National Stock Exchange and Bombay Stock Exchange

The National Stock Exchange was set up by IDBI and other all India Financial Institutions in Mumbai in November 1992 with a paid up equity of Rs. 25 crores.

It was recognised by the Government in the same year and the Exchange started operations in wholesale Debt market in June 1994 and in equity trading in Now, 1994. The wholesale debt market or the money market segments would cater to banks, FIS, etc. to encourage high value transactions in PSU bonds, UTI Units, Treasury Bills, Government securities and call money. There is no trading floor of the exchange. Trading is in large volumes and over the telephone, telex etc. Trading is done on computer with the help for PC Terminals in broker offices. The Capital market segment is also done similarly on computer based trading. The settlement is on T + 7 basis for equity trading. Benefits accruse to both issuers of securities and investors. As this is screen based trading with a national network, transparency and cost effectiveness are ensured. Besides, the investment counters can be spread wide in the country under the NSE electronic network. About 785 companies were already listed on NSE at end March 2001. Trading in them is continuing simultaneously with those in the principal and regional Stock Exchanges. As the Central Depositories are set up in 1998, book entry of deals and immobilization of certificates is taking place. At present the volume of daily trade is around Rs. 15000 to 2000 Crores, on the NSE going upto Rs. 4,000 crores on some days during the boom period of Jan. - Feb. 2000. The market capitalisation of listed companies is Rs. 544 lakh crores in 2000-01. There are also more than 320 permitted securities for trading on the NSE, asat end March 2001.

National Market System

A high powered study Group on the Establishment of New Stock Exchanges under the Chairmanship of Shri M.J. Pherwani has submitted its Report in June 1991. This Study Group has recommended some criteria for setting up of new Stock Exchanges and favoured the licensing of additional trading floors (ATF) instead of multiplying the number of Stock Exchanges in the country. The Study Group has also recommended the setting up of a model National Stock Exchange at Navi Mumbai (NSE) which will develop the National Market System in the country. Any infrastructure in terms of space, Tele-communications, Computerisation, on-line processing system, Library, Research facilities, Publicity Dept, etc. are all recommended for the “National Market” to be set up by NSE.

The market will have two types of members, viz., participating trading members, who can only trade on their behalf and intermediary trading members (dealers) who can deal on behalf of their clients. Trading members will have computer terminals connecting to the other trading members (PTM) and to the central computer system at the NSE. Trading orders to buy and sell securities or to borrow and lend are entered into the computer system and stocked in its memory in an order book. Trading being order driven, it will be matched with a matching counter order. If matched, both the buyer and seller are informed by the NSE computer system. By the end of the trading day, the Exchange System will give out rates and a list of completed transactions for each trading member.

Characteristics

The characteristics of National Market System are as follows:

1. Completely automated system in terms of both trading and settlement procedures to be provided through the Securities Facilities Support Corporation. 
2. Compulsory market makers/jobbers to provide liquidity and ready market (in the form of Principal Trading Members, i.e., PTM).
3. The members are large Corporate and Institutional members and professionals, rawn from various parts of the country and to represent the professionals on an All India Basis.
4. Only large and medium size companies and PSUs are listed on this Exchange and it will complement the existing Exchanges.
5. The NSE would have a separate trading facility and time allotted for debt instruments in order to have the beneficial effect of creating an active secondary market in debt instruments particularly of Government debt.

NSE Operations

The above recommendations were accepted by the Government and accordingly NSE was set up and recognised by the Government. As reported earlier, it has started trading in money market instruments, Government securities and other debt instruments on OTC basis. In the Capital market segment, corporate equity shares are traded on a weekly settlement basis since November 1994. It has no trading floor. Each trading member will have a computer in his office, anywhere in India which will be connected to the Central Computer System of NSE through leased lines or BSATs (Very Small Aparture Terminals) for an interim period, to be followed by a satellite link. The members for Debt Market will be different from the Equity market and the same members cannot operate for both markets, as originally visualised. As in May 2000, NSE terminals are located at 310 contres in the country with about 850 brokers connected through more than 2000 Vsats, adding upto over 6000 users. The NSE will operate two segments, namely, Debt market (Money market) and equity market (Capital market) and operations in both are separately maintained. POst trade services are also automated. For confirmed trades, the settling bank will arrange for payment and clearance and depository for effecting transfers by electronic book entry system. The clearing house facility is provided by Canara Bank and many banks are providing the depository facility for NSE. Automated Lending and Borrowing Mechanism (ALBM)

ALBM is a new product developed by NSE to meet a felt need of lending and borrowing of securities by short sellers. This does not involve borrowing and lending of money, as in the case of Badla trade. This is a flexible instrument, to be pressed into service for smooth trading and settlement and clearance. In the segment of Rolling Settlement market, ALBM is well suited to ensure that settlement took place daily. The securities borrowing and lending market in U.S.A. is estimated $ 100 billion per annum. Some institutions like SHCI specialise in lending of securities and short sellers need to borrow securities. The instrument does not have anything to do with carry forward or Badla nor does it finance purchases or long buyers.

Central Depository System

The Government has accepted the system of multiple depositories and SEBI was asked to frame guidelines for their operations in 1996. These Depositories will keep physical custody of share certificates leading to immobilisation of shares to be followed later by dematerialisation and complete book entry system of trading in future, say after 5 years.

This means that the statement given by the Depository is evidence of the ownership of the shares. This method was operated for the FIs and FFIs and banks and mutual funds, in the beginning and was extended to corporates and individuals later on. The depository will transfer the securities between the participants through electronic book entry, while the settling bank will effect the transfer of funds.

Listing of Securities

All medium and large sized companies with paid up equity Rs. 10 crores and above eligible to be listed on regular Stock Exchanges can be listed on NSE. Some of them may be listed and traded on regular Stock Exchanges also. The same formalities of listing are observed by NSE and a liting agreement is entered into with the company, as on a regular exchange and approved by the SEBI.

Settlement System

Trading period on any day will vary for the debt segment and equity segmenet. For capital market operations the trading is done in equities, convertible and nonconvertible debentures. Trading network can be spread all over the country, depending on the electronic link though the Satellite. A rolling settlement system operates in NSE with settlement period of T + 7. Thus a rolling T + 7 period means that transactions on a given day (T) will be settled seven days later (T + 7). On that day, funds and securities are exchanged by passing electronically proper debit and credit entries.

The National Securities Depository Limited (NSDL)

This is an organisation promoted by the Industrial Development Bank of India, the Unit Trust of India and the National Stock Exchange of India Limited to provide electronic depository facilities for stock traded in the equity and the debt market. The National Securities Depository Limited has been registered with the Securities Exchange Board of India and launched on Nov. 7, 1996 as India’s first depository to facilitate trading and settlement of securities in dematerialised form. Settlement of securities in dematerialised form will eliminate problems that are normally associated with settlement through physical certificates, like tearing/mutilation of share certificates due to careless handling, loss of certificates by postal authorities or delays with registrars and investors problems of bad delivery of shares. Cases of forgery of certificates will be eliminated in an electronic environment. Settlement of traders will be faster and hassle-free leading to shorter settlement cycles.

What is a Depository ?

A Depository is an organisation where the securities of a share holder are held in the electronic form at the request of the share holder through the medium of a depository participant. A depository can be compared to a bank for securities. If an investor wants to utilise the services offered by a depository, the investor has to open an account with the depository through a depository participant - this is very similar to the opening of an account with any of the branches of a bank in order to utilise the services of that bank, as a Depository Participant (D.P.). The depository can legally transfer beneficial ownership which a custodian cannot. The main objective of a depository is to minimise the paper work involved with the ownership, trading and transfer of securities.

Facilities offered by NSDL

1. Enable surrender and withdrawal of securities to and from the depository (i.e.dematerialisation and rematerialisation).
2. Maintain investor holdings in the electronic form.
3. Effect settlement of securities traded on the exchanges.
4. Carry out settlement of trades not done on the stock exchanges (i.e., off market traders).

Rematerialisation

If anybody wishes to get back his securities in the physical form all he has to do is to request his Depository participant for the rematerialisation of the same.

Advantages of the Depository

There are a number ov reasons why Investor should opt for the electronic form of holding securities. Depositing Investor’s securities with NSDL with give freedom from the worries of loss of share certificates through theft, mutilation, fire, etc. The process of opening an account with a depository participant is similar to the opening of a bank account. The investor can get a list of depository participants from NSDL. The depository participants may also advertise the services offered by them once they are registered. The Investor can approach any DP of his choue and fill up an account opening form. The depository participant will give a pass book or a stat ement of holdings. The statement of holdings will be dispatched to the Holder periodically by the Depository participant; however, the statement of holdings can be sent to Holders, as and when requested for a fee. The depository has not prescribed any minimum balance. In fact, the holder cna even have zero balance in his account. However, the depository participants may fix some minimum limits. Many FFIs, FIIs and Indian FIs and banks have joined the Depository System, as it is very suitable for their trade in large volumes.

About the Depository Participants

Similar to the brokers who trade on behalf of the customers in and outside the stock exchanges, a Depository Participant is the representative (agent) in the depository system. The Depository Participant will maintain the securities account balances and intimate to the Holder about their holdings from time to time. According to SEBI guidelines, financial institutions, banks, custodians, stock brokers, etc. can become participants in the depository. There are absolutely no restrictions to the number of DPs that the Investor can open accounts with. Opening an account with a depository participant is very similar to opening a bank account. Just as a person can have savings or current accounts with more than one bank, the person can open accounts with more than one depository participant. The person can exercise the option such a rights issue or optional conversion of debentures to shares. The holders do have a choice of either physical or electronic mode of holdings. However, corporate entitlements such as bonus will be made in the same form as the original holdings. Compulsory demat form of trading was enforced by SEBI in most of the welltraded stocks, soon after. The depository will also establish a help desk which will direct the holder to the holder to the appropriate agency. When the depository is ready to start functioning, it will advertise the help, desk, telephone lines, etc.

NSDL’S First Participants

1. SHCIL
2. ILFS
3. ITT Trust Corp Services
4. GLOBAL TRUST BANK
5. HDFC Bank
6. CITI Bank Custodial Services
7. Morgan Stanley Custodial Services
8. Reliance Share & Stock Brocking
9. Janta Sahakari Bank
10. Industrial Dev. Bank Of India
11. State Bank Of India
12. Standard Chartered
13. National Sec. Clearing Corp.
14. DEUTSCHE Bank

Legal Aspects

NSDL was set up by passing the Depositories Act, 1996 but with retrospective effect from Sept. 1995. Companies Act and SCR Act were amended to the extent necessary. Section 22A of SCR Act dealing with restrictions on transfer of shres was deleted. Sections 108 and 111 of the Companies Act were amended to dispense with transfer form and other formalities relating to the physial transfer of shares. The Depository’s statement is a valid documents of title, under law and transfers are effected by book entries in the pass-books of D.P.s.. The exemption from stamp duty was also granted for transactions in Demat form.

Interconnected Stock Exchange

The Inter-connected Stock Exchange of India Ltd. Was promtoed by 15 regional Stock Exchanges and Federation of

Indian Stock Exchanges. It was incorporated as a public limited company under Section 12 of the Companies Act in January 1998. Its registered location is at International Infotech Park, 7th Tower, 5th Floor, Vashi Railway Complex, Sector 30A, Vashi, Navi Mumbai 400 705. Its paid up capital or the project cost is Rs. 15 crores, which is covered by the contribution of Rs. 1 crores from each of the participating member in the form of admission fee of Rs. 5 lakhs and Infrastructure fee of Rs. 95 lakhs. The following participating exchanges paid the Initial Capital :

1. Bangalore Stock Exchange

2. Bhuvaneshwar Stock Exchange

3. Cochin Stock Exchange

4. Coimbatore Stock Exchange

5. Gauhati Stock Exchange

6. Hyderabad Stock Exchange

7. Jaipur Stock Exchange

8. Ludhiana Stock Exchange

9. Madhya Pradesh (Indore) Stock Exchange

10. Madras Stock Exchange

11. Magadh (Patna) Stock Exchange

12. Mangalore Stock Exchange

13. Saurashtra Kutch (Rajkot) Stock Exchange

14. Uttar Pradesh (Kanpur) Stock Exchange

15. Vadodara Stock Exchange

All these 15 Stock Exchanges have a total membership of 4613, which account for 51% of total membership of all exchanges in India in 1998. The total number of listed companies in these participating exchanges is 3,467, whichaccounts for 35% of total listed on all Stock Exchanges in India (9, 833 in 1998). But in terms of turnover of trade, the ISE participating Stock Exchanges account for Rs. 45,226 Crores in 1997-98, which constitues about 4% of the total turnover of all the Stock Exchanges in India. ISE has got the SEBI approval under Section 4 of S.C. (R) Act in  ovember 1998. The SEBI laid down the conditions of a minimum Base Capital of Rs. 2 lakh to being with by members to be  aised to Rs. 4 lakh by the end of one year. The participating exchanges will have a uniform trading and settlement cycle of Thursday to Wednesday, which is the actual cycle adopted by the ISF. Besides, the ISE has set up a settlement guarantee fund to guarantee payouts. Additionally every participating exchange is required to maintain with ISE, a Settlement Stabilisation Fund of Rs. 10 lakhs to meet any temporary exigencies at the time of pay in so that there is no delay in declaration of payout. ISE provides a national market system where in a trading member of one Stock Exchange can deal with a trading member of another exchange from his local Trader WorkStation (TWS). Through the Inter-connected market system, ISE provides for trading, clearing and settlement along withsurveillance and Risk Management to the inter-connectedtrading system. It has got SEBI’s clearance to start trading in Nov. 1998 but it has started training of members and stock trading sessions in the early months of 1999.

Objective

The basic aim of the Inter-connected Market System (ICMS), which ISE sets up is to consolidate the small fragmented and less liquid markets into a national level market, with the state of art infrastructure and systems support. It will create a level playing ground for all participating exchanges, reduce transactions costs, promote liquidity and volumes, necessary for survival of regional Stock Exchanges. Its functions are to provide trading among the inter-connected

exchanges in their listed securities by using the Electronic Securities Architecture Software and decentralized clearing and Settlement at all participating Exchange centers. The central clearing bank of ISE namely ABN AMRO-Vysya Bank

Consortium provides for exclusive funds transfer, electronically and sharing the relevant information on margins settlements and capital adequacy positions by opening of extension counters at the premises of participating Stock Exchanges. The ISE hires the services of the Elbe couriers to ensure timely movement of securities across the Exchanges for smooth settlement of deliveries, payouts and Auction payours. The ISE has a Settlement Guarantee Fund (SGF) to guarantee settlement of all trades validly executed in the ISE system. A real time risk management and surveillance system would ensure instant information on gross exposure, intra-day trading exposure and cumulative loss positions of member brokers etc. with a view to prevent gross irregularities undue price fluctuations and impose margins on members of various types, for the purpose of stopping overtrading by members and their consequent

defaults and failures. The listed securities on the ISE are divided into three groups : Group A, which consists of 50 most popular scrips; Group B which has about 500 actively well traded shares and Group C which has all the rest of the listed scrips which are generally thinly traded. Risk Management and Surveillance System : The ISE has established a Risk Management and Surveillance system that is a system driven to monitor the position of traders and dealers on a real time basis. The risks are controlled by the following methods:

• Intra-day Trading Limits : Trades allowed up to 33.33 times their Base Minimum Capital (BMC) and 25 times their additional capital, if any. Traders are warned by the system when they reach the trading limits of 60%, 70% and 90% and then as the limit reaches 100% of permitted level, the trader and dealer will be disabled to access the ICMS.
• Gross Exposure Limits : The trader can have maximum gross exposure of 12.5 times of capital deposited by the trader. The gross exposure is the sum of net purchases and sales and includes the exposure form the previous settlement waiting pay in.
• Cumulative Loss Margins : The system will not allow the cumulative loss of a trader to cross the capital adequacy amount. The loss is computed by marketing to the market values the net purchases and sales and carry forwards. The traders will have to deposit the loss margin, if the loss goes beyond the cast component of his capital adequacy amount.

Accordingly, the traders and dealers would be required to pay on a T + 1 basis the daily Mark to Market Margins on the loss suffered by them on their outstanding positions. Losses on any scrip would not be allowed to be set off against profits on others and a basic exemption limit of 25% of the capital adequacy amount is given to the trader while computing the margin liability. The extra losses would have to be covered by extra margin deposits.

Daily Circuit Filters

The system would also operate daily and settlement circuit limits to scrip prices, which set the limit to fluctuations of prices, unduly rising or falling. The filter is the point fixed by the ISE on the basis of previous day’s closing or settlement closing price or base price.

Suspension of Securities and Traders

The ISE has powers to suspend any security or trades if they are for any reason suspended on the participating regional Stock Exchange.

Computer System

For interconnected market system, there is a computer system provided by the Indigo Technologies with a Central Computer at Vashi, Navi Mumbai and Compaq N.T. Server Machines at the Reigonal Stock Exchanges. Similarly, there will be another computer system for trading set up by Tandem Computers, a subsidiary of Compaq company, while Compaq N.T. servers and work stations will be used for clearing and settlement and for Risk Management and Surveillance. The electronic Securities Architecture Software uses a modular architecture consisting of expandable set of business modules such as :

• Automated traded
• Manual trading module
• Market control
• System Administration
• Market information and dissemination

Trader Work Stations

In each Regional Stock Exchange, there can be multiple work stations for trading. Trader work stations comprise Member Server Application (MSA) and a Trader Workstation Application (TWS). The MSA will be responsible for maintaining local data base and submits requests to the central system through the TWS. The trader work station provide for order management through submission, modification and withdrawal of market orders and limit orders and allows the market view of the 10 best bids and offers, depth of the market and market statistics brokers can set up their own hierarchy and a system of scrutiny and control through setting up of trading limits.

Advantages of ISE

Volumes of trade can increase and there will be greater liquidity to scrips. More than 4,000 scrips are kept under permitted category. They cost of each transaction will be lower, on an average. The cost of acquiring membership rights on ISF is only Rs. 5,000 per annum to the member brokers of regional Stock Exchanges, which gives a cost advantage to traders on ISE. The additional facilities which the ISE may provide include trading in Demat form through a tie up with the CDSL, set up by the B.S.E. Besides, the RSE can have established ATFs and ATCs, for the purposes of facilitating trading in centres where the Stock Exchange is not available within the jurisdiction of R.S.E. The ISE has also proposed to set up a modified carry forward system, subject to the permission of SEBI and extend the trading rights as dealers to institutions like subsidiaries of banks, mutual funds, FIIS, etc.

1. Advantages of Members of RSEs
2. Increase in the business and earnings.
3. Increase in liquidity in shares that they trade in.
4. Appreciation in the value of membership at the participating exchange.
5. Greater Safeguards against defaults, bad deliveries, and frauds, etc.
6. Long-term strategy to survive in the face of competition from the big National Exchanges like NSE and BSE.
7. Creation of efficient and orderly market.
8. Establish transparency in dealings and improves the price discovery process.
9. Creates a level playing ground for all the participating exchanges and provides a larger ground to play to member brokers of RSEs.
10. The possibility of expansion to remote rural and semi urban areas as expansion of retail investor business.

Mumbai Stock Exchange (BSE)

The Stock Exchange, Bombay, which was established in 1875 as The Native Share and Stockbrokers’ Association, is the oldest Stock Exchange in Asia, even older than the Tokyo Stock Exchange, which was founded in 1878. The Stock Exchange, Bombay, is the most active stock market in India counting for over 70 percent of the listed capital and 90 percent of market capitalisation - as such, it is the premier Stock Exchange in India.

Trading System at BSE

Till Now, buyers and sellers used to negotiate face-to-face on the trading floor over a security until agreement was reached and a deal was struck in the open outcry system of trading, that used to take place in the trading ring. The transaction details of the account period (called settlement period) were submitted for settlement by members after each trading session. The computerised settlement system initiated the netting and clearing process by providing on a daily basis statements for each member, showing matched and unmatched transactions. Settlement processing involves computation of each member’s net position in each security, after taking into account all transactions for the member during the settlement period, which is 10 working days for group ‘A’ securities and 5 working days for group ‘B’ securities. Trading is done by members and their authorized assistants from their Trader Work Stations (TWS) in their offices, through the BSE On-Line Trading (BOLT) system. BOLT system has replaced the open outcry system of trading. BOLT system accepts two-way quotations from jobbers, market and limit orders from client-brokers and matches them according to the matching logic specified in the Business Requirement Specifications (BRS) document for this system. The matching logic for the Carry-Forward System as in the case of the regular trading system is quote-driven with the order book functioning as an “auxiliary jobber”.