AWARENESS OF DERIVATIVE AND ITS

COMPARISON WITH EQUITY AND COMMODITY

A Major Project Report

Submitted in partial fulfillment of the requirements for B.B.A. programme of

Guru Gobind Singh Indraprastha University, Delhi.

Submitted by
INDRA KUMAR GOSWAMI
BBA Semester-VI
Enroll. No.: 02219201715

Lingaya’s Lalita Devi Institute of Management & Sciences

Mandi Road, Mandi
Delhi-110047

1
 ACKNOWLEDGEMENT

I would like to offer my sincere gratitude to various people, who directly or indirectly
contributed in the development of this work and who influenced my thinking, behavior, and
acts during the course of study.

I am indebted Mr. Rajiv, faculty and LLDIMS for their support, co-operation and motivation
provided to me during the study. Many others had a direct or indirect by no means negligible
contribution in the completion of the project.

The project has been a learning experience for me and would not have been possible without
the support and guidance of the above-mentioned people. Needless to say, I alone remain
responsible for any errors that might have crept into the pages, despite of my best possible
effort to avoid them.

INDRA KUMAR GOSWAMI

2
 CERTIFICATE

This is to certify that the project titled “AWARENESS OF DERIVATIVE AND ITS
COMPARISON WITH EQUITY AND COMMODITY”, submitted by INDRA KUMAR
GOSWAMI to Lingaya’s Lalita Devi Institute of Management & Sciences in Partial
fulfillment of requirement for the award of the BBA Degree in an original piece of work
carried out under my guidance and may be submitted for evaluation.

The assistance rendered during the study has been duly acknowledged.

No part of this has ever been submitted for any other degree.

Place:
Date: (Faculty Guide)

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 TABLE OF CONTENTS

Sr. Topic Page No.

No.
1 INTRODUCTION 5
2 COMPANY PROFILE 21
3 RESEARCH METHODOLOGY 38
4 THEORITICAL ASPECT 42
5 DATA ANALYSIS & FINDINGS 55
6 CONCLUSION AND RECOMMENDATION 64
7 ANNEXURES 72

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 CHAPTER – 1
INTRODUCTION

5
 INDUSTRY PROFILE

THE INDIAN CAPITAL MARKET

The function of the financial market is to facilitate the transfer of funds from surplus sectors
(lenders) to deficit sectors (borrowers). Normally, households have inventible funds or
savings, which they lend to borrowers in the corporate and public sectors whose requirement
of funds far exceeds their savings. A financial market consists of investors or buyers of
securities, borrowers or sellers of securities, intermediaries and regulatory bodies. Financial
does not refer to a physical location. Formal trading rules, relationships and communication
networks for originating and trading financial securities link the participants in the market.
Organized money market: Indian financial system consists of money market and capital
market. The money market has two components - the organized and the unorganized. The
organized market is dominated by commercial banks. The other major participants are the
Reserve Bank of India, Life Insurance Corporation, General Insurance Corporation, Unit
Trust of India, Securities Trading Corporation of India Ltd. and Discount and Finance House
of India, other primary dealers, commercial banks and mutual funds. The core of the money
market is the inter-bank call money market whereby short-term money borrowing/lending is
affected to manage temporary liquidity mismatches. The Reserve Bank of India occupies a
strategic position of managing market liquidity through open market operations of
government securities, access to its accommodation, cost (interest rates), availability of credit
and other monetary management tools. Normally, monetary assets of short-term nature,
generally less than one year, are dealt in this market.

Un-organized money market: Despite rapid expansion of the organized money market
through a large network of banking institutions that have extended their reach even to the
rural areas, there is still an active unorganized market. It consists of indigenous bankers and
moneylenders. In the unorganized market, there is no clear demarcation between short-term
and long-term finance and even between the purposes of finance. The unorganized sector
continues to provide finance for trade as well as personal consumption. The inability of the
poor to meet the "creditworthiness" requirements of the banking sector make them take
recourse to the institutions that still remain outside the regulatory framework of banking. But
this market is shrinking.

The capital market consists of primary and secondary markets. The primary market
deals with the issue of new instruments by the corporate sector such as equity shares,
preference shares and debt instruments. Central and State governments, various public sector
industrial units (PSUs), statutory and other authorities such as state electricity boards and
port trusts also issue bonds/debt instruments. The primary market in which public issue of
securities is made through a prospectus is a retail market and there is no physical location.

6
Offer for subscription to securities is made to investing community. The secondary market or
stock exchange is a market for trading and settlement of securities that have already been
issued. The investors holding securities sell securities through registered brokers/sub-brokers
of the stock exchange. Investors who are desirous of buying securities purchase securities
through registered brokers/sub-brokers of the stock exchange. It may have a physical location
like a stock exchange or a trading floor. Since 1995, trading in securities is screen-based and
Internet-based trading has also made an appearance in India.

The secondary market consists of 23 stock exchanges including the National Stock
Exchange, Over-the-Counter Exchange of India (OTCEI) and Inter Connected Stock
Exchange of India Ltd. The secondary market provides a trading place for the securities
already issued, to be bought and sold. It also provides liquidity to the initial buyers in the
primary market to re-offer the securities to any interested buyer at any price, if mutually
accepted. An active secondary market actually promotes the growth of the primary market
and capital formation because investors in the primary market are assured of a continuous
market and they can liquidate their investments. Capital Market Participants: There are
several major players in the primary market. These include the merchant bankers, mutual
funds, financial institutions, foreign institutional investors (FIIs) and individual investors. In
the secondary market, there are stock- brokers (who are members of the stock exchanges),
the mutual funds, financial institutions, foreign institutional investors (FIIs), and individual
investors. Registrars and Transfer Agents, Custodians and Depositories are capital market
intermediaries that provide important infrastructure services for both primary and secondary
markets. Market regulation: It is important to ensure smooth working of capital market, as it
is the arena where the players in the economic growth of the country. Various laws have been
passed from time to time to meet this objective. The financial market in India was highly
segmented until the initiation of reforms in 1992-93 on account of a variety of regulations
and administered prices including barriers to entry. The reform process was initiated with the
establishment of Securities and Exchange Board of India (SEBI).

The legislative framework before SEBI came into being consisted of three major Acts
governing the capital markets:
1. The Capital Issues Control Act 1947, which restricted access to the securities
market and controlled the pricing of issues.
2. The Companies Act, 1956, which sets out the code of conduct for the corporate
sector in relation to issue, allotment and transfer of securities, and disclosures to be made in
public issues.
3. The Securities Contracts (Regulation) Act, 1956, which regulates transactions in
securities through control over stock exchanges. In addition, a number of other Acts.
Securities and Exchange Board of India

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With the objectives of improving market efficiency, enhancing transparency, checking unfair
trade practices and bringing the Indian market up to international standards, a package of
reforms consisting of measures to liberalize, regulate and develop the securities market was
introduced during the 1990s. This has changed corporate securities market beyond
recognition in this decade. The practice of allocation of resources among different competing
entities as well as its terms by a central authority was discontinued. The secondary market
overcame the geographical barriers by moving to screen-based trading. Trades enjoy counter
party guarantee. Physical security certificates have almost disappeared. The settlement period
has shortened to three days.

The following paragraphs discuss the principal reform measures undertaken since 1992. A
major step in the liberalization process was the repeal of the Capital Issues (Control) Act,
1947 in May 1992. With this, Government's control over issue of capital, pricing of the
issues, fixing of premium and rates of interest, on debentures, etc., ceased. The office, which
administered the Act, was abolished and the market was allowed to allocate resources to
competing uses and users. Indian companies were allowed access to international capital
market through issue of ADRs and GDRs. However, to ensure effective regulation of the
market, SEBI Act, 1992 was enacted to empower SEBI with statutory powers for
(a) protecting the interests of investors in securities,
(b) promoting the development of the securities market, and
(c) regulating the securities market.

Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of
securities, in addition to all intermediaries and persons associated with securities market.
SEBI can specify the matters to be disclosed and the standards of disclosure required for the
protection of investors in respect of issues. It can issue directions to all intermediaries and
other persons associated with the securities market in the interest of investors or of orderly
development of the securities market; and can conduct inquiries, audits and inspection of all
concerned and adjudicate offences under the Act. In short, it has been given necessary
autonomy and authority to regulate and develop an orderly securities market.

There were several statutes regulating different aspects of the securities market and
jurisdiction over the securities market was split among various agencies, whose roles
overlapped and which at times worked at cross-purposes. As a result, there was no coherent
policy direction for market participants to follow and no single supervisory agency had an
overview of the securities business. Enactment of SEBI Act was the first such attempt
towards integrated regulation of the securities market. SEBI was given full authority and
jurisdiction over the securities market under the Act, and was given con-current/delegated
powers for various provisions under the Companies Act and the SC(R) A. The Depositories
Act, 1996 is also administered by SEBI. A high level committee on capital markets has been

8
set up to ensure co-ordination among the regulatory agencies in financial markets. In the
interest of investors, SEBI issued Disclosure and Investor Protection (DIP) Guidelines.

Issuers are now required to comply with these Guidelines before accessing the market. The
guidelines contain a substantial body of requirements for issuers/intermediaries. The main
objective is to ensure that all concerned observe high standards of integrity and fair dealing,
comply with all the requirements with due skill, diligence and care, and disclose the truth, the
whole truth and nothing but the truth. The Guidelines aim to secure fuller disclosure of
relevant information about the issuer and the nature of the securities to be issued so that
investor can take an informed decision. For example, issuers are required to disclose any
material 'risk factors' in their prospectus and the justification for the pricing of the securities
has to be given. SEBI has placed a responsibility on the lead managers to give a due
diligence certificate, stating that they have examined the prospectus, that they find it in order
and that it brings out all the facts and does not contain anything wrong or misleading. Though
the requirement of vetting has now been dispensed with, SEBI has raised standards of
disclosures in public issues to enhance the level of investor protection. Improved disclosures
by listed companies: The norms for continued disclosure by listed companies have also
improved the availability of timely information. The information technology helped in easy
dissemination of information about listed companies and market intermediaries. Equity
research and analysis and credit rating have improved the quality of information. SEBI has
recently started a system for Electronic Data Information Filing and Retrieval System
(EDIFAR) to facilitate electronic filing of public domain information by companies.
Introduction of derivatives: To assist market participants to manage risks better through
hedging, speculation and arbitrage, SC(R) A was amended in 1995 to lift the ban on options
in securities. However, trading in derivatives did not take off, as there was no suitable legal
and regulatory framework to govern these trades. Besides, it needed a lot of preparatory work
- the underlying cash markets needed to be strengthened with the assistance of the
automation of trading and of the settlement system; the exchanges developed adequate
infrastructure and the information systems required to implement trading discipline in
derivative instruments. The SC(R) A was amended further in December 1999 to expand the
definition of securities to include derivatives so that the whole regulatory framework
governing trading of securities could apply to trading of derivatives also. A three-decade old
ban on forward trading, which had lost its relevance and was hindering introduction of
derivatives trading, was withdrawn.

Derivative trading took off in June 2000 on two exchanges. Now different types of derivative
contracts i.e. index future, index options, single stock futures and single stock options are
available in the market. The governing bodies of stock exchanges used to be dominated by
brokers, leading inevitably to conflicts of interest. To discipline brokers and cure typical
stock market ills such as price rigging, it was considered necessary for stock exchanges to
have a professionally managed environment. NSE started with the concept of an independent

9
governing body without any broker representation. It was specified in 1993 that the
governing boards of stock exchanges must have 50% non-broker members, and that on
committees handling matters of discipline, default, etc., brokers would be in the minority.

All stock exchanges were mandated to appoint a non-broker executive director who would be
accountable to SEBI for implementing the policy directions of the Central Government/
SEBI. In course of time, the position of the executive director in the management of stock
exchange has been strengthened. Indian securities market is getting increasingly integrated
with the rest of the world. Flls have been permitted to invest in all types of securities,
including government securities. Indian companies have been permitted to raise resources
from abroad through issue of ADRs, GDRs, FCCBs and ECBs. Reserve Bank of India has
recently allowed the limited two-way fungibility for the subscribers of these instruments.
Indian stock exchanges have been permitted to set up trading terminals abroad. The trading
platform of Indian exchanges can now be accessed through the Internet from anywhere in the
world. In line with the global phenomena, Indian capital markets have also moved to rolling
settlements on a T+2 basis where trades are settled on the second day after trading.

National Stock Exchange

The National Stock Exchange was set up in 1995 as a first step in reforming the securities
market through improved technology and introduction of best practices in management. It
started with the concept of an independent governing body without any broker representation
thus ensuring that the operators' interests were not allowed to dominate the governance of the
exchange. The practice of physical trading-imposed limits on trading volumes and, hence, the
speed with which new information was incorporated into prices. To obviate this, the NSE
introduced screen-based trading system (SBTS) where a member can punch into the
computer the quantities of shares and the prices at which he wants to transact. The
transaction is executed as soon as the quote punched by a trading member finds a matching
sale or buy quote from counter party. SBTS electronically matches the buyer and seller in an
order-driven system or finds the customer the best price available in a quote-driven system,
and, hence, cuts down on time, cost and risk of error, as well as on the chances of fraud.
SBTS enables distant participants to trade with each other, improving the liquidity of the
markets. The electronic and now fully online trading introduced by the NSE has made such
manipulation difficult. It has also improved liquidity and made the entire operation more
transparent and efficient.

The NSE has set up a clearing corporation to provide legal counter party guarantee to each
trade thereby eliminating counter party risk. The National Securities Clearing Corporation

10
Ltd. (NSCCL) commenced operations in April 1996. Counter party risk is guaranteed
through fine-tuned risk management systems and an innovative method of on-line position
monitoring and automatic disablement. Principle of "novation" is implemented by NSE
capital market segment. Under this principle, NSCCL is the counter party for every
transaction and, therefore, default risk is minimized. To support the assured settlement, a
"settlement guarantee fund" has been created. A large settlement guarantee fund provides a
cushion for any residual risk. As a consequence, despite the fact that the daily traded volumes
on the NSE run into thousands of crores of rupees, credit risk no longer poses any problem in
the marketplace.

Depository System

The erstwhile settlement system on Indian stock exchanges was also inefficient and increased
risk, due to the time that elapsed before trades were settled. The transfer was by physical
movement of papers. There had to be a physical delivery of securities -a process fraught with
delays and resultant risks. The second aspect of the settlement related to transfer of shares in
favor of the purchaser by the company. The system of transfer of ownership was grossly
inefficient as every transfer involves physical movement of paper securities to the issuer for
registration, with the change of ownership being evidenced by an endorsement on the
security certificate. To obviate these problems, the Depositories Act, 1996 was passed. It
provides for the establishment of depositories in securities with the objective of ensuring free
transferability of securities with speed, accuracy and security. It does so by (a) making
securities of public limited companies freely transferable subject to certain exceptions; (b)
dematerializing the securities in the depository mode; and (c) providing for maintenance of
ownership records in a book entry form. In order to streamline both the stages of settlement
process, the Act envisages transfer ownership of securities electronically by book entry
without making the securities move from person to person. The Act has made the securities
of all public limited companies freely transferable, restricting the company's right to use
discretion in effecting the transfer of securities, and the transfer deed and other procedural
requirements under the Companies Act have been dispensed with. Two depositories, viz.,
NSDL and CDSL, have come up to provide instantaneous electronic transfer of securities.

Capital Market Intermediaries:

11
There are several institutions, which facilitate the smooth functioning of the securities
market. They enable the issuers of securities to interact with the investors in the primary as
well as the secondary arena.

Merchant Bankers

Among the important financial intermediaries are the merchant bankers. The services of
merchant bankers have been identified in India with just issue management. It is quite
common to come across reference to merchant banking and financial services as though they
are distinct categories. The services provided by merchant banks depend on their inclination
and resources - technical and financial. Merchant bankers (Category 1) are mandated by
SEBI to manage public issues (as lead managers) and open offers in take-overs. These two
activities have major implications for the integrity of the market. They affect investors'
interest and, therefore, transparency has to be ensured. These are also areas where
compliance can be monitored and enforced. Merchant banks are rendering diverse services
and functions. These include organizing and extending finance for investment in projects,
assistance in financial management, acceptance house business, raising Euro-dollar loans and
issue of foreign currency bonds. Different merchant bankers specialize in different services.
However, since they are one of the major intermediaries between the issuers and the
investors, their activities are regulated by:

(1) SEBI (Merchant Bankers) Regulations, 1992.

(2) Guidelines of SEBI and Ministry of Finance.
(3) Companies Act, 1956.
(4) Securities Contracts (Regulation) Act, 1956.

The Merchant Bankers Regulations of Securities and Exchange Board of India

(SEBI) regulate merchant banking activities, especially those covering issue and
underwriting of shares and debentures. SEBI has made the quality of manpower as one of the
criteria for renewal of merchant banking registration. These skills should not be concentrated
in issue management and underwriting alone. The criteria for authorization take into account
several parameters. These include:

 Professional qualification in finance, law or business management,

 Infrastructure like adequate office space, equipment and manpower,
 Employment of two persons who have the experience to conduct the business of
merchant bankers,
 Capital adequacy and
 Past track record, experience, general reputation and fairness in all their transactions.

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 SEBI authorizes merchant bankers for an initial period of three years, if they have a
minimum net worth of Rs. 5 crores. An initial authorization fee, an annual fee and renewal
fee is collected by SEBI. According to SEBI, all issues should be managed by at least one
authorized merchant banker functioning as the sole manager or lead manager. The lead
manager should not agree to manage any issue unless his responsibilities relating to the issue,
mainly disclosures, allotment and refund, are clearly defined. A statement specifying such
responsibilities has to be furnished to SEBI. SEBI prescribes the process of due diligence that
a merchant banker has to complete before a prospectus is cleared. It also insists on
submission of all the documents disclosing the details of account and the clearances obtained
from the ROC and other government agencies for tapping peoples' savings. The
responsibilities of lead manager, underwriting obligations, capital adequacy, due diligence
certification, etc., are laid down in detail by SEBI. The objective is to facilitate the investors
to take an informed decision regarding their investments and not expose them to unknown
risks.

Credit Rating Agencies

The 1990s saw the emergence of a number of rating agencies in the Indian market. These
agencies appraise the performance of issuers of debt instruments like bonds or fixed deposits.
The rating of an instrument depends on parameters like business risk, market position,
operating efficiency, adequacy of cash flows, financial risk, financial flexibility, and
management and industry environment. The objective and utility of this exercise is twofold.
From the point of view of the issuer, by assigning a particular grade to an instrument, the
rating agencies enable the issuer to get the best price. Since all financial markets are based on
the principle of risk/reward, the less risky the profile of the issuer of a debt security, the
lower the price at which it can be issued. Thus, for the issuer, a favorable rating can reduce
the cost of borrowed capital. From the viewpoint of the investor, the grade assigned by the
rating agencies depends on the capacity of the issuer to service the debt. It is based on the
past performance as well as an analysis of the expected cash flows of a company when
viewed on the industry parameters as well as company performance. Hence, the investor can
judge for himself whether he wants to place his savings in a "safe" instrument and get a lower
return or he wants to take a risk and get a higher return. The 1990s saw an increase in activity
in the primary debt market. Under the SEBI guidelines all issuers of debt have to get the
instruments rated. They also have to prominently display the ratings in all that marketing
literature and advertisements. The rating agencies have thus become an important part of the
institutional framework of the Indian securities market.

R& T Agents - Registrars to Issue

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R&T Agents form an important link between the investors and issuers in the securities
market. A company, whose securities are issued and traded in the market, is known as the
Issuer. The R&T Agent is appointed by the Issuer to act on its behalf to service the investors
in respect of all corporate actions like sending out notices and other communications to the
investors as well as dispatch of dividends and other non-cash benefits. R&T Agents perform
an equally important role in the depository system as well.

Stock Brokers

Stockbrokers are the intermediaries who are allowed to trade in securities on the exchange of
which they are members. They buy and sell on their own behalf as well as on behalf of their
clients. Traditionally in India, individuals owned firms providing brokerage services or they
were partnership firms with unlimited liabilities. There were, therefore, restrictions on the
amount of funds they could raise by way of debt. With increasing volumes in trading as well
as in the number of small investors, lack of adequate capitalization of these firms exposed
investors to the risks of these firms going bust and the investors would have no recourse to
recovering their dues. With the legal changes being effected in the membership rules of stock
exchanges as well as in the capital gains structure for stock-broking firms, a number of
brokerage firms have converted themselves into corporate entities. In fact, NSE encouraged
the setting up of corporate broking members and has today has only 10% of its members who
are not corporate entities.

Custodians

In the earliest phase of capital market reforms, to get over the problems associated with
paper-based securities, large holding by institutions and banks were sought to be
immobilized. Immobilization of securities is done by storing or lodging the physical security
certificates with an organization that acts as a custodian - a securities depository. All
subsequent transactions in such immobilized securities take place through book entries. The
actual owners have the right to withdraw the physical securities from the custodial agent
whenever required by them. In the case of IPO, a jumbo certificate is issued in the name of
the beneficiary owners based on which the depository gives credit to the account of
beneficiary owners. The Stock Holding Corporation of India was set up to act as a custodian
for securities of a large number of banks and institutions who were mainly in the public
sector. Some of the banks and financial institutions also started providing "Custodial"
services to smaller investors for a fee. With the introduction of dematerialization of securities
there has been a shift in the role and business operations of Custodians.
Mutual Funds

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Mutual funds are financial intermediaries, which collect the savings of small investors and
invest them in a diversified portfolio of securities to minimize risk and maximize returns for
their participants. Mutual funds have given a major fillip to the capital market - both primary
as well as secondary. The units of mutual funds, in turn, are also tradable securities. Their
price is determined by their net asset value (NAV), which is declared periodically. The
operations of the private mutual funds are regulated by SEBI with regard to their registration,
operations, administration and issue as well as trading. There are various types of mutual
funds, depending on whether they are open ended or close ended and what their end use of
funds is. An open-ended fund provides for easy liquidity and is a perennial fund, as its very
name suggests. A closed-ended fund has a stipulated maturity period, generally five years. A
growth fund has a higher percentage of its corpus invested in equity than in fixed income
securities, hence, the chances of capital appreciation (growth) are higher. In Growth Funds,
the dividend accrued, if any, is reinvested in the fund for the capital appreciation of
investments made by the investor. An Income fund on the other hand invests a larger portion
of its corpus in fixed income securities in order to pay out a portion of its earnings to the
investor at regular intervals. A balanced fund invests equally in fixed income and equity in
order to earn a minimum return to the investors. Some mutual funds are limited to a
particular industry; others invest exclusively in certain kinds of short-term instruments like
money market or Government securities. These are called money market funds or liquid
funds. To prevent processes like dividend stripping or to ensure that the funds are available to
the managers for a minimum period so that they can be deployed to at least cover the
administrative costs of the asset management company, mutual funds prescribe an entry load
or an exit load for the investors. If investors want to withdraw their investments earlier than
the stipulated period, an exit load is chargeable. To prevent profligacy, SEBI has prescribed
the maximum that can be charged to the investors by the fund managers.

Depositories

The depositories are important intermediaries in the securities market that is scrip-less or
moving towards such a state. In India, the Depositories Act defines a depository to mean, "a
company formed and registered under the Companies Act, 1956 and which has been granted
a certificate of registration under sub-section (IA) of section 12 of the Securities and
Exchange Board of India Act, 1992." The principal function of a depository is to
dematerialize the securities and enable their transactions in book-entry form.
Dematerialization of securities occurs when securities, issued in physical form, are destroyed
and an equivalent number of securities are credited into the beneficiary owner's account. In a
depository system, the investors stand to gain by way of lower costs and lower risks of theft
or forgery, etc. They also benefit in terms of efficiency of the process. But the
implementation of the system has to be secure and well governed. All the players have to be
conversant with the rules and regulations as well as with the technology for processing. The

15
intermediaries in this system have to play strictly by the rules. A depository established under
the Depositories Act can provide any service connected with recording of allotment of
securities or transfer of ownership of securities in the record of a depository. A depository
cannot directly open accounts and provide services to clients. Any person willing to avail of
the services of the depository can do so by entering into an agreement with the depository
through any of its Depository Participants.

Depository Participants

A Depository Participant (DP) is described as an agent of the depository. They are the
intermediaries between the depository and the investors. The relationship between the DPs
and the depository is governed by an agreement made between the two under the
Depositories Act. In a strictly legal sense, a DP is an entity that is registered as such with
SEBI under the provisions of the SEBI Act. As per the provisions of this Act, a DP can offer
depository related services only after obtaining a certificate of registration from SEBI. SEBI
(D&P) Regulations, 1996 prescribe a minimum net worth of Rs. 50 lakh for stockbrokers,
R&T agents and non-banking finance companies (NBFC), for granting them a certificate of
registration to act as DPs. If a stockbroker seeks to act as a DP in more than one depository,
he should comply with the specified net worth criterion separately for each such depository.
No minimum net worth criterion has been prescribed for other categories of DPs. However,
depositories can fix a higher net worth criterion for their DPs. NSDL requires a minimum net
worth of Rs. 100 lakh to be eligible to become a DP as against Rs. 50 lakh prescribed by
SEBI (D&P) Regulations. The role, functions, responsibilities and business operations of
DPs are described in detail in the second section of this book.

Instruments

The changes in the regulatory framework of the capital market and fiscal policies have also
resulted in newer kinds of financial instruments (securities) being introduced in the market.
Also, a lot of financial innovation by companies who are now permitted to undertake treasury
operations, has resulted in newer kinds of instruments - all of which can be traded – being
introduced. The variations in all these instruments depend on the tenure, the nature of
security, the interest rate, the collateral security offered and the trading features, etc.

Debentures

16
These are issued by companies and regulated under the SEBI guidelines of June 11, 1992.
These are issued under a prospectus, which has to be approved by SEBI like in the case of
equity issues. The rights of investors as debenture holders are governed by the Companies
Act, which prohibits the issue of debentures with voting rights. There are a large variety of
debentures that is available. This includes:

• Participating debentures
• Convertible debentures with options
• Third party convertible debentures
• Debt/equity swaps
• Zero coupon convertible notes
• Secured premium notes
• Zero interest fully convertible debentures
• Fully convertible debentures with interest
• Partly convertible debentures.

Bonds

Indian DFIs, like IDBI, ICICI, and IFCI, have been raising capital for their operations by
issuing of bonds. These too are available in a large variety. These include:

• Income bonds
• Tax-free bonds
• Capital gains bonds
• Deep discount bonds
• Infrastructure bonds
• Retirement bonds

In addition to the interest rates and maturity profiles of these instruments, the issuer
institutions have been including a put/call option on especially the very long-dated bonds like
deep discount bonds. Since the tenures of some of these instruments spanned some 20 or 25
years during which the interest rate regimes may undergo a complete change, the issuer have
kept the flexibility to retire the costly debt. This they do by exercising their option to redeem
the securities at pre-determined periods like at the end of five or seven years. This has been
witnessed in number of instruments recently much to the chagrin of investors who were
looking for secure and hassle-free long-dated instruments.

17
Preference Shares:

As the name suggests, owners of preferential shares enjoy a preferential treatment with
regard to corporate actions like dividend. They also have a higher right of repayment in case
of winding up of a company. Preference shares have different features and are accordingly
available as:

• Cumulative and non-cumulative

• Participating
• Cumulative & Redeemable fully convertible to preference shares
• Cumulative & Redeemable fully convertible to equity
• Preference shares with warrants
• Preference shares

Equity Shares

As the name indicates, these represent the proportionate ownership of the company. This
right is expressed in the form of participation in the profits of the company. There has been
some innovation in the way these instruments are issued. Some hybrid securities like equity
shares with detachable warrants are also available.

Government securities

The Central Government or State Governments issue securities periodically for the purpose
of raising loans from the public. There are two types of Government Securities – Dated
Securities and Treasury Bills. Dated Securities have a maturity period of more than one year.
Treasury Bills have a maturity period of less than or up to one year. The Public Debt Office
(PDO) of the Reserve Bank of India performs all functions with regard to the issue
management, settlement of trade, distribution of interest and redemption. Although only
corporate and institutional investors subscribe to government securities, individual investors
are also permitted to subscribe to these securities. An investor in government securities has
the option to have securities issued either in physical form or in book-entry form (commonly
known as Subsidiary General Ledger form). There are two types of SGL facilities, viz., SGL-
1 and SGL-2. In the SGL-1 facility, the account is opened with the RBI directly. There are
several restrictions on opening SGL-1 accounts and only entities, which fulfill all the
eligibility criteria, are permitted to open SGL-1 account. The RBI has permitted banks,
registered primary dealers and certain other entities like NSCCL, SHCIL, and NSDL to
provide SGL facilities to subscribers. A subscriber to government securities who opts for

18
SGL securities may open an SGL account with RBI or any other approved entity. Investments
made by such approved entity on its own account are held in SGL-1 account, and
investments held on account of other clients are held in SGL-2 account.

Capital Market Processes

There are various processes that Issuers of securities follow or utilize in order to tap the
savers for raising resources. Some of the commonly used processes and methods are
described below.

Initial Public Offering (IPO)

Companies, new as well as old can offer their shares to the investors in the primary market.
This kind of tapping the savings is called an IPO or Initial Public Offering. SEBI regulates
the way in which companies can make this offering. New companies can make an IPO if they
have a dividend-paying (ability) record of three years. The size of the initial issue, the
exchange on which it can be listed, the merchant bankers' responsibilities, the nature and
content of the disclosures in the prospectus, procedures for all these are laid down by SEBI
and have to be strictly complied with. Exemption may be granted by SEBI in certain cases
for minimum public offer or minimum subscription in the case of certain industry sectors like
infrastructure or IT or media & communications. Several changes have also been introduced
in recent years in the manner in which the IPOs can be marketed. For example they can now
take the book-building route or they can even be marketed through the secondary market by
brokers or DPs. All these changes have been made with the objective of making the process
more investor friendly by reducing risk, controlling cost, greater transparency in the pricing
mechanism and protecting liquidity in the hands of the investor. Some of the IPOs have been
available for subscription online - where the bids are made in real time and the information is
made available on an instantaneous basis on the screen. It is possible to subscribe for IPO
shares in demat form through DPs.

Private Placement

Many companies choose to raise capital for their operations through various intermediaries
by taking what in marketing terms would be known as the wholesale route. The retail route -
of approaching the public -is expensive as well as time consuming. This is called in financial
markets as private placement. SEBI has prescribed the eligibility criteria for companies and
instruments as well as procedures for private placement. However, liquidity for the initial
investors in privately placed securities is ensured as they can be traded in the secondary
market. But such securities have different rules for listing as well as for trading.

19
Preferential Offer/Rights Issue

Companies can expand their capital by offering the new shares to their existing shareholders.
Such offers for sale can be made to the existing shareholders by giving them a preferential
treatment in allocation or the offer can be on a rights basis, i.e., the existing holders can get
by way of their right, allotment of new shares in certain proportion to their earlier holding.
All such offers have also to be approved by SEBI, which has laid out certain criteria for these
routes of tapping the public. These have to be complied with.

Internet Broking

With the Internet becoming ubiquitous, many institutions have set up securities trading
agencies that provide online trading facilities to their clients from their homes. This has been
possible since all the players in the securities market, viz., stockbrokers, stock exchanges,
clearing corporations, depositories, DPs, clearing banks, etc., are linked electronically. Thus,
information flows amongst them on a real time basis. The trading platform, which was
converted from the trading hall to the computer terminals at the brokers' premises, has now
shifted to the homes of investors. This has introduced a higher degree of transparency in
transactions. The investor knows exactly when and at what rate his order was processed. It
also creates an end-to-end audit trail that makes market manipulation difficult. The
availability of securities in demat form has given a further fillip to this process. However, the
emergence of, what is known as, "day-traders" has resulted in the business environment of
brokers, which has changed. Investors, who can now trade directly, no longer require their
intermediation. Service charges have therefore been declining - all of which has been in favor
of investors.

20
 CHAPTER - 2
COMPANY PROFILE

SHAREKHAN LIMITED

21
ShareKhan Ltd., one of the leading stock broking firm and pioneer in online trading in India
is a progeny of Shripal, Sevantilal, Kantilal and Ishwarlal [SSKI]. They have 250 share
shops in 120 cities. The daily turnover of ShareKhan is round about Rs. 11-12 crores and
working capital round about Rs. 450 crores. The growth of ShareKhan is because it is
consistent in providing innovative and value-based customer service. SSKI has been helping
their investors from round about 81 years with their equity investments.

The company provides equity-based products (research, equities, derivatives, depository,

margin funding, etc.). It has one of the largest networks in the country with 704 share shops
in 280 cities and India’s premier online trading portal www.sharekhan.com. With their
research expertise, customer commitment and superior technology, they provide investors
with end-to-end solutions in investments. They provide trade execution services through
multiple channels - an Internet platform, telephone and retail outlets.

Sharekhan was established by Morakhia family in 1999-2000 and Morakhia family,

continues to remain the largest shareholder. It is the retail broking arm of the Mumbaibased
SSKI [SHANTILAL SHEWANTILAL KANTILAL ISWARNATH LIMITED] Group. SSKI
which is established in 1930 is the parent company of Sharekhan ltd. With a legacy of more
than 80 years in the stock markets, the SSKI group ventured into institutional broking and
corporate finance over a decade ago. Presently SSKI is one of the leading players in
institutional broking and corporate finance activities. Sharekhan offers its customers a wide
range of equity related services including trade execution on
BSE, NSE, and Derivatives. Depository services, online trading, Investment advice,
Commodities, etc

Sharekhan Ltd. is a brokerage firm which is established on 8th February 2000 and
now it is having all the rights of SSKI. The company was awarded the 2005 Most Preferred
Stock Broking Brand by Awwaz Consumer Vote. It is first brokerage Company to go online.
The Company's online trading and investment site - www.Sharekhan.com - was also
launched on Feb 8, 2000. This site gives access to superior content and transaction facility to
retail customers across the country. Known for its jargon-free, investor friendly language and
high-quality research, the content-rich and research oriented portal has stood out among its
contemporaries because of its steadfast dedication to offering customers best-of-breed
technology and superior market information.

Share khan has one of the best states of art web portal providing fundamental and
statistical information across equity, mutual funds and IPOs. One can surf across 5,500
companies for in-depth information, details about more than 1,500 mutual fund schemes and
IPO data. One can also access other market related details such as board meetings, result
announcements, FII transactions, buying/selling by mutual funds and much more.

Sharekhan's management team is one of the strongest in the sector and has positioned
Sharekhan to take advantage of the growing consumer demand for financial services products
in India through investments in research, pan-Indian branch network and an outstanding

22
technology platform. Further, Sharekhan's lineage and relationship with SSKI Group provide
it a unique position to understand and leverage the growth of the financial services sector. We
look forward to providing strategic counsel to Sharekhan's management as they continue
their expansion for the benefit of all shareholders."

ShareKhan Ltd. is known for its deep understanding of the stock market. They are
also providing multi-channel access facility to its customer through an online service with its
website www.sharekhan.com and Dial-n-Trade through their call-centers.

They have excellent trading facilities like the Classic Account and other software
base online trading product for the day-traders, called Speed Trade [this provides everything
to the trader on his screen instantly]. They regularly send detail research reports and the
expert suggestions & tips through e-mail to its customer every day. These services help its
customer in the investment decisions. Share khan offers trade execution facilities on the BSE
and NSE, for cash as well as derivatives, depository services, commodities trading on the
MCX & NCDEX and most importantly.

The SSKI Group also comprises of Institutional broking & Corporate Finance. The
Institutional broking division caters to domestic and foreign institutional investors while the
Corporate Finance Division focuses on niche areas such as infrastructure, telecom and
media. SSKI has been voted as the Top Domestic Brokerage House in the research category,
twice by Euro money survey and four times by Asia money survey. SSKI was adjudged as
the ‘Best Local Brokerage’ in India by Asia money.
ShareKhan provides various On-line services to its customers like:

(i) Classic Account: - It facilitates its client to trade through website. There are features
like Demat & Digital Contacts, Quotes, Integrated Banking, Multiple Watch list,
and Instant credit & transfer.

(ii) Dial–n–trade: - Through Toll free number order is placed. The fund is
automatically transferred through phone banking. It is not time consuming; just
there is a need to enter TPIN. Tele-broker gives trusted and professional advice.
They also provide after hour Order placement facility between 8:00 a.m. to 9:30
a.m. It is simple and secure IVR based system for authentication.

(iii) Speed trade and speed trade plus: - It is software based online trading product
that brings power of broker’s terminal to investor’s PC. It is good for active
traders and jobbers who transact frequently during daytime. It is an Internet
based executable application that provides trader Real time streaming quotes,
Live tic-by-tic Intraday charting, instant Confirmation and alerts.

23
(iv) ShareKhan Depository Services: - ShareKhan Depository Services offers
dematerialization services to individual and corporate investors. A team of
professionals and experts in the latest technology are dedicated exclusively for the
Demate department, other than that franchisee to make the services quick,
convenient and efficient.
(v) Trading in Commodity Futures: - It provides the facility to trade in commodities
[Gold, Silver, Crude oil, Agricultural commodities etc.] through a wholly owned
subsidiary of its Parent SSKI. ShareKhan is a member of 2 Commodity Exchanges
and offers trading facility at both these exchanges.
(I) Multi Commodity Exchange of India [MCX]
(II) National Commodity and Derivative Exchange, Mumbai [NCDEX]
By research ShareKhan classified the scrips of the companies into six clusters to help its
clients. The six clusters are Evergreen, Apple Green, Emerging Star, Ugly Duckling,
Vulture's Pick and Cannonball. Each cluster represents a certain profile in terms of business
fundamentals as well as the kind of returns expected by the investor over a certain time span.
One of the most important pamphlets issued for commodities is termed as SHAREKHAN
EXCLUSIVE.

Sharekhan provides 4 in 1 account.

- Demat a/c
- Trading a/c: for cash calculation
- Bank a/c: for fund transfer
- Dial and Trade: for query relating trading

Products:

 Mutual fund schemes

 Insurance
 Portfolio Management System
 Shares – online and offline
 Bonds
 Fixed Deposits
 Commodities

24
In Sharekhan, under demat account there are two types of terminals.

TYPE OF DEMAT DEPOSIT (Refundable) CHARGES (nonrefundable)

ACCOUNT TERMINAL

CLASSIC Rs.5000 Rs.750

Rs.10000 Nil

TRADETIGER Rs.5000 Rs.1000

Rs.10000/25000 Nil

Its core services are:

 Equities, and Derivatives trading on the National Stock Exchange of India Ltd.
(NSE), and Bombay Stock Exchange Ltd. (BSE),
 Commodities trading on National Commodity and Derivatives Exchange India
(NCDEX) and Multi Commodity Exchange of India Ltd. (MCX),
 Depository services,
 Online trading services,

 IPO Services,
 Dial-n-Trade
 Portfolio management services,
 Fundamental and Technical Research services,
 In addition to this they also provide advisory services and distributions for mutual
funds.
 Sharekhan ValueLine (a monthly publication with reviews of recommendations,
stocks to watch out for etc.)
 Daily research reports and market review (High Noon & Eagle Eye)
 Pre-market Report
 Daily trading calls based on Technical Analysis
 Cool trading products (Daring Derivatives and Market Strategy)

25
 Personalized Advice
 Live Market Information

Sharekhan First Step

The Sharekhan First Step is a brand-new program designed especially for those who are new
to investing in shares. All one has to do is open a Sharekhan First Step account and they
guide us through the investing process.

Market Share

Sharekhan enjoyed about 20 per cent market share in Web business (Internet trading) in stock
markets. Three years ago, Web trading showed lot of promise but with the market witnessing
a downturn, there was not much interest among retail customers.

Profits

The share of Web trading constituted 22 per cent of the revenue. As Sharekhan's daily trading
volume was over Rs 200 crore, the share of Web trading at about Rs 40 crore a day was
substantial, and a larger part of the volume was coming from day traders.

Features of Trading with Sharekhan:

1.Freedom from paperwork

2.Instant credit and money transfer
3.Trade from any net enabled PC
4.After hour orders
5.Online orders on the phone
6.Timely advice and-research reports
7.Real-time Portfolio tracking
8. Information and Price alerts.

26
FINANCIAL CAPABILITY

Taking in to consideration all its assets and liabilities company is valued at around Rs.
750-850 crores.

HIERARCHY IN Sharekhan

There are 14 main hierarchical levels in Sharekhan:

1) Trainees
2) Super trainees
3) Sales executives
4) Assistant sales manager
5) Area sales manager
6) City sales manager
7) Assistant branch manager
8) Branch manager
9) Regional head
10)Cluster head
11) Business head
12)Country head
13)Directors
14)CEO

STRENGTHS WEAKNESSES
First brokerage firm to go online. High brokerage charges but now

27
 Products they have overcome this by a new
prepaid scheme in which brokerage is
PMS Services. reduced to half.
Technology

Online fund transfer.

Research reports.

Clients (average of 15,000 accounts per year)

Recommendations from clients.

Free Demat a/c opening.

Low annual maintenance charge

OPPORTUNITIES THREATS
Huge market. Volatility of the share market.

Competitors.

Account opening:
Opening a DP account with Sharekhan

One can open a Depository Participant (DP) account, either through a Sharekhan branch or
through a Sharekhan Franchisee center.
There is no fee for opening DP accounts with Sharekhan. However, a nominal deposit
(refundable) is charged towards services which will be adjusted against all future billings.

28
All investors have to submit their proof of identity and proof of address along with the
prescribed account opening form.

List of Documents required to open an account with Sharekhan:

1) Proof of Identity
You can submit a photo copy of any of the following
o Voter ID o Passport o PAN Card o MAPIN UID Card
o Driving License
o Photo I card issued by Employer registered under MAPIN

2) Copy of Ration Card

3) Address Proof
You can submit a photo copy of any of the following
o Voter ID Card o Driving License o Passport o Ration
Card
o Telephone Bill o
Electricity Bill
o Leave-License o
Bank Passbook o
Latest Bank
Statement o
Insurance Policy o
Flat Maintenance
Bill

4) A copy of cancelled cheque

5) Nominee photograph, if filled

6) Signed Photograph of all holders

BROKERAGE STRUCTURE OF SHAREKHAN

BROKERAGE:

29
 INTRADAY DELIVERY
CASH- EQUITIES 0.05% 0.5%
FnO 0.05%
PREPAID SCHEME 0.025% 0.25%
Sharekhan has tie up with the following banks:

• HDFC
• Axis Bank
• IDBI
• Citi Bank
• IndusInd Bank
• Union Bank
• ICICI
• Oriental Bank Of Commerce
MINIMUM INVESTMENT IN MUTUAL FUND:

INVESTMENT MINIMUM AMOUNT

Mutual Fund (Any Company) 5000

Systematic Investment Plan (Any 500

Company)

ADVANTAGES OF SHAREKHAN:

1. Online trading is very user friendly and one doesn't need any software to access.

2. They provide good quality of services like daily SMS alerts, mail alerts, stock
recommendations etc.

3. Sharekhan has ability to transfer funds from most banks. Unlike ICICI Direct, HDFC
Sec, etc., so investor not really needs to open an account with a particular bank as it
can establish link with most modern banks.

30
CUSTOMER

• Business class people (high class)

• High Net worth Individuals

• Service class people

• Government Employees

• Young Adults (19-30 yrs.)

• Adults (35-50 yrs.)

• HUF (Hindu Undivided Family)

• Women (literate and working)

• To project Sharekhan as an authority in the retail stock trading business.

• To execute business for the company by selling demat accounts and mutual funds.

• To study the various products of the company.

• To know how to open and close the calls.

• To learn the online terminal used for trading.

• To know the various policies of the company.

31
• To know how to handle various types of customers.

• To know various reasons for market fluctuations.

• To learn to manage time.

• To gain practical knowledge of the market.

• To have a practical experience of working in a reputed organization.

TARGETS

 sells 24 Demat accounts worth Rs.2,00,000/- for 3 month for Sharekhan

Limited at Nagpur.

 To sell 2 Demat accounts per week for 3 months for Sharekhan limited at Nagpur.

 To sell Mutual Funds of various companies through Sharekhan Limited in Nagpur

city for 3 months.

32
TASKS

 To collect the leads.

 To do the telecalling and take appointments.

 To attend the appointment on prescribed time.

 To tell the client about the company and its products.

 To tell the client about the advantages of opening a demat account with

Sharekhan limited.

 To convince the clients to do Online Trading.

 To explain him the terms and conditions of the product.

 To convince the client to open Demat account at Sharekhan ltd.

 To give a live demo of how the online terminal works.

 By means of presentation explaining them how to trade online.

 To take signatures of the client on the KYC (know your customer) form.

 To collect the documents required to open a demat account.

 To fill up the KYC form for the customer.

 To install the software in the client`s computer.

 To make the client trade.

 To sell the mutual funds.

 To get the references from the client.

 To conduct seminars in the banks and good companies.

33
 MY SIP IN SHAREKHAN

Before my Summer Internship Programme, I had very little knowledge about the stock

market and its fundamentals. And now after undergoing training for the 12th week at

Sharekhan there is a tremendous increase in my knowledge about the stock market. I have

also gained a lot of knowledge about the Sharekhan Company and its various products,

schemes and policies and also about its competitors. The products which I

have sold up till now are Demat accounts and mutual funds. And I am confident about my

knowledge about demat accounts and mutual funds. Although nobody can claim complete

expertise but there is a sea change at least from my point of view. I have learnt what are the

various indices and their significance in market. I have also learnt the impact of Sensex and

Nifty on overall stock market. I have learnt about various fundamentals and technical

aspects, which affect the stock prices in short, run and long run. At Sharekhan we have also

been taught to use the online terminal.

Sharekhan is one of the top retail brokerage houses in India with a strong online trading

platform. The company provides equity based products (research, equities, derivatives,

depository, margin funding, etc.). It has one of the largest networks in the country with 1000

share shops in 375 cities and India’s premier online trading portal www.sharekhan.com.

Out of these we have to mostly sell demat accounts and Mutual Funds.
In the first week we had training sessions for 3 days in which our company guide Mr. Chirag

Joshi gave us the complete information about the company, its products and policies. He

gave us tips on how to open and close the calls. He also gave us tips on how to do telecalling.

34
He also gave us information on how to fill the KYC form and what are the documents

required to open the demat account.

Then finally after this we were sent to the market to bring demat accounts and Mutual funds.

Initially we faced many obstacles and reasons were many like bad stock market conditions

and we were unable to locate potential market etc. but slowly I collected a good number of

leads and references from whom so ever I met. I am still following the clients who are

giving follow up dates.

Our main task is to sell the online demat account. During this venture I came across many

people who came from different walks of life. I have learned how to deal with them and

convince them to open the demat account with Sharekhan.

Selling a demat account requires special focus on targeting the customers. Each and every

person does not invest in the share market. The person who will be investing in the share

market should have at least the basic knowledge about the same or should have the curiosity

to gain the same. So what I had to do is to identify the prospective client and then try to

convince them. Wasting time on the customer who does not know anything about stock

market is completely worthless.

While on the call if customer asks me any query about which I am not very much sure then I

call our Chirag sir who then clears my doubts and queries without any irritation. This not

only solves clients query but also makes our concepts clear and strong.

I initially met roundabout 15 to 20 people every day. Out of these I found 5 to 6 persons who

took actual interest in the Demat account and Mutual funds. As I met more and more people,

I learned how to identify the prospective clients. I came to know more about how to talk to

35
them, how much time should be given to each client. So my clients’ conversion ratio also

increased. Even, by solving the customer queries, my own understandings were enhanced.

While selling our product in the market, I also came to know more about our

competitor's product like, ICICIDirect, India bulls, India Infoline, Motilal Oswal, Ventura,

Angel Broking etc. and their strategy of marketing and the consumer's preference towards

the competitor's product.

I did cold calling in these three months and created my own database through it. In the

second month some of the follow-ups from the first month started converting. Sharekhan

also started giving advertisement in leading English dailies and on channels like CNBC

where the customers care toll free number is displayed. Sharekhan also started giving ads on

the various sites like Yahoo, Google etc.Sharekhan also started a scheme of free demat

account opening and also the one in which the brokerage reduces to half of the original

brokerage of 0.05% for Intraday and 0.05% for Delivery.

I met people in different locations i.e. at central avenue road, Dharampeth, Gokulpeth road,

SitaBuldi market road, Ramdaspeth road, wardha road, lokmat square, somalwada, Bajaj

nagar, Ram Nagar, wardhaman nagar, Kampthee and Umred etc.

This includes people from the Big Showrooms and malls like Big Bazzar, Chartered

Accountants, Travel agents, business people, housewives, real estate people, Customer

Relationship Managers, Assistant Sales Manager, and engineers of some companies.

Once the customer fills up the KYC form, I call him/her after 5 working days to check if he

has received the welcome kit which contains the login ID and password from Bombay office

of Sharekhan. After he receives the kit I have to go to his place to install the software in his

computer and also I have to tell him how to trade online i.e. I have to explain him the

complete terminal. I am required to show the customer how to make a transaction and how to

36
get access to the terminal. Also, if the client faces any problem, then those too had to be

solved by me. So, it is all a very good learning experience for me.

We have to take about 25 signatures of the customer on the KYC form. This is again a big

challenge because they say that now they don`t have enough time to sign in 25 places. And if

the sign mismatches even a little then there is again some long procedure to make that form

acceptable. I had faced this kind of situation. My second client Mr. Vilash from Umred’s

signature on the KYC form was different from that on his PAN card. So the form got

rejected. And he even said that if this form will not proceed further then he don`t want to

open the Demat account and asked me to return the cheque. Due to this I was very depressed

for 2-3 days But then maybe I called him at a right time as he instantly asked me come and

collect the bank proof statement and I was very happy that day.

At Sharekhan, the atmosphere is perfectly cordial. There are senior trainees and back office

people always to solve the difficulties we faced in approaching a customer, filling up the

form, demonstrating the terminal, or solving the customer’s queries. Even our Chirag sir

helped us in solving our problems. We are supposed to be formally dressed and required to

report once daily at any time.

In the beginning we were asked to report twice a day but then after 4 weeks he asked to

report only once a day. This was done because our office is at Central Avenue road, near

telephone exchange square and if we any appointment in the west Nagpur then it is very

difficult for us to go and report in the office second time.

37
 CHAPTER - 3
RESEARCH
METHODOLOGY

38
Problem Statement

The topic, which is selected for the study, is “DERIVATIVE MARKET” in the firm
so the problem statement for this study will be “THE AWARENESS OF THE DERIVATIVE
AND ITS COMPARISION WITH EQUITY AND COMMODITIES”

Objective of the Study

 To know the awareness of the Derivative Market in Baroda City.

 To find what proportion of the population are investing in such derivatives along with
their investment pattern and product preferences.
 To understand the working of the organization.
 To know the trading system of the derivative exchange.

Research Design

The research design specifies the methods and procedures for conducting a particular
study. The type of research design applied here are “Descriptive” as the objective is to check
the position of the Derivative Market in Baroda city. The objectives of the study have
restricted the choice of research design up to descriptive research design. Therefore, no fixed
hypothesis is set up. This survey will help the firm to know how the investors invest in the
derivative segment & which factors affect their investing behavior.

Scope of the Study

The scope of the study will include the analysis of the survey, which is being
conducted to know the awareness of the Derivative Market in the city & also doing
comparison of derivatives with equity and commodities.

Research Source of Data

There are two types of sources of data which is being used for the studies: -

1. Primary Source of Data:

39
The primary source of data is being collected by preparing a Questionnaire & it was
collected by interviewing the investors.

2. Secondary Source Of Data

For having the detailed study about this topic, it is necessary to have some of the
secondary information, which is collected from the following: -
 Books.
 Magazines & Journals.
 Websites.
 Newspapers, etc.

Methods of Data Collection

The study to be conducted is about the awareness of the Derivative Market in the
New Delhi City so the method of data collection used id “SURVEY METHOD”.

Research Instrument

The research instrument, which is used, for the study is “QUESTIONNAIRE” which
includes the questions which are based on the investment pattern, general awareness, criteria
for investment & the questions are mostly close-ended for the convenience of the investors
to provide the information about it.

Sampling Techniques

In this survey work, no particular sampling technique is used. The sample are
included on the RANDOM NON- PROBABILITY BASIS.

Universe
Investors of New Delhi.

Sample Size

The numbers of respondents selected for conducting the survey are 100 investors.
These samples are collected on the random basis. The investor’s responses are analyzed to

40
know their awareness about the Derivatives & which factors play an important role in their
investment decisions & how far the investors like to invest in Derivative segment.

Presentation of Data

The presentation of data is through” CHARTS AND GRAPHS” which will help in analyzing
the response of the investors.

Findings & Suggestion

The findings & suggestion are given based on the research work done & after
analyzing the survey work conducted.

Limitation of the study

However, the study is going to be a research project, but it definitely has some of the
limitation, which is as follows:
 The time constraint is the important limitation of this study.
 No. of respondents selected was less as compared to the city population.
 Due to the shallow knowledge about the topic, detailed study could not be
conducted.
 Derivative Market being new to the Indian Market, less awareness was observed.
 Respondents were hesitating to give the financial information.

41
CHAPTER - 4
THEORETICAL
ASPECT

42
INTRODUCTION

According to dictionary, derivative means ‘something which is derived from another

source’. Therefore, derivative is not primary, and hence not independent. It depends upon
the primary source from which it is derived. Therefore, with changes in the value of primary
variable, value of derivative also varies. In financial terms, derivative is a product whose
value is derived from the value of one or more basic variables. These basic variables are
called bases, which may be value of underlying asset, a reference rate etc. the underlying
asset can be equity, foreign exchange, commodity or any asset.

For example: - the value of any asset, say share of any company, at a future date
depends upon the share’s current price. Here, the share is underlying asset, the current price
of the share is the bases and the future value of the share is the derivative. Similarly, the
future rate of the foreign exchange depends upon its spot rate of exchange. In this case, the
future exchange rate is the derivative and the spot exchange rate is the base.Derivatives are
contract for future delivery of assets at price agreed at the time of the contract. The quantity
and quality of the asset is specified in the contract. The buyer of the asset will make the cash
payment at the time of delivery.

Derivative product initially emerged, as hedging devices against the fluctuations in

commodity prices and commodity-linked derivatives remained the sole form of such
products for almost three hundred years.

The financial derivatives, derivatives for future delivery of stocks, debt instruments
and foreign currencies, came into spotlight in post-1970 period due to the introduction of
floating exchange rates. Since their emergence, financial derivatives have become very
popular and now they account for about two-third of total transaction in derivative products.

Meaning

Derivatives are the financial contracts whose value/price is dependent on the behaviour of
the price of one or more basic underlying assets (often simply known as the underlying).
These contracts are legally binding agreements, made on the trading screen of stock
exchanges, to buy or sell an asset in future. The asset can be a share, index, interest rate,
bond, rupee dollar exchange rate, sugar, crude oil, soybean, cotton, coffee etc.

43
 In the Indian Context the Security Contracts (Regulation) Act,1956 (SC(R)A) defines
“derivative” to include –
A security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or other form of security.
A contract, which derives its value from the prices, or index of prices of underlying
securities.
Derivatives are securities under the SC(R) A and hence the regulatory framework under the
SC(R) A. governs the trading of derivative.

Contracts agreement

Cash Derivatives

Forward Others like Swaps,

FRAs etc

Merchandising Futures Options

, customized (Standardized)

NTSD TSD

44
 In financial terms derivatives is a broad term for any instrumental whose value is
derived from the value of one more underlying assets such as commodities, forex, precious
metal, bonds, loans, stocks, stock indices, etc.

Derivatives were developed primarily to manage offset, or hedge against risk but
some were developed primarily to provide potential for high returns. In the context of equity
markets, derivatives permit corporations and institutional investors to effectively manage
their portfolios of assets and liabilities through instrument like stock index futures.

For example: - The price of Reliance Triple Option Convertible Debentures

(Reliance TOCD) used to vary with the price of Reliance shares. In addition, the price of
Telco warrants depends upon the price of Telco shares. American Depository receipts /
Global Depository receipts draw their price from the underlying shares traded in India.
Nifty options and futures. Reliance futures and options, are the most common and popular
form of derivatives.

The derivatives markets has existed for centuries as a result of the need for both
users and producers of natural resources to hedge against price fluctuations in the underlying
commodities. Although trading in agriculture and other commodities has been the deriving
force behind the development of derivatives exchanges, the demand for products based on
financial instruments such as bond, currencies, stocks and stock indices have now for
outstripped that for the commodities contracts.

The history of the derivatives dates back to the time since the trading came into
being. The merchants entered into contracts with one another for future delivery of specified
amount of commodities at specified price. A primary intention for contracting for future date
was to keep the transaction immune to unexpected fluctuations in price.

Therefore, derivative products initially emerged as hedging devices against

fluctuations in commodity prices. However, the concept applied to financial trade only in the
post-1970 period due to growing instability in the financial markets. However, since their
emergence, these products have become very popular and by 1990s, they accounted for
about two-third of the total transaction in derivative products.

In recent years, the market for financial derivatives has grown tremendously in terms
of variety of instruments available, their complexity and turnover. In the class of equity
derivatives the world over, futures and options on stock indices have gained more popularity

45
than on individual stocks, especially among institutional investors, who are major users of
index-linked derivatives. Even small investors find these useful due to high correlation of
the popular indexes with various portfolios and ease of use.

Early forward contracts in the US addressed merchants concerns about ensuring that
there were buyers and sellers for commodities. However “credit risk” remained a serious
problem.

1848

A group of Chicago businessmen formed the Chicago Board of Trade

(CBOT). The primary intention of the CBOT was to provide a centralized location known in
advance for buyers and sellers to negotiate forward contracts.

1865

The CBOT went one-step further and listed the first “exchange traded” derivatives contract
in the US; these contracts were called “future contracts”

1919

Chicago Butter and Egg & board, a spin-off of CBOT, was reorganized to allow futures
trading. Its name was changed to Chicago Mercantile Exchange (CME).
The CBOT and the CME remain the two largest organized futures exchanges, indeed the two
largest “financial” exchanges of any kind in the world today.

The first stock index futures contract was traded at Kansas City Board of Trade. Currently
the most popular stock index futures contract in the world was based on S&P 500 index,
traded on Chicago Mercantile Exchange.

During the mid eighties, financial futures became the most active derivatives instruments
generating volumes many times more than the commodity futures. Index futures, futures on
T-Bills and Euro-Dollar futures are the three most popular future contracts traded today.
Other popular international exchanges that trade derivatives are LIFFE in England, DTB in
Germany, SGX in Singapore, TIFFE in Japan, and MATIF in France, Eurex, etc.

46
 India has been trading derivatives contract in silver, gold, spices, coffee, cotton, etc
for decades in the gray market. Trading derivatives contracts in organized market was legal
before Morarji Desai’s government banned forward contracts.

Derivatives on stocks were traded in the form of Teji and Mandi in unorganized on
exchanges. For example, now cotton and oil futures trade in Mumbai, soybean futures trade
in Bhopal, pepper futures in Kochi, coffee in Bangalore, etc.

JUNE 2000

National Stock Exchange and Bombay Stock Exchange started trading in futures on Sensex
and Nifty. Options trading on Sensex and
Nifty commenced in June 2001. Very soon thereafter trading began on options and futures in
31 prominent stocks in the month of July and November respectively.

Option and future are the most commonly traded derivatives, but as the
understanding of financial markets and risked management continued to improve newer
derivatives were created. The family includes the host of other product such as forward
contracts. Structured notes, inverse floaters, caps & Floors and Collar Swaps.

The largest derivatives market in the world, are on government bonds (to help
control interest rate risk) the stock index (to help control risk that is associated with the
fluctuations in the stock market) and on exchange rates (to cope with currency risk).

Risk Associated With Derivatives

While derivatives can be used to help manage risks involved in investments, they also have
risks of their own. However, the risks involved in derivatives trading are neither new nor
unique – they are the same kind of risks associated with traditional bond or equity
instruments.

Market Risk

Derivatives exhibit price sensitivity to change in market condition, such as fluctuation in

interest rates or currency exchange rates. The market risk of leveraged derivatives may be
considerable, depending on the degree of leverage and the nature of the security.

47
Liquidity Risk

Most derivatives are customized instrument and could exhibit substantial liquidity risk
implying they may not be sold at a reasonable price within a reasonable period. Liquidity
may decrease or evaporate entirely during unfavorable markets.

Credit Risk

Derivatives not traded on exchange are traded in the over-the-counter (OTC) market. OTC
instrument are subject to the risk of counter party defaults.

Hedging Risk

Several types of derivatives, including futures, options and forward are used as hedges to
reduce specific risks. If the anticipated risks do not develop, the hedge may limit the fund’s
total return.

FUNCTION OF DERIVATIVES MARKET

The derivative market performs a number of economic functions:-

 Prices in an organized derivatives market reflect the perception of market

participants about the future and lead the prices of underlying to the perceived future
level. The prices of derivative converge with the prices of the underlying at the
expiration of the derivative contract. Thus, derivatives help in discovery of future as
well as current prices.
 The derivatives market helps to transfer risks from those who have them but may not
like them to those who have an appetite for them.
 Derivatives, due to their inherent nature, are linked to the underlying cash market.
With the introduction of the derivatives, the underlying market witnesses higher
trading volumes because of the participation by more players who would not
otherwise participate for lack of arrangement to transfer risk.

48
  Speculative trades shift to a more controlled environment of derivatives market. In
the absence of an organized derivative market, speculators trade in the underlying
cash market.
 An important incidental benefit that flows from derivatives trading is that it acts as a
catalyst for new entrepreneurial activity. The derivatives have a history of attracting
many bright, creative, well-educated people with an entrepreneurial attitude. They
often energize others to create new businesses, new products and new employment
opportunities, the benefit of which are immense.
 Derivatives markets help increase savings and investment in the end. Transfer of risk
enables market participants to expand their volumes of activity.

PARTICIPANTS OF THE DERIVATIVE MARKET

Market participants in the future and option markets are many and they perform multiple
roles, depending upon their respective positions. A trader acts as a hedger when he transacts
in the market for price risk management. He is a speculator if he takes an open position in
the price futures market or if he sells naked option contracts. He acts as an arbitrageur when
he enters in to simultaneous purchase and sale of a commodity, stock or other asset to take
advantage of mispricing. He earns risk less profit in this activity. Such opportunities do not
exist for long in an efficient market. Brokers provide services to others, while market makers
create liquidity in the market.

Hedgers

Hedgers are the traders who wish to eliminate the risk (of price change) to which they are
already exposed. They may take a long position on, or short sell, a commodity and would,
therefore, stand to lose should the prices move in the adverse direction.

Speculators

If hedgers are the people who wish to avoid the price risk, speculators are those who are
willing to take such risk. These people take position in the market and assume risk to profit
from fluctuations in prices. In fact, speculators consume information, make forecasts about
the prices and put their money in these forecasts. In this process, they feed information into

49
prices and thus contribute to market efficiency. By taking position, they are betting that a
price would go up or they are betting that it would go down.

The speculators in the derivative markets may be either day trader or position traders.
The day traders speculate on the price movements during one trading day, open and close
position many times a day and do not carry any position at the end of the day.

They monitor the prices continuously and generally attempt to make profit from just
a few ticks per trade. On the other hand, the position traders also attempt to gain from price
fluctuations, but they keep their positions for longer durations may is for a few days, weeks
or even months.

Arbitrageurs

Arbitrageurs thrive on market imperfections. An arbitrageur profits by trading a given

commodity, or other item, that sells for different prices in different markets. The Institute of
Chartered Accountant of India, the word “ARBITRAGE” has been defines as follows:-
“Simultaneous purchase of securities in one market where the price there of is low and sale
thereof in another market, where the price thereof is comparatively higher. These are done
when the same securities are being quoted at different prices in the two markets, with a view
to make profit and carried on with conceived intention to derive advantage from difference
in prices of securities prevailing in the two different markets”

Thus, arbitrage involves making risk-less profits by simultaneously entering into

transactions in two or more markets.

TYPES OF DERIVATIVES

The most commonly used derivatives contracts are Forward, Futures and Options. Here
some derivatives contracts that have come to be used are covered.

 FORWARD:-
A forward contract is a customized contract between two entities, where settlement takes
place on a specific date in the future at today’s pre-agreed price.

 FUTURES:-
A futures contact is an agreement between two parties to buy or sell an asset at a certain time
in the future at a certain price. Futures contracts are special types of forward contracts in the
sense that the former are standardized exchange-traded contracts.

50
For example:- A, on 1 Aug. agrees to sell 600 shares of Reliance Ind. Ltd. @ Rs. 450 to B on
1st sep.
A, on 1st Aug. agrees to buy 600 shares of Reliance Ind. Ltd. @ Rs. 450 to B on 1 st sep.

 OPTIONS:-
Options are a right available to the buyer of the same, to purchase or sell an asset, without
any obligation. It means that the buyer of the option can exercise his option but is not bound
to do so. Options are of 2 types: calls and puts.

1. CALLS:-
Call gives the buyer the right, but not the obligation, to buy a given quantity of the
underlying asset, at a given price, on or before a given future date.
example:- A, on 1st Aug. buys an option to buy 600 shares of Reliance Ind. Ltd. @ 450
Rs 450 on or before 1st Sep. In this case, A has the right to buy the shares on or before the
specified date, but he is not bound to buy the shares.

2. PUTS:-
Put gives the buyer the right, but not the obligation, to sell a given quantity of the underlying
asset, at a given price, on or before a given date.
For example:- A, on 1st Aug. buys an option to sell 600 shares of Reliance Ind. Ltd. @ Rs
450 on or before 1st Sep. In this case, A has the right to sell the shares on or before the
specified date, but he is not bound to sell the shares.

In both the types of the options, the seller of the option has an obligation but not a right
to buy or sell an asset. His buying or selling of an asset depends upon the action of buyer of
the option. His position in both the type of option is exactly the reverse of that of a buyer.

 WARRANTS:-
Options generally have lives of up to one year, the majority of options exchanges having a
maximum maturity of nine months. Longer-dated options are called warrants and are
generally traded over-the-counter.

 LEAPS:-

51
The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options
having a maturity of up to three years.

 BASKET:-
Basket options are options on portfolios of underlying assets are usually a moving average
of a basket of assets. Equity index options are a form of basket options.

 SWAPS:-
Swaps are private agreement between two parties to exchange cash flows in the future
according to a pre arranged formula. They can be regarded as portfolios of forward contract.
The two commonly used swaps are

1 INTEREST RATE SWAPS:-

These entail swapping only the interest related cash flows between the parties in the same
currency.

2 CURRENCY SWAPS:-
These entail swapping both principal and interest between the parties, with the cash flows in
one direction being in a different currency than those in the opposite direction.

 SWAPTIONS:-
Swaptions are options to buy or sell a swap that will become operative at the expiry of the
options. Thus, a swaptions is an option on a forward swap. Rather than have calls and puts,
the swaptions market has receiver swaptions and payer swaptions. A receiver swaptions is an
option to receive fixed and pay floating. A payer swaptions is an option to pay fixed and
receive floating.
Out of the above mentioned types of derivatives forward, future and options are the most
commonly used and have been detailed in this report.

52
EMERGENCE OF THE DERIVATIVE TRADING IN INDIA

 Approval For Derivatives Trading

The first step towards introduction of derivatives trading in India was the promulgation
of the Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on
options in securities. The market for derivatives, however, did not take off, as there was no
regulatory framework to govern trading of derivatives. SEBI set up a 24 – member
committee under the chairmanship of Dr. L.C.Gupta on November 18, 1996 to develop
appropriate regulatory framework for derivatives trading in India. The committee submitted
its report on March 17, 1998 prescribing necessary pre-conditions for introduction of
derivatives trading in India. The committee recommended that derivatives should be
declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’
could also govern trading of securities. SEBI also set up a group in June 1998 under the
chairmanship of Prof. J.R.Verma, to recommend measures for risk containment in derivative
market in India.

The repot, which was submitted in October 1998, worked out the operational details of
margining system, methodology for charging initial margins, broker net worth, deposit
requirement and real - time monitoring requirements.

The SCRA was amended in December 1999 to include derivatives within the ambit of
‘securities’ and the regulatory framework were developed for governing derivatives trading.
The act also made it clear that derivatives shall be legal and valid only if such contracts are
traded on a recognized stock exchange, thus precluding OTC derivatives. The government
also rescinded in March 2000, the three – decade old notification, which prohibited forward
trading in securities.

Derivatives trading commenced in India in June 2000 after SEBI granted the final
approval to this effect in May 2000. SEBI permitted the derivative segment of two stock
exchanges, NSE and BSE, and their clearing house/corporation to commence trading and
settlement in approved derivatives contract.

To begin with, SEBI approved trading in index future contracts based on S&P CNX
Nifty and BSE-30 (Sensex) index. This was followed by approval for trading in options

53
based on these two indices and options on individual securities. The trading in index options
commenced in June 2001.

Futures contracts on individual stocks were launched in November 2001. Trading and
settlement in derivatives contracts is done in accordance with the rules, byelaws, and
regulations of the respective exchanges and their clearing house/corporation duly approved
by SEBI and notified in the official gazette.

DIFFERENCE BETWEEN DERIVATIVE, EQUITY AND COMMODITIUES

DERIVATIVE EQUITY COMMODITIES

Warehousing No warehousing is No warehousing is Required in case of

required required delivery based
settlement
Quality of derivatives contract Equity contract Every underlying
underlying assets don’t have attribute don’t have attribute commodities have
of quality of quality specified qualities
Contract life Comparatively having long and Short life as
having long contract short contract life compared to
life derivatives.
Maturity date Standardized Standardized standardized

Return High Medium High

Risk Very High Less High

Liquidity Less Very high Less

Investment Amount Very high low Very high

Lot size Fixed by SEBI Not fixed by SEBI Fixed by SEBI

Time of trading 10a.m to 3.30p.m 10a.m to 3.30p.m Whole day

54
 CHAPTER – 5
DATA ANALYSIS
AND FINDINGS

55
QUESTIONNAIRE SURVEY FOR ANALYSING CONSUMER
PERCEPTION

Questionnaires were been filled by 100 respondents as an investor followed by detailed

interview. The data collected from such interviews and its analysis is as follows.

1. Are you aware about derivatives?

Yes No

Objective: The question was ask to know the awareness level of investors about
Derivatives

Response Yes No
Derivatives 65 35

AWARENESS
no

yes

Conclusion:
From above diagram we can say that most of people are aware about derivatives and the
people who aware about derivates are those people who are investing in stock market for
long period and also have much knowledge about stock market’s different instrument.

56
2. Have you made any investment in derivatives?
Yes No

Objective: This question was asking to know the investment criteria of investors about
Derivatives

Response Yes No
Derivatives 64 36

INVT. IN DERI.
no

yes

Conclusion:
From above diagram we can say that only 64% of investors are doing investment in
derivatives. This 36% people are the regular investor or have sufficient of to invest in
derivative. And the people who are not invested in derivatives are salaried people or small
investors.

57
3. If no, give the reason for not investing in derivatives?
Lack of knowledge High amount of investment
High risk Volatile market
Lot size

Objective: This question was asked to know the reason for not doing any investment in
Derivatives.

Reasons Respondents
Lack of knowledge 11
High Risk 9
Lot Size 8
High Amount of investment 7
Volatile market 1
others 64

REASON

Lot size

Volatile market

High risk

High amount

Lack of know ledge

0

Conclusion:
From above diagram we can say that, the main reason for not made any investment
in derivative is lack of knowledge among investors. So try to improve their knowledge about
derivatives and the other reasons are lot size, volatile market, high risk and high amount of
investment. Basically small investors and salaried people are not ready to take so much risk
and they also not preferred high amount investment.

58
4 Do you have any inclination of investing in derivatives in future?
Yes
No
May be

Objective: this question is asked to know the inclination of investors for investing in
Derivatives in future.
Response No. of Respondents
Yes 64
No 8
May be 28

Conclusion:

From above diagram we can say that people want to know about derivatives and also
have inclination of investing in derivatives. They think to do investment in derivatives.

5 If yes, which type of derivative instruments would you like to made your investment?

59
 Index future Stock future
Index option Stock option
Objective: This question was asked to know in which type of derivative instruments the
investor would like to invest
Product No. of Respondent
Index Futures 48
Index Option 24
Stock Futures 15
Stock Options 13

TYPE

Stock option

Index option

Index future

Stock future

Conclusion:

From this diagram we can say that people are more interested in index futures in
types of derivatives rather than options because they find options are much completed in
comparison of futures.

6 what approximate percentage of your portfolio have invested in derivatives?

Less than 20% 5 50% to 70%

60
 20% to 50% More than 70%

Objective: this question is asked to know the approximate percentage of

investors
Portfolios have invested in derivatives.

Percentage No. of Respondents

Less than 20% 59
20% to 50% 32
50% to 70% 6
More than 70% 3

% INVT

More than 70%

50 - 70%

20 - 50%

Less than 20%

Conclusion:

From above diagram we can say that because of lack of knowledge and high risk the
investors would not like to invest high amount of their portfolio in derivatives. Only 9 people
are ready for investing above than 50% of their portfolios. Most of people are only want to
do invest less than 20% of their portfolios in derivatives.

7 Mention your objective for investing in derivatives?

61
 Hedging
Arbitrating
Speculation

Objective: This question is asked to know the objective of investor for investing in
derivatives.
Objective No. of Respondents
Hedging 59
Arbitrating 29
Speculation 12

OBJCTIV

Speculation

Arbitraging
Hedging

Conclusion:
From above diagram we can say that the main objectives of investors are hedging

8 which factors affecting your investment decision?

Your decision In consultation with your broker
Any other sources Based on broker’s decision

62
Objective: This question is asked to know the factors affecting investor’s decision

Factors No. of Respondents

Own Decision 35
Any other Sources 34
In consultation with Broker 11
Based on Broker’s Decision 20

FACTORS

Based on broker deci

Your ow n decision

Any other source

Consultation w ith yo

Conclusion:
From this diagram we can say that the main factor which affects investment decision
is consultation with their broker and by their own perspective. From the graph it reveals that
in case of derivative people like to invest with the help of brokers because they are having
specialized knowledge and also by their own, se we can say it is mix bled of taking decision.
It means by own and by brokers.

9. Which factors affect your own decision?

Return Risk
Liquidity Safety

Objective: this question is asked to on which bases investors take their own decision.

63
Factors No. of Respondents
Return 42
Risk 15
Liquidity 23
Safety 20

DECISION

Safety

Return

Liquidity

Risk

Conclusion:
From above diagram we can say that all the above factors are affected the person’s
own investment decision because all the factors are very important before taking any
investment decision.

10 what are the difficulties faced by you for investing in derivatives?

Lot size Changes in margin by SEBI
Lack of knowledge Any other reason than specify
__________________________________________________

64
Objective: this question is asked to know the difficulties faced by investors for investing in
derivatives

Difficulties No. of Respondents

Lot Size 53
Lack of Knowledge 22
Changes in Margin by SEBI 15
Any other Reason(investment amount) 10

DIFFICULTY

Others

Lack of know ledge

Lot size

Change in margin bu

Conclusion:
From above diagram we can say that, the difficulties faced by the investors while
investing in derivatives are shown in the diagram. The main difficulty is problem of lot size
in derivatives. Investors are not know much about derivatives investment pattern so not do
much investment in derivatives and the other important factor is lack of knowledge.

11. Give your preferences for investment in this 3 instrument.

Equity
Derivative
Commodities

65
Objective: this question is asked to know the first choice of investors for investment

Investment Instrument No. of Respondents

Equity 58
Derivative 26
Commodities 16

PREF

Commodity

Derivatives Equity shares

Conclusion:
From above diagram we can say that most of people are interested in dong investment
in equities rather than in derivatives or in commodities coz of less amount of investment and
less risk.

12. Give the ranking for given parameters mention below :( 1= high to 5 = low)

Objective: The main objective of this question is to do the comparison of derivatives with
equity and commodities.

66
 Derivative Equity Commodities

Risk 18 37 45

Return 23 40 37

liquidity 22 52 26

Investment Amount 35 13 52

Conclusion:
From above diagram we can come on this conclusion that equity is having the nature
of high risky and having high return as compare to derivative. For risk adverse investor’s
derivative is preferable and for risky investors equity is preferable. Commodity involves high
amount and high risk.

FINDINGS

As from the study of questionnaires, I have found that in Surat 65% to 70% people are aware
about the derivatives. I submit my findings here.

 Majority of people and people investing in the financial market are aware of derivatives.

67
 The reasons for ignorance or lower investment in the derivatives are lack of knowledge,
high amount of investment, high risk and the volatility of the market.

 In the recent time around only 20% of portfolio are invested in derivatives

 The main aim for investing in derivatives is either hedging or speculation.

 Investor finds derivatives as completed product and considers it to be only for hedging or
secure profit.

 Margin in future contract acts as hindrances for the common investors as it has to pay
upfront and which is very high.

 Majority of investors do invest in derivatives

 The investors prefer to invest in equities also commodities and derivatives.

 The reasons for inadequate awareness or small amount of investment in the derivatives
are:
 Most of the investors are influenced by there broker’s decision
 They take decision only on the base of broker’s decision
 Investor in nowadays think only about the safety, return and the liquidity
 Changes in the percentage of margin by SEBI and lot size
 Investors in nowadays think only about in what places their investment are safe, give
higher return and liquidity. For all this reasons derivatives are no so much popular as
equities

68
 CHAPTER -7
CONCLUSION AND
RECOMMENDATIONS

CONCLUSION

69
Derivatives are an instrument used for reducing the risk of loss of an investor. It acts as a
price risk management system for an investor.

The current mindset of people regarding derivatives is that they are speculative due to non
delivery and are not safe. They do not consider it rather as a risk reducing instrument. Due to
such mindset derivatives segment are not rapidly growing in the Indian market as compared
to the cash segment.

Therefore efforts must be made in India to make people aware of derivatives and convince
them to consider it as a risk reducing instrument rather than a speculative instrument.

RECOMMENDATIONS

70
1) Derivative market is highly ill-famed among the investors. Thus it is required to
provide in depth knowledge of the market to investors.

2) Broking house must try to create massive awareness programme among the
beneficiaries about the benefits and risks of future trading and convince them to trade
in derivatives. Arranging seminars, workshops, etc can do this.

3) Those who are already investing in securities market can be given another
investment opportunity that will diversify their portfolio genuinely.

4) Investor should understand the risk and reward relation of investing in derivative
segment and than only enter in the market.

5) The lot size in the derivative segment should be reducing so that even retail investor
can also enter in the derivative market.

71
CHAPTER - 7
ANNEXURES

BIBLIOGRAPHY

72
MANAGEMENT BOOKS:

1. Gorden and Natrajan The Financial Market and Financial Services , Sixth Edition
Reprint 2007
2. NCFM Derivative core module
3. NCFM Capital market core module

FINANCIAL DAILIES:

1. The financial express

2. The economies Times
3. The business standard
4. Business Today

WEB SITES:

www.nseindia.com
www.bseindia.com
www.investopedia.com
www.derivativesindia.com

QUESTIONNAIRE

73
Name: ____________________________________________
Address: ____________________________________________
____________________________________________
Contact no: ____________________________________________

1. Are you aware about derivatives?

Yes No
2. Have you made any investment in derivatives?
Yes No
3. If no, give the reason for not investing in derivatives?
Lack of knowledge High amount of investment
High risk Volatile market
Lot size

4 Do you have any inclination of investing in derivatives in future?

Yes
No
May be

5 If yes, which type of derivative instruments would you like to made your invested?
Index future Stock future
Index option Stock option

6 what approximate percentage of your portfolio have invested in derivatives?

Less than 20% 50% to 70%
20% to 50% More than 70%

7 Mention your objective for investing in derivatives?

Hedging
Arbitrating
Speculation
8 which factors affecting your investment decision?
Your decision In consultation with your broker
Any other sources Based on broker’s decision

9. Which factors affect your own decision?

Return Risk
Liquidity Safety

74
10 what are the difficulties faced by you for investing in derivatives?
Lot size Changes in margin by SEBI
Lack of knowledge Any other reason than specify

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11 Give your first preferences for investment in these 3 instruments.
Equity
Derivative
Commodities

12 Give the ranking for given parameters mention below :( 1= high,2= moderate, and 3= law)

Derivative Equity Commodities

Risk

Return

liquidity

Investment Amount

75