1.1 What is a Financial System?

The Financial System of a country is an important tool for economic

development of the country, as it helps in creation wealth by linking savings with

investments. It facilitates the flow of funds from the savors to business firms

(investors) to aid in wealth creation and development of both parties.

The financial system is possible the most important institutional and functional

vehicle for economic transformation. Finance is bridge between the present and the

future and whether it is the mobilization of savings or their efficient, effective and

equitable allocation for investment, it is the success with which the financial system

performs its function that sets the pace for the achievement of border national

objectives.

There are areas or people with surplus funds and there are those with a deficit.

A financial system or financial sector functions as an intermediary and facilitates the

flow of funds from the areas of surplus to the areas of deficit.

A Financial System is a composition of various institutions, markets, regulations

and laws, practices, money manager, analysts, transactions and claims and liabilities.

According to Robinson, the primary function of a financial system is “to provide a link

between savings and investment for creation of wealth and permit portfolio

adjustment in the composition of existing wealth”.

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1.2 The Financial System of a country concerned with:

 Allocation and mobilization of savings

 Provision of funds

 Facilitating the financial transactions

 Developing the financial markets

 Provision of legal financial networks

 Provision of financial and advisory services.

1.3 Flow of funds

1.4 INDIAN FINANCIAL SYSTEM – AN OVERVIEW

The Indian financial system can be broadly classified into the formal

(organized) financial system and the informal (unorganized) financial system.

The formal financial system comes under the purview of the Ministry of

Finance (MOF) Reserve Bank of India (RBI), Securities Exchange Board of India

(SEBI) and other regulatory bodies

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The informal financial system consists of:

(i) Money lenders such as neighbors, relatives, land lords, traders, store

Individual owners and so on.

(ii) Groups of persons operating as funds or ‘associations’. These groups

function under a system of their own rules.

(iii) Partnership firms consisting of local brokers, pawn brokers and non

banking financial intermediaries such as finance, investment, chit fund

companies

Structure of Indian Financial System

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Formal financial system consist of four segments, these are financial institutions,

financial markets, financial instruments and financial services.

Financial Institutions:

Financial institutions are intermediaries that mobilize the savings and facilitate the

allocation of funds in an efficient manner. Financial institutions are classified as

banking and non banking financial institutions. Banking institutions are creator of

credit while non banking financial institutions are purveyors of credit. In India non-

banking financial institutions namely the Development Financial Institutions (DFIs)

and Non Banking Financial Companies (NBFCs) as well as Housing Finance Companies

(HFCs) are the major institutional purveyors of credit.

Financial Institutions may be classified into three categories:

Regulatory: It includes institutions like SEBI, RBI, and IRDI etc. which regulates

financial markets and protect the interest of investors.

Intermediaries: It includes commercial banks such as SBI, PNB, etc. that provide

short term loans and other financial services to individuals and corporate customers.

Non-Intermediaries: It includes financial institutions like NABARD, IDBI etc. that

provide long-term loans to corporate customers.

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Financial institutions are further classified as Term Finance Institutions such as

Industrial Development Bank of India (IDBI), Industrial Credit and Investment

Corporation of India (ICICI), Industrial Financial Corporation of India (IFCI), Small

Industries Development Bank of India (SIDBI) and Industrial Investment Bank of India

(IIBI). Specialized finance institutions like the Export Import Bank of India (EXIM),

Tourism Finance Corporation of India (TFCI), ICICI Venture, Infrastructure

Development Finance Company (IDFC) and spectral financial institutions such as

National Bank for Agricultural and Rural Development (NABARD) and National

Housing Bank (NHB). Investment institutions in the business of mutual funds (UTI,

Public Sector and Private Sector Mutual Funds) and insurance activity (LIC, GIC and

67 its subsidiaries) are also classified as financial institutions. There are state level

financial institutions such as State Financial Corporation and State Industrial

Development Corporation (SIDCs) which are owned and managed by the State

Governments.

Financial Markets:

Financial markets are a mechanism enabling participants to deal in financial claims.

Money market and capital market are the organized financial markets in India.

Money market is for short term securities while capital market is for long term

securities. Primary market deals in new issues, the secondary market is meant for

trading in outstanding or existing securities.

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Financial instruments:

Financial instrument is a claim against a person or an institution for the payment at a

future date a sum of money or a periodic payment in the form of interest or

dividend. Financial instruments may be primary or secondary securities. Primary

securities are issued by the ultimate borrowers of funds to the ultimate savers e.g.

Bank Deposits, Mutual Fund Units, Insurance Policies, etc. Financial instruments help

the financial markets and the financial intermediaries to perform the important role

of channelizing funds from leaders to borrowers.

Financial Services:

Financial services include merchant banking, leasing, hire purchase, credit rating etc.

Financial services rendered by the financial intermediaries’ bridge the gap between

lack of knowledge on the part of the investors and increasing sophistication of

financial market and instruments.

The four components are interdependent and they interact

continuously with each other. Their interaction leads to the development of a

smoothly functioning financial system.

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Savings and Investment:

Saving is abstaining from present consumption for a future use. Savings

are sometimes autonomous coming from households as a matter of habit but

the bulk of the savings come for specific objectives like interest on income,

future needs, contingencies, precautionary purposes, growth in future wealth,

leading to rise in the standard of living etc.

Investment is the exchange of the money or cash for a future claim on

money or the purchase of a security or a promise to pay at a later date along

with a regular income as in the case of a share, bond, debenture etc. Investment

is also a service like consultancy, construction, hotel or hospital and services in

future as in the case of consumer durables.

Securities purchases are investment for the economy and some

investments are offset by corresponding disinvestments. Gross investments are

total investments made from all sources by an economy or a single economic

unit and net investment are those which are gross investment minus

disinvestments for an economic unit. Gross Assets and Investments minus

Depreciation for the economy or a company or corporate sector or government

sector is net investment, which is termed as capital formation.

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Changes or fluctuations in economic activity may occur when

investment spending is greater or smaller than the savings at a given level of

income. The resources going into the productive process, i.e. capital formation,

may have direct relationship with economic growth. All economic activities –

agricultural, industrial or services – depend on the availability of financial

resources. The amount of financial resources and the volume of capital

formation depend upon the intensity and efficiency with which savings are

encouraged, gathered and directed towards investment.

Investment purpose: The investment purpose of public may be set out in

terms of their savings for:

(i) The investment purpose of public may be set out in terms of their

savings for: Transactions purpose (for daily needs or regular

payments)

(ii) Precautionary purposes (for contingencies or special needs)

(iii) Speculative or asset purposes (for capital gains and building of

assets).

Investment for Consumption and Business:

The income is divided into two components namely Consumption and

Investment. The amounts not consumed are saved and invested. Investments

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are also useful for present and future consumption in the case of consumer

durables, cars, gold and silver etc.

Investment and speculation:

Purchases of assets like shares and securities can be for either

investment or speculation or for both. Investment is long term in nature while

speculation is short term. All investments are risky to some extent but

speculation is most risky as it involves short term trading, buying and selling

which may lead to profits sometimes and losses at other times

Financial Investment and Physical Investment:

The savings at household sector which account for the bulk of savings are

measured by the total financial savings and savings in physical assets. The

savings in financial form include savings in currency, bank deposits, non bank

deposits, life insurance funds, provident and pension funds, claims on

government, shares and debentures, units of UTI, mutual funds and trade debts.

The currency and deposits is voluntary savings and motivated by transactions

and precautionary motives and are governed by income and other incentives.

The savings in life insurance, provident fund and pension fund are contractual

savings governed by precautionary and contingency motives. The claims on

government are compulsory deposits, tax credits and investment in government

bonds, etc. The savings in the form of units, shares and debentures etc are

voluntary savings and are used for investment in the business sector directly or

indirectly.

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Investment avenues:

There is large number of investment avenues for savers in India. Some

of them are marketable and liquid while others are more risky and less safe.

Risk and return are the major characteristics which an investor has to face and

handle. The investor has to choose proper avenues from among the depending

his.

Return:

Return being prime mover to induce investment and probably is one to sustain it.

Market participants are always tempted to scout for better investment

alternatives for higher return or yield.

Risk:

Commensurate to investment objectives risks distracts investment flows

with added agility. Conservatism is embedded in investor’s psychological

texture while making investment decisions. Portfolio investment is primarily

designed to mitigate risk through diversification.

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Risk and Return Relationship:

Risk and returns are positively related variables. These go along in the

investment process: A higher return is always accompanied with a larger risk

so that lower risk yields lesser return. Under such circumstances investors face

dilemma as to preference for one and distraction for other. Therefore one is

destined to face the drama orchestrated by the risk return duo. Preference for

one over the other determines the contour of investment philosophy followed

by investors and fund managers. A conservative investor pre-empts risk

reduction over return magnifications and thus search for such investments

alternatives commensurate with given level of risk tolerance. Aggressive

investors on the other hand pay more weight to return magnification and

readily been the risk accompanied thus scout for investment alternatives

commensurate on this risk return tolerance and preference.

The investor has to choose proper avenues from among them depending

on his objectives, preferences, needs and abilities to take the minimum risk and

maximize the returns.

The financial investment avenues are classified under the following

Heads:

1. Corporate Shares, Debentures, Deposits, etc.

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2. Bank Deposits and Schemes

3. UTI and Mutual Fund Schemes.

4. Post Office Deposits/Certificates, etc

5. Government and Semi-Government Bonds/Securities

6. PSU Shares and Bonds.

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Introduction

Stock Market is a market where the trading of company stock, both listed

securities and unlisted takes place. It is different from stock exchange because it

includes all the national stock exchanges of the country. For example, we use the term,

"the stock market was up today" or "the stock market bubble."

History of Indian Stock Market:

Indian stock market marks to be one of the oldest stock market in Asia. It dates

back to the close of 18th century when the East India Company used to transact loan

securities. In the 1830s, trading on corporate stocks and shares in Bank and Cotton

presses took place in Bombay. Though the trading was broad but the brokers were

hardly half dozen during 1840 and 1850.

An informal group of 22 stockbrokers began trading under a banyan tree

opposite the Town Hall of Bombay from the mid-1850s, each investing a (then) princely

amount of Rupee 1. This banyan tree still stands in the Horniman Circle Park, Mumbai.

In 1860, the exchange flourished with 60 brokers. In fact the 'Share Mania' in India

began with the American Civil War broke and the cotton supply from the US to Europe

stopped. Further the brokers increased to 250. The informal group of stockbrokers

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organized themselves as the The Native Share and Stockbrokers Association which, in

1875, was formally organized as the Bombay Stock Exchange (BSE).

BSE was shifted to an old building near the Town Hall. In 1928, the plot of land on

which the BSE building now stands (at the intersection of Dalal Street, Bombay

Samachar Marg and Hammam Street in downtown Mumbai) was acquired, and a

building was constructed and occupied in 1930.

Premchand Roychand was a leading stockbroker of that time, and he assisted in

setting out traditions, conventions, and procedures for the trading of stocks at Bombay

Stock Exchange and they are still being followed.

Several stock broking firms in Mumbai were family run enterprises, and were

named after the heads of the family.

 D.S. Prabhudas & Company (now known as DSP, and a joint venture

partner with Merrill Lynch)

 Jamnadas Morarjee (now known as JM)

 Champaklal Devidas (now called Cifco Finance)

 Brijmohan Laxminarayan

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In 1956, the Government of India recognized the Bombay Stock Exchange as the first

stock exchange in the country under the Securities Contracts (Regulation) Act.

The most decisive period in the history of the BSE took place after 1992. In the

aftermath of a major scandal with market manipulation involving a BSE member named

Harshad Mehta, BSE responded to calls for reform with intransigence. The foot-dragging

by the BSE helped radicalise the position of the government, which encouraged the

creation of the National Stock Exchange (NSE), which created an electronic marketplace.

NSE started trading on 4 November 1994. Within less than a year, NSE turnover

exceeded the BSE. BSE rapidly automated, but it never caught up with NSE spot market

turnover. The second strategic failure at BSE came in the following two years. NSE

embarked on the launch of equity derivatives trading. BSE responded by political effort,

with a friendly SEBI chairman (D. R. Mehta) aimed at blocking equity derivatives trading.

The BSE and D. R. Mehta succeeded in delaying the onset of equity derivatives trading

by roughly five years. But this trading, and the accompanying shift of the spot market to

rolling settlement, did come along in 2000 and 2001 - helped by another major scandal

at BSE involving the then President Mr. Anand Rathi. NSE scored nearly 100% market

share in the runaway success of equity derivatives trading, thus consigning BSE into

clearly second place. Today, NSE has roughly 66% of equity spot turnover and roughly

100% of equity derivatives turnover.

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Stock Exchange provides a trading platform, where buyers and sellers can meet to

transact in securities.

Capital Market: The capital market is divided into two segments viz:

a) Primary Market

b) Secondary Market

a) Primary Market:

Most companies are usually started privately by their promoters. However the

promoters‘ capital and the borrowed capital from banks or financial institutions might

not be sufficient for running the business over the long term. That is when corporate

and the government looks at the primary market to raise long term funds by issuing

securities such as debt or equity.

These securities may be issued at face value, at premium or at discount. Let us

understand the meaning of these terms:

 Face Value: Face value is the original cost of the security as shown in the

certificate/instrument. Most equity shares have a face value of Rs. 1, Rs. 5, Rs. 10

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or Rs. 100 and do not have much bearing on the actual market price of the stock.

When issuing securities, they may be offered at a discount or at a premium.

 Premium: When the security is offered at a price higher than the face value it is

called a premium

 Discount: When the security is offered at a price lower than the face value it is

called a discount

b) Secondary Market:

The secondary market provides liquidity to the investors in the primary market.

Today we would not invest in any instrument if there was no medium to liquidate

our position. The secondary markets provide an efficient platform for trading of

those securities initially offered in the primary market. Also those investors who

have applied for shares in an IPO may or may not get allotment. If they don‘t

then they can always buy the shares (sometimes at a discount or at a premium)

in the secondary market.

Trading in the secondary market is done through stock exchange. The Stock

exchange is a place where the buyers and sellers meet to trade in shares in an

organized manner. The stock exchange performs the following functions:

 Provide trading platform to investors and provide liquidity

 Facilitate Listing of securities

 Registers members - Stock Brokers, sub brokers

 Make and enforce by-laws

 Manage risk in securities transactions

 Provides Indices

There are two leading stock exchanges in India which help us trade are:

i. National Stock Exchange:

National Stock Exchange incorporated in the year 1992 provides trading in

the equity as well as debt market. Maximum volumes take place on NSE

and hence enjoy leadership position in the country today

ii. Bombay Stock Exchange:

BSE on the other hand was set up in the year 1875 and is the oldest

stock exchange in Asia. It has evolved in to its present status as the

premier stock exchange.

Introduction to NSE:

The National Stock Exchange (NSE) is India's leading stock exchange covering 364 cities

and towns across the country. NSE was set up by leading institutions to provide a

modern, fully automated screen-based trading system with national reach. The

Exchange has brought about unparalleled transparency, speed & efficiency, safety and

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market integrity. It has set up facilities that serve as a model for the securities industry

in terms of systems, practices and procedures.

NSE has played a catalytic role in reforming the Indian securities market in terms of

microstructure, market practices and trading volumes. The market today uses state-of-

art information technology to provide an efficient and transparent trading, clearing and

settlement mechanism, and has witnessed several innovations in products & services

viz. demutualisation of stock exchange governance, screen based trading, compression

of settlement cycles, dematerialisation and electronic transfer of securities, securities

lending and borrowing, professionalisation of trading members, fine-tuned risk

management systems, emergence of clearing corporations to assume counterparty

risks, market of debt and derivative instruments and intensive use of information

technology.

The National Stock Exchange of India Limited has genesis in the report of the High

Powered Study Group on Establishment of New Stock Exchanges, which recommended

promotion of a National Stock Exchange by financial institutions (FIs) to provide access

to investors from all across the country on an equal footing. Based on the

recommendations, NSE was promoted by leading Financial Institutions at the behest of

the Government of India and was incorporated in November 1992 as a tax-paying

company unlike other stock exchanges in the country. On its recognition as a stock

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exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE

commenced operations in the Wholesale Debt Market (WDM) segment in June 1994.

The Capital Market (Equities) segment commenced operations in November 1994 and

operations in Derivatives segment commenced in June 2000.

NSE's mission is setting the agenda for change in the securities markets in India. The NSE

was set-up with the following objectives:

 establishing a nation-wide trading facility for equities, debt instruments and

hybrids,

 ensuring equal access to investors all over the country through an appropriate

communication network,

 providing a fair, efficient and transparent securities market to investors using

electronic trading systems,

 enabling shorter settlement cycles and book entry settlements systems, and

 meeting the current international standards of securities markets.

The standards set by NSE in terms of market practices and technologies have

become industry benchmarks and are being emulated by other market

participants. NSE is more than a mere market facilitator. It's that force which is

guiding the industry towards new horizons and greater opportunities.

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Till the advent of NSE, an investor wanting to transact in a security not traded on

the nearest exchange had to route orders through a series of correspondent

brokers to the appropriate exchange. This resulted in a great deal of uncertainty

and high transaction costs. One of the objectives of NSE was to provide a

nationwide trading facility and to enable investors spread all over the country to

have an equal access to NSE.

NSE has made it possible for an investor to access the same market and order

book, irrespective of location, at the same price and at the same cost. NSE uses

sophisticated telecommunication technology through which members can trade

remotely from their offices located in any part of the country. NSE trading

terminals are present in 363 cities and towns all over India.

NSE has been promoted by leading financial institutions, banks, insurance

companies and other financial intermediaries

From day one, NSE has adopted the form of a demutualised exchange - the

ownership, management and trading is in the hands of three different sets of

people. NSE is owned by a set of leading financial institutions, banks, insurance

companies and other financial intermediaries and is managed by professionals,

who do not directly or indirectly trade on the Exchange. This has completely

eliminated any conflict of interest and helped NSE in aggressively pursuing

policies and practices within a public interest framework.

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The NSE model however, does not preclude, but in fact accommodates

involvement, support and contribution of trading members in a variety of ways.

Its Board comprises of senior executives from promoter institutions, eminent

professionals in the fields of law, economics, accountancy, finance, taxation, etc,

public representatives, nominees of SEBI and one full time executive of the

Exchange.

While the Board deals with broad policy issues, decisions relating to market

operations are delegated by the Board to various committees constituted by it.

Such committees include representatives from trading members, professionals,

the public and the management. The day-to-day management of the Exchange is

delegated to the Managing Director who is supported by a team of professional

staff.

Introduction to BSE:

As we read in the history of Indian stock exchange; the stock exchange, Mumbai,

popularly known as "BSE". BSE was established in 1875 as "The Native Share and

Stock Brokers Association". It is the oldest one in Asia, even older than the Tokyo

Stock Exchange, which was established in 1878. It is a voluntary non-profit

making Association of Persons (AOP) and has converted itself into demutualised

and corporate entity. It has evolved over the years into its present status as the

Premier Stock Exchange in the country. It is the first Stock Exchange in the

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Country to have obtained permanent recognition in 1956 from the Govt. of India

under the Securities Contracts (Regulation) Act, 1956.

The Exchange, while providing an efficient and transparent market for trading in

securities, debt and derivatives upholds the interests of the investors and ensures

redressal of their grievances whether against the companies or its own member-

brokers. It also strives to educate and enlighten the investors by conducting

investor education programmes and making available to them necessary

informative inputs.

A Governing Board having 20 directors is the apex body, which decides the

policies and regulates the affairs of the Exchange. The Governing Board consists

of 9 elected directors, who are from the broking community (one third of them

retire every year by rotation), three SEBI nominees, six public representatives and

an Executive Director & Chief Executive Officer and a Chief Operating Officer.

The Executive Director as the Chief Executive Officer is responsible for the day-to-

day administration of the Exchange and he is assisted by the Chief Operating

Officer and other Heads of Department

The Exchange has inserted new Rule in its Rules, Bye-laws & Regulations

pertaining to constitution of the Executive Committee of the Exchange.

Accordingly, an Executive Committee, consisting of three elected directors, three

SEBI nominees or public representatives, Executive Director & CEO and Chief

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Operating Officer has been constituted. The Committee considers judicial & quasi

matters in which the Governing Board has powers as an Appellate Authority,

matters regarding annulment of transactions, admission, continuance and

suspension of member-brokers, declaration of a memberbroker as defaulter,

norms, procedures and other matters relating to arbitration, fees, deposits,

margins and other monies payable by the memberbrokers to the Exchange, etc.

Security Measures and Operational Features of BSE and NSE:

The leading stock exchanges in India have developed itself to a large extent since

its emergence. These stock exchanges aim at offering the investors and traders

better transparency, genuine settlement cycle, honest transaction and to reduce

and solve investor grievances if any. Please Note: The researcher has not covered

all the operational features of both the stock exchanges, but has taken into

consideration only the ones which are important to understand the thesis. The

aim to describe these operational features is for better understanding of the

working of stock exchanges. This is done for the purpose of easy understanding

from the reader‘s point of view.

Let us see and understand its general operational features.

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1) Market Timings:

Trading on the equities segment takes place on all days of the week (except

Saturdays and Sundays and holidays declared by the Exchange in advance).

The market timings of the equities segment are:

Normal Market Open: 09:55 hours

Normal Market Close: 15:30 hours

The Post Closing Session is held between 15.50 to 16.00 hours.

2) Automated Trading System:

Today our country has an advanced trading system which is a fully automated

screen based trading system. This system adopts the principle of an order

driven market as opposed to a quote driven system.

i) NSE operates on the 'National Exchange for Automated Trading' (NEAT)

system.

ii) BSE operates on the „BSE‟s Online Trading‟ (BOLT) system.

 Order Management in Automated Trading System: The trading system provides

complete flexibility to members in the kinds of orders that can be placed by

them. Orders are first numbered and time-stamped on receipt and then

immediately processed for potential match.

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Every order has a distinctive order number and a unique time stamp on it. If a

match is not found, then the orders are stored in different 'books'. Orders are

stored in price-time priority in various books in the following sequence:

Best Price, Within Price, by time priority.

Price priority means that if two orders are entered into the system, the order

having the best price gets the higher priority. Time priority means if two orders

having the same price are entered, the order that is entered first gets the higher

priority.

 Order Matching Rules in Automated trading system:

The best buy order is matched with the best sell order. An order may match partially

with another order resulting in multiple trades. For order matching, the best buy

order is the one with the highest price and the best sell order is the one with the

lowest price. This is because the system views all buy orders available from the point

of view of a seller and all sell orders from the point of view of the buyers in the

market. So, of all buy orders available in the market at any point of time, a seller

would obviously like to sell at the highest possible buy price that is offered. Hence,

the best buy order is the order with the highest price and the best sell order is the

order with the lowest price.

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Members can proactively enter orders in the system, which will be displayed in the

system till the full quantity is matched by one or more of counter-orders and result

into trade(s) or is cancelled by the member. Alternatively, members may be reactive

and put in orders that match with existing orders in the system. Orders lying

unmatched in the system are 'passive' orders and orders that come in to match the

existing orders are called 'active' orders. Orders are always matched at the passive

order price. This ensures that the earlier orders get priority over the orders that

come in later.

 Order Conditions in Automated Trading System:

A Trading Member can enter various types of orders depending upon his/her

requirements. These conditions are broadly classified into three categories

i) Time Related Condition

ii) Price Related Condition

iii) Quantity Related Condition

Time Conditions

a) Day Order - A Day order, as the name suggests, is an order which is valid for

the day on which it is entered. If the order is not matched during the day, the

order gets cancelled automatically at the end of the trading day.

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b) GTC Order - Good Till Cancelled (GTC) order is an order that remains in the

system until it is cancelled by the Trading Member. It will therefore be able to

span trading days if it does not get matched. The maximum number of days a

GTC order can remain in the system is notified by the Exchange from time to

time.

c) GTD - A Good Till Days/Date (GTD) order allows the Trading Member to

specify the days/date up to which the order should stay in the system. At the

end of this period the order will get flushed from the system. Each day/date

counted is a calendar day and inclusive of holidays. The days/date counted

are inclusive of the day/date on which the order is placed. The maximum

number of days a GTD order can remain in the system is notified by the

Exchange from time to time.

d) IOC - An Immediate or Cancel (IOC) order allows a Trading Member to buy or

sell a security as soon as the order is released into the market, failing which

the order will be removed from the market. Partial match is possible for the

order, and the unmatched portion of the order is cancelled immediately

Price Conditions

a) Limit Price/Order – An order that allows the price to be specified while

entering the order into the system.

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b) Market Price/Order – An order to buy or sell securities at the best price

obtainable at the time of entering the order

c) Stop Loss (SL) Price/Order – The one that allows the Trading Member to

place an order which gets activated only when the market price of the

relevant security reaches or crosses a threshold price. Until then the order

does not enter the market

A sell order in the Stop Loss book gets triggered when the last traded price

in the normal market reaches or falls below the trigger price of the order.

A buy order in the Stop Loss book gets triggered when the last traded price

in the normal market reaches or exceeds the trigger price of the order.

E.g. If for stop loss buy order, the trigger is 93.00, the limit price is 95.00

and the market (last traded) price is 90.00, then this order is released into

the system once the market price reaches or exceeds 93.00. This order is

added to the regular lot book with time of triggering as the time stamp, as

a limit order of 95.00

Quantity Conditions:

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a) Disclosed Quantity (DQ)- An order with a DQ condition allows the

Trading Member to disclose only a part of the order quantity to the

market. For example, an order of 1000 with a disclosed quantity

condition of 200 will mean that 200 is displayed to the market at a

time. After this is traded, another 200 is automatically released and so

on till the full order is executed. The Exchange may set a minimum

disclosed quantity criteria from time to time.

b) MF - Minimum Fill (MF) orders allow the Trading Member to specify

the minimum quantity by which an order should be filled. For example,

an order of 1000 units with minimum fill 200 will require that each

trade be for at least 200 units. In other words there will be a maximum

of 5 trades of 200 each or a single trade of 1000. The Exchange may lay

down norms of MF from time to time

c) AON - All or None orders allow a Trading Member to impose the

condition that only the full order should be matched against. This may

be by way of multiple trades. If the full order is not matched it will stay

in the books till matched or cancelled..

Note: Currently, AON and MF orders are not available on the system as

per SEBI directives.

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3) Market Segments

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

 Rolling Settlement

In a rolling settlement, each trading day is considered as a trading period and

trades executed during the day are settled based on the net obligations for the

day. At NSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd

working day. For arriving at the settlement day all intervening holidays, which

include bank holidays, NSE holidays, Saturdays and Sundays are excluded.

Typically trades taking place on Monday are settled on Wednesday, Tuesday's

trades settled on Thursday and so on.

 Limited Physical Market

Pursuant to the directive of SEBI to provide an exit route for small investors

holding physical shares in securities mandated for compulsory dematerialised

settlement, the Exchange has provided a facility for such trading in physical

shares not exceeding 500 shares..

This market segment is referred to as 'Limited Physical Market' (small window).

The Limited Physical Market was introduced on June 7, 1999.

Limited Physical Market - Salient Features:

i) Trading is conducted in the Odd Lot market (market type ‗O‘) with Book

Type ‗OL‘ and series ‗TT‘.

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ii) Order quantities should not exceed 500 shares.

iii) The base price and price bands applicable in the Limited Physical Market

are same as those applicable for the corresponding Normal Market on that

day

iv) Trading hours are the same as that of the normal market and order entry

during the pre-open and post-close sessions are not allowed.

v) Settlement for all trades would be done on a trade-for-trade basis and

delivery obligations arise out of each trade

vi) Orders get matched when both the price and the quantity match in the

buy and sell order. Orders with the same price and quantity match on time

priority i.e. orders which have come into the system before will get

matched first.

vii) All Good-till-cancelled (GTC)/Good-till-date (GTD) orders placed and

remaining as outstanding orders in this segment at the close of market

hours shall remain available for next trading day. All orders in this

segment, including GTC/GTD orders, will be purged on the last day of the

settlement.

viii) Trading Members are required to ensure that shares are duly

registered in the name of the investor(s) before entering orders on their

behalf on a trade date.

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 Settlement Cycle

Settlement for trades is done on a trade-for-trade basis and delivery obligations

arise out of each trade. The settlement cycle for this segment is same as for the

rolling settlement viz

Activity Day

Trading Rolling Settlement Trading T

Clearing Custodial Confirmation T+1 working days

Delivery Generation T+1 working days

Settlement Securities and Funds pay in T+2 working days

Securities and Funds pay out T+2 working days

Post Assigning of shortages for close out T+3 working days

Settlement

Reporting and pick-up of bad delivery T+4 working days

Close out of shortages T+5 working days

Replacement of bad delivery T+6 working days

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Reporting of re-bad and pick-up T+8 working days

Close out of re-bad delivery T+9 working days

Salient features of settlement

 Delivery of shares in street name and market delivery (clients holding physical

shares purchased from the secondary market) is treated as bad delivery. The

shares standing in the name of individuals/HUF only would constitute good

delivery. The selling/delivering member must necessarily be the introducing

member.

 Any delivery of shares which bears the last transfer date on or after the

introduction of the security for trading in the LP market is construed as bad

delivery.

 Any delivery in excess of 500 shares is marked as short and such deliveries are

compulsorily closed-out

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 Shortages, if any, are compulsorily closed-out at 20% over the actual traded

price. Uncertified bad delivery and re-bad delivery are compulsorily closed-out at

20% over the actual traded price

 All deliveries are compulsorily required to be attested by the introducing/

delivering member.

 The buyer must compulsorily send the securities for transfer and

dematerialization, latest within 3 months from the date of pay-out.

 Company objections arising out of such trading and settlement in this market are

reported in the same manner as is currently being done for normal market

segment. However securities would be accepted as valid company objection, only

if the securities are lodged for transfer within 3 months from the date of pay-out

 Institutional Segment: The Reserve Bank of India had vide a press release on

October 21, 1999, clarified that inter-foreign-institutionalinvestor (inter-FII)

transactions do not require prior approval or postfacto confirmation of the

Reserve Bank of India, since such transactions do not affect the percentage of

overall FII holdings in Indian companies. (Inter FII transactions are however not

permitted in securities where the FII holdings have already crossed the overall

limit due to any reason).

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To facilitate execution of such Inter-Institutional deals in companies where the

cut-off limit of FII investment has been reached, the Exchange introduced a new

market segment on December 27, 1999. The securities where FII investors and FII

holding has reached the cutoff limit as specified by RBI (2% lower than the ceiling

specified by RBI) from time to time would be available for trading in this market

type for exclusive selling by FII clients. The cut off limits for companies with 24%

ceiling is 22%, for companies with 30% ceiling, is 28% and for companies with

40% ceiling is 38%. Similarly, the cut off limit for public sector banks (including

State Bank of India) is 18% whose ceiling is 20%. The list of securities eligible /

become ineligible for trading in this market type would be notified to members

from time to time

4) Brokerage And Other Transaction Costs

Brokerage is negotiable. The Exchange has not prescribed any minimum

brokerage. The maximum brokerage is subject to a ceiling of 2.5 percent of the

contract value. However, the average brokerage charged by the members to the

clients is much lower.Typically there are different scales of brokerages for

delivery transaction, trading transaction, etc

The Stamp Duty on transfer of securities in physical form is to be paid by the

seller but in practice it is paid by the buyer while registering the shares in his

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name. In case of transfer of shares, the rate is 50 paise for every Rs.100/- or part

thereof on the basis of the amount of consideration and that for transfer of

debentures the rate of stamp duty varies from State to State, where the

registered office of a Company issuing the debentures is located

5) Transfer Of Ownership

Transfer of ownership of securities, if the same is not delivered in demat form

by the seller, is effected through a date stamped transfer-deed which is signed

by the buyer and seller. The duly executed transfer-deed along with the share

certificate has to be lodged with the company for change in the ownership. A

nominal duty becomes payable in the form of stamps to be affixed on the

transfer-deeds.

Transfer-deed remains valid for twelve months or the next book closure

following the stamped date whichever occurs later for transfer of shares in the

name of buyer. However, for delivery of shares in the market, transfer deed is

valid till book closure date of the company

6) Listing of Securities

Listing means admission of the securities to dealings on a recognised stock exchange.

The securities may be of any public limited company, Central or State Government,

quasi governmental and other financial institutions/corporations, municipalities, etc.

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The objectives of listing are mainly to :

 provide liquidity to securities

 mobilize savings for economic development;

 protect interest of investors by ensuring full disclosures.

The Exchange has a separate Listing Department to grant approval for listing of

securities of companies in accordance with the provisions of the Securities Contracts

(Regulation) Act, 1956, Securities Contracts (Regulation) Rules, 1957, Companies Act,

1956, Guidelines issued by SEBI and Rules, Bye-laws and Regulations of the Exchange.

A company intending to have its securities listed on the Exchange has to comply with

the listing requirements prescribed by the Exchange. The exchange prescribes different

listing requirements for new companies, for company listed on other stock exchanges,

for companies delisted by the Exchange seeking relisting of the same Exchange

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