Security and Security Market Operations - E-trading - Notes - Financial Management, Study notes of Financial Management

Download Security and Security Market Operations - E-trading - Notes - Financial Management and more Study notes Financial Management in PDF only on Docsity! E-trading The structure of stock market in India has undergone a vast change due to the liberalization process initiated by the Government. A number of new structures have come to be added to the existing structure of the Indian stock exchange. A brief description of these structures in the Indian stock market system is presented below: Over-the-counter Market System Basically this market is meant for small size companies. The primary objective of this market was to enable the small start-up companies or companies in green field ventures to obtain their capital requirements at the minimum cost. On the basis of the recommendations of the High Powered Committee on Stock Exchange Reforms (G.S. Patel) and Committee (Abid Hussain) on Capital Market Reforms, the Over-The-Counter Exchange of India (OTCEI) was incorporated in October 1990 under the Companies Act, 1956. Granted recognition under section 4 of the Securities Contract (Regulation) Act 1956, the OTCEI was promoted by various public financial institutions like Unit Trust of India (UTI), Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Finance Corporation of India (IFCI), Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC), SBI Capital Market, CanBank Financial Services, etc. Commencing its operations on September 29, 1992 at Bombay, the OTCEI introduced screen-based automatic singular trading system. Although companies enjoy the same status as listed on the other stock exchanges, it is not possible that a company listed at OTCEI can be listed on other stock exchanges. National Stock Market System (NSMS) National stock market system was advocated by the ―High Powered Group on the 2 0 1 6Establishment of New Stock Exchanges headed by Shri. M.J.Pherwani (popularly known as Pherwani Committee). The committee recommended in June 1991, the following three tier-stock market structure: F 0 A 7 Principal Stock exchanges comprising 5 major stock exchanges at Bombay, Calcutta, Madras, Delhi and Ahmedabad F 0 A 7 Regional stock exchanges like those in major state capitals F 0 A 7 Additional Trading Floors (ATFs) sponsored or managed by Principal or Regional stock exchanges INTERCONNECTED STOCK EXCHANGE OF INDIA (ISE) Genesis Interconnected Stock Exchange of India Limited (ISE) has been promoted by 15 Regional Stock Exchanges to provide cost-effective trade linkage/connectivity to all the members of the Participating Exchanges, with the objective of widening the market for the securities listed on these exchanges. ISE is a national-level stock exchange which provides trading, clearing, settlement, risk management and surveillance support to its traders and dealers. ISE aims to address the needs of small companies and retail investors, with the guiding principle of optimizing the existing infrastructure and harnessing the potential of regional markets, so as to transform them into a liquid and vibrant market, through the use of state- of-the-art technology and networking. The participating Exchanges of ISE. In order to leverage its infrastructure and to expand its nation wide reach, ISE has also appointed around 450 ‗dealers‘ across 70 cities other than the Participating Exchange centers. These dealers are administratively supported by the regional offices of ISE at Delhi (north), Kolkata (east), Coimbatore (south) and Nagpur (central), besides Mumbai (west). ISE has also floated a wholly–owned subsidiary, ISE Securities and Services Limited (ISS), which has taken up corporate membership of the National Stock Exchange of India Ltd. (NSE) in the Capital Market Futures and Options segments and the Stock Excha nge, Mumbai, in the Equities segment, so that the traders and dealers of ISE can access other markets, in addition to the ISE market and their local markets. ISE thus provides the investors in smaller cities, a one-stop solution for cost-effective and efficient trading, and settlement in securities. With the objective of broadbasing the range of its services, ISE has started offering the full suite of DP facilities to its traders, dealers and their clients. ISE endeavors to consolidate the small, fragmented and less liquid markets into a national- level, liquid market by using state-of-the-art infrastructure and support systems. Objectives/features The Interconnected Stock Exchange of India Limited was constituted to realize the following objectives: 1. Create a single integrated national-level solution with access to multiple markets for providing high cost-effective service to millions of investors across the country 2. Create a liquid and vibrant national-level market for all listed companies in general and small capital companies in particular 3. Optimally utilize the existing infrastructure and other resources of participating stock exchanges, which are under-utilized now 4. Provide a level playing field to small traders and dealers, by offering an opportunity to participate in a national-market having investment-oriented business 5. Reduce transaction cost 6. Provide clearing and settlement facilities to the traders and dealers across the country at their doorstep in a decentralized mode 7. Spread demat trading across the Country Achievements Following are the achievements of ISE: 1. Network of intermediaries A broad base of members form the bedrock for any exchange. In this respect, ISE has a large pool of registered intermediaries who can be tapped for any new line of business. As at the beginning of the financial year 2003-04, 548 intermediaries (207 traders and 341 dealers) are registered on ISE. 2. Robust operational systems The trading, settlement and funds transfer operations of ISE and ISS are completely automated and state-of-the-art systems have been deployed. The communication network of ISE, which has connectivity with over 400 trading software and settlement software, along with the electronic funds transfer arrangement established with HDFC Bank and ICICI Bank, give ISE and ISS, the required operational efficiency and flexibility, to not only handle the secondary market functions effectively, but also by leveraging them for new ventures. 3. Skilled and experienced manpower ISE and ISS have experienced and professional staff, which has wide experience in Stock Exchanges/Capital Market institutions. The staff has the skill-set required to perform a wide range of functions, depending upon the requirements from time to time. 4. Aggressive pricing policy The philosophy of ISE is to have an aggressive pricing policy for the various products and services offered by it. The aim is to penetrate the retail market and strengthen the position, so that a wide variety of products and services having appeal for the retail market can be offered, using a common distribution channel. The aggressive pricing policy also ensures that the intermediaries have sufficient financial incentive for offering these products and services to the end-clients. 5. Trading, risk management and settlement software systems The ORBIT (Online Regional Bourses Inter-connected Trading) and AZIS [Automated Exchange Integrated Settlement] software developed on the Microsoft NT platform, with consultancy assistance from Microsoft, are the most contemporary of the trading and settlement software, introduced in the country. The applications have been built on a technology platform, which offers low cost of ownership, facilitates simple maintenance, and supports easy up gradation and enhancement. The software is so designed, that the transaction processing capacity depends on the hardware used; capacity can be enhanced by just adding inexpensive hardware, without any additional software work. 6. Vibrant subsidiary operations ISS, the wholly owned subsidiary of the biggest exchange subsidiaries in the country, on an average more than 250 registered intermediaries of ISS trade from 46 cities across the length and breadth of the country. 7. Fine liquidity ISE is addressing the problem of illiquidity in small capital companies at various exchanges by providing the securities of all such companies, an exposure to a larger investor base across the country. Currently, the ISE participating exchanges, directly account for about 5 percent of the total turnover and this is expected to increase with this integration, as indirectly, the ISE exchanges have been routing large volumes to BSE and NSE. NSE and BSE, both receive 50 percent of their business from outside Mumbai, from the Regional Exchange centers. This indicates the true potential of the ISE Exchanges and it would further increase after 5. IPO Distribution system The introduction of the ‗IPO Distribution System‘. For offering primary market issue by the ISE, would reduce the time and cost of marketing a new issue. This would be possible once the new system is finally notified by SEBI. 6. Additional facility Although the jurisdiction of ISE for listing of companies as Regional Stock Exchange is Navi Mumbai, Maharashtra, securities of companies, which are located elsewhere are also listed. 7. Investor protection ISE has set up an ‗Investors Grievance and Service Cell‘ which looks after all types of complaints of investors located across the country and provides decentralized support. 8. Website The facility of website where the publicly disclosed information on all companies would be placed for easy access by the investors would be a great advantage. In effect, all companies listed on this exchange would be able to update their site independently for greater investor information. Trading Methodology Transactions for the ISE segment are routed from the trader‘s workstation to the central trading computers, (i.e. Tandem system) installed at ISE‘s office in Vashi, through the regional Gate Way Server (GWS) system, installed at the participating Stck Exchanges using a VAST communication network. As far as the NSE segment is concerned, all orders are forwarded to NSE through the central trading and settlement software that is installed at Mumbai on a high-end Compaq computer. This Compaq computer is connected to the NES trading system through a 2 mbps leased line, as the primary link between ISS and NSE and it also has a VSAT link as a backup. In the case of traders, the existing VAST links connecting the Participating Stock Exchanges with ISE will be used for accessing the NSE segment too. Within the Participating Stock Exchange premises, the trader workstations (TWSs) required for NSE, access would be connected on a separate LAN segment to the VSAT infrastructure already established. Settlement System The total delivery-in/delivery-out of traders is computed on a netting basis. After netting of the traders and dealers, the net position of the center is computed. If there is pay-in position of that center, then funds or securities are moved out from one center to another center, having a corresponding pay-out position of funds or securities. The movement is based on a transportation model to ensure minimum distance and delivery time. Clearing System ISE has appointed ABN-AMRRO-Vysya Bank consortium and HDFC Bank to provide learning bank services. Act the operational level, pay-in of funds is done by way of direct debit of the pay-in/settlement accounts maintained by the traders and dealers with Vysys Bank or HDFC Bank. Similarly, in case of margins, debits are carried out on T+1, by electronically debiting the pay-in accounts of traders and dealers. The traders/dealers have to keep funds available in their accounts, as required for the purposes of pay-in and margins, in accordance with the statements downloaded to their TWSs, at the end of the settlement. Indian Public Offering Distribution system A system whereby market issue of securities in the primary market is made through the stock exchange mechanism, utilizing the network of the stock exchange, the ISE is known as ‗Indian Public Offering Distribution System.‘ This would serve as an additional issue system against the present non-computerized public offering system. The aim is to reduce the time taken for allotment of securities to the investors, as well as bring down discrepancies/errors inherent in any manual system The proposed system would reduce the time taken for allotment of securities from the date of closing of the issue. Under this system, the investor would part with his funds, only when he has been provisionally allocated the securities. There will be no question of refund of the application money. Mechanism 1. Appointment of agents The issuer company appoints members of the stock exchange as agents or collection centers for accepting applications from investors. The agents would place orders on behalf of the client-investor, besides underwriting the issue. Members act as agents when the issue is open to the public for subscription. 2. Order placement Interested investors approach their members and place suitable orders for subscribing to the issue. The order placement is doen through the Stock Exchange trading network. 3. Allotment information Registrars to the issue send information on allotment, to the stock exchange after finalizing the allotment. Members are then informed accordingly. The members in turn inform inform clients. Details of allotment are also made available on the ISE‘s website, which can be accessed by the investors directly. 4. Application The applications for shares are filled in by successful applicants, electronically, where the facility of internet is available or in the usual fashion, where the internet facility is unavailable. 5. Payment When the application is made through internet, payment for shares allotted, is made through the ‗payment Gateway System‘ and through the normal physical instruments in case of other modes. 6. Actual allotment The registrar to the issue makes a formal allotment of shares, after receiving the entire data and money in full. Allotment is made both in physical as well as in demats form, depending on the request. INDONEXT Indonext is the proposed common trading platform for regional stock exchanges. It is planned to obey introduced, by the SEBI on the basis of recommendations by the, ‗Justice Kania Committee on Corporatization and Demutalization of Stock Exchanges. Indonext is to be set up as the third National Stock Exchange, on the lines of ‗Euronext‘. Indonext is to be established by merging regional stock exchanges with, the Over-The-Counter Stock Exchange (OTCEI). The scheme aims at giving a new lease of life for the regional stock exchanges in India.