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A Review

Indian

Securities

Market

Volume X 2007

This publication reviews the developments in the securities market in India

Online: www.nseindia.com

in the securities market in India Online: www.nseindia.com NANANANANATIONALTIONALTIONALTIONALTIONAL

NANANANANATIONALTIONALTIONALTIONALTIONAL STSTSTSTSTOCKOCKOCKOCKOCK EXEXEXEXEXCHANGECHANGECHANGECHANGECHANGE OFOFOFOFOF INDIAINDIAINDIAINDIAINDIA LIMITEDLIMITEDLIMITEDLIMITEDLIMITED

Indian Securities Market

A Review

Copyright © 2007 by National Stock Exchange of India Ltd. (NSE) Exchange Plaza, Bandra Kurla Complex Bandra (East), Mumbai 400 051 INDIA

All rights reserved. No part of this publication may be produced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise without the written permission of NSE, except as stated below. Single photocopies of single chapters may be made for private study or research. Illustrations and short extracts from the text of individual chapters may be copied provided that the source is acknowledged and NSE is notified.

This publication reviews the developments in the Indian Securities Market up to June 2007. The views expressed herein do not necessarily reflect those of NSE. NSE does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use.

Orders for this issue and the back issues may be sent to:

Corporate Communication National Stock Exchange of India Limited Exchange Plaza, Bandra Kurla Complex Bandra (East), Mumbai 400 051 INDIA

i

Contents ISMR
Contents
ISMR

Contents

Chapter 1

Securities Market in India - An Overview Introduction Market Segments International Scenario Share Holding Pattern Households Primary Market Secondary Market Derivatives Market Regulatory Framework Rules Regulations and Regulators Reforms in the Indian Securities Market Corporate Securities Market Government Securities Market Research in Securities Market Testing and Certification Role of NSE in Indian Securities Market Achievements/ Milestones Technology and Application Systems in NSE International Initiatives IOSCO Report WFE Derivatives Market Survey 2006

1

1

2

2

5

5

8

10

14

14

18

18

18

22

23

23

24

25

27

30

30

32

Chapter 2 Primary Market

35

 

Introduction

35

Policy developments

35

DIP Guidelines

36

Amendments to Clause 32 of Equity Listing Agreement

38

External Commercial Borrowings (ECB)

38

Review of External Commercial Borrowing (ECB) Policy

39

External Commercial Borrowings (ECB) 38 Review of External Commercial Borrowing (ECB) Policy 39 www.nseindia.com

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Contents

ii

Market Design

39

DIP Guidelines, 2000

40

Credit Rating

45

Merchant Banking

45

Demat Issues

46

Private Placement

46

Market Outcome

46

Public Issues

46

Euro Issues

49

Performance of IPOs

49

Book Building through Online IPO system

52

Debt Issues

52

Private Placement of Debt

52

Corporate Debt

55

Chapter 3 Collective Investment Vehicles Mutual funds Policy Developments Union Budget 2007-08 Investment by Mutual Funds in Overseas Securities Distribution of Mutual Fund Products by NBFCs Overseas Investment by Venture Capital Funds (VCFs) Guidelines on certain operational aspects of Gold Exchange Traded Funds (GETF) Common Key Personnel between Mutual Funds and Venture Capital Funds Rationalisation of Initial Issue Expenses and Dividend Distribution procedure for Mutual Funds Parking of Funds in Short Term Deposits of Scheduled Commercial Banks by Mutual Funds - Pending deployment Investment by Mutual Funds in ADRs/GDRs/Foreign Securities And Overseas Exchange Traded Funds Uniform Cut-off timings for applicability of Net Asset Value (NAV)

62

62

64

64

64

64

66

66

67

67

69

69

72

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Value (NAV) 62 62 64 64 64 64 66 66 67 67 69 69 72 www.nseindia.com

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Market Design Structure of MFs Types of MFs/Schemes Regulation of Funds Restrictions on Investment Disclosure of Performance Code of Conduct Advertisement Code by MFs Market Outcome Resource Mobilisation Assets under Management Index Funds Exchange Traded Funds Collective Investment Schemes Guidelines under CIS Regulations Venture Capital Funds Regulations for VCFs Investment Conditions & Restrictions

74

74

75

76

79

82

82

83

85

85

89

90

92

96

97

98

98

99

Chapter 4 Secondary Market - Trading Introduction Policy Developments Union Budget 2007-08 PAN for Securities Trading Standing Committee- Computerised Trading System Exclusive email ID for redressal of Investor Complaints Short Selling and Securities Lending and Borrowing Banks exposure to Capital Markets - Rationalisation of Norms Issue of American Depository Receipts (ADRs/GDRs)- Depository Agreement Market Design Stock Exchanges Membership Listing of Securities Trading Mechanism

101

101

101

101

102

103

104

104

107

112

112

112

114

115

117

101 101 102 103 104 104 107 112 112 112 114 115 117 www.nseindia.com

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Contents

iv

Trading Regulations Demat Trading Charges for Services Institutional Trades Index Services Market Outcome Turnover - Growth and Distribution World Traded Value Market Capitalisation- Growth and Distribution World Market Capitalisation Indices Volatility Returns in Indian Market Exchange Traded Funds Liquidity Institutional Transactions Takeovers

118

123

124

125

126

133

133

139

140

140

142

143

144

144

144

146

148

Chapter 5 Secondary Market - Clearing and Settlement

155

Clearing and Settlement Processes

155

Settlement Cycle

158

Risk Containment Measures

159

Capital Adequacy Requirements

159

On-line Monitoring

159

Inspection and Investigation

160

Margin Requirements

160

Index Based Market-wide Circuit Breakers

162

Settlement Process

162

Dematerialized settlement

163

Settlement Guarantee

163

Settlement Statistics

164

Close Out Facility

165

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Contents ISMR
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Chapter 6 Debt Market

167

Introduction

167

Policy Developments

168

Accounting and related aspects - When Issued transactions in

Central Government Securities

168

Corporate Bond Market - Launch of Reporting Platform

168

Secondary Market Transactions in Government Securities - Short Selling

170

Standing Liquidity Facilites for Banks and Primary Dealers

174

Mid Term Review of RBIs Annual Policy for 2006-07

175

Annual Policy Statement for 2007-08

175

Market design

176

Market Participants

176

Issuer of Securities

178

Primary Issuance Process

179

Government Securities

179

Treasury Bills

181

State Government Securities

181

Secondary

Market

181

Negotiated Dealing System

182

NDS-Order Matching System

182

Wholesale Debt Market Segment

183

Corporate Debt Market

184

Dematerialization of Debt Instruments

185

Constituent SGL accounts

186

Clearing and Settlement

186

Clearing Corporation of India Limited

186

Collateralized Borrowing and Lending Obligations

192

Market Outcome

192

Primary Market

192

Secondary Market

195

Zero Coupon Yield Curve

202

FIMMDA-NSE MIBID/MIBOR

204

192 Secondary Market 195 Zero Coupon Yield Curve 202 FIMMDA-NSE MIBID/MIBOR 204 www.nseindia.com

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Contents

vi

NSE VaR system

205

Bond Index

206

Chapter 7 Derivatives Market

218

Global Derivatives Market

219

Policy Developments

223

Procedure for re-introduction of derivatives contracts and modified Position limits

223

RBIs Report on the Internal Working Group of Currency Futures SEBI plans new products in F&O Segment

224

227

Market Design

234

Trading Mechanism

234

Membership Criteria

235

Contract Specification

236

Charges

236

Clearing and Settlement

237

Clearing Mechanism

237

Settlement Mechanism

238

Risk Management

241

Risk Containment Measures

242

Eligibility Criteria for selection of stocks and indices for

F&O Contracts

244

NSE-SPAN

247

Margins

248

Market Outcome

250

Trading Volumes

250

Open Interest

253

Implied Interest Rate

253

Implied Volatility

254

Settlement

255

Other Derivative Products

255

vii

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Chapter 8 Foreign Institutional Investors in India

271

Introduction

271

Policy Developments

274

Maintenance of Collateral by FIIs

274

FII Investment in Debt Securities

275

FII Investment in Upper Tier Instruments

275

FII Investment in Infrastructure Companies in securities market

276

Acceptance of Foreign Sovereign Securities as collateral

276

Other Initiatives

278

Market Design

278

Registration Process of FIIs

279

Investment Conditions and Restrictions for FIIs

280

General Obligations and Responsibilities

282

Code of Conduct for FIIs

284

Prohibition of Investments

285

Risk Management

285

Investment by FII s under Portfolio Investment Scheme

289

Allocation of Funds

290

Private Placement with FIIs

290

Accounts with ADs

290

FII and Capital Account Convertibility

291

Market Outcome

291

Foreign Portfolio Investment flows to India

291

Trends in FII Investments

294

Foreign Institutional Investments - Equity and Debt

297

FII trades in Equity Market Segment of NSE

298

FII trades in Derivative Market Segment of NSE

298

Share of FIIs in NSE Listed Companies

299

FII Stock Market Indicators

299

of NSE 298 Share of FIIs in NSE Listed Companies 299 FII Stock Market Indicators 299

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viii

 

Offshore Derivative Instruments

300

Rules for NRIs to Invest in Indian Stock Markets

303

Chapter 9 Knowledge Initiatives

316

Quality Intermediation

316

 

NSE's Certification in Financial Markets

316

Research Initiatives

317

 

NSE Research Initiative

319

Data Dissemination

320

Investor Awareness and Education

321

Investor Protection Fund

323

Research Papers

 

Evaluating Corporate Governance Risk :

A

Fuzzy Logic Approach

324

Optimal Hedge Ratio and Hedging Effectiveness of Stock Index Futures : Evidence from India

343

Do the S&P CNX Nifty Index and Nifty Futures Really Lead/Lag ? Error Correction Model :

A

Cointegration Approach

359

Under Pricing and Long Run Performance of Initial Public Offerings In the Indian Stock Market

383

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Under Pricing and Long Run Performance of Initial Public Offerings In the Indian Stock Market 383

ix

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List of Tables

Table No.

Title

1-1

Market Participants in Securities Market Correlation of Global Markets (July 1990 to July 2007) Descriptive Statistics of Daily Returns (July 1990 to July 2007) International Comparison: end December 2006 Market Concentration in the World Index as on End 2006 Market Capitalisation and Turnover for Major Markets Select Stock Market Indicators Shareholding Pattern at the end of March 2007 of Companies Listed on NSE Savings of Household Sector in Financial Assets Resource Mobilisation from the Primary Market Secondary Market - Select Indicators Growth and Distribution of Turnover on Stock Exchanges List of Cities and VSATS at the end of March 2007

1

1-2

3

1-3

3

1-4

4

1-5

4

1-6

5

1-7

6

1-8

7

1-9

8

1-10

9

1-11

11

1-12

12

1-13

28

2-1

Resource Mobilisation by Government and Corporate Sector Resource Mobilisation from Public Equity Issues Sector-wise Distribution of Resources Mobilised by Public Equity Issues Response to Public Issues Resources Mobilised through Debt and Equity (Public Issues) Industry-wise Resource Mobilisation by Public Equity Issues Performance of IPOs Listed on NSE during April 01, 2006 to March 31, 2007 Resources Raised from Debt Markets Issuer-wise Distribution of Private Placement of Debt Sectoral Distribution of Resources Mobilised by Private Placement Resources Raised by Corporate Sector

35

2-2

46

2-3

47

2-4

47

2-5

48

2-6

48

2-7

49

2-8

52

2-9

53

2-10

54

2-11

55

3-1

Resource Mobilisation by Mutual Funds Accretion of Funds with Mutual Funds Scheme-wise Resource Mobilisation by Mutual Funds

86

3-2

88

3-3A

89

with Mutual Funds Scheme-w ise Resource Mobilisation by Mutual Funds 86 3-2 88 3-3A 89 www.nseindia.com

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x

Table No.

Title

3-3B

Scheme-wise Resource Mobilisation by Mutual Funds Assets under Management as at end March, 2007 Performance of Index Funds

89

3-4

90

3-5

91

4.1

Comparison of the NSE Model and the International Models of Demutualised Stock Exchanges Eligibility Criteria for Trading Membership on CM Segment of NSE Listing Criteria for Companies on CM Segment of NSE Progress of Dematerialisation: NSDL & CDSL Service Charges levied by the Depositories end of March 2007 Turnover on Stock Exchanges in India Stock Market Indicators - Monthly Trends on NSE and BSE Total Number of Trades in Equity Shares (in thousands)

113

4-2

114

4-3

116

4-4 A

124

4-4 B

125

4-5

134

4-6

135

4-7

136

4-8

Distribution of Turnover and Market Capitalisation of Top '50' Companies listed at NSE Percentage Share of Top 'N' Securities/Members in Turnover of NSE Market Concentration in Emerging Asian Markets:

137

4-9

138

4-10

End December 2006 Top 40 countries World Value Traded Turnover of BRIC Economies Market Capitalisation of top 40 countries Market capitalisation of BRIC Economies Movement of Select Indices on Indian/Foreign Markets Stock Market Index, Volatility and P/E Ratio:

138

4-11

139

4-12

140

4-13

141

4-14

142

4-15

142

4-16

April 2006 to March 2007

143

4-17

Performance of

Sectoral Indices

145

4-18

Performance of Select Indices as at end March 2007 Trading Frequency on NSE & BSE Frequency Distribution of Companies Traded at NSE and BSE Trends in FII Investment Trends in Transactions by Mutual Funds Substantial Acquisition of Shares and Takeovers

146

4-19

147

4-20

147

4-21

148

4-22

149

4-23

150

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and Takeovers 146 4-19 147 4-20 147 4-21 148 4-22 149 4-23 150 www.nseindia.com

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Table No.

Title

5-1

Settlement Cycle in CM Segment Capital Adequacy Norms for Membership on NSE Delivery Pattern in Stock Exchanges

158

5-2

159

5-3

164

6-1

Debt Market: Selected Indicators Participants and Products in Debt Market Listing Criteria for Securities on WDM Segment Market Borrowings of Governments Profile of Central Government Dated Securities Turnover of Debt Securities Secondary Market Transactions in Government Securities Share of WDM in Transactions of Government Securities Business Growth of WDM Segment of NSE Security wise Distribution of Turnover on WDM Segment of NSE Share of Top 'N' Securities/Trading Members/ Participants in Turnover in WDM Segment Participant-wise Distribution of Turnover Market Capitalisation of WDM Segment Yields on Government and Corporate Securities, 2006-07 Debt Market Indices, 2006-07

167

6-2

179

6-3

185

6-4

193

6-5

194

6-6

195

6-7

196

6-8

197

6-9

198

6-10

199

6-11

200

6-12

201

6-13

202

6-14

203

6-15

207

7-1

Top 20 Contracts for the year 2006 Futures on Individual Equities (Stock Futures) Global Futures and Options Volume Top 40 Futures Exchanges (Volume figures do not include options on futures) Eligibility Criteria for Membership on F&O Segment of NSE Requirements for Professional Clearing Membership Determination of Open Position of a Clearing Member Computation of MTM at the end of the day Trade Details of Derivatives Market Implied Interest Rate for Near Month Nifty Futures (April 2006 - March 2007) Settlement Statistics in F&O Segment

220

7-2

220

7-3

221

7-4

222

7-5 A

235

7-5 B

235

7-6

238

7-7

239

7-8

251

7-9

255

7-10

256

A 235 7-5 B 235 7-6 238 7-7 239 7-8 251 7-9 255 7-10 256 www.nseindia.com

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xii

Table No.

Title

8-1

Composition of Foreign Portfolio Investment in India Trends in FII Investment

293

8-2

295

8-3

Net Investments by FIIs and Nifty 50 closing values during 2006-07 Net Investments by Foreign Institutional Investors in Equity and Debt

296

8-4

297

8-5

FII investment in Cash Market Segment of

the Exchange

298

8-6

FII investment in Derivatives Market Segment of

the Exchange

299

8-7

FII Share in different sectors of companies listed on NSE at the end of March 2007 FII Stock Market Indicators

300

8-8

301

9-1

NCFM currently tests expertise in the following modules NCFM Modules Test Details Studies under the NSE Research Initiative

317

9-2

318

9-3

319

Annexures

 

Annex. No.

Title

2-1

Details of Private Placements Issues by NSE- listed Companies during the period April 01, 2006 to March 31, 2007 and listed on the Capital Market segment of the Exchange

56

4-1

Exchange -wise Brokers and Sub-brokers in India Business Growth of CM Segment of NSE Market Capitalisation, Weightage & Beta of S&P CNX Nifty Securities as on March 30, 2007

151

4-2

152

4-3

154

5-1

Settlement Statistics in CM Segment of NSE

166

6-1

Secondary Market Transactions in Government Securities

208

6 -2 Business Growth of WDM Segment

 

210

6-3

Security-wise and Participant wise Distribution of WDM Trades Market Capitalisation of WDM Securities FIMMDA NSE MIBID/MIBOR Rates 1-day VaR (99%) for GoI Securities Traded on NSE-WDM as on March 30, 2007

212

6-4

214

6-5

215

6-6

217

7-1

Contract Specification for F&O Business Growth of Derivatives Segment

 

262

7-2

264

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Contract Specification for F&O Business Growth of Derivatives Segment   262 7-2 264 www.nseindia.com

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Annex. No.

Title

7-3

List of Securities on which Futures & Options are available at NSE along with their market lot List of Indices on which Futures & Options are available along with their market lot Top 5 most active Futures and Options contracts during the period 2006-07

 

266

7-4

270

7-5

270

8-1

List of companies with respective ceilings as of November 2007

309

Charts

Chart No.

Title

1-1

Movement of Nifty 50

13

2-1

Growth of Private Placement of Debt Issuer-wise Distribution of Private Placement of Debt, 2006-07

53

2-2

54

3-1

Assets under Management at the end of March 2007

90

4-1

Movement of S&P CNX NIfty, BSE and NASDAQ, 2006-07 Stock Market Volatility, 2006-07 Movement of Nifty 50 and Sectoral Indices, 2006-07

142

4-2

143

4-3

146

5-1

Clearing and Settlement Process at NSE Share of WDM in Non-Repo Government Transaction Growth of WDM Segment Security-wise Distribution of Turnover, 2006-07 Participant-wise Distribution of Turnover, 2006-07 Market Capitalisation of WDM Segment at the end of March 2007 Zero Coupon Yield Curve, 2006-07 Overnight NSE-FIMMDA MIBID/MIBOR Rates, 2006-07

155

6-1

197

6-2

199

6-3

200

6-4

202

6-5

203

6-6

204

6-7

205

7-1

Product-wise Distribution of Turnover of F&O Segment of NSE,

2006-07

252

7-2

Daily Open Interest for Near Month Nifty Futures for 2006-07 Nifty Futures and Spot Price (2006-07) Implied Interest Rate for Near Month Nifty Futures (April 1, 2006 to March 31, 2007)

253

7-3

254

7-4

254

8-1

Nifty and Net FII Investments 2006-07

294

31, 2007) 253 7-3 254 7-4 254 8-1 Nifty and Net FII Investments 2006-07 294 www.nseindia.com

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Abbreviations

xiv

Abbreviations

ADB

Asian Development Bank

ADRs

American Depository Receipts

AIFIs

All India Financial Institutions

ALBM

Automated Lending and Borrowing Mechanism

ALBRS

Automated Lending and Borrowing under Rolling Settlement

AMC

Asset Management Company

AMFI

Association of Mutual Funds in India

ASC

Accounting Standards Committee

ASE

Ahmedabad Stock Exchange

ATM

At-The-Money

ATSs

Alternative Trading system

B2B

Business-to-Business

BIFR

Board for Industrial and Financial Reconstruction

BIS

Bank for International Settlement

BLESS

Borrowing and Lending Securities Scheme

BMC

Base Minimum Capital

BSE

The Stock Exchange, Mumbai

CBDT

Central Board of Direct Taxes

CC

Clearing Corporation

CDs

Certificate of Deposits

C&D

Corporatisation and Demutualisation

CH

Clearing House

CCIL

Clearing Corporation of India Limited

CDSL

Central Depository Services (India) Limited

CFM

Carry Forward Margin

CFRS

Carry Forward under Rolling Settlement

CIMC

Collective Investment Management Company

CISs

Collective Investment Schemes

CIVs

Collective Investment Vehicles

CLA

Central Listing Authority

CLF

Collateralised Lending Facility

www.nseindia.com

Investment Vehicles CLA Central Listing Authority CLF Collateralised Lending Facility www.nseindia.com

xv Abbreviations

ISMR
ISMR

CM

Clearing Member

CM Segment

Capital Market Segment of NSE

CMIE

Centre for Monitoring Indian Economy

COSI

Committee on Settlement Issues

COTI

Committee of Trade Issues

CP

Custodial Participant

CPs

Commercial Papers

CPSS

Committee on Payment and Settlement Issues

CRAs

Credit Rating Agencies

CRISIL

The Credit Rating Information Services of India Limited

CRR

Cash Reserve Ratio

CSD

Collateral Security Deposit

CSE

Calcutta Stock Exchange

DCA

Department of Company Affairs

DDBs

Deep Discount Bonds

DEA

Department of Economic Affairs

DFIs

Development Financial Institutions

DIP

Disclosure and Investor Protection

DNS

Deferred Net Settlement

DPs

Depository Participants

DRR

Debenture Redemption Reserve

DSCE

Debt Securities Convertible into Equity

DvP

Delivery versus Payment

ECBs

External Commercial Bodies

ECNS

Electronic communication Networks

EDGAR

Electronic Data Gathering, Analysis and Retrieval

EDIFAR

Electronic Data Information Filing and Retrieval

EFT

Eletronic Fund Transfer

ELN

Equity Linked Notes

ELSS

Equity Linked Saving Schemes

EPS

Earning Per Share

ETFs

Exchange Traded Funds

FIA

Futures Industry Association

F&O

Futures and Options

FCCBs

Foreign Currency Convertible Bonds

FCDs

Fully Convertible Debentures

FDI

Foreign Direct Investment

Currency Convertible Bonds FCDs Fully Convertible Debentures FDI Foreign Direct Investment www.nseindia.com

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ISMR
ISMR

Abbreviations

xvi

FDRs

Foreign Deposit Receipts

FDs

Fixed Deposits

FEMA

Foreign Exchange Management Act

FIBV

International World Federation of Stock Exchanges

FII

Foreign Institutional Investment

FIIs

Foreign Institutional Investors

FIMMDA

Fixed Income Money Markets and Derivatives Association

FIs

Financial Institutions

FMCG

Fast Moving Consumer Goods

FMPs

Fixed Maturity Plans

FoFs

Fund of Funds

FPOs

Further Public Offerings

FRAs

Forward Rate Agreements

FSAP

Financial Sector Assesment Program

FVCIs

Foreign Venture Capital Investors

GDP

Gross Domestic Product

GDRs

Global Deposit Receipts

GDRs

Gross Domestic Savings

GNP

Gross National Product

GOI

Government of India

G-Sec

Government Securities

GSO

Green Shoe Option

i-BEX

ICICI Securities Bond Index

ICAI

Institute of Chartered Accountants of India

ICICI

Industrial Credit and Investment Corporation of India Limited.

ICSE

Inter-Connected Stock Exchange of India Limited

IBRD

International Bank for Reconstruction and Development

IDBI

Industrial Development Bank of India

IDRs

Indian Depository Receipts

IEPF

Investors Education and Protection Fund

IFC

International Finance Corporation

IFSD

Interest Free Security Deposit

IIM

Indian Institute of Management

IISL

India Index Services and Products Limited

IMF

International Monetary Fund

IOSCO

International Organisation of Securities Commission

IDFC

Infrastructure Development Finance Corporation

www.nseindia.com

Organisation of Securities Commission IDFC Infrastructure Development Finance Corporation www.nseindia.com

xvii Abbreviations

ISMR
ISMR

IPF

Investor Protection Fund

IPOs

Initial Public Offers

IRDA

Insurance Regulatory and Development Authority

IRS

Interest Rate Swap

ISIN

International Securities Identification Number

ISSA

International Securities Services Association

IT

Information Technology

ITM

In-The-Money

JPC

Joint Parliamentary Committee

LAF

Liquidity Adjustment Facility

LIC

Life Insurance Corporation of India Limited

MCFS

Modified Carry Forward System

MFs

Mutual Funds

MFSS

Mutual Fund Service System

MIBID

Mumbai Inter-bank Bid Rate

MIBOR

Mumbai Inter-bank Offer Rate

MMMF

Money Market Mutual Fund

MNCs

Multi National Companies

MOU

Memorandum of Understanding

MoF

Ministry of Finance

MTM

Mark-To-Market

NASDAQ

National Association of Securities Dealers Automated Quotation System

NAV

Net Asset Value

NBFCs

Non-Banking Financial Companies

NCAER

National Council for Applied Economic Research

NCDs

Non-convertible Debentures

NCDS

Non-convertible Debt Securities

NCFM

NSE's Certification in Financial Markets

NDS

Negotiatied Dealing System

NEAT

National Exchange for Automated Trading

NGOs

Non-Government Organisations

NIBIS

NSE's Internet-based Information System

NIC

National Informatics Centre

NPAs

Non Performing Assets

NRIs

Non Resident Indians

NSCCL

National Securities Clearing Corporation of India Limited

NSDL

National Securities Depository Limited

Securities Clearing Corporation of India Limited NSDL National Securities Depository Limited www.nseindia.com

www.nseindia.com

ISMR
ISMR

Abbreviations

xviii

NSE

National Stock Exchange of India Limited

OCBs

Overseas Corporate Bodies

OECLOB

Open Electronic Consolidated Limit Order Book

OLTL

On-line Trade Loading

OPMS

On-line Position Monitoring System

ORS

Order Routing System

OSL

Open Strata Link

OTC

Over the Counter

OTCEI

Over the Counter Exchange of India Limited

OTM

Out-of the-Money

P/E

Price Earning Ratio

PAN

Permanent Account Number

PCDs

Partly Convertible Debentures

PCM

Professional Clearing Member

PDAI

Primary Dealers Association of India

PDO

Public Debt Office

PDs

Primary Dealers

PFI

Public Finance Institution

PFRDA

Pension Fund Redulatory Development Authority

PRI

Principal Return Index

PRISM

Parallel Risk Management System

PSUs

Public Sector Undertakings

PV

Present Value

QIBs

Qualified Institutional Buyers

RBI

Reserve Bank of India

ROCs

Registrar of Companies

RTGS

Real Time Gross Settlement

SA

Stabilising Agent

SAT

Securities Appelate Tribunal

SBTS

Screen Based Trading System

SCMRD

Society for Capital Market Research and Development

S&P

Standard and Poor's

SAT

Securities Appellate Tribunal

SC(R)A

Securities Contracts (Regulation) Act, 1956

SC(R)R

Securities Contracts (Regulation) Rules, 1957

SCBs

Scheduled Commercial Banks

SDs

Satellite Dealers

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Contracts (Regulation) Rules, 1957 SCBs Scheduled Commercial Banks SDs Satellite Dealers www.nseindia.com

xix

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SEBI

Securities and Exchange Board of India

SEC

Securities Exchange Commission

SGF

Settlement Guarantee Fund

SGL

Subsidiary General Ledger

SGX-DT

The Singapore Exchange Derivatives Trading Limited

SIPC

Securities Investor Protection Corporation

SLB

Securities Lending and Borrowing

SLR

Statutory Liquidity Ratio

SPAN

Standard Portfolio Analysis of Risks

SDL

State Development Loans

SPICE

Sensex Prudential ICICI Exchange Traded Fund

SPV

Special Purpose Vehicle

SROs

Self Regulatory Orgaisations

SSS

Securities Settlement System

STA

Share Transfer Agent

STP

Straight Through Processing

STRIPS

Separate Trading of Registered Interest and Principal of Securities

SUS 99

Special Unit Scheme 99

T-Bills

Treasury Bills

TDS

Tax Deducted at Source

TM

Trading Member

TRI

Total Return Index

UIN

Unique Identification Number

UTI

Unit Trust of India

VaR

Value at Risk

VCFs

Venture Capital Funds

VCUs

Venture Capital Undertakings

VSAT

Very Small Aperture Terminal

WAN

Wide Area Network

WAP

Wireless Application Protocol

WDM

Wholesale Debt Market Segment of NSE

YTM

Yield to Maturity

ZCYC

Zero Coupon Yield Curve

Wholesale Debt Market Segment of NSE YTM Yield to Maturity ZCYC Zero Coupon Yield Curve www.nseindia.com

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1

Securities Market in India - An Overview

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Securities Market in India – An Overview

Introduction

The securities market has essentially three categories of participants, viz., the issuer of securities, the investors in the securities and the intermediaries. The issuers are the borrowers or deficit savers, who issue securities to raise funds. The investors, who are surplus savers, deploy their savings by subscribing to these securities. The intermediaries are the agents who match the needs of users and suppliers of funds for a commission. These intermediaries function to help both the issuers and investors to achieve their respective goals. There are large variety and number of intermediaries providing various services in the Indian securities market (Table 1-1). This process of mobilisation of resources is carried out under the supervision and

Table 1-1: Market Participants in Securities Market

Market Participants

Number as on March 31

 

2006

2007

Securities Appellate Tribunal (SAT) Regulators* Depositories Stock Exchanges With Equities Trading With Debt Market Segment With Derivative Trading Brokers Corporate Brokers Sub-brokers FIIs Portfolio Managers Custodians Registrars to an issue & Share Transfer Agents Primary Dealers Merchant Bankers Bankers to an Issue Debenture Trustees Underwriters Venture Capital Funds Foreign Venture Capital Investors Mutual Funds Collective Investment Schemes

1

1

4

4

2

2

23

22

2

2

2

2

9,339

9,443

3,933

4,076

23,479

27,894

882

996

132

158

11

11

83

82

17

17

130

152

60

47

32

30

57

45

80

90

39

78

38

40

0

0

* DCA, DEA, RBI & SEBI. Source: SEBI

57 45 80 90 39 78 38 40 0 0 * DCA, DEA, RBI & SEBI.

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Securities Market in India - An Overview

overview of the regulators. The regulators develop fair market practices and regulate the conduct of issuers of securities and the intermediaries. They are also in charge of protecting the interests of the investors. The regulator ensures a high service standard from the intermediaries and supply of quality securities and non-manipulated demand for them in the market.

Market Segments

The securities market has two interdependent and inseparable segments, the new issues (primary) market and the stock (secondary) market. The primary market provides the channel for creation and sale of new securities, while the secondary market deals in securities previously issued. The securities issued in the primary market are issued by public limited companies or by government agencies. The resources in this kind of market are mobilized either through the public issue or through private placement route. It is a public issue if anybody and everybody can subscribe for it, whereas if the issue is made available to a selected group of persons it is termed as private placement. There are two major types of issuers of securities, the corporate entities who issue mainly debt and equity instruments and the government (central as well as state) who issue debt securities (dated securities and treasury bills).

The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risks and returns. Once the new securities are issued in the primary market they are traded in the stock (secondary) market. The secondary market operates through two mediums, namely, the over-the-counter (OTC) market and the exchange-traded market. OTC markets are informal markets where trades are negotiated. Most of the trades in the government securities are in the OTC market. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC market. The other option is to trade using the infrastructure provided by the stock exchanges. The exchanges in India follow a systematic settlement period. All the trades taking place over a trading cycle (day=T) are settled together after a certain time (T+2 day). The trades executed on exchanges are cleared and settled by a clearing corporation. The clearing corporation acts as a counterparty and guarantees settlement. A variant of the secondary market is the forward market, where securities are traded for future delivery and payment. A variant of the forward market is Futures and Options market. Presently only two exchanges viz., National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange (BSE) provides trading in the Futures & Options.

International Scenario

Global integration, the widening and intensifying of links, between high-income and developing countries, have accelerated over the years. The correlation of global markets over a period of time is presented in (Table 1- 2).

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over the years. The correlation of global markets over a period of time is presented in

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Securities Market in India - An Overview

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Table 1-2: Correlation of Global Markets (July 1990 to July 2007)

 

Nifty

Singa-

Taiwan Nasdaq

Hang

Nikkie

FTSE

S & P

CAC

Dow

50

pore

TAI

Seng

225

100

500

40

Jones

Nifty

1.00

Singapore

0.19

1.00

Taiwan TAI

0.12

0.27

1.00

Nasdaq

0.05

0.16

0.09

1.00

Hang Seng

0.18

0.62

0.24

0.14

1.00

Nikkie 225

0.14

0.38

0.24

0.13

0.38

1.00

FTSE 100

0.11

0.29

0.12

0.36

0.31

0.25

1.00

S&P 500

0.03

0.14

0.07

0.84

0.12

0.12

0.42

1.00

CAC 40

0.12

0.29

0.14

0.38

0.30

0.25

0.77

0.43

1.00

Dow Jones

0.03

0.15

0.06

0.71

0.13

0.12

0.41

0.94

0.43

1.00

Over the past few years, the financial markets have become increasingly global. The descriptive statistics of the major markets in terms of daily returns is presented in (Table 1-3), which shows that the markets are increasingly getting interlinked.

Table 1-3: Descriptive Statistics of Daily Returns (July 1990 to July 2007)

 

Nifty

Singapore Taiwan Nasdaq

Hang

Nikkie

FTSE

S & P

CAC

Dow

50

STI

TAI

Seng

225

100

500

40

Jones

Mean

0.08

0.03

0.03

0.05

0.06

-0.004

0.03

0.04

0.03

0.04

Median

0.10

0.03

0.01

0.12

0.06

-0.02

0.04

0.05

0.04

0.05

Maximum

12.85

16.03

7.88

14.17

18.82

13.24

6.08

5.73

7.25

6.35

Minimum

-12.24

-9.22

-9.25

-9.67

-13.70

-6.98

-5.72

-6.87

-7.39

-7.18

Std. Dev

1.74

1.27

1.74

1.51

1.58

1.46

1.01

0.99

1.31

0.98

Skewness

0.04

0.40

-0.05

0.16

0.25

0.30

-0.05

-0.03

-0.02

-0.14

Kurtosis

5.73

11.95

2.70

6.31

11.09

3.57

3.19

3.87

2.92

4.62

Cross border capital flows have shifted from public transfers to primarily private sector flows. Indian market has gained from foreign inflows through investment of Foreign Institutional Investors (FIIs) route. During 2006-07, cumulative net investments by FIIs amounted to US $ 51,967 million.

Following the implementation of reforms in the securities industry in the past years, Indian stock markets have stood out in the world ranking. As may be seen from (Table 1-4), India posted a turnover ratio of 93.1 %, which was quite comparable to the other developed markets. As per Standard and Poor's Fact Book 2007, India ranked 15th in terms of market capitalization (18th in 2004 and 17th in 2005) and 18th in terms of total value traded in stock exchanges and 21st in terms of turnover ratio as of December 2006.

terms of total value traded in stock exchanges and 21st in terms of turnover ratio as

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Securities Market in India - An Overview

Table 1-4: International Comparison: end December 2006

Particulars

USA

UK

Japan

Germany

Singa- Hong-

China

India

 

pore

kong

No. of listed Companies

5,133

2,913

3,362

656

461

1,165

1,440

4,796

Market Capitalisation ($ Bn.)

19,426

3,794

4,726

1,638

276

1,715

2,426

819

Market Capitalisation Ratio (%)

150.44

166.95

94.97

56.96

230.74

892.69

106.90

101.84

Turnover ($ Bn.)

33,268

4,242

6,252

2,487

184

831

1,635

638

Turnover Ratio (%)

182.8

123.8

132.1

173.9

62.2

60.0

102.0

93.1

Market Capitalisation Ratio is computed as a percentage of GNI 2005 Source: S&P Global Stock Market Factbook, 2007

A comparative study of concentration of market indices and index stocks in different world markets is presented in the (Table 1-5). It is seen that the index stocks share of total market capitalization in India is 81.6% whereas US index accounted for 89.5%. The ten largest index stocks share of total market capitalization is 32.2% in India and 13.4% in case of US.

Table 1-5: Market Concentration in the World Index as on End 2006

(In Percent)

Market

Index Stocks Share of Total Market Capitalization

10 largest Index Stocks Share of total Market Capitalization

Japan

99.9

20.1

Singapore

97.5

52.7

France

92.6

39.6

Germany

89.0

42.6

Italy

99.6

52.7

United Kingdom

96.2

35.2

United States

89.5

13.4

India

81.6

32.2

Note: Data is for the S&P CNX 500 Index for India Source: S&P Global Stock Market Factbook, 2007

The stock markets worldwide have grown in size as well as depth over the years. As can be observed from (Table 1-6), the turnover of all markets taken together have grown from US $ 39.61 trillion in 2004 to US $ 67.91 trillion in 2006. It is significant to note that US alone accounted for about 48.99 % of worldwide turnover in 2006. Despite having a large number of companies listed on its exchanges, India accounted for a meager 0.94% in total world turnover in 2006. The market capitalization of all listed companies taken together on all markets stood at US $ 54.19 trillion in 2006 (US $ 43.68 trillion in 2005). The share of US in worldwide market capitalization decreased from 38.85 % as at end-2004 to 35.84 % as at end 2006, while Indian listed companies accounted for 1.51% of total market capitalization in 2006.

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at end 2006, while Indian listed companies accounted for 1.51% of total market capitalization in 2006.

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Securities Market in India - An Overview

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Table 1-6: Market Capitalisation and Turnover for Major Markets

 

(US $ million)

Country/Region

Market Capitalisation (end of period)

 

Turnover

2004

2005

2006

2004

2005

2006

Developed Markets Australia Japan UK USA All Emerging Markets China India Indonesia Korea Malaysia Philippines Taiwan World Total US as % of World India as % of World

33,399,791

36,544,888

43,736,409

35,597,626

41,859,092

59,685,209

776,403

804,074

1,095,858

514,249

616,115

826,285

3,678,262

4,736,513

4,726,269

3,430,420

4,997,414

6,252,470

2,815,928

3,058,182

3,794,310

3,707,191

4,167,020

4,242,082

16,323,726

16,970,865

19,425,855

19,354,899

21,509,979

33,267,643

4,948,364

7,135,963

10,458,582

4,020,111

5,594,642

8,226,944

639,765

780,763

2,426,326

748,274

586,301

1,635,121

387,851

553,074

818,879

379,085

433,900

638,484

73,251

81,428

138,886

27,561

41,900

48,831

428,649

718,180

835,188

638,891

1,202,976

1,340,122

190,011

181,236

235,356

59,878

49,976

66,904

28,948