HDFC SECURITIES by vrama

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									                                        A

                          PROJECT REPORT ON

“Risk Management regarding working of a broking firm, and its investors”

                                      FOR

                          HDFC SECURITIES


                                       BY

                            Khavale Ajay Ganesh

                                    MBA-II

                                   2006-2008



                       UNDER THE GUIDANCE OF

                        PROF. MAHESH HALALE



                               SUBMITTED TO

                          UNIVERSITY OF PUNE

   IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR

      THE AWARD OF DEGREE OF MASTER OF BUSINESS

                        ADMINISTRATION (MBA)
                               ACKNOWLEDGMENT



It’s a great privilege that I have done my project in such a well-organized and
diversified organization. I am great full to all those who helped and supported me in
completing the project.

First of all I would sincerely like to thank Mr. Rohit Rakibe (Branch Manager,
Nasik), for his valuable guidance and kind co-operation during the project. I am
highly grateful to Mr. Dhirendra Kapadi (Associates of HDFC SEC) for the help
provided by them in various forms.

I am also thankful to our director Dr. Sharad Joshi and my project guide Prof.
Mahesh Halale for helping me in completing the project.

Last but not least, I am also thankful to all college staff and my friends for helping me
directly or indirectly in my project.




                                                                                       2
CONTENTS

Sr.No.   Topic                                       Page No.


1        Executive summary                                  1-1


2        Company Profile                                    2-4


3        Objective of Project                               5-5


4        Research Methodology                               6-6

         Data Presentation
                 Introduction to capital
5                                                          7-55
                 Working of a Broking Firm
                 Risks in a Broking Firm

         Data Analysis & Interpretation
6                                                          56-73
                 Risk Management in a Broking Firm


7        Conclusion of the study                           74-74


8        Suggestion & Recommendation                       75-76


9        Scope for development                             77-77


10       Limitation                                        78-78


11       Bibliography                                      79-79




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CHAPTER 1-EXECUTIVE SUMMARY



A Capital Market deals in financial assets, excluding coins and currency. The

financial assets comprise of banking accounts, pension funds, provident fund, mutual

fund, insurance policy, shares, debentures, and other securities. The secondary market

is the market where scrips are traded. It is a market place, which provides liquidity to

the scrips issued in the primary market.



All investments are risky, whether in stock, capital market, banking, financial sector,

real estate, bullion, gold etc. The degree of risk however varies on the basis of the

features of the assets, investments instrument, the mode of investment, time frame or

the issuer of the security etc.



Risk can be defined as “Possibility of suffering losses”

“The chance of something happening that will have an impact upon objectives. It is

measured in terms of consequences and likelihood”.



        Risk management in a Broking Industry is a new concept in India, since it

poses maximum risk in the financial market, managing it was felt most essential by

the regulatory bodies and exchanges.




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CHAPTER 2 - PROFILE OF THE ORGANIZATION

HDFC SECURITIES LTD.



Company’s Mission

“To create reputation synonymous with quality, competitiveness, fairness and

transparency dealings and be a responsible corporate citizen”.


Business Objectives


The primary objective of HDFC is to enhance residential housing stock in the country

through the provision of housing finance in a systematic and professional manner, and

to promote home ownership. Another objective is to increase the flow of resources to

the housing sector by integrating the housing finance sector with the overall domestic

financial markets..


Organizational Goals


HDFC’s main goals are to a) develop close relationships with individuals, b) maintain

its position as the premier housing finance institution in the country, c) transform

ideas into viable and creative solutions, d) provide consistently high returns to

shareholders, and e) to grow through diversification by leveraging off the existing

client base.




 b History and background


HDFC was incorporated in 1977 with the primary objective of meeting a social need –

that of promoting home ownership by providing long-term finance to households for



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their housing needs. HDFC was promoted with an initial share capital of Rs. 100

million.


HDFC Securities, a trusted financial service provider promoted by HDFC Bank and

JP Morgan Partners and their associates, is a leading stock broking company in the

country, serving a diverse customer base of institutional and retail investors.



HDFCsec.com provides investors a robust platform to trade in Equities in NSE and

BSE , and derivatives in NSE. Our website will support you with the highest

standards    of    service,    convenience     and    hassle-free    trading     tools.



Our research team tracks the economy, industries and companies to provide you the

latest information and analysis. Our content offers financial information, analysis,

investment guidance, news & views, and is designed to meet the requirements of

everyone from a beginner to a savvy and well-informed trader. With HDFCsec.com,

you get:

Speed :

Our state-of-the art technology enables to instantly trade on the BSE and NSE.

Convenience :

You can trade with us online or on the phone from the convenience of your home or

office. Use the 3-in-1 Advantage account to seamlessly move funds and securities

across your bank, demat and trading account. This way, you do not have to issue

cheques or delivery instructions.




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Transparency :

With our trusted pedigree, you can be assured that you get the best services in a

transparent manner. By broking with us, you are in total control of your funds and

stocks.


Expertise :

Our Group has decades of experience in providing financial services to customers in a

transparent and trusted manner. We have a dedicated, motivated and experienced

team of professionals to provide you top class service.

Our Group has decades of experience in providing financial services to customers in a

transparent and trusted manner. We have a dedicated, motivated and experienced

team of professionals to provide you top class service.

Timely and Relevant Information :

We realise the importance of making information available to you as it happens.

Empowered with the latest news, developments and research, you will be able to take

informed decisions.

Your Interest :

For us, your interest comes first. We endeavour to provide high quality investment

services, in a simple, direct and cost-effective way to help you achieve your financial

goals.




                                                                                     7
CHAPTER 3 – OBJECTIVE OF THE PROJECT



       Introduction to capital market.



       To get familiar with the working of a broking firm.



       To identify various risks involved in the broking firm.



       To identify various risk for the investors of the broking firm.



       To manage and reduce the identified risks.



       To give your report to the branch manager with your suggestion.




                                                                         8
CHAPTER 4– RESEARCH METHODLOGY



During my project, I collected data through various sources primary & secondary.


Primary source includes :-
   1) Discussion with branch manager


   2) Discussion with experts


   3) Discussion with investors of the firm.


   4) Live trading in the market


Secondary source includes :-
   1) Various books related to stock market


   2) Books related to Financial Management


   3) Web sites were used as the vital information source.




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CHAPTER 5- DATA PRESENTATION


Introduction to Capital Markets

Financial System

The financial system of every economy consists of various constituents such as



   1       Financial Institutions

   2       Financial Companies

   3       Financial Markets

   4       Financial Instruments

   5       Financial Services

   6       Financial regulations

The financial market in India comprised of capital market and money market whereas

the financial system of the country comprised of institutions, which operate the

financial markets and the financial instruments with which the financial system is put

into operation.

Tax anomy of financial markets can be understood on functional, sectoral and

institutional basis. On a functional basis we can divide financial markets into

   1       Money market (short term)

   2       Capital market (long term)

   The institutional classification can be made into

   1 Organized financial market

   2 Non-Organized financial market




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Capital Market Scenario

       The stock market in India dates back to the 18th century when the East India

Company was ruling the roost in the country and was perhaps the most dominant and

powerful institution and its securities were traded. The securities trading were done in

an unorganized form at Bombay and Calcutta in early 19th century.

The decade of 90’s has witnessed several changes in reformation of capital market.

Automation, transparency,. Strict surveillance, depository system, on line trading,

investors protection, new rules and regulations, etc. are some of the activities which

only reflect the growth of Indian capital market. By any reckoning Indian corporate

sector has grown very significantly in the last couple of decades whether to look at it

in terms of public and private limited companies, their share capitalization, their sales

turnover or their contribution to capital formation with this came the legislation of

SEBI to act as a regulatory body to protect investors



What is Capital Market?

A Capital Market deals in financial assets, excluding coins and currency. The

financial assets comprise of banking accounts, pension funds, provident fund, mutual

fund, insurance policy, shares, debentures, and other securities. If the stock exchanges

are well regulated and function smoothly, then it is an indication of healthy capital

market. Stock exchange provide a good leverage of the capital market and their

relationship is directly proportional. India has multi-stock exchange system with 24

stock exchanges functioning across the country. In our country, capital markets are

generally also known as security/stock market. The Indian capital market currently

provides excellent investment opportunities to domestic and foreign investors in both

equity and fixed income Segments.



                                                                                      11
The Indian Capital Markets can be broadly classified into three types of markets.

   1       Money market

   2       Primary market

   3       Secondary market



Money market

The money market is part of overall financial system and securities or capital market.

It deals in short term financial assets whish can be readily converted into cash. Money

market is a place for trading in money and short tern financial assets that are as liquid

as money. It provides a platform for short term surplus funds of lenders or investors

and short term requirements of borrowers, the instruments can be traded at low cost

and are highly liquid.



Primary market

Primary market is generally referred to the market of issues or market for new

mobilization of resources by the companies and the government undertakings, for new

projects as also for expansion, modernization, addition, and diversification and up

gradation. Primary market operations include new issues of shares by new and

existing companies, further and right issues to existing share holders, public offers,

and issue of debt instruments such as debentures, bonds, etc. Raising money from

capital market is cheap for the company and involves a low servicing cost. The

investors’ benefit by way of dividend and or capital appreciation. The following are

the market intermediaries associated with the primary market

   1       Merchant banker/book building lead manager

   2       Registrar and transfer agent



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   3       Underwriter/broker to the issue

   4       Advisor to the issue

   5       Banker to the issue

   6       Depository

   7       Depository participant

Defects in Indian Primary Market

   1       Aggressive pricing and over pricing.

   2       Price rigging before and during issues.

   3       Poor, wrong and vague disclosures in offer documents.

   4       Poor information accessibility.

   5       Misleading projections subject to vague assumptions.

   6       Delay in penal actions against the erring market intermediaries.

   7       SEBI not assuming any responsibility for disclosure/offer documents.

   8       Bunching of issues.

   9       Existence of grey or unofficial market.

   10      Lack of transparency

   11      Uninformed and uneducated investors.

   12      Delay in listing and trading permission.



Secondary Market

The secondary market is the market where scrips are traded. It is a market place,

which provides liquidity to the scrips issued in the primary market. Thus, the growth

of secondary market is dependent upon primary market. More the number of

companies entering the primary market, the greater is the volume at the secondary

market. Trading activities in the secondary market are done through recognized stock



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exchanges, which are 24 in number including Over the Counter Exchange of India,

National Stock Exchange of India, and Inter-connected Stock Exchange of India.

Secondary market operations involves buying and selling of securities on the stock

exchange through its members. The following intermediaries are involved in the

secondary marker.

   1      Broker/member of Stock Exchange- buyer broker and selling broker

   2      Portfolio manager

   3      Investment advisor

   4      Share transfer agent

   5      Depository

   6      Depository participant




                                                                               14
WORKING OF A BROKING FIRM



Stock Broker

According to SEBI Stock Broker is a member of a recognized stock exchange(s) and

is engaged in buying, selling and dealing in securities. In other words broker is an

intermediary who arranges to buy and sell securities on behalf of clients i.e. the buyer

and the seller. A broker can deal in securities only after getting registered with

SEBI.through stock exchanges. The constitution of a broking firm may be a

Proprietary Concern, a Partnership firm or a Corporate.



COMPLIANCE DEPARTMENT

The functions carried out by Compliance Department are as follows




COMPLIANCE DEPARTMENT




Reg. of Sub-Broker            Reg. Of Client          Reg. Of Franchisee



                      Individual      Non Individual



                      Limited Company          Partnership   Sole Proprietorship




                                                                                     15
Registration of Client

Documentation required for individual client as per SEBIs guidelines are as follows

Individual

   1         Client Registration Application Form.

   2         Broker Client Agreement on stamp paper of value as applicable in the

             respective state.

   3         Identity Proof like

             -   Copy of Passport

             -   Copy of ration card

             -   Copy of Driving Licenses

             -   Copy of Voters Identity Card

             -   Copy of Pan card

             -   Letter from bank certifying account number and period from which the

                 same is in operation

   2 Letter of Running account

   Non-Individual

   Limited Company

   1 Client Registration Application Form.

   2 Broker client Agreement on stamp paper.

   3 Certified copy of Memorandum and Articles of Association.

   4 Certified copy of resolution authorizing the company to open account with

       HDFC SEC and appointing persons authorized to operate upon said account

       on behalf of company.

   5 Proof of identity in respect of authorized director




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6 Letter from the bank certifying account number and period from which the

   same is in operation.

Partnership Firm

1 Application Form

2 Broker client agreement on stamp paper.

3 Partnership Deed

4 Partnership letter signed by all the partners authorizing the firm to open

   account with HDFC SEC and appoint one or more partners to operate the said

   account on behalf of the firm.

5 Identity Proof

6 Bank Certifying Letter

Proprietorship Concern

1 Client Registration Application Form

2 Broker Client Agreement

3 Identity Proof

4 Bank Certifying Letter



REGISTRATION OF SUB-BROKER

SEBI rules for application for registration of Sub Broker

       -       An application by a sub broker for the grant of a certificate shall be

               made in Form B

       -       The Application shall be accompanied by a recommendation letter

               from a stock broker of a recognized stock exchange with whom he

               is to affiliated along with two references including one from his

               banker



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            -       The application form shall be submitted to the stock exchange of

                    which the stock broker with whom he is affiliated as a member.

            -       The stock exchange on receipt of an application shall verify the

                    information contained and then shall also certify that the applicant

                    is eligible for registration.

The eligibility criteria is as follows

            -       The applicant should not be less than 21 years of age

            -       The applicant has not been convicted to any offence involving

                    fraud or dishonesty

            -       The applicant should have at least passed 12th STD

            -       The applicant should be fit and proper person

    DEALING DEPARTMENT

    Dealing department is a very important department in the broking firm as it carries

    out most important activities of Buying and Selling of securities. The people

    doing dealing are called as Dealers. He is the person dealing on behalf of the

    investor, therefore when the investor wants to trade in some scrip’s he must

    inform the dealer first and then the dealer deals in the market. The following are

    the activities carried out in a dealing department.

                                 DEALING DEPARTMENT



                        Buying                                       Selling

                        Securities                                   Securities



        Entering                 Order                Order                    Order

        Orders                   Modification         Cancellation             Matching



                                                                                       18
Entering Order

The trading member can enter orders in the normal market and auction market. When

an order enters the trading system it is an active order, it tries to find out on the other

side of the books if it finds the match, trade is generated. If it does not find a match,

the order becomes a passive order and goes and sits in the order book.



Order Modification

All orders can be modified in the system till the time they do not get fully traded and

only during market hours. Once an order is modified, the branch order values limit for

the branch and get adjusted automatically.



Order Cancellation

Order cancellation functionality can be performed only for orders which have not

been fully or partially traded (for the untraded part of partially traded orders only) and

only during market hours.



Order Matching

The buy and sell orders are matched on book type, symbol, series, quantity and price.

The best sell order is the order with lowest price and best buy order is the order with

highest price. The unmatched orders are queued in the system by the following

priority.

        1 By Price- the buy order with the higher price gets a higher priority and

similarly a sell order with a lower price gets a higher priority.

Ex. a) 100 shares @ Rs 35 @time 9.30 am

b) 500 shares @ Rs 35.05 @time 9.43 am



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The second order price is greater than the first order price and therefore it is the best

buy order.

   1 By Time- If there are one or more order at the same price the order entered

       earlier gets a higher priority.

   Ex. a) 200 shares @Rs 72.75 @time 9.30 am

       b) 300 shares @ Rs 72.75 @time 9.33 am

   Both orders have same price but they were entered in the system at different

   times, the first order was entered before the second order and therefore it is the

   best sell order.



   TRADE

   Trade is the basic activity of dealing of which a buy and sell order match with

   each other. This matching of two orders is done automatically in the system.

   Whenever the trade takes place the system sends a confirmation message to each

   of the user involved in the trade.



   Trade Modification

   The user can use trade modification facility to request for modifying trade to be

   done during the day. The user can request the exchange to modify price and

   quantity. Since trading is done on line the dealer makes the necessary changes on

   the request of the client in his trading term.



   Trade Cancellation

   The user can use canceling facility for canceling the trades requested. When the

   request for the trade cancellation is approved by the exchange, the party to trade



                                                                                      20
receives a system message confirming the trade cancellation at the workstation of

the dealer.



SETTLEMENT DEPARTMENT

This department performs the back office function ie settling of trades that takes

place every day. This settling is done under “T+2” rolling settlement system.



NSE/BSE provides a platform for trading to its trading members; the National

Securities Clearing Corporation LTD (NSCCL) determines the funds/securities

obligation of the trading members and ensures that trading members meet their

obligations. The clearing banks and depositories provide the necessary interface

between the custodians and clearing members (who clear for the trading members

or their own transactions) for settlement of funds/securities obligation of trading

members. Their core processes



                                     Placing Order



              Decision to trade                             Trade execution




              Funds and securities                          Clearing of trades



                                     Settlement of trades



The main functions of this department are as follows



                                                                                 21
                            SETTLEMENT DEPARTMENT



Pay in of          Pay out of              Pay in of                Pay out of

Securities         Securities              funds                    funds



Pay in of Funds and Securities

The members bring in their funds/securities to the NSCCL; they make available

required securities in designated accounts with the depositories by the prescribed

pay in time. If they fail to do so the securities go for Auction.



Pay out of Funds and Securities

After   due     scrutiny,    NSCCL      sends      electronic   instructions     to   the

depositories/clearing banks to release pay out of securities/funds. This

securities/funds reach the members account respectively, if the member account is

showing a debit balance his shares are kept on hold until he clears them.

This settlement is based on rolling system



What is Rolling Settlement System?

Under Rolling settlement all the trades executed on a trading day are settled X

days later this is called “T+X”rolling settlement where “T” is the trade date and

“X” is the number of business days after trade date in which settlement takes

place. The rolling settlement has started in T+5 basis in India, now it is T+2.




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Advantages


1 Under Rolling Settlement, the investors trading on the preceding or

   succeeding day are treated differently. All of them wait for “X” days from the

   trade date for settlement.

2 The gap between the trade date and the settlement is less under rolling

   settlement making both securities and funds easily convertible

3 The account period settlement combines the features of cash as well as futures

   market and hence distorts price discovery process. In contrast rolling

   settlement segregates cash and futures market and thereby removes excessive

   speculation that helps in better price discovery.

4 There is a scope for both inter-day and intra-day speculation under account

   period settlement, which allow large outstanding positions and hence poses

   greater settlement risks In contrast, since all open positions under rolling

   settlement at the end of a date “T” are closed on the same day and necessarily

   settled “X” working days later it limits the outstanding positions and reduces

   settlement risks.

5 Till recently it was possible to shift position from one exchange to another

   under account period as they follow different trading cycles. Rolling

   Settlement took care of this making trading cycle uniform




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CENTRAL DEPOSITORY SERVICES LTD (CDSL) DEPARTMENT: -

The main activities of CDSL Department are as follows

                                          CDSL




   Account              Transmission         Dematerialization              Settlement

   Opening              & Nomination         & Rematerialization            of    trade




Just as in a bank, opening an account is the first step that an investor has to do, here

an investor intends to hold scrip’s in D-mat form in a depository form in the

depository system. The Investor can open an account with any DP of NSDL, CDSL.

An investor can open an account with several DP’s or he may open several accounts

with a single DP in different permutation and combination as per the holding.



Why Demat Account has become a necessity?

   a) SEBI has made it compulsory for trades in almost all listed scrip’s to be settled

       in a demat mode. Although trades up to 500 shares was allowed to be settled

       in physical form for some time.

   b) It is safe and convenient way to hold securities compared to holding them in

       physical form.

   c) No stamp duty is levied on transfer of securities held in demat form.

   d) It eliminates thefts, deface, delays, and subsequent misuse of the certificates




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e) Change of name, address, registration of power of attorney, deletion of

    deceased name etc. can be effected across companies by one single instruction

    to the DP.

f) Each share is a market lots for the purpose of transactions so no odd lot

    problem.

g) Any number of securities can be transferred and delivered with one delivery

    order. Therefore paperwork and signing of multiple transfer forms is done

    away with.

h) It facilitates taking advances against securities on low margin and low interest.



1 Account Opening

Types of Accounts: -

The purpose fro which a depository account is opened determines the nature of

operation of such account.

Three Types Of Accounts

1      Beneficial owner account

2      Clearing member account

3      Intermediary account



Beneficial owner account

This is an account opened by investors to hold their securities in dematerialized

form with a depository and to settle the transactions of sale and purchase of such

securities in book entry form through the depository system. An account holder is

legally entitled for all rights and liabilities attached to the securities (i.e. Equity

shares, debentures, government securities etc) held in that account. Therefore the



                                                                                    25
account is called “beneficial owner account”. A beneficiary account can be in the

name of an individual/corporate or broker himself for the purpose of his personal

investments in demat form. The account is opened with the DP.



Clearing members account

The entities that are authorized to pay in and receive the pay out from a clearing

corporation/clearing house against trade done by them or on behalf of their clients

are known as clearing members (CMs). All pay in and pay out transactions are

carried out through their accounts

There are two types of clearing members

1 All members of stock exchanges popularly known as Brokers are clearing

   members.

2 Custodians who are permitted by the stock exchange to act as a clearing

   member.

Procedure

The clearing member has to first register itself with the depository and obtain a

business partner identification number (CM-BP-ID).

The steps undertaken to open the account are same as those of individuals

difference lays in the type of form the details to be filled in and documents to be

submitted.



Checklist for a clearing member account

1 Ensure that all compulsory fields in the account opening form have been

   entered (except PAN/GIR no and nomination, all other details are compulsory)




                                                                                26
2 Ensure that a copy of the board resolution for authorized signatories has been

   enclosed in case of corporate.

3 Ensure that required letter from NSCCL giving CC-ID is enclosed. In case of

   other stock exchanges this is not required.

4 Ensure CM is informed of standing instruction facility for receipts.

5 Ensure CM is informed that in case of delivery to CC instructions either of the

   joint holders can sign the instructions.

6 If the forms are received at the branch of a DP, ensure that the account

   opening form along with required references is dispatched to head office in the

   proper and timely manner. If required retain the copy.

7 Ensure follow up with head office in case defined deadline in respect of

   account opening is not met.



Intermediary account



As per SEBI regulations on stock lending and borrowing, only qualified

intermediary can lend and borrow stocks from clients. These intermediaries

borrow from lenders and lends to borrowers. Intermediaries registered with SEBI

as approved intermediary may open an intermediary account with a DP of its

choice for executing stock lending and borrowing transactions made through

them. The intermediary account may be opened only after obtaining registration

from SEBI under an approved stock lending scheme and getting the approval of

the depository for opening the account




                                                                               27
Transmission and Nomination

Transmission

The Companies Act 1956 distinguishes Transmission of shares from transfer of

shares. Transfer of shares relates to a voluntary act of the shareholder while

Transmission is brought about by operation of law. The word “Transmission”

means devolution of title to shares example- devolution by death, succession,

inheritance, bankruptcy, and marriage etc. the persons on whom the shares

devolve has to prove his entitlement by submitting appropriate documents and

seek transmission. If the securities are held in the depository system, documents

have to be submitted to the DP. If the securities are held in physical form, the

documents have to be sent to the company for effective transmission.



Check list for DP’s in case of Transmission

In case if securities held jointly

1 The surviving holder(s) to have a separate account with any DP.

2 Ensure all surviving holder(s) sign instruction form

3 Ensure that instruction form is accompanied with a copy of notarized death

    certificate.

4 Verify Signature

In case of securities held singly

1 Ensure legal heir(s)/representative(s)have an account with any DP

2 Ensure all legal heir(s)/ representatives sign the instruction form

3 Ensure that instruction form is accompanied with the following documents

        -   Copy of notarized death certificate

        -   Copy of notarized succession certificate



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           -   Certificate or order of court where deceased has not left a will, Or

           -   Copy of notarized probate or letter of administration



Nomination

The Companies (Amendment) Act 1999 has introduced provisions for nomination in

respect of shares, Debentures, Fixed Deposits etc. Under the provision, a Shareholder,

a Debenture holder, a Bondholder or a Deposit holder can nominate a person in whom

the shares, debentures, bonds or deposits would vest, in the event of original investors

death.



Individuals applying for holding shares/debt securities on their own behalf singly or

jointly with one or two persons can make nomination. If the shares are held jointly, all

the joint holders are required to sign the nomination form. A holder can even

nominate a minor, represented by one of the parents or guardian. Trusts, Societies,

Body Corporate, Partnership Firms, Karats of Hindu Undivided Family, or Power of

Attorney holder cannot be appointed as nominee.



Dematerialization and Rematerialization

Dematerialization

It is the process in which the physical form of holding securities is replaced with

electronic (book-entry) form of holding. The securities held in dematerialized form

are fungible. They do not bear any distinguishable features like distinctive number,

certificate number. Once the shares are dematerialized they lose their identification

feature in terms of share certificate distinctive number and folio numbers. Each

security is identified in the depository system by ISIN (International Securities



                                                                                      29
Identification number) this is a convenient method for preventing all the problems that

occur with physical securities through dematerialization.

Pre-requisites for dematerialization request

   1       The registered holder of the securities should make the request

   2       The request should be made in the prescribed dematerialization request

           form

   3       Securities to be dematerialized must be recognized by a Depository as

           eligible. In other words only those securities whose ISIN has been

           activated by a Depository, can be dematerialized.

   4       The company/issuer should have established connectivity with any

           Depository like NSDL, CDSL, Stock Holding Corporation ltd, only after

           this connectivity is established that the securities of the company/issuer are

           recognized to be “available for dematerialization”

   5       The holder of securities should have a beneficiary account in the same

           name as it appears on the security certificates to be dematerialized



   Procedure for dematerialization



   INVESTOR                                    DP




   R&T AGENT                  `                DEPOSITORY




                                                                                      30
1      Client Investor submits the DRF (Demat request form) and physical

       certificates to the DP. DP checks whether the securities are available for

       Demat.

2      DP enters the demat request in his system to be sent to the relevant

       Depository. DP dispatches the Physical certificates along with the DRF to

       the R&T agent.

3      Depository records the details of the electronic request in the system and

       forwards the request to the R&T agent.

4      R&T agent, on receiving the physical documents and the electronic request

       verifies and checks them. Once the R&T agent is satisfied,

       dematerialization of the concerned securities is electronically confirmed to

       the Depository.

5      Depository credits the dematerialized securities to the beneficiary account

       of the investor and intimates the DP electronically. The DP issues a

       statement of transaction to the client.

Rematerialization

It is exact reverse of dematerialization. It refers to the process of issuing physical

securities in place of the securities held electronically in book entry form with a

depository. Under this process the depository account of a beneficial owner is

debited for the securities sought to be rematerialized and physical certificates for

the equivalent number of securities is/are issued.



Pre requisite to a rematerialization request

1 The beneficial owner of the securities should make the request.




                                                                                   31
2 There should be sufficient balance of securities available in the beneficiary

account to honor the rematerialization request.



Procedure of rematerialization

1 The DP should provide rematerialization request forms (RRF) to the clients.

2 The client should complete RRF in all respects and submit it to the DP.

3 The DP should check RRF for validity, completeness and correctness. In

   Particular following points should be checked

       -   Sufficient balance of shares available in clients account or not

       -   The name of the client on the RRF is exactly the same as that in the

           client account

       -   Details like security type, face value, issuers name and lock in status

           are filled in correctly

       -   The RRF is properly signed or not

       -   If the RRF is not found in order the DP should return the RRF to the

           client for rectification

       -   If RRF is found in order the DP should accept RRF issue an

           acknowledgement to the client.



        Settlement of trades

       One of the basic services provided by the Depository is to facilitate

       transfer of securities from one account to another on the instruction of the

       account holder.

       Transfer of securities from one account to another may be done for any of

       the following purposes: -



                                                                                32
   1   Transfer due to a transaction done on a person-to-person basis (an” off-

       market” trade).

   2   Transfer arising out of transaction done on a stock exchange.

   3   Transfer arising out of transmission and account closure.

   There are four types of transactions, which a DP has to carry out

                                TRANSACTION




Off-Market             On-Market       Inter Depository    Intra Depository



   Off-Market Transaction

   Any trade that is clear and settled without the participation of a clearing

   corporation and transfer from one beneficiary account to another due to a

   trade between them is called Off- Market Trade.



   DEPOSITORY



              DP 1                                                 DP 2



              Seller                                               Buyer



   On-Market Transaction

   Any transaction for sale or purchase of securities through broker on a stock

   exchange to be settled through clearing corporation/clearing house is

   generally termed as On-Market Transaction.



                                                                              33
           The procedure is as follows

           a. The seller gives delivery instructions to his DP to move securities from

                his account to his brokers account.

           b. Securities are transferred from brokers account to CC on the basis of

                the delivery out instruction.

           c. On payout, securities are moved from CC to buying brokers account.

           d. Buying broker gives instructions and securities move to the buyers

                account.




           DEPOSITORY

           DP                                                                          DP

           CC



                         Broker                                       Broker

                Seller            Buyer                      Seller            Buyer



Inter Depository Transfer

Transfer of securities from an account in one depository to an account in another

depository is termed as an inter depository transfer.

Pre-requisites given by SEBI (Depository and Participants) regulations 1996

   1       Both the depository must be interconnected to enable inter depository

           transfers

   2       Inter Depository Transfer can be done only for securities that are available

           for dematerialization on both the depositories.



                                                                                       34
3      The account in Depository can be either a clearing account or a beneficiary

       account.

4      For debiting the clearing account on the beneficiary account with

       Depository the form for the inter depository delivery instruction is required

       to be submitted by the clearing member/beneficial owner to DP.

RISK MANAGEMENT DEPARTMENT

The concept of Risk Department on a broking firm is a new concept in India. The

Risk Management Department is principally concerned with the management of

trading and non-trading risks. It seeks to ensure that all risks, which threaten the

business, are recognized, controlled, and reduced to their feasible economic

minimum and not just the risks that are capable of being insured. There have been

experiments with different risk containment measures in the recent past, following

are some of the measures which are taken by the broking firms.



                              RISK DEPARTMENT




       Capital        On Line         Off-Line         Margin           Circuit

       Adequacy       monitoring     monitoring     requirement         filters




1 Capital Adequacy Requirement

    Every stock exchange has mentioned its own capital requirements, as

    compared to the minimum statutory requirements as also those stipulated by

    other stock exchanges; the Capital adequacy requirements stipulated by NSE



                                                                                  35
    are higher. Out of total capital provided by a member, Base Minimum Capital

    (BMC) is utilized towards taking exposure/turnover only and Additional Base

    Capital (ABC) is utilized towards margin payment if not used up for taking

    exposure/turnover.

2   On-Line and Off-Line Exposure Monitoring

    NSCCL has put in place an online monitoring and surveillance system

    whereby exposure of the members is monitored on a real time basis.

    Off-Line surveillance activity Consists of inspection and investigations as per

    regulatory requirement a minimum of 10% of the active trading members are

    to be inspected every year to verify the level of compliance with various rules,

    bye laws and regulations of the exchange.

3   Margin Requirement

    The daily margin in rolling settlement comprises of Mark to Market margin

    (MTM) and Value at Risk based Margin (VaR). Margins are computed at

    client level. A member entering an order needs to enter the client code. Based

    on this information margin is computed at the client level which will be

    payable by the trading member on T+1 basis.

4   Index based Circuit Filters

    An index based market wide circuit breakers system applies at three stages of

    the index movement either way at 10%, 15%, and 20%. These circuit breakers

    bring about a coordinated trading halt in all equity derivatives market

    nationwide.




                                                                                 36
RISK



Whether it is driving, or just walking down the street, everyone exposes himself to

risk. It is equally true in the case of investments. Your personality and lifestyle play a

big role on how much risk you are comfortably able to take if you invest in stocks and

have no trouble sleeping at nights because of your investments you are probably

taking too much of risk. All investments are risky, whether in stock, capital market,

banking, financial sector, real estate, bullion, gold etc. The degree of risk however

varies on the basis of the features of the assets, investments instrument, the mode of

investment, time frame or the issuer of the security etc.

Risk can be defined as “Possibility of suffering losses”

“The chance of something happening that will have an impact upon objectives. It is

measured in terms of consequences and likelihood”.

Investopedia has defined risk as “The chance that an investment’s actual return will

be different than expected” this includes the possibility of losing some or all of the

original investments.

When considering any security, the investor is always concerned with the return

expected on the investments and the risks of the investments, i.e. how likely it is that

the return expected will be achieved. There are two types of risks

   1       Systematic Risks

   2       Unsystematic Risks



   Systematic Risks

   The risks arising out of external and uncontrollable factors, arising out of the

   market, nature of industry, the state of the economy and a host of other factors.



                                                                                       37
This risk influences a large number of assets. It is virtually impossible to protect

yourself against this type of risk. Example, Market Risk, Interest rate risk,

Purchasing power risk etc.

Unsystematic Risk

The risk emerging out of known and controllable factors, internal to the issuer of

the securities or companies. This risk affects a very small number of assets.

Sometimes referred to as “specific risks”. Example Business risk, financial risk,

Insolvency risks etc.

                               RISK CATEGORIES



   Dynamic                 Static                  Pure                Speculative



Dynamic – Associated with changes in the economy

Static – With or without changes in the economy

Pure – Chance of loss or no loss

Speculative – Chance of loss or gain



Risk and Uncertainty

Risk and uncertainty go together. Risks suggests that the decision maker knows

that there is some possible consequence in an investment decision, but uncertainty

involves a situation, where the outcome is not known to the decision maker. But

basically, whether the outcome is known or not, the investments involve both risk

and uncertainty. For our decision, the word “Risk” is comprises of all elements of

variability of return, uncertainty of the outcome, etc.




                                                                                 38
        The investors and some issuers of securities can control some risks by

    planning. Others cannot control and they have to bear the consequence

    compulsorily.

    What Causes .the Risks?

    These risks are caused by the following factors

    1 Wrong decision of what to invest in.

    2 Wrong time of investments.

    3   Nature of investments.

    4 Creditworthiness of the issuer.

    5 Maturity period or the length of the instrument.

    6 Method of investments, namely, secured by collateral or not.

    7 Terms of lending such as periodicity of servicing, redemption period, etc.

    8 Nature of industry in which the company is operating.

    9 Amount of investment.

    10 National and International factors, acts of God.

    Ways to deal with Risks

                                        Dealing Risks




               Avoid it       Retain it       Reduce it    Transfer it    Share it

1       Avoid it

        Investor should take those risks, which are bearable. Unnecessary and

        excessive risks should be avoided.




                                                                                     39
2       Retain it

        Every Investment posses some inherent risks which are unavoidable; in order

        to earn certain returns investor has to retain certain risks.

3       Reduce it

        Investor can reduce the risk by taking advice from a knowledgeable persons,

        analysts etc before investing in any instruments.

4       Transfer it

        Insurance policies are the best way to transfer any risk.

5       Share it

        While investing an investor can approach his friends, relatives etc to invest

        with him and the risk gets shared among different people.

Rules of risk to be remembered

    1       Don’t risk more than you can afford to lose

    2       Consider the odds

    3       Don’t risk a lot for a little

    Risk and Return

    Every investor invests money to receive returns. The risk/return tradeoff could

    easily be called the iron stomach test. Deciding what amount of risk you can take

    on while allowing you to get rest at night is an investor’s most important decision.

        The risk/return tradeoff is the balance, an investor must decide on between the

    desires for the lowest possible risk for the highest possible returns. Remember to

    keep in mind that low levels of uncertainty (low risks) are associated with low

    potential return and high levels of uncertainty (high risks) are associated with high

    potential returns. Therefore risks and return go hand in hand.




                                                                                      40
                          RISK/ RETURN TRADEOFF




   R       Low Risk                         Higher Risk

           Low Return                     High Return




                          S.D (or Risk)



The Risk Return relationship between various Investments Instruments is as

follows




       R                                  * Equity

       E                              * Mutual Funds

       W                         * Debentures

       A                      * Fixed Deposits

       R                  * Post Office Certificates

       D                * Bank Deposits

       S          * Insurance Schemes

                                  Risk Taken By Investor




                                                                       41
INVESTORS RISKS



Smart investors know how much risk is appropriate for them, and they don't exceed

that level. They realize that risks come in many forms, and there is no way to totally

escape from them whatever measure or precautions they may take.

If you can recognize risks, you can manage them with relatively simple solutions. But

too many investors underestimate the importance of doing this and it's one of the most

important tasks investors should do.

The following are some risks which the investors face.



Inflation risk.

This is the risk that money you save or earn will lose some of its purchasing power.

Even if your five-year certificate of deposit is guaranteed, the dollars you get back

may not buy as much in five years as they bought when you took them to the bank.



It may make you feel giddy to receive double-digit interest on your money market

fund, as some investors did in the early 1980s. But if inflation is also in double digits,

as it was back then, you're more likely to fall behind economically than get ahead

From 1970 through 1999, the cost of living in the United States rose at a compound

rate of 5.1 percent a year. Many people believed they would be secured if they could

retire on a fixed income of $50,000 a year, which in many cases is adequate today.

But at the rate of 5.1 percent inflation, after 25 years you will need $173,400 to buy

what you can get today for $50,000. Even if inflation is much more modest, say 3

percent, a person who retires on $50,000 today at age 55 will require $104,700 at age

80 to buy what $50,000 buys today.



                                                                                       42
Stated another way, with inflation of 3 percent over 25 years, your $50,000 will be

worth only about $23,300 in today's dollars. At inflation of 5.1 percent, it will be

worth only $13,500.



You may think these numbers are far-fetched and have a hard time relating to them.

But it was amazing to learn that in King County, Washington, per-capita income rose

from $4,834 in 1969 to $40,904 in 1998.

To illustrate how money has lost its purchasing power during last 10 to 15 years, in

India a two wheeler which costed Rs 5000 few years back is available today in the

range of Rs 35000 to 60000.Our most popular car Maruti which was priced Rs 50000

initially when it was introduced in the market today costs Rs 2.5 lacs.



The way to protect yourself against this risk is to own at least some equity assets. For

most investors, that means stock funds. Over the past 75 years, the annual inflation-

adjusted return of the Standard & Poor's 500 Index was 8 percent, for small-cap

stocks it was 9 percent, while it was only 0.7 percent for Treasury bills and 1.5

percent for government bonds.

Most investors ought to have at least 10 percent of their portfolios in assets that can

increase in value, such as stock funds. Studies show that even a 10 percent equity

stake can noticeably increase the returns while at the same time it actually reduces the

risk of an all-fixed-income portfolio.




                                                                                     43
Business risk.

This is the risk that you buy stock in a company that fails or has a major unexpected

deterioration in its business. The cure for this risk is basic and simple: diversification.

If you own stock in one or a handful of companies, an unexpected disaster hitting one

of them can do serious damage to your portfolio. But if you own 100 companies, a

disaster in one will have little overall effect.



Credit risk.

This is the variation of business risk that affects bond investors. You can buy a bond

issued by a company that can't pay the interest or the principal. It's called a default.

More commonly, the company that issued your bond has an unexpected deterioration

in its business, and its bonds are downgraded by rating services. When this happens,

the market value of the bond falls.

The cure for credit risk is mostly diversification. If you own a single bond and it

winds up being insolvent, you may be in a heap of trouble. But if you own 20 bonds,

as is typical of some bond funds, one or two duds won't spoil your party.



Manager risk

Once you determine the proper amount of your portfolio that should be in stocks, you

typically hire a manager to pick them for you. Or you buy a mutual fund, which

amounts to the same thing. You’ll probably pick a manager with a winning

personality, persuasive marketing materials and a track record that's impressive.

There’s just one problem: Very, very few people have been able to successfully pick

market-beating stocks over long periods of time, and even the best track records don't

last forever. By now you might be able to guess the recommended way to overcome



                                                                                        44
this risk: by practicing the most fundamental investing technique of all,

diversification.

Invest in index funds that in turn invest in hundreds or even thousands of stocks. If

you prefer actively managed funds, split your investments among multiple managers.

If you're investing in an actively managed large-cap value fund, choose two of them,

run by different managers. Some mutual funds give you a way to do this in a single

package. Birla Mutual Fund for example, has several funds, which invest in different

sectors of industry and are managed by carefully chosen managers of proven record.

It's a way to get the benefit of several fund managers and diversification.



Market risk.

This is the chance that the entire market, either bonds or stocks, goes way up when

you want to buy-or way down when you want to sell. The market is the product of

nearly countless influences and forces, both economic and psychological, both

rational and irrational. In the very long term, it's a relatively safe bet that the market

will continue its upward climb. But nobody can consistently and accurately predict

what the market will do in a week, a month, a year or even a decade.



Over the past century, the U.S. stock market measured by the Dow ]ones Industrial

Average has experienced 19 bear markets in which the index declined more than 20

percent. These figures, by the way, represent bear markets for the highest quality

companies. If you think this is all in the past, remember that the NASDAQ 100 Index

suffered a decline of more than 50 percent last year. And Warren Buffet's Berkshire

Hathaway, a portfolio managed by one of the best in the business,

Dropped 50 percent from March 1999 to March 2000.



                                                                                       45
If you're an equity investor, you have two ways to protect yourself from bear markets.

First, you can use mechanical market timing, to attempt to get out of stocks before

they experience major losses and to attempt to get back in before they experience

major gains., this can be a frustrating and imperfect process. But at times it is very

successful. Second, you can have enough fixed-income assets in your portfolio to

dampen the volatility of equities, so your temporary losses won't exceed your risk

tolerance. Most investors should have at least 10 percent of their portfolios in variable

assets like equity funds, most should have at least 10 percent of their assets in fixed-

income investments like bond funds to dampen the volatility of their portfolios.

Bond investors, including those who invest through bond funds, can protect

themselves by the use of market timing and by investing in short-term bonds, which

are less volatile than bonds with longer maturities.

One form of market risk is paying too much for assets when you invest in them. By

using dollar cost averaging, the practice of routinely investing a fixed amount in an

asset every month or every quarter or every year, you automatically buy more units

when prices are down and fewer when prices are up. Over time, this technique will

make your average price per share of a mutual fund lower than the average of all the

prices at which you bought. This is the technique many investors use when they invest

a fixed amount every month to buy units of mutual fund.



Tax risk.

This is the risk, usually a certainty, that your investment gains will be diminished by

income taxes. Later this year, all mutual fund prospectuses will have to disclose more

fully the theoretical impact of taxes on their returns. This will make returns look




                                                                                      46
smaller, because the Securities & Exchange Board of India has ordered that

prospectuses and advertisements must mention the impact of tax clearly.



There are plenty of ways to protect you against tax risk, but some of them come at the

expense of good investing principles. Many people bought limited partnerships in the

early 1980s, having been promised substantial tax write-offs from big expected losses.

Then something unexpected happened: Government changed the tax laws

subsequently. The investment losses came as expected, but the tax write-offs

disappeared, as the changed law did not allow this. Without tax breaks, many limited

partnerships didn't have well enough fundamentals to attract any new buyers hence

the investments became duds.



Here are a few of the ways you can save taxes on your investments. Each of them

works, but each has drawbacks that you should understand in advance.

•      Buy and hold. If you don't sell, you won't be hit with a capital gain.

•      Invest in mutual funds with tax benefits. There are many funds available in the

       market, which allow this. The dividend earned on these investments is also

       tax-free.

•      if you're in a high tax bracket, invest in RBI tax-free bonds instead of taxable

       bond funds and taxable money-market funds.

•      if you have exhausted all other avenues and still need to reduce taxes, consider

       variable annuities.




                                                                                    47
Expense risk.

This is the risk that your investment returns will be eroded by paying needlessly high

expenses. Expenses are like anchors being dragged behind a sailboat. They may be

invisible, but they inevitably reduce the speed of the boat. High expenses take many

forms, including sales commissions (called loads in mutual funds) and ongoing

expense ratios.

Every investment manager expects and deserves to be paid. But some investment

companies and products charge investors too much. Than you should have a very

good reason.

The best way to control this risk is to inquire about expenses before you invest. Every

investment product involves expenses; don't invest in one until you understand this

element. Here are a few specific suggestions:

•      When you buy mutual funds, buy no-load funds. This will save you from one

       of the biggest one-time losses your investment can experience.

•      If you're a buy-and-hold investor, invest in index funds for their ultra low

       expenses.

•      If you invest in stocks or bonds, choose a reputed brokerage house who

       charges a reasonable brokerage. SEBI has these days made it mandatory for

       brokers to issue split Contract Notes, which separately give the rate at which

       the broker has bought the stock for you and brokerage he has charged you.



Event risk

This is the -risk that some unexpected event will topple the market, or part of it. This

may be an assassination, a natural disaster, a political upheaval or some man-made




                                                                                     48
crisis that causes investors to suddenly question the future. This risk also can be very

personal, affecting only you and your family: a death, illness, layoff or a house fire.

Unless you keep all your money in government-guaranteed bank accounts, there is no

absolute protection against sudden events. Your best protection may be the right

attitude, that life is uncertain and the uncertainty is part of what makes it worth living,

backed up by an emergency fund that would let you continue living if your income

were interrupted or if your expenses suddenly skyrocketed.



Liquidity risk

This is the risk that you won't be able to get your money quickly when you need it

without taking a significant investment hit. If you own a small business, selling it for

anything close to what you think it's worth is usually difficult and time consuming. If

your wealth is tied up in raw land and you need to turn it into cash, you may have to

wait months or years to get the price you think you deserve. If you invest in limited

partnerships and need to sell before they expire, you may have to sell at a substantial

loss.

You protect yourself against this risk in two ways: First, by making sure that most of

your investments are in liquid assets that can be sold quickly and inexpensively;

stocks, bonds and mutual funds, gold all qualify. Second, by having an emergency

fund that will let you quickly get your hands on money when you need it, without

having to sell an investment you had planned to keep.



Fraud risk.

This is the risk that you'll simply be defrauded in your investments. This is different

from making a dumb mistake. Fraud deliberately creates victims. To keep yourself



                                                                                          49
from becoming one of them, deal with reputable investment professionals. Don't make

impulsive decisions about unfamiliar investments; instead, take the time to have

somebody thoroughly check out anything you are considering to buy.

If you're told you must make a decision immediately to take advantage of a

opportunity, there is only one right answer: "I'll pass." If you are offered something

promising an unusually high return, remember that risks and returns always go

together. If you can't identify the risks you are taking in order to seek a high return,

leave your checkbook in the drawer where it belongs.

Finally, follow one of the most basic of all investment rules: Don't invest in

something you don't understand.



Emotional risk.

This is the risk that your emotions will get out of hand and start dictating your

decisions. Greed and fear are the two biggest forces driving our Stock Markets, and

nobody is totally immune to them. Another form of emotional risk is grandiosity,

thinking you know more than you really do and becoming overconfident in your

ability to see into the future.

We sometimes see emotional risk most clearly when investors who are on the

sidelines see others making big gains, and eventually they get so anxious to get some

of those gains for themselves that they just jump into whatever is "hot" in the market.

We call this the "I can't stand it any more" market timing system, and very often it

leads people to buy at close to the peak of a market cycle. We see the converse of this

when investors get increasingly frustrated and exasperated- at-continuing losses, and

finally they "Can't stand it any more" and sell, often at close-of -the bottom of a

market cycle.



                                                                                     50
If investors could follow the old Stock Market saying, "Buy low and sell high," they

would make money. But in both instances, the "I can't stand it anymore" timing

system leads them to do the opposite.

To protect yourself from the risk of grandiosity, be brutally honest about the results of

the investments you have made. Keep a list, if necessary, of the decisions you made

that went wrong. Next time you are sure that you know better than the rest of the

market, pull out the list and study it.

The best protection against emotional risk is a disciplined plan for buying and selling.

Make sure your assets are balanced so you can sleep at night no matter what the

market is doing. If you use market timing, follow a strict discipline, preferably having

somebody else implement it for you - somebody without any emotional charge on

each trade. If you are a buy-and-hold investor, make sure you have enough fixed

income in the portfolio to moderate the volatility of equities; and make sure you have

some equities in the portfolio so you won't feel totally left out during bull markets.

Finally, the biggest risk of all: You could run out of money before you run out of

life.

This is the biggest fear of many retirees, that their resources won't last long enough to

support them for life.

There are several good ways to protect you against this risk, but none is foolproof.

You must protect yourself against inflation, which we already discussed briefly. You

must keep your living costs within reasonable bounds. You must start with enough

assets before you stop working. Every year "early" that you retire can impact you

financially in two ways: It gives you one less year of savings and one more year of

future life. Finally, you must invest your assets in a sensible way so your risks are

limited and you have some opportunity for growth.



                                                                                         51
RISKS INVOLVED IN A BROKING FIRM i.e. FOR BROKER

The Exchange has been exposed to a large number of risks, which have been

inherently borne by the member brokers for all the times. These risks are as follows



                                          BROKER




               Operational       Financial       Market        Credit        Liquidity

               Risks              Risks          Risks          Risks         Risks



Operational Risks

Operational risks are very common risks, which are found in every organization.

Operational risks can be defined as “Risk of loss arising due to procedure errors,

omission or failure of internal control system”. Every individual organization faces

the risks that their activities and processes may be disrupted unexpectedly or fail to

meet expected performance level. Strong risk management is an essential part of good

corporate governance and something that helps to protect the shareholders value.

There is also growing recognition of the need to ensure that an effective framework of

management controls and supervision is in place. This view is reflected in the

attention that is being placed on risk management by regulators and testing authorities

around the world.

       Management at an operational level often forces on the smooth and efficient

running of an organization Attention is not always given to management of

operational risks within the context of an enterprise-wide view of risks. Therefore the

organization has to face the following risks



                                                                                       52
1      Direct financial losses, which arise from failing to meet an obligation (ex

       penalty interest payments or restitution loss).

2      Direct financial losses, attributable to an absence of income (ex, from loss

       of sales, transaction fees, direct fees or commission)

3      Statutory or regulatory penalties resulting to revocation of licenses.

4      Opportunity costs, arising from adverse publicity, being unable to trade or

       because of processing delays, backlogs, and poor customer service

       delivery or poor product or service quality.

The errors and failures causing risks



Risk category             Functional Responsibilities            Examples



PEOPLE                    Business line                          Human errors

                          Human recourses                        Internal fraud

                          Security                          Staff shortage/sabotage

TECHNOLOGY                Business line technologies            Technology failure

                          Central infrastructure                 Outmoded system

                          Data center maintenance                Poor data integrity

REGULATORY                Compliance                             Regulator disputes

                          Finance and accounting                Misstatingaccounts

                          Legal                                  Litigations




                                                                                  53
   The operational risks found in a broking firm at various departments are as

   follows

                               OPERATIONAL RISKS



       Compliance dept       Dealing dept       Settlement dept         CDSL dept




COMPLAINCE DEPARTMENT RISKS

In compliance department risks is involved in absence of documents

   1      Absence of application form

   2      Absence of different agreements and signs on agreement

   3      Absence of bank certification

   4      Absence of identity proof

   5      Absence of reference letter from chartered accountant

   6      Absence of undertaking from sub broker that he/she has not been involved

          in any criminal offence and no trail is pending against him/her.

   7      Absence of authorization letter for maintaining account on running basis

   8      Risk is involved if the client is not introduced by someone

   EFFECTS

   If the compliance department doesn’t complete all the required documentation the

   results could devastating. First of all in the absence of compliance the broker can

   be suspended and penalized. This would result in bad publicity, loss of business

   and credibility, because no one would like to be associated with a suspended

   broker. Secondly when compliance is done the broker is insulated from a probable

   risk, fraud, and cheating and financial loss at the entry level itself. Proper



                                                                                     54
  introduction, reference from a chartered accountant, bank statement ensures that

  the investor is genuine and has no malafide intentions. It wouldn’t be out of place

  that many brokers were cheated by some investors by giving false information and

  third party cheques. Since the compliance department had not done their work

  perfectly the brokers were on a very weak wicket when they sought legal redressal

  of their problems. Similarly the information about the sub broker that he is not

  involved in any criminal offence and no trial is pending against him saves the

  broker from any future risk and liability.



DEALING DEPARTMENT RISKS

  1      Placing of wrong order i.e. instead of buy order sell order is given.

  2      Placing of wrong quantity.

  3      Trading done from wrong account i.e. buying and selling for wrong clients

         account.

  4      Trading in wrong scrip ex instead of trading in reliance, trading is done in

         infosys.

  5      Entry not made in trade book.

  EFFECTS

  In all the above-mentioned points the broker suffers financial loss. When instead

  of buying the sell order is punched the broker is unable to give delivery of shares

  resulting in Auction of the shares and loss to him. It is also observed that in some

  volatile scrips if the investor misses an opportunity he pressurizes the broker to

  compensate him. If this is repeated quite often the investor loses confidence and

  prefers changing the broker. Thus long-term relationships are lost leading to

  financial losses.



                                                                                   55
SETTLEMENT DEPARTMENT RISKS

  1      Payout of shares to wrong account

  2      Failure in deciding brokerage slab for a client

  3      Pay in not done by the client

  4      Wrong preparation of statement of funds

  5      Failure in sending confirmation of account opening to the client.

  6      Failure in sending contracts.

  7      Failure in preparing bills.

  8      Failure in preparing pay in and pay out of slips.

  9      Frauds by the employees.

  EFFECTS

  Though no department is less important in a broking house, without hesitation it

  can be said that the work of settlement department is of utmost responsibility. All

  the good work done by different departments can be nullified by an incompetent

  or casual settlement department. Wrong payout of shares, wrong payout of funds,

  failure in preparing bills in time, failure in preparing pay in and pay out of slips

  can not only create chaos in a broking firm, it can result in huge financial losses to

  the broker. It is on the record that frauds by the employees have been responsible

  for many brokers to go bankrupt and close their business.

  RISK DEPARTMENT

  1 Failure in giving limits.

  2 Giving wrong limits to the client.

  3 Failure in collecting margins.

  4 Failure in sending daily reports to Franchisee and sub broker.

  5 Failure in sending daily reports to management.



                                                                                     56
  EFFECTS

  Like settlement department the role of risk department is very important. This

  concept is quite new in India and its needs were felt when during last two three

  years broking houses suffered huge losses. However the risk department, which is

  supposed to be managing risk, is managed by human beings and itself faces many

  risks. If it does not give enough limits where it is due and is required it can result

  in loss to investor or a sub broker leading to dispute and financial loss. On the

  contrary giving wrong limits have the same effect. Failure in collecting margins

  attracts two types of risks regulatory and financial. If the margins are not collected

  according to SEBI guidelines it can result in suspension, termination or financial

  penalty to a broking firm. And insufficient collection of margins exposes a broker

  to financial loss in case of default.



CDSL DEPARTMENT RISKS

  1       Time period for pay in of shares which is not followed

  2       Punching error

  3       Networking problem with the exchange.

  4       Failure in maintaining records for D-mat and R-mat account



  OTHER RISKS

  Market Risk

  The risk of loss arising from adverse market rate movements e.g. foreign

  exchange (transaction, translation, or economic) interest rates, commodity and

  equity prices are termed as market risk. Generally this risk occurs due to volatility

  in scrip’s, which can’t be controlled.



                                                                                     57
Credit risk

It is the risk that the counter party of financial transaction will fail to perform

according to the terms and conditions of the contract, thus causing the other party

to suffer a financial loss. Credit risk is often due to bankruptcy or insolvency of

the counter party.



Liquidity Risk

Market liquidity is the risk that a financial instrument cannot be sold quickly at a

price, which equates to their market value. Liquidity changes over time and rapid

changes occur in highly volatile conditions. Derivative instruments, which are

new, and the liquidity of the market have yet to be fully tested. It must be

recognized that many derivatives are OTC based and liquidity of these products

can disappear quickly.



Financial Risk

Financial risk means fear of loss of money, which is the biggest risk faced by a

broking firm. Financial risk in respect of broking firm can be of two types firstly

loss of income i.e. brokerage secondly loss of capital.




                                                                                 58
CHAPTER 6- DATA ANALYSIS & INTERPRETATION

RISK MANAGEMENT

Risk is defined as “possibility of suffering losses”

This risk in itself is not bad, risk is essential to progress, and failure is often key part

of learning, but we must learn to balance the possible negative consequences of risk

against the potential benefits of its associated opportunities. This is risk management.

Principles of Risk management are as follows

   1        Global Perspective

           -     Viewing development within the context of large level developments

           -     Recognizing both the potential value of opportunity and the potential

                 impact of adverse effects

   2        Forward looking view

           -     Thinking towards tomorrow, identifying uncertainties, anticipating

                 potential outcomes

           -     Managing project      resources    and activities while       anticipating

                 uncertainties

   3        Open Communication

           -     Encouraging free-flowing information at and between all project levels

           -     Enabling formal, informal, and proper communication

           -     Using processes that value the individual voice (bringing unique

                 knowledge and insight to identifying and managing risk)

   4           Integrated management

           -     Making risk management an integral and vital part of project

                 management




                                                                                         59
       -   Adapting risk management methods and tools to a projects

           infrastructure and culture

5      Continuous process

       -   Sustaining constant vigilance

       -     Identifying and managing risks routinely through all phases of the

       projects lifecycle

6      Shared product vision

       -   Mutual product vision based on common purpose, shared ownership,

           and collective communication

       -   Focusing on results

7      Teamwork

       -   Working cooperatively to achieve common goal

       -   Pooling talents, skills, and knowledge

    Functions of Risk Management are as follows

               i. Identify - Search for and locate risks before they become

                  problems

              ii. Analyze      - Transform risks data into decision-making

                  information. Evaluate impact, probability, and time frame,

                  classify risks, and prioritize them

              iii. Plan - Translate risk information into decision and mitigating

                  actions (both present and future) and implement those actions

              iv. Track - Monitor risk indicators and mitigation actions

              v. Control - Correct for deviations from the risk mitigation plan.




                                                                               60
                  vi. Communicate - Provide information and feedback internal and

                       external to the project on the risk activities, current risks, and

                       emerging risks.



RISK MANAGEMENT IN A BROKING FIRM



       Risk management in a Broking Industry is a new concept in India, since it

poses maximum risk in the financial market, managing it was felt most essential by

the regulatory bodies and exchanges. Therefore NSE introduced for the first time in

India, risk containment measures that were common internationally but were absent

from the Indian Securities Market. NSCCL has put in place a comprehensive risk

management system, which is constantly upgraded to pre-empt market failures. These

measures were taken to reduce the brokers’ risks. Whereas SEBI has given some

guidelines under Investors Protection to protect investors risks.

NSE has given the following risk management measures



Margins

NSE has specified Different margins for different instruments like stocks futures and

options etc. Margins depend upon the volatility and market conditions, It vary from

stock to stock and instrument to instrument

Categorization of stocks for imposition of margins

Daily margins payable by members consists of the following:



1. Value at Risk Margins

2. Mark to Market Margins



                                                                                      61
Daily margin, comprising of the sum of VaR margin and mark to market margin is

payable.



Value at Risk Margin



VaR margin is applicable for all securities in rolling settlement. All securities are

classified into three groups for the purpose of VaR margin.



The VaR based margin would be rounded off to the next higher integer (For E.g.: if

the VaR based Margin rate is 10. 0 1, it would be rounded off to 11. 00) and capped at

100%.

The VaR margin rate computed as mentioned above will be charged on the net

outstanding position (buy value-sell value) of the respective clients on the respective

securities across all open settlements. The net position at a client level for a member

are arrived at and thereafter, it is grossed across all the clients for a member to

compute gross exposure for margin calculation.

For example, in case of a member, if client A has a buy position of 1000 in a security

and client B has a sell position of 1000 in the same security, the net position of the

member in the security would be taken as 2000. The buy position of client A and sell

position of client B in the same security would not be netted. It would be summed up

to arrive at the member's exposure for the purpose of margin calculation.

VaR margin rate & Security category




                                                                                    62
Mark-to-Market Margin

Mark to market margin is computed on the basis of mark to market loss of a member.

Mark to market loss is the notional loss which the member would incur in case the

cumulative net outstanding position of the member in all securities, at the end of the

relevant day were closed out at the closing price of the securities as announced at the

end of the day by the NSE. Mark to market margin is calculated by marking each

transaction in scrip to the closing price of the scrip at the end of trading. In case the

security has not been traded on a particular day, the latest available closing price at

the NSE is considered as the closing price.



In the event of the net outstanding position of a member in any security being nil, the

difference between the buy and sell values would be considered as notional loss for

the purpose of calculating the mark to market margin payable.



MTM profit/loss across different securities within the same settlement is set off to

determine the MTM loss for a settlement. Such MTM losses for settlements are

computed at client level.



Upfront margins collection

Members are required to ensure collection of upfront margin from their clients at rates

mentioned below and deposit the same in a separate clients account, in respect of

trades in normal market in which would result in a margin of Rs 50,000 more, after

applying the margin percentages as given from 15%, 30%, 45%.




                                                                                      63
Failure to pay margins

Non-payment of either the whole or part of the margin amount due will be treated as a

violation of the Bye Laws of the Clearing Corporation and will attract penal charges

@ 0.09% per day of the amount not paid throughout the period of non-payment.

In case a member has a margin shortage of Rs. 10 lacs or above for more than 10

occasions in the past 4 weeks, the gross exposure multiple of the member will be

reduced to one level lower at the time of re-activation of their trading terminals as

giver. Under



Slab                  Multiple

Full Exposure         8.50 times

1st level             7.00 times

2nd level             5.00 times

3rd level             3.00 times

4th level             2.00 time



If there is no margin shortage for the next I week of Rs. 10 lacs or more, the exposure

limits shall be restored to the previous levels.



In addition, NSCCL may, within such time as it may deem fit, advise the Exchange to

withdraw any or all of the membership rights of the member including the withdrawal

of 'trading facilities without any notice.

In the event of withdrawal of trading facilities, the outstanding positions of the

member may be closed out, to the extent possible, forthwith or any time thereafter by

NSCCL, at its discretion by placing at the Exchange, counter orders in respect of the



                                                                                    64
outstanding position of the member, without any notice to the member, and such

action shall be final and binding on the member.



Margins based on turnover & Exposure limits (Initial margins)

Intra-day turnover limit

Members are subject to intra-day trading limits. Gross turnover (buy +sell) intra-day

of the member should not exceed thirty three and one-third (33 1/3) times the base

capital (cash deposit and other deposits in the form of securities or bank guarantees

with NSCCL and NSE).

Members violating the intra-day gross turnover limit at any time on any trading day

are not being permitted to trade forthwith.

Member’s trading facility is restored from the next trading day with a reduced

intraday turnover limit of 20 times the base capital till deposits in the form of

additional deposits (additional base capital) is deposited with NSCCL.



Members are given a maximum of 15 days time from the date of the violation to bring

in the additional capital. Upon members failing to deposit the additional capital within

the stipulated time, the reduced turnover limit of 20 times the base capital would be

applicable for a period of one month from the last date for providing the margin

deposits.

Upon the member violating the reduced intra-day turnover limit, the above-mentioned

provisions apply and the intra-day turnover limit will be further reduced to 15 times.

Upon subsequent violations, the intra-day turnover limit will be further reduced from

15 times to 10 times and then from 10 times to 5 times the base capital. Members are




                                                                                     65
not permitted to trade if any subsequent violation occurs till the required Additional

deposit is brought in.

Gross Exposure Limits

Members are also subject to gross exposure limits. Gross exposure for a member,

across all securities in rolling settlements, is computed as absolute (buy value - sell

value), i.e. ignoring +ve and -ve signs, across all open settlements. Open settlements

would be all those settlements for which trading has commenced and for which

Settlement payin is not yet completed. The total gross exposure for a member on any

given day would be the sum total of the gross exposure computed across all the

securities in which the member has an open position.

Gross exposure limit would be:

Total Base Capital              Gross Exposure Limit

Up to Rs. 1 crore      -   8.5 times the total base capital

> Rs. 1 crore       - 8.5 crores + 10 times the total base capital in excess of Rs 1 crore

Or any such lower limits as applicable to the members.

The total base capital being the base minimum capital (cash deposit and security

deposit) and additional deposits, not used towards margins, in the nature of securities,

bank guarantee, FDI; ~ or cash with NSCCL and NSE.

Security-wise Differential Exposure Limits

In case of securities that are traded in the Rolling settlement (Type 'N' and security

series 'EQ'), the GE multiple for each security are as under:

Groups (Securities Covered)                                         Covered Multiple

Group I                                                                         I time

Group 11                                                                       2 times

Group111                                                                       5 times



                                                                                         66
All new securities to be traded on the Exchange shall be subject to exposure multiple

of 2 times.

It is clarified that while computing the gross exposure at any time for a particular

trading day, for the purpose of the above limits, members are required to add the net

outstanding positions of the previous settlement period to the cumulative net

outstanding positions as of that particular trading day until the securities pay-in day

for the previous settlement period.

Members exceeding the gross exposure limit are not permitted to trade with

immediate effect and are not permitted to do so until the cumulative gross exposure is

reduced to below the gross exposure limits (as defined above or any such lower limits

as applicable to the members) or they increase their limit by providing additional base

capital.

Members who desire to reduce their gross exposure may submit their order entry

requirements as per the prescribed format if members desire to increase their limits,

additional deposits by way of , bank guarantee or Fixed Deposit Receipt CEDR) have

to be submitted to NSCCL. Additional deposits by way of securities in electronic

form ('demat securities') may be deposited as per procedures.

The additional deposits of the member are used first for adjustment against gross

exposure of the member. After such adjustments, the surplus additional deposits, if

any, excluding deposits in the form of securities is utilised for meeting margin

requirements.



Violation Charges

A penalty of Rs.5, 000/- is levied for each violation of gross exposure limit and Intra

Day Turnover limits, which shall be paid by next day. The penalty is debited to the



                                                                                    67
clearing account of the member. Non-payment of penalty in time will attract penal

interest of 15 basis points per day till the date of payment.

In respect of violation of stipulated limits on more than one occasion on the same day,

each violation would be treated as a separate instance for purpose of calculation of

penalty.

The penalty as indicated above, would be charged to the members irrespective of

whether the member brings in additional capital subsequently.



Additional Base Capital

Members may provide additional margin/collateral deposit (additional base capital) to

NSCCL, over and above their minimum deposit requirements (base capital), towards

margins and/ or exposure / turnover limits.

Members may submit such deposits in any one form or combination of the following

forms:

                     I.      Cash

                     II.     Fixed Deposit Receipts (FDRs) issued by approved banks

                             and deposited with Approved Custodians or NSCCL

                     III.    Bank Guarantee In favor of NSCCL from approved banks

                             in the specified format.

     Approved securities in demat form deposited with approved Custodians.



All Additional Base Capital (ABC) given in the form of cash / FDR (hereinafter

referred to as 'Cash Component) should be at least 30% of the total ABC and Cash

Margins in respect of every trading member. Incase where non - cash component is

more than 70 % of the total additional base capital, the excess non-cash component is



                                                                                    68
ignored for the purpose of exposure limits requirements and / or margins

requirements.

Exemption for institutional deals

While computing margins, institutional deals are excluded. Deals executed on behalf

of the following entities are considered as institutional deals:



1. Financial Institutions

2. SEBI registered FII’s

3. Banks

4. SEBI registered Mutual Funds



Deals are identified by the use of the participant code in the trades reported on the

NSE.

Deals entered into on behalf of custodial participants i.e. carrying custodial participant

code are considered as institutional deals unless not confirmed by the respective

custodians in which case the deals shall attract margins.



Non-Custodial Institutional Deals are identified by the use of the participant code

`NCIT'. The NCIT' deals will be exempted for margin purposes (However, VaR based

margin which is charged on institutional trades on the net outstanding sale position, in

securities shall be applicable in this case also) and the settlement obligation will

remain with TM clearing member. Non Custodial Institutional deals, which are not

marked as 'NCIT' at the time of order entry, will not be exempted.




                                                                                       69
All TM clearing members are required to provide details of the contract notes for all

Non-Custodial Institutional Trades through a file upload as per the procedure



Exemption upon delivery of securities

If members deliver securities prior to the securities pay-in day, then the margin

payable by the member will be recomputed after considering the above pay-in of

securities. The margin benefit on account of early pay-in (EPI) of securities shall be

given to the extent of the net delivery position across across all clients of the member.

The EPI would be allocated to clients having net deliverable position, on a random

basis, till such time that the system is developed to provide the EPI benefit on a client

basis. However, members are required to ensure to pass on appropriate early pay-in

benefit of margin/exposure to the relevant client, until the above system is in place.



The value of the advance pay-in made is reduced from the cumulative net outstanding

sale position of the member for the purpose of gross exposure limits.



Members may note that early pay-in of securities only up to the working day prior to

the scheduled settlement pay-in day shall be considered for the purpose of early pay-

in benefits. In case any member makes early pay-in on the scheduled day of pay-in for

the settlement, no benefit will accrue to the member. Such early pay-in shall not be

adjusted against the settlement pay-in obligation and it would be treated as short

delivery. Members are therefore alerted to ensure that no early pay-in is made on the

scheduled day of settlement pay-in




                                                                                         70
Pay-in of funds securities prior to scheduled pay-in day

The relevant authority may require members to pay-in funds and securities prior to the

scheduled pay-in day for funds and securities. The relevant authority would determine

from time to time, the members who would be required to pay-in funds and securities

prior to the pay-in day. The relevant authority would also determine securities and

funds which would be required to be paid in and the date by which such pay-in shall

be made by the respective member.



The value of such prior pay-in of funds and securities will not be reduced from the

cumulative net position of the member for the purpose of gross exposure reduction.

There will be no margin exemption available for such pay-in of funds and securities.



Some Risk management are also taken by BSE they are as follows



   1 Know your client scheme

       Under the procedure the member brokers of the exchange are compulsory

       required to obtain detailed information of clients prior to commencement of

       any transactions with new clients. A similar procedure is also to be followed

       for existing clients. This information is to be made available to the exchange

       authorities whenever called for. In case the member brokers fails to furnish the

       same it is viewed seriously.

   2 Verification of shares at members office

           The exchange has outlined the process i.e. in case the transaction in a

       script with one particular client in a settlement exceeds Rs 10 lacs then the

       member are to send the photocopies of the transfer deeds and the share



                                                                                    71
   certificates to the company/ registrar for verification of the material

   particulars. The basic idea behind the introduction of this procedure is to

   prevent fake/forged/stolen shares from being introduced in the market.

3 Inspection

   The department is carrying out inspection of the member brokers records as

regards compliance of the risk management procedures

4 Insurance

The exchange presently has in place insurance policies to protect itself in the

event of losses on account of fire, damage to computer systems and a

comprehensive policy that covers risks faced by the exchange, its member brokers

and the clearinghouse.

The risks covered under the basic cover of the policy are detailed as below.

       -   Loss to members on account of infidelity of employees

       -   Loss of member on account of fake/forged/ stolen shares being

           introduced by his clients

       -   Direct financial losses suffered by the member broker on account of

           physical loss, destruction, theft or damage to securities and cash.

       -   Loss on account of securities lost in transit

       -   Loss suffered on account of incomplete transaction

       -   Loss sustained as final receiving member on exchange on account of

           default of the introducing member

       -   Loss on account of errors and omission

       -   Directors and officials liability cover




                                                                                 72
Measures taken by SEBI for Investors protection are as follows

Government of India and SEBI have been stressing upon the need for regulating the

secondary market and bringing transparency in transactions on the floor of stock

exchanges

The steps taken by SEBI to regulate and control the business of stock exchanges and

reduce the risks of investors are as follows

   1 Regulation on insider trading with the object to curb it completely and punish

       the guilty

   2 Uniform Trading hours at all the stock exchanges in the country to check

       arbitrage.

   3 Registration of market players- brokers, non member brokers, sub brokers,

       registrars to issues, merchant bankers, portfolio managers, underwriters,

       debenture trustees, custodians etc so as to have access/inspection of their

       books, records and verification of transactions.

   4 Compulsory audit of accounts of all member brokers and registered

       intermediaries by practicing chartered accountants.

   5 Inspection of Stock exchange operations.

   6 Indirect supervision through stock exchanges in day-to-day business by fixing

       margins, imposing curbs, penalties and fines.

   7 Gradual automation to reduce paper work and ensure transparency in

       transactions this is now almost complete and all stock exchanges have been

       computerized.

   8 Brokers contact notes to mention brokerage separately.

   9 Nationwide paperless trading through over the counter exchange of India,

       National Stock Exchange, BSE, DSE and other exchanges.



                                                                                73
10 Transfers to be affected within two months as per companies act and within

   one month as per listing agreement.

11 Brokers should notify all transaction to the stock exchanges including off the

   floor trades.

12 Uniform good/bad delivery norms.

13 Capital adequacy norms prescribed for brokers.

14 Brokers to keep clients money in a separate bank account.

15 Forward trading being banned on stock exchanges

16 Stress upon shorter settlement period.

17 Dematerialization of securities permitted on a selective basis. By March 2001,

   about 3500 companies will have compulsory trading in demat mode.

18 Stern action against erring brokers, stock exchanges, companies, merchant

   bankers, etc.

19 Regulation for fraudulent trade practices

20 Total transparency and automation of stock exchanges.

21 Effective margin system for smooth settlement.

22 Circuit breaker system to check volatility on the exchanges

23 Introduction of modified carry forward system and automated lending

   borrowing mechanism (ALBM).

24 Introduction of Internet trading.

25 Derivative trading in index based futures of 30, 60 and 90 days.

26 Practicing prudent governance norms.

27 Stock lending.

28 Abolition of no delivery period in demat scrip’s.




                                                                              74
Recent Development steps taken by SEBI for Investor protection



1 Appointment of administrators to check bad deliveries

To get rid of bad deliveries, SEBI has decided to appoint administrator to

implement the signature guarantee and certificate authentication programs. The

administrators appointed by SEBI act on behalf regulator in resolving problems

arising out of signature mismatch

2 Streamlining Investor protection fund

The committee set up by SEBI to review the sources and utilization of investor

protection fund of stock exchanges has made following recommendations

       -   Funds should be on trust structure and set upon under Indian Trust Act,

           1882 with independent trustees

       -    Regular contributions from active member brokers and stock

           exchanges

       -   Fund to be utilized only for investor claims and not broker claims.

       -   Trustees to ensure that fund is not deployed in risky instruments or for

           the benefit of any member but only in prescribed avenues.

       -   Time schedule to be specified while setting investor claims.

3 Service centers for investors

SEBI has directed all stock exchanges to constitute service centers for investors to

enable the investors to have a form for recording and counseling of their

grievances as well as access financial and other information of companies on

government policies, rules, regulations, etc.




                                                                                 75
4 Compliance Officer

Each company is required to appoint compliance officer who would be able to

verify rumors and information floating in the market about the company to the

stock exchange. This will reduce motivated rumors about companies, which aids

in price manipulation.



5 Corporate Governance

SEBI has prescribed prudent corporate governance norms for all listed companies

to ensure transparency and better disclosure practices.



6 Investor Education

SEBI has taken steps to educate investors through various awareness programmes

and publications




                                                                            76
CHAPTER 10- CONCLUSION OF THE STUDY



Working with a broking firm especially was really a great experience.



   1       The researcher found that the working of a broking firm is a very risky job

           because risk is involved in each and every activity of the business.



   2       The risk prevailing in the business is recognized therefore an efficient risk

           management department is essential in every broking firm.



   3       Capital Market is growing very fast, turnover wise as well as area of

           operation wise. The activities have reached through lengths and breadth of

           the country. All these necessitated in the introduction of latest technology

           in the form of advanced software’s.



   4       Efficient staff and technology is the base of broking industry.



   5       Broking business is a client-based business. The recent trends of

           voluminous increase in investors has also increased the risk involved in it.

           There is need of continuous up gradation of internal control measures



   6       Staff in a broking firm is continuous busy and due to which they are

           always under stress.




                                                                                     77
CHAPTER 11- RECOMMENDATIONS & SUGGESTIONS

  1    Every Organization should have a risk management policy that is approved

       by the board of directors annually. The policy should outline

       -   Products Traded

       -   Parameters for risk activities

       -   Limit Structure

       -   Over Limit approval Procedure

       -   Frequency of review

  2    An Organization should have a risk management function that is

       independent of its trading staff i.e. personnel responsible for the risk

       management function should be separate from trading floor personnel.

  3    Ideally an institution should be able to identify the relevant risks and

       should have measurement systems in place to conceptualize, Quantify and

       control these risks on an institutional level using a common measurement

       framework.

  4    Senior management should regularly evaluate the risk management

       procedure in place to ensure they are appropriate and sound.

  5    Senior management should also foster and participate in active discussions

       with the board of directors, sub brokers, franchisee, staff of risk

       management function and investors regarding procedures for measuring

       and managing risk.

  6    Highly qualified staff not only in front office positions such as trading

       desk, relationship officer and sales but also all back office functions

       responsible for risk management and internal control.




                                                                              78
7    An organization should have an integrated management system that

     controls market risks and provide comprehensive reports.

8    Risk management or control function should be able to produce a risk

     management report that highlights positions, limits and excess on a basis

     commensurate with trading activity. This report should be sent to senior

     management, reviewed, signed and returned to control staff.

9    A periodical compliance review should be conducted to ensure conformity

     with the rules and regulations.

10   Auditors should perform a comprehensive review of risk management

     annually, emphasizing segregation of duties and validation of data

     integrity.

11   For avoiding market risk the organization should ensure that they

     adequately measure, monitor and control the market risk in their trading

     activities. the various methods like mark to mark and value at risk

     approach can be used for trading operations. Some more measures which

     can be used are Delta, Gamma, Vega, Theta etc

12   Every Organization should have “Know Your Customer” policy and this

     should be understood and acknowledged by the trading and sales staff.

13   Every organization should check cash flow statement and balance sheet of

     last two years of a client before starting business with him.

14   Taping of trader and dealer telephone lines will facilitate to resolve the

     disputes and can be a valuable source of information to auditors, managers

     and examiners.

15   The designated compliance officer should perform a review of trading

     Practices annually.



                                                                             79
SCOPE FOR DEVELOPMENT (HDFC SEC)

HDFC SEC have set themselves very stringent and high standards of Risk

Management. However I would like to make a few points, which would help the

organization in a big way.

1 Recording of trader and dealer telephone calls, which will facilitate to resolve

   the disputes at different levels.

2 Fast and frequent interaction between the risk managers, the sub brokers and

   client will help in reducing the delay in giving limits.

3 Periodical visits to the sub brokers and franchisee by the HDFC SEC

   personnel for interaction and inspection will help in minimizing the risk to

   great extent.

4 Regarding dealers risks, well-trained and less stressed dealers will help in

   reducing the mistakes. It has been observed that most of the mistakes are done

   when they are under stress. HRD must help in this matter.

5 In settlement department the persons have be appointed with utmost care and

   their periodic check can be conducted to avoid any employee fraud.

6 Before starting business with any client his financial capability should be

   checked, by checking his cash flow statement.

7 Along with large client base, quality of clientele will help in balanced growth

   of business and minimizing the risk.




                                                                               80
LIMITATIONS OF STUDY

    To understand the overall working of share market, the period of 60 days is
    not enough.


    Moreover, very few investor and agents have a detail knowledge of the study.


    The study was conducted in Nasik only, which restricted the scope of the
    study


    The data provided by the investor and the agents can’t be held true as 100%
    correct.


    The study was conducted to understand with respect to Risk involved in
    broking firm and investors, which is a part of the equity share market.




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CHAPTER 12 - BIBLIOGRAPHY



  www.hdfcsec.com



  www.bseindia.com



  www.nseindia.com



  www.google.co.in



  Dalal Street



  Various books of Equity Management.




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