CHAPTER-1

INTRODUCTION TO THE SUBJECT

INTRODUCTION
1.1 INTRODUCTION TO THE SUBJECT A stock exchange is that segment of the capital market where the securities issued by the corporate, are traded, these are organized and regulated markets for various securities issued by corporate sector and other institutions. Stock Exchange is a platform where buyers and sellers of securities issued by Government financial institutions, corporate houses etc. Meet and where the trading of theses corporate securities takes place. The securities that are traded in stock exchange are shares and debentures of public companies, port trust utility undertakings and such other securities. Since buying and selling of different types of securities takes place in stock exchange, the prices of particulars securities reflect their demand and supply. In fact, stock exchange is said to be a barometer of economic and financial health. The stock exchanges are the nerve center of capital market. The stock exchanges formation and in rising for the corporate sector. It provides place for sale and purchase of securities i.e. shares, bonds etc. It provides linkage between the savings of household sector and investment in corporate sector or economy. It provides market quotation for share, debentures and bonds and serves as a role of barometer, not only of the state of health of individual companies but also of the economy as a whole. Therefore by providing a market place quotation of the prices of shares and bonds or sort of collective judgment simultaneously reached by many buyer and sellers in the market, the stock exchanges serves the role of barometer, not only of the state of health of individual companies, but also of the nations economy as a whole.

Definition of Stock Exchange:2

THE STOCK EXCHANGE DEFINED AS "A stock exchange fulfills a vital function in the economic development of a nation. Its main function is to liquefy capital by enabling a person who has invested money in, say a factory or railway to convert it in to cash by disposing off his shares in the enterprises to someone else." A stock exchange, thus, fulfils a vital function in the economic development of the nation. Its main function is to liquidity capital by enabling a person who has invested money in shares of a company to convert it into cash by disposing of his shares in the company to some one else. Stock markets and equity prices are the barometer of the economy. 1.1.1 Regulation of Stock Exchanges The need to regulate stock exchanges was felt in 1921 first when Atlay Committee recommended Bombay Stock Exchange Securities Contract Control Act, passed in 1925. Later on, Securities Contracts (Regulation) Act was made in 1956 and Securities Contracts (Regulation) Rules in 1957. Certain powers how vest with SEBI w.e.f, 30th January 1992 on promulgation of SEBI Act, 1992. The Securities Contracts (Regulation). Act, 1956 was enacted to prevent undesirable transactions in. securities by regulating the business of dealing therein, by prohibiting options and by providing for certain other connected matters. The provisions and rules enable smooth functioning of the stock exchanges. The Act, empowers the stock exchanges to regulate the functioning of the exchanges through their bye-Law for regulation and control of contracts such as:1. Maintenance of a clearing house for all business transacted at the exchange. 2. Opening and closing of markets and regulation of trading hours. 3. Submission of various particulars to SEBI. 4. Regulation of settlements. 5. Regulation and settlement of claims or disputes. 6. Determination and declaration of market rates .

7. Regulation of blank transfers and carry over business. 8. Regulation of jobbing business. 9. Limitation of business done by members. 10. Fixation of margins brokerage, fine, fee etc. Recognition to stock exchanges is granted by Central Government (SEBI) which can also be withdrawn if necessary. Securities Contracts (Regulation) Act, 1956, also provides forSection 6 _ Power of Central Government to call for periodical returns or direct inquiries to be made. Section 7 _ Annual Reports to be furnished to Central Government by stock exchanges. Section 7 A _ Power of recognized stock exchanges to make rules restricting voting rights. Section 8 _Power of Central Government to direct rules to be made or to make rules. Section 10 _ Power of SEBI to make or amend bye-laws of recognized stock exchanges. Section 11 _ Power of Central Government 10 supersede governing body of a recognized stock exchange. Section 12 - Power to suspend business of recognized stock exchanges. Section 13A _ Establishment of additional trading with prior approval of SEBI. Section 16 __ Central Government's power to prohibit contracts in certain cases. Section 19 _Stock exchanges other than recognized stock exchanges prohibited. Section 30 - Power of Central Government to make rules for achieving objects of the Act.

1.1.2 Formation and Recognition of Stock Exchanges The first step in formation of a Stock Exchange is to form and get it registered with the registrar of companies as a company. The Government of India, Ministry of Finance (stock Exchange division) has already issued a circular to all the registrars of the

companies in the country not to incorporate an) company private or public with the word "STOCK EXCHANGE" unless prior approval, of the Government is obtained. This step has been taken to check the tendency of formation of unrecognized stock exchange in the country.

Application for Recognition of Stock Exchanges Any stock exchange which is desirous of being recognized may make an application in a prescribed manner to the Central Government. Every application under sub-section (1) of the relevant Act shall contain such particulars as may be prescribed and shall be accompanied by a copy of the bye-laws of the stock exchanges for the regulation and control of contracts and also a copy of the rules relating in general to the constitution of the stock exchange and in particular to (i) the governing body of such stock exchange, its constitution and powers of management and the manner in which its business is to he transacted. (ii) The powers and duties of the office bearers of the stock exchange. (iii) The admission into the stock exchange of various classes of members, The qualifications for membership and exclusion, suspension, expulsion and readmission of members there from or thereto, (iv) The procedure for the registration of partnerships as members of the stock exchange in cases where the rules provide for such membership and the nomination and appointment of authorized representatives and clerks Grant of Recognition to Stock Exchanges If the Central Government is satisfied, after making such enquiry as may be necessary in this behalf and after obtaining such further information, if any, as it may require: (1) That the rules and bye-laws of a stock exchange applying for the registration are in conformity with such conditions as may be prescribed with a view to ensuring fair dealing and to protect investors. (ii) That the stock exchange is willing to comply with the governing body of the stock exchange and having regard to the area served by The stock exchange and its standing and the nature of the securities dealt with by it, may impose for the purpose of carrying out the objects of the Act;

(iii) That it would be in the interest of the trade and also in the public interest to grant recognition to the stock exchange, it may grant recognition to the stock exchange subject to the conditions imposed upon it as aforesaid and in such form as may be prescribed. The conditions which the Central Government may prescribe under clause (a) of subsection (1) for the grant of recognition 10 the stock exchange may include, among other matters conditions relating to the qualifications for membership of stock exchanges, the manner in which contracts shall be entered into and enforced as between members (c) the representation of the Central Government on each of the stock exchanges by such number of persons not exceeding three as the Central Government may nominate in this behalf and (d) the maintenance of accounts of members and, their ,audit by chartered accountants whenever such audit is required by the Central Government, Every grant of recognition to a stock exchange shall be published in the gazelle of which the principal office of the stock exchange is situated and such recognition shall have effect as from the date of" its publication in the Gazette of India . No application for the grant of recognition shall be refused except after giving an opportunity to the stock exchange concerned to be heard in the matter, and the reasons for such refusal shall be communicated to the stock exchange in writing. No rules of a recognized stock exchange relating' to any of the matters specified in sub-section (2) of section 3 shall be amended except with the approval of the Central Government.

1.1.3 WHO BENEFITS FROM EXCHANGE STOCK Investors: It provides them liquidity, marketability, safety etc. of investment. Despite profitability is also a major benefit to the Investors. Companies: It provides them access to market funds, higher rating and public interest. Brokers: They receive commission in lieu of their services to investors Economy and Country: There is larger flow of savings better growth, moves industries higher income. General public: It provides all available information relating to different companies to the general public. Technological Development: It is the time of computers & technology & in stock market this regulates the whole set up. So this fact ways more & more development day by day. However Stock Exchange of Bombay, Delhi, Madras & Hyderabad & Bangalore have been granted permission reorganization.

1.1.4 LIST OF VARIOUS RECOGNIZED STOCK EXCHANGES IN INDIA S.No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10 . 11 . 12 . 13 . 14 Jaipur stock exchange Guahati stock exchange Pune stock exchange Ludhiana stock exchange 1983 Public limited company Name of Stock Exchanges Bombay stock exchange Ahmedabad stock exchange Calcutta stock exchange M.P. stock exchange, Indore Madras stock exchange Year of Establishment 1875 1897 Type of Organization Voluntary organization Non-profit I Voluntary organization Non-profit Public Limited company Voluntary Non-profit organization Co. limited by guarantee

1908 1930 1937 1943 1947 1957 1978 1982

Hyderabad stock exchange Delhi stock exchange Bangalore stock exchange Cochin stock exchange U.P stock exchange

Co. limited by guarantee Public limited company Pvt. converted into public ltd. co. Public limited company

Public limited company

1982

Co. limited by guarantee

1983

Public limited company

1984

Public limited company

15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . Naliollal stock exchange MelTut stock exchange OTCI (Over the counter exchange of India), Mumbai Bhuvneshwar stock exchange Saurashtra stock exchange, Kutch Vadora stock exchange Magadh stock exchange Karmaar stock exchange

1985

Public limited company

1986

Co. limited by guarantee

1989

Co. limited by guarantee

1989

Co. limited by guarantee

1990

N.D

1991

N.D

1993
Pure demutulised

1995

Pure demutulised

10

1.2 REVIEW OF LITERATURE

Lindsay Meredith (2007) studied A matrix based on market information levels and lead times is introduced to demonstrate how the threat variables can be classified in terms of their potential risk to the business marketer. The threat variables can then be located on the risk matrix and the degree of their potential danger can be defined. The objective of this paper is to provide a framework for the monitoring and early detection of external factors to the firm that have the potential to threaten its markets. The marketing and economics variables discussed here will be familiar. The focus specifically on their negative aspects and the framework used to prioritize their threat potential to the business to business (B2B) marketer, however, may be less familiar. The intent is to provide managers with an early warning list of threat variables and a priority structure of the most dangerous ones so that they can be monitored more carefully and more often. V.-W. Mitchell (1998) studied Despite the importance of professional services to organisations, relatively little is known about the way they are purchased. This study details the risks perceived and risk-reducing strategies employed by purchasers in local government and examines how these vary with buying-phase and buy-class. Risk varied little, but some of the 36 risk-reducing strategies identified varied across the buying phases and were more useful in the modified-rebuy situation. The results are discussed in the context of risk measurement and implications for purchasers and providers of professional services. Graham King, Clive Smallman (1997) studied that Brokers operate in an industry with very low capital requirements and equally low entry barriers. This means their market share is continually under attack. They have no significant control over the price of the product that they handle, which can fluctuate substantially for reasons over which they have no power to influence. Like advertising agencies, they exist by sufferance of demanding and increasingly sophisticated corporate clients. Also, as insurance policies are legal contracts, then like law and accounting firms they have to cope with the consequences of an increasingly litigious business environment, which in practice 11

translates into continual pressure on costs. Further to this they have to contend with the servicing costs of tail claims flowing into insurers and reinsurers in relation to policies which were placed in prior years. In some cases this may have been decades ago. John Holland (2006) studied the the nature of this private information agenda concerning intellectual capital or intangibles and the dynamic connections between these variables in the value creation process. The case data provided insight into how the book value and market value gap arose and the special role of information on intangibles and intellectual capital in valuing in the company. The fund management behaviour has important implications for regulatory policy issues on insider information, on corporate disclosure, the corporate governance role of financial institutions, and for the governance of financial institutions. Omera Khan (2007) studied that there are a number of key debates in the general literature on risk, especially in terms of qualitative versus quantitative approaches, which need to be recognised by those seeking to apply risk theory and risk management approaches to supply chains. In addition, the paper shows that the application of risk theory to supply chain management is still in its early stages and that the models of supply chain risk which have been proposed need to be tested empirically. The paper proposes a research agenda aimed at developing models of supply chain risk management based on combining the wider theory and practice of risk management with the needs and practices of supply chain management. Peter Finch (2004)studied analysis of the literature, supplemented by case studies to determine if large companies increase their exposure to risk by having small- and mediumsize enterprises (SMEs) as partners in business critical positions in the supply chain, and to make recommendations concerning best practice. A framework defining the information systems (IS) environment is used to structure the review. The review found that large companies exposure to risk appeared to be increased by inter-organisational networking. Having SMEs as partners in the supply chain further increased the risk exposure. SMEs increased their own exposure to risk by becoming partners in a supply chain. These

12

findings indicate the importance of undertaking risk assessments and considering the need for business continuity planning when a company is exposed to inter-organisational networking. Bixia Xu (2006) studied on the effect of R&D strategy on share price volatility. Share price volatility is regressed on the measure of drug discovery and development diversification. Strategies are classified into two categories: diversified vs. concentrated. Meanwhile, other factors that have an influence on share price volatility such as firm maturity, firm size, and book-to-market ratio are controlled. The purpose of this study is to explore how R&D strategies selected by biotech firms affect their share price volatilities. Specifically, the paper empirically investigates the impact of drug discovery and development diversification on share price volatility.

13

CHAPTER-2

COMPANY PROFILE

14

LUDHIANA STOCK EXCHANGE LIMITED

2.1 INTRODUCTION TO INDUSTRY The Ludhiana Stock Exchange Limited was established in 1983, by Sh. S.P. Oswal of Vardhman Group and Sh. H.M. Munjal of Hero Group leading industrial luminaries, to fulfill a vital need of having a Stock Exchange in an important role in canalizing savings into capital for the various industrial and commercial units of the State of Punjab and other parts of the country. The Exchange has facilitated the mobilization of funds by entrepreneurs from the public and thereby contributed in the overall, in the overall, economic, industrial and social development of the State. 2.1.1. GOVERNING COUNCIL COMMITTEES AND ADMINISTRATION The Council of Management of the Exchange consists of eleven members, out of which two are Government Nominees, six are Public Representatives and one Managing Director who is also Ex-officio member of the Board. At every Annual General Meeting, one third of the elected Directors retire by rotation. Administration of the Exchange is managed by the Managing Director who is assisted by a Company Secretary and a team of Executives, Assistants, Technicians and Sub-staff. The Exchange has four Statutory Committees namely Disciplinary Committee, Defaults Committee and Investor Services Committee. In addition, it has advisory and standing committees to assist the administration. 2.1.2 CORPORATE GOVERNANCE Although the Ludhiana Stock Exchange is not a listed Company, yet it has followed a model of corporate governance, which is evident from the composition of the Statutory Committees, the Investor Services Committee and Audit Committee. The Investor Services Committee comprises of four Public Representatives and one broker member. It is headed by Sh. D.K Malhotra, a legal expert. Statutory committees are represented by brokers and non-brokers in 20:80 ratios.

15

2.2 PROFILE OF THE LSE 2.2.1 OPERATIONS OF LUDHIANA STOCK EXCHANGE

1. TURNOVER Ludhiana Stock Exchange is one of' the leading Stock Exchanges among the Regional Stock Exchanges of the country, and has been providing trading platform for the investors situated in Punjab, J&K, Himachal Pradesh & Chandigarh. At present, it has 344 listed companies arid among them 220 are listed as regional companies. It had been generating significant amount of the business in the secondary market. It recorded a peak turnover of Rs. 9154 crores during the year 2000-2001. The structural changes that took place in the recent past b. the Capital Market o fthe country had a negative impact on the trading volume of the Regional Stock Exchanges. 2. LISTING Listing is one of the major functions of a Stock Exchange wherein the securities of the companies are enlisted for trading purpose by Company Incorporated under Companies Act, 1995, coming out with an IPO, has to mandatory list its shares on a Stock Exchange The Listing Department of Ludhiana Stock Exchange deals with listing of securities, further listing of issues like bonus and rights issues, post-listing compliance of the companies, which are already listed with are already listed with ,Ludhiana Stock Exchange. The Companies desirous of listing its securities on the, Exchange have to sign a Listing Agreement with the Stock. After getting the listing approval, the Company has to ensure and report compliance of the post listing requirements. The listing section of the LSE monitors the post-listing compliance of all the listed companies and follows up with the companies, which are found deficient in compliance. 3. SETTLEMENT GURANTEE FUNDS(SGF)

The Stock Exchange established a Settlement Guarantee Fund (SGF) on April 6, 1998. It provides guarantee of all the genuine trades made through the Screen Based Trading System of the Stock Exchange. 4. END OF AN ERA 16

The management of the Stock Exchange apprehended that the smaller regional Stock Exchanges would not be able to meet the challenges imposed by expansion of bigger Stock Exchanges like NSE and BSE and might up loosing their entire business to VSAT counters of the bigger Stock Exchanges. In order to prepare for such an Eventuality, Stock Exchange set up a broking arm in the name of LSE Securities Ltd. (a subsidiary company of stock exchange) in January 2000 and built infrastructure and IT based sophisticated system to enable its members and investors to trade on NSE and BSE through the subsidiary route. The Stock Exchange was thus able to convert the "threat" it faced from expansion of NSE and BSE into an opportunity for its members and investors. As expected. There was a marked shift in the trading volumes from the Stock Exchange to the NSE and BSE through the Subsidiary Company. This shift became more prominent when SEBI introduced compulsory Rolling Settlement arid banned the deferral products like Badia, CFS and ALBM w.e.f. July 2,2001 causing thereby an end to arbitrage opportunities between the Stock Exchange and NSE/BSE. Ultimately, there was complete shift of trading from the Stock Exchange to the LSE Securities Limited in January 2002. TRADING ON BIGGER STOCK EXCHANGES THROUGH SUBSIDIARY ROUTH As stated in the preceding para, the Exchange acquired the membership of NSE & BSE through its subsidiary, the LSE Securities Limited, with the objective of providing an enabling mechanism to its member brokers to trade on NSE and BSE as sub-brokers of LSE Securities Limited. Trading at BSE and NSE was commenced through the Subsidiary route from platform to the investors of the regions for redressal of their complaints and latest happenings in the Capital Market.

2.2.2 INTRODUCTION OF LSE SECURITIES LTD.

17

LSE securities Ltd., was incorporated in January, 2000 with a view to revive the capital markets in the region and for taking full advantage of the emerging opportunities being provided by expansion of bigger stock exchanges like NSE and BSE. The company since its inception has marched forward rapidly and achieved many milestones in a short span of existence. GOVERNING COUNCIL The Council of the management of the company comprises of 12 Directors of which, five arc broker members, five are non-brokers. The non broker members are Independent Directors of eminent status form the field of finance, law and management. Remaining two are Executive Director of the holding company (Ludhiana Stock Exchange) and Chief Executive Officer of the company, who are on the Board of the company as exofficio Directors. CORPORATE MEMBERSHIP OF NSE & BSE SEBI, at the initiative of Ludhiana Stock Exchange Association Limited, permitted smaller Stock Exchanges, to trade, on bigger Stock Exchanges through their subsidiary companies. The Ludhiana Stock Exchange floated its subsidiary company, the LSE Securities Limited, with the objective of obtaining trading rights on bigger Stock Exchanges. It has obtained corporate membership of both NSE and BSE in the year 2000.

2.3 OPERATIONS OF THE LSE AND LSE SECURITIES

18

2.3.1 TRADING AT BSE AND NSE LSE Securities Ltd. . Commenced trading operations m Capital Market Segments of BSE and NSE in September, 2000 and December, 2000 respectively, The total turnover during the financial year 2005-06 had been Rs. 8613 crores as against Rs. 7987 crores during the financial year 2004-05 in Capital Market segment of NSE.I The total turnover during the financial year 2005-6 had been Rs. 4920 crores as against Rs. 3833 crores during the financial year2004-05 in Capital Market segment of BSE. 2.3.2 F&O SEGMENT OF NSE The LSE Securities Ltd. Commenced trading operations in Future and Options Segment of N SE in February 2002 the company became the first subsidiary of any Regional Stock Exchange which commenced trading in "F&O" Segment of NSE. Response to trading facilities in the "F&O" segment on NSE has been very encouraging and volumes generated in this segment soon exceeded those in "Capital Market" segment. The total turnover during the financial year 2005-06 had been Rs. 27343 crores as against Rs. 25707 crores during the financial year 2004-05 in Capital Market segment of NSE. 2.3.3 TRADING THROUGH V-SATS The LSE Securities limited has also provided facility to its sub-brokers for trading on NSE and BSE through VSAT counters which are" located outside Stock Exchange Building. Presently, 17 sub-brokers of the, company have been 'trading through VSAT on NSE and 10 on BSE.

2.3.4 DEPOSITORY PARTICIPANT SERVICES NATIONAL SECURITIES

19

DEPOSITORY LIMITED (NSDL) LSE Securities Ltd. commenced its operations as Depository Participant of NSDL in August 2000. As a result of efficient services and competitive rates, the Company has been able to increase its market share in the DP business of the region. As on 03.11.2006 DP of NSDL of the company is servicing over 22540 active beneficiary accounts through four locations in Punjab as against 1716 accounts on 31.03.2001. DEPOSITORY PARTICIPANT SERVICES CENTRA L DEPOSITORY SERVICES (INDIA) LIMITED (CDSL) In order to further strengthen its services to sub-brokers and investors, the Company started DP of CDSL of the Company is servicing over 8972 active beneficiary accounts through four locations in Punjab as against 19 accounts on 31.03.2002. EXPANSION PROJECTS To increase its presence in the region further, the company plans to open its branches of Depository Services in the major cities of the region. To start with it has already opened its branches at Jalandher, Amritsar and Chandigarh. The Una DP is forth DP branch of the company and company is in the process of opening fifth DP branch at Sirsa (Haryana) in association with Ludhiana Stock Exchange Ltd.

20

2.4 DEPARTMENT OF LSE SECURITIES

The main aim of LUDHIANA STOCK EXCHANGE is to ensure the safety and security to the investments of the investors and to provide the proper services under the prescribed guidelines of SF 131. So to maintain the proper system of working of exchange, there are so many, different departments in which particular functions are performed, assigned to those departments. Following in the list of various departments of LSE. 2.4.1Operational Departments Margin Section Clearing House Market Surveillance Computer Section and information System Department

2.4.2 Service Departments Legal Department Secretarial Dept. I.G.C (Investor Grievance Cell) Accounting Section Membership Department Personnel Department Depository Department

All the section performs specific function. There is nowhere duplication of work; even then all the sections are interconnected with each other. There is an organized network of recording of activities performed there. But before studying the inter dependence of section) here is the details of all department i.e actually what function is performed by each and every section.

2.4.1 Operational Departments

21

(i) MARGIN SECTION

Margin Section is an important section. This section apart from dealing in the regulating the trading of brokers keep a check on excessive trading in speculation. Margin is the amount, which is collected from tile brokers for the safety of transactions. As the transactions are to be finalized-on basis in the mean time the rates may fluctuate which may lead to default. So to make the transaction safe, daily margins are collected from brokers. When a member gets registered in the exchange and with securities exchange board of India (SEBI), then before starting trading he is supposed to deposit some fixed by SEBI as -security. Now in SEBI rolling settlement prevails. Ultimately margin is the difference between the limit and trade done by the member. The security deposit by member is called Base Minimum Capital, If any member wants to do trade up to greater limit then he can deposit Additional Base Minimum Capital. Present Margin System: Base capital requirements are as follows: Total Cash Cash/HDI/Gross Net limit (B.M.C.) Portion BG Scrips Limit (Daily) Weekly A) Cash Trades OnlyRs.4lac Rs. 125 Rs. 2.75 33 Times 10 (1.32crs) (Times) Types of margins As we have discussed earlier margins, collected from members to avoid the losses and to provide security to the investors. There are different types of margins, which are imposed given as follows: Mark to Market Margin The exchange collects this margin on daily buses, broker-wise 100% national loss of each members or every scrip, calculated as the difference of his buying or selling price and

22

closing of that scrip at the end of the day. This is also called loss margin. The margin is payable in cash or in bank guarantee. Value at risk or VAR Margin For the scrips in the compulsory rolling settlement Len 99% V AR based margin system would be introduced w.e.f. July 02, 2001 the computation of this margin is done by software developed by CHICAQO Stock Exchange. Additional Margin Thus margin is 12% would be levied over and above the VAR margin is collected from brokers on T + 1 basis. Special Margin The brokers will be required to deposit margin as per the percentage prescribed by stock exchange in this regard from time to time. Payment of Margin The broker's shall b e required to deposit margin demanded from them by 11.00 AM on T+1 day. That is on next trading' day. The margin brokers shall be collected by way of cheques drawn on the prescribed hanks, demand draft or by way of direct debit to the bank account to broker. (ii) CLEARING HOUSE Clearing house takes care of pay-in and pay-out securities. At this time there is weekly trading system (Mondayto Friday) prevails. And securities are settled by rolling settlement. Means pay-ill and pay-out of securities is settled on T + 3 Basis would commence form 1st April, 2002. SEBI decide the following activity schedule for exchanges for the T +3 rolling settlement

23

Settlement Cycle Schedule

Sr. No. 1. 2. 3. 4. 5. Day T T+1 T+4 T+4 T+6 Description of Activity Trade Trade Date Custodial Confirmation Securities and Fund pay in and pay out Auction of shortage in deliveries Auctions pay-in/pay-out as soon as possible

T = Trading Period

PAY IN PAYOUT OF SECURITIES On trading day brokers buy and sold the securities or scrips and pay-I and payout of securities will be completed on T + 3 basis e.g. if broker buy sell shares on Monday then pay in of securities will be on Wednesday, 11.00 AM. And payout of scrips will also on Wednesday up to 4:00 P,M. way pay-in/pay- out of securities cycle will be completed. AUCTION OF UNDELIVERED SCRIPS In this in case if broker fails to deliver the scrips on T + 3 delivery day. Then it is responsibility of clearing house to settle the undelivered scrips. Then T +4 cycle will start in above example auction of pending securities will be conducted on Thursday. In auction price of securities may will fluctuate 20% high or low of that trading day. In this way T+4 schedules is settled. CLOSEOUT In case the shares of particular scrips is not available on the date of auction. Then it is obligation of solicitor (exchange) to give monetary benefit to initiator (buyer) against the default of defaulter of securities in this manner settlement schedule has completed. (iii) COMPUTER DEPARTMENT

24

The growing technicalities and the increasing workload have enhanced the importance of this department at LSE Now days this is the backbone of LSE. It remains active all the times and IS directly or indirectly period till its end. The whole function of the exchanges would come to a half, If this department become inactive. Various sessions are involved as: At beginning of the day at 8:00 AM, the servers are booted and net worth of the brokers is checked. At the time of opening" the investors can put their bid and if this bid is traded it becomes opening rate of the day. Also index is checked and their rates are displayed. In trading, the information system department ensures smooth trading and in case any problem arises, this section with the help of NSEIT revolves it. At the time of closing, it checks volume traded and evaluation is done.

(iv) MARKET SURVEALANCE SECTION The main task of this section is to see the market sanctity and maintenance so that the investors are n at cheated. So market surveillance entails scientifically identifying points in a stock price movement or trading volumes, which don't match with the company's fundamentals. So the price and volume trends in stock exchange are checked for abnormalities scientifically.

2.4.2 SERVICE DEPARTMENTS

(i) INVESTORS GRIEVANCE SECTION LSE has a separate investor's grievance cell, which receives complaints from investors ID follows up the complaints with companies and member broker to ensure their satisfactory redressal. For providing better services to the investors the stock exchange has maintained investor protection fund. In this fund Rs.500 is collected from each member annually. Apart from this one percent of the total listing fee collected and ten percent interest covered on company deposits is also transferred do the investor protection fund. One more fund investor service fund has been set up 20% listing a fee is transferred to it. The funds of it are used for maintenance of investor service center, holding of seminars for investor/brokers benefit, and publication of LSE Bulletin 25

(ii) LISTING DEPARTMENT Listing means admission of securities of a public ltd. company on a recognized Stock Exchange which provides a forum for the purchased and sale of securities. For doing trading in LSE, the company first has to be listed and the function of listing of the companies done by listing department. For getting listed the concerned company has to pay certain fee and that fee depends upon the authorized capital of the company. REQUIREMENTS The company which is listed has to give: Quarterly Reports Reports of Annual General Meeting Reports of Profit or Loss if any of the Company Listing fee

If above requirements are not fulfilled by the listed companies then company can be de listed by listing department. The below written amount is required for a listing company.

Capital up to Rs. One cr. Above Rs. One cr. & up to Rs. Five cr. Above Rs. Five cr. & up to Rs. Ten cr. Above Rs. Ten cr. & up to twenty cr. Above Rs. Twenty cr. & up to fifty cr. Above Rs. fifty cr.

Rs.8400 Rs.l6800 Rs.28000 Rs.56000 Rs.84000 Rs.140000

Company having a paid up share/debenture capital more than fifty cr. will pay additional fee of Rs.2800. If exchange is not a regional stock exchange then fee will be 50% of fee indicated above.

(iii) ACCOUNTS DEPARTMENT

26

It involves the preparation of trial balances, income and expenditures account and balance sheet with the help of computers. Main books that accounts section of LSE maintains are: Half Day Book: this book contains information regarding daily records of receipts and payments. Cash Book Ledger Bank Book Dank Reconciliation Statement Receipt Book Vouchers

Most of the work in account section of LSE is done manually, although help is taken through computers for the purpose of making trail balance, Income and Expenditure statement and Balance Sheet. The annual report of LSE is generally published in August every year. Some of the important polices of LSE are: The company follows accrual system of accounting recognizes income and expenditure accordingly. Depreciation is provided on written down, value method in accordance with the manner specified in schedule XIV of the Companies Act 1956. Fixed costs are stated at historical costs less depreciation. Stock/Inventory (stationery) is valued at cost. Interest on funds borrowed which is attributable to construction of fixed assets and other indirect expenditure during construction is included under work in progress.

Functions of Accounts Departments

The account section performs the following function.

27

To make and receive. payments to the outside agencies, these agencies include companies listed at LSE and brokers workingat LSE. To disburse personnel expenses. To keep the .records of all incoming and outgoing money depreciation of financial statements at the end of financial year. To get their accounts audited from the third party.

(iv) SECRETARIAL SECTION

The functions and duties of the secretarial department include maintenance of record of minutes of the meetings like: Meetings of Board of Directors Meetings of Various Committees Meetings of the Members Minutes of AGM Minutes of EGM

These minutes are statutory requirements & are preserved by secretarial department. SOME OTHER FUNCTIONS OF SECRETARIAL DEPARTMENT: To send notices with direction of Board of Directors to the respective directions to attend Board Meetings. To ensure that every meeting help as per the law every meeting is a valid meeting" having the quorum other wise it would effect towards unlawfulness. It also deals with transfer of shares. In order to be a member of exchange, a person has to hold at least one share. If a member wishes to sell his ticket, he has to initiative the Secretarial Department In advance a notice is given thereafter, in newspapers for objectives, if any. Within 10 days of such a notice, the creditors or clients can lodge their daims. A days notice is also displayed on the notice board of Exchange for objectives to be raised by members. The complete set of Share Transfer form is to be filled in by the buyer members and submitted to Secretarial Department.

28

(v) LEGAL DEPARTMENT Legal department assists the members and to settle their dispute through the Arbitration Committee or Investor Grievance Committee so that they may be settled at earliest without incurring heavy dues on amount regarding account fee, advocate fee etc. The main objective of the legal department is to stream line & make effective, the bye laws and regulation of the exchange and to see that guidelines, circulars and amendments III rules made by SEBI are enforced at the appropriate time so that' the future compilation may be reduced or avoided.

(vi) CLEARING HOUSE AND SETTLEMENT SECTION It acts as a common a sent of members for clearing contracts of the members. Clearing House takes case of pay in & payout of securities and funds as well as bad deliveries of the securities, it maintains DP for the members and brokers and it is mandatory for the brokers to have securities sold by them III there clearing member's business partner's identification number. There is a weekly settlement cycle prevailing at LSE, which commences on Monday and on end settlement members are given scrip wise delivery notes. The settlement procedure is as follows: T = Trading Day (say; Monday) T +2= Pay in securities (Wednesday) by 10:30 A.M. T +2= Payout of funds (Wednesday) by 4 P.M . T+3= Auction of undelivered scrip (Thursday) T +5= Auction pay in securities and funds on Saturday by 10:30 A.M. T +5= Auction payout Securities and funds 011 Saturday by 4 P.M

(vii) PERSONNEL SECTION This department carries out all the activities related to person. Functions of this department arc: Recruitment of staff members. Maintenance of attendance registers. 29

Keeping leave records: Total leave of 30 days IS given to those whose basic income is Rs, 2000, if more than 2000 then the Leave is for 35 days. Having a look on the matter related to Pf, Gratuity, T A, DA, Bonus etc. Loan: For two basic loans a minimum of SIX months service & for eight basic loans three year basic service & proof of necessity is required.

(viii) MEMBERSHIP DEPARTMENT There are two types of members in stock exchanges. Corporate members Individual member

This department deals with membership of exchange. The trade in market is through the authorized members who have duly registered with concerned stock exchange and SEBI. Following are the requirements to be an individual member of exchange. Age Limit: To be member of stock exchange there is age limit Minimum age is 21 yr Maximum age is 60 yrs. To be member minimum qualification Matriculation is plus person has three-year experience interview. Including written test and membership department deal with all above requirements of members. Qualification: Following requirements are for corporate must be registered under 322 of the company Act i.e. Directors with unlimited liability Two copies of memorandums & Articles of association. Qualification & Proof of age of the at least two direct ors, who will deal in securities. (ix) MAINTENANCE DEPARTMENT This department of LSE is regulating the activities related to the files of electrical, mechanical and civil engineering besides having other functions like that of security. Here are some of the important aspects: Electrification of Building Air Conditioning of Plant 30

Maintenance of lifts Maintenance of generators Maintenance of safety equipments such as smoke detectors, fire, extinguishers etc. Maintenance of Telephone Exchange

The electricity bill of stock exchange is 6 lakh to 7 lakh per month. It has also given Its some portion on rent to three banks i.e. : 4500 sq feet to HSBC, 3000 sq. feet to HDFC and 7000 sq feet to city Bank. Stock exchange gets rental income of Ks.7 lakh to 8 lakh. Security: This IS an additional charge given to this department. The supervision staff maintenance of mental detectors is also under preview (x) DEPOSITORY SECTION A depository is an organization where the securities of the shareholders are held in electronic form at the request of the shareholders through DP. The main aims are: To reduce the settlement cycle To eliminate the bad delivery To minimize paper work

FUNCTIONS PERFORMED BY DEPOSITORY PARTICIANT OF LSE Account maintenance Transfer and Transmission Dematerialization Pledge creation & closure Settlement of trades

31

CHAPTER-3

RISK MANAGEMENT AN OVERVIEW

32

RISK MANAGEMENT AN OVERVIEW

3.1 INTRODUCTION The word management is the summation of two words i.e Risk + Management, which means the process of managing the risk. Stock exchange is the place where investors come to invest their surplus money through brokers but they always have a question in their mind that whether adequate risk management system is in place at the exchange so as of default of brokers thereby granting the safety of money invested by them in the capital market. The risk management department is principally concerned with the management of nontrading risk. It seeks to ensure that all risks, which threaten the business, are recognized, controlled and reduced o their feasible economic minimum and not just the risk that capable of being ensured. The department has initiated a number of measures towards the minimization of risks associated with paper-based trading.

3.1.1 Creation of R.M.D: (Risk Management Dept.) The BSE appointed an international risk management consultant the WBK International limited in 1995 to conduct a risk management survey of stock exchange, Mumbai and associated Clearing Houses, The BOI shareholder Limited. The WBK committee conducted a limited scope risk management study and suggested various recommendations with a view to contain the risk of the various departments of the Exchange and also that clearing house. All the recommendations given by the introduction of the Risk Management Function of the Organization. On the basis of the recommendations of the WBK committee, the governing board constituted a Risk Management Committee which was to be responsible for all the proactive and the retroactive risk management in the addition to an operations control function and physical security.

33

3.1.2 Nature of Risk

The Exchange has been exposed to a large number of risks. This has been inherently borne by the member brokers for all times. Since the introduction of the screen based trading the nature risk to which the member of the exchange are exposed to has undergone radical transformation. At the same time the inherent risk involves with the trading of paper based securities still remains. Though the process of dematerialization has already begun, till such that it is made compulsory in all scripts, the risk of the trading in fake/forged shares and instances of loss of shares etc will continue to exit. The safe custody of these shares in physical form Exchange as well as in the members Brokers offices are of prime importance. The risk can be classified as under:A. Risk associated with paper based trading Lost/misplaced securities Damage to securities Loss or transit

B . Client risk Client default Client absconding Fake/forged/stolen securities introduced by the clients

Reduction and Control Risk A measure of the pro-active risk control several measures have been initiated by the Exchange to reduce the risk to which the Exchange and the member broker are exposed. In this regard the exchange following measures: Know Your Client Scheme:

34

Under the procedure the member brokers of the exchange are compulsory required to obtain details information of clients prior to commencement of any transactions for new clients. A similar procedure is to be made available to the Exchange authorities whenever called for. Database of Lost, Stolen or Misplaced Securities: The Exchange maintains the database on all the shares have been reported as lost, stolen, duplicate etc by the companies/registrar. The information available through the database is the time relevant thus the database is modified on a regular basis and is downloaded by the members through BOLT on weekly basis. This database is also provided to the clearing house. The member brokers can thus reduce the instance of delivery of shares that have been reported by the company as bad delivery by checking all the deliveries in their office with the database provided. The exchange has designed and developed a software module for the above for the benefic of the members. The clearing house also uses the database. At the time of pay-in the members of the Exchange are required to submit the details of the shares being deposited in the pay-in a softcopy in a prescribed format. These details are checked against the database and a report is generated in case a mismatch is found. Such shares are then reported as bad delivery in the Exchange. Further follow-up is done with the delivery broker and they are directed to lodge a police complaint against the client introducing the stolen shares.

Client Caution Database:

The risk management department in conjunction with the bad delivery cell of the Exchange has designed and developed a client database. All member brokers whose clients/sub-brokers has introduced fake/forged shares are required to lodge a fir/police complaint against the client and also report the same to the Exchange. The information of such clients is called for in a prescribed format. As per the scheme the member have to collect detailed information about the clients. These details are incorporated in the database, which is downloaded to the members, as a precautionary measure. The member Brokers at the tine of admitting new clients can refer to the client caution. database for further verification.

35

Verification of Shares at Member Office:

The Risk Management Committee has outlined a process of minimizing the risk arising out of fake/forged/stolen shares introduced by the clients of the member brokers. As per the procedure outlined issued by the exchange, in case the transaction in a script with one particular client in a settlement exceeds Rs.I0 lakh then the member brokers are required to send the photocopies of the transfer-deeds and the share certificates to the company/registrar for verification of the material particulars. The members can select a random sample for the same from the lot. A similar procedure should also be followed in case the shares worth more than Rs.10 lakh are received from the Clearing House during pay-out in one scrip. The basis idea behind the introduction of this procedure is to prevent Fake/Forged/Stolen shares from being introduced in the market. The Exchange issued a notice outlining the procedure to be followed. The above procedure is an important Risk Management Tool especially where there exist a large volume of deliveries. Inspection: The department is carrying out inspection of the member brokers records as regards compliance of risk management procedures. Insurance- As Risk Transfer: The Exchange presently has in place insurance policies to protect itself in the event of losses on account of, damage to Computer systems and a comprehensive policy which covers risk faced by the exchange, its members brokers and the clearing House. The Integration Comprehensive Insurance Policy: It is a unique and the first of risk kind of policy in India. This policy insures the risk pertaining to all the member 'brokers, the Exchange and clearing house. The policy covers the' members of cash segment, derivatives segments and internet trading. The policy has been operational for the last six years the policy period is from July to Jun. The current policy for the year 2005-06 provides a basic cover of 50 million for the various, risks faced by members. An additional cover of Rs.5 million each has also been taken for the

36

Exchange and clearing house as to insure only loses on account of physical damage of securities, theft etc. Along with the proactive risk control measures, this insurance will go along way in minimizing loses incurred by the member brokers, clearing house and the Exchange. The risks covered under the basic cover of policy are detailed as below: Lose of members on the account of Infidelity of employees. Lose to the member on account of fake/forged/stolen shares being introduced by his client. Direct financial loss suffered by the member broker on account of physical loss, destruction, theft or damage to securities & cash. Loss on account of securities lost in transit. Loss suffered on account of incomplete transaction. Loss sustained as Final receiving member en Exchange on account of the introducing members. Loss on account of errors & omissions. Director's & official liability cover.

Trade Guarantee Fund: (TGFs) While approving the proposal of the Exchange "for expansion of BOLT terminals to cities than Mumbai, SEBI had, interalia, stipulated that the exchange should introduce a system of guarantee settlement of traders or set up a clearing corporation to ensure that market equilibrium is not disturbed in case of payment default by members. The exchange has accordingly formulated a scheme to guarantee settlement of bonafide transaction of members which form part of the settlement system. The exchange has constituted a trade guarantee fund with the following objectives. A. To guarantee settlement of bonafide transaction of members of the exchange inter-se which from part of the stock exchange settlement system, so as to ensure timely completion of contracts and thereby protect the interest of investors and the members of the exchange.

37

B. To inculcate confidence in the minds of secondary market participants generally and global investor particularly to attract larger number of domestic and international players in capital market. C. To protect the interest of investors and to promote the development of and regulation of secondary market. The scheme has come into force with effect from May 12, 1997. The scheme is managed by the Defaulter's committee, which IS Standing Committee constituted by the exchange, the constitution of which is approved by SEBI. The declaration of a member, who is. unable to meet his requirement dues, as a defaulter is pre-conditions for invoking the provision of this scheme. The exchange has contributed an initial sum of Rs.60 crores to the corpus of the fund. All active members, are required to make an initial contribution of Rs.10,000/- Cash to the Fund and also contribute Rs.0.25 for every Rs.l lakh of gross in turnover in all groups of scripts by continuous contribution 'which is debited to their settlement account in 'each statement. The active members are required to maintain a base minimum capital of Rs.l 0 lakh each with the exchange. This contribution has also been transferred to the fund and has been treated as refundable contribution of members. Each member is also required to provide to the fund, a bar-k guarantee of Rs.10 lakh from a scheduled commercial or co-operative bank as an additional contribution of the funds. Thus, the initial contribution to the TGF was about Rs.170 crores has been contributed by the exchange as well as the member in manner discussed above. The total corpus of tin fund as on the August 31, 2001 was Rs.981crores. The creation of TGP has eliminated counter party risk so that if a member is declared a defaulter, other members do not suffer as was the case in past.

Broker's contingency fund (BCF): The exchange has set-up Q broker's contingency fund with a view: 1. To make temporary refundable advance to the members facing temporary financial missmatch as a result of which they may not be in a Position to meet thire financial obligations to the exchanges in time.

38

2. To protect the interest of the investor's dealing through members of the Exchange by ensuring timely completion of settlement. 3. To in calculate confidence in the minds of investors regarding safely of bonafide transactions entered into on the Exchange. The Scheme has come into force with effect from July 21, 1997. The fund is managed by committee comprising of the President, Executive Director, vice President, Honorary Treasurer and three non-elected directors. The exchange has contributed a sum of Rs.9.51 crores to the corpus of fund. All the active members are required to make initial non-refundable contribution of Rs 1000/- to the fund and also contribute Rs.0.125 for everyone lakh rupees of gross turnover by way of continuous contribution with is debited to there settlement account in each settlement. The members are eligible to get advances from the fund upto a maximum of Rs.25 lakh @ 21 per annum. The corpus of fund as on August 31, 2001 was Rs.31 crores. Thus, by creation of the BCF, it has been ensured that the settlement cycles at the Exchange are not effected due to the temporary financial problems faced by the members. Thus, it is presumed, that this will help in increasing the credibility of the stock Exchange settlement system. Market wide circuit Breakers: It would be noted that earlier circuit filters at individual scrip level used to restrict the excessive moments of indices as well. In the revised scenario, where there are no circuit filter on the scrip forming parts of popular indices like SENSEX and NIFTY there is need to contain such excessive market moments. Therefore, larder to contain large market moments, SEBI has mandated that the market wide circuit breakers (MV/CB) which at 1015% of the moments in either BSE SENSEX or NSC NIFTY which ever is reached earlier would be applicable. This would provide cooling period to the market participants and assimilate and re-act to the market moments.' The trading halt on the stock exchange would take place as under: In case of 10% moment of either index, there would be a 1 hour market half if the moment take place before 1 pm .

39

In case the moment takes place at or after 1.00 pm but before 2.30 pill there will be trading half for 1/2 hour. In case the moment takes places at or after 2.30 pm there will be no trading halt at the 10% level and the market will continue trading.

In case of a 15% movement of either index, there will be 2 hour market halt if the movement takes place before 1.1)0 pm. If the 15% trigger is reached on or after 1.00 pm but before 2:00 pm there will be 1 hour halt. If the 15% trigger is reacted on or after 2.00 pm, the trading will halt for the remainder of the day. In case of a 20% movement of the either index, the trading will halt for the remainder of day. The above percentage would be translated into absolute points of the index variations on quarterly bases. The above points are revised at the end of each quarter. The market wide circuit breakers at the national level have been introduced in the Indian market for the first time. This is on the lines of the system prevailing in the US market. As broker do' all these transaction so either the seller or the buyer broker will the defaulter one. So let's see that \V hat type of risk may be involved in stock trading. 1. Buyer broker may fail to submit to deposit money to share bank. 2. Seller broker may fail to submit shares to bank. Other than these' risks some more risks are also involved in stock trading. I. INSIDER TRADING: This type of trading is done when one or more broker get the inside news of company, which is not publicly disclosed. For example, declaration of higher dividend. It helps broker to make manipulation in shares. II. MANIPULATION TO HIKE THE PRICES: Some time manipulations are done to hike the prices of shares. For example a company has paid up capital of one lakh shares of Rs.I0 each that is Rs.l0 lakh. Now any broker or that company will purchase a large part of the shares to show publicly that there is some profit. But in real sense there is nothing of that sort. Public thinks that there is some profit and start purchasing shares. In this way fiction rise in prices take place. So to manage all these risks, stock exchange has such type of working process which helps to eliminates all the above said risks, it ensures: 1. In time payment to seller. 2. In time delivery to buyers

40

3. Fair deal among brokers

3.2 RISK MANAGEMENT SYSTEM AT LSE SECURITIES LTD.

As it is already explained that every stock Exchange has its own risks management process. Some as LSE securities ltd. has established various risk managing department which ensure the fair deal among brokers as per the rules prescribed by SEBI. Main department to manage the risks are: 1. Margin section 2. Surveillance 3. Clearing house 3.2.1. MARGIN SECTION Introduction: Margin section is the backbone of stock exchange it is the main department, which control the activities of the brokers. Margin section is one of the most important sections of the Ludhiana stock Exchange. It is necessary for every stock Exchange to maintain section in the Exchange. The basic aim of the margin section is to collect different type of margin from the brokers as per the guidelines given by SEBI. Margins are section deposits levied by an Exchange on its brokers. These margins prevent the defaults from occurring in the market and control their adverse impact if they still take place. In case of default by the broker the client and other member can claim for compensation out of the deposits given as security by particular brokers. On the other hand this section also keep track on the total volume as scrips traded by a broker, either by the way of sale or a purchase in the particular settlement period. The rationale behind establishing this section is as follows: To prevent the broker from indulging in excessive speculative trading.

41

To keep track of broker who are likely to default in future and prevent them from creating such a situation.

FUNCTION OF MARGlN SECTION 1. To collect the following from the broker BMC ABMC

2. Collection and release of the margin. COLLECTION OF CAPITAL BMC: The main function of margin section is to collect the BMC from the member brokers up to the July 1st, 1999 the minimum limit of, the capital in the stock Exchange was 3.75 lacs in scrips/BG and FD. This limit is to be change according to guidelines of the SEBL It is mandatory for the stock exchange to follow the guidelines of the SEBI. Because the SEBI is regulatory authority of the stock exchange. Limit of the BMC (BASE MINIMUM CAPITAL) Up to year 1998 Rs 4.00lakh Rs.3.00lakh in from of scrip's/FDl Bank Up to 1st July, 1999 Rs.3.75lakh in Scrips/BG/FD Rs. 1.00Lakh in cash From 1st July, 1999 Rs. 75lakh in Scrips/H GIFD RS.1.25 in cash Present limit Rs. 50,000 cash & 50,000 FD/ror scrip. Before 1 st July 1999 SEBI was forcing the Ludhiana stock exchange to increase the BMC to Rs.5.00 lakh because the member brokers of the DSN, NSE, BSE are under the obligation of play the amount because it is the minimum limit there. But the member brokers in Ludhiana Stock Exchange are opposing the aforesaid because it will increase the burden on them and it will also effect their liquidity position.

42

Out of the total BMC some part is deposited in form of cash and some in form of FD and Bank Guarantee. The FD is to be formed in the Joint Venture on the member broker and the Ludhiana by the Member Broker. The. validity of the bank guarantee is six months after that accounts department has to get in renewed it in the name of Ludhiana Stock Exchange. ABMC(ADDITIONAL BASE MINIMUM CAPITAL) Additional Base Minimum capital is paid by the member broke only when demanded by the margin section for the increase of the trading limits. The trading limit in the stock exchange in respect of the BMC is: 8.5 times in NET 6 time in the GROSS This limit is applicable only upto the 1st July, 1999 The limit from the I" July, 1999 towards is 6 time in the NET 25 times in the GROSS Present limits 6 times in NET 25 times in GROSS Present Limits 8.5 in NET No limit in gross In the above quotation the meaning of the NET and GROSS are following: NET: Actual outstanding position at the end of the day. The member broker purchased the shares of Rs 5,00,000 and sold the shares of Rs.5,00,000 his NET outstanding position is NIL because his account doesn't bear any balance amount. GROSS: Total amount of trading at the end of the day. The member broker is not allowed to trade more than the GROSS limit, Without the payment of ADDITIONAL CAPITAL the maximum trading limit of a member broker is 25 times of his BMC. eg. If the BMC paid by him is Rs.5,00,000. Then the GROSS Limit of his trading is Rs.l, 25,00,000.

43

ADDITIONAL CAPITAL: In the case when member broker want to increase his trading limit. He has submitted an additional capital to his account in the margin section. The additional capital can be paid either in the CASH/FD/BANK GUARANTEE/SCRIP. Receipt of the margin The function for which the margin section is formed is to collect the margin from the member broker. The marginsection is the only section, which is authorized by SEBI to receive the margins from the member brokers. There are many types of margins collected by the margin section. in narrow sense the margins are divided in two categories. 1. 2. Fixed Margin Daily Margin

FIXED MARGIN It is type of permanent security, which is compulsory to be deposited in the stock Exchange. Without this the member broker is not allowed to work in the stock exchange. The amount is not refundable until unless he resigns from being a member broker. DAILY MARGIN Daily margin are imposed on the member broker regularly on the base of the trading made by them in day to day business. There are collected by the stock exchange daily and the detail about amount, which is too received, is given to the member broker in advance by the margin section. IN BROADER SENSE THE MARGINS ARE DIVIDED IN MANY CATEGORIES Categorization of stock for imposition of margin.

44

The stock which have traded at least 80% of the day for the previous 18 months shell constitute the Group I and Group II. Out of the scrip identified above, the scrip's having mean impact cost of less then or equal to 1 % shall be categorized under group I and the scrip's where the impact cost is more than I, shell be categorized under group II. Special margin : This margin is charged only I special and abnormal cases at present this margin is charged by BSE at a very few scripts. Exposure margin: This margin is charged from brokers at their net position at the evening time of the day. The present rate of this margin is 5% Mark to Market Loss Margin (MTML): This margin is collected from brokers on the difference in the rates of scripts. For e.g If a broker purchases certain scripts for Rs.100 in the morning and the rate of the script becomes Rs.80 in evening then this margin is charged from broker A in the morning of next day. Collection of Margin. The margins will be collected on T + 1 Basis Membership in NSE/BSE

Required allow the exchanges to know that a worst-case one-day move might be for any open futures position (long or short). Risk analysis is done also for up and down changes in volatility a risk array is in fact created for each future option strike price and future contract. A worst-case risk arrays for a short cell, for example would be futures limit (extreme move up) and volatility up. Obviously, a short call will suffer from losses from an extreme (limit) move up of the underlying futures and a rise in volatility. SPAN margin requirement are determined by a calculation of possible of losses. The uniqueness of SPAM is that when establishing margin requirement, it takes into account the entire portfolio, not just the last trade. At present this system is not in use.

45

MARGIN PAYMENT & PAYOUT

Payment of margin The daily margin for roiling settlement is payable on T + 1 day. The margin is collected together for all settlements for all clients. Member is responsible to i compute margin payable and to make suitable margin payments on the due date. Members are required to deposit the margin money due in cash, cheques or FDRs, rounded off to the next higher multiple of Rs.I0,000/-. Payout of margin The margins deposited in cash on a given day may, if NSCCL choose not to exercise its lien, be returned to the member on the subsequent day after adjustment for margin, additional base capital and any other funds dues. Failure to pay margins Non-payment of either the whole 'or part of the margin amount due will be treated as a violation of the Bye laws of the clearing corporation and will attract penal charge @0.09% per day of the amount not paid throughout the period of non-payment. In case a member has a margin shortage of Rs.l0 lacs or above for more then 10 occasion in the past 4, weeks, the gross multiple of the member will be reduced to one level at time of reactivation of their trading terminals as given under: SLAB Full exposure MULTIPLE 8.50 times

If there is no margin shortage for the next 1 week of Rs.10 lacs or more, the exposure limits shall be restored to the previous levels. If there is margin shortage for more than Rs.5 lakh, the trading facility of the member will be withdrawn immediately, However in case of a shortage of les s than Rs.5 lakh, the trading facility of the member will be withdrawn only if the member has a shortage for 3 times or more in last 6 instances

46

of margin payment. In addition NSCCL may, within such time as it me/ay deem fit, advice the exchange to withdraw any or all the membership rights of the member including the withdrawal of trading facilities 'without any notice. In the event of withdrawal of trading facilities, the outstanding positions of the member may be closed out, to the extent possible, forthwith or any time thereafter by NSCCL, as its discretion by placing at the Exchange, Counter order in respect of the outstanding position of the member, without any notice to the member, and such action shall be final and binding on the member.

Margins based on turnover & exposure limit (Initial margins) Members are subject to intra-day trading limits. Gross turnover (but sell) intraday of the member is unlimited (cash deposit and other deposits in the form of securities or bank guarantees with NSCCL and NSE). Members violating the intra-day gross turnover limit at any time on any trading day are not being permitted to Jade forthwith. Member's trading facility is restored frem the next trading day with a reduced intra-day turnover limit of 20 times the base capital till deposits in the form of additional deposits (additional base capital) is deposited with NSCCL. Members are given a maximum of 15 days from the date of the violation to bring in additional capital within the stipulation time; the reduce turnover limit of 20 times the base capital would 'i be applicable for a period of one month from the last date for providing the margin deposits. Upon the member violating the reduced intra-day turnover I limit, the above-mentioned provisions apply and, the intra-day turnover limit will be further reduced to 15 times. Upon subsequent violations, the intra-day turnover limit will be further reduced from 15 times to 10 times and then from 10 times to 5 times the base capital. Members are not permitted to trade if any subsequent violation occurs till the required additional deposit is brought in.

47

Gross Exposure Limits

Members are also subject to gross exposure limits. Gross exposure for a member, across all securities in rolling statement, is computed as absolute (but value-sell value) i.e. ignoring +ve and -ve signs, across all open settlements. Open settlement would be all those settlement for which trading has commenced and for which settlement paying is not yet completed. The total gross exposure fora member on any given day would be the sum total of the gross. Exposure computed across all the securities in which a member has an open position. Gross exposure limit would be: Total base capital Upto Rs. 1crore > Rs. 1crore Gross exposure limit 8.5times the total base capital 8.5crore +10 times total base capital in excess of Rs. 1crore. Or any such lower limits as applicable to the members. The total base capital being the base minimum capital (cash deposit and security deposit) and additional deposits. not used towards margin, :1: the nature of securities, bank guarantee, FDR, or cash with NSCCL and NSE. Security-wise Differential Exposure Limits In case of securities that are' traded in the Rolling settlement (Type 'N' and security series 'EQ') the GE multiple for cash security areas under:

Groups (securities covered) Group I Group Il Group III .

Covered multiple 1.25 times 2 times 8.5 times

48

It is clarified that while completing the gross exposure at any time for a particular trading day, for the purpose of the above limit, members are required to add the net outstanding position of the previous settlement period to the cumulative net outstanding position as of that particular trading day until the securities pay in day for the previous settlement period. Member exceeding the gross exposure limit are no permitted to trade with immediate effect and arc not permitted to do so until the cumulative gross exposure is reduced to below the gross exposure limit (as defined above or any such lower limits as applicable to the members) or they increase their limit by providing additional base capital. Members who desire to reduce their gross 'exposure may submit their order entry requirement as per the prescribed format. If the members desire to increase their limits additional deposits by way to cash, bank guarantee or fixed deposit receipt (FDR) have to be submitted to NSCCL. Additional deposits by way of securities in Electronic from (demat securities) may be deposited as per procedure. The additional deposits of the member are used first for adjustment against gross exposure of the member. After such adjustments, the surplus additional deposits, if any, excluding deposits in the form of securities, is utilized for meeting margin requirement. Violation Charges A penalty of Rs.5,000/- is levied for each violation of gross exposure limit and intra day turnover limits, which shall be paid by next day. The penalty is debited to the clearing account of the member. Non-payment of penalty in time will attract penal interest of 15 basis points per day till the date of payment. In case of second an subsequent violation during the day the penalty will be in multiples of Rs.5000/- for each such instance. (for example in case of second violation for the day the penalty levied withRs.I0000/ Rs.15000/- for third instances and so on). In respect of violation of stipulation limits on more than one occasion on the same day, each violation would be treated as a separate instance for purpose of calculation of penalty. The penalty as indicate above would be changed to the members irrespective of whether brings in additional capital subsequently,

Exemption forInstitutional deals

49

While computing margins, Institutional deals are excluded. Deals executed on behalf of the following entries are considered as institutional deals: 1. 2. 3. Financial Institutions SEBI registered F I I Banks

SEBI registered Mutual funds deals are identified by the use of the participant code in the trades reported on the NSE. Deals entered into on behalf of custodial participants i.e. carrying custodial participant code are considered as institutional deals unless not confirmed by the respective custodians in which case the deals shall a tract margins. Noncustodial Institutional-deals are identified by the use of the participant code NCIT. The NCIT deals will be exempted for margin purposes (however, VAR based margin which is charged on this case also) and the settlement obligation will remain with TM clearing member. Non-custodial Institutional deals, which are not marked as NCIT at the time of order entity, will not be exempted. All TM clearing members are required to provide details - of the contract notes for all Non-custodial Institutional trades through a file upload as per the procedure. Pay-in of funds/securities prior to scheduled pay-in day. The relevant authority may require members to pay-in funds and securities prior to the scheduled pay-in day for funds and the securities. The relevant authority would determine from time to time, the members who would required to pay-in funds and securities prior to the pay-in day. The relevant authority would also determine security and funds which would be required to be pay-in and the date by which such pay-in shall be made by respective members. The value of such prior pay-in funds and securities will not be reduced from the cumulative net position of the member for the purpose of gross expenditure reduction. There will be no margin exemption available for such pay-in of funds and securities. However, the exposure limits in B l, T, TS group of scrips is proposed to be abolished in view of upfront collection of VAR margin w.e.f. May 30, 2005. Further, the special ad-hoc margin levied on excess positions in Bl, B2, T and TS group of scrips will be abolished w.e.f. May 30, 2005, in View of implementation of upfront collection of VAR. margin.

50

Exposure limit in Z group of securities in a single rolling settlement is 1 given below: The member are not allowed to have net outstanding purchase or sale position beyond Rs.25lakhs in a single scrip and all Z group scrips beyond Rs.100lakhs in a single Roiling Settlement. The above limits are monitored on-line and exception reports are scrutinized for members exceeding the above limits.

Pay-in liabilities of members above a threshold limit: The pay-in liability of members above a certain threshold limit is monitored with respect to the pay-in amount of the members, the members capital, the margin cover available to the Exchange against the members pay-in liability etc. In case of inadequate margin cover, the reasons of the pay-in are ascertained. If warranted, advance pay-in is called to ensure that pay-in is completed smoothly. Verification of institutional trade The institutional trades executed by the member-brokers are verified to ascertain the genuineness of trades. Exemption upon delivery of securities If a member deli very securities prior to the securities pay in day, the margin payable by the member will be recomputed after considering the above pay-in of securities. The margin benefits on account of early pay-in (EPI) of securities shall be given to the extent of net delivery position across all client of the member. The EPI would be allocated to client having net deliverable position, on a random bases, till such time that the system is developed to provide the EPI benefits on the client bases however, the members are required to ensure to pass on appropriate early pay-in benefits of margin/exposures to the relevant client until the above system is in place. The value of the advances pay-in made is reduced from the cumulative net outstanding sale position of the member for the purpose of gross exposure limits.

51

Members may note that early paying of securities only up to the working day prior to the scheduled paying day shall be considered for the purpose of early pay-in benefits. In case any member makes early pay-in one the schedules day of pay-in for the settlement, no benefit will be given to the member. Such early pay-in shall not be adjusted against the settlement pay-in obligation and it would be treated as short delivery. Members are there for alerted to ensure that no early pay-in is made on the scheduled day of settlement pay-in.

3.2.2 SURVEILLANCE AT EXCHANGE

52

The main objective of he Surveillance function of the Exchange is to promote market integrity in two ways, first by monitoring price and volume movements (volatility) as well as by detecting potential market abuses at a nascent stage, with a view to minimizing the ability of the market participants, both in Cash and Derivative market, to influence the pride of the scrip/series in the absence of any meaningful information, and second, by managing default risk by taking necessary timely actions. All the instruments traded in the equity segment of Cash and Derivative market come under the Surveillance umbrella of exchange. Surveillance activities at the Exchange are divided broadly into three major segments, namely, price, monitoring, position monitoring and Investigations. Price monitories are mainly related to the price movement abnormal fluctuation in prices or volumes etc. whereas the position monitoring relates mainly to abnormal positions of members, etc. in order to manage default risk. The investigation cell conducts snap investigations/examinations/detailed investigations in scrips where manipulation is suspected. MARKET ABUSE Price Monitoring On-line surveillance Off-line surveillance Derivative market surveillance Surveillance actions Pro-active measures Position monitoring Trading in B 1, R2 and Z group scrips Pay-in liabilities above a Threshold limit Verification of Institutional Trades Scrutiny Market intelligence

- Rumor verification

53

MARKET ABUSE Market abuse is a broad term, which includes abnormal price/volume movement, artificial transactions, false or misleading impressions, insider trading etc. In order to detect aberrant behavior/movement, it is necessary to know the normal market behavior. The department uses various tools to determine normal and abnormal market behavior. The necessary actions are initiated like imposition of special margin, reduction of circuit filters, trade-to-trade settlement, suspensions, de-activation of terminals etc to control abnormal market behavior. The department carries out investigations, if necessary, based on the preliminary examination/analysis and suitable actions are taken against members involved based on the investigation.

The detailed explanation of the various Surveillance activities is given as under: The department conducts in-depth investigations based on preliminary enquiries/analysis made into trading of the scrip as also at the instance of SEBI. In case irregularities observed, necessary actions arc initiated and/or investigation case forwarded to SEBI, if necessary. Price Monitoring The functioning of the Price Monitoring IS broadly divided into following activates. On-line surveillance Off-line- surveillance Derivative market surveillance Surveillance actions Rumor verification

ONLINE SURVEILLANCE
One of the most important tools of the Surveillance is the On-line Real Time Surveillance system which was commissioned on July 15, 1999 with main objectives of detecting potential market abuses at a. nascent stage to reduce the ability of the market participants to unduly influence the price and volumes of the scrips traded at the Exchange, improve the risk management system and strengthen the self regulatory mechanism at the exchange. 54

The system has a facility generate the alerts on-line, in real time, based on certain preset parameters like price and volume variations in scrips, members taking unduly large positions not commensurate with their financial position or having large concentrated position(s) in one or few scrips etc. An alert is a measure of abnormal behavior. An alert occur in the Surveillance system when a metric behaves significantly differently from its benchmark. The alerts generated by the system are analyzed and corrective action based on preliminary investigations is taken in such cases. The system also provides facility to access trades and other of members. OFF-LINE SURVEILLANCE The off-line Surveillance system comprises of the various reports based on different parameters and securities thereof. % change in prices over a week/fortnight/month Top N scrips by Turnover Trading in infrequently traded scrips Scrips hitting new High/low Scrips picked up for rumor verification. Scrips picked up based on references received including investor complaints.

The surveillance actions or investigations are initiated in the scrips identified from me above-stated reports. MARKET WIDE CIRCUIT BREAKERS In addition to the above stated price banks on individual scrips, SEBI has decided to implement index based market wide circuit breakers system, w.e.f. July 02, 2001. The circuit breakers are applicable at three stages of the index movement either way at 10%, 15% and 20%. These circuit breakers will bring about a coordinated trading halt in both Equity and Derivative market. The market wide circuit breakers can be triggered by movement of either BSE SENSEX or the NSE NIFTY, which ever is breached earlier. The percentage movements are calculated on the closing index value of the quarter. These percentages are translated into absolute points of index variation (rounded off to the nearest 25 points in case of SENSEX). At the 55

end of each quarter, these, absolute points of index variations are revised and made applicable for the next quarter. The absolute points of SENSEX variation triggering market wide circuit breaker for a specified time period for any day of the quarter is informed by the Exchange through Press Release from time to time. Trade to Trade If a scrip is shifted on a Trade-to trade settlement basis, selling/buying of shares in that scrip would result into giving/taking delivery of shares at the gross level and no intra day/settlement netting off/square; off facility would be permitted. The scrips which \form part of 'Z group are compulsorily settled on a trade to trade settlement basis. In addition to that Surveillance department transfers various scrips from time to time on a trade to trade settlement basis to contain the excessive volatility and / or abnormal / volumes in the scrips. Suspension of a scrip The scrips are suspended by the Surveillance department in the exceptional cases pending investigation or if the same scrip is suspended by any other Stock Exchange as a Surveillance action. Warning to Members The department may issue verbal/written warning to member/s when market manipulation in the scrip is suspected. Imposition of penalty/suspension de-activation of terminals The department imposes penalty or deactivate Bolt/Neat terminals or suspend the member/s who are involved in market manipulation, based on the input/evidence available from investigation report or as and when directed by SEBI. RUMOR VERIFICATION The following steps are involved in Rumor verification process: Surveillance department liaises with Compliance Officers of companies to obtain comments of the company or various price sensitive corporate news items appearing in the selected new papers. Comments received from the companies are disseminated to the market by way of BOLT Ticker and / Notices in the Bulletin. 56

Show cause notices are issued to companies which do not reply promptly to the Exchange.

PRO-ACTIVE MEASURES The Department compiled and disseminated a list of companies who have changed their names to suggest that their business interest is in the software industry. Compiled and disseminated by the department.

POSITION MONITORING Members wishing to take position, in excess of Rs.200 lakhs are required to obtain prior permission of the Surveillance Department and are subjected to payment of additional margin, as may be prescribed. Scrutiny The Department also carries out, wherever considered necessary, preliminary investigation of certain dealing to verify irregularities. Further action, viz., referring the case for detailed investigations, referring the cases to the Disciplinary Action Committee (DAC) of the Exchange for taking disciplinary action against members, referring cases to the Scrutiny Committee of the Exchange to re-assess the financial soundness of the members etc. are taken depending on the findings of preliminary investigations .

Market intelligence The rumors floating In the market are verified with the data available with the Exchange Newspapers. Televisions news channels and Reuters are referred to ascertain the national and global factors affecting the market sentiments. This enables the Exchange to avert market problems before it causes a serious damage. On assessment of the' market risk, decisions to call ad-hoc margins/early pay-in advising the member to limit his business, summoning him for explanation, placing trading restriction, deactivation of BOLT TWS etc. are taken. 3.2.3 CLEARING HOUSE This is the third important department for management of risk in LSE securities ltd. Its main function is to settled' fair deal between buyer and seller. Clearing house takes care of 57

pay 'in and pay of securities and funds as well as of bad delivery of securities. Their functions are classified as follows: 1. Settlement Cycle: There is rolling settlement cycle w.e.f; 1st April, 2002 which is prevailing at LSE and commenced on daily basis. At the end of the settlement date, members are given scrip wise delivery not1es and to deposit it with clearing house as per following. T = Trading Period (say Monday) T+2 = Payout of securities and funds on Wednesday by 4:00 pm T+2 = Pay in of securities and funds on Wednesday by 10:30 am T +3= Auction of undelivered securities T +5 = Pay in and payout of undelivered securities T+5 = Close out 2. ROLLING SETTLEMENT: There is a rolling settlement cycle prevailing at the LSE on T +3 system basis since 01-04-2002. Currently T+2 systems are prevailing. At the end of each settlement, members are given scrip wise delivery notes. For example, if a member purchase share on Monday then he has to pay in funds on Wednesday if the purchase is made on Friday then he has to provide funds on Monday because on Saturday and Sunday, the trading in every stock exchange of India are closed. The same procedure is applied in case of sal ~ of shares. 3. AUCTIONS: As per rolling settlement pay-in, pay-out completed, some members, make fault for which the clearing house has the responsibility to settle the pending securities. In order to perform the responsibility of the clearing house conducts an auction on Thursday (T +3) of pending securities. In the trading of auction price of the securities may be 20% high/less of closing price of that day. 4. CLOSING OF SETTLEMENT SCHEDULE: After auction of securities, if

still there is not solicitor (seller) on auction session, in that case the script is closed out as monetary benefits to the initiator (buyer against the fault of the seller (defaulter) of securities.

58

Clearing: Clearing is the process of determination of obligations, after which the obligations are discharged by settlement. NSCCL has two categories of clearing members: trading, members and custodians. The trading members can pass it's obligation to the custodians if the custodian confirms the same to NSCCL. All the 'traders whose obligation the trading member proposes to pass on to the custodian are forwarded to the custodian by the NSCCL for their confirmation. The custodian is required to confirm these trades on T + 1 basis. Once the above activities are completed, NSCCL starts its function of clearing. It uses the concept of multi-lateral netting for determining the obligations of counter parties. Accordingly, a clearing member would either have pay in or pay out obligation for funds and securities separately. Thus, members pay in and pay out obligations for funds and securities are determined latest by T+1 and are forwarded to them so that they can settle their obligation on the settlement day (T +2). Cleared and non cleared deals NSCCL carries out the clearing and settlement of traders executed in the following sub-segments of Equities segment. 1. All traders executed in the Book entry/Rolling segment. 2. All traders executed in the limited physical market segment. NSCCL does not undertake clearing and settlement deals executed in the Trade for trade sub segment of equities (Capital Market) segment of the exchange. A primary responsibility of settling these deals rests directly with the members and the Exchange only monitors the settlement. The parties are required to report settlement of these deals to the Exchange.

Clearing Mechanism Trades in rolling settlement are cleared and settled on netted basis. Trading and settlement period are specified by the exchange clearing corporation from time to time. Deals executed during, a particular period is netted at the end of that trading period and

59

settlement obligations for that settlement period are computed. A multilateral netting procedure is adopted to determine the net settlement obligations. In rolling settlement, each trading day is considered as a trading period and I trades are executed during the day are netted to obtain the net obligations for the day. Trade-for-trade deals and Limited Physical Market deals are settled on a trade for trade basis and settlement obligations arise out of every deal. Bad deliveries (in case of physical settlement) Bad deliveries (deliveries which are prima facie) are required to be reported to the clearing house within two days. Un-rectified bad are assigned to auction on next day. Company objections (in case of physical settlement) Company objections arise when on lodgment of the securities with the company/ share transfer agent (STA) for transfer, which are returned due to signature mismatch or for any other reason for which the transfer of security cannot be affected. The original selling CM is normally responsible for rectifying/replacing defective documents to the receiving CM as per pre notified schedule. The CM on who company objection of the objection (i.e. not as required under guideline No. 100 or 109 of SBI God Bad delivery guidelines), with in 7 days of lodgment against him. If the CM is unable to rectify/replace defective documents on or before 21 days, NSCCL conducts buying in auction for the non rectified Part of defective document on the next auction day. through the trading system of NSE. All objections, which are deemed, closed out on the auction say at the closing price on the auction day plus 20%. This amount is credited to the receiving member's account on the auction day payout.

60

CHAPTER-4

RESEARCH METHODOLOGY

61

4.1 OBJECTIVE OF THE STUDY

As the public is becoming more conscious about eagerly market and no of investors are increasing day by day. Investors deals with securities through brokers. This study will provide the knowledge about the stock exchange and its working. In this report I am covering the following topics: To know the risk management system of LSE Securities Ltd. To study the present margin study of LSE Securities. To know the brokers view regarding margins. To know about the risk1mallagement tools available.

Though the process of dematerialization has already begun, till such that it is made compulsory in all scripts, the risk of the trading in fake/forged shares and instances of loss of shares etc will continue to exit. The safe custody of these shares in physical form Exchange as well as in the members Brokers offices are of prime importance. The stock exchanges formation and in rising for the corporate sector. It provides place for sale and purchase of securities i.e. shares, bonds etc. It provides linkage between the savings of household sector and investment in corporate sector or economy.

62

4.2 Research Methodology

Introduction: Research in common parlance refers to a search for knowledge. One can also define research as a scientific and systematic search for pertinent information on a specific topic. Research is an academic activity; as such the term should be used on a technical sense. Research refers to: Defining and redefining problems Formulating hypothesis or suggested solutions Collecting, organizing and researching conclusions Making deductions and reaching conclusions At last carefully testing the conclusions to determine whether they fit the formulation hypothesis.

Definition of research
The advance learners Dictionary of current English lays down the meaning of research as a careful in investigation or inquiry especially through search for new facts in ant branch of knowledge Redman and Mory define research as a Systematized effort to gain new Knowledge RESEARCH PROCESS Research process consists of series of action or step necessary to effectively carry out research. These steps are to be followed in same sequence. These steps are as follows; Specifying research objective Preparing a list of needed information Designing the data collection project Organizing and carrying and reporting the findings

63

4.3 SOURCES OF DATA The sources of data means from where we have to get data. There are mainly two sources of data. These are; PRIMARY DATA: The primary data is that which is collected a fresh and for the first time and thus happens to be original in character. We collect primary data by face-to-face discussion, observation method and interview method through questionnaires. SECONDARY DATA: The Secondary data is that data which has already been collected by someone else and which have already been passed through statistics process. We collected data from LSE various journals and annual reports, internet, newspapers and books. Sample design The sample design is a definite plan for obtaining a sample from given population. It mainly refers to the technique and the procedure, which I have adopted in selection item for sampling. A sample design may as well lay down the number of items to be included in sample i.e the size of sample, universe sampling unit. Size of sample Sample size containing 25 brokers Universe It contains of all the brokers in stock exchange Sample unit A decision has to be taken concerning a sample unit before selecting. It comprise of LSE securities Ltd. Sample method The selection will be done on the basis of non-probability convenience sampling. In this method investigator is the important person. He picks up the sample according to his own convenience. Sample is not picked up with the help of scientific technique. There is

64

no preplanning for the preparation of a sample. Therefore it may be termed as unplanned method of sampling. 4.4 LIMITATIONS OF THE STUDY Following are the limitations of the study conducted by me in LSE: 1. The sample size is relatively small i.e out of 30 brokers only 25 brokers responded. 2. Some brokers do not take the questionnaire seriously because most of time they are busy in trading and large number of students call on them to get questionnaire filled. 3. There may be business in response by broker.

FINDINGS CHAPTER-5 AND ANALYSIS

65

5.1 DATA ANALYSIS

Working of LSE: Out of 25 brokers all brokers are satisfied from the working of stock Exchange and satisfy with the behavior of Margin section. TABLE 5.1 No. of Brokers 25 % Age 100

No. of Brokers

FIG 5.1

Showing %age income level of respondents

INTERPRETATION:- All the brokers are satisfied from the working of stock Exchange and satisfy with the behavior of Margin personals.

2. Types of margin impossed: 66

Out of 25 brokers, 6 brokers were given their view that margin were imposed on them are of 4 types, 10 were of the view that it of 2 types and view of 9 brokers were that it is of 5 types. TABLE NO. 5.2 No. of brokers 6 10 9 Type of margin 4 2 5 FIGURE 5.2 % Age 24% 40% 36%

24% 36%

40%

INTERPRETATION: Out of 25 brokers, 6 brokers were given their view that margin was imposed on them are of 4 types, 10 were of the view that it of 2 types and views of 9 brokers were that it is of 5 types.

3. A Margin affect on turnover: Out of 25 broker all were of the view that yes, turnover has been effected by margin.

67

TABLE NO. 3 No. of brokers 25 % Age 100%

4. Difference between Margin calculated and Margin imposed: Out of 25 brokers, 7 were of the view that there is no difference between margin calculated by them and margin imposed by margin section and 18 brokers were unable to answer the question. TABLE NO. 4 No. of brokers 18 7 Answer Unable to answer Yes FIGURE 5.4
% Age

% Age 72% 28%

28% 18 Unable to answer 7 Yes 72%

INTERPRETATION: 28% of the views that there is no difference between margin calculated by them and imposed by the section and 72% were unable to give answer.

5. Charge amount of margin: Out of 25 brokers 2 were of their view that less than 50% amount of margin is charged from their client, 6 brokers were charged 50% and 17 brokers charged more then50%. 68

TABLE NO.5 No. of brokers 2 6 17 Answer Less than 50% 50% More than 50% % Age 8% 24% 68%

FIGURE 5.5
% Age

8%

24%

2 Less than 50% 6 50% 17 More than 50%

68%

INTERPRETATION: Out of 25 brokers 8% were of their view that less than 50% amount of margin is charged from their client. 24% brokers were charged 50% and 68% brokers charged more then50%.

6. Type of margin should be deleted: Out of 25 brokers, 22 brokers have given their view that the entire margin should be deleted. 3 of the view VAR margin should be deleted. TABLE NO. 6 No. of brokers 22 Answer Delete All 69 % Age 88%

VAR

12%

FIGURE 5.6 % Age

12%

22 Delete All 3 VAR

88%

INTERPRETATION: Out of 25 brokers, 88% brokers have given their view that the entire margin should be deleted. 12% of the view VAR margin should be deleted.

7. Security for Margin: Out of 25 brokers, 10 brokers were in the favor of this question and remaining were against this. TABLE NO. 7 Answer % Age

70

Yes No

40% 60%

FIGURE 5.7
% Age

40% Yes No 60%

INTERPRETATION: 40% Brokers were agreed for the system of security of margin but 60% brokers were fully against this system.

8. Behavior of Personnel margin section TABLE NO. 8 Option Satisfactory Unsatisfactory No. of Brokers/Investors 20 5 % Age 80% 20%

71

FIGURE 5.8

No. of Brokers/Investors

No. of Brokers/Investor s, 20% Satisfactory Unsatisfactory No. of Brokers/Investor s, 80%

INTERPRETATION: 80% brokers are satisfied with the behavior of the personnel of margin section but 20% are unsatisfied with the margin section.

9. Performance of Margin Section. Out of 25 Brokers and Investors, 4 gave Excellent for toe performance, 8 gave their views that working of the LSE is good, 10 are in the favor of Average and 3 are in the favor of Poor working of margin section. TABLE NO. 9

72

Option Excellent Good Average Poor

No. of Brokers/Investors 4 8 10 3

% Age 16% 32% 40% 12%

FIGURE 5.9

12%

16%

Excellent Good Average 40% 32% Poor

INTERPRETATION: Out of 25 Brokers and Investors, 16% gave Excellent for toe performance, 32% gave their views that working of the LSE is good, 140% are in the favor of Average and 12% are in the favor of Poor working of margin section

10. Trading without Margin. Out of 25 Brokers, 4 are agree with this Question. Possibility is arrived on the part of lack of knowledge and 21 are disagree, margin is essential for trading. TABLE NO 10 Option Possible Impossible No. of Brokers/Investors 4 21 % Age 16% 84%

73

FIGURE 5.10

No. of Brokers/Investors

16%

Possible Impossible

84%

INTERPRETATION: Out of 25 Brokers, 16% brokers thinks that without margin trading is possible but 84% are not agree with the question that without margin trading is not possible.

74

FINDINGS
The result shows that in the LSE brokers are satisfied with the working of LSE and the various departments of LSE. To cover the risk in the trading the margin should be imposed on the brokers. And various types of margins are there. This is also comes that the margin affects on the turnover of the income of the brokers. Some of the brokers think that there is no major difference between Margin calculated by them and Margin imposed on them. It is also clear that they charge the different types of margin. There is no fixed rate to charge the margin. As we know that there are different types of margins like VAR margin, Mark to Mark loss margin etc. Most of the brokers wants to delete whole margin and some of the view that VAR margin should be deleted. There is also some security which they have to pay and some of the views that there should not be any kind of security and we know that security helps to reduce the risk so that it should be there. Without margin trading is not possible.

So these are the findings which helps to understand that how to cover the risk for trading

75

CONCLUSION AND RECOMMENDATIONS

76

CONCLUSIONS
I had undertaken training for 6 weeks of Ludhiana Stock Exchange Association Ltd. During this short stay, whatever I have learnt and have tried to present in this report is just equivalent to touch the top of the iceberg. I got all assistance to complete my work from the officers and other staff members. Whatever I observed during my training period, I am summarizing here. As there are many risks at stock exchange, to manage these risks a proper system is necessary. The risk management system at LSE is robust and strong. The various exposures limits like VAR margin, M'TML various exposures limits like intra-day & gross exposure limits and additional margin ensures the safety of transactions. There is possibility of margins delays, but not of margin defaults. If the system will prevail investor's confidence will increase otherwise they will be afraid of making investment in stock Market. Risk Management ensures the investor for:1. Payment of their funds. 2. Delivery of their shares 3. It controls volatility in market. 4. Liquidity in Market To control the risk margin, clearance and surveillance act as important functions.

77

RECOMMENDATIONS
Although, myself dont capable to suggesting something extraordinary to such well established Ludhiana Stock Exchange Limited. After undergoing training for a limited period of just 6 weeks. Yet I have tried to form opinion about the Risk Management System in LSE hope that these suggestions will help to reduce the Risk. DEMUTUALIZATION OF STOCK EXCHANGE Reduce the occurrence of insider trading and price ragging demutualization of Stock Exchange. Management of Exchange should be separated. Stock exchange should be managed by professional managers not by broker themselves. STRICT RULES BY SEBI The regulatory authority i.e, SEBI should make strict rules to punish the guilty. It will be helpful for the Stock Exchange which can be able to manage the risk of investor properly. It will be very helpful for the capital market of India.

78

BIBLIOGRAPHY
BOOKS
Sharma R.K Gupta, Shashi K. Gupta , Jaswant Banking & Foreign Trade Management, Kalyani Publishers. Kothari C.R, Research Methodology Methods and techniques By New Age Internationals (p) ltd.

MAGAZINES
LSE Profile Booklets issued by SEBI, BSE, NSE & LSE

WEBSITES
www.sebi.gov.in www.nseindia.com www.bseindia.com http://www.bseindia.com/about/risk_management.asp http://www.nseindia.com/content/nsccl/nsccl_eqmargins.htm http://www.bseindia.com/downloads/faqsrs.pdf http://www.emeraldinsight.com/Insight/ViewContentServlet? Filename=Published/EmeraldFullTextArticle/Articles/0090320401.html http://www.emeraldinsight.com/Insight/ViewContentServlet? Filename=Published/EmeraldFullTextArticle/Articles/0010350109.html http://www.emeraldinsight.com/Insight/ViewContentServlet? Filename=Published/EmeraldFullTextArticle/Articles/2850050105.html

79

http://www.emeraldinsight.com/Insight/ViewContentServlet? Filename=Published/EmeraldFullTextArticle/Articles/3000180203.html http://www.emeraldinsight.com/Insight/ViewContentServlet? Filename=Published/EmeraldFullTextArticle/Articles/0800220401.html http://www.emeraldinsight.com/Insight/searchResults.do? hdAction=select_pageNo&hdPageContext=loadSearchResultsArticles&hdBrowserId=833 053501&hdPrevAction=tab_ART&sortBy=REL&display=10&hdCurrPage=6

80

APPENDIX QUESTIONNAIRE
Name: ______________________ Address: _________________________________ _____________________________ Contact No. ___________________ Q1. Are you satisfied with the working of LSE? a) Yes b) No Q2. What type of the margin should be imposed? a) 2 b) 4 c) 5 d) other Q3. Does imposition of margin effects to your turnover? a) YES b) NO Q4. Have you ever found the difference between the actual margin and the margin imposed by the margin section? Please specify. a) Always b) Sometimes c) Never Q5. How much %age of margin imposed on brokers that are recovering from their clients? a) Less than 50% b) 50% c) More than 50% Q6. According to you which type of margin should be deleted from the following? a) VAR b) MTNL c) Both of them d) None of them Q7. Is there any security required other than margin? a) Yes b) No Q8. What is the Behavior of Personnel margin section? 81

a) Satisfactory b) Unsatisfactory Q9. What %age of your capital is blocked in margin? a) Less than 50% b) 50% c) More than 50% d) 100% Q10. What %age you charge from your client?

Q 11. What is the Performance of Margin Section? a) Excellent b) Good c) Average d) Poor Q12. Do frequent changes affect your working? a) Yes b) No Q13. According to you what changes should be made over the current system?

Q14. Is trading possible without margin? a) Yes b) No

82