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

In general, small time proprietors, or partners of a proprietary or partnership firm, are

likely to find it rather difficult to get out of their business should they for some reason
wish to do so. This is so because it is not always possible to find buyers for an entire
business or a part of business, just when one wishes to sell it. Similarly, it is not easy
for someone with savings, especially with a small amount of savings, to readily find
an appropriate business opportunity, or a part thereof, for investment. These problems
will be even more magnified in large proprietorships and partnerships. Nobody would
like to invest in such partnerships in the first place, since once invested, their savings
would be very difficult to convert into cash. And most people have lots of reasons,
such as better investment opportunity, marriage, education, death, health and so on for
wanting to convert their savings into cash. Clearly then, big enterprises will be able to
raise capital from the public at large only if there were some mechanism by which the
investors could purchase or sell their share of business as ands they wished to do so.
This implies that ownership in business has to be “broken up” into a lager number of
small units, such that each unit may be independently & easily bought and sold
without hampering the business activity as such. Also, such breaking of business
ownership would help mobilize small savings in the economy into entrepreneurial
This end is achieved in a modern business through the mechanism of shares.

What is a share?
A share represents the smallest recognized fraction of ownership in a publicly held
business. Each such fraction of ownership is represented in the form of a certificate
known as a share certificate. The breaking up of total ownership of a business into
small fragments, each fragment represented by a share certificate, enables them to be
easily bought and sold.

What is a stock exchange?

The institution where this buying and selling of shares essentially takes place is
the Stock Exchange.
In the absence of stock exchanges, ie. Institutions where small chunks of businesses
could be traded, there would be no modern business in the form of publicly held
companies. Today, owing to the stock exchanges, one can be part owners of one
company today and another company tomorrow; one can be part owners in several
companies at the same time; one can be part owner in a company hundreds or
thousands of miles away; one can be all of these things. Thus by enabling the
convertibility of ownership in the product market into financial assets, namely shares,
stock exchanges bring together buyers and sellers (or their representatives) of
fractional ownerships of companies. And for that very reason, activities relating to
stock exchanges are also appropriately enough, known as stock market or security
market. Also a stock exchange is distinguished by a specific locality and
characteristics of its own, mostly a stock exchange is also distinguished by a physical
location and characteristics of its own. In fact, according to H.T.Parekh, the earliest
location of the Bombay Stock Exchange, which for a long period was known as “the
native share and stock brokers’ association”, was probably under a tree around 1870!

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

Characteristics of Stock Exchanges in India

 Traditionally, a stock exchange has been an association of individual members

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

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

At present, there are 23 stock exchanges in India, the largest among them
being the Bombay Stock Exchange. BSE alone accounts for over 80% of the
total volume of transactions in shares.

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

largely elected by the member brokers, and a few nominated by the
government. Government nominee include representatives of the ministry of
finance, as well as some public representatives, who are expected to safeguard
the public interest in the functioning of the exchanges. A president, who is an
elected member, usually nominated by the government from among the
elected members, heads the board. The executive director, who is usually
appointed by the by the stock exchange with the government approval is the
operational chief of the stock exchange. His duty is to ensure that the day to
day operations the Stock Exchange are carried out in accordance with the
various rules and regulations governing its functioning.
 The overall development and regulation of the securities market has been
entrusted to the Securities and Exchange Board of India (SEBI) by an act of
parliament in 1992.
 All companies wishing to raise capital from the public are required to list their
securities on at least one stock exchange. Thus, all ordinary shares, preference
shares and debentures of the publicly held companies are listed in the stock

Exchange management

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

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

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

As per the SEBI act, 1992, the power and functions of the Board encompass the
regulation of Stock Exchanges and other securities markets; registration and
regulation of the working stock brokers, sub-brokers, bankers to an issue (a public
offer of capital), trustees of trust deeds, registrars to an issues, merchant bankers,
under writers, portfolio managers, investment advisors and such other intermediaries
who may be associated with the stock market in any way; registration and regulations
of mutual funds; promotion and regulation of self- regulatory organizations;
prohibiting Fraudulent and unfair trade practices and insider trading in securities
markets; regulating substantial acquisition of shares and takeover of companies;
calling for information from,undertking inspection, conducting inquiries and audits of
stock exchanges, intermediaries and self- regulatory organizations of the securities
market; performing such functions and exercising such powers as contained in the
provisions of the Capital Issues (Control) Act,1947 and the Securities Contracts
(Regulation) Act, 1956, levying various fees and other charges, conducting necessary
research for above purposes and performing such other functions as may be prescribes
from time to time.

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


The trading platform of a stock exchange is accessible only to brokers. The broker
enters into trades in exchanges either on his own account or on behalf of clients. The
clients may place their order with them directly or a sub-broker indirectly. A broker is
admitted to the membership of an exchange in terms of the provisions of the SCRA,
the SEBI act 1992, the rules, circulars, notifications, guidelines, etc. prescribed there
under and the byelaws, rules and regulations of the concerned exchange. No
stockbroker or sub-broker is allowed to buy, sell or deal in securities, unless he or she
holds a certificate of registration granted by SEBI. A broker/sub-broker compiles with
the code of conduct prescribed by SEBI.

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


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

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

Index services
Stock index uses a set of stocks that are representative of the whole market, or a
specified sector to measure the change in overall behavior of the markets or sector
over a period of time. India Index Services & Products Limited (IISL), promoted by
NSE and CRISIL, is the only specialized organization in the country to provide stock
index services.

Trading Mechanism

All stock exchanges in India follow screen-based trading system. NSE was the first
stock exchange in the country to provide nation-wide order-driven, screen-based
trading system. NSE model was gradually emulated by all other stock exchanges in
the country. The trading system at NSE known as the National Exchange for
Automated Trading (NEAT) system is an anonymous order-driven system and
operates on a strict price/time priority. It enables members from across the countries
to trade simultaneously with enormous ease and efficiency. NEAT has lent
considerable depth in the market by enabling large number of members all over the
country to trade simultaneously and consequently narrowed the spreads significantly.
A single consolidated order book for each stock displays, on a real time basis, buy and
sell orders originating from all over the country. The bookstores only limit orders,
which are orders to buy or sell shares at a stated quantity and stated price. The limit
order is executed only if the price quantity conditions match. Thus, the NEAT system
provides an open electronic consolidated limit order book (OECLOB). The trading
system provides tremendous flexibility to the users in terms of kinds of orders that can
be placed on the system. Several time-related (Good-Till-Cancelled, Good-Till-Day,
Immediate-or-Cancel), price related (buy/sell limit and stop-loss orders) or volume
related (All-or-None, Minimum Fill, etc.) conditions van be easily built into an order.
Orders are sorted and match automatically by the computer keeping the system
transparent, objective and fair. The trading system also provides complete market
information on-line, which is updated on real time basis. The trading platform of the
CM segment of NSE is accessed not only from the computer terminals from the
premises of brokers spread over 420 cities, but also from the personal computers in
the homes of investors through the internet and from the hand-held devices through
WAP. The trading platform of BSE is also accessible from 400 cities.

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

NSE was the first exchange in the country to provide web-based access to investors to
trade directly on the exchange. It launched Internet trading in February 2000. It was
followed by the launch of Internet trading by BSE in March 2001. The orders
originating from the personal computers (PCs) of investors are routed through the
Internet tot eh trading terminals of the designated brokers with whom they have
relations and further to the exchange of trade execution. Soon after these orders get
matched and result into trades, the investors get confirmation about them on their PCs
through the same Internet routes.

SEBI approved trading through wireless medium or WAP platform. NSE is the only
exchange to provide access to its order book through the hand held devices, which use
WAP technology. This serves primarily retail investors who are mobile and want to
trade from any place when the market prices for st0ocks of their choice are attractive.
Demat Trading

A depository holds securities in dematerialized form. It maintains ownership records

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

Since the introduction of the depository system, dematerialization has progressed at a

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

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

Capital Market’ released in April 2000, it has been observed that India has achieved a
very high level of dematerialization in less than three years’ time, and currently more
than 99%of trades settle in demand form. Competition and regulatory developments
facilitated reduction in custodial charges and improvements in qualities of service
standards. The paper observes that one imminent and apparent immediate
benefit of competition between the two depositories is fall in settlement and other
charges. Competition has been driving improvement in service standards.
Depository facility has effected changes in stock market microstructure. Breadth and
depth of investment culture has further got extended to interior areas of the country
faster. Explicit transaction cost has been falling due to dematerialization.
Dematerialization substantially contributed to the increased growth in the turnover.
Dematerialization growth in India is the quickest among all emerging markets and
also among developed markets excepting for the U.K and Hong Kong.
The Stock Exchange, Mumbai, popularly known as "BSE" was established in 1875 as
"The Native Share and Stock Brokers Association", as a voluntary non-profit making
association. It has evolved over the years into its present status as the premier Stock
Exchange in the country. It may be noted that the Stock Exchanges is the oldest one in
Asia, even older than the Tokyo Stock Exchange, which was founded in 1878.

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

A Governing Board comprising of 9 elected directors (one third of them retire every
year by rotation), two SEBI nominees, a Reserve Bank of India nominee, six public
representatives and an Executive Director is the apex body, which decides the policies
and regulates the affairs of the Exchange.

The Executive Director as the Chief Executive Officer is responsible for the day-to-
day administration of the Exchange.

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

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

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


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

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

Objectives of SENSEX

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

 To measure market movements

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

 Benchmark for funds performance

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

 For index based derivatives products

Institutional investors, money managers and small investors, all refer to the BSE
SENSEX for their specific purposes. The BSE SENSEX is in effect the proxy for
the Indian stock markets. Since SENSEX comprises of the leading companies in
all the significant sectors in the economy, we believe that it will be the most liquid
contract in the Indian market and will garner a predominant market share.

Companies represented in the SENSEX

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

Trading System

Till Now, buyers and sellers used to negotiate face-to-face on the trading floor over a
security until agreement was reached and a deal was struck in the open outcry system
of trading, that used to take place in the trading ring. The transaction details of the
account period (called settlement period) were submitted for settlement by members
after each trading session.

The computerized settlement system initiated the netting and clearing process by
providing on a daily basis statements for each member, showing matched and
unmatched transactions. Settlement processing involves computation of each
member's net position in each security, after taking into account all transactions for
the member during the settlement period, which is 10 working days for group 'A'
securities and 5 working days for group 'B' securities.
Trading is done by members and their authorized assistants from their Trader Work
Stations (TWS) in their offices, through the BSE On-Line Trading (BOLT) system.
BOLT system has replaced the open outcry system of trading. BOLT system accepts
two-way quotations from jobbers, market and limit orders from client-brokers and
matches them according to the matching logic specified in the Business Requirement
Specifications (BRS) document for this system.

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



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

Earlier, the members of the Exchange were permitted to open trading terminals only
in Mumbai. However, in October 1996, the Exchange obtained permission from SEBI
for expansion of its BOLT network to locations outside Mumbai. In terms of the
permission granted by SEBI and certain modifications announced later, the members
of the Exchange are now free to install their trading terminals at any place in the
country. Shri P. Chidambaram inaugurated the expansion of BOLT network the then
Finance Minister, Government of India on August 31, 1997.
In order to expand the reach of BOLT network to centers outside Mumbai and support
the smaller Regional Stock Exchanges, the Exchange has, as on March 31, 2002,
admitted subsidiary companies formed by 13 Regional Stock Exchanges as its
members. The members of these Regional Stock Exchanges work as sub-brokers of
the member-brokers of the Exchange.

The objectives of granting membership to the subsidiary companies formed by the

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

Trading on the BOLT System is conducted from Monday to Friday between 9:55 a.m.
and 3:30 p.m. The scrips traded on the Exchange have been classified into 'A', 'B1',
'B2', 'F' and 'Z' groups. The number of scrips listed on the Exchange under 'A', 'B1 ',
'B2' and 'Z' groups, which represent the equity segment, as on March 31, 2002 was
173, 560,1930 and 3044 respectively. The 'F' group represents the debt market (fixed
income securities) segment wherein 748 securities were listed as on March 31, 2002.
The 'Z' group was introduced by the Exchange in July 1999 and covers the companies
which have failed to comply with listing requirements and/or failed to resolve investor
complaints or have not made the required arrangements with both the Depositories,
viz., Central Depository Services (I) Ltd. (CDSL) and National Security Depository
Ltd. (NSDL) for dematerialization of their securities by the specified date, i.e.,
September 30, 2001. Companies in "Z" group numbered 3044 as on March 31, 2002.
Of these, 1429 companies were in "Z" group for not complying with the provisions of
the Listing Agreement and/or pending investor complaints and the balance 1615
companies were on account of not making arrangements for dematerialization of their
securities with both the Depositories. 1615 companies have been put in "Z" group as a
temporary measure till they make arrangements for dematerialization of their
securities. Once they finalize the arrangements for dematerialization of their
securities, trading and settlement in their scrips would be shifted to their respective
erstwhile groups.

The Exchange has also the facility to trade in "C" group which covers the odd lot
securities in 'A', 'B1', 'B2' and 'Z' groups and Rights renunciations in all the groups of
scrips in the equity segment. The Exchange, thus, provides a facility to market
participants of on-line trading in odd lots of securities and Rights renunciations. The
facility of trading in odd lots of securities not only offers an exit route to investors to
dispose of their odd lots of securities but also provides them an opportunity to
consolidate their securities into market lots.

The 'C' group can also be used by investors for selling upto 500 shares in physical
form in respect of scrips of companies where trades are to be compulsorily settled by
all investors in demat mode. This scheme of selling physical shares in compulsory
demat scrips is called as Exit Route Scheme.

With effect from December 31, 2001, trading in all securities listed in equity segment
of the Exchange takes place in one market segment, viz., Compulsory Rolling
Settlement Segment.

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

Computation of closing price of scrips in the Cash Segment:

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

A) Compulsory Rolling Segment (CRS):

Compulsory Rolling Settlement (CRS) Segment:

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

Under a rolling settlement environment, the trades done on a particular day are settled
after a given number of business days rather than settling all trades done during a
period at the end of an 'account period'. A T+3 settlement cycle means that the final
settlement of transactions done on T or trade day by exchange of monies and
securities, occurs on fifth business day after the trade day.

The transactions in securities of companies which have made arrangements for

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

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

demat are settled in demat mode on T+3 on netting basis and the transactions in scrips
of companies, which have not made arrangements for dematerialization of their
securities by the stipulated date or are in "Z" group for other reasons, are settled on
trade to trade basis on T+3 either in demat mode or in physical mode.

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

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

The following tables summarizes the steps in the trading and settlement cycle for
scrips under CRS:


Trading on BOLT and daily downloading of statements showing details of

transactions and margins at the end of each trading day.

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

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

Pay-in of funds and securities by 11:00 a.m. and pay-out of funds and securities by
2:00 p.m

Auction on BOLT.

Auction pay-in and pay-out.
* 6A/7A : A mechanism whereby the obligation of settling the transactions done by a
member-broker on behalf of a client is passed on to a custodian based on his

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

The Information Systems Department of the Exchange generates the following

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

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

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

The settlement of the trades (money and securities) done by a member on his own
account or on behalf of his individual, corporate or institutional clients may be either
through the member himself or through a SEBI registered Custodian appointed by
him or the respective client. In case the delivery/payment is to be given or taken by a
registered Custodian, he has to confirm the trade done by a member on the BOLT
System through 6A-7A entry. For this purpose, the Custodians have been given
connectivity to BOLT System and have also been admitted as members of the
Clearing House. In case a transaction is not confirmed by a registered Custodian, the
liability for pay-in of funds or securities in respect of the same devolves on the
concerned member.

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

risk, provided early receipt of securities and monies to buyers and sellers respectively
and brought Indian Capital Markets at the international standard of settlements

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

As discussed earlier, the trades done by members in all the securities in CRS are now
settled by payment of money and delivery of securities on T+3 basis. All deliveries of
securities are required to be routed through the Clearing House, except for certain off-
market transactions which, although are required to be reported to the Exchange, may
be settled directly between the members concerned.

The Clearing House is an independent company promoted jointly by Bank of India

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

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

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

The bank accounts of members maintained with the eight clearing banks, viz., Bank
of India, HDFC Bank Ltd., Global Trust Bank Ltd., Standard Chartered Bank,
Centurion Bank Ltd., UTI Bank Ltd., ICICI Bank Ltd., and Indusind Bank Ltd., are
directly debited through computerized posting for their settlement and margin
obligations and credited with receivables on accounts of pay-out dues and refund of

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

Auto D.O. facility:

Instead of issuing Delivery Out instructions for their delivery obligations in a
settlement /auction, a facility has been made available to the members of
automatically generating Delivery-Out (D.O.) instructions on their behalf from their
CM Pool A/cs by the Clearing House w.e.f., August 10, 2000. This Auto D.O. facility
is available for CRS (Normal & Auction) and for trade-to-trade settlements. This
facility is, however, not available for delivery of non-pari passu shares and shares
having multiple ISINs. The members wishing to avail of this facility have to submit
an authority letter to the Clearing House. This Auto D.O facility is currently available
only for Clearing Member (CM) Pool accounts/Principal Accounts maintained by the
members with National Securities Depository Ltd. (NSDL) and Central Depositories
Services Ltd. (CDSL)
Demat pay-in:
The members can effect demat pay-in either through Central Depository Services (I)
Ltd. (CDSL) or National Securities Depository Ltd. (NSDL). In case of NSDL, the
members are required to give instructions to their Depository Participant (DP)
specifying settlement no., settlement type, effective pay-in date, quantity, etc. The
securities are transferred to the Pool Account. The members are required to give
delivery-out instructions so that the securities are considered for pay-in.

As regards CDSL, the members give pay-in instructions to their DP. The securities
are transferred to Clearing Member (CM) Principal Account. The members are
required to give confirmation to their DP, so that securities are processed towards
pay-in obligations. Alternatively, members may also effect pay-in from clients'
beneficiary accounts for which member are required to do break-up on the front-end
software to generate obligation and settlement ID.

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

The auction is conducted for those securities which members fail to deliver/short
deliver during the Pay-in. In case the securities are not received in an auction, the
positions are closed out as per the closeout rate fixed by the Exchange in accordance
with the prescribed rules. The close out rate is calculated as the highest rate of the
scrip recorded in the settlement in which the trade was executed and in the subsequent
settlement upto the day prior to the day of auction, or 20% above the closing price on
the day prior to the day of auction, whichever is higher. However, in case of close-out
for shares under objection or traded in "C" group, 10% instead of 20% above the
closing price on the day prior to the day of auction and the highest price recorded in
the settlement in which trade took place upto a day prior to auction is considered.

The Exchange has strictly adhered to the settlement schedules for various groups of
securities and there has been no case of clubbing of settlements or postponement of
pay-in and pay-out during the last six years.

The Exchange is also maintaining a database of fake/forged, stolen, lost and duplicate
securities with the Clearing House so that distinctive numbers submitted by members
on delivery may be matched against the database to weed out bad paper from
circulation at the time of introduction of such securities in the market. This database
has also been made available to the members so that delivering and receiving
members can check the entry of fake, forged and stolen shares in the market


Shortages & consequent actions

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

The seller members have to deliver the shares in the Clearing House as per the
Delivery Orders downloaded. If a seller member is unable to deliver the shares on the
Pay-in day for any reason, his bank account is debited at the standard rate (which is
equal to the closing price of the scrip on the day of trading) fixed by the Exchange for
the quantity of shares short delivered. The Clearing House arrives at the shortages in
delivery of various scrips by members on the basis of their delivery obligations and
actual delivery.
The members can download the statement of shortages on T+3 in Rolling Settlements.
After downloading the shortage details, the members are expected to verify the same
and report discrepancy , if any, to the Clearing House by 1:00 p.m. If no discrepancy
is reported within the stipulated time, the Clearing House assumes that the shortage of
a member is in order and proceeds to auction the same. However, in 'C' group, i.e.,
Odd Lot segment the members are themselves required to report the shortages to the
Clearing House.

The Exchange issues an Auction Tender Notice to the members informing them about
the names of the scrips, quantity slated for auction and the date and time of the
auction session on the BOLT. The auction for the undelivered quantities is conducted
on T+4 for all the scrips under compulsory Rolling Settlements. The auction offers
received in batch mode are electronically matched with the auction quantities so as to
award the 'best price'. The members who participate in the auction session can
download the Delivery Orders on the same day, if their offers are accepted. The
members are required to deliver the shares in the Clearing House on the auction Pay-
in day, i.e, T+5. Pay-Out of auction shares and funds is also done on the same day,
i.e., T+5. The various auction sessions relating to shortages, and bad deliveries are
now conducted during normal trading hours on BOLT. Thus, it is possible to schedule
multiple auction sessions on a single trading day.

In auction, the highest offer price is allowed upto the close-out rate and the lowest
offer price can be 20% below the closing price on a day prior to day of auction. A
member who has failed to deliver the securities of a particular company on the pay-in
day is not allowed to offer the same in auction. He can, however, participate in
auction of other scrips.

In case no offers are received in auction for a particular scrip, the sale transaction is
closed-out at a close-out price, determined by higher of the following:-

- Highest price recorded in the scrip from the settlement in which the transaction took
place upto a day prior to the day of the auction.

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

However, in case of the close-out of the shares under objection and shortages in "C"
or "Z" group, 10% above the closing prices of the scrips on the pay-out day of the
respective settlement are considered instead of 20%.

Further, if the auction price/close-out price of a scrip is higher than the standard price
of the scrip in the settlement in which the transaction was done, the difference is
recovered from the seller who failed to deliver the scrip. However, in case, auction/
close-out price is lower than standard price, the difference is not given to the seller but
is credited by the Exchange to the Customers Protection Fund. This is to ensure that
the seller does not benefit from his failure to meet his delivery obligation. Further, if
the offeror member fails to deliver the shares offered in auction, then the transactions
is closed-out as per the normal procedure and the original selling member pays the
difference below the standard rate and offer rate and the offeror member pays the
difference between the offer rate and close-out rate.

Self Auction
As has been discussed in the earlier paragraphs, the Delivery and Receive Orders are
issued to the members after netting off their purchase and sale transactions in scrips
where netting of purchase and sale positions is permitted. It is likely in some
circumstances that a selling client of a member has failed to deliver the shares to him.
However, this did not result in a member's failure to deliver the shares to the Clearing
House as there was a purchase transaction of some other buying client of the member
in the same scrip and the same was netted off for the purpose of settlement. However,
in such a case, the member would require shares so that he can deliver the same to his
buying client, which otherwise would have taken place from the delivery of shares by
the seller. To provide shares to the members, so that they are in a position to deliver
them to their buying clients in case of internal shortages, the members have been
given an option to submit floppies for conducting self-auction (i.e., as if they have
defaulted in delivery of shares to the Clearing House). Such floppies are to be given to
the Clearing House on the pay-in day. The internal shortages reported by the members
are clubbed with the normal shortages in a settlement and the Clearing House for the
combined shortages conducts the auction. A member after getting delivery of shares
from the Clearing House in self-auction credits the shares to the Beneficiary account
of his client or hand over the same to him in case securities received are in physical
form and debits his seller client with the amount of difference, if any, between the
auction price and original sale price

B) Objections
When receiving members collect the physical securities from the Clearing House on
the Payout day, the same are required to be checked by them for good delivery as per
the norms prescribed by the SEBI in this regard. If the receiving member does not
consider the securities good delivery, he has to obtain an arbitration award from the
arbitrators and submit the securities in the Clearing House on the following day of the
Pay-Out (T+4). The Clearing House returns these securities to the delivering members
on the same day, i.e., (T+4). If a delivering members feels that arbitration awards
obtained against him is incorrect, he is required to obtain arbitration award for invalid
objection from the members of the Arbitration Review Committee. The delivering
members are required to rectify/replace the objections and return the shares to the
Clearing House on next day (T+5) to have the entry against them removed. The
rectified securities are delivered by the Clearing House to the buyer members on the
same day (T+5). The buyer members, if they are not satisfied with the rectification,
are required to obtain arbitration awards for invalid rectification from the Bad
Delivery Cell on T+6 day and submit the shares to the Clearing House on the same
If a member fails to rectify/replace the objections then the same are closed-out. This is
known as "Objection Cycle" and the entire process takes 3 days.

The following table summarizes the activities involved in the Patawat Objection
Cycle of CRS.

T + 3 Pay-out of securities of Rolling Settlement
T + 4 Patawat Arbitration session :
Arbitration awards to be obtained from officials of the Bad Delivery Cell.

Securities under objection to be submitted in the Clearing House

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

Arbitration Review Committee

Members and institutions to submit rectified securities, confirmation forms and
invalid objections in the clearing house

Rectified securities delivered to the receiving members

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

Securities to be lodged with the clearing house

The un-rectified and invalid rectification of securities are directly closed-out by the
Clearing House instead of first inviting the auction offers for the same.
The shares in physical form returned under objection to the Clearing House are
required to be accompanied by an arbitration award (Chukada) except in certain cases
where the receiving members are permitted to submit securities to the Clearing House
without "Chukada".

These cases are as follows:

Transfer Deed is out of date.
Cheques for the dividend adjustment for new shares where distinctive numbers are
given in the Exchange Notice is not enclosed.
Stamp of the Registrar of Companies is missing.
Details like Distinctive Numbers, Transferors' Names, etc. are not filled, in the
Transfer Deeds.
Delivering broker's stamp on the reverse of the Transfer Deed is missing.
Witness stamp or signature on Transfer Deed is missing.
Signature of the transferor is missing.
Death Certificate (in cases where one or more of the transferors are deceased) is

A penalty at the rate of Rs.100/- per Delivery Order is levied on the delivering
member for delivering shares, which are not in order. In the event a receiving member
misuses the facility of submitting shares under objection without "Chukada", a
penalty of Rs.500/- per case is charged and the penalty of Rs.100/- per Delivery Order
levied on the delivering member is refunded to him by debiting the receiving
member's account
Close Out:
There are cases when no offer for particular scrip is received in an auction or when
members who offer the scrips in auction, fail to deliver the same. In the former case,
the original seller member's account is debited and the buyer member's account is
credited at the closeout rate. In the latter case, the offeror member's account is debited
and the buyer member's account is credited at the close-out rate. The closeout rates for
closing the positions in different segments are as under:

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

The closeout rate is higher of the following rates:

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

For 'C' group segment

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

 The highest rate of the scrip from the first day to the day prior to the day of
auction of 'A', 'B1', 'B2, and 'Z' group segment of the respective settlements; or
 10% above the closing rate as on the day prior to the day of auction of 'A', 'B1',
'B2, and 'Z' group; or
 Transaction price.
In the 'C' group, i.e., Odd Lot Segment, no auction session is conducted. The
shortages are directly closed out.
Close Out:
There are cases when no offer for particular scrip is received in an auction or when
members who offer the scrips in auction, fail to deliver the same. In the former case,
the original seller member's account is debited and the buyer member's account is
credited at the closeout rate. In the latter case, the offeror member's account is debited
and the buyer member's account is credited at the close-out rate. The closeout rates for
closing the positions in different segments are as under:
For 'A' + 'B1' + 'B2' + 'Z', 'Rolling demat' and 'F' group

The closeout rate is higher of the following rates:

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

For 'C' group segment

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

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

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


The Exchange has commenced trading in the Derivatives Segment with effect from
June 9, 2000 to, enable the investors to hedge their risks. Initially, the facility of
trading in the Derivatives Segment has been confined to Index Futures. Subsequently,
the Exchange has since introduced the index options and options & futures in select
individual stocks. The investors in cash market had felt a need to limit their risk
exposure in the market to movement in Sensex.

With a view to provide investors with this facility of creating Sensex linked portfolios
and also to create a linkage of market prices of the underlying securities of Sensex in
the Cash Segment and Futures on Sensex, the Exchange has provided the facility of
Basket Trading System on BOLT. In Basket Trading System, the investors are able to
buy/ sell all 30 scrips of Sensex in the proportion of their respective weights in the
Sensex, in one go. The investors need not calculate the quantity of Sensex scrips to be
bought or sold for creating Sensex linked portfolios and this function is performed by
the system. The investors are also allowed to create their own baskets by deleting
certain scrips from the Sensex basket of 30 scrips.

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

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

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


Securities traded on BSE are classified into three groups, namely, specified shares or
'A' group and non-specified securities that are sub-divided into 'B1' and 'B2' groups.
Presently, equity shares of thirty-two companies are classified as specified shares.
These companies typically have a large capital base with widespread shareholding, a
steady dividend, good growth record and a large volume of business in the secondary
market. Contracts in this group are allowed to be carried over to subsequent
settlements upto a maximum permissible period of 75 days.

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

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

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

Clearing System

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

Opportunities available for foreign investors

1. Direct investment:

Foreign Companies are now permitted to have a majority stake in their Indian
affiliates except in a few restricted industries. In certain specific industries,
foreigners can even have holding upto 100 per cent.

2. Investment through Stock Exchanges:

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

Important requirements under the guidelines are as under:

I. Portfolio investment in primary or secondary markets will be subject to a

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

• Foreign investment under a financial collaboration (DFI), which is,

permitted upto 51 per cent in all priority areas.

• Investment by FIIs through following alternative routes; Offshore

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

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

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

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

Foreign investors can invest in Euro issues of Indian companies and in India-
specific funds floated abroad.

4. Broking Business:

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

5. Asset Management Companies/Merchant Banking:

Foreign Participation in Asset Management Companies and Merchant Banking

Companies is permitted.

Transfer of ownership of securities in effected through a date stamped transfer-deed,

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


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


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

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

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


The Investor's Services Cell redresses investors' grievances against listed companies
and stockbrokers. However, the Exchange does not have power to take penal action
against listed companies, except delisting for specified periods.


The Exchange has an eight member Disciplinary Action Committee (DAC) which
decides on punitive action in disciplinary cases referred to it by the Surveillance and
inspection departments of the Exchange Administration.


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

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

As the presence of the foreign investors grew, a need was felt to express the index
values by taking into account the Rupee-Dollar conversion rate. Consequently,
dividing the current Rupee market value by Rupee-Dollar modifies the BSE-200
conversion rate in the base year. This index, which indicates the movement of the
market in dollar values, is called the Dollex.


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

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

Computerized Trading

BSE computerized its trading and settlement activities by following a three-phased


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

Phase II: In 1994, settlement related daily transactions inputs and outputs were
uploaded and downloaded from the TWS in the brokers’ offices.

Phase III: Commissioned on March 14, 1995. Although, screen based trading started
with 818 scrips, by the 70th day of its commissioning, all scrips-exceeding 5000 had
been put on the BOLT system. The BOLT system was commissioned with the
Himalya K 10,000 central trading computer hardware. Since then the hardware has
been upgraded to the Himalya K 20,000 system. The system provides for a response
time of two seconds and can handle more than two hundred thousand trades in a day.

Stock Market Indicators

1991-92 1992-93 1993-94 1994-95
(Apr.Mar (Apr.Mar (Apr.Mar (Apr.Mar
) ) ) )
No. of Listed
2061 2861 3585 4702 5603
Market Capitalization
(In Rs.Billion) 3059.87 1881.46 3680.71 4354.81 5264.76
(In US $ Billion) 97.13 59.72 116.85 138.37 153.27
Annual Turnover
(In Rs.Billion) 717.77 456.96 836.29 677.49 500.64
(In US $ Billion) 22.78 14.50 26.55 21.51 14.57
Velocity 0.23 0.24 0.24 0.16 0.10
Average Daily Turnover
(In Rs.Billion) 3.32 2.38 3.84 1.78 2.16
(In US $ Billion) 0.10 0.07 0.12 0.06 0.06
No. of Shares
Traded 6,35,515 3,50,313 7,42,792 1,07,24.8 7,71,850
(In Million Nos.)
Number of Daily 75,000 65,535 63,786 85,010 73,855
BSE Sensitive
Index 4285.00 2280.52 3778.99 3260.95 3366.61
(Year End)
BSE National
Index 1967.71 1021.40 1829.53 1605.57 1549.25
(Year End)
BSE 2000
585.19 234.35 450.07 365.97 345.40
(Year End)
Dollex (Year
261.25 124.89 238.86 194.67 168.54
No. of
- - 145 308 366
Registered Flls
Fll Net investment
(In Rs. Billion) - - 29.85 21.24 31.63
(In US $ Billion) - - 0.95 0.67 0.92
No. of Members
558 558 628 636 641
(Year End)
No. of Corporate
Members (Year 4 4 4 26 63

Future Developments

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

establishment of depositories.

BSE in collaboration with Bank of India (BOI) will shortly establish a depository.
BSE has applied for permission from SEBI to expand BOLT to other centres.
Expansion of BOLT would bring more investors into the ambit of the capital market
and consequently add depth to it.

The National Stock Exchange (NSE) is India's leading stock exchange covering
around 400 cities and towns all over India. NSE introduced for the first time in India,
fully automated screen based trading. It provides a modern, fully computerized
trading system designed to offer investors across the length and breadth of the country
a safe and easy way to invest or liquidate investments in securities.

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

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

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

by providing a screen-based system, which transcends geographical barriers. Having
operationalised both the debt and equity markets, the NSE is planning for a derivative
market, which will provide futures and options in equity. Its main objectives has been
to set up comprehensive facilities for the entire range of securities under a single
umbrella, namely,
 To set up a nation wide trading facility for equities, debt instruments and
 To ensure equal access to investors across the country through an appropriate
communication network;
 To provide a fair, efficient and transparent securities market to investors using
the electronic trading system;
 To ensure shorter settlement cycles and book entry settlement systems; and
 To meet the current international standards prevalent in the securities


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


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

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

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


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

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

Trading mechanism

Rolling Settlement

In a rolling settlement, each trading day is considered as a trading period and trades
executed during the day are settled based on the net obligations for the day.

In NSE, the trades in rolling settlement are settled on a T+5 basis i.e. on the 5th
working day. For arriving at the settlement day all intervening holidays, which
include bank holidays, NSE holidays, Saturdays and Sundays are excluded. Typically
trades taking place on Monday shall be settled on the next Monday, Tuesday's trades
shall be settled on the next Tuesday and so on.

Limited Physical Market

Pursuant to SEBI guidelines, NSE introduced a new market called Limited Physical
Market to provide a facility to small investors to trade and settle physical shares in
those securities where compulsory dematerialized trading and settlement is enforced
by SEBI. In this segment quantities not exceeding 500 shares of each security held in
the name of the investor can be traded.

Institutional Segment

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

Trade for Trade Segment

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

Trading System

NSE operates on the 'National Exchange for Automated Trading' (NEAT) system, a
fully automated screen based trading system, which adopts the principle of an order
driven market. NSE consciously opted in favour of an order driven system as opposed
to a quote driven system. This has helped reduce jobbing spreads not only on NSE but
in other exchanges as well, thus reducing transaction costs.

Till the advent of NSE, an investor wanting to transact in a security not traded on the
nearest exchange had to route orders through a series of correspondent brokers to the
appropriate exchange. This resulted in a great deal of uncertainty and high transaction
costs. NSE has made it possible for an investor to access the same market and order
book, irrespective of location, at the same price and at the same cost.
Market Types

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

 Normal Market

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

 Odd Lot Market

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

 Spot Market

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

 Auction Market

In the Auction Market, the Exchange on behalf of trading members for settlement
related reasons initiates’ auctions.
There are 3 participants in this market.

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

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

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

Order Books

The NSE trading system provides complete flexibility to members in the kinds of
orders that can be placed by them. Orders are first numbered and time-stamped on
receipt and then immediately processed for potential match. Every order has a
distinctive order number and a unique time stamp on it. If a match is not found, then
the orders are stored in different 'books'. Orders are stored in price-time priority in
various books in the following sequence:

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

 Within Price, by time priority-Time priority means if two orders having the same
price are entered, the order that is entered first gets the higher priority.
The Capital Market segment has following types of books:

1. Regular Lot Book

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

2. Special Terms Book

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

3. Negotiated Trade Book

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

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

The stop loss condition is met under the following circumstances:

Sell order - A sell order in the Stop Loss book gets triggered when the last traded
price in the normal market reaches or falls below the trigger price of the order.
Buy order - A buy order in the Stop Loss book gets triggered when the last traded
price in the normal market reaches or exceeds the trigger price of the order.
5. Odd Lot Book
The Odd lot book contains all odd lot orders (orders with quantity less than
marketable lot) in the system. The system attempts to match an active odd lot
order against passive orders in the book. Currently, pursuant to a SEBI directive
the Odd Lot Market is being used for orders which has a quantity less than or
equal to 500 (Qty more than the market lot) for trading. This is referred as the
Limited Physical Market (LPM).

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

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

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

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

Order Conditions

A Trading Member can enter various types of orders depending upon his/her
requirements. These conditions are broadly classified into three categories: time
related conditions, price-related conditions and quantity related conditions. For

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

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

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

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

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

 AON - All or None orders allow a Trading Member to impose the condition
that only the full order should be matched against. This may be by way of
multiple trades. If the full order is not matched it will stay in the books till
matched or cancelled.

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

Price Conditions

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

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

Stop Loss (SL) Price/Order

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

Sell order
A sell order in the Stop Loss book gets triggered when the last traded price in the
normal market reaches or falls below the trigger price of the order.

Buy order
A buy order in the Stop Loss book gets triggered when the last traded price in the
normal market reaches or exceeds the trigger price of the order.

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

Quantity Conditions

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

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

Trading Workstation

The trader workstation is the terminal from which the member accesses the trading
system. Each trader has a unique identification by way of Trading Member ID and
User ID through which he is able to log on to the system for trading or inquiry
purposes. A member can have several user IDs allotted to him by which he can have
more than one employee using the system concurrently.

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

Trader Workstation Screens

The Trader Workstation screen of the Trading Member is divided into several major

Title Bar

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

Tool Bar

A window with different icons which provides quick access to various functions such
as Market By Order, Market By Price, Market Movement, Market Inquiry, Auction
Inquiry, Snap Quote, Market Watch, Buy order entry, Sell order entry, Order
Modification, Order Cancellation, Outstanding Orders, Order Status, Activity Log,
Previous Trades, Net Position, Online Backup, Supplementary Menu, Security List
and Help. All these functions are also available on the keyboard.

Ticker Window

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

Market Watch Window

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

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

For each security in the Market Watch window, market information is dynamically
updated on a real time basis. The market information displayed is for the current best
price orders available in the regular lot book. For each security, the corporate action
indicator (e.g., Ex or cum dividend, interest, rights etc.), the total buy order quantity
for the best buy price, best sell price, total sell order quantity for the best sell price,
the Last Traded Price (LTP), the last traded price change indicator ('+' if last traded
price is better than the previous last traded price and '-' if it is worse) and the no
delivery indicators are displayed. If the security is suspended, "SUSPENDED"
appears in front of the security.

On line index and Index Inquiry

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

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

Inquiry Window

In this window, the inquiries such as Market by Order, Market by Price, Previous
Trades, Outstanding Orders, Activity Log, Order Status and Market Inquiry can be

Market By Order (MBO)

The purpose of Market by Order is to enable the user to view outstanding orders in the
trading books in the order of price/time priority. The information is displayed for each
order. Stop Loss orders, which are not triggered will not be displayed on the window.
Buy orders are displayed on the left side of the window and Sell orders on the right
side. The orders are presented in a price/time priority with the "best priced" order at
the top.

Market by Price (MBP)

The purpose of Market By Price is to enable the Trading Member to view aggregate
orders waiting in the book at given prices.

Previous Trades (PT)

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

Outstanding Orders (OO)

The purpose of Outstanding Orders is to enable a Trading Member to view his/her
own outstanding buy or sell orders for a security. An outstanding order will be an
order that was entered by the user, but is not yet completely traded or cancelled.

Activity Log (AL)

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

Order Status (OS)

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

Market Inquiry (MI)

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

Market Movement (MM)

The Market Movement screen provides information to the user regarding the
movement of a security for the current day. It gives details of the movement of the
scrip for a time interval. The details include total buy and sell order quantity value,
Open, High, Low, Last traded price etc.
Most Active Securities

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

Net Position

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

Snap Quote

The Snap Quote feature allows a Trading Member to get instantaneous market
information on any desired security. This is normally used for securities which are not
already on display in the Market Watch window. The information presented is the
same as that of Market Watch window.

Order/Trade Window

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

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

is placed or a trading is done. The order confirmation slip contains among other
things, order no., security name, price, quantity, order conditions like disclosed or
minimum fill quantity etc. The trade confirmation slip contains the order and trade
no., date, trade time, price and quantity traded, amount etc. Orders and trades are
identified and linked by unique numbers so that the investor can check his order and
trade details.
Systems Message Window

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

Supplementary Menu

Some of the supplementary features in the NEAT system are:

On line back up

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

Off Line Order Entry

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

Computer-to-Computer Link (CTCL) Facility

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

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

National Securities Clearing Corporation Limited

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

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

NSCCL carries out the clearing and settlement of the trades executed in the Equities
and Derivatives segments and operates Subsidiary General Ledger (SGL) for
settlement of trades in government securities. It also undertakes settlement of
transactions on other stock exchanges like, the Over the Counter Exchange of India.
NSCCL assumes the counter-party risk of each member and guarantees settlement
through a fine-tuned risk management system and an innovative method of on-line
position monitoring. It operates a well-defined settlement cycle and there are no
deviations or deferments from this cycle. It aggregates trades over a trading period,
nets the positions to determine the liabilities of members and ensures movement of
funds and securities to meet respective liabilities. It provides a facility for multiple
settlement mechanisms including, account period settlement for dealings in physical
securities and dematerialized securities, rolling settlement (T+5 basis) in
dematerialized segment etc.

NSCCL has empanelled 9 clearing banks to provide banking services to trading

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

Badla is a complex system that contains many a pitfall for the uninitiated and the
unwary. Investors need to be aware of the problems, especially when brokers on BSE
and other regional stock exchanges are marketing vyaj badla schemes to their clients

Before an investor start believing in the stories of superlative returns (in excess of 20
per cent), coupled with liquidity, safety and flexibility, it is imperative that one takes a
hard, rational look at the entire mechanism. This is so because financing badla is a
definite no-no for the first-time investor in the stock market and also for those who
don't have the time to constantly monitor the status of his/her investments and
fluctuations in the market returns

Vyaj Badla

In the vyaj badla system, there was a very high chance that an investor may end up
with an average annual return of 14-18 per cent or sometimes even higher. But having
said that, unfortunately, the returns were not guaranteed. This rosy picture could well
be a reality during a bull run, but when the market was under a bear hug, returns could
diminish to just around 6-8 per cent a year. Comparing it with a steady 12 per cent
annual return offered by a bank fixed deposit or any AAA rated corporate bandit
seemed that The high-risk and uncertain return of vyaj badla would start looking like
a bad investment option.

And then the taxman cometh! Vyaj badla transactions began to be treated as purchase
and sale of shares, thus getting subjected to capital gains tax of 30 per cent. Thus, an
investor’s final returns get lopped off to that extent. Although nay Sayers might feel
that vyaj badla provides an investor with an opportunity to maximize his earnings in a
bull market, the fact remains that it is a good option for the experienced investor. Else,
the nerve-wracking tension that accompanies stock market fluctuations may well take
its toll.

How did the Badla function?

Assume that there had been 12 trades of 100 shares each in "ABC" stock, and there
are 12 separate buyers and sellers respectively. Among the buyers, while six wanted
to carry forward their positions, six want to take delivery. Of the sellers, eight wished
to deliver the shares while four were keen on carrying their positions forward. Now
six buyers made the payment for their purchases, while eight sellers effect delivery.
Six buyers and six sellers got squared off. Four "buy" carry-forward positions get
matched against four "sell" carry-forward positions.

To ensure payment to the remaining two sellers for their 200 shares, vyaj badla
financiers came in. This financier charged interest (badla) for the money paid on
behalf of the two buyers for them. The demand and supply of funds and shares
determined this rate. Shares delivered by the seller were kept by the exchange in the
clearing-house and allocated to the financier's broker in a special account, forming the
financier's collateral.

On the BSE, brokers who were sure of taking or making delivery of shares mark their
respective "for delivery" positions. This helped the exchange to arrive at the net
outstanding positions on Friday evening (the last day of the settlement on BSE), by
deducting them from the broker's weekly out standings. The difference is threw open
to the market's badla trading session on Saturday. Prior to the commencement of this
session, the base price (hawala rate) is fixed, which was normally the closing price of
the scrip on Friday. An outstanding "buy" position in a stock sees a "seedha badla"
where the financiers participate. An outstanding "sell" position in the stock sees an
"ulta" or "undha badla" where the stock lenders participate. Specified quantities of the
stock on offer are bought and sold at the financier's desired interest rate - the badla
In this case, let's assume the hawala rate to be Rs 69. If the financier wants to pay for
100 shares at 20 per cent per annum and the trade gets matched, the interest rate is
converted into a weekly figure. In this case, it would be 0.38 per cent. On the hawala
rate of Rs 69, this 0.38 percent works out to 26 paise. The terminals would constantly
keep flashing the best badla rate and the best annual yield for each stock on offer for a
particular quantity. A constant fluctuation in these values during the two-and-a-half
hour session is due to the constant change in demand and supply, and also market
perception. The broker would give the financier a badla bill or informal contract note,
which would have two entries. One would show a purchase of 100 shares at Rs 69 per
share, while the other would show a sale of 100 shares at Rs 69.26 per share. The
difference will be the financiers earning for that week. With the next trading cycle
ending, the financier can either receive the difference or roll over his/her money to a
new badla transaction.

Who can participate?

Not all brokers can participate in the badla process. Memberships on BSE are split
between type-I and type-II brokers. Only the former can carry out badla trades, for
they maintain higher margins with the exchange. Hence, if you are keen on becoming
a vyaj badla financier, you should approach the type-I broker.

Most brokers don't accept anything less than Rs 1 lakh per client for badla financing.
And the stock selection too is at their discretion. But it would be prudent for you to
know the basis of allocation of stocks to you, as you would be one among a lot of
clients whose money has been collectively invested in vyaj badla. Badla rates vary
between stocks, depending upon their demand and supply. These rates fluctuate
considerably throughout the session.

Ideally, brokers using the discretionary allocation of stocks to the badla account
should pay a weighted average return to each client. This should be reflected in the
badla bills. For getting the weighted average return on badla finance, it is advisable to
look for brokers who have automated this process.
As in any other market transaction, one cannot avoid brokerage in a vyaj badla
transaction too. Brokerage for such deals could range between 1-2.5 per cent,
trimming down your annual yield further. It is advisable to enter into a firm brokerage
percentage prior to the commencement of the relationship.

Are investors safe?

What is the investor’s safeguard in times of default? If the forward buyer defaults, he
got the shares held in the exchange's clearinghouse against his broker’s name, on
which he had a lien through his Badla bill. But his risk erosioned in the value of the
share during the days that it takes to release the shares.

In the recent history of BSE, there have been instances of brokers (having large carry-
forward positions in highly speculative stocks) defaulting. Although these shares were
enjoying very high badla rates at the time of the default, the prices had dipped sharply
by the time the financiers got their shares.

If the broker defaults, the financier is in a larger mess. Apart from the large
institutional brokers, most brokers on BSE have a net worth of Rs 1-2 crore. Badla
positions taken by them sometimes go up to 15-20 times their net worth. Even a 10
per cent downward shift in their position would wipe out the broker's entire net worth.
And then you could bid goodbye to your money too. The BSE's Trade Guarantee
Fund could be of some succour and solace in these situations, but just that.

Failure to cash in on your interest gain at the end of the trading cycle gives the
confidence to your broker to automatically roll over your investment to the next cycle.
While opting out, always time your exit. By virtue of the exchange's settlement cycle,
your money gets released within a ten-day period. This further reduces your yield.

As in the case of defaults, the delay in the release of your money can be detrimental.
So factor in those extra days while calculating your actual return. Although vyaj badla
is considered to be an effective short-term instrument, as is the case with all such
instruments, the delay can really eat into your returns. Given the quirks of the vyaj
badla transactions and the inherent risks involved, it can be concluded that amateurs
should stay away - it is strictly for the pro and the strong hearted.

Substitutes to Badla

Financial derivatives

By far the most significant event in finance during the past decade has been the
extraordinary development and expansion of financial derivatives...

These instruments enhance the ability to differentiate risk and allocate it to those
investors most able and willing to take it -- a process that has undoubtedly improved
national productivity growth and standards of living. -- Fed Chairman Alan

Following the introduction of index futures, the Securities and Exchange Board of
India (SEBI) permitted the BSE and the NSE to introduce more derivatives, such as
options on indices and individual stocks. But an instrument that may be more in line
with the domestic market structure -- single-stock futures -- is not under

Single-stock futures are a way to reap the benefits of a stock's performance without
actually owning the stock. Theoretically, they offer the benefits of ownership, of
leveraging the stock or its underlying asset. But a similar opportunity is not available
to the speculator-investor to sell options in the underlying scrip. As delivery of futures
contracts is on a future date, the investor has to put up only the margin money. Hence,
he can leverage on the margins to buy more units of the underlying security.

One of the advantages enjoyed by single-stock futures is that they are cheaper to trade
and easier to use for hedging strategies than options. Cheaper, because margins in
futures trading are lower than in options. But the valuation of futures contracts are not
as complicated as that of options. Hence, small investors find them relatively easy to
understand and use.
Trading options:

Trading options are riskier than futures. This is purely from the options-writer's
perspective. Market making in options depends to a great extent on institutions
willing to write the contracts. Since the buyer of an option contract is not under any
obligation to exercise his right, his risk is limited to the premium paid for purchasing
the right.

However, the writer is under an obligation to deliver. This means the risk borne by the
option-writer is enormous. Exchanges normally guarantee the writer's position.
Hence, to limit default in the market, the margin requirements are quite high. For
instance, in international markets, while the margin rate for index futures contracts is
around 5 per cent, that for index options works out to the commission received plus
around 15 per cent of the contract's notional value.

Thus, in this situation, there is excessive risk for the options-writer and transactions
costs could be high. Currently, the regulations prevent funds from taking speculative
positions in the spot market. So, they may not be allowed to write options. A market
exists only if there is a writer and a buyer. But given that there are few takers for the
futures market, it is difficult to foresee a lot of interest in the options market.

1) Stock exchanges in India : V. Raja Raman

2) Indian securities market : A review (Volume IV, 2001)

3) NSE News - : May, 2001

4) www.bseindia.com

5) www.nseindia.com







It gives me pleasure to submit this project to the

University of Mumbai as a part of curriculum of my
BMS course.

I take this opportunity to express my sincere

gratitude to Respected Prof. K. Venkatramani,
the Principal, S.K. Somaiya College of Arts, Science
& Commerce and our Course Coordinator, Prof.
Parvati Venkatesh, who simultaneously is my
project guide also, without whose guidance,
inspiration and motivation, I could not have
completed this project successfully.

My respect and grateful thanks to Mr.Dilip Adani,

broker, Stock Exchange, Mumbai, and
Ms.Gitanjali Madan, Stock Holding Corporation of
India Ltd. for their valuable assistance in
completion of this project.

Last but not the least, I am thankful to the

Almighty for giving me strength, courage and
patience to complete this project.

 Executive summary.
 Introduction.
 Light on stock exchange and it services.
 Role of SEBI.
 Terminologies associated with stock exchanges.
 Bombay Stock Exchange.
 Introduction.
 Capital listed and market capitalization.
 BSE Sensex.
 Trading system.
 Settlement and clearing.
 Demat pay in.
 Computation of closing price.
 Shortages and objections.
 Basket trading system.
 Settlement system.
 Closing system.
 Opportunities for foreign investors.
 Transfer of ownership.
 Safeguards.
 Arbitration machinery.
 Customer protection fund.
 Grievances redressal.
 Disciplinary actions.
 Indices.
 Disclosures and listing norms.
 Computerized trading.
 Future developments.
 National Stock Exchange.
 Introduction.
 Locations.
 Listing.
 Constitution.
 Trading members.
 Trading mechanism.
 Market types.
 Order books.
 Order matching rules.
 Order conditions.
 Quantity conditions.
 Trading workstation.
 Computer to computer links facility.
 National Securities Clearing Corporation Limited.
 Badla trading.
 Substitutes for Badla.
 Financial derivatives.
 Trading options.
 Bibliography.

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

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

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

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