Working of Stock Exchanges 633 786[1] 982

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Introduction

Of all the modern service institutions, stock exchanges are perhaps the most crucial

agents and facilitators of entrepreneurial progress. After the industrial revolution, asthe 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, arelikely 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. 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


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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?

A share represents the smallest recognized fraction of ownership in a publicly held

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

theStock 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, 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!


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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

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 governmentunder 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 thembeing 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


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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 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

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 demutualisation 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

demutualisation completely eliminates any conflict of interest and helps the exchange

to pursue market efficiency and investors interest aggressively.


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Role of SEBI

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,undertking inspection, conducting inquiries and audits of

stock 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 prescribesfrom time to time.


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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 brokerenters 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, 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,


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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 & 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 computer keeping the system


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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.

NSE was the first exchange in the country to provide web-based access to investors to

trade directly on the exchange. It launched Internet trading in February 2000. It was

followed by the launch of Internet trading by BSE in March 2001. The orders

originating from the personal computers (PCs) of investors are routed through the

Internet tot eh trading terminals of the designated brokers with whom they have

relations and further to the exchange of trade execution. Soon after these orders get

matched and result into trades, the investors get confirmation about them on their PCs

through the same Internet routes.

SEBI approved trading through wireless medium or WAP platform. NSE is the only

exchange to provide access to its order book through the hand held devices, which use

WAP technology. This serves primarily retail investors who are mobile and want to

trade from any place when the market prices for st0ocks of their choice are attractive.


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Demat Trading

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 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.


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Dematerialization growth in India is the quickest among all emerging markets and

also among developed markets excepting for the U.K and Hong Kong.


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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 StockExchange 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.

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.


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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 31stMarch 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.

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


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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.

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

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


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(As on 15.06.01)

Hindustan lever FMCG

Reliance limited Chemicals and petrochemicals

Infosys technologies Information technology

Reliance petroleum Oil and gas

ITC FMCGState 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 miningTISCO 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 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.


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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

TRADING

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.

Earlier, the members of the Exchange were permitted to open trading terminals only

in Mumbai. However, in October 1996, the Exchange obtained permission from SEBI

for expansion of its BOLT network to locations outside Mumbai. In terms of the

permission granted by SEBI and certain modifications announced later, the members

of the Exchange are now free to install their trading terminals at any place in the

country. Shri P. Chidambaram inaugurated the expansion of BOLT network the then

Finance Minister, Government of India on August 31, 1997.


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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 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. Once they finalize the arrangements for dematerialization of their

securities, trading and settlement in their scrips would be shifted to their respective

erstwhile groups.

The Exchange has also the facility to trade in "C" group which covers the odd lot

securities in 'A', 'B1', 'B2' and 'Z' groups and Rights renunciations in all the groups of


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scrips in the equity segment. The Exchange, thus, provides a facility to market

participants of on-line trading in odd lots of securities and Rights renunciations. The

facility of trading in odd lots of securities not only offers an exit route to investors to

dispose of their odd lots of securities but also provides them an opportunity to

consolidate their securities into market lots.

The 'C' group can also be used by investors for selling upto 500 shares in physical

form in respect of scrips of companies where trades are to be compulsorily settled by

all investors in demat mode. This scheme of selling physical shares in compulsory

demat scrips is called as Exit Route Scheme.

With effect from December 31, 2001, trading in all securities listed in equity segment

of the Exchange takes place in one market segment, viz., Compulsory Rolling

Settlement Segment.

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/

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):


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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 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.

In other words, the transactions in scrips of companies which are in compulsory

demat are settled in demat mode on T+3 on netting basis and the transactions in scrips


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of companies, which have not made arrangements for dematerialization of their

securities by the stipulated date or are in "Z" group for other reasons, are settled on

trade to trade basis on T+3 either in demat mode or in physical mode.

The settlement of transactions in 'F' group securities representing Fixed Income

Securities is also on Rolling Settlement Cycle of T+3 basis.

The following tables summarizes the steps in the trading and settlement cycle for

scrips under CRS:

DAY ACTIVITY

Trading on BOLT and daily downloading of statements showing details of

transactions and margins at the end of each trading day.

6A/7A entry by the member-brokers.

T+1

Confirmation of 6A/7A data by the Custodians. Downloading of securities and funds

obligation statement by members.

T+3

Pay-in of funds and securities by 11:00 a.m. and pay-out of funds and securities by

2:00 p.m

T+4

Auction on BOLT.

T+5

Auction pay-in and pay-out.


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* 6A/7A : A mechanism whereby the obligation of settling the transactions done by a

member-broker on behalf of a client is passed on to a custodian based on his

confirmation.

Thus, the pay-in and pay-out of funds and securities takes places on the 3rd working

day of the execution of the trade.

The Information Systems Department of the Exchange generates the following

statements, which can be downloaded by the members in their back offices on a daily

basis.

Statements giving details of the daily transactions entered into by the members.

Statements giving details of margins payable by the members in respect of the trades

executed by them.

The settlement of the trades (money and securities) done by a member on his own

account or on behalf of his individual, corporate or institutional clients may be either

through the member himself or through a SEBI registered Custodian appointed by

him or the respective client. In case the delivery/payment is to be given or taken by a

registered Custodian, he has to confirm the trade done by a member on the BOLT

System through 6A-7A entry. For this purpose, the Custodians have been given

connectivity to BOLT System and have also been admitted as members of the

Clearing House. In case a transaction is not confirmed by a registered Custodian, the

liability for pay-in of funds or securities in respect of the same devolves on the

concerned member.

The introduction of settlement on T+3 basis has resulted in reduction in settlement

risk, provided early receipt of securities and monies to buyers and sellers respectively

and brought Indian Capital Markets at the international standard of settlements


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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, 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 posting for their settlement and margin


23/73

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 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)


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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 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.

The auction is conducted for those securities which members fail to deliver/short

deliver during the Pay-in. In case the securities are not received in an auction, the

positions are closed out as per the closeout rate fixed by the Exchange in accordance

with the prescribed rules. The close out rate is calculated as the highest rate of the

scrip recorded in the settlement in which the trade was executed and in the subsequent

settlement upto the day prior to the day of auction, or 20% above the closing price on


25/73

the day prior to the day of auction, whichever is higher. However, in case of close-out

for shares under objection or traded in "C" group, 10% instead of 20% above the

closing price on the day prior to the day of auction and the highest price recorded in

the settlement in which trade took place upto a day prior to auction is considered.

The Exchange has strictly adhered to the settlement schedules for various groups of

securities and there has been no case of clubbing of settlements or postponement of

pay-in and pay-out during the last six years.

The Exchange is also maintaining a database of fake/forged, stolen, lost and duplicate

securities with the Clearing House so that distinctive numbers submitted by members

on delivery may be matched against the database to weed out bad paper from

circulation at the time of introduction of such securities in the market. This database

has also been made available to the members so that delivering and receiving

members can check the entry of fake, forged and stolen shares in the market

SHORTAGES AND OBJECTIONS

Shortages & consequent actionsThe 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.

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.


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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 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.

In auction, the highest offer price is allowed upto the close-out rate and the lowest

offer price can be 20% below the closing price on a day prior to day of auction. A

member who has failed to deliver the securities of a particular company on the pay-in

day is not allowed to offer the same in auction. He can, however, participate in

auction of other scrips.

In case no offers are received in auction for a particular scrip, the sale transaction is

closed-out at a close-out price, determined by higher of the following:-

- Highest price recorded in the scrip from the settlement in which the transaction took

place upto a day prior to the day of the auction.


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OR

- 20% above the closing price on a day prior to the day of auction.

However, in case of the close-out of the shares under objection and shortages in "C"

or "Z" group, 10% above the closing prices of the scrips on the pay-out day of the

respective settlement are considered instead of 20%.

Further, if the auction price/close-out price of a scrip is higher than the standard price

of the scrip in the settlement in which the transaction was done, the difference is

recovered from the seller who failed to deliver the scrip. However, in case, auction/

close-out price is lower than standard price, the difference is not given to the seller but

is credited by the Exchange to the Customers Protection Fund. This is to ensure that

the seller does not benefit from his failure to meet his delivery obligation. Further, if

the offeror member fails to deliver the shares offered in auction, then the transactions

is closed-out as per the normal procedure and the original selling member pays the

difference below the standard rate and offer rate and the offeror member pays the

difference between the offer rate and close-out rate.

Self AuctionAs has been discussed in the earlier paragraphs, the Delivery and Receive Orders are

issued to the members after netting off their purchase and sale transactions in scrips

where netting of purchase and sale positions is permitted. It is likely in some

circumstances that a selling client of a member has failed to deliver the shares to him.

However, this did not result in a member's failure to deliver the shares to the Clearing

House as there was a purchase transaction of some other buying client of the member

in the same scrip and the same was netted off for the purpose of settlement. However,

in such a case, the member would require shares so that he can deliver the same to his


28/73

buying client, which otherwise would have taken place from the delivery of shares by

the seller. To provide shares to the members, so that they are in a position to deliver

them to their buying clients in case of internal shortages, the members have been

given an option to submit floppies for conducting self-auction (i.e., as if they have

defaulted in delivery of shares to the Clearing House). Such floppies are to be given to

the Clearing House on the pay-in day. The internal shortages reported by the members

are clubbed with the normal shortages in a settlement and the Clearing House for the

combined shortages conducts the auction. A member after getting delivery of shares

from the Clearing House in self-auction credits the shares to the Beneficiary account

of his client or hand over the same to him in case securities received are in physical

form and debits his seller client with the amount of difference, if any, between the

auction price and original sale price

B) Objections

When receiving members collect the physical securities from the Clearing House on

the Payout day, the same are required to be checked by them for good delivery as per

the norms prescribed by the SEBI in this regard. If the receiving member does not

consider the securities good delivery, he has to obtain an arbitration award from the

arbitrators and submit the securities in the Clearing House on the following day of the

Pay-Out (T+4). The Clearing House returns these securities to the delivering members

on the same day, i.e., (T+4). If a delivering members feels that arbitration awards

obtained against him is incorrect, he is required to obtain arbitration award for invalid

objection from the members of the Arbitration Review Committee. The delivering

members are required to rectify/replace the objections and return the shares to the

Clearing House on next day (T+5) to have the entry against them removed. The

rectified securities are delivered by the Clearing House to the buyer members on the

same day (T+5). The buyer members, if they are not satisfied with the rectification,

are required to obtain arbitration awards for invalid rectification from the Bad

Delivery Cell on T+6 day and submit the shares to the Clearing House on the sameday.


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If a member fails to rectify/replace the objections then the same are closed-out. This is

known as "Objection Cycle" and the entire process takes 3 days.

The following table summarizes the activities involved in the Patawat Objection

Cycle of CRS.

DAY ACTIVITY

T + 3 Pay-out of securities of Rolling Settlement

T + 4 Patawat Arbitration session :

Arbitration awards to be obtained from officials of the Bad Delivery Cell.

Securities under objection to be submitted in the Clearing House

Arbitration awards for invalid objection to be obtained from members of the

Arbitration Review Committee

T + 5

Members and institutions to submit rectified securities, confirmation forms and

invalid objections in the clearing house

Rectified securities delivered to the receiving members

T + 6

Arbitration Awards for invalid rectification to be obtained from officials of the Bad

Delivery Cell

Securities to be lodged with the clearing house

The un-rectified and invalid rectification of securities are directly closed-out by theClearing House instead of first inviting the auction offers for the same.


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The shares in physical form returned under objection to the Clearing House are

required to be accompanied by an arbitration award (Chukada) except in certain cases

where the receiving members are permitted to submit securities to the Clearing House

without "Chukada".

These cases are as follows:

Transfer Deed is out of date.

Cheques for the dividend adjustment for new shares where distinctive numbers are

given in the Exchange Notice is not enclosed.

Stamp of the Registrar of Companies is missing.

Details like Distinctive Numbers, Transferors' Names, etc. are not filled, in the

Transfer Deeds.

Delivering broker's stamp on the reverse of the Transfer Deed is missing.

Witness stamp or signature on Transfer Deed is missing.

Signature of the transferor is missing.

Death Certificate (in cases where one or more of the transferors are deceased) is

missing.

A penalty at the rate of Rs.100/- per Delivery Order is levied on the delivering

member for delivering shares, which are not in order. In the event a receiving member

misuses the facility of submitting shares under objection without "Chukada", a

penalty of Rs.500/- per case is charged and the penalty of Rs.100/- per Delivery Order

levied on the delivering member is refunded to him by debiting the receiving

member's account


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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

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.


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In the 'C' group, i.e., Odd Lot Segment, no auction session is conducted. The

shortages are directly closed out.


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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:


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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.

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


35/73

individual stocks. The investors in cash market had felt a need to limit their risk

exposure in the market to movement in Sensex.

With a view to provide investors with this facility of creating Sensex linked portfolios

and also to create a linkage of market prices of the underlying securities of Sensex in

the Cash Segment and Futures on Sensex, the Exchange has provided the facility of

Basket Trading System on BOLT. In Basket Trading System, the investors are able to

buy/ sell all 30 scrips of Sensex in the proportion of their respective weights in the

Sensex, in one go. The investors need not calculate the quantity of Sensex scrips to be

bought or sold for creating Sensex linked portfolios and this function is performed by

the system. The investors are also allowed to create their own baskets by deleting

certain scrips from the Sensex basket of 30 scrips.

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.


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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.

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:


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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.

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.


38/73

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.

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.


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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

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 baseyear, was compiled. This index is made up of 100 scrips, 98 of which are quoted on


40/73

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 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.


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Any change in key managerial personnel.

Risk factors specific to the project and those which are external to the

company.

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 anysecurity 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.

Any take-over offer made either voluntarily or compulsorily to a

company requires a public announcement by both the offeror and the offeree

company.

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


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commissioned in November 1992 to disseminate bids, offers, actual rates of

transactions and indices on a real time basis.

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(Apr.Mar

)

1992-93(Apr.Mar

)

1993-94(Apr.Mar

)

1994-95(Apr.Mar

)

1995-96(Apr.Mar)

No. of ListedCompanies

2061 2861 3585 4702 5603

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 SharesTraded

(In Million Nos.)6,35,515 3,50,313 7,42,792 1,07,24.8 7,71,850

AverageNumber of Daily

Deals75,000 65,535 63,786 85,010 73,855

BSE SensitiveIndex

(Year End)4285.00 2280.52 3778.99 3260.95 3366.61

BSE National

Index(Year End)

1967.71 1021.40 1829.53 1605.57 1549.25


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BSE 2000(Year End)

585.19 234.35 450.07 365.97 345.40

Dollex (YearEnd)

261.25 124.89 238.86 194.67 168.54

No. of

Registered Flls - - 145 308 366Fll Net investment

(In Rs. Billion) - - 29.85 21.24 31.63

(In US $ Billion) - - 0.95 0.67 0.92

No. of Members(Year End)

558 558 628 636 641

No. of CorporateMembers (Year

End)4 4 4 26 63

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.


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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.

The NSE represented an attempt to overcome the fragmentation of regional markets

by providing a screen-based system, which transcends geographical barriers. Having

operationalised both the debt and equity markets, the NSE is planning for a derivative

market, which will provide futures and options in equity. Its main objectives has been

to set up comprehensive facilities for the entire range of securities under a single

umbrella, namely,

To set up a nation wide trading facility for equities, debt instruments and

hybrids;

To ensure equal access to investors across the country through an appropriate

communication network;


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To provide a fair, efficient and transparent securities market to investors using

the electronic trading system;

To ensure shorter settlement cycles and book entry settlement systems; and

To meet the current international standards prevalent in the securitiesIndustry/markets.

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.


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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 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,


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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, afully 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 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.


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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.

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.


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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 aSolicitor.

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.


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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.

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.


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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 use

Documents

Working of Stock Exchanges 633 786[1] 982