LESSON 13: NATIONALITY STOCK EXCHANGE (NSE)

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SECURITY ANALYSIS AND POR TFOLIO MANAGEMENT

                                                                                             LESSON 13:
                                                                                  NATIONALITY STOCK EXCHANGE (NSE)

                                              The National Stock Exchange was set up by IDBI and other all            computer system and stocked in its memory in an order book.
                                              India Financial Institutions in Mumbai in November 1992 with            Trading being order driven, it will be matched with a matching
                                              a paid up equity of Rs. 25 crores. It was recognised by the             counter order. If matched, both the buyer and seller are
                                              Government in the same year and the Exchange started                    informed by the NSE computer system. By the end of the
                                              operations in wholesale Debt market in June 1994 and in equity          trading day, the Exchange System will give out rates and a list of
                                              trading in Now, 1994. The wholesale debt market or the money            completed transactions for each trading member.
                                              market segments would cater to banks, FIS, etc. to encourage
                                                                                                                      Characteristics
                                              high value transactions in PSU bonds, UTI Units, Treasury
                                              Bills, Government securities and call money. There is no trading        The characteristics of National Market System are as follows :
                                              floor of the exchange. Trading is in large volumes and over the         1. Completely automated system in terms of both trading and
                                              telephone, telex etc. Trading is done on computer with the help            settlement procedures to be provided through the Securities
                                              for PC Terminals in broker offices. The Capital market segment             Facilities Support Corporation.
                                              is also done similarly on computer based trading. The settle-           2. Compulsory market makers/jobbers to provide liquidity
                                              ment is on T + 7 basis for equity trading.                                 and ready market (in the form of Principal Trading
                                              Benefits accruse to both issuers of securities and investors. As           Members, i.e., PTM).
                                              this is screen based trading with a national network, transpar-         3. The members are large Corporate and Institutional
                                              ency and cost effectiveness are ensured. Besides, the investment
                                                                                                                         members and professionals, rawn from various parts of the
                                              counters can be spread wide in the country under the NSE
                                                                                                                         country and to represent the professionals on an All India
                                              electronic network.
                                                                                                                         Basis.
                                              About 785 companies were already listed on NSE at end March
                                              2001. Trading in them is continuing simultaneously with those           4. Only large and medium size companies and PSUs are listed
                                              in the principal and regional Stock Exchanges. As the Central              on this Exchange and it will complement the existing
                                              Depositories are set up in 1998, book entry of deals and                   Exchanges.
                                              immobilization of certificates is taking place. At present the          5. The NSE would have a separate trading facility and time
                                              volume of daily trade is around Rs. 15000 to 2000 Crores, on               allotted for debtinstruments in order to have the beneficial
                                              the NSE going upto Rs. 4,000 crores on some days during the                effect of creating an active secondary market in debt
                                              boom period of Jan. - Feb. 2000. The market capitalisation of              instruments particularly of Government debt.
                                              listed companies is Rs. 544 lakh crores in 2000-01. There are also
                                              more than 320 permitted securities for trading on the NSE, as           NSE Operations
                                              at end March 2001.                                                      The above recommendations were accepted by the Government
                                                                                                                      and accordingly NSE was set up and recognised by the Govern-
                                              National Market System                                                  ment. As reported earlier, it has started trading in money market
                                              A high powered study Group on the Establishment of New                  instruments, Government securities and other debt instru-
                                              Stock Exchanges under the Chairmanship of Shri M.J.                     ments on OTC basis. In the Capital market segment, corporate
                                              Pherwani has submitted its Report in June 1991. This Study              equity shares are traded on a weekly settlement basis since
                                              Group has recommended some criteria for setting up of new               November 1994. It has no trading floor. Each trading member
                                              Stock Exchanges and favoured the licensing of additional                will have a computer in his office, anywhere in India which will
                                              trading floors (ATF) instead of multiplying the number of               be connected to the Central Computer System of NSE through
                                              Stock Exchanges in the country.                                         leased lines or BSATs (Very Small Aparture Terminals) for an
                                              The Study Group has also recommended the setting up of a                interim period, to be followed by a satellite link. The members
                                              model National Stock Exchange at Navi Mumbai (NSE) which                for Debt Market will be different from the Equity market and
                                              will develop the National Market System in the country. Any             the same members cannot operate for both markets, as
                                              infrastructure in terms of space, Tele-communications,                  originally visualised. As in May 2000, NSE terminals are located
                                              Computerisation, on-line processing system, Library, Research           at 310 contres in the country with about 850 brokers connected
                                              facilities, Publicity Dept, etc. are all recommended for the
                                                                                                                      through more than 2000 Vsats, adding upto over 6000 users.
                                              “National Market” to be set up by NSE.
                                                                                                                      The NSE will operate two segments, namely, Debt market
                                              The market will have two types of members, viz., participating          (Money market) and equity market (Capital market) and
                                              trading members, who can only trade on their behalf and                 operations in both are separately maintained. POst trade
                                              intermediary trading members (dealers) who can deal on behalf           services are also automated. For confirmed trades, the settling
                                              of their clients. Trading members will have computer terminals
                                                                                                                      bank will arrange for payment and clearance and depository for
                                              connecting to the other trading members (PTM) and to the                effecting transfers by electronic book entry system. The clearing
                                              central computer system at the NSE. Trading orders to buy and           house facility is provided by Canara Bank and many banks are
                                              sell securities or to borrow and lend are entered into the              providing the depository facility for NSE.

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Automated Lending and Borrowing Mechanism (ALBM)                          certificates, like tearing/mutilation of share certificates due to

                                                                                                                                                SECURITY ANALYSIS AND POR TFOLIO MANAGEMENT
ALBM is a new product developed by NSE to meet a felt need                careless handling, loss of certificates by postal authorities or
of lending and borrowing of securities by short sellers. This             delays with registrars and investors problems of bad delivery of
does not involve borrowing and lending of money, as in the                shares. Cases of forgery of certificates will be eliminated in an
case of Badla trade. This is a flexible instrument, to be pressed         electronic environment. Settlement of traders will be faster and
into service for smooth trading and settlement and clearance.             hassle-free leading to shorter settlement cycles.
In the segment of Rolling Settlement market, ALBM is well                 What is a Depository ?
suited to ensure that settlement took place daily. The securities         A Depository is an organisation where the securities of a share
borrowing and lending market in U.S.A. is estimated $ 100                 holder are held in the electronic form at the request of the share
billion per annum. Some institutions like SHCI specialise in              holder through the medium of a depository participant.
lending of securities and short sellers need to borrow securities.        A depository can be compared to a bank for securities. If an
The instrument does not have anything to do with carry                    investor wants to utilise the services offered by a depository, the
forward or Badla nor does it finance purchases or long buyers.            investor has to open an account with the depository through a
Central Depository System                                                 depository participant - this is very similar to the opening of an
The Government has accepted the system of multiple deposi-                account with any of the branches of a bank in order to utilise
                                                                          the services of that bank, as a Depository Participant (D.P.).
tories and SEBI was asked to frame guidelines for their
operations in 1996. These Depositories will keep physical                 The depository can legally transfer beneficial ownership which a
custody of share certificates leading to immobilisation of shares         custodian cannot. The main objective of a depository is to
to be followed later by dematerialisation and complete book               minimise the paper work involved with the ownership, trading
entry system of trading in future, say after 5 years.                     and transfer of securities.
This means that the statement given by the Depository is                  Facilities offered by NSDL
evidence of the ownership of the shares. This method was                  1. Enable surrender and withdrawal of securities to and from
operated for the FIs and FFIs and banks and mutual funds, in                 the depository (i.e., dematerialisation and rematerialisation).
the beginning and was extended to corporates and individuals
                                                                          2. Maintain investor holdings in the electronic form.
later on. The depository will transfer the securities between the
participants through electronic book entry, while the settling            3. Effect settlement of securities traded on the exchanges.
bank will effect the transfer of funds.                                   4. Carry out settlement of trades not done on the stock
Listing of Securities                                                        exchanges (i.e., off market traders).
All medium and large sized companies with paid up equity Rs.              Rematerialisation
10 crores and above eligible to be listed on regular Stock                If anybody wishes to get back his securities in the physical form
Exchanges can be listed on NSE. Some of them may be listed                all he has to do is to request his Depository participant for the
and traded on regular Stock Exchanges also. The same formali-             rematerialisation of the same.
ties of listing are observed by NSE and a liting agreement is
entered into with the company, as on a regular exchange and a             Advantages of the Depository
sapproved by the SEBI.                                                    There are a number ov reasons why Investor should opt for the
                                                                          electronic form of holding securities. Depositing Investor’s
Settlement System                                                         securities with NSDL with give freedom from the worries of
Trading period on any day will vary for the debt segment and              loss of share certificates through theft, mutilation, fire, etc.
equity segmenet. For capital market operations the trading is
                                                                          The process of opening an account with a depository partici-
done in equities, convertible and nonconvertible debentures.              pant is similar to the opening of a bank account. The investor
Trading network can be spread all over the country, depending             can get a list of depository participants from NSDL. The
on the electronic link though the Satellite. A rolling settlement         depository participants may also advertise the services offered by
system operates in NSE with settlement period of T + 7. Thus              them once they are registered. The Investor can approach any
a rolling T + 7 period means that transactions on a given day             DP of his choue and fill up an account opening form.
(T) will be settled seven days later (T + 7). On that day, funds          The depository participant will give a pass book or a stat ement
and securities are exchanged by passing electronically proper             of holdings. The statement of holdings will be dispatched to
debit and credit entries.                                                 the Holder periodically by the Depository participant; however,
The National Securities Depository Limited (NSDL)                         the statement of holdings can be sent to Holders, as and when
This is an organisation promoted by the Industrial Develop-               requested for a fee.
ment Bank of India, the Unit Trust of India and the National              The depository has not prescribed any minimum balance. In
Stock Exchange of India Limited to provide electronic deposi-             fact, the holder cna even have zero balance in his account.
tory facilities for stock traded in the equity and the debt market.       However, the depository participants may fix some minimum
The National Securities Depository Limited has been registered            limits. Many FFIs, FIIs and Indian FIs and banks have joined
with the Securities Exchange Board of India and launched on               the Depository System, as it is very suitable for their trade in
Nov. 7, 1996 as India’s first depository to facilitate trading and        large volumes.
settlement of securities in dematerialised form. Settlement of
securities in dematerialised form will eliminate problems that
are normally associated with settlement through physical

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About the Depository Participants                                          Interconnected Stock Exchange
SECURITY ANALYSIS AND POR TFOLIO MANAGEMENT

                                              Similar to the brokers who trade on behalf of the customers in             The Inter-connected Stock Exchange of India Ltd. was
                                              and outside the stock exchanges, a Depository Participant is the           promtoed by 15 regional Stock Exchanges and Federation of
                                              representative (agent) in the depository system. The Depository            Indian Stock Exchanges. It was incorporated as a public limited
                                              Participant will maintain the securities account balances and              company under Section 12 of the Companies Act in January
                                              intimate to the Holder about their holdings from time to time.             1998. Its registered location is at International Infotech Park,
                                              According to SEBI guidelines, financial institutions, banks,               7th Tower, 5th Floor, Vashi Railway Complex, Sector 30A,
                                              custodians, stock brokers, etc. can become participants in the             Vashi, Navi Mumbai 400 705.
                                              depository.                                                                Its paid up capital or the project cost is Rs. 15 crores, which is
                                              There are absolutely no restrictions to the number of DPs that             covered by the contribution of Rs. 1 crores from each of the
                                              the Investor can open accounts with. Opening an account with a             participating member in the form of admission fee of Rs. 5
                                              depository participant is very similar to opening a bank account.          lakhs and Infrastructure fee of Rs. 95 lakhs. The following
                                              Just as a person can have savings or current accounts with more            participating exchanges paid the Initial Capital :
                                              than one bank, the person can open accounts with more than                 1. Bangalore Stock Exchange
                                              one depository participant.
                                                                                                                         2. Bhuvaneshwar Stock Exchange
                                              The perosn can exercise the option such a rights issue or
                                              optional conversion of debentures to shares. The holders do                3. Cochin Stock Exchange
                                              have a choice of either physical or electronic mode of holdings.           4. Coimbatore Stock Exchange
                                              However, corporate entitlements such as bonus will be made in              5. Gauhati Stock Exchange
                                              the same form as the original holdings. Compulsory demat
                                                                                                                         6. Hyderabad Stock Exchange
                                              form of trading was enforced by SEBI in most of the well-
                                              traded stocks, soon after.                                                 7. Jaipur Stock Exchange
                                              The depository will also establish a help desk which will direct           8. Ludhiana Stock Exchange
                                              the holder to the holder to the appropriate agency. When the               9. Madhya Pradesh (Indore) Stock Exchange
                                              depository is ready to start functioning, it will advertise the help,
                                                                                                                         10. Madras Stock Exchange
                                              desk, telephone lines, etc.
                                                                                                                         11. Magadh (Patna) Stock Exchange
                                              NSDL’S First Participants
                                                                                                                         12. Mangalore Stock Exchange
                                              SHCIL
                                                                                                                         13. Saurashtra Kutch (Rajkot) Stock Exchange
                                              ILFS
                                                                                                                         14. Uttar Pradesh (Kanpur) Stock Exchange
                                              ITT Trust Corp Services
                                                                                                                         15. Vadodara Stock Exchange
                                              GLOBAL TRUST BANK
                                                                                                                         All these 15 Stock Exchanges have a total membership of 4613,
                                              HDFC Bank
                                                                                                                         which account for 51% of total membership of all exchanges in
                                              CITI Bank Custodial Services                                               India in 1998. The total number of listed companies in these
                                              Morgan Stanley Custodial Services                                          participating exchanges is 3,467, whichaccounts for 35% of total
                                              Reliance Share & Stock Brocking                                            listed on all Stock Exchanges in India (9, 833 in 1998). But in
                                                                                                                         terms of turnover of trade, the ISE participating Stock
                                              Janta Sahakari Bank                                                        Exchanges account for Rs. 45,226 Crores in 1997-98, which
                                              Industrial Dev. Bank Of India                                              constitues about 4% of the total turnover of all the Stock
                                              State Bank Of India                                                        Exchanges in India.
                                              Standard Chartered                                                         ISE has got the SEBI approval under Section 4 of S.C. (R) Act
                                              National Sec. Clearing Corp.                                               in November 1998. The SEBI laid down the conditions of a
                                                                                                                         minimum Base Capital of Rs. 2 lakh to being with by members
                                              DEUTSCHE Bank                                                              to be raised to Rs. 4 lakh by the end of one year. The participat-
                                              Legal Aspects                                                              ing exchanges will have a uniform trading and settlement cycle
                                              NSDL was set up by passing the Depositories Act, 1996 but                  of Thursday to Wednesday, which is the actual cycle adopted by
                                              with retrospective effect from Sept. 1995. Companies Act and               the ISF. Besides, the ISE has set up a settlement guarantee fund
                                              SCR Act were amended to the extent necessary. Section 22A of               to guarantee payouts. Additionally every participating exchange
                                              SCR Act dealing with restrictions on transfer of shres was                 is required to maintain with ISE, a Settlement Stabilisation
                                              deleted. Sections 108 and 111 of the Companies Act were                    Fund of Rs. 10 lakhs to meet any temporary exigencies at the
                                                                                                                         time of pay in so that there is no delay in declaration of payout.
                                              amended to dispense with transfer form and other formalities
                                              relating to the physial transfer of shares. The Depository’s               ISE provides a national market system where in a trading
                                              statement is a valid documents of title, under law and transfers           member of one Stock Exchange can deal with a trading
                                              are effected by book entries in the pass-books of D.P.s.. The              member of another exchange from his local Trader Work
                                              exemption from stamp duty was also granted for transactions                Station (TWS). Through the Inter-connected market system,
                                                                                                                         ISE provides for trading, clearing and settlement along with
                                              in Demat form.
                                                                                                                         surveillance and Risk Management to the inter-connected
                                                                                                                         trading system.

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It has got SEBI’s clearance to start trading in Nov. 1998 but it             traders will have to deposit the loss margin, if the loss goes

                                                                                                                                                  SECURITY ANALYSIS AND POR TFOLIO MANAGEMENT
has started training of members and stock trading sessions in                beyond the cast component of his capital adequacy amount.
the early months of 1999.                                                Accordingly, the traders and dealers would be required to pay on
Objective                                                                a T + 1 basis the daily Mark to Market Margins on the loss
The basic aim of the Inter-connected Market System (ICMS),               suffered by them on their outstanding positions. Losses on any
which ISE sets up is to consolidate the small fragmented and             scrip would not be allowed to be set off against profits on
less liquid markets into a national level market, with the state of      others and a basic exemption limit of 25% of the capital
art infrastructure and systems support. It will create a level           adequacy amount is given to the trader while computing the
playing ground for all participating exchanges, reduce transac-          margin liability. The extra losses would have to be covered by
                                                                         extra margin deposits.
tions costs, promote liquidity and volumes, necessary for
survival of regional Stock Exchanges.                                    Daily Circuit Filters
Its functions are to provide trading among the inter-connected           The system would also operate daily and settlement circuit
exchanges in their listed securities by using the Electronic             limits to scrip prices, which set the limit to fluctuations of
Securities Architecture Software and decentralized clearing and          prices, unduly rising or falling. The filter is the point fixed by the
Settlement at all participating Exchange centers. The central            ISE on the basis of previous day’s closing or settlement closing
clearing bank of ISE namely ABN AMRO-Vysya Bank                          price or base price.
Consortium provides for exclusive funds transfer, electronically
                                                                         Suspension of Securities and Traders
and sharing the relevant information on margins settlements
                                                                         The ISE has powers to suspend any security or trades if they are
and capital adequacy positions by opening of extension
counters at the premises of participating Stock Exchanges.               for any reason suspended on the participating regional Stock
                                                                         Exchange.
The ISE hires the services of the Elbe couriers to ensure timely
movement of securities across the Exchanges for smooth                   Computer System
settlement of deliveries, payouts and Auction payours. The ISE           For interconnected market system, there is a computer system
has a Settlement Guarantee Fund (SGF) to guarantee settlement            provided by the Indigo Technologies with a Central Computer
of all trades validly executed in the ISE system. A real time risk       at Vashi, Navi Mumbai and Compaq N.T. Server Machines at
management and surveillance system would ensure instant                  the Reigonal Stock Exchanges. Similarly, there will be another
information on gross exposure, intra-day trading exposure and            computer system for trading set up by Tandem Computers, a
cumulative loss positions of member brokers etc. with a view             subsidiary of Compaq company, while Compaq N.T. servers
to prevent gross irregularities undue price fluctuations and             and work stations will be used for clearing and settlement and
impose margins on members of various types, for the purpose              for Risk Management and Surveillance.
of stopping overtrading by members and their consequent
defaults and failures.                                                   The electronic Securities Architecture Software uses a modular
                                                                         architecture consisting of expandable set of business modules
The listed securities on the ISE are divided into three groups :         such as :
Group A, which consists of 50 most popular scrips; Group B
                                                                         Automated traded
which has about 500 actively well traded shares and Group C
which has all the rest of the listed scrips which are generally          Manual trading module
thinly traded.                                                           Market control
Risk Management and Surveillance System : The ISE has                    System Administration
established a Risk Management and Surveillance system that is a          Market information and dissemination
system driven to monitor the position of traders and dealers
on a real time basis. The risks are controlled by the following          Trader Work Stations
methods :                                                                In each Regional Stock Exchange, there can be multiple work
a. Intra-day Trading Limits : Trades allowed up to 33.33                 stations for trading. Trader work stations comprise Member
   times their Base Minimum Capital (BMC) and 25 times                   Server Application (MSA) and a Trader Workstation Application
   their additional capital, if any. Traders are warned by the           (TWS). The MSA will be responsible for maintaining local data
   system when they reach the trading limits of 60%, 70% and             base and submits requests to the central system through the
   90% and then as the limit reaches 100% of permitted level,            TWS. The trader work station provide for order management
   the trader and dealer will be disabled to access the ICMS.            through submission, modification and withdrawal of market
                                                                         orders and limit orders and allows the market view of the 10
b. Gross Exposure Limits : The trader can have maximum
                                                                         best bids and offers, depth of the market and market statistics
   gross exposure of 12.5 times of capital deposited by the
                                                                         brokers can set up their own hierarchy and a system of scrutiny
   trader. The gross exposure is the sum of net purchases and
                                                                         and control through setting up of trading limits.
   sales and includes the exposure form the previous
   settlement waiting pay in.                                            Advantages of ISE
c. Cumulative Loss Margins : The system will not allow the               Volumes of trade can increase and there will be greater liquidity
   cumulative loss of a trader to cross the capital adequacy             to scrips. More than 4,000 scrips are kept udner permitted
   amount. The loss is computed by marketing to the market               category. They cost of each transaction will be lower, on an
   values the net purchases and sales and carry forwards. The            average. The cost of acquiring membership rights on ISF is only

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11.621.3                                                                                                                                    61
Rs. 5,000 per annum to the member brokers of regional Stock              Trading is done by members and their authorized assistants
SECURITY ANALYSIS AND POR TFOLIO MANAGEMENT

                                              Exchanges, which gives a cost advantage to traders on ISE.               from their Trader Work Stations (TWS) in their offices, through
                                              The additional facilities which the ISE may provide include              the BSE On-Line Trading (BOLT) system. BOLT system has
                                              trading in Demat form through a tie up with the CDSL, set up             replaced the open outcry system of trading. BOLT system
                                              by the B.S.E. Besides, the RSE can have established ATFs and             accepts two-way quotations from jobbers, market and limit
                                              ATCs, for the purposes of facilitating trading in centres where          orders from client-brokers and matches them according to the
                                              the Stock Exchange is not available within the jurisdiction of           matching logic specified in the Business Requirement Specifica-
                                              R.S.E.                                                                   tions (BRS) document for this system.
                                              The ISE has also proposed to set up a modified carry forward             The matching logic for the Carry-Forward System as in the case
                                              system, subject to the permission of SEBI and extend the                 of the regular trading system is quote-driven with the order
                                              trading rights as dealers to institutions like subsidiaries of           book functioning as an “auxiliary jobber”.
                                              banks, mutual funds, FIIS, etc.
                                                                                                                       Notes
                                              Advantages of Members of RSEs
                                              1. Increase in the business and earnings.
                                              2. Increase in liquidity in shares that they trade in.
                                              3. Appreciation in the value of membership at the
                                                 participating exchange.
                                              4. Greater Safeguards against defaults, bad deliveries, and
                                                 frauds, etc.
                                              5. Long-term strategy to survive in the face of competition
                                                 from the big National Exchanges like NSE and BSE.
                                              6. Creation of efficient and orderly market.
                                              7. Establish transparency in dealings and improves the price
                                                 discovery process.
                                              8. Creates a level playing ground for all the participating
                                                 exchanges and provides a larger ground to play to member
                                                 brokers of RSEs.
                                              9. The possibility of expansion to remote rural and semi-
                                                 urban areas as expansion of retail investor business.
                                              Mumbai Stock Exchange (BSE)
                                              The Stock Exchange, Bombay, which was established in 1875 as
                                              The Native Share and Stockbrokers’ Association, is the oldest
                                              Stock Exchange in Asia, even older than the Tokyo Stock
                                              Exchange, which was founded in 1878. The Stock Exchange,
                                              Bombay, is the most active stock market in India counting for
                                              over 70 percent of the listed capital and 90 percent of market
                                              capitalisation - as such, it is the premier Stock Exchange in
                                              India.
                                              Trading System at BSE
                                              Till Now, buyers and sellers used to negotiate face-to-face on the
                                              trading floor over a security until agreement was reached and a
                                              deal was struck in the open outcry system of trading, that used
                                              to take place in the trading ring. The transaction details of the
                                              account period (called settlement period) were submitted for
                                              settlement by members after each trading session.
                                              The computerised settlement system initiated the netting and
                                              clearing process by providing on a daily basis statements for
                                              each member, showing matched and unmatched transactions.
                                              Settlement processing involves computation of each member’s
                                              net position in each security, after taking into account all
                                              transactions for the member during the settlement period,
                                              which is 10 working days for group ‘A’ securities and 5 working
                                              days for group ‘B’ securities.

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