Page 35 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes in demat form in an ever-increasing number of securities in a phased manner. The stamp duty
on transfer of demat securities was waived. Two depositories, namely, NSDL and CDSL, came
up to provide instantaneous electronic transfer of securities. All actively traded scrips are held,
traded and settled in demat form. Demat settlement accounts for over 99% of turnover settled by
delivery. This has almost eliminated the bad deliveries and associated problems.
To prevent physical certificates from sneaking into circulation, it is mandatory for all IPOs to be
compulsorily traded in dematerialised form. The admission to a depository for dematerialisation
of securities has been made a prerequisite for making a public or rights issue or an offer for sale.
It has also been made compulsory for public listed companies making IPO of any security for
` 10 crore or more to do the same only in dematerialised form.

Notes Risk Management
Market integrity is the essence of any financial market. To pre-empt market failures and
protect investors, the regulator/exchanges have developed a comprehensive risk
management system, which is constantly monitored and upgraded. It encompasses capital
adequacy of members, adequate margin requirements, limits on exposure and turnover,
indemnity insurance, on-line position monitoring and automatic disablement, etc. They
also administer an efficient market surveillance system to curb excessive volatility, detect
and prevent price manipulations. Exchanges have set up trade/settlement guarantee funds
for meeting shortages arising out of non-fulfilment/partial fulfilment of funds obligations
by the members in a settlement. As a part of the risk management system, the index based
market wide circuit breakers have also been put in place.
The anonymous electronic order book ushered in by the NSE did not permit members to
assess
credit risk of the counter-party necessitated some innovation in this area. To effectively
address this issue, NSE introduced the concept of a novation, and set up the first clearing
corporation, viz. National Securities Clearing Corporation Ltd. (NSCCL), which
commenced operations in April 1996. The NSCCL assures the counterparty risk of each
member and guarantees financial settlement. Counterparty risk is guaranteed through a
fine tuned risk management system and an innovative method of on-line position
monitoring and automatic disablement. NSCCL established a Settlement Guarantee Fund
(SGF). The SGF provides a cushion for any residual risk and operates like a self-insurance
mechanism wherein the members contribute to the fund. In the event of failure of a
trading member to meet his obligations, the fund is utilized to the extent required for
successful completion of the settlement. This has eliminated counter-party risk of trading
on the Exchange. The market has now full confidence that settlements will take place in
time and will be completed irrespective of default by isolated trading members. In fact
such confidence is driving volumes on exchanges.

Traditionally, brokerage firms in India have been proprietary or partnership concerns
with unlimited liabilities. This restricted the amount of capital that such firms can raise.
The growing volume of transactions made it imperative for such firms to be well capitalised
and professional. The necessary legal changes were effected to open up the membership of
stock exchanges to corporates with limited liability, so that brokerage firms may be able
to raise capital and retain earnings. In order to boost the process of corporatisation, capital
gains tax payable on the difference between the cost of the individual’s initial acquisition
of membership and the market value of that membership on the date of transfer to the
corporate entity was waived. In response, many brokerage firms reorganised themselves
into corporate entities.

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