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8/3/2019 An Overview of Indian Stock Market-Indiabuls
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JitendraVirahy
asJVIRAHYAS@GMAIL.COM
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A Project Report
OnAN OVERVIEW OF INDIAN STOCK MARKET
Submitted in Partial fulfillment for the award of the degree
MASTER IN BUSINESS ADMINISTRATION.
(Batch2008-2010)
Under Guidance Of, Submitted By,
Mr. C cccc vvvv
(faculty in finance)
MBA
DCTE SCHOOL OF MANAGEMENT,JP
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NNNNN
CANDIDATE DECLARATION
I solely declare that the report titled An Overview
Of Indian Stock Market is a bonafied record of
work carried by me, submitted partial fulfillment of
requirement for the award of degree Master Of Business
administration under the guidance of MR.
VVVV(FINANCE FACULTY OF DCTE
SCHOOL OF MANAGEMENT)
This research is solely the work of me based upon
questionnaire, printed material given in bibliography. The
matter embodied in this report has not been submitted for
the award of any other degree.
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Dated MR.C C C
ACKNOWLEDGEMENT
Dissertation Report is a bridge connecting the educationaland professional use. It is the path leading to success byshouldering responsibilities under the careful guidance ofseniors and experienced personnel without fear and failures.
It gives me immense pleasure to take the opportunity toremember and thanks to the personalities who are involved
with this project work during its study stage during my daysof hard work. I feel that it is my duty to express thanks anddeep gratitude to everyone who is directly or indirectlyassociated in the completion of this Dissertation Report
With deep reverence, I offer my deepest regards gratitude toMr. C Cccc Vvvv who is my finance faculti and, finance
faculty of Dcte School Of Management, without whom thisReport could not have been fulfilled.
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C C C
Executive Summary
Indian securities markets have undergone many changes during the
last decade. Exponential growth in trading volumes is pushing existing
trading systems and processes to capacity and increasing settlement
risk. With Indian market moving to a T+3 rolling settlement cycles in
line with global markets, SEBI is continuing its efforts to increase the
efficiency and transparency in Indian markets. Indeed it has been SEBI
endeavor to make the Indian markets, one of the most competitive and
efficient markets of the world.
Income, Savings mobilization and promotion of investment are
functions of the stock and capital markets which are a part of the
organized financial system in India.
This Project titled An Overview of Indian stock market is an
attempt to understand the stock market and role played by Indian retail
Brokerage Firms in stock market. The objective of brokerage firms is to
help the investor to minimize the risk involved in investment andmaximize the return. Some of the main characteristics of the brokerage
industry include growth in e-broking; growing derivatives market,
decline in brokerage fees etc.An endeavor was also made to
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understand the role played by Indiabulls Securities compared to its
competitors in Indian retail brokerage market.
The role played by Indian retail brokerage industry is of immense
significance, taking into account the health of the capital markets and
the intensity of competition among the brokerage companies.
Table of ContentsParticulars
Chapter 1 Outlook on Indian Stock market................
Chapter 2 Overview of Indiabulls..............................
Chapter 3 Overview of Indiabulls Securities..............
Chapter 4 Financial Analysis....................................
Chapter 5 Understanding Capital market..................
Chapter 6 Derivatives..............................................
Chapter 7 Competitors............................................
Chapter 8 Competitive Analysis...............................
Chapter 9 SWOT Analysis.........................................
Chapter 10 Research Methodology
Chapter 11 Findings & Suggestions..........................
Questionnare
Conclusion
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Bibliography...........................................................
Appendix................................................................
Chapter 1
OUTLOOK ON INDIAN STOCK
MARKET1.1 Introduction
Indian Stock Markets is one of the oldest in Asia. Its history dates back
to nearly 200 years ago. The earliest records of security dealings in
India are meager and obscure. The East India Company was the
dominant institution in those days and business in its loan securities
used to be transacted towards the close of the eighteenth century.
By 1830's business on corporate stocks and shares in Bank and Cotton
presses took place in Bombay. Though the trading list was broader in
1839, there were only half a dozen brokers recognized by banks and
merchants during 1840 and 1850. The 1850's witnessed a rapid
development of commercial enterprise and brokerage business
attracted many men into the field and by 1860 the number of brokers
increased into 60. In 1860-61 the American Civil War broke out and
cotton supply from United States to Europe was stopped; thus, the
'Share Mania' in India began. The number of brokers increased to
about 200 to 250.
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At the end of the American Civil War, the brokers who thrived out of
Civil War in 1874, found a place in a street (now appropriately called as
Dalal Street) where they would conveniently assemble and transact
business. In 1887, they formally established in Bombay, the "Native
Share and Stock Brokers' Association, which is alternatively
known as The Stock Exchange". In 1895, the Stock Exchange
acquired a premise in the same street and it was inaugurated in 1899.
Thus, the Stock Exchange at Bombay was consolidated.
The Indian stock market has been assigned an important place in
financing the Indian corporate sector. The principal functions of the
stock markets are enabling mobilizing resources for investment directly from the
investors
providing liquidity for the investors and monitoring
Disciplining company management.
The two major stock exchanges in India are National Stock Exchange
(NSE) and Bombay Stock Exchange (BSE).
1.2 National Stock Exchange
With the liberalization of the Indian economy, it was found inevitable to
lift the Indian stock market trading system on par with the international
standards. On the basis of the recommendations of high powered
Pherwani Committee, the National Stock Exchange was incorporated in
1992 by Industrial Development Bank of India, Industrial Credit and
Investment Corporation of India, Industrial Finance Corporation of India,
all Insurance Corporations, selected commercial banks and others.
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The National Stock Exchange (NSE) is India's leading stock
exchange covering various cities and towns across the country. NSE
was set up by leading institutions to provide a modern, fully automated
screen-based trading system with national reach. The Exchange has
brought about unparalleled transparency, speed & efficiency, safety
and market integrity. It has set up facilities that serve as a model for
the securities industry in terms of systems, practices and
procedures.
NSE has played a catalytic role in reforming the Indian securities
market in terms of microstructure, market practices and trading
volumes. The market today uses state-of-art information technology toprovide an efficient and transparent trading, clearing and settlement
mechanism, and has witnessed several innovations in products &
services viz. demutualization of stock exchange governance, screen
based trading, compression of settlement cycles, dematerialization and
electronic transfer of securities, market of debt and derivative
instruments and intensive use of information technology.
Trading at NSE can be classified under two broad categories:
Wholesale debt market
Capital market
Wholesale debt market operations are similar to money market
operations - institutions and corporate bodies enter into high value
transactions in financial instruments such as government securities,
treasury bills, public sector unit bonds, commercial paper, certificate of
deposit, etc.
Capital market: A market where debt or equitysecurities are traded.
There are two kinds of players in NSE:
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Trading members
Participants
Recognized members of NSE are called trading members who trade on
behalf of themselves and their clients. Participants include trading
members and large players like banks who take direct settlement
responsibility.
Trading at NSE takes place through a fully automated screen-based
trading mechanism which adopts the principle of an order-driven
market. Trading members can stay at their offices and execute the
trading, since they are linked through a communication network. The
prices at which the buyer and seller are willing to transact will appear
on the screen. When the prices match the transaction will be
completed and a confirmation slip will be printed at the office of the
trading member.
NSE has several advantages over the traditional trading exchanges.
They are as follows:
NSE brings an integrated stock market trading network across
the nation.
Investors can trade at the same price from anywhere in the
country since inter-market operations are streamlined coupled
with the countrywide access to the securities.
Delays in communication, late payments and the malpracticesprevailing in the traditional trading mechanism can be done away
with greater operational efficiency and informational
transparency in the stock market operations, with the support of
total computerized network.
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NSE Nifty
S&P CNX Nifty is a well diversified 50 stock index accounting for 22
sectors of the economy. It is used for a variety of purposes such as
benchmarking fund portfolios, index based derivatives and index funds.
NSE came to be owned and managed by India Index Services and
Products Ltd. (IISL), which is a joint venture between NSE and CRISIL.
IISL is India's first specialised company focused upon the index as a
core product. IISL have a consulting and licensing agreement with
Standard & Poor's (S&P), who are world leaders in index services.CNX
stands for CRISIL NSE Indices. CNX ensures common branding of
indices, to reflect the identities of both the promoters, i.e. NSE and
CRISIL. Thus, 'C' stands for CRISIL, 'N' stands for NSE and X stands for
Exchange or Index.The S&P prefix belongs to the US-based Standard &
Poor's Financial Information Services.
1.3 Bombay Stock Exchange
The Bombay Stock Exchange is one of the oldest stock exchanges in
Asia. It was established as "The Native Share & Stock BrokersAssociation" in 1875. It is the first stock exchange in the country to
obtain permanent recognition in 1956 from the Government of India
under the Securities Contracts (Regulation) Act, 1956. The Exchange's
pivotal and pre-eminent role in the development of the Indian capital
market is widely recognized and its index, SENSEX, is tracked
worldwide.
SENSEX
The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock
index that subsequently became the barometer of the Indian stock
market.
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SENSEX is not only scientifically designed but also based on globally
accepted construction and review methodology. First compiled in 1986,
SENSEX is a basket of 30 constituent stocks representing a sample
of large, liquid and representative companies. The base year of SENSEX
is 1978-79 and the base value is 100. The index is widely reported in
both domestic and international markets through print as well as
electronic media
The Index was initially calculated based on the "Full Market
Capitalization" methodology but was shifted to the free-float
methodology with effect from September 1, 2003. The "Free-float
Market Capitalization" methodology of index construction is regardedas an industry best practice globally. All major index providers like
MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float
methodology.
Due to is wide acceptance amongst the Indian investors; SENSEX is
regarded to be the pulse of the Indian stock market. As the oldest index
in the country, it provides the time series data over a fairly long period
of time. Small wonder, the SENSEX has over the years become one of
the most prominent brands in the country.
The SENSEX captured all these events in the most judicial manner. One
can identify the booms and busts of the Indian stock market through
SENSEX.
The launch of SENSEX in 1986 was later followed up in January 1989 by
introduction of BSE National Index (Base: 1983-84 = 100). It comprised
of 100 stocks listed at five major stock exchanges. The Exchange
launched dollar-linked version of BSE-100 index i.e. Dollex-100 on May
22, 2006.
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In order to fulfill the need of the market participants for still broader,
segment-specific and sector-specific indices, the Exchange has
continuously been increasing the range of its indices. The launch of
BSE-200 Index in 1994 was followed by the launch of BSE-500 Index
and 5 sectoral indices in 1999. In 2001, BSE launched the BSE-PSU
Index, DOLLEX-30 and the country's first free-float based index - the
BSE TECK Index. The Exchange shifted all its indices to a free-floatmethodology (except BSE PSU index) in a phased manner.
The values of all BSE indices are updated every 15 seconds during the
market hours and displayed through the BOLT system, BSE website and
news wire agencies.
All BSE-Indices are reviewed periodically by the "Index Committee" of
the Exchange.
Chapter 2
OVERVIEW OF INDIABULLS
2.1 Introduction
Indiabulls is Indias leading Financial and Real Estate Company with a
wide presence throughout India. Indiabulls Financial Services Limited
was established in the year 2000 by three promoters all of whom are
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engineers from Indian Institute of Technology, New Delhi, and has
attracted over Rs 700 million of investments from venture capital firms,
private equity funds and institutional investors.
History
Indiabulls Financial Services Limited was incorporated on January
10, 2000 as Orbis Infotech Private Limited at New Delhi.
The name of the Company was changed to Indiabulls Financial
Services Private Limited on March 16, 2001 due to change in the
main objects of our Company from Infotech business to
Investment & Financial Services business.
It became a Public Limited Company on February 27, 2004 and
the name of the Company was changed to Indiabulls Financial
Services Limited.
Indiabulls has over 640 branches all over India. The customers of
Indiabulls are more than 4,50,000 which covers from a wide range
of financial services and products from securities, derivatives
trading, depositary services, research & advisory services, consumer
secured & unsecured credit, loan against shares and mortgage &
housing finance. The company employs around 4000 Relationship
managers who help the clients to satisfy their customized financial
goals. Indiabulls entered the Real Estate business in the year 2005
with its group of companies.
Indiabulls Financial Services Ltd is listed on the National StockExchange, Bombay Stock Exchange and Luxembourg Stock
Exchange. The market capitalization of Indiabulls is around USD
2500 million (29th December 2006). Indiabulls and its group
companies have attracted USD 500 million of equity capital in
Foreign Direct Investment (FDI) since March 2000. Some of the large
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shareholders of Indiabulls are the largest financial institutions of the
world such as Fidelity Funds, Goldman Sachs, Merrill Lynch, Morgan
Stanley and Farallon Capital.
2.2 Growth of Indiabulls
Year 2000-01:
One of Indias first trading platforms was set up by Indiabulls Financial
Services Ltd. with the development of an in-house team.
Year 2001-03: The service offered by Indiabulls was increased to
include Equity, F&O, Wholesale Debt, Mutual fund, IPO
Financing/Distribution and Equity Research.
Year 2003-04: In this particular year Indiabulls ventured into
Distribution and Commodities Trading business.
Year 2004-05:This was one of the most important years in the history
of Indiabulls. In this year:
Indiabulls came out with its initial public offer (IPO) in September
2004.
Indiabulls started its Consumer Finance business.
Indiabulls entered the Indian Real Estate market and became the
first company to bring FDI in Indian Real Estate.
Indiabulls won bids for landmark properties in Mumbai.
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Securities &Derivatives
Broking
Mortgage &HousingFinance
Consumer
Financing
FinancialProducts
Distribution
SecuredFinancing
Year 2005-06: The world renowned investment banks like Merrill
Lynch and Goldman Sachs increased their shareholding in Indiabulls. It
also became a market leader in securities brokerage industry, with
around 31% share in Online Trading. The worlds largest hedge fund,
Farallon Capital and its affiliates committed Rs. 2000 million for
Indiabulls subsidiaries Viz. Indiabulls Credit Services Ltd. and Indiabulls
Housing Finance Ltd. In the same year, the Steel Tycoon Mr. LN Mittal
promoted LNM India Internet venture Ltd. acquired 8.2% stake in
Indiabulls Credit Services Ltd.
Year 2006-07: In this year, Indiabulls Financial Services Ltd. was
included in the prestigious Morgan Stanley Capital International Index
(MSCI). The company also received an in principle approval from
Government of India for development of multi product SEZ in the state
of Maharashtra.
Diversified Business Group of Indiabulls
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Fig 2.1: Diversified Business Groups of Indiabulls
2.3 IndiaBulls Subsidiaries
Indiabulls securities limited: business comprises of Securities &
Derivatives broking.
Indiabulls Credit services limited: business comprises of personal
loans, secured and unsecured loans, and housing and auto loans.
Financial products distribution: distribution of mutual funds andinsurance products.
Indiabulls commodities Pvt ltd: deals with commodity brokerage
business
Indiabulls Realities limited: is into development of Real estate and
mining.
Indiabulls housing loans: is into mortgage of properties and housing
loan business.
2.4 Organizational Structure of Indiabulls
The organizational structure of Indiabulls is Functional, which consist of
several departments.
Functioning Online: serving clients primarily through an Internet
based relationship targeted towards clients who value anytime,
anywhere access and can be serviced at low incremental costs.
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Functioning Offline:serving clients primarily through an office based
relationship targeted towards clients who value physical interaction.
Online & offline business consist of following departments
Administration
Operations & Service quality
Technology
Finance
Corporate affairs
Human resources
Marketing
Corporate communications
Legal
Department based Organizational Structure:
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Director-Online Director-Offline
FinanceCorporate
Affairs
Human
Resources
Technolog
y
Operations
&
Service
Administration
CorporateCommuni
cationLegal
Customer
ServiceRecruitment Marketing Training
Sr. Vice President
Regional Manager
Branch Manager
RelationshipManager
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Figure 2.2 Department based organizational Structure
of Indiabulls
Regional Hierarchy of Indiabulls
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Senior Vice President
Regional Manager
Branch Manager
Senior Sales Manager
Support System Sales Function
RM/SRM
ARM
Local Compliance
Officer
Back Office
Executive
Dealer
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Figure 2.3 Regional hierarchies of Indiabulls
Key Positions
Figure 2.4 Key Positions
Chairman
Real Estate
CFO & President
Securities Consumer Finance
Executive DirectorChief Executive
Officer Executive Director
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2.5 Products and Services of Indiabulls
Indiabulls offer the following products and services in the financialmarkets:
Stocks
Options and Futures
Depository Services
Commodities
Insurance Products
Mutual Funds
Bonds and Debt Products
Services
Commercial Vehicle Loans:
In April 2006 Indiabulls started Commercial Vehicle Finance under the
flagship of Indiabulls Credit Services Ltd. in order to provide refinance
to its commercial vehicle clients. Their fundamentals, competent
management and expertise in financing the transporters are pretty
sound. The companys unique market position enables it to excel in
client contentment, quick service and growthled profitability.
.Mortgage Loans:
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Indiabulls Housing Finance Ltd. which is a flagship of Indiabulls has
started lending of Mortgage Loans to prospective customers. This
company enables the home-seekers to access finance to buy their
homes. They provide different types of loans like plot loans, Loan
against Residential, Commercial and Rental Property, thereby enabling
the borrower to leverage the property owned to fund any genuine
needs be it Business Expansion, Child's Education, Child's Marriage or
for Holiday Abroad.
Consumer Finance:
Indiabulls is a retail focused organization that fulfills the credit needs of
a large percentage of population in India. The key aspect of Indiabulls
business model is to provide an extremely unique customer
experience.
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Chapter 3
OVERVIEW OF INDIABULLS SECURITIES LTD
3.1 Introduction
Indiabulls Securities Ltd is engaged in the business of Internet based
trading and is registered with SEBI as a stockbroker, trading and
clearing member of NSE, member of BSE and as a depositary
participant with National Securities Depository Limited (NSDL) and
Central Depository Services (India) Limited (CDSL). ISL is also a
member of the National Securities Clearing Corporation Limited.
History
Indiabulls Securities Limited (ISL) was incorporated as GPF Securities
Private Limited on June 9, 1995.
The name of the company was changed to Orbis Securities Private
Limited on December 15, 1995 to change the profile of the company
and subsequently due to the conversion of the company into a public
limited company; the name was further changed to Orbis Securities
Limited on January 5, 2004.
The name of the company was again changed to Indiabulls Securities
Limited on February 16, 2004 so as to capitalize on the brand image of
the term Indiabulls in the company name. ISL is a corporate memberof capital market & derivative segment of The National Stock Exchange
of India Ltd.
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Trading With Indiabulls
This section will introduce us about the process and instruments used to help
a customer or a client to trade with Indiabulls securities. This process is
almost similar to any other trading firm but there will be some difference in
the cost of brokerage commission.
Trading: It is a process by which a customer is given facility to buy and sell
share this buying and selling can only be done through some broker and this
is where Indiabulls help its customer.
A customer willing to trade with any brokerage house need to have a demat
account, trading account and saving account with a brokerage firm. Any one
having following document can open all the above mentioned account and
can start trading.
Document Required
3 photographs ( signed across)
Photo Identification Proof - any of the following - Voter ID/Driving
License/Passport.
Address Proof any of the following - Voter ID/Driving License/ Passport/
Bank statement or pass book sealed and attestation by bank official/
BSNL landline bill.
A crossed Cheque favoring India bulls Securities Ltd. of the required
amount. The amount for Demat as well as trading will be Rs. 900/-(free
Demat +900 Trading Account) the minimum amount being Rs. 900 a
cheque can be given for a larger amount.
Copy of PAN Card is mandatory.
Registration Kit
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CDSL Demat Kit
Bank and address proof declaration. (Master undertaking)
PAN name discrepancy form
These documents may not be consumer friendly but it is to avoid illegal
transaction and to prevent black money this ensures that money invested
is accounted.
3.2 Business Model & Operations of Indiabulls
Securities Ltd
The three distinct internal business segments are:
Online business
Offline business
Other Sales
Online business: serving clients primarily through an Internet based
relationship targeted towards clients who value anytime, anywhere
access and can be serviced at low incremental costs. The Online sales
force sells all products and services and follows the relationship
manager model.
Offline business: serving clients primarily through an office based
relationship targeted towards clients who value physical interaction
and are typically larger accounts. The Offline Sales force sells all
products and services and follows the relationship manager model. The
Institutional business serving clients such as mutual funds and pension
funds is considered part of the offline business due to largely similar
client servicing and channel needs as required for high net worth
clients. Indiabulls Securities Limited has established relationships with
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some large institutional players in India and is qualified broker for
Equities, F&O and Debt markets for 145 such institutional clients.
Other Sales: includes insurance, research services and other offerings
3.3 Basic Requirement for doing Trading
Trading requires Opening a Demat account.Demat refers to adematerialized account.
You need to open a Demat account if you want to buy or sell stocks. So
it is just like a bank account where actual money is replaced by shares.
We need to approach the Depository Participants (DP, they are like
bank branches), to open Demat account.
A depository is a place where the stocks of investors are held in
electronic form. The depository has agents who are called depository
participants (DPs).
Think of it like a bank. The head office where all the technology rests
and details of all accounts held is like the depository. And the DPs are
the branches that cater to individuals.
There are only two depositories in India
The National Securities Depository Ltd (NSDL) and the
Central Depository Services Ltd (CDSL).
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IndiabullsSecuritiesTrading Products
Cash Account Intraday Account Margin Trading
3.4 Trading Products of Indiabulls Securities
Fig
showing 3.1 Trading Products of Indiabulls securities
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Indiabulls Securities provide three products for trading. They are
Cash account
Intraday account
Margin trading (Mantra)
Cash account provides the client to buy 4 times of cash balance in his
trading account.
Intraday product provides the client to buy 8 times of his cash
balance in the trading account.
Mantra account called as margin trading, is a special account to buy on leverage for a
longer duration
Chapter 4
FINANCIAL ANALYSIS OF INDIABULLS SECURITIES
4.1 Income: Indiabulls Securities Ltd income unit has the following
components
Income from Online business : The contribution of revenue from
Online business have grown from Rs. 31.85 million in FY 2002 to Rs.
242.26 million in FY 2004 and from 24.05% of total business in FY 2002to 34.85% of business in FY 2004. The rapid growth of the online
business is driven by growth in total clients, increasing product
flexibility and quality, enhanced online-only features such as portfolio
analysis and updates, streaming tickers, enhanced product offering of
Power Indiabulls.
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Brokerage
Equities
F&O
Income from Offline Business: The offline business unit has one of
the widest branch networks in India with a pan India presence with
large market share. The revenues have grown from Rs. 96.02 million in
FY 2002 to Rs. 447.25 million in FY 2004 and have changed from
72.52% of total business in FY 2001 to 64.34% of business in FY 2004.
The rapid growth of the Offline business is driven by growth in total
clients, increased geographical presence.
Brokerage
Equities
F&O
Wholesale Debt Markets
Brokerage Income
Brokerage Income comprises revenues earned from Equities, F&O and
Wholesale debt markets on all stock exchanges.
The income from brokerage services is driven primarily by the
number of active clients.
The rapid growth in total clients is driven primarily by increased
geographical presence.
Equities constitute the largest portion of brokerage business.
F&O brokerage is becoming an increasingly important component
of its revenues as Futures & Options trading gains more
acceptance.
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Wholesale Debt market is focused on institutional clients.
Income from transaction and service charges andinterest income
Related income comprises revenues earned from market related
activities such as transaction charges, service charges and interest
levied on customer transactions. These charges are dependent on
trading volume, number of transactions completed and any ledger
debit amount in the client account.
Income from other Sales including Insurance, Mutual
Fund Sales and Other Products
Other income comprises revenues earned from sale of third party
products such as Insurance, Mutual Funds and new services such as
Research Services.Revenues are a function of volume of mutual funds
sold, the type of fund sold (active managed equity, passive fixed
income etc.) and the commissions paid on the funds sold.
Brokerage Income of Indiabulls Securities
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Brokerage Income of Indibulls Securities of 3 Years( in Crore)
47.2
99.65
261.11
0
50
100
150
200
250
300
2004 2005 2006Years
BrokerageInc
- - -
Bar Chart 4.1 Brokerage Income of Indiabulls Securities (in
Crore)
Segment wise Sales of Indiabulls securities for March 2005(in
Crore)
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S e g m e n tw i se S a l e s o f I n d i a b u l l s S e c u r iti e s F o r M a r c h
1.93, 2
0.84, 1
9.88, 92 , 2
99.65, 86
Brokerage Income
Incom e From Depos i tory S ervice
Incom e From other F inanc ia l Ac t i
Interest
Transact ion Charges
Pie Chart 4.2 Segment wise Sales of IndiaBulls Securities for
year 2005
Segment wise Sales of Indiabulls securities for March 2006(in
Crore)
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Segmentwise sales of Indiabulls Securities For March 2006(in
Crore)
261.11, 82%
23.06, 7%9.08, 3%
3.57, 1%
21.16, 7%
Brokerage Income Income From Depository Service
Income From other Financial Activity Interest
Transaction Charges
4.2 Financial Ratio Analysis of Indiabulls Securities
Ltd
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Profitability ratios:
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Indiabulls Securities Ltd. Mar 2004 Mar2005
Mar 2006
Per cent (Non-Annualized) 12months
12months
12 months
-
Margins ratios (%)-
As % of operating incomePBDT 43.05 44.75 58.76PBT 41.45 42.87 56.7PAT 25.92 27.25 37.49PBDT (NNRT) 43.01 44.52 58.72PBT (NNRT) 41.41 42.63 56.66PAT (NNRT) 25.88 27.02 37.45-
Corporate tax as per cent of
PBT
35.83 33.69 32.47
-
Returns ratios (%)-
As % of total assetsPBDT 18.95 31.35PBT 18.15 30.25PAT 11.54 20PAT (NNRT) 11.44 19.98Operating cash flow 77.78 65.19
-As % of net worthPBDT 53.48 128.77PBT 51.23 124.25PAT 32.57 82.16PAT (NNRT) 32.29 82.07Operating cash flow 219.53 267.75-
As % of capital employedPBDT 47.39 58.11PBT 45.39 56.06
PAT 28.86 37.07PAT (NNRT) 28.61 37.03Operating cash flow 194.53 120.82-
Appropriation of profits (as %of PAT)Dividends 3.89 19.66 0.52
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Equity dividends 0.44 2.27 0.07Preference dividends 3.44 17.39 0.45Retained profits 96.11 80.34 99.48-Dividends / net worth 6.4 0.43
Equity dividends / equity capital 3.98 0.45Equity dividends / equity cap. & sh.prem.
3.98 0.45
Liquidity ratios:
Indiabulls Securities Ltd. Mar 2004 Mar 2005 Mar 2006
Times (Non-Annualized) 12months
12months
12 months
-
Short term liquidity-Cash / current liabilities &provisions
0.67 0.86 1.7
Quick ratio 1.6 0.86 1.89-Medium to long term liquidity-
Current ratio 1.776 1.141 2.137Solvency ratio 1.567 1.561 1.269Debt equity ratio 1.237 0.848 2.056-
Interest incidence (%) 11.42 19.13 11.67-
Interest cover-PBIT / interest 3.63 4.01 5.2PBIT (NNRT) / interest 3.63 4 5.2
Operating cash flow / interest -2.99 11.97 8.91-(Rs. Crore)Current assets 231.47 261.19 914.49Current liabilities 130.34 228.86 427.87Working capital 101.13 32.33 486.62Net worth 83.34 108.43 181.77Reserves & surplus 20.24 45.33 163.94
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Asset utilization ratiosIndiabulls Securities Ltd. Mar
2004Mar2005
Mar 2006
Times (Non-Annualized) 12months 12months 12 months
-Efficiency ratios-Operating cash flow / total assets 0 0.78 0.65Operating cash flow / gross fixedassets
0 17.46 14.15
Operating cash flow / capitalemployed
0 1.95 1.21
-
Operating income / total assets 0.42 0.53Operating income / GFA / leasedassets
9.51 11.58
Operating income / capitalemployed
1.06 0.99
-PBDT (NNRT) / total assets 0.19 0.31PBDT (NNRT) / gross fixed assets 4.23 6.8PBDT (NNRT) / capital employed 0.47 0.58-PBT / total assets 0.18 0.3PBT / gross fixed assets 4.05 6.56PBT / capital employed 0.45 0.56-PAT / total assets 0.11 0.2PAT / gross fixed assets 2.57 4.34PAT / capital employed 0.29 0.37
4.3 Interpretation:
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Profitability Ratios: Profitability is the net result of a number of
policies and decisions. The ratios examined thus far provide useful
clues to the effectiveness of firms operations.
Liquidity Ratios: liquidity ratios deal with firms ability to pay off its
debts. It includes
Current ratio: The current ratio is calculated by dividing current
assets by current liabilities. The current ratio of Indiabulls
securities is 1.776, 1.441, & 2.137 for year 2004, 2005 & 2006
respectively.
Current ratio = Current assets
Current Liabilities
Quick ratio (acid test ratio): The quick ratio is calculated by
deducting inventories from current assets and then dividing the
remainder by current liabilities. The quick ratio is a measure of
the firms ability to pay-off the short-term liabilities. A large part
of the firms current assets are tied up in slow paying debts. The
industry average for Acid test ratio is 2.1, but for Indiabulls
securities quick ratio is 1.6, 0.86 & 1.89 for year 2004, 2005 &
2006 respectively, which is less than Industry average. The quick
ratio should be high which indicates the companys ability to pay-
off short term obligations.
Debt equity Ratio:
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Debt equity ratio is the related contribution of creditors and owners of
the business in its financing.
4.4 Financial performance Year on Year
Increasing Market Share of Indiabulls on NSE Trading VolumesIncreasing Market Share of Indiabulls on NSE Trading Volumes (1)(1)
(1) Source: NSE data from NSE website (Equity Segment)
22.3%
17.5%
18.8%
21.9%
30.7%
2.2%
5.5%
3.4%
1.1%
1.9%
0%
5%
10%
15%
20%
25%
30%
35%
FY2002
FY2003
FY2004
FY2005
FY2006
Share in OnlineTrading
Share in TotalTrading
(1)
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14%
20%
35%
24%
12%
7%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Top 5 Top 10 Top 25
FY02 FY05
Graph 4.3 Market share of Indiabulls on NSE trading
Volumes
UNDERSTANDING CAPITAL MARKET
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Market Shares of Top Brokers on NSEMarket Shares of Top Brokers on NSE (2)(2)
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An Outlook on Indian Stock Market
Capital Market Derivative Segment
Intraday Delivery Futures Options
5.1 Project Framework
Figure 5.1 Project Framework
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The Indian capital markets have witnessed a transformation over the
last decade. India now finds its place amongst some of the most
sophisticated and largest markets of the world. With over 20 million
shareholders, India has the third largest investor base in the world after
the USA and Japan. The Indian capital market is significant in terms of
the degree of development, volume of trading and its tremendous
growth potential.
Over the past few years, the capital markets have also witnessed
substantial reforms in regulation and supervision. Reforms, particularly
the establishment and empowerment of SEBI, market-determined
prices and allocation of resources, screen-based nation-wide trading,
dematerialization and electronic transfer of securities, rolling
settlement and derivatives trading have greatly improved both the
regulatory framework and efficiency of trading and settlement.
5.2 Indian Capital markets - Chronology
1994- Equity Trading commences on NSE
1995- All Trading goes Electronic
1996- Depository comes in to existence
1999- FIIs Participation- Globalization
2000- over 80% trades in Demat form
2001- Major Stocks move to Rolling Set
2003- T+2 settlements in all stocks
2003 - Demutualization of Exchanges
5.3 Capital Market Participants
Banks
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Exchanges
Clearing Corporations
Brokers
Custodians
Depositories
Investors
Merchant Bankers
5.4 Types of Investors
Institutional Investors- MFs / FI / FIIs / Banks
Retail Investors
Arbitrageurs / Speculators
Hedgers
Day traders/Jobbers
5.5 Cash Market
The Spot Market or Cash Market is a commodities or securitiesmarket in which goods are sold for cash and delivered immediately.
Contracts bought and sold on these markets are immediately effective.
Spot markets can operate wherever the infrastructure exists to conduct
the transaction. The Spot market for most securities exists primarily on
the internet. The trading in this cash market can be further divided into
Intraday and Delivery.
5.6 Key Terms
Intraday refers to buying or selling stocks today with an
obligation to sell or buy the stock on the same day. It means
completing the trading cycle in the same day. Here the stocks do
not come to the Demat account.
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Delivery refers to buying stocks today with a plan of selling it in
future. In India there is a concept of T+2 settlements. Which
means a stock bought on trade day is credited to your Demat
account (or delivered) into your Demat account after 2 days.
Square off- making the position nil. Say selling off the stocks.
(or buying back in case of short selling)
Short selling- selling without having the possession of the
stocks (possible in intraday trade). Selling the stocks initially and
buying them back later. It is a concept used in the falling
markets.
Demat Account- the account where in the shares are delivered.
Every Demat account is linked to a trading account and a savings
bank account. Demat account are provided by CDSL (central
depository services limited) and NSDL (national securities
depository limited). Indiabulls is a depository participant which
links the depository to the beneficial owner of the account
(client).
Trading pool/margin account- the place where the stock is
received after the trade, it is the brokers account called the
broker pool account.
T+2= Transaction + 2 days
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Chapter 6
DERIVATIVESBy 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
6.1 Definition:
Derivatives are instruments whose value is derived, in whole or in
part, from the value of one or more underlying assets.
History of Derivatives
The history of derivatives is surprisingly longer than what most people
think. Some texts even find the existence of the characteristics of
derivative contracts in incidents of Mahabharata. Traces of derivative
contracts can even be found in incidents that date back to the ages
before Jesus Christ. However, the advent of modern day derivative
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contracts is attributed to the need for farmers to protect themselves
from any decline in the price of their crops due to delayed monsoon, or
overproduction.
The first 'futures' contracts can be traced to the Yodoya rice market in
Osaka, Japan around 1650. These were evidently standardized
contracts, which made them much like today's futures.
The Chicago Board of Trade (CBOT), the largest derivative exchange inthe world, was established in 1848 where forward contracts on various
commodities were standardized around 1865. From then on, futures
contracts have remained more or less in the same form, as we know
them today.
Derivatives have had a long presence in India. The commodity
derivative market has been functioning in India since the nineteenth
century with organized trading in cotton through the establishment of
Cotton Trade Association in 1875. Since then contracts on various other
commodities have been introduced as well.
Exchange traded financial derivatives were introduced in India in June
2000 at the two major stock exchanges, NSE and BSE. There are
various contracts currently traded on these exchanges. National
Commodity & Derivatives Exchange Limited (NCDEX) started its
operations in December 2003, to provide a platform for commodities
trading.
The derivatives market in India has grown exponentially, especially at
NSE. Stock Futures are the most highly traded contracts on NSE
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accounting for around 55% of the total turnover of derivatives at NSE,
as on April 13, 2005.
6.2 Understanding Derivatives
The primary objectives of any investor are to maximize returns and
minimize risks. Derivatives are contracts that originated from the need
to minimize risk.
The word 'derivative' originates from mathematics and refers to a
variable, which has been derived from another variable. Derivatives are
so called because they have no value of their own. They derive their
value from the value of some other asset, which is known as the
underlying.
Derivatives are specialized contracts which signify an agreement or an
option to buy or sell the underlying asset of the derivate up to a certain
time in the future at a prearranged price, the exercise price. The
contract also has a fixed expiry period mostly in the range of 3 to 12months from the date of commencement of the contract. The value of
the contract depends on the expiry period and also on the price of the
underlying asset.
For example, a farmer fears that the price of soybean (underlying),
when his crop is ready for delivery will be lower than his cost of
production.
Let's say the cost of production is Rs 8,000 per ton. In order to
overcome this uncertainty in the selling price of his crop, he enters into
a contract (derivative) with a merchant, who agrees to buy the crop at
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a certain price (exercise price), when the crop is ready in three months
time (expiry period).
In this case, say the merchant agrees to buy the crop at Rs 9,000 per
ton. Now, the value of this derivative contract will increase as the price
of soybean decreases and vice-a-versa.
If the selling price of soybean goes down to Rs 7,000 per ton, the
derivative contract will be more valuable for the farmer, and if the price
of soybean goes down to Rs 6,000, the contract becomes even more
valuable.
This is because the farmer can sell the soybean he has produced at Rs
9000 per ton even though the market price is much less. Thus, the
value of the derivative is dependent on the value of the underlying.
6.3 Difference between Commodity Derivative & Financial
Derivative
If the underlying asset of the derivative contract is coffee, wheat,
pepper, cotton, gold, silver, precious stone or for that matter even
weather, then the derivative is known as a commodity derivative.
If the underlying is a financial asset like debt instruments, currency,
share price index, equity shares, etc, the derivative is known as a
financial derivative.
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Derivative contracts can be standardized and traded on the stock
exchange. Such derivatives are called exchange-traded derivatives. Or
they can be customized as per the needs of the user by negotiating
with the other party involved.
Such derivatives are called over-the-counter (OTC) derivatives.
Continuing with the example of the farmer above, if he thinks that the
total production from his land will be around 150 quintals, he can either
go to a food merchant and enter into a derivatives contract to sell 150
quintals of soybean in three months time at Rs 9,000 per ton. Or the
farmer can go to a commodities exchange, like the National Commodity
and Derivatives Exchange Limited, and buy a standard contract onsoybean.
The standard contract on soybean has a size of 100 quintals. So the
farmer will be left with 50 quintals of soybean uncovered for price
fluctuations.
However, exchange traded derivatives have some advantages like low
transaction costs and no risk of default by the other party, which mayexceed the cost associated with leaving a part of the production
uncovered.
In India we have several derivatives, two of the most famous
derivatives traded on National stock exchange are
Futures
Option
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Futures and options are traded on the NSE platform, with a normal
IndiaBulls trading account the client get the access to trade in the
F&O contracts.
6.4 Futures and Forwards
As the name suggests, futures are derivative contracts that give the
holder the opportunity to buy or sell the underlying at a pre-specified
price some time in the future.
They come in standardized form with fixed expiry time, contract sizeand price. Forwards are similar contracts but customizable in terms of
contract size, expiry date and price, as per the needs of the user.
6.5 Options
Option contracts give the holder the option to buy or sell the underlying
at a pre-specified price some time in the future.
An option to buy the underlying is known as a Call Option.
An option to sell the underlying at a specified price in the future
is known as Put Option.
In the case of an option contract, the buyer of the contract is not
obligated to exercise the option contract. Options can be traded on the
stock exchange or on the OTC market.
6.6 Futures Terminology
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Spot Price: the price at which an asset trades in the spot
market.
Futures Price: the price at which the futures contract trades
in the futures market
Contract Cycle: The period over which the contract trades.
The index futures contracts on the NSE have a one-month,
two-month and three-month expiry cycles which expire on the
last Thursday of the month. On the Friday following the last
Thursday, a new contract having a three-month expiry is
introduced for trading.
Expiry Date-the date specified in the futures contract. It is
the last Thursday of the month
Contract Size: the amount of asset that has to be delivered
less than one contract. For instance, the contract size on NSE
futures market is 100 Niftiest. It is prescribed by NSE for
stocks. Each stock had a different lot size.
Basis the futures price minus the spot price. There will be a
different basis for each delivery month for each contract. In a
normal market, basis will be positive. This reflects that futuresprices normally exceed spot prices.
Cost of Carry the storage cost plus the interest that is paid
to finance the asset less the income earned on the asset.
Initial Margin the amount that must be deposited in the
margin account at the time the futures contract is first entered
into. These margins are prescribed by the exchange. It varies
from stock to stock.
Marking to Market the adjustment made at the end of
each trading day to the investors margin account to reflect
the investors gain or loss depending upon the futures closing
price. It is the difference between todays closing price and
yesterdays closing. The MTM profit /loss are credited to the
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client account on day to day basis. Thus we call this a T+0
settlement.
Maintenance Margin somewhat lower than the initial
margin; the balance in the margin account must never
become negative and in case it does, the investor receives a
margin call that must top-up the account to the initial margin
level before trade commences the following day.
Difference between Long Position & Short Position
A long position is an agreement to buy. You take a long positionon a stock when you are bullish or have a feeling that the stock
will move up.
LONG => BUY
A short position is an agreement to sell. You take a short position
on a stock when you are bearish or have a feeling that the stock
will move down.
SHORT => SELL
There are around 152 companies which are underlying for future
and options in NSE. There are
index Futures (Nifty futures, Bank Nifty, CNX IT futures)
Stock Futures (Infosys futures. ITC futures, etc linked to specific
stocks)
Index options (linked to indices)
Stock option (linked to specific stocks).
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6.7 Option Contracts:The owner of an option has the OPTION to buy
or sell something at a predetermined price. Option provides the buyer
of the contract the right but not the obligation to exercise.
Right to BUY / OWN CALL OPTION
Or Right to SELL / WRITE PUT OPTION
You buy a call option when you are bullish or have an upward
target.
You buy a put option when you are bearish or have a downward
target.
6.8 Options Terminology
Stock options options on individual stocks. A contract gives
the buyer the right to buy or sell shares at the specified price
Buyer of an option the one who by paying price (premium)
buys the right but not the obligation to exercise his/her option on
the seller/writer
Writer of an option the one who by receiving premium, is
obliged to sell/buy the asset if the buyer exercises on him
Call Option gives the buyer the right but not the obligation to
buy an asset by a certain date for a certain price
Put Option gives the buyer the right but not the obligation to
sell an asset by a certain date for a certain price
Spot Price the price at which an asset trades in the spot
market.
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Strike Price the target price or the expected price.
Contract Cycle the period over which the contract trades.
There are three month contracts just like the futures.
Expiry Date the date specified in the option contract. It is the
last Thursday of the month, just as in futures.
Contract Size the amount of asset that has to be delivered
under one contract.
In-The-Money Option (ITM) an option that would lead to a
positive cash-flow to the holder if it were exercised immediately.
A call option on the index is said to be ITM if the current index
stands higher than the strike price (Spot Price > Strike Price).
A put option is ITM if the index is below the Strike price (Spot
Price < Strike Price).
At-The-Money (ATM) an option that would lead to zero cash
flows to the holder if it were exercised immediately.
Out-Of-The-Money Option (OTM) an option that would lead
to a negative cash-flow to the holder if it were exercised
immediately.
A call option on the index is said to be OTM if the current indexstands at a level which is less than the strike price (Spot Price
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