LESSON 13: NATIONALITY STOCK EXCHANGE (NSE)
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SECURITY ANALYSIS AND POR TFOLIO MANAGEMENT
LESSON 13:
NATIONALITY STOCK EXCHANGE (NSE)
The National Stock Exchange was set up by IDBI and other all computer system and stocked in its memory in an order book.
India Financial Institutions in Mumbai in November 1992 with Trading being order driven, it will be matched with a matching
a paid up equity of Rs. 25 crores. It was recognised by the counter order. If matched, both the buyer and seller are
Government in the same year and the Exchange started informed by the NSE computer system. By the end of the
operations in wholesale Debt market in June 1994 and in equity trading day, the Exchange System will give out rates and a list of
trading in Now, 1994. The wholesale debt market or the money completed transactions for each trading member.
market segments would cater to banks, FIS, etc. to encourage
Characteristics
high value transactions in PSU bonds, UTI Units, Treasury
Bills, Government securities and call money. There is no trading The characteristics of National Market System are as follows :
floor of the exchange. Trading is in large volumes and over the 1. Completely automated system in terms of both trading and
telephone, telex etc. Trading is done on computer with the help settlement procedures to be provided through the Securities
for PC Terminals in broker offices. The Capital market segment Facilities Support Corporation.
is also done similarly on computer based trading. The settle- 2. Compulsory market makers/jobbers to provide liquidity
ment is on T + 7 basis for equity trading. and ready market (in the form of Principal Trading
Benefits accruse to both issuers of securities and investors. As Members, i.e., PTM).
this is screen based trading with a national network, transpar- 3. The members are large Corporate and Institutional
ency and cost effectiveness are ensured. Besides, the investment
members and professionals, rawn from various parts of the
counters can be spread wide in the country under the NSE
country and to represent the professionals on an All India
electronic network.
Basis.
About 785 companies were already listed on NSE at end March
2001. Trading in them is continuing simultaneously with those 4. Only large and medium size companies and PSUs are listed
in the principal and regional Stock Exchanges. As the Central on this Exchange and it will complement the existing
Depositories are set up in 1998, book entry of deals and Exchanges.
immobilization of certificates is taking place. At present the 5. The NSE would have a separate trading facility and time
volume of daily trade is around Rs. 15000 to 2000 Crores, on allotted for debtinstruments in order to have the beneficial
the NSE going upto Rs. 4,000 crores on some days during the effect of creating an active secondary market in debt
boom period of Jan. - Feb. 2000. The market capitalisation of instruments particularly of Government debt.
listed companies is Rs. 544 lakh crores in 2000-01. There are also
more than 320 permitted securities for trading on the NSE, as NSE Operations
at end March 2001. The above recommendations were accepted by the Government
and accordingly NSE was set up and recognised by the Govern-
National Market System ment. As reported earlier, it has started trading in money market
A high powered study Group on the Establishment of New instruments, Government securities and other debt instru-
Stock Exchanges under the Chairmanship of Shri M.J. ments on OTC basis. In the Capital market segment, corporate
Pherwani has submitted its Report in June 1991. This Study equity shares are traded on a weekly settlement basis since
Group has recommended some criteria for setting up of new November 1994. It has no trading floor. Each trading member
Stock Exchanges and favoured the licensing of additional will have a computer in his office, anywhere in India which will
trading floors (ATF) instead of multiplying the number of be connected to the Central Computer System of NSE through
Stock Exchanges in the country. leased lines or BSATs (Very Small Aparture Terminals) for an
The Study Group has also recommended the setting up of a interim period, to be followed by a satellite link. The members
model National Stock Exchange at Navi Mumbai (NSE) which for Debt Market will be different from the Equity market and
will develop the National Market System in the country. Any the same members cannot operate for both markets, as
infrastructure in terms of space, Tele-communications, originally visualised. As in May 2000, NSE terminals are located
Computerisation, on-line processing system, Library, Research at 310 contres in the country with about 850 brokers connected
facilities, Publicity Dept, etc. are all recommended for the
through more than 2000 Vsats, adding upto over 6000 users.
“National Market” to be set up by NSE.
The NSE will operate two segments, namely, Debt market
The market will have two types of members, viz., participating (Money market) and equity market (Capital market) and
trading members, who can only trade on their behalf and operations in both are separately maintained. POst trade
intermediary trading members (dealers) who can deal on behalf services are also automated. For confirmed trades, the settling
of their clients. Trading members will have computer terminals
bank will arrange for payment and clearance and depository for
connecting to the other trading members (PTM) and to the effecting transfers by electronic book entry system. The clearing
central computer system at the NSE. Trading orders to buy and house facility is provided by Canara Bank and many banks are
sell securities or to borrow and lend are entered into the providing the depository facility for NSE.
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58 11.621.3Automated Lending and Borrowing Mechanism (ALBM) certificates, like tearing/mutilation of share certificates due to
SECURITY ANALYSIS AND POR TFOLIO MANAGEMENT
ALBM is a new product developed by NSE to meet a felt need careless handling, loss of certificates by postal authorities or
of lending and borrowing of securities by short sellers. This delays with registrars and investors problems of bad delivery of
does not involve borrowing and lending of money, as in the shares. Cases of forgery of certificates will be eliminated in an
case of Badla trade. This is a flexible instrument, to be pressed electronic environment. Settlement of traders will be faster and
into service for smooth trading and settlement and clearance. hassle-free leading to shorter settlement cycles.
In the segment of Rolling Settlement market, ALBM is well What is a Depository ?
suited to ensure that settlement took place daily. The securities A Depository is an organisation where the securities of a share
borrowing and lending market in U.S.A. is estimated $ 100 holder are held in the electronic form at the request of the share
billion per annum. Some institutions like SHCI specialise in holder through the medium of a depository participant.
lending of securities and short sellers need to borrow securities. A depository can be compared to a bank for securities. If an
The instrument does not have anything to do with carry investor wants to utilise the services offered by a depository, the
forward or Badla nor does it finance purchases or long buyers. investor has to open an account with the depository through a
Central Depository System depository participant - this is very similar to the opening of an
The Government has accepted the system of multiple deposi- account with any of the branches of a bank in order to utilise
the services of that bank, as a Depository Participant (D.P.).
tories and SEBI was asked to frame guidelines for their
operations in 1996. These Depositories will keep physical The depository can legally transfer beneficial ownership which a
custody of share certificates leading to immobilisation of shares custodian cannot. The main objective of a depository is to
to be followed later by dematerialisation and complete book minimise the paper work involved with the ownership, trading
entry system of trading in future, say after 5 years. and transfer of securities.
This means that the statement given by the Depository is Facilities offered by NSDL
evidence of the ownership of the shares. This method was 1. Enable surrender and withdrawal of securities to and from
operated for the FIs and FFIs and banks and mutual funds, in the depository (i.e., dematerialisation and rematerialisation).
the beginning and was extended to corporates and individuals
2. Maintain investor holdings in the electronic form.
later on. The depository will transfer the securities between the
participants through electronic book entry, while the settling 3. Effect settlement of securities traded on the exchanges.
bank will effect the transfer of funds. 4. Carry out settlement of trades not done on the stock
Listing of Securities exchanges (i.e., off market traders).
All medium and large sized companies with paid up equity Rs. Rematerialisation
10 crores and above eligible to be listed on regular Stock If anybody wishes to get back his securities in the physical form
Exchanges can be listed on NSE. Some of them may be listed all he has to do is to request his Depository participant for the
and traded on regular Stock Exchanges also. The same formali- rematerialisation of the same.
ties of listing are observed by NSE and a liting agreement is
entered into with the company, as on a regular exchange and a Advantages of the Depository
sapproved by the SEBI. There are a number ov reasons why Investor should opt for the
electronic form of holding securities. Depositing Investor’s
Settlement System securities with NSDL with give freedom from the worries of
Trading period on any day will vary for the debt segment and loss of share certificates through theft, mutilation, fire, etc.
equity segmenet. For capital market operations the trading is
The process of opening an account with a depository partici-
done in equities, convertible and nonconvertible debentures. pant is similar to the opening of a bank account. The investor
Trading network can be spread all over the country, depending can get a list of depository participants from NSDL. The
on the electronic link though the Satellite. A rolling settlement depository participants may also advertise the services offered by
system operates in NSE with settlement period of T + 7. Thus them once they are registered. The Investor can approach any
a rolling T + 7 period means that transactions on a given day DP of his choue and fill up an account opening form.
(T) will be settled seven days later (T + 7). On that day, funds The depository participant will give a pass book or a stat ement
and securities are exchanged by passing electronically proper of holdings. The statement of holdings will be dispatched to
debit and credit entries. the Holder periodically by the Depository participant; however,
The National Securities Depository Limited (NSDL) the statement of holdings can be sent to Holders, as and when
This is an organisation promoted by the Industrial Develop- requested for a fee.
ment Bank of India, the Unit Trust of India and the National The depository has not prescribed any minimum balance. In
Stock Exchange of India Limited to provide electronic deposi- fact, the holder cna even have zero balance in his account.
tory facilities for stock traded in the equity and the debt market. However, the depository participants may fix some minimum
The National Securities Depository Limited has been registered limits. Many FFIs, FIIs and Indian FIs and banks have joined
with the Securities Exchange Board of India and launched on the Depository System, as it is very suitable for their trade in
Nov. 7, 1996 as India’s first depository to facilitate trading and large volumes.
settlement of securities in dematerialised form. Settlement of
securities in dematerialised form will eliminate problems that
are normally associated with settlement through physical
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11.621.3 59About the Depository Participants Interconnected Stock Exchange
SECURITY ANALYSIS AND POR TFOLIO MANAGEMENT
Similar to the brokers who trade on behalf of the customers in The Inter-connected Stock Exchange of India Ltd. was
and outside the stock exchanges, a Depository Participant is the promtoed by 15 regional Stock Exchanges and Federation of
representative (agent) in the depository system. The Depository Indian Stock Exchanges. It was incorporated as a public limited
Participant will maintain the securities account balances and company under Section 12 of the Companies Act in January
intimate to the Holder about their holdings from time to time. 1998. Its registered location is at International Infotech Park,
According to SEBI guidelines, financial institutions, banks, 7th Tower, 5th Floor, Vashi Railway Complex, Sector 30A,
custodians, stock brokers, etc. can become participants in the Vashi, Navi Mumbai 400 705.
depository. Its paid up capital or the project cost is Rs. 15 crores, which is
There are absolutely no restrictions to the number of DPs that covered by the contribution of Rs. 1 crores from each of the
the Investor can open accounts with. Opening an account with a participating member in the form of admission fee of Rs. 5
depository participant is very similar to opening a bank account. lakhs and Infrastructure fee of Rs. 95 lakhs. The following
Just as a person can have savings or current accounts with more participating exchanges paid the Initial Capital :
than one bank, the person can open accounts with more than 1. Bangalore Stock Exchange
one depository participant.
2. Bhuvaneshwar Stock Exchange
The perosn can exercise the option such a rights issue or
optional conversion of debentures to shares. The holders do 3. Cochin Stock Exchange
have a choice of either physical or electronic mode of holdings. 4. Coimbatore Stock Exchange
However, corporate entitlements such as bonus will be made in 5. Gauhati Stock Exchange
the same form as the original holdings. Compulsory demat
6. Hyderabad Stock Exchange
form of trading was enforced by SEBI in most of the well-
traded stocks, soon after. 7. Jaipur Stock Exchange
The depository will also establish a help desk which will direct 8. Ludhiana Stock Exchange
the holder to the holder to the appropriate agency. When the 9. Madhya Pradesh (Indore) Stock Exchange
depository is ready to start functioning, it will advertise the help,
10. Madras Stock Exchange
desk, telephone lines, etc.
11. Magadh (Patna) Stock Exchange
NSDL’S First Participants
12. Mangalore Stock Exchange
SHCIL
13. Saurashtra Kutch (Rajkot) Stock Exchange
ILFS
14. Uttar Pradesh (Kanpur) Stock Exchange
ITT Trust Corp Services
15. Vadodara Stock Exchange
GLOBAL TRUST BANK
All these 15 Stock Exchanges have a total membership of 4613,
HDFC Bank
which account for 51% of total membership of all exchanges in
CITI Bank Custodial Services India in 1998. The total number of listed companies in these
Morgan Stanley Custodial Services participating exchanges is 3,467, whichaccounts for 35% of total
Reliance Share & Stock Brocking listed on all Stock Exchanges in India (9, 833 in 1998). But in
terms of turnover of trade, the ISE participating Stock
Janta Sahakari Bank Exchanges account for Rs. 45,226 Crores in 1997-98, which
Industrial Dev. Bank Of India constitues about 4% of the total turnover of all the Stock
State Bank Of India Exchanges in India.
Standard Chartered ISE has got the SEBI approval under Section 4 of S.C. (R) Act
National Sec. Clearing Corp. in November 1998. The SEBI laid down the conditions of a
minimum Base Capital of Rs. 2 lakh to being with by members
DEUTSCHE Bank to be raised to Rs. 4 lakh by the end of one year. The participat-
Legal Aspects ing exchanges will have a uniform trading and settlement cycle
NSDL was set up by passing the Depositories Act, 1996 but of Thursday to Wednesday, which is the actual cycle adopted by
with retrospective effect from Sept. 1995. Companies Act and the ISF. Besides, the ISE has set up a settlement guarantee fund
SCR Act were amended to the extent necessary. Section 22A of to guarantee payouts. Additionally every participating exchange
SCR Act dealing with restrictions on transfer of shres was is required to maintain with ISE, a Settlement Stabilisation
deleted. Sections 108 and 111 of the Companies Act were 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.
amended to dispense with transfer form and other formalities
relating to the physial transfer of shares. The Depository’s ISE provides a national market system where in a trading
statement is a valid documents of title, under law and transfers member of one Stock Exchange can deal with a trading
are effected by book entries in the pass-books of D.P.s.. The member of another exchange from his local Trader Work
exemption from stamp duty was also granted for transactions Station (TWS). Through the Inter-connected market system,
ISE provides for trading, clearing and settlement along with
in Demat form.
surveillance and Risk Management to the inter-connected
trading system.
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60 11.621.3It has got SEBI’s clearance to start trading in Nov. 1998 but it traders will have to deposit the loss margin, if the loss goes
SECURITY ANALYSIS AND POR TFOLIO MANAGEMENT
has started training of members and stock trading sessions in beyond the cast component of his capital adequacy amount.
the early months of 1999. Accordingly, the traders and dealers would be required to pay on
Objective a T + 1 basis the daily Mark to Market Margins on the loss
The basic aim of the Inter-connected Market System (ICMS), suffered by them on their outstanding positions. Losses on any
which ISE sets up is to consolidate the small fragmented and scrip would not be allowed to be set off against profits on
less liquid markets into a national level market, with the state of others and a basic exemption limit of 25% of the capital
art infrastructure and systems support. It will create a level adequacy amount is given to the trader while computing the
playing ground for all participating exchanges, reduce transac- margin liability. The extra losses would have to be covered by
extra margin deposits.
tions costs, promote liquidity and volumes, necessary for
survival of regional Stock Exchanges. Daily Circuit Filters
Its functions are to provide trading among the inter-connected The system would also operate daily and settlement circuit
exchanges in their listed securities by using the Electronic limits to scrip prices, which set the limit to fluctuations of
Securities Architecture Software and decentralized clearing and prices, unduly rising or falling. The filter is the point fixed by the
Settlement at all participating Exchange centers. The central ISE on the basis of previous day’s closing or settlement closing
clearing bank of ISE namely ABN AMRO-Vysya Bank price or base price.
Consortium provides for exclusive funds transfer, electronically
Suspension of Securities and Traders
and sharing the relevant information on margins settlements
The ISE has powers to suspend any security or trades if they are
and capital adequacy positions by opening of extension
counters at the premises of participating Stock Exchanges. for any reason suspended on the participating regional Stock
Exchange.
The ISE hires the services of the Elbe couriers to ensure timely
movement of securities across the Exchanges for smooth Computer System
settlement of deliveries, payouts and Auction payours. The ISE For interconnected market system, there is a computer system
has a Settlement Guarantee Fund (SGF) to guarantee settlement provided by the Indigo Technologies with a Central Computer
of all trades validly executed in the ISE system. A real time risk at Vashi, Navi Mumbai and Compaq N.T. Server Machines at
management and surveillance system would ensure instant the Reigonal Stock Exchanges. Similarly, there will be another
information on gross exposure, intra-day trading exposure and computer system for trading set up by Tandem Computers, a
cumulative loss positions of member brokers etc. with a view subsidiary of Compaq company, while Compaq N.T. servers
to prevent gross irregularities undue price fluctuations and and work stations will be used for clearing and settlement and
impose margins on members of various types, for the purpose for Risk Management and Surveillance.
of stopping overtrading by members and their consequent
defaults and failures. The electronic Securities Architecture Software uses a modular
architecture consisting of expandable set of business modules
The listed securities on the ISE are divided into three groups : such as :
Group A, which consists of 50 most popular scrips; Group B
Automated traded
which has about 500 actively well traded shares and Group C
which has all the rest of the listed scrips which are generally Manual trading module
thinly traded. Market control
Risk Management and Surveillance System : The ISE has System Administration
established a Risk Management and Surveillance system that is a Market information and dissemination
system driven to monitor the position of traders and dealers
on a real time basis. The risks are controlled by the following Trader Work Stations
methods : In each Regional Stock Exchange, there can be multiple work
a. Intra-day Trading Limits : Trades allowed up to 33.33 stations for trading. Trader work stations comprise Member
times their Base Minimum Capital (BMC) and 25 times Server Application (MSA) and a Trader Workstation Application
their additional capital, if any. Traders are warned by the (TWS). The MSA will be responsible for maintaining local data
system when they reach the trading limits of 60%, 70% and base and submits requests to the central system through the
90% and then as the limit reaches 100% of permitted level, TWS. The trader work station provide for order management
the trader and dealer will be disabled to access the ICMS. through submission, modification and withdrawal of market
orders and limit orders and allows the market view of the 10
b. Gross Exposure Limits : The trader can have maximum
best bids and offers, depth of the market and market statistics
gross exposure of 12.5 times of capital deposited by the
brokers can set up their own hierarchy and a system of scrutiny
trader. The gross exposure is the sum of net purchases and
and control through setting up of trading limits.
sales and includes the exposure form the previous
settlement waiting pay in. Advantages of ISE
c. Cumulative Loss Margins : The system will not allow the Volumes of trade can increase and there will be greater liquidity
cumulative loss of a trader to cross the capital adequacy to scrips. More than 4,000 scrips are kept udner permitted
amount. The loss is computed by marketing to the market category. They cost of each transaction will be lower, on an
values the net purchases and sales and carry forwards. The average. The cost of acquiring membership rights on ISF is only
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11.621.3 61Rs. 5,000 per annum to the member brokers of regional Stock Trading is done by members and their authorized assistants
SECURITY ANALYSIS AND POR TFOLIO MANAGEMENT
Exchanges, which gives a cost advantage to traders on ISE. from their Trader Work Stations (TWS) in their offices, through
The additional facilities which the ISE may provide include the BSE On-Line Trading (BOLT) system. BOLT system has
trading in Demat form through a tie up with the CDSL, set up replaced the open outcry system of trading. BOLT system
by the B.S.E. Besides, the RSE can have established ATFs and accepts two-way quotations from jobbers, market and limit
ATCs, for the purposes of facilitating trading in centres where orders from client-brokers and matches them according to the
the Stock Exchange is not available within the jurisdiction of matching logic specified in the Business Requirement Specifica-
R.S.E. tions (BRS) document for this system.
The ISE has also proposed to set up a modified carry forward The matching logic for the Carry-Forward System as in the case
system, subject to the permission of SEBI and extend the of the regular trading system is quote-driven with the order
trading rights as dealers to institutions like subsidiaries of book functioning as an “auxiliary jobber”.
banks, mutual funds, FIIS, etc.
Notes
Advantages of Members of RSEs
1. Increase in the business and earnings.
2. Increase in liquidity in shares that they trade in.
3. Appreciation in the value of membership at the
participating exchange.
4. Greater Safeguards against defaults, bad deliveries, and
frauds, etc.
5. Long-term strategy to survive in the face of competition
from the big National Exchanges like NSE and BSE.
6. Creation of efficient and orderly market.
7. Establish transparency in dealings and improves the price
discovery process.
8. Creates a level playing ground for all the participating
exchanges and provides a larger ground to play to member
brokers of RSEs.
9. 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.
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