HIGHLIGHTS OF NSE

NATIONAL STOCK EXCHANGE OF INDIA LIMITED NEWSLETTER

January 2010

ARTICLE
India's Financial Development: Measures and Analysis- by Anuradha Guru, NSE
This paper focuses on comprehensive measures of financial development which have been published by the World Economic Forum
(WEF) since 2008. In 2009, the WEF ranked 55 countries including India on over 120 variables including institutional and business
environment, financial stability, size and depth of capital market. This paper specifically highlights the key weaknesses in India's
financial sector which account for its relatively low ranking. In the light of this analysis, the paper suggests some key financial sector
reforms.

SPOTLIGHT
NSE Launches Mutual Fund Service System
In November 2009, SEBI allowed transaction in Mutual Fund schemes through the stock exchange infrastructure. Consequently, NSE
launched India's first Mutual Fund Service System (MFSS) on November 30, 2009 through which an investor can subscribe or redeem
units of a mutual fund scheme.

R E G U L ATO RY C H A N G E S

Initiated by SEBI
Þ
Stock Exchanges allowed to determine delivery period for Interest Rate Futures
Þ
Revision in the computation methodology of limitation period for cases filed for arbitration

Initiated by RBI
Þ
Clearing and settlement of Interest Rate Futures to be done by exchange clearing corporations or clearing houses
Þ
Review of External Commercial Borrowings (ECB) Policy

NSE NEWS

Þ
Extended market timings from January 4, 2010 onwards
Þ
Expansion of scheme of strikes in Stock Options
Delivery period of Interest Rate Futures reduced from a month (1st business day of delivery month till the last business day of the
Þ
same month) to just 1 day (last business day of the delivery month)
Þ
Expiry/Last trading day for Interest Rate Futures revised to two business days (from seven business days) prior to the last
business day of the expiry/delivery month.

NCFM NEWS

Þ
Till November 2009, 10 candidates have successfully acquired the NCMP (NSE Certified Market Professional) Level- 4
certification.

I N T E R N AT I O N A L N E W S
Þ
Shenzhen Stock Exchange launches listed companies-investors interaction platform
Þ
Eurex to launch dividend futures on single stocks from January 11, 2010
 HIGHLIGHTS OF NSE NEWSLETTER
January 2010

MARKET REVIEW
Nifty Movements vis-a-vis other International Indices Performance of select sectors vis-a-vis Nifty
(Rebased to 100 for March 31, 2009) (Rebased to 100 for March 31, 2009)

290
170
155 240
140
125 190
110 140
95
80 90
Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09

CNX IT CNX FMCG INDEX S&P CNX Finance

Nifty Dow Jones NIKKIE Hang seng Nasdaq S&P CNX Petrohemicals S&P CNX Pharmaceuticals CNX Bank Nifty
CNX Infrastructure S&P CNX Nifty

Capital Market Segment F&O Segment

5000 300 18000 1000
Avg. Daily Trading Value

Avg. Daily Trading Value

4000 250 15000
800
Trading Value

Trading Value
200 12000
3000 600
150 9000
2000 100 400
6000

1000 50 3000
Jan-09
200
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09

Currency Futures WDM Segment

1000 100 700 35
Avg. Daily Trading Value

Avg. Daily Trading Value

90 600 33
800 80 31
500
Trading Value

Trading Value

70 29
600 60 400 27
50 25
300 23
400 40
30 200 21
200 20 19
100
10 17
0 0 0 15
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09

Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09

Trading Value (Rs. hundred crore) Avg. Daily Trading Value (Rs. hundred crore)

NSE MARKET STATISTICS NSE's GLOBAL RANKINGS

Segments Turnover for Turnover for Percentage Average daily Market Parameters Rank
rd
Nov. 2009 Dec. 2009 Change over turnover Capitalisation Single Stock Futures 3
(Rs. crore) (Rs. crore) Sep. 2009 (Rs. crore) (Rs. crore) rd
Stock Index Options 3
CM 324,477 292,900 -9.73 13,948 5,699,637 Stock Index Futures 3
rd

WDM 64,999 37,567 -42.20 1788.91 3,129,747 th

No. of Trades 4
F&O 1,661,816 1,524,982 -8.23 72,618 th
CDS(Currency 157,554 191,415 21.49 9,115 Market Capitalisation 12
Futures) Source : WFE (Rankings done for the period Jan- Jun 2009). Rankings
for single stock futures, stock index options and stock index futures
TOTAL 2,208,846 2,046,865 -7.33 8,829,384 is based on number of contracts traded.

Prepared by SBU-EDUCATION
National Stock Exchange of India Ltd.
Exchange Plaza, Bandra Kurla Complex, Bandra (E) Mumbai - 400051. Tel No: 022-26598163
For detailed NSE Newsletter or for e-subscription, log on to www.nseindia.com>Press Room>NSE Newsletter.
For Market Data, refer to www.nseindia.com>Research>Datazone.
Articles for NSE Newsletter can be sent at research@nse.co.in
 Jan 2010
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N S E N E W S L E T T E R
A R T I C L E S

India’s Financial Development: Measures and Analysis

BY Anuradha Guru*

Economic growth and financial development are inextricably linked. While growth provides the ability to develop fi-
nancial structures, the latter in turn facilitates higher growth through efficient allocation of limited resources of the
economy. Economists have, since the times of evolutionary economist Joseph Schumpeter, (who put the role of finan-
cial intermediation at the center of economic development through his work in 1911), stressed the connection be-
tween a country's “financial superstructure and its real infrastructure”. Raymond W. Goldsmith, in his 1969 book,
“Financial Structure and Development” noted that the financial superstructure of an economy "accelerates economic
growth and improves economic performance to the extent that it facilitates the migration of funds to the best user,
i.e., to the place in the economic system where the funds will yield the highest social return". A number of empirical
studies have proved the causal linkage between growth and financial development. Thus, well functioning financial
markets are crucial, especially for emerging market economies (EMEs), such as that of India.

India is one of the five countries classified as big emerging market economies by the World Bank. This list, besides
India, includes China, Indonesia, Brazil and Russia. These countries have made the critical transition from a develop-
ing country to an emerging market. A World Bank study predicts that by 2020 the share of these five biggest emerging
markets' in world output will double to 16.1 percent from 7.8 percent in 1992.

India, as other emerging markets, stands out due to certain characteristics. These include, India being a regional eco-
nomic powerhouses with large population, large resource base, and large markets; being a transitional society which
is undertaking domestic economic reforms and gradually but steadily adopting open door policies to replace its tradi-
tional state interventionist policies that and India, along with other emerging markets, contributing significantly to
the rising world trade. Thus, it would be instructive to look at where India stands in terms of financial development in
accordance with generally accepted measures of development and how it fairs among its peer emerging market
economies. Let us first see how best financial development of a country can be measured.

Measuring financial development

There have been attempts to measure financial development of economies using different sets of indicators. The indi-
cators traditionally used include monetary measures (such as narrow money to GDP, central bank domestic credit as
percentage of GDP, money multiplier etc), financial institutions assets to GDP, stock market liquidity, regulation and
supervision of banks, coverage and structure of deposit insurance schemes, indicators of barriers to banking access in
developing and developed countries etc. However, there was hardly an attempt made to develop a comprehensive
index of financial development.

In a recent development, the International Financial Cooperation of the World Bank Group commenced publishing a
“Doing Business Database” for over 183 countries since 2003. This Database provides a quantitative measure of regu-
lations for starting a business, dealing with construction permits, employing workers, registering property, getting
credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business-
1
* The author is with the NSE. Views are personal.
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as they apply to domestic small and medium-size enterprises. A fundamental premise of Doing Business is that eco-
nomic activity requires good rules. This database suffers from quite a few limitations, such as, it does not measure
all aspects of the business environment that matter to firms or investors—or all factors that affect competitiveness;
it does not assess the strength of the financial system or financial market regulations, both important factors in un-
derstanding some of the underlying causes of the global financial crisis and it does not cover all regulations, or all
regulatory goals, in any economy. Thus it does not fully capture the financial development of a country. However,
this database has gained considerable attention in recent years among developing countries with hopes that a
higher spot on the list could help lure foreign investors. In 2010 database, India ranks 133 among 183 countries in
this database, falling one place from its position at 132 in 2009 database. Notably, some of the peer countries of
India rank above it- South Korea at 19, China at 89, Indonesia at 122 and Brazil at 129.

In another attempt to measure financial development, an occasional paper of the European Central Bank, brought
out in April 20091, constructs composite indices to measure domestic financial development in 26 emerging econo-
mies for 2008. The study uses 22 variables, grouped according to three broad dimensions: (i) institutions and regula-
tions; (ii) size of and access to financial markets and (iii) market performance. According to this index, South Korea
is ranked 6 among 30 countries, China 14 and India is at the position 22. This paper finds that India performed rela-
tively better as regards its financial markets and non-bank institutions, but requires improvements in the business
environment as well as bigger and efficient banks.

Recognizing that there is lack of intellectual agreement on how to define and measure financial system develop-
ment, the World Economic Forum (WEF), in September, 2008, released its first annual Financial Development Re-
port (FDR), which provides an Index and ranking of 52 of the world’s leading financial systems. The 2009 FDR re-
leased on October 8, 2009, ranks 55 countries based on over 120 variables spanning institutional and business envi-
ronments, financial stability, and size and depth of capital markets, among others and is thus one of the most com-
prehensive databases available on financial development.

For the purposes of this Report and Index, financial development is defined as the factors, policies, and institutions
that lead to effective financial intermediation and markets, and deep and broad access to capital and financial
services. In accordance with this definition, the Report recognizes various aspects of development of a financial
system, presenting them as “seven pillars” of the Financial Development Index (FDI). These are:

1. Factors, policies, and institutions: the “inputs” that allow the development of financial intermediaries, mar-
kets, instruments and services. It includes: (i) institutional environment; (ii) business environment and (iii) fi-
nancial stability.

2. Financial intermediation: the variety, size, depth, and efficiency of the financial intermediaries and markets
that provide financial services. It includes: (iv) banks, (v) non-banks and (vi) financial markets.

3. Financial access: (vii) access of individuals and businesses to different forms of capital and financial services.

One of the key design principles of the Index is the inclusion of a large number of variables relevant to the finan-
cial development of both emerging and developed economies. However, the FDI developed by the WEF, like other
2
1 “Domestic Financial Development in Emerging Economies Evidence and Implications”, European Central Bank, Occasional Pa-
per Series, No 102 / April 2009
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N S E N E W S L E T T E R

such indices on financial development, has many limitations, both conceptual/methodological as well as in data
accuracy and availability. One of this is that there is necessarily a lag in some of the data used to calculate the
FDI, so it is important not to view it as having captured the full effects of the current financial crisis.

The FDR recognizes that limitations also exist in the light of rapidly changing environment and the unique circum-
stances of some of the economies covered. Yet, in its attempt to establish a comprehensive framework and a
means for benchmarking, it provides a useful starting point. The Report is unique in the comprehensiveness of the
framework it provides and the richness of relevant data it brings to bear on financial system development.

The FDR 2009, places most of the developed countries in the top rankings, with the United Kingdom holding the
first rank. Amongst the emerging economies, Malaysia is placed at the top rank, at position 22, followed by South
Korea and China. India is at position 38 in its overall ranking, while it was ranked 31 out of 52 countries by FDR
2008. Table below presents the rankings of India on various financial development parameters vis-à-vis other im-
portant emerging markets.

Table: Financial Development Index 2009-Rankings of select Emerging economies

Country Overall Factors, Policies and institutions Financial intermediation Financial

rank access

Institutional Business envi- Financial Banks Non- Financial Financial

environment ronment stability banks markets access

Malaysia 22 22 30 13 12 25 29 22

South Korea 23 31 16 28 22 18 20 52
China 26 35 40 23 10 12 26 30
South Africa 32 27 36 31 30 32 30 47
Brazil 34 42 47 15 35 15 37 31
Thailand 35 33 31 36 34 47 36 29
India 38 48 48 46 39 17 22 48
Russia 40 53 34 39 55 4 41 49

Though India is not ranked very high in its overall score of financial development, it is relatively well placed in
terms of development of non-banking financial services (rank 17) and financial markets (rank 22). Within the fi-
nancial markets, India fairs well in development of its foreign exchange markets and derivatives markets. Some of
the sub-indicators in which India ranks well are regulation of securities exchanges (rank 9) and currency stability
(rank 10).

However, the FDR points out the India’s institutional environment is considerably weak, placing it at rank 48, fol-
lowing its lower levels of financial sector liberalization as well as a low degree of contract enforcement. India’s
business environment is also affected by two particular challenges—an absence of adequate infrastructure and
high cost of doing business. These areas of difficulty translate into highly constrained financial access, it notes.

Strengthening the institutional environment

Taking a cue from here, we look at one of the important aspect in which the FDR points out that India is weak,
3
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N S E N E W S L E T T E R

viz. institutional environment. In the FDR’s framework, the institutional environment encompasses: (i) laws and
regulations that allow the development of deep and efficient financial intermediaries, markets, and services,
which, inter-alia, includes a country’s capital account openness and domestic financial sector liberalization.;
(ii) macro prudential oversight of financial systems, i.e overall laws, regulations, and supervision of the finan-
cial sector; (iii) quality of contract enforcement and (iv) corporate governance.

Let us first look at the status of development of financial markets. The financial markets of India can, at best,
be described as developing. While the securities markets, especially the equity derivatives markets, can boost
of being in the league of some of the developed countries in terms of regulatory framework, market capitaliza-
tion, turnover and state of the art risk management; other segments of the financial markets fall behind in a
number of ways. For instance, the corporate bond markets are practically non-existent when compared with the
mounting long term funding requirements to finance India’s corporates and infrastructure development. They
account for only 3.9% of GDP in 2008, as against 61% in Korea and 37% in Malaysia, according to ADB estimates.
The recent government committee, High Powered Expert Committee on Making Mumbai an International Finan-
cial Centre (HPEC on MIFC), has pointed that corporate bond markets are an important missing link following
which India’s financial sector has not been able to achieve the desired bond-currency-derivatives (BCD) nexus
required, so as to be able to offer a whole milieu of financial services to market participants.

As regards the banking sector, a number of reforms have been undertaken towards liberalization and banks have
shown improvements in asset quality and profitability. However, as pointed out by Governor RBI, Dr D. Sub-
barao, in a recent speech 2, commercial banking in India has not penetrated sufficiently to serve the large mass
of rural, illiterate and poor people in any meaningful way. Estimates indicate that of the 600,000 habitation
centres in the country, only about 30,000 centres are covered by commercial banks. He adds that even where
100 per cent financial inclusion is claimed, oftentimes it is inclusion only in a nominal sense. Households have
bank accounts that remain dormant; few conduct any banking transactions and even fewer receive any credit.
Thus, financial inclusion in its true sense still evades us. Also, the sector is plagued with high intermediation
costs largely on account of high operating cost.

Looking at the government securities markets, one finds that it faces difficulties such as lack of liquidity across
different maturity levels and thus lack of a benchmark yield curve. The latter is generally held to be one of the
reasons for non-development of corporate bond markets in the country.

In the insurance sector, in terms of insurance penetration (ratio of premium to GDP), at 4.6%, in 2007, India is
at par with most other emerging market economies. However, it fairs poorly with respect to insurance density
(ratio of premium to total population) at only 46.6%. The participation of low-income groups in life insurance is
still very limited.

Thus, each of the segments of the financial markets has its own set of shortcomings that need special attention.

As regards openness of capital account, India has cautiously opened up its capital account since the early 1990s,
with the thrust of policy reform being in favor of a compositional shift in capital flows away from debt to non-
debt creating flows, viz., FDI and foreign portfolio investment; strict regulation of external commercial
4
2 Keynote address by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India at the International Finance and Banking Con-
ference organized by the Indian Merchants’ Chamber on ‘Banking - Crisis and Beyond’ on November 25, 2009 in Mumbai.
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N S E N E W S L E T T E R

borrowings, especially short term debt; discouraging volatile element of flows from non-resident Indians; and
gradual liberalization of outflows. Presently, for foreign corporate and foreign institutions, there is a reason-
able amount of convertibility; for non-resident Indians (NRIs) there is approximately an equal amount of con-
vertibility, but one accompanied by some procedural and regulatory impediments. For non-resident individu-
als, other than NRIs, there is near zero convertibility. For moving ahead on capital account convertibility, the
RBI “Committee on Fuller Capital Account Convertibility” has detailed the timing and sequencing of measures
for fuller capital account convertibility. Some of the recommendations of the committee have already been
acted upon; however, India is still not ready for full convertibility as the regulator carefully weighs the risks
and benefits of unfettered capital flows.

We now turn to look at the macro prudential oversight of the regulatory system in India. Presently there are
many regulatory agencies, apart from several ministries in the government that retain direct regulatory powers
on various segments of the financial markets. While on one hand this structure leads to major regulatory over-
laps and regulatory gaps, what is more concerning is that there is lack of any formal arrangement of coordina-
tion amongst these regulators in matters that concern more than one regulator. Also, as financial conglomer-
ates begin to dominate the Indian markets, a consolidated system of supervision becomes more important.

Regulatory coordination is now an imperative largely dictated by the recent global financial crisis. This is most
aptly articulated by President Barack Obama, in his speech while unveiling the 21st Century Financial Sector
Reforms agenda of the US Government early this year. He is quoted below:

“One of the reasons this crisis could take place is that while many agencies and regulators were responsible
for overseeing individual financial firms and their subsidiaries, no one was responsible for protecting the
whole system from the kinds of risks that tied these firms to one another. Regulators were charged with see-
ing the trees, but not the forest. And even then, some firms that posed a so-called "systemic risk" were not
regulated as strongly as others; they behaved like banks but chose to be regulated as insurance companies, or
investment firms, or other entities that were under less scrutiny.

As a result, the failure of one firm threatened the viability of many others. The effect multiplied. There was
no system in place that was prepared for this kind of outcome. And more importantly, no one has been
charged with preventing it.”

The proposal of US Government is to create an oversight council, as put forward by President Obama, as fol-
lows:

“…..And even as we place the authority to regulate these large firms in the hands of the Federal Reserve -- so
that lines of responsibility and accountability are clear -- we will also create an oversight council to bring
together regulators from across markets to coordinate and share information, to identify gaps in regulation,
and to tackle issues that don't fit neatly into an organizational chart. We're going to bring everyone together
to take a broader view -- and a longer view -- to solve problems in oversight before they can become crises.”

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N S E N E W S L E T T E R

In the context of India, the recently submitted report of the Government Committee on Financial Sector Reforms
(CFSR) (popularly known as the Raghuram Rajan Committee) has, inter-alia, recommended that a Financial Sector
Oversight Agency (FSOA) should be set up by statute, whose focus will be supervisory. It will monitor the function-
ing of large, systemically important, financial conglomerates; anticipating potential risks, it will initiate balanced
supervisory action by the concerned regulators to address those risks; it will address and defuse inter-regulatory
conflicts, and look out for the build-up of systemic risks.

This recommendation should be taken forward in the right earnest.

Looking at the issue of contract enforcement in India, we find an appalling state of affairs. According to the
“Doing Business database 2010”, contract enforcement in India requires 46 procedures, 1420 days (of which days
spent in trial and judgment are 1095) and the cost of the same is 40% of the claim amount. India ranks one but
last, in terms of this indicator, among 183 countries captured by the database. Some serious measures are re-
quired to come out of this abysmal situation.

On corporate governance, the latest episode at Satyam Computer Services raises several questions about the role
of three pillars of corporate governance in a firm i.e the Board of directors and independent directors; sharehold-
ers and institutional investors; and the auditors. Over and above all this, we need to ponder over the fact that in
spite of being proactive in promulgating corporate governance regulations and being touted as one of the best in
terms of corporate governance standards compared to our Asian counterparts, where does our country fail to pre-
vent such fiascoes? Satyam’s case highlights the need to make corporate governance laws more effective to
achieve more transparency and accountability. A New Companies Bill 2008 is under the consideration of the Par-
liament. It aims to improve corporate governance by vesting greater powers in shareholders. These have been
balanced by greater emphasis on self-regulation, minimization of regulatory approvals and increased and more
transparent disclosures. Will this be effective in addressing contemporary corporate governance issues in India,
remains to be seen.

In conclusion

There is unanimity in the opinion that India has come a long way on the path of development of its financial sec-
tor- deregulating, liberalising and increasing competitiveness along the way. However, there is no room for com-
placency. The imperatives of changing time, technology and needs of the economy, require us to take further
steps to build up on the financial sector’s capabilities, already achieved, in the form of the next generation re-
forms. This would help our financial markets achieve their full potential growth. The CFSR aptly summarises the
necessity of financial reforms as-

- “Financial sector reform is both a moral and economic imperative”.

The starting point for the same could be working on the lines of recommendations of two important recent gov-
ernment committee reports, viz. HPEC on MIFC and CFSR. Some of the thoughts of these committees have been
articulated above keeping the findings of the WEF’s FDR 2009 in the foreground.

6
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N S E N E W S L E T T E R
S P O T L I G H T

NSE Launches Mutual Fund Service System

Until November 2009, the Indian investors interested in subscribing to a mutual fund had to identify a dis-
tributor of the mutual fund and submit all documents along with payment instrument where applicable to the
distributor or directly to Mutual Fund/AMC/ RTA. In November 2009, SEBI allowed transaction in Mutual Fund
schemes through the Stock Exchange infrastructure. Consequent to this market development, NSE launched
India’s first Mutual fund Service System (MFSS) on November 30, 2009 through which an investor can subscribe
or redeem units of a mutual fund scheme.
Mutual Fund Service System (MFSS) is an online order collection system provided by NSE to its eligible mem-
bers for placing subscription or redemption orders on the MFSS based on orders received from the investors.
This has made buying and selling of mutual funds easier for investors. The subscription/redemption request
would thereafter get processed and investor would know about status of the request only in the form of direct
communication from Mutual Fund/AMC/RTA. The NSE MFSS facilitates entry of both buy and sell orders. With
the MFSS, investors can place an order through a registered NSE member who is eligible to participate in MFSS
for subscription/redemption of units. In order to subscribe units, members are required to place buy orders. A
member who wishes to redeem units of mutual fund scheme will be required to place sell orders in the sys-
tem. Participants can choose between physical mode and depository mode while putting their subscription /
redemption requests on the MFSS. All orders are settled on order to order basis, on T+1 (working days).

Mutual Funds are not listed like stocks, i.e., their prices would not change on a real time basis as in stocks.
The Net Asset Value (NAV) will remain the same as declared by the fund houses. Investors are allowed to con-
vert their existing physical units (represented by account statement) into a demat form, fund houses will have
to coordinate this with the registrar, transfer agents and depository participants to facilitate the process.
Individuals, Hindu Undivided Families (HUFs) and body corporates can participate in MFSS subject to complet-
ing the KYC procedure. In case of a minor the guardian would have to be KYC compliant.

Benefits of using MFSS for participation in mutual funds

⇒ Through this platform investors are able to get a single view of his portfolio across multiple assets
like securities, mutual fund units etc.,
⇒ Investors are able to get services from same intermediary for different asset class.
⇒ Investors can optimize their investment decisions due to reduced time lag in movement of funds.
⇒ Investors can have a voice in agreeing on charges to be paid for services rendered.
⇒ Reduction of paperwork.
⇒ Transparency in knowing status of order till completion thereby reducing disputes.
⇒ Recourse to grievance resolution in case of deficiency in service provided by member
As many as 10 fund houses have joined the NSE MFSS Platform and as on December 31, 2009 and there were
667 subschemes available for trading. As of December 2009, there were 982 orders placed for subscription
worth Rs.3.55 crore and 97 orders worth Rs.0.92 crore were redeemed. 175 trading members were registered
in MFSS as participants by end December 2009.

The launch of this new trading platform will facilitate in the expansion of the reach of mutual fund schemes
to more cities as trading terminals are spread all over the country.

7
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N S E N E W S L E T T E R 8

R E G U L A T O R Y C H A N G E S

Initiated by SEBI
1. Stock Exchanges allowed to determine delivery period for Interest Rate Futures

Based on feedback received from Exchanges, SEBI has, vide its circular dated 22nd December, 2009 allowed
Stock Exchanges to set any period of time during the delivery month as the delivery period for the deliverable
grade securities.

2. Revision in the computation methodology of limitation period for cases filed for arbitration

The Secondary Market Advisory Committee (SMAC) of SEBI, reviewed the existing provisions in the Exchange
Byelaws, which specify a limitation period of six months for reference of a complaint/claim/difference/dispute
for arbitration.
While computing the said limitation period, the time taken in amicable settlement of claims, complaints, differ-
ences, disputes through the Investors Grievances Redressal Committee mechanism of the Exchange under its
Rules, Bye-laws & Regulations is excluded.
Based on the recommendations of the SMAC, SEBI has decided, vide circular dated 2nd December, 2009 that the
limitation period of six months should be computed from the end of the quarter during which the disputed
transaction(s) were executed. The period of one month from the date of receipt of complaint/claim/
difference/dispute by the trading member or the actual time taken by the trading member from the date of
receipt of complaint/claim/difference/ dispute by the trading member to the date of receipt of the trading
member’s last communication by the investor, to resolve / counter the complaint / claim/ difference/ dispute,
whichever ends earlier, should be excluded.
Apart from the above, in certain instances it was observed by SEBI that the arbitration applications are being
rejected on the grounds of having exceeded the limitation period, without going into the circumstances leading
to the arbitration not being filed within the time period. In case the arbitration application is not filed within
the limitation period for reasons beyond the control of the party, rejection of the same is not in the interest of
investors. Accordingly, it has been decided that:

• The limitation period can be extended in certain cases for a further period of three months by the stock
exchange.

• The stock exchange can decide on extending the limitation period for a period of three months, only after
obtaining sufficient documentary proof in this regard and recording the reasons for the same in writing.
In this regard, the party is required to provide to the stock exchange sufficient documentary proof regarding the
reasons for the delay in filing the arbitration case and the stock exchange should examine, if the reasons /
documentary proof submitted, for not filing the arbitration within the limitation period were indeed beyond the
control of the party.

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N S E N E W S L E T T E R 9

R E G U L A T O R Y C H A N G E S ( c o n t d . . )

Initiated by RBI
1. Clearing and settlement of Interest Rate Futures to be done by exchange clearing corporations or
clearing houses
RBI has, vide circular dated 21st December, 2009, decided that all entities having short (sold) position in the Inter-
est Rate Futures (IRF) contracts and required to deliver securities on the appointed date will move these securi-
ties from their respective Subsidiary General Ledger/Constituents' Subsidiary General Ledger (SGL/CSGL) accounts
with the RBI to a special "Settlement" SGL account of the respective Clearing Corporations of the Exchanges
[Exchange Clearing House (ECH) / Exchange Clearing Corporation (ECC)] authorised to deal in IRF. The ECH/ECC
will in turn deliver the securities to the SGL/CSGL accounts of the entities having long (bought) position after en-
suring that the settlement of funds has been completed through the designated clearing banks. Thus, the clearing
and settlement will essentially be the responsibility of the ECH/ECC. RBI will be providing the facility for transfer
of Government securities to facilitate completion of the securities leg of the settlement.

For the clearing and settlement operations, the following operational guidelines have been given by RBI.

a. Each ECH/ECC will have to open a Settlement SGL account and a Proprietary SGL account for which they have
to apply to the Public Debt Office (PDO), Mumbai with relevant documents.

b. Upon the opening of such accounts, each ECH/ECC will be provided with the Negotiated Dealing System (NDS)
and the Indian Financial Network (INFINET) connectivity.

c. Since the IRF contracts will be traded on the authorised exchanges the settlement details will be arrived at by
the respective Exchanges and the details of the settlement will be communicated by the ECH/ECC to the parties
concerned who are required to either deliver or to receive the securities. The holder of the security (transferor)
who has to deliver the securities will initiate the transfer to the Settlement SGL Account of the ECH/ECC in the
NDS. The ECH/ECC will authorise each such transfer after which the security will move into their Settlement SGL
account. The ECH/ECC in turn will transfer the securities to different transferees who are eligible to receive the
securities. All the above transfers in respect of IRF settlements would be effected electronically with digital sig-
natures in terms of Regulation 4 (2) of the Government Securities Regulations, 2007. The above procedure will be
applicable only where it involves transfer of securities between two SGL/CSGL accounts or between the two de-
positories, i.e. NSDL and CDSL, while the transfer of securities between demat accounts maintained with the
same depository will be settled through the depository itself.

d. As only the settlement of securities arising out of obligations under IRF will take place under the above mode,
it would be the responsibility of the ECH/ECC to ensure the settlement of the funds leg of the transaction through
the designated clearing banks.

e. The ECH/ECC will ensure that only securities eligible under IRF are transferred to their Settlement SGL ac-
count.

f. The Settlement SGL account will be only for the limited purpose of enabling pay-ins and pay-outs of the Gov-
ernment securities to be delivered for the IRF settlement on the settlement date. As this account is for the lim-
ited purpose of holding securities between pay-in and pay-out while the ECH/ECC ensures that the funds leg has
been settled, this Settlement SGL Account must have a zero balance at the end of the day.

g. The ECH/ECC will give a onetime mandate to the PDO, Mumbai that any leftover security in the settlement
SGL account (arising out of securities blocked due to defaults in funds settlement or for any other reason) gets
automatically transferred to the Proprietary SGL account of the ECH/ECC at the end of the day. Any such incident
of transfer to the Proprietary SGL account will result in issue of notification message to the Financial Markets De-
partment, RBI, CO, Mumbai & the PDO, Mumbai and the concerned ECH/ECC.

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R E G U L A T O R Y C H A N G E S ( c o n t d . . )

h. In case of default in delivery of securities by the SGL account holders, it will be treated as "bouncing"
and current penalties in respect of SGL bouncing would apply. In case of default in delivery of security by the
CSGL account holders, arising out of the actions of the individual Gilt Account Holders (GAH), it will be the
responsibility of the CSGL account holders to suitably deal with the concerned GAH to prevent recurrence of
such defaults. The ECH/ECC will inform the PDO, Mumbai about any such default by the SGL/CSGL account
holders on the same day.

i. Individual ECH/ECC may decide upon the time frame for the settlement. However, the pay-out of the
securities for settlement of IRF contracts should be completed latest by 2.30 PM.

2. Review of External Commercial Borrowings (ECB) Policy

On a review of the prevailing macroeconomic conditions and developments in international financial markets,
the RBI has, vide its circular dated 9th December, 2009, modified the ECB policy as indicated below:

(i) All-in-cost ceilings

As per the extant policy, the all-in-cost ceilings have been dispensed with, under the approval route, until
December 31, 2009. In view of the improvement in the credit market conditions and narrowing credit spreads
in the international markets, the existing relaxation in the all-in-cost ceilings under the approval route with
effect from January 1, 2010 has been withdrawn. Accordingly, the all-in-cost ceilings under the approval
route for the ECBs, where Loan Agreements have been signed on or after January 1, 2010 will be as under:

Average Maturity Period All -in-cost Ceilings over six month Libor*
Three years and up to five years 300 basis points
More than five years 500 basis points

*for the respective currency of borrowing or applicable benchmark.

Eligible borrowers proposing to avail of ECB after December 31, 2009, where the Loan Agreement has been
signed on or before December 31, 2009 and where the all-in-cost exceed the above ceilings, should furnish a
copy of the Loan Agreement. Such proposals would continue to be considered under the approval route.

(ii) Integrated township

As per the extant policy, corporates, engaged in the development of integrated township, as defined in Press
Note 3 (2002 Series) dated January 04, 2002, issued by the Department of Industrial Policy and Promotion
(DIPP), Ministry of Commerce & Industry, Government of India are permitted to avail of ECB, under the ap-
proval route, until December 31, 2009. On a review of the prevailing conditions, it has been decided to ex-
tend the current policy until December 31, 2010, under the approval route. All other terms and conditions,
stipulated in the A.P. (DIR Series) Circulars referred to above, remain unchanged.

iii) Buyback of the Foreign Currency Convertible Bonds (FCCBs)

In terms of A.P. (DIR Series) Circular No. 39 dated December 8, 2008, read with A.P. (DIR Series) Circular No.
58 dated March 13, 2009 and A.P. (DIR Series) Circular No. 65 dated April 28, 2009, Indian companies have
been allowed to buyback their Foreign Currency Convertible Bonds (FCCBs) both under the automatic route
and approval route until December 31, 2009. Keeping in view the prevailing macroeconomic conditions and
global developments, especially the improvements in the stock prices, it has been decided to discontinue the
facility with effect from January 1, 2010.
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N S E N E W S L E T T E R
R E G U L A T O R Y C H A N G E S ( c o n t d . . )

v) ECB for the NBFC Sector

As per the current ECB norms, Non-Banking Finance Companies (NBFCs), which are exclusively involved in the
financing of the infrastructure sector, are permitted to avail of ECBs from multilateral / regional financial
institutions and Government owned development financial institutions for on-lending to the borrowers in the
infrastructure sector under the approval route. In view of the thrust given to development of infrastructure
sector, it has been decided with immediate effect to allow NBFCs exclusively involved in financing the infra-
structure projects to avail of ECB from the recognized lender category including international banks under the
approval route, subject to complying with the prudential standards prescribed by the Reserve Bank and the
borrowing entities fully hedging their currency risk. The AD Category-I bank should certify the compliance
with the prudential norms by the borrowing NBFCs.

(v) ECB for Spectrum in the Telecommunication Sector

As per the extant policy, as indicated in Circular dated October 22, 2008, payment for obtaining license/
permit for 3G Spectrum is considered an eligible end - use for the purpose of ECB under the automatic route.
It has now been decided to permit eligible borrowers in the telecommunication sector to avail of ECB for the
purpose of payment for Spectrum allocation. This modification will come into effect with immediate effect.

All other aspects of ECB policy such as USD 500 million limit per company per financial year under the
automatic route, eligible borrower, recognised lender, end-use, average maturity period, prepay-
ment, refinancing of existing ECB, reporting arrangements and terms and conditions stipulated in the
A.P. (DIR Series) Circulars are unchanged.

NSE NEWS

Extended market timings from January 4, 2010 onwards

From January 4, 2010 onwards, the Indian Stock markets would open from 9:00 a.m. to 3:30 a.m:

Normal Market / Retail Debt Market / Limited Physical Market Open: 9:00 a.m. Accordingly, the Block
Trade session shall be available from 9:00 am to 9:35 am. Normal Market / Retail Debt Market / Lim-
ited Physical Market close time shall remain unchanged i.e. 3:30 pm. There is no change in the tim-
ings of closing session and Auction market.

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N S E N E W S L E T T E R
N S E N E W S ( c o n t d … )

2. Expansion of scheme of strikes in Stock Options

In pursuance of SEBI guidelines for providing scheme of strikes in Stock options contracts and in ac-
cordance with consolidated circular no NSE/F&O/124/2008 (Download no. NSE/F&O/11675) dated
November 25, 2008, currently for all Stock options contracts, the Exchange introduces strikes as per
the following scheme:

Underlying Closing Price Step No. of Strikes (In

Value the money- At the
money-Out of the

Less than or equal to Rs.50 2.5 3-1-3

>Rs.50 to <= Rs.250 5 3-1-3
> Rs.250 to <= Rs.500 10 3-1-3
> Rs.500 to <=Rs.1000 20 3-1-3
> Rs.1000 to <= Rs.2500 30 3-1-3
>Rs.2500 to <= Rs.9999 50 3-1-3
>Rs.9999 100 3-1-3

Considering the need to provide a larger and uniform coverage of strikes for stock options contracts,
the following revised strike parameters scheme has been formulated by NSE vide its circular dated
10th December, 2009:

Underlying Closing Price Step No. of Strikes pro-

Value vided (In the money
- At the money-Out
of the money)
Less than or equal to 2.5 5-1-5
Rs.50
>Rs.50 to <= Rs.100 5 5-1-5
> Rs.100 to <= Rs.250 10 5-1-5
> Rs.250 to <=Rs.500 20 5-1-5
> Rs.500 to <=Rs.1000 50 5-1-5

>Rs.1000 100 5-1-5

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N S E N E W S L E T T E R
N S E N E W S ( c o n t d … )

3. Delivery period of Interest Rate Futures reduced from a month (1st business day of delivery month
till the last business day of the same month) to just 1 day (last business day of the delivery month)

Currently, for interest rate futures, the delivery of deliverable grade securities takes place from the first
business day of the delivery month till the last business day of the delivery month. SEBI, vide its circular
dated December 22, 2009 has now permitted the Exchanges to set any period of time during the delivery
month as the delivery period for Interest Rate Futures contracts. Accordingly, the delivery period has been
revised. The delivery settlement day for the Interest Rate Futures contract would be the last business day
of the delivery month. The last trading day and the intention day would therefore accordingly be two busi-
ness days prior to the delivery settlement day. This would be applicable from March 2010 contract on-
wards.

4. Expiry/Last trading day for Interest Rate Futures revised to two business days (from seven business
days) prior to the last business day of the expiry/delivery month.

Currently, the last trading/expiry day for Interest Rate Future (IRF) contracts is determined as seven work-
ing days prior to the last working day of the expiry/delivery month. In pursuance to SEBI circular SEBI/
DNPD/Cir- 49/2009 dated December 22, 2009 and, in partial modification of our circulars NSE/
CD/036/2009 dated August 25, 2009 andNSE/CD/057/2009 dated December 18, 2009, the exchange has
revised the expiry/last trading day as, two working days prior to the last working day of the expiry/
delivery month. In view of the above, the revised last trading/expiry dates for IRF contracts available for
trading will be as follows:

NCFM NEWS

Till November 2009, 10 candidates have successfully acquired the NCFM (NSE Certified Market Profes-
sional) Level –4 certification.

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N S E N E W S L E T T E R
I N T E R N A T I O N A L N E W S

1. Shenzhen Stock Exchange launches listed companies-investors interaction platform

In order to enhance the standardized operation of listed companies, protect the legitimate rights and inter-
ests of investors, especially small-medium investors, the SZSE recently has launched the “Interaction Plat-
form for SZSE-listed Companies and Investors Relation”. The establishment of the platform will provide an
important channel for direct communication and dialogue between listed companies and investors; benefit
the optimization of the relations between public investors and listed companies and facilitate investors to
widely participate in the corporate governance. And the platform is also a major measure for the SZSE to
regulate and deepen the administration of listed companies-investors relations.
Investors may, through the interaction platform, inquire about the relevant information of SZSE-listed com-
panies, put forward to listed companies consulting, advice, complaint or other relevant questions, or refer to
questions brought by other investors to listed companies and corresponding answer by listed companies.
The SZSE requires that all listed companies shall designate special person to take charge of the interaction
platform work and promptly handle or answer relevant questions. At the same time, the SZSE clearly re-
quires that listed companies shall properly handle different questions in light of different situations of these
questions in the interaction platform, and shall not give any answer in respect of information not publicly
disclosed.

2. Eurex to launch dividend futures on single stocks from January 11, 2010

The international derivatives exchange Eurex announced that it will offer futures contracts based on particu-
lar dividends of individual shares from 11 January 2010. Eurex will launch Dividend futures on the constitu-
ents of the Dow Jones EURO STOXX 50. Following the successful introduction of the index dividend futures on
the Dow Jones EURO STOXX 50 in June 2008, Eurex further expands its offering. Thus, for the first time in
Europe the pure dividend component of the underlying stocks of a benchmark equity index are available for
exchange trading and clearing as a stand-alone product.

Eurex is introducing these products to enable investors to hedge or trade the dividends that are announced
and paid by the individual index constituents in each year. The separate exchange listing of this dividend
element will improve possibilities for risk management and increases transparency on one of the fundamen-
tal elements determining a shares value.
Eurex will initially introduce dividend futures on 25 of the constituent components of the Dow Jones EURO
STOXX 50. Hence, investors can manage their exposure to the 2010 dividend period. Eurex will offer annual
contracts in each name from December 2010 out to December 2014 that will settle to the value of the divi-
dends paid in the annual period to that date. With the introduction of the dividend futures, Eurex aims to
work closely with the current market participants and to attract new entrants to the asset class.

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N S E N E W S L E T T E R
MANAGERIAL PERSONNEL NSE

Name DESIGNATION DEPARTMENT

Mr. Ravi Narain Managing Director and CEO
Ms. Chitra Ramkrishna Jt. Managing Director

Mr. J Ravichandran Director Finance & Accounts, Legal & Secretarial

Mr. Ravi Apte Chief Technology Officer

Mr. R Sundararaman Sr. Vice President NSCCL

Mr. Yatrik R Vin Sr. Vice President Finance & Accounts

Ms. Kamala Vice President Compliance, Inspection, Membership, Arbitra-

tion, Defaulters Section & Investor Service Cell

Mr. Nirmal Mohanty Head - SBU EDU SBU - Education

Mr. R Nanda Kumar Vice President NSCCL - Development & NCCL, NOW, Web
Team
Mr. Ravi Varanasi Vice President Investigation, Surveillance & Inspection

Ms. T. S. Jagadharini Vice President Trade (Capital Market, Currency Derivatives,

F&O & WDM), Development & Marketing

Mr. Vidhu Shekhar Vice President New Products & Six Sigma Inititiatives

Mr. Arup Mukherjee Asst. Vice President SBU - Education

Mr. C. N. Upadhyay Asst. Vice President Inspection & Compliance

Mr. Dhruvkumar Patil Asst. Vice President Investor Service Cell

Mr. Hari K Asst. Vice President Listing & Corporate Communications

Mr. Mahesh Haldipur Asst. Vice President Premises

Mr. Mayur Sindhwad Asst. Vice President NOW, Dotex International Ltd.

Mr. Nilesh Tinaikar Asst. Vice President Development

Ms. Nisha Subhash Asst. Vice President Investigation

Mr. R Jayakumar Asst. Vice President Secretarial

Ms. Rana Usman Asst. Vice President NSCCL - Securities, F&O Clearing and SLB

Mr. Ravindra Mohan Asst. Vice President Legal

Bathula
Mr. Suprabhat Lala Asst. Vice President Trade - (Capital Market, F&O, Currency De-
rivatives & WDM)
Mr. Suresh Narayan Asst. Vice President India Index Services & Products Ltd. & Dotex
Int'l

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N S E N E W S L E T T E R
MANAGERIAL PERSONNEL NSE
Name DESIGNATION DEPARTMENT
Mr. T Venkat Rao Branch In-charge Regional Office - Delhi
Mr. Ajith Kumar V Manager Administration & Development
Ms. Aparna Bhat Manager NSCCL -Risk Management
Mr. Amit Bhobe Manager NCCL
Mr. Amol Mahajan Manager Finance & Accounts
Ms. Anuradha Guru Officer on Special Duty SBU - Education
Mr. Arvind Goyal Manager Currency Derivatives - Trade
Mr. Avinash Kharkar Manager Listing
Mr. Bireshwar Chatterjee Manager Investigation

Ms. Himabindu Vakkalanka Manager Development

Mr. Huzefa Mahuvawala Manager NSCCL -Risk Management

Mr. Janardhan Gujaran Manager F&O - Trade

Ms. Jayna Gandhi Manager Finance & Accounts

Mr. Johnson Joseph Chiriyath Manager Investor Service Cell

Mr. Kiran Dusane Manager Premises

Mr. Kiran Sawant Manager NSCCL - Collaterals
Ms. Pareezad Deboo Manager NSCCL - Currency Derivatives
Mr. Prashanto Banerjee Manager Marketing

Mr. Ram Surve Manager Human Resources

Ms. Rehana D'Souza Manager Membership
Mr. Sandeep Dandapat Branch In-charge Regional Office - Kolkata
Mr. Sandeep Manoharan Manager NSCCL - Development

Mr. Shekhar Rao Manager Finance & Accounts

Ms. Sonali Karnik Manager Surveillance
Mr. Sunil Gawde Manager Capital Market - Trade
Ms. Sunitha Anand Branch In-charge Regional Office - Chennai & Hyderabad
Ms. Sushama Bhagchandani Manager Finance & Accounts

Mr. Vinayak Shenoy Manager Finance & Accounts

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N S E N E W S L E T T E R
MANAGERIAL PERSONNEL OF NSE INFOTECH SERVICES LTD.

Name Designation Dept

Mr.N Muralidaran CEO Projects
Mr.G. M. Shenoy Senior Vice President Projects
Mr.M. R. Krishnan Vice President Infrastructure
Ms.Hema Iyer Vice President Risk Management
Mr.Mahesh Soparkar Group Head Projects, DBA/SysAdmin
Mr.P. R. Visvas Assistant Vice President Internal Systems - Listing, DWH
Ms.Mamatha Rangaprasd Assistant Vice President Trade
Mr.Mahesh Basrur Assistant Vice President FOCASS, NCSS
Mr.Hemant Patade Assistant Vice President BCP
Mr.Deviprasad Singh Assistant Vice President Telecom
Ms.Smrati Kaushik Senior Manager Trade
Mr.Viral Mody Senior Manager Trade
Mr.Hitesh Shah Senior Manager DBA /Sys Admin
Mr.Sujoy Das Senior Manager PRISM / TAP
Mr.Sudhir Sawant Senior Manager Project Management Office
Mr.Pranav Gupta Senior Manager Risk Management
Mr.Rajanish Nagwekar Senior Manager Index / Neat Plus
Mr.Nipun Dave Senior Manager Architecture
Mr.Bineet Jha Senior Manager HWARE SUPPORT
Ms.Geeta Mathew Senior Manager ASG / Operations
Mr.Mathew Joseph K Senior Manager NCSS
Mr.Benny Sebastian Senior Manager Membership
Mr.Manoj Joshi Manager Projects
Ms.Anuja Joshi Manager BCP
Mr.Suresh Chandani Manager Trade
Mr.Shibu Tomy Manager NFA/FAMS
Ms.Pranali Taskar Manager Telecom
Mr.Umesh Agroya Manager Telecom
Mr.Joy John Manager BCP - Chennai
Mr.Narayan Neelakanthan Manager Telecom
Ms.Bernadine Swamy Manager HRD
Mr.Mahesh Dere Manager Membership
Mr.Anoop Kumar Rawat Consultant DBA
Mr.Nitin Gupte Manager Telecom
Mr.Sandeep Kumar Gupta Manager ASG
Mr.Tushar H. Kulkarni Manager C2N
Mr.Prasad Addagatla Manager SysAdmin

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N S E N E W S L E T T E R 18

MANAGERIAL PERSONNEL OF NSE INFOTECH SERVICES LTD.

Name Designation Dept

Mr.Suraj P Bangera Manager Web

Mr.Manoj Kumar Singh Manager TECH - Delhi

Mr.Sagar Joshi Manager Project Management Office

Mr.Shreekantha Velankar Manager DWH

Mr. Balakrishnan M Manager FOCASS

Mr.Aditya Agarwal Manager Architecture

Ms.Meena Hajare Manager Listing

Mr.Nishant Jha Manager OPMS

Ms.Veena Khilnani Manager DBA

Mr.Vinit Naik Manager Survellience

Ms.Vishakha Shenoy Manager PRISM

18