INDIAN STOCK MARKETS: THE SETTING

Prof. R. Vaidyanathan*

CORPORATES
INVESTORS
/ OTHERS

[ISSUERS / BORROWERS] [LENDORS]

REGULATORS INSTITUTIONS FACILITATORS

M.O.F MB's, MF's, FII's REGISTRARS
SEBI CB / FI (TLI) TRUSTEE
RBI INS. Co.'s UW's
CLB NBFC's SE's
DCA MMMF's SRO's
INSTRUMENTS
S.T. (M.M.) - TB's/GOI.Sec
- CP/CD
- BILLS
L.T (CAP.MKT) - SHARES PUBLIC
RTS
BONUS
-SHARES WITH WARRANTS
-DEBENTURES FCD, NCD, PCD, ZCB
-GDR/GDB's_
__________________
*Professor of Finance at IIMB [Rtd] and Chair Professor at Sastra University.
For class room purposes only.

1
 CAPITAL MARKET IS THE MARKET FOR FINANCIAL ASSETS
WHICH HAVE LONG OR INDEFINITE MATURITY.
 SECURITIES ARE FINANCIAL ASSETS THAT ARE USED TO
TRANSFER FUNDS FROM A SURPLUS UNIT (SAVER) TO A DEFICIT
UNIT (DISSAVER WHO SPENDS MORE NOW AND REPAY IT IN THE
FUTURE) AND ARE LIABILITIES/CAPITAL OF THE BORROWER
AND ASSETS OF THE LENDER E.g. GOVERNMENT BONDS;
CORPORATE BONDS; SHARES.
 THE PRIMARY MARKET FACILITATES THE TRANSFER OF FUNDS
TO THE ORIGINAL ISSUER FROM A SURPLUS UNIT
 TRANSFER OF ACQUIRED SECURITY BY THE SURPLUS
SPENDING UNIT (THAT ORIGINALLY BOUGHT THE
SECURITY) TO ANOTHER UNIT TAKES PLACE IN THE
SECONDARY MARKET.
 BOTH THE PROCESSES ARE FACILITATED BY THE STOCK
EXCHANGES.

2
PRIMARY MARKETS:
IT IS THROUGH THIS MARKET THAT THE BORROWERS NAMELY
GOVERNMENT AND THE CORPORATES ISSUE SECURITIES IN,
WHICH THE INVESTORS DEPLOY, THEIR SAVINGS. NET ADDITION
TO LONG TERM FUNDS OF THE ISSUER TAKES PLACE. FUNDS CAN
BE RAISED IN THE FORM; OF (I) PUBLIC ISSUE (II) RIGHTS ISSUE
(III) PRIVATE PLACEMENT.
CURRENTLY NEW ISSUE PRICING IS MARKET BASED. THE
ISSUER IN CONSULTATION WITH MERCHANT BANKER DECIDES
REGARDING THE PREMIUM. SECURITY AND EXCHANGE BOARD IS
THE REGULATORY BODY FOR PRIMARY AND SECONDARY
MARKETS. THE PRIMARY MARKETS ARE GOVERNED BY
DISCLOSURE AND INVESTOR PROTECTION [DIP] GUIDELINES. IT
DEALS WITH ELIGIBILITY NORMS, BOOK BUILDING GUIDELINES,
POST ISSUE OBLIGATIONS, GREEN SHOE OPTION AND CONTENTS
OF THE OFFER DOCUMENTS. DESIGNATED SE [CHOSEN BY CO]
FINALIZE ALLOTMENT.THE PROSPECTUS OF THE ISSUERS GIVES
DETAILS OF THE PROJECT, AMOUNT OF PREMIUM AND ALSO
ELABORATES ON THE RISK FACTORS.
FOR AN IPO OF AN UNLISTED COMPANY, THE ISSUER COMPANY
HAS THE DISCRETION TO FIX THE FACE VALUE BELOW RS.10 PER
SHARE SUBJECT TO LOWER LIMIT OF NOT LESS THAN RS.1
PER SHARE. IN CASE THE ISSUE PRICE IS BELOW RS.500 THEN THE
FACE VALUE EXPECTED TO BE RS.10 PER SHARE.

STOCK EXCHANGES
 SETTING UP OF AMSTERDAM STOCK EXCHANGE IN 1494.
3
 SHARE TRANSACTIONS STARTED CLOSE TO 18TH CENTURY IN
INDIA.
 AS EARLY AS 1836 BANK OF BENGAL HAD A REPORTED
PREMIUM OF RS 5000
 PREMCHAND ROYCHAND.THE PIONEER BROKER. (1850).
 BOMBAY ASSOCIATION IN 1875. (i.e. FIRST STOCK EXCHANGE)
 OTHER EXCHANGES WERE FORMED AT CALCUTTA IN 1908
AND AT MADRAS IN 1937.

SECURITIES CONTRACT (REGULATION) ACT 1956(SCRA) AND THE

RULES AND BYELAWS FORMED UNDER THE ACT IN 1957 GOVERN
THE RECOGNITION AND FUNCTIONING OF SE’S.
RECOGNITION IS BASED ON RULES AND BYELAWS.
 RULES: THESE ARE CONCERNED WITH
- POWERS OF MANAGEMENT OF GOVERNING BODY AND ITS
CONSTITUTION (INCLUDING GOVERNMENT NOMINEES)
- ADMISSION OF MEMBERS.
- QUALIFICATION OF MEMBERSHIP.
- EXPULSION-SUSPENSION AND RE-ENTRY.
- APPOINTMENT OF AA's, SUBBROKERS ETC.

4
 RULES CAN BE AMENDED, VARIED, AND RESCINDED ONLY WITH
PRIOR APPROVAL OF SEBI/MINISTRY OF FINANCE.
 BYELAWS: THESE PERTAIN TO DEALINGS IN THE MARKET.
- REGULATION AND CONTROL OF CONRTRACT IN
SECURITIES
- ALL ASPECTS OF TRADING.
AGAIN AMENDMENTS OR, MODIFICATION WITH PRIOR
APPROVAL OF GOVERNMENT.
 REGULATIONS: SE’S MAKES THESE FROM TIME TO TIME. NEED
NOT BE SAME FOR ALL SE’S.

MEMBERS:
BROADLY SPEAKING MEMBERS OF AN EXCHANGE PERFORM
TWO DISTINGUISHABLE FUNCTIONS
 THAT OF BROKERS ACTING AS AGENTS-BUYING AND
SELLING SECURITIES FOR OTHERS ON A COMMISSION
BASIS.
 THAT OF TRADERS OR DEALERS ACTING AS PRINCIPALS
BUYING AND SELLING SECURITIES ON THEIR OWN
ACCOUNT FOR A PROFIT OR LOSS.
MEMBERS OF AN EXCHANGE ARE PERMITTED TO ACT AS
BROKERS OR DEALERS. RULES, BYELAWS OF THE STOCK
EXCHANGES DO NOT PRESCRIBE ANY FUNCTIONAL
DISTINCTION BETWEEN MEMBERS.

 BUT IN THE EXCHANGES THERE IS A WELL-ESTABLISHED

SPECIALISATION.
5
- THE COMMISSION BROKER
- THE FLOOR BROKER.
- THE JOBBER OR TARAVANIWALLA (MARKET MAKER)
- THE DEALER IN NON-CLEARED SECURITIES
- ODD LOT DEALER.
- FINANCIER OR BADLIWALLA
- ARBITRAGEUR
- DEALER IN GOVT. SECURITIES (ACT LIKE A JOBBER)
OBSERVE THAT MANY OF THE ABOVE HAVE BECOME REDUNDANT
AFTER THE INTRODUCTION OF THE ANONYMOUS; ORDER DRIVEN
SCREEN BASED TRADING SYSTEM. FOR INSTANCE PRICE
ARBITRAGE BETWEEN DIFFERENT CENTERS IS NOT POSSIBLE
DUE TO SIMULTANEOUS AVAILABILITY OF PRICE INFORMATIOIN
ACROSS THE COUNTRY. FLOOR TRADER IS NOW A KEY IN
OPERATOR. ODD LOTS ARE DEALT WITH BY THE SYSTEM.
DEALINGS:
MEMBERS CAN DEAL ONLY IN LISTED SECURITIES.(LISTING
REQUIREMENTS IS UNIFORM FOR ALL THE EXCHANGES). THEY
CAN ALSO DEAL IN SECURITIES LISTED IN OTHER RECOGNISED
EXCHANGES IF THE GOVERNING COUNCIL OF THIS EXCHANGE
PERMITS THE SAME. THESE ARE CALLED PERMITTED
SECURITIES.

LISITING FEES ARE CHARGED BY EXCHANGES AND LISTING

GUIDELINES ARE TO BE FOLLOWED BY COMPANIES VIS-VIS
6
EXCHANGES; LIKE INFORMING ABOUT DIVIDEND DECISIONS/ NEW
ISSUES/MERGERS ETC
TRADING AND SETTLEMENT
A) T+2 ROLLING SETTLEMENT i.e. FOR DELIVERY AND
PAYMENT IN 2 DAYS OF THE DATE OF CONTRACT. LET US SAY
T IS THE TRADE DAY, AND THEN BY 11AM ON
T +1 CUSTODIAN [CLEARING MEMBERS] CONFIRMS THE
TRADES. BY 13-30 PM CLEARING CORPORATION, [NSCL FOR
NSE] PROCESS AND DOWNLOAD OBLIGATIONS FILES TO
BROKERS /CUSTODIANS. THE MEMBERS ON T+2, PAY-IN
SECURITIES AND FUNDS BY 11 AM AND PAY-OUT OF
SECURITIES AND FUNDS BY 13-30 PM.
B) CLOSING OR SQUARING OFF TRANSACTIONS WITHIN A DAY BY
INDIVIDUALS WHO ARE ALSO CALLED DAY TRADERS.
RISK MANAGEMENT
THE CLEARING CORPORATION ENSURES THAT THE TRADING
MEMBERS’ OBLIGATIONS ARE COMMENSURATE WITH THEIR NET
WORTH.
IT MONITORS THE TRACK RECORD AND PERFORMANCE OF
MEMBERS IN TERMS OF THEIR NEW WORTH, POSITIONS, AND
EXPOSURE WITH THE MARKET, COLLECTS MARGINS.

AT ANY POINT LIQUID ASSETS OF MEMBERS SHOULD COVER

 BASE MINIMUM CAPITAL: CAPITAL REQUIRED FOR ALL
RISKS OTHER THAN MARKET RISK—FOR EXAMPLE
OPERATIONALRISK, CLIENT CLAIMS
7
  MTM [MARK TO MARKET] LOSSES; MARK TO MARKET
LOSSES ON OUTSTANDING SETTLEMENT OBLIGATIONS OF
THE MEMBER
 VaR MARGINS; VALUE AT RISK MARGINS TO COVER
POTENTIAL LOSSES FOR 99% OF THE DAYS.
 EXTREME LOSS MARGINS: MARGINS TO COVER THE
EXPECTED LOSS IN SITUATIONS THAT LIE OUTSIDE THE
COVERAGE OF VaR MARGINS
CAPITAL ADEQUACY REQUIREMENTS OF MEMBERS CONSIST OF
NETWORTH, INTEREST FREE DEPOSIT AND SECURITY DEPOSIT.
THIS IS IN A SENSE ENTRY FEE TO THE MARKET AS A MEMBER.THE
DEPOSIT KEPT WITH THE EXCHANGE IS TAKEN AS BASE CAPITAL
TO DETERMINE THE MEMBERS’ INTRA-DAY TRADING LIMIT
AND /OR GROSS EXPOSURE LIMIT.
TRADING AND EXPOSURE LIMITS
IS IN RELATION TO THE BASE CAPITAL OF A MEMBER. INTRA-DAY
TURNOVER SHOULD NOT EXCEED 25 TIMES THE BASE CAPITAL.
SIMILARLY GROSS EXPOSURE [AGGREGATE OF NET CUMULATIVE
OUTSTANDING POSITIONS IN EACH SECURITY] OF A MEMBER AT
ANY POINT IN TIME SHOULD NOT EXCEED 8.5 TIMES THE TOTAL
BASE CAPITAL [NOT USED TOWARDS MARGINS] UP TO RS. 1 CRORE.

IF HE HAS FREE CAPITAL IN EXCESS OF RS 1 CRORE THEN IT

SHOULD NOT EXCEED RS.8.5 CRORE PLUS 10 TIMES OF THE
CAPITAL IN EXCESS OF RS.1 CRORE.
MEMBERS VIOLATING THE NORMS ARE AUTOMATICALLY AND
INSTANTANEOUSLY DISABLED FROM THE SYSTEM. A PENALY IS
8
LEVIED AND TRADING SYSTEM RESTORED THE NEXT DAY AFTER
MEETING THE GUIDELINES.
MARGIN REQUIREMENTS
STOCKS ARE CATEGORISED AS GROUP I OR II OR III BASED ON
NUMBER OF DAYS TRADED, IMPACT COST ETC.
THE DAILY MARGIN IS THE SUM OF MARK TO MARKET MARGIN
[MTM MARGIN] AND VALUE AT RISK BASED MARGIN. [VaR-BASED
MARGIN] AND EXTREME LOSS MARGIN
VAR MATGIN IS APPLICABLE TO FOR ALL SECURITIES IN ROLLING
SETTLEMENT.
MTM IS COMPUTED ON THE BASIS OF MARK TO MARKET LOSS OF
A MEMBER –IT IS A NOTIONAL LOSS, WHICH THE MEMBER WOULD
INCUR IN CASE THE CUMULATIVE NET OUTSTANDING POSITION
IN ALL SECURITIES AT THE CLOSING PRICE OF THE SECURITIES AT
THE END OF THE DAY BY THE EXCHANGE.
VaR MARGIN
THE VAR MARGIN IS A MARGIN INTENDED TO COVER THE
LARGEST LOSS THAT CAN BE ENCOUNTERED ON 99% OF THE DAYS
[99% VALUES AT RISK]. FOR LIQUID STOCKS, THE MARGIN COVERS
ONE-DAY LOSSES WHILE FOR ILLIQUID STOCKS IT COVERS
THREE-DAY LOSSES.

THIS ALLOWS THE CLEARING CORPORATION TO LIQUIDATE THE

POSITION IN THREE DAYS. THIS LEADS TO A SCALING FACTOR OF
SQUARE ROOT OF THREE FOR ILLIQUID STOCKS.
VaR MARGIN COMPUTATION REQUIRES SCRIP SIGMA
[VOLTILITY AT THE END OF PREVIOUS TRADING DAY] SCRIP VaR
[3.5 TIMES SCRIP SIGMA], INDEX SIGMA AND INDEX VaR
9
[3 INDEX SIGMAS]

[https://www.nseindia.com/content/assist/asst_Margins_faq.pdf]

INDEX BASED CIRCUIT BREAKERS

AN INDEX BASED MARKET-WIDE CIRCUIT BREAKER SYSTEM
APPLIES AT THREE STAGES OF THE INDEX MOVEMENT EITHER
WAY AT 10%, 15%, AND 20%. THESE CIRCUIT BREAKERS BRING
ABOUT A COORDINATED TRADING HALT IN TRADING ON ALL
EQUITY AND EQUITY DERIVATIVE MARKETS ACROSS THE
COUNTRY. THE BREAKERS ARE TRIGGERED BY MOVEMENTS IN
EITHER S&P CNX NIFTY OR SENSEX, WHICHEVER IS BREACHED
EARLIER
NSE SITE EXPLAINS AS
THE EXCHANGE HAS IMPLEMENTED INDEX-BASED MARKET-WIDE
CIRCUIT BREAKERS WITH EFFECT FROM JULY 02, 2001 BASED ON
SEBI CIRCULAR NO. SMDRPD/POLICY/CIR-37/2001 DATED JUNE 28,
2001. SEBI VIDE ITS CIRCULAR NO. CIR/MRD/DP/ 25 /2013 DATED
SEPTEMBER 03, 2013 HAS PARTIALLY MODIFIED THE EARLIER
CIRCULAR. THE REVISED GUIDELINES ARE AS BELOW.
THE INDEX-BASED MARKET-WIDE CIRCUIT BREAKER SYSTEM
APPLIES AT 3 STAGES OF THE INDEX MOVEMENT, EITHER WAY VIZ.
AT 10%, 15% AND 20%. THESE CIRCUIT BREAKERS WHEN
TRIGGERED BRING ABOUT A COORDINATED TRADING HALT IN
ALL EQUITY AND EQUITY DERIVATIVE MARKETS NATIONWIDE.
THE MARKET-WIDE CIRCUIT BREAKERS ARE TRIGGERED BY
MOVEMENT OF EITHER THE BSE SENSEX OR THE NIFTY 50,
WHICHEVER IS BREACHED EARLIER. IN THIS REGARD THE

10
EXCHANGE HAS ISSUED A CIRCULAR NO 85/2013 (DOWNLOAD NO-
24709) DATED OCTOBER 11, 2013.
THE MARKET SHALL RE-OPEN, AFTER INDEX BASED MARKET-
WIDE CIRCUIT FILTER BREACH, WITH A PRE-OPEN CALL AUCTION
SESSION. THE EXTENT OF DURATION OF THE MARKET HALT AND
PRE-OPEN SESSION IS AS GIVEN BELOW:

MARKET PRE-OPEN CALL

TRIGGER
TRIGGER TIME HALT AUCTION SESSION POST
LIMIT
DURATION MARKET HALT
BEFORE 1:00 PM. 45 MINUTES 15 MINUTES
AT OR AFTER 1:00
15 MINUTES 15 MINUTES
10% PM UPTO 2.30 PM
AT OR AFTER 2.30
 NO HALT NOT APPLICABLE
PM
1 HOUR 45
BEFORE 1 PM 15 MINUTES
MINUTES
AT OR AFTER 1:00
15% PM BEFORE 2:00 45 MINUTES 15 MINUTES
PM
ON OR AFTER REMAINDER
NOT APPLICABLE
2:00 PM OF THE DAY
ANY TIME
REMAINDER
20% DURING NOT APPLICABLE
OF THE DAY
MARKET HOURS

EXCHANGE SHALL COMPUTE THE INDEX CIRCUIT BREAKER LIMITS FOR 10%, 15%
AND 20% LEVELS ON A DAILY BASIS BASED ON THE PREVIOUS DAY'S CLOSING
LEVEL OF THE INDEX ROUNDED OFF TO THE NEAREST TICK SIZE.
DAILY MARKET WIDE CIRCUIT FILTER
NIFTY 50 CLOSING AS ON
10361.30
29-NOV-2017
INDEX CIRCUIT FILTER EQUIVALENT POINT (+/-)
TRIGGER LIMIT FOR 30-NOV-2017
10% 1036.10
15% 1554.20
20% 2072.25

IMPACT COST
THE FOLLOWING EXTRACTED FROM NSE SITE GIVES AN IDEA OF
IMPACT COST.

11
LIQUIDITY IN THE CONTEXT OF STOCK MARKETS MEANS A
MARKET WHERE LARGE ORDERS CAN BE EXECUTED WITHOUT
INCURRING A HIGH TRANSACTION COST. THE TRANSACTION COST
REFERRED HERE IS NOT THE FIXED COSTS TYPICALLY INCURRED
LIKE BROKERAGE, TRANSACTION CHARGES, AND DEPOSITORY
CHARGES ETC.
BUT IS THE COST ATTRIBUTABLE TO LACK OF MARKET LIQUIDITY
AS EXPLAINED SUBSEQUENTLY. LIQUIDITY COMES FROM THE
BUYERS AND SELLERS IN THE MARKET, WHO ARE CONSTANTLY
ON THE LOOK OUT FOR BUYING AND SELLING OPPORTUNITIES.
LACK OF LIQUIDITY TRANSLATES INTO A HIGH COST FOR BUYERS
AND SELLERS.
THE ELECTRONIC LIMIT ORDER BOOK (ELOB) AS AVAILABLE ON
NSE IS AN IDEAL PROVIDER OF MARKET LIQUIDITY. THIS STYLE
OF MARKET DISPENSES WITH MARKET MAKERS, AND ALLOWS
ANYONE IN THE MARKET TO EXECUTE ORDERS AGAINST THE
BEST AVAILABLE COUNTER ORDERS. THE MARKET MAY THUS BE
THOUGHT OF AS POSSESSING LIQUIDITY IN TERMS OF
OUTSTANDING ORDERS LYING ON THE BUY AND SELL SIDE OF THE
ORDER BOOK, WHICH REPRESENT THE INTENTION TO BUY OR
SELL.

WHEN A BUYER OR SELLER APPROACHES THE MARKET WITH AN

INTENTION TO BUY A PARTICULAR STOCK, HE CAN EXECUTE HIS
BUY ORDER IN THE STOCK AGAINST SUCH SELL ORDERS, WHICH
ARE ALREADY LYING IN THE ORDER BOOK, AND VICE VERSA.

12
AN EXAMPLE OF AN ORDER BOOK FOR A STOCK AT A POINT IN
TIME IS DETAILED BELOW:
BUY SELL
Sl. No. Quantity Price Quantity Price Sl. No.
1 1000 3.50 2000 4.00 5
2 1000 3.40 1000 4.05 6
3 2000 3.40 500 4.20 7
4 1000 3.30 100 4.25 8
THERE ARE FOUR BUY AND FOUR SELL ORDERS LYING IN THE
ORDER BOOK. THE DIFFERENCE BETWEEN THE BEST BUY AND
THE BEST SELL ORDERS (IN THIS CASE, RS.0.50) IS THE BID-ASK
SPREAD. IF A PERSON PLACES AN ORDER TO BUY 100 SHARES, IT
WOULD BE MATCHED AGAINST THE BEST AVAILABLE SELL ORDER
AT RS. 4 I.E. HE WOULD BUY 100 SHARES FOR RS. 4.
IF HE PLACES A SELL ORDER FOR 100 SHARES, IT WOULD BE
MATCHED AGAINST THE BEST AVAILABLE BUY ORDER AT RS. 3.50
I.E. THE SHARES WOULD BE SOLD AT RS.3.5.
HENCE IF A PERSON BUYS 100 SHARES AND SELLS THEM
IMMEDIATELY, HE IS POORER BY THE BID-ASK SPREAD. THIS
SPREAD MAY BE REGARDED AS THE TRANSACTION COST WHICH
THE MARKET CHARGES FOR THE PRIVILEGE OF TRADING (FOR A
TRANSACTION SIZE OF 100 SHARES).
PROGRESSING FURTHER, IT MAY BE OBSERVED THAT THE BID-
ASK SPREAD AS SPECIFIED ABOVE IS VALID FOR AN ORDER SIZE
OF 100 SHARES UP TO 1000 SHARES. HOWEVER FOR A LARGER
ORDER SIZE THE TRANSACTION COST WOULD BE QUITE
DIFFERENT FROM THE BID-ASK SPREAD.
SUPPOSE A PERSON WANTS TO BUY AND THEN SELL 3000 SHARES.
THE SELL ORDER WILL HIT THE FOLLOWING BUY ORDERS:
13
Sr. Quantity Price
1 1000 3.50
2 1000 3.40
3 1000 3.40
WHILE THE BUY ORDER WILL HIT THE FOLLOWING SELL
ORDERS:
Quantity Price Sr.
2000 4.00 5
1000 4.05 6
THIS IMPLIES AN INCREASED TRANSACTION COST FOR AN ORDER
SIZE OF 3000 SHARES IN COMPARISON TO THE IMPACT COST FOR
ORDER FOR 100 SHARES. THE "BID-ASK SPREAD" THEREFORE
CONVEYS TRANSACTION COST FOR A SMALL TRADE.
THIS BRINGS US TO THE CONCEPT OF IMPACT COST. WE START BY
DEFINING THE IDEAL PRICE AS THE AVERAGE OF THE BEST BID
AND OFFER PRICE, IN THE ABOVE EXAMPLE IT IS (3.5+4)/2, I.E. 3.75.
IN AN INFINITELY LIQUID MARKET, IT WOULD BE POSSIBLE TO
EXECUTE LARGE TRANSACTIONS ON BOTH BUY AND SELL AT
PRICES WHICH ARE VERY CLOSE TO THE IDEAL PRICE OF RS.3.75.
IN REALITY, MORE THAN RS.3.75 PER SHARE MAY BE PAID WHILE
BUYING AND LESS THAN RS.3.75 PER SHARE MAY BE RECEIVED
WHILE SELLING.
SUCH PERCENTAGE DEGRADATION THAT IS EXPERIENCED VIS-À-
VIS THE IDEAL PRICE, WHEN SHARES ARE BOUGHT OR SOLD, IS
CALLED IMPACT COST. IMPACT COST VARIES WITH TRANSACTION
SIZE.
FOR EXAMPLE, IN THE ABOVE ORDER BOOK, A SE LL ORDER FOR
4000 SHARES WILL BE EXECUTED AS FOLLOWS:
Sr. Quantity Price Value

14
1 1000 3.50 3500
2 1000 3.40 3400
3 2000 3.40 6800
Total value 13700
Wt. Average Price 3.43
THE SALE PRICE FOR 4000 SHARES IS RS.3.43, WHICH IS 8.53%
WORSE THAN THE IDEAL PRICE OF RS.3.75. HENCE WE SAY "THE
IMPACT COST FACED IN BUYING 4000 SHARES IS 8.53%".
DEFINITION
IMPACT COST REPRESENTS THE COST OF EXECUTING A
TRANSACTION IN A GIVEN STOCK, FOR A SPECIFIC PREDEFINED
ORDER SIZE, AT ANY GIVEN POINT OF TIME.
IMPACT COST IS A PRACTICAL AND REALISTIC MEASURE OF
MARKET LIQUIDITY; IT IS CLOSER TO THE TRUE COST OF
EXECUTION FACED BY A TRADER IN COMPARISON TO THE BID-
ASK SPREAD

IT SHOULD HOWEVER BE EMPHASIZED THAT:

(A) IMPACT COST IS SEPARATELY COMPUTED FOR BUY AND SELL
(B) IMPACT COST MAY VARY FOR DIFFERENT TRANSACTION SIZES
(C) IMPACT COST IS DYNAMIC AND DEPENDS ON THE
OUTSTANDING ORDERS
(D) WHERE A STOCK IS NOT SUFFICIENTLY LIQUID, A PENAL
IMPACT COST IS APPLIED
IN MATHEMATICAL TERMS IT IS THE PERCENTAGE MARK UP
OBSERVED WHILE BUYING / SELLING THE DESIRED QUANTITY OF
A STOCK WITH REFERENCE TO ITS IDEAL PRICE (BEST BUY + BEST
SELL) / 2.
EXAMPLE A:
15
ORDER BOOK SNAPSHOT
BUY BUY SELL SELL
QUANTITY PRICE QUANTITY PRICE
1000 98 1000 99
2000 97 1500 100
1000 96 1000 101

TO BUY 1500 SHARES

RISK MANAGEMENT SYSTEM: ROBUSTNESS

THE ROBUST AND STURDY NATURE OF ANY RISK MANAGEMENT
SYSTEM IS REVEALED DURING TIME OF STRESS.
FOR INSTANCE, AFTER THE LOK SABHA ELECTION IN APRIL 2004,
THE RULING NDA GOT DEFEATED AND A COALITION –UPA—
SUPPORTED BY COMMUNISTS CAME TO POWER.
THERE WAS UNCERTAINITY BETWEEN 14TH MAY [FRIDAY] AND 17TH
MAY [MONDAY] REGARDING THE CONTOURS OF THE NEW
GOVERNMENT AND ALSO REGARDING THE PM.
THERE WAS A MARKET CRASH ON THE 17 TH, WHICH IS
ILLUSTRATED BELOW.

16
THIS WAS A VERY LARGE FALL IN SENSEX AFTER 04/28/1992 WHEN
THERE WAS A MARKET CRISIS [FALL IN SENSEX OF 13.66%] DUE TO
BANK/STOCK SCAM. [HARSHAD MEHTA ERA!].
ON 17th MAY 2004, THE NIFTY FELL BY 181 POINTS [12%] WHILE
SENSEX FELL BY 553 POINTS [12%] IN THE FIRST 21 MINUTES [09-56
AM TO 10-16 AM] ON BOTH THE EXCHANGES.

AS A RESULT THE FIRST LEVEL MARKET WIDE CIRCUIT FILTER

[ONE HOUR HALT] WAS ENFORCED [MORE THAN 10% FALL].
WHEN TRADING RESUMED AT 11.16 AM ON THE NSE AND AT 11.15
AM ON THE BSE THE NIFTY FELL BY ANOTHER 95 POINTS [7%] IN
TWO MINUTES, WHILE THE SENSEX FELL BY ANOTHER 233 POINTS
[5.31%] IN FOUR MINUTES TRADING. INDEX MOVEMENTS ON MAY
17TH, 2004.

DATE OPEN HIGH LOW CLOSE CHANGE %

IN CHANGE
POINTS
BSE
SENSEX
14-05-04 5409 5416 5043 5069[5399] (330) (6.3)
17-05-04 5020 5020 4227 4505 (564) (11.8)
S&P
CNX
NIFTY
14-05-04 1717 1722 1566 1582[1717] (135) (8.2)
17-05-04 1542 1583 1292 1386 (196) (13.3)
NOTE: INDEX FIG IN BRACKETS ARE PREVIOUS DAY CLOSE

17
SOURCE: EXCHANGES.

THE FALL WAS MORE THAN 5%FROM THE LAST CLOSING OF

INDICES, AND HENCE THE SECOND MARKET WIDE CIRCUIT
FILTER WAS TRIGGERED FOR AN HALT OF TWO HOURS. NSE
CLOSED AT 11.17 AM AND BSE AT 11.19AM.
IN ALL AT THE SECOND TRADING HALT THE NIFTY HAS FALLEN BY
276 POINTS [19%] AND THE SENSEX FELL BY 824 POINTS [18%]
FROM FRIDAY’S CLOSE.
ON FRIDAY THE NIFTY HAD ALREADY DECLINED BY 8% AND THE
SENSEX BY 6%.
WHEN TRADING RESUMED ON BOTH EXCHANGES TWO HOURS
LATER AT 13.17 HRS THE INDICES RECOVERED STEADILY WITH
INSTITUTIONS PROVIDING SUPPORT, WITH RBI HAVING
ANNOUNCED LIQUIDITY SUPPORT TO CLEARING BANKS.
THE NIFTY RECOVERED 80 POINTS TO CLOSE AT 1386 THAT IS 196
POINTS BELOW THE PREVIOUS DAY’S CLOSE AND THE SENSEX
RECOVERED 260 POINTS, TO CLOSE 4505 THAT IS 564 POINTS
BELOW THE PRECVIOUS DAY’S CLOSE.

THE SHARP DECLINE OF THE NIFTY AND THE SENSEX ON MONDAY

WAS PRECEDED BY THEIR SIGNIFICANT DECLINE OF 135
POINTSAND 330 POINTS ON THE PREVIOUS TRADING DAY NAMELY
FRIDAY.
IN ALL, NIFTY FELL BY 331 POINTS AND THE SENSEX BY 894 POINTS
ON TWO DAYS.
FOR NIFTY, MONDAY’S FALL WAS THE HIGHEST EVER (TILL THEN),
THOUGH THE SENSEX HAD SEEN WORSE DAYS BEFORE.
NEXT DAY [18TH MAY 2004, TUESDAY] THE MARKETS WERE
ORDERLY.WHILE THE REASONS FOR THE FALL ON MAY 17, WILL
18
FOR LONG REMAIN A SUBJECT OF RESEARCH, IT IS WORTH
NOTING THAT NONE OF THE AD-HOC AND ARTIFICIAL MEASURES
REQUIRED IN THE EARLIER MARKET FALLS INCLUDING LONG
PERIOD OF MARKET CLOSURE AND AGGREGATION OF
SETTLEMENT CYCLES, WERE NECESSARY ON MAY 17, 2004 UNDER
CONDITIONS OF MOST SEVERE MARKET STRESS.
WE ALSO SAW SIMILAR FALLS IN 2006 AS WELL AS 2007 and 2008 BUT
THE SETTLEMENT ETC. WERE NOT AFFECTED.

THIS WAS MADE POSSIBLE PRIMARILY BECAUSE OF THE CHANGES

IN THE MARKET MICRO –STRUCTURE NAMELY
 AUTOMATION OF STOCK EXCHANGES
 SHORTENING OF SETTLEMENT CYCLES
 EFFICIENT RISK MANAGEMENT SYSTEM FOR THE CASH AND
THE DERIVATIVES MARKETS[ MARGINS ETC]
IT IS A TESTIMONY TO THE ROBUSTNESS OF THE RISK
MANAGEMENT SYSTEM THAT THE MARKETS COULD WITHSTAND
THE SHOCK, WITHOUT SETTLEMENT FAILURES OR FINANCIAL
FAILURE OF A BROKER UNDER CONDITIONS OF MARKET
VOLATILITY EXCEEEDING SIX SIGMA VARIATIONS IN A SINGLE
DAY.
MARKET MELTDOWN – July 01, 2008 to December 15, 2008

THE RETURNS IN DIFFERENT GLOBAL MARKETS DURING THE

PERIOD JULY 01, 2008 TO DECEMBER 15, 2008 ARE AS FOLLOWS

INDEX 1-JUL-08 15-DEC-8 RETURN VOLATILITY

S

SENSEX 12961.68 9832.39 -24.14% 3.31%

NIFTY 3896.75 2981.2 -23.50% 3.18%
BOVESPA 63396.19 38320.1 -39.55% 4.23%
19
 9
DAX 6315.94 4654.82 -26.30% 3.06%
CAC 4341.21 3185.66 -26.62% 3.32%
DOW JONES 11382.26 8564.53 -24.76% 3.18%
NASDAQ 2304.97 1508.34 -34.56% 3.37%
FTSE 100 5479.9 4277.56 -21.94% 3.06%
STRAIT TIMES INDEX 2906.79 1774.76 -38.94% 2.65%
NIKKEI 13463.2 8664.66 -35.64% 3.69%
TWSE 7407.98 4613.72 -37.72% 2.51%
KUALA LUMPUR COMPOSITE 1174.83 846.47 -27.95% 1.30%
KOSPI 1666.46 1158.19 -30.50% 3.23%
HANG SENG 22102.01 15046.9 -31.92% 3.87%
5
S&P CNX 500 3075.8 2282.35 -25.80% 2.96%
SOURCE: BLOOMBERG/SEBI

THE COMPARATIVE MARKET MOVEMENT, VOLATILITY AND

MOVEMENT OF KEY INDICES AND FIIS AND DOMESTIC
INSTITUTIONAL INVESTORS’ INVESTMENTS FOR THE PERIOD JULY
01, 2008 TO DECEMBER 15, 2008 ARE DISCUSSED BELOW:
DURING THE PERIOD JULY 01, 2008 TO DECEMBER 15, 2008, THE
SENSEX FELL BY 25.58 % FROM 12,961.68 ON JULY 01, 2008 TO
9832.39 ON DECEMBER 15, 2008. DURING THE SAID PERIOD, NIFTY
FELL BY 23.5% FROM 3896.75 ON JULY 01, 2008 TO 2981.2 ON
DECEMBER 15, 2008.THE BROAD BASED S&P CNX 500 INDEX FELL
BY 25.8 % DURING THIS PERIOD FROM 3075.80 TO 2282.35
VOLATILITY AND RETURNS
FROM THE ABOVE TABLE, IT IS OBSERVED THAT THE WORLD
MARKETS DURING THE PERIOD UNDER REVIEW HAD ALSO
WITNESSED A FALL IN THEIR RESPECTIVE INDICES. THE HIGHEST
FALL HAS BEEN WITNESSED BY BOVESPA (39.55%) FOLLOWED
CLOSELY BY STRAIT TIMES INDEX (38.94%) AND TAIWAN SE (37.72).
20
THE HIGHEST VOLATILITY WAS OBSERVED IN BRAZIL’S BOVESPA
INDEX (4.23%) FOLLOWED BY HANG SENG (3.87%). KUALA LUMPUR
COMPOSITE INDEX AND TAIWAN SE WITNESSED LEAST
VOLATILITY FOR THE SAID PERIOD.
SECTOR-WISE PERFORMANCE
DURING THE PERIOD JULY 01, 2008 TO DECEMBER 15, 2008, ALL THE
BSE SECTORAL INDICES HAVE SHOWN A NEGATIVE PERCENTAGE
CHANGE. THE INDICES SHOWING THE MAXIMUM AND MINIMUM
FALL ARE MENTIONED BELOW:
INDEX 1-JUL-08 15-DEC-08 RETURN VOLATILITY
S

BSE TECK 2950.53 2000.38 -32.20% 3.09%

BSE CAPITAL GOODS 9744.31 7044.48 -27.71% 3.67%
BSE FMCG 2021.44 1959.91 -3.04% 2.03%
BSE POWER 2156.94 1787.65 -17.12% 3.59%
BSE BANKEX 5583.59 5139.93 -7.95% 4.10%
BSE IT 3949.95 2286.2 -42.12% 3.17%
NOTE: VOLATILITY IS COMPUTED AS STANDARD DEVIATION OF DAILY LOG OF RETURNS OVER THE PERIOD.

FROM THE ABOVE TABLE IT CAN BE OBSERVED THAT ALL

SECTORAL INDICES WITNESSED A FALL IN VALUE. DURING THE
PERIOD UNDER REVIEW, HIGHEST FALL WAS WITNESSED BY IT
FOLLOWED BY TECK. THE HIGHEST VOLATILITY WAS WITNESSED
BY BSE BANKEX FOLLOWED BY BSE CAPITAL GOODS
TRADING VOLUME
AVERAGE DAILY TURNOVER
THE AVERAGE DAILY COMBINED TURNOVER OF BSE AND NSE IN
THE CASH MARKET, DELIVERY PERCENTAGE AND TURNOVER IN
THE F&O SEGMENT DURING THE PERIOD JULY 01, 2008 TO
DECEMBER 15, 2008 IS GIVEN IN THE TABLE BELOW:
MONTH AVERAGE DAILY AVERAGE AVERAGE DAILY AVERAGE DAILY
TURNOVER DAILY F&O TURNOVER F&O TURNOVER

21
 (CASH NSE) RS. IN DELIVERY % NO. OF RS. IN CR
CR CONTRACTS

JULY-08 12861.57 21.3 2643363 50442.34

AUGUST-08 11712.53 22.74 2344677 47872.24
SEPTEMBER- 12488.63 24.31 2957694 57041.54
08
OCTOBER-08 10809.92 24.09 3156741 47082.31
NOVEMBER 08 9617.94 19.67% 3230299 41408.67
DECEMBER 08 9900.76 18.75% 2975374 37004.49
SOURCE: NSE

MONTH AVERAGE DAILY AVERAGE AVERAGE DAILY AVERAGE DAILY

TURNOVER DAILY F&O TURNOVER F&O TURNOVER
(CASH MARKET DELIVERY % NO. OF RS. IN CR
BSE) CONTRACTS
RS. CR

JULY 08 5387.63 18.94 3287 33.30

AUGUST 08 4996.19 21.88 1675 18.63
SEPTEMBER 08 5147.14 25.22 1667 17.67
OCTOBER 08 3911.36 24.71 1171 9.14
NOVEMBER 08  3538.53  18.93%  376  2.73
DECEMBER 08*  3691.45  16.65%  262  1.82
SOURCE: BSE * TILL DECEMBER 15, 2008

FROM THE ABOVE TABLES, IT CAN BE OBSERVED THAT THE

AVERAGE DAILY TURNOVER IN THE CASH MARKET FOR NSE HAS
DECLINED BY 25.21% FROM RS.12861.57 CR TO RS.9617.94 CR FOR
THE PERIOD JULY TO NOVEMBER 2008.THE SAME CANNOT BE SAID
ABOUT THE AVERAGE DAILY TURNOVER IN THE F&O SEGMENT
FOR NSE.

INSTITUTIONAL INVESTMENTS
22
THE INVESTMENT TRENDS BY FIIS AND DOMESTIC
INSTITUTIONAL INVESTORS (DIIS) DURING THE PERIOD JULY 01,
2008 TO DECEMBER 15, 2008 IS SHOWN IN THE TABLE BELOW:
FII INVESTMENT IN EQUITY (IN RS. CR.)

MONTHS GROSS GROSS SALES NET

PURCHASES
JULY-08 63,563.30 65,400.40 -1,836.80
AUGUST-08 47,560.20 48,771.90 -1,211.70
SEPTEMBER-08 66,496.20 74,774.80 -8,278.10
OCTOBER-08 49,431.30 64,778.60 -15,347.30
NOVEMBER-08 30,416.10 33,013.80 -2,598.30
DECEMBER-
18,042.20 15,928.40 2,113.80
08*
TOTAL 275,509.30 302,667.90 -27,158.40
SOURCE: SEBI WEBSITE * TILL DECEMBER 15, 2008

IT CAN BE OBSERVED FROM THE ABOVE TABLE THAT FIIS WERE

NET SELLERS FROM JULY TO NOVEMBER. FOR THE MONTH OF
DECEMBER (DECEMBER 1 – DECEMBER 15), THE FIIS HAVE BEEN
NET BUYERS.

DII INVESTMENT IN EQUITY (BSE +NSE) IN RS. CR

MONTH GROSS GROSS NET
PURCHASE SALES

JUL-08 23217.27 21,690.06 1527.21

AUG- 17,813.52 14,841.16 2,972.36
08
SEP-08 25,415.62 16,202.67 9,212.95
OCT-08 26,254.38 15,458.05 10,796.33
NOV-08 15,196.15 12,322.00 2,874.15
23
 DEC-08 7,110.62 7,017.56 14,128.18
TOTAL 1,07,896.94 80,513.94 27,383.00
SOURCE: BSE WEBSITE
FROM THE ABOVE TABLE, IT IS OBSERVED THAT THE DOMESTIC
INSTITUTIONAL INVESTORS (DIIS) VIZ. BANKS, INSURANCE
COMPANIES, MUTUAL FUNDS ETC. HAVE BEEN NET PURCHASERS
DURING THE PERIOD UNDER REVIEW.
CURRENCY FUTURES:
CURRENCY FUTURES WERE LAUNCHED BY NSE ON AUGUST 29,
2008. AS ON DATE THREE EXCHANGES VIZ. NSE, BSE AND MCX ARE
OFFERING TRADING PLATFORM IN CURRENCY FUTURES.
DATE NSE BSE MCX
  AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
DAILY NO DAILY DAILY NO DAILY DAILY NO DAILY
OF TRADED OF TRADED OF TRADED
CONTRACTS VALUE CONTRACTS VALUE CONTRACTS VALUE
TRADED ACROSS TRADED ACROSS TRADED ACROSS
ACROSS EXPIRY ACROSS EXPIRY ACROSS EXPIRY
EXPIRY (CRS) EXPIRY (CRS) EXPIRY (CRS)

SEPTEMBER 56909 260 - - - -

OCTOBER 113768 557 8087 38 55998 276
NOVEMBER 179649 887 635 3 169702 840
DECEMBER* 223810 1107 514 3 223573 1106
* TILL DECEMBER 15, 2008

IT IS OBSERVED THAT AVERAGE DAILY CURRENCY FUTURES

VOLUME AT NSE HAS INCREASED BY MORE THAN 200% FROM
57,098 IN SEPTEMBER TO 1,79,649 IN NOVEMBER. AT BSE THE
VOLUMES HAVE DECLINED BY 92% FROM 8,087 IN OCTOBER TO 635
24
IN NOVEMBER. AT MCX, THE VOLUMES HAVE INCREASED BY
MORE THAN 150%.
FROM THE ABOVE IT IS SEEN THAT THE NUMBER OF CONTRACTS
IN NSE IS THE LARGEST FOLLOWED BY MCX AND BSE. WHEREAS
THE AVERAGE DAILY CURRENCY FUTURES VOLUME AT MCX IS
LAGGING BEHIND ONLY BY 5.5% AS COMPARED TO NSE, THE NO.
OF CONTRACTS IN BSE IS NOT EVEN 1% OF THE SAME IN NSE.

STEPS TAKEN BY SEBI PURSUANT TO THE FINANCIAL MELTDOWN

IN USA:
PURSUANT TO THE REPORTS APPEARED IN THE MEDIA ABOUT
LEHMAN BANKRUPTCY FILING IN THE US, ON SEPTEMBER 15, 2008,
SEBI HAD ADVISED THE STOCK EXCHANGES TO CONFIRM THAT
THEY HAVE PUT IN PLACE APPROPRIATE RISK CONTAINMENT
MEASURES SO THAT INVESTORS, MARKETS AND CLEARING AND
SETTLEMENT MECHANISM DO NOT SUFFER. LEHMAN BROTHERS
IS REGISTERED IN THE CAPACITY OF BROKER, DERIVATIVES
BROKER, CURRENCY BROKER, MERCHANT BANKER,
UNDERWRITER, FIIS AND SUB-ACCOUNTS IN INDIA.
THERE ARE IN ALL FIFTEEN CUSTODIAL PARTICIPANTS (CP) OF
LEHMAN BROTHERS.EVEN THOUGH THE FIFTEEN CUSTODIAL
PARTICIPANTS OF LEHMAN BROTHERS WERE DISABLED, TRADES
FOR CLOSING OUT THEIR POSITIONS WOULD BE ALLOWED UPON
REQUESTS MADE BY THE CUSTODIAN TO THE CLEARING
CORPORATION. FURTHER, THE RISK FOR SETTLING OBLIGATIONS
LAY WITH THE RESPECTIVE TRADING/CLEARING MEMBERS AND
25
THEREFORE IT DID NOT POSE A RISK TO THE EXCHANGE
OPERATIONS. GOING FORWARD, IN RESPECT OF THE ASSOCIATED
CP ENTITIES TRADE SHALL BE PERMITTED IN THE CASH
SEGMENT ON A PRE-FUNDING BASIS.

SEBI IS ALSO CONTINUOUSLY REVIEWING THE SITUATION IN

CONSULTATION WITH THE STOCK EXCHANGES AND THE
DEPOSITORIES. RBI – SEBI TECHNICAL COMMITTEE IS ALSO
CLOSELY MONITORING THE DEVELOPMENTS IN THE GLOBAL
FINANCIAL MARKETS AND MORE SPECIFICALLY OF 6 SUCH
FOREIGN INSTITUTIONS AFFECTED BY THE GLOBAL CRISIS VIZ.
LEHMAN BROTHERS, MORGAN STANLEY, MERRILL LYNCH,
GOLDMAN SACHS, CITIGROUP AND AIG TO ASSESS THE IMPACT ON
THE INDIAN MARKETS AND TO ENSURE THAT THE ORDERLY
FUNCTIONING OF THE MARKET IS NOT HAMPERED.
RECENT SEBI MOVES:
DE-RECOGNIZED / NON-OPERATIONAL /EXITED STOCK
EXCHANGES PLACED ON THE DISSEMINATION BOARD
CONSIDERING THE CONCERNS EXPRESSED BY
EXCLUSIVELY LISTED COMPANIES (ELCS) AND IN THE
INTEREST OF THE MARKET, SEBI HAD EARLIER ALLOWED A
TIME LINE OF 18 MONTHS WITHIN WHICH SUCH COMPANIES
HAD TO OBTAIN LISTING UPON COMPLIANCE WITH THE
LISTING REQUIREMENTS OF THE NATION-WIDE STOCK
EXCHANGES. UNTIL SUCH A LISTING, THESE COMPANIES HAD

DE-RECOGNIZED / NON-OPERATIONAL /
EXITED STOCK EXCHANGES PLACED ON
THE DISSEMINATION BOARD
26
CONSIDERING THE CONCERNS EXPRESSED BY
EXCLUSIVELY LISTED COMPANIES (ELCS) AND IN THE
INTEREST OF THE MARKET, SEBI HAD EARLIER ALLOWED A
TIME LINE OF 18 MONTHS WITHIN WHICH SUCH COMPANIES
HAD TO OBTAIN LISTING UPON COMPLIANCE WITH THE
LISTING REQUIREMENTS OF THE NATION-WIDE STOCK
EXCHANGES. UNTIL SUCH A LISTING, THESE COMPANIES
HADFURTHER, TO PROTECT SHAREHOLDER INTERESTS OF ELCS,

SEBI LAID DOWN THE FRAMEWORK WHICH PROVIDED

OPTIONS TO RAISE CAPITAL FOR MEETING THE CAPITAL
REQUIREMENTS FOR GETTING LISTED ON THE NATION-WIDE
EXCHANGES. THE EXCLUSIVELY LISTED COMPANIES WHICH
FAIL TO LIST ON THE NATION-WIDE STOCK EXCHANGES WILL
PROVIDE EXIT TO ITS INVESTORS.
THE POLICY ALSO STIPULATES ACTION AGAINST THE
PROMOTERS OR DIRECTORS WHOSE COMPANIES REMAIN ON
THE DB AND WHO HAVE FAILED TO DEMONSTRATE ADEQUACY
OF EFFORTS FOR PROVIDING EXIT TO THEIR SHAREHOLDERS IN
CONFORMITY WITH THE EXIT MECHANISM AS PROVIDED IN
THIS CIRCULAR.
B. PROCEDURES FOR AN EXCHANGE
LISTING CONTROL MECHANISM
REGULATION 45 OF THE SECC REGULATIONS
PROVIDES FOR LISTING OF STOCK EXCHANGES ON ANY
RECOGNIZED STOCK EXCHANGE, OTHER THAN ITSELF AND ITS
ASSOCIATED STOCK EXCHANGE.
IN ORDER TO ADDRESS ANY CONFLICT ARISING OUT OF
PROVISIONS REGARDING LISTING OF STOCK EXCHANGES ON
27
ANY OTHER RECOGNIZED STOCK EXCHANGE, OTHER THAN
ITSELF AND TO ENSURE COMPLIANCE WITH APPLICABLE LAWS,
SEBI PRESCRIBED THAT:
A. THE LISTING DEPARTMENT OF THE LISTING STOCK
EXCHANGE (THAT IS, A STOCK EXCHANGE ON WHICH
THE LISTING IS DONE) WILL BE RESPONSIBLE FOR
MONITORING THE COMPLIANCE OF THE LISTED STOCK

EXCHANGE (THAT IS, A STOCK EXCHANGE WHICH IS GETTING

LISTED) AS IN THE CASE OF LISTED COMPANIES.
B. THE INDEPENDENT OVERSIGHT COMMITTEE OF THE LISTING
STOCK EXCHANGE WILL EXERCISE OVERSIGHT.AT THE SECOND
LEVEL TO DEAL WITH CONFLICTS, IF ANY. THE LISTED STOCK
EXCHANGE MAY APPEAL TO THE INDEPENDENT OVERSIGHT
COMMITTEE OF THE LISTING STOCK EXCHANGE, IF AGGRIEVED,
WITHTHE DECISION ON DISCLOSURE OF THE LISTING STOCK
EXCHANGE AS REFERRED UNDER PARA (A) ABOVE.
C. AN INDEPENDENT CONFLICT RESOLUTION COMMITTEE (CRC)
CONSTITUTED BY SEBI, WITH THE OBJECTIVE OF INDEPENDENT
OVERSIGHT AND REVIEW WILL MONITOR POTENTIAL CONFLICTS
BETWEEN LISTED AND LISTING STOCK EXCHANGES ON A
REGULAR BASIS. THE LISTED STOCK EXCHANGES AGGRIEVED BY
THE DECISION OF THE INDEPENDENT OVERSIGHT COMMITTEE OF
THE LISTING EXCHANGE MAY APPEALTO CRC.
______________

28
 INSIDER TRADING
TRADING DONE BY PERSONS WHO BY VIRTUE OF THEIR
POSITIONS IN OFFICE OR OTHERWISE HAVE ACCESS TO
UNPUBLISHED PRICE SENSITIVE INFORMATION RELATING TO THE
AFFAIRS OF A COMPANY.
THE PERSONS CAN ALSO COMMUNICATE SUCH INFORMATION TO
OTHERS WHO USE IT IN CONNECTION WITH SALE AND OR
PURCHASE OF SUCH SECURITY.
INSIDER MEANS ANY PERSON WHO IS OR WAS CONNECTED WITH
THE COMPANY OR IS DEEMED TO HAVE BEEN CONNECTED WITH
THE COMPANY AND WHO IS EXPECTED TO HAVE ACCESS (BY
VIRTUE OF SUCH CONNECTION) TO UNPUBLISHED PRICE
SENSITIVE INFORMATION OR WHO HAS RECEIVED OR HAS HAD
ACCESS TO SUCH UNPUBLISHED PRICE SENSITIVE INFORMATION.
A PERSON IS DEEMED TO BE A CONNECTED PERSON IF SUCH
PERSON --
(i) IS A COMPANY UNDER THE SAME MGT OR GROUP OR ANY
SUBSIDIARY COMPANY THEREOF
(ii) IS AN OFFICIAL OR A MEMBER OF A STOCK EXCHANGE OR AN
EMPLOYEE OF SUCH A MEMBER
(iii) IS A MERCHANT BANKER, SHARE TRANSFER AGENT,
REGISTRAR TO AN ISSUE, DEBENTURE TRUSTEE, BROKER,
29
 PORTFOLIO MANAGER, SUB-BROKER, INVESTMENT
ADVISOR, OR AN EMPLOYEE THEREOF OR IS A MEMBER OF
BOARD OF TRUSTEE OF A MUTUAL FUND OR ASSET
MANAGEMENT COMPANY OF A MF OR AN EMPLOYEE
THEREOF, WHO HAVE A FIDUCIARY RELATIONSHIP WITH THE
COMPANY.
(iv) IS A MEMBER OF BOARD OF DIRECTOR OR AN EMPLOYEE OF
A PUBLIC FINANCIAL INSTITUTIONS (AS PER IV A OF CO's
ACT)
(v) IS AN OFFICIAL OR AN EMPLOYEE OF A SELF REGULATORY
ORGANISATION RECOGNIZED OR AUTHORISED BY A BOARD
OF A REGULATORY BODY OR
(vi) IS A RELATIVE (SEC 6 OF CO's ACT 1956) OF ANY OF THE
AFORE MENTIONED PERSONS
(vii) IS A BANKER TO THE COMPANY
UNPUBLISHED PRICE SENSITIVE INFORMATION PERTAINING To
(i) FINANCIAL RESULTS (BOTH HALF YEARLY AND ANNUAL) OF
THE COMPANY
(ii) INTENDED DECLARATION OF DIVIDENDS (BOTH INTERIM
AND FINAL)
(iii) ISSUE OF SHARES BY WAY OF PUBLIC, RIGHTS, BONUS ETC.
(iv) ANY MAJOR EXPANSION PLANS OR EXECUTION OF NEW
PROJECTS.
(v) AMALGAMATION, MERGERS AND TAKEOVERS
(vi) DISPOSAL OF THE WHOLE OR PART OF THE COMPANY
(vii) OTHER INFORMATION AFFECTING EARNINGS
(viii) CHANGE IN POLICIES, PLANS OR OPERATIONS OF THE Co.
_______________

30
MAJOR LACUNAE OF THE INDIAN STOCK MARKETS
 ILLIQUID
 INSIDER TRADING
 PRICE RIGGING
 CIRCULAR TRADING
 FRONT RUNNING
 CAPITAL INADEQUACY OF BROKERS
 LACK OF TRANSPARENCY
 EXCESSIVE SPECULATION IN A FEW SCRIPS.
 NEARLY 80-90% OF TRADING ACTIVITY IS IN 2% OF SECURITIES
 OWN ACCOUNT SPECULATION
 RECONNAISSANCE AND SURVEILLANCE-- NEED
IMPROVEMENTS
 DISCLOSURE PRACTICES
 QUALITY OF ACCOUNTING INFORMATION
 SEPARATION OF JOBBER AND BROKER
 CONVENTIONS WITHIN ORGANISATIONS (LIKE BANKS,
MFs, MBs, FIs, ETC)
 COORDINATION BETWEEN REGULATORY AGENCIES--NEED
ENHANCEMENT [HPCM EXISTS].

31
INVESTMENT
INVESTMENT IS IDENTIFIED WITH SAFETY

DEFINITION: AN INVESTMENT OPERATION IS ONE, WHICH UPON

THOROUGH ANALYSIS PROMISES SAFETY OF PRINCIPAL AND A
SATISFACTORY RETURN. OPERATIONS NOT MEETING THESE
REQUIREMENTS ARE SPECULATIVE.

NOTE: AT ONE PRICE A STOCK MAY HAVE INVESTMENT MERIT BUT

NOT AT ANOTHER LEVEL. OR A GROUP OF ISSUES MAY-HAVE
INVESTMENT MERIT BUT NOT SINGLY.
(INVESTMENT-SUCCESSFUL SPECULATION?
SPECULATION UNSUCCESSFUL INVESTMENT!)
_________________

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