Capital Markets of India: An Investor's Guide

JWPR021-FM JWPR021-Kanuk June 24 2007 1323 Char Count= 0

Capital Marketsof India

An Investorrsquos Guide

ALAN R KANUK

John Wiley amp Sons Inc

Founded in 1807 John Wiley amp Sons is the oldest independent publishingcompany in the United States With offices in North America Europe Aus-tralia and Asia Wiley is globally committed to developing and marketingprint and electronic products and services for our customersrsquo professionaland personal knowledge and understanding

The Wiley Finance series contains books written specifically for financeand investment professionals as well as sophisticated individual investorsand their financial advisers Book topics range from portfolio management toe-commerce risk management financial engineering valuation and finan-cial instrument analysis as well as much more

For a list of available titles visit our Web site at wwwWileyFinancecom

ALAN R KANUK

Published by John Wiley amp Sons Inc Hoboken New JerseyPublished simultaneously in Canada

Wiley Bicentennial Logo Richard J Pacifico

No part of this publication may be reproduced stored in a retrieval system or transmitted inany form or by any means electronic mechanical photocopying recording scanning orotherwise except as permitted under Section 107 or 108 of the 1976 United States CopyrightAct without either the prior written permission of the Publisher or authorization throughpayment of the appropriate per-copy fee to the Copyright Clearance Center Inc 222Rosewood Drive Danvers MA 01923 (978)750-8400 fax (978) 646-8600 or on the Web atwwwcopyrightcom Requests to the Publisher for permission should be addressed to thePermissions Department John Wiley amp Sons Inc 111 River Street Hoboken NJ 07030(201) 748-6011 fax (201) 748-6008 or online at httpwwwwileycomgopermissions

Limit of LiabilityDisclaimer of Warranty While the publisher and author have used their bestefforts in preparing this book they make no representations or warranties with respect to theaccuracy or completeness of the contents of this book and specifically disclaim any impliedwarranties of merchantability or fitness for a particular purpose No warranty may be createdor extended by sales representatives or written sales materials The advice and strategiescontained herein may not be suitable for your situation You should consult with aprofessional where appropriate Neither the publisher nor author shall be liable for any loss ofprofit or any other commercial damages including but not limited to special incidentalconsequential or other damages

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Library of Congress Cataloging-in-Publication Data

Kanuk Alan RCapital markets of India an investorrsquos guide Alan R Kanuk

p cmmdash (Wiley finance series)ldquoPublished simultaneously in CanadardquoIncludes bibliographical references and indexISBN 978-0-470-13763-5 (cloth)

1 Capital marketndashIndia 2 Stock exchangesndashIndia I TitleHG5732K36 2007332prime04150954mdashdc22

2007003314

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

To my wonderful wife Jaquiwhose love and support are a neverending source of

great energy and inspiration for meAnd

to Max and Sarahmy two spectacular children

who give me the greatest joy and a constant smile

Contents

List of Figures xi

List of Tables xiii

Preface xvii

Acknowledgments xxiii

About the Author xxvii

CHAPTER 1

Indiarsquos Capital Markets 1

Growth of Foreign Investment 1Improved FII Interest and Access to the Public Markets 5Rising Domestic Investment Demand 9Market Risks 11Summary 17

CHAPTER 2

Foreign Portfolio Investment in India 19

Foreign Investment 20Tax Considerations for FIIs 26Repatriation of Investment Funds 29Challenges for US Hedge Fund FIIs 29Financial Instruments Available to FIIs 33Investment Limits 48Brokerage Fees 51FII Application Procedures 52Trading and Settlement-Related Issues 56Summary of FII Investment 56

viii CONTENTS

CHAPTER 3

Foreign Direct Investment 57

Ministries and Departments Administering FDI 59Foreign Investment through Global Depositary

Receipts (Euro Issues) 61Approval Process for FDI 61Industrial Sector Preference 63Summary 64

CHAPTER 4

Safety and Integrity The Regulator and Market Safeguards 65

The Securities and Exchange Board of India (SEBI) 66Market Safety and Safeguards 69Disclosure and Transparency Rules 69Exchange Surveillance 70Stock Exchange Risk Systems 75Market-Embedded Safeguards to Control Abnormal

Stock and Market Behavior 76Margin Controls 82Additional Risk Controls for Derivatives 89Stock Exchange Central Counterparty Role 91Guarantee Funds 93Inspection of Brokersrsquo Books 98Summary 99

CHAPTER 5

The Equity Market Stock Exchanges Trading and Settlement 101

Indiarsquos Stock Exchanges 103Exchange Trading Rudiments 106Exchange Trading Systems 112Trading Features of the Exchanges 113Exchange Settlement Systems 119Approved Clearing Banks 124Exchange Clearinghouses 125Custodians 130Depositories 132Settlement Preparation for Short Selling 135Summary 135

Contents ix

CHAPTER 6

Derivatives 137

Indian Derivatives Market Fundamentals 138BSE Derivatives Products 144NSE Derivatives Products 151Summary 158

CHAPTER 7

The Indian Debt Market 159

Indian Debt Market Fundamentals 160Market Infrastructure 169Market Structure 172Debt Trading 175Clearing and Settlement 179Risk Management 183Brokerage Rates 184Reference Rates 185Summary 187

CHAPTER 8

Indexes General Market and Sector Specific 189

BSE-Sponsored Indexes 190NSE-Sponsored Indexes 208Summary 225

APPENDIX A

Facts and Figures about India 227

Fun Facts about India 241

APPENDIX B

Indiarsquos Unique Numbering System 245

APPENDIX C

The Indian Time Zone 249

APPENDIX D

BSE and NSE Derivatives Underlying Stock Details 251

x CONTENTS

APPENDIX E

Economic Statistics 259

APPENDIX F

Order Types 263

APPENDIX G

NSE and BSE Equity Classifications 265

APPENDIX H

Exchange Trading and Clearing Holidays 267

APPENDIX I

Index Constituents 271

APPENDIX J

Calculation of NSE Option Base Prices 355

APPENDIX K

ADRGDR versus Ordinary Share Arbitrage An Example 357

APPENDIX L

Major Financial Institutions in India 361

APPENDIX M

Contact Information for Important Financial Services Institutions 365

APPENDIX N

Further Sources of Information 377

Notes 381

Acronyms and Abbreviations 383

Glossary 385

Index 397

List of Figures

Figure 11 Total net capital inflows to India 1990ndash2005 2Figure 12 Total equity inflows to India 1990ndash2005 2Figure 13 Foreign portfolio investment 1990ndash2005 3Figure 14 Growth in foreign institutional investor registrations

December 2000 to December 2006 3Figure 15 Foreign direct investment 1990ndash2005 5Figure 16 BSE market turnover 2000ndash2006 6Figure 17 NSE market turnover 2001ndash2006 7Figure 18 Growth of NSE derivatives turnover 2001ndash2006 7Figure 19 Growth of BSErsquos market capitalization 2000ndash2006 8Figure 110 Growth of NSErsquos market capitalization 2000ndash2006 8Figure 111 Comparison of Indiarsquos BSE market capitalization versus

Asian developing markets 9Figure 21 Growth of registered FIIs 2002ndash2006 21Figure 22 Net portfolio investment by FIIs FY1993ndashFY2006 21Figure 23 Annual gross foreign investment flows FY1993ndashFY2006 22Figure 31 Indian foreign direct investment FY1991ndashFY2006 58Figure 41 Individual stock daily price movement limits 78Figure 42 The central counterparty role of the exchanges 92Figure 51 The settlement cycle 122Figure 61 Growth of NSE derivatives versus equities 2001ndash2006 138Figure 71 Volume of secondary market transactions in the

government securities market 1995ndash2005 162Figure 72 Gross market borrowings of central and state governments

FY1991ndashFY2006 167Figure 73 Growth of the market capitalization in the NSE

wholesale debt market 2000ndash2006 173Figure 74 Growth of the wholesale debt market number of trades 174Figure 75 Growth of the wholesale debt market average activity 174

List of Tables

Table 11 2006 Stock Price Volatility in BSE Indexes 12Table 21 Country of Origin for Foreign Direct Investment 28Table 22 US- and UK-listed ADRs and GDRs 45Table 41 Marketwide Circuit Breakers 80Table 42 Eligible Forms of Capital to Meet Margin Requirements 82Table 43 Liquidity Groups 85Table 51 BSE and NSE Trading Statistics Year-End FY2006 104Table 52 Foreign Broker Members of the Bombay Stock Exchange 105Table 53 Foreign Broker Members of the National Stock Exchange 106Table 54 BSE Scrip Classifications 109Table 55 BSE Scrip Equity Classification Trading Distinctions 110Table 56 FII Custodian Concentration 131Table 57 Comparative Depository Statistics 134Table 61 Derivative Products Available for Trading on the

BSE and NSE 139Table 62 Summary of Derivative Attributes 142Table 63 Underlying Index Options Contracts 146Table 64 Underlying Index and Four Stocks that Currently Offer

Weekly Options 147Table 65 Contract Specifications for BSE Index Options Contracts

(Monthly and Weekly) 148Table 66 Contract Specifications for BSE Stock Options Contracts

(Monthly and Weekly) 149Table 67 Underlying BSE Index Futures Contracts 150Table 68 Contract Specifications for BSE Index Futures Contracts 150Table 69 Contract Specifications for BSE Single Stock Futures 150Table 610 Nifty Strike Intervals and Number of Options in Series 153Table 611 NSE Option Strike Price Intervals 155Table 612 Contract Specifications for NSE Derivatives Contracts 156Table 613 Securities on which Interest Rate Futures Contracts Are

Available and Their Symbols for Trading 156Table 614 Product Characteristics of Interest Rate Derivatives 158Table 71 Available Fixed Income Instruments 170

xiv LIST OF TABLES

Table 72 Trading Statistics of the NSE Wholesale Debt Market2000ndash2006 172

Table 73 Settlement Schedule for the Retail Debt Market forGovernment Securities 182

Table 74 NSE Wholesale Debt Market Brokerage Rates 185Table 75 Example of a Daily View of the NSE Government

Security Index 187Table 81 BSE Indexes 190Table 82 The Impact of Differing Index Weighting Methodologies 193Table 83 Sensex Constituents and Their Free-Float

Adjustment Factors 195Table 84 BSE Market Index Features 198Table 85 BSE Sector-Specific Indexes 199Table 86 Constituents of the Bankex Index 200Table 87 BSE TECk Index Constituents 201Table 88 BSE PSU Index Constituents 202Table 89 BSE Capital Goods Index 204Table 810 BSE Auto Index 205Table 811 BSE Consumer Durables Index 205Table 812 BSE Healthcare Index 206Table 813 BSE IT Index 206Table 814 BSE Metal Index 207Table 815 BSE Oil amp Gas Index 207Table 816 BSE FMCG Index 208Table 817 NSE-Listed Indexes 209Table 818 NSE Sector-Specific Indexes 213Table 819 CNX IT Sector Index Constituent Stocks 214Table 820 CNX Bank Index Constituent Stocks 216Table 821 CNX FMCG Index Constituent Stocks 216Table 822 CNX PSE Index Constituent Stocks 218Table 823 CNX MNC Index Constituent Stocks 219Table 824 CNX Service Sector Index Constituent Stocks 221Table 825 CNX Energy Sector Index Constituent Stocks 222Table 826 CNX Pharma Sector Index Constituent Stocks 223Table 827 CNX Industry Sectors 224Table A1 The CIA World Factbook India 228Table B1 Indiarsquos Unique Number System 246Table B2 Simple Rupee Conversion Tables 247Table C1 Comparative Indian Time Zones versus Global Money

Center Time Zones 250Table D1 Product Details for the BSE Single Stock Monthly Options

and Futures 251

List of Tables xv

Table D2 Individual Securities with Approved Futures and OptionsCurrently Traded on the NSE 254

Table F1 Orders Recognized by the Exchanges 263Table G1 NSE and BSE Scrip Classifications 265Table H1 2007 Market Holidays 268Table H2 Market Trading Times 269Table H3 Derivative Session Daily Schedule 269Table I1 BSE 100 Index Constituents 271Table I2 BSE 200 Index and Dollex 200 Constituents 274Table I3 BSE 500 Index Constituents 280Table I4 BSE Mid-Cap Index Constituents 287Table I5 BSE Small-Cap Index Constituents 294Table I6 SampP CNX Nifty Constituent List 305Table I7 Nifty Market Capitalization Weighting and Beta 308Table I8 CNX Nifty Junior Constituent List 312Table I9 SampP CNX 500 Constituent List 314Table I10 SampP CNX 500 Industry Groups 336Table I11 CNX Midcap Constituent List 349Table L1 Major Financial Institutions in India 361Table M1 Important Financial Services Contact Information 366

Preface

When I moved to Hong Kong in early 1995 as Senior Managing Directorfor the investment bank Bear Stearns my assignment was not only to

manage its existing Asian equity business but also to explore opportunitiesfor further involvement throughout the region The equities of Hong KongIndonesia Singapore and Thailand were of greatest interest China shareslisted in Shanghai were watched with some interest and the securities ofIndia were not even on the radar screen I found this odd

The dominant investment theme in Hong Kong at the time was Chinaand the investment community there was falling all over itself to do Chineseinvestment banking deals and bring IPOs No one could take their eyes off ofChinarsquos population of one-billion-strong potential consumers People spentlittle time considering the unreliability of Chinese company financials and theinconsistent application of the rule of law Everyone seemed to be wearingrose-colored glasses and blinders facing north to China

Being new to Asia I found myself questioning why no one and it seemedlike absolutely no one was looking west to the one-billion-strong populationof India which was and is the worldrsquos largest democracy and thanks to itsbeing a former British colony was built upon strong foundations a traditionof entrepreneurship and most importantly the rule of law I was told thatIndia with the oldest stock exchange in Asia was still a highly inefficientmarket for trading that monies had to be transferred into the country priorto trade execution and that settlement still physical with numerous signa-tures required on stock certificates from various parties in multiple locationswas problematic and could take months Having these realities explained tome I didnrsquot focus on India for several years but always kept an eye on itsdevelopments

The stunning success of the Chinese economy and many private invest-ments there overshadowed the countryrsquos stagnant secondary market storywhere the markets did virtually nothing or even traded lower for years until2006 In the meantime bureaucratic India was beginning its reform processstarted in 1991 by the well-respected economist then-finance minister andcurrent Prime Minister Manmohan Singh Begun 12 years after the China re-form process the Indian reforms opened the way for the Indian economy and

xviii PREFACE

capital markets to modernize and begin an ascent that has been nothing shortof outstanding Since 1998 its benchmark Sensex Index has increased five-fold and in 2006 the secondary market capitalization of the Bombay StockExchange exceeded that of the Shanghai and Shenzhen exchanges combinedThe economy has been growing at a consistent 8 percent rate that appears tobe long-term sustainable While lagging Chinarsquos reported 10 percent growthby 2 percent the Indian authorities like to describe this as the ldquo2 percentdemocracy dragrdquomdashthey are happy to give up that 2 percent in return for afree and democratic system that cannot autocratically impose change anddirection

I made my first investment in Indian securities in 2004 Investing as anindividual I found it impossible to invest directly into Indian companiesand relegated to the fund route found it quite difficult to find an invest-ment vehicle available to an American resident with which to get India-onlyexposure without my investment being watered down by dilutive pan-Asianexposure I eventually found my vehicle Falling into the old trader truismldquoYou donrsquot really care until you carerdquo (meaning until you have a position)I started learning all I could about investing in India as a foreigner I learnedfour interesting things

1 Virtually no professional investors in the United States with whom I spokehad any inkling that the Indian economy was growing at a sustained 8percent per year

2 Very few non-India-based so-called experts of Indiarsquos capital markets hadany real detailed knowledge of the market

3 Very few of the thousands of professional and institutional investors inthe United States alone hadhave market exposure to India

4 Fewer still of these investors knew what needs to be done to invest directlyinto Indian securities

These four added up to one clear result Opportunity for investing inan underappreciated underinvested dynamic and reforming economy Indiscussions with friends in the investment field it became apparent to methat this underexposure to India was the result of ignorance About Indiain general about the reform process that had greatly improved a previouslyunwieldy investment process about the incredible economic growth happen-ing about the world-class securities regulator and about the sophisticatedmarket systems and processes that had been developed to make the tradingsystem not a third-world nightmare but rather arguably one of the safestmarket systems in the world This book is my antidote to that ignorance

Capital Markets of India An Investorrsquos Guide is a reference book writ-ten for professional and other sophisticated investors It has been written

Preface xix

in recognition of the emergence of the Indian economy as a significant par-ticipant in the Asian and world economies Smart investors do not take onexposure to a market without understanding the market and having a levelof comfort about its structure The goal of this book is to address this lack ofknowledge about India and its capital markets to inform the reader aboutthe many relevant issues related to taking on Indian market exposure andto provide that necessary level of comfort

The slow but growing realization of Indiarsquos strong consistent economicgrowth and its political and economic stability has led to growing interestamong both institutional and individual investors in the exciting investmentopportunities available in the Indian capital markets This reference bookserves as an introduction to this exciting market

As India newly appears on the radar screen of investors they will gothrough a process familiar to them for all of their international investmentactivities

Market UnderstandingmdashHow does the market operate The investormust first learn as much as possible about Indiarsquos financial marketsThis includes learning about its institutions such as the stock exchangesand regulatory structure the strength of these institutions the safetyand integrity of the market and the trading and settlement process Theinvestor must learn about the reforms that have taken place and theadvantages that they bring to the market but also about the risks to themarket and what can derail the booming share prices

Foreign Access to the MarketmdashHow can I get involved Along withachieving a level of comfort that India is a market with foundations forsafe and efficient handling of investments the investor must understandhow to make investments in the market whether it is freely open forforeign investment whether foreigners have any restrictions or require-ments associated with investing in the domestic markets and if so theexact procedure to follow to address these requirements

Available Financial ProductsmdashHow can I gain exposure to India Hav-ing addressed the background and underpinnings of the market the risksand opportunities and the process required for foreigners to invest inIndiarsquos markets the next step is for the investor to receive an overviewof the products available in the market for investment In particularthe pending investor in Indiarsquos markets should be introduced to (1)the equity and derivative products available together with the detailsassociated with them (2) the stocks underlying the various derivativeproducts (3) the available government and private debt market and(4) the various benchmark general market and sector-specific indexestogether with their component companies

xx PREFACE

Capital Markets of India An Investorrsquos Guide has been written to ad-dress these steps in the process of becoming a new investor in the Indianmarkets The book will introduce the reader to many relevant facts aboutIndia and the structure of the Indian equity capital markets The book con-tains a detailed discussion about foreign investment possibilities in Indiaincluding foreign institutional investor (FII) registration requirements Theappendixes provide useful information for the investor including numerousdetails about the economy and challenged national infrastructure an expla-nation of the countryrsquos unique numbering system a chart of comparativetime zones around the world a list of economic statistics and how to obtainthem names descriptions and Web site addresses of key market institutionsnames addresses and phone numbers of important market participants andweb site addresses for other useful information

I emphatically recommend that all investors visit India and see firsthandthe progress it is making in so many areas the dynamism of the people andtheir culture the exploding consumerism so prevalent in the cities and thesophisticated businesses springing up throughout the country But I cautionyou Remember your trained analytical skills that allow you to look beyonda companyrsquos basic financials to find its underlying value When you land atChattrapathi Shivaji International Airport in Mumbai and drive to one ofthe wonderful hotels in the city you will pass people living in lean-tos bythe side of the street and you will see crumbling real estate and find your-self wondering ldquoWhat am I doing hererdquo As you make this trip and travelthrough other parts of India you must remember to use those analyticalskills to look beyond the surface of what you seemdashthe poverty and the chal-lenged infrastructuremdashto see the underlying value and potential of this greatand prospering country

When using this book the reader should be aware of several bookkeep-ing points with regard to currency conversion the annual period used forstatistics stock exchange information and the accuracy of the provided in-formation

In virtually all places where a statistic is quoted in the Indian rupee thereader is provided with an approximate US-dollar equivalent in parenthe-ses The currency exchange rate used is virtually always a rate of 45 rupeesto 1 US dollar This rate was used because it is almost exactly the midpointbetween the high and low in the exchange rate for the year 2006 and becauseit is a round number The reader must remember that the rupee is a freelyfloating currency and that in 2006 it ranged from a low of 4695 rupeesto the dollar to a high of 4407 a movement of 654 percent from top tobottom Thus the US-dollar equivalent of Rs1 million in January (the lowfor the year) was different from what it was in July (the high for the year)Nevertheless throughout the text the rate of 45 rupees to the dollar is usedregardless of the date and year of the rupee-denominated statistic

Preface xxi

India operates on an April 1 to March 30 fiscal year and as such moststatistics provided by the institutions in India including the stock exchangesthe Reserve Bank of India the Ministry of Finance and the Securities andExchange Board of India (SEBI) are presented in fiscal years where for exam-ple FY2006 refers to the fiscal year ending March 30 2006 Where monthlynumbers are available through December 2006 I have attempted to presentsome charts with the more up-to-date data on a calendar year basis endingDecember 31 a period that will be more comfortable for some readers Thusdata presented in the book is of both types and is noted either as ldquoFY2006rdquomeaning the 12-month periods ending March 2006 or simply as ldquo2006rdquomeaning the 12-month periods ending December 2006

The Indian market is technically made up of 22 different stock ex-changes the two primary most significant and liquid are the Bombay StockExchange and the National Stock Exchange The stock exchange informa-tion discussed in this book refers exclusively to these two exchanges Eachof these two exchanges has many similar systems and processes so wherepossible and appropriate information relating to both exchanges has beenpresented together

The reader must note that much of the information provided in this bookand in the Web sites and sources referred to in the text is time sensitive andsubject to change All of the sources from which I have gathered informa-tion have stressed this point both in discussions and in written disclaimersI emphasize that in a dynamic evolving marketplace information is contin-ually changing and that all of the information used in this book has beencollected from publicly available sources presumed to be correct and reliableat the time of their use Neither the author nor the stock exchanges nor theother sources make any warranty as to the accuracy of the sources of thisinformation and I remind the reader that all information was collected ona best-effort basis The reader is reminded that the rules and regulations arecontinually being updated and that market indexes and their constituents arecontinually evolving You are encouraged to look at the various Web sitesreferred to throughout the text for the most up-to-date information and toheed the disclaimers accompanying these sites

At the time of this writing the benchmark Sensex index is hitting newall-time highs and the economy is strong This book will assist all investorsto make informed and educated evaluations of whether the markets of Indiashould be part of their portfolio It is my sincere hope that Capital Marketsof India An Investorrsquos Guide proves to be a useful reference resource

Alan R KanukJanuary 2007

Acknowledgments

This book could not have been as complete and comprehensive withoutthe help input and openness of a number of people in the United States

India and other countries As with many reference-type books this is acompilation of facts insights viewpoints and knowledge obtained over timefrom many people Web sites government agencies and publications

I would like to thank Brad West and Paul Alapat of AMBA Research fortheir support introductions and valuable input for the manuscript The AsiaSocietyrsquos numerous India-focused programs and their speakers have providedme with wonderful insights and in particular I want to thank Judi Kilac-hand its Executive Director of Business Programs for all of her assistance inmaking introductions for me in India and in New York I am grateful to BillWreaks of the Wreaks Media Group for his help patience and generosity oftime as I developed the book to Marc Still for his support friendship andguidance throughout this process and to Douglas Hughes whose skepti-cism stubbornness and risk-averse investment nature forced me to developever-more-articulate arguments for the soundness of an investment in India

There were many people in India with whom I met and spoke to whomI am also most appreciative K N (ldquoVaidyrdquo) Vaidyanathan president ofAlchemy Brokerage in Mumbai for his insight introductions and adviceRavi Narain CEO and MD of the National Stock Exchange and RajnikantPatel CEO and MD of the Bombay Stock Exchange for their valuable in-sights into the broad market issues and their exchange inner-workings VShanker CEO of the Inter-connected Stock Exchange of India and Mr ST Gerela CEO of Satco Securities amp Financial Services Ltd for their de-tailed explanations of the exchange-imbedded risk management systems andsafeguards that make the Indian exchanges so safe Dominic Fernandez andCyrus Khambata of the Central Depository Services Ltd for their expla-nations of the depository system its history and features that have done somuch to modernize the Indian settlement process and Mr D Chandra ChiefGeneral Manager of the Securities and Exchange Board of India (SEBI) incharge of FII registration for his numerous insights into the FII registrationprocess and issues considered regarding FII approvals and his valuable in-sights regarding many of the broader issues concerning the Indian markets

xxiv ACKNOWLEDGMENTS

From the private sector I received valuable assistance from Chetan Ahya theeconomist at JM Morgan Stanley who provided a very balanced overviewof the Indian economy and from Shaurabh Mitra Assistant Vice Presidentat Citibank India in Product Management and Global Transaction Servicesfor his explanation of and insights into the Indian settlement process I amvery grateful to Khozem Merchant the Mumbai correspondent for the Fi-nancial Times for his unique and balanced outlook of the Indian economyfor sharing with me his insightful anecdotal evidence concerning the sustain-ability of the current boom taking place in India and for introducing me tohis friends who represent the dynamic educated new India

I would also like to thank the anonymous taxi driver in Mumbai whogave me additional confidence in my belief in the future of the Indian econ-omy and its markets when he told me of his two children who not only wereable to get scholarships for high school and college but based on their meritalone were able to attend the Indian Institute of Technology (IIT) and theIndian Institute of Management (IIM) respectively I have always believedthat the greatness of America lay in the unlimited opportunities for successthat even the less-advantaged members of our society can achieve This taxidriverrsquos story tells me that India too may be a society that offers similaropportunities for all members of its society to succeed and thus be a societythat will realize and capitalize upon the great potential of its many people

I would like to give special thanks to Rajendra P Chitale managing part-ner of M P Chitale amp Co and M P Chitale Law Associates and his partnerSatish Dinavahi both of whom provided great help to me for backgroundand details regarding the FII registration process and the tax-related issuesaffecting FII investments As chartered accountants and attorneys offeringfinancial structuring tax and regulatory advice to international institutionalinvestors FIIs private-equity investors and special situations investors theyproved to be extremely knowledgeable and a remarkably valuable resourceon these topics

A very special thanks goes to Carolyn Tiemann my freelance editor inSingapore whose careful reading insightful comments and questions andconsidered suggestions resulted in a significantly improved final manuscriptI would also like to thank my editors at John Wiley amp Sons Bill FalloonLaura Walsh Emilie Herman and Christina Verigan for their invaluableassistance in bringing this book to print

I am indebted to Wall Street legend Alan ldquoAcerdquo Greenberg former seniorpartner and CEO of Bear Stearns amp Co who took a chance 27 years agoand hired an inexperienced new graduate of Cornell for a much-desired seaton the trading desk Having the privilege of sitting next to or near Ace for 14years I learned not only trading-related skills at the highest level but also

Acknowledgments xxv

how integrity decisiveness intelligence and fairness are integral to the skillsof strong charismatic leadership

I am most thankful to my father Jack who introduced me to the worldof Wall Street and investments and continues to be my great role model ofa good person and caring father and to my mother Leslie who instilled inme an inquiring mind and the confidence to seek success My parents havetaught me to challenge myself question the status quo and always seek torealize my potential

My greatest thanks and appreciation go to my terrific family My won-derful wife Jaqui whose continuous unwavering love support and patiencesmoothed the way for this book to be completed and my fantastic childrenMax and Sarah Life with them all is never dull and their love and joy makeevery day a great day

About the Author

Alan ldquoDeucerdquo Kanuk is a 27-year veteran of the investment business Hejoined Bear Stearns amp Co in 1980 rose to be Senior Managing Director

in Institutional Trading served on the Equity Management Committee andwas a member of several NYSE committees In 1995 he moved to HongKong to manage Bear Stearnsrsquos Asian Equity business and served as a directorof Bear Stearns Asia Limited Along with his Bear Stearns Asia role MrKanukrsquos eight years living in Asia included being Managing Director andDeputy Head of Asian Equities for ING and founder and CEO of his ownmultimarket electronic trading business During this time Mr Kanuk gainedextensive experience with regulators stock exchanges trading-related issuesand investment systems in 12 Asian markets and he dealt with some of theworldrsquos largest investment institutions in these markets He holds a BA ineconomics from Cornell University in 1980 and an MBA in finance fromNew York University in 1987

xxviii

chap01 JWPR021-Kanuk June 21 2007 1110 Char Count=

CHAPTER 1Indiarsquos Capital Markets

I ndiarsquos economy has undergone a profound evolution over the last 15years due in large part to reforms instituted by Manmohan Singh the cur-

rent prime minister a former finance minister and a respected internationaleconomist These reforms have had significant positive impacts throughoutthe economy and specifically have led to the financial markets developingthe institutions regulations and practices that have put it on par with thebest practices of the worldrsquos most respected financial markets

Reforms in Indiarsquos capital markets from 1991 to 2006 include the im-plementation of advanced electronic trading systems in the two primarystock exchanges demutualization of securities issues allowing for straight-through processing and electronic settlement on a T+2 settlement basisimplementation of state-of-the-art built-in market security and safeguardmechanisms to insure the safety and integrity of the markets and the de-velopment of a sophisticated set of securities regulations monitored andenforced by the very capable and professional securities regulator the Secu-rities and Exchange Board of India (SEBI)

This chapter will introduce the reader to the capital markets of Indiawith a discussion about foreign investment the forms it takes in India itsrecent growth and certain measures of that growth and the factors thatstymied growth in previous years The chapter will examine the sources ofrising domestic demand benefiting the capital markets and then explore thevarious risks to the market both internal and external that all sophisticatedinvestors must understand consider and weigh when contemplating theircomfortable level of investment exposure to this exciting market

GROWTH OF FOREIGN INVESTMENT

Reforms instituted over the last 15 years have opened the economy to sig-nificantly more foreign investment by easing the rules and procedures for

2 CAPITAL MARKETS OF INDIA

Total Net Capital Inflows 1990ndash2005

70564089

884 85511084

10152025303540

1990ndash91 1995ndash96 2000ndash01 2001ndash02 2002ndash03 2003ndash04R

2004ndash05P

F IGURE 11 Total net capital inflows to India 1990ndash2005Source RBI 2004ndash2005 Annual Report Capital Account Inflows

both public and private investment The increase in foreign investment isillustrated in Figures 11 through 14

Figure 11 shows the growth of overall net capital inflows to India risingeightfold from US$409 billion in 1995ndash1996 to US$3218 billion in March2005

Total equity inflows made up of portfolio investment and foreign directinvestment have also grown markedly from the early days of reform toFY2005 although growth has not been steady Figure 12 shows that total

Total Equity Inflows 1990ndash2005

480679

814602

16061445

1990ndash91 1995ndash96 2000ndash01 2001ndash02 2002ndash03 2003ndash04 2004ndash05

F IGURE 12 Total equity inflows to India 1990ndash2005Source RBI 2004ndash2005 Annual Report Capital Account Inflows

Foreign Portfolio Investment 1990ndash2005

266 276 202098

F IGURE 13 Foreign portfolio investment 1990ndash2005Source RBI 2004ndash2005 Annual Report Capital Account Inflows

equity inflows grew from US$48 billion in FY1996 to US$1445 billionin FY2005 but fell 10 percent year-on-year (yoy) in FY2005 from a yearearlier

Foreign portfolio investment representing foreign funds coming into theprimary and secondary share markets represented the bulk of the growth inequity inflows and saw a huge surge in interest particularly in FY2004 wheninvestment increased more than 1000 percent to US$1138 billion from lessthan US$1 billion in FY2003 Again however FY2005 demonstrated a

Growth in Number of Registered Foreign Institutional Investors 2000ndash2006

556482 489 517

Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06

F IGURE 14 Growth in foreign institutional investor registrations December2000 to December 2006Source The Bombay Stock Exchange

year-on-year reduction with net foreign portfolio investment falling 22 per-cent to US$891 billion

The increase in net portfolio investment has been accompanied by abroader base of foreign investors Regulations addressing investment in theprimary and secondary public markets monitored by SEBI through the For-eign Institutional Investor (FII) regime have dramatically shortened the FIIregistration process from several months to a current benchmark of sevenbusiness days This streamlined the registration process and together withnew awareness of the strength of the economy has led to a steadily increas-ing number of FIIs more than doubling in five years from 482 in December2001 to 1057 in December 2006 Figure 14 illustrates this growth

Foreign direct investment (FDI) has not mimicked the rising interest inportfolio investment and rather has experienced modest growth over the re-form period from US$214 billion in FY1996 to US$553 billion in FY2005an increase of just 212 times over the past 10 years This modest rise andfairly level FDI over the previous four years is somewhat disappointing inlight of such factors as (1) the easing of the regulatory approval process(2) the increased number of industries now open to foreign investment (3)the rise in the percentage of domestic entities permitted to be owned byforeigners and (4) the tremendous demand for infrastructure developmentFurthermore given the overwhelming growth of FDI in China during a sim-ilar period to nearly US$50 billion in 2005 FDI in India is severely lagging

Some economists in India believe that the Reserve Bank of India (RBI)underestimates FDI by ignoring international standards of FDI computationset by the IMF by including only one component of FDI into its calculationsrather than including several other components commonly used by the IMFin its international standard for FDI comparisons The one component usedby the RBI is foreign equity capital reported on the basis of the issuetransferof equity or preference shares to foreign direct investors Some of the IMF-recognized components that India does not include when estimating its FDIinflows are

Reinvested earnings by foreign companies Proceeds of foreign equity listings and foreign subordinated loans to

domestic subsidiaries as part of intercompany (short- and long-term)debt transactions

Overseas commercial borrowings (financial leasing trade creditsgrants and bonds) by foreign direct investors in foreign invested firms

Non-cash acquisition of equity investment made by foreign venturecapital investors earnings data of indirectly held FDI enterprises con-trol premium and noncompetition fees as per the IMFrsquos definitionwhich are normally included in other countriesrsquo statistics

Foreign Direct Investment 1990 ndash2005

504 468553

illiio

F IGURE 15 Foreign direct investment 1990ndash2005Source RBI 2004ndash2005 Annual Report Capital Account Inflows

The inclusion of these components would raise the reported FDI butit would still lag China significantly Figure 15 illustrates Indiarsquos reportedFDI from 1990 to 2005

IMPROVED FOREIGN INSTITUTIONAL INVESTOR(F I I ) INTEREST AND ACCESS TO THEPUBLIC MARKETS

Foreign investment in India was limited previously due to two key factors

1 External Foreign investors believed that the marketrsquos liquidity was notlarge enough to first take a meaningful position and second to be ableto get out of that position in a timely manner without a significant marketimpact This concern kept many large institutional investors away fromthe market

2 Internal There was fear and concern among Indian regulators and thefinancial community that the size and therefore power of the domes-tic Indian investor community both retail and institutional was toosmall relative to potential foreign institutional investment to absorb anymeaningful foreign flows In particular there was fear that a herd in-stinct among foreign investors to get out of the market would lead toa severe market crash that would overwhelm the domestic investment

communityrsquos buying ability and thus lead to a sharp negative impactnot just on public market investors but in such a way as to reverberatethroughout the economy as a whole

These two factorsmdashmarket liquidity and domestic investment activitymdashhave both evolved and improved such that they are no longer impedi-ments to greater FII interest in India or Indiarsquos desire to attract greater FIIinvestment

Figures 16 and 17 illustrate the development of liquidity in Indiarsquospublic cash equity markets over the past six years After experiencing adecline in 2001 and 2002 Bombay Stock Exchange (BSE) liquidity morethan tripled from a low of US$69 billion in 2002 to US$215 billion in 2006National Stock Exchange (NSE) liquidity for cash equities more than tripledfrom a low of US$139 billion in 2002 to US$426 billion in 2006

In addition to cash equities the liquidity in derivatives products futuresand options has also increased from less than US$9 billion in 2001 to overUS$15 trillion in 2006 an increase of over 176 times Figure 18 illustratesthis dramatic growth in both the value and number of contracts traded onthe NSE

In addition the market capitalizations of Indiarsquos two primary stockexchanges the BSE and the NSE have also grown dramatically since 2001BSErsquos market cap has grown more than sevenfold from US$111 billion toUS$812 billion at the end of 2006 and the NSE has grown more than sixfoldfrom US$123 billion to US$761 billion This is illustrated in Figures 19and 110

BSE Turnover

$69$88

2000 2001 2002 2003 2004 2005 2006

F IGURE 16 BSE market turnover 2000ndash2006Source The Bombay Stock Exchange Limited

NSE Turnover

$114$137

$244 $253

FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006

F IGURE 17 NSE market turnover 2001ndash2006Source The National Stock Exchange

F IGURE 18 Growth of NSE derivatives turnover 2001ndash2006Source The National Stock Exchange

BSE Market Capitalization 2000 ndash2006

148111 130

300400500600700

800900

2000 2001 2002 2003 2004 2005 2006

F IGURE 19 Growth of BSErsquos market capitalization 2000ndash2006Source The Bombay Stock Exchange Limited

NSE Market Capitalization 2000ndash2006

$169$123 $150

2000 2001 2002 2003 2004 2005 2006

F IGURE 110 Growth of NSErsquos market capitalization 2000ndash2006The figures for this chart were converted from the original rupee-denominated figure to US$ using a RupeeUS$ exchange rate of 451 This rate isused throughout the bookSource The National Stock Exchange

Market Capitalizations of Emerging Asia October 2006

ndash 200 400 600 800 1000 1200 1400 1600 1800

Thailand

Malaysia

Singapore

Taiwan

Hong Kong

US$ Billions

F IGURE 111 Comparison of Indiarsquos BSE market capitalization versus Asiandeveloping marketsThe figure for India represents the BSE only given the high percentage of duallistings with the NSEThe figure for China represents the Shanghai and Shenzhen Stock ExchangesSources The stock exchanges of BSE HKEX KSE TSE KLSE SZSE SSE SETand SGX

Figure 111 places Indiarsquos market capitalization in context relative toother Asian financial markets that have attracted considerable foreign in-terest and portfolio investment over the last decade Further perspective asto Indiarsquos market size can be gleaned by comparing it to the market capi-talization of Brazilrsquos Bovespa another emerging market commanding muchattention among global investors At the end of January 2007 the marketcap of the BSE was US$852 billion or 14 percent higher than that of theBovespa at $745 billion1

RIS ING DOMESTIC INVESTMENT DEMAND

Large and growing domestic investment demand in India has helped to alle-viate concern among many domestic investors that the purchasing power ofdomestic investment funds could be overwhelmed by foreign flows particu-larly selling flows The expected significant increase in domestic investmentdemand over the next five years is the result of a strong economy a grow-ing middle class of 300 million people rising incomes booming domestic

retail consumption and strong household savings rates Sources of domesticdemand include

Growth of retail investment in the public markets India enjoys a do-mestic savings rate of close to 25 percent but only 2 percent ofhousehold savings enters the public markets through direct retailinvestment in the stock market This compares to an average of ap-proximately 10 percent in other markets Domestic retail investorsare expected to begin to increase direct investments toward theglobal norm thereby enhancing investment demand

Maturing of the mutual fund industry While mutual funds have beenoperating for several years they are only now coming into theirown Approximately 3 percent of household savings enters the mar-ket through mutual funds and this figure is expected to rise due toseveral factors in the industry Many new funds are being launchedfunds are posting strong nominal returns in line with booming mar-ket indexes more products are being created and more marketingis being conducted which will likely attract more money

Development of the insurance industry The insurance industry isgrowing via both domestic companies and the entry of more foreigninsurers into India The industry is finally taking off and accumu-lating a surplus much of which is expected to be invested in thedomestic market

Expected easing of restrictions on pension fund investment options bythe government Currently all public pension funds are limitedto investing in government securities with no funds reaching thepublic stock markets Furthermore private pension funds also haverestrictions on their investment options that require a significantshare of their funds to be invested in government securities Thereare expectations in the market that the government is considering aloosening of these investment restrictions which will permit pensionfunds both public and private to invest a greater percentage of theirfunds in listed stocks

Expectation that banks will increase exposure in the listed marketsPresently domestic banks leave a large majority of their assets ingovernment securities Banks are widely believed to be underex-posed to the markets and are likely to begin to increase this exposureover the next several years

In addition to the above expected sources of domestic demand alleviat-ing many concerns regarding the domestic ability to not be overwhelmed by

foreign fund movements recent anecdotal evidence has shown that domes-tic investor demand has in fact been able to not only absorb the foreignfunds for sale but also to push the market higher A market sell-off in thespring of 2006 due to foreign selling was viewed as an opportunity fordomestic buyers who absorbed the selling and caused the market to rallySuch anecdotal evidence has supported the easing of not only opinions butalso the practices of regulators and other market participants toward foreigninstitutional investment

MARKET RISKS

When evaluating investment prospects investors must understand and eval-uate the risks in a market in order to determine the most prudent andlucrative ways to exploit the investment potential Risk is not bad in itselfbut risk must be identified understood defined and incorporated into asound investment strategy

A positive view about prospects for the Indian economy and by ex-tension for the financial markets is due to the following factors cited bykey market participants the consistency and strength of earnings growth along-developed culture of entrepreneurship a competitive business environ-ment the loosening of business restrictions the strength of the fundamentalsunderpinning the economic expansion rising incomes exploding domesticconsumption and the ldquoflattening of the worldrdquo in terms of communicationand globalization as described by author Thomas Friedman in his book TheWorld Is Flat Furthermore the economy has been resilient to many recentshocks and many investors and economists expect 8 percent GDP growth(GDP growth was 92 percent in the second quarter of FY2006ndash2007) tocontinue for many years to come

Volatility of stock prices in the emerging markets is a risk that mustbe understood Despite the positive views among so many key Indian mar-ket participants an AprilMay 2006 correction in global emerging marketscaused by fears of rising interest rates did not spare Indiarsquos markets TheIndian market at the time up 34 percent year-on-year had been one ofthe worldrsquos best performers going into the correction but then like otheremerging markets it experienced a volatile period with the benchmark Sen-sex index falling from a then YTD high in May 2006 of 1261238 to a YTDlow in June 2006 of 892944 down 44 percent from top to bottom TheSensex finished the calendar year 2006 at 1378691 up approximately 47percent since December 2005 The broader indexes also experienced sharpvolatility as shown in Table 11 with the greatest volatility shown by theBSE Small Cap index which experienced a swing of 76 percent between the

1minus6

minus97

6minus1

5minus1

5minus2

yearrsquos high and low The marketrsquos high PE ratios the one cause for concernexpressed by a few cautious economists dropped from the low 20s for theBSE 100 in May to 1667 and then back to 1884 at the end of 2006

The MayJune 2006 market correction was very much an internationalphenomenon caused by fears of rising interest rates in the United States andJapan However there are several potential India-specific domestic risksto the economy although most domestic participants had not given themenough weight to lead to a reduction of their exposure In the contrarianinvestor viewpoint the seemingly unanimous bullishness on the Indian econ-omy prior to the correction would be a signal that it was an ideal time toreduce exposure and possibly even look to short the market The correctionwas not caused by such thinking but was certainly a catalyst for those con-cerned about the market to quickly exit positions While the Indian markethad apparently stabilized from the correction by June 2006 and resumedits upward movement any overview of Indiarsquos market would be deficientwithout noting some of the domestic and international risks that investorsshould consider

The following is not an exhaustive or comprehensive list of marketrisks but rather some issues that investors must consider when evaluatingexposure to Indiarsquos economy

Internal Factors

Infrastructure Infrastructure is the first and most-often-cited risk to In-diarsquos economy The nationrsquos rapid growth has put a heavy strain on the al-ready stretched facilities Power and electricity telecommunications roadsand airports all desperately need dramatic upgrades due to years of neglectFrequent power outages require businesses particularly manufacturing tomaintain backup power generation The generally poor state of roadsmdashonlyabout 48 percent of the nationrsquos roads are pavedmdashhas severely hamperedefficient and cost-effective distribution and movement of goods and portcapacity is struggling to accommodate an increase in sea traffic The goodnews is that the present government is aware of the problems and has begunaddressing them by proposing budgets reforming infrastructure fundingrules easing investment limits and exploring publicprivate partnershipsHowever if the reforms fail andor needed investment doesnrsquot pursue in-frastructure projects the weak infrastructure could become an impedimentto continued economic growth

Government Bureaucracy While much progress has been made to stream-line government bureaucracy considered by many to be one of the mostbloated in the world there is still a great deal of inefficiency experiencedby businesses as they try to navigate through the system Despite reducing

the time to start a business from 71 to 25 days the World Bankrsquos DoingBusiness Report 2007 ranks India at number 134 of 175 ranked countrieson ease of doing business

Nat ional Budget Deficit The national deficit is being widely watched notonly for its potential to negatively impact growth but also as a sign ofthe governmentrsquos fiscal discipline At the beginning of FY2007 the com-bined public debt of the federal and state governments stood at 82 percentof Indiarsquos GDP This represented a 20 percent increase over the past 10years2 In addition there was a deficit of 41 percent of GDP in FY2006The government has targeted the FY2007 deficit to narrow to 38 percentand parliament passed a law to trim that deficit to 3 percent by FY2009These deficit and debt burdens are viewed as potential problems that couldimpact infrastructure and education reforms and eventually weigh down themarket

Pol i t ics and Popul ism Some influential politicians including SoniaGandhi current president of the Congress Party and one of the most pow-erful politicians in India have failed to see the trickle-down effect from therecent expansion and have begun to question the advantage of economic lib-eralization and globalization for the vast rural population representing 60percent of India If Ms Gandhi and others decide to take a strong stand thegovernment will have a difficult time pushing through additional reformsmuch less maintaining the present ones Furthermore the nature of coalitiongovernments is that small parties essential to the coalition often wield con-siderable leverage over the government In July 2006 a small yet importantcoalition party the Dravida Munnetra Kazhagam (DMK) party caused thegovernment to halt all privatizations pending further review Privatizationshave raised approximately US$12 billion3 for the government since reformefforts began in 1992 and halting them may negatively impact budget andspending plans Other such demands from within the coalition could furtherimpact the economic reform efforts

Demographics Fifty-four percent of the population is under 25 years ofage and 31 percent is under 15 years of age They must be educated andprepared for employment Yet while education at the top levels rivals thebest in the world the capacity quality and breadth of access to educationfor the masses must be improved dramatically If the economy does not growfast enough to absorb the growth of the working-age population estimatedat many tens of millions of new people each year social unrest could developwhich might impede or even reverse some of the recent economic reformsthat have driven the strong growth

The extremes between the very rich and very poor are very acute inIndia According to Forbes magazine the number of US dollar billionairesin India doubled in 2006 to 23 and their combined net worth of $99 billionnow surpasses that of former Asian leader Japanrsquos 27 billionaires In themeantime the latest World Bank estimates report that the percent of thepopulation below the poverty line is 29 percent and 47 percent of childrenunder five suffer from malnutrition Many in India fear that this extremedivide if not addressed is another potential source of social unrest

Energy Requirements The fast-growing economy is developing a rapidand expanding need for energy China and India together account for asignificant rise in the global demand for oil and have been very competitivein locating and locking up oil supplies around the world In addition Indiais seeking to expand its civilian nuclear power capacity India and the UnitedStates have negotiated a nuclear parts trade deal which at the time of thewriting of this book requires a ratification by both countriesrsquo legislaturesthat is controversial in both countries Should either legislature reject thetrade deal the consequences to the Indian economy may be felt beyond justthe energy issue and influence trade as well In addition Australia is theworldrsquos largest supplier of uranium that is needed to fuel nuclear reactorsand like the United States Australia has domestic regulations restrictingsuch trade with nonsignatories to the Nuclear Non-Proliferation Act ofwhich India is one If India incurs energy shortages such restrictions willimpede its ability to continue to grow at its current pace

External Factors

Oi l Pr ices While the economy has so far been resilient regarding risingoil prices the impact of continued high prices will likely affect growth inseveral ways First the domestic price of oil and gasoline is held stable bysubsidies to shield consumers from true market prices These subsidies areincreasing directly with the rising price of oil While these subsidies aredirectly borne by the large domestic oil companies in their bottom linesthey are indirectly borne by the government the major shareholder of thedomestic oil companies To the extent that this impacts the governmentrsquosbudget or deficit it will impact spending Second higher oil prices musteventually flow through to businesses and consumers which would affectcapital spending and consumption and negatively impact economic growth

Pakistan While relations with Pakistan have been improving over the lastseveral years the relationship requires constant attention and is by no meanstrouble free Tension continues regarding Kashmir and uncertainty remains

about the policies of any post-Musharaf Pakistani government The July2006 series of train bombings in Mumbai have been blamed on a Pakistan-based terrorist group (at the time of this writing) putting a further glitchin relations and causing some IndiandashPakistan conciliation talks to be inter-rupted While many Indians dispute that Pakistan negatively impacts Indiarsquosmarket foreigners note the uncertainty and from an investorrsquos point ofview uncertainty raises the risk premium

Market-Specific Risks

Expectat ions versus Fundamenta ls Indiarsquos benchmark indexes even giventhe MayJune 2006 correction have risen to what many believe are unsus-tainable levels The BSE Sensex and the BSE 100 Index had PE multiplesat the end of 2006 of 2251 and 1993 respectively Some analysts thinkthese multiples and hence company valuations are not justified by the fun-damentals of the underlying companies Furthermore there is concern thatinvestors and some domestic analysts are not adjusting their expectationsexpressed as market multiples and thus price targets to those fundamentalsas logic would dictate Rather they are irrationally doing just the oppositeThey are playing with the fundamentals4 to make them appear higher andthereby fit them into their inflated expectations and then feel justified bythe inflated expectations and associated higher prices This would inevitablylead to disappointment when earnings are announced and then followedby steep declines in share prices The existence of this contrary view in themarket should be noted by investors

SupplyDemand Mismatch There is concern that if domestic and foreigninvestment enters the market too rapidly and in significant quantities thesupply of attractive investment opportunities would further increase PEmultiples This would lead to (1) unsustainable prices and valuations (2)the risk of further sharp stock price corrections from high levels (3) signifi-cant losses for domestic and foreign investors and (4) undesirable volatilityFurthermore this would likely result in discouraging investors from par-ticipating in Indiarsquos markets which would impede capital marketndashfundedgrowth The counterargument to this is that there are numerous sources offuture equity supply that are beginning to enter the market that may effec-tively fill much of the demand There are still a number of new sectors thatwill absorb much of the new money These include the civil aviation mar-ket which is one of the fastest growing in the world and the retail sectorpresently a largely private mom-and-pop industry of 12 million shops onlyjust beginning to organize into public chains as retail consumption takesoff Currently the public retail chains represent just a small percentage of

overall consumer activity In addition there are several important indus-tries not yet well represented in the stock markets such as the real estatetelecommunications and power sectors Assuming the government contin-ues privatizations there is anticipation that the government will begin toprivatize its vast holdings in the banking and power sectors

SUMMARY

Economic reforms initiated by the government 15 years ago have led toa dramatic transformation of the once-socialist centrally planned economyinto a dynamic capitalist entrepreneurial competitive engine of wealthcreation Firmly established as a key player in the global economy India ispoised to produce sustainable economic growth of 8 percent in the yearsto come The financial markets have responded with one of the worldrsquosbest performances over the last several years and an easing of the rules forforeign institutional participation The rebound from the sharp MayJune2006 correction shows the growing resilience of the stock markets andgrowing investment appetite among domestic investors While risks to thispotential economic growth and the stock market exist India presents acompelling investment opportunity to the savvy investor who can adeptlynavigate these risks

CHAPTER 2Foreign Portfolio

Investment in India

CHAPTER HIGHL IGHTS Foreign investors must register with the SEBI and the RBI to invest

in India FII applicants must have been in existence for at least one year

prior to applying FIIs must be registered with and regulated by an appropriate for-

eign regulatory authority Standard FII registration requires that at least 70 percent of in-

vestments be in equities debt-only FIIs may hold 100 percent oftheir investment in debt

FIIs and sub-accounts can issue deal in or hold offshore derivativeinstruments such as participation notes equity-linked notes or anysimilar instruments

Foreign investors are subject to limits on the size of their invest-ment in Indian securities and derivatives

As per BSE and NSE bylaws a broker cannot charge clients morethan 25 percent brokerage

FIIs must use special nonresident rupee bank accounts for move-ments of money in regard to the securities markets All balancescan be fully repatriated

Short selling has been approved but will not be implemented untilthe second half of 2007

Foreign investment in India typically occurs either as foreign portfo-lio investment (FPI) or as foreign direct investment (FDI) FDI is generally

characterized by an investor investing directly into a company with theexpress purpose of exercising a significant degree of influence over the man-agement and operations of that company FPI is distinguished from FDI asbeing a passive investment entailing no active management or control of theissuer by the investor Purchases of shares in the stock markets are the mostcommon form of portfolio investment This chapter addresses many of theissues relevant to foreign portfolio investment in India FDI is discussed indetail in Chapter 3 ldquoForeign Direct Investmentrdquo

The following discussion of FPI will include information about the typesof foreign investors recognized by India the regulatory and registration re-quirements for foreign investment approval time periods entities eligibleto be registered tax considerations the financial instruments available toFIIs and investment limits imposed on foreign investment In addition thischapter addresses some challenges for US hedge funds as they seek registra-tion in India Finally there is a detailed explanation of the FII registrationprocedures

FOREIGN INVESTMENT

Foreign portfolio investment by investors in India is technically permissibleonly for investors registered with the Indian regulatory authority the Securi-ties and Exchange Board of India (SEBI)a as foreign institutional investorsmore commonly referred to as FIIs or as a sub-account of an FII

The strength and vitality of Indiarsquos economy accompanied by signifi-cant government reforms have led to increasing interest in Indiarsquos financialmarkets among global investors This phenomenon is best demonstrated bythe number of registered foreign institutional investors (FIIs) registered withSEBI up 66 percent in less than two years and more than doubling from482 in 2001 to 1057 in December 2006 (See Figure 21)

Total cumulative equity inflows including portfolio investment and for-eign direct investment amounted to more than US$106 billion betweenFY1991 and March 2006 with US$50 billion arriving in the three-year pe-riod from FY2004 to FY20061 The bulk of the growth from FY2003rsquosUS$6 billion to FY2006rsquos US$20 billion can be found in portfolio invest-mentsrsquo twelvefold increase from $1 billion to $125 billion (A full discussionof investment growth in India can be found in Chapter 1 ldquoIndiarsquos CapitalMarketsrdquo) These flows are illustrated in Figures 22 and 23

aThe Securities Exchange Board of India is discussed more fully in Chapter 4 ldquoSafetyand Integrity The Regulator and Market Safeguardsrdquo

Growth in Number of Registered Foreign InstitutionalInvestors 2000ndash2006

556482 489 517

F IGURE 21 Growth of registered FIIs 2000ndash2006Source Bombay Stock Exchange

Background

In 1991 India began liberalizing its economy with economic reforms aimedat stimulating the moribund economy Recognizing the extensive capitalrequirements necessary to bring about the desired growth and benefitsof foreign investment such as capital to fund business development andtechnology transfer the government designed new policies to attract and

F IGURE 22 Net portfolio investment by FIIs FY1993ndashFY2006Source Reserve Bank of India

F IGURE 23 Annual gross foreign investment flows FY1993ndashFY2006Source RBI Annual Report 2005ndash2006

manage foreign capital inflows In a 1992 budget address then FinanceMinister and current Prime Minister Dr Manmohan Singh introduced poli-cies to give foreign institutional investors access to Indiarsquos financial marketsPortfolio investment by FIIs in the primary and secondary markets was per-mitted for the first time in 1992 In addition foreign direct investment (FDI)was also liberalized Over the next year a number of procedures and policieswere implemented many of which are still in effect from the policy writtenby the Ministry of Finance in 1992

Statutes Regulat ing Investment by ForeignInst i tut ional Investors

The primary regulation governing investment by foreign institutional in-vestors is the Securities and Exchange Board of India (Foreign Institu-tional Investors) Regulations 1995 This has been subsequently amended23 times2 The most recent amendment called the Securities and ExchangeBoard of India (Foreign Institutional Investors) (Amendment) Regulations2006 was issued on June 26 2006 It addresses among other issuescertain application proceduresb Regulation 5(2) of the Foreign ExchangeManagement Act Notification No 20 2000 also governs the actions of FIIswith regard to their investments in India

bThese new procedures have been incorporated into the text of this book It shouldbe noted that at the most recent check the SEBI Web sitersquos application instructionsdo not incorporate these amendments

Types of Foreign Investors

A foreign investor may choose to participate directly in the Indian marketeither as a foreign institutional investor (FII) or as a sub-account

An FII as defined by SEBI is ldquoan entity established or incorporatedoutside India which proposes to make investment in Indiardquo

A sub-account is an individual or entity established or incorporatedoutside India that invests in India through an FII

FIIs and sub-accounts must register with the Securities and ExchangeBoard of India (SEBI) and the Reserve Bank of India (RBI) There is amarked difference in both the eligibility criteria and the registration processbetween FIIs and sub-accounts with sub-accounts of FIIs enjoying a lessrigorous standard and process This difference most likely accounts for thefact that an estimated 90 percent of the cumulative FII investments in Indiaare through sub-accounts versus the balance of just 10 percent representingproprietary investments made by FIIs3

E l ig ib le Ent i t ies

The following types of entities are eligible to register as an FII

Pension funds Mutual funds Insurance companies Investment trusts Banks University funds Endowments Foundations Charitable trusts and charitable societies Asset management companies Institutional portfolio managers Trustees Power-of-attorney holders

Protected cell companies and cells incorporated in Mauritius cannot beregistered as FIIs or as sub-accounts (See below for more discussion aboutMauritius as an FII-favored jurisdiction)

Registrat ion Requirements

As per regulations presented in SEBI (Foreign Institutional Investors) Regu-lations 1995 and its subsequent 23 amendments FIIs are required to fulfill

the following conditions to qualify for registrationc

1 They must have an established ldquotrack record professional compe-tence financial soundness experience general reputation of fairness andintegrityrdquo

2 An applicant must be a ldquofit and proper personrdquod

3 Applicants should be in existence for at least one year University fundsendowments foundations and charitable trusts should be in existencefor at least five years

4 Applicants should be ldquoregistered with and regulated by an appropriateforeign regulatory authority in the same capacity in which the appli-cation is filed with the SEBIrdquo Registration with authorities that areresponsible for incorporation only is not considered an adequate regu-latory authority to qualify as an FII

5 An applicant should be a regulated entity for at least one year prior toapplication

6 Applicants are required to obtain permission under the provisions of theForeign Exchange Management Act 1999 from the RBI

7 Applicants must be legally permitted to invest in securities outside thecountry of their incorporationestablishment

8 Applicants should not have legal proceedings initiated against them byany statutory authority

9 An applicant must appoint a local custodian and enter into an agreementwith the custodiane

10 An applicant must appoint a designated bank to open and main-tain foreign-currency-denominated accounts and nonresident rupee ac-counts and to route transactions

11 A registration fee of US$10000 is requiredf both for initial applicationsand for each renewal

Applicants applying under the ldquoasset management companyrdquo categorymust include a plan with details of the type of funds for which the applicantproposes to make investments for its clients (such as sub-accounts) It is

cRequirements Nos 3 4 and 5 are discussed in greater detail below with regard tohedge fundsdThe definition of and criteria for ldquofit and proper personrdquo are addressed in SEBIRegulations (Criteria for Fit and Proper Person) 2004eThe custodian must monitor investments on behalf of the FII and report suchinvestments to SEBI on a daily basisfThis is one of the key changes affecting FII registration as amended in the June 262006 SEBI (Foreign Institutional Investors) (Amendment) Regulations 2006 TheUS$10000 registration fee is an increase from the previous US$5000 registrationfee

not uncommon for applicants who apply for FII status under the assetmanagement company category to also submit a simultaneous applicationfor registration of a sub-account fund

Once approved FIIs must appoint a compliance officer to monitor com-pliance with the SEBI Act and all rules and regulations issued by SEBI andthe government

Debt-Only Investors

Standard FII registration requires the FII to invest not less than 70 percentof their total investments in equity-related instruments and up to 30 percentin non-equity instruments For those FII applicants who are interested onlyin debt securities FII regulations permit an FII or sub-account to apply as adebt-only investor who will make all of its investment in debt instrumentsThis application is known as the ldquo100 percent debt routerdquo The registrationprocedure under the 100 percent debt route is similar to the non-debt appli-cation except for the addition of a statement by the applicant that it wishesto be registered under the 100 percent debt route

Approval T ime Period

The SEBI uses a time-period benchmark for approving FII applications ofseven days from receipt but some approvals for FIIs have been as short asthree days When the applicant is a bank or subsidiary of a bank SEBI solicitscomments from the Reserve Bank of India (RBI) and thus the approvalprocess is usually extended as it becomes dependent upon the RBI reviewIncomplete applications or those requiring further information from SEBIwill also require additional time

Reject ion of Appl icat ion

Decisions to reject an application are communicated by SEBI to the applicantin writing stating the grounds on which the application was rejected Suchapplicants have 30 days to apply to SEBI for reconsideration and SEBI isrequired to give the rejected applicant a hearing

Val id i ty of Registrat ion

Once registered as an FII registration and subsequent renewals are valid forthree yearsg

gThe time validity of registration and renewal was reduced to three years from fiveas one of the changes affecting FII registration as amended in the June 26 2006SEBI (Foreign Institutional Investors) (Amendment) Regulations 2006

TAX CONSIDERATIONS FOR FI IS

The following discussion should be read as an overview only andas a method of introducing the reader to the many issues that shouldbe considered when seeking registration In no way should the in-formation presented be viewed as timely beyond the printing of thisbook as fully comprehensive or as tax or legal advice The reader isstrongly encouraged to consult with appropriate tax and legal expertsabout these issues and their most up-to-date recommendations whenseeking FII registration in India

Foreign investors in India are subject to various taxes related to capitalgains and business income These taxes are applied to entities based on vari-ous factors including (1) the nature of the income and whether it is businessincome or capital gains income (2) the length of time of the investment (ielong-term vs short-term capital gains) (3) whether the foreign entity hasa ldquobusiness presencerdquoh in India and (4) the tax jurisdiction of the foreigninvestor and whether that jurisdiction enjoys with India an Agreement forAvoidance of Double Taxation (AADT)

Long-term capital gains Long-term capital gains derived from the saleof equity shares or convertible securities executed on a recognizedstock exchange in India by an FII or sub-account are exempt fromIndian income taxi However as per an amendment to the IncomeTax Act in April 2006j there is a possibility of an alternative taxon the profits of 10455 percentk

Short-term capital gains Short-term capital gains achieved throughthe execution on a recognized stock exchange of India by an FII orsub-account are subject to tax in India at a rate of 10455 percentl

but investors may be able to avoid this tax subject to the provisionsof any applicable Agreement for Avoidance of Double Taxation(see below)

hA specific status defined by the India tax authoritiesiUnder section 10(38) of the Income Tax Act 1961jThe amendment was to section 115JB of the Income Tax Act 1961kThis includes a surcharge of 25 percent and an additional surcharge of 2 percentlUnder section 115AD(1)(ii) read with section 111A of the Income Tax Act 1961

Business income Profits from the sale of securities derivatives tradingand arbitrage trading can be deemed to be business income in certaininstances by the Indian tax authoritiesm Such income might thenbe subject to India income tax of 4182 percent If the FII is a taxresident of a country with which India has a tax treaty (see below)then such business income would be liable to the income tax inIndia only if the FII maintains a permanent establishment in Indiaas defined by the relevant AADT It is for this reason that many FIIsinvesting in India carefully avoid establishing any kind of presenceon the ground in India

Interest income Interest income earned by FIIs is taxable in India at arate of 2091 percentn

Dividend income Dividend income earned from portfolio companiesis exempt from Indian income taxo

Agreement for avoidance of double taxation The government of In-dia has entered into tax treaties with certain other countries forthe purpose of encouraging investment A key provision of thesetreaties is to provide protection to taxpayers against double taxa-tion for capital gains and other income The practical effect of thisis that FIIs domiciled in a jurisdiction that has entered into such atax treaty with India will not be subject to Indian taxes on theircapital gains

Maurit ius and Its Ind ian Bi lateral Tax Treaty

The country of Mauritius is home to a large majority of Indiarsquos registeredFIIs primarily because it is among a very few countries that has a bilateraltax treaty with India since 1983 that includes capital gains among its pro-tected income classes Thus as explained above the Indian-based capitalgains earnings of a Mauritius-registered entity are exempt from certain In-dian capital gains taxes As a result a majority of FIIs set up and registerinvestment vehicles in Mauritius to take advantage of these tax advantagesto which such Mauritius-based entities are entitled This is best illustratedby Table 21 which lists the country of origin for foreign direct invest-ment flows It is interesting to note that flows originating from Mauritius

mAs is true for the rest of this section the reader should consult with an Indian taxexpert to learn the exact nature of income that might be deemed ldquobusiness incomerdquoby the tax authoritiesnUnder section 115AD of the Income-Tax Act 1961oUnder section 10(34) of the Income-Tax Act 1961

TABLE 21 Country of Origin for Foreign Direct Investment

Fiscal Year 2003ndash2004 2004ndash2005 2005ndash2006

Total FDI Flows(US$ millions) $1462 $2320 $3358

Mauritius $381 26 $820 35 $1363 41United States 297 20 469 20 346 10UK 157 11 84 4 261 8Germany 69 47 143 62 45 13Netherlands 197 135 196 84 50 15Japan 67 46 122 53 86 26France 34 23 44 19 12 04Singapore 15 10 64 28 166 49Switzerland 5 03 64 28 68 20South Korea 22 15 14 06 61 18Others 218 15 300 13 901 27

Source Reserve Bank of India Annual Report 2005ndash2006

increased from 26 percent of all flows in the 2003ndash2004 period to 41 per-cent in 2005ndash2006 while those originating from the United States fell from20 percent to 10 percent of all flows in the same period It should be rec-ognized that country of origin indicates where the FII is incorporated andwhere the remittance into India came from not necessarily the origin of itsultimate end beneficiary

Investors seeking FII status would be wise to seek tax advice from appro-priate experts to ascertain whether such a structure or another structure isthe most suitable for their purposes SEBI officials have been clear howeverthat when they review applications and eligibility they do look through suchvehicles to the home country of the underlying investor as if the applicationwere submitted from that entityrsquos home country

While Mauritius-registration has tended to be a popular approach toaddress these tax issues there has been talk of a recent tax ruling by theIndian tax authorities with regard to a large American-based fund manage-ment company The fund company is believed to have successfully arguedto the Indian tax authorities that as its business is the buying and sell-ing of securities the profits from such business activities should be deemedbusiness income rather than capital gains income Furthermore if deemedbusiness income any associated taxes against such income should not fallunder capital gains rules but rather business income rules Further it arguedthis business income from a foreign entity with no ldquobusiness presencerdquo inIndia may in fact not be subject to any taxes at all Based on the successof that argument the fund company bypassed Mauritius incorporation and

registered directly from the United States While this situation and rulingcannot be verified at this printing the implications of such a ruling wouldimpact how potential FIIs might structure their application

This section should give readers an appreciation for many of the is-sues to be taken into account when structuring an FII registration andthe possible complexities associated with creating a tax-efficient investmentstructure Furthermore the reader should gain an appreciation of the valuethat can be obtained from clever tax advice received from an Indian tax andlegal expert

REPATRIATION OF INVESTMENT FUNDS

Although India maintains strict control over the movement of funds bydomestic entities to offshore jurisdictions the investment funds of FIIs areexpressly granted full repatriation rights as granted in the Foreign ExchangeManagement Act (FEMA) As per the FEMA approved FIIs are permittedto open special nonresident rupee accounts dedicated purely for inwardremittances and for meeting payment obligations for transactions in thesecurities market All balances in these special nonresident rupee accountscan be repatriated in full

CHALLENGES FOR US HEDGE FUND FI IS

Hedge funds registered in the United States under the Investment AdvisorsAct of 1940 tend to meet most of the criteria for registration under the assetmanagement companies category However there is considerable reluctancewithin SEBI and the government to approve or encourage such applicantsThis reluctance is discussed in detail in the November 2005 Report of theExpert Group on Encouraging FII Flows and Checking the Vulnerability ofCapital Markets to Speculative Flows

While the eligibility guidelines for FII registration are very specific is-sues that often elicit requests from SEBI for further elaboration from theapplicant (and thus slow down application approvals) revolve around re-quirement No 4 listed on page 24 in the Registration Requirements (1)the requirement of being regulated in onersquos home country (2) the natureof the regulation itself under which it is regulated as well as (3) the natureof the specific regulator regulating it

Eligibility requirements (see Nos 4 and 5) state that the applicant mustbe a regulated entity in its home country for at least one year and thatthe nature of the investorapplicantrsquos regulation by its home country is ina capacity similar to that for which the application is being filed but SEBI

extends these requirements when considering applications SEBIrsquos opinion ofthe nature of the foreign regulator and the nature of the regulation regulatingthe applicant is subjective It asks questions such as (1) Is the regulatoryregime under which the applicant operates a rigorous regime or is it aloose oversight and (2) Is the nature of the specific regulation under whichthe applicant operates considered adequate by SEBI as to the depth of theregulation or is that regulation considered inadequate for the interests ofSEBI These issues are discussed in greater detail next

Home Regulator

Simply being regulated by a regulator in onersquos home country is not enoughto meet SEBIrsquos requirement Instead SEBI is interested in the nature of theregulator and the strictness of the regulatory regime Are the local rulesstrict and enforced or are they loose and ignored Generally if an applicantis regulated by one of the internationally accepted regulators of developedmarketsmdashregulators such as the SEC (US) FSA (UK) ASIC (Australia)SFC (Hong Kong) or MAS (Singapore)mdashSEBI is satisfied with the qualityof the regulator

However if a regulatory regime is not known to be rigorous the ap-plication may be delayed or rejected In situations where the applicant isapplying as an entity from a tax haven jurisdiction such as MauritiusJersey the Cayman Islands or the British Virgin Islands SEBI may exam-ine the entity further by looking beyond the technical home country of theapplicant (the tax haven) and also examine the individual applicantrsquos truehome country the jurisdiction of that home country the regulator in thehome country and its ultimate registrationregulation

For example an application by a Mauritius-registered entity whoseultimate owner is a US hedge fund manager will result in the investigationnot only of the Mauritius entity and its principals but also of the US-based hedge fund manager the fitness of the manager the US regime underwhich it is regulated the US regulator (the SEC) and the suitability of itsregulation with regard to that hedge fund

Specific Regulat ions under Which theAppl icant Operates

After the SEBI is satisfied with the regulator it then examines the specificregulations that the applicant is subject to and whether the regulations areadequate according to the standards of the SEBI

The specific regulations are particularly relevant to hedge funds espe-cially those in the United States While the US Securities and Exchange

Commission (SEC) is a highly regarded regulator US hedge funds comeunder greater scrutiny by the SEBI because of (1) the one-year regulationrequirement for eligibility and (2) the nature of specific regulation in theUnited States regulating hedge funds

As of the date of this writing the regulation of US hedge funds is anissue fraught with confusion and uncertainty In 2005 the US SEC passed arule requiring hedge funds with assets in excess of US$30 million to registerwith the SEC as investment advisers and submit to occasional inspectionsof their books and records This rule went into effect in February 2006 atwhich time many hedge funds complied and registered However the rulewas challenged in court and voided by a US Court of Appeals in July 2006At the time of this writing the SEC was still deciding whether to appeal therecent ruling seek legislation reinstating it or pursue some other course ofaction Thus hedge fund applicants for FII registration face two questions

1 Are they registered with any entity If not their eligibility becomesproblematic

2 Does SEBI regard the regulation under which the hedge funds are reg-istered as in providing adequate oversight to the standard that SEBI isseeking Prior to the voidance of the registration requirement SEBI hadnot yet reached a conclusion regarding the nature of the recent UShedge fund regulation and whether it is simply an informative processor a more rigorous oversight of hedge fund operations Up to May 2006SEBI had not acted favorably on any US hedge fund applications whileit continued to review the nature of the regulation and whether SEBIconsiders it adequate for participation in Indiarsquos financial markets Withthe recent court ruling voiding the registration requirement altogetherSEBI approval will remain problematic

In addition to the difficulties in meeting the FII registration eligibilityrequirements for hedge fund applications in India US hedge funds alsoreceive greater scrutiny from SEBI because of two other concerns (1) a con-cern for mass movements of funds out of the market and (2) the originationof investor money

Mass Movement of Funds

The potential for the mass movement of funds out of the marketmdashwhichcould cause a short period of concentrated selling beyond what the domesticmarket can easily or comfortably absorbmdashremains a concern throughoutthe developing market and India is no exception Indian regulators havebeen concerned about the possibility of a mass foreign investor exodus from

the market that would overwhelm the buying power of domestic investorsthus leading to a sharp correction in the market Recent and expected fu-ture growth of domestic investor demand has mitigated some of these con-cerns However these concerns have not disappeared and SEBI remainsconsciousmdashand warymdashof the issue Thus the nature of a particular ap-plicantrsquos investment strategy and style will be scrutinized to determine thequality of the FIIrsquos contribution to the market

In the minds of some observers in Southeast Asia including govern-ment bureaucrats and politicians such as former Malaysian Prime MinisterMahathir the Asian economic crisis in the late 1990s was caused by hedgefunds and the havoc that their fast trading can cause particularly when op-erating under a herd mentality As SEBI is concerned about maintaining thequality of FII flows it seeks to approve only investors it considers respon-sible and beneficial to Indiarsquos capital markets The regulators are proud tonote that every year from FY1993 until FY2006 (ending March 31 2006)there have been net positive flows from FIIs into India with the only ex-ception being 1999 when net outflows totaled a mere US$166 million For2007 (encompassing the steep market corrections in AprilndashJune 2006 andFebruary 2007) net equity investment flows were up US$573 billion andnet FII investment in debt was up $127 billion resulting in a net positiveinvestment flow of almost US$70 billion for FY2007

Source of Funds

The Indian government remains vigilant about knowing the source of fundscoming into its markets This vigilance includes but extends beyond globalmoney laundering concerns from illegal sources of money Of particular con-cern to India is what is known as round-tripping Round-tripping concernsthe return of money to India in respectable form from money that originallyleft India illegally This might be money earned in the underground marketor money for which taxes were never paid

India has currency controls for citizens on the ability to move moneyoutside of the country The government wants to stop the illegal outflowsand wants to ensure that money coming back into India is not illegally ex-ported money Thus investments in India by nonresident Indians persons ofIndian origin and overseas-controlled businesses (known as Overseas Cor-porate Bodiesp) are monitored closely and fall under rules that are different

pOverseas Corporate Bodies (OCBs) are defined as entities that are predominantly(at least 60 percent) owned directly or indirectly by individuals of Indian nationalityor origin resident outside India and include overseas companies partnership firmssocieties and other corporate entities

from other foreign investors This issue may impact hedge fund applicantsbecause of their perceived lack of transparency as to the identity of under-lying investors and whether too large a block of a fund might in reality beround-tripping money returning to India

Growing Acceptance of Hedge Funds

In the spring of 2007 the Chairman of SEBI M Damodaran appeared tosoften his stance regarding hedge fund registration in the Indian marketsA proposal is under consideration to permit the registration of any foreignentity which agrees to make certain disclosures about their operations Thisshift from a previously harder line rejecting attempts by hedge funds toregister is thought to be a result of the widely accepted reality that hedgefunds are already participating in the Indian markets in a significant waybut doing so under the radar without disclosure to the regulators In 2006approximately 30 percent of the estimated US$200 billion in FII activitywas in the form of participatory notes and a significant percentage of thatactivity is thought to be hedge fund driven As such SEBI has apparentlydecided that it is better to have the hedge funds operate as registered entitiesin an open transparent and direct way with full disclosure rather thanthrough the hidden indirect route behind off-shore participatory notes Inresponse to critics expressing concern about the feared destabilizing effectthat hedge funds can impose on a stock market the SEBI Chairman notedthat since the hedge funds are in the market already albeit hidden theirability to destabilize will only be reduced by registration Time will tell howthis proposal to be more inclusive of hedge funds will develop but the trendis definitely positive for hedge fund acceptance

F INANCIAL INSTRUMENTS AVAILABLE TO FI IS

Foreign investors registered with SEBI can invest in the following financialinstruments

Securities in the primary and secondary markets including sharesdebentures and warrants of companies unlisted listed or to be listedon a recognized stock exchange in India

Units of mutual funds Dated government securities Derivatives traded on a recognized stock exchange and subject to oper-

ational guidelines as specified by the SEBI the RBI and other variousregulatory authorities

Commercial paper

The following are the main financial productsinstruments traded in thesecondary market

Equity Equity shares Rights issues and rights shares Bonus shares Preferred stock and preference shares Security receipts Cumulative preference shares Cumulative convertible preference shares Participating preference shares

Derivatives Futures Options Participatory notes

Fixed Income Government securities Bonds

Zero-coupon bonds Convertible bonds

Debentures Commercial paper Treasury bills

Short Sel l ing

Short selling is not permitted in India at the present time However theMinister of Finance and SEBI announced in the 2007ndash2008 Annual BudgetSpeech that short selling by domestic and foreign institutions will be ap-proved in 2007 The rules and regulations surrounding short selling have yetto be finalized and the settlement community will need to organize a stocklending and borrowing regime to support the business In the meantimemarket participants acknowledge that investors seeking to hedge positionsor pursue a downside short strategy can utilize the index and single stockfutures and options which trade for in excess of 180q underlying stocks andfour indexes

qThe BSE and NSE trade single stock futures and options for 155 underlying stocksas of 1Q2007

Offshore Derivat ives and Part ic ipatory Notes

Investors both registered and unregistered with SEBI may access theIndian market through the use of offshore derivative instruments knownas participatory notes (or P-notes) Participatory notes are equity-linked in-struments that track the performance of underlying equity securities listedon any stock exchange in India FIIs and sub-accounts may issue deal inand hold participatory notes Participatory notes are generally created byone of the large international investment banks with FII status in responseto an investor expressing interest in a particular Indian stock The FII invest-ment bank would then purchase that stock for its own account and issue tothe investor what is essentially a contract guaranteeing the investor a returnon that contract exactlyr matching the return on the underlying stocks Theuse by foreign investors of participatory notes has steadily increased sincethe government began tracking them in September 2003 when approxi-mately 26 percent of net FII investments was through participatory notesIn fiscal year 2004ndash2005 ending March 2005 participatory notes repre-sented on average 3269 percent of monthly net FII investment and in thefirst five months of fiscal 2005ndash2006 this proportion increased again to4031 percent4

Regulatory Caut ion Regarding Part ic ipatory Notes Although foreign in-vestment in India through participatory notes has been growing SEBI theMinistry of Finance and the RBI have become increasing uncomfortablewith their growing popularity The financial market regulators have alwaysmaintained that it is imperative to monitor foreign investment not only withregard to the size of the investments but also with regard to the sources ofthe funds behind them Of particular concern has been the ability to track theimport of ldquodirtyrdquo money enforce anti-money-laundering rules monitor thereturn of NRIPIOOCBt money and prevent the investment of fast money

rDifferent issuers of participatory notes may offer investors variations on the ideaand features specific to that contract or investorsAs of the end of June 2005 the most recent data available only 17 registeredFIIs out of the then-registered 733 FIIs had issued PNs The total value of underlyinginvestments in equity represented by the PNs was Rs 67185 crore (simUS$15 billion)representing about 25 percent of the cumulative net investments in equities by FIIs ofRs261334 crore (simUS$594 billion) (Report of the Expert Group on EncouragingFII Flows and Checking the Vulnerability of Capital Markets to Speculative FlowsNovember 2005 annex III)tNon-Resident IndiansPersons of Indian OriginOverseas Corporate Bodies Of par-ticular concern to Indian authorities is the return to India of money that left thecountry illegally either because it was earned in illegal ways or because it was theresult of illegal tax avoidance

(ie hedge funds) As participatory notes were issued offshore by foreignentities registered as FIIs and then the holders of the participatory noteshad in some cases the ability to sell them on to others the number of layersbetween the regulator and the ultimate beneficial owner grew impeding theability of the regulators to have complete knowledge of the beneficial ownerThe RBI response to the governmentrsquos Report of the Expert Group on En-couraging FII Flows and Checking the Vulnerability of Capital Markets toSpeculative Flows November 2005 was to recommend a phasing out ofthe participatory note issuance due to this lack of knowledge issues It wasdecided to maintain the rule implemented by SEBI in February 2004 thatrequired FIIs to issue P-notes only to regulated entities and not to any non-regulated entities such as hedge funds and that further transfers if any mustbe only to other regulated entities P-notes issued prior to February 2004to nonregulated entities are permitted to expire or to be wound down onmaturity or within a period of five years whichever is earlier Furthermorethe RBI supported SEBIrsquos ability to gain full knowledge of the beneficialowners from issuing FIIs through regular reporting requirements

Why Investors Use Part ic ipatory Notes Foreign investors choosing toparticipate in Indiarsquos markets through participatory notes rather than di-rectly as an FII or sub-account fall into several groups

One group of investors uses participatory notes because it is ineligibleto apply for FII status Many hedge funds fall into this group for the reasonsdiscussed above

Another group of investors some of whom might easily obtain approvalas an FII choose not to do so because the participatory note route is quickand easy The major advantages to using the participatory note route ofinvesting in India are that an investor can avoid going through the registra-tion process with SEBI does not have to pay attorney and accounting feesto prepare the application does not have to pay the application fee doesnot have to hire custodians and clearing agents and does not have to dealwith local brokers FII-eligible entities might choose to use participatorynotes because they do not anticipate active investment activity in India butrather sporadic or small involvement possibly as part of a global investmentstrategy in which India is only a small percentage of the portfolio

A third group of investors some of whom have FII status use theparticipatory note route for some trades to ensure that their identity is hiddenfrom the market (except from the participatory note issuer of course) Whiletrading with a broker in any country is supposed to be confidential and theBSE BOLT and NSE NEAT trading systems are anonymous with regard tothe underlying client inevitably investor names sometimes get out into themarket to the detriment of the investor As this is a problem worldwide in

every marketplace particularly but by no means exclusively in the emergingmarkets one method investors in India have found to stay anonymous is totrade through participatory notes

Disadvantages to Using Part ic ipatory Notes There are two distinct dis-advantages to using participatory notes (1) The cost of using participatorynotes is higher than going direct and (2) the buyer is a captured clientof the participatory note issuer in that it must exit the position throughthe brokerissuer of the participatory note The cost disadvantage is de-batable however when one weighs the high single-trade execution costof a participatory note against the startup cost of the application pro-cess including the US$10000 registration fee and the fees of attorneysand others Obviously the more trading one does the more advantageousregistration becomes

E l ig ib i l i ty to Use Part ic ipatory Notes SEBI regulations officially defineentities that are eligible to subscribe and invest in participatory notes as5

1 Any entity incorporated in a jurisdiction that requires filing of con-stitutional andor other documents with a registrar of companies orcomparable regulatory agency or body under the applicable companieslegislation in that jurisdiction

2 Any entity that is regulated authorized or supervised by a central banksuch as the Bank of England the US Federal Reserve the Hong KongMonetary Authority the Monetary Authority of Singapore or any othersimilar body provided that the entity must not only be authorized butalso be regulated by some of the aforesaid regulatory bodies

3 Any entity that is regulated authorized or supervised by a securitiesor futures commission such as the Financial Services Authority (UK)the Securities and Exchange Commission (US) the Commodities Fu-tures Trading Commission (US) the Securities and Futures Commis-sion (Hong Kong or Taiwan) Australian Securities and InvestmentsCommission (Australia) or other securities or futures authority or com-mission in any country state or territory

4 Any entity that is a member of securities or futures exchanges such as theNew York Stock Exchange (US) London Stock Exchange (UK) TokyoStock Exchange (Japan) NASD (US) or other similar self-regulatorysecurities or futures authority or commission within any country stateor territory provided that the aforementioned self-regulatory organiza-tions are ultimately accountable to the respective securities and financialmarket regulators

5 Any individual or entity (such as a fund trust collective investmentscheme investment company or limited partnership) whose investmentadvisory function is managed by an entity satisfying the criteria of (1)(2) (3) or (4) above

Report ing Requirements for F I Is and Sub-Accounts IssuingPart ic ipatory Notes

FIIs and sub-accounts that issue renew cancel or redeem participatorynotes are required to report their activity to SEBI on a monthly basis bythe seventh day of the following month

FIIs and sub-accounts investing in or subscribing to participatory notesaccess products offshore derivative instruments or any such type ofinstrument and security with underlying Indian market securities arerequired to report on a quarterly basis (JanuaryndashMarch AprilndashJuneJulyndashSeptember and OctoberndashDecember)

FIIs and sub-accounts that do not issue participatory notes but tradeand hold Indian securities during a reporting quarter (JanuaryndashMarchAprilndashJune JulyndashSeptember and OctoberndashDecember) are required tosubmit ldquonilrdquo undertaking on a quarterly basis

FIIs and sub-accounts that do not issue participatory notes and do nothave trades or holdings in Indian securities during a reporting quarter(JanuaryndashMarch AprilndashJune JulyndashSeptember and OctoberndashDecember)are not required to report for that reporting quarter

American Depositary Receipts (ADRs) and GlobalDepositary Receipts (GDRs)

Foreign investors can also access shares of certain Indian companies withoutany form of registration or Indian regulation through the use of AmericanDepositary Receipts (ADRs) and Global Depositary Receipts (GDRs) listedin the United States London and elsewhere Purchasing Depositary Re-ceipts is the fastest and easiest way for a foreign investor to gain investmentexposure and is available to all investors in the United States both institu-tional and retail who can purchase local US stocks Depositary Receipts aresimilar to the abovementioned participatory notes in that they are equity-linked instruments that track the performance of their underlying securityThe issuances of ADRsGDRs for Indian companies are deemed by the In-dian authorities to be a form of foreign direct investment (FDI) and thusissuers must abide by applicable existing FDI policy as set by the Ministryof Finance and Reserve Bank of India All ADRs and most GDRs are de-nominated in US dollars although GDRs can be denominated in another

currency The Issue of Foreign Currency Convertible Bonds and OrdinaryShares (Through Depositary Receipt Mechanism) Scheme 1993 addressesmany of the issues surrounding GDRs and ADRs

Definit ions

American Depositary Receipt (ADR) An American Depositary Receipt(ADR) is a certificate issued by a US bank that represents a fixed ratioof shares of a foreign ordinaryu stock ADRs trade in the US markets ei-ther listed on an exchange or on NASDAQ Furthermore they are quotedtraded and settled in US dollars regardless of the currency of the underly-ing ordinary share The concept of Depositary Receipts was created by thelegendary banker J P Morgan in the 1920s to assist American investors topurchase shares listed in London At the time Mr Morgan sought to easethe foreign investment process for Americans by handling such aspects ascurrency conversion settlement and dividend collection The success of thefirst ADR spawned what is today an entire security class and may be one ofthe first derivatives ever created

ADRs are initially created when a corporate issuer issues to a US bankunderlying ordinary shares that are kept at the ADR-issuing bankrsquos localcustodian bank The US bank then issues receipts against these depositedshares and it is these receipts that are the American Depositary ReceiptsAs noted above the ADRs represent a fixed ratio of ordinary shares thatcan be greater than or equal to 11 For example if the ratio is 31 theneach ADR represents 3 underlying shares If the ratio is 051 two ADRswould represent 1 underlying share In theory the price of an ADR shouldbe exactly equivalent to its intrinsic pricemdashthe aggregate price of the corre-sponding number of underlying shares In reality ADRs tend to trade aroundthe intrinsic price often at a premium but occasionally at a discount Thisis discussed in greater depth below in the section titled ldquoADROrdinaryArbitragerdquo

American Depositary Share (ADS) An American Depositary Share (ADS)is the actual underlying ordinary share held by the US depositary bankthat issued the ADR and is the share(s) for which the ADR certificate is thereceipt Many people use the term ADS and ADRs interchangeably

uAn ordinary stock refers to the shares trading in the local domestic primary exchangewhere the issuing company is listed Ordinary shares are distinguished from overseaslistings and other instrumentsderivatives representing the primary shares

Global Depositary Receipt (GDR) Global Depositary Receipts (GDRs) arecertificates issued outside of the United States by a non-US bank that repre-sent a fixed ratio of shares of a foreign ordinary stock GDRs are very similarto ADRs The key differences are that they are issued by a non-US bankthey may trade in currencies other than US dollars they are not listed onthe US exchanges and they are not subject to the US SEC registration re-quirements and US regulations such as Sarbanes-Oxley Some issuers mightprefer issuing GDRs over ADRs to avoid the SEC requirements even if itmeans forgoing access to the retail US investor

Sponsored ADRs Sponsored ADRs are those that were created and man-aged by the underlying company Unsponsored ADRs are created by bankswithout the companyrsquos involvement The NYSE and NASDAQ in the UnitedStates trade only sponsored ADRs

Benefits of ADRsGDRs to Investors ADRs are purchased by US investorsfor several reasons most of which revolve around the ease with which theyprovide exposure to foreign stocks they cater to investors either unfamiliarwith or uncomfortable with overseas investment Specifically the benefitsinclude

US dollar denominated ADRs are quoted trade and settle in USdollars The investor does not need to worry about currency conversionwhen quoting the stock or to effect settlement Furthermore the investordoes not need to maintain a foreign currency account at his or her brokerto hold the position as might be required if holding the foreign ordinaryshares All this said however the investor is still subject to the risks ofcurrency fluctuations in terms of converting the intrinsic value of theADRrsquos underlying shares into US dollars

SEC regulated ADRs listed and traded in the United States areregistered with and subject to the rules and regulations of the USSecurities and Exchange Commission giving investors some peaceof mind regarding the legitimacy of the shares they are purchasingholding

US dollar dividends For those underlying companies that pay divi-dends to shareholders owners of ADRs receive their dividends in USdollars and need not worry about handling the currency conversion oflocally denominated dividends

Corporate actions Any corporate actions instituted by the underlyingcompany get addressed by the ADR-issuing Depositary Bank on behalfof the ADR owner Corporate actions might include such actions asstock splits non-cash dividends and rights offerings

Institutional investor restrictions Many institutional investors werecreated under charters limiting their investment to US-listed or -tradedsecurities ADRs provide the only ability for such institutions to gainforeign exposure

US trading hours Since ADRs trade in the US markets investorscan quote them and bid foroffer the ADRs during normal US daytimehours rather than having to trade in foreign local hours For instancethe Indian stock exchangesrsquo trading hours are between 1155 PM and 6AM New York DST the middle of the night and somewhat inconvenientfor most investors in the United States

No lead time Particularly in the case of investing in India the pur-chase of ADRsGDRs can be done immediately by any investor Thelead time for registering as an FII could be six weeks when including thetime to complete the application hire attorneys accountants and cus-todians and open brokerage accounts not to mention putting togethera tax-efficient structure for the FII entity Even participatory notes re-quire some lead time to set up the arrangement with an issuing invest-ment bank

Benefits of ADRsGDRs to Foreign Corporat ions There are several reasonstypically presented for a foreign corporation to issue ADRs andor GDRs

Access vast US investor liquidity The primary reason companies is-sue depositary receipts (DRs) is to gain access to the tremendous poolof international investment capital located in the United States andEurope particularly from investors legally or in practice limited to theirhome market products Many US institutional funds are limited bytheir prospectus to investments in US-traded products thus their onlyway to obtain exposure to foreign markets is through US-listed and-traded ADRs The great majority of the 91 million individual investorsand 57 million equity-owning households in America currently limittheir investments to US funds or US-traded products The most re-cent statistics available from the Investment Company Institute indi-cate that 63 percent of equity-owning households or almost 36 millionhouseholds own foreign equities and do so both through global mu-tual funds or by owning individual stocks6 The form of this ownershipis overwhelmingly through DRs As noted in the above section aboutADR benefits to investors most of this huge investment pool will onlyconsider ADRs when seeking foreign exposure

Enhance foreign visability A second significant reason to issue ADRsor GDRs is for foreign corporations to build their visibility with foreigninvestors

Create US valued currency A third reason also significant to the cor-porations is to create a currency with which to participate in takeoveractivity in the listing country Should an Indian corporation wish topurchase US corporations but not do so primarily using cash USshareholders of the US corporation would view a bid using US-listedUS-dollar-denominated ADRs similarly to a US-listed US-dollar-denominated share of a US corporation In other words the US-listedUS-dollar-denominated ADRs would act as a currency with which topurchase US-traded companies

Boost credibility with investors Finally some companies listed in theUnited States also gain a measure of credibility with US investors andto some extent with their local investment community

Having noted the above reasons recent events and realities of the globalinvestment climate have made the issuance of US ADRs less valuableto Indian corporations than it might once have been thus explaining tosome extent the relatively small number of only 13 Indian corporationssponsoring ADRs

Indian corporations now have the ability to raise significant capital intheir home markets thus forestalling their need to seek capital fromoverseas markets such as the United States

The implementation of the US Sarbanes-Oxley Bill in 2002 dramati-cally increased the costs and liability that a US-registered security issuerfaces in complying with US corporate law This increased burden onall corporations domestic and foreign-based and the concurrent nega-tive impact that the new regulation has on the ability of the US capitalmarkets to compete with other international markets for foreign listingsfurther reduce the likelihood of new Indian ADRs getting issued

The primary reasons Indian companies now seek ADR listings is toestablish a currency in the United States as previously discussed

Disadvantages of ADRs to Investors Although ADRs provide a numberof benefits to investors there are two significant disadvantages to limitingonersquos foreign investment capability to available ADRs

Limited ADR availability Only a very small percentage of foreigncompanies have issued ADRs andor GDRs when compared with theuniverse of foreign listed companies In the case of India where thereare in excess of 7000 listed companies there are only 10 NYSE-listedand 3 NASDAQ-listed ADRs and 19 London Stock Exchange-listed

GDRsv Thus investors limiting themselves to ADRs or GDRs arevery limited in their investment options when seeking exposure to theIndian market

Imperfect pricing As noted above Depositary Receipts should theo-retically trade at the intrinsic aggregate value of their underlying sharesRealistically though they tend to trade around the intrinsic value pre-dominantly at a premium Thus investors purchasing ADRs are likely topay a higher price than they might otherwise pay if buying the ordinaryshares as FIIs in the local market Contributing to the imperfect pricingare issues such as a restricted number of available ADRs If the demandfor ADRs by foreign investors exceeds the demand for local shares andno more ADRs can be createdw the ADRs will trade to a premiumover the ordinaries Practically speaking the premium or discount tothe intrinsic value will be controlled by the actions of arbitrageurs asdiscussed below

ADR Two-Way Fundabi l i ty Creat ion and Breakup ADRs are certificatesrepresenting a fixed number of underlying ordinary shares For every ADRissued there are a fixed number of shares that are represented by that ADRheld in a depositary ADRs are initially created by an ADR-issuing USbank by their purchasing the shares placing them with a custodian bankand issuing Depositary Receipts against those shares Because India regardsADR issuance as a form of FDI and there are company and industry limitson permitted FDI the number of shares eligible to be purchased for creationof ADRs is limited and controlled ultimately by the Ministry of Financeand the RBI

A 2002 amendment to the Issue of Foreign Currency Convertible Bondsand Ordinary Shares (Through Depositary Receipt Mechanism) Scheme19937 opened the door to limited two-way convertibility of ADRs andGDRs The result was that not only could corporations and ADR-sponsoringUS banks create ADRs but investors owning ADRs had the option tobreak them into ordinary shares or interestingly purchase ordinary shares

vSee Table 22 for a list of the NYSE- and NASDAQ-listed ADRs and LSE-listedGDRswIn India ADRGDR issuance falls under the FDI rules of the Ministry of Financeand the RBI and are subject to foreign investment limits imposed on certain industrysectors Thus there is a limit to the number of Depositary Receipts (DRs) that can becreated for any particular approved issue Once the limit of available and approvedunderlying shares used for DRs is reached no more DRs will be created and the DRswill trade to a premium

to reconvert them back into ADRsx The mechanisms to affect the breakingup or reconversion of ADRs is beyond the scope of this book For purposesof understanding the existence of price differentials between ordinaries andADRs however the reader should understand that there is a cost associatedwith these mechanisms that although small does exist

ADRs and GDRs Avai lab le for Trading At the time of the writing of thisbooky there are a total of 32 ADRs and GDRs listed and available fortrading in the United States and the United Kingdom 10 NYSE-listed ADRs3 NASDAQ-quoted ADRs and 19 London Stock Exchangendashlisted GDRsTable 22 lists the names of the underlying companies their ADRGDR localsymbols and the ratio of underlying ordinaries to Depositary Receipt Ofthese two of the listings occurred in 2006 one on the NYSE and anotheron the LSE

ADROrdinary Arbitrage US-listed ADRs and foreign locally listed ordi-nary shares are linked financial instruments that have a fixed ratio betweenthem and thus should theoretically trade in such a way that the ADR isvalued at exactly the aggregate value of the underlying ordinary shares

Theoretical Price of ADR = [Price of Ordinary] times [Conversion Ratio]

Thus if each ADR represents three ordinary shares then the price ofthe ADR should equal the price of the ordinary share times three Howeverseveral factors exist that result in a differential between the actual andtheoretical price of the ADR The factors creating this differential are bothof the inefficient and efficient kind and include

Market trading times differentials At any point in time trading on anexchange reflects micro and macro events that are occurring at that mo-ment These can be non-company-specific industry related local marketrelated local economy related or even global issues that will move in-dividual stock prices away from the value of related securities listed onother markets The related security would not be trading at the sametime given that its market is closed thus price differentials will open upThese differentials may be arbitrage opportunities

xThe reconversion of broken ADR shares back into new ADRs is limited to theshares previously created by breaking other ADRs and subject to FDI limitations Themechanism for this process is beyond the scope of this book and interested readersshould consult the bank sponsors of particular ADRs or GDRs wwwadrcom aunit of JP Morgan Chase Bank and wwwadrbnycom a unit of the Bank of NewYork are particularly good sources for Depositary Receipt informationyAs of October 2006

rsquosL

rsquosA

Inefficient markets Perfect theoretical pricing relies on completely ef-ficient markets including equal dissemination of information to all par-ties in the market We do not yet live in such a world and uniform in-formation dissemination around the world between markets and timezones is still not a reality Thus information differentials between mar-kets and investors lead to price differentials These differentials may bearbitrage opportunities

While arbitrage opportunities arise due to price discrepancies and thearbitrage trades result in such spreads narrowing the market is not so effi-cient that arbitrageurs act to close the slightest spreads In fact some prac-tical considerations come into play that allow a spread to persist withoutarbitrage activity These practical considerations include

ADR supply limits As already noted ADRs are considered a form ofFDI in India and thus subject to restrictions on supply Should the ADRissue limit be reached in the face of continued strong demand by ADRbuyers a premium in the ADR price will arise These differentials maybe arbitrage opportunities

Costs of Arbitrage ADR creationbreakup costs Although small the costs associated

with breaking ADRs or reconverting shares back into ADRs createsa price differential that arbitrageurs must factor in when assessingthe opportunity to make money These differentials are not arbitrageopportunities

Commission costs Transaction fees on both sides of an arbitragetransaction must be factored in before calculating whether a givenprice differential is a profit opportunity

Currency conversion costs Although very small there does exist aspread in the currency markets and this spread is a cost of conversionand thus will create a differential that will not alone be an arbitrageopportunity

Inability to short one side An arbitrage involves buying the cheaperinstrument and shorting the more expensive instrument locking in thespread and then converting one instrument to the other to close theposition and realize the locked-in spread This is dependent on beingable to short one side of the trade Since shorting of securities is stillnot permitted in India the arbitrage can be one way buying ordinariesand shorting ADRs Should ADRs ever trade to a discount arbitrageactivity cannot be performed to close the discount and all else equal the

discount price differential will persistz In cases where the ADRs tradeto a premium the strategy is to buy the ordinaries and short the ADRthen reconvert shares into a new ADR to cover the short However ifthere are no ADRs available to borrow the short side of the transactioncannot be executed Similarly if there is no ADR capacity in the systemto create new ADRsaa no ADRs can be created to cover the short In thislast situation however the trade might still be put on and the positionwould be left open anticipating the large premium to closebb

Price differential thus may create arbitrage opportunities between thetwo instruments that can be a source of profit for traders Such arbitrageopportunities do exist between Indian ADRs and India-listed ordinaries andarbitrage trading does occur between the two instruments taking place overthe US ADR market and the India-listed ordinary market (arbitrage activityalso occurs between the UK GDR market and the India-listed ordinarymarket) Appendix K of this book takes the reader through an example ofADRordinary arbitrage

INVESTMENT LIMITS

Foreign investors are subject to limits on the size of their investments inIndian securities and derivatives regardless of whether they invest in Indiathrough the primary and secondary capital markets or through foreign directinvestment These investment limits are set by SEBI and the RBI These limitsare periodically changed and during the economic liberalization processfrom 1991 through 2006 the changes have largely reflected a loosening ofthe investment limits

Investments by nonresident Indians and persons of Indian origin aresubject to limits that are different from other FIIs some are stricter andsome are looser limits The regulations rules and limits discussed in thisbook apply primarily to investors not falling under the status of nonresidentIndians and persons of Indian origin For investors who are interested inmore details about the restrictions and advantages applicable specifically to

zAs of the time of this writing short selling is not permitted Sophisticated traderscan get around this problem by creating a synthetic short one method of whichentails maintaining a large perfectly hedged portfolio and then selling the ordinariesfrom the portfolio to create the synthetic shortaaeg if the ADR limit as per FDI limits is reachedbbWhile a good strategy large premiums do get larger spreads widen and such atrade can lose money

nonresident Indians and persons of Indian origin please consult the RBIWeb site at wwwrbiorgin

Aggregate F I I Investment L imits

For FII investments the following limits currently apply to aggregate foreigninvestment in an Indian company

Twenty percent of the paid-up capital can be owned in public sectorbanks including the State Bank of India

Twenty-four percent of the paid-up capital can be owned aggregatelyby all FIIs inclusive of their sub-accounts

The 24 percent ceiling can be raised up to sectoral cap and statutoryceilings subject to the approval of the companyrsquos board and shareholderspassing a special resolution to that effect A number of companies haveincreased percentages to 30 percent 40 percent and 49 percent In additionother companies have raised their FII investment limits to between 50 percentand 74 percent (referred to as intermediate limits) and a smaller group haveapproved FII investment up to 100 percent of the paid-up capital

Monitor ing Aggregate Foreign Investment L imits The RBI monitors theholdings of FII investments in Indian companies on a daily basis to ensurethat the investment limits are not breached The RBI has set alert pointsthat are 2 percent below the investment limits to act as a warning that thelimit is being approached For example the alert point for companies with a24 percent ceiling is set at 22 percent Once the aggregate FII net purchasesof equity shares of the company reach the alert point (2 percent below theactual limit) the RBI issues a ldquocautionrdquo Following this additional purchasesof the company in question are prohibited without prior approval from theRBI When the banks receive further orders to buy shares in the companythey are required to inform the RBI about the total number and value ofequity shares and convertible debentures they have orders to buy on behalfof FIIs On receipt of this information the RBI provides clearances on afirst-come-first-served basis until such investments in companies reach theirultimate approved limits On reaching the aggregate investment limit theRBI issues a ldquostop purchaserdquo advisory to all designated banks with regardto purchases in that stock on behalf of their FII clients These ldquocautionrdquo andldquostop purchaserdquo advisories are disseminated to the general public througha press release and maintained by the RBI in an up-to-date list of all limitlevels on its Web site at wwwfiilistrbiorgin Investors interested in the

limits of a particular company or whether that company is nearing or at itslimit should consult this Web site

Ind iv idual Investor L imits

In addition to the limits imposed for aggregate foreign investment in Indiancompanies there are limits for individual FIIs and sub-accounts8 Theseinclude

Equity Investments Ten percent of total issued capital of an Indian company by an FII on

its own behalf Ten percent of total issued capital of an Indian company on behalf of

each sub-account Five percent of issued capital for each sub-account registered under

foreign companiesindividual category

Derivative Investments Individual stock derivative contracts (including options contracts and

single stock futures contracts) Twenty percent of the marketwide limit for stocks in which the mar-

ketwide position limit is less than or equal to Rs250 crore (simUS$55million)cc

Rs50 crore (simUS$11 million) for stocks in which the marketwideposition limit is greater than Rs250 crore (simUS$55 million)

Index option contracts On a particular underlying index Rs250 crore (simUS$55 million) or

15 percent of the total open interest of the market in index optionswhichever is higher per exchange This limit applies to open positionsin all options contracts on a particular underlying index

Index futures contracts The limit for all index futures contracts on a particular underlying

index is Rs250 crore (simUS$55 million) or 15 percent of the totalopen interest of the market in index futures whichever is higher perexchange This limit applies to open positions in all futures contractson a particular underlying index

ccThroughout this book a rupeeUS-dollar exchange rate of 451 is used regardlessof the date on which the rupee-denominated statistic was released The exchangerate of 451 represents the approximate midpoint of the fx rate in calendar 2006

Interest rate derivative contracts For an FII the notional value of the gross open position of an FII in an

exchange-traded interest rate derivative contract is US$100 millionIn addition the FII may take exposure in exchange-traded interestrate derivative contracts to the extent of the book value of the cashmarket exposure in government securities

For a sub-account the position limits in near-month exchange-traded interest rate derivative contracts will be the higher ofRs100 crore (simUS$23 million) or 15 percent of the total openinterest in the market in exchange-traded interest rate derivativecontracts

BROKERAGE FEES

The maximum brokerage fee that can be charged by a broker is specified bySEBI and is currently set at a maximum of 25 percent brokerage to clientsThis maximum brokerage is inclusive of the brokerage charged by a sub-broker In addition the SEBI (Stock Brokers and Sub-Brokers) Regulation1992 stipulates that a sub-broker cannot charge clients a commission thatis more than 15 percent of the value mentioned in the respective purchaseor sale note

Stock brokers and sub-brokers may charge investors

Brokerage charges by member brokers Penalties arising on specific defaults on behalf of clients (investors) Service tax as stipulated Securities transaction tax

The securities transaction tax (STT) was created by the Finance Act(No 2) 2004 As a tax on the value of certain transactions it applies to theIndian stock exchange for (1) purchases and sales of equity shares and unitsof equity-oriented mutual funds (delivery-based) (2) the sale only of equityshares and units of equity-oriented mutual funds (non-delivery based) and(3) the sale of derivatives At the time of this writing typical purchases andsales of equity shares were subject to an STT of 010 percent and derivativesales-only were subject to an STT of 001 percent9 These rates are subjectto change by the government

The brokerage charge service tax and securities transaction tax mustbe indicated separately in contracts

F I I APPLICATION PROCEDURES

How to Register to Be an F I I

SEBI has attempted to make the registration process clear andstraightforward and it has provided a lot of information on its Website at wwwsebigovin to assist prospective applicants What followsis information provided by SEBI on its Web site or obtained by theauthor from discussions with key SEBI officials

To register as an FII

1 Applicants must use Form A of the SEBI (FII) Regulations Act 1995approval of which is valid for three years and can be renewed (Acopy of Form A from the SEBI can be viewed on the SEBI Web siteat wwwsebigovinfiifii5pdf)

2 The application form and all supporting documents must be submittedin duplicate one set each for SEBI and the RBI Both sets of applicationsare to be sent only to SEBI

3 Applications should be sent toThe Division ChiefFII DivisionSecurities and Exchange Board of India224 Mittal Court B Wing 1st FloorNariman Point Mumbai 400 021India

If the applicant meets the eligibility requirements and all of the docu-ments are submitted with the application SEBI has set an approval time ofseven days as its benchmark

The registration procedure operates as a single-window procedurethrough SEBI in which the following steps are involved

1 SEBI forwards one set to the RBI2 The application is processed by SEBI to determine the eligibility of the

applicant3 After the initial processing is completed and eligibility is determined the

SEBI writes to the RBI noting the eligibility of the applicant At the sametime a letter is sent to the applicant asking him to pay a registration fee

of US$10000 by a demand draft to the ldquoSecurities and Exchange Boardof Indiardquo payable in New York

4 The RBI gives approval to the FII through its designated bank Thisapproval is granted through the Foreign Exchange Management Act(FEMA) and enables the FII to open a bank account As noted earlierthis is a special nonresident rupee account of the FII meant purely forinward remittances and meeting payment obligations with regard tothe securities market All balances in this account can be repatriatedin full

5 Upon receipt of fees from the applicant and FEMA approval from theRBI the SEBI grants a certificate of registration that is valid for threeyears and can be renewed

SEBI registration transferability The SEBI FII registration is not trans-ferable In the case of a registered FII losing its existence such asin a merger or takeover the SEBI FII registration cannot be trans-ferred to the surviving entity The surviving entity must obtain newregistration as an FII from the SEBI

Registration renewal procedure The FII has to apply for renewal threemonths before the registration expires The application for renewalis the same as an application for the FII registration The renewalperiod is three years

Sub-Accounts

There are two categories of sub-accounts

1 Broad-baseddd and proprietary sub-accounts These are allowed to in-dividually buy up to 10 percent of the total issued capital of a company

2 Foreign corporates and foreign individuals Investment by each sub-account in this category should not exceed 5 percent of the issued capital

Sub-Account Registrat ion To register a sub-account

Applicants must submit Annexure B of the FII application Form Asigned by both the FII and the sub-account

ddA fund established or incorporated outside of India that has at least 20 investorsno one of which holds more than 10 percent of the shares or units of the fund If oneof the investors is an institutional investor the 20-investor rule will no longer applyif the institution is itself a broad-based fund

A fee of US$2000ee must be paid by demand draft to the ldquoSecuritiesand Exchange Board of Indiardquo payable in New York and should besubmitted along with the Annexure B (A copy of this form can beviewed on the SEBI web site at wwwsebigovinfiifii7pdf)

Sub-Account E l ig ib i l i ty Entities that are eligible to register as a sub-accountinclude

Institutions or funds or portfolios established outside India regardlessof whether incorporated

Proprietary funds of FIIs Foreign corporates Foreign individuals

While individuals are technically eligible to become sub-accounts todate SEBI has not approved any sub-account application for an individual

Nonresident Indians and overseas corporate bodiesff are not entitled tobe registered as a sub-account A sub-account does not need to be registeredwith an overseas regulatory body and an applicant does not need to submita custodian agreement It needs only to declare that it has entered intoa custodian agreement and should submit the particulars of the domesticcustodian

Sub-Account Appl icat ion Process There is no requirement for a sub-account applicant to submit any documents with the application form How-ever SEBI may request additional information or documents The applicantdoes affirm the following

The applicant sub-account or its directors have not been convicted bya court for any offense involving ldquomoral turpituderdquo or fraud and sen-tenced in respect thereof to imprisonment for a period greater than sixmonths

No dissolution orders have been passed against the applicant No orders suspending or debarring the applicant from permanently

carrying on activities in the financial sector have been passed by anyregulatory authority

eeThe cost of sub-account registration increased from US$1000 to US$2000 as oneof the changes affecting FII registration as amended in the June 26 2006 SEBI(Foreign Institutional Investors) (Amendment) Regulations 2006ffEntities that are at least 60 percent owned by nonresident Indians or persons ofIndian origin and include overseas companies partnership firms societies and othercorporate entities

No order withdrawing or refusing to grant any licenseapproval to theapplicant that has a bearing on the securities market has been passed byany authority in the preceding five years

Any penalty (including monetary) imposed by any regulatory authorityhas been carried out

The applicant is subject to the jurisdiction of outside tax authorities andregularly files tax returns

The income of the sub-account applicant is from known and legitimatesources

The applicant is not a nonresident Indian or an overseas corporationregistered with the Reserve Bank of India

Sub-Account Registrat ion Time Val id i ty The registration of the sub-account is concurrent with the FII with which it is registered and theregistration of the sub-account expires with the expiry of registration ofthe FII with which it is registered Further if the registration of the FII issuspended or canceled the registration of its sub-account is also suspendedor canceledgg

Sub-Accounts Changing F I Is If a registered sub-account wants to trans-fer from one registered FII to another the FII to whom it proposes to betransferred has to request a transfer from SEBI along with

A declaration that it is authorized to invest on behalf of the sub-account A no-objection letter for the transfer of the sub-account from the FII

from which it is transferring

Convert ing a Sub-Account to an F I I If a registered sub-account wants tobecome a registered FII then it has to apply with Form A to SEBI andsatisfy all of the eligibility criteria norms in the SEBI (Foreign InstitutionalInvestor) Regulations 1995 as amended It must also submit a letter fromthe old FII indicating no objection to such registration

ggThis is a noteworthy rule that impacts the willingness of FIIs to be sponsorsand thus responsible for the activities of a sub-account Should one sub-accountof an FII with numerous other sub-accounts run into trouble with the SEBI oranother regulatory agency thereby leading to a restriction on that sub-accountit is entirely possible that the sponsoring FII will also come under fire for poorsupervision Should the FIIrsquos registration be canceled due to the activity of one of itssub-accounts all of the sub-accounts of that FII will have their registration canceledas well Thus sub-accounts subject their sponsoring FII to potential financial andreputation risk

TRADING AND SETTLEMENT-RELATED ISSUES

Trading with an Expired Registrat ion

An FII and sub-account cannot trade in Indiarsquos securities market with anexpired registration unless it obtains a renewal from the SEBI If it is notinterested in renewal but has certain residual assets it can apply for disin-vestment from SEBI

Share Registrat ion

When purchasing and registering securities the FII has a choice to registersecurities among the following ways

In the name of the FII if the FII is investing on his own behalf In the name of the sub-account if the FII is investing on behalf of the

sub-account In the name of the ldquoFII ac sub-accountrdquo if the FII is investing on behalf

of the sub-account

F I I and Sub-Accounts Changing Custodians

Custodian changes must be reported to the SEBI by the FII On receipt ofno objection from the existing custodian and acceptance from the proposedcustodian the change of custodian would be approved by the SEBI

Mult ip le Custodians

An FII having an account with one custodian can open accounts with differ-ent custodians for different sub-accounts However one sub-account cannotbe custodied with more than one custodian

SUMMARY OF F I I INVESTMENT

SEBI is very much a pro-market pro-investment organization Growth ofthe domestic involvement in the markets has increased the comfort level forincreased foreign participation and SEBI views the growth of FII activityin India as being a positive factor for the markets The large number ofmethods and instruments by which foreign investors both those registereddirectly with SEBI as well as those not can access the market provide ampleability to gain investment exposure to India The rigorous registration re-quirements imposed and processed by SEBI give it confidence that India willremain a dynamic and vibrant marketplace with an environment of stronginstitutions and high-quality participation in the markets

CHAPTER 3Foreign Direct Investment

CHAPTER HIGHL IGHTS FDI in India totaled approximately US$7691 billion in FY2006

an increase of 37 percent year-over-year from FY2005 Most FDI applications enjoy an automatic approval route through

the RBI Certain industries have maximum foreign investment caps Investment restrictions have been loosening over the last several

Foreign direct investment (FDI) has been a preferred method of invest-ing in India for a number of years and India has been the beneficiary ofsome very large private equity transactions by some of the worldrsquos largestinvestors A truly comprehensive examination of FDI would require a ded-icated book of its own The following chapter has been included to givethe reader a useful overview of some of the issues surrounding FDI inIndia

FDI is defined by the Ministry of Finance in India as ldquodirect investmentin an Indian company either through a joint venture agreement or as awholly owned subsidiary with management interestrdquo

The International Monetary Fund (IMF) in its fifth edition of the IMFrsquosBalance of Payment Manual defines FDI as ldquoa category of internationalinvestment that reflects the objective of a resident in one economy (thedirect investor) obtaining a lasting interest in an enterprise resident in an-other economy (the direct investment enterprise) The lasting interest im-plies the existence of a long-term relationship between the direct investorand the direct investment enterprise and a significant degree of influence by

F IGURE 31 Indian foreign direct investment FY1991ndashFY2006Source RBI Annual Report 2005ndash2006

the investor on the management of the enterprisea A direct investment re-lationship is established when the direct investor has acquired 10 percentor more of the ordinary shares or voting power of an enterprise abroadrdquoFDI is further defined by the IMF1 in greater detail as the sum of numerousstatistics including equity capital reinvestment of earnings other long-termcapital and short-term capital as shown in the balance of payments Thisdetail is significant as the reader will see below when comparing FDI inIndia to FDI in other countries particularly China

FDI in India totaled approximately US$7751 billion in FY2006 anincrease of 37 percent year-over-year from FY2005 FDI in India has beena valuable source of much-needed funds as the economy develops but it isstill relatively modest when compared with Chinarsquos world-leading FDI ofUS$6062 billion in 2005 or even to remittances from overseas Indians thattotaled US$2463 billion in FY2006 (India is the largest remittance-receivingcountry in the world) Figure 31 illustrates FDI in India from FY1991 untilFY2006

While considering this huge difference between China and India thereader should note the above-stated difference in the definition of FDI byIndiarsquos Ministry of Finance and the IMF namely that Indiarsquos calculationsdo not include such statistics as equity capital reinvestment of earningslong-term capital and short-term capital as shown in the balance of pay-ments While India does not currently calculate FDI on the basis of IMF-and OECD-set international standards the latest RBI Annual Report forFY2006 does state that ldquodata on FDI have been revised since 2000ndash01with expanded coverage to approach [authorrsquos emphasis] international best

aThe interest in management distinguishes FDI from portfolio investment whereinvestment is passive and there is no interest in management or operational control

practices FDI data for previous years would not be comparable with thesefiguresrdquo Thus Indiarsquos FDI is still underestimated by the exclusion of somestatistics in its measurements In all likelihood Indian FDI measured ex-actly by international standards would result in a higher figure although noestimate is currently available as to the extent of such an adjustment

MINISTRIES AND DEPARTMENTSADMINISTERING FDI

FDI policy falls under several ministries and departments in India Theseinclude the Reserve Bank of India (RBI) the Ministry of Finance and theMinistry of Commerce and Industry Two ministry departments noteworthyand involved in FDI are the Department of Industrial Policy and Promotion(DIPP) a division of the Ministry of Commerce and Industry and the For-eign Investment Promotion Board (FIPB) a division of the Department ofEconomic Affairs of the Ministry of Finance

The Department of Industrial Policy and Promotion which was estab-lished in 1995 as part of the governmentrsquos reforms and liberalization isresponsible for facilitating and increasing investment and technology flowsinto India and monitoring industrial development The Department of In-dustrial Policy and Promotion also formulates FDI policy and promotionand approves and facilitates FDI

In the departmentrsquos Foreign Direct Investment Policy 2006b an annualreport the up-to-date investment rules concerning FDI are presented forevery industry sector and activity Among the rules listed are the investmentlimits for each industry the approval process required for that industry andany other conditions to which foreign investments are subject with regardto each particular industry

In other functions of the department the Foreign Investment Imple-mentation Authority (FIIA) resolves problems faced by foreign investorsabout implementing projects and interacts on behalf of investors directlywith the ministry and state government concerned The Foreign InvestmentPromotion Board (FIPB) approves certain FDI investment proposals

FDI applications and further details regarding specific policy issues canbe obtained from the Department of Industrial Policy and Promotion atwwwdippgovin

FDI issues and policies specified by the RBI Ministry of Finance andMinistry of Commerce and Industry follow

bThis report can be viewed in its entirety at wwwdippnicinpublicationsfdipolicy 2006pdf

Permitted FDI

FDI is permitted in India under the following types of investments

Financial collaborations Joint ventures and technical collaborations Capital markets via euro issues Private placements or preferential allotments

Restr icted Industr ies

For national security and other reasons many countries have restrictions onforeign investment in certain industries In India FDI is not permitted in thefollowing industrial sectors

Retail trading (except for single-brand product retailing)c

Atomic energy Lottery business Gambling and betting

In addition FDI for the following sectors must go through the govern-mentrsquos Foreign Investment Promotion Board (FIPB) rather than under an au-tomatic approval route the two approval processes for foreign investment

Some housing and real estate businesses Agriculture (excluding floriculture horticulture development of seeds

animal husbandry pisiculture and cultivation of vegetables and mush-rooms under controlled conditions and services related to agro andallied sectors) and plantations

Atomic minerals Broadcasting industries Courier services Defense production Refining (in the case of public service undertakings)

cThis exception for single-brand product retailing was implemented in early 2006The retailing industry is a very sensitive political issue concerning the viability ofthe approximately 12 million small retail outlets in the face of the sophisticatedcapabilities of such huge international retailers as Wal-Mart and Carrefour As of thewriting of this book such large multiproduct retailers are still excluded from directlyowning multibrand retailers in India In November 2006 however a significantinroad was made when Wal-Mart entered into a joint venture agreement with IndiarsquosBharti Enterprises Ltd whereby Bharti would open and operate a retailing chainwhile Wal-Mart would handle all of the retail chainrsquos supply chain technologylogistics and wholesale operations

Print media Tea sector Telecommunications (beyond a 49 percent ownership)

As infrastructure development is a major priority for the governmentto ensure continued economic growth projects such as power generationtelecommunications petroleum exploration refining ports airports androads enjoy a reduced standard of approval

FOREIGN INVESTMENT THROUGH GLOBALDEPOSITARY RECEIPTS (EURO ISSUES)

Indian companies are allowed to raise equity capital in the internationalmarkets through the issue of Global Depositary Receipts (GDRs) Foreigninvestment through GDRs is treated as FDI GDRs are often designated inUS dollars and are not subject to any ceilings on investment An applicantcompany seeking the governmentrsquos approval to issue GDRs should have atrack record of good performance (financial and otherwise) for a minimumof three years

Permitted Use of GDR Proceeds

GDR proceeds can be used for financing capital goods imports capital ex-penditure including domestic purchases and the installation of plant equip-ment and buildings investment in software development prepayment orscheduled repayment of external borrowings and equity investment in jointventures and wholly owned subsidiaries in India Companies can retain theproceeds abroad or may remit funds to India for approved purposes

Restr ict ions on GDR Proceeds

GDR proceeds cannot be used to invest in the stock market or real estateAny such investment from a foreign firm into India requires approval fromthe government

APPROVAL PROCESS FOR FDI

Approval for FDI can be obtained through two routes

1 Automatic approval by the RBI2 Processing by the FIPB

Automat ic Approval by the RBI4

The RBI grants automatic approval for FDI for up to 100 percent in allactivities and sectors except the following which require approval from thegovernment

Activities and items that require an industrial license Proposals in which the foreign collaborator has an existing financial or

technical collaboration in India in the same field All proposals falling outside of specified sectoral policy or caps or under

sectors in which FDI is not permittedd

FDI in sectors and activities permitted under the automatic route doesnot require any prior approval by the RBI or any other department of thegovernment Investors and companies are required to notify only the RBIwithin 30 days of issue of shares to foreign investors

Foreign Investment Promot ion Board Processingof Nonautomat ic Approval Cases

FDI in activities not covered under the automatic route requires prior gov-ernment approval Such approval is evaluated and granted by the ForeignInvestment Promotion Board (FIPB) of the Ministry of Finance Specificallyprior approval is required for

Activities and items that require an industrial license Proposals for which the foreign investor already has an existing financial

or technical collaboration in India in the same field or industrye

Proposals for the acquisition of shares in an existing Indian companyin the financial services sector and where the Securities and ExchangeBoard of India (Substantial Acquisition of Shares and Takeovers) Reg-ulations 1997 is applicable

All proposals falling outside specified sectoral policy and caps or undersectors in which FDI is not permittedf

dFor an up-to-date list of such sectors see the most recent annual report on FDIissued by the DIPP at wwwdippnicinpublicationsfdi policy 2006pdfeThis clause becomes important when an investor seeks a second investment ina competing business or as has happened seeks to leave a joint venture with onepartner and enter into another investment in the same business with another partnerNot only does the government require approval of this second investment but theinvestor may need the agreementpermission of the first joint venture partner toexit the original investment Appropriate legal advice should be sought for furtherclarification of this issuefFor details see the most recent annual report on FDI issued by the DIPP atwwwdippnicinpublicationsfdi policy 2006pdf

FDI applications to the FIPB are made using Form FC-IL which can bedownloaded from httpwwwdippgovin Normal processing time is fourto six weeks The FIPB tries to have a liberal approach for all sectors andtypes of proposals and there are few rejections Foreign investors do notneed to have a local partner even if the foreign investor wishes to hold lessthan the entire equity of the company To be more investment friendly theRBI stopped a requirement to obtain prior ldquoin principlerdquo permission beforereceiving overseas investment or at a last stage for issuing shares to foreigninvestors As noted earlier companies are required to report to the RBIwithin 30 days after issuing shares to foreign investors

INDUSTRIAL SECTOR PREFERENCE

As FDI is recognized by the government as being important for Indiarsquoseconomic growth the government continues to update its FDI policies andincrease the number of industries for which investment is permitted andto whatever extent possible increase the allowed ownership stakes in sec-tors that are eligible to receive FDI investment This loosening of restric-tions however requires a careful balancing of competing interests withinthe country

On the one hand reformers acknowledge the long-term benefits of FDIfor India to provide capital infusions for economic growth and imports ofinternational best practices in areas such as corporate governance efficiencysupply-chain management and technology On the other hand reformersare careful about addressing the concerns of those who are less inclinedtoward loosening investment restrictions Defense- and media-related in-dustries continue to enjoy a level of protection similar to the restrictionsfound in other countries The more difficult industries to address are thoselikely to experience large transition costs associated with FDI Transitioncosts might include short-term dislocations and hardships experienced bylocal interests whose current methods and protected businesses will likelybe negatively impacted by greater competition

Two examples of this gradualist approach toward liberalizing FDI inan effort to minimize transition costs include the retail food and gen-eral merchandise (including clothing) industries Many acknowledge thatthe introduction of modern retailing practices will lead to significant im-provements to be enjoyed by consumers but this would likely come atthe cost of the initial dislocation of the countryrsquos 12 million individuallyowned small retail outlets A gradualist approach has been pursued for sec-tors that are slowly allowing FDI and investment caps are slowly beingraised An example of the gradualist approach is the government grant-ing permission for FDI for single-brand foreign retail outlets to open in

India in early 2006 while still excluding much larger global multibranddepartment stores such as Wal-Martg of the United States and Carrefourof France

Industries that have recently seen an easing of FDI restrictions includemany infrastructure-related sectors such as real estate power airports con-struction and maintenance of roads highways vehicular tunnels and portsand harbors One hundred percent foreign equity has already been approvedfor electricity generation transmission and distribution These changes areexamples of the governmentrsquos efforts to steer capital and foreign expertiseto the much-needed infrastructure improvements necessary for India

SUMMARY

While the tremendous growth of domestic demand and consumer spendinghas been a key driver behind Indiarsquos explosive economic growth over thelast five years FDI remains a valuable source of much-needed funds for theeconomy to continue its expansion The government is very conscious thatits policies must continue to attract overseas investment and the transferof international best practices and technology that accompanies it and totarget that investment with policies to ensure that the upgrading of infras-tructure continues unabated The government of Prime Minister ManmohanSingh supports continued economic reform and globalization and overseasinvestors should continue to experience a receptive welcome and a gradualbut consistent liberalization of investment policies

gFootnote c in the Restricted Industries section discusses how Wal-Mart is attemptingto enter the Indian retail market not as a retailer but rather as a coordinator of-supply-chain technology logistics and wholesale operations

CHAPTER 4Safety and Integrity

The Regulator and Market Safeguards

CHAPTER HIGHL IGHTS The Securities and Exchange Board of India with internationally

recognized stature is the market regulator The stock exchanges are the primary regulator of the stock

markets Tight market oversight includes

Strict disclosure and transparency rules Vigilant online and dynamic market monitoring and surveil-

lance Sophisticated margin controls Continuous member capital adequacy maintenance

Market and individual security circuit breakers contain volatility Guarantee funds provide a safety net to the market

Guarantee settlement of bona fide trades Instill confidence in secondary market participants Eliminate counterparty risk Protect investors

India has made great efforts to create an investment environmentthat is comparable with the safest markets in the world To developthe markets India (1) created a world-class regulator the Securities andExchange Board of India and (2) implemented state-of-the-art marketsurveillance and safeguard mechanisms to ensure the safety and integrityof the markets

The fact that Indiarsquos capital markets are well-regulated and tightly con-trolled from a safety standpoint is due both to the implementation of severalimportant government reforms made in the 1990s that created an effectivebody of regulations and to innovative market professionals who designedexceptionally sophisticated exchange systems to ensure market safety and in-tegrity The reforms and systems that made Indiarsquos financial markets strongand safe include

Regulation and enforcement Strict rules and regulations along withreasonable enforcement have been implemented to maintain the in-tegrity of the system

Disclosure and transparency More stringent disclosure requirementsand stricter ldquoknow-your-customerrdquo rules contribute to a more trans-parent investing environment

Settlement and trading The entire trading and settlement process isfully electronic and has been streamlined to be extremely robust andefficient

Risk mechanisms Risk control mechanisms have been built into theexchange trading systems which are online and real time to provide fastresponses to problems as they develop

This chapter will discuss the various aspects of Indiarsquos capital marketsthat contribute to the solid foundations upon which the markets stand TheSecurities and Exchange Board of India the internationally recognized regu-lator of Indiarsquos capital markets is discussed along with the risk managementpolicies they implement Next the risk management systems and policies ofthe two primary stock exchanges the Bombay Stock Exchange and the Na-tional Stock Exchange are discussed including continuous and online priceand position monitoring member capital adequacy monitoring daily pricemovement controls for both the market and individual securities and thevery sophisticated individual security-specific multiple margin system thathas proven to be extremely effective in ensuring timely settlement and fewdefaults Derivative-specific controls and risk management are addressedfollowed by a discussion of the underappreciated but immensely impor-tant and valuable guarantee funds maintained by the exchanges that furtherensure settlement on a timely basis

THE SECURIT IES AND EXCHANGE BOARDOF INDIA (SEBI)

Indiarsquos financial markets are regulated by the Securities and Exchange Boardof India (SEBI) SEBI is the regulatory authority established under Section 3

Safety and Integrity 67

of the Securities and Exchange Board of India Act in 1992 to

Protect the interests of investors in securities Promote the development of Indiarsquos securities markets Regulate the securities markets

Besides the act that created SEBI several other government acts includ-ing two enacted before the creation of SEBI help SEBI meet its objectivesand exercise its powers These include the

Securities Contracts (Regulations) Act 1956 Depositories Act 1996 Companies Act 1956

SEBI regulates securities market activities through four departments

1 Market Intermediaries Registration and Supervision Department(MIRSD) The MIRSD oversees the registration supervision compli-ance monitoring and inspection of all market intermediaries for allsegments of the market including equity derivatives and debt

2 Market Regulation Department (MRD) The MRD is responsible forformulating new policies and supervising the operation of securitiesexchanges their subsidiaries and market institutions such as clearingand settlement organizations and depositories for all instruments exceptderivatives

3 Derivatives and New Products Departments (DNPD) The DNPD ap-proves the creation and introduction of new derivative products andsupervises trading for derivative operations of the stock exchanges

4 Integrated Surveillance Department The Integrated Surveillance De-partment monitors the activities of the cash and futures and optionsmarkets and generates detailed reports at the end of each day concern-ing such issues as the identity of the most active scrips clients andbrokers The department monitors market movements analyzes abnor-mal trading patterns and if suspecting that something is amiss initiatesappropriate action

Rigorous risk management methodology is used by the stock exchangesand SEBIrsquos four departments to regulate securities market activities

Market Survei l lance

The stock exchanges are the first and primary regulator for detectionof market manipulation price rigging and other regulatory breachesregarding capital market functions Unusual deviations from normal

behavior are reported to the SEBI In addition SEBI through the Inte-grated Surveillance Department also initiates surveillance cases based onreferences received from other regulatory agencies and from investors andcorporations

SEBI R isk Management

In its quest to enhance investor protection and encourage market devel-opment SEBI regularly reviews and updates its policies and systems toanticipate monitor and address market risk operational risk and sys-temic risk in the financial market The risk management procedures used bySEBI include

Imposing varying margin requirements based on liquidity and volatilityof securities and then categorizing securities into these groups for theimposition of margins

Specifying mark-to-market marginsa Specifying intraday trading limits and gross exposure limits Real-time monitoring of intraday trading limits and gross exposure

limits by the stock exchanges Specifying time limits for the payment of margins Collecting margins on a T+1 basis Using index-based marketwide circuit breakers Automatically deactivating trading terminals in case of breach of expo-

sure limits Using a VaR-based margin systemb that addresses 99 percent of the

statistical risks in the market Specifying extreme loss margins to address on-balance 1 percent risks

Enforcement

SEBI is a highly regarded regulator throughout the global investment worldwith policies and practices that are more than adequate to address the safetyneeds of the market However the enforcement of policies is still consideredby some market participants to require greater vigilance with a more finan-cially astute enforcement team While the enforcement division was initially

aMark-to-market margin refers to margins determined by the daily fluctuation in theprice of a financial instrument and is used both pre- and post-settlement This andother margin types will be discussed in greater detail later in the chapterbVaR or Value-at-Risk margin and other margin types will be discussed in greaterdetail later in the chapter

created using civil servants from other areas of the government includ-ing the tax department this division needs financially trained officers lawexperts and accounting and trading professionals to more effectively pre-vent detect and curtail market abuse

There have been few if any significant enforcement cases of any scaleAs most market participants believe the markets are not without their prob-lems this leaves the assumption that enforcement is not as robust as it couldbe SEBI officials unofficially acknowledge this shortcoming while at thesame time noting the steady improvement

MARKET SAFETY AND SAFEGUARDS

The safety and integrity of the financial market is important for SEBI and thegovernment to maintain a well-functioning highly regarded financial mar-ket Investor protection in Indiarsquos markets is safeguarded and addressedthrough preventive measures instantaneous automatic response mecha-nisms to ongoing situations and remedial relief for problems Preventivemeasures include

Strict know-your-customer requirements and comprehensive initialmargin requirements

Systems to monitor detect and react to unusual potentially illegalmarket activity

Systems to anticipate and mitigate potentially destabilizing marketmovements Safeguards designed to address the consequences of prob-lems that have already occurred include settlement and investor protec-tion funds

DISCLOSURE AND TRANSPARENCY RULES

Preventive market safeguards include greater disclosure and transparency byrequiring market participants to be readily identifiable across brokers andaccounts and the ability to monitor the activity of every market participantThe measures begin with account opening procedures for all clients Strictknow-your-customer requirements have been enforced to provide a mecha-nism whereby illegal unusual or manipulative market activity can be tracedacross firms and account names directly to the party involved

All brokerage account forms require a permanent account number(PAN) which is a unique 10-digit alphanumeric number issued by the In-come Tax Department (similar to a Social Security number in the United

States) All orders entered into exchange trading systems must include aclientrsquos PAN before being accepted by the system Surveillance systems havethe ability to monitor unusual trading activity and marketwide positionsacross brokerage firms and brokerage accounts by looking at individual andentity-specific PANs

EXCHANGE SURVEILLANCE

The markets are monitored by surveillance systems built into the tradingsystems of each exchange The stock exchanges created independent surveil-lance departments under a 1995 SEBI directive Surveillance activity is di-vided broadly into three major segments

1 Price monitoring Price movements and volumes of individual stocksare monitored for abnormal activity that is not consistent withnormal trading patterns Trading in newly listed scrips is watchedclosely

2 Position monitoring Member-brokersrsquo positions and exposures aswell as underlying client exposures are monitored on a daily basis toensure that overextension beyond financial settlement capacity does notoccur Also default risk is managed by taking timely action

3 Investigations Snap investigations examinations and detailed in-vestigations are conducted where manipulation or aberrations aresuspected

Detect ing and Responding to Market Abuse

Markets are monitored to first understand normal behavior in the marketand then based on deviations from this observed norm to detect marketabuses such as abnormal price and volume movements artificial transactions(ie wash sales) and insider trading When market surveillance departmentssuspect abnormal behavior preliminary investigations are conducted SEBIcan also request an investigation in cases where it has concerns Should suchinvestigations determine that something is awry and find market abuses orsuspect behavior the exchanges have numerous tools at their disposal toaddress the situation These include

Imposition of special margins on specific stock issues Narrowing of price movement circuit filters Imposition of trade-to-trade settlement Suspensions Deactivation of trading terminals

The surveillance departments maintain an active monitoring program toassess market risk This program includes extensive and sophisticated priceand position monitoring

Price Monitor ing

Price monitoring to detect abnormal price fluctuations is carried out inseveral ways through

Online surveillance Offline surveillance Derivative market surveillance Surveillance action Rumor verification Proactive measures

Onl ine Survei l lance The main objective of online surveillance is to detectpotential market abuse at an early stage with the goal of quickly addressingsuch abuse and minimizing its impact on the market An alert is generatedwhen a particular metric behaves significantly differently from its bench-mark or normal behavior Alerts are generated online in real time basedon preset parameters such as

Like-price and volume variations in shares this is a sign of potentialwash sales

Members taking large positions that are not commensurate with theirfinancial positions this is an indication of possible insider trading aswell as a potential settlement risk

Members having large concentrated positions in one or a few scripsthis is another indication of both insider trading and settlement risk

Offline Survei l lance Offline surveillance systems consist of preparing andanalyzing reports based on different parameters such as

Percentage changes in prices over a week fortnight and month Most actively traded stocks Activity in infrequently traded scrips Stocks hitting new highs and lows Shares identified as the subject of rumors Shares identified in investor complaints

Derivat ive Market Survei l lance The derivative markets are scrutinizedwith an additional set of criteria that look at the relative movements

between the prices of the derivatives versus their underlying shares andinclude monitoring trading activity at the close where great potential existsfor price manipulation

Survei l lance Act ion Once the surveillance systems identify or suspect un-usual trading in a particular issue there are a number of different responsesthat may be initiated including

Special margins Special margins may be imposed on specific stocksthat have demonstrated abnormal price or volume movements Marginsof 25 or 50 percent of a clientrsquos net outstanding purchase or sale positionor both can be imposed

Trade-to-trade The surveillance departments can impose a trade-to-trade settlement basis versus the standard settlement basis on specificstocks to control excessive volatility or abnormal trading volume Ifa stock is shifted to a trade-to trade settlement basis the selling andbuying of shares in that stock would require giving or taking deliv-ery of shares at the gross level with no intraday settlement netting-offcapability permitted

Suspension of trading Shares can be suspended by the surveillancedepartments in exceptional cases pending investigation or if a stock issuspended by another stock exchange for surveillance action

Warning to members The surveillance departments may issue verbaland written warnings to members suspected of market manipulation

Imposition of a penalty suspension and deactivation of terminalsThe surveillance departments may impose penalties deactivate tradingterminals to deny trading access or suspend members who are involvedin market manipulation Habitual offenders are taken to a DisciplinaryAction Committee

Rumor verification If a stock is the subject of market rumors leading tounusual trading activity the surveillance departments must investigateto verify or refute the rumors

Proact ive Measures The surveillance departments perform proactivemeasures to detect and minimize problems before they impact the marketSome of these measures include

Compiling and disseminating a list of companies that have changedtheir names to mislead investors as to their actual business Changesto suggest that business interests are in the software industry are primeexamples

Compiling and disseminating a list of non-banking financial companiesthat had their registration applications rejected by the Reserve Bank ofIndia

Issuing notices advising members not to deal on behalf of debarredclients and to exercise due diligence when registering a new client

Posit ion Monitor ing

The surveillance departments monitor the outstanding exposures of mem-bers on a daily basis to avoid settlement defaults as well as to track ir-regular and possibly illegal market activity Reports are generated andevaluated for excessive purchase or sale positions compared with thenormal business of that member to determine (1) whether there havebeen abnormally concentrated purchases or sales (2) whether the pur-chases have been made by inactive or financially weak members and(3) whether the quality of the positions held suggests inordinate expo-sure risk Based on an analysis of these factors the margins already paidand the capital deposited by a member-broker early settlement calls canbe required and members can be advised to reduce their outstanding ex-posure in the market Trading restrictions can be placed on financiallyweak members

The reports generated include the following

Reports detailing the top 100 purchasers and sellers Reports detailingthe largest 100 net purchasers and 100 net sellers in the A B1 B2 and Zgroups of scrips (see Appendix G BSE and NSE Equity Classifications)are prepared and evaluated daily This enables the surveillance depart-ments to monitor the exposure of members ascertain the quality ofexposure measure the risk vis-a-vis the cover available by way of mar-gins and capital and initiate action such as calling for early settlementor imposing trading restrictions on members A detailed report on thenet outstanding positions of top purchasers and top sellers with expo-sure to individual scrips above certain limits and margin cover availableis prepared daily

Concentrated purchases and sales The concentration of purchases andsales by a member in one or a limited number of scrips is monitoredThe fundamentals of the scrips their daily turnover and the nature ofthe transactions are evaluated and if deemed warranted appropriatesurveillance action is taken

Purchases and sales of scrips with thin trading Purchases and salesof illiquid stocks are closely scrutinized Details of trades in such stocksare requested from members to assess the market risk involved

Settlement liabilities of members above a threshold limit The liabilityof members with respect to settlement funds that are due is monitoredwhen the funds exceed a certain threshold limit with respect to thememberrsquos current liability the memberrsquos capital and the margin coveravailable to the exchange against the memberrsquos settlement liability Incases of inadequate margin cover the reasons for the excessive liabilityare ascertained If warranted an advance margin can be called to ensurethat settlement is completed smoothly

In addition to the reports generated position monitoring also entails thefollowing proactive monitoring

Verification of institutional trade Unduly large institutional tradesexecuted by member-brokers may be subject to scrutiny

Scrutiny The surveillance departments conduct preliminary investi-gations of particular transactions to ascertain irregularities If deemedappropriate the transactions can be referred for a more detailed investi-gation to the Disciplinary Action Committee of an exchange and to theScrutiny Committee of an exchange to reassess the financial soundnessof the member

Bulk deal disclosure and monitoring Member-brokers are required todisclose by 5 PM daily all transactions in a stock for a client where thetotal quantity bought or sold is more than 05 percent of the companyrsquosoutstanding listed equity shares ldquoAll transactionsrdquo is clarified as Single trades Member-brokers must immediately report the execu-

tion of an order where the traded quantity is more than 05 percentof the listed shares

Cumulative trades for the day Member-brokers must report withinone hour from the close of trading where the cumulative quantitytraded under any single client code on that day either purchased orsold is more than 05 percent of the listed shares

Invest igat ions

If the surveillance departments conclude that some monitored activity ormarket situation requires further scrutiny it will conduct the followingtypes of analysis and if necessary take appropriate and timely action

Snap investigations A preliminary analysis of the trading pattern andcorporate developments in a security is performed and a determinationis made as to whether the price or volume variation represents possiblemanipulation

Examinations A more detailed analysis of the trading pattern andvarious company developments is prepared upon receiving a requestfrom SEBI any department of the exchange or an investor

Investigations If an examination suggests further review a com-plete analysis is conducted to resolve whether the suspected ma-nipulation occurred Considerable resources are used for such aninvestigation

STOCK EXCHANGE RISK SYSTEMS

Bombay Onl ine Survei l lance System (BOSS)

The Bombay Stock Exchange (BSE) developed the Bombay Online Surveil-lance System (BOSS) to generate online alerts in real time When an order isentered into the exchange trading system it simultaneously goes to BOSSIn BOSS the order security name and client are evaluated for anything ab-normal such as circular trading (wash trades) manipulation and excessivetrade sizes If the system detects anything abnormal it generates an immedi-ate alert to the BOSS staff and exchange who then evaluate whether furtheraction is necessary

BSE Onl ine Trading (BOLT) Risk Management

Trading on the BSE takes place in the BSE Online Trading (BOLT) SystemNumerous risk management alerts indicating a breach of any particularmonitored risk characteristic are built into the BOLT system to permit theexchanges to monitor and control their member-brokers and the member-brokers to closely monitor and control their employee-tradersrsquo activitiesRisk management features in this system include

Order-size controls If a single order exceeds a certain value a warning is issued to the

trader who entered the order This feature prevents data-entry errors No single order greater than 25 percent of a memberrsquos liquid capital

is accepted by the system Capital adequacy checks

If a member exceeds liquid capital limits the system will flash amessage on BOLT terminals saying ldquocapital adequacy limit violatedrdquoand all of the BOLT terminals will be deactivated (as discussed laterthere are numerous warnings prior to deactivation to give the memberan opportunity to increase its liquid capital)

Gross exposure limit norms for members Members are allowed to set trading limits for traders Members can

selectively grant these trading rights The following types of limits areavailable Grant or remove trader access to the BOLT trading system and

thus trading Maximum gross buy and maximum gross sell limits (in rupees

lakhs) Net value limits (in rupees lakhs) Maximum order quantity and value (in rupees lakhs) Scrip limits on selected stocks Default buying and selling limits for scrips on which an explicit

limit has not been set Scrip control

Group control Members can specify buy-side and sell-side value limits on trading

for groups such as the A B1 B2 Z and F groups Traders arenot allowed to trade in those groups once the value is exceeded Ifthe buy value is exceeded the trader will not be allowed to buyand when the sell value is exceeded the trader will not be allowedto sell

Nat ional Stock Exchange (NSE) Risk Management

The National Securities Clearing Corporation Ltd (NSCCL) the clear-ing and settlement subsidiary of the National Stock Exchange (NSE) alsomaintains a comprehensive risk management system that seeks to ensurethat trading members have adequate capital to meet their obligations Theserisk-containment measures include

Stringent margin requirements Position limits based on capital Online monitoring of member positions Automatic disablement from trading when limits are breached Capital adequacy requirements for members Monitoring of member performance and track record

MARKET-EMBEDDED SAFEGUARDS TO CONTROLABNORMAL STOCK AND MARKET BEHAVIOR

Market safety mechanisms built into the trading and settlement systemsinstantaneously and automatically respond to abnormal trading events as

they are happening These mechanisms are triggered automatically whenpredetermined safety levels are breached In addition SEBI the NSE andBSE acting together have the ability to tighten the safety levels of differentembedded mechanisms if they deem it prudent to do so given the circum-stances These mechanisms act to reduce volatility as well as to reduce anychance of settlement default The primary safety mechanisms built into thetrading and settlement systems are

Individual stock circuit filters Market circuit filters Real-time monitoring of exchange membersrsquo available capital Margin adjustment controls

VaR margin Mark-to-market margin Extreme loss margin

Price Movement Controlsand Market Circui t Breakers

The exchanges have built two types of price movement controls into theirtrading systems (1) individual stock daily movement limits and (2) marketindex daily movement limits Both are designed to reduce stock and marketvolatility and enhance investor safety

Ind iv idual Stock Movement L imits The exchanges have the ability to con-trol the daily price volatility of individual stocks These controls take theform of price bands above and below the previous dayrsquos closing price withinwhich executions may occur and orders may be accepted by the tradingsystem The trading systems will reject all orders with buy limits below thebottom range of the band and sell orders with limits above the top rangeof the band In addition the system will not execute any trades outsidethe band

Typically the individual stock price movement limit is set at plusmn 20percent from the previous trading dayrsquos closing price implying that a stockprice is permitted to fall a maximum of 20 percent below the previous closingprice and is permitted to rise a maximum of 20 percent above the previousdayrsquos closing price A stock trading to its limit is not suspended from tradingbut only halted from trading outside the plusmn 20 percent band At any timeduring the trading day executions may occur at or within the band

Individual Circuit Limit Bands If a stock closes at 100 on the previous dayits price movement is limited to a trading band of 80 to 120 In the extreme

Out of Range for Permitted Trading

Permitted Trading

Previous Sessionrsquos Closing Price

ndash 20

F IGURE 41 Individual stock daily price movement limits

case if the stock falls to 80 then orders to buy or sell at a price below 80 willbe rejected by the system limit orders to buy or sell at 80 will be acceptedby the system and market sell orders will also be accepted However noexecutions will occur below 80 despite the existence of an unfilled marketorder The stock will not trade again the rest of the day unless a buyerwho is prepared to pay 80 or above enters an order into the system Thusprice movements of individual stocks can be controlled without suspendingtrading in that stock for the day (see Figure 41)

Tightening Circuit Filter Bands As noted above the typical stock has aprice band of plusmn 20 percent However this level can be reset either for themarket as a whole or for specific individual stocks The circuit filters canbe reduced to 10 percent 5 percent or 2 percent based on the prevailingcircumstances A reset of the band and thus a reduction in a securityrsquospotential daily volatility may be applied for illiquid scrips or related toabnormal trading behavior speculation fear of manipulation or any num-ber of other reasons However the exchanges must agree and act in unisonto change a circuit filter trading band and may not do so unilaterally Thisrule is significant given that the large bulk of companies listed on the BSEand NSE exchanges the nationrsquos two principal stock exchanges are duallylisted If both exchanges do not agree then the active limit remains in effectwith no change on either exchange

Circuit filters do not apply to all securities trading on the exchangesFutures and options do not have circuit filters and can trade freely with-out limits In addition scrips on which derivative products are availableand scrips that are included in indexes on which derivative products areavailable (ie the 30 constituent stocks of the Sensex for which an in-dex future exists) have no circuit filters However the exchanges have im-posed dummy circuit filters on these scrips to avoid input errors such askeypunch errors

There are also other methods that can be used by SEBI and the exchangesto reduce volatility

Applying extra margins to individual securities Applying extra limits to individual brokers Imposing limits on individual client exposure

Marketwide Circuit Breakers SEBI created a set of market circuit filtersin an effort to control excessive market movements and their indexes due topotential panic among market participants This ability is similar to marketcircuit breakers on international exchanges These circuit breakers will resultin a coordinated trading halt on both the equity and derivative markets withthe express purpose of providing a cooling-off period for market participantsto digest the marketrsquos behavior and rationally react to the cause of excessivemarket movements

SEBI has mandated that the marketwide circuit breakers trigger at 10percent 15 percent and 20 percent movements on either the BSE Sensex orthe NSE Nifty the key market index barometers for these two exchangesThe circuit breakers would go into effect on both exchanges simultaneouslyregardless of which index band is breached first

A trading halt on all stock exchanges would take place in the situationsfor the noted time periods as given in Table 41

Market Circuit Breaker Trigger Points The percentage movements forwhich these circuit breaker limits become effective are calculated and setquarterly based on the closing index value of the last trading session of theprevious quarter They are not calculated based on the previous sessionrsquosclosing value The percentage movement triggers of 10 percent 15 per-cent and 20 percent are translated into absolute points of index variation(rounded off to the nearest 25 points for the Sensex) The calculation usingthe quarter-end index close then applies for the entire following quarter untila new level is set at the end of that quarter applicable to the subsequentquarter

TABLE 41 Marketwide Circuit Breakers

Time of Circuit Breaker Breach

Size of Movement Before 1 pm 1 pmndash230 pm After 230 pm

10 1 hour 12 hour None15 2 hour 1 hour Remainder of the day20 Trading halted the remainder of the day

Source The Bombay Stock Exchange

Application of Market Circuit Breakers A greater understanding of theapplication of market circuit breakers can be gained from real-value exam-ples of how they have been used For example the December 2005 Sensexclosed at 939793 of which 10 percent of that level is 939 This is thenrounded to the nearest 25 points or 950 Thus the marketwide circuitbreakers applicable for the entire next quarter January to March 2006 areas follows

Circuit Filter Absolute Index Points

10 95015 142520 1900

In the quarter January to March 2006 if the index had moved 950points on a single day regardless of the then-level of the index it wouldtrigger the 10 percent marketwide circuit breaker and lead to a trading halton the nationrsquos stock exchanges

On March 31 2006 the Sensex closed at 1127996 of which 10 percentof that level is 1128 Rounding off to the nearest 25 points leads to a circuitbreaker absolute number of 1125 A new calculation of the circuit breakerswas then performed with new absolute index points being set as the circuitfilter levels These levels applicable for the entire quarter of April to June2006 were set at

10 112515 168720 2250

On July 1 new levels were set for the July-to-September quarter basedon the closing index levels on June 30 These would be applicable untilOctober 1 when the September 30 close determines the new break levelsand so on

Broker Capita l Account Monitor ing

The central factor upon which the exchanges manage intraday risk revolvesaround the availability of membersrsquo capital to meet their actual or potentialsettlement liabilities All stock exchange members are required to maintainadequate liquid capital balances to retain their trading privileges and haveaccess to the exchangesrsquo trading systems These balances are continuallymonitored by the exchanges and updated on a real-time basis If a brokerhas insufficient available capital at any point of the trading day he is unableto enter orders into the exchange trading systems

When an order is entered into the exchange trading terminal the sys-tem calculates the required initial margin for that particular trade and thenimmediately debits the brokerrsquos capital account by the calculated marginamount before placing the order into the trading system order book Thereare three possibilities

1 The broker has more than sufficient capital to cover the debited marginand the order is then accepted by the trading system and placed into theexchange trading book

2 The broker does not have sufficient capital with the exchange to coverthe required margin for this particular trade and the trade is rejected

3 The broker has used up his available capital The moment this occursthe brokerrsquos trading terminals will be deactivated in order to make themincapable of accepting or entering new orders

The system generates a number of warnings to the broker regarding thereal-time balances of available liquid capital Warnings are generated by thesystem when 70 percent 80 percent and 90 percent of the available liquidcapital has been utilized At 100 percent the terminals are deactivated untilthe liquid capital is increased Deactivation of terminals due to insufficientliquid assets results in the imposition of fines and penalties increasing withthe frequency of such occurrences

The exchanges provide a facility for member-brokers to increase liquidcapital intraday online to respond to the warnings and avoid deactivationand the imposition of fines

The result of this safety mechanism is that the trading system acceptsorders only from members that have sufficient capital on hand to provide the

TABLE 42 Eligible Forms of Capital to Meet Margin Requirements

Form of Capital Percent Applicable Against Requirements

1 Cash 100 (ie no haircut)2 Fixed Deposit Receipts from Banks 1003 Government Securities 1004 Bank Guarantees 1005 Mutual Fund Units NAV minus 106 Group 1 Shareslowast 100 minus margin requirement

lowastHighly liquid shares as defined by the exchanges

required up-front margins for every entered trade This minimizes the chanceof settlement default and the ability of brokers to overextend themselves

Brokersrsquo capital can be categorized as base minimum capital and liq-uid capital Base minimum capital for every broker is equal to Rs10 lakh(US$23000) and must be on deposit with the exchange at all times Veryimportantly this base minimum capital is not applicable to meet marginrequirements Margin requirements must be funded by additional capitalover and above the base minimum capital This additional capital may beheld in various forms Each form is subject to its own haircutc with regardto the percentage that is used to meet capital requirements Table 42 showsthe different forms in which the capital can be held and the haircut appliedto each form

There are two additional stipulations about member capital At alltimes 50 percent of a memberrsquos capital must be in the most liquid formswhich are forms 1 through 4 in Table 42 In addition 5 percent oftotal aggregate member capital with the exchange cannot be greater than5 percent for a single bank with regard to bank guarantees and depositsThis avoids the eventuality of a single bankrsquos insolvency impacting morethan 5 percent of the aggregate exchange-membersrsquo capital

MARGIN CONTROLS

The Indian capital markets have built into their trading and settle-ment systems a very sophisticated set of margin requirements These

cA ldquohaircutrdquo with regard to capital refers to the percent of the asset used for capitalpurposes that does not apply to the liquid capital computation An asset subject toa 10 percent haircut means that only 90 percent of the asset value can be applied tothe capital computation

requirements in combination with the real-time monitoring of broker capitalaccounts discussed above are extremely effective in (1) reducing volatilityand speculation in stocks (2) ensuring that brokers and investors do notoverextend themselves by taking on additional exposure without adequatecapital and (3) minimizing any possibility of settlement default on pre-settled trades

Every trade executed on the Bombay Stock Exchange and NationalStock Exchange is subject to a combination of different types of marginsincluding

VaR margin Mark-to-market margin Extreme loss margin Special margins

Derivatives trades are additionally subject to

Premium margin Assignment margin

The margins required for any particular trade can vary and are associ-ated very specifically with the particular security and instrument traded withthe trading characteristics of the particular security used to determine therequired margins for that trade Furthermore the regulator and exchangesacting together have the ability to tighten beyond the standard requirementcertain of these margins for the market as a whole or for individual securi-ties if they deem it necessary or beneficial to the proper functioning of themarket In addition the exchanges have the ability to selectively impose agross exposure margin in cases where they are concerned about too muchexposure by a particular broker or client or in too concentrated a set ofpositions

This stock-specific determination of applicable margins yields marginrates that can range from a low of as little as 75 percent for large ex-tremely liquid blue-chip companies to as much as 100 percent for thesmaller illiquid less financially sound companies The result and bene-fits include the fact that in the instance of a severe market correctionor the default of a member-broker settlement risk will have been effec-tively minimized for a large majority of executed but pre-settled trades thateither will be settled with already-deposited funds or will involve easilyliquidated securities

This section discusses these different requirements how and why theyare applied and the contribution they make to the safety and integrity ofthe Indian capital markets

Margins for Equit ies

There are some differences in the margin requirements for equities versusderivatives In this section those requirements pertaining to equities arediscussed

VaR Margin As mandated by the SEBI the stock exchanges apply a value-at-risk (VaR) margin system to all outstanding pre-settled trades The VaRmargin is intended to cover the largest loss that could be expected for agiven share with a 99 percent probability (99 VaR) Because VaR margincalculations are based on each individual stockrsquos trading history each indi-vidual stock has its own margin requirement The most liquid stocks haveVaR margins below 10 percent and many illiquid stocks are subject to 100percent VaR margins Specific stock VaR margins are regularly recalculatedand can be found on the Web sites of both primary exchanges on a dailybasis They can be found on the BSE Web site at wwwbseindiacommktlivemarket summmarginasp and on the NSE Web site at wwwnse-indiacomcontentnscclnsccl eqvarrateshtm

There are three categories of shares with regard to VaR margin cal-culations each with its own formula for determining a particular stockrsquosmargin requirement Group 1 Group 2 and Group 3 stocks withGroup 1 stocks considered the most liquid The categories are distin-guished by the different liquidity and market impact characteristics of theirtraded shares

As noted above the VaR margin is intended to cover with 99 percentprobability a negative price movement For the most liquid stocks the mar-gin covers a one-day loss whereas for illiquid stocks it covers a three-dayloss (to allow the exchange three days to liquidate an illiquid position) Thisthree-day requirement leads to a scaling factor of the square root of threefor illiquid stocks For liquid stocks the VaR margins are based only onthe volatility of the stock itself whereas for illiquid stocks the formula alsoincludes the volatility of the market index in the calculations Details of theformulas can be found on the BSE and NSE Web sites

Defining Liquidity Groups Stocks are deemed liquid if they have tradedon 80 percent of the trading days over an 18-month period and they aredeemed illiquid if they have traded fewer than 80 percent of the days overthe last 18 months Illiquid stocks are defined as Group 3 stocks Liquidstocks are further characterized and divided based on the market impactthey exhibit during trading Specifically the market impact is measured byimpact cost a measure of how much a stock price is moved by a marketorder of Rs500000 (simUS$11000) coming into the market

TABLE 43 Liquidity Groups

Group 1Group 2

Liquid Traded gt 80 of days over the last18 months

Impact costlowast lt 1Impact costlowast gt 1

Group 3 Illiquid Traded lt 80 of days over the last18 months

lowastThe impact cost is a measure of how much a stock price is moved by a market orderof 500000 shares coming into the market

This is evaluated by examining four randomly chosen snapshots of theorder book depth every day over the trailing six months Stocks exhibitingan impact cost consistently less than 1 percent are deemed the mostliquid the Group 1 stocks Those exhibiting an impact cost greater than1 percent but still trading for more than 80 percent of the days for thetrailing 18 months are deemed Group 2 stocks Table 43 summarizes theliquidity groups

A key feature of the VaR margin is that it is an upfront margin calcu-lated immediately upon the broker entering an order on a trading terminaland instantaneously collected from the member-brokerrsquos liquid capital ac-count before the order is accepted for execution For example in the caseof a Group 3 stock with 100 percent VaR margin the entire cost of apurchase order is collected by the exchange from the broker before the or-der is even executed meaning that there is a 100 percent chance of thetrade settling or put another way zero chance of the settlement failing Asnoted above in the discussion of broker capital monitoring this upfront fea-ture prevents brokers from overextending themselves beyond their availableliquid capital

Mark-to-Market Margins Mark-to-market margins in reference to stocktrading refer to margin requirements post-execution but pre-settlement andthey apply on trade date T as well as T+1 For mark-to-market marginsinvestors are required to put up additional margin equal to the paper lossresulting from the difference between the execution price and the closingprice (on T) and the closing price on T+1 versus the closing price on T Onsettlement day T+2 the trade is settled No credit is issued for net paperprofits on T or T+1

For example if a stock purchase is executed at 100 in the morning andthe stock closes on that trade day at 95 the investor must post an additionalmark-to-market margin of 5 representing the mark-to-market loss If thestock price falls to 91 on T+1 the investor must post an additional 4mark-to-market margin to cover the additional mark-to-market difference

from T If on T the stock closes at 103 no credit is given for the mark-to-market profit Similarly if the stock closes on T at 95 requiring the 5mark-to-market margin and then at a price above 95 (whether 96 or 106)there is no return of the previous dayrsquos margin payment and no credit isgenerated

On an intraday basis individual clients are permitted to net out their var-ious mark-to-market losses against mark-to-market profits across all theirsecurities either to partially reduce their mark-to-market margin require-ment or to completely offset any mark-to-market payment Again no creditis generated from net mark-to-market gains Clients cannot net across daysusing T gains to offset T+1 mark-to-market losses

On the broker level there is no netting of one client versus anotherFrom a broker point of view all netted client positions are grossed up andpayments are debited from the memberrsquos capital the following morning

Extreme Loss Margins Extreme loss margins are imposed to cover unusualinstances where losses fall outside the VaR-addressed 99 percent probabilityof loss The extreme loss margin for each stock is the greater of 5 percent ofthe price and 15 times the standard deviation of daily logarithmic returns ofthe stock price over the previous six months (Specific extreme loss marginsapplicable to any specific stock can be found on the above noted BSE andNSE Web sites)

Specia l Margins Exchanges have the ability to impose an additional spe-cial margin on particular stocks to contain volatility speculation or otherabnormal trading activity An additional margin may be imposed on a spe-cific member-broker or specific investor if there is too much exposure ingeneral or in too concentrated a set of positions

Margin Obl igat ions for Equit ies

In all instances the member-brokerrsquos capital is debited the upfront marginbefore an order is accepted by the exchange trading system However inthe equity market the broker has the discretion as to when the client hasto put up the margin If the broker does not require the client to fund themargin the broker funds it with his own liquid capital on behalf of the clientWhile brokers have the discretion to sell out client positions in the case ofnonpayment it is important to note that there is no required forced sellingof client positions This loophole in the regulations is one of the few in anotherwise very tight system of control that could in a worst-case scenariocause the default of a broker who has chosen to extend payment dates andexcessive credit to a client who subsequently fails to cover his own margin

requirements In such an instance numerous clients of the broker could beaffectedd

Margins in the Futures and Opt ions Segmentof the Exchanges

The risk management mechanisms for the futures and options segmentsof the markets also use online position monitoring and sophisticated on-line real-time systems The futures and options margin requirements differsomewhat from the cash segment rules In the futures and options segment ofthe market clients are required to pay upfront margins Thus the loopholein equities discussed above whereby a broker may elect to extend excessivecredit to a client is closed in the case of derivatives

There are three types of futures and options margins

1 Exposure margin This is an initial upfront margin equal to 10 percentof the contract size

2 VaR-based 99 percent margin In the case of futures contracts thisVaR margin may be computed for a two-day period

3 Mark-to-market margin This continues for the life of the position

Risk management for the futures and options segments of the BSE andNSE stock exchanges entails online intraday position monitoring and asophisticated margin system There are different margin calculations andposition limits for the marketrsquos aggregate outstanding derivative positionfor any particular underlying security for (1) individual member-brokersand (2) different types of end-clients These calculations and limits may beadjusted by regulators to tighten market security

In i t ia l Exposure Margin An initial exposure margin is collected upfront forall of the open positions of a clearing member based on the internationallyaccepted Standard Portfolio Analysis of Risk (SPAN1) methodology Theobjective of SPAN is to identify overall risk in a portfolio of futures andoptions contracts for each investor The system treats futures and optionscontracts uniformly while at the same time recognizing the unique exposureassociated with options portfolios such as extremely deep out-of-the-moneyshort positions intermonth risk and intercommodity risk A more detailedexplanation of the SPAN margin can be found on the Web site of the NSEat wwwnse-indiacomcontentnscclnsccl fospanhtm

dIt is the opinion of the author that this is a serious loophole that should be addressedand closed by the regulatory authorities

SPAN evaluates scenarios of probable changes in underlying prices andvolatilities in order to identify the largest loss with a 99 percent probabilitythat a portfolio might suffer and then it sets the margin requirement at alevel sufficient to cover this one-day loss

While initial margin requirements are based on 99 percent VaR over aone-day time horizon in the case of futures contracts (on index or individualsecurities) the initial margin may be computed over a two-day time horizonThe methodology for the computation of VaR is determined by the SEBI

Minimum Initial Margins Minimum initial margins in the derivative mar-ket vary depending upon the product For all of the products the followingapply

A derivative product upfront initial margin is required to be collectedfrom end-clients This differs from the cash segment where the brokermust provide the upfront margin but has the discretion of collecting itor not from the end-client

For initial margin requirements netting is permitted at the level ofindividual client but grossed across all clients at the tradingclearing-member level Tradingclearing members may net their own proprietarypositions but not net against client positions

The exchanges and SEBI have the discretion to impose stricter require-ments for tighter risk management in instances where they deem it ap-propriate and beneficial to the smooth functioning of the markets Thismight occur in times of excessive volatility or excessive speculation inan effort to reduce such activity

Product-specific initial margins are as follows

Stock Futures There is a minimum initial margin equal to 75 percent ofthe notional value of the contract based on the last available price of thefutures contract This minimum initial margin is further scaled up by thesquare root of three for stocks that have a mean value of impact cost ofmore than 1 percent

Calendar spread margins are calculated to give credit for the hedgednature of the position However a calendar spread is treated as anaked position in the far-month contract as the near-month contract ap-proaches expiry The calendar-spread margin is charged in addition to theVaR margin

Stock Options A minimum margin on short option positions is equal to75 percent of the notional value of all short stock options if the sum of theVaR margin and the calendar-spread margin is lower than the short option

minimum margin A net option value is calculated for each member as thenet current market value of options in the portfolio A memberrsquos liquidcapital is then either debited (for net short positions) or credited the amountof the net option value

For unsettled option positions the value of the premium is deductedfrom the memberrsquos liquid capital on a real-time basis until the buyer settles(pays for) the trade

Index Futures The minimum initial margin is 5 percent of the notionalvalue of the contract This value is monitored real time and the margin iscalculated and applied against a memberrsquos capital on an intraday basis

Index derivatives are also subject to a spread charge of 05 percent permonth for the difference between the two sides of the spread subject to aminimum of 1 percent and maximum of 3 percent

Index Options A short option minimum margin is 3 percent of the notionalvalue of all short index options held This is applicable if the VaR marginplus the calendar spread margin is less than 3 percent The net option value(the value of long options minus short options) is calculated and added tothe memberrsquos liquid capital Negative values are deducted against capital

Premium Margin In addition to an initial margin a premium margin ischarged to members and must be paid by the buyer until the premiumsettlement is complete

Assignment Margin An assignment margin is levied on a member in addi-tion to the SPAN margin and premium margin This is required to be paidon assigned positions of members toward interim and final exercise settle-ment obligations for option contracts on individual securities until suchobligations are fulfilled

Dai ly Mark-to-Market Margin Clients are assessed mark-to-market mar-gins on a daily basis These can be netted out on a member level

ADDIT IONAL RISK CONTROLS FOR DERIVATIVES

Exposure L imits on Capita l

In addition to the various margin requirements imposed by the exchangesto limit the risk of settlement default that might roil the markets additionalcontrols have been instituted to further safeguard the markets Among these

are exposure limits on positions taken by exchange members for individualstock and index futures and options These safeguards are as follows

Ind iv idual Stock Futures and Opt ions The notional value of gross openpositions carried by a firm may not be greater that 20 times the availablenet worth of the member The memberrsquos liquid capital will be debited ona real-time basis by an amount of 5 percent or 15 standard deviations ofnotional value of gross open positions in single stock derivatives (futuresand options) whichever is higher This debit will be over and above themargin collected for the SPAN margin

Index Futures and Index Opt ions The notional value of gross open posi-tions may not exceed 3313 times the available liquid net worth of a memberFor index futures contracts and gross short open index option positions3 percent of the notional value of gross open positions is collected froma memberrsquos capital on a real-time basis This is in addition to the SPANmargin

These exposure limits on capital may be tightened by the exchanges forrisk-management purposes

Posit ion L imits

Another mechanism employed by the exchanges to minimize risk in themarkets is to limit the size of positions taken by exchange members forindividual stock and index futures and options The position limits are asfollows

Ind iv idual Stock Futures and Ind iv idual Stock Opt ions Position limits areimposed (1) on the number of marketwide outstanding positions that mayexist (2) on the maximum positions that a member-broker may hold and(3) on the maximum positions that individual investors may hold

Marketwide Limits Marketwide limits on open positions on stock optionsand futures contracts are based on the number of shares of underlying stockand are the lower of (1) 30 times the average daily volume of the underlyingstock during the previous month or (2) 20 percent of the free-float of shares(ie non-insider shares) trading in the market

Broker Limits Broker limits are calculated on a gross basis for all of abrokerrsquos clients They are related to the marketwide position limits and varydepending on whether the marketwide position limit is less than or greaterthan Rs250 crore (US$56 million) The limits are (1) 20 percent of the

marketwide limit for stocks with marketwide position limits less than orequal to Rs250 crore or (2) Rs50 crore (US$11 million) for stocks with aposition limit greater than Rs250 crore

Once brokers reach the position limit they are permitted only to executeoffsetting positions that lower their gross open positions

Client Limits An individual client is subject to a position limit with re-spect to the underlying shares of all derivative positions that are the greaterof (1) 1 percent of the free-float number of shares or (2) 5 percent of theopen interest in the underlying stock

Index Derivat ive L imits Position limits for index derivatives are

Broker Limits The position limit for a broker is based on the gross positionsof all of its clients and the aggregate of all open interest positions in all indexderivatives contracts futures and options existing in the market for thatparticular index The limit is the higher of (1) 15 percent of the aggregateopen positions or (2) Rs250 crore (US$56 million)

Client Limits One entity or a group of entities acting in concert are notsubject to a maximum holding but are required to report in a timely mannerany holding exceeding 15 percent of the open interest in any particularindex

There are different limits that apply to foreign-based investors andthese are addressed in Chapter 2 ldquoForeign Institutional Investorsrdquo

Opt ion Exercise L imits

There are currently no limits on the number of individual stock or indexoption contracts that can be exercised However the exchanges do have theability to set limits in the interest of risk management

STOCK EXCHANGE CENTRAL COUNTERPARTY ROLE

The stock exchanges in India play a central counterparty role on all trans-actions executed on their trading systems Thus the buyer and seller ofa particular transaction have no direct contractual relationship with each

Exchange as Facilitator Exchange as Central Counterparty

F IGURE 42 The central counterparty role of the exchanges

other but rather each separately has as its counterparty to the transac-tion only the stock exchange (or one of its subsidiaries) The significanceof this system is that each member no longer is subject to the counterpartyrisk and settlement risk associated with the various other trading membersof the exchange Each member-broker has as its counterparty only the ex-change and thus is concerned only with the ability of the exchange to settlethe transaction As is explained in the next section about guarantee fundsthe exchanges have taken the final step of removing any settlement risk ontheir own part As a consequence credit risk no longer poses any threatin the Indian marketplace The market has full confidence that settlementwill occur on time and will be completed irrespective of defaults by isolatedtrading members

Figure 42 illustrates the advantages of this system The left side ofFigure 42 illustrates a system whereby the exchange represented as ahexagon in the middle acts as a facilitator of every transaction and eachmember has as its counterparty the member on the other side of each ofits transactions As such each member assumes the settlementcounterpartyrisk associated with that member In the figure only six members are pre-sented and each may have trades with the other five members thus eachassumes settlement risk with the five counterparties A default or failure byone member impacts each of its counterparties or all five other membersin the example The right side of Figure 42 illustrates a system wherebythe exchange acts as the central counterparty for every trade and thus eachmember has only one counterpartymdashthe exchange In the event of default orfailure by one member no other member is impacted as the exchange willstill settle every transaction whether settlement entails funds to be deliveredor shares to be delivered Only the central counterparty will be impacted

The central counterparty dealing with a settlement default with oneof the members has several tools at its disposal to mitigate the impact

of that default First the margin system discussed earlier in this chapterensured that the defaulting member had already deposited with the exchangesignificant funds to cover settlement ranging up to 100 percent of the settle-ment requirement for illiquid securities Second tight monitoring of the cashposition of the member minimizes the number of transactions for which set-tlement is at risk Third the exchanges maintain settlement guarantee fundsdiscussed below to cover shortages in the event of such a default occurringAnd finally the exchanges are in a strong position with significant leverageover the defaulting member to press for a speedy resolution to any default

The exchanges as counterparties provide an additional valuable featureBecause the exchanges are the counterparty to every transaction a memberknows only the exchange as the other side of his trade not the memberwho entered the contra-order Thus all trades on the exchanges are doneanonymously to all other parties

In summary the exchanges acting as a central counterparty in con-junction with automatic margin collection and settlement guarantee fundssignificantly reduce if not eliminate settlement counterparty risk in theIndian capital markets

GUARANTEE FUNDS

A little known and underappreciated yet extremely valuable feature of In-diarsquos markets is the existence of guarantee funds There are three types ofguarantee funds

The Trade Guarantee Fund of the BSE and the Settlement GuaranteeFund of the NSE insureguarantee the settlement of all trades executedon these two exchanges

The Broker Contingency Fund of the BSE makes temporary cash ad-vances to member-brokers who are facing short-term financial difficul-ties

The Investor Protection Funds of the BSE and NSE insure investorsagainst losses due to the default of their broker (similar to the SecuritiesInvestor Protection Corporation (SIPC) in the United States)

As noted in the section above discussing the central counterparty roleof the exchanges in Indiarsquos capital markets each member-broker has asits counterparty to every transaction the exchange on which the trade wasexecuted and thus is concerned only with the ability of the exchange tosettle the transaction This has limited the counterparty risk of trading onthe NSE and BSE exchanges to the exchanges themselves The settlement

guarantee takes the final step of removing any settlement risk associatedwith the exchanges

The trade and settlement guarantee funds effectively guarantee settle-ments and eliminate all counterparty risk for securities transactions executedon the NSE and the BSE The creation of these funds can be traced to 1997when the SEBI stipulated that the exchanges should introduce a systemto guarantee settlement of bona fide transactions by members to ensurethat market equilibrium is not disturbed in the case of payment defaultby members

Both the NSE and the BSE have reported that there has never been ayear since the trade guarantee funds were established when the balance ofthe funds was not higher than the previous year Furthermore there hasnever been a case where any money from the guarantee funds used to settletransactions was not replaced with assets of the defaulting broker

The guarantee funds are regularly tapped to complete settlements onbehalf of brokers who miss the T+2 pay-in settlement deadline While thesefunds are usually replaced the same or next day the commonly acceptedreason given for payment delays is an inefficient national banking systemparticularly outside of major cities

CASE STUDY Thailand 1997mdashEffectiveness of Trade Guarantee Funds

On July 2 1997 Thailand devalued the baht and inadvertently set off a regionwide rout ofthe financial markets leading to what became known as the Asian Economic Crisis As aresult of the devaluation the financial fundamentals of many Thai companies particularlythose with debt denominated in currencies other than the baht took a nosedive leading to aquick and severe drop in share prices on the Stock Exchange of Thailand The result was thedefault andor bankruptcy of approximately 44 Thai brokerage firms and in turn their defaulton their unsettled trades executed over the previous two days Because of the ExchangersquosSecurities Investor Protection Fund a settlement guarantee fund with balances equivalent toapproximately three times the average daily turnover every trade for every brokerage firmwas settled on time and in full The system survived the sharp correction and default bynumerous members because of the existence of the settlement guarantee fund

BSE Trade Guarantee Funds

The BSE trade guarantee funds were implemented in 1997 with the followingobjectives

To guarantee the settlement of bona fide transactions between membersof the exchange that form part of the stock exchange settlement systemand to ensure timely settlements of executions thereby protecting theinterests of investors and members of the exchange

To instill confidence in secondary market participants and global in-vestors in order to attract more players into the capital markets

To protect the interests of investors and to promote the development ofand regulation of the secondary market

The balance of the trade guarantee funds (TGF) as of November 302006 was Rs264376 crore (simUS$590 million) which represents 57 per-cent of the November 2006 average daily equity turnover on the exchangeSince India trades in a T+2 environment at any one time there are two daysof unsettled trades outstanding thus the coverage ratio is approximately285 percent of the total value of all unsettled trades outstanding In otherwords brokerage firms representing 285 percent of all trades executed overa two-day period could default and the total value of all of the trades wouldbe covered and settled Since many of the S T and Z-classified shares aresubject to 100 percent margin collected by the exchange prior to execution(thus are fully paid for) virtually no settlement risk exists in those shareseSince these trades constitute approximately only 45 percent of all trades theTGF then represents in excess of 30 percent of the total aggregated averageA B1 and B2 share two-day turnover Since these shares are also subjectto pretrade margin including VaR-based margin and extreme loss marginthe outstanding funds due are substantially less than the total value of thetrades thus raising the coverage ratio of the TGF even higher Since thevalue at risk for a defaulted settlement is not 100 percent of the value ofthe shares but rather considerably less (in all likelihood less than 15 percent)the practical ability of the trade guarantee funds to settle all unsettled bal-ances of pre-settled executed trades would represent significantly more thanthe 30 percent of unsettled trades and probably many multiples of averagedaily turnover Thus the TGF provides a valuable and important cushionof safety to the market

The balances in the BSE trade guarantee funds come from the followingsources

The exchange contributed an initial sum of approximately Rs170 crore(US$385 million)

All active members are required to make an initial contribution ofRs10000 (US$225) in cash to the fund

All active members also contribute Rs025 for every Rs1 lakh(US$2300) of gross turnover in all of the groups of scrips throughcontinuous contributions that are debited to their settlement accountsin each settlement

eSee Table 54 for a full description of these classifications and the section on margincontrols earlier in this chapter for a discussion about margins on illiquid shares

Active members are required to maintain a base minimum capitalof Rs10 lakh (US$23000) with the exchange This contribution istransferred to the fund and treated as a refundable contribution ofmembers

Each member is required to provide the fund with a bank guaranteeof Rs10 lakh (US$23000) from a scheduled commercial or cooperativebank as an additional contribution to the fund

The trade guarantee funds totaled Rs264376 crore (simUS$590 million)as of November 30 2006

NSE Sett lement Guarantee Funds

Settlement guarantee funds of the National Securities Clearing CorporationLtd (NSCCL) assume the counterparty risk for trades executed on the NSEThe total value of the settlement guarantee fund as of March 31 2006 wasRs405518 crore (simUS$905 million) This represents 584 percent of theFY06 average daily turnover for the NSE implying that member-brokersrepresenting more than 29 percent of all trades over a two-day period coulddefault and the fund could fully settle every trade in its entirety Furtheras noted above when discussing the BSE TGF given the margin collectedby the exchanges prior to execution and the fact that many securities carryan upfront 100 percent margin the funds available in the settlement guar-antee fund would represent significantly more than 58 percent of the dailyoutstanding balances

A separate settlement guarantee fund is maintained for the futures andoptions segment The total value of the futures and options settlement guar-antee fund was US$2606 billion as of March 31 2006

Brokersrsquo Cont ingency Fund

The brokersrsquo contingency fund was established in 1997 to

Make temporary refundable advances to members facing temporaryfinancial shortfalls

Protect the interests of investors dealing through members of the ex-change by ensuring timely completion of settlement

Instill confidence in investors regarding the safety of exchange transac-tions

The balance for the brokersrsquo contingency fund comes from thefollowing

The exchange contributed an initial sum of Rs951 crore (US$22 mil-lion)

Active members are required to make an initial nonrefundable contri-bution of Rs1000000 (simUS$23000)

Active members contribute Rs0125 (US$00027) for every Rs1 lakh(US$2300) of gross turnover through continuous contributions thatare debited to their settlement accounts for each settlement

The fund totaled Rs5069 crore (US$113 million) as of November 302006

Members are eligible to get advances from the fund for up to a maximumof Rs25 lakh (US$57000) at a rate of 21 percent per annum

The fund ensures that settlement cycles at the exchange are not affecteddue to temporary financial problems faced by members This helps to con-tribute to the credibility of the stock exchange settlement system

Investor and Customer Protect ion Funds

As mandated by the Ministry of Finance the BSE and NSE establishedinvestor protection funds to meet the claims of investors against defaultingmembers Funds come from

Members contribute Rs015 per Rs100000 (US$2200) of grossturnover

The stock exchange contributes 25 percent of the listing fees that itcollects on a quarterly basis

Total interest earned by the exchange from 1 percent security depositsmade by companies making public and rights issues is credited to thefund

Auction proceeds from instances of price manipulation or rigging areimpounded and transferred to the fund

The surplus in accounts of defaulters after meeting their liabilities on theexchange is released to them after transferring 5 percent of the surplusamount to the fund

The BSE fund totaled Rs26992 crore (US$601 million) as of November30 2006 and the NSE fund was about Rs1737 crore (simUS$43 million) asof April 30 2007

In the event of default by a member the maximum amount payable toan investor from the investor protection funds of the BSE and NSE is Rs10lakh (US$23000)

INSPECTION OF BROKERSrsquo BOOKS

As stipulated by the Ministry of Finance the stock exchanges are required toinspect accounts of at least 10 percent of their active members during eachfinancial year The number of inspections carried out by the exchanges everyyear tends to far exceed the requirements The purpose of these inspectionsis to verify that members have maintained the required books of accounts asper the Securities Contracts (Regulation) Rule 1957 and that members haveadhered to the rules regulations and bylaws of the exchange and SEBI

The findings of the inspections are reported to the examined membersand follow-up action is taken based on the responses and clarificationsprovided by members If the violations are serious the matter is referred tothe Disciplinary Action Committee of the exchange Members are required tohave their annual accounts audited by a chartered accountant and to submitan audit certificate as well as profit-and-loss and balance sheet statementsto the exchange Members are also required to submit net-worth certificatesat the end of every March and September The filing of these documents bymembers is monitored by the Inspection Department

CASE STUDY Effectiveness of the Risk Management Mechanisms

In May 2004 the Indian market experienced extreme volatility and on May 17 2004 thebenchmark Sensex Index fell quickly and sharply providing a real-time stress test for theembedded market safety mechanisms ldquoThe risk management system withstood volatilityof 8 sigma or above as against the normal built-in capacity of withstanding only the 3ndash6sigma variations internationallyrdquo2 The risk systems all worked as designed no brokersdefaulted and the settlement guarantee funds were not tapped This event is often referredto as proof and confirmation of the safety of the markets and the effectiveness of thesecurity systems

On that day the Sensex declined dramatically but then rallied to finish 56471 pointsor 11 percent lower This occurred in response to an upset win by the United ProgressiveAlliance party in a federal election At the time there were fears that the party was in aposition to unduly influence the coalition government and possibly reverse some of thevaluable reforms that were behind the economic growth being enjoyed by the country Whenthe market initially fell 10 percent in the morning the market circuit breaker was triggeredand a one-hour halt went into effect This was the first time the circuit breaker had beentripped since the imposition of the circuit breaker rules The market reopened and then the15 percent down two-hour halt went into effect When the market reopened after the two-hourhalt the circuit breaker achieved its intended effect The investor public had time to reflect onthe market-moving event in this case election results and conclude that the situation wasnot as bad as initially feared The buyers came back and the market moved higher beforethe close

In addition to the circuit breakers being triggered to temper overreaction other riskmechanisms including intraday margins and intraday capital calls to brokers all functionedas planned keeping the market operating and the participants trading only when they hadadequate capital to do so as determined by the various margining systems

SUMMARY

The capital markets of India have been vigilant in developing and imple-menting very sophisticated safeguards that ensure the integrity of the mar-ket System-embedded position and price monitoring individual stock andbroad market circuit breakers multilayered and upfront margining andguarantee funds all contribute to a market system that has withstood ex-treme stress and volatility emerging strong intact and viable Such robustcontrols put Indiarsquos exchanges in league with the worldrsquos safest and mostrespected trading and settlement systems

CHAPTER 5The Equity Market

Stock Exchanges Trading and Settlement

CHAPTER HIGHL IGHTS The Bombay Stock Exchange and the National Stock Exchange

are the two primary stock exchanges of India

Trading

The trading systems are electronic screen based and order driven Trading hours are Monday through Friday from 955 AM to

330 PM Trading is conducted in an anonymous environment There is a capability for basket trading and index arbitrage Short selling has been approved but will not be implemented until

the second half of 2007

Settlement

Settlement is T+2 Shares are dematerialized There are two clearinghouses the NSCCL on the NSE and the

BOISL on the BSE There are two depositories the NSDL and the CDSL

The equity market in India has undergone profound change over the last15 years that has justly resulted in the perception that the capital marketshave obtained world-class status Earlier chapters of this book have discussed

the development of an internationally respected regulator in SEBI and thesignificant risk controls that maximize the safety and integrity of the marketsThis chapter looks more closely at the equity market specifically centeredin Bombay (Mumbai) around its two primary stock exchanges the BombayStock Exchange and the National Stock Exchange and the trading andsettlement systems and processes under which they operate

Two of the most significant developments include the introduction ofscreen-based electronic trading platforms and the dematerialization of sharesand shareholding These developments have permitted the implementationof a global standard T+2 straight-through-processing settlement as wellas enabling risk management to develop the very sophisticated automaticmechanisms discussed in the previous chapter The capability and efficiencyof trading and settling large volumes of shares through this streamlinedprocess have made Indiarsquos financial markets significantly more attractive toglobal investors

This chapter addresses numerous issues involved in trading and settle-ment of trades executed on the stock exchanges In the trading sectionsthe electronic platforms and their systems and methodologies are discussedas are the order matching rules used acceptable order types and tradingcapabilities such as basket trading The discussion on settlements looks atthe clearing and settlement process and the role of the clearinghouses cus-todians and depositories

The exchangesrsquo trading systems are known by their acronyms TheNSE trading system is referred to as the NEAT system (National Ex-change for Automated Trading) The BSE trading system is known asBOLT (BSE Online Trading) While there are some subtle differencesunderpinning the two systems and some nomenclature differenceswhen referring to similar concepts the clientinvestor elements arelargely alike and thus will be transparent to the user For instancethe BSE refers to its equity trading system as the ldquoEquity Segmentrdquoand the NSE refers to a ldquoCapital Market Segmentrdquo In this chap-ter the trading and settlement systems of the two exchanges will bepresented together where possible to present information needed bytraders portfolio managers and risk control managers For settle-ment clerks and settlement practitioners who need to learn about theindividual exchange trading and settlement systems in intricate de-tail please refer to the exchange web sites at wwwbseindiacom andwwwnse-indiacom or contact the exchanges directly

The Equity Market 103

INDIA rsquoS STOCK EXCHANGES

Indiarsquos financial markets have evolved from a decentralized and fragmentedsystem of 23 regional stock exchanges into two dominant primary ex-changes the Bombay Stock Exchange (BSE) and the National Stock Ex-change (NSE)

Exchange History

The Bombay Stock Exchange (BSE) the oldest stock exchange in Asia wasfounded in 1875 and began as a regional exchange centered in Bombay Anumber of other regional stock exchanges developed throughout the countryand were supported by a government requirement that all companies hadto initially list on their local regional exchange This created a captive setof listed companies and made the local exchanges viable The BSE locatedin Bombay the commercial center of India became the dominant regionalexchange with access to the most capital among its members Over timemany of the regionally listed companies sought BSE listings resulting in theBSE effectively becoming Indiarsquos primary exchange

A government study in the early 1990s recommended the creation of astock exchange with nationwide interests and unlike the BSE no regionalroots The National Stock Exchange (NSE) founded in 1992 was the result

Changes in the listing rules of the nationrsquos exchanges led to the re-moval of two key factors that made the regional stock exchanges viableand reshaped the stock exchange landscape of India The changes were (1)the removal of a requirement that companies must initially list on their lo-cal exchange and (2) the removal of a requirement that companies list onany regional exchange Immediately following the removal of these require-ments all companies that could qualify to list on both or either the BSE orNSE soon did so to access the superior liquidity found on these exchangesInevitably liquidity dried up on the regional exchanges

In an effort by the regional exchanges to revive liquidity and create aviable business for their respective regional members 14 of the exchangescreated the Interconnected Stock Exchange of India (ISE) as an electronicplatform to give regional members access to trading other exchangesrsquo listedcompanies and thereby enhance liquidity of all of the companies Althoughthe ISE and the regional exchanges still exist the centralization of the BSEand NSE has made them all but obsolete The ISE now functions primarilyas a vehicle through which regional exchange members have access to entertrades for their clients on the NSE and BSE The ISE is trying to reestablishitself as the market for small and medium-sized enterprises but as of thiswriting has been unable to gain much traction

TABLE 51 BSE and NSE Trading Statistics Year-End FY2006

No of No of Avg Daily MarketNo of Listed Trades Turnover Turnover Capitalization

Members Companies in 2006 (US$ Bn) (US$ Mn) (US$ Bn)

NSE 953 1158 746800000 $42583 $1708 $761BSE 913 4796 328246360 $21462 $864 812

Sources The National Stock Exchange the Bombay Stock Exchange

Stock Exchange Structure

Both of the primary exchanges are demutualized corporations run by a boardof directors This structure mandated by the Securities Laws (Amendment)Act of January 7 2005 effectively segregated the ownership managementand trading rights at the exchange from one another removing concernabout conflicts of interest

Stock Exchange Compet i t ion

The BSE and NSE are competing organizations Most market participantsbelieve that the existence of two exchanges rather than one merged exchangeleads to a better performing marketplace Competition between the twoexchanges has led to reduced costs faster innovation and greater efficienciesand most participants would be opposed to a merger of the exchanges

As the first and oldest exchange in India BSE had 4796 listed compa-nies and 7500 different scrips listed as of December 31 2006 considerablyhigher than the NSErsquos 1158 listed companies although many of them arevery small entities On any given day approximately 50 percent of the BSErsquoslisted companies do not trade and of those that do trade more than 1000 ofthem trade very infrequently1 Among the larger more significant companiesin India virtually all are listed on both exchanges As such arbitragea trad-ing between dual-listed shares regularly occurs between the two exchangesand has been estimated to reach 30 percent of turnover on some daysTable 51 shows that while the NSErsquos number of listings is significantly lessthan the BSE the NSE has more members transacted more than twice the

aArbitrage refers to the practice of taking advantage of the price discrepancy of thesame item trading in two different marketplaces buying the item in the less expensivemarket and instantaneously selling it in the higher-priced market

number of trades and had an average daily turnover and gross annualturnover of two times that of the BSE in 2006

Foreign Brokers in Ind ia

A number of non-Indian brokerage firms and investment banks have estab-lished a presence in the Indian market through their own local corporateentities or through joint venture agreements with local firms In the growingand dynamic environment in Indian capital markets relationships are con-stantly evolving In 2006 alone US investment bank Merrill Lynch boughtout 90 percent of its Indian partner DSP and Goldman Sachs ended a jointventure with its local partner Kotak Mahindra presumably to begin theirown venture Foreign individual and joint ventures have sought and receivedmembership in Indiarsquos two primary stock exchanges Tables 52 and 53 listthe foreign members of each exchange current at the time of this writing butwith the recognition that new foreign investment banks continue to enterIndia and likely seek exchange memberships

TABLE 52 Foreign Broker Members of the Bombay Stock Exchange

ClearingSEBI Reg No No Trade Name

INB010706931 278 ABN AMRO Asia Equities (India) LtdINB011205730 576 Brics Securities LtdINB011141331 670 Citigroup Global Markets India Pvt LtdINB010826432 152 CLSA India LtdINB010970631 497 Credit Suisse First Boston (India) Securities LtdINB011196830 905 Deutsche Equities India Pvt LtdINB010706833 276 Dresdner Kleinwort Wasserstein Securities (India)

Pvt LtdINB010935530 130 DSP Merill Lynch LtdINB011095636 157 Dundee Securities Company Pvt LtdINB010791730 66 HSBC Securities amp Capital Markets India Pvt LtdINB011054831 325 JM Morgan Stanley Financial Services Pvt LtdINB011054237 457 JM Morgan Stanley Securities Pvt LtdINB010675237 324 JP Morgan India Pvt LtdINB010599037 165 Jacob Ballas Securities India Pvt LtdINB011246734 46 Macquarie Securities India Pvt LtdINB011250330 416 Man FinancialndashSify Securities India Pvt LtdINB010792034 472 Peregrine Securities (India) Pvt LtdINB010925237 668 SG Asia Securities India Pvt LtdINB010951437 691 UBS Securities India Pvt Ltd

Source Bombay Stock Exchange

TABLE 53 Foreign Broker Members of the National Stock Exchange

MemberSEBI Reg No Code Member Name

INB230608032 06080 ABN AMRO Asia Equities (India) LtdINB230920030 09200 ASKndashRaymond James amp Associates Pvt LtdINB231205734 12057 Brics Securities LtdINB230854633 08546 Brilliant Securities LtdINB231222036 12220 BSV Securities Pvt LtdINB230781538 07815 Bulls amp Bears Portfolios LtdINB231094237 10942 CD Integrated Services LtdINB230769433 07694 C Mackertich LtdINB231203234 12032 Citicorp Capital Markets LtdINB231141335 11413 Citigroup Global Markets India Pvt LtdINB230826436 08264 CLSA India LtdINB230970637 09706 Credit Suisse First Boston (I) Securities Pvt LtdINB230647738 06477 DBS Capital Markets Pvt LtdINB231196834 11968 Deutsche Equities India Pvt LtdINB230597934 05979 DSP Merrill Lynch LtdINB230653732 06537 Fortis Securities LtdINB230791734 07917 HSBC Securities amp Capital Markets (India) Pvt

LtdINB230852332 08523 ING Baring Securities (i) Pvt LtdINB231055337 10553 JM Morgan Stanley Fixed Income Securities

Pvt LtdINB231054835 10548 JM Morgan Stanley Retail Services Pvt LtdINB231054231 10542 JM Morgan Stanley Securities Pvt LtdINB230675231 06752 JP Morgan India Pvt LtdINB230599031 05990 Jacob Ballas Securities India Pvt LtdINB230753135 07531 Nikko Capital Market Pvt LtdINB231217234 12172 Refco Capital India Pvt LtdINB231123333 11233 RefcondashSify Securities India Pvt LtdINB230886230 08862 SG Stock Services LtdINB230655838 06558 UAE Exchange amp Finance LtdINB230951431 09514 UBS Securities India Pvt Ltd

Source National Stock Exchange

EXCHANGE TRADING RUDIMENTS

Trading Hours

Trading on the BSE BOLT system and NSE NEAT system is conducted fromMonday to Friday from 955 AM to 330 PM

Trading System Methodology and Characterist ics

In the mid-1990s the National Stock Exchange (NSE) and the Bombay StockExchange (BSE) introduced screen-based electronic trading systems based onthe principle of an order-driven market Orders are entered into the tradingsystems using computer terminals provided by the exchanges Currentlyall orders input into the trading systems must be manually released intothe system Computer-generated automatic order entry is not permittedFurthermore no systems are permitted to interface with both the BSE andNSE order entry terminals to evaluate and choose the most appropriate(ie best price) market to send the order which is a valuable tool fordually listed stocks Instead investors must decide which market to senda particular order As such some inefficiency exists among the prices ofdually listed shares and therefore arbitrage opportunities appear betweenthe two exchanges While proprietary electronic systems interfacing with theexchange trading terminals have been prohibited to protect the markets fromexcessive computer-generated trading some market participants anticipatea loosening of this restriction in the near future as market liquidity continuesto grow and as domestic demand rises

Trading Anonymity

Trading is conducted in an anonymous environment The counterparty toevery trade is the exchangeb and thus the identity of the broker-memberrepresenting the other side of a trade is not revealed

Trade Entr ies

Trade entries into the two exchange trading systems are conducted on trad-ing terminals provided by the exchanges and installed in member-brokeroffices that link directly to the exchanges The member-brokersrsquo trading per-sonnel enter orders to buy or sell securities through these terminals Themember-brokers of the exchange are free to install trading terminals any-where in the country The trading terminals are unique for each exchange soa broker who is a member of both exchanges is required have two separatetrading terminals each dedicated to one of the exchangersquos trading systemsThe BSE had 14440 trader workstations installed in 414 different cities asof December 20062 and the NSE had 2769 terminals installed in 311 citiesas of March 2006 the most recent data available3

bThe central counterparty role of the exchanges and the benefits accruing from sucha role are discussed more fully in Chapter 4

All orders inputted into the terminals must be placed by a person man-ually by ldquohitting the enter keyrdquo rather than placed automatically by anothercomputer Aside from the perceived control of having a person be respon-sible for entering all trades into the system this rule impacts three tradingfunctions

1 Best execution For dually listed stocks where price discrepancies be-tween the exchanges might exist a person must first check both ex-change terminals for the best price and then manually enter and releasethat order into the exchangersquos terminal that offers the best price

2 Exchange arbitrage As many stocks are dually listed on the BSE andNSE price discrepancies and thus arbitrage opportunities between likeissues on the two exchanges regularly occur Such arbitrage is estimatedto constitute up to 30 percent of volume on some days but is currentlya manual process The exchanges and SEBI do not permit automatedcomputer-generated arbitrage between the two exchanges

3 Computer-generated trading The exchanges and SEBI still appear tobe concerned that non-arbitrage computer-generated and entered tradesinto the terminals for instantaneous transmission into the exchange trad-ing system may overwhelm the markets

Trading Segments

The BSE has divided the issues traded on the exchange into several clas-sifications based on certain qualitative and quantitative parameters Thequantitative parameters include such statistics as the market capitalizationliquidity consistency of revenue and income streams and impact cost ofthe stock Qualitative parameters include such issues as the quality of acompanyrsquos corporate governance the number of investor complaints con-cerning the stock or the company and any general perceptions good orbad pertaining to the stock A review committee meets two times a yearto review the stocks assigned to each classification and make changes asnecessary The highest-quality classification is A and at the time of the semi-annual review the number of A-classified companies is set at exactly 200The 200 A-classified companies are characterized as being 200 of the safesthighest-market-capitalized highest-liquidity companies with the strongestcorporate governance and consistently strong financials Between the semi-annual reviews the number of A companies may be slightly below 200 in-dicating either companies taken over merged or delisted or slightly above200 indicating possible IPOs of very strong companies deserving of an Aclassification At the semiannual review however the 200 number is strictlyadhered to and companies are added or deleted accordingly to achieve the

TABLE 54 BSE Scrip Classifications

Classification Description

A Equity The 200 strongest highest-market-capitalizedhighest-liquidity companies on the BSE with strongfinancials and high-quality corporate governance

B1 Also strong companies but not in the top 200 Manymay compare favorably with A-classificationcompanies based on the objective and subjectiveparameters but not be in the top 200 and thus receivea B1 classification There is no fixed number of B1companies

B2 B2 companies represent the lowest tier of listed equitiesin terms of market cap liquidity financials and thesubjective measures such as corporate governance andcomplaints Investors should be wary of B2 companiesin terms of management quality of earnings and thefinancial soundness of the business

S S shares are also known as ldquoBSE Indonextrdquoshares Thisclassification consists of scrip from the B1 and B2groups and companies exclusively listed on regionalstock exchanges that have capital of Rs3 to 30 crores(US$700000 to US$7 million)

Z Z shares include companies that either (1) have failed tocomply with the listing requirements of the exchange(2) have failed to resolve investor complaints or (3)have not made the required arrangements with bothof the depositories for the dematerialization of theirsecurities

T These are shares that settle on a trade-to-trade basis formarket-surveillance reasons

TS These are a subclassification of S shares that settle on atrade-to-trade basis for market-surveillance reasons

F Debt These are fixed income securitiesG These are government securities for retail investors

correct number Table 54 lists the BSE scrip classifications and a descriptionof the companies so classified

The distinction between the various classifications can be seen bylooking at the trading statistics on any random day Table 55 looks atMarch 20 2007 when 7637 scrips were listed on the exchange and only345 percent or 2633 scrips traded that day A scrips totaling 216 on thisday represent only 8 percent of the number of traded scrips but account for

TABLE 55 BSE Scrip Equity Classification Trading Distinctions

Market Avg Capitalization

No of of No of of of Daily (EquityClassification Scrips Scrips Trades Trades Volume Turnover US$ mn)

Total Traded 2633 100 1233179 100 100 100 7902A 216 8 498526 40 28 54 6080 77B1 709 27 626685 51 51 40 1280 16B2 890 34 52862 4 10 259 154 19BSE Indonext 496 19 44803 4 6 323 172 22Z 103 39 991 01 06 004 120 15T 214 8 9248 1 39 043 96 12

Source Bombay Stock Exchange Limited March 20 2007 data Market capitaliza-tions are for February 2007

40 percent of the number of trades representing 54 percent of the averagedaily turnover and approximately 77 percent of the market capitalization Aand B1 equity shares together represent 91 percent of the number of trades94 percent of the average daily turnover and 93 percent of the market cap-italization Within these numbers it is interesting to note that A and B1stocks have declined slightly as a percentage of total equity numbers andthat A stocks represent a progressively smaller percentage of equity businesswhile B1 stocks represent a progressively greater percentage of equity busi-ness The percentage ratio of A to B1 was as high as 93 percent to 7 percentin 2000 and had declined to almost 58 percent to 42 percent by late 2006The implication is that the market is becoming more broad based as thesecond tier stocks are beginning to attract greater interest among investors

Lot Sizes

Company scrip that is in dematerialized form can be traded in a market lotof one Scrip that is still in the physical form is traded in a market lot ofeither 50 or 100 Most scrip now trade in the dematerialized form

Tick Sizes

There is a 5 paisec tick size for standard trading in listed scrip quoted atmore than Rs15

cA paise is the smallest unit in the Indian numbering system representing one hun-dredth of a rupee See Appendix B Indiarsquos Unique Numbering System for a furtherdiscussion on Indiarsquos numbering system

There is a 1 paise tick size for

Units of mutual funds Securities traded in the F group Equity shares having closing prices up to Rs15 on the last trading day

of the calendar month Accordingly the tick size in various stocks upto Rs15 is revised to 1 paise on the first trading day of the subsequentmonth The tick size that is revised on the first trading day of the monthremains unchanged during the month even if the price of the sharesurpasses the Rs15 level

L isted Securit ies

Listed securities are securities of companies traded on the exchanges thathave signed listing agreements with the exchanges With very few exceptionsdiscussed below most issues fall into this category

Permitted Securit ies

Permitted securities are securities of companies that are listed and activelytraded on regional stock exchanges and are not listed on either the BSE orNSE The BSE and NSE allow trading in such securities on their exchangesprovided they meet the requirements specified by the exchange They tradeon the exchanges as permitted securities

Computat ion of the Clos ing Price in theCash Segment

The closing price of a stock is the weighted-average price of all trades exe-cuted during the final 15 minutes of the continuous trading session If thereis no trade recorded during the last 15 minutes the last traded price in thecontinuous trading session is taken as the official closing price

L imited Physica l Market

The limited physical market is the trading facility for small investors hold-ing physical shares in securities mandated for compulsory dematerializedsettlement Trading should not exceed 500 shares

Trading is conducted in the odd lot market (market type O) The base price and price bands applicable in the limited physical mar-

ket are the same as those for the corresponding normal market onthat day

The trading hours are the same as those of the normal market and orderentry during the pre-open and post-close sessions is not allowed

Settlement for all trades is done on a trade-for-trade basis and deliveryobligations arise out of each trade

Trading members are required to ensure that shares are duly registeredin the name of investors

EXCHANGE TRADING SYSTEMS

BOLTmdashBSE Onl ine Trading System

The BSErsquos online trading system (BOLT) converted the open-outcry systemof trading to a screen-based trading system On March 14 1995 the firstgroup of 818 scrips was traded on the BOLT system At regular intervalsadditional scrips were added and all 5000 scrips were shifted to the BOLTsystem within 50 days

Highl ights of BOLT

Dissemination of information within less than two seconds Current maximum of 4 million trades a day4 Average execution time is 100 orderssecond with a peak speed of 200

ordersquotes per second5 Fault-tolerance features at each level Proprietary open interface that allows members to connect directly to

BOLT using third-party-developed applications Integrated risk management alert system

Benefits of BOLT

Makes trading accessible anywhere and any time Facilitates a fast response time Disseminates data at a fast rate Facilitates the transparency of information Provides global connectivity Increases awareness of market participants through the provision of

information

Risk Management Risk management is an integral part of the BOLT system(see Chapter 4 ldquoSafety and Integrityrdquo for more details)

BS7799 Cert ificat ion for BSE BS7799 is the standard for securing infor-mation managing risk and protecting technical and people assets It certifiesthe confidentiality integrity and availability of information BSE achievedthe BS7799ndash22002 certification for BOLT Det Norske Veritas (DNV) con-ducted the BS7799 audit at BSE The following are the benefits of BOLTreceiving the BS7799 certification

Gives confidence to clients investors and business partners who entrusttheir financial information to BSErsquos custody by maintaining informationconfidentiality and integrity

Provides internationally recognized best practices for maintaining infor-mation security

Strengthens BSErsquos competitive edge by creating trust in the firm exter-nally as well as internally

Ensures business continuity from a trading operations perspective andminimizes losses for BSE as a whole even in the case of a disaster

Demonstrates compliance with standards for information security inaddition to helping to safeguard vital information

Motivates management and employees to demonstrate adherence tobest international security practices

NEATmdashNational Exchange for Automated Trading

The National Stock Exchange has named its trading system NEAT anacronym for the National Exchange for Automated Trading NEAT is afully automated screen-based trading system operating with an order-drivenmarket methodology

Risk Management Risk management is an integral part of the NEAT trad-ing system As discussed more fully in Chapter 4 ldquoSafety and Integrityrdquo anumber of online real-time safety mechanisms are incorporated into NEAT

TRADING FEATURES OF THE EXCHANGES

Order Books

All orders entered into the exchange trading systems are time-stamped andassigned a unique identification number to facilitate a verifiable audit trailThe exchanges adhere to a pricetime priority whereby better prices (higherbids and lower offers) have first priority and at the same price orders enteredfirst have priority over those entered later

The trading systems of both exchanges accommodate numerous ordersizes and types and maintain different order books to handle the varioustypes

Normal market All NSE orders of regular lot size or multiples thereofare traded in the normal market The market lot of these shares isone

Odd-lot market All NSE orders whose order size is less than the regularlot size are traded in the odd-lot market

The BSE maintains the following trading books

Regular lot book The regular lot book contains all regular lot orderssuch as market and limit orders but there are no contingencies suchas all-or-none or minimum fill conditions attached to the orders

Special terms book The special terms book contains all orders thatare either all-or-none or minimum fill However all-or-none andminimum fill orders are not always permissible by SEBI

Negotiated trade book The negotiated trade book contains all nego-tiated order entries captured by the system before they have beenmatched against their counterparty trade entries These are similarto prearranged cross trades These entries are matched with identi-cal counterparty entries only These entries contain a counterpartycode in addition to other order details

Stop-loss book The stop-loss order book stores all stop-loss orders untilthey are triggered after which the order is released to the regularlot book as live orders for execution

Odd-lot book The odd-lot book contains all odd-lot orders (orders withquantities less than the marketable lot) in the system Currentlypursuant to a SEBI directive the odd-lot market is used for ordersthat have quantities of less than or equal to 500 shares

Spot-lot book The spot-lot book not currently active contains all spotorders in the system

Auction book The auction book contains orders that are entered for allauctions The matching process for auction orders in this book isinitiated only at the end of the solicitor period

Order Matching Rules

The best (ie highest-priced) buy order is matched with the best (ielowest-priced) sell order A standard order with no contingencies may match

partially with another order resulting in partial executions andor multipletrades to fill the order The system views all buy orders available from thepoint of view of a seller and all sell orders from the point of view of a buyerin the market

Members can proactively enter orders in the system which will be dis-played in the system until either (1) the full quantity is matched against oneor more subsequently entered contra-orders resulting in trades or (2) is can-celed Alternatively members may be reactive and put in orders that matchwith existing orders in the system Orders lying unmatched in the system arecalled passive orders and orders that come in to match the existing passiveorders are called active orders

Order Types

The exchange trading systems accommodate various order types whose at-tributes can be broadly classified into four categories

1 Time2 Price3 Quantity4 Additional

Time The two stock exchange trading systems accommodate four differenttime conditions attached to an order

1 Day order An order is valid only for the day on which it is enteredUnexecuted day orders are canceled automatically at the end of eachtrading day

2 Good till canceled This is an order that remains in the system untilit is canceled by the trading member It will therefore be able to spantrading days if it does not become matched The maximum number ofdays a good-till-canceled order can remain in the system is set by theexchanges

3 Good till daysdate This is an order that remains valid and in thesystem until a specific date or a specific number of days specified in theorder At the end of this period the order will be automatically canceledEach daydate counted is a calendar day and inclusive of holidays Thedaysdate counted are inclusive of the daydate on which the order isplaced The maximum number of days a good-till-daysdate order canremain in the system is set by the exchanges

4 Immediate or cancel This is an order to buy or sell a security imme-diately upon the order being released into the market Any unexecutedremainder of the order is then automatically and immediately canceled

Price The three types of price attributes accepted by the exchanges are

1 Limit price order This is an order eligible for execution at or betterthan the specified limit price

2 Market order This is an order with no price limit and is to be executedat the best price obtainable whatever it is at the time of entering theorder

3 Stop loss price order This is an order that is dormant and becomesactivated only when the market price of the relevant security reaches orcrosses a threshold which is a trigger price specified on the order Untiltriggered the order is a dormant order not eligible for execution

A sell order in the stop loss book is triggered when the last traded pricein the normal market reaches or falls below the trigger price of the orderA buy order in the stop loss book becomes triggered when the last tradedprice in the normal market reaches or exceeds the trigger price of the orderStop loss orders are often used to preserve profits or limit losses

Quant i ty The trading systems recognize and accept several quantity at-tributes and conditions on orders

No quantity restriction An order is considered to have no quantityrestriction unless marked otherwise and is therefore available for exe-cution in any quantity from the smallest permissible trading lot to thefull quantity of the order subject of course to meeting the orderrsquos otherattributes

Disclosed quantity or drip-feed mechanism This is an order that allowsmembers to disclose only a part of the order quantity to the marketFor example an order of 1000 with a disclosed quantity condition of200 means that 200 is displayed to the market at a time After this istraded another 200 is automatically released and so on until the fullorder is executed The exchange may set a minimum disclosed quantityperiodically Traders often use this mechanism to avoid showing themarket that there is a large quantity for saleto buy and then causingthe buyerssellers to get nervous and back away

Minimum fill This is an order allowing members to specify the mini-mum quantity by which an order should be filled For example an orderof 1000 units with a minimum fill of 200 requires that each trade befor at least 200 units In other words there will be a maximum of fivetrades of 200 each or a single trade of 1000 The exchange may setnorms for minimum fills periodically

Hit and take order mechanism Minimum fillrest kill orders (a combi-nation of immediate or cancel [IOC] and minimum fill) will be matched

at a specified price to a quantity greater than or equal to the minimumquantityless than or equal to the total quantity (orders being satisfiedat least up to the minimum fill quantity are executed the unexecutedquantity of the order will be canceled)

All or none This is an order imposing the condition that only the fullorder should be executed No partial executions are accepted

At the time of writing all-or-none and minimum fill orders were notpermitted by the SEBI

Addit ional Order Type

Batch Orders The BOLT trading system provides a facility for a batchupload of orders all at one time that is often used before the opening so thatthe orders are ready for entry into the trading system at the start of tradingThis function may also be used during trading hours and is an effective toolwhen doing index arbitraged The maximum number of orders the user maysubmit at one time is 500 There are two ways in which the user can inputorders in a batch

1 Through screen entry of orders and later submission2 By loading a pre-created batch file into the system

Price Bands

As discussed more fully in Chapter 4 ldquoSafety and Integrityrdquo most securi-ties are subject to price bands that define their maximum permissible dailyprice movements No price bands are applicable to securities for whichderivative products are available or for securities included in indexes forwhich derivative products are available All other securities are subject todaily price bands of plusmn2 percent plusmn5 percent plusmn10 percent or plusmn20 percentMost securities including debentures warrants and preference shares aresubject to the 20 percent bands Those subject to smaller price movementbands are usually those in which SEBI or the BSE and NSE exchangesacting together wish to limit or control volatility A list of the securitiessubject to these tighter bands can be found daily on the NSE exchange Web

dIndex arbitrage is the strategy whereby traders attempt to take advantage of pricediscrepancies between an index and the basket of underlying stocks in that index

site at httpwwwnse-indiacomcontentequitieseq pricebandshtm Notethat although derivative-related securities are not subject to price bandsthe exchange trading systems use the 20 percent control feature to preventorder-entry errors for such securities

Basket Trading System

The BOLT trading system was designed to accommodate basket trading andutilizes the batch upload mechanism to do so Initially created to provideinvestors with a facility for trading Sensex-linked portfolios and to createa linkage of market prices of the underlying securities of Sensex in thecash segment and futures on Sensexe the system has evolved to provide afacility for investors to create and trade custom baskets In the basket tradingsystem

Investors through member-brokers are able to buy and sell all 30Sensex stocks with a single order in the proportion of their respectiveweights in the Sensex

Investors can customize baskets specifying the constituent securitiesand their respective weightings

To use this system for the Sensex 30 member-brokers need to indicatethe number of Sensex baskets to be bought or sold where the value ofone Sensex basket is arrived at by the system by multiplying Rs50 by theprevailing Sensex index value For example if the Sensex is 10000 thenthe value of one basket of Sensex would be 10000 times 50 = Rs500000Investors can also place orders by entering a value of the Sensex portfolioto be bought or sold with a minimum value of Rs50000 for each order

The basket trading system provides index arbitrage opportunities bysimultaneously buying and selling baskets comprising the Sensex scripsin the cash segment and Sensex futures Index arbitrage ensures that un-derlying cash prices and futures prices do not vary significantly fromeach otherf

The trades executed under the basket trading system on BOLT aresubject to intraday trading and gross exposure limits applicable to member-brokers The VaR MTM and other applicable margins apply

eThis linkage is the means of effecting index arbitragefIf the prices varied index arbitrageurs would quickly take advantage of the discrep-ancy by purchasing the cheaper side of the trade and selling the more expensivethereby once again bringing the prices in line with each other

Short Sel l ing

Currently short selling by institutions is prohibited in the Indian equity mar-ket although traders and investors have been able to use the futures andoptions markets to affect a downside position in the market In a long an-ticipated policy shift the Minister of Finance Palandiappan Chidambaramannounced on February 28 2007 in his 2007ndash2008 Budget Speech thathe proposed ldquoto allow short selling settled by delivery and securitieslending and borrowing to facilitate delivery by institutions rdquo (Ministryof Finance 2007ndash2008 Budget Speech Section 94) This was followed bya similar announcement from SEBI on March 22 2007 supporting shortselling in the cash market by domestic and foreign institutional investorsWhile approved by the marketrsquos two primary regulatory bodies the rulesand regulations surrounding short selling are yet to be finalized In additionthe infrastructure to support short selling in particular a regime for stocklending and borrowing of securities has yet to be implemented and couldtake several months to establish Early indications are that short selling willinitially be limited to only those stocks eligible for derivatives trading Inaddition institutions may find themselves subject to margin payments forshort selling currently they do not have to pay margin for market tradesWith regard to timing some market professionals estimate that the ruleswill not be finalized for three to six months and that a useful short sellingregime will not be in place for almost one year from the announcements

EXCHANGE SETTLEMENT SYSTEMS

Securities settlement in India has improved dramatically since reforms beganin 1992 and is similar to that found in more advanced developed marketsStrong institutions have built robust sophisticated systems that allow fastefficient straight-through-processing from the time of execution to the fundsand securities pay-out These institutions include the exchanges clearing-houses custodians and depositories

Introduct ion to Sett lement

At the end of each trading day details of all executed trades and the securityobligations of members are downloaded to members and custodians by theexchange clearinghouses The clearinghouses then determine the cumulativeand net obligations of each member and they electronically transfer this datato the clearing members All of the trades executed during a particular trad-ing period are settled together A multilateral netting procedure is adopted

to determine the net settlement obligations (deliveryreceipt positions) ofclearing members The clearinghouses then allocate or assign delivery of se-curities tofrom the members to arrive at the delivery and receipt obligationof funds and securities by each member

The process of receiving securities from member-brokers against theirsale obligations is called securities pay-in On the securities pay-in day de-livering members are required to deliver securities to the clearinghouse Onsecurities pay-out day (usually the same day as the pay-in day) securitiesare delivered by memberscustodians to the respective receiving membersExceptions to this process may arise because of short delivery (ie fewershares than have been contracted to be delivered) of securities by clearingmembers bad deliveries or company objections on the pay-out day Settle-ment is deemed to be complete upon the declaration and release of pay-outof funds and securities

Sett lement T iming

Delivering members are required to deliver all documents to the clearing-house (in the case of physical settlement) during business hours from 10 AMto 5 PM but no later than 10 AM on the pay-in day Receiving membersare allotted specific time slots on pay-out day to collect the documents fromthe clearinghouse

In the case of dematerialized settlement representing most trading ac-tivity clearinghouses for the two exchanges (discussed in detail below) haveslightly different timings for settlement activities For the National Securi-ties Clearing Corporation Ltd (NSCCL) the wholly owned subsidiary ofthe NSE that settles all NSE executions the delivering member should havebalances of securities in his delivery account within his clearing memberclearing account with the depository on or before 10 AM on the pay-in dayThe depository would debit the delivering memberrsquos account on or after 10AM The depository would credit the receiving memberrsquos receipt accountwithin his clearing member clearing account with the depository on or after230 PM on the pay-out day

The BOI Shareholding Ltd (BOISL) a joint venture between the Bankof India and the BSE that settles all BSE executions requires member-brokersto submit the pay-in instructions for funds and securities to banks anddepositors by 1030 AM on T+2 The pay-in of funds and securities mustoccur by 11 AM and the pay-out of funds and securities must occur by130 PM

Members may pass the responsibility of settling trades to their custodi-ans by way of a mechanism known as 6A7A which refers to the transfer ofthe settlement responsibility from the clearing member-broker who executed

the trade on the stock exchange to a custodiang Custodians were grantedclearing member status to be able to do so The custodian can confirm thetrades done by the member-brokers online and up to 11 AM on the nexttrading day However late confirmation of transactions by the custodianafter 11 AM up to 1215 PM on the next trading day is permitted subjectto payment of charges for late confirmation at 001 percent of the value oftrades confirmed or Rs10000 whichever is less

Sett lement Cycle

The settlement cycle is a complex system where all of the required partici-pants transmit trade information and settlement instructions to the relevantparties on trade date T confirm the instructions on T+1 and settle on T+2(see Figure 51)

1 The client enters the trade to the member-broker2 The broker enters the trade into the exchange trading terminal3 After execution the exchange confirms the execution to the broker4 The broker

a Confirms the trade to the clientb Issues a contract note to the custodianc Issues a contract note to the clearinghouse

5 The client sends the trade details to the custodian with settlement in-structions

6 The exchangea Sends trade details to its clearinghouse with settlement instructionsb Sends each custodian a list of trades executed for that custodian

7 The clearinghouse instructs the appropriate depository to either receiveor deliver shares and at the same time instructs the clearing bank toeither receive or deliver funds

8 The custodian instructs the depository to receive or deliver sharesand at the same time instructs the clientrsquos clearing bank to receive ordeliver funds

gThe name ldquo6A7Ardquo refers to the forms previously used by the BSE clearing mem-bers to request the clearinghouse to transfer the settlement obligations of tradesparticularly institutional trades executed on the BSE from the clearing members tothe custodians Form 6A was used for Sales and Form 7A was used for PurchasesAlthough the forms were discontinued when the transfer of settlement obligationsfrom clearing member to broker was accomplished electronically such transfer ofsettlement obligations has continued to be referred to as 6A7A trades and now refersto NSE trades as well

Client enters trade Broker enters order

Client Broker

Broker confirms trade execution

Exchange

Custodian

Custodian instructs the bank to receivedeliver

Clearinghouse instructs the bank to receive

deliver funds

Clearinghouse instructs the depository to

receivedeliver the shares

Clearinghouse

Custodian instructs the depository to receive

deliver shares

Broker issues contract note to the custodian

Broker issues contract note to clearinghouse

Exchange confirms execution

Depository

Exchange issues custodian list of their client trades

to be settled

Client sends instructions to its

custodian

Exchange instructs the clearinghouse about the execution

F IGURE 51 The settlement cycle

Compulsory Rol l ing Sett lement

Compulsory rolling settlement refers to the settling of trades at a stan-dard fixed period of days after the execution occurredh Before compulsoryrolling settlement was implemented in India trades settled in a batch systemwhereby all trades executed over a particular two-week period would besettled at the same time This was moved to one-week batches before com-pulsory rolling settlement was implemented The batch settlement processwas problematic for numerous reasons and the implementation of com-pulsory rolling settlement was an important step in the development of thefinancial markets

The introduction of settlement on a T+2 basis reduced the time tosettlement lowered settlement risk ensured early receipt of securities andmonies by buyers and sellers and brought the capital market on par withinternationally accepted standards of settlement

The settlement systems in India are efficient enough and capable ofmoving to a T+1 settlement but this is unlikely to occur any time in thenear future because

hThe fixed number of days for settlement is often expressed using the terminologyldquoTrdquo for the day of the trade then a ldquo+rdquo sign and then the number of days tosettlement Thus ldquoT+2rdquo refers to settlement occurring two days following the dateof the trade

1 The intracountry banking system is still not efficient enough outside ofthe major cities to ensure timely payment of purchases on T+1

2 Time-zone differences for foreign investors would in essence requiresettlement by foreign institutional investors on T which is currently notpractical

Net versus Gross Sett lement Securit ies

Net Sett lement Securit ies Securities that qualify for net settlement permitmember-brokers to net out the quantities and monies due when settlingtrades in these securities occurring on the same trade date For examplewhen settling two trades in the same security on the same day in whichthe broker purchased 2000 shares for Rs100 and sold 1000 shares forRs101 the member-broker may net the shares received (2000 purchasedminus 1000 sold or net 1000 to be received in) and the monies due (2000shares times Rs100 or Rs200000 owed minus 1000 shares times Rs101or Rs101000 or net Rs99000 cash due)

Gross Sett lement Securit ies Transactions in securities of companies inthe BSE-categorized Z groupi or companies that have been placed underldquotrade-to-traderdquo by the exchanges as a surveillance measure are settled onlyon a gross basis and netting of buy and sell transactions is not permittedFor example if a member-broker buys and sells 100 shares from the Zgroup trade-to-trade basis company on the same day the two trades maynot be netted as with net settlement securities discussed above but ratherthe member-broker has to first deliver 100 shares at the time of pay-in ofsecurities and then receive 100 shares at the time of pay-out of securities onthe same day Thus if one fails to deliver the securities sold at the time ofpay-in the transaction is treated as a shortage and the relevant quantity issubject to short-delivery penalties and procedures as per exchange rules

Statements and Transmitted TradeSett lement Deta i ls

The exchanges generate the following statements on a daily basis formember-brokers

Daily transaction statements with details of transactions by member-brokers

iZ Group securities as categorized and defined by the BSE include the companiesthat either (1) have failed to comply with the listing requirements of the Exchange(2) have failed to resolve investor complaints or (3) have not made the requiredarrangements with both the depositories for dematerialization of their securities

Margins-payable statements with details from member-brokers aboutexecuted trades

Securities and fund obligation statements Delivery and receive order statements for delivery and receipt of

securities

Settlement of the trades done by a member-broker on his own accountor on behalf of his individual corporate or institutional clients may be ei-ther through the member-broker or through an SEBI-registered custodianappointed by a client In case the deliverypayment for a transaction exe-cuted by a member-broker is to be given or taken by a registered custodianthen the latter has to confirm that the trade was done by a member-brokeron the trading system through the 6A7A settlement mechanism For thispurpose the custodians are connected to the exchange trading systems andhave been admitted as clearing members of the clearinghouses In case atransaction done by a member-broker is not confirmed by a registered cus-todian within the time permitted the liability for pay-in of funds or securitiesis the responsibility of the member-broker

APPROVED CLEARING BANKS

Every clearing member is required to maintain and operate a clearing ac-count with a clearing bank The clearing account is to be used exclusively forclearing and settlement operations The bank accounts of members main-tained with the clearing banks are directly credited and debited throughcomputerized posting for their fund settlement obligations Approved clear-ing banks as of March 2007 are

Bank of India Canara Bank Citibank HDFC Bank Ltd ICICI Bank IDBI Bank IndusInd Bank Ltd Kotak Mahindra Bank Standard Chartered Bank State Bank of India HSBC Union Bank of India UTI Bank Ltd

Contact details for these clearing banks are provided inAppendix M

EXCHANGE CLEARINGHOUSES

In September 2005 SEBI mandated that all institutional trades must besettled through the clearinghouses of the exchanges Each exchange has itsown clearinghouse BOISL conducts clearing and settlement for trades onthe BSE and NSCCL clears and settles trades on the NSE If a broker doesnot settle through a clearinghouse the broker is subject to a fine

BOISLmdashThe BSE Clearinghouse

BOI Shareholding Ltd (BOISL) was established in 1989 as a joint ventureenterprise between Bank of India and the Bombay Stock Exchange (BSE)Bank of India holds a 51 percent stake and BSE holds a 49 percent stakeBOISL is popularly known as the BSE clearinghouse but the company is asubsidiary of Bank of India and conducts clearing and settlement for tradesexecuted on the BSE

NSCCLmdashThe NSE Clearinghouse

The National Securities Clearing Corporation Ltd (NSCCL) is a whollyowned subsidiary of the National Stock Exchange (NSE) It was incorpo-rated in August 1995 and commenced clearing operations in April 1996Both equity and derivative trades executed on the NSE clear and settlethrough the NSCCL

Facilities provided by the clearinghouses include

Settlement of securities and money to the clearing members of the ex-change

Clearing and settlement of all dematerialized (dematj) and physical sharetrades

Settlement of derivatives (futures and options) executed on the ex-changes

Connectivity to all approved clearing banks

jThe term demat is used in Indiarsquos capital markets to refer to dematerialized securities

Connectivity and services for clearing members and clients to the NSDLand CDSL depositoriesk

Direct payout into the end-clientrsquos depository account Licensed to frank stamp duty on documents by the government of Ma-

harashtra (the home state of Mumbai) The franking time is 10 AM to 2PM There is a charge of Rs10 if the franked value per document is lessthan Rs1000 There are no charges if the franked value per documentis more than Rs1000

The NSCCL does not clear andor settle trades executed in the trade-for-trade subsegment of the equities segment of the NSE exchange The primaryresponsibility of settling these trades rests directly with the members andthe exchange only monitors settlement The parties are required to reportsettlement of these transactions to the exchange

Securit ies and Funds Pay- In and Pay-Out

For the purpose of securities and funds payments and deliveries the follow-ing terms used are from the perspective of the clearinghouses

Securities pay-in The process of delivering securities to the clearing-houses to effect settlement of a sale transaction

Funds pay-in The process of payment of funds to the clearinghousesto pay for purchase transactions

Securities pay-out The process of receiving securities from the clearing-houses to complete the securities settlement of a purchase transaction

Funds pay-out The process of payment of funds from the clearing-houses to complete the money settlement of a sale transaction

Securit ies Pay- In All pay-in (deliveries) of securities is required to gothrough the clearinghouse with the exception of certain off-market transac-tions These may be settled directly between member-brokers but they arerequired to be reported to the exchange Members that do not settle exchangetransactions through the clearinghouse are subject to fines Member-brokerscan effect pay-in of securities to the clearinghouses through the deposito-ries There are currently two depositories in India the National SecuritiesDepository Ltd (NSDL) and the Central Depository Services Ltd (CDSL)(See section titled ldquoDepositoriesrdquo for more details)

kThe National Securities Depository Ltd and the Central Depository Services Ltdrespectively These are discussed more fully later in the chapter

Member-brokers who are not depository participantsl (DPs) are re-quired to give instructions to their DPs specifying the settlement numbersettlement type effective pay-in date and quantity of a trade The secu-rities are transferred by the depository to a clearing memberrsquos principalaccount Member-brokers are required to give confirmation to their depos-itory so that securities are processed toward pay-in obligations Alterna-tively member-brokers may also effect pay-in from clientsrsquo beneficiary ac-counts To do this clients are required to provide the settlement details andclearing member-broker ID of the member-broker through whom they havesold the securities Thus in such cases clearing members are not requiredto give any delivery instructions for their own accounts

Funds Pay- In Once the reconciliation of securities is completed by theclearinghouse the bank accounts of member-brokers maintained with theapproved clearing banks are directly debited through computerized linkagesbetween the clearinghouse and the clearing bank

In case membersrsquo pay-in obligations are returned by their clearing banksdue to insufficient funds in their bank accounts the memberrsquos trading ter-minals will be immediately deactivated effectively prohibiting the memberfrom further trading The trading terminals remain deactivated until thepay-in obligations are met

Once the pay-in of securities and funds is complete the clearinghousearranges for the pay-out of securities and funds

Securit ies Pay-Out The process of the clearinghouse passing on tomember-brokers the delivery of securities purchased by them is calledsecurities pay-out Securities are credited by the clearinghouse into theprincipal accounts of member-brokers The exchanges also provide a fa-cility to member-brokers so they can transfer pay-out securities directly totheir clients without routing the securities through their principal accountsin the NSDL or CDSL

To do this member-brokers are required to provide a client break-up file which is uploaded by member-brokers to the clearinghouse Basedon the break-up provided by the member-brokers the clearinghouse in-structs depositories to credit the securities to the clientsrsquo accounts In case the

lDepository participants are members of the depository who hold depository ac-counts Eligibility and definitions of DPs are discussed more fully in the section onDepositories Many member-brokers of each exchange are DPs While all member-brokers do not need to be DPs those who are not will have to operate through a DPto access the depository services

delivery of securities received from one depository is to be credited to anaccount in another depository the clearinghouse does an interdepositorytransfer

Funds Pay-Out Bank accounts of member-brokers having pay-out fundsare credited by the clearinghouse with the clearing banks on the same day

In case a member-broker fails to deliver securities the value of sharesdelivered short is recovered from the member-broker at the closing price ofthe scrips on the trading day

In the case of rolling settlements pay-in and pay-out of both funds andsecurities as stated earlier are completed on the same day

Member-brokers are required to make payment for securities that aresold or delivered for their clients within one working day after the pay-outof the funds and securities for the settlement is completed by the exchange

The settlement calendar which indicates the dates of settlement ac-tivities is prepared by each exchange on a quarterly basis and is dis-tributed to market participants The settlement calendars are strictly ad-hered to and there have been no cases of postponement of pay-in or pay-outsince 1999

Fa i led Del iveriesmdashShortage Handl ing On the securities pay-in day clear-ing members communicate to the clearinghouse the securities that the clear-ing member will deliver and those that the clearing member is unable todeliver The clearinghouses debit the clearing member who is unable to de-liver an amount equivalent to the securities not delivered by him and valuedat a valuation price This is called a valuation debit A valuation debit is alsoconducted for bad delivery by clearing members

Auct ions Short deliveries result in the clearinghouses conducting a buying-in auction on the day after the pay-out day through the relevant exchangetrading system If the buy-in auction price is more than the valuation pricethe member is required to pay the difference

The clearing member is debited an amount equivalent to the securitiesnot delivered and valued at a valuation price (the closing price on the dayprevious to the day of the valuation) If the buy-in auction price is more thanthe valuation price the clearing member is required to pay the difference Allshortages not bought in are deemed closed out at the highest price betweenthe first day of the trading period until the day of final settlement or atthe closing price on the auction day plus 20 percent whichever is higherThis amount is credited to the receiving memberrsquos account on the auctionpay-out day

Bad Del iveries ( in the Case of Physica l Sett lement) Bad deliveriesare required to be reported to the clearinghouse within two days fromthe receipt of documents The delivering member is required to correctthe problem within two days Unrectified bad deliveries are auctioned on thenext day

Valuat ion Prices Valuation prices at which valuation debits are conductedare calculated as follows

Valuation price for failure to deliver for regular market tradesdepository tradeslimited physical market The valuation price forsecurities that were not delivered on the settlement day will be theclosing price of such securities on the immediate trading day preced-ing the pay-in day for the securities unless prescribed otherwise by therelevant authority

Valuation price for bad delivery for regular market trades and thelimited physical market The valuation price for securities that consti-tute bad deliveries will be the closing price of such securities on theimmediate trading day preceding the bad delivery rectification day forthe securities unless prescribed otherwise by the relevant authority

Closeout Procedures All shortages not bought in are deemed closed out atthe highest price between the first day of the trading period until the day ofsquaring off or closing price on the auction day plus 20 percent whicheveris higher This amount is credited to the receiving memberrsquos account on theauction pay-out day

The prices at which shortages are closed out are

For Regular Market Depository Trades

In the case of failure to give delivery At the highest price prevailing onthe exchange from the first day of the relevant trading period until theday of closing out or 20 percent above the official closing price on theauction day whichever is higher

In the case of nonrectificationreplacement for bad delivery At thehighest price prevailing on the exchange from the first day of the relevanttrading period until the day of the closing out or 20 percent above theofficial closing price on the auction day whichever is higher

For Limited Physical Market Trades

In the case of failure to give delivery 20 percent over the actual tradeprice

In the case of nonrectificationreplacement for bad delivery 20 percentover the actual trade price

In the case of nonrectificationreplacement for objection cases 20percent above the official closing price in the regular market on theauction day

Auct ion Market In the case of auction nondelivery When the auctionseller fails to deliver in part or full on auction pay-in day the trade willbe settled at the highest price prevailing on the exchange from the firstday of the relevant trading period until the day of closing out or 20percent over the official closing price on the closeout day whichever ishigher and the price will be charged to the auction seller unless otherwisespecified

In the case of an auction bad delivery An auction delivery reported asbad delivery will be settled at the highest price prevailing on the exchangeof the clearinghouse from the first day of the relevant trading period untilthe day of closing out or 10 percent over the official closing price on thecloseout day whichever is higher and will be charged to the auction sellerunless otherwise specified

CUSTODIANS

Custodians serve a very important role for institutions particularly for-eign institutions in the settlement and clearing function in the securitiesmarkets Custodians are clearing members of the exchanges but they arenot trading members On behalf of their clients they settle trades thatare executed through other trading members A trading member may as-sign a particular trade to a custodian for settlement The custodian is re-quired to confirm whether he is going to settle that trade If a trade isconfirmed the clearing corporation assigns the obligation to the custodianIf the custodian rejects the trade the obligation is assigned back to thetrading member

As mandated by the SEBI all mutual funds and foreign institutionalinvestors (FIIs) in India must use a custodian to assist them in the clearingand settlement of executed trades Some FIIs choose to use a global custo-dian often the one they use for clearing and settlement around the worldOthers choose to use a local custodian in India There are benefits for us-ing both and each institution makes its own choice on how it wants tooperate in India In some cases FIIs rely on their custodian to assist themthrough the entire process of investing in India beginning with shepherding

them through the FII registration process and liaising with SEBI on theirapplication The custodian often assists the FII in choosing the brokers withwhom the FII might want to execute trades sets up the accounts choosesthe local depository and might recommend local legal accounting and taxadvice service providers

Many FIIs choose to deal with a global custodian because of the famil-iarity of dealing with them in other markets and because they prefer havingjust one point of contact in their home country for all of their worldwidecustodial needs Furthermore particularly when operating in India once anFII chooses a global custodian to represent their interests there the globalcustodian takes care of most of the other needs of the client

The other option for FIIs in India is to choose and operate througha domestic local custodian The advantages of this is that FIIs have morecontrol over how they are represented in the markets and can deal directlywith the Indian custodian rather than having to always go through theirglobal custodian home country intermediary when issues arise This is of-ten the difference between dealing in market time and dealing in homehours that coincide with the middle of the night in India In additionthe custodial costs of a local custodian tend to be less than global cus-todians FIIs entering the Indian markets must weigh the pros and consof each option and decide which more closely addresses their particularneeds

Currently FIIs have concentrated their custodial business among ahandful of global custodians Table 56 is a rough approximation of thebreakdown of custodial business among FIIs gleaned through interviewswith market participants

Local settlement of institutional trades among the custodians clientsand brokers goes through the locally mandated straight-through-processing(STP) systems There are two or three currently available and they are totallyinteroperable

TABLE 56 FII Custodian Concentration

Name of Custodian Estimated Market Share

HSBC 40 percentCitigroup 33 percentDeutsche Bank 10 percentStandard Chartered 10 percentMiscellaneous 7 percent

For international clients cash instructions transfers and security in-structions typically are transmitted through SWIFT

DEPOSITORIES

Introduct ion

The introduction of electronic depositories to enable the dematerializationof shareholdings was another essential reform of the 1990s that has con-tributed to the strength of Indiarsquos financial markets There are currently twodepositories in India the National Securities Depository Ltd (NSDL) andthe Central Depository Services Ltd (CDSL)

The depository system within a dematerialized environment is a book-entry system whereby securities are electronically held in depository ac-counts After a buysell transaction the transfer of ownership of securities isaccomplished through the simple debiting of the sellerrsquos depository accountand the simultaneous credit to the buyerrsquos depository account The benefitsof this system are many including the possibility of the now-standard T+2settlements the virtual elimination of lost certificates and the eliminationof problems and risks associated with paper-based settlement

History

Indiarsquos financial markets were once infamous for a very long inefficientand unreliable paper-based settlement system yielding bad deliveries andtitle transfers This inability to settle transactions in any kind of timelymanner kept many potential foreign investors away from the market In themid-1990s SEBI mandated the dematerialization of securities holdings in aphased approach More than 99 percent of the settlement of securities nowoccurs in dematerialized form The SEBI (Depositories and Participants)Regulations 1996 was enacted to streamline the growing volume of securitiestransactions through the creation of the depository system

The NSDL came into existence in 1996 and participated in the beginningof the dematerialization as shares were being destroyed and replaced by theelectronic book entry form maintained by the depositories In January 1999in recognition of the future for dematerialization all market participantswere required to have depository accounts

The CDSL was launched in March 1999 and was fully active by Jan-uary 2000 three years after the NSDL Therefore the NSDL as the onlyexisting depository in existence at the launch of dematerialization hadthe first-entrant advantage of signing up virtually all of the then-eligibleparties

Depository Part ic ipants

The clients of depositories are referred to as depository participants (DPs)The Depositories Act 1996 defines the following entities as being eligible tobecome a depository participant

Public financial institutions Banks including foreign banks State financial corporations Custodians of securities Stock brokers Nonbanking financial companies Registrars and transfer agents The clearing corporation or clearinghouse of a stock exchange An institution engaged in providing financial services such as those

provided by the abovementioned institutions

Depository participants typically have a number of clients for whomthey set up depository accounts There are approximately 93 million clientsof depository participants at the depositories

Investor-Level Records

In India there is no omnibus account structure Thus the depositories main-tain investor-level records rather than omnibus records of the depositoryparticipants as is done in the United States All investor records are basedon a permanent account number that every client must present to open atrading account The permanent account number is a unique 10-digit al-phanumeric identification number issued for all taxpayers by the IncomeTax Department Because of the investor-level records kept by the deposi-tories for every investor in Indian securities their beneficial holder lists areconsidered the most accurate in the country and are often provided to thecustodians and issuing companies for purposes such as dividend paymentsto shareholders

Depository Compet i t ion

For the first several years of dematerialization the NSDL was the onlydepository and all market participants opened accounts with it The CDSLwas a later entrant so it missed the initial signup for existing institutionsand found itself playing catch-up in building its business Currently CDSLhas more depository participants but NSDL has more accounts Table 57illustrates the relative businesses of the two custodians

TABLE 57 Comparative Depository Statistics

NSDL6 CDSL7

No of Depository Participants 240 360No of Investor Accounts 7891507 (77) 2351361 (23)Value of Shares in Custody US$532 billion US$633 billionValue of Tradeslowast 86 14Volume of Shares 79 21

lowast An exact calculation of the value and number of trades handled by each depositoryis a difficult task given the procedures of settlement When settling a trade the sellinginvestor must deliver shares to a pooled account at his brokerrsquos depository who inturn delivers the shares to the clearinghouse Often the investor might have sharesin his depository account at one depository yet delivers the shares to the pooled ac-count at the other depository The question then might arise as to which depositoryhandled the trade It could be said that the investorrsquos depository should get creditbut also that the brokerrsquos depository should get it The figures provided are esti-mates only by knowledgeable market participants and should be used for indicativepurposes only

The 81 ratio of value compared to the 31 ratio of trades is a resultof the NSDL accounts being some of the larger institutions that do fewertrades of significantly more value while the CDSLrsquos depository participantsalthough more numerous are smaller brokers with a smaller number ofaccounts The NSDLrsquos accounts also consist of a large number of retailinvestors and brokers who are not depository participants

The launch of CDSL led to a dramatic reduction in depository pricingto the market as CDSL used an aggressive pricing strategy to attract newdepository participants From 1996 to 2005 depository costs declined fromthe NSDLrsquos initial 2 basis points charged to the seller of every transactionto a flat fee of Rs5 (US$011) per transaction charged to the issuer by CDSL(NSDLrsquos price is a flat fee of Rs6)

NSDLrsquos earlier launch and head start in signing up depository partici-pants gave the NSDL an important advantage over CDSL in that all of theearly depository participants built electronic interfaces to the NDSL and thustheir systems are all well integrated with NDSL As a result most FIIs opendepository accounts with NSDL Interestingly though the pricing structureis such that depository revenue is now based on a per-transaction chargerather than a value of transaction charge so a depository earns more with aretail investor trading a large number of small executions than an institutiontrading a fewer number of large executions That said the depositories bothseek FII clients for the prestige that they provide

Settlement in India is done by a very efficient electronic system wherebyvirtually all of the participants are electronically connected The depositoryparticipantsrsquo systems are electronically interfaced with the depositories thedepositories are linked to each other for interdepository transfers of sharesand the custodians are linked to the depositories through the depositoryelectronic system

SETTLEMENT PREPARATION FOR SHORT SELL ING

The legalization and introduction of short selling in India was announced bythe Minister of Finance in his 2007ndash2008 Annual Budget Speech and will bea significant development in the continuing evolution of Indiarsquos capital mar-kets However the implementation of short selling will require the develop-ment of new processes and procedures in the settlement system particularlythe creation of a stock lending and borrowing regime As such the settlementcommunitymdashcustodians exchange clearinghouses and depositoriesmdashmustbuild the infrastructure and systems necessary to support the shortingof stocks

SUMMARY

Indiarsquos capital market settlement system is made up of strong competitiveinstitutions that have developed into time-tested efficient operators over thelast 15 years The clearinghouses custodians and depositories comprise avery smooth system that exhibits few problems in the processing clearingand settling of more than 55 million trades per day The clearing andsettlement capabilities continue to increase capacity and the quality of theinstitutions and processes should ensure that they will remain world class

CHAPTER 6Derivatives

CHAPTER HIGHL IGHTS BSE derivatives trading is screen-based through the Derivatives

Trading and Settlement System (DTSS) DTSS is an order-driven market BSE offers weekly options with a two-week maturity BSE trades futures and options on 89 underlying stocks NSE trades futures and options on 155 underlying stocks

The Bombay Stock Exchange (BSE) introduced derivative trading in In-dia with the launch of the Sensex futures contract in June 2000 Over thenext two years the BSE and the National Stock Exchange (NSE) launchedthe trading of futures and options contracts for various indexes specific sec-tors and individual stocks Beginning with virtually no derivatives turnoverin 2001 the NSE has become Indiarsquos dominant derivatives marketplace andhas witnessed explosive growth derivatives turnover was more than doublethat of the equity markets turnover by 2004 and at US$156591 billionin 2006 derivatives turnover was more than three and one half times theUS$425 billion equity markets turnover in 2006 Interestingly in 2006 88percent of the derivatives turnover was in futures two-thirds of which werestock futures with options turnover representing only 11 percent of deriva-tives turnover This derivatives turnover growth is illustrated in Figure 61

This chapter addresses the derivatives market in India beginning withan introduction to some derivatives terms and followed by an in-depthdiscussion of the derivatives offerings by the Bombay Stock Exchange andthe National Stock Exchange respectively The topics covered include thederivatives trading system a description of the derivatives products availableas well as their underlying stocks and indexes eligibility requirements for

Growth of NSE Derivatives Turnover vs Equity Turnover 2001-2006

155 139

426308

261202

2001 2002 2003 2004 2005 2006

Derivatives TurnoverEquity Turnover

F IGURE 61 Growth of NSE derivatives versus equities 2001ndash2006Source The National Stock Exchange

underlying stocks the different attributes of traded options and futures andcontract specifications for both options and futures Finally interest ratederivatives are addressed

INDIAN DERIVATIVES MARKET FUNDAMENTALS

Table 61 lists the derivative products available for trading on the BSE andthe NSE organized by futures first then options and within those categoriesthe underlying instruments upon which the derivative is linked

History of Derivat ives in Ind ia

The dates on which these products were launched are listed below

June 9 2000 BSE launched the BSE Sensexmdashthe firstexchange-traded index derivative contract

June 12 2000 NSE commenced trading in SampP CNX Nifty indexfutures

June 1 2001 BSE commenced trading in index options on theSensex

June 4 2001 NSE introduced trading in index optionsJuly 2 2001 NSE commenced trading in options on individual

securitiesJuly 9 2001 BSE stock options were introduced on 31 stocks

Derivatives 139

November 92001

NSE commenced trading in futures on individualsecurities The futures contracts are available on117 securities stipulated by the Securities andExchange Board of India (SEBI) These securitiesare traded in the capital market segment of theexchange

November 92002

BSE single stock futures were launched

September 132004

BSE launched weekly options a unique product inthe domestic and international derivative marketsBSE permitted trading in weekly contracts inoptions in the shares of four leadingcompaniesmdashReliance Industries Satyam StateBank of India and TISCOmdashin addition to theflagship Sensex index

Derivat ives Definit ions and Attr ibutes

Futures Contract A futures contract is a legally binding agreement to buyor sell an underlying security at an agreed-upon price on a future dateFutures contracts are standardized contracts in terms of quantity quality

TABLE 61 Derivative Products Available for Trading on the BSE and NSE

BSE Derivatives NSE Derivatives

Futures Sensex index SampP CNX Nifty IndexBSE TECk Index CNXIT IndexBSE Bankex Index BANK Nifty IndexBSE Oil amp Gas IndexBSE PSU IndexBSE Metal IndexBSE FMCGIndividual securities Individual securities

Options Sensex index SampP CNX NiftyBSE TECk Index CNXITBSE Bankex Index BANK NiftyBSE Oil amp Gas IndexBSE PSU IndexBSE Metal IndexBSE FMCGIndividual securities Individual securities

Interest rate derivatives

Sources The Bombay Stock Exchange the National Stock Exchange

(in the case of commodities) delivery time and place for settlement onany date in the future The contracts expire on a prespecified date whichis called the expiry date of the contract On expiry futures can be settledby delivery of either the underlying asset or cash Cash settlement entailspaying or receiving the difference between the price at which the contractwas entered and the price of the underlying asset at the time of the expiryof the contract The futures traded on the exchanges are financial futuresrepresenting financial assets as opposed to commodity futures representinghard commodities

Opt ions Contract An options contract is a contract that gives the buyer orholder of the contract the right (but not the obligation) to buy or sell theunderlying asset at a predetermined price within or at the end of a specifiedperiod The buyer or holder of the option purchases the right from the selleror writer for a consideration which is called the premium The seller orwriter of an option is obligated to settle the option as per the terms of thecontract when the buyer or holder exercises his right The underlying assetcould include securities or an index of prices of securities

Attr ibutes A particular options contract has four attributes

1 The underlying security2 Put or call3 American- or European-style exercisability4 Strike price (or exercise price)

The underlying security is the asset that is contracted to be bought orsold by the option There are two types of options

1 Call option An option to buy a fixed number of shares at the speci-fied price

2 Put option An option to sell a fixed number of shares at the speci-fied price

Options both calls and puts are also classified as either American-styleoptions or European-style options distinguished by the eligible time periodduring which the option can be exercised

American option An option that is exercisable on or before theexpiry date

European option An option that is exercisable only on the expirydate

Derivatives 141

The strike price or exercise price is the price at which the option is tobe exercised

Addit ional Derivat ives Attr ibutes Additional definitions and attributesapplicable to derivatives are as follows

Exercising an option This is the act by which an option owner uses itsright to either buy (in the case of a call option) or sell (put option) anunderlying asset at the strike price stated on the contract The requestfor an exercise is submitted to the exchange which randomly assignsthe exercise request to the sellers of the options who are obligated tosettle the terms of the contract within a specified time frame

Option settlement Option contracts can be settled by delivery of theunderlying security or cash Cash settlement in option contracts entailspaying or receiving the difference between the strike or exercise priceand the price of the underlying asset either at the time of expiry ofthe contract or at the time of the exercise or assignment of the optioncontract

Index futures underlyings Index futures contracts are based on an indexsuch that the underlying asset is the index

Index futures settlement Index futures contracts are cash settled onexpiry

Index option contracts Options contracts are based on an underlyingindex as opposed to an underlying single security as in an individualstock option Index options contracts are generally European-style op-tions These contracts are cash settled on expiry

Minimum contract size SEBI specifies that the value of a derivative con-tract should not be less than Rs200000 (simUS$4500) when introducingthe contract in the market

Lot size of a contract For stock-specific derivative contracts SEBI spec-ifies that the lot size of the underlying individual security should be inmultiples of 100 and fractions if any should be rounded off to the nexthigher multiple of 100 This requirement together with the requirementfor minimum contract sizes forms the basis of arriving at the lot size ofa contract For example if shares of XYZ Ltd are quoted at Rs1000each and the minimum contract size is Rs200000 then the lot size forthat particular scrip is 2000001000 = 200 shares so that one contractin XYZ Ltd covers 200 shares

Trading cycle The BSE and NSE trade futures and options on a monthlyexpiration period with a maximum maturity of three months At anyone time there are three contracts trading These contracts are knownas the ldquonear-monthrdquo ldquonext-monthrdquo and ldquofar-monthrdquo contracts The

TABLE 62 Summary of Derivative Attributes

MaximumType Settlement Maturity Expiration

Index future American Cash 3 months Last Thursday of the monthIndex option European Cash 3 months

2 weeksLast Thursday of the month

Friday of expiring weekStock future American Cash 3 months Last Thursday of the monthStock option American Cashshares 3 months

Friday of expiring week

BSE also trades a limited number of options with a unique two-weekexpiration period

Expiration period Standard futures and options contracts expire on thelast Thursday of the expiring month If the last Thursday is a tradingholiday the contracts expire on the previous trading day A new contractis introduced on the trading day following the expiry of the near-monthcontract The new contract will be introduced for a duration of threemonths The BSE two-week expiration options expire on the Friday ofthe expiring week

Contract exercise type BSE options are the European and Americanstyles

Price steps The tick size for futures and options contracts is Rs 005(US$0001)

Table 62 summarizes the four key attributes of NSE and BSE derivativecontracts

Futures and Opt ions E l ig ib i l i ty Criter ia for theSelect ion of Securit ies and Indexes

SEBI determines the eligibility criteria for introducing futures and optionscontracts on stocks and indexes The following criteria for selecting stocksand indexes as underlyings for futures and options contracts were adoptedin September 2004

E l ig ib i l i ty Criter ia for L isted Stocks

Market capitalization Stocks are chosen from among the top 500stocks in terms of average daily market capitalization in the previous

Derivatives 143

six months on a rolling basis The average daily market capitalizationsare computed on the 15th of each month on a rolling basis to arriveat the list of the top 500 securities

Liquidity Stocks are chosen from among the top 500 stocks in termsof average daily traded value in the previous six months on a rollingbasis The average daily traded values are computed on the 15th ofeach month on a rolling basis to arrive at the list of top 500 securitiesIn addition quarter-sigma size is evaluated defined as the order size(in value terms) required to change the stock price by one-quarter of astandard deviationa The stockrsquos median quarter-sigma order size overthe last six months shall not be less than Rs100000 (US$2300)

Position limits The marketwide position limit in the stock shall notbe less than Rs500 million (US$11 million) The marketwide positionlimit (the value of shares) is valued by taking the closing prices of stocksin the underlying cash market on the date of expiry of contract inthe month

An existing security must continue to meet the eligibility criteria forthree consecutive months If it fails to meet the requirements then no freshmonthly contract will be issued for that security

The NSE has taken the position that ldquoa stock that has remained subjectto a ban on new positions for a significant part of the month consistentlyfor three months shall be phased out from trading in the futures and optionssegmentrdquo However all existing unexpired contracts will be permitted tocontinue trading until they expire new strike prices may also be introducedfor the existing contract months

The number of securities eligible for futures and options may vary frommonth to month depending upon changes in quarter-sigma order sizes av-erage daily market capitalization and average daily traded value calculatedevery month on a rolling basis for the past six months and the marketwideposition limit in that security Contracts may be introduced on new securi-ties that meet the eligibility criteria subject to approval by SEBI Again theWeb sites of the two exchanges should be consulted for the up-to-date listof stocks for which futures and options are available

E l ig ib i l i ty Criter ia for Unl isted Stocks For unlisted companies makinginitial public offerings if the net public offer is Rs500 crore (US$111 million)

aFurther details on the definition and methodology for calculating quarter-sigma canbe found on the NSE Web site at httpwwwnse-indiacomcontentfofo selectionhtm or the BSE Web site at httpwwwbseindiacomaboutderivatiaspEligible

or more then the exchange may consider introducing stock options andstock futures on the stocks at the time of listing in the cash market

E l ig ib i l i ty Criter ia of Indexes

The exchange may consider introducing derivative contracts on an indexif the stocks contributing to 80 percent of the weighting of the index areindividually eligible for derivative trading However no single ineligiblestocks in the index shall have a weighting of more than 5 percent inthe index

The above criteria are applied every month If the index fails to meet theeligibility criteria for three consecutive months then no fresh monthlycontract will be issued for that index However the existing unexpiredcontacts will be permitted to trade until expiry and new strikes mayalso be introduced in the existing contracts

BSE DERIVATIVES PRODUCTS

The information contained in this section including the detailsfor contract specifications options- and futures-eligible underlyingstocks and their symbols is presented with the generous permissionof the Bombay Stock Exchange Ltd

BSE Trading System

Derivative trading at the BSE takes place through a Derivative Trading andSettlement System (DTSS) which is a fully automated screen-based tradingplatform The DTSS is designed to allow trading on a real-time basis Inaddition to generating trades by matching opposite orders the DTSS alsogenerates various reports for member participants

Order matching rules Matching orders is prioritized by price and thentime All orders are time-stamped when accepted by the DTSS A uniquetrade-ID is generated for each order and the complete trade informationis sent to the members involved in the order

Order conditions The derivatives market is order driven so traders canplace only orders in the system For derivative products the order types

Derivatives 145

available have characteristics that are similar to order types in the cashmarket and include Limit order An order eligible for execution at or better than the

specified limit price Market order There are two types of market orders

Partial fill rest kill (PF) Execute the available quantity and cancelany unexecuted portion (similar to immediate-or-cancel [IOC] inthe United States)

Partial fill rest convert (PC) Execute the available quantity andconvert any unexecuted portion into a limit order at the tradedprice

Stop loss order This is an order that is dormant and becomes activatedonly when the market price of the relevant security reaches or crossesa threshold which is a trigger price specified on the order Untiltriggered the order is a dormant order not eligible for executionStop loss orders are often used to preserve profits or limit losses A sell order in the stop loss book is entered at a trigger price below

the then-current price and triggered when the last traded price inthe normal market reaches or falls below the trigger price of theorder

A buy order in the stop loss book is entered with a trigger priceabove the then-current price and becomes triggered when the lasttraded price in the normal market reaches or exceeds the triggerprice of the order

An additional order type is used only in special circumstances Risk-reducing orders are used when a memberrsquos collateral falls below

Rs5000000 (US$114000) he will be allowed to enter only risk-reducing orders and not initiate any new positions This status fora member is imposed only when the member violates his collaterallimit A member who has this status will be allowed to enter only onerisk-reducing order at a time

All orders entered into the trading system need to have the followingattributes to be accepted for execution

Order type (limitmarket PFmarket PCstop loss) Asset code product type maturity callput and strike price Buysell indicator Order quantity Price Client type (owninstitutionalnormal)

Client code Order retentiontime type

Good till canceled (GTC) Good for day (GFD) Good till date (GTD) Order retention period For GTD orders the

number of calendar days for which the order is good must be stated Protection points This is a field relevant in market orders and stop

loss orders The value will be in absolute underlying points and specifythe band from the touchline price or the trigger price within which themarket order or the stop loss order respectively can be traded

BSE Opt ions

The BSE trades both index and single stock options

Index Opt ions Index options are generally European style and trade witha monthly expiration period and a three-month maximum maturity At thetime of this bookrsquos printing the BSE traded options for seven1 differentunderlying indexes Table 63 lists the underlying indexes for which optionsare available the option codes and the specific contract multipliers for eachoptions contract

Ind iv idual Stock Opt ions Individual stock options trade American stylewith a maximum three-month maturity except for the few weekly op-tions as noted below Stocks for which options are available are selectedbased on the previously listed eligibility criteria and are subject to ap-proval by SEBI These contracts are cash settled At the time of this bookrsquos

TABLE 63 Underlying Index Options Contracts

Underlying Option Security Option ContractIndex Product Symbol Code Multiplier

BSE Sensex BSE 30 Sensex BSX SENOPT 25BSE TECk BSE TECk TEK TECKOPT 125BSE Bankex BSE Bankex BNK BNKXOPT 50BSE Oil amp Gas BSE Oil amp Gas OGX ONGXOPT 38BSE PSU BSE PSU PSU PSUOPT 50BSE Metal BSE Metal MET METLOPT 25BSE FMCG BSE FMCG FMC FMCGOPT 175

Source The Bombay Stock Exchange as of November 2006

Derivatives 147

TABLE 64 Underlying Index and Four Stocks that CurrentlyOffer Weekly Options

Product Product Code

Sensex Options SENOPTRIL Options RILOPTSatyam Options SATOPTSBI Options SBIOPTTISCO Options TISOPT

printing the BSE traded options for 89 different individual underlyingstocks2 Appendix D Table D1 lists the underlying stocks for which op-tions are available the option codes and the specific contract multipliers foreach option

Weekly Opt ions Sensing a market for options of shorter maturity the BSElaunched weekly options in September 2004 on four stocks and the BSESensex

Weekly options have the same characteristics as monthly stock options(stocks and indexes) except that these options settle on Friday of every weekThese options are introduced on Monday of every week and have a maturityof two weeks expiring on Friday of the expiring week Table 64 lists theone index and four stocks for which weekly options trade

Opt ions Contract Specificat ions

Tables 65 and 66 list the contract specifications of BSE index optionscontracts and BSE stock options contracts respectively

BSE Futures

The BSE trades both index and single stock futures

Index Futures At the time of this writing the BSE traded futures for sevendifferent underlying indexes Table 67 lists the underlying indexes for whichfutures are available the product codes and the specific contract multipliersfor each futures contract

TABLE 65 Contract Specifications for BSE Index Options Contracts (Monthlyand Weekly)

Security symbol [Symbol of the index option]Underlying [Symbol of the underlying index]Contract multiplier [See Table 63]Contract period 1 2 and 3 months and 1 and 2 weeksExercise style EuropeanSettlement style CashTick size 005 index pointsPremium quotation In index pointsStrike price intervals Shall have a minimum of 3 strikes (1 in-the-money

1 near-the-money and 1 out-of-the-money)Trading hours 930 AM to 330 PMLast trading

expiration dayIn the case of monthly expiration the last Thursday of the

contract month is used and in the case of weeklyoptions the last Friday of the contract maturity is usedIf there is a holiday then the preceding business day isused (Note A business day is a day during which theunderlying stock market is open for trading)

Final settlement The final settlement of the expiring options contractswould be taken as the closing value of the underlyingindex The following algorithm is used for calculatingthe closing value of the individual stocks in the cashsegment of the BSE including the stocks constituting theSensex the weighted average price of all of the trades inthe last 30 minutes of the continuous trading session Ifthere are no trades during the last 30 minutes then thelast traded price in the continuous trading session wouldbe taken as the official closing price

Exercise notice time This would be a specified time (exercise session) on the lasttrading day of the contract All in-the-money options bycertain specified ticks would be deemed to be exercisedon the day of expiry unless the participant communicatesotherwise in the manner specified by the derivativessegment

Source The Bombay Stock Exchange Ltd

Ind iv idual Stock Futures At the time of this writing the BSE tradedindividual stock futures for 89b different individual underlying stocksAppendix D Table D1 lists the underlying stocks for which futures are

bSource The Bombay Stock Exchange

Derivatives 149

TABLE 66 Contract Specifications for BSE Stock Options Contracts (Monthlyand Weekly)

Security symbol [Symbol of the single stock option]Underlying [Symbol of the stock underlying the option]Contract multiplier [See Appendix D Table D1]Contract period 1 2 and 3 months and 1 and 2 weeksExercise style AmericanSettlement style CashTick size 005 (5 paisa)Premium quotation Rupees per shareStrike price intervals Shall have a minimum of 3 strikes (1 in-the-money

1 near-the-money 1 out-of-the-money)Trading hours 930 AM to 330 PMLast trading

Final settlement The final settlement of the expiring options contractswould be based on the closing price of the underlyingstock The following algorithm is used for calculatingclosing value of the individual stocks in the cash segmentof BSE including the stocks constituting the Sensex theweighted average price of all the trades in the last 30minutes of the continuous trading session

If there are no trades during the last 30 minutes then thelast traded price in the continuous trading session wouldbe taken as the official closing price

Exercise notice time This is a specified time (exercise session) every day Allin-the-money options would be deemed to be exercisedon the day of expiry unless the participant communicatesotherwise in the manner specified by the derivativessegment

available the product codes and the specific contract multipliers for eachfutures contract

Futures Contract Specificat ions

Tables 68 and 69 list the contract specifications of BSE index futures con-tracts and BSE single stock futures contracts respectively

TABLE 67 Underlying BSE Index Futures Contracts

Security Product ContractUnderlying Symbol Product Code Multiplier

BSE Sensex BSX BSE 30 Sensex Futures SENFUT 25BSE TECk Index TEK BSE TECk Futures TECKFUT 125BSE Bankex BNK BSE Bankex Futures BNKXFUT 50BSE Oil amp Gas Index OGX BSE Oil amp Gas Futures ONGXFUT 38BSE PSU Index PSU BSE PSU Futures PSUFUT 50BSE Metal Index MET BSE Metal Futures METLFUT 25BSE FMCG Index FMC BSE FMCG Futures FMCGFUT 175

TABLE 68 Contract Specifications for BSE Index Futures Contracts

Security symbol [Symbol of the index future]Underlying [Symbol of the underlying index]Contract multiplier [See Table 67]Contract period 1 2 and 3 monthsTick size 005 index pointsPrice quotation Index pointsTrading hours 930 AM to 330 PMLast trading

expiration dayThe last Thursday of the contract month If there is a

holiday the preceding business day (Note A businessday is a day during which the underlying stock market isopen for trading)

Final settlement Cash settlement On the last trading day the closing valueof the underlying index would be the final settlementprice of the expiring futures contract

TABLE 69 Contract Specifications for BSE Single Stock Futures

Security symbol [Symbol of the stock future]Underlying [Symbol of the underlying stock]Multiplier [See Table D1]Contract period 1 2 and 3 monthsTick size 005 points (5 paisa)Price quotation Rupees per shareTrading hours 930 AM to 330 PMLast trading

holiday then the immediately preceding business dayFinal settlement Cash settlement On the last trading day the closing value

of underlying stock is the final settlement price of thefutures contract

Derivatives 151

NSE DERIVATIVES PRODUCTS

The information contained in this section including the detailsfor contract specifications options- and futures-eligible underlyingstocks and their symbols is presented with the generous permissionof the National Stock Exchange Ltd

NSE Trading System

NSE derivatives are traded on the NEAT screen-based trading system NEAThas the following characteristics

Order matching rules NEAT is an order-driven market and operateswith a price-time priority for matching orders

Order conditions NEAT accepts orders with time-related and price-related parameters similar to those accepted in the cash market Theseare Time-related parameters

Day order This order is valid only for the day on which it is enteredAt the end of that trading day any unmatched (unexecuted) partof the order is canceled

Immediate-or-cancel (IOC) order This order is valid only at themoment at which it is exposed to the market to execute at the priceparameters under which it is entered against any orders in the sys-tem meeting those requirements Any part of the order unexecutedat the moment after entry is canceled from the market

Price-related parameters Limit order An order eligible for execution at or better than the

specified limit price Market order An order eligible for execution at the best price then

available in the market Stop loss order This is an order that is dormant and becomes ac-

tivated only when the market price of the relevant security reachesor crosses a threshold which is a trigger price specified on the or-der Until triggered the order is a dormant order not eligible forexecution A sell order in the stop loss book is entered at a trig-ger price below the then-current price and triggered when the lasttraded price in the normal market reaches or falls below the triggerprice of the order A buy order in the stop loss book is entered with

a trigger price above the then-current price and becomes triggeredwhen the last traded price in the normal market reaches or exceedsthe trigger price of the order Stop loss orders are often used topreserve profits or limit losses

NSE Trading System Trade Verificat ion The NSE provides a facility formembers and investors to verify all trades on the NSE Web site Usingthis facility an investor who has received a contract note from a tradingmember of the exchange can verify whether the trade has been executed onthe exchange

This facility is available on the NSE web site for the capital marketderivatives (futures and options) and retail debt market segments

Trade details are available for verification on the trade date after 1900hours ISTc until T+4 To receive verification the investor inputs the follow-ing minimum details of the trade (1) client code (provided by the tradingmember) (2) security details (description of the contract) (3) order number(4) trade number (5) trade quantity and (6) executed price (ie excludingbrokerage) If an identical match is found for the details provided confir-mation along with the details of the trade is displayed by the NSE to theinvestor If no match is found a message is displayed to that effect In in-stances where no match is found by the NSE the investor is strongly advisedto contact the trading member for clarification as to the genuineness of theexecution report

Opt ions

In addition to the characteristics common to both the futures and optionscontracts the following characteristics apply to all NSE options contracts

Price Bands There are no daily minimum or maximum price ranges appli-cable for options contracts However in order to prevent order-entry errorsoperating ranges and day minimum or maximum ranges for options con-tracts are kept at 99 percent of the base price Members cannot place ordersat prices that are beyond 99 percent of the base price Members who wantto place orders in options contracts beyond the day minimum or maximumoperating range have to send a request to the exchange The base prices foroptions contracts may be modified at the discretion of the exchange basedon requests received from trading members

cThat is 7 PM India Standard Time See Appendix C The India Time Zone forsimultaneous world times

Derivatives 153

Base Prices The base price of options contracts used for pricing the in-troduction of new contracts is the theoretical value of the options con-tract derived from the Black-Scholes model of calculation of options pre-miums (see Appendix J for details about the Black-Scholes option pricingmodel)

The base price of the contracts on subsequent trading days will be thedaily closing price of the options contracts

Closing Price Methodology The closing price of options is calculated asfollows

If the contract is traded in the last half hour the closing price shall bethe last-half-hour weighted-average price

If the contract is not traded in the last half hour but traded during anytime of the day then the closing price will be the last traded price of thecontract

If the contract is not traded for the day the base price of the contractfor the next trading day shall be the theoretical price of the optionscontract derived from the Black-Scholes model

Index Opt ions The following information applies specifically to the indexoptions that trade on the NSE

Strike Price Intervals

SampP CNX Nifty options The number of contracts provided in optionson the Nifty is related to the index range in which the previous dayrsquosclosing value of Nifty falls Table 610 lists the number of traded con-tracts associated to given levels of the index For instance if the Niftyindex is trading at a level between 1500 and 2000 there will be trading

TABLE 610 Nifty Strike Intervals and Number of Options in Series

Strike Strikes to be introducedNifty Index Level Interval (ITM-ATM-OTM)lowast

Up to 1500 10 3-1-3gt1500 up to 2000 10 5-1-5gt2000 up to 2500 10 7-1-7gt2500 10 9-1-9

lowastIn-the-money at-the-money out-of-the-moneySource The National Stock Exchange Ltd

five contracts in-the-money one at-the-money and five contracts out-of-the-moneyd

New contracts with new strike prices for existing expiration datesare introduced for trading on the next working day based on the previ-ous dayrsquos closing Nifty values as and when required In order to decideon the at-the-money strike price the Nifty closing value is rounded offto the nearest 10

CNXIT and BANK Nifty options At any point in time there are a mini-mum of seven contracts three contracts in-the-money (ITM) three con-tracts out-of-the-money (OTM) and one contract at-the-money (ATM)The strike price interval is 10 New contracts with new strike prices forexisting expiration dates are introduced for trading on the next work-ing day based on the previous dayrsquos closing index values as and whenrequired In order to decide on the at-the-money strike price the indexclosing value is rounded off to the nearest 10

Ind iv idual Stock Opt ions NSE options contracts for individual securitiesare available for 155 securities as approved by SEBI See Appendix D TableD2 for a list of the securities

Strike Price Intervals For individual stock options there is always a min-imum of seven strike prices for every option type (call and put) during thetrading month three contracts in-the-money (ITM) three contracts out-of-the-money (OTM) and one contract at-the-money (ATM) The strike priceintervals vary depending on the price of the underlying security wideningwith increasing prices as noted in Table 611

New contracts with new strike prices for existing expiration dates areintroduced for trading on the next working day based on the previous dayrsquosunderlying close values as and when required In order to decide on theat-the-money strike price the underlying closing value is rounded off to thenearest strike price interval

Futures

In addition to the common characteristics of all of the futures and optionscontracts that trade on the NSE the following characteristics apply to allNSE futures contracts

Price Bands There are no daily minimummaximum price ranges appli-cable for NSE futures contracts However in order to prevent order entry

dThe SampP CNX NIFTY last traded below 2500 on November 9 2005 thus therehave been at least 19 strike prices available for trading since that time

Derivatives 155

TABLE 611 NSE Options Strike Price Intervals

Strike PricePrice of Underlying Security Interval (Rs)

Less than or equal to Rs50 250gt Rs50 to less than or equal to Rs250 5gt Rs250 to less than or equal to Rs500 10gt Rs500 to less than or equal to Rs1000 20gt Rs1000 to less than or equal to Rs2500 30gt Rs2500 50

Source The National Stock Exchange Ltd

errors by trading members operating ranges are kept at plusmn10 percent for thethree index futures and plusmn20 percent for the 155 individual stock futuresFor orders entered that exceed this operating range members are required toconfirm to the exchange that the order is good and that there is no error in theorder entry Upon confirmation the exchange may approve such an order

Base Prices The base price of all futures contracts on the first day oftrading is the theoretical futures price The base price of the contracts onsubsequent trading days is the daily settlement price of the futures contracts

Ind iv idual Stock Futures Futures contracts are currently available on 155individual underlying stocks trading on the NSE and were subject to ap-proval by SEBI See Appendix D Table D2 for a list of the securities

NSE Derivat ives Contract Specificat ions Table 612 lists the contractspecifications of NSE index and single stock derivatives contracts

Interest Rate Derivat ives

The NSE makes a market in interest rate futures contracts Interest ratefutures contracts are based on the list of underlying fixed income in-struments as specified by the exchange and approved by SEBI Interestrate futures contracts are currently available on notional T-bills notional10-year zero-coupon bonds and notional 10-year coupon-bearing bonds(See Table 613)

Contract Specificat ions for Interest Rate Derivat ives

Trading cycles Interest rate futures contracts have maturities of one yearwith three-month continuous contracts for the first three months

TABLE 612 Contract Specifications for NSE Derivatives Contracts

Parameter Index Futures Index Options

Futures onIndividualSecurities

Options onIndividualSecurities

Underlying 3 indexes 3 indexes 155 securities 155 securities

Security DescriptorInstrument FUTIDX OPTIDX FUTSTK OPTSTKUnderlying Symbol of

underlyingindex

Symbol ofunderlyingindex

Symbol ofunderlyingsecurity

Expiry date dd-mm-yyyy dd-mm-yyyy dd-mm-yyyy dd-mm-yyyyOption type mdash CEPE mdash CAPA

Strike price mdash Strike price mdash Strike price

Trading cycle Three-month trading cyclemdashthe near month (one) the next month(two) and the far month (three)Expiry day Last Thursday of the expiry month If the last Thursday is a tradingholiday then the expiry day is the previous trading daySource The National Stock Exchange

and fixed quarterly contracts for the entire year New contracts areintroduced on the trading day following the expiry of the near-month contract

Expiry day Contracts expire on the last Thursday of the expiry monthIf that day is a trading holiday the contract will expire on theprevious trading day In addition if the last Thursday falls on theannual or half-yearly closing dates of the bank the expiry and lasttrading day in respect of these derivatives contracts would be movedto the previous trading day

Settlement Interest rate futures contracts settle on T+1

TABLE 613 Securities on which Interest Rate Futures Contracts Are Availableand Their Symbols for Trading

Symbol Description

NSETB91D Futures contract on notional 91-day T-billsNSE10Y06 Futures contract on notional 10-year coupon-bearing bondsNSE10YZC Futures contract on notional 10-year zero-coupon bonds

Source The National Stock Exchange

Derivatives 157

Trading Parameters

Price Steps The price step for all interest rate futures contracts is Rs001

Quotation method Futures contracts with face values of Rs100 onnotional 10-year coupon-bearing bonds and notional 10-year zero-coupon bonds are based on price quotations and futures contractswith a face value of Rs100 (US$222) on notional 91-day Treasurybills are based on the discounted percent from par or Rs100 minusthe yield

Base price Base prices of interest rate futures contracts for new contractsare the theoretical futures prices based on the previous dayrsquos closingprice of the notional underlying security The base price of thecontracts on subsequent trading days will be the closing price ofthe futures contracts However on days when the contracts are nottraded the base price will be the daily settlement price of the futurescontracts

Price ranges There will be no day minimummaximum price rangesfor futures contracts However in order to prevent order-entry er-rors the operating ranges for interest rate futures contracts areplusmn2 percent of the base price For orders that exceed these operatingranges members are required to confirm that the order is valid andupon confirmation the exchange has the discretion to approve theorder If confirmation is not given by a member the order will notbe processed

Order conditionsTime conditions

Immediate-or-cancel

Good until day

Good till canceled (GTC)e

Good till date (GTD)

Price conditionsStop loss order

Spread order

Interest Rate Derivat ive Contract Specificat ion See Table 614 for char-acteristics of interest rate derivatives

eGood-till-canceled orders will be canceled at the end of the period of seven calendardays from the date of entering an order

TABLE 614 Product Characteristics of Interest Rate Derivatives

ContractUnderlying

Notional 10-YearBond (6Coupon)

Notional 10-YearZero-CouponBond

Notional 91-DayT-Bill

ContractDescription

N FUTINTNSE10Y0626JUN2003

N FUTINTNSE10YZC26JUN2003

N FUTINTNSETB91D26JUN2003

Contract Value Rs200000Lot Size 2000Tick Size Rs001Expiry Date Last Thursday of the monthContract Months Contracts have maturities of one year with three-month

continuous contracts for the first three months and fixedquarterly contracts for the entire year

Price Limits Not applicableSettlement Price Stipulated by the NSCCL

SUMMARY

Derivatives play an important and growing role in the capital markets ofIndia as evidenced by the significant trading volume they represent andthe continually increasing number of scrips underlying both futures andoptions Derivatives offer investors a method to play the short side of themarket as well as to trade the volatility of the market and individual sharesIt is anticipated that the activity in derivatives will continue to play a largerole in the market as the number of foreign investors registered to trade inIndia employ ever-more-sophisticated trading strategies

CHAPTER 7The Indian Debt Market

CHAPTER HIGHL IGHTS The Reserve Bank of India (RBI) is the primary regulator of the

government securities market and issues by banks The Securities and Exchange Board of India (SEBI) is the primary

regulator of the corporate debt market Government securities operate within a strong primary dealer

system Government securities account for

70 to 75 percent of the outstanding value of all Indian-issuedsecurities

90 to 95 percent of trading volume among all Indian securities The Clearing Corporation of India Ltd (CCIL) is a central coun-

terparty assuming all counterparty risk Settlement for government securities is T+1 The corporate debt market is largely a private placement market

with most of the corporate bond issues being privately placedamong wholesale investors

Government debt trading is largely conducted through the RBItrading system Negotiated Dealing SystemndashOrder Match (NDS-OM)

Short positions of dated government securities are permitted forup to five trading days

Indiarsquos debt market plays a vital role in the current and future devel-opment of the Indian economy There is a thriving government securitiesmarket a small but growing corporate debt market and very importantly

a set of foundations and institutions upon which further growth can de-velop This chapter first discusses the background and reforms supportingand leading up to this growth of the Indian debt market An examinationof the fundamentals of the market follows including a look at the variousissuers in the market the regulatory oversight the available instrumentsand the trading and settlement processes The government securities mar-ket currently dominating debt trading in India is examined along with thecorporate debt market and the chapter looks at the two stock exchangesrsquowholesale and retail debt markets Finally the Indian reference rates anddevelopment of a credible yield curve is addressed

INDIAN DEBT MARKET FUNDAMENTALS

Background

An integral aspect of the financial liberalization initiated in the early 1990swas the process of reforming the debt market Two of the main catalysts forthis reform were (1) the realization that the growing budget deficit wouldhave to be funded through a liquid efficient government securities marketand (2) the recognition that sustained economic growth will require a sig-nificant improvement of the nationrsquos infrastructure which itself will requirea deep source of funding Funding on the scale envisioned necessitated thedevelopment of a deep and liquid domestic debt market

The Reserve Bank of India (RBI) took the lead in these efforts It fo-cused on an overhaul of the government securities market commonly re-ferred to as the G-Sec market This includes issues of both the central andstate governments The reforms instituted have dramatically transformedthe government securities market in numerous ways Before the reformsthe market was characterized by administered interest rates illiquidity andcaptive holders but it is now characterized by

An increasingly broad investor base A smooth elongated 30-year yield curve Active benchmark securities Sophisticated government securities auctions Significant liquidity Narrowed bid-ask spreads A variety of instruments

Annual turnover in the secondary market for government securitieswas approximately US$633 billion1 for the 12 months ending July 2006

on an outstanding government securities size of approximately US$355billion2

The government securities market is now a well-functioning marketwith adequate benchmark issues strong sophisticated regulatory legaland technological infrastructure and well-developed clearing and settlementsystems

Having successfully improved the government securities market whichrepresents a large bulk of the total outstanding debt both the RBI and SEBIare now focused on building a viable and vibrant corporate debt marketThis will be imperative for the funding of many infrastructure projects takenon by private industry While the corporate market will be able to build onthe foundations of the government securities market it will undoubtedlyprove to be a more difficult process given the issues revolving around thewide range of issuers the wide range of creditworthiness and legal reformsthat will need to be addressed

Reforms Impact ing the Debt Market Since 1991

In the 1990s the RBI implemented reforms to make a transition from an ad-ministered to a market-determined interest rate environment The debt mar-ket along the lines envisioned by the government required addressing certainkey elements of a vibrant market and the development of key foundationsand institutions upon which the market could operate These included

New legislation New laws were created to support the market reforms Primary dealer system A strong primary dealer system was created to

promote secondary market liquidity market making and price discov-ery in government securities Primary dealers were expected to activelypromote greater retail participation in the government securities mar-ket There are currently 18 primary dealers (a list of the primary dealersis in the Important Contacts section)

Auctions Auctions were needed to broaden the primary market withan appropriate methodology for market-determined price discovery

Market making Market making was needed to promote depth andliquidity in the secondary market and to encourage market making inthe new primary dealer system

Trading systems The Negotiated Dealing System (NDS) was imple-mented and trading of government securities on stock exchanges wasintroduced

Settlement systems The Clearing Corporation of India Ltd (CCIL)was created as a central counterparty assuming all counterparty risk A

F IGURE 71 Volume of secondary market transactions in the governmentsecurities market 1995ndash2005Source The Reserve Bank of India Handbook of Statistics on the Indian Economy

uniform T+1 settlement cycle was adopted for the settlement of out-right transactions in government securities A new settlement programknown as DvP III enables net settlement of both the funds and securitiessettlement in the government securities market and permits the rolloverof repos Under DvP III traders can sell pre-settled positions (ie exe-cute a buy trade and sell the position later the same day T+0 or T+1before they have actually settled the trade and taken possession of thesecurity) This facility has significantly enhanced liquidity in the market

Debt instrument expansion Many new financial instruments were in-troduced including 91-day T-bills for managing liquidity and bench-marking exchange traded interest rate futures zero-coupon bondsfloating rate bonds repos in government securities capital indexedbonds and over-the-counter interest rate derivatives

Improved regulatory systems Regulatory systems were implemented toensure adequate institutional legal and risk management systems

Greater transparency Greater transparency was imposed and imple-mented in the debt market so as to instill greater confidence in theworkings of the erstwhile opaque market

The result of these reforms has been a deep and liquid government se-curities market with the market becoming increasingly broad based char-acterized by an efficient auction process an active secondary market anda liquid yield curve up to 30 years There has been a near 20-fold increase

in the volume of transactions in the 10 years from 1995 to 2005 Marketliquidity has improved to a point where bid-offer spreads in liquid securitiesare a very tight 1ndash3 bps The market is now supported by an active primarydealer system and electronic trading and settlement technology that ensuresafe settlement with straight-through-processing and central counterpartyguarantee Figure 71 shows the growth of government securities turnoverover the reform period

Recent Trends and Current In i t iat ives

The reform process is ongoing in the debt market Significant reforms re-cently initiated include

The ending of RBIrsquos subscription to government securities in the primarymarket This will complete the transition to fully market-based issuanceof government securities

The role of the central government as a financial intermediary for stategovernments is effectively ending This means the state governments willneed to issue debt directly to the market at their own respective creditratings rather than enjoying the national sovereign debt credit ratingat which up until this point they have been pricing their debt issuanceThus their borrowing rates will become market determined This mayeventually result in the emergence of a vibrant subnational debt market

An amendment to the Banking Regulation Act has been introducedin Parliament that would remove the 25 percent minimum statutoryliquidity ratio when feasible

Characterist ics and Further Reform Efforts of theDebt Market

The government continues to propose and implement additional reforms inits effort to bring the debt market up to the finest international standards andto provide the underpinnings for a vibrant liquid corporate and public debt-raising platform The continuing needs for financing growth both publicinfrastructure as well as private industry require a viable means of raisingand trading debt These reforms will help realize this goal

Broadening the Investor Base The government has raised the foreigninstitutional investor (FII) limit for government securities to US$26 billionin January 2007 from US$2 billion in order to accommodate the increasedFII demand for government securities Trading access through the NDS-OM trading facility (discussed below) has been extended beyond the initial

RBI-regulated entities to include mutual funds provident funds and pensionfunds

Traditionally the investor base for government securities in India hadbeen spread among banks financial institutions insurance funds and pen-sion funds but when the reform process began in 1991 the large bulkof government security holdings seem to be concentrated among the com-mercial banks the Life Insurance Corporation of India and some smallerpension plans In 1995 this group owned 95 of all government securitiesThis concentration in holdings was a result of the commercial banks and lifeinsurance industry being statutorily mandated to hold a significant percent-age of assets in government securities while the other traditional investorsbecame free to seek higher returns in alternative investment opportunitiesOver the ten years from 1995 to 2005 this concentration in holdings hasdecreased to where the commercial banks own 52 percent of the outstand-ing government securities the Life Insurance Corporation of India owns 20percent with the balance of holdings spread among numerous others3 Theinvestor base has diversified by the entry of cooperative banks regional ruralbanks mutual funds and non-banking finance companies as well as by theincreasing interest among FIIrsquos as evidenced by the higher investment limitsgranted by SEBI in response to growing FII demand In addition the entryof 100 percent gilt mutual funds has broadened the retail investor base

Policy initiatives have been focused on developing the retail segment ofthe market To enable small- and medium-sized investors to participate inthe primary auction of government securities a ldquoScheme of NoncompetitiveBiddingrdquo was introduced in January 2002 which is open to any entityapproved by the RBI The program provides for the allocation of up to5 percent of the auctioned amount at the weighted average rate of acceptedbids Investors can bid through banks or primary dealers with a minimumamount of Rs10000 (US$225) to a maximum amount of Rs20 million(US$450000)

Screen-based order-driven trading on the stock exchanges has also beenintroduced to encourage retail participation in the government securitiesmarket but this has had limited success to date While the bulk of gov-ernment securities holdings still resides with the commercial banks and lifeinsurance industry all of these measures have collectively resulted in morediversified holdings of government securities among market participantswhich now include banks financial institutions provident funds insuranceand pension funds primary dealers 100 percent gilt mutual funds corporatebodies trusts individuals FIIs and nonresident Indians

Creat ing an E longated Yie ld Curve For most of the 1990s the matu-rities of central government issuance ranged up to 10 years resulting in

redemption pressure and refinancing risk To create an elongated yield curvethat could effectively determine benchmark rates the government increasedthe maturity of its bond issuance In the early 2000s the RBI succeeded inincreasing maturities up to 30 years resulting in the weighted-average ma-turity of bonds issued increasing to 1517 years by end-January 2004 fromapproximately 55 years in 1996ndash1997

Consol idat ing Government Securit ies to Enhance L iqu id i ty The numberof liquid outstanding government securities was relatively low in relation tothe total number of issues At the end of 2005 there were 111 different issuesof which 44 with a minimum issuance of Rs100 billion (US$22 billion)represented 71 percent of the outstanding total issuance Of these only 10 to12 traded on a daily basis of which just 4 or 5 trade actively To achieve thegoal of a liquid market with a number of securities across maturities tradingactivelymdasha necessity for a smooth valid yield curvemdashthe government isactively consolidating issues through a purchase and reissuance process Ofthe 25 loans issued (excluding private placements) during 2002ndash2003 15were reissues

Promot ing L iqu id i ty in State Government Securit ies Promoting liquidityin state government paper is crucial for large anticipated funding require-ments Liquidity of state paper represented less than 1 percent of total gov-ernment securities turnover prior to 2004 and in the first six months of2006 still represented only 39 percent of turnover4 Efforts to enhance statepaper liquidity include (1) direct access to the market with state-specificmarket-determined rates (2) the possibility of permitting repo-status to statesecurities (3) permitting noncompetitive bidding in the primary market and(4) the securitization of various state government paper

Short Sel l ing The Reserve Bank of India (RBI) has been progressively loos-ening the rules surrounding the short selling of government securities in aneffort to create more liquidity enable more effective management of interestrate risk and permit the implementation of a downward investment view inthe market From a strict prohibition of short selling in February 2006 theRBI issued a circular granting permission for banks and primary dealers toshort central government dated securities subject to the provision (amongothers) that the short be covered on the same trading day by the purchase ofthe same security In January of 2007 the RBI further loosened the rules bypermitting short positions to be maintained for up to five trading days Shortpositions assumed on trade date T must be covered by the end of trading onT+4 Readers interested in further details of this ruling and all associated

provisions are encouraged to view the ruling circular on the RBI Web site athttprbiorginscriptsNotificationUseraspxId=3255ampMode=0

Creat ing a When- Issued Market The government is considering the in-troduction of a when-issued market in government securities to extend thedistribution period and allow more time for the market to absorb new issues

Diversi fy ing Instrument Types Recognizing that investors have a varietyof investment horizons risk appetites and needs the market is introducingvarious financial products While plain-vanilla bonds still represent the bulkof issuance the current new and proposed instruments include

Zero-coupon bonds Capital- and inflation-indexed bonds Floating rate bonds Bonds with call and put options STRIPSa

Introducing Corporate Debt Repos The RBI is considering the introduc-tion of repurchase agreements (repos) for corporate bonds to be settledthrough the Clearing Corporation of India Ltd (CCIL) Participation of cor-porates in the repo market is also being considered

Develop ing a Securit i zat ion Market The securitization market has beengrowing rapidly particularly after the SEBI and RBI introduced regulationsfor private placements in the debt market To encourage the growth ofthis market the RBI excluded investments in asset-backed securities andmortgage-backed securities from the 10 percent ceiling on the investment ofbanks in unlisted non-SLRb securities

Expanding Repo Market E l ig ib i l i ty The repo market was expanded bywidening the participant base to include non-bank entities such as mutualfunds insurance companies housing companies and non-banking financialcompanies

aSTRIPS is the acronym for Separate Trading of Registered Interest and Principal ofSecuritiesbGovernment securities are referred to as SLR (Statutory Liquidity Ratio) securitiesin India as they are eligible securities for the maintenance of the statutory reserveratio by banks Nongovernment securities are called non-SLR securities

Debt Issuers

The central government is the largest issuer of debt As noted earlier thegrowing national budget deficit has required the increased issuance of gov-ernment securities The annual primary issuance of central government debtincreased 18 times during the 15 years since the reform process began fromRs90 billion (US$2 billion) in FY1991 to Rs1600 billion (US$36 billion)in FY2006 In addition the growing needs of the state governments haveled to their growing issuance in the debt market The annual issuance ofstate government debt has increased as much as 20 times from Rs26 billion(US$ 057 billion) in FY1991 to a peak of Rs505 billion (US$11 billion) inFY20045 This growth is illustrated in Figure 72

Sources of possible future issuance include

Infrastructure financing The need for significant infrastructure up-grading to permit the economy to continue on its fast growth trackwill depend on debt market access for both public and privateenterprises

Gross Market Borrowings of Central And State Governments FY1991ndashFY2006

118 9 8

Central GovtState Govt

F IGURE 72 Gross market borrowings of central and state governments FY1991ndashFY2006Source Reserve Bank of India Handbook of Statistics on the Indian Economy

Housing Economic growth has been responsible for a vast expansionof the middle class to 300 million who are enjoying new and growingwages With 25 percent of the population below 15 years of age Indiais experiencing a major housing boom along with very large increasesin housing finance Securitization of mortgages will be an importantfunding source to support this long-term trend

Municipal bonds India has about 35 cities with populations greaterthan 1 million and about 400 cities with populations exceeding 100000There is an urgent need to upgrade urban infrastructure and the de-velopment of a municipal bond market will be an invaluable source offunding

Corporates Indiarsquos industrial sector has been growing dramatically overthe last several years largely funded by internal cash flows and theequity markets Banks are currently the only source of credit but theexpanding domestic and international business will demand expansionthat will require a deeper source of funds

Corporate Debt Market The corporate debt market is largely a privateplacement market with most of the corporate bond issues being privatelyplaced among wholesale investors such as banks financial institutions mu-tual funds large corporates and other large investors The public market isa barely viable marketplace characterized by inactivity poor to no marketmaking securities held to maturity and illiquidity

The development of the corporate debt market is the next area of focusfor the RBI and SEBI A viable corporate market is imperative to supportcontinued industrial growth and to fund new large projects both in theinfrastructure space and in manufacturing The development of a corporatemarket would be helped by the foundations and institutions already put inplace during the development of the government securities market Howeverthe corporate bond market would differ from the government securitiesmarket as there would be a large number of issuers versus just the centralgovernment issuers would each have their own creditworthiness versus thesingle sovereign rating of the government and issue sizes would be smaller

Reforms and advancements planned to enhance the corporate debt mar-ket include

Dematerialization and electronic transfer of securities Rolling settlement New trading systems with better transparency low cost and improved

liquidity New settlement systems Appropriate risk management systems

Reform of corporate bankruptcy laws to define and protect the rightsof creditors

Improvement in the interest rate derivatives market to provide enhancedhedging opportunities

Development of credit-enhancement institutions and processes

MARKET INFRASTRUCTURE

Regulat ion

The RBI has the primary regulatory responsibility of the government secu-rities market issues by other government institutions and issues by banksSEBI has the primary responsibility of the corporate debt market

Debt Instruments

Instruments traded in the debt market include

Floating rate bonds Zero-coupon bonds Commercial paper Certificates of deposit Corporate debentures Convertible debentures Secured premium notes Debentures with warrants Deep-discount bonds PSU bondstax-free bonds State government loans Securitized debt Units of mutual funds SLRc and non-SLR bonds issued by institutions

In Table 71 these instruments are classified into segments based on thecharacteristics of the identity of the issuer

In addition to the above instruments capital indexed bonds (CIBs) areto be introduced and will offer inflation-linked returns both on the couponsand on the principal repayments

cGovernment securities are referred to as SLR (Statutory Liquidity Ratio) securitiesin India as they are eligible securities for the maintenance of the statutory reserveratio by banks Nongovernment securities are called non-SLR securities

TABLE 71 Available Fixed Income Instruments

MarketSegment Issuer Instruments

Governmentsecurities

Central government Zero-coupon bonds coupon-bearingbonds Treasury bills STRIPS

State governments Coupon-bearing bondsPublic sector

bondsGovernment agencies and

statutory bodiesGovernment-guaranteed bonds

debenturesPublic sector units PSU bonds debentures commercial

paperPrivate sector

bondsCorporates Debentures bonds commercial paper

floating rate bonds convertibleszero-coupon bonds intercorporatedeposits

Banks Certificates of deposit debenturesbonds

Financial institutions Certificates of deposit bonds

The world over the debt markets are dominated by government se-curities which represent between 50 and 75 percent of trading volumeand market capitalization when aggregating all markets In India the debtmarket accounts for 70 to 75 percent of the outstanding value of issuedsecurities the top of that range and 90 to 95 percent of the trading vol-ume Indiarsquos state government securities and Treasury bills account for only3 to 4 percent of the daily trading volume up from less than 1 percentprior to 20056 Indiarsquos corporate debt market is still in its infancy andrelatively small

Traditionally banks in India have been the largest category of investorsin government securities accounting for more than 60 percent of the trans-actions in the wholesale debt market Banks are a prime and captive investorbase for government securities as SLR requirements mandate that they mustmaintain 25 percent of their net time and demand liabilities as SLR Bankstypically invest 10 to 15 percent more than the normal requirement in gov-ernment securities because of the risk-free nature of government securitiesand their greater returns compared to other comparable investments

Government- Issued Securit ies Central and State

Debt instruments are issued at both the central government level as well asthe state government level The term government securities also referred

to in India as G-Secs typically refers to all debt instruments issued by theReserve Bank of India (RBI) on behalf of the central government Further-more these are generally characterized by longer maturities T-bills alsoissued by the central government is the term used for shorter-term issueswhile those instruments issued on behalf of the local state governments arereferred to as state government securities

Government Securit ies Government securities are characterized as hav-ing maturities ranging from five to 30 years and have the followingattributes

Carry a face value of Rs10000 (US$222) Normally are coupon bearing Typically have semiannual coupon or interest payments

Bond Description Example An 1150 percent government of India 2007

Carries an annual coupon rate (interest rate) of 1150 percent Has a face value per unit of Rs10000 (US$222) Is payable semiannually Matures in 2007

Treasury Bi l ls Treasury bills issued by the RBI on behalf of the centralgovernment are characterized as such and

Have maturities that range from 91 days and 364 days Have a face value of Rs100 (US$222) Are issued at a discount to the face value and redeemed at par

The low face value is aimed at encouraging greater retail participationin the T-bill market

State Government Securit ies As discussed above the state governmentsthroughout India have a growing need for funds to upgrade infrastructureWhile currently representing a very small percentage of total issuance andtrading volume as noted above efforts are being made to invigorate thisclass of debt State government debt

Is issued by the RBI on behalf of each of the state governments Is coupon bearing Has a face value of Rs100 (US$222)

MARKET STRUCTURE

The secondary debt market is differentiated by the characteristics of theinvestors and the structure of the market The two segments are

1 Wholesale debt market Investors are mostly banks financial institutionsthe RBI primary dealers insurance companies mutual funds corpora-tions and FIIs

2 Retail debt market Investors include individuals provident funds pen-sion funds private trusts nonbank financial companies and other legalentities in addition to the wholesale investor classes

Wholesale Debt Market Segment (WDS)

The RBI permits banks primary dealers and financial institutions in India totrade debt instruments among themselves or with nonbank clients throughmembers of the stock exchanges The most prominent investors in the whole-sale debt market are commercial banks and financial institutions During thepast few years the investor base has widened to include cooperative banksinvestment institutions cash-rich corporates non-banking finance compa-nies mutual funds and high-net-worth individuals FIIs have also beenpermitted to invest 100 percent of their funds in the debt market whichis a significant increase from the earlier limit of 30 percent and as notedabove these investors can now invest up to US$26 billion in bonds from theprevious US$2 billion The government also allows FIIs to invest in T-bills

Growth in the Wholesale Debt Market The wholesale debt market hasmore than tripled in market capitalization outstanding to US$34835 billionbetween FY2000 and FY2006 Yet while the average trade size continued

TABLE 72 Trading Statistics of the NSE Wholesale Debt Market 2000ndash2006

Market Number Net Traded Average AverageCapitalization of Value Daily Value Trade Size(US$ Billions) Trades (US$ Billions) (US$ Billions) (US$ Millions)

2000 $ 10979 46987 $ 676 $ 0230 $ 1442001 $ 12907 64470 $ 952 $ 0330 $ 1482002 $ 16818 144851 $ 2105 $ 0728 $ 1452003 $ 19211 167778 $ 2375 $ 0800 $ 1422004 $ 27019 189518 $ 2925 $ 0995 $ 1542005 $ 32483 124308 $ 1972 $ 0673 $ 1592006 $ 34835 61891 $ 1057 $ 0390 $ 171

F IGURE 73 Growth of the market capitalization in the NSE wholesale debtmarket 2000ndash2006Source The National Stock Exchange

to grow over the same period of time the number of trades and the valueof those trades initially rose peaked in 2003ndash2004 and have declined sincethen over the same period Table 72 details this market capitalizationgrowth in conjunction with the trading statistics of the NSE Wholesale DebtMarket over the 2000 to 2006 period Figures 73 74 and 75 illustratethe growth patterns of the individual parameters

Figure 73 illustrates the gradual but consistent growth in marketcapitalization

Secondary market turnover showed very consistent growth through2004 with increased participation from the mainstream banking sector andnew entrants into the market Since 2004 however the wholesale debtmarket has shown a reduction in the number of trades and daily turnoveraccompanied by larger trades transacted Figures 74 and 75 illustrate this

Reta i l Debt Market (RDM)

Reta i l Market Part ic ipants The main investors permitted to participate inthe retail debt market include

Mutual funds Provident funds Pension funds

F IGURE 74 Growth of the wholesale debt market number of tradesSource The National Stock Exchange

F IGURE 75 Growth of the wholesale debt market average activitySource The National Stock Exchange

Private trusts Housing finance companies Corporate treasuries Hindu-undivided families Individual investors State-level and district-level cooperative banks Large religious trusts and charitable organizations Non-Banking Financial Companiesd (NBFC) and Residuary Non-

Banking Companiese (RNBC)

DEBT TRADING

Debt trading is largely conducted through the RBI trading system known asthe Negotiated Dealing System (NDS) This system was upgraded in 2005to the NDS-OM system which includes anonymous order matching and itis integrated with the Clearing Corporation of India Ltd (CCIL) In 2003in an effort to facilitate easier access and wider retail participation in thegovernment securities markets the RBI permitted trading through the stockexchangesrsquo (NSE BSE and OTCEI) extensive national network of tradingterminals Each exchange has its own debt trading modules The NDS-OMorder matching system now accounts for a significant share of the totaltraded volume in government securities

dAs defined by the Reserve Bank of India a Non-Banking Financial Company(NBFC) is ldquoa company registered under the Companies Act 1956 and is engaged inthe business of loans and advances acquisition of sharesstockbondsdebentures se-curities issued by Government or local authority or other securities of like marketablenature leasing hire-purchase insurance business chit business but does not includeany institution whose principal business is that of agriculture activity industrial ac-tivity salepurchaseconstruction of immovable property A non-banking institutionwhich is a company and which has its principal business of receiving deposits underany scheme or arrangement or any other manner or lending in any manner is alsoa non-banking financial company (Residuary non-banking company)rdquoeAs defined by the Reserve Bank of India a Residuary Non-Banking Company(RNBC) is ldquoa class of NBFC which is a company and has as its principal business thereceiving of deposits under any scheme or arrangement or in any other manner andnot being an Investment Leasing Hire-Purchase Loan Company These companiesare required to maintain investments as per directions of RBI in addition to liquidassets The functioning of these companies is different from those of NBFCs in termsof method of mobilization of deposits and requirement of deployment of depositorsrsquofundsrdquo

Auct ions

As part of the reform process and to create a market-driven price-discoverymechanism the RBI implemented an auction process for the primary marketissuance of government securities The primary dealer system was imple-mented and as of April 2006 the RBI no longer participates in auctions Inthe auctions government securities are bid for two ways (1) a yield-basedbasis where participants bid for the coupon payable and (2) a price-basedauction basis where participants bid a price for a bond with a fixed couponThe auction can be either a multiple price (participants get allotments attheir quoted pricesyields) or a uniform price (all participants get allotmentsat the same price)

To further encourage retail participation in the government securi-ties market the RBI instituted noncompetitive bidding for retail investorsthrough which noncompetitive bids are allowed up to 5 percent of theamount in the specified auctions of dated securities

Negot iated Deal ing SystemndashOrder Matching(NDS-OM)

The negotiated dealing system includes

An online electronic bidding facility for the primary auctions of centraland state government securities

Secondary market transactions in government securities An anonymous order matching system Screen-based electronic dealing and reporting of transactions in money

market instruments (including repos) Dissemination of information on trades with a minimal time lag Facilitation of straight-through processing

The implementation of the NDS-OM coincided with the launch of andis fully integrated with the Clearing Corporation of India Ltd (CCIL) TheCCIL discussed below becomes the central counterparty to each trade doneon the system

The NDS-OM which was initially accessible only for RBI-regulatedentities has been extended to all insurance entities

Transact ions in the Debt Market

Transactions are executed over-the-counter and on the exchanges

Direct transactions Banks and other wholesale market participantstrade directly between themselves either on the telephone or on

the NDS system This type of trading accounts for approximately25 percent of the wholesale market volume

Broker-intermediated transactions These types of transactions accountfor around 70 to 75 percent of trades in the market Brokers need tobe members of a recognized stock exchange for RBI to allow banksprimary dealers and institutions to trade through them

There are normally two types of transactions executed in the wholesaledebt market

1 An outright sale or purchase This is a standard execution in which thebuyer purchases with no predetermined agreement to sell the position orthe seller sells to close out a position

2 Repurchase agreement trades This type of transaction is when a trade isintended to be reversed at a specific point of time at a rate that will includethe interest component for the period between the two opposite legs ofthe transactions Repos short for repurchase agreements are also knownin India as ready forward trades Trades are called repo transactionsfrom the point of view of the seller and they are called reverse repotransactions from the point of view of the buyer Repos and reverse reposare commonly used in the money markets as instruments for short-termliquidity management and can also be considered a collateralized lendingand borrowing mechanism Banks and financial institutions usually enterinto reverse repo transactions to manage their reserve requirements or tomanage liquidity

Trading Methodology

Government securities trade and settle inclusive of the accrued interest(ie the ldquodirty pricerdquo as per market parlance in the wholesale debt mar-ket) This is similar to the trading of corporate debentures at a cum-interest price The minimum order size is 10 units of government securitieseach with a face value of Rs100000 (simUS$2200) for a total order valueof Rs1000000 (simUS$22000) and subsequent orders will be in lots of10 securities each

Debt Trading on Stock Exchanges

The stock exchanges have offered facilities to trade corporate debt since1994 and added government securities in 2003 to encourage retail par-ticipation Keeping in view the interests of small investors the mini-mum order size for government securities was reestablished by RBI to

Rs1000 (US$22) face value or a permitted lot size of ten Rs100 facevalue bonds

The exchanges segregate debt trading among the wholesale debt marketand the retail debt market The wholesale debt market provides trading fa-cilities for government securities Treasury bills and bonds issued by publicsector undertakings corporations and banks The secondary market forcorporate debt can be accessed through the electronic order-matching plat-form offered by the exchanges Retail debt trading at the NSE takes place ina screen-based electronic environment called the RETDEBT market facilityThe BSE offers wholesale debt market trading in government securities on itsGILT trading system and provides access to the retail debt market throughBOLT Government securities trade under the ldquoGrdquo security classificationCorporate debt instruments issued by development financial institutionspublic sector units and public companies trade in the ldquoFrdquo group on theBSE BSErsquos trade guarantee fund covers all of the trades in the F group onthe exchangersquos electronic BOLT system

Reta i l Trading in Government Securit ies

Trading in the RDM of the BSE occurs in the GILT trading system and likeequities is an electronic order matching system based on price-time priorityContinuous trading operates from 955 AM to 330 PM

BSErsquos GILT Trading System

The GILT system which at the time of this writing trades only govern-ment securities will eventually provide trading facilities for all availabledebt instruments central and state government securities Treasury billsinstitutional bonds public-service undertakings bonds commercial papercertificates of deposit corporate debt instruments and new instruments suchas municipal securities securitized debt mortgage loans and STRIPS

Trade executions in the GILT trading system are conducted three ways

1 Order-grabbing system This method is characterized by one participantresponding and matching with an order that is already in the tradingsystem

2 Negotiated-deal module This system permits the reporting of tradesundertaken by market participants through members of the exchange

3 Cross-deal module This system permits the reporting of trades under-taken by two different market participants through a single member ofthe exchange

Exchange Member El ig ib i l i ty to Trade in the Reta i lDebt Market Segment

NSE trading members who are registered members in the capital marketsegment and wholesale debt market segment are allowed to trade in theretail debt market subject to fulfilling capital adequacy norms

Members of the BSE are automatically granted membership in thedebt segment of the BSE permitting them to trade debt in the tradingsystems

Trading Parameters

Trading parameters for the NSE retail debt market segment are

Face value Rs100Permitted lot size 10Tick size Rs001Operating range plusmn5Market type indicator D (RETDEBT)Book type RD

BSE Corporate Debt Market Trading

The corporate debt market has yet to demonstrate any liquidity on the ex-changes and as noted above remains a priority for development by the RBIand SEBI While corporate issuance is expected to improve most corporateissuance is still in the form of private placements and investors tend to holdthe securities to maturity For transactions that occur on the BSE securitiesare traded in the F group and are settled on a rolling settlement basis witha T+2 cycle F group trading remains extremely thin with 2006 turnovertotaling only US$45 million and the average daily turnover a paltry US$181thousand To put this into some perspective the NSE wholesale debt markethad FY2006 turnover of US$105 billion and an average daily turnover of$390 million

CLEARING AND SETTLEMENT

Trades executed in the BSE RDM are subject to rolling settlement witha T+2 delivery cycle Trades executed throughout the continuous tradingsessions will be netted out at the end of the trading hours through a process

of multilateral netting Transactions will be netted out by members and thenby scrip to determine the net settlement and payment obligations of themembers

Accounts Used for Hold ing and Sett lementof Government Securit ies

Government securities can be held in any of the following forms

Subsidiary General Ledger (SGL) This is an account with the RBI thatcan only be opened by a select few entities including primary deal-ers banks and financial institutions The account is used to hold theirinvestments in government securities and Treasury bills in electronicbook-entry form These accounts can also be used to settle trades usinga delivery-versus-payment (DvP) mechanism

Constituent Subsidiary General Ledger (CSGL) Also known as anSGL-II account this is an account at the RBI held by banks or primarydealers on behalf of their smaller investors who are not eligible as perthe RBI to have their own SGL accounts The SGL-II account is used tohold the investorsrsquo government securities positions The SGL-II accountsprovide investors with a DvP settlement capability

Physical security This refers to securities still in physical form as cer-tificates In the dematerialized environment there are very few debtinstruments still in physical form Those that do exist are held in aphysical security account

Government securities can be held by investors in the same account atthe depositories the CDSL and NSDL that is used for holding equities Thedepositories will hold the government securities in their own ConstituentSubsidiary General Ledger (SGL-II) accounts at the RBI These SGL-II ac-counts can be used only for their client holdings

Sett lement

Government Securit ies Settlement of government securities and funds isbeing done on a DvP basis by the Clearing Corporation of India Ltd (CCIL)an entity established to provide a ldquosafe institutional structure for the clear-ing and settlement of trades for government securities foreign exchangecurrency and debt marketsrdquo The CCIL started clearing transactions in gov-ernment securities and repos reported on the NDS in February 2002 TheCCIL acts as a clearinghouse and central counterparty for all trades

In acting as a central counterparty through novationf the CCIL pro-vides guaranteed settlement and has in place risk management systems tolimit settlement risk It also operates a settlement guarantee fund backedby lines of credit from commercial banks The netting of funds by CCILreduces the liquidity requirements of the market and thereby liquidity riskof the system All transactions in government securities concluded or re-ported on the National Dealing System (NDS) have to be settled throughthe CCIL

Clearing and Sett lement in the Wholesale Debt Market The fol-lowing characterize settlement for securities traded in the GILT trad-ing system the BSE system through which all government securitiesare traded

Settlement is on a trade-by-trade delivery-versus-purchase (DvP) basis The primary responsibility of settling trades concluded in the wholesale

debt market rests directly with the participants who settle trades ontheir behalf through the subsidiary ledger account of the RBI or theCCIL account through the NDS

For broker-intermediated transactions the settlement responsibility fortrades in the wholesale debt market primarily rests with clients A mem-ber has to only report settlement details to the exchange for monitoringpurposes The exchange reports trades to the RBI regularly and monitorsthe settlement of these trades

Each transaction is settled individually Netting of transactions is not allowed Members need to report settlement details to the BSE for all trades

undertaken by them on the GILT system Settlements for all trades executed on the GILT system are on a rolling

basis The exchange permits settlement periods ranging from the same day

(T+0) to a maximum of six working days (T+5)

fNovation is the process by which the CCIL steps out of two complementary trans-actions and replaces itself with the name of the counterparty to each of the comple-mentary transactions When a trade occurs on an exchange there is a buyer and aseller each of whom has as its counterparty the CCIL which stands in the middleof the trade In the process of novation the CCIL steps away for settlement so allnetting is done between members without the presence of the CCIL

TABLE 73 Settlement Schedule for the Retail Debt Market forGovernment Securities

Sr No Day Description

1 T Trade date2 T + 1 (1100 AM) Custodial confirmation3 T + 2 (1030 AM) Securities amp funds pay-in4 T + 2 Securities amp funds pay-out

Clearing and Sett lement for the Reta i l Debt Market The following appliesto all trades executed in the retail debt market on the NSE

Trades are cleared through the National Securities Clearing CorporationLtd (NSCCL)

Trades settle on a T+2 basis Trades are under rolling settlement Net settlement is permitted The NSCCL computes member obligations and makes reports available

by T+1 Obligations are computed separately for this market from theobligations of the equity market

The exchange allows settlement periods ranging from same day (T+0)to a maximum of T+2 for nongovernment securities

Settlement of all outright secondary market transactions in governmentsecurities is standardized at T+1

For repo transactions in government securities the first leg can be settledon a T+0 basis or T+1 basis

The typical settlement schedule for the RDM in government securitiesis summarized in Table 73

Fund Sett lement Fund settlement and securities settlement for debt tradesexecuted on the NSE are conducted through the clearing banks and deposi-tories of the NSCCL in a manner similar to the equity segment The existingclearing bank accounts are used for funds settlement

Government Securities The actual settlements of funds and securities are effected directly be-

tween participants or through the RBI All trades in government securities are reported to the RBI-SGL through

the NDS The trades are settled on a net basis through the DvP-III system

Nongovernment Securities Trades are settled on a gross basis directly between participants on a

DvP basis On the scheduled settlement date the exchange provides data to the

respective members regarding trades to be settled on that day withdetails such as security counterparty and funds owed or due

RISK MANAGEMENT

Risk management in the debt market like the equity market is a vitalpriority of the regulators As such several layers of control are utilizedto maintain the safety and integrity of the market These controls includestringent base capital and net-worth requirements trading and exposurelimits and margins

Base Capita l and Net-Worth Requirements

Membership in the BSE debt segment is granted to members with a minimumnet worth of Rs15 crores (US$340000)

Clearing members of the NSE wholesale debt market segment of theexchange are allowed to participate in clearing and settlement of trades donein government securities subject to a minimum net worth of Rs1 crore (US$220000) An initial contribution to the settlement guarantee fund (SGF)by way of interest-free security deposit (IFSD) of Rs500000 (US$11000) isrequired to be kept with the NSCCL A member wishing to participate in theRDM may opt to set aside a contribution of Rs500000 from his additionalbase capital available on the capital market segment andor futures andoptions segment toward this IFSD

Trading and Exposure L imits

BSE members of the retail debt segment are permitted up to 15 times theiradditional capital deposited with the exchange in gross exposure in gov-ernment securities along with their gross exposure in the equity segmentHowever no gross exposure is permitted for members against their baseminimum capital plus contribution of Rs1 000000 (US$22222) towardthe trade guarantee fund in the cash segment Transactions done by themembers in this segment along with their transactions in the equity seg-ment would form part of their intraday trading limits and are subject toa limit of 3333 times the capital deposited with the exchange However

institutional business would not form part of these intraday and gross ex-posure limits

NSE Value-at -R isk for Government Securit ies

Value-at-risk (VaR) is widely accepted in the financial community as aneffective way of monitoring and managing market risk and as a basis forsetting regulatory minimum capital standards The NSE developed a VaRsystem using the NSE ZCYCg for measuring the market risk inherent ingovernment securities in India

The NSE-VaR system provides measures of VaR using five alternativemethods (1) variance-covariance (normal) (2) historical simulation meth-ods (3) weighted normal (4) weighted historical simulation and (5) therecently developed extreme value method (more information about thesemethods is available on the NSE Web site) While the first set of methods iseasier to implement and therefore more popular they may not provide anaccurate assessment of risk in volatile market conditions The five methodsprovide a range of options for market participants

Margins and Gross Exposure L imits

Mark-to-market margins payable on T+1 are applicable to all open po-sitions in government securities and are calculated on the basis of ZCYCprices

Participation in the debt segment of the NSE requires an initial con-tribution to the Settlement Guarantee Fund of the NSE of a minimum ofRs500000 (simUS$11000) in the form of an interest-free security deposit(IFSD) to the NSCCL The gross exposure in government securities cannotexceed 20 times this IFSD Any member desiring greater exposure will needto increase its additional base capital similar to the process in the capitalmarket segment

BROKERAGE RATES

The NSE has specified the maximum rates of brokerage charges by tradingmembers in relation to trades done in securities available on the wholesaledebt market segment of the exchange These rates vary depending on thesize of the order and the issue Table 74 lists these brokerage rates

gThe zero-coupon yield curve (ZCYC) is explained more fully later in this chapterunder the Reference Rates section

TABLE 74 NSE Wholesale Debt Market Brokerage Rates

Government of India Securities and T-BillsOrder value lt Rs10 million 25 ps per Rs100Rs10 millionndash50 million 15 ps per Rs100Rs50 millionndash100 million 10 ps per Rs100gtRs100 million 5 ps per Rs100

State government Securities and Institutional BondsOrder value lt Rs25 million 50 ps per Rs100Rs25 millionndash5 million 30 ps per Rs100Rs5 millionndash10 million 25 ps per Rs100Rs10 millionndash50 million 15 ps per Rs100Rs50 millionndash100 million 10 ps per Rs100gtRs100 million 5 ps per Rs100

Public Service Undertakings and Floating Rate BondsOrder value lt Rs10 million 50 ps per Rs100Rs10 millionndash50 million 25 ps per Rs100Rs50 millionndash100 million 15 ps per Rs100gtRs100 million 10 ps per Rs100Commercial Paper and Debentures 1 of the order value

lowastPs refers to paise or Rs001Source The National Stock Exchange

REFERENCE RATES

Mumbai Inter-Bank Bid Rate (MIBID) and MumbaiInter-Bank Offer Rate (MIBOR)

The key overnight interest rate benchmarks in India are the MIBIDMIBORrates initially developed by the NSE and later co-brandedsponsored bythe Fixed Income Money Market and Derivative Association of India(FIMMDA) With the goal of bringing uniformity to the marketplace theovernight MIBID and MIBOR rates are the benchmark rates for a majorityof trades among interest rate swaps forward rate agreements floating ratenotes and term deposits

The methodology behind the MIBIDMIBOR rates consists of a pollsampling a panel of 33 banks and primary dealers in India This sampleis then run through a formula and system that trims the data of outliersand computes a mean and standard deviation The reference rate is thensimultaneously released to all market participants through various mediaDissemination of the reference rate information occurs every business day

at 955 AM for the overnight rates and at 1215 PM for the 14-day one-month and three-month rates

A number of fixed income products are now linked to the MIBIDMIBOR rates including floating rate notes issued by GE Capital corporatedebentures issued by Larsen and Toubro and GE Capital term depositsissued by ICICI Bank forward rate agreements issued by HSBC and anumber of interest rate swaps issued by Standard Chartered HSBC HDFCABN AMRO and Deutsche Bank

BSE Inter-Bank Offer Rate (BIBOR)

The BSE offers a reference rate to provide a short-term benchmark interestrate While not as widely quoted as the MIBORMIBID rates the BIBORcomputation methodology includes a poll sampling of exactly 20 contribut-ing banks a screening of the data to eliminate outliers and then dissemina-tion of the resulting reference rate to the market

NSE Zero-Coupon Yie ld Curve (ZCYC)

In an effort to create a standard by which government securities acrossall maturities could be effectively valued the NSE created the zero-couponyield curve (ZCYC) The ZCYC is now increasingly being used by marketparticipants as an acceptable basis for the valuation of debt instruments

NSE Government Securit ies Index

The NSE created the NSE Government Securities Index as a bond index forIndiarsquos markets to measure returns in the bond market and to provide abenchmark for portfolio management The index prices components off ofthe NSE benchmark ZCYC so that movements reflect returns to an investoron account of a change in interest rates only and not those arising fromtrading factors such as illiquidity Featuresh of the index include

The base date for the index is January 1 1997 The base date index value is 100 The index is calculated on a daily basis for all trading days from January

1 1997 onward

hAdditional information about the NSE Government Securities Index ZCYCMibidMibor rates or the current dayrsquos Daily View can be found on the NSE Website at wwwnse-indiacom under Debt gt Products amp Services

TABLE 75 Example of a Daily View of the NSE Government Securities Index

Total Principal Avg PortfolioReturns Returns Avg Residual Portfolio Portfolio Modified Portfolio

Index Index index Coupon Maturity YTM Duration Duration Convexity

ALL 2383 12061 8644 9496 8143 5716 5493 586851ndash3 2018 941 9325 2356 7512 2130 2053 50023ndash8 24046 1108 8866 5753 7775 4525 4355 248608+ 28179 13455 8139 15102 8301 8312 7981 101719TB 2114 2114 0000 0329 6040 0325 0315 0181GS 24153 11234 8644 10223 8151 6120 5880 63048

The index uses all Government of India bonds issued after April 1992These were issued on the basis of an auction mechanism that impartedsome amount of market-relatedness to their pricing Bonds issued priorto 1992 were on the basis of administered interest rates

Each day the prices for all of these bonds are estimated off of the NSEbenchmark zero-coupon yield curve for the day

The index is a market capitalizationndashweighted index of its constituents Computations are based on arithmetic and not geometric calculations The index uses a chain-link methodology (ie todayrsquos values are based

on the previous value times the change since the previous calculations)This gives the index the ability to add new issues and also remove oldissues when redeemed

Coupons and redemption payments are assumed to be reinvested backinto the index in proportion to the constituent weights

Both the Total Returns Index and the Principal Returns Index are com-puted

The indexes provided are Composite 1ndash3 3ndash8 8+ years a Treasurybill index and defined dated Government Securities Index

Table 75 illustrates a view of the NSE Government Securities Index andall the information that is available every day

SUMMARY

The debt market of India like others throughout the Asian region is stilla developing market that has demonstrated tremendous growth over thepast 10 years but still has a long way to go to meet the needs of the Indian

economy While indicators such as issuance number of trades and turnovergrow in the government securities market the corporate debt market is stillin its infancy and suffers from minimal liquidity The foundations of a strongmarket are all in place including good trading and settlement systems debt-specific risk management processes and the development of a viable yieldcurve and a set of benchmark rates Given the significant capital needs ofthe economy to improve infrastructure India will undoubtedly continue todrive regulatory reform that enhances the attractiveness and demand fordebt resulting in investors witnessing a steady growth in the Indian debtmarket

CHAPTER 8Indexes General Market

and Sector Specific

CHAPTER HIGHL IGHTS The BSE Sensex of 30 stocks is the benchmark for Indiarsquos financial

markets All BSE indexes are calculated based on a free-float methodology

except the PSU Index The Sensex is updated every 15 seconds Dollex indexes are indexes expressed in US dollar terms For

example the Dollex 200 is the BSE 200 expressed in US dollarterms

The BSE 500 represents nearly 97 percent of the total market capon the BSE and represents all 20 major industries

The Bombay Stock Exchange (BSE) and National Stock Exchange(NSE) Indiarsquos two most important stock exchanges have each compileda number of different stock indexes to serve as benchmarks of performancefor investors Indexes have been created both for the general market as wellas for specific key industries in Indiarsquos economy In this chapter both the free-float and full market capitalization methodologies are discussed as are thefeatures and selection criteria of the various indexes of the BSE and the NSEEvery index offered by each exchange both general market and industry

The indexes are the proprietary property of each exchange The BSE NSE andIndia Index Services amp Products Ltd (IISL) have generously given permission fortheir information to be presented in this book

sectorndashspecific is addressed together with a listing of their constituents andwhere available the applicable free-float factor associated with each con-stituent The chapter is organized by the index-sponsoring exchange begin-ning with the indexes of the BSE and followed by those of the NSE

The constituents of the various indexes are regularly updated by theirrespective sponsors The constituents listing for each index was up-to-date at the date listed on each table The reader should rememberthat in all likelihood there will have been some amendments to eitherthe constituents or their free-float factor by the time of this bookrsquosprinting The most up-to-date constituents listings can be found onthe Web sites of the respective exchange-sponsors

BSE-SPONSORED INDEXES

The Bombay Stock Exchange is the sponsor of 6 general market and 11sector-specific indexes In addition the BSE has created three indexes knownas the Dollex indexes which are US-dollar denominated The best-knownBSE index is the Sensex the most widely quoted and internationally watchedbenchmark of the Indian capital markets A full list of the BSE indexes is inTable 81

TABLE 81 BSE Indexes

Market Indexes Sector-Specific Indexes

SensexMidcapSmall Cap

BSE 100BSE 200BSE 500

Dollex 30Dollex 100Dollex 200

BSE Auto Index BSE IT IndexBSE Bankex Index BSE Metal IndexBSE Capital Goods Index BSE Oil amp Gas IndexBSE Consumer Durables Index BSE Public Service

Undertakings IndexBSE FMCG Index BSE TECk IndexBSE Healthcare Index

Each of these indexes are described below The discussion of the indexesbegins with an explanation of the methodologies used to develop the indexes

Index Methodolog ies Computat ionsand Related Deta i ls

Free-F loat Methodology Initially indexes in India and elsewhere through-out the world were calculated based on the full market capitalizationmethodology whereby the capitalization of a stock was based on the numberof issued shares multiplied by the closing price of the stock The rationaleof this methodology came into question when analysts began to questionthe impact of the huge holdings of stocks that never came to the market fortrading in the normal course of events These holdings included those of pro-motersa government entities strategic investors and other locked-in shares

To adjust for this issue a new methodology was devised to look atcapitalizations based on only those shares commonly available to or freelyfloating in the market This new approach became known as the modifiedmarket capitalizationndashweighted method and free-float adjustment methodor the more common free-float capitalization method BSE pioneered thefree-float concept in India by launching the BSE TECk in 2001 and theBankex in June 2003b The BSE has since shifted all of its indexes exceptthe PSU Indexc to the free-float methodology

Free-float market capitalization is based on the free-float factor or pro-portion of total shares issued by the company that are readily available fortrading in the market Using this methodology the market capitalization ofa company is determined first by multiplying the price of its stock by thenumber of shares issued by the company (the standard market capitaliza-tion) Then second this market capitalization is further multiplied by thefree-float factor to determine the free-float market capitalization In otherwords the market capitalization of each company in a free-float index isreduced to the extent of its readily available shares in the market

For example if a company has 45 percent of its shares held by the publicand 55 percent of the shares are still held by the companyrsquos founding family

aldquoPromotersrdquo of a company in India generally refers to the company founders whotypically retain a large portion of the shares when a company goes public Theseshares tend to be closely held and do not tend to trade in the market thus they arenot considered part of the free-floatbThe BSE TECk Index is a benchmark for technology media and telecommunica-tions the Bankex is a benchmark for bank stockscThe PSU Index is the benchmark for public-sector undertakings Indiarsquos descriptionand name for state-owned enterprises

then the free float factor of the company would be 45 and only 45 percentof the total market capitalization of the company would be considered forthe purpose of calculating the index

Free-Float Factor =[Issued Shares of a Company Readily Available to Trade in the Market]

[Total Issued Shares of the Company]

Free-Float Market Capitalization = [Full Market Capitalization]times [Free-Float Factor]

Using the free-float methodology the level of an index at any timereflects the free-float market value of an indexrsquos component stocks relativeto a base period The free-float capitalization methodology as a methodto measure market capitalization of indexes is now used by many stockexchanges around the world

Free-Float Exclusions Shareholdings held by investors that would not comeinto the open market for trading are treated as controllingstrategic holdingsand are not included in the free-float Specifically the following holdings aregenerally excluded when determining a companyrsquos free-float

Holdings by founders directors and acquirers that have some controlelement

Holdings by persons and bodies with a ldquocontrolling interestrdquo Government holdings as a promoter and acquirer Holdings through the FDI route Strategic stakes by private corporate bodies and individuals Equity held by associate and group companies (cross-holdings) Equity held by employee welfare trusts Locked-in shares and shares that would not normally be sold in the

open market

The remaining shareholders would fall under the free-float category

Free-Float Capitalization Methodology A companyrsquos free-float in India isdetermined according to a shareholding format specified by the SecuritiesExchange Board of India (SEBI) The format is

A Promoters Indian Foreign Persons acting in concert

TABLE 82 The Impact of Differing Index Weighting Methodologies

Free-Float Full Mkt Free-FloatFree-Float Full Mkt Adjusted Cap Mkt Cap

Company Adj Factor Cap Mkt Cap Weighting Weighting

A 025 10000 2500 59 42B 05 7000 3500 41 58

B Nonpromoters Financial institutions and foreign institutional investors Corporations Public

Example of Weightings for Full Market Capitalization versus Free-FloatMethodologies A greater appreciation of the impact of the free-floatmethodology on index component weightings can be gained from the exam-ple in Table 82 where an index of two constituent stocks A and B willhave very different weightings in the index depending on whether the indexmethodology is based on full market capitalizations versus free-float marketcapitalizations

Note that while the straight full market capitalization weighting wouldsuggest company Arsquos weighting would be 59 percent compared to Brsquos 41percent the free-float methodology utilizing the free-float adjustment factorresults in company Arsquos weighting of only 42 percent versus Brsquos 58 percent

Index Oversight Two bodies within the BSE are responsible for the ex-changersquos index-related matters The Index Committee of the BSE is chargedwith setting the policies and framework of the index-related issues and theIndex Cell is responsible for the daily maintenance of the BSE indexes TheIndex Committee is made up of experts in all areas of the capital markets andincludes academics fund managers journalists BSE executives and othermarket participants The Index Committee meets every quarter to review allof the BSE indexes In case there is a revision in the index constituents anannouncement of the incoming and outgoing stocks is made six weeks inadvance of the actual implementation of the index revision

The Sensex

In 1986 the BSE introduced the BSE Sensitive Index commonly known asthe Sensex and widely recognized as the benchmark index of Indiarsquos capital

markets and the index most often quoted in the worldrsquos financial press whenreporting on Indiarsquos capital market performance Much like the Dow JonesIndustrial Average in the United States the Sensex is made up of only 30stocks The Sensex is the oldest index in India and provides time series datagoing back to 1979

In 1989 in response to the perceived need for an index representing amore broad-based cross-section of the Indian economy the BSE launchedthe BSE National Index representing 100 stocks that are multilisted onvarious Indian exchanges In 1996 the name was changed to the BSE 100Index

In 1994 the BSE launched two new index series the BSE 200 and theDollex 200 indexes These were followed by the launch of the BSE 500Index and five sectoral indexes in 1999 In 2001 BSE launched the BSE-PSUIndex Dollex-30 and the countryrsquos first free-float-based indexmdashthe BSETECk Index

Sensex Calcu lat ion Methodology The Sensex was initially calculated basedon the full market capitalization methodology but it shifted to the free-floatmethodology in 2003 With this methodology the level of the index at anytime reflects the free-float market value of the 30 component stocks relativeto a base period The market capitalization of a company is determinedby multiplying the price of its stock by the number of shares issued by thecompany This market capitalization is further multiplied by the free-floatfactor of the company to determine the free-float market capitalization

The base period of the Sensex is 1978ndash1979 and the base value is100 index points This is often indicated by the notation 1978ndash79 = 100The Sensex calculation divides the free-float market capitalization of 30companies in the index by a number called the index divisor The divisor isthe only link to the original base period value of the Sensex It keeps the indexcomparable over time and is the adjustment point for all index adjustmentsarising out of corporate actions and replacement of components Duringmarket hours prices of the index components determined by the latestexecutions are used by the trading system to calculate the Sensex every 15seconds and are disseminated in real time

Computat ion of the Sensex

Closing Value Computation The closing value of the Sensex is computedby taking the weighted average of all of the trades on each Sensex constituentin the last 30 minutes of the trading session If a Sensex constituent has nottraded in the last 30 minutes the last traded price is used If a Sensexconstituent has not traded at all during the day then the previous dayrsquos

TABLE 83 Sensex Constituents and Their Free-Float Adjustment Factors

Free-FloatCode Name Sector Adj Factor

500410 Associated Cement Cos Ltd Housing Related 065500490 Bajaj Auto Ltd Transport Equipment 070500103 Bharat Heavy Electricals Ltd Capital Goods 035532454 Bharti Airtel Ltd Telecom 035500087 Cipla Ltd Healthcare 065500124 Dr Reddyrsquos Laboratories Ltd Healthcare 075500300 Grasim Industries Ltd Diversified 075500425 Gujarat Ambuja Cements Ltd Housing Related 080500010 HDFC Finance 090500180 HDFC Bank Ltd Finance 080500182 Hero Honda Motors Ltd Transport Equipment 050500440 Hindalco Industries Ltd Metal amp Mining 075500696 Hindustan Lever Ltd FMCG 050532174 ICICI Bank Ltd Finance 100500209 Infosys Technologies Ltd Info Technology 080500875 ITC Ltd FMCG 070500510 Larsen amp Toubro Ltd Capital Goods 090532500 Maruti Udyog Ltd Transport Equipment 040532555 NTPC Ltd Power 015500312 ONGC Ltd Oil amp Gas 020500359 Ranbaxy Laboratories Ltd Healthcare 070532712 Reliance Communications Ltd Telecom 035500390 Reliance Energy Ltd Power 075500325 Reliance Industries Ltd Oil amp Gas 055500376 Satyam Computer Svcs Ltd Info Technology 095500112 State Bank of India Finance 045532540 Tata Consultancy Svcs Ltd Info Technology 020500570 Tata Motors Ltd Transport Equipment 060500470 Tata Steel Ltd Metal amp Mining 070507685 Wipro Ltd Info Technology 020

As of March 2007Source The Bombay Stock Exchange Ltd

closing price is used The index closure algorithm is intended to preventintentional manipulation of the closing index value

Intraday Value Computation During market hours the execution pricesof index stocks are used to automatically calculate the Sensex every 15seconds The newly calculated index is continuously updated on all tradingworkstations connected to the BSE trading computer in real time

Select ion Criter ia for Sensex Const i tuents General guidelines for theselection of constituent stocks of the Sensex are as follows

Quantitative Criteria

1 Final rank The stock should figure in the top 100 companies listed byfinal rank The final rank is arrived at by assigning a 75 percent weightingto the rank on the basis of the six-month average full market capitalizationand 25 percent weighting to the liquidity rank based on the six-monthaverage daily turnover and six-month average impact cost

2 Trading frequency The stock should have been traded on every trad-ing day for the last three months although exceptions can be made forunusual circumstances such as stock suspensions

3 Free-float market capitalization weighting The weight of each stock inthe Sensex based on a three-month average free-float market capitaliza-tion should be at least 05 percent of the index

4 Industry representation The Index Committee seeks a balanced repre-sentation of the listed companies in the BSE universe The index compa-nies should be leaders in their industry group

5 Listed history The stock should have a listing history of at least threemonths on the BSE but the criteria may be relaxed in exceptional cir-cumstances

Qualitative Criteria

6 Track record In the subjective opinion of the Index Committee thecompany should have ldquoan acceptable track recordrdquo

Sensex Index Const i tuents Table 83 lists the component stocks of theBSE Sensex Index the industrial sectors that each stock represents and thefree-float adjustment factors applied to each componentrsquos capitalization

BSE 500

The BSE 500 Index is the most important BSE benchmark of performancefor the broader market By design it represents nearly 93 percent of the totalmarket capitalization on the BSE and represents all 20 major industries ofthe economy The index is calculated based on the free-float methodologyonly as of August 16 2005

Appendix I contains various tables listing the component stocks of thevarious market indexes Table I1 lists the components of the BSE 100 TableI2 the components of the BSE 200 and Table I3 the components of theBSE 500

BSE Mid-Cap and BSE Smal l -Cap Index

The BSE created the BSE Mid-Cap Index and BSE Small-Cap Index as bench-marks for the performance of the smaller companies trading on the stockexchange The free-float market capitalization methodology applies to bothindexes The components of these indexes are determined and reviewedquarterly The selection methodology and criteria are based on the size ofthe average market capitalization and is as follows

1 Any companies in the Z group traded as permitted securities or trad-ing less than 60 percent of the days in the preceding three months areexcludedd

2 All remaining stocks in the BSE universe are ranked by their averagemarket capitalization

3 The bottom 15 percent of companies are excluded from inclusion leavingthe top 985 percent of companies

4 Those companies that fall between 80 percent and 95 percent of theremaining aggregated market capitalization are included in the BSE Mid-Cap Index

5 Those companies that fall in the bottom 5 percent of the remaining ag-gregated market capitalization are included in the BSE Small-Cap Index

The above selection methodology results in a varying number of compo-nent stocks after each quarterly review The two indexes track the large-capBSE 500 index with a correlation greater that 090 Appendix I Table I4lists the component stocks of the BSE Mid-Cap Table I5 lists the compo-nents of the BSE Small-Cap

Summary of BSE Market Index Features

A brief summary of the features of each of the general market indexes ispresented in Table 84

Dol lex

The standard indexes of the BSE are always expressed in terms of rupeesand all changes in value of the indexes are expressed in stable rupee termsIn recognition of the growth in foreign portfolio investment as well as the

dSee Appendix G or Chapter 5 for a definition of ldquoZ grouprdquo securities and theGlossary for a definition of ldquopermitted securitiesrdquo

TABLE 84 BSE Market Index Features

BSE BSESensex BSE 100 BSE 200 BSE 500 Mid-Cap Small-Cap

Weightingcriteria

Market capitalization weighted

CapitalizationMethodology

Free-float

Number ofComponentStocks

30 100 200 500 Varies Varies

Base YearDateof Index

1978ndash79 1983ndash84 1989ndash90 Feb 11999

2002ndash03 2002ndash03

Base Value ofIndex

100 100 100 1000 1000 1000

most common global investment industry practice of monitoring and report-ing investment performance in US-dollar-based terms the BSE thought itvaluable to provide foreign investors with an easy method to monitor Indianmarket performance in stable US-dollar terms With this in mind in 1994the BSE introduced a dollar-linked version of the BSE 200 and called it theDollexmdashin which the formula for the calculation of the BSE 200 is modifiedto express the current and base market values in dollar terms by dividingthe current rupee market value by the current rupeendashdollar conversion rateand the base value by a constant average rupeendashdollar conversion rate inthe base year In 2001 the BSE introduced a Dollex version of the Sensexcalled the Dollex 30 and then in 2006 they introduced the Dollex 100 theUS$ version of the BSE 100

BSE Sector-Specific Indexes

Sector-specific indexes use the free-float methodology and each sector indexrepresents approximately 90 percent of the market capitalization for itssector The selection criteria for the sector indexes are as follows

1 Only present constituents of the BSE 500 are eligible for inclusion in asector index

2 Stocks must have a 90 percent trading frequency during the previous sixmonths

TABLE 85 BSE Sector-Specific Indexes

BSE Index Name Sector Focus

BSE Auto Auto industryBSE Bankex BankingBSE Capital Goods Fast-moving consumer goodsBSE Consumer Durables Consumer durablesBSE FMCG Fast-moving consumer goodsBSE Healthcare Healthcare industryBSE IT Software technologyBSE Metal MetalBSE Oil amp Gas EnergyBSE PSU Companies owned or controlled by the

central governmentBSE TECk Information technology media amp telecom

3 Sector constituents representing a minimum of 90 percent of the aggre-gate free-float market capitalization of the stocks in the particular sectorwill make up the index

4 Within the above criteria there is a plusmn2 percent buffer whereby a stockwill not necessarily be included in the index unless it falls within 88percent coverage and will not necessarily be excluded unless if fallsbelow the 92 percent coverage level The purpose of this buffer is toreduce the changes into and out of each index

Table 85 lists the 11 BSE-sponsored sector-specific indexes that havebeen developed to provide benchmarks to track the performance of specificsectors of Indiarsquos economy

BSE Bankex Index The BSE Bankex Index is an index exclusively made upof Indian bank stocks

Features

The index comprises 12 stocks The Bankex tracks the performance of the leading banking sector stocks

listed on the BSE The Bankex is based on the free-float methodology of the index con-

struction

TABLE 86 Constituents of the Bankex Index

Code Name Free-Float Adj Factor

532480 Allahabad Bank Ltd 045532418 Andhra Bank 050532134 Bank of Baroda 050532149 Bank of India 035532483 Canara Bank 030532273 Centurion Bank Ltd 070500469 Federal Bank Ltd 100500180 HDFC Bank Ltd 080532174 ICICI Bank Ltd 100532388 Indian Overseas Bank 040500247 Kotak Mahindra Bank Ltd 045500315 Oriental Bank of Commerce 050532461 Punjab National Bank 045500112 State Bank of India 045532477 Union Bank Ltd 045532215 UTI Bank Ltd 075

As of March 2007Source The Bombay Stock Exchange

The BSE has calculated the historical index values of Bankex sinceJanuary 2002

The Bankex stocks represent 90 percent of the total market capitaliza-tion of all banking sector stocks listed on the BSE

Base The Bankexrsquos base date is 1 January 2002 The Bankexrsquos base value is 1000 points

Table 86 lists the indexrsquos component stocks

BSE TECk Index The BSE TECk is made up of companies in the informationtechnology media and telecom (TMT) sectors

Features The BSE TECk Index comprises 21 stocks The BSE TECk index represents around 90 percent of the market cap-

italization of the TMT sector and includes the sector leaders as itsconstituents

TABLE 87 BSE TECk Index Constituents

Free-FloatStock AdjustmentCode Name Sector Factor

532399 Adlabs Films Ltd Media amp Publishing 03532382 Balaji Telefilms Ltd Media amp Publishing 035532454 Bharti Airtel Ltd Telecom 025532608 Deccan Chronicle Holdings

LtdMedia amp Publishing 03

526881 Financial Technologies (I) Ltd Information Technology 055500144 Finolex Cables Ltd Telecom 055532281 HCL Technologies Ltd Information Technology 035500183 Himachal Futuristic Comm Telecom 1532662 HT Media Ltd Media amp Publishing 02532466 I-Flex Solutions Ltd Information Technology 02500209 Infosys Technologies Ltd Information Technology 085532706 Inox Leisure Limited Media amp Publishing 035532705 Jagran Prakashan Ltd Media amp Publishing 02500108 Mahanagar Telephone Nigam

LtdTelecom 045

526299 Mphasis BFL Ltd Information Technology 04532529 New Delhi Television Ltd Media amp Publishing 04532529 Paramount Communications

LtdTelecom 07

532517 Patni Computer Systems Ltd Information Technology 04532689 PVR Ltd Media amp Publishing 06532712 Reliance Communications Ltd Telecom 035532663 Sasken Communication

TechnoTelecom 05

500376 Satyam Computer ServicesLtd

Information Technology 095

532374 Sterlite Optical TechnolrsquoS Ltd Telecom 065532733 Sun TV Ltd Media amp Publishing 01532540 Tata Consultancy Services Ltd Information Technology 02532371 Tata Teleservices

(Maharashtra) LtdTelecom 035

532755 Tech Mahindra Ltd Information Technology 015500483 Videsh Sanchar Nigam Ltd Telecom 025507685 Wipro Ltd Information Technology 02505537 Zee Telefilms Ltd Media amp Publishing 06

As of March 2007Source Copyright ccopy 2000 The Bombay Stock Exchange

rsquolT

htc copy

Approximately 68 percent of the turnover on the stock exchanges occursin TMT sector stocks

These stocks collectively account for 23 percent of the total marketcapitalization

Base The base date for the BSE TECk Index is April 2 2001 The base value for the BSE TECk Index is 1000 points

TECk stands for the following

TmdashTechnology (BSE sector information technology)

EmdashEntertainment (BSE sector media and publishing)

CmdashCommunication (BSE sector telecom)

kmdashOther knowledge-based companies

BSE PSU Index The BSE PSU Index constitutes listed companies institu-tions and corporations owned or controlled by the central government un-der Section 619-B of the Companies Act 1956 PSU stands for public-sectorundertakings

Features The index consists of all PSU stocks in the BSE 500 Index which cur-

rently includes 34 major public-sector undertakings listed on the ex-change

The index was launched in June 2001

Base The base date is February 1 1999 The base value is 1000

BSE Sectoral Indexes Tables 89 through 816 list the constituents foreach of the BSE sectoral indexes

TABLE 89 BSE Capital Goods Index

Code Name FF Factors

500002 ABB Ltd 050532683 AIA Engineering Limited 035505885 Alfa Laval (India) Ltd 040522275 Alstom Ltd 035532309 Alstom Power India Ltd 035532493 Astra Microwave Products 050503960 Bharat Bijlee Ltd 065500048 Bharat Earth Movers Ltd 040500049 Bharat Electronics Ltd 025500103 Bharat Heavy Electricals Ltd 035513375 Carborundum Universal Ltd 060500093 Crompton Greaves Ltd 060509550 Gammon India Ltd 065501455 Greaves Cotton Ltd 050513250 Jyoti Structures Ltd 075522287 Kalpataru Power Transmission 04500241 Kirloskar Brothers Ltd 040500243 Kirloskar Oil Engines Ltd 04500252 Lakshmi Machine Works Ltd 065500510 Larsen amp Toubro Limited 090522205 Praj Industries Ltd 070532693 Punj Lloyd 035523445 Reliance Industrial Infrastruc 055500550 Siemens Ltd 045500472 Skf India Ltd 050532667 Suzlon Energy Limited 035500411 Thermax Ltd 035

TABLE 810 BSE Auto Index

520077 Amtek Auto Ltd 070500877 Apollo Tyres Ltd 050500477 Ashok Leyland Ltd 050500490 Bajaj Auto Ltd 070500493 Bharat Forge Ltd 065500480 Cummins India Ltd 050500495 Escorts Ltd 070500086 Exide Industries Co Ltd 050500182 Hero Honda Motors Ltd 050500500 Hindustan Motors Ltd 075500520 Mahindra amp Mahindra Ltd 080532500 Maruti Udyog Ltd 040500530 MICO Ltd 040500290 Mrf Ltd 065500344 Punjab Tractors Ltd 080500570 Tata Motors Ltd 060504973 Tube Investments of India Ltd 060532343 TVS Motors Ltd 045

TABLE 811 BSE Consumer Durables Index

500067 Blue Star Ltd 06532715 Gitanjali Gems Ltd 03517518 Lloyd Electric amp Engineering 07531500 Rajesh Exports Ltd 04500114 Titan Industries Ltd 05511389 Videocon Industries Ltd 03

TABLE 812 BSE Healthcare Index

508869 Apollo Hospitals Enterprises Ltd 065524804 Aurobindo Pharma Ltd 045500674 Aventis Pharma Ltd 040532523 Biocon Ltd 040532321 Cadila Healthcare Ltd 030500087 Cipla Ltd 065532488 Divirsquos Laboratories Ltd 050500124 Dr Reddyrsquos Laboratories Ltd 075500660 Glaxo Ltd 050532296 Glenmanrk Pharmaceuticals Ltd 050500257 Lupin Ltd 050524794 Matrix Laboratories Ltd 045500302 Nicholas Piramal India 045500672 Novartis India Ltd 050532391 Opto Circuits (India) Ltd 065524372 Orchid Chemicals Pharmaceuticals 060531349 Pacacea Biotec Ltd 035500680 Pfizer Ltd 060500359 Ranbaxy Laboratories Ltd 070512299 Sterling Biotech Ltd 070524715 Sun Pharmaceutical Inds Ltd 030532300 Wockhardt Ltd 030500095 Wyeth Ltd 045

TABLE 813 BSE IT Index

526881 Financial Technologies (I) Ltd 055532281 HCL Technologies Ltd 055532466 I-Flex Solutions Ltd 045500209 Infosys Technologies Ltd 08526299 Mphasis BFL Ltd 04532517 Patni Computer Systems Ltd 04500376 Satyam Computer Services Ltd 095532540 Tata Consultancy Services Ltd 02532755 Tech Mahindra Ltd 15507685 Wipro Ltd 02

TABLE 814 BSE Metal Index

500440 Hindalco Industries Ltd 075500188 Hindustan Zinc Ltd 010500378 Jindal Saw Ltd 050532508 Jindal Stainless Ltd 060532286 Jindal Steel amp Powers Ltd 050500228 JSW Steel Ltd 050500265 Maharashtra Seamless Ltd 045532234 National Aluminium Co Ltd 015500295 Sesa Goa Ltd 050513349 Shree Precoated Steels Ltd 035500113 Steel Authority of India Ltd 015500900 Sterlite Industries Ltd 020500470 Tata Steel Ltd 075

TABLE 815 BSE Oil amp Gas Index

500547 Bharat Petroleum Corp Ltd 035500134 Essar Oil Ltd 08532155 Gail (India) Ltd 04500104 Hindustan Petroleum Corp Ltd 05530965 Indian Oil Corporation Ltd 01500312 ONGC Ltd 02532522 Petronet Lng Ltd 04500325 Reliance Industries Ltd 055532709 Reliance Natural Resources Limited 055532743 Reliance Petroleum Ltd 010

TABLE 816 BSE FMCG Index

500043 Bata India Ltd 05500825 Britannia Industries Ltd 05500830 Colgate Palmolive (India) 05500096 Dabur India Ltd 03500676 GlaxoSmithkline Consumer 06532424 Godrej Consumer Products 035500696 Hindustan Lever Ltd 05500875 ITC Ltd 07531642 Marico Limited 035532432 Mcdowell amp Co Ltd 065500790 Nestle India Ltd 04500459 Procter amp Gamble 035500800 Tata Tea Ltd 075532478 United Breweries Ltd 025

NSE-SPONSORED INDEXES

The National Stock Exchange as part of a joint venture called India In-dex Services amp Products Ltd (IISL) is the sponsor of six general marketand eight sector-specific indexes The SampP CNX Nifty is the benchmark ofthe NSE and together with the BSE Sensex a determinant for triggeringthe circuit-breakers built into the marketrsquos risk management features (dis-cussed more fully in Chapter 4) A full list of the NSE indexes is given inTable 817

This section begins with a description of the joint venture India IndexServices amp Products Ltd along with the products and services it offersEach of the specific indexes are then described below

Ind ia Index Services amp Products Ltd ( I ISL)

India Index Services amp Products Ltd (IISL) is a joint venture between theNational Stock Exchange of India Ltd (NSE) and CRISIL Ltde to providea variety of indexes and index-related services and products for the capital

eCRISIL is the official name of the company and is an acronym for Credit RatingInformation Services of India Ltd

TABLE 817 NSE-Listed Indexes

SampP CNX Nifty CNX IT CNX PharmaCNX Nifty Junior CNX Bank CNX PSECNX 100 CNX Energy CNX ServiceSampP CNX 500 CNX FMCG SampP CNX Industry IndexesCNX Midcap CNX MNC Customized indexesSampP CNX Defty

markets The IISL indexes are identified by the prefix CNX before the indexdescriptor to reflect the identities of both of the partners CNX stands forCRISIL NSE and indeX

I ISL Products and Services Data subscription IISL provides index data on a daily weekly or ad-

hoc basis as a paid service Data include index values index constituentsand historical growth trends

Customized indexes IISL develops and maintains ldquocustomized indexesfor clients to track the performance of portfolios vis-a-vis objectively de-fined benchmarks or for benchmarking the net asset value performanceto customized indexes The customized indexes can be subsets of exist-ing indexes or a completely new index such as sector indexes individualbusiness group indexes and industry indexesrdquo

Consulting IISL provides consulting services for index fundsexchange-traded funds derivatives and index options and alerts forrebalancing index funds

Market updates IISL provides specialized clients with facts figuresreports and equity market updates in regular intervals

Research IISL undertakes research activities for its clients on the equityand derivative markets

SampP CNX Nif ty

The SampP CNX Nifty is the benchmark index of the National Stock Exchangeand represents the most liquid stocks on the NSE It is further characterizedas follows

The Nifty Fifty is always made up of the 50 most liquid stocks tradedon the NSE

The index constituents account for 22 sectors of the economy

The average total traded value for the last six months of all Nifty stocksis approximately 4961 percent of the traded value of all stocks onthe NSE

Nifty stocks represented about 5766 percent of the total market capi-talization as of December 29 2006

Appendix I Table I6 contains a list of the component stocks of the SampPCNX Nifty Table I7 lists the market capitalizations weightings betas R2and volatility of the Nifty component stocks

CNX Nif ty Junior

The next level of liquid securities after the SampP CNX Nifty is the CNX NiftyJunior The SampP CNX Nifty and the CNX Nifty Junior make up the 100most liquid stocks trading on the National Stock Exchange

The CNX Nifty Junior represented about 10 percent of the total marketcapitalization as of September 29 2006

The average traded value for the six months prior to March 31 2005of all Nifty Junior stocks is approximately 988 percent of the tradedvalue of all stocks on the NSE

Appendix I Table I8 contains a list of the component stocks of the SampPCNX Nifty Junior

SampP CNX 500

The SampP CNX 500 was Indiarsquos first broad-based benchmark of the Indiancapital market for comparing portfolio returns vis-a-vis market returns

The SampP CNX 500 represents about 9266 percent of total marketcapitalization

The SampP CNX 500 represents about 8644 percent of total turnover onthe NSE

Appendix I Table I9 contains a list of the component stocks of the SampPCNX 500 organized in alphabetical order

SampP CNX 500 companies are categorized into 72 industry indexesIndustry weightings in the index reflect the industry weightings in the marketFor example if the banking sector has a 5 percent weighting in the universeof stocks traded on the NSE banking stocks in the index would also havean approximate representation of 5 percent in the index Appendix I TableI10 lists the SampP CNX 500 organized by the 72 industry groups and theirrespective component stocks

CNX Midcap

The medium-capitalized segment of the stock market is increasingly per-ceived as an attractive investment segment with high growth potential Theobjective of the CNX Midcap Index is to capture the movement of and bea benchmark for the midcap segment of the market The CNX Midcap ismade up of 100 constituent stocks

Method of Computat ion The CNX Midcap is computed using a marketcapitalizationndashweighted method wherein the level of the index reflects thetotal market value of all of the stocks in the index relative to a particular baseperiod The method also takes into account constituent changes in the indexand corporate activities such as stock splits and rights without affecting theindex value

Base Date and Value The CNX Midcap Index has a base date of January1 2003 The base value = 1000

Criter ia for the Select ion of Const i tuent Stocks1 All of the stocks that constitute more than 5 percent market capitaliza-

tion of the universe (after sorting the securities in descending order ofmarket capitalization) are excluded in order to reduce the skewness inthe weightings of the stocks in the universe

2 The weightings of the remaining stocks in the universe are determinedagain

3 The cumulative weighting is calculated4 Companies that form part of the cumulative percentage in ascending

order up to the first 75 percent (ie up to 7499 percent) of the reviseduniverse are ignored

5 Next all of the constituents of the SampP CNX Nifty are ignored6 From the universe of companies remaining (ie 75 percent and above)

the first 100 companies in terms of highest market capitalization consti-tute the CNX Midcap Index subject to meeting the additional criteriamentioned below

Trading Liquidity Requirement All of the constituents of the CNX MidcapIndex must have a minimum listing record of six months In addition allcandidates for the index are also evaluated for trading interest in terms ofvolume and trading frequency

Financial Performance All companies in the CNX Midcap Index musthave a minimum track record of three years of operations with a positivenet worth

Other Issues A company that comes out with an IPO will be eligible forinclusion in the index if it fulfills the normal eligibility criteria for the indexfor a three-month period instead of a six-month period

Appendix I Table I11 contains a list of the component stocks of theSampP CNX Midcap Index organized in alphabetical order

SampP CNX Defty

To accommodate foreign institutional investors and offshore funds thatmight like to measure the return on their India equity investments in US-dollar terms IISL created the SampP CNX Defty Index which is the dollar-denominated version of the SampP CNX Nifty

Benefits Indicates performance for foreign institutional investors and offshore

funds Provides an effective tool for hedging Indian equity exposure Provides fund managers with an instrument to measure returns on equity

investment in US-dollar terms

Calcu lat ion of the SampP CNX Defty Computations are done using the SampPCNX Nifty Index calculated on the NEAT trading system of the NSE andthe end of the previous dayrsquos exchange rate (USDRS)

SampP CNX Defty =SampP CNX Nifty at Time t lowast Exchange Rate as on Base Date

Exchange Rate at Time t

Specificat ions of the SampP CNX Defty Base date November 3 1995 Base SampP CNX Defty Index value 1000 SampP CNX Nifty value as on the base date 1000 Exchange rate as on the base date 3465 Adjustment factor as on the base date 100

NSE Sector-Specific Indexes

Several sector specific indexes have been developed to provide an appropri-ate benchmark that captures the performance of various sectors of Indiarsquoseconomy Sector-specific indexes are shown in Table 818

TABLE 818 NSE Sector-Specific Indexes

NSE Index Name Sector Focus

CNX IT Sector Information technologyCNX Bank Sector BankingCNX FMCG Sector Fast-moving consumer goodsCNX PSE Sector Public-service enterprisesCNX MNC Sector Multinational corporationsCNX Service Sector ServicesCNX Energy Index Energy stocksCNX Pharma Pharmaceutical companies

Methodology All of the indexes are calculated using a full marketcapitalizationndashweighted method

Select ion Criter ia All of the indexes use the following selection criteriafor their constituents

A companyrsquos market capitalization rank in the universe should be lessthan 500

A companyrsquos turnover rank in the universe should be less than 500

A company that issues an IPO will be eligible for inclusion in the indexif it fulfills the normal eligibility criteria for the index for a three-monthperiod instead of a six-month period

In addition the specific indexes have additional criteria related to prof-itability and net worth These index-specific criteria are noted along withthe other index specifics

CNX IT Sector Index Companies in the information technology (IT) indexhave more than 50 percent of their turnover from IT-related activities suchas software development hardware manufacture vending support andmaintenance

Features

There are 20 stocks in the index The average total traded value for CNX IT stocks is approximately 91

percent of the traded value of the IT sector CNX IT stocks represented about 96 percent of the total market capi-

talization of the IT sector as of March 31 2005

The average total traded value of all CNX IT constituents is approxi-mately 14 percent of the traded value of all of the stocks on the NSE

The CNX IT Index constituents represented about 14 percent of thetotal market capitalization as of March 31 2005

Methodology The index base period is December 1995 The base date is January 1 1996 The base value is 100 from May 28 2004

Selection Criteria Selection of the index constituents is based on the fol-lowing

A companyrsquos trading frequency should be at least 90 percent in the lastsix months

A company should have a positive net worth

Table 819 lists the component stocks of the CNX IT Sector Index

TABLE 819 CNX IT Sector Index Constituent Stocks

Company Name Symbol Company Name Symbol

CMC Ltd CMC Mastek Ltd MASTEKFinancial

Technologies(India) Ltd

FINANTECH Moser Baer IndiaLtd

MOSERBAER

GTL Ltd GLOBALTELE Mphasis BFL Ltd MPHASISBFLHCL Infosystems

LtdHCL-INSYS Patni Computer

Systems LtdPATNI

HCL TechnologiesLtd

HCLTECH Polaris Software LabLtd

POLARIS

HexawareTechnologies Ltd

HEXAWARE Rolta India Ltd ROLTA

Hinduja TMT Ltd HTMT Satyam ComputerServices Ltd

SATYAMCOMP

I-Flex Solutions Ltd I-FLEX Tata Elxsi Ltd TATAELXSIiGate Global

Solutions LtdIGS Tata Consultancy

Services LtdTCS

Infosys TechnologiesLtd

INFOSYSTCH Wipro Ltd WIPRO

As of December 2006Source The National Stock Exchange

CNX Bank Index The CNX Bank Index comprises the most liquid andhighly capitalized Indian bank stocks

Features The index includes 12 stocks from the banking sector that trade on the

NSE The average total traded value of CNX bank stocks is approximately

74 percent of the traded value of the banking sector CNX bank stocks represented about 79 percent of the total market

capitalization of the banking sector as of March 31 2005 The average total traded value of all of the CNX bank constituents is

approximately 10 percent of the traded value of all stocks on the NSE CNX Bank Index constituents represented about 9 percent of total mar-

ket capitalization as of March 31 2005

Methodology The index has a base date of January 1 2000 The base value is 1000

Selection Criteria Selection of the index set is based on the following A companyrsquos trading frequency should be at least 90 percent in the last

six months A company should have a positive net worth

Table 820 lists the component stocks of the CNX Bank Index

CNX FMCG Index The CNX FMCG Index comprises 15 stocks from theFast-Moving Consumer Goods sector that trade on the NSE

Features Fast-moving consumer goods are goods and products that arenondurable mass-consumption products available off the shelf

Methodology The base period is December 1995 The base value is 1000

Selection Criteria Selection of the index set is based on the following

A companyrsquos trading frequency should be at least 90 percent in the lastyear

A company should have a minimum track record of three years ofoperations with a positive net worth

Table 821 lists the component stocks of the CNX CMCG Index

TABLE 820 CNX Bank Index Constituent Stocks

Company Name Symbol

Bank of Baroda BANKBARODABank of India BANKINDIACanara Bank CANBKCorporation Bank CORPBANKHDFC Bank Ltd HDFCBANKICICI Bank Ltd ICICIBANKOriental Bank of Commerce ORIENTBANKPunjab National Bank Ltd PNBState Bank of India SBINSyndicate Bank SYNDIBANKUnion Bank of India UNIONBANKUTI Bank Ltd UTIBANK

TABLE 821 CNX FMCG Index Constituent Stocks

Company Name Industry Symbol

Britannia Industries Ltd Food and Food Processing BRITANNIAColgate-Palmolive (India) Ltd Personal Care COLGATEDabur India Ltd Personal Care DABURGodrej Consumer Products Ltd Personal Care GODREJCPHindustan Lever Ltd Diversified HINDLEVERGillette India Ltd Personal Care INDSHAVINGITC Ltd Cigarettes ITCMarico Industries Ltd Solvent Extraction MARICOINDMcdowell amp Company Ltd BrewDistilleries MCDOWELL-NNirma Ltd Detergents NIRMAPantaloon Retail (India) Ltd Retail PANTALOONRRadico Khaitan Ltd BrewDistilleries RADICOGlaxoSmithkline Consumer

Healthcare LtdFood and Food Processing SMITKLBECH

Tata Tea Ltd Tea and Coffee TATATEATrent Ltd Retail TRENT

CNX PSE Index The CNX PSE Index is made up of Public-ServiceEnterprises and includes only companies defined as having more than 51percent of their outstanding share capital held by the central governmentandor state government directly or indirectly

Features The CNX PSE Index comprises 20 public-service enterprisestocks

Methodology

The base period is December 1994 The base value is 1000

Table 822 lists the component stocks of the CNX PSE Index

CNX MNC Index The CNX MNC Index is made up of Multi-NationalCompanies and comprises listed companies with foreign shareholdings ofmore than 50 percent andor management control vested in the foreigncompany

Features The CNX MNC Index comprises 50 stocks

Methodology

The base value is 1000 The base period is December 1994

Table 823 lists the component stocks of the CNX MNC Index

mdashIn

smdash4

CNX Service Sector Index The CNX Service Sector Index includes compa-nies in the service sector This includes computer software banks telecom-munications services financial institutions power media and courierand shipping According to RBI data the service sector is the principaldriver of Indiarsquos economy contributing 57 percent of the growth of realGDP in 2003ndash2004 and representing almost 30 percent of GDP at factorcostf

Features The CNX Service Sector Index comprises 30 stocks

Methodology

The base period is May 1999 The base value is 1000

Table 824 lists the component stocks of the CNX Service Sector Index

CNX Energy Index The CNX Energy Index includes companies involved inthe petroleum natural gas and power sectors The index represents 8506percent of the market capitalization of the energy sector over the six monthsending October 31 2006 and 8203 percent of the aggregate turnover of thesector during the same period The average total traded value over the periodrepresented 1391 percent of the total traded value of all stocks on the NSEand approximately 1875 percent of the total NSE market capitalization onOctober 31 2006

Features The CNX Energy Sector Index comprises 10 stocks

Methodology

Market capitalization weighted index The base period is January 1 2001 The base value is 1000

fSource Reserve Bank of India Handbook of Statistics on the Indian Economy

TABLE 825 CNX Energy Sector Index Constituent Stocks

Company Name Symbol

Bharat Petroleum Corporation Ltd BPCLGAIL (India) Ltd GAILHindustan Petroleum Corporation Ltd HINDPETROIndian Oil Corporation Ltd IOCNational Thermal Power Corporation Ltd NTPCNeyveli Lignite Corporation Ltd NEYVELILIGOil amp Natural Gas Corporation Ltd ONGCReliance Energy Ltd RELReliance Industries Ltd RELIANCETata Power Co Ltd TATAPOWER

As of March 2007Source The National Stock Exchange

A companyrsquos market capitalization rank should be less than 500 A companyrsquos turnover rank rank should be less than 500 A companyrsquos trading frequency should be at least 90 percent in the last

year A company should have a minimum track record of three years with a

positive net worth An IPO may be eligible for inclusion in the index if it fulfills the normal

eligibility criteria for a three-month period

Table 825 lists the component stocks of the CNX Energy Sector Index

CNX Pharma Index The CNX Pharma Index includes companies involvedin the pharmaceutical sector healthcare services including outsourcing andbiotechnology sectors The index represents 65 percent of the market cap-italization of the pharma sector over the six months ending October 312006 and 649 percent of the aggregate turnover of the sector during thesame period The average total traded value over the period represented37 percent of the total traded value of all stocks on the NSE and approx-imately 3 percent of the total NSE market capitalization on October 312006

Features The CNX Pharma Sector Index comprises 10 stocks

Methodology

Table 826 lists the component stocks of the CNX Pharma Sector Index

CNX Industry Indexes The components of the SampP CNX 500 Equity Indexare part of 72 different industrial sectors that are separately maintained byIISL The IISL makes every effort to ensure that the industry representationof the entire universe of securities is reflected in the SampP CNX 500 Thus if a

TABLE 826 CNX Pharma Sector Index Constituent Stocks

Company Name Symbol

Biocon Ltd BIOCONCadila Healthcare Ltd CADILAHCCipla Ltd CIPLADr Reddyrsquos Laboratories Ltd DRREDDYGlaxosmithkline Pharmaceuticals Ltd GLAXOGlenmark Pharmaceuticals Ltd GLENMARKNicholas Piramal India Ltd NICOLASPIRRanbaxy Laboratories Ltd RANBAXYSun Pharmaceutical Industries Ltd SUNPHARMAWockhardt Ltd WOCKPHARMA

TABLE 827 CNX Industry Sectors

Industry Name Industry Name

1 Abrasives 37 Hotels2 Air Conditioners 38 Industrial Gas3 Aluminum 39 Leather and Leather Products4 Auto Ancillaries 40 Media amp Entertainment5 Automobilesmdash2 and 3 Wheelers 41 Metals6 Automobilesmdash4 Wheelers 42 Mining7 Banks 43 Miscellaneous8 Bearings 44 Oil ExplorationProduction9 BrewDistilleries 45 Packaging10 CablesmdashTelecom 46 Paints11 CastingsForgings 47 Paper and Paper Products12 Cement and Cement Products 48 Personal Care13 ChemicalsmdashInorganic 49 Pesticides and Agrochemicals14 ChemicalsmdashOrganic 50 Petrochemicals15 ChemicalsmdashSpecialty 51 Pharmaceuticals16 Cigarettes 52 Photographic Products17 CompressorsPumps 53 Plastic and Plastic Products18 ComputersmdashHardware 54 Power19 ComputersmdashSoftware 55 Printing and Publishing20 ConstructionmdashCivil 56 Refineries21 Consumer Durables 57 Refractories22 Cycles 58 Shipping23 Detergents 59 Solvent Extraction24 Diesel Engines 60 Steel and Steel Products25 Diversified 61 Sugar26 Dyes and Pigments 62 Tea and Coffee27 Electrical Equipment 63 TelecommunicationmdashEquipment28 Electrodes 64 TelecommunicationmdashServices29 ElectronicsmdashIndustrial 65 Textile Machinery30 Engineering 66 Textile Products31 Fasteners 67 TextilesmdashCotton32 Fertilizers 68 TextilesmdashSynthetic33 Finance 69 Trading34 FinancemdashHousing 70 Transmission Towers35 Financial Institution 71 Travel and Transport36 Food and Food Processing 72 Tyres

particular sector has a 7 percent weighting in the entire universe of securitiesthen that sector (as determined by the stocks of that particular sector that arein the SampP CNX 500) would have a similar 7 percent weighting in the SampPCNX 500 The sector index would be derived from that sectorrsquos stocks in theSampP CNX 500 When the weightings of various sectors change in the entireuniverse of securities these changes become reflected in the weightings ofthe SampP CNX 500 industry sectors Table 827 lists the 72 industry sectorscontained in the SampP CNX 500 Index

Customized Indexes The IISL develops and maintains customized indexesfor clients as well as offers consultancy services for developing indexesCustomized indexes can be used for tracking the performance of a clientrsquosstock portfolio vis-a-vis objectively defined benchmarks or for benchmarkingthe net asset value performance to customized indexes

The customized indexes can be subsets of existing indexes or a com-pletely new index Some of the indexes that can be constructed include

Sector indexes Individual business group indexes Portfolios Industry indexes

Methodology Customized indexes are computed as per the methodologyspecified by a client if they are not market capitalizationndashweighted indexes

Maintenance The IISL maintains indexes for an annual fee A study will beconducted by IISL in consultation with clients to review the specified criterianumber of constituent companies in an index and their performance basedon the selection criteria at periodic intervals

Services to Clients Reports and other information are provided accordingto clientsrsquo requirements

SUMMARY

The National Stock Exchange and the Bombay Stock Exchange have cre-ated and maintained numerous indexes that provide useful benchmarks tomonitor Indiarsquos capital markets For overall market performance the cur-rently available indexes cover the most liquid and the highest capitalizationstocks as well as the mid-cap and small cap stocks For investors seeking

to monitor the specific industries and sectors that are driving the growthof Indiarsquos economy the exchanges have provided 20 sector-specific indexesThe exchangesrsquo respective index committees regularly evaluate and updatethe constituent stocks in these indexes and create new indexes to reflect theimportance of emerging sectors of the economy Investors who seek to mon-itor Indiarsquos markets have a wonderful selection of valuable tools to keepthem informed and on top of general and specific market performance

app01 JWPR021-Kanuk June 11 2007 1637 Char Count=

APPENDIX AFacts and Figures about India

T he following facts have been sourced from the CIA World FactbookThe information in the Factbook is updated approximately every six

months and the information contained here was updated on March 152007 The Factbook is an invaluable resource of information for everycountry in the world It was created as a summary for annual classifiedNational Intelligence Survey studies The Factbook was unclassified in 1971and became available to the public in 1975 The Factbook can be viewed onthe Internet at wwwciagovciapublicationsfactbookindexhtml

TABLE A1 The CIA World Factbook India

Historical BackgroundThe Indus Valley civilization one of the oldest in the world dates back at

least 5000 years Aryan tribes from the northwest invaded about 1500BC and their merger with the earlier Dravidian inhabitants created theclassical Indian culture Arab incursions in the 8th century and Turkishinvasions in the 12th century were followed by European tradersbeginning in the late 15th century By the 19th century Britain hadassumed political control of virtually all Indian lands Indian armedforces in the British army played a vital role in both world warsNonviolent resistance to British colonialism led by Mohandas Gandhiand Jawaharlal Nehru brought independence in 1947 The subcontinentwas divided into the secular state of India and the smaller Muslim stateof Pakistan A war between India and Pakistan in 1971 resulted in EastPakistan becoming the separate nation of Bangladesh Despiteimpressive gains in economic investment and output India facespressing problems such as an ongoing dispute with Pakistan over theterritory of Kashmir massive overpopulation environmentaldegradation extensive poverty and ethnic and religious strife

TABLE A1 (Continued)

GeographyLocation Southern Asia bordering the Arabian Sea and the Bay of

Bengal between Burma and PakistanGeographic

coordinates20 00 N 77 00 E

Map references AsiaArea Total 3287590 sq km

Land 2973190 sq kmWater 314400 sq km

Areamdashcomparative Slightly more than one-third the size of the United StatesLand boundaries Total 14103 km

Border countries Bangladesh 4053 km Bhutan 605 kmBurma 1463 km China 3380 km Nepal 1690 kmPakistan 2912 km

Coastline 7000 kmMaritime claims Territorial sea 12 nm

Contiguous zone 24 nmExclusive economic zone 200 nmContinental shelf 200 nm or to the edge of the continental

marginClimate Varies from tropical monsoon in south to temperate in northTerrain Upland plain (Deccan Plateau) in the south flat to rolling

plain along the Ganges deserts in the west and theHimalayas in the north

Elevationextremes

Lowest point Indian Ocean 0 mHighest point Kanchenjunga 8598 m

Natural resources Coal (fourth-largest reserves in the world) iron oremanganese mica bauxite titanium ore chromite naturalgas diamonds petroleum limestone and arable land

Land use Arable land 4883Permanent crops 28Other 4837 (2005)

Irrigated land 558080 sq km (2003)Natural hazards Droughts flash floods as well as widespread and destructive

flooding from monsoonal rains severe thunderstorms andearthquakes

Environmentmdashcurrent issues

Deforestation soil erosion overgrazing desertification airpollution from industrial effluents and vehicle emissionswater pollution from raw sewage and runoff of agriculturalpesticides tap water is not potable throughout the countryhuge and growing population is overstraining naturalresources

(Continued)

Environmentmdashinternationalagreements

Party to Antarctic-Environmental ProtocolAntarcticndashMarine Living Resources Antarctic TreatyBiodiversity Climate Change Climate ChangendashKyotoProtocol Desertification Endangered SpeciesEnvironmental Modification Hazardous Wastes Law ofthe Sea Ozone Layer Protection Ship Pollution TropicalTimber 83 Tropical Timber 94 Wetlands andWhaling

Geography Dominates the South Asian subcontinent near the importantIndian Ocean trade routes Kanchenjunga the third tallestmountain in the world lies on the border with Nepal

PeoplePopulation 1095351995 (July 2006 estimate)Age structure 0ndash14 years 308 (male 173478760female 163852827)

15ndash64 years 643 (male 363876219female 340181764)65 years and over 49 (male 27258020female

26704405) (2006 estimate)Median age Total 249 years

Male 249 yearsFemale 249 years (2006 estimate)

Populationgrowth rate

138 (2006 estimate)

Birth rate 2201 births1000 population (2006 estimate)Death rate 818 deaths1000 population (2006 estimate)Net migration rate minus007 migrant(s)1000 population (2006 estimate)Sex ratio At birth 105 male(s)female

Under 15 years 106 male(s)female15ndash64 years 107 male(s)female65 years and over 102 male(s)femaleTotal population 106 male(s)female (2006 estimate)

Infant mortalityrate

Total 5463 deaths1000 live birthsMale 5518 deaths1000 live birthsFemale 5405 deaths1000 live births (2006 estimate)

Life expectancy atbirth

Total population 6471 yearsMale 639 yearsFemale 6557 years (2006 estimate)

Total fertility rate 273 children bornwoman (2006 estimate)HIVAIDSmdashadult

prevalence rate09 (2001 estimate)

HIVAIDSmdashpeopleliving withHIVAIDS

51 million (2001 estimate)

HIVAIDSmdashdeaths 310000 (2001 estimate)

Major infectiousdiseases

Degree of risk high

Food or waterborne diseases bacterial diarrhea hepatitis Aand E and typhoid fever

Vectorborne diseases dengue fever malaria and Japaneseencephalitis are high risks in some locations

Animal contact disease rabiesNationality Noun Indian(s)

Adjective IndianEthnic groups Indo-Aryan 72 Dravidian 25 Mongoloid and other

3 (2000)Religions Hindu 805 Muslim 134 Christian 23 Sikh

19 other 18 unspecified 01 (2001 census)Languages English enjoys associate status but it is the most dominant

language for national political and commercialcommunication Hindi is the national language andprimary tongue of 30 of the people there are 14 otherofficial languages Bengali Telugu Marathi Tamil UrduGujarati Malayalam Kannada Oriya Punjabi AssameseKashmiri Sindhi and Sanskrit Hindustani is a popularvariant of HindiUrdu spoken widely throughout northernIndia but it is not an official language

Literacy Definition age 15 and over can read and writeTotal population 595Male 702Female 483 (2003 estimate)

GovernmentCountry name Conventional long form Republic of India

Conventional short form IndiaGovernment type Federal republicCapital New DelhiAdministrative

divisions28 states and 7 union territories Andaman and Nicobar

Islands Andhra Pradesh Arunachal Pradesh AssamBihar Chandigarh Chhattisgarh Dadra and NagarHaveli Daman and Diu Delhi Goa Gujarat HaryanaHimachal Pradesh Jammu and Kashmir JharkhandKarnataka Kerala Lakshadweep Madhya PradeshMaharashtra Manipur Meghalaya Mizoram NagalandOrissa Pondicherry Punjab Rajasthan Sikkim TamilNadu Tripura Uttaranchal Uttar Pradesh West Bengal

Independence 15 August 1947 (from the United Kingdom)

(Continued)

National dayholiday

Republic Day 26 January (started in 1950)

Constitution 26 January 1950 amended many timesLegal system Based on English common law limited judicial review of

legislative acts accepts compulsory InternationalCommission of Jurists jurisdiction with reservationsseparate personal law codes apply to Muslims Christiansand Hindus

Suffrage 18 years of age universalExecutive branch Chief of state President APJ Abdul Kalam (since 26 July

2002) Vice President Bhairon Singh Shekhawat (since 19August 2002)

Head of government Prime Minister Manmohan Singh (since22 May 2004)

Cabinet Appointed by the president on the recommendationof the prime minister

Elections The president is elected by an electoral collegeconsisting of elected members of both houses of Parliamentand the legislatures of the states for a five-year term Thelast election was held in July 2002 and the next one will beheld on 18 July 2007

The vice president is elected by both houses of Parliament fora five-year term The last election was held on 12 August2002 and the next one will be held in August 2007

The prime minister is chosen by parliamentary members ofthe majority party following legislative elections The lastelection was on held in AprilndashMay 2004 and the next onewill be held in May 2009

Election results Abdul Kalam was elected president thepercentage of the electoral college vote was 896Bhairon Singh Shekhawat was elected vice president thepercentage of the parliamentary vote was 598

Legislative branch A bicameral Parliament or Sansad consists of the Council ofStates or Rajya Sabha (a body consisting of not more than250 members up to 12 of whom are appointed by thepresident and the remainder is chosen by the electedmembers of the state and territorial assemblies membersserve six-year terms) and the Peoplersquos Assembly or LokSabha (545 seats of which 543 are elected by popular voteand two are appointed by the president members servefive-year terms)

Elections The Peoplersquos Assembly elections were last held on20 Aprilndash10 May 2004 and the next one must be heldbefore May 2009

Election results The Peoplersquos Assemblymdashpercent of vote bypartymdashNA seats by partymdashINC 145 BJP 138 CPI(M)43 SP 36 RJD 24 BSP 19 DMK 16 SS 12 BJD 11 CPI10 NCP 9 JDU 8 SAD 8 PMK 6 TDP 5 TRS 5 JMM 5LJSP 4 MDMK 4 independents 5 other 30

Judicial branch The Supreme Court has one chief justice and 25 associatejustices who are appointed by the president and remain inoffice until they reach the age of 65 or are removed forldquoproved misbehaviorrdquo

Political parties India has dozens of national and regional political partiesonly parties with four or more seats in the PeoplersquosAssembly are listed Bahujan Samaj Party (BSP) BharatiyaJanata Party (BJP) Biju Janata Dal (BJD) CommunistParty of India (CPI) Communist Party of India (Marxist)[CPI (M)] Dravida Munnetra Kazagham (DMK)Eqtedar-e-Melli-Eslami (National Islamic Empowerment)Indian National Congress (INC) Janata Dal (United)(JDU) Jharkhand Mukti Morcha (JMM) Lok Jan ShaktiParty (LJSP) Marumalarchi Dravida Munnetra Kazhagam(MDMK) Nahzat-e-Faragir-e-Democracy WaTaraqi-e-Afghanistan (Afghanistanrsquos Democracy andProgress Movement) Nationalist Congress Party (NCP)Pattali Makkal Katchi (PMK) Rashtriya Janata Dal (RJD)Samajwadi Party (SP) Shiromani Akali Dal (SAD) ShivSena (SS) Telangana Rashtra Samithi (TRS) TeluguDesam Party (TDP)

Political pressuregroups andleaders

There are numerous religious or militantchauvinisticorganizations including the Vishwa Hindu ParishadBajrang Dal and Rashtriya Swayamsevak Sangh and thereare various separatist groups seeking greater communalandor regional autonomy including the All PartiesHurriyat Conference in the Kashmir Valley and theNational Socialist Council of Nagaland in theNortheast

Diplomaticrepresentationin the UnitedStates

Chief of mission Ambassador Ranendra SENChancery 2107 Massachusetts Avenue NW Washington

DC 20008 Note The Consular Wing is located at 2536Massachusetts Avenue NW Washington DC 20008

Telephone [1] (202) 939-7000Fax [1] (202) 265-4351Consulates general Chicago Houston New York and San

Francisco

(Continued)

Diplomaticrepresentationfrom theUnited States

Chief of mission Ambassador David C MulfordEmbassy Shantipath Chanakyapuri New Delhi 110021Mailing address Use the embassyrsquos street addressTelephone [91] (11) 2419-8000Fax [91] (11) 2419-0017Consulates general Chennai (Madras) Kolkata (Calcutta) and

Mumbai (Bombay)Flag description There are three equal horizontal bands of saffron (subdued

orange) (top) white and green with a blue chakra (24-spokedwheel) centered in the white band it is similar to the flag ofNiger which has a small orange disk centered in a white band

EconomyEconomymdash

OverviewIndiarsquos diverse economy encompasses traditional village farming

modern agriculture handicrafts a wide range of modernindustries and a multitude of services Services are the majorsource of economic growth accounting for half of Indiarsquosoutput with less than one-quarter of its labor force Aboutthree-fifths of the workforce is in agriculture leading theCongress-led coalition government referred to as the UnitedProgressive Alliance (UPA) to develop an economic reformprogram that includes developing basic infrastructure toimprove the lives of the rural poor and boost economicgrowth Government controls on foreign trade and investmenthave been reduced in some areas but high tariffs (averaging20 on nonagricultural items in 2004) and limits on foreigndirect investment are still in place The government in 2005liberalized investment in the civil aviation telecom andconstruction sectors Privatization of government-ownedindustries essentially came to a halt in 2005 and continues togenerate political debate continued social political andeconomic rigidities hold back needed initiatives The economyhas posted an excellent average growth rate of more than7 percent in the decade since 1994 reducing poverty by about10 percentage points India achieved 76 percent GDP growthin 2005 significantly expanding manufacturing India iscapitalizing on its large numbers of well-educated peopleskilled in the English language to become a major exporter ofsoftware services and software workers Despite stronggrowth the World Bank is worried about the combined stateand federal budget deficit running at approximately 9 percentof GDP government borrowing has kept interest rates highEconomic deregulation would help attract additional foreigncapital and lower interest rates The huge and growingpopulation is the fundamental social economic andenvironmental problem

GDP (purchasing powerparity)

$4042 trillion (2006 estimate)

GDP (official exchangerate)

$7961 billion (2006 estimate)

GDPmdashreal growth rate 85 (2005 estimate)GDPmdashper capita (PPP) $3700 (2006 estimate)GDPmdashcomposition by

sectorAgriculture 199Industry 193Services 607 (2005 estimate)

Labor force 5093 million (2006 estimate)Labor forcemdashby

occupationAgriculture 60Industry 12Services 28 (2003)

Unemployment rate 78 (2006 estimate)Population below poverty

line25 (2002 estimate)

Household income orconsumption bypercentage share

Lowest 10 35Highest 10 335 (1997)

Distribution of familyincomemdashGini index

325 (2000)

Inflation rate (consumerprices)

53 (2006 estimate)

Investment (gross fixed) 292 of GDP (2006 estimate)Budget Revenues $1094 billion

Expenditures $1438 billion including capitalexpenditures of $15 billion (2006 estimate)

Public debt 528 of GDP (federal and state debt combined)(2006 estimate)

Agriculturemdashproducts Rice wheat oilseed cotton jute tea sugarcanepotatoes cattle water buffalo sheep goatspoultry fish

Industries Textiles chemicals food processing steeltransportation equipment cement miningpetroleum machinery software

Industrial productiongrowth rate

75 (2006 estimate)

Electricitymdashproduction 6306 billion kWh (2004)Electricitymdashproduction by

sourceFossil fuel 818Hydro 145Nuclear 34Other 03 (2001)

Electricity consumption 5879 billion kWh (2004)

(Continued)

Electricity exported 60 million kWh (2004)Electricity imported 15 billion kWh (2004)Oil production 785000 bblday (2005 estimate)Oil consumption 245 million bblday (2004 estimate)Oil exports 350000 bblday NA (2005 estimate)Oil imports 209 million bblday NA (2005 estimate)Proven oil reserves 56 billion bbl (2006 estimate)Natural gasmdashproduction 282 billion cu m (2004 estimate)Natural gasmdashconsumption 3083 billion cu m (2004 estimate)Natural gas exports 0 cu m (2001 estimate)Natural gas imports 263 billion cu m (2004 estimate)Natural gasmdashproved

reserves8535 billion cu m (2005)

Current account balance $264 billion deficit (2006 estimate)Exports US$112 billion fob (2006 estimate)Exportsmdashcommodities Textile goods gems and jewelry engineering goods

chemicals leatherExportsmdashpartners United States 167 UAE 85 China 66

Singapore 53 UK 49 Hong Kong 44(2005)

Imports $1879 billion fob (2006 estimate)Importsmdashcommodities Crude oil machinery gems fertilizer chemicalsImportsmdashpartners China 73 United States 56 Switzerland 47

(2005)Reserves of foreign

exchange and gold$165 billion (2006 estimate)

Debtmdashexternal $1321 billion (2006 estimate)Economic aidmdashrecipient US$29 billion (FY9899)Currency Indian rupeeCurrency code INRExchange rates Indian rupees per US dollar 453 (2006) 44101

(2005) 45317 (2004) 46583 (2003) 4861(2002) 47186 (2001)

Fiscal year 1 April to 31 MarchCommunicationsTelephonesmdashmain lines in

use4975 million (2005)

Telephonesmdashmobilecellular

69193321 (2006)

Telephone system General assessment Recent deregulation andliberalization of telecommunications laws andpolicies have prompted rapid change local andlong distance service provided throughout allregions of the country with services primarilyconcentrated in the urban areas steady

improvement is taking place with the recent admission ofprivate and private-public investors but telephone densityremains low at about 7 for each 100 persons nationwideand only 1 per 100 persons in rural areas and a nationalwaiting list of over 17 million fastest growth is in cellularservice with modest growth in fixed lines

Domestic Expansion of domestic service although still weakin rural areas resulted from increased competition anddramatic reductions in price led in large part by wirelessservice mobile cellular service (both CDMA and GSM)was introduced in 1994 and organized nationwide intofour metropolitan cities and 19 telecom circles each withabout three private service providers and one state-ownedservice provider in recent years significant trunk capacityhas been added in the form of fiber-optic cable and one ofthe worldrsquos largest domestic satellite systems the IndianNational Satellite system (INSAT) with five satellitessupporting 33000 very small aperture terminals (VSAT)

International Country codemdash91 satellite earth stationsmdash8Intelsat (Indian Ocean) and 1 Inmarsat (Indian Oceanregion) 9 gateway exchanges operating from Mumbai(Bombay) New Delhi Kolkata (Calcutta) Chennai(Madras) Jalandhar Kanpur Gandhinagar Hyderabadand Ernakulam 5 submarine cables includingSea-Me-We-3 with landing sites at Cochin and Mumbai(Bombay) Fiber-Optic Link Around the Globe (FLAG)with landing site at Mumbai (Bombay) South AfricandashFarEast (SAFE) with landing site at Cochin i2icn linking toSingapore with landing sites at Mumbai (Bombay) andChennai (Madras) and Tata Indicom linking Singaporeand Chennai (Madras) provide a significant increase in thebandwidth available for both voice and data traffic(2004)

Radio broadcaststations

AM 153 FM 91 shortwave 68 (1998)

Radios 116 million (1997)Television

broadcaststations

562 (of which 82 stations have 1 kW or greater power and480 stations have less than 1 kW of power) (1997)

Internet countrycode

Internet hosts 1543289 (2006)Internet users 60 million (2005)

(Continued)

TransportationAirports 341 (2006)Airportsmdashwith

paved runwaysTotal 243over 3047 m 172438 to 3047 m 511524 to 2437 m 73914 to 1523 m 81

Airportsmdashwithunpaved runways

Total 982438 to 3047 m 11524 to 2437 m 7914 to 1523 m 42under 914 m 48 (2006)

Heliports 28 (2006)Pipelines condensategas 8 km gas 5184 km liquid petroleum gas

1993 km oil 6500 km refined products 6152 km (2006)Railways Total 63230 km

Broad gauge 45718 km 1676 m gauge (16528 kmelectrified)

Narrow gauge 14406 km 1000 m gauge (165 kmelectrified) 3106 km 0762 m gauge and 0610 m gauge(2005)

Roadways Total 3383344 kmPaved 1603705 kmUnpaved 1779639 km (2002)

Waterways 14500 kmNote 5200 km on major rivers and 485 km on canals

suitable for mechanized vessels (2005)Merchant marine Total 316 ships (1000 GRT or over) 7772313

GRT13310858 DWTBy type bulk carrier 96 cargo 72 chemical tanker 13

container 8 liquefied gas 17 passenger 3 passengercargo10 petroleum tanker 96 roll onroll off 1

Foreign-owned 10 (China 2 Hong Kong 1 UAE 6 UK 1)Registered in other countries 46 (Bahamas 1 Comoros 1

Cyprus 5 North Korea 1 Liberia 3 Malta 1 Mauritius 2Panama 19 Saint Vincent and the Grenadines 6Singapore 5 Venezuela 1 unknown 1) (2006)

Ports and terminals Chennai Haldia Jawaharal Nehru Kandla Kolkata(Calcutta) Mumbai (Bombay) New MangaloreVishakhapatnam

MilitaryMilitary branches Army Navy (includes naval air arm) Air Force Coast

Guard various security or paramilitary forces (includesBorder Security Force Assam Rifles National SecurityGuards Indo-Tibetan Border Police Special FrontierForce Central Reserve Police Force Central IndustrialSecurity Force Railway Protection Force and DefenseSecurity Corps)

Military service ageand obligation

16 years of age for voluntary military service (2001)

Manpower availablefor military service

Males age 16ndash49 287551111Females age 16ndash49 268524835 (2005 estimate)

Manpower fit formilitary service

Manpower reachingmilitary service ageannually

Militaryexpendituresmdashpercent of GDP

27 (2006 estimate)

Transnational IssuesDisputesmdash

internationalSince China and India launched a security and foreign policy

dialogue in 2005 consolidated discussions continue thatare related to the dispute over most of their ruggedmilitarized boundary regional nuclear proliferation andIndian claims that China transferred missiles to PakistanVarious talks and confidence-building measures havecautiously begun to defuse tensions over Kashmirparticularly since the October 2005 earthquake in theregion Kashmir nevertheless remains the site of theworldrsquos largest and most militarized territorial disputewith portions under the de facto administration of China(Aksai Chin) India (Jammu and Kashmir) and Pakistan(Azad Kashmir and Northern Areas) In 2004 India andPakistan instituted a cease-fire in Kashmir and in 2005they restored bus service across the highly militarized Lineof Control Pakistan has taken its dispute on the impactand benefits of Indiarsquos building the Baglihar Dam on the

(Continued)

Chenab River in Jammu and Kashmir to the WorldBank for arbitration A UN Military Observer Groupin India and Pakistan (UNMOGIP) has maintained asmall group of peacekeepers since 1949 India does notrecognize Pakistanrsquos ceding historic Kashmir lands toChina in 1964 Disputes persist with Pakistan overIndus River water sharing To defuse tensions andprepare for discussions on a maritime boundary in2004 India and Pakistan resurveyed a portion of thedisputed boundary in the Sir Creek estuary at themouth of the Rann of Kutch Pakistani maps continueto show its Junagadh claim in Indian Gujarat StateDiscussions with Bangladesh remain stalled to delimit asmall section of river boundary to exchange 162minuscule enclaves in both countries to allocatedivided villages and to stop illegal cross-border trademigration violence and transit of terrorists throughthe porous border Bangladesh protests Indiarsquosattempts to fence off high-traffic sections of the borderA dispute with Bangladesh over New MooreSouthTalpattyPurbasha Island in the Bay of Bengal detersmaritime boundary delimitation India seekscooperation from Bhutan and Burma to keep IndianNagaland and Assam separatists from hiding in remoteareas along the borders A Joint Border Committeewith Nepal continues to demarcate minor disputedboundary sections India maintains a strict borderregime to keep out Maoist insurgents and controlillegal cross-border activities from Nepal

Refugees and internallydisplaced persons

Refugees (country of origin) 92394 (TibetChina)57274 (Sri Lanka) 9761 (Afghanistan)

Internally displaced persons 600000 (resulting from the26 December 2004 tsunami) 500000 (Jammu andKashmir conflicts most internally displaced persons areKashmiri Hindus) (2005)

Illicit drugs India is the worldrsquos largest producer of licit opium for thepharmaceutical trade but an undetermined quantity ofopium is diverted to illicit international drug marketsIt serves as a transit point for illicit narcotics producedin neighboring countries it is an illicit producer ofmethaqualone and it is vulnerable to narcotics moneylaundering through the hawala system

CultureArchitecture The early Indian civilization of the Indus valley produced the great

cities of Harappa and Mohenjo Daro (now part of Pakistan) builtfrom mud brick Mohenjo Daro is famous for its giant granariesdrainage systems and the Great Bath which measured about 12meters by seven meters

The lavishly decorated Hindu temples such as those at Hoysala inKarnataka are representative of one of the most famous styles ofIndian architecture Islam though opposed to the representativesculpture of Hindu art brought its own architectural style typifiedby mosques minarets and geometric decoration

The Moghuls built many beautiful palaces and gardens The MoghulEmperor Shah Jahan built the Taj Mahal and Indiarsquos largestmosque as well as many other buildings

European-style architecture is a reminder of the days of the BritishRaj One of the most famous examples of modern architecture isthe town of Chandigarh built in the 1950s from plans made by LeCorbusier the French architect Lutyens was responsible for theplanning of New Delhi

Food Religion has had a major impact on regional food Many Hindus arestrict vegetarians although some eat fish and chicken The cow issacred to Hindus around the world and Muslims do not eat anypig products

As in regional cooking around the world recipes depend on what isgrown caught or otherwise available locally Rice millet andbread (nan and chapattis) are staple foods Food is flavored withspices such as chilli coriander ginger and tumeric Milk-baseddesserts and gulab jamuns are popular

Tea which is also one of the countryrsquos major exports is universallyavailable in some areas tea is flavored with spices

Source CIA World Factbook 2006Indicates a territory

FUN FACTS ABOUT INDIA

The following information was obtained with generous permissionfrom wwwindianchildcom

National animal Tiger Panthera tigris National bird Peacock National flower Lotus National tree Banyan National fruit Mango The official Sanskrit name for India is Bharat The name India is derived from the River Indus the valleys around

which were the home of the early settlers The Aryan worshippers re-ferred to the River Indus as the Sindhu The Persian invaders convertedthe Sindhu into Hindu The name Hindustan combines Sindhu andHindu and thus refers to the land of the Hindus

Chess was invented in India The place value system and the decimal system were developed in 100

BC in India India is the largest democracy in the world the sixth largest country

in the world and one of the most ancient living civilizations (at least10000 years old)

India has the most post offices in the world There were 155516 as ofMarch 2005 compared to approximately 27000 in the United Statesa

The worldrsquos first university was established in Takshila in 700 BCMore than 10500 students from all over the world studied more than60 subjects when it flourished during the first to the fifth centuries AD

Ayurveda is the earliest school of medicine known to mankind Thefather of medicine Charaka consolidated Ayurveda 2500 years ago

Although modern images and descriptions of India often show povertyIndia was one of the richest countries until the time of British rule inthe early 17th century Christopher Columbus was attracted by Indiarsquoswealth and was looking for a route to India when he discovered Americaby mistake

The art of navigation and navigating was born on the River Sindh morethan 6000 years ago The word navigation is derived from the Sanskritword navgatih The word navy is also derived from the Sanskrit wordNou

Bhaskaracharya the great Indian mathematician who represented thepeak of mathematical and astronomical knowledge in the 12th centurycorrectly calculated the time taken by the earth to orbit the sun hun-dreds of years before anyone else His calculation for the time taken byearth to orbit the sun 365258756484 days The modern accepted mea-surement is 3652596 days a difference of just one minute The value of

aFrom the Web sites of the India Post and United States Postal Service respectively

pi was first calculated by the Indian mathematician Budhayana and heexplained the concept of what is known as the Pythagorean TheoremHe discovered this in the 6th century which was long before Europeanmathematicians

Algebra trigonometry and calculus also originated from IndiaQuadratic equations were used by Sridharacharya in the 11th centuryThe largest numbers the Greeks and the Romans used were 106 whereasHindus used numbers as big as 1053 (ie 10 to the power of 53) withspecific names as early as 5000 BC during the Vedic period Eventoday the largest used number is Tera 1012 (10 to the power of 12)

Until 1896 India was the worldrsquos only source for diamonds (Gemolog-ical Institute of America)

APPENDIX BIndiarsquos Unique Numbering System

The most common units used in Indiarsquos numbering and currency system arethe rupee lakh and crore Very importantly most financial data issued inIndia uses this system These units of currency are defined as

PaisamdashOne-hundredth subdivision of a rupee RupeemdashThe base unit of the currency LakhmdashA unit equal to 100000 rupees CroremdashA unit equal to 10000000 rupees

India has an ancient numbering system using a unique grouping of twodecimal places rather than the three decimal places more commonplacein the West This system of measurement uses separators in numbers in adifferent place than what is common outside India For example 30 million(three crore) would be written as 30000000

Crore and lakh are the most widely used higher denominationsbut there are even higher denominations as shown in Table B1 Araband kharab two of the higher denominations are sometimes used inHindi General usage of higher denominations is recursive such as2 lakh crores 2 times [100000] times [10000000] or 2 followed by 12 zeros(2000000000000 or 2 trillion in US terms)

diarsquo

lowast Rup

TABLE B2 Simple Rupee Conversion Tables

Rs Crore Rupees US$ Rs Lakh Rupees US$

1 10000000 $ 222222 1 100000 $ 22222 20000000 $ 444444 2 200000 $ 44443 30000000 $ 666667 3 300000 $ 66674 40000000 $ 888889 4 400000 $ 88895 50000000 $ 1111111 5 500000 $ 111116 60000000 $ 1333333 6 600000 $ 133337 70000000 $ 1555556 7 700000 $ 155568 80000000 $ 1777778 8 800000 $ 177789 90000000 $ 2000000 9 900000 $ 20000

10 100000000 $ 2222222 10 1000000 $ 22222100 1000000000 $ 22222222 100 10000000 $ 222222

1000 10000000000 $222222222 1000 100000000 $2222222

RupeeUS$ Exchange Rate = 45

APPENDIX CThe Indian Time Zone

T he entire country of India operates within one time zone that is 4 12hours ahead of Greenwich Mean Time (GMT+4 12) India does not

change its clocks during the year for Daylight Savings as do Europe andthe United States Table C1 presents several time charts to assist the readerin understanding Indian market trading hours in relationship to New Yorktime (both ESTa and DSTb are presented) Londonrsquos Greenwich Mean Time(GMTc) and Hong KongSingapore time

aEST = Eastern Standard Time This is the time zone in effect on the Eastern part ofthe United States during the winter hours Daylight Savings Time (DST) so-calledldquosummer hoursrdquo begins for most of the United States at 200 AM on the firstSunday of April Time reverts to standard time at 200 AM on the last Sundayof October In an effort to save energy the United States has decided to extendDST beginning in 2007 The 2007 start date will be the second Sunday in March(currently first Sunday in April) to the first Sunday in November (currently lastSunday in October) at which point EST will then come into effectbDST = Daylight Savings TimecIn the European Union Summer Time begins and ends at 100 AM Universal Time(Greenwich Mean Time) It begins the last Sunday in March and ends the last Sundayin October In the EU all time zones change at the same moment

TABLE C1 Comparative Indian Time Zones versus Global Money Center TimeZones

HongNY NY London Kong

India EST India DST India GMT India Singapore

Midnight 1330 Midnight 1430 Midnight 1930 Midnight 230100 1430 100 1530 100 2030 100 330200 1530 200 1630 200 2130 200 430300 1630 300 1730 300 2230 300 530400 1730 400 1830 400 2330 400 630500 1830 500 1930 500 030 500 730600 1930 600 2030 600 130 600 830700 2030 700 2130 700 230 700 930

800 2130 800 2230 800 330 800 1030 TypicalIndian900 2230 900 2330 900 430 900 1130WorkDayBSE amp 955 2225 955 2325 955 455 955 1155

NSE 1000 2330 1000 030 1000 530 1000 1230Exchange 1100 030 1100 130 1100 630 1100 1330Open Noon 130 Noon 230 Noon 730 Noon 1430Hours 1300 230 1300 330 1300 830 1300 1530

1400 330 1400 430 1400 930 1400 16301500 430 1500 530 1500 1030 1500 17301530 500 1530 600 1530 1100 1530 1800

1600 530 1600 630 1600 1130 1600 18301700 630 1700 730 1700 1230 1700 19301800 730 1800 830 1800 1330 1800 20301900 830 1900 930 1900 1430 1900 2130

2000 930 2000 1030 2000 1530 2000 22302100 1030 2100 1130 2100 1630 2100 23302200 1130 2200 1230 2200 1730 2200 0302300 1230 2300 1330 2300 1830 2300 130000 1330 000 1430 000 1930 000 230100 1430 100 1530 100 2030 100 330200 1530 200 1630 200 2130 200 430300 1630 300 1730 300 2230 300 530400 1730 400 1830 400 2330 400 630500 1830 500 1930 500 030 500 730600 1930 600 2030 600 130 600 830700 2030 700 2130 700 230 700 930800 2130 800 2230 800 330 800 1030900 2230 900 2330 900 430 900 11301000 2330 1000 030 1000 530 1000 12301100 030 1100 130 1100 630 1100 13301200 130 1200 230 1200 730 1200 1430

APPENDIX DBSE and NSE DerivativesUnderlying Stock Details

TABLE D1 Product Details for BSE Single Stock Monthly Options and Futures

Security Futures Options ContractUnderlying Symbol Code Code Multiplier

Associated Cement CompaniesLtd

ACC ACCFUT ACCOPT 375

Allahabad Bank ALBK ALBKFUT ALLOPT 2450Alok Industries Ltd ALOK ALOKFUT ALOKOPT 3350Arvind Mills Ltd ARVML ARVFUT ARVOPT 4300Ashok Leyland Ltd ASHOK ASHFUT ASHOPT 4775Areva T amp D India Ltd ATD ATDFUT ATDOPT 250Bajaj Auto Ltd BAJAUTO BAJFUT BAJOPT 100Bharat Heavy Electricals Ltd BHEL BHEFUT BHEOPT 150Bank of Baroda BOB BOBFUT BOBOPT 1400Bank of India BOI BOIFUT BOIOPT 1900Bharat Petroleum Corporation

LtdBPCL BPCFUT BPCOPT 1100

Bharti Tele-Ventures Ltd BTELE BTLFUT BTLOPT 500Cairn India Ltd CAIRN CNLFUT CNLOPT 2500Canara Bank CANBNK CNBFUT CNBOPT 1600Century Textiles amp Industries

LtdCEN CENFUT CENOPT 425

Cipla Ltd CIPLA CIPFUT CIPOPT 1250Castrol India Ltd CRL CRLFUT CRLOPT 950Dr Reddys Laboratories Ltd DRREDDY DRRFUT DRROPT 400

(Continued)

TABLE D1 (Continued)

Gujarat Ambuja Cement Ltd GACL GACFUT GACOPT 2062Gail India Ltd GAIL GAILFUT GAILOPT 750Great Eastern Shipping

Company LtdGESHIP GESFUT GESOPT 1200

GMR Infrastructure GMR GMRFUT GMROPT 1000Gujarat Narmada Valley

Fertilizers Company LtdGNFC GNFCFUT GNFCOPT 2950

Grasim Industries Ltd GRASIM GRSFUT GRSOPT 88HCL Technologies Ltd HCLTECH HCLTFUT HCLTOPT 325HDFC Bank Ltd HDBK HDBKFUT HDBKOPT 200Housing Development Finance

Corporation LtdHDFCLTD HDFFUT HDFOPT 150

Hero Honda Motors Ltd HEROHON HEROFUT HEROOPT 400Hindustan Lever Ltd HLEVER HLLFUT HLLOPT 1000Hindalco Industries Ltd HNDALCO HNDFUT HNDOPT 1595Hindustan Petroleum

Corporation LtdHPCL HPCFUT HPCOPT 1300

Hindustan Zinc Ltd HZN HZNFUT HZNOPT 500ICICI Bank Ltd ICICIBA ICICFUT ICICOPT 350Industrial Development Bank of

India LtdIDBI IDBIFUT IDBIOPT 2400

Idea Cellular Ltd IDEA IDEAFUT IDEAOPT 2700Infrastructure Development

Finance Company LtdIDFC IDFCFUT IDFCOPT 2950

i-Flex Solutions Ltd IFLEXSL IFLXFUT IFLXOPT 150IndusInd Bank Ltd INBK INBKFUT INBKOPT 3850India Cements Ltd INCEM INCMFUT INCMOPT 1450Indian Bank INDNBK INDBFUT INDBOPT 2200Infosys Technologies Ltd INFOSYS INFFUT INFOPT 100Indian Oil Corporation Ltd IOCL IOCLFUT IOCLOPT 600Indian Petrochemicals

Corporation LtdIPCL IPCLFUT IPCLOPT 1100

ITC Ltd ITC ITCFUT ITCOPT 2250Jet Airways Ltd JET JETFUT JETOPT 400Jaiprakash Hydro Power Ltd JHPL JHPFUT JHPOPT 6250Jindal Steel amp Power Ltd JINST JNSTFUT JNSTOPT 125Kalyani Steel Ltd KLS KLSFUT KLSOPT 500Lanco Infratech Ltd LNC LNCFUT LNCOPT 850LNT LNT LNTFUT LNTOPT 200

Mahindra amp Mahindra Ltd MAHMAH MNMFUT MNMOPT 312Maruti Udyog Ltd MARUTI MULFUT MULOPT 400Mahanagar Telephone Nigam

LtdMTNL MTNFUT MTNOPT 1600

National Aluminium CompanyLtd

NALCO NALCFUT NALCOPT 1150

National Thermal PowerCorporation Ltd

NTPC NTPCFUT NTPCOPT 1625

Oriental Bank of Commerce OBC OBCFUT OBCOPT 1200Oil and Natural Gas

Corporation LtdONGC ONGCFUT ONGCOPT 225

Orchid Chemicals ampPharmaceuticals Ltd

ORC ORCHFUT ORCHOPT 1050

Power Finance Corporation Ltd PFC PFCFUT PFCOPT 2400Punjab National Bank PNBNK PNBFUT PNBOPT 600Punj Lloyd Ltd PNJ PNJFUT PNJOPT 300Polaris Software Ltd POLARIS POLAFUT POLAOPT 1400Parsvnath Developers Ltd PSN PSNFUT PSNOPT 700Ranbaxy Laboratories Ltd RANBAXY RBXFUT RBXOPT 800Reliance Capital Ltd RCAP RCAPFUT RCAPOPT 550Reliance Comm Ltd RCOM RCOMFUT RCOMOPT 700Reliance Energy Ltd RELENRG RENFUT RENOPT 550Reliance Petroleum Ltd RELPETR RPLFUT RPLOPT 3350Reliance Industries Ltd RIL RILFUT RILOPT 150SAIL SAIL SAILFUT SAILOPT 2700Satyam Computer Serivices Ltd SATYAM SATFUT SATOPT 600State Bank of India SBI SBIFUT SBIOPT 250Sobha Developers Ltd SDL SDLFUT SDLOPT 350Siemens Ltd SIEMN SIEMFUT SIEMOPT 188Sun TV Ltd SUNTV SNTVFUT SNTVOPT 125Spicejet Ltd SPJ SPJFUT SPJOPT 4000Sterlite Industries (India) Ltd STER STERFUT STEROPT 438Suzlon Energy Ltd SUZ SUZFUT SUZOPT 200Tata Chemicals Ltd TCHEM TCHMFUT TCHMOPT 1350Tata Power Company Ltd TATAPWR TPWFUT TPWOPT 400Tata Tea Ltd TATEA TTEFUT TTEOPT 550Tata Consultancy Services Ltd TCS TCSFUT TCSOPT 250Tata Iron amp Steel Company Ltd TISCO TISFUT TISOPT 675

(Continued)

Tata Motors Ltd TELCO TELFUT TELOPT 412Union Bank of India UBI UBIFUT UBIOPT 2100UTI Bank Ltd UTIBK UTIBFUT UTIBOPT 450Videsh Sanchar Nigam Ltd VSNL VSNLFUT VSNLOPT 525Wipro Ltd WIPRO WIPRFUT WIPROPT 600Zee Telefilms Ltd ZEE ZEEFUT ZEEOPT 700

TABLE D2 Individual Securities with Approved Futures and Options CurrentlyTraded on the NSE

Underlying Underlying Security Symbol

ABB Ltd ABBAban Offshore Ltd ABANAssociated Cement Co Ltd ACCAllahabad Bank ALBKAlok Industries Ltd ALOKTEXTAmtek Auto Ltd AMTEKAUTOAndhra Bank ANDHRABANKArvind Mills Ltd ARVINDMILLAshok Leyland Ltd ASHOKLEYAurobindo Pharma Ltd AUROPHARMABajaj Auto Ltd BAJAJAUTOBajaj Hindustan Ltd BAJAJHINDBalrampur Chini Mills Ltd BALRAMCHINBank of Baroda BANKBARODABank of India BANKINDIABata India Ltd BATAINDIABharat Electronics Ltd BELBharat Earth Movers Ltd BEMLBharat Forge Co Ltd BHARATFORGBharti Airtel Ltd BHARTIARTLBharat Heavy Electricals Ltd BHELBallarpur Industries Ltd BILT

Bombay Dyeing amp Mfg Co Ltd BOMDYEINGBongaigaon Refinery Ltd BONGAIREFNBharat Petroleum Corporation Ltd BPCLCanara Bank CANBKCairn India Ltd CAIRNCentury Textiles Ltd CENTURYTEXCESC Ltd CESCChambal Fertilizers Ltd CHAMBLFERTChennai Petroleum Corporation Ltd CHENNPETROCipla Ltd CIPLAColgate Palmolive (I) Ltd COLGATECorporation Bank CORPBANKCrompton Greaves Ltd CROMPGREAVCummins India Ltd CUMMINSINDDabur India Ltd DABURDivirsquos Laboratories Ltd DIVISLABDr Reddyrsquos Laboratories Ltd DRREDDYEscorts India Ltd ESCORTSEssar Oil Ltd ESSAROILFederal Bank Ltd FEDERALBNKGAIL (India) Ltd GAILGateway Distriparks Ltd GDLThe Great Eastern Shipping Co Ltd GESHIPGlaxosmithkline Pharma Ltd GLAXOGMR Infrastructure Ltd GMRINFRAGujarat Narmada Fertilizer Co Ltd GNFCGrasim Industries Ltd GRASIMGTL Ltd GTLGujarat Alkalies amp Chem GUJALKALIGujarat Ambuja Cement Ltd GUJAMBCEMHindustan Construction Co HCCHCL Technologies Ltd HCLTECHHousing Development Finance Corporation Ltd HDFCHDFC Bank Ltd HDFCBANKHero Honda Motors Ltd HEROHONDAHindalco Industries Ltd HINDALC0Hindustan Lever Ltd HINDLEVERHindustan Petroleum Corporation Ltd HINDPETROHinduja TMT Ltd HTMT

(Continued)

I-FLEX Solutions Ltd I-FLEXICICI Bank Ltd ICICIBANKIndustrial development bank of India Ltd IDBIIdea Cellular Ltd IDEAInfrastructure Development Finance Company Ltd IDFCIFCI Ltd IFCIIndian Hotels Co Ltd INDHOTELIndia Cements Ltd INDIACEMIndian Bank INDIANBIndusind Bank Ltd INDUSINDBKInfosys Technologies Ltd INFOSYSTCHIndian Petrochemicals Corpn Ltd IPCLIndian Overseas Bank IOBIndian Oil Corporation Ltd IOCITC Ltd ITCIVRCL Infrastructure amp Projects Ltd IVRCLINFRAJ amp K Bank Ltd JampKBANKJet Airways (India) Ltd JETAIRWAYSJindal Steel amp Power Ltd JINDALSTELJaiprakash Associates Ltd JPASSOCIATJaiprakash Hydro-Power Ltd JPHYDROJindal Stainless Ltd JSTAINLESSJSW Steel Ltd JSWSTEELKotak Mahindra Bank Ltd KOTAKBANKThe Karnataka Bank Ltd KTKBANKLIC Housing Finance Ltd LICHSGFINLanco Infratech Ltd LITLLarsen amp Toubro Ltd LTLupin Ltd LUPINMahindra amp Mahindra Ltd MampMMaharashtra Seamless Ltd MAHSEAMLESMaruti Udyog Ltd MARUTIMatrix Laboratories Ltd MATRIXLABSUnited Spirits Ltd MCDOWELL-NMphasis BFL Ltd MPHASISMangalore Refinery and Petrochemicals Ltd MRPLMahanagar Telephone Nigam Ltd MTNLNagarjuna Constrn Co Ltd NAGARCONSTNagarjuna Fertiliser amp Chemicals Ltd NAGARFERTNational Aluminium Co Ltd NATIONALUMNDTV Ltd NDTV

Neyveli Lignite Corporation Ltd NEYVELILIGNicolas Piramal India Ltd NICOLASPIRNational Thermal Power Corporation Ltd NTPCOil amp Natural Gas Corp Ltd ONGCOrchid Chemicals Ltd ORCHIDCHEMOriental Bank of Commerce ORIENTBANKParsvnath Developers Ltd PARSVNATHPatni Computer Syst Ltd PATNIPower Finance Corporation Ltd PFCPunjab National Bank PNBPolaris Software Lab Ltd POLARISPraj Industries Ltd PRAJINDPunj Lloyd Ltd PUNJLLOYDRanbaxy Laboratories Ltd RANBAXYReliance Communications Ltd RCOMReliance Energy Ltd RELReliance Capital Ltd RELCAPITALReliance Industries Ltd RELIANCEShree Renuka Sugars Ltd RENUKAReliance Petroleum Ltd RPLSteel Authority of India Ltd SAILSatyam Computer Services Ltd SATYAMCOMPState Bank of India SBINShipping Corporation of India Ltd SCISesa Goa Ltd SESAGOASiemens Ltd SIEMENSSobha Developers Ltd SOBHASRF Ltd SRFStrides Arcolab Ltd STARSterlite Industries (I) Ltd STERSun Pharmaceuticals India Ltd SUNPHARMASun TV Ltd SUNTVSuzlon Energy Ltd SUZLONSyndicate Bank SYNDIBANKTata Chemicals Ltd TATACHEMTata Consultancy Services TCSTata Motors Ltd TATAMOTORSTata Power Co Ltd TATAPOWERTata Steel Ltd TATASTEELTata Tea Ltd TATATEA

(Continued)

Titan Industries Ltd TITANTriveni Engg amp Inds Ltd TRIVENITata Teleserv(Maharastra) TTMLTVS Motor Company Ltd TVSMOTORUltratech Cement Ltd ULTRACEMCOUnion Bank of India UNIONBANKUTI Bank Ltd UTIBANKVijaya Bank VIJAYABANKVoltas Ltd VOLTASVidesh Sanchar Nigam Ltd VSNLWipro Ltd WIPROWockhardt Ltd WOCKPHARMAZee Entertainment Enterprises Ltd ZEEL

As of March 2007Source The National Stock Exchange Ltd

APPENDIX EEconomic Statistics

T he two primary sources of information and statistics for Indiarsquos economyare the Reserve Bank of India (RBI) and the Economic Division of the

Department of Economic Affairs Ministry of Finance Both institutionsissue numerous statistics covering many aspects of the Indian economyThis information is posted on their Web sites daily weekly or monthly asnoted below

The key Web sites to view the government-provided information are

wwwrbiorgin The Web site of the Reserve Bank of India (RBI)Information is readily available in the ldquoDatabaserdquo and ldquoPress Releaserdquosections of this Web site

httpfinminnicin The Web site of the Department of EconomicAffairs Economic Division of the Ministry of Finance The depart-ment issues a Monthly Economic Report containing extensive statis-tics and data The report can be downloaded at this Web addresshttpfinminnicinstats datamonthly economic report

The Reserve Bank of India issues data on a daily weekly and monthlybasis Below is a sample of the information readily accessible on its Website

Daily Liquidity Adjustment Facility (LAF)mdashInformation including applica-

tions and calendar for daily repo and reverse repo auctions Daily money market operations

Weekly The Weekly Statistical Supplement includes information on

Foreign exchange reserves Cash reserve ratio

Interest rates Foreign exchange rates Government securities auctions Index numbers for wholesale prices Government securities turnover Corporate debt volume on the National Stock Exchange debt segment

The National Summary Data Page includes information on Balance of payment data such as the current account and capital

account International reserves International investment position External debt

Monthly (RBI Monthly Bulletin) Government securities market information including T-Bill and repo

auctions and turnover Industrial production numbers

Gross industrial production Industry-specific numbers including

Mining Manufacturing Electricity Food products Textiles Basic chemicals and chemical products Basic metal and alloy industries Machinery

Consumer Price Index numbers for industrial workers urban nonman-ual employees and agriculturalrural laborers

Wholesale prices Trade and balance of payments

The statistics issued by the Ministry of Finance are compiled in theirMonthly Economic Report which is released during the first week of everymonth and contains information regarding the preceding month The reportincludes

Quarterly GDP growth Index of industrial production

Production and performance of infrastructure industries Monetary statistics Foreign trade Monthly inflation statistics as measured by wholesale prices and con-

sumer prices Public finance statistics

APPENDIX FOrder Types

TABLE F1 Orders Recognized by the Exchanges

Price ConditionsMarket Order An order entered that is to be executed immediately at the

prevailing market priceLimit Order An order that is to be executed at or better than the stated limitStop Order An order that becomes activated only when the market price of

the relevant security reaches or crosses the trigger pricespecified on the order Until triggered the order is not eligiblefor execution

Buy stop An order entered above the prevailing market pricethat is dormant until the stock price touches or exceeds thetrigger price at which point the order becomes a normal livebuy order

Sell stop An order entered below the prevailing market pricethat is dormant until the stock price touches or goes below thetrigger price at which point the order becomes a normal livesell order

Time ConditionsDay Order An order that is valid only for the day on which it is entered

Unexecuted day orders are canceled automatically at the endof the trading day

Good TillCanceled(GTC)

An order that remains in the system until it is canceled by atrading member It will therefore be able to span trading daysif it does not become matched The maximum number of daysa GTC order can remain in the system is set by the exchanges

(Continued)

TABLE F1 (Continued)

Good TillDaysDate(GTD)

An order that remains valid and in the system until a specificdate or a specific number of days specified on the order Atthe end of this period the order will be automaticallycanceled Each daydate counted is a calendar day andinclusive of holidays The daysdates counted are inclusive ofthe daydate on which the order is placed The maximumnumber of days a GTD order can remain in the system is setby the exchanges

Immediate orCancel (IOC)

An order to buy or sell a security as soon as the order is releasedinto the market Any unexecuted remainder of the order isthen automatically and immediately canceled

Quantity ConditionsDisclosed

Quantity (DQ)or Drip-FeedMechanism

An order that reveals only part of the orderrsquos total quantity tothe market at any one time For example a DQ buy order fora total of 80000 shares with a disclosed quantity condition of10000 will result in only 10000 shares being bid for at anyone time concealing the 70000 share balance of the orderfrom the market After the 10000 is purchased the tradingsystem will then bid for only another 10000 shares more inthe market concealing the balance of 60000 shares Thisprocess continues until all 80000 shares have been executedThis methodology is also known as the ldquoDrip-FeedMechanismrdquo because metaphorically the order is slowlydripped into the market as opposed to poured in all at onceThis order type is used for clients who are concerned thatexposing their entire order to the market at one time mayadversely affect their ability to obtain the most favorableexecution on the entire order

Minimum Fill(MF)

An order that specifies the minimum quantity acceptable for anyexecution toward fulfillment of the entire order For examplean order to buy 5000 shares with a minimum fill of 1000mandates that any execution against this order must be for atleast 1000 shares

All or None(AON)

An order imposing the condition that only the full order shouldbe executed no partial executions will be accepted

APPENDIX GNSE and BSE Equity

Classifications

TABLE G1 NSE and BSE Scrip Classifications

O Trading conducted in the odd-lot market

BSE Scrip Classifications

Equity

A The 200 strongest highest-market-capitalizedhighest-liquidity companies on the BSE with strongfinancials and high-quality corporate governance

B1 Also strong companies but not in the top 200 Many maycompare favorably with A classification companiesbased on the objective and subjective parameters butnot be in the top 200 and thus receive a B1 classificationThere is no fixed number of B1 companies

B2 B2 classified companies represent the lowest tier of listedequities in terms of market cap liquidity financials andsubjective measures such as corporate governance andcomplaints Investors should be wary of B2 companies interms of management quality of earnings the financialsoundness of the business and thus the investment safetyof such a company

(Continued)

TABLE G1 (Continued)

S S shares are also known as BSE Indonext shares Thisclassification consists of scrip from the B1 and B2 groupsand companies exclusively listed on regional stockexchanges that have capitalization of Rs3 to 30 crore(US$700000 to US$7 million)

Z Includes companies that either (1) have failed to complywith the listing requirements of the exchange (2) havefailed to resolve investor complaints or (3) have notmade the required arrangements with both thedepositories for the dematerialization of their securities

T Shares that settle on a trade-to-trade basis formarket-surveillance reasons

TS These shares are a subclassification of the S shares thatsettle on a trade-to-trade basis for market-surveillancereasons

F Fixed income securitiesG Government securities for retail investors

APPENDIX HExchange Trading and

Clearing Holidays

T able H1 notes the trading and clearing holidays that have been posted bythe NSE and BSE exchanges for the calendar year of January to December

radicradic

umradic

radicradic

radic16

radicradic

radic4-

radicradic

radic19

radicradic

radic27

radicradic

iradic

radicradic

radic1-

radicradic

radic6-

ayradic

radicradic

radic14

radicradic

ayradic

radicradic

radic2-

radicradic

radic20

rradic

radicradic

radic2-

radicradic

Idradic

radicradic

radic21

aradic

radicradic

radic9-

radicradic

radic11

radicradic

iradic

radicradic

radic21

)radic

radic25

asradic

radicradic

lowast Muh

TABLE H2 Market Trading Times

Exchange Days Open Close

BSE Equity MndashF 955 AM 330 PMNSE Equity MndashF 955 AM 330 PMLimited Physical Market MndashF 955 AM 330 PMDerivatives MndashF 955 AM 330 PM

TABLE H3 Derivative Session Daily Schedule

Session From To

Beginning of the Day 8 AM 9 AMLogin 9 AM 930 AMTrading 930 AM 330 PMPosition Transfer 330 PM 350 PMClosing 350 PM 405 PMOption Exercise 405 PM 435 PMMargin 435 PM 450 PMQuery 450 PM 535 PMEnd of Day 535 PM 535 PM

table1-6 JWPR021-Kanuk June 12 2007 2025 Char Count=

APPENDIX IIndex Constituents

TABLE I 1 BSE 100 Index Constituents

AdjCode Name Sector Factor

500002 ABB Ltd Capital Goods 05500303 Aditya Birla Nuvo Ltd Diversified 07532418 Andhra Bank Finance 05500101 Arvind Mills Ltd Textile 07500477 Ashok Leyland Ltd Transport Equipments 05500820 Asian Paints Ltd Chemical amp Petrochemical 055500410 Associated Cement

Companies LtdHousing Related 065

500490 Bajaj Auto Ltd Transport Equipments 07500032 Bajaj Hindustan Ltd Agriculture 065500038 Balrampur Chini Mills Ltd Agriculture 06532134 Bank of Baroda Finance 05532149 Bank of India Finance 035500048 Bharat Earth Movers Ltd Capital Goods 04500049 Bharat Electronics Ltd Capital Goods 025500493 Bharat Forge Ltd Transport Equipments 065500103 Bharat Heavy Electricals Ltd Capital Goods 035500547 Bharat Petroleum Corp Ltd Oil amp Gas 035532454 Bharti Airtel Ltd Telecom 035532483 Canara Bank Finance 03500040 Century Textiles Ind Ltd Textile 06500087 Cipla Ltd Healthcare 065500830 Colgate Palmolive(India) FMCG 05500093 Crompton Greaves Ltd Capital Goods 06500480 Cummins India Ltd Transport Equipments 05500124 Dr Reddyrsquos Laboratories Ltd Healthcare 075

(Continued)

TABLE I 1 (Continued)

526881 Financial Technologies(India) Ltd

532155 Gail (India) Ltd Oil amp Gas 04500660 Glaxo Ltd Healthcare 05532296 Glenmark Pharmaceuticals

LtdHealthcare 05

500300 Grasim Industries Ltd Diversified 075500425 Gujarat Ambuja Cements

LtdHousing Related 08

532281 HCL Technologies Ltd Information Technology 035500010 HDFC Finance 09500180 HDFC Bank Ltd Finance 08500182 Hero Honda Motors Ltd Transport Equipments 05500440 Hindalco Industries Ltd Metal amp Mining 075500696 Hindustan Lever Ltd FMCG 05500104 Hindustan Petroleum Corp

LtdOil amp Gas 05

532174 ICICI Bank Ltd Finance 1532466 I-Flex Solutions Ltd Information Technology 045500850 Indian Hotels Co Ltd Tourism 075530965 Indian Oil Corporation Ltd Oil amp Gas 01500105 Indian Petrochemicals Corp

LtdChemical amp Petrochemical 055

500116 Industrial Dev Bank of India Finance 05500209 Infosys Technologies Ltd Information Technology 08532659 IDFC Ltd Finance 04500875 ITC Ltd FMCG 07532532 Jaiprakash Associates Ltd Housing Related 06532617 Jet Airways (India) Ltd Transport Services 02500228 JSW Steel Ltd Metal amp Mining 05500247 Kotak Mahindra Bank Ltd Finance 045500510 Larsen amp Toubro Ltd Capital Goods 09500257 Lupin Ltd Healthcare 05500108 Mahanagar Telephone

Nigam LtdTelecom 045

500520 Mahindra amp Mahindra Ltd Transport Equipments 08532500 Maruti Udyog Ltd Transport Equipments 04524794 Matrix Laboratories Ltd Healthcare 045532432 McDowell amp Company Ltd FMCG 065500530 MICO Ltd Transport Equipments 04

532234 National Aluminum Co Ltd Metal amp Mining 015500790 Nestle India Ltd FMCG 04500302 Nicholas Piramal India Healthcare 045532555 NTPC Ltd Power 015500312 ONGC Ltd Oil amp Gas 02500315 Oriental Bank of Commerce Finance 05532517 Patni Computer Systems Ltd Information Technology 04532522 Petronet lng Ltd Oil amp Gas 04532693 Punj LLoyd Ltd Capital Goods 035532461 Punjab National Bank Finance 045500359 Ranbaxy Laboratories Ltd Healthcare 07500330 Raymond Ltd Textile 065500111 Reliance Capital Ltd Finance 03532712 Reliance Communications

LtdTelecom 06

500390 Reliance Energy Ltd Power 05500325 Reliance Industries Ltd Oil amp Gas 055532709 Reliance Natural Resources

LtdOil amp Gas 055

500295 Sesa Goa Ltd Metal amp Mining 05500550 Siemens Ltd Capital Goods 045500112 State Bank of India Finance 045500113 Steel Authority of India Ltd Metal amp Mining 015500900 Sterlite Industries Ltd Metal amp Mining 02524715 Sun Pharmaceutical Inds

LtdHealthcare 03

532667 Suzlon Energy Ltd Power 015500770 Tata Chemicals Ltd Diversified 07532540 Tata Consultancy Services

LtdInformation Technology 02

500570 Tata Motors Ltd Transport Equipments 06500400 Tata Power Co Ltd Power 07500470 Tata Steel Ltd Metal amp Mining 075500800 Tata Tea Ltd FMCG 075532371 Tata Teleservices

(Continued)

500114 Titan Industries LtdConsumer

Consumer Durables 05

532538 Ultratech Cement Ltd Housing Related 04532477 Union Bank of India Finance 045512070 United Phosphorus Ltd Agriculture 075532215 UTI Bank Ltd Finance 075500483 Videsh Sanchar Nigam Ltd Telecom 03507685 Wipro Ltd Information Technology 02532300 Wockhardt Ltd Healthcare 03505537 Zee Telefilms Ltd Media amp Publishing 055

As of August 2006Source Copyright ccopy 2000 The Bombay Stock Exchange

TABLE I 2 BSE 200 Index and Dollex 200 Constituents

523204 Aban Loyd Chiles OffshoreLtd

Capital Goods 04

500002 ABB Ltd Capital Goods 05500303 Aditya Birla Nuvo Ltd Diversified 07532480 Allahabad Bank Finance 045521070 Alok Industries Ltd Textile 06532309 Alstom Power India Ltd Capital Goods 035520077 Amtek Auto Ltd Transport Equipment 07532418 Andhra Bank Finance 05508869 Apollo Hospitals Enterprises

LtdHealthcare 065

522275 Areva TampD India Ltd Capital Goods 035500101 Arvind Mills Ltd Textile 07500477 Ashok Leyland Ltd Transport Equipments 05500820 Asian Paints Ltd Chemical amp Petrochemical 055500410 Associated Cement

524804 Aurobindo Pharma Ltd Healthcare 045500674 Aventis Pharma Ltd Healthcare 04500490 Bajaj Auto Ltd Transport Equipments 07500032 Bajaj Hindustan Ltd Agriculture 065

500102 Ballarpur Industries Ltd Miscellaneous 06500038 Balrampur Chini Mills Ltd Agriculture 06532134 Bank of Baroda Finance 05532149 Bank of India Finance 035500043 Bata India Ltd FMCG 05532430 BF Utilities Ltd Miscellaneous 05500048 Bharat Earth Movers Ltd Capital Goods 04500049 Bharat Electronics Ltd Capital Goods 025500493 Bharat Forge Ltd Transport Equipments 065500103 Bharat Heavy Electricals Ltd Capital Goods 035500547 Bharat Petroleum Corp Ltd Oil amp Gas 035532454 Bharti Airtel Ltd Telecom 035532523 Biocon Ltd Healthcare 04500335 Birla Corporation Ltd Housing Related 04500020 Bombay Dyeing amp Mfg Co

LtdTextile 06

500825 Britannia Industries Ltd FMCG 05532321 Cadila Healthcare Ltd Healthcare 03532483 Canara Bank Finance 03500870 Castrol India Ltd Oil amp Gas 03532273 Centurion Bank Ltd Finance 07500040 Century Textiles Ind Ltd Textile 06500084 CESC Ltd Power 065500085 Chambal Fertilisers amp

ChemicalAgriculture 05

500110 Chennai PetroleumCorporation Ltd

Oil amp Gas 035

500087 Cipla Ltd Healthcare 065500830 Colgate Palmolive(India) FMCG 05531344 Container Corporation of

IndiaTransport Services 04

532179 Corporation Bank Finance 02500093 Crompton Greaves Ltd Capital Goods 06500480 Cummins India Ltd Transport Equipments 05500096 Dabur India Ltd FMCG 03532488 Divirsquos Laboratories Ltd Healthcare 05500124 Dr Reddyrsquos Laboratories Ltd Healthcare 075523618 Dredging Corporation of

IndiaCapital Goods 025

(Continued)

500125 EID Parry (India) Ltd Agriculture 065500840 EIH Ltd Tourism 055532178 Engineers India Ltd Miscellaneous 01500134 Essar Oil Ltd Oil amp Gas 08500630 Essar Shipping Ltd Transport Services 025500469 Federal Bank Ltd Finance 1526881 Financial Technologies

(India) LtdInformation Technology 055

532155 Gail (India) Ltd Oil amp Gas 04509550 Gammon India Ltd Capital Goods 065532622 Gateway Distriparks Ltd Transport Services 065507815 Gillette India Ltd FMCG 015500660 Glaxo Ltd Healthcare 05500676 GlaxoSmithKline Consumer

HealthcareHealthcare 06

532296 Glenmanrk PharmaceuticalsLtd

Healthcare 05

532424 Godrej Consumer ProductsLtd

FMCG 035

500300 Grasim Industries Ltd Diversified 075500160 GTL Ltd Information Technology 065530001 Gujarat Alkalies amp Chem

500425 Gujarat Ambuja CementsLtd

Housing Related 08

500670 Gujarat Narmada ValleyFertiliser

Agriculture 06

500690 Gujarat State Fertilisers ampChem Ltd

Agriculture 06

500179 HCL Infosystems Ltd Information Technology 05532281 HCL Technologies Ltd Information Technology 035500010 HDFC Finance 09500180 HDFC Bank Ltd Finance 08500182 Hero Honda Motors Ltd Transport Equipments 05532129 Hexaware Technologies Ltd Information Technology 075500440 Hindalco Industries Ltd Metal amp Mining 075500189 Hinduja TMT Ltd Information Technology 035500185 Hindustan Construction Co

500696 Hindustan Lever Ltd FMCG 05

500104 Hindustan Petroleum CorpLtd

Oil amp Gas 05

500188 Hindustan Zinc Ltd Metal amp Mining 01500193 Hotel Leela Venture Ltd Tourism 055532174 ICICI Bank Ltd Finance 1500106 IFCI Ltd Finance 09532466 I-Flex Solutions Ltd Information Technology 045530005 India Cements Ltd H Housing Related 065532544 Indiabulls Financial Services

LtdFinance 065

500850 Indian Hotels Co Ltd Tourism 075530965 Indian Oil Corporation Ltd Oil amp Gas 01532388 Indian Overseas Bank Finance 04500105 Indian Petrochemicals Corp

532514 Indraprastha Gas Ltd Oil amp Gas 055532187 Indusind Bank Ltd Finance 06500116 Industrial Dev Bank of India Finance 05500209 Infosys Technologies Ltd Information Technology 08532659 IDFC Ltd Finance 04500875 ITC Ltd FMCG 07530773 IVRCL Infrastructures amp

Projects LtdHousing Related 09

532532 Jaiprakash Associates Ltd Housing Related 06532209 Jammu amp Kashmir Bank

LtdFinance 05

532617 Jet Airways (India) Ltd Transport Services 02500378 Jindal Saw Ltd Metal amp Mining 05532508 Jindal Stainless Ltd Metal amp Mining 06532286 Jindal Steel amp Powers Ltd Metal amp Mining 045500228 JSW Steel Ltd Metal amp Mining 05530019 Jubilant Organosys Ltd Chemical amp Petrochemical 045532714 KEC International Ltd Power 07500241 Kirloskar Brothers Ltd Capital Goods 04500243 Kirloskar Oil Engines Ltd Transport Equipment 04500873 Kochi Refineries Ltd Oil amp Gas 045500247 Kotak Mahindra Bank Ltd Finance 045500510 Larsen amp Toubro Ltd Capital Goods 09500253 LIC Housing Finance Ltd Finance 065

(Continued)

500257 Lupin Ltd Healthcare 05500260 Madras Cements Ltd Housing Related 06500108 Mahanagar Telephone

500520 Mahindra amp Mahindra Ltd Transport Equipments 08500109 Mangalore Refinery amp Petro

LtdOil amp Gas 015

531642 Marico Ltd FMCG 035532500 Maruti Udyog Ltd Transport Equipments 04524794 Matrix Laboratories Ltd Healthcare 045500271 Max India Ltd Diversified 045532432 McDowell amp Company Ltd FMCG 065500530 MICO Ltd Transport Equipments 04523886 Micro Inks Ltd Chemical amp Petrochemical 025517140 Moser Baer India Ltd Information Technology 05526299 Mphasis BFL Ltd Information Technology 04500290 MRF Ltd Transport Equipment 065500294 Nagarjuna Construction Co

532234 National Aluminum Co Ltd Metal amp Mining 015500790 Nestle India Ltd FMCG 04532529 New Delhi Television Ltd Media amp Publishing 04513683 Neyveli Lignite Corp Power 01500302 Nicholas Piramal India Healthcare 045500308 Nirma Ltd FMCG 025500672 Novartis India Ltd Healthcare 05532555 NTPC Ltd Power 015500312 ONGC Ltd Oil amp Gas 02524372 Orchid Chemicals

PharmaceuticalsHealthcare 06

500315 Oriental Bank of Commerce Finance 05523574 Pantaloon Retail (India) Ltd Miscellaneous 06532517 Patni Computer Systems Ltd Information Technology 04532522 Petronet lng Ltd Oil amp Gas 04500680 Pfizer Ltd Healthcare 06500459 Procter amp Gamble FMCG 035532693 Punj Lloyd Ltd Capital Goods 035532461 Punjab National Bank Finance 045500344 Punjab Tractors Ltd Transport Equipment 08

500359 Ranbaxy Laboratories Ltd Healthcare 07524230 Rashtriya Chem amp Fert Ltd Agriculture 01500330 Raymond Ltd Textile 065500111 Reliance Capital Ltd Finance 03532712 Reliance Communications

LtdTelecom 06

LtdOil amp Gas 055

500366 Rolta India Ltd Information Technology 06500376 Satyam Computer Services

500295 Sesa Goa Ltd Metal amp Mining 05523598 Shipping Corp of India Ltd Transport Services 02532670 Shree Renuka Sugars Ltd Agriculture 055500550 Siemens Ltd Capital Goods 045500472 SKF Bearings Ltd Capital Goods 05500285 SpiceJet Ltd Transport Services 065503806 SRF Ltd Chemical amp Petrochemical 065500112 State Bank of India Finance 045500113 Steel Authority of India Ltd Metal amp Mining 015512299 Sterling Biotech Ltd Healthcare 07500900 Sterlite Industries Ltd Metal amp Mining 02524715 Sun Pharmaceutical Inds Ltd Healthcare 03532667 Suzlon Energy Ltd Power 015532276 Syndicate Bank Finance 035500770 Tata Chemicals Ltd Diversified 07532540 Tata Consultancy Services

500411 Thermax Ltd Capital Goods 035500114 Titan Industries Ltd

ConsumerConsumer Durables 05

(Continued)

504973 Tube Investments of IndiaLtd

Transport Equipment 06

532343 TVS Motors Ltd Transport Equipment 045532505 UCO Bank Finance 03532538 Ultratech Cement Ltd Housing Related 04532477 Union Bank of India Finance 045512070 United Phosphorus Ltd Agriculture 075532215 UTI Bank Ltd Finance 075511389 Videocon Industries Ltd Consumer Durables 03500483 Videsh Sanchar Nigam Ltd Telecom 03532401 Vijaya Bank Finance 05500575 Voltas Ltd Diversified 075507685 Wipro Ltd Information Technology 02532300 Wockhardt Ltd Healthcare 03500095 Wyeth Ltd Healthcare 045505537 Zee Telefilms Ltd Media amp Publishing 055

As of August 14 2006Source The Stock Exchange Mumbai India

3M India LtdAarti Drugs LtdAarti Industries

LtdAban Lloyd Chiles

Offshore LtdABB LtdAbbott India LtdABG Shipyard

LimitedAbhishek

Industries Ltd

Adani ExportsLtd

Aditya Birla NuvoLimited

Adlabs Films LtdAdor Welding

LtdAegis Logistics

LtdAftek Infosys LtdAhmednagar

Forgings Ltd

AIA EngineeringLtd

Alembic LtdAlfa Laval (India)

LtdAll Cargo Global

Logistics LtdAllahabad BankAlok Industries

LtdAlstom Power

India Ltd

Amtek Auto LtdAmtek India LtdAnant Raj

Industries LtdAndhra BankApollo Hospitals

Enterprises LtdApollo Tyres LtdAptech LtdAreva T amp D

India Ltd

Arvind Mills LtdAsahi India Glass

LtdAshok Leyland

LtdAsian Electronics

LtdAsian Hotels LtdAsian Paints (I)

LtdAssam Company

LtdAssociated

CementCompanies Ltd

Astra MicrowaveProducts Ltd

Atlas Copco(India) Ltd

Atul LtdAurobindo

Pharma LtdAutomotive Axles

LtdAvaya

GlobalconnectLtd

Aventis PhramaLtd

Aztec Software ampTechnoServices

B L Kashyap ampSons Ltd

Bajaj AutoFinance Ltd

Bajaj Auto LtdBajaj Hindustan

Balaji TelefilmsLtd

BalkrishnaIndustries Ltd

BallarpurIndustries Ltd

Balmer Lawrie ampCo Ltd

Balrampur ChiniMills Ltd

Bank of BarodaBank Of IndiaBank of

MaharashtraBank of Rajasthan

LtdBannari Amman

Sugars LtdBASF India LtdBata India LtdBayer

CropScienceLtd

Berger PaintsIndia Ltd

BF UtilitiesBharat Bijlee LtdBharat Earth

Movers LtdBharat Electronics

LtdBharat Forge LtdBharat Heavy

Electricals LtdBharat Petroleum

Corp LtdBharti Shipyard

LtdBharti Tele

Ventures Ltd

Bhushan Steel ampStrips Ltd

Bilcare LtdBinani Industries

LtdBiocon LtdBirla Corporation

LtdBlue Star LtdBOC (I) LtdBombay Dyeing

amp Mfg Co LtdBombay Rayon

Fashions LtdBongaingaon

Refinery ampPetro

BritanniaIndustries Ltd

Cadila HealthcareLtd

Canara BankCarborundum

Universal LtdCastrol India LtdCCL Products

(India) LtdCeat LtdCenturion Bank

LtdCentury Enka LtdCentury TextilesCESC LtdChambal

Fertilisers ampChemical

ChennaiPetroleumCorporationLtd

Ciba SpecialityChem

Cipla LtdCity Union Bank

LtdCMC LtdColgate Palmo-

live(India)Container

Corporation ofIndia

CoromandelFertilizers Ltd

Corporation BankCranes Software

InternationalLtd

CRISIL LtdCrompton

Greaves LtdCummins India

LtdDabur India LtdDabur Pharma

LimitedDalmia Cements

(Bharat) LtdDCM Shriram

ConsolidatedLtd

Deccan ChronicleHoldingsLimited

Deepak Fert ampPetrochemicals

Dena BankDhampur Sugar

Mills Ltd

Continued

DishmanPharmaceuticalsamp ChemicalsLtd

DivirsquosLaboratoriesLtd

DlSl KulkamiDevelopers Ltd

Dr ReddyrsquosLaboratoriesLtd

DredgingCorporation ofIndia

Dwarikesh SugarIndustries Ltd

DynamaticTechnologiesLtd

EID Parry (I)Ltd

EducompSolutions Ltd

Eicher MotorsLtd

EIH LtdElder

PharmaceuticalsLtd

EleconEngineering CoLtd

ElectrosteelCastings Ltd

Elgi EquipmentsLtd

Emami LtdEMCO LtdEngineers India

EntertainmentNetwork(India) Ltd

Era Constructions(India) Ltd

Esab India LtdEscorts LtdEssar Oil LtdEssar Shipping

LtdEssar Steel

LimitedEssel Propack LtdEveready

IndustriesLimited

Everest IndustriesLtd

Exide IndustriesCo Ltd

F D C LtdFag Bearings India

LtdFederal Bank LtdFederal Mogul

Goetze (India)Ltd

FinancialTechnologiesLtd

Finolex CablesLtd

Finolex IndustriesLtd

Forbes GokakLtd

Force MotorsLimited

Gail (India) LtdGammon India

GatewayDistriparksLtd

Gati LtdGeodesic

InformationSystems Ltd

GeometricSoftware Solut

GHCL LtdGillette India LtdGitanjali Gems

LtdGlaxo LtdGlaxoSmithKline

ConsumerHealthcare

GlenmanrkPharmaceuticalsLtd

GMRInfrastructureLtd

Godfrey PhillipsIndia Ltd

Godrej ConsumerProducts Ltd

Godrej IndustriesLtd

Gokaldas Exportslimited

GoldiamInternationalLtd

Graphite IndiaLtd

Grasim IndustriesLtd

Greaves CottonLtd

GTC IndustriesLtd

GTL LtdGujarat Alkalies

amp Chem LtdGujarat Ambuja

Cements LtdGujarat Fluoro-

chemicalsLtd

Gujarat GasCompany Ltd

Gujarat IndustriesPowerco Ltd

Gujarat MineralDevelopmentCorp

Gujarat NarmadaValley Fertiliser

Gujarat NRECoke Ltd

Gujarat StateFertilisers ampChem Ltd

Gujarat StatePetronet Ltd

Gulf OilCorporation

GVK Power ampInfrastructureLtd

HEG LtdHavellrsquoS India

LtdHCL Infosystems

LtdHCL

TechnologiesLtd

HDFC Bank LtdHelios amp

MathesonInformationTechnologyLtd

Hero HondaMotors Ltd

HexawareTechnologiesLtd

Hikal LtdHimachal

FuturisticCommunication

HimatsingkaSeide Ltd

HindalcoIndustries Ltd

Hinduja TMTLtd

HindustanConstructionCo Ltd

Hindustan LeverLtd

HindustanMachine ToolsLtd

HindustanMotors Ltd

Hindustan OilExploration CoLtd

HindustanPetroleum CorpLtd

Hindustan ZincLtd

HoneywellAutomationIndia Ltd

Hotel LeelaVenture Ltd

HT MediaLimited

IBP Co LtdICSA (India)

LtdICI India LtdICICI Bank LtdIDFC LtdIFCI LtdI-Flex Solutions

LtdILampFS Investmart

LtdIndia Cements

LtdIndia Glycols LtdIndia Infoline LtdIndiabulls

FinancialServices Ltd

Indian Hotels CoLtd

Indian OilCorporationLtd

Indian OverseasBank

IndianPetrochemicalsCorp Ltd

Indian Rayon ampIndustries Ltd

Indraprastha GasLtd

IndraprasthaMedical CorpLtd

Ind-SwiftLaboratoriesLtd

Indusind BankLtd

Industrial DevBank of India

InfosysTechnologiesLtd

InfotechEnterprises Ltd

ING Vysya BankLtd

Ingersoll - Rand(India) Ltd

Inox Leisure LtdIpca Laboratories

LtdISMT LtdIspat Industries

LtdITC LtdIVRCL

Infrastructuresamp Projects

J B Chemicals ampPharma Ltd

J K Cement LtdJ K Industries

LtdJagran Prakashan

LtdJain Irrigation

Systems LtdJaiprakash

Associates Ltd

JaiprakashHydro-Power

Jammu ampKashmir BankLtd

Jct LtdJet Airways

(India) LimitedJindal Poly Flims

LtdJindal Saw LtdJindal Stainless

LtdJindal Steel amp

Powers LtdJK Corporation

LtdJM Financial LtdJSW Steel LtdJubilant

Organosys LtdJyoti Structures

LtdK S B Pumps LtdKalpataru Power

TransmissionLtd

Kalyani BrakesLtd

Kalyani Steels LtdKansai Nerolac

Paints LtdKarnataka Bank

LtdKEC International

LtdKEI Industries

LtdKernex

Microsystems(India) Ltd

Continued

KesoramIndustries Ltd

Kirloskar BrothersLtd

KirloskarElectrical CoLtd

Kirloskar FerrousIndustries Ltd

Kirloskar OilEngines Ltd

KirloskarPneumatic CoLtd

Kotak MahindraBank Ltd

KPIT InfosystemsLtd

Lakshmi MachineWorks Ltd

Lakshmi OverseasIndustries Ltd

Larsen amp ToubroLimited

LIC HousingFinance Ltd

Lloyd Electric ampEngineering Ltd

Lupin LtdMadhucon

Projects LtdMadras Cements

LtdMahanagar

TelephoneNigam Ltd

MaharashtraSeamless Ltd

Mahavir SpgMills

Mahindra ampMahindraFinancialServices Ltd

Mahindra ampMahindra Ltd

Mahindra GescoDevelopers Ltd

Mahindra UgineSteel Co Ltd

Man Industries (I)Ltd

MangalamCement Ltd

MangaloreRefinery ampPetro Ltd

Manugraph IndiaLtd

Marico LtdMarksons Pharma

LtdMaruti Udyog

LtdMascon Global

LtdMastek LtdMatrix

LaboratoriesLtd

Mawana SugarsLtd

Max India LtdMcdowell amp Co

LtdMcLeod Russel

India LtdMcNally Bharat

EngineeringCompany

Megasoft StdMercator Lines

LtdMerck LtdMICO LtdMicro Inks LtdMid-Day

MultimediaLtd

Monnet Ispat LtdMonsanto India

LtdMoser Baer India

LtdMotherson Sumi

Systems LtdMphasis BFL LtdMRF LtdMukand LtdMysore Cements

LtdNagarjuna

ConstructionCo Ltd

Nagarjuna Fertilzamp Chem Ltd

Nahar ExportsLtd

NationalAluminium CoLtd

National OrganicChemicals IndsLtd

National ThermalPowerCorporation

Nava BharatFerro AlloysLtd

Navin FluorineInternationalLtd

NavneetPublicationsLtd

Nestle India LtdNew Delhi

Television LtdNeyveli Lignite

CorpNicholas Piramal

IndiaNIIT LtdNIIT

TechnologiesLtd

Nirma LtdNitco Tiles LtdNoida Toll Bridge

CompanyNovartis India

LtdNucleus Software

Exports LtdONGC LtdOpto Circuits

(India) LtdOrchid Chemicals

PharmaceuticalsOrient Paper amp

Industries LtdOriental Bank of

CommerceOudh Sugar Mills

LtdPanacea Biotec

LtdPantaloon Retail

(India) Ltd

Patel EngineeringLtd

Patni ComputerSystems Ltd

Peninsula LandLtd

Petronet LNGLtd

Pfizer LtdPhoenix Lamps

LtdPhoenix Mills LtdPidilite Industries

LtdPiramyd Retail

LtdPolaris Software

Lab LtdPraj Industries

LtdPrajay Engineers

Syndicate LtdPratibha

Industries LtdPremier

Instruments ampControls Ltd

Prism CementLtd

PrithviInformationSolutions Ltd

Procter amp GambleProvogue (India)

LtdPSL LtdPTC India LtdPunj Lloyd

Limited

Punjab NationalBank

Punjab TractorsLtd

PVR LtdRadico Khaitan

LtdRain Calcining

LtdRajesh Exports

LtdRallis India LtdRanbaxy

LaboratoriesLtd

Rashtriya Chemamp Fert Ltd

Rayban SunOptics IndiaLtd

Raymond LtdReliance Capital

LtdReliance Commu-

nicationsLimited

Reliance EnergyLtd

RelianceIndustrialInfrastructure

RelianceIndustries Ltd

Reliance NaturalResourcesLimited

ReliancePetroleumLimited

Rico AutoIndustries Ltd

Rolta India LtdRoyal Orchid

Hotels LtdRuchi Soya

Industries LtdS Kumars

NationwideLtd

SadbhavEngineeringLtd

Sakthi Sugars LtdSanghvi Movers

LtdSaregama India

LtdSasken

CommunicationTechno Ltd

Satyam ComputerServices Ltd

ScandentSolutionsCorporationLtd

Sesa Goa LtdShanti Gears LtdShasun Chemicals

amp Drugs LtdShaw Wallace amp

Co LtdShipping Corp of

India LtdShoppers Stop

LtdShree Cements

Shree PrecoatedSteels Ltd

Shree RenukaSugars Limited

ShriramTransport FinCo Ltd

Sical LogisticsLtd

Siemens LtdSimbhaoli Sugar

Mills LtdSimplex

InfrastructuresLtd

Sintex IndustriesLtd

SKF Bearings LtdSona Koyo

SteeringSystems Ltd

Sonata SoftwareLtd

South IndianBank Ltd

Southern Iron ampSteel Co Ltd

Spicejet LtdSrei Infrastructure

Finance LtdSRF LtdState Bank of

IndiaSteel Authority of

India LtdSterling Biotech

LtdSterlite Industries

Continued

Sterlite OpticalTechnologiesLtd

Strides ArcolabLtd

Subex SystemsLtd

SunPharmaceuticalInds Ltd

Sun TV LtdSundaram

Clayton LtdSundaram

Fastners LtdSupreme

Industries LtdSuzlon Energy

LtdSyndicate BankSyngenta India

LtdTV Today

Network LtdTaj GVK Hotels

amp Resorts LtdTamil Nadu

Newsprint ampPapers

Tata ChemicalsLtd

Tata Coffee Ltd

Tata ConsultancyServices Ltd

Tata Elxsi LtdTata Investment

CorporationLtd

Tata Iron amp SteelCo Ltd

Tata Motors LtdTata Power Co

LtdTata Tea LtdTata Teleservices

(Maharashtra)Ltd

Tech MahindraLtd

Tele DataInformatics Ltd

TelevisionEighteen IndiaLtd

Teneja Aerospaceamp Aviation Ltd

Texmaco LtdThermax LtdThomas Cook

(India) LtdTimken India LtdTitan Industries

Torrent PharmaLtd

Transgene BiotexLtd

Trent LtdTriveni

Engineering ampIndustries Ltd

Tube InvestmentsOf India Ltd

Tulip IT ServicesLtd

TVS Motors LtdUCO BankUgar Sugar Works

LtdUltratech Cement

LimitedUnichem

LaboratoriesLtd

Union Bank ofIndia

Unitech LtdUnited Breweries

(Holdings) LtdUnited Breweries

LtdUnited

PhosphorusLtd

Usha Martin Ltd

UTI Bank LtdUttam Galva

Steels LtdUttam Sugar Mills

LtdVarun Shipping

Co LtdVertex Spinning

LtdVesuvius India

LtdVideocon

InternationalLtd

Videsh SancharNigam Ltd

Vijaya BankVisualsoft (India)

LtdVoltas LtdWelspun Gujarat

Stahl RohrenLtd

Welspun IndiaLtd

Wipro LtdWockhardt LtdWyeth LtdYes Bank LtdZee Telefilms LtdZuari Industries

As of September 22 2006Source The Stock Exchange Mumbai India

TABLE I 4 BSE Mid-Cap Index Constituents

Code Name Adj Factor

532628 3i Infotech Ltd 05523395 3M India Ltd 02500488 Abbott India Ltd 04532682 ABG Shipyard Ltd 02512599 Adani Exports Ltd 045532399 Adlabs Films Ltd 03532683 AIA Engineering Ltd 03506235 Alembic Ltd 04505885 Alfa Laval (India) Ltd 04532749 Allcargo Global Logistics Ltd 015521070 Alok Industries Ltd 06532309 Alstom Power India Ltd 035532201 Ambuja Cement Eastern Ltd 005520077 Amtek Auto Ltd 07532282 Amtek India Ltd 05515055 Anant Raj Industries Ltd 035508869 Apollo Hospitals Enterprises Ltd 065500877 Apollo Tyres Ltd 05522275 Areva T amp D India Ltd 035500101 Arvind Mills Ltd 07515030 Asahi India Glass Ltd 045527001 Ashapura Minechem Ltd 025500023 Asian Hotels Ltd 04532493 Astra Microwave Products Ltd 05506820 Astrazeneca Pharma Ltd 01526991 Atlas Copco (India) Ltd 02524804 Aurobindo Pharma Ltd 045505010 Automotive Axles Ltd 03532385 Aztec Software amp Techno Services Ltd 06532719 B L Kashyap and Sons Ltd 03523457 B O C Ltd 05500034 Bajaj Auto Finance Ltd 055532382 Balaji Telefilms Ltd 035502355 Balkrishna Industries Ltd 05500102 Ballarpur Industries Ltd 06523319 Balmer Lawrie amp Co Ltd 04500038 Balrampur Chini Mills Ltd 07532525 Bank of Maharashtra 025500041 Bannari Amman Sugars Ltd 055500042 BASF India Ltd 05500043 Bata India Ltd 05506285 Bayer Cropscience Ltd 03

509480 Berger Paints India Ltd 03532609 Bharti Shipyard Ltd 06500055 Bhushan Steel amp Strips Ltd 035526853 Bilcare Ltd 055500335 Birla Corporation Ltd 04526612 Blue Dart Express Ltd 02500067 Blue Star Ltd 06500020 Bombay Dyeing amp Mfg Co Ltd 06532678 Bombay Rayon Fashions Ltd 03500072 Bongaingaon Refinery amp Petro Ltd 03505185 Bosch Chassis Systems Ltd 02500825 Britannia Industries Ltd 05513375 Carborundum Universal Ltd 06500870 Castrol 03532273 Centurion Bank Ltd 07500084 CESC Ltd 065500085 Chambal Fertilisers amp Chemical 05511243 Cholamandalam Invt amp Fin Ltd 03517326 CMC Ltd 05506395 Coromandel Fertilisers Ltd 03512093 Cranes Softward Ltd 065500092 CRISIL Ltd 045532545 Dabur Pharma Ltd 025500097 Dalmia Cements (Bharat) Ltd 05523367 DCM Shriram Consolidated Ltd 05532747 Deccan Aviation Ltd 02532608 Deccan Chronicle Holdings Ltd 025500645 Deepak Fert amp Petrochemicals 06532121 Dena Bank 05532488 Devirsquos Laboratories Ltd 05500119 Dhampur Sugar Mills Ltd 065532526 Dishman Pharmaceuticals amp Chemicals 03523618 Dredging Corporation of India 025500125 EED Parry (I) Ltd 065505200 Eicher Motors Ltd 04500840 EIH Ltd 055500128 Electrosteel Castings Ltd 05531162 Emami Ltd 015532700 Entertainment Network (India) Ltd 03500133 Esab India Ltd 065500495 Escorts Ltd 075500630 Essar Shipping Ltd 025

500627 Essar Steel Ltd 03500135 Essel Propack Ltd 045531508 Eveready Industries (I) Ltd 06532684 Everest Kanto Cylinder Ltd 035500086 Exide Industries Co Ltd 05531599 F D C Ltd 04505790 Fag Bearings India Ltd 05500469 Federal Bank Ltd 1505744 Federal-Mogul Goetz (India) Ltd 05500144 Finolex Cables Ltd 055500940 Finolex Industries Ltd 05502865 Forbes Gokak Ltd 03500033 Force Motors Ltd 03509550 Gammon India Ltd 065532622 Gateway Distriparks Ltd 05503699 Geodesic Information Systems Ltd 075500171 GHCL Ltd 06507815 Gillette India Ltd 015532715 Gitanjali Gems Ltd 03500676 GlaxoSmithKline Consumer Healthcare 06500163 Godfrey Phillips India Ltd 03532424 Godrej Consumer Products Ltd 035500164 Godrej Industries Ltd 015532630 Gokaldas Exports Ltd 025509488 Graphite India Ltd 04501455 Greaves Cotton Ltd 05506076 Grindwell Norton Ltd 025500160 GTL Ltd 065530001 Gujarat Alkalies amp Chem Ltd 065500670 Gujarat Barmada Val Fer Co Ltd 06500173 Gujarat Fluorochemicals Ltd 035523477 Gujarat Gas Company Ltd 035517300 Gujarat Industries Power Co Ltd 035532181 Gujarat Mineral Development Corp 03512579 Gujarat NRE Coke Ltd 055500690 Gujarat State Fertilisers amp Chem Ltd 06532702 Gujarat State Petronet Ltd 04506480 Gulf Oil Corporation Ltd 04509631 HEG Ltd 045517354 HavellrsquoS India Ltd 035500179 HCL Infosystems Ltd 05532129 Hexaware Ltd 075

(Continued)

524735 Hikal Ltd 025500183 Himachal Futuristic Comm 1514043 Himatsingka Seide Ltd 055500189 Hinduja TMT Ltd 035500185 Hindustan Construction Co Ltd 05500500 Hindustan Motors Ltd 075500186 Hindustan Oil Exploration Co Ltd 07517174 Honeywell Automation India Ltd 02500193 Hotel Leela Venture Ltd 055532662 HT Media Ltd 02500198 IBP Co Ltd 05500710 ICI India Ltd 04500106 IFCI Ltd 09532337 Igate Global Solutions Ltd 02532653 IlampFs Investmart Ltd 055530005 India Cements Ltd 065532636 India Infoline Limited 065500207 Indo Rama Synthetics (India) Ltd 045532514 Indraprastha Gas Ltd 055532187 Indusind Bank Ltd 06532175 Infotech Enterprises Ltd 06531807 ING Vysya Bank Ltd 06500210 Ingersoll - Rand (India) Ltd 03532706 Inox Leisure Ltd 035524494 IPCA Laboratories Ltd 05532479 ISMT Ltd 05500305 Ispat Industries Ltd 05530773 IVRCL Infrastructures amp Projects 09506943 JB Chemicals amp Pharma Ltd 045532644 J K Cement Ltd 04532705 Jagran Prakashan Ltd 02500219 Jain Irrigation Systems Ltd 07532627 Jaiprakash Hydro-Power Ltd 04532209 Jammu amp Kashmir Bank Ltd 05500227 Jindal Poly Films Ltd 045500378 Jindal Saw Ltd 05532508 Jindal Stainless Ltd 06523405 JM Financial Ltd 015530019 Jubilant Organosys Ltd 045500249 K S B Pumps Ltd 035522287 Kalpataru Power Transmission 025500235 Kalyani Steels Ltd 045

500165 Kansai Nerolac Paints Ltd 04532652 Karnataka Bank Ltd 1504807 KEC International Ltd 07502937 Kesoram Industries Ltd 08500243 Kirloskar Oil Engines Ltd 04500252 Lakshmi Machine Works Ltd 065519570 Lakshmi Overseas Industries 05500253 LIC Housing Finance Ltd 07532440 MacMillan India Ltd 03531497 Madhucon Projects Ltd 05504580 Madras Aluminum Co Ltd 02500260 Madras Cements Ltd 06500265 Maharashtra Seamless Ltd 045502986 Mahavir Spg Mills 035532720 Mahindra amp Mahindra Financial Services Ltd 03532313 Mahindra Gesco Developers Ltd 045505324 Manugraph India Ltd 045531642 Marico Ltd 035524404 Marksans Pharma Ltd 055523704 Mastek Ltd 06500271 Max India Ltd 045532432 McDowell amp Co Ltd 065526235 Mercator Lines Ltd 06500126 Merck Ltd 05523886 Micro Inks Ltd 04513446 Monnet Ispat Ltd 05524084 Monsanto India Ltd 03517140 Moser Baer India Ltd 05517334 Motherson Sumi Systems Ltd 03526299 Mphasis BFL Ltd 04500290 MRF Ltd 065500460 Mukand Ltd 055500294 Nagarjuna Construction Co Ltd 075523630 National Fertilisers Ltd 005532529 New Delhi Television Ltd 04500304 NIIT Ltd 06532541 NIIT Technologies Ltd 06532481 Noida Toll Bridge Co Ltd 065500672 Novartis India Ltd 05502165 OCL India Ltd 04532391 Opto Circuits (India) Ltd 065524372 Orchid Chemicals Pharmaceuticals 06

(Continued)

531349 Panacea Biotec Ltd 025531120 Patel Engineering Ltd 04503031 Peninsula Land Ltd 03500680 Pfizer Ltd 06503100 Phoenix Mills Ltd 02500331 Pidilite Industries Ltd 03532739 Plethico Pharmaceuticals Ltd 015532254 Polaris Software Lab Ltd 03522205 Praj Industries Ltd 07500338 Prism Cement Ltd 04532675 Prithvi Information Solutions Ltd 06500459 Procter amp Gamble Hygiene amp Health 035526801 PSL Ltd 03532524 PTC India Ltd 07500344 Punjab Tractors Ltd 08532689 PVR Ltd 06532497 Radico Khaitan Ltd 045531500 Rajesh Exports Ltd 04524230 Rashtriya Chem amp Fert Ltd 01500330 Raymond Ltd 065523445 Reliance Industrial Infrastructures Ltd 055520008 Rico Auto Industries Ltd 06500368 Ruchi Soya Industries Ltd 075514304 S Kumars Nationwide Ltd 05532663 Sasken Communication Techno Ltd 045501379 Shaw Wallace amp Co Ltd 025532638 Shoppers Stop Ltd 035500387 Shree Cements Ltd 03513349 Shree Precoated Steels Ltd 03503205 Shree Ram Mills Ltd 015532670 Shree Renuka Sugars Ltd 055511218 Shriram Transport Fin Co Ltd 05520086 Sical Logistics Ltd 035523838 Simplex Infrastructure Ltd 055502742 Sintex Industries Ltd 045500472 SKF India Ltd 05500285 SpiceJet Ltd 065503806 SRF Ltd 065512299 Sterling Biotech Ltd 07532374 Sterlite Optical TechnolrsquoS Ltd 065532531 Strides Arcolab Ltd 04532348 Subex Systems Ltd 09

520056 Sundaram Clayton Ltd 02500403 Sundaram Fastners Ltd 055532276 Syndicate Bank Ltd 035532409 Syngenta India Ltd 02532390 Taj GVK Hotels amp Resorts Ltd 03531426 Tamil Nadu Newsprint amp Papers 065500408 Tata Elxsi Ltd 065501301 Tata Investment Corporation Ltd 04532299 Television Eighteen India Ltd 075505400 Texmaco Ltd 05500411 Thermax Ltd 035500413 Thomas Cook (India) Ltd 035522113 Timken India Ltd 02500114 Titan Industries Ltd 05500366 Tolta India Ltd 06500420 Torrent Pharma Ltd 03500251 Trent Ltd 075532356 Triveni Engineering amp Industries Ltd 035504973 Tube Investments of India Ltd 06532691 Tulip IT Services Ltd 035532343 TVS Motors Ltd 045532505 UCO Bank 03506690 Unichem Laboratories Ltd 055507458 United Breweries (Holdings) Ltd 045532478 United Breweries Ltd 025517146 Usha Martin Ltd 065532729 Uttam Sugar Mills Ltd 02500465 Varun Shipping Co Ltd 06531544 Vertex Spinning Ltd 025532401 Vijaya Bank 05500575 Voltas Ltd 075509966 VST Industries Ltd 03514162 Wellspun India Ltd 065532144 Welspun Gujarat Stahl Rohren Ltd 055500095 Wyeth Lederle Ltd 045532648 Yes Bank Ltd 03

As of September 22 2006Source The Bombay Stock Exchange

TABLE I 5 BSE Small-Cap Index Constituents

524208 Aarti Industries Ltd 06514274 Aarvee Denims amp Exports Ltd 025520155 ABG Heavy Industries Ltd 035521064 Abhishek Industries Ltd 04532727 Adhunik Metaliks Ltd 04517041 Ador Welding Ltd 045500003 Aegis Logistics Ltd 04530707 Aftek Infosys Ltd 09500215 Agro Tech Foods Ltd 04513335 Ahmednagar Forgings Ltd 05532351 Aksh Optifibre Ltd 045526707 Alchemist Ltd 065532633 Allsec Technologies Ltd 05530715 Alps Industries Ltd 065532664 Amar Remedies Ltd 06500008 Amara Raja Batteries 05531978 Ambika Cotton Mills Ltd 075532141 Andhra Cement Ltd 02502330 Andhra Pradesh Paper Mills Ltd 035526173 Andrew Yule amp Company Ltd 01530721 Ang Auto Ltd 05531683 Ankur Drugs and Pharma Ltd 07505665 Antifriction Bearings Corp Ltd 045506260 Anuh Pharma Ltd 03532259 Apar Industries Ltd 035532475 Aptech Ltd 085531381 Arihant Foundations amp Hsg Ltd 06514193 Arrow Webtex Ltd 03523716 Ashiana Hsg amp Finance (I) Ltd 035503940 Asian Electronics Ltd 06500024 Assam Company Ltd 045500027 Atul Ltd 065505036 Automobile Corp of Goa Ltd 065500463 Avaya Globalconnect Ltd 045500031 Bajaj Electricals Ltd 035532485 Balmer Lawrie Investment Ltd 045500019 Bank of Rajasthan Ltd 06532674 Bannari Amman Spinning Mills Ltd 045522004 Batliboi Ltd 02500046 Best amp Crompton Engg Ltd 01512296 Bhagyanagar India Ltd 035500052 Bhansali Engineering Polymers Ltd 06

503960 Bharat Bijlee Ltd 065500059 Binani Industries Ltd 06500066 Blow Plast Ltd 04501425 Bombay Burmah Trg Corp Ltd 03532123 BSEL Infrastructure Realty Ltd 07500446 Carol Info Services Ltd 04519600 CCL Products (India) Ltd 055500878 CEAT Ltd 06532695 Celebrity Fashions Ltd 035500280 Century Enka Ltd 075532548 Century Plyboards (India) Ltd 03522059 Champagne Indage Ltd 05506355 Chemplast Sanmar Ltd 025526817 Cheviot Company Ltd 03532184 CIBA Speciality Chem 03532210 City Union Bank Ltd 1506390 Clariant Chemicals (India) Ltd 04523200 Classic Diamonds (I) Ltd 03505052 Clutch Auto Ltd 065500226 Consolidated Finvest amp Hldgs Ltd 035508814 Cosmo Films Ltd 06526785 Crest Animation Studios Ltd 085532542 Crew BOS Products Ltd 05523890 D S Kulkarni Developers Ltd 065532528 Datamatics Technologies Ltd 035502817 Dawn Mills Co Ltd 03500099 DCL Polyester Ltd 055502820 DCM Ltd 07523369 DCM Shriram Industries Ltd 075500117 DCW Ltd 06506401 Deepak Nitrate Ltd 05520022 Denso India Ltd 03511072 Dewan Hsg Finance Corp Ltd 045507442 Dharani Sugars amp Chemicals Ltd 055500089 DIC India Ltd 035532419 D-Link (India) Ltd 04522261 Dolphin Offshore Ent (I) Ltd 03512519 Donear Inds Ltd 005532610 Dwarikesh Sugar Industries Ltd 06505242 Dynamatic Technologies Ltd 045532696 Educomp Solutions Ltd 03

(Continued)

531835 Eicher Ltd 03523127 EIH Associated Hotels Ltd 045523708 EIMCO Elecon (I) Ltd 03532322 Elder Pharmacueticals Ltd 065505700 Elecon Engineering Co Ltd 06526608 Electrotherm (India) Ltd 045522074 Elgi Equipments Ltd 07504008 Emco Ltd 05532737 Emkay Share amp Stock Brokers Ltd 03526560 English Indian Clays Ltd 02531147 Enkei Castalloy Ltd 025505982 Ennore Foundries Ltd 02530323 Era Constructions (India) Ltd 08514118 Eskay Krsquonrsquoit (India) Ltd 04508906 Everest Industries Ltd 035532511 Excel Crop Care Ltd 07532657 Facor Steel Ltd 005520145 Fairfield Atlas Ltd 02504250 FCI OEN Connectors Ltd 035532666 FCS Software Solutions Ltd 025500139 Fedders Lloyd Corporation Ltd 07500141 Ferro Alloys Corp Ltd 025500148 Flex Industries Ltd 055500150 Foseco India Ltd 015532521 Four Soft Ltd 05506803 Fulford (I) Ltd 06505714 Gabriel India Ltd 04506186 Galaxy Entertainment Corp Ltd 055513108 Gandhi Special Tubes Ltd 03526367 Ganesh Housing Corp Ltd 025500155 Garden Silk Mills Ltd 045501848 Garware Offshore Services Ltd 055532345 Gati Ltd 035500398 GE Capital Transportation Fin Services 025532318 Gemini Communications Ltd 065530343 Genus Overseas Electronics Ltd 05532285 Geojit Financial Services Ltd 05532312 Geometric Software Solutions Co Ltd 065511676 GIC Housing Finance Ltd 05532716 Gillanders Arbuthnot amp Co Ltd 03505255 GMM Pfaudler Ltd 025500162 GMR Industries Ltd 03

532734 Godavari Power amp Ispat Ltd 035526729 Goldiam International Ltd 04500166 Goodricke Group Ltd 03500168 Goodyear India Ltd 03511288 Gruh Finance Ltd 04500151 GTC Industries Ltd 06524226 Gujarat Ambuja Exports Ltd 04522217 Gujarat Apollo Equipment Ltd 055518029 Gujarat Sidhee Cement Ltd 055532708 Gvk Power amp Infrastructure Ltd 04500177 Hanil Era Textiles Ltd 045500467 Harrisons Malyalam Ltd 055517271 HBL NIFE Power Systems Ltd 025532347 Helios amp Matheson Info Technology 055532671 Henkel India Ltd 035500181 Herbertsons Ltd 03505720 Hercules Hoists Ltd 02519552 Heritage Foods (India) Ltd 055500184 Himadri Chemicals amp Inds Ltd 035509627 Hindustan Dorr-Oliver Ltd 05500449 Hindustan Organic Chemical Ltd 045500187 Hindustan Sanitaryware amp Inds 035523398 Hitachi Home amp Life Soln (I) Ltd 035522073 Hi-Tech Gears Ltd 05522064 Honda Siel Power Products Ltd 035509675 Hyderabad Industries Ltd 06531524 ICSA India Ltd 085532133 IFGL Refractors Ltd 03517380 Igarashi Motors India Ltd 045511208 Il amp Fs Investment Managers Ltd 045524652 IND Swift Ltd 065500201 India Glycols Ltd 055532240 India Nippon Electricals Ltd 035509692 Indian Card Clothing Ltd 045504741 Indian Hume Pipe Co Ltd 035509706 Indian Resort Hotels Ltd 05532658 Indo Asian Fusegear (India) Ltd 06532501 Indo Rama Textiles Ltd 02532717 Indo Tech Transformers Ltd 04532612 Indoco Remedies Ltd 045532150 Indraprastha Medical Corp Ltd 055

(Continued)

532305 IND-Swift Laboratories Ltd 075500213 International Travel House Ltd 04504786 Invest amp Precision Casting Ltd 055500214 Ion Exchange (I) Ltd 06509496 ITD Cementation India Ltd 02523610 ITI Ltd 01507155 Jagatjit Industries Ltd 01512237 Jai Corp Ltd 015520066 Jay Bharat Maruti Ltd 045509715 Jayshree Tea amp Industries Ltd 065514034 JBF Industries Ltd 04500223 JCT Ltd 05532624 Jindal Photo Ltd 03532642 Jindal Southwest Holdings Ltd 045531543 Jindal Worldwide Ltd 015530007 JK Industries Ltd 045500380 JK Lakshmi Cement Ltd 065532162 JK Paper Ltd 04522263 JMC Projects (India) Ltd 05504076 Jyoti Ltd 08513250 Jyoti Structures Ltd 075505283 K G Khosla Compressors Ltd 05526209 K S Oil Ltd 07532673 K M Sugar Mills Ltd 035500233 Kajaria Ceramics Ltd 055532268 Kale Consultants Ltd 06513509 Kalyani Forge Ltd 045526668 Kamat Hotels (India) Ltd 03506525 Kanoria Chemicals amp Inds Ltd 03504807 KEC Infrastructures Ltd 07517569 KEI Industries Ltd 06505890 Kennametal Widia India Ltd 015532686 Kernex Microsystems (India) Ltd 035507180 Kesar Enterprises Ltd 05532732 Kewal Kiran Clothing Ltd 03504269 Khaitan Electricals Ltd 075590052 Kirloskar Electrical Company Ltd 055500245 Kirloskar Ferrous Industries Ltd 055532536 Kojam Fininvest Ltd 04524280 Kopran Ltd 06530299 Kothari Products Ltd 02532400 KPIT Infosystems Ltd 055

530813 KRBL Ltd 035500250 L G Balkrishnan amp Bros Ltd 06513605 Lanco Industries Ltd 045506222 Lanxsee ABS Ltd 03526596 Liberty Shoes Ltd 04512349 Linkhouse Industries Ltd 08507912 LKP Merchant Financing Ltd 045517518 Lloyd Electric amp Engineering 07500254 Lloyds Steel Industries Ltd 08500255 LML Ltd 06532341 Logix Microsystems Ltd 065532740 Lokesh Machines Ltd 03514036 Loyal Textiles Mills Ltd 03522241 M M Forgings Ltd 04524000 Magma Leasing Ltd 02530059 Maharaja Shree Umaid Mills Ltd 02500266 Maharashtra Scooters Ltd 05504823 Mahindra Ugine Steel Co Ltd 045513269 Man Industries (India) Ltd 065500268 Manali Petrochemicals Ltd 065502157 Mangalam Cement Ltd 07530011 Mangalore Chemicals amp Fert Ltd 07531131 Mascon Global Ltd 1532469 Mather amp Platt Pump Ltd 04532512 Mawana Sugars Ltd 06532613 Maxwell Industries Ltd 04532654 Mcleod Russel India Ltd 06532629 Mcnally Bharat Engineering Co Ltd 07532408 Megasoft Ltd 055532494 Micro Technologies (I) Ltd 065532416 Mid-Day Multimedia Ltd 05532539 Minda Industries Ltd 03500279 Mirc Electronics Ltd 04526642 Mirza Tanners Ltd 035532723 Monnet Sugar Ltd 035500288 Morepen Laboratories Ltd 095532407 MOSCHIP Semiconductors Technology 07531096 Mount Everest Mineral Water 08532376 MRO-Tek Ltd 065532553 MSK Projects (India) Ltd 045520043 Munjal Showa Ltd 035

(Continued)

519323 Murli Agro Products Ltd 03515037 Murudeshwar Ceramics Ltd 055500292 Mysore Cements Ltd 075524709 Nagarjuna Agrichem Ltd 025500075 Nagarjuna Fertilz amp Chem Ltd 065523391 Nahar Exports Ltd 04519136 Nahar Industrial Enterprises Ltd 045500296 Nahar Spinning Mills Ltd 045532256 Nalwa Sons Investments Ltd 045532641 Nandan Exim Ltd 03524650 Narmada Chematur Petrochem Ltd 045524816 Natco Pharma Ltd 04500730 National Organic Chemicals Inds Ltd 075500298 National Peroxide Ltd 035513023 Nava Bharat Ferro Alloys Ltd 05532504 Navin Fluorine International Ltd 065508989 Navneet Publications Ltd 04532649 Nectar Lifesciences Ltd 03504112 NELCO Ltd 05500301 Nepc India Ltd 09505355 Nesco Ltd 035523385 Nilkamal Plastics Ltd 045504058 Nippo Batteries Co Ltd 02500307 Nirlon Ltd 09532722 Nitco Tiles Ltd 055590057 Northgate Technologies Ltd 06530605 Nova Petrochemicals Ltd 04530367 NRB Bearings Ltd 02503780 NRC Ltd 05531209 Nucleus Software Exports Ltd 045532051 Numeric Power Systems Ltd 035531092 Om Metals Ltd 025520021 Omax Autos Ltd 05524101 Onedo Nalco India Ltd 005517195 ORG Informatics Ltd 04504879 Orient Abrasives Ltd 05502420 Orient Paper amp Industries Ltd 075500314 Oriental Hotels Ltd 045507260 Oudh Sugar Mills Ltd 055531816 Panoramic Universal Ltd 03521153 Pantaloon Industries Ltd 045509820 Paper Products Ltd 04

530555 Paramount Communications Ltd 07508184 Parry Agro Industries Ltd 02532676 PBA Infrastructure Ltd 035530381 Petron Engineering Construction Ltd 04517296 Phoenix Lamps Ltd 055532366 PNB Gilts Ltd 03532486 Pokarna Ltd 04524051 Polyplex Corporation Ltd 06531746 Prajay Engineers Syndicate Ltd 08506022 Prakash Industries Ltd 04532718 Pratibha Industries Ltd 03526109 Pricol Ltd 055532748 Prime Focus Ltd 025532647 Provogue (India) Ltd 05532679 Pyramid Retail Ltd 04532735 R Systems International Ltd 035532140 R M Mohitex Textiles Ltd 03532153 Rain Calcining Ltd 05500339 Rain Commodities Ltd 05504614 Raipur Alloys amp Steels Ltd 03532503 Rajapalayam Mills Ltd 05500350 Rajasthan Spg amp Wvg Mills Ltd 05500354 Rajshree Sugars amp Chemicals Ltd 06500355 Rallis India Ltd 055532369 Ramco Industries Ltd 045532370 Ramco Systems Ltd 04532527 Ramkrishna Forgings Ltd 06532690 Ramsarup Industries Ltd 035507490 Rana Sugars Ltd 07532661 Rane (Madras) Ltd 05532328 Rane Brake Linings Ltd 05532490 Rane Engine Valves Ltd 04505800 Rane Holdings Ltd 06520111 Ratnamani Metals amp Tubes Ltd 035500044 Rayban Sun Optics India Ltd 06500362 Recron Synthetics Ltd 05532687 Repro India Ltd 03505368 Revathi Equipment Ltd 04517496 Ricoh India Ltd 03532731 Rohit Ferro-Tech Ltd 03532699 Royal Orchid Hotels Ltd 035

(Continued)

500384 RPG Life Sciences Ltd 06503169 Ruby Mills Ltd 03509020 Ruchi Infrastructure Ltd 04532604 SAL Steel Ltd 05532710 Sadbhav Engineering Ltd 03503691 Sahara One Media and Entert Ltd 005515043 Saint-Gobain Sekurit India Ltd 015507315 Sakthi Sugars Ltd 065500372 Samtel Colour Ltd 05514234 Sangam India Ltd 05526521 Sanghi Industries Ltd 055530073 Sanghvi Movers Ltd 055532163 Saregama India Ltd 045512559 Satnam Overseas Ltd 06502175 Saurashtra Cement Ltd 02524667 Savita Chemicals Ltd 03532616 Scandent Solutions Corporation Ltd 055500123 Schenectady-Beck India Ltd 015506460 Schenectady Herdillia Ltd 02513436 Shah Alloys Ltd 04522034 Shanti Gears Ltd 055511413 Sharyans Resources Ltd 05524552 Shasun Chemicals amp Drugs Ltd 045530549 Shilpa Medicare Ltd 055522175 Shiv Vani Oil amp Gas Explo Serv Ltd 035502180 Shree Digvijay Cement Ltd 045523236 Shrenuj amp Co Ltd 03520151 Shreyas Shipping Ltd 03532631 Shringar Cinemas Ltd 055532498 Shriram City Union Finance Ltd 03530515 Shriram Overseas Finance Ltd 03523371 Siel Ltd 035507446 Simbhaoli Sugar Mills Ltd 065502455 Sirpur Paper Mills Ltd 06503811 Siyaram Silk Mills Ltd 035532725 Solar Explosives Ltd 03517544 Solectron Centum 04532447 Solvay Pharma India Ltd 035520057 Sona Koyo Steering Systems Ltd 055532221 Sonata Software Ltd 045532452 South Asian Petrochem Ltd 05526807 South East Asia Marine Engg Const 025

530491 Southern Iron amp Steel Co Ltd 06521082 Spentex Industries Ltd 02532651 SPL Industries Ltd 04523756 SREI Infrastructure Finance Ltd 08532468 SRF Polymers Ltd 035517556 SSI Ltd 07530017 Standard Industries Ltd 045512531 State Trading Corp of India Ltd 01513262 Steel Strips Wheels Ltd 03523363 Sterling Holiday Resort (I) Ltd 06522085 Stone India Ltd 065526733 Suashish Diamonds Ltd 015517168 Subros Ltd 035513414 Sujana Metal Products Ltd 07500404 Sunflag Iron amp Steel Co Ltd 06532711 Sunil Hitech Engineers Ltd 04521180 Super Spinning Mills Ltd 065532509 Suprajit Engineering Ltd 055509930 Supreme Industries Ltd 06500405 Supreme Petrochem Ltd 04507892 Su-Raj Diamonds (I) Ltd 06513597 Surana Industries Ltd 025532516 Surya Pharmaceuticals Ltd 06500336 Surya Roshni Ltd 08521200 Suryalakshmi Cotton Mills Ltd 03521194 Sutlej Industries Ltd 025530239 Suven Life Sciences Ltd 045500407 Swaraj Engines Ltd 05505192 Swaraj Mazda Ltd 03504920 Swil Ltd 09526169 Synergy Multibase Ltd 02505854 TRF Ltd 055532515 TV Today Network Ltd 045500777 Tamilnadu Petroproducts Ltd 065522229 Taneja Aerospace amp Aviation 055532738 Tantia Constructions Ltd 04532301 Tata Coffee Ltd 045513434 Tata Metaliks Ltd 055513010 Tata Sponge Iron Ltd 06505397 Techno Electric amp Engg Co Ltd 04532358 Tele Data Informatics Ltd 1590054 The Jeypore Sugar Company Ltd 06

(Continued)

532218 The South Indian Bank Ltd 1500430 The United Western Bank Ltd 085530199 Themis Medicare Ltd 035507450 Thiru Arooran Sugars Ind Ltd 055500412 Thirumalai Chemicals Ltd 05505196 TIL Ltd 06500414 Timex Watches 03504966 Tinplate Company of India Ltd 07504096 Torrent Cables Ltd 04526139 Transgene Biotek Ltd 045532349 Transport Corporation of India Ltd 03508998 Transworld Infotech Ltd 05531675 Tricom India Ltd 08517506 TTK Prestige Ltd 03509960 UP Hotels Ltd 015500464 UCAL Fuel Systems Ltd 055530363 Ugar Sugar Works Ltd 06506685 Ultra Marine amp Pigments Ltd 05532746 Unity Infraprojects Ltd 03504212 Universal Cables Ltd 05530505 Upper Ganges Sugar amp Indus Ltd 055513216 Uttam Galva Steels Ltd 055532619 UTV Software Communications Ltd 06507880 VIP Industries Ltd 045511431 Vakrangee Software Ltd 08532389 Valecha Engineering Ltd 065500439 Vardhaman Spg amp Gen Mills Ltd 04523261 VenkeyrsquoS (I) Ltd 05526953 Venus Remedies Ltd 085520113 Vesuvius India Ltd 045523796 Viceroy Hotels Ltd 08524394 Vimta Laboratories Ltd 045517015 Vindhya Telelinks Ltd 05532721 Visa Steel Ltd 03509055 Visaka Industries Ltd 05532411 Visesh Infotecnics Ltd 045532618 Vishal Export Overseas Ltd 045532214 Visualsoft (India) Ltd 085532660 Vivimed Labs Ltd 05507410 Walchandnagar Industries Ltd 055524212 Wanbury Ltd 055

500443 Wartsila India Ltd 015517498 Webel-Sl Energy Systems Ltd 06505412 Wendt (I) Ltd 025500444 West Coast Paper Mills Ltd 05500238 Whirpool of India Ltd 02517216 Yokogawa India Ltd 02506720 Zandu Pharma Works Ltd 06532298 Zenith Infotech Ltd 035504067 Zensar Technologies Ltd 02505163 ZF Steering Gear (I) Ltd 03531404 Zicom Electronic Security Systems 075521163 Zodiac Clothing Co Ltd 04500780 Zuari Industries Ltd 04

TABLE I 6 SampP CNX Nifty Constituent List

Company Name Industry Symbol ISIN Code

ABB Ltd Electrical Equipment ABB INE117A01014Associated Cement

Companies LtdCement and Cement

ProductsACC INE012A01025

Bajaj Auto Ltd Automobilesmdash2 and3 Wheelers

BAJAJAUTO INE118A01012

Bharti Tele-VenturesLtd

TelecommunicationsmdashServices

BHARTIARTL INE397D01016

Bharat HeavyElectricals Ltd

Electrical Equipment BHEL INE257A01018

Bharat PetroleumCorporation Ltd

Refineries BPCL INE029A01011

Cipla Ltd Pharmaceuticals CIPLA INE059A01026Dabur India Ltd Personal Care DABUR INE016A01026Dr Reddyrsquos

Laboratories LtdPharmaceuticals DRREDDY INE089A01023

GAIL (India) Ltd Gas GAIL INE129A01019

(Continued)

GlaxoSmithKlinePharmaceuticalsLtd

Pharmaceuticals GLAXO INE159A01016

Cement and CementProducts

GRASIM INE047A01013

Gujarat AmbujaCements Ltd

GUJAMBCEM INE079A01016

HCL TechnologiesLtd

ComputersmdashSoftware HCLTECH INE860A01027

HousingDevelopmentFinanceCorporation Ltd

FinancemdashHousing HDFC INE001A01028

HDFC Bank Ltd Banks HDFCBANK INE040A01018Hero Honda Motors

LtdAutomobilesmdash2 and

3 WheelersHEROHONDA INE158A01026

Hindalco IndustriesLtd

Aluminum HINDALC0 INE038A01012

Hindustan Lever Ltd Diversified HINDLEVER INE030A01027Hindustan Petroleum

Corporation LtdRefineries HINDPETRO INE094A01015

ICICI Bank Ltd Banks ICICIBANK INE090A01013Infosys Technologies

LtdComputersmdash

SoftwareINFOSYSTCH INE009A01021

IndianPetrochemicalsCorporation Ltd

Petrochemicals IPCL INE006A01019

ITC Ltd Cigarettes ITC INE154A01017Jet Airways (India)

LtdTravel amp Transport JETAIRWAYS INE802G01018

Larsen amp ToubroLtd

Engineering LT INE018A01030

Automobilesmdash4 Wheelers

MampM INE101A01018

Maruti Udyog Ltd Automobilesmdash4 Wheelers

MARUTI INE585B01010

MahanagarTelephone NigamLtd

MTNL INE153A01019

National AluminumCo Ltd

Aluminum NATIONALUM INE139A01026

Oil amp Natural GasCorporation Ltd

Oil ExplorationProduction

ONGC INE213A01011

Oriental Bank ofCommerce

Banks ORIENTBANK INE141A01014

Punjab NationalBank

Banks PNB INE160A01014

RanbaxyLaboratories Ltd

Pharmaceuticals RANBAXY INE015A01010

RelianceCommunicationsLtd

RCOM INE330H01018

Reliance Energy Ltd Power REL INE036A01016Reliance Industries

LtdRefineries RELIANCE INE002A01018

Steel Authority ofIndia Ltd

Steel and SteelProducts

SAIL INE114A01011

ComputersmdashSoftware

SATYAMCOMP INE275A01028

State Bank of India Banks SBIN INE062A01012Siemens Ltd Electrical Equipment SIEMENS INE003A01024Sun Pharmaceutical

Industries LtdPharmaceuticals SUNPHARMA INE044A01028

Suzlon Energy Ltd Electrical Equipment SUZLON INE040H01013Tata Motors Ltd Automobilesmdash4

WheelersTATAMOTORS INE155A01014

Tata Power Co Ltd Power TATAPOWER INE245A01013Tata Steel Ltd Steel and Steel

ProductsTATASTEEL INE081A01012

TCS INE467B01029

VSNL INE151A01013

Wipro Ltd ComputersmdashSoftware

WIPRO INE075A01022

Zee EntertainmentEnterprises Ltd

Media ampEntertainment

ZEEL INE256A01028

ilesmdash

nsmdash

rsquosL

rsmdash

ncemdash

smdash2

mdashSo

smdash4

mdashSe

lampSt

rsmdash

mdashSe

ilesmdash

mdashSo

lampSt

nsmdash

rsmdash

TABLE I 8 CNX Nifty Junior Constituent List

Andhra Bank Banks ANDHRABANK INE434A01013Apollo Tyres Ltd Tires APOLLOTYRE INE438A01014Ashok Leyland Ltd Automobilesmdash

4 WheelersASHOKLEY INE208A01029

Asian Paints Ltd Paints ASIANPAINT INE021A01018Aurobindo Pharma

LtdPharmaceuticals AUROPHARMA INE406A01029

Aventis Pharma Ltd Pharmaceuticals AVENTIS INE058A01010Bank of Baroda Banks BANKBARODA INE028A01013Bank of India Banks BANKINDIA INE084A01016Bharat Electronics

LtdElectronicsmdash

IndustrialBEL INE263A01016

Bharat Forge Ltd CastingsForgings BHARATFORG INE465A01025Biocon Ltd Pharmaceuticals BIOCON INE376G01013Bongaigaon

Refinery ampPetrochemicalsLtd

Refineries BONGAIREFN INE241A01012

Pharmaceuticals CADILAHC INE010B01019

Canara Bank Banks CANBK INE476A01014Chennai Petroleum

Corporation LtdRefineries CHENNPETRO INE178A01016

ContainerCorporation ofIndia Ltd

Travel and Transport CONCOR INE111A01017

Corporation Bank Banks CORPBANK INE112A01015Cummins India Ltd Diesel Engines CUMMINSIND INE298A01020I-Flex Solutions Ltd ComputersmdashSoftware I-FLEX INE881D01027IBP Co Ltd Refineries IBP INE261A01010Industrial

DevelopmentBank of India Ltd

Financial Institution IDBI INE008A01015

InfrastructureDevelopmentFinance Co Ltd

Financial Institution IDFC INE043D01016

IFCI Ltd Financial Institution IFCI INE039A01010Indian Hotels Co

LtdHotels INDHOTEL INE053A01029

Ingersoll Rand(India) Ltd

CompressorsPumps INGERRAND INE177A01018

ING Vysya BankLtd

Banks INGVYSYABK INE166A01011

Indian OverseasBank

Banks IOB INE565A01014

JaiprakashAssociates Ltd

Construction JPASSOCIAT INE455F01017

Banks KOTAKBANK INE237A01010

FinancemdashHousing LICHSGFIN INE115A01018

Lupin Ltd Pharmaceuticals LUPIN INE326A01029Moser Baer India

LtdComputersmdashHardware MOSERBAER INE739A01015

Mphasis BFL Ltd ComputersmdashSoftware MPHASISBFL INE356A01018Nicholas Piramal

India LtdPharmaceuticals NICOLASPIR INE140A01024

Nirma Ltd Detergents NIRMA INE091A01011Patni Computer

Systems LtdComputersmdashSoftware PATNI INE660F01012

Pfizer Ltd Pharmaceuticals PFIZER INE182A01018Polaris Software

Lab LtdComputersmdashSoftware POLARIS INE763A01023

Punjab TractorsLtd

PUNJABTRAC INE170A01013

Raymond Ltd Textile Products RAYMOND INE301A01014Reliance Capital

LtdFinance RELCAPITAL INE013A01015

Reliance PetroleumLtd

Refineries RPL INE475H01011

Sterlite Industries(India) Ltd

Metals STER INE268A01031

Syndicate Bank Banks SYNDIBANK INE667A01018Tata Teleservices

(Maharashtra)Ltd

TTML INE517B01013

TVS MotorCompany Ltd

Automobilesmdash2 and3 Wheelers

TVSMOTOR INE494B01023

Union Bank of India Banks UNIONBANK INE692A01016UTI Bank Ltd Banks UTIBANK INE238A01026Vijaya Bank Banks VIJAYABANK INE705A01016Wockhardt Ltd (As

of March 2007)Pharmaceuticals WOCKPHARMA INE049B01025

TABLE I 9 SampP CNX 500 Constituent List

3M India Ltd Trading 3MINDIA INE470A01017Aarti Industries Ltd ChemicalsmdashOrganic AARTIIND INE769A01020Aban Offshore Ltd Oil Explo-

rationProductionABAN INE421A01028

ABB Ltd Electrical Equipment ABB INE117A01014Abhishek Industries

LtdTextilesmdashCotton ABSHEKINDS INE064C01014

ACC Ltd Cement and CementProducts

ACC INE012A01025

Adani EnterprisesLtd

Trading ADANIENT INE423A01024

Aditya Birla NuvoLtd

TextilesmdashSynthetic ABIRLANUVO INE069A01017

Adlabs Films Ltd Media ampEntertainment

ADLABSFILM INE540B01015

Ador Welding Ltd Electrodes ADORWELD INE045A01017Aftek Infosys Ltd ComputersmdashSoftware AFTEKINFO INE796A01023Agro Dutch

Industries LtdFood and Food

ProcessingAGRODUTCH INE135B01014

Agro Tech FoodsLtd

Solvent Extraction ATFL INE209A01019

AjantaPharmaceuticalsLtd

Pharmaceuticals AJANTPHARM INE031B01015

Aksh Optifibre Ltd CablesmdashTelecom AKSHOPTFBR INE523B01011Alembic Ltd Pharmaceuticals ALEMBICLTD INE426A01027Alfa Laval (India)

LtdEngineering ALFALAVAL INE427A01017

Allahabad Bank Banks ALBK INE428A01015Alok Industries Ltd TextilesmdashSynthetic ALOKTEXT INE270A01011Alstom Projects

India LtdPower APIL INE878A01011

Amara RajaBatteries Ltd

Auto Ancillaries AMARAJABAT INE885A01016

Amtek Auto Ltd Auto Ancillaries AMTEKAUTO INE130C01021Andhra Bank Banks ANDHRABANK INE434A01013Andhra Sugars Ltd Diversified ANDHRSUGAR INE715B01013Ansal Properties amp

InfrastructureLtd

Construction ANSALINFRA INE436A01026

Apollo HospitalsEnterprises Ltd

Miscellaneous APOLLOHOSP INE437A01016

Apollo Tyres Ltd Tyres APOLLOTYRE INE438A01014Aptech Ltd ComputersmdashSoftware APTECHT INE266F01018Archies Ltd Printing and

PublishingARCHIES INE731A01012

Arvind Mills Ltd Textile Products ARVINDMILL INE034A01011Asahi India Glass

LtdAuto Ancillaries ASAHIINDIA INE439A01020

Ashok Leyland Ltd Automobilesmdash4 Wheelers

ASHOKLEY INE208A01029

Asian ElectronicsLtd

ElectronicsmdashIndustrial ASIANELEC INE441A01018

Asian Hotels Ltd Hotels ASIANHOTEL INE363A01014Asian Paints Ltd Paints ASIANPAINT INE021A01018AstraZenca Pharma

India LtdPharmaceuticals ASTRAIDL INE203A01020

Atlas Cycle(Haryana) Ltd

Cycles ATLASCYCLE INE446A01017

Atul Ltd Dyes and Pigments ATUL INE100A01010Aurobindo Pharma

Automotive AxlesLtd

Auto Ancillaries AUTOAXLES INE449A01011

AvayaGlobalConnectLtd

TelecommunicationsmdashEquipment

AVAYAGCL INE676A01019

Aventis PharmaLtd

Pharmaceuticals AVENTIS INE058A01010

Aztecsoft Ltd ComputersmdashSoftware AZTECSOFT INE651B01010B L Kashyap amp

Sons LtdConstruction BLKASHYAP INE350H01016

Bajaj Auto FinanceLtd

Finance BAJAUTOFIN INE296A01016

Bajaj HindusthanLtd

Sugar BAJAJHIND INE306A01021

Balaji Telefilms Ltd Media ampEntertainment

BALAJITELE INE794B01026

Ballarpur IndustriesLtd

Paper and PaperProducts

BILT INE294A01011

Miscellaneous BALMLAWRIE INE164A01016

(Continued)

Sugar BALRAMCHIN INE119A01028

Bank of Baroda Banks BANKBARODA INE028A01013Bank of India Banks BANKINDIA INE084A01016Bannari Amman

Sugars LtdSugar BANARISUG INE459A01010

BASF India Ltd ChemicalsmdashSpecialty BASF INE373A01013Bata India Ltd Leather and Leather

ProductsBATAINDIA INE176A01010

Berger Paints IndiaLtd

Paints BERGEPAINT INE463A01020

BhansaliEngineeringPolymers Ltd

Petrochemicals BEPL INE922A01025

Bharat EarthMovers Ltd

Engineering BEML INE258A01016

Bharat ElectronicsLtd

ElectronicsmdashIndustrial BEL INE263A01016

Bharat Forge Ltd CastingsForgings BHARATFORG INE465A01025Bharat Heavy

Electricals LtdElectrical Equipment BHEL INE257A01018

Bharti Airtel Ltd TelecommunicationsmdashServices

BHUSANSTL INE824B01013

Biocon Ltd Pharmaceuticals BIOCON INE376G01013Birla Corporation

LtdCement and Cement

ProductsBIRLAJUTE INE340A01012

Birla EricssonOptical Ltd

CablesmdashTelecom BIRLAERIC INE800A01015

Blue Dart ExpressLtd

Miscellaneous BLUEDART INE233B01017

Blue Star InfotechLtd

ComputersmdashSoftware BLUESTINFO INE504B01011

Blue Star Ltd Air Conditioners BLUESTARCO INE472A01039BOC India Ltd Gas BOC INE473A01011Bombay Dyeing amp

ManufacturingCo Ltd

TextilesmdashCotton BOMDYEING INE032A01015

BongaigaonRefinery ampPetrochemicalsLtd

Bosch ChassisSystems India Ltd

Auto Ancillaries BOSCHCHASY INE053B01019

BPL Ltd Consumer Durables BPL INE110A01019Britannia Industries

LtdFood and Food

ProcessingBRITANNIA INE216A01014

Can Fin Homes Ltd FinancemdashHousing CANFINHOME INE477A01012Canara Bank Banks CANBK INE476A01014Carborundum

Universal LtdAbrasives CARBORUNIV INE120A01026

Carol Info ServicesLtd

Pharmaceuticals CAROLINFO INE198A01014

Ceat Ltd Tires CEAT INE482A01012Century Enka Ltd TextilesmdashSynthetic CENTENKA INE485A01015Century Textile amp

Industries LtdDiversified CENTURYTEX INE055A01016

CESC Ltd Power CESC INE486A01013Chambal Fertilizers

amp Chemicals LtdFertilizers CHAMBLFERT INE085A01013

Chemplast SanmarLtd

Petrochemicals CHEMPLAST INE488A01027

Chennai PetroleumCorporation Ltd

Refineries CHENNPETRO INE178A01016

CholamandalamDBS Finance Ltd

Finance CHOLADBS INE121A01016

Cinevistaas Ltd Media ampEntertainment

CINEVISTA INE039B01018

Cipla Ltd Pharmaceuticals CIPLA INE059A01026City Union Bank

LtdBanks CUB INE491A01013

Clariant Chemicals(India) Ltd

Dyes and Pigments CLNINDIA INE492A01029

CMC Ltd ComputersmdashHardware CMC INE314A01017Colgate-Palmolive

(India) LtdPersonal Care COLGATE INE259A01014

(Continued)

ConsolidatedFinvest ampHoldings Ltd

Finance CONSOFINVT INE025A01027

Miscellaneous CONCOR INE111A01017

CoromandelFertilisers Ltd

Fertilizers COROMNFERT INE169A01023

Corporation Bank Banks CORPBANK INE112A01015Cosmo Films Ltd Packaging COSMOFILMS INE757A01017Crest Animation

Studios LtdMedia amp

EntertainmentCRESTANI INE774A01012

CRISIL Ltd Miscellaneous CRISIL INE007A01017Crompton Greaves

LtdElectrical Equipment CROMPGREAV INE067A01029

Cummins India Ltd Diesel Engines CUMMINSIND INE298A01020Dabur India Ltd Personal Care DABUR INE016A01026Dabur Pharma Ltd Pharmaceuticals DABURPHARM INE575G01010Dalmia Cement

(Bharat) LtdCement and Cement

ProductsDALMIACEM INE495A01022

DCM ShriramConsolidated Ltd

Diversified DCMSRMCONS INE499A01024

DCW Ltd Petrochemicals DCW INE500A01029Deccan Chronicle

Holdings LtdPrinting and

PublishingDCHL INE137G01019

Deepak Fertilisersamp PetrochemicalsCorp Ltd

Fertilizers DEEPAKFERT INE501A01019

Dena Bank Banks DENABANK INE077A01010Dhampur Sugar

Mills LtdSugar DHAMPURSUG INE041A01016

DIC India Ltd Miscellaneous DICIND INE303A01010Dishman

Pharmaceuticalsamp Chemicals Ltd

Pharmaceuticals DISHMAN INE353G01020

Divirsquos LaboratoriesLtd

Pharmaceuticals DIVISLAB INE361B01016

D-Link India Ltd ComputersmdashHardware D-LINK INE178C01020Dr Reddyrsquos

DredgingCorporation ofIndia Ltd

Miscellaneous DREDGECORP INE506A01018

DS KulkarniDevelopers Ltd

Construction DSKULKARNI INE891A01014

Dwarikesh SugarIndustrial Ltd

Sugar DWARKESH INE366A01033

EID Parry (India)Ltd

Diversified EIDPARRY INE126A01023

EMerck (India) Ltd Pharmaceuticals EMERCK INE199A01012Eicher Ltd Finance EICHER INE065A01023Eicher Motors Ltd Automobilesmdash

4 WheelersEICHERMOT INE066A01013

EIH Ltd Hotels EIHOTEL INE230A01023Elder

PharmaceuticalsLtd

Pharmaceuticals ELDERPHARM INE975A01015

Electrosteel CastingsLtd

CastingsForgings ELECTCAST INE086A01011

Elgi EquipmentsLtd

CompressorsPumps ELGIEQUIP INE285A01027

Elgitread (India)Ltd

Auto Ancillaries ELGITYRE INE257B01024

Engineers India Ltd Construction ENGINERSIN INE510A01010Era Constructions

(India) LtdConstruction ERACONS INE039E01012

ESAB India Ltd Electrodes ESABINDIA INE284A01012Escorts Ltd Automobilesmdash

4 WheelersESCORTS INE042A01014

Essar Oil Ltd Refineries ESSAROIL INE011A01019Essar Steel Ltd Steel and Steel

ProductsESTL INE127A01021

Essel Propack Ltd Packaging ESSELPACK INE255A01020Everest Industries

ProductsEVERESTIND INE295A01018

Exide Industries Ltd Auto Ancillaries EXIDEIND INE302A01020Fag Bearings India

LtdBearings FAGBEARING INE513A01014

FCI OENConnectors Ltd

ElectronicsmdashIndustrial

OENCONNECT INE669B01012

FDC Ltd Pharmaceuticals FDC INE258B01022

(Continued)

Federal Bank Ltd Banks FEDERALBNK INE171A01011Federal-Mogul

Goetze (India)Ltd

Auto Ancillaries FMGOETZE INE529A01010

FinancialTechnologies(India) Ltd

ComputersmdashSoftware FINANTECH INE111B01023

Finolex Cables Ltd Miscellaneous FINCABLES INE235A01014Finolex Industries

LtdPetrochemicals FINPIPE INE183A01016

First Leasing Co ofIndia Ltd

Finance FIRSTLEASE INE492B01019

Flex Industries Ltd Packaging FLEX INE516A01017Foseco India Ltd ChemicalsmdashSpecialty FOSECOIND INE519A01011GAIL (India) Ltd Gas GAIL INE129A01019Gammon India Ltd Construction GAMMONIND INE259B01020Garden Silk Mills

LtdTextilesmdashSynthetic GARDENSILK INE526A01016

Gateway DistriparksLtd

Travel and Transport GDL INE852F01015

Geometric SoftwareSolutions Co Ltd

ComputersmdashSoftware GEOMETRIC INE797A01021

GHCL Ltd ChemicalsmdashInorganic GHCL INE539A01019Gillette India Ltd Personal Care GILLETTE INE322A01010Gitanjali Gems Ltd Gems GITANJALI INE346H01014GlaxoSmithkline

ConsumerHealthcare Ltd

Food and FoodProcessing

GSKCONS INE264A01014

GlaxoSmithklinePharmaceuticalsLtd

GlenmarkPharmaceuticalsLtd

Pharmaceuticals GLENMARK INE935A01027

GMR InfrastructureLtd

Construction GMRINFRA INE776C01013

Godavari Fertilisersamp Chemicals Ltd

Fertilizers GODAVRFERT INE507C01012

Cigarettes GODFRYPHLP INE260B01010

Personal Care GODREJCP INE102D01028

ChemicalsmdashInorganic GODREJIND INE233A01035

Gokaldas ExportsLtd

Textile Products GOKEX INE887G01019

Graphite India Ltd Electrodes GRAPHITE INE371A01017Grasim Industries

ProductsGRASIM INE047A01013

Greaves Cotton Ltd Diesel Engines GREAVESCOT INE224A01018GTL Ltd ComputersmdashSoftware GTL INE043A01012GTN Industries Ltd TextilesmdashCotton GTNIND INE537A01013Gujarat Alkalies amp

Chemicals LtdChemicalsmdashInorganic GUJALKALI INE186A01019

Gujarat AmbujaExports Ltd

Trading GAEL INE036B01022

GujaratFluorochemicalsLtd

Gas GUJFLUORO INE538A01029

Gujarat Gas CoLtd

Gas GUJRATGAS INE374A01011

Gujarat IndustriesPower Co Ltd

Power GIPCL INE162A01010

Gujarat MineralDevelopmentCorporation Ltd

Mining GMDCLTD INE131A01023

Gujarat NarmadaValley FertilisersCo Ltd

Fertilizers GNFC INE113A01013

Gujarat NRE CokeLtd

Mining GUJNRECOKE INE110D01013

Gujarat StateFertilizers ampChemicals Ltd

Fertilizers GSFC INE026A01017

HEG Ltd Electrodes HEG INE545A01016Harrisons

Malayalam LtdTea and Coffee HARRMALAYA INE544A01019

(Continued)

Havellrsquos India Ltd Electrical Equipment HAVELLS INE176B01026HCL Infosystems

LtdComputersmdashHardware HCL-INSYS INE236A01020

HCL TechnologiesLtd

HDFC Bank Ltd Banks HDFCBANK INE040A01018Heritage Foods

(India) LtdFood and Food

ProcessingHERITGFOOD INE978A01019

HEROHONDA INE158A01026

ComputersmdashSoftware HEXAWARE INE093A01033

Hikal Ltd ChemicalsmdashOrganic HIKAL INE475B01014Himachal Futuristic

CommunicationsLtd

HIMACHLFUT INE548A01010

Himatsingka SeideLtd

Textile Products HIMATSEIDE INE049A01027

Hinduja TMT Ltd ComputersmdashSoftware HTMT INE353A01015Hindustan

Construction CoLtd

Construction HCC INE549A01026

Hindustan LeverLtd

Diversified HINDLEVER INE030A01027

Hindustan MotorsLtd

HINDMOTOR INE253A01017

HINDOILEXP INE345A01011

HindustanPetroleumCorporation Ltd

Refineries HINDPETRO INE094A01015

HindustanSanitaryware ampIndustries Ltd

Construction HINDSANIT INE415A01038

HMT Ltd Automobilesmdash4 Wheelers

HMT INE262A01018

Honda SIEL PowerProducts Ltd

Electrical Equipment HONDAPOWER INE634A01018

HoneywellAutomation IndiaLtd

ElectronicsmdashIndustrial HONAUT INE671A01010

Hotel LeelaventureLtd

Hotels HOTELEELA INE102A01024

HT Media Ltd Printing andPublishing

HTMEDIA INE501G01016

I T C Ltd Cigarettes ITC INE154A01025IBP Co Ltd Refineries IBP INE261A01010ICI India Ltd Paints ICI INE133A01011ICICI Bank Ltd Banks ICICIBANK INE090A01013I-Flex Solutions Ltd ComputersmdashSoftware I-FLEX INE881D01027iGate Global

Solutions LtdComputersmdashSoftware IGS INE177B01016

ILampFS InvestsmartLtd

Finance INVSTSMART INE800B01013

India Cements Ltd Cement and CementProducts

INDIACEM INE383A01012

India Glycols Ltd Petrochemicals INDIAGLYCO INE560A01015India Nippon

Electricals LtdAuto Ancillaries INDNIPPON INE092B01017

Indiabulls FinancialServices Ltd

Finance INDIABULLS INE894F01025

Indian CardClothing Co Ltd

Textile Machinery INDIANCARD INE061A01014

Indian Hotels CoLtd

Hotels INDHOTEL INE053A01029

Indian OilCorporation Ltd

Refineries IOC INE242A01010

Indian OverseasBank

Indo RamaSynthetics Ltd

TextilesmdashSynthetic INDORAMA INE156A01020

Indraprastha GasLtd

Gas IGL INE203G01019

(Continued)

IndraprasthaMedicalCorporation Ltd

Miscellaneous INDRAMEDCO INE681B01017

Ind-SwiftLaboratories Ltd

Pharmaceuticals INDSWFTLAB INE915B01019

IndusInd Bank Ltd Banks INDUSINDBK INE095A01012Industrial

Banks IDBI INE008A01015

InfosysTechnologies Ltd

ComputersmdashSoftware INFOSYSTCH INE009A01021

Infotech EnterprisesLtd

ComputersmdashSoftware INFOTECENT INE136B01020

InfrastructureDevlopmentFinance Co Ltd

ING Vysya BankLtd

Inox Leisure Ltd Media ampEntertainment

INOXLEISUR INE312H01016

Ipca LaboratoriesLtd

Pharmaceuticals IPCALAB INE571A01012

IVRCLInfrastructures ampProjects Ltd

Construction IVRCLINFRA INE875A01025

JB Chemicals ampPharmaceuticalsLtd

Pharmaceuticals JBCHEPHARM INE572A01028

JagsonpalPharmaceuticalsLtd

Pharmaceuticals JAGSNPHARM INE048B01027

Jain IrrigationSystems Ltd

Plastic and PlasticProducts

JISLJALEQS INE175A01020

Jain Studios Ltd Media ampEntertainment

JAINSTUDIO INE486B01011

Jammu amp KashmirBank Ltd

Banks JampKBANK INE168A01017

Jay Shree Tea ampIndustries Ltd

Tea and Coffee JAYSREETEA INE364A01012

Jet Airways (India)Ltd

Travel and Transport JETAIRWAYS INE802G01018

Jindal Poly FilmsLtd

TextilesmdashSynthetic JINDALPOLY INE197D01010

Jindal Saw Ltd Steel and SteelProducts

JINDALSAW INE324A01016

Jindal Stainless Ltd Steel and SteelProducts

JSTAINLESS INE220G01021

Jindal Steel ampPower Ltd

JINDALSTEL INE749A01022

JSW Steel Ltd Steel and SteelProducts

JSWSTEEL INE019A01020

Jubilant OrganosysLtd

Pharmaceuticals JUBILANT INE700A01033

Jyoti Structures Ltd Transmission Towers JYOTISTRUC INE197A01024Kajaria Ceramics

LtdConstruction KAJARIACER INE217B01028

Kakatiya CementSugar ampIndustries Ltd

Sugar KAKATCEM INE437B01014

Kale ConsultantsLtd

ComputersmdashSoftware KALECONSUL INE793A01012

Kalpataru PowerTransmission Ltd

Transmission Towers KALPATPOWR INE220B01014

Kansai NerolacPaints Ltd

Paints KANSAINER INE531A01016

Karnataka BankLtd

Banks KTKBANK INE614B01018

Karur Vysya BankLtd

Banks KARURVYSYA INE036D01010

KCP Ltd Cement and CementProducts

KCP INE805C01010

KEC InfrastructuresLtd

Construction KECINFRA INE852A01016

Kesoram IndustriesLtd

Tires KESORAMIND INE087A01019

CompressorsPumps KBL INE732A01028

(Continued)

Diesel Engines KIRLOSOIL INE250A01021

Kohinoor FoodsLtd

KOHINOOR INE080B01012

Kopran Ltd Pharmaceuticals KOPRAN INE082A01010Kotak Mahindra

Bank LtdBanks KOTAKBANK INE237A01010

Kothari ProductsLtd

KOTHARIPRO INE823A01017

KPIT CumminsInfosystem Ltd

ComputersmdashSoftware KPIT INE836A01027

KSB Pumps Ltd CompressorsPumps KSBPUMPS INE999A01015LG Balakrishnan

amp Bros LtdMetals LGBROS INE337A01026

Textile Machinery LAXMIMACH INE269B01011

Lakshmi Vilas BankLtd

Banks LAKSHVILAS INE694C01018

LANXESS ABS Ltd Petrochemicals LANABS INE189B01011Larsen amp Toubro

LtdEngineering LT INE018A01030

Lumax IndustriesLtd

Auto Ancillaries LUMAXIND INE162B01018

Lupin Ltd Pharmaceuticals LUPIN INE326A01029Maars Software

International LtdComputersmdashSoftware MAARSOFTW INE390A01017

Macmillan India Ltd Printing andPublishing

MACMILLAN INE943D01017

Madras CementsLtd

MADRASCEM INE331A01029

MTNL INE153A01019

MaharashtraScooters Ltd

MAHSCOOTER INE288A01013

MAHSEAMLES INE271B01025

Mahindra ampMahindraFinancial ServicesLtd

Finance MampMFIN INE774D01016

Automobilesmdash4Wheelers

MampM INE101A01018

Mahindra GescoCorporation Ltd

Construction GESCOCORP INE813A01018

MAHINDUGIN INE850A01010

Mangalore Refineryamp PetrochemicalsLtd

Refineries MRPL INE103A01014

Maral Overseas Ltd TextilesmdashCotton MARALOVER INE882A01013Marico Ltd Solvent Extraction MARICO INE196A01018Maruti Udyog Ltd Automobilesmdash4

WheelersMARUTI INE585B01010

Mastek Ltd ComputersmdashSoftware

MASTEK INE759A01021

Matrix LaboratoriesLtd

Pharmaceuticals MATRIXLABS INE604D01023

Max India Ltd Packaging MAX INE180A01012Mcdowell amp

Company LtdBrewDistilleries MCDOWELL-

NINE854D01016

Melstar InformationTechnologies Ltd

ComputersmdashSoftware MELSTAR INE817A01019

Mercator Lines Ltd Shipping MLL INE934B01028Micro Inks Ltd Miscellaneous MICRO INE056A01014Mid-Day

Multimedia LtdPrinting and

PublishingMID-DAY INE747B01016

Mirc ElectronicsLtd

Consumer Durables MIRCELECTR INE831A01028

Mirza InternationalLtd

Leather and LeatherProducts

MIRZAINT INE771A01018

Monnet Ispat Ltd Steel and SteelProducts

MONNETISPA INE743C01013

Monsanto India Ltd Pesticides andAgrochemicals

MONSANTO INE274B01011

Moser Baer IndiaLtd

ComputersmdashHardware MOSERBAER INE739A01015

(Continued)

Motherson SumiSystems Ltd

Auto Ancillaries MOTHERSUMI INE775A01035

Motor IndustriesCo Ltd

Auto Ancillaries MICO INE323A01026

Mphasis BFL Ltd ComputersmdashSoftware MPHASISBFL INE356A01018MRF Ltd Tires MRF INE883A01011MRO-TEK Ltd ComputersmdashHardware MRO-TEK INE398B01018Mukta Arts Ltd Media amp

EntertainmentMUKTAARTS INE374B01019

Munjal Showa Ltd Auto Ancillaries MUNJALSHOW INE577A01027Nagarjuna

Construction CoLtd

Construction NAGARCONST INE868B01028

NagarjunaFertilizers ampChemicals Ltd

Fertilizers NAGARFERT INE580A01013

Nahar Exports Ltd TextilesmdashCotton NAHAREXP INE308A01019Nahar Spinning

Mills LtdTextilesmdashSynthetic NAHARSPG INE290A01019

Narmada ChematurPetrochemicalsLtd

Petrochemicals NARMDCHEMAINE693B01012

Nava BharatVentures Ltd

Metals NBVENTURES INE725A01022

NavneetPublications(India) Ltd

Printing andPublishing

NAVNETPUBL INE060A01024

NDTV Ltd Media ampEntertainment

NDTV INE155G01029

NELCO Ltd ElectronicsmdashIndustrial NELCO INE045B01015NEPC India Ltd Electrical Equipment NEPCMICON INE588A01016Neyveli Lignite

Corporation LtdPower NEYVELILIG INE589A01014

Nicholas PiramalIndia Ltd

Pharmaceuticals NICOLASPIR INE140A01024

Nilkamal PlasticsLtd

NILKAMPLST INE310A01015

Nirma Ltd Detergents NIRMA INE091A01011

NovaPetrochemicalsLtd

TextilesmdashSynthetic NOVAPETRO INE787A01014

NRB Bearings Ltd Bearings NRBBEARING INE349A01013NTPC Ltd Power NTPC INE733E01010Oil amp Natural Gas

Corporation LtdOil Explo-

rationProductionONGC INE213A01011

Omax Autos Ltd Auto Ancillaries OMAXAUTO INE090B01011Onward

Technologies LtdComputersmdashHardware ONWARDTEC INE229A01017

Orchid Chemicals ampPharmaceuticalsLtd

Pharmaceuticals ORCHIDCHEM INE191A01019

Orient InformationTechnologies Ltd

ComputersmdashSoftware ORIENTINFO INE067B01019

Orient Paper ampIndustries Ltd

Diversified ORIENTPPR INE592A01018

Oriental Hotels Ltd Hotels ORIENTHOT INE750A01012Panacea Biotec Ltd Pharmaceuticals PANACEABIO INE922B01023Pantaloon Retail

(India) LtdMiscellaneous PANTALOONR INE623B01019

Paper Products Ltd Paper and PaperProducts

PAPERPROD INE275B01018

Construction PATELENG INE244B01030

ComputersmdashSoftware PATNI INE660F01012

Patspin India Ltd TextilesmdashCotton PATSPINLTD INE790C01014Petronet LNG Ltd Gas PETRONET INE347G01014Pfizer Ltd Pharmaceuticals PFIZER INE182A01018Pidilite Industries

LtdChemicalsmdashOrganic PIDILITIND INE318A01026

PNB Gilts Ltd Finance PNBGILTS INE859A01011Polaris Software

Praj Industries Ltd Engineering PRAJIND INE074A01025Pricol Ltd Auto Ancillaries PRICOL INE605A01026Prism Cement Ltd Cement and Cement

ProductsPRISMCEM INE010A01011

(Continued)

Pritish NandyCommunicationsLtd

PNC INE392B01011

Procter amp GambleHygiene ampHealth Care Ltd

Personal Care PGHH INE179A01014

PSL Ltd Miscellaneous PSL INE474B01017Pudumjee Pulp amp

Paper Mills LtdPaper and Paper

ProductsPDUMJEPULP INE606A01016

Punj Lloyd Ltd Construction PUNJLLOYD INE701B01013Punjab National

BankBanks PNB INE160A01014

Punjab Tractors Ltd Automobilesmdash4Wheelers

Radico Khaitan Ltd BrewDistilleries RADICO INE944F01028Rain Calcining Ltd Petrochemicals RAINCALCIN INE329A01015Rajesh Exports Ltd Trading RAJESHEXPO INE343B01022Rallis India Ltd Pesticides and

AgrochemicalsRALLIS INE613A01012

Ramco IndustriesLtd

RAMCOIND INE614A01010

Ramco Systems Ltd ComputersmdashSoftware RAMCOSYS INE614A01010Ranbaxy

Laboratories LtdPharmaceuticals RANBAXY INE015A01028

Rane Brake LiningsLtd

Auto Ancillaries RANEBRAKE INE413A01017

Rane Engine ValvesLtd

Auto Ancillaries REVL INE385A01017

Rashtriya Chemicalsamp Fertilizers Ltd

Fertilizers RCF INE027A01015

RCOM INE330H01018

Reliance Energy Ltd Power REL INE036A01016Reliance Industrial

InfrastructureLtd

Engineering RIIL INE046A01015

Reliance IndustriesLtd

Refineries RELIANCE INE002A01018

Reliance NaturalResources Ltd

Gas RNRL INE328H01012

Rico Auto IndustriesLtd

Auto Ancillaries RICOAUTO INE209B01025

Rolta India Ltd ComputersmdashSoftware ROLTA INE293A01013RPG Life Sciences

LtdPesticides and

AgrochemicalsSEARLEIND INE629A01018

RSWM Ltd TextilesmdashSynthetic RSWM INE611A01016Ruchi Soya

Industries LtdSolvent Extraction RUCHISOYA INE619A01019

S KumarsNationwide Ltd

Textile Products SKUMARSYNF INE772A01016

SB amp TInternational Ltd

Gems SBampTINTL INE465B01015

Sakthi Sugars Ltd Sugar SAKHTISUG INE623A01011Salora International

LtdConsumer Durables SALORAINTL INE924A01013

Samtel Color Ltd Consumer Durables SAMTEL INE381A01016Sandesh Ltd Printing and

PublishingSANDESH INE583B01015

Saregama India Ltd Media ampEntertainment

SAREGAMA INE979A01017

ComputersmdashSoftware SATYAMCOMP INE275A01028

Sesa Goa Ltd Mining SESAGOA INE205A01017Seshasayee Paper amp

Boards LtdPaper and Paper

ProductsSESHAPAPER INE630A01016

Shanthi Gears Ltd Auto Ancillaries SHANTIGEAR INE631A01022Shasun Chemicals

amp Drugs LtdPharmaceuticals SHASUNCHEM INE317A01028

ShippingCorporation ofIndia Ltd

Shipping SCI INE109A01011

Shoppers Stop Ltd Miscellaneous SHOPERSTOP INE498B01016Shree Cement Ltd Cement and Cement

ProductsSHREECEM INE070A01015

Shree RenukaSugars Ltd

Sugar RENUKA INE087H01014

Shrenuj amp Co Ltd Gems SHRENUJ INE633A01028Shriram Transport

Finance Co LtdFinance SRTRANSFIN INE721A01013

(Continued)

Siemens Ltd Electrical Equipment SIEMENS INE003A01024Simplex

InfrastructuresLtd

Construction SIMPLEXINF INE059B01024

SINTEX INE429C01027

Sirpur Paper MillsLtd

SIRPAPER INE202C01010

SKF India Ltd Bearings SKFINDIA INE640A01023Sona Koyo Steering

Systems LtdAuto Ancillaries SONASTEER INE643A01027

Sonata SoftwareLtd

ComputersmdashSoftware SONATSOFTW INE269A01021

South East AsiaMarineEngineering ampConstruction Ltd

Oil Explo-rationProduction

SEAMECLTD INE497B01018

South Indian BankLtd

Banks SOUTHBANK INE683A01015

SREI InfrastructureFinance Ltd

Finance SREINTFIN INE872A01014

SRF Ltd TextilesmdashSynthetic SRF INE647A01010Sri Adhikari

BrothersTelevisionNetwork Ltd

SRIADIKARI INE416A01028

SSI Ltd ComputersmdashSoftware SOFTSOLINT INE362A01016State Bank of India Banks SBIN INE062A01012State Trading

Corporation ofIndia Ltd

Trading STCINDIA INE655A01013

SAIL INE114A01011

Sterling Biotech Ltd Pharmaceuticals STERLINBIO INE324C01038Sterlite Industries

(India) LtdMetals STER INE268A01031

Sterlite OpticalTechnologies Ltd

CablesmdashTelecom STROPTICAL INE089C01011

Strides Arcolab Ltd Pharmaceuticals STAR INE939A01011Sun Pharmaceutical

Sun TV Ltd Media ampEntertainment

SUNTV INE424H01019

Sundaram BrakeLinings Ltd

Auto Ancillaries SUNDRMBRAK INE073D01013

Sundaram FastenersLtd

Fasteners SUNDRMFAST INE387A01021

Sundaram FinanceLtd

Finance SUNDARMFIN INE660A01013

Sundaram-ClaytonLtd

Auto Ancillaries SUNDRMCLAY INE105A01019

Supreme IndustriesLtd

SUPREMEIND INE195A01010

Supreme PetrochemLtd

Petrochemicals SUPPETRO INE663A01017

Surya Roshni Ltd Steel and SteelProducts

SURYAROSNI INE335A01012

Suzlon Energy Ltd Electrical Equipment SUZLON INE040H01013Swaraj Engines Ltd Diesel Engines SWARAJENG INE277A01016Swaraj Mazda Ltd Automobilesmdash

4 WheelersSWARAJMAZD INE294B01019

Syndicate Bank Banks SYNDIBANK INE667A01018Taj GVK Hotels amp

Resorts LtdHotels TAJGVK INE586B01026

Tamil NaduNewsprint ampPapers Ltd

TNPL INE107A01015

TamilnaduPetroproductsLtd

Petrochemicals TNPETRO INE148A01019

Tata Chemicals Ltd ChemicalsmdashInorganic TATACHEM INE092A01019Tata Coffee Ltd Tea and Coffee TATACOFFEE INE493A01019Tata Consultancy

Services LtdComputersmdashSoftware TCS INE467B01029

Tata Elxsi Ltd ComputersmdashHardware TATAELXSI INE670A01012Tata Investment

Corporation LtdFinance TATAINVEST INE672A01018

Tata Metaliks Ltd Steel and SteelProducts

TATAMETALI INE056C01010

Tata Motors Ltd Automobilesmdash4 Wheelers

TATAMOTORS INE155A01014

Tata Power Co Ltd Power TATAPOWER INE245A01013

(Continued)

Tata Sponge IronLtd

Metals TATASPONGE INE674A01014

Tata Steel Ltd Steel and SteelProducts

TATASTEEL INE081A01012

Tata Tea Ltd Tea and Coffee TATATEA INE192A01017Thermax Ltd Electrical Equipment THERMAX INE152A01029Thiru Arooran

Sugars LtdSugar THIRUSUGAR INE409A01015

Thomas Cook(India) Ltd

Miscellaneous THOMASCOOK INE332A01019

Tips Industries Ltd Media ampEntertainment

TIPSINDLTD INE716B01011

Titan IndustriesLtd

Gems TITAN INE280A01010

Todayrsquos WritingProducts Ltd

Miscellaneous TODAYS INE944B01019

TorrentPharmaceuticalsLtd

Pharmaceuticals TORNTPHARM INE685A01028

Tourism FinanceCorporation ofIndia Ltd

Financial Institution TFCILTD INE305A01015

Trent Ltd Miscellaneous TRENT INE849A01012Trigyn

Technologies LtdComputersmdashSoftware TRIGYN INE948A01012

Triveni Engineeringamp Industries Ltd

Sugar TRIVENI INE256C01024

Tube Investments ofIndia Ltd

Cycles TUBEINVEST INE149A01025

TV Today NetworkLtd

TVTODAY INE038F01029

UCAL Fuel SystemsLtd

Auto Ancillaries UCALFUEL INE139B01016

UCO Bank Banks UCOBANK INE691A01018UltraTech Cement

ProductsULTRACEMCO INE481G01011

UnichemLaboratories Ltd

Pharmaceuticals UNICHEMLAB INE351A01027

Union Bank of India Banks UNIONBANK INE692A01016Unitech Ltd Construction UNITECH INE694A01020

United PhosphorousLtd

Pesticides andAgrochemicals

UNIPHOS INE628A01036

Usha Martin Ltd Steel and SteelProducts

USHAMART INE228A01027

UTI Bank Ltd Banks UTIBANK INE238A01026Uttam Galva Steels

LtdSteel and Steel

ProductsUTTAMSTL INE699A01011

VIP Industries Ltd Plastic and PlasticProducts

VIPIND INE054A01019

Vardhman PolytexLtd

TextilesmdashCotton VARDMNPOLY INE835A01011

Vardhman TextilesLtd

TextilesmdashCotton VTL INE825A01012

Venkyrsquos (India) Ltd Miscellaneous VENKEYS INE398A01010Vesuvius India Ltd Refractories VESUVIUS INE386A01015Videocon

Appliances LtdConsumer Durables VDOCONAPPL INE352A01017

Videocon IndustriesLtd

Consumer Durables VIDEOIND INE703A01011

VSNL INE151A01013

Vijaya Bank Banks VIJAYABANK INE705A01016Vindhya Telelinks

LtdCablesmdashTelecom VINDHYATEL INE707A01012

Visaka IndustriesLtd

VISAKAIND INE392A01013

Vishal ExportsOverseas Ltd

Trading VISHALEXPO INE167C01023

VisualsoftTechnologies Ltd

ComputersmdashSoftware VISUALSOFT INE755A01011

Voltas Ltd Air Conditioners VOLTAS INE226A01021VST Industries Ltd Cigarettes VSTIND INE710A01016Welspun Gujarat

Stahl Rohren LtdSteel and Steel

ProductsWELGUJ INE191B01025

Welspun India Ltd Textile Products WELSPUNIND INE192B01023West Coast Paper

Mills LtdPaper and Paper

ProductsWSTCSTPAPR INE976A01013

Wheels India Ltd Auto Ancillaries WHEELS INE715A01015Wipro Ltd ComputersmdashSoftware WIPRO INE075A01022Wockhardt Ltd Pharmaceuticals WOCKPHARMA INE049B01025Wyeth Ltd Pharmaceuticals WYETH INE378A01012

(Continued)

ZanduPharmaceuticalWorks Ltd

Pharmaceuticals ZANDUPHARM INE719A01017

ZEEL INE256A01028

Zenith ComputerLtd

ComputersmdashHardware

ZENITHCOMP INE598B01013

Zensar TechnologiesLtd

ZENSARTECH INE520A01019

Zodiac Clothing CoLtd

Textile Products ZODIACLOTH INE206B01013

Zuari Industries Ltd Fertilizers ZUARIAGRO INE217A01012

TABLE I 10 SampP CNX 500 Industry Groups

Industry Companies

Abrasives Carborundum Universal LtdAir Conditioners Blue Star Ltd

Voltas LtdAluminum Hindalco Industries Ltd

National Aluminium Co LtdAuto Ancillaries Amara Raja Batteries Ltd

Amtek Auto LtdAsahi India Glass LtdAutomotive Axles LtdBosch Chassis Systems India LtdElgitread (India) LtdExide Industries LtdFederal-Mogul Goetze (India) LtdIndia Nippon Electricals LtdLumax Industries LtdMotherson Sumi Systems LtdMotor Industries Co LtdMunjal Showa LtdOmax Autos Ltd

Industry Companies

Pricol LtdRane Brake Linings LtdRane Engine Valves LtdRico Auto Industries LtdShanthi Gears LtdSona Koyo Steering Systems LtdSundaram Brake Linings LtdSundaram-Clayton LtdUCAL Fuel Systems LtdWheels India Ltd

Automobilesmdash2 and 3 Wheelers Bajaj Auto LtdHero Honda Motors LtdMaharashtra Scooters LtdTVS Motor Company Ltd

Automobilesmdash4 Wheelers Ashok Leyland LtdEicher Motors LtdEscorts LtdHindustan Motors LtdHMT LtdMahindra amp Mahindra LtdMaruti Udyog LtdPunjab Tractors LtdSwaraj Mazda LtdTata Motors Ltd

Banks Allahabad BankAndhra BankBank of BarodaBank of IndiaCanara BankCity Union Bank LtdCorporation BankDena BankFederal Bank LtdHDFC Bank LtdICICI Bank LtdIndian Overseas BankIndusInd Bank LtdIndustrial Development Bank of India LtdING Vysya Bank LtdJammu amp Kashmir Bank LtdKarnataka Bank Ltd

(Continued)

Industry Companies

Karur Vysya Bank LtdKotak Mahindra Bank LtdLakshmi Vilas Bank LtdOriental Bank of CommercePunjab National BankSouth Indian Bank LtdState Bank of IndiaSyndicate BankUCO BankUnion Bank of IndiaUTI Bank LtdVijaya Bank

Bearings Fag Bearings India LtdNRB Bearings LtdSKF India Ltd

BrewDistilleries Mcdowell amp Company LtdRadico Khaitan Ltd

CablesmdashTelecom Aksh Optifibre LtdBirla Ericsson Optical LtdSterlite Optical Technologies LtdVindhya Telelinks Ltd

CastingsForgings Bharat Forge LtdElectrosteel Castings Ltd

Cement and Cement Products ACC LtdBirla Corporation LtdDalmia Cement (Bharat) LtdEverest Industries LtdGrasim Industries LtdGujarat Ambuja Cements LtdIndia Cements LtdKCP LtdMadras Cements LtdPrism Cement LtdRamco Industries LtdShree Cement LtdUltraTech Cement LtdVisaka Industries Ltd

ChemicalsmdashInorganic GHCL LtdGodrej Industries LtdGujarat Alkalies amp Chemicals LtdTata Chemicals Ltd

Industry Companies

ChemicalsmdashOrganic Aarti Industries LtdHikal LtdPidilite Industries Ltd

ChemicalsmdashSpecialty BASF India LtdFoseco India Ltd

Cigarettes Godfrey Phillips India LtdITC LtdVST Industries Ltd

CompressorsPumps Elgi Equipments LtdIngersoll Rand (India) LtdKirloskar Brothers LtdKSB Pumps Ltd

ComputersmdashHardware CMC LtdD-Link India LtdHCL Infosystems LtdMoser Baer India LtdMRO-TEK LtdOnward Technologies LtdTata Elxsi LtdZenith Computer LtdZensar Technolgies Ltd

ComputersmdashSoftware Aftek Infosys LtdAptech LtdAztecsoft LtdBlue Star Infotech LtdFinancial Technologies (India) LtdGeometric Software Solutions Co LtdGTL LtdHCL Technologies LtdHexaware Technologies LtdHinduja TMT LtdI-Flex Solutions LtdiGate Global Solutions LtdInfosys Technologies LtdInfotech Enterprises LtdKale Consultants LtdKPIT Cummins Infosystem LtdMaars Software International LtdMastek LtdMelstar Information Technologies LtdMphasis BFL Ltd

(Continued)

Industry Companies

Orient Information Technologies LtdPatni Computer Systems LtdPolaris Software Lab LtdRamco Systems LtdRolta India LtdSatyam Computer Services LtdSonata Software LtdSSI LtdTata Consultancy Services LtdTrigyn Technologies LtdVisualsoft Technologies LtdWipro Ltd

Construction Ansal Properties amp Infrastructure LtdB L Kashyap amp Sons LtdD S Kulkarni Developers LtdEngineers India LtdEra Constructions (India) LtdGammon India LtdGMR Infrastructure LtdHindustan Construction Co LtdHindustan Sanitaryware amp Industries LtdIVRCL Infrastructures amp Projects LtdJaiprakash Associates LtdKajaria Ceramics LtdKEC Infrastructures LtdMahindra Gesco Corporation LtdNagarjuna Construction Co LtdPatel Engineering LtdPunj Lloyd LtdSimplex Infrastructures LtdUnitech Ltd

Consumer Durables BPL LtdMirc Electronics LtdSalora International LtdSamtel Color LtdVideocon Appliances LtdVideocon Industries Ltd

Cycles Atlas Cycle (Haryana) LtdTube Investments of India Ltd

Detergents Nirma LtdDiesel Engines Cummins India Ltd

Industry Companies

Greaves Cotton LtdKirloskar Oil Engines LtdSwaraj Engines Ltd

Diversified Andhra Sugars LtdCentury Textile amp Industries LtdDCM Shriram Consolidated LtdEID Parry (India) LtdHindustan Lever LtdOrient Paper amp Industries Ltd

Dyes and Pigments Atul LtdClariant Chemicals (India) Ltd

Electrical Equipment ABB LtdBharat Heavy Electricals LtdCrompton Greaves LtdHavellrsquos India LtdHonda SIEL Power Products LtdNEPC India LtdSiemens LtdSuzlon Energy LtdThermax Ltd

Electrodes Ador Welding LtdESAB India LtdGraphite India LtdHEG Ltd

ElectronicsmdashIndustrial Asian Electronics LtdBharat Electronics LtdFCI OEN Connectors LtdHoneywell Automation India LtdNELCO Ltd

Engineering Alfa Laval (India) LtdBharat Earth Movers LtdLarsen amp Toubro LtdPraj Industries LtdReliance Industrial Infrastructure Ltd

Fasteners Sundaram Fasteners LtdFertilizers Chambal Fertilizers amp Chemicals Ltd

Coromandel Fertilisers LtdDeepak Fertilisers amp Petrochemicals Corp LtdGodavari Fertilisers amp Chemicals LtdGujarat Narmada Valley Fertilisers Co LtdGujarat State Fertilizers amp Chemicals Ltd

(Continued)

Industry Companies

Nagarjuna Fertilizers amp Chemicals LtdRashtriya Chemicals amp Fertilizers LtdZuari Industries Ltd

Finance Bajaj Auto Finance LtdCholamandalam DBS Finance LtdConsolidated Finvest amp Holdings LtdEicher LtdFirst Leasing Co of India LtdILampFS Investsmart LtdIndiabulls Financial Services LtdMahindra amp Mahindra Financial Services LtdPNB Gilts LtdReliance Capital LtdShriram Transport Finance Co LtdSREI Infrastructure Finance LtdSundaram Finance LimitedTata Investment Corporation Ltd

FinancemdashHousing Can Fin Homes LtdHousing Development Finance Corporation LtdLIC Housing Finance Ltd

Financial Institution Infrastructure Devlopment Finance Co LtdTourism Finance Corporation of India Ltd

Food and Food Processing Agro Dutch Industries LtdBritannia Industries LtdGlaxoSmithkline Consumer Healthcare LtdHeritage Foods (India) LtdKohinoor Foods LtdKothari Products Ltd

Gas BOC India LtdGAIL (India) LtdGujarat Fluorochemicals LtdGujarat Gas Co LtdIndraprastha Gas LtdPetronet LNG LtdReliance Natural Resources Ltd

Gems Jewelry and Watches Gitanjali Gems LtdSB amp T International LtdShrenuj amp Co LtdTitan Industries Ltd

Hotels Asian Hotels LtdEIH Ltd

Industry Companies

Hotel Leelaventure LtdIndian Hotels Co LtdOriental Hotels LtdTaj GVK Hotels amp Resorts Ltd

Leather and Leather Products Bata India LtdMirza International Ltd

Media and Entertainment Adlabs Films LtdBalaji Telefilms LtdCinevistaas LtdCrest Animation Studios LtdInox Leisure LtdJain Studios LtdMukta Arts LtdNDTV LtdPritish Nandy Communications LtdSaregama India LtdSri Adhikari Brothers Television Network LtdSun TV LtdTips Industries LtdTV Today Network LtdZee Telefilms Ltd

Metals LG Balakrishnan amp Bros LtdNava Bharat Ventures LtdSterlite Industries (India) LtdTata Sponge Iron Ltd

Mining Gujarat Mineral Development Corporation LtdGujarat NRE Coke LtdSesa Goa Ltd

Miscellaneous Apollo Hospitals Enterprises LtdBalmer Lawrie amp Co LtdBlue Dart Express LtdContainer Corporation of India LtdCRISIL LtdDIC India LtdDredging Corporation of India LtdFinolex Cables LtdIndraprastha Medical Corporation LtdMicro Inks LtdPantaloon Retail (India) LtdPSL LtdShoppers Stop Ltd

(Continued)

Industry Companies

Thomas Cook (India) LtdTodayrsquos Writing Products LtdTrent LtdVenkyrsquos (India) Ltd

Oil ExplorationProduction Aban Offshore LtdHindustan Oil Exploration Co LtdOil amp Natural Gas Corporation LtdSE Asia Marine Engineering amp Construction Ltd

Packaging Cosmo Films LtdEssel Propack LtdFlex Industries LtdMax India Ltd

Paints Asian Paints LtdBerger Paints India LtdICI India LtdKansai Nerolac Paints Ltd

Paper and Paper Products Ballarpur Industries LtdPaper Products LtdPudumjee Pulp amp Paper Mills LtdSeshasayee Paper amp Boards LtdSirpur Paper Mills LtdTamil Nadu Newsprint amp Papers LtdWest Coast Paper Mills Ltd

Personal Care Colgate-Palmolive (India) LtdDabur India LtdGillette India LtdGodrej Consumer Products LtdProcter amp Gamble Hygiene amp Health Care Ltd

Pesticides and Agrochemicals Monsanto India LtdRallis India LtdRPG Life Sciences LtdUnited Phosphorous Ltd

Petrochemicals Bhansali Engineering Polymers LtdChemplast Sanmar LtdDCW LtdFinolex Industries LtdIndia Glycols LtdIndian Petrochemicals Corporation LtdLANXESS ABS LtdNarmada Chematur Petrochemicals LtdRain Calcining Ltd

Industry Companies

Supreme Petrochem LtdTamilnadu Petroproducts Ltd

Pharmaceuticals Ajanta Pharmaceuticals LtdAlembic LtdAstraZenca Pharma India LtdAurobindo Pharma LtdAventis Pharma LtdBiocon LtdCadila Healthcare LtdCarol Info Services LtdCipla LtdDabur Pharma LtdDishman Pharmaceuticals amp Chemicals LtdDivirsquos Laboratories LtdDr Reddyrsquos Laboratories LtdE Merck (India) LtdElder Pharmaceuticals LtdFDC LtdGlaxoSmithKline Pharmaceuticals LtdGlenmark Pharmaceuticals LtdInd-Swift Laboratories LtdIpca Laboratories LtdJB Chemicals amp Pharmaceuticals LtdJagsonpal Pharmaceuticals LtdJubilant Organosys LtdKopran LtdLupin LtdMatrix Laboratories LtdNicholas Piramal India LtdOrchid Chemicals amp Pharmaceuticals LtdPanacea Biotec LtdPfizer LtdRanbaxy Laboratories LtdShasun Chemicals amp Drugs LtdSterling Biotech LtdStrides Arcolab LtdSun Pharmaceutical Industries LtdTorrent Pharmaceuticals LtdUnichem Laboratories LtdWockhardt LtdWyeth Ltd

(Continued)

Industry Companies

Zandu Pharmaceutical Works LtdPlastic and Plastic Products Jain Irrigation Systems Ltd

Nilkamal Plastics LtdSintex Industries LtdSupreme Industries LtdVIP Industries Ltd

Power Alstom Projects India LtdCESC LtdGujarat Industries Power Co LtdNeyveli Lignite Corporation LtdNTPC LtdReliance Energy LtdTata Power Co Ltd

Printing and Publishing Archies LtdDeccan Chronicle Holdings LtdHT Media LtdMacmillan India LtdMid-Day Multimedia LtdNavneet Publications (India) LtdSandesh Ltd

Refineries Bharat Petroleum Corporation LtdBongaigaon Refinery amp Petrochemicals LtdChennai Petroleum Corporation LtdEssar Oil LtdHindustan Petroleum Corporation LtdIBP Co LtdIndian Oil Corporation LtdMangalore Refinery amp Petrochemicals LtdReliance Industries Ltd

Refractories Vesuvius India LtdShipping Mercator Lines Ltd

Shipping Corporation of India LtdSolvent Extraction Agro Tech Foods Ltd

Marico LtdRuchi Soya Industries Ltd

Steel and Steel Products Bhushan Steel amp Strips LtdEssar Steel LtdJindal Saw LtdJindal Stainless LtdJindal Steel amp Power LtdJSW Steel Ltd

Industry Companies

Maharashtra Seamless LtdMahindra Ugine Steel Co LtdMonnet Ispat LtdSteel Authority of India LtdSurya Roshni LtdTata Metaliks LtdTata Steel LtdUsha Martin LtdUttam Galva Steels LtdWelspun Gujarat Stahl Rohren Ltd

Sugar Bajaj Hindusthan LtdBalrampur Chini Mills LtdBannari Amman Sugars LtdDhampur Sugar Mills LtdDwarikesh Sugar Industrial LtdKakatiya Cement Sugar amp Industries LtdSakthi Sugars LtdShree Renuka Sugars LtdThiru Arooran Sugars LtdTriveni Engineering amp Industries Ltd

Tea and Coffee Harrisons Malayalam LtdJay Shree Tea amp Industries LtdTata Coffee LtdTata Tea Ltd

TelecommunicationsmdashEquipment Avaya GlobalConnect LtdHimachal Futuristic Communications Ltd

TelecommunicationsmdashServices Bharti Airtel LtdMahanagar Telephone Nigam LtdReliance Communications LtdVidesh Sanchar Nigam Ltd

Textile Machinery Indian Card Clothing Co LtdLakshmi Machine Works Ltd

Textile Products Arvind Mills LtdGokaldas Exports LtdHimatsingka Seide LtdRaymond LtdS Kumars Nationwide LtdWelspun India LtdZodiac Clothing Co Ltd

TextilesmdashCotton Abhishek Industries LtdBombay Dyeing amp Manufacturing Co Ltd

(Continued)

Industry Companies

GTN Industries LtdMaral Overseas LtdNahar Exports LtdPatspin India LtdVardhman Polytex LtdVardhman Textiles Ltd

TextilesmdashSynthetic Aditya Birla Nuvo LtdAlok Industries LtdCentury Enka LtdGarden Silk Mills LtdIndo Rama Synthetics LtdJindal Poly Films LtdNahar Spinning Mills LtdNova Petrochemicals LtdRSWM LtdSRF Ltd

Tires Apollo Tyres LtdCeat LtdKesoram Industries LtdMRF Ltd

Trading 3M India LtdAdani Enterprises LtdGujarat Ambuja Exports LtdRajesh Exports LtdState Trading Corporation of India LtdVishal Exports Overseas Ltd

Transmission Towers Jyoti Structures LtdKalpataru Power Transmission Ltd

Travel and Transport Gateway Distriparks LtdJet Airways (India) Ltd

TABLE I 11 CNX Midcap Constituent List

Amtek Auto Ltd Auto Ancillaries AMTEKAUTO INE130C01021Asahi India Glass

Exide Industries Ltd Auto Ancillaries EXIDEIND INE302A01020Motherson Sumi

Systems LtdAuto Ancillaries MOTHERSUMI INE775A01035

Sundaram-ClaytonLtd

HMT INE262A01018

Punjab Tractors Ltd Automobilesmdash4 Wheelers

Allahabad Bank Banks ALBK INE428A01015Andhra Bank Banks ANDHRABANK INE434A01013Bank of India Banks BANKINDIA INE084A01016Bank of

MaharashtraBanks MAHABANK INE457A01014

Centurion Bank ofPunjab Ltd

Banks CENTBOP INE484A01026

Corporation Bank Banks CORPBANK INE112A01015IndusInd Bank Ltd Banks INDUSINDBK INE095A01012Industrial

ING Vysya BankLtd

Syndicate Bank Banks SYNDIBANK INE667A01018UCO Bank Banks UCOBANK INE691A01018Union Bank of India Banks UNIONBANK INE692A01016Vijaya Bank Banks VIJAYABANK INE705A01016Birla Corporation

Madras CementsLtd

Shree Cement Ltd Cement and CementProducts

SHREECEM INE070A01015

(Continued)

HCL InfosystemsLtd

HCL-INSYS INE236A01020

Moser Baer IndiaLtd

MOSERBAER INE739A01015

HEXAWARE INE093A01033

Hinduja TMT Ltd ComputersmdashSoftware

HTMT INE353A01015

Mphasis BFL Ltd ComputersmdashSoftware

MPHASISBFL INE356A01018

PATNI INE660F01012

Polaris SoftwareLab Ltd

POLARIS INE763A01023

Engineers India Ltd Construction ENGINERSIN INE510A01010Gammon India Ltd Construction GAMMONIND INE259B01020Nirma Ltd Detergents NIRMA INE091A01011Cummins India Ltd Diesel Engines CUMMINSIND INE298A01020Century Textile amp

Crompton GreavesLtd

Electrical Equipment CROMPGREAV INE067A01029

Thermax Ltd Electrical Equipment THERMAX INE152A01029Alfa Laval (India)

Chambal Fertilizersamp Chemicals Ltd

Fertilizers CHAMBLFERT INE085A01013

Britannia IndustriesLtd

BRITANNIA INE216A01014

GlaxoSmithklineConsumerHealthcare Ltd

Indraprastha GasLtd

Petronet LNG Ltd Gas PETRONET INE347G01014EIH Ltd Hotels EIHOTEL INE230A01023Hotel Leelaventure

LtdHotels HOTELEELA INE102A01024

Gujarat NRE CokeLtd

Sesa Goa Ltd Mining SESAGOA INE205A01017Apollo Hospitals

Enterprises LtdMiscellaneous APOLLOHOSP INE437A01016

Micro Inks Ltd Miscellaneous MICRO INE056A01014Pantaloon Retail

Aban Offshore Ltd Oil ExplorationProduction

ABAN INE421A01028

Max India Ltd Packaging MAX INE180A01012Asian Paints Ltd Paints ASIANPAINT INE021A01018Kansai Nerolac

Paints LtdPaints KANSAINER INE531A01016

BILT INE294A01011

Colgate-Palmolive(India) Ltd

Personal Care COLGATE INE259A01014

Gillette India Ltd Personal Care GILLETTE INE322A01010Godrej Consumer

Products LtdPersonal Care GODREJCP INE102D01028

Aurobindo PharmaLtd

Pharmaceuticals AUROPHARMA INE406A01029

Aventis Pharma Ltd Pharmaceuticals AVENTIS INE058A01010

(Continued)

Lupin Ltd Pharmaceuticals LUPIN INE326A01029Matrix Laboratories

LtdPharmaceuticals MATRIXLABS INE604D01023

Pfizer Ltd Pharmaceuticals PFIZER INE182A01018Sterling Biotech Ltd Pharmaceuticals STERLINBIO INE324C01038Wyeth Ltd Pharmaceuticals WYETH INE378A01012Nicholas Piramal

Alstom ProjectsIndia Ltd

Power APIL INE878A01011

CESC Ltd Power CESC INE486A01013Bongaigaon

Essar Oil Ltd Refineries ESSAROIL INE011A01019IBP Co Ltd Refineries IBP INE261A01010Marico Ltd Solvent Extraction MARICO INE196A01018Jindal Saw Ltd Steel and Steel

ProductsJINDALSAW INE324A01016

Bajaj HindusthanLtd

Arvind Mills Ltd Textile Products ARVINDMILL INE034A01011Raymond Ltd Textile Products RAYMOND INE301A01014

Bombay Dyeing ampManufacturingCo Ltd

MRF Ltd Tires MRF INE883A01011

APPENDIX JCalculation of NSE Option

Base Prices

T he base price of options contracts used for pricing the introduction ofnew contracts is the theoretical value of the options contract derived

from the Black-Scholes model of calculation of options premiums as des-cribed here

The options price for a call is computed as per the following Black-Scholes formula

C = S lowast N(d1) minus X lowast eminusrt lowast N(d2)

and the price for a put is computed as

P = X lowast eminusrt lowast N(minusd2) minus S lowast N(minusd1)

d1 = [ln(SX) + (r + σ 22) lowast t]σ lowast sqrt(t)d2 = [ln(SX) + (r minus σ 22) lowast t]σ lowast sqrt(t)

= d1mdashσ lowast sqrt(t)C = Price of a call optionP = Price of a put optionS = Price of the underlying assetX = Strike price of the optionr = Rate of interestt = Time to expirationσ = Volatility of the underlying

The variable N represents a standard normal distribution with mean = 0and standard deviation = 1

ldquolnrdquo represents the natural logarithm of a number Natural logarithmsare based on the constant e (271828182845904)

The rate of interest use may be the relevant MIBOR rate or anotherspecified rate

APPENDIX KADRGDR versus Ordinary

Share ArbitrageAn Example

A DRGDR arbitrage opportunities between India-listed ordinary sharesand listed depositary receipts in the US and UK do arise as explained

in Chapter 2 The following example illustrates an arbitrage trade and someof the considerations that the arbitrageur must consider when employingsuch a strategy

ADRGDR ORDINARY ARBITRAGE

The following facts apply to the examples

Company Issuer India IncUS Bank Sponsor Bank USAADROrdinary Ratio 101BreakupReconvert Fee per ADR US$050Value of Rs900 at given RsUS$ FX Rate445 = US$2022450 = US$2000455 = US$1978

Situat ion ADR Trading at a Premium

India Inc price = Rs90India Inc ADR = US$2070Intrinsic value of ADR at FX 45 = US$2000Implied premium of ADR at FX 45 = US$070

Arbitrage strategy is to buy 10 ordinary shares at Rs900 short 1 ADRat US$2070 reconvert the 10 ordinaries into 1 ADR use the new ADR tocover the short and close out the position locking in the arbitrage profitafter expenses

[Buy 10 Ordinaries] + [Short 1 ADR] minus [Reconversion Cost] = Profit[minusRs900a] + [+US$2070] minus [US$050] = Profit

At an FX rate of 45 Rs900 will cost US$20 so

[minusUS$2000] + [+US$2070] minus [US$050] = $020 Profit

Thus when the ADR is trading at a US$070 premium and the FX rate is45 the arbitrage yields a profit of US$020b If done with 1000000 sharesof ordinaries versus 100000 ADRs the profit would be US$20000

Is this a good trade Net capital utilized is close to zeroc so the returnon capital is high The implications of the above example are that an ADRpremium over the intrinsic value of the underlying ordinaries greater thanUS$050 would yield a profit and a premium less than US$050 would notbe a profitable trade

Thus in the above example ADR premiums of up to US$050 could beexpected to arise with no arbitrage activity occurring to narrow the spreadYet for a long-only investor it would still be prudent and less expensive topurchase the ordinary shares at Rs90 per share than the ADRs at US$2070

The trade does carry some time risk given that the two markets are openin two different time zones This is not a simultaneous riskless transactionas it carries the risk that events both macro or stock-specific occurringbetween the close of one market and the opening of the other can negativelyimpact the relative prices

aThis purchase is negative to reflect a cost money going outbCommissions stamp duties taxes and other possible fees for doing the two sidesof the trade have not been included and would further increase the costs of the tradecBefore financing costs required margins borrowing costs etc

ADRGDR versus Ordinary Share Arbitrage 359

Another risk to the trade is currency risk if it is not addressedhedged atthe time of the first leg of the transaction In the above example at an FX rateof 45 the US$070 premium implied a profitable trade yielding US$020 perADR shorted However if the rupee strengthened just 1 percent from 45 tothe US dollar to a rate of 445 to the US dollar during the period betweenthe first leg of the trade and the second without any hedging the profit num-bers would change dramatically The cost of the 10 ordinary shares whilestill Rs900 changes in US-dollar terms from costing US$2000 to costingUS$2022 and the trade results in a loss of US$002 before miscellaneouscosts This is illustrated below

[Buy 10 Ordinaries] + [Short 1 ADR] minus [Reconversion Cost] = Profit[minusRs900d] + [+US$2070] minus [US$050] = US$050

[minusUS$2022] + [+US$2070] minus [US$050] = $002 Loss

Conversely depreciation of the rupee would yield a larger profit Insummary then ADRordinary arbitrage requires careful attention to thedetails of the costs associated with the strategy one of the most importantof which is the foreign exchange risk

dThis purchase is negative to reflect a cost money going out

APPENDIX LMajor Financial

Institutions in India

T he strength and vitality of Indiarsquos financial markets rest on the estab-lished foundations and key institutions that have developed over the last

15 years Table L1 lists a number of these institutions their role in themarkets and general contact information

TABLE L1 Major Financial Institutions in India

Organization Role

Bank of India (BOI) State-owned Bank of India (BOI) is the largest bank inIndia wwwbankofindiacom

BOI ShareholdingLtd (BOISL)

BOI Shareholding Ltd (BOISL) is the clearing house forall trades executed on the Bombay Stock Exchange Itis a joint venture between the Bank of India thelargest bank in India and the Bombay StockExchange wwwbankofindiacom

Bombay StockExchange (BSE)

The Bombay Stock Exchange (BSE) is the oldest andalong with the National Stock Exchange one ofIndiarsquos two primary stock exchanges Located in thefinancial center of Mumbai the BSE is discussed indetail in the text wwwbseindiacom

Central DepositoryServices Ltd

The Central Depository Services Ltd is one of the twocentral depositories for securities in Indiawwwcdslindiacom

(Continued)

TABLE L1 (Continued)

Organization Role

Clearing Corporation ofIndia Ltd (CCIL)

The Clearing Corporation of India Ltd (CCIL)acts as a clearing house for the settlement of alltrades of government securities The settlementof government securities and funds is done on aDvP basis In addition the CCIL acts as acentral counterparty for all tradeswwwccilindiacom

Credit Rating InformationServices of India Ltd(CRISIL)

Credit Rating Information Services of India Ltd(CRISIL) is Indiarsquos leading credit rating agencywhose majority shareholder is Standard ampPoorrsquos CRISIL has approximately 60 of themarket in India wwwcrisilcom

Department of EconomicAffairs Ministry ofFinance

The Department of Economic Affairs (DEA) isresponsible for developing and monitoring thenationrsquos economic policies The DEA overseesthe Indian banking industry insuranceindustry and the capital markets including thestock exchanges It oversees market borrowingsand the regulation of the money supply Itssubdivisions include the Banking Divisionoverseeing public sector banks and term lendingfinancial institutions the Budget Divisionpreparing the union budget the Capital MarketDivision responsible for policy issues related tothe securities markets and the SecuritiesExchange Board of India the EconomicDivision formulating policy on macromanagement of the economy the ExternalCommercial Borrowing amp Pension ReformsDivision relating to policies of pension reformand credit ratings among other issues theForeign Investment Promotion Board theInsurance Division overseeing issues related tolife insurance and general insurance includingthe Insurance Regulatory Authority and theInvestment Division overseeing foreigninvestment in India both direct and portfolioinvestment from foreign institutional investorsand nonresident Indians httpfinminnicin

Organization Role

Department of IndustrialPolicy and Promotion(DIPP)

The Department of Industrial Policy andPromotion (DIPP) is a division of theMinistry of Commerce and Industry Therole of the department includes theformulation of foreign direct investment(FDI) policy and the promotion approvaland facilitation of FDI the formulation andimplementation of overall industrial policyand strategies for industrial development inconformity with the development needs andnational objectives and responsibility forintellectual property rights relating topatents designs trademarks andgeographical indication of goods andincluding their promotion and protectionThe department also plays a proactive role inresolving problems faced by foreign investorswhen implementing their projects throughthe Foreign Investment ImplementationAuthority (FIIA) which interacts directlywith the relevant ministry and stategovernment httpdippnicin

Foreign InvestmentPromotion Board (FIPB)

The Foreign Investment Promotion Board(FIPB) is a unit of the Department ofEconomic Affairs of the Ministry of Financebut is also closely associated with theDepartment of Industrial Policy andPromotion It approves foreign directinvestment proposals when the parametersfor automatic approval are not methttpfinminnicin

India Index Services ampProducts Ltd (IISL)

India Index Services amp Products Ltd (IISL) ajoint venture between the National StockExchange and Credit Rating InformationServices of India Ltd provides a variety ofindexes and index-related services andproducts for the capital marketswwwnse-indiacom

(Continued)

Organization Role

Ministry of Commerce andIndustry

The Ministry of Commerce and Industry overseesthe broad area of Indiarsquos domestic andinternational trade Areas of responsibilityinclude international trade tariffs import andexport trade policies many commodities andmatters relating to special economic zones andinvestment policy httpcommercenicin

Ministry of Finance The Ministry of Finance is the governmentministry charged with overseeing the financialactivities of the country and includes theDepartment of Revenue the Department ofExpenditures and the Department of EconomicAffairs (DEA) httpfinminnicin

National Securities ClearingCorporation Ltd(NSCCL)

The National Securities Clearing Corporation Ltd(NSCCL) is the clearing house for all tradesexecuted on the National Stock Exchange inboth the equity and retail debt markets It is awholly owned subsidiary of the National StockExchange wwwnse-indiacom

National Service DepositoryLtd

The National Service Depository Ltd is one of thetwo central depositories for securities in Indiawwwnsdlcomin

National Stock Exchange(NSE)

Along with the Bombay Stock Exchange theNational Stock Exchange (NSE) is one of Indiarsquostwo primary stock exchanges Located in thefinancial center of Mumbai the NSE is discussedin detail in the text wwwnse-indiacom

Reserve Bank of India (RBI) The Reserve Bank of India (RBI) is the centralbank of India Its functions include regulatingthe currency and reserves maintaining monetarystability and operating the countryrsquos creditsystem It is the primary regulator of thegovernment debt markets regulates the bankingsystem and sets monetary policy wwwrbiorgin

Securities Exchange Boardof India (SEBI)

The Securities Exchange Board of India (SEBI) isthe securities regulator of Indiarsquos financialmarkets serving as the primary regulator of thecorporate debt market and the ultimateregulator of the stock exchanges wwwsebigovin

APPENDIX MContact Information for

Important FinancialServices Institutions

Cmdash

5ldquoG

rdquoB

rsquosou

baimdash

omlsquoC

rsquo12

imdash40

01mdash

imdashndash4

rsquoSou

APPENDIX NFurther Sources of Information

Further Sources of Information

Topic Web Address What You Will Find

ADRs wwwadrcom The Web site of the unit of JP MorganChase Bank that maintains a lot of usefulinformation about ADRs and GDRs

ADRs wwwadrbnycom The Web site of the unit of the Bank of NewYork the largest depositary in the worldis a wonderful source for DepositaryReceipt information

Benchmarkinterest rates(NSE)

wwwnse-indiacomthen Debt gt

Products ampServices

This describes more fully the details of theMibidMibor rates zero coupon yieldcurve and government securities index

CIA WorldFactbook

wwwciagovciapublicationsfactbookindexhtml

The CIA World Factbook can be viewed onthe Internet at this address and containsdetailed information for virtually everycountry on earth

FDI Industrylimits andrules

wwwdippnicinpublicationsfdi policy 2006pdf

The Department of Industrial Policy andPromotionrsquos report Foreign DirectInvestment Policy 2006 an annual reportthat contains the up-to-date investmentrules concerning FDI for every industrysector and activity Among the rules listedare the investment limits for each industrythe approval process required for thatindustry and any other conditions towhich foreign investments are subject withregard to each particular industry

(Continued)

FDI policy wwwdippgovin The Web site of the Department ofIndustrial Policy and Promotion for FDIapplications and details regarding specificFDI policy issues

FII Sub-accountregistration

wwwsebigovinfiifii7pdf

A copy of Annexure B which is theapplication form for Sub-accountregistration

FII companylimits

wwwfiilistrbiorgin This Web site is used to disseminate to thegeneral public the ldquocautionrdquo and ldquostoppurchaserdquo advisories for companiesreaching their foreign investor limitsInvestors interested in the limits of aparticular company or whether thatcompany is nearing or at its limit shouldconsult this Web site

FII registration wwwsebigovinfiifii5pdf

A copy of Form A of the SEBI (FII)Regulations Act 1995 which is theapplication form for FII registration

G Sec shorting httprbiorginscriptsNotificationUseraspxId=3255ampMode=0

This is the site of the Reserve Bank of Indiacircular granting permission for shortinggovernment securities for up to five daysReaders wanting full details of the rulingshould review this circular

NRIPOIrestrictioins

wwwrbiorgin For investors who are interested in moredetails about the restrictions andadvantages applicable specifically tononresident Indians and persons ofIndian origin

Quarter-sigmaexplained(BSE)

httpwwwbseindiacomaboutderivatiaspEligible

The BSE Web site that provides details onthe definition and methodology forcalculating quarter-sigma one of theeligibility requirements for futures ampoptions underlying stocks

Quarter-sigmaexplained(NSE)

httpwwwnse-indiacomcontentfofo selectionhtm

The NSE Web site that provides details onthe definition and methodology forcalculating quarter-sigma one of theeligibility requirements for futures ampoptions underlying stocks

SPAN marginexplained

wwwnse-indiacomcontentnscclnscclfospanhtm

This NSE site provides a somewhat detailedexplanation of the SPAN margin that isapplied to futures and options on theexchanges

VaR marginsand ExtremeLoss marginsby stock(BSE)

wwwbseindiacommktlivemarketsummmarginasp

This Web address displays theup-to-date BSE specific stock VaRmargins and Extreme Loss marginswhich are regularly recalculated on adaily basis

VaR marginsand ExtremeLoss marginsby stock(NSE)

wwwnse-indiacomcontentnscclnsccleqvarrateshtm

This Web address displays theup-to-date NSE specific stock VaRmargins and Extreme Loss marginswhich are regularly recalculated on adaily basis

note JWPR021-Kanuk June 12 2007 1941 Char Count=

Chapter 1 Ind ia rsquos Capita l Markets

1 BOVESPA (Bolsa de Valores de Sao Paulo) the Sao Paulo Stock Ex-change

2 Reuters News3 The New York Times4 These adjustments might include adding extraordinary one-time gains

into continuing earnings or not including in market earnings the per-formance of companies with large government ownership and mediocreperformance on the justification that these companies donrsquot necessarilyreflect the economic realities but rather reflect state-owned companiesrsquoinefficiency and bureaucracy While some of these adjustments may havemerit it isnrsquot clear where a line should be drawn regarding which com-pany results to include when reporting the year-on-year performance ofthe market or particular indexes Without quoted performance statisticsof a particular index incorporating all index constituents rosy perfor-mance numbers of those indexes must become suspect

Chapter 2 Foreign Portfo l io Investment in Ind ia

1 Reserve Bank of India 2005ndash2006 Annual Report Capital Account In-flows

2 SEBI3 Report of the Expert Group on Encouraging FII Flows and Checking the

Vulnerability of Capital Markets to Speculative Flows November 2005paragraph 159

4 Report of the Expert Group on Encouraging FII Flows and Checking theVulnerability of Capital Markets to Speculative Flows November 2005annex III Available data covers the period through August 2005

5 The Securities and Exchange Board of India6 The Investment Company Institute and Securities Industry Association

report Equity Ownership in America 2005 page 237 Ministry of Finance Government of India8 The Securities and Exchange Board of India

Chapter 3 Foreign Direct Investment

1 The International Monetary Fund Foreign Direct Investment StatisticsmdashHow Countries Measure FDI 2001 can be read in its entirety athttpwwwimforgexternalpubsftfdis2003fdistatpdf

2 AT Kearney FDI Confidence Index Survey 20053 The RBI 2006 Annual Report The World Bank Global Economic

Prospects 2006 Economic Implications of Remittances and Migration4 The Reserve Bank of India

Chapter 4 Safety and Integrity

1 SPAN Rcopy is a registered trademark of the Chicago Mercantile Exchange2 Report of the Expert Group on Encouraging FII Flows and Checking the

Vulnerability of Capital Markets to Speculative Flows November 2005

Chapter 5 The Equity Market

1 The Bombay Stock Exchange2 ibid as of December 20063 The National Stock Exchange as of April 20064 The Bombay Stock Exchange5 ibid6 Published information by the NSDL7 Published information by the CDSL

Chapter 6 Derivat ives

1 The Bombay Stock Exchange2 ibid

Chapter 7 The Ind ian Debt Market

1 Reserve Bank of India 2006 Annual Report Appendix Table 42 Sec-ondary Market Transactions in Government Securities

2 Reserve Bank of India Handbook of Statistics on Indian Economy3 ibid4 ibid5 ibid6 ibid

acron JWPR021-Kanuk June 15 2007 1739 Char Count=

Acronyms and Abbreviations

Acronym orAbbreviation Term

ABF Asian Bond FundADRs American Depositary ReceiptsALBM Automated Lending and Borrowing MechanismBLESS Borrowing and Lending of Securities SchemeBOI Bank of IndiaBOISL BOI Shareholding LtdBOLT BSE On-Line Trading SystemBSE Bombay Stock ExchangeCCIL Clearing Corporation of India LtdCDSL Central Depository Services (I) LtdCIB Capital Indexed BondsCLA Central Listing AuthorityCRISIL Credit Rating Information Services of India LtdCRS Compulsory Rolling SettlementDNPD Derivatives and New Products Department (of the Securities and

Exchange Board of India)DTSS Derivatives Trading and Settlement SystemDvP Delivery vs PaymentEDIFAR Electronic Data Information Filing and Retrieval SystemFDI Foreign Direct InvestmentFEMA Foreign Exchange Management ActFII Foreign Institutional InvestorFIMMDA Fixed Income Money Market and Derivative Association of IndiaFIPB Foreign Investment Promotion BoardFMCG Fast-Moving Capital GoodsGDRs Global Depositary ReceiptsG-Secs Government SecuritiesHKEX Hong Kong Exchanges and Clearing LtdIFSD Interest-Free Security DepositIISL India Index Services and Products LtdIMF International Monetary FundIPF Investor Protection FundKLSE Kuala Lumpur Stock ExchangeKSE Korean Stock Exchange

LPM Limited Physical MarketLTP Last Traded PriceMAPIN Market Participants and Investors Integrated DatabaseMIBID Mumbai Interbank Bid RateMIBOR Mumbai Interbank Offer RateMIRSD Market Intermediaries Registration and Supervision Department (of

SEBI)MRD Market Regulation Department (of SEBI)NBFC Non-Bank Finance CompanyNDS Negotiated Dealing SystemNEAT National Exchange for Automated Trading (the National Stock

Exchange trading system)NRI Non-Resident IndianNSCCL National Securities Clearing Corporation LtdNSDL National Securities Depository LtdNSE National Stock ExchangeOCB Overseas Corporate BodiesOLTP On-Line Transaction Processing (on the BSE On-Line trading

system)OTCEI Over-the-Counter Exchange of IndiaPIS Portfolio Investment SchemePN Participatory NotesPOI Person of Indian OriginPSU Public-Sector UndertakingsRBI Reserve Bank of IndiaRNBC Residuary Non-Banking CompaniesSEBI The Securities and Exchange Board of IndiaSET Stock Exchange of ThailandSGL Subsidiary General LedgerSGX Singapore Stock ExchangeSLR Statutory Liquidity RatioSPIcE Sensex Prudential ICICI Exchange Traded FundSRO Self-Regulatory OrganizationSSE Shanghai Stock ExchangeSTRIPS Separate Trading for Registered Interest and Principal of SecuritiesSWIFT Society for Worldwide Interbank Financial TelecommunicationSZSE Shenzhen Stock ExchangeTECk Technology Entertainment Communications Knowledge-Based

CompaniesTGF Trade Guarantee FundTMT Technology Media and TelecommunicationsTSE Taiwan Stock ExchangeTWS Trader WorkstationsUIN Unique Identification NumberVaR Value at RiskYoY Year-over-yearZCYC Zero-Coupon Yield Curve

gloss JWPR021-Kanuk June 24 2007 142 Char Count=

Glossary

6A7A The term 6A7A refers to the transfer of the settlement respon-sibility from the clearing member-broker who executed the trade on thestock exchange to a custodian Custodians are granted clearing memberstatus to be able to do so The term 6A7A refers to the forms previouslyused by the BSE clearing members to request the clearing house to transferthe settlement obligations of trades particularly institutional trades exe-cuted on the BSE from the clearing members to the custodians Form 6Awas used for sales and Form 7A was used for purchases Although theseforms were discontinued when the transfer of settlement obligations fromclearing member to broker started being done electronically such transferof settlement obligations has continued to be referred to as 6A7A tradesand refers to NSE trades as well

Asian Bond Fund (ABF) This fund is an intra-Asia initiative to promotethe development of regional and domestic bond markets in Asia

BOI Shareholding Ltd (BOISL) BOISL a joint venture between the Bankof India (BOI) and the Bombay Stock Exchange (BSE) conducts clearingand settlement of trades taking place on the BSE Popularly referred to asthe BSE clearing house it was established in 1989 with BOI holding a 51percent stake and BSE holding a 49 percent stake

Bond A bond is a negotiable certificate of indebtedness that is normallyunsecured A debt security is generally issued by a company municipalityor government agency A bond investor lends money to an issuer and inexchange the issuer promises to repay the loan amount on a specifiedmaturity date The issuer usually pays the bondholder periodic interestpayments over the life of the loan

Bonus shares These are shares issued by companies to shareholders freeof cost by capitalization of accumulated reserves from the profits earnedin earlier years

Capital-indexed bonds (CIBs) A CIB is a debt instrument that offersinflation-linked returns both on the coupons and the principal repayments

The government of India previously issued a CIB December 1997 thatmatured in December 2002 A newly proposed CIB is likely to be offeredwith a market-determined real coupon rate which would remain fixedfor the duration of the bond Semiannual coupon payments on the bondswould be made by applying the fixed real coupon rate to the inflation-adjusted principal The principal repayment at maturity would be theinflation-adjusted principal amount or its original par value whichever isgreater thus providing built-in insurance that at the time of redemptionthe principal value would not fall below par

Capital market This is a market for long-term debt and equity shares inwhich the capital funds comprising both equity and debt are issued andtraded This also includes private placement sources of debt and equity aswell as organized markets such as stock exchanges A capital market canbe further divided into primary and secondary markets

Central listing authority A central listing authority (CLA) is set up toaddress the issue of multiple listings of the same security and to bringabout uniformity in the due diligence exercise of scrutinizing all list-ing applications on any stock exchange The functions of the CLA asstipulated in the SEBI (Central Listing Authority) Regulations 2003include

Processing applications made by a corporate body mutual fund orcollective investment plan for a letter of recommendation to becomelisted on a stock exchange

Making recommendations about listing conditions Fulfilling any other function specified by the Securities and Exchange

Board of India

Clearing Corp of India Ltd (CCIL) The Clearing Corp of India Ltdwas set up at the behest of the RBI as a clearing house to modernizethe clearing and settlement of government securities foreign exchangeand money markets The CCIL acts as the counterparty to all tradesexecuted on the Negotiated Dealing System the electronic trading systemfor government securities

Commercial paper This is a short-term promise to repay a fixed amountthat is placed on the market either directly or through a specialized in-termediary It is usually issued by companies with high credit standing inthe form of a promissory note redeemable at par to the holder on matu-rity and therefore doesnrsquot require any guarantee Commercial paper is amoney market instrument issued for a tenure of 90 days

Glossary 387

Compulsory rolling settlement This is the process by which securities arecontinually being settled for a specified number of days following the tradeexecution This is in contrast to a former system of single-batch settlementof multidays of trading volume

Constituent SGL (SGL-II) account Also known as an SGL-II accountthis is an account at the Reserve Bank of India (RBI) held by banks orprimary dealers on behalf of small investors who are not permitted by theRBI to have their own SGL accounts SGL-II accounts are used to holdan investorrsquos government securities positions SGL-II accounts provideinvestors with a DvP settlement capability

Contract note A contract note also known as a confirmation is a doc-ument detailing the specifics of an executed trade such as the name ofthe executed financial instrument the price the commission applicabletaxes the total monies due or to be received the name of the executingbroker and other regulatory-mandated information

Control This includes the right to appoint a majority of directors forthe board of a target company directly or indirectly or by virtueof agreements or by any other manner Control also includes theability to control management or policy decisions affecting the targetcompany

Convertible bond This type of bond gives the investor the option to con-vert the bond into equity at a fixed conversion price

Corporatization This is the process of converting the organizational struc-ture of the stock exchange from a noncorporate structure to a corporatestructure Traditionally some of the stock exchanges in India were es-tablished as an ldquoassociation of personsrdquo (eg BSE ASE and MPSE)Corporatization of such exchanges is the process of converting them intoincorporated companies

Cumulative convertible preference shares This is a type of preferred shareswhere the dividend payable accumulates if not paid After a specified datethese shares will be converted into the equity capital of a company

Cumulative preference shares This is a type of preferred shares on whichthe dividend accumulates if not paid All arrears of preference dividendshave to be paid out before paying dividends on equity shares

Debentures Debentures are bonds issued by a company bearing a fixedrate of interest usually payable half yearly on a specific date with theprincipal amount repayable on a particular date on redemption of the

debentures Debentures are normally securedcharged against the assetsof the company in favor of the debenture holder

Delivery-versus-payment Also known by its initials DvP this refers to atheoretically instantaneous exchange of a financial instrument (ie sharesor bonds) for the payment of them The purpose of DvP settlement isto remove the risk associated with one party to a transaction making adelivery of a security or cash and then having to wait for the other side toeither pay for the security or deliver the already paid-for security In sucha two-step settlement process the first part is known as a ldquofree deliveryrdquobecause at the time it is made there is nothing given back in returnThe risk exists if the other side to the transaction subsequently fails toperform after the initial delivery of cash or securities thereby leaving theinitial party exposed In practice DvP tends not to be instantaneous butrather delivery and payment occur within a few hours of each other

Demat Dematerialized securities are a nonphysical electronic book-entryform of share ownership whereby ownership information is stored incomputers by a depository and trading and settlement of shares occurelectronically significantly improving and streamlining the entire settle-ment process

Demutualization Demutualization refers to the transition process of anexchange from a mutually owned association to a company owned byshareholders In other words transforming the legal structure of an ex-change from a mutual form to a business corporation form is referredto as demutualization This in effect means that after demutualizationthe ownership management and trading rights at the exchange are seg-regated

Dirty price In the market parlance of the wholesale debt market this refersto the cum-interest-traded price of government securities (ie is inclusiveof the accrued interest)

DvP Delivery-versus-purchase is a method of settlement that most closelyapproaches an instantaneous exchange of securities and funds between abuyer and a seller or their agents The purpose is so neither side of thetransaction is exposed to the risk of settling their part of the transactionwhile receiving nothing in return In reality DvP settlements occur withinhours of each other rather than as an instantaneous exchange

Electronic Data Information Filing and Retrieval System (EDIFAR) Thisis a Web site launched by the Securities and Exchange Board of Indiain association with the National Informatics Center (NIC) in 2002 to

Glossary 389

facilitate the online filing of certain material information or documentsby listed companies This is similar to the SECrsquos EDGAR system in theUnited States

Equity Equity is the ownership interest in a company by holders of com-mon and preferred shares

Equity shares An equity share commonly referred to as an ordinary sharerepresents a form of fractional ownership in which a shareholder as afractional owner undertakes the maximum entrepreneurial risk associ-ated with a business venture The holder of such shares is an owner ofthe company and typically has voting rights A company may issue suchshares with differential rights as to voting and dividend payments

Foreign institutional investor (FII) An FII is an entity established or incor-porated outside India that proposes to make investments in India

Free-float factor The proportion of total shares issued by a company thatare readily available for trading in the market See Free-float methodology

Free-float methodology Free-float is an index construction methodologythat takes into consideration only the free-float market capitalization ofa company for the purpose of index calculation and assigning weightto stocks in an index Free-float market capitalization is defined as thatproportion of total shares issued by the company that is readily availablefor trading in the market It generally excludes promotersrsquo holdings gov-ernment holdings strategic holdings and other locked-in shares that willnot come to the market for trading in the normal course In other wordsthe market capitalization of each company in a free-float index is reducedto the extent of its readily available shares in the market For exampleif a company has a 35 percent public holding with 65 percent of thecompanyrsquos shares still held by the founding family then only 35 percentof the total market capitalization of the company would be considered forthe purpose of calculating the index

GILT The GILT system is the trading system of the Bombay Stock Ex-change (BSE) for the wholesale debt market of the BSE debt segment

Government securities (G-Secs) G-Secs are debt instruments issued by thecentral and state governments of India

Independent directors Independent directors is a term defined by the Bom-bay Stock Exchange listing agreement and refers to directors who apartfrom receiving a directorrsquos remuneration do not have any other materialpecuniary relationship or transactions with the company its promoters

its management or its subsidiaries that may affect the independence ofthe judgment of the director

Interest-free security deposit (IFSD) This is the capital available to abroker-member of the National Stock Exchange to be applied againstgross fixed income position limits A memberrsquos position is limited to 20times the IFSD Additional capital may be added to increase the exposurelimit

Letter of offer A letter of offer is a document from a potential acquireraddressed to the shareholders of a target company containing disclosure ofinformation regarding the offer for the target company financial recordsoffer price justification for the offer price number of shares to be acquiredfrom the public purpose of the acquisition future plans of the acquirerregarding the target company change in control over the target companyprocedure to be followed by the acquirer in accepting the shares tenderedby the shareholders and the period within which all of the formalitiespertaining to the offer would be completed The rules for a letter of offerare enumerated in Chapter III of the SEBI (Substantial Acquisition ofShares and Takeovers) Regulations 1997 and subsequent amendmentsthereof Interestingly the statute requires that the ldquoLetter of Offer

may not be technical in legal or financial jargon but it shall be presentedin simple clear concise and easily understandable languagerdquo

Limited physical market This is the trading facility for small investorsholding physical shares in securities mandated for compulsory demateri-alized settlement where trading cannot exceed 500 shares

Market Participants and Investors Integrated Database (MAPIN) SEBI(Central Database of Market Participants) Regulations 2003 was im-plemented in 2003 As per these regulations all of the participants inIndiarsquos securities market including SEBI-registered intermediaries listedcompanies and their associates and investors need to become registeredand obtain a unique identification number (UIN) The system for the al-lotment of a UIN involves the use of biometric impressions for naturalpersons The major objective of MAPIN is the creation of a comprehen-sive database of market participants Once created the database wouldnot only help the regulator in establishing the identity of persons whohave taken large exposures in the market andor who are trading througha large number of different brokers but also enable the regulator to takeadequate risk-containment measures such as the imposition of marginsand trading or exposure limits depending on the exposure of variousinvestors Hence in the event of the failure of market integrity an imme-diate audit trail would be possible and the regulator would be able to take

Glossary 391

early preventive andor remedial measures and track down the defaultersandor manipulators

Market self-regulatory organizations These are the securities exchangestheir subsidiaries and market institutions such as clearing and settlementorganizations and depositories

Mumbai Inter-Bank Bid Rate (MIBID)Mumbai Inter-Bank Offer Rate (MI-BOR) The benchmark rate for the Indian call money market was de-veloped by the NSE Committee for the Development of the Debt MarketLaunched in 1998 by the National Stock Exchange for the overnightmoney market the MIBIDMIBOR rate is used as a benchmark rate fora majority of interest rate swaps forward rate agreements floating ratedebentures and term deposits

Money market This is a market for debt securities that pay off in the shortterm (usually less than one year) such as the market for 90-day Treasurybills This market encompasses the trading and issuance of short-termnonequity debt instruments including Treasury bills commercial paperbankersrsquo acceptances and certificates of deposits

National Exchange for Automated Trading (NEAT) The National StockExchangersquos NEAT trading system is a fully automated screen-based trad-ing system that adopts the principle of an order-driven market

Negotiated dealing system This is an electronic dealing system for govern-ment securities to facilitate electronic bidding in auctions and secondarymarket transactions and for the dissemination of information on tradeson a real-time basis

Negotiated Dealing System (NDS) The NDS is an electronic trading andsettlement system for Indian government securities and money marketinstruments The NDS facilitates the electronic submission of bids forauctions of government securities by the Reserve Bank of India (RBI)and interfaces with the Securities Settlement System (SSS) of the PublicDebt Office at the RBI to facilitate the settlement of government securitiestransactions The Clearing Corp of India Ltd (CCIL) is the counterpartyto all trades executed on the NDS

Non-banking financial company (NBFC) As defined by the Reserve Bankof India a non-banking financial company (NBFC) is ldquoa company reg-istered under the Companies Act 1956 and is engaged in the businessof loans and advances the acquisition of sharesstockbondsdebenturessecurities issued by the government or local authority or other securi-ties of like marketable nature leasing hire-purchase insurance business

and chit business but does not include any institution whose principalbusiness is that of agricultural activity industrial activity or sale pur-chaseconstruction of immovable property A non-banking institution thatis a company and that has its principal business receiving deposits underany scheme or arrangement or any other manner or lending in any man-ner is also a non-banking financial company and known as a residuarynon-banking companyrdquo

Nonresident Indian (NRI) A nonresident Indian is technically defined asan ldquoIndian citizen who stays abroad for employmentcarrying on businessor vocation outside India or stays abroad under circumstances indicatingan intention for an uncertain duration of stay abroadrdquo (Persons postedin UN organizations and officials posted abroad by the central and stategovernments and public sector undertakings on temporary assignmentsare also treated as nonresidents) Nonresident foreign citizens of Indianorigin are treated on par with nonresident Indian citizens

Non-SLR securities Non-SLR securities are not eligible for the mainte-nance of a bankrsquos statutory liquidity ratio (SLR) imposed by the Re-serve Bank of India Nongovernment securities are non-SLR securitiesSee statutory liquidity ratio

Novation The process by which a central counterparty steps out of twocomplementary transactions and replaces itself with the name of the coun-terparty to each of the complementary transactions When a trade occurswith a central counterparty there is a buyer and a seller each of whomhas as its counterparty the central counterparty which stands in the mid-dle of the trade In the process of novation the central counterparty stepsaway for settlement so all netting is done between members without thepresence of the CCIL

Overseas corporate bodies (OCBs) OCBs are entities including overseascompanies partnerships societies and other corporate bodies that are atleast 60 percent owned by individuals of Indian nationality or origin livingoutside of India Overseas trusts in which at least 60 percent of the ben-eficial interest is irrevocably held by such persons are also deemed OCBsThe various facilities granted to nonresident Indians are also available withcertain exceptions for OCBs as long as the ownershipbeneficial interestheld in them by nonresident Indians continues to be at least 60 percent

Participating preference share Certain preference shareholders have theright to participate in profits after a specified fixed dividend contractedfor is paid Participation right is linked with the quantum of dividend paidon the equity shares over and above a particular specified level

Glossary 393

Participatory notes Equity-linked derivatives issued by foreign banks areoften used by foreign investors to obtain exposure to local shares withoutdirectly purchasing the ordinary shares

Permitted securities Securities of companies that are not listed on theBombay Stock Exchange (BSE) or National Stock Exchange (NSE) areactively traded on regional stock exchanges and are permitted to tradeon the BSE and NSE provided they meet the relevant norms specified bythe exchanges are known as permitted securities

Person of Indian origin (POI) This is an important status from the point ofview of investment in India and it is defined somewhat differently for bankaccounts and investments in securities versus investments in property Forbank accounts and securities investments a POI is a foreign citizen (otherthan a citizen of Pakistan or Bangladesh) who

Has held an Indian passport at any time Has at least one parent or grandparent who was a citizen of India by

virtue of the Constitution of India or the Citizenship Act 1955 (57 of1955) A spouse (not being a citizen of Pakistan or Bangladesh) of anIndian citizen or of a person of Indian origin is also treated as a personof Indian origin for the above purposes provided that bank accountsare opened or investments in sharessecurities in India are made by suchpersons only jointly with their nonresident Indian spouses

For investments in real estate a foreign citizen (other than a citizen of Pak-istan Bangladesh Afghanistan Bhutan Sri Lanka or Nepal) is deemed aPOI if this person

Has held an Indian passport at any time Was or hisher father or paternal grandfather was a citizen of India by

virtue of the Constitution of India or the Citizenship Act 1955 (57 of1955)

Permanent account number (PAN) A ten-digit alphanumeric number is-sued by the Income Tax Department of India must be quotedpresentedwhenever dealing with the income tax authority A typical PAN is in thefollowing form ABCDE1234F

Preferred stockpreference shares Owners of this type of shares are enti-tled to a fixed dividend or dividend calculated at a fixed rate to be paidregularly before dividends can be paid in respect of equity shares Theyalso enjoy priority over equity shareholders in the payment of a surplus

But in the event of liquidation their claims rank below the claims of thecompanyrsquos creditors bondholders and debenture holders

Promoters This is the term used in India to refer to a companyrsquos insidersand generally refers to the company founders who typically retain a largeportion of the shares when a company goes public Promoters shares arenot considered part of the free-float of the companyrsquos shares because theytend to be closely held and do not to trade in the market

Public Sector Undertakings Public sector undertakings is the term usedin India for ldquostate-ownedrdquo Public sector undertakings are state-ownedenterprises For example a public sector bank ie State Bank of India isa state-owned bank rather than a private bank

Quarter-sigma size A stockrsquos quarter-sigma order size is a measure of astock trading liquidity and refers to the order size (in value terms) requiredto cause a change in the stock price equal to one-quarter of a standarddeviation This measure of liquidity is a complementary approach to im-pact cost which measures the size of a price change due to the fixed ordersize hitting the market Quarter sigma measures varying order sizes caus-ing the same price change whereas impact cost measures various pricechanges caused by a fixed order size

Ready forward trades Another name for repurchase agreements this isa transaction executed when the trade is intended to be reversed at aspecific point of time at a rate that will include the interest componentfor the period between the two opposite legs of the transactions SeeRepurchase Agreement (repo)

Repurchase agreement (repo) This is a transaction where the trade is in-tended to be reversed at a specific later point of time at a rate that willinclude the interest component for the period between the two oppositesides of the transaction The trade is called a repo transaction from thepoint of view of the seller and it is called a reverse repo transaction fromthe point of view of the buyer

Residuary non-banking company (RNBC) As defined by the Reserve Bankof India (RBI) a residuary non-banking company (RNBC) is ldquoa class ofNBFC that is a company and has as its principal business the receivingof deposits under any scheme or arrangement or in any other mannerand not being investment leasing hire-purchase or loan company Thesecompanies are required to maintain investments as per the directions ofthe RBI in addition to liquid assets The functioning of these companiesis different from those of NBFCs in terms of method of mobilization ofdeposits and requirement of deployment of depositorsrsquo fundsrdquo

Glossary 395

RETDEBT trading system The National Stock Exchangersquos retail debttrading system takes place in a screen-based electronic environment

Reverse repo A repo is called a reverse repo from the point of view of thebuyer

Rights issuerights shares This is the issue of new securities to existingshareholders at a ratio to those already held

Securities transaction tax (STT) The STT is a tax levied on all transactionsexecuted on the stock exchanges Rates are set by the central governmentThe STT came into effect with the enactment of the Finance (No 2) Act2004 on October 1 2004

SGL-II account See constituent SGL accounts

Short selling Selling borrowed securities and making delivery with thosesecurities is done with the intention of returning them to the lender atsome unspecified future time Short sellers sell the borrowed securitieswith the anticipation that the price will drop and they will replace theborrowed securities with lower-priced ones

SLR securities SLRs are securities that are eligible for the maintenance ofthe statutory liquidity ratio (SLR) by banks Government securities areSLR securities

Statutory liquidity ratio (SLR) This is the minimum percentage of a bankrsquostotal demand and time liabilities in India as on the last Friday of thesecond preceding fortnight which every banking company must maintainin the form of cash gold or unencumbered approved securities at theclose of business on any day The SLR is set by the Reserve Bank of India

Sub-account A sub-account is an individual or entity established or incor-porated outside India who invests in India through an FII

Sub-broker A sub-broker is a person who is registered with the Securi-ties and Exchange Board of India and is affiliated with a member of arecognized stock exchange

Subsidiary General Ledger (SGL) The SGL is an account facility providedby the Reserve Bank of India to large banks and financial institutionsto hold their investments in government securities and Treasury bills inelectronic book-entry form

Treasury bills These are short-term (up to one year) bearer debt instru-ments issued by the government at a discount to par value as a means offinancing its cash requirements

Unique client code This is an exclusive identification for a client usedin financial transactions The following are acceptable forms of uniqueidentification PAN passport number driving license voter ID numberand ration card number coupled with a frequently used bank accountnumber and a depository beneficiary account

Zero-coupon bond A zero-coupon bond is issued at a discount and repaidat face value No periodic interest is paid The difference between the issueprice and redemption price represents the return to the holder The buyerof these bonds receives only one payment at the maturity of the bond

Zero-coupon yield curve (ZCYC) The National Stock Exchange (NSE)developed a zero-coupon yield curve (ZCYC) to help with the valuationof sovereign securities across all maturities irrespective of liquidity It aimsto create uniform valuation standards in the market The NSE ZCYC aimsto help improve asset liability management of institutions with realisticvaluations of portfolios of sovereign papers It has been developed keepingin mind the emergence of a scientific forward curve for the market that willbe useful in developing derivative products and STRIPS in the emergingscenario

JWPR021-IND JWPR021-Kanuk June 25 2007 1355 Char Count= 0

AAbnormal stock behavior control 76ndash82Acronymsabbreviations 383ndash384Aggregate FII investment limits 46ndash47Aggregate foreign investment limits

monitoring 49Agreement for Avoidance of Double

Taxation (AADT) 26ndash27All or None (AON) 264American Depositary Receipts (ADRs)

arbitrage 46ndash48availability limitation 42definition 38ndash39foreign corporation benefits 41ndash42investor benefits 39ndash40investor disadvantages 42ndash43ordinary share arbitrage contrast

357ndash359premium trading 358ndash359pricing imperfection 42ndash43supply limits 46trading availability 43ndash46two-way fundability 43usage 38

American Depositary Share (ADS)definition 39

Approval time period 25Arbitrage costs 47Asset management company applicants

24ndash25Assignment margin 89At-the-money (ATM) contracts 154Auction book maintenance 114Auction market 130Auctions 128 161 176

BBank exposure increase (expectation) 10BANK Nifty options 154Bank of India (BOI) 361

Bank of India Shareholding Ltd (BOISL)125 361

Base capital requirements 183Base prices 153 155 157Basket trading system 118Best execution impact 108Bombay Online Surveillance System (BOSS)

75Bombay Stock Exchange (BSE) 102 361

Bankex Index 199ndash200BSE 100 fluctuation 13BSE 100 index constituents 271ndash274BSE 200 Index 274ndash280BSE 500 196BSE 500 Index Constituents 280ndash286BSE Mid-Cap Index Constituents

287ndash293BSE-sponsored indexes 190ndash208corporate debt market trading 179derivative products 144ndash150derivatives 251ndash258equity classifications 265ndash266futures 147ndash149futuresoptions margins 87ndash89GILT Trading System 178ndash179market capitalizations growth 6ndash9market index features 197Mid-Cap Index 197options 146ndash147PSU Index 203sectoral indexes 203ndash208sector-specific indexes 198ndash208Sensex 79single stock monthly optionsfutures

251ndash254Small Cap Index 11ndash12 197Small Cap Index Constituents 294ndash305TECk index 200ndash203trade guarantee funds 94ndash96trading system 144ndash146

398 Index

Bombay Stock Exchange Inter-Bank OfferRate (BIBOR) 186

Bombay Stock Exchange Online Trading(BOLT) 112ndash113

BS7799 certification 113highlightsbenefits 112risk management 113trading management 75ndash76

Bonds 4 34 39 43 155 156 157 158159 162 165 166 169 170 172178 185 186ndash187

capital-indexed (CIBs) 169convertible 26 34 29 43 170institutional 178 185municipal 168zero-coupon 155 156 157 158 162

166 169 170Bonus shares 34Bovespa market capitalization (comparison)

9Broad-based sub-accounts 53Brokerage fees maximum 50ndash51Brokerage rates 184ndash185Broker Contingency Fund 93Broker-intermediated transactions 177Brokers

books inspection 98ndash99capital categorization 82capital account monitoring 81ndash82contingency fund 96ndash97

Bulk deal disclosuremonitoring 74Business income tax consideration 27

CCapital exposure limits 89ndash90Central counterparty interaction 92ndash93Central Depository Services Ltd 361Central listing authority 180Circuit filter bands tightening 78ndash79Circuit limit bands usage 77ndash78Clearing banks

approval 124ndash125contact information 368ndash371

Clearing Corporation of India Ltd (CCIL)166 175 362

Clearingsettlement process 179ndash183Closeout procedures 129ndash130Closing price methodology 153CNX Bank Index 215CNX Energy Index 220ndash222

CNX FMCG Index 215ndash216CNX Industry Indexes 223ndash225CNXIT options 154CNX IT Sector Index 213ndash214CNX Midcap 211ndash212

Constituent List 349ndash353CNX MNC Index 217ndash219CNX Nifty Junior 210

Constituent List 312ndash313CNX Pharma Index 222ndash223CNX PSE Index 217CNX Service Sector Index 220Commercial paper 33 34 169 170 178

185Commission costs 47Compulsory rolling settlement 122ndash123Computer-generated trading impact 108Constituent SGL (SGL-II) account 180Constituent stocks criteria 211ndash212Contract lot size 141Contract note 121-122 152Control 20 32 43 58 65 66 75ndash82 86

89ndash99Corporate debt market 168ndash169Corporate debt repos introduction 166Country of origin indication 27ndash28Credit Rating Information Services of India

Ltd (CRISIL) 362Crore 245Cross-deal module 178Cumulative preference shares 34Currency conversion costs 47Custodians 130ndash132

change 55contact information 371ndash373

Customer protection funds 97

DDaily mark-to-market margin 89Day order 151 263

validity 115Debentures 33 34 49 117 169-170 175

177 185 186Debt instruments 25 109 159 168ndash172

178 180 186expansion 162

Debt issuers 167ndash169Debt market 159ndash188

background 160ndash161characteristics 163ndash166

Index 399

fundamentals 160ndash169reforms 161ndash163transactions 176ndash177transparency increase 162

Debt-only investors 25Debt trading 175ndash178Delivery-versus-payment (DvP)180Delivery-versus-purchase (DvP)

basis 181Dematerialization 102 109 110 168

settlements and 120 123 135depositories and 132ndash133

Demographics impact 14ndash15Demutualization 1 104Department of Economic Affairs 362Department of Industrial Policy and

Promotion (DIPP) 59 363Depositories 132ndash135

competition 133ndash135contact information 367history 132participants 133

Derivative investments limits 49ndash50Derivative markets surveillance 71ndash72Derivatives 137

definitionsattributes 139ndash142history 138ndash139market fundamentals 138ndash144risk controls 89ndash91

Derivatives and New Products Departments(DNPD) 67

Derivative Trading and Settlement System(DTSS) 144

Direct transactions 176ndash177Disclosed Quantity (DQ) 264Disclosuretransparency

process 66rules 69ndash70

Dividend income tax consideration 27Dollar indexes 190Dollex 197ndash198Dollex 200 constituents 274ndash280Domestic investment

activity evolution 6demand increase 9ndash11

Drip-freed mechanism 264

EEconomic statistics 259ndash261Elongated yield curve creation 164ndash165

Energy requirements impact 15Entities types 23Equity investments limits 49Equity margins 84ndash86

obligations 86ndash87Exchange clearinghouses 125ndash130Exchanges

arbitrage 108futuresoptions margins 87ndash89settlement systems 119ndash124surveillance 70ndash75trade entries 107ndash108tradingclearing holidays 267ndash269

Exchange tradinganonymity 107basics 106ndash112features 113ndash119hours 106segments 108ndash110systemmethodology characteristics 107systems 112ndash113

Expectations fundamentals (contrast) 16Exposure limits 183ndash184Exposure margin 87Extreme loss margins 86

FFinancial institutions 361ndash364Financial instruments foreign investor

registration 33Financial markets reformssystems 66Financial productsinstruments secondary

market trading 33ndash34Financial services

contact information 366ndash376institutions contact information 366ndash376

Fixed Income Money Market and DerivativeAssociative of India (FIMMDA) 185

Foreign brokers presence 105Foreign direct investment (FDI) 4 57

approval process 61ndash63form 38industrial sector preference 63ndash64industry restriction 60ndash61inflows estimation 4ministrydepartment administration

59ndash61permission 60RBI automatic approval 62total 58

400 Index

Foreign Direct Investment Policy 2006annual report 59

Foreign Exchange Management Act (FEMA)29

Foreign Institutional Investor (FII)application procedures 51ndash55custodians change 55definitions 38ndash40financial instruments availability 33ndash48investment statute regulation 22regime 4registration process 51ndash52reporting requirements 37ndash38sub-accounts impact 55tax considerations 26ndash29trading issues 55ndash56

Foreign investment 20ndash25background 21ndash22external factors 5GDRs usage (Euro issues) 61growth 1ndash5internal factors 5ndash6

Foreign Investment ImplementationAuthority (FIIA) problem resolution59

Foreign Investment Promotion Board (FIPB)363

FDI investment protocol (approval) 59Foreign investors types 23Foreign portfolio investment (FPI) 19

representation 3ndash4Free-float capitalization methodology

192ndash193Free-float exchanges 192Free-float factor 191ndash192Free-float methodologies

weightings example 193Friedman Thomas 11Full market capitalizations weightings

(example) 193Funds

mass movement 31ndash32pay-inpay-out 126ndash128settlement 182ndash183source 32ndash33

Futures contract 139ndash140specifications 149ndash150

Futuresoptionscharacteristics 154ndash155margins types 87

GGILT Trading System 178ndash179Global Depositary Receipts (GDRs)

definition 39foreign corporation benefits 41ndash42investor benefits 39ndash40ordinary share arbitrage contrast

357ndash359proceeds restrictions 61proceeds usage permission 61trading availability 43ndash46usage 38

Good till canceled (GTC) order 115263

Good till daysdate (GTD) order 115264

Government bureaucracy impact 13ndash14Government-issued securities 170ndash171Government securities (G-Secs) 171

180ndash181consolidation 165holdingsettlement accounts (usage)

180NSE VaR 184RBI-registered primary dealers contact

information 373ndash376retail trading 178

Gross domestic product (GDP) growthexpectations 11ndash12

Gross exposure limits 184Gross settlement securities 123Guarantee funds 93ndash97

HHit and take order mechanisms 116ndash117Home regulator impact 30

IImmediate or cancel (IOC) order 115 151

264Index constituents 271Indexes 189

derivative limits 91eligibility criteria 144methodologiescomputationsdetails

191ndash193options 146 153ndash154oversight 193selection futuresoptions eligibility

criteria 142

Index 401

Index futuresoptions 147margins 89risk control 90settlementscontracts 141

Indiaculture 241economy 234ndash237facts 227 241ndash243figures 227financial institutions 361ndash364geography 229ndash230government 231ndash234historical background 228ndash241military 239numbering system 245people 230ndash231time zone 249ndash250transnational issues 239ndash240transportation 238

India Index Services amp Products Ltd (IISL)206ndash207 363

productsservices 209Individual investors investment limits

49ndash50Information sources 377ndash379Infrastructure

financing 167impact 13

Initial exposure margin 87ndash89Institutional trade verification 74Instrument types diversification 166Insurance industry development 10Integrated Surveillance Department 67Interest-free security deposit (IFSD)

183Interest income tax consideration 27Interest rate derivatives 155

contract specifications 155ndash156157ndash158

International Monetary Fund (IMF) 4Balance of Payment Manual fifth edition

57In-the-money (ITM) contracts 154Intraday value computation 195Investigations usage 70 74ndash75Investment funds repatriation 29Investment limits 48ndash50Investor base broadening 163ndash164Investor-level records 133Investor Protection Funds 93 97

KKnow-your-customer requirements 69

LLakh 245Limited physical market definition 111ndash112Limit order 145 151 263Limit price order 116Liquidity 143

enhancement 165Liquidity Adjustment Facility (LAF) 259Liquidity groups defining 84ndash85Listed securities definition 111Listed stocks eligibility criteria 142ndash143Long-term capital gains tax considerations

26Lot sizes usage 110

MMargin

controls 82ndash89limits 184types 83

Marketabuse detectionresponse 70ndash71behavior control 76ndash82capitalization 142ndash143infrastructure 169ndash171liquidity evolution 6order 116 145 151 263safeguards 65 69safety 69securities 172ndash175surveillance 67ndash68surveillance systems 70ndash75trading differentials 46

Market circuit breakersapplication 80ndash81trigger points 79usage 77ndash80

Market-embedded safeguards usage 76ndash82Market Intermediaries Registration and

Supervision Department (MIRSD)67

Market Participants and Investors IntegratedDatabase (MAPIN) definition 391

Market Regulation Department (MRD) 67Market risks 11ndash17

external factors 15ndash16internal factors 13ndash15

402 Index

Market self-regulatory organizationsdefinition 391

Market-specific risks 16ndash17Marketwide circuit breakers 79ndash81Mark-to-market margins 85ndash86 87

See also Daily mark-to-market marginMauritius Indian bilateral tax treaty 27ndash29Minimum fill (MF) 264Minimum initial margins 88Ministry of CommerceIndustry 364Ministry of Finance 364Money market definition 391Monthly Economic Report 260ndash261Mumbai Inter-Bank Bid Rate (BIBID)

185ndash186definition 391

Mumbai Inter-Bank Offer Rate (MIBOR)185ndash186

definition 391Municipal bonds See BondsMutual fund industry maturation 10

NNational budget deficit impact 14National Dealing System (NDS) 181National Exchange for Automated Trading

(NEAT) 113National Securities Clearing Corporation

Ltd (NSCCL) 96 125ndash126182 364

National Service Depository Ltd 364National Stock Exchange (NSE) 102 364

derivatives 251ndash258derivatives contract specifications 155derivatives products 151ndash158equity classifications 265ndash266futuresoptions margins 87ndash89government securities index 186ndash187market capitalizations growth 5ndash9Nifty 79NSE-sponsored indexes 208ndash225option base prices calculation 355ndash356risk management 76sector-specific indexes 212ndash225securities 254ndash258settlement guarantee funds 96trading system 151ndash152

trade verification 152Zero-Coupon Yield Curve (ZCYC) 186

National Summary Data Page 260

Negotiated Dealing System (NDS) 175Negotiated Dealing System-Order Matching

(NDS-OM) 176Negotiated-deal module 178Negotiated trade book maintenance 114Net capital inflows growth 2Net portfolio investment increase 4Net settlement securities gross settlement

securities (contrast) 123Net worth requirements 183NIFTY Market Capitalization

WeightingBeta 308ndash311Nonautomatic approval cases FIPB

processing 62ndash63Numbering system 245

OOdd-lot book maintenance 114Odd-lot market 113Offline surveillance 71Offshore derivatives 34ndash37Oil prices impact 15Online surveillance 71Options 152ndash154

exercise limits 91exercisesettlement 141

Options contract 140specifications 147

Order books usage 113ndash114Order conditions 144ndash145 151 157Order-driven market principle 107Order-grabbing system 178Order matching rules 114ndash115

144 151Order types 115ndash117 263ndash264Ordinary arbitrage 46ndash48 357ndash359Out-of-the-money (OTM) contracts 154

PPaisa 245Pakistan impact 15ndash16Participatory notes 34ndash37

investor usage reasons 36regulatory caution 35ndash36usage disadvantages 36usage eligibility 37

Pension fund investment options restrictions(easing) 10

Permitted securities definition 111Physical settlement delivery problems 129

Index 403

Politicspopulism impact 14Position limits 90ndash91 143Position monitoring 70 73ndash74Premium margin 89Price attributes types 116Price bands 117ndash118 152Price conditions 263Price monitoring 70 71ndash73Price movement controls 77ndash81Price-related parameters 151ndash152Primary dealer system 161Promoters inclusion 191Proprietary sub-accounts 53Public markets

FII interestaccess improvement 5ndash9retail investment growth 10

Purchasessales concentration 73

QQuantity attributes 116ndash117Quantity conditions 116ndash117 264Quotation method 157

RReference rates 185ndash187Registration

application rejection 25requirements 23ndash25validity 25

Regulator safeguards 65Repurchase agreement (repo)

market eligibility expansion 166trades 177

Reserve Bank of India (RBI) 364data issuance 259ndash261FDI underestimates 4ndash5monthly bulletin 260RBI-registered primary dealers contact

information 373ndash376registration 23rules loosening 165

Retail debt market (RDM) 173ndash175clearingsettlement 182segment trading exchange member

eligibility 179RETDEBT trading system 178ndash179Risk management 183ndash184

mechanisms case study 98ndash99Risk mechanisms 66Risk-reducing order 145

Rumor verification 72Rupee 245

conversion table 247

SSafetyintegrity 65Securities

market activities SEBI regulation 67pay-inpay-out 126ndash128registration 55selection futuresoptions eligibility

criteria 142Securities and Exchange Board of India Act

(1992) 67Securities and Exchange Board of India

(SEBI) 1application rejection 25enforcement 68ndash69investor registration 20registration 23regulation 66ndash69Regulations 22risk management 68

Securities Exchange Board of India (SEBI)364

Securities transaction tax (STT) 51Securitization market development 166Sensitive Index (Sensex) 11 193ndash194

calculation methodology 194computation 194ndash195constituents selection criteria 196

Settlement 180ndash183cycle 121ndash122introduction 119ndash120systems 161ndash162timing 120ndash121

Settlement-related issues 55ndash56Settlementtrading process 66Shortage handling 128Short selling 101 119 165ndash166

permission 19 34settlement preparation 135

Short-term capital gains tax considerations26

Snap investigations 70 74Spot-lot book maintenance 114Standard and Portfolio (SampP) CNX 500

210Constituent List 314ndash336Industry Groups 336ndash348

404 Index

Standard and Portfolio (SampP) CNX Defty212

Standard and Portfolio (SampP) CNX Nifty209ndash210

Constituent List 305ndash307options 153ndash154

Standard Portfolio Analysis of Risk (SPAN)methodology 87ndash88

State government securities 171liquidity promotion 165

Stock exchanges 103ndash106central counterparty role 91ndash93contact information 366ndash367debt trading 177ndash178history 103risk systems 75ndash76structurecomposition 104ndash105

Stock futuresoptions 148ndash149 154 155margin 88position limits 90ndash91risk control 90

Stocksclosing price computation 111movement limits 77ndash79options 146ndash147

Stop lossbook maintenance 114order 145 151ndash152 263price order 116

Strike price intervals 154Sub-accounts 23

application process 54categories 53custodians change 55eligibility 53ndash54FII conversion 55registration 53registration time validity 54reporting requirements 37ndash38

Supplydemand mismatch 16ndash17Surveillance 70ndash75

action 72proactive measures 72ndash73

TTick sizes usage 110ndash111Time conditions 263ndash264

accommodation 115

Time-related parameters 151Total cumulative equity inflows 20Total equity inflows growth 2Trade Guarantee Fund (TGF) 93

balance 95case study 94

Trader workstations number 107Trade settlements details 123ndash124Trade-to-trade settlement basis 72Trading 55ndash56

books BSE maintenance 114cycle 141ndash142expired registration usage 55limits 183ndash184methodology 177parameters 157ndash159 179systems 161

Tradingclearing holidays 267ndash269Treasury bills 171

UUnlisted stocks eligibility criteria

143ndash144US hedge fund FIIs

regulations 30ndash31US hedge fund FIIs challenges

29ndash33US Securities and Exchange Commission

(SEC) impact 31

VValuation prices 129Value-at-Risk (VaR)

margin 84ndash85VaR-based 99 percent margin 87

WWeekly Statistical Supplement

259ndash260When-issued market creation 166Wholesale debt market clearingsettlement

181ndash182Wholesale debt market segment (WDS)

172ndash173

ZZero-coupon bond See BondsZero-Coupon Yield Curve (ZCYC) 186

Capital Markets of India An Investors Guide

Contents

List of Figures

List of Tables

Preface

Acknowledgments

About the Author

Chapter 1 Indiarsquos Capital Markets


IMPROVED FOREIGN INSTITUTIONAL INVESTOR (FII) INTEREST AND ACCESS TO THE PUBLIC MARKETS

RISING DOMESTIC INVESTMENT DEMAND

MARKET RISKS

SUMMARY

Chapter 2 Foreign Portfolio Investment in India

CHAPTER HIGHLIGHTS

FOREIGN INVESTMENT

TAX CONSIDERATIONS FOR FIIS


CHALLENGES FOR US HEDGE FUND FIIS

FINANCIAL INSTRUMENTS AVAILABLE TO FIIS

INVESTMENT LIMITS

BROKERAGE FEES

FII APPLICATION PROCEDURES


SUMMARY OF FII INVESTMENT


CHAPTER HIGHLIGHTS

MINISTRIES AND DEPARTMENTS ADMINISTERING FDI

FOREIGN INVESTMENT THROUGH GLOBAL DEPOSITARY RECEIPTS (EURO ISSUES)



SUMMARY


CHAPTER HIGHLIGHTS

THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)





MARKET-EMBEDDED SAFEGUARDS TO CONTROL ABNORMAL STOCK AND MARKET BEHAVIOR

MARGIN CONTROLS

ADDITIONAL RISK CONTROLS FOR DERIVATIVES


GUARANTEE FUNDS


SUMMARY


CHAPTER HIGHLIGHTS

INDIArsquoS STOCK EXCHANGES







CUSTODIANS

DEPOSITORIES

SETTLEMENT PREPARATION FOR SHORT SELLING

SUMMARY

Chapter 6 Derivatives

CHAPTER HIGHLIGHTS




SUMMARY

Chapter 7 The Indian Debt Market

CHAPTER HIGHLIGHTS



MARKET STRUCTURE

DEBT TRADING


RISK MANAGEMENT

BROKERAGE RATES

REFERENCE RATES

SUMMARY

Chapter 8 Indexes General Market and Sector Specific

CHAPTER HIGHLIGHTS



SUMMARY

Appendix A Facts and Figures about India


Appendix B Indiarsquos Unique Numbering System

Appendix C The Indian Time Zone

Appendix D BSE and NSE Derivatives Underlying Stock Details

Appendix E Economic Statistics

Appendix F Order Types

Appendix G NSE and BSE Equity Classifications

Appendix H Exchange Trading and Clearing Holidays

Appendix I Index Constituents

Appendix J Calculation of NSE Option Base Prices

Appendix K ADRGDR versus Ordinary Share Arbitrage


Appendix L Major Financial Institutions in India

Appendix M Contact Information for Important Financial Services Institutions

Appendix N Further Sources of Information

Notes


Glossary

Index

ALAN R KANUK

2007003314

10 9 8 7 6 5 4 3 2 1

Contents

List of Figures xi

List of Tables xiii

Preface xvii

CHAPTER 1

CHAPTER 2

viii CONTENTS

CHAPTER 3

CHAPTER 4

CHAPTER 5

Contents ix

CHAPTER 6

Derivatives 137

CHAPTER 7

CHAPTER 8

APPENDIX A

APPENDIX B

APPENDIX C

APPENDIX D

x CONTENTS

APPENDIX E

APPENDIX F

Order Types 263

APPENDIX G

APPENDIX H

APPENDIX I

APPENDIX J

APPENDIX K

APPENDIX L

APPENDIX M

APPENDIX N

Notes 381

Glossary 385

Index 397

List of Figures

List of Tables

xiv LIST OF TABLES

and Futures 251

List of Tables xv

Preface

xviii PREFACE

Preface xix

xx PREFACE

Preface xxi

Acknowledgments

Acknowledgments xxv

About the Author

xxviii

70564089

884 85511084

10152025303540

2004ndash05P

480679

814602

16061445

266 276 202098

556482 489 517

504 468553

illiio

BSE Turnover

$69$88

2000 2001 2002 2003 2004 2005 2006

NSE Turnover

$114$137

$244 $253

FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006

148111 130

300400500600700

800900

2000 2001 2002 2003 2004 2005 2006

$169$123 $150

2000 2001 2002 2003 2004 2005 2006

ndash 200 400 600 800 1000 1200 1400 1600 1800

Thailand

Malaysia

Singapore

Taiwan

Hong Kong

US$ Billions

MARKET RISKS

1minus6

minus97

6minus1

5minus1

5minus2

Internal Factors

External Factors

SUMMARY

Investment in India

FOREIGN INVESTMENT

556482 489 517

Background

Debt-Only Investors

Home Regulator

Source of Funds

Commercial paper

Short Sel l ing

Definit ions

rsquosL

rsquosA

INVESTMENT LIMITS

BROKERAGE FEES

Sub-Accounts

Share Registrat ion

of the sub-account

Permitted FDI

SUMMARY

Enforcement

Price Monitor ing

Invest igat ions

Permitted Trading

ndash 20

10 95015 142520 1900

10 112515 168720 2250

MARGIN CONTROLS

Group 1Group 2

Posit ion L imits

GUARANTEE FUNDS

SUMMARY

Trading

Settlement

Exchange History

NSE 953 1158 746800000 $42583 $1708 $761BSE 913 4796 328246360 $21462 $864 812

Trading Hours

Trading Anonymity

Trade Entr ies

Trading Segments

Lot Sizes

Tick Sizes

L isted Securit ies

Highl ights of BOLT

Benefits of BOLT

information

Order Books

Order Types

Price Bands

Short Sel l ing

Sett lement T iming

Sett lement Cycle

Client Broker

Exchange

Custodian

deliver funds

Clearinghouse

deliver shares

Depository

to be settled

custodian

securities

CUSTODIANS

DEPOSITORIES

Introduct ion

History

NSDL6 CDSL7

SUMMARY

155 139

426308

261202

2001 2002 2003 2004 2005 2006

Derivatives 139

November 92001

November 92002

September 132004

Derivatives 141

Derivatives 143

BSE Trading System

Derivatives 145

BSE Opt ions

Derivatives 147

BSE Futures

Derivatives 149

Derivatives 151

NSE Trading System

Opt ions

Derivatives 153

Futures

Derivatives 155

underlyingindex

Symbol Description

Derivatives 157

Trading Parameters

Immediate-or-cancel

Good until day

Spread order

ContractUnderlying

ContractDescription

SUMMARY

Background

Debt Issuers

118 9 8

Regulat ion

Debt Instruments

paperPrivate sector

MARKET STRUCTURE

2000 $ 10979 46987 $ 676 $ 0230 $ 1442001 $ 12907 64470 $ 952 $ 0330 $ 1482002 $ 16818 144851 $ 2105 $ 0728 $ 1452003 $ 19211 167778 $ 2375 $ 0800 $ 1422004 $ 27019 189518 $ 2925 $ 0995 $ 1542005 $ 32483 124308 $ 1972 $ 0673 $ 1592006 $ 34835 61891 $ 1057 $ 0390 $ 171

DEBT TRADING

Auct ions

Trading Methodology

Trading Parameters

Sett lement

RISK MANAGEMENT

BROKERAGE RATES

REFERENCE RATES

1 1997 onward

SUMMARY

and Sector Specific

open market

A 025 10000 2500 59 42B 05 7000 3500 41 58

The Sensex

BSE 500

Dol lex

Weightingcriteria

Free-float

Base Value ofIndex

100 100 100 1000 1000 1000

Features

struction

LtdTelecom 045

LtdTelecom 07

TechnoTelecom 05

rsquolT

htc copy

SampP CNX Nif ty

CNX Nif ty Junior

SampP CNX 500

CNX Midcap

SampP CNX Defty

Features

MOSERBAER

Systems LtdPATNI

HCL TechnologiesLtd

POLARIS

SATYAMCOMP

Services LtdTCS

Company Name Symbol

Methodology

mdashIn

smdash4

Methodology

Company Name Symbol

Methodology

Company Name Symbol

SUMMARY

Elevationextremes

(Continued)

138 (2006 estimate)

Degree of risk high

(Continued)

National dayholiday

Francisco

(Continued)

EconomyEconomymdash

Lowest 10 35Highest 10 335 (1997)

325 (2000)

53 (2006 estimate)

75 (2006 estimate)

(Continued)

(2005) 45317 (2004) 46583 (2003) 4861(2002) 47186 (2001)

69193321 (2006)

broadcaststations

(Continued)

27 (2006 estimate)

(Continued)

diarsquo

lowast Rup

1 10000000 $ 222222 1 100000 $ 22222 20000000 $ 444444 2 200000 $ 44443 30000000 $ 666667 3 300000 $ 66674 40000000 $ 888889 4 400000 $ 88895 50000000 $ 1111111 5 500000 $ 111116 60000000 $ 1333333 6 600000 $ 133337 70000000 $ 1555556 7 700000 $ 155568 80000000 $ 1777778 8 800000 $ 177789 90000000 $ 2000000 9 900000 $ 20000

10 100000000 $ 2222222 10 1000000 $ 22222100 1000000000 $ 22222222 100 10000000 $ 222222

1000 10000000000 $222222222 1000 100000000 $2222222

1400 330 1400 430 1400 930 1400 16301500 430 1500 530 1500 1030 1500 17301530 500 1530 600 1530 1100 1530 1800

1600 530 1600 630 1600 1130 1600 18301700 630 1700 730 1700 1230 1700 19301800 730 1800 830 1800 1330 1800 20301900 830 1900 930 1900 1430 1900 2130

2000 930 2000 1030 2000 1530 2000 22302100 1030 2100 1130 2100 1630 2100 23302200 1130 2200 1230 2200 1730 2200 0302300 1230 2300 1330 2300 1830 2300 130000 1330 000 1430 000 1930 000 230100 1430 100 1530 100 2030 100 330200 1530 200 1630 200 2130 200 430300 1630 300 1730 300 2230 300 530400 1730 400 1830 400 2330 400 630500 1830 500 1930 500 030 500 730600 1930 600 2030 600 130 600 830700 2030 700 2130 700 230 700 930800 2130 800 2230 800 330 800 1030900 2230 900 2330 900 430 900 11301000 2330 1000 030 1000 530 1000 12301100 030 1100 130 1100 630 1100 13301200 130 1200 230 1200 730 1200 1430

(Continued)

Minimum Fill(MF)

All or None(AON)

Classifications

Equity

(Continued)

Clearing Holidays

radicradic

umradic

radicradic

radic16

radicradic

radic4-

radicradic

radic19

radicradic

radic27

radicradic

iradic

radicradic

radic1-

radicradic

radic6-

ayradic

radicradic

radic14

radicradic

ayradic

radicradic

radic2-

radicradic

radic20

rradic

radicradic

radic2-

radicradic

Idradic

radicradic

radic21

aradic

radicradic

radic9-

radicradic

radic11

radicradic

iradic

radicradic

radic21

)radic

radic25

asradic

radicradic

lowast Muh

Session From To

(Continued)

LtdHealthcare 05

LtdOil amp Gas 05

LtdTelecom 06

LtdOil amp Gas 055

LtdHealthcare 03

(Continued)

Capital Goods 04

LtdHealthcare 065

LtdTextile 06

Oil amp Gas 035

(Continued)

Healthcare 05

FMCG 035

Housing Related 08

Agriculture 06

Oil amp Gas 05

LtdFinance 065

LtdFinance 05

(Continued)

LtdOil amp Gas 015

LtdTelecom 06

LtdOil amp Gas 055

(Continued)

LimitedAbhishek

Industries Ltd

Adani ExportsLtd

LtdAegis Logistics

Forgings Ltd

AIA EngineeringLtd

LtdAll Cargo Global

LtdAlstom Power

India Ltd

LtdAshok Leyland

LtdAssam Company

LtdAssociated

CementCompanies Ltd

Atul LtdAurobindo

LtdAvaya

GlobalconnectLtd

Aventis PhramaLtd

Balaji TelefilmsLtd

LtdBannari Amman

CropScienceLtd

LtdBharti Tele

Ventures Ltd

Refinery ampPetro

Ciba SpecialityChem

Corporation ofIndia

InternationalLtd

CRISIL LtdCrompton

ConsolidatedLtd

Mills Ltd

Continued

EID Parry (I)Ltd

Eicher MotorsLtd

EIH LtdElder

PharmaceuticalsLtd

Elgi EquipmentsLtd

LtdEssar Steel

IndustriesLimited

Goetze (India)Ltd

Finolex CablesLtd

Forbes GokakLtd

Force MotorsLimited

Gati LtdGeodesic

ConsumerHealthcare

Graphite IndiaLtd

Greaves CottonLtd

GTC IndustriesLtd

chemicalsLtd

Gujarat NRECoke Ltd

Gulf OilCorporation

LtdHCL Infosystems

LtdHCL

TechnologiesLtd

Hikal LtdHimachal

Hinduja TMTLtd

Hindustan LeverLtd

HindustanMotors Ltd

Hindustan ZincLtd

HT MediaLimited

LtdIndia Cements

Indian Hotels CoLtd

Indian OverseasBank

Indraprastha GasLtd

Indusind BankLtd

ING Vysya BankLtd

LtdITC LtdIVRCL

LtdJagran Prakashan

LtdJain Irrigation

Associates Ltd

Jct LtdJet Airways

LtdJindal Steel amp

TransmissionLtd

Kalyani BrakesLtd

LtdKEI Industries

LtdKernex

Continued

KPIT InfosystemsLtd

Lupin LtdMadhucon

LtdMahanagar

TelephoneNigam Ltd

Mahavir SpgMills

MangalamCement Ltd

Manugraph IndiaLtd

LtdMaruti Udyog

LtdMascon Global

LtdMastek LtdMatrix

LaboratoriesLtd

Mawana SugarsLtd

LtdMcLeod Russel

EngineeringCompany

MultimediaLtd

LtdMoser Baer India

LtdMotherson Sumi

LtdNagarjuna

ConstructionCo Ltd

Nahar ExportsLtd

IndiaNIIT LtdNIIT

TechnologiesLtd

LtdNucleus Software

LtdPanacea Biotec

LtdPantaloon Retail

(India) Ltd

Peninsula LandLtd

Petronet LNGLtd

LtdPiramyd Retail

LtdPolaris Software

LtdPrajay Engineers

Prism CementLtd

Limited

Punjab NationalBank

Punjab TractorsLtd

LtdRain Calcining

LtdRajesh Exports

LaboratoriesLtd

LtdReliance Commu-

nicationsLimited

Reliance EnergyLtd

NationwideLtd

LtdSaregama India

LtdSasken

LtdShree Cements

Sical LogisticsLtd

Mills LtdSimplex

InfrastructuresLtd

SteeringSystems Ltd

Sonata SoftwareLtd

Continued

Strides ArcolabLtd

Subex SystemsLtd

Sun TV LtdSundaram

Clayton LtdSundaram

Fastners LtdSupreme

LtdTV Today

Newsprint ampPapers

Tata ChemicalsLtd

Tata Coffee Ltd

CorporationLtd

(Maharashtra)Ltd

Tech MahindraLtd

Torrent PharmaLtd

Transgene BiotexLtd

Trent LtdTriveni

LtdUltratech Cement

LimitedUnichem

LaboratoriesLtd

Union Bank ofIndia

LtdUnited

PhosphorusLtd

Usha Martin Ltd

LtdVarun Shipping

LtdVesuvius India

LtdVideocon

InternationalLtd

Stahl RohrenLtd

Welspun IndiaLtd

(Continued)

GRASIM INE047A01013

HCL TechnologiesLtd

LtdComputersmdash

MampM INE101A01018

MARUTI INE585B01010

MTNL INE153A01019

ONGC INE213A01011

Punjab NationalBank

RCOM INE330H01018

SAIL INE114A01011

TCS INE467B01029

VSNL INE151A01013

WIPRO INE075A01022

ZEEL INE256A01028

ilesmdash

nsmdash

rsquosL

rsmdash

ncemdash

smdash2

mdashSo

smdash4

mdashSe

lampSt

rsmdash

mdashSe

ilesmdash

mdashSo

lampSt

nsmdash

rsmdash

LtdElectronicsmdash

ING Vysya BankLtd

Indian OverseasBank

Punjab TractorsLtd

(Maharashtra)Ltd

TTML INE517B01013

ACC INE012A01025

Agro Tech FoodsLtd

InfrastructureLtd

Automotive AxlesLtd

Aventis PharmaLtd

Bajaj HindusthanLtd

BILT INE294A01011

(Continued)

ManufacturingCo Ltd

LtdFood and Food

Chemplast SanmarLtd

(Continued)

PharmaceuticalsLtd

Elgi EquipmentsLtd

(Continued)

Goetze (India)Ltd

Gokaldas ExportsLtd

Gujarat Gas CoLtd

Gujarat NRE CokeLtd

(Continued)

HCL TechnologiesLtd

CommunicationsLtd

Construction CoLtd

Hindustan LeverLtd

Hindustan MotorsLtd

HMT INE262A01018

Indian Hotels CoLtd

Indian OverseasBank

Indraprastha GasLtd

(Continued)

ING Vysya BankLtd

Kale ConsultantsLtd

Karnataka BankLtd

Karur Vysya BankLtd

KCP INE805C01010

(Continued)

Kohinoor FoodsLtd

Kothari ProductsLtd

Lumax IndustriesLtd

Madras CementsLtd

MTNL INE153A01019

MampM INE101A01018

MASTEK INE759A01021

NINE854D01016

Mirc ElectronicsLtd

Moser Baer IndiaLtd

(Continued)

Construction CoLtd

NDTV INE155G01029

(Continued)

PNC INE392B01011

Ramco IndustriesLtd

RCOM INE330H01018

InfrastructureLtd

LtdPesticides and

(Continued)

InfrastructuresLtd

SINTEX INE429C01027

Sonata SoftwareLtd

SAIL INE114A01011

SUNTV INE424H01019

Sundaram FinanceLtd

Sundaram-ClaytonLtd

TNPL INE107A01015

(Continued)

Tata Sponge IronLtd

Titan IndustriesLtd

TV Today NetworkLtd

LtdSteel and Steel

VIPIND INE054A01019

Vardhman PolytexLtd

VSNL INE151A01013

(Continued)

ZEEL INE256A01028

Zenith ComputerLtd

Industry Companies

(Continued)

Industry Companies

(Continued)

Industry Companies

(Continued)

Industry Companies

(Continued)

Industry Companies

(Continued)

Industry Companies

(Continued)

Industry Companies

Sundaram-ClaytonLtd

HMT INE262A01018

ING Vysya BankLtd

Madras CementsLtd

(Continued)

HCL InfosystemsLtd

Moser Baer IndiaLtd

HTMT INE353A01015

PATNI INE660F01012

Crompton GreavesLtd

Indraprastha GasLtd

Gujarat NRE CokeLtd

ABAN INE421A01028

BILT INE294A01011

Aurobindo PharmaLtd

(Continued)

Bajaj HindusthanLtd

Base Prices

Organization Role

(Continued)

Organization Role

(Continued)

Organization Role

Cmdash

5ldquoG

rdquoB

rsquosou

baimdash

omlsquoC

rsquo12

imdash40

01mdash

imdashndash4

rsquoSou

CIA WorldFactbook

(Continued)

FII companylimits

NRIPOIrestrictioins

Glossary

Board of India

Glossary 387

Glossary 389

Glossary 391

Glossary 393

Glossary 395

398 Index

Bonds 4 34 39 43 155 156 157 158159 162 165 166 169 170 172178 185 186ndash187

178 180 186expansion 162

Index 399

400 Index

(example) 193Funds

criteria 142

Index 401

MMargin

402 Index

Ltd (NSCCL) 96 125ndash126182 364

Index 403

404 Index

accommodation 115

(SEC) impact 31

172ndash173

Contents

List of Figures

List of Tables

Preface

Acknowledgments

About the Author





MARKET RISKS

SUMMARY


CHAPTER HIGHLIGHTS

FOREIGN INVESTMENT





INVESTMENT LIMITS

BROKERAGE FEES





CHAPTER HIGHLIGHTS





SUMMARY


CHAPTER HIGHLIGHTS







MARGIN CONTROLS



GUARANTEE FUNDS


SUMMARY


CHAPTER HIGHLIGHTS








CUSTODIANS

DEPOSITORIES


SUMMARY


CHAPTER HIGHLIGHTS




SUMMARY


CHAPTER HIGHLIGHTS



MARKET STRUCTURE

DEBT TRADING


RISK MANAGEMENT

BROKERAGE RATES

REFERENCE RATES

SUMMARY


CHAPTER HIGHLIGHTS



SUMMARY

















Notes


Glossary

Index

ALAN R KANUK

2007003314

10 9 8 7 6 5 4 3 2 1

Contents

List of Figures xi

List of Tables xiii

Preface xvii

CHAPTER 1

CHAPTER 2

viii CONTENTS

CHAPTER 3

CHAPTER 4

CHAPTER 5

Contents ix

CHAPTER 6

Derivatives 137

CHAPTER 7

CHAPTER 8

APPENDIX A

APPENDIX B

APPENDIX C

APPENDIX D

x CONTENTS

APPENDIX E

APPENDIX F

Order Types 263

APPENDIX G

APPENDIX H

APPENDIX I

APPENDIX J

APPENDIX K

APPENDIX L

APPENDIX M

APPENDIX N

Notes 381

Glossary 385

Index 397

List of Figures

List of Tables

xiv LIST OF TABLES

and Futures 251

List of Tables xv

Preface

xviii PREFACE

Preface xix

xx PREFACE

Preface xxi

Acknowledgments

Acknowledgments xxv

About the Author

xxviii

70564089

884 85511084

10152025303540

2004ndash05P

480679

814602

16061445

266 276 202098

556482 489 517

504 468553

illiio

BSE Turnover

$69$88

2000 2001 2002 2003 2004 2005 2006

NSE Turnover

$114$137

$244 $253

FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006

148111 130

300400500600700

800900

2000 2001 2002 2003 2004 2005 2006

$169$123 $150

2000 2001 2002 2003 2004 2005 2006

ndash 200 400 600 800 1000 1200 1400 1600 1800

Thailand

Malaysia

Singapore

Taiwan

Hong Kong

US$ Billions

MARKET RISKS

1minus6

minus97

6minus1

5minus1

5minus2

Internal Factors

External Factors

SUMMARY

Investment in India

FOREIGN INVESTMENT

556482 489 517

Background

Debt-Only Investors

Home Regulator

Source of Funds

Commercial paper

Short Sel l ing

Definit ions

rsquosL

rsquosA

INVESTMENT LIMITS

BROKERAGE FEES

Sub-Accounts

Share Registrat ion

of the sub-account

Permitted FDI

SUMMARY

Enforcement

Price Monitor ing

Invest igat ions

Permitted Trading

ndash 20

10 95015 142520 1900

10 112515 168720 2250

MARGIN CONTROLS

Group 1Group 2

Posit ion L imits

GUARANTEE FUNDS

SUMMARY

Trading

Settlement

Exchange History

NSE 953 1158 746800000 $42583 $1708 $761BSE 913 4796 328246360 $21462 $864 812

Trading Hours

Trading Anonymity

Trade Entr ies

Trading Segments

Lot Sizes

Tick Sizes

L isted Securit ies

Highl ights of BOLT

Benefits of BOLT

information

Order Books

Order Types

Price Bands

Short Sel l ing

Sett lement T iming

Sett lement Cycle

Client Broker

Exchange

Custodian

deliver funds

Clearinghouse

deliver shares

Depository

to be settled

custodian

securities

CUSTODIANS

DEPOSITORIES

Introduct ion

History

NSDL6 CDSL7

SUMMARY

155 139

426308

261202

2001 2002 2003 2004 2005 2006

Derivatives 139

November 92001

November 92002

September 132004

Derivatives 141

Derivatives 143

BSE Trading System

Derivatives 145

BSE Opt ions

Derivatives 147

BSE Futures

Derivatives 149

Derivatives 151

NSE Trading System

Opt ions

Derivatives 153

Futures

Derivatives 155

underlyingindex

Symbol Description

Derivatives 157

Trading Parameters

Immediate-or-cancel

Good until day

Spread order

ContractUnderlying

ContractDescription

SUMMARY

Background

Debt Issuers

118 9 8

Regulat ion

Debt Instruments

paperPrivate sector

MARKET STRUCTURE

2000 $ 10979 46987 $ 676 $ 0230 $ 1442001 $ 12907 64470 $ 952 $ 0330 $ 1482002 $ 16818 144851 $ 2105 $ 0728 $ 1452003 $ 19211 167778 $ 2375 $ 0800 $ 1422004 $ 27019 189518 $ 2925 $ 0995 $ 1542005 $ 32483 124308 $ 1972 $ 0673 $ 1592006 $ 34835 61891 $ 1057 $ 0390 $ 171

DEBT TRADING

Auct ions

Trading Methodology

Trading Parameters

Sett lement

RISK MANAGEMENT

BROKERAGE RATES

REFERENCE RATES

1 1997 onward

SUMMARY

and Sector Specific

open market

A 025 10000 2500 59 42B 05 7000 3500 41 58

The Sensex

BSE 500

Dol lex

Weightingcriteria

Free-float

Base Value ofIndex

100 100 100 1000 1000 1000

Features

struction

LtdTelecom 045

LtdTelecom 07

TechnoTelecom 05

rsquolT

htc copy

SampP CNX Nif ty

CNX Nif ty Junior

SampP CNX 500

CNX Midcap

SampP CNX Defty

Features

MOSERBAER

Systems LtdPATNI

HCL TechnologiesLtd

POLARIS

SATYAMCOMP

Services LtdTCS

Company Name Symbol

Methodology

mdashIn

smdash4

Methodology

Company Name Symbol

Methodology

Company Name Symbol

SUMMARY

Elevationextremes

(Continued)

138 (2006 estimate)

Degree of risk high

(Continued)

National dayholiday

Francisco

(Continued)

EconomyEconomymdash

Lowest 10 35Highest 10 335 (1997)

325 (2000)

53 (2006 estimate)

75 (2006 estimate)

(Continued)

(2005) 45317 (2004) 46583 (2003) 4861(2002) 47186 (2001)

69193321 (2006)

broadcaststations

(Continued)

27 (2006 estimate)

(Continued)

diarsquo

lowast Rup

1 10000000 $ 222222 1 100000 $ 22222 20000000 $ 444444 2 200000 $ 44443 30000000 $ 666667 3 300000 $ 66674 40000000 $ 888889 4 400000 $ 88895 50000000 $ 1111111 5 500000 $ 111116 60000000 $ 1333333 6 600000 $ 133337 70000000 $ 1555556 7 700000 $ 155568 80000000 $ 1777778 8 800000 $ 177789 90000000 $ 2000000 9 900000 $ 20000

10 100000000 $ 2222222 10 1000000 $ 22222100 1000000000 $ 22222222 100 10000000 $ 222222

1000 10000000000 $222222222 1000 100000000 $2222222

1400 330 1400 430 1400 930 1400 16301500 430 1500 530 1500 1030 1500 17301530 500 1530 600 1530 1100 1530 1800

1600 530 1600 630 1600 1130 1600 18301700 630 1700 730 1700 1230 1700 19301800 730 1800 830 1800 1330 1800 20301900 830 1900 930 1900 1430 1900 2130

2000 930 2000 1030 2000 1530 2000 22302100 1030 2100 1130 2100 1630 2100 23302200 1130 2200 1230 2200 1730 2200 0302300 1230 2300 1330 2300 1830 2300 130000 1330 000 1430 000 1930 000 230100 1430 100 1530 100 2030 100 330200 1530 200 1630 200 2130 200 430300 1630 300 1730 300 2230 300 530400 1730 400 1830 400 2330 400 630500 1830 500 1930 500 030 500 730600 1930 600 2030 600 130 600 830700 2030 700 2130 700 230 700 930800 2130 800 2230 800 330 800 1030900 2230 900 2330 900 430 900 11301000 2330 1000 030 1000 530 1000 12301100 030 1100 130 1100 630 1100 13301200 130 1200 230 1200 730 1200 1430

(Continued)

Minimum Fill(MF)

All or None(AON)

Classifications

Equity

(Continued)

Clearing Holidays

radicradic

umradic

radicradic

radic16

radicradic

radic4-

radicradic

radic19

radicradic

radic27

radicradic

iradic

radicradic

radic1-

radicradic

radic6-

ayradic

radicradic

radic14

radicradic

ayradic

radicradic

radic2-

radicradic

radic20

rradic

radicradic

radic2-

radicradic

Idradic

radicradic

radic21

aradic

radicradic

radic9-

radicradic

radic11

radicradic

iradic

radicradic

radic21

)radic

radic25

asradic

radicradic

lowast Muh

Session From To

(Continued)

LtdHealthcare 05

LtdOil amp Gas 05

LtdTelecom 06

LtdOil amp Gas 055

LtdHealthcare 03

(Continued)

Capital Goods 04

LtdHealthcare 065

LtdTextile 06

Oil amp Gas 035

(Continued)

Healthcare 05

FMCG 035

Housing Related 08

Agriculture 06

Oil amp Gas 05

LtdFinance 065

LtdFinance 05

(Continued)

LtdOil amp Gas 015

LtdTelecom 06

LtdOil amp Gas 055

(Continued)

LimitedAbhishek

Industries Ltd

Adani ExportsLtd

LtdAegis Logistics

Forgings Ltd

AIA EngineeringLtd

LtdAll Cargo Global

LtdAlstom Power

India Ltd

LtdAshok Leyland

LtdAssam Company

LtdAssociated

CementCompanies Ltd

Atul LtdAurobindo

LtdAvaya

GlobalconnectLtd

Aventis PhramaLtd

Balaji TelefilmsLtd

LtdBannari Amman

CropScienceLtd

LtdBharti Tele

Ventures Ltd

Refinery ampPetro

Ciba SpecialityChem

Corporation ofIndia

InternationalLtd

CRISIL LtdCrompton

ConsolidatedLtd

Mills Ltd

Continued

EID Parry (I)Ltd

Eicher MotorsLtd

EIH LtdElder

PharmaceuticalsLtd

Elgi EquipmentsLtd

LtdEssar Steel

IndustriesLimited

Goetze (India)Ltd

Finolex CablesLtd

Forbes GokakLtd

Force MotorsLimited

Gati LtdGeodesic

ConsumerHealthcare

Graphite IndiaLtd

Greaves CottonLtd

GTC IndustriesLtd

chemicalsLtd

Gujarat NRECoke Ltd

Gulf OilCorporation

LtdHCL Infosystems

LtdHCL

TechnologiesLtd

Hikal LtdHimachal

Hinduja TMTLtd

Hindustan LeverLtd

HindustanMotors Ltd

Hindustan ZincLtd

HT MediaLimited

LtdIndia Cements

Indian Hotels CoLtd

Indian OverseasBank

Indraprastha GasLtd

Indusind BankLtd

ING Vysya BankLtd

LtdITC LtdIVRCL

LtdJagran Prakashan

LtdJain Irrigation

Associates Ltd

Jct LtdJet Airways

LtdJindal Steel amp

TransmissionLtd

Kalyani BrakesLtd

LtdKEI Industries

LtdKernex

Continued

KPIT InfosystemsLtd

Lupin LtdMadhucon

LtdMahanagar

TelephoneNigam Ltd

Mahavir SpgMills

MangalamCement Ltd

Manugraph IndiaLtd

LtdMaruti Udyog

LtdMascon Global

LtdMastek LtdMatrix

LaboratoriesLtd

Mawana SugarsLtd

LtdMcLeod Russel

EngineeringCompany

MultimediaLtd

LtdMoser Baer India

LtdMotherson Sumi

LtdNagarjuna

ConstructionCo Ltd

Nahar ExportsLtd

IndiaNIIT LtdNIIT

TechnologiesLtd

LtdNucleus Software

LtdPanacea Biotec

LtdPantaloon Retail

(India) Ltd

Peninsula LandLtd

Petronet LNGLtd

LtdPiramyd Retail

LtdPolaris Software

LtdPrajay Engineers

Prism CementLtd

Limited

Punjab NationalBank

Punjab TractorsLtd

LtdRain Calcining

LtdRajesh Exports

LaboratoriesLtd

LtdReliance Commu-

nicationsLimited

Reliance EnergyLtd

NationwideLtd

LtdSaregama India

LtdSasken

LtdShree Cements

Sical LogisticsLtd

Mills LtdSimplex

InfrastructuresLtd

SteeringSystems Ltd

Sonata SoftwareLtd

Continued

Strides ArcolabLtd

Subex SystemsLtd

Sun TV LtdSundaram

Clayton LtdSundaram

Fastners LtdSupreme

LtdTV Today

Newsprint ampPapers

Tata ChemicalsLtd

Tata Coffee Ltd

CorporationLtd

(Maharashtra)Ltd

Tech MahindraLtd

Torrent PharmaLtd

Transgene BiotexLtd

Trent LtdTriveni

LtdUltratech Cement

LimitedUnichem

LaboratoriesLtd

Union Bank ofIndia

LtdUnited

PhosphorusLtd

Usha Martin Ltd

LtdVarun Shipping

LtdVesuvius India

LtdVideocon

InternationalLtd

Stahl RohrenLtd

Welspun IndiaLtd

(Continued)

GRASIM INE047A01013

HCL TechnologiesLtd

LtdComputersmdash

MampM INE101A01018

MARUTI INE585B01010

MTNL INE153A01019

ONGC INE213A01011

Punjab NationalBank

RCOM INE330H01018

SAIL INE114A01011

TCS INE467B01029

VSNL INE151A01013

WIPRO INE075A01022

ZEEL INE256A01028

ilesmdash

nsmdash

rsquosL

rsmdash

ncemdash

smdash2

mdashSo

smdash4

mdashSe

lampSt

rsmdash

mdashSe

ilesmdash

mdashSo

lampSt

nsmdash

rsmdash

LtdElectronicsmdash

ING Vysya BankLtd

Indian OverseasBank

Punjab TractorsLtd

(Maharashtra)Ltd

TTML INE517B01013

ACC INE012A01025

Agro Tech FoodsLtd

InfrastructureLtd

Automotive AxlesLtd

Aventis PharmaLtd

Bajaj HindusthanLtd

BILT INE294A01011

(Continued)

ManufacturingCo Ltd

LtdFood and Food

Chemplast SanmarLtd

(Continued)

PharmaceuticalsLtd

Elgi EquipmentsLtd

(Continued)

Goetze (India)Ltd

Gokaldas ExportsLtd

Gujarat Gas CoLtd

Gujarat NRE CokeLtd

(Continued)

HCL TechnologiesLtd

CommunicationsLtd

Construction CoLtd

Hindustan LeverLtd

Hindustan MotorsLtd

HMT INE262A01018

Indian Hotels CoLtd

Indian OverseasBank

Indraprastha GasLtd

(Continued)

ING Vysya BankLtd

Kale ConsultantsLtd

Karnataka BankLtd

Karur Vysya BankLtd

KCP INE805C01010

(Continued)

Kohinoor FoodsLtd

Kothari ProductsLtd

Lumax IndustriesLtd

Madras CementsLtd

MTNL INE153A01019

MampM INE101A01018

MASTEK INE759A01021

NINE854D01016

Mirc ElectronicsLtd

Moser Baer IndiaLtd

(Continued)

Construction CoLtd

NDTV INE155G01029

(Continued)

PNC INE392B01011

Ramco IndustriesLtd

RCOM INE330H01018

InfrastructureLtd

LtdPesticides and

(Continued)

InfrastructuresLtd

SINTEX INE429C01027

Sonata SoftwareLtd

SAIL INE114A01011

SUNTV INE424H01019

Sundaram FinanceLtd

Sundaram-ClaytonLtd

TNPL INE107A01015

(Continued)

Tata Sponge IronLtd

Titan IndustriesLtd

TV Today NetworkLtd

LtdSteel and Steel

VIPIND INE054A01019

Vardhman PolytexLtd

VSNL INE151A01013

(Continued)

ZEEL INE256A01028

Zenith ComputerLtd

Industry Companies

(Continued)

Industry Companies

(Continued)

Industry Companies

(Continued)

Industry Companies

(Continued)

Industry Companies

(Continued)

Industry Companies

(Continued)

Industry Companies

Sundaram-ClaytonLtd

HMT INE262A01018

ING Vysya BankLtd

Madras CementsLtd

(Continued)

HCL InfosystemsLtd

Moser Baer IndiaLtd

HTMT INE353A01015

PATNI INE660F01012

Crompton GreavesLtd

Indraprastha GasLtd

Gujarat NRE CokeLtd

ABAN INE421A01028

BILT INE294A01011

Aurobindo PharmaLtd

(Continued)

Bajaj HindusthanLtd

Base Prices

Organization Role

(Continued)

Organization Role

(Continued)

Organization Role

Cmdash

5ldquoG

rdquoB

rsquosou

baimdash

omlsquoC

rsquo12

imdash40

01mdash

imdashndash4

rsquoSou

CIA WorldFactbook

(Continued)

FII companylimits

NRIPOIrestrictioins

Glossary

Board of India

Glossary 387

Glossary 389

Glossary 391

Glossary 393

Glossary 395

398 Index

Bonds 4 34 39 43 155 156 157 158159 162 165 166 169 170 172178 185 186ndash187

178 180 186expansion 162

Index 399

400 Index

(example) 193Funds

criteria 142

Index 401

MMargin

402 Index

Ltd (NSCCL) 96 125ndash126182 364

Index 403

404 Index

accommodation 115

(SEC) impact 31

172ndash173

Contents

List of Figures

List of Tables

Preface

Acknowledgments

About the Author





MARKET RISKS

SUMMARY


CHAPTER HIGHLIGHTS

FOREIGN INVESTMENT





INVESTMENT LIMITS

BROKERAGE FEES





CHAPTER HIGHLIGHTS





SUMMARY


CHAPTER HIGHLIGHTS







MARGIN CONTROLS



GUARANTEE FUNDS


SUMMARY


CHAPTER HIGHLIGHTS








CUSTODIANS

DEPOSITORIES


SUMMARY


CHAPTER HIGHLIGHTS




SUMMARY


CHAPTER HIGHLIGHTS



MARKET STRUCTURE

DEBT TRADING


RISK MANAGEMENT

BROKERAGE RATES

REFERENCE RATES

SUMMARY


CHAPTER HIGHLIGHTS



SUMMARY

















Notes


Glossary

Index

Documents

Capital Markets of India: An Investor's Guide