stock exchange development and trading operations in...

Stock Exchange Development and Trading Operations in India

Introduction

Economic development is largely characterized by the industrial development of

the nation. Industrialization, however, depends upon a host of factors like

entrepreneurship, compatible infrastructure, technological development, existence of

trade promoting institutions which include banks, insurance companies, transport

facilities, warehousing etc. In modern scenario of industrial development, States establish

specialized facilities for rapid and accelerated growth of industry and trade. These include

building industrial estates, setting up Special Economic Zones (SEZs), Export Oriented

Zones, etc.

Of all these pre-requisites for industrial development the most important factor is

the 'investment.' Industrial development is, in fact, hugely dependent and influenced by

'Investment.' Investment, in run, depends upon the flow of adequate funds from such

economic units which have a surplus (savers) those to economic units which have a

deficit of funds (investors). But the savers and investors are widely scattered and

separated physically and knowledgeably from each other. This necessitates the

establishment of a meeting ground as well as provision of adequate information about

those who demand funds to those who supply the funds. This void is bridged through the

Stock exchange Development and Operation in India

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media of Stock Exchange. Every nation sets up stock exchanges to ensure regular and

uninterrupted flow of finance for industrial development. It enables the entrepreneurs and

investors to make decision about setting up new business units and / or undertaking

expansion in the capacities of existing manufacturing units. India is no exception. It also

established stock exchanges and over the course of years these exchanges not only

developed into an advance sophisticated and strong financially viable industry but also

multiplied in number expanded in activities and volume of business.

The present chapter is split into two sections. The first section presents an

overview of the Stock Exchanges followed by development and growth of Capital market

in India. The second section discusses the stock market operations in India.

Section – I

Development and Growth of Stock Market in India

The stock exchange emergence and development in India has a chequered history.

The concept initiated from the speculative activity undertaken by some businessmen in

Bombay during the period 1816-1865. The American Civil War during this period

doubled the demand for cotton exported from Bombay. The cotton price bounced and

during 1861-65 the price was five to nine times higher than the price charged earlier.

Moreover, a large amount of cotton exports was paid for in the form of bullion that

poured into Bombay in the shape of silver and gold. Huge wealth generated in Bombay

during cotton boom. Available facts indicate that speculation in securities and


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establishment of new companies were two of them. Speculation can be termed as the

purchase (or temporary sale) of securities for later resale (re-purchase) in the hope of

profiting from the intervening changes.

From 1861 to the beginning of 1865 speculation was the key activity in Bombay's

securities trading places. Around 25 new banks, 69 financial associations, 7 land

reclamation companies and 30 miscellaneous companies were floated during this period.

But soon the boom was followed by disasters as soon as the American Civil was ended in

early 1865. As a result, the sources of huge earnings dried up. The speculative activity

was interrupted by non-fulfillment of transactions.

Stock Exchange Era in India

The disaster that followed the boom brought the speculators / brokers together in

July 1875, they decided to form an association, that is today called the Bombay Stock

Exchange, the Institution was the first of its kind in India.

The Bombay experience was later followed in Ahmedabad and Calcutta. Security

dealers in these two places also shared the cotton boom. On the pattern of Bombay, the

speculators/brokers at these two centers and at other cities also formed associations with

stock exchanges being set up at Ahmedabad in 1894, at Calcutta in 1908, at Indore in

1930 at Madras in 1937, at Hyderabad in 1943 and at Delhi in 1947. Since

beginning Bombay Stock Exchange is considered as the leader among Indian Stock

Exchanges. Therefore, trends and developments that have taken place at the Bombay


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Stock Exchange or that are taking place can be treated as broad indicators of performance

of Stock Exchanges in the country.

Post-Independence Period:

The national government (post-independence) placed focus on expansion of stock

exchanges which were essential for development of financial markets to channelize and

maintain adequate funds flows for industry and trade. The Government enacted the

Securities Contract (Regulation) Act in 1956 to accord recognition to Stock Exchanges

registered under the Act. Only Bombay, Calcutta, Madras, Ahmedabad, Delhi,

Hyderabad, and Indore Stock Exchange, which were well established, were recognized

under the Act, Bangalore Stock Exchange was registered in 1957 but recognized in 1963.

Thus, during early sixties there were eight recognized Stock Exchanges in India.

The number virtually remained unchanged for nearly two decades.

The decade of eighties witnessed emergence of Stock market as a major source of

finance for trade and industry. During eighties, therefore, many Stock exchanges were

established. The addition of new stock exchanges resulted in the widening of Indian stock

market. Consequently, the number of companies listed in the stock exchanges also shot

up and the volume of market capitalization through these stock exchanges also expanded

tremendously. The following table 2.1 shows the growth of stock market in India during

the last six decades.


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Table 2.1: Stock Exchange Development in India

Description 1961 1971 1981 1991 2001 2010

No. of stock exchanges 7 8 9 22 23 20

No. of listed companies 1203 1599 2265 6229 9871 10297

Market Capitalization

(Rs. In. billion)

12 27 68 1103 11926 12570

Source: BSE & NSE

Statistics of table reflects that the strength of stock exchanges almost tripled from

7 to 20 over the course of 1961 through 2010. The number of listed companies on these

stock exchanges grew more than nine-fold from 1203 to 10297 during the corresponding

period. The amount of market capitalization raised through the stock market soared from

12 billion rupees in 1961 to 12570 billion rupees in 2010 registering an increase of more

than one thousand times during the period.

Post-Liberalization Development of Stock Market:

India embarked upon the economic liberalization and reforms policy in the

beginning of the 90's and switched over from the protected market to open market

economic environment. In the wake of it, reforms, both structural and legal, had to be

carried out in different sectors of economy. Financial sector was no exception.


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The liberalization encompassed wide ranging measures compatible to open

market requirements. Some of the important ones were de- licensing of a number of

industries; through opening up, a number of industries of the public sector to the private

sector, the lowering of personal and corporate tax rate, raising of the interest rate in

convertible debentures of companies, raising the asset limit for applicability of

Monopolies and Restrictive Trade Practice with regard to foreign collaborations;

allowing scope for dominant undertaking to go in for diversification projects. Significant

changes were made in various policies relating to industrial development as well as

overall economic development. The liberalization also included special incentives for

private enterprise by way of reduction of direct taxes and tax free high-yielding

instruments without any financial limit on individual subscription.

One of the results of the liberalization is an increase in the demand for funds on

the part of private corporate sector. As a result investment in shares and debentures

became middle class phenomenon. Financial liberalization in fact help in deepening the

activities of stock market. The countries that succeeded in developing a compatible equity

market in the post-liberalization era were also successful in attracting domestic and

international funds for the growth of economy. In India the process of reforms started in

1991 which included, inter alia, reforms of investments, exchange rate, and trade regimes

has ended the four decades of national planning and set in motion a quiet industrial

revolution.

In fact, Stock Exchanges play an important role in the development and growth of

capital markets which determine economic health of the industry and economy by

providing long term funds to those who need for productive purposes Even Governments


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(Central & States) raise funds from the capital market by issuing government securities.

Capital markets help to raise medium and long term funds through various instruments

such as shares (Equity & preference) debentures and bonds etc. Thus there are two

important operations on the capital markets viz Raising of fresh capital (funds) and

trading in securities already issued by government & companies. The important

constituents of capital markets are stock Exchanges, Banks, Investment trust and

companies Specialized, financial institutions / development banks, Mutual Funds, Non-

banking financial institutions (NBFI) Foreign Institutional Investors (FIIs). Besides these,

Individuals, corporate Governments, Provident Funds & Insurance companies act as fund

providers by utilizing their savings / surplus funds. In India the establishment of

Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) has proved a

turning point in the development of capital markets.

INDIAN CAPITAL MARKET IN ITS HISTORICAL RETROSPECT

The history of the capital market in India dates back to the eighteenth century

when East India Company securities were traded in the country. Until the end of the

nineteenth century' securities trading was unorganized and the main trading centers were

Bombay (now Mumbai) and Calcutta (now Kolkata). Of the two, Bombay was the main

trading center wherein bank shares were the major trading stock. During the American

Civil War (1860-61), Bombay was an important source of supply for cotton. Hence,

trading activities flourished during the period, resulting in a boom in share prices. This

boom, the first in the history of the Indian capital market, lasted for a half a decade. The

bubble burst on July 1, 1865, when there was tremendous slump in share prices.


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Trading was at that time limited to a dozen brokers: their trading place was under

a banyan tree in front of the Town Hall in Bombay. These stockbrokers organized an

informal association in 1865- Native Shares and Stock Brokers Association, Bombay.

The stock exchanges in Calcutta and Ahmedabad, also industrial and trading centers,

came up later. The Bombay Stock Exchange was recognized in May 1927 under the

Bombay Securities Contracts Control Act, 1925.

The capital market was not well organized and developed during the British rule

because the British government was not interested in the economic growth of the country.

As a result, many foreign companies depended on the London capital market for funds

rather than on the Indian capital market. In the post-independence period also, the size of

the capital market remained small. During the first and second five-year plans, the

government's emphasis was on the development of the agricultural sector and public

sector undertakings. The public sector undertakings were healthier than the private

undertakings in terms of paid-up capital but their shares were not listed on the stock

exchanges. Moreover, the Controller of Capital Issues (CCI) closely supervised and

controlled the timing, composition, interest rate, pricing, allotment, and floatation costs of

new issue. These strict regulations demotivated many companies from going public for

almost four and a half decades.

In the 1950s, Century Textiles, Tata Steel, Bombay Dyeing, National Rayon, and

Kohinoor Mills were the favorite scrips of speculators. As speculation became rampant,

the stock market came to be known as 'Satta Bazaar’. Despite this speculation, non-

Payment or defaults were not very frequent. The government enacted the Securities

Contracts (Regulation) Act in 1956s. This year was also characterized by the


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establishment of a network for the development of financial institutions and state

financial corporations.

The 1960s was characterized by wars and draughts in the country which led to

bearish trends. These trends were aggravated by the ban in 1969 on forward trading and

“badla”, technically called “contracts for clearing”. Badla provided a mechanism for

carrying forward positions as well as borrowing funds. Financial institutions such as L I

C and GIC helped to revive the sentiment by emerging as the most important group of

investors. The first mutual fund of India, the Unit Trust of India (UTI) came into

existence in 1964.

In the 1970s, badla trading was resumed under the disguised form of “hand-

delivery contracts-A group”. This revived the market. However, the capital market

received another severe setback on July 6, 1974 when the government promulgated the

Dividend Restriction Ordinance, restricting the payment of dividend by companies to 12

per cent of the face value or one-third of the profits of the companies that can be

distributed, as computed under section 369 of the Companies Act, whichever was lower.

This led to a slump in market. Later came a buoyancy in the stock markets when the

multinational companies (MNCs) were forced to dilute their majority stocks in their

Indian ventures in favour of the Indian public under FERA, 1973. Several MNCs opted

out of India. One hundred and twenty-three MNCs offered shares which were lower than

their intrinsic worth. Hence, for the first time, the FERA dilution created an equity cult in

India. It was the spate of FERA issues that gave a real fillip to the Indian stock markets.

For the first time, many investors got an opportunity to invest in the stocks of such MNCs

as Colgate and Hindustan Liver Limited. Then, in 1977, a little-known entrepreneur,


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Dhirubhai Ambani, tapped the capital market, its scrip, Reliance textiles, has become a

hot favourite and dominates trading at all exchanges.

The 1980s witnessed an explosive growth of the securities market in India, with

millions of investors suddenly discovering lucrative opportunities. Many investors

jumped into the stock markets for the first time. The government's liberalization process

initiated during the mid-1980s, spurred this growth. Participation by small investors,

speculation, defaults, ban on badla, and resumption of badla continued. Convertible

debentures emerged as a popular instrument of resource mobilization in the primary

market. The introduction of public sector bonds and the successful mega issue of

Reliance Petrochemicals and Larson and Toubro gave a new lease of life to the primary

market. This, in turn, enlarged volumes in the secondary market. The decade of the 1980s

was characterized by an increase in the capitalization.

Figure 2.1: Indian Capital Market

Corporates Brokers Equity Primary

Stock Exch SEBL Investment Bankers Debt Secondary

Brokers MCA Stock Exchanges Hybrid

Underwriters RBI Underwriters (Derivatives)

Individual

FIIs

CRA

The 1990s will go down as the most important decade in the history of the capital

market of India. Liberalisation and globalization were the new terms coined and marketed

Markets Instruments Intermediaries Regulators Players


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during this decade. The Capital Issue (Control) Act, 1947 was repealed in May 1992. The

decade was characterized by a new industrial policy, emergence of SEBI as a regulator of

capital market, advent of foreign institutional investors, euro-issue, free pricing, new

trading practices, new stock exchanges, entry of new players such as private sector

mutual funds and private banks, and primary market boom and bust. Major capital market

scams took place in the 1990s. These shook the capital market and drove away small

investors from the market. The securities scam of March 1992 involving brokers as well

as bankers was one of the biggest scams in the history of the Capital market. In the

subsequent years owing to free pricing, many unscrupulous promoters, who raised money

from the capital market, proved to be fly-by-night operators. This led to an erosion in the

investors' confidence. The M S shoes case, a scam which took place in March 1995, put a

break on new issue activity.

The 1991-92 securities scam revealed the inadequacies of and inefficiencies in the

financial system. It was the scam, which prompted a reform of the equity market. The

Indian stock market witnessed a sea change in terms of technology and market prices.

Technology brought radical changes in the trading mechanism. The Bombay Stock

Exchange was subject to nationwide competition by two new stock exchanges-the

National Stock Exchange, set up in 1994, and Over the Counter Exchange of India, set up

in 1992. The National Securities Clearing Corporation (NSCC) and National Securities

Depository Limited (NSDL) were set up in April 1995 and November 1996 respectively

for improved clearing and settlement and dematerialized trading. The Securities Contracts

(Regulation) Act, 1956 was amended in 1995-96 for introduction of options trading.

Moreover, rolling settlement was introduced in January 1998 for the dematerialized


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segment of all companies. With automation and geographical spread, stock market

participation increased.

In the late 1990s, the Information Technology (IT) scrips were dominant on the

Indian bourse. These scrips included Infosys, Wipro, and Satyam. They were a part of the

favorite scrips of the period, also known as 'New Economy' scrips, along with

telecommunications and media scrips. The new economy companies are knowledge

intensive unlike the old economy companies that were asset intensive.

The Indian capital market entered the twenty-first century with the Ketan parekh

scam. As a result of this scam, badla was discontinued from July 2001 and rolling

settlement was introduced in all scrips. Trading of futures commenced from June 2000

and internet trading was permitted in February 2000. On July 2, 2001, the Unit Trust of

India announced suspension of the sale and repurchase of its flagship US-64 scheme due

to heavy redemption leading to panic on the bourses. The government's decision to

privatize oil PSUs in 2003 fuelled stock prices. One big divestment of international

telephony major VSNL took place in early February 2002. Foreign institutional investors

have emerged as major players on the Indian bourses. NSE has an upper hand over its

rival BSE in terms of volumes not only in the equity markets but also in the derivatives

market.

Having examined the development and growth of stock market it its historical

retrospect, now we will have a look at the facts and figures during pre and post

liberalization period.


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Comparison of trends of Indian capital market during pre and post

liberalization period

The most popular method of raising the capital in the New Issue Market is issue

through prospectus and through rights. In table 2.2 an attempt has been made to analyze

the trends in the new capital issue of non-government companies since 1970 to 2008.

In 1970-80, the average capitalization was Rs. 95.18 crore was increased to

2335.90 with 2354 percent growth rate (table 2.2). During 2000-08, the average

capitalization was 18322.87 crore that was 684 percent more from period 1981-91 (table

2.2). The number of issues through prospectus and rights were highest during the period

1992-2000 after introduction of liberalization. From the analyzes we may conclude that

there was a huge jump in the New Capital Issues by Non-Government Public Limited

Companies in the post liberalization period, in terms of total number of capital issues

through of prospectus and through rights and in terms of the respective amount.

Table 2.2: New Capital Issues by Non-Government Public Limited

Companies

(Rs. in crore)

Year

OF TOTAL CAPITAL ISSUES

Total

Amount

Yearly

Average

Growth

Rate

(%age

Change)

Prospectus Rights

No. of

Issues Amount

No. of

Issues Amount

1970-1980 1305 790 465 257 1047 95.18

1981-1991 3842 11398 1230 11961 23359 2335.9 2354

Post-Liberaization Period (1992-2008)

1992-2000 5087 66536 2008 44919 111455 12383.88 430

2000-2008 445 117116 179 29467 146583 18322.87 48

Source: RBI, report on currency and finance. Various issues and SBEI annual report 2008.


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The trend of capital market in India in terms of the number of stock exchanges,

Number of listed companies and market capitalization in the pre and post liberalization

period is analyzed in Table 2.3. Table 2.3 depicts that Indian Stock Market now comprise

of 21 Stock Exchanges with 9500 listed companies. The market capitalization

RS.110,279 Crore in the year of liberalization (ie.1991) which increased to Rs. 8,130,816

Crore in 2008. There is change in market capitalization after introduction of

liberalization. The number of Stock Exchanges increased from eight in 1971 to 20 in

1991 and to 21 in 2008. India now has the largest number of organized and recognized

SEs in the World.

Table 2.3: Capital Market Development in India during Pre and Post

Liberalization Period

Yea

Number of

Exchanges

Stock

Number of

listed companies

Market

Capitalization

(Rs. in Crore)

Market value of

capital per listed

companies

(Rs. in lakhs)

1 2 3 4 2=1(4

Pre-Liberalization Period (1971-1991)

1971 8 1599 2675 167

1981 9 2265 6750 298

1985 14 4344 25302 582

1990 19 5968 70521 1182

1991 20 6229 110279 1770

Post-Liberalization Period (1992-2008

1992 22 6480 354106 5465

1997 23 9332 488270 5232

1999 23 9877 1023381 10361

2000 23 9871 2067030 20940

2008 21 9500 8130816 85588

Estimated Source: RBI report on currency and finance, various issues and SEBI annual repoty 2008


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Table2.4: Annual Average of Share Price Indices and Market Capitalization

of BSE during Pre and Post Liberalization Period

Source: SEBI, and RBI reports, various issues, BSE, NSE.

The Table 2.4 shows that annual average of share price index of BSE which was

711.79 during period 1987-91, increased to 7699.94 by 2001-08, which was mere 172.65

in the period 1979-83. There was 319.20 percent growth in respect of average share price

index after the introduction of liberalization. During period of 1987-91, the average

market capitalization of BSE, which was Rs.64030.25 crore, increased to Rs. 1823873.14

crore during 2001-08, which was mere Rs.3797.50 crore in 1979-83.

Indian capital market has accomplished a long journey, it is well organised, fairly

integrated, mature and modernized with global exposure. It is now being considered as

one of the best in the world in terms of technology. The explosion of knowledge in the

world of information technology has rendered boundaries meaningless. Internet trading

has become a global phenomenon. The Indian stock markets are now getting integrated

with global markets.

***

Year

BSE Sensex

Base

1978

79>100

Yearly

Average

Growth

Rate

(%age

change

Marker

Capitalization

(Rs. in crote)

Yearly

Average

Growth

Rate

(%age

change

Per-Liberalization Period (1979-1991)

1979-83 690.61 172.65 15190 3797.5

1983-87 1564.14 391.04 126.49 78170 195542.5 414.61

1987-91 2847.14 711.79 82.02 256121 64030.25 227.65

Post-Liberalization Period (1992-2008)

1991.96 14937.46 2987.94 319.2 1841537 368307.4 475.21

1996-2001 19505.2 3901.04 30.58 3053996 610799.2 65.83

2001-2008 53895.83 7699.94 97.37 12767112 1823873.14 198.6


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Section – II

STOCK MARKETS OPERATIONS

Stock exchange promotes different types of markets depending upon the type of

financial asset / claims. The claim traded in a financial market may be either for a fixed

rupee amount or a residual amount. The former financial instrument referred to as debt

instrument and the financial market in which such instruments are traded is referred to as

the debt market. The latter financial assets are called equity instruments and the financial

market where such instruments are traded is referred to as the equity market or,

alternatively, it is referred to as stock market. Some instruments traded in the market are

of short duration and some others of longer duration. Financial market for short term

financial assets is referred to as Money Market and the one for longer maturity period is

termed as capital market. In the capital market, the financial assets may be either newly

issued or the already issued assets may be bought and sold. The market for this newly

issued financial asset is referred to as the primary market. Where the issued instruments

are further exchanged and traded, the place is referred to as the secondary market.

Moreover, the stock exchanges have developed financial markets based on their

functional and organizational structure. Based on it, the markets are referred to as auction

markets, over the counter markets, and intermediate markets.

TRADING IN THE STOCK EXCHANGE

The Stock Exchange, as an entity, provides “trading” facility for stock brokers

and traders. They trade stock, bonds and other securities. Stock Exchange also provides


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facilities for the issue and redemption of securities as well as other financial instruments.

The players in the stock market include the entities that issue financial assets and those

entities that invest in assets. A simple classification of these entities is: (1) Central

government (2) agencies of central government (3) State government and their agencies

(4) Local self-governments like municipalities, (5) manufactory business comprising

corporate sector (6) financial enterprises comprising financial institutions, and (7)

households. Other players in the financial markets are the regulators. Financial markets

play a prominent role in any economy, government deems it necessary to regulate certain

aspects of these markets. The Securities and Exchange Board of India (SEBI) is the chief

regulator of trading in the stock markets.

Figure 2.2: Showing Stock Market Trading in India

Stock Market Trading

Cash Trading

Or

Normal Trading Derivative

Trading

Equity (Capital Market)

Segment

Wholesale Debt

Segment

Trading of Government

Securities

Secondary Market for

Corporate Debt Securities

Forward

Futures

Options

Types

Trading

System

Clearings

Settlement

Risk

Management


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MARKET SEGMENTATION:

Stock Exchange has various market segments christened on the basis of nature of

security. Trading in shares of corporations is conducted in the market called ‘Equity

Market’ or ‘Capital Market’. The debt instruments like debentures and bonds are dealt

with in the debt market, the financial derivatives are traded in the Derivative Market; the

working of each market has its own peculiarities. An insight into the trading procedures

and practices in each market is presented below:

(A) THE EQUITY MARKET:

The stock/shares of corporate sector are traded in the Equity Market. The Primary

Market deals in the trading of initial issue of shares while the subsequent trading of these

securities is done in the Secondary Market. Below we will discuss about the trading

system and methodology of the equity market in India.

The Bombay Stock Exchange (BSE) and the National Stock Exchange (NES) are

the leading two entities which form the hub of India financial markets. Both these

organisations have screen based electronic trading system based on the principle of an

order-driven market. Orders are entered into the trading system using computer terminals

provided by the exchanges. Currently all order inputs into the trading system must be

manually released into system. Computer-generated automatic order entry is not

permitted. Nor any systems permitted to interface with both the BSE and NSE order entry

terminals to evaluate and chose the most appropriate market (i.e. best price) to send the

order, which is a valuable tool for dually listed stocks. Instead investors must decide


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which market to send a particular order. As such, some inefficiency exists amongst the

price of deadly tested shares, and therefore arbitrage opportunities appear the two

exchanges.

The transactions take place through the medium of brokers. The trading is

conducted in an anonymous environment. The counterparty to every trade is the exchange

and thus the identity of the broker member representing the other side of the trade is not

revealed.

TRANSACTION ENTRIES:

Trading entries are made on trading terminals provided by the exchanges and

installed in member-broker offices that link directly to the exchanger. Order to buy or

sale securities are entered through these terminals. The trading terminals are unique for

each exchange, BSE & NSE and the member-broker has to install separate terminals for

each exchange. As the entries for trade are manually allowed by each exchange, this rule

influences trading functions in three ways. Firstly, best price advantage is obtained as

such exchange terminal is to be checked before entering and outgressing the order.

Secondly, Arbitrage opportunities are available as securities dually listed on BSE and

NSE often have price discrepancy. However, the exchange and the SEBI do not permit

automated computer-generated arbitrage between the two exchanges. Third, computer-

based trading ensures efficient and instantaneous transaction which will improve the

quality of trading.


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Scrip Classification:

The issues traded on BSE are classified into various categories based on certain

qualitative and quantitative parameters. The following Table 2.5 explains the scrip

classification:

TABLE 2.5: SCRIP CLASSIFICATION

Classification Description

A Equity The 200 strongest, highest market-capitalized, highest-

liquidity companies on the BSE, with strong financials

and high-quality corporate governance.

B1 Also strong companies, but not in the top 200. Many

may compare favorably with A-classification

companies based on the objective and subjective

parameters, but not be in the top 200 and thus receive a

B1 classification. There is no fixed number of B1

companies.

B2 B2 companies represent the lowest tier of listed

equities in terms of market cap, liquidity, financials,

and the subjective measures such as corporate

governance and complaints. Investors should be wary

of B2 companies in terms of management, quality of

earnings, and the financial soundness of the business.

S S shares are also known as “BSE Indonext” shares.

This classification consists of scrip from the B1 and

B2 groups and companies exclusively listed on

regional stock exchanges that have capital of Rs. 3 to

30 crores (US$700,000 to US$7 million).

Z Z shares include companies that either: (1) have failed

to comply with the listing requirements of the

exchange; (2) have failed to resolve investor

complaints; or (3) have not made the required

arrangements with both of the depositories for the

dematerialization of their securities.

T These are shares that settle on a trade-to-trade basis for


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market surveillance reasons.

TS These are a sub-classification of S shares that settle on

a trade-to-trade basis for market- surveillance reasons.

F Debt These are fixed income securities.

G These are government securities for retail investors.

The 200 A-classified holding characteristics as stated in Table 2.5 above are subject to

review semi-annually. Between the semi-annual reviews, the number of A companies

may fluctuate below 200 for reasons of take-over, merger, delisting, etc. or the number

may go slightly above 200 due to possible OPOs of very strong companies deserving A

classification. But at the semi-annual review, however, the number is strictly adhered to

and companies are added to bring their number at specified figure.

NATURE OF SECURITIES TRADED:

Listed securities, as well as permitted securities are qualified for trading in the

stock market. Companies that have signed listing agreements with the BSE & NSE, their

securities acquire the property of “listed securities”. With few exceptions most issues fall

into this category. Permitted securities are issues of companies that are listed and actively

traded on regional Stock Exchanges. However, they are not listed on either BSE or NSE.

These securities are allowed trading on BSE and NSE provided they meet the

requirements specified by the Exchange. They trade on the exchanges as permitted

securities.


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The computation of closing price of a stock is on the basis of all trades executed

during the final 15 minutes of the continuous trading session. If there is no trade recorded

during the last 15 minutes, the last traded price in the continuous trading session is taken

as the official closing price.

TRADING FEATURES OF STOCK EXCHANGES:

Ordering: All orders entered into the exchange trading systems are time-stamped

and assigned a unique identification number to facilitate a verifiable audit trail. The

exchanges adhere to a price-time priority whereby price (higher bids and lower offers)

have first priority, and at the same price orders entered first have priority over those

entered later.

All NSE orders of regular lot size or multiple thereof are traded in the NORMAL

MARKET. The market lot of these shares is one. Orders with size less than the regular lot

size traded in the ODD LOT MARKET at the NSE.

The BSE maintains trading books such as Regular Lot Book, Special Terms

Book, Negotiated Trade Book, Stop Loss Book, Odd Lot Book, Spot Lot Book, and

Auction Book. 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 a buyer. Thus, the best (i.e. highest

priced) buy order is matched with the best (i.e. lowest-priced) sell order.

Type of orders accommodated by exchange system can be classified into four

categories, viz. ‘Time’, ‘price’, ‘Quantity’, and ‘Additional’. Four different time


59 | P a g e

conditions attached to an order are accommodated by the NSE and BSE, namely, Day

Order; Good Till cancelled, Good Till Days/Date; and Immediate or Cancel.

Price Attributes of three types accepted by the Exchanges are:(1) Limit price

order, eligible for execution at or better than specified limit price; (2) Market Order, with

no price limit and executed at the best price obtainable at the time of entering the order,

and (3) Stop Loss Price Order, activated only when the market price of relevant security

reaches or crosses a threshold price as specified in the order. Until this trigger price the

order is dormant and not executed. Quantity attributes and condition on orders recognized

for trading by stock exchanges are: No quantity Restrictions; Disclosed Quantity,

Minimum Fill; Hit and Take-order; and All or None; Batch orders are also accepted by

BOLT system at BSE.

PRICE BANDS:

Most securities are subject to price bands that define their maximum permissible

daily price movements. No price bands are applicable to securities which are having

derivative products. All other securities are subject to daily price bands 2 percent; 5

percent, 10 percent, or 20 percent. Securities such as bonds, debentures warrants and

preference shares are mostly subject to 20 percent bands are usually those in which SEBI

or the BSE and NSE acting together, wish to limit or control violability. A list of

securities under lighter band is placed daily or NSE exchange and also displayed on its

website.


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Basket Trading:

Initially created to provide investors with a facility for trading sensex-linked

portfolios and to create a linkage of market prices of the underlying securities of sensex

in the cash segment and futures on sensex, the system has evolved to provide a facility for

investors to create and trade custom baskets. BSE’s trading system BOLT has been

designed to accommodate basket trading and utilizes the batch upload mechanism to do

so.

Investors through member brokers are able to buy and sell 30 sensex stocks with a

single order in the proportion of their respective weights in the sensex. Also investors can

customize baskets specifying the constituent securities and their respective weightings.

Member-brokers need to indicate the number of sensex baskets to be bought or

sold. The value of one sensex basket is arrived at by multiplying Rs 50 to the prevailing

sensex index value. The basket trading system provides index arbitrage opportunities by

simultaneously buying and selling baskets comprising the sensex scrips in the cash

segment and sensex futures.

EXCHANGE SETTLEMENT SYSTEM:

At the end of the day, details of all executed trades and the security obligations of

members are downloaded to members and custodians by the exchange clearing houses.

The clearinghouses then determine the cumulative and net obligation of each member,

and they electronically transfer this data to the clearing members. All of the trades

executed during a particular trading period are settled together. A multilateral netting


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procedure is adopted to determine the net settlement obligations (delivery / receipt

positions) of clearing members. The clearing houses then allocate or assign delivery of

securities to / from the members to arrive at the delivery and receipt obligations of funds

and securities by each member.


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4a

6b 4c 6a 4b

Figure 2.3: The settlement cycle

Broker

Broker enters order

Exchange

confirms

execution

2 1

Exchange

Client enters trade

Broker confirms

trade execution

Client

3

Broker issues

contract note to the

custodian

Client sends

instructions to its

custodian

Exchange issues

custodian list of their

client trades to be settled

Broker issues

contract note to

clearinghouse

Exchange instructs

the clearinghouse

about the

execution

5

Custodian

Custodian instructs

the depository to

receiver/deliver

shares

Depository

Clearinghouse

instructs

receive/deliver the

shares

Clearin

ghou

se

Custodian instructs

the bank to

receive/deliver

funds

Bank

Clearinghouse instructs

the bank to

receive/deliver funds

8 7


63 | P a g e

SETTLEMENT CYCLE:

Securities Pay-in and Pay-out:

It is the process of receiving securities from member-brokers against their sale

obligations. On the securities pay-in Day, delivering members are required to deliver

securities to the clearing house. Member brokers can effect pay in of securities to the

clearing house through the depositories.

The process of clearing house passing on to member-brokers the delivery of

securities bought by them is called securities pay-out. It is usually the same day as pay-in

day. Securities are credited by the clearing house into the principal accounts of members.

The exchanges also provide a facility to member brokers so that they can transfer pay-out

securities directly to their clients without routing the securities through their principal

accounts in the depositories. But this is subject to the client providing break-up file which

is uploaded by the members to the clearing house. Based on this break-up the clearing

house instructs depositories to credit the securities to client’s accounts. In case delivery of

securities received from one depository is to be credited to an account in another

depository, the clearing house does an inter-depository transfer.

Compulsory rolling settlement:

CRS refers to the setting of trades a standard fixed period of days after the

execution occurred. Under CRS the settlement is on T+2 basis. This, CRS takes place

from trade day (T) plus 2 more days (T+2). This reduced the time of settlement, powered

settlement risk, ensured early receipt of securities and monies by buyers and sellers and

brought the capital market at par with internationally accepted standards of settlement.


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Depositories:

Almost all equity settlements today take place at the depository. The Depository

system was introduced in India in 1995 to overcome the operational inefficiencies

breeding into the India capital markets due to traditional paper based trading and

settlement system. Depository Act 1996 enacted and the SEBI authorized to frame the

regulations for depositories operation. SEBI mandated the dematerialization of securities

holdings in a phased approach. Moreover, all market participants are required to have

depository accounts.

At present there are two Depositories in India. THE NATIONAL SECURITIES

DEPOSITORY LTD. (NSDL) came into existence in 1996. Three largest organizations

viz. IDBI, UTI and NSE, promoted the NSDL. This Depository is actually a giant

satellite-based integrated computer network that eliminates papers in all share

transactions.

Central Depository Services (India) Ltd. (CDS) is the second depository in India

established in 1999. Next to NSDL, this second depository has been promoted by DSE in

association with BOI, HDFC, and SBI.

Depository Participants:

The Depositories Act 1996 qualifies the following entities being eligible to

become a depository participant:

i. Public Financial Institutions

ii. Banks including foreign banks


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iii. Non-banking financial companies

iv. Clearing houses of stock exchanges

v. Any institution providing financial services such as those provided by the

above mentioned institutions.

vi. State financial corporations

vii. Custodian of securities

viii. Stock Brokers

ix. Registrars & Transfer Agents

DEMAT TRADING:

Compulsory demat delivery by institutions and all investors has been mandated.

Also all the scrips have been mandated for compulsory rolling settlement at T+2 basis

thereby eliminating the weekly settlement cycle on both the exchanger BSE and NSE.

Under the screen-based system now in vogue the players (brokers) strike deals from their

respective locations through their terminals. The computer located at the brokers end is

connected to the central computers located at the exchange through a telephone or a

satellite based system.

(B) DERIVATIVES MARKET:

Derivatives arise from the futures contract. A futures contract is an agreement that

requires a party to the agreement to either buy or sell something at a designated future

date at a pre-determined price. Futures contracts are either commodity futures or financial

futures. Commodity futures involve traditional agricultural commodities, imported


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foodstuffs and industrial commodities. Financial futures are on financial instruments or a

financial index. They can be stock index futures, interest rate futures. The derivatives are

exchanges in other derivative instruments include options and swaps.

‘Options’ contract gives the right for a consideration, to the holder of the contract

to buy or sell the underlying asset at a pre-determined price within or at the end of a

specified period. The underlying asset could include securities or an index of the price of

securities. An, option, to buy a fixed number of shares at the specified price is called a

‘call option’. While an option, to sell a fixed number of shares at a fixed price is called a

‘put option’. Options both ‘Call and Put’ are also classified as American-Style option or

European Style option. The former is exercisable on a before the expiry date whereas the

later only on the expiry date.

The basic economic function of a futures market is to provide an opportunity for

market participants to hedge against the risk of adverse price movements.

The Bombay Stock Exchange (BSE) introduced derivatives trading in India with

the launch of sensex futures contract in June 2000. Later, the BSE and NSE launched the

trading of Futures and Options Contracts for various indexes, specific sectors and

individual stocks. The following table 2.10 shows the derivatives products available for

trading on the BSE and NSE.

BSE Derivative Products and Trading System:

Derivative trading at BSE takes place though Derivative Trading and Settlement

System (DTSS). It is a fully automated screen based trading platform and is designed to


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allow trading on a real-time basis. The derivatives market is order driven. The traders can

place only orders in the system. All orders are time-stamped when accepted by the DTSS.

A unique trade ID is generated for each order and complete information is sent to the

concerned member. Market orders are of two types:

(a) Partial Fill Rest Kill: Execute the available quantity and cancel the rest.

(b) Partial Fill Rest Convert: Execute the available quantity and convert the unexecuted

portion into a limit order for execution at or better than the specified limit price. Stop loss

order is dormant and become active when the security reaches or crosses threshold price

(trigger price), such orders are to preserve profits or limit losses.

BSE OPTIONS:

The BSE trades both index and single stock options. Index options are generally

European style and trade with a three-month maximum maturity. Table 2.6 below lists the

underlying indexes for which option are available:

Table 2.6: Underlying Index Option Contracts

Source: The Bombay Stock Exchange, as of November 2006.

BSE 30 Senesx

BSE Teck

BSE Bankex

BSE Oli & Gas

BSE PSU

BSE Metal

BSE FMCG

BSX

TEK

BNK

OGX

PSU

MET

FMC

SENOPT

TECKOPT

BANKXOPT

ONGXOPT

PSUOPT

METLOPT

FMCGOPT

25

125

50

38

50

25

175

BSE 30 Senesx

BSE Teck

BSE Bankex

BSE Oli & Gas

BSE PSU

BSE Metal

BSE FMCG

Underlying Index

Option Product Security Symbol

Option Code Contract Multoplier


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STOCK OPTIONS:

Individual Stock options trade American style with a maximum 3 month maturity,

except for a few weekly options: Stock for which options are available must satisfy

eligibility criteria and are subject to approval by SEBI. These contracts are cash settled.

Weekly options are introduced on Monday of every week and have a maturity of two

weeks, expiring on Friday of expiry week. Their characteristics are the same as monthly

stock options.

BSE FUTURES:

BSE trades both Index and Single Stock Futures. The underlying indexes futures

contracts of BSE are shown in Table 2.7 below.

Table 2.7: Underlying BSE Index Futures Contracts

Source: BSE

Underlying Index

Security Symbol

Product Product Code Contract Multiplier

BSE Sensex

BSE TECK Index

BSE Bankex

BSE Oil & Gas Index

BSE PSU Index

BSE Metal Index

BSE FMCG Index

BSE 30 Sensex Futures

BSE TECK Futures

BSE Bankex Futures

BSE Oil & Gas Futures

BSE PSU Futures

BSE Metal Futures

BSE FMCG Futures

BSX

TEX

BNK

OGX

PSU

MET

FMC

SENOPT

TECKOPT

BANKXOPT

ONGXOPT

PSUOPT

METLOPT

FMCGOPT

25

125

50

38

50

25

175


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NSE DERIVATIVE PRODUCTS:

NSE Derivatives are traded on NEAT screen-based trading system. NEAT is an

order-driven market and operates with a price-time priority for matching orders. NEAT

accept orders with time-related and price-related parameters similar to those accepted in

the cash market.

NSE OPTIONS:

NSE option contracts must satisfy the following requirements:

(a) Price bands: There are no daily minimum or maximum price ranges applicable to

option contracts. However, in order to prevent order entry errors, the operating

range and day minimum and maximum ranges for option contracts are kept at 99

percent of base price. Orders beyond 99 percent of base price are not placed.

(b) Closing Price: The contracts traded any time of the day, their closing price is the

last traded price of the contract. Contracts traded in the last hour, their closing

price is the last half hour weighted price.

INDEX OPTIONS:

The number of contracts provided in options on the NIFTY is related to the Index

Range in which the previous day’s closing value of NIFTY falls. Table 2.8 below gives

the number of traded contracts associated to given level of index.


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Table 2.8: Nifty Strike Intervals and Number of Options in Series

* In the money, at the money, out-of-the-money.

Source: The National Stock Exchange

INDIVIDUAL STOCK OPTIONS:

NSE options contracts for individual securities are available for 155 securities as

approved by SEBI. For individual stock there are always a minimum of seven strike

prices for every type (call and put) during the trading month, viz. three contracts in the

money (ITM), three contracts out of money (OTM) and one contract at the money

(ATM). The strike price intervals vary depending on the price of underlying security,

widening with increasing price.

NSE FUTURES:

All futures are options traded on NSE have common characteristics. Price bands

have no daily minimum price ranges applicable to all NSE Future Contracts. However,

operating ranges are kept at 10 percent for the three index futures and 20 percent for

155 individual stock futures. Base price for all future contracts on the first day of trading

is the theoretical futures price. The base price of the contracts on subsequent trading days

is the daily settlement price of the futures contracts.

Nifty Index level Strike Interval Strikes to be introduced (ITM-ATM-OTM)*

Up to 1500

> 1500 up to2000

> 2000 Up to 2500

> 2500

10

10

10

10

3-1-3

5-1-5

7-1-7

9-1-9


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Individual Stock Futures:

These future contracts are currently available on 155 individual underlying stocks

trading on the NSE and are subject to approval by SEBI.

NSE Derivative Contract Specification:

Contract specification of NSE index and single stock derivative contracts are as

given below in Table 2.9.

Table 2.9: Contract specifications for NSE Derivatives Contracts*

* Trading cycle: Three-month trading cycle- the near month (one), the next month (two), and the far month

(three).

** Expiry day: Last Thursday of the expiry month. If the last Thursday is a trading holiday, then the expiry day

is the previous trading day.

Source: The National Stock Exchange.

Interest Rate Derivatives:

The NSE makes a market in interest rate future contracts. Interest rate future

contracts are based on the list of underlying fixed income instruments as specified by the

exchange and approved by SEBI. Interest rate futures contracts are available on notional

T-bills, notional 10-year zero coupon bearing bonds securities on which Interest-Rate

Futures contracts are available are show below:

Parameter Index Futures Index Options Futures on Individual Securities

Options on Individual Securities

Underlying 3 indexes 3 indexes 155 securities 155 securities

Instrument Futidx Optidx Futstk Optstk

Option type - CE/PE - CA/PA

Strike price - Strike price - Strike price

Underlying Symbol of underlying

index

Symbol of underlying

index


index


index

Security Descriptor:

Expiry date** dd-mm-yyyy dd-mm-yyyy dd-mm-yyyy dd-mm-yyyy


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Table 2.10: Securities for Interest Rate Contracts

Source: National Stock Exchange (NSE)

TRADING OF INTEREST RATE FUTURES:

The price step for all interest rate futures contracts is Rs. 0.01.Quotation method

is applied in such a way that futures contracts with face values of Rs 100 on notional 10-

year coupon bearing bonds and notional 10-year zero coupon bond are based on price

quotations while futures contracts of face value of Rs. 100 on notional 91-day Treasury

bills are based on the discounted percent from par, or Rs. 100 minus the yield. Base price

for new interest rate futures contracts is the theoretical futures prices based on the

previous day’s closing price of the notional underlying security. The base price of

contracts on subsequent trading days will be the closing price of the futures contracts.

Price ranges of days minimum/maximum are not considered. However, in order to

prevent, order entry errors, the operating ranges for these futures contracts are 2 percent

of the base price. Order conditions available ‘Immediate or cancel’, ’Good until day’,

‘Good until cancelled‘ and ‘Good till date’. Time conditions available are ‘Stop Loss

order’ and ‘Spread order’.

NSETB91D

NSE10Y06

NSE10YZC

Symbol Description

Futures contract on notional 91-day T-bills

Futures contract on notional 10-year coupon- bearing bonds

Futures contract on notional 10-year zero coupon- bonds


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(C) DEBT MARKET:

The debt market plays a vital role in the current and future development of Indian

economy. There is a thriving government securities market, a small but growing

corporate debt market.

The central government is the largest issuer of debt. Debt financing is required for

infrastructure, housing and meeting other economic growth requirements including

meeting the temporary revenue deficits. Most of the corporate bond issue bring privately

placed wholesale investors such as banks, financial institutions, mutual funds, large

corporate and other large investors. The corporate debt market is imperative to support

continued industrial growth and to fund new and large projects both in the infrastructure

space and in manufacturing.

The RBI has the primary regulatory responsibility of the government securities

market, issue by other government institutions and issues by banks. SEBI is the primary

regulatory body of the corporate debt market.

Debt Instruments

Instruments traded in the debt market include instruments issue by government

and corporate sector. These instruments are classified in Table 2.12 below into segments

based on the characteristics of the identity of the issuer.


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Table 2.12: Available Fixed Income Instruments

S. No. Market Segment Issuer Instruments

1. Government Securities

Central Government Zero Coupon bonds, Coupon bearing

bonds, Treasury Bills, STRIRs

State Government Coupon-bearing Bonds

2. Public Sector Bonds

Government

Agencies and

Statutory Bodies

Government guaranteed bonds debentures

Public Sector Units PSU bonds, debentures, commercial

papers

3. Private Sector Bonds

Corporates Debentures, bonds, commercial papers,

floating rate bonds, convertibles, zero-

coupon bonds, inter-corporate deposits

Banks Certificates of deposits, debentures, bonds.

Financial Institutions Certificates of deposits, bonds.

Source: Compiled from information collected from Debt Market.

Wholesale Debt Market Segment:

The RBI permits banks, primary dealers and financial institutions in India to trade

debt instruments among themselves or with non-bank clients through members of stock

exchanges. The most prominent investors in the debt market are commercial banks and

financial institutions. The investors’ base has now widened to include cooperative banks,

investment, cash rich corporate, non-banking financing companies, mutual funds and

high-net worth individuals. FIIs have also been permitted to invest 100 percent of their

funds in debt market. The government also allows FIIs to invest in Treasury Bills.


75 | P a g e

Retail Debt Market:

In the retail debt market debt is open to specific participants. The main

investors permitted to participate to participate in the retail debt market include: Mutual

Funds, Provident Funds, Pension Fund, Private Trusts, Housing Finance Companies,

Corporate Treasuries, Hindu Undivided Families, individual investors, cooperative bank,

religious trusts and charitable organizations, Non-banking financial companies and

Residuary Non-banking companies.

DEBT TRADING:

Debt trading is largely conducted through RBI trading system known as

Negotiated Dealing System (NDS). The system has now been upgraded to NDB-OM

system (order matching included). The system is integrated with the clearing corporation

of India Ltd. (CCIL). The RBI also permits trading through the Stock Exchanges viz.

NIES and OTCEI, extensive national network of trading terminals. Each exchange has its

own debt trading module.

AUCTIONS:

In auctions, government securities are bid in two ways:

(1) As yield-based basis where the participants bid for the coupon payable and (2)

a price-based auction basis where participants bid a price for a bond with a

fixed coupon. The auction can be either a multiple price (participants get


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allotments at their quoted price/yields) or a uniform price (all participants get

allotments at the same price).

TRANSACTIONS IN DEBT MARKET:

Transactions are executed over the counter and at the exchanges. Direct

Transactions are traded by banks and other wholesale participants directly between

themselves either on telephone or the NDS system. One-fourth of total transactions are

traded in this manner. Broker-intermediated transactions are traded through the brokers

who need to be members of a recognized stock exchange. The RBI allows banks, primary

dealers and institutions to trade through them.

RISK MANAGEMENT:

Several measures of control are used to maintain the safety and integrity of the

market. These controls include stringent adequacy capital and net worth requirements,

trading and exposure limits, and margins.

At BSE:

Net worth of minimum Rs. 1.5 crores entitles membership in the BSE debt

segment: Clearing members of the NSE wholesale debt market are subject to a minimum

net worth of Rs. 1 crore. An initial contribution to the Settlement Guarantee Fund (SGE)

by way of interest-free security deposit of Rs. 5 lakh is required to be kept with the

NSCCL.

Trading and Exposure limits permit BSE members of the retail debt segment upto

15 times their additional capital deposited with the exchange in gross exposure in


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government securities along with their gross exposure in equity segment. No gross

exposure is permitted for member against their base minimum capital towards the Trade

Guarantee Fund in the Cash segment. Transactions done in this segment and in the equity

segment together would from part of their intraday trading limits and are subject to a limit

of 33.3 times the capital deposited with the exchange.

At NSE:

Value at risk (VaR) system provides effective way of monitoring and managing

market risk and as a basis of setting regulatory minimum capital standards. The VaR

system uses five alternative methods: (1) Variance-Covariance (normal), (2) Historical

simulation method, (3) weighted normal, (4) weighted historical simulation, and (5)

Extreme value method. The five methods provide a range of options for market

participants.

Margin and gross exposure limits of NSE include Mark-to-market margins,

payable on T+1 and are applicable to all open positions in government securities.

Participation in the debt segment of NSE requires an initial contribution to the Settlement

Guarantee Fund of a minimum of Rs. 5 lakh in the form of interest security deposit to the

NSCCL. The gross exposure in government securities cannot exceed 20 times of this

interest free security deposit (IFSD). Greater exposure will need an increase in additional

base capital.


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Summary

The evolution and growth of stock exchanges and capital markets have a

chequered history. There has been a tremendous growth in terms of members of stock

exchanges, resources mobilisation, volume of trade, members of listed companies and

market capitalisation stock exchanges are the barometer of economic growth as they help

to make funds available for various developmental and productive purposes which help

raises general well being of people at large. In fact stock exchanges play a crucial role in

the consolidation of national economy in general and in the development of industrial

sector in particular. It is the most dynamic organised component of capital market,

especially in developing countries like India. Stock exchanges play a cardinal roll

promoting the level of capital formation through effective utilisation of savings and

offering investment opportunities, liquidity, safety of investment, and wide marketability

of securities. With the explosion of knowledge and use of information technology the

trading and settlement mechanism has become smoother and quicker process. The demat

(scripless) trading has further strengthened the capital market segment.

The salient feature of the risk-containment mechanism are stringent capital

adequacy requirement, up front initial margin for all open positions of the clearing

member (CM), marked to market of open position on the contract settlement price, online

position monitoring and creating of separate settlement guarantee fund. However, the

most critical component of the risk-containment mechanism is the margin system and

online position monitoring.

Economic reforms initiated by Government in 1991 have led to a dramatic

transformation of Indian economy which was once socialist centrally planned economy


79 | P a g e

into a dynamic capitalist, entrepreneurial competitive economy India's capital market

trading and settlement system is made up of strong competitive institutions that have

developed into time tested efficient operators over the last 20 years. The clearing and

settlement capabilities continue to increase and the quality of the institutions and

processes ensures that these will remain world class.

However, the debt market of India, like others throughout the Asian region

is still a developing market that has demonstrated tremendous growth over the last 15

years but still has a long way to go to meet the needs of the Indian economy. The

foundations of strong market are all in place including good trading and settlement

systems and debt specific risk management processes, providing the significant capital

needs of the economy to improve infrastructure. India will undoubtedly continue to drive

regulatory reforms that enhances the attractiveness and demand for debt, resulting in a

steady growth of investors interest in the Indian debt market.

To sum up the capital market and stock exchange operations in India have

undergone profound change. The financial markets have obtained world class status.

India’s capital market settlement system is made up of strong, competitive institutions

that have developed into time-tested efficient operations. The clearing houses, custodians

and depositories comprise a very smooth system that exhibits few problems in the

processing, clearing and settling of more than 6 million transactions per day. Derivative

plays an important and growing role and their trading volume is continually increasing in

number of scrips underlying both futures and options. Investors find derivatives a method

to play the short term of the market as well as to trade the volatility of the market and in

individual shares. Derivatives will continue to play a greater role in the market as the


80 | P a g e

number of foreign investors registered to trade in India employ even more sophisticated

trading strategies. The debt market comprises a thriving government securities market, a

small but growing corporate debt market, and very importantly, a set of foundations and

institution upon which further growth can be achieved. Comparatively, the debt market of

India is still a developing market like others in Asian region. In fact, the debt market

suffers from minimal liquidity and still has a long way to go. Given the significant capital

needs of economy, improved infrastructure, India would undoubtedly continue to drive

regulatory reforms that enhance the attractiveness and demand for debt resulting in steady

growth of the debt market.


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References:

1. Frank J. Fabozzi, Franco Modigliani and Frank J. Jones (2005), “Capital Markets:

institutions and instruments, New Delhi, Prentice-Hall of India.

2. Javid khan Mohammad (2005), “operating of stock exchange in India”, Delhi

(India), Vista International Publishing House.

3. Chance, Don M. (1992), “An Introduction to Options and Futures (The Dryden

Press series in finance)”, 2nd

Edition, published by Thomson Learning, Fort

Worth.

4. Endo Tadashi (1999), “The Indian Securities Market”, New Delhi, Vision Books.

5. Machiraju H.R. (2000), “The working of Stock Exchanges in India”, 2nd

Edition,

New delhi, New Age International.

6. Indian Financial Year Book.

7. Annual Reports of BSE.

8. Annual Reports of NSE.

9. en.wikipedia.org

10. National Stock Exchange of India (NSE), NIFTY Fact Book (2009).

11. Attri Kuldeep and Kumar Rajeev (2011), “comparative analysis of Indian capital

Market in the pre and post liberalisation period”, GGGI Managment Review,

Vol.1, No.1, pp. 66-74.

12. Alan R. kanuk (2007), “Capital Market of India: An Investor’s Guide”, India,

John Wiley & sons, Inc.

13. Economic Survey of India of various years.


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14. Reserve bank of India (RBI) Annual Reports of various years.

15. Hand book of Statistics on Indian Economy, Reserve bank of India (RBI).

16. Published information by NSDL & CDSL

17. www.nseindia.com

***

http://www.nseindia.com/

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