Chapter 1

CAPITAL MARKET IN INDIA

CAPITAL MARKETS

MEANINGCapital markets are markets where people, companies, and governments with more funds than they need (because they save some of their income) transfer those funds to people, companies, or governments who have a shortage of funds (because they spend more than their income). Stock and bond markets are two major capital markets. Capital markets promote economic efficiency by channeling money from those who do not have an immediate productive use for it to those who do.

Capital markets carry out the desirable economic function of directing capital to productive uses. The savers (governments, businesses, and people who save some portion of their income) invest their money in capital markets like stocks and bonds. The borrowers (governments, businesses, and people who spend more than their income) borrow the savers' investments that have been entrusted to the capital markets.

ABOUT CAPITAL MARKETBroadly speaking, the capital market can be divided into two constituents:

The financial institutions The securities market

These two constituents provide long-term and medium-term loan facilities. The securities market is a market where securities can be bought & sold freely. It consists of the new Issues Market (the Primary Market) & the Stock Exchange (the secondary market).

ROLE AND IMPORTANCE OF CAPITAL MARKETS IN INDIAThe capital markets encourage capital formation in the country. The capital markets mobilize savings of the households and of the industrial concerns. Such savings are then invested for productive purposes. Capital markets also facilitate the growth of the industrial sector, as well as the other sectors of the economy. The capital markets provide funds for the projects in backward areas. Thus, Capital markets generate employment in the country.

Moreover, the capital markets makes possible to generate foreign capital. They also facilitate the development of stock markets. Due to capital markets, the public has alternative sources of investment. The public can invest not only in bank deposits, but also in shares and debentures issued by public companies. The commercial and FIs provide timely financial assistance to viable sick units to overcome their industrial sickness. The banks and FIs may also write off a part of loan, or they re-schedule the loan, so as to offer payment flexibility to the weak units, which in turn helps the weak units to overcome financial crises. The secondary market makes it possible for the investors to sell off their holdings in form of shares and debentures and convert them into liquid cash.

GROWTH OF CAPITAL MARKET IN INDIAThere has been considerable growth in the capital markets in India. This can be interpreted from the above mentioned statistical figures. The following are the factors responsible for the growth of capital markets in India.

Growth of Stock Exchanges in IndiaNational Securities Clearing Corporation

Growth of Financial InstitutionsCorporate Governance

Growth of Mutual FundsGrowth of Multinationals

Growth of Merchant Banking in IndiaGeneral Awareness

Development of Venture Capital FundsClearing Corporation of India Limited

Development of Credit Rating AgenciesGrowing Public Confidence

Setting up of SEBIGrowth of Entrepreneurs

SECURITIES MARKET

Securities market consists of two segments, viz.,

Primary market and

Secondary market.

Primary market is the place where issuers create and issue equity, debt or hybrid instruments for subscription by the public, the secondary market enables the holders of securities to trade them.

Secondary market essentially comprises of stock exchanges which provide platform for purchase and sale of securities by investors. In India, apart from the Regional Stock Exchanges established in different centers, there are exchange like the National Stock Exchange (NSE) and the Over the Counter Exchange of India (OTCEI), who provide nation wide trading facilities with terminals all over the country. The trading platforms of stock exchanges are accessible only through brokers and trading of securities is confined only to stock exchanges.

Thus, the securities market has two independent, inseparable segment, the new issues (primary) market and the stock (secondary) market. The primary market provides channel for sale of new securities while the secondary market deals in securities previously issued. The issuer of securities sells the securities to the primary market to raise funds for investment and/or to discharge some obligations. The secondary market enables them who hold securities to adjust their holdings in response to change in their assessment of risk and return. They also sell securities for cash to meet their liquidity needs.

STOCK EXCHANGES

Secondary MarketA stock exchange or securities exchange is a marketplace where stocks offered for sale are listed and exchanged. Typically, the exchange is made up of a Board of Governors generally selected by the members, which is chosen to represent the interests of seat holders. The Board then employs an executive officer, to manage the Exchange. The Exchange usually assigns a number of seats to brokers. Persons eligible to be brokers may purchase seats in the Exchange.

WHY WAS THE EXCHANGE BORN? - Purpose of Existence

To safeguard the interest of investors as well as creating a sense of security in their minds.

To establish and promote honorable and just practices in securities transactions.

To promote, development and maintain a well-regulated market for dealing in securities.

To promote industrial development in the country through efficient resource mobilizations by way of investment in corporate securities.

Stock Exchange is medium for the corporate sector to highlight its goodwill and to gain confidence of the general public to propagate its trade in the country.

To bring liquidity in the transactions and to increase the pace of buying and selling and shares with discipline.

To create a common recognized platform for the buying and selling of the securities.

To bring about speedier conclusion of transactions greater transparency in operations, and greater investor protection.

To enhance the growth of capital market.

To spurt investments in the country.

HISTORICAL BACKGROUND OF STOCK EXCHANGES IN INDIA

The stock trading history in India is obscured in the mists of time. Historical records, as and where they exist, rarely speak about business and speculative activity except in passing. However, the origin of stock broking in the country may go back to a time, when shares, debentures and bonds representing titles to property were first issued on the condition of transfer from one person to another and the earliest record of dealings in securities in India is the East India Company's loan securities, way back in the 18th century.

The first stock exchange in India, Bombay Stock Exchange was established in 1875 as 'The Native Share and Stockbrokers Association' and has evolved over the years into its present status as the premier stock exchange in the country. It may be noted that BSE is the oldest stock exchange in Asia, even older than the Tokyo Stock Exchange, which was founded in 1878. The country's second stock exchange was established in Ahmedabad in 1894, followed by the Calcutta Stock Exchange (CSE). CSE can also trace its origin back to 19th century. The CSE was formally established in May 1908.

India's other major stock exchange National Stock Exchange (NSE), promoted by leading financial institutions, was established in April 1993. Over the years, several stock exchanges have been established in the major cities of India.

LIST OF STOCK EXCHANGES OPERATING IN INDIASR. NO.STOCK EXCHANGE

1The Stock Exchange, Mumbai

2The Stock Exchange, Ahmedabad

3Calcutta Stock Exchange Association Ltd., Calcutta

4Madras Stock Exchange Association Ltd , Madras

5Delhi Stock Exchange Association Ltd, Delhi

6Hyderabad Stock Exchange Ltd, Hyderabad

7Madhya Pradesh Stock Exchange, Indore

8Bangalore Stock Exchange Ltd., Bangalore

9Cochin Stock Exchange Ltd., Cochin

10The Uttar Pradesh Stock Exchange Association Ltd., Kanpur

11Pune Stock Exchange Ltd., Pune

12Ludhiana Stock Exchange Association Ltd., Ludhiana

13Gauhati Stock Exchange Ltd., Gauhati

14Magadh Stock Exchange Ltd., Gauhati

15Mangalore Stock Exchange Ltd., Mangalore

16Jaipur Stock Exchange Ltd., Jaipur

17Bhubaneshwar Stock Exchange Association Ltd., Bhubeshwar

18Saurashtra Kutch Stock Exchange Ltd., Rajkot

19Vadordara Stock Exchange Ltd., Vadodara

20Coimbatore Stock Exchange Ltd., Coimbatore

21National Stock Exchange of India Ltd., Mumbai

22Capital Stock Exchange of Kerala Ltd., Thiruvanathapuram

NATIONAL STOCK EXCHANGE

The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000.

HISTORICAL BACK GROUND

Before the incorporation of NSE, there has been number of limitations associated with the trading system in securities market. Some of the major areas of problem were:

1. Broker Managed Exchanges

2. Geographical Spread and Diversity

3. Lack of Transparency / Liquidity

4. Paper Based System

5. Settlement Delays

6. No Risk Containment Measures

So, the institutional set up was formed to overcome all these problems. Thus NSE was formed and incorporated in November 1992, and got recognition as a Stock Exchange in April 1993, went live for debt markets in June 1994 and commenced Capital Market Operations in November 1994.

NSE TODAY

Operational in over 360 cities

Over 872 trading members with 18500 users

More than 1000 listed companies and 2200 debt securities

The Companies listed on NSE are selected, based on their paid-up capital, market capitalization, dividend payment and a good track record. The criteria is meant to ensure that only companies that meet certain standards are listed. The list is reviewed at periodic intervals. From 26th December 1996, the NSE has started trading in depositary scripts. Its debt market operations average 270 crores (US$ 75 Million) a day and capital market operations average more than Rs.1200 crores (US$ 340 Million) a day.

OBJECTIVES OF NSE

1. Nation wide trading facilities

2. Fair, efficient and transparent market

3. Efficient and risk free settlement

4. Benchmark with global standards

5. High governance standards

IMPORTANCE OF NSE IN INDIAN SECONDARY MARKET

The NSE has been playing a catalytic role and has significantly contributed to the reforming of the secondary markets in India in terms of microstructure, market practices, trading volumes and use of state-of-the-art technology. The use of satellite communication technology for trading using Very Small Aperture Terminals (VSATs) enabled NSE to rapidly expand across the length and breadth of the country. The broad objective for which the exchange was setup has made it to play a leading role in enlarging the scope of market reforms in securities market in India. Moreover, to take care of investors interest, NSE has created an Investment Protection Fund (IPF) that would help investors who have incurred financial loss due to the default of brokers.

CORPORATE STRUCTURE

NSE is one of the first de-mutualised stock exchanges in the country, where the ownership and management of the Exchange is completely divorced from the right to trade on it. Though the impetus for its establishment came from policy makers in the country, it has been set up as a public limited company, owned by the leading institutional investors in the country.

From day one, NSE has adopted the form of a demutualised exchange - the ownership, management and trading is in the hands of three different sets of people. NSE is owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries and is managed by professionals, who do not directly or indirectly trade on the Exchange. This has completely eliminated any conflict of interest and helped NSE in aggressively pursuing policies and practices within a public interest framework. The NSE model however, does not preclude, but in fact accommodates involvement, support and contribution of trading members in a variety of ways. Its Board comprises of senior executives from promoter institutions, eminent professionals in the fields of law, economics, accountancy, finance, taxation, etc, public representatives, nominees of SEBI and one full time executive of the Exchange. While the Board deals with broad policy issues, decisions relating to market operations are delegated by the Board to various committees constituted by it. Such committee includes representatives from trading members, professionals, the public and the management. The day-to-day management of the Exchange is delegated to the Managing Director who is supported by a team of professional staff.

NSE FAMILY

NSCCL

HYPERLINK "http://www.nseindia.com/content/us/us_nsccl.htm"

National Securities Clearing Corporation Limited (NSCCL), a wholly owned subsidiary of NSE was incorporated in August 1995 and commenced clearing operations in April 1996. the formation of NSCCL has revolutionized the entire concept of settlement system in India. It has been the first clearing corporation in the country.

The NSCCL is responsible for post-trade activities of a stock exchange. Clearing and settlement of trades and risk management are its central functions. It clears all trades, determines obligations of members, arranges for pay-in of funds/securities, receives funds/securities, processes for shortages in funds/securities, arranges for pay-out of funds/securities to members, guarantees settlement, and collects and maintains margins/collateral/base capital/other funds. Various committees have been constituted to advise on areas such as good market practices, settlement procedures, risk containment systems etc. These committees are manned by industry professionals, trading members, Exchange staff as also representatives from the market regulator.Thus, the main objective of NSCCL has been:

To bring and sustain confidence in clearing and settlement of securities; To promote and maintain, short and consistent settlement cycles; To provide counter-party risk guarantee, and To operate a tight risk containment system.

In order to solve the myriad problems associated with trading in physical securities, NSE joined hands with the Industrial Development Bank of India (IDBI) and the Unit Trust of India (UTI) to promote dematerialisation of securities. Together they set up National Securities Depository Limited (NSDL), the first depository in India. NSDL commenced operations in November 1996 and has since established a national infrastructure of international standard to handle trading and settlement in demat form and thus completely eliminated the risks to investors associated with fake/bad/stolen paper.

TECHNOLOGY AT NSE

INFORMATION TECHNOLOGY AND SECURITIES MARKETAcross the globe, developments in information, communication and network technologies have created paradigm shifts in the securities market operations. Technology has enabled organizations to build new sources of competitive advantage, bring about innovations in products and services, and to provide for new business opportunities. Stock exchanges all over the world have realised the potential of IT and have moved over to electronic trading systems, which are cheaper, have wider reach and provide a better mechanism for trade and post trade execution.

NSES PERSPECTIVE ON TECHNOLOGYNSE believes that technology will continue to provide the necessary impetus for the organization to retain its competitive edge and ensure timeliness and satisfaction in customer service. In recognition of the fact that technology will continue to redefine the shape of the securities industry, NSE stresses on innovation and sustained investment in technology to remain ahead of competition.

LARGEST IT SETUP IN INDIA BY NSENSE's IT set-up is the largest by any company in India. It uses satellite communication technology to energise participation from around 400 cities spread all over the country. In the recent past, capacity enhancement measures were taken up in regard to the trading systems so as to effectively meet the requirements of increased users and associated trading loads. With upgradation of trading hardware, NSE can handle up to 1 million trades per day. NSE has also put in place NIBIS (NSE's Internet Based Information System) for on-line real-time dissemination of trading information over the internet. In order to capitalize on in-house expertise in technology, NSE set up a separate company, NSE.IT, in October 1999. This is expected to provide a platform for taking up new IT assignments both within and outside India and attaining global exposure.

The telecommunications network uses X.25 protocol and is the backbone of the automated trading system. Each trading member trades on the NSE with other members through a PC located in the trading member's office, anywhere in India. The trading members on the Wholesale Debt Market segment are linked to the central computer at the NSE through dedicated 64Kbps leased lines and VSAT terminals. These leased lines are multiplexed using dedicated 2 Mbps, optical-fibre links. The WDM participants connect to the trading system through dial-up links. The Exchange uses powerful RISC -based UNIX servers, procured from Digital and HP for the back office processing. The latest software platforms like ORACLE 7 RDBMS, GUPTA - SQL/ORACLE FORMS 4.5 Front - Ends, etc. have been used for the Exchange applications. The Exchange currently manages its data centre operations, system and database administration, design and development of in-house systems and design and implementation of telecommunication solutions.

VSAT BASED STOCK EXCHANGE NSE is one of the largest interactive VSAT based stock exchanges in the world. Today it supports more than 3000 VSATs and is expected to grow to more than 4000 VSATs in the next year. The NSE- network is the largest private wide area network in the country and the first extended C- Band VSAT network in the world. Currently more than 9000 users are trading on the real time-online NSE application. There are over 15 large computer systems which include non-stop fault-tolerant computers and high end UNIX servers, operational under one roof to support the NSE applications. This coupled with the nation wide VSAT network makes NSE the country's largest Information Technology user.

PRESENT & FUTUREIn an ongoing effort to improve NSE's infrastructure, a corporate network has been implemented, connecting all the offices at Mumbai, Delhi, Calcutta and Chennai. This corporate network enables speedy inter-office communications and data and voice connectivity between offices. In keeping with the current trend, NSE has gone online on the Internet. Apart from having a 2mbps link to VSNL and the own domain for internal browsing and e-mail purposes, NSE has also set up its own Web site. Currently, NSE is displaying its live stock quotes on the web site (www.nseindia.com) which are updated online.

TRADING NETWORK

SATELLITE

NSE MAINFRAME

Brokers Premises

LOCATIONS Till the advent of NSE, an investor wanting to transact in a security not traded on the nearest exchange had to route orders through a series of correspondent brokers to the appropriate exchange. This resulted in a great deal of uncertainty and high transaction costs. One of the objectives of NSE was to provide a nationwide trading facility and to enable investors spread all over the country to have an equal access to NSE. NSE has made it possible for an investor to access the same market and order book, irrespective of location, at the same price and at the same cost. NSE uses sophisticated telecommunication technology through which members can trade remotely from their offices located in any part of the country. NSE trading terminals are present in various cities and towns all over India.

APPLICATION SYSTEMS

NEAT SYSTEMNEAT (National Exchange for Automated Trading) is a state-of-the-art client server based application. At the server end, all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. The trading server software runs on a fault tolerant STRATUS main frame computer while the client software runs under Windows on PCs. The combination of Front end & Back end applications has made a success story in the trading system at NSE.

LISTING AT NSEThe stocks, bonds and other securities issued by issuers require listing for providing liquidity to investors. Listing means formal admission of a security to the trading platform of the Exchange. It provides liquidity to investors without compromising the need of the issuer for capital and ensures effective monitoring of conduct of the issuer and trading of the securities in the interest of investors.

The issuer wishing to have trading privileges for its securities satisfies listing requirements prescribed in the relevant statutes and in the listing regulations of the Exchange. It also agrees to pay the listing fees and comply with listing requirements on a continuous basis. All the issuers who list their securities have to satisfy the corporate governance requirement framed by regulators.

Only public companies are allowed to list their securities in the stock exchange. Private Limited companies cannot get listing facility. They shall first convert themselves into public limited companies and their Articles of Association shall contain prohibitions as laid down in the listing agreement and as applicable to public limited companies.

The prices at which the securities are traded in the stock exchange are published in the News Papers. Investors are able to know these price trends from such publications. Compared to listed securities the trading of unlisted securities is difficult. The price trends in respect of unlisted securities are seldom known to the investors and the contract between the seller and buyer takes places mostly on one to one basis.

Section 73 of the Companies Act, 1956 requires companies to make an application to one or more recognized stock exchanges seeking permission for dealing with the securities offered to the public before issue of prospectus. Section 21 of the Securities Contract (Regulation) Act, 1956 prescribes necessary conditions that are required to be satisfied by the public limited companies for the purpose of listing of securities in the stock exchange.

CHARACTERISTICS OF LISTING

The following are the characteristics of listing of securities:

(A) AGREEMENT:

Listing agreement is made between the respective stock exchange and the company. The company offers or issues the securities to the public through the issue of offer document like prospectus or a letter of offer. The stock exchange is a recognized stock exchange where the securities are listed for trading.

(B) PURPOSE:

The purpose of listing is to ensure free transferability of securities so as to facilitate clear transparency and open disclosure of information relating to the affairs of the company whose securities are listed. In addition, official quotation and liquidity in the trading of listed securities is also ensured.

(C) RESTRICTION:

A company is free to have its securities listed in any number of stock exchanges. It is important that the securities are listed at least on the regional stock exchange.

(D) INVESTOR PROTECTION:

Listing offers a measure of protection to the investors. It is a barometer of performance and continued good performance of the company.

LISTING PROCEDUREThe listing procedure involves making a simple application by the company and payment of listing fees as prescribed by the respective stock exchange. It is to be completed before the offer of securities to the public and registration of prospectus with the Registrar of Companies. The recognized stock exchange has to give approval and then make an agreement stating the terms and conditions. Registration and recording is done for the purpose of trading by the registered members of the stock exchange and for the official quotation of the security price. For the benefit of the public and the investors. The company has to continue listing by paying renewal fees from time to time. Listing is mandatory for a public company, which intends to offer its securities to the public by issue of prospectus and which wishes to provide facilities to the securities being offered to the public. Any allotment of securities made in the absence of listing or refusal of listing is held to be void i.e. illegal. Again, any failure to comply with the Section 21 of the Securities Contracts (Regulation) Act attracts penalty to the parties.

The authority of the stock exchange may refuse listing of the securities of a company. The authorities should intimate the company within 15 days with the reasons for refusal. The company can make an appeal to the Central Government within a prescribed period. The Central Government may either grant or refuse to grant the permission for listing and the decision of the Central Government would be informed to the stock exchange concerned who shall act in conformity with such a decision.

The stock exchange is empowered to suspend or withdraw an admission to dealing in securities of company for breach or non-compliance with the listing provision on giving an opportunity of being heard in writing. In an eventuality where any withdrawal or suspension exceeds 3 months, the company may appeal to the SEBI who may either vary or set aside the decision of the stock exchange.

BENEFITS OF LISTINGThe following are the benefits of listing of securities by a company:

Easy marketability and liquidity which also ensures easy raising of capital.

Easy evaluation of the real worth of securities.

High collateral value for bank loans.

Providing activities of quick transfer registration and company information.

There is a safety in dealing of securities.

It safeguards general public interest by ensuring equitable allotment, easy transfer, disclosure of proper information.

Tax incentives are available to listed securities.

Higher status and reputation for the company by enjoying the confidence of the investing public.

Provides an assurance of an existence of good faith or an absence of fraud with regard to the issue of securities.

Listing is made through analysis of a company's capital structure, management pattern and business prospects. Hence, provides assurance of genuineness of securities.

TYPES OF LISTINGListing of securities falls under 5 groups

(1) INITIAL LISTING:

If the shares or securities are to be listed for the first time by a company on a stock exchange is called initial listing.

(2) LISTING FOR PUBLIC ISSUE:

When a company whose shares are listed on a stock exchange comes out with a public issue of securities, it has to list such issue with the stock exchange.

(3) LISTING FOR RIGHTS ISSUE:

When companies whose securities are listed on the stock exchange issue securities to existing shareholders on rights basis, it has to list such rights issues on the concerned stock exchange.

(4) LISTING OF BONUS SHARES:

Shares issued as a result of capitalization of profit through bonus issue shall list such issues also on the concerned stock exchange.

(5) LISTING FOR MERGER OR AMALGAMATION:

When new shares are issued by an amalgamated company to the shareholders of the amalgamating company, such shares are also required to be listed on the concerned stock exchange.

BENEFITS OF LISTING AT NSEThe benefits of listing on NSE are as enumerated below:

NSE provides a trading platform that extends across the length and breadth of the country. Investors from approximately 345 centers can avail of trading facilities on the NSE trading network. Listing on NSE thus, enables issuers to reach and service investors across the country.

NSE being the largest stock exchange in terms of trading volumes, the securities trade at low impact cost and are highly liquidity. This in turn reduces the cost of trading to the investor. The trading system of NSE provides unparallel level of trade and post-trade information. The best 5 buy and sell orders are displayed on the trading system and the total number of securities available for buying and selling is also displayed. This helps the investor to know the depth of the market.

The facility of making initial public offers (IPOs), using NSE's network and software, results in significant reduction in cost and time of issues. NSE's web-site www.nseindia.com provides a link to the web-sites of the companies that are listed on NSE, so that visitors interested in any company can visit that company's web-site from the NSE site. Listed companies are provided with monthly trade statistics for the securities of the company listed on the Exchange. The listing fee is nominal.

LISTING IN CAPITAL MARKET SEGMENTTwo categories, namely 'listed' and 'permitted to trade' categories of securities (equity shares, preference shares and debentures) are available for trading in the CM segment. However, the permitted to trade category is being phased out gradually and no new company is been given the benefit of this category. At the end of March 2005, 970 'listed' and 1 'permitted to trade' companies were available for trading. These securities had a market capitalization of Rs. 1,585,585 crore.

LISTING CRITERIAThe Exchange has laid down criteria for listing of new issues by companies, companies listed on Other exchanges, and companies formed by amalgamation/restructuring, etc. in conformity with the Securities Contracts (Regulation) Rules, 1957 and directions of the Central Government and the Securities and Exchange Board of India (SEBI).

EQUITY MARKET

Equity Market is nothing but market where investors buy and sell securities providing ownership of a company's shares. The purpose of business is to add wealth. The means of business is to take calculated risk and then manage it. An economy without adequate risk capital cannot create business enterprises. Therefore, equity markets are the primary engines of business finance.

A vibrant equity market can channelise risk capital from the household to the industry. A complex process of information processing, risk taking, speculation, arbitrage, and incentives enables the equity market to balance the interests of a diverse set of participants. Attempts to make the equity markets efficient, transparent and safe have transformed the way equity markets function today. It would not be an exaggeration to say that sea-changes have taken place in the past one decade.

Equity market is often considered as the main engine driving the economy. Equity markets allow savers to acquire stake in a firm, and sell it, if they need access to their savings or if they want to alter their portfolio. At the same time, it allows firms to raise permanent capital for asset creation. By incorporating information about future earnings potential in current stock prices, the equity market also serves as a barometer to the state of the economy. This makes the equity market an important constituent of financial markets.In emerging countries, equity market plays an even more important role in economic development. In many emerging markets, firms would need large quantum of fund to expand and be able to pursue the prevalent high growth rates. Equity market is the only liquid financial market in many emerging countries and hence its role in economic development can not be overemphasized. In addition, world over, financial markets are getting less insular. The investors in developed countries are seeking investment opportunities beyond the confines of their domestic economy to enhance return and diversify risks.Despite the increasing importance of the equity market in emerging countries, their growth is stifled by several systemic factors. The equity markets in many emerging countries exhibit poor liquidity and very high volatility. The markets are still fettered by several regulatory and policy constraints. There is a large amount of information asymmetry in the market. These markets also suffer from lack of depth as the derivatives trading are in its embryonic stage.

CAPITAL MARKET SEGMENT OF NSE

The Equity Market is popularly known as, Capital Market by NSE. The trading on the NSEs Capital Market Segment (CM segment) commenced on November 4, 1994 and within a year of its existence NSE became the largest stock exchange in the country. The CM segment of NSE provides an efficient and transparent platform for trading of equity, preference shares, debentures, warrants, exchange traded funds as well as retail debt in government securities.

TRADING MECHANISMThe trading system, know as the National Exchange for Automated trading (NEAT) system, is an on-line, anonymous, order-driven, screen-based trading system. In this system, a member can key into the computer quantities of securities and the prices at which he would transact and the transaction is executed as soon as it finds a matching sale or buy order from a counter party. The system electronically matches orders on a price/time priority and hence cuts down on time and cost. It allows faster incorporation of price sensitive information into prevailing prices, thus increasing the informational efficiency of markets. It enables market participants to see the full market on a real-time basis, making the markets transparent. It allows a large number of participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth and liquidity of the market. The system ensures full anonymity by accepting orders, big or small, from members without revealing their identity, thus providing equal access to everybody ad provides a perfect audit trail by logging in the trade execution process in entirely.

INDICES India Index Services and products Ltd. (IISL), a joint venture between NSE and CRISIL has been developing and is maintaining an array of indices. The popular indices are the S&P CNX Nifty, CNX Nifty Junior, S&P CNX Defty, S&P CNX 500, CNX Midcap 200, S&P CNX Industry indices and CNX Segment indices. S&P CNX Nifty, introduced in November 3, 1995, is based on 50 largest and highly liquid stocks. CNX nifty Junior, introduced in December 1996, is built out of the next 50 large and liquid stocks. These indices are monitored and updated dynamically and are reviewed regularly.

RISKS IN SETTLEMENT

TYPES OF RISKS

The following two kinds of risks are inherent in a settlement system:

(1) COUNTERPARTY RISK This arises if parties do not discharge their obligations fully when due or at any time thereafter. This has two components, namely replacement cost risk prior to settlement and principal risk during settlement.

(a) The replacement cost risk arises from the failure of one of the parties to transaction.

(b) The principal risk arises if a party discharges his obligations but the counter party defaults.

A variant of counterparty risk is liquidity risk which arises if one of the parties to transaction does not settle on the settlement date, but later. Another variant is the third party risk which arises if the parties to trade are permitted or required to use the services of a third party which fails to perform.

(2) SYSTEM RISK This comprises of operational, legal and systemic risks. The operational risk arises from possible operational failures such as errors, fraud, outages etc. The legal risk arises if the laws or regulations do not support enforcement of settlement obligations or are uncertain. Systemic risk arises when failure of one of the parties to discharge his obligations leads to failure by other parties.

MARGINS Categorisation of stocks for imposition of margins

The Stocks which have traded atleast 80% of the days for the previous 18 months shall constitute the Group I and Group II. Out of the scrips identified above, the scrips having mean impact cost of less than or equal to 1% shall be categorized under Group I and the scrips where the impact cost is more than 1, shall be categorized under Group II. The remaining stocks shall be classified into Group III. The impact cost shall be calculated at 15th of each month on a rolling basis considering the order book snapshots of the previous six months. On the basis of the impact cost so calculated, the scrips shall move from one group to another group from the 1st of the next month.

Daily margins payable by members consists of the following:

1. Value at Risk Margin (VaR)

2. Mark to Market Margin (MTM)

Daily margin, comprising of the sum of VaR margin and mark to market margin is payable.

A. MARK TO MARKET MARGIN

Mark to market margin is computed on the basis of mark to market loss of a member. Mark to market loss is the notional loss which the member would incur in case the cumulative net outstanding position of the member in all securities, at the end of the relevant day were closed out at the closing price of the securities as announced at the end of the day by the NSE. Mark to market margin is calculated by marking each transaction in a scrip to the closing price of the scrip at the end of trading. In case the security has not been traded on a particular day, the latest available closing price at the NSE is considered as the closing price.

B. VALUE AT RISK-BASED MARGIN.

The VaR rate is applied to gross exposure to determine VaR-based margin. The computation of the VaR rate as well as the gross exposure on which VaR rate is applied is explained below:

COMPUTATION OF VAR RATEVaR rate is a single number, which encapsulates whole information about the risk in a portfolio. It measures potential loss from an unlikely adverse event in a normal market environment. It involves using historical data on market prices and rates, the current portfolio positions, and models (e.g., option models, bond models) for pricing those positions. These inputs are then combined in different ways, depending on the method, to derive an estimate of a particular percentile of the loss distribution, typically the 99th percentile loss.

NO-DELIVERY PERIODWhenever a book closure or a record date is announced by a company, the exchange sets up a 'no-delivery' period for that security. During this period, trading is permitted in the security. However, these trades are settled only after the no-delivery period is over. This is done to ensure that investor's entitlement for the corporate benefits is clearly determined. However, there is no no-delivery period on account of book closures and record dates for corporate actions, such as, issue of dividend and bonus shares, in respect of the scrips which are traded in the compulsory dematerialised mode. The time gap between two book closures/record dates is 30 days.

MARKET SEGMENTS The Exchange operates the following sub-segments in the Equities segment:

Rolling Settlement

Limited Physical Market

Institutional Segment

Trade for Trade SegmentROLLING SETTLEMENT

In a rolling settlement, each trading day is considered as a trading period and trades executed during the day are settled based on the net obligations for the day. At NSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.

LIMITED PHYSICAL MARKET

Pursuant to the directive of SEBI to provide an exit route for small investors holding physical shares in securities mandated for compulsory dematerialised settlement, the Exchange has provided a facility for such trading in physical shares not exceeding 500 shares. This market segment is referred to as 'Limited Physical Market' (small window). The Limited Physical Market was introduced on June 7, 1999.

INSTITUTIONAL SEGMENT

The Reserve Bank of India had vide a press release on October 21, 1999, clarified that inter-foreign-institutional-investor (inter-FII) transactions do not require prior approval or post-facto confirmation of the Reserve Bank of India, since such transactions do not affect the percentage of overall FII holdings in Indian companies. (Inter FII transactions are however not permitted in securities where the FII holdings have already crossed the overall limit due to any reason). To facilitate execution of such Inter-Institutional deals in companies where the cut-off limit of FII investment has been reached, the Exchange introduced a new market segment on December 27, 1999. The securities where FII investors and FII holding has reached the cut-off limit as specified by RBI (2% lower than the ceiling specified by RBI) from time to time would be available for trading in this market type for exclusive selling by FII clients. The cut off limits for companies with 24% ceiling is 22%, for companies with 30% ceiling, is 28% and for companies with 40% ceiling is 38%. Similarly, the cut off limit for public sector banks (including State Bank of India) is 18% whose ceiling is 20%. The list of securities eligible / become ineligible for trading in this market type would be notified to members from time to time.

TRADE FOR TRADE SEGMENT

Trading in this segment is available only for the securities

Which have not established connectivity with both the depositories as per SEBI directive. The list of these securities is notified by SEBI from time to time. On account of surveillance action

STOCK MARKET: THE OTHER NAME OF RISKEven the most disciplined long-term investors cannot resist sneaking a quick look at the ticker while the market is in session. Most people assume that if their portfolio gains a few notches, its a clear vindication of their stock-picking skills. Price movements are considered the ideal indicator of actual demand for a freely-traded stock. Unfortunately most stocks are not quite as freely traded as the retail investor imagines. And, markets definitely dont have perfect price-discovery mechanisms. Thus, there are number of risks involved in the stock market system

RATIONALE FOR REGULATION

Risk of Higher Volatility

Volatility refers to the dynamic changes in price that securities undergo when trading activity continues on the Stock Exchange. Generally, higher the volatility of a security, greater is its price swings. There may be normally greater volatility in thinly traded securities than in active securities. As a result of volatility, your order may only be partially executed or not executed at all, or the price at which your order got executed may be substantially different from the last traded price or change substantially thereafter, resulting in notional or real losses.

RISK OF LOWER LIQUIDITYLiquidity refers to the ability of market participants to buy and sell securities expeditiously at a competitive price and with minimal price difference. Generally, it is assumed that more the numbers of orders available in a market, greater is the liquidity. Liquidity is important because with greater liquidity, it is easier for investors to buy or sell securities swiftly and with minimal price difference, and as a result, investors are more likely to pay or receive a competitive price for securities purchased or sold. There may be a risk of lower liquidity in some securities as compared to active securities. As a result, your order may only be partially executed, or may be executed with relatively greater price difference or may not be executed at all.

RISK OF WIDER SPREADSSpread refers to the difference in best buy price and best sell price. It represents the differential between the price of buying a security and immediately selling it or vice versa. Lower liquidity and higher volatility may result in wider than normal spreads for less liquid or illiquid securities. This in turn will hamper better price formation.

RISK-REDUCING ORDERSMost Exchanges have a facility for investors to place "limit orders, "stop loss orders" etc". The placing of such orders (e.g., "stop loss orders, or "limit" orders) which are intended to limit losses to certain amounts may not be effective many a time because rapid movement in market conditions may make it impossible to execute such orders.

RISK OF NEWS ANNOUNCEMENTSIssuers make news announcements that may impact the price of their securities. These announcements may occur during trading, and when combined with lower liquidity and higher volatility, may suddenly cause an unexpected positive or negative movement in the price of the security.

RISK OF RUMOURSRumours about companies at times float in the market through word of mouth, financial newspapers, websites or news agencies, etc. The investors should be wary of and should desist from acting on rumours.Manipulation can prevent realistic price discovery, for instance. Bull and bear operators possess the capital and the expertise to either prop up stock prices to unrealistic levels or to hammer prices down by supplying sizeable quantities of shares.This can influence any stocks price and trading volumes and unwary investors often fall into the trap of following a trend that isnt actually there. If left unregulated, such a market can turn into a happy hunting ground for the manipulator. Retail investors may not have the knowledge to diagnose price-fixing activities and this is why the bourses have to step in and create safeguards.Stock exchanges are responsible for putting protective mechanisms in place to lend stability to market movements and, to safeguard investor interest. At the Indian bourses, two types of such mechanisms exist.

PRICE CIRCUIT FILTER

One key tool of market regulation is the price circuit filter. By setting a limit on price fluctuations within a given session, the stock exchanges control manipulation. Circuit breakersare one way of tackling the problem. The principle on which they operate is simple: when the buying and selling of shares getstoo frenzied, a circuit breaker is triggered. It's almost like the fusein your electrical meter.A circuit breakerhalts trading after a particular level (high or low as the case may be) is reached. It isactivated when the stock moves up or down by a certain percentage (in terms of price). If the regulator or the stock exchange decides to have a circuit breaker at 20 percent,it will get triggered if the price of astock moves up or down by 20 per cent in one day. Circuit filter is applied to all the shares to supposedly safeguard the interests of general investors from the extreme volatilities in markets by preventing any unexpected fall or rise in a single day beyond a limit. If the limit is crossed by any of the shares in a single trading day it is frozen for trade.A major characteristic of circuit-breakers is that it halts trading when the limits are reached. On the contrary a circuit-filter is a ceiling fixed on price movement. In other words assume a stock is trading at Rs 100. If the circuit ``breaker'' level is around 5 per cent, then trading will stop if the stock touches either Rs 95 or Rs 105. If the circuit ``filter'' level is around 5 per cent, then it only means that traders cannot bid/ask quotes below Rs 95 or above Rs 105. Hence, if traders are willing, they can still trade within the prescribed band.Once the circuit breaker is triggered, it halts further trading in the stock either for a number of hours or for a day. This is to allow the panic/frenzy to subside and enable investors to take a cooler, more rational view of the stock. These circuit breakers are based on the movement of the big indices. At the BSE, the authorities monitor the Sensex, while the NSE monitors the Nifty. If either of these benchmark indices crosses the set limits, it triggers the circuit breaker and trading halts.There are actually three different circuit breakers calculated on the basis of the previous trading days closing values. If any of these is triggered it brings trading to a halt for some time (see table: Triggering the Markets Fuse). In a sense it forces excited players in a volatile market to step back and think again about their positions.

The market circuit-breaker is an emergency brakeits unlikely to be invoked under normal circumstances. Only concerted movements in the largest, well-known, institutionally-owned stocks can drive the Sensex or Nifty up or down by large amounts. Thus, massive movements that trigger circuit breakers are very infrequent.

CIRCUIT BREAKERS INTRODUCEDIt was 27th September, 1996, when the concept of Circuit Breakers was put forward by SEBI in their First meeting of Risk Management System By Stock Exchanges. It was observed that prices of some of the actively traded stocks at the major Exchanges showed huge variations on different exchanges. In volatile situations leading to manipulation by operators. The members were of the view that fixing uniform filter bands on daily basis may not be advisable and it should be left to the discretion of the Exchanges. However, weekly price filter should be fixed at 25% for all scrips quoting above par. This would keep abnormal variations in check. For scrips quoting below par, the Exchange can consider relaxing the bandwidth of 25%.

CIRCUIT BREAKERS AND NSE The Exchange has implemented index-based market-wide circuit breakers in compulsory rolling settlement with effect from July 02, 2001.

INDEX-BASED MARKET-WIDE CIRCUIT BREAKERS The index-based market-wide circuit breaker system applies at 3 stages of the index movement, either way viz. at 10%, 15% and 20%. These circuit breakers when triggered, bring about a coordinated trading halt in all equity and equity derivative markets nationwide. The market-wide circuit breakers are triggered by movement of either the BSE Sensex or the NSE S&P CNX Nifty, whichever is breached earlier.

In case of a 10% movement of either of these indices, there would be a one-hour market halt if the movement takes place before 1:00 p.m. In case the movement takes place at or after 1:00 p.m. but before 2:30 p.m. there would be trading halt for hour. In case movement takes place at or after 2:30 p.m. there will be no trading halt at the 10% level and market shall continue trading.

In case of a 15% movement of either index, there shall be a two-hour halt if the movement takes place before 1 p.m. If the 15% trigger is reached on or after 1:00p.m. but before 2:00 p.m., there shall be a one-hour halt. If the 15% trigger is reached on or after 2:00 p.m. the trading shall halt for remainder of the day. In case of a 20% movement of the index, trading shall be halted for the remainder of the day.

These percentages are translated into absolute points of index variations on a quarterly basis. At the end of each quarter, these absolute points of index variations are revised for the applicability for the next quarter. The absolute points are calculated based on closing level of index on the last day of the trading in a quarter and rounded off to the nearest 10 points in case of S&P CNX Nifty.

OTHER INITIATIVES BY NSEThe National Stock Exchange has been set up to ensure equal access to the capital market to investors from all over the country. The Exchange, with more than 9000 trading terminals across the country, realises that the investor confidence is of primary importance. Given the legal / regulatory complexities of the capital markets, the Exchange realises that an enlightened investor is the moving force towards progress of the markets. To this end, the Exchange has conducted a number of Investor Awareness Programmes and has issued a number of advertisements in various newspapers and other publications.

FORMATION OF IGC

The National Stock Exchange strive to continuously upgrade its service levels and make the system more investor-friendly. Hence, to redress investor complaints, the Investor Grievance Cell (IGC) have been formed. The Investor Grievances Cell is manned by a team of professionals who possess relevant experience in the areas of capital markets, company and legal affairs; specially trained to identify the problem faced by the investor, and to find and execute a solution at the earliest. The IGC attends to various problems faced by investors in dealing with the two integral parts of the Capital Markets, Trading Members and Companies whose securities are traded on the Exchange.The investors can report their complaints/ grievances to the IGC through e-mails or Complaint forms. All valid complaints are assigned a unique complaint no. and are entered into a database for easy follow up and necessary action. Most complaints are resolved within a period of 45 days. On exhausting all means, if the matter remains unresolved, it is referred to Arbitration.

ARBITRATION Arbitration is an alternative dispute resolution mechanism provided by the Exchange for resolving disputes between the trading members and between trading members & constituents (i.e. clients of trading members), in respect of trades done on the Exchange. This process of resolving a dispute is comparatively faster than other means of redressal.

The facility of arbitration on the Exchange can be availed by:1. Investors who have dealt on the Exchange through its trading members and who possess a valid contract note issued by the trading member of the Exchange.2. Investors who have dealt on the Exchange through registered sub-brokers of the trading members of NSE and who possess valid sale/purchase note issued by the registered sub-broker.3. Trading members who have a claim, dispute or difference with another trading member or a constituent.

INVESTORS CENTRE

NSE's diverse network ensures that its investors avail of prompt services whenever they might need them. NSE has a presence in all the major cities of the country. The following are the locations of NSEs investors centers:

1) NSE Corporate Office, BKC, Mumbai

2) NSE Branch Office, Ahmedabad

3) NSE Branch Office, Chennai

4) NSE Branch Office, Hyderabad

5) NSE Branch Office, Delhi

6) NSE Branch Office, Kolkatta

INVESTOR PROTECTION FUND

Investor Protection Fund (IPF) has been set up as a trust under Bombay Public Trust Act, 1950 under the name and style of National Stock Exchange Investor Protection Fund Trust and is administered by the Trustees. The IPF is maintained by NSE to make good investor claims, which may arise out of non-settlement of obligations by the trading member, who has been declared defaulter, in respect of trades executed on the Exchange. The IPF is utilised to settle claims of such investors where the trading member through whom the investor has dealt has been declared a defaulter. Payments out of the IPF may include claims arising of non payment/non receipt of securities by the investor from the trading member who has been declared a defaulter.

NSE AND SECONDARY MARKET INTERMEDIARIESSTOCK BROKER

A Stock Broker plays a very important role in the secondary market helping both the seller and the buyer of the securities to enter in to a transaction. The buyer and seller may be either a broker or a client. A broker is an intermediary who arranges to buy and sell securities on behalf of clients (the buyer and the seller).According to Rule 2 (e) of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, a stockbroker means a member of a recognized stock exchange. No stockbroker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration granted by SEBI. A stock-broker shall not buy, sell, and deal in securities, unless he holds a certificate granted by SEBI.CONDITIONS FOR GRANT OF CERTIFICATE TO STOCK-BROKER BY SEBIA stockbroker applies for registration to SEBI through a stock exchange or stock exchanges of which he or she is admitted as a member. SEBI may grant a certificate to a stock-broker [as per SEBI (Stock Brokers and Sub-Brokers) Rules, 1992] subject to the conditions that:

He holds the membership of any stock exchange;

He shall abide by the rules, regulations and bye-laws of the stock exchange or stock exchanges of which he is a member;

In case of any change in the status and constitution, he shall obtain prior permission of SEBI to continue to buy, sell or deal in securities in any stock exchange;

He shall pay the amount of fees for registration in the prescribed manner; and

He shall take adequate steps for redressal of grievance of the investors within one month of the date of the date of the receipt of the complaint and keep SEBI informed about the number, nature and other particulars of the complaints.

MEMBERSHIP AT NSEThere are no entry/exit barriers to the membership in NSE. Anybody can become member by complying with the prescribed eligibility criteria and exit by surrendering membership without any hidden/overt cost. The members are admitted to the different segments of the Exchange subject to the provisions of the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, the Rules, circulars, notifications, guidelines, etc., issued there under and the Bye laws, Rules and Regulations of the Exchange.

The standards for admission of members laid down by the Exchange stress on factors such as, corporate structure, capital adequacy, track record, education, experience, etc. and reflect a conscious effort on the part of NSE to ensure quality broking services so as to build and sustain confidence among investors in the Exchange's operations.

BENEFITS OF MEMBERSHIPBenefits to the trading membership of NSE include:

Access to a nation-wide trading facility for equities, derivatives, debt and hybrid instruments / products.

Ability to provide a fair, efficient and transparent securities market to the investors

Use of state-of-the-art electronic trading systems and technology,

ACQUIRING MEMBERSHIPMembership of NSE is open to all persons desirous of becoming trading members, subject to meeting requirements/criteria as laid down by SEBI and the Exchange. The different segments currently available on the Exchange for trading are:

Capital Market (Equities and Retail Debt) Wholesale Debt Market Derivatives (Futures and Options) Market

Admission to membership of the Exchange to any of the segments is currently open and available. Persons or Institutions desirous of securing admission as Trading Members (Stock Brokers) on the Exchange may apply for any one of the following segment groups:

1. Wholesale Debt Market Segment2. Capital Market and Wholesale Debt Market segments 3. Capital Market and Futures & Options segments4. Capital Market , Wholesale Debt Market and Futures & Options segment5. Clearing Membership of (NSCCL) as a Professional Clearing Member (PCM)

SUB BROKERS A sub-broker is a person who intermediates between investors and stockbrokers. He acts on behalf of a stockbroker as an agent or otherwise for assisting the investors for buying, selling or dealing in securities through such stockbroker. No sub-broker is allowed to buy, sell, or deal in securities, unless he or she holds a certificate of registration granted by SEBI. A sub-broker may take the form of a sole proprietorship, a partnership firm or a company. Stockbrokers of the recognized stock exchanges are permitted to transact with sub-brokers. Sub-brokers are required to obtain certificate of registration form SEBI in accordance with SEBI (Stockbrokers and sub-brokers) Rules and Regulations, 1992, withouth which they are not permitted to buy, sell or deal in securites.CONDITIONS FOR GRANT OF CERTIFICATE TO A SUB BROKER BY SEBISEBI may grant a certificate to a sub-broker, subject to the conditions that:

He shall pay the fees in the prescribed manner; He shall take adequate steps for redressal of grievances of the investors within one month of the date of the receipt of the complaint and keep SEBI informed about the number, nature and other particulars of the complaints received. In case of any change in the status and constitution, the sub-broker shall obtain prior permission of SEBI to continue to buy, sell or deal in securities in any stock exchange; and He is authorized in writing by a stockbroker being a member of a stock exchange for affiliating himself in buying, selling or dealing in securities.

PORTFOLIO MANAGERS

A Portfolio manager is a professional with experience and expertise in the field. He studies the marketand adjust the investment mix for his client on a continuing basis to ensure safety of investment and reasonable returns there from. Any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be is a portfolio manager.SEBI takes into account all matters which it deems relevant to the activities relating to portfolio management. The applicant has to be a body corporate and must have necessary infrastructure like adequate office space, equipments and the manpower to effectively discharge the activities of a portfolio manager. The principal officer of the applicant should have the professional qualifications in finance, law, accountancy or business management from an institution recognised by the Government.

CUSTODIAN

Custodian of Securities means any person who carries on or proposes to carry on the business of providing custodial services. Custodial Services in relation to securities means safekeeping of securities of a client and providing services incidental thereto, and includes-

Maintaining accounts of securities of a client; Collecting the benefits or rights accruing to the client in respect of securities; Keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client; and Maintaining and reconciling records of the services.

JOBBERA jobber is a specialist and independent dealer in securities. A jobber has to give two quotations as a dealer in securities. He gives lower quotation for buying and higher quotation for selling the securities. Jobber deals only with the brokers and not with the investors. His margin is fixed by competition among themselves as dealers. The margin is narrow when there is keen competition.TARANIWALA

A jobber who makes an orderly and continous auction in the stock market is called Taraniwala. He is a localized dealer who handles transactions on a commission basis for other brokers who act on behalf of their customers. He trades in the stock market even for small differences in price and helps to maintain liquidity in the stock market.

ODD LOT DEALER

These are specialists who handles the odd lots. The standard trading unit for listed stock is called lot. The shares are normally traded in the lots of 5, 50, 100 etc. However, the minimum lot has become 1 due to dematerialisation. But all the listed stocks are not compulsorily in the demat form. Odd lot dealers buy odd lots which other members wish to sell for their customers and sell odd lots which others want to buy. The price of odd lots is determined by the round lot transactions. The odd lot dealer earns his profit on the difference between the purchase and sales price.

ARBITRAGEURAn arbitrageur is a specialist in dealing with securities in different stock exchange centers at the same time. He makes the profit by difference in the prices prevailing in different centers of market activity. He carries out these transactions with a good communication system and telephonic and teleprinter facility. He should have ability to get the prices from different centers before other members trading in the stock market.

SECURITY DEALERThe members who purchase and sale of government securities on the stock exchange are known as Security Dealers. Each transaction has to be separately negotiated. The dealers should have information about the several kinds of government securities. They take risk in ready purchase and sale of securities for current requirements. Their role is restricted by the participation of LIC and Commercial Banks.

NSE: THE FUTURE PROSPECTS

The decision at NSE to use a demutualised structure was an important innovation. If NSE had been own by brokerage firms, it would have had greater incentives to maximise the profit rates of brokerage firms. Instead, the fact that large institutional investors owned NSE, helped ensure that the prime goal that NSE worked towards was the reduction of transactions costs, even if it involved reduced profit rates for brokerage firms. While NSE has been an extremely successful organisation, there are two important areas of concern when we visualise its functioning in the future:

CAPTURE The governance of NSE suffers from important vulnerabilities that flow from its being a public sector organisation. Now that NSE is the most important securities exchange in the country, there is likely to be significant interest on the part of political actors to capture NSE and derive rents from it. The constituency which benefits from a well functioning securities exchange (households engaging in saving across the country) has too little at stake to engage in political actions which favour a soundly run NSE.

COST MINIMISATION AND INNOVATION It increasingly appears that NSE faces little competitive pressure from other securities exchanges in India. Given the public-sector ownership of NSE, there is a real possibility that NSE may be weak on cost minimisation and innovation in the years to come.

Policy makers should be conscious of these two vulnerabilities about NSE in the future. As with SEBI, it is important to undertake special efforts to bring the diffused beneficiaries of sound securities markets to have a greater impact upon decision making at NSE.

This can work in two directions:

1. INDIAN PRODUCTS TRADED OFFSHOREAs of today, Indian firms do list offshore, and index futures on the NSE-50 index do trade at Singapore. These offshore trading venues constitute some competition for NSE. For example, the transactions charges in NSE-50 futures trading at Singapore have been an important source of pressure for NSE to lower charges for NSE-50 futures trading in India.

2. OFFSHORE PRODUCTS TRADED IN INDIAConversely, international products traded at NSE would also serve as competitive situations which could help constrain governance and cost minimisation at NSE.

The extent to which the international financial system imposes competitive pressures upon NSE today is quite limited. However it can be substantially expanded in the future. This can play a valuable role in giving NSE incentives in favour of innovation and cost-minimisation.

BOND MARKETSWHAT IS A BOND?Bonds are debt. They are debt because when an investor buys a bond they are effectively loaning the bonds issuer a sum of money and that issuer is incurring a debt. So the issuer or seller of the bond - is a borrower and the investor - or buyer of the bond - is a lender.

The price paid for the bond is the money the investor is loaning the issuer. And, like most other loans, when you buy a bond the borrower pays you interest for as long as the loan is outstanding and then at the end of the agreed period of the loan pays you the loan back.

THE BOND MARKETThe bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. As of 2006, the size of the international bond market is an estimated $45 trillion, of which the size of the outstanding U.S. bond market debt was $25.2 trillion. Average daily trading volume in the U.S. bond market takes place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges.

MARKET STRUCTUREBond markets in most countries remain decentralized and lack common exchanges like stock, future and commodity markets. This has occurred, in part, because no two bond issues are exactly alike, and the number of different securities outstanding is far larger.SHORT TERM DEBT INSTRUMENT 1.BANKERS ACCEPTANCE BAThis instrument is used to finance domestic as well as international trade. On completing the transaction, the exporter hands over the shipping documents and letter of credit LC issued by the importers bank to its own bank. At the same time, the exporter draws a draft (or bill) on the importers bank and gets paid the discounted value of the draft. A bankers acceptance (BA) is created when the exporters bank presents the draft to the importers bank which accepts it. This BA may be sold (or discounted) as a money market instrument or the exporter may keep it as an asset with himself. Bas are highly standardized negotiable instruments and are available in varying amounts. They permit importers and other users to obtain credit on better terms than simple borrowing.

2. EURO COMMERCIAL PAPER Euro commercial paper is a short term Euro note issued by corporates on a discountto-yield basis. Investor in ECP may be money market funds, insurances companies, pension funds and other corporate bodies having short-term cash surpluses. For investor s, it represents an attractive short-term investment opportunity, unlike a time deposit with financial institution. For borrowers, it is a cheap and flexible source of funds, cheaper than bank loans. As mentioned above, a CP or ECP is a discount redeemed at face value on maturity. For example, an ECP issued at $952.4 with a maturity of 180 days will have a face value of $1,000, if the discount rate is 10 % pa.

3. EURO CERTIFICATE OF DEPOSIT (ECD)

A certificate of deposit is an evidence of a deposit with a bank. CD is a negotiable or marketable instrument. Unlike a bank term deposit, a CD can be sold in the secondary market whenever cash is needed. Who ever is holding it at the time of maturity receives its face value in addition to the interest due. Euro CDs are issued by London banks. The interest on floating rate CDs is indexed to LIBOR and Treasury Bill rate, etc. These instruments may be issued in sum like $1, 00,000 or more. For fixed rate CDs, usually there is a single period maturity when principal and interest are paid.

BOND MARKET PARTICIPANTSBond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both.

Participants include:

Institutional investors;

Governments;

Traders; and

Individuals

BOND MARKET VOLATILITYFor market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds falls, since new issues pay a higher yield. Likewise when interest rates decrease, the value of existing bonds rise since new issues pay a lower yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes.

BOND INDICESA number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The most common American benchmarks are the Lehman Aggregate, Citigroup BIG and Merrill Lynch Domestic Master. Most indices are parts of families of broader indices that can be used to measure global bond portfolios, or may be further subdivided by maturity and/or sector for managing specialized portfolio Issuing bondsBonds are issued by public authorities, credit institutions, companies and supranational institutions in the primary markets. The most common process of issuing bonds is through underwriting. In underwriting, one or more securities firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer and re-sell them to investors. Government bonds are typically auctioned.

FEATURES OF BONDSThe most important features of a bond are:

1. NOMINAL, PRINCIPAL OR FACE AMOUNT:The amount on which the issuer pays interest and which has to be repaid at the end.

2. ISSUE PRICEThe price at which investors buy the bonds when they are first issued, typically $1,000.00. The net proceeds that the issuer receives are calculated as the issue price, less issuance fees, times the nominal amount.

3. MATURITY DATEThe date on which the issuer has to repay the nominal amount. As long as all payments have been made, the issuer has no more obligations to the bond holders after the maturity date.

4. TENUREThe length of time until the maturity date is often referred to as the term or tenure or maturity of a bond. The maturity can be any length of time, although debt securities with a term of less than one year are generally designated money market instruments rather than bonds. Most bonds have a term of up to thirty years. Some bonds have been issued with maturities of up to one hundred years, and some even do not mature at all. In early 2005, a market developed in euros for bonds with a maturity of fifty years. In the market for U.S. Treasury securities, there are three groups of bond maturities:

short term (bills): maturities up to one year;

medium term (notes): maturities between one and ten years;

Long term (bonds): maturities greater than ten years.

5.INDENTURES AND COVENANTSAn indenture is a formal debt agreement that establishes the terms of a bond issue, while covenants are the clauses of such an agreement. Covenants specify the rights of bondholders and the duties of issuers, such as actions that the issuer is obligated to perform or is prohibited from performing. In the U.S., federal and state securities and commercial laws apply to the enforcement of these agreements, which are construed by courts as contracts between issuers and bondholders.

6.OPTIONALITY: A bond may contain an embedded option; that is, it grants option-like features to the holder or the issuer:

7.CALLABILITY:Some bonds give the issuer the right to repay the bond before the maturity date on the call dates; see call option. These bonds are referred to as callable bonds. Most callable bonds allow the issuer to repay the bond at par. With some bonds, the issuer has to pay a premium, the so called call premium. This is mainly the case for high-yield bonds. These have very strict covenants, restricting the issuer in its operations. To be free from these covenants, the issuer can repay the bonds early, but only at a high cost.

8.PUTTABILITYSome bonds give the holder the right to force the issuer to repay the bond before the maturity date on the put dates; ("Puttable" denotes an embedded put option; "Puttable" denotes that it may be putted.)

9.CALL DATES AND PUT DATESThe dates on which callable and Puttable bonds can be redeemed early. There are four main categories.

A Bermudan callable has several call dates, usually coinciding with coupon dates.

A European callable has only one call date. This is a special case of a Bermudan callable.

An American callable can be called at any time until the maturity date.

A death put is an optional redemption feature on a debt instrument allowing the beneficiary of the estate of the deceased to put (sell) the bond (back to the issuer) in the event of the beneficiary's death or legal incapacitation. Also known as a "survivor's option".

Sinking fund provision of the corporate bond indenture requires a certain portion of the issue to be retired periodically. The entire bond issue can be liquidated by the maturity date. If that is not the case, then the remainder is called balloon maturity. Issuers may either pay to trustees, which in turn call randomly selected bonds in the issue, or, alternatively, purchase bonds in open market, then return them to trustees.

TYPES OF BONDS1. Fixed rate bonds have a coupon that remains constant throughout the life of the bond.2. Floating rate notes (FRN's) have a coupon that is linked to an Index. Common Indices include: money market indices, such as LIBOR or Euribor, or CPI (the Consumer Price Index). Coupon examples: three month USD LIBOR + 0.20%, or twelve month CPI + 1.50%. FRN coupons reset periodically, typically every one or three months. In theory, any Index could be used as the basis for the coupon of an FRN, so long as the issuer and the buyer can agree to terms.3. High yield bonds are bonds that are rated below investment grade by the credit rating agencies. As these bonds are more risky than investment grade bonds, investors expect to earn a higher yield. These bonds are also called junk bonds.4. Zero coupon bonds do not pay any interest. They are issued at a substantial discount from par value. The bond holder receives the full principal amount on the redemption date. 5. Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other assets. Examples of asset-backed securities are mortgage-backed securities (MBS's), collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs).6. Perpetual bonds are also often called perpetuities. They have no maturity date. The most famous of these are the UK Consol, which are also known as Treasury Annuities or Undated Treasuries. Some of these were issued back in 1888 and still trade today. Some ultra long-term bonds (sometimes a bond can last centuries: West Shore Railroad issued a bond which matures in 2361 (i.e. 24th century)) are sometimes viewed as perpetuities from a financial point of view, with the current value of principal near zero.7. Bearer bond is an official certificate issued without a named holder. In other words, the person who has the paper certificate can claim the value of the bond. Often they are registered by a number to prevent counterfeiting, but may be traded like cash. Bearer bonds are very risky because they can be lost or stolen. Especially after federal income tax began in the United States, bearer bonds were seen as an opportunity to conceal income or assets. U.S. corporations stopped issuing bearer bonds in the 1960s, the U.S. Treasury stopped in 1982, and state and local tax-exempt bearer bonds were prohibited in 1983. 8. Registered bond is a bond whose ownership (and any subsequent purchaser) is recorded by the issuer, or by a transfer agent. It is the alternative to a Bearer bond. Interest payments, and the principal upon maturity, are sent to the registered owner.9. Municipal bond is a bond issued by a state, U.S. Territory, city, local government, or their agencies. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued, although municipal bonds issued for certain purposes may not be tax exempt.10. Book-entry bond is a bond that does not have a paper certificate. As physically processing paper bonds and interest coupons became more expensive, issuers (and banks that used to collect coupon interest for depositors) have tried to discourage their use. Some book-entry bond issues do not offer the option of a paper certificate, even to investors who prefer them.11. Lottery bond is a bond issued by a state, usually a European state. Interest is paid like a traditional fixed rate bond, but the issuer will redeem randomly selected individual bonds within the issue according to a schedule. Some of these redemptions will be for a higher value than the face value of the bond.12. War bond is a bond issued by a country to fund a war.13. Convertible bond lets a bondholder exchange a bond to a number of shares of the issuer's common stock.CONCLUSION

How to manage capital inflows remains an important policy issue for many emerging market economies. The issue has assumed even greater importance in recent years as the volume of capital flows picked up against the background of increasing global financial integration. In this environment, even countries without a fully open capital account can no longer consider themselves immune from the risks of capital inflows as they liberalize their trade regime and domestic financial system. Current account convertibility substantially reduces the ability of a control regime to manage capital flows, while financial liberalization increases substitutability among different types of capital account transactions. Once a certain threshold of economic openness and financial market development is reached, a partially open capital account may not effectively protect an economy from the volatility of international capital flows.The Project provides little practical guidance on capital account liberalization, except to advocate the need for pursuing sound macroeconomic policies and establishing an effective framework of prudential regulation. The difficulty of identifying the precise sequencing of steps comes from the fact that the risks of capital inflows are specific to each transaction and are difficult to measure. Countries with a fully open capital account may resort to the use of temporary capital controls or prudential regulations, but it requires a high degree of administrative capacity to implement them effectively. With respect to the use of conventional macroeconomic measures, the existing literature may provide guidance on good practice, suggesting for example the greater effectiveness of fiscal tightening relative to other measures.BIBLIOGRAPHY1. www.google.com.

2. www.yahoo.com.

3. www.economywatch.com

4. www.indiacapitalmarket. In

5. www.ask.com

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Companies Listed for trading on CM Segment

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Mar-95135

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Mar-98612

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Mar-03818

Mar-04909

Mar-05970

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