SECONDARY MARKET

Risk Management

A sound risk management system is integral to an efficient

clearing and settlement system. NSE introduced for the first
time in India, risk containment measures that were common
internationally but were absent from the Indian securities
markets.

Risk Containment Measures

• capital adequacy requirements of members,

• monitoring of member performance and track record,
• stringent margin requirements,
• position limits based on capital,
• online monitoring of member positions and
• automatic disablement from trading when limits are breached, etc.
 STOCK BROKER

• Stock broker is a member of a recognized SE who buys, sells or deals in

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

A broker ,seeking registration with Sebi ,has to apply through the stock
exchange of which he is a member.
• Every registered broker has to pay to Sebi a specified registration fee
based on the annual turnover, i.e., of sale and purchase prices of
securities received and receivable by the stock broker during the financial
year on his own a/c as well as on a/c of his client.
• If the stock broker fails to remit the fee within the specified period , he
would be liable to pay an interest at 15%p.a. for each month of delay.
This would be in addition to any other action which Sebi may deem fit.
 CAPITAL ADEQUACY NORMS FOR BROKERS

Base Minimum Capital

Security deposit kept by members in SEs form the base minimum capital

• 25% of base minimum capital to be kept in cash with the exchange

• 25% in form of long term (3yrs or more) fixed deposit with bank
suggested by SE

• Remaining maintained in the form of securities

• the securities should be in the name of members and pledged in favor of

SE
 Intra-day Turnover Limit

Gross turnover (buy+ sell) intra-day of the member should not exceed 25
times the base capital.

• To trade in excess of this limit, a broker would be required to deposit

additional capital with the exchange

• Members violating the intra-day gross turnover limit at any time on any
trading day are not be permitted to trade forthwith

• Members are given a maximum of 15 days time from the date of the
violation to bring in the additional capital.

• Upon members failing to deposit the additional capital within the stipulated
time, the reduced turnover limit of 20 times the base capital would be
applicable for a period of one month from the last date for providing the
margin deposits.
 Margins
• SEs impose different types of margins on brokers for individuals
stocks depending on the exposures taken by these brokers in these
stocks , both on proprietary basis and on behalf of clients , vis-à-vis
the overall market in the scrips.

• Several of these margins are paid upfront by brokers.

• These margins are collected to prevent operators from taking market

positions in excess of their buying capacities and are used to settle
dues to the exchanges / clearing corporations / traders in the event of
any fund shortage faced by the brokers.

• The margins vary from operators to operator depending on the size of

the position taken in the market.
Failure to pay Margin

• Non-payment of either the whole or part of the margin amount due will be treated as a violation
of the Bye Laws of the Clearing Corporation and will attract penal charges @ 0.09% per day of
the amount not paid throughout the period of non-payment.

• In case a member has a margin shortage of Rs. 10 lacs or above for more than 10 occasions
in the past 4 weeks, the gross exposure multiple of the member will be reduced to one level
lower at the time of re-activation of their trading terminals
 CODE OF CONDUCT
General
• Maintain high standard of integrity, promptness and fairness
• Work with due skill ,care and diligence in the conduct of business
• Not indulge in manipulative and fraudulent activities
• Should not create a false market
• Abide by all the provisions of Sebi, SE and govt.
• Should not submit false or misleading returns to Sebi
Duty to investor :
• Faithfully execute the orders at the best possible prices
• Promptly issue a contract note in the specified form
• Avoid breach of trust , should not disclose client's confidential details
• Should not furnish false or misleading advice or information
• Clarity of status – agent or principal
• Adequately trained staff and arrangements to render fair services
 In relation to other stockbrokers :
• Cooperate with other brokers
• Comply with the necessary obligations in completing the settlement of
transactions
• Should not advertise his business publically
• Should not resort to unfair means to induce clients from other stock broker
 SUB BROKERS

A sub broker acts on behalf of a stock broker as an agent or otherwise for

assisting investors in buying ,selling or dealing in securities through such
brokers

• He is not a member of a SE
To act as a sub broker, a certificate of registration from Sebi is required
which is issued if :
• Prescribed fee is paid

• Have got a written authority from a broker to deal in securities

• Sub broker who wishes to work with more than one broker needs to be
separately registered with the Sebi for each broker

• But he can not be affiliated to more than one stock broker of one SE
 FOREIGN BROKERS
Registration
A foreign broker has to disclose to Sebi :
• names
• registration numbers (s) of overseas SEs where he is registered in
the capacity of a broker-dealer
• give an undertaking that he would operate and assist only on behalf
of registered FIIs and
• would not deal in securities on his own account as principal in India.
• On advice from Sebi , the RBI would accord approval to him to open :
***A foreign currency denominated bank account and a rupee
account with a designated bank branch
***Multiple custodian account with the approved custodian of all
registered FIIs whom he may be assisting
• Thus he will have to maintain two separate a/c s, one for FII a/c and the
other for himself.
• Foreign brokers are allowed to :
*** freely repatriate commissions / brokerage
***subject to payment of taxes
 MARKET OPERATIONS

• Contract Notes
When the FB transmits order to the members of SE ,they issue contract
notes to him with the name of the FII on whose behalf contract is executed.

• Payment for Purchases

Is made by FB from his rupee a/c

• Sales Proceeds
The sales proceeds are credited directly to the rupee a/c of FII

• Delivery of Scrips against direct purchase / sale

Has to be made through the custodian of the FII within 4 hours.

• Limit on Money Value

The FB should ensure that at no point of time the rupee value of the total
purchases of securities made by him, on behalf of all FIIs using his
services, exceeds the rupee equivalent of the remittance in foreign
currency credited to his foreign currency denominated a/c.
 DEMATERIALISATION

Dematerialisation is the process by which physical certificates of an investor

are converted to an equivalent number of securities in electronic form and
credited into the investor's account with his / her DP.

Constituents of Depository System 

• Depository
• Depository Participants (DPs)
• Clearing Corporation/Member
• Share Registrar/Issuers
• Investor
 DEPOSITORY
A depository is an organisation which holds securities of investors in
electronic form at the request of the investors through a registered
Depository Participant.
• It also provides services related to transactions in securities.
• At present two depositories viz. National Securities Depository Limited
(NSDL) and Central Depository Services (I) Limited (CDSL) are registered
with SEBI.
• The minimum net worth stipulated by SEBI.
Role of Depository

  The Depository performs its functions through a network of Depository Participants

(DPs) who interact with the Clearing Members and Investor.

The Depository carries out following functions through its participants:-

• Enabling the surrender and withdrawal of securities through the process of

demat and re-mat to and from the depository system,
• Maintaining investors' holdings in the electronic form through computers,
• Effecting settlement of securities traded on the stock exchanges.
• Advising periodically to the Share Registrar / Issuer
 
 Depository Participant (DP)
Is an agent of the depository through which it interfaces with the
investor. Financial Institutions / Banks / Custodian / Stock Brokers etc. can
become DPs provided they meet the necessary requirements and guidelines
prescribed by SEBI. A DP can offer depository services only after it gets
proper registration from SEBI.

Function
• Similar to brokers, who act on behalf of a client in the stock market, a Depository
Participant is your representative in the depository system.

• DP serves as a link between the investor and the Company through NSDL for
dematerialization of shares and other electronic transactions.

• DP provides various services with regard to your holdings such as

*** Maintaining the securities account balances
*** Enabling surrender (dematerialization ) and withdrawal (rematerialisation)
of your securities to and from the depository.
*** Delivering and receiving shares in your account on your instructions.
Hence, shares bought by you on a stock exchange can be received
directly in your account and similarly those sold by you can be delivered
on your instructions.
****Keeping you updated with regard to status of your holdings periodically.
 Clearing & Settlement (Equities)

• National Securities Clearing Corporation Ltd. [NSCCL] carries out

clearing and settlement functions as per the settlement cycles of different
sub-segments.

The clearing function of the clearing corporation is designed to work out

a) what counter parties owe and
b) what counter parties are due to receive on the settlement date.

Settlement is a two way process which involves legal transfer of title to funds
and securities on the settlement date.
 Benefits of Depository Services

• A safe and convenient way to hold securities;

• Immediate transfer of securities;
• No stamp duty on transfer of securities;
• Elimination of risks associated with physical certificates such as bad
delivery, fake securities, delays, thefts etc.;
• Reduction in paperwork involved in transfer of securities;
• Reduction in transaction cost;
• No odd lot problem, even one share can be sold;
• Nomination facility;
• Change in address recorded with DP gets registered with all
companies in which investor holds securities electronically eliminating
the need to correspond with each of them separately;
• Transmission of securities is done by DP eliminating correspondence
with companies;
• Automatic credit into demat account of shares, arising out of bonus /
split / consolidation / merger etc.
• Holding investments in equity and debt instruments in a single
account.
• Badla System
It is the postponement of delivery of or payment for the purchase of
securities from one settlement period to another.

• Circuit Breakers:
To contain excessive volatility in prices , the Sebi introduced , in 1995 ,
scrip wise daily circuit breakers / price-bands.
The circuit breakers bring about a halt / suspension in trading
automatically for a specified period if the market prices vary unusually
on either side i.e. move out of a pre-specified band .
 Stock Index

• Stock Index captures the behavior of the overall equity market.

Movements of the index represents the changing expectations of the
stock market about future dividends of India's corporate sector. The
ideal index gives us instant-to-instant readings about how the stock market
perceives the future of India's corporate sector.

Ups and Downs of an Index

• When the stock market thinks that the prospective dividends in the future
will be better than previously thought the index goes up.

• When prospects of dividends in the future become pessimistic, the index

drops.

• BSE Indices : Sensex , BSE-100 , BSE-200 , BSE-500 ,BSE Midcap , BSE

Smallcap

• NSE Indices : S&P CNX Nifty , CNX Nifty Junior-100 second rung of growth
stocks , CNX MidCap , CNX IT Sector Index , CNX PSE Index -20

PSE stocks, CNX MNC Index -15 listed companies

 Guidelines for selection of constituents in SENSEX are as follows:

• Listed History
• Trading Frequency
• Market Capitalization Weightage
• Industry / Sector Representation
• Final Rank
• Track Record

• Large Cap Stocks - Companies with large capitalization. Traditionally, the safest
stocks, but also the least rewarding in return.
Infosys Technologies , Bharti-Tele-Ventures Ltd. , ICICI Bank Ltd , HDFC Ltd ,
ONGC Ltd , Maruti Udyog Ltd ,

• Mid Cap Stocks - Bigger than small caps, smaller than large caps. They are in
the middle of the road in terms of risk and reward.
India-bulls Securities Ltd. ; Thomas Cook ( India ) Ltd. ; Century Plyboards
( India ) Ltd. ; Jet Airways( India ) Ltd. ; Parshavnath Developers Ltd. ; Nicholas
Piramal India Ltd.

• Small Cap Stocks - Smaller companies that usually grow faster, giving a better
return, but are riskier because they have less protection against going out of
business due to their small size.
Kajaria Ceramics Ltd. ; Kohinoor Foods Ltd. ; Bata India Ltd. ; Arvind Mills Ltd. ;
J.K. Cement Ltd.
• Thank you