A Very Brief Look At India’s Capital Markets
The Indian National Congress election victory in the largest democracy in the world set that nation’s bourses alight rallying 17% in one day. Volume traded in the equities market reached 8.4 million shares totaling almost USD 36,000,000 on the National Stock Exchange alone. Hardly worth noting really but the exchanges were halted most of the day as the 15% upper band brought trading to a standstill for 2 hours and then again for the rest of the days when the 20% level was breached.
The India capital markets have been around for centuries as the sub continent served as a trading destination for Asia and the Middle East. It wasn’t until 1875, only 5 years after the Chicago Board of Trade began operation that India formalized a cotton exchange. The cotton trade flourished when the British could no longer buy from the Americans during the war of Independence. Today, India’s Capital markets have come a long way and is home to some of largest companies in the world.
The 2 major stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE). The exchanges have always been rivals and you can find most public companies inter-listed on both. The BSE is the home of the SENSEX 30 Index and the NSE lists the S&P CNX NIFTY Index. The BSE launched its Index future June 9, 2000 and the NSE on June 12, 2000 further fueling their rivalry. Today the S&P CNX NIFTY stands as the clear leader in traded volume.
The BSE introduced its BOLT (BSE On-line Trading) platform in 1995 which totally automated, screen-based trading in securities. The BSE also has the Derivatives Trading & Settlement System (DTSS) system for futures trading so if you want to trade both index futures and equities you need to have 2 screens. The BSE has since woken up and expects to introduce futures into BOLT in June. This will hopefully lead to increased turnover and put pressure on the S&P CNX Nifty market share. BOLT can handle 8 million orders per day.
The NSE, founded in 1994, is the largest stock exchange in India in terms of volume and trades in both the equities and derivatives segments. It offers trading in equities, exchange-traded funds (ETF), index futures, stock futures, interest rate futures and options. The NSE also has its own trading platform called NEAT (National Exchange Automated Trading) that boasts it can handle 15 million trades per day in its Capital Market segment alone. NEAT is a client server based application that was recently using X.25 protocol and has since moved onto IP Protocol. Like the BSE the bulk of trading is done through more than 2000 VSAT terminals.
What else should you know?
Slippage is a big problem in India. For one DMA orders are only available to institutional clients but not until they have applied with The Securities and Exchange Board of India (SEBI) for permission. Retail clients still need to have their trades approved by a person before the order goes to the exchange. I remember my days at Etrade when we would arrive in the morning and start approving client orders. How many calls did we receive from clients unable to cancel their orders stuck in the trade staging area.
Slippage is further exasperated by the lack of telecommunication infrastructure in India. The majority of trading takes place by satellite or VSAT (Very Small Aperture Terminal) technology. Latency over this type of network can be 500 milliseconds on a clear day and then you still may need to have your order approved by a person before it even hits the exchange.
Short selling is available to both retail and institutional investors by borrowing the stock through the Clearing House of the stock exchange which is registered as an Approved Intermediaries (AIs). Naked short selling is not permitted however and all short sales must result in delivery. Details of the short sale have to be disclosed to the exchange by end of day for retail investors and at the time of trade for institutional investors.
Trades are settled on T+2 basis through either of the National Securities Depository Ltd. (NSDL) or Central Depository Services Ltd. (CDSL).
Block trades must have a minimum quantity of 500,000 shares or minimum value of USD 1 million.
The Securities and Exchange Board of India (SEBI) is one of two regulators of India’s financial market. The other is the Forward Markets Commission (FMC) which oversees futures on physical commodities. SEBI administers financial products. SEBI is an independent agency that was created in 1992 and is a department in the Ministry of Consumer Affairs Food and Public Distribution. Foreign Institutional Investors (FIIs), in most cases, must receive approval from SEBI before they can commence trading in India.
As mandated by SEBI, the Value at Risk (VaR) margining system is applicable on the outstanding positions of the Members in all shares. Margin is intended to cover the largest loss that can be encountered on 99% of the days (99% Value at Risk). For liquid stocks, the margin covers one-day losses while for illiquid stocks, it covers three-days. NSE and BSE both offer SPAN margining.
India uses a different numbering system based on grouping numbers in two decimal places rather than 3 as commonly found in the west. Lakh (1,00,000) and Crore (1,00,00,000) are words that come from Sanskrit and are the most common numbers in use.
According to the Forward Markets Commission, the country has 22 commodity bourses. 18 stock exchanges are demutualised in India. No doubt there will be some consolidation here.
Trading hours are from 9:55am to 03:30pm and all futures and options contracts expire on the same day – the last Thursday of the contract month.
The financial industry in India is a very unique place offering all the products of any other modern trading center. The technological short comings and the regulatory hurdles do make India a difficult place to do business but the competitive nature of its people and the highly educated work force should continue to push India in the right direction to take its place in the globalized markets. I realize this discussion is hardly complete and hasn’t even touched upon the commodity business or ODIN and the vendor space in India but this article has to end somewhere.
What do you think about India’s capital markets?