Working of Stock Exchange

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 for someone with savings, especially
with a small amount of savings, to readily find an appropriate
business opportunity, or a part thereof, for investment. These
problems will be even more magnified in large proprietorships
and partnerships. Nobody would like to invest in such
partnerships in the first place, since once invested, their savings
would be very difficult to convert into cash. And most people
have lots of reasons, such as better investment opportunity,
marriage, education, death, health and so on for wanting to
convert their savings into cash. Clearly then, big enterprises will
be able to raise capital from the public at large only if there were
some mechanism by which the investors could purchase or sell
their share of business as ands they wished to do so. This
implies that ownership in business has to be “broken up” into a
lager number of small units, such that each unit may be
independently & easily bought and sold without hampering the
business activity as such. Also, such breaking of business
ownership would help mobilize small savings in the economy
into entrepreneurial ventures.
This end is achieved in a modern business through the
mechanism of shares.
What is a share?
A share represents the smallest recognized fraction of ownership

in a publicly held business. Each such fraction of ownership is
represented in the form of a certificate known as a share
certificate. The breaking up of total ownership of a business
into small fragments, each fragment represented by a share
certificate, enables them to be easily bought and sold.
What is a stock exchange?
The institution where this buying and selling of shares

essentially takes place is the Stock Exchange.
In the absence of stock exchanges, ie. Institutions where small
chunks of businesses could be traded, there would be no modern
business in the form of publicly held companies. Today, owing
to the stock exchanges, one can be part owners of one company
today and another company tomorrow; one can be part owners
in several companies at the same time; one can be part owner in
a company hundreds or thousands of miles away; one can be all
of these things. Thus by enabling the convertibility of ownership
in the product market into financial assets, namely shares, stock
exchanges bring together buyers and sellers (or their
representatives) of fractional ownerships of companies. And for
that very reason, activities relating to stock exchanges are also
appropriately enough, known as stock market or security
market. Also a stock exchange is distinguished by a specific
locality and characteristics of its own, mostly a stock exchange
is also distinguished by a physical location and characteristics of
its own. In fact, according to H.T.Parekh, the earliest location of
the Bombay Stock Exchange, which for a long period was
known as “the native share and stock brokers’ association”, was
probably under a tree around 1870!
The stock exchanges are the exclusive centers for the trading of
securities. The regulatory framework encourages this by
virtually banning trading of securities outside exchanges. Until
recently, the area of operation/ jurisdiction of exchange was
specified at the time of its recognition, which in effect precluded
competition among the exchanges. These are called regional
exchanges. In order to provide an opportunity to investors to
invest/ trade in the securities of local companies, it is mandatory
foe the companies, wishing to list their securities, to list on the
regional stock exchange nearest to their registered office.
Characteristics of Stock Exchanges in India
 Traditionally, a stock exchange has been an association of

individual members called member brokers (or simply
members or brokers), formed for the express purpose of
regulating and facilitating buying and selling of securities
by the public and institution at large.
 A stock exchange in India operates with due recognition

from the government under the Securities and Contracts
(Regulations) Act, 1956. the member brokers are
essentially the middlemen who carry out the desired
transactions in securities on behalf of the public(for a
commission) or on their own behalf. New membership to a
Stock Exchange is through election by the governing
board of that stock exchange.
At present, there are 23 stock exchanges in India, the

largest among them being the Bombay Stock Exchange.
BSE alone accounts for over 80% of the total volume of
transactions in shares.
 Typically, a stock exchange is governed by a board

consisting of directors largely elected by the member
brokers, and a few nominated by the government.
Government nominee include representatives of the
ministry of finance, as well as some public representatives,
who are expected to safeguard the public interest in the
functioning of the exchanges. A president, who is an
elected member, usually nominated by the government
from among the elected members, heads the board. The
executive director, who is usually appointed by the by the
stock exchange with the government approval is the
operational chief of the stock exchange. His duty is to
ensure that the day to day operations the Stock Exchange
are carried out in accordance with the various rules and
regulations governing its functioning.
 The overall development and regulation of the securities

market has been entrusted to the Securities and Exchange
Board of India (SEBI) by an act of parliament in 1992.
 All companies wishing to raise capital from the public are
required to list their securities on at least one stock
exchange. Thus, all ordinary shares, preference shares and
debentures of the publicly held companies are listed in the
stock exchange.
Exchange management
Made some attempts in this direction, but this did not materially
alter the situation. In view of the less than satisfactory quality,
of administration of broker-managed exchanges, the finance
minister in march 2001 proposed demutualisation of exchanges
by which ownership, management and trading membership
would be segregated from each other. The regulators are
working towards implementing this. Of the 23 stock exchanges
in India, two stock exchanges viz., OTCEI and NSE are already
demutualised. Board of directors, which do not include trading
members, manages these. Theses are purest form of
demutualised exchanges, where ownership, management and
trading are in the hands of three sets of people. The concept of
demutualisation completely eliminates any conflict of interest
and helps the exchange to pursue market efficiency and
investors interest aggressively.
Role of SEBI
The SEBI, that is, the Securities and the Exchange Board of
India, is the national regulatory body for the securities market,
set up under the securities and Exchange Board of India act,
1992, to “protect the interest of investors in securities and to
promote the development of, and to regulate the securities
market and for matters connected therewith and incidental too.”
SEBI has its head office in Mumbai and it has now set up
regional offices in the metropolitan cities of Kolkata, Delhi, and
Chennai. The Board of SEBI comprises a Chairman, two
members from the central government representing the
ministries of finance and law, one member from the Reserve
Bank of India and two other members appointed by the central
government.
As per the SEBI act, 1992, the power and functions of the Board
encompass the regulation of Stock Exchanges and other
securities markets; registration and regulation of the working
stock brokers, sub-brokers, bankers to an issue (a public offer of
capital), trustees of trust deeds, registrars to an issues, merchant
bankers, under writers, portfolio managers, investment advisors
and such other intermediaries who may be associated with the
stock market in any way; registration and regulations of mutual
funds; promotion and regulation of self- regulatory
organizations; prohibiting Fraudulent and unfair trade practices
and insider trading in securities markets; regulating substantial
acquisition of shares and takeover of companies; calling for
information from,undertking inspection, conducting inquiries
and audits of stock exchanges, intermediaries and self-
regulatory organizations of the securities market; performing
such functions and exercising such powers as contained in the
provisions of the Capital Issues (Control) Act,1947 and the
Securities Contracts (Regulation) Act, 1956, levying various
fees and other charges, conducting necessary research for above
purposes and performing such other functions as may be
prescribes from time to time.
SEBI as the watchdog of the industry has an important and
crucial role in the market in ensuring that the market participants
perform their duties in accordance with the regulatory norms.
The Stock Exchange as a responsible Self Regulatory
Organization (SRO) function to regulate the market and its
prices as per the prevalent regulations. SEBI and the Exchange
play complimentary roles to enhance the investor protection and
the overall quality of the market.
Membership
The trading platform of a stock exchange is accessible only to

brokers. The broker enters into trades in exchanges either on his
own account or on behalf of clients. The clients may place their
order with them directly or a sub-broker indirectly. A broker is
admitted to the membership of an exchange in terms of the
provisions of the SCRA, the SEBI act 1992, the rules, circulars,
notifications, guidelines, etc. prescribed there under and the
byelaws, rules and regulations of the concerned exchange. No
stockbroker or sub-broker is allowed to buy, sell or deal in
securities, unless he or she holds a certificate of registration
granted by SEBI. A broker/sub-broker compiles with the code of
conduct prescribed by SEBI.
The stock exchanges are free to stipulate stricter requirements
for its members than those stipulated by SEBI. The minimum
standards stipulated by NSE for membership are in excess of the
minimum norms laid down by SEBI. The standards for
admission of members laid down by NSE stress on factors, such
as, corporate structure, capital adequacy, track record,
education, experience, etc. and reflect the conscious endeavors
to ensure quality broking services.
Listing
Listing means formal admission of a security to the trading

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

whole market, or a specified sector to measure the change in
overall behavior of the markets or sector over a period of time.
India Index Services & Products Limited (IISL), promoted by
NSE and CRISIL, is the only specialized organization in the
country to provide stock index services.
Trading Mechanism
All stock exchanges in India follow screen-based trading

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

has approved the use of Internet as an order routing system, for
communicating clients’ orders to the exchanges through brokers.
SEBI- registered brokers can introduce internet-based trading
after obtaining permission from the respective Stock Exchanges.
SEBI has stipulated the minimum conditions to be fulfilled by
trading members to start internet-based trading and services.
NSE was the first exchange in the country to provide web-based
access to investors to trade directly on the exchange. It launched
Internet trading in February 2000. It was followed by the launch
of Internet trading by BSE in March 2001. The orders
originating from the personal computers (PCs) of investors are
routed through the Internet tot eh trading terminals of the
designated brokers with whom they have relations and further to
the exchange of trade execution. Soon after these orders get
matched and result into trades, the investors get confirmation
about them on their PCs through the same Internet routes.
SEBI approved trading through wireless medium or WAP

platform. NSE is the only exchange to provide access to its
order book through the hand held devices, which use WAP
technology. This serves primarily retail investors who are
mobile and want to trade from any place when the market prices
for st0ocks of their choice are attractive.
Demat Trading
A depository holds securities in dematerialized form. It

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

dematerialization has progressed at a fast pace and has gained
acceptance among the participants in the market. All actively
traded scrips are held, traded and settled in demat form. The
details of progress in dematerialization in two depositories, viz.,
NSDL and CDSL., are presented as below:
In a SEBI working paper titled ‘Dematerialization: A Silent
Revolution in the Indian Capital Market’ released in April 2000,
it has been observed that India has achieved a very high level of
dematerialization in less than three years’ time, and currently
more than 99%of trades settle in demand form. Competition and
regulatory developments facilitated reduction in custodial
charges and improvements in qualities of service standards. The
paper observes that one imminent and apparent immediate
benefit of competition between the two depositories is fall in
settlement and other charges. Competition has been driving
improvement in service standards. Depository facility has
effected changes in stock market microstructure. Breadth and
depth of investment culture has further got extended to interior
areas of the country faster. Explicit transaction cost has been
falling due to dematerialization. Dematerialization substantially
contributed to the increased growth in the turnover.
Dematerialization growth in India is the quickest among all
emerging markets and also among developed markets excepting
for the U.K and Hong Kong.
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-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-Weighted” index
of 30 component stocks representing a sample of large, well-
established and financially sound companies. The index is
widely reported in both, the domestic international, print
electronic media and is widely used to measure the used to
measure the performance of the Indian stock markets.
The BSE SENSEX is the benchmark index of the Indian capital

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

acceptance among individual investors, institutional investors,
foreign investors, foreign investors and fund managers. The
objectives of the index are:
 To measure market movements

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

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

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

Company name Sector
(As on 15.06.01)
Hindustan lever FMCG
Reliance limited Chemicals and
petrochemicals
Infosys technologies Information technology
Reliance petroleum Oil and gas
ITC FMCG
State bank of India Finance
MTNL Telecom
Satyam computers Information technology
Zee telefilms Media
Ranbaxy labs Healthcare
ICICI Finance
Larsen & toubro Diversified
Cipla Healthcare
Hindalco Metals and mining
HPCL Metal and mining
TISCO Metal and mining
Nestle FMCG
Trading System
Till Now, buyers and sellers used to negotiate face-to-face on

the trading floor over a security until agreement was reached
and a deal was struck in the open outcry system of trading, that
used to take place in the trading ring. The transaction details of
the account period (called settlement period) were submitted for
settlement by members after each trading session.
The computerized settlement system initiated the netting and
clearing process by providing on a daily basis statements for
each member, showing matched and unmatched transactions.
Settlement processing involves computation of each member's
net position in each security, after taking into account all
transactions for the member during the settlement period, which
is 10 working days for group 'A' securities and 5 working days
for group 'B' securities.
Trading is done by members and their authorized assistants from

their Trader Work Stations (TWS) in their offices, through the
BSE On-Line Trading (BOLT) system. BOLT system has
replaced the open outcry system of trading. BOLT system
accepts two-way quotations from jobbers, market and limit
orders from client-brokers and matches them according to the
matching logic specified in the Business Requirement
Specifications (BRS) document for this system.
The matching logic for the Carry-Forward System as in the case

of the regular trading system is quote driven with the order book
functioning as an "auxiliary jobber".
TRADING
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 member-brokers of the
Exchange.
The objectives of granting membership to the subsidiary

companies formed by the Regional Stock Exchanges were to
reach out to investors in these centers via the members of these
Regional Exchanges and provide the investors in these areas
access to the trading facilities in all scrips listed on the
Exchange.
Trading on the BOLT System is conducted from Monday to

Friday between 9:55 a.m. and 3:30 p.m. The scrips traded on the
Exchange have been classified into 'A', 'B1', 'B2', 'F' and 'Z'
groups. The number of scrips listed on the Exchange under 'A',
'B1 ', 'B2' and 'Z' groups, which represent the equity segment, as
on March 31, 2002 was 173, 560,1930 and 3044 respectively.
The 'F' group represents the debt market (fixed income
securities) segment wherein 748 securities were listed as on
March 31, 2002. The 'Z' group was introduced by the Exchange
in July 1999 and covers the companies which have failed to
comply with listing requirements and/or failed to resolve
investor complaints or have not made the required arrangements
with both the Depositories, viz., Central Depository Services (I)
Ltd. (CDSL) and National Security Depository Ltd. (NSDL) for
dematerialization of their securities by the specified date, i.e.,
September 30, 2001. Companies in "Z" group numbered 3044 as
on March 31, 2002. Of these, 1429 companies were in "Z"
group for not complying with the provisions of the Listing
Agreement and/or pending investor complaints and the balance
1615 companies were on account of not making arrangements
for dematerialization of their securities with both the
Depositories. 1615 companies have been put in "Z" group as a
temporary measure till they make arrangements for
dematerialization of their securities. Once they finalize the
arrangements for dematerialization of their securities, trading
and settlement in their scrips would be shifted to their respective
erstwhile groups.
The Exchange has also the facility to trade in "C" group which
covers the odd lot securities in 'A', 'B1', 'B2' and 'Z' groups and
Rights renunciations in all the groups of scrips in the equity
segment. The Exchange, thus, provides a facility to market
participants of on-line trading in odd lots of securities and
Rights renunciations. The facility of trading in odd lots of
securities not only offers an exit route to investors to dispose of
their odd lots of securities but also provides them an opportunity
to consolidate their securities into market lots.
The 'C' group can also be used by investors for selling upto 500
shares in physical form in respect of scrips of companies where
trades are to be compulsorily settled by all investors in demat
mode. This scheme of selling physical shares in compulsory
demat scrips is called as Exit Route Scheme.
With effect from December 31, 2001, trading in all securities

listed in equity segment of the Exchange takes place in one
market segment, viz., Compulsory Rolling Settlement Segment.
Permitted Securities
The Exchange has since decided to permit trading in the
securities of the companies listed on other Stock Exchanges
under " Permitted Securities" category which meet the relevant
norms specified by the Exchange. Accordingly, to begin with
the Exchange has permitted trading in scrips of five companies
listed on other Stock Exchanges w.e.f. April 22, 2002/
Computation of closing price of scrips in the Cash Segment:

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

Compulsory Rolling Settlement (CRS) Segment:
With a view to introduce the best international trading practices

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

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

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

representing Fixed Income Securities is also on Rolling
Settlement Cycle of T+3 basis.
The following tables summarizes the steps in the trading and

settlement cycle for scrips under CRS:
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 member-broker 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 of the Clearing House. In
case a transaction is not confirmed by a registered Custodian,
the liability for pay-in of funds or securities in respect of the
same devolves on the concerned member.
The introduction of settlement on T+3 basis has resulted in

reduction in settlement risk, provided early receipt of securities
and monies to buyers and sellers respectively and brought
Indian Capital Markets at the international standard of
settlements
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, the members have
to deliver the securities in special closed pouches (supplied by
the Exchange) along with the relevant details (distinctive
numbers, scrip code, quantity, and receiving member) on a
floppy. The data submitted by the members on floppies is
matched against the master file data on the Clearing House
computer systems. If there are no discrepancies, then a scroll
number is generated by the Clearing House and a scroll slip is
issued. The members can then submit the securities at the
receiving counter in the Clearing House
Auto D.O. facility:

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

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

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

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

for various groups of securities and there has been no case of
clubbing of settlements or postponement of pay-in and pay-out
during the last six years.
The Exchange is also maintaining a database of fake/forged,

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

and shortages in "C" or "Z" group, 10% above the closing prices
of the scrips on the pay-out day of the respective settlement are
considered instead of 20%.
Further, if the auction price/close-out price of a scrip is higher

than the standard price of the scrip in the settlement in which the
transaction was done, the difference is recovered from the seller
who failed to deliver the scrip. However, in case, auction/ close-
out price is lower than standard price, the difference is not given
to the seller but is credited by the Exchange to the Customers
Protection Fund. This is to ensure that the seller does not benefit
from his failure to meet his delivery obligation. Further, if the
offeror member fails to deliver the shares offered in auction,
then the transactions is closed-out as per the normal procedure
and the original selling member pays the difference below the
standard rate and offer rate and the offeror member pays the
difference between the offer rate and close-out rate.
Self Auction
As has been discussed in the earlier paragraphs, the Delivery
and Receive Orders are issued to the members after netting off
their purchase and sale transactions in scrips where netting of
purchase and sale positions is permitted. It is likely in some
circumstances that a selling client of a member has failed to
deliver the shares to him. However, this did not result in a
member's failure to deliver the shares to the Clearing House as
there was a purchase transaction of some other buying client of
the member in the same scrip and the same was netted off for
the purpose of settlement. However, in such a case, the member
would require shares so that he can deliver the same to his
buying client, which otherwise would have taken place from the
delivery of shares by the seller. To provide shares to the
members, so that they are in a position to deliver them to their
buying clients in case of internal shortages, the members have
been given an option to submit floppies for conducting self-
auction (i.e., as if they have defaulted in delivery of shares to the
Clearing House). Such floppies are to be given to the Clearing
House on the pay-in day. The internal shortages reported by the
members are clubbed with the normal shortages in a settlement
and the Clearing House for the combined shortages conducts the
auction. A member after getting delivery of shares from the
Clearing House in self-auction credits the shares to the
Beneficiary account of his client or hand over the same to him in
case securities received are in physical form and debits his seller
client with the amount of difference, if any, between the auction
price and original sale price
B) Objections
When receiving members collect the physical securities from
the Clearing House on the Payout day, the same are required to
be checked by them for good delivery as per the norms
prescribed by the SEBI in this regard. If the receiving member
does not consider the securities good delivery, he has to obtain
an arbitration award from the arbitrators and submit the
securities in the Clearing House on the following day of the
Pay-Out (T+4). The Clearing House returns these securities to
the delivering members on the same day, i.e., (T+4). If a
delivering members feels that arbitration awards obtained
against him is incorrect, he is required to obtain arbitration
award for invalid objection from the members of the Arbitration
Review Committee. The delivering members are required to
rectify/replace the objections and return the shares to the
Clearing House on next day (T+5) to have the entry against
them removed. The rectified securities are delivered by the
Clearing House to the buyer members on the same day (T+5).
The buyer members, if they are not satisfied with the
rectification, are required to obtain arbitration awards for invalid
rectification from the Bad Delivery Cell on T+6 day and submit
the shares to the Clearing House on the same 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
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
credited at the close-out rate. The closeout rates for closing the
positions in different segments are as under:
For 'A' + 'B1' + 'B2' + 'Z', 'Rolling demat' and 'F' group
The closeout rate is higher of the following rates:
 The highest rate of the scrip from the first day (trading day in
case of Rolling demat segment) to the day prior to the day on
which the auction is conducted for the respective settlement.
 20% above the closing rate as on the day prior to the day of
auction of the respective settlement.
For 'C' group segment
The close-out rate is higher of the following rates :

 The highest rate of the scrip from the first day to the day prior
to the day of auction of 'A', 'B1', 'B2, and 'Z' group segment of
the respective settlements; or
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
credited at the closeout rate. In the latter case, the offeror
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.
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
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.
BASKET TRADING SYSTEM
The Exchange has commenced trading in the Derivatives

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

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

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

investors and also boost the volumes and depth in cash and
futures markets.
The Basket Trading System has been implemented by the

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

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

'B1' group. The remaining securities-about 5800 as on May 31,
1996 are placed in the 'B2' group. All newly listed securities are
placed in the 'B2' group.
Settlement of transactions is done on an 'Account Period' basis.

The period is a calendar week in the case of 'A' and 'B1' groups
and 14 calendar days in the case of 'B2' group During an
account period, buy or sell positions in a particular security can
be either squared up by entering into contra transactions or can
be further accumulated by entering into more buy or sell
transactions.
Clearing System
The Clearing House of the Exchange handles the share and the
money parts of the settlement process in the case of 'A' and 'B1'
groups. The Clearing House handles only the money part of 'B2'
group while securities are physically exchanged between the
brokers.
Opportunities available for foreign investors
1. Direct investment:
Foreign Companies are now permitted to have a majority

stake in their Indian affiliates except in a few restricted
industries. In certain specific industries, foreigners can even
have holding upto 100 per cent.
2. Investment through Stock Exchanges:
Foreign Institutional Investors (FII) upon registration with the

Securities and Exchange Board of India (SEBI) and the
Reserve Bank of India (RBI) are allowed to operate in Indian
Stock Exchanges subject to the guidelines issued for the
purpose by SEBI.
Important requirements under the guidelines are as under:
I. Portfolio investment in primary or secondary markets will

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

(DFI), which is, permitted upto 51 per cent in all
priority areas.
• Investment by FIIs through following alternative routes;

Offshore Single/Regional funds, GDR's and Euro
convertibles.
II. Disinvestments will be allowed only through a broker of

a Stock Exchange.
III. A registered FII is required to buy or sell only for

delivery. It should not offset a deal. It is also not
allowed to sell short.
3. Investment in Euro Issues/Mutual Funds Floated Overseas:

Foreign investors can invest in Euro issues of Indian
companies and in India-specific funds floated abroad.
4. Broking Business:
Foreign brokers upon registration with the SEBI are now

allowed to route the business of registered FIIs. Guideline for
the purpose have been issued by SEBI. However, foreign
brokers at present are not allowed membership in India Stock
Exchanges.
5. Asset Management Companies/Merchant Banking:
Foreign Participation in Asset Management Companies and

Merchant Banking Companies is permitted.
TRANSFER OF OWNERSHIP
Transfer of ownership of securities in effected through a date

stamped transfer-deed, which is signed, by the buyer and the
seller. The duly executed transfer-deed along with the share
certificate has to be lodged with the company for change in the
ownership. A nominal duty becomes payable in the form of
stamps to be affixed on the transfer-deeds. Transfer-deeds
remain valid for twelve months or the next book closure
following the stamped date whichever occurs later.
SAFEGUARDS
1. Margins are collected from the brokers on buying and
selling positions at the end of the day. The total
outstanding position is further subject to capital adequacy
norms laid down from time to time.
2. A comprehensive insurance cover for the Exchange and
the members is about to be put in place.
3. Guaranteeing trades is the cornerstone of a mature clearing
and settlement process. BSE is in the process of
establishing a Clearing Corporation that will guarantee
trades.
4. Companies are required to publish half-yearly unaudited
results and other price sensitive information. This imparts
greater transparency to the stock market operations.
5. Insider Trading Regulations have been laid down and a
'Take-Over' code has been created.
ARBITRATION MACHINERY
There exists three level arbitration machinery. The first two

levels, which are adjudicated by member brokers, comprise of a
two-member bench and a full bench that is to comprise of at
least sixteen members respectively. The highest arbitrator in the
Exchange is the Governing Board. Disputes unresolved in the
Exchange are taken to the Court of Law.
CUSTOMER PROTECTION FUND
The objective of this fund is to provide insurance to investors in

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

against listed companies and stockbrokers. However, the
Exchange does not have power to take penal action against
listed companies, except delisting for specified periods.
DISCIPLINARY ACTION
The Exchange has an eight member Disciplinary Action

Committee (DAC) which decides on punitive action in
disciplinary cases referred to it by the Surveillance and
inspection departments of the Exchange Administration.
INDICES
The Exchange compiles four indices, which are based on market

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

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

express the index values by taking into account the Rupee-
Dollar conversion rate. Consequently, dividing the current
Rupee market value by Rupee-Dollar modifies the BSE-200
conversion rate in the base year. This index, which indicates the
movement of the market in dollar values, is called the Dollex.
DISCLOSURE & LISTING NORMS
Companies who wish to raise money from capital market follow

guidelines relating to disclosure, laid down by the Securities and
Exchange Board of India. Some of the disclosure norms are:
• Details of other income if it constitutes more than ten
percent of total income.
• All adverse event affecting the operations of the
company.
• Any change in key managerial personnel.
• Risk factors specific to the project and those which
are external to the company.
The listing requirements with the Exchange call for further

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

following a three-phased approach.
Phase I: The primary objective of this phase was the real time
dissemination of price data through the Display Information
Driver System (DIDS). DIDS was commissioned in November
1992 to disseminate bids, offers, actual rates of transactions and
indices on a real time basis.
Phase II: In 1994, settlement related daily transactions inputs

and outputs were uploaded and downloaded from the TWS in
the brokers’ offices.
Phase III: Commissioned on March 14, 1995. Although, screen

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

1991- 1992- 1993- 1994- 1995-
92 93 94 95 96
(Apr.M (Apr.M (Apr.M (Apr.M (Apr.M
ar) ar) ar) ar) ar)
No. of
Listed 2061 2861 3585 4702 5603
Companies
Market Capitalization
(In 3059.8 1881.4 3680.7 4354.8 5264.7
Rs.Billion) 7 6 1 1 6
(In US $
97.13 59.72 116.85 138.37 153.27
Billion)
Annual Turnover
(In
717.77 456.96 836.29 677.49 500.64
Rs.Billion)
(In US $
22.78 14.50 26.55 21.51 14.57
Billion)
Velocity 0.23 0.24 0.24 0.16 0.10
Average Daily Turnover
(In
3.32 2.38 3.84 1.78 2.16
Rs.Billion)
(In US $
0.10 0.07 0.12 0.06 0.06
Billion)
No. of
Shares
6,35,51 3,50,31 7,42,79 1,07,24 7,71,85
Traded
5 3 2 .8 0
(In Million
Nos.)
Average 75,000 65,535 63,786 85,010 73,855
Number of
Daily Deals
BSE
Sensitive 4285.0 2280.5 3778.9 3260.9 3366.6
Index 0 2 9 5 1
(Year End)
BSE
National 1967.7 1021.4 1829.5 1605.5 1549.2
Index 1 0 3 7 5
(Year End)
BSE 2000
585.19 234.35 450.07 365.97 345.40
(Year End)
Dollex (Year
261.25 124.89 238.86 194.67 168.54
End)
No. of
Registered - - 145 308 366
Flls
Fll Net investment
(In Rs.
- - 29.85 21.24 31.63
Billion)
(In US $
- - 0.95 0.67 0.92
Billion)
No. of
Members 558 558 628 636 641
(Year End)
No. of
Corporate
4 4 4 26 63
Members
(Year End)
Future Developments
In 1995, the President of India promulgated an Ordinance,

which allowed for establishment of depositories.
BSE in collaboration with Bank of India (BOI) will shortly
establish a depository. BSE has applied for permission from
SEBI to expand BOLT to other centres. Expansion of BOLT
would bring more investors into the ambit of the capital market
and consequently add depth to it.
INTRODUCTION
The National Stock Exchange (NSE) is India's leading stock

exchange covering around 400 cities and towns all over India.
NSE introduced for the first time in India, fully automated
screen based trading. It provides a modern, fully computerized
trading system designed to offer investors across the length and
breadth of the country a safe and easy way to invest or liquidate
investments in securities.
Sponsored by the industrial development bank of India, the NSE

has been co-sponsored by other development/ public finance
institutions, LIC, GIC, banks and other financial institutions
such as SBI Capital Market, Stockholding corporation,
Infrastructure leasing and finance and so on. India has had a
history of stock exchanges limited in their operating jurisdiction
to the cities in which they were set up.
NSE started equity trading on November 3, 1994 and within a

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

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

trading facility and to enable investors’ spread all over the
country to have an equal access to NSE. NSE uses sophisticated
telecommunication technology through which members can
trade remotely from their offices located in any part of the
country. NSE trading terminals are present in around 400 cities
and towns all over India.
Listing
The prime objective of admission to dealings on the Exchange is

to provide liquidity and marketability to securities as also to
provide a mechanism for effective management of trading.
Securities listed on the Exchange are required to fulfill the

listing eligibility criteria. Various types of securities of a
company are traded under a unique symbol and different series.
This section provides a direct link to the web site of companies
traded on the Exchange.
Constitution
The NSE has two segments for trading in securities: Wholesale
Debt Market (WDM) and Capital Market (CM). Separate
membership is required for each segment.
Trading members
They are recognized members of NSE. The persons eligible to

become TMs are body corporates, subsidiaries of banks and
financial institutions. They are selected on the basis of a
comprehensive selection criterion. The whole time
directors/dealers of thess
Trading mechanism
Rolling Settlement
In a rolling settlement, each trading day is considered as a

trading period and trades executed during the day are settled
based on the net obligations for the day.
In NSE, the trades in rolling settlement are settled on a T+5

basis i.e. on the 5th working day. For arriving at the settlement
day all intervening holidays, which include bank holidays, NSE
holidays, Saturdays and Sundays are excluded. Typically trades
taking place on Monday shall be settled on the next Monday,
Tuesday's trades shall be settled on the next Tuesday and so on.
Limited Physical Market
Pursuant to SEBI guidelines, NSE introduced a new market

called Limited Physical Market to provide a facility to small
investors to trade and settle physical shares in those securities
where compulsory dematerialized trading and settlement is
enforced by SEBI. In this segment quantities not exceeding 500
shares of each security held in the name of the investor can be
traded.
Institutional Segment
Trading in this market segment is available for institutional

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

which have not established connectivity with both the
depositories as per SEBI directive. The list of these securities is
notified by SEBI from time to time.
Trading System
NSE operates on the 'National Exchange for Automated

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

security not traded on the nearest exchange had to route orders
through a series of correspondent brokers to the appropriate
exchange. This resulted in a great deal of uncertainty and high
transaction costs. NSE has made it possible for an investor to
access the same market and order book, irrespective of location,
at the same price and at the same cost.
Market Types
The NEAT system in NSE has four types of market. They are:
 Normal Market
All orders which are of regular lot size or multiples thereof are
traded in the Normal Market. For shares, which are traded in the
compulsory dematerialised mode the market lot of these shares,
is one. Normal market consists of various book types wherein
orders are segregated as Regular lot orders, Special Term orders,
Negotiated Trade Orders and Stop Loss orders depending on
their order attributes.
 Odd Lot Market

All orders whose order size is less than the regular lot size are
traded in the odd-lot market. An order is called an odd lot order
if the order size is less than regular lot size. These orders do not
have any special terms attributes attached to them. In an odd-lot
market, both the price and quantity of both the orders (buy and
sell) should exactly match for the trade to take place. Currently
the odd lot market facility is used for the Limited Physical
Market as per the SEBI directives.
 Spot Market
Spot orders are similar to the normal market orders except that
spot orders have different settlement period’s vis-à-vis normal
market. These orders do not have any special terms attributes
attached to them. Currently the Spot Market is being used for
the Automated Lending & Borrowing Mechanism (ALBM)
session.
 Auction Market
In the Auction Market, the Exchange on behalf of trading

members for settlement related reasons initiates’ auctions.
There are 3 participants in this market.

 Initiator
The party who initiates the auction process is called an
initiator.
 Competitor
The party who enters orders on the same side as of the
initiator is called a
Competitor.
 Solicitor
The party who enters orders on the opposite side as of
the initiator is called a
Solicitor.
Order Books
The NSE trading system provides complete flexibility to

members in the kinds of orders that can be placed by them.
Orders are first numbered and time-stamped on receipt and then
immediately processed for potential match. Every order has a
distinctive order number and a unique time stamp on it. If a
match is not found, then the orders are stored in different
'books'. Orders are stored in price-time priority in various books
in the following sequence:
 Best Price- Price priority means that if two orders are entered
into the system, the order having the best price gets the higher
priority.
 Within Price, by time priority-Time priority means if two

orders having the same price are entered, the order that is
entered first gets the higher priority.
The Capital Market segment has following types of books:
1. Regular Lot Book

The Regular Lot Book contains all regular lot orders that
have none of the following attributes attached to them.
a) All or None (AON)
b) Minimum Fill (MF)
c) Stop Loss (SL)
2. Special Terms Book
The Special Terms book contains all orders that have either
of the following terms
attached:
a) All or None (AON)
b) Minimum Fill (MF)
Note: Currently, special term orders i.e AON and MF are not
available on the system as per the SEBI directives.
3. Negotiated Trade Book

The Negotiated Trade book contains all negotiated order
entries captured by the system before they have been matched
against their counterparty trade entries.
These entries are matched with identical counterparty entries
only. It is to be noted that these entries contain a counter
party code in addition to other order details.
4. Stop-Loss Book
Stop Loss orders are stored in this book till the trigger price
specified in the order is reached or surpassed. When the
trigger price is reached or surpassed, the order is released in
the Regular lot book.
The stop loss condition is met under the following

circumstances:
Sell order - A sell order in the Stop Loss book gets triggered
when the last traded price in the normal market reaches or falls
below the trigger price of the order.
Buy order - A buy order in the Stop Loss book gets triggered
when the last traded price in the normal market reaches or
exceeds the trigger price of the order.
5. Odd Lot Book
The Odd lot book contains all odd lot orders (orders with
quantity less than
marketable lot) in the system. The system attempts to match
an active odd lot
order against passive orders in the book. Currently, pursuant
to a SEBI directive
the Odd Lot Market is being used for orders which has a
quantity less than or
equal to 500 (Qty more than the market lot) for trading. This
is referred as the
Limited Physical Market (LPM).
6. Spot Book
The Spot lot book contains all spot orders (orders having only
the settlement period different) in the system. The system
attempts to match an active spot lot order against the passive
orders in the book. Currently the Spot Market book type is
being used for conducting the Automated Lending &
Borrowing Mechanism (ALBM) session.
7. Auction Book
This book contains orders that are entered for all auctions.
The matching process
for auction orders in this book is initiated only at the end of
the solicitor period.
Order Matching Rules

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

be displayed in the system till the full quantity is matched by
one or more of counter-orders and result into trade(s) or is
cancelled by the member. Alternatively, members may be
reactive and put in orders that match with existing orders in the
system. Orders lying unmatched in the system are 'passive'
orders and orders that come in to match the existing orders are
called 'active' orders. Orders are always matched at the passive
order price. This ensures that the earlier orders get priority over
the orders that come in later.
Order Conditions
A Trading Member can enter various types of orders depending
upon his/her requirements. These conditions are broadly
classified into three categories: time related conditions, price-
related conditions and quantity related conditions. For example
Time Conditions
 DAY - A Day order, as the name suggests, is an order
which is valid for the day on which it is entered. If the
order is not matched during the day, the order gets
cancelled automatically at the end of the trading day.
 GTC - A Good Till Cancelled (GTC) order is an order that

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

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

Trading Member to buy or sell a security as soon as the
order is released into the market, failing which the order
will be removed from the market. Partial match is possible
for the order, and the unmatched portion of the order is
cancelled immediately.
 AON - All or None orders allow a Trading Member to

impose the condition that only the full order should be
matched against. This may be by way of multiple trades. If
the full order is not matched it will stay in the books till
matched or cancelled.
Note: Currently, AON and MF orders are not available on the

system as per SEBI directives.
Price Conditions
Limit Price/Order
An order, which allows the price to be specified while entering
the order into the system.
Market Price/Order
An order to buy or sell securities at the best price obtainable at
the time of entering the order.
Stop Loss (SL) Price/Order

The one which allows the Trading Member to place an order
which gets activated only when the market price of the relevant
security reaches or crosses a threshold price. Until then the order
does not enter the market.
Sell order
A sell order in the Stop Loss book gets triggered when the last
traded price in the normal market reaches or falls below the
trigger price of the order.
Buy order
A buy order in the Stop Loss book gets triggered when the last
traded price in the normal market reaches or exceeds the trigger
price of the order.
e.g. If for stop loss buy order, the trigger is 93.00, the limit price
is 95.00 and the market (last traded) price is 90.00, then this
order is released into the system once the market price reaches
or exceeds 93.00. This order is added to the regular lot book
with time of triggering as the time stamp, as a limit order of
95.00
Quantity Conditions
Disclosed Quantity (DQ)- An order with a DQ condition allows

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

specify the minimum quantity by which an order should be
filled. For example, an order of 1000 units with minimum fill
200 will require that each trade be for at least 200 units. In other
words there will be a maximum of 5 trades of 200 each or a
single trade of 1000. The Exchange may lay down norms of MF
from time to time.
Trading Workstation
The trader workstation is the terminal from which the member
accesses the trading system. Each trader has a unique
identification by way of Trading Member ID and User ID
through which he is able to log on to the system for trading or
inquiry purposes. A member can have several user IDs allotted
to him by which he can have more than one employee using the
system concurrently.
The Exchange may also allow a Trading Member to set up a

network of dealers in different cities all of whom are provided a
connection to the NSE central computer. A Trading Member can
define a hierarchy of users of the system with the Corporate
Manager at the top followed by the Branch Manager and
Dealers.
Trader Workstation Screens
The Trader Workstation screen of the Trading Member is

divided into several major windows:
Title Bar
The title bar displays the current time, Trading system name and
date.
Tool Bar
A window with different icons which provides quick access to
various functions such as Market By Order, Market By Price,
Market Movement, Market Inquiry, Auction Inquiry, Snap
Quote, Market Watch, Buy order entry, Sell order entry, Order
Modification, Order Cancellation, Outstanding Orders, Order
Status, Activity Log, Previous Trades, Net Position, Online
Backup, Supplementary Menu, Security List and Help. All these
functions are also available on the keyboard.
Ticker Window
The ticker displays information about a trade as and when it

takes place. The user has the option to set-up the securities,
which appear in the ticker.
Market Watch Window
The Market Watch window is the main area of focus for a

Trading Member. The purpose of Market Watch is to view
market information of pre-selected securities, which are of
interest to the Trading Member.
To monitor various securities, the trading member can set them

up by typing the Security Descriptor consisting of a Symbol
field and a Series field. Invoking the Security List and selecting
the securities from the window can also set up securities. The
Symbol field incorporates the Company name and the Series
field captures the segment/instrument type. A third field
indicates the market type.
For each security in the Market Watch window, market

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

the information on the current value of the Nifty. This value is
displayed at the extreme right hand corner of the ticker window.
Index Inquiry gives information on Close, Open, High, Low and
current index values at the time of invoking this inquiry screen.
Inquiry Window
In this window, the inquiries such as Market by Order, Market

by Price, Previous Trades, Outstanding Orders, Activity Log,
Order Status and Market Inquiry can be viewed.
Market By Order (MBO)
The purpose of Market by Order is to enable the user to view

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

Member to view aggregate orders waiting in the book at given
prices.
Previous Trades (PT)
The purpose of this window is to provide information to users

for their own trade.
Outstanding Orders (OO)
The purpose of Outstanding Orders is to enable a Trading

Member to view his/her own outstanding buy or sell orders for a
security. An outstanding order will be an order that was entered
by the user, but is not yet completely traded or cancelled.
Activity Log (AL)
The Activity Log shows the activities, which have been

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

Order Status enables the user to look into the status of a specific
order. Current status of the order and other order details are
displayed. In case the order is traded, the trade details are also
displayed.
Market Inquiry (MI)
Market Inquiry enables the user to view the market statistics like
Open, High, Low, Previous close, Last traded price change
indicator, Last traded quantity, date and time etc. A user may
find inquiry screens like Market Movement, Most Active
Securities and Net Position useful. These are available in the
supplementary menu.
Market Movement (MM)
The Market Movement screen provides information to the user

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

This screen gives a list of the securities with the highest traded
value during the day and the quantity traded for each of them.
Net Position
This functionality enables the user to interactively view his net

position for all securities in which he has traded.
Snap Quote
The Snap Quote feature allows a Trading Member to get

instantaneous market information on any desired security. This
is normally used for securities which are not already on display
in the Market Watch window. The information presented is the
same as that of Market Watch window.
Order/Trade Window
Order entry mechanisms enable the Trading Member to place

orders in the market. The system will request re-confirmation of
an order so that the user is cautioned before the order is finally
released into the market. Orders once placed on the system can
be modified or cancelled till they are matched. Once orders are
matched they cannot be modified or cancelled.
There is a facility to generate online order/trade confirmation
slips as soon as an order is placed or a trading is done. The order
confirmation slip contains among other things, order no.,
security name, price, quantity, order conditions like disclosed or
minimum fill quantity etc. The trade confirmation slip contains
the order and trade no., date, trade time, price and quantity
traded, amount etc. Orders and trades are identified and linked
by unique numbers so that the investor can check his order and
trade details.
Systems Message Window
This window is used to view messages from the Exchange to all

specific Trading Members.
Supplementary Menu
Some of the supplementary features in the NEAT system are:
On line back up
An on line back up facility is provided which the user can

invoke to take a back up of all order and trade related
information. There is an option to copy the file to any drive of
the computer or on a floppy diskette. Trading members find this
convenient in their back office work.
Off Line Order Entry
A member is able to make an order entry in the batch mode.
Computer-to-Computer Link (CTCL) Facility
NSE offers a facility to its trading members by which members

can use their own trading front-end software in order to trade on
the NSE trading system. This Computer-to-Computer Link
(CTCL) facility is available only to trading members of NSE.
Through CTCL facility Trading Members can use their own

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

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

executed in the Equities and Derivatives segments and operates
Subsidiary General Ledger (SGL) for settlement of trades in
government securities. It also undertakes settlement of
transactions on other stock exchanges like, the Over the Counter
Exchange of India.
NSCCL assumes the counter-party risk of each member and
guarantees settlement through a fine-tuned risk management
system and an innovative method of on-line position
monitoring. It operates a well-defined settlement cycle and there
are no deviations or deferments from this cycle. It aggregates
trades over a trading period, nets the positions to determine the
liabilities of members and ensures movement of funds and
securities to meet respective liabilities. It provides a facility for
multiple settlement mechanisms including, account period
settlement for dealings in physical securities and dematerialized
securities, rolling settlement (T+5 basis) in dematerialized
segment etc.
NSCCL has empanelled 9 clearing banks to provide banking

services to trading members and has established connectivity
with both the depositories for electronic settlement of securities.
BADLA TRADING
Badla is a complex system that contains many a pitfall for the

uninitiated and the unwary. Investors need to be aware of the
problems, especially when brokers on BSE and other regional
stock exchanges are marketing vyaj badla schemes to their
clients aggressively.
Before an investor start believing in the stories of superlative
returns (in excess of 20 per cent), coupled with liquidity, safety
and flexibility, it is imperative that one takes a hard, rational
look at the entire mechanism. This is so because financing badla
is a definite no-no for the first-time investor in the stock market
and also for those who don't have the time to constantly monitor
the status of his/her investments and fluctuations in the market
returns
Vyaj Badla
In the vyaj badla system, there was a very high chance that an
investor may end up with an average annual return of 14-18 per
cent or sometimes even higher. But having said that,
unfortunately, the returns were not guaranteed. This rosy picture
could well be a reality during a bull run, but when the market
was under a bear hug, returns could diminish to just around 6-8
per cent a year. Comparing it with a steady 12 per cent annual
return offered by a bank fixed deposit or any AAA rated
corporate bandit seemed that The high-risk and uncertain return
of vyaj badla would start looking like a bad investment option.
And then the taxman cometh! Vyaj badla transactions began to

be treated as purchase and sale of shares, thus getting subjected
to capital gains tax of 30 per cent. Thus, an investor’s final
returns get lopped off to that extent. Although nay Sayers might
feel that vyaj badla provides an investor with an opportunity to
maximize his earnings in a bull market, the fact remains that it is
a good option for the experienced investor. Else, the nerve-
wracking tension that accompanies stock market fluctuations
may well take its toll.
How did the Badla function?
Assume that there had been 12 trades of 100 shares each in

"ABC" stock, and there are 12 separate buyers and sellers
respectively. Among the buyers, while six wanted to carry
forward their positions, six want to take delivery. Of the sellers,
eight wished to deliver the shares while four were keen on
carrying their positions forward. Now six buyers made the
payment for their purchases, while eight sellers effect delivery.
Six buyers and six sellers got squared off. Four "buy" carry-
forward positions get matched against four "sell" carry-forward
positions.
To ensure payment to the remaining two sellers for their 200

shares, vyaj badla financiers came in. This financier charged
interest (badla) for the money paid on behalf of the two buyers
for them. The demand and supply of funds and shares
determined this rate. Shares delivered by the seller were kept by
the exchange in the clearing-house and allocated to the
financier's broker in a special account, forming the financier's
collateral.
On the BSE, brokers who were sure of taking or making

delivery of shares mark their respective "for delivery" positions.
This helped the exchange to arrive at the net outstanding
positions on Friday evening (the last day of the settlement on
BSE), by deducting them from the broker's weekly out
standings. The difference is threw open to the market's badla
trading session on Saturday. Prior to the commencement of this
session, the base price (hawala rate) is fixed, which was
normally the closing price of the scrip on Friday. An
outstanding "buy" position in a stock sees a "seedha badla"
where the financiers participate. An outstanding "sell" position
in the stock sees an "ulta" or "undha badla" where the stock
lenders participate. Specified quantities of the stock on offer are
bought and sold at the financier's desired interest rate - the badla
rate.
In this case, let's assume the hawala rate to be Rs 69. If the

financier wants to pay for 100 shares at 20 per cent per annum
and the trade gets matched, the interest rate is converted into a
weekly figure. In this case, it would be 0.38 per cent. On the
hawala rate of Rs 69, this 0.38 percent works out to 26 paise.
The terminals would constantly keep flashing the best badla rate
and the best annual yield for each stock on offer for a particular
quantity. A constant fluctuation in these values during the two-
and-a-half hour session is due to the constant change in demand
and supply, and also market perception. The broker would give
the financier a badla bill or informal contract note, which would
have two entries. One would show a purchase of 100 shares at
Rs 69 per share, while the other would show a sale of 100 shares
at Rs 69.26 per share. The difference will be the financiers
earning for that week. With the next trading cycle ending, the
financier can either receive the difference or roll over his/her
money to a new badla transaction.
Who can participate?
Not all brokers can participate in the badla process.

Memberships on BSE are split between type-I and type-II
brokers. Only the former can carry out badla trades, for they
maintain higher margins with the exchange. Hence, if you are
keen on becoming a vyaj badla financier, you should approach
the type-I broker.
Most brokers don't accept anything less than Rs 1 lakh per client
for badla financing. And the stock selection too is at their
discretion. But it would be prudent for you to know the basis of
allocation of stocks to you, as you would be one among a lot of
clients whose money has been collectively invested in vyaj
badla. Badla rates vary between stocks, depending upon their
demand and supply. These rates fluctuate considerably
throughout the session.
Ideally, brokers using the discretionary allocation of stocks to

the badla account should pay a weighted average return to each
client. This should be reflected in the badla bills. For getting the
weighted average return on badla finance, it is advisable to look
for brokers who have automated this process.
As in any other market transaction, one cannot avoid brokerage

in a vyaj badla transaction too. Brokerage for such deals could
range between 1-2.5 per cent, trimming down your annual yield
further. It is advisable to enter into a firm brokerage percentage
prior to the commencement of the relationship.
Are investors safe?
What is the investor’s safeguard in times of default? If the

forward buyer defaults, he got the shares held in the exchange's
clearinghouse against his broker’s name, on which he had a lien
through his Badla bill. But his risk erosioned in the value of the
share during the days that it takes to release the shares.
In the recent history of BSE, there have been instances of

brokers (having large carry-forward positions in highly
speculative stocks) defaulting. Although these shares were
enjoying very high badla rates at the time of the default, the
prices had dipped sharply by the time the financiers got their
shares.
If the broker defaults, the financier is in a larger mess. Apart

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

cycle gives the confidence to your broker to automatically roll
over your investment to the next cycle. While opting out, always
time your exit. By virtue of the exchange's settlement cycle,
your money gets released within a ten-day period. This further
reduces your yield.
As in the case of defaults, the delay in the release of your money
can be detrimental. So factor in those extra days while
calculating your actual return. Although vyaj badla is considered
to be an effective short-term instrument, as is the case with all
such instruments, the delay can really eat into your returns.
Given the quirks of the vyaj badla transactions and the inherent
risks involved, it can be concluded that amateurs should stay
away - it is strictly for the pro and the strong hearted.
Substitutes to Badla
Financial derivatives
By far the most significant event in finance during the past

decade has been the extraordinary development and expansion
of financial derivatives...
These instruments enhance the ability to differentiate risk and

allocate it to those investors most able and willing to take it -- a
process that has undoubtedly improved national productivity
growth and standards of living. -- Fed Chairman Alan
Greenspan
Following the introduction of index futures, the Securities and
Exchange Board of India (SEBI) permitted the BSE and the
NSE to introduce more derivatives, such as options on indices
and individual stocks. But an instrument that may be more in
line with the domestic market structure -- single-stock futures --
is not under consideration.
Single-stock futures are a way to reap the benefits of a stock's

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

they are cheaper to trade and easier to use for hedging strategies
than options. Cheaper, because margins in futures trading are
lower than in options. But the valuation of futures contracts are
not as complicated as that of options. Hence, small investors
find them relatively easy to understand and use.
Trading options:
Trading options are riskier than futures. This is purely from the
options-writer's perspective. Market making in options depends
to a great extent on institutions willing to write the contracts.
Since the buyer of an option contract is not under any obligation
to exercise his right, his risk is limited to the premium paid for
purchasing the right.
However, the writer is under an obligation to deliver. This

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

writer and transactions costs could be high. Currently, the
regulations prevent funds from taking speculative positions in
the spot market. So, they may not be allowed to write options. A
market exists only if there is a writer and a buyer. But given that
there are few takers for the futures market, it is difficult to
foresee a lot of interest in the options market.
INDEX.
 Executive summary.
 Introduction.
 Light on stock exchange and it services.
 Role of SEBI.
 Terminologies associated with stock exchanges.
 Bombay Stock Exchange.
 Introduction.
 Capital listed and market capitalization.
 BSE Sensex.
 Trading system.
 Settlement and clearing.
 Demat pay in.
 Computation of closing price.
 Shortages and objections.
 Basket trading system.
 Settlement system.
 Closing system.
 Opportunities for foreign investors.
 Transfer of ownership.
 Safeguards.
 Arbitration machinery.
 Customer protection fund.
 Grievances redressal.
 Disciplinary actions.
 Indices.
 Disclosures and listing norms.
 Computerized trading.
 Future developments.
 National Stock Exchange.
 Introduction.
 Locations.
 Listing.
 Constitution.
 Trading members.
 Trading mechanism.
 Market types.
 Order books.
 Order matching rules.
 Order conditions.
 Quantity conditions.
 Trading workstation.
 Computer to computer links facility.
 National Securities Clearing Corporation Limited.
 Badla trading.
 Substitutes for Badla.
 Financial derivatives.
 Trading options.
 Bibliography.
EXECUTIVE SUMMARY
The project is an attempt to working of stock exchanges in

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

trading and In all they offer 9 different avenues for investing,
which have been explained in length in the pages to come.
The third part is the Case, attached with the report, which is also
taken from Franklin Templeton India Ltd. The case speaks about
3 facts of investing; first being that growth and value do not
move in tandem; second being, value investing has rewarded
long term investors; and the third one as, value stocks have
provided low relative volatility over time.

Working of Stock Exchange

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Working of Stock Exchange

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Introduction

Of all the modern service institutions, stock exchanges are

In general, small time proprietors, or partners of a proprietary or

A share represents the smallest recognized fraction of ownership

What is a stock exchange?

The institution where this buying and selling of shares

Characteristics of Stock Exchanges in India

 Traditionally, a stock exchange has been an association of

 A stock exchange in India operates with due recognition

At present, there are 23 stock exchanges in India, the

 Typically, a stock exchange is governed by a board

 The overall development and regulation of the securities

The trading platform of a stock exchange is accessible only to

Listing means formal admission of a security to the trading

Stock index uses a set of stocks that are representative of the

All stock exchanges in India follow screen-based trading

Internet trading is available on NSE and BSE, as of now. SEBI

SEBI approved trading through wireless medium or WAP

A depository holds securities in dematerialized form. It

Since the introduction of the depository system,

The Exchange, while providing an efficient and transparent

A Governing Board comprising of 9 elected directors (one third

The Executive Director as the Chief Executive Officer is

CAPITAL LISTED AND MARKET CAPITALIZATION.

The Stock Exchange, Bombay (BSE) is the premier Stock

The BSE SENSEX, short form of Sensitive Index, first

The BSE SENSEX is the benchmark index of the Indian capital

The BSE SENSEX is the benchmark index with wide

 To measure market movements

 Benchmark for funds performance

 For index based derivatives products

Companies represented in the SENSEX

Till Now, buyers and sellers used to negotiate face-to-face on

Trading is done by members and their authorized assistants from

The matching logic for the Carry-Forward System as in the case

The Exchange, which had an open outcry trading system, had

Earlier, the members of the Exchange were permitted to open

The objectives of granting membership to the subsidiary

Trading on the BOLT System is conducted from Monday to

With effect from December 31, 2001, trading in all securities

Computation of closing price of scrips in the Cash Segment:

A) Compulsory Rolling Segment (CRS):

With a view to introduce the best international trading practices

Under a rolling settlement environment, the trades done on a

The transactions in securities of companies which have made

The settlement of transactions in 'F' group securities

The following tables summarizes the steps in the trading and

Trading on BOLT and daily downloading of statements

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

* 6A/7A : A mechanism whereby the obligation of settling the

The Information Systems Department of the Exchange generates

Statements giving details of margins payable by the members in

The settlement of the trades (money and securities) done by a

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

As discussed earlier, the trades done by members in all the

The Clearing House is an independent company promoted

The Information Systems Department (ISD) of the Exchange

The Delivery Orders provide information like scrip, quantity

The bank accounts of members maintained with the eight

The securities, as per the Delivery Orders issued by the

Auto D.O. facility:

As regards CDSL, the members give pay-in instructions to their

The Clearing House arranges and tallies the securities received

The auction is conducted for those securities which members