A REPORT ON FUNCTIONING OF STOCK EXCHANGES IN INDIA AND COMPARISON WITH STOCK EXCHANGES OF DIFFERENT COUNTRIES

By VARSHA KESWANI 12BSPHH011163

IBS Hyderabad

A REPORT ON FUNCTIONING OF STOCK EXCHANGES IN INDIA AND COMPARISON WITH STOCK EXCHANGES OF DIFFERENT COUNTRIES By VARSHA KESWANI 12BSPHH011163

A report submitted in partial fulfillment of the requirements of MBA Program of the IBS, Hyderabad

VADODARA STOCK EXCHANGE LIMITED

Date of Submission: 3rd May 2013

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TABLE OF CONTENTS Sr. No.

1. 2.

Topic
Abstract Introduction to the Stock markets in India Economy-Industry Analysis 2.1 Industry Structure 2.2 Trading pattern of the Indian Stock Market 2.3 Types of transactions 2.4 Limitations 2.5 Regulatory issues 2.6 Major Players 2.6.1 National Stock Exchange 2.6.2 Bombay Stock Exchange 2.7 Comparison: BSE & NSE 2.8 Who can invest in India 2.9 Restrictions/ Investment ceiling

Page No.
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2 4 5 5 6 7 7 8 9 10 11 12

3. 4.

Functioning of Stock Exchange Company Analysis 4.1 Background of Vadodara Stock Exchange 4.2 Functioning of Vadodara Stock Exchange 4.2.1 Listing department 4.2.2 Automation department 4.2.3 Margin & Surveillance department 4.2.4 Pay-in/Pay-out department 4.2.5 Clearing House 4.2.6 Membership department 4.3 Comparison of financial statements of VSE with that of BSE and NSE 4.3.1 Analysis of financial statements of VSE 4.3.2 Common Size Statements

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17 17 18 20 21 22

23 25 26 28
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5. 6.

Plan for the completion of project References

ABSTRACT

The report covers the introduction to the stock exchanges, their history and their functioning. Industry analysis include the topics like industry structure, trading pattern of Indian Stock Market, types of transanctions, limitations, regulatory issues, major players and comparison between NSE and BSE. After that, functioning of the various departments of stock exchanges is explained using an example of a human body. Company analysis covers the background of VSE and its key milestones. The Final project report will be divided into 3 parts: i. Functioning of Vadodara Stock Exchange (VSE) ii. iii. Comparison of the financial statements of VSE with that of BSE and NSE Comparison of functioning of stock exchanges in India with the stock exchanges of the world

In this report, functioning of the various departments of VSE is explained. These departments are margin and surveillance department, listing department, membership department, payin/pay-out department and clearing house. With respect to the second part, the analysis of financial statements of VSE is covered in the report. Also, the analysis of common size statements of VSE is included in this report

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1. INTRODUCTION TO THE INDIAN STOCK MARKETS

Stock markets are barometers of the economy. It is expected that the markets and their indicators, in the form of indices, reflect the potential of the corporate listed on them and, in the process, the direction and health of the economy. If a countrys economy is performing well and expected to grow at a healthy rate, the market is usually expected to reflect that. Indian economy is increasingly exposed to global markets post liberalization in the early 90s. So before analyzing domestic markets one needs to analyze the Global economy. In India we have number of recognized stock exchanges which consists of a few at national level and majority at regional level. Stock Exchanges constitute the primary institution of the secondary market. Stock Exchange is a key institution facilitating the issue and sale of various types of securities. It is a spin around which every activity of the capital market revolves. Stock exchanges provide the market place for buying and selling of securities under regulatory framework and ensuring liquidity to them in the interest of investors in securities. When a company lists its securities on a public exchange, the money paid by investors for the newly issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). Once a company is listed, it is able to issue additional common shares via a secondary offering, thereby again providing itself with capital for expansion without incurring any debt. This ability to quickly raise large amounts of capital from the market is a key reason many companies seek to go public. There are several benefits to being a public company, namely: Bolstering and diversifying equity base Enabling cheaper access to capital Exposure, prestige and public image Attracting and retaining better management and employees through liquid equity participation Facilitating acquisitions Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.

2. ECONOMY-INDUSTRY ANALYSIS
2.1 Industry Structure Stock markets refer to a market place where investors can buy and sell stocks. The price at which each buying and selling transaction takes is determined by the market forces (i.e. demand and supply for a particular stock). In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction but now with the dawn of IT, most of the operations are done electronically and the stock markets have become almost paperless. Now investors dont have to gather at the Exchanges, and can trade freely from their home or office over the phone or through Internet. One of the oldest stock markets in Asia, the Indian Stock Markets have a 200 years old history. The depression witnessed after the Independence led to closure of a lot of exchanges in the country. Lahore Stock Exchange was closed down after the partition of India, and later on merged with the Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and got recognition only by 1963. Most of the other Exchanges were in a miserable state till 1957 when they applied for recognition under Securities Contracts (Regulations) Act, 1956. The Exchanges that were recognized under the Act were: 1. Bombay 2. Calcutta 3. Madras 4. Ahmedabad 5. Delhi 6. Hyderabad 7. Bangalore 8. Indore

Many more stock exchanges were established during 1980's, namely: 1. Cochin Stock Exchange (1980) 2. Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982) 3. Pune Stock Exchange Limited (1982) 4. Ludhiana Stock Exchange Association Limited (1983) 5. Gauhati Stock Exchange Limited (1984) 6. Kanara Stock Exchange Limited (at Mangalore, 1985) 7. Magadh Stock Exchange Association (at Patna, 1986) 8. Jaipur Stock Exchange Limited (1989) 9. Bhubaneswar Stock Exchange Association Limited (1989) 10. Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989) 11. Vadodara Stock Exchange Limited (at Baroda, 1990) 12. Coimbatore Stock Exchange 13. Meerut Stock Exchange At present, there are twenty five recognized stock exchanges in India which also include the Over The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL). Government policies during 1980's also played a vital role in the development of the Indian Stock Markets. There was a sharp increase in number of Exchanges, listed companies as well as their capital, which is visible from the following table:

2.2 Trading Pattern of the Indian Stock Market Indian Stock Exchanges allow trading of securities of only those public limited companies that are listed on the Exchange(s). They are divided into two categories:

2.3 Types of Transactions: The flowchart below describes the types of transactions that can be carried out on the Indian stock exchanges:

2.4 LimitationsLike any other institutions, the stock exchanges too have their limitations. One of the common evils associated with stock exchange operations is the excessive speculation. We know that speculation implies buying or selling securities to take advantage of price differential at different times. The speculators generally do not take or give delivery and pay or receive full payment. They settle their transactions just by paying the difference in prices. Normally, speculation is considered a healthy practice and is necessary for successful operation of stock exchange activity. But, when it becomes excessive, it leads to wide fluctuations in prices and various malpractices. In the process, genuine investors suffer and are driven out of the market. Another shortcoming of stock exchange operations is that security prices may fluctuate due to unpredictable political, social and economic factors as well as on account of rumours spread by interested parties. This makes it difficult to assess the movement of prices in future and build appropriate strategies for investment in securities.

However, these days good amount of vigilance is exercised by stock exchange authorities and SEBI to control activities at the stock exchange and ensure their healthy functioning. 2.5 Regulatory Issues The stock exchanges suffer from certain limitations and require strict control over their activities in order to ensure safety in dealings. Hence, as early as 1956, the Securities Contracts (Regulation) Act was passed which provided for recognition of stock exchanges by the central Government. It has also the provision of framing of proper bylaws by every stock exchange for regulation and control of their functioning subject to the approval by the Government. All stock exchanges are required to submit information relating to its affairs as required by the Government from time to time. The Government was given wide powers relating to listing of securities, make or amend bylaws, withdraw recognition to, or supersede the governing bodies of stock exchange in extraordinary/abnormal situations. Under the Act, the Government promulgated the Securities Regulations (Rules) 1957, which provided inter alia for the procedures to be followed for recognition of the stock exchanges, submission of periodical returns and annual returns by recognised stock exchanges, inquiry into the affairs of recognised stock exchanges and their members, and requirements for listing of securities. As part of economic reforms programme started in June 1991, the Government of India initiated several capital market reforms, which included the abolition of the office of the Controller of Capital Issues (CCI) and granting statutory recognition to Securities Exchange Board of India (SEBI) in 1992 for: (a) Protecting the interest of investors in securities; (b) Promoting the development of securities market; (c) Regulating the securities market; and (d) Matters connected there with or incidental thereto.

SEBI has been vested with necessary powers concerning various aspects of capital market such as: regulating the business in stock exchanges and any other securities market; registering and regulating the working of various intermediaries and mutual funds; promoting and regulating self regulatory organisations; promoting investors education and training of intermediaries; prohibiting insider trading and unfair trade practices; regulating substantial acquisition of shares and takeover of companies; calling for information, undertaking inspection, conducting inquiries and audit of stock exchanges, and intermediaries and self regulation organisations in the stock market; performing such functions and exercising such powers under the provisions of the Capital Issues (Control) Act, 1947 and the Securities Contracts (Regulation) Act,1956 may be delegated to it by the Central Government.

2.6 Major PlayersThere are two major players among the stock exchange in India. These are the National Stock Exchange and the Bombay Stock Exchange. 2.6.1 National Stock Exchange The NSE was founded in 1992 and started trading in 1994. The National Stock Exchange (NSE) is India's leading stock exchange covering various cities and towns across the country. NSE was set up by leading institutions to provide a modern, fully automated screen-based trading system with national reach. The Exchange has brought about unparalleled transparency, speed & efficiency, safety and market integrity. It has set up facilities that serve as a model for the securities industry in terms of systems, practices and procedures. NSE has played a catalytic role in reforming the Indian securities market in terms of microstructure, market practices and trading volumes. The market today uses state-of-art information technology to provide an efficient and transparent trading, clearing and settlement mechanism, and has witnessed several innovations in products & services viz. demutualisation of stock exchange governance, screen based trading, compression of
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settlement cycles, dematerialisation and electronic transfer of securities, securities lending and borrowing, professionalization of trading members, fine-tuned risk management systems, emergence of clearing corporations to assume counterparty risks, market of debt and derivative instruments and intensive use of information technology. The National Stock Exchange (NSE) is a stock exchange located at Mumbai, India. It is the 16th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading. NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market capitalisation. NSE is mutually owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities.

2.6.2 Bombay Stock ExchangeThe Bombay Stock Exchange (formerly, The Stock Exchange, Bombay) is a stock exchange located on Dalal Street, Mumbai and is the oldest stock exchange in Asia. The BSE has been in existence since 1875. The BSE SENSEX, also called "BSE 30", is a widely used market index in India and Asia. Though many other exchanges exist, BSE and the National Stock Exchange of India account for the majority of the equity trading in India.

2.7 Comparison: BSE and NSE Almost all the significant firms of India are listed on both the exchanges. Both exchanges follow the same trading mechanism, trading hours, settlement process, etc. Trading Mechanism Trading at both the exchanges takes place through an open electronic limit order book, in which order matching is done by the trading computer. There are no market makers or specialists and the entire process is order-driven, which means that market orders placed by investors are automatically matched with the best limit orders. As a result, buyers and sellers remain anonymous. The advantage of an order driven market is that it brings more transparency, by displaying all buy and sell orders in the trading system. However, in the absence of market makers, there is no guarantee that orders will be executed.

All orders in the trading system need to be placed through brokers, many of which provide online trading facility to retail customers. Institutional investors can also take advantage of the direct market access (DMA) option, in which they use trading terminals provided by brokers for placing orders directly into the stock market trading system.

Settlement Cycle and Trading Hours Equity spot markets follow a T+2 rolling settlement. This means that any trade taking place on Monday, gets settled by Wednesday. All trading on stock exchanges takes place between 9:55 am and 3:30 pm, Indian Standard Time (+ 5.5 hours GMT), Monday through Friday. Delivery of shares must be made in dematerialized form, and each exchange has its own clearing house, which assumes all settlement risk, by serving as a central counterparty.

Market Indexes The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market index for equities; it includes shares of 30 firms listed on the BSE, which represent about 45% of the index's free-float market capitalization. It was created in 1986 and provides time series data from April 1979, onward.

Another index is the S&P CNX Nifty; it includes 50 shares listed on the NSE, which represent about 62% of its free-float market capitalization. It was created in 1996 and provides time series data from July 1990, onward. Market Regulation The overall responsibility of development, regulation and supervision of the stock market rests with the Securities & Exchange Board of India (SEBI), which was formed in 1992 as an independent authority. Since then, SEBI has consistently tried to lay down market rules in line with the best market practices. It enjoys vast powers of imposing penalties on market participants, in case of a breach 2.8 Who can invest in India? India started permitting outside investments only in the 1990s. Foreign investments are classified into two categories: foreign direct investment (FDI) and foreign portfolio investment (FPI). All investments in which an investor takes part in the day-to-day management and operations of the company, are treated as FDI, whereas investments in shares without any control over management and operations, are treated as FPI. For making portfolio investment in India, one should be registered either as a foreign institutional investor (FII) or as one of the sub-accounts of one of the registered FIIs. Both registrations are granted by the market regulator, SEBI. Foreign institutional investors mainly consist of mutual funds, pension funds, endowments, sovereign wealth funds, insurance companies, banks, asset management companies etc. At present, India does not allow foreign individuals to invest directly into its stock market. However, high-net-worth individuals (those with a net worth of at least $US50 million) can be registered as sub-accounts of an FII.

Foreign institutional investors and their sub accounts can invest directly into any of the stocks listed on any of the stock exchanges. Most portfolio investments consist of investment in securities in the primary and secondary markets, including shares, debentures and warrants of companies listed or to be listed on a recognized stock exchange in India. FIIs can also invest in unlisted securities outside stock exchanges, subject to approval of the price by the Reserve Bank of India. Finally, they can invest in units of mutual funds and derivatives traded on any

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stock exchange.

2.9 Restrictions/Investment Ceilings The government of India prescribes the FDI limit and different ceilings have been prescribed for different sectors. Over a period of time, the government has been progressively increasing the ceilings. FDI ceilings mostly fall in the range of 26-100%.

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3. FUNCTIONING OF A STOCK EXCHANGE

Brain Function Automation Department

Veins & Vessels Banks Heart Function Account Department

Right Hand BSE

Kidney Function Margin Left Hand NSE

Right Legs CDSL

Left Legs NSDL

Stock exchanges function like a human body. Various departments in stock exchange perform the functions similar to different parts of a human body.

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Brain function- Automation department The human brain is the source of the conscious, cognitive mind. The brain regulates autonomic processes related to essential body functions such as respiration and heart beat, especially through the autonomic nervous system. Likewise automation department regulates the automatic process from brokers to exchange / exchange to brokers. Without automation stock exchange cannot exist, because all the transactions take place through computerized network system. Automation department works as an intermediary of sub-brokers to member-brokers (VSE) / member-brokers to the BSE/NSE. Heart function - Account Department The heart is a specialized muscle that contracts regularly and continuously, pumping blood to the various parts of the body and the lungs. The pumping action is caused by a flow of electricity through the heart that repeats itself in a cycle. Likewise accounts department functions as a heart and pumps fund from the brokers to BSE/NSE and vice versa. Money flows like blood in a company. Accounts department carries out the function of collection of cheques in case of pay-in and issues the cheques in case of pay-out to the client or sub-brokers. Kidney function- Margin department Kidneys are vital organs that perform many functions to keep blood clean and chemically. Kidneys are sophisticated reprocessing machine. Likewise margin department functions as a kidney in the stock exchange. The main function of margin department is to collect a margin for NSE/BSE pay-ins. A margin is deducted from the trade executed by the broker as a protection against the risk involved. This function ensures fairness and transparency in the transaction by undertaking various safe guards. Which include maintenance of broker base minimum capital (BMC), collection of different types of margins, monitoring of trading activities of brokers individually and as a whole, monitoring the gross exposure limit of outstanding position of brokers on any individual share etc.

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Veins and Vessels- Banks Veins are flexible and are necessary to keep blood flowing to the heart. Blood vessels are hollow tubes that circulate our blood. Veins and vessels act as a medium to circulate the blood. Similarly, banks perform the job of transferring the funds from one place to another for easy settlement. Two hands- BSE and NSE Our two hands, though being same, perform different functions and work like competitor. Similarly, BSE and NSE help in the mechanism of stock market. Every broker has terminals on NSE, BSE or both and can work on both the exchanges. Two legs- CDSL and NSDL A man cannot stand or walk without their legs. Likewise stock market cannot stand or walk without Central Depositary Services Limited (CDSL) / National Depositary Services Limited (NDSL). CDSL and NDSL are two autonomous bodies inter dependent of each other and are responsible for transferring and holding securities. These depositories provide various services to the investors and clearing members.

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4. COMPANY ANALYSIS
4.1 Background of Vadodara Stock Exchange Vadodara Stock Exchange Limited was incorporated as a company limited by guarantee in 1990, but was subsequently converted into a company limited by shares in 2005. The main objective of VSEL is to facilitate, assist, regulate and control the trade of business in securities and effectively serve the interest of the general public and the investors. VSEL is regulated and controlled by the Securities and Exchange Board of India (SEBI), which is a statutory body established under the Securities and Exchange Board of India Act, 1992 Vadodara Stock Exchange Limited (VSEL) received recognition as Stock Exchange from the Government of India on 5th January 1990 and became Countrys 19th recognized Stock Exchange. In the beginning it had 150 members and now the strength is 325. In order to revive the Regional Stock Exchanges, SEBI came out with a Circular whereby RSEs floated its subsidiary company which acquired membership rights of BSE/NSE to facilitate trading terminals to the members of RSE. Accordingly, Vadodara Stock Exchange Limited floated its 100% subsidiary named as VSE Stock Services Limited (VSSL). For the Depository operations, VSEL has branches in Surat, Bharuch & Anand. The services provided by VSSL are as under:

Trading at BSE & NSE Cash Segment Strong Risk Management Features Trading at BSE & NSE Cash Segment Strong Risk Management Features Electronic Contract Notes Direct Billing of Clients Efficient Pay Out of Securities and Funds Auto Pay In for VSSL clients having Demat Accounts in VSE CDSL DP
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KEY MILSTONES OF Vadodara Stock Exchange Limited

Incorporation of VSEL

22/01/1990

Formation of Brokerage Subsidiary-VSE Stock Services Ltd

29/05/2000

Commencement of Trading on BSE cash segment

29/05/2000

Commencement of Online real time depository services

01/07/2000

Trading and settlement in Demat scrips

2002

Commencement of Trading on NSE cash segment

16/02/2005

Approval of Demutualization Scheme

15/09/2005

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4.2 Functioning of Vadodara Stock Exchange 4.2.1 Listing Department of VSE The listing is very basis for liquidity of securities of any company. Therefore all companies who want their securities to be traded in the stock market need to get registered with recognized Stock Exchange. The companies that have got their securities listed are required to comply with regulatory measures of SE & SEBI. Listing department of VSE lists the securities of corporate bodies at the Exchange by making an agreement with the companies that are required to comply with the terms and conditions of VSE. This agreement is prepared in order to secure the rights of the investors and to control or minimise the risk of the investors to the extent possible. There are about 51 clauses in listing agreement. Some of the main clauses are: Clause 35: Defines shareholding Pattern. Clause 41: Defines declaration and publication of un audited result. Clause 47: Appointment of Company Secretary as a compliance officer. Clause 49: Corporate Governance. According to this agreement it is the duty of every company to inform VSE about any of its major decision which will affect the functioning of the company as well as investors decision. VSE in turn informs its member brokers who in turn inform their clients. This helps the prospective investors to take informed decision while investing in any company. 4.2.2 Automation Department of VSE Automation department at VSE performs the following functions: To ensure the maintenance of the connectivity of terminals of the sub brokers Each member office has 3 network connections and on each floor there is 1 HUB room which connects all these network connections. All HUB rooms are interconnected. Automation department has to check and solve all problems related to HUB rooms.

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To check the transactions files sent by BSE everyday To issue contracts of those sub-brokers of VSE Stock Services Ltd who have transacted the business

To prepare cumulative data of the shares which are transacted by the sub-brokers with the help of surveillance department

To provide required information to other departments

4.2.3 Margin and surveillance department of VSE In order to minimise the risk arising out of the transactions entered into by the memberbrokers either on their own account or on behalf of their clients, the exchange has a well designed risk management system which, inter alias, include recovery of margins from the member brokers. The margin percentage differs from scrip to scrip based on their risk exposures in the market. VSE accepts the margin in the following forms:

The margin is deposited in the form of 50% of FDRs, cheque or bank guarantee and 50% in the form of shares.

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Margin trading was introduced by SEBI to curb speculative dealing in shares leading to volatility in the prices of securities. In VSE, each and every Broker has to deposit a minimum of Rs.200000 as initial margin to start their terminal. Following margins are practiced in VSE:

Initial Margin Initial margin means the minimum amount, calculated as a percentage of the transaction value, entered into by the broker, before the actual purchase takes place. It is mandatory to deposit initial margin in cash (cheque), not shares.

Mark to Market margin Variation or mark to market Margin is the daily profit or loss obtained by marketing the clients outstanding position to the market (closing price of the day).

Additional Margin Brokers cannot transact more than their margin balance in exchange. In case of insufficient margin balance, brokers need to deposit additional margin in order to extend their trading limit and transact further. These margins are then released into the brokers account on T+2 day (settlement

day) after 12 p.m. Working of margin department is explained with the help of an example as below. Particular Margin Deposited Broker buy 200 shares of Rs.1000 (supposed margin 40%) Day Mon Mon Mon Closing price Rs.800 Balance c/f Deposited by broker Mon Tue Tue Amount 200000.00 80000.00 120000.00 40000.00 80000.00 20000.00 Additional M to M Type Initial

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Tue Broker bought 1000 shares of Rs.180 (supposed margin 50%) Balance c/f Margin released on T+2 day (of Monday) Balance on Wednesday Tue Wed Wed

100000.00 90000.00 10000.00 120000.00 Released

130000.00

Suppose a broker A deposits 2,00,000 of margin on Monday. All brokers have their accounts in Axis bank. Suppose on Monday, the trade executed by A is Rs. 2,00,000 (200 shares x Rs. 1000 per share). The margin % applicable to this scrip is 40%. Then 80,000 is the initial margin deducted from the initial deposit. At the end of the day, closing price of the scrip purchased by A is Rs. 800 which is Rs. 200 less than the purchase price. So the additional margin of Rs. 40,000 (200 shares x Rs. 200) will be deducted and withdrawal limit for Tuesday will be Rs. 80,000. Same continues for subsequent days. If on any day the deposit of the broker falls short of the trade to be executed by broker, surveillance department will send a warning message to the broker. The broker will then accordingly deposit more money to increase his limit. Margin is to be paid in case of both purchase and selling of the shares. The settlement is done on T+2 days basis. This means that within 2 days after the Trading day the settlement is done in terms of pay-in and pay-out of the shares. In the example above, 1,20,000 (80,000+40,000) deducted from the brokers deposit on Monday will be added back on Thursday to his account. 4.2.4 Pay-in/pay-out department of VSE Settlement is the process of netting of transaction and actual delivery/receipt of securities. The member broker can affect pay-in of the securities to the Clearing House either through the Central Depository Services Ltd. (CDSL) or National Securities Depository Ltd (NSDL). In case of NSDL, the member brokers are require to give instructions to their respective Depository Participant (DPs) specifying settlement no., settlement type, effective pay-in date, quantity, etc.

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As regards CDSL, the member-brokers give pay-in instruction to their respective DPs. The securities are transferred by DPs to the clearing member (CM) Principle Account. The member-brokers are required to give confirmation to their DPs, so that securities are processed towards pay-in obligations. Alternatively, the member-brokers may also affect payin from the clients BO a/c. For this, the clients are required to mention the settlement details and clearing member-broker ID of the securities. Thus, in this case, the clearing member is not required to give any delivery instruction from their accounts. 4.2.5 Clearing house of VSE VSE has its own Clearing House known as VSE Clearing House. It was established in 19992000. Currently, it has around 76,000 account holders. Depositories are important intermediaries in the securities market. The principle function of depository is to dematerialize securities and enable their transactions in book-entry form. Dematerialization of securities occurs when securities issued in physical form is destroyed and an equivalent number of securities are credited into the beneficiary owners account. All the players have to be conversant with the rules and regulations as well as with the technology for processing. The intermediaries in this system have to play strictly by the rules. A depository established under the Depositories Act can provide any services connected with recording of allotment of securities in the record of a depository. A depository cannot directly open accounts and provide services to clients. Any person willing to avail of the services of the depository can do so by entering into an agreement with the depository through any of its Depository Participants. Depository Participant (DP) A Depository Participant is described as an agent of the depository. They are the intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an agreement under the Depository Act, 1996. In a strictly legal sense, a DP is an entity who is registered as such with SEBI under the provisions of SEBI Act. As per this Act, a DP can offer depository related services only after getting certificate of registration from SEBI.

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4.2.6 Membership department of VSE There are 325 members currently registered with VSE. In order to become a member of VSE, a number of the documents are to be submitted which are sent to the Board for the approval. After that, the documents are sent to SEBI for approval. On proper scrutiny, SEBI issues a membership card to the person if all the documents are found proper. Currently, no new members are allowed to register with VSE. However, current members can transfer their membership to other person after carrying out required procedure. The membership department deals with the matters relating to membership of the exchange. The responsibilities of the department include activities such as (a) Admission of individual and body corporate as the member brokers in terms of rules and regulations of the stock exchange. (b) Ensuring compliance of requirements by the member brokers in terms of rules and regulations of the SEBI Act 1992, and securities contract (regulations) rules 1957 (c) Ensuring and monitoring mentions of base minimum capital by the member brokers with the exchange in terms of its rules and regulations. (d) To conduct an inspection of books of accounts and other documents of the member brokers. (e) Providing membership service.

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4.3 Comparison of the financial statements of VSE with that of BSE and NSE 4.3.1 Analysis of financial statements of VSE Figure 1:

Sources of income
60,000,000.00 50,000,000.00 40,000,000.00 Income 30,000,000.00 20,000,000.00 10,000,000.00 -

Profit on sale of assets Dividend VSSL Income from training institute Other income Income from Clearing house Fees from members Income from investments Interest income Listing fees

31.03.2008 3,284,730.00 23,202,765.69 318,000.00 8,779,083.00 4,406,445.00 1,129,996.00

Year 31.03.2009 4,000,000.00 92,177.00 3,780,394.00 18,325,670.00 447,588.00 16,276,334.00 9,504,888.00 904,846.00

31.03.2010 3,777,959.00 2,000,000.00 4,296,766.00 18,990,851.00 527,750.00 21,521,099.00 697,648.00

31.03.2011 4,000,000.00 37,821.00 5,584,089.00 19,926,000.00 278,750.00 21,884,983.00 1,137,688.00

Source: www.vselindia.com

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Analysis: The above graph shows the trend followed by various sources of income of VSE over the years. Income from clearing house form the major proportion of total income. The next highest contribution is made by the interest income. Earlier, listing fees used to be an important source of income for VSE. But, because of SEBIs notification that removed the compulsion for the companies to be listed in their nearest stock exchanges, there has been a drastic downfall in the income from the listing fees. Figure 2:

PBT & PAT

60,000,000.00 50,000,000.00 40,000,000.00 Profit 30,000,000.00 20,000,000.00 10,000,000.00 Profit before tax Net profit after tax

Year

Analysis: The above graph shows the trend of Profit after tax (PAT) and Profit before tax (PBT) of VSE over the period 2008-2011.There has been a fall in the profit from the year 2009 because of various regulations of SEBI which has led to decrease in the income of stock exchanges.

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4.3.2 Common Size statements Common size statements are companys financial statements that display all items as percentages of a common base figure. This type of financial statement allows for easy analysis between companies or between time periods of a company. The values on the common size statement are expressed as percentages of a statement component such as revenue. Formatting financial statements in this way reduces the bias that can occur when analyzing companies of differing sizes. It also allows for the analysis of a company over various time periods. Common size statements of VSE are prepared in the excel sheets. The data taken is from 313-2008 to 31-3-2011. Common size statements involve the analysis of Profit & Loss Account and Balance Sheet of VSE. The statements show the change in the percentage of each item with respect to total income in case of profit and loss account and with respect to sources and applications of funds in case of balance sheet. Analysis of Balance sheet: The balance sheet of VSE shows a drastic increase of share capital in 2010 with respect to 2009. The common size statement shows an increase from 4.28% to 14.59%. This increase was because of issue of bonus shares in the ratio of 1:1 in that year. Moreover, cash and bank balances have increased almost 5 times from 13.47% from 60.77% in the year 2009. This is because of the demutualisation of shares that took place in 2008-09. Analysis of Profit & Loss Account: The profit and loss account of VSE shows the changes in the income and expenditure over the period 2008-2011. It can be seen that income from clearing house has reduced over the years. PBT and PAT showed great fluctuations in the years 2009 and 2010 because of the reasons discussed above.

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5. PLAN FOR THE COMPLETION OF PROJECT

Completed Activities: 12th March to 13th April: Visiting various departments of Stock Exchange and understanding their working 15th April to 20th April: Understanding about trading in Capital (Equity), Derivative (F&O) and Commodity Markets. 22nd April to 27th April: Collect information on the history of VSE and other details about the company, prepare the first part of the report and discuss the report with the mentor for necessary changes. Also, make a visit to VSSL, a fully owned subsidiary of VSE and understand its working. 29th April to 2nd May: Collecting the necessary information and documents like financial statements, annual reports, list of the companies listed on VSE, figures on the turnover for the period under study, data about the segregation of revenues etc required to carry out the comparison with BSE and NSE. Also collect the necessary information about BSE and NSE online. 3rd May: Submit Interim Evaluation Report

Pending Activities: 6th May to 11th May: Work with the Chartered Accountant to understand and analyse the financial statements of VSE. (Partially remaining) 12th May to 16th May: Calculate financial ratios of the 3 exchanges and conduct the comparative analysis. 17th May & 18th May: Present the comparative report and discuss the same with the Chairman for suggestions. 20th May to 23rd May: Collect information on the functioning of stock exchanges worldwide and compare them with the Indian Regional Stock exchanges by taking an example of Vadodara Stock Exchange. This activity will be done under the guidance of company mentor who will be providing me with the details of SEBI guidelines and regulations that conduct the functioning of VSE. Also provide my findings and conclusion on the factors hindering the efficiency of regional stock exchanges in India to the company mentor.
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24th May: Final evaluation 25th May to 1st June: Prepare and present the final project report to the company Mentor

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6. REFERENCES:

Websites referred: http://www.nse-india.com/ http://www.investopedia.com http://www. bseindia.com http://www. vseindia.com www.investopedia.com

Book(s) referred: I.M Pandey, 2009. Financial Management. Vikas publishing house Pvt. Ltd Ajay Shah, Susan Thomas, Michael Gorham, 2008. Indias Financial Markets. UP: Reed Elsevier India Pvt. Ltd. Financial Markets: A Beginners Module NCFM Working of Bombay Stock Exchange- BSE

Articles: (http://www.eurojournals.com/finance.htm) Measuring Stock Market Volatility in an Emerging Economy by Rajni Mala & Mahendra Reddy www.nios.ac.in/srsec319new/319el18.pdf (INDIAN FINANCIAL MARKET) http://mises.org/daily/4654 (How the Stock Market and Economy Really Work by Kel Kelly)

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