1

Working of Stock Market

Introduction

Sr. No. Page No.

CONTENTS
1 What is share? 9
2 What is Stock Exchange 6
3 Characteristics of Stock Exchanges in India 11
4 Exchange management 13
5 Role of SEBI 14
6 Demat Trading 19
7 B S E (Bombay Stock Exchange) 21
8 Capital Listed And Market Capitalization 23
9 BSE Sensex & Its Objectives 24
10 Trading System 27
11 Settlement 32
12 Shortages & Objections 34
13 Close Out 38
14 Basket Trading System 42
15 Clearing System 43
16 Transfer Of Ownership 45
17 Disclosure & Listing Norms 49
18 Computerized Trading 50
19 Future Developments 52
20 N S E (National Stock Exchange) 53
21 Market Types 58
22 Order Books 60
23 Capital Market Segment 61
24 Order Matching Rules 64
25 Order Conditions 65
26 Price Conditions 67
27 Computer-to-Computer Link (CTCL) Facility 76
26 National Securities Clearing Corporation Limited 77

Conclusion

Bibliography
 2

ACKNOWLEDGEMENT

It is a great pleasure to prepare Project Report on Working of Stock

Market. Present it to Shri GPM Degree College of Science & Commerce.
Shri GPM Degree College of Commerce & Management Studies.
Affiliated to Mumbai University. I am very thankful to Prof. MANOR
KUMAR VISHWAKARMA for providing valuable guidance and advice
 3

from time to time, co-operation encouragement and time spend for this
project work.
I would like to thank our library staff for providing me sufficient
information, which helped me to complete my project successfully, I
would like to thank all the lectures for this support and guidance
throughout the project.
I also thank my family member for their continued support in completing
the project work and last but not least, I wish to thank all my friends &
well wises who are directly or indirectly link with this success of my
project.

DECLARATION

I hereby declare that the project title Working of Stock Market, Is an

original work prepared by me and is being submitted to University of
Mumbai in partial fulfillment of BMS Degree for the academic year
2017-18.
 4

To the best of my knowledge this project report has not been submitted
earlier to this University or to any other affiliated college for the
fulfillment of BMS Degree. The contents of the project are not copied
from any other source such as Internet, earlier project, textbook etc.

PROJECT REPORT
ON

Working of Stock Market

 5

BACHELORE OF MANAGEMENT STUDIES (BMS)

UNIVERSITY OF MUMBAI

SUBMITTED TO:
SHRI GPM COLLEGE
SHRI GPM DEGREE COLLGE OF COMMERCE & MANAGEMENT

UNDER THE GUIDANCE OF:

PROF: MANOJ KUMAR VISHWAKARMA

SUBMITTED BY:
NIKHIL
BATCH 2017-18
ROLL NO.
FINANCE
 7

Working of Stock Market

Introduction

Of all the modern service institutions, stock exchanges are perhaps the
most crucial agents and facilitators of entrepreneurial progress. After the
industrial revolution, as the size of business enterprises grew, it was no
longer possible for proprietors or partnerships to raise colossal amount
of money required for undertaking large entrepreneurial ventures. Such
huge requirement of capital could only be met by the participation of a
very large number of investors; their numbers running into hundreds,
thousands and even millions, depending on the size of business venture.

In general, small time proprietors, or partners of a proprietary or

partnership firm, are likely to find it rather difficult to get out of their
business should they for some reason wish to do so. This is so because it
is not always possible to find buyers for an entire business or a part of
business, just when one wishes to sell it. Similarly, it is not easy for
someone with savings, especially with a small amount of savings, to
readily find an appropriate business opportunity, or a part thereof, for
investment. These problems will be even more magnified in large
proprietorships and partnerships. Nobody would like to invest in such
partnerships in the first place, since once invested, their savings would
be very difficult to convert into cash. And most people have lots of
reasons, such as better investment opportunity, marriage, education,
death, health and so on for wanting to convert their savings into cash.
 8

Clearly then, big enterprises will be able to raise capital from the public
at large only if there were some mechanism by which the investors could
purchase or sell their share of business as ands they wished to do so.
This implies that ownership in business has to be broken up into a
lager number of small units, such that each unit may be independently &
easily bought and sold without hampering the business activity as such.
Also, such breaking of business ownership would help mobilize small
savings in the economy into entrepreneurial ventures.
This end is achieved in a modern business through the mechanism of
shares.

What is a share?
 9

A share represents the smallest recognized fraction of ownership in a

public yield business. Each such fraction of ownership is represented in
the form of a certificate known as a share certificate. The breaking up of
total ownership of a business into small fragments, each fragment
represented by a share certificate, enables them to be easily bought and
sold.

What is a stock exchange?

The institution where this buying and selling of shares essentially takes
place is the Stock Exchange.
In the absence of stock exchanges, ie. Institutions where small chunks of
businesses could be traded, there would be no modern business in the
form of publicly held companies. Today, owing to the stock exchanges,
one can be part owners of one company today and another company
tomorrow; one can be part owners in several companies at the same
time; one can be part owner in a company hundreds or thousands of
miles away; one can be all of these things. Thus by enabling the
convertibility of ownership in the product market into financial assets,
namely shares, stock exchanges bring together buyers and sellers (or
their representatives) of fractional ownerships of companies. And for
that very reason, activities relating to stock exchanges are also
appropriately enough, known as stock market or security market. Also a
stock exchange is distinguished by a specific locality and characteristics
of its own, mostly a stock exchange is also distinguished by a physical
location and characteristics of its own. In fact, according to H.T.Parekh,
 10

the earliest location of the Bombay Stock Exchange, which for a long
period was known as the native share and stock brokers association,
was probably under a tree around 1870!

The stock exchanges are the exclusive centers for the trading of
securities. The regulatory framework encourages this by virtually
banning trading of securities outside exchanges. Until recently, the area
of operation/ jurisdiction of exchange was specified at the time of its
recognition, which in effect precluded competition among the
exchanges. These are called regional exchanges. In order to provide an
opportunity to investors to invest/ trade in the securities of local
companies, it is mandatory foe the companies, wishing to list their
securities, to list on the regional stock exchange nearest to their
registered office.

Characteristics of Stock Exchanges in India

 11

Traditionally, a stock exchange has been an association of individual

members called member brokers (or simply members or brokers),
formed for the express purpose of regulating and facilitating buying and
selling of securities by the public and institution at large.

A stock exchange in India operates with due recognition from the

government under the Securities and Contracts (Regulations) Act, 1956.
the member brokers are essentially the middlemen who carry out the
desired transactions in securities on behalf of the public(for a
commission) or on their own behalf. New membership to a Stock
Exchange is through election by the governing board of that stock
exchange.

At present, there are 23 stock exchanges in India, the largest among

them being the Bombay Stock Exchange. BSE alone accounts for over
80% of the total volume of transactions in shares.

Typically, a stock exchange is governed by a board consisting of directors

largely elected by the member brokers, and a few nominated by the
government. Government nominee include representatives of the
ministry of finance, as well as some public representatives, who are
expected to safeguard the public interest in the functioning of the
exchanges. A president, who is an elected member, usually nominated by
the government from among the elected members, heads the board.
The executive director, who is usually appointed by the by the stock
exchange with the government approval is the operational chief of the
 12

stock exchange. His duty is to ensure that the day to day operations the
Stock Exchange are carried out in accordance with the various rules and
regulations governing its functioning.

The overall development and regulation of the securities market has

been entrusted to the Securities and Exchange Board of India (SEBI) by
an act of parliament in 1992.
All companies wishing to raise capital from the public are required to list
their securities on at least one stock exchange. Thus, all ordinary shares,
preference shares and debentures of the publicly held companies are
listed in the stock exchange.

Exchange management
 13

Made some attempts in this direction, but this did not materially alter
the situation. In view of the less than satisfactory quality, of
administration of broker-managed exchanges, the finance minister in
march 2001 proposed demutualization of exchanges by which
ownership, management and trading membership would be segregated
from each other. The regulators are working towards implementing this.
Of the 23 stock exchanges in India, two stock exchanges viz., OTCEI and
NSE are already demutualised. Board of directors, which do not include
trading members, manages these. Theses are purest form of
demutualised exchanges, where ownership, management and trading
are in the hands of three sets of people. The concept of demutualization
completely eliminates any conflict of interest and helps the exchange to
pursue market efficiency and investors interest aggressively.

Role of SEBI
 14

The SEBI, that is, the Securities and the Exchange Board of India, is the
national regulatory body for the securities market, set up under the
securities and Exchange Board of India act, 1992, to protect the interest
of investors in securities and to promote the development of, and to
regulate the securities market and for matters connected therewith and
incidental too.

SEBI has its head office in Mumbai and it has now set up regional offices
in the metropolitan cities of Kolkata, Delhi, and Chennai. The Board of
SEBI comprises a Chairman, two members from the central government
representing the ministries of finance and law, one member from the
Reserve Bank of India and two other members appointed by the central
government.

As per the SEBI act, 1992, the power and functions of the Board
encompass the regulation of Stock Exchanges and other securities
markets; registration and regulation of the working stock brokers, sub-
brokers, bankers to an issue (a public offer of capital), trustees of trust
deeds, registrars to an issues, merchant bankers, under writers, portfolio
managers, investment advisors and such other intermediaries who may
be associated with the stock market in any way; registration and
regulations of mutual funds; promotion and regulation of self- regulatory
organizations; prohibiting Fraudulent and unfair trade practices and
insider trading in securities markets; regulating substantial acquisition of
shares and takeover of companies; calling for information from,
undertaking inspection, conducting inquiries and audits of stock
 15

exchanges, intermediaries and self- regulatory organizations of the

securities market; performing such functions and exercising such powers
as contained in the provisions of the Capital Issues (Control) Act,1947
and the Securities Contracts (Regulation) Act, 1956, levying various fees
and other charges, conducting necessary research for above purposes
and performing such other functions as may be prescribes from time to
time.

SEBI as the watchdog of the industry has an important and crucial role in
the market in ensuring that the market participants perform their duties
in accordance with the regulatory norms. The Stock Exchange as a
responsible Self Regulatory Organization (SRO) function to regulate the
market and its prices as per the prevalent regulations. SEBI and the
Exchange play complimentary roles to enhance the investor protection
and the overall quality of the market.

Membership

The trading platform of a stock exchange is accessible only to brokers.

The broker enters into trades in exchanges either on his own account or
on behalf of clients. The clients may place their order with them directly
or a sub-broker indirectly. A broker is admitted to the membership of an
exchange in terms of the provisions of the SCRA, the SEBI act 1992, the
rules, circulars, notifications, guidelines, etc. prescribed there under and
the byelaws, rules and regulations of the concerned exchange. No
stockbroker or sub-broker is allowed to buy, sell or deal in securities,
 16

unless he or she holds a certificate of registration granted by SEBI. A

broker/sub-broker compiles with the code of conduct prescribed by SEBI.

The stock exchanges are free to stipulate stricter requirements for its
members than those stipulated by SEBI. The minimum standards
stipulated by NSE for membership are in excess of the minimum norms
laid down by SEBI. The standards for admission of members laid down by
NSE stress on factors, such as, corporate structure, capital adequacy,
track record, education, experience, etc. and reflect the conscious
endeavors to ensure quality broking services.

Listing

Listing means formal admission of a security to the trading platform of a

stock exchange, invariably evidenced by a listing agreement between the
issuer of the security and the stock exchange. ; Listing of securities on
Indian Stock Exchanges is essentially governed by the provisions in the
companies act, 1956, SCRA, SCRR, rules, bye-laws and regulations of the
concerned stock exchange, the listing agreement entered into by the
issuer and the stock exchange and the circulars/ guidelines issued by
central government and SEBI.

Index services

Stock index uses a set of stocks that are representative of the whole
market, or a specified sector to measure the change in overall behavior
of the markets or sector over a period of time. India Index Services &
 17

Products Limited (IISL), promoted by NSE and CRISIL, is the only

specialized organization in the country to provide stock index services.

Trading Mechanism

All stock exchanges in India follow screen-based trading system. NSE was
the first stock exchange in the country to provide nation-wide order-
driven, screen-based trading system. NSE model was gradually emulated
by all other stock exchanges in the country. The trading system at NSE
known as the National Exchange for Automated Trading (NEAT) system is
an anonymous order-driven system and operates on a strict price/time
priority. It enables members from across the countries to trade
simultaneously with enormous ease and efficiency. NEAT has lent
considerable depth in the market by enabling large number of members
all over the country to trade simultaneously and consequently narrowed
the spreads significantly. A single consolidated order book for each stock
displays, on a real time basis, buy and sell orders originating from all over
the country. The bookstores only limit orders, which are orders to buy or
sell shares at a stated quantity and stated price. The limit order is
executed only if the price quantity conditions match. Thus, the NEAT
system provides an open electronic consolidated limit order book
(OECLOB). 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 (Good-Till-Cancelled, Good-Till-Day, Immediate-or-
Cancel), price related (buy/sell limit and stop-loss orders) or volume
related (All-or-None, Minimum Fill, etc.) conditions van be easily built
into an order. Orders are sorted and match automatically by the
 18

computer keeping the system transparent, objective and fair. The trading
system also provides complete market information on-line, which is
updated on real time basis. The trading platform of the CM segment of
NSE is accessed not only from the computer terminals from the premises
of brokers spread over 420 cities, but also from the personal computers
in the homes of investors through the internet and from the hand-held
devices through WAP. The trading platform of BSE is also accessible from
400 cities.

Internet trading is available on NSE and BSE, as of now. SEBI has

approved the use of Internet as an order routing system, for
communicating clients orders to the exchanges through brokers. SEBI-
registered brokers can introduce internet-based trading after obtaining
permission from the respective Stock Exchanges. SEBI has stipulated the
minimum conditions to be fulfilled by trading members to start internet-
based trading and services.

Demat Trading
 19

A depository holds securities in dematerialized form. It maintains

ownership records of securities in a book entry form and also effects
transfer of ownership through book entry. SEBI has introduced some
degree of compulsion in trading and settlement of securities in
dematerialized form. While the investors have a right to hold securities
in either physical or demat form, SEBI has mandated compulsory trading
and settlement of securities in dematerialized form. This was initially
introduced for institutional investors and was later extended to all
investors. Starting with 12 scrips on January 15, 1998, all investors are
required to mandatorily trade in dematerialized form in respect of 2,335
securities as at end-June, 2001.

Since the introduction of the depository system, dematerialization has

progressed at a fast pace and has gained acceptance among the
participants in the market. All actively traded scrips are held, traded and
settled in demat form. The details of progress in dematerialization in two
depositories, viz., NSDL and CDSL., are presented as below:

In a SEBI working paper titled Dematerialization: A Silent Revolution in

the Indian Capital Market released in April 2000, it has been observed
that India has achieved a very high level of dematerialization in less than
three years time, and currently more than 99%of trades settle in
demand form. Competition and regulatory developments facilitated
reduction in custodial charges and improvements in qualities of service
standards. The paper observes that one imminent and apparent
immediate benefit of competition between the two depositories is fall
 20

in settlement and other charges. Competition has been driving

improvement in service standards. Depository facility has effected
changes in stock market microstructure. Breadth and depth of
investment culture has further got extended to interior areas of the
country faster. Explicit transaction cost has been falling due to
dematerialization. Dematerialization substantially contributed to the
increased growth in the turnover. Dematerialization growth in India is
the quickest among all emerging markets and also among developed
markets excepting for the U.K and Hong Kong.
 21

B S E (Bombay Stock Exchange)

Introduction
The Stock Exchange, Mumbai, popularly known as "BSE" was established
in 1875 as "The Native Share and Stock Brokers Association", as a
voluntary non-profit making association. It has evolved over the years
into its present status as the premier Stock Exchange in the country. It
may be noted that the Stock Exchanges is the oldest one in Asia, even
older than the Tokyo Stock Exchange, which was founded in 1878.

The Exchange, while providing an efficient and transparent market for

trading in securities, upholds the interests of the investors and ensures
redressal of their grievances, whether against the companies or its own
member-brokers. It also strives to educate and enlighten the investors by
making available necessary informative inputs and conducting investor
education programmes.

A Governing Board comprising of 9 elected directors (one third of them

retire every year by rotation), two SEBI nominees, a Reserve Bank of
India nominee, six public representatives and an Executive Director is the
apex body, which decides the policies and regulates the affairs of the
Exchange.

The Executive Director as the Chief Executive Officer is responsible for

the day-to-day administration of the Exchange.
 22

The average daily turnover of the Exchange during the year 2000-2001
(April-March), was Rs.3984.19 crores and average number of daily trades
was 5.69 lakhs. However, the average daily turnover of the Exchange
during the year 2001- 2002 has declined to Rs. 1244.10 crores and
number of average daily trades during the period to 5.17 lakhs. The ban
on all deferral products like BLESS and ALBM in the Indian capital
Markets by SEBI w.e.f. July 2, 2001, abolition of account period
settlements, introduction of Compulsory Rolling Settlements in all scrips
traded on the Exchanges w.e.f. December 31, 2001, etc. have adversely
impacted the liquidity and consequently there is a considerable decline
in the daily turnover at the Exchange.
 23

Capital Listed And Market Capitalization

The Stock Exchange, Bombay (BSE) is the premier Stock Exchange in

India. The BSE accounted for 46 per cent of listed companies on an all
India basis as on 31st March 1994. It ranked first in terms of the number
of listed companies and stock issues listed. The capital listed in the BSE
as on 31st March 1994 accounted for 50% of the overall capital listed on
all the stock exchanges. Its share of the market capitalization was around
74% as on the same date. The paid-up capital of equity,
debentures/bonds and preference were 73%, 31%, 44% respectively of
the overall capital listed on all the Stock Exchanges as on the same date.

On the BSE, the Steel Authority of India had the largest market
capitalization of Rs.19, 908 crores as on the 31st March, 1994 followed
by the State Bank of India with the market capitalization of Rs.16, 702
crores and Mahanagar Telephone Nigam Limited with the market
capitalization of Rs.11, 700 crores.
 24

BSE Sensex

The BSE SENSEX, short form of Sensitive Index, first compiled in 1986 is a
market Capitalization-Weighted index of 30 component stocks
representing a sample of large, well-established and financially sound
companies. The index is widely reported in both, the domestic
international, print electronic media and is widely used to measure the
used to measure the performance of the Indian stock markets.

The BSE SENSEX is the benchmark index of the Indian capital market and
one, which has the longest social memory. In fact the SENSEX is
considered to be the pulse of the Indian stock markets. It is the oldest
index in India and has acquired a unique place in collective
consciousness of the investors. Further, as the oldest index of the Indian
Stock Market, it provides time series data over a fairly long period of
time. Small wonder that the SENSEX has over the years has become one
of the most prominent brands of the Country.
 25

Objectives of SENSEX

The BSE SENSEX is the benchmark index with wide acceptance among
individual investors, institutional investors, foreign investors, foreign
investors and fund managers. The objectives of the index are:

To measure market movements

Given its long history and its wide acceptance, no other index matches
the BSE
SENESX in the reflecting market movements and sentiments. SENSEX
is widely
used to describe the mood in the Indian stock markets.

Benchmark for funds performance

The inclusion of blue chip companies and the wide and balanced
industry Representation in the SENSEX makes it the ideal
benchmark for fund managers to compare the performance of their
funds.

For index based derivatives products

Institutional investors, money managers and small investors, all refer
to the BSE
SENSEX for their specific purposes. The BSE SENSEX is in effect the
proxy for
the Indian stock markets. Since SENSEX comprises of the leading
companies in
 26

all the significant sectors in the economy, we believe that it will be

the most liquid
contract in the Indian market and will garner a predominant market
share.

Companies represented in the SENSEX

Company name Sector
(As on 15.06.01)
Hindustan lever FMCG
Reliance limited Chemicals and petrochemicals
Infosys technologies Information technology
Reliance petroleum Oil and gas
ITC FMCG
State bank of India Finance
MTNL Telecom
Satyam computers Information technology
Zee telefilms Media
Ranbaxy labs Healthcare
ICICI Finance
Larsen & toubro Diversified
Cipla Healthcare
Hindalco Metals and mining
HPCL Metal and mining
TISCO Metal and mining
Nestle FMCG

Trading System
Till Now, buyers and sellers used to negotiate face-to-face on the trading
floor over a security until agreement was reached and a deal was struck
in the open outcry system of trading, that used to take place in the
trading ring. The transaction details of the account period (called
 27

settlement period) were submitted for settlement by members after

each trading session.

The computerized settlement system initiated the netting and clearing

process by providing on a daily basis statements for each member,
showing matched and unmatched transactions. Settlement processing
involves computation of each member's net position in each security,
after taking into account all transactions for the member during the
settlement period, which is 10 working days for group 'A' securities and 5
working days for group 'B' securities.

Trading is done by members and their authorized assistants from their

Trader Work Stations (TWS) in their offices, through the BSE On-Line
Trading (BOLT) system. BOLT system has replaced the open outcry system
of trading. BOLT system accepts two-way quotations from jobbers,
market and limit orders from client-brokers and matches them according
to the matching logic specified in the Business Requirement
Specifications (BRS) document for this system.

The matching logic for the Carry-Forward System as in the case of the
regular trading system is quote driven with the order book functioning as
an "auxiliary jobber".

Trading
 28

The Exchange, which had an open outcry trading system, had switched
over to a fully automated computerized mode of trading known as BOLT
(BSE on Line Trading) System. Through the BOLT system the members
now enter orders from Trader Work Stations (TWSs) installed in their
offices instead of assembling in the trading ring. This system, which was
initially both order and quote driven, was commissioned on March 14,
1995. However, the facility of placing of quotes has been removed w.e.f.,
August 13, 2001 in view of lack of market interest and to improve
system-matching efficiency. The system, which is now only order driven,
facilitates more efficient processing, automatic order matching and
faster execution of orders in a transparent manner.

In order to expand the reach of BOLT network to centers outside

Mumbai and support the smaller Regional Stock Exchanges, the
Exchange has, as on March 31, 2002, admitted subsidiary companies
formed by 13 Regional Stock Exchanges as its members. The members of
these Regional Stock Exchanges work as sub-brokers of the member-
brokers of the Exchange.

The objectives of granting membership to the subsidiary companies

formed by the Regional Stock Exchanges were to reach out to investors
in these centers via the members of these Regional Exchanges and
provide the investors in these areas access to the trading facilities in all
scrips listed on the Exchange.

Trading on the BOLT System is conducted from Monday to Friday

between 9:55 a.m. and 3:30 p.m. The scrips traded on the Exchange
 29

have been classified into 'A', 'B1', 'B2', 'F' and 'Z' groups. The number of
scrips listed on the Exchange under 'A', 'B1 ', 'B2' and 'Z' groups, which
represent the equity segment, as on March 31, 2002 was 173, 560,1930
and 3044 respectively. The 'F' group represents the debt market (fixed
income securities) segment wherein 748 securities were listed as on
March 31, 2002. The 'Z' group was introduced by the Exchange in July
1999 and covers the companies which have failed to comply with listing
requirements and/or failed to resolve investor complaints or have not
made the required arrangements with both the Depositories, viz.,
Central Depository Services (I) Ltd. (CDSL) and National Security
Depository Ltd. (NSDL) for dematerialization of their securities by the
specified date, i.e., September 30, 2001. Companies in "Z" group
numbered 3044 as on March 31, 2002. Of these, 1429 companies were
in "Z" group for not complying with the provisions of the Listing
Agreement and/or pending investor complaints and the balance 1615
companies were on account of not making arrangements for
dematerialization of their securities with both the Depositories. 1615
companies have been put in "Z" group as a temporary measure till they
make arrangements for dematerialization of their securities.
Permitted Securities

The Exchange has since decided to permit trading in the securities of the
companies listed on other Stock Exchanges under " Permitted Securities"
category which meet the relevant norms specified by the Exchange.
Accordingly, to begin with the Exchange has permitted trading in scrips
of five companies listed on other Stock Exchanges w.e.f. April 22, 2002/
 30

Computation of closing price of scrips in the Cash Segment:

The closing prices of scrips are computed on the basis of weighted
average price of all trades in the last 15 minutes of the continuous
trading session. However, if there is no trade during the last 15 minutes,
then the last traded price in the continuous trading session is taken as
the official closing price.

A) Compulsory Rolling Segment (CRS):

Compulsory Rolling Settlement (CRS) Segment:

With a view to introduce the best international trading practices and to

achieve higher settlement efficiency, as mandated by SEBI, trades in all
the equity shares listed on the Exchange in CRS Segment were to be
settled on T+5 basis w.e.f. December 31, 2001. SEBI has further directed
the Stock Exchanges that trades in all scrips w.e..f. April 1, 2002 should
be settled on T+3 basis. Accordingly, all transactions in all groups of
securities in the equity segment and fixed income securities listed on the
Exchange are settled on T+3 basis w.e.f. April 1, 2002

Under a rolling settlement environment, the trades done on a particular

day are settled after a given number of business days rather than settling
all trades done during a period at the end of an 'account period'. A T+3
settlement cycle means that the final settlement of transactions done on
 31

T or trade day by exchange of monies and securities, occurs on fifth

business day after the trade day.

The transactions in securities of companies which have made

arrangements for dematerialization of their securities by the stipulated
date are settled only in Demat mode on T+3 on net basis, i.e., buy and
sale positions in the same scrip are netted and the net quantity is to be
settled. However, transactions in securities of companies, which have
failed to make arrangements for dematerialization of their securities
or /are in "Z" group, are settled only on trade to trade basis on T+3 i.e.,
the transactions are settled on a gross basis and the facility of netting of
buy and sale transactions in a scrip is not available. For example, if one
buys and sells 100 shares of a company on the same day which is on
trade to trade basis, the two positions will not be netted and he will have
to first deliver 100 shares at the time of pay-in of securities and then
receive 100 shares at the time of pay-out of securities on the same day.
Thus, if one fails to deliver the securities sold at the time of pay-in, it will
be treated as a shortage and the position will be auctioned/ closed-out.

Settlement

Pay-in and Pay-out for 'A', 'B1', 'B2', 'C', "F" & 'Z' group of securities

As discussed earlier, the trades done by members in all the securities in

CRS are now settled by payment of money and delivery of securities on
T+3 basis. All deliveries of securities are required to be routed through
the Clearing House, except for certain off-market transactions which,
 32

although are required to be reported to the Exchange, may be settled

directly between the members concerned.

The Clearing House is an independent company promoted jointly by

Bank of India and Stock Exchange, Mumbai for handling the clearing and
settlement operations of funds and securities on behalf of the Exchange.
For this purpose, the Clearing & Settlement Dept. of the Exchange liaises
with the Clearing House on a day to day basis.

The Information Systems Department (ISD) of the Exchange generates

Delivery and Receive Orders for transactions done by the members in A,
B1, B2 and F group scrips after netting purchase and sale transactions in
each scrip whereas Delivery and Receive Orders for "C" and "Z" group
scrips are generated on trade to trade basis, i.e., without netting of
purchase and sale transactions in a scrip.

The Delivery Orders provide information like scrip, quantity and the
name of the receiving member to whom the securities are to be
delivered through the Clearing House. The Money Statement provides
scrip wise/item wise details of payments/receipts for the settlement. The
Delivery/Receive Orders and money statements can be downloaded by
the members in their back offices

The bank accounts of members maintained with the eight clearing

banks, viz., Bank of India, HDFC Bank Ltd., Global Trust Bank Ltd.,
Standard Chartered Bank, Centurion Bank Ltd., UTI Bank Ltd., ICICI Bank
Ltd., and Indusind Bank Ltd., are directly debited through computerized
 33

posting for their settlement and margin obligations and credited with
receivables on accounts of pay-out dues and refund of margins.

The securities, as per the Delivery Orders issued by the Exchange, are
required to be delivered by the members in the Clearing House on the
day designated for securities pay-in, i.e., on T+3 day. In case of the
physical securities, the members have to deliver the securities in special
closed pouches (supplied by the Exchange) along with the relevant
details (distinctive numbers, scrip code, quantity, and receiving member)
on a floppy. The data submitted by the members on floppies is matched
against the master file data on the Clearing House computer systems. If
there are no discrepancies, then a scroll number is generated by the
Clearing House and a scroll slip is issued. The members can then submit
the securities at the receiving counter in the Clearing House

Auto D.O. facility

Instead of issuing Delivery Out instructions for their delivery obligations

in a settlement /auction, a facility has been made available to the
members of automatically generating Delivery-Out (D.O.) instructions on
their behalf from their CM Pool A/cs by the Clearing House w.e.f., August
10, 2000. This Auto D.O. facility is available for CRS (Normal & Auction)
and for trade-to-trade settlements. This facility is, however, not available
 34

for delivery of non-pari passu shares and shares having multiple ISINs.
The members wishing to avail of this facility have to submit an authority
letter to the Clearing House. This Auto D.O facility is currently available
only for Clearing Member (CM) Pool accounts/Principal Accounts
maintained by the members with National Securities Depository Ltd.
(NSDL) and Central Depositories Services Ltd. (CDSL)

Demat pay-in

The members can effect demat pay-in either through Central Depository
Services (I) Ltd. (CDSL) or National Securities Depository Ltd. (NSDL). In
case of NSDL, the members are required to give instructions to their
Depository Participant (DP) specifying settlement no., settlement type,
effective pay-in date, quantity, etc. The securities are transferred to the
Pool Account. The members are required to give delivery-out
instructions so that the securities are considered for pay-in.

As regards CDSL, the members give pay-in instructions to their DP. The
securities are transferred to Clearing Member (CM) Principal Account.
The members are required to give confirmation to their DP, so that
securities are processed towards pay-in obligations. Alternatively,
members may also effect pay-in from clients' beneficiary accounts for
 35

which member are required to do break-up on the front-end software to

generate obligation and settlement ID.

The Clearing House arranges and tallies the securities received against
the receiving member wise report generated on the Pay-in day. Once this
reconciliation is complete, the bank accounts of members with seven
clearing banks having pay-in positions are debited on the scheduled pay-
in day. This procedure is called Funds Pay-in. In case of the demat
securities, the securities are credited in the Pool Account of the
members or the Client Accounts as per the client details submitted by
the members. In case of Physical securities, the Receiving Members
collect securities from the Clearing House on the payout day and the
accounts of the members having payout are credited on Friday. This is
referred to as Payout. In case of the Rolling Settlements, pay-in and
payout of both funds and securities is on the same day, in case of Weekly
settlements, pay-in of funds and securities is on Thursday and payout is
on Friday.

Shortages & Objections

Shortages & consequent actions

The members download Delivery/Receive Orders based on their netted
positions for transactions entered into by them during a settlement in
'A', 'B1', 'B2', and 'F' group scrips and on trade to trade basis, i.e.,
without netting buy and sell transactions in scrips in "C" & 'Z' groups and
scrips in B1 and B2 groups which have been put on trade to trade basis
as a surveillance measure.
 36

The seller members have to deliver the shares in the Clearing House as
per the Delivery Orders downloaded. If a seller member is unable to
deliver the shares on the Pay-in day for any reason, his bank account is
debited at the standard rate (which is equal to the closing price of the
scrip on the day of trading) fixed by the Exchange for the quantity of
shares short delivered. The Clearing House arrives at the shortages in
delivery of various scrips by members on the basis of their delivery
obligations and actual delivery.

The members can download the statement of shortages on T+3 in Rolling

Settlements. After downloading the shortage details, the members are
expected to verify the same and report discrepancy , if any, to the
Clearing House by 1:00 p.m. If no discrepancy is reported within the
stipulated time, the Clearing House assumes that the shortage of a
member is in order and proceeds to auction the same. However, in 'C'
group, i.e., Odd Lot segment the members are themselves required to
report the shortages to the Clearing House.

The Exchange issues an Auction Tender Notice to the members informing

them about the names of the scrips, quantity slated for auction and the
date and time of the auction session on the BOLT. The auction for the
undelivered quantities is conducted on T+4 for all the scrips under
compulsory Rolling Settlements. The auction offers received in batch
mode are electronically matched with the auction quantities so as to
award the 'best price'. The members who participate in the auction
session can download the Delivery Orders on the same day, if their offers
 37

are accepted. The members are required to deliver the shares in the
Clearing House on the auction Pay-in day, i.e, T+5. Pay-Out of auction
shares and funds is also done on the same day, i.e., T+5. The various
auction sessions relating to shortages, and bad deliveries are now
conducted during normal trading hours on BOLT. Thus, it is possible to
schedule multiple auction sessions on a single trading day.

Close Out

There are cases when no offer for particular scrip is received in an

auction or when members who offer the scrips in auction, fail to deliver
the same. In the former case, the original seller member's account is
debited and the buyer member's account is credited at the closeout rate.
In the latter case, the offeror member's account is debited and the buyer
 38

member's account is credited at the close-out rate. The closeout rates

for closing the positions in different segments are as under:

For 'A' + 'B1' + 'B2' + 'Z', 'Rolling demat' and 'F' group

The closeout rate is higher of the following rates:

The highest rate of the scrip from the first day (trading day in case of
Rolling demat segment) to the day prior to the day on which the
auction is conducted for the respective settlement.
20% above the closing rate as on the day prior to the day of auction
of the respective settlement.

For 'C' group segment

The close-out rate is higher of the following rates :

The highest rate of the scrip from the first day to the day prior to the
day of auction of 'A', 'B1', 'B2, and 'Z' group segment of the respective
settlements; or
10% above the closing rate as on the day prior to the day of auction
of 'A', 'B1', 'B2, and 'Z' group; or
Transaction price.

In the 'C' group, i.e., Odd Lot Segment, no auction session is conducted.
The shortages are directly closed out.
 39

Close Out:
There are cases when no offer for particular scrip is received in an
auction or when members who offer the scrips in auction, fail to deliver
the same. In the former case, the original seller member's account is
debited and the buyer member's account is credited at the closeout rate.
In the latter case, the offeror member's account is debited and the buyer
member's account is credited at the close-out rate. The closeout rates
for closing the positions in different segments are as under:

For 'A' + 'B1' + 'B2' + 'Z', 'Rolling demat' and 'F' group

The closeout rate is higher of the following rates:

The highest rate of the scrip from the first day (trading day in case of
Rolling demat segment) to the day prior to the day on which the
auction is conducted for the respective settlement.
20% above the closing rate as on the day prior to the day of auction
of the respective settlement.

For 'C' group segment

The close-out rate is higher of the following rates :

The highest rate of the scrip from the first day to the day prior to the
day of auction of 'A', 'B1', 'B2, and 'Z' group segment of the respective
settlements; or
 40

10% above the closing rate as on the day prior to the day of auction
of 'A', 'B1', 'B2, and 'Z' group; or
Transaction price.

In the 'C' group, i.e., Odd Lot Segment, no auction session is conducted.
The shortages are directly closed out.

Basket Trading System

The Exchange has commenced trading in the Derivatives Segment with

effect from June 9, 2000 to, enable the investors to hedge their risks.
Initially, the facility of trading in the Derivatives Segment has been
confined to Index Futures. Subsequently, the Exchange has since
introduced the index options and options & futures in select individual
 41

stocks. The investors in cash market had felt a need to limit their risk
exposure in the market to movement in Sensex.

Further, the Basket Trading System provides the arbitrageurs an

opportunity to take advantage of price differences in the underlying
securities of Sensex and Futures on the Sensex by simultaneous buying
and selling of baskets covering the Sensex scrips and Sensex Futures. This
is expected to have balancing impact on the prices in both cash and
futures markets.

The Basket Trading System would, thus, meet the needs of investors and
also boost the volumes and depth in cash and futures markets.

The Basket Trading System has been implemented by the Exchange w.e.f.
Monday, the 14th August 2000. The trades executed under the Basket
Trading System are subject to intra-day trading/gross exposure limits and
daily margins as are applicable to normal trades.. To participate in this
system the member indicates number of Sensex basket(s) to be bought
or sold, where the value of one Sensex basket is arrived at by the system
by multiplying Rs.50 to prevailing Sensex.

Settlement System

Securities traded on BSE are classified into three groups, namely,

specified shares or 'A' group and non-specified securities that are sub-
divided into 'B1' and 'B2' groups.
 42

Presently, equity shares of thirty-two companies are classified as

specified shares. These companies typically have a large capital base
with widespread shareholding, a steady dividend, good growth record
and a large volume of business in the secondary market. Contracts in this
group are allowed to be carried over to subsequent settlements upto a
maximum permissible period of 75 days.

495 relatively liquid securities are placed in a category called 'B1' group.
The remaining securities-about 5800 as on May 31, 1996 are placed in
the 'B2' group. All newly listed securities are placed in the 'B2' group.

Settlement of transactions is done on an 'Account Period' basis. The

period is a calendar week in the case of 'A' and 'B1' groups and 14
calendar days in the case of 'B2' group During an account period, buy or
sell positions in a particular security can be either squared up by
entering into contra transactions or can be further accumulated by
entering into more buy or sell transactions.

Clearing System

The Clearing House of the Exchange handles the share and the money
parts of the settlement process in the case of 'A' and 'B1' groups. The
Clearing House handles only the money part of 'B2' group while
securities are physically exchanged between the brokers.
 43

Opportunities available for foreign investors

1. Direct investment:

Foreign Companies are now permitted to have a majority stake in

their Indian affiliates except in a few restricted industries. In certain
specific industries, foreigners can even have holding upto 100 per
cent.

2. Investment through Stock Exchanges:

Foreign Institutional Investors (FII) upon registration with the

Securities and Exchange Board of India (SEBI) and the Reserve Bank of
India (RBI) are allowed to operate in Indian Stock Exchanges subject
to the guidelines issued for the purpose by SEBI.

Important requirements under the guidelines are as under:

I. Portfolio investment in primary or secondary markets will be

subject to a ceiling of 24 per cent of issued share capital for the total
holding of all registered FIIs in any one company. The holding of a
single FII in any one company is subject to a ceiling of 5 per cent of
the total issued capital.
However, in applying the ceiling of 24 percent the following are
excluded:

Foreign investment under a financial collaboration (DFI), which

is, permitted upto 51 per cent in all priority areas.

Investment by FIIs through following alternative routes;

Offshore Single/Regional funds, GDR's and Euro convertibles.
 44

II. Disinvestments will be allowed only through a broker of a Stock

Exchange.

III. A registered FII is required to buy or sell only for delivery. It should
not offset a deal. It is also not allowed to sell short.

3. Investment in Euro Issues/Mutual Funds Floated Overseas:

Foreign investors can invest in Euro issues of Indian companies and in

India-specific funds floated abroad.

4. Broking Business:

Foreign brokers upon registration with the SEBI are now allowed to
route the business of registered FIIs. Guideline for the purpose have
been issued by SEBI. However, foreign brokers at present are not
allowed membership in India Stock Exchanges.

5. Asset Management Companies/Merchant Banking:

Foreign Participation in Asset Management Companies and Merchant

Banking Companies is permitted.

Transfer Of Ownership

Transfer of ownership of securities in effected through a date stamped

transfer-deed, which is signed, by the buyer and the seller. The duly
executed transfer-deed along with the share certificate has to be lodged
with the company for change in the ownership. A nominal duty becomes
payable in the form of stamps to be affixed on the transfer-deeds.
Transfer-deeds remain valid for twelve months or the next book closure
following the stamped date whichever occurs later.
 45

Safeguards

1. Margins are collected from the brokers on buying and selling

positions at the end of the day. The total outstanding position is
further subject to capital adequacy norms laid down from time to
time.
2. A comprehensive insurance cover for the Exchange and the
members is about to be put in place.
3. Guaranteeing trades is the cornerstone of a mature clearing and
settlement process. BSE is in the process of establishing a Clearing
Corporation that will guarantee trades.
4. Companies are required to publish half-yearly unaudited results
and other price sensitive information. This imparts greater
transparency to the stock market operations.
5. Insider Trading Regulations have been laid down and a 'Take-Over'
code has been created.

Arbitration Machinery

There exists three level arbitration machinery. The first two levels, which
are adjudicated by member brokers, comprise of a two-member bench
and a full bench that is to comprise of at least sixteen members
respectively. The highest arbitrator in the Exchange is the Governing
Board. Disputes unresolved in the Exchange are taken to the Court of
Law.
 46

Customer Protection Fund

The objective of this fund is to provide insurance to investors in case of

default by a member. The investor is indemnified from default to the
extent of Rs.1, 00,000. The corpus of the fund is created by depositing
2.5% of the listing fees and a levy on turnover at the rate or Re.1 for Rs. 1
million of turnover. It is further augmented by 50% of the interest
accrued on 1% of the issue amount which is deposited by companies at
the time of their public and rights issues for a three month period as a
safeguard against non-refund of excess subscription.

Grievance Redressal

The Investor's Services Cell redresses investors' grievances against listed

companies and stockbrokers. However, the Exchange does not have
power to take penal action against listed companies, except delisting for
specified periods.

Disciplinary Action

The Exchange has an eight member Disciplinary Action Committee (DAC)

which decides on punitive action in disciplinary cases referred to it by
the Surveillance and inspection departments of the Exchange
Administration.

Indices
 47

The Exchange compiles four indices, which are based on market

capitalization. The first index to be compiled was the BSE Sensitive Index
with 1978-79 as the base year. It comprises of equity shares of 30
companies from both specified and non-specified securities groups. The
companies have been selected on the basis of market activity.
Subsequently, a more broad based index, BSE National Index with 1983-
84 as base year, was compiled. This index is made up of 100 scrips, 98 of
which are quoted on Bombay. This index also includes prices on the
other major stock exchanges of Delhi, Calcutta, Ahmedabad and Madras.
If scrip is actively quoted on more than one Exchange the average price
of the scrip is used in the compilation of the index.

It was felt that the sensitive index-the most popular indicator of market
movement-had become oversensitive to a handful of scrips. With
divestment of Public Sector Unit (PSU) equity by government and a sharp
increase in the number of companies listed over the last few years, it
was felt that a new index, which is more representative of the recent
changes and is more balanced is necessary. The BSE-200, which was
introduced in May 1994, consists of equity shares of 200 companies,
which have been selected on the basis of market capitalization, volume
of turnover and strength of the companies' fundamentals. 1989-90 has
been chosen as the base year for BSE-200.

As the presence of the foreign investors grew, a need was felt to express
the index values by taking into account the Rupee-Dollar conversion rate.
Consequently, dividing the current Rupee market value by Rupee-Dollar
 48

modifies the BSE-200 conversion rate in the base year. This index, which
indicates the movement of the market in dollar values, is called the
Dollex.

Disclosure & Listing Norms

Companies who wish to raise money from capital market follow

guidelines relating to disclosure, laid down by the Securities and
Exchange Board of India. Some of the disclosure norms are:
Details of other income if it constitutes more than ten percent of
total income.
All adverse event affecting the operations of the company.
Any change in key managerial personnel.
Risk factors specific to the project and those which are external to
the company.
 49

The listing requirements with the Exchange call for further disclosure by
companies to promote public confidence. Important disclosures are:
The company is required to furnish unaudited half-yearly financial
results in the prescribed Performa.
The company must explain to the Stock Exchange any large
variation between audited and unaudited results in respect of any
item.
When any person or an institution acquires or agrees to acquire
any security of a company which would result in his holding five
percent or more of the voting capital of the company, including
the existing holding the Exchange must be notified within two days
of such acquisition by the company or by authorized intermediary
or by the acquirer.

Computerized Trading

BSE computerized its trading and settlement activities by following a

three-phased approach.

Phase I: The primary objective of this phase was the real time
dissemination of price data through the Display Information Driver
System (DIDS). DIDS was commissioned in November 1992 to
disseminate bids, offers, actual rates of transactions and indices on a real
time basis.
 50

Phase II: In 1994, settlement related daily transactions inputs and

outputs were uploaded and downloaded from the TWS in the brokers
offices.

Phase III: Commissioned on March 14, 1995. Although, screen based

trading started with 818 scrips, by the 70th day of its commissioning, all
scrips-exceeding 5000 had been put on the BOLT system. The BOLT
system was commissioned with the Himalya K 10,000 central trading
computer hardware. Since then the hardware has been upgraded to the
Himalya K 20,000 system. The system provides for a response time of
two seconds and can handle more than two hundred thousand trades in
a day.

Stock Market Indicators

1991-92 1992-93 1993-94 1994-95 1995-96
(Apr.Mar) (Apr.Mar) (Apr.Mar) (Apr.Mar) (Apr.Mar)
No. of Listed
2061 2861 3585 4702 5603
Companies
Market Capitalization
(In Rs.Billion) 3059.87 1881.46 3680.71 4354.81 5264.76
(In US $ Billion) 97.13 59.72 116.85 138.37 153.27
Annual Turnover
(In Rs.Billion) 717.77 456.96 836.29 677.49 500.64
(In US $ Billion) 22.78 14.50 26.55 21.51 14.57
Velocity 0.23 0.24 0.24 0.16 0.10
Average Daily Turnover
(In Rs.Billion) 3.32 2.38 3.84 1.78 2.16
(In US $ Billion) 0.10 0.07 0.12 0.06 0.06
No. of Shares Traded
6,35,515 3,50,313 7,42,792 1,07,24.8 7,71,850
(In Million Nos.)
Average Number of75,000 65,535 63,786 85,010 73,855
 51

Daily Deals
BSE Sensitive Index
4285.00 2280.52 3778.99 3260.95 3366.61
(Year End)
BSE National Index
1967.71 1021.40 1829.53 1605.57 1549.25
(Year End)
BSE 2000
585.19 234.35 450.07 365.97 345.40
(Year End)
Dollex (Year End) 261.25 124.89 238.86 194.67 168.54
No. of Registered
- - 145 308 366
Flls
Fll Net investment
(In Rs. Billion) - - 29.85 21.24 31.63
(In US $ Billion) - - 0.95 0.67 0.92
No. of Members
558 558 628 636 641
(Year End)
No. of Corporate
4 4 4 26 63
Members (Year End)

Future Developments

In 1995, the President of India promulgated an Ordinance, which allowed

for establishment of depositories.

BSE in collaboration with Bank of India (BOI) will shortly establish a

depository. BSE has applied for permission from SEBI to expand BOLT to
other centres. Expansion of BOLT would bring more investors into the
ambit of the capital market and consequently add depth to it.
52
 53

N S E (National Stock Exchange)

Introduction

The National Stock Exchange (NSE) is India's leading stock exchange

covering around 400 cities and towns all over India. NSE introduced for
the first time in India, fully automated screen based trading. It provides a
modern, fully computerized trading system designed to offer investors
across the length and breadth of the country a safe and easy way to
invest or liquidate investments in securities.

Sponsored by the industrial development bank of India, the NSE has

been co-sponsored by other development/ public finance institutions,
LIC, GIC, banks and other financial institutions such as SBI Capital
Market, Stockholding corporation, Infrastructure leasing and finance and
so on. India has had a history of stock exchanges limited in their
operating jurisdiction to the cities in which they were set up.

NSE started equity trading on November 3, 1994 and within a short span
of 1 year became the largest exchange in India in terms of volumes
transacted. Trading volumes in the equity segment have grown rapidly
with average daily turnover increasing from Rs.7 crores in November
1994 to Rs.6797 crores in February 2001 with an average of 9.6 lakh
trades on a daily basis. During the year 2000-2001, NSE reported a
turnover of Rs.13, 39,510 crores in the equities segment accounting for
45% of the total market.
 54

Locations

One of the objectives of NSE was to provide a nationwide trading facility

and to enable investors spread all over the country to have an equal
access to NSE. NSE uses sophisticated telecommunication technology
through which members can trade remotely from their offices located in
any part of the country. NSE trading terminals are present in around 400
cities and towns all over India.

Listing

The prime objective of admission to dealings on the Exchange is to

provide liquidity and marketability to securities as also to provide a
mechanism for effective management of trading.

Securities listed on the Exchange are required to fulfill the listing

eligibility criteria. Various types of securities of a company are traded
under a unique symbol and different series. This section provides a direct
link to the web site of companies traded on the Exchange.

Constitution

The NSE has two segments for trading in securities: Wholesale Debt
Market (WDM) and Capital Market (CM). Separate membership is
required for each segment.
 55

Trading members

They are recognized members of NSE. The persons eligible to become

TMs are body corporates, subsidiaries of banks and financial institutions.
They are selected on the basis of a comprehensive selection criterion.
The whole time directors/dealers of thess

Trading mechanism

Rolling Settlement

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.

In NSE, the trades in rolling settlement are settled on a T+5 basis i.e. on
the 5th 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 shall be
settled on the next Monday, Tuesday's trades shall be settled on the next
Tuesday and so on.

Limited Physical Market

Pursuant to SEBI guidelines, NSE introduced a new market called Limited

Physical Market to provide a facility to small investors to trade and settle
 56

physical shares in those securities where compulsory dematerialized

trading and settlement is enforced by SEBI. In this segment quantities
not exceeding 500 shares of each security held in the name of the
investor can be traded.

Institutional Segment

Trading in this market segment is available for institutional investors only.

In order to ensure that the overall FII ceiling limits are not violated,
trading members are allowed to enter sell orders in this market segment
only for their FII clients. However, members can enter buy orders on
behalf of FII/FI clients. The settlement of transactions in this segment is
in demat mode only.

Trade for Trade Segment

Trading in this segment is available only for those securities, which have
not established connectivity with both the depositories as per SEBI
directive. The list of these securities is notified by SEBI from time to time.

Trading System

NSE operates on the 'National Exchange for Automated Trading' (NEAT)

system, a fully automated screen based trading system, which adopts the
principle of an order driven market. NSE consciously opted in favour of
an order driven system as opposed to a quote driven system. This has
 57

helped reduce jobbing spreads not only on NSE but in other exchanges
as well, thus reducing transaction costs.

Till the advent of NSE, an investor wanting to transact in a security not

traded on the nearest exchange had to route orders through a series of
correspondent brokers to the appropriate exchange. This resulted in a
great deal of uncertainty and high transaction costs. NSE has made it
possible for an investor to access the same market and order book,
irrespective of location, at the same price and at the same cost.
 58

Market Types

The NEAT system in NSE has four types of market. They are:

Normal Market

All orders which are of regular lot size or multiples thereof are traded in
the Normal Market. For shares, which are traded in the compulsory
dematerialised mode the market lot of these shares, is one. Normal
market consists of various book types wherein orders are segregated as
Regular lot orders, Special Term orders, Negotiated Trade Orders and
Stop Loss orders depending on their order attributes.

Odd Lot Market

All orders whose order size is less than the regular lot size are traded in
the odd-lot market. An order is called an odd lot order if the order size is
less than regular lot size. These orders do not have any special terms
attributes attached to them. In an odd-lot market, both the price and
quantity of both the orders (buy and sell) should exactly match for the
trade to take place. Currently the odd lot market facility is used for the
Limited Physical Market as per the SEBI directives.
 59

Spot Market

Spot orders are similar to the normal market orders except that spot
orders have different settlement periods vis--vis normal market. These
orders do not have any special terms attributes attached to them.
Currently the Spot Market is being used for the Automated Lending &
Borrowing Mechanism (ALBM) session.

Auction Market

In the Auction Market, the Exchange on behalf of trading members for

settlement related reasons initiates auctions.

There are 3 participants in this market.

Initiator
The party who initiates the auction process is called an initiator.

Competitor
The party who enters orders on the same side as of the initiator is
called a Competitor.

Solicitor
The party who enters orders on the opposite side as of the
initiator is called a
Solicitor.
 60

Order Books

The NSE trading system provides complete flexibility to members in the

kinds of orders that can be placed by them. Orders are first numbered
and time-stamped on receipt and then immediately processed for
potential match. Every 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 different 'books'. Orders are stored in price-time priority in
various books in the following sequence:

Best Price- Price priority means that if two orders are entered into the
system, the order having the best price gets the higher priority.

Within Price, by time priority-Time priority means if two orders

having the same price are entered, the order that is entered first gets
the higher priority.
 61

Capital Market Segment

The Capital Market segment has following types of books:

1. Regular Lot Book

The Regular Lot Book contains all regular lot orders that have none of
the following attributes attached to them.
a) All or None (AON)
b) Minimum Fill (MF)
c) Stop Loss (SL)

2. Special Terms Book

The Special Terms book contains all orders that have either of the
following terms
attached:
a) All or None (AON)
b) Minimum Fill (MF)
Note: Currently, special term orders i.e AON and MF are not available
on the system as per the SEBI directives.

3. Negotiated Trade Book

The Negotiated Trade book contains all negotiated order entries
captured by the system before they have been matched against their
counterparty trade entries.
These entries are matched with identical counterparty entries only. It
is to be noted that these entries contain a counter party code in
addition to other order details.
 62

4. Stop-Loss Book
Stop Loss orders are stored in this book till the trigger price specified
in the order is reached or surpassed. When the trigger price is
reached or surpassed, the order is released in the Regular lot book.

The stop loss condition is met under the following circumstances:

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.

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.
5. Odd Lot Book
The Odd lot book contains all odd lot orders (orders with quantity less
than
marketable lot) in the system. The system attempts to match an
active odd lot
order against passive orders in the book. Currently, pursuant to a SEBI
directive
the Odd Lot Market is being used for orders which has a quantity less
than or
equal to 500 (Qty more than the market lot) for trading. This is
referred as the
Limited Physical Market (LPM).
 63

6. Spot Book
The Spot lot book contains all spot orders (orders having only the
settlement period different) in the system. The system attempts to
match an active spot lot order against the passive orders in the book.
Currently the Spot Market book type is being used for conducting the
Automated Lending & Borrowing Mechanism (ALBM) session.

7. Auction Book
This book contains orders that are entered for all auctions. The
matching process
for auction orders in this book is initiated only at the end of the
solicitor period.
 64

Order Matching Rules

The best buy order is matched with the best sell order. An order may
match partially with another order resulting in multiple trades. For order
matching, the best buy order is the one with the highest price and the
best sell order is the one with the lowest price. This is because the
system views all buy orders available from the point of view of a seller
and all sell orders from the point of view of the buyers in the market. So,
of all buy orders available in the market at any point of time, a seller
would obviously like to sell at the highest possible buy price that is
offered. Hence, the best buy order is the order with the highest price
and the best sell order is the order with the lowest price.

Members can proactively enter orders in the system, which will be

displayed in the system till the full quantity is matched by one or more of
counter-orders and result into trade(s) or is cancelled by the member.
Alternatively, members may be reactive and put in orders that match
with existing orders in the system. Orders lying unmatched in the system
are 'passive' orders and orders that come in to match the existing orders
are called 'active' orders. Orders are always matched at the passive order
price. This ensures that the earlier orders get priority over the orders
that come in later.
 65

Order Conditions

A Trading Member can enter various types of orders depending upon

his/her requirements. These conditions are broadly classified into three
categories: time related conditions, price-related conditions and quantity
related conditions. For example

Time Conditions
DAY - A Day order, as the name suggests, is an order which is valid for the
day on which it is entered. If the order is not matched during the day, the
order gets cancelled automatically at the end of the trading day.

GTC - A Good Till Cancelled (GTC) order is an order that remains in the
system until the Trading Member cancels it. It will therefore be able to
span trading days if it does not get matched. The Exchange notifies the
maximum number of days a GTC order can remain in the system from
time to time.

GTD - A Good Till Days/Date (GTD) order allows the Trading Member to
specify the days/date up to which the order should stay in the system. At
the end of this period the order will get flushed from the system. Each
day/date counted is a calendar day and inclusive of holidays. The
days/date counted are inclusive of the day/date on which the order is
placed. The Exchange notifies the maximum number of days a GTD order
can remain in the system from time to time.
 66

IOC - An Immediate or Cancel (IOC) order allows a Trading Member to

buy or sell a security as soon as the order is released into the market,
failing which the order will be removed from the market. Partial match is
possible for the order, and the unmatched portion of the order is
cancelled immediately.

AON - All or None orders allow a Trading Member to impose the

condition that only the full order should be matched against. This may be
by way of multiple trades. If the full order is not matched it will stay in
the books till matched or cancelled.

Note: Currently, AON and MF orders are not available on the system as
per SEBI directives.
 67

Price Conditions

Limit Price/Order
An order, which allows the price to be specified while entering the order
into the system.

Market Price/Order
An order to buy or sell securities at the best price obtainable at the time
of entering the order.

Stop Loss (SL) Price/Order

The one which allows the Trading Member to place an order which gets
activated only when the market price of the relevant security reaches or
crosses a threshold price. Until then the order does not enter the
market.

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.

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.
 68

e.g. If for stop loss buy order, the trigger is 93.00, the limit price is 95.00
and the market (last traded) price is 90.00, then this order is released
into the system once the market price reaches or exceeds 93.00. This
order is added to the regular lot book with time of triggering as the time
stamp, as a limit order of 95.00

Quantity Conditions

Disclosed Quantity (DQ)- An order with a DQ condition allows the

Trading Member to disclose only a part of the order quantity to the
market. For example, an order of 1000 with a disclosed quantity
condition of 200 will mean that 200 is displayed to the market at a time.
After this is traded, another 200 is automatically released and so on till
the full order is executed. The Exchange may set a minimum disclosed
quantity criteria from time to time.

MF - Minimum Fill (MF) orders allow the Trading Member to specify the
minimum quantity by which an order should be filled. For example, an
order of 1000 units with minimum fill 200 will require that each trade be
for at least 200 units. In other words there will be a maximum of 5 trades
of 200 each or a single trade of 1000. The Exchange may lay down norms
of MF from time to time.

Trading Workstation

The trader workstation is the terminal from which the member accesses
the trading system. Each trader has a unique identification by way of
 69

Trading Member ID and User ID through which he is able to log on to the

system for trading or inquiry purposes. A member can have several user
IDs allotted to him by which he can have more than one employee using
the system concurrently.

The Exchange may also allow a Trading Member to set up a network of

dealers in different cities all of whom are provided a connection to the
NSE central computer. A Trading Member can define a hierarchy of users
of the system with the Corporate Manager at the top followed by the
Branch Manager and Dealers.

Trader Workstation Screens

The Trader Workstation screen of the Trading Member is divided into

several major windows:

Title Bar

The title bar displays the current time, Trading system name and date.

Tool Bar

A window with different icons which provides quick access to various

functions such as Market By Order, Market By Price, Market Movement,
Market Inquiry, Auction Inquiry, Snap Quote, Market Watch, Buy order
entry, Sell order entry, Order Modification, Order Cancellation,
Outstanding Orders, Order Status, Activity Log, Previous Trades, Net
Position, Online Backup, Supplementary Menu, Security List and Help. All
these functions are also available on the keyboard.
 70

Ticker Window

The ticker displays information about a trade as and when it takes place.
The user has the option to set-up the securities, which appear in the
ticker.

Market Watch Window

The Market Watch window is the main area of focus for a Trading
Member. The purpose of Market Watch is to view market information of
pre-selected securities, which are of interest to the Trading Member.

To monitor various securities, the trading member can set them up by

typing the Security Descriptor consisting of a Symbol field and a Series
field. Invoking the Security List and selecting the securities from the
window can also set up securities. The Symbol field incorporates the
Company name and the Series field captures the segment/instrument
type. A third field indicates the market type.

For each security in the Market Watch window, market information is

dynamically updated on a real time basis. The market information
displayed is for the current best price orders available in the regular lot
book. For each security, the corporate action indicator (e.g., Ex or cum
dividend, interest, rights etc.), the total buy order quantity for the best
buy price, best sell price, total sell order quantity for the best sell price,
the Last Traded Price (LTP), the last traded price change indicator ('+' if
 71

last traded price is better than the previous last traded price and '-' if it is
worse) and the no delivery indicators are displayed. If the security is
suspended, "SUSPENDED" appears in front of the security.

On line index and Index Inquiry

With every trade in a security participating in Index, the user has the
information on the current value of the Nifty. This value is displayed at
the extreme right hand corner of the ticker window.

Index Inquiry gives information on Close, Open, High, Low and current
index values at the time of invoking this inquiry screen.

Inquiry Window

In this window, the inquiries such as Market by Order, Market by Price,

Previous Trades, Outstanding Orders, Activity Log, Order Status and
Market Inquiry can be viewed.

Market By Order (MBO)

The purpose of Market by Order is to enable the user to view

outstanding orders in the trading books in the order of price/time
priority. The information is displayed for each order. Stop Loss orders,
which are not triggered will not be displayed on the window. Buy orders
are displayed on the left side of the window and Sell orders on the right
 72

side. The orders are presented in a price/time priority with the "best
priced" order at the top.

Market by Price (MBP)

The purpose of Market By Price is to enable the Trading Member to view

aggregate orders waiting in the book at given prices.

Previous Trades (PT)

The purpose of this window is to provide information to users for their

own trade.

Outstanding Orders (OO)

The purpose of Outstanding Orders is to enable a Trading Member to

view his/her own outstanding buy or sell orders for a security. An
outstanding order will be an order that was entered by the user, but is
not yet completely traded or cancelled.

Activity Log (AL)

The Activity Log shows the activities, which have been performed on any
order of the Trading Member such as whether, the order has been
traded against fully or partially, it has been modified or has been
cancelled. It displays information only of those orders in which some
activity has taken place. It does not display orders, which have entered
 73

the books but have not been matched (fully or partially) or modified or
cancelled.

Order Status (OS)

Order Status enables the user to look into the status of a specific order.
Current status of the order and other order details are displayed. In case
the order is traded, the trade details are also displayed.

Market Inquiry (MI)

Market Inquiry enables the user to view the market statistics like Open,
High, Low, Previous close, Last traded price change indicator, Last traded
quantity, date and time etc. A user may find inquiry screens like Market
Movement, Most Active Securities and Net Position useful. These are
available in the supplementary menu.

Market Movement (MM)

The Market Movement screen provides information to the user

regarding the movement of a security for the current day. It gives details
of the movement of the scrip for a time interval. The details include total
buy and sell order quantity value, Open, High, Low, Last traded price etc.

Most Active Securities

 74

This screen gives a list of the securities with the highest traded value
during the day and the quantity traded for each of them.

Net Position

This functionality enables the user to interactively view his net position
for all securities in which he has traded.

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 which are not already on display in the Market Watch window.
The information presented is the same as that of Market Watch window.

Order/Trade Window

Order entry mechanisms enable the Trading Member to place orders in

the market. The system will request re-confirmation of an order so that
the user is cautioned before the order is finally released into the market.
Orders once placed on the system can be modified or cancelled till they
are matched. Once orders are matched they cannot be modified or
cancelled.

There is a facility to generate online order/trade confirmation slips as

soon as an order is placed or a trading is done. The order confirmation
slip contains among other things, order no., security name, price,
quantity, order conditions like disclosed or minimum fill quantity etc. The
 75

trade confirmation slip contains the order and trade no., date, trade
time, price and quantity traded, amount etc. Orders and trades are
identified and linked by unique numbers so that the investor can check
his order and trade details.

Systems Message Window

This window is used to view messages from the Exchange to all specific
Trading Members.

Supplementary Menu

Some of the supplementary features in the NEAT system are:

On line back up

An on line back up facility is provided which the user can invoke to take a
back up of all order and trade related information. There is an option to
copy the file to any drive of the computer or on a floppy diskette. Trading
members find this convenient in their back office work.

Off Line Order Entry

A member is able to make an order entry in the batch mode.

 76

Computer-to-Computer Link (CTCL) Facility

NSE offers a facility to its trading members by which members can use
their own trading front-end software in order to trade on the NSE trading
system. This Computer-to-Computer Link (CTCL) facility is available only
to trading members of NSE.

Through CTCL facility Trading Members can use their own software
running on any suitable hardware/software platform of their choice. This
software would be a replacement of the NEAT front-end software that is
currently used by members to trade on the NSE trading system.
Members can use software customised to meet their specialized needs
like provision of on-line trade analysis, risk management tools,
integration of back-office operations etc. The dealers of the member may
trade using the software remotely through the member's own private
network, subject to approvals from Department of Telecommunication
etc. as may be required in this regard.
 77

National Securities Clearing Corporation Limited

National Securities Clearing Corporation Ltd. (NSCCL), a wholly owned

subsidiary of NSE, was incorporated in August 1995 and commenced
clearing operations in April 1996. It has been set up with a philosophy to
sustain confidence in clearing and settlement of securities; promoting
and maintaining, short and consistent settlement cycles; to provide
counter-party risk guarantee, and to operate a tight risk containment
system. It assumes the counter-party risk of each member and
guarantees financial settlement. It has successfully brought about an up-
gradation of the clearing and settlement procedures and has brought
Indian financial markets in line with international markets.

NSCCL carries out the clearing and settlement of the trades executed in
the Equities and Derivatives segments and operates Subsidiary General
Ledger (SGL) for settlement of trades in government securities. It also
undertakes settlement of transactions on other stock exchanges like, the
Over the Counter Exchange of India.
NSCCL assumes the counter-party risk of each member and guarantees
settlement through a fine-tuned risk management system and an
innovative method of on-line position monitoring. It operates a well-
defined settlement cycle and there are no deviations or deferments from
this cycle. It aggregates trades over a trading period, nets the positions
to determine the liabilities of members and ensures movement of funds
and securities to meet respective liabilities. It provides a facility for
multiple settlement mechanisms including, account period settlement
 78

for dealings in physical securities and dematerialized securities, rolling

settlement (T+5 basis) in dematerialized segment etc.

NSCCL has empanelled 9 clearing banks to provide banking services to

trading members and has established connectivity with both the
depositories for electronic settlement of securities.
 79

Conclusion

The project is an attempt to working of stock exchanges in detail. It

provides thorough knowledge of different aspects of trading in stock
exchanges. The focus is basically with Indian context. The report is
divided in three parts. The first dealing with the theory, ie, introduction
of securities market, concept of stock exchanges, their role in economy,
their characteristics, role of SEBI etc.

The second part is the study made of different methods of trading and In
all they offer 9 different avenues for investing, which have been
explained in length in the pages to come.

The third part is the Case, attached with the report, which is also taken
from Franklin Templeton India Ltd. The case speaks about 3 facts of
investing; first being that growth and value do not move in tandem;
second being, value investing has rewarded long term investors; and the
third one as, value stocks have provided low relative volatility over time.
 80

Bibliography

www.nseindia.com
www.bse.com
www.investopedia.com
www.sebi.com
www.stockmarket.in