GURU GHASIDAS VISHWAVIDYALAYA

(A CENTRAL UNIVERSITY ESTABLISHED IN 2009)

BILASPUR (C.G.) 495009

DEPARTMENT OF MANAGEMENT STUDIES

MASTER OF BUSINESS ADMINISTRATION PROGRAMME

(M.B.A.)

SESSION: 2013-14

M.B.A. IVth Semester

SUBJECT: MANAGEMENT OF FINANCIAL SERVICES

PRESENTATION TOPIC: BROKERAGE SERVICES

Submitted To: Submitted By:

Dr. B.D. Mishra Rupesh Thote

Associate Professor Ravi Singraul
Department of Management Rajan Tambey
Studies Sumit Dhomne
J.R. Benzamin
 Stock Broking
Introduction
Until 1988 stock exchanges were more or less self-regulatory organization supervised by the
ministry of finance under the securities contracts regulation Act (SCRA). However the stock
exchanges were not discharging their self-regulatory role well as a result of which
malpractices crept into trading adversely affecting investors interests. Several committees
examined and made recommendations to reform the organizations of the stock exchanges.
SEBI has been setup to ensure that the stock exchanges discharge their self-regulatory
role properly. Ever since SEBI began to monitor brokers stock broking is emerging as a
professional advisory service, in tune with the requirements of a mature sophisticated screen
based ring less automated stock exchanges in the country in sharp contrast to the traditional
closed character as inherited family business.

Stock-Brokers

Stockbroker is a member of a recognized stock exchange who buys, sells or deals in

securities. A certificate of registration from SEBI is mandatory to act as a broker. SEBI is
empowered to impose conditions while granting the certificate. As a member of a stock
exchange he will have to abide by its rules, regulations and by-laws, pay the prescribed fee
and take adequate steps for redressal of investor’s grievances within one month of the receipt
of the complaint and keep SEBI informed about the number, nature and other particulars of
such complaints.

Registration

A broker, seeking registration with SEBI has to apply through the stock exchange of which
he is a member. The application must be forwarded by the exchange to SEBI within 30 days
from the date of receipt. While forwarding the application the exchange should also include a
statement to the effect that no complaints/arbitration cases are pending against the applicant.
For granting registration to the broker, SEBI checks whether or not he is eligible to be a
member of a stock exchange, has the necessary infrastructure including manpower to
effectively discharge his activities has past experience in the business of buying selling or
dealing in securities and is subject to disciplinary proceedings under the rules, regulations and
by-laws of the stock exchange with respect to his business and is a fit and proper person.

Payment Of Fee

Every registered broker has to pay the SEBI a specified registration fee based on the annual
turnover, that is the aggregate of the sale and purchase prices of securities received and
receivable by the stockbroker during any financial year on his own account as well as on
account of his clients. For an annual turnover up to Rs 1 crore, a sum of Rs 5000 is to be paid
as fee to the SEBI. For an annual turnover in excess of Rs 1 crore the registration fee is Rs
5000 plus one hundredth of one per cent of the turnover in excess of Rs 1 crore for each
financial year.
General Obligations And Responsibilities

Every stock broker is required to keep and maintain the following books of accounts records
and documents:
a) Register of transactions (sauda book);
b) Client ledger;
c) General ledger;
d) Journals;
e) Cash book;
f) Bank pass book;
g) Documents register containing inter alia particulars of securities received and
delivered in physical form and the statement of account and other records relating to
receipt and delivery of securities provided by the depository participant in respect of
dematerialized securities;
h) Counterfoils or duplicates of contract notes issued to clients;
i) Margin deposit book;
j) Registers of accounts of sub-brokers;

Appointment of Compliance Officer every stock broker should appoint a compliance

officer to monitor the compliance of the SEBI Act/rules/regulations/notifications/guidelines
instructions issued by the SEBI/government and for redressal of investors grievances. He
should immediately and independently report any non-compliance observed by him to the
SEBI.

Stock Broker Not To Deal With Unregistered Sub-Broker A stock broker should not deal
with any person as a sub broker unless he has obtained a certificate of registration from the
SEBI.

Procedure For Inspection

The SEBI is empowered to appoint one or more persons as inspection authority to inspect the
book of accounts other records and documents of the stockbroker:
a) To ensure that the books of accounts and other books are being maintained in the
required manner and in accordance with the provisions of the SEBI act, rules,
regulations and the provisions of the SCRA;
b) To investigate into the complaints received from investors, other stockbrokers, sub-
brokers or any other person on any matter having a bearing on the activities of the
stockbroker; and
c) To investigate, suo moto, in the interest of the securities business or in the investors’
interest, into the affairs of stockbrokers.

The SEBI can also appoint a qualified auditor to carry out inspection/investigation into the
records of the brokers. On the basis of the inspection report, SEBI can take action in case of
default as specified below.

Liability for contravention of the SEBI act, rules/regulations A stock broker or a sub-
broker who contravenes any of the provisions of the SEBI act rules or regulations would be
liable for any one or more of the following actions:
i. Monetary penalty under chapter VI –A of the SEBI Act.
 ii. Penalties as specified under SEBI (procedure for holding enquiry by enquiry officer
and imposing penalty) regulation, including suspension or cancellation of certificate
of registration.
iii. Prosecution under section 24 of the SEBI Act.

Liability for monetary penalty A stock broker or a sub-broker would be liable for monetary
penalty in respect of the following violations namely;

i. Failure to file any return or report with the SEBI.

ii. Failure to furnish any information, books or other documents within 15 days of issue
of notes by the SEBI.
iii. Failure to maintain books of account or records as per the SEBI act rules or
regulations.
iv. Acting as an unregistered sub-broker or dealing with unregistered sub-brokers.
v. Failure to exercise due skill care and diligence.
vi. Failure to satisfy the net worth or capital adequacy norms, if any, specified by the
SEBI.

Liability for action under the enquiry proceeding regulations A stock broker or a sub-
broker would be liable for any action as specified in the SEBI (procedure for holding enquiry
by enquiry officer and imposing penalty) regulation, including suspension or cancellation of
his certificate of registration, if he:

i. Ceases to be a member of a stock exchange; or

ii. Has been declared defaulter by a stock exchange and not readmitted as a member
within a period of six months; or
iii. Surrenders his certificate of registration to the SEBI; or
iv. Fails to pay the prescribed fee; or
v. Fails to cooperate with the inspecting or investigating authority; or

Liability for prosecution A stock broker or a sub-broker would be liable for prosecution
under section 24 of the SEBI act for any of the following violations, namely:-

i. Dealing in securities without obtaining certificate of registration from the SEBI.

ii. Market manipulation of securities or index.
iii. Failure without reasonable cause
a. To produce the investigating authority or any person authorized by him in this
behalf, any books, registers, records or other documents which are in his
custody or power; or
b. To appear before the investigating authority personally or to answer any
question which is put to him by the investigating authority; or
c. To sign the notes of any examination taken down by the investigating
authority.
iv. Failure to pay penalty imposed by the adjudicating officer or failure to comply with
any of his directions or orders.
Capital Adequacy Norms For Brokers

The capital adequacy requirements for brokers consist of the following components:
1. Base minimum capital,
2. Additional/optional capital related to the volume of business.

Base minimum capital An absolute minimum of Rs 5 lakh should be maintained as a deposit

with the stock exchange by member brokers of the Mumbai and Kolkata stock exchanges and
Rs 3.5 lakh for those of Delhi and Ahmedabad exchanges, irrespective of the volume of
business. In case of the other stock exchanges the minimum requirement is Rs 2 lakh. The
security deposit, kept by members in stock exchanges, forms part of the base minimum
capital; 25 per cent of the base minimum capital is to be maintained in cash with the
exchange.

Additional capital related to volume of business The additional or optional capital required
from a member should, at any point of time, be such that together with the base minimum
capital, it is not less than 8 per cent of the gross outstanding business in the stock exchange
defined as the aggregate of up to date sales and purchases by a member broker in all the
securities put together. It includes inter-client business not executed on the floor of the
exchange at any point of time during the current settlement.
No netting of sales and purchases made on behalf of clients is permitted. However
sales and purchases made by the broker on his own behalf in the same security are allowed to
be netted and his exposure is limited to the price differential.
The gross outstanding business of a member at any point of time should not exceed
12.5 times the base and additional capital requirements. On the outstanding business reaching
10 times the base and additional capital a broker has the responsibility to intimate the stock
exchange. If the outstanding business reaches 12.5 times the base and additional capital, the
member should not increase his outstanding business until additional capital has been brought
into his business and the stock exchange is satisfied that the member could be allowed to
trade further.

Sub-brokers

A sub-broker acts on behalf of a stockbroker as an agent or otherwise for assisting investors

in buying, selling or dealing in securities through such brokers, but he is not a member of a
stock exchange. To act as a sub-broker a certificate of registration from the SEBI is required.
It grants a registration certificate to a sub-broker subject to the condition that he
a. Pays the prescribed fee,
b. Takes adequate steps for redressal of investor grievances within one month of the
receipt of the complaint and keeps the SEBI informed about the number, mature and
other particulars of the complaints and
c. Is authorized in writing by a broker for affiliation in buying, selling or dealing in
securities.
Sub-broker would wanting to do business with more than one broker need to be separately
registered with the SEBI for each broker. Consequent to a broker having corporatized his
membership, all sub-brokers affiliated to him would need to apply to the SEBI for transfer for
their affiliation.
Registration of sub-brokers

According to the SEBI regulations currently in force a sub-broker is required to submit along
with the application:
1. A recommendation from a stockbroker with whom he will be affiliated and
2. Two references, including one from his banker. The application has to be submitted to
the concerned stock exchange, which has to verify the information contained in it. It
has also to certify that the applicant is eligible for registration as per the specified
eligibility criteria, namely, an individual applicant is not less than 21 years of age, has
not been convicted of any offence involving fraud or dishonesty, has passed the
equivalent of at least 12th standard examination from a recognized institution and is a
fir and proper person. The educational qualification may be relaxed by the SEBI on
the basis of merit and subject to the experience of the applicant. Similar eligibility
criteria apply to the partners of a firm of the directors of a body corporate. In addition,
the applicant:
I. Has the necessary infrastructure like adequate office space, equipment and
manpower to effectively discharge his activities and
II. Should be a person recognized by the stock exchange as a sub-broker affiliated
to a member broker of the stock exchange.

General obligations

Payment of fee the annual fee payable by a sub-broker is Rs 1000 for an initial period of five
years. After the expiry of five years, an annual fee of Rs 500 is payable as long as the
certificate remains in force.

Agreement there should be an agreement with the broker and the sub-broker specifying the
scope of his authority and responsibilities.
The sub-brokers should:
I. Comply with the rules, regulations and bye-laws of the stock exchange and
II. Not be affiliated to more than one stock broker of one stock exchange.

Books of accounts the same books of accounts and documents as are required to be
maintained/by brokers except those specified in clause (h) to (m) should be maintained by
sub-brokers also.

TRADING AND CLEARING/SELF-CLEARING MEMBERS

A trading member is a member of a derivative exchange/derivative segment of a stock exchange who
settles the trade in the clearing corporation or clearing house (i.e. clearing corporation/house of a
recognised stock exchange to clear and settle trades in securities) through a clearing member (i.e. a
member of a clearing corporation/house of the derivative exchange/derivative segment of a stock
exchange who may clear and settle transactions in securities.) A self-clearing member means a
member of a clearing corporation house (CC/CH) who may clear and settle transactions on its own
account or on account of its clients only. He cannot clear/settle transactions in securities for any other
trading member(s).

Registration

An application for registration with the SEB1 by a trading member, clearing or self-clearing member
should be routed through the concerned derivative exchange/derivative segment of a stock exchange
(DE/DSSE) and the CC/CH respectively, who would forward it to the SEBI within 30 days from the
date of its receipt A trading member who also seeks to act as a clearing/self-clearing member should
apply separately. While considering the application, the SEBI would consider all matters relating to
dealing in derivatives and in particular whether the applicant is (i) eligible to be admitted as a
trading/clearing member; (ii) has the necessary infrastructure like adequate office space, equipment
and manpower to effectively undertake his activities, (iii) is subjected to disciplinary proceedings
under the rules/regulations/bye-laws of any stock exchange with respect to his business as a stock
broker or a member of a DE/DSSE/CC/CH, involving either himself or any of his
partners/directors/employees; and (iv) has any financial liability which is due and payable to the SEBI
under these regulations.
In addition, applicants for registration as trading members should have (a) a networth [i.e. paid-up
capital, free reserves and other securities approved by the SEBI from time to time but excluding fixed
assets/pledged securities, value of members card, non-allowable securities (unlisted securities), bad
deliveries, doubtful debts/advances (overdue for more than three months or given to the associate
persons of the member), prepaid expenses, losses, intangible assets and 30 per cent value of
marketable securities] specified by the DE/DSSE from time to time and (b) the approved user and his
sales personnel should have passed a certification programme approved by the SEBI.
Similarly, an applicant for registration as a clearing member should (a) have a minimum net worth of
rupees three crore and (b) deposit at least rupees fifty lakh with the CC/CH of the DS/DSSE in the
form specified from time to time. The additional requirement for an applicant to act as self-clearing
member would be a networth of one crore rupees and a deposit of fifty lakh rupees.

Payment of Fees
The fees to be paid by the trading/clearing/self-clearing member of a DE/DSSE/CC/CH are specified
below, f ailure to pay the requisite fee would result in suspension/cancellation of registration by the
SEBI and they would cease to deal in/settle a derivative contract.

Clearing Member A clearing member should pay a fee of Rs 20,000 every year, alongwith the
application for registration for the first financial year (April 1 - March 31) and before June 1 for
subsequent financial years.

Self-Clearing Member Self-clearing members should pay, every year, a fee as applicable to a
clearing member and a trading member and all the provisions applicable to them would also be
applicable miatis mutandis to him.
Code of Conduct
The code of conduct specified for stock-brokers, discussed earlier, is applicable mutatis thutandis to
the trading/clearing/self-clearing members, who should abide by them. They should also abide by the
code of conduct specified in the rules/bye-laws/regulations of the DE/DSSE. A clearing member/self-
clearing member should (i) obtain details of the prospective clients in the know your client format
specified by the SEBI before executing an order on his behalf and (ii) mandatorily furnish the risk
disclosure document disclosing the risk inherent in trading in derivatives to the prospective clients in
the form specified by the DE/DSSE. The trading/clearing/self-clearing members should (i) deposit
margin/any other deposit and W) maintain the position/exposure limit specified by the
SEBI/concemed DE or DSSE/CC or CH from time to time.

General Obligations/Inspection/Action in Case Default

The provisions relating to general obligations, inspection and action in case of default applicable to
stockbrokers discussed earlier are applicable mutatis mutandis to trading/clearing/self-clearing members of
,
DE/DSSE/CC/CH.
FOREIGN BROKERS

Foreign institutional investors (FIIs) now play a significant role in stock markets. With a view to
helping the follow the procedures and encourage them to invest in India, the SEBI has issued a
different set of for foreign brokers.

Registration with the SEBI

while applying for registration, a foreign broker has to, inter-alia, disclose to the SEBI
name(s)/registration ' of the overseas stock exchanges where he is registered in the capacity of a
broker-dealer together with an undertaking that he would operate and assist only on behalf of
registered FIIs and would not deal I securities on his own account as principal in India. On advice
from the SEBI, the RBI would accord approval to him to open (a) a foreign currency denominated
bank account and a rupee account with a designated bank branch and (b) multiple custodian accounts
with the approved custodian of all registered FIIs whom he may be assisting or on whose behalf he
would be placing orders with a member of the Indian stock exchanges. Thus, he would have to
maintain two separate accounts, one for the FU account and da other for himself.

Transactions in Accounts
The foreign currency denominated account of the registered foreign broker would be credited with
inward remittance brought in by him and inward remittance to make the initial payment against the
purchase contracts on behalf of registered FUs. The rupee account will be credited with the
commissions/brokerage earned by him in India. Initial payment on account of purchase contract on
behalf of registered FIIs would also be made through the rupee account. Reimbursement of this initial
payment would be made by (he designated bank/custodian of the registered Fll.
Foreign brokers are allowed to freely repatriate commissions/brokerage earned in India after
transferring them to the foreign currency denominated account, subject to payment of taxes on the
basis of conversion of rupees into foreign currency at the prevailing market rate.

Markets Operations
The market operations of a foreign broker are conducted as follows.

Contract Notes A foreign broker can operate only on behalf of registered FIIs. He cannot deal in
securities on his own account as a principal. He transmits orders on behalf of FIIs to the members of
the stock exchanges who would issue contract notes to him with a specific mention of the name of the
FH on whose behalf the contract is being executed or use of a code number obtained from the SEBI in
place of the FH’s name. The name(s) of the FII sub-accounts need not be mentioned in contract notes.
The contract note should be given to the custodian of the foreign broker who is also the custodian of
the FII(s). A copy of the contract note is to be given to the broker as well as the custodian of the FTI.

Payment for Purchases Payment for Purchases of securities is made by the foreign broker from his
rupee account. If a FH places an order for purchase directly, payment is made directly out of his rupee
account.

Sale Proceeds If a FU sells securities through a broker, the latter should ensure that the proceeds/at*
credited directly to the rupee account of the FII. This is required to calculate the capital gains tax on a
transaction basis by the designated bank branch of the FII. In other cases, the foreign broker makes
payment to the FII.

Delivery of Scrips Delivery of scrips against direct purchases/sale by the FII has to be made throng”
the custodian of the FII within four hours. In the case of purchase through a foreign broker, scrips would
be delivered to the custodian of the FII through the broker’s custodian within four hours. The foreign
broke1» custodian account is, thus, a balancing account with a zero balance after completion of every
transaction
Contract Notes by Foreign Broker A foreign broker cannot issue any contract note in India P but it
may issued by him to an FII outside India separately specifying the price/brokerage/commission.

on Repatriation Before making any remittance of repatriable proceeds, any FII should
Restrictions
match the purchases made through the foreign brokers account with the sale proceeds in respect of the
same securities that have been credited to his own account. Repatriation of capital gains can be made
only after completion of such reconciliation.

Limit on Money Value The foreign broker should ensure that at no point of time the rupee value of
the total purchases of securities made by him, on behalf of all FIIs using his services, exceeds the
rupee equivalent of the remittance in foreign currency credited to his foreign currency denominated
account.

Reporting System
The designated bank branches of FIIs should submit their reports to the SEBI or the RBI. In addition,
the custodian of foreign brokers should submit monthly reports to the SEBI or the RBI containing the
following information:
 Names of FIIs on whose behalf he has made transactions with members of stock exchanges
 Date of transactions
 Name of scrips
 Volume contracted
 Price
 Date of receipt of delivery from members of the exchanges
 Date of delivery to the custodian of the FII in respect of purchases
 Date of delivery to the members of exchanges in respect of sales
The designated bank branch accounts of foreign brokers should submit such reports as specified by
the RBI. It may, at any time, call for any information from the foreign broker regarding the records of
utilization. of inward remittances and also a statement of security transactions.

Insection

The SEBI or the RBI can inspect the books and accounts of foreign brokers and take appropriate
action in respect of any violation of the SEBI guidelines.

Wholesale Debt Market (WDM) Segment

The WDM segment provides a facility for institutions/body corporates (institutional investors) to
enter into high value transactions in instruments such as Government securities, T-bills, public sector
undertakings (PSU) bonds, units of mutual funds, certificates of deposits, commercial papers and so
on. The players on the WDM segment are trading members (TMs) and participants.

Trading Members These are the recognized members of the NSE. Body corporates, subsidiaries of
banks and financial institutions can become TMs. They are selected on the basis of a comprehensive
selection criteria. Whole-time directors/dealers of these should possess at least two years’ experience
in any activity related to banking/financial services. They must possess a minimum net worth of Rs 2
crore. The annual fee is Rs 30 lakh, and a TM cannot withdraw his membership before five years. The
applicant must be engaged solely in the securities business and not in any fund-based activity. The
minimum paid-up capital should be Rs 30 lakh. TMs can either trade on their own or on behalf of
their clients, including participants.

Participants Participants are the organizations directly responsible for the settlement of trade. They
are large players in the market and as such take direct settlement responsibility of their own trades
executed through TMs. Participants have access to the NSE trading system to enable them to see the
breadth and depth of the market through enquiry screens. They are able to monitor all market
movements.

Trading System The fully computerized, online trading system has changed the very manner u
which trading is perceived in the Indian stock market. Besides the fact that the system has increased
trading velocities and cut timeframes, it has also managed to incorporate the critical aspect of security
in ® functioning. The NSE provides a facility for screen-based trading with order matching facility.
Members are connected from their respective offices, at different locations, to the main system at the NSE
premises through a high-speed efficient satellite telecommunication network. The trading system is an
order driven, automated order matching system that does not reveal the identity of parties to an order
or to a trade. This helps orders, whether large or small, to be placed without the members being
disadvantaged by disclosure of their identity. The trading system operates on a price-time priority. Orders are
matched automatically 1 the computer, keeping the system transparent, objective and fair. Where an
order does not find a mate > remains in the system and is displayed to the whole market, till a fresh
order that matches comes m earlier order is cancelled or modified. ^
The trading system provides tremendous flexibility to users in terms of the type of orders that can
placed on the system. Several time related, price related or volume related conditions can easily be P
on an order. The trading system also provides complete on line market information through various
inquiry facilities. Detailed information on the total order depth in a security, the best buys and sells
available in the market quantity traded in that security, the high, the low and the last traded price is
available through ! the various market screens at all points of time.

Access The WDM trading system recognizes three types of users: trader, privileged, and inquiry.
Trading members can have all the three user types whereas participants are allowed as privileged and
inquiry users only. The user of a trader gives access for entering orders or trades on the trading
system. The I privileged user has the exclusive right to set up counter party exposure limits. The inquiry
user can only ! (he market information and set up the market watch screen but cannot enter orders,
trade or set up exposure limits.

Market Type Trading on the WDM segment can be executed in the continuous or negotiated market. in the
continuous market, orders entered by the trading members are matched by the trading system. For
each order entering the trading system, the system scans for a probable match in the order books. On
finding a match, a trade takes place. In case the order does not find a suitable counter in the order
books, it is added to the order books and is called a passive order. This could later match with any
future order entering the order book and result into a trade. This future order, which results in
matching of an existing order, is called the active order.

Trade Type WDM trading system provides for trading in debt and other instruments, either as
outright purchase and sale as Non-Repo trades or as Repo. While entering the order, the trading member
has to indicate the trade type (Non-Repo or Repo) and the desired settlement terms if their order is to
result into a trade. Similarly, the Repo terms also needs to be specified if the order is a repo order.
Currently, the NSE permits the settlement term from T+ 0 (that is, same day) to T+5 (six days) and
Repo term from three to 14 days. Repo is allowed in certain Government securities, PSU bonds and
corporate debentures that are traded in an electronic form.

Order Matching Rules Orders are matched on the basis of price-time priority. For non-repo trades, w
best-buy order is the one with the highest buy price and the best sell order is the one with the lowest
price. Orders are matched automatically by the trading system based on passive order price. In case of
repo Wes, the best buy order is one with the lowest buy rate and the best sell order is one with the
highest sell rate' The trade is based on passive order rate.
Order Types and Conditions The system provides flexibility to enter various types of orders with
time volume and price related conditions.

CP Exposure Screen This facility is available only to the privileged trading members and pants. The user
can set up exposure limits against other trading members or participants with respect ti sell, buy + sell
or buy-sell transactions. The user can set limits for a certain amount or has an option to without
restrictions, that is, NO LIMIT. The system provides flexibility to set up different |1 different trade
types (repo, non-repo) and settlement days (same day, day one, day two, any other day).

How This Limit Works Any trading member/participant can set up/modify CP limits on other in
members/participants to commence trading on the WDM system. These limits are stored by the
system used for validation of all transactions before orders are matched for trades. Every time a trade
is exec between respective trading members/participants, the limit is reduced by trade consideration.
On settlement of the trade, the limit is restored to the original level, that is, all same day trades reduce
limit avail during the day for trading and the limits are restored for the next trading day. Where trades
are execute; other day settlement (say, T+2), the limit would be restored on T+3 day. The limits will
be overwritten c when the trading member/participant modifies the previously set limits. All trades
executed by trade members, for their participants (entities registered with the NSE as participants),
will not affect the trade member’s counterparty exposure and will be reckoned only in the
participant’s counterparty exposure., client trades are done by the trading member on his own account
and settled directly by the client. the reduces the exposure limit available to the trading member.

Clearing and Settlement The primary responsibility of settling trades concluded in the WDI
segment rests directly with the participants and the NSE monitors the settlements. These trades are
settlement Mumbai, as per the procedure laid down:
 Trades are settled directly between the constituents/participants to the trade and not through
an) clearing house mechanism. Thus, each transaction is settled individually and netting of
transactions is not allowed.
 Settlement is on a rolling basis, that is, there is no account period settlement. Each order has
a unique settlement date specified upfront at the time of order entry and used as a matching
parameter. It15 mandatory for trades to be settled on the predefined settlement date. The NSE
currently allows settlement periods ranging from same day (T+0) settlement to a maximum of
six working days (T+8- On the scheduled settlement date, it provides data/information to the
respective member/participant regarding trades to be settled on that day with details like
security, counterparty and consideration.
 Government securities, including treasury bills, are settled by the participants through their
Subside General Ledger (SGL) account (a book entry settlement system) with the RBI or
through the exchange of physical certificates. The required settlement details, that is,
certificate number, SGL from number cheque number, constituent, and so on are reported by
the member/participant to the NSE- instruments are settled through delivery of physical
securities. In case of Repo trades, the settlement details of the forward leg is also reported.

The NSE closely monitors the settlement of transactions through the reporting of settlement details by
members and participants. In case of deferment of settlement or cancellation of trade, participants
required to seek its prior approval. For any dispute arising in respect of the trades or settlement, the has
established an arbitration mechanism for resolving the same.

NSE SGL A/c Facility for Constituents The NSE has the approval of the RBI to operate a second
SGL facility for constituents. Banks had originally been provided with this facility to give an impetus to
the process of widening the government securities market but this did not quite take off. It is in this
context that the SGL facility has been provided to the NSCC of the NSE to give a fillip to trading
securities. The NSE uses this facility to open constituent SGL accounts for all non-SGL participants
who Are currently unable to get the benefit of a DVP (delivery vs payment) settlement. The
constituents would include trading members, PFs, trusts, corporates and so on.
With the RBI SGL and current account facility, the NSE can take up the clearing and
settlement of non- bank/institutional trades through the clearing corporation. This makes it possible to
provide counterparty -guarantee for trades settled through the clearing corporation in due course. This
also does away with the current difficulties in inter-city settlements as well as physical settlements and
enhances debt trading activity III across other centers. In order to encourage government securities trades,
transaction charges for the SGL settlement would be nominal, at Rs 50 per transaction.

Trading of Central Government Securities Segment

With a view to encourage wider participation of all classes of investors, including retail, across the
country trading in Government Securities has been introduced from January 2003 through a nation-
wide, anony- mous, order-driven, screen-based trading system of stock exchanges, in the same
manner in which trading takes place in equities subject to the following conditions:
1. Eligible Stock Exchanges Presently, the RBI has permitted the banks and financial
institutionsto , transact in Government securities among themselves or with non-bank
clients through the members | of the BSE, the NSE and the OTCEI. These eligible stock
exchanges have been permitted to provide the facility for trading in Government securities.
2. Eligible Securities All Government securities as notified by the RBI from time to time are
eligible to be traded on the automated, anonymous, order-driven system of the eligible stock
exchanges.
3. The eligible stock exchanges upon receipt of the notification from the RBI should
immediately disseminate the information to the market through the ticker facility as well as
through their websites,
4. Listing of Government Securities The Government securities would be deemed to be listed
at issuance.
5. Members Eligible to Trade in Government Securities The members of the eligible stock
exchanges having the net worth of Rs 1 crore or more are eligible to trade in the
Government securities on the eligible stock exchanges.
6. Trading Module The Government securities should be traded along with the equity
segment in the anonymous, screen based, order driven trading system in which trades
should be matched on the basis of price time priority.
7. The trading price should be inclusive of interest. The eligible stock exchanges should
provide a mechanism for disseminating the information on accured interest on the
securities separately.
8. The minimum order size should be 10 units of Rs 100 each and multiple s thereof.

Trading mechanism of stock exchange

For successful investment of funds, an investor must have adequate knowledge about the
working of the securities market. Only the members are allowed to deal in a stock exchange,
therefore, marketing of securities can be done only through them. The members are either
individuals or partnership firms. Trading among the members is done under statutory
regulations of the stock exchange. Only listed and permitted securities are traded in the stock
exchange.

Classification of stock markets

The trading in a stock exchange takes place either on the basis of auction system on a trading
floor or through a broker-dealer. On this basis, the world’s stock markets can be classified
into:
  Auction markets ( order-driven)
 Broker- dealer market ( quote- driven)
 A hybrid of both

Auction markets
The auction market allows the buyer and the seller to find a mutually agreeable price without
broker-dealers. The buy and sell orders are automatically matched with the specialist on the
floor of an exchange. The specialists are members of one of the specialist firms. The New
York stock exchange is an example of an auction market.

Broker-dealer market
The broker- dealer market is a negotiated market. The dealers who regularly buy and sell a
particular security are said to make in that security. There are no restrictions limiting the
number of market makers in a given share. The prices are quoted through this system by
competing market makers. The markets who offer the best price are assigned orders on a
rotating basis. The prices are arrived at by negotiating with other dealers. The over- the –
counter market is an example for a broker- dealer market.

Hybrid market
In certain markets, both the auction type of trading with bids and offers made by open outery
and the quote-driven system prevail. The Bombay stock exchange is an example of the hybrid
system of trading.
All members are permitted to trade in the trading ring. Each member is allowed to have
authorized assistants’ upto a maximum number as fixed by the stock exchange. The members
trade in the market either in their own behalf or on behalf of their clients. When the member
acts as a broker, he is doing retail business by buying and selling securities for his customers.
When the members offers both purchase and sale prices (bid and offer) to the other members
brokers, he is doing wholesale business and is called a jobber are an essential part of the stock
market.

Classification of listed shares

The purchase and sale transactions in the market relate to dealings in securities listed on the
stock exchange. These securities include equity shares, preference shares, debentures, gilt-
edged securities and semi- government bonds. The central, state and semi- government
securities are listed automatically for trading after they have been issued to the public without
any listed fees.
The listed shares in the stock exchange are divided into two groups, namely, group A and
group B shares.

Group A shares
The group A is those shares that come under the specified group. They are also called
cleared securities. The security in order to be included in the specified group should satisfy
the following conditions:
1. The shares should be fully paid-up equity shares which have already been listed on the
stock exchange for at least 5 years on the cash list.
2. The company’s paid-up equity should be at least Rs. 5 crore.
3. The shares should have been actively traded while on the cash list.
4. The shares should be widely disbursed and a large volume of shares is available with the
public for trading.
5. The company should have a record of good earnings and dividends over the past few
years before its inclusion in the specialist list.

Group B shares
The group B shares come under the non specified group. They are also called non- cleared
securities. The non specified group includes those shares which are first listed and kept in the
cash group.
Speculation is permitted only in specified group. The trading is said to be genuine if the
delivery is taken or given and it will be speculative if no delivery takes place. The facility for
carrying forward a transaction from one accounting period to another is available only for
group A share. In addition to the specified and non- specified groups, there is another
category of permitted securities. These securities are not listed on that particular stock
exchange, but listed on some other exchange permitted to be traded in this exchange.

Procedure for buying and selling shares

Transactions in shares are done on the floor of a stock exchange. Trading on the stock
exchange is officially done in the trading ring for three hours from 11:30 a.m. to 2:30 p.m. or
12 noon to 3 p.m. Trading before or after official hours is called kerb trading. Trading ring is
the location on the floor of an exchange where trade is executed. It is a circular arrangement
where the traders can make bid and offer prices. In the trading ring, space is provided
separately for specified and non specified sections. The members or their authorized
assistants have to wear a badge or carry with them identity cards given by the exchange to
enter the trading ring. They also carry a sauda or block book and pen. The sauda book is a
book of transactions executed on the floor. After each order is executed, suitable entries are
made in the block book of concerned members.
Kerb trading
Kerb transactions are dealings between brokers who assemble outside the stock exchange
after market hours. Kerb trading is illegal and concerned as a punishable offence, despite it
flourishes, and purchase and sale take place outside the market after market hours. In fact,
brokers often report kerb transactions along with the transactions done during official
business hours. For all practical purposes, no difference is found between official transaction
and kerb transactions expec5t that the former falls outside the official stock exchange.
Kerb trading is highly price sensitive and a few transactions are enough to bring about
significant changes in the prices of securities. It, therefore, provides a fertile ground for
speculators. It is argued that legalization of kerb trading may check speculation to some
extent.

Steps in buying and selling

The following steps are involved in buying and selling a security on the exchange:
1) Finding a broker
2) Opening an account with broker
3) Placing the order
4) Making the contract
5) Preparing contract note
6) Settlement of transaction

These are now briefly described:

1) Finding a broker- The shares are bought through a stock broker who is a licensed
member of a recognized stock exchange. The selection of broker depends mainly on the
kind of services rendered by him as well as upon the kind of transaction a person wishes
to undertake. A prospective broker should be able to render the following services:

a) Provide information: A broker should be able to provide information about the available
investments such as the form of capital structure, earnings, dividend policies and
prospects. Also, he should be able to advise the investor about taxes, portfolio planning
and investment management.

b) Supply investment management: A broker must be able to educate the investor

therefore; he should provide the necessary financial periodicals, prospectus and reports of
companies.

c) Availability of competent representatives: The brokers must have appointed sufficient

number of competent representatives who can help the customer solve their investment
problems.

In India, The stock exchange rules, by laws and regulations do not prescribe any
functional distinction between members. Here, the brokers themselves have established
some specialization. So, the investor has to find a good, reputed and established broker
who is engaged in the kind of deal that the investor is interested in.

2) Opening an account with broker- After selection of the broker, the investor will
proceed to open an account with the broker. The broker opens an account in the name of
the prospective client only if he is satisfied about the credit worthiness of the investor and
his intention to trade in the market. If the broker is satisfied, he will open an account in
the name of the customer by writing his name in the broker’s book.
 After opening an account, the broker will ask the investor to deposit a small amount of
money called “margin money” as an advance.

3) Placing the order- Once the broker is located, the prospective investor can place an
order to buy the shares. In the order, he has to specify the name of the company and the
number of shares he wants to buy. The order should be in clear and precise terms. Such
orders take different forms. The different types of orders are described below:

a) Market orders: These are instructions to a broker to buy or sell at the best price
immediately available. The market orders are commonly used when trading is
active in stock exchanges or when there is an urgent desire to buy or sell securities.
b) Limited orders: These specify the maximum or minimum price at which the
investors are willing to buy or sell the shares.
c) Stop order: It is used to limit the amount of losses or to protect the amount of
capital gains. This type of order is also known as stop loss order. It authorizes the
broker to sell the security immediately if the price falls below the given limit to
stop further losses.
d) Immediate or cancel order: It directs the order to be executed immediately. If it is
not possible to be implemented, the broker should cancel the order and report the
same to the customer.
e) Discretionary order: In this type of order, the broker, the broker is given power to
use this discretion to executed order at a price which he considers the best. Such an
order is placed when the client has full confidence in the ability and integrity of the
broker.
f) Open order: When the client does not fix any time or price limit for the execution
of the order, it is called an open order; such an order can be carried at any time
until it is cancelled.
g) Fixed price order: When the client specifies the price at which the shares are to be
purchased, it is known as fixed price order.

4) Making the contract- On receipt of an order, the broker or his authorized clerk will
go to the floor of the exchange to transact the business. The trading floor of the stock
exchange is divided into a number of wings or trading posts. Each trading post is a market
for the particular security for making the bargain. The intending member or his
representative reaches the trading post where that particular security is traded. Hence he
comes in contact with others interested in transacting in that security. The buyers make
their bids and sellers make their offers. The bargains are closed at mutually agreed-upon
prices. Usually, the seller gives his offer and their buyer signifies his bid through open
outery. The bargain is noted by both parties in their notebooks. The notebook is generally
divided into two parts. The left side is meant for recording purchases and the right side
for sale.
A slip containing brief details of the bargain is put in a box for making announcement in
the official price list. The exchange authorities publish a list of scrip traded during the day
 along with various prices at which the scrip was quoted during the day on the basis of the
prices given by the jobber. These quotations are published in the newspapers next day.

5) Preparing contract note- As soon As the bargain is closed, both the parties record
the dealings in their books and the transactions is completed by the issue of contract
notes. A contract note is an agreement between the broker and the client for the executed
of order. A copy of the contract note is sent to the client to ensure the accuracy of the
particulars. The brokers are allowed to charge their brokerage only to the amount
specified in the contract note.

6) Settlement of transaction- The last step-in the buying and selling of securities in the
stock exchange is the settlement of the contract by the broker for his client. The procedure
for settlement of transaction on the stock exchange can be studied under two heads:

 Ready delivery contracts

 Forward delivery contracts

These are now explained in detail below:

 Ready delivery contracts- In the case of ready delivery contracts, immediate delivery of
shares is contemplated and cash payment is involved. These contracts, also known as cash
trading or cash transaction, are to be settlement either on the same day or within a short
period of time. In Bombay and madras stock exchange the usual period is seven days whereas
in Calcutta it is three days. If the payment and the delivery are on the same day or on the next
day, the contract may be called spot delivery contract.
The ready delivery contracts may be settlement in two ways:
 By actual delivery of securities bought or sold and the price paid or received in full.
 Without actual delivery of securities, but by paying the differences. Here, only the
prices difference is adjusted between the two members.
The ready delivery contracts may deal with cleared or non cleared securities; cleared
securities are settled through the clearing house. This enables the members to pay or receive
net dues instead of separate payments for all individual transactions. Before the clearing day,
each member submits a clearing sheet showing details purchased and sold by him during the
weeks. On the clearance day, the securities together with the transfer deed are given by the
sellers. The buyer makes payments and accepts delivery of securities from the clearing house.
For non-cleared securities, the settlement is made without the intervention of the clearing
house. It is done through a process called hand delivery and payment.

 Forward delivery contracts- These contracts can be made only in those securities
which are placed on the forward list. The parties in this contract do not have any intention of
taking delivery or making payment on buying and selling of securities. Such contracts are
used for speculations.
 The forward delivery contracts are settlement on a fixed settlement day occurring at
fortnightly intervals in one of the following ways:
 Through actual delivery of securities
 Be revising the transaction through a neutralizing purchase or sale.
 Be carrying over the transaction to the next settlement day.

Generally, the first situation rarely occurs. In the second case, the purchase is offset by a sale
and vice-versa, the difference received or paid. In the third method, the transaction is carried
forward for future settlement to the next settlement day. It is called carry over or badla. It can
be made by paying a premium called badla charges.
Badla charges are the interest payable for carrying over the transactions from one settlement
to the other for the value of shares when they are paid by buyers to the sellers, it is called
contango or seeda badla and when it is payable by sellers to buyers, it is called backwardation
or undha badla.

Benefits of forward transactions

 These transactions inject liquidity into the trading system.
 They help in moderating the extreme movement of prices as it facilitates short
selling in a rising market and long purchases in a declining market.
 Such transactions act as a risk-heading instrument like options and futures.

Types of Delivery
A contract which has been executed on behalf of a client or on the member’s own account
results in the delivery/receipt of payment for shares.

The deliveries of securities can be affected in three ways:

i. Hand delivery: In this method, the delivery and payment should be completed on
the days fixed at the time of entering into the bargain. But the period should not
exceed 14 days following the date of the contract.
ii. Spot delivery: It is transaction settlement by delivery and payment on the date of the
contracts or on the next day.
iii. Special delivery: Under this type of transaction, the delivery and payment are made
at any time after 14 days, but not exceeding 2 months, following the date of the
contract as may be stipulated when entering into the bargain and permitted by the
governing board or the president.
TRANSFER OF SECURITIES

Share Transfer
Share transfer is the process by which the title or ownership to a security on sale or gift is changed in
the register of shareholders maintained by the company. The Indian stock exchanges employ
clearance and delivery method where physical transfer of securities takes place. In order to get the
shares transferred in the name of the buyer, the share certificate along with the duly filled transfer
deed with transfer stamps affixed on it are sent to the company where each and every detail is
checked. If the share certificates are found to be up to the mark, it will be returned in three months
with a new ledger folio number recorded at the reverse of the certificate along with the transfer
number, date and buyer’s name. These should be endorsed by appropriate authority of the
company.

Long delay in getting the shares transferred in the name of the buyer hampers the growth of
securities business. Therefore, there is a tendency all over the world to eliminate the physical
transfer of shares. In India this goal is achieved by the Stock Holding Corporation of India (SHCIL)
which handles the shares of financial institutions.

Blank Transfer

Blank transfer is the transfer of a security by the transferor without specifying the name of the
transferee in the transfer deed. The buyer of the security can offer it as a collateral security to the
bankers for obtaining loan. Blank transfers encourage speculation as the same transfer deed without
any stamp duty revolves through many sales transactions. It results in non-payment of transfer fees
and, hence, evasion of tax.

Margin Trading

In margin trading, the securities are bought ‘on account’ with the broker. The buyer enters into an
agreement with the broker whereby he undertakes to keep a specified margin with the broker. The
broker lends the balance for the purchase of securities. The client is expected to maintain a
customary or agreed margin. If the margin falls below the agreed amount due to changes in price of
securities, additional payment of cash is to be made. The securities purchased would be the
collateral on any amount payable by the client to the broker.
INVESTMENT CLUB

Investment club is a group of people who pool their assets in order to make joint investment
decisions. Each member of the club contributes certain amount of capital, with additional money to
be invested every month or quarter. Decisions on which stocks or bonds to buy are made by a vote
of members. Besides this, the club helps the members become more knowledgeable about
investing. It also allows people with small amounts of money to participate in large investments and
thereby pay lower commissions.

STOCK MARKET REPORTING

The investors are interested in knowing what is happening to both the individual securities and the
market as a whole. The information relating to the activities on the stock exchanges is reported
through various media such as newspapers, business periodicals, other publications, radio and
television. Newspapers, particularly, The Economic Times and The Financial Express give a very
good coverage of the various stock exchange activities such as giving adequate information about
the movement of share prices and quotations. The investors who need more information can get a
comprehensive information from the Daily Official Quotations List of the Bombay Stock Exchange.

STOCK MARKET INDICES

The investors are often anxious to know the movement or the important segments of the market.
One popular method of measuring the price movements in a stock exchange is the index. A stock
market index is an average of charges in the price of the individual securities in the market. It
reflects the overall price or return movements of a group of securities. Most of the stock market
indices used in practice are of the following two types:

1. An index reflecting the simple arithmetic average of the price relatives of the shares in

a certain year with reference to a base year.

2. An index reflecting the aggregate market capitalization of a sample share in a certain year in
relation to the same in the base year.

National Index
The Bombay Stock Exchange index covers equity shares of 100 companies from both the specified
and non-specified lists of the five major stock exchanges such as Bombay, Delhi, Kolkata,
Ahmedabad and Chennai with 1983-84 as the base year.

The Sensex

The equity shares of 30 companies from both specified and non-specified groups are selected on the
basis of market activity and representation to major industries. The base year chosen for Sensex was
1978-79 and the exchanges covered were Bombay, Delhi, Calcutta, Ahmedabad, Madras and
Bangalore.
INSIDER TRADING

Insider trading means sale or purchase of securities by persons who possess price-sensitive
information about the company on account of their fiduciary capacity. The securities include shares,
debentures, options and futures. Insider transactions also include those who receive confidential
price-sensitive information from insiders who have access to it.

Insider

An insider has been defined by the SEBI Insider Regulations, 1992 as:

any person who is or was connected with the company or is deemed to have been connected with
the company and who is reasonably expected to have access by virtue of such connection to
unpublished price-sensitive information in respect of securities of the company, or who has received
or has had access to such unpublished price- sensitive information.

Therefore, an insider is a person who has access to key information before it is announced to the
public. Usually, the term refers to directors, officers and key employees, but the definition has been
extended legally to include the relatives and others in a position to capitalize on the inside
information.

Inside Information

Inside information means the corporate affairs that have not yet been made public. The officers of a
company would know in advance, for instance, if the company was about to be taken over or if the
latest earnings report was going to differ significantly from the information released earlier.

The SEBI Insider Regulations, 1992 define the unpublished price-sensitive information as any
information which relates to

1. the financial results of the company (both half-yearly and annual);

2. the intended declaration of dividends (both interim and final);
3. the issue of shares by way of public rights and bonus;
 4. any major expansion plans or execution of new projects;
5. amalgamation, mergers and takeovers;
6. the disposal of the whole or substantially the whole of the undertaking;
7. such other information as may affect the earnings of the company; and
8. any changes in policies, plans or operations of the company.

In India, a large amount of insider trading take place through the broker-management
nexus. The managements employs the services of brokers close to them to purchase and
sell shares. When the brokers get knowledge of the likely trend in share prices they buy and
sell even on their own account. The following persons and institutions buy or sell shares on
the basis of inside information:

 Brokers, journalists, government officials and company executives.

 Financial institutions, banks and mutual funds.

Prohibition of Insider Dealing

The SEBI Insider Regulations, 1992 prohibit dealing, communicating or counselling on matter relating
to insider trading. It has laid down that no insider shall:

1. either on his own behalf or on behalf of any other person, deal in securities of a company
listed on any stock exchange on the basis of any unpublished price-sensitive information;

2. communicate any unpublished price-sensitive information to any person, with or without his
request for such information except as required in the ordinary course of business or under
any law; or

3. counsel or procure any other person to deal in securities of any company on the basis of
unpublished price-sensitive information

Thus, any insider who deals in securities or communicates any information or counsels any
person dealing in securities in contravention of the provisions of the Regulations shall be guilty of
insider trading.
Grey Market

Grey market refers to the unofficial markets where trading on shares is carried out by persons, who
have applied for shares, before they get allotment of shares. Usually, the trading procedure
commences only after getting the shares listed in the stock exchange and by the time, the
shareholders should have received allotments and share certificates. But, in practice, the issue of
certificates may be delayed. Therefore, trading on shares may be commenced even before the
allotment is made by the issuing company. This is a kind of speculative market in which the
prospective investors quote rates unofficially before getting allotment expecting that the shares will
be allotted to them. The investors who wish to buy shares but failed to apply for the same may buy
the shares from the grey market.