STOCK MARKET
BY
Vikrant saini
Delhi University 3rd year 2011-2012
Introduction
Of all the modern service institutions, stock exchanges are perhaps the most crucial agents and facilitators of entrepreneurial progress. After the industrial revolution, as the size of business enterprises grew, it was no longer possible for proprietors or partnerships to raise colossal amount of money required for undertaking large entrepreneurial ventures. Such huge requirement of capital could only be met by the participation of a very large number of investors;
their numbers running into hundreds, thousands and even millions, depending on the size of business venture. In general, small time proprietors, or partners of a proprietary or partnership firm, are likely to find it rather difficult to get out of their business should they for some reason wish to do so. This is so because it is not always possible to find buyers for an entire business or a part of business, just when one wishes to sell it. Similarly, it is not easy
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for someone with savings, especially with a small amount of savings, to readily find an appropriate business opportunity, or a part thereof, for investment. These problems will be even more magnified in large proprietorships and partnerships. Nobody would like to invest in such partnerships in the first place, since once invested, their savings would be very difficult to convert into cash. And most people have lots of reasons, such as better investment opportunity, marriage, education, death, health and so on for wanting to convert their savings into cash. Clearly then, big enterprises will be able to raise capital from the public at large only if there were some mechanism by which the investors could purchase or sell their share of business as ands they wished to do so. This implies that ownership in business has to be ´broken upµ into a lager number of small units, such that each unit may be independently & easily bought and sold without hampering the business activity as such. Also, such breaking of business ownership would help mobilize small savings in the economy into entrepreneurial ventures. This end is achieved in a modern business through the mechanism of shares. Q. What is a share? A share represents the smallest recognized fraction of ownership in a publicly held business. Each such fraction of ownership is represented in the form of a certificate known as a share certificate. The breaking up of total ownership of a business into small fragments, each fragment represented by a share certificate, enables them to be easily bought and sold. What is a stock exchange? The institution where this buying and selling of shares essentially takes place is the Stock Exchange. In the absence of stock exchanges, ie. Institutions where small chunks of businesses could be traded, there would be no modern business in the form of publicly held companies. Today, owing to the stock exchanges, one can be part owners of one company today and another company tomorrow; one can be part owners in several companies at the same time; one can be part owner in a company hundreds or thousands of miles away; one can be all of these things. Thus by enabling the convertibility of ownership in the product market into financial assets, namely shares, stock exchanges bring together buyers and sellers (or their representatives) of fractional ownerships of companies. And for that very reason, activities relating to stock exchanges are also appropriately enough, known as stock market or security market. Also a stock exchange is distinguished by a specific locality and characteristics of its own, mostly a stock exchange is also distinguished by a physical location and characteristics of its own. In fact, according to H.T.Parekh, the earliest location of the Bombay Stock Exchange, which for a long period was known as ´the native share and stock brokers· associationµ, was probably under a tree around 1870! The stock exchanges are the exclusive centers for the trading of securities. The regulatory framework encourages this by virtually banning trading of securities outside exchanges. Until recently, the area of operation/ jurisdiction
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of exchange was specified at the time of its recognition, which in effect precluded competition among the exchanges. These are called regional exchanges. In order to provide an opportunity to investors to invest/ trade in the securities of local companies, it is mandatory foe the companies, wishing to list their securities, to list on the regional stock exchange nearest to their registered office.
Characteristics of Stock Exchanges in India
Traditionally, a stock exchange has been an association of individual members called member brokers (or simply members or brokers), formed for the express purpose of regulating and facilitating buying and selling of securities by the public and institution at large. A stock exchange in India operates with due recognition from the government under the Securities and Contracts (Regulations) Act, 1956. the member brokers are essentially the middlemen who carry out the desired transactions in securities on behalf of the public(for a commission) or on their own behalf. New membership to a Stock Exchange is through election by the governing board of that stock exchange. At present, there are 23 stock exchanges in India, the largest among them being the Bombay Stock Exchange. BSE alone accounts for over 80% of the total volume of transactions in shares. Typically, a stock exchange is governed by a board consisting of directors largely elected by the member brokers, and a few nominated by the government. Government nominee include representatives of the ministry of finance, as well as some public representatives, who are expected to safeguard the public interest in the functioning of the exchanges. A president, who is an elected member, usually nominated by the government from among the elected members, heads the board. The executive director, who is usually appointed by the by the stock exchange with the government approval is the operational chief of the stock exchange. His duty is to ensure that the day to day operations the Stock Exchange are carried out in accordance with the various rules and regulations governing its functioning. The overall development and regulation of the securities market has been entrusted to the Securities and Exchange Board of India (SEBI) by an act of parliament in 1992. All companies wishing to raise capital from the public are required to list their securities on at least one stock exchange. Thus, all ordinary shares, preference shares and debentures of the publicly held companies are listed in the stock exchange.
Exchange management
Made some attempts in this direction, but this did not materially alter the situation. In view of the less than satisfactory quality, of administration of broker-managed exchanges, the finance minister in march 2001 proposed demutualisation of exchanges by which ownership, management and trading membership would be segregated from each other. The regulators are working towards implementing this. Of the 23 stock exchanges in India, two stock exchanges viz., OTCEI and NSE are already
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demutualised. Board of directors, which do not include trading members, manages these. Theses are purest form of demutualised exchanges, where ownership, management and trading are in the hands of three sets of people. The concept of demutualisation completely eliminates any conflict of interest and helps th e exchange to pursue market efficiency and investors interest aggressively
Role of SEBI
The SEBI, that is, the Securities and the Exchange Board of India, is the national regulatory body for the securities market, set up under the securities and Exchange Board of India act, 1992, to ´protect the interest of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith and incidental too.µ SEBI has its head office in Mumbai and it has now set up regional offices in the metropolitan cities of Kolkata, Delhi, and Chennai. The Board of SEBI comprises a Chairman, two members from the central government representing the ministries of finance and law, one member from the Reserve Bank of India and two other members appointed by the central government. As per the SEBI act, 1992, the power and functions of the Board encompass the regulation of Stock Exchanges and other securities markets; registration and regulation of the working stock brokers, sub-brokers, bankers to an issue (a public offer of capital), trustees of trust deeds, registrars to an issues, merchant bankers, under writers, portfolio managers, investment advisors and such other intermediaries who may be associated with the stock market in any way; registration and regulations of mutual funds; promotion and regulation of self- regulatory organizations; prohibiting Fraudulent and unfair trade practices and insider trading in securities markets; regulating substantial acquisition of shares and takeover of companies; calling for information from,undertking inspection, conducting inquiries and audits of stock exchanges, intermediaries and self- regulatory organizations of the securities market; performing such functions and exercising such powers as contained in the provisions of the Capital Issues (Control) Act,1947 and the Securities Contracts (Regulation) Act, 1956, levying various fees and other charges, conducting necessary research for above purposes and performing such other functions as may be prescribes from time to time. SEBI as the watchdog of the industry has an important and crucial role in the market in ensuring that the market participants perform their duties in accordance with the regulatory norms. The Stock Exchange as a responsible Self Regulatory Organization (SRO) function to regulate the market and its prices as per the prevalent regulations. SEBI and the Exchange play complimentary roles to enhance the investor protection and the overall quality of the market.
Membership
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The trading platform of a stock exchange is accessible only to brokers. The broker enters into trades in exchanges either on his own account or on behalf of clients. The clients may place their order with them directly or a subbroker indirectly. A broker is admitted to the membership of an exchange in terms of the provisions of the SCRA, the SEBI act 1992, the rules, circulars, notifications, guidelines, etc. prescribed there under and the byelaws, rules and regulations of the concerned exchange. No stockbroker or sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration granted by SEBI. A broker/sub-broker compiles with the code of conduct prescribed by SEBI. The stock exchanges are free to stipulate stricter requirements for its members than those stipulated by SEBI. The minimum standards stipulated by NSE for membership are in excess of the minimum norms laid down by SEBI. The standards for admission of members laid down by NSE stress on factors, such as, corporate structure, capital adequacy, track record, education, experience, etc. and reflect the conscious endeavors to ensure quality broking services.
Listing
Listing means formal admission of a security to the trading platform of a s tock exchange, invariably evidenced by a listing agreement between the issuer of the security and the stock exchange. ; Listing of securities on Indian Stock Exchanges is essentially governed by the provisions in the companies act, 1956, SCRA, SCRR, rules, bye-laws and regulations of the concerned stock exchange, the listing agreement entered into by the issuer and the stock exchange and the circulars/ guidelines issued by central government and SEBI.
Index services
Stock index uses a set of stocks that are representative of the whole market, or a specified sector to measure the change in overall behavior of the markets or sector over a period of time. India Index Services & Products Limited (IISL), promoted by NSE and CRISIL, is the only specialized organization in the country to provide stock index services.
Trading Mechanism
All stock exchanges in India follow screen-based trading system. NSE was the first stock exchange in the country to provide nation-wide order-driven, screen-based trading system. NSE model was gradually emulated by all other stock exchanges in the country. The trading system at NSE known as the National Exchange for Automated Trading (NEAT) system is an anonymous order-driven system and operates on a strict price/time priority. It enables members from across the countries to trade simultaneously with enormous ease and efficiency. NEAT has lent considerable depth in the market by enabling large number of members all over the country to trade simultaneously and consequently narrowed the spreads significantly. A single consolidated order book for each stock displays, on a real time basis, buy and sell orders originating from all over the country. The bookstores only
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limit orders, which are orders to buy or sell shares at a stated quantity and stated price. The limit order is executed only if the price quantity conditions match. Thus, the NEAT system provides an open electronic consolidated limit order book (OECLOB). The trading system provides tremendous flexibility to the users in terms of kinds of orders that can be placed on the system. Several time-related (Good-Till-Cancelled, Good-Till- Day, Immediate-or-Cancel), price related (buy/sell limit and stop-loss orders) or volume related (All-or-None, Minimum Fill, etc.) conditions van be easily built into an order. Orders are sorted and match automatically by the computer keeping the system transparent, objective and fair. The trading system also provides complete market information on-line, which is updated on real time basis. The trading platform of the CM segment of NSE is accessed not only from the computer terminals from the premises of brokers spread over 420 cities, but also from the personal computers in the homes of investors through the internet and from the hand-held devices through WAP. The trading platform of BSE is also accessible from 400 cities. Internet trading is available on NSE and BSE, as of now. SEBI has approved the use of Internet as an order routing system, for communicating clients· orders to the exchanges through brokers. SEBI- registered brokers can introduce internet-based trading after obtaining permission from the respective Stock Exchanges. SEBI has stipulated the minimum conditions to be fulfilled by trading members to start internet-based trading and services. NSE was the first exchange in the country to provide web-based access to investors to trade directly on the exchange. It launched Internet trading in February 2000. It was followed by the launch of Internet trading by BSE in March 2001. The orders originating from the personal computers (PCs) of investors are routed through the Internet tot eh trading terminals of the designated brokers with whom they have relations and further to the exchange of trade execution. Soon after these orders get matched and result into trades, the investors get confirmation about them on their PCs through the same Internet routes.
SEBI approved trading through wireless medium or WAP platform. NSE is the only exchange to provide access to its order book through the hand held devices, which use WAP technology. This serves primarily retail investors who are mobile and want to trade from any place when the market prices for st0ocks of their choice are attractive
Demat Trading
A depository holds securities in dematerialized form. It maintains ownership records of securities in a book entry form and also effects transfer of ownership through book entry. SEBI has introduced some degree of compulsion
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in trading and settlement of securities in dematerialized form. While the investors have a right to hold securities in either physical or demat form, SEBI has mandated compulsory trading and settlement of securities in dematerialized form. This was initially introduced for institutional investors and was later extended to all investors. Starting with 12 scrips on January 15, 1998, all investors are required to mandatorily trade in dematerialized form in respect of 2,335 securities as at end-June, 2001. Since the introduction of the depository system, dematerialization has progressed at a fast pace and has gained acceptance among the participants in the market. All actively traded scrips are held, traded and settled in demat form. The details of progress in dematerialization in two depositories, viz., NSDL and CDSL., are presented as below: In a SEBI working paper titled ¶Dematerialization: A Silent Revolution in the Indian Capital Market· released in April 2000, it has been observed that India has achieved a very high level of dematerialization in less than three years· time, and currently more than 99%of trades settle in demand form. Competition and regulatory developments facilitated reduction in custodial charges and improvements in qualities of service standards. The paper observes that one imminent and apparent immediate benefit of competition between the two depositories is fall in settlement and other charges. Competition has been driving improvement in service standards. Depository facility has effected changes in stock market microstructure. Breadth and depth of investment culture has further got extended to interior areas of the country faster. Explicit transaction cost has been falling due to dematerialization. Dematerialization substantially contributed to the increased growth in the turnover. Dematerialization growth in India is the quickest among all emerging markets and also among developed markets excepting for the U.K and Hong Kong
INTRODUCTION
The Stock Exchange, Mumbai, popularly known as "BSE" was established in 1875 as "The Native Share and Stock Brokers Association", as a voluntary non-profit making association. It has evolved over the years into its present status as the premier Stock Exchange in the country. It may be noted that the Stock Exchanges is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was founded in 1878. The Exchange, while providing an efficient and transparent market for trading in securities, upholds the interests of the investors and ensures redressal of their grievances, whether against the companies or its own member-
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brokers. It also strives to educate and enlighten the investors by making available necessary informative inputs and conducting investor education programmes. A Governing Board comprising of 9 elected directors (one third of them retire every year by rotation), two SEBI nominees, a Reserve Bank of India nominee, six public representatives and an Executive Director is the apex body, which decides the policies and regulates the affairs of the Exchange. The Executive Director as the Chief Executive Officer is responsible for the day -to-day administration of the Exchange. The average daily turnover of the Exchange during the year 2000-2001 (April-March), was Rs.3984.19 crores and average number of daily trades was 5.69 lakhs. However, the average daily turnover of the Exchange during the year 2001- 2002 has declined to Rs. 1244.10 crores and number of average daily trades during the period to 5.17 lakhs. The ban on all deferral products like BLESS and ALBM in the Indian capital Markets by SEBI w.e.f. July 2, 2001, abolition of account period settlements, introduction of Compulsory Rolling Settlements in all scrips traded on the Exchanges w.e.f. December 31, 2001, etc. have adversely impacted the liquidity and consequently there is a considerable decline in the daily turnover at the Exchange.
CAPITAL LISTED AND MARKET CAPITALIZATION.
The Stock Exchange, Bombay (BSE) is the premier Stock Exchange in India. The BSE accounted for 46 per cent of listed companies on an all India basis as on 31st March 1994. It ranked first in terms of the number of listed companies and stock issues listed. The capital listed in the BSE as on 31st March 1994 accounted for 50% of the overall capital listed on all the stock exchanges. Its share of the market capitalization was around 74% as on the same date. The paid- up capital of equity, debentures/bonds and preference were 73%, 31%, 44% respectively of the overall capital listed on all the Stock Exchanges as on the same date. On the BSE, the Steel Authority of India had the largest market capitalization of Rs.19, 908 crores as on the 31st March, 1994 followed by the State Bank of India with the market capitalization of Rs.16, 702 crores and Mahanagar Telephone Nigam Limited with the market capitalization of Rs.11, 700 crores.
BSE SENSEX
The BSE SENSEX, short form of Sensitive Index, first compiled in 1986 is a ´market Capitalization-Weightedµ index of 30 component stocks representing a sample of large, well- established and financially sound companies. The index is widely reported in both, the domestic international, print electronic media and is widely used to measure the used to measure the performance of the Indian stock markets. The BSE SENSEX is the benchmark index of the Indian capital market and one, which has the longest social memory. In fact the SENSEX is considered to be the pulse of the Indian stock
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markets. It is the oldest index in India and has acquired a unique place in collective consciousness of the investors. Further, as the oldest index of the Indian Stock Market, it provides time series data over a fairly long period of time. Small wonder that theSENSE X has over the years has become one of the most prominent brands of the Country
Objectives of SENSEX
The BSE SENSEX is the benchmark index with wide acceptance among individual investors, institutional investors, foreign investors, foreign investors and fund managers. The objectives of the index are: To measure market movements Given its long history and its wide acceptance, no other index matches theBSE SENESX in the reflecting market movements and sentiments. SENSEXis widely used to describe the mood in the Indian stock markets. Benchmark for funds performance The inclusion of blue chip companies and the wide and balanced industry Representation in theSENSE X makes it the ideal benchmark for fund managers to compare the performance of their funds.
For index based derivatives products Institutional investors, money managers and small investors, all refer to theBSE
SENSEX for their specific purposes. The BSE SENSEXis in effect the proxy for the Indian stock markets. SinceSENSE Xcomprises of the leading companies in allthe significant sectors in the economy, we believe that it will be the most liquid contract in the Indian market and will garner a predominant market share.
Companies represented in the SENSEX
Company name (As on 15.06.01) Sector
Hindustan lever Reliance limited
FMCG Chemicals and petrochemicals
Infosys technologies Reliance petroleum
Information technology Oil and gas
ITC State bank of India
FMCG Finance
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MTNL Telecom
Satyam computers
Information technology
Zee telefilms
Media
Ranbaxy labs
Healthcare
ICICI
Finance
Larsen & toubro
Diversified
Cipla
Healthcare
Hindalco
Metals and mining
HPCL
Metal and mining
TISCO
Metal and mining
FMCG Nestle
Trading System
Till Now, buyers and sellers used to negotiate face-to-face on the trading floor over a security until agreement was reached and a deal was struck in the open outcry system of trading, that used to take place in the trading ring. The transaction details of the account period (called settlement period) were submitted for settlement by members after each trading session. The computerized settlement system initiated the netting and clearing process by providing on a daily basis statements for each member, showing matched and unmatched transactions. Settlement processing involves
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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".
TRADING
The Exchange, which had an open outcry trading system, had switched over to a fully automated computerized mode of trading known as BOLT (BSE on Line Trading) System. Through the BOLT system the members now enter orders from Trader Work Stations (TWSs) installed in their offices instead of assembling in the trading ring. This system, which was initially both order and quote driven, was commissioned on March 14, 1995. However, the facility of placing of quotes has been removed w.e.f., August 13, 2001 in view of lack of market interest and to improve system-matching efficiency. The system, which is now only order driven, facilitates more efficient processing, automatic order matching and faster execution of orders in a transparent manner. Earlier, the members of the Exchange were permitted to open trading terminals only in Mumbai. However, in October 1996, the Exchange obtained permission from SEBI for expansion of its BOLT network to locations outside Mumbai. In terms of the permission granted by SEBI and certain modifications announced later, the members of the Exchange are now free to install their trading terminals at any place in the country. Shri P. Chidambaram inaugurated the expansion of BOLT network the then Finance Minister, Government of India on August 31, 1997. In order to expand the reach of BOLT network to centers outside Mumbai and support the smaller Regional Stock Exchanges, the Exchange has, as on March 31, 2002, admitted subsidiary companies formed by 13 Regional Stock Exchanges as its members. The members of these Regional Stock Exchanges work as sub-brokers of the memberbrokers of the Exchange.
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The objectives of granting membership to the subsidiary companies formed by the Regional Stock Exchanges were to reach out to investors in these centers via the members of these Regional Exchanges and provide the investors in these areas access to the trading facilities in all scrips listed on the Exchange.
Trading on the BOLT System is conducted from Monday to Friday between 9:55 a.m. and 3:30 p.m. The scrips traded on the Exchange have been classified into 'A', 'B1', 'B2', 'F' and 'Z' groups. The number of scrips listed on the Exchange under 'A', 'B1 ', 'B2' and 'Z' groups, which represent the equity segment, as on March 31, 2002 was 173, 560,1930 and 3044 respectively. The 'F' group represents the debt market (fixed income securities) segment wherein 748 securities were listed as on March 31, 2002. The 'Z' group was introduced by the Exchange in July 1999 and covers the companies which have failed to comply with listing requirements and/or failed to resolve investor complaints or have not made the required arrangements with both the Depositories, viz., Central Depository Services (I) Ltd. (CDSL) and National Security Depository Ltd. (NSDL) for dematerialization of their securities by the specified date, i.e., September 30, 2001. Companies in "Z" group numbered 3044 as on March 31, 2002. Of these, 1429 companies were in "Z" group for not complying with the provisions of the Listing Agreement and/or pending investor complaints and the balance 1615 companies were on account of not making arrangements for dematerialization of their securities with both the Depositories. 1615 companies have been put in "Z" group as a temporary measure till they make arrangements for dematerialization of their securities. Once they finalize the arrangements for dematerialization of their securities, trading and settlement in their scrips would be shifted to their respective erstwhile groups. The Exchange has also the facility to trade in "C" group which covers the odd lot securities in 'A', 'B1', 'B2' and 'Z' groups and Rights renunciations in all the groups of scrips in the equity segment. The Exchange, thus, provides a facility to market participants of on-line trading in odd lots of securities and Rights renunciations. The facility of trading in odd lots of securities not only offers an exit route to investors to dispose of their odd lots of securities but also provides them an opportunity to consolidate their securities into market lots. The 'C' group can also be used by investors for selling upto 500 shares in physical form in respect of scrips of companies where trades are to be compulsorily settled by all investors in demat mode. This scheme of selling physical shares in compulsory demat scrips is called as Exit Route Scheme. With effect from December 31, 2001, trading in all securities listed in equity segment of the Exchange takes place in one market segment, viz., Compulsory Rolling Settlement Segment Permitted Securities The Exchange has since decided to permit trading in the securities of the companies listed on other Stock Exchanges under " Permitted Securities" category which meet the relevant norms specified by the Exchange. Accordingly, to begin with the Exchange has permitted trading in scrips of five companies listed on other Stock Exchanges w.e.f. April 22, 2002/ Computation of closing price of scrips in the Cash Segment:
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The closing prices of scrips are computed on the basis of weighted average price of all trades in the last 15 minutes of the continuous trading session. However, if there is no trade during the last 15 minutes, then the last traded price in the continuous trading session is taken as the official closing price.
A) Compulsory Rolling Segment (CRS):
Compulsory Rolling Settlement (CRS) Segment: With a view to introduce the best international trading practices and to achieve higher settlement efficiency, as mandated by SEBI, trades in all the equity shares listed on the Exchange in CRS Segment were to be settled on T+5 basis w.e.f. December 31, 2001. SEBI has further directed the Stock Exchanges that trades in all scrips w.e..f. April 1, 2002 should be settled on T+3 basis. Accordingly, all transactions in all groups of securities in the equity segment and fixed income securities listed on the Exchange are settled on T+3 basis w.e.f. April 1, 2002 Under a rolling settlement environment, the trades done on a particular day are settled after a given number of business days rather than settling all trades done during a period at the end of an 'account period'. A T+3 settlement cycle means that the final settlement of transactions done on T or trade day by exchange of monies and securities, occurs on fifth business day after the trade day. The transactions in securities of companies which have made arrangements for dematerialization of their securities by the stipulated date are settled only in Demat mode on T+3 on net basis, i.e., buy and sale positions in the same scrip are netted and the net quantity is to be settled. Howev er, transactions in securities of companies, which have failed to make arrangements for dematerialization of their securities or /are in "Z" group, are settled only on trade to trade basis on T+3 i.e., the transactions are settled on a gross basis and the facility of netting of buy and sale transactions in a scrip is not available. For example, if one buys and sells 100 shares of a company on the same day which is on trade to trade basis, the two positions will not be netted and he will have to first deliver 100 shares at the time of pay-in of securities and then receive 100 shares at the time of pay-out of securities on the same day. Thus, if one fails to deliver the securities sold at the time of pay-in, it will be treated as a shortage and the posit ion will be auctioned/ closed-out. In other words, the transactions in scrips of companies which are in compulsory demat are settled in demat mode on T+3 on netting basis and the transactions in scrips of companies, which have not made arrangements for dematerialization of their securities by the stipulated date or are in "Z" group for other reasons, are settled on trade to trade basis on T+3 either in demat mode or in physical mode The settlement of transactions in 'F' group securities representing Fixed Income Securities is also on Rolling Settlement Cycle of T+3 basis.
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The following tables summarizes the steps in the trading and settlement cycle for scrips under CRS: DAY ACTIVITY Trading on BOLT and daily downloading of statements showing details of transactions and
margins at the end of each trading day.
6A/7A entry by the member-brokers.
T+1 Confirmation of 6A/7A data by the Custodians. Downloading of securities and funds obligation statement by members. T+3 Pay-in of funds and securities by 11:00 a.m. and pay-out of funds and securities by 2:00 p.m T+4 Auction on BOLT. T+5 Auction pay-in and pay-out. * 6A/7A : A mechanism whereby the obligation of settling the transactions done by a memberbroker on behalf of a client is passed on to a custodian based on his confirmation. Thus, the pay-in and pay-out of funds and securities takes places on the 3rd working day of the execution of the trade. The Information Systems Department of the Exchange generates the following statements, which can be downloaded by the members in their back offices on a daily basis. Statements giving details of the daily transactions entered into by the members. Statements giving details of margins payable by the members in respect of the trades executed by them. The settlement of the trades (money and securities) done by a member on his own account or on behalf of his individual, corporate or institutional clients may be either through the member himself or through a SEBI registered Custodian appointed by him or the respective client. In case the delivery/payment is to be given or taken by a registered Custodian, he has to confirm the trade done by a member on the BOLT System through 6A-7A entry. For this purpose, the Custodians have been given connectivity to BOLT System and have also been admitted as members
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of the Clearing House. In case a transaction is not confirmed by a registered Custo dian, the liability for pay-in of funds or securities in respect of the same devolves on the concerned member.
The introduction of settlement on T+3 basis has resulted in reduction in settlement risk, provided early receipt of securities and monies to buyers and sellers respectively and brought Indian Capital Markets at the international standard of settlements
Settlement
Pay-in and Pay-out for 'A', 'B1', 'B2', 'C', "F" & 'Z' group of securities As discussed earlier, the trades done by members in all the securities in CRS are now settled by payment of money and delivery of securities on T+3 basis. All deliveries of securities are required to be routed through the Clearing House, except for certain off-market transactions which, although are required to be reported to the Exchange, may be settled directly between the members concerned. The Clearing House is an independent company promoted jointly by Bank of India and Stock Exchange, Mumbai for handling the clearing and settlement operations of funds and securities on behalf of the Exchange. For this purpose, the Clearing & Settlement Dept. of the Exchange liaises with the Clearing House on a day to day basis.
The Information Systems Department (ISD) of the Exchange generates Delivery and Receive Orders for transactions done by the members in A, B1, B2 and F group scrips after netting purchase and sale transactions in each scrip whereas Delivery and Receive Orders for "C" and "Z" group scrips are generated on trade to trade basis, i.e., without netting of purchase and sale transactions in a scrip. The Delivery Orders provide information like scrip, quantity and the name of the receiving member to whom the securities are to be delivered through the Clearing House. The Money Statement provides scrip wise/item wise details of payments/receipts for the settlement. The Delivery/Receive Orders and money statements can be downloaded by the members in their back offices The bank accounts of members maintained with the eight clearing banks, viz., Bank of India, HDFC Bank Ltd., Global Trust Bank Ltd., Standard Chartered Bank, Centurion Bank Ltd., UTI Bank Ltd., ICICI Bank Ltd., and Indusind Bank Ltd., are directly debited through computerized posting for their settlement and margin obligations and credited with receivables on accounts of pay-out dues and refund of margins. The securities, as per the Delivery Orders issued by the Exchange, are required to be delivered by the members in the Clearing House on the day designated for securities pay-in, i.e., on T+3 day. In case of the physical securities,
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the members have to deliver the securities in special closed pouches (supplied by the Exchange) along with the relevant details (distinctive numbers, scrip code, quantity, and receiving member) on a floppy. The data submitted by the members on floppies is matched against the master file data on the Clearing House computer systems. If there are no discrepancies, then a scroll number is generated by the Clearing House and a scroll slip is issued. The members can then submit the securities at the receiving counter in the Clearing House
Auto D.O. facility:
Instead of issuing Delivery Out instructions for their delivery obligations in a settlement /auction, a facility has been made available to the members of automatically generating Delivery-Out (D.O.) instructions on their behalf from their CM Pool A/cs by the Clearing House w.e.f., August 10, 2000. This Auto D.O. facility is available for CRS (Normal & Auction) and for trade-to-trade settlements. This facility is, however, not available for delivery of non -pari passu shares and shares having multiple ISINs. The members wishing to avail of this facility have to submit an authority letter to the Clearing House. This Auto D.O facility is currently available only for Clearing Member (CM) Pool accounts/Principal Accounts maintained by the members with National Securities Depository Ltd. (NSDL) and Central Depositories Services Ltd. (CDSL)
Demat pay-in:
The members can effect demat pay-in either through Central Depository Services (I) Ltd. (CDSL) or National Securities Depository Ltd. (NSDL). In case of NSDL, the members are required to give instructions to their Depository Participant (DP) specifying settlement no., settlement type, effective pay-in date, quantity, etc. The securities are transferred to the Pool Account. The members are required to give delivery-out instructions so that the securities are considered for pay-in. As regards CDSL, the members give pay-in instructions to their DP. The securities are transferred to Clearing Member (CM) Principal Account. The members are required to give confirmation to their DP, so that securities are processed towards pay-in obligations. Alternatively, members may also effect pay-in from clients' beneficiary accounts for which member are required to do break-up on the front-end software to generate obligation and settlement ID. The Clearing House arranges and tallies the securities received against the receiving member wise report generated on the Pay-in day. Once this reconciliation is complete, the bank accounts of members with seven clearing banks having pay-in positions are debited on the scheduled pay- in day. This procedure is called Funds Pay-in. In case of the demat securities, the securities are credited in the Pool Account of the members or the Client
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Accounts as per the client details submitted by the members. In case of Physical securities, the Receiving Members collect securities from the Clearing House on the payout day and the accounts of the members having payout are credited on Friday. This is referred to as Payout. In case of the Rolling Settlements, pay-in and payout of both funds and securities is on the same day, in case of Weekly settlements, pay-in of funds and securities is on Thursday and payout is on Friday. The auction is conducted for those securities which members fail to deliver/short deliver during the Pay-in. In case the securities are not received in an auction, the positions are closed out as per the closeout rate fixed by the Exchange in accordance with the prescribed rules. The close out rate is calculated as the highest rate of the scrip recorded in the settlement in which the trade was executed and in the subsequent settlement upto the day prior to the day of auction, or 20% above the closing price on the day prior to the day of auction, whichever is higher. However, in case of close-out for shares under objection or traded in "C" group, 10% instead of 20% above the closing price on the day prior to the day of auction and the highest price recorded in the settlement in which trade took place upto a day prior to auction is considered. The Exchange has strictly adhered to the settlement schedules for various groups of securities and there has been no case of clubbing of settlements or postponement of pay-in and pay-out during the last six years. The Exchange is also maintaining a database of fake/forged, stolen, lost and duplicate securities with the Clearing House so that distinctive numbers submitted by members on delivery may be matched against the database to weed out bad paper from circulation at the time of introduction of such securities in the market. This database has also been made available to the members so that delivering and receiving members can check the entry of fake, forged and stolen shares in the market
SHORTAGES AND OBJECTIONS
Shortages & consequent actions
The members download Delivery/Receive Orders based on their netted positions for transactions entered into by them during a settlement in 'A', 'B1', 'B2', and 'F' group scrips and on trade to trade basis, i.e., without netting buy and sell transactions in scrips in "C" & 'Z' groups and scrips in B1 and B2 groups which have been put on trade to trade basis as a surveillance measure. The seller members have to deliver the shares in the Clearing House as per the Delivery Orders downloaded. If a seller member is unable to deliver the shares on the Pay-in day for any reason, his bank account is debited at the
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standard rate (which is equal to the closing price of the scrip on the day of trading) fixed by the Exchange for the quantity of shares short delivered. The Clearing House arrives at the shortages in delivery of various scrips by members on the basis of their delivery obligations and actual delivery. The members can download the statement of shortages on T+3 in Rolling Settlements. After downloading the shortage details, the members are expected to verify the same and report discrepancy , if any, to the Clearing House by 1:00 p.m. If no discrepancy is reported within the stipulated time, the Clearing House assumes that the shortage of a member is in order and proceeds to auction the same. However, in 'C' group, i.e., Odd Lot segment the members are themselves required to report the shortages to the Clearing House. The Exchange issues an Auction Tender Notice to the members informing them about the names of the scrips, quantity slated for auction and the date and time of the auction session on the BOLT. The auction for the undelivered quantities is conducted on T+4 for all the scrips under compulsory Rolling Settlements. The auction offers received in batch mode are electronically matched with the auction quantities so as to award the 'best price'. The members who participate in the auction session can download the Delivery Orders on the same day, if their offers are accepted. The members are required to deliver the shares in the Clearing House on the auction Pay-in day, i.e, T+5. Pay-Out of auction shares and funds is also done on the same day, i.e., T+5. The various auction sessions relating to shortages, and bad deliveries are now conducted during normal trading hours on BOLT. Thus, it is possible to schedule multiple auction sessions on a single trading day.
In auction, the highest offer price is allowed upto the close -out rate and the lowest offer price can be 20% below the closing price on a day prior to day of auction. A member who has failed to deliver the securities of a particular company on the pay-in day is not allowed to offer the same in auction. He can, however, participate in auction of other scrips. In case no offers are received in auction for a particular scrip, the sale transaction is closed-out at a close-out price, determined by higher of the following:-
Highest price recorded in the scrip from the settlement in which the transaction took place upto a day prior to the day of the auction.
OR
20% above the closing price on a day prior to the day of auction
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However, in case of the close-out of the shares under objection and shortages in "C" or "Z" group, 10% above the closing prices of the scrips on the pay-out day of the respective settlement are considered instead of 20%. Further, if the auction price/close-out price of a scrip is higher than the standard price of the scrip in the settlement in which the transaction was done, the difference is recovered from the seller who failed to deliver the scrip. However, in case, auction/ close-out price is lower than standard price, the difference is not given to the seller but is credited by the Exchange to the Customers Protection Fund. This is to ensure that the seller does not benefit from his failure to meet his delivery obligation. Further, if the offeror member fails to deliver the sh ares offered in auction, then the transactions is closed-out as per the normal procedure and the original selling member pays the difference below the standard rate and offer rate and the offeror member pays the difference between the offer rate and close-out rate. Self Auction As has been discussed in the earlier paragraphs, the Delivery and Receive Orders are issued to the members after netting off their purchase and sale transactions in scrips where netting of purchase and sale positions is permitted. It is likely in some circumstances that a selling client of a member has failed to deliver the shares to him. However, this did not result in a member's failure to deliver the shares to the Clearing House as there was a purchase transaction of some other buying client of the member in the same scrip and the same was netted off for the purpose of settlement. However, in such a case, the member would require shares so that he can deliver the same to his buying client, which otherwise would have taken place from the delivery of shares by the seller. To provide shares to the members, so that they are in a position to deliver them to their buying clients in case of internal shortages, the members have been given an option to submit floppies for conducting self-auction (i.e., as if they have defaulted in delivery of shares to the Clearing House). Such floppies are to be given to the Clearing House on the pay-in day. The internal shortages reported by the members are clubbed with the normal shortages in a settlement and the Clearing House for the combined shortages conducts the auction. A member after getting delivery of shares from the Clearing House in self-auction credits the shares to the Beneficiary account of his client or hand over the same to him in case securities received are in physical form and debits his seller client with the amount of difference, if any, between the auction price and original sale price
B) Objections
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When receiving members collect the physical securities from the Clearing House on the Payout day, the same are required to be checked by them for good delivery as per the norms prescribed by the SEBI in this regard. If the receiving member does not consider the securities good delivery, he has to obtain an arbitration award from the arbitrators and submit the securities in the Clearing House on the following day of the Pay-Out (T+4). The Clearing House returns these securities to the delivering members on the same day, i.e., (T+4). If a delivering members feels that arbitration awards obtained against him is incorrect, he is required to obtain arbitration award for invalid objection from the members of the Arbitration Review Committee. The delivering members are required to rectify/replace the objections and return the shares to the Clearing House on next day (T+5) to have the entry against them removed. The rectified securities are delivered by the Clearing House to the buyer members on the same day (T+5). The buyer members, if they are not satisfied with the rectification, are required t o obtain arbitration awards for invalid rectification from the Bad Delivery Cell on T+6 day and submit the shares to the Clearing House on the same day. If a member fails to rectify/replace the objections then the same are closed -out. This is known as "Objection Cycle" and the entire process takes 3 days.
The following table summarizes the activities involved in the Patawat Objection Cycle of CRS.
DAY ACTIVITY T + 3 Pay-out of securities of Rolling Settlement T + 4 Patawat Arbitration session : Arbitration awards to be obtained from officials of the Bad Delivery Cell.
Securities under objection to be submitted in the Clearing House
Arbitration awards for invalid objection to be obtained from members of the Arbitration Review Committee T+ 5 Members and institutions to submit rectified securities, confirmation forms and invalid objections in the clearing house Rectified securities delivered to the receiving members T+ 6 Arbitration Awards for invalid rectification to be obtained from officials of the Bad Delivery Cell
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Securities to be lodged with the clearing house The un-rectified and invalid rectification of securities are directly closed -out by the Clearing House instead of first inviting the auction offers for the same. The shares in physical form returned under objection to the Clearing House are required to be accompanied by an arbitration award (Chukada) except in certain cases where the receiving members are permitted to submit securities to the Clearing House without "Chukada". These cases are as follows: Transfer Deed is out of date. Cheques for the dividend adjustment for new shares where distinctive numbers are given in the Exchange Notice is not enclosed. Stamp of the Registrar of Companies is missing. Details like Distinctive Numbers, Transferors' Names, etc. are not filled, in the Transfer Deeds. Delivering broker's stamp on the reverse of the Transfer Deed is missing. Witness stamp or signature on Transfer Deed is missing. Signature of the transferor is missing. Death Certificate (in cases where one or more of the transferors are deceased) is missing. A penalty at the rate of Rs.100/- per Delivery Order is levied on the delivering member for delivering shares, which are not in order. In the event a receiving member misuses the facility of submitting shares under objection without "Chukada", a penalty of Rs.500/- per case is charged and the penalty of Rs.100/- per Delivery Order levied on the delivering member is refunded to him by debiting the receiving member's account Close Out: There are cases when no offer for particular scrip is received in an auction or when members who offer the scrips in auction, fail to deliver the same. In the former case, the original seller member's account is debited and the buyer member's account is credited at the closeout rate. In the latter case, the offeror member's account is debited and the buyer member's account is credited at the close-out rate. The closeout rates for closing the positions in different segments are as under:
For 'A' + 'B1' + 'B2' + 'Z', 'Rolling demat ' and 'F' group
The closeout rate is higher of the following rates: The highest rate of the scrip from the first day (trading day in case of Rolling demat segment)
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to the day prior to the day on which the auction is conducted for the respective settlement. 20% above the closing rate as on the day prior to the day of auction of the respective settlement. For 'C' group segment The close-out rate is higher of the following rates : The highest rate of the scrip from the first day to the day prior to the day of auction of 'A', 'B1', 'B2, and 'Z' group segment of the respective settlements; or 10% above the closing rate as on the day prior to the day of auction of 'A', 'B1', 'B2, and 'Z' group; or Transaction price.
In the 'C' group, i.e., Odd Lot Segment, no auction session is conducted. The shortages are directly closed out.
Close Out: There are cases when no offer for particular scrip is received in an auction or when members who offer the scrips in auction, fail to deliver the same. In the former case, the original seller member's account is debited and the buyer member's account is credited at the closeout rate. In the latter case, the offeror member's account is debited and the buyer member's account is credited at the close-out rate. The closeout rates for closing the positions in different segments are as under: For 'A' + 'B1' + 'B2' + 'Z', 'Rolling demat ' and 'F' group The closeout rate is higher of the following rates: The highest rate of the scrip from the first day (trading day in case of Rolling demat segment) to the day prior to the day on which the auction is conducted for the respective settlement. 20% above the closing rate as on the day prior to the day of auction of the respective settlement.
For 'C' group segment
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HTTP://PAKISTANMBA.JIMDO.COM
doc_421791506.docx
BY
Vikrant saini
Delhi University 3rd year 2011-2012
Introduction
Of all the modern service institutions, stock exchanges are perhaps the most crucial agents and facilitators of entrepreneurial progress. After the industrial revolution, as the size of business enterprises grew, it was no longer possible for proprietors or partnerships to raise colossal amount of money required for undertaking large entrepreneurial ventures. Such huge requirement of capital could only be met by the participation of a very large number of investors;
their numbers running into hundreds, thousands and even millions, depending on the size of business venture. In general, small time proprietors, or partners of a proprietary or partnership firm, are likely to find it rather difficult to get out of their business should they for some reason wish to do so. This is so because it is not always possible to find buyers for an entire business or a part of business, just when one wishes to sell it. Similarly, it is not easy
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for someone with savings, especially with a small amount of savings, to readily find an appropriate business opportunity, or a part thereof, for investment. These problems will be even more magnified in large proprietorships and partnerships. Nobody would like to invest in such partnerships in the first place, since once invested, their savings would be very difficult to convert into cash. And most people have lots of reasons, such as better investment opportunity, marriage, education, death, health and so on for wanting to convert their savings into cash. Clearly then, big enterprises will be able to raise capital from the public at large only if there were some mechanism by which the investors could purchase or sell their share of business as ands they wished to do so. This implies that ownership in business has to be ´broken upµ into a lager number of small units, such that each unit may be independently & easily bought and sold without hampering the business activity as such. Also, such breaking of business ownership would help mobilize small savings in the economy into entrepreneurial ventures. This end is achieved in a modern business through the mechanism of shares. Q. What is a share? A share represents the smallest recognized fraction of ownership in a publicly held business. Each such fraction of ownership is represented in the form of a certificate known as a share certificate. The breaking up of total ownership of a business into small fragments, each fragment represented by a share certificate, enables them to be easily bought and sold. What is a stock exchange? The institution where this buying and selling of shares essentially takes place is the Stock Exchange. In the absence of stock exchanges, ie. Institutions where small chunks of businesses could be traded, there would be no modern business in the form of publicly held companies. Today, owing to the stock exchanges, one can be part owners of one company today and another company tomorrow; one can be part owners in several companies at the same time; one can be part owner in a company hundreds or thousands of miles away; one can be all of these things. Thus by enabling the convertibility of ownership in the product market into financial assets, namely shares, stock exchanges bring together buyers and sellers (or their representatives) of fractional ownerships of companies. And for that very reason, activities relating to stock exchanges are also appropriately enough, known as stock market or security market. Also a stock exchange is distinguished by a specific locality and characteristics of its own, mostly a stock exchange is also distinguished by a physical location and characteristics of its own. In fact, according to H.T.Parekh, the earliest location of the Bombay Stock Exchange, which for a long period was known as ´the native share and stock brokers· associationµ, was probably under a tree around 1870! The stock exchanges are the exclusive centers for the trading of securities. The regulatory framework encourages this by virtually banning trading of securities outside exchanges. Until recently, the area of operation/ jurisdiction
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of exchange was specified at the time of its recognition, which in effect precluded competition among the exchanges. These are called regional exchanges. In order to provide an opportunity to investors to invest/ trade in the securities of local companies, it is mandatory foe the companies, wishing to list their securities, to list on the regional stock exchange nearest to their registered office.
Characteristics of Stock Exchanges in India
Traditionally, a stock exchange has been an association of individual members called member brokers (or simply members or brokers), formed for the express purpose of regulating and facilitating buying and selling of securities by the public and institution at large. A stock exchange in India operates with due recognition from the government under the Securities and Contracts (Regulations) Act, 1956. the member brokers are essentially the middlemen who carry out the desired transactions in securities on behalf of the public(for a commission) or on their own behalf. New membership to a Stock Exchange is through election by the governing board of that stock exchange. At present, there are 23 stock exchanges in India, the largest among them being the Bombay Stock Exchange. BSE alone accounts for over 80% of the total volume of transactions in shares. Typically, a stock exchange is governed by a board consisting of directors largely elected by the member brokers, and a few nominated by the government. Government nominee include representatives of the ministry of finance, as well as some public representatives, who are expected to safeguard the public interest in the functioning of the exchanges. A president, who is an elected member, usually nominated by the government from among the elected members, heads the board. The executive director, who is usually appointed by the by the stock exchange with the government approval is the operational chief of the stock exchange. His duty is to ensure that the day to day operations the Stock Exchange are carried out in accordance with the various rules and regulations governing its functioning. The overall development and regulation of the securities market has been entrusted to the Securities and Exchange Board of India (SEBI) by an act of parliament in 1992. All companies wishing to raise capital from the public are required to list their securities on at least one stock exchange. Thus, all ordinary shares, preference shares and debentures of the publicly held companies are listed in the stock exchange.
Exchange management
Made some attempts in this direction, but this did not materially alter the situation. In view of the less than satisfactory quality, of administration of broker-managed exchanges, the finance minister in march 2001 proposed demutualisation of exchanges by which ownership, management and trading membership would be segregated from each other. The regulators are working towards implementing this. Of the 23 stock exchanges in India, two stock exchanges viz., OTCEI and NSE are already
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demutualised. Board of directors, which do not include trading members, manages these. Theses are purest form of demutualised exchanges, where ownership, management and trading are in the hands of three sets of people. The concept of demutualisation completely eliminates any conflict of interest and helps th e exchange to pursue market efficiency and investors interest aggressively
Role of SEBI
The SEBI, that is, the Securities and the Exchange Board of India, is the national regulatory body for the securities market, set up under the securities and Exchange Board of India act, 1992, to ´protect the interest of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith and incidental too.µ SEBI has its head office in Mumbai and it has now set up regional offices in the metropolitan cities of Kolkata, Delhi, and Chennai. The Board of SEBI comprises a Chairman, two members from the central government representing the ministries of finance and law, one member from the Reserve Bank of India and two other members appointed by the central government. As per the SEBI act, 1992, the power and functions of the Board encompass the regulation of Stock Exchanges and other securities markets; registration and regulation of the working stock brokers, sub-brokers, bankers to an issue (a public offer of capital), trustees of trust deeds, registrars to an issues, merchant bankers, under writers, portfolio managers, investment advisors and such other intermediaries who may be associated with the stock market in any way; registration and regulations of mutual funds; promotion and regulation of self- regulatory organizations; prohibiting Fraudulent and unfair trade practices and insider trading in securities markets; regulating substantial acquisition of shares and takeover of companies; calling for information from,undertking inspection, conducting inquiries and audits of stock exchanges, intermediaries and self- regulatory organizations of the securities market; performing such functions and exercising such powers as contained in the provisions of the Capital Issues (Control) Act,1947 and the Securities Contracts (Regulation) Act, 1956, levying various fees and other charges, conducting necessary research for above purposes and performing such other functions as may be prescribes from time to time. SEBI as the watchdog of the industry has an important and crucial role in the market in ensuring that the market participants perform their duties in accordance with the regulatory norms. The Stock Exchange as a responsible Self Regulatory Organization (SRO) function to regulate the market and its prices as per the prevalent regulations. SEBI and the Exchange play complimentary roles to enhance the investor protection and the overall quality of the market.
Membership
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The trading platform of a stock exchange is accessible only to brokers. The broker enters into trades in exchanges either on his own account or on behalf of clients. The clients may place their order with them directly or a subbroker indirectly. A broker is admitted to the membership of an exchange in terms of the provisions of the SCRA, the SEBI act 1992, the rules, circulars, notifications, guidelines, etc. prescribed there under and the byelaws, rules and regulations of the concerned exchange. No stockbroker or sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration granted by SEBI. A broker/sub-broker compiles with the code of conduct prescribed by SEBI. The stock exchanges are free to stipulate stricter requirements for its members than those stipulated by SEBI. The minimum standards stipulated by NSE for membership are in excess of the minimum norms laid down by SEBI. The standards for admission of members laid down by NSE stress on factors, such as, corporate structure, capital adequacy, track record, education, experience, etc. and reflect the conscious endeavors to ensure quality broking services.
Listing
Listing means formal admission of a security to the trading platform of a s tock exchange, invariably evidenced by a listing agreement between the issuer of the security and the stock exchange. ; Listing of securities on Indian Stock Exchanges is essentially governed by the provisions in the companies act, 1956, SCRA, SCRR, rules, bye-laws and regulations of the concerned stock exchange, the listing agreement entered into by the issuer and the stock exchange and the circulars/ guidelines issued by central government and SEBI.
Index services
Stock index uses a set of stocks that are representative of the whole market, or a specified sector to measure the change in overall behavior of the markets or sector over a period of time. India Index Services & Products Limited (IISL), promoted by NSE and CRISIL, is the only specialized organization in the country to provide stock index services.
Trading Mechanism
All stock exchanges in India follow screen-based trading system. NSE was the first stock exchange in the country to provide nation-wide order-driven, screen-based trading system. NSE model was gradually emulated by all other stock exchanges in the country. The trading system at NSE known as the National Exchange for Automated Trading (NEAT) system is an anonymous order-driven system and operates on a strict price/time priority. It enables members from across the countries to trade simultaneously with enormous ease and efficiency. NEAT has lent considerable depth in the market by enabling large number of members all over the country to trade simultaneously and consequently narrowed the spreads significantly. A single consolidated order book for each stock displays, on a real time basis, buy and sell orders originating from all over the country. The bookstores only
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limit orders, which are orders to buy or sell shares at a stated quantity and stated price. The limit order is executed only if the price quantity conditions match. Thus, the NEAT system provides an open electronic consolidated limit order book (OECLOB). The trading system provides tremendous flexibility to the users in terms of kinds of orders that can be placed on the system. Several time-related (Good-Till-Cancelled, Good-Till- Day, Immediate-or-Cancel), price related (buy/sell limit and stop-loss orders) or volume related (All-or-None, Minimum Fill, etc.) conditions van be easily built into an order. Orders are sorted and match automatically by the computer keeping the system transparent, objective and fair. The trading system also provides complete market information on-line, which is updated on real time basis. The trading platform of the CM segment of NSE is accessed not only from the computer terminals from the premises of brokers spread over 420 cities, but also from the personal computers in the homes of investors through the internet and from the hand-held devices through WAP. The trading platform of BSE is also accessible from 400 cities. Internet trading is available on NSE and BSE, as of now. SEBI has approved the use of Internet as an order routing system, for communicating clients· orders to the exchanges through brokers. SEBI- registered brokers can introduce internet-based trading after obtaining permission from the respective Stock Exchanges. SEBI has stipulated the minimum conditions to be fulfilled by trading members to start internet-based trading and services. NSE was the first exchange in the country to provide web-based access to investors to trade directly on the exchange. It launched Internet trading in February 2000. It was followed by the launch of Internet trading by BSE in March 2001. The orders originating from the personal computers (PCs) of investors are routed through the Internet tot eh trading terminals of the designated brokers with whom they have relations and further to the exchange of trade execution. Soon after these orders get matched and result into trades, the investors get confirmation about them on their PCs through the same Internet routes.
SEBI approved trading through wireless medium or WAP platform. NSE is the only exchange to provide access to its order book through the hand held devices, which use WAP technology. This serves primarily retail investors who are mobile and want to trade from any place when the market prices for st0ocks of their choice are attractive
Demat Trading
A depository holds securities in dematerialized form. It maintains ownership records of securities in a book entry form and also effects transfer of ownership through book entry. SEBI has introduced some degree of compulsion
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in trading and settlement of securities in dematerialized form. While the investors have a right to hold securities in either physical or demat form, SEBI has mandated compulsory trading and settlement of securities in dematerialized form. This was initially introduced for institutional investors and was later extended to all investors. Starting with 12 scrips on January 15, 1998, all investors are required to mandatorily trade in dematerialized form in respect of 2,335 securities as at end-June, 2001. Since the introduction of the depository system, dematerialization has progressed at a fast pace and has gained acceptance among the participants in the market. All actively traded scrips are held, traded and settled in demat form. The details of progress in dematerialization in two depositories, viz., NSDL and CDSL., are presented as below: In a SEBI working paper titled ¶Dematerialization: A Silent Revolution in the Indian Capital Market· released in April 2000, it has been observed that India has achieved a very high level of dematerialization in less than three years· time, and currently more than 99%of trades settle in demand form. Competition and regulatory developments facilitated reduction in custodial charges and improvements in qualities of service standards. The paper observes that one imminent and apparent immediate benefit of competition between the two depositories is fall in settlement and other charges. Competition has been driving improvement in service standards. Depository facility has effected changes in stock market microstructure. Breadth and depth of investment culture has further got extended to interior areas of the country faster. Explicit transaction cost has been falling due to dematerialization. Dematerialization substantially contributed to the increased growth in the turnover. Dematerialization growth in India is the quickest among all emerging markets and also among developed markets excepting for the U.K and Hong Kong
INTRODUCTION
The Stock Exchange, Mumbai, popularly known as "BSE" was established in 1875 as "The Native Share and Stock Brokers Association", as a voluntary non-profit making association. It has evolved over the years into its present status as the premier Stock Exchange in the country. It may be noted that the Stock Exchanges is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was founded in 1878. The Exchange, while providing an efficient and transparent market for trading in securities, upholds the interests of the investors and ensures redressal of their grievances, whether against the companies or its own member-
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brokers. It also strives to educate and enlighten the investors by making available necessary informative inputs and conducting investor education programmes. A Governing Board comprising of 9 elected directors (one third of them retire every year by rotation), two SEBI nominees, a Reserve Bank of India nominee, six public representatives and an Executive Director is the apex body, which decides the policies and regulates the affairs of the Exchange. The Executive Director as the Chief Executive Officer is responsible for the day -to-day administration of the Exchange. The average daily turnover of the Exchange during the year 2000-2001 (April-March), was Rs.3984.19 crores and average number of daily trades was 5.69 lakhs. However, the average daily turnover of the Exchange during the year 2001- 2002 has declined to Rs. 1244.10 crores and number of average daily trades during the period to 5.17 lakhs. The ban on all deferral products like BLESS and ALBM in the Indian capital Markets by SEBI w.e.f. July 2, 2001, abolition of account period settlements, introduction of Compulsory Rolling Settlements in all scrips traded on the Exchanges w.e.f. December 31, 2001, etc. have adversely impacted the liquidity and consequently there is a considerable decline in the daily turnover at the Exchange.
CAPITAL LISTED AND MARKET CAPITALIZATION.
The Stock Exchange, Bombay (BSE) is the premier Stock Exchange in India. The BSE accounted for 46 per cent of listed companies on an all India basis as on 31st March 1994. It ranked first in terms of the number of listed companies and stock issues listed. The capital listed in the BSE as on 31st March 1994 accounted for 50% of the overall capital listed on all the stock exchanges. Its share of the market capitalization was around 74% as on the same date. The paid- up capital of equity, debentures/bonds and preference were 73%, 31%, 44% respectively of the overall capital listed on all the Stock Exchanges as on the same date. On the BSE, the Steel Authority of India had the largest market capitalization of Rs.19, 908 crores as on the 31st March, 1994 followed by the State Bank of India with the market capitalization of Rs.16, 702 crores and Mahanagar Telephone Nigam Limited with the market capitalization of Rs.11, 700 crores.
BSE SENSEX
The BSE SENSEX, short form of Sensitive Index, first compiled in 1986 is a ´market Capitalization-Weightedµ index of 30 component stocks representing a sample of large, well- established and financially sound companies. The index is widely reported in both, the domestic international, print electronic media and is widely used to measure the used to measure the performance of the Indian stock markets. The BSE SENSEX is the benchmark index of the Indian capital market and one, which has the longest social memory. In fact the SENSEX is considered to be the pulse of the Indian stock
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markets. It is the oldest index in India and has acquired a unique place in collective consciousness of the investors. Further, as the oldest index of the Indian Stock Market, it provides time series data over a fairly long period of time. Small wonder that theSENSE X has over the years has become one of the most prominent brands of the Country
Objectives of SENSEX
The BSE SENSEX is the benchmark index with wide acceptance among individual investors, institutional investors, foreign investors, foreign investors and fund managers. The objectives of the index are: To measure market movements Given its long history and its wide acceptance, no other index matches theBSE SENESX in the reflecting market movements and sentiments. SENSEXis widely used to describe the mood in the Indian stock markets. Benchmark for funds performance The inclusion of blue chip companies and the wide and balanced industry Representation in theSENSE X makes it the ideal benchmark for fund managers to compare the performance of their funds.
For index based derivatives products Institutional investors, money managers and small investors, all refer to theBSE
SENSEX for their specific purposes. The BSE SENSEXis in effect the proxy for the Indian stock markets. SinceSENSE Xcomprises of the leading companies in allthe significant sectors in the economy, we believe that it will be the most liquid contract in the Indian market and will garner a predominant market share.
Companies represented in the SENSEX
Company name (As on 15.06.01) Sector
Hindustan lever Reliance limited
FMCG Chemicals and petrochemicals
Infosys technologies Reliance petroleum
Information technology Oil and gas
ITC State bank of India
FMCG Finance
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MTNL Telecom
Satyam computers
Information technology
Zee telefilms
Media
Ranbaxy labs
Healthcare
ICICI
Finance
Larsen & toubro
Diversified
Cipla
Healthcare
Hindalco
Metals and mining
HPCL
Metal and mining
TISCO
Metal and mining
FMCG Nestle
Trading System
Till Now, buyers and sellers used to negotiate face-to-face on the trading floor over a security until agreement was reached and a deal was struck in the open outcry system of trading, that used to take place in the trading ring. The transaction details of the account period (called settlement period) were submitted for settlement by members after each trading session. The computerized settlement system initiated the netting and clearing process by providing on a daily basis statements for each member, showing matched and unmatched transactions. Settlement processing involves
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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".
TRADING
The Exchange, which had an open outcry trading system, had switched over to a fully automated computerized mode of trading known as BOLT (BSE on Line Trading) System. Through the BOLT system the members now enter orders from Trader Work Stations (TWSs) installed in their offices instead of assembling in the trading ring. This system, which was initially both order and quote driven, was commissioned on March 14, 1995. However, the facility of placing of quotes has been removed w.e.f., August 13, 2001 in view of lack of market interest and to improve system-matching efficiency. The system, which is now only order driven, facilitates more efficient processing, automatic order matching and faster execution of orders in a transparent manner. Earlier, the members of the Exchange were permitted to open trading terminals only in Mumbai. However, in October 1996, the Exchange obtained permission from SEBI for expansion of its BOLT network to locations outside Mumbai. In terms of the permission granted by SEBI and certain modifications announced later, the members of the Exchange are now free to install their trading terminals at any place in the country. Shri P. Chidambaram inaugurated the expansion of BOLT network the then Finance Minister, Government of India on August 31, 1997. In order to expand the reach of BOLT network to centers outside Mumbai and support the smaller Regional Stock Exchanges, the Exchange has, as on March 31, 2002, admitted subsidiary companies formed by 13 Regional Stock Exchanges as its members. The members of these Regional Stock Exchanges work as sub-brokers of the memberbrokers of the Exchange.
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The objectives of granting membership to the subsidiary companies formed by the Regional Stock Exchanges were to reach out to investors in these centers via the members of these Regional Exchanges and provide the investors in these areas access to the trading facilities in all scrips listed on the Exchange.
Trading on the BOLT System is conducted from Monday to Friday between 9:55 a.m. and 3:30 p.m. The scrips traded on the Exchange have been classified into 'A', 'B1', 'B2', 'F' and 'Z' groups. The number of scrips listed on the Exchange under 'A', 'B1 ', 'B2' and 'Z' groups, which represent the equity segment, as on March 31, 2002 was 173, 560,1930 and 3044 respectively. The 'F' group represents the debt market (fixed income securities) segment wherein 748 securities were listed as on March 31, 2002. The 'Z' group was introduced by the Exchange in July 1999 and covers the companies which have failed to comply with listing requirements and/or failed to resolve investor complaints or have not made the required arrangements with both the Depositories, viz., Central Depository Services (I) Ltd. (CDSL) and National Security Depository Ltd. (NSDL) for dematerialization of their securities by the specified date, i.e., September 30, 2001. Companies in "Z" group numbered 3044 as on March 31, 2002. Of these, 1429 companies were in "Z" group for not complying with the provisions of the Listing Agreement and/or pending investor complaints and the balance 1615 companies were on account of not making arrangements for dematerialization of their securities with both the Depositories. 1615 companies have been put in "Z" group as a temporary measure till they make arrangements for dematerialization of their securities. Once they finalize the arrangements for dematerialization of their securities, trading and settlement in their scrips would be shifted to their respective erstwhile groups. The Exchange has also the facility to trade in "C" group which covers the odd lot securities in 'A', 'B1', 'B2' and 'Z' groups and Rights renunciations in all the groups of scrips in the equity segment. The Exchange, thus, provides a facility to market participants of on-line trading in odd lots of securities and Rights renunciations. The facility of trading in odd lots of securities not only offers an exit route to investors to dispose of their odd lots of securities but also provides them an opportunity to consolidate their securities into market lots. The 'C' group can also be used by investors for selling upto 500 shares in physical form in respect of scrips of companies where trades are to be compulsorily settled by all investors in demat mode. This scheme of selling physical shares in compulsory demat scrips is called as Exit Route Scheme. With effect from December 31, 2001, trading in all securities listed in equity segment of the Exchange takes place in one market segment, viz., Compulsory Rolling Settlement Segment Permitted Securities The Exchange has since decided to permit trading in the securities of the companies listed on other Stock Exchanges under " Permitted Securities" category which meet the relevant norms specified by the Exchange. Accordingly, to begin with the Exchange has permitted trading in scrips of five companies listed on other Stock Exchanges w.e.f. April 22, 2002/ Computation of closing price of scrips in the Cash Segment:
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The closing prices of scrips are computed on the basis of weighted average price of all trades in the last 15 minutes of the continuous trading session. However, if there is no trade during the last 15 minutes, then the last traded price in the continuous trading session is taken as the official closing price.
A) Compulsory Rolling Segment (CRS):
Compulsory Rolling Settlement (CRS) Segment: With a view to introduce the best international trading practices and to achieve higher settlement efficiency, as mandated by SEBI, trades in all the equity shares listed on the Exchange in CRS Segment were to be settled on T+5 basis w.e.f. December 31, 2001. SEBI has further directed the Stock Exchanges that trades in all scrips w.e..f. April 1, 2002 should be settled on T+3 basis. Accordingly, all transactions in all groups of securities in the equity segment and fixed income securities listed on the Exchange are settled on T+3 basis w.e.f. April 1, 2002 Under a rolling settlement environment, the trades done on a particular day are settled after a given number of business days rather than settling all trades done during a period at the end of an 'account period'. A T+3 settlement cycle means that the final settlement of transactions done on T or trade day by exchange of monies and securities, occurs on fifth business day after the trade day. The transactions in securities of companies which have made arrangements for dematerialization of their securities by the stipulated date are settled only in Demat mode on T+3 on net basis, i.e., buy and sale positions in the same scrip are netted and the net quantity is to be settled. Howev er, transactions in securities of companies, which have failed to make arrangements for dematerialization of their securities or /are in "Z" group, are settled only on trade to trade basis on T+3 i.e., the transactions are settled on a gross basis and the facility of netting of buy and sale transactions in a scrip is not available. For example, if one buys and sells 100 shares of a company on the same day which is on trade to trade basis, the two positions will not be netted and he will have to first deliver 100 shares at the time of pay-in of securities and then receive 100 shares at the time of pay-out of securities on the same day. Thus, if one fails to deliver the securities sold at the time of pay-in, it will be treated as a shortage and the posit ion will be auctioned/ closed-out. In other words, the transactions in scrips of companies which are in compulsory demat are settled in demat mode on T+3 on netting basis and the transactions in scrips of companies, which have not made arrangements for dematerialization of their securities by the stipulated date or are in "Z" group for other reasons, are settled on trade to trade basis on T+3 either in demat mode or in physical mode The settlement of transactions in 'F' group securities representing Fixed Income Securities is also on Rolling Settlement Cycle of T+3 basis.
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The following tables summarizes the steps in the trading and settlement cycle for scrips under CRS: DAY ACTIVITY Trading on BOLT and daily downloading of statements showing details of transactions and
margins at the end of each trading day.
6A/7A entry by the member-brokers.
T+1 Confirmation of 6A/7A data by the Custodians. Downloading of securities and funds obligation statement by members. T+3 Pay-in of funds and securities by 11:00 a.m. and pay-out of funds and securities by 2:00 p.m T+4 Auction on BOLT. T+5 Auction pay-in and pay-out. * 6A/7A : A mechanism whereby the obligation of settling the transactions done by a memberbroker on behalf of a client is passed on to a custodian based on his confirmation. Thus, the pay-in and pay-out of funds and securities takes places on the 3rd working day of the execution of the trade. The Information Systems Department of the Exchange generates the following statements, which can be downloaded by the members in their back offices on a daily basis. Statements giving details of the daily transactions entered into by the members. Statements giving details of margins payable by the members in respect of the trades executed by them. The settlement of the trades (money and securities) done by a member on his own account or on behalf of his individual, corporate or institutional clients may be either through the member himself or through a SEBI registered Custodian appointed by him or the respective client. In case the delivery/payment is to be given or taken by a registered Custodian, he has to confirm the trade done by a member on the BOLT System through 6A-7A entry. For this purpose, the Custodians have been given connectivity to BOLT System and have also been admitted as members
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of the Clearing House. In case a transaction is not confirmed by a registered Custo dian, the liability for pay-in of funds or securities in respect of the same devolves on the concerned member.
The introduction of settlement on T+3 basis has resulted in reduction in settlement risk, provided early receipt of securities and monies to buyers and sellers respectively and brought Indian Capital Markets at the international standard of settlements
Settlement
Pay-in and Pay-out for 'A', 'B1', 'B2', 'C', "F" & 'Z' group of securities As discussed earlier, the trades done by members in all the securities in CRS are now settled by payment of money and delivery of securities on T+3 basis. All deliveries of securities are required to be routed through the Clearing House, except for certain off-market transactions which, although are required to be reported to the Exchange, may be settled directly between the members concerned. The Clearing House is an independent company promoted jointly by Bank of India and Stock Exchange, Mumbai for handling the clearing and settlement operations of funds and securities on behalf of the Exchange. For this purpose, the Clearing & Settlement Dept. of the Exchange liaises with the Clearing House on a day to day basis.
The Information Systems Department (ISD) of the Exchange generates Delivery and Receive Orders for transactions done by the members in A, B1, B2 and F group scrips after netting purchase and sale transactions in each scrip whereas Delivery and Receive Orders for "C" and "Z" group scrips are generated on trade to trade basis, i.e., without netting of purchase and sale transactions in a scrip. The Delivery Orders provide information like scrip, quantity and the name of the receiving member to whom the securities are to be delivered through the Clearing House. The Money Statement provides scrip wise/item wise details of payments/receipts for the settlement. The Delivery/Receive Orders and money statements can be downloaded by the members in their back offices The bank accounts of members maintained with the eight clearing banks, viz., Bank of India, HDFC Bank Ltd., Global Trust Bank Ltd., Standard Chartered Bank, Centurion Bank Ltd., UTI Bank Ltd., ICICI Bank Ltd., and Indusind Bank Ltd., are directly debited through computerized posting for their settlement and margin obligations and credited with receivables on accounts of pay-out dues and refund of margins. The securities, as per the Delivery Orders issued by the Exchange, are required to be delivered by the members in the Clearing House on the day designated for securities pay-in, i.e., on T+3 day. In case of the physical securities,
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the members have to deliver the securities in special closed pouches (supplied by the Exchange) along with the relevant details (distinctive numbers, scrip code, quantity, and receiving member) on a floppy. The data submitted by the members on floppies is matched against the master file data on the Clearing House computer systems. If there are no discrepancies, then a scroll number is generated by the Clearing House and a scroll slip is issued. The members can then submit the securities at the receiving counter in the Clearing House
Auto D.O. facility:
Instead of issuing Delivery Out instructions for their delivery obligations in a settlement /auction, a facility has been made available to the members of automatically generating Delivery-Out (D.O.) instructions on their behalf from their CM Pool A/cs by the Clearing House w.e.f., August 10, 2000. This Auto D.O. facility is available for CRS (Normal & Auction) and for trade-to-trade settlements. This facility is, however, not available for delivery of non -pari passu shares and shares having multiple ISINs. The members wishing to avail of this facility have to submit an authority letter to the Clearing House. This Auto D.O facility is currently available only for Clearing Member (CM) Pool accounts/Principal Accounts maintained by the members with National Securities Depository Ltd. (NSDL) and Central Depositories Services Ltd. (CDSL)
Demat pay-in:
The members can effect demat pay-in either through Central Depository Services (I) Ltd. (CDSL) or National Securities Depository Ltd. (NSDL). In case of NSDL, the members are required to give instructions to their Depository Participant (DP) specifying settlement no., settlement type, effective pay-in date, quantity, etc. The securities are transferred to the Pool Account. The members are required to give delivery-out instructions so that the securities are considered for pay-in. As regards CDSL, the members give pay-in instructions to their DP. The securities are transferred to Clearing Member (CM) Principal Account. The members are required to give confirmation to their DP, so that securities are processed towards pay-in obligations. Alternatively, members may also effect pay-in from clients' beneficiary accounts for which member are required to do break-up on the front-end software to generate obligation and settlement ID. The Clearing House arranges and tallies the securities received against the receiving member wise report generated on the Pay-in day. Once this reconciliation is complete, the bank accounts of members with seven clearing banks having pay-in positions are debited on the scheduled pay- in day. This procedure is called Funds Pay-in. In case of the demat securities, the securities are credited in the Pool Account of the members or the Client
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Accounts as per the client details submitted by the members. In case of Physical securities, the Receiving Members collect securities from the Clearing House on the payout day and the accounts of the members having payout are credited on Friday. This is referred to as Payout. In case of the Rolling Settlements, pay-in and payout of both funds and securities is on the same day, in case of Weekly settlements, pay-in of funds and securities is on Thursday and payout is on Friday. The auction is conducted for those securities which members fail to deliver/short deliver during the Pay-in. In case the securities are not received in an auction, the positions are closed out as per the closeout rate fixed by the Exchange in accordance with the prescribed rules. The close out rate is calculated as the highest rate of the scrip recorded in the settlement in which the trade was executed and in the subsequent settlement upto the day prior to the day of auction, or 20% above the closing price on the day prior to the day of auction, whichever is higher. However, in case of close-out for shares under objection or traded in "C" group, 10% instead of 20% above the closing price on the day prior to the day of auction and the highest price recorded in the settlement in which trade took place upto a day prior to auction is considered. The Exchange has strictly adhered to the settlement schedules for various groups of securities and there has been no case of clubbing of settlements or postponement of pay-in and pay-out during the last six years. The Exchange is also maintaining a database of fake/forged, stolen, lost and duplicate securities with the Clearing House so that distinctive numbers submitted by members on delivery may be matched against the database to weed out bad paper from circulation at the time of introduction of such securities in the market. This database has also been made available to the members so that delivering and receiving members can check the entry of fake, forged and stolen shares in the market
SHORTAGES AND OBJECTIONS
Shortages & consequent actions
The members download Delivery/Receive Orders based on their netted positions for transactions entered into by them during a settlement in 'A', 'B1', 'B2', and 'F' group scrips and on trade to trade basis, i.e., without netting buy and sell transactions in scrips in "C" & 'Z' groups and scrips in B1 and B2 groups which have been put on trade to trade basis as a surveillance measure. The seller members have to deliver the shares in the Clearing House as per the Delivery Orders downloaded. If a seller member is unable to deliver the shares on the Pay-in day for any reason, his bank account is debited at the
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standard rate (which is equal to the closing price of the scrip on the day of trading) fixed by the Exchange for the quantity of shares short delivered. The Clearing House arrives at the shortages in delivery of various scrips by members on the basis of their delivery obligations and actual delivery. The members can download the statement of shortages on T+3 in Rolling Settlements. After downloading the shortage details, the members are expected to verify the same and report discrepancy , if any, to the Clearing House by 1:00 p.m. If no discrepancy is reported within the stipulated time, the Clearing House assumes that the shortage of a member is in order and proceeds to auction the same. However, in 'C' group, i.e., Odd Lot segment the members are themselves required to report the shortages to the Clearing House. The Exchange issues an Auction Tender Notice to the members informing them about the names of the scrips, quantity slated for auction and the date and time of the auction session on the BOLT. The auction for the undelivered quantities is conducted on T+4 for all the scrips under compulsory Rolling Settlements. The auction offers received in batch mode are electronically matched with the auction quantities so as to award the 'best price'. The members who participate in the auction session can download the Delivery Orders on the same day, if their offers are accepted. The members are required to deliver the shares in the Clearing House on the auction Pay-in day, i.e, T+5. Pay-Out of auction shares and funds is also done on the same day, i.e., T+5. The various auction sessions relating to shortages, and bad deliveries are now conducted during normal trading hours on BOLT. Thus, it is possible to schedule multiple auction sessions on a single trading day.
In auction, the highest offer price is allowed upto the close -out rate and the lowest offer price can be 20% below the closing price on a day prior to day of auction. A member who has failed to deliver the securities of a particular company on the pay-in day is not allowed to offer the same in auction. He can, however, participate in auction of other scrips. In case no offers are received in auction for a particular scrip, the sale transaction is closed-out at a close-out price, determined by higher of the following:-
Highest price recorded in the scrip from the settlement in which the transaction took place upto a day prior to the day of the auction.
OR
20% above the closing price on a day prior to the day of auction
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However, in case of the close-out of the shares under objection and shortages in "C" or "Z" group, 10% above the closing prices of the scrips on the pay-out day of the respective settlement are considered instead of 20%. Further, if the auction price/close-out price of a scrip is higher than the standard price of the scrip in the settlement in which the transaction was done, the difference is recovered from the seller who failed to deliver the scrip. However, in case, auction/ close-out price is lower than standard price, the difference is not given to the seller but is credited by the Exchange to the Customers Protection Fund. This is to ensure that the seller does not benefit from his failure to meet his delivery obligation. Further, if the offeror member fails to deliver the sh ares offered in auction, then the transactions is closed-out as per the normal procedure and the original selling member pays the difference below the standard rate and offer rate and the offeror member pays the difference between the offer rate and close-out rate. Self Auction As has been discussed in the earlier paragraphs, the Delivery and Receive Orders are issued to the members after netting off their purchase and sale transactions in scrips where netting of purchase and sale positions is permitted. It is likely in some circumstances that a selling client of a member has failed to deliver the shares to him. However, this did not result in a member's failure to deliver the shares to the Clearing House as there was a purchase transaction of some other buying client of the member in the same scrip and the same was netted off for the purpose of settlement. However, in such a case, the member would require shares so that he can deliver the same to his buying client, which otherwise would have taken place from the delivery of shares by the seller. To provide shares to the members, so that they are in a position to deliver them to their buying clients in case of internal shortages, the members have been given an option to submit floppies for conducting self-auction (i.e., as if they have defaulted in delivery of shares to the Clearing House). Such floppies are to be given to the Clearing House on the pay-in day. The internal shortages reported by the members are clubbed with the normal shortages in a settlement and the Clearing House for the combined shortages conducts the auction. A member after getting delivery of shares from the Clearing House in self-auction credits the shares to the Beneficiary account of his client or hand over the same to him in case securities received are in physical form and debits his seller client with the amount of difference, if any, between the auction price and original sale price
B) Objections
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When receiving members collect the physical securities from the Clearing House on the Payout day, the same are required to be checked by them for good delivery as per the norms prescribed by the SEBI in this regard. If the receiving member does not consider the securities good delivery, he has to obtain an arbitration award from the arbitrators and submit the securities in the Clearing House on the following day of the Pay-Out (T+4). The Clearing House returns these securities to the delivering members on the same day, i.e., (T+4). If a delivering members feels that arbitration awards obtained against him is incorrect, he is required to obtain arbitration award for invalid objection from the members of the Arbitration Review Committee. The delivering members are required to rectify/replace the objections and return the shares to the Clearing House on next day (T+5) to have the entry against them removed. The rectified securities are delivered by the Clearing House to the buyer members on the same day (T+5). The buyer members, if they are not satisfied with the rectification, are required t o obtain arbitration awards for invalid rectification from the Bad Delivery Cell on T+6 day and submit the shares to the Clearing House on the same day. If a member fails to rectify/replace the objections then the same are closed -out. This is known as "Objection Cycle" and the entire process takes 3 days.
The following table summarizes the activities involved in the Patawat Objection Cycle of CRS.
DAY ACTIVITY T + 3 Pay-out of securities of Rolling Settlement T + 4 Patawat Arbitration session : Arbitration awards to be obtained from officials of the Bad Delivery Cell.
Securities under objection to be submitted in the Clearing House
Arbitration awards for invalid objection to be obtained from members of the Arbitration Review Committee T+ 5 Members and institutions to submit rectified securities, confirmation forms and invalid objections in the clearing house Rectified securities delivered to the receiving members T+ 6 Arbitration Awards for invalid rectification to be obtained from officials of the Bad Delivery Cell
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Securities to be lodged with the clearing house The un-rectified and invalid rectification of securities are directly closed -out by the Clearing House instead of first inviting the auction offers for the same. The shares in physical form returned under objection to the Clearing House are required to be accompanied by an arbitration award (Chukada) except in certain cases where the receiving members are permitted to submit securities to the Clearing House without "Chukada". These cases are as follows: Transfer Deed is out of date. Cheques for the dividend adjustment for new shares where distinctive numbers are given in the Exchange Notice is not enclosed. Stamp of the Registrar of Companies is missing. Details like Distinctive Numbers, Transferors' Names, etc. are not filled, in the Transfer Deeds. Delivering broker's stamp on the reverse of the Transfer Deed is missing. Witness stamp or signature on Transfer Deed is missing. Signature of the transferor is missing. Death Certificate (in cases where one or more of the transferors are deceased) is missing. A penalty at the rate of Rs.100/- per Delivery Order is levied on the delivering member for delivering shares, which are not in order. In the event a receiving member misuses the facility of submitting shares under objection without "Chukada", a penalty of Rs.500/- per case is charged and the penalty of Rs.100/- per Delivery Order levied on the delivering member is refunded to him by debiting the receiving member's account Close Out: There are cases when no offer for particular scrip is received in an auction or when members who offer the scrips in auction, fail to deliver the same. In the former case, the original seller member's account is debited and the buyer member's account is credited at the closeout rate. In the latter case, the offeror member's account is debited and the buyer member's account is credited at the close-out rate. The closeout rates for closing the positions in different segments are as under:
For 'A' + 'B1' + 'B2' + 'Z', 'Rolling demat ' and 'F' group
The closeout rate is higher of the following rates: The highest rate of the scrip from the first day (trading day in case of Rolling demat segment)
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to the day prior to the day on which the auction is conducted for the respective settlement. 20% above the closing rate as on the day prior to the day of auction of the respective settlement. For 'C' group segment The close-out rate is higher of the following rates : The highest rate of the scrip from the first day to the day prior to the day of auction of 'A', 'B1', 'B2, and 'Z' group segment of the respective settlements; or 10% above the closing rate as on the day prior to the day of auction of 'A', 'B1', 'B2, and 'Z' group; or Transaction price.
In the 'C' group, i.e., Odd Lot Segment, no auction session is conducted. The shortages are directly closed out.
Close Out: There are cases when no offer for particular scrip is received in an auction or when members who offer the scrips in auction, fail to deliver the same. In the former case, the original seller member's account is debited and the buyer member's account is credited at the closeout rate. In the latter case, the offeror member's account is debited and the buyer member's account is credited at the close-out rate. The closeout rates for closing the positions in different segments are as under: For 'A' + 'B1' + 'B2' + 'Z', 'Rolling demat ' and 'F' group The closeout rate is higher of the following rates: The highest rate of the scrip from the first day (trading day in case of Rolling demat segment) to the day prior to the day on which the auction is conducted for the respective settlement. 20% above the closing rate as on the day prior to the day of auction of the respective settlement.
For 'C' group segment
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