Indian Financial System 3

1. Concept & Role of Stock Exchanges [SEs]*                                                                   2.The National Stock Exchange Of India Limited [NSE]*                                           3.Securities Trading, Clearing and Settlement Systems*                       

4.Trading, Clearing and Settlement Systems in BSE and NSE*

5.Clearing Corporation of India Ltd.[CCIL]*

6. Initial Public Offer [IPO]: Book Building Mechanism, etc*

7.Green Shoe Option in an IPO*

* Extract from relevant internet sites

1. Concept & Role of Stock Exchanges [SEs]

Stock Exchange [SE] is an essential financial infrastructure for any economy

§  Concept of Stock Exchange

Ø  Prior to  amendment  The Securities Contracts (Regulation) Act [SCRA], 1956, has defined  Stock Exchange as an "association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in Securities".

Ø  Post amendment [in 2004] stock exchange means:

(a)  any body of individuals, whether incorporated or not, constituted before  corporatisation and demutualisation under sections 4A and 4B, or

(b)   a body corporate incorporated under the Companies Act, 1956 (1 of 1956) whether under a scheme of corporatisation and demutualisation or otherwise,for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.

§  Role of Stock Exchanges [SEs]

Ø  SEs  helps orderly flow and distribution of savings between different types of investments.

Ø  SEs  provide a conduit which channelizes the savings into investment along with a free movement of capital.

Ø  SE as an institution performs an important part in the economic life of a country, acting as a free market for securities where prices are determined by the forces of supply and demand.

Ø  The SEs have a vital role to play in the development of the country in general and industrial growth of companies in the private sector in particular and helps the Government to raise internal resources for the implementation of various development programmes in the public sector

Ø  The SE as a segment of the Capital Market it performs an important function in mobilizing and channelizing resources which remain otherwise scattered and help tap  new resources and stimulate a broad based investment in the capital structure of industries.

Ø  A well developed and healthy SE is an important institution in building up a property base along with a broader distribution of wealth and income. Thus SE is a vital organ in a modern socialist society. Without a SE a modern democratic economy cannot exist.

Ø  SEs have aided emergence the system of joint stock companies financed through the public investment  that has  put the vast means of finances almost to entrepreneurs' needs.

Ø  SEs have made finance from external sources mainly from the investing public [both local and global] by providing opportunities for the conversion of scattered savings into profitable investments with the promises of a reasonable yield and minimum element of risk.

Ø  The SE benefits the entire community in a variety of way. It enables the producers to raise capital and investors an opportunity to invest which directly and indirectly gives gainful employment to millions of people within and outside the SE.

Ø  The primary market segment of SE assists in mobilizing funds for the Government and the Industry and to supply a channel for the investment of savings in the performance of its functions.

Ø  The secondary market segment of SE as an organized security market provides marketability and price continuity for shares and helps in a fair evaluation of securities in terms of their intrinsic worth [I.e it helps in liquidity, saleability and price discovery].

Ø  SE apart from providing a mechanism for transacting business in stock and shares it generates genuine potential for a new entrepreneur to take up initiative in the private sector enterprises and allows the expansion of investing community by offering gainful deployment of funds

Ø  The transparency of the price discovery process which results, especially in technology driven SEs  encourages participation in economic activity and enhances the efficient utilization of resources.

Ø  Further SE is increasingly perceived as an electronic marketplace for buyers and sellers of securities to transact their business, under the full view of observers.

Thus from all above we can see that the stock exchange is now seen increasingly for what it really is, namely an essential financial infrastructure for any economy. It is this view of the exchange as infrastructure that motivated the Indian government to encourage the establishment of the National Stock Exchange of India at Mumbai, which in a few short years completely revolutionized the Indian capital market.

§  Powers that may be exercised by the SE

Ø  The powers of the stock exchange are to be exercised as per provisions in its bye-law. As per SCRA Act any recognized stock exchange may, subject to the previous approval of the SEBI make bye-laws for the regulation and control of contracts.

Ø   The bye-laws can provide for the exercise of following powers by the stock exchange:

ü  The opening and closing of markets and the regulation of the hours of trade

ü   Set up a clearing house for the periodical settlement of contracts and differences there under, the delivery of and payment for securities, the passing on of delivery orders and the regulation and maintenance of such clearing house                                                         

ü   The regulation or prohibition of blank transfers

ü  The regulation, or prohibition of badlas or carry-over facilities

ü   The fixing, altering or postponing of days for settlements

ü   The determination and declaration of market rates, including the opening, closing, highest and lowest rates for securities

ü  The terms, conditions and incidents of contracts, including the prescription of margin requirements, if any, and conditions relating thereto, and the forms of contracts in writing  

ü  The regulation of ALL aspects relating to contracts and dealings between members, between member and non-member and/or their constituents, market intermediaries and between the seller and buyer

ü  The regulation of taravani (or jobbing) business including the placing of limitations thereon 

ü  The listing of securities on the stock exchange, the inclusion of any security for the purpose of dealings and the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in any specified securities

ü  The method and procedure for the settlement of claims or disputes, including settlement by arbitration

ü   The levy and recovery of fees, fines and penalties

ü  The regulation of the course of business between parties to contracts in any capacity

ü  The exercise of powers in emergencies in trade(which may arise, whether as a result of pool or syndicated operations or cornering or otherwise) including the power to fix maximum and minimum prices for securities

ü  The regulation of dealings by members for their own account 

ü  The separation of the functions of jobbers and brokers

ü  The limitations on the volume of trade done by any individual member in exceptional circumstances

ü   Fixing the obligation of members to supply such information or explanation and to produce such documents relating to the business as the governing body may require.

2. The National Stock Exchange Of India Limited [NSE]: Genesis, Objectives, Initiatives and Achievements

§  The NSE has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a NSE by financial institutions (FIs) to provide access to investors from all across the country on an equal footing.

§  NSE was promoted by leading Financial Institutions at the behest of the Government of India, and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.

§  NSE was set up with the objectives of

Ø  Establishing a nation-wide trading facility for types of securities  like equities, debt instruments and hybrids

Ø   Establishing nationwide trading facility for all

Ø   Ensuring equal access to investors all over the country through an appropriate telecommunication network 

Ø  Providing fair, efficient & transparent securities market using electronic trading system

Ø   Enabling shorter settlement cycles and book entry settlements

Ø  Meeting International benchmarks and standards of securities market

§  NSE's mission is setting the agenda for change in the securities markets in India. It has written for itself the mandate to create World-class Stock Exchange and use it as an instrument of change for the industry as a whole through competitive pressure

§  NSE is the first stock exchange in India to be set up on a demutualised model wherein the ownership, management and trading rights are in the hands of three different sets of people. This has completely eliminated any conflict of interest.

§  On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993 NSE commenced operations as follows:

Ø  In the Wholesale Debt Market (WDM) segment in June1994. 

Ø  In the Capital Market (Equities) segment commenced in Nov1994 and

Ø  In the Derivatives segment commenced in June 2000.

§  NSE  is India's largest Stock Exchange & World's third largest Stock Exchange in terms of transactions. Located in Mumbai,

§   NSE has set up its trading system as a nation-wide, fully automated screen based trading system. in the Equity / Capital Markets, Wholesale Debt Market (WDM),  Mutual Funds (MF) and Initial Public Offerings (IPO)

§   NSE has stressed on innovation and sustained investment in technology to ensure customer satisfaction, improvement in services, better productivity, Value-adds & features, improving efficiency, reducing operational costs, for better compliance and  operational transparency

§   NSE's Capital Market Trading system operational on two machine split architecture using Fault Tolerant mainframes is  geared to handle 3 million trades with faster response time which translates into higher turnover and  more opportunities and growth for the Entire Indian Securities market

§  NSE launched NEAT [National Exchange for Automated Trading] – a fully automated screen based trading system that enables members from across the country to trade simultaneously with ease and efficiency

§  NSE has deployed NIBIS (NSE's Internet Based Information System) for real-time dissemination of trading information over the Internet

§   NSE’s Online Position Monitoring (OPMS) and Risk Management system for the Capital Market segment  tracks positions of trading members from Turnover and Exposure limits with a view of identifying and preventing potential settlement related issues.

§   NSE has a matured data warehouse [DWH] application extensively used for analysis, reporting and investigative purposes due to which response time & query performance improved dramatically by about 100%. And  has contributed to timely, efficient reporting and  reduced lead time in providing data to Regulator

§   NSE’s Straight Through Processing (STP) framework seeks to provide seamless data flow both within the enterprise as well as across the market without any manual intervention using ISO 15022 messaging standards.

§  NSE & SEBI endeavored  to shorten the settlement cycle and has been successful in reducing the same from T+5 to T+2. It has now set a target for achieving T+1 settlement in Indian Securities Market. T+1 settlement cycle has not been achieved anywhere in the world

§  India thru NSE is the first country to successfully implement STP effectively for all the market intermediaries and this will  help in attracting further foreign investments

§  NSE introduced settlement guarantee funds, investor protection fund and centralized insurance cover for all trading members

§   NSE allows brokers’ trade right free of cost on NSE’s electronic highway that link 4 metros.It has reduced the techonology cost for borkers drastically.The idea is also attract FIIs [like morgan Stanley, Goldmansachs, Nomura, UBS Securities which have huge funds to invest in India]

§   NSE has proposed to offer fast paced 54 server racks – extends co-location rack facility  to brokers to give faster access to order book data stemmed from the exchange which is crucial for broking firms which offer direct market access and algorithm facilities to clients to execute trades faster.

§  NSE’s cross-listing initiative  - it has licensed the Nifty index to Chicago Mercantile Exchange (CME) for listing dollar-denominated Nifty futures contracts. Singapore Exchange (SGX) has already been providing Nifty futures to its members for around 10 years now  - is an exciting development for the Indian financial markets.                         

§  NSE also has a proposal to have a bilateral securities trading link with SGX to enable investors in one country to seamlessly trade on the other country’s exchange.

§   NSE introduced National Securities Clearing Corporation Ltd [NSCCL]  the first  Clearing Corporation in India in 1995 and National Securities Depository Limited [NSDL] the  first Depository in India in 1996

§  Other initiatives/ Milestones of NSE:

v Mar 1995      Establishment of Investor Grievance Cell

v Apr 1995       Establishment of NSCCL, the first Clearing Corporation

v Jun 1995      Introduction of centralised insurance cover for all trading members

v Jul 1995        Establishment of Investor Protection Fund

v Oct 1995      Became largest stock exchange in the country

v Apr 1996       Launch of S&P CNX Nifty

v Jun 1996      Establishment of Settlement Guarantee Fund

v Dec 1996      Commencement of trading/settlement in dematerialised securities

v Feb 1997      Regional clearing facility goes live

v May 1998     Promotion of joint venture, India Index Services & Products Limited (IISL)

v May 1998     Launch of NSE's Web-site:www.nse.co.in

v July 1998      Launch of NSE's Certification Programme in Financial Market

v Feb 1999      Launch of Automated Lending and Borrowing Mechanism

v Jan 2000      Launch of NSE Research Initiative

v Feb 2000      Commencement of Internet Trading

v Jun 2000      Commencement of Derivatives Trading (Index Futures)

v Sep 2000      Launch of 'Zero Coupon Yield Curve'

v Jun 2001      Commencement of trading in Index Options

v Jul 2001        Commencement of trading in Options on Individual Securities

v Nov 2001      Commencement of trading in Futures on Individual Securities

v Dec 2001      Launch of NSE VaR for Government Securities

v Jan 2002      Launch of Exchange Traded Funds (ETFs)

v Oct 2002      Launch of NSE Government Securities Index

v Jan 2003      Commencement of trading in Retail Debt Market

v June 2003     Launch of Interest Rate Futures

v Aug  2003     Launch of Futures & options in CNXIT Index

v Jun 2004      Launch of STP Interoperability

v Aug 2004      Launch of NSE's electronic interface for listed companies

v Jun 2005      Launch of Futures & options in BANK Nifty Index

v The standards set by NSE in terms of market practices and technologies have become industry benchmarks and are being emulated by other market participants.                      

v  NSE has played a catalytic role in reforming Indian securities market in terms of microstructure, market practices and trading volumes

v  NSE is able to radically transform the Indian Capital market during the decade of its existence. It has changed the mindset of all market players and has built investor confidence in the secondary markets.

v NSE is more than a mere market facilitator. It's that force which is guiding the industry towards new horizons and greater opportunities.

 3.Securities Trading, Clearing and Settlement Systems

• Once trades are negotiated on regulated markets or over the counter, the relating securities are processed by post-market infrastructures, that ensure both the delivery and payment of securities.
• Three steps feature the securities processing chain: negotiation, clearing and settlement.
• Whereas the clearing house computes a net position for each of operator and guarantees the performance of transactions by becoming the single and central counterparty of the buyer and the seller, the delivery and payment of securities is ensured by the securities settlement system.

Securities processing chain for purchase of securities

• Trades on the regulated market are cleared through the clearing house.
• Only some of the OTC trades go through the clearing house.
• Trades on the regulated market are cleared through the clearing house.
• Only some of the OTC trades go through the clearing house.
• The clearing house:

• Computes each participants net position by netting its offsetting transactions
• Guarantees performance on transactions by acting as the sole counterparty for sellers and  buyers
• Conducts multilateral netting of participants positions

• The securities settlement system provides delivery versus payment and eliminates principal risk
• The settlement bank holds the cash accounts
• The central securities depository holds the securities accounts. The securities are recorded on the investors account with the custodian. The custodian administers the events relating to securities holdings.

Clearing systems

• After negotiation, clearing is the second step in the securities processing chain.
• Clearing houses generally ensure the following functions:
• Recording the trades processed by the trading system in the clearing system, computing clearing participants. net positions,
• Applying adequate risk management measures with regard to participants. positions,
• Ensuring novation by substituting itself to sellers and buyers and taking on their respective obligations, and
• Transferring net orders to securities settlement systems.

Securities settlement systems

• The settlement function is the last step in the securities processing chain.
• It involves the settlement of the reciprocal obligations of trades, counterparties, and the accounting registration that ensures the finality of transactions, i.e. the delivery of securities to the buyer and the payment of the securities price to the seller.
• Delivery versus payment (DVP) ensures that securities are delivered if and only if the price of the securities is paid, and vice versa.
• Generally, securities settlement systems are operated by a central securities depository (CSD), which ensures notary functions as regards the issuance of publicly traded securities and enables securities transactions by means of book entries.

4.Trading, Clearing and Settlement Systems in BSE and NSE

BSE’s trading and settlement procedure

• BSE has initiated a number of measures aimed at providing quality products and services and expanding its network using cutting edge information technology.

• BSE made its transition from an 'outcry' system of trading to a completely electronic trading system 5 years ago

• BSE’s electronic trading system is BOLT (BSE On Line Trading) with the following facilities:

1. This is an order driven facilitates efficient processing; automatic order matching and faster execution is enabled

2. Trading system displays on a continuous basis scrip and market-related information required supporting traders. (Information includes best five bids and offers, last traded quantity and price, total buy and sell depth (irrespective of rates), open, high, low and close price, total number of trades, volume and value, and index movement. Other company-related information is also displayed)

3. As soon as an order is matched, the confirmation of the trade is generated on-line.

4. The order matching logic is based on best price and time priority.

5. The BOLT has a capacity of conducting 2 million trades per day and the latest state of the art technology infrastructure with Trader Work Stations located in more than 400 cities all over the country.

6. Trading on the BOLT system is conducted from Monday to Friday between 9: 30 a.m. and 3:30 p.m.

7. Trading can also be conducted through the BSE Internet Trading System - www.bsewebx.com the first Exchange enabled Internet Trading System.

8. BSE aims to provide trading anywhere and at anytime in mind and the exchange continuously upgrades the hardware, software and networking systems so as to enable it to enhance the quality and standards of service to its members and other market intermediaries.

Clearing and settlement at BSE

• The settlement of transactions was earlier done in the weekly settlement environment, where the exchange had a carry forward facility.
• The exchange commenced exchange of trades on rolling basis where the trades are settled on T+ 2 basis.
• Undelivered quantities of securities in settlement is promptly auctioned or closed out as per the well-laid procedure.
• Two depositories, namely the Central Depository Services (India) Ltd. and National Securities Depository of India Ltd. operate in the Indian Market place. The Clearing House of the exchange has well- structured linkages with both the depositories.
• Direct transfer of securities to and from the Beneficial Owner Accounts is facilitated at the Clearinghouse level only, making for the seamless movement of securities in the settlement system.
• The settlement of transactions in the depositories mode is based on the ISIN codes of the securities. The exchange Rules, Bylaws and regulations have clearly laid down the default handling procedure.

Trading systems at NSE

• The NSE provides a facility for screen based trading with order matching facility.
• The members are connected from their respective offices at dispersed locations to the main system at the NSE premises through a high- speed efficient satellite telecommunication network.
• The trading system is an order driven, automated order matching system which does not reveal the identity of parties to an order or a trade.
• This helps orders whether large or small to be placed without the members being disadvantaged by disclosure of their identity.
• Orders are matched automatically by the computer keeping the system transparent, objective and fair. Where an order does not find a match it remains in the system and is displayed to the whole market, till a fresh order which matches, comes in or the earlier order is cancelled or modified.
• The trading system provides tremendous flexibility to the users in terms of the type of orders that can be placed on the system.
• Several time related, price related or volume related conditions can easily be placed on an order.
• The trading system also provides complete on-line market information through various inquiry facilities
• The trading system recognizes three types of users Trader, Privileged and Inquiry. Trading Members can have all the three user types whereas Participants are allowed privileged and inquiry users only.
• The user-id of a trader gives access for entering orders or trades on the trading system. The privileged user has the exclusive right to set up counter party exposure limits. The Inquiry user can only view the market information and set up the market watch screen but cannot enter orders or trade or set up exposure limits.
• The trades in the NSE trading system can be executed in the continuos or the negotiated market.
• In the continuous market, orders entered by the trading members are matched by the trading system. For each order entering the trading system, the system scans for a probable match in the order books. On finding a match, a trade takes place.
• In a negotiated order, two parties enter into a contract with each other according to their terms and conditions. Unlike a continuos order, it is a contract entered into between those two parties only. The buyer and seller know each other and the contract is entered into at mutual understable terms and conditions.
• Orders are matched on the basis of price-time priority. For non-repo trades, the best buy order is the one with the highest buy price and the best sell order is the one with the lowest sell price.
• Orders are matched automatically by the trading system based on passive order price. In case of repo trades, the best buy order is one with the lowest buy rate and the best sell order is one with the highest sell rate. The trade rate is based on passive order rate.
  
  NSE SGL a/c facility for constituents

• SGL stands for ‘Subsidiary General Ledger’ accounts. 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 funds 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 RBI 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 loose 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 SCCL vide its letter PDO.SGL.07.18.21/ 97/98 dated March 30, 1998. SCCL is also taking steps to setup a common clearing and settlement framework for its SGL constituents. This endeavor will help the market to have uniform settlement procedures and will help evolve the market to a higher plane.
  
  
  

Settlement on NSE

• Primary responsibility of settling trades concluded in the WDM segment rests directly with the participants and the exchange monitors the settlements.
• Trades are settled gross, i.e. on trade for trade basis directly between the  constituents/participants to the trade and not through any Clearing House mechanism. Thus, each transaction is settled individually and netting of transactions is not allowed.
• Settlement is on a rolling basis, i.e. there is no account period settlement.
•  Each order has a unique settlement date specified upfront at the time of order entry and used as a matching parameter. It is mandatory for trades to be settled on the predefined settlement date.
• The Exchange currently allows settlement periods ranging from same day (T+0) settlement to a maximum of six working days (T+5).
• On the scheduled settlement date, the Exchange provides data/information to the respective member/participant regarding trades to be settled on that day with details like security, counterparty and consideration.
• Government securities including treasury bills are settled by the participants through their Subsidiary General Ledger (SGL) account (a book entry settlement system) with RBI or through exchange of physical certificates. Other instruments are settled through delivery of physical securities.
• The required settlement details, i.e. certificate no., SGL form no., Cheque no., constituent etc. are reported by the member/participant to the Exchange. In case of Repo trades the settlement details of the forward leg is also reported.
• The exchange closely monitors the settlement of transactions through the reporting of settlement details by members and participants.
• In case of deferment of settlement or cancellation of trade, participants are required to seek prior approval from the Exchange.
• For any dispute arising in respect of the trades or settlement, the exchanges has established arbitration mechanism for resolving the same

5. Clearing Corporation of India Ltd.[CCIL]:

• The setting-up of CCIL an unique institution marks a new era in the
   annals of India's financial services industry
• CCIL is Incorporated as India's first clearing house for settlement of market trades in Government Securities and inter-bank foreign exchange transactions
• CCIL has been promoted by SBI,IDBI, LIC, ICICI, BOB and HDFC Bank to address the need for an integrated clearing and settlement system for debt and forex transactions.

• CCIL was set up in April, 2001 for providing exclusive clearing and settlement for  transactions in Money, GSecs and Foreign Exchange

• The prime objectives of CCIL are to:

§  improve efficiency in the transaction settlement process

§  insulate the financial system from shocks emanating from operations related issues

§  to undertake other related activities to help broaden and deepen the money, debt and  forex markets in the country

• CCIL commenced operations with the clearing and settlement of trades in government securities from February 15, 2002, CCIL  commenced with the clearing and settlement of inter-bank spot and forward US Dollar-Indian Rupee (USD-INR) trades from November 8, 2002
• The clearinghouse structure of CCIL is designed to localize risks by preventing the contagion from spreading from a failed counter party to others
• Savvy market players in the debt, money and forex markets now have new opportunities to profit from the markets by deliberately assuming risks
• CCIL offer superior risk management systems and enable participants to manage their risks adequately

• The clearinghouse structure of CCIL is designed to localize risks by preventing the  contagion from spreading from a failed counter party to others

• CCIL  provide institutional structure to support and facilitate the clearing and settlement of  trades across different markets viz., G-Secs, forex and money markets

• The facility of centralized clearing and settlement offered by CCIL is of great advantage  especially to non-bank players in the call & money market

• CCIL's assurance that trades entrusted to it will get settled on the settlement day will provide much-needed comfort to market participants
• All trades in the securities settlement routed through CCIL through netting by Novation [a process where the bilateral relationship between two participants/members is  substituted with bilateral contracts between each participant/member & CCIL]

§  The clearing and settlement system has the following features:

Ø  Membership Risk management,

Ø  Collateral management,

Ø  Clearing of trades Settlement of trade obligations,

Ø  Shortage handling   and

Ø  Financial Accounting

• CCIL brings the following tangible benefits:

Ø  Improved efficiency

Ø  Easier reconciliation of accounts with the counter parties

Ø  Lower operational cost to the participating banks

Ø  Assurance of settlement on the settlement date 

Ø  Reduction in counter party exposure.

Ø  Operational efficiency

Ø  Improved liquidity

Ø  Better leveraging (e.g., shorter holding periods for government securities)

§  The achievements of CCIL are as listed below:

Ø  Commenced operations in 2002 when the Negotiated Dealing System (NDS) of  RBI went live

Ø  Started providing the settlement of forex transactions since  2002

Ø  Launched the Collateralized Borrowing and Lending Obligation (CBLO) in 2003,   a money market product based on Gilts as collaterals

Ø  Developed & launched a forex trading platform “FX-CLEAR”  in 2003

Ø  Started the settlement of cross-currency deals through the CLS Bank from 2005

Ø  Developed and currently manages the NDS-OM and NDS- CALL electronic trading platforms for trading in the government securities and call money & the NDS- Auction module for Treasury Bills auction by RBI

Ø  Introduced many innovative products/tools like Zero Coupon Yield Curve
 [ZCYC], Bond and T-Bills indices, Sovereign Yield Curve, Benchmark reference rates like CCIL-MIBOR/MIBID and CCBOR/CCBID, etc

Ø  Released Sovereign Bond Indices, CCIL BROAD GILTS INDEX, Consisting of  top 20 securities and CCIL LIQUID GILTS INDEX, consisting of the 5 most liquid bonds, to track the movement of the government securities market

Ø  Released T-Bill Index consisting of two T-bill indices – CCIL EQUAL WEIGHT T-   Bills INDEX and CCIL LIQUIDITY WEIGHT T-Bills INDEX. The CCIL T-Bills Indices as instruments to capture the market movement in the short term maturity segment

Ø  Commenced net settlements in Government Securities as per DVP III Guidelines  of Reserve Bank of India.

Ø  Operationalised “Straight Through Processing” arrangement  for settlement of foreign exchange trades done on FXCLEAR

Ø  Operationalised Anonymous Auction System to facilitate Buy Back of Government  Securities by Government of India

Ø  Launched Overnight Collateralized Benchmark Reference Rates for Indian  market, namely CCIL Collateralized Benchmark Bid Rate (CCBID) and CCIL Collateralized Benchmark Offer Rate (CCBOR). The rates are disseminated at 10:10  A.M

Ø  Finalised in consultation with market users, the business model, including the risk management processes, for settlement of OTC trades in Rupee Derivative Products  (Interest Rate Swaps and Forward Rate Agreements)

Ø  Regularly comes out with many publications for the benefit of the market participants

Ø  Set up a wholly owned Subsidiary Company Clearcorp Dealing Systems (India)  Pvt. Ltd to manage dealing platforms in Money and Currency Markets

Ø  Received the ISO/IEC 27001:2005 certification from M/s Det Norsk Veritas in 2006 for securing its information assets

Ø  The Depository Trust & Clearing Corporation (DTCC) and CCIL have signed a   Memorandum of Understanding (MOU) aimed at promoting closer collaboration between the two market infrastructure organizations

6. Initial Public Offer [IPO]: Book Building Mechanism and etc

·       Book building process is a common practice used in most developed countries for marketing a public offer of equity shares and offer of bonds and debenture of a company

·       The objective of book building process is to discover the price as to get the highest price for equity issue and lowest cost/rate for debt issue

·       A company may raise capital [equity and or debt] in the primary capital market through initial public offers (IPOs), rights issues and private placement.

·       IPOs, the largest sources of funds in the primary capital market, to the company are basically an invitation by a company to the public to subscribe to its securities offered through prospectus. CAPITAL MARKET

• SEBI guidelines, 1995 defines book building as “a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document.”  
• Book building is a transparent and flexible price discovery method of initial public offerings (IPOs) in which price of securities is fixed by the issuer company along with the Book Running Lead Manager (BRLM) on the basis of feedback received from investors as well as market intermediaries during a certain period.

The advent of  & rationale for book building

• The abolition of the Capital Issue Control Act, 1947 has brought a new era in the primary capital markets in India. Controls over the pricing of the issues, designing and tenure of the capital issues were abolished. 

• Book building acts as scientific method through which a consensus price of IPOs may be determined on the basis of feedback received from most informed investors who are institutional and corporate investors [Qualified Institutional Buyers QIBs] like LIC,SBI,UTI GIC, FIIs, etc. The method helps to make a correct evaluation of a company’s potential and the price of its shares.

• Before establishment of SEBI in 1992, the quality of disclosures in the offer documents was very poor. SEBI has overtime formulated and prescribed stringent disclosure norms in conformity to global standards.
• The issuers, at present, are free to make the price of the issues. The price band is disclosed on the draft [red herring] prospectus within which the investors can bid.The difference between floor and cap price is fixed at 20%.The price band can be revised and if revised the bidding process is extended by further 3 days subject to  total bidding not exceeding 13 days
• Unlike India, in international markets the most active investors are the mutual funds and other institutional investors and the entire issue is made through book building process.
• In India, on the other, a large number of retail investors participate actively in IPOs made by the company.
• In US, book building is called soft underwriting by investment bankers which implies that they sell the securities on a best efforts basis and they are not obliged to take up the unsold stock of securities if there is no demand for such securities. Public issue through book building process in US takes an average of 75 days to make a prospectus, file it with SEC, NYSE or NASDAQ, talk to select investors, establish a price range, print the red herring prospectus and launch the offering. Trading of securities begins on the 16th day and payment by investors and delivery of shares are completed by the 20th day.

IPO: Book building Vs Fixed price option

• The traditional fixed price method of tapping individual investors suffered from two defects:
• Delays in the IPO process and 
• Under-pricing of issue

• The main drawback of fixed pricing was the process of pricing of issues. The issue price was determined around 60-70 days before the opening of the issue and the issuer had no clear idea about the market perception of the price determined.

• In fixed price method, public offers do not have any flexibility in terms of price as well as number of issues.

• From experience it can be stated that a majority of the public issues coming through the fixed price method are either under-priced or over-priced. Individual investors (i.e. retail investors), as such, are unable to distinguish good issues from bad one. 

• This is because the issuer Company and the merchant banker as lead manager do not have the exact idea on the fixed pricing of public issues.

• Thus it is required to find out a new mechanism for fair price discovery and to help the least informed investors. That’s why, Book Building mechanism, a new process of price discovery, has been introduced to overcome this limitation and determine issue price effectively.

• Public offers in fixed price method involve a pre issue cost of 2-3% and carry the risk of failure if it does not receive 90% of the total subscription. In Book Building such cost and risks can be avoided because the issuer company can withdraw from the market if demand for the security does not exist.

• In fixed price process in IPOs, allotments of shares to all investors are made on proportionate basis.

• Institutional investors normally are not interested to participate in fixed price public issues due to uncertainty of allotment and lack of opportunity cost.

• However they like to participate largely in book built transactions as in this process the costs of public issue and the time taken for the completion of the entire process are much lesser than the fixed price issues.

• In Book Building the price is determined on the basis of demand received or at price above or equal to the floor price whereas in fixed price option the price of issues is fixed first and then the securities are offered to the investors.

• In case of Book Building process book is built by Book Runner Lead Manager (BRLM) to know the every day demand whereas in case of fixed price of public issues, the demand is known at the close of the issue.

Book Building process in India

The main parties who are directly associated with book building process are the issuer company, the Book Runner Lead Manager (BRLM) and the syndicate members (Fig A). The Book Runner Lead Manager (i.e. merchant banker) and the syndicate members who are the intermediaries are both eligible to act as underwriters. The steps which are usually followed in the book building process can be summarized below:

(1) The issuer company proposing an IPO appoints a lead merchant banker as a
      BRLM.

 (2) Initially, the issuer company consults with the BRLM in drawing up a draft
       prospectus (i.e. offer document) which does not mention the price of the
       issues, but includes other details about the size of the issue, past history of
       the company, and a price.band. The securities available to the public are
       separately identified as “net offer to the public”.

(3) The draft prospectus is filed with SEBI which gives it a legal standing.

(4) A definite period is fixed as the bid period and BRLM conducts awareness
     campaigns like advertisement, road shows etc.

(5)The BRLM appoints a syndicate member, a SEBI registered intermediary to
     underwrite the issues to the extent of “net offer to the public”.

(6) The BRLM is entitled to remuneration for conducting the Book Building
      process.

(7) The copy of the draft prospectus may be circulated by the BRLM to the
       institutional investors as well as to the syndicate members.

(8) The syndicate members create demand and ask each investor for the number
       of shares and the offer price.

(9) The BRLM receives the feedback about the investor’s bids through syndicate
       members.

(10) The prospective investors may revise their bids at any time during the bid
        period.

(11) The BRLM on receipts of the feedback from the syndicate members about
        the bid price and the quantity of shares applied has to build up an order
        book showing the demand for the shares of the company at various prices.
       The syndicate members must also maintain a record book for orders
        received from institutional investors for subscribing to the issue out of the
         placement portion.

(12) On receipts of the above information, the BRLM and the issuer company
        determine the issue price. This is known as the market-clearing price.

(13) The BRLM then closes the book in consultation with the issuer company and

        determine the issue size of (a) placement portion and (b) public offer portion.

(14) Once the final price is determined, the allocation of securities should be
       made by the BRLM based on prior commitment, investor’s quality, price
       aggression, earliness of bids etc. The bid of an institutional bidder, even if he
       has paid full amount may be rejected without being assigned any reason as
       the Book Building portion of institutional investors is left entirely at the
      discretion of the issuer company and the BRLM.

 (15) The Final prospectus is filed with the registrar of companies within 2 days of
        determination of issue price and receipts of acknowledgement card from
        SEBI.

(16) Two different accounts for collection of application money, one for the
        private placement portion and the other for the public subscription should be
       opened by the issuer company.

(17) The placement portion is closed a day before the opening of the public issue
        through fixed price method. The BRLM is required to have the application
        forms along with the application money from the institutional buyers and the
       underwriters to the private placement portion.

(18) The allotment for the private placement portion shall be made on the 2nd
       day from the closure of  the issue and the private placement portion is ready
        to be listed.

(19) The allotment and listing of issues under the public portion (i.e. fixed price
        portion) must be as per the existing statutory requirements.

(20) Finally, the SEBI has the right to inspect such records and books which are
      maintained by the BRLM and other intermediaries involved in the Book
      Building process

SEBI’s regulatory framework on book building process

• The Book Building guidelines were first introduced by SEBI in 1995 (clarification XIII, dated 12.10.95) for optimum price discovery of corporate securities. The SEBI, from time to time modifies the guidelines in order to upgrading the existing mechanism.

• The SEBI in its press release dated 7th September, 1998 prescribed the fresh guidelines for book building mechanism after thorough modification and it was again modified in  2001(Circular No.2, dated 6.12.2001) and 2003(Circular No. 11, dated 14.08.2003).

• According to the SEBI, a public issue through Book Building route should consist of two portions:

                                            (a) the Book Building portion and

                                             (b) the fixed price portion.

• The fixed price portion is conducted like normal public issues (conventionally followed earlier) after the book built portion during which the issue price is fixed after the bid closing date.

• Basically, an issuer company proposing to issue capital through book building shall comply with the guidelines prescribed by SEBI.

• However, the main theme of SEBI guidelines regarding book building can be presented at a glance in the following manner:

(1) 75% Book Building process Under this process 25% of the issue is to be sold at a fixed price and the balance 75% through the Book Building process.

(2) Offer to public through Book building process The process specifies that an issuer company may make an issue of securities to the public through prospectus in the following manner:

(i) 100% of the net offer to the public through book building process 

(ii) 75% of the net offer to the public through book building process and 25% of the net offer to the public at the price determined through book building process

• The net offer to the public, under this process shall be fully underwritten by the syndicate members/book running lead managers.
• The syndicate members are to enter into an underwritten agreement with the BRLMs indicating the number of securities which they would like to subscribe at the pre-determined price and BRLMs shall in turn enter into an underwritten agreement with the issuer company.
• If the syndicate members are not able to fulfill their underwritten obligations, the BRLMs shall be responsible for bringing in the amount involved. The bid remains open for at least five days. The date of opening as well as closing of the bidding, the names and addresses of BRLMs, syndicate members, bidding terminals for accepting the bids must be mentioned in the advertisement.

Recent book building issues in India

• The practice of book building is new to the Indian capital market and the procedure is still evolving. ICICI first used Book Building method for its Rs. 1000 crore bond issue in April 1996 followed by Rs. 4323 crore Larsen & Toubro issue and Rs. 5878 crore TISCO bond issue for the placement portion.

• The issue of Hughes Software made history in more ways than one. It was the first Indian IPO in IT industries to adopt the “Book-Building” process.

• In November 1999 when another issue like HCL technologies, introduced the IPO by Book Building method, investors gave an enthusiastic response. The issue got oversubscribed 27 times. This was despite the fact that the company revised its original price band of Rs.450-540 to Rs. 500-580. The final price offered was Rs. 580 for the shares.

• Other companies accepted the book building mechanism were Shree Rama Multi Tech Ltd., Zydus Cadila Healthcare Ltd., Mascot Systems Ltd., Creative Eye Ltd., MosChip Semiconductor Technology Ltd., SIP Technologies and Exports Ltd., Hughes Tele. Com India Ltd., MRO TEK Ltd., Pritish Nandy communications Ltd., Balaji Telefilms Ltd., AZTEC Software & Technology Services Ltd, Mid-Day Multimedia Ltd, D-Link(India) Ltd.

Criticism on book building mechanism

• Retail investors are not free from certain disadvantages compared to institutional investors in Book Building, which still does not provide to the retail investors an appropriate price discovery mechanism. They are forced to apply at cut-off price.

• Book Building process which aims at fair pricing of the issue is impacted because a floor price is fixed for the Book Building below which no bid can be accepted.

• Since investors participate through Book Building process in making fair pricing of IPOs where there is no ceiling price, there should not be any floor price.

• It is the main reason why small investors have stayed away from the market. It needs changes to make it more suitable to the Indian context and the conditions prevailing in the Indian capital market.

• If small investors still stay away from the IPOs, it is because of their unpleasant experience in the mid-1990s—a process that actually continued till 1998, albeit on a smaller scale and the IPO scam further dampened the process.

• In the IPOs through the Book-Building route the process of allotting 50% to QIBs leaves very little for the retail investors. Interestingly, the primary advisory markets of SEBI has recommended that QIBs limit should be reduced to 40 per cent due to thin interest and enhance the share for retail investors.

• Of late, more and more public issues are using the Book-Building route, which would result in a progressively smaller amount being allotted for small investors.

• In other words, the small investor who is sometimes described in a flattering manner as the ‘backbone’ of the bourses, has in effect been driven out of the capital markets not so much on account of their lack of interest but because of the policy framework. This, in turn, has led to other problems — a low public float makes it easier for promoters to manipulate prices and also leads to lack of liquidity.

• It is heard that small investors are not just uninterested but also lack resources. Both these contentions are incorrect. Say for instance, a study of four IPOs issued by banks during 2002 reveals that in three out of the four instances, small investors subscribed to more than three-fourths of the total issue despite the prevalence of bearish and nervous sentiments in the markets.
• Actually, vanishing companies and scamsters galore have shattered the confidence of small investors. Yet it is also clear that it would be unrealistic to expect the stock markets to revive or remain healthy without the active participation of small investors.
• In addition to this, unlike international market, India has not reached the stage of development of the institutional framework to experiment with the book building process because retail investors (i.e. individual investors) are still now an integral part of Indian capital market. If the interests of the small investors are not safeguarded appropriately, this may be very dangerous to the primary capital market.
• It can be concluded that although the book building mechanism in Indian capital market has not arrived with expected success but Indian capital market will also move, like international capital market, with sufficient success through Book Building process provided that lead merchant bankers (i.e. BRLMs), issuer company, regulators (i.e. SEBI), and investors all discharge there responsibility to the best interest of the investors.

7.Green Shoe Option in an IPO

• Green Shoe Option is the option to exercise over subscription applicable  in the issue securities –Equities [shares] and Debt [bonds and debentures
• For example in the case of bond issue if company’s offer document state that the size of the issue – say 8% (annual coupon) 5 yr secured redeemable bonds with face value of Rs 1000 each – is Rs 500 cr with a green shoe option of Rs 100 cr then if the issue is subscribed say for Rs 700 cr the company if needed will be able to retain issue bonds upto Rs 600 cr
• In the case of an equity IPO the application of green shoe option is essentially as a price stabilizing mechanism post listing
•  It is experienced that IPO through Book Building method in India turns out to be overpriced or under priced after their listing of them and ultimately the small investors become a net looser.

• If the IPO is overpriced it creates a bad feeling in investor’s mind as initial returns to them may be negative at that point of time.

• On the other side, if the prices in the open market fall below the issue price, small investors may start selling their securities to minimize losses.

• Therefore, there was a vital need of a market stabilizer to smoothen the swings in the open market price of a newly listed share, after an initial public offering.

• Market stabilization is the mechanism by which stabilizing agent acts on behalf of the issuer company, buys a newly issued security for the limited purpose of preventing a declining in the new security’s open market price in order to facilitate its distribution to the public.

• It can prevent the IPO from huge price fluctuations and save investors from potential loss.

• Such mechanism is known as Green Shoe Option (GSO) which is an internationally recognized for market stabilization. It owes its origin to the Green Shoe Company which used this option for the first time throughout the World

• In a company prospectus the legal term for the greenshoe is "over-allotment option", because in addition to the shares originally offered, shares are set aside for underwriters.

•  This type of option is the only means permitted by SEBI for an underwriter to legally stabilize the price of a new issue after the offering price has been determined.

• SEBI introduced this option in order to enhance the efficiency and competitiveness of the fundraising process for IPOs
  
  
• GSO can rectify the demand and supply imbalances and can stabilize the price of the stock..

• Recently, ICICI Bank has, perhaps, used Green Shoe Option in first time in case of its public issue through the book building mechanism in India.

• As such, such important mechanism i.e.GSO in the system of initial public offerings (IPOs) using book building method was recognised by SEBI in India through its new guidelines on 14.08.2003(vide SEBI/CFD/DIL/DIP/Circular No.11).

• In case an initial public offer of equity shares is made by an issuer company through the book building mechanism, the Green Shoe option (GSO) can be used by such company for stabilizing the post listing price of its shares, subject to the guidelines prescribed by SEBI.

• According to SEBI guidelines, “a company desirous of availing the GSO shall in the resolution of the general meeting authorizing the public issue, seek authorization also for the possibility of allotment of further shares to the ‘stabilizing agent’ (SA).

• The company shall appoint one of the lead book runners, amongst the issue management team, as the “stabilizing agent” (SA), who will be responsible for the price stabilization process, if required.

• The SA shall enter into an agreement with the issuer company, prior to filing of offer document with SEBI, clearly stating all the terms and conditions relating to this option including fees charged / expenses to be incurred by SA for this purpose.

• The SA shall also enter into an agreement with the promoter(s) who will lend their shares, specifying the maximum number of shares that may be borrowed from the promoters, which shall not be in excess of 15% of the total issue size.

• The stabilization mechanism shall be available for the period disclosed by the company in the prospectus, which shall not exceed 30 days from the date when trading permission was given by the exchange(s)”.

 

4. Securities trading, clearing and settlement systems

• Once trades are negotiated on regulated markets or over the counter, the relating securities are processed by post-market infrastructures, that ensure both the delivery and payment of securities.
• Three steps feature the securities processing chain: negotiation, clearing and settlement.
• Whereas the clearing house computes a net position for each of operator and guarantees the performance of transactions by becoming the single and central counterparty of the buyer and the seller, the delivery and payment of securities is ensured by the securities settlement system.

Securities processing chain for purchase of securities

• Trades on the regulated market are cleared through the clearing house.
• Only some of the OTC trades go through the clearing house.
• Trades on the regulated market are cleared through the clearing house.
• Only some of the OTC trades go through the clearing house.
• The clearing house:

• Computes each participants net position by netting its offsetting transactions
• Guarantees performance on transactions by acting as the sole counterparty for sellers and  buyers
• Conducts multilateral netting of participants positions

• The securities settlement system provides delivery versus payment and eliminates principal risk
• The settlement bank holds the cash accounts
• The central securities depository holds the securities accounts. The securities are recorded on the investors account with the custodian. The custodian administers the events relating to securities holdings.

Clearing systems

• After negotiation, clearing is the second step in the securities processing chain.
• Clearing houses generally ensure the following functions:
• Recording the trades processed by the trading system in the clearing system, computing clearing participants. net positions,
• Applying adequate risk management measures with regard to participants. positions,
• Ensuring novation by substituting itself to sellers and buyers and taking on their respective obligations, and
• Transferring net orders to securities settlement systems.

Securities settlement systems

• The settlement function is the last step in the securities processing chain.
• It involves the settlement of the reciprocal obligations of trades, counterparties, and the accounting registration that ensures the finality of transactions, i.e. the delivery of securities to the buyer and the payment of the securities price to the seller.
• Delivery versus payment (DVP) ensures that securities are delivered if and only if the price of the securities is paid, and vice versa.
• Generally, securities settlement systems are operated by a central securities depository (CSD), which ensures notary functions as regards the issuance of publicly traded securities and enables securities transactions by means of book entries.

5.Trading, clearing and settlement systems in BSE and NSE

BSE’s trading and settlement procedure

• BSE has initiated a number of measures aimed at providing quality products and services and expanding its network using cutting edge information technology.

• BSE made its transition from an 'outcry' system of trading to a completely electronic trading system 5 years ago

• BSE’s electronic trading system is BOLT (BSE On Line Trading) with the following facilities:

9. This is an order driven facilitates efficient processing; automatic order matching and faster execution is enabled

10. Trading system displays on a continuous basis scrip and market-related information required supporting traders. (Information includes best five bids and offers, last traded quantity and price, total buy and sell depth (irrespective of rates), open, high, low and close price, total number of trades, volume and value, and index movement. Other company-related information is also displayed)

11. As soon as an order is matched, the confirmation of the trade is generated on-line.

12. The order matching logic is based on best price and time priority.

13. The BOLT has a capacity of conducting 2 million trades per day and the latest state of the art technology infrastructure with Trader Work Stations located in more than 400 cities all over the country.

14. Trading on the BOLT system is conducted from Monday to Friday between 9: 30 a.m. and 3:30 p.m.

15. Trading can also be conducted through the BSE Internet Trading System - www.bsewebx.com the first Exchange enabled Internet Trading System.

16. BSE aims to provide trading anywhere and at anytime in mind and the exchange continuously upgrades the hardware, software and networking systems so as to enable it to enhance the quality and standards of service to its members and other market intermediaries.

Clearing and settlement at BSE

• The settlement of transactions was earlier done in the weekly settlement environment, where the exchange had a carry forward facility.
• The exchange commenced exchange of trades on rolling basis where the trades are settled on T+ 2 basis.
• Undelivered quantities of securities in settlement is promptly auctioned or closed out as per the well-laid procedure.
• Two depositories, namely the Central Depository Services (India) Ltd. and National Securities Depository of India Ltd. operate in the Indian Market place. The Clearing House of the exchange has well- structured linkages with both the depositories.
• Direct transfer of securities to and from the Beneficial Owner Accounts is facilitated at the Clearinghouse level only, making for the seamless movement of securities in the settlement system.
• The settlement of transactions in the depositories mode is based on the ISIN codes of the securities. The exchange Rules, Bylaws and regulations have clearly laid down the default handling procedure.

Trading systems at NSE

• The NSE provides a facility for screen based trading with order matching facility.
• The members are connected from their respective offices at dispersed locations to the main system at the NSE premises through a high- speed efficient satellite telecommunication network.
• The trading system is an order driven, automated order matching system which does not reveal the identity of parties to an order or a trade.
• This helps orders whether large or small to be placed without the members being disadvantaged by disclosure of their identity.
• Orders are matched automatically by the computer keeping the system transparent, objective and fair. Where an order does not find a match it remains in the system and is displayed to the whole market, till a fresh order which matches, comes in or the earlier order is cancelled or modified.
• The trading system provides tremendous flexibility to the users in terms of the type of orders that can be placed on the system.
• Several time related, price related or volume related conditions can easily be placed on an order.
• The trading system also provides complete on-line market information through various inquiry facilities
• The trading system recognizes three types of users Trader, Privileged and Inquiry. Trading Members can have all the three user types whereas Participants are allowed privileged and inquiry users only.
• The user-id of a trader gives access for entering orders or trades on the trading system. The privileged user has the exclusive right to set up counter party exposure limits. The Inquiry user can only view the market information and set up the market watch screen but cannot enter orders or trade or set up exposure limits.
• The trades in the NSE trading system can be executed in the continuos or the negotiated market.
• In the continuous market, orders entered by the trading members are matched by the trading system. For each order entering the trading system, the system scans for a probable match in the order books. On finding a match, a trade takes place.
• In a negotiated order, two parties enter into a contract with each other according to their terms and conditions. Unlike a continuos order, it is a contract entered into between those two parties only. The buyer and seller know each other and the contract is entered into at mutual understable terms and conditions.
• Orders are matched on the basis of price-time priority. For non-repo trades, the best buy order is the one with the highest buy price and the best sell order is the one with the lowest sell price.
• Orders are matched automatically by the trading system based on passive order price. In case of repo trades, the best buy order is one with the lowest buy rate and the best sell order is one with the highest sell rate. The trade rate is based on passive order rate.
  
  NSE SGL a/c facility for constituents

• SGL stands for ‘Subsidiary General Ledger’ accounts. 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 funds 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 RBI 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 loose 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 SCCL vide its letter PDO.SGL.07.18.21/ 97/98 dated March 30, 1998. SCCL is also taking steps to setup a common clearing and settlement framework for its SGL constituents. This endeavor will help the market to have uniform settlement procedures and will help evolve the market to a higher plane.
  
  
  

Settlement on NSE

• Primary responsibility of settling trades concluded in the WDM segment rests directly with the participants and the exchange monitors the settlements.
• Trades are settled gross, i.e. on trade for trade basis directly between the  constituents/participants to the trade and not through any Clearing House mechanism. Thus, each transaction is settled individually and netting of transactions is not allowed.
• Settlement is on a rolling basis, i.e. there is no account period settlement.
•  Each order has a unique settlement date specified upfront at the time of order entry and used as a matching parameter. It is mandatory for trades to be settled on the predefined settlement date.
• The Exchange currently allows settlement periods ranging from same day (T+0) settlement to a maximum of six working days (T+5).
• On the scheduled settlement date, the Exchange provides data/information to the respective member/participant regarding trades to be settled on that day with details like security, counterparty and consideration.
• Government securities including treasury bills are settled by the participants through their Subsidiary General Ledger (SGL) account (a book entry settlement system) with RBI or through exchange of physical certificates. Other instruments are settled through delivery of physical securities.
• The required settlement details, i.e. certificate no., SGL form no., Cheque no., constituent etc. are reported by the member/participant to the Exchange. In case of Repo trades the settlement details of the forward leg is also reported.
• The exchange closely monitors the settlement of transactions through the reporting of settlement details by members and participants.
• In case of deferment of settlement or cancellation of trade, participants are required to seek prior approval from the Exchange.
• For any dispute arising in respect of the trades or settlement, the exchanges has established arbitration mechanism for resolving the same

6.Clearing Corporation of India Ltd.[CCIL]:

• The setting-up of CCIL an unique institution marks a new era in the
   annals of India's financial services industry
• CCIL is Incorporated as India's first clearing house for settlement of market trades in Government Securities and inter-bank foreign exchange transactions
• CCIL has been promoted by SBI,IDBI, LIC, ICICI, BOB and HDFC Bank to address the need for an integrated clearing and settlement system for debt and forex transactions.

• CCIL was set up in April, 2001 for providing exclusive clearing and settlement for  transactions in Money, GSecs and Foreign Exchange

• The prime objectives of CCIL are to:

§  improve efficiency in the transaction settlement process

§  insulate the financial system from shocks emanating from operations related issues

§  to undertake other related activities to help broaden and deepen the money, debt and  forex markets in the country

• CCIL commenced operations with the clearing and settlement of trades in government securities from February 15, 2002, CCIL  commenced with the clearing and settlement of inter-bank spot and forward US Dollar-Indian Rupee (USD-INR) trades from November 8, 2002
• The clearinghouse structure of CCIL is designed to localize risks by preventing the contagion from spreading from a failed counter party to others
• Savvy market players in the debt, money and forex markets now have new opportunities to profit from the markets by deliberately assuming risks
• CCIL offer superior risk management systems and enable participants to manage their risks adequately

• The clearinghouse structure of CCIL is designed to localize risks by preventing the  contagion from spreading from a failed counter party to others

• CCIL  provide institutional structure to support and facilitate the clearing and settlement of  trades across different markets viz., G-Secs, forex and money markets

• The facility of centralized clearing and settlement offered by CCIL is of great advantage  especially to non-bank players in the call & money market

• CCIL's assurance that trades entrusted to it will get settled on the settlement day will provide much-needed comfort to market participants
• All trades in the securities settlement routed through CCIL through netting by Novation [a process where the bilateral relationship between two participants/members is  substituted with bilateral contracts between each participant/member & CCIL]

§  The clearing and settlement system has the following features:

• Membership Risk management,
• Collateral management,
• Clearing of trades Settlement of trade obligations,
• Shortage handling   and
• Financial Accounting
• CCIL brings the following tangible benefits:
• Improved efficiency
• Easier reconciliation of accounts with the counter parties
• Lower operational cost to the participating banks
• Assurance of settlement on the settlement date 
• Reduction in counter party exposure.
• Operational efficiency
• Improved liquidity
• Better leveraging (e.g., shorter holding periods for government securities)

§  The achievements of CCIL are as listed below:

§  Commenced operations in 2002 when the Negotiated Dealing System (NDS) of  RBI went live

§  Started providing the settlement of forex transactions since  2002

§  Launched the Collateralized Borrowing and Lending Obligation (CBLO) in 2003,   a money market product based on Gilts as collaterals

§  Developed & launched a forex trading platform “FX-CLEAR”  in 2003

§  Started the settlement of cross-currency deals through the CLS Bank from 2005

§  Developed and currently manages the NDS-OM and NDS- CALL electronic trading platforms for trading in the government securities and call money & the NDS- Auction module for Treasury Bills auction by RBI

§  Introduced many innovative products/tools like Zero Coupon Yield Curve
 [ZCYC], Bond and T-Bills indices, Sovereign Yield Curve, Benchmark reference rates like CCIL-MIBOR/MIBID and CCBOR/CCBID, etc

§  Released Sovereign Bond Indices, CCIL BROAD GILTS INDEX, Consisting of  top 20 securities and CCIL LIQUID GILTS INDEX, consisting of the 5 most liquid bonds, to track the movement of the government securities market

§  Released T-Bill Index consisting of two T-bill indices – CCIL EQUAL WEIGHT T-   Bills INDEX and CCIL LIQUIDITY WEIGHT T-Bills INDEX. The CCIL T-Bills Indices as instruments to capture the market movement in the short term maturity segment

§  Commenced net settlements in Government Securities as per DVP III Guidelines  of Reserve Bank of India.

§  Operationalised “Straight Through Processing” arrangement  for settlement of foreign exchange trades done on FXCLEAR

§  Operationalised Anonymous Auction System to facilitate Buy Back of Government  Securities by Government of India

§  Launched Overnight Collateralized Benchmark Reference Rates for Indian  market, namely CCIL Collateralized Benchmark Bid Rate (CCBID) and CCIL Collateralized Benchmark Offer Rate (CCBOR). The rates are disseminated at 10:10  A.M

§  Finalised in consultation with market users, the business model, including the risk management processes, for settlement of OTC trades in Rupee Derivative Products  (Interest Rate Swaps and Forward Rate Agreements)

§  Regularly comes out with many publications for the benefit of the market participants

§  Set up a wholly owned Subsidiary Company Clearcorp Dealing Systems (India)  Pvt. Ltd to manage dealing platforms in Money and Currency Markets

§  Received the ISO/IEC 27001:2005 certification from M/s Det Norsk Veritas in 2006 for securing its information assets

§  The Depository Trust & Clearing Corporation (DTCC) and CCIL have signed a   Memorandum of Understanding (MOU) aimed at promoting closer collaboration between the two market infrastructure organizations

7.Collateralized borrowing and lending obligation (CBLO) system:

• Collateralized Borrowing and Lending Obligation (CBLO) is a money market instrument  as approved by RBI and became operational in 2004
• CBLO is a product developed by CCIL for the benefit of the entities who have either been phased out from inter bank call money market or have been given restricted participation in terms of ceiling on call borrowing and lending transactions and who do not have access to the call money market
• To expand the depth of the debt market in India, CCIL has provided a trading platform to the market participants for undertaking collateralized borrowing and lending by offering repoable securities and bonds as collateral

• What is CBLO?:

§  It is a discounted instrument available in electronic book entry form for the maturity  period ranging from one day to ninety Days (can be made available up to one year as per RBI guidelines).

§  It is an obligation by the borrower to return the money borrowed, at a specified future date

§  It is an authority to the lender to receive money lent, at a specified future date with an option/privilege to transfer the authority to another person for value received

§  It is an underlying charge on securities held in custody (with CCIL) for the amount borrowed/lent.

• Membership to CBLO segment is extended to entities who are RBI- NDS members viz  Nationalized Banks, Private Banks, Foreign Banks, Co-operative Banks, Financial Institutions, Insurance Companies, Mutual Funds, Primary Dealers etc

• Associate Membership to CBLO segment is extended to entities who are not members of RBI- NDS viz. Co-operative Banks, Mutual Funds, Insurance companies, NBFC's,  Corporates, Provident/ Pension Funds etc.

• Eligible securities are Central Government securities including Treasury Bills, as specified by CCIL from time to time.

•  In order to enable the market participants to borrow and lend funds, CCIL provides the  Dealing System through:
• Indian Financial Network (INFINET), a closed user group to the Members of the Negotiated Dealing System (NDS) who maintain Current account with RBI
• Internet gateway for other entities who do not maintain Current account with RBI

• The scope of the CBLO trading system initiative consists of trading and clearing and settlement activities for market participants engaged in transactions of short-term collateralized borrowing and lending obligation

• The key features of the CBLO trading system:

•        Order management

•        Trade management

•        Risk management

•        Market information

•         Position monitoring

•        Query management

§  By providing the CBLO trading system, CCIL has achieved the following
objectives:

      

§  Enhancing the depth of the market through wider participation by corporate, MFs, trusts etc.

§  Facilitating easy liquidity in the repo market

§  Providing non-bank entities suitable opportunities for short-term investment (other than call money market)

§  Reduce the counter-party and default risk by ensuring suitable settlement mechanism

§  Elimination of market inefficiency in short-term borrowing and lending

§  Development of market-oriented short-term reference rate for inter-bank transact