What are Derivatives (F&O)?
The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities.
With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the definition of Securities. The term Derivative has been defined in Securities Contracts (Regulations) Act, as:-
A Derivative includes: -
a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
a contract which derives its value from the prices, or index of prices, of underlying securities;
What is a Futures Contract?
Futures Contract means a legally binding agreement to buy or sell the underlying security on a future date. Future contracts are the organized/standardized contracts in terms of quantity, quality (in case of commodities), delivery time and place for settlement on any date in future. The contract expires on a pre-specified date which is called the expiry date of the contract. On expiry, futures can be settled by delivery of the underlying asset or cash. Cash settlement enables the settlement of obligations arising out of the future/option contract in cash.
What is an Option contract?
Options Contract is a type of Derivatives Contract which gives the buyer/holder of the contract the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within or at end of a specified period. The buyer / holder of the option purchases the right from the seller/writer for a consideration which is called the premium. The seller/writer of an option is obligated to settle the option as per the terms of the contract when the buyer/holder exercises his right. The underlying asset could include securities, an index of prices of securities etc.
Under Securities Contracts (Regulations) Act,1956 options on securities has been defined as "option in securities" meaning a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities.
An Option to buy is called Call option and option to sell is called Put option. Further, if an option that is exercisable on or before the expiry date is called American option and one that is exercisable only on expiry date, is called European option. The price at which the option is to be exercised is called Strike price or Exercise price.
Therefore, in the case of American options the buyer has the right to exercise the option at anytime on or before the expiry date. This request for exercise is submitted to the Exchange, which randomly assigns the exercise request to the sellers of the options, who are obligated to settle the terms of the contract within a specified time frame.
As in the case of futures contracts, option contracts can be also be settled by delivery of the underlying asset or cash. However, unlike futures cash settlement in option contract entails paying/receiving the difference between the strike price/exercise price and the price of the underlying asset either at the time of expiry of the contract or at the time of exercise / assignment of the option contract.
What are Index Futures and Index Option Contracts?
Futures contract based on an index i.e. the underlying asset is the index, are known as Index Futures Contracts. For example, futures contract on NIFTY Index and BSE-30 Index. These contracts derive their value from the value of the underlying index.
Similarly, the options contracts, which are based on some index, are known as Index options contract. However, unlike Index Futures, the buyer of Index Option Contracts has only the right but not the obligation to buy / sell the underlying index on expiry. Index Option Contracts are generally European Style options i.e. they can be exercised / assigned only on the expiry date.
An index, in turn derives its value from the prices of securities that constitute the index and is created to represent the sentiments of the market as a whole or of a particular sector of the economy. Indices that represent the whole market are broad based indices and those that represent a particular sector are sectoral indices.
In the beginning futures and options were permitted only on S&P Nifty and BSE Sensex. Subsequently, sectoral indices were also permitted for derivatives trading subject to fulfilling the eligibility criteria. Derivative contracts may be permitted on an index if 80% of the index constituents are individually eligible for derivatives trading. However, no single ineligible stock in the index shall have a weightage of more than 5% in the index. The index is required to fulfill the eligibility criteria even after derivatives trading on the index has begun. If the index does not fulfill the criteria for 3 consecutive months, then derivative contracts on such index would be discontinued.
By its very nature, index cannot be delivered on maturity of the Index futures or Index option contracts therefore, these contracts are essentially cash settled on Expiry.
Why mini derivative contract?
The minimum contract size for the mini derivative contract on Index (Sensex and Nifty) is Rs. 1 lakh at the time of its introduction in the market. The lower minimum contract size means that smaller investors are able to hedge their portfolio using these contracts with a lower capital outlay. This means a better hedge for portfolio, and also results in more liquidity in the market.
Why longer dated index options?
Longer dated derivatives products are useful for those investors who want to have a long term hedge or long term exposure in derivative market. The premiums for longer term derivatives products are higher than for standard options in the same stock because the increased expiration date gives the underlying asset more time to make a substantial move and for the investor to make a healthy profit. Presently, longer dated options on Sensex and Nifty with tenure of upto 3 years are available for the investors.
What is Bond Index?
A bond index is used to measure the performance of bond markets. The index is used as a benchmark against which investment managers measure their performance. It is also used as a measure to compare the performance of different asset classes. The government bond market is the most liquid segment of the bond market.
What is Volatility Index?
Volatility Index is a measure of expected stock market volatility, over a specified time period, conveyed by the prices of stock / index options. It depicts the collective sentiment of the market on the implied future volatility.
What is the structure of Derivative Markets in India?
Derivative trading in India takes can place either on a separate and independent Derivative Exchange or on a separate segment of an existing Stock Exchange. Derivative Exchange/Segment function as a Self-Regulatory Organisation (SRO) and SEBI acts as the oversight regulator. The clearing & settlement of all trades on the Derivative Exchange/Segment would have to be through a Clearing Corporation/House, which is independent in governance and membership from the Derivative Exchange/Segment.
What are the various membership categories in the equity derivatives market?
The various types of membership in the derivatives market are as follows:
Trading Member (TM) ? A TM is a member of the derivatives exchange and can trade on his own behalf and on behalf of his clients.
Clearing Member (CM) ?These members are permitted to settle their own trades as well as the trades of the other non-clearing members known as Trading Members who have agreed to settle the trades through them.
Self-clearing Member (SCM) ? A SCM are those clearing members who can clear and settle their own trades only.
What are the requirements to be a member of the equity derivatives exchange/ clearing corporation?
Balance Sheet Networth Requirements: SEBI has prescribed a networth requirement of Rs. 3 crores for clearing members. The clearing members are required to furnish an auditor's certificate for the networth every 6 months to the exchange. The networth requirement is Rs. 1 crore for a self-clearing member. SEBI has not specified any networth requirement for a trading member.
Liquid Networth Requirements: Every clearing member (both clearing members and self-clearing members) has to maintain atleast Rs. 50 lakhs as Liquid Networth with the exchange / clearing corporation.
Certification requirements: The Members are required to pass the certification programme approved by SEBI. Further, every trading member is required to appoint atleast two approved users who have passed the certification programme. Only the approved users are permitted to operate the derivatives trading terminal.
What are requirements for a Member with regard to the conduct of his business?
The derivatives member is required to adhere to the code of conduct specified under the SEBI Broker Sub-Broker regulations. The following conditions stipulations have been laid by SEBI on the regulation of sales practices:
Sales Personnel: The derivatives exchange recognizes the persons recommended by the Trading Member and only such persons are authorized to act as sales personnel of the TM. These persons who represent the TM are known as Authorised Persons.
Know-your-client: The member is required to get the Know-your-client form filled by every one of client.
Risk disclosure document: The derivatives member must educate his client on the risks of derivatives by providing a copy of the Risk disclosure document to the client.
Member-client agreement: The Member is also required to enter into the Member-client agreement with all his clients.
Which derivative contracts are permitted by SEBI?
Derivative products have been introduced in a phased manner starting with Index Futures Contracts in June 2000. Index Options and Stock Options were introduced in June 2001 and July 2001 followed by Stock Futures in November 2001. Sectoral indices were permitted for derivatives trading in December 2002. Interest Rate Futures on a notional bond and T-bill priced off ZCYC have been introduced in June 2003 and exchange traded interest rate futures on a notional bond priced off a basket of Government Securities were permitted for trading in January 2004. During December 2007 SEBI permitted mini derivative (F&O) contract on Index (Sensex and Nifty). Further, in January 2008, longer tenure Index options contracts and Volatility Index and in April 2008, Bond Index was introduced. In addition to the above, during August 2008, SEBI permitted Exchange traded Currency Derivatives.
What is the eligibility criteria for stocks on which derivatives trading may be permitted?
A stock on which stock option and single stock future contracts are proposed to be introduced is required to fulfill the following broad eligibility criteria:-
The stock shall be chosen from amongst the top 500 stock in terms of average daily market capitalisation and average daily traded value in the previous six month on a rolling basis.
The stock?s median quarter-sigma order size over the last six months shall be not less than Rs.1 Lakh. A stock?s quarter-sigma order size is the mean order size (in value terms) required to cause a change in the stock price equal to one-quarter of a standard deviation.
The market wide position limit in the stock shall not be less than Rs.50 crores.
A stock can be included for derivatives trading as soon as it becomes eligible. However, if the stock does not fulfill the eligibility criteria for 3 consecutive months after being admitted to derivatives trading, then derivative contracts on such a stock would be discontinued.
What is the lot size of contract in the equity derivatives market?
Lot size refers to number of underlying securities in one contract. The lot size is determined keeping in mind the minimum contract size requirement at the time of introduction of derivative contracts on a particular underlying.
For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum contract size is Rs.2 lacs, then the lot size for that particular scrips stands to be 200000/1000 = 200 shares i.e. one contract in XYZ Ltd. covers 200 shares.
What is corporate adjustment?
The basis for any adjustment for corporate action is such that the value of the position of the market participant on cum and ex-date for corporate action continues to remain the same as far as possible. This will facilitate in retaining the relative status of positions viz. in-the-money, at-the-money and out-of-the-money. Any adjustment for corporate actions is carried out on the last day on which a security is traded on a cum basis in the underlying cash market. Adjustments mean modifications to positions and/or contract specifications as listed below:
Strike price
Position
Market/Lot/ Multiplier
The adjustments are carried out on any or all of the above based on the nature of the corporate action. The adjustments for corporate action are carried out on all open, exercised as well as assigned positions.
The corporate actions are broadly classified under stock benefits and cash benefits. The various stock benefits declared by the issuer of capital are:
Bonus
Rights
Merger/ demerger
Amalgamation
Splits
Consolidations
Hive-off
Warrants, and
Secured Premium Notes (SPNs) among others
The cash benefit declared by the issuer of capital is cash dividend.
What is the margining system in the equity derivatives market?
Two type of margins have been specified -
Initial Margin - Based on 99% VaR and worst case loss over a specified horizon, which depends on the time in which Mark to Market margin is collected.
Mark to Market Margin (MTM) - collected in cash for all Futures contracts and adjusted against the available Liquid Networth for option positions. In the case of Futures Contracts MTM may be considered as Mark to Market Settlement.
Dr. L.C Gupta Committee had recommended that the level of initial margin required on a position should be related to the risk of loss on the position. The concept of value-at-risk should be used in calculating required level of initial margins. The initial margins should be large enough to cover the one day loss that can be encountered on the position on 99% of the days. The recommendations of the Dr. L.C Gupta Committee have been a guiding principle for SEBI in prescribing the margin computation & collection methodology to the Exchanges. With the introduction of various derivative products in the Indian securities Markets, the margin computation methodology, especially for initial margin, has been modified to address the specific risk characteristics of the product. The margining methodology specified is consistent with the margining system used in developed financial & commodity derivative markets worldwide. The exchanges were given the freedom to either develop their own margin computation system or adapt the systems available internationally to the requirements of SEBI.
A portfolio based margining approach which takes an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in all Derivative Contracts i.e. Index Futures, Index Option, Stock Options and Single Stock Futures, has been prescribed. The initial margin requirements are required to be based on the worst case loss of a portfolio of an individual client to cover 99% VaR over a specified time horizon.
The Initial Margin is Higher of
(Worst Scenario Loss +Calendar Spread Charges)
Short Option Minimum Charge
The worst scenario loss are required to be computed for a portfolio of a client and is calculated by valuing the portfolio under 16 scenarios of probable changes in the value and the volatility of the Index/ Individual Stocks. The options and futures positions in a client?s portfolio are required to be valued by predicting the price and the volatility of the underlying over a specified horizon so that 99% of times the price and volatility so predicted does not exceed the maximum and minimum price or volatility scenario. In this manner initial margin of 99% VaR is achieved. The specified horizon is dependent on the time of collection of mark to market margin by the exchange.
The probable change in the price of the underlying over the specified horizon i.e. ?price scan range?, in the case of Index futures and Index option contracts are based on three standard deviation (3s ) where ?s ? is the volatility estimate of the Index. The volatility estimate ?s ?, is computed as per the Exponentially Weighted Moving Average methodology. This methodology has been prescribed by SEBI. In case of option and futures on individual stocks the price scan range is based on three and a half standard deviation (3.5 s) where ?s? is the daily volatility estimate of individual stock.
If the mean value (taking order book snapshots for past six months) of the impact cost, for an order size of Rs. 0.5 million, exceeds 1%, the price scan range would be scaled up by square root three times to cover the close out risk. This means that stocks with impact cost greater than 1% would now have a price scan range of - Sqrt (3) * 3.5s or approx. 6.06s. For stocks with impact cost of 1% or less, the price scan range would remain at 3.5s.
For Index Futures and Stock futures it is specified that a minimum margin of 5% and 7.5% would be charged. This means if for stock futures the 3.5 s value falls below 7.5% then a minimum of 7.5% should be charged. This could be achieved by adjusting the price scan range.
The probable change in the volatility of the underlying i.e. ?volatility scan range? is fixed at 4% for Index options and is fixed at 10% for options on Individual stocks. The volatility scan range is applicable only for option products.
Calendar spreads are offsetting positions in two contracts in the same underlying across different expiry. In a portfolio based margining approach all calendar-spread positions automatically get a margin offset. However, risk arising due to difference in cost of carry or the ?basis risk? needs to be addressed. It is therefore specified that a calendar spread charge would be added to the worst scenario loss for arriving at the initial margin. For computing calendar spread charge, the system first identifies spread positions and then the spread charge which is 0.5% per month on the far leg of the spread with a minimum of 1% and maximum of 3%. Presently, calendar spread position on Exchange traded equity derivatives has been granted calendar spread treatment till the expiry of the near month contract.
In a portfolio of futures and options, the non-linear nature of options make short option positions most risky. Especially, short deep out of the money options, which are highly susceptible to, changes in prices of the underlying. Therefore a short option minimum charge has been specified. The short option minimum charge is 3% and 7.5 % of the notional value of all short Index option and stock option contracts respectively. The short option minimum charge is the initial margin if the sum of the worst ?scenario loss and calendar spread charge is lower than the short option minimum charge.
To calculate volatility estimates the exchange are required to uses the methodology specified in the Prof J.R Varma Committee Report on Risk Containment Measures for Index Futures. Further, to calculate the option value the exchanges can use standard option pricing models - Black-Scholes, Binomial, Merton, Adesi-Whaley.
The initial margin is required to be computed on a real time basis and has two components:-
The first is creation of risk arrays taking prices at discreet times taking latest prices and volatility estimates at the discreet times, which have been specified.
The second is the application of the risk arrays on the actual portfolio positions to compute the portfolio values and the initial margin on a real time basis.
The initial margin so computed is deducted from the available Liquid Networth on a real time basis.
CONDITIONS FOR LIQUID NETWORTH
Liquid net worth means the total liquid assets deposited with the clearing house towards initial margin and capital adequacy; LESS initial margin applicable to the total gross open position at any given point of time of all trades cleared through the clearing member.
The following conditions are specified for liquid net worth:
Liquid net worth of the clearing member should not be less than Rs 50 lacs at any point of time.
Mark to market value of gross open positions at any point of time of all trades cleared through the clearing member should not exceed the specified exposure limit for each product.
Liquid Assets
At least 50% of the liquid assets should be in the form of cash equivalents viz. cash, fixed deposits, bank guarantees, T bills, units of money market mutual funds, units of gilt funds and dated government securities. Liquid assets will include cash, fixed deposits, bank guarantees, T bills, units of mutual funds, dated government securities or Group I equity securities which are to be pledged in favor of the exchange.
Collateral Management
Collateral Management consists of managing, maintaining and valuing the collateral in the form of cash, cash equivalents and securities deposited with the exchange. The following stipulations have been laid down to the clearing corporation on the valuation and management of collateral:
At least weekly marking to market is required to be carried out on all securities.
Debt securities of only investment grade can be accepted.10% haircut with weekly mark to market will be applied on debt securities.
Total exposure of clearing corporation to the debt or equity of any company not to exceed 75% of the Trade Guarantee Fund or 15% of its total liquid assets whichever is lower.
Units of money market mutual funds and gilt funds shall be valued on the basis of its Net Asset Value after applying a hair cut of 10% on the NAV and any exit load charged by the mutual fund.
Units of all other mutual funds shall be valued on the basis of its NAV after applying a hair cut equivalent to the VAR of the units NAV and any exit load charged by the mutual fund.
Equity securities to be in demat form. Only Group I securities would be accepted. The securities are required to be valued / marked to market on a daily basis after applying a haircut equivalent to the respective VAR of the equity security.
Mark to Market Margin
Options ? The value of the option are calculated as the theoretical value of the option times the number of option contracts (positive for long options and negative for short options). This Net Option Value is added to the Liquid Networth of the Clearing member. Thus MTM gains and losses on options are adjusted against the available liquid networth. The net option value is computed using the closing price of the option and are applied the next day.
Futures ? The system computes the closing price of each series, which is used for computing mark to market settlement for cumulative net position. If this margin is collected on T+1 in cash, then the exchange charges a higher initial margin by multiplying the price scan range of 3 s & 3.5 s with square root of 2, so that the initial margin is adequate to cover 99% VaR over a two days horizon. Otherwise if the Member arranges to pay the Mark to Market margins by the end of T day itself, then the initial margins would not be scaled up. Therefore, the Member has the option to pay the MTM margins either at the end of T day or on T+1 day.
MARGIN COLLECTION
Initial Margin - is adjusted from the available Liquid Networth of the Clearing Member on an online real time basis.
Mark to Market Margins-
Futures contracts: The open positions (gross against clients and net of proprietary / self trading) in the futures contracts for each member are marked to market to the daily settlement price of the Futures contracts at the end of each trading day. The daily settlement price at the end of each day is the weighted average price of the last half an hour of the futures contract. The profits / losses arising from the difference between the trading price and the settlement price are collected / given to all the clearing members.
Option Contracts: The marked to market for Option contracts is computed and collected as part of the SPAN Margin in the form of Net Option Value. The SPAN Margin is collected on an online real time basis based on the data feeds given to the system at discrete time intervals.
Client Margins
Clearing Members and Trading Members are required to collect initial margins from all their clients. The collection of margins at client level in the derivative markets is essential as derivatives are leveraged products and non-collection of margins at the client level would provide zero cost leverage. In the derivative markets all money paid by the client towards margins is kept in trust with the Clearing House / Clearing
Corporation and in the event of default of the Trading or Clearing Member the amounts paid by the client towards margins are segregated and not utilised towards the dues of the defaulting member.
Therefore, Clearing members are required to report on a daily basis details in respect of such margin amounts due and collected from their Trading members / clients clearing and settling through them. Trading members are also required to report on a daily basis details of the amount due and collected from their clients. The reporting of the collection of the margins by the clients is done electronically through the system at the end of each trading day. The reporting of collection of client level margins plays a crucial role not only in ensuring that members collect margin from clients but it also provides the clearing corporation with a record of the quantum of funds it has to keep in trust for the clients.
What are the exposure limits in equity derivatives market?
It has been prescribed that the notional value of gross open positions at any point in time in the case of Index Futures and all Short Index Option Contracts shall not exceed 33 1/3 (thirty three one by three) times the available liquid networth of a member, and in the case of Stock Option and Stock Futures Contracts, the exposure limit shall be higher of 5% or 1.5 sigma of the notional value of gross open position.
In the case of interest rate futures, the following exposure limit is specified:
The notional value of gross open positions at any point in time in futures contracts on the notional 10 year bond should not exceed 100 times the available liquid networth of a member.
The notional value of gross open positions at any point in time in futures contracts on the notional T-Bill should not exceed 1000 times the available liquid networth of a member.
What are the position limits in equity derivatives market? UL>
The position limits specified are as under-
Client / Customer level position limits:
For index based products there is a disclosure requirement for clients whose position exceeds 15% of the open interest of the market in index products.
For stock specific products the gross open position across all derivative contracts on a particular underlying of a customer/client should not exceed the higher of ?
1% of the free float market capitalisation (in terms of number of shares).
or
5% of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts).
This position limits are applicable on the combine position in all derivative contracts on an underlying stock at an exchange. The exchanges are required to achieve client level position monitoring in stages.
The client level position limit for interest rate futures contracts is specified at Rs.100 crore or 15% of the open interest, whichever is higher.
Trading Member Level Position Limits:
For Index options the Trading Member position limits are Rs. 250 cr or 15% of the total open interest in Index Options whichever is higher and for Index futures the Trading Member position limits are Rs. 250 cr or 15% of the total open interest in Index Futures whichever is higher.
For stocks specific products, the trading member position limit is 20% of the market wide limit subject to a ceiling of Rs. 50 crore. In Interest rate futures the Trading member position limit is Rs. 500 Cr or 15% of open interest whichever is higher.
It is also specified that once a member reaches the position limit in a particular underlying then the member shall be permitted to take only offsetting positions (which result in lowering the open position of the member) in derivative contracts on that underlying. In the event that the position limit is breached due to the reduction in the overall open interest in the market, the member are required to take only offsetting positions (which result in lowering the open position of the member) in derivative contract in that underlying and fresh positions shall not be permitted. The position limit at trading member level is required to be computed on a gross basis across all clients of the Trading member.
Market wide limits:
There are no market wide limits for index products. For stock specific products the market wide limit of open positions (in terms of the number of underlying stock) on an option and futures contract on a particular underlying stock would be lower of ?
30 times the average number of shares traded daily, during the previous calendar month, in the cash segment of the Exchange,
or
20% of the number of shares held by non-promoters i.e. 20% of the free float, in terms of number of shares of a company.
What are Currency Futures?
Currency futures are contracts to buy or sell a specific underlying currency at a specific time in the future, for a specific price. Currency futures are exchange-traded contracts and they are standardized in terms of delivery date, amount and contract terms.
Currency future contracts allow investors to hedge against foreign exchange risk. Since these contracts are marked-to-market daily, investors can--by closing out their position--exit from their obligation to buy or sell the currency prior to the contract's delivery date.
What are the parameters for initial margin, exposure margin and what are the position limits specified for exchange traded currency futures?
What are the eligibility criteria for members of the currency futures segment?
The trading member is subject to a balance sheet networth requirement of Rs. 1 crore while the clearing member is subject to a balance sheet networth requirement of Rs. 10 crores. The clearing member is subject to a liquid networth requirement of Rs. 50 lakhs.
What are the eligibility criteria for setting up of currency futures segment in a recognized stock exchange?
A recognized stock exchange having nationwide terminals or a new exchange recognized by SEBI may set up currency futures segment after obtaining SEBI?s approval. The currency futures segment should fulfill the following eligibility conditions for approval:
i. The trading should take place through an online screen-based trading system, which also has a disaster recovery site.
ii. The clearing of the currency derivatives market should be done by an independent Clearing Corporation, which satisfies the eligibility for a clearing corporation.
iii. The exchange must have an online surveillance capability which monitors positions, prices and volumes in real time so as to deter market manipulation.
iv. The exchange shall have a balance sheet networth of atleast Rs. 100 crores.
v. Information about trades, quantities, and quotes should be disseminated by the exchange in real time to at least two information vending networks which are accessible to investors in the country.
Thursday, December 17, 2009
Indian Stock Market Evolution
Evolution
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meagre and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century.
By 1830s business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850.
The 1850s witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60.
In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the Share Mania in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87).
At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers Association" (which is alternatively known as " The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.
Other leading cities in stock market operations
Ahmedabad gained importance next to Bombay with respect to cotton textile industry. After 1880, many mills originated from Ahmedabad and rapidly forged ahead. As new mills were floated, the need for a Stock Exchange at Ahmedabad was realised and in 1894 the brokers formed "The Ahmedabad Share and Stock Brokers Association".
What the cotton textile industry was to Bombay and Ahmedabad, the jute industry was to Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta. After the Share Mania in 1861-65, in the 1870s there was a sharp boom in jute shares, which was followed by a boom in tea shares in the 1880s and 1890s; and a coal boom between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta Stock Exchange Association".
In the beginning of the twentieth century, the industrial revolution was on the way in India with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel Company Limited in 1907, an important stage in industrial advancement under Indian enterprise was reached.
Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies generally enjoyed phenomenal prosperity, due to the First World War.
In 1920, the then demure city of Madras had the maiden thrill of a stock exchange functioning in its midst, under the name and style of "The Madras Stock Exchange" with 100 members. However, when boom faded, the number of members stood reduced from 100 to 3, by 1923, and so it went out of existence.
In 1935, the stock market activity improved, especially in South India where there was a rapid increase in the number of textile mills and many plantation companies were floated. In 1937, a stock exchange was once again organized in Madras - Madras Stock Exchange Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange Limited).
Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the Punjab Stock Exchange Limited, which was incorporated in 1936.
Indian Stock Exchanges - An Umbrella Growth
The Second World War broke out in 1939. It gave a sharp boom which was followed by a slump. But, in 1943, the situation changed radically, when India was fully mobilized as a supply base.
On account of the restrictive controls on cotton, bullion, seeds and other commodities, those dealing in them found in the stock market as the only outlet for their activities. They were anxious to join the trade and their number was swelled by numerous others. Many new associations were constituted for the purpose and Stock Exchanges in all parts of the country were floated.
The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.
In Delhi two stock exchanges - Delhi Stock and Share Brokers Association Limited and the Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947, amalgamated into the Delhi Stock Exchnage Association Limited.
Post-independence Scenario
Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was closed during partition of the country and later migrated to Delhi and merged with Delhi Stock Exchange.
Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.
Most of the other exchanges languished till 1957 when they applied to the Central Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore, the well established exchanges, were recognized under the Act. Some of the members of the other Associations were required to be admitted by the recognized stock exchanges on a concessional basis, but acting on the principle of unitary control, all these pseudo stock exchanges were refused recognition by the Government of India and they thereupon ceased to function.
Thus, during early sixties there were eight recognized stock exchanges in India (mentioned above). The number virtually remained unchanged, for nearly two decades. During eighties, however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently established exchanges - Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock exchanges in India excluding the Over The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL).
The Table given below portrays the overall growth pattern of Indian stock markets since independence. It is quite evident from the Table that Indian stock markets have not only grown just in number of exchanges, but also in number of listed companies and in capital of listed companies. The remarkable growth after 1985 can be clearly seen from the Table, and this was due to the favouring government policies towards security market industry.
Trading Pattern of the Indian Stock Market
Trading in Indian stock exchanges are limited to listed securities of public limited companies. They are broadly divided into two categories, namely, specified securities (forward list) and non-specified securities (cash list). Equity shares of dividend paying, growth-oriented companies with a paid-up capital of atleast Rs.50 million and a market capitalization of atleast Rs.100 million and having more than 20,000 shareholders are, normally, put in the specified group and the balance in non-specified group.
Two types of transactions can be carried out on the Indian stock exchanges: (a) spot delivery transactions "for delivery and payment within the time or on the date stipulated when entering into the contract which shall not be more than 14 days following the date of the contract" : and (b) forward transactions "delivery and payment can be extended by further period of 14 days each so that the overall period does not exceed 90 days from the date of the contract". The latter is permitted only in the case of specified shares. The brokers who carry over the outstandings pay carry over charges (cantango or backwardation) which are usually determined by the rates of interest prevailing.
A member broker in an Indian stock exchange can act as an agent, buy and sell securities for his clients on a commission basis and also can act as a trader or dealer as a principal, buy and sell securities on his own account and risk, in contrast with the practice prevailing on New York and London Stock Exchanges, where a member can act as a jobber or a broker only.
The nature of trading on Indian Stock Exchanges are that of age old conventional style of face-to-face trading with bids and offers being made by open outcry. However, there is a great amount of effort to modernize the Indian stock exchanges in the very recent times.
Over The Counter Exchange of India (OTCEI)
The traditional trading mechanism prevailed in the Indian stock markets gave way to many functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly long settlement periods and benami transactions, which affected the small investors to a great extent. To provide improved services to investors, the countrys first ringless, scripless, electronic stock exchange - OTCEI - was created in 1992 by countrys premier financial institutions - Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries and CanBank Financial Services.
Trading at OTCEI is done over the centres spread across the country. Securities traded on the OTCEI are classified into:
Listed Securities - The shares and debentures of the companies listed on the OTC can be bought or sold at any OTC counter all over the country and they should not be listed anywhere else
Permitted Securities - Certain shares and debentures listed on other exchanges and units of mutual funds are allowed to be traded
Initiated debentures - Any equity holding atleast one lakh debentures of a particular scrip can offer them for trading on the OTC.
OTC has a unique feature of trading compared to other traditional exchanges. That is, certificates of listed securities and initiated debentures are not traded at OTC. The original certificate will be safely with the custodian. But, a counter receipt is generated out at the counter which substitutes the share certificate and is used for all transactions.
In the case of permitted securities, the system is similar to a traditional stock exchange. The difference is that the delivery and payment procedure will be completed within 14 days.
Compared to the traditional Exchanges, OTC Exchange network has the following advantages:
OTCEI has widely dispersed trading mechanism across the country which provides greater liquidity and lesser risk of intermediary charges.
Greater transparency and accuracy of prices is obtained due to the screen-based scripless trading.
Since the exact price of the transaction is shown on the computer screen, the investor gets to know the exact price at which s/he is trading.
Faster settlement and transfer process compared to other exchanges.
In the case of an OTC issue (new issue), the allotment procedure is completed in a month and trading commences after a month of the issue closure, whereas it takes a longer period for the same with respect to other exchanges.
Thus, with the superior trading mechanism coupled with information transparency investors are gradually becoming aware of the manifold advantages of the OTCEI.
National Stock Exchange (NSE)
With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others.
Trading at NSE can be classified under two broad categories:
(a) Wholesale debt market and
(b) Capital market.
Wholesale debt market operations are similar to money market operations - institutions and corporate bodies enter into high value transactions in financial instruments such as government securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc.
There are two kinds of players in NSE:
(a) trading members and
(b) participants.
Recognized members of NSE are called trading members who trade on behalf of themselves and their clients. Participants include trading members and large players like banks who take direct settlement responsibility.
Trading at NSE takes place through a fully automated screen-based trading mechanism which adopts the principle of an order-driven market. Trading members can stay at their offices and execute the trading, since they are linked through a communication network. The prices at which the buyer and seller are willing to transact will appear on the screen. When the prices match the transaction will be completed and a confirmation slip will be printed at the office of the trading member.
NSE has several advantages over the traditional trading exchanges. They are as follows:
NSE brings an integrated stock market trading network across the nation.
Investors can trade at the same price from anywhere in the country since inter-market operations are streamlined coupled with the countrywide access to the securities.
Delays in communication, late payments and the malpractices prevailing in the traditional trading mechanism can be done away with greater operational efficiency and informational transparency in the stock market operations, with the support of total computerized network.
Unless stock markets provide professionalised service, small investors and foreign investors will not be interested in capital market operations. And capital market being one of the major source of long-term finance for industrial projects, India cannot afford to damage the capital market path. In this regard NSE gains vital importance in the Indian capital market system.
ECONOMIC PLANNING IN INDIA
Preamble
Often, in the economic literature we find the terms development and growth are used interchangeably. However, there is a difference. Economic growth refers to the sustained increase in per capita or total income, while the term economic development implies sustained structural change, including all the complex effects of economic growth. In other words, growth is associated with free enterprise, where as development requires some sort of control and regulation of the forces affecting development. Thus, economic development is a process and growth is a phenomenon.
Economic planning is very critical for a nation, especially a developing country like India to take the country in the path of economic development to attain economic growth.
Why Economic Planning for India?
One of the major objective of planning in India is to increase the rate of economic development, implying that increasing the rate of capital formation by raising the levels of income, saving and investment. However, increasing the rate of capital formation in India is beset with a number of difficulties. People are poverty ridden. Their capacity to save is extremely low due to low levels of income and high propensity to consume. Therefor, the rate of investment is low which leads to capital deficiency and low productivity. Low productivity means low income and the vicious circle continues. Thus, to break this vicious economic circle, planning is inevitable for India.
The market mechanism works imperfectly in developing nations due to the ignorance and unfamiliarity with it. Therefore, to improve and strengthen market mechanism planning is very vital. In India, a large portion of the economy is non-monitised; the product, factors of production, money and capital markets are not organized properly. Thus the prevailing price mechanism fails to bring about adjustments between aggregate demand and supply of goods and services. Thus, to improve the economy, market imperfections has to be removed; available resources has to be mobilized and utilized efficiently; and structural rigidities has to be overcome. These can be attained only through planning.
In India, capital is scarce; and unemployment and disguised unemployment is prevalent. Thus, where capital being scarce and labour being abundant, providing useful employment opportunities to an increasing labour force is a difficult exercise. Only a centralized planning model can solve this macro problem of India.
Further, in a country like India where agricultural dependence is very high, one can not ignore this segment in the process of economic development. Therefore, an economic development model has to consider a balanced approach to link both agriculture and industry and lead for a paralleled growth. Not to mention, both agriculture and industry can not develop with out adequate infrastructural facilities which only a the state can provide and this is possible only through a well carved out planning strategy. The governments role in providing infrastructure is unavoidable due to the fact that the role of private sector in infrastructural development of India is very minimal since these infrastructure projects are considered as unprofitable by the private sector.
Further, India is a clear case of income disparity. Thus, it is the duty of the state to reduce the prevailing income inequalities. This is possible only through planning.
Planning History of India
The development of planning in India began prior to the first Five Year Plan of independent India, long before independence even. The idea of central directions of resources to overcome persistent poverty gradually, because one of the main policies advocated by nationalists early in the century. The Congress Party worked out a program for economic advancement during the 1920s, and 1930s and by the 1938 they formed a National Planning Committee under the chairmanship of future Prime Minister Nehru. The Committee had little time to do anything but prepare programs and reports before the Second World War which put an end to it. But it was already more than an academic exercise remote from administration. Provisional government had been elected in 1938, and the Congress Party leaders held positions of responsibility. After the war, the Interim government of the pre-independence years appointed an Advisory Planning Board. The Board produced a number of some what disconnected Plans itself. But, more important in the long run, it recommended the appointment of a Planning Commission.
The Planning Commission did not start work properly until 1950. During the first three years of independent India, the state and economy scarcely had a stable structure at all, while millions of refugees crossed the newly established borders of India and Pakistan, and while ex-princely states (over 500 of them) were being merged into India or Pakistan. The Planning Commission as it now exists, was not set up until the new India had adopted its Constitution in January 1950.
Objectives of Indian Planning
The Planning Commission was set up he following Directive principles :
To make an assessment of the material, capital and human resources of the country, including technical personnel, and investigate the possibilities of augmenting such of these resources as are found to be deficient in relation to the nations requirement.
To formulate a plan for the most effective and balanced use of the countrys resources.
Having determined the priorities, to define the stages in which the plan should be carried out, and propose the allocation of resources for the completion of each stage.
To indicate the factors which are tending to retard economic development, and determine the conditions which, in view of the current social and political situation, should be established for the successful execution of the Plan.
To determine the nature of the machinery which will be necessary for securing the successful implementation of each stage of Plan in all its aspects.
To appraise from time to time the progress achieved in the execution of each stage of the Plan and recommend the adjustments of policy and measures that such appraisals may show to be necessary.
To make such interim or auxiliary recommendations as appear to it to be appropriate either for facilitating the discharge of the duties assigned to it or on a consideration of the prevailing economic conditions, current policies, measures and development programs; or on an examination of such specific problems as may be referred to it for advice by Central or State Governments.
The long-term general objectives of Indian Planning are as follows :
Increasing National Income
Reducing inequalities in the distribution of income and wealth
Elimination of poverty
Providing additional employment; and
Alleviating bottlenecks in the areas of : agricultural production, manufacturing capacity for producers goods and balance of payments.
Economic growth, as the primary objective has remained in focus in all Five Year Plans. Approximately, economic growth has been targeted at a rate of five per cent per annum. High priority to economic growth in Indian Plans looks very much justified in view of long period of stagnation during the British rule.
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meagre and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century.
By 1830s business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850.
The 1850s witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60.
In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the Share Mania in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87).
At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers Association" (which is alternatively known as " The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.
Other leading cities in stock market operations
Ahmedabad gained importance next to Bombay with respect to cotton textile industry. After 1880, many mills originated from Ahmedabad and rapidly forged ahead. As new mills were floated, the need for a Stock Exchange at Ahmedabad was realised and in 1894 the brokers formed "The Ahmedabad Share and Stock Brokers Association".
What the cotton textile industry was to Bombay and Ahmedabad, the jute industry was to Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta. After the Share Mania in 1861-65, in the 1870s there was a sharp boom in jute shares, which was followed by a boom in tea shares in the 1880s and 1890s; and a coal boom between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta Stock Exchange Association".
In the beginning of the twentieth century, the industrial revolution was on the way in India with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel Company Limited in 1907, an important stage in industrial advancement under Indian enterprise was reached.
Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies generally enjoyed phenomenal prosperity, due to the First World War.
In 1920, the then demure city of Madras had the maiden thrill of a stock exchange functioning in its midst, under the name and style of "The Madras Stock Exchange" with 100 members. However, when boom faded, the number of members stood reduced from 100 to 3, by 1923, and so it went out of existence.
In 1935, the stock market activity improved, especially in South India where there was a rapid increase in the number of textile mills and many plantation companies were floated. In 1937, a stock exchange was once again organized in Madras - Madras Stock Exchange Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange Limited).
Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the Punjab Stock Exchange Limited, which was incorporated in 1936.
Indian Stock Exchanges - An Umbrella Growth
The Second World War broke out in 1939. It gave a sharp boom which was followed by a slump. But, in 1943, the situation changed radically, when India was fully mobilized as a supply base.
On account of the restrictive controls on cotton, bullion, seeds and other commodities, those dealing in them found in the stock market as the only outlet for their activities. They were anxious to join the trade and their number was swelled by numerous others. Many new associations were constituted for the purpose and Stock Exchanges in all parts of the country were floated.
The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.
In Delhi two stock exchanges - Delhi Stock and Share Brokers Association Limited and the Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947, amalgamated into the Delhi Stock Exchnage Association Limited.
Post-independence Scenario
Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was closed during partition of the country and later migrated to Delhi and merged with Delhi Stock Exchange.
Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.
Most of the other exchanges languished till 1957 when they applied to the Central Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore, the well established exchanges, were recognized under the Act. Some of the members of the other Associations were required to be admitted by the recognized stock exchanges on a concessional basis, but acting on the principle of unitary control, all these pseudo stock exchanges were refused recognition by the Government of India and they thereupon ceased to function.
Thus, during early sixties there were eight recognized stock exchanges in India (mentioned above). The number virtually remained unchanged, for nearly two decades. During eighties, however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently established exchanges - Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock exchanges in India excluding the Over The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL).
The Table given below portrays the overall growth pattern of Indian stock markets since independence. It is quite evident from the Table that Indian stock markets have not only grown just in number of exchanges, but also in number of listed companies and in capital of listed companies. The remarkable growth after 1985 can be clearly seen from the Table, and this was due to the favouring government policies towards security market industry.
Trading Pattern of the Indian Stock Market
Trading in Indian stock exchanges are limited to listed securities of public limited companies. They are broadly divided into two categories, namely, specified securities (forward list) and non-specified securities (cash list). Equity shares of dividend paying, growth-oriented companies with a paid-up capital of atleast Rs.50 million and a market capitalization of atleast Rs.100 million and having more than 20,000 shareholders are, normally, put in the specified group and the balance in non-specified group.
Two types of transactions can be carried out on the Indian stock exchanges: (a) spot delivery transactions "for delivery and payment within the time or on the date stipulated when entering into the contract which shall not be more than 14 days following the date of the contract" : and (b) forward transactions "delivery and payment can be extended by further period of 14 days each so that the overall period does not exceed 90 days from the date of the contract". The latter is permitted only in the case of specified shares. The brokers who carry over the outstandings pay carry over charges (cantango or backwardation) which are usually determined by the rates of interest prevailing.
A member broker in an Indian stock exchange can act as an agent, buy and sell securities for his clients on a commission basis and also can act as a trader or dealer as a principal, buy and sell securities on his own account and risk, in contrast with the practice prevailing on New York and London Stock Exchanges, where a member can act as a jobber or a broker only.
The nature of trading on Indian Stock Exchanges are that of age old conventional style of face-to-face trading with bids and offers being made by open outcry. However, there is a great amount of effort to modernize the Indian stock exchanges in the very recent times.
Over The Counter Exchange of India (OTCEI)
The traditional trading mechanism prevailed in the Indian stock markets gave way to many functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly long settlement periods and benami transactions, which affected the small investors to a great extent. To provide improved services to investors, the countrys first ringless, scripless, electronic stock exchange - OTCEI - was created in 1992 by countrys premier financial institutions - Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries and CanBank Financial Services.
Trading at OTCEI is done over the centres spread across the country. Securities traded on the OTCEI are classified into:
Listed Securities - The shares and debentures of the companies listed on the OTC can be bought or sold at any OTC counter all over the country and they should not be listed anywhere else
Permitted Securities - Certain shares and debentures listed on other exchanges and units of mutual funds are allowed to be traded
Initiated debentures - Any equity holding atleast one lakh debentures of a particular scrip can offer them for trading on the OTC.
OTC has a unique feature of trading compared to other traditional exchanges. That is, certificates of listed securities and initiated debentures are not traded at OTC. The original certificate will be safely with the custodian. But, a counter receipt is generated out at the counter which substitutes the share certificate and is used for all transactions.
In the case of permitted securities, the system is similar to a traditional stock exchange. The difference is that the delivery and payment procedure will be completed within 14 days.
Compared to the traditional Exchanges, OTC Exchange network has the following advantages:
OTCEI has widely dispersed trading mechanism across the country which provides greater liquidity and lesser risk of intermediary charges.
Greater transparency and accuracy of prices is obtained due to the screen-based scripless trading.
Since the exact price of the transaction is shown on the computer screen, the investor gets to know the exact price at which s/he is trading.
Faster settlement and transfer process compared to other exchanges.
In the case of an OTC issue (new issue), the allotment procedure is completed in a month and trading commences after a month of the issue closure, whereas it takes a longer period for the same with respect to other exchanges.
Thus, with the superior trading mechanism coupled with information transparency investors are gradually becoming aware of the manifold advantages of the OTCEI.
National Stock Exchange (NSE)
With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others.
Trading at NSE can be classified under two broad categories:
(a) Wholesale debt market and
(b) Capital market.
Wholesale debt market operations are similar to money market operations - institutions and corporate bodies enter into high value transactions in financial instruments such as government securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc.
There are two kinds of players in NSE:
(a) trading members and
(b) participants.
Recognized members of NSE are called trading members who trade on behalf of themselves and their clients. Participants include trading members and large players like banks who take direct settlement responsibility.
Trading at NSE takes place through a fully automated screen-based trading mechanism which adopts the principle of an order-driven market. Trading members can stay at their offices and execute the trading, since they are linked through a communication network. The prices at which the buyer and seller are willing to transact will appear on the screen. When the prices match the transaction will be completed and a confirmation slip will be printed at the office of the trading member.
NSE has several advantages over the traditional trading exchanges. They are as follows:
NSE brings an integrated stock market trading network across the nation.
Investors can trade at the same price from anywhere in the country since inter-market operations are streamlined coupled with the countrywide access to the securities.
Delays in communication, late payments and the malpractices prevailing in the traditional trading mechanism can be done away with greater operational efficiency and informational transparency in the stock market operations, with the support of total computerized network.
Unless stock markets provide professionalised service, small investors and foreign investors will not be interested in capital market operations. And capital market being one of the major source of long-term finance for industrial projects, India cannot afford to damage the capital market path. In this regard NSE gains vital importance in the Indian capital market system.
ECONOMIC PLANNING IN INDIA
Preamble
Often, in the economic literature we find the terms development and growth are used interchangeably. However, there is a difference. Economic growth refers to the sustained increase in per capita or total income, while the term economic development implies sustained structural change, including all the complex effects of economic growth. In other words, growth is associated with free enterprise, where as development requires some sort of control and regulation of the forces affecting development. Thus, economic development is a process and growth is a phenomenon.
Economic planning is very critical for a nation, especially a developing country like India to take the country in the path of economic development to attain economic growth.
Why Economic Planning for India?
One of the major objective of planning in India is to increase the rate of economic development, implying that increasing the rate of capital formation by raising the levels of income, saving and investment. However, increasing the rate of capital formation in India is beset with a number of difficulties. People are poverty ridden. Their capacity to save is extremely low due to low levels of income and high propensity to consume. Therefor, the rate of investment is low which leads to capital deficiency and low productivity. Low productivity means low income and the vicious circle continues. Thus, to break this vicious economic circle, planning is inevitable for India.
The market mechanism works imperfectly in developing nations due to the ignorance and unfamiliarity with it. Therefore, to improve and strengthen market mechanism planning is very vital. In India, a large portion of the economy is non-monitised; the product, factors of production, money and capital markets are not organized properly. Thus the prevailing price mechanism fails to bring about adjustments between aggregate demand and supply of goods and services. Thus, to improve the economy, market imperfections has to be removed; available resources has to be mobilized and utilized efficiently; and structural rigidities has to be overcome. These can be attained only through planning.
In India, capital is scarce; and unemployment and disguised unemployment is prevalent. Thus, where capital being scarce and labour being abundant, providing useful employment opportunities to an increasing labour force is a difficult exercise. Only a centralized planning model can solve this macro problem of India.
Further, in a country like India where agricultural dependence is very high, one can not ignore this segment in the process of economic development. Therefore, an economic development model has to consider a balanced approach to link both agriculture and industry and lead for a paralleled growth. Not to mention, both agriculture and industry can not develop with out adequate infrastructural facilities which only a the state can provide and this is possible only through a well carved out planning strategy. The governments role in providing infrastructure is unavoidable due to the fact that the role of private sector in infrastructural development of India is very minimal since these infrastructure projects are considered as unprofitable by the private sector.
Further, India is a clear case of income disparity. Thus, it is the duty of the state to reduce the prevailing income inequalities. This is possible only through planning.
Planning History of India
The development of planning in India began prior to the first Five Year Plan of independent India, long before independence even. The idea of central directions of resources to overcome persistent poverty gradually, because one of the main policies advocated by nationalists early in the century. The Congress Party worked out a program for economic advancement during the 1920s, and 1930s and by the 1938 they formed a National Planning Committee under the chairmanship of future Prime Minister Nehru. The Committee had little time to do anything but prepare programs and reports before the Second World War which put an end to it. But it was already more than an academic exercise remote from administration. Provisional government had been elected in 1938, and the Congress Party leaders held positions of responsibility. After the war, the Interim government of the pre-independence years appointed an Advisory Planning Board. The Board produced a number of some what disconnected Plans itself. But, more important in the long run, it recommended the appointment of a Planning Commission.
The Planning Commission did not start work properly until 1950. During the first three years of independent India, the state and economy scarcely had a stable structure at all, while millions of refugees crossed the newly established borders of India and Pakistan, and while ex-princely states (over 500 of them) were being merged into India or Pakistan. The Planning Commission as it now exists, was not set up until the new India had adopted its Constitution in January 1950.
Objectives of Indian Planning
The Planning Commission was set up he following Directive principles :
To make an assessment of the material, capital and human resources of the country, including technical personnel, and investigate the possibilities of augmenting such of these resources as are found to be deficient in relation to the nations requirement.
To formulate a plan for the most effective and balanced use of the countrys resources.
Having determined the priorities, to define the stages in which the plan should be carried out, and propose the allocation of resources for the completion of each stage.
To indicate the factors which are tending to retard economic development, and determine the conditions which, in view of the current social and political situation, should be established for the successful execution of the Plan.
To determine the nature of the machinery which will be necessary for securing the successful implementation of each stage of Plan in all its aspects.
To appraise from time to time the progress achieved in the execution of each stage of the Plan and recommend the adjustments of policy and measures that such appraisals may show to be necessary.
To make such interim or auxiliary recommendations as appear to it to be appropriate either for facilitating the discharge of the duties assigned to it or on a consideration of the prevailing economic conditions, current policies, measures and development programs; or on an examination of such specific problems as may be referred to it for advice by Central or State Governments.
The long-term general objectives of Indian Planning are as follows :
Increasing National Income
Reducing inequalities in the distribution of income and wealth
Elimination of poverty
Providing additional employment; and
Alleviating bottlenecks in the areas of : agricultural production, manufacturing capacity for producers goods and balance of payments.
Economic growth, as the primary objective has remained in focus in all Five Year Plans. Approximately, economic growth has been targeted at a rate of five per cent per annum. High priority to economic growth in Indian Plans looks very much justified in view of long period of stagnation during the British rule.
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