities move from person to person.

The Act has made the securities of all public limited companies freely transferable,
restricting the companys right to use discretion in effecting the transfer of securities,
and the transfer deed and other procedural requirements under the Companies Act
have been dispensed with.
The terms used in the Act are defined as under:
(a)
(b)
(c)
(d)
(e)

Beneficial owner means a person whose name is recorded as such

with a depository.
Depository means a company, formed and registered under the
Companies Act, 1956 and which has been granted a certificate of
registration under sub-section (1A) of section 12 of the SEBI Act, 1992.
Issuer means any person making an issue of securities.
Participant means a person registered as such under sub-section (1A)
of section 12 of the SEBI Act, 1992.
Registered owner means a depository whose name is entered as such
in the register of the issuer.

No depository can act as a depository unless

commencement of business from the SEBI Board.

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it

obtains

certificate

of

The Depositories Act, defines the rights and obligations of depositories,

participants, issuers and beneficial owners which are mentioned below (Chapter
III):
(i) Agreement between Depository and Participant: A depository is required to
enter into an agreement in the specified format with one or more participants as its
agent.
(ii) Services of Depository: Any person, through a participant, may enter into an
agreement, in such form as may be specified by the bye-laws, with any depository
for availing its services.
(iii) Surrender of Certificate of Security: Any person who has entered into an
agreement with a depository should surrender the certificate of security, for which he
seeks to avail the services of a depository, to the issuer in such manner as may be
specified by the regulations. The issuer, on receipt of certificate of security, should
cancel the certificate of security and substitute in its records the name of the
depository as a registered owner in respect of that security and inform the
depository accordingly. A depository should, on receipt of information enter the
name of the person in its records, as the beneficial owner in respect of that security
and inform the depository accordingly.
(iv) Registration of Transfer of Securities with Depository; On receipt of
intimation from a participant, the depository is required to register the transfer of
security in the name of the transferee. If a beneficial owner or a transferee of any
security seeks to have custody of such security, the depository should inform the
issuer accordingly.
(v) Options to Receive Security Certificate or Hold Securities with
Depository: Every person subscribing to securities offered by an issuer should have
the option either to receive the security certific ates or hold securities with a
depository. Where a person opts to hold a security with a depository, the issuer
should intimate such depository the details of allotment of the security, and on
receipt of such information the depository should enter in its records the name of the
allottee as the beneficial owner of that security.
(vi) Securities in Depositories to be in Fungible Form: All securities held by a
depository should be in dematerialised and be in fungible form.
(vii) Rights of Depositories and Beneficial Owner: A depository is deemed to be
the registered owner for the purpose of effecting transfer of ownership of security on
behalf of a beneficial owner. The depository as a registered owner does not have any
voting rights or any other rights in respect of securities held by it. The beneficial
owner is entitled to all the rights and benefits and is subjected to all the liabilities in
respect of his securities held by a depository.
(viii) Pledge or Hypothecation of Securities held in a Depository : A beneficial
owner may with the previous approval of the depository create a pledge or
hypothecation in respect of a security owned by him through a depository. Every
beneficial owner is required to give intimation of such pledge or hypothecation to the
depository and accordingly the depository makes entries in its records. Any entry in
the records of a depository would act as an evidence of a pledge or hypothecation.

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(ix) Furnishing of Information and Records by Depository and Issuer: Every

depository should furnish to the issuer information about the transfer of securities in
the name of beneficial owners at such intervals and in such manner as may be
specified by the bye-laws. Every issuer should make available to the depository
copies of the relevant records in respect of securities held by such depository.
(x) Option to Opt out in Respect of any Security: If a beneficial owner seeks to
opt out of a depository in respect of any security, he should inform the depository
accordingly. After receiving the information, the depository is required to make
appropriate entries in its records and inform the issuer. Within thirty days of the
receipt of intimation from the depository and on fulfillment of such conditions and
payment of such fees as may be specified by the regulations, the issuer is required
to issue the certificate of securities to the beneficial owner or the transferee, as the
case may be.
(xi) Depository to Indemnify Loss in certain cases: In case of any loss caused
to the beneficial owner due to the negligence of the depository or the participant, the
depository has to indemnify beneficial owner. Where the loss due to the negligence
of the participant is indemnified by the depository, the depository has the right to
recover the same from such participant.

5.5 Indian Contract Act, 1872

In the securities markets, the SCRA governs the contracts for or relating to the
purchase or sale of securities. However, the provisions of the Indian Contract Act,
1872 also have a bearing on these securities contracts as this is a general Act which
governs the rights of parties in a contract and the effects thereof.
Following are some important terms/definitions used in the Indian Contract Act:
(i) Contract: According to section 2(h) of the Indian Contract Act, 1872, a contract
is an agreement enforceable by law. Therefore, there has to be an agreement to
create a contract and secondly, it has to satisfy certain requirements mentioned in
section 10 of the Act, i.e., the agreement has to be between parties competent to
contract, with their free consent, for a lawful object and with lawful consideration,
and it should not have been expressly declared as void agreement.
(ii) Standard Form Contracts: With an enormous increase in commercial
transactions, the concept of Standard Form Contracts has come into existence.
Various business organisations like insurance companies, airways, securities market
regulator, other businessman etc. generally get the terms of the contract printed on
a standard form and the other side is simply required to agree to the same, or
sometimes to sign in token of his having agreed to the terms of the contract so
drafted. A standard form contract is a pre-established record of legal terms regularly
used by a business entity or firm in transactions with customers. The record specifies
the legal terms governing the relationship between the firm and another party. The
firm requires the other party to accept the record without amendment and without
expecting the other party to know or understand its terms. A Standard Form
Contract is effective upon acceptance.

143

(iii) Agency Contract: An agent is a person employed to do any act for another or
to represent another in dealings with third persons, as per section 182 of the Indian
Contract Act, 1872. The person for whom such act is done, or who is so represented,
is called the Principal. Principal is bound by the acts done by an agent or the
contracts entered into by him on behalf of the principal in the same manner, as if the
acts had been done or the contracts had been entered into by the principal himself,
in person.
An agent has a dual capacity: one, he serves as a connecting link between his
principal and the third person, and second, he can have a contractual relationship
with his principal.
An agent, having an authority to do an act, has authority to do every lawful thing
which is necessary in order to do such act. An agent having authority to carry on a
business, has authority to do every lawful thing necessary for the purpose, or usually
done in the course, of conducting such business.
(iv) Sub-agent: A sub-agent is a person employed by, and acting under the control
of, the original agent in the business of the agency. Though the general rule is
against delegation of authority by an agent or the appointment of a sub-agent, there
could be such an appointment in exceptional situations recognised by law. Thus,
when any act does not need personal performance by the agent himself, or the
principal agrees to the appointment of a sub-agent, or the ordinary custom of trade
permits the same, or the nature of the business of agency so warrants, nature of the
agency so warrants, a sub-agent may be validly appointed by an agent.
When a sub-agent has been properly appointed the position of various parties is as
under:
(a)
The principal is, so far as regards third persons, represented by the
sub-agent, and is bound by and responsible for his acts, as if he were
an agent originally appointed by the principal.
(b)
The agent is responsible to the principal for the acts of the sub-agent.
(c)
The sub-agent is responsible for his acts to the agent, but not to the
principal except in case of fraud or willful wrong.

5.6 Income Tax Act, 1961

Some of the important definitions related to Income Tax Act are as follows:
(i) Domestic Company means an Indian company, or any other company which, in
respect of its income liable to tax under this act, has made the prescribed
arrangements for the declaration and payment, within India, of the dividends
(including dividends on preference shares) payable out of such income, as per
Section 2 (22A).
(ii) Dividend, according to Section 2(22) includes:
(a)
any distribution by a company of accumulated profits, whether
capitalised or not, if such distribution entails the release by the company
to its shareholders of all or any part of the assets of the company;
(b)
any distribution to its shareholders by a company of debentures,
debenture-stock, or deposit certificates in any form, whether with or
without interest, and any distribution to its preference shareholders of
144

(c)

(d)

(e)

shares by way of bonus, to the extent to which the company possesses

accumulated profits, whether capitalised or not;
any distribution made to the shareholders of a company on its
liquidation, to the extent to which the distribution is attributable to the
accumulated profits of the company immediately before its liquidation,
whether capitalised or not;
any distribution to its shareholders by a company on the reduction of its
capital, to the extent to which the company possesses accumulated
profits which arose after the end of the previous year ending next before
the 1st day of April, 1933, whether such accumulated profits have been
capitalised or not;
any payment by a company, not being a company in which the public
are substantially interested, of any sum (whether as representing a part
of the assets of the company or otherwise) made after the 31st May,
1987, by way of advance or loan to a shareholder, being a person who is
the beneficial owner of shares (not being shares entitled to a fixed rate
of dividend whether with or without a right to participate in profits)
holding not less than ten per cent of the voting power, or to any concern
in which such shareholder is a member or a partner and in which he has
a substantial interest (hereafter in this clause referred to as the said
concern) or any payment by any such company on behalf, or for the
individual benefit, of any such shareholder, to the extent to which the
company in either case possesses accumulated profits;

but dividend does not include:

(a)

(b)

(c)

(d)

(e)
(f)

a distribution made in accordance with sub-clause (c) or sub-clause (d)

in respect of any share issued for full cash consideration, where the
holder of the shares is not entitled in the event of liquidation to
participate in the surplus assets;
a distribution made in accordance with sub-clause (c) or sub-clause (d)
in so far as such distribution is attributable to the capitalised profits of
the company representing bonus shares allotted to its equity
shareholders after the 31st day of March, 1964 (and before the 1st day
of April, 1965);
any advance or loan made to a shareholder (or the said concern) by a
company in the ordinary course of its business, where the lending of
money is a substantial part of the business of the company;
any dividend paid by a company which is set off by the company against
the whole or any part of any sum previously paid by it and treated as a
dividend within the meaning of sub-clause (e), to the extent to which it
is so set off;
any payment made by a company on purchase of its own shares from a
shareholder in accordance with the provisions of section 77A of the
Companies Act, 1956.
any distribution of shares pursuant to a demerger by the resulting
company to the shareholders of the demerged company (whether or not
there is a reduction of capital in the demerged company).

(iii) Dividend Income (Section 8): For the purposes of inclusion in the total income
of an assessee:

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(i)

(ii)

any dividend declared by a company or distributed or paid by it within

the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or
sub-clause (d) or sub-clause (e) of clause (22) of Section 2, should be
deemed to be the income of the previous year in which it is so declared,
distributed or paid, as the case may be;
any interim dividend should be deemed to be the income of the
previous year, in which the amount of such dividend is unconditionally
made available by the company to the member who is entitled to it.

(iv) Interest on Securities (Clause 28B of Section 2) means:

(i)
interest on any security of the Central Government or a State
Government,
(ii)
interest on debentures or other securities for money issued by or on
behalf of a local authority or a company or a corporation established by
a Central, State or provincial Act.
(v) Capital Asset
(i)
(ii)

Long term capital asset means a capital asset which is not a short term
capital asset, as per Clause 29A of Section 2.
Short term capital asset means a capital asset held by an assessee for
not more than thirty-six months* immediately preceding the date of its
transfer, (Clause 42A of Section 2)* twelve months in the case of a
share held in a company or any other security listed in a recognised
stock exchange in India or a unit of the Unit Trust of India established
under the Unit Trust of India Act, 1963 or a unit of a Mutual Fund
specified under clause (23D) of section 10 or a zero coupon bond.

(vi) Capital Gains (Section 45)

Any profits or gains arising from the transfer of a capital asset effected in the
previous year should, save as otherwise provided in sections (54, 54B, 54D, 54E,
54EA, 54EB, 54F, 54G and 54H), be chargeable to income -tax under the head
Capital gains, and should be deemed to be the income of the previous year in which
the transfer took place.
Where any person has had at any time during previous year any beneficial interest in
any securities, then any profits or gains arising from transfer made by the depository
or participant of such beneficial interest in respect of securities should be chargeable
to income -tax as the income of the beneficial owner of the previous year in which
such transfer took place and should not be regarded as income of the depository who
is deemed to be registered owner of securities by virtue of sub-section (1) of section
10 of the Depositories Act, 1996, and for the purposes of section 48 and provison to
clause ( 42A) of section 2, the cost of acquisition and the period of holding of any
securities should be determined on the basis of the first-in-first-out method.
Types of Capital Gains

1. Long term Capital Gain means capital gain arising from the transfer of a long
term capital asset.
2. Short term Capital Gain means capital gain arising from the transfer of a short
term capital asset.

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PAN compulsory for Securities transaction

The Income -tax (Eighth Amendment) Rules, 2002 made it mandatory for a person to
quote permanent account numbers (PAN), issued by the income tax department, for
securities transactions of over Rs. 1 lakh.
Tax on long-term capital gains (Section 112)
Where the total income of an assessee includes any income, arising from the transfer
of a long-term capital asset, which is chargeable under the head Capital gains, the
tax payable by the assessee on the total income should be the aggregate of:
(i) in the case of an individual or a Hindu Undivided Family, being a
resident:
(a)
the amount of income -tax payable on the total income as reduced by
the amount of such long-term capital gains, had the total income as so
reduced been his total income; and
(b)
the amount of income -tax calculated on such long-term capital gains
at the rate of twenty per cent:
(ii) in the case of a domestic company:
(a)
the amount of income -tax payable on the total income as reduced by
the amount of such long-term capital gains, had the total income as so
reduced been its total income; and
(b)
the amount of income -tax calculated on such long-term capital gains
at the rate of twenty per cent
(iii) in the case of a non-resident (not being a company) or a foreign
company:
(a)
the amount of income -tax payable on the total income as reduced by
the amount of such long-term capital gains , had the total income as
so reduced been its total income; and
(b)
the amount of income -tax calculated on such long-term capital gains
at the rate of twenty percent
(iv) in any other case of a resident:
(a)
the amount of income -tax payable on the total income as reduced by
the amount of long-term capital gains, had the total income as so
reduced been its total income; and
(b)
the amount of income -tax calculated on such long-term capital gains
at the rate of twenty per cent
Where the gross total income of an assessee includes any income arising from the
transfer of a long term capital asset, the gross total income should be reduced by the
amount of such income and the deduction should be allowed as if the gross total
income as so reduced were the gross total income of the assessee. Where the total
income of an assessee includes any income arising from the transfer of a long-term
capital asset, the total income should be reduced by the amount of such income and
the rebate under section 88 should be allowed from the income -Tax on the total
income as so reduced.

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CHAPTER 6: FUNDAMENTAL VALUATION CONCEPTS

6.1 Time Value of Money
Money has time value. A rupee is less valuable in the future than it is today. Time
value of money could be studied under the following heads:
(a)
Future value of a single cash flow
(b)
Future value of an annuity
(c)
Present value of a single cash flow
(d)
Present value of an annuity
6.1.1 Future Value of a Single Cash Flow
For a given present value (PV) of money, future value of money (FV) after a period
t for which compounding is done at an interest rate of r, is given by the equation
FV = PV (1+r)t
This assumes that compounding is done at discrete intervals. However, in case of
continuous compounding, the future value is determined using the formula
FV = PV * ert

where the compounding factor is calculated by taking natural logarithm (log to

base). e=2.71828
Example 1: Calculate the value 5 years hence of a deposit of Rs.1,000 made today
if the interest rate is 10%.
Solution: By discrete compounding
FV = 1,000 * (1+0.10)5 = 1,000 * (1.1)5 = 1,000 * 1.61051 = Rs.1,610.51
By continuous compounding:
FV = 1,000 * e (0.10 * 5) = 1,000 * 1.648721 = Rs.1,648.72
Example 2: Find the value of Rs. 50,000 deposited for a period of 3 years at the end
of the period when the interest is 10% and continuous compounding is done.
Solution: Future Value = 50,000* e^(0.01*10*3) = Rs. 67,493.00
The future value (FV) of the present sum (PV) after a period t for which
compounding is done m times a year at an interest rate of r, is given by the
equation
FV = PV (1+(r/m))^mt
Example 3: How much does a deposit of Rs. 5,000 grow to at the end of 3 years, if
the nominal rate of interest is 10 % and compounding is done quarterly?
Solutio n: Future value = 5,000 * ((1 + 0.10/4)^(4*3)) = Rs.6,724.45
6.1.2 Future Value of an Annuity
The future value (FV) of a uniform cash flow (CF) made at the end of each period till
the time of maturity t for which compounding is done at the rate r is given by
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FV

= CF*(1+r)t-1 + CF*(1+r)t-2 + ... + CF*(1+r)1 +CF

= CF [{(1+r)t - 1} / r]

Example 4: Suppose, you deposit Rs. 1,000 annually in a bank for 5 years and your
deposits earn a compound interest rate of 10 per cent, what will be value of this
series of deposits (an annuity) at the end of 5 years? Assume that each deposit
occurs at the end of the year.
Solution: Future value of this annuity is:
=Rs.1000*(1.10)4 + Rs.1000*(1.10)3 + Rs.1000*(1.10)2 + Rs.1000*(1.10)
+Rs.1000
=Rs.1000*(1.4641)+Rs.1000*(1.3310)+Rs.1000*(1.2100)+Rs.1000*(1.10)
+Rs.1000
= Rs. 6,105.00
In case of continuous compounding, the future value of annuity is determined using
the formula FV = CF * (ert -1)/r
6.1.3 Present Value of a Single Cash Flow
Present value of (PV) of the future sum (FV) to be received after a period t for
which discounting is done at an interest rate of r, is given by the equation
In case of discrete discounting:

PV = FV / (1+r)t

Example 5: What is the present value of Rs.1,000 payable 3 years hence, if the
interest rate is 12 % p.a.
Solution:
PV
= 1000 / (1.12)3 i.e. = Rs.711.78
In case of continuous discounting: PV = FV * e- rt
Example 6: What is the present value of Rs. 50,000 receivable after 3 years at a
discount rate of 10% under continuous discounting?
Solution: Present Value = 50,000/(exp^(0.01*10*3)) = Rs. 37,041.00
6.1.4. Present Value of an Annuity
The present value of annuity is the sum of the present values of all the cash
inflows/outflows.
Present value of an annuity (in case of discrete discounting)
PV = FV [{(1+r)t - 1 }/ {r * (1+r)t }]
Present value of an annuity (in case of continuous discounting)
PVa = FVa * (1-e-rt)/r

6.2 Understanding Financial Statements

Accounting is a system of collecting, summarizing, analyzing and reporting in
monetary terms, financial status of an organization. The end product of the financial

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accounting is the financial statements consisting of Balance Sheet and Profit &
Loss Account.
As the name suggests, balance sheet provides information about financial position of
a firm at a particular point of time. On the other hand, Profit & Loss Account of a firm
portrays as a flow statement, the results of operations over a specified period of time
(usually accounting year, April-March). The Bala nce Sheet contains information
pertaining to firms assets, liabilities and shareholders equity whereas Profit & Loss
Account summarizes the revenue items, the expense items and the difference
between the two (net income) for an accounting period.
Mere statistics/data presented in the different financial statements do not reveal the
true picture of a financial position of a firm. Properly analyzed and interpreted
financial statements can provide valuable insights into a firms performance. To
extract the information from the financial statements, a number of tools are used to
analyse these statements. The popular tools are:
(a)
Comparative Financial Statements,
(b)
Common sized Statements, and
(c)
Ratio Analysis.
6.2.1 Comparative Financial Statements
This involves putting statements for two periods/organizations in a comparative form
and indicating differences between them in terms of rupees and percentages.
Example 7: Financial statement of XYZ Ltd. for the years 2000 and 2001 are
compared as under:
___________________________________________________________________
Particulars
Amount (in Rs. Lakh)
Increase/Decrease
2000
2001
in amount
in % ___
Equity Share Capital
15.00
15.00
Debentures
9.00
6.00
(-) 3.00
(-) 33.33
Current Liabilities
10.00
10.50
(+) 0.50
(+) 5.00
Land and Building
13.00
13.00
Investments
8.00
10.00
(+) 2.00
(+) 25.00
Current Assets
13.00
8.50
(-) 4.50
(-) 34.62
__________________________________________________________________

6.2.2 Common Size Statements

This involves putting statements for two years/organizations in a comparative form,
where the items appear in percentage to total, rather than in absolute rupee form.
This indicates relative importance of each item in the total and significant changes in
the composition of the items.

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Example 8: Common size statement of ABC Ltd. for the years 2000 and 2001 is as
under:
___________________________________________________________________
Particulars
Amount (in Rs. Lakh)
Percentage
2000
2001
2000
2001_______
Equity Share Capital
15.00
15.00
23.62
16.17
Debentures
9.00
6.00
14.17
6.47
Current Liabilities
10.00
10.50
15.75
11.32
Land and Building
13.00
13.00
20.47
14.02
Investments
8.00
10.00
12.60
10.78
Current Assets
13.00
8.50
13.39
41.23
Total
63.50
92.74
100.00
100.00
___________________________________________________________________
6.2.3 Ratio Analysis
A ratio is a numerical relationship between two numbers (in financial statements) in
terms of proportion, rate or percentage. The popular ratios are discussed in the
following paragraphs:
(i) Return for Shareholders: A common (equity) shareholder has only a residual
claim on profits and assets of a firm, i.e., only after claims of creditors and
preference shareholders are fully met, the equity shareholders receive a distribution
of profits or assets on liquidation. A measure of his well being is reflected by return
on equity. There are several measures to calculate return on shareholders equity:
(a)

Earnings Per Share (EPS): EPS measures the profit available to the equity
shareholders on a per share basis, that is, the amount that they can get
on every share held. It is calculated by dividing the profit available to the
shareholders by number of outstanding shares. The profit available to the
ordinary shareholders is net profit after taxes and preference dividend.
EPS = Net profit after tax/number of ordinary shares outstanding

(b)

Dividend Yield: Dividend Yield is closely related to EPS. While the EPS is
based on book value per share, the yield is expressed in terms of the
market value per share. The dividend yield is calculated by dividing the
cash dividends per share (DPS) by the market value per share, (not price
actually paid by investors)
Dividend yield = Dividend per share/Market Price per share * 100

(c)

Price to Earnings Ratio: The P/E ratio reflects the price currently being
paid by the market for each rupee of currently reported EPS. It measures
investors expectations and market appraisal of the performance of a firm.
It is defined as:
Price to Earnings Ratio = Market Price of share/EPS

(d)

Return on Equity: It reflects the rate of return which a firm is able to

generate on equity. This is calculated as:
Return on Equity = Net income after tax/Equity
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Where
Equity = Equity Share Capital + Reserves and Surplus
(e)

Debt to Equity Ratio: The Debt to Equity Ratio is the ratio of debt
(liabilities) to the share capital plus reserves and surplus (Networth). It is
also known as Financial Leverage Ratio. It is defined as:
Debt to Equity Ratio = Debt/ Equity
Higher ratio implies greater financial risk (on account of interest
payment). Therefore, for a newly set up firms equity finance is preferred
to debt finance.

(ii) Ratios for Short-term Creditors: A short-term creditor is interested in near

term prospects of having his dues paid in time. He looks at the following ratios:
(a)

Current Ratio: It is the most popularly used ratio to judge liquidity of a

firm. It is defined as the ratio between current assets and current
liabilities i.e.
Current Ratio = Current Assets/Current Liabilities
Current Assets include cash, debtors, marketable securities, bills
receivable, inventories, loans and advances, and prepaid expenses, while
Current Liabilities include loans and advances (taken), creditors, bills
payable, accrued expenses and provisions.
It measures a firms ability to meet short term obligations. The higher the
current ratio, the more is the firms ability to meet current obligations,
and greater is the safety of funds of short term creditors.
A current ratio of 1.5:1 implies that for every one rupee of current
liability, current assets of one-and-half rupees are available to meet the
obligation.

(b)

Acid-Test Ratio (Quick Ratio): Though higher current ratio implies the
greater short term solvency of the firm, the break-up of the current assets
is very important to assess the liquidity of a firm. A firm with a large
proportion of current assets in the form of cash and accounts receivable is
more liquid than a firm with a high proportion of inventories even though
two firms might have the same ratio. A more rigorous way to ascertain a
firm's liquidity is found out by acid-test/quick ratio. Inventory and prepaid
expenses are excluded from the current assets, leaving only the more
liquid assets to be divided by current liabilities. It is found by:

Acid-Test Ratio = Current Assets - (Inventory + Prepaid Expenses)/Current Liabilities

(iii) Ratios for Efficiency

More popularly known as activity ratios or asset management ratios which help
measure how efficiently the assets are employed by a firm under consideration.
Some of the important turnover ratios are:

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(a)

Inventory Turnover Ratio: It measures how many times a firm's inventory

has been sold during a year. It is found by:
Inventory Turnover Ratio = Cost of Goods Sold/Inventory
Where, Cost of Goods Sold means Sales minus gross profit and Inventory
implies stock of goods at the end of the year. This ratio reflects the
efficiency of inventory management. The higher the ratio, the more
efficient the inventory management (i.e. how quickly/fast the inventory is
sold. A high ratio is considered good from the view point of liquidity and
vice versa.

(b)

Average Collection Period: Average collection period represents the

number of days taken to collect an account. It is defined as:
Average Collection Period=Average Accounts Receivable/Average Daily
Credit Sales

(c)

Fixed Assets Turnover Ratio: This ratio is used to measure the efficiency
with which fixed assets are employed. A high ratio indicates an efficient
use of fixed assets. Generally this ratio is high when the fixed assets are
old and substantially depreciated.
Fixed Assets Turnover Ratio = Net Sales/Average Net Fixed Assets

(d)

Gross Profit Ratio: It is defined as ratio between gross profit to net sales
i.e.
Gross Profit Ratio = Gross Profit/Net Sales
Where, Gross Profit is defined as the difference between net sales and the
cost of the goods sold.

(e)

Net Profit Ratio: It is defined as ratio between net profit to net sales i.e.
Net Profit Ratio = Net Profit/Net Sales
This ratio shows the profits left for shareholders as a percentage of net
sales. It measures the overall efficiency of production, administration,
selling, financing, pricing and tax management.

153

Example 9: from the following Balance Sheet and Profit & Loss Account of XYZ Co.
Ltd., calculate the relevant ratios:
Balance Sheet of XYZ Co. Ltd
as on March 31, 2000
Liabilities
Share Capital
(1,00,00,000
equity
shares of Rs.10 each)
Reserves & Surplus
Secured Loans
Unsecured Loans
Current Liabilities &
Provisions

Total

Amount
10.00

Assets
Fixed
Assets
(net)

15.20
14.30
16.90
10.50

Current Assets:
Cash & Bank
Debtors
Inventories

67.90

Pre-paid
expenses
Investments
Total

(Rs. in Crore)
Amount
34.00
23.40
0.20
11.80
10.60
0.80
10.50
67.90

Profit and Loss Account of XYZ Co. Ltd

for the year ending March 31, 2000
Particulars
Opening Stock
Purchases
Wages and Salaries
Other Mfg. Expenses
Gross Profit
Total
Administrative
and
Personnel Expenses
Selling and Distribution
Expenses
Depreciation
Interest
Net Profit
Total
Income Tax
Equity Dividend
Retained Earning
Total

Amount
8.00
44.70
6.80
6.30
14.90
80.70
1.20

Particulars
Sales (net)
Closing Stock

(Rs. in Crore)
Amount
70.10
10.60

Total
Gross Profit

80.70
14.90

Total
Net Profit

14.90
6.80

1.80
3.00
2.10
6.80
14.90
3.50
2.00
1.30
6.80

Total

154

6.80

Market price per equity share - Rs. 20.00

Ratios for XYZ Limited are computed as under:
EPS = Net profit after tax/number of ordinary shares outstanding
= 3.30/1.00 = Rs. 3.30 per share
Dividend yield = Dividend per share/Market Value per share * 100
= 2.00/20.00 * 100 = 10.00%
Price to Earning Ratio = Market Price of Share/EPS.
= 20.00/3.30 = Rs. 6.06
Return on Equity = Net income after tax/Equity
= 3.30/(10.00+15.20) * 100 = 13.09%
Debt to Equity Ratio = Debt/ Equity
= (14.30+16.90)/(10.00+15.20) = 1.24
Current Ratio = Current Assets / Current Liabilities
= 23.40/10.50 = 2.29
Quick Ratio = Quick Assets / Current Liabilities
= (0.20+11.80)/10.50 = 12.00/10.50 = 1.14
Inventory Turnover Ratio = Cost of goods sold/Inventory
= 55.20/10.60 = 5.20
Average Collection period = Receivables / Average Sales per day
= 11.80/70.1*1/360 = 61 days
Fixed Assets Turnover ratio = Net Sales / Fixed Assets
= 70.10/34.00 = 2.06
Gross Profit Ratio = Gross Profit/Net Sales
= 14.90/70.10 * 100 = 21%
Net Profit Ratio = Net Profit / Net Sales
= 6.80/70.10 * 100 = 9.70 %

155