D55b3 Indian Financial System

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Indian Financial System

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Name of InstitutionCapital Markets:

• These include treasury bill market, call money market, inter bank market, bill market, government securities (gilt-edged)

• market, Industrial Securities market, Public debt market, etc.

• Range of services:• Management Marketing and underwriting of new issues• Project promotion services and project finance• Syndication of credit and other facilities• Leasing, including project leasing• Corporate advisory services• Investment advisory services• Bought out deals• Venture capital• Mutual funds and offshore funds• Investment Management including Discretionary Management• Assistance for technical or financial collaboration and joint ventures• Investment services for Non- Indians• Commercial paper- Management and dealing, etc

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SECONDARY MARKET

• Introduction• Control over Secondary Market

(I) i. Recognition of Stock Exchange

ii. Listing of Securities

iii. Registration of Broker• Functions/ Services of Stock Exchanges

i. Liquidity and Marketability of Securities

ii. Safety of Funds

iii. Supply of Long Term Funds

iv. Flow of Capital to Profitable Ventures

v. Motivation for Improved Performance

vi. Promotion of Investment

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vii. Reflection of Business Cycle

viii. Marketing of New Issues

ix. Miscellaneous Services- Wider Portfolio Choices

RECOGNITION PROCEDURE• Recognized by the Central Government under SCRA and SEBI• Grant of Recognition• Renewal of Recognition• Organization of Stock Exchanges in India• Traditional Structure of Stock Exchanges• Demutualization of Stock Exchanges• Management• Membership

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(II) Listing of Securities

Group A, Group B and Group C Shares (BSE)

Group A shares (Specified Shares or Cleared securities)

Group B shares (Non-Specified Shares or Non-Cleared Securities)

Group C shares (Only ODD Lots)

ADVANTAGES OF LISTING

i. Facilitates Buying and Selling Secrities

ii. Ensures Liquidity

iii. Offers Publicity

iv. Assures Finance

v. Enables Borrowing

vi. Protects Investors

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DRAWBACKS OF LISTING

i. Leads to Speculation

ii. Degrades Company’s Reputation

iii. Discloses vital information to competitors

LISTING PROCEDURE

Criteria for Listing

Listing Obligations

Additional Obligations

New Listing Obligations

Listing Agreement

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(III) Registration of Stock Brokers

Registration Procedure

Code of Conduct for Stock Brokers

Functions of stock Brokers

i. Client Registration

ii. Obtaining Margin Money

iii. Execution of Orders

iv. Supply of Necessary Slips

v. Issue of Contract Note

vi. Statement of Particulars in a Contract Note

vii. Payment/ Delivery of Securities

viii. Charging of Brokerage and other Charges

ix. Maintenance of Bank Accounts

x. Receipt of Interest, Dividend, Rights etc.

xi. Settlement of disputes

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REGISTRATION OF SUB-BROKERS

KINDS OF BROKERS AND THEIR ASSISTANTS

1. Jobbers

2. Tara Waril Walas

3. Commission Brokers

4. Sub-Brokers/ Remisiers

5. Authorized Clerks

Method of Trading in a Stock Exchange

i. Choice of a Broker

ii. Placement of Order

a) At Best Order

b) Limit order

c) Immediate or Cancel Order

d) Discretionary Order

e) Limited Discretionary Order

f) Open Order

g) Stop Loss Order

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iii. Execution of Orders

iv. Preparation of Contract Notes

v. Settlement of Transactions

a) Spot Delivery Settlement

b) Hand Delivery Settlement

c) Clearing Settlement

d) Special Delivery Settlement

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Current Settlement Procedure of Trading TransactionsTable: Showing Typical Settlement Cycle for various Activities

Item Activity Day

Trading Rolling Settlement Trading T

Clearing Custodial Confirmation

Delivery generation

T+1 working days

T+1 working days

Settlement Securities and funds pay-in

Securities and funds pay-out

T+2 working days

T+2 working days

Post Settlement Valuation Debit

Auction

Bad delivery reporting

Auction settlement

Close out

Rectified bad delivery pay-in and pay-out

Re-bad delivery reporting and pick up

Close up of re-bad delivery

T+2 working days

T+3 working days

T+4 working days

T+5 working days

T+5 working days

T+6working days

T+8 working days

T+9 working days

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• Settlement and Payment• Rolling Settlement• Pay-in Day and Pay-out Day• “Market Trade” and “Off Market Trade”• Good Delivery and Bad Delivery• Lodging for Transfer and Return Certificates

ONLINE TRADING

Online fully automated Screen Based Trading System (SBTS) almost 100% trading takes place through electronic Order Matching.

NSE has a main computer connected through Very Small Aperture Terminal (VSAT).

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Main computer runs on a fault tolerant STRATUS main computer at the exchange. Brokers have terminals which are connected through VSATS/ Leased Lines/ Modems. This system also provides complete market information on-line. The market screens at any point of time provides complete information as to:

i. Total order depth in a security

ii. The best five buys and sells in the market

iii. The quantity traded during the day in that security

iv. The last traded price for a security etc.

BSE- Bolt System

Bombay Online Trading-Brokers conduct trading from their Trading Work Stations (TSW) displays ‘touchline’-Best bid after- ‘Market View’

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Merits of Online Trading

i. Faster Trading

ii. Accessible to All

iii. Faster Incorporation of Price Sensitive Information

iv. Widening the market

v. Saving of time and cost

vi. Fully transparent

vii. No errors and frauds

viii. Perfect audit trial

Types Of Stock Market Orders (NSE – NEAT SYSTEM)

NEAT – National Exchange for automated trading

i. Time conditions

ii. Quantity conditions

iii. Price conditions

iv. Quantity freezes

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i. Time Conditionsa) Day orderb) GTC- A Good Till Cancelledc) GTD – A Good Till Daysd) IOC – Immediate or cancel order

ii. Quantity Conditionsa) DQ – Disclosed Quantityb) MF – Minimum Fill Orderc) AON – All or non order

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iii. Price Conditionsa) STOP – Loss orderb) MKT Order – Market Order. For which the price is specified

on ‘MKT’c) ATO – At the Open – Market orders entered during pre –

open staged) ABO – At Best Ordere) DO – Discretionary order

iv. Quantity Price Freezesa) Quantity Freeze – Quantity ordered in greater than 10% of

the issue size of the securityb) Price Freeze

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Carry over or Badla Transactions

Badla and Short Selling

Badla and Stock Landing

SEBI Guidelines

Genuine Trading vs Speculative Trading

Kind of Speculators

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Various Categories OF Stock Brokers

i. Client Brokers

ii. Floor Brokers

iii. Jobbers/ Taravani Walls : Specialize in selected scrips

iv. Badla Financers/ Badlawalls

v. Arbitragers

vi. Bulls/ Tejiwalls

vii. Bears/ Mandiwalls

viii. Other Speculators

a. Stags: Grey Market – unlisted securities

b. Wolves: Trade fast and make fast – buck, Not caught in the wrong foot

c. Lame Ducks – Sell securities without having shares caught in the wrong foot.

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Speculative Transactions

i. Option Dealing

ii. Wash Sales

iii. Arbitrage

iv. Cornering

v. Rigging the Market

vi. Blank Transfers

vii. Margin Trading

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OPTION DEALING

When the option gives the option holder a right to buy securities at a predetermined price – It is called Call Option, on the other hand when the option gives the option holder a right to sell securities at a predetermined price, it is called Put Option. When both rights are given it is called Double Option.

OPTIONS FOR HEADING

ii. Wash Sales – Speculator sells a security and then buys the same at a higher price through another broker. There is severe penalty for such sales.

iii. Arbitrage

iv. Cornering – Process of holding entire supply of a particular security.

Ragging the market – Market value of a particular share is pushed up – Speculators buy and sell to ‘ make a market’ and gradually sell the holdings to get huge profits.

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Blank TransfersWhen seller simply signs the transfer form without specifying the name of the buyer.

Margin TradingIt is carried on by the clients with funds borrowed from their brokers.

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Stock IndicesThe Stock Market index is a convenient and effective product due to the following reasons:

i. It acts as a barometer for market behaviorii. It is used to benchmark portfolio performanceiii. It helps to allocate scarce resources to the best performed

companies reflected through best performed scripsiv. It is used as a forecasting tool to predict the future movement of

stock indices and also the business cycles.v. It is used in derivative instruments like index futures and index

options.vi. It can be used for passive fund management as in the case of

index funds.

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Stock Indices of BSE NSEIndices of BSE: The base year for this index is April 1979.

i. Sensex – Launched on 2nd January, 1986. Originally 30 companies representing various sectors on the exchange. At present, all scrips are selected from specified groups only. This index is available online and it is updated continuously.

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ii. BSE National Index :This trade up of 100 scrips with 1982-84 as base year. It includes prices of scrips of Delhi, Calcutta, Ahmedabad and Madras. The average price of the scrip is taken for the compilation of the index.

iii. BSE-200 : Introduced in May, 1994 with 1989-90 as the base year. Consists of equity shares of 200 companies selected on the basis of market capitalization, volume of turnover and strength of the companies fundamentals. It comprises of scrips of both specified and non specified groups.

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iv. Dollex :

It is BSE-200 expressed in Dollar values so that it may be useful to foreign investors. In Dollex, the BSE-200 is modified by dividing the current rupee market value by rupee – dollar conversion rate.

v. BSE-500 :

Introduced in 1999 with the base year 1999. It is treated to be standard index covering all sections of the economy as well as the major part of the capital.

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Name of InstitutionThe Indian Financial system at present

INTERMEDIARIES:• Banking: RBI, Commercial banks, Co operative credit societies

and banks, Post office saving banks • Non- Banking: Provident funds, Pension funds, LIC,GIC,UTI,

Mutual funds, Investment companies, Finance corporations, Hire purchase and lease finance companies, National housing bank and other housing finance companies, HUDCO, Venture capital funds, National cooperative bank of India

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• Special Development : Industrial finance corporation of India (IFCI),ICICI,IDBI,IRBI,NABARD,IFCI, EXIM Bank, Agriculture finance Consultancy ltd., National Co operative Development corporation, NIDC,NSIC, State industrial Investment Corporations, SSIDCs, Power finance Corporation (PFC)

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Regulatory and Others:I. Regulatory: RBI, SEBI, BFIR, Board for financial

supervision, Insurance regulatory authority

II. Others: Deposit insurance and credit guarantee corporation, Export credit guarantee corporation, Stock holding corporation of India, CRISIL, ICRA, Merchant banks, Factoring companies, Depositories, Custodians

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• Instruments & Markets:• Instruments :Equity shares, preference shares,

Industrial debentures or bonds, Capital gains bonds, National development bonds, NSCs, CDs, CPs, Treasury bills, commercial bills, Social Security certificates, GDRs, foreign bonds, Floating rate notes (FRNs), Foreign currency convertible bonds, Zero coupon bonds, Non- voting shares, Indexed bonds, Future, option ,swaps and other financial derivatives

• Markets: Call money market, Treasury bills market, Government securities market, Foreign exchange market, Industrial securities market (stock market), OTCE, NSE, Derivatives market, Equity market

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Services: Hire purchase and installment credit, Merchant banking, Factoring, Stock holding, discounting and rediscounting, Underwriting, Leasing, Financial and performance guarantees, Acceptances, Fund transfer, Credit cards, Loan syndicating, Portfolio management, Managing Capital issues, Custodial services, Depository services