Report on Summer Training Trading Around the Globe With reference to KOTAK TRADER Submitted to Lovely Professional University In partial fulfillment of the Requirements for the award of Degree of Master of Business Administration Submitted by: Name: Varun Puri Registration no.: 10800464 DEPARTMENT OF MANAGEMENT LOVELY PROFESSIONAL UNIVERSITY PHAGWARA (2008 - 2010)
Constraints of international sock trading, benefits, meaning, indian market scenarion internationally...
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Report on Summer Training
Trading Around the Globe
With reference to KOTAK TRADER
Submitted to Lovely Professional University
In partial fulfillment of the
Requirements for the award of Degree of
Master of Business Administration
Submitted by:
Name: Varun Puri
Registration no.: 10800464
DEPARTMENT OF MANAGEMENT
LOVELY PROFESSIONAL UNIVERSITY
PHAGWARA
(2008 - 2010)
Student’s Declaration
I, Varun Puri, student of M.B.A, hereby declare that project entitled “TRADING AROUND
THE GLOBE” submitted in the partial fulfilment of the degree for Master of Business
Administration to “Lovely Professional University” is of my own accurate work. I further
declare that all the facts and figures furnished in this project report are the outcome of my
own intensive research and findings.
Submitted By
Varun Puri
Acknowledgement
“Expression of feelings by words makes them less significant when it comes to make
statement of gratitude” It gives me pleasure to express my most profound regards and sense
of great indebtedness and sincere gratitude to my Company Guide Mr. Kapil Tandon (Cluster
Head, Kotak Securities Ltd. Jalandhar.).
I would thank to my project guide Ms. Anu Shital for her guidance in preparing this report. I
would also like to thank my co employees who gave guidance and support during the
completion of the project.
Varun Puri
EXECUTIVE SUMMARY
It is commonly said that
“Finance is the life & blood of economy”
So, to generate blood & to manage this blood, oxygen i.e. brokerage houses are there, A stock
broker or stockbrokerage house is a regulated professional broker who buys and sells shares
and other securities through market makers or Agency Only Firms on behalf of investors. In
modern world these organizations work as life & blood of the commerce system of an
economy.
Without practical training, management education is meaningless so long with theory;
practical training is provided to M. B.A. students to expose them to actual working
environment of any organization. Such training provides a framework of knowledge relating
to the concepts & practices of assigned topics in the organization.
The summer training is integral part of the course curriculum of two years full time Masters
of Business Administration course. In this the student is in the position to analyze the integral
working of an organization with mature eyes & understand the dynamics in a much better
manner.
This particular project has been conducted at Kotak Securities Ltd., Jalandhar. The basic
purpose is to know the customer perception about International stock trading, with reference
to their new product KOTAK TRADER, through which their clients can trade in worlds 24
stock exchanges. It begins with introduction of stock broking, Company profile of Kotak
Securities. Then details of the products offered by Kotak Securities ltd. has been given &
Data analysis of respondents.
This study has been conducted with a variety of important objectives in mind. The following
provides us with the chief objectives that have tries to achieve through the study. The extent
to which these objectives have been met could be judged from the conclusions & suggestions,
which appear later in the study.
The Chief objectives of the study are:
To study the product & services provided by Kotak Securities.
To know the consumer perception towards Kotak’s new product Kotak Trader.
To know about what are the considerations, that a investors keeps in his/her mind
while investing
To study the factors influencing the investment by investors
To study the unique constraints that would be faced by investors in International
Investment.
To get suggestions for the improvement or change in services of Kotak Securities Ltd.
Research Methodology
Research is defined as human activity based on intellectual application in the investigation of
matter. The primary purpose for applied research is discovering, interpreting, and the
development of methods and systems for the advancement of human knowledge on a wide
variety of scientific matters of our world and the universe. Research can use the scientific
method, but need not do so.
Research methodology means a “defining a problem, defining the research objectives,
developing the research plan, collecting the information, analyzing the information &
presentation of findings.” Such framework is called “Research Design”.
The research plan that was followed by me consisted following steps;
A) Defining the problem
B) Developing the research plan
C) Collection of data
D) Analysis of data
E) Presentation of findings
Defining the problem
My research problem is to study the new product launched by Kotak securities i.e. KOTAK
TRADER. In which an investor can trade in worlds 24 stock exchanges.
Developing the research plan
The development of research plan has following steps
1. Data source
2. Research approach
3. Research instrument
4. Sampling plan
i. Sample unit
ii. Sample size
iii. Contact methods
5. Questionnaire design
Data Source: The researcher can get two types of data:
a) Primary data
Primary data is a data which did not exist earlier & is being collected by the researcher
first time for his/her specific objectives. In other words, direct collection of data from the
source of information, technology including personal interview, telephonic interviews,
observations, Questionnaire & through schedules
b) Secondary data
Secondary data is data collected by someone other than the user. Common sources of
secondary data for social science include censuses, surveys, and organizational
records. Primary data, by contrast, are collected by the investigator conducting the
research. Such as:
Published statistics: Census, housing and social security data, and so on
Published texts: Theoretical work, secondary analyses by ‘experts’ and reports
Media: Documentaries for example, as a source of information
Personal documents: Diaries
Case studies and literature Reviews.
For collecting the secondary data, the literature review has been done, case studies
have been carried out, published texts and statistic have been used, and media
(especially internet) and personal contacts have also been utilized.
Research Approach
Survey is best suited for the descriptive & analytical research. Survey are undertaken to learn
about people’s knowledge, beliefs, preferences, satisfaction & so on & to measure these
magnitudes in the general public. Therefore, I have done survey for conducting my research
project.
Descriptive research includes surveys & fact finding enquiries of different kinds. The main
purpose is description of the state of affairs is noted down & analytical research used to
analyze the material & facts.
Research Instrument
Questionnaire: A questionnaire is a research instrument consisting of a series of questions
and other prompts for the purpose of gathering information from respondents. Although they
are often designed for statistical analysis of the responses, this is not always the case.
Sampling Plan
Sampling is that part of statistical practice concerned with the selection of individual
observations intended to yield some knowledge about a population of concern, especially for
the purposes of statistical inference. Each observation measures one or more properties
(weight, location, etc.) of an observable entity enumerated to distinguish objects or
individuals. Survey weights often need to be applied to the data to adjust for the sample
design. Results from probability theory and statistical theory are employed to guide practice.
In business, sampling is widely used for gathering information about a population.
The sampling plan calls for three decisions:
a) Sample unit – who is to be surveyed?
b) Sample size – how many people have to be surveyed?
c) Contact methods – how they will be contacted?
Questionnaire Design:
There are 14 questions in my questionnaire & I asked all these questions from 100
respondents in Jalandhar & Nakodar city.
Collecting Information:
After this I have collected the information from the respondents with the help of
questionnaire.
Data analysis & Interpretation
The next step is to extract the pertinent findings from the collected data. I have tabulated the
collected data & developed frequency distributions. Thus, the whole data was grouped aspect
wise & was presented in tabular form. Thus, frequency & percentages were prepared to
render impact of study. I have used the factor analysis method in order to know about the
various considerations of respondents about international stock trading.
LIMITATIONS OF THE STUDY
Due to constraints of time & resources, the study is likely to suffer from certain limitations.
Some of these are mentioned here under so that the findings of the study may be understood
in a proper perspective.
Awareness level of peoples affected the research. Lack of awareness of Stock market
among respondents.
The sample size taken may not be sufficient to predict the results with 100% accuracy.
For a study like this o ne a still bigger sample size would have been appropriate.
The information given by the respondents might be biased because some of them might
not be interested to give correct information.
Some of the respondents of the survey were unwilling to share information.
The research was carried out in a very short time period. Therefore the sample size and
other parameters were selected accordingly so as to finish the work within the given time
frame.
Findings of the study
From the above study it was clear that due to new product (Kotak Trader) maximum
of people are not aware of the International stock trading. Only 28 % people were
aware of it & the rest were unaware. & those who were aware are the online clients &
they too came to know about it from internet only.
From the above study it is clear Kotak securities’ majority of clients are ready to
invest in international market. About 56 % of respondents were in favor of investing
in global exchange & majority of them think it will be safe to invest in global market.
From the above study it is evident that Kotak securities Jalandhar. Branch is lacking
in marketing aspect as very few people knew about their new product KATAK
TRADER.
From my study we came to know that most of respondents trade during market hours,
so Kotak securities will have to make special arrangement to harmonize their clients
timing with the timing of the stock exchange in which he/she ids trading.
The study also indicates that the respondent who had experience of more than 4 years
think that, such a platform for global securities trading will help Indian market to
grow.
The study also helps the Kotak securities to know about the beliefs of investors they
have for the factors they will be considering while investing in international market.
For e.g. Majority of respondents said SECURITY, TIME ZONE DIFFERENCE,
AVAILEBILITY OF DATA ABOUT CO., is the most considerable factors.
The study also indicates that, when the respondents came to know about the new
product of Kotak trader, majority of them were ready to invest in international market.
About 56% said they would like to invest outside the country
From the study we came to know about the various obstacles, which investors will be
facing while trading in international market.
Some of these were: Time zone difference, Forex conversion, Clearing & settlement
etc.
Recommendations
Based on the study conducted the following suggestions are given to the Kotak Securities ltd,
Jalandhar branch.
24 hours securities trading should be inducted so as to facilitate the customers who
may be trading in the stock exchange which have difference in time zone.
More Relationship managers should be appointed to cover the marketing aspect
Kotak should bring out the brokerage structure in such manner that the investor is
attracted with its lower prices
In order to create awareness regarding the various products & services provided by
Kotak, various medium of media can be put to use to advertise about the same
New strategies should be made by Kotak which enables them to face the competition
with other brokerage houses like AnandRathi, Unicon, Religare & Indiabulls
The branch should promote cooperation & coordination among employees which help
them in efficient working
CONTENTS
CHAPTER 1: Introduction of Subject &Review of Literature 1- 45
Stock Exchange- An Introduction 1 The Meaning of Globalization 2 Trends Driving Globalization 3 The Evolution of Global Securities Market 6 International Stock Trading 6 Channels for International Stock Trading 7 Benefits of International stock trading 9 Unique Risks of and Institutional Constraints for
International Investment 13 Securities Market in India – An Overview 22 International scenario of Indian Market 23 Key Strengths of Indian securities market 26
Clearing & Settlement 35
CHAPTER 2: Overview of Industry & Company Profile 46 - 62 The Kotak Mahindra Group 46 Kotak Securities Limited 48 Awards and Reorganizations of Kotak Securities Ltd. 50 Key Developments of Kotak Securities Ltd. 51 Salient Features Offered by Kotak Securities for their investors 51 Kotak Research Products 52 Core strengths of Kotak Securities Ltd. 53 Products Range 54
CHAPTER 3: Objectives of the Study & Research Methodology 63 - 69 Objectives of the study 63
Research Methodology Defining the problem 63 Developing the research plan 65
o Data sourceo Research approacho Research instrumento Sampling plano Questionnaire design
Data analysis & Interpretation 67 Presentations of findings 68 Significance 68 Managerial Usefulness of Study 68 Scope of the Study 68
Chapter 5: Summary, Conclusions & Recommendations 83 - 86 Findings of study 83 Summary & Conclusion 84 Recommendations 85
Chapter 6: On the Job Training 87 - 88 Title of the On Job Training 87 Objectives 87 Target/ Task Assigned 87 Strategies Applied 87 Achievements 87 Limitations 88 Conclusion 88 Corporate learning 88
Appendix
Questionnaire Dummy Application form for KOTAK TRADER Bibliography
List of Tables
Tables
Table 1.1: Trading Cost Comparison for Equity Trades, 1999 20
Table 1-2: International Comparison: end December 2007 24
Table 1.3: Market Concentration in the World Index as on End 2007 24
Table 1.4: Market Capitalisation and Turnover for Major Markets 25
Table 1.5: Select Stock Market Indicators 26
Table 1.6: Savings of Household Sector in Financial Assets 28
Table 1.7: Resource Mobilisation from the Primary Market 28
Table 1.8: Market Participants in Securities Market 29
Table 2.1: 24 Stock exchanges in a Kotak client can trade in 59
List of Graphs
Chart 1.1: Clearing & settlement process at NSE 37
Chart 2.1: Journey of Kotak 46
Chart: 4.1: Experience held by investors/respondents 70
Chart 4.2: No. of Online & Offline clients 71
Chart 4.3: Trading hours preferred by investors 72
Chart 4.4: Is international stock trading safe 73
Chart 4.5: Investors preference to invest in international stock exchange 74
Chart 4.6: What do investors think about the effect of international
Trading on Indian Market 75
Chart 4.7: Investor’s trading preference 76
Chart 4.8: Factors considered by investors while investing 77
Chart 4.9: How many people knew about KOTAK TRADER 78
Chart 4.10: Will this new product will help Kotak in attracting new
Investors 79
Chart 4.11: How do investors get fundamental & technical analysis about
Companies 80
Chart 4.12: Obstacles faced by Investors 81
Chart 4.13: Brokerage clients are ready to pay 82
CHAPTER 1:
INTRODUCTION OF SUBJECT &
REVIEW OF LITERATURE
Trading Around the Globe
1 | P a g eLovely Professional University (2008-2010)
CHAPTER 1:
INTRODUCTION OF SUBJECT & REVIEW OF LITERATURE
Overview of Industry
Stock Exchange- An Introduction
The world's foremost marketplace New York Stock
Exchange (NYSE), started its trading under a tree (now
known as 68 Wall Street) over 200 years ago? Similarly,
India's premier stock exchange Bombay Stock Exchange
(BSE) can also trace back its origin to as far as 125 years
when it started as a voluntary non-profit making association.
The history of the earliest stock exchange, the French stock
exchange, may be traced back to 12th century when transactions occurred in commercial bills
of exchange. The first stock exchange in India, Bombay Stock Exchange was established in
1875 as 'The Native Share and Stockbrokers Association' and has evolved over the years into
its present status as the premier stock exchange in the country. It may be noted that BSE is
the oldest stock exchange in Asia, even older than the Tokyo Stock Exchange, which was
founded in 1878. The country's second stock exchange was established in Ahmadabad in
1894, followed by the Calcutta Stock Exchange (CSE). CSE can also trace its origin back to
19th century. From a get together under a 'Neem Tree' way back in the 1830s, the CSE was
formally established in May 1908.
India’s other major stock exchange National Stock Exchange (NSE), promoted by leading
financial institutions, and was established in April 1993. Over the years, several stock
exchanges have been established in the major cities of India. There are now 23 recognized
An aggregate of Rs. 5,788,150 million (US $ 144,812 million) were raised by the government
and corporate sector during 2007-08 as against Rs. 3,944,540 million (US $ 90,492 million)
during the preceding year, an increase of 46.74%. Private placement accounted for 71.75% of
the domestic resource mobilization by the corporate sector. (Table 1.7).
Table 1.7: Resource Mobilisation from the Primary Market
Trading Around the Globe
29 | P a g eLovely Professional University (2008-2010)
The Indian market is getting integrated with the global market, though in a limited way
through Euro Issues, since they were permitted access in 1992. Indian companies have raised
about Rs. 265,560 million i.e. US $ 6,644 million during 2007-08 through American
Depository Receipts (ADRs)/Global Depository Receipts (GDRs), an increase of 56.17% as
compared with Rs.170,050 million ( US $ 3901 million) during 2006-07. Of the total
resources mobilized through the primary markets, the share of resources raised by the
Government decreased from 51 % in 2006-07 to 42% in 2007-08. While the primary issues of
the Central Government increased from Rs. 1,793,730 million in 2006-07 to Rs. 1,882,050
million in 2007-08, the resources raised by State Governments increased by 225% from Rs.
208,250 million in 2006-07 to Rs.677, 790 million in 2007-08.
Intermediaries
The term “market intermediary” is usually used to refer to those who are in the business of
managing individual portfolios, executing orders, dealing in or distributing securities and
providing information relevant to the trading of securities. The market mediators play an
important role on the stock exchange market; they put together the demands of the buyers
with the offers of the security sellers. A large variety and number of intermediaries provide
intermediation services in the Indian securities markets. Table 1.8 presents an overview of
market participants in the Indian securities market.
Table 1.8: Market Participants in Securities Market
Trading Around the Globe
30 | P a g eLovely Professional University (2008-2010)
The market intermediary has a close relationship with the investor with whose protection the
Regulator is primarily tasked. As a consequence a large portion of the regulation of a
securities industry is directed at the market intermediary. Regulations address entry criteria,
capital and prudential requirements, ongoing supervision and discipline of entrants, and the
consequences of default and failure.
One of the issue concerning brokers is the need to encourage then to corporatize. Presently,
44% of the brokers are corporate. Corporatisation of their business would help them compete
with global players in capital markets at home and abroad. Corporatisation brings better
standards of governance and better transparency hence increasing the confidence level of
customers.
Regulators
The absence of conditions of perfect competition in the securities market makes the role of
regulator extremely important. The regulator ensures that the market participants behave in a
desired manner so that securities market continues to be a major source of finance for
corporate and government and the interest of investors are protected. The responsibility for
regulating the securities market is shared by Department of Economic Affairs (DEA),
Ministry of Company Affairs (MCA), Reserve Bank of India (RBI) and SEBI. The activities
of these agencies are coordinated by a High Level Committee on Capital Markets. The orders
of SEBI under the securities laws are appealable before a Securities Appellate Tribunal.
Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI.
The powers of the DEA under the SCRA are also con-currently exercised by SEBI. The
powers in respect of the contracts for sale and purchase of securities, gold related securities,
money market securities and securities derived from these securities and ready forward
contracts in debt securities are exercised concurrently by RBI. The SEBI Act and the
Depositories Act are mostly administered by SEBI. The rules under the securities laws are
framed by government and regulations by SEBI. All these are administered by SEBI. The
powers under the Companies Act relating to issue and transfer of securities and non-payment
of dividend are administered by SEBI in case of listed public companies and public
companies proposing to get their securities listed. The SROs ensure compliance with their
own rules as well as with the rules relevant for them under the securities laws.
Trading Around the Globe
31 | P a g eLovely Professional University (2008-2010)
Policy debates
Regulatory Impact Assessment (RIA)
Regulations for the securities markets are made by the Government and regulators to achieve
the goal of a well functioning market area, with minimal conflicts of interests and ensuring
investor protection. However, regulations may create unintended and unavoidable barriers for
market players and may not be without costs of compliance. Also, these are reviewed from
time to time based on changing market practices, changing mindset and ideology of the
regulators.
However, when a new regulation in put in place or an existing regulation is reviewed, it may
perhaps be desirable to assess and understand the alternatives available, the costs of
compliance and enforcement, potential impact of new or changed regulation and whether it
would achieve the desired objectives. In essence, some relevant questions on these lines need
to be posed and answered to make any new regulation or revised regulation a success both
with the regulated and the regulators. RIA is a tool that helps do this. RIA facilitates
understanding of the impact of regulatory actions and enables integration of multiple policy
objectives, improves transparency and consultation, and enhances accountability of
governments and regulators. It not only brings the actions of decision-makers under public
scrutiny and highlights how their decisions impact society as a whole, but also mandates
greater information sharing by them.
RIA is essentially a document created before a new regulation is introduced or a regulation is
modified, systematically assessing the positive and negative impacts of the proposed
regulation. It serves as a tool for regulatory reform.
International Practice
RIAs are produced in many countries, although their scope, content, role and influence on
policy making vary. For example, The European Commission introduced an impact
assessment system in 2002, integrating and replacing previous single-sector type of
assessments. In the European Commission perspective, Impact Assessment (IA) is a process
aimed at structuring and supporting the development of policies. It identifies and assesses the
problem at stake and the objectives pursued. It identifies the main options for achieving the
objective and analyses their likely impacts in the economic, environmental and social fields.
Trading Around the Globe
32 | P a g eLovely Professional University (2008-2010)
It outlines advantages and disadvantages of each option and examines possible synergies and
trade-offs.
In the United Kingdom, RIAs have been a key tool in helping improve the quality of
regulation and reduce unnecessary burdens on business. RIAs have been produced by Central
Government departments for many years using guidance produced by the Better Regulation
Executive (BRE) in the Cabinet Office. In May 2007 a new system of Impact Assessments
(IAs) was introduced and made fully operational in November 2007. The aim of IAs is to
help improve policy making by placing a greater emphasis on quantifying benefits and costs
in the IA.
RIA has been adopted in most OECD (Organization for Economic Co-operation and
Development) countries. RIA has also been undertaken in middle-income developing
countries, especially South Korea and Mexico.
On the other hand, despite considerable interest in measuring the effectiveness of
development policy and in the design and implementation of regulatory measures, the
potential of RIA has neither been explored nor analysed in the developing countries and in
their organizations involved in the design and formulation of development policy.
Indian context
The High Level Expert Committee on Making Mumbai an International Financial Centre
(HPEC on MIFC), which submitted its report to the Government in February 2007, has,
among other things, recommended that adopting practice that is now normal in almost all
OECD countries, the Government of India should conduct-using independent, impartial
interlocutors, including regulators from other IFCs- a periodic RIA of the financial regulatory
regime. The RIA would aim to evaluate, using enhanced cost-benefit methodology, how
efficient and cost effective extant regulation is in meeting the main regulatory objectives, and
to understand what modifications are needed to improve it.
The Government and regulators need to decide on how to go about implementing this
recommendation. It may perhaps be better if the impact assessment is integrated into the
decision-making process from the stage of formulation of policies, acts and regulations,
Trading Around the Globe
33 | P a g eLovely Professional University (2008-2010)
instead of later in the process simply to comply with externally imposed requirements.
Among other things, integration would help the earlier consideration of alternative solutions
and help weigh each ones cost and benefits.
Comprehensive regulations for intermediaries
Various intermediaries in the securities markets, including depositories, depository
participants, custodians of securities, mutual funds, foreign institutional investors, credit
rating agencies etc., are regulated under various regulations of SEBI. As each of these
regulations was drafted in order to provide a framework which would enable SEBI to better
regulate and monitor intermediaries/entities, the broad framework of such regulations is very
similar to one another.
It was observed that every regulation seeking to regulate an intermediary incorporates some
basic provisions regarding registration, general obligations, inspection and investigation,
default etc. In addition to the above, the general requirements of the Code of Conduct
provided in almost all the regulations are also similar in nature. Except for the clauses
relating to the specific requirements of, and particular concerns in, each category, the content
of all the regulations is common either in language or in spirit, if not in both.
Given the overlap in content and the fact that many requirements and obligations of most
intermediaries are common, SEBI now proposes to consolidate the common requirements
under these regulations and put in place a comprehensive regulation which will apply to all
intermediaries and prescribe the obligations, procedure, limitations etc in so far as the
common requirements are concerned. Some of the highlights of the proposed comprehensive
regulations are:
• Registration is proposed to be made permanent for all intermediaries subject to
compliance with law, updating of relevant disclosures and payment of annual fees.
• As updating is required either promptly or annually, thus more accurate filing of
material developments is made available to SEBI and to the public.
Trading Around the Globe
34 | P a g eLovely Professional University (2008-2010)
• Conducting multiple activities by the same intermediary becomes a simpler process
without reducing the regulatory rigours previously imposed.
• Substantial amounts of filing details will enter the public domain, thus allowing
investors to assess the appropriateness of using the intermediary.
• The number of investor grievances not addressed beyond a particular period will
need to be disclosed, thus incentivising early resolution of complaints by the
intermediary.
• The code of conduct rules will be found in one place making compliance with the
code easier.
• Consistency across regulation of various intermediaries stand improved.
• Fit and Proper person requirements are rationalized and inserted into these draft
regulations.
• The intermediary shall prominently display the registration certificate and the name
and contact details of the compliance officer to whom complaint may be made.
• Rationalization of prior approval upon change in status and constitution of the
intermediary.
The draft proposal of SEBI on the above lines was put out in public domain in July, 2007,
seeking comments and suggestions before the same is finalized.
Trading Around the Globe
35 | P a g eLovely Professional University (2008-2010)
Clearing & Settlement
The transactions in secondary market pass through three distinct phases, viz., trading, clearing
and settlement. While the stock exchanges provide the platform for trading, the clearing
corporation determines the funds and securities obligations of the trading members and
ensures that the trade is settled through exchange of obligations. The clearing banks and the
depositories provide the necessary interface between the custodians/clearing members for
settlement of funds and securities obligations of trading members.
Several entities, like the clearing corporation, clearing members, custodians, clearing
banks, depositories are involved in the process of clearing. The role of each of these
entities is explained below:
• Clearing Corporation: The clearing corporation is responsible for post-trade activities
such as the risk management and the clearing and settlement of trades executed on a stock
exchange.
• Clearing Members: Clearing Members are responsible for settling their obligations as
determined by the NSCCL. They do so by making available funds and/or securities in the
designated accounts with clearing bank/depositories on the date of settlement.
• Custodians: Custodians are clearing members but not trading members. They settle trades
on behalf of trading members, when a particular trade is assigned to them for settlement. The
custodian is required to confirm whether he is going to settle that trade or not. If he confirms
to settle that trade, then clearing corporation assigns that particular obligation to him. As on
date, there are 11 custodians empanelled with NSCCL. They are Citibank N.A., Deutsche
Bank A.G., HDFC Bank Limited, HSBC Limited, ICICI Limited, IL&FS Limited, and
Standard Chartered Bank, State Bank of India, SHCIL, Kotak Mahindra Bank Ltd., DBS
Bank Ltd and Axis Bank.
• Clearing Banks: Clearing banks are a key link between the clearing members and Clearing
Corporation to effect settlement of funds. Every clearing member is required to open a
dedicated clearing account with one of the designated clearing banks. Based on the clearing
member’s obligation as determined through clearing, the clearing member makes funds
Trading Around the Globe
36 | P a g eLovely Professional University (2008-2010)
available in the clearing account for the pay-in and receives funds in case of a pay-out. There
are 13 clearing banks of NSE, viz., Axis Bank Ltd., Bank of India Ltd., Canara Bank Ltd.,
Citibank N.A, HSBC Ltd., HDFC Bank Ltd., ICICI Bank Ltd., IDBI Bank Ltd., Indusind
Bank Ltd., Kotak Mahindra Bank, Standard Chartered Bank, State Bank of India and Union
Bank of India
• Depositories: Depository holds securities in dematerialized form for the investors in their
beneficiary accounts. Each clearing member is required to maintain a clearing pool account
with the depositories. He is required to make available the required securities in the
designated account on settlement day. The depository runs an electronic file to transfer the
securities from accounts of the custodians/clearing member to that of NSCCL and vice-versa
as per the schedule of allocation of securities.
• Professional Clearing Member: NSCCL admits special category of members known as
professional clearing members (PCMs). PCMs may clear and settle trades executed for their
clients (individuals, institutions etc.). In such cases, the functions and responsibilities of the
PCM are similar to that of the custodians. PCMs also undertake clearing and settlement
responsibilities of the trading members. The PCM in this case has no trading rights, but has
clearing rights i.e. he clears the trades of his associate trading members and institutional
clients.
Clearing & Settlement in India
The clearing process involves determination of what counter-parties owe, and which
counter-parties are due to receive on the settlement date, thereafter the obligations are
discharged by settlement. The clearing and settlement process comprises of three main
activities- Clearing, Settlement and Risk Management.
Trading Around the Globe
37 | P a g eLovely Professional University (2008-2010)
The clearing and settlement process for transaction in securities on NSE is presented in
Chart1.1: Clearing & settlement process at NSE
1. Trade details from Exchange to NSCCL (real-time and end of day trade file).
2. NSCCL notifies the consummated trade details to clearing members/custodians who affirm
back. Based on the affirmation, NSCCL applies multilateral netting and determines
obligations.
3. Download of obligation and pay-in advice of funds/securities.
4. Instructions to clearing banks to make funds available by pay-in time.
5. Instructions to depositories to make securities available by pay-in-time.
6. Pay-in of securities (NSCCL advises depository to debit pool account of custodians/CMs
and credit its account and depository does it)
7. Pay-in of funds (NSCCL advises Clearing Banks to debit account of custodians/CMs and
credit its account and clearing bank does it)
8. Pay-out of securities (NSCCL advises depository to credit pool account of custodians/CMs
and debit its account and depository does it)
9. Pay-out of funds (NSCCL advises Clearing Banks to credit account of custodians/CMs and
debit its account and clearing bank does it)
10. Depository informs custodians/CMs through DPs.
11. Clearing Banks inform custodians/CMs.
Trading Around the Globe
38 | P a g eLovely Professional University (2008-2010)
The core processes involved in clearing and settlement include:
(a) Trade Recording: The key details about the trades are recorded to provide basis for
settlement. These details are automatically recorded in the electronic trading system
of the exchanges.
(b) Trade Confirmation: The parties to a trade agree upon the terms of trade like
security, quantity, price, and settlement date, but not the counterparty which is the
NSCCL. The electronic system automatically generates confirmation by direct
participants.
(c) Determination of Obligation: The next step is determination of what counter-parties
owe, and what counterparties are due to receive on the settlement date. The NSCCL
interposes itself as a central counterparty between the counterparties to trades and nets
the positions so that a member has security wise net obligation to receive or deliver a
security and has to either pay or receive funds.
The settlement process begins as soon as members’ obligations are determined through the
clearing process. The settlement process is carried out by the Clearing Corporation with the
help of clearing banks and depositories. The Clearing Corporation provides a major link
between the clearing banks and the depositories. This link ensures actual movement of funds
as well as securities on the prescribed pay-in and pay-out day.
(d) Pay-in of Funds and Securities: This requires members to bring in their
funds/securities to the clearing corporation. The CMs make the securities available in
designated accounts with the two depositories (CM pool account in the case of NSDL
and designated settlement accounts in the case of CDSL). The depositories move the
securities available in the pool accounts to the pool account of the clearing
corporation. Likewise CMs with funds obligations make funds available in the
designated accounts with clearing banks. The clearing corporation sends electronic
instructions to the clearing banks to debit designated CMs’ accounts to the extent of
payment obligations. The banks process these instructions, debit accounts of CMs and
credit accounts of the clearing corporation. This constitutes pay-in of funds and of
securities.
Trading Around the Globe
39 | P a g eLovely Professional University (2008-2010)
(e) Pay-out of Funds and Securities: After processing for shortages of funds/securities
and arranging for movement of funds from surplus banks to deficit banks through RBI
clearing, the clearing corporation sends electronic instructions to the
depositories/clearing banks to release pay-out of securities/funds. The depositories
and clearing banks debit accounts of the Clearing Corporation and credit accounts of
CMs. This constitutes pay-out of funds and securities. Settlement is deemed to be
complete upon declaration and release of pay-out of funds and securities.
CLEARING AND SETTLEMENT: International Scenario
The most critical problems for international securities trading, but also the most concerted
efforts at problem resolution, are in the area of clearing and settlement. Clearing and
settlement systems for financial instruments differ greatly within and across countries, in
procedures, in timing of settlement, in the institutions involved, and in the degree, nature, and
locus of risks. These differences in countries’ systems are important because:
1) Systems traditionally used for domestic trading are now being called upon to
accommodate international participants;
2) The integrity and efficiency of a nation’s clearing, settlement, and payment system are
important to its internal financial and economic stability and its ability to compete
with other nations;
3) The failure of a foreign clearing entity could affect a U.S. clearinghouse through the
financial failure of a common clearing member;
4) The growing number of U.S. investors in foreign markets may be unaware that risk
levels in some foreign markets can be much higher than those in our domestic
markets.
To improve efficiency and reduce risks, the world’s clearing and settlement systems must be
coordinated with each other in a number of ways. Both the private sector and regulators in the
United States and other countries have begun to take, or are considering, actions to
accomplish the needed improvements. A number of international studies are in general
agreement on the types of improvements needed. These studies have been done by the
European Economic Commission, the Federation International des Bourses de Valeurs
(FIVB), the Group of Thirty, the International Society of Securities Administrators, and
Bankers Trust Co. (the last as contractor to OTA). One of the shared conclusions of these
Trading Around the Globe
40 | P a g eLovely Professional University (2008-2010)
studies is that the world’s major clearing and settlement systems should be “harmonized” in
selected ways in order to strengthen them and prepare for the emerging global trading
environment.
“Clearing and settlement” is the processing of transactions on stock, futures, and options
markets. It is what happens after the trade. “Clearing” confirms the identity and quantity of
the financial instrument or contract being bought and sold, the transaction price and date, and
the identity of the buyer and seller. It also sometimes includes the netting of trades, or the
offsetting of buy orders and sell orders. “Settlement” is the fulfilment, by the parties to the
transaction, of the obligations of the trade; in equities and bond trades, “settlement” means
payment to the seller and delivery of the stock certificate or transferring its ownership to the
buyer. Settlement in futures and options takes on different meanings according to the type of
contract.
Trades are processed differently depending on the type of financial instrument being traded,
the market or exchange on which it is traded, and the institutions involved in the processing
of the trade (i.e., an exchange, a clearinghouse, a depository, or some combination). The
clearing and settlement mechanisms and institutions in the United States, the United
Kingdom, Japan, and India are described in the appendix. The differences in countries’
clearing and settlement are important because clearing and settlement systems used for
domestic trading are now being called onto accommodate international participants. The
integrity and efficiency of a nation’s clearing and settlement systems are important to both its
internal financial and economic stability and its ability to compete with other nations.
Many markets have ‘clearinghouses’ that handle both the clearing process and some of the
settlement process. This is the most common system in the United States for exchange-traded
financial products. Many markets, including the Indian markets, have “depositories,” that
hold stocks and bonds for safekeeping on behalf of their owners.
Where clearinghouses do not exist (e.g., in some European markets), depositories may take
on functions of clearinghouses. Depositories may transfer ownership of stocks and bonds by
‘‘book entry” (a computer entry in the depository’s record books) instead of physical delivery
of certificates to the buyer, which saves time and money. There are also markets in which
exchanges perform some of the clearing and settlement functions (e.g., London’s
Trading Around the Globe
41 | P a g eLovely Professional University (2008-2010)
International Stock Exchange), and markets in which neither clearinghouses nor depositories
exist (e.g., until very recently, foreign exchange, or “forex,” markets).
The Goals of Clearing and Settlement
Differences in the clearing and settlement process among countries are often linked to
historical, economic, and cultural factors in their laws and customs. These differences can
expose international investors to extra risk in some instances. Perceptions of the purposes of
the clearing and settlement process vary widely among countries. In the United States and
Canada, where public policy supports broad public access to the markets, the reduction of
risk, through the clearinghouse as an intermediary, is a major goal of clearing and settlement.
These policies are reflected in a hierarchy of protections for the clearinghouse, including
minimum capital requirements for clearinghouse members.
In many other counties, risk reduction is imposed before trading takes place, by controls on
who is allowed to participate, or by the participants ‘knowing their trading partners,’ and, in
equities, by reducing the time allowed to settle a transition. In these markets, clearinghouse
guarantee funds are generally small or nonexistent, and settlement is seen merely as a
delivery function, rather than as a mechanism for risk reduction.
These different views of the purpose of clearing and settlement have become significant as
more investors begin trading in markets other than their domestic markets. Indian investors,
accustomed to domestic markets where safeguards are in place, may assume that the clearing
and settlement of their trades in a foreign market has risks comparable to those in the United
States, where there are guarantees provided by clearing and settlement organizations.
The chief aims of clearing and settlement in the India and some other countries are efficiency
and safety. The faster and more accurately a trade can be processed, the sooner the same
capital can be reinvested, and at less cost and risk to investors. Therefore, as markets become
global, one could expect that investment capital will flow toward markets that are most
attractive on a risk-return basis, and that also have efficient and reliable clearing and
settlement systems.
Trading Around the Globe
42 | P a g eLovely Professional University (2008-2010)
The soundness of clearing and settlement systems in one nation can also impact other nations.
The failure of a clearing member at a foreign clearinghouse could affect an Indian
clearinghouse through the impact on a common clearing member. To reduce the risk of such
an occurrence, different countries’ clearing and settlement systems must be coordinated with
each other, for example, by sharing risk information and harmonizing trade settlement dates.
Both the private sector and Federal regulators have begun to take steps in this direction. It is
doubtful that the private sector can achieve the needed changes without national governments
taking a prominent and concerted role.
Risks from Differences in Clearing and Settlement Mechanisms
These differences-the use of guarantee funds, the time allowed to settle a trade, etc.—in
countries’ clearing and settlement systems are a major constraint on global trading and may
impose risks on traders and investors. Defaults in a national clearing and settlement process
can propagate through other national systems, since multinational financial institutions may
be active in several national markets. Collapse of a major settlement system could endanger
financial systems in both its own and other countries.
Even in day-to-day operations, differences in clearing and settlement systems and in their
performances constrain some kinds of trading. For example, in Japan, settlement in equities
and bonds is normally on the third day after a trade (T+3) and in the United States it is
normally on the fifth day (T+5). An investor trading General Motors (GM) stock on both the
New York Stock Exchange (NYSE) and the Tokyo Stock Exchange (TSE) would have
trouble perfectly arbitraging his holdings. If the investor were to buy GM shares on the
NYSE and simultaneously sells them on the TSE, because the U.S. settlement period is 2
days longer, the GM shares would be delayed by 2 business days for the Japanese settlement.
If the investor were to buy GM stock on the TSE and sell GM stock that same day on the
NYSE, the shares could be available for the NYSE settlement because that is 2 days later
than Tokyo’s. The Japan Securities Clearing Corp. (JSCC)--through its link with
International Securities Clearing Corp. (ISCC) in the United States— holds the U.S. shares at
The Depository Trust Co. (DTC); therefore instead of physical movement of certificates there
simply would be a book entry delivery at DTC. The average number of days for settlement of
various financial instruments in different countries differs widely (figure 5-2). The number of
Trading Around the Globe
43 | P a g eLovely Professional University (2008-2010)
days for settlement varies widely among countries in each geographical region. As a result,
harmonized clearing and settlement is needed.
Trading in European markets, unlike in the United States, mostly does not rely only on stock
exchanges. In Japan, there is as yet no central depository, but there is a clearing and custody
system at TSE. Many European countries have depositories, but their functions vary from
country to country, and are often different from U.S. depositories.
There are three principal models for clearing and settlement in the world’s major stock
markets. The first model has no centralized depository or independent clearinghouse beyond
the stock exchange. The exchanges usually perform as many of the clearing and settlement
functions as are feasible. These include trade matching, confirmation, and some type of
settlement facility-usually a central location where market participants can deliver and
receive securities and payments. The equities market in the United Kingdom is an example.
The second model of clearing and settlement is one in which there is a central depository
structure, with trade matching and confirmation services provided by the exchanges. Once
trades have been matched and confirmed, the trade data are sent to the depository for
settlement. There are variations on this model with differing degrees of settlement services
provided by the depository. The depository may offer book-entry transfer of ownership of
immobilized securities, with limited provisions for varying payment methods. Or the
depository may provide book-entry transfer of dematerialized securities and the ability,
through direct links to local payment systems, to simultaneously and irrevocably transfer
funds for each settlement. An example is West Germany and its Deutscher Kassenverein
(KV) Depository system.
The third model has not only a stock market and a central depository, but also a
clearinghouse that stands between the stock market and depository to reduce risk. The stock
market, along with the clearinghouse, provides trade matching and confirmation services. A
trade is confirmed by the market participants and is then passed to the clearinghouse, which
substitutes itself as the counterpart to each trade. This gives a degree of financial assurance to
The markets since the clearinghouse will honour the obligations of a clearing member if
necessary. The clearinghouse then passes the trade information to the depository for delivery
versus payment on the settlement date. An example is the United States equities market.
Trading Around the Globe
44 | P a g eLovely Professional University (2008-2010)
In most European equities markets, there are no central clearing organizations that assume the
role of counterpart to every trade or provide other kinds of mechanisms to ensure the
financial integrity of all market participants in the clearing and settlement phase. Where there
is no third-party guarantee mechanism for trade settlement, market participants are forced to
choose their counterparties based on their own credit assessment.
But when a market ceases to be a closed structure with only a select group of participants
who know each other, the market must implement some standardized processes which can
offer a guarantee of financial integrity. When a national market encourages international
participation, it must try to ensure the continuing financial integrity of the market. The
current focus in Europe on the standardization or harmonization of clearing, settlement, and
depository systems is in preparation for the common market in 1992. The movement toward
increased coordination of clearing and settlement systems is, however, worldwide, stemming
from recognition of the increasing internationalization of securities trading.
Efforts to Reduce the Differences
Improvement of clearing and settlement for global or cross-border trading in equities is being
addressed by the Group of Thirty, an independent, non-profit organization of
businesspersons, bankers, and representatives of financial institutions from 30 developed
nations. The Group of Thirty addresses multinational financial and economic issues,
including Third World debt. The Group’s recommendations for the world’s securities markets
are aimed at ‘‘maximizing the efficiency and reducing the cost of clearance and settlement,”
and thereby reducing risk.
While the development of a single global clearing facility was not practical, agreement on a
set of practices and standards that could be embraced by each of the many markets that
makeup the world’s securities system was highly desirable, . . . and (reached) agreement that
the present standards were not acceptable.
Their recommendations are:
1.) All comparisons of trades between direct market participants (i.e., brokers, dealers,
and other exchange members) should be compared within 1 day after a trade is
executed, or “T+l.”
Trading Around the Globe
45 | P a g eLovely Professional University (2008-2010)
2.) Indirect market participants-institutional investors or any trading counterparties which
are not broker/dealers-should be members of a trade comparison system which
achieves positive affirmation of trade details.
3.) Each country should have an effective and fully developed central securities
depository, organized and managed to encourage the broadest possible industry
participation.
4.) Each country should study its market volumes and participation to determine whether
a trade netting system would be beneficial in terms of reducing risk and promoting
efficiency.
5.) Delivery versus payment should be the method for settling all securities transactions.
6.) Payments associated with the settlement of securities transactions and the servicing of
securities portfolios should be made consistent across all instruments and markets by
adopting the “same day” convention.
7.) A “rolling settlement” system should be adopted by all markets. Final settlement
should occur on T+3 by 1992.
8.) Each country should adopt the technical standard for securities messages developed
by the International organization for Standardization (ISO Standards 7775 and 6166).
CHAPTER 2:
Overview of Industry &
Company Profile
Trading Around the Globe
46 | P a g eLovely Professional University (2008-2010)
CHAPTER 2:
OVERVIEW OF INDUSTRY & COMPANY PROFILE
The Kotak Mahindra Group
Kotak Mahindra is one of India's leading financial institutions, offering complete financial
solutions that encompass every sphere of life. From commercial banking, to stock broking, to
mutual funds, to life insurance, to investment banking, the group caters to the financial needs
of individuals and corporate.
The group has a net worth of over Rs. 2,840 crore, employs around 7,800 people in its
various businesses and has a distribution network of branches, franchisees, representative
offices and satellite offices across 264 cities and towns in India and offices in New York,
London, Dubai and Mauritius. The Group services over 1.6 million customer accounts.
The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance
Limited. Uday Kotak, Sidney A. A. Pinto and Kotak & Company promoted this company.
Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and that's when the
company changed its name to Kotak Mahindra Finance Limited. Since then it's been a steady
and confident journey to growth and success.
Chart-3.1: Journey of Kotak
In October 2005, Kotak Group acquired the 40% stake in Kotak Prime held by Ford Credit International (FCI)and FCI acquired the stake in Ford Credit Kotak Mahindra (FCKM) held by Kotak Group. In May 2006, KotakGroup bought 25% stake held by Goldman Sachs in Kotak Capital and Kotak Securities.
Trading Around the Globe
47 | P a g eLovely Professional University (2008-2010)
1986 Kotak Mahindra Finance Limited starts the activity of Bill Discounting
1987 Kotak Mahindra Finance Limited enters the Lease and Hire Purchase market
1990 The Auto Finance division is started
1992 Enters the Funds Syndication sector
1995 Brokerage and Distribution businesses incorporated into a separate company -Kotak Securities. Investment Banking division incorporated into a separatecompany - Kotak Mahindra Capital Company
1996 The Auto Finance Business is hived off into a separate company - Kotak MahindraPrime Limited (formerly known as Kotak Mahindra Primus Limited). KotakMahindra takes a significant stake in Ford Credit Kotak Mahindra Limited, forfinancing Ford vehicles. The launch of Matrix Information Services Limited marksthe Group's entry into information distribution.
1998 Enters the mutual fund market with the launch of Kotak Mahindra AssetManagement Company.
2000 Kotak Mahindra ties up with Old Mutual plc. For the Life Insurance business.Kotak Securities launches its on-line broking site (now www.kotaksecurities.com).Commencement of private equity activity through setting up of Kotak MahindraVenture Capital Fund.
2001 Matrix sold to Friday Corporation Launches Insurance Services
2003 Kotak Mahindra Finance Ltd. converts to a commercial bank - the first Indiancompany to do so.
2004 Launches India Growth Fund, a private equity fund.
2005 Kotak Group realigns joint venture in Ford Credit; Buys Kotak Mahindra Prime(formerly known as Kotak Mahindra Primus Limited) and sells Ford credit KotakMahindra.Launches a real estate fund
2006 Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital Company