National Stock Exchange

The National Stock Exchange of India Limited was set upon the basis of the
recommendations of the High Powered Study Group on Establishment of New
Stock Exchanges. On its recognition as a stock exchange under the Securities
Contracts (Regulation) Act, 1956 in April 1993, NSF commenced operations in
the Wholesale Debt Market (WDM) seg7ment in June 1994. The Capital
Market (Equities) segment commenced operations in November 1994 and
operations in Derivatives segment commenced in June 2000.
The National Stock Exchange (NSE) was incorporated in November 1992 with
an equity capital of Rs. 25 crores. It was promoted by the International
Securities Consultancy (ISC) of I-long Kong in association with financial
institutions, insurance companies, banks, SBI Capital Markets Ltd.,
Infrastructure Leasing and Financial Services Ltd., and Stock Holding
Corporation Ltd. ISC has prepared the detailed business plan, including the
installation of hardware and software systems. It aims at promoting
professionalism in the capital market and providing better securities trading
facilities to investors nationwide. NSE transcends geographical barriers and
overcomes fragmentation by providing a screen-based trading system instead of
the conventional trading ring. This results in greater depth and liquidity of the
market and reduces the transaction costs.
The NSE is not an exchange in the traditional sense of the term, where brokers
own and manage the exchange. Its two tier administrative set up involves a
company board and a governing board of the exchange.
NSF is a professionally managed national market for shares, PSU bonds.,
debenture and government securities with all the necessary infrastructure and
trading facilities.
THE MISSION
NSF was set up to realize the following objectives:
I Establishing a nationwide trading facility for equities, debt instruments and
hybrids
2. Ensuring equal access to investors all over the country through an appropriate
communication network
3. Providing a fair, efficient and transparent securities market to investors using
electronic trading systems
4. Enabling shorter settlement cycles and book entry settlements systems, and
5. Meeting the current international standards of securities markets
The standards set by NSE in terms of market practices and technology has
become industry benchmarks and is being emulated by other market participants
as well. NSE is more than a mere market facilitator. It guides the industry
towards new horizons and greater opportunities.
Trading Mechanism
In order to encourage an institutional market where large volume trades come
up for settlement in jumbo lots, two exclusive additional market segments, the
institutional lot segment and trade-for-trade segment have been setup. NSF has
an order driven system, which allows members to undertake jobbing in
securities of their choice. Several members undertake jobbing on account of the
cease of entry and exit, and narrow margins which results in improved liquidity
and reduced transaction costs.
Settlement
The settlement cycle is completed within eight days from the last day of the
trading cycle. The trading period is a week (Wednesday to Tuesday) and the
settlement of trades takes place in the ensuing week.
Counter Guarantee
NSE’s Clearing Corporation stands guarantee to all trades done in the cash
market on the exchange. The counter guarantee of the Clearing Corporation
ensures that no default, either in payment or delivery takes place for trades done
on NSF.
Price Bands
The price bands are based on the liquidity of a company’s shares as well as its
volatility. The chances for price manipulation are more in the case of liquid
securities. The factors, which determine the measure of liquidity of a security,
are:
1. Frequency of trading
2. Average daily volume of trading
3. Average daily value of trading
4. Average daily number of trades
Listing Requirement
The exchange has also modified two of its listing clauses. The minimum paid-
up capital requirement for initial public offerings has been increased from Rs.10
crores to Rs. 20 crores. With regard to companies whose shares are already
listed on another exchange, there will now be a requirement of a minimum
market capitalization of Rs. 20 crores (for companies with a paid-up capital of
at least Rs. 10 crores) or of Rs. 40 crores (for companies with a paid-up capital
of less than Rs. 10 crores). Companies, which have not paid dividend for at least
two of the last three years, will not be required to have a net worth of at least
Rs. 50 crores for seeking listing on the house.
TRADING
The National Stock Exchange of India started its trading operations in debt
market segment from June 30, 1994. The NSE has adopted a fully automated
screen-based trading system, which allows trading members to trade from their
offices through a communications network. Price, time and volume conditions
are quite flexible. Securities like the government bonds, treasury bills, PSU
bonds, CPS, floating rate bonds and Unit 64 of UTI are traded on the exchange.
The capital market segment covers the trading done in convertible/non-
convertible debentures and hybrids, both in equities and retail trade.
Wholesale Debt Market
Two distinctive segments representing Wholesale Debt Market (W’DM) and
Capital Market have started operations in 1994-95, providing secondary market
trading facilities. WDM is a facility for institutions and corporate bodies to enter
into high value transactions in instruments such as government securities,
treasury bills, PSU bonds, Unit 64 of UTI, CPS and CDs. Few large investors
and a high average trade volume characterize the segment. The principal
participants are banks, corporates and mutual funds.
There are two types of entities on WDM, Trading Members and Participants.
Trading members are the recognized members of NSE. They can either trade on
their own account or on behalf of their clients, including participants. In the
WDM segment of the exchange more than nine categories of instruments are
allowed for trading. The capital market segment of NSE commenced operations
on November 3, 1994 to provide trading facilities for institutions and retail
investors. The exchange has allowed for trading 1,300 securities of medium and
large companies with nationwide investor bases. Because of the nationwide
equal access, such securities can be traded anywhere in country at the same
price.
Electronic Trade Monitoring System
The Stock-Watch s is a computer system designed and programmed to monitor
market activity and identify aberrations from historical patterns. The algorithm
for the NSF system is similar to the one prevalent at NASDAQ in the United
States. However, the trading systems at NASDAQ and NSE are totally different.
The algorithm 0fNASDAQ has been adapted to NSF trading conditions. The
system enables NSE to electronically monitor the trading patterns, which would
lead to a more effective surveillance. Currently, NSE officials have to manually
screen the trading patterns to ascertain any strange price fluctuations. The
electronic track monitoring S stem will automatically kick off alerts. It will
make the task of surveillance easier and more effective. There is a great need to
enhance information flow and this will go hand-in-hand with better monitoring
of trading patterns to reduce eases of price manipulation. SEW will define the
kind of information the stock exchanges need to furnish so as to make their
enforcement job more effective,
CORPORATE STRUCTURE
NSF is one of the first demutualized stock exchanges in the country, where the
ownership and management of the Exchange is completely divorced from the
right to trade on it. Though the impetus for its establishment came from policy
makers in the country, it has been set up as a public limited company, owned by
the leading situational investors in the country.
The ownership, management and trading is in the hands of three different sets of
people. NSF is owned by set of leading financial institutions, banks, insurance
companies and other financial intermediaries and is managed by professionals,
who do not directly or indirectly trade on the Exchange. This has completely
ruminated any conflict of interest and helped NSE in aggressively pursuing
policies and practices within a public interest framework.
Board
The Board of NSF comprises of senior executives from promoter institutions,
eminent professionals in the fields of law, economics, accountancy, finance,
taxation, etc public representatives, three nominees of SEBI including a senior
official of SEBI and one full time executive of the Exchange.
Executive Committee
While the Board deals with broad policy issues, decisions relating to market
operations are delegated by the Board to an Executive Committee (EC) formed
under the Articles of Association and Rules. The EC includes representatives
from trading members, the public and the management. The EC has four broker-
members who are nominated by the Board of NSEI based on their experience in
stock market and represent different regions. The day-to-day management of the
Exchange is delegated to the Managing Director who is supported by a team of
professional staff
Promoters
NSE was promoted by leading financial institutions, banks, insurance
companies and other financial intermediaries such as the following:
1. Industrial Development Bank of India
2. Industrial Finance Corporation of India Limited
3. Life Insurance Corporation of India
4. State Bank of India
5. CICI Bank Limited
6. Infrastructure Leasing and Financial Services Limited
7. Stock Holding Corporation of India Limited
8. SBI Capital Markets Limited
9. Unit Trust of India
10. Bank of Baroda
11. Canara Bank
12. General Insurance Corporation of India
13. National Insurance Company Limited
14. The New India Assurance Company Limited
15. The Oriental Insurance Company Limited
16. United India Insurance Company Limited
17. Punjab National Bank
18.. Oriental Bank of Commerce
19. Corporation Bank
20. Indian Bank
21. Union Bank of India
Committees
The Exchange has constituted various committees to advise it on areas such as
good market practices, settlement procedures, risk containment systems, etc.
Industry professionals. These committees, are manned by industry trading
members, exchange staff as also representatives from the market regulator.
1. Executive Committee
2. Committee on Settlement Issues (COSI)
3. Dispute Resolution Committee (DRC)
4. Committee On Trade Related Issues (COTI)
5. Advisory Committee—Listing of securities
PRODUCTS
NSE has played a catalystic role in bringing about a favorable transformation in
the securities market in terms of microstructure, market practices and trading
volumes. The market has witnessed several innovations in products and
services. NSE offers a wide range of products and services in the equities, debt
and derivative segments of the market as shown below:
I. Indices: Major Indices/Other Indices
2. Derivatives—Futures/Options
3. Computer to Computer Link (CTCL) facility: Equities Derivatives
4. Internet-based Trading: Equities Derivatives
5. Initial Public Offering (IPO)
6. Mutual Funds
7. Mutual Fund Service System (MFSS)
8. Exchange Traded Funds (ETFs)
9. Index Funds
10. Working Capital Funding
11. Direct Payout to Investors
Debt Market
I. References Rates (MIBID/MIBOR)
2. Zero-coupon Yield Curve (ZCYC)
3. Var for Government Securities
4. Constituent SGL Account
Major Indices
The NSE deals with the following major indices:
1. S&P CNX Nifty
2. CNX Nifty Junior
3. S&PCNX500
4. S&P CNX Defty
5. CNX Midcap 200
6. Other IISL Indices
7. CNX IT Sector Index
8. CNX FMCG Index
9. CNX Millennium Index
10. CNX Segment Indices CNX PSE Index/CNX MNC index /CNX IBG Index
I. S & P CNX Industry Indices
12. Customized Indices
Derivatives
The derivatives that are dealt in include:
I. S&P CNX Nifty Futures
2. S&P CNX Nifty
3. Futures on Individual Securities
4. Options on Individual Securities
Computer-to-Computer Link (CTCL) Facility
NSE offers a facility to its trading members by which members can use their
own trading front-end software in J order to trade on the NSE trading system.
This facility called Computer-to-Computer Link (CTCL) facility is available
only to trading members of NSE.
Trading Members can use their own software running on any suitable
hardware/software platform of their choice. This software would be a
replacement of the NEAT front-end software that is currently used by members
to trade on the NSF trading system. Members can use software customized to
meet their specialized needs like provision of on-line trade analysis, risk
management tools, integration of back-office operations. etc. The dealers of the
member may trade using the software remotely through the members own
private networks subject to approvals from Department of Telecommunication,
etc as may be required in this regard.
Internet-based Trading
The Securities and Exchange Board of India (SEBJ) approved the report on
Internet Trading brought out by the SEBI Committee on Internet Based Trading
and Services. Internet trading can take place through order routing systems,
which will route client orders to exchange trading systems for execution. Thus a
client sitting in any part of the country would be able to trade using the internet
as a medium through brokers’ internet trading systems. SF81-registered brokers
can introduce Internet based trading after obtaining permission from respective
stock exchanges. SEBI has stipulated the minimum conditions to be fulfilled by
trading members to start internet based trading and services.
NSE became the first exchange to grant approval to its members for providing
internet based trading services. In line with SEBI directives, NSE has issued
circulars detailing the requirements and procedures to be complied with by
members desirous of providing internet based trading and services. Members
can procure the internet trading software from software vendors who are
empanelled with NSE or they may develop the software through their own in-
house development team or may procure the software from other non-
empanelled vendors. Members can also avail of services provided by
Application Service Providers(ASP) (which may inter-alia include
providing/maintaining software/hardware other infrastructure etc.) for providing
Internet based trading services subject to the Application Service Provider being
empanelled with the exchange for providing such services.
Mutual Fund Service System
Mutual Fund Service System (MESS) is a facility provided by NSE/NSCCL to
the investors for transacting in the dematerialized units of open-ended schemes
of mutual funds. The objective is to provide the investor with a one-stop shop
for transacting in financial products.
While a good number of closed-ended schemes are traded on the Exchanges, the
facilities for transacting in open-ended schemes of the Mutual Funds are very
limited. The entire process of buying and redeeming open-ended mutual fund
scheme units takes place directly between the individual investor and the Asset
Management Company (AMC). The AMC appoints a number of
agents/representatives for the purpose. In spite of these arrangements, the
Mutual Funds have not been able to effectively cater to the millions of small
investors spread across the length and breadth of the country. The Mutual Funds
Services System addresses the need for a common platform for sale and
repurchase of units of schemes managed by different Funds. The Exchange with
its extensive network covering around 400 cities and towns across the country
offers a mechanism for electronic on-line collection of orders from the market
and the Clearing Corporation acts as a central agency for the clearing and
settlement of all the orders.
Salient features of MFSS
a. Orders for purchase and sale (redemption) of units from investors are
collected using the on-line order collection system of NSE
b. Orders are settled using the Clearing and Settlement system of NSCCL
c. Orders are settled on order-to-order basis
d. Settlement on rolling basis with orders entered on T-day settled on T+3
(working days)
e. Settlement to the extent of securities/funds pay-in made by the participants
f Securities settlement in dematerialized mode only
g. Transactions are not covered by settlement guarantee
Exchange Traded Funds
An Exchange Traded Fund (ETF) is a mutual fund scheme, which combines the
best features of open-ended and close-ended funds. It usually tracks an index
and trades like a single stock on the stock exchange. It is priced continually and
can be bought or sold throughout the trading day. Buying/Selling ETFs is as
simple as buying/selling any other stock on the exchange allowing investors to
take advantage of intra-day price movements. Thus, with ETFs, one can benefit
both from, the flexibility of a stock as well as the diversification and cost
efficiency of an index fund. Globally, since their introduction in the U.S., in
1993, ETFs have grown rapidly with around US $ 100 Billion in assets as on
December 2001. Today, over 60 percent of trading volumes on the American
Stock Exchange (AMEX) are from ETFs. Currently, more than 120 ETFs are
available in US, Europe, Singapore, Hong Kong, Japan and other countries.
Among the popular ones are SPDRs (Spiders) based on the S&P 500 Index,
QQQs (Cubes) based on the NASDAQ-100 Index, iSHARES based on MSCI
Indices and TRAHK (Tracks) based on the Hang-Seng Index.
Index Funds
Index hinds today are a source of investment for investors looking at a long-
term, less risky form of investment. The success of index hinds depends on their
low volatility and therefore the choice of the index. S&P CNX
Nifty is used by a number of well-known mutual funds in India for promoting
Index Funds. These funds are:
I. India Access Fund Ltd. by UTI Warburg Dillon Read and Morley Fund
Management. It was launched in November 1997, and is listed on the London
Stock Exchange.
2. UTI Nifty Fund, by Unit Trust of India, is a domestic fund launched in March
2000 and 1DB Index 1-Nit ‘99, by IDBI - Principal Mutual Fund, a domestic
fund launched in July 1999.
3. Franklin India Index Fund, b Templeton Mutual Fund, a domestic fund
launched in June 2000.
4. Franklin hid/a Tax Index Fund, a domestic fund launched in February 2001
and Pioneer ITI Index Fund, a domestic fund launched in August 2001.
5. NIFTY BEES, an Exchange Traded Fund on the Nifty, by Benchmark Mutual
Fund, launched in December 2001.
6. Mug Index Fund, a domestic fund by SBI Mutual Fund, launched in
December2001.
7. IL&FS Index Fund, a domestic index hind, launched in February 2002.
8. Prudential ICICI Index Fund, a domestic index hind, launched in February
2002.
Working Capital Funding
This is a facility provided o clearing members in association with the clearing
banks to meet their working capital requirements. Any clearing bank interested
in utilizing this facility has to enter into an agreement with NSCCL and with the
clearing member. The bank is also required to open clearing accounts with
depositories. Clearing member interested in availing the facility would approach
its bank to meet its funding requirements for a particular settlement. The bank in
consultation with NSCCL would extend the funding to meet its finds pay-in
obligation for that settlement against the securities payout of the member for the
same settlement.
Funding amount is determined after applying appropriate haircut to the values
of its securities payout. The J securities payout to the extent determined for
funding is given to the bank.
Direct Payout to Investors
According to the SEBI directives NSCCL has introduced the facility of direct
payout to clients’ account on both the depositories. It ascertains from each
clearing member, the beneficiary account details of their respective clients who
are due to receive payout of securities. NSCCL has provided its members with a
front-end for creating the file through which the information is provided to
NSCCL. Based on the information received from members, the Clearing
Corporation sends payout instructions to the depositories, so that the client
receives the payout of securities directly to their accounts on the payout day.
The client receives payout to the extent of instructions received from the
respective clearing members. To the extent of instruction not received, the
securities are credited to the CM pool account of the member
Reference Rates—FIMMDA-NSE MIBID MIBOR
A reference rate is an accurate measure of the market price. In the fixed-income
market, it is an interest rate that the market respects and closely watches, It
plays a useful role in a variety of situations. In particular, a call money reference
rate can find the following applications:
I. Traders can make many decisions as offsets compared with the prevailing
reference rate.
2. Derivatives require a clearly defined reference rate as a foundation, of which
the pay-off from the derivative is defined.
3. A variety of contracts can be structured as offsets from the future levels of a
reference rate. The simplest example may be a floating rate bond that uses an
interest rate, which is a given ‘n’ offsets above a given reference rate.
Apart from its accuracy, such a reference rate needs to have other qualities. The
methodology of collation and computation should be scientific, should eliminate
noise, and resist manipulation. It should form an unbiased source, be
representative of the market, transparent, reliable and continuously available.
Moreover, it should find applicability across a wide range of products. A
reference rate, which embodies all these qualities, would be widely acceptable
to the market as the benchmark rate.
NSE Zero-Coupon Yield Curve (ZCYC)
With NSE’s strong focus on debt market segment and the long felt need to
create standardized market practices. NSE has embarked upon developing
products that will be used by the market participants to address themselves to
issues relating to this market segment.
In its continuing effort to innovate, the Exchange has developed a ‘Zero-coupon
Yield Curve’ (ZCYC) that will help in valuation of sovereign securities across
all maturities irrespective of its liquidity. It aims at creating uniform valuation
standards in the market. The product has been developed keeping in mind the
requirements of the banking industry, financial institutions, mutual funds,
insurance companies, etc that have substantial investment in sovereign papers.
NSE ZCYC aims at improving the Asset Liability Management of institutions
with realistic valuations of portfolio of sovereign papers. It has been developed
keeping in mind the emergence of a scientific forward curve for the market that
will be useful in developing derivative products and STRIPS in the emerging
scenario.
NSE VaR for Government Securities
‘Value-at-Risk (VaR) has been widely promoted by regulatory authorities as a
way of monitoring and managing market risk and as a basis for setting
regulatory minimum capital standards. The revised Basle Accord, implemented
in January 1998, makes it mandatory for banks to use VaR as a basis for
determining the amount of regulatory capital, adequate for covering market risk
beyond that required for credit risk. Within the realm of the Fixed-income
portfolios of financial sector players, market related risk has become more
relevant and important on account of their trading activities and market
positions.
For players in the Indian financial sector, the need to develop risk measurement
models would prove critical, as regulation progressively moves from uniform
prudential standards to entity-specific risk coverage requirements. Specifically,
the guidelines call for linking of each entity’s market risk capital charge to the
riskiness of its assets as measured by the chosen VaR model. Accuracy of
measurement would prove critical as regulation would not special single model
for measurement of risk; the choice of model would be left to market
participants who would also be required to furnish details of back-testing for the
chosen VaR model. While a conservative estimate of risk would lead to very
large capital holdings, a liberal estimate would result in inadequate coverage of
loss and excessive number of model failures historically, which would in turn
attract penalties from the regulator. It would therefore be in the interest of
market participants to develop models that accurately measure the riskiness of
their portfolios and furnish estimates of capital charge that would provide
adequate cover. An important consideration in this context is that setting up of
risk measurement systems by each individual participant for estimating
portfolio risk under alternative models and scenarios would involve significant
costs,
In line with its endeavor to develop market infrastructure, NSF, has taken
initiative in developing a VaR system for measuring the market risk inherent in
Government of India (Gol) securities. The NSF-VaR system builds on the NSF
database of daily yield curves—the NSEZCYC is now well accepted in terms of
its conceptual soundness and empirical performance, and is increasingly being
used by market participants as a basis for valuation of fixed-income
instruments. The NSEVaR system provides measures of VaR using 5 alternative
methods—variance-covariance (normal) and historical simulation methods,
together with weighted normal, weighted historical simulation and the recently
developed extreme value method.
Constituent SGL Account
SGL stands for ‘Subsidiary General Ledger’ account. It is a facility provided by
RBI to large banks and financial Institutions to hold their investments in
Government securities and Treasury bills in the electronic book-entry form.
Such institutions can settle their trades for securities held in SGL through a
‘Delivery-versus-Payments’ (DVP) mechanism, which ensures movement of
finds and securities simultaneously.
As all investors in Government securities do not have an access to the SGL
accounting system, RBI has permitted such investors to hold their securities in
physical stock certificate form. They may also open a Constituent SGL account
with any entity authorized by RB for this purpose, and thus avail of the DVP
settlement. Such client accounts are referred to as Constituent SGL accounts.
Due to the wholesale nature of the market, retail investors usually lose their
competitive strength due to their physical holdings. Further, absence of a
common settlement agency makes it difficult for the retail investors to settle
these transactions on a bilateral basis.
To redress the problems faced by retail participants in the market, NSCCL
offers Constituent SGL facility to such participants. RBI has allowed NSCCL to
open SGL and current accounts for this purpose. RBI has also permitted
PFs/Trusts to open their accounts with NSCCL in the year 1998.
Book-building at NSE
The NSE has set up nation-wide network for trading whereby members can
trade remotely from their offices located all over the country. The NSE trading
network spans around 400 cities and towns across India. NSE offers this
infrastructure for conducting on-line IPOs through the Book-building process.
NSE operates a fully automated screen-based bidding system called NEAT IPO
that enables trading members to enter bids directly from their offices through a
sophisticated telecommunication network. Book-building through the NSE
system offers several advantages: